Neoliberalism — an oversold ideology

May 25, 2017 1 comment

from Lars Syll

So what’s wrong with the economy? …

austerity_world_tour_greeceA 2002 study of United States fiscal policy by the economists Olivier Blanchard and Roberto Perotti found that ‘both increases in taxes and increases in government spending have a strong negative effect on private investment spending.’ They noted that this finding is ‘difficult to reconcile with Keynesian theory.’

Consistent with this, a more recent study of international data by the economists Alberto Alesina and Silvia Ardagna found that ‘fiscal stimuli based on tax cuts are more likely to increase growth than those based on spending increases.’

Greg Mankiw

From Mankiw’s perspective ‘the Alesina work suggests a still plausible hypothesis.’

Hmm …   Read more…

Making corporate taxes great again

from David Ruccio

fredgraph (1)

I continue to maintain that Congressional Republicans will stick with President Donald Trump until they get their favorite policies enacted—or until Trump’s missteps and declining popularity stand in the way of their getting what they want.

And one of the things they want is tax reform—specifically, a cut in corporate taxes.

Here’s the problem: U.S. corporations aren’t taxed too heavily. They’re taxed too little.

As is clear from the chart above, corporate profits (as a percentage of GDP) have risen dramatically since the mid-1980s—from 5.8 percent in 1985 to 11.8 percent in 2016.  Read more…

Econometrics? Keep it very simple.

May 23, 2017 4 comments

Readers of this blog might have noticed that I prefer to detrend time series using a moving average – and not the advanced and routinely and widely used Hodrick-Prescott filter. Part of this was lazyness. But I also do not like the HP filter: what is it? Why does it wag its tails so much? What is the ‘right’ smoothing parameter? James D. Hamilton has answered my questions (while implicating that a load of research is at least suspect if not worthless):

Why You should never use the Hodrick-Prescott filter: “Here’s why. (1) The HP filter produces series with spurious dynamic relations that have no basis in the underlying data-generating process. (2) Filtered values at the end of the sample are very different from those in the middle, and are also characterized by spurious dynamics. (3) A statistical formalization of the problem typically produces values for the smoothing parameter vastly at odds with common practice, e.g., a value for λ far below 1600 for quarterly data. (4) There’s a better alternative. A regression of the variable at date t+h on the four most recent values as of date t offers a robust approach to detrending that achieves all the objectives sought by users of the HP filter with none of its drawbacks.”,

The Mathesis Universalis and Neoclassical Economics

from Maria Alejandra Madi

As Edward Fullbrook highlights in his recent book Narrative Fixation in Economics, the Cartesian view of human reality has deeply shaped the way Neoclassical Economics theorizes about the economic and social existence (2016, p. 45). Indeed, while emphasizing the relevance of the pure thought of a disembedded human subject,  Neoclassical Economics has reinforced the relevance of the Cartesian method of inquiry  that moved the so called scientific (true) knowledge  out of the general flux of experience.

In the second part of the Discourse of Method, Descartes presented some principles that should be followed in order to acquire knowledge: 1) human beings cannot  admit any ideas that are not absolutely clear; 2) human beings must divide each problem in so many parts as appropriate for its best resolution; 3) human beings should apply deductive reasoning to organize their  thoughts from the simplest to the most complex ones 4) the analytical-synthetic process of reasoning leads to true knowledge.

According to Descartes, the first principle of his method focuses the importance of “never accepting something as true that I clearly don’t know as such” (Discourse of Method, Part II). Indeed, Descartes inspired himself in Geometry as a model of Science. As a result, he considered the postulates of Geometry not only as universal and necessary but also as clear and distinctive ideas related to intellectual intuition. Only these clear and distinctive ideas  are considered to be the pillars of true knowledge.

