Category: Equitablog

Must-Read: The more I look at the British labor market, the more likely it seems to me that low productivity growth is the result of two things: (a) the reduction in financial services’s profitability in London, and (b) a reemployment system gone mad which is creating an awful lot of low productivity matches between workers and jobs: people who are to be holding out for a job with more hours at which they could be more productive, but were being driven to take whatever will get the social insurance system off their backs–hence the huge number of zero-hour jobs and the large number of people who are not employed, really, but are rather casual labor who might be called on next week. And if aggregate demand in Britain picked up, my guess would be that a lot of the low productivity would turn out to be a mirage.

Martin Sandbu: Free Lunch: Below potential, But How Far?: “The central issue in the Inflation Report published yesterday by the Bank of England is…

…the poor productivity growth that has burdened the UK economy since the crisis…. Monetary policy makers must soon think they are getting close to the point where monetary stimulus leads the economy to overheat rather than pick up slack, and rate rises are in order even if growth is slow…. That raising productivity is hard does not mean it is impossible…. There are some deep lessons to draw for policy thinking from the importance of ‘tweaking’. One is that ‘capacity is not well defined’, as Hendel and Spiegel write. Another is that productivity gains may rely on protecting or putting in place conditions where workers themselves can and want to figure out how to do things better. This complements the conjecture that labour market flexibility may be behind the UK’s poor productivity growth. At the very least it should make us question what sort of flexibility works best. High rates of churn and the shorter employment relationships they imply may help reallocate labour from low-productivity to high-productivity sectors, but also impair workers’ ability or incentive to improve productivity on the job.

Must-Read: It used to be the bookstores collected order flow and then ordered books from distributors who ordered them from publishers who edited and printed them from manuscript by authors. Then Amazon appeared and is still seeking to eliminate as many intermediaries between authors and book readers as it can. Is Facebook about to try the same thing? And how long before reporters with followings start collecting their paychecks from Facebook directly? Interesting questions…

John Herrmann: Notes on the Surrender at Menlo Park: “Platforms grow by incorporating the labor of users and partners…

…they tend, over time, to regard the presence of the partners as an inefficiency. Twitter asks developers to make a bunch of apps using its data, so people make a bunch of mobile apps, then Twitter notices that these apps are actually very important to Twitter, and so Twitter buys one of the apps and takes steps to expel all the other apps…. [Facebook’s] publishers are app developers… working… to find ways to increase Facebook’s share of user attention and satisfaction. If they… succeed… Facebook will take note. Perhaps Facebook will then devise a way to compensate reporters, or content creators, directly, rather than through the publications they work for. Maybe they’ll just buy a publication! Or many publications…. A word of caution about Facebook is not a wish to return to some non-existent ideal time. Print media was broken, TV was broken, commercial and public radio were broken, local media was broken, web media was very broken…. Worrying about the details of the coming future is merely taking that future seriously. People who insist otherwise? They have their reasons…. One of the great triumphs of Silicon Valley is its success in framing its companies’ objectives as missions, and their successes as pure contributions to progress…

Today’s best piece I have read on the internet is by the extremely sharp John Quiggin:

John Quiggin: The Last Gasp of (US) [Left-]Neoliberalism: “US neoliberalism is… closer to Blair’s Third Way than to Thatcher….

…[US] neoliberalism maintained and even extended ‘social liberalism’, in the US sense of support for equal marriage, reproductive choice and so on. In economic terms, its central claim was that the goals of the New Deal… could best be pursued through market-friendly policies that would earn the support of the financial sector…. [The] signature issues for US neoliberals were free trade, cuts in ‘entitlement’ spending, and school reform… a ‘grand bargain’, in which Republicans would accept minimal increases in taxation in return for the abandonment of most of the Democratic program. The Clinton administration was explicitly neoliberal…. And, while Obama’s 2008 election campaign was masterfully ambiguous, his first Administration neoliberal through and through…. But developments since then, including the global financial crisis, the failure of school reform and increasing awareness of entrenched inequality have destroyed the appeal of neoliberalism…

I think that John Quiggin is largely correct–if you correct “abandonment” to “reconfiguration”.

