Posts Tagged ‘economists’

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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.”

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Apparently, the latest attempt to redefine the role of economists is to encourage them to be plumbers.

Maybe it’s just my age but, when I read plumbers, I immediately think of the covert Special Investigations Unit in the Nixon White House—the operation that began with attempting to stop the leak of classified information (such as the Pentagon Papers) and then branched into illegal activities while working for the Committee to Re-elect the President (including the Watergate break-in).

I don’t think that’s what MIT economist Esther Duflo (pdf) had in mind when, in her Ely Lecture to the American Economic Association meeting last month, she suggested that economists seriously engage with plumbing, “in the interest of both society and our discipline.”

As economists increasingly help governments design new policies and regulations, they take on an added responsibility to engage with the details of policy making and, in doing so, to adopt the mindset of a plumber. Plumbers try to predict as well as possible what may work in the real world, mindful that tinkering and adjusting will be necessary since our models gives us very little theoretical guidance on what (and how) details will matter.

I’ll admit, I have a lot of respect for plumbers (especially when they’re able to fix the mess I’ve made trying to repair an existing fixture or install a new one). And I do think anyone involved in designing new policies and regulations should learn more about how they are actually implemented.

But economists, especially mainstream economists (of the sort Duflo is speaking for and to), are the last people I’d call in to fix the policy plumbing. Me, I’d pay them a large sum of money to learn about how policy formulation and implementation actually works. And then I’d pay them even more not to get anywhere near the process.

I’d much prefer that others—from the people actually affected by the policies to representatives from other academic disciplines and areas (such as anthropology, labor studies, peace studies, and so on)—be the ones who actually engage with the details of policy-making.

A good example of why I would want mainstream economists to be kept as far as possible away from the process of policy and implementation is a recent piece by Laura Tyson and Susan Lund.*

Their view is that capitalist globalization has had “disruptive effects on millions of advanced-economy workers” (and, we should add, on millions of workers—peasants, wage-laborers, and others—in economies that are not so advanced) and has aggravated income inequality within countries. So far so good.

But then they assert, without evidence, that the main culprit is not how globalization has been carried out, but technological change, which “automates routine manual and cognitive tasks, while increasing demand (and wages) for highly skilled workers.”

And because they take technological change as a given (rather than a strategy on the part of employers to boost profits), they recommend that workers (who, they presume, have no say in the development and implementation of new technologies) are the ones who need to adapt.

advanced economies must help workers acquire the skills needed to fill high-quality jobs in the digital economy. Lifelong learning cannot just be a slogan; it must become a reality. Mid-career retraining must be made available not only to those who have lost their jobs to foreign competition, but also to those facing disruption from the continuing march of automation. Training programs should be able to impart new skills in a matter of months, not years, and they should be complemented by programs that support workers’ incomes during retraining, and that help them relocate for more productive work.

Now, it’s true, Tyson and Lund don’t spend any time on the plumbing of creating and implementing lifelong learning programs. But that’s not the problem. Even if they were good economic plumbers, we’d still end up with a situation in which employers set the agenda and workers are forced to have the freedom to scramble to try to keep up.

That’s the plumbing Tyson and Lund leave out of their analysis. It’s what keeps the extra value flowing from workers to their employers. And, if workers are no longer useful for creating that extra value, they’re simply flushed down the drain.

If and when mainstream economists are willing to talk about those parts of the economic system, I’ll be the first to invite them to join the plumbers’ union.

But only, until they prove they can analyze and fix the problem, as plumber apprentices.

 

*This is not to pick on Tyson and Lund. I could have chosen any one of an almost infinite number of essays on economic policy by mainstream economists I’ve read over the years. Theirs just happens to be the latest I’ve run across.

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Last year, as I reported the other day, I published over 800 new posts.

I’ve never done this before. However, I decided to look back over the year and choose one post for each month of 2016:

January—Liberal ideology

February—Who are the capitalists?

March—Yea, they’re angry!

April—Life among the liberal econ

May—Letting capitalism off the hook

June—Globalization, inequality, and imperialism

July—Trump and the Prosperity Gospel

August—The Mandibles and dystopian finance fiction

September—What about the white working-class?

October—Nobel economics—or why does capital hire labor?

November—Condition of the working-class in the United States

December—China syndrome

Enjoy!

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The stock-in-trade of neoclassical economists, like Harvard’s Gregory Mankiw, is that free markets are the most efficient way of allocating scarce resources. Therefore, they spend a great deal of time celebrating free markets, and criticizing any kind of regulation of or intervention into markets.

