Category: Equitablog

Ken Rogoff’s Hooverismo…: Hoisted from the Archives from Three Years Ago

Posted on by Brad DeLong
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Just what is Ken Rogoff’s argument that the Cameron-Osborne-Clegg government in Great Britain was correct to hit the British economy over the head with the austerity hammer in the spring of 2010, anyway?

Simon Wren-Lewis opens: Ken Rogoff on UK austerity: “Ken Rogoff’s article… is a welcome return to sanity…

…Rogoff focuses on what was always the critical debate: was austerity necessary because financial markets might have stopped buying government debt…. As critical pieces go, you couldn’t have a friendlier one than this…. Rogoff agrees that it was a mistake to cut back on public sector investment…. He says that austerity critics “have some very solid points”…. His comment after putting the austerity critics’ case is “perhaps” or “maybe”…

But… But… But…

About the Rogoff argument: If markets stop buying government debt, then they are buying something else: by Walras’s Law, excess supply of government debt is excess demand for currently-produced goods and services and labor. That is not continued deflation and depression, that is a boom–it may well be a destructive inflationary boom, and it may be a costly boom, but it is the opposite problem of an deflationary depression

So, by continuity, somewhere between policies of austerity that that produce deflationary depression due to an excess demand for safe assets and policies of fiscal license that produce inflationary boom caused by an excess supply of government debt, there must be a sweet spot: enough new issues of government debt to eliminate the excess demand for safe assets and so cure the depression, but not so much in the way of new issues of government debt to produce destructive inflation, right? Why not aim for that sweet spot? Certainly Cameron-Osborne-Clegg were not aiming for that sweet spot, and the John Stuart Millian using the government’s powers to issue money and debt to balance supply and demand for financial assets and so make Say’s Law true in practice even though it is not true and theory?

More urgent and important: In the spring of 2010 there was no sign of an inflationary boom with rising interest rates. There was no sign that there was going to be an inflationary boom soon. There was no sign that anybody in financial markets whose money moved market prices at the margin placed a weight greater than zero on any prospect of an inflationary boom at any time horizon out to thirty years.

Thus the question is: what do you do if there is no boom, are no signs of a boom, is no expectation that there will be a boom, is no excess supply of government debt right now, is no sign in the term structure of interest rates that people expect an excess supply of government debt in the near-future–if in fact looking out thirty years into the future via the term structure there is no sign that there will ever be any significant chance of an excess supply of government debt?

Ken Rogoff thinks that the answer is obvious: that you must then hit the economy on the head with the hammer of austerity to raise unemployment in order to guard against the threat of the invisible bond-market vigilantes, even though there is no sign of them–for, he says, they are invisible and silent as well. We must not try to infer expectations, probabilities, scenarios, and risks from market prices, but rather have St. Paul’s faith that austerity is necessary because of “the evidence of things not seen”.

The argument seems to be:

  1. We can’t trust financial markets that price the scenario in which people lose confidence in government finances at zero because financial markets are irrational–we cannot look at prices as indicators of when austerity might be appropriate, but must hit the economy on the head with the austerity brick and raise unemployment.

  2. Once interest rates rise as people lose confidence in government finances, it is then politically impossible for the government to run the primary surpluses needed–to cut spending and raise taxes–in order to service the debt without the implicit national bankruptcy of inflation

  3. Once interest rates rise as people lose confidence in government finances, it is not possible for the Bank of England to reduce the pound far enough to bring foreign-currency speculators who then expect the next bounce of the pound will be up into the market to reduce interest rates–or, at least, not possible without setting off an import price-driven inflationary spiral, and thus produce the implicit national bankruptcy of inflation.

  4. Greece! Argentina! You don’t want Britain to suffer the fate of Greece or Argentina, do you

Therefore, Rogoff argues, in order to guard against the possibility of a destructive fiscal dominance-inflation in the future, the Cameron-Osborne-Clegg government was wise to hit the British economy on the head with the austerity hammer and produce a longer, deeper, more destructive depression now.

