Heather Boushey on “Capital in the Twenty-First Century”
The Schwartz Center for Economic Policy Analysis hosted a panel discussion of “Capital in the Twenty-First Century” with economist Thomas Piketty on October 3, 2014. After Piketty’s remarks, the New School’s Anwar Shaikh and Equitable Growth’s Executive Director Heather Boushey gave remarks on the book. The text of Dr. Boushey’s speech is below and a video can be found here.
Speech As Prepared for Delivery
I want to use my 10 minutes to focus on a couple of points: What are the implications if Thomas Piketty is right? Where should we start looking for policy answers?
Thomas points his readers to the novels of Jane Austen, Henry James and Henri Balzac. I want to quote him – he says, “for Jane Austen’s heroes, the question of work did not arise; all that mattered was the size of one’s fortune, whether acquired through inheritance or marriage.” Reading Henry James and Jane Austen certainly made me glad to have been born in 1970, not 1800.These novels are a testament to the limited choices that women had.
Today, to some extent, anyone can create a decent standard of living – or become a millionaire – through accomplishment in this life, rather than what we inherited from our parents. Of course, Thomas presents evidence that the “upper classes instinctively abandoned idleness and invented meritocracy lest universal suffrage deprive them of everything they owned,” but let’s set that aside for a moment.
There’s been a gender revolution, although it remains fairly recent and still incomplete. When I went off to college, my mother admitted to me she was jealous of the opportunities that I had. She told me how when she was thinking about her college option, they were much more limited than mine. She felt that her options were only to study to become a nurse, teacher, or secretary. That wasn’t the array of opportunities that I faced or today’s young women face.
These changes have been good for our economy. According to Stanford economist Peter Klenow and his colleagues, the opening up of professions to women and minorities accounted for a fifth of growth in U.S. GDP between 1960 and 2008. A fifth! That’s non-trivial. In my own research with John Schmitt and Eileen Appelbaum, we found that the increase in women’s labor supply in the United States has added 11 percent to GDP since 1979.
We – all of us, no matter our age – have lived through an era where the presumption is that our society marches always towards great equality or less discrimination, even if slowly. But, if Thomas is right, then this era could be at an end. To get a feel for this, one could point to the PBS it Downton Abbey where Lord Grantham’s family will face eviction from their family manor when the Earl dies. There was no other way for Grantham’s three daughters to maintain their standard of living other than marrying well. So, the show’s first season focuses on whether the eldest daughters would concede to marry her cousin Matthew.
If Thomas is right, then once again, the rules over inheritances will make all the difference for the potential for women’s equality. Do inheritances go to the eldest child or to the eldest male child? What happens upon the death of a spouse – does the wife or the child inherit? I fear that the answers to these questions are not likely to be good for women because while the gender revolution has come a long way, it has stalled in recent decades. Thomas’s data makes me wonder if we’ll wish we’d solidified that more quickly.
In 2014, only one-in-ten U.S. billionaires were women (11.4 percent) and the female share of self-made billionaires is only 3.1 percent. While women have made progress in the workplace, the gender pay gap remains 78 cents on the dollar and this gap begins as soon as women enter the labor force and grows over time.
The gap in pay and labor force participation between men and women, especially here in the United States, is in no small part because we have no found sufficient ways to help workers with care responsibilities. For example, in the vast majority of workplaces neither women nor men have access to paid family leave. That is, except in California, New Jersey, and Rhode Island, where paid family and medical leave has been implemented.
The lack of a federal paid leave policy leaves female caregivers disadvantaged in the labor market. We see this when we compare the labor force participation rates of women in the United states to other OECD countries where the United States has fallen to 17th out of 22 countries. Policy plays a clear role here.
Cross-national studies on the role of policies that reconcile work and family demands have found that the work hours of women in dual-earner families are similar to those of men when child care is publicly provided. Paid maternity and parental leave also increases the employment rate of mothers and more generous paid leave benefits increase the economic contributions of wives to family earnings.
If we’re on the cusp of an era where wealth becomes more important, the failure to implement these policies and achieve greater equality in the preceding era are all the more urgent to address. But, Thomas also questions whether we can raise “g.” And we know, expanding opportunities to excluded groups raises productivity. So there might be some potential there.
That leads me to two aims for policymakers that I draw from the book. First, recognizing that women are an underutilized source of growth and addressing this is extremely urgent for our economy and may be imperative if we don’t want to regress on the gender progress we have made.
In Japan, in order to boost growth in the face of declining population growth, they are pursuing “womenomics’ and implementing policies to boost female labor force participation and close the gender wage gap. When I talk to policy leaders from the United Kingdom or Canada, they will make the argument to me that addressing conflicts between work and family are critical for economic productivity. Too often, I find that I have to make that argument to U.S. policymakers.
While I fear that Thomas’s analysis predicts that women may have fewer economic opportunities moving forward, I also wonder what it means to ponder an economy where dead capital could again supersede human capital. Certainly, it would imply less innovation if economic opportunities were confined to those who started with the most capital. But, is this an overreaction?
