Tag: James Kwak

Three Books for 2017: Economics for the Common Good, Janesville, Economism

Posted on by Brad DeLong
3 books

Ken Murphy asked me for three books for 2017. Mine are: Amy Goldstein: Janesville: An American Story, Jean Tirole: Economics for the Common Good, and James Kwak: Economism: Bad Economics and the Rise of Inequality:

  • Amy Goldstein: Janesville: An American Story (9781501102233): The best of the very large and very uneven crop of ground-level books attempting to explain why those parts of America that are treading water or losing ground have been unable to adapt to changing technology and organization in the global economy…

  • Jean Tirole: Economics for the Common Good (9780691175164): A very wise book on what high-quality economics is and is not, from the guy who was truly the smartest guy in the room back when I spent a year as a young lecturer in the MIT economics department…

  • James Kwak: Economism: Bad Economics and the Rise of Inequality (9781101871195): How a very large part of the economics profession has failed to get the true message of economics through its own biases and the political and ideological filters…

Amy Goldstein: Janesville: An American Story (9781501102233): This is the best of the very large and very uneven crop of ground-level books attempting to explain why those parts of America that are treading water or losing ground have been unable to adapt to changing technology and organization in the global economy. General Motors closed its Janesville plant in 2008 as it teetered on the edge of bankruptcy. Students began showing up at the local high school hungry and dirty. Teachers and others started social service organizations to supply them with supplies and food. Contributions to local charities fell off just when the need spiked. The closing of the GM plant triggered the closing of its nearby supplier plants as well.

The GM assembly-line workers had earned \$30 an hour at the plant. Some—a few—maintain their paychecks by becoming “birds of passage” working at still-open GM plants in other states. Others see their paychecks collapse: settle at jobs paying half as much, and with minimal benefits. For nobody was willing to pay anywhere near \$30 an hour for the skills and the energy of ex-GM workers. And the ex-workers could not use their skills and energy themselves to find a retraining path to anywhere near the pay levels that GM had offered them.

The big flaw, of course, is Amy Goldstein’s ignorance of and unwillingness to learn about the macro picture that makes the closing of the GM plant so devastating for Janesville. Plants, after all, close all the time because the money being spent on the products they had made is diverted to purchase other commodities made more efficiently that promote greater prosperity. Why weren’t the Janesville ex-workers able to benefit from spillovers from that greater efficiency and greater prosperity? Goldstein has no clue.

Jean Tirole: Economics for the Common Good (9780691175164): This is a very wise book on what high-quality economics is and is not, from the guy who was truly the smartest guy in the room back when I spent a year as a young lecturer in the MIT economics department. “The distinctive characteristic of academics”, Tirole writes, “their DNA, is doubt”. This creates a substantial tension: economists need to teach what they know not just to their peers and their students but to the public sphere; but the public sphere today—did it ever?—does not want nuanced arguments from two-handed economists. Cable TV and Twitter do not like to be told: “It is difficult to tell”. Yet, often, that is what Tirole has to say. Nevertheless, Tirole thinks—and I agree—that we have no alternative but to try: we must imagine Sisyphus happy.

In its thoughtful discussions of market-state interactions, boundaries, and synergies; in its focus on the government’s role not in prescribing actions but remedying information and other externalities; in its pleas for a diversified portfolio of institutional forms; in its speculations about the long-run impact of information and communications technology revolutions; in its use of the economics of information as an organizing principle; in its rich institutional detail; in its application of theory to real-world examples; and in its (much appreciated) boosterism for behavioral economics—this is the best book I read in 2017.

James Kwak: Economism: Bad Economics and the Rise of Inequality (9781101871195): This is a very good book about how a very large part of the economics profession has failed to get the true message of economics through its own biases and the political and ideological filters.

First of all, I think the book is mistitled. It is not economics that becomes a misleading and destructive ideological “-ism”. Rather, it is, as my friend Noah Smith puts it, it is Econ 101—supply and demand, and where the curves cross is always the bet place to be—that became a misleading and destructive ideological “-ism”.