Maybe the argument is really that the big policy mistake was made by Governor of the Bank of England–that Britain was in conditions of fiscal dominance, in which the Exchequer needed to balance the budget to preserve price stability and the Bank of England should have engaged in massive quantitative easing, aggressive forward interest- and exchange-rate guidance, and explicit raising of the inflation target in order to balance aggregate demand and potential supply, and that the unforgivable policy blunders were not Cameron-Osborne-Cleggs’ but King’s. But if that is what Rogoff means, it is not what he says.

So I am still left puzzled.

And so is Simon Wren-Lewis, who continues:

The argument here is all about insurance. The financial markets are unpredictable…. [What if] the Euro had collapsed[?] As Rogoff acknowledges, they might have run for cover into UK government debt, but… might have done the opposite…. The UK is not immune from the possibility of a debt crisis, so we needed to take out insurance against that possibility, and that insurance was austerity…. So let us agree that it was possible to imagine, particularly in 2010, that the markets might stop buying UK government debt. What does not follow is that austerity was an appropriate insurance policy….

Government needed to have a credible long term plan for debt sustainability…. I hope Rogoff would agree that in the absence of any risk coming from the financial markets, it is optimal to delay fiscal tightening until the recovery is almost complete. The academic literature is clear that, in the absence of default risk, debt adjustment should be very gradual, and that fiscal policy should not be pro-cyclical. So the insurance policy involves departing from this wisdom. This has a clear cost in terms of lost output, but an alleged potential benefit in reducing the chances of a debt crisis…. What the Rogoff piece does not address at all is that the UK already has an insurance policy, and it is called Quantitative Easing…. Rogoff says that, if the markets suddenly forsook UK government debt “UK leaders would have been forced to close massive budget deficits almost overnight.” With your own central bank this is not the case–you can print money instead…. We are talking about a government with a long-term feasible plan for debt sustainability, faced with an irrational market panic…. We never needed the much more costly, far inferior and potentially dubious additional insurance policy of austerity.

And so is Paul Krugman: Phantom Crises:

Simon Wren-Lewis is puzzled by a Ken Rogoff column that sorta-kinda defends Cameron’s austerity policies. His puzzlement, which I share, comes at several levels. But I want to focus on… Rogoff’s assertion that Britain could have faced a southern Europe-style crisis, with a loss of investor confidence driving up interest rates and plunging the economy into a deep slump. As I’ve written before, I just don’t see how this is supposed to happen in a country with its own currency that doesn’t have a lot of foreign currency debt–especially if the country is currently in a liquidity trap, with monetary policy constrained by the zero lower bound on interest rates. You would think, given how many warnings have been issued about this possibility, that someone would have written down a simple model of the mechanics, but I have yet to see anything of the sort…. Suppose that investors turn on your country for some reason… a decline in capital inflows at any given interest rate, so that the currency depreciates. If you have a lot of foreign-currency-denominated debt, this could actually shift IS left through balance-sheet effects, as we learned in the Asian crisis. But that’s not the case for Britain; clearly, IS shifts right. If LM doesn’t shift, the interest rate will rise, but only because the loss of investor confidence is actually, through depreciation, having an expansionary effect….

My point is that… [the] claim that loss of foreign confidence causes a contractionary rise in interest rates just doesn’t come out of anything like a standard model. If you want to claim that it will happen nonetheless, show me the model!…

Furthermore, as Wren-Lewis says, even if there is somehow a squeeze on long-term bonds, why can’t the central bank just buy them up? Yes, this is “printing money”–but when you’re in a liquidity trap, that doesn’t matter. (Alternatively, you can take a consolidated view of the government and central bank balance sheets, in which case what we’re effectively doing is refinancing at the zero short-term rate.)…

And Matthew C. Klein: Ken Rogoff’s Latest Bad Argument for Austerity:

It’s been more than three years since the U.K.’s coalition government began aggressively raising taxes and cutting spending in an effort to reduce its deficit. Many economists now agree that this program retarded the recovery, producing a slump worse than the Great Depression. Yet Harvard economist Kenneth Rogoff, in a column in the Financial Times, argues that those measures made sense as a form of insurance against the sort of crisis that has afflicted countries in the euro area such as Spain and Italy. His case has two parts, neither of which is convincing.

