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Archive for December, 2009

Robert Reich has been pretty much dead-on for the last 18 months: criticizing the size of the stimulus, the bailouts, and on health care reform. He sums up the last 12 months (and much of the time before it) pretty well:

But if 2009 has proved anything, it’s that the bailout of Wall Street didn’t trickle down to Main Street. Mortgage delinquencies continue to rise. Small businesses can’t get credit. And people everywhere, it seems, are worried about losing their jobs. Wall Street is the only place where money is flowing and pay is escalating…

The real locus of the problem was never the financial economy to begin with, and the bailout of Wall Street was a sideshow. The real problem was on Main Street, in the real economy. Before the crash, much of America had fallen deeply into unsustainable debt because it had no other way to maintain its standard of living. That’s because for so many years almost all the gains of economic growth had been going to a relatively small number of people at the top…

President Obama and his economic team have been telling Americans we’ll have to save more in future years, spend less and borrow less from the rest of the world, especially from China…

In truth, most Americans did not spend too much in recent years, relative to the increasing size of the overall American economy. They spent too much only in relation to their declining portion of its gains. Had their portion kept up — had the people at the top of corporate America, Wall Street banks and hedge funds not taken a disproportionate share — most Americans would not have felt the necessity to borrow so much.

The year 2009 will be remembered as the year when Main Street got hit hard. Don’t expect 2010 to be much better — that is, if you live in the real economy. The administration is telling Americans that jobs will return next year, and we’ll be in a recovery. I hope they’re right. But I doubt it…

As long as income and wealth keep concentrating at the top, and the great divide between America’s have-mores and have-lesses continues to widen, the Great Recession won’t end — at least not in the real economy.

Why oh why can’t he, not Summers and Geithner, be calling the shots on Obama’s economic team? They, not he, are the idealists.

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Thank You

To all the readers and commenters on this blog, I genuinely thank you for supporting this occasional habit of mine. I’ve been writing posts regularly for a little over a year, and vain as it may sound, the continuously growing number of readers has served as a motivation for continuing to think through and write about some really important issues. I wish you all a wonderful holiday season and hope you’ll be back in the new year.

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I’m in the Christmas spirit, fresh from decorating the Krafft family tree (pictured above), and I wanted to write something holiday related. As so often happens, though, David Ruccio beats me to the punch, pushing back on the typical counter-intuitive anti-gift argument from mainstream economics. Thankfully I have something to add this time, as you’ll see below. First, here’s David:

It’s Christmas, and therefore the time when one or another neoclassical economist shows up to point out the impossibility of the gift. The basic argument—this year from Joel Waldfogel, courtesy of the Economist—is that gift-giving represents a “deadweight loss,” that is, the difference between the satisfaction people get when they spend money on themselves and when well-meaning gift-givers spend the same amount of money on gifts.

The conclusion: from the perspective of neoclassical theory, gift-giving would be improved by just offering money, and letting people buy their own presents. Thus, in a world of self-interested, utility-maximizing individuals, gift-giving makes no sense. It represents a loss, both on the individual level and the social level.

What neoclassical economists miss is the ethical moment of the gift (whether for Christmas or some other occasion), which is the product of the uncertainty surrounding the gift. The uncertainty runs from the decision to make the offering of a gift (what should the gift be, and when should it be given?) to the debt incurred by the recipient (what should the reciprocal gift be, and when should it be given?). The indeterminacy of the gift, and therefore the social relationship connecting the giver and recipient, creates moments in which ethical decisions need to be made.

It’s that ethical moment of the gift (and, for the matter, any form of exchange other than capitalist commodity exchange) that escapes the work of Waldfogel and neoclassical economists generally.

Of course, there is a deconstructionist perspective that also points out the impossibility of the gift, but relies on a different view of selfishness. For this, we’ll look to Jacques Derrida, whose methodology could not be more different from the neoclassical economist’s:

In his text, Given Time, Derrida suggests that the notion of the gift contains an implicit demand that the genuine gift must reside outside of the oppositional demands of giving and taking, and beyond any mere self-interest or calculative reasoning (GT 30). According to him, however, a gift is also something that cannot appear as such (GD 29), as it is destroyed by anything that proposes equivalence or recompense, as well as by anything that even proposes to know of, or acknowledge it…

The important point is that, for Derrida, a genuine gift requires an anonymity of the giver, such that there is no accrued benefit in giving. The giver cannot even recognise that they are giving, for that would be to reabsorb their gift to the other person as some kind of testimony to the worth of the self – ie. the kind of self-congratulatory logic…

Significantly, however, according to Derrida, the existential force of this demand for an absolute altruism can never be assuaged, and yet equally clearly it can also never be fulfilled, and this ensures that the condition of the possibility of the gift is inextricably associated with its impossibility.

