Tag: Barry Eichengreen

A Brief History of (In)equality: No Longer So Fresh at Project Syndicate

Posted on by Brad DeLong
Elephant graph Google Search

No Longer Fresh at Project Syndicate: A Brief History of (In)equality: Here we have a very nice set of slides http://tinyurl.com/dl20160725a. It comes from a talk in Lisbon given by Barry Eichengreen, my sixth-floor office neighbor here at the Berkeley Economics Department. The slides have one of the great virtues of economic history: We, unlike other economists, are allowed to at least gesture at and even glory at the complexities of a situation. We are not forced, as other economists are, into ruthless oversimplification in pursuit of conceptual clarity—to be followed by the intellectually-faulty imperialism overloading more of an explanation of the world on a simple model then it can rightfully bear. Read MOAR at Project Syndicate

In Barry’s view, with respect to inequality there have been and are now ongoing six important first-order processes at work over the past two and a half centuries:

  1. The 1750-1850 pulling-apart of Britain’s income distribution, as the technologies and institutions of the British Industrial Revolution benefitted the urban bourgeoisie and the rural bourgeois gentry but neither the rural nor the urban proletariat http://amzn.to/2aFJAYz https://www.jstor.org/stable/2600061.

  2. The 1850-1914 great First Age of Globalization convergence of living standards and labor productivity levels in the Global North, as 50 million people left overcrowded agricultural Europe for resource-rich settler colonies and ex-colonies, and brought their institutions, their technologies, and their capital with them. Gaps of roughly 100% in wage levels between European sender and settler recipient economies shrank to 25% or so http://amzn.to/2a6aXz6.

  3. The 1750-1975 enormous pulling-apart of the global income distribution, as some parts of the world were able to take full or nearly full advantage of industrial and post industrial technologies, and others were not. Measured at purchasing power parity, America was twice as well off as China in 1800. By 1975 it was thirty times as well off http://tinyurl.com/dl20160725b.

  4. The 1870-1914 First Gilded Age rise of within-country inequality in the Global North, as entrepreneurship, industrialization, and rent seeking distributed the bulk of increases and productivity to the relatively well off and to the plutocracy http://tinyurl.com/dl20160725a.

  5. The 1930-1980 Social Democratic Age great compression of the earnings distribution in the Global North http://tinyurl.com/dl20160725c.

  6. The post 1980 divergence of outcomes within the Global North, as political economic choices lead to the coming of a Second Gilded Age to the Global North’s English-speaking portions.

I, however, think Barry’s talk is not economic-historiany enough. I would go further. I would start by adding five more first-order important factors and processes:

  1. The extraordinary post-1980 reduction in and yet stubborn persistence of remaining pools of absolute poverty. Inequality is a maldistribution of the opportunities for Isaiah Berlin’s positive liberty. But as my ex-colleague Ananya Roy points out, absolute poverty is a deprivation of Berlin’s negative liberty as well—it matters little when you are in a cage without any money whether you could theoretically buy a key http://amzn.to/2ac721f http://tinyurl.com/dl20160725d.

  2. The extraordinary nineteenth-century global shrinkage of slavery.

  3. The global reduction of other caste barriers—race, ethnicity, gender—which limit people’s opportunities to make use of whatever wealth they have.

  4. The post-1975 global-scale switch from increasing planet-wide divergence in wealth to convergence—although do note that, so far at least, all of the switch from the pre-1975 increasing divergence pattern is the result of two good growth generations in China, and one good growth generation in India.

  5. The dynamic of compound interest backed by political-economic rent-seeking identified by Thomas Piketty—with the caveat that Piketty’s logic applies not very much to our past, even our 1980-2015 past, but may well be an important part of our 2015-2100 future http://amzn.to/2ab4rSI.

Complicated, yes? A matter for careful adjustment of institutions by those with social science expertise directed by elected leaders who share the people’s value, yes?

