Monday, March 27, 2017

Say's Other Law: "Misery is the inseparable companion of luxury"

It was a dark and stormy global night economy and a spectre task was haunting facing Europe...
A new supply-side agenda for the left
The task facing Europe is to meet the challenge of the global economy while maintaining social cohesion in the face of real and perceived uncertainty. Rising employment and expanding job opportunities are the best guarantee of a cohesive society. 
The past two decades of neo-liberal laissez-faire are over. In its place, however, there must not be a renaissance of 1970s-style reliance on deficit spending and heavy-handed state intervention. Such an approach now points in the wrong direction.  
Our national economies and global economic relationships have undergone profound change. New conditions and new realities call for a re-evaluation of old ideas and the development of new concepts. 
In much of Europe unemployment is far too high - and a high proportion of it is structural. To address this challenge, Europe's social democrats must together formulate and implement a new supply-side agenda for the left. 
-- Tony Blair and Gerhard Schroeder, The Third Way/Die Neue Mitte, 1998.
In a 1981 review of George Gilder's Wealth and Poverty, Anna Weniger and Hank Robinson succinctly described "the essence of supply-side economics" as "simply a campaign to redistribute income from poor to rich, dressed in the garb of economic theory." Gilder's economic theory was fundamentally an affirmation of Say's so-called Law. "The essential thesis of Say's Law," he insisted, "remains true: supply creates demand. There can be no such thing as a general glut of goods."

I'm not going to bother trying to debunk supply-side economics. What would it take to change the mind of someone who "can't see what's wrong" with a theory about a monetary economy that is based on the assumption it is a barter economy? What would it take to change the mind of someone whose belief in the theory is intimately tied to their identity?

So let's assume that anyone I could persuade with the following argument is already inclined to agree with Weniger and Robinson's assessment of supply-side economics as mere pretext. Theoretical flimsiness is no problem for conservatives because the argument is, after all, consistent with their values and objectives. Supply-side rhetoric is their sales pitch.

But what about "the left"? If we take Blair's and Schroeder's representation of their position on the left at face value, the question arises of what in Hell did they think they were selling? A social democratic redistribution of income from the poor to the rich? It appears they were selling the supply-side rhetoric to themselves and to corporate media and campaign donors as "realism."

The old ideas that were thinly veiled ends in themselves for conservatives were to be repackaged as new concepts that would enable electoral success in an environment that was inhospitable to the Labour Party's own "old ideas." Whether the "new concepts" could somehow deliver social cohesion and expanding job opportunities as well as redistribution of income from the poor to the rich was seen by Third Way acolytes as strictly a matter of cleverness. Third Way proselytizers were supremely confident of their cleverness.

You Don't, Say?

On the assumption that those who believe Say's Law -- or those who cling to the argument as a ready-made justification for their preferred policy outcomes -- will not change their minds, I would like to present what might be described as Say's other law:
Misery is the inseparable companion of luxury.
A position Say proclaims "as false in principle, as it would be cruel in practice" is that misery and want are indispensable as incentives to work:
The apologists of luxury have sometimes gone so far as to cry up the advantages of misery and indigence; on the ground, that, without the stimulus of want, the lower classes of mankind could never be impelled to labour, so that neither the upper classes, nor society at large, could have the benefit of their exertions.
Of course the Third Way manifesto didn't overtly "cry up the advantages of misery and indigence." The phrasing was more subtle and nuanced:
But providing people with the skills and abilities to enter the workforce is not enough. The tax and benefits systems need to make sure it is in people’s interests to work... Part-time work and low-paid work are better than no work because they ease the transition from unemployment to jobs. ... The labour market needs a low-wage sector in order to make low-skill jobs available.
In short, there needs to be more low-wage jobs to transition people away from benefits and benefits need to be restricted so that they are not an impediment to people accepting low-wage jobs. Or, in blunter words, "without the stimulus of want, the lower classes of mankind could never be impelled to labour."

Say's "other law" appears in the chapter "On Consumption" in his Treatise on Political Economy; or the Production, Distribution, and Consumption of Wealth. Here's more:

Sunday, March 26, 2017

Economics: Part of the Rot, Part of the Treatment, or Some of Each?

Is mainstream economics, with its false certitudes and ideological biases, one of the reasons for the dismal state of policy debate in countries like the UK and the US, or are its rigorous methods an important antidote to the ruling political foggery?  That’s being debated right now, live online.

Our starting point is a post on Unlearning Economics, dated March 5, which argues that the flaws of mainstream economics contribute to lousy policy on several fronts: downplaying the role of monopoly, cheerleading for the shareholder value imperative in the corporate world, knee-jerk support for trade agreements under the banner of comparative advantage, and regressive macroeconomic policy, among others.  A particularly pointed paragraph brought up the Reinhart-Rogoff 90% affair and accused the economics profession of dereliction of duty by not taking action to rebuke the wrongdoers:
Where was the formal, institutional denunciation of such a glaring error from the economics profession, and of the politicians who used it to justify their regressive policies?
UE’s conclusion is that mainstream economics needs to be taken down several notches, which would open more space for alternative approaches to economics and, indeed, alternative approaches to policy that place more weight on human outcomes, broadly understood, than the formalistic criteria of efficiency, etc.

Simon Wren-Lewis responded by arguing that UE has it exactly backwards.  Restricting himself to UE’s critique of macroeconomics, SWL says, yes, reactionary politicians have invoked “economics” to support austerity, but “real” economists for the most part have not gone along.  True, there were a few, like Reinhart and Rogoff and those in the employ of the British financial sector (“City economists”) who took a public stand against sensible Keynesian policies in the wake of the financial crisis, but they were a minority, and, in any case, what would you want to do about them?  Economists, like professionals in any field, will disagree sometimes, and having a centralized agency to enforce a false consensus would ultimately work against progressives and dissenters, not for them.  Let’s put the blame where it really belongs, says SWL—on the politicians and pundits who have brushed aside decades of theoretical and empirical work to promulgate a reactionary, fact-free discourse on economic policy.

