Should-Read: Dani Rodrik: Global Citizens, National Shirkers: “I know what a ‘global citizen’ looks like…

…I see a perfect specimen every time I pass a mirror. I grew up in one country, live in another, and carry the passports of both. I write on global economics, and my work takes me to far-flung places…. Yet May’s statement… contains an essential truth…. Real citizenship entails interacting and deliberating with other citizens in a shared political community…. Global citizens do not have similar rights or responsibilities. No one is accountable to them, and there is no one to whom they must justify themselves…. Political representatives are elected to advance the interests of the people who put them in office. National governments are meant to look out for national interests, and rightly so….

But what happens when the welfare of local residents comes into conflict with the wellbeing of foreigners – as it often does? Isn’t disregard of their compatriots in such situations precisely what gives so-called cosmopolitan elites their bad name?… Economics teaches that countries should maintain open economic borders, sound prudential regulation and full-employment policies, not because these are good for other countries, but because they serve to enlarge the domestic economic pie…. Policy failures… reflect poor domestic governance….
Hiding behind cosmopolitanism… is a poor substitute for winning policy battles on their merits…. Cosmopolitans often come across like the character from Fyodor Dostoyevsky’s The Brothers Karamazov who discovers that the more he loves humanity in general, the less he loves people in particular….

We have to live in the world we have, with all its political divisions, and not the world we wish we had. The best way to serve global interests is to live up to our responsibilities within the political institutions that matter: those that exist.

Must-Read: Five things are going on with respect to America’s blue-, pink-, and–increasingly–white lower-middle and middle-middle working classes. Three of them are real, and two of them are fake:

1. Technology: It has–worldwide–greatly amplified manufacturing labor productivity, accompanied by limited demand for manufactured goods: few of us want more than one full-sized refrigerator, and very very few of us want more than two. That means that if you are hoping to be relatively high up in the wage distribution by virtue of your position as a hard-to-replace cog on a manufacturing assembly line, you are increasingly out of luck. If you are hoping for high blue-collar wages to lift your own via competition, you are increasingly out of luck.

2. Legal and institutional bargaining power: The fact that bargaining power has flowed to finance and the executive suite and away from the shop- and assembly-floor is the second biggest deal here. It could have been otherwise–this is, primarily, a thing that has happened in English-speaking countries. It has happened much less elsewhere. It could have happened much less here.

3. Macro policy: Yes, the consequences of the Reagan deficits were to cream midwestern manufacturing and destroy worker bargaining power in export and import-competing industries. Yes, the low-pressure economies of Volcker, late Greenspan, and Bernanke wreaked immense damage. Any more questions?

4. Globalization: Globalization deepens the division of labor, and does so in a way that is not harmful to high-paying manufacturing jobs in the global north. The high-paying manufacturing jobs that require skills and expertise (as opposed to the lower-paying ones that just require being in the right place at the right time with some market power) are easier to create and hold on to if you can be part of a globalized value chain than otherwise. This is largely fake.

5. Trade agreements: This is a nothingburger: completely fake.

As somebody who strongly believes that supply curves slope up–are neither horizontal nor vertical–and that demand curves slope down–are neither horizontal nor vertical–I think that Larry Summers is misguided here when he talks about how “companies have been able to drive harder bargains with workers, particularly in unionised sectors, because of the threat they can outsource.” This was certainly true since the 1950s with the move of American manufacturing to the south, and the rise of deceptively-named “right-to-work” laws. But the threat to outsource is zero-sum on a national level: the balance of payments balances. Individual sectors lose–and manufacturing workers have been big losers. But that is, I think, only because of our macro policies. If we were a normal global North manufacturing power–a Germany or a Japan–exporting capital and running a currency policy that did not privilege finance, he would not be talking a out how “companies have been able to drive harder bargains with workers, particularly in unionised sectors, because of the threat they can outsource.” He would be talking about how the opportunity to participate in global value chains increases the productivity of semi-skilled and skilled manufacturing workers in the U.S.

Thus I think Larry conceded too much here. Blame macro policy. Blame technology. Blame the conflict between the market society’s requirements that only property rights matter and that everything pass a profitability test against people’s strong beliefs that even if they have no property rights they have rights to stable communities, stable industries, and stable occupations. But, to channel Pascal Lamy, look not at the finger but at the moon here.

However, Larry is right on his main point: NAFTA really ain’t the problem:

Lawrence Summeers: Revoking Trade Deals Will Not Help American Middle Classes: “There is a debate to be had about the impact of globalisation on middle class wages and inequality…

…Increased imports have displaced jobs. Companies have been able to drive harder bargains with workers, particularly in unionised sectors, because of the threat they can outsource. The advent of global supply chains has changed production patterns in the US. My judgment is that these effects are considerably smaller than the impacts of technological progress. This is based on a variety of economic studies, experience in hypercompetitive Germany and the observation that the proportion of American workers in manufacturing has been steadily declining for 75 years….

