Category: Equitablog

Must-Read: Martin Wolf: The challenge of Xi Jinping’s Leninist autocracy: “Xi Jinping[‘s]… claims… are bold: ‘Socialism with Chinese characteristics has crossed the threshold into a new era,’…

…’It offers a new option for other countries and nations who want to speed up their development while preserving their independence’. The Leninist political system is… yet again, a model…. Yet how has the system that failed in Moscow succeeded in Beijing?… Deng Xiaoping… freeing the economy… maintain[ing] party control…. Whether the Soviet Union could have followed such a path is open to debate. But it did not. As a result, today’s Russia does not know how to mark the October revolution…. Xi is… an autocrat… but… also an heir to the Leninist tradition. His legitimacy rests on the party’s….

China has indeed learnt from the west in economics. But it rejects modern western politics…. China has an ostensibly modern template for its ancient system of imperial sovereignty and meritocratic bureaucracy. But the party is now emperor…. Will this combination of Leninist politics with market economics go on working?… We do not know…. The system has worked spectacularly so far. Yet… the party… always above the law… makes power ultimately lawless… corruption… sap[ping] economic dynamism… as the economy and… education advance, the desire for a say in politics will become overwhelming….

All this is for the long run. The immediate position is quite clear. China is emerging as an economic superpower under a Leninist autocracy, controlled by one man. The rest of the world has no choice but to co-operate peacefully…. Those of us who believe in liberal democracy… need to recognise that China not only is, but sees itself, as a significant ideological rival. First, the west has to keep a margin of technological and economic superiority, without developing an unduly adversarial relationship with Mr Xi’s China. China is our partner. It is not our friend. Second and far more important, the west (fragile as it is today) has to recognise—and learn from—the fact that management of its economy and politics has been unsatisfactory for years, if not decades… financial crisis… under-invested in its future… yawning gulf… between economic winners and the losers… let lies and hatred consume its politics…. The west needs rejuvenation, too…. Autocracy is the age-old human norm. It must not have the last word.

Should-Read: Paul De Grauwe and Yuemei Ji: Behavioural economics is also useful in macroeconomics: “Concepts from behavioural economics… [help] develop macroeconomic models with endogenous business cycle fluctuations…

…Application of the models highlights how the trade-off between output and inflation is moderated by the flexibility of the economy… [and] help to explain… international transmission…. Assuming that agents experience cognitive limitations… [and] use simple forecasting rules (heuristics) and evaluate the forecasting performances of these rules ex post. This evaluation leads them to switch to the rules that perform best…. This adaptive learning assumption… produces endogenous waves of optimism and pessimism (animal spirits) that drive the business cycle in a self-fulfilling way. This also leads to a two-way causality. That is, optimism (pessimism) leads to an increase (decline) in output, and the increase (decline) in output in term intensifies optimism (pessimism). An important feature of this dynamics of animal spirits is that the movements of the output gap are characterised by periods of tranquility alternating in an unpredictable way with periods of intense movements reflecting booms and busts…

Should-Read: This from the very sharp Dani Rodrik seems to me to be largely wrong. The 1990s did not see dislocated workers fall into poverty: the 1990s saw, for the most part, workers pulled into higher-paying jobs and occupations by the then high-pressure economy. It was the Reagan deficits of the 1980s that started the midwest on its decline—but the idea was to blame the Japanese rather than St. Ronnie and his feckless policymakers. The China shock of the 2000s was a big deal. But the crash of 2007-2009 and the slow recovery since an even bigger one. And the long, slow decline of manufacturing and other traditionally male blue-collar jobs—a decline overwhelmingly independent of globalization—that was the biggest deal of all. I write about this. But here is Dani:

Dani Rodrik: The Trouble With Globalization: “The United States, too, could have moved aggressively to compensate dislocated workers in the 1990s, when it opened its economy to imports from Mexico, China…

…and other low-income countries in a major way. Instead, under the sway of market fundamentalists, the United States let the chips (and workers) fall where they may. By now, the compensation approach has been tarred as “burial insurance.” The trade adjustment assistance programs that are habitually tacked on to trade agreements have provided inadequate aid — and to just a sliver of the affected population. That is partly by design: politicians have little incentive to implement strong compensation programs once trade agreements are approved.

American workers have been the weak party in the bargain all along — if they’d had enough clout to obtain a robust safety net, they would have had the clout to reshape trade agreements in worker-friendly ways in the first place…

Must-Read: Jason Furman and Greg Leiserson: The real cost of the Republican tax cuts: “The House Republican plan will itself be incomplete…

…Sending cuts or tax increases will almost certainly still be required to pay for it. Analyses that do not account for those spending cuts or tax increases, whether they occur in the near term or in the longer term, obscure…

Should-Read: Wladimir Woytinsky (1952): Lerner’s Economics of Employment: A Review: “The first and most obvious objection-conforming with the idea of Functional Finance as a supplement to the ordinary budget-is…

…that, as long as inflationary and deflationary forces are in balance with each other, the government’s revenues must be likewise in balance with outlays. The balanced budget is the simplest way for ensuring the desired equilibrium. It implies that each dollar the government spends for its operation must be extracted from national income by means of taxation.