Yes—but, adds Brad DeLong.  He largely agrees with SWL, but delves more deeply into the Reinhart-Rogoff affair.  He shows that, even without the famed Excel glitch, a cursory look would reveal that R-R were trumpeting nonexistent results:

• The 90% debt cliff was an artifact of the way R-R set up their bins.  Replace binning with a continuous relationship between growth and debt and the cliff disappears.

• The correlation between growth and debt supported no particular causal interpretation, and R-R provided no other evidence to support their particular causal argument.

• The correlation itself was so weak that the practical implication of R-R’s claim was nil.  Fiscal stimulus that could make or break a recovery was being rejected on the basis of future economic growth effects that would be too small to measure.

So the R-R claim that fiscal consolidation was necessary and urgent was unfounded from the get-go, and these two were both respected mainstream economists, so what can we infer?  DeLong’s takeaway is that economists do need to recognize that they operate in a political environment (the sewers of Romulus) in which their work will be seized upon by interested groups, with real practical outcomes.  In this situation, the profession as a whole has a responsibility to assess high profile but dubious work.  Although he isn’t explicit, my reading is that DeLong wants some sort of professional quality control, but not institutionalized in the way UE seems to call for.

I have a few points to make in addition to those already in the public stream (or sewer).  First, I think that, apart from the specific value of particular economic theories, there is a giant problem in mainstream economics resulting from a false certainty that the overarching theory, the economy as an arena in which agents are constantly maximizing subject to constraint, with their interactions entirely mediated by markets, is correct.  Believing they are operating within a correct framework, most economists grossly narrow the scope of the questions they allow themselves to ask.  This shows up in virtually every applied area, from the economics of the family, to industrial organization, labor markets, environmental problems, etc.  Just to take one example, consider the immense labor economists have put into estimating the social cost of carbon, as their primary instrument for “optimal” climate policy.  It’s true that one needs such a magnitude if the goal is optimality, but why is that the goal?  In the end, it’s because there’s no other model of decision-making: all agents are assumed to be constrained maximizers, and the public objective is simply to correct for the non-maximizing effects of an externality like greenhouse gas accumulation.  You can’t even pose a question like, what are the risks that a climate catastrophe will destroy the foundations of human civilization?  That’s not an assumption, that climate change will do this—it’s a question, which one could investigate.  Start with the social cost of carbon framework, and you will be sure not to ask it, or dozens of other questions about the meaning of climate risk for fundamental human values.  (Where in your integrated assessment models will you find the cost of cultural memory resulting from sea level rise and coastal inundation?)

The false certainty about core theory has in turn given rise to a pernicious tendency in econometrics to calibrate rather than actually test models.  This is true almost by definition in most structural econometrics: a set of equations is derived from theory, and their parameters are estimated from an available dataset.  This procedure makes sense if you know the structure is right, since you aren’t actually testing it.  Incredibly, the bar is lowered still further, since many theories remain in circulation even when their structural estimations fail out of sample or are inconsistent with one another.  There doesn’t exist in mainstream economics a culture of radical self-testing, since there is no professional cost to having one’s results disconfirmed by a subsequent study.  Hey, we’re all just playing with our models, which is OK since they follow the proper rules, with maximizing agents and everything.  The world of DSGE modeling is rife with this, but you’ll see the same thing in the micro world; it just hasn’t been called out as vociferously up to now.

So where do these biases come from?  What would need to be changed in order for mainstream economics to be a reasonably reliable, self-correcting body of knowledge?  I don’t have all the answers, but here’s a hypothesis: the simplistic, formulaic introductory economics course—the infamous Econ 101—has brainwashed not only generations of students for whom this is their only exposure to the field, but also generations of professional economists themselves.  The so-called “economic way of thinking” dished out to neophytes serves equally as the way sophisticates understand their own field of study.  The empirical basis for this claim is my own anecdotal experience working with economist colleagues in a number of educational and research institutions over the years.  I might have this wrong, but hear me out.

The first causal mechanism is selection.  After all, Econ 101 is where the light begins to glimmer in a few heads: hmmmm, maybe I should think about becoming an economist.  A professor (or grad student) is going on and on about rational this and optimal that, illustrated with simple geometry, and the beauty of it seizes upon some small proportion of the students scribbling notes.  Someone in this multitude is thinking, yeah, this is the real deal.  And that someone goes on to become an economist.

The second is the power of discourse.  Econ 101 introduces the framework and language economists use to think through the problems they’ll face further down the road.  Yes, they will complexify and qualify it as their knowledge deepens, but the fundamental terms are set in place.  Many of the framing effects are subtle: thinking of economic relationships solely as encapsulated in their moments of exchange, adopting a particular conception of rationality, etc.  This is not to say that there exists some mentally liberated existence beyond discourse and framing—hardly.  But mainstream economics is a discourse, and it has no self-awareness of it.  This is a problem because, for many of the practical areas economists get involved in, there are other, competing discourses (management, political theory, psychology, cultural and historical theories) that economists can barely perceive, much less understand.  These leads to the hermetic quality of economic practice that many have noted.

The third is the role of default assumptions.  Economics is a giant, multifarious discipline with lots of detailed, arcane specialties.  Some people spend their lives studying health care markets.  Others the economic impacts of immigration.  Or petroleum markets.  Or the effects of cash transfer programs in low income countries.  And so on.  In their own fields of specialization economists often develop complex understandings of the forces at play, and cross-disciplinary applied work with colleagues from other backgrounds is becoming more common.  (This contradicts what I just said about hermetic economics; it’s an evolving contradiction.)  One of the stock arguments of those who deny the existence of any mainstream at all is that if you look at these subfields you will see well-recognized scholars wielding all sorts of hybrid models, and there is truth to this.  But the process that gives us intensive specialization also gives us widespread ignorance of the specialization of others.  The economist who burrows deeply into markets for health services has to rely on a hazy sense of the rest of the discipline and how her work connects with it.  Where does that hazy sense come from?  To some extent (yeah, this is quite a hedge) it comes from Econ 101 or at most the field surveys undergraduates take in addition to their core requirements.  Consider a world in which there is a discipline like economics and four equally populated subdisciplines A, B, C and D.  All economists take Econ 101, after which they specialize in their own subdiscipline.  In 101 they learn that markets mostly work, agents are mostly rational, and economic policy is mainly about marginal tweaks to keep the machine humming.  Then they dive into their subdisciplines.  In A they learn that behavior is complicated, institutions matter, and markets are embedded, with contradictory impacts.  It’s all messy and fascinating, and it keeps them busy.  But the denizens of A believe, due to their initial training in Econ 101, that B, C and D, together the bulk of the discipline, are all basically variations on 101-ness, so they see their specific problems as exceptions to the general account of how the economy works.  And the same is true of the B, C and D tribes.  Each of them comes to understand how different their subdiscipline is from the norm laid forth in Econ 101, but also how these differences should be seen as exceptional.  Thus, taken together, the economics profession would simultaneously be creative and heterodox in its day-to-day work and rigid and orthodox in its general view of the entire field and the principles that ought to govern it.

