Quiggin the Econozombie-slayer- 95% Effective

I just finished reading John Quiggin’s Zombie Economics, from Princeton UP. I had read most of the book months ago, and then a number of things got in the way of finishing it. However, it’s an easy book to come back to because it is methodical in debunking the some major conceits of neoclassical economics and the associated policies. One of the reasons I was interested in this book in the first place is that Quiggin posted the chapters serially on his blog and received comment ahead of publication. The level of rigor and care is quite evident in the text- it goes without saying that this publishing strategy is an effective one.

There are five chapters, addressing what Quiggin sees as the five most dubious accepted truths in the mainstream: the Great Moderation; Efficient Markets Hypothesis; use of DSGE models; trickle-down economics; and Privatization. Each chapter has five sections- birth, life, death, reanimation, and after the zombies. This setup allows Quiggin to carefully explain the history of each idea, how each has been applied, and how to move beyond.

I most enjoyed the DSGE section, in which he takes on the predominant practice of a microeconomics-based approach to macroeconomics. Here, he probes the technical and philosophical assumptions of these accepted models, and shows how they were bound to failure in predicting the current crisis. In presenting alternatives, he shows how one can look to Keynes and seek models without a “coherent dynamic equilibrium concept.” Such models would embrace animal spirits, and eschew false attempts to simplify human behavior in pursuit of elegance. Quiggin also urges a return to Minsky in order to understand bubbles.

I had highest hopes for Chapter 4, which covered trickle-down economics. Here, I thought, Quiggin would unmask the class-based roots of the crisis, demonstrated by inequality and stagnant wages. He does talk about inequality a lot, and how political power has led to more of it and also the outsized growth of the financial sector (something like the Hacker-Pierson argument, but not articulated as such). He even debunks the notions that inequality leads to growth and that social mobility compensates for it. However, when discussing the real harm of inequality, he ends up falling back on the loss of autonomy it produces. I don’t want to downplay the importance of autonomy, but for some reason, the following paragraph annoyed me:

The points are clearest in relation to employment. Early on, Marmot debunks the Marxian notion of exploitation (capitalists taking surplus value from workers) and says that what matters in Marx is alienation. It’s the fact that the boss is a boss, and not the fact that capitalists are extracting profit, that makes the employment relationship so troublesome.

I’m not sure how Quiggin misses the fact that alienation and exploitation are tightly linked. Further, when one sees the divergence of wage growth and productivity growth in the last three decades, and the need for debt-based consumption it fueled, I’m not sure how one could conclude that exploitation and class don’t matter. I am beating a dead drum on this concept, I know, but it really seems to me that overlooking these factors is the critical conceit of economics, as most in the field assume that labor must simply take what is given to it. Thus, I’ve urged repeatedly for more worker-owned enterprises as a pathway to a new economy. A shift along these lines would address both alienation and exploitation, which is good because I’m not sure how one could address one without the other.

By eliding over exploitation, Quiggin naturally steers his policy pitch against trickle-down- the emphasis shifts to the outsized wages at the top (CEO pay), not to the stagnant ones at the bottom. The related (and wrong-headed) key political questions follow naturally, and emphasize tax reform. All told, in shooting down one zombie here, Quiggin seems to have reanimated one of the most important ones, that class is irrelevant.

Quiggin ends with a nice touch in his conclusion- he turns the financially-oriented notion of risk on its head by pointing out the great risks our society assumes by having inadequate safety nets and a privatization-first mindset. Put simply, “a social democratic response to the crisis must begin by reasserting the crucial role of the state in risk management…collective risk management through the welfare state helps to stabilize the aggregate economy.” Indeed, the tussle over the question has been the most marked in politics and economics in the last 30 years. We may need to settle it once and for all before moving on to the deeper structural tensions of our economy. Pointing out that opponent ideas are essentially “zombies” is a critical contribution here.

Finally, I enjoy Quiggin’s three simple propositions for economics, which he says should focus, “more on realism, less on rigor; more on equity, less on efficiency; and more on humility, less on hubris.” Though I think Quiggin may have missed something crucial in this book, he gets 95% of it right, and does so in a way that’s accessible for non-economists. His book is a great contribution to our understanding of the failure of economics, and a good start to putting the discipline on the right path.

