There’s a post over at Outside the Beltway I’d like to draw your attention to on the decline of war from the second half of the 20th century to the present. I’d intended to comment on this in a post of my own but his will do. Here’s a snippet:

In a mass media environment where we hear about horrible events from all over the world every day, it’s easy to think the world is falling apart. Or at least getting worse. But, according to Harvard Prof. Steven Pinker, the world has been becoming more peaceful and less violent throughout the history of civilization–and continues to do so&@133;

Take particular note of the graphic attached to the post. I won’t bother reproducing it here but, since much of this post is based directly on it, the post may not make a great deal of sense to you without it (it may not make much sense to you with it but that’s another issue).

First, if you needed a graphic illustration, literally, of the Pax Americana, the American Peace, for good or ill here it is. All of the spending (and borrowing) borne by Americans, all of the loss of life has bought this. We have made war futile. Attention must be paid.

That would probably be denied vehemently by some (which is largely why I’m posting this here rather than at OTB) and I recognize that the Europeans, in particular, reject this explanation. IMO it’s blindingly obvious and has some implications. Our challenge going forward is to preserve the peace while doing it at a cost we can bear. I sincerely believe that in a couple of centuries the history of our times will be seen by how successful we are at that.

Second, look at the jump ups in the light blue bars, the increases in battle deaths in interstate war. With two exceptions those jumps are when America went to war, first during the Second World War in the 40s, Korea in the 50s, Viet Nam in 60s and 70s, and the first Gulf War in the 90s. The jump during the 1980s is almost certainly primarily due to the war between Iran and Iraq while the jump in the late 1990s was presumably due to a number of small, bloody conflicts that took place largely without the notice of the American media because we weren’t involved in the fighting.

The wars in Iraq and Afghanistan are invisible. Painful and costly as they’ve been to us they haven’t provided the number of battlefield deaths that previous wars have done.

Finally, how you choose your terms is important. The graph reflects battlefield deaths in interstate wars, civil wars, and colonial wars. It does not reflect the hundreds of million of deaths due to countries killing their own people. We will never know how many people were killed in Germany, Russia, Eastern Europe, China, Cambodia, Iraq, Iran, and so on, murdered by their own governments. They don’t show up on the chart.

Were these deaths added to the chart it would strip away any illusion that the present is less violent than the past. But Leviathan’s hand reaches only so far.

Charles Kenny is absolutely right that small companies as such won’t solve the problem of the millions who are unemployed:

In the U.S. in 2007 there were around 6 million companies with workers on the payroll. Ninety percent of those businesses employed fewer than 20 people, according to analysis of the latest census data by Erik Hurst and Ben Pugsley of the University of Chicago. Collectively, those companies accounted for 20 percent of all jobs. Most small employers are restaurateurs, skilled professionals or craftsmen (doctors, plumbers), professional and general service providers (clergy, travel agents, beauticians), and independent retailers. These aren’t sectors of the economy where product costs drop a lot as the firm grows, so most of these companies are going to remain small. And according to Hurst and Pugsley’s survey evidence, the majority of small business owners say that’s precisely their intent—they didn’t start a business for the money but for the flexibility and freedom. Most have no plans to grow.

but his adulation of the virtues of large, established companies provides cold comfort:

If you’re looking for a lot of good-paying, stable jobs, you’d better hope there are some big companies around that want to hire. Kansas City Federal Reserve economist Kelly D. Edmiston’s analysis of U.S. data found that each year, 22 percent of staff in companies with fewer than 100 employees quit or are fired, compared with only 8 percent for companies with 2,000 or more workers. Edmiston also found that the jobs offered at large businesses were better than those at small businesses. Hourly wages at the largest companies, those with more than 2,500 employees, average around $27, compared with $16 in companies with payrolls of fewer than 100. Companies with more than 100 workers are almost twice as likely to offer retirement benefits and insurance, and considerably more likely to offer health care.

