Must- and Should-Reads: January 16, 2017


Interesting Reads:

Must-Read: Paul Krugman: Infrastructure Delusions

Must-Read: I believe Paul Krugman is right here. It looks as though Donald Trump’s preferences are having very little effect on the policies of his own administration:

Paul Krugman: Infrastructure Delusions: “There will be no significant public investment program…

…Congressional Republicans have no interest in such a program. They’re hell-bent on depriving millions of health care and cutting taxes at the top… aren’t even talking about public investment, and would probably drag their feet…. Trump has no policy shop, nor does he show any intention of creating one; he’s too busy tweeting about perceived insults from celebrities, and he’s creating a cabinet of people who know nothing about their responsibilities. Any substantive policy actions will be devised and turned into legislation by Congressional Republicans who, again, have zero interest in a public investment program. So investors betting on a big infrastructure push are almost surely deluding themselves. We may see some conspicuous privatizations, especially if they come with naming opportunities: maybe putting in new light fixtures will let him rename Hoover Dam as Trump Dam? But little or no real investment is coming.

Weekend Reading: George Orwell (1946): In Front of Your Nose

George Orwell (1946): In Front of Your Nose: “Many recent statements in the press have declared…

…that it is almost, if not quite, impossible for us to mine as much coal as we need for home and export purposes, because of the impossibility of inducing a sufficient number of miners to remain in the pits. One set of figures which I saw last week estimated the annual ‘wastage’ of mine workers at 60,000 and the annual intake of new workers at 10,000. Simultaneously with this—and sometimes in the same column of the same paper—there have been statements that it would be undesirable to make use of Poles or Germans because this might lead to unemployment in the coal industry. The two utterances do not always come from the same sources, but there must certainly be many people who are capable of holding these totally contradictory ideas in their heads at a single moment.

This is merely one example of a habit of mind which is extremely widespread, and perhaps always has been.

Bernard Shaw, in the preface to “Androcles and the Lion”, cites as another example the first chapter of the Gospel of Matthew, which starts off by establishing the descent of Joseph, father of Jesus, from Abraham. In the first verse, Jesus is described as ‘the son of David, the son of Abraham’, and the genealogy is then followed up through fifteen verses: then, in the next verse but one, it is explained that as a matter of fact Jesus was not descended from Abraham, since he was not the son of Joseph.

This, says Shaw, presents no difficulty to a religious believer, and he names as a parallel case the rioting in the East End of London by the partisans of the Tichborne Claimant, who declared that a British working man was being done out of his rights.

Medically, I believe, this manner thinking is called schizophrenia: at any rate, it is the power of holding simultaneously two beliefs which cancel out. Closely allied to it is the power of igniting facts which are obvious and unalterable, and which will have to be faced sooner or later. It is especially in our political thinking that these vices flourish. Let me take a few sample subjects out of the hat. They have no organic connexion with each other: they are merely cased, taken almost at random, of plain, unmistakable facts being shirked by people who in another part of their mind are aware to those facts.

  1. Hong Kong: For years before the war everyone with knowledge of Far Eastern conditions knew that our position in Hong Kong was untenable and that we should lose it as soon as a major war started. This knowledge, however, was intolerable, and government after government continued to cling to Hong Kong instead of giving it back to the Chinese. Fresh troops were even pushed into it, with the certainty that they would be uselessly taken prisoner, a few weeks before the Japanese attack began. The war came, and Hong Kong promptly fell — as everyone had known all along that it would do.

  2. Conscription: For years before the war, nearly all enlightened people were in favour of standing up to Germany: the majority of them were also against having enough armaments to make such a stand effective. I know very well the arguments that are put forward in defence of this attitude; some of them are justified, but in the main they are simply forensic excuses. As late as 1939, the Labour Party voted against conscription, a step which probably played its part in bringing about the Russo-German Pact and certainly had a disastrous effect on morale in France. Then came 1940 and we nearly perished for lack of a large, efficient army, which we could only have had if we had introduced conscription at least three years earlier.

  3. The Birthrate: Twenty or twenty-five years ago, contraception and enlightenment were held to be almost synonymous. To this day, the majority of people argue—the argument is variously expressed, but always boils down to more or less the same thing—that large families are impossible for economic reasons. At the same time, it is widely known that the birthrate is highest among the low-standard nations, and, in our population, highest among the worst-paid groups. It is also argued that a smaller population would mean less unemployment and more comfort for everybody, while on the other hand it is well established that a dwindling and ageing population is faced with calamitous and perhaps insoluble economic problems. Necessarily the figures are uncertain, but it is quite possible that in only seventy years our population will amount to about eleven millions, over half of whom will be Old Age Pensioners. Since, for complex reasons, most people don’t want large families, the frightening facts can exist some where or other in their consciousness, simultaneously known and not known.

