Cartoon of the day

Special mention

Tale of two depressions

Mainstream economists continue to discuss the two great crises of capitalism during the past century just like the pillars of society performed in the brothel—a “house of infinite mirrors and theaters”—in Jean Genet’s The Balcony.* The order they represent is indeed threatened by an uprising in the streets, and the only question is: can they reestablish the illusion of control?

The latest version of the absurdist economic play opens with Brad DeLong, who dons the costume of the liberal mainstream economist and argues that, while the Great Depression of the 1930s was far deeper than the Great Recession (what I have long referred to as the Second Great Depression), the recovery from the crash of 2007-08 was so mishandled that it casts a shadow over the U.S. economy in a way the first Great Depression did not.

now we are haunted by our Great Recession in a sense that our predecessors were not haunted by the Great Depression. Looking forward, it appears that we will be haunted for who knows how long. No unbiased observer projects anything other than slow growth, much slower than the years during and after World War II. Nobody is forecasting that the haunting will cease — that the shadow left from the Great Recession will lift.

Basically, DeLong blames two groups—conservative mainstream economists and policymakers (“including the decision makers at the top in the Obama administration”)—for a recovery that was both too long and too slow. The first claims the monetary and fiscal policies that were adopted were wrongheaded from the start, and fought every attempt to sustain or expand them. The second group claims they prevented a second Great Depression and refuses to acknowledge the failure of the policies they devised and adopted.

The customer who dresses up as a representative of the conservative wing of mainstream economics, Robert Samuelson, expresses his sympathy with DeLong’s analysis but considers it be overstated. Samuelson’s view is that slow growth is not caused by the shadow cast by inadequate economic policies, but is the more or less inevitable result of two exogenous events: reduced growth of the labor force and slower growth in productivity.

The retirement of baby-boom workers would have occurred without the Great Recession. The slowdown in productivity growth — reflecting technology, management and worker skills — is not well understood, but may also be independent of the Great Recession.

This is exactly what is to be expected in the high-end economic brothel. It’s a debate confined to growth rates and the degree to which economic policies or exogenous factors should ultimately shoulder the blame of the crisis of legitimacy of the current economic order. Each, it seems, wants to play the fantasy of the Chief of Police in order to create the illusion of restoring order.**

What DeLong and Samuelson choose not to talk about are the fundamental differences between the response to the 1929 crash and the most recent crisis of capitalism. As is clear from the data in the chart at the top of the post, the balance of power was fundamentally altered as a result of the New Deals (the first and especially the second), which simply didn’t occur in recent years. After 1929, the wage share (the green line) remained relatively constant, even in the face of massive unemployment—and eventually, as a result of a whole series of other policies (from regulating the financial sector through jobs programs to unleashing a wave of labor-union organizing), the shares of national income going to the bottom 90 percent (the blue line) and the top 1 percent (the red line) moved in opposite directions. The current recovery has been quite different: a declining wage share (which, admittedly, continues a decades-long slide), the bottom 90 percent losing out and the top 1 percent resuming its rise.

And the reason? As I see it, what was happening outside the brothel, in the streets, explains the different responses to the two crashes. It was the Left—in the form of political parties (Socialist, Communist, and the left-wing of the Democratic Party), but also labor unions, councils of the unemployed, academics, and so on—that pushed the administration of Franklin Delano Roosevelt and Congress to adopt policies that moved beyond restoring economic growth to fundamentally restructure the U.S. economy (which, of course, continued during and after the war years).*** Nothing similar happened in the United States after 2008. As a result, the policies that were discussed and eventually adopted only meant a recovery for large corporations and wealthy households. Everyone else has been left to battle over the scraps—attempting to get by on low-paying jobs retirement incomes based on volatile stock markets, with underwater mortgages and rising student debt, and facing out-of-control healthcare costs.****

It should come as no surprise, then, that the elites who continue to play out their fantasies in the house of mirrors have lost the trust of ordinary people. Unfortunately, in the wake of the Second Great Depression, it’s clear that new masqueraders have been willing to don the costumes and continue the fantasy that the old order can be restored.

Only a fundamental rethink, which rejects all the illusions created within the economic bordello, will chart a path that is radically different from the recoveries that followed both great crises of capitalism of the past hundred years.