Rent control is a good example, one that is taught to thousands of undergraduate students every semester. According to Mankiw, when governments establish price ceilings on rental housing, they cause a shortage of rental units. In the short run (as in the chart on the left above), when the supply of rental housing is fixed, the shortage may be relatively small. But in the long run (as in the chart on the right above), when both the supply of and the demand for rental housing are more “elastic” (that is, more sensitive to changes in price), the shortage grows.

When rent control creates shortages and waiting lists, landlords lose their incentive to respond to tenants’ concerns. Why should a landlord spend money to maintain and improve the property when people are waiting to get in as it is? In the end, tenants get lower rents, but they also get lower-quality housing. . .

In a free market, the price of housing adjusts to eliminate the shortages that give rise to undesirable landlord behavior.

That’s the world according to neoclassical economic theory. And in reality?

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Philadelphia, the City of Brotherly Love—aka the nation’s poorest big city, and among the most racially segregated—according to Caitlin McCabe [ht: ja], “is increasingly becoming a renter’s haven.”

But what happens when too many renters, many of them higher-income, flood the market?

In cities such as Philadelphia, lower-income residents feel the squeeze. And it could be getting worse for them

A new study by the Federal Reserve Bank of Philadelphia shows that, as a result of gentrification, Philadelphia lost one-fifth of its low-cost rental-housing stock—more than 23,000 units renting for $750 a month or less—between 2000 and 2014.

Even more, the study found, the affordable housing that remains in the city is in danger, too—

since 20 percent of the city’s federally subsidized rental units will see their affordability restriction periods expire within the next five years. Of these rental units, more than 2,300 are in gentrifying neighborhoods.

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The short-term result of gentrification and the loss of low-cost rental housing is that Philadelphia is now the fifteenth-most-expensive rental city in the nation, with a median rent (for a one-bedroom apartment) of $1,400. In the long run, the shrinking stock of affordable housing leaves lower-income renters saddled with higher rent burdens, greater financial distress, and insecure housing arrangements, which combine to reinforce residential patterns that are already highly segregated by income and socioeconomic status.

As the Philadelphia Fed explains,

The pockets of gentrification in Philadelphia appear to reinforce these patterns in several ways. First, gentrifying neighborhoods become less accessible to lower-income movers, limiting their housing search to more distressed and less central neighborhoods. Vulnerable residents who remain in these upgrading neighborhoods often face higher housing costs and are less likely to see improvements in their financial health. In addition, vulnerable residents in neighborhoods that are in more advanced stages of gentrification may even become more likely to move out of these neighborhoods. Each of these consequences of gentrification reflects the impact of increasingly burdensome housing costs, driven by losses of both low-cost rental units and units with subsidized affordability.

The market for rental housing in Philadelphia is increasingly becoming a neoclassical economist’s dream—but a nightmare for low-income renters in the City of Brotherly Love.

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When it comes to artificial intelligence and automation, the current White House seems to want to have it both ways.

On one hand, it warns about the potentially unequalizing, “winner-take-most” effects of the economic use of artificial intelligence:

Research consistently finds that the jobs that are threatened by automation are highly concentrated among lower-paid, lower-skilled, and less-educated workers. This means that automation will continue to put downward pressure on demand for this group, putting downward pressure on wages and upward pressure on inequality. In the longer-run, there may be different or larger effects. One possibility is superstar-biased technological change, where the benefits of technology accrue to an even smaller portion of society than just highly-skilled workers. The winner-take-most nature of information technology markets means that only a few may come to dominate markets. If labor productivity increases do not translate into wage increases, then the large economic gains brought about by AI could accrue to a select few. Instead of broadly shared prosperity for workers and consumers, this might push towards reduced competition and increased wealth inequality.

But then it invokes, and repeats numerous times across the report, the usual mainstream economists’ nostrums about the “strong relationship between productivity and wages”—such that “with more AI the most plausible outcome will be a combination of higher wages and more opportunities for leisure for a wide range of workers.”

Except, of course, historically that has not been the case—certainly not in the United States.

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For example, from the early 1970s to the present, workers’ wages have not kept pace with increases in productivity. Not by a long shot. As is clear from the chart above, productivity since 1973 has risen much more than workers’ compensation—72.2 percent, compared to a paltry 9.2 percent.

