Must- and Should-Reads:
Must-Read: : Star Trek Economics: Life After the Dismal Science: “I grew up watching ‘Star Trek: The Next Generation’ (easily the best of the Star Trek shows)…
…There’s one big, obvious thing missing from the future society depicted in the program. No one is doing business…. Food and luxuries are free, provided by ‘replicators’…. Scarcity… seems to have been eliminated. Is this really the future?… Current world annual gross domestic product per capita… is only about $13,000–enough to put food on the table and a roof over one’s head. What happens when it is $100,000, or $200,000?… This is the basic Star Trek future. But actually, I think that the future has a far more radical transformation in store for us. I predict that technological advances will actually end economics as we know it, and destroy scarcity, by changing the nature of human desire…. Instead of a world defined by scarcity, we will live in a world defined by self-expression. We will be able to decide the kind of people that we want to be, and the kind of lives we want to live, instead of having the world decide for us. The Star Trek utopia will free us from the fetters of the dismal science.
(1984): The Supply of Money and Reichsbank Financing of Government and Corporate Debt in Germany, 1919-1923: “During the five years of inflation, price stability, and hyperinflation in Germany after World War I…
…three factors determined the growth of the money supply. First, the Reichsbank freely issued money in exchange for whatever government or corporate debt the private sector did not wish to hold at the official discount rate. Second, the government persistently ran large deficits. Political instability and the inflation itself prevented taxation adequateto pay for social programs, subsidies to the railroad and businesses, and reparations to the Allies. The third factor was expectations of inflation, which, as they became more pessimistic, led people to hold less and monetize more of the outstanding stock of debt. Thus, the money supply was partly endogenous and partly dependent on government fiscal policy. The monetary policy of the Reichsbank, although essential to the inflation process, was a constant and passive one until stabilization at the end of 1923…
In what way does Peter Gourevitch think that Paul Krugman’s analysis of the Federal Reserve is wrong?
Here we have, first, Gourevitch saying: “opinions of the shape of the earth always differ”:
: This is why Paul Krugman is wrong about the Federal Reserve: “The second set of criticisms reflects a more fundamental disagreement between economics and political science…
…Economists tend to assume that there is a single right answer (even if they disagree bitterly among each other about what the right answer is)…. Political scientists… assume that there is more than one interpretation of what is correct, and try to come up with theories about which “correct” answer is chosen…
I reject this.
I reject this completely.
I reject this utterly.
For more than a hundred years there has been a broad near-consensus among economists that there is such a thing as a “correct” monetary policy.
To quote Keynes (1924):
Rising prices and falling prices each have their characteristic disadvantages. The Inflation which causes the former means Injustice to individuals and to classes,–particularly to investors; and is therefore unfavorable to saving. The Deflation which causes falling prices means Impoverishment to labour and to enterprise by leading entrepreneurs to restrict production in their endeavour to avoid loss to themselves; and is therefore disastrous to employment, The counterparts are, of course, also true,–namely that Deflation means Injustice to borrowers, and that Inflation leads to the over-stimulation of industrial activity. But these results are not so marked… borrowers are in a better position to protect themselves than lenders… labour is in a better position to protect itself from over-exertion in good times than from under-employment in bad times.
Thus Inflation is unjust and Deflation is inexpedient. Of the two perhaps Deflation is, if we rule out exaggerated inflations such as that of Germany, the worse; because it is worse, in an impoverished world, to provoke unemployment than to disappoint the rentier. But it is not necessary that we should weigh one evil against the other. It is easier to agree that both are evils to be shunned. The Individualistic Capitalism of to-day, precisely because it entrusts saving to the individual investor and production to the individual employer, presumes a stable measuring rod of value, and cannot be efficient–perhaps cannot survive–without one…
Paul Krugman’s point is that the consensus of the 1980 MIT macroeconomics posse is that right now a higher inflation target than 2%/year is appropriate and that raising interest rates is not appropriate. “Opinions of shape of earth differ” or even “There is no correct answer when there are competing rival views that are not easily testable in a complex world where one cannot readily carry out controlled experiments with obvious real world interpretations…” simply does not clear the bar as a criticism.
As I like to put it, back in 1820 Thomas Robert Malthus identified a “general glut” as a problem independent from and much more dire than a simple misallocation of productive resources that produced excess supply in one industry and excess demand in another:
: The “General Glut” (1820): “[T]he effect of falling [manufacturing export] prices in reducing profits…
…is but too evident at the present moment. In the largest article of our exports, the wages of labour are now lower than they probably would be in an ordinary state of things if corn were at fifty shillings a quarter. If, according to [Ricardo’s] new theory of profits, the prices of our exports had remained the same, the master manufacturers would have been in a state of the most extraordinary prosperity, and the rapid accumulation of their capitals would soon have employed all the workmen that could have been found. But, instead of this, we hear of glutted markets, falling prices, and cotton goods selling at Kamschatka lower than the costs of production.
