Pop Keynesianism

There’s no surer sign that someone has achieved pop star status than that they are the target of a satire. And so it is with Paul Krugman.

But, according to Joshua Clover, pop has its particular tensions and contradictions:

In December, Krugman wrote two blog entries in swift succession: “Rise of the Robots” and “Human Versus Physical Capital.” Inequality, his charts informed him, was itself a consequence of the opposition between capital and labor—specifically the increasing domination of capital in the form of machines—as labor is expelled from the production process. That ratio turns out to be basically the same measure as productivity, sine qua non of economic progress.

Moreover, in a development Krugman couldn’t quite bring himself to declare, his charts suggest that a generally declining labor share since the 1970s has also spelled bad news for overall profitability outside the finance sector. The productivity race wasn’t just unfortunate for the unemployed; it was for capital a poison pill of its own making. Thus Krugman’s comedy: always on the verge of discovering the arguments of a 150-year-old book; always turning away at the last second. In Krugman’s words, “I think our eyes have been averted from the capital/labor dimension of inequality, for several reasons. It didn’t seem crucial back in the 1990s, and not enough people (me included!) have looked up to notice that things have changed. It has echoes of old-fashioned Marxism—which shouldn’t be a reason to ignore facts, but too often is. And it has really uncomfortable implications.”

Does it? I suppose so. And that uncomfort is what pop, for all its pleasures, must defer. Pop must affirm the way things are, no matter how often it choruses the word “change.” You cannot be Paul Krugman, Pop Star, and at the same time discover that capital is built to break us, and itself—even if your charts so testify. So you will not be shocked to discover Krugman stepped back from this realization and continued about his business, scarcely speaking of it again. There are some things you do not say. They are not popular.

Cartoon of the day

Special mention

 

Class struggles

It should come as no surprise that, as reported in the Chronicle of Higher Education [paywall], students on college campuses are struggling over the issue of class.

The situation is particularly difficult for first-generation college students (as I was back in the day), who are cast as subjects of “socioeconomic diversity” within institutions of higher education that are increasingly targeting the sons and daughters of the wealthy in order to increase revenues and move up in the rankings.

The class problem in relation to higher education, of course, is an old one, as Thorstein Veblen discussed in the Theory of the Leisure Class:

Ritualistic survivals and reversions come out in fullest vigor and with the freest air of spontaneity among those seminaries of learning which have to do primarily with the education of the priestly and leisure classes. Accordingly it should appear, and it does pretty plainly appear, on a survey of recent developments in college and university life, that wherever schools founded for the instruction of the lower classes in the immediately useful branches of knowledge grow into institutions of the higher learning, the growth of ritualistic ceremonial and paraphernalia and of elaborate scholastic “functions” goes hand in hand with the transition of the schools in question from the field of homely practicality into the higher, classical sphere. The initial purpose of these schools, and the work with which they have chiefly had to do at the earlier of these two stages of their evolution, has been that of fitting the young of the industrious classes for work. On the higher, classical plane of learning to which they commonly tend, their dominant aim becomes the preparation of the youth of the priestly and the leisure classes—or of an incipient leisure class—for the consumption of goods, material and immaterial, according to a conventionally accepted, reputable scope and method. This happy issue has commonly been the fate of schools founded by “friends of the people” for the aid of struggling young men, and where this transition is made in good form there is commonly, if not invariably, a coincident change to a more ritualistic life in the schools.

And, of course, it’s become much sharper in recent years, with growing inequality in the wider society and soaring debt for those students who are trying to follow the American Dream.

While I’m certainly not against the “dialogues” featured in the Chronicle article, what students in fact need is a clear and rigorous discussion of how class works—in the economy and in the wider society. They need academic courses—in economics and sociology but also in literature and the sciences—that explicitly treat the issue of class, which given students the concepts and methods to understand how class works and how it shapes their lives, before, during, and after their studies.

Otherwise, all we’re doing is participating in the “growth of ritualistic ceremonial and paraphernalia and of elaborate scholastic ‘functions’” and watching students struggle, outside the classroom, with the issue of class.

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.

“Affirmative action for the wealthy”

Pell Grants and need-based financial aid are supposed to make a college education accessible for low-income students and institutions of higher education more socioeconomically diverse. But it’s not working. Instead, what we’re seeing is a determined effort on the part of many colleges and universities—both public and private—to recruit affluent students in order to boost their revenues and rankings. Those schools, in other words, are providing “affirmative action for the wealthy.”

That’s the conclusion of a recent study by the New America Foundation, “Undermining Pell: How Colleges Compete for Wealthy Students and Leave the Low-Income Behind.”

With their relentless pursuit of prestige and revenue, the nation’s public and private four-year colleges and universities are in danger of shutting down what has long been a pathway to the middle class for low-income and working-class students. This report presents a new analysis of little-examined U.S. Department of Education data showing the “net price” — the amount students pay after all grant aid has been exhausted — for low-income students at thousands of individual colleges. The analysis shows that hundreds of colleges expect the neediest students to pay an amount that is equal to or even more than their families’ yearly earnings. As a result, these students are left with little choice but to take on heavy debt loads or engage in activities that lessen their likelihood of earning their degrees, such as working full-time while enrolled or dropping out until they can afford to return.

