Month: July 2014

Simon Wren-Lewis: Synthesis!? David Beckworth’s Insurance Policy: “I really like David Beckworth’s insurance proposal…

…against ‘incompetent’ monetary policy. Here it is…. 1) Target the level of nominal GDP (NGDP). 2) ‘The Fed and Treasury sign an agreement that should a liquidity trap emerge… they would then quickly work together to implement a helicopter drop. The Fed would provide the funding and the Treasury Department would provide the logistical support to deliver the funds to households. Once NGDP returned to its targeted path the helicopter drop would end and the Fed would implement policy using normal open market operations. If the public understood this plan, it would further stabilize NGDP expectations and make it unlikely a helicopter drop would ever be needed.’… Jonathan Portes and I proposed something very like it…. Now this does not mean that Market Monetarists and New Keynesians suddenly agree about everything…. For David this is an insurance against incompetence by the central bank, whereas Keynesians are as likely to view hitting the ZLB as unavoidable if the shock is big enough. However this difference is not critical…

Should-Reads:

1. Emmanuel Saez: Optimal Income Transfer Programs: Intensive versus Extensive Labor Supply Responses: “When behavioral responses are concentrated along the intensive margin, the optimal transfer program is a classical Negative Income Tax program with a substantial guaranteed income support and a large phasing-out tax rate. However, when behavioral responses are concentrated along the extensive margin, the optimal transfer program is similar to the Earned Income Tax Credit with negative marginal tax rates at low income levels and a small guaranteed income. Carefully calibrated numerical simulations are provided…” Via Owen Zidar

2. David Beckworth: A Surprising Look Back at the Fed’s QE Programs: “If anything… QE programs raised long-term financing costs for the government. One way to explain this outcome is that the QE programs actually raised expected economic growth and that pushed up treasury yields…. It is as if the term premium needed QE to stay propped up. Here is one possible explanation. The QE programs increased the economic outlook and that, in turn, reduced the risk premium on other assets. Investors, therefore, were more willing to hold other higher-yielding assets and this meant they had to be compensated more to hold the low-yielding treasuries…. By failing to restore full employment to the economy, the Fed has allowed risk premiums to stay elevated and interest rates on safe assets to stay depressed…. Now one could conclude from this that the QE programs did not make that much difference. I disagree. The evidence above suggest the Fed at least put a floor under long-term interest rates (and by implication a floor under the economy) with its QE programs…. So goodbye QE. It was good knowing you…”

3. Adair Turner: High tide for house prices is engulfing our economy: “A beach hut in Dorset is on sale for £250,000. The UK’s housing obsession is as great as ever…. In France, housing wealth grew from 120 per cent of national income in 1970 to 371 per cent in 2010. More than half of Canada’s wealth and all of the increase in its wealth-to-income ratio is explained by property prices…. Further technological progress, in particular in IT and telecoms, will continue to drive down the price of many goods and services. But paradoxically, an increasingly high-tech economy will be one in which the relative value of the oldest and most physical thing of all–land–will probably rise. Expectations of rising prices generate responses that make economies less stable…. Property will inevitably play a more important role in economies as incomes grow. We need to manage the consequences–and there is no silver bullet…. If the fundamental problem is that desirable property is scarce, the obvious answer is to lift planning constraints and build more houses. But more construction is no panacea: Ireland’s relaxed planning rules did not prevent a devastating property boom and bust. And the motivations that drive increased competition for desirable locations also produce strong opposition to unrestricted development…. Transport and environmental policies that enable people to live in more densely populated areas without jeopardising their quality of life could be as important to financial stability as bank capital requirements…”

4. Scott Sumner: Jonathan Gruber on federal exchanges and subsidies: “Several commenters pointed to a statement made by Jonathan Gruber in 2012…. ‘What’s important to remember politically about this is if you’re a state and you don’t set up an exchange, that means your citizens don’t get their tax credits — but your citizens still pay the taxes that support this bill. So you’re essentially saying [to] your citizens you’re going to pay all the taxes to help all the other states in the country. I hope that that’s a blatant enough political reality that states will get their act together and realize there are billions of dollars at stake here in setting up these exchanges.’… The quote was taken out of context, and that the comments immediately preceding the quote tells a very different story: ‘Yes, so these health insurance exchanges… will be these new shopping places and they’ll be the place that people go to get their subsidies for health insurance. In the law it says if the states don’t provide them the federal backstop will. The federal government has been sort of slow in putting up its backstop in part because I think they want to sort of squeeze the states to do it.’ That seems to imply the federal backstops would provide health subsidies. So how can we reconcile these two statements? I believe Gruber was trying to say that the federal government was being slow in setting up the exchanges, because until they did so, those states without state exchanges would get no subsidy. Once the federal exchanges were set up, they would all get the subsidy. What I don’t understand is why commenters were providing me with the quote on top, but not the second quote, which provides important context…”