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Put the money back in economics

Perry Mehrling has a wonderful new book that advocates for the reintegration of money into macroeconomics. His claim is that neither economics nor finance have been helpful in understanding the current crisis because both abstract from money. By combining the history of economic thought into his analysis of the current economic crisis, Mehrling shows how by taking money for granted, the inherent instability of credit was lost in economic theory and the DSGE models of modern macro. In order to make macroeconomics more useful, the practitioners of the field will need to relearn how to include the story of money in their story of how the economy functions.

Perry has also started writing a blog, “Money View“, which will fit in nicely on our blogroll. The aim of the blog seems to be mostly to “read between the lines” of Financial Times articles. And then he also includes other fun items, such as a recent post that reviewed the film “Inside Job.”

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RIP Alison Snow Jones, aka Maxine Udall

Dr. Alison Snow Jones, who blogged under the pseudonym Maxine Udall, has suddenly passed away. Many of you will be familiar with her excellent, essay-length blog posts, which drew beautifully on her life experience and her professional knowledge. She also had an impressive career:

Dr. Jones received her Ph.D. in Health Economics from Johns Hopkins School of Hygiene and Public  Health (now Bloomberg School of Public Health). She served on the faculty of Johns Hopkins and later Wake Forest School of Medicine. Her last position was at Drexel University where she headed a joint program between the Schools of Business and Public Health.

Dr. Jones had a clear penchant for heterodox economics. Here’s an excerpt of one of my favorite posts of hers:

I was drawn to economics because of my family’s business background. Thinking like an economist came naturally to me. When my brethren were talking about “rational self-interest,” I knew they meant the kind of rational self-interest all the business men and women in my family employed: self-interest that included the welfare of their community and their customers; self-interest that included their reputation and their long-term status in the community; self-interest that traded off short-term gains in profits against long-term losses of return business and social standing. No one (at least no one in my immediate family…there was great uncle Oscar, whose entrepreneurial acumen led him to function more like a con man than a business man (think Harold Hill here)) would have wanted to sell a customer something they could not afford to pay for. Our job, the reason we earned a profit, was to match customer preferences and means with our products in ways that made every party to the deal better off…

My fear has always been that we would lose capitalism, the commercial enterprise and society that I learned about from my father, grandfather and grandmother, uncles, great uncles, and the occasional aunt. That what now passes for capitalism and commercial society would eventually lead to public misunderstanding about the social benefits of markets that are competitive, that do function properly in terms of both efficiency and equity. And that the misunderstanding would lead to excessive regulation. I did not anticipate that I would come to advocate much of the regulation that would be proposed to counter the market failures and misallocations that have occurred.

Dr. Jones, and especially her work as Maxine Udall, will be dearly missed in this space. Rest in peace, Maxine.

 

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Low-paying jobs are not inevitable, just as profits aren’t

Ezra Klein indirectly rebuts my post from last night (of course I’m under no illusion that he has read it). He argues that it’s hard to pay workers well in America. I think he’s wrong, but this is the crux of his argument:

So then the question is why were manufacturing jobs traditionally high-wage jobs? There seem to be a few answers to this (unions, industrial policy, capital intensity, etc), but the one that I’ve found most persuasive is that they could be. To a degree I really didn’t understand before picking through the endless tables and graphs in ‘Where Are All The Good Jobs Going?‘, high wages were a choice that businesses could make. Some of them were forced into making that choice through unions and some of them were lured into making that choice because they wanted the best workers. But a lot of them just made that choice because, well, they could…

Foreign competition has made the wage gap between different sorts of workers vast: Paying American workers a good wage while the other guy pays Thai workers a bad wage leaves you at much more of a competitive disadvantage than paying American workers a good wage while the other guy pays American workers a mediocre wage. Unions are partially in decline because of policy, but they’re partially in decline because these forces make it very hard for them to survive. Bottom line? It’s hard to pay workers well in America now, even if you want to…

I’d really like to find an answer that’s more interesting than “education” here. And maybe I will. I’m toying around with the idea that we’re in a weird interregnum period in which a lot of other countries have become rich and educated enough for their workers to compete with our workers but not quite rich and educated enough for their workers to begin buying things from our workers, and that this’ll largely sort itself out as time goes on.