Based on the second principle, Descartes builds his research method of analysis that isolates the clear and distinctive ideas from the most complex ones. His emphasis on the order of thoughts strengthens the role of Mathematics in the Cartesian method of pure inquiry. Moreover, the third principle of his method leads to a special kind of organization of thoughts. In his own words, the organization of thought should start “with the simplest and easier to gradually rise, as if by means of steps, to the knowledge of the more composed, and assuming an order between the ones that don’t precede naturally each other” (Discourse of Method, Part II).  read more

Baumol’s disease? George Will’s misdiagnosis of U.S. health care costs

May 23, 2017 7 comments

from Dean Baker

In his Washington Post column today George Will told readers that the problem of rising costs in the U.S. health care system is simply a case of Baumol’s disease. This refers to the problem identified by economist William Baumol (who recently died), that productivity in the service sector tends to rise less rapidly than productivity in the manufacturing sector. The implication is that if workers get paid the same in both sectors, then the cost of services will always rise relative to the cost of manufactured goods. Will tells us that this is the story of rapidly rising health care costs.

There are a couple of big problems with this story. First, it is not always the case that productivity in services rises less rapidly than productivity in manufacturing. ATMs have hugely increased the ability of banks to serve customers without tellers. Film developing became hugely more productive with digital cameras.

It is quite likely in the decades ahead that we will see innovations in technology that will lead to large increases in productivity in health care. For example, improvements in diagnostic technology will likely allow a skilled technician to diagnose illnesses with better accuracy than the best doctor. Similarly, robots will almost certainly be able to perform delicate surgeries with more precision than the best surgeon. In these and other areas of health care there is enormous potential for productivity gains, assuming that doctors and others who stand to lose don’t use their political power to block the technology.

This brings up the second point. While health care costs have risen everywhere, no other country pays anything close to what we do in the United States, even though they have comparable outcomes. The figure below shows per capita health care spending in the United States and five other wealthy countries since 1971. (The numbers shown are from the OECD and expressed in purchasing power parity. I converted them to 2016 dollars using the PCE deflator.)  Read more…

The laws of mathematics and economics

May 22, 2017 7 comments

from Lars Syll

Some commentators on this blog — and elsewhere — seem to have problems with yours truly’s critique of the overly debonair attitude with which mathematics is applied to economics. In case you think the critique is some odd outcome of heterodox idiosyncrasy, well, maybe you should think twice …

einstein

The human development revolution

May 21, 2017 4 comments

from Asad Zaman

HDI

Goethe starts his famous East-West Divan with a poem about the journey (Hegire), both physical and spiritual, from the West to the East. In this essay, we consider the analogous journey from Western to Eastern conceptions of development. This involves switching from viewing humans as producers of wealth, to viewing wealth as a producer of human development. To start with the Western conceptions, both Adam Smith and Karl Marx defined economic growth as the process of accumulation of wealth. The range of diversity of Western thought is bounded by the Left-Right spectrum. Ideas on which both extremes agree command widespread consensus in the West. Consequently, a core concept of modern economic theory is that wealth is the means and ends of the process of economic development. Unfortunately, due to the dominance and influence of Western paradigms, this concept has been widely accepted and adopted in the East today.

Mahbubul Haq was indoctrinated into the Western development paradigm which gives primacy to wealth at leading universities, Yale and Harvard. He got the chance to apply these economic models as the chief economist in Pakistan during the ’60s. However, because of his Eastern upbringing and heritage, he was able to see the murderous message at the heart the cold mathematics of the Solow-Swan growth models. These models focus on savings, created by reducing present levels of consumption, as the only route to the accumulation of greater future wealth.  read more

Mainstream economics — an emperor turned out to be naked

May 20, 2017 4 comments

from Lars Syll

The main reason why the teaching of microeconomics (or of “ micro foundations” of macroeconomics) has been called “autistic” is because it is increasingly impossible to discuss real-world economic questions with microeconomists – and with almost all neoclassical theorists. They are trapped in their system, and don’t in fact care about the outside world any more. If you consult any microeconomic textbook, it is full of maths (e.g. Kreps or Mas-Colell, Whinston and Green) or of “tales” (e.g. Varian or Schotter), without real data (occasionally you find “examples”, or “applications”, with numerical examples – but they are purely fictitious, invented by the authors).

an-inconvenient-truth1At first, French students got quite a lot of support from teachers and professors: hundreds of teachers signed petitions backing their movement – specially pleading for “pluralism” in teaching the different ways of approaching economics. But when the students proposed a precise program of studies … almost all teachers refused, considering that is was “too much” because “students must learn all these things, even with some mathematical details”. When you ask them “why?”, the answer usually goes something like this: “Well, even if we, personally, never use the kind of ‘theory’ or ‘tools’ taught in micoreconomics Courses … surely there are people who do ‘use’ and ‘apply’ them, even if it is in an ‘unrealistic’, or ‘excessive’ way”.