So this has gone on rather long, hasn’t it?  My point is that, while SWL is right that there is a lot of work in economics that can be used as a resource for thinking clearly about making the world a better place, UE is right that mainstream economics is also a big part of the problem.  I agree with DeLong that the profession needs to take more seriously the problem that there are few if any professional incentives that lead economists to scrutinize their own work lest it be subsequently disconfirmed.  A false sense of having the correct overarching model, hammered out in Econ 101, pervades the entire field and undermines what ought to be the effects of the ongoing turn toward empiricism.  From the header: mostly rot, some treatment, could be more.

Wednesday, March 22, 2017

Complacency Or Community Commitment? Human And Social Capital Reconsidered

I have been poking at Tyler Cowen's recent book on The Complacent Class, along with those who have praised it unstintingly, with my main complaint being that what he calls complacency may really be fear.  In an exchange posted today between Tyler and Noah Smith at Bloomberg, Noah makes many of my points, saying that what people who are not moving or changing jobs are doing is seeking "safety and security," with "complacency" sounding like "blithe optimism." Tyler then admits that "many people are afraid," but then says that they are still complacent because they are not reacting "with urgency."  He also says that a lack of increased income volatility shows that they do not have reason to feel they are facing more risks than those in the past did, although it looks to me like the greater risks they face are more due to higher payments they must make for health or education rather than greater volatility of income.  But this is not what I want mostly to address here, at least further.

I wish to go back to the implications of people not quitting jobs and not moving as much as they used to. Rather than rerunning the fear versus complacency point, I want to think about how this relates to human and social capital accumulation.  In particular, I think  that while people may increase their individual human capital by moving around more, there may be an increase in social capital from people staying in one place more.  This greater social capital may result in more committing by people to the quality of their communities, more engagement in civic groups, and so  on.  It may be that the human capital part means that greater mobility improves economic growth, but this may be at the expense of better quality of life and other parts of economic growth associated with having high quality communities with high social capital.

Since I am setting up in effect a competition between human and social capital, I must admit that some of  the early work on these matters,  especially by sociologists like James Coleman and political scientists like Robert Putnam, initially argued that they were linked, that social capital enhances human capital.  Now I am not going to deny that. Certainly a person with a larger network of trusting acquaintances may be able to be more productive in their work and have essentially higher skills than someone who does not. Nevertheless, I am going to note how they may also be in conflict.

A crucial issue here involves externalities.  I  think that social capital involves and leads to more externatities than does human capital.  Or, even if I am wrong, they will involve different kinds of externalities.  So, someone who moves around a lot from job to job and state to state may well acquire more narrow technical skills that will lead them to earn more money and possibly produce more as well in their jobs than someone who stays in the same job in the same place.  Silicon Valley is full of people constantly changing their jobs, although this is a special case where while they change their jobs a lot, they do not move away, with this being a classic "industrial cluster" case, where the externalities involved mean that they must stay in the same location to get the full advantage of their human capital. Of course, we may also have the hard-to-separate out matter that those who do so  much moving and accumulating of human capital are more likely to be the ones with greater skills and education to begin with, compared to those who fearfully hang onto one job while staying in one place, and it may be that these latter are also  less able to provide all those community benefits associated with possibly accumulated social capital from staying where they are. Certainly we expect this to be true in very depressed communities with declining jobs.

The literature on social capital is voluminous, and there are competing definitions, with the leading candidates being generalized trust versus levels of civic engagement or membership in social groups.  Usually it is argued that these are correlated, but not necessarily.  Empirical  studies have tended to find the former to be more important for economic growth than the latter, as with the classic 1996 QJE paper by Knack and Keefer.  But either way, what is involved with social capital, especially "bridging" social capital that extends broadly and not just to others in a very specific social group, involves lots of externalities. And the  literature on how more social capital aids the building up of quality neighborhoods and communities is also voluminous.  It is also very much in the literature that this sort of social capital is accumulated, if you will, more by people staying where they are longer so  that they can establish these local networks and build up these groups, as well as  the trust involved in doing so.

I would note, that while we expect the high flying movers to have all  this productive human capital, there is also a benefit to firms of having people who stay with them, accumulating social capital within the firm, which in turn can enhance the human capital of those there, again given the externalities involved.  Indeed, this sort of view was part of what lay behind the old Japanese management practices, with lifetime employment in a firm a common practice, with this involving employees moving around from one type of job in the firm to another.  They gained much firm-specific human capital, rather than profession-specific human capital.  This is where we see this conflict between narrow human capital and social capital coming out.  It is true that lifetime employment in Japan has been declining, but the days when this was practiced was also the period when the Japanese economy performed most spectacularly.  There are clearly gains to firms and to society of having at least some people stay put where they are, although hopefully changing specifically what they are doing where they stay put.

I note a possible exception to all this that Tyler raises in his debate with Noah Smith.  He brings up one of  his favorite pet peeves to punch, the supposedly lazy, or now complacent, millennial without a job who sits at his (or occasionally her) parent's home playing video games.  I  must admit that such people are not going to be generating much social capital or go out and work in community organizations or civic groups probably very much.  However, it may be that this is somewhat of a caricature, and in any case, I would say that such people are more likely to be afraid than complacent, although I cannot say that for sure.

