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Trumponomics: causes and consequences – Part I – RWER issue no. 78

March 22, 2017 1 comment

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Preface          download pdf

Trumponomics: everything to fear including fear itself?          3
Jamie Morgan          download pdf                                                                           

Can Trump overcome secular stagnation?          20
James K. Galbraith            download pdf                             

Trump through a Polanyi lens: considering community well-being          28
Anne Mayhew            download pdf                                                                                    

Trump is Obama’s legacy. Will this break up the Democratic Party?          36
Michael Hudson          download pdf

Causes and consequences of President Donald Trump          44
Ann Pettifor               download pdf                                

Explaining the rise of Donald Trump          54
Marshall Auerback          download pdf 

Class and Trumponomics          62
David F. Ruccio          download pdf 

Trump’s Growthism: its roots in neoclassical economic theory          86
Herman Daly          download pdf 

Trumponomics: causes and prospects          98
L. Randall Wray          download pdf 

The fall of the US middle class and the hair-raising ascent of Donald Trump
Steven Pressman          download pdf          112

Mourning in America: the corporate/government/media complex          125
Neva Goodwin          download pdf 

How the Donald can save America from capital despotism          132
Stephen T. Ziliak          download pdf 

Prolegomenon to a defense of the City of Gold          141
David A. Westbrook          download pdf 

Trump’s bait and switch: job creation in the midst of welfare state sabotage
Pavlina R. Tcherneva           download pdf          148

Can ‘Trumponomics’ extend the recovery?          159
Stephanie Kelton           download pdf 

Board of Editors, past contributors, submissions and etc.          173

To be a good economist one cannot only be an economist

March 21, 2017 8 comments

from Lars Syll

The master-economist must possess a rare combination of gifts …. He must be mathematician, historian, statesman, philosopher—in some degree. He must understand symbols and speak in words. He must contemplate the particular, in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man’s nature or his institutions must be entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood, as aloof and incorruptible as an artist, yet sometimes as near to earth as a politician.

John Maynard Keynes

Economics students today are complaining more and more about the way economics is taught. The lack of fundamantal diversity — not just path-dependent elaborations of the mainstream canon — and narrowing of the curriculum, dissatisfy econ students all over the world. The frustrating lack of real world relevance has led many of them to demand the discipline to start develop a more open and pluralistic theoretical and methodological attitude.  Read more…

Why Krugman and Stiglitz are no real alternatives to mainstream economics

March 20, 2017 9 comments

from Lars Syll

verso_978-1-781683026_never_let_a_serious_crisis__pb_edition__large_300_cmyk-dc185356d27351d710223aefe6ffad0cLittle in the discipline has changed in the wake of the crisis. Mirowski thinks that this is at least in part a result of the impotence of the loyal opposition — those economists such as Joseph Stiglitz or Paul Krugman who attempt to oppose the more viciously neoliberal articulations of economic theory from within the camp of neoclassical economics. Though Krugman and Stiglitz have attacked concepts like the efficient markets hypothesis … Mirowski argues that their attempt to do so while retaining the basic theoretical architecture of neoclassicism has rendered them doubly ineffective.

First, their adoption of the battery of assumptions that accompany most neoclassical theorizing — about representative agents, treating information like any other commodity, and so on — make it nearly impossible to conclusively rebut arguments like the efficient markets hypothesis. Instead, they end up tinkering with it, introducing a nuance here or a qualification there … Stiglitz’s and Krugman’s arguments, while receiving circulation through the popular press, utterly fail to transform the discipline.

Paul Heideman

Despite all their radical rhetoric, Krugman and Stiglitz are — where it really counts — nothing but die-hard mainstream neoclassical economists. Just like Milton Friedman, Robert Lucas or Greg Mankiw.

Read more…

Neoliberalism and mainstream economics

March 19, 2017 2 comments

from Lars Syll

Oxford professor Simon Wren-Lewis isn’t pleased with heterodox attacks on mainstream economics. One of the reasons is that he doesn’t share the heterodox view that mainstream economics and neoliberal ideas are highly linked.

