“Boom Bust Boom” busted

I cited Andrew O’Heir’s critical review of Boom Bust Boom, Terry Jones and Theo Kocken’s Monty Pythonesque documentary about the crash of 2007-08 back in March but I hadn’t seen the film itself until last night.

In many ways, I wish I hadn’t.

Oh, sure, there are a couple of good moments. Introducing the work of Hyman Minsky to a larger audience. A cameo by John Cusack, who suggests that economics students should pelt their professors with vegetables and rotten fruit if they continue to parrot the party line. “Maybe urinate on them. That’s what I would do.” And some well-deserved attention to the students in the Post-Crash Economics Society at the University of Manchester.

But otherwise, the film is just not very good. For starters, consider the fact that, after the worst crisis of capitalism since the first Great Depression, only once is capitalism itself even mentioned!

Then, as O’Heir wrote, there’s not a single mention of John Maynard Keynes (who published his General Theory in 1936, in the midst of the earlier depression), let alone Karl Marx (who, along with Friedrich Engels, was writing about capitalism’s crisis tendencies in the middle of the nineteenth century). Since Jones and Kocken decided to make forgetting a central part of their story—especially failing to remember and draw lessons from previous financial crises—they might also have mentioned the deliberate forgetting by mainstream economists and economic policymakers of other economic ideas, now as in the past.

And, in this day and age, it smacks viewers in the face that, as Shane Ferro wrote, “Women and minorities are almost entirely left out of this film—not unlike the way they’ve been left out of financial and economics professions.” The only two expert women the movie manages to feature are Lucy Prebble, a playwright who once wrote a play about the collapse of Enron, and Laurie Santos, a Yale psychology professor who studies how monkeys make decisions. Neither, as it turns out, has a background in economics, or much knowledge of capitalism, its history, or the 2007-08 crash.*

But the worst part of this high-budget, cleverly animated documentary is the actual story Terry and Kocken decided to tell. What it boils down to is this: financial crises have always been with us (at least since Tulip Mania in the 1630s), people tend to make irrational decisions (e.g, by forgetting about previous crises and taking on too much risk), and making irrational decisions is part of our human nature, as determined by evolutionary behavioral psychology (hence the monkeys).

Actually, the film is more confused than that. At one point, it features Minsky (in an animated dialogue with his son)—and, if it had continued in that vein, it would have been able to reveal something about the financial fragility inherent in the regular boom-and-bust cycles of capitalism (since the key actors in Minsky’s approach are capitalist enterprises and banks). But then Minksy is dropped and the filmmakers decide to go in a different direction, with a fanciful discussion of human nature (continuing an approach that, from the beginning, features an undifferentiated “we” who is responsible for speculation, risk-taking, euphoria, forgetting, and so on) and then an attempt to ground human nature in primate behavior (this after criticizing the scientistic pretensions of neoclassical economics).

There’s no attempt to identify the dynamics of a particular economic system, which we usually refer to as capitalism. No attempt to identify particular and differentiated actors and institutions within capitalism, such as bankers, workers, consumers, politicians, enterprises, financial markets, and so on. No references to other countries today, in addition to the United States and the United Kingdom. No mention of the grotesques levels of inequality in the lead-up to the crash, and no discussion of unemployment, poverty, homelessness, and so on after the crash.

Instead, what we are presented with is a succession of financial crises, which in the end are grounded in our singular human nature.

That, to say the least, is not a particularly insightful analysis of the causes and consequences of the crash. And the best the filmmakers and the various talking heads can come up with by way of policies is the need, since human nature can’t be changed, to regulate the financial system (perhaps, at its most adventurous, by restoring Glass-Steagal barriers between commercial and investment banking) to keep “us” from making the same mistakes.

To which we can all respond: “Been there, done that. Now let’s try something that might actually work, beginning with the inherent instabilities of capitalism itself.”

 

*Here’s the list of the contributors: Dan Ariely, Dirk Bezemer, Zvi Bodie, Willem Buiter, John Cassidy, John Cusack, John K. Galbraith, James K. Galbraith, Andy Haldane, Daniel Kahneman, Steve Keen, Stephen Kinsella, Larry Kotlikoff, Paul Krugman, George Magnus, Paul Mason, Perry Mehrling, Hyman P. Minsky, Alan Minsky, Lucy Prebble, Laurie Santos, Robert J. Shiller, Nathan Tankus, Sweder Van Wijnbergen, and Randall Wray.

Cartoon of the day

Special mention

 

Cartoon of the day

Special mention

 

Ignoring the experts

Clearly, mainstream economists don’t like it when their advice is ignored. But that’s what seems to have happened with Brexit, Britain’s decision to exit the European Union.

