Feeds:
Posts
Comments

Archive for June, 2011

Steven Greenhouse, who generally covers labor issues for the NYT, has a blog post about a new paper on the current “jobless and wageless recovery.” The authors (Andrew Sum, Ishwar Khatiwada, Joseph McLaughlin, and Sheila Palma, from the Center for Labor Market Studies at Northeastern University) present the most comprehensive statistics I’ve seen on how capital has recovered in lieu of labor. The chart below, for example, shows that 92% of national income growth has gone to corporate profits in the current recovery.

The same dynamics that led us into the crisis are leading us forward in stagnation. There is no reason to expect a vibrant recovery in consumption if all gains in output and productivity are going to corporations, while government money is running to the sidelines.

The authors don’t delve into what’s causing this dynamic, but it should be obvious to anyone who has followed American political economy in the last 3 decades. Corporations simply have too much power in economic and political spheres. American workers and voters are no longer organized to fight this power. I originally saw the election of 2008 as a correction from the usual feedback loop, and it certainly has been in some ways, but certainly not to the extent that is needed.

Read Full Post »

For all the enjoyment I receive from reading Nicholas Kristof (see my previous post), he certainly does not have everything quite right. Mark Engler [ht:cr] points out how mistakenly placed is Kristof’s praise of the economics profession:

No matter how disastrously myopic they might be, it seems that economists can do no wrong in the eyes of many.

If there was one outcome of mainstream economists failing to recognize the multi-trillion dollar housing bubble of the past decade and being roundly blindsided by the most significant economic downturn in three-quarters of a century, you would think it would be a decrease in the amount of respect afforded to their “expert” opinions.

Instead, with a distressing lack of mea culpas, the economics profession – still dominated by neoclassical, “free market” assumptions – continues its march of progress. Ever greater swaths of public life and democratic decision making are handed over to economists, and they continue to fearlessly propagate the idea that they are the right technocrats to get the job done.

Now, globetrotting liberal Nicholas Kristof of the New York Times has decided to give them a hand. In his column, “Getting Smart on Aid,” he offers — without irony or any mention of recent blemishes on their record — “a paean to economists.”

If our society’s alternative to irrelevant political scientists is letting economists take over the university, I’d say we’re in big trouble.

What Engler is especially attuned to is the economic’s professions unwillingness to admit any culpability for the ongoing financial crisis. In fact, many economists are already in denial that anything much went wrong or that anything has to change. So yes, Engler is right: we are in big trouble.

Read Full Post »

The Economist’s visceral reaction is to scoff whenever a non-economist says something about the economy. I’ve seen the attitude time and again that, privileged to economic knowledge, Economists have no economics to learn from the rest of society. Yet I’ve witnessed that much of what economists have to say about the economy is useless at best, and incredibly destructive at worst (such as all the advice about financial deregulation since the 1990s). And at the same time, I’ve been left with no doubt that journalists, social scientists, moral philosophers, bloggers, business people, and even everyday workers can have a great deal of economic insight.

This time, a gem of economic insight from Nicholas Kristof at the New York Times. What Kristof realizes, and many economists apparently do not, is that any plan for economic recovery and prosperity necessarily needs to look seriously at the organization of firms in the United States. Publicly-traded corporations are not the only option; in fact, they seem to be one of the worst. There are various models of different organizational, decision-making, and ownership structures that lead to different economic outcomes. Kristof argues that if we want a model that encourages human development, affords universal access to healthcare, and curbs income inequality, we have a lot to learn from the organization of the US military:

You see, when our armed forces are not firing missiles, they live by an astonishingly liberal ethos — and it works. The military helped lead the way in racial desegregation, and even today it does more to provide equal opportunity to working-class families — especially to blacks — than just about any social program. It has been an escalator of social mobility in American society because it invests in soldiers and gives them skills and opportunities.

The United States armed forces knit together whites, blacks, Asians and Hispanics from diverse backgrounds, invests in their education and training, provides them with excellent health care and child care. And it does all this with minimal income gaps: A senior general earns about 10 times what a private makes, while, by my calculation, C.E.O.’s at major companies earn about 300 times as much as those cleaning their offices. That’s right: the military ethos can sound pretty lefty.

Now this is a model of the economy that I think deserves a Nobel Prize.

