Posts Tagged ‘economics’

Trumponomics

Posted: 22 March 2017 in Uncategorized
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TRUMPONOMICS

Part 1 of the Real-World Economics Review on the causes and consequences of Trumponomics is now available.

Here is the direct link to my own contribution, “Class and Trumponomics” (pdf).

Part 2, with additional essays on Trumponomics, will be available next week.

And both issues will combined for a book that will be published in late April.

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One of the courses I’m offering this semester is A Tale of Two Depressions, cotaught with one of my colleagues, Ben Giamo, from American Studies. It’s a comparison of the conditions and consequences of the two major crises of capitalism during the past hundred years, the 1930s and the period after the crash of 2007-08.*

It just so happens the Guardian is also right now revisiting the 1930s. Readers will find lots of interesting material, from some evocative street photography from the period (including bread lines, hunger marches, and various protests) to classics of political theater (from Bertolt Brecht and Federico García Lorca to John Dos Passos and Clifford Odets).

I’ve been writing about the Second Great Depression, in mostly economic terms, since 2010. For the Guardian, the idea is that the situation then, in the 1930s, offers lessons for us today—partly for economic reasons but, increasingly, given the victory of Donald Trump and the growth of other right-wing populist-nationalist movements in Europe, in political terms.

Larry Elliott focuses on the economics. Unfortunately, he makes the mistake many commit, by starting with the stock-market crash of 1929—which, as it turns out, was the trigger, but not the cause, of the First Great Depression. He does a much better job examining the different responses to the two precipitating crashes (yes, there were lessons were learned, especially in the United States, with the quick bailout of Wall Street), including identifying those who were left out of the post-2009 recovery.

Wage increases have been hard to come by, and the strong desire of governments to reduce budget deficits has resulted in unpopular austerity measures. Not all the lessons of the 1930s have been well learned , and the over-hasty tightening of fiscal policy has slowed growth and caused political alienation among those who feel they are being punished for a crisis they did not create, while the real villains get away scot-free . A familiar refrain in both the referendum on Brexit and the 2016 US presidential election was: there might be a recovery going on, but it’s not happening around here. . .

The winners from the liberal economic system that emerged at the end of the cold war have, like their forebears in the 20s, failed to look out for the losers. A rising tide has not lifted all boats, and those who do not consider themselves the beneficiaries of globalisation have grown weary of hearing how marvellous it is.

The 30s are proof that nothing in economics is inevitable. There was eventually a backlash against the economic orthodoxies and Skidelsky can see why there is another backlash happening today. “Globalisation enables capital to escape national and union control. I am much more sympathetic since the start of the crisis to the Marxist way of analysing things.

And then, of course, there’s the political backlash, the topic of the most recent piece in the series. Jonathan Freedland begins by noting the differences between the two periods: the fact that ultra-nationalist and fascist movements managed to seize power in Germany, Italy, and Spain in the 1930s, which has not (yet) happened in the more recent period. Trump, for example, has criticized the media but has not (yet) closed any sites down. Nor has he suggested Muslims wear identifying symbols.

These are crumbs of comfort; they are not intended to minimise the real danger Trump represents to the fundamental norms that underpin liberal democracy. Rather, the point is that we have not reached the 1930s yet. Those sounding the alarm are suggesting only that we may be travelling in that direction – which is bad enough.

There are other warning signs, which suggest closer parallels between the 1930s and today: the shattering of the faith in globalization’s ability to spread the wealth, the growing hostility to those deemed outsiders, and a growing impatience with the rule of law and with democracy. Then, as now, capitalism faces a profound crisis of legitimacy.

In the end, Freedland takes comfort in our having a memory of the 1930s: “We can learn the period’s lessons and avoid its mistakes.” What he fails to acknowledge, however, is that economic and political elites in the 1930s also had vivid memories—of the great crashes of 1873 and 1893 and, of course, the horrors of the “war to end all wars.” But those events were forgotten amidst more short-run memories, including their joining to put down workers’ actions, including the widespread attacks after the 1926 general strike led by the Trades Union Congress in England and the anti-union “American Plan” during the 1920s on the other side of the Atlantic.

