Ryan, deficits and hypocrisy

April 13, 2018 4 comments

from Peter Radford

Paul Ryan is leaving Congress. Before he had finished announcing his upcoming retirement the airwaves were awash with commentary about his legacy.

Count me as one of those who have a particularly strong perspective on this. Paul Ryan was, and presumably still is, a supremely hypocritical human being.

Recall how he sprang into public consciousness. He quickly established himself as a severe right winger, but one with the smarts to back it all up. He promoted himself as a thoughtful conservative. He quoted all the thinkers one has to refer to if one is to be such a person. Ayn Rand was his go-to intellectual foundational source.

He spoke eloquently about the damage that Federal deficits would do. He berated Democrats, and Obama especially, for their wanton reliance on debt to pay for rescuing the economy in the aftermath of the Great Recession. His mantra was that if we would only set taxpayers free, if we would only slash social spending, and if we would only see the sense in balancing our budget then America would enter a new golden age.

Well, a golden age for the wealthy at any rate.

He was, and presumably still is, one of those far right conservatives who honestly believe that cutting away the social safety net from underneath our fellow citizens will somehow lead to their discovery of endless vitality, determination, and virtue sufficient to lift them free of poverty, sickness, or age whichever of which is the cause of their reliance on that safety net.  Read more…

More evidence of the skills shortage in top management

April 13, 2018 9 comments

from Dean Baker

We all know about the skills shortage Harvard has to pay investment managers millions to lose the school a fortune on its endowment, Facebook can’t find a CEO who can avoid compromising its customers’ privacy, and restaurant managers apparently don’t understand that the way to get more workers is to offer higher pay. The NYT gives us yet another article complaining about labor shortages.

The complaint is that restaurants have small profit margins and therefore can’t afford to offer higher pay to their workers. The way markets are supposed to work is that businesses that can’t afford to pay the market wage go out of business. This is why we don’t still have half of our workforce employed in agriculture. Factories and other urban businesses offered workers better paying opportunities. Most farms could not afford to match the pay and therefore folded often with the farm owner themselves moving to new employment.

This is the story that we should expect to see with restaurants if there really is a labor shortage. We should start to see more rapidly rising wages. The restaurants that can’t pay the market wage go under. That may not be pretty, but that’s capitalism. We tell that to unemployed and low paid workers all the time.  Read more…

ET1%: blindfolds created by economics

April 12, 2018 3 comments

from Asad Zaman

In my paper on “The Empirical Evidence Against Neoclassical Utility Theory: A Survey of the Literature”, I have argued that economic theories act as a blindfold, preventing economists from seeing basic facts about human behavior, obvious to all others. For instance, economists consider cooperation, generosity, integrity (commitments), and socially responsible behavior, as anomalies requiring explanation, while all others consider these as natural aspects of human behavior.

Far deeper insight into the blindfolds created by economic theory is obtained when we realize that these are not random mistakes, made due to defective reasoning or neglect of empirical evidence. If the shopkeeper systematically makes mistakes which always increase the total bill, we can conclude that the mistakes are purposeful. Similarly, strong and repeated commitment of exactly the same mistakes, flying in face of all empirical evidence, reveals the deep ideological commitments which create these systematic errors.  In particular, the goal of this note is to show that modern economics is not what it claims and pretends to be: an objective, factual and scientific description of the laws governing capitalist economies. Instead, it is actually a branch of moral philosophy, and provides a justification for the inequality and injustice built into the system, by “showing” that these are necessary for the functioning of the system, and the system itself is fair for all participants, and leads to the best possible outcomes.  read more

Keynesian uncertainty

April 12, 2018 45 comments

from Lars Syll

0In “modern” macroeconomics — Dynamic Stochastic General Equilibrium, New Synthesis, New Classical and New ‘Keynesian’ — variables are treated as if drawn from a known “data-generating process” that unfolds over time and on which we therefore have access to heaps of historical time-series. If we do not assume that we know the “data-generating process” – if we do not have the “true” model – the whole edifice collapses. And of course, it has to. Who really honestly believes that we have access to this mythical Holy Grail, the data-generating process?

“Modern” macroeconomics obviously did not anticipate the enormity of the problems that unregulated “efficient” financial markets created. Why? Because it builds on the myth of us knowing the “data-generating process” and that we can describe the variables of our evolving economies as drawn from an urn containing stochastic probability functions with known means and variances. Read more…

Ten years after the crash (8 charts)

April 11, 2018 12 comments

from David Ruccio     

“. . . ten years on, U.S. capitalism has created the conditions for
renewed instability and another, dramatic crash.”

The economic crises that came to a head in 2008 and the massive response—by the U.S. government and corporations themselves—reshaped the world we live in.* Although sectors of the U.S. economy are still in one of their longest expansions, most people recognize that the recovery has been profoundly uneven and the economic gains have not been fairly distributed.

