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.

Hiding their heads in the sand

We now know, thanks to the release of the minutes of the 7 August 2007 meeting of the Federal Open Market Committee, that those in attendance were acting like ostriches: foolishly ignoring the mounting economic problems, while hoping they would magically vanish.

Here, for example, is William Poole, president of the Federal Reserve Bank of St. Louis:

My own bet is that the financial market upset is not going to change fundamentally what’s going on in the real economy. First of all, bank capital is not impaired. So unlike in some past cases, when losses on real estate impaired bank capital and thus affected the lending in areas that had nothing to do with real estate, I don’t think that’s the case this time. Second, the fact that some LBO deals fall through isn’t going to change what those companies are producing. The fact that the ownership hasn’t changed doesn’t change the company’s profit-maximizing level of production in the short run. Obviously, that could change, but it seems to me that the best information that we now have is that this financial market upset is going to settle out and not have major repercussions on the real economy, putting the housing part aside. Thank you. (p. 57)

As it turns out, the Board of Governors of the Fed performed a similar ostrich-like move back in February 1929.* As you can see from the extracts pasted below, Adolph C. Miller was clearly aware of increased speculation in the stock market (a month before the crash in March) but he and a majority of the other members of the board chose not to make a public statement.

Apparently, the officials in charge of the Federal Reserve acted—in 2007 as in 1929—like ostriches with their heads in the sand, hoping the accumulating stresses and strains in the economy would magically vanish.

And, of course, they didn’t—leaving us in both cases on the road to a great depression.

 

*The minutes of the 2 February meeting are available as a pdf file here.

Austerity—not if but how much

Friends continue to remind me that, back in the day, when Obama first announced his plans to run for the presidency, I explained to them that, based on watching him in Illinois, he was one of the smartest and at the same time most moderate, middle-of-the-road Democrats around. He was not then, nor would he ever become, a “progressive.” Instead, he (along with much of the Democratic Party) was firmly in the middle of the mainstream consensus that austerity was inevitable. The only question was, how much?

Tim Duy, after witnessing Obama in the most recent negotiations over the fiscal cliff, comes to much the same conclusion.

From day one this has been a debate about the extent of the austerity, not a debate about austerity itself.  Does anyone have the sense that President Obama does not fundamentally believe in the pursuit of deficit reduction sooner than later?  I keep coming back to this observation from Bruce Bartlett:

In a little-noticed comment on Spanish-language television on December 14, Obama himself confirmed this typology of today’s political spectrum. Said Obama, “The truth of the matter is that my policies are so mainstream that if I had set the same policies that I had back in the 1980s, I would be considered a moderate Republican.”

I think this is correct and explains a great deal about why Obama refuses to use his leverage to pursue liberal policies and keeps inviting Republicans back to the negotiating table again and again on the budget. He wants a deal, he wants to cut spending and balance the budget if possible. This may or may not be a wise course for a Democratic president to follow, but that is who Obama is.

I frequently see commentators saying that Obama is terrible at the bargaining table, but I can’t help thinking that he is getting pretty much what he wanted.  Despite all the hate heaped upon him by the right, Obama just isn’t a progressive, and we shouldn’t expect him to seek a deal as if he was one.  After all, what progressive ensures a tax hike on the lower and middle classes (the expiration of the payroll tax cut with no offsetting cut elsewhere)?  Obama seems to believe the best deal is the one no one likes. . .

My guess is that Obama already knows that the outcome of that debate will be one in which he looks like he retreated over time.  But I also believe that the place he retreats to will be where he wanted to go in the first place; indeed, I suspect he never believed he would get 100% of the Bush tax cuts reversed in the fiscal cliff negotiations.  Note too that, to DeLong’s complaint, the next debate will again be an issue of how much austerity.  And expect that Obama will allow the negotiations to drag out to the eleventh hour, thereby forcing both Republicans and Democrats to choke down a meal – some combination of tax hikes and entitlement cuts – they both find distasteful.

But, we should remember, Franklin Delano Roosevelt wasn’t a progressive either. He and his administration moved in a more progressive direction, with the New Deal, because of sustained criticism from progressive economists, pressure from the left-wing of the Democratic Party, and, of course, organizing on the part of the Left and the threat of mass rebellion in the streets of America.

Their absence today makes the choice between two different paths to austerity the only game in town.

Cartoon of the day

Special mention

 

The making of a Right to Work state

Mainstream economists, to judge by the blogs and columns I’ve been looking at in recent days, don’t seem to have much to say about the recent decision to make Michigan a Right to Work state.

