Back to the future

Posted: 31 December 2011 in Uncategorized
Tags: , , , , ,

Today, as we celebrate the passing of the old and the ushering in of the new, we have to recognize that while we can’t repair the past we can certainly figure out how to create a different future. The key question, as always: what is to be done?

Francis Fukuyama makes a hash of it (arguing, incorrectly, that the working-class and with it Marxism can be consigned to the distant past) but he does identify one key task:

It is not possible to get to that point, however, without providing a serious and sustained critique of much of the edifice of modern neoclassical economics, beginning with fundamental assumptions such as the sovereignty of individual preferences and that aggregate income is an accurate measure of national well-being. This critique would have to note that people’s incomes do not necessarily represent their true contributions to society. It would have to go further, however, and recognize that even if labor markets were efficient, the natural distribution of talents is not necessarily fair and that individuals are not sovereign entities but beings heavily shaped by their surrounding societies.

The Pew Research Center continues to document solid support for socialism (notwithstanding the post-Cold War assault on anything and anyone associated with the idea), especially among some groups (such as young people, African-Americans, those with lower incomes, and Democrats).

Occupations have a long tradition in the United States, Michael Moore reminds us, beginning with the Flint sit-down strike 75 years ago yesterday.

Although there had been prior strikes at other auto plants, Flint represented a new milestone for the union movement. The strike targeted two critical plants, Fisher 1 and 2. Both belonged to General Motors, the biggest of the big three auto manufacturers in the United States. UAW activists realized the strike had the potential to paralyze the auto manufacturer and give them a platform to organize on a national level.

Goldman Sachs is certainly not optimistic about the future:

“Slowing growth (and in places outright contraction), public-sector cuts, and a renegotiation of the social compact between state and society in different parts of the world is an environment ripe for political turmoil,” Goldman said in a note to clients.

Mainstream economists continue not to understand the redistributive effects of government deficits, with Paul Krugman focusing only on the national identity of those who finance deficits and Greg Mankiw arguing (with the help of Laurence Ball) that the question of who wins and who loses is mostly philosophy and not economics.

There is much more, of course, that remains to be done. And it’s clear that the answers are not going to be found within mainstream economics or within the existing forms of capitalism. The only way out of the Second Great Depression is to make a clean break from the past and chart a different future.

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Comments
  1. The points of argument between Capitalism and Socialism are now moot. Without real money, there is no pure form of Capitalism. Because of the innate nature of human commercial interaction, there has never been a form of Socialism consistent with it’s stated objectives. Both ideologies have been absorbed in Corporatism. Now it’s easier to understand, than live with. An Elite Corporate Oligarchy is now the structure of the world. No matter how Capitalist or Socialist a nation claims to be, they are all administered by the agencies of the Privileged Few.

    http://georgesblogforum.wordpress.com/2011/11/02/the-daily-climb-2/

  2. Magpie says:

    Prof. Ruccio,

    Regardless of Mankiw’s conclusions, I believe there is something wrong with the argument in the paper linked to in Mankiw’s post.

    He says in the PDF article:

    “How does lower national saving affect the economy? The answer
    can be seen most easily by considering some simple (and irrefutable)
    accounting identities. Letting Y denote gross domestic product, T
    taxes, C consumption, and G government purchases, then private
    saving is Y-T-C, and public saving is T-G. Adding these yields
    national saving, S:
    “S = Y – C – G.”

    If I am not mistaken, Y = C+S+T (from this one gets S = Y-T-C). See, for instance, here (you’ll need to scroll to around the middle of the page):
    http://bilbo.economicoutlook.net/blog/?p=9869

    However, Mankiw does not stop there: he defines Public Savings as T-G.

    If we add these things together, as Mankiw says in the quote above, what one gets is:

    S + Public Savings = Y-C-G.

    Perhaps you would like to check this?

  3. Christian says:

    Magpie,

    Taxes (T) represents gross public saving, the G represents transfer payments like social security, medicare etc. So T-G= Net Public Saving; G acts as income to the individual so it has to be subtracted from income for saving; the T would be encompassed in S.

    As a related example, when we look at exports and imports, (X-M), we can say that the difference between the two is net foreign investment, and then we could write the income expenditure model this way; Y=C+I+G+IM, where IM=(X-M). I think he (Mankiw) may not have been clear with his exposition. (Disclaimer, not an endorsement Mankiw or mainstream economists!!)

    Hope this helps.

  4. Magpie says:

    Thanks, Christian

    “Taxes (T) represents gross public saving, the G represents transfer payments like social security, medicare etc. So T-G= Net Public Saving; G acts as income to the individual so it has to be subtracted from income for saving; the T would be encompassed in S.”

    Yes, I understand that: after consumption, what’s left from disposable income is saving. And as we are talking about the government, disposable income is T (in other words, the government pays no taxes to itself, so to speak). I have no problem with this, in PRINCIPLE.

    However, the interpretation given to T and G (and in consequence, to T-G) in the article I am commenting is NOT the interpretation you just gave them in your paragraph quoted above.

    Have a look at the paragraph with the verbatim quote in my first comment:

    “Letting Y denote gross domestic product, T taxes, C consumption, and G government PURCHASES”. (Emphasis added).

    G is not just transfers, as you interpreted, but PURCHASES: it includes social security, medicare, all other transfers, AND all payments and purchases. In this, the article is just adopting the usual interpretation given to the symbol “G”.