And:

• Robert Rubin: How ignoring climate change could sink the U.S. economy
• Nick Rowe: Three growth stages of the New Keynesian model
• Ladonna Pavetti: Ryan’s Rhetoric Doesn’t Match His Proposal’s Reality
• Carter C. Price and Ben Zipperer: Designing a research agenda to move the minimum wage forward
• Mark Zastrow: Satellites reveal swift groundwater loss in western United States
• Jose Antonio Ocampo: The IMF’s Special Drawing Rights as a global reserve currency
• Christine Monahan: Halbig v. Sebelius and State Motivations to Opt for Federally Run Exchanges

Should Be Aware of:

1. Ed Kilgore: The Two Paul Ryans: “Ezra… probably feels he’s providing an incentive for the Good Ryan to subdue the Bad Ryan once and for all, and even hints that the Bad Ryan’s work was mainly a product of the days when deficits and debt were taken more seriously by everybody. But… there is a very long history of ‘reform-minded’ Republicans talking big and expressing compassion about poverty, and then screwing the poor the first opportunity they get…. It’s going to take a lot more than a ‘poverty plan’ to make me treat the Ryan Budget as anything less than his central enduring legacy…”

2. Norman Ornstein: The Existential Battle for the Soul of the GOP: “What began as a ruthlessly pragmatic, take-no-prisoners parliamentary style opposition to Obama was linked to constant efforts to delegitimize his presidency, first by saying he was not born in the U.S., then by calling him a tyrant trying to turn the country into a Socialist or Communist paradise. These efforts were not condemned vigorously by party leaders in and out of office, but were instead deflected or encouraged, helping to create a monster: a large, vigorous radical movement that now has large numbers of adherents and true believers in office and in state party leadership…. A Rasmussen survey shows that 23 percent of Americans still believe Obama is not an American, while an additional 17 percent are not sure. Forty percent of Americans! This is no longer a fringe view. As for the radicals in elected office or in control of party organs, consider a small sampling of comments: ‘Sex that doesn’t produce people is deviate.’–Montana state Rep. Dave Hagstrom. ‘It is not our job to see that anyone gets an education.’–Oklahoma state Rep. Mike Reynolds. ‘I hear you loud and clear, Barack Obama. You don’t represent the country that I grew up with. And your values is not going to save us. We’re going to take this country back for the Lord. We’re going to try to take this country back for conservatism. And we’re not going to allow minorities to run roughshod over what you people believe in!’–Arkansas state Sen. Jason Rapert…. ‘I don’t want to get into the debate about climate change. But I’ll simply point out that I think in academia we all agree that the temperature on Mars is exactly as it is here. Nobody will dispute that. Yet there are no coal mines on Mars. There’s no factories on Mars that I’m aware of.’–Kentucky state Sen. Brandon Smith…. ‘Although Islam had a religious component, it is much more than a simple religious ideology. It is a complete geo-political structure and, as such, does not deserve First Amendment protections.’–Georgia congressional candidate Jody Hice…. ‘God’s word is true. I’ve come to understand that. All that stuff I was taught about evolution and embryology and the big-bang theory, all that is lies straight from the pit of hell. It’s lies to try to keep me and all the folks who were taught that from understanding that they need a savior.’–U.S. Rep. (and M.D.) Paul Broun of Georgia. ‘Now I don’t assert where he [Obama] was born, I will just tell you that we are all certain that he was not raised with an American experience. So these things that beat in our hearts when we hear the National Anthem and when we say the Pledge of Allegiance doesn’t beat the same for him.’–U.S. Rep. Steve King of Iowa…. One might argue that these quotes are highly selective—-but they are only a tiny sampling…. Importantly, almost none were countered by party officials or legislative leaders, nor were the individuals quoted reprimanded in any way. What used to be widely seen as loony is now broadly accepted or tolerated…”