  4. U.N.O.: In order to have any efficacy whatever, a world organization must be able to override big states as well as small ones. It must have power to inspect and limit armaments, which means that its officials must have access to every square inch of every country. It must also have at its disposal an armed force bigger than any other armed force and responsible only to the organization itself. The two or three great states that really matter have never even pretended to agree to any of these conditions, and they have so arranged the constitution of U.N.O. that their own actions cannot even be discussed. In other words, U.N.O.’s usefulness as an instrument of world peace is nil. This was just as obvious before it began functioning as it is now. Yet only a few months ago millions of well-informed people believed that it was going to be a success.

There is no use in multiplying examples. The point is that we are all capable of believing things which we know to be untrue, and then, when we are finally proved wrong, impudently twisting the facts so as to show that we were right. Intellectually, it is possible to carry on this process for an indefinite time: the only check on it is that sooner or later a false belief bumps up against solid reality, usually on a battlefield.

When one looks at the all-prevailing schizophrenia of democratic societies, the lies that have to be told for vote-catching purposes, the silence about major issues, the distortions of the press, it is tempting to believe that in totalitarian countries there is less humbug, more facing of the facts. There, at least, the ruling groups are not dependent on popular favour and can utter the truth crudely and brutally. Goering could say ‘Guns before butter’, while his democratic opposite numbers had to wrap the same sentiment up in hundreds of hypocritical words.

Actually, however, the avoidance of reality is much the same everywhere, and has much the same consequences. The Russian people were taught for years that they were better off than everybody else, and propaganda posters showed Russian families sitting down to abundant meal while the proletariat of other countries starved in the gutter. Meanwhile the workers in the western countries were so much better off than those of the U.S.S.R. that non-contact between Soviet citizens and outsiders had to be a guiding principle of policy. Then, as a result of the war, millions of ordinary Russians penetrated far into Europe, and when they return home the original avoidance of reality will inevitably be paid for in frictions of various kinds. The Germans and the Japanese lost the war quite largely because their rulers were unable to see facts which were plain to any dispassionate eye.

To see what is in front of one’s nose needs a constant struggle. One thing that helps toward it is to keep a diary, or, at any rate, to keep some kind of record of one’s opinions about important events. Otherwise, when some particularly absurd belief is exploded by events, one may simply forget that one ever held it. Political predictions are usually wrong. But even when one makes a correct one, to discover why one was right can be very illuminating. In general, one is only right when either wish or fear coincides with reality. If one recognizes this, one cannot, of course, get rid of one’s subjective feelings, but one can to some extent insulate them from one’s thinking and make predictions cold-bloodedly, by the book of arithmetic.

In private life most people are fairly realistic. When one is making out one’s weekly budget, two and two invariably make four. Politics, on the other hand, is a sort of sub-atomic or non-Euclidean word where it is quite easy for the part to be greater than the whole or for two objects to be in the same place simultaneously. Hence the contradictions and absurdities I have chronicled above, all finally traceable to a secret belief that one’s political opinions, unlike the weekly budget, will not have to be tested against solid reality.

Must-Read: Luigi Zingales: Donald Trump’s Economic Policies: Pro-Business, Not Pro-Market

Must-Read: Trump’s Republican Party: not the party of enterprise, but the party of rent-seekers with something to lose and of would-be rent seekers with something to gain…

Luigi Zingales: Donald Trump’s Economic Policies: Pro-Business, Not Pro-Market: “Trump is eliminating lobbyists by putting them in charge of all departments…
 

…After his election, it was difficult to predict what President Trump would do. In the election campaign he said everything and the opposite of everything: from a 45 percent tariff on Chinese imports to the reintroduction of the separation of commercial and investment banks, from an aggressive use of antitrust authority to the total abolishment of Dodd-Frank, the financial regulation that was enacted after the crisis. After two months, it is clear that the Trump industrial policy will be pro-business, not pro-market.
 
