Posts Tagged ‘mainstream’

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Once again, the work of Hyman Minsky has been discovered—this time, by the BBC.

Minsky’s main idea is so simple that it could fit on a T-shirt, with just three words: “Stability is destabilising.”

Most macroeconomists work with what they call “equilibrium models” – the idea is that a modern market economy is fundamentally stable. That is not to say nothing ever changes but it grows in a steady way.

To generate an economic crisis or a sudden boom some sort of external shock has to occur – whether that be a rise in oil prices, a war or the invention of the internet.

Minsky disagreed. He thought that the system itself could generate shocks through its own internal dynamics. He believed that during periods of economic stability, banks, firms and other economic agents become complacent.

They assume that the good times will keep on going and begin to take ever greater risks in pursuit of profit. So the seeds of the next crisis are sown in the good time.

Much the same can be said about Marx’s work. In both theories, crises are endogenously produced within the capitalist system itself.

The approaches differ, of course: while Minsky focused on rising debt and complacency, Marx emphasized class exploitation and capitalist competition. But it doesn’t take much work to combine the insights of the two thinkers to identify what we might call the “Minsky-Marx moment”—the moment when, as a result of rising debt and competition over the surplus, the whole house of cards falls down.

But you won’t find either in modern macroeconomics. In fact, if you search inside one of the leading texts—Robert Barro’s Macroeconomics: A Modern Approach—you won’t find even a single mention of Minsky or Marx.

It’s no wonder modern mainstream macroeconomists and their students had so little to offer in terms of understanding how and why the latest crisis occurred or what to do once the house of cards did in fact come tumbling down.

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The debate about inequality, especially the growing gap between the top one percent and everyone else, has gone mainstream—as we can see by the debate between Robert Solow and Greg Mankiw in the pages of the Journal of Economic Perspectives.

First up was Mankiw, in an article I characterized last summer as throwing “everything against the wall in the hope that at least something will stick.” Then, Solow challenges Mankiw on every major facet of his argument, from the role of finance and the political influence of the one percent to economic rents, intergenerational mobility, and the idea of “just deserts.”

who could be against allowing people their “just deserts?” But there is that matter of what is “just.” Most serious ethical thinkers distinguish between deservingness and happenstance. Deservingness has to be rigorously earned. You do not “deserve” that part of your income that comes from your parents’ wealth or connections or, for that matter, their DNA. You may be born just plain gorgeous or smart or tall, and those characteristics add to the market value of your marginal product, but not to your just deserts. It may be impractical to separate effort from happenstance numerically, but that is no reason to confound them, especially when you are thinking about taxation and redistribution. That is why we may want to temper the wind to the shorn lamb, and let it blow on the sable coat.

Finally, Mankiw has the temerity to refer to Solow’s letter as “scattershot” and then to repeat his original arguments—even the silliest ones, such as the idea that tall people earn higher wages (why? because there’s “a positive correlation between height and cognitive skills”).

My own view, for what it’s worth, is that Solow is wrong about one thing: the one percent are not particularly good at defending themselves (as we can see with the recent examples of Sam Zell, Kevin O’Leary, and Tom Perkins). That’s why, as in the classic Three-Card Monte hustle, they have to have a shill. Which is why they need Harvard’s Mankiw, to attempt to defend them. The problem is, as Solow shows, the “cheerful blandness” of Mankiw’s attempt does not succeed in covering over the “occasional unstated premises, dubious assumptions, and omitted facts.”

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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):

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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):

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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.

 

This is an extended interview with Nobel Prize winner and MIT Professor Emeritus Robert M. Solow in which, among other things, he supports the view, recently enunciated by Pope Francis, that trickle-down economics “has never been confirmed by the facts.”

I’ll admit I have a soft spot in my heart for Solow, who wrote a letter to the President of the University of Notre Dame back in 2003 opposing the idea of splitting the existing Department of Economics into two separate departments: a Department of Economics and Econometrics (with the doctoral program and all new hires), and a Department of Economics and Policy Studies (with no participation in the doctoral program and no new hires). The latter department was dissolved in 2010.

