Tag: political economy

Ten Current-Situation Questions for Brad DeLong

Posted on by Brad DeLong

(1) Recession Chances?: The chances of recession are smmall, but not very small. Robert Solow likes to quote Damon Runyon that nothing between humans is more than 3 to 1. We have a very hard time imagining how fat the tails are–and so even when things look clear there are always dangers surprisingly close

That said, expansions do not die of natural causes. It is true that the unwinding of malinvestment balances is a fraught moment. But we climbed down from the dot-com bubble successfully. And we almost climbed down from the housing bubble successfully—I confess that even in July 2008 I thought we were going to make it. And so I think, today, that we are going to make it without a recession in our near future. (Britain and Texas, on the other hand…)

(2) Secular Stagnation?: If what we call “secular stagnation” were predominantly on the supply side, we would be seeing many more signs of demand exceeding supply and of upward pressure on prices in individual sectors with bottlenecks than we are. As it is, we see only one bottleneck and one sector of significant pressure: housing prices in world cities where NIMBYism rules.

(3) The Equilibrium Level of the Interest Rate?: The case for a lower equilibrium safe real interest rate is the market’s: that is what the market is telling us. The big remaining question his whether this Is because of a shortage of profitable investment opportunities—that we have had a breakdown in that those investments that would promote societal utility cannot be also jiggered to create private profits—or whether it is because it is a shortage of global risk-bearing capacity. And both theories have evidence supporting them.

(4) Should the Fed Have Increased Rates in December?: No. There was no upside I could see. There was some downside that I could see. Now the downside has come to roost and is sitting on the telephone wire. With no possible upside and possible downsides, how could it not have been a mistake ex ante? And with the downside as it has materialized, it does look like a moderate mistake ex post.

(5) A Higher Inflation Target?: Put yourself back in the mid-1990s. There is no way that anybody who foresaw any reasonable possibility of 2008-2016 would have thought that a 2.5%/year CPI-inflation target was a reasonable thing. It would have been 4%/year. And in the long run there is nothing to be gained by desperately trying to hold onto a policy that was and remains unwise. For getting a credible reputation for unwisdom is not the kind of credibility you want.

(6) Fed Performance?: Both Bernanke and Yellen were world-class in their preparation for the job, are world-class in their intelligence and competence, and have done better then any of the other first-world central bankers since 1995. We are lucky. They have avoided repeating previous mistakes. They are making and will continue to make their own mistakes. But what we think we identify in real-time and will identify in retrospect as their policy failures speaks not that they should not have had their jobs but rather of the difficulty of the dive. We are very lucky that GWB and Obama made those appointments, and Senators who did not advise and consent should be deeply ashamed of themselves.

(7) Trump?: The hoped-for scenario if Trump wins is Trump = Schwarzenegger—a Hollywood celebrity who would try to make Hollywood-style deals in politics and, like Schwarzenegger, fail. The feared scenario if Trump wins is Trump = Berlusconi–or, worse, Mussolini. More broadly, if Trump wins and turns out to be less abnormal than his campaign persona–or if Clinton wins–there are then three other scenarios:

  1. There is the total gridlock scenario.
  2. There is the people-realize-that-they-are-“Washington”-and-that-making-“Washington”-disfunctional-is-bad-for-their-long-run-careers scenario, in which case what we used to think of as normal—pre-1993 dealmaking rather than rigid ideological posturing—resumes.
  3. There is the Trump has negative coattails that destroy Republican congressional power scenario.

(8) China?: We do not know if Xi Jinping’s desire to return to “democratic centralism” is at all compatible with a prosperous modern economy. The experience of 19th and 20th Century Europe says no—that authoritarian rule by a caste without a plausible economic role is unstable in the industrial and even more so in the post-industrial age. But maybe Europe is a bad guide. We do not know why the Middle Income Trap is a Thing, or even whether it is really a Thing. But maybe that is a Latin American phenomenon only. China’s long history tells us that the way to bet is that China’s natural condition is to be at the lead as one of the world’s most prosperous and most peaceful regions containing about one-fifth of humanity. If we can take a 200-year perspective, that is probably right. But in a 50-year perspective? Be afraid. Be very afraid.

But it is not a thing I would worry about if either the Federal Reserve or the rest of the U.S. government had both the will and the tools to stabilize aggregate demand in response to what can be, at most, only a moderate adverse shock from China. Unfortunately, the Federal Reserve has the will but may not have the tools. And the rest of the government has the tools but not the will…

(9) Brexit?: Brexit may well not happen. Buyer’s remorse may be very high, and none of the Brexiteers seem to have read the legal documents to figure out which parliaments have to approve Brexit for it to happen or if indeed there can be an Engxit if Scotland, Wales, and Northern Ireland wish their people to retain their EU passports. It is a disaster: investment in England is right now dropping like a stone as everyone decides to wait and see.

Whatever happens–Engxit, Brexit, Morexit, or nothing–Europe will continue to be a very rich part of the world. Profits from investing and producing in Europe will continue to be high. The political economy of Europe will continue to make Germany an export powerhouse. And that means that as long as the world as a whole has slack demand—which looks like a long time—being in a currency union with Germany and being subject to German demands for fiscal policy will inflict considerable drag on the rest of Europe. But it is the strangling of rapid growth and the fumbling of opportunities for economic convergence that is at issue here, not a meltdown or any harder landing then we have already had.

(10) Risks to Emerging Markets?: The conventional economic models that I was taught told me that monetary tightening in the United States was expansionary for emerging markets as long as they allowed the market to value their currencies. That seems to be wrong. But we are confused about why that is wrong. Some say that it is because emerging markets must borrow inflation-fighting credibility from abroad and so cannot afford to let their currencies undergo a clean float. Others say that international capital flows carry not just financing capacity but risk-bearing and entrepreneurship along with them. Therefore: be afraid, be very afraid of the current Fed tightening cycle, although our models of why we should be afraid are pretty-much crap.

As to why growth keeps disappointing, it has always been thus. We tend to focus on the Western European convergence during the 30 glorious years, on the Asian Tigers, on Japan’s Meiji and Showa eras, on China today, and, earlier, on Wilhelmine Germany. But those are the exceptions. The rule is that this is very hard.

