Category: Equitablog

Afternoon Must-Read: Barry Eichengreen: Financial Crisis: The Banking Rules that Died by a Thousand Small Cuts

Posted on by Brad DeLong

Barry Eichengreen:
Financial Crisis: The Banking Rules that Died by a Thousand Small Cuts:
“The financial crisis of the late 2000s…

…was not brought on by the lack of Glass-Steagall per se but instead by a whole set of measures that loosened regulation. The end of Glass-Steagall was simply emblematic…. It all started in 1980 with the abolition of Regulation Q…. That led to a cascade of unintended consequences…. The Garn-St. Germain Act of 1982 allowed S&Ls to engage in a range of commercial banking activities….

In response to a petition from J.P. Morgan, Bankers Trust, and Citicorp, the Federal Reserve creatively reinterpreted Glass-Steagall in December 1986 to allow commercial banks to derive up to 5% of their income from investment banking activities…. In 1987, over the opposition of Fed Chair Paul Volcker, the Federal Reserve Board authorized several large banks to further expand their underwriting…. Under Volcker’s successor, Alan Greenspan, the Fed then allowed bank holding companies to derive as much as 25% of their revenues from investment banking operations….

Investment banks had first been allowed to expand when, in 1970, the ban on publicly listing their shares was lifted. The response took time to gather steam…. In 1997, Morgan Stanley… merged with Dean, Witter, Discover & Co., a brokerage and credit card company…. Bankers Trust acquired Alex. Brown & Sons, an investment and brokerage firm. The consolidation… threatened to put banks at an even bigger disadvantage. So the banks responded by lobbying even more intensely for the removal of the remaining restrictions on their operations.

By the 1990s, then, the Glass-Steagall Act was already significantly weakened. The fatal blow was struck in 1998 when Citicorp moved to purchase Travelers…. The chairmen and co-CEOs of the merged company, John Reed and Sandy Weill, mounted a furious campaign to remove Glass-Steagall’s nettlesome restrictions before the two-year window closed. Their arguments received a sympathetic hearing from Alan Greenspan’s Fed, the Clinton White House, and the Treasury…. Glass-Steagall was finally euthanized by the Gramm-Leach-Bliley Act… in November 1999…. Glass-Steagall’s death… was the culmination of a decades-long process of financial deregulation in which both commercial banks and shadow banks were permitted to engage in a wider range of activities, while supervision and oversight lagged behind. Competition between commercial banks, investment banks, and shadow banks squeezed the profits of all involved. Many of the affected institutions responded by using more borrowed money and assuming more risk.

The consequences, we now know, were disastrous…. We need comprehensive financial reform to cope with 21st century financial markets. From this point of view, eviscerating the Dodd-Frank Wall Street Reform and Consumer Protection Act, as some in the recently inaugurated Congress propose, would be a step in precisely the wrong direction.

Afternoon Must-Read: Tim Worstall: Facebook Explains Why Marc Andreessen And Larry Summers Disagree

Posted on by Brad DeLong

Tim Worstall is, I think, 100% right here. The key difference is between “Smithian” commodities–where it is a safe rule of thumb that the consumer surplus generated is about equal to the producer cost, so that GDP accounts that value goods and services at real producer cost will capture a more-or-less stable fraction equal to half of true standards of living–and… I might as well call them “Andreesenian” commodities, where consumer surplus is a much larger proportion of monetized value because what is monetized is merely an ancillary good or service to what actually promotes societal welfare. What is the proportion? 5-1? 10-1? Somewhere in that range, I think–at least.

Tim Worstall:
Facebook Explains Why Marc Andreessen And Larry Summers Disagree:
“I was a little puzzled to see that Larry Summers…

…and Marc Andreessen were disagreeing… over the effects of technology on the passing landscape…. Take, for example, Facebook. As far as the general economic statistics are concerned, GDP, labour productivity and all that, the output of Facebook is the advertising it sells…. Valuing Facebook’s contribution to living standards as being the advertising it sells is near insane… but that advertising is the only part of the value which we do ascribe to Facebook that is actually monetised. And given that GDP, labour productivity and all that are described only in monetised terms then we’re missing a very large part of what it’s all about.

People (for some unknown reason to me) like Facebook. Their lives are made richer by Facebook’s existence: they are in fact richer. We’re just not measuring that extra wealth that they derive from Facebook’s existence…. Brad Delong once pointed out (or perhaps pointed to someone who pointed out) that one way of looking at rising living standards in the 20th century was a factor of about 8. Rich world people in 2000 were 8 times better off than rich world people in 1900. Roughly true by those standard measures of GDP and so on. But if we than added what people could do, the improvements in quality, all something analagous to that consumer surplus. it might be more true to say that people were 100 times better off. That’s how I would explain (some of) that productivity puzzle….

