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China is the world’s largest economy: Get over it

September 16, 2022 4 comments

from Dean Baker

It is common for politicians and pundit types to speculate on when or whether China’s economy will pass the US economy as the world’s largest. The latest episode to cross my path was a column by David Wallace in the New York Times.

There is little reason for this sort of speculation. China is already the world’s largest economy, its economy is more than 20 percent larger than the US economy, according to the IMF. Furthermore, it is growing considerably more rapidly (assuming they don’t continue their zero COVID-19 policy forever), so it is projected to be more than a third larger than the US economy by the end of the decade.

Here’s the picture.

Source: International Monetary Fund.

Read more…

The danger of teaching the wrong thing all too well

September 12, 2022 Leave a comment

from Lars Syll

It is well known that even experienced scientists routinely misinterpret p-values in all sorts of ways, including confusion of statistical and practical significance, treating non-rejection as acceptance of the null hypothesis, and interpreting the p-value as some sort of replication probability or as the posterior probability that the null hypothesis is true …

servicemanIt is shocking that these errors seem so hard-wired into statisticians’ thinking, and this suggests that our profession really needs to look at how it teaches the interpretation of statistical inferences. The problem does not seem just to be technical misunderstandings; rather, statistical analysis is being asked to do something that it simply can’t do, to bring out a signal from any data, no matter how noisy. We suspect that, to make progress in pedagogy, statisticians will have to give up some of the claims we have implicitly been making about the effectiveness of our methods …

It would be nice if the statistics profession was offering a good solution to the significance testing problem and we just needed to convey it more clearly. But, no, … many statisticians misunderstand the core ideas too. It might be a good idea for other reasons to recommend that students take more statistics classes—but this won’t solve the problems if textbooks point in the wrong direction and instructors don’t understand what they are teaching. To put it another way, it’s not that we’re teaching the right thing poorly; unfortunately, we’ve been teaching the wrong thing all too well.

Andrew Gelman & John Carlin

Teaching both statistics and economics, yours truly can’t but notice that Read more…

Weekend read – The big myth on inequality: it just happened

September 9, 2022 5 comments

from Dean Baker

The standard line in policy circles about the soaring inequality of the last four decades is that it is just an unfortunate outcome of technological change. As a result of technological developments, education is much more highly valued and physical labor has much less value. The drop in relative income for workers without college degrees is unfortunate and provides grounds for lots of hand wringing and bloviating in elite media outlets, but hey, what can you do?

Manufacturing plays a central role in this story since it has historically been the major source of high-paying jobs for workers without college degrees. Manufacturing jobs offered a pay premium of almost 17.0 percent in the 1980s. This had fallen sharply by the start of the last decade and had largely disappeared in more recent years.

This decline in the wage premium has coincided with a plunge in unionization rates in manufacturing. Approximately 20 percent of manufacturing workers were unionized at the start of the 1980s. In 2021 just 7.7 percent of manufacturing workers were in unions, only slightly higher than the average of 6.1 percent in the private sector. Read more…

Share buybacks — again?

September 7, 2022 2 comments

from Peter Radford

What isn’t said is often more telling than what is.  The silence denotes either a disrespect for thorough analysis or an ignorance of issues beyond the ken of the speaker.  Then, of course, a third option arises: that those issues are an embarrassment to the point being made and are thus best left unmentioned.

For some reason stock buybacks appear to fall into such a zone of silence.  There is some controversy currently about the topic because of the recent proposal to impose a very modest tax on stock buybacks here in the U.S.

The usual arguments have been put forward to defend buybacks.

Michael Mauboussin, who is head of something called consilient research in an arm of Morgan Stanley, recently wrote this in an op-ed for the Financial Times:

“An essential role of an efficient economic system is the reallocation of capital away from businesses with limited prospects to those with more potential. Buybacks facilitate this process, and nearly all of the proceeds are reinvested in the shares of other companies.”

All you need to know about the oddity of the topic is contained within these two sentences. Read more…

WEA Commentaries 

September 6, 2022 Leave a comment

Econometric FUQs

September 5, 2022 3 comments

from Lars Syll

Mostly Harmless EconometricsIf you can’t devise an experiment that answers your question in a world where anything goes, then the odds of generating useful results with a modest budget and nonexperimental survey data seem pretty slim. The description of an ideal experiment also helps you formulate causal questions precisely. The mechanics of an ideal experiment highlight the forces you’d like to manipulate and the factors you’d like to hold constant.

Research questions that cannot be answered by any experiment are FUQs: fundamentally unidentified questions.