Already-Noted Must-Reads:

1. Matt Bruenig: How Reform Conservatives Like Reihan Salam and Paul Ryan Misunderstand Poverty: “Oh boy. Reihan Salam has a piece riddled with confusions, some conceptual, some technical, and some just downright strange…. Poverty measurement that also includes tax credits (like the EITC) and non-cash benefits (like SNAP) called the Supplemental Poverty Metric… the only thing that has reduced poverty since 1967 is non-market benefits. That’s it. Those advocating non-market benefits to cut poverty are not the crazy ones. Those thinking the market will do it are…. Let’s just make some things clear…. Market income is not distributed according to desert (i.e. each get what they produce). Nobody produces nature, yet its massive marginal productivity flows to random private owners…. The majority of the national output each year is attributable to inherited technology and knowledge (aka TFP) that nobody alive produced…. Nobody is economically independent from the government…. If you want to make people’s flow of material resources independent of the government, you must repeal property law first and foremost, the biggest government welfare program in history…. More disposable income doesn’t solve all of the problems in the society, but it does solve the problem of inadequate diposable income…”

2. Barry Eichengreen: The ECB Tries Again: “In June the European Central Bank announced a series of new steps to counter deflation…. Rather than bemoaning the failure of President Draghi & Co. to move earlier, it is more productive at this stage to ask: are the central bank’s measures now up to the task?… The ECB’s conventional measures, reducing its benchmark interest rate from 0.25 to 0.15 per cent and charging commercial banks 0.1 per cent on the money they deposit with the central bank, will make little difference…. Conventional monetary policy has run its course…. Thus, if policy is going to make a difference, policy will have to be unconventional. Here the ECB unveiled… one and a half… initiatives in June… ‘Targeted Long-Term Refinancing Operation’… €400 billion, or some US$550 billion, cumulatively over four months. Recall that the Federal Reserve, under QE3, had been injecting $85 billion a month into U.S. financial markets before starting to taper in December. This makes TLTRO look like a substantial commitment…. The additional ‘half an initiative’ announced in June was that the ECB would study the possibility of security purchases…. These cautions should not be taken as a council of despair. If ECB officials conclude that the impact of TLTRO and securities purchase will be marginal, they should not give up hope; rather, they should strive to do more…”

3. Barry Ritholtz: Cognitive Dissonance: “Of all of the failings of human wetware, the one I find most intriguing is cognitive dissonance… [which] occurs in the mind of an individual when a theoretical belief system is confronted by factual evidence demonstrating outcomes contrary to what theories dictate should occur. Stated more plainly, when facts conflict with beliefs people find ways to ignore those facts, rationalizing them in a way that allows the disproven ideas to survive. John Kenneth Galbraith famously referenced cognitive dissonance before it was even called that, stating: ‘Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof’….
    
   “Examples are many and varied…. Radical deregulation resulting in bad outcomes rather than the free market nirvana its believers espoused; Austrian economists warning of imminent hyperinflation and the collapse of the fiat dollar that never arrives. Rather than question the theory, the person suffering from cognitive dissonance ignores the facts in front of their very eyes and instead devises rationales for why any specific expected outcome never occurred. The blame is laid elsewhere…. It wasn’t the wildly irresponsible behavior of non-bank lenders and junk mortgages securitized and rated AAA that caused the problems. Rather, it had to be something else, and if we can find a government entity to blame, so much the better…. There is a fine line between having confidence in your methodologies and living in your own private fantasy world. Like it or not, this is the human condition. Recognizing it at least gives us a chance to avoid getting caught in its pernicious grasp…”

4. Ricardo Hausmann: The Real Raw Material of Wealth: “Poor countries export… materials such as cocoa, iron ore, and raw diamonds…. Rich countries export–often to those same poor countries… chocolate, cars, and jewels…. Some ideas are worse than wrong: they are castrating, because they interpret the world in a way that emphasizes secondary issues–say, the availability of raw materials–and blinds societies to the more promising opportunities that may lie elsewhere…. Consider Finland…. A classical economist would argue that, given this, the country should export wood… a traditional development economist would argue that it should… add value by transforming the wood into paper or furniture…. But wood opened up a different and much richer path to development. As the Finns were chopping wood, their axes and saws would become dull and break down, and they would have to be repaired or replaced. This eventually led them to become good at producing machines that chop and cut wood…. From here, they went into other automated machines…”