Thatcherite right-neoliberalism is the claim that social democracy was one huge mistake–that it created a North Atlantic of takers who mooched off the makers. It holds that if we got rid of social democracy, we would have a utopia because the makers wouldn’t have to carry the takers on their backs and the takers would shape up–or if the takers did not shape up, serve them right! The moochers would then wallow in their much deserved squalor and misery. And the makers would not have to, as they do now, suffer the pain of watching the moochers live tolerable lives.

Right-neoliberalism is alive and kicking.

(Bill) Clintonian left-neoliberalism makes two twin arguments.

The first is addressed to the left: it is that market mechanisms–properly-regulated market mechanisms–are more likely than not a better road to social democratic ends than command-and-control mechanisms.

The second is addressed to the right: it is that social democracy is the only political system that can in the long run underpin a market economy that preserves a space for private property and private enterprise. Therefore the right had better shut up and try to make social democracy work, or else.

The true underlying problem with left-neoliberalism, I think, is that with the Brezhnevite stagnation of the Soviet Union the second claim addressed to the right was no longer convincing. Hence the right went into its dismantle-social-democracy mode. And once the right was committed to dismantling social democracy, the ability to construct and maintain the proper regulations needed to make market mechanisms tools to achieve social democratic ends fell apart as well.

This leaves those who want to present electorates with a broader menu of political choices than simply right-neoliberalism and its even more conservative relatives with the task of figuring out another political-economic agenda to repair the flaws in the post-WWII Fordist economic regulation model that led to the original development of left-neoliberalism in the first place. But I am at my wit’s end as to what alternative political-economic agenda could both (a) work technocratically and (b) be sold to North Atlantic electorates politically. Hell, our failure to maintain political coalitions to even implement Milton Friedman’s cures for depression, let along John Maynard Keynes’s, is terribly depressing.

Must-Read: The key negotiating questions on TPP are how to make the pharmaceutical IP carve-out work, and how to make sure ISDS levels regulatory playing fields up rather than down. The judgment call from a technocratic point of view is how much are these worth–should they be put forward as negotiating-position dealbreakers, and should they really be dealbreakers?

Ezra Klein: Why Adam Posen Thinks Obama’s TPP Is Worth Passing: “Companies, Posen continues, have taken ISDS…

…much too far…

We’re now getting into things that aren’t like buying a mine. We’re getting into issues of cultural property, health, and safety. It’s legitimate for a poor country as much as a rich country to say, “If you want to trade here, you need to follow our domestic rules on things like food safety and local content on films.” And some companies, including US companies, have gone to extremes to try to get these local regulations interpreted as forms of expropriation. I don’t think that’s right or necessary. I don’t think ISDS should be a back door for companies to get around local regulations they don’t like….

Posen is broadly supportive of the IP provisions in the deal, but he thinks the critics have some fair points:

I do think there is a lot of room for increasing enforcement of rich countries’ brand protections, diminishing pirated films and music (though less of an issue in today’s digital world), and especially protecting industrial technologies…. [But] on pharma, there has to be some sort of constructive compromise so that the US isn’t overdoing the protection of profits and costs to poor people…

Posen… backs a proposal by Caroline Freund that would shorten the TPP’s pharmaceutical patent exclusivity from 12 years… to seven….

A major part of TPP is potentially orienting, if not anchoring, important developing markets on a market-friendly outwards-facing, and yes pro-US and pro-democracy, path….

