Posts Tagged ‘economists’

humpty

Mainstream economics has clearly had a great fall.

Just two days ago, I argued that—after the crash of 2007-08 and, now, Brexit—mainstream economists have had “nothing to offer, either in terms of insight or a path moving forward.” Also recently, Antonio Callari challenged Brad DeLong’s attempt to reduce economics to the mainstream debate between supply-siders and demand-siders and his argument that there’s no room for economists as public intellectuals.

Now, Mark Thoma has stepped forward to explain why it is that “in recent years the public has lost faith the in the economics profession.” And since by the “economics profession” Thoma is essentially referring to mainstream economists, he’s absolutely correct.

One reason for the lack of faith is the failure to predict the Great Recession, but the public’s dismissal of macroeconomists is based upon more than the failure to foresee the dangers the housing bubble posed for the economy. It is also due to false promises about the benefits to the working class from globalization, tax cuts for the wealthy, and trade agreements – promises that were often used to support ideological and political goals or to serve special interests.

Even more, mainstream economists simply don’t have “a solid understanding of the mechanisms that drive the economy.”*

Therefore, in Thoma’s view, economists need to exercise more humility and flexibility:

more humility about what we do and do not know, more willingness to change our minds when the evidence disagrees with our favorite theoretical model, and the willingness to acknowledge disagreement within the profession. But most of all we need to take a strong stand against those inside and outside the profession who misuse economic theory and empirical results for political and ideological purposes.

I’m all in favor of theoretical humility and flexibility. I certainly do not hold to the idea that our processes of producing knowledge can, or even should aim to, give us access to a complete or definitive model of the world. And I’m quite willing to admit—against the pretensions of most mainstream economists—that all we have (and can have) are partial and local and incomplete knowledges, which themselves are always changing.

But, while a good start (given the arrogance and rigidity with which much mainstream economics has been and continues to be produced and disseminated), that’s not enough. The real challenge, it seems to me, is to go beyond that and criticize both the theoretical models utilized by mainstream economists and their self-identified status as scientists who are somehow outside and independent of the world of politics and ideology.

There are, according to all three of us (Callari, Thoma, and myself), good reasons why mainstream economists have fallen in the eyes of the public. And try as they might, it’s doubtful “All the king’s horses and all the king’s men” can or should put mainstream economics back together again.

What’s needed is a fundamentally different way of doing economics and of thinking about the role of economists—economic theories that focus on issues of power and class (instead of relegating them to the margins) and a conception of economists as real public intellectuals (who play “a galvanizing role in the production of public knowledge and policy, where ‘public’ means not just ‘for’ the public, the people, but also ‘of’ and ‘by’ the people”).

I recognize that’s a radically different way of defining economics compared to the mainstream tradition. But, as it turns out, it’s a move Humpty Dumpty himself would have recognized.

“The question is,” said Alice, “whether you can make words mean so many different things.”

“The question is,” said Humpty Dumpty, “which is to be master—that’s all.”

 

*Thoma’s list of issues on which mainstream economists simply don’t have answers includes the following:

  • Why has productivity fallen? Will it stay low in the future?
  • What has caused the decline in labor force participation?
  • How strong is the economy’s self-correction mechanism in recessions, and how does it work?
  • Is there a Phillips curve (i.e. a reliable relationship between inflation, inflation expectations, and unemployment)?
  • How are expectations formed, and do they converge to rational expectations over time?
  • What is more important in the determination of wage and capital shares of income, marginal products or bargaining power and other institutional features of labor markets?
  • What frictions should we focus on? Price and wage stickiness? Financial frictions? Both? How do these frictions vary over the business cycle?
  • How high can the minimum wage be raised before there are significant employment effects?
  • What is the cause of inequality? Is it baked into the capitalist system, or is it the result of political and institutional forces?

And, according to Thomas, “that’s nowhere near a complete list of the things we don’t fully understand. We don’t even agree about what caused the Great Recession.”

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American voters are clearly angry. At least it’s clear to me—for example, as reflected in the success of the Donald Trump and Bernie Sanders campaigns (and in the evident dissatisfaction with Hillary Clinton, Congress, and Wall Street).

But it’s not clear to many economists, who cite rising average incomes, a relatively low unemployment rate, and other aggregate indicators. For them, the economic situation is improving and there’s really no reason for Americans to be angry.*

And then there are the philosophers, like Martha Nussbaum, who think anger is itself morally bad.

