Must-Read: Never bet on an inside straight. Never eat at a place called “Mom’s”. Never go up against a Sicilian when death is on the line. And never construct a currency union vastly larger than any conceivable optimal currency area:
Martin Wolf: More Perils for the Eurozone: “Divergence in the performance of members of the single currency is a real challenge…
The combination of weak aggregate demand with huge post-crisis divergences in economic performance has turned the eurozone into an accident waiting to happen. True, it is quite possible that the situation will stabilise. But the interactions between economic and financial events and political stresses are unpredictable and dangerous.
What the eurozone needs most is a shift away from the politics of austerity. In its most recent Economic Outlook, the OECD, a club of mostly rich nations, makes a cogent (albeit belated) plea for a combination of growth-supporting fiscal expansion with relevant structural reforms. This is most relevant to the eurozone because that is where demand has been weakest and the fetish over fiscal deficits most exaggerated. In the big eurozone economies, net public investment is near zero. This is folly.
Alas, little chance of change exists. Those who matter — the German government, above all — view public borrowing as a sin, regardless of its cost. The political and economic impact of breaking up the eurozone is so great that the single currency may well soldier on forever. But it has by now become identified with prolonged stagnation. Those member countries with the power to change this approach should ask themselves whether it really makes sense. It is time for the eurozone to stop living dangerously and start living sensibly, instead.
Should-Read: I want the opinion of Sherman Robinson of IFPRI and PIIE on this: Sherman?
Simon Wren-Lewis: The OBR and the Impact of Brexit: “The debate about whether the OBR is being too pessimistic about the impact of Brexit…
…lower immigration from the EU and lower productivity. The two are linked…. The OBR also assumes that Brexit will reduce the trade intensity of the UK: less exports and imports. This is pretty obvious to anyone who has looked at international trade: transport costs may not be as high as they once were, but gravity equations tell us that geographical distance is still a key factor in influencing whether trade takes place, which means that reduced trade with the EU will not be matched by new trade outside the EU. The Treasury analysis of Brexit assumed that this lower trade intensity would also reduce productivity. The OBR do not include this effect, calling it too uncertain. This is a slightly surprising judgement….
None of these transmission mechanisms from greater trade to higher productivity are particularly fanciful: they all make common sense (at least as seen by an economist). They are all one directional, which means assuming an effect of zero is an extreme point in every case. In this sense, the OBR is being rather optimistic about the impact of Brexit on the UK economy.
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120716-WP-distributional-national-accounts
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Authors:
Thomas Piketty, Professor of Economics, École des Hautes Études en Sciences Sociales, Paris School of Economics
Emmanuel Saez, Professor of Economics & Director of the Center for Equitable Growth, University of California, Berkeley
Gabriel Zucman, Assistant Professor of Economics, University of California, Berkeley
Abstract:
This paper combines tax, survey, and national accounts data to estimate the distribution of national income in the United States since 1913. Our distributional national accounts capture 100% of national income, allowing us to compute growth rates for each quantile of the income distribution consistent with macroeconomic growth. We estimate the distribution of both pre-tax and post-tax income, making it possible to provide a comprehensive view of how government redistribution affects inequality. Average pre-tax national income per adult has increased 60% since 1980, but we find that it has stagnated for the bottom 50% of the distribution at about $16,000 a year. The pre-tax income of the middle class—adults between the median and the 90th percentile—has grown 40% since 1980, faster than what tax and survey data suggest, due in particular to the rise of tax-exempt fringe benefits. Income has boomed at the top: in 1980, top 1% adults earned on average 27 times more than bottom 50% adults, while they earn 81 times more today. The upsurge of top incomes was first a labor income phenomenon but has mostly been a capital income phenomenon since 2000. The government has offset only a small fraction of the increase in inequality. The reduction of the gender gap in earnings has mitigated the increase in inequality among adults. The share of women, however, falls steeply as one moves up the labor income distribution, and is only 11% in the top 0.1% today.
Should-Read: Kevin Drum: Obamacare Repeal Is Doomed: “Republicans. Can’t. Repeal. Obamacare…
…Democrats [need to]… focus on… the provision of Obamacare that bans insurers from turning down customers or charging them extra for coverage…. Republicans say they favor keeping it. Donald Trump says he favors keeping it. It’s not a minor regulation. It is absolutely essential to any health care plan…. Repealing Obamacare but leaving in place the pre-existing conditions ban would destroy the individual insurance market and leave tens of millions of people with no way to buy insurance….