One of the limitations of economics is the restricted possibility to perform experiments, forcing it to mainly rely on observational studies for knowledge of real-world economies.

But still — the idea of performing laboratory experiments holds a firm grip on our wish to discover (causal) relationships between economic ‘variables.’If we only could isolate and manipulate variables in controlled environments, we would probably find ourselves in a situation where we with greater ‘rigour’ and ‘precision’ could describe, predict, or explain economic happenings in terms of ‘structural’ causes, ‘parameter’ values of relevant variables, and economic ‘laws.’ Read more…

Economics as ideology

August 30, 2022 3 comments

from Lars Syll

Study proves trickle-down didn't trickle | PoliticsNCTax cuts for the wealthy were supposed to stimulate growth and make everyone better off. There was dispute about this within the profession, but there were also many economists who provided intellectual support for the claim that tax cuts will create growth and widespread prosperity. The evidence from the Bush and Reagan tax cuts does not support this claim, but it is still made by some economists and this gives those who are serving wealthy interests or who want to force government to shrink by starving it of revenue the cover they need for their arguments …

We do need more humility about what we do and do not know, more willingness to change our minds when the evidence disagrees with our favorite theoretical model, and the willingness to acknowledge disagreement within the profession. But most of all we need to take a strong stand against those inside and outside the profession who misuse economic theory and empirical results for political and ideological purposes.

Mark Thoma

You never hear anyone at our seminars telling the lecturer that the assumptions on which his models are built are only made for ideological reasons. But that does not necessarily mean — whether on the surface or not — that academic analysis is judged on its merits. What it means is that we have a catechism that no one dares to question. Read more…

Rosa Luxemburg on Czarist Russia

August 29, 2022 2 comments

After reading her contemporary Alfred Marshall, reading Rosa Luxemburg (born in Poland, 1871-1919) is a joy. The clarity of the prose, the consistence of the arguments, the sheer knowledge of events and facts. She backed an anti-imperialist socialist agenda coupled with – no, based upon – differences of view and discussion in combination with cultural and linguistic diversity. In my view, she would have backed the growth of international food supply chains binding Ukraine, Russia, Turkey and Morocco, among other countries together. But she would have despized the cartelization of the inernational grain trade (five companies rule the roost) and the preponderance of financial and shareholder interests. One of the points where Putin had to back off is the agreement that he will not attack ships transporting Ukrainian grain.. Might Luxemburg have seen this as an annti-imperialist glimmer of hope and a token of the growing power of non-western countries? Or as a cynical proof of the power of international grain trade cartels? About this we can be clear: she would have been totally against the Russian cultural assimilation policies in the Donbas. Here an excerpt from the Junius pamphlet, written when she was, during world war I, in jail. For me, it t rings some bells, even when you have to change ‘Dardanelles’ into ‘Crimea’ and ‘Austria’ to ‘USA’.

Russian imperialism, like that of western nations, consists of widely diversified elements. Its strongest strain is not, however, as in Germany or England, the economic expansion of capital, hungry for territorial accumulation, but the political interests of the nation. To be sure, Russian industry can show a considerable export to the Orient, to China, Persia and Central Asia, and the Czarist Government seeks to encourage this export trade because it furnishes a desirable foundation for its sphere of interest. But national policies here play an active, not a passive, role. On the one hand, the traditional tendencies of a conquest-loving Czardom, ruling over a mighty nation whose population today consists of 172 millions of human beings, demand free access to the ocean, to the Pacific Ocean on the East, to the Mediterranean on the South, for industrial as well as for strategic reasons. On the other hand, the very existence of absolutism, and the necessity of holding a respected place in the world-political field, and finally the need of financial credit in foreign countries without which Czarism cannot exist, all play their important part. We must add to these, as in every other monarchy, the dynastic interest. Foreign prestige and temporary forgetfulness of inner problems and difficulties are well known family remedies in the art of ruling, when a conflict arises between the government and the great mass of the people.

Read more…

How to decimate the corporate tax-avoidance industry

August 26, 2022 2 comments

from Dean Baker

The Inflation Reduction Act includes a remarkable innovation. Share buybacks will be taxed at a 1% rate. This is a huge deal, not only because it taxes money that was often escaping taxation at the individual level, but it is a move away from basing the corporate income tax on profits, which can be easily manipulated, to taxing returns to shareholders.

It is time for a major and simple overhaul of the corporate income tax system. The main problem with the current system is that it is focused on the wrong target. Instead of taxing corporate profits, we should be taxing stock returns to investors.