But it’s a momentous decision, at this particular economic and political juncture—in the midst of the Second Great Depression and after Obama’s re-election.

Reuters explains how the decision had been in the works since March 2011 and how the unions were outmaneuvered by right-wing forces at both the national and state level.

From outside Michigan Republican circles, it appeared that the Republican drive to weaken unions came out of the blue – proposed, passed and signed in a mere six days.

But the transformation had been in the making since March 2011 when [Republican State Senator Patrick] Colbeck and a fellow freshman, state Representative Mike Shirkey, first seriously considered legislation to ban mandatory collection of union dues as a condition of employment in Michigan. Such was their zeal, they even went to union halls to make their pitch and were treated “respectfully,” Colbeck said.

The upstarts were flirting with the once unthinkable, limiting union rights in a state that is the home of the heavily unionized U.S. auto industry and the birthplace of the nation’s richest union, the United Auto Workers. For many Americans, Michigan is the state that defines organized labor.

But in a convergence of methodical planning and patient alliance building – the “systematic approach” – the reformers were on a roll, one that establishment Michigan Republicans came to embrace and promised to bankroll.

Republicans executed a plan – the timing, the language of the bills, the media strategy, and perhaps most importantly, the behind-the-scenes lobbying of top Republicans including Snyder. . .

From outside Michigan Republican circles, it appeared that the Republican drive to weaken unions came out of the blue – proposed, passed and signed in a mere six days.

But the transformation had been in the making since March 2011 when [Republican State Senator Patrick] Colbeck and a fellow freshman, state Representative Mike Shirkey, first seriously considered legislation to ban mandatory collection of union dues as a condition of employment in Michigan. Such was their zeal, they even went to union halls to make their pitch and were treated “respectfully,” Colbeck said.

The upstarts were flirting with the once unthinkable, limiting union rights in a state that is the home of the heavily unionized U.S. auto industry and the birthplace of the nation’s richest union, the United Auto Workers. For many Americans, Michigan is the state that defines organized labor.

But in a convergence of methodical planning and patient alliance building – the “systematic approach” – the reformers were on a roll, one that establishment Michigan Republicans came to embrace and promised to bankroll.

Republicans executed a plan – the timing, the language of the bills, the media strategy, and perhaps most importantly, the behind-the-scenes lobbying of top Republicans including Snyder.

One of the big questions, in Michigan as well as in Wisconsin and Indiana, is: did the union movement get outmaneuvered or were they simply defeated by overwelling financial and political forces?

Another significant question is, what does this mean in terms of both the history and future of unionism in the United States?

Nelson Lichtenstein explains, in an interview with Brad Plumer, that the history of Right to Work legislation goes back to the nineteenth century.

Brad Plumer: Where did these “right-to-work” laws come from? And when did conservatives start using them in order to weaken labor unions? Walk me through the history here.

Nelson Lichtenstein: Go back to the 1930s, when the Wagner Act was created to allow the government to certify voluntary unions as the exclusive bargaining agent for a workplace. There was one thing the Wagner Act didn’t say anything about. If you’re the exclusive representation in a workplace, what about workers who don’t want to join? And employers could be quite clever in winning workers away from the union.

So John L. Lewis and other unionists said we need to have a union shop. The employer hires the worker, and after they get the job, they have to join the union. (This was different from the closed shop, where if you want a job, you go to the union first.) Companies resisted this idea bitterly. But then World War II comes along. Unions are going to be patriotic, accept a no-strike pledge, let the government set wage levels. And in return, the government said, okay, we’ll give you the union shop. And union membership went up by millions of workers.

But at this very moment, conservatives were already mobilizing against the New Deal and unions. They were saying, we want to pass laws that will make a collective bargaining contract illegal if joining a union becomes a condition of employment.

BP: So already in the 1940s you’re seeing a right-to-work movement form—conservatives want rules that forbid employers and unions from agreeing to a union shop arrangement. 

NL: Right, the language on this goes all the way back to the 19th century. The guy who invented the term “right-to-work,” I think that was invented in the Progressive Era. What’s remarkable is that anti-union discourse hasn’t changed over the years. It doesn’t matter whether unions are weak or strong. The talk is always about union bosses, about coercion, about how there should be freedom in the workplace.

Clearly, unions and their supporters need to fight back but they’re not getting a lot of support from their political allies.