In a post on his blog, Wren-Lewis defends the mainstream economics establishment against critique waged against it by Phil Mirowski:

Mirowski overestimates the extent to which neoliberal ideas have become “embedded in economic theory”, and underestimates the power that economic theory and evidence can have over even those academic economists who might have a neoliberal disposition. If the tide of neoliberal thought is going to be turned back, economics is going to be important in making that happen.

Wren-Lewis admits that “Philip Mirowski is a historian who has written a great deal about both the history of economics as a discipline and about neoliberalism” and that Mirowski “knows much more about the history of both subjects than I [W-L] do.”

632488Fair enough, but there are simple remedies for the lack of knowledge.

Read this essay, where yours truly try to further analyze — much inspired by the works of Amartya Sen — what kind of philosophical-ideological-political-economic doctrine neoliberalism is, and why it so often comes natural for mainstream economists to embrace neoliberal ideals.

Or maybe — if your Swedish isn’t too rusty … — you could take part of the book-length argumentation in Den dystra vetenskapen (‘The Dismal Science,’ Atlas 2001) for why there has been such a deep and long-standing connection between the dismal science and different varieties of neoliberalism.

Solving the fundamental problem of decision theory (wonkish)

March 17, 2017 Leave a comment

from Lars Syll

Currently the dominant formalism for treating the [general gamble] problem is utility theory. Utility theory was born out of the failure of the following behavioral null model: individuals were assumed to optimize changes in the expectation values of their wealth. We argue that this null model is a priori a bad starting point because the expectation value of wealth does not generally reflect what happens over time. We propose a different null model of human behavior that eliminates, in many cases, the need for utility theory: an individual optimizes what happens to his wealth as time passes …

Our method starts by recognizing the inevitable non- ergodicity of stochastic growth processes, e.g. noisy multiplicative growth. The specific stochastic process implies a set of meaningful observables with ergodic properties, e.g. the exponential growth rate. These observables make use of a mapping that in the tradition of economics is viewed as a psychological utility function, e.g. the logarithm …

The dynamic approach to the gamble problem makes sense of risk aversion as optimal behavior for a given dynamic and level of wealth, implying a different concept of rationality. Maximizing expectation values of observables that do not have the ergodic property … cannot be considered rational for an individual. Instead, it is more useful to consider rational the optimization of time-average performance, or of expectation values of appropriate ergodic observables. We note that where optimization is used in science, the deep insight is finding the right object to optimize … The same is true in the present case  — deep insight is gained by finding the right object to optimize — we suggest time-average growth.

Ole Peters & Murray Gell-Mann

Although the expected utility theory is obviously both theoretically and descriptively inadequate, colleagues in economics, game theory and decision theory, gladly continue to use it, as though its deficiencies were unknown or unheard of.   Read more…

Understanding economic development and demolishing neoliberal development myths

March 16, 2017 Leave a comment

from Erik Reinert, Jayati Ghosh and Rainer Kattel and WEA Commentaries

We have recently co-edited a book (The Handbook of Alternative Theories of Economic Development, Edward Elgar 2016, also available as an e-book on http://www.ebooks.com/95628740/handbook-of-alternative-theories-of-economic-development/reinert-erik-s-ghosh-jayati-kattel-rainer/) that seeks to bring back the richness of development economics through many different theories that have contributed over the ages to an understanding of material progress. The underlying approach is based on this quotation from nearly four centuries ago: “There is a startling difference between the life of men in the most civilised province of Europe, and in the wildest and most barbarous districts of New India. This difference comes not from the soil, not from climate, not from race, but from the arts.” (Francis Bacon, Novum Organum, 1620)

For centuries, economics was at its very core an art, a practice and a science devoted to ‘economic development’, albeit under a variety of labels: from an idealistic promotion of ‘public happiness’ to the nationalistic creation of wealth and greatness of nations and rulers, and the winning of wars. In some sense, until about 100 years ago, most economists were ‘development economists’. But during the process of formalization of economics into neoclassical economics in the post-World War II period, development economics slowly disappeared from the economic mainstream. ‘Where are their models?’ was one famous battle cry. For example, Jacob Viner made a key contribution to the demise of development economics by removing a fundamental force of uneven development – increasing returns – from international trade theory, on the account that it was not compatible with equilibrium. What would have been more logical would have been to remove equilibrium from economic theory because it is not compatible with an analysis of the real world. Economists’ choice of tools came to trump their interest in reality. Equilibrium became virtually the only game in town.  read more

 

Has economics really become an empirical science?