I don’t think I have anything to add, other than that Derrida’s argument is infinitely closer to being right than Waldfogel’s. Shocker, right?

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Should you have 15 minutes to spare this Christmas Eve, go read Chris Hayes’ excellent article on China in The Nation. He delves into a number of the contradictions in China’s society and economy. Here are some key excerpts:

This marginal population freaks out the Chinese authorities because they desperately wish to avoid the experience of so many other developing countries, from Brazil to India, which have seen the growth of massive, ungovernable miserable slums in their largest cities. “We have learned many lessons from other countries, including the so-called Latin American trap during the urbanization process,” said Wen. “The governments didn’t think thoroughly about urbanization. Huge numbers of villagers came to the cities and they couldn’t find a job. That’s why there are so many slums.” [...]

Atop the urban-rural divide is a stark class divide as well. Peasants are the original Chinese revolutionary class, hundreds of millions of whom remain chained to a life of crushing preindustrial penury while oligarchs in Shanghai and Beijing live lives that would make even a Goldman Sachs banker blush…

To the Chinese elites we talked with, though, the future is everything. Although Chinese civilization (and administrative bureaucracy) is 5,000 years old, no one seemed interested in talking about anything that occurred before 1978…if the dark side of Chongqing is the triumph of Robert Moses’s vision over that of Jane Jacobs, the silver lining is that–at a technical level, at least–this vision is pursued and executed with what seemed like an impressive degree of mastery…

The Chinese affection for urban planning is closely connected to their belief in the virtues of economic planning. The fable we are told about China, particularly by neoliberals, who hold it up as a model of how capitalism has delivered millions from poverty, is that the market reforms have produced growth and prosperity by throwing off the shackles of state intervention. It’s a deeply incomplete story: the commanding heights of the economy (telecom, energy, transportation and, most important, finance) remain in state control…

Like the Death Star, the corporatist behemoth that is the Chinese economy is intimidating to behold, but it is not without its vulnerabilities. The abominable lack of a social safety net helps produce the high savings rate that most economists say stands as the single biggest obstacle to making the necessary transition to an economy driven more by domestic consumption (not to mention basic justice and security for hundreds of millions of people). This is connected to the much deeper problem of distribution, which presents economic and political challenges, although those two categories bear a strange, sometimes mysterious relationship to each other. “We do worry about equality,” says Shanghai Institutes for International Studies president Yang Jiemian. “We do need to focus on distribution, allocation of rights, taxes, hospitals, healthcare.”

When you raise the issue of distribution with other Chinese officials, they acknowledge the problem (they are nothing if not vigilant about emerging threats to their managerial order) but caution that achieving a more equal society will take time…

China has undoubtedly made some progress on this front: improving rural healthcare, ending taxes on farmers and even passing a labor law with a minimum wage, overtime and other protections (over the objections, I hasten to point out, of the US Chamber of Commerce). But while everything in China on the business side seems to move as fast as Shanghai’s Maglev train, which goes 430 kilometers an hour, the project of equality, justice and social welfare proceeds much more slowly…

The reason that democracy is an obstacle to economic progress, Xu said, is that “the poor people want to divide the property of the rich people…. If we Chinese copied the directly elected situation today, people will say, ‘I want everyone to have a good job.’ Someone will say, ‘I will divide the property of the rich people to poor people,’ and he will be elected. It is useless: parity will not solve the problem of economic development…” [...]

But Wang Hui, the lone dissident we spoke with during our time in China, says the state’s attempts to maintain a strong and stark dividing line between legitimate critiques of its economic policy-making and illegitimate critiques of its very foundation doesn’t always work. China’s nominally socialist orientation, Wang argued, has provided many of its citizens with a vocabulary with which to criticize the state. “The paradoxical situation is that many ordinary people can use [Marxism] to defend their own interest because there is a real contradiction between the theoretical claim and what happens in reality.” [...]

But after a while I wondered if we aren’t in some way converging with our supposed rival. China has managed the transition from a repressive, authoritarian, impoverished country to an industrial, corporatist oligarchy by allowing a loud and raucous debate while also holding tightly onto power. Perhaps we are moving toward the same end from a democratic direction, the roiling public debate and political polarization obscuring the fact that power and money continue to collect and pool among an elite that increasingly views itself as besieged on all sides by a restive and ungrateful populace…

I may be going out on a limb, but I don’t think either country is going to be able to make this system work.

