Posts Tagged ‘Economist’

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Economic inequality in the United States and around the world is now so obscene, and has convinced more and more people to do something about it, that the business press has initiated a campaign to deny its very existence.

They and the folks they represent are losing the battle of public opinion. And they’ve decided to do whatever they can to turn things around.

First up was the Economist, the “newspaper” of record for liberal capitalism [ht: sk], claiming that new research undermines the pillars of the seemingly universal belief that “inequality has risen in the rich world.” Yes, as I have documented from the very beginning on this blog (e.g., here, here, and here), there are plenty of mainstream economists who have attempted to prove that inequality isn’t really a problem—either because it doesn’t really exist or, if it does, it’s not something we can or should do much about. And so the Economist managed to find pieces of research that call into question some of the key pillars of the inequality argument—that the gap between the top 1 percent and everyone else is growing, the middle-class is shrinking, capital is gaining at the expense of labor, and wealth inequality is soaring.

I won’t waste readers’ time repeating the arguments I’ve made on all four of those points over the past decade. You can use the search function at the top of the page to see what I and others have written on these issues—or look at the latest report from the Congressional Budget Office, which I discuss below.

What’s more interesting is where the Economist wants to take the discussion—away from wealth taxes (of the sort being proposed by Bernie Sanders and Elizabeth Warren) and toward the sorts of policies that, while they won’t lessen the degree of inequality, conform to the Economist‘s fantasy of liberal capitalism. Thus, they propose more building (so that young workers can afford housing), antitrust regulation (as if capitalism didn’t have an inherent tendency toward monopoly), less regulation of high-income professions (to create more competition for those high-paying jobs), and fewer restrictions on immigration (but only for “high-skilled” workers).

That’s the Economist’s derisory attempt to minimize the existence of inequality (against most of the available evidence and widespread belief) and to devise some tiny tweaks in existing economic arrangements (and avoid more serious efforts to lessen the degree of inequality).

The Wall Street Journal has also decided to confront the growing campaign against economic inequality—by attempting to show that Donald Trump’s administration has done more to decrease inequality than Barack Obama’s, by promoting economic growth through deregulation and increased business investment. Now, it’s true, Obama oversaw a bailout of Wall Street and a return (after a brief hiatus in 2009) to the same unequalizing trends that predated the Second Great Depression. So, that’s a very low bar to surpass.

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And even though the wages of low-income workers have been rising at a faster rate in recent quarters (the supposedly “happy wages of a growing economy”), it is still the case that the wage share of national income (as seen in the chart above) is still less than what it was in 2008 (when it was 44.9, compared to 43.2 in 2018) and far below its postwar peak in 1970 (at 51.6).

To rely on continued growth to solve the problem of inequality is simply a pipe dream, which is even less convincing than the castle in the air invented by the business press on the other side of the pond.

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The fact is, the Congressional Budget Office [pdf] projects that income in the United States—both before and after transfers and taxes—will be more unevenly distributed in 2021 than it was in 2016. That’s because, even though average incomes for the bottom four quintiles are expected to grow, incomes for the top quintile (and especially for the top 1 percent) are expected to grow even faster.

Thus, for example, since 1979, while the average incomes of the middle three quintiles are expected to grow (after transfers and taxes) by a total of 57 percent, the incomes of those in the top 1 percent are projected to increase by a whopping 281 percent by 2021.

There’s no other way around it: inequality in the United States is obscene, and something—much more than minor regulations and continued growth—needs to be done to overcome it.

As it turns out, Americans are fully aware of the problem. For example, according to Gallup, the overall opinion of capitalism held by young adults (both Millennials and Gen Zers) has deteriorated to the point that capitalism and socialism are tied in popularity.

And a new Reuters/Ipsos poll finds that nearly two-thirds of respondents agree that the very rich should pay more.*

Among the 4,441 respondents to the poll, 64% strongly or somewhat agreed that “the very rich should contribute an extra share of their total wealth each year to support public programs” – the essence of a wealth tax. Results were similar across gender, race and household income. While support among Democrats was stronger, at 77%, a majority of Republicans, 53%, also agreed with the idea.

Moreover, when asked in the poll if “the very rich should be allowed to keep the money they have, even if that means increasing inequality,” 54 percent of respondents disagreed.

