Back in Brazil: bureaucracy

After two years away, I’m trying to put my life back on tracks in Brazil, and one of the main obstacles for doing so is the country’s crazy bureaucracy. Maybe this will come as no surprise for many, but Brazil is known for its big fat bureaucratic system, and basically, any rational analyst I’ve ever heard or read believes that this is one of the main obstacles for the country’s economic growth.

One of the problems I’m facing is getting the money from my FGTS. FGTS stands for “Fundo de Garantia do Tempo de Serviço”, a compulsory savings account that all Brazilian workers are forced to have. The moment you get a job, your employer is responsible for putting a percentage of your salary in the account. In case you are fired (or retire, or get cancer – seriously), you can get the money.

FGTS was created in 1966, at the beginning of the military regime that lasted from 1964 to 1985. Funny enough, people on the left, who demonize the Military governments, are today the main defensors of FGTS. Reality is, as you can probably tell, that this does little to help workers. FGTS has a very low interest rate, lower than the country’s inflation. That means that you actually lose money with it. Any other private investement would be better. Besides, it is clear that its reason to be is not to help workers. FGTS was created because bureaucrats realized that Brazilians had no culture of savings, therefore the government had to create one in order to have some money reserve to use. And using it government did. FGTS accounts have frequently been used by the government to try to boom the economy Keynesian style. Trying to get your FGTS money is crazily hard. Bureaucracy turns into a maze and can win you by fatigue. Perhaps I should just leave my money with the government.

The Bolsonaro government is trying to modernize the economy, and part of the process might involve putting an end to FGTS and other peculiarities created by Brazilian bureaucrats in the past. The left, however, complains that workers are losing rights. I can tell by personal experience that I would be losing my right to have a very poor savings account that I didn’t choose and that I have a very hard time to get access to. But try to explain this to millions of workers that are still hostages for labor unions and left-wing political parties.

The Canons of Economics

by Fred E. Foldvary

A “canon” is a set of items which are regarded by the chiefs of a field to be the accepted elements of the domain. Every religion, for example, has a canon of accepted ideas and documents such as the established books of the Bible. Every scientific field has a canon of propositions and facts accepted as genuine by the experts and by those in authority such as editors of the major journals and most members of the departments of the prominent universities.

The canon of economics consists of the propositions, methods, and historical facts accepted as true and applicable by most scholarly economists. This canon appears in textbooks and in the articles of the prominent journals. The ideas and methods outside the canon are referred to as heterodox economics, in contrast to the mainstream or orthodox canon. There have been articles and organizations about the mainstream and alternative canons, but they have not laid out what the canons consist of. Here is my attempt.

The canon of orthodox neoclassical economics consists of 1) supply and demand; 2) graphical curves of equal utility, inputs, and output; 3) marginal analysis (additional amounts of utility, inputs, outputs); 4) the factors or input variables of capital goods and labor; 5) the price level; 6) equations of production and utility; 7) the government-influenced money supply and the market-based velocity of the circulation of money; 8) economic and accounting profit; 9) market failure and government corrections; 10) equilibrium; 11) maximizing and minimizing within constraints; 12) the premises of subjective values, self-interest, scarcity, unlimited desires, and the uncertainty of the future; 13) the “time preference” for present day good relative to future goods; 14) the trade-off between goods and leisure; 15) the trade-off between equity and efficiency; 16) diminishing marginal utility; 17) diminishing marginal products; 18) theory from mathematical models; 19) econometric testing of hypotheses; 20) the producer and consumer surplus.

Neoclassical economics is divided into several sub-schools for macroeconomic theory. The major schools and their canons are:
1) Keynesian or demand-side economics, with the canons of the consumption function, spending multiplier, and the determination of output from autonomous spending and the multiplier.
2) The Monetarist school, its canon being the equation of exchange: Money times velocity equals the price level times real output, hence monetary inflation generally causes price inflation.
3) The New Classical school with its canon of rational expectations, which makes inflationary policy ineffective.
4) The New Keynesian school with its canon of wages, prices, and interest rates stuck above equilibrium; it accepts New-Classical rational expectations but claims that contracts and other rigid conditions make expansionary policy effective in increasing output.

The heterodox Austrian economic school of thought accepts these elements of neoclassical economics:1, 3, 4, 7, 8, 12, 13, 14, 15, 16, 17, 20. Austrians reject the excessive emphasis on 6, 9, 10, 11, 18, 19. The canons of the Austrian school that have not been absorbed into the mainstream are: 1) the time and interest-based structure of capital goods; 2) market dynamics rather than equilibrium; 3) dispersed knowledge; 4) discrete marginal utility based on diminishing importance; 4) axiomatic-deductive theory (praxeology); 5) entrepreneurship as both discovery and creative reconstruction; 6) free-market money and banking; 7) roundabout production; 8) the market as spontaneous order; 9) the failure of government intervention; 10) the evenly rotating economy that illustrates the role of entrepreneurship in the real world of uncertainty and change.