In the lead up to the 23 June referendum, 12 Nobel Laureates and 175 U.K.-based mainstream economists launched their version of Project Fear to warn voters about the economic dangers—recession, inflation, falling investment, lower growth, and higher taxes—from deciding against Remain. But the people ignored the dramatic pleas for economic stability on the part of the “high priests of capitalism” and voted instead to Leave.*

Jean Pisani-Ferry sees the result as one example of a much broader “angry attitude toward the bearers of knowledge and expertise”—but one that is specifically aimed at mainstream economists. Why? The presumed expertise of mainstream economists was compromised because they “failed to warn them about the risk of a financial crisis in 2008,” they’re biased toward “mobility of labor across borders, trade openness, and globalization more generally,” and because they “tend to disregard or minimize” the effects of openness on particular classes or communities.

While Pisani-Ferry gives greater weight to the third explanation, the fact is they’re related. The thread running through all three factors is the issue of distribution. Mainstream economists tend to treat the inequalities that are both the cause and consequence of capitalism as either irrelevant (because everyone gets what they deserve) or as exogenous (created outside and independent of the economy itself). Thus, they ignored the role of inequality both in creating the conditions leading up to the crash of 2007-08 and as a consequence of the way the recovery was crafted and took place; and they tend to model and support economic globalization—in people, trade, finances, and much else—as if everyone benefits, rather than seeing winners and losers. Because mainstream economists relegate issues like power and class to (and, in many cases, beyond) the margins, they literally don’t see for themselves or show to others the unequal distributions that are either presumed by capitalism or that follow from capitalist ways of organizing economic and social life.

Neil Irwin, too, has expressed his concern about the rejection of expert opinion with respect to Brexit (and, he adds, the success of Donald Trump’s campaign). And draws much the same lesson: mainstream economists (and, more generally, the members of the economic elite whose views they tend to celebrate) focus their attention on efficiency and economic growth—with respect to issues ranging from rent control to international trade—and not on the unequal outcomes of those policies. Thus, he asks, “what if those gaps between the economic elite and the general public are created not by differences in expertise but in priorities?”

In the end, the problem identified by Pisani-Ferry and Irwin is not really one of economic expertise. It is, rather, a question of priorities and perspectives. Mainstream economists hold one set of theories, according to which capitalist markets lead to (or, at least can, with the appropriate policies, end up with) efficient, dynamic outcomes from which everyone benefits. But other economists—both other academic economists and everyday economists—use different economic theories, many of which highlight the unequal conditions and consequences of capitalist activities and institutions. In other words, each of these groups has a different expertise, informed by a different way of organizing their knowledge about the economy, including the effects of economic practices and policies.

What we’re seeing, then—with Brexit, but also after the most recent financial crash and the uneven recovery, the success of the campaigns of both Trump and Bernie Sanders, not to mention the battles over austerity and much else across Europe and the rest of the world right now—is a widespread challenge to the self-professed expertise of mainstream economists. It’s also a challenge to the economic and social system glorified by mainstream economists and by the elites that both govern and gain from that system.

Those academic and economic elites are clearly worried their opinions, backed up by their presumed expertise, no longer hold sway in the way they once did. And for good reason.

All they have to do is remember the fate of their predecessors who suggested the downtrodden and everyone else who had been marginalized or otherwise beaten down by the system just eat cake.

 

*As Rafael Behr explains, “People had many motives to vote leave, but the most potent elements were resentment of an elite political class, rage at decades of social alienation in large swaths of the country, and a determination to reverse a tide of mass migration. Those forces overwhelmed expert pleas for economic stability.”

 

Unequal recovery

The latest numbers are in (from Emmanuel Saez [and pdf]): while the bottom 99 percent of U.S. households have managed to claw back some of what they lost during the Great Recession, those at the top have done much better. The result is that, while the economic recovery looks a bit less lopsided than in previous years, income inequality in the United States remains extremely high.

As readers can see in the chart above, rom 2014 to 2015, the incomes of the bottom 99 percent grew by 3.9 percent, which is the best annual growth rate since 1999. Still, even after the second year of real income growth for families in the bottom 99 percent (amounting to 6 percent, for a total of a 7.6 percent gain since the recovery began), they’ve still only recouped about 65 percent of what they lost (-11.6 percent) during the most severe economic downturn since the first Great Depression. The bottom 99 percent still have not experienced the recovery they were promised.

But those in the top 1 percent have in fact enjoyed their recovery. They did much better last year (when their incomes grew by 7.7 percent), as they have since the Great Recession officially ended (for a total of 37.4 percent since 2009—thus more than making up for the losses they experienced after the crash, -36.3 percent). As a result, the share of income going to the top 1 percent of families—those earning on average about $1.4 million a year—increased to 22 percent in 2015 from 21.4 percent in 2014, while the share of income going to the top 10 percent of income earners—those making on average about $300,000 a year—increased to 50.5 percent in 2015 from 50.0 percent in 2014, the highest ever except for 2012.