That’s the reason the Economist and the Wall Street Journal have decided to launch their campaign about inequality—to attempt to undermine the widespread belief that inequality is growing and, even more, to challenge any and all efforts to actually do something to create a more equal economy and society.

Such a campaign may satisfy their readers, at least in the short run, but the problem itself will remain. This election year, I expect the growing gap between the tiny group at the top and everyone else to overshadow their shabby efforts and culminate in a movement they simply won’t be able to contain.

 

*Ironically, another recent attempt to undermine the Sanders-Warren proposals of new, higher wealth taxes actually serves to reinforce how extreme wealth inequality is in the United States. While admitting that “only a small segment of the population would be subject to the top rate,” the American Action Forum’s Douglas Holtz-Eakin and Gordon Gray [pdf] can only conclude that the taxes would have “broad impacts” only because the wealth holdings of that group “constitute a significant share of the investable wealth in the economy.”

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One of the consequences of Bernie Sanders’s campaign for president is that economists and economic ideas that are often overlooked or marginalized are making the news.

Consider, for example, Gerald Friedman [ht: ja], a University of Massachusetts Amherst economics professor.* He’s front-page news on CNN, and that’s because he has provided “the first comprehensive look at the impact of all of Sanders’ spending and tax proposals”—including spending on infrastructure and youth employment, increasing Social Security benefits, making college free, expanding health care and family leave, raising the minimum wage, and shifting income from the rich to the working-class through tax hikes on the wealthy and corporations.

“Like the New Deal of the 1930s, Senator Sanders’ program is designed to do more than merely increase economic activity,” Friedman writes. It will “promote a more just prosperity, broadly-based with a narrowing of economy inequality.”

Emmanuel Saez, Professor of Economics at the University of California, Berkeley, is also in the news, because of his research on tax rates. In a 2011 paper he wrote with Peter Diamond, Saez argued that, in order to achieve a fair distribution of the tax burden in the midst of rising inequality, very high earners should be subject to high and rising marginal tax rates on earnings. While the top income marginal tax rate on earnings today is about 42.5 percent, they estimate the optimal top tax rate (which would maximize tax revenue from top-bracket taxpayers) to be 73 percent, even higher than Sanders is currently proposing.

“My feel is that the reasoning behind Sanders’s tax plan is not so much tax revenue generation from top earners but rather make top tax rates so high so as to discourage ‘greed,’ defined broadly as extracting income at the expense of the rest of the economy as opposed to real productive behavior,” Mr. Saez wrote in an email. “I think pretax top incomes would finally start to decline.”

Friedman and Saez are economists who are never cited in the mainstream media. But their ideas are now receiving a public airing precisely because of Sanders’s extraordinary success in the current campaign.

 

*Here’s the appropriate disclaimer: I did my doctoral work at the University of Massachusetts Amherst, although Friedman was not there at the time. However, we have traded course syllabi and discussed how best to teach the first Great Depression.

Economist of the day

Posted: 13 December 2015 in Uncategorized
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I can’t say I was ever a big fan of the neoclassical institutionalism of the late Douglass North, 1993 Nobel Laureate (with Robert Fogel) in Economics.

However, this vignette, as related by Margaret Levi and Barry Weingast, does serve to distinguish him from most contemporary neoclassical economists:

Doug’s decision to become an economist was not straightforward. Much of his history is told elsewhere, but the crucial moment came when Dorothea Lange, his fellow photographer in the Farm Security Administration, and her husband, Paul Taylor, Doug’s economics professor, asked him to dinner on his return from World War II. Taylor urged his profession, and Lange, hers. We know who won.

We both have experiences with Doug North illustrating the intellectual curiosity that nourished his insights and genius. Margaret met him in 1974 when she was in her first weeks as an assistant professor at the University of Washington. He sought her out because he understood that she was a Marxist, and he wanted to relearn the Marxism he had studied as a youth. They hit it off and that began a life-long friendship that included Doug’s wife and editor, Elisabeth Case. Doug and Margaret founded an undergraduate political economy program and taught together for nearly 10 years.

It’s hard to imagine any mainstream economist today showing an interest in Marxian theory much less seeking out a colleague to learn it.

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Many faculty members in Texas are opposed to SB 11, also known as the “campus carry” law [ht: sm]. The law, which was signed in June by Texas Governor Greg Abbott, provides that license holders may carry concealed handguns in university buildings and classrooms, extending the reach of a previous law that allowed concealed handguns on university grounds.