In any case, my argument here is not about unemployed video  game players, but about those who have jobs, but stay with them and in their communities.  They may contribute more and commit more to those communities and their social and economic development than do those high human capital people who are constantly moving from one job and place to another.

Barkley Rosser




Tuesday, March 21, 2017

Fifty Shades of Yellow? Post-Truth Then and Now

Simon Wren-Lewis can’t take it anymore.  I’ve just read his fulminations on the blatant dishonesty of right wing media outlets in the US and the UK, untethered to any residual professional attachment to standards of evidence and nakedly in the service of political ideologues.  He’ll get no argument from me about that.

But I think his distinction between post-truth outlets and the other kind (pre-truth?) is much too clean.  We won’t understand the new frontier of news/fiction unless we see what connects it to the rest of the media world.

A first hint appears in his discussion of the difference between UK and German media on the issue of immigration.  The nativist tabloids in the UK bombarded its readership with several stories per day that dehumanized immigrants and presented them as threats to jobs, services and civil order, while their counterparts in Germany (e.g. Bild) had heartwarming portrayals of immigrants overcoming great odds to save themselves and their families.  This is true; I saw it myself when I was in Germany during the runup to Merkel’s adoption of a Welcome Culture policy.

But this was also the period during which Greece, led by Syriza, faced off against Schäuble and his EU Wall of Nein.  Here the ruling interests in Germany showed their other side, and the popular press was filled with made-up atrocities about the lazy, dishonest crew in Greece whose main purpose in life was to fleece the German taxpayer.  (I posted here at the time about the false news, widely reported in Germany, that Syriza, financed by EU funds, had made rail travel free as a ploy to buy votes.)  Obviously the probity of German journalism was selective.

And similar post-truth spasms have characterized media outlets in the English-speaking world ever since the advent of the printing press.  These were in the service of fomenting war fever (the Spanish-American War, World War I, Vietnam, and Iraq, to mention examples from US history), demonizing labor organizers and civil rights activists or whatever cause needed a bit of extra buttressing.

If there is anything new, I think it might be on one of these fronts: (1) The doctrine that deceit and manipulation are virtuous in the service of the Cause, an element of fascism and Leninism alike, has now found a home in somewhat more mainstream ideologies on the right.  A self-conscious defense of making stuff up increases its effectiveness, because embarrassment at being caught out is no longer a risk.  (2) Post-truth is being deployed, to some extent, against the interests of the capitalist class, particularly as it attacks globalization.  It is “out of control”, the figurative loose cannon on the deck of the battleship, rolling around and capable of firing in any direction.  It needs to be domesticated again.

The reality is that the elevated devotion to truth has always had moments—particular issues or political exigencies—during which it was expected to look the other way.  We won’t understand what’s new and different about today’s propaganda unless we recognize the continuities as well.

Sunday, March 19, 2017

Three Quarters Of Population Fear Losing Homes, So Fear Dominates Complacency

A poll taken last September by the NHP Foundation and reported by Kriston Capps of City Lab that 75 percent of Americans were worried that they could lose their housing in a crisis.  That is three times as many people as were not worried about this.  I note that housing is a basic necessity, along with food and clothing.  This is very basic fear.  People having this sort of fear cannot remotely be called complacent, so at least three times as many people are fearful rather than complacent.  This is the reality of America today, people afraid of losing basic necessities, not complacent about their wonderful and glorious state of life.

Barkley Rosser

Friday, March 17, 2017

Review of Economism: Bad Economics and the Rise of Inequality by James Kwak


There’s economics, a field that has been renewing itself, shaking off theoretical rigidities through more attention to behavior and institutions and shifting its center of gravity toward empirical observation and testing.  And then there’s economics as it exists in standard political discourse, seeing the whole world as refracted through supply and demand diagrams where markets are always efficient and outcomes always socially optimal.  This second, dumbed down, knee-jerk libertarian creed is the object of James Kwak’s new book, Economism.

If ever a book arrived to fill a need, this one has.  Neoliberalism, which is essentially simplified pseudo-economics in action, is finally beginning to break down, but rather than yielding to a more rational  politics it is giving us Brexit, Trump and similar delusionary movements.  Required to choose between the stale cant of economism and authoritarian fairytales of denial, the public is opting for the second door.  Unless economism is disposed of quickly, there won’t be an opening for a more enlightened third option.

In many ways, Kwak is an ideal person to take on the job.  He’s very, very smart.  He generally knows his economics, but he’s not in thrall to the profession.  (He’s actually a law professor.)  He writes clearly and explains economic concepts with a minimum of lecture-itis.  His book is short and to the point.

Most chapters follow the same general template.  Kwak begins by laying out an area of policy and briefly explaining why it’s important; topics include income distribution, taxes, health care, finance and trade.  He then goes into a thorough exposition of the standard economistic analysis, usually based on casual assumptions concerning rational choice, competition, and the market as a cost-benefit device.  His next step is to show this conceptual framework in action, as mouthed by politicians and journalists.  The critical deconstructive move follows, in which Kwak surveys the empirical literature, showing that, in real economics, the conventional assumptions are either flat out wrong or at least seriously qualified.  He then concludes by explaining the policy implications of a more informed approach.  It gets to be a bit formulaic, but it is effective and easy to follow.

I can imagine using a book like this in an introductory microeconomics class.  (Except for a bit of macro here and there, the book’s focus is micro.)  It’s exactly the right antidote for the tendency of introductory textbooks to oversell markets and undersupply critical thinking.  I hope lots of faculty teaching Econ 101 adopt it.

That said, I think it could have been even better than it is.  In a future second edition—and I expect there will be one—Kwak should consider these improvements:

1. His adoption of the voice of economism is very extended.  He will go on for several pages presenting the economistic worldview as if it were his.  Yes, I know, academics like Kwak, myself and perhaps you are trained to cope with this.  It’s nothing for us to read a book in which the author takes on the personna of someone with a differnt point of view for many pages at a time.  Most general readers are not familiar with this, however.  I can say from personal experience that something like half my students would come away thinking that Kwak himself espouses economism and is contradicting himself when he criticizes it.  What to do about this?  Of course, it’s important for Kwak to present economism in a neutral, even sympathetic voice, and to do so at the length it requires.  Perhaps he considered adding, every paragraph or so, a qualifier like “from this point of view”, but decided it was too clunky.  In that case, an altered typeface, like italics, could have been used to set off his temporarily assumed voice as expositor of economism.  One way or the other, markers are needed for readers unused to academic protocols.