First, Rogoff implies that the U.K. was vulnerable to the same sorts of shocks that battered Spain and Italy…. The comparison is misleading, however. Unlike the 17 countries of the euro area, which share a single currency, the U.K. uses its own… totally different from the euro area….

Rogoff’s second point is that previous episodes of high indebtedness in the U.K. were special cases that should not inform today’s policy makers…. Rogoff dismisses the gradual repayment of the U.K.’s World War II-era debts because it was only made possible by persistent rapid inflation. That’s true, but Rogoff himself has repeatedly argued that the rich world needs more inflation, rather than less. In fact, at the bottom of his most recent column, Rogoff says that it was a mistake not to have pursued “even more aggressive monetary policy.”

Taxing the rich more: Preliminary evidence from the 2013 tax increase

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Author:

Emmanuel Saez, Professor of Economics and Director of the Center for Equitable Growth, University of California, Berkeley

Abstract:

This paper provides preliminary evidence on behavioral responses to taxation around the 2013 tax increase that raised top marginal tax rates on capital income by about 9.5 points and on labor income by about 6.5 points. Using published tabulated tax statistics from the Statistics of Income division of the IRS, we find that reported top 1% incomes were significantly higher in 2012 than in 2013, implying a large short-run elasticity of reported income with respect to the net-of- tax rate in excess of one. This large short-run elasticity is due to income retiming for tax avoidance purposes and is particularly high for realized capital gains and dividends, and highest at the very top of the income distribution. However, comparing 2011 and 2015 top incomes uncovers only a small medium-term response to the tax increase as top income shares resumed their upward trend after 2013. Overall, we estimate that at most 20% of the projected tax revenue increase from the 2013 tax reform is lost through behavioral responses. This implies that the 2013 tax increase was an efficient way to raise revenue.

Technological change and upskilling in the labor market

Posted on by Bridget Ansel
A “Now Hiring” sign appears in a storefront display window in Philadelphia.

One of the more concerning trends of the U.S. labor market in the post-Great Recession era is the seeming disconnect between the demand for labor in the economy and the actual hiring of workers. This divergence is often depicted by the difference in the growth rate of job openings (a sign of labor demand) and the number of hires in the Job Openings and Labor Turnover Survey data complied by the U.S. Bureau of Labor Statistics. One explanation of this trend is a “skills-gap” in the economy where workers just don’t have the requisite skills to get hired for the jobs that are open. Another diagnosis is that the 2007-2009 recession led employers to “up-skill” jobs—require higher skill levels for a given job—in the face of abundant labor. A new paper offers a slightly different interpretation of this upskilling argument.

The new paper, by economists Brad Hershbein of the Upjohn Institute and Lisa Kahn of Yale University, looks at how skill requirements for job openings changed from 2007 to 2010 and then to 2015. The economists used data from Burning Glass Technologies, which according to the firm contains the near universe of job openings posted online. Hershbein and Kahn use this data is see how skill requirements on job postings in different metropolitan statistical areas change depending on how hard their labor market was hit by the Great Recession.

What they find is that in areas that were hit hard by the recession experienced more upskilling than areas where the impact of the recession was more mild. In other words, the firms in areas where there were relatively more unemployed people were requesting higher skill requirements for posted jobs. This would seem to fit quite well with the common upskilling story that employers are taking advantage of a pool of reserve labor.

But their results don’t necessarily indicate this is the only factor in upskilling. Not only do firms in these areas have higher requirements on job openings, they also appear to hire workers with more skills. At the same time, these same firms appear to be investing more in an effort to retool their firms. To Hershbein and Kahn, these signs all point to firms in these areas adjusting to the recession by increasing investment in technology and skills as part of a longer-term trend in the economy. The two authors also point out this trend is continuing despite a tightening labor market in recent years as seen in the data up to the end of 2015.

