The collapse of housing investment in the U.S. after the bubble pop began in late 2005 was absolutely huge:

By the end of 2007, about $400 billion/year–2.5% of GDP–of spending on residential construction that had been there in 2005 was no longer. Yet the U.S. economy was not in recession. The predominant worries in the councils of the mighty were that the Federal Reserve would do too much to boost spending and so cause inflation rather than too little and cause recession. And the slack created by the collapse in investment in residences had been quickly and smoothly picked up by rising exports and rising business fixed investment.

The lesson? Make sure the pieces of the government–the fiscal-policy authorities, the president and congress at the federal level and their counterparts in the states, plus the monetary-policy authority that is the Federal Reserve–are doing their job. Make sure they use the levers they control to keep aggregate demand humming along at a stable path. Then sector-specific shocks–even huge sector-specific shocks–are not a big deal for the economy as a whole.

That, at least, is the lesson I draw from 2005-2007. As long as aggregate demand is properly managed, a decentralized market economy is a wonderfully flexible thing. It can and does adjust swiftly to even big sectoral shocks. Shifts in the flow of demand rapidly pull resources out of now-unproductive and into newly-productive uses. As John Maynard Keynes wrote back in 1936:

The State will have to exercise a guiding influence… partly through its scheme of taxation, partly by fixing the rate of interest, and partly, perhaps, in other ways…. [But] if the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary…. Our criticism of the accepted classical theory of economics has [thus] consisted not so much in finding logical flaws in its analysis as in pointing out that its tacit assumptions are seldom or never satisfied…. But…[with] an aggregate volume of output corresponding to full employment as nearly as is practicable, the classical theory comes into its own again…. There is no objection to be raised against the classical analysis of the manner in which private self-interest will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be distributed… no objection to be raised against the modern classical theory as to the degree of consilience between private and public advantage…. Thus I agree with Gesell that the result of filling in the gaps in the classical theory is not to dispose of the ‘Manchester System’, but to indicate the nature of the environment which the free play of economic forces requires if it is to realise the full potentialities of production…

Yet, writing from the Earthly Paradise that is San Diego, CA, the very sharp Jim Hamilton disagrees:

Jim Hamilton: Economic importance of China: “How important would an economic downturn in China be for the United States?…

…Paul Krugman reviews… reasons why… [we] shouldn’t worry too much…. I’ve long believed that to understand business cycles we need to consider not just net flows but also gross interdependencies…. While China may only account for 15% of world GDP, it has been a huge factor in commodity markets… 55% of the increase in global petroleum consumption between 2005 and 2013…. Arezki and Matsumoto note that China now accounts for about half of global consumption of iron ore, aluminum, copper, and nickel…. U.S. exports of goods and services to China… [are] only about 1% of U.S. GDP. But U.S. investment in mining structures (explorations, shafts, and wells) amounted to $146B at an annual rate in 2014:Q4. By the second quarter of this year that number was down to $89B, largely a result of cutbacks in the U.S. oil patch…. This development alone has already subtracted about 0.3% from U.S. GDP…. Another concern comes from financial linkages…. I don’t know what the ultimate implications for the U.S. of a significant recession in China would be. But things I don’t know cause me to worry.

If we take the current shock to oil-patch investment of 0.3% of GDP to be half the shock from China, right now the shock from China is one-quarter of the 2005-2007 shock from the housing market that the U.S. economy was adjusting to and shrugging off without much difficulty until the financial crisis began the collapse of Wall Street. Thus, IMHO, the major lesson of 2005-7 is that for the macroeconomy it is finance and only finance–plus the ability of the government to react properly and in a timely fashion–that matters. A sectoral shock one-quarter as large as 2005-7, or indeed one-sixth as large as 1999-2001, ought not to matter much at all.

Must-Read: I think Ta-Nehisi Coates has this right: As I read it, Moynihan tried to use, in the context of the rising crime wave, Richard Nixon’s and others’ racist fears of young Black men and even the Black middle class to mobilize support for massive federal support for poor Black communities in the ghetto and elsewhere. He most of all wanted America’s poor children in the future to have mothers supported by society in a way that his mother had not been, and to have more of a chance of a father in their lives in a constructive way than he had had. But in his political-ideological-intellectual maneuvering to try to accomplish this good end, he gave hostages to very bad currents of thought:

Ta-Nehisi Coates: Daniel Patrick Moynihan’s Responsibility for Mass Incarceration: “I almost had the sense that Moynihan was trying to trick Nixon into embracing liberal policy…

