Must-Read: Gene Smolensky says Bob Reich’s latest book is truly excellent:
: Saving Capitalism: For the Many, Not the Few: “The New Property…
The New Monopoly… The New Contracts… The New Bankruptcy… The Enforcement Mechanism… The Meritocratic Myth… The Hidden Mechanisms of CEO Pay… The Subterfuge of Wall Street Pay… The Declining Bargaining Power of the Middle… The Rise of the Working Poor… The Rise of the Non-Working Rich…
Must-Read: (2012): Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds: “Start by assuming that future innovation propels growth…
in per-capita real GDP at the same rate as in the two decades before 2007, about 1.8 percent per year…. Baby-boomer retirement (the reversal of the demographic dividend) brings us down to 1.6 and the failure of educational attainment to continue its historical rise takes us to 1.4 percent…
And adding 1.0%/year population growth gets us up to 2.4%/year as the U.S. economy’s future projected rate of economic growth.
Must-Read: I do not understand China. But it now looks more likely than not to me that Xi Jinping’s rule will lose China a decade, if not half a century…
: Chairman of Everything: “Two curious articles appeared in government-linked news media…
…The first [was] written in an allegorical style traditionally used in China to criticise those in power, in this case in the form of an essay praising the seventh-century emperor, Taizong, for heeding a plain-talking courtier… [and] called for more debate and freer speech at a time when China’s president, Xi Jinping, has been restricting both. ‘The ability to air opinions freely often determined the rise and fall of dynasties,’ it said. ‘We should not be afraid of people saying the wrong things; we should be afraid of people not speaking at all.’ The second article, in the form of an open letter, ran—fleetingly—on a state-run website. ‘Hello, Comrade Xi Jinping. We are loyal Communist Party members,’ the letter began. It called on Mr Xi to step down and eviscerated his record in office. The president, it said, had abandoned the party’s system of ‘collective’ leadership; arrogated too much power to himself; sidelined the prime minister, Li Keqiang; caused instability in equity and property markets; distorted the role of the media; and condoned a personality cult….
The historical essay was reposted on the disciplinary commission’s website (where it remains); it was clearly more than the work of a single disgruntled editor. The letter may have been planted by a lone dissident who managed to hack into an official portal, but it raised many eyebrows in China. The police have reportedly detained around 20 people…. When he became the party’s leader in 2012, more was known about Mr Xi’s family and personal qualities than about his politics. He was a princeling…. Mr Xi had spent almost 20 years in Fujian, a southern province far from political nerve-centres. More is now clear. As Geremie Barmé, an Australian academic, puts it, Mr Xi is China’s ‘COE’, or chairman of everything….
Mr Hu was a wooden leader whose rule was overshadowed by the retired Mr Jiang; Mr Jiang, while in power, had to bow to his retired predecessor, Deng Xiaoping; even Deng trod carefully for fear of upsetting fellow party elders. Mr Xi, like Mao, appears unfettered by such concerns. He wants the country to know it, too…. Mr Xi is no Mao, a man whose whims caused the deaths of tens of millions and who revelled in the hysteria of his cult. But he rules in a way unlike any leader since the Great Helmsman. After Mao’s death, Deng tried to create a leadership of equals in order to push China away from Maoist caprices. Mr Xi is turning from that system back towards a more personal one. Indeed, he is more of a micromanager than Mao ever was….
The anti-corruption campaign has involved a radical change in the unwritten rules that have held the party together since the near civil war that Mao inflicted on it…. The anti-graft campaign is popular with the public, which suffers hugely from officials’ corruption, negligence and incompetence (a scandal that came to light in March involved rampant corruption in the state’s oversight of the sale and use of vaccines). But it has dismayed officials, many of whom have responded with passive resistance and fear-driven inertia…. Mr Xi has also sown alarm throughout the 2.3m-member People’s Liberation Army (PLA), the collective name for the armed forces. He has arrested generals for graft who were once considered untouchable, announced a trimming of the ranks by 300,000, shaken up the outdated command structure and slimmed down the top-heavy high command. Any one of these moves would have been impressive…. Mr Xi’s willingness to take on these tasks simultaneously suggests remarkable confidence….