Andreessen is… talking to that Facebook example above…. I do tend to think that the gap between “real living standards” and “recorded living standards” is growing simply because so much more of the value of the new technologies is not in fact monetised.

Afternoon Must-Read: Sahil Kapur: Paul Ryan Undermines SCOTUS Case To Topple Obamacare

Posted on by Brad DeLong

Sahil Kapur:
Paul Ryan Undermines SCOTUS Case To Topple Obamacare):
“Remarks in 2010 by Rep. Paul Ryan…

…weaken the premise of… King v. Burwell…. The lawsuit… contends that the text of the Affordable Care Act unambiguously blocks premium tax credits for Americans in three-dozen states which didn’t build their own insurance exchange…. Ryan… believed otherwise….

You’re taking money out of this program to create a brand new open-ended entitlement. And it’s a new open-ended entitlement that basically says to just about everybody in this country, people making less than $100,000, “You know what? If your health care expenses exceed anywhere from 2 to 9.8 percent of your adjusted gross income, don’t worry about it. Taxpayers got you covered. Government’s gonna subsidize the rest.”… What we’re basically saying to people making less than… $100,000, is “Don’t worry about it. Taxpayers got you covered.”

Ryan expressed no doubt that the relevant language… would apply the subsidies to Americans… regardless of where in the country they lived. His remarks… add to the overwhelming body of evidence that members of Congress, staffers, policy experts, and the media covering the health reform debate all understood the law to be providing for subsidies on the exchanges, whether state or federal…

Weekend reading

Posted on by Nick Bunker

This is a weekly post we publish every Friday with links to articles we think anyone interested in equitable growth should read. We won’t be the first to share these articles, but we hope by taking a look back at the whole week we can put them in context.

Wages

Justin Wolfers and Jan Zilinsky review economics research on the connection between higher wages and productivity. [piie]

Neil Irwin points to three signs that wage growth could pick up in 2015. [the upshot]

Mark Thoma argues long-term forces will hold back wage growth even as the labor market continues to recover. [the fiscal times]

Inflation

Carola Binder looks at the problems with central banks targeting inflation when inflation is already low. [quantitative ease]

Noah Smith says that Fed should consider letting inflation run above its target rate of 2 percent. [bloomberg view]

Matthew C. Klein investigates the relationship between inflation and investment and finds conflicting stories. [ft alphaville]

Gwynn Guilford highlights the potentially toxic mix of deflation and debt in the Chinese economy. [quartz]

Over at Grasping Reality: Lunchtime Must-Read: Plato in Syracuse

Posted on by Brad DeLong

Trying to construct the Just City in the Sewer of Dionysios II:

Over at Grasping Reality:

Plato:
Plato’s Seventh Letter: Live from the Fortress of Ortygia in Syracuse (Brad DeLong’s Grasping Reality…):
“You write to me that I must consider your views the same as those of Dion…

…and you urge me to aid your cause so far as I can in word and deed. My answer is that, if you have the same opinion and desire as he had, I consent to aid your cause; but if not, I shall think more than once about it.

Now what his purpose and desire was, I can inform you from no mere conjecture but from positive knowledge. For when I made my first visit to Sicily, being then about forty years old, Dion was of the same age as Hipparinos is now, and the opinion which he then formed was that which he always retained, I mean the belief that the Syracusans ought to be free and governed by the best laws. So it is no matter for surprise if some God should make Hipparinos adopt the same opinion as Dion about forms of government. But it is well worth while that you should all, old as well as young, hear the way in which this opinion was formed, and I will attempt to give you an account of it from the beginning. For the present is a suitable opportunity… READ MOAR

Things to Read on the Afternoon of January 15, 2015

Posted on by Brad DeLong

Must- and Shall-Reads:

 