Take me. I’m currently being kept alive by about $100,000 worth of prescriptions drugs each year. If I can go to any insurer and demand that they cover me for $10,000, that’s a certain loss of $90,000. If millions of people like me do this, insurance companies will lose billions. In the employer market… this is workable because insurers have lots and lots of healthy, profitable people at each company to make up these losses. In the individual market—after you’ve repealed the individual mandate and the subsidies—they don’t….
Every insurance company in America would simply stop selling individual policies. It would be political suicide to make this happen, and this means that Democrats have tremendous leverage if they’re willing to use it. It all depends on how well they play their hand. The current Republican hope is that they can repeal parts of Obamacare, and then hold Democrats hostage: vote for our replacement plan or else the individual insurance market dies. There’s no reason Democrats should do anything but laugh at this…. Pre-existing conditions is the hammer Democrats can use to either save Obamacare or else demand that any replacement be equally generous. They just have to use it.
Note to Self: If we want to have a better world, we either need to change the politics to restore the stabilization policy mission to fiscal authorities–and somehow provide them with the technocratic competence to carry out that mission–or give additional powers to central banks, powers that we classify or used to classify as being to a degree “fiscal”.
See: http://www.bradford-delong.com/2016/11/imf-panel-fiscal-policy-in-the-new-normal-partial-transcript.html
Should-Read: The swipe at Tony Blair is, I think, undeserved. If the Athenian demos can vote to reverse its previous-day’s massacre decree before upon being convinced by Diodotos son of Eukrates that that vote was a mistake, the sovereign Queen-in-Parliament of the United Kingdom can–and I believe should–reject the narrow majority for BREXIT produced by the advisory vote. And the swipe at the OBR for simply doing its job is definitely undeserved, and unfair. The possibility that BREXIT will in the end be seen as having accelerated British economic growth is definitely a possibility out in the tail of the probability distribution.
If I were Wolfgang, I would tear up this current column of his and write another one, starting from the end of the current column. Start by saying that the first and most important economic-policy job of the elected leaders of a democracy is to maintain a high-pressure low-unemployment economy. Continue by saying that the second but subsidiary task is then to manage finances so that that high-pressure low-unemployment economy does not produced either undue inflation or unmanageable structural imbalances. Then note that economists’ first job is to remind the elected leaders of what their tasks are. Then note that economists’ second job is to give the elected leaders policy options that will (a) maintain a high-pressure low-unemployment economy economy, and (b) manage finances to prevent either undue inflation or unmanageable structural imbalances.
Conclude by saying that the economics profession has failed to do its job–but be sure to include a coda listing honorable exceptions.
Wolfgang Munchau: The Elite’s Marie Antoinette Moment: “The Bourbons were hard to beat as the quintessential out-of-touch establishment. They have competition now…
…We–the gatekeepers of the global liberal order–keep on doubling down. The campaign by Tony Blair, former UK prime minister, to undo Brexit is probably the quaintest example of all…. The truth about the impact of Brexit is that it is uncertain, beyond the ability of any human being to forecast and almost entirely dependent on how the process will be managed. “Don’t know” is the technically correct answer….
The correct course of action would be to stop insulting voters and, more importantly, to solve the problems of an out-of-control financial sector, uncontrolled flows of people and capital, and unequal income distribution…. Imagine what would have been possible if Chancellor Angela Merkel had spent her even larger political capital on finding a solution to the eurozone’s multiple crises, or on reducing Germany’s excessive current account surpluses. If you want to fight extremism, solve the problem.
But it is not happening for the same reason it did not happen in revolutionary France. The gatekeepers of western capitalism, like the Bourbons before them, have learnt nothing and forgotten nothing.
Must-Read: Whether Britain’s BREXIT vote would bring on a more-or-less immediate recession depended on whether markets and the Bank of England could and would drop the value of the pound far enough to boost exports enough to offset the shock to investment in Britain. There was a risk that they would or could not–enough of a risk that I thought that avoiding a post-vote recession was a tail possibility. But a more than 20% fall in the value of the pound turns out to have been enough to do the job:
However, is there any other high card in the hole that can make use forecast that British economic growth in the five years post-vote will be as fast as or faster than in the counterfactual in which the BREXIT vote went the other way? Yes–if Britain reverses itself and abandons the BREXIT project. Otherwise? I cannot see any. Untangling value chains is expensive. And the untangling will end with less productive value chains than Britain has now. You can argue–and I do–for a less financialized Britain in which government does much more to nurture and support communities of engineering practice and excellence. But BREXIT looks to me like a uniquely stupid and destructive way to set about such a policy shift. And I cannot imagine the clowns who run Britain’s Conservative and Unionist Party today having any clue as to how to accomplish such.