Both in his reforms of the PLA and in his fight against corruption, Mr Xi’s actions aim first and foremost at tightening control: both the party’s over the army and his own over the party. It is similar in other areas of politics…. Mr Xi is determined to reimpose discipline on a querulous society that in recent years, thanks to the rapid spread of social media, has become much better equipped to organise itself independently of the party and to evade official controls. In the war against dissent, however, Mr Xi is facing visible resistance. Ren Zhiqiang, a property mogul turned commentator, said the media should serve readers and viewers, not the party….
Mr Xi has been even more hesitant in his handling of the economy. Months after taking power, he proclaimed that under his leadership markets would play a ‘decisive’ role. Since last year he has begun to talk of a need for ‘supply-side’ reforms, implying that inefficient, debt-laden and overstaffed state-owned enterprises (SOEs)—ie, most of them—need shaking up. But his approach has been marked by uncertainty, U-turns and, occasionally, incompetence…. Mr Xi’s lack of clear focus on the economy, and his unwillingness to let people more expert in such matters (namely, the prime minister, Mr Li) handle it, have caused a series of errors…. Markets are unpredictable and no Chinese leader (including Mr Xi) has any experience of the way they work in Western economies. But it is also likely that Mr Xi’s desire to hog power is partly to blame…. Mr Xi understands power, is not afraid to use it and is willing to take risks. He understands less about the new complexities of a changing society and worries about social unrest, so plays safe. He does not understand the economy well, is not sure what to do and does not trust others to act for him.
The way Mr Xi rules has three broad implications. The first is that problems common to all dictatorships will grow…. Another implication is that it is no longer reasonable to argue that China is a model of an authoritarian country opening up economically without doing so politically…. The third is that Deng’s policy of putting ‘economic construction at the centre’ is no longer the country’s most hallowed guiding principle. For Mr Xi, politics comes first every time…. The success of Mr Xi’s rule will rest not just on whether he wins the battles he has chosen to fight, but on whether he has picked the right ones. Seen from the point of view of China as a whole, it does not look as if he has. Mr Xi seems bent on strengthening his party and keeping himself in power, not on making China the wealthier and more open society that its people crave.
Must-Read: : The internet and the Productivity Slump: “How much would an average American, whose annual disposable income is $42,300…
…need to be paid in order to be persuaded to give up their mobile phone and access to the internet, for a full year? Would it be more, or less, than $8,400 for the year?… Chad Syverson… calculates that the productivity slowdown in the US is equivalent to about $2.7 trillion of lost output per annum by 2015. Even on the most generous method that he can find to calculate the extent of the underestimated consumer surplus from the digital economy, he reckons that only about one third of the productivity gap can be explained in this way…. He suggests, on prima facie grounds, that few people would value their access to the digital economy at one fifth of their disposable income. Maybe, but… most people are now extremely reliant upon, or addicted to, the internet, especially via their smartphones. Faced with the choice, I doubt whether they would be prepared to be transported back to the obsolete technology of a decade ago in exchange for an annual payment of less than, say, a few thousand dollars a year–i.e. far less than than the value currently accorded to digital activity in GDP…
Must-Read: Invest like mad in your technology drivers–even if it looks as if they are not the most profitable. But, conversely, don’t keep pouring money into things that used to be technology drivers but are no longer. And keep your mind open and place many bets as to what your future true technology drivers will be:
: Andy Grove and the iPhone SE: “While [Gordon] Moore is immortalized for having created ‘Moore’s Law’…
…the fact that the number of transistors in an integrated circuit doubles approximately every two years is the result of a choice made first and foremost by Intel to spend the amount of time and money necessary to make Moore’s Law a reality… and the person most responsible for making this choice was Grove…. Grove [also] created a culture predicated on a lack of hierarchy, vigorous debate, and buy-in to the cause (compensated with stock)…. Intel not only made future tech companies possible, it also provided the template for how they should be run….
Grove’s most famous decision…. Intel was founded as a memory company… the best employees and best manufacturing facilities were devoted to memory in adherence to Intel’s belief that memory was their ‘technology driver’…. The problem is that by the mid-1980s Japanese competitors were producing more reliable memory at lower costs (allegedly) backed by unlimited funding from the Japanese government…. Grove soon persuaded Moore, who was still CEO to get out of the memory business, and then proceeded on the even more difficult task of getting the rest of Intel on board; it would take nearly three years for the company to fully commit to the microprocessor….