But when you ask those scholars who do “use these tools”, especially those who do a lot of econometrics with “representative agent” models, they answer (if you insist quite a bit): “OK, I agree with you that it is nonsense to represent the whole economy by the (intertemporal) choice of one agent –- consumer and producer — or by a unique household that owns a unique firm; but if you don’t do that, you don’t do anything !”

Bernard Guerrien

Yes indeed — “you don’t do anything!”   Read more…

Risk vs. arrogance

from David Ruccio

Most of us are pretty cautious when it comes to spending our money. The amount of money we have is pretty small—and the global economic, financial, and political landscape is pretty shaky right now.

And even if we’re not cautious, if we’re not prudent savers, then no harm done. Spending everything we have may be a personal risk but it doesn’t do any social harm.

It’s different, however, for the global rich. The individual decisions they make do, in fact, have social ramifications. That’s why, back in 2011, I suggested we switch our focus from the “culture of poverty” to the pathologies of the rich.

Consider, for example, the BBC [ht: ja] report on the findings of UBS Wealth Management’s survey of more than 2,800 millionaires in seven countries.

Some 82 percent of those surveyed said this is the most unpredictable period in history. More than a quarter are reviewing their investments and almost half said they intend to but haven’t yet done so.

But more than three quarters (77 pct) believe they can “accurately assess financial risk arising from uncertain events”, while 51 percent expect their finances to improve over the coming year compared with 13 percent who expect them to deteriorate.

More than half (57 pct) are optimistic about achieving their long-term goals, compared with 11 percent who are pessimistic. And an overwhelming 86 percent trust their own instincts when making important decisions.

“Most millionaires seem to be confident they can steer their way through the turbulence without so much as a dent in their finances,” UBS WM said.

Most of us can’t afford that kind of arrogance in the face of risk. But the world’s millionaires can. Just as they did during the lead-up to the crashes of 1929 and of 2008.

They trusted their instincts—and everyone else paid the consequences.

A tax on Wall Street trading is the best solution to income inequality

May 19, 2017 9 comments

from Dean Baker

In the years since the 2008 economic crisis, financial transactions taxes (FTTs) have gone from a fringe idea to a policy that is in mainstream policy debates. They are seen as a way to both raise large amounts of money and to slow the pace of churning in financial markets. For this reason, most progressive Democrats have come out in support, and even the Clinton campaign provided a hat-tip to some form of taxation on high frequency trading.

This is a welcome change from where things stood before the crisis, when the only people supporting FTTs were the far left of the party. As a long-time proponent of an FTT, I welcome this change, but even many of the proponents of FTTs don’t realize the full benefits of such a tax.

To get some bearing, it is first worth recognizing how much money is potentially at stake. The Joint Tax Committee projected that a modest tax of 0.03 percent on all trades of stocks, bonds, and derivative instruments, along the lines of a proposal by Representative Peter DeFazio, would raise more than $400 billion over the course of a decade. This is roughly equal to 0.2 percent of gross domestic product (GDP. This would be enough money to cover 60 percent of the cost of the food stamp program.There have been proposals for larger FTTs. The Tax Policy Center of the Urban Institute and the Brookings Institution analyzed an FTT with a varying rate structure on stocks, bonds, and derivative instruments. They calculated that the maximum revenue would be achieved with a rate on stocks of 0.34 percent, with lower tax rates on other financial instruments. This tax would raise more than  $800 billion, or 0.4 percent of GDP, over the course of a decade.   Read more…

Equilibrium: a weed to pull

May 19, 2017 19 comments

from Peter Radford

Just how pejorative must we be in order to get attention? There are silly things in economics that need to be weeded out, so that something better can emerge. Sometimes I just say the whole thing is a waste of time, after all economics is not simply a body of thought, but it is also a social phenomenon, it has its own language, its own self-referential estimate of quality, its own hierarchy, and its own history that locks it tightly along a specific path.