  1. Dani Rodrik:
    From Welfare State to Innovation State:
    “When the… industrial working class began to organize, governments defused the threat of revolution from below that Karl Marx had prophesied by expanding political and social rights, regulating markets, erecting a welfare state that provided extensive transfers and social insurance, and smoothing the ups and downs of the macroeconomy… reinvented capitalism to make it more inclusive…. Today’s technological revolutions call for a similarly comprehensive reinvention…. The trouble is that the bulk of [our] new technologies are labor-saving…. Few jobs are really protected from technological innovation…. A world in which robots and machines do the work of humans need not be a world of high unemployment. But it is certainly a world in which the lion’s share of productivity gains accrues to the owners of the new technologies and the machines that embody them. The bulk of the workforce is condemned either to joblessness or low wages.
    Indeed, something like this has been happening in the developed countries for at least four decades…. Imagine that a government established a number of professionally managed public venture funds, which would take equity stakes in a large cross-section of new technologies…. Central banks offer a model of how such funds might operate independently of day-to-day political pressure. Society, through its agent–the government–would then end up as co-owner…. The public venture funds’ share of profits from the commercialization of new technologies would be returned to ordinary citizens in the form of a ‘social innovation’ dividend…. The welfare state was the innovation that democratized–and thereby stabilized–capitalism in the twentieth century. The twenty-first century requires an analogous shift to the ‘innovation state’…”

  2. Barry Eichengreen:
    Secular Stagnation: The Long View:
    “Four explanations for secular stagnation… a rise in global saving, slow population growth that makes investment less attractive, averse trends in technology and productivity growth, and a decline in the relative price of investment goods. A long view from economic history is most supportive of the last of these…. I define secular stagnation as a downward tendency of the real interest rate, reflecting an excess of desired saving over desired investment, resulting in a persistent output gap and/or slow rate of economic growth…. A wide variety of connected activities and sectors, such as health care, education, industrial research and finance, are being disrupted by the latest wave of new technologies…. Again, this is not a prediction but a suggestion to look to the range of adaptation required in response to the current wave of innovations when seeking to interpret our slow rate of productivity growth and when pondering our future…

  3. Thomas Piketty:
    On the Elasticity of Capital-Labor Substitution:
    “I do not believe in the basic neoclassical model. But I think it is a language that is important to use in order to respond to those who believe that if the world worked that way everything would be fine. And one of the messages of my book is, first, it does not work that way, and second, even if it did, things would still be almost as bad…. My response to Summers and others is… what we observe… [is] a rise in the capital/income ratio and a rise in the capital share… [in] the standard neoclassical model… the only possible logical… expla[nation]… would be an elasticity of substitution somewhat bigger than 1… that there are more and more different uses for capital over time and maybe in the future robots will make substitution even more…. Now, does this mean that it is the right explanation for what we have seen in recent decades? Certainly not…. All I am saying to neoclassical economists is this: if you really want to stick to your standard model, very small departures from it like an elasticity of substitution slightly above 1 will be enough to generate what we observe in recent decades. But there are many other, and in my view more plausible, ways to explain it…. It is perfectly clear to me that the decline of labor unions, globalization, and the possibility of international investors to put different countries in competition… have contributed to the rise in the capital share…”

  4. Paul De Grauwe and Yuemei Ji:
    Quantitative easing in the Eurozone: It’s possible without fiscal transfers:
    “The ECB has been struggling to implement a programme of quantitative easing (QE) that would successfully target deflation. The main difficulty is political, stemming from opposition from German institutions. Their argument against is that a government bond buying programme by the ECB would mix fiscal and monetary policy. This column argues the opposite – such a programme can be structured so that it does not mix fiscal and monetary policy. It, therefore, would not impose a risk on German taxpayers.”

  5. Robert Waldmann:
    Angry Bear » Secular Stagnation, The US Recovery, and Houses:
    “Larry Summers… responds to Marc Andreesen on secular stagnation. The post is rather brilliant (no surprise there)…. I like Summers’s list of possible causes of secular stagnation… it is appropriately long. A model-addicted economist would look at one possible explanation and assume away all the others…. The point (if any) of this post is to add another explanation–lower demand for housing…. First lower population growth causes much lower housing investment…. Second… maybe the housing bubble has lasted for decades and the generally-recognised housing bubble post 2000 was just more extreme…. There is a similar issue related to consumption and savings. The suspicion that inequality leads to secular stagnation is based on the idea that the super rich are satiated…”

Should Be Aware of:

 

  1. Plato:
    The Republic: “Sok: One woman has a gift of healing, another not; one is a musician, and another has no music in her nature? Gla: Very true. Sok: And one woman has a turn for gymnastic and military exercises, and another is unwarlike and hates gymnastics? Gla: Certainly. Sok: And one woman is a philosopher, and another is an enemy of philosophy; one has spirit, and another is without spirit? Gla: That is also true. Sok: Then one woman will have the temper of a guardian, and another not. Was not the selection of the male guardians determined by differences of this sort? Gla: Yes. Sok: Men and women alike possess the qualities which make a guardian; they differ only in their comparative strength or weakness. Gla: Obviously. Sok: And those women who have such qualities are to be selected as the companions and colleagues of men who have similar qualities and whom they resemble in capacity and in character? Gla: Very true. Sok: And ought not the same natures to have the same pursuits? Gla: They ought. Sok: Then, as we were saying before, there is nothing unnatural in assigning music and gymnastic to the wives of the guardians—to that point we come round again. Gla: Certainly not…”

