I guess that is it: Concrete Economics @ SXSW!: Speaking 12:30 PM Meeting 10AB Level 3 :: Signing 1:00 PM Bookstore Level 3:
: Concrete Economics: The Hamilton Approach to Economic Growth and Policy] (Allston, MA: Harvard Business Review Press:1422189813) http://amzn.to/22ds5TK
I think Paul Krugman is wrong today on international trade. For we find him in “plague on both your houses” mode. On the one hand:
: Trade and Tribulation and A Protectionist Moment?: “Protectionists almost always exaggerate the adverse effects of trade liberalization…
…Globalization is only one of several factors behind rising income inequality, and trade agreements are, in turn, only one factor in globalization. Trade deficits have been an important cause of the decline in U.S. manufacturing employment since 2000, but that decline began much earlier. And even our trade deficits are mainly a result of factors other than trade policy, like a strong dollar buoyed by global capital looking for a safe haven.
And yes, Mr. Sanders is demagoguing the issue…. If Sanders were to make it to the White House, he would find it very hard to do anything much about globalization…. The moment he looked into actually tearing up existing trade agreements the diplomatic, foreign-policy costs would be overwhelmingly obvious. In this, as in many other things, Sanders currently benefits from the luxury of irresponsibility….
But on the other hand:
That said… the elite case for ever-freer trade, the one that the public hears, is largely a scam…. [The] claims [are] that trade is an engine of job creation, that trade agreements will have big payoffs in terms of economic growth and that they are good for everyone. Yet… the models… used by real experts say… agreements that lead to more trade neither create nor destroy jobs… make countries more efficient and richer, but that the numbers aren’t huge….
False claims of inevitability, scare tactics (protectionism causes depressions!), vastly exaggerated claims for the benefits of trade liberalization and the costs of protection, hand-waving away the large distributional effects that are what standard models actually predict…. A back-of-the-envelope on the gains from hyperglobalization — only part of which can be attributed to policy — that is less than 5 percent of world GDP over a generation…. Furthermore, as Mark Kleiman sagely observes, the conventional case for trade liberalization relies on the assertion that the government could redistribute income to ensure that everyone wins—but we now have an ideology utterly opposed to such redistribution in full control of one party…. So the elite case for ever-freer trade is largely a scam, which voters probably sense even if they don’t know exactly what form it’s taking….
And, Paul summing up:
Why, then, did we ever pursue these agreements?… Foreign policy: Global trade agreements from the 1940s to the 1980s were used to bind democratic nations together during the Cold War, Nafta was used to reward and encourage Mexican reformers, and so on. And anyone ragging on about those past deals, like Mr. Trump or Mr. Sanders, should be asked what, exactly, he proposes doing now.… The most a progressive can responsibly call for, I’d argue, is a standstill on further deals, or at least a presumption that proposed deals are guilty unless proved innocent.
The hard question to deal with here is the Trans-Pacific Partnership…. I consider myself a soft opponent: It’s not the devil’s work, but I really wish President Obama hadn’t gone there…. Politicians should be honest and realistic about trade, rather than taking cheap shots. Striking poses is easy; figuring out what we can and should do is a lot harder. But you know, that’s a would-be president’s job…. [But] he case for more trade agreements—including TPP, which hasn’t happened yet—is very, very weak. And if a progressive makes it to the White House, she should devote no political capital whatsoever to such things.
So I guess it is time to say “I think Paul Krugman is wrong here!” and fly my neoliberal freak flag high…
On the analytics, the standard HOV models do indeed produce gains from trade by sorting production in countries to the industries in which they have comparative advantages. That leads to very large shifts in incomes toward those who owned the factors of production used intensively in the industries of comparative advantage: Big winners and big losers within a nation, with relatively small net gains.
But the map is not the territory. The model is not the reality. An older increasing-returns tradition sees productivity depend on the division of labor, the division of labor depends on the extent of the market, and free-trade greatly widens the market. Such factors can plausibly quadruple The Knick gains from trade over those from HOV models alone, and so create many more winners.
Moreover, looking around the world we see a world in which income differentials across high civilizations were twofold three centuries ago and are tenfold today. The biggest factor in global economics behind the some twentyfold or more explosion of Global North productivity over the past three centuries has been the failure of the rest of the globe to keep pace with the Global North. And what are the best ways to diffuse Global North technology to the rest of the world? Free trade: both to maximize economic contact and opportunities for learning and imitation, and to make possible the export-led growth and industrialization strategy that is the royal and indeed the only reliable road to anything like convergence.