Ricardo Hausmann: The Real Raw Material of Wealth: “Poor countries export… materials such as cocoa, iron ore, and raw diamonds…

…Rich countries export–often to those same poor countries… chocolate, cars, and jewels…. Some ideas are worse than wrong: they are castrating, because they interpret the world in a way that emphasizes secondary issues–say, the availability of raw materials–and blinds societies to the more promising opportunities that may lie elsewhere…. Consider Finland…. A classical economist would argue that, given this, the country should export wood… a traditional development economist would argue that it should… add value by transforming the wood into paper or furniture…. But wood opened up a different and much richer path to development. As the Finns were chopping wood, their axes and saws would become dull and break down, and they would have to be repaired or replaced. This eventually led them to become good at producing machines that chop and cut wood…. From here, they went into other automated machines…

Karl Polanyi, Classical Liberalism, and the Varieties of “Neoliberalism”: Virtual Office Hours:

Karl Polanyi’s The Great Transformation is certainly the right place to start in thinking about “neoliberalism” and its global spread. But you are right to notice and do need to keep thinking that Polanyi is talking about pre-World War II classical liberalism, and that modern post-1980 neoliberalism is somewhat different.

First, as I, at least, see it, there are three strands of thought that together make up the current of ideas and policies that people call “neoliberalism”:

1. The revived and restored classical liberals, via the Mont Pelerin society and so forth—-and they do indeed have an attachment to the gold standard.

2. The Milton Friedman neoliberals—-who believe that the gold standard was a disaster and the government needed to guarantee full employment (and low inflation) via activist monetary policy. But, they go on, attempts by the government to do more than simply maintain full employment and price stability would inevitably come to grief. Government policies would be turned to enrich the politically powerful rather than to enhance social welfare, and so almost always do more harm than good. (Why he thought that activist monetary policy was different—-why Milton Friedman believed government could be successful there while it could not be successful anywhere else—-was never something that he could explain very well.)

3. The Washington Monthly neoliberals, who argued that 1945-1980 had demonstrated that central planning of all kinds had grave deficiencies, and the governments that wanted to achieve social democratic ends were more often than not better off doing so through market means and market incentives than with bureaucracy.

There are also differences with respect to the value put on democracy and liberty. The classical liberals wanted limited and representative government, which is a very different thing than modern political democracy, and were as likely or not to approve of traditional deference traditional social authority structures. Washington Monthly neoliberals are social liberals, and are democrats first and neoliberals second. Milton Friedman neoliberals tend to be true libertarians–social liberals–and want democracy constrained to preserve both social and economic liberties. Mont Pelerin neoliberals tend to be social conservatives, and to at least play with endorsing fascist and authoritarian dictators like Mussolini and Pinochet.

Of these three currents the second was, I think, always the most powerful. But the other two have not been negligible in the mix. And there has been a tendency as people age for people in the second camp to slide into the first and people in the third camp to slide into the second.

To those of us so eat, breathe, sleep, and live this stuff every day, the differences between these three currents seem large. To others the differences may seem much smaller.

I have always thought of myself as a Washington Monthly neoliberal, and I am trying to resist the transformation into a Milton Friedman neoliberal. That still seems to me to be wrong: it seems to me that a government that is corrupt and incompetent at running and urban water system will be even more corrupt and incompetent at conducting a privatization auction. But I do recognize that there are deep issues of political economy and of governmental confidence that us Washington monthly neoliberals have tended to avoid thinking about.