Second, as James Kwak writes, Econ 101 became a misleading and destructive ideological “-ism” because it suited the interest of powerful groups with megaphones that it become so: neoclassical economics badly done via those who learned little economics simplistically applying the most basic supply-and-demand models. Our large upward leap in inequality, the financial crash, and the large holes in our safety net are some of the current flaws in America that Kwak traces to 101-ism. And he is in large part correct do so. 101-ism makes people think that whatever inequality there is in the current market is natural and just, and that government policies will always reduce wealth by generating Harberger triangles. And these are very convenient beliefs for plutocrats—not for plutocrats to hold them, but for those who pay rents to plutocrats to hold in order to make plutocrats richer.

Noah Smith hopes that empirical evidence will disrupt and dismantle 101-ism:

The economics discipline itself has been shifting from theory to data for years now, and the world is taking notice. Every time studies show that tax cuts don’t do much to encourage investment, or that the impact of minimum wage hikes is modest, the public loses a little faith in the power of traditional Econ 101. The cure… is more and better economics…. Americans are now starting to question economism because of declining median income, spiraling inequality and a huge financial and economic crisis…

I think Noah is wrong here: 101-ism provides a simple and powerful intellectual framework easily grasped that makes sense of a complicated world and also works to the advantage of people with a great deal of money who benefit from its spread. Thought is vulnerable to simplistic theories which then gain an unshakeable hold. Simplistic theories are easily propagated because they are, well, simplistic. When it is in the interest of someone with resources that others believe a doctrine, they will devote their resources to spreading it. And it is very difficult to convince somebody of anything when their pocketbook or their sense of self-worth depends on their thinking otherwise. 101-ism thus has powerful material and cognitive advantages over alternatives. And the only thing that the alternatives have going for them is that they are the truth.

I think that James Kwak is showing us here both how much and how little arguments based on the truth can do in the modern public sphere.

But, as I said in talking about Jean Tirole’s Economics for the Common Good: we must imagine Sisyphus happy…

James Kwak Thinks About Lessons from Steve Cohen’s and My “Concrete Economics”

Posted on by Brad DeLong

James Kwak has, I think, an attack of pessimism of the will–declares that our current dysfunctional economic institutions and policies benefit the “financial institutions, financial professionals, corporate executives, and rich people” who “basically control the American political system”, and so “things are unlikely to change anytime soon”.

I disagree:

Thanks Obamacare America s Uninsured Rate Is Below 10 For First Time Ever Forbes

And the uninsured rate is likely to dip below 8% when the remaining nullification states finally expand their Medicaid programs.

James:

James Kwak: Hamilton Everywhere, All the Time:

Alexander Hamilton is a big deal these days…. Stephen Cohen and Brad DeLong have titled their new book Concrete Economics: The Hamilton Approach to Economic Growth and Policy… about an overall attitude of which Hamilton cited as an exemplar: in short, a pragmatic rather than ideological approach to policymaking…. The best contrast is between the Republican Party c. 1955–which used state power to suburbanize the country, build up the military, and spin off the technologies that turbocharged productivity growth–and the Republican Party of the past 35 years….

The big question is why the we had this major transformation… [1] people suddenly started believing ‘neoclassical’ economic theories about the benefits of free markets (particularly for capital) and small government, and then acted on those beliefs… [2] financial institutions, financial professionals, corporate executives, and rich people generally all stood to gain…. Superstructure, base…. Both stories are true….

