Category: Equitablog

Must-Read: Dean Baker: Job Growth Slows Sharply

Posted on by Brad DeLong

Must-Read: I am trying to think of rational state-dependent monetary policy algorithms—even semi-rational state-dependent monetary policy algorithms. I can think of none that would take the last three months’ worth of data, and say that it is appropriate to reverse the surprise 25 basis point March Federal Funds rate increase. I can certainly think of none that would say that it is appropriate to double down by another 25 basis point rise this month.

And yet the FOMC looks highly likely to raise interest rates this month. Go figure:

Dean Baker: Job Growth Slows Sharply: “the overall employment-to-population ratio (EPOP) dropp[ed] from 60.2 percent in April to 60.0 percent in May… http://cepr.net/data-bytes/jobs-bytes/jobs-2017-06

…The establishment survey showed further evidence of a weakening labor market, as the pace of job growth slowed in May to 138,000… [as] substantial downward revisions to the prior two months’ job growth numbers, which brought the average for the last three months to just 121,000. The big job gainers were restaurants (30,300) and health care (24,300)… 40 percent of job growth in May. Job growth in restaurants… 22,000 average for the last year… [and] health care… 30,000…. Other job gainers were education services… 14,700; temporary employment… 12,900… professional and technical services… 10,900 jobs. Employment growth in education services is erratic, so the May number is likely to be followed by a decline next month…. The weak employment growth in professional and technical services is disappointing….

Retail trade shed another 6,100 jobs, its fourth consecutive drop. The job loss is concentrated in the department store sector…

Equitable Growth’s Jobs Day Graphs: May 2017 Report Edition

Posted on by Nick Bunker

Earlier this morning, The U.S. Bureau of Labor Statistics released new data on the U.S. labor market during the month of May 2017. Below are five graphs compiled by Equitable Growth staff highlighting important trends in the data.

1.

The share of all workers with a job ticked down in May and the employment rate for prime-age workers fell to 78.4 percent.

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2.

The recent spike in inflation may be abating, but nominal wage growth for most workers is still quite weak.

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3.

The unemployment rate for African Americans is back to pre-recession levels, but it’s still twice as high as the white unemployment rate.

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4.

The gap between the U6 measure of underemployment and the official unemployment rate shrunk in May.

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5.

Workers out of a job for longer than 15 weeks rose as a share of unemployment in May, but the overall trend has been downward since the recession ended.

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Economic Policy Challenges in the US and Japan Panel: Globalization and Inequality

Posted on by Brad DeLong
San Francisco from Abovee Berkeley

Globalization and Inequality

J. Bradford DeLong :: U.C. Berkeley, WCEG, and NBER http://bradford-delong.com brad.delong@gmail.com @delong

.pages: https://www.icloud.com/pages/0_H9kCtNY6cZglaYpa4IRw2pQ | .key: https://www.icloud.com/keynote/0a1YIQGu-i9__uHwnHA0thhTg | .html: http://www.bradford-delong.com/2017/06/economic-policy-challenges-in-the-us-and-japan-panel.html

Globalization and Inequality

  • Moderator: Naoyuki Haraoka
  • Brad DeLong
  • Francis Fukuyama
  • Yoriko Kawaguchi
  • Hideichi Okada

Growth Strategies of the US and Japan

  • Moderator: Takeo Hoshi
  • Nick Bloom
  • Takatoshi Ito
  • Keiichiro Kobayashi
  • Kathryn Shaw

Is Technology the Answer? (or Will Silicon Valley Save the World?)

  • Moderator: Ken Singleton
  • Shai Bernstein
  • Kenji Kushida
  • Masaaki Tanaka
  • Tsunehiko Yanagihara

Proceed with Caution: What can we say about globalization and inequality?

First, we must say that we have to proceed with caution. We face truly grave problems of measurement—at measuring the extent of globalization, at measuring the prosperity and rate of economic growth of the world, and at measuring inequality.

The problems of measuring growth become insuperable unless we largely neglect the fact that we produce and consume not just more of the same commodities than we did in 1800, but new commodities and new kinds of commodities that give us, as John Maynard Keynes wrote a hundred years ago, “conveniences, comforts, and amenities beyond the compass of the richest and most powerful monarchs of other ages”. The problems of measuring inequality become insuperable unless we largely neglect the implications of fact that an income one-third of the geometric average two hundred years ago meant that you starved to death unless someone took explicit pity on you personally, while an income one-third the geometric average today leaves you poor relative to your neighbors, but still rich relative to your ancestors. But if you wanted deep thoughts about these issues, you would have called for a philosopher rather than an economist.