Second, the baseline against which various forms of market liberalism is reacting are very different. This was brought home to me a couple of days ago when I was rereading George Dangerfield’s excellent The Strange Death of Liberal England about British politics on the eve of World War I, where Dangerfield writes about the anti-classical liberal and social democratic politician David Lloyd-George. To quote Dangerfield:

Lloyd George… one July evening in 1909… went down to Limehouse… a packed and partisan audience of East End cockneys…. England has scarcely known a greater demagogue than this pre-war Lloyd-George…. Without the magic of face and voice to support them, his speeches are not likely to survive; and one can only imagine the effect of this, the most famous passage in that famous Limehouse speech:

I was telling you I went down a coal-mine the other day. We sank into a pit half a mile deep. We then walked underneath the mountain, and we did about three quarters of a mile with rock and shale above us. The earth seemed to be straining–around us and above us–to crush us in. You could see the pit props bent and twisted and sundered until you saw their fibers split in resisting the pressure. Sometimes they give way and then there is mutilation and death. Often a spark ignites, the whole pit is deluged in fire, and the breath of life is scorched out of hundreds of breasts by the consuming flame. In the very next colliery to the one I descended, just a few years ago three hundred people lost their lives that way.

And yet when the Prime Minister and I knock at the door of these great landlords and say to them—-’Here, you know these poor fellows who have been digging up royalties at the risk of their lives, some of them are old, they have survived the perils of their trade, they are broken, they can earn no more. Won’t you give them something [Page 23] towards keeping them out of the workhouse?’—-they scowl at us and we say—’Only a ha’penny, just a copper.’ They say, ‘You thieves!’ And they turn their dogs on to us, and you can hear their bark every morning….

Lloyd George was having the time of his life. He kept his audience howling with alternate rage and laughter; moment by moment, sentence by sentence, he assaulted the landlords, and outraged the gentry, and invited the dispossessed, and cozened the dissatisfied; he shouted and implored and wheedled and mimicked. It was a great performance.

And yet this spirited voice was not quite the voice of revolution–though thus it sounded in the anxious imagination of the Conservative press…. It was also Liberalism’s extravagant last will and testament. All it really said was this–that the rich, who are beginning to get too much in their own hands, have got to pay… his revolutionary language [was] nothing more than the language of super-taxes and old age pensions.

But in the meantime, the speech had done its work. If their lordships had been violent about the Budget before, they were twice as violent now. Mr. Lloyd-George redoubled his efforts… and up and down the country certain noblemen emerged from the rustic obscurity to which history had consigned them and began to trade public insults with their persecutor…

That was class war!

Or was it?

As Dangerfield points out, while the Tory squires and the titled members of the House of Lords in 1909 heard David Lloyd-George and thought “REVOLUTION!!”, the policies of the so-called People’s Budget of 1909 involved less income-tax progressivity (“supertaxes”) and less social insurance (“old age pensions”) than even the old Paul Ryan budget. And now even Paul Ryan has begun talking about how he wants to expand the EITC, and keep anti-poverty funding at levels far elevated beyond David Lloyd-George’s wildest dreams, and how the Ryan budget wasn’t his budget but rather the House Republican Conference’s budget.

1204 words

Barry Eichengreen: The ECB Tries Again: “In June the European Central Bank announced a series of new steps to counter deflation….

…Rather than bemoaning the failure of President Draghi & Co. to move earlier, it is more productive at this stage to ask: are the central bank’s measures now up to the task?… The ECB’s conventional measures, reducing its benchmark interest rate from 0.25 to 0.15 per cent and charging commercial banks 0.1 per cent on the money they deposit with the central bank, will make little difference…. Conventional monetary policy has run its course…. Thus, if policy is going to make a difference, policy will have to be unconventional. Here the ECB unveiled… one and a half… initiatives in June… ‘Targeted Long-Term Refinancing Operation’… €400 billion, or some US$550 billion, cumulatively over four months. Recall that the Federal Reserve, under QE3, had been injecting $85 billion a month into U.S. financial markets before starting to taper in December. This makes TLTRO look like a substantial commitment…. The additional ‘half an initiative’ announced in June was that the ECB would study the possibility of security purchases…. These cautions should not be taken as a council of despair. If ECB officials conclude that the impact of TLTRO and securities purchase will be marginal, they should not give up hope; rather, they should strive to do more…

Barry Ritholtz: Cognitive Dissonance: “Of all of the failings of human wetware…

…the one I find most intriguing is cognitive dissonance… [which] occurs in the mind of an individual when a theoretical belief system is confronted by factual evidence demonstrating outcomes contrary to what theories dictate should occur. Stated more plainly, when facts conflict with beliefs people find ways to ignore those facts, rationalizing them in a way that allows the disproven ideas to survive. John Kenneth Galbraith famously referenced cognitive dissonance before it was even called that, stating: ‘Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof’….

