Connecting the dots—or not

Paul Krugman continues to have a hard time connecting the dots—for example, between inequality and macroeconomics. For him, there’s the macroeconomic dot and then there’s the inequality dot, and the two are separate: the former is “economics,” while the latter is “politics.” That’s what you get in the IS-LM world of which Krugman is so enamored.

Joseph Stiglitz, on the contrary, is in fact busy connecting the dots. He understands quite well that the existing macroeconomic models are fundamentally flawed, at least in part because they exclude the problems created by growing inequality.

Distribution matters as well – distribution among individuals, between households and firms, among households, and among firms. Traditionally, macroeconomics focused on certain aggregates, such as the average ratio of leverage to GDP. But that and other average numbers often don’t give a picture of the vulnerability of the economy.

In the case of the financial crisis, such numbers didn’t give us warning signs. Yet it was the fact that a large number of people at the bottom couldn’t make their debt payments that should have tipped us off that something was wrong.

And Stiglitz understands that another economic crisis may soon break out, this one connected to soaring student debt, which in turn is caused by the same trends of inequality that preceded the financial crisis of 2007-08.

Student debt also is a drag on the slow recovery that began in 2009. By dampening consumption, it hinders economic growth. It is also holding back recovery in real estate, the sector where the Great Recession started. . .

Those with huge debts are likely to be cautious before undertaking the additional burdens of a family. But even when they do, they will find it more difficult to get a mortgage. And if they do, it will be smaller, and the real estate recovery will consequently be weaker. . .

It’s a vicious cycle: lack of demand for housing contributes to a lack of jobs, which contributes to weak household formation, which contributes to a lack of demand for housing.

As bad as things are, they may get worse. With budgetary pressures mounting — along with demands for cutbacks in “discretionary domestic programs” (read: K-12 education subsidies, Pell Grants for poor kids to attend college, research money) — students and families are left to fend for themselves. College costs will continue to rise far faster than incomes. As has been repeatedly observed, all of the economic gains since the Great Recession have gone to the top 1 percent. . .

We now have a pay-to-play, winner-take-all game where the wealthiest are assured a spot, and the rest are compelled to take a gamble on huge debts, with no guarantee of a payoff.

There is simply no macroeconomic analysis worth its salt that doesn’t help us begin to make sense of the relationship between inequality and capitalist economic crises.

And unless and until economists begin to connect the dots, they’ll be caught unawares—once again—by the onset of the crisis and they’ll have little to offer—once again—about how to deal with it once it happens.

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After neoliberalism?

The founding editors of the British journal Soundings—Stuart Hall, Doreen Massey and Michael Rustin—have published an online manifesto in which they argue for disrupting the current neoliberal common sense and challenging the assumptions that organize our twenty-first-century political discourse.

Three ideas are, in my view, particularly important. First, “mainstream political debate simply does not recognise the depth of this crisis, nor the consequent need for radical rethinking.” That indictment is accurate not only for the current political debate but also for mainstream political and economic thought, both liberal and conservative—although there are plenty of intellectuals who are willing to take the “pay to play” in the sandbox of neoliberalism.

Second, neoliberalism has never succeeded in conquering everything. It is, instead, a project, an attempt—not always or everywhere successful—to colonize the world.

It operated within, and created, a world of great diversity and unevenness. Its early – classic – laboratory was Chile, but the rise of South East Asian tigers was, critically, a state-aided development (by no means the official neoliberal recipe). And in spite of the Western triumphalism of 1989, Russia also retains its specificities – a hybrid of oligarchic and state capitalism combined with authoritarianism. China, too, struggles to define a different model; it currently combines centralised party control with openness to foreign investment, and acute internal geographical dislocations and widespread social conflict with break-neck rates of growth and the lifting of hundreds of millions out of poverty. Indeed, conflict has erupted in many parts of the world where the neoliberal orthodoxy has been adopted. India, so frequently lauded for its embrace of the market consensus, exhibits both extraordinary rifts between the new elites and the impoverished, and multiple and persistent conflicts over its current economic strategy. Other major sites of conflict have been the water and gas wars in Bolivia, and the struggle of ‘the poors’ in Thailand. The emerging articulations of progressive governments and grassroots social movements in Latin America are, in varying ways and in varying degrees, responses to the impact of previous neoliberal policies. The alter-globalisation movement has been vocal. This has not been a simple victory.

Third, the shift in economic and social power since the 1970s has not been driven by a simple logic or single motor.

The economic is critical; but it cannot determine everything – even ‘in the last instance’, as Althusser famously argued. Any given conjuncture represents, rather, the fusion ‘into a ruptural unity’ of an ensemble of economic, social, political and ideological factors where ‘dissimilar currents … heterogeneous class interests … contrary political and social strivings’ fuse. What has come together in the current neoliberal conjuncture includes class and other social interests, new institutional arrangements, the exercise of excessive influence by private corporations over democratic processes, political developments such as the recruitment of New Labour to the neoliberal consensus, the effects of legitimising ideologies and a quasi-religious belief in the ‘hidden hand’, and the self- propelling virtues of ‘the market’.