And, most important, I would finish by adding, underlining, and emphasizing a twelfth process:

Populist mobilizations to try to deal with problems of inequality have had consequences we can call “checkered” only out of politeness. Populist mobilizations have been directed in France toward installing an Emperor, Napoleon III, and toward overthrowing democratic governments of the Third Republic. Populist mobilizations in America have been directed at excluding immigrants from China to California, at excluding immigrants from anywhere save northwest Europe, at enforcing Jim Crow. Populist mobilizations in central Europe were turned toward imperialism as the problem was redefined as that Germany and Italy were “proletarian nations” that needed bigger empires. And only Naziism could surpass in its consequences the populist mobilizations that were turned to entrenching in power Lenin’s “party of a new type” and all of its imitators. The constructive responses were fewer: Extending the franchise. Progressive income taxes. Social insurance. Building society’s physical and, more important, human capital. Opening economies. Prioritizing full employment. Encouraging migration to where ample resources and, more important, good institutions were already established. History teaches us that those have been the reactions to inequality that have made the world a better place.

Of course, history also tells us that we fail to learn what lessons history has to teach us.

A Brief History of (In)equality: Now Live at Project Syndicate

Posted on by Brad DeLong
Digesting Income Inequality Mind the Post

Over at Project Syndicate: A Brief History of (In)equality: BERKELEY – The Berkeley economist Barry Eichengreen recently gave a talk in Lisbon about inequality that demonstrated one of the virtues of being a scholar of economic history. Eichengreen, like me, glories in the complexities of every situation, avoiding oversimplification in the pursuit of conceptual clarity. This disposition stays the impulse to try to explain more about the world than we can possibly know with one simple model. For his part, with respect to inequality, Eichengreen has identified six first-order processes at work over the past 250 years.

READ MOAR of A Brief History of (In)equality at Project Syndicate

Lack of Demand Creates Lack of Supply; Lack of Proper Knowledge of Past Disasters Creates Present and Future Ones

Posted on by Brad DeLong
FRED Graph FRED St Louis Fed

“We have lost 5 percent of capacity… $800 billion[/year]…. A soft economy casts a substantial shadow forward onto the economy’s future output and potential.” It is now three years later than when Summers and the rest of us did these calculations. If you believe Janet Yellen and Stan Fischer’s claims that we are now effectively at full employment, the permanent loss of productive capacity as a result of the 2007-9 financial crisis, the resulting Lesser Depression, and the subsequent bobbling of the recovery is not 5% now. It is much closer to 10%. And it is quite possibly aiming for 15% before it is over:

Lawrence Summers et al. (2014): Lack of Demand Creates Lack of Supply: “Jean-Baptiste Say, the patron saint of Chicago economists…

…enunciated the doctrine in the 19th century that supply creates its own demand…. If you produce things… you would have to create income… and then the people who got the income would spend the income and so how could you really have a problem[?]… Keynes… explain[ed] that [Say’s Law] was wrong, that in a world where the demand could be for money and for financial assets, there could be a systematic shortfall in demand.

Here’s Inverse Say’s Law: Lack of demand creates, over time, lack of supply…. We are now in the United States in round numbers 10 percent below what we thought the economy’s capacity would be today in 2007. Of that 10 percent, we regard approximately half as being a continuing shortfall relative to the economy’s potential and we regard half as being lost potential…. We have lost 5 percent of capacity… we otherwise would have had…. $800 billion[/year]. It is more than $2,500[/year] for every American…. A soft economy casts a substantial shadow forward onto the economy’s future output and potential. This might have been a theoretical notion some years ago, it is an empirical fact today…

What are we going to do?

Well, we are going to do nothing–or, rather, next to nothing. Life would be convenient for the Federal Reserve if right now (a) the U.S. economy were at full employment, (b) a rapid normalization of interest rates were necessary to avoid inflation rising significantly above the Federal Reserve’s 2%/year PCE chain index inflation target, and (c) U.S. tightening were more likely to stimulate economies abroad via greater opportunities to sell to the U.S. than contract economies abroad by withdrawing risk-bearing capacity. And the Federal Reserve appears to have decided to believe what makes life convenient. Thus nothing additional in the way of action to boost the economy can be expected from monetary policy. And on fiscal policy a dominant or at least a blocking position is held by those who, as the very sharp Olivier Blanchard put it recently, even though:

[1] In the short run, the demand for goods determines the level of output. A desire by people to save more leads to a decrease in demand and, in turn, a decrease in output. Except in exceptional circumstances, the same is true of fiscal consolidation [by governments]…

nevertheless Olivier Blanchard:

was struck by how many times… [he] had to explain the “paradox of saving” and fight the Hoover-German line, [2] “Reduce your budget deficit, keep your house in order, and don’t worry, the economy will be in good shape”…

Apparently he was flabbergasted by the number of people who would agree with [1] in theory and yet also demand that policies be made according to [2], and he plaintively asks for:

anybody who argues along these lines must explain how it is consistent with the IS relation…

Remember: the United States is not that different. As Barry Eichengreen wrote:

It is disturbing to see the refusal of [fiscal] policymakers, particularly in the US and Germany, to even contemplate… action, despite available fiscal space (as record-low treasury-bond yields and virtually every other economic indicator show). In Germany, ideological aversion to budget deficits runs deep… rooted in the post-World War II doctrine of “ordoliberalism”…. Ultimately, hostility to the use of fiscal policy, as with many things German, can be traced to the 1920s, when budget deficits led to hyperinflation. The circumstances today may be entirely different from those in the 1920s, but there is still guilt by association, as every German schoolboy and girl learns at an early age.

The US[‘s]… citizens have been suspicious of federal government power, including the power to run deficits…. From independence through the Civil War, that suspicion was strongest in the American South, where it was rooted in the fear that the federal government might abolish slavery. In the mid-twentieth century… Democratic President Lyndon Baines Johnson’s “Great Society”… threatened to withhold federal funding for health, education, and other state and local programs from jurisdictions that resisted legislative and judicial desegregation orders. The result was to render the South a solid Republican bloc and leave its leaders antagonistic to all exercise of federal power… a hostility that notably included countercyclical macroeconomic policy. Welcome to ordoliberalism, Dixie-style. Wolfgang Schäuble, meet Ted Cruz…

The world very badly needs an article–a long article, 20,000 words or so. It would teach us how we got into this mess, why we failed to get out, and how the situation might still be rectified–so that the Longer Depression of the early 21st century does not dwarf the Great Depression of the 20th century in future historians’ annals of macroeconomic disasters. Such a book would have to assimilate and transmit the lessons of what I think of as the six greatest books on our current ongoing disaster:

Plus it would have to summarize and evaluate Larry Summers’s musings on secular stagnation.

We were lucky that John Maynard Keynes started writing his General Theory summarizing the lessons we needed to learn from the Great Depression even before that depression reached its nadir. But we were not lucky enough. As Eichengreen stresses, only half the lessons of Keynes were assimilated–enough to keep us from repeating the disaster, but not enough to enable us to get out of it. (Although, to be fair, the world of the 1940s emerged from it only at the cost of imbibing the even more poisonous and deadly elixir called World War II.)

Paul? (Krugman, that is.) Are you up to the task?

Must-read: Barry Eichengreen: “The Case for a Grand Bargain”

Posted on by Brad DeLong

Must-Read: Barry Eichengreen: The Case for a Grand Bargain: “What would it take for all this to happen?…

…First, there would have to be a reassertion of non-ideological economic common sense in U.S. and German policy making circles. One doesn’t have to be a Keynesian to believe that record low interest rates in both countries create a once-in-a-lifetime opportunity for infrastructure spending or to acknowledge that there are aspects of public infrastructure in both countries desperately in need of repair.

Second, central banks in countries lacking fiscal space would have to do more. This means not just talking down the exchange rate as a way of enhancing competitiveness but taking steps to encourage domestic spending, for example ramping up domestic [financial] security purchases still further, and ignoring domestic opposition.

Third, emerging markets and Southern European countries would have to make a credible commitment to structural reform. The need is there, quite independent of international coordination. But without this commitment, international coordination is off the table.

Skeptics will say that I am a dreamer for imagining this grand bargain. But the alternative to this dream is an ongoing economic nightmare.