 

*I saw my first production of “O Balcão” at Sao Paulo’s Teatro Oficina in 1970, as a young exchange student during one of the most repressive years of the Brazilian dictatorship. Staging Genet’s play at that moment represented both a searing critique of the military regime and an extraordinary act of resistance to government censorship.

**Much the same can be said of a parallel debate, between Joseph Stiglitz and Lawrence Summers.

***Even then, we need to recognize how limited the recovery from the first Great Depression was. Amidst all the changes and new regulations, leaving control of the surplus in private hands left large corporations with the interest and means to circumvent and ultimately eliminate the New Deal regulations, thus creating the conditions for the Second Great Depression.

****As Evan Horowitz has shown, roughly 14 percent of workers have seen no raise over the past year (counting only those who have stayed in the same job). That means, with inflation, their real wages have fallen. Moreover, “when a large share of workers get passed over for raises, wage growth for all workers tends to remain slow in the year ahead.”

Cartoon of the day

Special mention

  

Cartoon of the day

Special mention

“Labour is a disgrace”

Banksy, “Untitled” (2009)

On first glance, liberals and conservatives agree on very little these days, especially now that we find ourselves in the era of Donald Trump. But they do seem to find common ground on one thing: the so-called dignity of labor.

Let me explain. In the article I referred to yesterday, conservative Arthur Brooks invokes the “dignity of labor” as the reason anything and everything should be done to stem the fall in the labor-force participation rate of white men and get them back to work.

If its goal is to instill dignity, the U.S. government does not need to find more innovative ways to “help” people; rather, it must find better ways to make them more necessary. The question for leaders, no matter where they sit on the political spectrum, must be, Does this policy make people more or less needed—in their families, their communities, and the broader economy?

Some may ask whether making people necessary is an appropriate role for government. The answer is yes: indeed, it represents a catastrophic failure of government that millions of Americans depend on the state instead of creating value for themselves and others. However, it’s not enough to merely make people feel that they are needed; they must become more authentically, objectively necessary.

The single most important part of a “neededness agenda” is putting more people to work.

Well, as it turns out, one of Brooks’s liberal critics, Lane Kenworthy, actually agrees that working for someone else and producing more than one needs has “significant virtues”:*

It imposes regularity and discipline on people’s lives. It can be a source o mental stimulation. It helps to fulfill the widespread desire to contribute to, and be integrated in, the larger society. It shapes identity and can boost self-­esteem. With neighborhood and family ties weakening, the office or factory can be a key site of social interaction. Lack of employment tends to be associated with feelings of social exclusion, discouragement, boredom, and unhappiness. Societies also need a significant majority of people in paid work to help fund government programs.

No matter the fundamental differences in the policies they advocate, Brooks and Kenworthy are in fundamental agreement that people should believe in the dignity of work and government policy should be redesigned to make sure people—especially the members of the white working-class—get back to work.

I have already dealt numerous times (e.g, here, here, and here) with the argument that participating in wage-labor is intrinsically dignified. But the question remains, why should the government be brought in—in the eyes of by both conservatives and liberals—to make sure people are forced to have the freedom to acquire that dignity?

The answer actually lies in an unexpected source. According to Friedrich Nietzsche (in his 1871 preface to an unwritten book, “The Greek State”), the dignity of labor was invented as one of the “needy products of slavedom hiding itself from itself.” That’s because, in Nietzsche’s view (following the Greeks), labor is only a “painful means” for existence and existence (as against art) has no value in itself. Therefore, “labour is a disgrace.”

Accordingly we must accept this cruel sounding truth, that slavery is of the essence of Culture; a truth of course, which leaves no doubt as to the absolute value of Existence.  This truth is the vulture, that gnaws at the liver of the Promethean promoter of Culture.  The misery of toiling men must still increase in order to make the production of the world of art possible to a small number of Olympian men.

And if slaves—or, today, wage-workers—no longer believe in the “dignity of labour,” it falls to the likes of both conservatives and liberals to ignore the “disgraced disgrace” of labor and create the necessary “conceptual hallucinations.” And then, on that basis, to suggest the appropriate government policies such that the “enormous majority [will], in the service of a minority be slavishly subjected to life’s struggle, to a greater degree than their own wants necessitate.”