Solow’s view?

“Economics, like any discipline, ought to welcome unorthodox ideas, and deal with them intellectually as best it can. To conduct a purge, as you are doing, sounds like a confession of incapacity.”

 

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Mainstream academic economists have finally caught up with American everyday economists, who have long supported—and by great margins—an increase in the minimum wage.

Laura Tyson presents the mainstream economists’ case: there’s simply no economic reason—either micro or macro—not to support a higher minimum wage for American workers. And there’s every reason to support a minimum wage that is much higher than the current $7.25 an hour:

Putting more income into the hands of minimum-wage workers would not only reduce poverty; it would also stimulate consumer spending at a time when inadequate demand continues to impede a robust recovery and job creation. Using very different methodologies, two recent studies confirm that an increase in the minimum wage to the $10 range would lift spending, gross domestic product and job creation.

Contrary to the warnings of its opponents, a higher minimum wage would, under current economic circumstances, mean more employment, not less.

That’s it. Done!

But, before we get too excited, let’s remember what a $10.10-an-hour minimum wage represents: It is still only half of what, on average, American workers (production and nonsupervisory employees on private nonfarm payrolls) currently receive. And, on an annual basis, it only amounts to $20,200, which is just above the poverty line for a family of three.

So, let’s follow the lead of the American public, ignore the howling from low-wage employers and their political shills, and raise the minimum wage. And then admit, it’s only the beginning.

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You can’t but agree with Mark Thoma’s observation concerning the debate within the dismal science about the Second Great Depression: “There is no single class of macroeconomic models that is best for all questions.”

Sure. Absolutely. There are different models for different questions and problems.

But then Thoma unnecessarily limits the debate to a single choice—between IS/LM and New Keynesian models, between the older type macroeconomic model with non-dynamic money and product markets and the newer models with individual agents guided by rational expectations, various kinds of imperfect markets, and dynamic reactions to external shocks. And he asks for tolerance among the advocates of each type of model for those who use the other type.

The New Keynesian model was built to explain a world of moderate fluctuations in GDP. It features temporary price rigidities, and the macroeconomic aggregates in the model are consistent with the optimizing behavior of individual consumers and producers. For certain types of questions – how should policymakers behave to stabilize an economy with mild fluctuations induced by price rigidities – it is the best model to use. Hence it’s popularity during the “Great Moderation” from 1984-2007 when there were no large shocks to the economy.

The IS-LM model, on the other hand, was built in the aftermath of the Great Depression to examine precisely the kinds of questions we faced throughout the Great Recession, issues such as a liquidity trap, the paradox of thrift, and how policymakers should react in such an environment. Why is it surprising that a model built to explain a particular set of questions does better than a model built to explain other things? Especially when the model is used in a way that incorporates the lessons we’ve learned in the intervening decades about its shortcomings.

OK. But what about all the other models out there, which represent critiques of and alternatives to mainstream economics? Models (from both the Marxian and Post Keynesian traditions) in which the boom and bust cycles of capitalism occur as endogenous events, as a result of the inner workings of a capitalist economy. Why aren’t they included in the choice of appropriate models?

The fact is, macroeconomists have little to offer in terms of understanding either the causes and consequences of the current crises—which, remember, have now been going on for over six years, with no end in sight—much less effective solutions for the economic mess we’re in. Merely tweaking and tinkering with the hydraulic mechanisms of either class of models is simply not going to get us very far.

And we’re going to remain stuck here unless and until we confront the limitations imposed by the dismal choice between the IS/LM and New Keynesian models, which are the only ones mainstream economists teach and use to make sense of what is going in the world today.

hey mr economics

The teaching of economics is in a shambles. It was a mess before the current crises, and it seems not to have been improved even in recent years.

Mike Konczal [ht: jh] has a proposal to change all that. His proposal (which, he admits, is just a “temporary fix”) is to teach introductory economics backwards. Macro before micro, short-run before long-run, and market failures before perfectly functioning markets.

