Category: Equitablog

Should-Read: Heather Boushey: The tax bill should’ve been called The Inequality Exacerbation Act: “Policymakers should reform the corporate tax system while maintaining or increasing the level of revenues it raises…

…In prior years, policymakers believed that corporate tax reform should be “revenue neutral.”… More money in the pockets of poor and middle-income taxpayers is what will drive companies to invest…. We should be acting to reduce inequality. We need to address America’s needs for investments in infrastructure, science, education and health care…. We need the best-educated workers…. We need a tax reform agenda that delivers the revenue our nation needs to succeed in the 21st century. We should not be under the illusion that this Congress and this president will reverse course. But those who believe the first priority should be to make our economy stronger and spread the benefits of growth more widely must be prepared to pursue those policies when we have the chance…

Must-Read: John Maynard Keynes (1924): Tract on Monetary Reform: “Inflation and Deflation… inflicted great injuries…

…Each as an effect in altering the distribution of wealth, Inflation in this respect being the worse…. Each has also an effect in overstimulating or retarding the production of wealth though here Deflation is the ore injurious…. How have the price changes of the past nine years affected the productivity of the community… and… the conflicting interests and mutual relations of its component classes? The answer to these questions will serve to establish the gravity of the evils….

If the depreciation of money is a source of gain to the business man [nominal debtor], it is also the occasion of opprobrium…. No man of spirit will consent to remain poor if he believes his betters to have gained their goods by lucky gambling. To convert the business man into the profiteer is to strike a blow at capitalism, because it destroys the psychological equilibrium which permits the perpetuance of unequal rewards…. If the fall in the value of money discourages investment, it also discredits enterprise….

Inflation redistributes wealth…. Its most striking consequence is its injustice to those who in good faith have committed their savings to titles to money rather than to things…. Injustice on such a scale has further consequences…. Inflation has… destroyed the atmosphere of confidence which is a condition of the willingness to save….

We see, therefore, that rising prices and falling prices each have their characteristic disadvantage. The Inflation which causes the former means Injustice to individuals and to classes, particularly to investors; and is therefore unfavourable to saving. The Deflation which causes falling prices means Impoverishment to labour and to enterprise by leading entrepreneurs to restrict production, in their endeavour to avoid loss to themselves; and is therefore disastrous to employment.

The counterparts are, of course, also true,—namely that Deflation means Injustice to borrowers, and that Inflation leads to the over-stimulation of industrial activity. But these results are not so marked as those emphasized above, because borrowers are in a better position to protect themselves from the worst effects of Deflation than lenders are to protect themselves from those of Inflation, and because labour is in a better position to protect itself from over-exertion in good times than from under-employment in bad times.

Thus Inflation is unjust and Deflation is inexpedient. Of the two perhaps Deflation is, if we rule out exaggerated inflations such as that of German, the worse; because it is worse, in an impoverished world, to provoke unemployment than to disappoint the rentier. But it is not necessary that weigh one evil against the other. It is easier to agree that both are evils to be shunned.

Individualistic Capitalism of to-day, precisely because it entrusts saving to the individual investor and production to the individual employer, presumes a stable measuring-rod of value, and cannot be efficient—perhaps cannot survive—without one.

For these grave causes we must free ourselves from the deep distrust which exists against allowing the regulation of the standard of value to be the subject of deliberate decision. We can no longer afford to leave it in the category of which the distinguishing characteristics are possessed in different degrees by the weather, the birth-rate, and the Constitution,—matters which are settled by natural causes, or are the resultant of the separate action of many individuals acting independently, or require a Revolution to change them…

Should-Read: WTF?! Real economic outcomes are not invariant to the monetary policy rule. A gold standard, a silver standard, adoption or non-adoption of Bagehot’s Rule, a constant stock of high-powered money rule, a constant broad money stock rule, a k% growth rate rule, a k% growth rate rule with base drift, a k% growth rate rule with catchup after unexpected shortfalls, inflation targeting, price level targeting, inflation targeting switching to price level targeting with catchup at the ZLB—to claim that “real outcomes are invariant to the monetary policy rule, not just to the trend in inflation” is to ignore most of monetary economics. Why are these people writing this?: Robert E. Hall and Thomas J. Sargent Short-Run and Long-Run Effects of Milton Friedman’s Presidential Address: “The immediate effect of Friedman’s 1968 AEA presidential address on the economics profession was the introduction of an adaptive term in the Phillips curve…

…that shifted the curve, as Friedman proposed, based on expected inflation. Initial formulations suggested that the shift was less than point-for-point, but later thinking, based on the emerging idea of rational expectations, together with the experience of the 1970s, came to agree with Friedman that the shift was by the full amount. The profession also recognized that Friedman’s point was deeper—real outcomes are invariant to the monetary policy rule, not just to the trend in inflation. The presidential address made an important contribution to the conduct of monetary policy around the world. It ushered in low and stable inflation rates in all advanced countries, and in many less advanced ones…

Much, much better would have been to simply parrot John Maynard Keynes (1924): Tract on Monetary Reform: “Inflation and Deflation… inflicted great injuries…

…Each as an effect in altering the distribution of wealth, Inflation in this respect being the worse…. Each has also an effect in overstimulating or retarding the production of wealth though here Deflation is the ore injurious…. How have the price changes of the past nine years affected the productivity of the community… and… the conflicting interests and mutual relations of its component classes? The answer to these questions will serve to establish the gravity of the evils….

