Hold the champagne

from David Ruccio

Last week, to judge by the commentary on the latest Census Bureau report, Income and Poverty in the United States: 2015 (pdf), you’d think the fountain of broadly shared economic prosperity had just been discovered.

Binyamin Appelbaum is a good example:  

Phlogiston, the identification problem, and the state of macroeconomics

from David Ruccio

The other day, I argued (as I have many times over the years) that contemporary mainstream macroeconomics is in a sorry state.

Mainstream macroeconomists didn’t predict the crash. They didn’t even include the possibility of such a crash within their theory or models. And they certainly didn’t know what to do once the crash occurred.

I’m certainly not the only one who is critical of the basic theory and models of contemporary mainstream macroeconomics. And, at least recently (and, one might say, finally), many of the other critics are themselves mainstream economists—such as MIT emeritus professor and former IMF chief economist Olivier Blanchard (pdf), who has noted that the models that are central to mainstream economic research—so-called dynamic stochastic general equilibrium models—are “seriously flawed.”

Now, one of the most mainstream of the mainstream, Paul Romer (pdf), soon to be chief economist at the World Bank, has taken aim at mainstream macroeconomics.* You can get a taste of the severity of his criticisms from the abstract: 

Mind the gaps: compensation and productivity (3 graphs)

from David Ruccio

According to the norms of both neoclassical economic theory and capitalism itself, workers’ wages should increase at roughly the same rate as their productivity.* Clearly, in recent years they have not. 

Rising tides and marginal productivity theory

from David Ruccio

A constant refrain among mainstream economists and pundits since the crash of 2007-08 has been that, while the state of mainstream macroeconomics is poor, all is well within microeconomics.

The problems within macroeconomics are, of course, well known: Mainstream macroeconomists didn’t predict the crash. They didn’t even include the possibility of such a crash within their theory or models. And they certainly didn’t know what to do once the crash occurred.

What about microeconomics, the area of mainstream economics that was supposedly untouched by all the failures in the other half of the official discipline? Well, as it turns out, there are major problems there, too—especially given the obscene levels of inequality that both preceded and have resumed since the crash erupted, not to mention the slow economic growth that rising inequality was supposed to solve.

In particular, as I have written many times over the years, the idea that a rising tide lifts all boats—along with its theoretical justification, marginal productivity theory—needs to be questioned and ultimately abandoned.

But you don’t have to take my word for it. Just read the latest essay by Nobel Prize-winning economist Joseph Stiglitz.

Stiglitz first explains that neoclassical economists developed marginal productivity theory as a direct response to Marxist claims that the returns to capital are based on the exploitation of workers. 

Inheritance taxes, equity, and the gift

from David Ruccio

You’d think a Harvard economics professor would be able to do better than invoke horizontal equity as the sole argument for reducing the U.S. inheritance tax.

But not Gregory Mankiw, who uses the silly parable of the Frugals and the Profligates to make his case for a low tax rate on the estates of the wealthiest 0.2 percent of Americans who actually owe any estate tax.*

I’ll leave it to readers to judge whether or not it’s worth spending the time to compose a column on a tax that affects such a tiny percentage of rich—very rich—American households. And then to argue not for raising the tax, but for lowering it.

Me, I want to raise a few, more general issues about how mainstream economists like Mankiw think about inheritance taxes.

First, Mankiw presents one principle—horizontal equity, the “equal treatment of equals”—and never even mentions the other major tax principle—vertical equity, the “unequal treatment of unequals,” the idea that people with higher incomes should pay more taxes. Certainly, on the vertical criterion, those who receive large inheritances (for doing nothing more than being born into and raised within the right family) should pay taxes at a much higher rate than those who do not. 

“Who will own the robots?”

from David Ruccio

I’ve been writing for some years now about the emergence of new technologies, especially automation and robotics, and their potential contribution to raising already-high levels of inequality even further.

The problem is not, as I have tried to make clear, technology per se but the way it is designed and utilized within existing economic institutions. In other words, the central question is: who will own the robots?

If capital owns the robots, even if their development and use increases labor productivity, the returns mostly go to capital and the workers (those who are left, in addition to those who have been displaced) are the ones who lose out.

But you don’t have to believe me. That’s the conclusion of a recent piece published in Finance & Development, the research journal of the International Monetary Fund.

The authors, Andrew Berg, Edward F. Buffie, and Luis-Felipe Zanna, designed an economic model in which they assume robots are a particular sort of physical capital, one that is a close substitute for human workers.* They also consider three versions of the model: one in which robots are almost perfect substitutes for human labor; another in which robots and human labor are close but not perfect substitutes (i.e., “people bring a spark of creativity or a critical human touch” that cannot, at least for the foreseeable future, be replaced by robots); and a third in which they distinguish between “skilled” and “unskilled” workers.