B. Our Rough Guesses: Thus: neglecting these issues, the world’s prosperity center-of-gravity—the geometric average level of production—was up from perhaps $1000 of today’s real-value international dollars per capita per annum to $4000 , and the world’s life expectancy was up from 28 to 65 years over the period 1800-1976. And in the past forty years prosperity has jumped from $4000 to $9000, and life expectancy from from 65 to 75.

But look at the spread. The spread was roughly a factor of 8 in 1800: few countries then had average income levels less than $500 or more than $4000 per capita per annum. The spread rose to a factor of 32 as of 1976: few countries then had average income levels less than $500 or more than $16000 per capita per annum. The spread remains a factor or 32 today: few countries now have average income levels less than $1000 or more than $32000 per capita per annum.

While the story across nations is one of growing inequality from 1800-1976 followed by a stable level of inequality, the story across people is considerably different. The relative spread of people’s incomes today is substantially, gratifyingly, and fortunately much smaller than it was in 1976. Russia has regressed, not absolutely—fortunately—but relatively toward the global geometric mean.

C. China and India: China and India have grown at stupendous rates so that they now are within close shouting distance above and below the global geometric mean, and few countries and only one large country—Japan—already rich has grown rapidly and so pulled, relatively, significantly further ahead of the global geometric mean. Russia and Japan offset each other. So the “convergence” of relatively income levels across the globe that we have seen over the past forty years that has, in combination with underlying economic growth, made it the best forty year period for human economic material progress ever in global history is 100% a China-India phenomenon.

That is is only two countries makes this “convergence” difficult to interpret as we try to assess the likely future. Have we seen good governance institutions spread to another 30% of the human race, leaving less than 40% of the world with severely sub-par institutions as far as economic growth is concerned? In that case, we would expect good governance institutions for economic growth to continue to spread over the next two generations, and we would be hopeful. Or did just good luck bring good leaders to power in two countries—albeit the two countries that together amount to 30% of the human race—in which case normal luck would see the next two countries to get good governance institutions be small ones, and would perhaps see institutional backsliding, perhaps severe institutional backsliding, in China and India? On such questions as this does our optimism or pessimism about the human global future depend.

D. Branko Milanovic’s Elephant Diagram: The pattern of global growth over the past generation or so in terms of the incomes accruing to different percentile slots in the global income distribution are well-captured in what has come to be called Branko Milanovic’s “Elephant Diagram”: the tail of the elephant are the global poorest, whose lives were and remain virtually indistinguishable from those of our pre-industrial agrarian age ancestors under the curse of Malthus. The back of the elephant is the global prosperous working and middle class—primarily but far from exclusively in China. The upward-lifted tip of the trunk is the global overclass, the elite. the downward-pointing base of the trunk is Russia. And the first upward curve is the middle class of the North Atlantic economies, for whom—especially for the native-born males among whom—the past generation or so has been the worst period since 1850.

E. Globalization, Technology, Education, Institutions as Causes and as Scapegoats: In what sense is “globalization” the cause of this distressing recent generation plus for the North Atlantic middle classes? Or, alternatively, in what sense is “globalization” the scapegoat to which the North Atlantic middle classes resort on their own out of ignorance or are led to resort in an attempt to distract them from the true causes—or, in many cases, simply because if you scare mostly-elderly people about foreigners you can keep their eyeballs glued to the TV and so collect money from advertisers as they try to sell them overpriced gold funds and fake diabetes cures?

The overwhelming part of the story is: technology and educational failure as cause, and globalization as scapegoat.

In brief:

  • In the United States, manufacturing employment has gone from 30% to 12% because of technology.
    • Japan has seen analogous but much smaller technological trends—in large part because technological forces have been hobbled, if that is the word, by institutions in important sectors like food processing
    • The decline in manufacturing employment has been made a much bigger deal for distribution in the United States because the U.S. lost the race between education and technology.
    • Has it been made a bigger deal because of the rise of the overclass?
      • At U. Chicago, it is conventional to bow to Sherwin Rosen’s “superstar economy” ideas and view the rise of the overclass as an unmixed blessing.
      • Not so at Berkeley.
  • In the United States, manufacturing employment has gone from 12% to 9% because of an ill-managed savings-investment balance.
    • Not so in Japan: if the Japan savings-investment balance has been ill-managed, it has been so in the opposite direction.
    • The catastrophic mistake of the Reagan and Bush deficits—starving the country of savings in order to overincentivize the nascent overclass.
      • Japan and Germany offer a different road
      • Globalization provided an important safety valve: allowed a low savings country to continue to invest, albeit at an inadequate pace.
    • Here globalization is not the cause but the scapegoat—and a partial cure.
  • “Bad trade deals!”
    • Manufacturing employment from 9% to 8.7% because of the China shock
    • Manufacturing employment from 8.7% to 8.6% because of NAFTA
      • Trump’s economic policy team appears to have two ideas for how to renegotiate NAFTA
        • Require year-by-year bilateral balance everywhere.
        • Force Canada and Mexico to accept the provisions of the TPP
    • No effect of TPP

E. Globalization, Job Instability, and Job Quality in America: Manufacturing and other goods value-chain jobs become unstable because of the post-1980 dollar cycles the sharp up from the inauguration of Ronald Reagan to the Plaza, the sharp down from the Plaza to the Louvre, the sharp up during the dot-com boom, the down of the 2000s, and now—perhaps—the start of a Trump dollar cycle. These very large exchange rate fluctuations are side effects of improper governance and policy non-coordination. But since the end of Bretton Woods governments in the Global North appear to have decided that they would much rather let currencies float as shock absorbers than commit themselves to policy coordination to damp such fluctuations. The consequence has been to make export and import-competing manufacturing sectors very unstable—and thus very risky, especially for workers but also for investors and managers.

What role has this instability played in undermining the institutional job ladders that used to exist for blue-collar workers in the U.S., and still exist in Japan. And what role have this and other sources of instability started to play since the mid-2000s in undermining the institutional white-collar job ladder stability as well? One powerful possibility is that manufacturing and other goods value-chain jobs are good jobs only as long as they are union jobs. And dollar-cycle instability has meant maintaining a strong union movement in affected industries nearly impossible—even if firms do not prioritize union destruction.

These issues are still very unsettled. I would point people to the arguments raised by and the forthcoming debate around Richard Baldwin’s new The Great Convergence: Information Technology and the New Globalization http://amzn.to/2rhle17.

I would also say that we are next to nowheresville in terms of understanding the sources of the rise of the overclass in America. There are lots of very good but speculative theories and ideas. But there is little consensus. I find “winner take all economy” explanations completely inadequate. But what is adequate? I would point out that increasing investigation of tax avoidance and tax evasion strongly suggests that the rise of the overclass has been much stronger than one gets from the Piketty-Saez tax data. But I would also point out that, here in the U.S., pre-1987, large amounts of soft-dollar compensation and the use of recapitalizations to create ownership interests then passed on at death or committed to foundations means that we have less insight into historical trends than we would wish.

We do know that the situation is not stable. We can see, ahead, the possible transformation of the American overclass into one in which inheritance has played a much greater role a la Piketty. Has globalization played a large role in its rise? If so, it is a role that Japan—and much of continental Europe—have been largely able to neutralize. English-speaking countries, resource exporters like the Middle East and Russia, and emerging market economies able to find a place in global value chains appear to be in the domain of the rising global overclass in a way that Japan and continental western Europe.

F. Polanyian Perplexes and Fukuyamian Foresight: I have two more slides—with a long quote from Keynes, a brief attempt to apply insights from Karl Polanyi’s The Great Transformation, and a bow to Fukuyama-sensei’s 1989 “The End of History?”—note the question mark at the end—in the shadow of which we have all now lived for a generation.

But I am much more interested in hearing Fukuyama-sensei discuss these issues than I am interested in hearing me so far out of my proper confidence, and the same is almost surely true of you as well…

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Should-Read: Larry Summers: What History Tells Us about Trump’s Budget Fantasy

Posted on by Brad DeLong

Should-Read: Larry Summers is not happy with Steve Mnuchin or Gary Cohn. I suspect that he has not registered the transformation of Goldman Sachs that took place with its shift away from relationship banking to trading plus adoption of the corporate form. High standards of integrity are an asset only if you are both playing a much-repeated game and have the mental discipline to be not short-term but long-term greedy. That last, especially, is very hard.