Thus, as Saez explains, income inequality in the United States remains extremely high, particularly at the very top of the income ladder: the figure at the top of the post

shows that the incomes (adjusted for inflation) of the top 1 percent of families grew from $990,000 in 2009 to $1,360,000 in 2015, a growth of 37 percent. In contrast, the incomes of the bottom 99 percent of families grew only by 7.6 percent–from $45,300 in 2009 to $48,800 in 2015. As a result, the top 1 percent of families captured 52 percent of total real income growth per family from 2009 to 2015 while the bottom 99 percent of families got only 48 percent of total real income growth. This uneven recovery is unfortunately on par with a long-term widening of inequality since 1980, when the top 1 percent of families began to capture a disproportionate share of economic growth.

Thus, what we’ve seen in the United States is a crash that was caused, over the course of decades, by obscene levels of inequality—which has turned into a recovery that has been characterized, over the course of the last few years, by similarly grotesque levels of inequality. Those at the top, who managed to capture a large share of the growing surplus in the years leading up to 2007-08, have restaked their claim on the surplus during the recovery.

The rest of the U.S. population, most of whom actually produce the surplus, continues to fall further and further behind. The bottom 99 percent enjoyed only 35 percent of the gains from the Bush expansion (from 2002 to 2007), suffered 51 percent of the losses from the Great Recession (from 2007 to 2009), and, thus far, have gotten only 48 of total income growth during the recovery (from 2009 to 2015).

It’s clear, then, the recovery from the crash of 2007-08 has been highly unequal—which really should come as no surprise, since the current recovery has been just as unequal as the period of expansion before it and the downturn itself. Since the same forces are at work, now as then, why should be expect a different outcome?

As Albert Einstein once quipped, the definition of insanity is “doing the same thing over and over again and expecting different results.”

College haves and have-nots

Joan Robinson famously quipped, “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all.”

In the United States right now, workers with a college degree, with an unemployment rate of only 2.8 percent, are forced to endure the misery of being exploited by capitalists; while workers with a high-school diploma or less, with an unemployment rate between 5.4 and 8 percent, have it even worse: many of them confront the misery of not being exploited at all.

That’s because, as a new report from Georgetown University’s Center on Education and the Workforce [ht: ja] makes clear, of the 11.6 million jobs created in the United States after the Great Recession, 8.4 million (72 percent) went to those with at least a bachelor’s degree. Those with associate’s degrees or some college education got 3.1 million (27 percent) of the jobs. The remainder, 80,000 jobs (less than 1 percent), were left for workers with a high-school diploma or less.

Now, it’s true, Americans with only high-school diplomas represent a shrinking share of the workforce. This year, for the first time, college grads made up a larger slice of the labor market than those without higher education, by 36 percent to 34 percent, respectively. Including workers with an Associate’s degree or some college, workers with postsecondary education now make up 65 percent of total employment.

But the divided nature of the current recovery for American workers among themselves is even more stark.

Workers with a graduate degree (Master’s degree or higher) experienced no decline in jobs in the recession and maintained a stable employment growth throughout the recovery. Workers with a Bachelor’s degree struggled until the second half of 2011, but have since seen fast job growth, and in fact have exceeded the gains of graduate degree holders. . .Workers with a graduate degree have gained 3.8 million jobs since January 2010. Over the same period, workers with a Bachelor’s degree have gained 4.6 million jobs.

Workers with some college or an Associate’s degree have experienced a lot of volatility since 2007. They rode the recession to its depths, losing 1.8 million jobs. Those workers have now ridden the recovery back up; the economy recovered all those jobs by mid-2012. Over the next three and a half years, this group of workers experienced decent job growth, with a net gain of 1.3 million jobs since the beginning of the recession. Overall, this group of workers has added 3.1 million jobs since January 2010.

The workers who have suffered the most are those with a high school diploma or less. They lost the most jobs in the recession and have seen almost no growth in the job market during the recovery. They remain 5.5 million jobs short of their pre-recession employment level. Further, the current economic trends fail to provide any sign that those lost jobs will be returning in the near future.

The growing gap in the job situations of college haves and have-nots is certainly part of a long-term trend, based on structural changes in the U.S. economy beginning especially in the 1980s. But their diverging trajectories since the crash of 2007-08 have only exacerbated the previous trends. That’s due in part to the precipitous decline in the construction and manufacturing sectors of the economy (which have still not recovered) and the fact that workers with college degrees or at least some postsecondary education have taken most of the new jobs at all skill levels: high, middle, and low. For workers with a high school diploma or less, low-skill jobs have been just about the only jobs available—and, even in those occupations, they’ve been forced to compete with workers with higher levels of education.

