Tag: Populism

Fiscal Expansion Needs to Be Done Right

Posted on by Brad DeLong
10 Year Treasury Constant Maturity Rate FRED St Louis Fed

Fiscal expansion now is really a no-brainer:

  • borrow at unbelievably low rates;
  • use it to put people to work doing useful things to make America more productive;
  • if we are near full employment, it will also push up interest rates, restore equilibrium to the banking sectors, and reduce the chances of future bubbly financial vulnerabilities;
  • if we are not near full employment, it will pull people back into the labor force and raise production and employment now as well as in the future.

What’s the downside? Implementation. Larry Summers thinks it will be very badly implemented indeed:

Larry Summers: A Badly Designed US Stimulus Will Only Hurt the Working Class: “Rüdiger Dornbusch made an extensive study of… populist economic programmes….

Over the medium- and long-term they were catastrophic for the working class in whose name they were launched. This could be the fate of the Trump programme given its design errors, implausible assumptions and reckless disregard for global economics…. Tax credits for equity investment and total private sector participation that will not cover the most important projects, not reach many of the most important investors, and involve substantial mis-targeting…. The highest return infrastructure investments–such as improving roads, repairing 60,000 structurally deficient bridges, upgrading schools or modernising the air traffic control system–do not generate a commercial return and so are excluded….

Trump’s global plan… rests on a misunderstanding…. The plan seems to assume we can pressure countries not to let their currencies depreciate…. [But] not even US presidents… can repeal the laws of economics. Populist economics will play out differently in the US than in emerging markets. But the results will be no better…

Back in 1980 there were a great many people who thought they had Reagan’s approval and baton for:

  • cutting interest rates,
  • returning to the gold standard,
  • balancing the budget,
  • boosting military spending
  • cutting taxes,
  • cutting “weak claims” to federal dollars by successful rent seekers,
  • cutting off federal support to “weak claimants” who did not look or act like real America.

All six of these factions were correct: they all did have Reagan’s approval baton. But few of these goals were consistent with the others. The final policy outcome in the 1980s was random. It was disastrous for midwestern manufacturing, disastrous for fiscal stability, a negative for economic growth, but an extremely strong positive for the rich and superrich whose taxes were cut the most.

Because the last group speaks with a loud voice, there are lots of people today who think that Reagan’s economic policies were, in some vague way they do not understand, a success. But that is the wrong lesson. The right lesson is: incoherent and contradictory policy goals produce largely-random policies that are very unlikely to turn out well.

Must-Read: Ricardo Hausmann: Overdosing on Heterodoxy Can Kill You

Posted on by Brad DeLong

Must-Read: The very sharp Ricardo Hausmann on the catastrophe of Venezuelan Peronismo. Peronismo is, in a nutshell, manipulating market prices to affect the distribution of wealth and attempting to use government controls and commands to guide the pattern of economic activity. This commits both market prices and the government commands to focus on their competitive disadvantages, and ends badly.

I have scattered thoughts on why Peronismo is popular–why the descamisados–whether voting for Peron, for Chavez, or for Trump–would much rather have the government take steps to boost the incomes they receive via labor and capital than rely on the stinking charity of a sensible social-insurance system. But I think I should leave them for another day…

Ricardo Hausmann: Overdosing on Heterodoxy Can Kill You: “Venezuela’s current catastrophe…. A country that should be rich is suffering the world’s deepest recession, highest inflation…

…and worst deterioration of social indicators. Its citizens, who live on top of the world’s largest oil reserves, are literally starving and dying for lack of food and medicine. While this disaster was brewing, Venezuela won accolades from the United Nations Food and Agricultural Organization, the Economic Commission for Latin America, British Labour Party leader Jeremy Corbyn, former Brazilian President Luiz Inácio Lula da Silva and the US Center for Economic Policy Research, among others….

Venezuela is the poster child of the perils of rejecting economic fundamentals.
One of those fundamentals is the idea that, to achieve social goals, it is better to use–rather than repress–the market… [which] is essentially just a form of self-organization whereby everyone tries to earn a living by doing things that others find valuable. In most countries, people buy food, soap, and toilet paper without incurring a national policy nightmare, as has happened in Venezuela.
But suppose you do not like the outcome the market generates. Standard economic theory suggests that you can affect it by taxing some transactions–such as, say, greenhouse-gas emissions–or giving money to certain groups of people, while letting the market do its thing.

An alternative tradition, going back to Saint Thomas Aquinas, held that prices should be ‘just.’ Economics has shown that this is a really bad idea, because prices are the information system that creates incentives for suppliers and customers…. Making prices ‘just’ nullifies this function, leaving the economy in perpetual shortage. In Venezuela, the Law of Just Costs and Prices is one reason why farmers do not plant… agro-processing firms shut down… incentives to flip goods into the black market. As a result, the country with the world’s most extensive system of price controls also has the highest inflation–as well as an ever-expanding police effort that jails retail managers for holding inventories….

In Venezuela, subsidies for gasoline and electricity are larger than the budget for education and health care combined…. With one daily minimum wage in Venezuela, you can buy barely a half-pound (227 grams) of beef or 12 eggs, or 1,000 liters (264 gallons) of gasoline or 5,100 kWh of electricity–enough to power a small town. With the proceeds of selling a dollar at the black market rate, you can buy over $100 at the strongest official rate….