Reversing the order in which introductory economic classes are taught today might be the easiest way to respond to the crisis in undergraduate education. Plus, the history of how it gets taught now is more interesting and more political than you might think.

It’s actually an interesting proposition, which no doubt would raise the hackles on many mainstream economists’ necks. The problem is, it still doesn’t change the exclusive focus within introductory economics on the methods and models of mainstream (neoclassical and Keynesian) economics. In particular, it doesn’t introduce students to the idea that there are now and have been throughout the history of economics theories in which mainstream economics has been criticized and alternatives presented: alternatives to mainstream economic theory and alternatives to the economic and social system—based on private property and markets—celebrated by mainstream economists.

That’s the kind of economics education our students deserve.

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They never give up. But no matter how much lipstick they put on a pig, it’s still a pig.

Ross Douthat did it back in February, by painting a rosy picture of the drop in the employment-population ratio.

Now, we have Zachary Karabell expressing his optimism about the youth unemployment crisis (16 percent in the United States, more than 50 percent in countries like Spain and Greece). Based on a single anecdote, he concludes that young people, at least college graduates, are not really unemployed. They’re just choosing to look for better options.

many college-educated young people are choosing not to take low-paying service-level jobs if they don’t absolutely have to. Because they can live with their parents (and as many as 45 percent of recent grads do) and because they rarely have much in the way of fixed costs such as homes and children, they can hold out for a job that matches their ambitions. They can also retool their skills as they discover that their college degree in marketing and communications may not leave them in the best position to get the type of job that they want.

This type of unemployment is one of choice — rational, legitimate choice — not of systemic failure. It is a challenge to find a meaningful job, but that hasn’t stopped people from trying. A youth cohort determined to create meaningful work should not be seen as lazy, lost or in dire straits. Instead it could be exactly the type who might actually lead the transition of our economy away from the making-stuff economy of the 20th century to an ideas economy of the 21st. . .

In the United States, youth unemployment is not quite what it seems. It is not a simple sign of how bad the economy is. Youth unemployment is actually a sign of ambition and expectation. Young people aren’t part of a generation of despair, but rather a generation determined not to settle. That may not always be realistic, but it is a vital fuel to propel our society forward.

If it looks like a pig, smells like a pig, no matter how much lipstick you put on it, it’s still a pig.

And, while we’re on the topic (of porcine cosmetics, not unemployment), there’s Simon Wren-Lewis, who so desperately wants to tell us, notwithstanding the spectacular failures of mainstream economics in recent years, that all is well. Everything we need is right there in the textbooks, he argues. Like the “the proposition that austerity was a crazy thing to try in this recession.” Well, on that one point he’s right: all you need is some basic Keynesian economics to criticize austerity. But, no matter how hard you look, you’re not to going to find the appropriate tools for analyzing a whole host of other crisis-related issues, such as the role of inequality in creating the conditions for crisis or the tendencies within capitalism to endogenously produce such crises. Sure, the ideas are there to push back against the austerians but, nowhere in mainstream macroeconomics—whether in the textbooks or in the most advanced areas of research—are you going to find a theory of capitalist dynamics that explains how we got into the current mess, much less how to get out of it. Wren-Lewis wants to blame partisan concerns (and, sure, there’s plenty of that) but not the basic theory.

To give credit where credit is due, Wren-Lewis sincerely wants to do the right thing and take the ideological lipstick off the pig. But then, even after adding a bit of economic history and the history of economic thought, he’s still left with the same old pig.

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My better half has insisted for years that I not be too hard on Paul Krugman. The enemy of my enemy. Popular Front. And all that. . .

But enough is enough.

I simply can’t let Krugman [ht: br] get away with writing off a large part of contemporary economic discourse (not to mention of the history of economic thought) and with his declaration that Larry Summers has “laid down what amounts to a very radical manifesto” (not to mention the fact that I was forced to waste the better part of a quarter of an hour this morning listening to Summers’s talk in honor of Stanley Fischer at the IMF Economic Forum, during which he announces that he’s finally discovered the possibility that the current level of economic stagnation may persist for some time).