In Capital in the Twenty-First Century, Thomas focuses on the rise of the “supermanager,” which he referenced earlier. Which brings me to a second area for policy. We must consider that some of what we’re calling labor income is actually capital income or unproductive rents. This has important policy implications. We hosted a conference last week where Alan Blinder and Emmanuel Saez debated this point, noting that we don’t have data that allows us to discern whether high incomes are rents or productive. At the end of the day, this is a key piece of information we need to inform policymakers in terms of whether and how to intervene.
I have thought a lot about your wealth tax idea, Thomas, and am very taken by remarks Michael Ettlinger made at that same conference we hosted last week where he pointed out that wealth is harder to track and harder to value than income. That’s not to say we shouldn’t not seek to pursue this or try to pull together the data, but I also want us to consider a variety of other strategies that could also be effective.
I want to end by saying that I’m really pleased we are having this conversation at the New School of Social Research. To echo what Anwar said, I think it’s encouraging and exciting to see economic research that beings by seeking to understand the real world and then uses that data to inform a theoretical framework. I think that Thomas is part of a new generation of economic asking different questions than their teachers.
Many of us who came into adulthood as the 1980s turned into the 1990s begin not from President Kennedy’s dictum that a rising tide lifts all boats, but rather from the premise articulated by presidential economics advisor Gene Sperling that “the rising tide will lift some boats, but other will run aground.”
We had to begin here.
The only economic reality we’ve ever experienced is one where productivity gains go to the top while leaving the vast majority to cope with stagnant wages, greater hours of work, and, most especially in the past decades, rising debt burdens. We’ve experienced first-hand the damage this has done to our generation and the ones that follow. The idea that the real world matters was a key idea I took from my education here at the New School and I’m glad we’ve been able to be here together to discuss this important book here today.
Morning Must-Read: Stephanie Lo and Kenneth Rogoff: Secular Stagnation, Debt Overhang, and Other Rationales for Sluggish Growth, Six Years on
I have a very easy time believing that debt overhangs–private, international, and public–can be enormous headwinds and exert substantial drag on growth and recovery. What I cannot understand is how debt can do so without also being an impaired asset to those who hold it. Debt that is painful enough to bear that it discourages enterprise and spending is also debt that may not be collected in the end, and thus debt that sells at a low price and carries a high face interest rate.
Claiming that the pieces of debt selling at record-high prices and carrying record-low face interest rates–which is the case right now for the death of credit-worthy sovereigns possessing exorbitant privilege–are in any sense a drag or a headwind seems to me to be simply wrong. I do not understand how people of note and reputation can believe it…
…over why sluggish economic growth persists across many advanced economies six years after the onset of the financial crisis. Theories include a secular deficiency in aggregate demand, slowing innovation, adverse demographics, lingering policy uncertainty, post-crisis political fractionalisation, debt overhang, insufficient fiscal stimulus, excessive financial regulation, and some mix of all of the above.
This paper surveys the alternative viewpoints. We argue that until significant pockets of private, external and public debt overhang further abate, the potential role of other headwinds to economic growth will be difficult to quantify.
The pitfalls of just-in-time-scheduling
Part-time and low-wage employees today are increasingly at the mercy of “just-in-time scheduling,” which uses a computer algorithm to create an employee schedule based on predicting customer demand, driven by factors such as time of day, season, weather, or even a nearby sporting event. Retail and service industries are the most avid users of just-in-time scheduling—the very industries in which workers already face a lack of benefits, poor working conditions, and insufficient pay.
This use of “workplace optimization systems” ensures that stores have a correct number of workers on an hourly basis, yet wreaks havoc on workers, who have no control over their erratic schedule. Workers’ “just-in-time” schedules change from day to day, and they typically receive only three days’ notice of their schedule for the coming week. Employees are often obliged to be “on call,” seeing their shift canceled only a couple hours before it is meant to begin. Workers may arrive at work only to be sent home, which is particularly burdensome for the working poor, who commit more time and a greater portion of their income to commuting.
Such a situation is especially untenable for parents, who already struggle to patch together a system of childcare. In many instances, they must resort to poor quality options when left in a bind, with implications for our children’s development and future productivity.
Joan C. Williams, a Distinguished Professor and Founding Director of the Center for WorkLife Law at the University of California Hastings College of Law—as well as a 2014 Equitable Growth grantee—is conducting research to address these issues. Working alongside Susan Lambert, a University of Chicago professor who has pioneered work on scheduling issues, Williams has created a pilot program to test new ways to stabilize worker schedules in ways that benefit employers, employees, and taxpayers alike.
Yes, taxpayers, too, because just-in-time schedules can create sky-high levels of absenteeism, and managers’ response often is to cut workers’ hours to ensure a sufficient pool of people to call as replacements when a worker doesn’t show up. But workers who work too few hours to support themselves may end up turning to government benefits for help.
Furthermore, these workers’ earnings may fluctuate depending on how many hours they work in any given month. This not only affects these workers’ ability to put food on the table, but also more generally, deprives our economy of much-needed demand for products and services to power sustained economic growth.
There are companies out there that are beginning to take their employees’ well-being seriously. After The New York Times published an article chronicling the hardship imposed on a Starbucks barista and her family by the company’s scheduling practices, the company vowed to change. Indeed, The Gap, Inc. has agreed to take part in William’s research, allowing her team to work directly with 30 Gap store managers in the San Francisco Bay Area and Miami, Florida. Williams, through her partnership with The Gap, will compare stores with and without her scheduling pilot program to uncover the effectiveness of a more stable scheduling program for employees and employers’ bottom lines alike.
