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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