Larry Summers: What History Tells Us about Trump’s Budget Fantasy: “The Trump economic team has not engaged in serious analysis or been in dialogue… http://larrysummers.com/2017/05/30/what-history-tells-us-about-trumps-budget-fantasy/

…they have had nothing to say in defense of their forecast except extravagant claims…. Do they really believe that through tax cuts and deregulation they are going to accomplish more than Ronald Reagan, who after all reduced the top tax rate from 70 to 28 percent? Between 1981 and 1988, GDP per adult grew by an average of 2.5 percent, distinctly slower than what they are forecasting. Even this figure reflects a substantial cyclical tail wind….

A business trying to sell stock on the basis of a document half as hype-filled as the Trump budget would be a joke. No reputable investment bank would underwrite their offering. A great mystery here is why the experienced investment bankers in senior positions in the Trump administration hold the budget of the United States to so much lower standards of integrity than they applied in their earlier lives.

Must- and Should-Reads: June 1, 2017

Posted on by Brad DeLong

Interesting Reads:

Venture capital’s gender gap is costly for firms and the economy

Posted on by Emilie Openchowski
Men and women walk to work on Wall Street in New York.

A new study uncovers a surprising performance enhancer for venture capital funds: hiring partners who have daughters. A recent study by business professor Paul A. Gompers and doctorate student Sophie Q. Wang of Harvard University looks at venture capital firms between 1990 and 2016, and finds that senior partners who had daughters were not only more likely to hire women but also realized increased deal and fund performance because of better gender diversity.

This research is not the first to look at the extent to which gender diversity—or lack thereof—can affect an organization’s performance. But no study has been able to establish a causal relationship between diversity and firm outcomes in real-world settings. Gompers and Wang look at the effect of gender diversity driven by a random, outside variable—the gender of venture capitalists’ children. Having a daughter can reduce one’s bias toward women, something that other research confirms. Gompers and Wang find that there is a “significant and economically meaningful increase in the proportion of females hired” when VC partners boast daughters in their families. The two researchers find this increase in firm gender diversity has a causal, positive effect on business performance.

The new study by Gompers and Wang further supports the business case for gender diversity, but its implications for venture capital are especially profound. The industry’s role in the economy has grown enormously over the past 30 years and today is synonymous with fostering the best-of-the-best in innovation and entrepreneurship. But venture capital overwhelmingly remains a boy’s club. The proportion of women in venture capital—10 percent overall—is barely higher than it was three decades ago. Today, 75 percent of firms have never hired a female senior investment partner, and only 7 percent of partners at top venture capital firms are women.

Women are shut out of top venture capital positions even as a growing number have obtained advance degrees in science, technology, and business—typically a criterion for going into the industry. What’s going on? Research has established that people tend to be drawn to people most like themselves, whether that’s in terms of friendships, business deals, or marriage. Other research specific to venture capital firms co-authored by Gompers finds these firm’s investors are more likely to collaborate with those who are similar to them in gender, ethnicity, and background. Doing so, according to the study, reduces the firm’s performance, in part because it may overlook opportunities to work with diverse yet more qualified or able individuals. Thus, given the preponderance of men in venture capital, it makes sense that women might be passed over at a higher rate. The authors also note that hiring is binary: Either you hire somebody or you don’t. So, even if one’s bias is slight, it can have a huge effect on the makeup of the workforce, especially given that many venture capital firms are small and do not hire senior partners very often.

The absence of women in VC firms, of course, trickles down into the success of female entrepreneurs: Women-led startup companies comprised less than 5 percent of venture capital deals last year. The two authors find that firms with a senior female investor are more likely to invest in portfolio companies founded by women. It also means that firms might overlook viable opportunities or suffer from stale thinking or costly mistakes due to a lack of different perspectives.

The authors do some interesting modeling, too. They find that if each of the partners of venture capital firms had had a daughter instead of a son (and thus were more likely to hire female partners), then an additional $4.5 billion could have been raised by firms’ portfolio companies between 1990 to 2010. They also estimate that increasing the percentage of women hired by 10 percent would result in portfolio companies raising an additional $23.2 billion. Gompers and Wang’s research shows how bias not only harms women but also can have an effect on the economy at large.

Perhaps Today We See Not a New Crisis of Liberal Democratic Capitalism, But an Old Condition Recurring

Posted on by Brad DeLong

I do not believe that the very sharp Branko Milanovic ever studied George Kennan’s “Long Telegram”: his 8000-word message in 1946 back from Moscow, where he was then U.S. ambassador, to the State Department in Washington.