The Marxist school canon includes 1) class struggle, 2) the labor theory of value; 3) the surplus from labor taken by the capitalists who dominate labor; 4) benefits from socializing wealth.

The Georgist or geo-classical school has these canons: 1) land and its rent as major elements of the economy; 2) the margin of production as the least productive land in use; 3) land speculation and the movement of the margin raising rent and reducing wages; 4) the creation of land rentals from public goods; 5) depressions resulting from land-value bubbles; 6) economic effects of replacing market-hampering market-hampering taxes and subsidies with land-value taxation; 7) the surplus as land rent; 8) the ethics of labor and land; 9) harmony between equity and efficiency, and 10) the social behavioral effects of economic justice.

There is also a school of thought called “public choice,” which has been accepted by neoclassical economics as well as by other schools, as a side branch. Its canon includes: 1) self-interest in politics; 2) the rational ignorance of voters; 3) transfer-seeking and getting due to concentrated interests and spread-out costs; 4) vote trading by representatives; 5) bureaucrats maximizing their power and comfort; 6) the primacy of the median voter; 7) constitutional versus operational choice; 8) clubs that provide collective goods to their members.

The classical economics canon, before it turned neoclassical, included these elements: 1) Say’s law, that production pays factors that enable effective demand; 2) the division of labor; 3) economic growth from unhampered production and free trade; 4) the margin of production as the least productive land in use; 5) population growth pushing the margin to less productive land; 6) the three factors of production as land, labor, and capital goods.

A problem in economics today is that each canon excludes the useful elements of other schools. Economics needs a universalist canon that integrates the best elements from all schools of thought. However, economists disagree on what the canon should be. In my judgment, the most glaring omission in the mainstream canon is the neglect of the Austrian-school time-structure of capital goods, its neglect of the creation of land rent by public goods, and its neglect of the benefits of a prosperity tax shift, the replacement of market-hampering taxes with market-enhancing payments of land rent and pollution charges.

Note: This article first appeared in the Progress Report.

Obama’s Economic Policies: What’s Wrong, in a Nutshell

People are overwhelmed by the avalanche of bad news, and of news in general. It’s difficult to stop long enough to summarize objections to the new economic policies fostered by Presidents Obama and Pelosi.  Besides, if you tried, you might just strangle with horror and indignation. I made the effort. Here it is:

Pres Obama wants to re-distribute wealth when the amount of wealth available to re-distribute  is dwindling. It’s never happened, I think, in any democratic, market-oriented country before. Normally, you wait for a period when wealth is growing.

Pres Obama insists on an expensive stimulus package that will do, and has done little to stimulate the economy. Keynesian economics is largely wrong. This is Keynesian economics at its worst. It’s not even defensible by Keynesian standards.

Pres Obama choses a severe economic downturn to force us as a nation to try and do things we don’t know how to do. This includes switching from proven energy technologies such as coal and petroleum-based technologies to unproven ones such as air and wind technologies. It includes also constructing a satisfactory national health system, something no country has done. Normally, whenever you try something new, you make mistakes. You need a margin of error. You need to be reasonably rich. You don’t want to do it on a tight budget or when you are close to poverty.

Pres Obama is not evil. He has something I have seen hundreds of times in academia: He knows what he thinks he knows and he does not know anything else. He is narrow-minded and dogmatic. The more intelligent the person, the more stubborn in his narrow-mindedness and in his dogmatism. A less intelligent person would have the virtue of self-doubt, “Wait a minute, am I doing the right thing?”

Perplexing: There is an international media consensus  to the effect that the current global economic crisis was made in America. Yet, I detect no rise in anti–Americanism abroad. This would be a good time to be pissed off at us but, I don’t see it anywhere.

I wrote on this blog about “European Anti-Americanism.”  I suggested it was mainly based on envy. Perhaps, I was right: Others like us better when we are down and hurting. What do you think?

Recently, I mentioned the sentencing of a 75-year old woman to a whipping, in Saudi Arabia. I promised that I would check for indignant reactions on the part of Muslims. I have seen nothing on the website of the American Muslim Council and nothing of the website of the Islamic Society of North America.  I haven’t found anything either on French Muslim sites.

Of course, it’s disturbing. I would like it if someone told me that I am wrong and that I searched in the wrong places. I know I have Muslim readers. Get on your feet and do what’s right.