Now on some level it makes no sense that this is very hard.

Both Karl Marx and John Stuart Mill around 1850 were certain that the next 50 years would see industrial structure and productivity levels in India converge to the British standard. Mill expected it to be because of world trade, the inculcation of British market-friendly institutions, and good government by himself and all his friends in the India Office. Marx expected it to be because the British Millocracy were throwing a net of railroads across India for their own profit that would, unintentionally, allow the global markets and the world bourgeoisie to do their wonderful, horrible thing that would make the communist revolution to create a free society of associated producers possible, necessary, and very desirable. Both were wrong.

Right now we can ship anything non-spoilable across the world for pennies, talk to anyone, and access any piece of engineering knowledge less than a generation old for free. Yet the world has very steep valleys and peaks. And one billion of our fellow human beings who could do just as well as we do in our pitch and our board meetings if they were properly briefed still live lives barely distinguishable from those of our pre-industrial agrarian age ancestors.

In Which I Call for Academic Scribblers and Funct Economists to Enter into Utopian Frenzy with Respect to the Institutional Design of the Eurozone

Posted on by Brad DeLong
Long Term Government Bond Yields 10 year Main Including Benchmark for Germany© FRED St Louis Fed

Must-Read: From my perspective, this piece at Vox.eu makes many too many bows to conventional-wisdom idols with not just feet but bodies and heads of clay. Thus I cannot sign on to it.

Eleven observations:

  1. The situation is dire. The Eurozone as currently constituted has been a macroeconomic disaster.

  2. The forecast that the authors make is that on the current policy path “economic health will eventually be restored, unemployment will decrease, and the periphery countries will regain competitiveness” is not a real forecast. I think that this is not a real forecast: if it were a real forecast, it would have a date attached, no?

  3. Thus the framing of needed policy changes as things needed to improve “resiliency” just in case things do not “go as forecast” substantially underplays the seriousness of the problem. Fewer readers will pick up on the “things rarely go as forecast” to understand that the forecast is not a forecast.

  4. The first and most obvious feature of the Eurozone is that its interest rates are at the zero lower bound and its economy lacks aggregate demand. A depressed economy at the zero lower bound needs fiscal expansion. If for some reason normal fiscal expansion is feared to be unwise by some holding veto points, the economy needs helicopter drops–backed up by strong commitments by central banks to raise reserve requirements to curb the velocity of outside money should it suddenly become higher rather than lower than desirable.

  5. The bank regulatory system needs responsibility for banks’ rescue to be transferred from national governments to the ESM now. Without that transfer, nation-level governments will continue to make the political calculation that letting supervisory and regulatory standards slide is the more attractive course. It may be true “this is the kind of political step that seems unlikely to be feasible in the near term”. But that does not keep it from being needed now. The purpose of a document like this is to set out what is needed–not to reassure people by claiming that whatever is not politically possible now is not needed now.

  6. Public debt is too high if and only if market interest rates now and forecast for the foreseeable future are about to undergo a rapid and massive jump upward. Right now g > r–which means that public debt is not too high but too low.

  7. How governments should hedge against interest rate increases in a world where g > r is an interesting research question. The obvious route is simply to sell consols. Then, when the real consol rate is higher than the societal return on additional government expenditures, we can talk about what the target debt-to-GDP ratio should be and how to get there. But those who are unwilling to advocate the sale of consols as the obvious way to manage public debt risk have, as long as g > r, no standing to complain that public debts are too high–let alone to set out the proposition that public debt is too high as a self-evident truth.

  8. A massively-underfunded ESM is not “the right institution to deal with [government debt] default”. It is the wrong institution. It is worse than no institution at all, because it allows people to claim that there is a backstop when there is, in fact, no backstop.

  9. The “structural reform” agenda is more-or-less orthogonal to the macroeconomic institution redesign agenda. To even hint that energy that would otherwise be devoted to macroeconomic institution design should be diverted to lobby for structural reform is in its essence a call to do less on macroeconomic institution redesign. And that strikes me as unhealthy.

  10. Now I think that I do understand why the economists below–who are, by and large, among the best economists in the world in their wisdom and in their understanding of the European situation–have made the rhetorical choices that they have. They want to appeal to practical men, who believe they are exempt from any trace of utopian frenzy.

  11. But if the Eurozone is to be a good thing for Europe rather than a millstone around the neck of the continent, I think that utopian frenzy is needed.

Here is the vox.eu column:

Richard Baldwin, Charlie Bean, Thorsten Beck, Agnès Bénassy-Quéré, Olivier Blanchard, Peter Bofinger, Paul De Grauwe, Wouter den Haan, Barry Eichengreen, Lars Feld, Marcel Fratzscher, Francesco Giavazzi, Pierre-Olivier Gourinchas, Daniel Gros, Patrick Honohan, Sebnem Kalemli-Ozcan, Tommaso Monacelli, Elias Papaioannou, Paolo Pesenti, Christopher Pissarides, Guido Tabellini, Beatrice Weder di Mauro, Guntram Wolf, and Charles Wyplosz.: Making the Eurozone more resilient: What is needed now and what can wait?: “Britain voted to leave the EU. This is terrible news for the UK…

…but it is also bad news for the Eurozone. Brexit opens the door to all sorts of shocks, and dangerous political snowball effects. Now is the time to shore up the Eurozone’s resiliency. The situation is not yet dire, but prompt action is needed. This VoxEU column – which is signed by a wide range of leading economists – identifies what needs to be done soon, and what should also be done but can probably wait if markets are patient.

The UK’s choice to leave the EU was, we believe, a historic mistake. But the choice was made; we must now turn to damage control – especially when it comes to the euro.

The Eurozone is growing, albeit slowly. If all goes as forecast, economic health will eventually be restored, unemployment will decrease, and the periphery countries will regain competitiveness.

But things rarely go as forecast – as we were so forcefully reminded last week. Brexit was the latest – but certainly not the last – shock that will challenge the monetary union.

The question is: Is the Eurozone resilient enough to withstand the bad shocks that it is likely to face in the months and years to come?