Research indicates that unstable schedules lead to high annual turnover, possibly because a worker quits or doesn’t show up to work because they can’t balance their work and life schedules. Companies, therefore, must invest in increased re-hiring and training costs, and may suffer from poor customer service because, as Williams says, “new employees do not have a strong grasp of the product and a high level commitment to the organization.”
Investing in company profit and employee well-being may not be a zero sum situation. Instead, providing scheduling stability to workers may allow them to realize their full economic potential. Williams’ research involving The Gap should provide some telling answers.
Things to Read on the Afternoon of January 26, 2015
Must- and Shall-Reads:
- : The leap not taken: Wage growth | Marketplace.org
- : “Look no further than Europe’s economic mess for a lesson in the folly of austerity…”
- : Technocrats know how to fix the economy. And they did
- Via Mark Thoma: : Who are the Radicals in Europe?
- : “Jamie Galbraith in interviewed by Roger Strassburg on the upcoming Greek election and the prospects and consequences of a possible Syriza government”
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: Repealing Obamacare Would Be Immoral: “As a political matter Obamacare probably can’t be repealed outright…. Strain also notes that conservatives might ‘have their way with Obamacare’ if ‘the Supreme Court deals it a death blow.’… [Strain’s] wishing for this outcome is morally dubious, and Strain’s counterclaim is unusually weak. ‘In a world of scarce resources, a slightly higher mortality rate is an acceptable price to pay for certain goals–including more cash for other programs, such as those that help the poor; less government coercion and more individual liberty; more health-care choice for consumers…. Such choices are inevitable. They are made all the time.’ This argument about ends is concise, unobjectionable, and completely unresponsive to the situation at hand. If the Supreme Court eliminates ACA subsidies… the federal government will indeed spend less…. But none of the other tradeoffs Strain lists will happen… [no] programs that help the poor… individual liberty will not increase… a wider array of health plans will not materialize. Millions will lose their coverage, insurance markets will collapse…. The moral implications of this outcome are hideous…” -
: Can We Solve Our Child-Care Problem?: “I called economist Heather Boushey to find out. ‘What’s interesting about the cost question is that it presumes that no one is paying the costs right now…. We are paying for it, we’re just paying for it in this inefficient way that doesn’t work for families and isn’t good for kids.’ Families that can scrape together the money for safe, inspected day-care facilities are forgoing other priorities like saving for retirement or buying new shoes. Families who can’t afford day care are relying on a relative or a neighbor to provide informal care, which may or may not be paid…. Obama’s suggested tax credit is a first step. But he was not proposing a network of state-run, quality day-care facilities–which actually did exist, during World War II, when men were at war and women flooded the workplace…. Nixon vetoed a bill that would have established a network of federally subsidized child-care centers, open to all parents on a sliding scale. He cited the bill’s ‘family-weakening implications’…. The notion that affordable day care is harmful to families sounds downright crazy today…. Sure, personal politics play a role in how each family makes child-care decisions. But in the vast majority of cases, the economics matter far more…” -
: What Is Noah [Smith] Thinking?: “Noah Smith put up a post Sunday purporting to show that things aren’t so bad for the middle class… immediately shows us a chart of median household income. Stop right there….. We need to look at individual data, aggregated weekly… to know what’s going on…. The individual real weekly wage is still below 1972 levels, [so] households… have traded time and debt for current consumption. This is not an improvement in the middle class lifestyle…. Richard Serlin points out that we also need to consider risk…. The middle class is less secure than it was in 1972. Noah has lots of interesting things to say, and you should check out his blog if you haven’t already. But this is an error on his part, and I don’t understand what he’s thinking.” -
: Value Investing as Software Eats the World: “Venture capitalist Marc Andreessen’s trenchant phrase–‘Software is Eating the World’–evokes the reach and power of this pervasive and powerful phenomenon…. There are serious investing implications…. The following is just a small sample of companies that once used to dominate their niche are now are either gone, or fundamentally transformed, by the encroachment of software: The bookstore chain Borders got ‘eaten’ by software-based Amazon. The music store chain Tower Records got ‘eaten’ by iTunes software. Apple’s iTunes itself is getting ‘eaten’ by Pandora and Spotify streaming software. The video chain Blockbusters got ‘eaten’ by Netflix software. Newspapers and magazines got ‘eaten’ by the websites and blogs and online ads. Yellow Pages got ‘eaten’ by Google software. Kodak got ‘eaten’ by digital photos and smartphone cameras. AT&T and Vodaphone are under attack from Skype, Whatsapp, Facetime, and Facebook. Retailing giants like Sears, Target, Walmart, and Tesco are being ‘eaten’ by Amazon. Bank clerks got ‘eaten’ by ATM machines. Human brokers were ‘eaten’ by online brokerage sites. Travel agencies are being ‘eaten’ by Expedia and Travelocity, etc. Recruiters are being ‘eaten’ by LinkedIn and other social networks. Insurance underwriters and actuaries are being ‘eaten’ by ‘big data’ analytic software…. the list grows every day. This should be of critical interest to all value investors since companies in the process of being eaten alive can often seem attractive to investors–inexpensive on the basis of the usual valuation ratios–right until their very end…. It seems clear, at least to me, that the old value investing strategy of avoiding technology stocks is no longer tenable as software keeps eating more and more of the world…”
