Links for September 23

I am going to strive to make these posts weekly. People need things to read.

 

The trouble with macro. I haven’t yet read any of the latest big-name additions to the “what’s wrong with macroeconomics?” pile: Romer (with update), Kocherlakota, Krugman, Blanchard. I should read them, maybe I will, maybe you should too. Here’s my own contribution, from a few years ago.

 

Tankus notes. You may know Nathan Tankus from around the internet. I’ve been telling him for a while that he should have a blog. He’s finally started one, and it’s very much worth reading. I’m having some trouble with one of his early posts. Well, that’s how it works: You comment on what you disagree with, not the things you think are smart and true and interesting — which in this case is a lot.

 

The shape of the elephant. Branko Milanovic’s “elephant graph” shows the changes in the global distribution of income across persons since 1980, as distinct from the more-familiar distribution of income within countries or between countries. The big story here is that while there has been substantial convergence, it isn’t across the board: The biggest gains were between the 10th and 75th percentiles of the global distribution, and at the very top; gains were much smaller in the bottom 10 percent and between the 70th and 99th percentiles. One question about this has been how much of this is due to China; as David Rosnick and now Adam Corlett of the Resolution Fondation note, if you exclude China the central peak goes away; it’s no longer true that growth was unusually fast in the middle of the global distribution. Corlett also claims that the very slow growth in the upper-middle part of the distribution — close to zero between the 75th and 85th percentiles — is due to big falls in income in the former Soviet block and Japan. Initially I liked the symmetry of this. But now I think Corlett is just wrong on this point; certainly he gives no real evidence for it.  In reality, the slow growth of that part of the distribution seems to be almost entirely an artifact due to the slow growth of population in the upper part of the distribution; correct for that, as Rosnick does here, and the non-China distribution is basically flat between the 10th and 99th percentiles:

Source: David Rosnick
Source: David Rosnick

Yes, there does seem to be slightly slower growth just below the top. But given the imprecision of the data we shouldn’t put much weight on it. And in any case whatever the effect of falling incomes in Japan and Eastern Europe (and blue-collar incomes in the US and western Europe), it’s trivial compared to the increase in China. Outside of China, the global story seems to be the familiar one of the very rich pulling ahead, the very poor falling behind, and the middle keeping pace. Of course, it is true, as the original elephant graph suggested, that the share of income going to the upper-middle has fallen; but again, that’s because of slower population growth in the countries where that part of the distribution is concentrated, not because of slower income gains.

It’s important to stress that no one is claiming that Branko’s figures are wrong, and also that Branko is on the side of the angels here. He’s been fighting the good fight for years against the whiggish presumption of universal convergence.

 

Equality of opportunity and revolution. Speaking of Branko, here he is on the problem with equality of opportunity:

Upward mobility for some implies downward mobility for the others. But if those currently at the top have a stronghold on the top places in society, there will no upward mobility however much we clamor for it. … In societies that develop quickly even if a lot of mobility is about positional advantages, … it can be compensated by creating enough new social layers, new jobs and by making people richer. …

In more stagnant societies, mobility becomes a zero-sum game. To effect real social mobility in such societies, you need revolutions that, while equalizing chances or rather improving dramatically the chances of those on the bottom, do so at the cost of those on the top. … The French Revolution, until Napoleon to some extent reimposed the old state of affairs, was precisely such an upheaval: it oppressed the upper classes (clergy and nobility) and promoted the poorer classes. The Russian revolution did the same thing; it introduced an explicit reverse discrimination against the sons and daughters of former capitalists, and even of the intellectuals, in the access to education.

I think this is right. The principle of equality of opportunity is incompatible, not just practically but logically, with the principle of inheritance. The only way to realize it is to deprive those at the top of their power and privileges, which by definition is possible only in a revolutionary situation. This is one reason why I have no interest in a political program defined, even in its incremental first steps, in terms of equality of income or wealth. The goal isn’t equality but the abolition of the system which makes quantitative comparisons of people’s life-situations possible.

The post continues:

There is also an age element to such revolutions which fundamentally alter societies and lift those from below to the top. The young people benefit. In a beautiful short novel entitled “The élan of our youth” Alexander Zinoviev, a Russian logician and later dissident, describes the Stalinist purges from a young man’s perspective. The purges of all 40- or 50-year old “Trotskyites” and “wreckers” opened suddenly incredible vistas of upward mobility for those who were 20- or 25-year old.  They could hope, at best, to come to the positions of authority in ten or fifteen years; now, that were suddenly thrown in charge of hundreds of workers, became chief designers of airplanes, top engineers of the metro. What was purge and Gulag for some, was upward mobility for others.