The big issue here is that corporate profits are not a well-defined concept. A thousand issues arise in determining profit, all of which depend to a substantial extent on judgment calls by accountants. Depreciation of capital is the most obvious problem, but there are many others.

What’s Visible, What’s Not

While profits are something that we cannot see, returns to shareholders can be easily seen. This is simply the increase in market capitalization, plus whatever money is paid out in dividends. This information is readily available on dozens of financial websites. Read more…

Tax stock buybacks?

August 25, 2022 2 comments

from Peter Radford

Taking a short break from my crusade to get information taken more seriously in economics …

Yesterday’s Financial Times includes, on page 9 of the print edition, one of its regular “Market Insights” columns.  This is the space the FT allocates to sundry financial market types to opine on subjects of general interest to other financial market types.  It’s always a good read if you want to gain insight into how our magnificent financiers talk to themselves whilst allocating capital appropriately around the economy.  Well that’s what they see themselves doing, so let’s not nitpick.

The column yesterday was written by a luminary of the investment community, someone who sat on the board of a popular retirement fund, and who has written extensively on subjects related to finance, investing and so on through the years.  The subject was the possibility of eliminating the new tax that Congress just established on stock buybacks.  The new tax, all of 1% and thus hardly onerous, has stirred up a ton of ire in the corporate world where stock buybacks are viewed as a centerpiece of good “stewardship”.  That is if you consider stewardship to be centered purely on making shareholders happy. Read more…

Science and crossword solving

August 23, 2022 2 comments

from Lars Syll

Evidence and Inquiry: Towards Reconstruction in Epistemology by Susan Haack  - Hardcover - Reprint - 1994 - from Common Crow Books (SKU: B54435)The model is not . . . how one determines the soundness or otherwise of a mathematical proof; it is, rather, how one determines the reasonableness or otherwise of entries in a crossword puzzle. . . . The crossword model permits pervasive mutual support, rather than, like the model of a mathematical proof, encouraging an essentially one-directional conception. . . . How reasonable one’s confidence is that a certain entry in a crossword is correct depends on: how much support is given to this entry by the clue and any intersecting entries that have already been filled in; how reasonable, independently of the entry in question, one’s confidence is that those other already filled-in entries are correct; and how many of the intersecting entries have been filled in.

Yours truly — an avid crossword solver himself — can’t but agree.

In inference to the best explanation, we start with a body of (purported) data/facts/evidence and search for explanations that can account for these data/facts/evidence. Having the best explanation means that you, given the context-dependent background assumptions, have a satisfactory explanation that can explain the evidence better than any other competing explanation — and so it is reasonable to consider the hypothesis to be true. Even if we (inevitably) do not have deductive certainty, our reasoning gives us a license to consider our belief in the hypothesis as reasonable.  Read more…

Inflation: where are we now?

August 22, 2022 1 comment

from Dean Baker

With the United States data we have seen from the last few months, it’s fair to say that no one has a very good idea of where the economy is. At the most basic level, we have seen seven months of incredibly rapid job creation this year; the economy added 3.3 million jobs through July, along with two consecutive quarters of negative growth. We don’t have to join the Trumpers in calling this a recession, to be bothered by seeing two main economic indicators going in opposite directions.

I suspect most economists (I haven’t done a poll) would agree that the negative growth reported for the first two quarters was a statistical fluke. The GDP data are often revised by large amounts, so it would not be surprising if we see a very different picture after comprehensive revisions next year.

In this respect, it is worth noting Gross Domestic Income (GDI) grew at a 1.8 percent annual rate in the first quarter. In principle, GDI should be the same as GDP, since it is just measuring the income side of the GDP equation. While the two measures never measure up exactly, the size of the divergence in the first quarter was extraordinary. This is consistent with the view that GDP for the quarter may be revised upward. (We don’t have GDI data for the second quarter yet.)

Is Inflation Slowing?     

Read more…

Econometrics — the danger of calling your pet cat dog

August 20, 2022 3 comments

from Lars Syll

The assumption of additivity and linearity means that the outcome variable is, in reality, linearly related to any predictors … and that if you have several predictors then their combined effect is best described by adding their effects together …

catdogThis assumption is the most important because if it is not true then even if all other assumptions are met, your model is invalid because you have described it incorrectly. It’s a bit like calling your pet cat a dog: you can try to get it to go in a kennel, or to fetch sticks, or to sit when you tell it to, but don’t be surprised when its behaviour isn’t what you expect because even though you’ve called it a dog, it is in fact a cat. Similarly, if you have described your statistical model inaccurately it won’t behave itself and there’s no point in interpreting its parameter estimates or worrying about significance tests of confidence intervals: the model is wrong.