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And while over the same period hours worked have in fact fallen, the decrease in the United States (a minuscule 5.6 percent) has been far less than the increase in productivity—and much less than in other countries, such as France (24 percent) and Germany (27.3 percent).

So, yes, whether the use of artificial intelligence leads to improvements for U.S. workers—in the form of higher wages and fewer hours worked—”depends not only on the technology itself but also on the institutions and policies that are in place.”

But the experience of the past four decades suggests it will not benefit the American working-class.

And there’s nothing to suggest that trend won’t continue—unless, of course, there is a radical change in economic institutions and policies, which allow workers to have much more of a say in the technologies that are adopted and how wages and hours are set.

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Back in 2010, Charles Ferguson, the director of Inside Job, exposed the failure of prominent mainstream economists who wrote about and spoke on matters of economic policy to disclose their conflicts of interest in the lead-up to the crash of 2007-08. Reuters followed up by publishing a special report on the lack of a clear standard of disclosure for economists and other academics who testified before the Senate Banking Committee and the House Financial Services Committee between late 2008 and early 2010, as lawmakers debated the biggest overhaul of financial regulation since the 1930s.

Well, economists are still at it, leveraging their academic prestige with secret reports justifying corporate concentration.

That’s according to a new report from ProPublica:

If the government ends up approving the $85 billion AT&T-Time Warner merger, credit won’t necessarily belong to the executives, bankers, lawyers, and lobbyists pushing for the deal. More likely, it will be due to the professors.

A serial acquirer, AT&T must persuade the government to allow every major deal. Again and again, the company has relied on economists from America’s top universities to make its case before the Justice Department or the Federal Trade Commission. Moonlighting for a consulting firm named Compass Lexecon, they represented AT&T when it bought Centennial, DirecTV, and Leap Wireless; and when it tried unsuccessfully to absorb T-Mobile. And now AT&T and Time Warner have hired three top Compass Lexecon economists to counter criticism that the giant deal would harm consumers and concentrate too much media power in one company.

Today, “in front of the government, in many cases the most important advocate is the economist and lawyers come second,” said James Denvir, an antitrust lawyer at Boies, Schiller.

Economists who specialize in antitrust — affiliated with Chicago, Harvard, Princeton, the University of California, Berkeley, and other prestigious universities — reshaped their field through scholarly work showing that mergers create efficiencies of scale that benefit consumers. But they reap their most lucrative paydays by lending their academic authority to mergers their corporate clients propose. Corporate lawyers hire them from Compass Lexecon and half a dozen other firms to sway the government by documenting that a merger won’t be “anti-competitive”: in other words, that it won’t raise retail prices, stifle innovation, or restrict product offerings. Their optimistic forecasts, though, often turn out to be wrong, and the mergers they champion may be hurting the economy.

Right now, the United States is experiencing a wave of corporate mergers and acquisitions, leading to increasing levels of concentration, reminiscent of the first Gilded Age. And, according to ProPublica, a small number of hired guns from economics—who routinely move through the revolving door between government and corporate consulting—have written reports for and testified in favor of dozens of takeovers involving AT&T and many of the country’s other major corporations.

Looking forward, the appointment of Republican former U.S. Federal Trade Commission member Joshua Wright to lead Donald Trump’s transition team that is focused on the Federal Trade Commission may signal even more mergers in the years ahead. Earlier this month Wright expressed his view that

Economists have long rejected the “antitrust by the numbers” approach. Indeed, the quiet consensus among antitrust economists in academia and within the two antitrust agencies is that mergers between competitors do not often lead to market power but do often generate significant benefits for consumers — lower prices and higher quality. Sometimes mergers harm consumers, but those instances are relatively rare.

Because the economic case for a drastic change in merger policy is so weak, the new critics argue more antitrust enforcement is good for political reasons. Big companies have more political power, they say, so more antitrust can reduce this power disparity. Big companies can pay lower wages, so we should allow fewer big firms to merge to protect the working man. And big firms make more money, so using antitrust to prevent firms from becoming big will reduce income inequality too. Whatever the merits of these various policy goals, antitrust is an exceptionally poor tool to use to achieve them. Instead of allowing consumers to decide companies’ fates, courts and regulators decided them based on squishy assessments of impossible things to measure, like accumulated political power. The result was that antitrust became a tool to prevent firms from engaging in behavior that benefited consumers in the marketplace.

And, no doubt, there will be plenty of mainstream economists who will be willing, for large payouts, to present the models that justify a new wave of corporate mergers and acquisitions in the years ahead.

 

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Are mainstream economists responsible for electing Donald Trump?

