Posts Tagged ‘economists’

Heinrich Kley, "Sabotage" (Betriebsstorung)

Heinrich Kley, “Sabotage” (Betriebsstorung)

I have long argued (e.g., here and here) that capitalism involves a kind of pact with the devil: control over the surplus is reluctantly given over to the top 1 percent in return for certain promises, such as just deserts, economic stability, and full employment.

In recent years, as so often in the past, we’ve witnessed those at the top sabotaging the pact (simply because they have the means and interest to do so) and now, once again, they’ve undermined their legitimacy to run things.

First, they broke their promise of just deserts, as the distribution of income has become increasingly (and, to describe it accurately, grotesquely) unequal and the tendency toward high concentrations of wealth has returned, threatening to create a new class of coupon-clippers. Then, they ended the Great Moderation with speculative decisions that ushered in the worst economic crisis since the First Great Depression. And, now, the promise of full employment appears to be falling prey to the prospect of secular stagnation.

That’s the worry expressed in a new ebook edited by Richard Baldwin and Coen Teulings published by Vox. While secular stagnation can be defined in different ways, the basic idea is that, for the foreseeable future, economic growth—and therefore the prospect of full employment—is probably going to be much lower than it was in the decades leading up to the global crises of 2007-08. Moreover, what little growth is expected will most likely be accompanied by great inequality and financial stability.

If it becomes a reality, secular stagnation represents the end of the pact with the devil. It’s going to be impossible to keep any of the promises—just deserts, economic stability, and full employment—that have maintained capitalism’s legitimacy.

I don’t know if the members of the 1 percent are aware of or concerned about the extent to which secular stagnation may be their undoing (because, in fact, they may hold out the hope that more austerity can successfully be imposed to keep pumping out the surplus). But, to judge from many of the contributions to the Vox volume, the prospect of secular stagnation certainly appears to be worrying mainstream macroeconomists.

Why? Because their own promise was to analyze the uneven and shifting patterns of the macroeconomy and to devise the appropriate set of monetary and fiscal policies to ensure the continuation of the pact with the devil. However, secular stagnation—including the idea that the real rate of interest would have to be negative to maintain an equilibrium of savings and investment—calls into question the efficacy of the kinds of macroeconomic policies that have long held sway among mainstream macroeconomists. Now, they’re not sure they’ll be able to maintain the promise of creating a just distribution of income, avoiding financial instability, and creating enough jobs to ensure every able-bodied person who wants a decent, well-paying job can have one.

Actually, as we’ve seen, they haven’t been able to fulfill that promise for the past 7 years. And now, the threat of secular stagnation means they won’t able to do it anytime in the near future.

There just may not be a happy Disney ending to this one. . .

NYT-economists-and-recession-cartoon

Right now, mainstream economists are both congratulating themselves and bemoaning their fate.

Mainstream economists (such as Justin Wolfers and Paul Krugman) are congratulating themselves for having achieved a virtual consensus on the positive effects of fiscal stimulus. But they’re also complaining about the fact that the rest of the world (such as politicians, central bankers, and others) doesn’t seem to be listening to their expert advice.

Just two quick comments on this approach to consensual economics:

First, of course there’s a consensus among mainstream economics! That’s what their theories and models are supposed to do: produce and reproduce a consensus in terms of the basic analysis of macroeconomic events (although, of course, there can still be disagreements about particular aspects, such as the exact size of the fiscal multiplier and so on). And anyone who doesn’t use those models, and therefore reaches a different set of conclusions, is declared to be outside the mainstream, and therefore not worth reading or being listened to.

Second, how is it possible to declare—in the midst of the Second Great Depression—that mainstream economics has been an unqualified success? To arrive at such a conclusion would mean to overlook, at a minimum, the role that mainstream economics played in creating the conditions for the crash of 2007-08, in failing to include even the possibility of such a crash in their models, and in confining themselves to a package of monetary and fiscal policy measures—and not to even consider the possibility of larger, structural changes—as tens of millions of people lost their jobs, were stripped of their wealth, and were pushed further and further down the economic ladder.