But an assessment of the impact of trade on wages is very different than an assessment of trade agreements. It is inconceivable that multilateral trade agreements, such as the North American Free Trade Agreement, have had a meaningful impact on US wages and jobs…. American tariffs on Mexican goods, for example, averaged about 4 per cent before Nafta came into force. China had what was then called “most favoured nation” trading status with the US before its accession to the World Trade Organization…. The irrelevance of trade agreements to import competition becomes obvious when one listens to the main arguments against trade agreements. They rarely, if ever, take the form of saying we are inappropriately taking down US trade barriers….

Incremental agreements like TPP have been largely irrelevant to the fate of middle class workers. The real strategic choice Americans face is whether the objective of their policies is to see the economies of the rest of the world grow and prosper. Or, does the US want to keep the rest of the world from threatening it by slowing global growth and walling off products and people?… A strategy of returning to the protectionism of the past and seeking to thwart the growth of other nations is untenable and would likely lead to a downward spiral in the global economy…

Must-Read: Dietrich Vollrath (2016): The Returns to Societal Capital: “Brad DeLong… points out that much of our prosperity comes from a stock of societal capital that we unknowingly rely on every day…

…Trust: I think this is much of what DeLong has in mind. We are lucky to be in the “trust” or “cooperate” equilibrium in our repeated game of exhanging goods and services. If you like, call it the “stag hunt” equilibrium Nick Rowe talks about. Regardless, we benefit from the decisions of our ancestors to play this equilibrium, so that it is the default. If you want to say this is due to some institutions, or culture, or pure luck, it doesn’t matter. We’ve found our way to the trust equilibrium, and benfit from that immensely. Scale… I think it is as relevant as trust. Scale influences the potential profits from innovations, and so is crucial to growth. Bigger market, more profits, more incentives to innovate. But scale is not the same thing as trust, or institutions, or culture….

The heart of DeLong’s point is that neither trust nor scale are things that are owned by any firm or individual. You could say that we inherited them from our ancestors, or you could say these are emergent properties, or you could say that they are designed by the institutions we choose for ourselves. Regardless, trust and scale are “ideas” in the broadest sense, and are inputs into the production process in that trust and scale mean our set of rival inputs (labor, capital) can produce more with them than without.

How is it that scale and trust mean we are overpaid?… [I’ll] “hoist one from the archives” of this blog:

Dietrich Vollrath (2015): What Assumptions Matter for Growth Theory?: “Just to refresh, a production function tells us that output is determined by some combination of non-rival inputs and rival inputs.

…Non-rival inputs are things like ideas that can be used by many firms or people at once without limiting the use by others. Think of blueprints. Rival inputs are things that can only be used by one person or firm at a time. Think of nails. The income earned by both rival and non-rival inputs has to add up to total output. Okay, given all that setup, here are three statements that could be true.

1. Output is constant returns to scale in rival inputs
2. Non-rival inputs receive some portion of output
3. Rival inputs receive output equal to their marginal product

Pick two.

Resuming: The Returns to Societal Capital: The ideas of trust and scale are non-rival inputs to production. If we assume that output is constant returns to scale in rival inputs (point 1), then we have to pick either 2 or 3. As neither trust nor scale receive payments, we have essentially chosen 3. And in that sense DeLong means that rival inputs (our labor and our capital) are overpaid. We are not compensating anyone for the trust and scale that we inherited or created as a group…. Labor is overpaid because it earns returns that could be going to ideas like trust and scale. Whether we say that what it earns is the marginal product or not is irrelevant…. You may be wondering how the increasing returns to scale that DeLong mentions fits in here…. In terms of all inputs (labor, capital, and ideas) production is increasing returns to scale. If I doubled all of them, output would more than double.

Back to the main story. What DeLong does with this is to provide what I found to be a unique justification for the public sector. That is, taxes are a way of collecting the royalties on trust and scale that we inherited and/or create ourselves. Taxes are the rents to idea of playing “cooperate” or having scale. And the proper use of those rents, if I am reading him correctly, is in ensuring that those endowments are perpetuated and handed off to our own children.

What does it mean to perpetuate trust and scale? Part of it, I think, is in providing the insurance against the fluctuations that are the necessary corollary of the markets we create with trust and scale. Those fluctuations play havoc with local communities and ways of life, a la Polyani….

The issue with this, as DeLong spends most of his post working out, is that simply handing out those rents to people creates issues for everyone involved. Those paying taxes feel that they are being taken as suckers. Those receiving the rents – the members of disrupted communities – feel like deadbeats. No one wants to be in either of those positions….