March 15, 2017 1 comment

from Lars Syll

As I see it, a rational predictor should use a combination of theory and empirics. But theory should also be informed by data – there are lots of theories, and in general they can’t all apply to the same situation, so you need evidence to tell you which one(s) to use. So a rational predictor’s predictions should always be tied as closely as possible to empirical evidence. Discounting empirical evidence … seems inevitably to lead to the use of casual intuition (or to even worse things, like pure ideology).

George-Akerlof-Quotes-3Anyway, just in case you were curious, Seattle went ahead and hiked the minimum wage, and whether you measure by stylized facts or carefully controlled empirical studies, any negative effect on employment was small or zero. Of course, if you want, you can say that the empirical studies weren’t controlled well enough, and the stylized facts are illusions, and the minimum wage hike must have hurt employment because government intervention always hurts employment la la la I can’t hear you, but if you say that, who’s going to respect you intellectually?

Noah Smith

Yes, indeed, who would respect such a person ‘intellectually’?  Read more…

Behavioral vs Neoclassical Economics

March 14, 2017 Leave a comment

from Asad Zaman

In my paper entitled “Empirical Evidence Against Neoclassical Utility Theory: A Survey of the Literature,” I have argued that neoclassical utility theory acts as a blindfold, which prevents economists from understanding simple realities of human behavior. The paper provides many examples of this phenomenon, which I will illustrate briefly with one simple example in this post.

Consider the two player Ultimatum Game. The Proposer (P) has ten dollars in single dollar bills. He makes an offer of $m to the Responder (R), which allows him to keep $(10-m). The responder can either Accept or Reject. If Responder Accepts than P get $10-m, and R get $m as proposed; it is convenient to denote this outcome as (P:10-m,R:m). If Responder Rejects, then both get $0: (P:0,R:0)

Here are four predictions made by Game Theory, based on utility maximization behavior.

  1. Responder will be indifferent between the two choices Accept and Reject if he is offered $0.
  2. Responder will Accept an offer of $1, resulting in outcome (P:9, R:1). R prefers 1 to 0.
  3. Proposer believes that Responder is a Utility Maximizer; that is, he will behave in accordance with propositions 1 & 2 above.
  4. Proposer will therefore offer $1, as it maximizes his share at $9. If he offers $0, the outcome is uncertain because both responses A and R are possible maximizing responses, which is why an offer of $1 is the unique utility maximizing offer.

All four of these propositions are false. Furthermore, every layman will . . .  read more

Kenneth Arrow (1921-2017)

March 13, 2017 12 comments

from Lars Syll

arrowA democratic polity is supposed to be based on egalitarian distribution of political power. In a system where virtually all resources are available for a price, economic power can be translated into political power by channels too obvious for mention. In a capitalist society, economic power is very unequally distributed, and hence democratic government is inevitably something of a sham. In a sense, the maintained ideal of democracy makes matters worse, for it adds the tensions of hypocrisy to the inequality of power.

Kenneth Arrow

Kenneth Arrow, one of the greatest economists ever, died last month at age 95.
A great modeler, yes, but also an economist who never forgot on what assumptions the models were based …

Some methodological perspectives on statistical inference in economics

March 11, 2017 3 comments

from Lars Syll

Causal modeling attempts to maintain this deductive focus within imperfect research by deriving models for observed associations from more elaborate causal (‘structural’) models with randomized inputs … But in the world of risk assessment … the causal-inference process cannot rely solely on deductions from models or other purely algorithmic approaches. Instead, when randomization is doubtful or simply false (as in typical applications), an honest analysis must consider sources of variation from uncontrolled causes with unknown, nonrandom interdependencies. Causal identification then requires nonstatistical information in addition to information encoded as data or their probability distributions …

157e4bb021a73ee61009ce85178c36c3a6d4069b53842d45f3dc54a39754676bThis need raises questions of to what extent can inference be codified or automated (which is to say, formalized) in ways that do more good than harm. In this setting, formal models – whether labeled ‘‘causal’’ or ‘‘statistical’’ – serve a crucial but limited role in providing hypothetical scenarios that establish what would be the case if the assumptions made were true and the input data were both trustworthy and the only data available. Those input assumptions include all the model features and prior distributions used in the scenario, and supposedly encode all information being used beyond the raw data file (including information about the embedding context as well as the study design and execution).