The problem, not surprisingly, is highest in the private nonprofit college sector, “where only a few dozen mostly exclusive colleges meet the full financial need of the low-income students they enroll.” The rest are leaving poor students behind, because they’re using their institutional financial aid as “a competitive tool to reel in the top students, as well as the most affluent, to help them climb up the U.S. News & World Report rankings and maximize their revenue.”

As it turns out, many public universities are traveling down the same road:

As more states cut funding for their higher education systems, public colleges are increasingly adopting the enrollment management tactics of their private college counterparts — to the detriment of low-income and working-class students alike.

One of the main ways that states have dealt with the financial pressure has been to free their public institutions to take a so-called “high tuition, high aid” approach — meaning that these institutions can sharply raise their prices with the expectation that they will provide more generous financial aid to offset the effect on low- and moderate-income students. This analysis finds that the high-tuition, high aid approach has been a failure for low-income students. In many states that are following this model, such as Pennsylvania and South Carolina, the neediest students are facing net prices that are more than double what they are being charged in low-tuition states such as North Carolina.

Penn State University is a case in point. In-state students attending the university’s flagship campus in University Park pay about $16,000 in tuition and fees annually, which is double the average charged at public four-year colleges and universities. Despite the fact that Penn State spends nearly $14 million a year on institutional aid, its lowest-income in-state students pay an average net price of nearly $17,000, the fifth-highest of any public institution this report examines. In other words, Penn State’s neediest students do not appear to be getting any discount relative to other students at all. At the same time, about 6 percent of the school’s first-time freshmen received an average of $3,800 in so-called “merit aid” in 2010-11.

Schools like Penn State seem to be using their pricing autonomy to gain an advantage as they fiercely compete for the students they most desire: the “best and brightest” students — and the wealthiest.

The result: too many colleges and universities, both public and private, are failing to maintain an accessible higher education for the nation’s students. They are, instead, making it more and more difficult for low-income students to acquire a high-quality postsecondary education while creating a system that provides affirmative action for the sons and daughters of already-wealthy Americans.

Chart of the day

 

Actually two charts: corporate profits (a new record high) and wages (a new record low) as a share of Gross Domestic Product.

And Henry Blodget’s view is that

our current obsessed-with-profits philosophy is creating a country of a few million overlords (shareholders) and 300+ million serfs (employees).

It is also resulting in employees sharing less of the corporate wealth that they spend their lives creating than they ever have before.

That’s not what has made America a great country. It’s also not what most people think America or other lands of opportunity are supposed to be about.

I’d put it a bit differently: our current obsessed-with-profits philosophy is creating a country of a few million overlords (members of boards of directors of corporations, plus those who get a cut of the surplus they appropriate) and 300+ million wage-laborers (employees). It is resulting in employees sharing less of the corporate wealth that they spend their lives creating than they ever have before. That’s precisely what has made America a great country in the midst of a Second Great Depression. Even though it’s not what most people think America or other lands of opportunity are supposed to be about.

Chart of the day

source

According to a new study by the Urban Institute,

While the Great Recession didn’t cause the wealth disparities between whites and minorities, it did exacerbate them. The 2007–09 recession brought about sharp declines in the wealth of white, black, and Hispanic families alike, but Hispanics experienced the largest decline. Lower home values account for much of Hispanics’ wealth loss, while retirement accounts are where blacks were hit hardest.

Chart of the day

According to a new report by the Pew Research Center,

During the first two years of the nation’s economic recovery, the mean net worth of households in the upper 7% of the wealth distribution rose by an estimated 28%, while the mean net worth of households in the lower 93% dropped by 4%. . .

From 2009 to 2011, the mean wealth of the 8 million households in the more affluent group rose to an estimated $3,173,895 from an estimated $2,476,244, while the mean wealth of the 111 million households in the less affluent group fell to an estimated $133,817 from an estimated $139,896.

These wide variances were driven by the fact that the stock and bond market rallied during the 2009 to 2011 period while the housing market remained flat.

Affluent households typically have their assets concentrated in stocks and other financial holdings, while less affluent households typically have their wealth more heavily concentrated in the value of their home.

From the end of the recession in 2009 through 2011 (the last year for which Census Bureau wealth data are available), the 8 million households in the U.S. with a net worth above $836,033 saw their aggregate wealth rise by an estimated $5.6 trillion, while the 111 million households with a net worth at or below that level saw their aggregate wealth decline by an estimated $0.6 trillion.

Because of these differences, wealth inequality increased during the first two years of the recovery. The upper 7% of households saw their aggregate share of the nation’s overall household wealth pie rise to 63% in 2011, up from 56% in 2009. On an individual household basis, the mean wealth of households in this more affluent group was almost 24 times that of those in the less affluent group in 2011. At the start of the recovery in 2009, that ratio had been less than 18-to-1.

Now, that’s what I call an uneven recovery!

Cartoon of the day

Special mention

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.