If the depreciation of money is a source of gain to the business man [nominal debtor], it is also the occasion of opprobrium…. No man of spirit will consent to remain poor if he believes his betters to have gained their goods by lucky gambling. To convert the business man into the profiteer is to strike a blow at capitalism, because it destroys the psychological equilibrium which permits the perpetuance of unequal rewards…. If the fall in the value of money discourages investment, it also discredits enterprise….

Inflation redistributes wealth…. Its most striking consequence is its injustice to those who in good faith have committed their savings to titles to money rather than to things…. Injustice on such a scale has further consequences…. Inflation has… destroyed the atmosphere of confidence which is a condition of the willingness to save….

We see, therefore, that rising prices and falling prices each have their characteristic disadvantage. The Inflation which causes the former means Injustice to individuals and to classes, particularly to investors; and is therefore unfavourable to saving. The Deflation which causes falling prices means Impoverishment to labour and to enterprise by leading entrepreneurs to restrict production, in their endeavour to avoid loss to themselves; and is therefore disastrous to employment.

The counterparts are, of course, also true,—namely that Deflation means Injustice to borrowers, and that Inflation leads to the over-stimulation of industrial activity. But these results are not so marked as those emphasized above, because borrowers are in a better position to protect themselves from the worst effects of Deflation than lenders are to protect themselves from those of Inflation, and because labour is in a better position to protect itself from over-exertion in good times than from under-employment in bad times.

Thus Inflation is unjust and Deflation is inexpedient. Of the two perhaps Deflation is, if we rule out exaggerated inflations such as that of German, the worse; because it is worse, in an impoverished world, to provoke unemployment than to disappoint the rentier. But it is not necessary that weigh one evil against the other. It is easier to agree that both are evils to be shunned.

Individualistic Capitalism of to-day, precisely because it entrusts saving to the individual investor and production to the individual employer, presumes a stable measuring-rod of value, and cannot be efficient—perhaps cannot survive—without one.

For these grave causes we must free ourselves from the deep distrust which exists against allowing the regulation of the standard of value to be the subject of deliberate decision. We can no longer afford to leave it in the category of which the distinguishing characteristics are possessed in different degrees by the weather, the birth-rate, and the Constitution,—matters which are settled by natural causes, or are the resultant of the separate action of many individuals acting independently, or require a Revolution to change them…

Should-Read: BitCoin has no good endgame: Charlie Stross: Unforeseen Consequences and that 1929 vibe: “We’re going to run out of new BTC to mine… [then] the incentive for mining (a process essential for reconciling the public ledgers) will disappear…

…and the currency will… will what? The people most heavily invested in it will do their best to patch it up and keep it going, because what BTC most resembles (to my eye, and that of Jamie Dimon, CEO of JP Morgan Chase) is a distributed Ponzi scheme. But when a Ponzi scheme blows out, it’s the people at the bottom who lose. The longer BTC persists, the worse the eventual blowout—and the more angry people there are going to be. Angry people who are currently being recruited and radicalized by neo-Nazis…

Should-Read: José Azar, Ioana Marinescu, Marshall I. Steinbaum: Labor Market Concentration: “A product market is concentrated when a few firms dominate the market…

…Similarly, a labor market is concentrated when a few firms dominate hiring in the market. Using data from… http://CareerBuilder.com, we calculate labor market concentration for over 8,000 geographic-occupational labor markets in the US. Based on the DOJ-FTC horizontal merger guidelines, the average market is highly concentrated. Using a panel IV regression, we show that going from the 25th percentile to the 75th percentile in concentration is associated with a 15-25% decline in posted wages, suggesting that concentration increases labor market power…

Should-Read: Nouriel Roubini: The Mystery of the Missing Inflation: “The recent growth acceleration in the advanced economies would be expected to bring with it a pickup in inflation…

…Yet core inflation has fallen in the US this year and remains stubbornly low in Europe and Japan…. One possible explanation… is… developed economies have been experiencing positive supply shocks…. Globalization… weaker unions and workers’ reduced bargaining power… oil and commodity prices are low or declining… technological innovations…. If… the shock is permanent, central banks should ease monetary conditions…. [But] the Fed has justified its decision to start normalizing rates… by arguing that the inflation-weakening supply-side shocks are temporary…. Central banks aren’t willing to give up on their formal 2% inflation target, [but] they are willing to prolong the timeline for achieving it…. This central bank patience risks de-anchoring inflation expectations downward…

