We are Afghanistan

The troubles of forging unity from tribalism and chaos are universal.

With support for the nation-building effort in Afghanistan waning, it seems timely to discuss how common its lessons are for societies around the world. Afghanistan has never had a strong central state, unlike, say, Iraq or the US. As we in the US rush headlong into an always-on, utterly connected, everyone talking to everyone else world, we have left the insular tribal worlds of our own forebears far behind. Even the Germanic tribes of pre-Roman Europe seem to have been more organized and cosmopolitan than what we are facing in Afghanistan.

On the other hand, the perennial pull of state's rights here at home, the nihilism of modern Republicanism, and insurgent subcultures like urban gangs, remind us that state legitimacy is not secure even in the most "advanced" cultures- it has to be earned perpetually. And overarching all these organizations is the international political system, which remains dedicated to an anarchic individualism reminiscent of the Germany of Luther's time, or before.

So what will it take to glue Afghanistan back together, and what lessons can be taken to or applied from elsewhere? I'll start in my backyard. One blight of urban life is gang tags, which are applied dog-like to territories to proclaim gang "ownership", a form of sovereignty among gangs, or in extreme situations, over everyone else in the territory as well, as we see in Brazil's favelas and Mexico's cartel-owned cities and provinces.

Erasing such tags is part of a "broken windows" strategy to assert the legitimacy of a community's silent majority over the vandalizing minority who by their "ownership" signs try to assert political hegemony. The lesson is at once extremely simple and complex- that whoever controls the local infrastructure and public spaces gains social power. If we concede our public spaces to corporations in the form of billboards, we give them dominant legitimacy. If we concede our public spaces to gangs, we give them legitimacy, first to tag and counter-tag territories in never-ending internecine battles, and then, if we are sufficiently negligent, legitimacy over other aspects of our lives, like parking lot security, small business security and shakedowns, and eventually coercive power over the entire local political system.

What's the lesson? An obvious one is to know what is going on in order to know how to wield power. We have to know what is going on with gangs in order to realize that their tags are not gifts of public art, but adversarial political statements. We need to know the real power structures on the ground in order to break them and replace them with more broadly legitimate structures. Likewise in Afghanistan, we need to know the social / political setting in order to know the signs they produce. Schools for girls may make *us happy, but they might be threatening to a hide-bound traditional culture. While rebuilding Afghanistan requires some degree of cultural change on its part, we'll have more success the less such change we demand. I'm no expert, only commenting on the need to know what we are doing before trying to rebuild a nation, rather than reading the lessons of failure afterwards.

A second lesson is that the (silent) majority needs an active voice if it is to drown out the vocal, even armed minorities vying for political control, including whatever elite class currently holds power. Such majorities are easily cowed by armed coercion, so it can be tricky to know their true attitude, especially in a canny and beaten-down culture like Afghanistan. The Afghan tradition of elder conclaves remains one of the bulwarks of civil political dialog, and needs to be fostered throughout the system, especially at the grass roots. More generally, such a voice requires media that discuss and bring to light gang/Taliban activities, corruption, cultural ideals, etc. And it requires official channels that control coercive power, are responsive to community needs, effective in addressing them, (such as apprehending gang members), and free of corruption that impairs each of the foregoing elements.

Afghanistan is sadly far away from each of these elements- militias roam the country, the Afghan army has little loyalty or competence, the government is breathtakingly corrupt, the population is largely illiterate, and the stolen presidential election indicates a certain lack of responsiveness to the populace. Where will all this end? The situation is not lost, but without more trust and organization among the anti-Taliban, pro-democracy and pro-state elements, our role is futile.

One critical angle is the nature of central government in Afghanistan. With artificial borders, impassable terrain, and multiple quasi-independent ethnic groups, central governments have never been very strong even when they have been brutally tyrannical. Yet empowering the presumed silent majority of Afghanistan (including women) over the various gangs either allied with or part of the Taliban requires that the state have quite a bit of countervailing power- power that needs be legitimate in that majority's eyes if it is to be effective in the long run. That is the basic trick- how to draw the allegiance of the people (who may or may not have voted for the government) to its use of power over Talibs and other fanatics whether religious, mercenary, or the usual mixture thereof.