Read Full Post »

Today marked the end of the 2011 History of Economics Society annual conference, hosted this year at Notre Dame. There were many interesting discussions, and keynote lectures given by journalist John Cassidy and historian of physics David Kaiser. But here I want to focus on this year’s HES presidential address, annually given by the outgoing president of the society.

This year’s HES president, Jerry Evensky of Syracuse University, gave a lecture entitled “What’s Wrong with Economics?” His brief answer to this question is that we ignore what he calls the “Pogo Principle,” that is, that “We have met the enemy and he is us.”

As a scholar on Adam Smith, Evensky says that the problem with economics today are models based on “homo economicus” because there is no room for vice or virtue or ethical behavior. Unlike the conception of man that was used by Adam Smith, homo economicus has no norms.

This also relates to the lack of analysis of power and power structures in society. According to Evensky, power can be generated by both political institutions and socially constructed norms such as gender or race. Given the existence of power structures, unfettered competition will NOT be fair competition. Rather, “the powerful win in the race for wealth because they control the race.” But these concepts elude economists who use the standard economics toolkit of utility maximization. For Evensky, the value of a research toolkit is not in the answers it gives, but in the questions it encourages us to ask. By this measure, the neoclassical economics toolkit leaves much to be desired.

Evensky ended his talk on an even more troubling note. He explained how the history of economic thought course that he taught at Syracuse had been part of the core graduate economics curriculum when he went to work there. But, the department decided that HET course had a very high opportunity cost and should not be part of the core; in 2002 the course ended. This is not a trend that will help economists remember the “Pogo principle” in the future.

Read Full Post »

This video from Robert Reich might be the best and briefest summary of how we got into, and may remain in, our current economic mess:

Read Full Post »

The Nation had 16 activists respond to the question, “If you had the ability to reinvent American capitalism, where would you start? What would you change to make it less destructive and domineering, more focused on what people really need for fulfilling lives?” Three of them resonated with me in particular: Chris Macklin on employee ownership, Dirk Philipsen on how we measure prosperity, and Eugene McCarraher on our “moral imagination.”

I’m not going to block-quote them, however- instead, I’ve put in my own reader submission (limited to 400 words), which the magazine is soliciting from its readers. You’ll see that it attempts to weave together concepts from all three of these columns:

Capitalism’s defining quality is evident in its name- capital, not labor, nature, or morals, is put above all else. This preeminence of capital has ramifications for how we produce, consume, earn, save, and tally it all up; I argue that it causes problems in each of these facets of our economic life. Often, people confuse capitalism with markets (free ones in particular). Instead, I think capitalism has a few distinctive consequences: 1) surplus is distributed by those who own, not those who work and make; 2) more consumption is always better; and 3) anything “outside” the economy, like the environment, may as well not exist.

Capital is relevant to these features because it means that the production process can be owned, and thus the fruits of it can be immediately taken from the hands that produce it. As a corollary, this means that to profit, those who own capital must sell as much as possible, some of which is indeed bought back by those who make the goods. And finally, capital seeks its return without any regard to destruction that it doesn’t have to pay for, like ozone depletion or disappearing wetlands.

As long as capital remains preeminent, we cannot remake capitalism. Instead, we need to gradually remake economic structures to chip away at capital’s power. Giving workers stock ownership is one small step, but giving workers complete control over their enterprise is a more radical fruitful step. It would mean that production and consumption would be more tightly linked, as the amount one consumes would be more in line with what one produces. Lavish consumption would not disappear entirely, but would be made scarce. Remeasuring economic value to include environmental externalities is another small step, but forcing these externalities into pricing through democratically-decided taxes is a larger and more fruitful step (and I guarantee, a worker-run Chamber would fight it a lot less).

These steps must be supported by increased class consciousness through education.  The value of worker ownership and environmental stewardship are obvious to their beneficiaries; demonstrating that capital’s dominance stands in the way of these benefits is critical. A class-conscious society will support economic structures that value labor and value nature, not just profits. Changing capitalism does not mean removing markets or destroying property, but rather reshaping production and consumption markets so economic value is not distorted by power divides between capital and other.

How would you remake capitalism?