Of course, it’s not clear that the areas hardest hit by the Great Recession have fully recovered, as other research shows. But while cyclical factors in the economy may have and might continue to play an important role in upskilling by employers, the role of longer-term trends is something that perhaps we shouldn’t ignore in this debate as well.

Must-Read: Barry Eichengreen: Rethinking Capital Controls

Posted on by Brad DeLong

Must-Read: Barry Eichengreen: Rethinking Capital Controls: “Worries persist that capital controls create a breeding ground for both corruption and distortions in resource allocation…

…The benefits of controls are concentrated, giving the favored groups (exporters, in the case of China) a strong incentive to lobby for their retention, while the costs are diffuse…. Controls may also provide an excuse not to undertake painful but necessary reforms…. What can be done to limit those risks? One possibility is to develop standards…. One possible way to ensure that governments adhere to these standards would be to make compliance an obligation for members of the International Monetary Fund and to authorize the fund to name and shame countries that fail to comply. More ambitiously, countries that fail to comply could be denied access to the fund’s financing facilities…. The International Monetary Fund has displayed greater open-mindedness about capital controls…. And given this new open-mindedness, there may be a way to create the long-elusive consensus. Stay tuned.

Must-Reads: November 2, 2016

Posted on by Brad DeLong

Should Reads:

Solutions to Income Volatility: A Discussion with Elisabeth Jacobs

Posted on by Nick Bunker

The following post was originally published on the website of the Aspen Institute.

Elisabeth Jacobs is Senior Director for Policy at the Washington Center for Equitable Growth. Her research focuses on economic inequality and mobility, family economic security, poverty, social insurance, and the politics of inequality. Prior to joining Equitable Growth, she was a Fellow in Governance Studies at the Brookings Institution, and held positions with the Senate Committee on Health, Education, Labor and Pensions, as well as with the Joint Economic Committee. Here, she shares insights on how best to help families struggling with income volatility. 

In a world with rising income volatility, what would it take to help individuals and families be financially stable even when their incomes vary and can be difficult to predict?

It is important to consider how these challenges impact families. Every working parent knows that family responsibilities can interrupt their work in ways that can have a meaningful impact on their household balance sheets. Having children, paying for childcare, caring for elderly and ill family members, and even caring for their own health can all cause severe levels of financial insecurity. These stresses are particularly acute for lower- and middle-income families, but research suggests that they stretch surprisingly high up the economic ladder. Furthermore, the same labor force trends that are contributing to rising income volatility are also major sources of stress for working families. Unpredictable scheduling and lack of steady hours at work, for example, not only contribute to earnings fluctuations; they also make childcare more difficult to arrange and limit resources available to care for other family members. Lack of paid sick time and family leave are also major challenges. We need a suite of policies to help families deal with interruptions to work and reductions in earnings, so that these (often short-term) events do not cause long-term financial distress. And we know that helping prime-age workers secure more stable employment can have big impacts not just for individual families, but for the health of the economy as a whole.

What kind of policies would make a difference?

State and local governments are pioneering solutions to earnings volatility caused by irregular scheduling, variable hours, and lack of paid leave. In 2015, San Francisco passed a work scheduling ordinance that requires retailers to provide employees with schedules at least two weeks in advance, pay employees more when their schedules are changed with little advance notice, partial payment when employees who are on-call are not actually called in, and pay equity for part-time workers. On September 19, Seattle’s city council passed a similar law. California, Rhode Island and New Jersey have implemented paid family leave programs (plus New York, whose policy takes effect in January 2018). California, Connecticut, Massachusetts, Oregon, and Vermont have enacted paid sick leave policies. Momentum is building—several other state legislatures and municipal governments are considering enacting versions of these policies. But for these policies to become the standard, federal policymakers must also take action.