The alternative model is one of decentralization, where the parts of Afghanistan go their own way under token sovereignty in Kabul. In the absence of external threats, this would be quite attractive, but it lays the country wide open to divide-and-conquer by the Taliban and its ISI/Al Qaeda allies. That is the threat that necessitates our involvement and in the long run necessitates a strong central state, however novel the idea is for Afghanistan. One way to help this along would be to put the tribal areas of Pakistan on the table- to start discussing the idea that there is a cost to Pakistan for destabilizing Afghanistan, and that cost is US and international support for transferring the "tribal areas" that Pakistan has never shown much constructive interest in to their more natural home in Afghanistan, forming a more unified Pashtun region.

(Incidentally, the firing of General McCrystal puts another interesting light on the universality of these state power issues. It would not serve America well to put its own constitution in danger for the sake of more effective Afghan rebuilding. Seen from the perspective of ancient Rome, we are already in mortal danger by having standing armies, paying them as mercenaries rather than drafting them from the eligible population, paying various proxies to fight for us, sending them off to countless far-away wars and garrisons with little end in sight, and having a sclerotic and corrupted Senate virtually unable to serve the public interest. The last thing we need is military insubordination that brings ultimate civilian control into question.)

This brings me to the international system- another political system with some need of integration and federalization. Right now, nations exist in a largely lawless domain where armed states and non-states compete for shifting alliances either trying to gain legitimacy in the eyes of some audience, or trying to exert direct power over or under the table. The powerful bully the weak, and chaos is held at bay largely through the good (or not so good, depending on your perspective) offices of Pax Americana.

Al Qaeda has shown the power of PR over mere bombs and aircraft carriers. Their message continues to corrode the status/legitimacy of the US in the Muslim world. This is doubly remarkable because their own brutality hardly renders them attractive, as might be, say, the far more justified plight of the Tibetan people under the Dalai Lama.

Having a more organized and democratic international system (i.e. a world government) would be very helpful to address such issues of common concern, like the lawless fishing of the seas, pollution, and climate change. Perhaps the greatest need, however, is to set a floor of minimal standards of local governance, monitoring failed states before they became festering international sores and taking a systematic, organized response that is stronger than the shrugging and flaccid UN ministrations they are met with today. With respect to Al Qaeda, a coherent world government would be much more likely to treat such irritants as policing and governance issues rather than some kind of clash of civilizations / war on terror, etc. The US didn't have an international structure to turn to, forcing it to "go it alone" with all the problems attendant to such foreign adventures.

Afghanistan is a model of state failure, suffering decades of civil war capped by the brutally benighted government of the Taliban. The international system as sponsored by the US is not in quite such a chaotic state, after the last century gave us such cautionary lessons. But the US will not always be the global superpower, nor is it universally appreciated in that position. So it would be wise to build international institutions, as we are building national Afghan institutions, that can further the peaceful interests of humanity in an effective way.

• Friedman is pretty down on Afghanistan. But how can our work there not "resonate" if it has world-wide importance?
• Know thy parents.
• Why are we failing? Because markets are not enough.
• Who governs Britain?
• Stem cells to the rescue.
• Bill Mitchell quote of the week, explaining the curious phenomenon where the private markets were clamoring for public debt issues even when the government was running surpluses. And secondly, the fact that public debt has always found a market:

"If you then think about this, independently of the specific proposal that the paper is considering, public debt serves a core function for private profit-seeking. The mainstream macroeconomics textbooks and commentators never emphasise this aspect of public debt.

They are always relating it back to profligate government spending and the sovereign default. The reality is that public debt plays no fundamental role in funding government spending. But it plays a very crucial role in underpinning the risk management in the private sector.

In other words, public debt is really corporate welfare."

Tax carbon, or it will keep taxing us

When will we take our addiction seriously?

Far more serious than America's fiscal deficit / debt is our ecological deficit- the garbage we are spewing into the oceans and air. While in this blog I enjoy taking potshots at religion as our clearest and most outrageous example of cultural self-delusion, and have spent some effort on the delusions of the deficit terrorists and conservative economists generally, and also love to post updates on biology that interests me, none of those issues compare in importance with that of evironmental sustainability.

While the BP blowout sends perhaps one to two million gallons (or ~4,000 tons) of oil into the ocean daily, humanity is sending roughly 30 million tons of CO2 into the oceans daily by way of the atmosphere. Day in, day out, with no end in sight. This pollution may be invisible and less drama-turgic than an oil slick, but it is creating far-reaching and ever-mounting problems for everyone in the biosphere. And that means us, too! Al Gore has told us all about it, But out of sight, out of mind, and why deal today with what can be put off till tomorrow?