Should Be Aware of:
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: Ben Carson Advocated Partial Government Health Care Takeover In His 2012 Book: “Dr. Ben Carson advocated for government-run catastrophic health care as late as 2012. Responding to a report from BuzzFeed News during a press conference at the Iowa Freedom Summit on Saturday, Carson said that a 1996 essay that ran in the Harvard Journal of Minority Public Health in which he proposed government-run nationalized catastrophic care and end-of-life national guidelines for who should and should not receive care, ‘bears about as much resemblance to my current views as our views on Afghanistan did 20 years ago.’ Carson, however, advocated a nearly-identical proposal to reform health care in his 2012 book, ‘America the Beautiful’…”
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: Alternative Eurozone Histories: “It would be very nice if this was all about history. Unfortunately exactly the same mistakes are continuing, with equally damaging effects. Fiscal policy continues to be pro-cyclical, meaning that we had a second Eurozone recession and no real recovery from that. Monetary policy is either perverse (2011), or 6 years too late (!) and continues to openly encourage fiscal austerity. That most policy makers in the Eurozone have still not understood past errors remains scandalous…” -
: Climate-driven technical change: seasonality and the invention of agriculture: “During the Neolithic Revolution, seven populations independently invented agriculture. In this paper, I argue that this innovation was a response to a large increase in climatic seasonality. Hunter-gatherers in the most affected regions became sedentary in order to store food and smooth their consumption. I present a model capturing the key incentives for adopting agriculture, and I test the resulting predictions against a global panel dataset of climate conditions and Neolithic adoption dates. I find that invention and adoption were both systematically more likely in places with higher seasonality. The findings of this paper imply that seasonality patterns 10,000 years ago were amongst the major determinants of the present day global distribution of crop productivities, ethnic groups, cultural traditions, and political institutions.”
Afternoon Must-Read: Nick Bunker: Did Credit Replace Wage Growth in the Mid-2000s?
Let me highlight the last paragraph of Nick Bunker’s piece over at our Value Added, just for those of you who don’t click through either from the home page or from the title list at right:
…were taking out much larger loans than before or more mortgages? According to Adelino, Severino, and Schoar… more so the latter… new borrowers entering the market…. Adelino, Severino and Schoar’s paper would seem to indicate that what caused the run up in mortgage debt wasn’t due to a change in ‘lending technology’ such as securitization or looser government policies. Rather, the debt was built by the same kind of bubble dynamics that leads to investors betting that an asset will never lose value. Which story is true is still up for debate, but it could just be that this time wasn’t no different after all…
Afternoon Must-Read: Brian Buetler: Repealing Obamacare Would Be Immoral
…Strain also notes that conservatives might ‘have their way with Obamacare’ if ‘the Supreme Court deals it a death blow.’… [Strain’s] wishing for this outcome is morally dubious, and Strain’s counterclaim is unusually weak. ‘In a world of scarce resources, a slightly higher mortality rate is an acceptable price to pay for certain goals–including more cash for other programs, such as those that help the poor; less government coercion and more individual liberty; more health-care choice for consumers…. Such choices are inevitable. They are made all the time.’ This argument about ends is concise, unobjectionable, and completely unresponsive to the situation at hand. If the Supreme Court eliminates ACA subsidies… the federal government will indeed spend less…. But none of the other tradeoffs Strain lists will happen… [no] programs that help the poor… individual liberty will not increase… a wider array of health plans will not materialize. Millions will lose their coverage, insurance markets will collapse…. The moral implications of this outcome are hideous…
Afternoon Must-Read: Ann Friedman: Heather Boushey on Can We Solve Our Child-Care Problem?
What’s interesting about the cost question is that it presumes that no one is paying the costs right now…. We are paying for it, we’re just paying for it in this inefficient way that doesn’t work for families and isn’t good for kids.
Families that can scrape together the money for safe, inspected day-care facilities are forgoing other priorities like saving for retirement or buying new shoes. Families who can’t afford day care are relying on a relative or a neighbor to provide informal care, which may or may not be paid…. Obama’s suggested tax credit is a first step. But he was not proposing a network of state-run, quality day-care facilities–which actually did exist, during World War II, when men were at war and women flooded the workplace…. Nixon vetoed a bill that would have established a network of federally subsidized child-care centers, open to all parents on a sliding scale. He cited the bill’s ‘family-weakening implications’…. The notion that affordable day care is harmful to families sounds downright crazy today…. Sure, personal politics play a role in how each family makes child-care decisions. But in the vast majority of cases, the economics matter far more…
The Future of the European Project, and the Future of the Eurozone: The Honest Broker
J. Bradford DeLong :: U.C. Berkeley and NBER :: April 16, 2013 http://eurofuture2013.wordpress.com/1
My problem this morning is that I have four starting points. Or maybe my problem is that I have five starting points:
I. A Little Dutch History
My first starting point is the history of the Netherlands.