So, there we have it: a neoliberal order in crisis that simply cannot be grasped or contained by mainstream political and economic thought, which has only ever involved an incomplete and always-contested attempt to remake the world, and which represents the contradictory fusion of economic and non-economic processes and events.

That’s a very good start. I look forward to reading the next installments of the Kilburn Manifesto.

Inequality and the current crises

Mainstream economists (like Brad DeLong) can’t seem to find any connections between growing inequality and the current crises. But it’s not a problem for Federal Reserve Board Governor Sarah Bloom Raskin.

Yes, this is the same Raskin who recently decided to look beyond capitalism for a solution to the current crises. In an extension of those remarks, she set out to examine how “economic marginalization and financial vulnerability, associated with stagnant wages and rising inequality, contributed to the run-up to the financial crisis and how such marginalization and vulnerability could be relevant in the current recovery.”

Here’s her argument in a nutshell:

at the start of this recession, an unusually large number of low- and middle-income households were vulnerable to exactly the types of shocks that sparked the financial crisis. These households, which had endured 30 years of very sluggish real-wage growth, held an unusually large share of their wealth in housing, much of it financed with debt. As a result, over time, their exposure to house prices had increased dramatically. Thus, as in past recessions, suffering in the Great Recession–though widespread–was most painful and most perilous for low- and middle-income households, which were also more likely to be affected by job loss and had little wealth to fall back on.

Moreover, I am persuaded that because of how hard these lower- and middle-income households were hit, the recession was worse and the recovery has been weaker. The recovery has also been hampered by a continuation of longer-term trends that have reduced employment prospects for those at the lower end of the income distribution and produced weak wage growth.

This is a remarkable thesis, better than 99 percent of what we have heard from mainstream economists throughout this sorry spectacle (although Raskin does stumble a bit in repeating the mainstream penchant to invoke “technological change that favors those with a college education and globalization” as the causes of inequality).

And Raskin is well aware of how novel her thesis is, at least in mainstream circles:

To be clear, my approach of starting with inequality and differences across households is not a feature of most analyses of the macroeconomy, and the channels I have emphasized generally do not play key roles in most macro models. The typical macroeconomic analysis focuses on the general equilibrium behavior of “representative” households and firms, thereby abstracting from the consequences of inequality and other heterogeneity across households and instead focusing on the aggregate measures of spending determinants, including current income, wealth, interest rates, credit supply, and confidence or pessimism. In certain circumstances, this abstraction might be a reasonable simplification. For example, if the changes in the distribution of income or wealth, and the implications of those changes for the overall economy, are regular features of business cycles, then even an aggregate model without an explicit focus on distributional issues would capture those historical regularities.

However, the narrative I have emphasized places economic inequality and the differential experiences of American families, particularly the highly adverse experiences of those least well positioned to absorb their “realized shocks,” closer to the front and center of the macroeconomic adjustment process. The effects of increasing income and wealth disparities–specifically, the stagnating wages and sharp increase in household debt in the years leading up to the crisis, combined with the rapid decline in house prices and contraction in credit that followed–may have resulted in dynamics that differ from historical experience and which are therefore not well captured by aggregate models. How these factors have interacted and the implications for the aggregate economy are subject to debate, but I have laid out some possible channels through which there could be effects and that I believe represent some particularly fruitful areas for continued research.

I’m certainly not going to hold my breath—and I doubt Raskin is, either—until mainstream economists decide to actually pursue these lines of research.

Protest of the day

 

Flamenco flash mobs—seemingly spontaneous dance and song performances—have been taking place in banks not just in Seville, but all over Andalusia. They are being staged by Flo6x8 to express anger and frustration at the economic crisis.

“At first there is surprise,” says Pepe El Moody’s (a pseudonym), one of the organisers, describing how people in the banks tend to react to these events. “Older people stand terrified in a corner, and mostly the bank employees are sympathetic, because they are suffering in this [economic] situation.”

Interestingly, the flash mobs are reconnecting flamenco with its origins as an art form of protest and social awareness.

The visible thumb

I can’t do much writing these days, since one of my thumbs no longer serves its opposable purpose.

But I can’t resist commenting on Professor DeLong’s attempt to grasp the reality of the current economic crisis—with two visible hands, no less.

On one hand, he admits that his batting average over the past six years has been very low. On the other hand, he offers an analysis of the sequences of processes that got us into the current mess without a single mention of inequality.

Not a word about the increasingly visible thumb on the scales of the distribution of income and wealth, starting in the mid-1970s, and therefore nothing about its role in creating the bubble that burst in 2007-08. That’s like trying to make sense of the causes of the Second Great Depression with one hand tied behind your back.

Unfortunately, all I can do right now is use my remaining good thumb to oppose any economic analysis, at the microeconomic or macroeconomic level, that fails to grasp the significance of inequality.

Cartoon of the day

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Cartoon of the day

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