In Kennan’s view, what was required was containment. And, indeed, containment was the keystone, indeed the whole arch, of U.S. policy from 1946 all the way up to 1989. Remember that really-existing socialism—Soviet communism—is attractive only to those who do not have to live under it. Remember to keep the competition on the economic, personal freedom, and ideological levels, using force only to preserve post-WWII boundaries and limits. Remember that we have the better system—in choosing leaders, in deciding on policies, in guiding economic growth. And if, when the competition is carried out on the economic, personal freedom, and ideological levels, it turns out that we do not have the better system? Then, as Kennan wrote:

The issue of Soviet-American relations is in essence a test of the overall worth of the United States… [which] need only measure up to its own best traditions…. Surely, there was never a fairer test of national quality than this…. The thoughtful observer… will find no cause for complaint in the Kremlin’s challenge to American society…

George Kennan (1946): The Sources of Soviet Conduct: “The main element of any United States policy toward the Soviet Union must be that of long-term, patient but firm and vigilant containment… http://www.historyguide.org/europe/kennan.html

…It is a sine qua non of successful dealing with Russia that the foreign government in question should remain at all times cool and collected and that its demands on Russian policy should be put forward in such a manner as to leave the way open for a compliance not too detrimental to Russian prestige…. Soviet pressure against the free institutions of the western world is something that can be contained by the adroit and vigilant application of counter-force at a series of constantly shifting geographical and political points, corresponding to the shifts and maneuvers of Soviet policy, but which cannot be charmed or talked out of existence. The Russians look forward to a duel of infinite duration, and they see that already they have scored great successes….

But if the ideology convinces the rulers of Russia that truth is on their side and they they can therefore afford to wait, those of us on whom that ideology has no claim are free to examine objectively the validity of that premise…. Suppose that the western world finds the strength and resourcefulness to contain Soviet power…. What does that spell for Russia itself?…

The Kremlin has… proved able to accomplish its purpose of building up Russia… [but] both the maintenance of internal political security and the building of heavy industry has been carried out at a terrible cost in human life and in human hopes and energies… involved the neglect or abuse of… particularly agriculture, consumers’ goods production, housing and transportation…. There are limits to the physical and nervous strength of people themselves. These limits are absolute ones, and are binding even for the cruelest dictatorship…. Soviet economic development, while it can list certain formidable achievements, has been precariously spotty and uneven. Russian Communists who speak of the “uneven development of capitalism” should blush at the contemplation of their own national economy….

It is difficult to see how these deficiencies can be corrected at an early date by a tired and dispirited population working largely under the shadow of fear and compulsion. And as long as they are not overcome, Russia will remain economically as vulnerable, and in a certain sense an impotent, nation, capable of exporting its enthusiasms and of radiating the strange charm of its primitive political vitality but unable to back up those articles of export by the real evidences of material power and prosperity.

Meanwhile, a great uncertainty hangs over the political life of the Soviet Union. That is the uncertainty involved in the transfer of power from one individual or group of individuals to others. This is, of course, outstandingly the problem of the personal position of Stalin…. It is always possible that another transfer of pre-eminent power may take place quietly and inconspicuously, with no repercussions anywhere. But again, it is possible that the questions involved may unleash, to use some of Lenin’s words, one of those “incredibly swift transitions” from “delicate deceit” to “wild violence” which characterize Russian history, and may shake Soviet power to its foundations…. This is not only a question of Stalin himself. There has been, since 1938, a dangerous congealment of political life in the higher circles of Soviet power….

It is curious to note that the ideological power of Soviet authority is strongest today in areas beyond the frontiers of Russia, beyond the reach of its police power. This phenomenon brings to mind a comparison used by Thomas Mann in his great novel Buddenbrooks. Observing that human institutions often show the greatest outward brilliance at a moment when inner decay is in reality farthest advanced, he compared one of those stars whose light shines most brightly on this world when in reality it has long since ceased to exist. And who can say with assurance that the strong light still cast by the Kremlin on the dissatisfied peoples of the western world is not the powerful afterglow of a constellation which is in actuality on the wane? This cannot be proved. And it cannot be disproved. But the possibility remains (and in the opinion of this writer it is a strong one) that Soviet power, like the capitalist world of its conception, bears within it the seeds of its own decay, and that the sprouting of these seeds is well advanced….