Overconfident inferences follow when the hypothetical nature of these inputs is forgotten and the resulting outputs are touted as unconditionally sound scientific inferences instead of the tentative suggestions that they are (however well informed) …

The practical limits of formal models become especially apparent when attempting to integrate diverse information sources. Neither statistics nor medical science begins to capture the uncertainty attendant in this process, and in fact both encourage pernicious overconfidence by failing to make adequate allowance for unmodeled uncertainty sources. Instead of emphasizing the uncertainties attending field research, statistics and other quantitative methodologies tend to focus on mathematics and often fall prey to the satisfying – and false – sense of logical certainty that brings to population inferences. Meanwhile, medicine focuses on biochemistry and physiology, and the satisfying – and false – sense of mechanistic certainty about results those bring to individual events.

Sander Greenland

Read more…

Economics — confusing mathematical masturbation with intercourse between research and reality

March 9, 2017 9 comments

from Lars Syll

There’s no question that mainstream academic macroeconomics failed pretty spectacularly in 2008 …

Many among the heterodox would have us believe that their paradigm worked perfectly well in 2008 and after … This is dramatically overselling the product. First, heterodox models didn’t “predict” the crisis in the sense of an actual quantitative forecast.

64f5d94d9836c6a09b5d2009f0d4634a845bb2d7ba56bbaa16176c2fd0e958c0This is because much of heterodox theory is non-quantitative. Basically, people write down English words explaining their conceptual ideas about how the economy works. This describes the ideas of mid-20th-century economist Hyman Minsky, who wrote books and essays about the instability of the financial system. Minsky, though trained in math, chose not to use equations to model the economy — instead, he sketched broad ideas in plain English …

At the end of the day, policymakers and investors need to make quantitative decisions — how much to raise or lower interest rates, how big of a deficit to run, or how much wealth to allocate to Treasury bonds.

Noah Smith

Noah Smith — like so many other mainstream economists — obviously has the unfounded and ridiculous idea that because heterodox people like yours truly often criticize the application of mathematics in mainstream economics, we are critical of math per seRead more…

Minsky matters!

March 6, 2017 7 comments

from Lars Syll

In his book Why Minsky Matters L. Randall Wray tries to explain in what way Hyman Minsky’s thoughts offer a radical challenge to mainstream economic theory.

812NiJyT3MLAlthough there were a handful of economists who had warned as early as 2000 about the possibility of a crisis, Minsky’s warnings actually began a half century earlier—with publications in 1957 that set out his vision of financial instability. Over the next forty years, he refined and continually updated the theory. It is not simply that he was more prescient than others. His analysis digs much deeper. For that reason, his work can continue to guide us not only through the next crisis, but even those that will follow.

Minsky’s view can be captured in his memorable phrase: “Stability is destabilizing.” What appears initially to be contradictory or perhaps ironic is actually tremendously insightful: to the degree that the economy achieves what looks to be robust and stable growth, this is setting up the conditions in which a crash becomes ever more likely. It is the stability that Changes behaviors, policy making, and business opportunities so that the instability results.

As a young research stipendiate in the U.S. yours truly had the great pleasure and privelege of having Hyman Minsky as teacher.

He was a great inspiration at the time.

He still is.   Read more…

Indian ministers and CEOs flock to the US to report to the digital colonizers

March 6, 2017 Leave a comment

from Norbert Häring

To “prepare the next generation of world leaders”, the Massachusetts Institute of Technology (MIT) will hold its 2017 MIT India Conference, this time  on “Digital India”. Members of the Indian government and CEOs are travelling to Cambridge to report on the “success” of the US inspired crackdown on the use of cash. As usual, the plight of the cash-using poor and the data-security and privacy nightmare resulting from mandatory biometric identification are unlikely to be discussed.

