Archive for November, 2012

The neoclassical theory of comparative advantage is both a prediction of how international trade will take place and a story about the gains from trade if countries specialize and trade according to their relative cost advantages.

Contra Greg Mankiw, Emily Oster’s essay is the worst possible way to teach the theory of comparative advantage.

Why? First, because international trade is not at all similar to dividing up chores in a household. Even worse is this example:

When I teach my students at the University of Chicago this principle, I explain it in the context of managing their employees. Imagine you have a good employee and a not-so-good one. Should you make the good employee do literally everything?

Managing their employees?!

Using such “common sense” examples absolves teachers of the responsibility of explaining to students the history and institutions of international trade (such as colonialism and multinational corporations) and the assumptions of the Ricardian/neoclassical story (such as starting with full employment, the absence of externalities, no economies of scale, and so on).

I really can’t think of a worse way of teaching the theory of comparative advantage than following the lead of Mankiw and Oster.

And one last thought: there’s the wonderful irony that most textbook examples of comparative advantage are based on a labor theory of value—without, at least these days, a single mention of Marx.

Protest of the day

Posted: 28 November 2012 in Uncategorized
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[the sign reads: “Budget = Hunger, Unemployment”]

Earlier this year, a friend sent me the following message concerning saudade, the Portuguese word for longing or yearning, which has often been used to “explain” the absence of anti-austerity protests in Portugal:

I think that this “saudade” . . .will quickly flush down the sewers if the austerity really ramps up, and even more people are thrown out of work, find their pensions depleted or cancelled, and so forth.

He was right, as evidenced in the recent upsurge of protests in that country.

Until a few months ago, Portugal was seen as a role model in the grinding euro zone crisis, adopting deep spending cuts and raising taxes to reduce its deficit without the outcry, protests and strikes that austerity policies have set off in other Southern European countries. International lenders praised the Portuguese government even as they arranged a 78 billion euro bailout for the country last year, following similar deals with Greece and Ireland.

But the belt-tightening helped push Portugal deeper into one of Europe’s longest recessions — and the Portuguese have now joined the ranks of Europe’s discontented, even coordinating a general strike with workers in neighboring Spain earlier this month. . .

Such protests and work stoppages have become much more common over the past year, as daily life for many Portuguese families has become a struggle to stay afloat. Pay is being cut for government and private-sector workers alike, the unemployment has risen to nearly 16 percent, retirees face higher health costs and students will pay more for tuition without any assurance that their degrees will lead to jobs. In fact, many graduates are packing their bags to emigrate instead.

Chart of the day

Posted: 28 November 2012 in Uncategorized
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Marvin Miller RIP

Posted: 28 November 2012 in Uncategorized
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Marvin Miller led Major League Baseball, kicking and screaming, from slavery into the modern era.

When Mr. Miller was named the executive director of the association in 1966, club owners ruled much as they had since the 19th century. The reserve clause bound players to their teams for as long as the owners wanted them, leaving them with little bargaining power. Come contract time, a player could expect an ultimatum but not much more. The minimum salary was $6,000 and had barely budged for two decades. The average salary was $19,000. The pension plan was feeble, and player grievances could be heard only by the commissioner, who worked for the owners.

By the time Mr. Miller retired at the end of 1982, he had secured his place on baseball’s Mount Rushmore by forging one of the strongest unions in America, creating a model for those in basketball, football and hockey.

Here’s Tommy Bennett’s characterization from earlier this year:

Marvin Miller is a throwback to a past era—maybe two or three eras ago. It’s rare these days to hear a well-dressed economist refer to himself as a lifelong “trade unionist.” It’s rare to hear someone earnestly compare the federal minimum wage to the minimum salary in baseball.

And here’s Miller himself:


Miller has still not been elected to the Baseball Hall of Fame.

The series continues with the Queen of Diamonds: Ina Drew.

Ina Drew was the Chief Investment Officer (CIO) for J.P. Morgan Chase before resigning after the company suffered a trading loss of $4 to $6 billion (and counting). She earned more than $15 million for the last two years and, in spite of being the person in charge at the time of the disaster, walked away with a handsome compensation package.

Special mention


Chart of the day

Posted: 27 November 2012 in Uncategorized
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David Cay Johnston explains:

Anyone who wants to understand the enduring nature of Occupy Wall Street and similar protests across the country need only look at the first official data on 2010 paychecks, which the U.S. government posted on the Internet on Wednesday. . .

There were fewer jobs and they paid less last year, except at the very top where, the number of people making more than $1 million increased by 20 percent over 2009.

The median paycheck — half made more, half less — fell again in 2010, down 1.2 percent to $26,364. That works out to $507 a week, the lowest level, after adjusting for inflation, since 1999.

The number of Americans with any work fell again last year, down by more than a half million from 2009 to less than 150.4 million.

The series continues with the Queen of Clubs: Erin Callan.

Erin Callan was the Chief Financial Officer of Lehman Brothers in 2008, who repeatedly reassured investors that Lehman was sound. She made many media appearances and gave interviews right up almost to the moment that Lehman Brothers filed for bankruptcy—the largest filing in U.S. history, $600 billion. Callan either ignored or stood by while the bank used misleading gimmicks to bolster its balance sheet by $50 billion, and she paid no attention to the various red flags that warned of the impending collapse.

Special mention


The series continues with the King of Hearts: Larry Summers.

As Treasury Secretary, Larry Summers pushed to deregulate CDS precrisis and during crisis wanted to sprinkle “magical liquidity dust” in bailouts to banks.