For many observers, the answer is ‘no’. To survive the next bad shock, they argue, Europe’s monetary union needs major reform and deeper political integration. As such deeper integration is extremely difficult in today’s political climate, pessimism is the order of the day.

We do not share this pessimism. The Eurozone’s construction has surely followed a convoluted process, but the fundamental architecture is now in place. Yes, some measures are needed to strengthen this architecture. And yes, more ambitious steps would improve resilience further, but these will have to wait for a political breakthrough.

The purpose of this essay is to identify what needs to be done soon, and what would be good to do but can probably wait. To avoid the mind-numbing details that often cloud discussions of Eurozone reform, we paint our arguments with a broad brush. (We will follow up with further documents with much greater detail on specific reform proposals.)

On banks and the financial system: Think of a good financial architecture for the Eurozone as achieving two main objectives in coping with another bad shock: 1) reducing the risk of bank defaults; and 2) containing the broader economic effects when defaults do occur.

This architecture is largely built. Both supervision and regulation are now largely centralised. Supervision is improving and stress tests are becoming more credible with each iteration. The Single Resolution Mechanism is in place and private-sector bail-in rules have been defined. The Single Resolution Fund can provide some recapitalisation funds if and when needed. If they turn out not to be enough, the European Stability Mechanism (ESM) can, within the context of a macroeconomic adjustment programme, add more. In the longer term, a euro-wide deposit insurance scheme could improve resiliency, but this will take time.

So what more needs to be done soon?: Mostly to make sure that the rules in place can be enforced. Italy provides two cases in point. First, non-performing loans have steadily increased and are carried on the books at prices substantially above market prices. Second, the Italian government has proven very reluctant to apply the bail-in rules. The credibility of the rules is at stake. Either they have to be applied, or credibly modified.

What are the measures that would be good to take, but can probably wait?: Diversifying the portfolios of banks so that there are more resilient to domestic shocks would clearly be desirable. The focus has been on decreasing the proportion of domestic sovereign bonds in banks’ portfolios. This would be good, but domestic sovereign bonds represent a relatively small proportion of banks’ portfolios. Decreasing banks’ overexposure to domestic loans would also be an important step towards boosting resiliency. A different approach would be to transfer the responsibility for banks’ rescue from national governments to the ESM. But this is the kind of political step that seems unlikely to be feasible in the near term.

On public finances: Public debt is high, even if, for the time being, low interest rates imply a manageable debt service. Just as for the financial system, a resilient public finance architecture needs to:  1) reduce the risk of default; and 2) contain the adverse effects of default, if it were to occur nevertheless.

On both counts, much remains to be done: Reducing the risk of default is best achieved through a combination of good rules and market discipline. Neither is really in place. The accumulation of rules has made them unwieldy, unenforceable, and open to too many exceptions. They can and should be simplified. In most countries, the level of expenditure – rather than the deficit – is the main problem. High expenditure makes it difficult to raise taxes and balance the budget, leading to dangerous debt dynamics. Thus, a focus on expenditure rules, linking expenditure reduction to debt levels, appears to be one of the most promising routes. Market discipline, on the other hand, will not work if the holders of the debt do not know what will happen if and when default takes place. This takes us to the second objective.

The Eurozone has put in place the right institution to deal with default, namely the ESM. Like the IMF, the ESM can, under a programme, help a country adjust. In its current form however, the ESM falls short of what is needed. First, the ESM’s ‘firepower’ is too small compared to the sort of shock-absorbing operations it may be called on to undertake in the case of a large Eurozone nation getting into debt trouble. Second, given its current decision-making procedures, markets cannot be sure that action will be taken promptly. Higher funding or higher leverage, and changes in governance such as replacing the requirement of unanimity by a more flexible one, are needed to make the ESM able to respond quickly and fully to a country in trouble. Third, the current structure is silent on who should negotiate a public debt restructuring in the extreme case where one was needed. Putting an explicit process in place should be a priority; the ESM is the natural place for it.

What other measures which would be good to have, but can probably wait?: Initiatives to address the legacy of high public debt would bolster Eurozone resiliency and thus would be very useful. However, as low interest rates are likely for some time to come, debt service is manageable, and debt forecasts show that debt-to-GDP ratios will slowly decline (absent a bad shock). Since proposals for dealing with legacy national debts would require the sort of political willpower that seems in short supply for now, such plans cannot be realistically put on the ‘do now’ menu, even if they are may be necessary in the future.

Another set of measures would implement stronger risk sharing, and transfer schemes to further reduce the impact of domestic shocks on their own economy. Proposals run from euro bonds to fiscal transfer schemes for countries subject to bad shocks. These measures would make the Eurozone more resilient and thus may be desirable. But, equally clearly, they would require more fiscal and political integration than is realistic to assume at this point. We believe that the Eurozone can probably function without tighter fiscal integration at least for some time.

We end with two sets of remarks:

Solvency and liquidity: Whether it is with respect to banks or states, the two issues facing policymakers are how to deal with solvency and liquidity problems. We have argued that, when solvency is an issue, the ESM is the right structure to address it (assuming a public debt restructuring procedure is in place). With respect to liquidity, we believe that, in addition to the liquidity facilities of the ECB, which can address sudden stops on banks, the Outright Monetary Transactions (OMT) is the right structure to address sudden stops facing states. One step that could be taken soon is a clearer articulation of how to combine the two. This would clarify the role of the ECB, and eliminate a source of criticism about the allocation of roles between the ECB and other Eurozone structures such as the ESM. The resulting clarity would make it easier for markets and investors to be assured that Europe’s monetary union could deal effectively with any future shocks.

Structural reforms: In any country, at any point, some pro-growth structural and institutional reforms are desirable. Is there a particularly strong argument for them in the case of the Eurozone? To some extent, yes. The institutional problems of the euro are made worse by low growth, and demographic change. If the structural and institutional reforms delivered higher growth, this would be good by itself – ignoring distribution effects – and it would allow for faster improvement in bank and state balance sheets.