The more or less inevitable result in both countries was growing inequality, as large corporations and a tiny group of wealthy individuals at the top managed to capture a larger and larger share of national income—thus creating a financial bubble that eventually crashed, in 1929 just as in 2007-08.

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The memory of the 1929 crash certainly didn’t prevent the most recent one, nor did it create a recovery that has benefited the majority of the population. In fact, it seems the only lesson learned was how it might be possible, in recent years, for those at the top to recovery more quickly than they managed to do after the First Great Depression what they had lost.

It’s that rush to return to business as usual, characterized by obscene levels of inequality, and not the lack of memory of the 1930s, that has created the conditions for the growth and strengthening of populist, right-wing movements in the United States and Europe.

 

*As is my custom, the syllabus is publicly available on the course web site. Readers might find the large collection of additional materials—music, charts, videos, and so on—of interest. They can be found by following the News link.

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Millions of workers have been displaced by robots. Or, if they have managed to keep their jobs, they’re being deskilled and transformed into appendages of automated machines. We also know that millions more workers and their jobs are threatened by much-anticipated future waves of robotics and other forms of automation.

But mainstream economists don’t want us to touch those robots. Just ask Larry Summers.

Summers is particularly incensed by Bill Gates’s suggestion that we begin taxing robots. So, he trots out all the usual arguments, hoping that at least one of them will stick. It’s hard to distinguish between robots and other forms of automation. Robots and other forms of automation produce better goods and services. And, of course, automation enhances productivity and leads to more wealth. So, we shouldn’t do anything to shrink the size of the economic pie.

This last point has long been standard in international trade theory. Indeed, it is common to point out that opening a country up to international trade is just like giving it access to a technology for transforming one good into another. The argument, then, is that since one surely would not regard such a technical change as bad, neither is trade, and so protectionism is bad. Mr Gates’ robot tax risks essentially being protectionism against progress.

Progress, indeed.

What mainstream economists like Summers fail to understand is that not touching the robots—or, for that matter, international trade—means keeping things just as they are. It means keeping the decisions about jobs, just like the patterns of international trade, in the hands of a small group of employers. They’re the ones who, under current circumstances, appropriate the surplus and decide where and how jobs will be created—and, of course, where they will be destroyed. Which, as I explained last year, is exactly how international trade takes place.

And because employers, now and as Summers would like to see the world, are the ones who are allowed to retain a monopoly over jobs and trade, they also decide how the economic pie is distributed and redistributed. Tinkering around the edges—with the usual liberal shibboleths about the need for “education and retraining”—doesn’t fundamentally alter the fact that workers remain subject to decisions about technology and trade in which they have no say. Workers are thus forced to have the freedom to adjust, with more or less government assistance, to decisions taken by their employers.

And to sit back and admire, but not touch, the growth in productivity.*

 

*And that’s pretty much what Brad DeLong also recommends in making, for the umpteenth time, the argument that today, the world’s population is, on average, many times richer than it was during the long preceding age—because both average wealth and consumer choice have increased. Delong, like Summers, doesn’t want us to touch the “innovations that have fundamentally transformed human civilization.”

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It comes as no surprise, at least to most of us, that corporations are getting larger and increasing their share in many different industries. We see it everyday—when we buy plane tickets or try to take out a loan or just make a purchase at a retail store.

We know it. And now, it seems, economists and the business press have finally taken notice.

According to recent research by Gustavo Grullon, Yelena Larkin, and Roni Michaely,

More than 75% of US industries have experienced an increase in concentration levels over the last two decades. Firms in industries with the largest increases in product market concentration have enjoyed higher profit margins, positive abnormal stock returns, and more profitable M&A deals, which suggests that market power is becoming an important source of value. In real terms, the average publicly-traded firm is three times larger today than it was twenty years ago.

That’s right. As Figures 1-A and 1-B above show, the level of concentration (measured by the Herfindahl-Hirschman Index) has been steadily increasing over the course of the past twenty years, together with a decrease in the number of public firms.

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And the average size of firms, as shown in Figure 1-C, has also been growing.

The business press may have changed the language—they like to refer to such corporations as “superstar firms”—but the problem remains the same: corporations are growing larger, both absolutely and relative to the industries in which they operate.