So I figure that, all in all, not 5% but more like 30% of net global prosperity–and considerable reduction in cross-national inequality–is due to globalization. That is a very big number indeed. But, remember, even the 5% number cited by Krugman is a big deal: $4 trillion a year, and perhaps $130 trillion in present value.
As for the TPP, the real trade liberalization parts are small net goods. The economic question is whether the dispute-resolution and intellectual-property protection pieces are net goods. And on that issue I am agnostic leaning negative. The political question is: Since this is a Republican priority, why is Obama supporting it without requiring Republican support for a sensible Democratic priority as a quid pro quo?
That said, let me wholeheartedly endorse what Paul (and Mark) say here:
as Mark Kleiman sagely observes, the conventional case for trade liberalization relies on the assertion that the government could redistribute income to ensure that everyone wins—but we now have an ideology utterly opposed to such redistribution in full control of one party…. So the elite case for ever-freer trade is largely a scam, which voters probably sense even if they don’t know exactly what form it’s taking….
Must-See: : Chowdhury Center for Bangladesh Studies hosts Nobel-winning economist Amartya Sen: “Chowdhury Center for Bangladesh Studies hosts Nobel-winning economist Amartya Sen…
…widely known for his work on income inequality and the roles of famine, poverty and freedom in developing countries around the world…. WHEN: 4-6 p.m., Sunday, March 13. WHERE: The sanctuary of the First Presbyterian Church, 2407 Dana St., Berkeley…. Sen is the Thomas W. Lamont University Professor and Professor of Economics and Philosophy at Harvard University…
At the zero lower bound on safe nominal short-term interest rates, an expansionary fiscal policy impetus of d percent of current GDP will:
where [mu] is the Keynesian multiplier, τ is the tax rate, and φ is the hysteresis coefficient.
It will then require a commitment of (r-g)ΔD percent of future output the service the additional debt, where r is the real interest rate on government debt and g is the growth rate of the economy. The debt service can be raised through explicit and fiscal deadweight loss-inducing taxation, through inflation–a tax on outside money balances accompanied by disruption of the unit of account–or through financial repression–a tax on the banking system but also imposes financial distortions.
That is the simple arithmetic of expansionary fiscal policy in a liquidity trap.
The question of whether and how much expansionary fiscal policy a government facing a liquidity trap should engage and then becomes a technocratic one of calculating uncertain benefits and uncertain costs. Why uncertain? Because our knowledge of the parameters of the economy is uncertain. And we are particularly uncertain not just of the outcome of the key debt- amortization parameter r-g but of its ex-ante distribution as well. There is this an element of radical, almost Knightian, uncertainty here in the benefit-cost calculation. But it remains a benefit-cost calculation. And rare these days is the competent economist Who has thought through the benefit-cost calculation and failed to conclude that the governments of the United States, Germany, and Britain have large enough multipliers, strong enough hysteresis coefficients for infrastructure investment programs, and sufficient fiscal space–favorable likely distributions of r-g–to make substantially more expansionary fiscal policies than they are currently following almost no-brainers.
It is against the backdrop of this situation that we find aversion to fiscal expansion being driven not by pragmatic technocratic benefit-cost calculations but by raw ideology. And so we find Barry Eichengreen being… shrill:
: Confronting the Fiscal Bogeyman: “The world economy is visibly sinking, and the policymakers who are supposed to be its stewards are tying themselves in knots…
…Or so suggest the results of the G-20 summit held in Shanghai…. All that emerged… was an anodyne statement… structural reforms… avoiding beggar-thy-neighbor policies. Once again, monetary policy was left… the only game in town…. Someone needs to do something to keep the world economy afloat, and central banks are the only agents capable of acting. The problem is that monetary policy is approaching exhaustion….
The solution is straightforward. It is to fix the problem of deficient demand… by boosting public spending. Governments should borrow to invest in research, education, and infrastructure…. Such investments cost little given low interest rates… [and] enhance the returns on private investment [as well]…. Thus it is disturbing to see… particularly… the US and Germany [refusing] to even contemplate such action, despite available fiscal space….
Barry blames Germany’s derangement on the ideology of Ordliberalism:
In Germany, ideological aversion to budget deficits… is rooted in the post-World War II doctrine of ‘ordoliberalism,’ which counseled that government should enforce contracts and ensure adequate competition but otherwise avoid interfering in the economy…. The ordoliberal emphasis on personal responsibility fostered an unreasoning hostility to the idea that actions that are individually responsible do not automatically produce desirable aggregate outcomes…. It rendered Germans allergic to macroeconomics….