Nietzsche believed that, in the modern world, the so-called dignity of labor was one of the “transparent lies recognizable to every one of deeper insight.” Apparently, neither Brooks nor Kenworthy can count himself among those with such insight.

*This is even after Kenworthy admits “employment is not always a good thing.”

The need for a paycheck can trap people in careers that divert them from more productive or rewarding pursuits. Paid work can be physically or emotionally stressful. It can be monotonous, boring, alienating. Some jobs require a degree of indiference, meanness, or dishonesty toward customers or subordinates that eats away at one’s humanity. And work can interfere with family life.

Populism and mainstream economics

There doesn’t seem to be anything remarkable about mainstream economists’ rejection of the new populism.

Lest we forget, mainstream economists in the United States and Europe (and, of course, around the world) mostly celebrated current economic arrangements. As far as they were concerned, everyone benefits from contemporary globalization (the more trade the better) and from the distribution of income created by market forces (since everyone gets what they deserve).

To be sure, those who identify with different wings of mainstream economics debate the extent to which there are market imperfections and therefore how much interference there should be in markets. Conservative mainstream economists tend to argue in favor of less regulation, their liberal counterparts for more government intervention. But they share the same general economic vision—that capitalism is characterized by “just deserts,” stable growth, and rising standards of living.

Except of course in recent decades it hasn’t. Not by a long shot.

Inequality has skyrocketed to obscene levels (and continues to rise), leaving many people behind. The crash of 2007-08 shattered the illusion of stability—and now there’s a deepening worry of “secular stagnation” moving forward. And, while the conspicuous consumption of the tiny group at the top continues unabated, only rising debt keeps everyone else from falling down the ladder.

No wonder, then, that economic populists, especially those on the Right, are rejecting the status quo—and winning campaigns and elections (often in the form of protest votes).

For the most part, to judge by Brigitte Granville’s survey of a variety of Project Syndicate commentators’ responses to populism, mainstream economists remain blind as to “why so many voters have embraced facile policies and populist politics.”

That’s pretty much what one would expect, given mainstream economists’ general commitment to the status quo.

But even when they admit that “much has gone wrong for a great many people,” as Margaret MacMillan does (“Globalization and automation are eliminating jobs in developed countries; powerful corporations and wealthy individuals in too many countries are getting a greater share of the wealth and paying fewer taxes; and living conditions continue to deteriorate for people in the US Rust Belt or Northeast England and Wales”), we read the spectacular claim that today’s populists—these “new, outsider political forces”—are wrong because they “claim to have a monopoly on truth.”

Now, I understand, MacMillian is a historian, not an economist. But the idea that populists are somehow the only ones who claim to have a monopoly on truth is an extraordinary diagnosis of the problem.

Think of the legions of mainstream economists who have lined up over the years to claim a monopoly on the truth concerning a wide variety of policies, from restricting minimum wages and approving NAFTA to deregulating finance and voting no on Brexit. They are the ones who have aligned themselves with the interests of economic and political elites and who, in the name of expertise, have attempted to trump democratic, public discussion of important economic issues.

It should come as no surprise, then, that mainstream economists—such as Harvard’s Sendhil Mullainathan—are so concerned that economists have been demoted within the new Trump administration. The horror! The chairperson of the Council of Economic Advisers is not going to be a member of the Cabinet.

Yes, it is true, business acumen is not the same as economic analytics. (I teach economics in a College of Arts and Letters, not in a business school—and, as I remind my students on a regular basis, I’m the last person they should turn to for investment or business advice.) But that’s a far cry from claiming a monopoly on the truth, which is only available to those who speak and write in the language of mainstream economics.*

If mainstream economists finally relinquished that claim—and, as a result, spent more time both learning the languages of other traditions within the discipline of economics and listening to the grievances and desires of those who have been sacrificed at the altar of the status quo—perhaps then they’d have something useful to contribute to the larger debate about where the world is headed right now.