It may seem to be a nuance, but there is a fundamental difference. A pro-business policy favors existing companies at the expense of future generations. A pro-market policy favors conditions that allow all businesses to thrive without any favoritism…

Should-Read: Charles Wilson (1967): Trade, Society, and the State

Should-Read: What was my most prized and (I thought) original insight of 1991–one that I worked hard to discover and document in DeLong and Shleifer, “Princes and Merchants”–was, to Charlie Wilson 25 years earlier, a throwaway half paragraph:

Charles Wilson (1967): Trade, Society, and the State: “The two areas which in 1500 represented the richest and most advanced concentrations…

…of trade, industry and wealth were the quadrilateral formed by the Italian cities Milan, Venice, Florence and Genoa; and the strip of the Netherlands that ran from Ypres north-east past Ghent and Bruges up to Antwerp. It was not merely coincidence that these were the areas where the tradesmen of the cities had been most successful in emancipating themselves from feudal interference and in keeping at bay the newer threat of more centralized political control offered by the new monarchies. In the fleeting intervals between the storms of politics and war, men here glimpsed the material advance that was possible when tradesmen were left in peace unflattered by the attentions of strategists who regarded their activities as the sinews of war.

Precisely because the political and social relationships in which the merchants here lived were so relatively simple, these economic societies left behind them very little in the way of speculative literature. The precocious economic development of the cities of Italy and the Low Countries was cradled in the civic independence of those cities where merchants had achieved political power. The way in which that power was exercised varied from one city to another. At Venice the ‘state’ seemed to achieve a certain degree of independence of the rich patricians themselves, while it did not in Genoa. The Venetian Republic built galleys, fixed freight rates, auctioned galleys to private bidders, maintained factories and arranged routes and protection for Venetian ships. Yet neither here nor in the Netherlands did the political or social situation provoke merchants or statesmen into speculation about the relationship between economic and other activities. Such ‘economic’ literature as emerged from these urban economies was of two kinds: either ruminations, in the medieval tradition, on the moral implications and problems posed by business life, or attempts to deal with the purely technical problems ofa mercantile economy—largely questions of exchange, credit and money. Far the most fertile source of semi-economic literature at Florence, Venice and Genoa in the sixteenth century was the seemingly endless controversy on the legitimacy of interest…

Charles Wilson (1967): Trade, Society, and the State, in Cambridge Economic History of Europe, vol 4.

Must-Read: Sharun W. Mukand and Dani Rodrik: Ideas versus Interests: A Unified Political Economy Framework

Must-Read: Sharun W. Mukand and Dani Rodrik: _Ideas versus Interests: A Unified Political Economy Framework: “[We] distinguish between two kinds of ideational politics…

…the battle among different worldviews on the efficacy of policy (worldview politics) versus the politics of victimhood, pride and identity (identity politics). Our framework suggests a complementarity between worldview politics and identity politics. In particular, an increase in identity polarization may be associated with a shift in views about how the world works. Furthermore, an increase in income inequality is likely to result in a greater incidence of ideational politics…

Should-Read: Matthew Yglesias: Democrats Should Write Their Own “Terrific” Obamacare Replacement

Should-Read: Matthew Yglesias: Democrats Should Write Their Own “Terrific” Obamacare Replacement: “Protecting Medicare and Medicaid means you can’t… scrap the Medicaid expansion, and you can’t scrap the payment reforms to Medicare…

…You’re left then only to talk about the… marketplaces that are successfully delivering affordable care to millions but that are still short of enrollment and competition goals. Trump is, obviously, not a detailed policy thinker. But… he laid out some core principles…. “Everybody’s going to be taken care of much better than they’re taken care of now…. The government’s gonna pay for it. But we’re going to save so much money on the other side. But for the most it’s going to be a private plan, and people are going to be able to go out and negotiate great plans…”
Trump, in short, campaigned on the same basic principle as Bernie Sanders–health care needs to be a privilege rather than a right…. But it would be too disruptive to interfere with people’s current employer-based arrangements and try to shift everyone to a government-run system….

Democrats can characterize them as Affordable Care Act “fixes” or “tweaks” or “improvements” if they want to. Or they can call it an “alternative” or “replacement” to the ACA if that sounds better. Heck, they can even call it “Trumpcare.”