Addressing income volatility also requires us to rethink childcare, from birth all the way up. Public policy may be the best way to provide accessible and affordable childcare supports to all working families. That said, more research is needed to fully understand the connections between income volatility and childcare. There are two issues here: new parents who take time off from work face large reductions in income, but taking short-term leave to care for sick children or deal with lack of daycare (or insufficient after-care) can also contribute to families’ financial instability. Parents should be able to take paid time off to bond with new children, and paid leave policies need to become more responsive to employees’ actual needs, such as allowing employees to break up paid family leave into multiple short time periods, rather than requiring time to be taken all at once. And, beyond paid leave, we have a lot of work to do on providing families with children with reliable, affordable, high-quality child care.

Does household income volatility have a broader impact on the economy?

A growing body of work suggests that widespread family financial insecurity has a deleterious impact on the macroeconomy. For instance, work by Princeton economist Atif Mian and University of Chicago economist Amir Sufi suggests that the Great Recession was (essentially) caused by household income volatility – the long, steep run-up in household debt was followed by an equally sharp drop in household spending that crushed the American economy under its weight. But we need more research, because there are so many important and interesting unanswered questions in this space! Focusing on income volatility, for instance: we know that, during recessions, unemployment insurance is an important stabilizer for families and the economy as a whole. And we know that the share of the workforce covered by unemployment insurance has eroded substantially over time, for a variety of reasons. There is good reason to believe that the erosion of UI coverage undermines the program’s ability to boost the economy as a whole – but this is an empirical question as well as a theoretical one. These are the kinds of research questions that the Washington Center for Equitable Growth is looking to support.

Must-Read: IMF: 17th Annual Research Conference: Macroeconomics after the Great Recession, November 3-4, 2016

Posted on by Brad DeLong

Must-Read: IMF: 17th Annual Research Conference: Macroeconomics after the Great Recession, November 3-4, 2016: “The theme… is “Macroeconomics after the Great Recession”…

…honor[ing] Olivier Blanchard’s contributions to economic research and policy…. The conference will bring together an outstanding array of economists and policymakers, many of whom studied or worked in collaboration with Blanchard. Lawrence Summers (Harvard University) will deliver the Mundell-Fleming Lecture…. Christine Lagarde… David Lipton… Ugo Panizza… Charles Wyplosz… Jesper Lindé… Christoph Trebesch… Jeromin Zettelmeyer… Athanasios Orphanides… François Gourio… Anil K. Kashyap… Jae Sim… Galina Hale… Poul Thomsen… Lewis Alexander… Janice Eberly… Ricardo Caballero… Romain Duval… Davide Furceri… Beth Anne Wilson… James Poterba… Hamid Faruqee… Chang Yong Rhee… Suman S. Basu… Atish R. Ghosh… Jonathan D. Ostry… Pablo E. Winant… Anton Korinek… Philip R. Lane… Gian Maria Milesi-Ferretti… Linda Tesar … Lawrence H. Summers… Maurice Obstfeld… Sharmini Coorey… Tito Cordella… Giovanni Dell’Ariccia… Robert Marquez… Patricia Mosser… Gideon Bornstein… Guido Lorenzoni… Olivier Jeanne… Vitor Gaspar… Alberto Alesina… Gualtiero Azzalini… Carlo Favero… Francesco Giavazzi… Armando Miano… Chris Erceg… Thomas Philippon… Francisco Roldán… Marcos Chamon… Adam Posen… George Akerlof… Peter A. Diamond… Ayşegül Şahin… Betsey Stevenson… Giuseppe Bertola… Juan Francisco Jimeno… Maurice Obstfeld… Olivier Blanchard… Stanley Fischer… Kristin Forbes… Federico Sturzenegger…

Business taxation, retained earnings, and measuring income inequality

Posted on by Bridget Ansel
Photo of the exterior of the Internal Revenue Service (IRS) building in Washington.