I would have to be more rash indeed than the fifteenth century’s Charles de Valois-Burgogne,2 the last sovereign Duke of Burgundy, to dare to opine about classical Dutch history with Jan de Vries in the room. But my read of it tells me that “political union” is a very vague and sketchy concept indeed. Consider the “political union” of what was surely the strongest power in seventeenth-century Western Europe: the seven United Provinces of the Netherlands that dominated the economy and were the political-military lynchpin of the coalition to contain the aggressive King Louis XIV Bourbon of France. As I understand it, the Dutch political union then consisted of:
- A talk-shop in the Hague, with rather less power than currently held by the organs of the European Union in Brussels and Strasbourg.
- The holding of the seven offices of stadthouder of each of the provinces by the then-current Prince of Orange, whoever that happened to be.
- The fact that the single province of Holland had 60% of the GDP of the whole; and thus could credibly threaten to go it alone, do what was necessary, make a little list of those who had not enthusiastically contributed their share of the resources needed for the common good, and remember.3
That was enough of a political union to support a great power in the seventeenth century that could dominate the seas and orchestrate the best-funded and most powerful military coalition on land as well. Certainly the most memorable piece of bureaucrat and raconteur Samuel Pepys Diary of his life in Stuart-Restoration England is his lament, one night as he watched the warfleet he had spent so much of his career trying to build burn in the Thames estuary, that it seemed to him “the Devil shits Dutchmen!”4
It was enough then. Will that amount of “political union” be enough for Europe today? I do not know. That is my first point–that “political union” is a vague thing, and often you only know that you had it after the fact when you look back, and see that things worked, and that in fact it did not all fall apart.
II. The Classical Political Theory Tradition (and James Madison)
My second starting point is to ask whether a stronger political union than what Europe has now–or than the Dutch Republic of the seventeenth century–is even possible.
Here the place to start is with the classical political tradition plus James Madison. Aristotle of Stagira5 believed that there were and could be no stable democracies, and certainly no good democracies. They were, he thought to the innermost core of his bones, inevitably ruled by faction–so much so that the end-state of democratic politics was a downward spiral of street-fights and purges ending in tyranny. And while this process worked itself out, he thought, at those times when you could get enough people assembled in the Assembly to make a decision, the policies that resulted would be irrational and random. They would decide today that they should execute every adult male in the recently-recaptured city of Mitylene because even the demos had been unwise enough to follow the lead of the aristoi when they had decided to rebel and affiliate with Sparta. They would decide tomorrow–after what must have been an incredibly intense night of bribery by Mitylene’s ambassadors and well-wishers in Athens–that their decision of today had been unwise, reversing themselves, and sending a second messenger-ship across the Aegean to tell the occupying fleet not to do what the previous day’s messenger-ship had commanded them to do.6
Moreover, a democracy would be a bad neighbor. It would be always prepared for aggressive war, for war would bring the demos paid employment in the fleet and their share of plunder as well. Since those who were prosperous and had something to lose did not have a big voice in the government, the government would not pay proper attention to the destructive side of war.
Faction-ridden, irrational, aggressive, militaristic–the classical Athenian democracy, Aristotle said, and for good reason, was very bad news for its neighbors and for itself.
A better alternative government, Aristotle thought, would contain an element of “monarchy”–top-down direction of an elite competition for winning zero-sum status in serving the government and the people–an element in which the ruling principle of politics was “honor”, as Montesquieu would put it 2000 years later7. A better alternative government, Aristotle thought, would even be one of despotism–under despotism the ruling principle would be fear, but at least order would be maintained, and life and prosperity could proceed for all except the few who got crosswise of the despot. Perhaps the best regime would be a “republic”–a government where, again in Montesquieu’s words, the ruling principle would be a positive-sum contest for displaying “virtue” in serving the republic. But such needed to be small–the virtuous cycle of public spirit and public-spirited action could only be maintained in a small community where the behavior of all could be seen. Thus a small city-state with a not-very-democratic mixed-constitution virtue-oriented regime could approximate the Just City, for a while, if you were lucky, if you had a good initial lawgiver, but only as long as the extent of territory did not grow too great.
And if territory did grow too great? Then the good republic was unsustainable, and you would oscillate between monarchy and despotism–as Aristotle must have reflected many times during his life first as tutor to and then as subject of Alexander III Argeios of Macedon, called “the Great”.
Thus the classical tradition says that something like today’s “Europe”–a highly-democratic republic on a continent-wide scale–cannot be a possible good regime. To this James Madison, writing in The Federalist, says: “Not so! Look at the institutions of the second-century BC Aeolian League.”8 (I have not found any other references in secondary works that might have been read by James Madison: he must have trawled deeply indeed to come up with this one as a possible model for what he hoped the United States would become.) It is true that democratic politics tends to be faction-ridden. It is true that political decision-making tends to be irrational–ruled by transitory passions rather than durable interests. But start with a large enough territory, add enough cooling constitutional elements to the orrery of government, construct an eighteenth-century Enlightenment mechanical system of political order with the right properties, and if in its division of power between president, senate, and house of representatives it just happens to mimic the division in Great Britain of power between king, lords, and commons at the accession of King George III Hanover of Great Britain–well then, says Madison, it just might work. The constitutional cooling-off elements tame the irrationality. The extent of territory makes it more difficult for factions, limited to one class in one region, to out-organize the rational upholders of good government.