Developing counties run by authoritarian governments under weak legal restraints are great places to try out disruptive technological plans for changing the social landscape. As Bill Gates said in 2015 at the “Financial Inclusion Forum” in Washington, countries like India can transit to full digitalization of the economy faster than the USA, inter alia, because there are much less restrictions from legal mandates to protect people’s privacy and data.

“Notebandi”, the sudden banning of banknotes representing over 80 percent of Indian cash in circulation, which happened in November 2016, was such a disruption on the way to full digitalization, which could not possibly have taken place in the US, but in India it could.   Read more…

Simon Wren-Lewis — flimflam defender of economic orthodoxy

March 3, 2017 5 comments

from Lars Syll

flimflam-2Again and again, Oxford professor Simon Wren-Lewis rides out to defend orthodox macroeconomic theory against attacks from ‘heterodox’ critics like yours truly.

A couple of years ago, it was the rational expectations hypothesis (REH) he wanted to save:

It is not a debate about rational expectations in the abstract, but about a choice between different ways of modelling expectations, none of which will be ideal. This choice has to involve feasible alternatives, by which I mean theories of expectations that can be practically implemented in usable macroeconomic models …

However for the foreseeable future, rational expectations will remain the starting point for macro analysis, because it is better than the only practical alternative.

And now it is the concept of non-accelerating inflationary rate of unemployment (NAIRU) he tries to save. A couple of weeks ago he wroteRead more…

Robert Lucas — an example of macroeconomic quackery

March 2, 2017 16 comments

from Lars Syll

In an interview a couple of years ago, Robert Lucas said he now believes that “the evidence on postwar recessions … overwhelmingly supports the dominant importance of real shocks.”

So, according to Lucas, changes in tastes and technologies should be able to explain, e.g., the main fluctuations in unemployment that we have seen during the last seven decades.

Let’s look at the facts and see if there is any strong evidence for this allegation. Just to take an example, let’s look at the unemployment rate in a couple of European countries:

europefail

What shocks to tastes and technologies drove the unemployment rate up and down like this in these countries? I guess most would recognise a ‘structural brake’ around 2008–2009 and start to think about financial crises and subprime loans … It’s simply not possible to come up with a warranted and justified explanation solely based on changes in tastes and technologies. Lucas is just making himself ridiculous.   Read more…

Simpson’s paradox, Trump voters and the limits of econometrics

February 28, 2017 2 comments

from Lars Syll


From a more theoretical perspective, Simpson’s paradox importantly shows that causality can never be reduced to a question of statistics or probabilities, unless you are — miraculously — able to keep constant all other factors that influence the probability of the outcome studied.

To understand causality we always have to relate it to a specific causal structure. Statistical correlations are never enough. No structure, no causality.   Read more…

The power of gold: Why Deutsche Bundesbank had to promise to leave 1200 tons in New York

February 27, 2017 8 comments

from Norbert Häring

With big fanfare, Deutsche Bundesbank announced on February 9 that ahead of plan they had repatriated 300 tons of gold from New York. This put a positive spin on a rather disturbing fact –1236 tons of gold that is supposed to be part of Germany’s currency reserve will continue to be kept outside of German control in New York – indefinitely.

The German gold in question is being kept in storage at the New York Fed, an institution that is owned and controlled by Wall-Street-banks, in a country, whose current president considers it an imposition that the law and so-called judges tell him what he is allowed to do and not allowed to do.

I am not criticizing the Bundesbank for storing 37 percent of Germany’s official gold in in a place there it has no control over it. It seems clear that they negotiated hard with the US and acted rather shrewdly. Their negotiation position was much enhanced in 2012 by the leakage of a report of the German Court of Auditors, which was very critical of the conditions under which German gold was being held in New York. This created public and political pressure on the Bundesbank to renegotiate and to get that gold out of New York. At the same time, the US-side could hardly afford to snub this demand, because there was lots of speculation, even in the US, that something was amiss with the gold reserves of the US and the rest of the world that were stored in the country. The way in which the official gold of the US, and the gold held in custody for other countries, is guarded against public scrutiny and shielded from its owners, gives fodder to any number of conspiracy theories. Had the New York Fed refused to let a foreign central bank, which was under such obvious pressure, retrieve some of their gold, these conspiracy theories around official gold might very well have become intense enough to damage trust in the dollar.