Barry blames the U.S. derangement on a somewhat analogous ideological formation—call it Ordovolkism:
[In] the US… citizens have been suspicious of federal government power, including the power to run deficits, which is fundamentally a federal prerogative.… That suspicion was strongest in the American South… rooted in the fear that the federal government might abolish slavery…. During the civil rights movement, it was again the Southern political elite that opposed the muscular use of federal power…. The South [became] a solid Republican bloc and leave its leaders antagonistic to all exercise of federal power except for the enforcement of contracts and competition—a hostility that notably included countercyclical macroeconomic policy. Welcome to ordoliberalism, Dixie-style. Wolfgang Schäuble, meet Ted Cruz.
And Barry concludes by asking:
Ideological and political prejudices deeply rooted in history will have to be overcome to end the current stagnation. If an extended period of depressed growth following a crisis isn’t the right moment to challenge them, then when is?
Barry intends this last as a rhetorical question: It is the great Hillel’s “If not now, when?”, to which the proper answer is: “Then now!”
But it is quite possible that the best answer is, instead: “Never!”
While Austerian fear and suspicion of countercyclical monetary policy is rooted in the same Ordoliberal and Ordovolkist ideological fever swamps as objections to countercyclical fiscal policy, it is much weaker. It is much weaker because fundamentalist cries for an automatic monetary system—whether based on a gold standard, a k%/year percent growth rule, or John Taylor’s interest-rate rule—have crashed and burned so spectacularly so many times that they lack even the barest surface plausibility. History has definitively refuted Henry Simons’s call for rules rather than authority in monetary policy. The near-consensus agreed-upon task of institution design for monetary policy is not to construct rules but, instead, to construct authorities with technocratic competence and sensible objectives and values.
Thus one way around the Ordoliberal and Ordovolkist ideological blockages is to redefine a sufficient quantum of countercyclical fiscal policy as monetary policy. I call this “social credit”. Others call it “helicopter money”. Move the central bank’s seigniorage revenue stream outside of the government’s consolidated budget. Assign the disposition of this revenue stream to the central bank. It is not first-best. It may be good enough to do the job.
Another way of attempting to finesse the problem is to construct a fiscal council of some sort. Such an institution, assigned responsibility for the government’s investment budget, may attract the technocratic competence and status of the central banks, and so outflank Ordoliberal and Ordovolkist ideological blockages. Are haps.
But if neither of these expedients—neither social credit or helicopter money on the one hand nor fiscal councils on the other—will serve, then Barry Eichengreen is completely right: it is long past time for a frontal intellectual assault on the dangerous and destructive ideologies of Ordoliberalism and Ordovolkism.
And that assault would be, itself, part of a broader intellectual struggle. The major point of Steve Cohen’s and my Concrete Economics is precisely that ideology is a very bad guide the economic policy. This is simply another—albeit an unusually important—instance.
Must-Read: Investment has been weak because demand growth has been weak–and because the residential-investment credit channel broke in 2007, and neither Barack Obama nor Tim Geithner nor Jack Lew nor Ed de Marco nor Mel Watt nor any congressional coalition has taken any steps to fix it.
This is a very important channel for “hysteresis”–especially if, like me, you believe in powerful external benefits from investment, especially equipment investment:
: Closing the Investment Gap: “BERKELEY – The weakness of private investment in the United States and other advanced economies is… worrisome… perplexing…
…Through 2014, private investment declined by an average of 25% compared to pre-crisis trends.
The shortfall in investment has been deep and broad-based, affecting not only residential investment but also investment in equipment and structures. Business investment remains significantly below pre-2008 expectations, and has been hit hard again in the US during the last year by the collapse of energy-sector investment in response to the steep drop in oil prices….The investment shortfall in the US coincides with a strong rebound in returns to capital. By one measure, returns to private capital are now at a higher point than any time in recent decades. But extensive empirical research confirms that at the macro level, business investment depends primarily on expected future demand and output growth, not on current returns or retained earnings. According to the IMF, this ‘accelerator’ theory of investment explains most of the weakness of business investment in the developed economies since the 2008 crisis. In accordance with this explanation, investment growth in the US has been in line with its usual historical relationship with output growth. In short, private investment growth has been weak primarily because the pace of recovery has been anemic….