So Madison, trying to correct Aristotle and found the United States, raises at least the possibility that “Europe” could work–with the right constitutional order.
III. The Necessity of Political Union in the Dark Continent
My third starting point is the absolute necessity of political union in Europe today. It is just too costly and too terrible not to have one: the history of the first half of the twentieth century and then the edge-of-nuclear-terror decades of the Cold War teach that very strongly.
Was it 111 BC that the Kimbri and the Teutones, having moved down from Jutland to what is now Austria and crossed the Danube, decided they would rather cross the Rhine into the land of feta and olives in the Rhone Valley rather than eat Sauerkraut and sausage–or, back then, probably auroch jerky–in Noricum, near what is now Salzburg? So they went. And so they looted, burned, ravaged, killed, and ruled until a decade later they were broken at the battles of Aquae Sextiae and Vercellae by the new-model Roman Republican army commanded by Gaius Marius C. f. seven times consul.9 Ever since then, by my count, it is every thirty-seven years that a hostile army crosses the Rhine going one way or the other bringing fire and sword. The original Swiss–the Helvetii. Julius Caesar. All of those who claimed to be Julius Caesar’s adoptive descendants. The Visigoths heading for Andalusia. Louis XIV commanding his armies to make sure that nothing grows in the Rhinish Palatinate so that his armies attacking Holland have a secure right flank. And, last, Remagen bridge in 1945. Every thirty-seven years, with increasing destructiveness as time passes.
Thirty-seven years after 1945 carries us to 1982. Thirty-seven years after 1982 will carry us to 2019. By 2019 we will have missed two of our appointments with slaughter. We desperately need political union in Europe lest the bad old days from 111 BC to 1945 come again as we once again fall victim to the tragedy of great power politics10. That means that politicians find some way to union–so that differences are thrashed out in conference rooms in Brussels and Strasbourg rather than in the streets with Molotov cocktails, submachine guns, armed drones, and worse. That is the necessity.
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IV. Kindlebergian Hegemony?
The fourth starting point: return to the question of the possibility of a unified Europe. A presupposition of the Madisonian hope for a durable and well-functioning democratic government of great extent and territory was a certain original cultural not homogeneity but affinity: people in Georgia had to look at people in Maine as friends and allies by default, with the growth of faction needed to convince them otherwise. Suppose that is lacking. What then?
You then have to jury-rig something. You then have to hope for or to somehow generate a benevolent Kindlebergian hegemon11–some actor large enough to be the first-mover, to set the policy, because it is our way or the highway. This requires a willingness on the part of the hegemon to follow-through on its policy commitments–to mean it when it says “our way or the highway”. This also requires a willingness on the part of the hegemon to be exploited to some degree–to let others free-ride on the public goods of international civil, political, and economic order that it establishes and provides. The hegemon has to be large and powerful enough to have an overarching interest in those international public goods. And it has to value public order, or public order plus various exorbitant-privilege12 benefits of hegemony, more than it feels taken advantage of by the free-riding.
Absence of a hegemon is, in brief, Kindleberger’s theory of why the history of the North Atlantic economy between 1919 and 1939 was such a tragedy: Britain no longer but the United States not yet willing and perhaps not yet able to be the hegemon. That leads one to fear that perhaps, at the deepest level, the central problem with Europe today is that the United States is no longer the Cold-War North Atlantic benevolent hegemon it once was, but that Germany has not or has not yet stepped into that benevolent-hegemon role–or because of German history and German attitudes would not be tolerated by the rest of Europe in that role.
V. External Pressure?
The fifth and last starting point is what Madison left out: who the Aetolian League actually worked. It did work. It was remarkably stable. It had an executive. Its executive had powers and made decisions. It could command rather than request from its city-state members–and its commands were obeyed. But the Aetolian League was impossible to imagine without Macedon to the north. A hostile great power on its borders was essential to induce the surrenders of sovereignty needed for the Aetolian League to function. Analogously, a hostile Great Britain that would not have minded scooping up an ex-colony or two that wished to return to the bosom of Westminster–and confiscate the fortunes, and perhaps the lives and sacred honor–of the politicians who had led them astray into independence was essential to induce the surrenders of sovereignty needed for Madison’s constitution and Madison’s United States. In the absence of potentially hostile Great Britain, it is very difficult to imagine the politicians of Rhode Island agreeing to their voice being all-but-drowned-out in the lower house of representatives, and impossible to imagine the politicians of Virginia and Massachusetts agreeing to their voice being reduced to no louder than Rhode Island’s voice in the upper house of the senate.
There is a story that when Paul-Henri Spaak was Secretary-General of NATO, he was asked if it would not be a good idea to erect statues to the founders of what was then becoming the European Union–the ECSC, the EEC, the EC, et cetera. His response, supposedly: “What a wonderful idea! There should be a fifty-foot tall statue of Josef Stalin in front of the Berlaymont Palace to remind us of why we are all here!” It was the Red Army’s Group of Soviet Forces in Germany at the Fulda Gap that concentrated people’s minds behind the ideas of the Monnets and the Schumanns most powerfully in the decades after World War II. That potentially-hostile superpower created a powerful desire on the part of many to make sure the ECSC, then the EEC, then the EC, and finally the EU succeeded.
