As 2020 ends, let’s celebrate science

January 2, 2021 2 comments

from Blair Fix

We’ve finally reached the end of 2020, a year that many people are happy to forget. In the history books, 2020 will be known for little besides the Covid pandemic. Fortunately, the end of this disaster is in sight. With multiple vaccines starting to roll out, it looks like 2021 will be a better year.

Speaking of vaccines, I’ve been racking my brain to find things to be thankful for this holiday season. It’s not easy. My wife, daughter and I are in lockdown in Toronto. The rest of our extended families are in lockdown in Alberta and BC. So no family Christmas this year. I suspect it’s the same for many people. Fortunately, the Covid vaccine provides some light at the end of the tunnel. This is something to celebrate. But more than that, we should celebrate the whole enterprise that made the vaccine possible — science.

In the grand scheme of our species, it was not long ago that we believed infectious diseases were caused by ‘bad air’. The idea that germs cause disease became widely accepted only in the late 19th century, thanks largely to the work of Louis Pasteur. Vaccines are a similarly recent invention.

Our knowledge of infectious diseases is certainly something to celebrate. But as a political economist, I can’t help note how vaccination is stubbornly related to social inequalities. Vaccines are the ultimate public good — a life-saving device that is the product of our collective scientific effort. Predictably, though, this public good is not shared equally. In the last mile, vaccines are paywalled by private companies. So while in principle vaccines could be free for every human, in practice they are not. The result is that vaccination rates grow with income. The richer the country, the higher the vaccination rate. Here’s the relation in 1988. Read more…

End of the year thoughts on inequality and its remedies

January 1, 2021 4 comments

from Dean Baker

The approach of the end of the year seems a good time to sum up thoughts. My comments here will not be news to regular readers, but may be to others. Also, this exercise is helpful for me to keep my thoughts clear. (I also expect to take next week off, so you won’t be hearing from me for a while.)

Most of my work for the last several years has been focused on ways to reduce before tax inequality by reducing the amount of before-tax income that goes to those at the top of the income distribution. For better or worse, there don’t seem to be a lot of progressives that share this beat. There are a few points that are worth making.

First, my focus on reducing income at the top doesn’t mean for a second that I don’t see efforts at raising income for those at the bottom (and middle) as being important. I have long been involved with or worked alongside people trying to raise minimum wages, protect or increase Social Security benefits, and increase unionization rates.

These are very important efforts, but at the end of the day, our ability to raise incomes at the middle and bottom will depend on reducing incomes at the top. This gets to the old pie-cutting story. If we want those at the middle and bottom to have much bigger slices of the pie, the folks at the top will have to get by with smaller slices.

To see how skewed the pie eating has gotten, if the federal minimum wage had kept pace with productivity growth since 1968, as it did from its establishment in 1938 until 1968, it would be $24 an hour today. That means a single full-time minimum wage earner would have an income of $48,000 a year. A two-earner couple getting the minimum wage would have an income of $96,000 a year. Read more…

On logic and science

December 31, 2020 17 comments

from Lars Syll

Julia Rohrer в Twitter: "I don't always tweet about books I haven't  finished yet, but when I do, it's because they're awesome 📘 @_MiguelHernan  & Robins have a (free!) book on causalSuppose you conducted an observational study to identify the effect of heart transplant A on death Y and that you assumed no unmeasured confounding given disease severity L. A critic of your study says “the inferences from this observational study may be incorrect because of potential confounding.” The critic is not making a scientific statement, but a logical one. Since the findings from any observational study may be confounded, it is obviously true that those of your study can be confounded. If the critic’s intent was to provide evidence about the shortcomings of your particular study, he failed. His criticism is noninformative because he simply restated a characteristic of observational research that you and the critic already knew before the study was conducted.

To appropriately criticize your study, the critic needs to engage in a truly scientific conversation. For example, the critic may cite experimental or observational findings that contradict your findings, or he can say something along the lines of “the inferences from this observational study may be incorrect because of potential confounding due to cigarette smoking, a common cause through which a backdoor path may remain open”. This latter option provides you with a testable challenge to your assumption of no unmeasured confounding. The burden of the proof is again yours.