Lerner ridicules this procedure, but its only alternative is a financial system in which the government prints all the money it needs and-as a completely separate operation-destroys an equal amount of the purchasing power of individuals. The latter purpose could be achieved, theoretically, by confiscation, or demolition of houses, or setting fire to selected properties. Few people will agree that such measures make more sense than the orthodox procedure.

Lerner is right when he objects to worshipping a balanced budget and “sound” currency, but his arguments are very thin when-by means of repetition-he tries to persuade his readers that the best way to run public finance is to print notes-or occasionally borrow-when money is needed for public establishments, and destroy the purchasing power of individuals when his model indicates that there is too much fat in the community.

Lerner’s argument would win if it were free from such iconoclastic outbursts as the assertion that “taxes should never (Lerner’s italics) be imposed for the sake of the tax revenues,” that money “could be provided by an appropriate printing job”, etc….

Should-Read: Steven Rosenthal: Foreigners Would Win Big from A Corporate Tax Cut: “The Trump Administration and congressional Republican leaders (the Big Six) have proposed a $70 billion-a-year tax cut for foreign investors…

…[Of] outstanding U.S. corporate stock… foreigners now own about 35 percent… would reap about 35 percent of the benefits of the cut in corporate taxes, which translates to around $70 billion a year.

[In] the long run… four conditions that must be met for the corporate tax cut to increase wages:  U.S. corporate tax rates must attract lots of new investment capital.  Corporations must use the money to purchase a lot of new equipment for their U.S. businesses.  All that new investment must make U.S. workers much more productive.  And, finally, that productivity growth must translate into far higher wages…. The length of the short run may be stretched… [as] a stronger dollar… discourage[s the] capital inflows from abroad that would finance new investments….

In the short run the Big Six is proposing to cut taxes for investments that have already been made, providing a windfall to existing investors, including foreign shareholders…. The recently passed Senate Budget Resolution would allow Congress to borrow $1.5 trillion to pay for coming tax cuts. Future generations of U.S. taxpayers will bear the burden of that shortfall, which could prove especially onerous on top of the $10 trillion of deficits CBO projects under current law….

Promising big corporate tax cuts, with large windfalls for foreigners, is a lot easier than enacting real tax reform.  But unless Congress changes the Big Six plan, Americans will pay a big price for a corporate tax cut—much of which would be a windfall for foreign investors…

Should-Read: Heather Boushey: Equitable Growth in Conversation: Kimberly A. Clausing: “Boushey: One of the arguments that you hear time and time again for why Congress needs to reduce the corporate tax rate is that doing so will boost investment in overall economic growth…

…Tell us a little bit about how strongly investment would react to a reduction in the tax rate at the corporate side?

Clausing: On the corporate side, there are a couple of considerations to keep in mind. One is that the distribution of corporate income within the tax base is highly skewed, with about three-quarters of it due to excess profits or rents. What are excess profits or rents? Well, there’s a normal return of capital, which enables a company to pay the interest costs or the equity costs of raising capital, but any income earned above that normal return is an excess profit.

For those firms that have a lot of excess profits—the Googles and Apples and General Electrics of the world—they are earning more than we normally expect for business activity. It’s not clear that giving them a windfall is going to lead to new investments. They already have more than enough after-tax profits from which to make investments.

If policymakers believe more after-tax profits are the way to suddenly spur investment, we might ask why it hasn’t already happened, since these kinds of firms are sitting on piles of cash. It’s unclear that giving them a bigger pile of cash is going to spur investment. We need companies to have desirable investments. And often what’s stopping them is not the absence of funds, but the absence of viable investments they want to make. If policymakers really think after-tax profits are what’s needed to drive investment, then we should already be in an investment nirvana, since lately we’ve had much higher profits than we’ve ever had in the past 50 years of our history.

Boushey: And yet our investment rate is quite low right now.

Clausing: Right. That’s why I don’t think after-tax profits are the answer…

Must-Read: Practically everything that the Democrats have been saying about the insanity of the Republicans (and that much of the media has been ignoring), said here by Republican ex-Speaker John Boehner:

Tim Alberta: John Boehner Unchained: “After railing against the defund strategy, however, Boehner surveyed his conference and realized…

…it was a fight many members wanted—and some needed. Yielding, he joined them in the trenches, abandoning his obligations of governance in hopes of strengthening his standing in the party. But the 17-day shutdown proved costly. Watching as Republicans got butchered in nationwide polling, the speaker finally called a meeting to inform members that they would vote to reopen the government and raise the debt ceiling. “I get a standing ovation,” Boehner says. “I’m thinking, ‘This place is irrational’”…