  2. Scott Lemieux:
    Eviscerating Chris Caldwell’s “Why History Will Eviscerate Obama”:
    “From the right, the argument should be even easier—most of what Obama has done will either result in the entrenchment of policies inconsistent with conservative values or fail to endure. Which makes Christopher Caldwell’s attempt to argue that historians will ‘eviscerate’ Obama such a remarkable achievement. It reads as if he had outtakes from some random Weekly Standard articles lying around, and given the assignment, hastily complied some sentences from them at random while pretending that his argument had something to do with Obama. Laden with falsehoods, remarkable feats of illogic, implausible predictions, non-sequiturs, and some ugly race-baiting, almost every sentence of the Caldwell’s argument makes a better case for Obama’s positive legacy than the most fawning hagiography could. Hence, we bring you the annotated Christopher Caldwell…”

  3. Yael Levine:
    Dollar Guilt in the Land of the Collapsing Ruble:
    “I’ve gotten a 100 percent raise. Not as a reward for hard work or long-term loyalty to my employer, but as a gift of timing. This windfall isn’t a one-off like a bonus, nor is it evenly spaced like paychecks after a promotion. I get richer at random. Almost every time I visit the ATM, what I take out is a smaller slice of what I make than it was the time before. I’m paid in dollars, but I live in Russia, where the currency is currently collapsing…. As the ruble falls, I think back on a night in late autumn of 2007…. Moscow had been named the world’s most expensive city for expatriates to live in…. My driver heard my foreignness…. ‘Americans, what do they think in America now that it’s 25 rubles to the dollar!’ he demanded…. When I first visited Russia seven years ago, Ziploc bags were commonly washed and hung to dry on a clothesline in the kitchen, and not out of environmentalism…. Russia was ‘rising from its knees’… but it hadn’t stood up quite yet…. But although the city felt, objectively, far from the most desirable place in the world to live, a personal-sized pizza with gluey cheese cost $30…. By the time I arrived for my gig in Moscow this June, the ruble was clocking in at around 35…. There is a giddy gambler’s thrill to watching your money gain value for reasons beyond your control…. Taxis no longer felt like an indulgence and on more than one occasion, I ordered an extra two entrees for dinner to meet the delivery minimum…. I walked in the cold among these masses and the thought went through my mind repeatedly: ‘I’m getting richer and richer, they’re getting poorer and poorer.’ That night I gave the woman who walks my dog while I’m at work a 60 percent raise…. After the ruble hit 80 to the dollar yesterday, I walked down Tverskaya Street toward the Kremlin. Every single pedestrian I passed averted their eyes from the neon displays that advertise currency exchange rates…”

Afternoon Must-Read: Dani Rodrik: From Welfare State to Innovation State

Posted on by Brad DeLong

Dani Rodrik:
From Welfare State to Innovation State:
“When the… industrial working class began to organize…

…governments defused the threat of revolution from below that Karl Marx had prophesied by expanding political and social rights, regulating markets, erecting a welfare state that provided extensive transfers and social insurance, and smoothing the ups and downs of the macroeconomy… reinvented capitalism to make it more inclusive…. Today’s technological revolutions call for a similarly comprehensive reinvention…. The trouble is that the bulk of [our] new technologies are labor-saving…. Few jobs are really protected from technological innovation…. A world in which robots and machines do the work of humans need not be a world of high unemployment. But it is certainly a world in which the lion’s share of productivity gains accrues to the owners of the new technologies and the machines that embody them. The bulk of the workforce is condemned either to joblessness or low wages.
Indeed, something like this has been happening in the developed countries for at least four decades….

Imagine that a government established a number of professionally managed public venture funds, which would take equity stakes in a large cross-section of new technologies…. Central banks offer a model of how such funds might operate independently of day-to-day political pressure. Society, through its agent–the government–would then end up as co-owner…. The public venture funds’ share of profits from the commercialization of new technologies would be returned to ordinary citizens in the form of a ‘social innovation’ dividend…. The welfare state was the innovation that democratized–and thereby stabilized–capitalism in the twentieth century. The twenty-first century requires an analogous shift to the ‘innovation state’…

Afternoon Must-Read: Barry Eichengreen: Secular Stagnation: The Long View

Posted on by Brad DeLong

Barry Eichengreen:
Secular Stagnation: The Long View:
“Four explanations for secular stagnation…

…a rise in global saving, slow population growth that makes investment less attractive, averse trends in technology and productivity growth, and a decline in the relative price of investment goods. A long view from economic history is most supportive of the last of these…. I define secular stagnation as a downward tendency of the real interest rate, reflecting an excess of desired saving over desired investment, resulting in a persistent output gap and/or slow rate of economic growth….