To turn the tide, it won’t be enough simply to tell people that they should be more practical and less ideological. Powerful interest groups have to decide that they would be better served by different policies based on different ideas…. But… the very wealthy–who basically control the American political system–seem to be happy with the way things are. Which is one indication that things are unlikely to change anytime soon…

James and the rest of us need to think harder about just how it is that “the very wealthy… basically control the American political system”–how it is that large chunks of the white working class votes for politicians like Mitt Romney who view them as losers:

Forty-seven percent of Americans pay no income tax. So our message of low taxes doesn’t connect. And he’ll be out there talking about tax cuts for the rich. I mean that’s what they sell every four years. And so my job is not to worry about those people–I’ll never convince them that they should take personal responsibility and care for their lives…

In my view, it used to be that there were conservatives and libertarians who believed in small government and low taxes. And it used to be the case that there was the Goldwater turn–that if one only made the jump to the position that the first and most important liberty was the liberty to discriminate against Black people, then you could build electoral majorities for conservative-libertarian economic policies. Maybe, then, with that alliance in place, James was correct

But now there is the new turn–ditching the conservative-libertarian economic policies and doubling down on discriminating not just against African-Americans but “Mexicans”, “Asians”, all Muslims.

And so things are once again in motion. And that is why I think–and Steve thinks–that pragmatic American technocracy may once again become possible.

Must-read: James Kwak: “Profits in Finance”

Posted on by Brad DeLong

Must-Read: It used to be that we collectively paid Wall Street 1% per year of asset value–which was then some 3 years’ worth of GDP–to manage our investment and payments systems. Now we pay it more like 2% per year of asset value, which is now some 4 years’ worth of GDP. My guess is that, at a behavioral finance level, people “see” commissions but do not see either fees or price pressure effects.

Plus there is the cowboy-finance-creates-unmanageable-systemic-risk factor, plus the corporate-investment-banks-have-no-real-risk-managers factor. We are paying a very heavy price indeed for having disrupted our peculiarly regulated and oligopoly-ridden post-Great Depression New Deal financial system:

James Kwak: Profits in Finance: “Expense ratios on actively managed mutual funds have remained stubbornly high…

…Even though more people switch into index funds every year, their overall market share is still low—about $2 trillion out of a total of $18 trillion in U.S. mutual funds and ETFs. Actively managed stock mutual funds still have a weighted-average expense ratio of 86 basis points. Why do people pay 86 basis points for a product that is likely to trail the market, when they could pay 5 basis points for one that will track the market (with a $10,000 minimum investment)? It’s probably because they think the more expensive fund is better. This is a natural thing to believe. In most sectors of the economy, price does correlate with quality, albeit imperfectly…. And this is one area where I think marketing does have a major impact, both in the form of ordinary advertising and in the form of the propaganda you get with your 401(k) plan…. The persistence of high fees is partly due to the difficulty of convincing people that markets are nearly efficient and that most benchmark-beating returns are some product of (a) taking on more risk than the benchmark, (b) survivor bias, and (c) dumb luck.

Morning Must-Read: James Kwak: Tax Policy Revisionism

Posted on by Brad DeLong

James Kwak: Tax Policy Revisionism: “In an otherwise unobjectionable article…

…the generally excellent David Leonhardt wrote… In the 1950s, the top rate exceeded 90 percent. Today, it is 39.6 percent, and only because President Obama finally won a yearslong battle with Republicans in early 2013 to increase it from 35 percent.”… The 39.6 percent tax rate… was lowered to 35 percent by the 2001 Bush tax cut, which had a sunset provision at the end of 2010…. The 35 percent rate was then extended for two years by the December 2010 tax cut, which was supported by President Obama…. It finally expired on January 1, 2013, at which point the 39.6 percent rate reappeared in its original form. A few hours later, Congress passed a new tax cut for just about everyone, except households with income over $450,000, who were left with the 39.6 percent rate…. President Obama didn’t fight a battle with Republicans. He fought a battle with himself. In 2010 and 2012 he could have restored the top tax rate to 39.6 percent simply by doing nothing and letting the Bush tax cuts expire. The January 2013 tax bill also locked in big tax preferences for capital gains and dividends…. President Obama talks a good game when it comes to inequality, but he hasn’t backed it up…. [In] tax policy, his main impact has been to make permanent most of the inequality-increasing tax cuts that were his predecessor’s most treasured legacy.