BP: So unions don’t really have a good response to this state-level opposition?

NL: Unions will have to defend themselves. But here’s a question. There have been hundreds of thousands of people flocking to Madison, Wisconsin, or Lansing to fight over this. The meaning of solidarity’s what’s at stake here. It approaches the sacred. But we don’t hear that. The language of union leaders is that they’re defending the middle class. But it’s more than that. Workers are defending a concept, a sentiment, and a fundamental moral value. . .

BP: And it doesn’t look like very many national Democrats are willing to fight hard for unions anymore.

NL: No, and here I’d add a criticism of Obama. The Obama campaign made a strategic decision that it wanted to win in non-union North Carolina, in non-union Virginia. So Obama didn’t fly into Madison, Wisconsin during the recall of [Gov. Scott] Walker. Obama’s campaign was not a referendum of unionism.

And I’d add a larger meta-historical point. This is the experiment America’s now having. Obama has just won re-election. A liberal president is popular. But juxtapose that with what just happened in Michigan. So the question is, can you have a liberal, progressive America without unions? History says no.

Capital vs. labor

source

For much of the postwar period, mainstream economists contented themselves with the observation that the factor distribution of income in the United States—basically, profits versus wages—was relatively constant. Therefore, they didn’t need to concern themselves with the dreaded c-word (class), and they could marginalize the economic theory that actually focused on class (Marxism).

And, even when things started to change, they held to their dogma. The growing gap between productivity and average wages was one sign the factor distribution had turned against labor in favor of capital. So was the increasing inequality in the distribution of income—for example, of the top 1 percent against everyone else. It became increasingly obvious to many of us that the kind of capitalism we experienced in the immediate postwar period—when both wages and profits were growing—was giving way, starting in the mid-1970s, to a different kind of capitalism, a much more unequal kind of capitalism—when profits began to grow at the expense of wages.

But, of course, mainstream economists mostly ignored these trends. And when, in the last few years, they finally began to take notice, the unequalizing pattern of U.S. capitalism was explained—really, explained away—by exogenous events, such as globalization and skill-based technical change. In other words, changes in the distribution of income reflected gains to those at the top, who just happened to be those with more education and more skills and thus were winners in the globalized world economy. And if others had a problem with that, they just needed to acquire more education and more skills and get their “deserved” share of the economic pie.

Now, even that excuse has fallen apart and it’s become obvious to mainstream economists—starting with Paul Krugman—that capital’s income has been growing at the expense of labor’s income.

The American economy is still, by most measures, deeply depressed. But corporate profits are at a record high. How is that possible? It’s simple: profits have surged as a share of national income, while wages and other labor compensation are down. The pie isn’t growing the way it should — but capital is doing fine by grabbing an ever-larger slice, at labor’s expense.

Wait — are we really back to talking about capital versus labor? Isn’t that an old-fashioned, almost Marxist sort of discussion, out of date in our modern information economy? Well, that’s what many people thought; for the past generation discussions of inequality have focused overwhelmingly not on capital versus labor but on distributional issues between workers, either on the gap between more- and less-educated workers or on the soaring incomes of a handful of superstars in finance and other fields. But that may be yesterday’s story.

And what’s today’s story? For Krugman, it’s all about technology and market imperfections (what he calls monopoly power, not unlike Joe Stiglitz’s rent-seeking behavior).

That may be almost a Marxist sort of discussion. But if they actually did want to have a Marxist discussion of the issue, they’d have to start talking about how new value is created and then distributed—some to the workers who created the value in the first place, some to others who supervise the workers and otherwise make that value creation possible, and another portion retained as corporate profits.

It’s that approach to value that can begin to make sense of the factor distribution of income in the postwar period. Even when the shares remained relatively constant, a portion of officially reported “wages” actually were distributions of the new value created that went to those at the top of the distribution of income.* And things got even worse when the shares of income to capital and labor started to diverge.

We’ll be having a real discussion of the issue when we connect the conflict between capital and labor to an analysis of the conditions and consequences of the crash of 2007-08 and what is happening now during the Second Great Depression.

And when we begin to consider alternative economic arrangements that are not based on the conflict between capital and labor.

 

*In Marxian terms, the rate of exploitation (the ratio of surplus-value to the value of labor power) may be rising even when the capital and labor shares are constant because some of what is reported as wages represents a distribution of the appropriated surplus-value (e.g, to CEOs and others).

“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.