And all of that vanished at the start of the 1990s–although there is a chance that we may in a few years be thanking Vladimir Putin for bringing it back.
Where do all five of these starts leave us?
VI. The Euro and the Lessons of 1919-1939
We ought, when we started the euro, have remembered the principal lessons of 1919-1939.
First, there is the lesson that John Maynard Keynes tried unsuccessfully to teach Harry Dexter White at Bretton Woods: that in order for an international market economy to be stable and prosperous, adjustment to macroeconomic disequilibrium needs to be symmetrically undertaken by both surplus and deficit regions, and not by deficit regions alone.[][]
When Christina Romer was in office back in 2010, she would stand up at OECD meetings and say: “What Europe needs to do in order to solve its financial and structural crises is not just a shift to sounder finance and more public austerity in the periphery, but pro-growth policies in the core.” Everyone would say “yes, yes” and applaud. But what Christie would mean by “pro-growth policies in the core” is for a proportional share of the adjustment burden to be undertaken by surplus regions, which would mean 4%/year inflation in Germany and Holland. That would have been required for 2%/year inflation in the Eurozone as a whole, and thus for structural adjustment in Southern Europe to take place without grinding wage deflation. Deflation in the periphery and only 2%/year inflation in Germany means you won’t hit your 2%/year inflation target for the Eurozone as a whole. And you won’t get structural adjustment until generations have passed.
Second, if an international economy is to have any chance of avoiding crises, an integrated banking system requires an integrated banking supervisory system. Either you have to cut banking systems off from each other and run credits and debits through sovereigns–and then backstop those sovereigns, as the government of Austria was not backstopped when it tried to support the Credit-Anstalt back in 1931–or if you let banks hold assets and liabilities across national borders the supervision with an eye toward minimizing and then dealing with systemic risk needs to cross national borders and be global as well.
Third, for crises to be successfully managed, the lender of last resort must truly be a lender of last resort. The first part of the Bagehot rule is lend freely–and the lending must be truly free, and truly unlimited in quantity. The lender must be able to create whatever asset the market thinks is their port-of-safe-refuge and do so in whatever quantities the market thinks it might every possibly demand. It cannot get hung up on, say, Pierre Laval’s desire to win points for himself in French domestic politics by vetoing Austro-German plans to increase the tax base via customs union as a way of making it sustainable for the German Weimar Republic’s Reichbank to rescue the OeNB which was trying to rescue the Credit-Anstalt which had tried to moderate the Great Depression in the Danube basin by continued lending into the post-1929 downturn.
Fourth, in order for any monetary union or fixed exchange-rate union larger than the size of a true optimum currency area to survive, it must be willing to undertake large-scale fiscal transfers to compensate for the absence of the prohibited exchange rate movements that would otherwise shift terms of trade and rebalance the economy. Monetary union on a scale as large as the Eurozone requires large fiscal transfers, which are unthinkable without some operating and functioning form of political union.
I do know that those of us who were, back at the start of the 1990s, watching the project of the establishment of the Eurozone assumed that the establishment was being carried out by people who had learned these lessons. They were, after all, obvious–or maybe obvious only to people who watched international finance, or maybe obvious only to people with Ph.D.’s in economics who had written their dissertations in international finance, or maybe obvious only to those few of us who had made a relatively deep study of 1919-1939. We now find that the Princes and Princesses of Eurovia today do not appear to have learned these lessons. History taught the lessons. It taught them, I thought, fairly convincingly. But were the Princes and Princesses of Eurovia listening?
How did this come about? Why didn’t Maastricht set up a single Eurovia-wide banking supervisor to align financial regulatory policies across the Eurozone? Why didn’t Maastricht explicitly set up the fiscal transfer funds that, it was clear then, would be needed whenever some regional component of Eurovia were to fall into a deep recession–as some regional component surely would at some time? Why did Maastricht leave a good deal of lender-of-last-resort authority in the hands of national governments that could not print money–could not create the safe asset for the system–and implicitly task them with responsibility for their banking system? And why, given that one country’s exports are another country’s imports by necessity–and given that the United States will not always be enthusiastically the possessor of a hyper-strong dollar and the importer of last resort to guarantee full employment throughout Europe–does not the adoption of policies in Eurovia deficit regions to shrink their imports automatically trigger the adoption of corresponding policies in Eurovia surplus regions to boost their imports?
Part of the reason was the general belief in the Berlaymont and elsewhere that requiring the specification of what were seen as ancillary details at Maastricht would postpone the project for years if not decades. The logic of events, it was thought by many, would inevitably lead to the development of the missing pieces: first the common banking regulatory union, then over time the fiscal union, and then the political union necessary to make the fiscal union durable and acceptable, and then the making of the Europeans needed to populate the political union and keep it stable against centrifugal tendencies. And as for the fear that surplus countries might be reluctant to share in adjustment–well, back in 1992 it must have seemed extremely unlikely that politicians anywhere in Europe would ever have turned down an IMF-blessed demand that they expand their economies and reduce their levels of unemployment.