What mainstream economists and the business press won’t acknowledge is those tendencies have existed since capitalism began. The neoclassical fantasy of perfect competition was only ever that, a fantasy.

Certainly one mid-nineteenth-century critic of both mainstream economic theory and capitalism understood that:

Every individual capital is a larger or smaller concentration of means of production, with a corresponding command over a larger or smaller labour-army. Every accumulation becomes the means of new accumulation. With the increasing mass of wealth which functions as capital, accumulation increases the concentration of that wealth in the hands of individual capitalists, and thereby widens the basis of production on a large scale and of the specific methods of capitalist production. The growth of social capital is effected by the growth of many individual capitals. All other circumstances remaining the same, individual capitals, and with them the concentration of the means of production, increase in such proportion as they form aliquot parts of the total social capital. At the same time portions of the original capitals disengage themselves and function as new independent capitals. Besides other causes, the division of property, within capitalist families, plays a great part in this. With the accumulation of capital, therefore, the number of capitalists grows to a greater or less extent. Two points characterise this kind of concentration which grows directly out of, or rather is identical with, accumulation. First: The increasing concentration of the social means of production in the hands of individual capitalists is, other things remaining equal, limited by the degree of increase of social wealth. Second: The part of social capital domiciled in each particular sphere of production is divided among many capitalists who face one another as independent commodity-producers competing with each other. Accumulation and the concentration accompanying it are, therefore, not only scattered over many points, but the increase of each functioning capital is thwarted by the formation of new and the sub-division of old capitals. Accumulation, therefore, presents itself on the one hand as increasing concentration of the means of production, and of the command over labour; on the other, as repulsion of many individual capitals one from another.

This splitting-up of the total social capital into many individual capitals or the repulsion of its fractions one from another, is counteracted by their attraction. This last does not mean that simple concentration of the means of production and of the command over labour, which is identical with accumulation. It is concentration of capitals already formed, destruction of their individual independence, expropriation of capitalist by capitalist, transformation of many small into few large capitals. This process differs from the former in this, that it only presupposes a change in the distribution of capital already to hand, and functioning; its field of action is therefore not limited by the absolute growth of social wealth, by the absolute limits of accumulation. Capital grows in one place to a huge mass in a single hand, because it has in another place been lost by many. This is centralisation proper, as distinct from accumulation and concentration.

Those of us who have actually read that text are not at all surprised by the contemporary reemergence of the concentration and centralization of capital. We have long understood that the forces of competition within capitalism create both the incentive and the means for individual firms to grow in size and to drive out other firms, thus leading to the concentration of capital. The availability of large amounts of credit and finance only makes those tendencies stronger.

And the limit?

In a given society the limit would be reached only when the entire social capital was united in the hands of either a single capitalist or a single capitalist company.

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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”

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Noah Smith is right about one thing: mainstream economists tend to use the word “capital” pretty loosely.

It just means “anything you can spend resources to build, which lasts a long time, and which also can be used to produce value.” That’s really broad. For example, it could include society itself. It also typically includes “human capital,” which refers to people’s skills, talents, and knowledge.

But then Smith proceeds, like the neoclassical equivalent of Humpty Dumpty, to make his definition of human capital the master—because, in his view, “it helps to convey some important truths about the world.”

Human capital, as I’ve explained in some detail before, is a profoundly misleading concept.

I don’t want to repeat those arguments here. But I do want to make two additional points.

First, if Smith wants to invoke human capital to say “education and skills are a form of wealth,” then why not include other ways people are able to earn more or less than their counterparts? Why not, for example, go beyond his reference to credentials (he has a Stanford degree) and intellectual abilities (apparently, he can do math well and write well) and refer to some of the other important ways people are sorted out within existing economic relations. I’m thinking of such things as gender, race and ethnicity, immigration status, and so on. They’re all ways workers are able to receive more or less income that have nothing to do with the effort they put into their jobs. Does Smith want to argue that masculinity, whiteness, and native birth are forms of human capital?

No, I didn’t think so.