Krugman may want to curse Summers out of professional jealousy. Me, I want to curse the lot of them—not only the MIT family but mainstream economists generally—for their utter cluelessness when it comes to making sense of (and maybe, eventually, actually doing something about) the current crises of capitalism.

So, what is he up to? Basically, Krugman showers Summers in lavish praise for his belated, warmed-over, and barely intelligible argument that attains what little virtue it has about the economic challenges we face right now by vaguely resembling the most rudimentary aspects of what people who read and build on the ideas of Marx, Kalecki, Minsky, and others have been saying and writing for years. The once-and-former-failed candidate for head of the Federal Reserve begins with the usual mainstream conceit that they successfully solved the global financial crash of 2008 and that current economic events bear no resemblance to the First Great Depression. But then reality sinks in: since in their models the real interest-rate consistent with full employment is currently negative (and therefore traditional monetary policy doesn’t amount to much more than pushing on a string), we may be in for a rough ride (with high output gaps and persistent unemployment) for some unknown period of time. And, finally, an admission that the conditions for this “secular stagnation” may actually have characterized the years of bubble and bust leading up to the crisis of 2007-08.

That’s where Krugman chimes in, basking in the glow of his praise for Summers, expressing for the umpteenth time the confidence that his simple Keynesian model of the liquidity trap and zero lower bound has been vindicated. The problem is, Summers can’t even give Alvin Hansen, the first American economist to explicate and domesticate Keynes’s ideas, and the one who first came up with the idea of secular stagnation based on the Bastard Keynesian IS-LM model, his due (although Krugman does at least mention Hansen and provide a link). I guess it’s simply too much to expect they actually recognize, read, and learn from other traditions within economics, concerning such varied topics as the role of the Industrial Reserve Army in setting wages, political business cycles, financial fragility, and much more.

And things only go down from there. Because the best Summers and Krugman can do by way of attempting to explain the possibility of secular stagnation is not to analyze the problems embedded in and created by existing economic institutions but, instead, to invoke that traditional deus ex machina, demography.

Now look forward. The Census projects that the population aged 18 to 64 will grow at an annual rate of only 0.2 percent between 2015 and 2025. Unless labor force participation not only stops declining but starts rising rapidly again, this means a slower-growth economy, and thanks to the accelerator effect, lower investment demand.

You would think that a decent economist, not even a particularly left-wing one, might be able to imagine the possibility that a labor shortage might cause higher real wages, which might have myriad other effects, many of them really, really good—not only for people who continue to be forced to have the freedom to sell their ability to work but also for their families, their neighbors, and for lots of other participants in the economy. But, apparently, stagnant wages (never mind supply-and-demand) are just as “natural” as Wicksell’s natural interest rate.

And then, finally, this gem:

The point is that it’s not hard to think of reasons why the liquidity trap could be a lot more persistent than anyone currently wants to admit.

No, it’s not hard to think of many such reasons. But when the question is asked in the particular way Krugman poses it—in terms of natural rates of this and that, of interest-rates, population, wages, innovation, and so on—the only answers that need be admitted into the discussion come from other members of the close-knit family (and thus from Summers, Paul Samuelson, and Robert Gordon). All of the other interesting work that has been conducted in the history of economic thought and by contemporary economists concerning in-built crisis tendencies, long-wave failures of growth, endogenous technical innovation, financial speculation, and so on is simply excluded from the discussion.

It is no wonder, then, that mainstream economists—even the best of them—are so painfully inarticulate and hamstrung when it comes to making sense of the current economic malaise.

I’ll admit, it wouldn’t be so bad if it was just a matter of professional jealousy and their not being able to analyze what is going on except through the workings of a small number of familiar assumptions and models. They talk as if it’s only their academic reputations that are on the line. But we can’t forget there are millions and millions of people, young and old, in the United States and around the world, whose lives hang in the balance—well-intentioned and hard-working people who are being made to pay the costs of economists like Krugman attempting to keep things all in the family.