As the accelerator theory of investment would predict, much R&D investment is occurring in technology-intensive sectors where current and future expected demand has been strong. There is also evidence that the distribution of returns to capital is becoming increasingly skewed toward these sectors…
Must-Read: : A (Much) Better Fiscal Rule: “Today the Labour Shadow Chancellor John McDonnell…
…will give a speech where he puts forward an alternative fiscal rule… a rolling target for the government’s current balance: within 5 years taxes must cover current spending. It leaves the government free to borrow to invest…. There is a commitment to reduce debt relative to trend GDP over the course of a parliament. No doubt we will hear the usual cries from the opponents of sensible fiscal rules: Labour plan to borrow billions more than George Osborne and they plan to go on borrowing forever. The simple response to that should be that it is right to borrow to invest in the country’s future, just as firms borrow to invest in capital and individuals borrow to invest in a house. Indeed, with so many good projects for the government to choose from, and with interest rates at virtually zero, it is absolute madness not to investment substantially in the coming years….
Recessions come and go, you might respond, but higher debt will always be with us. That ignores two key points. First, prolonged and deep recessions cause lasting damage. UK GDP per head is currently over 15% below pre-recession trends. Does none of that have anything to do with the slowest UK recovery from a recession in centuries? Second using fiscal policy to end recessions quickly does not mean higher debt forever. The key point is that debt can be reduced once the recession is over and interest rates are safely above their lower bound. Doing that will be no cost to the economy as a whole, as monetary policy can offset the impact on demand. Obsessing about debt during a recession, by contrast, costs jobs and reduces incomes, as every economics student knows and as the OBR have shown….
Some Labour MPs and commentators. They say, quite rightly, that one of the main reasons the 2015 election was lost was because Labour were not trusted on fiscal policy. But the basic truth is that you do not enhance your fiscal credibility by signing up to a stupid fiscal rule. Apart from getting attacked for doing so by people like me, your collective heart is not really in it and it shows. You get trapped into proposing to shrink the state as Osborne is doing, or hitting the poor as Osborne is doing, or raising taxes which makes you unpopular. And if by chance it ever looks like you might be getting that trust back, Osborne or his successor will move the goalposts again.
The far more convincing way to get trust back is to adopt a fiscal rule that makes sense to both economists and the public (‘only borrowing to invest’), and actively talking about it….
The Conservatives know they are vulnerable on public investment. Osborne tries to give the impression that he is doing a lot of it, but the figures do not lie. In the last five years of the Labour government the average share of net public investment in GDP was over 2.5%. During the coalition years it fell to 2.2%, and for the five years from 2015 it is planned to average just 1.6%. That is not building for the future, but putting it in jeopardy, as those whose homes have been flooded have found to their cost.
Must-Read: : Confronting the Fiscal Bogeyman: “The International Monetary Fund… warned the assembled G-20 attendees…
…[Yet] all that emerged from the meeting was an anodyne statement about pursuing structural reforms and avoiding beggar-thy-neighbor policies…. Once again, monetary policy was left… as the only game in town…. Someone needs to do something to keep the world economy afloat, and central banks are the only agents capable of acting. The problem is that monetary policy is approaching exhaustion…. The solution is straightforward. It is to fix the problem of deficient demand not by attempting to further loosen monetary conditions, but by boosting public spending… in research, education, and infrastructure…. Such investments cost little, given low interest rates. Productive public investment would also enhance the returns on private investment….
Thus, it is disturbing to see the refusal of policymakers, particularly in the US and Germany, to even contemplate such action, despite available fiscal space (as record-low treasury-bond yields and virtually every other economic indicator show). In Germany, ideological aversion to budget deficits runs deep… rooted in the post-World War II doctrine of ‘ordoliberalism’…. The ordoliberal emphasis on personal responsibility… rendered Germans allergic to macroeconomics….
The US did not experience hyperinflation…. But for the better part of two centuries, its citizens have been suspicious of federal government power, including the power to run deficits…. That suspicion was strongest in the American South, where it was rooted in the fear that the federal government might abolish slavery. In the mid-twentieth century, during the civil rights movement, it was again the Southern political elite that opposed the muscular use of federal power…. Lyndon Baines Johnson’s ‘Great Society’… render[ed] the South a solid Republican bloc and leave its leaders antagonistic to all exercise of federal power except for the enforcement of contracts and competition–a hostility that notably included countercyclical macroeconomic policy. Welcome to ordoliberalism, Dixie-style. Wolfgang Schäuble, meet Ted Cruz.
Ideological and political prejudices deeply rooted in history will have to be overcome to end the current stagnation. If an extended period of depressed growth following a crisis isn’t the right moment to challenge them, then when is?