After former President Hugo Chávez was reelected in 2006, he expropriated farms, supermarkets, banks, telecoms, power companies, oil production and service firms, and manufacturing companies producing steel, cement, coffee, yogurt, detergent, and even glass bottles. Productivity collapsed in all of them…. Venezuela used the 2004-2013 oil boom to quintuple its external public debt, instead of saving up for a rainy day. By 2013, Venezuela’s extravagant borrowing led international capital markets to shut it out, leading the authorities to print money. This caused the currency to lose 98% of its value in the last three years. By the time oil prices fell in 2014, the country was in no position to take the hit….

Progress requires identifying errors, which in turn calls for heterodox thinking. But learning becomes difficult when there are long delays between action and consequences, as when we try to regulate the water temperature while in the shower. When reaction times are slow, exploring the heterodox is necessary, but should be done with care. When all orthodoxy is thrown out the window, you get the disaster that was the Chinese Cultural Revolution–and that is today’s Venezuela.

Must-read: Daniel Gros: “Is Globalization Really Fueling Populism?”

Posted on by Brad DeLong

Must-Read: Daniel Gros: Is Globalization Really Fueling Populism?: “Amid relative economic stability, rising real wages, and low unemployment rates [in northern Europe]…

…grievances about the economic impacts of economic globalization are simply not that powerful. Instead, right-wing populist parties like the FPÖ, Finland’s True Finns, and Germany’s Alternative für Deutschland are embracing identity politics, playing on popular fears and frustrations – from ‘dangerous’ immigration to the ‘loss of sovereignty’ to the European Union – to fuel nationalist sentiment.

In the southern European countries, however, the enduring impact of the euro crisis makes populist economic arguments far more powerful. That is why it is left-wing populist parties that are winning the most support there, with promises of, say, tax credits for low-paid workers. The most extreme case is Greece’s leftist Syriza party, which rode to victory in last year’s elections on pledges to end austerity. (Once in power, of course, Syriza had to change its tune and bring its plans in line with reality.)

Calling the rise of populism in Europe a revolt by the losers of globalization is not just simplistic; it is misleading. If we are to stem the rise of potentially dangerous political forces in Europe, we need to understand what is really driving it – even if the explanation is more complex than we would like.

Must-read: Megan McArdle: “Listen to the Victims of the Free Market”

Posted on by Brad DeLong

Must-Read: For the most part, an excellent piece by Megan McArdle. But…

McMegan: There is a lot of good reason to think that the elasticity of labor demand at the low end is about -0.2! That higher minimum wages of the magnitude we are talking about throw not a lot but a few people out of work–that the actual low-wage household societal welfare gain is roughly 80% of the naive estimate.

And maternity leave makes even not-good jobs much better…

And the point is not to send everyone to a four-year college, but to send enough people to a four-year college to reduce the four-year college wage premium from its current 90% back to the 30% or so it was in the 1970s…

Otherwise: perfect:

Megan McArdle: Listen to the Victims of the Free Market: “The arguments for market liberalism are bound to sound a lot less convincing…

…when they invariably issue from the folks who aren’t expected to take one for the team–who are, in fact, being made better off, thanks to skills… prize… and thanks to trade, automation and immigration…. Academic economists and policy analysts are among the knowledge workers who have benefited greatly from liberalization…. Let’s look at something that elites consistently fail to talk about in any meaningful way: good jobs…. We talk around those things… about inequality… paid leave… education… ritual obeisances toward the necessity of decent work, promising that some policy laughably inadequate to the task…. But neither party has any meaningful policy to foster good work…. The closest either party comes is the $15-an-hour minimum wage, a policy with the slight drawback that it may throw a lot of people out of work….

Elites of both parties focus on the things they want for themselves. Republicans offer tax cuts and deregulation, as if everyone in America were going to become an entrepreneur. Democrats offer free college tuition and paid maternity leave, as if these things were a great benefit to people who don’t have the ability, preparation or inclination to sit through four years of college, and as a result, can’t find a decent job from which to take their leave…. The implicit assumption of elites in both parties is that the solution for the rest of the country is to become more like us, either through education or entrepreneurship. Rarely does anyone discuss how we might build an economy that works for people who aren’t like us and don’t want to turn into us….

Even if they are still consuming the same amount of stuff, even if their incomes are all right for the moment, if people feel that they cannot count on work, then they will feel helpless and frightened, and they will turn to politicians who can assuage those fears by pointing to specific enemies who can be vanquished to secure their safety. Democrats convinced that they have the answer to populism in the form of more social welfare programs are as gravely mistaken as the Republicans who focused on the same old pro-business program…. People are worried about their physical security and their ability to make a decent life for themselves. And ‘for themselves’ is the important phrase in that sentence…. There is no better example of the folly of the elites than the current fashion for a universal basic income among both liberals and libertarians…. I will give the universal basic income people this much; even if they aren’t really grappling with the need for work, at least they understand that there is a problem…. That’s more than you’d gather from the major speeches or the policy programs….

Start thinking about how to listen and talk to everyone else. Don’t answer every question about jobs with boilerplate about clean energy, or entrepreneurship, or… assum[ing] that the solution to our problems is to somehow arrange for everyone in America to get a four-year degree. Don’t assume that the rest of the country is full of Morlocks who do not need what you have for yourself: a stable job that connects you… gives you a sense of usefulness and security, and offers you some chance at an even better future…. That improved conversation is not an answer to either the political or the economic problems that Americans are facing. But at least it’s a start.

We are all Polanyiites now…