I don’t think Ezra’s last paragraph will bear much fruit- these forces of globalization seem unlikely to equilibrate. Regarding his fallback of education, I think most of my rebuttal comes in my post from last night, which of course is completely ripped off of Larry Mishel’s excellent work. The important fact, though, is that profits have been doing just fine- yes, they fell during the crisis, but they have soared in the recovery.

Profits show that businesses can choose to pay better; however, because labor is weak, they don’t, and because their political power is strong, they have to give back relatively less in corporate taxes. The power gap is the reason why businesses can afford to pay better wages, and create more jobs, but choose not to. The power gap will not go away on its own, but will only accelerate without a political movement to restructure our economy.

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Reducing inequality requires addressing power gaps, so education won’t cut it

Larry Mishel has a new briefing paper with the Economic Policy Institute. In it, he argues that more education will not cure our employment deficits or our inequality. The succinct claim is made early on:

The huge increase in wage and income inequality experienced over the last 30 years is not a reflection of a shortfall in the skills and education of the workforce. Rather, workers face a wage deficit, not a skills deficit.

Mishels brings a lot of time series and cross-tab data to refute the structural unemployment argument:

This argument implies that unemployment difficulties reside in the workers who are unemployed: they either are located in the wrong place or do not have the required skills for the currently available jobs. If this is so, then macroeconomic tools such as fiscal policy (spending or tax cuts) or monetary policy cannot address our unemployment or long-term unemployment situation. But surprisingly, perhaps amazingly, there is no systematic empirical evidence for such assertions.

He specifically takes on the claim that we need more higher education:

The point for our current purposes is that the pay of college graduates is as disconnected from productivity growth as is the pay of high school graduates. Vastly expanding college enrollment and completion will do nothing to address this problem…

Together, these trends suggest that the forthcoming supply of college graduates is meeting the growing demands of employers for such workers. Moreover, these trends suggest that a rapid expansion of the supply of college graduates will cause the wages of college graduates to decline, assuming that the productivity–pay gap continues unabated.

Mishels concludes:

It is not the economy that has limited or will limit strong income growth, but rather the economic policies pursued and the distribution of economic and political power that are the limiting factors.

Education is a favored response to inequality and unemployment for many mainstream economists of all stripes. Its proponents are then able to say that by favoring equal education, they favor equal opportunity. However, a class lens shows that this leveling does not actually happen. Rather, a relatively powerful and small group of people will continue to capture societal surplus, while wages for everyone else will stagnate relative to what they produce. It needs to be said again and again- power matters. There is also no guarantee that increased education will lead to more jobs, as our economy has clearly not shown that tendency in the last several decade.

If the bottom 90% of Americans have no say over how surplus is distributed, they will continue to get less than their productive share as the incomes of the very top fly away. This issue holds for the uneducated, high school educated, and college educated- however, the college educated are relatively productive enough that they end up earning plenty to get by (although this could become less true).

Thus, we realize that as Mishels says, the wage gap and jobs gap do not come from a skills gap but a class gap and a power gap. Unemployment and stagnant wages are structural, but not in the sense that conservative neoclassical economics define it. They are a result of the capitalist power dynamics and employer relations in our society. Fiscal stimulus and education are both admirable goals, but we need radical changes to restore our economy’s long-term ability to create quality jobs. Mishels doesn’t drive at the solutions to these problems, but I’m really glad he helps dispel some important mainstream economic myths.

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The recovery is labor-free, workers are consumers, so what’s next?

I couldn’t believe my eyes this morning when I read the mainstream/left of center David Leonhardt probing the true causes of our jobless recovery- it’s class, stupid. Specifically, capital is stronger than labor, so as productivity rises, capital profits, and labor languishes. We have both stagnating wages and employment.

Why? One obvious possibility is the balance of power between employers and employees.