Protest of the century

David Ruccio

During the past couple of weeks, the only real India economic news in the Western press was the decision by “the Ranbir Kapoor of banking,” Raghuram G. Rajan, to step down from his position as the head of the Reserve Bank of India.

But we read almost nothing about the 2 September nationwide strike by 150 million Indian workers [ht: Magpie], which was certainly the largest strike in India’s long labor history—and may have been the largest general strike in world history.

As Vijay Prashad explained, 

What shared prosperity?!

from David Ruccio

In a recent New York Times article, Quoctring Bui reveals some fascinating details about the geography of inequality in the United States—including the fact that 

Capitalism vs. democracy

from David Ruccio

I have been arguing for some time on this blog that contemporary capitalism faces a profound legitimation crisis. It has failed to deliver on its promises, and therefore is being calling into question.

As it turns out, Martin Wolf, the chief economics commentator at the Financial Times, has also sounded a warning about the ongoing legitimacy crisis. But for him it’s a bit different. The problem, as he sees it, is the tension between democracy and capitalism.

A natural connection exists between liberal democracy — the combination of universal suffrage with entrenched civil and personal rights — and capitalism, the right to buy and sell goods, services, capital and one’s own labour freely. They share the belief that people should make their own choices as individuals and as citizens. Democracy and capitalism share the assumption that people are entitled to exercise agency. Humans must be viewed as agents, not just as objects of other people’s power.

Yet it is also easy to identify tensions between democracy and capitalism. Democracy is egalitarian. Capitalism is inegalitarian, at least in terms of outcomes. If the economy flounders, the majority might choose authoritarianism, as in the 1930s. If economic outcomes become too unequal, the rich might turn democracy into plutocracy.

Historically, the rise of capitalism and the pressure for an ever-broader suffrage went together. This is why the richest countries are liberal democracies with, more or less, capitalist economies. Widely shared increases in real incomes played a vital part in legitimising capitalism and stabilising democracy. Today, however, capitalism is finding it far more difficult to generate such improvements in prosperity. On the contrary, the evidence is of growing inequality and slowing productivity growth. This poisonous brew makes democracy intolerant and capitalism illegitimate.

Inequality in the US and mainstream macroeconomics

from David Ruccio

I have argued many times over the years that mainstream economists, especially mainstream macroeconomists, largely ignore the issue of inequality. And when they do see it, they tend to misunderstand both its causes (often attributing it to exogenous events, such as globalization and technical change) and its consequences (often failing to connect it, other than through “political capture,” to events like the crash of 2007-08).

In my view, mainstream economists overlook or forget about the role inequality plays, especially in macroeconomic events, for two major reasons. First, their theoretical and empirical models—either based on a representative agent or undifferentiated macroeconomic relationships (such as consumption and investment)—can be solved without ever conceptualizing or measuring inequality. The models they use create a theoretical blindspot. But, second, even when it’s clear they could include inequality as a significant factor, they don’t. They literally choose not to see inequality as a relevant issue in making sense of macroeconomic fluctuations. So, as I see it, when it comes to inequality, mainstream economics (especially, as I say, mainstream macroeconomics) is haunted by both a theoretical and an ethical problem.

Beyond the carried interest tax loophole

from David Ruccio

Everyone (from President Obama to venture capitalist Alan Patricof) agrees the carried tax loophole—which allows investment fund managers to treat much of their income as capital gains (taxed at a top rate of 23.8 percent) rather than as income (for which the top rate is 39.6 percent)—should be closed.

But, as Michael Hiltzik reminds us, it’s a tax break the super rich are willing to give up in order to keep the loophole they really value: the capital gains tax break.

“Bougie playground”—now, then, and in the future

from David Ruccio

Unhealthy healthcare: workers pay

from David Ruccio

On Tuesday, I began a series on the unhealthy state of the U.S. healthcare system—starting with the fact that the United States spends far more on health than any other country, yet the life expectancy of the American population is actually shorter than in other countries that spend far less.

Today, I want to look at what U.S. workers are forced to pay to get access to the healthcare system.

Unhealthy healthcare

from David Ruccio

 

While I was finishing up the latest right-wing libertarian dystopian finance novel, I was also trying to figure out the dystopia that the U.S. healthcare system has become.

Not so fast!

from David Ruccio

Everyone has read or heard the story: the labor market has rebounded and workers, finally, are “getting a little bigger piece of the pie” (according to President Obama, back in June).

And that’s the way it looked—until the Bureau of Labor Statistics revised its data. What was originally reported as a 4.2 percent increase in the first quarter of 2016 now seems to be a 0.4 decline (a difference of 4.6 percentage points, in the wrong direction).

What’s more, real hourly compensation for the second quarter (in the nonfarm business sector) is down another 1.1 percent.

Education, inequality, and power

from David Ruccio

Is education the solution to the problem of growing inequality?

As I wrote in early 2015,

Americans like to think that education is the solution to all economic and social problems. Including, of course, growing inequality.