The possibilities for American policy are by no means limited to holding the line and hoping for the best…. The United States can create among the peoples of the world generally the impression of a country which knows what it wants, which is coping successfully with the problem of its internal life and with the responsibilities of a World Power, and which has a spiritual vitality capable of holding its own…. The palsied decrepitude of the capitalist world is the keystone of Communist philosophy. Even the failure of the United States to experience the early economic depression which the ravens of the Red Square have been predicting with such complacent confidence since hostilities ceased would have deep and important repercussions throughout the Communist world…. The issue of Soviet-American relations is in essence a test of the overall worth of the United States as a nation among nations. To avoid destruction the United States need only measure up to its own best traditions and prove itself worthy of preservation as a great nation. Surely, there was never a fairer test of national quality than this. In the light of these circumstances, the thoughtful observer of Russian-American relations will find no cause for complaint in the Kremlin’s challenge to American society…

Nikita Sergeyevich Khrushchev took up this gauge ten years later:

Nikita Sergeyevich Khrushchev (1956): “Whether you like it or not, history is on our side. We will bury you.”

Nikita Sergeyevich Khrushchev (1959): “The expression I used was distorted, and on purpose…

…what was meant was not the physical burial of any people but the question of the historical force of development. It is well known that at the present time no one social or economic system is dominant throughout the world, but that there are different systems, social systems in different countries. And those systems change. At one time the most widespread system of society in the world was feudalism. Then capitalism took its place….

We believe that Karl Marx, Engels and Lenin gave scientific proof of the fact that the system, the social system of socialism, would take the place of capitalism.… That is why I said that looking at the matter from the historical point of view, socialism, communism, would take the place of capitalism and capitalism thereby would be, so to speak, buried…

Nikita Sergeyevich Khrushchev (1963): “I once said, ‘We will bury you,’ and I got into trouble with it. Of course we will not bury you with a shovel. Your own working class will bury you…

Thus Branko does not understand how the post-World War II Cold War era looked from the perspective of the United States. From the U.S. perspective the important thing was to keep the (nuclear) piece and make sure that decisions were reached by speeches and majority votes, not by iron and blood. And from the U.S. perspective the U.S.S.R. was another inhumane authoritarian government with two particular characteristics; a more dysfunctional than usual economy, and an alliance with a strange eschatological messianic quasi-religious cult. The cult made it more dangerous to the world. Its economic inefficiency made it less dangerous. Those balanced out.

Yet Branko can write:

Branko Milanovic: The Hidden Dangers of Fukuyama-Like Triumphalism http://glineq.blogspot.com/2017/05/the-hidden-dangers-of-fukuyama-like.html “Deeply divided between the democratic and Communist factions…

…The former eventually prevailed but after having to keep in check, often by very brutal and undemocratic means, one-quarter of the electorate in France and Italy, large organized trade unions linked with communist and socialist parties in most of Continental Europe, all the while supporting capitalist dictatorial regimes in most of the Mediterranean Europe and in places… far away… fighting innumerable colonialist and post-colonialist wars… support[ing] the “bad” guys…. “Liberal democracy” was in a continual crisis, fighting for its mere survival…. It… survived, not because everybody, as the triumphalist narrative would have it, saw that it was a more “natural” system but because it used power and intimidation on the one hand, and superior economic performance for the masses on the other…

For those of us whose Kronstadt was Lenin’s armed thugs dissolving the elected Constituent Assembly in Petrograd at the end of 1917, claims that liberal democratic capitalism’s Cold War victory over communism was in some sense unfair because it used “power and intimidation” leaves us rolling on the floor and laughter. And the last clause “superior economic performance for the masses” gives away the game, no? Any societal system that must point to Josip Broz Tito as its most successful leader is truly in very deep trouble at so many levels.

And I think Branko simply gets it wrong when he writes: “In 1945, the chances of democratic capitalism winning over the Soviet system were 10% (read Schumpeter)…” Schumpeter’s Capitalism, Socialism, and Democracy is an interesting book. But at the core Schumpeter’s argument is the false argument you hear at the American Enterprise Institute: that political majorities will vote for high taxes on job-creators and burdensome regulations on businesses; thus they will strangle entrepreneurship with red tape of bureaucracy, and then socialism will win by pointing out that the entrepreneurial capitalism it has strangled with red tape is not delivering proper growth. That Schumpeter thought that capitalism was creating its own gravediggers—not in the form of an immiserized working class but of a new class of intellectuals hostile to entrepreneurship and an electoral majority of losers, moochers, and takers—does not mean that that was true, even in 1945.