Read Full Post »

Peter Diamond thinks that because he won a Nobel Prize, he should be running the Federal Reserve. I have just two three four quick points to add:

(1) The research for which he won the Nobel prize, modeling search processes in labor markets, is from the early 1980s. The mathematics it uses is analogous to that of particles randomly moving in a box. For our purposes, they call the particles “unemployed workers” and “job vacancies.” There is a random probability of a collision, or “match,” as well as probability of filled jobs being lost. What the model shows is how there can be unemployment even in equilibrium. However, this research has little to say about the recession or how to promote employment during a downtown. Clearly, it had little impact on preventing such a catastrophe in the first place.

(2) Diamond’s research is not that different from other neoclassical economics research. The framework is essentially the same. Neoclassical economists were advising the president before the crisis, and Obama’s real problem is that there simply are no other major schools of economic thought. That is why we need to promote pluralism. Not more of the same.

(3) The Nobel Prize in Economics has long been justification for giving credibility. It should not be. It is given for a contribution to a very specific and highly specialized subdiscipline of the field of economics. Just because Paul Krugman won one does not mean that we should trust everything he writes in the New York Times. Same goes for anyone.

(4) This claim in the op-ed that the political processes is hindering objectivity is not quite right. I do not care much for American politics. But to say that:

We need to preserve the independence of the Fed from efforts to politicize monetary policy and to limit the Fed’s ability to regulate financial firms.

implies that economics is not political. Actually, it is. I think it can be quite useful, but let’s also not kid ourselves that the politicians are the only ones with political beliefs and goals.

Read Full Post »

When I first read Deirdre N. McCloskey’s The Bourgeois Virtues a few years ago, I decided that it was the best argument for capitalism that I had ever read. A recent book review by James Seaton reminded me that that is still true today. (Anyone who thinks that Ayn Rand makes a good case for capitalism really needs to get out more!) Two main aspects of the argument are especially thought-provoking. First, is the idea that many attempts at helping the poor by intervening in the market have often had unintended consequences that hurt those most in need:

Minimum wages protected union jobs but made the poor unemployable. .  .  . Zoning and planning permission has protected rich landlords rather than helping the poor. Rent control makes the poor and the mentally ill unhousable. .  .  . Regulation of electricity hurt householders by raising electricity costs, as did the ban on nuclear power. .  .  . The importation of socialism into the third world .  .  . stifled growth, enriched large industrialists, and kept the people poor.

Of course there is an equally long list of examples where a lack of market intervention hurt those most in need, but it is an important point. Secondly, and the main argument of the book, is that capitalism is not only the more efficient and fair economic system. And not only that capitalism requires virtues in order to function successful. But in fact, capitalism itself promotes and encourages virtues:

Deirdre McCloskey is out to demonstrate that life under capitalism—bourgeois life—nourishes the virtues more than life under feudalism, socialism, or any other alternative. She claims that “actually existing capitalism, not the collectivisms of the left or of the right, has reached beyond mere consumption, producing the best art and the best people.” Even if capitalism were not able to do what almost all observers agree it does do—deliver the goods—McCloskey argues that it would, on moral grounds, still be the best economic and social system around: “Had capitalism not enriched the world by a cent nonetheless its bourgeois, antifeudal virtues would have made us better people than in the world we have lost.”

McCloskey constructs this argument by first placing the seven virtues - courage, justice, temperance, prudence, faith, hope, and love – at the center of moral life. Then, she goes on to demonstrate how each is encouraged in capitalist society, and how destruction will ensue when any virtue is not balanced by the others.

The book is especially thought-provoking for those of us who are skeptical of capitalism’s usefulness for our society. Even for those who do not agree with the conclusions to which McCloskey arrives, these are arguments that must be taken seriously.

Read Full Post »

Below is a guest post from Philip George, whose website is philipji.com. The post is a shortened version of a longer article you can find on his website here. Some related posts are here and here.

For nearly a century the progress of macroeconomics has been stalled by a single error, the error of regarding money as cash balances and the demand for money as the demand for cash balances. It is an error that is common to the Keynesians, the monetarists and the Austrians. And it has been taught to every economics undergraduate for generations so that it is etched into the collective consciousness of all economists.