Washington's ditherfest on this issue reflects the general apathy of the country, (in addition to large dollops of corruption), which feeds off dramatic events like an oil spill, while finding it hard to attend to deeper and longer-term issues, especially those with economic commons characteristics, prone to pseudoscientific obfuscation, or hard to see directly. In short, it takes moral fiber to face up to the many ills of our carbon addiction:

1. Climate change, with disruptions to Earth's climate not seen for tens of millions of years. Do we have a duty of love and care to our fellow-travelers on planet earth? Should we give future generations of humans a degraded biosphere? Beyond the carbon cycle, we are also upsetting the nitrogen cycle with huge amounts of fertilizers, being responsible now for most fixed nitrogen on the planet. We are laying waste to whole ecosystems in slow motion. Will we take responsibility?

2. Pollution- coal pollution kills 24,000 people in the US, along with countless other health and environmental problems. We are scrubbing some acid from some power plant flues, but there are numerous problems with the remaining pollutants, including continuing acid rain. Mining coal rapes some of America's finest wild country, not to mention its danger to miners. Coal-fired pollution from China is starting to drift clear across the Pacific to us in California. Oil drilling isn't risk-free or clean either- nor is gas drilling. A carbon tax would cleanly target the most polluting fuels with the highest penalties, and would hopefully eliminate the scourge of coal use entirely here in the US.

3. Strategically, we accumulate endless problems incurring trade deficits to send money to Iran, Saudi Arabia, Venezuela, and the other petro-countries for their oil. We get poorer, and they incur the notorious "resource curse" that impedes governance and human development. We import about 1.2 million tons of petroleum per day, costing roughly $700 million per day. The external costs of this in military responsibilities throughout the Middle East and beyond, combined with foregone policy choices in places like Nigeria and Saudi Arabia due to our economic dependence, are incalculable. Our position is reminiscent of Rome's, dependent on Egypt and North Africa for its life-line of grain. That didn't turn out well, either.

So, what will it take to get us off oil? A recent newshour panel talked about new research investments needed to get this ball rolling.

It would be great to have spiffy new technologies and magical solutions. But we have all the materials we need at hand already, in the form of renewable, nuclear, and other technologies. What we need is the will and incentive structure to use them. Wind and solar power are on the edge of economic viability, combined with storage technologies for load balancing on a smarter grid. A serious and sustained carbon tax would give them the playing field they need by pricing-in the many ills attendent to fossil fuel use. Such an incentive structure will naturally bring out sustained technological innovation as well, without a lot of government involvement and direction. It is time to use economics to do the planet and ourselves some good for a change!

How high would such a carbon tax need to be? Energy consumption in Europe is roughly half of ours per capita, with gasoline and natural gas prices roughly double ours, due mostly to taxes. Europe's fossil energy consumption seems to have peaked, with renewables a growing part of their source mix. This would indicate that a carbon tax in the US that would double consumer fuel prices would take us a substantial distance towards higher efficiency and more renewable sources. Technological development that would extend this curve to the complete elimination of fossil fuels is in my view likely, but still a matter of speculation and future evaluation/policy adjustment. Remember that the current policy on acid rain, modest though effective, turned out to be much less costly than anyone estimated.

However partial such solution, it will still be a rather large political and economic pill to swallow, given our spineless political system dedicated to incumbant interests. The climate bills under consideration are only baby steps toward this solution, even after the BP blowout has so dramatically illustrated the stakes. If one thinks of humanity's long term residence on the planet, however, time is very much of the essence, as is effective action.

• Toles on a carbon tax.
• Some notes on a culture of responsibility.
• Who manages our companies?
• And Krugman gets it, on Europe's descent into double-dippery.
• Bill Mitchell quote of the week, here quoting Alan Greenspan, of all people(!):

"'The U.S. government can create dollars at will to meet any obligation, and it will doubtless continue to do so. U.S. Treasurys are thus free of credit risk. But they are not free of interest rate risk. If Treasury net debt issuance were to double overnight, for example, newly issued Treasury securities would continue free of credit risk, but the Treasury would have to pay much higher interest rates to market its newly issued securities.'"

Four genomes

A nuclear family gets its nuclear DNA sequenced. What can it tell us?