 

*According to Andrea Brandolini, the late Tony Atkinson understood this: “‘Economists are too often prisoners within the theoretical walls they have erected’, he recently wrote discussing austerity policies, ‘and fail to see that important considerations are missing”

Profits and poverty

Provoked, first, by liberal celebrations of the recent decline in the poverty rate in the United States—and, then, by conservative attempts to dismiss the issue of inequality, I decided to run some numbers. Just to see.

As it turns out, the corporate profit share (on the right in the chart above) and the poverty rate (on the left) appear to have moved in tandem since the mid-1990s: when the profit share declines, so does the poverty rate, and vice versa.

This is one of those times when I don’t have a theory or an explanation. But I was reminded of that long-forgotten ruthless critic of political economy:

Accumulation of wealth at one pole is, therefore, at the same time accumulation of misery, agony of toil slavery, ignorance, brutality, mental degradation, at the opposite pole, i.e., on the side of the class that produces its own product in the form of capital.

Elite divisions?

As if in direct response to one of my recent posts on “ignoring the experts,” the best mainstream economist Noah Smith can come up with is there is no single, unified elite opinion—perhaps on Brexit but not on most economic issues.

The “elite” isn’t a single unified bloc. There are many different kinds of elites. Politicians, bureaucrats, wealthy businesspeople, corporate managers, financiers, academics and media personalities can all be labeled elites. But there are huge fissures and rivalries both within and between these groups. They are almost never in broad agreement on any issue — Brexit was the exception, not the rule.

That’s not saying much. Of course, elites and elite opinions are divided. They have always have been and certainly are now.

The issue is not whether different groups or fractions within the elite hold different opinions, but the limits of those differences and the views that are marginalized or excluded as a result.

Consider the views of mainstream economists (which is really what my original post was about). They hold different views about most economic issues—from labor markets to international trade—but the range of differences is very narrow. As I explained back in January:

while conservative mainstream economists believe that efficiency, growth, and full employment stem from allowing markets to operate freely, liberal mainstream economists argue that markets are often imperfect and therefore the only way to achieve (or at least approximate) those goals is to intervene in and regulate markets. Those are the terms of the mainstream debate in economics, from the origins of modern economic discourse in the late-eighteenth century right on down to the present.

Think about it as the difference between the invisible hand and the visible hand.

Liberal mainstream economists, of course, hotly contest the free-market doctrine of their conservative counterparts. But notice also that they hold in common both the goals and the limits of economic policy with conservatives. Liberals and conservatives share the idea that the goals of an economy are to ensure efficiency, growth, and full employment. And they share the idea that economic policy should be limited to tinkering with capitalism—in the direction of more regulation or, for conservatives, more free markets—in order to achieve those goals.

That’s it, the limits of the mainstream debate.

Mainstream economists use different theories and promote different policies within those narrow limits. What they exclude are theories and policies that fall outside those limits—and thus, in their view, don’t deserve a hearing.

Their expertise ends when it comes to theories that focus on such things as the inherent instability of capitalism or the role of class in determining the value of goods and services and the distribution of income. And they exclude policies that either change the fundamental rules of capitalism or look beyond capitalism, to alternative ways of organizing economic and social life.

What that means, concretely, is mainstream economists tend to minimize the damage—to different groups of people and to society as a whole—of existing economic arrangements. Just as Paul Krugman minimizes the loss of jobs from deindustrialization (“we’re talking about 1.5 percent of the work force”), Smith understates the disruptive effects of globalization (in referring to “some economic setbacks” for the middle-class of rich nations while presuming everyone else has gained).

So, yes, mainstream economists (like the elites whose position they never contest) often find themselves disagreeing among themselves about theories and policies. But it’s precisely because the limits of their disagreements are so narrow, there’s always a surplus of meaning that falls outside of and escapes their purview. That’s when alternative theories and policies flourish—and all mainstream economists can do is invoke their self-professed expertise to attempt to quash the alternatives and relegate them to (or beyond) the margins.

Sometimes, of course, it works and non-elite opinion falls in line. But other times—after the crash of 2007-08, in the lead-up to the Brexit vote, and so on—it doesn’t and the narrow limits of expert opinion are challenged, parodied, or ignored. And other possibilities, always just below the surface, acquire new resonance.