The way TPP will turn countries towards the US, in Posen’s telling, isn’t through the governments, but through the ‘business and political integration through trade,’ the ‘winning hearts and minds’ that comes through foreign investment and more routine business dealings…

Must-Read: Larry Elliott: Thomas Piketty to Investigate Inequality in New Role at LSE: “The LSE has announced that the author of Capital in the Twenty-First Century…

…has been appointed centennial professor at its International Inequalities Institute (III)… to look at why inequality has been rising across the world and to develop ways of responding to the growing gaps between rich and poor…. ‘I am thrilled by my appointment to work in LSE’s new International Inequalities Institute,’ Piketty said:

Rising inequalities is one of the great challenges of our time, which we desperately need to address. We have a unique opportunity at the LSE to create a truly dynamic and exciting interdisciplinary centre which will make a real difference to our understanding of the causes and consequences of inequality…

Must-Read: My assorted progeny complain that I have not referred enough things from Ta-Nehisi Coates recently. They are correct. In America today, unfortunately, formally race-blind policy discourse on poverty and inequality is and will not for a long time be truly race-blind at all:

Ta-Nehisi Coates: President Obama on Color-Blind Policy and Color-Conscious Morality: “You will hear no policy targeted toward black people…

…coming out of the Obama White House…. The standard progressive approach… is to mix color-conscious moral invective with color-blind public policy…. Asserting the moral faults of black people tends to gain votes. Asserting the moral faults of their government, not so much. I am sure Obama sincerely believes in the moral invective he offers. But I suspect he believes a lot more about his country which he chooses not to share….

Consider that in a conversation about poverty, featuring America’s first black president, one of its most accomplished progressive political scientists, and one of its most important liberal columnists, the word ‘racism’ does not appear in the transcript once…. This is not a ‘both/and.’ It is a bait and switch. The moral failings of black people are directly addressed. The centuries-old failings of their local, state, and federal government, less so. One need not imagine what a ‘both/and’ approach might sound like, to understand why a president of the United States can’t actually offer one. At best, one can hope for reference to ‘past injustice.’… Perhaps the progressive approach, no matter how intellectually dishonest, is ultimately politically prudent. I don’t wish to minimize the difficulty, rhetorical and otherwise, of being the first black president of a congenitally racist country. In that business, Obama has gotten a lot right. But his ‘both/and’ approach has been very wrong. One way around the conundrum is for the president to say as little as possible….

These people have never tired of hearing is another discourse on the lack of black morality or on the failings of black culture. It saddens me to see the president so sincerely oblige.”

Must- and Should-Reads:

• Dani Rodrik and Sharun Mukand: “Perhaps liberal democracy has little to do with the balance of power among social groups and their strategic motivations. Maybe it requires instead, the development over time of a culture of tolerance and civil liberties. Or maybe both are needed to sustain institutions that uphold property, political, and civil rights in the long term…”
• Kimberly Ann Elliott: “Bangladesh and Cambodia… are paying the full freight… 15 percent and up average tariffs…. If Vietnam were to get substantial new access to the US market, I think that could have potentially serious trade diversion implications…”
• Greg Ip: Bond Market Plunge Shows How Stability Can Breed Instability
• David Wessel: “Shelby[‘s]… avoids nearly all the tough issues of legitimacy… seven-member commission is [not to]… touch questions raised by the archaic ownership structure of the Fed or… having nominally private companies making public-policy decisions… ignoring the bizarre and outdated governance of the system is a missed opportunity…”
• Ashoka Mody: “The Greek government’s mounting financial woes are leading it to contemplate the previously unthinkable: defaulting on a loan from the International Monetary Fund. Instead of demanding repayment and further austerity, the IMF should recognize its responsibility for the country’s predicament and forgive much of the debt…”)
• Akhil Reed Amar: “The most important limit, the one we fought the Revolutionary War for, is that the people doing this to you are the people you elect….”
• Evan Soltas: Student Loans and the Next Crisis
• Must-Read: Marshall Steinbaum: What explains rising wealth inequality?
• Must-Read: Andrew Jalil and Gisela Rua: Inflation Expectations and Recovery from the Depression in 1933
• Must-Read: Lawrence Summers (2011): A Conversation on New Economic Thinking
• Must-Must-Read: Matthew Yglesias: “Brookings did a symposium

Might Like to Be Aware of:

• Mailinator
• Emily Badger: President Obama on How Fox News Teaches the Middle Class to Demonize the Poor
• Jason Kander for Missouri
• Freddie de Boer: “As a political movement we are in pathetic shape…. We not only have no capacity to move people who don’t already share our worldview, we seem to have no interest in doing so. Our stock arguments are lazy stacks of cliches…. Being clever doesn’t fix the world. Scoring points on Twitter doesn’t create justice…”

Paul Krugman digs in in defense of old economic thinking: behavioral finance to explain bubbles, money illusion plus anchoring to explain wage and price inertia, and then the three-commodity–outside money, bonds, and currently-produced goods and services–temporary-equilibrium model of Hicks and Metzler to provide the backbone of a useful macroeconomics:

I find myself genuinely split here. When I look at the size of the housing bubble that triggered the Lesser Depression from which we are still suffering, it looks at least an order of magnitude too small to be a key cause. Spending on housing construction rose by 1%-age point of GDP for about three years–that is $500 billion. In 2008-9 real GDP fell relative to trend by 8%–that is $1.2 trillion–and has stayed down by what will by the end of this year be seven years–that is $8.5 trillion. And that is in the U.S. alone. There was a mispricing in financial markets. It lead to the excess expenditure of $500 billion of real physical assets–houses–that were not worth their societal resource cost. And each $1 of investment spending misallocated during the bubble has–so far–caused the creation of $17 of lost Okun gap.

(You can say that bad loans were far in excess of $500 billion. But most of the bad loans were not bad ex ante but only became bad ex post when the financial crisis, the crash, and the Lesser Depression came. You can say that low interest rates and easy credit led a great many who owned already-existing houses to take out loans that were ex ante bad. But that is offset by the fact that the excess houses built had value, just not $500 billion of value. I think those two factors more or less wash each other out. You can say that it was not the financial crisis but the destruction of $8 trillion of wealth revealed to be fictitious as house prices normalized that caused the Lesser Depression. But the creation of that $8 trillion of fictitious wealth had not caused a previous boom of like magnitude.)

To put it bluntly: Paul is wrong because the magnitude of the financial accelerator in this episode cries out for a model of multiple–or a continuous set of–equilibria. And so Roger seems to me to be more-or-less on the right track.

When Paul says that standard Hicks-Metzler macro has done well, he means that, since the end of the 2008, given the magnitude of the leftward shift in the IS curve then experienced, Hicks-Metzler has given the right answer to four important questions:

1. Will extraordinary expansion of the outside money base by the Federal Reserve have powerful effects boosting the economy even after short-term safe nominal interest rates hit zero? No, because such central banking operations are essentially swaps of assets that are nearly perfect substitutes in investors’ portfolios, and expectations of higher future inflation are not easily generated out of thin air but require facts on the ground that can be pointed to.

2. Will expansionary fiscal policy be counterproductive because it will lead to a crisis of confidence and to a spiking of interest rates? No, not as long as the central bank can and does create the safe high-powered monetary asset that underpins the economy.

3. Will expansionary monetary policy trigger stagflation–high unemployment and accelerating prices? No, because, once again, expectations of higher future inflation are not easily generated out of thin air but would require the facts on the ground of full recovery to trigger their appearance.

4. Will the economy quickly recover back to its old normal? No, absent the working-out of bad debt and deleveraging of the economy needed to reverse the large leftward shift of the IS curve.

Giving the right answers ex ante to these four questions was a powerful victory for Hicks-Metzler macro. Judging that the housing price rise was a bubble, the popping of which would create risks, and that wage and price inertia would make recovery without truly extraordinary demand stimulation very painful are also powerful victories. Those who understood the behavioral finance of bubbles and the institutional psychology of wage-price inertia could see and think where others were blind or insane.

But it seems to me that Roger Farmer has empirical victories too. From today’s perspective, the things I used to teach before 2008 about how the American economy had a strong tendency to return to a full employment equilibrium with a 1/e time of two years seems simply wrong: rapid recovery in the past, looking back, seems to have depended on aggressive policy rather than on any natural equilibrating economic process. And I would have given very long odds that $500 billion of sectoral overinvestment, even overleveraged overinvestment, would not take down the U.S. and the world economy.