I think they deserve a significant share of the blame. So, as it turns out, does Dani Rodrick.

My argument is that, when mainstream economists in the United States embraced and celebrated neoliberalism—both the conservative and liberal versions—they participated in creating the conditions for Trump’s victory in the U.S. presidential election. As I see it, mainstream economists adopted neoliberalism as a set of ideas (about self-governing individuals and an economic system that needs to be understood and obeyed) and a political-economic project (on behalf of corporate bosses) and ignored the enormous costs, especially those borne by the majority of workers, their families, and the communities in which they live. And it was precisely the resentments generated by neoliberalism—which were captured, however imperfectly and in a cynical manner, by Trump’s campaign (and downplayed by Hillary Clinton’s, in the campaigns against both Bernie Sanders and Trump)—that many voters took to the polls one week ago.

Rodrick’s condemnation of mainstream economists is more specific: he focuses on the role that mainstream economists served as “cheerleaders” for capitalist globalization.*

It has long been an unspoken rule of public engagement for economists that they should champion trade and not dwell too much on the fine print. This has produced a curious situation. The standard models of trade with which economists work typically yield sharp distributional effects: income losses by certain groups of producers or worker categories are the flip side of the “gains from trade.” And economists have long known that market failures – including poorly functioning labor markets, credit market imperfections, knowledge or environmental externalities, and monopolies – can interfere with reaping those gains.

They have also known that the economic benefits of trade agreements that reach beyond borders to shape domestic regulations – as with the tightening of patent rules or the harmonization of health and safety requirements – are fundamentally ambiguous.

Nonetheless, economists can be counted on to parrot the wonders of comparative advantage and free trade whenever trade agreements come up. They have consistently minimized distributional concerns, even though it is now clear that the distributional impact of, say, the North American Free Trade Agreement or China’s entry into the World Trade Organization were significant for the most directly affected communities in the United States. They have overstated the magnitude of aggregate gains from trade deals, though such gains have been relatively small since at least the 1990s. They have endorsed the propaganda portraying today’s trade deals as “free trade agreements,” even though Adam Smith and David Ricardo would turn over in their graves if they read the Trans-Pacific Partnership.

This reluctance to be honest about trade has cost economists their credibility with the public. Worse still, it has fed their opponents’ narrative. Economists’ failure to provide the full picture on trade, with all of the necessary distinctions and caveats, has made it easier to tar trade, often wrongly, with all sorts of ill effects.

Rodrick is absolutely right: mainstream economists’ own models include at least some of the losses from trade—in terms of outsourced jobs, declining wages, and rising inequality—but, in their textbooks and public interventions, they routinely ignore those uenqual costs and take the position that globalization and free trade need to be celebrated, protected, and expanded. Lest they create an opening for the “barbarians” who, inside and outside the academy, are critical of the conditions and consequences of capitalist globalization.

Those of us who have been critical of free-trade agreements and the whole panoply of policies associated with globalization and neoliberalism (e.g., here and here) understand they’re not the sole or even main cause for the deteriorating condition the U.S. working-class has found itself in recent years and decades. Neoliberalism is not just globalization, as it includes a wide range of economic and social strategies and institutions that have boosted the bargaining power of employers vis-à-vis workers—from the adoption of labor-saving technologies through the growth of the financial sector to the privatization of public services and the social safety net.

But we also can’t ignore the correlation, since the early-1970s, between globalization (measured, in the chart above, by the sum of exports and imports as a percentage of U.S. GDP, which is the green line on the right-hand axis) and inequality (measured, in the same chart, by the percentage of income, including capital gains, going to the top 1 percent, on the left-hand axis). There are lots of economists, both everyday and academic, who understand that a tiny group at the top has captured most of the benefits of trade agreements and other measures that have allowed U.S. corporations to engage in increased international trade, both importing and exporting commodities that have boosted their bottom-line. Meanwhile, many American workers—such as voters in Pennsylvania, Ohio, Michigan, and Wisconsin—have lost jobs, faced stagnating wages, and suffered as their local communities have deteriorated.

However, mainstream economists, in their zeal to push globalization forward, ignored those problems and concerns. They thus paved the way and deserve a large part of the blame for Trump’s victory.

 

*Readers need to keep in mind that, when Rodrick refers to economists, he’s actually referring only to mainstream economists (which is the only group he seems to recognize). Other, so-called heterodox economists have never been so sanguine about the effects of neoliberalism or capitalist globalization.