The question is, what has changed—and, equally significant, what hasn’t—during the past decade?

DJCA

Let’s start with U.S. stock markets, which over the course of less than 18 months, from October 2007 to March 2009, dropped by more than half. And since then? As is clear from the chart above, stocks (as measured by the Dow Jones Composite Average) have rebounded spectacularly, quadrupling in value (until the most recent sell-off). One of the reasons behind the extraordinary bull market has been monetary policy, which through normal means and extraordinary measures has transferred debt and put a great deal of inexpensive money in the hands of banks, corporations, and wealth investors.  Read more…

Modern Money Theory (MMT) vs. Structural Keynesianism

April 10, 2018 17 comments

from Thomas Palley

A journalist sent me some questions about MMT. My answers are below.

1. What are the major flaws you see within Modern Monetary Theory?

(A) I like to say that MMT is a mix of “old” and “new” ideas. The old ideas are well known among Keynesian economists and are correct, but the new ideas are either misleading or wrong.

The essential old idea, which everybody knows, is government has the power to issue money. We used to talk of “printing” money. In today’s electronic world we talk about “keystroke” money created by electronic credit entries.

Everyone knows that because government has the capacity to create money, it can always pay its bills and debts by printing money. But having the capacity is not the same thing as saying it should, which is the beginning of where MMT goes astray.

In economic debate and economic journalism there is a “demand for difference”. On one side you have extreme budget hawks who see every deficit as a dire existential threat. MMT is the counterpart to the hawks. And here’s the rub. MMT is needed as an anti-dote to austerity hawks, but neither make for good economic theory.

That creates a dilemma for progressive economists. On one hand, there is need for a powerful progressive polemic to counter neoliberal austerity polemic. The basic MMT message that government has a lot more fiscal space than mainstream economists say, is correct. On the other hand, MMT’s theoretical arguments are not novel, and are sometimes incorrect.  Read more…

How to get published​ in top economics journals

April 9, 2018 2 comments

from Lars Syll

an-inconvenient-truth1By the early 1980s it was already common knowledge among people I hung out with that the only way to get non-crazy macro-economics published was to wrap sensible assumptions about output and employment in something else, something that involved rational expectations and intertemporal stuff and made the paper respectable. And yes, that was conscious knowledge, which shaped the kinds of papers we wrote.

Paul Krugman

More or less says it all, doesn’t it?

And for those of us who do not want to play according to​ those sickening hypocritical rules — well, here’s one particularly good alternative.

Why should the poor pay high drug prices?

April 8, 2018 3 comments

from Dean Baker

We have seen a lot of hyperventilating in political circles over Donald Trump’s recently proposed tariffs on steel and aluminum. While these do not seem like well-considered policies, and are likely to do more harm than good even from the narrow standpoint of increasing manufacturing employment, they are not by themselves the horror story being presented.

Steel prices often fluctuate by 20 or 30 percent over the course of a year, as they did in 2016. If tariffs raise the price in the US by 10 percent, that would be unfortunate for downstream industries, but not exactly a catastrophe.

However, more important than the specifics of a steel tariff is the implicit assumption that the country as a whole has an interest in stronger and longer patent and copyright protection. Many pundits have attacked Trump’s focus on steel and manufacturing because they argue, we should be more concerned about protecting US corporations’ patents and copyrights overseas. This doesn’t make sense.  Read more…

Keynes vs. Keynesianism

April 8, 2018 17 comments

from Lars Syll

keynes3But these more recent writers like their predecessors were still dealing with a system in which the amount of the factors employed was given and the other relevant facts were known more or less for certain. This does not mean that they were dealing with a system in which change was ruled out, or even one in which the disappointment of expectation was ruled out. But at any given time facts and expectations were assumed to be given in a definite and calculable form; and risks, of which, tho admitted, not much notice was taken, were supposed to be capable of an exact actuarial computation. The calculus of probability, tho mention of it was kept in the background, was supposed to be capable of reducing uncertainty to the same calculable status as that of certainty itself …

Thus the fact that our knowledge of the future is fluctuating, vague and uncertain, renders Wealth a peculiarly unsuitable subject for the methods of the classical economic theory.

John Maynard Keynes QJE 1937

And this emphasis on the importance of uncertainty is not even mentioned in IS-LM or ‘New’ Keynesianism …

Disagreeing with Krugman: Is China stealing knowledge?

April 7, 2018 17 comments

from Dean Baker

I would agree with pretty much all of Paul Krugman’s criticisms of Donald Trump’s trade war with China, but I would strongly disagree with one of his criticisms of China. He tells readers:

“In some ways, China really is a bad actor in the global economy. In particular, it has pretty much thumbed its nose at international rules on intellectual property rights, grabbing foreign technology without proper payment.”

