China’s demographic crisis

June 3, 2021 1 comment

from Dean Baker

Both the Post and NYT had pieces today on how China is encouraging families to have more babies in order to counter an alleged demographic crisis. The basic story, which has been repeated many times in the U.S., is that China will be seeing a decline in the ratio of workers to retirees since families have had relatively few children over the last four decades. This is supposed to be really bad news, in fact, a crisis.

In response, China’s government is apparently taking steps to encourage families to have more children. This follows several decades in which it had the opposite policy in place, encouraging families to have just one child.

The crisis story is a bit hard to understand for those of us familiar with arithmetic. Every wealthy country has seen a sharp reduction in the ratio of working-age people to retirees. That is something that happens when better living standards and improved health care allow people to live longer. Also, when countries have gotten wealthier, people have chosen to have fewer children.

This rise in the ratio of retirees to the working-age population has not prevented both working-age people and retirees from enjoying higher living standards. This isn’t magic, productivity rises through time as technology improves and workers become better educated. This means that each worker can produce more output in the hours they work.

The graph below Read more…

The ritual of capitalization

June 2, 2021 10 comments

from Blair Fix

. . . the clergy aren’t priests … they’re economists.

There’s something mysterious about finance. The symbols are arcane. The math is complex. The practitioners are impressively educated. And the stakes are high. All of this gives finance the veneer of higher truth — as if quants are uncovering a reality not accessible to the rest of us. In a sense they are. But the ‘reality’ is not what you think.

When you look at stock-market numbers, they do point to a truth about the world. But it is a truth not about natural law or of human nature. It is a truth about human ideology. The reality is that finance is a quantitative belief system. At its center is a universal ritual — the ritual of capitalization. It is this ritual that underlies all stock-market numbers.

In this post, we’ll look at the regularities that stem from the ritual of capitalization. They are astonishing in scope — a breathtaking consistency to human behavior. They beg the mind to look for some material basis for their existence. But that is a mistake. The reality is that the regularities of capitalization are an artifact of ideas — a manifestation of capitalist ideology itself. A regularity from ritual.

Giving property a number

The ritual of capitalization starts with the institutional act of exclusion — namely property.1 Property, of course, has a deep history that long predates capitalism. I won’t wade into this history here. Instead, I’ll defer to Jean-Jacques Rousseau’s succinct (but apocryphal) telling of property’s emergence. Property arose when

[t]he first person who, having enclosed a plot of land, took it into his head to say ‘this is mine’ and found people simple enough to believe him …

Putting a fence around something and calling it ‘property’ is step 1 of capitalization. But property alone is not enough. Romans had property. So did most feudal kingdoms. But these societies did not have capitalization. To capitalize property, there is a second step. You must mix property with finance. Read more…

Racial wealth gap in the U.S.

June 2, 2021 Leave a comment

Is causality only in the mind?

June 2, 2021 2 comments

from Lars Syll

James HeckmanI make two main points that are firmly anchored in the econometric tradition. The first is that causality is a property of a model of hypotheticals. A fully articulated model of the phenomena being studied precisely defines hypothetical or counterfactual states. A definition of causality drops out of a fully articulated model as an automatic by-product. A model is a set of possible counterfactual worlds constructed under some rules. The rules may be the laws of physics, the consequences of utility maximization, or the rules governing social interactions, to take only three of many possible examples. A model is in the mind. As a consequence, causality is in the mind.

James Heckman

So, according to this ‘Nobel prize’ winning econometrician, “causality is in the mind.” But is that a tenable view? Yours truly thinks not. If one as an economist or social scientist would subscribe to that view there would be pretty little reason to be interested in questions of causality at all.  And it sure doesn’t suffice just to say that all science is predicated on assumptions. To most of us, models are seen as ‘vehicles’ or ‘instruments’ by which we represent causal processes and structures that exist and operate in the real world. As we all know, models often do not succeed in representing or explaining these processes and structures, but if we didn’t consider them as anything but figments of our minds, well then maybe we ought to reconsider why we should be in the science business at all … Read more…

Two kinds of inflation chart

June 1, 2021 3 comments

This chart shows the cumulative gain in the traditional inflation metric used by the Fed called the personal consumption deflator, in red, and a modified metric which equally weights the PCE and the S&P 500 in blue.