Over the past 30 years, business income has moved away from traditional corporations and toward pass-through entities, such as partnerships. This shift means more and more business income is taxed solely through individual tax filings instead of in conjunction with corporate income tax. Clearly, this trend bears examination for how the federal tax system should tax business income, but it also leads to questions about how economists and policymakers measure income inequality in the United States.

First, a reminder (or a quick lesson) on how a well-known analysis of tax data that tracks income inequality is calculated. A 2003 paper by Thomas Piketty of the Paris School of Economics and Emmanuel Saez of the University of California-Berkeley created a new data series on income inequality that is now a widely cited measure of income inequality. In particular, the paper and the resulting data series highlights the rise of the top 1 percent of income earners. The series was created using federal tax data that let Piketty and Saez construct a distribution of income that was large enough to see how incomes at the top increased dramatically over the past several decades.

The accuracy of their calculations requires that income reported on tax returns be as accurate as possible. For wages and salaries, that’s pretty easy, but for capital income accuracy isn’t guaranteed. On individual income tax returns, any capital gains generated by the sale of assets (and thus realized as income in a given year) are counted as income. But any unrealized gains on assets that are not sold but still increase in value while an individual holds them are not recognized as income.

This distinction is relevant due to the shift in business income from corporations to pass-through entities such as partnerships, argue Conor Clarke of Yale Law School and Wojciech Kopczuk of Columbia University in a new paper. When business income was concentrated in traditional corporations, a lot of business income was retained inside the firm instead of passed out to shareholders (retained earnings), which means that the capital income that eventually flowed to shareholders was inside corporations in the form of those earnings. Those retained earnings led to an increase in the value of the firm and therefore to more unrealized capital gains for shareholders. But as business income shifted more toward pass-through entities, it began to show up more and more on individual tax returns. This means the direct observability of business income on tax forms has increased (because pass-through income shows up on individual tax returns) over time.

What this means for the measurement of income inequality depends on the distribution of unrealized capital gains among income earners. In the paper, Clarke and Kopczuk make an assumption that all retained earnings and the resulting unrealized gains from the corporate sector flowed to the top 1 percent. They acknowledge that it’s an unrealistic assumption, but it’s one that lets them figure out an upper-bound estimate for how much retained earnings could influence measures of inequality. The result is a data series that shows a higher level of income inequality than the trend tracked by Piketty and Saez, but a less steep increase in inequality over recent decades.

If this estimate is an upper bound, then clearly there is work to be done to figure out a more realistic assumption. There is a legitimate debate to have about how relevant income measures that include unrealized capital gains are for calculating U.S. income inequality. More data on the trend and better measures of the shift in business income reporting would be quite interesting.

Must-Read: Mervyn King: The End of Alchemy

Posted on by Brad DeLong

Must-Read: Mervyn King: The End of Alchemy: “I tend not to blame individual bankers, but the economics profession as a whole…

…The crisis was a failure of a system and the ideas that underpinned it, not of individual policy-makers or bankers, incompetent and greedy though some of them undoubtedly were.. There was a general misunderstanding of how the world economy worked…. Economists have been cast by many as the villain. An abstract and increasingly mathematical discipline, economics is seen as having failed to predict the crisis…. rather like blaming science for the occasional occurrence of a natural disaster. Yet we would blame scientists if incorrect theories made disasters more likely or created a perception that they could never occur, and… economics has encouraged ways of thinking that made crises more probable…..

Economics must change, perhaps quite radically, as a result of the searing experience of the crisis…. When push came to shove, the very sector that had espoused the merits of market discipline was allowed to carry on only by dint of taxpayer support. The creditworthiness of the state was put on the line….