To be ‘analytical’ and ‘logical’ is something most people find recommendable. These words have a positive connotation. Scientists think deeper than most other people because they use ‘logical’ and ‘analytical’ methods. In dictionaries, logic is often defined as “reasoning conducted or assessed according to strict principles of validity” and ‘analysis’ as having to do with “breaking something down.” Read more…

Climate Change and the Social Contract

December 30, 2020 1 comment

Marcellus Andrews

I am sorry to say that I am about to confirm my marginal status in the economics profession by digging into a most unpleasant aspect of the already far too scary matter of climate change. I am going to consider why climate change will inevitably shred the contemporary American social contract – that evolving mix of markets and violence that creates knowledge and wealth, billionaires and prisoners, opportunity and social death in ways that fascinate and horrify the rest of humanity. I want to explain why climate change will force the United States, and every other market society, to abandon the practice of creating disposable classes of persons whose primary function is to serve as blood and bone buffers who absorb the risks of life at the cost of their bodies and souls. I am suggesting that the market fundamentalism of Milton Friedman and Friedrich Hayek, the inspirational twin intellectual dynamos of the profession for the past three decades or more, will soon slip into oblivion because climate change will push all of us to understand that unlimited capitalism is, in the end, inextricably connected to the disposability of human beings.

First, climate change destroys market fundamentalism by showing why market based inequalities necessarily lead to hierarchies of pleasure and suffering where the well-off regularly sacrifice the well-being and lives of the poor and vulnerable. Second, climate change poses such severe collective risks to societies that polities must explicitly choose whether to reorient national and local economic policy in ways that share these risks in an egalitarian manner or to deliberately shift these risks to the bottom of society, even at the cost of escalating the degree low-intensity civil conflict by broadening the American race/poverty/prison complex beyond the hard black/white color boundary.   read more

Debt, levered losses, & unemployment

December 29, 2020 Leave a comment

from Asad Zaman

A previous post on “Causes of the Global Financial Crisis” provided a detailed summary of the first three chapters of “House of Debt” by Mian and Sufi. This post provides a brief summary of Chapters 4 and 5, in which they present a theoretical framework which explains why leveraged debt leads to high unemployment following a shock to asset prices. The main insight is that the problem is caused by interest-based debt contracts which put most of the risks of default on the weaker party (borrowers), and very little on the stronger party (lenders). Equitable risk sharing between lenders and borrowers would provide a solution.

Background: In the Keynesian Revolution and the Monetarist Counter-Revolution, I have explained how high and persistent unemployment after the Great Depression led to Keynesian insight that government interventions are required to create full employment. This is in conflict with the supply side view, which insists the free markets automatically lead to full employment of all productive resources, including labor. The Reagan-Thatcher era created a counter-revolution against Keynesian theory, and re-implanted the rejected supply side view at the heart of the economic theory. Accordingly, policy responses to the Global Financial Crisis were based on the wrong dogmas. Chapters 4 & 5 of HoD describes the Supply Side view, explains why it is wrong, and then provides an alternative theory to explain the GFC: the Levered Losses framework. read more

Little value from Global Chains

December 28, 2020 3 comments

from C. P. Chandrasekhar

On December 12, in an outburst of suppressed anger, workers employed at a factory assembling iPhones in Narasapura near Bengaluru ransacked its premises and damaged parked vehicles. The facility is a unit of Wistron, a Taiwanese vendor engaged in assembly of Apple iPhones, that had begun commercial operations only recently. This made the worker action surprising to say the least. Workers recently employed in a known foreign-invested firm are not likely to turn against the management in a matter of months. Something was clearly amiss.

The initial response of the administration was to arrest the workers involved for criminal violation and launch an image saving exercise to appease existing and potential foreign investors, whom the NDA governments at the Central and the State levels are desperately wooing. But investigations soon revealed that the workers had been wantonly provoked with the management in the Wistron unit in serious violation of labour laws. Apple, which has been known to turn a blind eye to poor working conditions in factories run by its vendors, had to admit that Wistron had violated its supplier code of conduct, and declare the launch of an enquiry. Interestingly, Wistron too decided to acknowledge serious lapses at this particular unit and sack its vice-president in charge of India operations. The implicit narrative was that the violations were not typical of the company’s operations but the result of errors of judgement or rogue behaviour of some managers responsible for the operations of the Narasapura unit. Read more…

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

December 27, 2020 2 comments

from Dean Baker

It is more than a bit annoying to hear reporters endlessly refer to China as the world’s second largest economy. It isn’t. It’s the world’s largest economy and has been since 2017. Here are the data from the International Monetary Fund.

Source: International Monetary Fund.

As the chart shows, China’s economy first passed the U.S. in 2017. It is projected to be more than 16 percent larger this year, and by 2025 is projected to be almost 40 percent larger by 2025.

Purchasing power parity (PPP) measures of GDP are based on applying a common  set of prices for all goods and services produced across countries. While it is difficult to measure accurately, most economists view PPP as being the better way to calculate GDP, since it reflects living standards and does not fluctuate with currency values. China does have four time the population of the United States, so it is still much poorer on a per capita basis.