And I think Branko gets it wrong when he write: “In 1965, they were 30% (read Samuelson, Galbraith and Tinbergen)…” Tinbergen and Galbraith saw not victory but rather convergence—communist countries would move toward a role for the price system and toward some form of representative political institutions, while liberal democracies would move toward larger welfare states and more public services. Samuelson saw a future in which the communist countries would be rich because of the suppression of household consumption: high savings rates and thus high capital-output ratios would produce greater GDP per capita even with central-planning inefficiencies. But communist societies would not be good societies.

And when we get to “in 1975, they were 60%…”, I still do not see what Branko sees. Lenin had had his lovers. Stalin had had his stooges. Castro had had his cadres. Mao had had his masses. But who by 1975 living in Russia or China or Cuba thought they lived in a good system? And who outside in 1975 found Leonid Brezhnev or Hua Guofeng or even Fidel Castro an attractive figure.

Branko gets back on track when he write:

When you have in your mind this (I think) much more accurate narrative of the past half-century, the current crisis can only be seen as one of the many crises of capitalism…

That is a much more defensible position. But right now I am playing with the idea that it is not a new crisis, but rather it is in some sense the same old crisis as we saw in the 1930s, the 1920s, or—indeed—with the post-Boer War khaki election and then the strange death of liberal England before WWI. I am playing with the idea that Frank Fukuyama got it wrong when he wrote:

Francis Fukuyama (1989): The End of History? https://ps321.community.uaf.edu/files/2012/10/Fukuyama-End-of-history-article.pdf: “Fascism was destroyed as a living ideology by World War II…

…a defeat… on a very material level… [and] of the idea as well…. Expansionist ultranationalism, with its promise of unending conflict leading to disastrous military defeat, had completely lost its appeal. The ruins of the Reich chancellory as well as the atomic bombs dropped on Hiroshima and Nagasaki killed this ideology on the level of consciousness as well as materially, and all of the proto-fascist movements spawned by the German and Japanese examples like the Peronist movement in Argentina or Subhas Chandra Bose’s Indian National Army withered after the war…

Thinking clearly about this is, I think, greatly hindered by references to “populism” rather than by calling it what it is: “neo-fascism”, if you insist on not using the full F-word. (The real populists of the late nineteenth century were something very different.) But what is really going on is that Frank was wrong when he said that this ideology had been “killed… on the level of consciousness”, wasn’t he?

Must-Read: Lael Brainard: Navigating the Different Signals from Inflation and Unemployment

Posted on by Brad DeLong

Must-Read: Once again:

Employment Rate Aged 25 54 All Persons for the United States© FRED St Louis Fed

Over the past 30 years we have had three business cycle peaks—1990, 2000, and 2007—and three business cycle troughs—1993, 2003, and 2009. The 2009 trough—what marked the nadir of what I now call the Longer Depression, at least as far as Europe is concerned—was an extraordinary and anomalous disaster. Taking the averages of the other peaks and troughs tells us that an economy with a prime-age employment-to-population ratio of 78.5% is still depressed relative to its normal sustainable configuration, while an economy with an employment-to-population ratio of 80.5% or above is in some kind of potential danger zone—although in all of 1990, 2000, and 2007 the danger has come from financial imbalances rather than accelerating wage-push inflationary pressures.

I remember back in mid-2014 when the prime-age employment-to-population ratio was 76.5%: I was then told that it was an unreliable indicator—that structural changes and hysteresis on the downside had made it next to impossible to get those missing prime-age workers back into employment. More than “I was told”, in fact: I greatly feared it myself.

Well, that was wrong.

So why say “the prime-age employment-to-population ratio—remains more than 1 percentage point below pre-crisis levels” rather than “the prime-age employment-to-population ratio remains at levels that before 2010 we would have characterized as depressed and indicating substantial economic slack”?

Lael Brainard: Navigating the Different Signals from Inflation and Unemployment: “The labor market has continued to strengthen… https://www.federalreserve.gov/newsevents/speech/brainard20170530a.htm

…the employment-to-population ratio has reached a new post-recession high…. The… U-3 measure of the unemployment rate moved down to 4.4 percent… the cyclical low reached in 2006-07…. There is little indication of an outbreak of inflation—rather, the latest data on inflation have been lower than expected…. Even wage inflation, which is most tightly connected to labor market slack, shows little sign of heating up by most measures…. Traditionally, economists assessed that as labor market slack diminished and the economy approached full employment, upward pressure on inflation would result, in the statistical relationship known as the Phillips curve. But I am not confident we can count on the Phillips curve to restore inflation to target in today’s economy…. The anchoring role of inflation expectations remains critically important….