Those specific structural reforms which allow for faster adjustment of competitiveness, be it through faster cost adjustment or faster reallocation, would also improve the functioning of the monetary union. Implementing such reform is a slow and difficult process, but necessary nonetheless. The Eurozone will never be a well-functioning monetary union until it is much more of an economic union as well.

We have stressed that actions need to be taken soon, while others are more long term, but the long-term questions do need to be discussed without delay.

Do you support this view?: Starting next week, we will open this column to endorsement by economists. Details to be posted on Monday.

Must-Read: Felix Salmon: Little England Just Screwed Us All

Posted on by Brad DeLong

Must-Read: Felix Salmon: Little England Just Screwed Us All: “The world’s bond markets (and, even more, its foreign-exchange markets) tell you everything you need to know…

…Recession in the UK, quite possibly recession in Europe, and extremely nasty spillover effects in the rest of the world, including the U.S. The small-minded burghers of rural England have managed to destroy trillions of dollars of value globally, including to their own investments, pension plans, and housing values. And things will get worse before they get worse: it’s going to take a while for all the subsequent shoes to drop. Make no mistake, the forces set in motion by this vote will not end here. France and Spain will want their own referendums; so will Scotland. Northern Ireland… will request and probably receive a referendum on whether it should just rejoin the Republic of Ireland, and Europe. Britain has been in many ways the most unambiguous winner of the European project: it received all the advantages of free trade with an enormous economic bloc, while also having a floating currency instead of one which was pegged mercilessly to how things were going in Germany….

This vote is also the grimmest of reminders of the power still held by the older generation, not only in the UK but around the world. Young Britons—the multicultural generation which grew up in and of Europe, the people who have only ever known European passports—voted overwhelmingly to remain. They’re the generation that just lost its future. Meanwhile, Britons over the age of 65, fed a diet of lies by a sensationalist UK press, voted by a large margin to leave. Most of them did so out of a misplaced belief that doing so might reduce immigration, or make them better off, or save them from meddling bureaucrats. In a couple of decades, most of those voters will be dead. But the consequences of their actions will resonate far beyond the grave….

The forces of narrow-minded nationalism have tasted a major victory; they will want more, much more. The economic malaise that has beset all of Europe for the past decade will work in their favor, as will the growing inequality that can be seen in almost every country worldwide. International institutions like the European Union, born of an idealistic belief in peace and prosperity, have become avatars of unaccountable power, and are much loathed by the suffering European middle classes. The result is that we are now entering a world in retreat from progress, a world of atavistic nationalisms and mutual distrust, a world in which we demonize foreigners and prefer walls to bridges. In November, the U.S. will have its own plebiscite, and will likely vote along similar lines to Britain. The cities, and the young, will vote for progress, inclusion, and unity. Meanwhile, the white, rural areas and the old will vote for a sepia-tinged dream of a past in which equality was something only straight white men really qualified for. Before the Brexit vote, I didn’t believe it could happen here. But Britain is significantly more cosmopolitan than America, and we managed to shoot ourselves (and all of Europe) straight through the heart.

So, be afraid.

Must-Read: Jamelle Bouie: Is American Really in an Anti-Establishment Rage?

Posted on by Brad DeLong

Must-Read: Jamelle Bouie: Is American Really in an Anti-Establishment Rage?: “The same people who disapprove of Congress will readily re-elect most members to the House and Senate…

…Just 24 percent of Americans described themselves as ‘angry’ about the federal government…. Forty-seven percent said they were dissatisfied, which is similarly low compared with previous surveys…. 85 percent of Americans said they were satisfied [with the economy]…. The number of Americans who say they are personally worse off has taken a sharp decline since the last presidential election…. Layoffs are down… job openings are up; earnings are up…. For all the talk of anger and dissatisfaction in the Democratic primary, it’s also true that a majority of Democrats back the establishment candidate…. And while there’s plenty of evidence for the case that Americans are angry with the political system—in a November survey from NBC News and the Wall Street Journal, 54 percent said the system was ‘stacked’ against them—this doesn’t jibe with the fact that most Democrats are fine with Hillary Clinton as their nominee or that—before Trump won—most Republicans were fine with a conventional candidate as theirs….

Despite this, Americans also insist they’re angry about the political system and dismayed at the country’s direction. And while primary electorates are far from representative of Americans at large, the obvious popularity of figures like Bernie Sanders and Donald Trump speaks to something…. Voters aren’t uniformly frustrated or frustrated in the same ways, and whatever anger and frustration they have doesn’t translate to broad support for either of the candidates who seek to harness it. What we should do, instead, is try to pinpoint the nature of the most salient kinds of anger and frustration. On the right, the most important dynamic is racial resentment and white status anxiety…. On the left, we’re looking at the rumblings of a generation hit hardest by the Great Recession caught in the winds of rising global inequality. And insofar as nonwhites are frustrated with their place in society, it likely owes to moments of highly visible and still consequential discrimination…. But even this complicates the question of discontent. Blacks and Latinos saw the worst of the recession and the recovery: Among Americans, they have the strongest case for disrupting the system. And yet they back Hillary Clinton, who is running for modest gains over the status quo…

Must-Read: Nancy LeTourneau: What Happens When One Party Doesn’t Care About Governing?

Posted on by Brad DeLong

Must-Read: I want to play the bipartisan-technocrat policy game.

The old conventional wisdom was that playing that game was productive and fun. You see, members of the Senate and the House. Thus, and so the two houses–everybody in them–shared the goal of trying to arrange things so that they each looked good to their local constituents. And good technocratic policies were an effective move in that win-win–or mostly win-win–game.

But now? The political-economy and political-structural questions are:

  1. Has this changed–is the game now to make the president of the other party look bad?
  2. Did the game change with the Democrats under Richard Nixon–who was genuinely bad–and have Republicans just been playing tit-for-tat since?
  3. Did the game change with the accession of Newt Gingrich–and his strange and false belief that he would have a better and longer career as a partisan bomb thrower than as a statesman?
  4. Did the game change with George W. Bush–and his decision that Democratic members of the House and Senate who supported him on policy would not be cut any campaign fund-allocation breaks at election time?
  5. Did the game change with the election of a Black man?

And how do we get back–if we can get back? And do we want to get back?