Those engaged in consensual economics are, it seems, too busy congratulating themselves and bemoaning their fate to want to recognize the gorilla in the room.

 

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This, according to the Obama administration, is what “a broad array of ideological views” [ht: br] looks like:

  • Paul Krugman (Princeton University), Alan Blinder (Princeton University), Claudia Goldin (Harvard University), Anat Admati (Stanford University), Erik Brynjolfsson (Massachusetts Institute of Technology), and Roland Fryer (Harvard University), who were among the economists invited to have lunch with President Obama on 18 June; and
  • Martin Feldstein (Harvard University), Robert Hall (Stanford University), Ben Bernanke (former Federal Reserve Chairman), Edward Glaesar (Harvard University), Luigi Zingales (University of Chicago), Kevin Hassett (American Enterprise Institute), and Melissa Kearney (the Hamilton Project), who were invited for lunch yesterday.

Apparently, that’s what we’ve come to in this country, when “consulting a wide variety of perspectives” is in fact limited to a discussion within a narrow range, from the extreme right to mainstream liberalism. No one who actually offered a real sense of the impending crisis before 2007-08. Nor anyone who is critical of capitalism and is seriously thinking about alternative economic institutions.

The problem is not just that Obama is only listening to a narrow set of views. The list of invitees to the two gatherings also serves as an official stamp of approval—that these economists’ views are worth listening to, and all other approaches to economic analysis can be safely marginalized.

Franck Scurti, “Homo Economicus” at Cabinet

Franck Scurti, “Homo Economicus” at Cabinet

Maybe I should leave them alone, and just get on my with my grading. But there are certain misconceptions that get repeated so often someone has to step in to correct the record.

Such as the idea that “economists”—without qualification—are “finally taking inequality seriously.” That’s the title of Mark Thoma’s latest essay in which he has the temerity to assert that “Until recently, most questions surrounding the distribution of income were considered out of the realm of serious, scientific analysis.”

Now, that may be true of mainstream economists, who have either ignored the problem of the distribution of income or  attempted to contain the issue by examining it through the lens of marginal productivity theory (according to which, absent market imperfections, everyone gets what they deserve). But it’s certainly not true of generations of nonmainstream, heterodox economists for whom the distribution of income has been central to the dynamics of capitalist economies.

But my more general point is that you should run anytime anyone argues that “economists do this” or “economists say that.” Given the existence of different theories or discourses within the discipline of economics, there is nothing economists in general do or say. There are only neoclassical economists and Keynesian economists and Marxist economists, and so on—and they all do and say different things, about the distribution of income and much else.

The other pet peeve concerns the characterization of Marx as an economic determinist, again without qualification. This canard has returned in Kevin Quinn’s facile attempt to find a symmetry between Marx and the late Gary Becker.

I want to compare them in another respect. Both championed different forms of Rabid Economism. Marx’s economism was holist,  Becker’s individualist, but both forms are equally reductionist and equally  imbecilic. Marx’s materialism reduces the cultural, the political, the ethical to super-structural epiphenomena: all were just distorted reflections of the underlying reality of class struggle. Becker thinks all human agency simply consists of maximizing utility. For neither thinker do human beings have the ability to think and act  “for the sake of the world,” as Hannah Arendt would say. For each, we are deluding ourselves if we think that acting can ever be a matter of  trying to get things right – to do what is called for, to believe what is warranted -independent of what our interests dictate. For both, in other words, the concept of disinterested action – including the disinterested pursuit of truth – is a snare and a delusion.  Finally, in this latter respect, both systems of thought are self-undermining:   neither can make sense of  itself as a disinterested attempt to understand the human condition.

There is no doubt that Becker championed a reductionist conception of individual decisionmaking and therefore of the universe of economic and social interactions—including, famously, the family, suicide, and racial discrimination.* However, where’s the evidence of Marx’s supposed economism? While it’s an oft-repeated assertion, just a little research would have uncovered a nice piece by Peter G. Stillman disputing that myth, as well as an entire tradition associated with the journal Rethinking Marxism that has sought to distance Marx and Marxist theory from that unfortunate characterization.