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Ruccio points out that Martin Wolf doesn’t understand the inequality-bubble link:

Here’s a good question for Martin Wolf, the chief economics commentator for the Financial Times:

How could a more equitable distribution of income be instrumental in solving the impact of this crisis? Especially in the UK and the USA the top 20% has close to 50% of the net incomes which is one of the reasons for the bubbles on Wall Street and on the housing market.

The amazing thing is, Wolf can’t come up a good answer:

I am not at all sure about the link between inequality and the bubble. I think that the growth of the financial sector played an important role in increasing inequality in the US and UK. It helped a very small proportion of the population to extract a large amount of rent. But I am not sure about the reverse causal relationship from higher inequality to the bubble.

No? So, Wolf can’t imagine how increasing inequality—rising productivity and stagnating wages—led both to higher profits (which could be soaked up by the financial sector through securitization) and increased borrowing (on the part of wage-and-salary-earners), thus generating a financial bubble. Not such a difficult argument to imagine and make, although seemingly beyond Wolf’s worldview.

And, of course, once you imagine a link between inequality and capitalist crises, then you have to think about solving the inequality problem in order to solve the crises. And that’s a place Wolf clearly doesn’t want to go.

This shouldn’t come as a surprise to naive me, but it does. Months back, I made the unverified claim that even Krugman had drawn the inequality-bubble link. Now, I’m having my doubts. Wolf’s argument led me to look back in Krugman’s archives. This post, in particular, challenges the “underconsumption hypothesis,” which states that highly unequal societies will suffer from underconsumption. The argument seems like something that comes straight from Marx. Krugman writes,

But how, exactly, do you reconcile this assertion with the fact that we have a negative savings rate, and that consumption is at a near-record share of national income?

I mean, by all means let’s worry about inequality. But I don’t get how this particular reason for worrying about inequality can be reconciled with the facts.

Isn’t the collapse of our mortgage/credit-based consumption justification for worry about this particular aspect of inequality? Krugman confuses me here, because people like Dean Baker, whom he often cites approvingly, have been making the inequality-bubble argument. And for someone like Krugman, who likes to go off his economic intuition, it is fairly easy to connect the dots for an unequal society temporarily staving off underconsumption with unholy credit mechanisms before finally going down in flames. As for Wolf, there seems to be little hope for him on this particular topic if he can’t read between these lines.

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Some Friday Links

Here are a few quick hits on some longer posts and articles you should read.

First, Daniel Little posts on Robert Merton’s sociological theory of science. There’s a relevant chunk here for economists:

…the conduct of science is driven by the values that the institutions of science inculcate and enforce; the incentives created by the scientific institutions shape and motivate the behavior of scientists; and the product of science is the result of the constrained activities of scientists shaped and motivated in these particular ways.

Steve Keen writes that post-Keynesians need to formalize and mathematize their models, after attending a recent conference:

 We can and must do better than that. But to do so, non-orthodox economists have to find tools that can express their vision of the economy analytically, either as mathematical or computer models. If we don’t, then whatever might be said by “Critical Realists” about the inappropriateness of mathematical analysis in economics, or how one can’t model open systems mathematically, the critics will be sidelined in a not too distant future by those who do use such models–and who care a good deal less about realism than the critics do. Yet again, the critics may win the philosophical battle, only to lose the methodological war.

Finally, Teresa Ghilarducci, who is a former professor of mine and now at the New School, says the current social security/pension scheme is inadequate and unfair:

[Obama's plan] does not actually fix the worst flaw of the 401(k) system, and the flaw is this: 3% of pay is not enough for people to supplement their Social Security; if people want to maintain their standard of living for the rest of their lives and they are in the middle class or above income brackets, they are going to have to save 7 to almost 20% of their income, depending upon family circumstances. . . .  Also, these accounts are managed by for-profit, mutual-fund brokers.  Charles Schwab, Vanguard, Fidelity — these are all commercial accounts that actually charge you hefty brokerage fees, hefty management fees, for your retirement accounts…

We should not have tax breaks for the retirement savings that go to people in the very top bracket — it doesn’t make any sense.  If the government is going to lay out money to help people accumulate their retirement funds, they should do it for lower-income and middle-income groups.  The other principle they had is that retirement contributions should be pooled and professionally managed. . . .  It minimizes costs and also smoothes out financial risks.