“This chart shows the cumulative gain in the traditional inflation metric used by the Fed called the personal consumption deflator, in red, and a modified metric which equally weights the PCE and the S&P 500 in blue.”

source: https://www.forbes.com/sites/vineerbhansali/2021/02/23/why-paying-attention-to-asset-price-inflation-is-important-for-investors/?sh=4f1909944399

Economists need to rethink the foundations of their discipline

June 1, 2021 8 comments

from Ken Zimmerman (originally a comment)

Economists are fixated on a framework developed for relationships that are fixed and predictable. Relationships involving humans are neither fixed nor predictable. So the problem infecting economics is a simple one — it’s using the wrong framework. Which means of course economists can never reveal anything of importance or useful in understanding economic relationships. Economists need to rethink the foundations of their discipline.

If, as I believe economics is a social science, here are some things economists need to consider in doing the make over of their discipline.

The social sciences are about how society works. Social scientists examine institutions like the government, the economy, and family; they also study how individuals and groups interact with one another and the roots of human behavior.

Some examples of social sciences include the following: Read more…

World population graph: past, present, and future

May 31, 2021 3 comments

Why econometric models by necessity are endlessly misspecified

May 31, 2021 2 comments

from Lars Syll

The impossibility of proper specification is true generally in regression analyses across the social sciences, whether we are looking at the factors affecting occupational status, voting behavior, etc. The problem is that as implied by the three conditions for regression analyses to yield accurate, unbiased estimates, you need to investigate a phenomenon that has underlying mathematical regularities – and, moreover, you need to know what they are. Neither seems true. I have no reason to believe that the way in which multiple factors affect earnings, student achievement, and GNP have some underlying mathematical regularity across individuals or countries. More likely, each individual or country has a different function, and one that changes over time. Even if there was some constancy, the processes are so complex that we have no idea of what the function looks like.

Misspecification in empirical models: How problematic and what can we do  about it? | VOX, CEPR Policy PortalResearchers recognize that they do not know the true function and seem to treat, usually implicitly, their results as a good-enough approximation. But there is no basis for the belief that the results of what is run in practice is anything close to the underlying phenomenon, even if there is an underlying phenomenon. This just seems to be wishful thinking. Most regression analysis research doesn’t even pay lip service to theoretical regularities. But you can’t just regress anything you want and expect the results to approximate reality. And even when researchers take somewhat seriously the need to have an underlying theoretical framework – as they have, at least to some extent, in the examples of studies of earnings, educational achievement, and GNP that I have used to illustrate my argument – they are so far from the conditions necessary for proper specification that one can have no confidence in the validity of the results.

Steven J. Klees

Most work in econometrics and regression analysis is made on the assumption that the researcher has a theoretical model that is ‘true.’ Read more…

Excessive wealth

May 30, 2021 2 comments

from Ken Zimmerman (originally a comment)

Following the ‘Great Depression’ excessive wealth required justification. Otherwise those who possessed it were looked on as freeloaders and featherbedders who played no or little useful part in society. FDR came from one of America’s wealthiest family’s but proved himself by his work ethic, care for ordinary Americans, and work to save the USA. Even the wealthy who wanted to be ostentatious feared public rebuke and legal punishments if they focused solely on protecting their wealth. At best excessive wealth was tolerated but seldom glorified, at least publicly. Mostly Americans found their heroes elsewhere.

Second, WWII reinforced the notion that in winning wars, protecting democracy, ensuring an economy that is both successful and good for all Americans the wealthy are not required and often an impairment for these goals. Particularly economic equity.

Third, the tax code, while not outlawing great wealth accumulation did ensure that accumulation was clearly limited and the wealthy’s tax rate was the highest with few escape routes.