These are all the questions that I wish political scientists were trying to answer for me. Yet few are–save Tom Mann, Norm Ornstein, Rick Perlstein, and a very few others…

Nancy LeTourneau: What Happens When One Party Doesn’t Care About Governing?: “Over the course of the Obama presidency, we’ve watched as Republicans have thrown out many of the norms…

…[Not] just things like shouting ‘You lie!’ in a presidential address… not just a requirement that basically any vote (including presidential nominations) get a super majority… includes… overtly undermining the executive branch during complex negotiations with other countries… failing to give a Supreme Court nominee a hearing… threatening to not raise the debt limit…. These are the kinds of things a party does when it doesn’t care about governing…. I am reminded of something a blogger named mistermix wrote back in 2010 during the height of the budget negotiations.

As Tim F. posted earlier, Ezra Klein thinks that Obama’s a bad poker player…. The analogy isn’t helpful. Poker is a win/lose game. Negotiation is a win/win game…. Republicans aren’t playing poker or negotiating. They are playing another game, call it ‘You Must Lose’. They’re happy with win/lose, if they win, but they’ll tolerate lose/lose as long as Obama loses. The only analogy that springs to mind when I look at the Republicans’ recent behavior is a bad divorce…. Bob is so hell-bent on hurting Lisa that he doesn’t care about their kids or their bank account. Bob will deploy a hundred variations on the same tactic: put the Lisa in a bind where she has to choose between damaging the children and losing money. Lisa will lose money almost every time in order to save the children….

That caught my eye because, as a former family therapist I know the analogy well…. It actually becomes calcified and intractable when both parents buy in–which ensures that everyone always loses. Think about that next time you hear a liberal suggest that Democrats should employ the same tactics as the Republicans…. Here is how Mike Lofgren described it back in 2011:

A couple of years ago, a Republican committee staff director told me candidly (and proudly) what the method was to all this obstruction and disruption. Should Republicans succeed in obstructing the Senate from doing its job, it would further lower Congress’s generic favorability rating among the American people. By sabotaging the reputation of an institution of government, the party that is programmatically against government would come out the relative winner.

So what are the Democrats’ options in a situation like this? First of all, they shouldn’t take the bait and join in a guaranteed lose-lose game….At some point, voters have to decide if it is in their interest to elect politicians who are simply using them as their pawns in a power game. I know that as a family therapist, when I saw that a divorce wars situation was intractable, I would eventually go to the kids to begin the process of empowering them to make good choices (luckily in my practice they were adolescents)….

The old conservative vs liberal arguments aren’t much in play this election. That is obvious in the presidential contest. But it is also true in House/Senate races…

Why Not Up the Mississippi?: Outtake from Cohen and DeLong, Concrete Economics

Posted on by Brad DeLong
Preview of Why Not Up the Mississippi Outtake from Cohen and DeLong Concrete Economics

The conventional–pioneer–wisdom in American history is, still, that independent, entrepreneurial people settled the continent in small farms and established this civilization, pulling themselves up by their own bootstraps and building things through their own energy and enterprise, aided by democracy and the legal infrastructure of the free market.

This, of course, misses three big and immediate things:

  • First, the Amerindians who had been 12000 years in residence rightly objected–both to the plagues the European settlers brought that decimated their populations and then to the form the civilization being built took. Behind small-farm settlement stood conquest–and conquest requires governments and armies, not free-market association and catallaxy.

  • Second, a great deal of the surplus generated by the American economy–and used to finance its development–up to and beyond 1865 came from slavery–once again, not a free-market institution by any means.

  • Third, conquest and slavery do not by themselves build a prosperous economy, let alone an economy as prosperous as that of America today. Behind small-farm settlement stands an enormous public-sector governmental framework of institutions, infrastructure, and incentives necessary for an economy to be truly developmental.

As we have argued elsewhere, to a truly remarkable degree all United States citizens today owe that framework to the one single individual who may have made a significant difference in American political economic history, Alexander Hamilton—although even he needed his followers and successors to make a durable impact.

But, before there was a Hamilton, before there was a United States of America, there were earlier deliberate shapings of the economy of North America-to-be. These shaping were carried out by the colonial powers who ruled North American: Spain, France and Britain–and, in the end, especially by the British politicians who decided on the form that the British colonizing effort in the Americas would take.. Their plans and powers resulted in a pre-revolutionary American economy that was quite different in where it was located and how it was organized from what nature–also known as economic geography—-would appear to have intended.

Back in the 17th century the British government made the decision that its colonial policy would be to bet on populating the Atlantic seaboard–at least the Atlantic seaboard north of Virginia–with colonies based on staple agriculture and yeoman settlement, rather than with colonies based on treasure theft, on forced-labor mining, on slave-plantation agriculture, or on long-distance trade:

  • To some degree, this was a matter of necessity: Britain being late to the American colonial enterprise, It had to take what was left over.

  • To some degree, this was because the British government was not an absolutist one with Bastilles available, and it seemed wise to try to diminish domestic tensions by subsidizing the emigration of especially-vocal malcontents–whether Puritan, Quaker, or Catholic.

  • But mostly this was a matter of policy: from the days of Francis Drake on British expeditions to the Americas carried colonists rather than plantation owners and conquistadores, or rather than missionaries and coureurs du bois.

Thus Spanish and French, governments largely ignored their potential colonists outside the forts, ports, and trading posts they established–St. Augustine, Mobile, New Orleans, etc. They largely eschewed support for yeoman settlement and staple small-farm agriculture. They pushed for resource exploitation via long-distance trade, treasure-theft, extractive and exploitative plantation agriculture, and mining. And these industries were accompanied by extractive political-economic institutions. They were tuned to maximize the short-run financial flow to the metropole and the chances of proconsuls being able to return to the European capital with their fortunes in a decade or less. This did not provide a large incentive for French and Spanish subjects to migrate and large numbers. This did not provide a large incentive for those who did migrate to stay.

The English governments, by contrast, provided a very visible hand in support of colonial settlement–and, of course, provided a mailed fist directed against the North American continent’s Amerindian inhabitants. This mattered enormously.