And, frankly, that path has led it astray.

Take this piece of silliness from one of its greats:

” Just as we measure gravity by its effects in the motion of a pendulum, so we may estimate the equality or inequality of feelings by the decisions of the human mind. The will is our pendulum, and its oscillations are minutely registered in the price lists of the markets. I know not when we shall have a perfect system of statistics, but the want of it is the only insuperable obstacle in the way of making Economics an exact science.” ~ William Stanley Jevons

Well, we do know about Jevon’s ‘perfect system of statistics’. We will never have it. An economy is too complex to fit neatly into any statistics Jevons could imagine. Maybe he was hinting at that when he called the lack of it an ‘insuperable obstacle’.

In any case, the entire search for equilibrium has bedeviled economics long enough. Those mechanical references to nicely oscillating systems slowly swinging away under the influence of gravity are totally inappropriate for something like an economy. Equilibrium is  a nasty weed. It clutters up our garden. It distracts us from reality. Rip it out!   Read more…

Comparing income inequality in the United States and France

May 18, 2017 2 comments

The bottom 50 percent of income earners makes more in France than in the United States even though average income per adult is still 35 percent lower in France than in the United States (partly due to differences in standard working hours in the two countries).9 Since the welfare state is more generous in France, the gap between the bottom 50 percent of income earners in France and the United States would be even greater after taxes and transfers.

Read more…

Formal mathematical modeling in economics — a dead-end

May 17, 2017 3 comments

from Lars Syll

Using formal mathematical modeling, mainstream economists sure can guarantee that the conclusions hold given the assumptions. However, the validity we get in abstract model worlds does not warrantly transfer to real world economies. Validity may be good, but it isn’t enough. From a realist perspective both relevance and soundness are sine qua non.

broken-linkIn their search for validity, rigour and precision, mainstream macro modellers of various ilks construct microfounded DSGE models that standardly assume rational expectations, Walrasian market clearing, unique equilibria, time invariance, linear separability and homogeneity of both inputs/outputs and technology, infinitely lived intertemporally optimizing representative household/ consumer/producer agents with homothetic and identical preferences, etc., etc. At the same time the models standardly ignore complexity, diversity, uncertainty, coordination problems, non-market clearing prices, real aggregation problems, emergence, expectations formation, etc., etc.

Behavioural and experimental economics — not to speak of psychology — show beyond any doubts that “deep parameters” — peoples’ preferences, choices and forecasts — are regularly influenced by those of other participants in the economy. And how about the homogeneity assumption? And if all actors are the same – why and with whom do they transact? And why does economics have to be exclusively teleological (concerned with intentional states of individuals)? Where are the arguments for that ontological reductionism? And what about collective intentionality and constitutive background rules?   Read more…

Late capitalism?

from David Ruccio

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Apparently, “late capitalism” is the term that is being widely used to capture and make sense of the irrational and increasingly grotesque features of contemporary economy and society. There’s even a recent novel, A Young Man’s Guide to Late Capitalism, by Peter Mountford.

A reader [ht: ra] wrote in wanting to know what I thought about the label, which is admirably surveyed and discussed in a recent Atlantic article by Anne LowreyRead more…

Bundesbank rejects 100%-money based on sophistry and false claims

May 16, 2017 5 comments

from Norbert Häring

In its April monthly report, Deutsche Bundesbank explains that banks create money ex-nihilo and rejects the proposal of 100%-money. The full English version is now online. The arguments employed to discredit 100%-money are a mix of sophistry and misleading or false statements.

With some delay, Bundesbank has joined the Bank of England in explicitly stating that the treatment of banks and money creation in most textbooks is wrong and that banks are not intermediaries, transferring money from savers to investors, but rather creators of money.