2. He would do well to distinguish between the normative and positive aspects of economism.  In a policy context, both are usually entailed: the positive view that this is how the world works is given political salience by the normative view that demand curves represent “benefits” to society and the supply curve “costs”.  It’s important to recognize that economism can fail on either account: either empirical work can show that this is not how the world works, or the assumptions about how markets represent social interests can be challenged, or both.  In practice, Kwak relies more on the first critique, and the book usefully draws together key empirical findings on topics like minimum wages, health costs, etc.  But the market failure framework could have been given more of a workout than it received; in practice these arguments are effective.

3. The chapter on international trade is timid.  Kwak points out that the full-dress neoclassical trade model (Heckscher-Ohlin-Samuelson, although he doesn’t identify it as such) recognizes losers as well as winners from trade liberalization and makes this the conceptual linchpin of his critique of economism in this area.  In this he has a lot of company; H-O-S with lots of friction has become the standard progressive position.  However, the impacts of trade liberalization on employment may be worse than this, since the proposition that the trade balance is unaffected by changes in the degree of openness requires adjustments in exchange rates that, at the very least, are empirically unreliable.  (All exchange rate adjustments in response to anything are empirically unreliable.)  In practice it’s entirely possible, likely even, that a major liberalization event like the US opening to trade with China at the time of its WTO accession has an effect on the aggregate trade balance and not just the composition of industries on each side of the ledger.  I shouldn’t make a big deal of this, because Kwak is no doubt eager to avoid criticism that he is unknowledgeable about economics, and most economists would regard my criticism as falling under that shadow—but I don’t think I’m wrong about this.

4. The very end of the book—the final four pages—are simply weak.  To wrap up, Kwak points out that, whatever its faults, economism delivers by having a simple, all-purpose, easy-to-grasp message and then asks, “What’s our message?”  His answer is that wealthy economies don’t need economic growth or even economic efficiency as they used to, and we should all turn away from economic concerns and embrace happiness instead.  Huh?  Now, before I launch into a critique of this view, I should make it clear that I agree with a lot of it on matters of substance: economic values, like income, are not the same as human values.  One can live well on less money, and the pursuit of wealth should not be the primary goal either for individuals or societies.  Yes, of course.  But that doesn’t mean that “downplay money” is the logical message to set against economism.

One obvious reason is that the difference between wealth and happiness played no role whatsoever in the chapters that led up to his conclusion.  Economism is wrong about how labor markets work, how health care works, how international trade works and so on, not because money doesn’t buy you love, but because its analysis is wrong.  If we’re looking for a common message that applies to all these topics and pokes a hole in the economistic world view, wouldn’t we look for common elements in the arguments we’ve already made?  It’s always a mistake in a piece of writing to go off in a new direction at the point where we should be summing up; this should have occurred to Kwak or been pointed out to him by his reviewers.

The other reason is that downplaying economics—saying that income and other economic measures don’t mean so much—violates the spirit of the book.  At its best, Economism is feisty.  It challenges sloppy thinking about how the economic system works and makes the case for progressive policies that would result in greater income equality and access to economic goods.  Excellent!  Why at the end turn around and say, in effect, OK, we’ll give the conservatives economics, and we’ll take happiness instead?  No!  Don’t give them that!  They don’t deserve it!  The unifying progressive message is not that economics doesn’t matter so much; it’s that the economics of knee-jerk libertarianism is doctrinaire, false and self-serving.  Our message is that we reject the ideology of universal unlimited acquisitiveness as a reasonable way of organizing human affairs, and that the evidence is on our side.  I’d love to see a hard-hitting conclusion replace the flabby one that’s currently there.

It’s in the nature of a review like this to dwell on the negative, but I don’t want you to be dissuaded from buying and reading this book.  Economism is an important work of popular education that needed to be written.  Kwak has the skills to do it well—even better than he has this time out.

The Role of Experts in Public Debate

Jonathan Portes asks, "What’s the role of experts in the public debate?" He assumes it is his prerogative, as an expert, to define that role:
I think we have three really important functions. 
First, to explain our basic concepts and most important insights in plain English. Famously, Paul Samuelson, the founder of modern macroeconomics, was asked whether economics told us anything that was true but not obvious.  It took him a couple of years, but eventually he gave an excellent and topical example – simply the theory of comparative advantage. 
Similarly, I often say that the most useful thing I did in my 6 years as Chief Economist  at DWP was to explain the lump of labour fallacy – that there isn’t a fixed number of jobs in the economy, and increased immigration or more women working adds to both labour demand and labour supply – to six successive Secretaries of State. So that’s the first. 
Second is to call bullshit.
O.K. I call bullshit. What Portes explained "to six successive Secretaries of State" was a figment of the imagination of a late 18th century Lancashire magistrate, a self-styled "friend to the poor" who couldn't understand why poor people got so upset about having their wages cut or losing their jobs -- to the extent they would go around throwing rocks through windows, breaking machines and burning down factories -- when it was obvious to him that it was all for the best and in the long run we would all be better off... or else dead.

I call bullshit because what Portes explained to six successive Secretaries of State was simply the return of the repressed -- the obverse of "Say's Law" (which was neither Say's nor a Law) that "supply creates its own demand," which John Maynard Keynes demolished in The General Theory of Employment, Interest and Money and that John Kenneth Galbraith subsequently declared "sank without trace" in the wake of Keynes's demolition of it.