The problem is that those very companies have reduced their payrolls in the United States by millions of job over the period of the last 25 years. Can anybody reasonably predict they’ll start hiring a lot more people in the foreseeable future.

Can anybody think of a large company that is less than 15 years old that has a net increase in U. S. employees in the last year? In the last five years? I can’t. GE, GM, and Ford have all reduced their domestic employment. Apple is cagey about its employment figures (it doesn’t report them in its 10-K filings). What jobs its added have been mostly low wage retail clerks for its Apple stores and, as I read the reports, most of the growth in that area has been overseas.

The size of the company is largely misdirection. New companies hire; old, established ones don’t. That’s why policy should pay more attention to greasing the skids for the creation of new companies, not to mention getting the dinosaurs out of the way.

but I can’t hear what he’s saying. George Soros presents his prescription for “preventing a second Great Depression”:

Three bold steps are needed. First, the governments of the eurozone must agree in principle on a new treaty creating a common Treasury for the eurozone. In the meantime, the main banks must be put under European Central Bank direction in return for a temporary guarantee and permanent recapitalisation. The ECB would direct banks to maintain credit lines and outstanding loans, while closely monitoring risks taken for their own accounts. Third, the ECB would enable countries such as Italy and Spain to temporarily refinance themselves within limits at a very low cost. These steps would calm markets and give Europe time to develop a growth strategy, without which the debt problem cannot be solved.

I see how this could block the immediate problem but I don’t see how it resolves the fundamental, structural problems of the euro: a common currency with different, even conflicting fiscal policies. Greece will still need to borrow. German and French banks will still hold too much Greek debt.

I don’t see another practical alternative other than Greece exiting the euro or German taxpayers being willing to backstop Greek spending indefinitely, much as New York taxpayers propped up Tennessee for decades.

Gregg Easterbrook’s prescription for healing the aging economy? Optimism! After noting that we’ve had two rounds of tax cuts and and two rounds of stimulus spending, all of which have failed to jump-start the economy, he remarks:

That means more than $7 trillion in borrowing for the economy in just five years, roughly the amount per capita, in today’s dollars, the United States borrowed during World War II. Amazingly, some commentators call this “austerity.” Whatever the label, the Keynesian borrow-to-spark-demand formula has not worked. It is time to accept that more government spending is not the solution.

If more borrowing or more tax cutting aren’t what the economy needs, what is? Optimism. Human psychology is a bigger force in economics than current policy debate acknowledges.

In 2005, many fundamentals of the economy were worrisome – a housing bubble, highly leveraged banks and investment banks, a profusion of liars’ loans. Yet the economy boomed, partly because optimism was universal.

In 2011, many fundamentals of the economy are sanguine – high corporate profits, no resource shortages, low interest rates, ample money supply, low international tensions. Yet the economy is flatlined, partly because there is little optimism.

In reflecting on my own circumstances, I have plenty of reasons for optimism. I have all of my own hair and teeth. I’m fitter than many men half my age. I take no medications. Barring the things about which little can be done and I find tolerable I’m in extremely good health.

I am mentally more acute, if anything, than I was ten years ago. As Camus paraphrases the conclusion of Oedipus at Colonus, “Despite so many ordeals, my advanced age and the nobility of my soul make me conclude that all is well.”

Blogging may play a part in that. For me it’s a form of therapy or mental gymnastics, like sudoku or a crossword puzzle.

Our economic circumstances are fine, too. We own our own home and are planning to stay there until we’re carried out feet first (the addition we put on several years ago made our home completely liveable on the first floor alone). Barring some catastrophe, in ten years our income will probably be higher than it is now albeit from different sources and our present income places us easily in the top quintile of income earners.

I recognize that many are not nearly so fortunate. How can they be helped?

As I scan the transcripts of recent speeches and interviews by our leaders, the persistent message I take away from our political leaders is one, ultimately, of pessimism. Does that help or hinder? I think the latter. I wish they’d find some way to split the difference between an out-of-touch and Pollyannaish optimism and overwhelming doom and gloom. Tenacity and confidence in the face of adversity, perhaps. I see the tenacity but not the confidence.