Second, there’s the issue of capital itself. When capital is treated as a thing (which is what one finds in Smith’s account, as in most versions of mainstream economics), then it’s possible to forget about or overlook the historical and social conditions necessary for those things to operate as capital. Buildings, machinery, and raw materials, robots and computer software, even skills, talents, and knowledge—they only operate as capital within particular economic relations. Only when workers are forced to have the freedom to sell their ability to work to a small group of employers, only then does capital become a means to extract surplus labor from those workers. Once appropriated, that surplus labor then assumes a variety of different, seemingly independent forms—from capitalist profits to land rents, including payments to merchants and finance, the super-profits of oligopolies, taxes to the state, and, yes, the salaries of CEOs and supervisors.

But those payments are not “returns” to independent forms of capital, human or otherwise. They’re all distributions of the surplus-value that both presume and produce the conditions under which laborers work not for themselves, but for their capitalist employers.

They, and not the various meanings neoclassical economists attribute to capital, are the real masters.

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Mainstream economics presents quite a spectacle these days. It has no real theory of the firm and, even now, more than nine years after the Great Recession began, its most cherished claim to relevance—the use of large-scale forecasting models of the economy that assume people always behave rationally—is still misleading policymakers.

As if that weren’t embarrassing enough, we now have a leading mainstream economist, Havard’s Martin Feldstein, claiming that the “official data on real growth substantially underestimates the rate of growth.”

Mr. Feldstein likes to illustrate his argument about G.D.P. by referring to the widespread use of statins, the cholesterol drugs that have reduced deaths from heart attacks. Between 2000 and 2007, he noted, the death rate from heart disease among those over 65 fell by one-third.

“This was a remarkable contribution to the public’s well-being over a relatively short number of years, and yet this part of the contribution of the new product is not reflected in real output or real growth of G.D.P.,” he said. He estimates — without hard evidence, he is careful to point out — that growth is understated by 2 percent or more a year.

This is not just a technical issue for Feldstein:

it is misleading measurements that are contributing to a public perception that real incomes — particularly for the middle class — aren’t rising very much. That, he said, “reduces people’s faith in the political and economic system.”

“I think it creates pessimism and a distrust of government,” leading Americans to worry that “their children are going to be stuck and won’t be able to enjoy upward mobility,” he said. “I think it’s important to understand this.”

Here’s what folks need to understand: mainstream economists like Feldstein, who celebrate an economic system based on private property and free markets, build and use models in which market prices capture all the relevant costs and benefits to society. And, since GDP is an accounting system based on adding up transactions of goods and services based on market prices, for mainstream economists it should represent an accurate measure of the “public’s well-being.”

Mainstream economists can’t have it both ways—either market prices do accurately reflect social costs and benefits or they don’t. If they do, then Feldstein & Co need to stick with the level and rate of growth of GDP as the appropriate measure of the wealth of the nation. And, if they don’t, all their claims about the wonders of free markets simply dissolve.

Notice also that, for Feldstein, the problem is always in one direction: GDP statistics only undercount social well-being. What he and other mainstream economists fail to consider is that whole sectors of the economy, like financial services (or, more generally, FIRE, finance, insurance, and real estate), are counted as adding to national income.

As Bruce Roberts has explained,

because “financial services” are deemed useful by those who pay for them, those services must be treated as generators in their own right of value and output (even though there is nothing there that can actually be measured as output at all). . .

the standard (neoclassical) approach embedded in GDP accounting means, in concrete terms, that profits in FIRE must be treated as a reflection of rising real output generated by FIRE activities, requiring a numerical “imputation” of greater GDP. And, worse, that *rising* profits in FIRE then go hand in hand with *rising* levels of imputed “output” and hence enhanced “productivity.”

If Wall Street doesn’t add to GDP—if FIRE activities just represent transfers of value from other economic sectors (both nationally and internationally)—then its resurgence in the years since the crash doesn’t contribute to output or growth.

The consequence is that GDP, as it is currently measured, actually overcounts national output and income. Actual growth during the so-called recovery is much less than mainstream economists and politicians would have us believe.

That’s the real reason many Americans are worried they and “their children are going to be stuck and won’t be able to enjoy upward mobility.”