Figure 1 shows nominal and real interest rates for the United States over the last two centuries…. The figure points to an alternative interpretation, namely that the decline in real interest rates starting in the 1980s is mean reversion after the exceptional period of high interest rates and inflation that preceded it…. Figure 3 shows the estimates of Robert Gallman (1966)…. The U.S. in the 19th century displays the behavior familiar from 21st century emerging markets, with investment rates rising from 16 per cent in 1834-43 to 28 per cent in 1899-1908. Subsequently, U.S. savings rates headed back down. This… suggests that even if high global savings are a factor in current low real interest rates, they may not remain so indefinitely.

A second popular explanation… is a decline in the relative price of investment goods…. With less investment spending chasing the same savings, the result can be lower real interest rates and, potentially, a chronic excess of desired saving over desired investment….. Even if the post-1980 decline in the relative price of investment goods is part of the explanation for the concurrent decline in real interest rates, there is no ruling out that it may be reversed in the future.

A third possible explanation for secular stagnation, due originally to Alvin Hansen (1938), is that the rate of investment is being dragged down by a low rate of population growth…. My own work with Molly Fifer (2002) suggests that increases in old-age dependency ratios have approximately equal negative effects on savings and investment rates and minimal impact on real interest rates….

A fourth popular if controversial explanation for low interest rates and the slow growth with which they are evidently associated is a dearth of attractive investment opportunities…. Here some observers will point to the fact that productivity growth in the United States has been disappointing in recent years as having positive implications for the future. A wide variety of connected activities and sectors, such as health care, education, industrial research and finance, are being disrupted by the latest wave of new technologies…. Once a broad range of adaptations is complete, productivity growth will accelerate…. Again, this is not a prediction but a suggestion to look to the range of adaptation required in response to the current wave of innovations when seeking to interpret our slow rate of productivity growth and when pondering our future…

Afternoon Must-Read: Thomas Piketty: On the Elasticity of Capital-Labor Substitution

Posted on by Brad DeLong

As I have said before in Very Rough: Exploding Wealth Inequality and Its Rent-Seeking Society Consequences (backed up by the numbers here) and elsewhere, in my view Thomas because he really needed a rent seeking society chapter in his Capital in the 21st Century. The underlying logic of his argument seems to be that wealth can take two forms: investments in capital-embodied technological wealth that boost wages in the economy, or investments in rent-seeking wealth that erode wages in the economy. And, I think, his argument is that we are headed for a society with a higher wealth-to-income ratio, and in such a society a greater share of wealth will find its way into the second channel.

Maybe that is not what Pikitty’s argument is. But I at least think that it is what Piketty’s argument should be–because I think it is highly likely to be true…

Thomas Piketty:
On the Elasticity of Capital-Labor Substitution:
“I do not believe in the basic neoclassical model…

…But I think it is a language that is important to use in order to respond to those who believe that if the world worked that way everything would be fine. And one of the messages of my book is, first, it does not work that way, and second, even if it did, things would still be almost as bad….

My response to Summers and others is… what we observe… [is] a rise in the capital/income ratio and a rise in the capital share… [in] the standard neoclassical model… the only possible logical… expla[nation]… would be an elasticity of substitution somewhat bigger than 1… that there are more and more different uses for capital over time and maybe in the future robots will make substitution even more…. Now, does this mean that it is the right explanation for what we have seen in recent decades? Certainly not….

All I am saying to neoclassical economists is this: if you really want to stick to your standard model, very small departures from it like an elasticity of substitution slightly above 1 will be enough to generate what we observe in recent decades. But there are many other, and in my view more plausible, ways to explain it…. It is perfectly clear to me that the decline of labor unions, globalization, and the possibility of international investors to put different countries in competition… have contributed to the rise in the capital share…

Cf.: Suresh Naidu:
Capital Eats the World, and The Slack Wire: Notes from Capital in the 21st Century Panel; and me: The Hourly Piketty: Paul Krugman, “Gattopardo Economics”, and Economic Modelling, and The Honest Broker: Mr. Piketty and the “Neoclassicists”: A Suggested Interpretation: For the Week of May 17, 2014.