Why have money and banking, the alchemists of a market economy, turned into its Achilles heel?… The economic failures of a modern capitalist economy stem from our system of money and banking, the consequences for the economy as a whole, and how we can end the alchemy…. In the 1990s not only did inflation fall to levels unseen for a generation, but central banks and their governors were hailed for inaugurating an era of economic growth with low inflation–the Great Stability or Great Moderation. Politicians worshipped at the altar of finance, bringing gifts in the form of lax regulation and receiving support, and sometimes campaign contributions, in return. Then came the fall…. The recession is hurting people who were not responsible for our present predicament, and they are, naturally, angry. There is a need to channel that anger into a careful analysis of what went wrong and a determination to put things right. The economy is behaving in ways that we did not expect, and new ideas will be needed if we are to prevent a repetition of the Great Recession and restore prosperity…

Must-Read: Ann Pettifor: Brexit and Its Consequences

Posted on by Brad DeLong

Must-Read: As I have said before, I think Ann Pettifor here fundamentally misreads what is going on. I think she has fallen victim to a version of what Ernst Gellner cruelly but accurately called the “wrong address” neo-Marxist theory of history: that parcels that were supposed to be delivered to “class” were somehow delivered to “nation-state” or “ethnicity” instead. This theory has a codicil that if we close our eyes, Tap our heels together three times, wish really hard, and argue really eloquently then when we open our eyes we will see that it was always really about class, exploitation, and capitalism all along.

I am sorry: they have been waiting up on the hilltop for the millennium ever since 1848. It is time to try something very different.

Still: very well argued, and very much worth reading:

Ann Pettifor: Brexit and Its Consequences: “The ‘Brexit’ vote is but the latest manifestation of popular dissatisfaction with the utopian ideal of autonomous markets beyond the reach of regulatory democracy…

…Brexit represented the collective, if (to my mind) often misguided, efforts of those ‘left behind’ in Britain to protect themselves from the predatory nature of market fundamentalism. In a Polanyian sense, it is a form of social self-protection from self-regulating markets in money, trade and labour. Globalization was, and remains, the utopian ambition of those many economists, financiers, politicians, and policy-makers that were once aptly defined by George Soros as ‘market fundamentalists’…. When more than 17 million British voters opted to end ties with the European Union on the 23 June 2016, they exposed the fragility and even futility of the ambition to build markets beyond the reach of regulatory democracy. By doing so, British voters rejected the advice of dozens of leading economists and several powerful financial institutions. The outcome threatens to undermine the pivotal role played by the City of London in ‘globalizing’ and financializing the world economy….

The economic theories and policies that led to the Great Financial Crisis… the structures and operation of an increasingly globalized, autonomous, self-regulating market in finance, trade, and labour…. The destabilizing consequences of the crisis and the reversal of the globalization agenda triggered countervailing nationalist and protectionist movements…. Re-regulating the British economy in favour of finance and enriching the 1% while shrinking labour’s share of income resulted in rising inequality and lit a still smouldering fuse of popular resentment. Resentment made most explicit in the Brexit vote….

The economic profession’s deflationary, liberal finance bias, and the failure to include money, debt, and banks in economic analyses and modelling made it nigh impossible for the profession to correctly predict, prevent, or mitigate the ongoing crisis…. Today’s policy-makers struggle to stabilize an unbalanced global financial system, and doggedly oppose expansionary policies needed to ensure employment and recovery. The necessary restructuring and rebalancing of the global economy have been postponed. With the historic Brexit vote, the British people rejected this flawed brand of economics—and in particular the dominant liberal finance narrative. And they did so because the hardship they are experiencing—repressed wages, diminished public services, rising housing costs and shortages, and insecure employment—is indirectly a consequence of the theories and policies of the mainstream economics profession….

Britain’s ‘Brexit’ vote is but the latest manifestation of popular dissatisfaction with the economists’ globalized, marketized society. And if there should be any doubt that these movements are both nationalistic and protectionist, consider Donald Trump’s campaign threat to build a wall between Mexico and the US, to deter migrants, ‘gangs, drug traffickers and cartels’ (Trump website). Trump’s plan for financing the wall involves the introduction of controls over the movement of capital. If the Mexican government resisted, argued Trump, the US would cut off the billions of dollars that undocumented Mexican immigrants working in the US send to their families annually…. Nationalism, protectionism, and populism are not confined to Western nations. In India, a BJP MP, Subramanian Swamy, fired a salvo at the Reserve Bank of India (RBI) governor Raghuram Rajan that led to his unexpected decision not to seek a second term….