Andy Field

Econometrics fails miserably over and over again — and not only because of the additivity and linearity assumption. Read more…

Say it ain’t so

August 19, 2022 4 comments

from Peter Radford

re-visiting economics’ basic concepts

I am nothing if not annoying.  Allow me to elaborate.

Let’s be basic.

I mean really really basic.

Our model world initially consists of two people, Adam and Eve.  I know, it’s been done before.  But we are economists.  What are we interested in?  What problems that Adam and Eve face do we want to study?

Well, they need energy.  Human bodies, like all ordered structures, need flows of energy to maintain that structure.  The Second Law of Thermodynamics is the damndest thing.  It gets in the way.  But that’s life.  So what do Adam and Eve do?  They go look for energy, which in our speak we call food.  They avert death by searching for, finding, and consuming food.  Problem solved.

What do we make of this?

Demand — the need for a supply of energy — precedes its supply.  And that the search for, location of and ultimately the consumption of that energy requires more energy.  We are stuck in a loop.  We can summarize the search and location parts of the process as work.  And work requires its own source of energy.  

One thing leads to another as they say.  But cut to its absolute minimalist core, work is about sources of energy.  It is the application of energy to a task, which in a primitive sense is simply survival.  And the sum of all the work being done is the sum of all the energy gathered and processed to satisfy the demand for — energy.

I know.  This is absurd reduction.  But that’s where we need to go in order to clarify what an economy actually is.  It is the sum of work being done.  It is an energy flow. Read more…

Jürgen Habermas and Hans Albert on the weaknesses of mainstream economics

August 17, 2022 Leave a comment

from Lars Syll

On the Logic of the Social Sciences | Jurgen Habermas, Shierry Weber Nicholsen, Jerry A. Stark | Paperback OctavoThe weaknesses of social-scientific normativism are obvious. The basic assumptions refer to idealized action under pure maxims; no empirically substantive lawlike hypotheses can be derived from them. Either it is a question of analytic statements recast in deductive form or the conditions under which the hypotheses derived could be definitively falsified are excluded under ceteris paribus stipulations. Despite their reference to reality, the laws stated by pure economics have little, if any, information content. To the extent that theories of rational choice lay claim to empirical-analytic knowledge, they are open to the charge of Platonism (Modellplatonismus). Hans Albert has summarized these arguments: The central point is the confusion of logical presuppositions with empirical conditions. The maxims of action introduced are treated not as verifiable hypotheses but as assumptions about actions by economic subjects that are in principle possible. The theorist limits himself to formal deductions of implications in the unfounded expectation that he will nevertheless arrive at propositions with empirical content. Albert’s critique is directed primarily against tautological procedures and the immunizing role of qualifying or “alibi” formulas.

This critique of normative-analytic methods argues that general theories of rational action are achieved at too great a cost when they sacrifice empirically verifiable and descriptively meaningful information … Against the recent normativism of pure economics, Albert adduces the old viewpoint that an economic theory must make assumptions about the actions of subjects in their social roles … The system of exchange relationships is so little isolated from society as a whole that the social behavior of economic subjects cannot be comprehended independently of the institutional context, that is, the extra-economic motivational patterns: “Immunization against· the influence of so-called extra-economic factors leads to immunization against experience as such.”

Read more…

Markets are only a sub-set of economic life

August 15, 2022 1 comment

from Ken Zimmerman  (originally a comment)

Economic life is the activities through which people produce, circulate and consume things, the ways that people and societies secure their subsistence or provision themselves. Activities by which communities sustain themselves. ‘[T]hings’ is, however, an expansive term. It includes material objects, but also the immaterial: labor, services, knowledge and myth, poems, religion, names and charms, and so on. In different times and places, different ones of these will be important resources in society, and when they are important they come within the purview of economic anthropologists. That is, where some economists have identified economic life in terms of the sorts of mental calculus that people use and the decisions that they make (for example, utility maximization), which stresses the form of thought of the person being studied (theories), most economic anthropologists would identify it in terms of the substance of the activity; even those who attend to the mental calculus are likely to do so in ways that differ from what is found in formal economics (for example, Gudeman 1986; Gudeman and Rivera 1991). This substance includes markets in the conventional sense, whether village markets in the Western Pacific or stock markets in the First World. However, these markets are only a sub-set of economic life, and in accord with their tendency to see the interconnectedness in social life, economic anthropologists tend to situate things like markets or other forms of circulation, or production or consumption, in larger social and cultural frames, in order to see how markets, to continue the example, affect and are affected by other areas of life.

