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.

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.

Cartoon of the day

Krugman’s bankruptcy

Paul Krugman can be criticized for many things (and I have, many times on this blog). But the story of his personal bankruptcy was, much to the embarrassment of Breitbart.com editor at large Larry O’Connor, a satire.

You can read the original story here.

And finally, since when is Krugman “of the left,” darling or otherwise?

Inequality, the Second Great Depression, and mainstream economics

This morning, we’re faced with the extraordinary spectacle of two left-of-center, Nobel Prize-winning economists stumbling all over themselves trying to make sense of the role of inequality in creating and sustaining the Second Great Depression.

Really?! Now, they may have missed the trend of growing inequality over the course of the past three decades. Still, with all the talk of obscene levels of inequality in the last five years and mainstream economists, even the best and the brightest, are still having a hard time formulating a theory about the impact of that inequality in producing the conditions for the crash of 2007-08 and sustaining the recovery that never was.

First, Joseph Stiglitz argued that “Inequality stifles, restrains and holds back our growth.” Then, Paul Krugman responded by telling us he’s not convinced “that this particular morality tale is right.”

It’s true, they agree that current economic conditions are, for that vast majority of people, pretty ugly. And that inequality distorts the political process, by allowing those on top to buy their favorite politicians and policies.

Both Stiglitz and Krugman also mention that growing inequality fosters financial crises, although from all that I’ve read neither has ever offered a theory of how that actually works.

So, their big disagreement is centered on the role of inequality (which, after a brief hiatus in 2009, is growing once again) in sustaining the current non-recovery, which I have come to refer to as the Second Great Depression. Basically, Stiglitz borrows from the radicals’ playbook and makes an underconsumption argument, which Krugman attempts to refute by invoking private savings rates and the idea that there can be full employment “based on purchases of yachts, luxury cars, and the services of personal trainers and celebrity chefs.”

Sure, but there isn’t. Not even close. And, according to all the projections I’ve seen, there won’t be for quite some time.

It is surely an embarrassment for mainstream economics that two of its best can barely even begin a serious discussion of the complex and contradictory effects of inequality on the pace and nature of growth since the financial crash of 2008. But, to give them credit, they’re still way out in front of their mainstream colleagues, who aren’t even attempting to make sense of the role inequality has played and continues to play in creating the Second Great Depression.

Parem delinquentis et suasoris culpam esse

The downward trend of labor’s share is not a recent phenomenon. It has been taking place (albeit not evenly or without disruption) since the mid-1970s.

Be that as it may, Paul Krugman now recognizes that the old storyline (of skills and education) no longer works to explain the obscene levels of inequality in the United States.

So the story has totally shifted; if you want to understand what’s happening to income distribution in the 21st century economy, you need to stop talking so much about skills, and start talking much more about profits and who owns the capital. Mea culpa: I myself didn’t grasp this until recently. But it’s really crucial.

Absolutely. We need to talk much more about profits and who owns capital. And, in addition, who appropriates and distributes the surplus and to whom that surplus is subsequently distributed. And then how they use that surplus to create the conditions whereby profits continue to rise and more capital deployed so that they get and keep even more profits.

Missing these elements of the story is not just Krugman’s mistake. The fault lies with an entire group of mainstream economists who assume—and, for generations, have attempted to persuade others—that the distribution of income corresponds to the choices people make, and that attempting to change the existing distribution of income would require changing human nature.

“Echoes of old-fashioned Marxism”

 

Lots of us have been talking about class for years now.

Back in 2009, I suggested we needed to begin connecting the dots among the falling wage share, rising inequality, and asset price inflation. And just this past July, I pointed out that mainstream economists—both neoclassical and Keynesian—didn’t want to talk about the fact that the profit share is high precisely because the labor share is low.

All along, I’ve drawn two implications: first, the crash of 2007-08 can be explained, at least in part, by reference to class; and, second, more education would do nothing to remedy the class dimensions of inequality and crisis in the U.S. economy.

Well, lo and behold, Paul Krugman has finally stumbled upon the same problem (in reference to the use of robots in manufacturing):

This is an old concern in economics; it’s “capital-biased technological change”, which tends to shift the distribution of income away from workers to the owners of capital.

Twenty years ago, when I was writing about globalization and inequality, capital bias didn’t look like a big issue; the major changes in income distribution had been among workers (when you include hedge fund managers and CEOs among the workers), rather than between labor and capital. So the academic literature focused almost exclusively on “skill bias”, supposedly explaining the rising college premium.

But the college premium hasn’t risen for a while. What has happened, on the other hand, is a notable shift in income away from labor. . .