The distribution of those rents is perhaps more palatable when seen not as a handout (which makes people feel like a deadbeat) but as something like a dividend on shared ownership of an asset. I feel like this would be one way to think of how a universal basic income could be framed – everyone is getting their share of the collective dividend payment due to the owners of the “ideas” of trust and scale. It is a sign of ownership, not dependence.

• Dietrich Vollrath (2016): The Returns to Societal Capital
• Dietrich Vollrath (2015): What Assumptions Matter for Growth Theory?
• Dietrich Vollrath (2015): Mathiness versus Science in Growth Economics:

Must-Read: The incredibly sharp Kaushik Basu is another one who makes what I regard as a substantial mistake in diagnosing the economic ills of our age. The loss of security and place by those who in an earlier age would have been blue-collar workers settled in stable firms with straightforward career paths is due to:

1. Technological progress which has–worldwide–greatly amplified manufacturing labor productivity, accompanied by limited demand for manufactured goods: few of us want more than one full-sized refrigerator, and very very few of us want more than two.

2. The failure to manage the economy to either prevent deep recessions or to insure a rapid bounce-back of employment in the industries that collapsed in the downturn. The Reagan administration, with Paul Volcker, delivered the disinflation shock in the early 1980s and then followed it with a bounce-back that was rapid but generated jobs elsewhere than in blue-collar manufacturing. The Bush administration delivered the 2007-2009 shock, and the Obama administration then failed to deliver a rapid bounce-back anywhere.

3. Macro policies–the Reagan and Bush tax cuts and the strong-dollar policy–that have turned the U.S. not into the trade-surplus capital-exporting economy that a rich economy should be, but a trade-deficit capital-importing economy, and in the process sent the market signals that large chunks, and very valuable chunks, of our manufacturing communities of engineering practice and blue-collar skilled worker pools are simply not wanted.

4. Basu says “globalization”–but globalization is really not on the list. Globalization deepens the division of labor, and does so in a way that is not harmful to high-paying manufacturing jobs in the global north. The high-paying manufacturing jobs that require skills and expertise (as opposed to the moderate-paying ones that just require being in the right place at the right time with some market power, and the low-paying ones) are easier to create and hold on to if you can be part of a globalized value chain than otherwise…

Kaushik Basu: America’s Dangerous Neo-Protectionism: “NEW YORK – US President Donald Trump is about to make a policy mistake…

…It will hurt – particularly in the short run – countries across Sub-Saharan Africa, Latin America, and Asia, especially emerging economies like China and Sri Lanka (which run large trade surpluses vis-à-vis the United States) and India and the Philippines (major outsourcing destinations). But none will suffer more than the US itself. The policy in question is… an attempt to “save” domestic jobs by slapping tariffs on foreign goods, influencing exchange rates, restricting inflows of foreign workers, and creating disincentives for outsourcing. On the other hand, it involves neoliberal financial deregulation….

Real wages have been largely stagnant for decades; the real median household income is the same today as it was in 1998. From 1973 to 2014, the income of the poorest 20% of households actually decreased slightly, even as the income of the richest 5% of households doubled. One factor driving these trends has been the decline in manufacturing jobs. Greenville, South Carolina, is a case in point. Once known as the Textile Capital of the World, with 48,000 people employed in the industry in 1990, the city today has just 6,000 textile workers left. But… the major challenge facing labor today lies only partly in open trade or immigration; the much bigger culprit is technological innovation and, in particular, robotics and artificial intelligence, which have boosted productivity substantially. From 1948 to 1994, employment in the manufacturing sector fell by 50%, but production rose by 190%….

While some forms of targeted protection may be able to play a role in supporting US workers, neo-protectionism is not the answer. And it would not just be ineffective; it would actually do substantial harm…. An effective solution to the problems facing American workers must recognize where those problems’ roots lie…. What workers need, however, is more wages. If they aren’t coming from employers, they should come from elsewhere. Indeed, the time has come to consider some form of basic income and profit-sharing…

Should-Read: Dietrich Vollrath (2015): What Assumptions Matter for Growth Theory?: “Somewhere along I-40 and I-81 I was able to get a little clarity…

…in this whole “price-taking” versus “market power” part of the debate. I’ll circle back to the actual “mathiness” issue at the end of the post…. Do inputs to production earn their marginal product?… Do the owners of non-rival ideas have market power or not?… Here are three statements that could be true.

1. Output is constant returns to scale in rival inputs
2. Non-rival inputs receive some portion of output
3. Rival inputs receive output equal to their marginal product

Pick two.

Romer’s argument is that (1) and (2) are true… through replication arguments… [and] an empirical fact. Therefore, (3) cannot be true…. I don’t need to say anything about how the non-rival inputs are compensated…. If they earn anything… the rival inputs cannot be earning their marginal product…. McGrattan and Prescott abandoned (1) in favor of (2) and (3). Boldrin and Levine dropped (2) and accepted (1) and (3)…. If there is a sticking point with McGrattan and Prescott, Boldrin and Levine, or other papers, it is not “price-taking” by innovators. It is rather the unwillingness to abandon (3), that factors earn their marginal products. Holding onto this assumption means that they are forced to abandon either (1) or (2).