A key statement is this:

Sight deposits are created when a bank grants a credit or purchases an asset and credits the corresponding amount to the customer’s bank account in return. This means that banks can create book money just by making an accounting entry. This refutes a popular misconception that banks act simply as intermediaries at the time of lending – ie that banks can only grant credit using funds placed with them previously as deposits by other customers.

All the explanations are impeccable, albeit framed in a way that is very friendly toward the interests of commercial banks. The Bundesbank is stressing the “services” that banks provide. It does not even mention the benefits, which banks derive from their extraordinary privilege of having their short-term debt instruments treated as money.

Still, overall the article is a welcome attempt to bring knowledge and sanity back into the treatment of money.

The Annex titled “Remarks on a 100% reserve requirement for sight deposits”, however, is quite disappointing.   Read more…

Trump family and friends: in your pockets

May 16, 2017 6 comments

from Dean Baker

Donald Trump has openly said that he doesn’t care at all about the rules that prohibit the president and those around him from profiting from their government positions. In breaking with longstanding precedent, he is holding on to his business empire and having his children run it as he carries on with the business of being president.

With the government forced to pay the bills for the Secret Service to stay at his golf resorts and hotels, Trump obviously feels no compunction about gouging taxpayers to put more money in his pockets. But this open graft is almost certainly the least important way in which Donald Trump’s family and friends will profit at the expense of the rest of us.

We still don’t know most of the details of Trump’s tax plan, but the main parts of the plan we do know look like it was written to benefit him personally as much as possible. First, it gets rid of the Alternative Minimum Tax (AMT). This tax was put into law in 1986 to ensure that wealthy people, who can use deductions to drastically reduce their taxes, will still have to pay some amount of tax.

In his leaked 2005 tax return we know that Trump paid 25 percent AMT rather than the much lower rate that his aggressive use of tax loopholes would have allowed. It’s not a big surprise then, that Trump’s tax plan gets rid of the AMT.  Read more…

Structural econometrics

May 16, 2017 2 comments

from Lars Syll

In a blog post the other day, Noah Smith returned again to the discussion about the ’empirical revolution’ in economics and how to — if it really does exist — evaluate it. Counter those who think quasi-experiments and RCTs are the true solutions to finding causal parameters, Noah argues that without structural models

empirical results are only locally valid. And you don’t really know how local “local” is. If you find that raising the minimum wage from $10 to $12 doesn’t reduce employment much in Seattle, what does that really tell you about what would happen if you raised it from $10 to $15 in Baltimore?

That’s a good reason to want a good structural model. With a good structural model, you can predict the effects of policies far away from the current state of the world.

If only that were true! But it’s not.

Structural econometrics — essentially going back to the Cowles programme — more or less takes for granted the possibility of a priori postulating relations that describe economic behaviours as invariant within a Walrasian general equilibrium system. In practice that means the structural model is based on a straightjacket delivered by economic theory. Causal inferences in those models are — by assumption — made possible since the econometrician is supposed to know the true structure of the economy. And, of course, those exact assumptions are the crux of the matter. If the assumptions don’t hold, there is no reason whatsoever  to have any faith in the conclusions drawn, since they do not follow from the statistical machinery used!   Read more…

Models and measurement in economics: Wesley Mitchell in 1946

May 15, 2017 2 comments

Noah Smith is not the first one to be puzzled by the rift between theory and measurement in economics. He states:

econ seems too focused on “theory vs. evidence” instead of using the two in conjunction. And when they do get used in conjunction, it’s often in a tacked-on, pro-forma sort of way, without a real meaningful interplay between the two. Of course, this is just my own limited experience, and there are whole fields – industrial organization, environmental economics, trade – that I have relatively limited contact with. So I could be over-generalizing. Nevertheless, I see very few economists explicitly calling for the kind of “combined approach” to modeling that exists in other sciences – i.e., using evidence to continuously restrict the set of usable models”..