With sequencing technology going dramatically down in price and up in speed, and routine individual genomes within sight as a matter of routine medical practice, one group of researchers decided to sequence the DNA of two parents and their two children to see what we can gleen from such ultimate-detail data.

One thing to note is that the sequence of an individual's genome is static data. Once done, for whatever price, that is it- it does not have to be redone again, unless the original error rate was excessive. This work claims accuracy of 99.999%, which seems sufficient for most needs. At three billion base pairs, this amounts to 3,000 errors, which isn't nothing, but is very small.

On the other hand, the interpretation of this data is highly dynamic. As we learn more about how human biology works, how genes turn into cells, organs, behaviors, and about how the astronomical numbers of human genetic variants affect these traits, we can keep going back to our genomes to learn more about ourselves.

The paper makes several basic observations, improving data that had been approximated by other means. For instance, the human mutation rate turns out to be ~70 mutations per generation. Considering that roughly 2% of the genome codes for proteins, and no more than 30% of the genome involves gene-related DNA at all, (introns, promoters, etc.), this is a pretty modest mutation rate. We are all mutants, but the chances of something disastrous occuring are relatively small, as is seen in the phenotypic real world as well.

The researchers are able to map the recombinations that happened on each chromosome in each gamete that produced each child, in detail. Just over half occurred at what are called recombination hotspots, sprinkled along each chromosome. This remarkable process of recombination mixes things up genetically, insuring that what each child gets is not just a roulette selection of whole chromosomes from the respective grandparents, (which is what would happen in the absence of recombination), but a unique patchwork assembled out of both grandparent's chromosomes, insuring that each human is highly unique, and that, over long periods of time, genes get selected on their own merits rather than living and dying based on the many other gene variants with which they co-habit their chromosome.

The putative reason to do all this sequencing was to track down two rare and severe genetic diseases afflicting both children, and this complete sequencing offers several technical advantages for such a hunt. Firstly, the accuracy of each of the full sequences is increased by having the others to compare with. Shared variants are likely to be real, while unique ones can be explicitly resequenced to double-check. Assembling these sequences from the small individual reads that form the basis of all DNA sequencing is a huge computational effort, always helped by having a comparison base of maximally similar data.

Secondly, the density of this data makes finding disease-causing genetic variants much easier. In typical studies of genetic associations, a population of affected patients is studied, with comparison to a control group, randomly selected from the population. There will be a very large number of genetic variants among all these people. Ferreting out the variants or regions of variation that happen more frequently in the affected group is thus very difficult. In a family group, on the other hand, while the parents presumably have no special genetic relationship to each other, the group as a whole will have far lower numbers of stray variants, decreasing the search space substantially.

In this case, the researchers find that since two diseases they are interested in, present in both children but absent in the parents, appear to show recessive genetics, they can throw out 78% of the sequences, and, from the recombination map, focus on those bits of the children's genomes that are identical between them and heterozygous in the parents (22%). The variants also must be rare, based on the rarity of the syndromes (primary ciliary dykinesia and Miller syndrome), allowing them to throw out variants known to be common from other population genetic variant studies. This allows them to winnow down the disease candidates to four variant genes, as opposed to the dozens that would have resulted from a more typical gentic disease association study.

Personalized medicine is coming our way- it will combine sequence analysis of our genomes (in addition to molecular analysis of cancer biopsies and the like) with the developing knowledge of just what the sequence means- knowledge that is only in its infancy right now.

• The genetics of grooming.
• The dark heart of the Democratic party.
• A double-dip, on the way.
• Religion, shmeligion.
• Bill Mitchell quote of the week, regarding Greece and its suffering brethren in the Euro:

"If I was in charge of one of these nations I would announce next weekend (when the banks are closed) that I was introducing a new currency, defining all Euro debt liabilities in the new currency and let the foreign exchange markets value that currency on the Monday morning.

I would withdraw any semblance of central bank independence (that is just another democratic insult) and I would expand the budget deficit immediately by introducing a Job Guarantee.

Then by Tuesday, I would start repairing the confidence of private spenders to get the economy rolling again.

And after a relatively short time I would notice that economic growth was gaining speed, private spending was returning, unemployment was low and … the budget deficit was falling.

Then I would send an open invitation to the citizens of Germany to abandon the teutonic ship and head south (or west)."

What is labor's share?

How does labor's share of income and wealth happen? (Forgive me, this is sort of a thinking-aloud and lengthy post.)

