Posts Tagged ‘corporations’

Sometimes we just have to sit back and laugh. Or, we would, if the consequences were not so serious.

I’ve been reading and watching the presentations (and ensuing discussions) at the Rethinking Macroeconomic Policy conference recently organized by the Peterson Institute for International Economics.

Quite a spectacle it appears to have been, with an opening paper by famous mainstream macroeconomists Olivier Blanchard and Larry Summers and a closing session—a “fireside chat” without the fire—with the very same doyens of the field.

The basic question of the conference was: does contemporary macroeconomics, in the wake of the Second Great Depression, require a few reforms or does it need a wholesale revolution? Blanchard lined up in the reform camp, with Summers calling for a revolution—with the added spice of Adam Posen referring to himself as Trotsky to Summers’s Lenin.

Most people would think it’s about time. They know that mainstream macroeconomics failed spectacularly in recent years: It wasn’t able to predict the onset of the crash of 2007-08. It didn’t even include the possibility of such a crash occurring. And it certainly hasn’t been a reliable guide to getting out of the crisis, the worst since the Great Depression of the 1930s.

So what are the problems according to Blanchard and Summers? In their view, “the events of the last ten years have put into question the presumption that economies are self stabilizing, have raised again the issue of whether temporary shocks can have permanent effects, and have shown the importance of non linearities.”

Only mainstream macroeconomists could possibly have thought that capitalism is self stabilizing. The rest of us—who have read Marx and Keynes as well as the work of Robert Clower, Hyman Minsky, and Axel Leijonhufvud—actually knew something about the roots of capitalist instability: the various ways a monetary commodity-producing economy might (but not necessarily) generate imbalances and instabilities based on the normal workings of the system.

Yes, of course, temporary shocks can have permanent effects. How could they not, when tens of millions of people are thrown out of work and, especially in the wake of the most recent crash, inequality has soared to new heights?

And then there are those “non linearities,” the idea that financial crises are characterized by feedback effects such that shocks, even small ones, “are strongly amplified rather than damped as they propagate.” Bank runs are the quintessential example—whether customers demanding their deposits in the first Great Depression or the run on financial institutions (including insurance companies that issued credit default swaps) that occurred in the midst of the second Great Depression. But that’s not all: when corporations, facing a declining profit rate, choose to sell but not purchase, they make individually rational decisions that can have large-scale social ramifications—for workers, indebted households, and other corporations (on both Main Street and Wall Street).

So mainstream macroeconomists appear to be waking up from their slumber and seeing capitalism as it is—and as it has functioned for 150 years or so.

You’d think, then, with all the rhetoric of reform and revolution, they’d be in favor of questioning the entire edifice of their theories and models. What we get instead is a bit of tinkering, along the lines of the following: (a) monetary policy is limited because of low interest-rates (although it’s still expected to provide generous liquidity in the even of another shock); (b) more active financial regulation, which still may not be able to keep up with the quickly changing and complex structure of the financial sector and actually prevent financial risks; thus (c) fiscal policy should once again be important, both because of the limits on monetary policy and financial regulation and because, with low interest-rates, government debt is less significant.

No, you’re not mistaken, it sounds a lot like a mainstream version of Keynesian macroeconomic policy, which is consistent with the subtitle of the Blanchard and Summers paper: “Back to the Future.”

That’s it? That’s all we’ve learned in the last ten years? Not a word in their paper about the international dimensions of macroeconomics—nothing about international contagion (e.g., the fact that the crisis started in the United States and then engulfed the rest of the world) or cross-border capital flows. And, perhaps even more important, there’s no discussion of inequality and the role it played both in creating the conditions for the crisis or the way it has characterized the nature of the recovery.*

There’s no reform being proposed here, let alone a revolution. It’s just business as usual, which is exactly the way the recovery itself has been treated.

In the end, Blanchard, Summers, and the other participants in the conference are the macroeconomists who developed the current models and policies. Thus, for all they might venture some mild criticisms of the pre-crisis orthodoxy and call for some new ideas, they are so invested in the status quo, no one should expect a truly radical rethinking from them.

To expect otherwise is just laughable.


*Yes, there was one paper in the conference on inequality, by Jason Furman, but it was about growth, not macroeconomic policy. The theme of inequality was not taken up in the rest of the conference—and it was even ridiculed (e.g., in terms of the research currently being conducted in the IMF) by Summers in the final session.


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Kevin Hassett and the other members of the president’s Council of Economic Advisers are just like the long-haired preachers Joe Hill sang about more than a century ago. They come out every night to tell us what’s wrong and what’s right. But when asked about something to eat, they answer in voices so sweet:

You will eat, bye and bye
In that glorious land above the sky
Work and pray, live on hay
You’ll get pie in the sky when you die.
That’s a lie

With one notable exception: according to the Council (pdf), that “glorious land above the sky” lies just on the other side of the Trump administration’s proposed tax reform. And workers, whose real wages have stagnated for decades now, won’t have to die to receive their pie in the sky.