It may be said, perhaps, that the cotton trade happens to be glutted; and it is a tenet of the new doctrine on profits and demand, that if one trade be overstocked with capital, it is a certain sign that some other trade is understocked. But where, I would ask, is there any considerable trade that is confessedly under-stocked, and where high profits have been long pleading in vain for additional capital? The [Napoleonic] war has now been at an end above four years; and though the removal of capital generally occasions some partial loss, yet it is seldom long in taking place, if it be tempted to remove by great demand and high profits…
And back in 1829 the young John Stuart Mill identified the key cause as our possession of a monetary economy, and in a monetary economy Say’s Law–that supply creates its own demand–is false in theory: a general excess supply of pretty much all currently-produced goods and services, Malthus’s “general glut”, is the metaphysically-necessary consequence of an excess demand for whatever currently counts as money:
(1829): Essays on Some Unsettled Questions: “[In a non-monetary economy] the sellers and the buyers…
…for all commodities taken together, must, by the metaphysical necessity of the case, be an exact equipoise to each other; and if there be more sellers than buyers of one thing, there must be more buyers than sellers for another….
If, however, we suppose that money is used, these propositions cease to be exactly true…. Although he who sells, really sells only to buy, he needs not buy at the same moment when he sells; and he does not therefore necessarily add to the immediate demand for one commodity when he adds to the supply of another….
There may be, at some given time, a very general inclination to sell with as little delay as possible, accompanied with an equally general inclination to defer all purchases as long as possible. This is always actually the case, in those periods which are described as periods of general excess… which is of no uncommon occurrence….
What they called a general superabundance, was… a superabundance of all commodities relatively to money…. Money… was in request, and all other commodities were in comparative disrepute. In extreme cases, money is collected in masses, and hoarded; in the milder cases, people merely defer parting with their money, or coming under any new engagements to part with it. But the result is, that all commodities fall in price, or become unsaleable. When this happens to one single commodity, there is said to be a superabundance of that commodity; and if that be a proper expression, there would seem to be in the nature of the case no particular impropriety in saying that there is a superabundance of all or most commodities, when all or most of them are in this same predicament…
And ever since then, every monetary economist worthy of the name has sought a government and a central bank that will pursue a monetary policy that makes Say’s Law true in practice even though it is false in theory. Everyone has sought for a policy that makes the demand for money in conditions of full employment equal to the supply, so that we have neither an excess demand for money and Keynes’s inexpedient Deflation, nor an excess supply of money and Keynes’s unjust Inflation.
There is a single right answer in monetary policy. It is the policy that hits this sweet spot.
Must-Read: : Remember all those people who predicted Obamacare would make us a nation of part-timers? http://t.co/IBOlyomtbE:
Must- and Should-Reads:
Might Like to Be Aware of:
Must-Read: : A Question About the Future of the World Wide Web: “The current state of the ad-funded web…
…is a death-spiral…. Casual information consumers won’t pay for access to paywalled sites, and a lot of the struggling/bottom-feeding resources on the web are engaged in a zero-sum game for access to the same eyeballs that are increasingly irritated by the clickbait and attention-grabbing excesses of the worst advertisers…. Is there any way to get to a micro-billing infrastructure from where we are today that doesn’t involve burning down the web and starting again from scratch?
http://www.antipope.org/charlie/blog-static/2015/09/a-question-about-the-future-of.html
Must-Read: : Trade within versus Between Nations: “The proper response to the question ‘is free trade good?’…
…is, as always, ‘it depends.’… Many of the conditions under which free trade between nations is guaranteed to be desirable are unlikely to hold in practice. Market imperfections, returns to scale, macro imbalances, absence of first-best policy instruments are ubiquitous… particularly in the developing world…. This does not guarantee that import restrictions will be necessarily desirable. There are many ways in which governments can screw up…. But it does mean that a knee-jerk free trader response is faith-based…. OK then, what about trade restrictions within nations? If I am a skeptic on free trade between nations, should I not be a skeptic on trade within a nation as well?