It is also possible that the… unemployment rate still may be overstating the strength of the labor market…. Another key measure—the prime-age employment-to-population ratio—remains more than 1 percentage point below pre-crisis levels, and further improvement there would be welcome…

Should-Read: Anatole Kaletsky: The Divergence of US and British Populism

Posted on by Brad DeLong

Should-Read: IMHO, Anatole Kaletsky is over credulous: He believes what the Republican establishment told him at the Milken Institute Conference—that everything is under control. It isn’t. Or, if it is, it could blow in any moment in any of a number of different ways. That the Republican establishment in Los Angeles thought that its highest priority was to sooth the rich of America with the meme that everything was just fine is information. But it does not necessarily reflect reality:

Anatole Kaletsky: The Divergence of US and British Populism: “Trump’s key economic officials… plus a galaxy of Congressional officials and business leaders, made clear that Trump… is only a temporary aberration… https://www.project-syndicate.org/commentary/trump-resistance-brexit-acceptance-by-anatole-kaletsky-2017-05

…The US has taken a detour into a theme park of nationalist nostalgia, but it remains focused on the future and the benefits of globalization…. Trump will not deliver most of his domestic agenda. The Rust Belt will not enjoy a surge of infrastructure spending. US relations with Mexico or China will not change much. Trump’s main tax proposals will not get through Congress. And Trump’s promise to “repeal and replace” Obamacare immediately after taking office is almost certain to give way, under public pressure, to “reform and repair.”

After this immersion in US pragmatism, my return to British politics was deeply depressing…. The US has taken only 100 days to see through Trump’s “alternative reality” (though perhaps not through Trump himself). Almost nobody in Britain is even questioning the alternative reality of Brexit…. How might we explain the starkly different responses in American and British civil society to the dangerous flirtation with nationalist populism? In America, the immediate response to policies that were logically incoherent, economically dishonest, and diplomatically impossible to implement was an upsurge of opposition and debate…. Most important, US businesses started lobbying immediately to block any Trump policies that threatened their economic interests. As a top Senate staffer told the Milken conference, Walmart and other retailers “were extremely effective at educating our members”….

Now compare all this US opposition to the passivity in Britain after last year’s referendum…. Brexit has become an immovable dogma, immune to challenge or questioning of any kind…. No major British companies have tried to protect their interests by campaigning to reverse the Brexit decision. None has even publicly pointed out that the referendum gave Prime Minister Theresa May no mandate to rule out membership of the European single market and customs union…. The taboo against questioning Brexit has not been justified by appeals to reason, economics, or national interest. Instead the “will of the people” has been invoked….

There was never any doubt about the democratic legitimacy of opposition in the US…. A clear majority of Americans voted against Trump…. Trump lost the popular vote by 2%….

In Britain’s unwritten constitution, there is only one limitation on the power of a prime minister with a parliamentary majority–the right of voters to change their minds. But what happens if anyone who tries to persuade voters to change their minds is delegitimized as a denier of democracy and an “enemy of the people”?… Britain will take a wrong turn onto the bumpy path of nostalgic nationalism, while the US rejoins Europe on the modern highway of multicultural globalization.

Should-Read: Annette Alstadsæter, Niels Johannesen, and Gabriel Zucman: Tax Evasion and Inequality

Posted on by Brad DeLong

Should-Read: Annette Alstadsæter, Niels Johannesen, and Gabriel Zucman: Tax Evasion and Inequality: “We combine stratified random audits… with new micro-data leaked from two large offshore financial institutions, HSBC Switzerland (“Swiss leaks”) and Mossack Fonseca (“Panama Papers”)… http://gabriel-zucman.eu/files/AJZ2017.pdf

…We match these… to population-wide wealth records in Norway, Sweden, and Denmark…. Tax evasion rises sharply with wealth, a phenomenon that random audits fail to capture…. About 3% of personal taxes are evaded in Scandinavia, but this figure rises to about 30% in the top 0.01% of the wealth distribution…. Taking tax evasion into account increases the rise in inequality seen in tax data since the 1970s markedly…. Fighting tax evasion can be an effective way to collect more tax revenue from the ultra-wealthy…