Ordoliberalismus and Ordovolkismus

Posted on by Brad DeLong

At the zero lower bound on safe nominal short-term interest rates, an expansionary fiscal policy impetus of d percent of current GDP will:

  1. raise current output by (μ)d,
  2. raise future output by (φμ)d, and
  3. raise the debt to GDP ratio by a proportional amount ΔD = (1 – μτ – μφ)d,

where [mu] is the Keynesian multiplier, τ is the tax rate, and φ is the hysteresis coefficient.

It will then require a commitment of (r-g)ΔD percent of future output the service the additional debt, where r is the real interest rate on government debt and g is the growth rate of the economy. The debt service can be raised through explicit and fiscal deadweight loss-inducing taxation, through inflation–a tax on outside money balances accompanied by disruption of the unit of account–or through financial repression–a tax on the banking system but also imposes financial distortions.

That is the simple arithmetic of expansionary fiscal policy in a liquidity trap.

The question of whether and how much expansionary fiscal policy a government facing a liquidity trap should engage and then becomes a technocratic one of calculating uncertain benefits and uncertain costs. Why uncertain? Because our knowledge of the parameters of the economy is uncertain. And we are particularly uncertain not just of the outcome of the key debt- amortization parameter r-g but of its ex-ante distribution as well. There is this an element of radical, almost Knightian, uncertainty here in the benefit-cost calculation. But it remains a benefit-cost calculation. And rare these days is the competent economist Who has thought through the benefit-cost calculation and failed to conclude that the governments of the United States, Germany, and Britain have large enough multipliers, strong enough hysteresis coefficients for infrastructure investment programs, and sufficient fiscal space–favorable likely distributions of r-g–to make substantially more expansionary fiscal policies than they are currently following almost no-brainers.

It is against the backdrop of this situation that we find aversion to fiscal expansion being driven not by pragmatic technocratic benefit-cost calculations but by raw ideology. And so we find Barry Eichengreen being… shrill:

Barry Eichengreen: Confronting the Fiscal Bogeyman: “The world economy is visibly sinking, and the policymakers who are supposed to be its stewards are tying themselves in knots…

…Or so suggest the results of the G-20 summit held in Shanghai…. All that emerged… was an anodyne statement… structural reforms… avoiding beggar-thy-neighbor policies. Once again, monetary policy was left… the only game in town…. Someone needs to do something to keep the world economy afloat, and central banks are the only agents capable of acting. The problem is that monetary policy is approaching exhaustion….

The solution is straightforward. It is to fix the problem of deficient demand… by boosting public spending. Governments should borrow to invest in research, education, and infrastructure…. Such investments cost little given low interest rates… [and] enhance the returns on private investment [as well]…. Thus it is disturbing to see… particularly… the US and Germany [refusing] to even contemplate such action, despite available fiscal space….

Barry blames Germany’s derangement on the ideology of Ordliberalism:

In Germany, ideological aversion to budget deficits… is rooted in the post-World War II doctrine of ‘ordoliberalism,’ which counseled that government should enforce contracts and ensure adequate competition but otherwise avoid interfering in the economy…. The ordoliberal emphasis on personal responsibility fostered an unreasoning hostility to the idea that actions that are individually responsible do not automatically produce desirable aggregate outcomes…. It rendered Germans allergic to macroeconomics….

Barry blames the U.S. derangement on a somewhat analogous ideological formation—call it Ordovolkism:

[In] the US… citizens have been suspicious of federal government power, including the power to run deficits, which is fundamentally a federal prerogative.… That suspicion was strongest in the American South… rooted in the fear that the federal government might abolish slavery…. During the civil rights movement, it was again the Southern political elite that opposed the muscular use of federal power…. The South [became] a solid Republican bloc and leave its leaders antagonistic to all exercise of federal power except for the enforcement of contracts and competition—a hostility that notably included countercyclical macroeconomic policy. Welcome to ordoliberalism, Dixie-style. Wolfgang Schäuble, meet Ted Cruz.

And Barry concludes by asking:

Ideological and political prejudices deeply rooted in history will have to be overcome to end the current stagnation. If an extended period of depressed growth following a crisis isn’t the right moment to challenge them, then when is?

Barry intends this last as a rhetorical question: It is the great Hillel’s “If not now, when?”, to which the proper answer is: “Then now!”

But it is quite possible that the best answer is, instead: “Never!”