In our time, large increases in productivity are going everywhere but to the laborers who are doing the work- to the financial sector, to capital, to government, and especially to the rich in the form of income and wealth inequality. Why is this, and what can be done about it? I will discuss a hierarchy of processes that affect this balance, from the easily understood to the more arcane.

(Please see a recent NYT story for a discussion of this inequality, with useful graphics.)

- Direct conflict: strikes, unionization, union-busting
One method of altering the share of income going to labor is to agitate directly for that increased share. Unions are the primary vehicle of pro-labor agitation, and in their heyday made America a much better place, with a more-equal distribution of income and other advancements in workplace decency. Conversely, antiunion government policies ("right-to-work" laws, strike breaking assistance, and race-to-the-bottom tax breaks for business relocation) and corporate agitation have the reverse effect. Since the 60's, antiunion agitation by large employers like Walmart, Ronald Reagan, and many others has been markedly more effective than pro-union activity. Thus, on balance, this effect has contrbuted to decreasing the labor share of GDP in recent decades.

- Labor markets:
Theoretically, the labor market lets employers bid for available labor, and in flush times, even for unavailable labor, poaching from other employers. Conversely, it lets workers bid for acceptable workplaces and higher salaries. In the aggregate, employers have to pay labor enough to staff the enterprises from which they can then reap excess profits and value. What limits labor supply, and what sets the price?

Conventional theory claims that it is productivity that ultimately sets the labor price.. that employers hire workers at the market wage rate until the marginal profit per extra worker reaches zero, assuming that the last worker is less productive in the enterprise setting than the first one.

A more realistic scenario might be that employers have certain models of how to run their enterprise at a certain scale with a minimum amount of labor. They hire that labor at the prevailing wage, then pursue productivity gains that allow them to eliminate those individual employees representing the lowest profit to wage ratios. The employer has no interest in hiring to the limit of marginal utility, since that is a waste of effort and profit in an organized business model which is not, typically, infinitely expandable. Thus there is no need to clear the labor market from an individual employer's perspective, and nor does pay in a given company necessarily rise to the level of productivity. In aggregate, however, new enterprises will hopefully be founded to employ marginal labor, depending on a variety of cultural and governmental settings, discussed below.

Businesses also have a variety of other advantages in the labor market. One is assymetric information, where a culture of secrecy surrounds salaries outside the HR department, putting applicants at a severe disadvantage. Secondly, employees tend to be more loyal to companies than the reverse, valuing stability for personal reasons and setting themselves up for undervaluation. Thirdly, in the internal competition to be a high profit-to-wage employee, the profit side of the equation is highly flexible, in the form of extra time spent, creative effort, and other contributions (though the reverse might also be cited, in Dilbert fashion, with pointless meetings, personal activities, self-dealing, and other drags on profit). On the other hand, pay is highly inflexible, raised only in the most notoriously grudging manner.

I'd rate this process as tending toward lowering the labor share as well, though it is perhaps the only process of those discussed here that can lead to wage gains when the stars are all aligned, which it to say, when enough entrepreneurs and businesses have pending business needs and credit available to bid up salaries. This happened most recently during the late Clinton years, not due to that administration's economic policies, but mostly due to the techno-cultural ferment of the computer and internet boom which raised productivity even faster.

- Immigration and trade policy:
Another broad influence on the macroeconomic settings and on labor power in particular is immigration policy, or lack thereof. While legal immigration is relatively balanced and doesn't lead to overall distortions in the employment market, illegal immigration has huge effects on the lower end of the labor market, essentially removing the wage floor for unskilled workers. The enormous tide of illegal immigration from Latin America is great for employers, who bid down unskilled pay to minimum wage and below, with under-the-table arrangements, and other means of keeping menial work not only underpaid, but distasteful. The upshot of this process is the typical mantra that such immigrants "do work that citizens don't want to do".

The alternative to importing and underpaying labor is offshoring work to low-wage countries. The usual theory of comparative advantage would say that we gain from this exchange, freeing domestic labor for higher-value pursuits, while getting advantages of trade. This only works when domestic labor is actually employed in higher value pursuits- something that is not the rule, needless to say. Scandinavian countries take a strongly supportive role in labor mobility, sponsoring serious retraining for displaced workers, leading to real jobs in such higher-value industries. The lesson is that the state has an important role to play in making such economic freedom for companies work for the labor force and country at large.