Relative to the situation in most other countries — or in this country for most of the last century — American employers operate with few restraints. Unions have withered, at least in the private sector, and courts have grown friendlier to business. Many companies can now come much closer to setting the terms of their relationship with employees, letting them go when they become a drag on profits and relying on remaining workers or temporary ones when business picks up.

Just consider the main measure of corporate health: profits. In Canada, Japan and most of Europe, corporate profits have still not recovered to precrisis levels. In the United States, profits have more than recovered, rising 12 percent since late 2007.

For corporate America, the Great Recession is over. For the American work force, it’s not.

Of course, a class analysis of the recovery can also inspire one to think about the crisis in terms of class. While employment was doing okay in the buildup to the crisis due to the housing bubble, wages were still stagnating. And, finally, one might ask if the labor-free recovery might create another crisis of effective demand. In the absence of stimulus, one wonders how long even capital can accrue its gains. Mainstream economists should remember that workers are consumers, consumers are workers. If workers don’t have power, consumers can only keep things going for so long. I think many economists are aware of this, but are restrained from probing the root cause of it all by a general aversion to talk about labor and power. Kudos to Leonhardt for chipping away at that aversion.

Update: One of my favorite bloggers, Ezra Klein, touched on this issue today as well. He rarely talks about organized labor, but I was glad that even as he has become mainstream, he was willing to aver, “I consider myself extremely pro-organized labor.” He then makes a micro, macro, and political argument for unions. Unfortunately, he doesn’t have any good advice to wonk out on. Instead,

If anything, the reverse seems to be happening: As labor loses ground, it becomes more reviled. People stop thinking about what a union could do for them and begin resenting what it’s doing for others. You’re seeing some of this with the anger at public-employee unions right now….

I don’t write about the issue more because I have nothing new to say about it. “Labor: Still important, still in bad shape, and still with no obvious savior in sight” isn’t a very interesting blog post. But as I look around at the economy and the political system, I certainly don’t think the working class needsfewer powerful advocates.

Sad, but true. What we need is a rebirth of labor consciousness. I thought the crisis would bring it, but as Klein points out, it’s done the opposite if anything.

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Zinn on King, Social Justice

Every year, when MLK day rolls around, it’s always enjoyable to read the retrospectives on this great man. His gripping rhetoric and willingness to speak truth to power obviously inspires across party and ideological lines. Yet, as many progressive historians note, we cannot simply put King in a racial justice box. He died on a trip to Memphis where the goal was economic justice, namely for the sanitation workers on strike in the city. Howard Zinn noted this in an interview in late 2009, only a few months before his death. Zinn said that if Obama were to follow King’s example,

We’re going to take our immense resources, our wealth, we’re going to use it for the benefit of people. Remember, Martin Luther King started a Poor People’s Campaign just before he was assassinated. And if Obama paid attention to the working people of this country, then he would be doing much, much more than he is doing now…

King had a much more fundamental critique of our economic system. And certainly more fundamental than Obama has because a fundamental critique of our economic system would not simply give hundreds of billions of dollars to the bankers and so on, and give a little bit to the people below. A fundamental change in our system would really create a greater equalization of wealth, would I think give us free medical care. Not the kind of half-baked health reforms that are being now debated in Congress…

[people at the top are] willing to let people think about mild reforms and little changes, and incremental changes, but they don’t want people to think that we could actually transform this country into a peaceful country, that we no longer have to be a super military power. They don’t want to think that way because it’s profitable for certain interests in this country to carry on war, to have military bases in 100 countries, to have a $600 billion military budget. That makes a lot of money for certain people. But it leaves the rest of the country behind.

Thinkers like Zinn have been less successful in changing the world because the injustices that currently plague it are less obvious. However, they were evident to King, and they should be evident to anyone who has seen our economy collapse on itself amid rising inequality and low job growth. In King’s Memphis speech, he said,

Now, let me say as I move to my conclusion that we’ve got to give ourselves to this struggle until the end. Nothing would be more tragic than to stop at this point in Memphis. We’ve got to see it through. And when we have our march, you need to be there. If it means leaving work, if it means leaving school — be there. Be concerned about your brother. You may not be on strike. But either we go up together, or we go down together.