So, let’s finally put these two shibboleths to rest: there’s no such thing as this is what economists, without qualification, do or say; and Marxism is not economic determinism.

 

*While we’re on the topic of Becker, permit me one further reflection: while I can’t agree with the praise heaped on him by economists like Justin Wolfers, I will admit to a grudging admiration for someone who was the subject of derision from mainstream economists at places like Harvard and MIT during the 1960s—and yet stuck to his guns and pursued a research strategy that, at least at the time, placed him at the margins of the economics establishment.

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Back in 2009, in the midst of the Great Crash (and therefore at the start of the Second Great Depression), a colleague and friend asked me whether I expected the teaching of economics to change. His view was that, since mainstream economics had so miserably failed in both predicting the crash and providing a guide as to what to do once the crash occurred, it was obvious the economics being taught to students had to fundamentally change. My answer was that, while the need for a change was obvious, I didn’t see it happening—and it probably wouldn’t happen (thinking back to the emergence of the Union of Radical Political Economics in the late-1960s) unless and until students of economics demanded a different approach.

Well, in various places (starting almost a decade before the current crises, with the eruption of the Post-Autistic Economics movement in June 2000), students have been demanding a fundamental change in the way economics is being taught. The latest effort to move that project along is a report from the University of Manchester Post-Crash Economics Society. Here are some of their key findings, which refer to how economics is taught at Manchester but clearly have much wider relevance, in and beyond the United Kingdom:

  • Economics education at Manchester has elevated one economic paradigm, often called neoclassical economics, to the sole object of study. Other schools of thought such as institutional, evolutionary, Austrian, post-Keynesian, Marxist, feminist and ecological economics are almost completely absent.
  • The consequence of the above is to preclude the development of meaningful critical thinking and evaluation. In the absence of fundamental disagreement over methodology, assumptions, objectives and definitions, the practice of being critical is reduced to technical and predictive disagreements. A discipline with a broader knowledge of alternative perspectives will be more internally self-critical and aware of the limits of its knowledge. Universities cannot justify this monopoly of one economic paradigm.
  • The ethics of being an economist and the ethical consequences of economic policies are almost completely absent from the syllabus.
  • History of economic thought is an optional third year module which students are put off taking due to it requiring essay writing skills that have not been extensively developed elsewhere in the degree. Very little economic history is taught. Students finish an economics degree without any knowledge of momentous economic events from the Great Depression to the break-up of the Bretton Woods Monetary System.
  • When taken together, these points mean that economics students are taught the economic theory of one perspective as if it represented universally established truth or law.

 

What is it about the music industry when it comes to discussing the grotesque levels of inequality that prevail today?

Last year, Alan Krueger used it to explain the “winner-take-all economy,” as a way of introducing the Great Gatsby curve at the Rock and Roll Hall of Fame.

The music industry is a microcosm of what is happening in the U.S. economy at large. We are increasingly becoming a “winner-take-all economy,” a phenomenon that the music industry has long experienced. Over recent decades, technological change, globalization and an erosion of the institutions and practices that support shared prosperity in the U.S. have put the middle class under increasing stress. The lucky and the talented – and it is often hard to tell the difference – have been doing better and better, while the vast majority has struggled to keep up.

And now we have Robert Frank doing much the same, using the example of his two sons, who “comprise two-thirds of the Nepotist, a band in the hypercompetitive indie music scene of New York City” (nepotism in the free national publicity, you say?) to discuss the difference between winner-take-all and long-tail economics.

No doubt, I’m biased, but I think that my sons are good enough to break out in today’s music market. Yet a stark reality persists: Because there are thousands of talented bands today, their odds of stardom are vanishingly small.

The fact is, the music industry is not at all a good example of winner-take-all economics. Sure, there are a few winners and lots of folks who struggle to get by at the bottom—and a long history of artists’ complaints about being ripped off by the recording industry.

But that’s not the story told by economists like Krueger and Frank. Their analysis is all about technology and market share, and the few artists who manage at any point in time to dominate the charts, perform in gigantic concert venues, and rake in the money. It’s as if being a winner is all about getting rents.