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Newshour (ht: jw) had a segment that featured a debate between Robert Skidlesky (Keynes’ biographer and most recently author of Keynes: Return of the Master) and Russell Roberts, who is a professor of economics at George Mason and blogs at Cafe Hayek. The debate was pretty much what you’d expect, given the intellectual influence of both, but it had an entertaining twist. Roberts is producing a hip-hop video about this very topic. Here’s the video (and here’s a link to the interview transcript). I’ve also put just the excerpted rap lyrics below the video for your enjoyment.

John Maynard Keynes wrote the book on modern macro, the man you need when the economy’s off track. Whoa. Depression, recession, now your question’s in session. Have a seat, and I will school you in one simple lesson…

We have been going back and forth for a century. I want to steer markets. I want them set free. There’s a boom-and-bust cycle, and good reason to fear it. Blame low interest rates. No, it’s the animal spirits…

I had a real plan any fool can understand, the advice, real simple. Boost aggregate demand…

Boom, 1929, the big crash. We didn’t bounce back. Economy’s in the trash, persistent unemployment, the result of sticky wages. Waiting for recovery? That’s outrageous…

There’s a boom and bust cycle and good reason to fear it. Blame low interest rates. No, it’s the animal spirits…

Your so-called stimulus will make things even worse. Just more of the same, more incentives perversed. And that credit crunch ain’t a liquidity trap. It’s just a broke banking system. I’m done. That’s a wrap…

My general theories made quite an impression. I transformed the econ profession. You know me, modesty. Still, I’m taking a bow. So, say it loud and say it proud. We’re all Keynesians now.

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Rick Wolff says that mainstream economics is ignoring one of the biggest casualties of the recession:

Capitalist crises, especially severe ones, are case studies in that system’s social costs.  Because the dutifully conservative economics profession rarely studies such cases, let’s do just that here by focusing on how the current capitalist crisis is damaging public education.  Deteriorating schools leave scars lasting for many years.  They undercut the quality of the skills and knowledge of the next generation in their individual capacities as workers, citizens, friends, parents, and so on…

Politicians concerned about their careers dare not seek extra state revenues from the corporations and the rich.  Instead they cut state services not favored by their patrons.  Since children of the rich increasingly attend private schools or certain elite public schools, politicians end up cutting chiefly the public education that serves everyone else.  As US corporations shift ever more skilled jobs overseas, they need fewer educated US workers…

Reacting to the economic crisis, both Bush’s and Obama’s administrations have allowed the state and local funding supports for public education to decline nationwide.  Educational opportunities shrink as educational inequality rises.  From coast to coast, most students’ job, income, and life prospects fall ever further behind those of children of the rich.  The US government’s response to economic crisis might well be ironically renamed as “leave no banker behind.”  Yet a collapsing public education system threatens society’s future no less than a collapsing credit market.  A president who campaigned on a program of hope presides over its evaporation for most children.

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In light of the Dean of Arts and Letters’ recommendation to the Academic Council to close ECOP, I have sent the following letter to him and the members of the Academic Council.

Dear Dean McGreevy,

I was saddened when I learned of your decision to recommend the closure of the Department of Economics and Policy Studies to the academic council. I’m sure you are familiar with the arguments I could make against this decision; they are well-documented on the blog to which I contribute (openeconomicsnd.wordpress.com), which I shared with you last spring, as well as in the petition that I signed along with over one thousand others this fall. We also discussed these issues at length during two private meetings while I was a student. Whatever the merits of my arguments, your recent decision has seemed inevitable for at least eighteen months, and the purpose of this letter is not to change your mind. Instead, I’m writing you today to express my belief that your execution of this decision does not fit the high standard of transparency and dialogue that your position demands and that the academic community at Notre Dame deserves.

It was encouraging that on two occasions, you opened the doors of your office to my peers and me so we could share the experiences of our economics education. At the time, I expressed how blessed I felt to take a diverse and stimulating course load that emphasized rigorous quantitative analysis as well as descriptive critical thinking. Although I did not know it then, it was this diverse skill set that helped me secure a job as a research assistant in the Africa Growth Initiative at Brookings Institution. On a daily basis, my job requires this whole skill set. As I pursue a career path, I am confident that Notre Dame has provided me the foundation to make a meaningful contribution in whatever field I choose to enter.