…Through all of his memos Moynihan  remains thoroughly committed to government action to help black families. He believes the black poor to be ‘unusually self-damaging,’ but he does not believe they should be left to their fate. He believes the government should invest in poor black communities. But this is accompanied by a telling dig–aiding the ghettoes would prevent the militant black middle class from threatening the ‘the larger society much as the desperate bank robber threatens to drop the vial of nitroglycerin.’ Moynihan used the rhetoric of black criminalization, even in arguing for government aid. It takes a peculiar blindness to wonder why we built prisons instead. The point is not that Moynihan wanted prisons.  I am certain the growth in incarceration truly horrified Moynihan. And I don’t doubt for a minute the sincerity in the words that Weiner quotes in Moynihan’s defense. But the possession of good intentions, and deep sympathies, does not absolve men with power of their responsibility, nor of their imprudence. Whatever his ultimate goals, Moynihan buttressed, and employed, the logic of black criminality and white victimhood. Are we to simply ignore this because we approve of Moynihan’s sympathies?

Paul Krugman: Economics: What Went Right): “One piece of the conventional story hasn’t worked that well…

…namely the Phillips curve, where the ‘clockwise spirals’ of previous protracted large output gaps haven’t materialized. Maybe it’s about what happens at very low inflation rates. What’s notable about the Fed’s urge to raise rates, however, is that Fed officials, including Janet Yellen, are acting as if they have high confidence in their models of inflation dynamics –which is the one thing we really haven’t done well at recently. I really fear that we’re looking at incestuous amplification here.

Must- and Should-Reads:

• William Baumol (1990): Entrepreneurship: Productive, Unproductive, and Destructive
• Mancur Olson (2000): Power and Prosperity
• Paul Krugman: More on the Political Economy of Permahawkery
• Jared Bernstein**: The Affordable Care Act Is Providing Affordable Care. That’s a Big Problem for Its Opponents
• Larry Summers: The Importance of Global Health Investment
• Barry Eichengreen, Donghyun Park, and Kwanho Shin: The Global Productivity Slump: Common and Country-Specific Factors
• David Keohane: “A wink and a nod later… and the debt is monetised. In the event of a new downturn please press the giant red button. To do so please break through the glass emblazoned with the words ‘political reality’…”
• Willem Buiter: Is China Leading the World into Recession?
• George A. Kahn, Pier Francesco Asso, and Robert Leeson (2007): The Taylor Rule and the Transformation of Monetary Policy
• Martin Wolf (2011): A Conversation on New Economic Thinking withLarry Summers
• Tim Kane: Immigration and The GOP
• Steve Teles: The Scourge of Upward Redistribution

The very sharp Ravi Kanbur and Joseph Stiglitz move the ball forward on sources of rising inequality:

Ravi Kanbur and Joseph Stiglitz: Wealth and Income Distribution: New Theories Needed for a New Era: “Six decades ago, Nicholas Kaldor (1957) put forward…

…the constancy of the share of capital relative to that of labor…. Simon Kuznets (1955) put forward… while the interpersonal inequality of income distribution might increase in the early stages of development, it declines as industrialised economies mature. These empirical formulations brought forth a generation of growth and development theories whose object was to explain the[se] stylised facts…. However, the Kaldor-Kuznets stylised facts no longer hold for advanced economies….

It stands to reason that theories developed to explain constancy of factor shares cannot explain a rising share of capital… [or] the new trends, or the turnaround….

Indeed. This seems to me exactly right. Which is why I have never understood economists who think that they can use an argument made from within a Solow growth model–a model deliberately engineered to make it next to impossible for almost anything to materially alter factor shares–to argue that Piketty must be wrong in his claims that the forces he has identified are materially altering factor shares.

Kanbur and Stiglitz continue:

Rising inequality has opened once again… questions [of] the normative significance of inequality of outcomes versus… opportunity. New theoretical developments are needed….Piketty has himself put forward a theory… consistent with the other stylised fact of rising capital-output ratio only if the elasticity of substitution between capital and labour is greater than unity, which is not consistent with the broad empirical findings (Stiglitz, 2014a). Further, what Piketty and others measure as wealth ‘W’ is a measure of control over resources, not a measure of capital K….

Here, however, I lose the thread:

Piketty’s “capital” is–explicitly–not K-in-a-neoclassical-production-function but rather W-the-capitalized-income-streams-in-a-rent-seeking-society. Indeed, in ordinary speech that is what “capital” means:

Cambridge English Dictionary: Capital: Definition: “capital noun (MONEY)…

…[U] ​wealth, esp. ​money used to ​produce more ​wealth through ​investment or a new ​business: “She ​invested well, and can ​live on the ​interest without ​touching the capital.”