Examples are many and varied…. Radical deregulation resulting in bad outcomes rather than the free market nirvana its believers espoused; Austrian economists warning of imminent hyperinflation and the collapse of the fiat dollar that never arrives. Rather than question the theory, the person suffering from cognitive dissonance ignores the facts in front of their very eyes and instead devises rationales for why any specific expected outcome never occurred. The blame is laid elsewhere…. It wasn’t the wildly irresponsible behavior of non-bank lenders and junk mortgages securitized and rated AAA that caused the problems. Rather, it had to be something else, and if we can find a government entity to blame, so much the better…. There is a fine line between having confidence in your methodologies and living in your own private fantasy world. Like it or not, this is the human condition. Recognizing it at least gives us a chance to avoid getting caught in its pernicious grasp…

Matt Bruenig: How Reform Conservatives Like Reihan Salam and Paul Ryan Misunderstand Poverty: “Oh boy. Reihan Salam has a piece riddled with confusions…

…some conceptual, some technical, and some just downright strange…. Poverty measurement that also includes tax credits (like the EITC) and non-cash benefits (like SNAP) called the Supplemental Poverty Metric… the only thing that has reduced poverty since 1967 is non-market benefits. That’s it. Those advocating non-market benefits to cut poverty are not the crazy ones. Those thinking the market will do it are…. Let’s just make some things clear…. Market income is not distributed according to desert (i.e. each get what they produce). Nobody produces nature, yet its massive marginal productivity flows to random private owners…. The majority of the national output each year is attributable to inherited technology and knowledge (aka TFP) that nobody alive produced…. Nobody is economically independent from the government…. If you want to make people’s flow of material resources independent of the government, you must repeal property law first and foremost, the biggest government welfare program in history…. More disposable income doesn’t solve all of the problems in the society, but it does solve the problem of inadequate diposable income…

Washington Center for Equitable Growth Announces Inaugural Class of Grantees: “Equitable Growth will award $481,000 to 15 grantees…

…with additional funding for two of those grantees provided by the Russell Sage Foundation…. “Motivating academic economists to investigate whether and how structural changes in the U.S. economy, particularly those related to the distribution of wealth and the provision of opportunity, affect economic growth is exceedingly important,” says Heather Boushey, executive director and chief economist at Equitable Growth…. Philip Cohen… economic inequality [and] women’s employment patterns…. Ariel Kalil… inequality… parenting and the acquisition of skills…. Jesse Rothstein… school finance reforms [and] educational equity…. Michael Barr… how families manage different kinds of debt…. Will Dobbie… the impact of debt forgiveness on economic stability and recoveries…. Timothy Smeeding… how inequality in the distribution of income and wealth affect consumption… David Howell… cross-country trends in “good jobs”… William Lester… how regional variations in labor market regulation influence business decisions…. Joan Williams… workplace scheduling practices conflict with family care-giving needs…. Young scholar grantees… Pascal Noel… Shayak Sarkar and Ryan Sakoda… Stefanie Stancheva… Vanessa Williamson at Harvard… Danny Yagan… Owen Zidar…

As we often say around here, since the days of Lyndon Johnson’s Great Society discussions of equitable growth here in the United States have revolved around Arthur Okun’s metaphor of the “leaky bucket”: the market produces unequal distribution of income, and the government has a bucket that it can use to redistribute income from rich to poor, but the bucket leaks and so more is taken from the rich and is received by the poor. The efficiency-equity trade-off. Policies that would move toward more equity would also move toward slower economic growth.

But the question of whether our Bergson-Samuelson social welfare function has a higher value with a smaller pie more equally divided or a bigger pie with some slices much larger than others is only one of the ways that the question can be conceptualized.