After meeting with you twice, my general sense was that you understood our feelings, and more encouragingly, you relished getting to know us and our stories. You demonstrated a desire for a degree of pluralism and openness, while cautioning the limits of your understanding of the divides within economics.  Although we were aware of the broader institutional pressures at work, it seemed to me that these stories, and the interests of the students that they represented, would affect your decisions about economics and the way in which you executed them.

It is for that reason that I now write to you with great dismay. The candor you demonstrated to my peers and me behind closed doors has been lacking in the last three months. Particularly disturbing is that you have declined to engage in a forum with economics students, requested at the behest of the Economics Club, to explain what the decision means and how it will impact them, as well as to answer lingering questions. By citing sensitivity and personnel issues as reasons to not engage, more accurately you have chosen to dodge potential bad publicity from the situation, and more importantly, missed a teachable moment. Since you are first and foremost an educator, it is hard to imagine a successful student-oriented decision process without your participation in such a forum, or a similar event organized on your own terms. The perception of this decision for some students will be that it occurred behind closed doors; more disconcertingly, a greater number will remain in ignorance because of your omissions.

Having thought very carefully about the issues facing the economics discipline, I can understand the erroneous thinking that led to your decision. I can understand the sociology of a profession in turmoil as well as the long-run socio-political causes and implications of this retreat from pluralism. Even with that understanding, I realize that it is not my place to judge your job performance; that is the job of your peers, some of whom will be engaged in the decision to close ECOP in the months to come. It is for that reason that I have chosen to include the members of the Academic Council on this letter as well, since I believe strongly that every decision, however major or minor, or however painful to think about, must be held to a high standard and a healthy dose of transparency. I believe that you have not only made a poor decision, but have failed to meet the expectations of the highest academic official in the College of Arts and Letters. I sincerely hope that the members of the Academic Council consider openly the merits of your recommendation and the way in which you have arrived at it.

The detriment of your decision to students present and future will not be obvious. Inevitably, Notre Dame’s standing among ‘peer institutions’ will increase in the field of economics, and the number of economics majors will continue to rise because of the great interest in the discipline. I’m sure your decision will be regarded as a bold and courageous one, and the results I mentioned above will continue to serve as proof of its merits.

Few students will know what they are missing; I know that I may never have been exposed to heterodox ideas under the proposed future arrangement. Indeed, the fact that much of this process has occurred in the shadows has ensured that ignorance of heterodox ideas will persist. However, as a shaper of young minds who will be our future leaders, I question how you can justify this result. In the context of social action, ignorance breeds inertia, and your decision and its execution will contribute to the maintenance of a status quo that we all agree is fundamentally unjust and unsustainable.

We live in troubling times indeed. As our economy continues to change, and another economic crisis comes and goes, it is inevitable that more discontented young intellectuals will thirst for a more critical approach to economics. Your decision makes it impossible for them to pursue this approach at Notre Dame. This hidden legacy of your decision will be the most deleterious and, I fear, the most lasting.

Sincerely,

Nick Krafft

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The New York Times describes classes around the country, at universities such as Cornell, Columbia, and Vassar, that are probing the economic crisis. The approaches are diverse:

Steven Fraser, a professor of American studies at Columbia University, has taught the cultural history of Wall Street for years, usually bringing his students up to the 1990s. But this fall, with thefinancial crisis providing an irresistible new coda to the course, he extended the timeline to include the drama, intrigue and pain of the past two years…

“The class is struck by the similarities between today and the darker periods of Wall Street’s past, for example in the Gilded Age” …

Sidney Plotkin, a professor of political science at Vassar College, has taught “Power and Public Policy” in one iteration or another for more than 30 years. But last month he began a new section of the course by exploring the housing bubble and Bernard L. Madoff, consumer borrowing and federal bailouts — and shining a Marxist light on the whole morass.

“Marx is the uninvited guest in the discussion,” Dr. Plotkin told the group of undergraduates assembled in Rockefeller Hall. “By looking at the financial crisis through the lens of a Marxist analysis, we begin to see how the American debate about power is shaped by Marxism.”

As for the students?

For students, taking a class that probes the gyrations of the economy — even through the prism of Marx — forces them to keep up with current events…

Although students may be energized by the relevance and immediacy of the subject, Dr. Plotkin detects a growing cynicism as well.

Meanwhile, ND is deciding behind closed doors to evict Marx, Minksy, and any other non-mainstream economics from the classroom. Thus, a generation of students will miss out on alternative perspectives and for those who might pursue economics as their own career, will be pigeon-holed into the mainstream- truly a liberal arts approach.

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