The reading of Piketty as using “capital” to primarily mean produced-means-of-production has always seemed me very odd, as an incredibly strange warping of what he is saying. I remember back in 1979 Jeff Weintraub and Shannon Stimson taught me that that you could make a hash of anyone’s argument if you took one of their central terms and read it ungenerously–“democracy” for Tocqueville, “rationality” for Weber, and so forth. But that was not a good intellectual strategy.

Thus, IMHO, the finding of a capital-labor K-and-L elasticity of substitution that is less than one for “capital” understood as produced-means-of-production-machines-and-buildings-that-are-the-variable-K-in-a-neoclassical-production-function is not terribly relevant, and not a strong critique of Piketty’s argument. And so Stiglitz and Kanbur seem to me to be not criticizing but rather confirming Piketty when they write:

There is a fundamental distinction between capital K, thought of as physical inputs to production, and wealth W, thought of as including land and the capitalised value of other rents…. New theories explaining the evolution of inequality will have to address directly changes in rents and their capitalised value (Stiglitz 2014). Two examples… sea-front property on the French Riviera… government gives an implicit guarantee to bail out banks…. [We] will need a theory of rents which takes us beyond the competitive determination of factor rewards…. [Moreover,] ntergenerational transmission of inequality is more than simple inheritance of physical and financial wealth…. Human capital inequality perpetuates itself through intergenerational transmission just as wealth inequality caused by politically created rents perpetuates itself…. We still need fully developed theories of how the different mechanisms interact…. The distinction between opportunity and income begins to fade and the case for progressive taxation is not undermined by the ‘equality of opportunity’ objective…

Names that have not been mentioned in this discussion as much as I think they deserve to be mentioned include, most prominently, Mancur Olson and William Baumol. Great profit could, I think, be earned from bringing to the center of the discussion:

• William Baumol (1990): Entrepreneurship: Productive, Unproductive, and Destructive

• Mancur Olson (2000): Power and Prosperity

A column from Daniel Ben-Ami really made me wince:

It is hard to imagine how the rapid development of many poorer economies in recent decades could have happened without the emergence of super-rich individuals. No doubt for most Financial Times readers the two go together…. Extreme wealth in emerging markets is largely self-made…. [Success] means, among other things, showing through the force of argument that everyone can benefit from a wealthier society…. [But] the fight cannot be won with evidence alone…

And this last brings me up short: what kinds of “non-evidence” is he thinking of?

What Ben-Ami–and, in my view, Freund also–really need is a much closer engagement with William Baumol (1990): Entrepreneurship: Productive, Unproductive, and Destructive:

1. Some very rich people become very rich because they are productive entrepreneurs.
2. Others become very rich because they find a way to collect a rent off of ongoing economic activity–they impoverish others, but in a zero-sum way because they do not distort and damage the pattern of economic activity.
3. Still others not only live high on the hog off of the rents they collect but also destroy portions of the social division of labor.

Coincidentally, the next tab in my browser right now has this graph in it:

And the next browser tab has:

Hamilton Nolan: Jeb Bush Vows Not to Give Greedy Black People “Free Stuff”: “A white guy at a South Carolina campaign event last night asked him…

…how he planned to attract black voters…. Jeb replied:

Our message is one of hope and aspiration. It isn’t one of division and get in line and we’ll take care of you with free stuff. Our message is one that is uplifting–that says you can achieve earned success.

Are you listening, black Americans? This is Jeb’s message. You have to work for everything in life and not be handed anything for free. If you need a role model, look to Jeb Bush, the son and brother of U.S. Presidents. IMPORTANT: JEB’S MESSAGE IS NOT ‘WE’LL TAKE CARE OF YOU.’ DO NOT MISTAKENLY ASSUME THAT YOU WILL BE TAKEN CARE OF. When Jeb Bush was running for governor of Florida in the 90s, he answered the question of what he would do for black Floridians with the statement ‘Probably nothing.’ He’s come a long way since then.

May I suggest that reinforcing the belief of the plutocrats of our Second Gilded Age that their success is “earned” and must aways redound to the public good is a very low-value activity to engage in?

Dividing the plutocracy into those who are productive, unproductive, and destructive would be a much better thing to focus on, IMHO.

Daniel Ben-Ami: Book review: ‘Rich People, Poor Countries’, by Caroline Freund: “It is hard to imagine how the rapid development of many poorer economies in recent decades…

…could have happened without the emergence of super-rich individuals. No doubt for most Financial Times readers the two go together…. But it is important to remember that many people do not see it that way…. Rich People, Poor Countries should be understood against the backdrop of this debate…. Winnie Byanyima… the richest 1 per cent of the world’s population would own more than 50 per cent of the world’s wealth by 2016. In response, Sir Martin Sorrell, chief executive of WPP… ‘I make no apology for having started a company 30 years ago with two people and having 179,000 people in 111 countries and investing in human capital each year to the tune of at least $12bn a year.’