To view it in practice look at how Milton Friedman used it. For Friedman money is an asset, one of many alternative assets, such as stocks, bonds, durable consumer goods, or even human capital. To determine the demand for money one has to compare it with the demand for those alternative assets. If Paul wishes to hold more stocks and bonds it follows that his demand for money and therefore his cash balances will come down.

So where is the error? Consider that Paul decides to hold fewer bonds than he did, preferring instead to hold more money. In Friedman’s analysis his demand for money has gone up. But the only way that Paul can reduce his holding of bonds is to sell some to Peter. So Peter’s holding of bonds goes up and his demand for money goes down. Although Peter and Paul can change their individual stocks of bonds and money, their combined stock of bonds or combined stock of money cannot change. By trading in financial assets the stock of money in the economy cannot be changed one whit.

In Friedman’s model of the economy money exists only in the form of currency. There are no banks and the only way in which money can be increased or decreased is through the agency of the central bank. To see how such a model results in errors for Austrians, see http://www.philipji.com/stupidity-of-economists.html, and for how it lands Keynesians in errors see http://www.philipji.com/paul-krugman-and-the-liquidity-trap.html.

So what is money? To answer that question, we begin with the money multiplier. In its simplest form, this is how it works. The central bank buys $100 worth of, say, government bonds, from a bond dealer. The dealer deposits the $100 in a commercial bank. Assuming that the reserve ratio is 20%, the bank has to retain $20 as a reserve; so it lends out $80. Assuming this is deposited in another bank, the second bank now has to retain 20% of this $80 as a reserve i.e. $16 and can lend out $64, which in turn is deposited in a third bank. By adding up the entire chain of new deposits it can be shown that the $100 created by the central bank’s initial purchase of a bond for $100 will result in the creation of $500 of new money.

We show the process in a simple diagram as below, where M is the reserve, m is the multiplier, and mM is the money created.

The money multiplier

So far, Keynesians, monetarists and Austrians will all be in agreement with us. Curiously none of them seems ever to have asked: What happens when this newly created money mM is spent? We now ask the question by drawing the figure below.

The money multiplier integrated with the economy

And having asked the question we are immediately confronted by a problem. At A the central bank injects M dollars into the system. The banking system, through a series of loans and deposits, converts it into mM dollars at B. When this money returns to A, it is then converted by means of the multiplier to a value of m2M at B. In the next cycle this becomes m3M at B, and on on in an ever-increasing spiral. Equilibrium, it would seem, is impossible.

There is only one way out. For equilibrium to be maintained the money created while moving from A to B must be destroyed in the movement from B to A. We answer one objection immediately. Why isn’t the entire mM dollars created at B spent? That is to say, why is M dollars retained unspent at A while moving from B to A? The answer is quite simple: in the money multiplication process described at the start of this section, when 500 dollars of new money is created, 100 dollars has to be retained by all the banks together as reserve.

The answer to the second question may be a little more difficult to appreciate. How is the amount of money mM at B destroyed so that it becomes M at A? The answer is that the destruction happens through the mechanism of saving. Each person who receives money spends some of it while saving a little and withdrawing it from the system. The total of this saving must be exactly equal to the net money created mM-M for equilibrium to be maintained. But people do not hide their savings under their mattresses. Because they are assured that the central bank will not allow the disorderly failure of banks they place their savings in the bank. We draw the result as in Fig 3 below.

Savings and money creation in the economy

Simple though it is, this is the model of the economy that has eluded economists so far. In it a) Money is created when banks lend money and is destroyed when loans are liquidated and b) Money is endogenous i.e. it can be created and destroyed without the intervention of the central bank.

Many conclusions can be derived from this model. For instance,

a)     If the injection of money  into the system by the central bank is multiplied by a process of bank lending, it can be sustained only if the system produces an equivalent amount of saving and this saving is loaned out again.

b)    It is possible for the system to remain in equilibrium when the economy is operating at levels far below full employment.

c)     It is possible to estimate the amount of money (an aggregate I call Corrected Money Supply) by estimating the amount of savings in demand deposits and by subtracting this amount from M1. See http://www.philipji.com/riddle-of-money/ For the period from 2001 to 2011 we get a graph accurately tracks the economy.

 

Corrected Money Supply 2001 to 2011

 

Read Full Post »

Follow

Get every new post delivered to your Inbox.

Join 53 other followers