The issue here is who set the rules and what is proper payment.

The problem is that it was largely the United States that has set the rules in this story and it is demanding ever more money for items protected by its patent and copyright monopolies. We do this through our control of trade arrangements, most importantly the WTO where we had the TRIPS provisions inserted as a late entry to the Uruguay Round that was concluded in 1994. These rules were about forcing developing countries to pay more money to companies like Pfizer and Microsoft for everything from drugs and medical equipment to seeds and software. It shouldn’t be surprising that developing countries like China might not like these rules.  Read more…

“Capitalism was built on the exploitation and suffering of black slaves and continues to thrive on the exploitation of the poor”

from David Ruccio

memphis4

50 years ago, Martin Luther King Jr. was assassinated, just days after joining a march of thousands of African-American protestors down Beale Street, one of the major commercial thoroughfares in Memphis, Tennessee. King and the other marchers were demonstrating their support for 1300 striking sanitation workers, many of whom held placards that proclaimed, “Union Justice Now!” and “I Am a Man.”  Read more…

The efficient market hypothesis — pseudoscientific mumbo-jumbo​

April 6, 2018 9 comments

from Lars Syll

The efficient market hypothesis — EMH — argues there is no free lunch and prices are ‘right.’ Well, as we all know, that is not true. dogNoise does influence asset prices and the law of one price is blatantly violated again and again.

Of course, THERE ARE IDIOTS, as Larry Summers once (in)famously put it. When visiting Chicago, look around …

The price is often wrong, and sometimes very wrong … If policy-makers simply take it as a matter of faith that prices are always right, they will never see any need to take preventive action. But once we grant that bubbles are possible, and the private sector appears to be feeding the frenzy, it can make sense for policy-makers to lean against the wind in some way.

Central banks around the world have had to take extraordinary measures to help economies recover from the financial crisis. The same people​ who complain most about these extraordinary measures​ are also those who would object to relatively minor steps to reduce the likelihood of another catastrophe. That is simply irrational.

Richard Thaler

Watch the boulder

April 6, 2018 19 comments

from Peter Radford

There’s a bold rolling down the hill.

We are watching it carefully. It is accelerating. It is enormous. It will mow us down. Lives will be lost. Or at least livelihoods will be lost. People will suffer. The boulder is terrifying.

But, hey, let’s keep watching.

That’s about the attitude of the people who keep on talking about the imminent tsunami of automation, AI, and other so-called disruptive technologies. Let’s keep watching because it’s bad — really, really, bad.

The good folks at Axios distribute a regular synopsis of all the hyperbole surrounding the future of work and today’s edition caught my eye. Buried deep in the summary is a short item headed: “A long disruption is ahead, with low-paying jobs“.

The contents are grim reading.

Here’s a taste:

“Their big picture: There may be a long, deep economic disruption lasting decades and taking millions of jobs. The economy will eventually come out of it. But wages for most jobs may be too low to sustain a middle-class lifestyle.

Important background: In the 19th century, it took about six decades for U.S. wages to recover after the first industrial age automation of the 1810s. And the agriculture-to-industrial shift of the 20th century lasted four decades.”

This is hardly something to ignore.  Read more…

US wins trade war! China goes generic big time

April 5, 2018 3 comments

from Dean Baker

Donald Trump has proved the skeptics wrong, it seems that the American people stand to be big winners as a result of his trade war. The Chinese government announced a major initiative to promote the manufacture and use of generic drugs.

The reason this is potentially a big deal for the United States is that it could mean that China intends to push the envelope in replacing drugs protected by government-granted patent monopolies with drugs sold at free market prices. While the TRIPs provisions of the WTO do require members to respect patents and copyrights, there are flexibilities, such as compulsory licensing, to allow far more competition that what we see in the United States market.

Countries also have varying rules on what items can be patented. For example, India has far more stringent patent rules than the United States so that many drugs that are protected by patents in the U.S. are sold in a free market in India.

This can matter hugely for people in the United States since if China joins India as a mass producer of high quality generic drugs it will become increasingly difficult for the U.S. drug companies to maintain an island of protected prices in the United States. The gap between the patent protected price for drugs like the Hepatitis C drug Solvaldi and new cancer drugs is often more than 100 to 1 (equivalent to a 10,000 percent tariff) and can be as much as 1000 to 1.   Read more…

Mathematical economics — an unmixed evil

April 5, 2018 26 comments

from Lars Syll

Balliol Croft, Cambridge
27. ii. 06
My dear Bowley,

I have not been able to lay my hands on any notes as to Mathematico-economics that would be of any use to you: and I have very indistinct memories of what I used to think on the subject. I never read mathematics now: in fact I have forgotten even how to integrate a good many things.

marshallBut I know I had a growing feeling in the later years of my work at the subject that a good mathematical theorem dealing with economic hypotheses was very unlikely to be good economics: and I went more and more on the rules — (1) Use mathematics as a short-hand language, rather than as an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics. (6) If you can’t succeed in 4, burn 3. This last I did often.