Chart of the day

The other night during our symposium, a student asked the following questions: Why is labor-saving technological change a problem? If new technologies eliminate jobs, aren’t those workers then free to go find other jobs?

Clearly, he had learned exactly what his neoclassical economics professor had taught him. I then tried to help him out by explaining that one of the key assumptions of the neoclassical framework is there’s already an efficient allocation of resources, and therefore no unemployment. The neoclassical conclusion is, the economy simply moves from one efficient allocation of resources to another.

But things are different when there is considerable unemployment—like now, during the Second Great Depression.

As Michael Greenstone and Adam Looney explain,

Today’s labor market provides the strongest case for extending UI benefits. It has always been harder to find work the longer you are unemployed, but the situation facing today’s workers is exceptional. No matter how long a worker has been unemployed, the odds that they find a job are far lower than before the Great Recession. Furthermore, the odds of experiencing long-term unemployment are highly related to losing a job in a particularly hard-hit industry, like construction or manufacturing, and are disproportionately concentrated in certain distressed states.

The chart [above] shows the likelihood of finding a job as measured in the monthly Current Population Survey data. The chart shows the probability of leaving unemployment for employment in each month. These rates are simply at exceptionally low levels. The odds that an unemployed worker found a job each month fell from 28 percent in 2007 to an average of 16 percent during the last three months of 2009. This year, the job finding rate is still 30 percent lower than the average from 1990-2007.

Why is the job-finding rate so low? The basic reason is that job openings remain depressed and there are a lot of unemployed workers competing for those jobs. The job opening rate fell more than 40 percent between 2007 and 2009 and is still almost 20 percent lower than that level now.

Chart of the day

This year’s National Survey of Student Engagement reveals that college students are having a rough time in the midst of the Second Great Depression.

more than a third of seniors and more than a quarter of freshmen did not purchase required academic materials because of the cost. Roughly equal shares, around 60 percent, said they worried about having enough money for day-to-day expenses. And 36 percent of freshmen and 32 percent of seniors reported that financial concerns had interfered with their academic performance.

I’ve also noticed, at least where I teach, an increasing number of students who are missing classes, either because they are participating in job interviews or because they are experiencing psychological difficulties at least partly induced by their own or their families’ financial concerns.

Finance and monopoly

Not surprisingly, the story of Monopoly is even more complicated than I knew and related before. It’s a history of not only landlords but also finance and monopoly.

The story [ht: ja] does, in fact, begin with Elizabeth Magie, in 1904. But, before we get to the modern version of Monopoly, there was another game, created by Dan Layman: Fortune. Fortune was first produced by Electronic Laboratories and then by Knapp Electric. By 1935, Finance was outselling Monopoly 10 to 1. That year, Monopoly again came to the attention of Parker Brothers, when they decided to purchase and produce the game.

Parker Brothers wanted a “monopoly” on Monopoly so they began trying to squash the competition. George Parker went to visit Lizzie Magie-Phillips to try to acquire her 1924 Landlord’s Game patent. The two knew each as Parker Brothers had published some of her games in the past and she considered George Parker the “King of Games”. The negotiation over the purchase was an easy one, Parker Brothers would pay Mrs. Magie-Phillips $500 and agree to publish a few more of her games including The Landlords Game (this was done in 1939 again with very little success). Patent number 1,509,312 now belonged to Parker Brothers.

Knapp (Electronics Laboratories) was another story. Already outselling Monopoly and beginning to market the game on a national level they weren’t convinced as easily. It took $10,000 of Parker Brothers Money (a huge amount in depression torn 1935) to convince Knapp to sell. Parker Brothers then changed Finance completely and, hiding behind a dummy company (The Finance Game Company), filled Knapp’s outstanding orders. In 1936 the board and rules were again changed slightly and Finance became a Parker Brothers game.

Parker Brothers wasn’t about to put all its eggs in one basket though. They had Darrow file for a patent, but knowing the true history of Monopoly they decided to produce their own version of the game. Fortune was the result of this work. As few as 5,000 of these games were made in 1935 before patent 2,026,082 was granted giving Parker Brothers proprietary rights to Monopoly. The name Fortune was then added to Finance which became Finance and Fortune until Parker Brothers used the name Fortune for another game in 1958.

So, as it turns out, the real history of Monopoly is the story of landlords, finance, and monopoly during the First Gilded Age and the First Great Depression.

I wonder what games will have been created based on the finances and fortunes of the Second Gilded Age and the Second Great Depression.