Let us develop a kind of dangerous unselfishness…

That’s the question before you tonight. Not, “If I stop to help the sanitation workers, what will happen to my job. Not, “If I stop to help the sanitation workers what will happen to all of the hours that I usually spend in my office every day and every week as a pastor?” The question is not, “If I stop to help this man in need, what will happen to me?” The question is, “If I do not stop to help the sanitation workers, what will happen to them?” That’s the question.

Let us rise up tonight with a greater readiness. Let us stand with a greater determination. And let us move on in these powerful days, these days of challenge to make America what it ought to be.

His words are still gripping, true as they’ve ever been. Who will be the MLK of the working class, the impoverished class, the jobless class? It’s likely that there is no such person. Instead, we’ll have to organize ourselves to make the world as it is into the world as it ought to be.

The mural above was painted by a member of my church and installed this weekend. Here is a link to our senior pastor’s dedication.

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Dollars and Depressions

In the last two weeks, I read two books that sit firmly in the world of finance and money. The first is Barry Eichengreen’s Exorbitant Privilege, from Oxford UP, and the second is Liaquat Ahamed’s Lords of Finance, which has won a number of awards including the Pulitzer Prize. Ahamed’s book reads almost like a novel, with a diverse cast of characters found in the key central bankers of the era. His book is ultimately one of technocratic bumbling in the context of a political vacuum, wherein the key countries, often for reasons of domestic pride, hold hostage sound economic policy. By far the most interesting vignette comes early on, with regards to the issue of Germany’s World War I reparations. Ultimately, all sides end up compromising, but it’s not enough to prevent Germany from heading into a spiral ahead of the rest of the world (and eventually into fascism). While long, Lords of Finance is extremely entertaining.

One wants to continually draw parallels with the recent crisis. Of course, the central bankers of the times had a living and breathing Keynes, whose work is well woven into the story. Nevertheless, Keynes was probably too new at the time to have a meaningful impact. And of course, in the lead up to our crisis, Keynes was willfully ignored, and has had a minor resurgence among policymakers. Bernanke, Paulson, Brown, et al. look like financial wizards in comparison to Norman, Strong, Schacht, and Moreau. Nevertheless, given the greater global political consensus on the need for action, it is somewhat disappointing that the solutions were still half-measures, and the banks have only gained more power over governments, finance ministries, et al. This book shows we’ve come a long way, but still have far to go.

Eichengreen also has a keen knowledge of history- he traces the rise of the dollar through history, showing the economic and political underpinnings of it’s dominance and the sterling’s faltering. His book is most interesting when it discusses the role of the dollar in the present day, and the shortcomings of possible usurpers. What Eichengreen deserves most praise for is his discussion of the ability for a multipolar currency world to arise amid a multipolar global economy. Though he shows how the dollar’s dominance was indeed an “exorbitant privilege” for the US economy, it is clear that economic strength leads to currency dominance, not vice-versa. However, even amid our stagnation, Eichengreen rightfully cautions against assuming that the dollar will fall. Parts of the book could be summed up as, “rumors of the dollars demise are much exaggerated.”

Money is an area I don’t understand sufficiently, but this book helped me understand what brings about a strong or weak currency. However, I was annoyed at the last chapter, which attempts to argue that US deficits will ultimately determine the US’s ability to dominate. The evidence for this is never given- rather, it’s merely assumed that a large federal debt need imply stagnation. Most economists will go along with this, so I suppose it’s fine that he does. However, I don’t think the connection between the deficit and the dollar is intellectually strong. Indeed, the dollar has been a haven for investors amid economic uncertainty and record deficits. The dollar may not dominate forever, but perhaps its fall could come from too little deficit spending and thus too weak an economy. I agree with one of Eichengreen’s closing sentences, “the fundamental underlying health the economy matters for geopolitical leverage. If one wants a single unified explanation for the behavior of the exchange rate…it would be [that].” Indeed, but perhaps we need a better macroeconomics to probe that underlying health.

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“Hardly a Revelation”

I’m about a week late on this gem from Peter Radford, but such are the consequences of falling off of blogging for several weeks.