    Therefore, T-G cannot be interpreted as Net Public Saving, as you just did; its correct interpretation is as Budget Deficit/Surplus, which is also the standard interpretation to the expression “T-G”: isn’t the article entitled “What Budget Deficits Do?”, after all?

    In consequence, S already accounts for ALL savings in Y = C + S + T.

    Then, I’d say S + Net Public Savings seems to include Net Public Savings twice. Won’t you agree?

  5. Magpie says:

    Sorry, I forgot to add this:

    And S + Net Public Savings, not S, is what one gets if one follows the article under consideration: “(…) then private saving is Y-T-C, and public saving is T-G. Adding these yields national saving, S:

    S = Y – C – G.”

  6. Christian says:

    If taxes (T) exceed expenditures (G), then there is net public saving, or a surplus. If T<G, then there is negative net public saving or a deficit. So I interpreted T-G correctly; it is saying what you said only another way.

    Mankiw is assuming that what people pay in taxes, the government gets, so he cancels out the T to say S=Y-C-G. The problem is that the money spent by the government (G) goes in to thin air I guess? In an accurate model, it would seem that private saving should equal S=Y-T-C, where T is equal to taxes minus transfers, or T-G, because private citizens receive the money. In this way, both T and G would drop out of the equation for total saving and it would equal S=Y-C. We could then go to his Y=C+I+G+NX equation and find that Y=I+G+NX, which would further lead us to believe that government spending actually increases Y, which increases investment and saving.

    I think the largest problem with Mankiw's argument is that he believes in what is called the treasury view, where any amount of government spending is bad and directly takes away from the private sector. More importantly, as prof Ruccio points out, Mankiw completely misses the fact that people are saving less because they have had stagnating wages! And guys like this write the textbooks…

  7. Christian says:

    S=I+G+NX (Correction)

  8. Magpie says:

    Christian,

    Okay, I hate to insist, but I’ll try one last time. Whatever we choose to call G, I suppose we agree on this:

    C + I + G + NX = Y = C + S + T

    From this we get:

    (1) S = I + (G – T) + NX

    Note that this equation says that national saving is the sum of investment, budget surplus/deficit and net exports. Further, note that a bigger G other things remaining the same (i.e. a budget deficit) INCREASES national saving.

    The reasoning contained in the article concluded in this equation:

    (2) S = I + NX (See page 3 of the article)

    But never fear, we can get equation (2) from (1). There are two ways to do this: (A) one assumes that G – T = 0. I will repeat this, because it is important: one ASSUMES that G – T = 0. This means that either there is no government or it runs a balanced budget.

    So, if there is no government or it runs a balanced budget, how can one possibly conclude that:

    “This simple equation sheds considerable light on the effects of budget deficits. It says that national saving equals the sum of investment and net exports. When budget deficits reduce national saving, they must reduce investment, reduce net exports, or both”.

    One cannot conclude that. It cannot possibly show any effect, because there is no deficit/surplus: the budget is either balanced or there is no government.

    So, this cannot be the way. That accounts for the first way (A) to turn (1) into (2).

    The other way (B) to get equation (2) is that S in (2) means something different to S in (1): in (2) it contains -(G – T) and that’s why (G – T) is not on the RHS.

    This, as blatantly absurd as it is, has one thing going for it: it does not depend on us making any assumption. That’s why I made the remark before.

    In fact, it is suggested by the article itself: “private saving is Y-T-C, and public saving is T-G. Adding these yields national saving, S” = Y – C – G = I + NX.

    So, the two ways one can turn equation (1) into equation (2) involve an absurd. Take your pick.

  9. Christian says:

    He isn’t equating C + I + G + NX = Y = C + S + T, as you have done. Here is what he did.

    Mankiw’s process:
    Private Saving is S=Y-T-C
    Public Saving is S=T-G, he adds the two together;
    - Private Saving + Public Saving= (Y-T-C)+(T-G), which equals
    - S=Y-C-G
    THEN, he adds the income-expenditure model (Y=C+I+G+NX):
    - S=(C+I+G+NX)-G-C, simplifying:
    - S=I+NX

    Like I said before, though, private citizens receive government purchases, so private saving needs to be: (I’d also add he is implying Ricardian equivalence, which is ridiculous.)
    - Y=C+T-G+S or S=Y-T+G-C, not Mankiw’s S=Y-T-C. [He assumes that, as I said before, the private sector does not receive the money spent in some form, which is impossible.] For the private sector T+G is what they pay in taxes and what they receive in government assistance. Necessarily then, saving is by definition disposable income (Y-Taxes+Transfers) minus consumption spending (C), or S=Y-T+G-C
    - If we then add Mankiw’s “Public Saving” T-G to the new Private Saving, we get S=Y-T+G-C+T-G or S=Y-C (The T and G cancel each other out)
    - Then add the income-expenditure model S=(C+I+G+NX)-C, which equals S=I+G+NX, which leads to the conclusion that G increases output and saving. SO, I agree that he had to make an absurd assumption for his conclusions to fit!

    Like I said before, the real reason that saving has decreased is because investment has moved abroad and wages have stagnated; not because government deficits have been larger. The odd thing is that he engineered the Bush Tax cuts, and at least from his perspective, cutting taxes create budget deficits, which reduce saving etc…

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