A second way is to deny that the size of the pie has relevance because those who get the big slices are not “us” but “them”. That was how David Lloyd-George did his political economy and politics in Wales and in London’s East End back in 1909. To quote from George Dangerfield’s great The Strange Death of Liberal England:

Lloyd George… one July evening in 1909… went down to Limehouse… a packed and partisan audience of East End cockneys…. England has scarcely known a greater demagogue than this pre-war Lloyd-George…. Without the magic of face and voice to support them, his speeches are not likely to survive; and one can only imagine the effect of this, the most famous passage in that famous Limehouse speech:

I was telling you I went down a coal-mine the other day. We sank into a pit half a mile deep. We then walked underneath the mountain, and we did about three quarters of a mile with rock and shale above us. The earth seemed to be straining–around us and above us–to crush us in. You could see the pit props bent and twisted and sundered until you saw their fibers split in resisting the pressure. Sometimes they give way and then there is mutilation and death. Often a spark ignites, the whole pit is deluged in fire, and the breath of life is scorched out of hundreds of breasts by the consuming flame. In the very next colliery to the one I descended, just a few years ago three hundred people lost their lives that way.

And yet when the Prime Minister and I knock at the door of these great landlords and say to them—-’Here, you know these poor fellows who have been digging up royalties at the risk of their lives, some of them are old, they have survived the perils of their trade, they are broken, they can earn no more. Won’t you give them something [Page 23] towards keeping them out of the workhouse?’—-they scowl at us and we say—’Only a ha’penny, just a copper.’ They say, ‘You thieves!’ And they turn their dogs on to us, and you can hear their bark every morning….

Lloyd George was having the time of his life. He kept his audience howling with alternate rage and laughter; moment by moment, sentence by sentence, he assaulted the landlords, and outraged the gentry, and invited the dispossessed, and cozened the dissatisfied; he shouted and implored and wheedled and mimicked. It was a great performance.

And yet this spirited voice was not quite the voice of revolution–though thus it sounded in the anxious imagination of the Conservative press…. It was also Liberalism’s extravagant last will and testament. All it really said was this–that the rich, who are beginning to get too much in their own hands, have got to pay… his revolutionary language [was] nothing more than the language of super-taxes and old age pensions.

But in the meantime, the speech had done its work. If their lordships had been violent about the Budget before, they were twice as violent now. Mr. Lloyd-George redoubled his efforts… and up and down the country certain noblemen emerged from the rustic obscurity to which history had consigned them and began to trade public insults with their persecutor…

My favorite passage from the Limehouse speech is different. Mine is Lloyd-George’s claim that:

a fully-equipped duke cost[s] as much to keep up as two [naval] dreadnought [battleships]… [but is] much less easy to scrap…

Lloyd-George lived in a mental universe in which the dukes had their ownership of broad acres and their claims on GDP not because they did anything useful and entrepreneurial but rather because their very distant ancestor had laid Anglo-Saxon England waste in 1066 with King William the Bastard, or their distant ancestor had slept with King Charles II Stuart, or their not-so-distant ancestor had bribed enough members of Parliament to get an Enclosure Bill.

That was class war!

Or was it?

As Dangerfield points out, while the Tory squires and the titled members of the House of Lords in 1909 heard David Lloyd-George and thought “REVOLUTION!!”, the policies of the so-called People’s Budget of 1909 involved less income-tax progressivity (“supertaxes”) and less social insurance (“old age pensions”) than even the old Paul Ryan budget. And now that Paul Ryan has begun talking about how he wants to expand the EITC and the Ryan budget wasn’t his budget but rather the House Republican Conference’s budget, David Lloyd-George appears very far to his right indeed in everything but rhetoric.

I think that we here at Equitable Growth want to conceptualize the issues in yet a third way. If Arthur Okun was right, and if the bucket is indeed leaky, then the sharp reduction in the progressivity of the income tax and the reduction in union power to extract quasi-rents should both have given a significant boost to economic growth since 1980 or so. Yet that has not been the case. Is it the other factors reduced the underlying growth rate, and that Reaganomics actually did considerable good for growth but its effects have been masked? Is it that our Second Gilded Age is not gilded enough, and that growth will accelerate if we make just one more push to further widen the income distribution? Or is it that the leaky budget paradigm is wrong, and that there are at least as many channels by which greater inequality erodes investments, especially investments in human capital, and slows growth as channels by which it boosts growth?

We would really like to know which of these three is true. For unless we know, it will be hard to have an even semi-rational policy debate even were we to find a critical mass of people who wanted to have one.

So: in this round, half a million dollars out to some very smart and energetic people looking for answers to pieces of this big question. I am very interested to see and very hopeful about what the recipients will come up with.