Posts Tagged ‘economists’

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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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According to recent news reports, Kevin Hassett, the State Farm James Q. Wilson Chair in American Politics and Culture at the American Enterprise Institute (no, I didn’t make that up), will soon be named the head of Donald Trump’s Council of Economic Advisers.

Yes, that Kevin Hassett, the one who in 1999 predicted the Down Jones Industrial Average would rise to 36,000 within a few years.

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Except, of course, it didn’t. Not by a long shot. The average did reach a record high of 11,750.28 in January 2000, but after the bursting of the dot-com bubble, it steadily fell, reaching a low of 7,286 in October 2002. Although it recovered to a new record high of 14,164 in October 2007, it crashed back to the vicinity of 6,500 by the early months of 2009. And, even today, almost two decades later, it’s only just cracked the 20,000 barrier.

But, no matter, mainstream economists and pundits—like Greg Mankiw, Noah Smith, and Tim Worstall—think Hassett is a great choice.

Perhaps, in addition to his Dow book, they want to place the rest of Hassett’s writings on an altar.

Like Hassett’s claim (which I discuss here) that “lowering corporate taxes is the only real cure for wage stagnation among American workers.”

Or his other major claim (which I discuss here), that poverty and inequality in the United States are merely figments of our imagination.

Let’s focus on that last claim. As regular readers of this blog know, income inequality—whether measured in terms of fractiles (e.g., the 1 percent versus everyone else) or classes (e.g., profits and wages)—has been increasing for decades now. But for conservative economists like Hassett (who was an economic adviser to Mitt Romney before being a candidate to join the Trump team), inequality has not been growing and poor people are actually much better off than they and the rest of us normally think. What they do then is substitute consumption for income and argue that consumption inequality has actually not been growing.

So, what’s the big problem?

But even in terms of consumption they’re wrong. As Orazio Attanasio, Erik Hurst, Luigi Pistaferri have shown, once you correct for the measurement errors in the Consumer Expenditure Survey (which Hassett and his coauthor, Aparna Mathur, don’t do), and bring in other sources of consumption information (including the well-regarded Panel Study of Income Dynamics), consumption inequality has increased substantially in recent decades—more or less at the same rate as inequality in the distribution of income.

Overall, our results suggest that there has been a substantial rise in consumption and leisure inequality within the U.S. during the last 30 years. The rise in income inequality translated to an increase in actual well-being inequality during this time period because consumption inequality also increased.

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And, remember, that doesn’t take into account other forms of inequality, such as the increase in the unequal distribution of wealth, which has exploded in recent decades. The poor and pretty much everyone else—the 90 percent—are being left behind.

It’s the spectacular grab for income, consumption, and wealth by the small group at the top that Hassett and the new administration will be trying to protect.

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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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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.