The fact that China has a larger GDP than the United States is important for policy debates since many people seem to hold illusions are about the ability of the U.S. to influence China. While United States can take steps that will damage China’s economy, even the harshest measures will only have limited impact, and China will be able to take steps to overcome them through time. This is important background for debates on China policy.

Econometrics — the art of pulling a rabbit out of a hat

December 26, 2020 8 comments

from Lars Syll

Magician Pulling Rabbit From Hat Cartoon Illustration Royalty Free  Cliparts, Vectors, And Stock Illustration. Image 68544338.In econometrics one often gets the feeling that many of its practitioners think of it as a kind of automatic inferential machine: input data and out comes causal knowledge. This is — as Joan Robinson once had it — like pulling a rabbit from a hat. Great — but first you have to put the rabbit in the hat. And this is where assumptions come in to the picture.

The assumption of imaginary ‘superpopulations’ is one of the many dubious assumptions used in modern econometrics, and as Clint Ballinger highlights, this is a particularly questionable rabbit pulling assumption:

Inferential statistics are based on taking a random sample from a larger population … and attempting to draw conclusions about a) the larger population from that data and b) the probability that the relations between measured variables are consistent or are artifacts of the sampling procedure.

However, in political science, economics, development studies and related fields the data often represents as complete an amount of data as can be measured from the real world (an ‘apparent population’). Read more…

Time to end patent monopolies

December 25, 2020 Leave a comment

from Dean Baker

For several years the opioid crisis has been recognized as a major national catastrophe. Millions of people have become addicted to the new generation of opioid drugs. In many cases, this addiction has led to the destruction of families, job loss, crime, and suicide. At the peak of the crisis in West Virginia, the hardest hit state, the death rate from overdoses alone, was more than 41 people per 100,000. This is more than 70 percent of its fatality rate from the pandemic, as of mid-December. And this doesn’t count deaths due to crime or opioid-related health conditions. Opioids are a big part of the story of the state’s drop in life expectancy over the last quarter century.

The crisis did not just happen by chance. As we now know, drug manufacturers and distributors made large amounts of money pushing their drugs. Read more…

Christmas, Greece, 2020

December 25, 2020 1 comment

Differentiating social, market, and government debts

December 25, 2020 Leave a comment

from Asad Zaman

In a previous post on “ABC’s of MMT”, I explained the basics of MMT as a preliminary to a critique of Raghuram Rajan’s article on “How Much Debt is Too Much?”. A significant part of the discussion on this post consisted of debates over words and their meanings. My use of words like assets, savings, wealth, liability, and debt was contested, and alternative usages were offered. It seems necessary to pause for a discussion of these terminological confusions, prior to going on Rajan’s article. This is because part of the critique is about the terminology used by Rajan. Standard terminology is based on false analogy between the government and the household. In a previous post on “The Power of False Names”, I have explained how the use of misleading terminology can lead to severe misunderstandings and wrong policies.

A deeper understanding of contested meanings of debt, liability, assets, savings, wealth, and related terms, emerges from the study of the history of debt in David Graeber’s “Debt: The First Five Thousand Years”.  Graeber writes that “Arguments about who really owes what to whom have played a central role in shaping our basic vocabulary of right and wrong.” One of the key arguments of Graeber is that there are two kinds of debt.  read more

Why everything we know about modern economics is wrong

December 24, 2020 70 comments

from Lars Syll

The proposition is about as outlandish as it sounds: Everything we know about modern economics is wrong. And the man who says he can prove it doesn’t have a degree in economics. But Ole Peters is no ordinary crank. A physicist by training, his theory draws on research done in close collaboration with the late Nobel laureate Murray Gell-Mann, father of the quark …

His beef is that all too often, economic models assume something called “ergodicity.” That is, the average of all possible outcomes of a given situation informs how any one person might experience it. But that’s often not the case, which Peters says renders much of the field’s predictions irrelevant in real life. In those instances, his solution is to borrow math commonly used in thermodynamics to model outcomes using the correct average …

If Peters is right — and it’s a pretty ginormous if — the consequences are hard to overstate. Simply put, his “fix” would upend three centuries of economic thought, and reshape our understanding of the field as well as everything it touches …

Peters asserts his methods will free economics from thinking in terms of expected values over non-existent parallel universes and focus on how people make decisions in this one. His theory will also eliminate the need for the increasingly elaborate “fudges” economists use to explain away the inconsistencies between their models and reality.

.                                                                                                                          Brandon Kochkodin / BlombergQuint

sfiOle Peters’ fundamental critique of (mainstream) economics involves arguments about ergodicity and the all-important difference between time averages and ensemble averages. These are difficult concepts that many students of economics have problems with understanding. So let me just try to explain the meaning of these concepts by means of a couple of simple examples. Read more…

Merry Christmas and a happy…

December 24, 2020 4 comments

What can RCTs tell us?