[Editor’s note: this essay first appeared on Dr. Delacroix’s blog, Bay Watch, on March 26th 2009]

National Economic Systems: an Introduction for Intelligent Beginners

Part One: Stimulation.

This essay does not require any specialized or advanced knowledge of economics. It does require an open mind and moderate alertness.

It’s must be difficult for the average working stiff with a job or school attendance, or both, a mortgage, and a family, to make sense of the daily economic news. It’s not because you are ill-informed, it’s because the media gives economic news in bits and pieces without tying them together, and usually without context. I suspect few of the big media commentators understand the context or try to link the fragments, anyway. Those who do understand tend to assume that everyone is aboard the same train they are riding. They don’t have much to say to those who are still at the station.

Major exceptions are the Financial Times, which has a strong pro-Obama bias, and the Wall Street Journal, which does not. Even with those, you have to read them every other day to get the big picture. So here, is the straight dope. (If you are concerned about my qualifications, a valid point, you will find a link to a fairly up-to-date version of my vita on the front of this blog.)

We are not facing one economic crisis but two. One is more or less routine, the other is almost unprecedented. The mildly re-assuring noises the media are currently making are about the first crisis, the almost-routine crisis only.

The first crisis is a conventional recession. Recessions are historically a normal part of capitalism. Healthy capitalist economies are on a growth path most of the time. There are several measures of economic growth and contraction. The easiest to understand is Gross Domestic Product, “GDP.” There are criticisms of this measure but we don’t care right now, for our narrow purpose.

GDPs grow at varying rate at different times and in different countries. A US GDP growth of 3.5 % per year makes nearly everyone happy. Countries that are at an early stage of development, such as India, and have a long way to go, often experience annual growth of 6% or 7%. China’s GDP growth has often topped 10% .Western European countries have been pleased with annual rates of growth of 2% for many years. There is a lesson here; don’t lose track of it.

National economies don’t always expand, sometimes, they contract. That’s a lot like the income of someone on an hourly wage instead of a straight salary. The prodigious economic growth of western countries under capitalism in the past 150 years is made up of series of expansions followed by contractions. We had overall growth because the contractions were both less in magnitude and shorter in duration than the periods of expansion.

The word “recession” means either two consecutive quarters of contraction of the national economy or it means any damn thing you want. Serious people only use the term in connection with the definition above. That’s what I do because I try to be a serious person.

Recessions are tricky because you only know about them after the fact, when the national statistics come out. Anyone who says, “We are in a recession” is either speculating or making propaganda. Economic commentators try to read the existence of a recession, and the waning of a recession, by studying other economic events. Those are events believed to be associated with recessions and to which numbers are attached that are collected frequently.

Here are two main ones: Unemployment figures and stock market indexes. There are others you can learn about if you become interested. When national unemployment goes down and the main stock market indexes go up for a while, commentators tend to announce the end of a recession. I think that liberal commentators give those a lot of weight under Democrat administrations, and conservative commentators under Republican administrations.

The reading of these signals is not an exact science, by a long shot. I just believe those readings are better than nothing if you take care to follow several. That’s a big “if,” of course.

Incidentally, there are very good scholarly, academic studies regarding the connections between various indicators and economic growth/contraction. I suspect few commentators keep abreast of those. I wouldn’t be surprised if it were none. I would be pleasantly surprised if some did.

Now, on to the current situation. When President Obama took office, it’s pretty clear the US was in a recession, or entering one. The President had nothing to do with it. There was much discussion everywhere about whether his buddies in Congress caused it. Fact is that there have been recessions with Republican as well as with Democratic administrations, and with Congressional domination of one or of the other major party.

The political elites of most countries, including many American Republicans believe in something called “Keynesian economics.” You don’t need to read Keynes to know as much as they do. Here is the gist: In modern developed societies, the government is such a large economic actor that it can influence decisively the path of the national economy. Thus, Keynesians believe that government has the power to stop or to improve on recessions. Governments may do this by engaging in spending, public spending, spending tax money, or borrowed money. (Keep I mind that, with the interesting exception of a few oil rich countries, governments have no money except what they can take in taxes and what they can borrow.)

Real conservatives, and libertarians who are not especially conservative, think that Keynesian economics is a dangerous hoax. They argue that government spending aggravated and deepened past recessions including the one associated with the Great Depression of the nineteen thirties. Fortunately, we don’t have to consider here who is right. (Full disclosure: I am one of them.)

A point that’s not in dispute is that government spending usually entails bigger government debt. More on this later.