If this is the wave of the future, it makes nonsense of just about all the conventional wisdom on reducing inequality. Better education won’t do much to reduce inequality if the big rewards simply go to those with the most assets. Creating an “opportunity society”, or whatever it is the likes of Paul Ryan etc. are selling this week, won’t do much if the most important asset you can have in life is, well, lots of assets inherited from your parents. And so on.

OK, so why did it take Krugman so long to recognize these class issues?

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.

Great Depressions have a way of doing that—bringing to the fore issues of class. The First Great Depression did it, and as it turns out this one is, too. The problem, of course, is that once the crisis is over, class is quickly pushed to the margins, buried until the next major crisis comes along.

Maybe this time the Krugmans of the world will actually stop ignoring the facts and deal honestly with those “uncomfortable implications.” Many of us have been doing exactly that for years.

Nostalgia for the Twinkie economy

The Twinkie Manifesto, like Twinkies themselves, cuts two different ways.

Twinkies taste good but they’re not particularly good for you. (And, of course, they’ll continue to exist, when some other corporation buys the brand from Hostess.)

Likewise, focusing on the differences between the economy now and in the 1950s shows that things can be different. But it also represents a nostalgia for a supposed Golden Age of American capitalism, aka the Twinkie economy, instead of looking forward.

Do we really want to return to a time when, yes, marginal tax rates were high and workers’ wages were rising but when, at the same time, employers fought against unions tooth and nail, when U.S. corporations were riding high only because every other advanced economy had been destroyed but were in the process of being rebuilt, when the jobs in manufacturing were mind-numbing and dangerous, when those in the top 1 percent had the means and incentives to undo all the regulations imposed on them under the New Deal?

In my view, it’s a problem that comes with our focus (and I consider myself as culpable as anyone else on this charge) that comes with dividing postwar capitalism into two periods: the “good capitalism” (roughly 1950 to 1976) of rising wages and decreasing inequality and the “bad capitalism” (roughly 1976 to the present) of stagnant wages and rising inequality.

One option, represented in the Twinkie Manifesto, is to return to the period of “good capitalism.” The other option is to move beyond capitalism and to create the kind of economy in which workers actually have a role in deciding how the economy is structured.

And that may be the ultimate lesson of the Twinkie economy: deciding either to accept Hostess’s raw deal and continue working with declining wages and benefits or to go on strike knowing that ultimately jobs would be eliminated is no choice at all.

GIGO

Once you’ve stated the obvious point that the financial sector “has grown to an unprecedented share of the economy,” how do you make sense of that growth?

Well, if you’re Paul Krugman, you send us to Thomas Philippon’s unpublished essay, “Has the U.S. Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation” (pdf) [ht: br]. And that’s when the fun—or the horror—begins.

Here we have neoclassical economics in all its glory, starting with the following proposition:

Since the opportunity cost of being a banker is the wage in the non-financial sector, and since this wage is proportional to aggregate productivity, the income share of finance remains constant on the balanced growth path.

An extraordinary syllogism, based on two absurd premises—that the “wage” of a banker bears any resemblance to wages in the nonfinancial sector (has he bothered to even look at the levels of compensation in the financial sector?), and that that “wage” is proportional to aggregate productivity (thereby presuming the neoclassical illusion that finance is productive of something, which is appropriately compensated). The conclusion (that “the income share of finance remains constant on the balanced growth path”) is simply laughable except—wait for it: “I test this hypothesis and find that it holds well.”

In the rest of the paper, Philippon marshals all of the neoclassical machinery—of production-function econometrics, given preferences, utility-maximizing households, monitoring technology, equilibrium, and so on—to analyze the “production of intermediation services” in order to arrive at “the main conclusion of the paper.” To wit,

In other words, what Philippon finds is that the cost of financial intermediation, defined as income divided by output, (a) is “remarkably stable” over 130 years and (b) “has been trending upward, especially since the late 1970s,” notwithstanding the development and use of new information technologies.

Unbelievable! All that neoclassical machination to “prove” that, during more than a century, it took only two cents of “cost” to produce a dollar’s worth of financial “output” and that the cost of financial intermediation has risen in the last few decades, to 3 cents.

And that forms the basis for Philippon’s final question:

How is it possible for today’s finance industry not to be significantly more efficient that [sic] the finance industry of John Pierpont Morgan?

Boy, those banks were so efficient for so long (like in the good old days of the House of Morgan), and now they’re not (today, with Jamie Dimon’s JPMorgan Chase). And we have no idea why that’s the case.

Perhaps, Philippon suggests, it’s because there’s been an increase in trading activity and people trade so much because—wait again—”they simply enjoy it.”