All this began to change in the late 1970s. This effort was and is deliberate, cynical, funded by the politically right wing wealthy, and decidedly anti-democratic. Today, the totalitarian propaganda of this effort is almost impossible to escape.

How soon the next dip? – chart

May 30, 2021 1 comment

Where the 1% have the largest wealth share

May 29, 2021 5 comments

Debts, deficits, and patent monopolies

May 28, 2021 10 comments

from Dean Baker

Yes, it is spring. The flowers are blooming, the birds are singing, and the deficit hawks are whining. The proximate cause is President Biden’s new budget, which will push the ratio of government debt to GDP to its highest level ever.

The question is whether this should bother anyone who has a life? The projections show that the debt to GDP ratio will rise to 117 percent of GDP in 2031. If that sounds scary, consider that Greece’s debt to GDP ratio is over 180 percent. And, the bond vigilantes don’t seem to be too bothered by this. The interest rate on long-term Greek debt is 0.8 percent, compared to the 1.6 percent on U.S. Treasury bonds.

Of course if we really want to go big we can look at Japan, where the debt to GDP ratio is approaching 250 percent of GDP. It is paying 0.08 percent interest on its long-term debt.

But let’s get to the issue at hand, how patent monopolies are like government debt. Read more…

Weekend read: Why economic models do not explain

May 28, 2021 5 comments

from Lars Syll

Krugman on models (II) | LARS P. SYLLAnalogue-economy models may picture Galilean thought experiments or they may describe credible worlds. In either case we have a problem in taking lessons from the model to the world. The problem is the venerable one of unrealistic assumptions, exacerbated in economics by the fact that the paucity of economic principles with serious empirical content makes it difficult to do without detailed structural assumptions. But the worry is not just that the assumptions are unrealistic; rather, they are unrealistic in just the wrong way.

Nancy Cartwright

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

Testing causal explanations in economics

May 27, 2021 2 comments

from Lars Syll

Idealisations to the rescue | Opinion | Chemistry WorldThird, explanations fail by question (3.1) [“are the factors cited as possible causes of an event in fact aspects of the situation in which that event occurred?”] where the factors invoked as possible causes are idealisations. No doubt this claim will be considered contentious by some economists, accustomed as they are to explanations based on such dramatic assumptions as rational expectations, single-agent ‘economies’, and two-commodity ‘worlds’. The issue here turns on the distinction between abstraction (passing over or omitting to mention aspects of the causal history) and idealisation (invoking entities that exist only in the realm of ideas, such as most limit types and what Maki (1992) calls ‘theoretical isolations’). This distinction cannot be pursued here, but the general idea is that although every explanation involves abstraction insofar as we can never provide a complete list of the causes of any event, no genuine attempt at causal explanation can invoke as causes theoretical entities that have no existence other than in the minds and discourse of scientific investigators. For such entities cannot be aspects of real economic situations and are therefore ineligible as candidate causes. Explanations that invoke such entities therefore either fail, if offered as causal explanations in the sense I have described, or should be thought of as something other than causal explanations.

Jochen Runde

When it comes to modelling, yours truly does see the point often emphatically made for simplicity among economists and econometricians — but only as long as it doesn’t impinge on our truth-seeking. Read more…

Where are we going?

May 26, 2021 4 comments

from Peter Radford

Paul Krugman has been rightly skeptical about cryptocurrencies lately.  The extraordinary volatility in the price of Bitcoin, for example, has brought a bout of crypto mania to the fore in both the media and the marketplace.  And, as seems usual, various regulators around the world are arriving at the party about a decade after the launch of what their advocates call an alternative to the evils of fiat currencies.

I suppose it would be churlish of me to remind us all that the launch of each and every form of crypto assets is itself an act of fiat.  Instead of a government waving its wand, a small group of self-selected techie libertarians waves its collective wand, that is if a group of libertarians can be called a collective.  The former is, apparently evil, the latter a wonderful expression of freedom and democracy.

Whatever.