Keynesian public spending is forthrightly intended to stem the spread of unemployment. The reasoning is simple: When people lose their job, or fear losing their job, they, and often, their neighbors, spend less. This lowered spending in turn slows down the national economy. This induces more unemployment: If I stop buying my daily latte because I am unemployed, or I fear I might soon be, and if others do the same, the barrista at my local coffee shop will lose her job. And so forth.

The fewer people earn a living, the smaller the national economy. If I merely forgo buying a car for the time being, the indirect effects on the national economy are even worse.

Hence, good Keynesian government spending should have very quick effects. It should stem the spread of unemployment rapidly and durably. It used to be the case that government had the ability to spend money quickly through public works. Hitler, for example, reduced quickly very high German unemployment by hiring the unemployed, and many underemployed, essentially to dig holes: Go to work in the morning; get a government check in the evening; spend the next day.

This approach has become difficult to employ for a variety of reasons, including permitting processes related to safety and to environmentalist zeal. Thus, if my city of Santa Cruz decides to build another breakwater for its harbor today, it’s unlikely anyone will get a paycheck for handling a tool for eighteen months, or more. Most past recessions lasted less than eighteen months.

As I write, only 10% or 15 % of the stimulus package money decreed by the President has been spent. Either, that’s not enough to stem the spread of unemployment, or, it’s not really a spending spree intended to stimulate. If the latter, what’s the purpose?

There is a beginning of an answer if you look at parts of the package that have a well-known name attached. One such is financing for a train from Disneyland to Las Vegas. It was put in by Harry Reid, the Senate Democratic Leader. There is no way the bulk of the corresponding money will be spent until five or even six years from now, except for studies employing a handful of specialists. Those specialists are not suffering from high unemployment, by the way. This part of the package does nothing to put to work Tom, Dick and Harry. The money won’t be spent for a long time because such a project needs a lot of planning, including for permitting to satisfy environmentalists.

What is the real purpose of this part of the stimulus package, then? At least, it makes Harry Reid look good with his voters. At worst, Harry Reed is using his muscle in Congress to satisfy special interests. I don’t know if the latter is true. I have not researched it. It’s plausible.

My conclusion: Even if you subscribe to Keynesian views on how to jump-start a national economy in recession, the measures taken by the administration six months ago do not work and cannot work.

Those who say, “Give it time” don’t know what they are talking about. The essence of government spending for stimulus purposes is speed. If you don’t stop and reverse unemployment quickly, the recessionary spiral worsens. If you did nothing at all, it would stop on its own, in good time, anyway.

Why do I care about the stimulus package’s lack of effectiveness?

Two reasons. First its part of a mass of unprecedented government spending. I mean unprecedented in the absence of a major war, like WWII. It increases public, government indebtedness to a worrying extent. Public debt has consequences, in the long run and in the not- so-long-run. More on this in the next episode of this posting.

The second reason, I care is that I detect a social and political project markedly different from the one announced by the administration in the current oversize government spending. I have not become a conspiracy theorist. I am relying on public information, including the President’s own past statements, those of his close advisers and, above all, my knowledge of what went on in Western Europe between about 1980 and 2000. I will address this alternative project in a subsequent posting also.

You have been good but there will be a quiz!

Current events update:

The Wall Street Journal has a good discussion of the Maine public health plan in today’s issue. It’s on p. A12, in the editorial section. It’s a fiasco. We care because it has important features in common with what we know of Obamacare.

Cool people tend to dismiss Rush Limbaugh, even conservatives. Limbaugh is bombastic and he exaggerates. That’s vulgar. However, he must have an army of good researchers because he comes up within a short time with hard evidence of allegations against his political adversaries. One of the wildest allegations from the right is that Obamacare entails “death boards.” Well, what do you know: Today, on-air, he reads excerpts from a Veterans Administration practitioner guidebook that sounds for all the world to me like a “death book.”

The convicted mass murderer of 270 people  in the air over Lockerbie, Scotland receives a hero’s welcome in his home-country of Libya. He had been freed on compassionate grounds by the gutless Scottish Minister of Justice. (Yes, there is such a thing.) I saw it on television. This is not hearsay.

I think the enthusiasm greeting him in Libya should be written in the accounts book. It should enter into any calculus, side-by-side with collateral damage, next time this country has reason to consider bombing anything in Libya. It should not be long.

It’s unreasonable to treat in exactly the same way those who hate us and those who harbor sheer evil in their hearts, and our old friends. The stupid  Scots should get a pass. The evil  Libyans shouldn’t. There is no ethical system in the world that requires that this country do otherwise, not even Christianity. You are supposed to forgive your enemies after they have stopped harming you, not while they are cutting your throat, not even when they are impotently clamoring  their wish to do it.

By the way, I am told by those who should know that Arabs respect this kind of thinking.