The English settled the wrong, eastern, Atlantic coast. Ships probing upward along the rivers soon encountered rapids, and beyond the rapids came the mountains: the great Appalachian Range. The Spanish and French built their port-forts on the proper, southern, Gulf coast of America. From that base broad navigable rivers allowed rapid, cheap, and easy movement inland; culminating, of course, in the unique Mississippi-Missouri-Ohio River. Spain had, of course, known about the Mississippi Valley since Hernando de Soto’s thousand-man expedition of 1540.

Gulf of Mexico-based settlement provided a major advantage. The settler agricultural economies possible in the seventeenth, eighteenth, and nineteenth centuries were far from self-sufficient. Their spearheads required the weight of full spearshafts behind them, in the form of a steady supply of largely hand-made manufactured goods–high-tech for their time–from Europe.

Thus the southern, water road to the most fertile and valuable parts of agricultural America was the obvious and optimal one. A simple glance at the map of where U.S. agriculture is today tells the story. America’s prime agricultural resources are in the watersheds of the St. Lawrence, Mississippi-Missouri-Ohio, Sacramento-San Joaquin, and Columbia Rivers–not east of the Appalachians:

NewImage

Expansion up the Mississippi from the south seemed natural. Expansion from the east across the Appalachians seemed not. And those who crossed the Appalachians would do so without a sound logistical tail. And without secure transport links behind them, such migrants could be, at best, itinerant trappers and woodsmen–not agricultural settlers.

However, the Spanish authorities in charge along the coast of the Gulf of Mexico in the sixteenth, seventeenth, and second half of the eighteenth centuries, and the French authorities in charge in the first half of the eighteenth century, did not design a settler economy. Thus the initial British governmental decisions to design their version of colonial America by yeoman settlement made New York City rather than New Orleans or St. Louis the economic capital of America. It changed the destiny of the continent. Government trumped geography. And government trumped geography because the British colonial government made it so, while the French and Spanish colonial governments did not.

The British deciders in the thirteen colonies and their successors in the United States believed in and acted to make Manifest Destiny via agricultural settlement a reality. The Spanish and French deciders who controlled the mouth of the Mississippi up to 1803 did not. Thus while the logic of geography strongly suggests that the largest city of colonial America really ought to have been New Orleans, that was not the way it happened. Better agricultural land and better water transportation than was available east of the Appalachians did not lead to mass settlement: New Orleans in 1800 did have 10,000 people, but St. Louis had only 1000, Chicago did not exist, and Cincinnati, Pittsburgh, and Nashville were then villages being settled not from the southwest but from the east by people trecking over the Alleghany Mountains and through the Cumberland Gap.

By contrast, New York in 1800 had 80,000 people, Philadelphia 40,000, Boston 25,000, and Charleston, SC 20,000: 165,000 people in cities of 10,000 or more east of the Appalachians, and so (then) cut off from what was to become America’s productive heartland, with only 10,000 people in cities with easy access to what would become the farmbelt. The overall population mix disparity was the same: 1800 saw 5.0 million people of recent European and African descent settled in the original thirteen states, with only 300,000 in the Missouri-Mississippi-Ohio Valleys.

As of 1800, the European colonization and settlement of North America had, from the perspective of matching colonists to where the resources and the logistic and transportation avenues were, completely wrong.

Must-Read: Simon Wren-Lewis: Brexit and Democracy

Posted on by Brad DeLong

Must-Read: Some nice backup from the wise Simon Wren-Lewis. The frame of eurocrats vs. democrats is much, much, much too simple to be more than misleading. We want democracy where democracy belongs, with technocracy where it is needed–always acknowledging that circumstances alter cases, mechanism design is complex, and that democracy’s key benefits are as a legitimacy machine and an anti rent-seeking machine, not as a wise leader or wise policy selection machine:

Simon Wren-Lewis: Brexit and Democracy: “Germany… believed a union-wide demonstration of austerity was required…

…I strongly disagree…have thought a lot about why it happened, but a lack of democracy is not high on my list of culprits…. Democracy was overridden in Greece so cruelly… not [as] the result of actions of unelected bureaucrats, but of elected finance ministers… because of pressure from their own electorates. This exercise in raw political power worked because the Greek people wanted to stay in the Euro. The ‘bad equilibrium’ Evans-Pritchard talks about happens in part because of democracy…. Union governments should not lend money directly to other union governments, precisely because governments are democratic and so find it hard to accept write-offs…

Must-Read: Noah Smith: Republic of Science or Empire of Ideology?

Posted on by Brad DeLong

Must-Read: Noah Smith: Republic of Science or Empire of Ideology?: “[Jim Tankersley of] The Washington Post has a long story about Charles’ Koch’s attempt to influence the economics profession with massive donations…

…The Post’s article is titled ‘Inside Charles Koch’s $200 million quest for a ‘Republic of Science'”. This is a reference to a 1962 article by Michael Polanyi called ‘The Republic of Science: Its Political and Economic Theory’….The Post article’s author, Jim Tankersley, drily notes:

[Koch’s donation effort] raises the question of whether Koch has become, for university researchers, the sort of distorting force that Polanyi warns against.

Why yes. Koch is making a sustained, multi-hundred-million dollar effort to push the academic economics profession toward a libertarian ideology. This is a ‘Republic of Science’ to the same degree that North Korea is a ‘Democratic People’s Republic of Korea’…. I don’t like it…. It sets back our understanding of the world when people try to flood any portion of academia with researchers whom they think will promote a certain set of conclusions. I don’t have much more to say than that, so here’s one of my favorite Feynman quotes:

Our responsibility is to do what we can, learn what we can, improve the solutions, and pass them on. It is our responsibility to leave the people of the future a free hand. In the impetuous youth of humanity, we can make grave errors that can stunt our growth for a long time. This we will do if we say we have the answers now, so young and ignorant as we are. If we suppress all discussion, all criticism, proclaiming ‘This is the answer, my friends; man is saved!’ we will doom humanity for a long time to the chains of authority, confined to the limits of our present imagination. It has been done so many times before.

A real ‘Republic of Science’ would focus on an open-minded search for truth, not the enshrinement of one pre-decided dogma.