At any rate, our immigration and trade policies have been strongly on the side of decreasing labor's share of income, winking at a flood of low-skilled immigration, and providing trade agreements that favor US businesses, occasionally consumers, but never labor (NAFTA, for example).

- Macroeconomic policy:
A key insight of Keynes was that demand leads to production. Enterprises don't produce what doesn't sell, and they can only sell to someone who has money to spend, which was earned or was given by the government. Collapses in aggregate demand, such as we see currently as the private economy swings from excessively high indebtedness and consumption to higher saving, lead directly to lower production, and thence to a spiral of deflation unless the state (which prints the money, after all) steps in to fill the demand gap. The state ideally supplies money up to productive capacity, also funding the increased private saving and leakage via the trade deficit while also keeping aggregate demand afloat.

The stimulus package of the last year was a step in this direction, but clearly not enough, as unemployment remains painfully high and we head into what looks like a double-dip recession. High unemployment leads naturally to a lower wage share of GDP, as employers can bid lower for workers, as well as employing fewer overall.

On the long term, macroeconomic settings have critical effects on this balance, as the Federal Reserve's fundamental directive makes clear- "maximum employment, stable prices, and moderate long-term interest rates". Have they been pursuing maximum employment? I don't think so. Recent decades have seen the decline of Keynesianism and the rise of monetarism, after the inflation, stagflation, and resource shocks of the 70's led economists to pitch full employment under the train in favor of fighting inflation. The chosen weapon was high interest rates, which choked credit and business formation, lowering employment in what was generally viewed as "necessary pain" to wring inflation (in the form of escalating wage demands) out of the economy. All this was quite effective on the inflation front, but what of employment? Maximum employment has been reinterpreted as NAIRU, or the rate of unemployment consistent with low inflation. What unemployment is that? Well, it is very difficult to say. Could be 5%, or 10%. Right now, we have low inflation, so we could be at the NAIRU- no one really knows.

The fact is that there is no analytical method to determine the NAIRU. It is whatever unemployment rate has been consistent with low inflation in the past, and might change at any time, depending on cultural, technical, or other factors. It is a chimerical construct allowing policy makers to accept some arbitrary amount of unemployment as good rather than bad. But there are other ways to skin the cat of inflation, rather than through unemployment. Employment is very high in Japan while inflation remains very low, probably due to a high savings rate that keeps aggregate demand relatively low. The US in the 50's and 60's also had consistently high employment with low inflation, until the Vietnam war and other compounding fiscal and resource problems led to rising inflation in the 70's.

In that time period the US probably benefitted from consistent export surpluses which allowed rising private net saving with low government debt (i.e. even without government deficits, the private economy gained net financial resources from trade that it could save). Now that our trade balance is consistently in deficit, the government has to continually replace that leakage with deficit spending, leading to accumulated government debt, pending eventual re-alignment of our trade position. (Debt which is not bad, by the way. Who worries about our 28 trillion of accumulated private debt, compared to the 10 trillion of public debt? No one.)

At any rate, the Fed has focused on wringing out residual inflation over the last thirty years, accepting substantial levels of unemployment and underemployment along the way. The Fed has been pilloried for keeping interest rates too low in the last decade, fueling the housing boom with easy money. I would disagree. The Fed was partially at fault, but not for low rates- those were fine, general inflation being quite dormant. Rates are a very blunt instrument, penalizing all businesses and workers for the sins of one sector in this case. No, the Fed's fault lies in lack of regulation, both of the mortgage industry, and of the high-finance industry, which created such an Everest of fraudulant "instruments". Its laxity was driven by ideology, assuming that markets self-correct and that active and adversarial regulation is unnecessary. They do self-correct, but not in a timely fashion. After all, Ponzi schemes self-correct as well, eventually! The Fed was established to mitigate this kind of destructive self-correction that was recurrent in the 1800's, and it failed spectacularly in that role.

High interest rates are a drag on business and labor, but more pernicious for labor, since while the number and size of businesses can go down during a recession, the population can't- it keeps going up, leading to the agony of unemployment, as well as the market effects noted above where wages are bid down to the lowest level necessary to hire the desired worker. I.e., the labor share of a shrinking GDP decreases. This is one reason why most economists take economic growth as such an automatic good- even though growth may represent unsustainable resource use, pernicious monetization of human needs, and counterproductive activities of many other kinds, the basic need for employment is only met in a setting of economic growth.