Garbage in, garbage out. But think about it: if we throw a lot more research money at the economists at the Stern School of Business at New York University and the National Bureau of Economic Research, and hold more research seminars on the topic at Stanford, Yale, NYU, Harvard, and the Paris School of Economics, maybe someday we’ll find out why it is that “the non-financial sector [is] still transferring so much income to the financial sector”

Whose problem?

The Second Great Depression poses a real dilemma for liberal mainstream economists. They want to attack conservative mainstream (aka austerity) measures and, at the same time, to fix capitalism. In other words, they want at all costs to avoid the alternative: to point in the direction of a world beyond capitalism.

Paul Krugman’s approach is to argue that we’re all in this together, not in the manner of a household but in an Irving Fisher debt-deflation kind of way:

an economy is not like an indebted family. Our debt is mostly money we owe to each other; even more important, our income mostly comes from selling things to each other. Your spending is my income, and my spending is your income.

So what happens if everyone simultaneously slashes spending in an attempt to pay down debt? The answer is that everyone’s income falls — my income falls because you’re spending less, and your income falls because I’m spending less. And, as our incomes plunge, our debt problem gets worse, not better.

The moral of Krugman’s story is that, when the private sector is busy paying down its debts, the public sector needs to engage in deficit-spending until the economy has recovered.

Joseph Stiglitz also wants us to understand we’re all in this together, but in a somewhat different manner. His focus is on growing inequality—”a few mega-yachts surrounded by masses of people in dugout canoes, or clinging to flotsam”—and the tendency of unequal capitalism toward underconsumption.

The relationship is straightforward and ironclad: as more money becomes concentrated at the top, aggregate demand goes into a decline. Unless something else happens by way of intervention, total demand in the economy will be less than what the economy is capable of supplying—and that means that there will be growing unemployment, which will dampen demand even further. In the 1990s that “something else” was the tech bubble. In the first dec­ade of the 21st century, it was the housing bubble. Today, the only recourse, amid deep recession, is government spending—which is exactly what those at the top are now hoping to curb.

Once again (as with Adam Davidson), the focus is on what Stiglitz considers to be the rent-seeking behavior of those on top.

The word “rent” was originally used, and still is, to describe what someone received for the use of a piece of his land—it’s the return obtained by virtue of ownership, and not because of anything one actually does or produces. This stands in contrast to “wages,” for example, which connotes compensation for the labor that workers provide. The term “rent” was eventually extended to include monopoly profits—the income that one receives simply from the control of a monopoly. In time, the meaning was expanded still further to include the returns on other kinds of ownership claims. If the government gave a company the exclusive right to import a certain amount of a certain good, such as sugar, then the extra return was called a “quota rent.” The acquisition of rights to mine or drill produces a form of rent. So does preferential tax treatment for special interests. In a broad sense, “rent seeking” defines many of the ways by which our current political process helps the rich at the expense of everyone else, including transfers and subsidies from the government, laws that make the marketplace less competitive, laws that allow C.E.O.’s to take a disproportionate share of corporate revenue (though Dodd-Frank has made matters better by requiring a non-binding shareholder vote on compensation at least once every three years), and laws that permit corporations to make profits as they degrade the environment. . .

In their simplest form, rents are nothing more than re-distributions from one part of society to the rent seekers. Much of the inequality in our economy has been the result of rent seeking, because, to a significant degree, rent seeking re-distributes money from those at the bottom to those at the top.

The moral of Stiglitz’s story is that the top of the pyramid is shaky without a firm base. In other words, the fate of the 1 percent is tied to the (mis)fortunes of the rest and the only way out is, as with Krugman, government spending.

There is a kernel of truth in the accounts of both Krugman and Stiglitz. Capitalism is an interconnected economy in which the spending of some becomes the income for others, and for decades now capitalism has created a massive redistribution of income and wealth from the majority at the bottom to a tiny minority at the top.

However, what neither Krugman nor Stiglitz wants to see is that government spending can’t possibly reverse the fortunes of those at the bottom without creating further problems for those at the top. Wealthy individuals and large corporations do want to see economic activity pick up so that they can sell more goods and services and make even more profits. But they don’t want anyone to demonstrate that they’re the problem—to show that private capitalism is incapable of generating sufficient jobs and pay for those at the bottom, or to impose further regulations on their activities—and that a different set of economic arrangements would render them superfluous.

So, yes, it’s all well and good to recognize that capitalists and workers are all in this together. But, we need to add a caveat: albeit in a quite different manner.

Update

Here’s a link to Robert Kuttner’s piece on Joseph Stiglitz and Paul Krugman who, in his view, are “astonishingly prescient, widely read, and largely ignored by those in power.”