You can be dignified, you can protest, you can say this is outrageous, but you don’t have to do it in a way that is angry or seeks payback.

But the fact is, even with slight improvements in the overall economic situation in recent years, many Americans remain financially stressed and are angry that most of the gains that have been achieved since 2009 have been captured not by them, but by a tiny group at the top.

The financial stress underlying the anger is evident in the latest Report on the Economic Well-Being of U.S. Households in 2015 issued by the Board of Governors of the Federal Reserve System (pdf).

The word cloud above is a good place to start. Each cloud includes the 75 most frequently observed words in the description of individuals’ challenges, with the size of the word reflecting its frequency. Thus, for example, among low-income respondents, “bills” and “money” are the most commonly reported words, while for those in the middle, the most common words are “insurance,” “health,” “money,” and “retirement.” For those earning more than $100,000, the emphasis shifts to worries about “retirement.”

The report offers plenty of additional evidence about the financial stress experienced by many Americans. For example, just under one-third of respondents report that they are either “finding it difficult to get by” (9 percent) or are “just getting by” (22 percent) financially. This represents approximately 76 million adults who are struggling to some degree to get by.

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And while individuals are 9 percentage points more likely to say that their financial well-being improved during the prior year than to say that their situation worsened, it is still the case that 46 percent of adults reveal they either could not cover an emergency expense costing $400, or would cover it by selling something or borrowing money.

That’s 46 percent! To cover a $400 expense!

So, although there’s been some improvement in recent years when looking at aggregate-level results for the U.S. population as a whole, the fact is most of the improvement has occurred at the top (especially for college-educated, white Americans). The rest of the population (black, white, Hispanic, without college degrees) continues to be financially squeezed. And it’s that difference—between improvement for a few and stress for everyone else—that means lots of Americans are angry right now. And, yes, they want payback.

The mainstream economists and politicians who say that people should not be angry, that they should be content with their lot, are wrong. So are the philosophers who argue that anger and the desire for payback are morally suspect.

As I see it, the American working-class is justifiably angry and they clearly want to see some kind of payback. The real questions are, who is standing in their way (and thus whom should they be angry at) and what kinds of fundamental changes in the economic system are necessary to improve their situation (and thus to achieve the appropriate payback)?

 

*To be fair, Jared Bernstein himself looks behind the aggregate numbers, which leads him to understand “why some people are unsatisfied with the economy and beyond. Growth hasn’t reached all corners by a long shot, and policymakers have too often been at best unresponsive to that reality and at worst, just plain awful.”

 

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We know that the so-called gig economy—in the form of such online platforms as Uber and Airbnb—offers more alternatives in terms of finding transportation and renting property. But it doesn’t overturn the unequalizing dynamics of contemporary capitalism. In fact, it probably makes things even more unequal.

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What about the online platforms for workers, like TaskRabbit and HourlyNerd? They, too, represent a new kind of freedom—and, at the same time, a new way for employers to take advantage of workers.

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A June 2015 report from the McKinsey Global Institute makes clear the advantages for employers: more output (by up to 9 percent), lower costs (by up to 7 percent), and higher profits (by up to 5.4 percent). The idea is that digital platforms enhance recruiting and personalize various aspects of talent management (including training, incentives, and career paths) in the case of high-skilled workers, and improve the screening and assessment of job candidates (thus allowing them to “make better predictions about candidates’ ability to perform tasks as well as the likelihood of their timeliness, reliability, and commitment”) for companies with large low-skilled workforces. It also makes it easier for employers to contract workers for particular projects and then let them go, until the next project (requiring a different group of workers) comes up. So, with better matching, screening, and flexibility, workers produce more, cost less, and create more profits for their employers.

It sounds like a dream come true for employers.* And it is!

The problem, of course, is to sell the new digital labor platforms to workers, both blue-collar and increasingly white-collar. Here’s how McKinsey does it:

Online talent platforms can bring a new dimension to profiles of individual workers: their soft skills, traits, and endorsements from colleagues and superiors. The accumulated ratings and feedback provided to contingent workers through online marketplaces could be valuable, particularly for young people with little other work experience as they seek permanent employment. Accumulating and codifying these reputational elements can help individuals distinguish themselves in the job market and can help employers identify people who are a better fit for the positions they are filling.

In other words, it’s all about freedom and control.