Elites, who simply can’t or don’t want to understand, suggest the masses just eat cake (or, today, crack)—and, like Smith, hide behind the idea that “there are no easy answers to the challenges of the modern global economy.”

Liberal ideology

I know what liberal ideology in economics is all about. I’ve encountered it at every turn, even before I began my formal studies in economics. The same is true of liberal ideology in politics, which has shown its ugly face once again in the current electoral campaign.

In both cases, liberal ideology is based on the idea that the existing system, while perhaps imperfect, is the only game in town. It is a conception both of what is and of how change can and should take place—gradually and without major disruption. According to liberals, the biggest threat is populism, when the masses of people challenge the existing common sense and seek radical change. It therefore works with conservative ideology, as two bookends of mainstream discourse, to limit the theoretical and policy debate to a narrow set of options.

Here’s how liberal ideology works in economics: At the microeconomic level, capitalism (or, as liberals generally refer to it, the market system) has the potential of achieving an efficient allocation of resources. As for the macroeconomy, capitalism is capable of providing stable growth and full employment. Capitalism, therefore, promises the best possible outcomes both for individuals and for the economy as a whole.

Now, while conservative mainstream economists believe that efficiency, growth, and full employment stem from allowing markets to operate freely, liberal mainstream economists argue that markets are often imperfect and therefore the only way to achieve (or at least approximate) those goals is to intervene in and regulate markets. Those are the terms of the mainstream debate in economics, from the origins of modern economic discourse in the late-eighteenth century right on down to the present.

Think about it as the difference between the invisible hand and the visible hand.

Liberal mainstream economists, of course, hotly contest the free-market doctrine of their conservative counterparts. But notice also that they hold in common both the goals and the limits of economic policy with conservatives. Liberals and conservatives share the idea that the goals of an economy are to ensure efficiency, growth, and full employment. And they share the idea that economic policy should be limited to tinkering with capitalism—in the direction of more regulation or, for conservatives, more free markets—in order to achieve those goals.

That’s it, the limits of the mainstream debate.

Liberals, in particular, believe that the appropriate set of government institutions and regulations can move capitalism toward microeconomic efficiency (within individual markets, national economies, and across the global economy) and macroeconomic stability and full employment (especially, during a downturn, with expansionary fiscal and monetary policies). Anything else, from the perspective of liberal ideology, represents an unscientific view of the economy and an unwarranted attempt to dismantle existing economic institutions.

What liberal mainstream economists don’t see is that capitalism, despite its premises and promises, fails to deliver on them. For example, capitalism holds up “just deserts” as an ideal—everybody gets what they deserve—but it actually means that most people are forced to surrender the surplus they create to their employers, who are allowed to either keep it (and do with it what they want) or distribute it to still others (the tiny group at the top that manages the way those enterprises operate). Capitalism also pledges stable growth and full employment but then, precisely because of that private control over the surplus, regularly delivers boom-and-bust cycles and throws millions out of work.

Liberals also don’t see (because they don’t want to or, given their theory, can’t see) that even the policies they endorse to make capitalism work better are frustrated at every turn. Why? Because, even when regulations are imposed (such as they were during the New Deal programs of the 1930s), they leave in place both the interest and means on the part of employers and their allies to first evade and then, eventually, overturn those regulations.

Not only does liberal economic ideology offer a limited view of how capitalism works; it is also serves to keep out of the debate both other theories of capitalism and other ideas of how the economy might be organized. It’s premised on the notion that here are the acceptable terms of discussion—capitalism is characterized by markets that work more or less well, at the microeconomic and macroeconomic levels—and that other conceptions of capitalism—which introduce things like class exploitation into the discussion—are simply wrong or irrelevant. And it limits the discussion to regulating markets and rules out of court the possibility of imagining and creating other economic institutions—ways of organizing the economy that seek, for example, to actually eliminate class exploitation.

Part of the problem is that, from the perspective of liberal ideology, fundamental changes to the way the economy is organized aren’t necessary. That’s the liberal fantasy that markets can be made to work correctly. The other part of the problem is the liberal stoking of fears that changing current institutions—dismantling some and creating new ones—leads to chaos.