Must-Read: : Reflections on Macroeconomics Then and Now: “In 1961, at the end of my school years, on the advice of a friend…
…I read Keynes’s General Theory for the first time. Did I understand it? Certainly not. Was I captivated by it? Certainly, though ‘captured’ is a more appropriate word than ‘captivated.’ Does it remain relevant? Certainly. Just a week ago I took it off the bookshelf to read parts of chapter 23, ‘Notes on Mercantilism, the Usury Laws, Stamped Money and Theories of Under-Consumption.’ Today that chapter would be headed ‘Protectionism, the Zero Lower Bound, and Secular Stagnation,’ with the importance of usury laws having diminished since 1936.
There is an old joke about our field…. ‘But this is exactly the same as the exam I wrote over 50 years ago.’ ‘Ah yes,’ says the professor. ‘It is the same, but all the answers are different.’ Is that really the case? Not really…. The basic framework we learned a half-century ago remains extremely useful. But also yes: Some of the answers are different because… the problems they deal with were not evident fifty years ago…. Learn as much as you can, for most of it will come in useful at some stage of your career; but never forget that identifying what is happening in the economy is essential to your ability to do your job, and for that you need to keep your eyes, your ears, and your mind open, and with regard to your mouth–to use it with caution.
Must-Read: When I look at these five graphs below, this paragraph from Stan Fischer seems to me to be simply the wrong one-paragraph summary of the issues. Just wrong:
: Reflections on Macroeconomics Then and Now: “Estimated Phillips curves appear to be flatter than they were estimated to be many years ago…
…in terms of the textbooks, Phillips curves appear to be closer to what used to be called the Keynesian case (flat Phillips curve) than to the classical case (vertical Phillips curve). Since the U.S. economy is now below our 2 percent inflation target, and since unemployment is in the vicinity of full employment, it is sometimes argued that the link between unemployment and inflation must have been broken. I don’t believe that. Rather the link has never been very strong, but it exists, and we may well at present be seeing the first stirrings of an increase in the inflation rate–something that we would like to happen.
https://www.whitehouse.gov/sites/default/files/docs/ERP_2016_Book_Complete%20JA.pdf | https://www.evernote.com/l/AAE6xHSsx8VH54YkkTp_visEwoz4UEAKtxwB/image.png
This is a weekly post we publish on Fridays with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth has published this week and the second is work we’re highlighting from elsewhere. 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.
As the United States moves toward a lower-carbon energy system, the shift to a new system will create (and destroy) many jobs. Arizona State University professor Christopher F. Jones looks at how this change might result in more equitable job growth.
The U.S. labor market is a far less dynamic place than it was 30 years ago. Workers today are less likely to get a job while unemployed, move into unemployment, switch jobs, or move across state lines. What’s behind this decline in fluidity? A new paper investigates.
A college degree is supposed to be a great equalizer when it comes to incomes. But new research has uncovered something surprising: Students from low-income backgrounds get less of an earnings bump from getting a college degree.
The lack of strong U.S. wage growth continues to confuse some economists. Wages across the country should be growing at a strong clip as unemployment is below 5 percent. Maybe it’s due to changes in the composition of workers getting jobs? That may be true, but it’s not proof that labor market slack is gone.
In 1930, John Maynard Keynes predicted that increasing productivity growth could make our workweeks just 10 to 15 hours long. But he was wrong. Very wrong in the case of professionals. Why? Ryan Avent argues it’s some combination of an arms race and increasing sense of identity forged through work. [1843]
Speaking of productivity growth, all of Silicon Valley’s advances in recent years haven’t amounted to much. We were promised jetpacks but we got a decline in the growth rate of total factor productivity. Max Ehrenfreund lays out the argument—and it comes to gains in total factor productivity. [wonkblog]
The past several decades have seen a fissuring of the workplace, as companies are more likely to contract or subcontract out work. The result: a disconnect between who sets the condition of work and who legally employs workers. Lydia DePillis profiles two policymakers focused on creating new rules for this work environment. [wonkblog]
The rise of indexed mutual funds has been a boon for personal investors. But could the move to more passively managed funds have a negative impact? James Ledbetter looks at the argument that passive investment, at least in its current form, harms economic growth. [the new yorker]
Could making sure the economy is in a permanent boom actually increase the economy’s productivity capacity? Evan Soltas is fairly certain the answer is no. But that doesn’t mean letting recessions happen would pull down long-run growth. [economics & thought]
Figure from “Why it’d nice if the ‘job-hopping’ Millennial story were true” by Nick Bunker