And that’s important to recognize, because capitalism does represent the birth of a new freedom—for example, compared to feudalism and slavery. Under feudalism, workers (serfs) were tied to their employers (lords) in order to gain access to land (and, if the serfs violated those ties, for instance by attempting to attach themselves to a different lord’s demense, there was always the blacklist). As for slavery, workers (slaves) were owned as human chattel by their employers (slaveowners) and could not work for anyone else unless they were rented or sold by their owners (and subject to torture if they didn’t work hard enough).

Capitalism, in contrast, means that workers own their ability to work and are free to sell it to any employer. But it also mean, because their ability to work isn’t worth anything to them unless they sell it to someone else for a wage or salary, workers are forced to have the freedom to sell their ability to work to another group, their employers. (And the employers, of course, appropriate the surplus those workers create—just as their predecessors did from their workers under feudalism and slavery.)

Nothing in the new digital platforms changes that. Workers are still forced to have the freedom to sell their ability to work (and to produce a surplus for someone else, or they won’t be hired). The only thing that’s changed is the amount of data and the kind of analytics that are available to their employers (concerning the positions employers are filling, the skills required, and the paths workers have followed in education or previous positions).

But workers beware: “As data collection and analysis become more sophisticated, users will have to be mindful that every online interaction can affect their professional reputation.” What’s new for workers is they’re now forced to have the freedom to also watch what they do online.

And that’s why workers—both on and off the job—are increasingly being turned into jack rabbits.

 

*It’s also the fulfillment of a dream for neoclassical economists, who in their models spend a great deal of time on issues of job search, screening, and matching—for them, when those issues are solved, the perfect labor market.

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A week ago, I noted the pushback against liberal mainstream economists’ attacks on Bernie Sanders’s plans and Gerald Friedman’s analysis of those plans.

The first set of attacks, as Bill Black explained, plumbed “new depths of moral obtuseness, arrogance, and intellectual dishonesty.”

More recently, Christina D. Romer and David H. Romer (pdf) have responded with a more detailed critique of Friedman’s calculations, which has led to additional gloating by Paul Krugman and more publicity to only one side of the debate in the pages of the New York Times.

But, fortunately, that didn’t end the debate.

James K. Galbraith reminded us that “all forecasting models embody theoretical views.”

All involve making assumptions about the shape of the world, and about those features, which can, and cannot, safely be neglected. This is true of the models the Romers favor, as well as of Professor Friedman’s, as it would be true of mine. So each model deserves to be scrutinized.

In the case of the models favored by the Romers, we have the experience of forecasting from the outset of the Great Financial Crisis, which was marked by a famous exercise in early 2009 known as the Romer-Bernstein forecast. According to this forecast (a) the economy would have recovered on its own, in full and with no assistance from government, by 2014, (b) the only effect of the entire stimulus package would be to accelerate the date of full recovery by about six months, and (c) by 2016, the economy would actually be performing worse than if there had been no stimulus at all, since the greater “burden” of the government debt would push up interest rates and depress business investment relative to the full employment level.

It’s fair to say that this forecast was not borne out: the economy did not fully recover even with the ARRA, and there is no sign of “crowding out,” even now. The idea that the economy is now worse off than it would have been without any Obama program is, to most people, I imagine, quite strange. These facts should prompt a careful look at the modeling strategy that the Romers espouse.

Mark Thoma, for his part, argues that, while he does not believe that “we can sustain 5% growth over the next eight years. In the short-run—over the next two to four years—the situation is different.”

I’m worried people will accept without question that the gap is small due to the pushback against Friedman’s analysis of the Sander’s plan, and that will justify policy passivity when we need just the opposite. So let’s stop arguing, put the policies we need in place, and push as hard as we can to increase employment until inflation reveals that we have, in fact, hit capacity constraints. Maybe that happens quickly, but maybe not and we owe it to those who remain unemployed, have dropped out of the labor force but would return, or took a job with lousy wages to try. People who had nothing to do with causing the recession have paid the costs for it, and if we experience a short bout of above target inflation I can live with that. We’ve been wrong about this before in the 1990s, and we may very well be wrong about this again.

Finally, there’s a much more mainstream supporter of the idea that it’s not technologically impossible to imagine “materially super-normal rates of growth in the coming four years”: former Minneapolis Federal Reserve President and University of Rochester economist Narayana Kocherlakota. His view is that “given current economic circumstances, demand-based stimulus is likely to be more effective than supply-based stimulus.”