Intel today is still a very profitable company…. [But] the company’s strategic position is much less secure than its financials indicate, thanks to Intel’s having missed mobile. The critical decision came in 2005…. Steve Jobs was interested in… the XScale ARM-based processor… [for] the iPhone. Then-CEO Paul Otellini….
We ended up not winning it or passing on it, depending on how you want to view it. And the world would have been a lot different if we’d done it…. You have to remember is that this was before the iPhone was introduced and no one knew what the iPhone would do…. At the end of the day, there was a chip that they were interested in that they wanted to pay a certain price for and not a nickel more and that price was below our forecasted cost. I couldn’t see it. It wasn’t one of these things you can make up on volume. And in hindsight, the forecasted cost was wrong and the volume was 100x what anyone thought.
It was the opposite of Grove’s memory-to-microprocessor decision: Otellini prioritized Intel’s current business (x86 processors) instead of moving to what was next (Intel would go on to sell XScale to Marvell in 2006), much to the company’s long-term detriment…
Debunking America’s Populist Narrative: BERKELEY – One does not need to be particularly good at hearing to decipher the dog whistles being used during this year’s election campaign in the United States. Listen even briefly, and you will understand that Mexicans and Chinese are working with Wall Street to forge lousy trade deals that rob American workers of their rightful jobs, and that Muslims want to blow everyone up.
All of this fear mongering is scarier than the usual election-year fare. It is frightening to people in foreign countries, who can conclude only that voters in the world’s only superpower have become dangerously unbalanced. And it is frightening to Americans, who until recently believed – or perhaps hoped – that they were living in a republic based on the traditions established by George Washington, Abraham Lincoln, and Teddy and Franklin Roosevelt. READ MOAR
Must-Read: : The State of American Politics: “Paul Ryan, in a speech…
…on the state of American politics, says:
We don’t lock ourselves in an echo chamber, where we take comfort in the dogmas and opinions we already hold.
Followed by:
… in 1981 the Kemp-Roth bill was signed into law, lowering tax rates, spurring growth, and putting millions of Americans back to work.
Bruce Bartlett:
… I was the staff economist for Rep. Jack Kemp (R-N.Y.) in 1977, and it was my job to draft what came to be the Kemp-Roth tax bill, which Reagan endorsed in 1980 and enacted the following year…. Republicans like to say that massive growth followed the Reagan tax cut. But average real GDP growth during Reagan’s eight years in the White House was only slightly above the rate of the previous eight years: 3.4 percent per year vs. 2.9 percent. The average unemployment rate was actually higher under Reagan than it was during the previous eight years: 7.5 percent vs. 6.6 percent…
The highly-estimable Jared Bernstein has a very nice piece today. It attempts to sum up a great deal about the state of the economy in a very short space with five super-short equations;
So, first, let us listen to Jared:
: Five Simple Formulas: “Here are five useful, simple… inequalities…
…Each one tells you something important about the big economic problems we face today or, for the last two formulas, what we should do about them. And when I say ‘simple,’ I mean it….
[1] r>g… that if the return on wealth, or r, is greater than the economy’s growth rate, g, then wealth will continue to become ever more concentrated….
[2] S>I… Bernanke’s imbalance…. Larry Summers’ ‘secular stagnation’ concerns offer a similar, though somewhat more narrow, version. For the record, I think this one is really serious (I mean, they’re all really serious, but relative to r>g, S>I is underappreciated)…. In theory, there are key mechanisms in the economy that should automatically kick in and repair the disequilibrium…. Central bankers, like Bernanke and Yellen, tend to discuss S>I and the jammed mechanisms just noted, as ‘temporary headwinds’ that will eventually dissipate (Summers disagrees). But while it has jumped around the globe—S>I is more a German thing right now than a China thing (Germany’s trade surplus is 8 percent of GDP!)—the S>I problem has lasted too long to warrant a ‘temporary’ label….
[3] u>u… Baker/Bernstein’s slack attack…. For most of the past few decades—about 70 percent of the time, to be precise—u has been > than mainstream estimates of u, meaning the job market has been slack…. From the 1940s to the late 1970s, u*>u only 30 percent of the time, meaning the job market was mostly at full employment….