Should-Read: Manu Saadia: Why Peter Thiel Fears “Star Trek”

Should-Read: Manu Saadia: Why Peter Thiel Fears “Star Trek”: “Asked… whether he was a bigger fan of ‘Star Wars’ or ‘Star Trek’…

…Thiel replied that, as a capitalist, he preferred the former. “‘Star Trek’ is the communist one,” he said…. In “Star Wars,” criminal potentates hire bounty hunters to recover debts from roguish smugglers. Robots are menial servants and sycophants rather than colleagues, and human slavery persists. Unelected tyrants and religious zealots make policy by fiat…. Fate and the lottery of birth reign supreme. It is a libertarian’s fever dream….

This, rather than the liberal-democratic setting of the U.S.S. Enterprise, is the political environment in which Thiel seems to feel most comfortable. In his Cato essay, he places “confiscatory taxes, totalitarian collectives, and the ideology of the inevitability of the death of every individual” in opposition to “authentic human freedom.” Only the strong and lucky, like Han Solo, should survive…

Weekend reading: “Thawing out from #ASSA2017” edition

This is a weekly post we publish on Fridays with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth published this week and the second is the work we’re highlighting from elsewhere. We won’t be the first to share these articles, but we hope by taking a look back at the whole week, we can put them in context.

Equitable Growth round-up

The annual meeting of the Allied Social Science Associations was this past weekend in Chicago. Here are the highlights of presentations Equitable Growth staff saw during the first, second and final days of the meeting.

Among the highlights was a new paper by several economists on the decline in labor’s share of income. The research points to rising concentration of businesses and the rise of “superstar firms” as a major contributor to the decline in the labor share of income.

The continued existence of the Affordable Care Act is an open question these days. Kavya Vaghul looks at the potential distributional effects if the health care law is repealed.

Links from around the web

Claudia Sahm reflects on the 2017 meeting of the ASSA and comes up with three stories from the conference about economists and economics research. [claudiasahm]

Milton Friedman famously suggested that a people’s consumption responds more to changes in their permanent income than to temporary changes in income. Noah Smith argues that hypothesis is dead wrong. [bloomberg view]

Riffing on Robert Shiller’s American Economic Association Presidential address, Martin Sandbu writes about the importance of narratives for understanding not just economics but also how those narratives affect the economy. [free lunch]

Is the zero lower bound a technical problem that can be solved by policymakers, an intractable problem for modern macroeconomics, or not a special case at all? J.W. Mason raises these questions. [slackwire]

Guy Rolnik interviews Sandra Black, a member of President Obama’s Council of Economic Advisers, on the influence of labor market monopsony, or the ability of employers to set wages. [pro-market]

Friday figure

Figure from “U.S labor market tightness, hiring, and the decline in job switching” by Nick Bunker

Should-Read: Matthew Yglesias: Obama to Working Class Trump Voters: You Played Yourselves

Should-Read: Matthew Yglesias: Obama to Working Class Trump Voters: You Played Yourselves: “‘If every economic issue is framed as a struggle between a hardworking white middle class and undeserving minorities’…

…he said, “then workers of all shades will be left fighting for scraps while the wealthy withdraw further into their private enclaves.” It does not take a genius to understand who is whom in this parable. Donald Trump… was born rich and lives in a gold-plated tower… can withdraw further into his private enclaves. So is his son-in-law and senior advisor Jared Kushner. So is… Betsy DeVos… Wilbur Ross. So is the Goldman Sachs executive he’s tapped to run the National Economic Council and the Goldman Sachs trader turned hedge fund manager he’s tapped to run the Treasury…. This crew is laughing all the way to the bank as white working class votes install a new regime based on regressive tax cuts and bank deregulation.

And… Obama mercifully spared us the tired pieties…. He didn’t balance the ledger with a slam on identity politics… didn’t argue that white people’s economic pain is somehow more authentic or meaningful. He identified… the economic woes of [the] working class… [as] caused, to a large extent, by the racism of a sub-set of the working class that leads them to prefer a politics of white supremacy to a politics of economic uplift. This commitment to white supremacy is, Obama argued, deadly to the future of the country:

If we decline to invest in the children of immigrants, just because they don’t look like us, we diminish the prospects of our own children – because those brown kids will represent a larger share of America’s workforce. And our economy doesn’t have to be a zero-sum game. Last year, incomes rose for all races, all age groups, for men and for women….

Trump is proposing to bring back the exact policy mix of tax cuts for millionaire and deregulation for banks and fossil fuel extractors that brought the global economy to its knees under George W Bush. Economic policy will be crafted at the highest levels by and for the inheritors of large fortunes…. [Obama’s] message… is clear enough: white working class Trump supporters played themselves…