Updates: I also thought this passage from Tankersley’s article was interesting:

None of the largest recipients of Koch dollars appear on a list of the most influential academic economic departments in the United States, as calculated by the research arm of the Federal Reserve Bank of St. Louis. Only one professor who works at one of Koch’s most-supported centers cracks a similar list that calculates the top 5 percent of influential economists in the research community
Koch-funded researchers make a larger impact in the public arena. They frequently testify before Republican-led committees in Congress. Their work often guides lawmakers, particularly conservatives, at the state level in drafting legislation, and they have provided the foundations for judicial opinions that affect the economy on issues such as whether the government should intervene to stop large companies from merging.

It’s possible that the Koch doesn’t want to influence economic science itself, as much as he wants to sculpt its public-facing component. The end result could be two econ professions – a dispassionate, truth-seeking one occupying the upper levels of the ivory tower, at MIT and Princeton and Stanford, doing hard math things and careful honest data work that slowly trickles out through traditional media channels, and another in the lower-ranked schools, doing a slightly fancier version of the kind of political advocacy now done by conservative think tanks. The former would have the best brains and the best understanding of the real world, but the latter would have much more policy influence and impact on the wider intellectual world. This is different from the wholesale yoking of science to ideology that I was envisioning, but it also doesn’t seem like a pleasant vision of the future.

Agriculture the Worst Mistake in the History of the Human Race?: Today’s Economic History

Posted on by Brad DeLong

Explore Equitable Growth’s current work in our Value Added blog.

Consider Jared Diamond’s 1987 paean to hunter gatherers. While I find his article provocative and insightful, I also find it annoying. It seems to me that it mostly misses the most important parts of the story.

For one thing, it misses the importance of the dominant Malthusian mechanisms. The invention of agriculture and the domestication of animals provide an enormous technological boost to humanity both in terms of the number of calories that can be harvested by an hour of work and in terms of the ability of a society to make durable investments of all kinds that further boost its productivity. It is an absolute living-standard bonanza for the generations that discover it, and the generations that come after.

So what goes wrong with quality of life among agriculturalists? Well, without rapid technological progress and before the demographic transition, human populations and living standards tend to settle at a point where, given nutrients, hazards of life, and societal institutions, every mother has on average one daughter who herself reproduces. The standard of living will be whatever standard of living makes that happen. And, for agriculturalists–without the hazards to adults of travel and hunting, and without the hazards a mobile lifestyle imposes on the very young–that standard of living is a lot lower than among hunter-gatherers. Lifespan looks about the same looking across hunter-gatherers and agriculturalists. Biomedical and fitness indicators are much much higher for hunter-gatherers.

Whether this is a “disaster” or not depends on the answer to the old utilitarian conundrum of whether it is better to have a few people who live very well or a lot of people who live very poorly. This is an open question in philosophy, but Diamond appears to think that it is a closed one. And Diamond ignores the important consideration that only the density of population that comes with agriculture can generate enough human brains thinking to allow us to–quite possibly–transcend our Malthusian limits and create a truly human world in the long run.

Competitive Edge

Competitive Edge: Big Ag’s monopsony problem: How market dominance harms U.S. workers and consumers

By Hiba Hafiz, Nathan Miller,

February 18, 2021

post

Policy workshop addressed promises and challenges of using carbon pricing to combat climate change

By Gernot Wagner,

April 15, 2021

As to inequality … violence … domination … In my view it is difficult to say on net. Certainly the agricultural epoch has many many more people reaping where they did not sow and gathering where they did not scatter. Nevertheless, taking all three together, I cannot judge whether there was either a positive or a negative change across the boundary of the Neolithic Revolution. More inequality and domination, certainly. But you also have many more interactions between humans that are not one-shot interactions: people have fixed addresses, after all. If we know anything about humans, it is that human males have a tendency to resort to violence–perhaps not as great a tendency as chimps or gorillas, but a tendency, and we make more deadly weapons. It is not at all clear to me that the hunter-gatherer epoch had less murder, rape, kidnapping and enslavement of women, and so forth than did the agricultural epoch.

The hunter-gatherer age was not a kumbaya-singing age. Where, after all, are the Neanderthals today?

Jared Diamond (1987): The Worst Mistake in the History of the Human Race: Discover (May), pp. 64-66: “Archaeology is demolishing another sacred belief: that human history over the past million years has been a long tale of progress…

…The adoption of agriculture, supposedly our most decisive step toward a better life, was in many ways a catastrophe from which we have never recovered. With agriculture came the gross social and sexual inequality, the disease and despotism, that curse our existence…. For most of our history we supported ourselves by hunting and gathering: we hunted wild animals and foraged for wild plants. It’s a life that philosophers have traditionally regarded as nasty, brutish, and short…. Our escape from this misery was facilitated only 10,000 years ago, when in different parts of the world people began to domesticate plants and animals. The agricultural revolution spread until today it’s nearly universal and few tribes of hunter-gatherers survive…. Planted crops yield far more tons per acre than roots and berries. Just imagine a band of savages, exhausted from searching for nuts or chasing wild animals, suddenly grazing for the first time at a fruit-laden orchard or a pasture full of sheep. How many milliseconds do you think it would take them to appreciate the advantages of agriculture?…. The progressivist party line sometimes even goes so far as to credit agriculture with the remarkable flowering of art…. Agriculture gave us free time that hunter-gatherers never had. Thus it was agriculture that enabled us to build the Parthenon and compose the B-minor Mass….

While farmers concentrate on high-carbohydrate crops like rice and potatoes, the mix of wild plants and animals in the diets of surviving hunter-gatherers provides more protein and a better balance of other nutrients…. The lives of at least the surviving hunter-gatherers aren’t nasty and brutish, even though farmers have pushed them into some of the world’s worst real estate…. The progressivist view is really making a claim about the distant past: that the lives of primitive people improved when they switched from gathering to farming. Archaeologists can date that switch by distinguishing remains of wild plants and animals from those of domesticated ones in prehistoric garbage dumps….