While Austerian fear and suspicion of countercyclical monetary policy is rooted in the same Ordoliberal and Ordovolkist ideological fever swamps as objections to countercyclical fiscal policy, it is much weaker. It is much weaker because fundamentalist cries for an automatic monetary system—whether based on a gold standard, a k%/year percent growth rule, or John Taylor’s interest-rate rule—have crashed and burned so spectacularly so many times that they lack even the barest surface plausibility. History has definitively refuted Henry Simons’s call for rules rather than authority in monetary policy. The near-consensus agreed-upon task of institution design for monetary policy is not to construct rules but, instead, to construct authorities with technocratic competence and sensible objectives and values.

Thus one way around the Ordoliberal and Ordovolkist ideological blockages is to redefine a sufficient quantum of countercyclical fiscal policy as monetary policy. I call this “social credit”. Others call it “helicopter money”. Move the central bank’s seigniorage revenue stream outside of the government’s consolidated budget. Assign the disposition of this revenue stream to the central bank. It is not first-best. It may be good enough to do the job.

Another way of attempting to finesse the problem is to construct a fiscal council of some sort. Such an institution, assigned responsibility for the government’s investment budget, may attract the technocratic competence and status of the central banks, and so outflank Ordoliberal and Ordovolkist ideological blockages. Are haps.

But if neither of these expedients—neither social credit or helicopter money on the one hand nor fiscal councils on the other—will serve, then Barry Eichengreen is completely right: it is long past time for a frontal intellectual assault on the dangerous and destructive ideologies of Ordoliberalism and Ordovolkism.

And that assault would be, itself, part of a broader intellectual struggle. The major point of Steve Cohen’s and my Concrete Economics is precisely that ideology is a very bad guide the economic policy. This is simply another—albeit an unusually important—instance.

Must-read: Barry Eichengreen: “Confronting the Fiscal Bogeyman”

Posted on by Brad DeLong

Must-Read: Barry Eichengreen: Confronting the Fiscal Bogeyman: “The International Monetary Fund… warned the assembled G-20 attendees…

…[Yet] all that emerged from the meeting was an anodyne statement about pursuing structural reforms and avoiding beggar-thy-neighbor policies…. Once again, monetary policy was left… as the only game in town…. Someone needs to do something to keep the world economy afloat, and central banks are the only agents capable of acting. The problem is that monetary policy is approaching exhaustion…. The solution is straightforward. It is to fix the problem of deficient demand not by attempting to further loosen monetary conditions, but by boosting public spending… in research, education, and infrastructure…. Such investments cost little, given low interest rates. Productive public investment would also enhance the returns on private investment….

Thus, it is disturbing to see the refusal of policymakers, particularly in the US and Germany, to even contemplate such action, despite available fiscal space (as record-low treasury-bond yields and virtually every other economic indicator show). In Germany, ideological aversion to budget deficits runs deep… rooted in the post-World War II doctrine of ‘ordoliberalism’…. The ordoliberal emphasis on personal responsibility… rendered Germans allergic to macroeconomics….

The US did not experience hyperinflation…. But for the better part of two centuries, its citizens have been suspicious of federal government power, including the power to run deficits…. That suspicion was strongest in the American South, where it was rooted in the fear that the federal government might abolish slavery. In the mid-twentieth century, during the civil rights movement, it was again the Southern political elite that opposed the muscular use of federal power…. Lyndon Baines Johnson’s ‘Great Society’… render[ed] the South a solid Republican bloc and leave its leaders antagonistic to all exercise of federal power except for the enforcement of contracts and competition–a hostility that notably included countercyclical macroeconomic policy. Welcome to ordoliberalism, Dixie-style. Wolfgang Schäuble, meet Ted Cruz.

Ideological and political prejudices deeply rooted in history will have to be overcome to end the current stagnation. If an extended period of depressed growth following a crisis isn’t the right moment to challenge them, then when is?

Must-read: Barry Eichengreen and Charles Wyplosz: “How the Euro Crisis Was Successfully Resolved”

Posted on by Brad DeLong

Must-Read: When people ask me if Barry Eichengreen is in, I sometimes say: No, he is in the 1920s. But he will be coming back via time machine and in his office this afternoon.