The latter is the basis of the ever-present charge of populism. Creating economic institutions that give “too much” to the mass of working people—whether high minimum wages or guaranteed lifetime incomes or taking areas of the economy out of international trade or giving workers some say in how the enterprises in which they labor operate—are deemed to be too costly or simply unfeasible.

And then, when those arguments fail to work, if radical ideas appear to capture the popular imagination, liberal economic ideology casts the final die: fundamentally changing how the economy works would be so disruptive of existing arrangements that it would invite a negative reaction by those currently in charge. It would create, so the argument goes, chaos. Therefore, it is necessary to protect existing regulations and perhaps introduce a few new regulations to markets and leave things at that.

That’s how liberal ideology works in economics. And, as it turns out, that’s exactly how liberal ideology is being deployed in our current political debate—to normalize one, very limited set of options and to marginalize any discontent or desire that threatens to go beyond them.

Hey, mainstream economics professors

Thomas Palley reminded me of a post I had planned to write on how mainstream economists are attempting to raise the drawbridge. And not just those on the conservative wing.

Liberal mainstream economists, such as Paul Krugman and Simon Wren-Lewis, also want to pull up the drawbridge over the moat and protect the castle of mainstream economics.

According to Krugman, heterodox economists are working with the wrong storyline:

Here’s the story they tell themselves: the failure of economists to predict the global economic crisis (and the poor policy response thereto), plus the surge in inequality, show the failure of conventional economic analysis. So it’s time to dethrone the whole thing — basically, the whole edifice dating back to Samuelson’s 1948 textbook — and give other schools of thought equal time.

Unfortunately for the heterodox (and arguably for the world), this gets the story of what actually happened almost completely wrong.

It is true that economists failed to predict the 2008 crisis (and so did almost everyone). But this wasn’t because economics lacked the tools to understand such things — we’ve long had a pretty good understanding of the logic of banking crises. What happened instead was a failure of real-world observation — failure to notice the rising importance of shadow banking. Economists looked at conventional banks, saw that they were protected by deposit insurance, and failed to realize that more than half the de facto banking system didn’t look like that anymore. This was a case of myopia — but it wasn’t a deep conceptual failure. And as soon as people did recognize the importance of shadow banking, the whole thing instantly fell into place: we were looking at a classic financial crisis.

Wren-Lewis offers much the same interpretation:

Let me get personal. Over the last few years, I have been in charge of a macroeconomics course at Oxford. For better or worse, if past evidence is anything to go by, one or two of those taking this course will end up helping run the economy. There is so much important mainstream theory that needs to be covered in that course, because it is theory that is essential to trying to understand what is currently going on in the world. At its core is Keynesian theory, which has proved its worth since the recession. (Interest rates didn’t rise because of all that government debt, inflation didn’t take off because of all the money that has been created, and austerity did delay the recovery.) It would be a great step backwards if I had to stop teaching part of that, and instead teach Austrian or Marxian views about the macroeconomy, or still worse spend time worrying about what Keynes really meant. I would much rather a future Chancellor, Prime Minister, or advisor to either, remembered from their undergraduate degree that mainstream theory said austerity was contractionary, rather than ‘well it all depends on whether you are a Keynesian or an Austrian’.

In both cases, the argument is that everything we need to analyze and come up with effective policies to get out of the Second Great Depression is contained within mainstream economics. And we don’t really need to do anything fundamental to change the way we teach and do economics. Instead of attempting to learn something about heterodox economic theory and making an alliance with heterodox economists—perhaps even creating new drawbridges into the mainstream castle or blowing up the walls of the castle itself—liberal mainstream economists like Krugman and Wren-Lewis have decided to stick with the hydraulic Keynesian models that can be found in the corners of the castle of mainstream economics.

Don’t get me wrong: I’m not against teaching mainstream economics. I do it all the time, precisely because it’s the hegemonic economic discourse and students need to know how it works (even, and perhaps especially, when it doesn’t work). But that doesn’t mean it’s the only sort of economics students or policymakers should be exposed to. There are a lot of other ideas, which heterodox economists have been developing and using for a long time, that can make sense of and get us out of the current mess we’re in.

But students won’t even know such ideas exist if their professors keep them trapped within the walls of the existing castle.