I rarely read op-eds from The Nation’s Katrina vanden Heuvel because as a rule I find it such an unpleasant experience and, well, life is only so long. However, I deviated from my typical practice to look at this op-ed in the Washington Post and immediately came up with a question. Here’s her statement:

Corporations continue to ship good jobs abroad, while the few jobs created at home are disproportionately in the lowest wage sectors.

There appears to be evidence that this is the case. Unfortunately, the report cited has a problem. It’s comparing apples to oranges. Sectors with low median wages and low wage jobs are not synonymous. You can’t derive the wages being paid by new jobs based on the median wage in the sector. The jobs could be paying the highest wages in the sector or the lowest. There’s just no way to tell using sector as a benchmark.

Let me give an example. Median wages are higher in the healthcare sector are higher than in most other sectors of the economy and over the period of the last decade the healthcare sector has seen substantial job growth. Is this a good or bad thing from the standpoint of “good paying jobs”? The answer is there’s no way to tell based on this information alone. If all of the jobs are for cardiac surgeons, it’s a good thing. If all of the jobs are for bedpan emptiers, it’s a bad thing.

But here’s my question. Let’s assume that the jobs that are being created are mostly low wage jobs, as suggested by Ms. vanden Heuvel. How do you reconcile that with the assertion that the way out of our fix is more education. Will that result in a “Field of Dreams” outcome (“if you build it they will come”) or will it just result in the best educated bedpan emptiers and fast food order takers in the world?

I can’t figure it out.

Laurence Kotlikoff has five prescriptions for improving the economy over at Bloomberg. Here’s a quick summary:

1. Stop paying interest on bank reserves.
2. Get workers to invest in jobs.
3. Compel corporate America to invest.
4. Get prices and wages unstuck.
5. Achieve fiscal sustainability.

I think these prescriptions are something of a mixed bag. I agree with the first and think it’s just commonsensical. I guess I don’t understand why we’re paying interest on bank reserves in the first place. If it’s to induce banks to increase their reserves, that sounds to me like a perfect thing that should just be a mandate. If you want banks to have higher reserves, just make it a requirement of being eligible for federal deposit insurance, allowing your shares to be traded publicly, and all of the other benefits of a federal charter.

#3 isn’t just thinking outside of the box, it’s confusing a box with a hat. It’s either pathetically naive, frustratingly wrong-headed, or terribly phrased. The descriptive paragraph doesn’t describe “compelling” but rather cajoling. Yeah, that’ll work.

There are other problems with it as well. GE is frequently held up as an example of a company that’s sitting on a lot of cash, something on the order of $80 billion. Dr. Kotlikoff’s suggestion to “double their U.S. investment” is puzzling in this context. GE’s market capitalization is around $166 billion and the enterprise worth is something like a half trillion. I strongly suspect that its present U. S. investment dwarfs the $80 billion it’s holding in reserve. That can’t be what Dr. Kotlikoff means.

Does he mean increase whatever increase in U. S. investment it’s already planning to make? My off-hand guess is that GE has disinvested in the U. S. over the last couple of decades and plans to continue that next year. Double nothing is still nothing.

Additionally, how much of that $80 billion is offshore? Maybe an incentive to repatriate that money would be more effective.

Let me present an alternative prescription: provide incentives for companies investing more in the U. S. and disincentives for investing elsewhere. The U. S. government has enormous leverage, most of which is rarely if ever used. Just to give one example, if an executive order went out that no Microsoft products could be used in any U. S. government contract until the country stops eliminates its overseas facilities and replaces them with domestic ones that would be a pretty big hit on the company. It will never happen, of course. The Washington Congressional delegation would scream bloody murder, a horde of lobbyists would descend like a cloud of locusts, a telephone and email campaign would be started, and, importantly, actually doing it would be tremendously disruptive to government operations. My point is that the federal government has a lot of levers to pull and it doesn’t need permission to pull them.

