On predicting the crisis

Really, Noah Smith? The best you can do is go after Steve Keen for failing to successfully predict when, where, and how the crash of 2007-08 would break out?

Now, maybe Keen deserves a bit of stick for loudly proclaiming more “loudly and confidently than just about anyone else on the planet” that he predicted the global financial crisis. Perhaps that’s a bit brash.

But mainstream economists are the ones who dominate economic discourse. And they’re the ones who claim the scientificity of their approach to economic analysis is based not on the realism of their assumptions but on the predictive power of their models. And, finally, they’re the ones who, with few exceptions (like Nouriel Roubini, aka Dr. Doom), failed to predict the more recent crisis.

At least Keen and other heterodox economists use theories that contain the possibility of crises occurring based on the endogenous tendencies of capitalist development (I know, and we’ve successfully predicted 15 of the last 5 crises). Mainstream economists don’t even admit of that possibility, although Smith has shown that at least a few of them have been able to successfully recalibrate one of their models (by adding financial frictions) and then to have successfully predicted the crisis—AFTER THE FACT.

Well, that simply doesn’t cut it. Either admit that mainstream economics is a failure because it didn’t successfully predict the crisis or give up on the idea that predictive power is one of the key criteria of economics, which has served as an excuse for attempting to demonstrate that what mainstream economists are doing is science and what the rest of us are doing is non-science. You just can’t have it both ways.

And beating up on Steve Keen is simply the coward’s way out.

Cartoon of the day

Special mention

From MOOCs to MOCs

source

I guess I was right (back in 2011) about one thing: we were witnessing just the beginning of colleges and universities offering massive on-line courses. And, I thought at the time, the interesting thing to watch was how the institutions would turn those courses into commodities.

Well, that day has come. And quickly. We’re now in the midst of the transition from Massive Open On-line Courses to Massive—but no longer Open—On-line Courses. In other words, on-line courses are being turned into commodities.

Coursera is doing it, having put together deals with ten public universities. So is Semester Online, with six private universities (including my own). They’re both putting together courses for which students will receive credit and that will only be available for students (or their institutions) that pay fees. (The Chronicle of Higher Education has posted the University of Kentucky’s contract with Coursera.)

What’s the significance of this move? Duke, which has been actively involved in on-line courses through Coursera, has recently opted out of Semester Online, the for-credit version of on-line education.

Does this mean we’re going be seeing a handful of prestigious universities at the top, producing MOOCs and MOCs (but making sure their own students still study in classrooms and residential environments), and all the other colleges and universities at the bottom (like Massachusetts Bay Community College) forced to have the freedom to pay for those courses so that their students can have the appropriate certified literacies to make it in the world?

Update

So, what does this mean for aspiring, keep-up-with-the-Joneses universities in the middle? Two things, I think: first, it’s an attempt to develop the “branding” of the university, by producing and disseminating the kinds of MOOCs that have achieved such success at Stanford and elsewhere. MOOCs will take their place alongside athletic programs and branded T-shirts as ways such universities are using to attempt to make a name for themselves (even while they undermine the quality of the education they offer to their students). Second, the production and purchase of MOCs represent an attempt to increase in the productivity of faculty labor, by allowing more students to get course credit in activities beyond the classroom. It signifies a shift, in other words, from “more butts in seats” to “more butts in front of the computer”—under the presumption of course that education is a homogenous commodity, which can equally be produced on-line, in the classroom, and by professors at different universities.

Cartoon of the day

Special mention

Taxes, surplus, and the top 1 percent

We know that U.S. economic inequality—especially the share of income going to the top 1 percent—has been increasing for about three decades. The question is, can the latest research assist us in making sense of the ways top income-earners in the United States have been managing to capture a larger and larger share of the surplus?

In a new paper, “The Top 1 Percent in International and Historical Perspective,” Facundo Alvaredo, Anthony B. Atkinson, Thomas Piketty, Emmanuel Saez note that there’s nothing universal or given (as suggested by theories of globalization and skill-based technological change) about the rising share of the top 1 percent. Instead, country-specific policies explain a large share of growing inequality that has been occurring in some places and not in others.

Alvarado et al. start by focusing on changes in top marginal tax rates and find that top tax rates have moved in the opposite direction from top income shares. In the United States, for example, top marginal tax rates have fallen while top income shares have been on the rise since the mid-1970s. That’s their springboard to consider the causes behind the rise in top income shares, of which two are particularly significant for our purposes: bargaining power of those at the top and the relationship between so-called earned income and capital incomes.