I believe in Newton’s Principia Methods, because they carry so much of the ordinary mind with them. Mathematics used in a Fellowship thesis by a man who is not a mathematician by nature — and I have come across a good deal of that — seems to me an unmixed evil. And I think you should do all you can to prevent people from using Mathematics in cases in which the English language is as short as the Mathematical …

Your emptyhandedly,
Alfred Marshall

How unequal are world incomes?

April 4, 2018 1 comment

from C.P. Chandrasekhar and Jayati Ghosh

In discussions of global inequality, there is general agreement that, whatever else may have happened, within-country inequality has increased in most cases, even as between-country inequality has come down. But overall, because of the recent emergence of countries with large populations like China and India, there has actually been some reduction in global inequality, because of increasing incomes in the  “middle” of the global distribution. Chart 1 shows that, whether measured by the Gini coefficient (a measure of the dispersion of incomes of the population) or the Palma  ratio (the ratio of the share of income of the top ten per cent of the population to the bottom 40 per cent), inequality has declined especially since the turn of the century.

Chart 1: Global income inequality appears to have come down

Source: World Inequality Report 2018.  Read more…

John Stuart Mill and the end of monetarism

April 3, 2018 2 comments

I apprehend that bank notes, bills, or cheques, as such, do not act on prices at all. What does act on prices is Credit, in whatever shape given, and whether it gives rise to any transferable instruments capable of passing into circulation or not.

John Stuart Mill, 1848

The relation of changes in M (money) to Y (income) and r (the interest rate) depends, in the first instance, on the way in which changes in M come about.”

John Maynard Keynes, 1936

John Cochrane has an interesting post about a Milton Friedman article. But the post does, fifty years after Friedman published the article, still not address the Main Monetarist Mistake: ignoring credit.  The entire discussion if money is neutral is redundant as money creating credit is not. Definitely not. Changes in credit – to be more precise: in the stocks of debt, in the flows of new credit and in the terms of availability of credit –  do influence the short and the long term development of an economy. Debts and credits make a large difference to the long run development of countries. Here a fine Reinhart and Rogoff working paper about this, which also shows that financial crises are not rare. This is not just about bank credit – Microsoft financed the transfer of its intellectual property by intercompany payables which do show up in the statistics on international capital flows! Credit is an essential part of a capitalist and even a market economy. And, as Keynes suggested, it makes quite a difference if banks provide credit to enable households to buy existing houses or to enable companies or governments to invest in new roads and houses. Read more…

Privatization of public education

from David Ruccio

fig1

For the first time in American history, students in more than half of all U.S. states are paying more in tuition to attend public colleges or universities than the government contributes.

The privatization of public education has been under way for decades but this inflection point was hastened by deep cuts states made to their higher-education appropriations in the midst of the Second Great Depression.

Read more…

The Piketty effect

April 2, 2018 3 comments

from Eli Cook  

A few years ago, I opened my review of Thomas Piketty’s Capital in the 21st Century in the Raritan Quarterly Review with this “bait and switch” vignette. I thought the striking similarities between George and Piketty revealed that while history does not repeat itself, the “Pikettymania” that washed over the world in 2014 might bring forth once more an era in which – much like during the “Gilded Age” of Henry George – economic inequality was at the forefront not only of economic thought but political agitation, social anxiety and cultural discourse.[1]

Looking back now to those heady days in 2014, it is clear that Piketty’s groundbreaking study was just the beginning. The floodgates of inequality studies have been opened. The wave ushered in by Piketty has, in the past few years, come in many shapes and sizes: We now have global analyses such as Branko Milanovich’s Global Inequality, centuries-long histories such as Unequal Gains, and a collected volume dedicated entirely to the economic agenda titled After Piketty. The dramatic titles of other recent books reveal the current mood of inquiry, be it Thomas Shapiro’s Toxic Inequality: How America’s Wealth Gap Destorys Mobility, Deepens the Racial Divide, & Threatens Our Future, Dean Baker’s Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer Steven Teles and Lindsay Brink’s The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality or Brian Alexander’s Glass House: The 1% Economy and the Shattering of the All-American Town. It appears, that the “1 percent” have not only been gobbling up much of the wealth and income these past few decades but, in recent years, also the attention of economists, journalists and public intellectuals.[2]   Read more…

Keynes’ beauty contest

April 1, 2018 2 comments

from Lars Syll

beautyProfessional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each​ competitor has to pick not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgement are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.

J M Keynes General Theory

Still the best description of the logic of financial markets. Professional money management is at heart a guessing game where investors try to guess what other investors guess about other investors guess about the future …