Read more…

RBC models — the art of missing the point completely

February 26, 2017 4 comments

from Lars Syll

64f5d94d9836c6a09b5d2009f0d4634a845bb2d7ba56bbaa16176c2fd0e958c0Vielleicht ist diese Grundperspektive der radikalen Trennung von Form und Gehalt hilfreich, einige zunächst überaus paradoxe Äußerungen von Lucas etwas zu erhellen. Erinnert man sich der Forderungen von Lucas, die Makroökonomik zwingend auf Basis der klassischen Postulate, die Lucas und Sargent (1978) als (a) „Markträumung“ und (b) „Eigennutz“ umrissen hatten, zu errichten, so erstaunt man doch angesichts Passagen wie der folgenden:

“In recent years, the meaning of the term “equilibrium” has undergone such dramatic development that a theorist of the 1930s would not rec ognize it. It is now routine to describe an economy following a multi variate stochastic process as being “in equilibrium,” by which is meant nothing more than that at each point in time, postulates (a) and (b) above are satisfied. This development, which stemmed mainly from work by K. J. Arrow […] and G. Debreu […], implies that simply to look at any economic time series and conclude that it is a “disequilibrium phenomenon” is a meaningless observation. Indeed, a more likely conjecture […] is that the general hypothesis that a collection of time series describes an economy in competitive equilibrium is without con tent.” (Lucas und Sargent 1978: 58-9)”

Read more…

Solow kicking Lucas and Sargent in the pants

February 24, 2017 1 comment

from Lars Syll

In opening the conference, Frank Morris mentioned his disappointment or disillusionment – which many others share – that the analytical success of the 1960s didn’t survive that decade. I think we all knew, even back in the 1960s, that as Geof put it, “inflation doesn’t wait for full employment.” These days inflation doesn’t even seem to care if full employment is going along on the trip … The question is: what are the possible responses that economists and economics can make to those events?

robert_solow4One possible response is that of Professors Lucas and Sargent. They describe what happened in the 1970s in a very strong way with a polemical vocabulary reminiscent of Spiro Agnew. Let me quote some phrases that I culled from thepaper: “wildly incorrect,” “fundamentally flawed,” “wreckage,” “failure,” “fatal,” “of no value,” “dire implications,” “failure on a grand scale,” “spectacular recent failure,” “no hope” … I think that Professors Lucas and Sargent really seem to be serious in what they say, and in turn they have a proposal for constructive research that I find hard to talk about sympathetically. They call it equilibrium business cycle theory, and they say very firmly that it is based on two terribly important postulates — optimizing behavior and perpetual market clearing. When you read closely, they seem to regard the postulate of optimizing behavior as self-evident and the postulate of market-clearing behavior as essentially meaningless. I think they are too optimistic, since the one that they think is self-evident I regard as meaningless and the one that they think is meaningless, I regard as false. The assumption that everyone optimizes implies only weak and uninteresting consistency conditions on their behavior. Anything useful has to come from knowing what they optimize, and what constraints they perceive. Lucas and Sargent’s casual assumptions have no special claim to attention …

Read more…

Cutting wages is not the solution

February 22, 2017 8 comments

from Lars Syll

axA couple of years ago yours truly had a discussion with the chairman of the Swedish Royal Academy of Sciences (yes, the one that yearly presents the winners of The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel). What started the discussion was the allegation that the level of employment in the long run is a result of people’s own rational intertemporal choices and that how much people work basically is a question of incentives.

Somehow the argument sounded familiar.

When being awarded the ‘Nobel prize’ for 2011, Thomas Sargent declared that workers ought to be prepared for having low unemployment compensations in order to get the right incentives to search for jobs. The Swedish right-wing finance minister at the time appreciated Sargent’s statement and declared it to be a “healthy warning” for those who wanted to increase compensation levels.

The view is symptomatic. As in the 1930s, more and more right-wing politicians – and some economists – now suggest that lowering wages is the right medicine to strengthen the competitiveness of their faltering economies, get the economy going, increase employment and create growth that will get rid of towering debts and create balance in the state budgets.  Read more…