The first part of Freund’s work is essentially a taxonomy of the super-rich in the emerging world…. Extreme wealth in emerging markets is largely self-made…. The second part of the book argues strongly that the rising prosperity of poorer countries has been closely associated with the growth of large companies…. Winning the debate on the benefits of popular prosperity requires a culture war waged on several fronts. It means, among other things, showing through the force of argument that everyone can benefit from a wealthier society. It is also necessary to tackle the moral qualms about mass affluence. The fight cannot be won with evidence alone.

Must-Read: Yet another straw in the wind–that we really need to rebalance the Federal Reserve system to lessen the influence of commercial bankers within it. Carter Glass and company made a good try to set up a central bank that would administer finance in the general rather than in the bankers’ interest, but the past decade would have certainly taught us that they did not do a good enough job–if we had not already known that:

Paul Krugman: More on the Political Economy of Permahawkery: “How to make sense of the ever-changing rationales for the ever-changing demand for higher interest rates[?]…

…If you try to understand the political economy of trade policy, what you see is much narrower interests at play…. Capital is temporarily stuck in a particular industry; in the long run it may be fungible, but lobbyists don’t worry about that…. [The] long discussion of the distributional effects of QE… [is] irrelevant…. It’s bad for bankers, because it leads to a compression of the net interest margin…. And that is why there’s so much agitation for rate hikes on the part of finance…. Institutions… pick up by osmosis from all the bankers they meet the general prejudice… leading to increasingly baroque attempts to justify rate hikes despite low inflation…. The common claim that QE is a giveaway to bankers is the opposite of the truth…. Journalists with close ties to bankers spread this story… [are] Orwellian. Remember, the Fed isn’t lending money at low interest to banks–banks, with their $2.5 trillion (!) of excess reserves, are lending vast sums at low interest to the Fed. It’s all falling into place.

Must-Read: As I say over and over again, conservatives could be taking a huge victory lap right now with the empirical policy success of the nationwide implementation of the health-care reform pioneered in Massachusetts by the 2012 right-wing standard-bearer Mitt Romney. It is an index of their extraordinary policy, rhetorical, and ideological dysfunction that they are not doing so.

Would somebody please point them a way back to fact-based reality?

Jared Bernstein**: The Affordable Care Act Is Providing Affordable Care. That’s a Big Problem for Its Opponents: “A gov’t program that, after a troubled start…

…found its footing and is having its intended effect, and without the distortions opponents claim. While they can keep calling it a “job killer,” that’s just not defensible. I’m increasingly struck by how… conservatives… [and] candidates, are so intent–and so successful–at not talking about what matters to people beyond what I think is a narrow sliver of their base…. Elevating a policy success in a realm that’s very important to families–health coverage–serves as a lamppost on the way back to Factville….

I’m sure some will respond to the piece: “yeah, millions more now have coverage, but it’s lousy coverage and they don’t like it.” Wrong….

A large majority (86%) of people who are currently insured through the Affordable Care Act (ACA) marketplaces or newly insured in Medicaid are very or somewhat satisfied with their new health care coverage, according to a Commonwealth Fund report out today. Nearly seven in 10 (68%) adults with new coverage have used it to get health care, and of those more than three in five (62%) previously would not have been able to obtain or afford that care.

Must-Read: Larry Summers: The Importance of Global Health Investment: “I am proudest of… the idea… that the [World Bank should devote its… World Development Report to making the case for… global health investment. The 1993 report produced by a team led by Dean Jamison proved more influential than I could have hoped, not least because it drew Bill Gates into the global health arena… [and] made a strong case that the benefits of the right health investments far exceed the costs…. The dramatic declines in child mortality and increases in life expectancy demonstrate that policy can make an immense difference….

Our generation has the opportunity to achieve a ‘grand convergence’ in global health reducing preventable maternal, child, and infectious diseases to universally low levels by 2035… benefits that exceeded their costs by a factor of 10… would require commitments to health system reform and… resources that go well beyond what is in place…. I was therefore excited when the Rockefeller Foundation asked me to work with them to develop a Declaration that a broad spectrum of economists could issue underscoring the importance of global health efforts. The 266 economists who have joined our declaration come from 44 countries and at least as many political and ideological perspectives…. Our Declaration was published in the LANCET last week and is summarized in a full page New York Times ad that is running today. I hope the world listens…