[4] g>t… [Richard] Kogan’s cushion…. For most of the years that our country has existed (he’s got data back to 1792!), the economy’s growth rate (g again) has been greater than the rate the government has to pay to service its debt, which I call t. Kogan calls it r since it’s a rate of return, but it’s not the same r as in Piketty (which is why I’m calling it t)….
[5] 0.05>h… the DeLong/Summers low-cost lunch…. When the private economy is weak, government spending can be a very low-cost way to lift not just current jobs and incomes, but future growth as well…. The ‘h’ stands for hysteresis, which describes the long-term damage to the economy’s growth potential when policy neglect allows depressed economies to persist over time…. As an increase in current output by a dollar raises future output by at least a nickel, the extra spending will be easily affordable. But how do we know if 0.05>h? In a follow-up paper for CBPP’s full-employment project, D&S, along with economist Larry Ball, back out a recent number for h that amounts to 0.24, multiples of the 0.05 threshold, and evidence that, at least recently, h>0.05…
The Piketty inequality, [1] r>g, tells us that we are going to be hard-put to become less of a plutocracy than we are now. Consider Donald Trump. He is, or was back before he decided to concentrate on making money by renting his name out as a celebrity to those who could do management, a lousy manager and a lousy investor. Depending on whether you choose a New York real estate benchmark or a broad stock market benchmark, Trump now is between a quarter and a half as wealthy as he would be if he had simply been a passive investor throughout his career. And that is if he is truly as wealthy as he claims to be. In an environment in which most money feels that it has to be prudent, the plutocracy which can’t afford to take risks has the power of compound interest raising its economic salience over time.
The global investment shortfall inequality, [2] S>I, and the labor-market slack inequality, [3] u>u*, tell us that our major and chronic economic problem here in the Global North is and is for the next generation likely to be an excess of prudent saving looking for acceptable vehicles and of potential workers looking for jobs. This is in striking contradiction to the era 1945-1980 in which our major and chronic economic problems were a potential inflation-causing excess of liquidity and governments that believed or hoped to control inflation via financial repression longer than was feasible. This “secular stagnation” problem of chronic slack demand and excess prudent saving has in fact, been the major and chronic economic problem in the Global North since 1980 in Europe and since 1990 in Japan. But we here in the United States paid little notice until the problem spread to us at the start of the 2000s.
Richard Kogan’s observation [4] g>t is this: The United States economy is not and has not been dynamically inefficient in a growth-theory capital-intensity sense. It has, however, been chronically short of federal government debt valued as a prudent investment vehicle for savers. The Treasury’s borrowing operations have, therefore, been on balance not a cost reducing the resources that can flow through from taxes to useful government expenditures, but rather a profit center. A national debt is thus, in Alexander Hamilton’s words, a national blessing. And in the range of debt the U.S. has possessed, a larger national debt has been a national blessing not just for the country as a whole but even from the narrow perspective of the Treasury, in that it is made it easier for the Treasury to balance its books.
And one of the major points of DeLong and Summers (2012), [5] 0.05>h, is that at current levels of debt and interest rates the United States does not run increasing risks but rather runs reduced risks by aggressively borrowing and spending. Whatever you think the risks of a U.S. debt crisis are, they are greater with a higher debt-to-GDP ratio. But the current configuration of the U.S. and Global North economies is such that higher government deficits now reduce the projected debt-to-GDP ratio and the associated debt-financing burden however serious you think that debt-financing burden is. And this will remain the case until (a) interest rates “normalize” (if they ever do), and (b) the economy reattains potential output (if it ever does).
The corollary, of course, is that state governments and the Republican Congressional Caucus and even Treasury Secretaries Jack Lou and Tim Geithner and President Barack Obama have been both retarding the short- and long-run growth of the American economy and raising the long-term risks of financial crisis by focusing so much on reducing the government deficit.
In my view, the economics of Abba Lerner—what is now called MMT—is not always right: It is not always possible for the government to spend freely to attain full employment, use monetary policy to keep the debt under control, and rely on rising inflation as the only signal needed of whether and when policy needs to be tightened. Why not? Because it is possible that the bond market can get itself into an unsustainable position, in which underlying inflationary pressures are masked until it is too late to rebalance government finances without a financial crisis.