Now I learn that I was wrong: that he has been visiting Charles Wyplosz, whose home base is a parallel universe in which the Euro crisis was successfully resolved in 2010:

Barry Eichengreen and Charles Wyplosz: How the Euro Crisis Was Successfully Resolved: “When the newly elected Greek government of George Papandreou…

…revealed that its predecessor had doctored the books, financial markets reacted violently. This column discusses the steps implemented by policymakers following this episode, which were essential in resolving the Crisis. What is remarkable, in hindsight, is the combination of pragmatism and reasoning based on sound economic principles displayed by European leaders. Instead of finger pointing, they acknowledged that they were collectively responsible for the Crisis….

A miracle [was] made possible by a combination of steely resolve and economic common sense. In their historic 11 February 2010 statement, European heads of state and government acknowledged that the Greek government’s debt was unsustainable. Rather than ‘extend and pretend’, they faced reality…. Greece, European leaders insisted, had to restructure its debt as a condition of external assistance…. Trichet, rather than opposing debt restructuring, opposed the Emergency Liquidity Assistance, noting that the ECB’s mandate limited it to lending against good collateral. German Chancellor Angela Merkel and French President Nicolas Sarkozy, not happy that their banks had recklessly taken positions in Greek bonds, agreed that those banks should now bear the consequences. If banks failed, then the German and French governments would resolve them, bailing in stakeholders while preserving small depositors. Chancellor Merkel was adamant: asking Greek taxpayers to effectively bail out foreign banks was not only unjust but would aggravate moral hazard….

[The] IMF staff’s debt-sustainability analysis showed that Greece’s debt was already too high for [any] large loan to be paid back…. The managing director quickly concluded that the expedient path was to ally with European leaders and embrace the priority they attached to debt restructuring. At the landmark meeting of the IMF Executive Board on Sunday 10 May, European directors overrode the objections of the US Executive Director. The Board agreed on a programme assuming a 50% haircut on Greek public debt…. Fiscal consolidation was still required but for the moment would be limited to 5% of GDP, which was just possible for Greece’s new national union government to swallow. 

In return for this help, Greece was asked to prepare a programme of structural reforms, starting with product market reform… [which] lowered prices and increased households’ spending power, thereby not worsening the recession…. Programme documents gave the Greek authorities considerable leeway in the design of these measures and acknowledged the reality that they would take time to implement. The Greek government having been reassured of IMF support commenced negotiations with its creditors. A market-based debt exchange, in which investors were offered a menu of bonds with a present value of 50 cents on the euro, was completed by the end of the year…

Must-read: Barry Eichengreen: “Reforming or Deforming the Fed?”

Posted on by Brad DeLong

Barry Eichengreen: Reforming or Deforming the Fed?: “Some… proposals by Bernie Sanders… deserve to be taken seriously…

…The fact that three of the nine directors of the Fed’s regional reserve banks are private bankers is an anachronism that creates the appearance, and potentially the reality, of a conflict of interest. Sanders’ suggestion that the US president, rather than their own directors, nominate the regional reserve banks’ presidents is also worthy of consideration…. The peculiar arrangements prevailing today were designed to overcome the financial sector’s opposition to the establishment of a central bank when the Federal Reserve Act was passed in 1913. This, clearly, is no longer the problem….

Other proposals… are more dubious…. To release full transcripts six months after Fed meetings would guarantee a scripted debate. Meaningful discussion would simply move to the anteroom. The result, perversely, would be a decline in policy transparency.

Must-read: Barry Eichengreen: “Reforming or Deforming the Fed?”

Posted on by Brad DeLong

Barry Eichengreen: Reforming or Deforming the Fed?: “Proposals for a ‘Taylor rule’ are… merely a formula purporting to explain…

…why the Fed set its policy interest rate as it did in the 1980s and early 1990s, the period Taylor considered in his original study… a guide for desirable policy only if one thinks that the policies followed in that period were desirable, or, more to the point, that similar policies will be desirable in the future. It provides no direct way to address other concerns, such as financial stability, which most people will agree should, in light of recent events, figure more prominently in monetary-policy decisions.