Karl Polanyi predicted in The Great Transformation that no sooner will today’s utopians have institutionalized their ideal of a global economy, apparently detached from political, social, and cultural relations, than powerful counter-movements—from the right no less than the left—would be mobilized. The Brexit vote was, to my mind, just one manifestation of the expected resistance to market fundamentalism….

the idea of a self-adjusting market implied a stark utopia. Such an institution could not exist for any length of time without annihilating the human and natural substance of society … . Inevitably, society took measures to protect itself, but whatever measures it took impaired the self-regulation of the market, disorganized industrial life, and thus endangered society in yet another way.

Brexit has endangered British society in yet another way, but the vote was, I contend, a form of social self-protection from self-regulating markets in money, trade, and labour.

Ann Pettifor (June 2016): Brexit: Economists Dangerously Irrelevant: “We… call for an urgent, independent, public inquiry into the economics profession[‘s]…

…precipitating both the financial crisis of 2007-9… the subsequent very slow ‘recovery’… [and its] role of the profession in the run up to the British European referendum campaign…. It may just be that the prospect of hardship to come might not have been very compelling for those already suffering the hardship of low wages, insecure low-skilled jobs, bad housing, high rents, an under-resourced and increasingly privatised NHS, and other forms of public sector ‘austerity’. With this historic vote, the British people have… rejected economics–and in particular the dominant economic narrative….

Economists led the way to financial liberalisation of the past 40 years, which led to soaring levels of debt, crises and financial ruin. Economists dictated the terms for austerity that has so harmed the economy and society over the past years. As the policies have failed, the vast majority of economists have refused to concede wrongdoing, nor have societies been offered alternative economics policies…. It is hardly surprising, therefore, that the British public did not find the opinion of Remain ‘experts compelling’…. The “experts” and the economic stories they tell, have been well and truly walloped by the result of this referendum. And rightly so….

I voted to Remain. I do not believe that Brexit is a wise decision. I fear its consequences in energising the Far Right both in Britain but also across both Europe and the US…. But the people are not to blame. The economics profession, and their friends amongst the world’s financial elites, are to blame. They engineered their own political and financial bail-outs after the grave financial crisis of 2007-9. Economists cheered on politicians and effectively urged them to transfer the burden of losses on to those most innocent of the crisis. Conservative and Social Democratic politicians with friends in financial circles, were only too happy to oblige…

Ann Pettifor (April 2016): Why I Will Vote Remain: “Back in 1975 I did not just oppose membership of the EU, I actively campaigned against it…

…In the 1990s I strongly opposed Britain’s membership of the Exchange Rate Mechanism (ERM)…. I am firmly opposed to the way in which European Treaties… have embedded market fundamentalist economic policies into quasi-constitutional law…. So why then, am I voting to Remain?….

First and foremost, the… continent is now on the brink of fracturing…. The situation is of course exacerbated by the EU’s ‘free’ market principles for the untrammelled and unmanaged movement of capital, trade and labour. And for the commodification of land and labour. These liberal finance principles have triggered popular resistance…. Right-wing populism–a reaction to, and movement against market fundamentalism–now poses a real threat to European democracy, and to European peace and stability…. I am not prepared to be party to such disruption at such a tense time in European political history….

A second reason… is… Britain is heavily responsible for the market fundamentalism entrenched in the European Treaties…. Europe’s social welfare model has been severely strained by Anglo-American policies for de-regulation, privatisation and ‘structural’ changes to labour markets, now alas more widely shared within the EU. Our responsibility for such policies requires that we act responsibly in helping to get them reversed….

My third reason is… the move to Brexit is led by the most reactionary forces in Britain…. They stand for market fundamentalism, not for the more progressive EU we seek. The EU’s gains on social and labour standards, on environmental protection and climate change–themselves at risk–would be dismantled…