Why? Because, as Kocherlakota explained elsewhere, labor’s share remains extremely low by historical standards. So, faster growth would serve to push the share of income going to labor back to their historical (pre-1990) ranges and thus boost economic growth above the so-called consensus among economists.

And that’s exactly the basis of Bernie Sanders’s economic plans and Friedman’s analysis : raising labor’s share via redistributive measures is a spur to faster economic growth and encouraging unemployed and underemployed workers to take decent, better-paying jobs will sustain those faster rates of economic growth.

As I’ve written before, that’s not so much a forecast of what will happen as a mirror that demonstrates how diminished are the expectations created by contemporary capitalism and the policies that continue to be put forward by liberal mainstream economists.

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Economists and economic commentators have started to push back against the attacks of liberal mainstream economists on Bernie Sanders’s economic proposals and the analysis of the consequences of those proposals by Gerald Friedman.

Here’s a quick rundown:

Matthew Klein notes that the “supposedly ‘extreme’ and ‘unsupportable’ forecast” that was part of Friedman’s analysis merely “implies American output will return to its previous trend just as Sanders would be finishing up his second term, in the third quarter of 2024.”

we have no insight into the macroeconomic effects of Sanders’s entire programme, which has lots of moving parts and would not just affect things like the quantity of infrastructure investment and the distribution of income, but also the incentives to work and take risks. Our point is a simple one: a prolonged period of rapid growth in the US is plausible, with the right policy mix. The burden of proof should be on those who say otherwise.

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David Dayen makes much the same point (that Friedman’s “economic growth numbers would simply eliminate the GDP gap that was created by the Great Recession and was never filled in the subsequent years of slow growth”) and then notes that the growth projections of some of the liberal critics (such as Laura Tyson, Christina Romer, Austan Goolsbee, and Alan Krueger) were themselves far off the mark.

Economist Jamie Galbraith (pdf), who was Executive Director of the Joint Economic Committee in 1981-82, agrees that “skepticism about standard forecasting methods is perfectly reasonable” but then observes that Friedman’s methods are actually pretty mainstream.

It is not fair or honest to claim that Professor Friedman’s methods are extreme. On the contrary, with respect to forecasting method, they are largely mainstream. Nor is it fair or honest to imply that you have given Professor Friedman’s paper a rigorous review. You have not.

What you have done, is to light a fire under Paul Krugman, who is now using his high perch to airily dismiss the Friedman paper as “nonsense.” Paul is an immensely powerful figure, and many people rely on him for careful assessments. It seems clear that he has made no such assessment in this case. . .

Let’s turn, finally, to the serious question. What does the Friedman paper really show? The answer is quite simple, and the exercise is – while not perfect – almost entirely ordinary.

What the Friedman paper shows, is that under conventional assumptions, the projected impact of Senator Sanders’ proposals stems from their scale and ambition. When you dare to do big things, big results should be expected. The Sanders program is big, and when you run it through a standard model, you get a big result.

Finally, economist Joshua Mason makes five main points about Friedman’s analysis of of the results one might expect from Sanders’s programs.

First, conventional wisdom in economics is that an exceptionally deep recession should be followed by a period of exceptionally strong growth. Second, the growth in output and employment implied by the paper are more or less what is required to return to the pre-recession trend. Third, discussions of macroeconomic policy in other contexts imply the possibility of growth qualitatively similar to what Jerry describes. Fourth, it is not necessarily the case that the employment Jerry projects would exceed full employment in any meaningful sense. Fifth, if you don’t believe a growth performance at this level is possible, that implies a sharp slowdown in potential output, for which you need a credible story.

In Mason’s view, the fifth point is the most important. And the bottom line is this:

Ten years ago, the CBO expected GDP to be $20.5 trillion (correcting for inflation) as of the end of 2015. Today, it is $18.1, trillion, or about 12 percent lower. Similarly, the employment-population ratio fell by 5 points during the recession (from 63.4 to 58.4 percent) and has risen by only one point during the past six years of recovery. Either these facts — unprecedented in the postwar period — reflect a shortfall of effective demand, or they don’t. If they do reflect a lack of demand, then there is no reason the expanded pubic spending and downward redistribution that Sanders proposes cannot close the gap, with a period of high growth while output and employment return to trend. (The fact that such high growth hasn’t been seen in the postwar period is neither here nor there, since there also has been no comparable deviation from trend.) Alternatively, you may think that the shortfall relative to previous growth rates reflects a decline in potential output. But then you need to offer some explanation of why the growth of the economy’s productive capacity slowed so abruptly, and you need to apply this belief consistently. I think it’s more reasonable to believe that the gaps in output and employment reflect a demand shortfall. In which case, the Sanders plan could in principle have the kind of results Friedman describes.