No…. The set of circumstances under which free trade within a nation may be undesirable is substantially smaller than the set of circumstances under which free trade between nations is undesirable…. Consider a case where a region loses out from trade within a nation–say because it de-industrializes rapidly and ends up specializing in technologically non-dynamic primary activities…. The workers in that region can migrate…. There is an overarching state that will engage in transfer payments and other policies that aid the lagging region. The region will have political representatives…. A third–particularly important–feature is that a nation shares a common set of regulations (in labor, product, and capital markets). Changes in inter-regional trade patterns are unlikely to be the result of what many people feel are ‘unfair trade practices’ or ‘tilted playing fields.’… The boundaries of a nation are defined by shared sense of collective purpose, as embodied, in part, in that nation’s common laws and regulations and in its instruments of solidarity…. So the national market and the international market are different….
A libertarian might view much of the regulatory apparatus of the nation-state as superfluous at best and detrimental at worst. For me, the apparatus is what makes capitalism feasible and sustainable at the national level–and problematic at the global level.
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.
Talk about taxing business and most people will think of the corporate income tax. Most U.S. business income, however, is now earned by pass-through businesses like partnerships. This income is more unequally distributed, less taxed, and harder to track in the data than traditional corporate income.
In the wake of the housing bubble’s burst and the resulting Great Recession, economists and the general public have become more skeptical about the merits of private debt—and for good reason. New research by economists Atif Mian and Emil Verner of Princeton University and Amir Sufi of the University of Chicago shows how high levels of private debt affects economic growth and stability.
Economists continue to debate how much of the U.S. productivity gains have gone to the owners of capital instead of wage earners in recent years. That’s an important debate, but what if the resulting decline in the labor share of income itself affects the rate of measured productivity gains?
The job ladder, or the movement of workers to higher-paying jobs over the course of their career, has long been an important source of wages for workers. But it seems to have broken down since the Great Recession. In fact, as Marshall Steinbaum and Austin Clemens show, the ladder has been broken for the entire 21st century.
Today’s data from the U.S. Bureau of Labor Statistics show that the labor market is far from fully recovered. While the unemployment rate is close to 5 percent, the employment rate for workers 25 to 54 years old is still quite weak. Ben Zipperer shows how historically lackluster the labor market recovery has been by the latter metric.
Economics has become increasingly empirical and has gone through what some people call a “credibility revolution.” But there is still some reason to be concerned about taking this triumphalism too far, as economics isn’t exactly a lab science. Noah Smith discusses some of the tensions of “theory vs. data.” [noahpinion]
The rise of “sharing economy” companies like Uber and Airbnb has raised concerns about the future of the labor market and the relationship between employer and employees. Steve Randy Waldman suggests that changing the requirements for 1099 status might be an interesting way to address the potential problem. [interfluidity]
Policymakers are considering repealing the “Cadillac tax”—a tax on expensive health insurance plans that was part of the Affordable Care Act. Catherine Rampell argues that the tax, by urging companies to find more affordable insurance plans, might actually help boost cash wages for workers. [wa post]
The United Kingdom, like the United States, has experienced a slowdown in productivity growth in recent years. This slowdown is almost always interpreted as a problem with the supply side of the economy, but Jeremy Smith argues the U.K. slowdown is mainly about demand. [prime economics]
MIT economist Amy Finkelstein has done pioneering research on insurance markets and health economics and won the John Bates Clark Medal, given to the leading American economist under 40, in 2012. Douglas Clement interviews her about her research. [minneapolis fed]
Figure from “What happened to the job ladder in the 21st century?” by Marshall Steinbaum and Austin Clemens.
Must-Read: : Reviving Economic Growth: Policy Proposals from 51 Leading Experts: “If you could wave a magic wand and make one or two policy or institutional changes…
…to brighten the U.S. economy’s long-term growth prospects, what would you change and why? That was the question asked to the 51 contributors to this volume. These essays originally appeared in conjunction with a conference on the future of U.S. economic growth held at the Cato Institute in December 20014. Brink Lindsey, Vice President for Research at the Cato Institute and editor of this volume, is pleased to share this insightful and provocative collection with a new audience.
The motivation for asking that question should be clear enough to anyone who has been following the dreary economic news of the past few years. Since the Great Recession of 2008–2009, the U.S. economy has experienced the most stubbornly disappointing expansion since World War II. Reviving Economic Growth offers a wide-ranging exploration of policy options from an eclectic group of contributors. Think of this collection as a brainstorming session, not a blueprint for political action. By bringing together thinkers one doesn’t often see in the same publication, the editor’s hope is to encourage fresh thinking about the daunting challenges facing the U.S. economy—and, with luck, to uncover surprising areas of agreement that can pave the way to constructive change.