December 23, 2020 Leave a comment

from Lars Syll

Using Randomised Controlled Trials in Education (BERA/SAGE Research Methods  in Education): Connolly, Paul, Biggart, Andy, Miller, Dr  Sarah, O'hare, Liam, Thurston, Allen: 9781473902831: BooksWe seek to promote an approach to RCTs that is tentative in its claims and that avoids simplistic generalisations about causality and replaces these with more nuanced and grounded accounts that acknowledge uncertainty, plausibility and statistical probability …

Whilst promoting the use of RCTs in education we also need to be acutely aware of their limitations … Whilst the strength of an RCT rests on strong internal validity, the Achilles heel of the RCT is external validity … Within education and the social sciences a range of cultural conditions is likely to influence the external validity of trial results across different contexts. It is precisely​ for this reason that qualitative components of an evaluation, and particularly the development of plausible accounts of generative mechanisms are so important …

Highly recommended reading.

Nowadays it is widely believed among mainstream economists that Read more…

Bloomberg is concerned that Janet Yellen’s dollar policy may lessen wealth inequality

December 22, 2020 1 comment

from Dean Baker

You don’t have to look far, it’s literally the first sentence in a Bloomberg piece on dollar policy under incoming Treasury Secretary Janet Yellen.

“Janet Yellen once touted the benefits of a weaker greenback for exports, but as the incoming Treasury secretary, she faces pressure to return the U.S. to a “strong-dollar” policy — and may cause trembles on Wall Street if she doesn’t.”

For folks who don’t know, the vast majority of U.S. stock is held by the richest 10 percent of households in the country, with the richest 1 percent holding close to 50 percent of all stock wealth. The run-up in the stock market over the last four decades has been the main factor behind the rise in the inequality of wealth over this period. A drop in the stock market would reduce wealth inequality, which is apparently a really bad outcome in the view of Bloomberg.

But getting beyond its promotion of wealth inequality it is worth looking at the substance of this piece pushing Janet Yellen to support a stronger dollar.

The piece gives us some dollar boosterism from Larry Summers, Treasury Secretary under President Clinton and the head of President Obama’s National Economic Council: Read more…

Causes of global financial Crisis: House of debt

December 21, 2020 2 comments

from Asad Zaman

This is a review and a summary of some of the key arguments presented by Mian and Sufi in their recent book “House of Debt.” It highlights the contribution of Mian and Sufi by showing how they have solved the mystery of why there was a huge drop in aggregate demand during the Great Depression of 1929 and also following the recent Global Financial Crisis of 2007-8. The article shows how major economists like Keynes, Friedman, Lucas and others tried and failed to provide an adequate explanation of this mystery. The key to the mystery is the huge amount of levered debt present during both of these economic crises. The solution suggested by Mian and Sufi is to replace interest based debt by equity based contracts in financial markets. This solution resonates strongly with Islamic teachings on finance. The lecture below covers the first three chapters of the book.

Atif Mian and Amir Sufi open their book “House of Debt” with a MYSTERY. It describes the . . . read more

ECONOMIC THOUGHT: History, Philosophy, and Methodology

December 21, 2020 Leave a comment

MMT perspectives on rising interest rates

December 21, 2020 8 comments

from Lars Syll

The Bank of England is today wholly-owned by the UK government, and no other body is allowed to create UK pounds. It can create digital pounds in the payments system that it runs, thus marking up and down the accounts of banks, the government and other public institutions. It also acts as the bank of the government, facilitating its payments. The Bank of England also determines the bank rate, which is the interest rate it pays to commercial banks that hold money (reserves) at the Bank of England …

The Great Unwind: What Will Rising Interest Rates Mean for Bank Risk  Exposures?The interest rate that the UK government pays is a policy variable determined by the Bank of England. Furthermore, it is not the Bank of England’s remit to bankrupt the government that owns it. The institutional setup ensures that the Bank of England supports the liquidity and solvency of the government to the extent that it becomes an issuer of currency itself. Selling government bonds, it can create whatever amount of pounds it deems necessary to fulfil its functions. Given that the Bank of England stands ready to purchase huge amounts of gilts on the secondary market (for “used” gilts), it is clear to investors that gilts are just as good as reserves. There is no risk of default …

The government of the UK cannot “run out of money”. Read more…

USA Pandemic Depression update

December 18, 2020 Leave a comment

from David Ruccio

Both the number of initial unemployment claims for unemployment compensation and the number of continued claims for unemployment compensation are once again on the rise, signaling a worsening of the Pandemic Depression.

Read more…

WEA Commentaries – vol.10, issue 4

December 18, 2020 Leave a comment