The problem is, musicians and other “stars” (authors, artists, athletes, and celebrities) make up only a tiny fraction of the winners, the members of the top 1 percent. The rest, the majority of the minority, get their incomes from elsewhere.

What Krueger and Frank don’t want to talk about is the real winner-take-all economy, in which lots of people produce the surplus that is then appropriated by a tiny minority at the top. A large and growing surplus that either shows up as corporate retained earnings or is distributed to others, both inside and outside those corporations, who manage to “share in the booty.” In that economy, the use of new production technologies means that corporate profits and the percentage of income captured by the top 1 percent are both soaring, while the wage share and the incomes of the other 99 percent continue to decline.

Workers and the other members of the 99 percent are, like Frank’s sons, not short on talent. It’s just that their talents are always at the service of their employers, who continue to be the real winners in the current economy.

sinking-ship-inequality-cartoon

You have to give credit to mainstream economists: they’ll do anything to avoid talking about class.

Take the current discussion about inequality. Right now, eyes are clearly focused on two major trends: the share of national income going to the top 1 percent (and therefore the gap between them and the other 99 percent) and the share of profits and wages in national income (and therefore the growing gap between capital and labor). The issues are on the agenda, the data are easily accessible, and the charts are dramatic.

Here’s what the share going to the top 1 percent looks like (from the World Top Incomes Database):

chart

And here are the profit and wage shares (from FRED, the Economic Research unit of the St. Louis Fed, where blue represents the profit share and red the wage share):

fredgraph

Clear enough?

But, of course, once you look at inequality through the lens of those two data series, you have to talk about class: about how capital is gaining at the expense of labor, and about how top income earners are getting their share of the surplus created by labor. (There is, of course, a lot more work that needs to be done, in terms of both the data and an analysis of the data, but at least it’s a start.)

Mainstream economists, as it turns out, want us to look elsewhere—not at class but at the effects of anything and everything else. That’s how we get such nonsense as “Marry Your Like: Assortative Mating and Income Inequality,” an NBER working paper by Jeremy Greenwood et al.

Has there been an increase in positive assortative mating? Does assortative mating contribute to household income inequality? Data from the United States Census Bureau suggests there has been a rise in assortative mating. Additionally, assortative mating affects household income inequality. In particular, if matching in 2005 between husbands and wives had been random, instead of the pattern observed in the data, then the Gini coefficient would have fallen from the observed 0.43 to 0.34, so that income inequality would be smaller. Thus, assortative mating is important for income inequality. The high level of married female labor-force participation in 2005 is important for this result.

Fortunately, Kevin Drum has showed how silly and misleading their analysis is. At best, assortative marriage patterns might tell us something about changes in the distribution of income between, say, the the middle fifth and the next quintile up. But that’s it.

Even progressive economists can get distracted in this discussion—as for example when Larry Mishel discusses the “tight link” between the minimum wage and inequality. While, yes, a declining real minimum wage can increase the 50-10 wage gap (the difference between the median and the 10th percentile earner) but that’s not the real source of income inequality in the United States. It does tell us something about inequality among wage-earners—and that can undermine labor as a whole, by lowering the floor and thus leaving all wage-earners in a more desperate position. But, again, that’s it.

Better it seems to me to focus our attention on the real sources of inequality in the United States. And that means we have to face the class questions straight on. Anything else is merely a distraction.

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It used to be Harvard-based neoclassical economists could count on their Republican friends and allies to support their free-market policies. Now, apparently, not so much.

That’s the only explanation for why Jeffrey Frankel has to step forward and attempt to remind Republicans that market mechanisms—such as cap-and-trade and Obamacare—were their idea.

In the US, cap-and-trade was originally considered a Republican idea. Market-friendly regulation was pushed by those who thought of themselves as pro-market, rather than by those who thought of themselves as pro-regulation. . .

Republican politicians have now forgotten that this approach was ever their policy. To defeat the last major climate bill in 2009, they worked themselves into a frenzy of anti-regulation rhetoric. . .