The first point is that cuts in top tax rates meant that top executives had additional incentives to bargain more aggressively to increase their compensation. The result was that, in the context of other changes (such as financial deregulation and the increased extent of performance-pay), executives of large corporations were able to secure a large share of the surplus for themselves—perhaps at the expense of growth and employment.

international evidence shows that current pay levels for chief executive officers across countries are strongly negatively correlated with top tax rates even controlling for firm’s characteristics and performance, and that this correlation is stronger in firms with poor governance. . .This finding also suggests that the link between top tax rates and pay of chief executive officers does not run through firm performance but is likely to be due to bargaining effects.

The second point is that, at least in the United States, where wealth concentration is much higher than in other developed countries, there has been an increasing degree of association between earned income and capital income. Thus, for example (as can been seen in the table below), whereas in 1980 only 17 percent of capital-income and labor-income recipients were in the top one per cent for both, that number had risen to 27 percent in 2000.

In other words, those at the top have been able to receive an increased share of the surplus in the form of both “earned income” (i.e., their salaries) and “capital income” (i.e., having claims on the surplus through their accumulated wealth).

It’s that combination of increased bargaining power and the ability to accumulate private wealth that explains the growth of inequality—the amount of the surplus captured by the 1 percent—in the United States over the last three decades.

The only thing missing from the Alvarado et al. story is an analysis of where the surplus itself comes from, that is, how the surplus that is being captured by the top one percent has been originally pumped out of employees in the United States and around the world.

Protest of the day

 

Demonstrators confronted police and bulldozers in Taksim Gezi Park [ht: ym], one of the only remaining green spots in downtown Istanbul, which is reportedly under the risk of the construction of a shopping mall.

Cartoon of the day

Special mention

Protest of the day

Amazon’s German workers yesterday walked off the job in a one-day strike to demand higher wages.

The union is pushing the online retailer to adopt wage agreements similar to those governing retail and mail-order workers, which include Christmas bonuses and extra pay for working nights, Sundays and holidays. The agreements could mean as much as 9,000 euros ($11,700) more annually for Amazon workers.

Amazon says its distribution warehouses in Germany are logistics centers, and employees are already paid on the upper end of what workers in that industry earn.

Ver.di represents some 2,000 workers in Leipzig and 3,300 employees at Amazon’s Bad Hersfeld center. They staged a first strike earlier this month.

Krugman and me

Apparently, Paul Krugman and I crossed paths—way back in 1976.

According to his “maudlin memories of youth,” Krugman was one of five MIT graduate students sent to Portugal during the summer to work on the national accounts and to offer economic advice to the folks running the central ban—in a continuation of a long line of mainstream economic advisers from the United States to the Portuguese government stretching back to the 1960s.

Me, after graduating from college, I went with a Watson Fellowship to study the prospects for socialism after the Carnation Revolution of 24 April 1974, with a project titled “The Political Economy of the Portuguese Revolution 1974-1976” (which I mention briefly in this interview).

Krugman found a country that was “fascinating, lovable, and still very poor.” I found a country that, from north to south, was struggling to explore and expand its new-found freedoms and to debate its future after the end of fascist regime of Marcelo Caetano and the Portuguese Colonial Wars in Africa and East Timor. That summer, liberal Mário Soares was elected Prime Minister of a weak minority government (in coalition with the Social Democratic Party), and proceeded to impose austerity measures that were criticized by the opposition Communist Party and the Armed Forces Movement, while collective farms continued to operate on millions of acres of occupied lands in the Alentejo.

1976 was also the year I decided to return to the United States and to apply for a graduate program in radical economics. Places like MIT held no interest for me. Instead, I applied to Stanford (where Paul Baran had taught), the New School, and the University of Massachusetts Amherst and ended up, in 1977, enrolling at UMass.

Today, the right-wing Social Democratic Party led by Pedro Passos Coelho, elected in 2011, is hellbent on imposing the troika-sponsored austerity policies that have resulted in a shrinking economy and 18 percent unemployment.

And, while to my knowledge Krugman and I have never crossed paths again, the Portuguese people have been forced to take to the streets once again to find a way out of the economic crisis.

Cartoon of the day

Special mention