You might ask, how do top subjects of modern economists such as financialization, stock and commodity markets, hedging, private equity, etc. serve this definition? Read more…

Dumb and Dumber — the Chicago economics version

August 11, 2022 1 comment

from Lars Syll

dumb_aSome years ago, in a lecture on the US recession, Robert Lucas gave an outline of what the New Classical school of macroeconomics today thinks on the latest downturns in the US economy and its future prospects.

Lucas shows that real US GDP has grown at an average yearly rate of 3 per cent since 1870, with one big dip during the Depression of the 1930s and a big — but more minor — dip in the recent recession.

After stating his view that the US recession that started in 2008 was basically caused by a run for liquidity, Lucas then goes on to discuss the prospect of recovery from where the US economy is today, maintaining that past experience would suggest an “automatic” recovery if the free market system is left to repair itself to equilibrium unimpeded by social welfare activities of the government.

As could be expected there is no room for any Keynesian-type considerations on eventual shortages of aggregate demand discouraging the recovery of the economy. As usual in the New Classical macroeconomic school’s explanations and prescriptions, the blame game points to the government and its lack of supply-side policies.

Lucas is convinced that what might arrest the recovery are higher taxes on the rich, greater government involvement in the medical sector and tougher regulations of the financial sector. But — if left to run its course unimpeded by European-type welfare state activities — the free market will fix it all. Read more…

A coherent alternative has to be proposed

August 10, 2022 4 comments

from Nikolaos Karagiannis and Issue 94 RWER

The practical use of the term “neoliberal” exploded in the 1990s, when it became closely associated with two developments. One of these was financial deregulation, which would culminate in the 2008 financial crash and in the still-lingering euro debacle. The second was economic hyper-globalization, which accelerated thanks to free flows of finance and to new, more ambitious types of trade agreements. Financialization and hyper-globalization have become the most overt manifestations of neoliberalism in today’s world.[1]

That neoliberalism is a highly biased concept does not mean that it is irrelevant or unreal. Who can deny that the world has experienced a decisive shift towards markets from the 1980s on? Or that centre-left politicians – Democrats in the US, socialists and social democrats in Europe – enthusiastically adopted some of the central creeds of Thatcherism and Reaganism, such as deregulation, privatization, financial liberalization and individual enterprise? Much of contemporary policy discussions remain infused with free market principles. However, the looseness of the term neoliberalism also means that criticism of it often misses key points. The real trouble is that neoliberal economics shades too easily into ideology, constraining the choices that different countries appear to have and providing cookie-cutter solutions.[2]

However, neoliberalism decouples political liberalism from economic liberalism and promotes commoditization of everything and the needs of transnational corporations over those of individuals. Read more…

Yanis Varoufakis on the irrelevance of mainstream economics

August 8, 2022 8 comments

from Lars Syll

Varoufakis is undoubtedly right — there is indeed something about the way mainstream economists construct their models that obviously doesn’t sit right.

One might have hoped that humbled by the manifest failure of its theoretical pretences during the latest economic-financial crises, the one-sided, almost religious, insistence on axiomatic-deductivist modelling as the only scientific activity worthy of pursuing in economics would give way to methodological pluralism based on ontological considerations rather than formalistic tractability. But Read more…

Machine age musings on algorithmic growth theory

August 7, 2022 1 comment

from Peter Radford

Don’t mind me.  I am just thinking out aloud…

That we live in a Machine Age is indisputable.  Our lifestyles depend entirely upon the mediation of machines.  Without them modernity collapses back to whatever existed in the prior ages and we surrender most of what we currently cherish.

And it is important to use the phrase “machine age” because other phrases such as Industrial Age and so on limit us.  Some say we are now entering a Digital Age, but this too is a mistake.  All that is changing is the nature of our machines.  The Machine Age lives on.

So what is a machine?

It is a piece of information that allows us to channel energy and concentrate it such that we amplify the output we expect from that application of energy.  In this case the information is embodied in a plan, design, or layout of a particular physical structure through which we harness the energy.  The nature of that information has changed mightily throughout the Machine Age, ranging from the design of steam engines at one end to the design of supercomputers at the other.  At its core, though, the notion remains the same.  The application of information to the harnessing of energy is the basis of economic activity.  We might even say that we don’t simply harness energy through the use of machines: we also harvest it.  Or, at least, we use that aspect of energy available to do work.  And an economy is simply the totality of work we need to do to provide whatever it is we feel we want — whether those “wants” are essential or luxurious is irrelevant to this discussion.  That’s a moral not a machinery question. Read more…

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