One of them has now taken his opposition to the law a step further.

A longtime economics professor at the University of Texas at Austin is leaving the school, saying  the state’s new campus carry law — which makes it legal for some Texans to carry concealed handguns into college classrooms beginning next August — has “substantially enhanced” the chances of a shooting.

“With a huge group of students my perception is that the risk that a disgruntled student might bring a gun into the classroom and start shooting at me has been substantially enhanced by the concealed-carry law,” economics professor emeritus Daniel Hamermesh, who has been at UT since the mid-90s, wrote in a letter announcing his departure. “Out of self-protection I have chosen to spend part of next Fall at the University of Sydney, where, among other things, this risk seems lower.”

Here’s Fred Mishkin [ht: ra], an economist at the Columbia Business School and star of Charles Ferguson’s Inside Job, on the possibility of preventing a rerun of the 2008 financial crisis:

Frederic S. Mishkin, a former Fed governor, noted that financial firms tend to resist increased regulation, often with considerable success. “They’re going to hire a lot of lawyers to figure out how to get around these regulations and undermine them,” Mr. Mishkin, a Columbia University economist, said.

This is the same Mishkin who argued, in late 2011, it was necessary to regulate Too Big to Fail banks:

Too-big-to-fail is now a larger problem than before, in part because banks have merged in a way that creates even larger banking institutions and because, with the Fed bailout of Bear Stearns in March 2008 and then the financial assistance to AIG by the Fed and the U.S. Treasury in September of 2008, it has become clear that a much wider range of financial firms are likely to be considered “too big to fail” in the future. Indeed, the most prominent case of a firm that was not bailed out—Lehman Brothers in September 2008—was followed by such a severe crisis that it is unlikely that governments would let this happen again. In the wake of the Lehman failure, governments throughout the world bailed out or guaranteed all their major financial institutions.

One way to address the too-big-to-fail problem is to limit the size of fifinancial institutions, which might involve either the breakup of large fifinancial institutions and/or limits on what activities banking institutions can engage in. However, arbitrary limits on their size or activities might well decrease the effificiency or raise other risks in the fifinancial system. An alternative approach is to subject systemically important institutions to greater regulatory oversight, say by a systemic regulator. . ., or by imposing larger capital requirements for systemically important financial firms.

The Dodd–Frank financial reform bill passed in summer 2010 gives the federal government one more tool for dealing with systemically important financial companies. Before Dodd–Frank, the U.S. government only could take over individual banking institutions, but not fifinancial holding companies that own banks and other fifinancial institutions. (In other words, it could take over Citibank, but not Citigroup or a free-standing investment bank like Lehman Brothers.) It used to be that the government had only two alternatives with such fifirms: send them into bankruptcy or bail them out. Now, the federal government has “resolution authority” over such fifirms, which means that they can treat them as they would an insolvent bank. Critics have expressed concerns that this federal resolution authority will further entrench too-big-to-fail and so make the moral hazard problem worse. . . As with all regulatory authority, the devil will be in the details. But the new resolution authority is likely to help limit moral hazard because it gives the government a big stick to force systemically important financial institutions to desist from risk taking or to raise more capital—or else face a government takeover that imposes costs on managers and shareholders.

On one hand, according to Mishkin, we have Too Big to Fail banks, which are “now a larger problem than before,” that need to be regulated. On the other hand, also according to Mishkin, the banks will resist regulation by hiring a lot of lawyers “to get around these regulations and undermine them.”

So, why are we repeating the mistakes of the past, after the last great depression, when the banks were left with both the incentive and the means to evade and ultimately overturn the regulations?

Economists like Mishkin might even write that up in a working paper if only we paid them enough money.

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Like Jonathan Chait [ht: sm], I haven’t yet had the chance to work my way through the new book by Edward BaptistThe Half Has Never Been Told. Still, in reading about slavery over the years, from Eric Williams’s Capitalism and Slavery to Craig Steven Wilder’s Ebony & Ivy, it doesn’t surprise me that a scholarly work on the topic of American slavery would reveal that “the expansion of slavery in the first eight decades after American independence drove the evolution and modernization of the United States,” that the violence of slavery made it possible for the United States to become “a wealthy nation with global influence,” and that a combination of “survival and resistance. . .brought about slavery’s end.”

But apparently that argument was too much for the Economist (which, in recent decades, has become a British-edited business magazine for mostly American readers), which first published and then retracted its review of Baptist’s book.