The Fed was also at fault for persistently calling for federal fiscal discipline and balanced budgets, via ideologs like Alan Greenspan. It was this fiscal discipline, briefly expressed as federal budget surpluses, which drove the private economy into high debt which has now imploded. Government spending has to cover leakages from the private economy- leakages like trade deficits and net savings to government bonds which reduce money available for consumption. With the economy in perpetually high trade deficit, and the dollar not adjusting due to its special position as the world's reserve currency, (among other reasons), far more government deficit spending was needed to keep the private economy from consuming out of private debt as has happened over the last decade. Issuing government debt for all these deficits was also not necessary- debt is purely a monetary operation to guide interest and inflation rates, and is not required to directly "fund" government spending.

- Cultural settings of education and optimism:
Now I transition from what is economics (loosely construed!) to what is practically theology. Entrepreneurs create jobs, combining inspiration, skills, labor, and capital into new ways to fulfill human needs. Apple Computer is a great example of a persistently entrepreneurial operation, which keeps coming up with new businesses- ways to transform mundane materials and engineering talent into satisfied human desires and economic flows.

Entrepreneurs need a variety of external ingredients, principally labor with the education or skills to realize a new vision, and capital. If capital is scarce, as it is right now, then labor excess is not going to make up for it, unless its price is bid dramatically down, perhaps to garage start-up levels. Conversely, all the money in the world isn't going to make an Apple Computer- it takes education and more broadly a culture of technical innovation, even geekery. This is what makes urban environments so productive relative to rural ones- labor's share is higher in dynamic urban environments because the balance of entrepreneurs with the necessary ingredients for job creation is high, compared to the labor pool, leading to economic growth. In rural areas, wages are low, but that is not enough to offset the lack of an educated labor pool flexible enough and concentrated enough to turn its hand to many different value-creating ideas.

But not all urban environments are dynamic, and this is California's achilles heel looking to the future. Our schools have dropped to among the worst in the nation, as we have counted on the cultural / physical climate and the UC system to attract bright people from elsewhere to employ a workforce which is heading toward unskilled labor due to demographic and immigration trends. As California becomes increasingly dysfunctional politically, educationally, and economically, entrepreneurs may lose access to the requisite concentration of skills and eventually the sense of optimism to keep building high-tech businesses in the state. This would seriously impair not only economic growth, but also, given a lower rate of business formation and job growth, labor's share of the economy.

- Conclusion:
Now, it could be that capital and high earners have in all truth become more important than labor to the production of GDP in the US, deserving their higher and growing share. Perhaps with rising automation and other technological conveniences, the marginal product of low-skill labor has declined, while the leverage of high-creativity and capital-intensive work has increased. Perhaps the ceaseless winner-take-all nature of many professions has properly segregated very high producers from the riffraff, now unsupported by blanket protections they might have enjoyed in the past like unionization and conveyer belt-like promotion and seniority systems. We may have transitioned to an Ayn Rand-ian meritocratic system which has finally uncovered the true relative worth of various economic actors, both human and monetary.

However, I doubt that is the case. First principles would indicate that with rising wealth, the economic value of that wealth as capital should decline relative to the labor which is the true source of creativity in employing it. The more wealth we pile up, the less useful each increment is in funding productive activity. Thus one suspects that the evident higher returns to wealth in recent times are a form of rent, perhaps due to rampant financialization and excessive private indebtedness that has afflicted the US economy in recent decades.

Secondly, inequality between high and low earners is very hard to defend if one takes our educational system seriously, since it cranks out broad classes of certified people for the various professions and other pursuits. While there are surely fine differences in personal characteristics that make people variously productive after such training, they are unlikely to correspond to the differentials of hundreds-fold present in today's business pay structures. Not in any linear fashion, at any rate. Far more likely is that these markets are defective, either because of intrinsic problems of tournament-like markets, or because executives defeat market mechanisms by collusion, misappropriation of shareholder equity, etc., while using the same markets to consistently underpay employees.

• A little harmless dreaming on the economic left.
• Back to the barricades in Europe?
• A brief little labor primer.
• Larry Summers even gets it, seemingly.
• How science works.. by critique and experiment.. somewhat unlike theology.
• Mr. Bully kindly requests that we bomb Iran.
• Revolving door sleeze under Ken Salazar.
• We may be headed for a double-dip super-recession.