Surely when the crisis came we thought–at least those of us who worked in the U.S. Treasury and talked to the IMF thought–if it is indeed necessary that some European countries expand in the interest of structural adjustment, the IMF blessing of that expansion would neutralize any domestic political opposition to “sound finance”. Yet we seem today to live in a very different world indeed from the world that we thought then that we did.
And, of course, underlying everything at Maastricht and in those Helmut Kohl post-Cold War years was a background gestalt that Maastricht was in large part Germany renewing its commitment to the continued and further integration of Europe in the aftermath of the very strong support given by the rest of continental Europe to the Bundesrepublik’s absorption of the German East. If it turned out that someone had to pay somehow somewhen for the sin of not clearly foreseeing the consequences of the single currency and the Eurozone, this political support by the rest of continental Europe in the face of some skepticism as to the wisdom of immediate German unification from the United States and Russia meant that the rest of Europe had a very deep well of credit with Germany on which it could draw. Germany would remember. And Germany would be eager to pay.
It may well all work out. Fifty years from now historians may well be writing that Maastricht was a gamble–and was, like Waterloo, a near-run thing–but a gamble that in the end paid off after all. “After all”, historians may say in 2063, “it has now been 108 years since an army crossed the Rhine with fire and sword, and the unforeseen costs of Maastricht are a very small payment for an insurance policy against that eventuality”. There may still be large differences in prosperity between Europe’s core and its periphery. But come 2063 Europe as a whole may well be so rich that these are and are seen as second-order concerns at most. In 2063 Northern Europeans may still grumble that Southern Europeans lack a proper work-ethic, but when they do so they may do so as they pay through the nose for the amenities of all of their Mediterranean vacations.
After all, being taxed a bit to support the common European project has large benefits. The Kimbri and the Teutones never got to enjoy the feta and the olives and the sunshine. We have every reason to think that the Northern Europeans of 2063 will.
Perhaps.
Perhaps not.
But right now, it looks to me as though history did indeed teach the lesson, but that while history was teaching the lesson the Princes and Princesses of Eurovia today were too busy texting on their cell phones to pay any attention.
http://delong.typepad.com/files/20130416-brad-delong-22future-of-the-euro22-eichengreen-conference-talk.m4a | Notes
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Did credit really replace wage growth in the mid-2000s?
The bursting of the U.S. housing bubble in 2006 and 2007 revealed a mountain of debt that households had accumulated in the preceding years. This massive debt overhang obviously had severe consequences for the U.S. economy, which is why economists and policymakers have spent the years since the bust arguing about the best way to deal with the overhang.
But with households starting to increase their leverage once again, perhaps reconsidering the dynamics that led to the housing bubble might be more useful. A rush of new middle and high income mortgage borrowers may have been a significant factor in the run up to the housing crisis of 2006 and 2007, according to a new paper. This new analysis challenges the findings of other recent research into the origins of the crisis that suggest lending to lower-income borrowers who were experiencing no wage gains in this period was the primary cause.
So first, let’s briefly present the currently favored theory. One argument that garners quite a bit of attention is from economist Raghuram Rajan, now the governor of the Reserve Bank of India but formerly of the International Monetary Fund and the University of Chicago. In his book, Fault Lines, Rajan argues that governments loosened credit so that low-and medium-income households could borrow to make up for stagnant wage growth.
Economists Atif Mian of Princeton University and Amir Sufi of the University of Chicago build on Rajan’s research, finding evidence that credit and relative wage growth in zip codes were negatively correlated—meaning that credit grew as relative wages went down—as the housing bubble inflated. But importantly, Mian and Sufi didn’t look at individual lenders, only the activity in the zip code as a whole.
The new National Bureau of Economic Research working paper does look at individual borrowers. The authors, economists Manuel Adelino of Duke University, Felipe Severino of Dartmouth College, and Antoinette Schoar of the Massachusetts Institute of Technology analyze individual mortgage and income data from the Internal Revenue Services to tackle this question. They find similar results to Mian and Sufi on a variety of questions. Their data, for example, also show that credit flowed to areas where housing prices increased the most and that there was a negative correlation between relative income growth and credit growth at the zip code level.
But when Adelino, Severino, and Schoar look at the individual level they find a positive correlation. In other words, mortgage credit was going to individuals who were seeing positive income growth. The authors show that the borrowers who were receiving the credit weren’t those at the bottom of the income ladder, but rather those at the middle and the top. And the credit growth appeared to be in proportion to income growth: The debt-income-ratio didn’t appear to change much during the bubble years.
So were the middle class and the rich were taking out much larger loans than before or more mortgages? According to Adelino, Severino, and Schoar it was both, but more so the latter. They find that the effect on the extensive margin, meaning new borrowers entering the market, was larger than the effect on the intensive margin, or borrowers increasing the size of loans. As the title of their paper says, the composition of home buyers changed during the period.
Adelino, Severino and Schoar’s paper would seem to indicate that what caused the run up in mortgage debt wasn’t due to a change in “lending technology” such as securitization or looser government policies. Rather, the debt was built by the same kind of bubble dynamics that leads to investors betting that an asset will never lose value. Which story is true is still up for debate, but it could just be that this time wasn’t no different after all.