I call bullshit because when Paul Samuelson resurrected the defunct fallacy claim that Portes explained to six successive Secretaries of State, he did so on the condition that governments pursued the sorts of "Keynesian" job-creating policies that the discredited principle of "supply creates its own demand" insisted were both unnecessary and counter-productive.
But the lump of labor argument implies that there is only so much useful remunerative work to be done in any economic system, and that is indeed a fallacy. If proper and sound monetary, fiscal, and pricing policies are being vigorously promulgated, we need not resign ourselves to mass unemployment. And although technological unemployment is not to be shrugged off lightly, its optimal solution lies in offsetting policies that create adequate job opportunities and new skills.
[Incidentally, as Robert Schiller has noted, the promised prevention of mass unemployment by vigorous policy intervention did not imply the preservation of wage levels. Schiller cited the following passage from the Samuelson textbook,  "...a decrease in the demand for a particular kind of labor because of technological shifts in an industry can he adapted to -- lower relative wages and migration of labor and capital will eventually provide new jobs for the displaced workers."]

I call bullshit because what Portes explained to six successive Secretaries of State was not even Paul Samuelson's policy-animated zombie lump-of-labour fallacy but a supply-side, anti-inflationary retrofit cobbled together by Richard Layard and associates and touted by Tony Blair and Gerhard Schroeder as the Third Way "new supply-side agenda for the left." Central to that agenda were tax cuts to promote economic growth and "active labour market policies" to foster non-inflationary expansion of employment by making conditions more "flexible" and lower-waged:
Part-time work and low-paid work are better than no work because they ease the transition from unemployment to jobs. ... 
Encourage employers to offer ‘entry’ jobs to the labour market by lowering the burden of tax and social security contributions on low-paid jobs. ... 
Adjustment will be the easier, the more labour and product markets are working properly. Barriers to employment in relatively low productivity sectors need to be lowered if employees displaced by the productivity gains that are an inherent feature of structural change are to find jobs elsewhere. The labour market needs a low-wage sector in order to make low-skill jobs available.
I call bullshit because in defending the outcomes of supply-side labour policies, Portes soft-pedaled the stated low-wage objectives of the Third Way agenda. In a London Review of Books review, Portes admitted that "it may drive down wages for the low-skilled, but the effect is small compared to that of other factors (technological change, the national minimum wage and so on)." In the Third Way supply-side agenda, however, a low-wage sector was promoted as a desirable feature -- making more low-skill jobs available -- not a trivial bug to be brushed aside. In other words, in "driving down wages for the low skilled" the policy was achieving exactly what it was intended to but Portes was "too discreet" to admit that was the stated objectives of the policy.

The Poor Man's Friend

Dorning Rasbotham, a magistrate from near Bolton, Lancashire wrote a pamphlet in response to those 1779 riots, Thoughts on the Use of Machines in the Cotton Manufacture, that was to leave a lasting impression on polemical political economy. The pamphlet was signed "a Friend to the Poor." Although there has been some confusion the authorship of the pamphlet, a memorial plaque in the church where Rasbotham was buried described him as having "the characters of the poor man's friend." Squire Rasbotham strove to leave no doubt about where his sympathies laid:
I am, from the bottom of my heart, a Friend to the Poor. I wish to plead their cause, and to speak in their favour. I feel tenderly for the poor man and his family. And, if my heart does not deceive me, I would do, I would suffer any thing for their welfare. Led by no other principle, but regard to the Poor, I now wish to enter into free and friendly conversation with you, my poor but esteemed friends, on the subject of our machines.
Rasbotham's free and friendly conversation consisted of a series of assertions, many of which may strike the reader as condescending and several of which express notions that are repeated perennially as commonplaces in economic thought:
  1. The interests of the poor should have the highest priority (after all, what would become of the rich if there were no poor people to till their grounds, and pay their rent?);
  2. There is not so great a difference between the real interests of the rich and of the poor;
  3. Trade is a large and difficult subject that requires deep thought, long study, extensive reading and large experience to form a true judgment;
  4. Machines distinguish men in society from men in a savage state. There are many examples showing how machines invariably benefit people;
  5. All improvements at first produce some difficulty but many receive the benefit while only a few suffer (probably not much and hopefully not for too long), Those who are inconvenienced should be grateful for the opportunity to make a sacrifice for their fellow man;
  6. Trade will find its own level. Those thrown out of their old employments will find or learn new ones. Those who get a disproportionate gain will soon find many rivals and lose their temporary advantage;
  7. There is a disposition among people to be unduly alarmed by new discoveries;
  8. Even if machines are evils they are necessary evils. We might as well make the best of them;
  9. This would be a prosperous time for the poor, if only they would show some initiative and weren't so inclined to carry their money to the alehouse;
  10. Anyone who disagrees with the above truths is an irreligious, conscienceless scoundrel and nincompoop; and, last but not least,
  11. The belief that "there is only a certain quantity of labour to be performed" is a false principle.
John Ramsey McCulloch, one of the more prolific, second-rank political economists of the early 19th century was effusive in his praise for the sensibility and soundness of Mr. Rasbotham's opinion, emphasizing the observation that "There is, in fact, no idea so groundless and absurd, as that which supposes that an increased facility of production can under any circumstances be injurious to the labourers." Rasbotham's own indictment of that "groundless and absurd" idea merits quotation in full if only because future economists echoed it incessantly for two centuries hence -- presumably without the faintest clue as to its origin:
There is, say they, a certain quantity of labour to be performed. This used to be performed by hands, without machines, or with very little help from them. But if now machines perform a larger share than before, suppose one fourth part, so many hands as are necessary to work that fourth part, will be thrown out of work, or suffer in their wages. The principle itself is false. There is not a precise limited quantity of labour, beyond which there is no demand. Trade is not hemmed in by great walls, beyond which it cannot go. By bringing our goods cheaper and better to market, we open new markets, we get new customers, we encrease the quantity of labour necessary to supply these, and thus we are encouraged to push on, in hope of still new advantages. A cheap market will always be full of customers. [emphasis in original]

Wednesday, March 15, 2017

Where Should We Put Economic Empiricism on the Hubris-Humility Spectrum?