From Romer’s perspective, abandoning (1) makes no sense due to replication…. Abandoning (2) also does not make sense for Romer. We clearly have non-rival ideas in the world. Some of those non-rival ideas are remunerated in some way, whether there is market power or not…. The “mathiness” comes from authors trying to elide the fact that they are abandoning (1) or (2). McGrattan and Prescott have this stuff about location, which is just to ensure that (1) is false. Lucas (2009), as Romer explained here, is abandoning (2), and asserts that this is something we know as a result of prior work. It’s not….

Now you can talk about market power or the lack of it. Romer, taking (1) and (2) as given, asks how non-rival inputs could possibly be earning output…. Non-rival ideas must be excludable, to some extent, in order to earn the output we see them earning in reality…. The lack of full market power here is fully compatible with (1) and (2) being true, and (3) being false. The issue with Boldrin and Levine isn’t that they allow people to compete with the innovator immediately, it’s that they dismiss the whole idea of non-rival ideas and abandon (2)…

• Dietrich Vollrath (2016): The Returns to Societal Capital
• Dietrich Vollrath (2015): What Assumptions Matter for Growth Theory?
• Dietrich Vollrath (2015): Mathiness versus Science in Growth Economics:

Should-Read: Michael Berube: Theory Tuesday III: “Sean [McCann]’s account of [how]…

…not literature, but Theory now is the special kind of expertise that challenges all other expertise, the unique kind of training that subverts all other discipline.

Contrast this account of theory with Brad DeLong’s narrative of How He Came to Grips with Foucault: for DeLong, a Foucauldian account of the history of economic brought him to see some things and take issue with others. And that’s all I would ever ask a theory to do, myself. at’s all I ever ask students to ask for, too…

Should-Read: Paul Krugman: Trump’s Rosy Scenario: “The claimed returns to Trumpnomics are close to the highest growth rates we’ve seen under any modern administration…

…Real GDP grew 3.4 percent annually under Reagan; it grew 3.7 percent annually under Clinton (shhh — don’t tell conservatives.) But there are fundamental reasons to believe that such growth is unlikely to happen now… demography..Trump did not, in fact, inherit a mess, both Reagan and Clinton did… both came into office… with unemployment above 7 percent… a substantial amount of slack to be taken up when the economy returned to full employment…. Maybe something awesome will happen: either driverless or flying cars will transform everything, whatever. But you shouldn’t be counting on it.

Should-Read: The centrist neoliberal project–use market means to achieve both social democratic ends and the rapid expansion of wealth–has crashed and burned. Now comes Ruy Texeira to lead the left that was kept off the plane and the center that has survived out of the mountains to a practical utopia…

Ruy Texeira tells leftists and centrists, cosmopolitans and communitarians, organizers and activists which is the way to a pragmatic utopianism based on the energy and accomplishments of humanity…

Ruy Teixeira: The Optimistic Leftist: “A new utopian vision for the left’s emerging coalition will… include…

…First… a commitment to abundance…. Material abundance is a very good thing…. It is only those that already have it that are inclined to downplay its importance…. Closely linked to this aspect of the left’s utopian vision will be a re-embrace of technology…. Technological progress will also have a central role in another aspect of the left’s vision—a green world where the environment is safeguarded and global warming is held in check…. A better world is also a global, interconnected world…. This means explicitly rejecting the idea that there is an intrinsically disadvantageous tradeoff between the welfare of the West and the welfare of the rest of the world….

The left will aim for a world where racial and gender equality are worldwide realities, where sexual orientation is a non-prejudicial, individual a air and where tolerance of others from different cultural, religious or national backgrounds is the rule…. Universal and deepened democracy…. Universal suffrage, with freedoms of the press, association, speech, etc., should be and can be the core governmental form in every country. In addition, the advance of information technology should be leveraged to provide citizens with far greater access to the workings of government and ease the costs of political participation across the world… an educated world… not just universal literacy but universal tertiary (college) education….

This vision does not include an embrace of “socialism”—much less a planned economy—and implicitly assumes that capitalism will continue in some form with a large role for the market. The key question is not “whether capitalism?” but rather “what form?”… Such a society will not be perfect. But perfection is not the point. The goal is to make society as close as it reasonably can be to the left’s new utopian vision, while making no heroic assumptions… pragmatic utopianism… a continuous process, a never-ending quest to improve society…. It is the signature of the optimistic leftist and of a twenty-first century that will be far, far better than you think. We live in extraordinary times; the left can and will make them extraordinarily good for humanity.