But Krugman’s larger criticism is more interesting: Read more…

US income and wealth by percentile – 2 graphs

May 25, 2021 3 comments

“Household Income by Percentile, for the time period 2019 to 2020. The open circle represents an estimate of income in the top percentile, including income gains for billionaires reported in April 2020.”
Source: Rhys McCarneyhttps://medium.com/@rhys.mccarney/wealth-inequality-the-gini-coefficient-and-the-pandemic-economy-fbc6a19bdd43
    Read more…

Functional finance and Ricardian equivalence

May 25, 2021 3 comments

from Lars Syll

According to Abba Lerner, the purpose of public debt is “to achieve a rate of interest which results in the most desirable level of investment.” He also maintained that an application of Functional finance will have a tendency to balance the budget in the long run:

Finally, there is no reason for assuming that, as a result of the continued application of Functional Finance to maintain full employment, the government must always be borrowing more money and increasing the national debt. There are a number of reasons for this.

dec3bb27f72875e4fb4d4b62daebb2fd161b36392c1a0626f00cfd2ece207d84First, full employment can be maintained by printing the money needed for it, and this does not increase the debt at all. It is probably advisable, however, to allow debt and money to increase together in a certain balance, as long as one or the other has to increase.

Second, since one of the greatest deterrents to private investment is the fear that the depression will come before the investment has paid for itself, the guarantee of permanent full employment will make private investment much more attractive, once investors have gotten over their suspicion of the new procedure. The greater private investment will diminish the need for deficit spending.

Third, as the national debt increases, and with it the sum of private wealth, there will be an increasingly yield from taxes on higher incomes and inheritances, even if the tax rates are unchanged. These higher tax payments do not represent reductions of spending by the taxpayers. Therefore the government does not have to use these proceeds to maintain the requisite rate of spending, and can devote them to paying the interest on the national debt.

Fourth, as the national debt increases it acts as a self-equilibrating force, gradually diminishing the further need for its growth and finally reaching an equilibrium level where its tendency to grow comes completely to an end. The greater the national debt the greater is the quantity of private wealth. The reason for this is simply that for every dollar of debt owed by the government there is a private creditor who owns the government obligations (possibly through a corporation in which he has shares), and who regards these obligations as part of his private fortune. The greater the private fortunes the less is the incentive to add to them by saving out of current income …

Fifth, if for any reason the government does not wish to see private property grow too much … it can check this by taxing the rich instead of borrowing from them, in its program of financing government spending to maintain full employment. The rich will not reduce their spending significantly, and thus the effects on the economy, apart from the smaller debt, will be the same as if Money had been borrowed from them.

Abba Lerner

Even if most of today’s mainstream economists do not understand Lerner, there once was one who certainly did: Read more…

Vaccinating the world: if we had grown ups in charge

from Dean Baker

People in policy debates are not supposed to question the desirability of patent monopolies as a mechanism for financing the development of new drugs and vaccines. After all, why ask a question that could jeopardize the profits of some of the world’s largest corporations? But, since I live out in Southern Utah, far away from the great centers of policy debate, I thought I would ask the question in reference to vaccines against Covid.

To be specific, suppose that instead of funneling money into drug companies to subsidize the patent monopoly financed system, we instead use this money, and added more to it, for the purpose of fully prefunding the development of vaccines. The condition of accepting funding is that all the work would be fully open-source.

This means that all the findings would be posted on the web, so that researchers around the world could build on them. It also means that any patents would be in the public domain so that any manufacturers, anywhere in the world, could produce the vaccines developed through this system, if they had the necessary expertise. The requirement for openness would also apply to the results of clinical trials, so it would be possible for researchers to know which vaccines were most effective for specific demographic groups and against which variants of the virus. Read more…

How do you explain this?

May 23, 2021 13 comments

United States

A Guide to Statistics on Historical Trends in Income Inequality | Center on  Budget and Policy Priorities

U.S. billionaires taxed at lower rate than bottom 50%

May 22, 2021 8 comments