But in 1946, in the wake of the war and the Keynesian revolution, Wesley C. Mitchell, long time head of the NBER (National bureau of Economic Research), one of the foremost economists of his time and one of the best students as well as a friend of Thorstein Veblen, held a “read the whole thing” speech (like much of this old stuff made available by the NBER) about “Empirical research and the future of economic science”. Eloquent (though not succinct) it bears in a somewhat depressing way on the ideas stated by Smith  (though Mitchell restricts himself much less to the Ivory Tower than Smith does):

There is better prospect than before that men who think of themselves as theorists will absorb into their work the methods and findings of realistically minded investigators, while the latter will make such free use of the concepts and procedures of theorists that no one will know on which side of the old line of demarcation he stands. In fine, the years near at hand may see the beginnings of an economics worthy to be called a science. Rapid progress toward that goal is not to be expected. The great drawbacks of empirical research in comparison with speculative reasoning are that it is much more laborious, Slower, and more dependent on financial support. The speculative reasoner must think hard; his is no easy task. But if gifted with logical acumen, he can select a set of assumptions interesting to him, and think Empirical Research and the Development of Economic Science out their implications by himself. If he has a funded income, or earns a living salary by work that does not exhaust his energy, he can get on without financial grants. In a relatively short time he can cover much ground, and, barring logical errors, arrive at conclusions incontestably true in the sense that they are necessary consequences of his assumptions. The empirical investigator, on the contrary, requires mass observations and considerable intimacy with actual practices; to extract the meaning from his data he needs assistants whose salaries few scholars can pay out of their own pockets”.

See p. 16 for his institutional stance. I’m afraid the ideas of Noah Smith indicate there still is a problem. Much has been accomplished, be sure of that. But a rift still exits. Here are my takes on models and measurement in economics: the concepts, social worlds and even the language of economic statistics and economic theory are not always congruent. Plus ça change, plus c’est la même chose. Why?

Where’s the productivity growth? The Bureau of Labor Statistics can’t find the robots!

May 15, 2017 3 comments

from Dean Baker

Manu prod

Source: Bureau of Labor Statistics.

We hear endless stories in the media about how the robots are taking all the jobs. There was a new rush of such stories after the release of a study by Daron Acemoglu and Pascual Restrepo, which found that robots were responsible for a substantial share of the job loss in manufacturing in the last decade. (For example, this Bloomberg piece by Mira Rojanasakul and Peter Coy.)

However, there remains a very basic problem in the robot story, it is not showing up in the productivity data. To step back a minute, robots are supposed to replace human labor. This means that for the same number of hours of human work, we should see much higher output of goods and services, since the robots are now adding to total output. This is what productivity growth means.

So if robots are having a large impact on jobs, then we should see productivity growth going through the roof. Instead, it is falling through the floor. It has averaged less than 1.0 percent annually in the last decade. This compares to an average growth rate of 3.0 percent in the decade from 1995 to 2005 and also in the long Golden Age from 1947 to 1973.

Strikingly, productivity growth has been especially bad in manufacturing, the place where we see the greatest use of robots. Here’s the picture since 1988, the period for which the Bureau of Labor Statistics (BLS) has a consistent series.
Read more…

Curb your enthusiasm: Macron is just the beginning of a new fight for France and Europe

May 14, 2017 12 comments

from Mark Weisbrot

The media response to the French election reads like some people had too much cannabis. From the first paragraph of a front page news analysis of the New York Times: “It was globalization against nationalism. It was the future versus the past. Open versus closed.”

Let’s not get carried away. It’s great that Marine Le Pen, whose National Front party with deep racist roots that go back to French collaborators during the Nazi occupation, as well as French colonialism, was defeated by a large margin of the votes cast. There were no signs that she had any realistic chance of winning, but people were understandably nervous after the Brexit and Trump votes. On the other hand, her 34 percent of the vote was about twice that of her father in 2002, who ran against the conservative Jacques Chirac. And abstentions this time were higher than in any French election since 1969; together with blank or spoiled ballots, 34 percent of the electorate chose none of the above.

Most importantly, if the “global open future” of France and Europe is going to be like the recent past, then the National Front and similar movements are still going to have some growth potential. Because it is primarily the economic policies of Europe, including France, over most of the past decade, that have allowed the National Front to progress from a marginalized boil on the body politic to what is now treated as a legitimate, serious opposition party.  Read more…