Why? Because focusing on education—encouraging people to get more higher education—involves no particular tradeoffs. More education for some doesn’t mean less education for others (at least in principle). And providing more education doesn’t involve any structural changes in society—just more funding. (Of course, suggesting more education under current conditions—when public financing of higher education continues to decline, and students and their families are forced to take on more and more debt—is itself disingenuous).

As a result, there’s a broad consensus in the middle—among conservatives and liberals alike—that encouraging more young people who have yet to enter the labor market and existing workers who want to get ahead to obtain a college education will solve the problem of inequality.

And I proceeded to show how, in terms of declining wages for workers at various levels of education and increasing inequality within the top 1 percent, more education does not actually solve the problem of inequality.

But education is still the preferred solution of mainstream Democrats, and inequality itself is receiving less attention. And Thomas Frank [ht: sm] (in an interview with Jennifer Berkshire aka EduShyster) explains why: 

“Wealth helps accumulate more wealth”

from David Ruccio

The world economy only grew by 3.1 percent in 2015. But the world’s billionaires did much better. As David Barks, associate director of custom research for Wealth-X, understands, “Wealth helps accumulate more wealth.”

According to the latest Wealth-X report on the global billionaire population, the world’s billionaire population grew by 6.4 percent, to 2,473, last year. And their combined wealth increased by 5.4 percent, to a record $7.7 trillion.  

Trickle-up healthcare

from David Ruccio

We’re all familiar with the usual indictment of the U.S. healthcare system: we pay much more and we get much less.

For example, according to the Commonwealth Fund:

Data from the OECD show that the U.S. spent 17.1 percent of its gross domestic product (GDP) on health care in 2013. This was almost 50 percent more than the next-highest spender (France, 11.6% of GDP) and almost double what was spent in the U.K. (8.8%).

Since 2009, health care spending growth has slowed in the U.S. and most other countries. The real growth rate per capita in the U.S. declined from 2.47 percent between 2003 and 2009 to 1.50 percent between 2009 and 2013. In Denmark and the United Kingdom, the growth rate actually became negative. The timing and cross-national nature of the slowdown suggest a connection to the 2007–2009 global financial crisis and its aftereffects, though additional factors also may be at play. . .

On several measures of population health, Americans had worse outcomes than their international peers. The U.S. had the lowest life expectancy at birth of the countries studied, at 78.8 years in 2013, compared with the OECD median of 81.2 years. Additionally, the U.S. had the highest infant mortality rate among the countries studied, at 6.1 deaths per 1,000 live births in 2011; the rate in the OECD median country was 3.5 deaths.

That alone is an argument in favor of Medicare for all.

Voters aren’t buying what mainstream economists are selling

from David Ruccio

Mainstream economists, such as Harvard’s Gregory Mankiw, celebrate international trade (including outsourcing, which they argue is just another form of international trade) at every opportunity. But right now, voters—especially in the United States and the United Kingdom—aren’t buying what mainstream economists are selling. They are (as I’ve argued here, here, and here) ignoring the so-called experts.

That rejection clearly disturbs Mankiw, who just adds fuel to the fire by arguing that the more education people acquire the more they will eventually come around to his view. The implication, of course, is that being against free trade is a sign of ignorance.

We all know that Mankiw and his mainstream colleagues have spent an enormous amount of time and effort—in abstract modeling and lending their support to trade agreements, in the classroom, research, and the public arena—extolling the benefits of more international trade.

But it’s clear, not only from the Brexit vote and the rhetoric on both sides of the current U.S. presidential campaigns, but also from a survey earlier this year by Bloomberg, that many people remain opposed to free international trade: 65 percent favor restrictions on imported goods to protect American jobs, 44 percent think NAFTA has been bad for the U.S. economy, and 82 percent are willing to pay more for U.S.-made goods. 

“I will row through shit for you, America.”

from David Ruccio

U.S. Olympic rower Megan Kalmoe doesn’t want to talk about water quality anymore. As she explained on her blog, journalists are ruining the 2016 Olympic games by being “fixated on shit in the water.”

We are American, and we are going to Rio to represent you in this potentially flawed and imperfect setting that you are trying so desperately to get the public to love to hate.  We are going to compete for medals to bring them home to you, and for you so that the US has a good shot at winning the medal tally again in Rio.  We go to Rio and face incredible odds, some of us, for you so that you will be proud of us, and proud of supporting Team USA. We are supposed to be a Team–all of us–and those of you covering our stories, and those of you resting comfortably in your intellectual armchairs are supposed to have our backs. All of us owe something to our nation for getting us this far, or for believing in us, and competing under our shared colors is our way of expressing our gratitude to you.  So tell me again why you want to talk about poop? . . .

I will row through shit for you, America.

Kalmoe and her fellow participants are, by her own admission, experts on only one thing: their performance.

Unfortunately, what she doesn’t take into account is the real shit in the water: the financing of the International Olympic Committee. That’s what makes it difficult for both viewers like me and athletes like her.