Here’s the problem: while would-be workers may be able to exercise some choice in obtaining more education (and thus jump over the gap between college haves and have-nots), they still don’t have any say in determining either the quality or quantity of jobs. Those decisions are still in the hands of the small group of employers at the top.

That means all workers—with or without college degrees—are forced to endure a choice between the misery of being exploited by capitalists or the misery of not being exploited at all. And that’s no choice at all.

Cartoon of the day

Special mention

 

Mainstream economists after Brexit

Major events, when business as usual is disrupted, are perhaps the best test for ideas and the people who hold them. Do they have anything useful to offer, either by way of making sense of what happened or in terms of repairing the damage and imagining new possibilities?

We all know that mainstream economists failed miserably after the crash of 2007-08, when they offered little if anything to enhance our understanding of the causes of the crash (it wasn’t even a possibility in their models) or to chart a new path moving forward (the best they could come up with is the old debate between fiscal and monetary policy, while millions were forced into the unemployment lines and inequality resumed its grotesque upward trajectory). They spoke and wrote a great deal but the best they could offer was to keep calm and carry on. Everything, they claimed, would eventually be sorted out—without any major change in their theories or policy proposals.

More than seven years later and, as we know, nothing at all (except, perhaps, for the increasingly bloated finance sector) has been sorted out.

What about now, after Brexit? Once again, we find that mainstream economists have nothing to offer, either in terms of insight or a path moving forward.

Consider the example of the so-called Resiliency Authors, literally a who’s who of U.S. and European mainstream economists.* It’s no surprise they consider the United Kingdom’s choice to leave the European Union a mistake. Their dream, like that of most mainstream economists, was to lower trade barriers and expand the space of free markets. (They even have the temerity to assert all is well in the eurozone, as “economic health will eventually be restored, unemployment will decrease, and the periphery countries will regain competitiveness”). But the Brexit decision, they recognize, was made and now the only issue is “damage control.”

So, what do they offer? Basically, in their view, all the pieces (what they refer to as the financial “architecture”)—bank supervision and regulation, recapitalization funds, and so on—are already in place. All that is needed is “to make sure that the rules in place can be enforced.” As for the rest, their major concern is with high public debt—and, as with the problem of bank defaults, all they can imagine is “a combination of good rules and market discipline.”

That’s it. They exhibit no understanding that, after the debacles of Greece, Spain, and Portugal, not to mention the wrenching adjustments in Iceland, Ireland, and Italy (and, of course, the list could go on), and now with Brexit, the expanding space of private markets and corporate-led growth (which has now become, at best, corporate-led stagnation) is being called into question. No sense that a European Union without a vibrant Social Charter has no meaning, at least for the vast majority of ordinary Europeans. No idea that, their preferred combination of “good rules and market discipline” imposes all the costs of adjustment on European workers.

Once again, it seems, after business as usual has been disrupted—after the crash of 2007-08 and after Brexit—the best mainstream economists can come up with is. . .more business as usual.

 

*The list of signatories includes the following: Richard Baldwin, Charlie Bean, Thorsten Beck, Agnès Bénassy-Quéré, Olivier Blanchard, Peter Bofinger, Paul De Grauwe, Wouter den Haan, Barry Eichengreen, Lars Feld, Marcel Fratzscher, Francesco Giavazzi, Pierre-Olivier Gourinchas, Daniel Gros, Patrick Honohan, Sebnem Kalemli-Ozcan, Tommaso Monacelli, Elias Papaioannou, Paolo Pesenti, Christopher Pissarides, Guido Tabellini, Beatrice Weder di Mauro, Guntram Wolf, and Charles Wyplosz.

Cartoon of the day

Special mention

 

Representing the crash

The spectacular crash of 2007-08, once a public spectacle of economists, politicians, and bankers, is increasingly becoming a popular spectacle in art.

Alessandra Stanley reviews some of the recent films, TV series, and novels—from The Big Short through Billions to Opening Belle—that attempt to represent the causes and consequences of the worst crash since the Great Depression of the 1930s.

Americans are once again paying for the 2008 financial collapse.

This time, though, it’s willingly.

Entertainment industry executives and publishers say there is a growing audience for movies, plays, television shows and novels that address the misdeeds and systemic failures that brought the economy to the edge of collapse eight years ago.

I wonder what impact these projects will have on the current political campaign in the United States, where both parties are being forced to deal with widespread discontent over the real-world spectacle of growing inequality, Too Bigger to Fail banks, and more instability ahead.