A bit of a kerfuffle has broken out over the claim that, as economics gets more empirical, it also gets more reliable.  Russ Roberts says that, in the name of empiricism, economists are trotting out contested results to adjudicate questions that are vastly more complicated than their methods can allow for, and that they should acquire a bit more humility instead.  Balderdash, says Noah Smith: whatever lack of humility is evinced by researchers who jump the gun in empirical work is swept away by the tsunami of hubris issuing from those who have only vague, unsubstantiated assumptions about how the world “really” works.  Cowen rebuts, arguing that motivated, hubristic reasoning can seize on empiricism just as readily as any other academic raw material.  Smith retorts, going halfway to meet Cowen, but expressing optimism that empirical methods carry their own antibody against motivated bs and will pull knowledge in a more realistic direction over time.

So what do I say?  (I thought you’d never ask.)  First, Roberts is simply recycling, for a forgetful age, the now-ancient claim of Hayek regarding the Fatal Conceit.  I agree that it is desirable to not be Fatally Conceited, although it is widely recognized, I think, that, as he drew it,  Hayek’s circle of unknowability is both too wide (not respecting degrees of evidence) and too narrow (sweeping assumptions about market process).  Roberts can challenge me on this if he wants, but I see Fatal Conceit-ism in just about every paragraph of his post.

Meanwhile, I think really empirical economics would place intrinsic barriers to hubris and ideological cherry-picking, since its methods would be inherently self-critical.  For instance, cataloging all plausible explanations for a possible relationship between X and Y and identifying potential markers for them in the evidence, as I suggest here, would be a prophylactic against overconfident “empirical” claims about a researcher’s favored theory.  Similarly, serious attention to issues of proxy measurement would give pause to those eager to read in a sweeping interpretation of what is often just indirect evidence.  I have also expressed concern over methods that are based on the assumptions that impose a priori uniformities on the economic relationships one tries to estimate.

So my position is that Roberts and Cowen are more right, and Smith less, than I would like, mainly because what passes for empiricism in economics at present is often deficient in an empiricist, self-critical spirit and methodology.  At the same time, the debates over topics like the minimum wage, the effects of charter schools on educational outcomes and the like are on a vastly higher plane when they are about data sets and analytical assumptions than the certitude of my unquestioned beliefs against the certitude of yours.  It’s also a cheap and not altogether forthcoming dodge to respond to econometric disputes with a flip “There is never a clean empirical test that ultimately settles these issues.”  (Roberts)  That's a Merchants of Doubt epistemology.

Have Fascists Done Anything Right Regularly?

Build lots of infrastructure.   This is especially the case if we include the proto-fascist Bonapartes on the list, who really built a lot of it and did a pretty good job of it, sewers and good streets in Paris especially.  Mussolini built lots of railway stations and also railroads. After all, he was famous for supposedly making the trains run on time.  And Hitler invented the freeway with his autobahn system that inspired Eisenhower to build the interstate highway system. 

Why have so many of them done this?  A major reason, certainly relevant for both Napoleon I and Mussolini, was a fascination with Ancient Rome and Julius Caesar, and building lots of quality infrastructure was one of the things the Romans did well in their republic and early empire heyday, roads, aqueducts, and sewers.  The cloaca maxima sewer line in central Rome is still functioning more than 2000 years after it was built.

Now sometimes fascists have not done such a good job of it and some of it has been overdone and monumental, with Mussolini in particular guilty of this with his brutalist massive buildings.  And some have simply not done much of it all, such as the milder fascists of the Franco variety in Spain and parts of Latin America.  And there was also the absurd proto-fascist Cola di Rienzo in Rome in the mid-1300s, who one would think would have imitated the ancient Romans, he claimed to be reviving their republic, but spent too much time fighting dumb wars, having massive parades, and triggering famines to get around to building any updated aqueducts or sewer lines.

Now we have a president in the US who has talked a lot  about building infrastrure, throwing around some large numbers of spending that might happen.  However, the only specific plan he has put forward has been a plan to cut taxes for  private companies that build infrastructure, with the likely outcome of this effectively a privatization of the infrastructure with the companies collecting tolls, although this is likely not to lead to infrastructure improvements the US needs such as fixing potholes. But then, he has yet to make an actual proposal along these lines, much less along more conventional just up the highway budget and fix the darned potholes sort of thing.  So, it looks like he might not even be any good at the one maybe good thing that many fascists have actually done.

Barkley Rosser

Tuesday, March 14, 2017

Trumpcare Saves Social Security By Killing People!

Yes, there it is in black and white in footnote f on p. 33 of the Congressional Budget Office (CBO) official report on the proposed American Health Care Act, aka Trumpcare.  Between now and 2026 spending by the Social Security Administration is projected to decline by $3 billion if Trumpcare passes.  This is due to a projected 1 out of 830  people dying who would not under the status quo, this based on a study of what happened to death rates in Massachusetts after Romneycare came in. The projected deaths are about 17,000 in 2018 and up to about 29,000 in 2026.

Another great thing?  There will be a reduction in accumulated deficits of about $300 billion, with a reduction of revenues of about $0.9 trillion and a reduction of outlays of about $1.2 trillion.  The former will be due to cuts in taxes on high income people while the latter will be due to eliminating subsidies to help poorer people pay for health insurance on the exchanges as well as cutbacks in Medicaid spending for even poorer people.  How fortunate can we get?

Barkley Rosser

Health Care: Jonathan Gruber v. Sean Spicer

Trump’s press secretary is fielding questions from the press on health care and is basically lying through his teeth as he bashes ObamaCare and sings the glory of TrumpCare. OK – that is what he is paid to do. A reporter asks him about the latest from Jonathan Gruber:
MIT economics professor and Obamacare architect Jonathan Gruber said that any healthcare replacement law the GOP has in store is a scam. “Any replace[ment] that they would pass would result in millions of Americans losing health insurance, would result in higher premiums, and would result in a huge redistribution from the poor to the rich," Gruber said on Boston Herald Radio's "Herald Drive" show with John Sapochetti and Rick Shaffer. "Now if they are happy with that and they are willing to do that, I wouldn’t call that a replacement, I would call that a scam”.
Gruber used to be the Republican guru on health care economics – until of course President Obama adopted RomneyCare. I guess their new guru is Sean Spicer.