But, in my view, right now the economics of Abba Lerner is 100% correct. The U.S. (and Europe!) should use expansionary fiscal policy to rebalance the economy at full employment and potential output. And interest rates are so low that doing so does not require any additional monetary policy steps to keep the debt under control.
Japan, alas, confronts us with a difficult and much more devilish program of economic policy. Partial and nearly painless debt repudiation via inflation and financial repression seems to me to be the best way forward—if that can be attained. But more on that anon.
Must-Read: : Five Simple Formulas: “Here are five useful, simple… inequalities…
…Each one tells you something important about the big economic problems we face today or, for the last two formulas, what we should do about them. And when I say ‘simple,’ I mean it…. r>g… that if the return on wealth, or r, is greater than the economy’s growth rate, g, then wealth will continue to become ever more concentrated….
S>I… Bernanke’s imbalance…. Larry Summers’ ‘secular stagnation’ concerns offer a similar, though somewhat more narrow, version. For the record, I think this one is really serious (I mean, they’re all really serious, but relative to r>g, S>I is underappreciated)…. In theory, there are key mechanisms in the economy that should automatically kick in and repair the disequilibrium…. Central bankers, like Bernanke and Yellen, tend to discuss S>I and the jammed mechanisms just noted, as ‘temporary headwinds’ that will eventually dissipate (Summers disagrees). But while it has jumped around the globe—S>I is more a German thing right now than a China thing (Germany’s trade surplus is 8 percent of GDP!)—the S>I problem has lasted too long to warrant a ‘temporary’ label….
u>u… Baker/Bernstein’s slack attack…. For most of the past few decades—about 70 percent of the time, to be precise—u has been > than mainstream estimates of u, meaning the job market has been slack…. From the 1940s to the late 1970s, u*>u only 30 percent of the time, meaning the job market was mostly at full employment….
g>t… [Richard] Kogan’s cushion…. For most of the years that our country has existed (he’s got data back to 1792!), the economy’s growth rate (g again) has been greater than the rate the government has to pay to service its debt, which I call t. Kogan calls it r since it’s a rate of return, but it’s not the same r as in Piketty (which is why I’m calling it t)….
0.05>h… the DeLong/Summers low-cost lunch…. When the private economy is weak, government spending can be a very low-cost way to lift not just current jobs and incomes, but future growth as well…. The ‘h’ stands for hysteresis, which describes the long-term damage to the economy’s growth potential when policy neglect allows depressed economies to persist over time…. As an increase in current output by a dollar raises future output by at least a nickel, the extra spending will be easily affordable. But how do we know if 0.05>h? In a follow-up paper for CBPP’s full-employment project, D&S, along with economist Larry Ball, back out a recent number for h that amounts to 0.24, multiples of the 0.05 threshold, and evidence that, at least recently, h>0.05…
Must-Read: : Manufacturing didn’t leave; it left workers behind: “America’s blue-collar aristocracy fell on hard times long ago…
…but its ghost remains influential in politics. That much is clear from Hillary Clinton’s vow to ‘bring manufacturing back’ and Donald Trump’s railing against the ‘mortal threat to American manufacturing’ (presumably any number of foreign countries with which the US trades, but in this case the target was the Trans-Pacific Partnership trade agreement). One problem with this rhetoric, politically potent though it may be, is that manufacturing has never left the US. As the chart below shows, manufacturing output has grown at a steady pace for decades, only temporarily thrown off course by recessions before returning to its previous trend. American factories today produce as much as they ever have.
Of course the number of jobs in manufacturing has fallen deeply — US manufacturing employment peaked in the 1970s — with particularly steep slides in the recessions of the 2000s. And this is what drives the rhetoric, and makes the Trans-Pacific Partnership a particularly delicate issue, in the current US political campaign. Mark Muro and Siddharth Kulkarni are quite right to refer to the blue line above as a one-chart explanation of why voters are angry. That’s understandable even though, as Jeffrey Rothfeder points out, job numbers in US manufacturing have been on a steady increase since 2010. However, the fact that output has kept going up while employment has sunk like a stone means that the political narrative of manufacturing activity ‘stolen’, or whisked away to other countries, doesn’t quite add up. What the numbers show is, by definition, that manufacturing has become more productive as well as increasing in total output. In other words, what has been happening — since the 1970s — is a productivity-boosting restructuring, not a shrinkage…