In commenting on an LA Times article on the unfolding Solyndra storing, comparing it with another “green energy” loan guarantee in which the project, unlike the Solyndra guarantee, has no great likelihood of going bankrupt, Tyler Cowen Alex Tabarrok makes a prudent remark:

In the Solyndra case just about everything went wrong, including bankruptcy and possible malfeasance. Caithness Energy and GE Energy Financial Services are unlikely to go bankrupt and malfeasance is not at issue. As a result, this loan guarantee and the hundreds of millions of dollars in other subsidies that made this project possible are unlikely to create an uproar. Nevertheless, the real scandal is not what happens when everything goes wrong but how these programs work when everything goes right.

What’s the problem? Taxpayer dollars (or, worse, borrowed money) are being used to finance a project which the Obama Administration thought was likely to be funded anyway and for which the greatest consequence of federal support will be to increase the return on equity, enriching its owners while not actually accomplishing a great deal otherwise.

Barry Ritholtz has a very good piece of advice for policy makers which there is no likelihood whatever that they’ll heed:

When Bear Stearns first began to wobble in 2007, the initial error in this era of bailouts was in rescuing their bondholders. Instead, in 2008, they should have been forced to take the loss.

Its the same for creditors of Citi, Bank of America et. al. — instead of rescue packages, their creditors should have had to take the loss.

Mortgage delinquencies growing? More and more defaults in the pipeline? We can extend & pretend, or we can take the loss.

Note that via the FDIC, some bank lenders did take the loss. Washington Mutual’s collapse led it to being bought by JPM. Wells Fargo picked up Wachovia. Other examples abound, In each case where losses were forced to be realized, we ended up with a healthier few banks, and no moral hazard.

Zombie banks get created when they do not take the loss.

Now we have the European crisis, wherein all of the parties involved refuse to (say it with me) take the loss.

When you’re not willing to accept any losses you end up in the fix Japan has landed itself in.

This is a problem that extends past economic policy into fiscal and foreign policy, where it is particularly acute. If you’re not willing to take a loss in order to achieve something you want and that’s known to be the case it puts you into a weaker bargaining position.

I’ve quoted it before but this snippet of poetry from James Graham puts it well:

He either fears his fate too much,
Or his deserts are small,
That dares not put it to the touch,
To gain or lose it all.

I want to draw your attention to a lengthy and thoughtful post by my long time blog-friend, Marc Schulman, proprietor of the blog American Future. Marc is a retired Wall Street guy, reasonable, knowledgeable, and IMO a good egg.

He begins by outlining the history of the fiscal and monetary policy responses to the economic downturn to date, no mean feat in a blog post. His proposal for moving forward is not unlike that of Scott Summers Sumner: he advocates loosening fiscal policy and tightening monetary policy. Read the whole thing. Lots of charts and graphs for those of you who are into such things.

I have a few reservations about Marc’s proposals the most important of which is that I see the strategy he outlines as ancillary to substantial structural reforms, not a substitute for them. As the chart I posted here yesterday suggests private sector GDP is moving sideways and is only loosely correlated with increases in public sector spending. Total GDP continues to rise solely due to the huge, unsustainable deficit.

Second, we have both a near term economic problem and a long term one. Absent two consecutive bubbles private sector per capita real GDP would have grown very little if at all over the period of the last 15 years. I don’t know how you account for the effects of a bubble when determining aggregate demand but I find it incredible that the bubbles would account for nothing at all of our growth over the period. Those bubbles have created enormous problems of bad resource allocation and much of the policy response has been to retard or prevent the necessary re-allocation.

Third, we are perilously near primary default. If we are going to try yet another round of fiscal stimulus, it should be quick, efficient, and large enough to make a difference. We can’t lather, rinse, and repeat forever. And by “forever” I mean more than another couple of years.

I am extremely skeptical that pouring money into the education, healthcare, government, and bubble sectors will turn the economy around. But it’s self-evident that borrowing to do so will expand the debt.