Economists are free to do as much damage as they like. One of the most worrying trends of the last three decades has been the total commitment of orthodox economic ideas to supporting a generally right wing political agenda. This may be unwitting. It cannot be unnoticed. Only the most blind of professors could have ignored the incessant anti-government rhetoric, the attacks on regulation, and the attempts to undermine the social safety nets put in place during the years of Keynesian hegemony. It is a nice but specious distinction to argue that such attacks are simply the result of an improved theory. It is convenient to overlook the ideological taint that permeates such theory, but the surely taint exists.

Some economists complain that non-orthodox economists are too invested in left of center politics. It may well be true that some heterodox economists are not exactly friends of the Republican party. But that merely shifts the question it does not answer it. Heterodox economists are not those claiming scientific status. They are not claiming to be “positive”. They, mostly, recognize the intractable connection between politics and economics. It is the orthodox, the market magic folks, who make such claims and thus hide their ideological roots beneath the skirt of scientific righteousness.

So as the debate about ethical standards roils on I feel foolish to have to point out that ideas have consequences. This is hardly a revelation. But to hear people like Lucas speak you would think it is shockingly new.

Positivist economics should always be viewed with greater skepticism than economics that embraces uncertainty, and it’s for the precise reason that Radford cites- ideas have consequences. In the last few decades, economics has increasingly served, and led to policies that reinforce, an elite capitalist mindset. In a separate post, Radford writes,

This new elite thinks it is above what it sees as local, and therefore lesser, issues. It is based in places such as New York, London, Moscow, Hong Kong or Mumbai, and sees workers the world over as one big labor pool. Differential wages, and cultural matters are nuisances. Worse, they are seams of profit to exploit. It is convenient to this elite group for local politicians to adopt similar solutions to what are viewed by the elite as similar problems. Thus the wave of austerity sweeping the industrialized world. This is a homogenous solution to a set of heterogeneous problems. Those that suffer are the ordinary workers in those countries who are saddled with bailing out the errors of the elite. An elite unchastened by its errors, but determined to protect its wealth at all costs.

The same economic orthodoxy that led us into the crisis is leading us through our non-recovery. It is not an economics that serves truth, nor one that is intellectually curious; rather, it is one that generates policies beneficial to the powerful. This conclusion also should hardly be a revelation.

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Influence of the Nobel prize

University of Notre Dame professor Philip Mirowski has been awarded, along with Avner Offer of Oxford University and Gabriel Soderberg of Uppsala University, a grant by the Institute for New Economic Thinking for “a research project to investigate the influence of economic doctrines on policy norms in recent decades through analysis of the history of the Nobel Prize in Economics.” From the press release:

The Nobel Memorial Prize defines high achievement in economics, and validates the discipline’s claim for scientific authority. And yet, historically, it can be understood as a reflection of domestic policy conflicts in Sweden. In the 1970s-90s, the prize committee was dominated by Assar Lindbeck, and lent authority to his domestic liberal policy agenda. Likewise, outside Sweden, between the 1970s and the 1990s, the prize tended to reinforce a market-liberal policy agenda.

The research project will analyze the extent to which the selection of a Nobel winner played a role in the advancement of theoretical and policy agendas in other countries, especially the USA.

There does seem to be an interesting story to tell about conflict between Swedish economists and their successful welfare state:

“The research problem focuses on the influence of economic doctrines that has worked to discredit government in the name of efficiency norms. The authority of the doctrines was enhanced by the creation of the Prize in Economics by the Swedish Central Bank, and more so after its incorporation into the Nobel procedure. The project strives to locate the origins of the Prize in the conflict between Swedish economists and their successful welfare state,” said Avner Offer, Chichele Professor of Economic History, University of Oxford. “The INET grant will make it possible for us to construct an economics citation database, to investigate Swedish-language source materials, to visit European and North American archives, to re-examine the work of the laureates, and to write up our findings for publication. This study will specify the role of the Prize in validating economic doctrines, and will provide a more skeptical overview of the achievement of economics since the 1970s.”

This is an important project whose findings could be very useful to the INET’s goal of returning economics to its core mission of guiding and protecting society.

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