Monday, March 13, 2017

Should The Complacent Class Be Called The Fearful Class?

Tyler Cowen has published his most successful book yet, The Complacent Class, now on the Washington Post nonfiction bestseller list and getting reviewed by everybody from The Economist to the New York Times and on.  It is the Book de Jour that all are commenting on one way or another.  Is America declining because so many of its people have become complacent?  (Shame on them.)

The book has much to offer.  It is chock  full of many interesting facts, although many of them Tyler has publicized at one point or another on his blog, Marginal  Revolution.  He even pushes some newly fashionable ideas that have been in the dark for too long, such as a sort of cyclical theory of history.  And he certainly makes the case that there are lots of trends that seem to show the American people not being as energetic or adventurous as they used to be, with headline data including reduced interstate migration, reduced changing of jobs, reduced patenting, and reduced entrepreneurial startups, among other things.  He does note some external matters that may be adding to some of this, with building codes and land use restriction in economically dynamic urban areas a big culprit as it makes it harder for many to take advantage of the high paying jobs in those areas.  He has also noted that we may be running out of new scientific knowledge to learn or discover, which makes it harder to find dramatic things to patent, and indeed he wrote a previous book about this, blaming this as a major reason for secular stagnation.

But the big question is whether the title is an accurate representation of what is in the book, which has come up in a series of inconclusive blogposts about "Who is the Complacent Class?"  Frankly, it is not clear  that there is one, or if there is one, they are not the people who are responsible for the data he puts forth as supposedly claiming there is one.  If there is a complacent class in the US, it is the top 1 or 2 percent of the wealth and income distribution, who get lots of attention, but who are not the people who are not moving across state lines or changing jobs.  That is going on in the other 98 percent mostly.

That great mass of the population is not complacent at all, as the election of Donald Trump shows.  They are fearful.  The are the Fearful Class.  Real wages have been stagnant for a good 40 years, basically since the time that the distribution of income began to become more unequal again.  This has been offset partly by the rise of double income households, but this phenomenon can be seen as the main reason why interstate migration has fallen.  When there is only one breadwinner in the household, then the family will move when that person gets offered a better job out of state. But when there are two, a possible promotion/raise for one may mean the loss of income from the other losing their job without necessarily being able to find a comparable one in the new location.  And such a move with such a failure can lead to the breakup of the family as well.

This flatness of wages also is obviously behind the decline of job changing. That has long been the path for raising one's income, but as wages do not grow, the availability of such better opportunities declines.  Another aspect of this is the worsening situation regarding pensions.  We have seen a long term shift from defined benefit pensions to defined contribution pensions, which shifts costs to workers from employers.  Given that the benefits then depend on the future stock market and other such noncertain matters, this reduces security and complacency and has many people approaching retirement more fearful.  It is fear, not  complacency, that holds people in their jobs and in their states.

One area where Tyler might have a point is the decline of startups.  However, a close examination of  this data shows that the main decline of startups has been since the advent of the Great Recession, with this decline looking like it has bottomed out and may be reversing.  Of course one can argue about whether this is a chicken or egg situation.  Was the decline of startups due to the Great Recession or did it aggravate it and add to the tendency of secular stagnation?  Probably both are true, but this again cannot be blamed on some outbreak or even long term increase in complacency by whomever (although maybe this is that top group getting complacent).  Rather this looks more like rational fear: when the economy is tanking the prospects for successfully starting a new business look worse.  Again, it looks like we are dealing with fear far more than we are dealing with complacency.

Barkley Rosser


No Centennial Celebration Of Either Revolution In Russia

There will be no celebration in Russsia of the centennial of either the February Revolution (March in Gregorian calendar) or the Great October Socialist Revolution (November in Gregorian calendar).  During the Soviet period there never were celebrations of the February revolution, per se, as it was superseded by the October one,  although it was de facto celebrated in that the anniversary of its begining, March 8 in Gregorian calendar, was and is International Womens' Day, and I have posted on that previously here.  The irony is that this link is a major reason why that day is not generally celebrated in the US, indeed, is not widely known thanks to anti-communist hysteria in the 1950s.

One might have thought that perhaps Vladimir Putin might have been interested in uplifting the February Revolution as overcoming weak tsardom.  But apparently he likes to glorify the tsarist regime from the period of its strong tsars, not the weak and pathetic Nicholas II who could not avoid having his government fall, pathetic loser wimp.  And pretty much the same goes for Alexander Kerensky, whose form of government partly resembled what is in place now, a more or less democratically elected Duma, but no president with strong powers.  But Kerensky was another pathetic wimp loser who could not maintain power and got overthrown, nothing to celebrate there!

Then we have the big one, which was always celebrated as the biggest holiday of the year (followed by May Day and Victory Day, May 9, which does get celebrated now), November 7.  But no, the problem being that while Lenin was strong, he was down on the Russian Orthodox Church, and that entity is now a major supporter of Putin's and a major component of his power base, also a supporter of his various shenanigans abroad, all of this part of making Russia great again like in the days of teal tsars like Peter the Great and Catherine the Great.  So, Lenin is not to be remembered either .  The bottom line is that there is nobody from 1917 that Putin can view as a heroic leader with whom he can identify and praise.  Better to forget the whole thing, although apparently in December he appointed a committee to organize some academic seminars about all of it.

Of course there is the odd matter of Stalin, whom Putin has been quietly rehabilitating even to the point of allowing statues of him to be built in certain locations, if not in Moscow.  There remain obvious problems with putting Old Joe up too much, but Putin has definitely glommed onto World War II big time as the great and glorious event, the Great Patriotic War that was the glory of Russia (and the former Soviet Union), and so Stalin must be given credit as the great leader of that.  He even gets a bit of a pass from the Church in a way that Lenin does not.  Although mostly Stalin suppressed the Church, at the lowest depths of the war when the Nazis were at the gates of Moscow, Stalin brought Church leaders in and drew on them to encourage Russian people to support the war effort as a nationalist enterprise.  So, Stalin gets more acceptance from them than does Lenin who never did anything for the Russian Orthodox Church beyond making it become heroic through persecution.

Barkley Rosser