So put me on record as strongly supporting Britain’s Office of Budgetary Responsibility against all of its enemies and critics–including the extremely sharp [William Munchau[]:
Simon Wren-Lewis: Hitting Back: “A reaction to reading this [by Wolfgang Munchau][]…
…A more serious incident was the forecast by the Office for Budget Responsibility in the UK, which said last week that Brexit would have severe economic consequences. Coming only a few months after the economics profession discredited itself with a doomy forecast about the consequences of Brexit, this is an astonishing reminder of the inadequacy of economic forecasting models. The truth about the impact of Brexit is that it is… beyond the ability of any human being to forecast and almost entirely dependent on how the process will be managed…
Shrug your shoulders and move on? If it had appeared in the partisan press that would be a sensible reaction, but this was written by a widely respected journalist in the UK’s internationally renown financial newspaper… written by someone whose knowledge on the Eurozone is beyond dispute and whose views I often agree with.
Well, on this occasion, this particular member of a discredited profession who is no longer apparently considered an expert on macroeconomics is not prepared to take this kind of stuff anymore, whoever it may come from…. No journalist has any excuse nowadays for misunderstanding the probabilistic nature of forecasts (Bank of England fan charts)…. Macro forecasts… exist because it is worth being slightly better than guesswork when the stakes are so high….
In the Brexit campaign… our collective knowledge about the impact of trade restrictions was treated as just one more opinion, or described as Project Fear…. To have the nerve to blame economists for the Brexit result, to suggest that using their knowledge was a ‘tactical mistake’, to imply that the OBR should pretend they know nothing about Brexit, all that is itself amazing malevolent chutzpah. But it goes beyond audacity to criticise a profession and subject matter you appear not to understand when it is this lack of understanding that has contributed so much to the damage over the last few years.
Should-Read: Diego Daruich, William Easterly, Ariell Reshef: The Surprising Instability of Export Specializations: “Specializations are surprisingly unstable: Export ranks are not persistent, and new top products and destinations replace old ones…
…Source-country factors are not the main explanation of this instability: Only 20% of the variation in export growth can be explained by variation in comparative advantage (source-by-product factors), while another 20% of the variation in export growth can be explained by variation in bilateral (source-by-destination) factors. The high share of product, destination, and product-by-destination factors diminishes the emphasis on the nations where the exports originate. The high share of idiosyncratic variance (residual at the source-product-destination level of variation) of about 30%, also indicates the difficulty to predict export success using source country characteristics. These findings suggest that export performance depends, to a greater extent than previously appreciated, on forces that are outside the realm of national export promotion and industrial policies.
Should-Read: To paraphrase Rawls: Nobody deserves the benefits that flow because their native endowments and luck have given them talents and resources are hard to duplicate and help produce things that rich people have a strong jones for. According to Rawls, the most that is true is that it is useful to us all to pretend that the rich and talented deserve the benefits that flow because, etc. If you want to contest Rawls here, IMHO, you need to specify why people actually deserve to profit from having chosen the right parents and the right environment which formed them when young and from luck.
Now you can do so. You can say:
- Those with the right parents and the right environment when young and with luck do things that are pleasing to the gods, and since we are in gift-exchange relationships with the gods, they respond by providing us benefits. But then you immediately fall into the pit of Euthyphro..
- Those with the right parents and the right environment when young and with luck are advancing humanity’s telos to become as clever and strong as possible–are evolutionarily superior. But this is worse off than (1): we are not even in a gift-exchange relationship with humanity’s telos
- Those with the right parents and the right environment when young and with luck “deserve” benefits because they are strong and clever, and justice is nothing but a word that the strong and clever use to disorient and disorganize the weak so that the strong can do what they will while the weak suffer what they must.
You see the trouble we are in? “Desert” is not a concept that can be deployed to clarify thought.
But on what principles should we act? My view is that the height of moral philosophy is attained by Bill and Ted, with their injunction: “Be excellent to each other!”
T.M. Scanlon: Giving Desert Its Due: “Here the relevant critical point was made by Rawls…
…in his remark that “no one deserves his place in the distribution of native endowments”…. This remark is often read as presupposing the idea that a desert basis must itself be deserved. However, this is not the correct interpretation. Rawls’ point is not that no one deserves to have endowments that are scarce (although that may be true), but rather that no one deserves any special reward simply because his abilities are scarce–that mere scarcity is not a desert basis at all. This is not to deny that institutions that assign premium prices to scarce talents and resources may be justifiable, perhaps on grounds of greater efficiency. If such an institution is justified in this way, and is just, then individuals with scarce talents are entitled to the rewards that this institution provides. This, however, is not a desert-based argument but rather an argument for institutional entitlement, based on a prior conception of justice.