Mr Baptist cites the testimony of a few slaves to support his view that these rises in productivity were achieved by pickers being driven to work ever harder by a system of “calibrated pain”. The complication here was noted by Hugh Thomas in 1997 in his definitive history, “The Slave Trade”; an historian cannot know whether these few spokesmen adequately speak for all.

Another unexamined factor may also have contributed to rises in productivity. Slaves were valuable property, and much harder and, thanks to the decline in supply from Africa, costlier to replace than, say, the Irish peasants that the iron-masters imported into south Wales in the 19th century. Slave owners surely had a vested interest in keeping their “hands” ever fitter and stronger to pick more cotton. Some of the rise in productivity could have come from better treatment. Unlike Mr Thomas, Mr Baptist has not written an objective history of slavery. Almost all the blacks in his book are victims, almost all the whites villains. This is not history; it is advocacy.

 

Update

For a different angle on the nexus between slavery and capitalism in the United States, one that focuses not just on how the slave plantation produced commodities that fueled the broader national economy but also how it generated innovative business practices that would come to typify modern management, see the piece by Sven Beckert and Seth Rockman:

As some of the most heavily capitalized enterprises in antebellum America, plantations offered early examples of time-motion studies and regimentation through clocks and bells. Seeking ever-greater efficiencies in cotton picking, slaveholders reorganized their fields, regimented the workday, and implemented a system of vertical reporting that made overseers into managers answerable to those above for the labor of those below.

The perverse reality of a capitalized labor force led to new accounting methods that incorporated (human) property depreciation in the bottom line as slaves aged, as well as new actuarial techniques to indemnify slaveholders from loss or damage to the men and women they owned. Property rights in human beings also created a lengthy set of judicial opinions that would influence the broader sanctity of private property in U.S. law.

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Special mention

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There’s probably a story here but, for the life of me, I don’t know what it is.

A nude portrait of University of Cambridge economics fellow Victoria Bateman [ht: ja] has gone on display in London’s Mall Galleries as part of an exhibition by the Royal Society of Portrait Painters. Commissioned by Bateman in celebration of her own birthday, the portrait was painted by Anthony Connolly.

Best I can tell, Bateman is an unremarkable economist (with an econometric paper [pdf] on grain prices in early modern Europe and a book, Markets and Growth in Early Modern Europe, on a related topic). And her own comments on the portrait are not particularly insightful (in terms of either the aesthetics of the painting itself or the context for exhibiting the portrait). But kudos to her for citing the work of Dobb, Hobsbawm, Brenner, and Wallerstein in her paper (since they’re rarely cited in mainstream economic history), and for having the courage to present her portrait to the public (how many academics, let alone academic economists, would have the nerve?).

As for myself, while there aren’t a lot of mainstream economists I’d like to see in the nude (whether represented in painting, photography, or some other artistic medium), I do think that, after the crises of 2007-08 and in the midst of the Second Great Depression, the lot of them should be disrobed and hung in a gallery.

The rogues gallery.

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The strength (in profits) is directly related to the weakness in hourly wages, which are still growing at just a 2% nominal pace. The weakness of wages and the resulting strength of profits are telling signs that the US labor market is still far from full employment. . .

The bottom line is that the favorable environment for corporate profits should persist for some time yet, and the case for an acceleration in the near term is strong. Hourly labor costs would need to grow more than 4% to eat into margins on a systematic basis. Such a strong acceleration still seems to be at least a couple of years off.

Jan Hatzius, chief U.S. economist at Goldman Sachs

 

 

This is an extended interview with Nobel Prize winner and MIT Professor Emeritus Robert M. Solow in which, among other things, he supports the view, recently enunciated by Pope Francis, that trickle-down economics “has never been confirmed by the facts.”

I’ll admit I have a soft spot in my heart for Solow, who wrote a letter to the President of the University of Notre Dame back in 2003 opposing the idea of splitting the existing Department of Economics into two separate departments: a Department of Economics and Econometrics (with the doctoral program and all new hires), and a Department of Economics and Policy Studies (with no participation in the doctoral program and no new hires). The latter department was dissolved in 2010.

Solow’s view?

“Economics, like any discipline, ought to welcome unorthodox ideas, and deal with them intellectually as best it can. To conduct a purge, as you are doing, sounds like a confession of incapacity.”