One can draw a fascinating parallel between the evolution of American political attitudes toward market mechanisms in the area of environmental regulation and Republican hostility to the Affordable Care Act, also known as Obamacare. Obamacare is a market mechanism in the sense that health insurers and care providers remain private and compete against each other.

Frankel is, in fact, right. Both cap-and-trade and Obamacare came straight out of Republican think tanks, precisely in the way neoclassical economists had designed them. Then, they were the best of friends. Now, apparently, Republicans have to be reminded of that friendship.

Or scared into remembering that close relationship. Because, Frankel warns, the alternative is more government regulation.

It really is a sign of how much political and economic discourse has changed in the United States that it’s Democrats who are implementing market-based, originally Republican-designed policies. And that, even more: from the perspective of someone like Frankel, any government regulation of business (not, mind you, government ownership) can blithely be referred to as “command and control.”

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OK, the movie isn’t very good. (The Wolf of Wall Street is basically Goodfellas goes to Wall Street, with more cocaine and less violence, in which Scorcese focuses on the low-hanging fruit of penny-stock huckstering rather than on the real, much-more-powerful culprits behind the financial crisis.) But that doesn’t mean there aren’t wolves that need to be exposed: the academics who are bought and paid for by Wall Street.

Charles Ferguson, in the Inside Job, did a fine job shining light on some of the the better-known economists—R. Glenn Hubbard, Larry Summers, Frederic Mishkin, and so on—who have been willing to be paid to play in the debates surrounding financial deregulation.**

Around the same time, Reuters [pdf] conducted a study of academics who present themselves as disinterested experts at U.S. Congressional hearings but who have industry ties they don’t reveal. Thus, for example, roughly a third of the 82 academics who gave testimony to the Senate Banking Committee and the House Financial Services Committee between late 2008 and early 2010 (as lawmakers debated the biggest overhaul of financial regulation since the 1930s) did not reveal their financial affiliations in their testimony.

More recently, both The Nation and the New York Times have carried out similar studies—of academics who reap the rewards of defending one or another practice developed by Wall Street firms to manipulate financial markets for enormous gains.

As it turns out, it was Elizabeth Warner, the modern-day Leonard Horner, who sounded the alarm back in 2002 about the emerging market for scholarly data, “as journalists, lobbyists and legislators search for facts to pepper their public statements and better influence public opinion.” In her own area of bankruptcy law, she cites the example of the Credit Research Center located at Georgetown University that was taking money from the consumer credit industry to produce studies supporting the credit industry’s political positions. What happens is that the kind of studies issued by such centers acquire an academic legitimacy but the data they report are considered “proprietary,” belonging exclusively to the industry funders who decide what data are released and what data are held private.

Warren’s conclusion?

The market for data threatens the role that social science research can play in policymaking. When data become a commodity—purchased, packaged, and sold to a willing public under a university imprimatur by those who profit from its distribution—then empirical work becomes little more than cheap ad copy. When that happens, the value of every kind of research academics do declines sharply. Like it or not, our collective worth is on the line.

When that happens, all of us—inside and outside the academy—fall prey to the wolves of Wall Street.

 

*I reserve the right to change the title of this post, since I’m going to see David O. Russell’s American Hustle later today. If I do, I’ll disclose the fact that I knew Russell back when he was in college.

**Partly as a result of that negative exposure, the American Economics Association was forced to consider developing a code of conduct it has never had. Instead, it adopted a very limited disclosure policy [pdf], according to which the only rule is that “Every submitted article should state the sources of financial support for the particular research it describes.”

Follow-up. . .

As it turns out, I did go to see American Hustle, which is terrific—superior (in my humble opinion) to Scorcese’s film. Russell has managed to capture a nation of small-time con artists (not unlike the characters in such TV series as The Sopranos and The Wire), who both deserve our affection (in the earnest manner in which they reinvent themselves and try to “do the right thing”) and represent a distraction from the real culprits (the big-time con artists whose activities have actually put people out of work and driven them into poverty and have deprived them of much-needed social benefits, like food stamps and unemployment compensation).

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[ht: cwc]