Should-Read: Peter Leyden: California is the Future-of American Politics: “The 21st-century hit California early, and the innovative state adapted quickly…

…and has pioneered a promising new way forward in many fields-including politics. The same forces-from demographics to technology adoption- re now hitting the rest of America in roughly a 15 year time delay. So what happened politically in California about 15 years ago is paralyzing America right now, and what’s happening politically now in California will hit the rest of America over the next 15 years. The once politically Red, now deep Blue state is inventing a progressive political playbook that will soon come to all America and even other parts of the world. That’s because California is in the early stages of inventing what will eventually be understood as a new digital, sustainable civilization for the 21st century…

Should-Read: You really cannot do the history of economic thought without being willing to do counterfactuals! Now it is true that many times the counterfactual will be “somebody else would have done exactly this same work five or fifteen years later: it was immanent in the structure of the theory and in the empirical data being fed to the profession by the world”. But not always: John Maynard Keynes: Essays In Biography: “If only Malthus, instead of Ricardo, had been the parent stem from which nineteenth-century economics proceeded, what a much wiser and richer place the world would be to-day!…

…We have laboriously to rediscover and force through the obscuring envelopes of our misguided education what should never have ceased to be obvious…. Malthus proceeded to apply these principles “to the Distresses of the Labouring Classes since 1815.” He points out that the trouble was due to the diversion of resources, previously devoted to war, to the accumulation of savings; that in such circumstances deficiency of savings could not possibly be the cause, and saving, though a private virtue, had ceased to be a public duty; and that public works and expenditure by landlords and persons of property was the appropriate remedy….

The whole problem of the balance between Saving and Investment had been posed in the Preface to the book, as follows:

Adam Smith has stated, that capitals are increased by parsimony, that every frugal man is a public benefactor, and that the increase of wealth depends upon the balance of produce above consumption. That these propositions are true to a great extent is perfectly unquestionable…. But it is quite obvious that they are not true to an indefinite extent, and that the principles of saving, pushed to excess, would destroy the motive to production. If every person were satisfied with the simplest food, the poorest clothing, and the meanest houses, it is certain that no other sort of food, clothing, and lodging would be in existence….

The two extremes are obvious; and it follows that there must be some intermediate point, though the resources of political economy may not be able to ascertain it, where, taking into consideration both the power to produce and the will to consume, the encouragement to the increase of wealth is the greatest…

Surely it was a great fault in Ricardo to fail entirely to see any significance in this line of thought…

John Maynard Keynes: The General Theory of Employment, Interest and Money: “The idea that we can safely neglect the aggregate demand function is fundamental to the Ricardian economics…

…which underlie what we have been taught for more than a century. Malthus, indeed, had vehemently opposed Ricardo’s doctrine that it was impossible for effective demand to be deficient; but vainly. For, since Malthus was unable to explain clearly (apart from an appeal to the facts of common observation) how and why effective demand could be deficient or excessive, he failed to furnish an alternative construction; and Ricardo conquered England as completely as the Holy Inquisition conquered Spain. Not only was his theory accepted by the city, by statesmen and by the academic world. But controversy ceased; the other point of view completely disappeared; it ceased to be discussed.

The great puzzle of effective demand with which Malthus had wrestled vanished from economic literature. You will not find it mentioned even once in the whole works of Marshall, Edgeworth and Professor Pigou, from whose hands the classical theory has received its most mature embodiment. It could only live on furtively, below the surface, in the underworlds of Karl Marx, Silvio Gesell or Major Douglas.

The completeness of the Ricardian victory is something of a curiosity and a mystery. It must have been due to a complex of suitabilities in the doctrine to the environment into which it was projected. That it reached conclusions quite different from what the ordinary uninstructed person would expect, added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and consistent logical superstructure, gave it beauty. That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority.

But although the doctrine itself has remained unquestioned by orthodox economists up to a late date, its signal failure for purposes of scientific prediction has greatly impaired, in the course of time, the prestige of its practitioners. For professional economists, after Malthus, were apparently unmoved by the lack of correspondence between the results of their theory and the facts of observation;¾a discrepancy which the ordinary man has not failed to observe, with the result of his growing unwillingness to accord to economists that measure of respect which he gives to other groups of scientists whose theoretical results are confirmed by observation when they are applied to the facts.

The celebrated optimism of traditional economic theory, which has led to economists being looked upon as Candides, who, having left this world for the cultivation of their gardens, teach that all is for the best in the best of all possible worlds provided we will let well alone, is also to be traced, I think, to their having neglected to take account of the drag on prosperity which can be exercised by an insufficiency of effective demand. For there would obviously be a natural tendency towards the optimum employment of resources in a society which was functioning after the manner of the classical postulates. It may well be that the classical theory represents the way in which we should like our economy to behave. But to assume that it actually does so is to assume our difficulties away…