As for myself, I believe there is a debate worth having—which, alas, the liberal mainstream critics are attempting to shut down.

If however we let that debate unfold, it will show that contemporary capitalism produces a grotesquely unequal distribution of income, a crumbling physical and social infrastructure, inadequate healthcare, heavily indebted college students, a Too Big to Fail financial sector that threatens another collapse, and slow rates of growth that simply cannot employ the U.S. working-age population.

All that Sanders’s proposals and Friedman’s analysis demonstrate is how far we’ve fallen and what it would take for the United States to reverse those disturbing trends.

Yesterday, I wrote about the attacks of liberal mainstream economists on Bernie Sanders and one of his economic advisers, Gerald Friedman.

Today, Neil Irwin tries to explain why the “liberal wonkosphere has a problem with Bernie Sanders.”

there may be something broader going on here beyond the specific disagreements about growth assumptions, or cost savings from a single-payer health system, or how to regulate the financial system.

Behind closed doors, among the left-of-center policy types who populate the congressional offices, executive agencies and think tanks of Washington, I’ve seen enough eye rolls when Mr. Sanders’s name comes up to suspect something more tribal is going on.

The wonkosphere vs. Bernie clash is not just a story of center-left versus left-left. It is also a clash between those who have been in the trenches of trying to make public policy for the last seven years versus those who can exist in a kind of theoretical world of imagining what public policy ought to be.

That’s pretty much what I argued yesterday: “The liberal mainstream economists who are now attacking Sanders and Friedman seem to be taking it personally, as if their monopoly on analysis and policy has been challenged.”

Irwin concludes by asserting that Sanders needs to mend “fences with left-of-center policy wonks.”

Alternatively, liberal mainstream economists might want to put aside their delicate sensibilities and, to invoke a saying from a time when a similar standoff between liberals and radicals took place, stop being part of the problem and start being part of the solution.

Inequality

Mainstream economists have gotten much better estimating the obscene levels of inequality that exist today. But imagining equality? They still find that almost impossible.

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Emmanuel Saez, Gabriel Zucman, and Thomas Piketty have been at the forefront of estimating the extraordinary growth of inequality that has taken place since the late-1970s and early-1980s in the United States—when incomes for the top 10 percent grew about three times as fast as those of the bottom 90 percent, thus reversing the trend of more than three decades of the postwar period when they grew at roughly the same rate.

But then, when the BBC asked mainstream economists about the effect inequality has on growth and prosperity, well, they just can’t get themselves to imagine an equal or even a substantially less unequal distribution of income.

Deirdre McCloskey, of course, is very relaxed about inequality “as long as it’s not force or fraud that caused it.” Jared Bernstein, for his part, just wants a better balance between productivity and incomes for middle-class families. And then there’s Jonathan Ostry, who is worried about opportunity and not inequality, and Branko Milanovic, who think we need inequality to provide incentives.

And there, in one package, we have all the ways mainstream economists demonstrate their long-held justification of inequality and their profound inability to imagine an equal distribution of income. Basically, for them, inequality is not a problem and equality is not the goal—because capitalism alone is capable of producing growth (McCloskey); even the levels of inequality we saw in the late-1970s (when the top 1 percent captured about 10 percent of all income) are too high a goal (Bernstein); inequality is not a problem as long as there are “adequate opportunities for the less well-off in society” (Ostry); and, finally, because inequality has always existed (Milanovic).

Milanovic, at least, imagines there might be problems down the road:

“If the gaps keep on increasing as they’ve increased in the last 20 years, you would end up with two types of societies within a single country. If there is no sufficient middle class and if the poor really are very far from the rich, then you really cannot speak of a single society.

“We could end up with a kind of a global plutocracy, this global one per cent or even half a per cent that are very similar among themselves, but really belong to different nations.”

But, basically, all of them, along with most other mainstream economists, take the world as it is—based on capitalist commodity production—as normal, such that inequality is either benign (it’s what we get in exchange for more stuff) or necessary (as the condition for getting people to work).

And they simply can’t imagine anything like what the rest of us envision: a world in which we have eliminated the obscene levels of inequality that current economic arrangements are creating.