Usually the only human remains available for study are skeletons, but they permit a surprising number of deductions…. keletons from Greece and Turkey show that the average height of hunger-gatherers toward the end of the ice ages was a generous 5’9″ for men, 5’5″ for women. With the adoption of agriculture, height crashed, and by 3000 B. C. had reached a low of only 5’3″ for men, 5′ for women. By classical times heights were very slowly on the rise again, but modern Greeks and Turks have still not regained the average height of their distant ancestors…. Burial mounds in the Illinois and Ohio river valleys… a hunter-gatherer culture gave way to intensive maize farming around A. D. 1150…. These early farmers paid a price for their new-found livelihood. Compared to the hunter-gatherers who preceded them, the farmers had a nearly 50 per cent increase in enamel defects indicative of malnutrition, a fourfold increase in iron-deficiency anemia (evidenced by a bone condition called porotic hyperostosis), a theefold rise in bone lesions reflecting infectious disease in general, and an increase in degenerative conditions of the spine, probably reflecting a lot of hard physical labor. ‘Life expectancy at birth in the pre-agricultural community was bout twenty-six years,’ says Armelagos, ‘but in the post-agricultural community it was nineteen years. So these episodes of nutritional stress and infectious disease were seriously affecting their ability to survive.’ The evidence suggests that the Indians at Dickson Mounds, like many other primitive peoples, took up farming not by choice but from necessity in order to feed their constantly growing numbers. ‘I don’t think most hunger-gatherers farmed until they had to, and when they switched to farming they traded quality for quantity,’ says Mark Cohen of the State University of New York at Plattsburgh, co-editor with Armelagos, of one of the seminal books in the field, Paleopathology at the Origins of Agriculture. ‘When I first started making that argument ten years ago, not many people agreed with me. Now it’s become a respectable, albeit controversial, side of the debate.’

There are at least three sets of reasons to explain the findings that agriculture was bad for health… a varied diet… [vs] one or a few starchy crops. The farmers gained cheap calories at the cost of poor nutrition…. Because of dependence on a limited number of crops, farmers ran the risk of starvation if one crop failed. Finally, the mere fact that agriculture encouraged people to clump together… led to the spread of parasites and infectious disease….

Besides malnutrition, starvation, and epidemic diseases, farming helped bring another curse upon humanity: deep class divisions. Hunter-gatherers have little or no stored food, and no concentrated food sources, like an orchard or a herd of cows: they live off the wild plants and animals they obtain each day. Therefore, there can be no kings, no class of social parasites who grow fat on food seized from others. Only in a farming population could a healthy, non-producing elite set itself above the disease-ridden masses. Skeletons from Greek tombs at Mycenae c. 1500 B. C. suggest that royals enjoyed a better diet than commoners, since the royal skeletons were two or three inches taller and had better teeth (on the average, one instead of six cavities or missing teeth). Among Chilean mummies from c. A. D. 1000, the elite were distinguished not only by ornaments and gold hair clips but also by a fourfold lower rate of bone lesions caused by disease…. Farming may have encouraged inequality between the sexes, as well. Freed from the need to transport their babies during a nomadic existence, and under pressure to produce more hands to till the fields, farming women tended to have more frequent pregnancies than their hunter-gatherer counterparts — with consequent drains on their health….

Thus with the advent of agriculture and elite became better off, but most people became worse off. Instead of swallowing the progressivist party line that we chose agriculture because it was good for us, we must ask how we got trapped by it despite its pitfalls. One answer boils down to the adage ‘Might makes right.’ Farming could support many more people than hunting, albeit with a poorer quality of life. (Population densities of hunter-gatherers are rarely over on person per ten square miles, while farmers average 100 times that.)… As population densities of hunter-gatherers slowly rose at the end of the ice ages, bands had to choose between feeding more mouths by taking the first steps toward agriculture, or else finding ways to limit growth. Some bands chose the former solution… outbred and then drove off or killed the bands that chose to remain hunter-gatherers, because a hundred malnourished farmers can still outfight one healthy hunter….

Hunter-gatherers practiced the most successful and longest-lasting life style in human history. In contrast, we’re still struggling with the mess into which agriculture has tumbled us, and it’s unclear whether we can solve it. Suppose that an archaeologist who had visited from outer space were trying to explain human history to his fellow spacelings. He might illustrate the results of his digs by a 24-hour clock on which one hour represents 100,000 years of real past time. If the history of the human race began at midnight, then we would now be almost at the end of our first day. We lived as hunter-gatherers for nearly the whole of that day, from midnight through dawn, noon, and sunset. Finally, at 11:54 p. m. we adopted agriculture. As our second midnight approaches, will the plight of famine-stricken peasants gradually spread to engulf us all? Or will we somehow achieve those seductive blessings that we imagine behind agriculture’s glittering facade, and that have so far eluded us?

Diamond is broadly right in what he says:

Carles Boix and Frances Rosenbluth: Bones of Contention: The Political Economy of Height Inequalty: “Human osteological data provide a rich, unmined source of information…

…about the distribution of nutrition, and by extension, the distribution of political power and economic wealth, in societies of long ago. On the basis of data we have collected and analyzed, we find that the shift from a hunter–gatherer to a labor-intensive agriculture opened up inequalities that had discernible effects on human health and stature. But we also find that political institutions intervene decisively in affecting the distribution of resources within societies. Political institutions appear to be shaped not only by economic factors but also by military technology and vulnerability to invasion, leaving important questions for additional exploration.

Must-Read: Carles Boix and Frances Rosenbluth: Bones of Contention: The Political Economy of Height Inequality

Posted on by Brad DeLong

Must-Read: Carles Boix and Frances Rosenbluth: Bones of Contention: The Political Economy of Height Inequality: “Human osteological data provide a rich, unmined source of information…

…about the distribution of nutrition, and by extension, the distribution of political power and economic wealth, in societies of long ago. On the basis of data we have collected and analyzed, we find that the shift from a hunter–gatherer to a labor-intensive agriculture opened up inequalities that had discernible effects on human health and stature. But we also find that political institutions intervene decisively in affecting the distribution of resources within societies. Political institutions appear to be shaped not only by economic factors but also by military technology and vulnerability to invasion, leaving important questions for additional exploration.