Reducing the statutory federal corporate tax rate from 35 to 20 percent would. . .increase average household income in the United States by, very conservatively, $4,000 annually. The increases recur each year, and the estimated total value of corporate tax reform for the average U.S. household is therefore substantially higher than $4,000. Moreover, the broad range of results in the literature suggest that over a decade, this effect could be much larger.

There’s no other way to put it. That’s a lie.


As is clear from this chart, both corporate profits (the red line) and investment (the blue line) have soared in recent decades. There’s simply been no shortage of investment or investment funds, either from retained earnings or in terms of money borrowed from financial institutions. At the same time, the wage share of national income (the green line in the chart) has fallen precipitously.

So, even if cutting corporate tax rates (and thus permitting higher retained earnings) did lead to more investment, there’s no guarantee workers’ wages would increase as a result. They haven’t for decades now. Why should that change in the future?

Moreover, there’s no guarantee higher retained earnings would lead to more investment. Just as likely (perhaps even more so), corporations would be able to use their profits for other purposes—including higher CEO salaries, increased dividends to stockholders, and more mergers and acquisitions—which have nothing to do with raising workers’ wages.

The only result would be more corporate power and more obscene levels of inequality in the United States.

And that’s no lie.


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The latest IMF Fiscal Monitor, “Tackling Inequality,” is out and it represents a direct challenge to the United States.

It’s not just a rebuke to Donald Trump, who with his allies is pursuing under the guise of “tax reform” a set of policies that will lead to even greater inequality—or, for that matter, Republicans in state governments across the country that have sought to cut back on programs targeted at poor Americans. It also takes to task decades of growing inequality in the United States, under both Democratic and Republican administrations.

As is clear from the chart above, the distribution of both income and wealth in the United States has become increasingly unequal since the mid-1970s. The share of income captured by the top 1 percent has more than doubled (from 10 to 20 percent), while it’s share of total wealth has increased dramatically (from 23 percent to 39 percent). Meanwhile, the share of income of the bottom 50 percent has declined precipitously (from 20 percent to 12.5 percent) and it’s share of wealth, which was never very high (at 0.9 percent), is now nonexistent (at negative 0.1 percent).

And what is the United States doing about it? Absolutely nothing. Over the course of the past four decades it’s done very little to tackle the problem of growing inequality—and what it has done has been spectacularly ineffective. Thus, inequality has grown to obscene levels.

What’s interesting about the IMF report is that it raises—and then challenges—every important argument made by mainstream economists and members of the economic and political elite.

Should we worry just about income inequality? Well, no, since “changes in income inequality are reflected in other inequality dimensions, such as wealth inequality.”


Doesn’t the United States take care of the problem by redistribution? Absolutely not, since only Israel does less than the United States in terms of lowering inequality (as measured by the Gini coefficient) through taxes and transfers.

But doesn’t tackling inequality through progressive income taxes lower economic growth? Again, no: “There is not strong empirical evidence showing that progressivity has been harmful for growth.”


Nor is there any justification for low tax rates on those at the top in terms of social preferences. Most Americans, according to a recent Gallup survey, most believe that the rich and corporations don’t pay their fair share of taxes. In fact, the IMF notes, perhaps thinking about the United States, “societal preferences may not be reflected in actual policy implementation because of the concentration of political power in certain affluent groups.”

Clearly, much more can be done to lower the degree of inequality in the United States.

As a sign of the times, the IMF even chooses to discuss the role a Universal Basic Income might play in decreasing inequality.

Proponents argue that a UBI can be used as a redistributive tool to help address poverty and inequality better than means-­tested programs, which su er from information constraints, high administrative costs, and other obsta­cles that limit benefit take-­up. A UBI could also help address increased income uncertainty resulting from the impact of technology (particularly automation) on jobs.


According to its calculations, a Universal Basic Income in the United States (calibrated at 25 percent of median per capita income, in addition to existing programs) would cost only 6.5 percent of national income and achieve a remarkable reduction in both inequality (by more than 5 Gini points) and poverty (by more than 10 percentage points).

What puts the United States in stark relief is the contrast between the whole panoply of inequality-reducing policies that are available—from more progressive income taxes and the adoption of wealth taxes to reducing gaps in education and health programs—and the fact that the United States is moving in the opposite direction.

The United States is simply not tackling the problem, with the inevitable result: current levels of economic inequality are—by any measure, and especially in comparison to what could be but isn’t being done—grotesque.


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