As this suggests, the overturning ofhierarchies didn’t stop with the revolutions themselves — that was the essential content of the various purges, to prevent a new elite from consolidating itself. I’ve always wondered how much vitality revolutionary France and Russia gained from these great overturnings. There are an enormous number of working-class people in our society, I have no doubt, who would be much more capable of running governments and factories, designing airplanes and subways, or teaching economics for that matter, than the people who get to do it.

 

We simply do not know — but we can fake it. Aswath Damodaran has a delicious post on the valuations that Elon Musk’s bankers came up with to justify Tesla’s acquisition of Solar City. The basic problem in these kinds of exercises is that the same price has to look high to the shareholders of the acquired company and low to the shareholders of the acquiring company. In this case, the Solar City shareholders have to believe that the 0.11 Tesla shares they are getting are worth more than the Solar City share they are giving up, while the Tesla shareholders have to believe just the opposite — that one Solar City share is worth more than the 0.11 Tesla shares they are giving for it. You can square this circle by postulating some gains from the combination — synergies! efficiencies! or, sotto voce, market power — that allows the acquirer to pay a premium over the market price while still supposedly getting a bargain. Those gains may be bullshit but at least there’s a story that makes sense. But as Damodaran explains, that isn’t even attempted here. Instead the two sets of advisors (both ultimately hired by Musk) simply use different assumptions for the growth rates and cost of capital for the two companies, generating two different valuations. For instance, Tesla’s advisors assume that Solar City’s existing business will grow at 3-5% in perpetuity, while Solar City’s advisors assume the same business will grow at 1.5-3%. So one set of shareholders can be told that a Solar City share is definitely worth less than 0.11 Tesla shares, while the other set of shareholders can be told that it is definitely worth more.

So what’s the interest here? Obviously, it’s always fun to se someone throwing shoes at the masters of the universe. But with my macroeconomist hat on, the important thing is it’s a snapshot of the concrete sociology behind the discounting of future cashflows. Whenever we talk about “the market” valuing some project or business, we are ultimately talking about someone at Lazard or Evercore plugging values into a spreadsheet. This is something people who imagine that production decisions are or can be based on market signals — including my Proudhonist friends — would do well to keep in mind. Solar City lost money last year. It lost money this year. It will lose money next year. It keeps going anyway not because “the market” wants it to, but because Musk and his bankers want it to. And their knowledge of the future isn’t any better founded than the rest of ours. Now, you could argue that this case is noteworthy because the projections are unusually bogus. Damodaran suggests they aren’t really, or only by degree. And in any case this sort of special pleading wouldn’t work if there were an objective basis for computing the true value of future cashflows. I suspect it was precisely Keynes’ experience with real-world financial transactions like this that made him stress the fundamental unknowability of the future.

 

Uber: The bar mitzvah moment. While we’re reading Damodaran, here’s another well-aimed shoe, this one at Uber. As he says, pushing down costs is not enough to make profits. You also need some way of charging more than costs. You need some kind of monopoly power, some source of rents: network externalities; increasing returns, and the financing to take advantage of them; proprietary technology; brand loyalty; explicit or implicit collusion with your competitors. Which of these does Uber have? maybe not any? Uber’s foray into self-driving cars is perhaps a way to generate rents, though they’re more likely to accrue to the companies that actually own the technology; I think it’s better seen as a ploy to convince investors for another quarter or two that there are rents there to be sought.

Izabella Kaminska covers some of the same territory in what may be the definitive Uber takedown at FT Alphaville. Though perhaps she focuses overmuch on how awful it would be if Uber’s model worked, and not enough on how unlikely it is to.

 

On other blogs, other wonders. 

San Francisco Fed president John Williams writes, “during a downturn, countercyclical fiscal policy should be our equivalent of a first responder to recessions.” Does this mean that MMT has won?

Mike Konczal: Trump is full of policy.

My friend Sarah Jaffe interviews my friend Vamsi, on the massive strikes going on in India.

The Harry Potter books are bad books and and have a bad, childish, reactionary view of the world. So does J. K. Rowling.

The Mason-Tanebaum household has its first byline in the New York Times this week, with Laura’s review of the novel Black Wave in the Sunday books section.

 

 

Potential Output: Why Should We Care?

Brian Romanchuk has a characteristically thoughtful post making “the case against growth and stimulus.” He’s responding to pieces by Larry Summers and John Cochrane arguing that macroeconomic policy should focus more on output growth.

Brian has two objections to this. First, environmental resource constraints are real. Not in an absolute sense — in principle a given throughput of physical inputs can be associated with an arbitrarily high GDP. But in our economies as currently organized there is a tight connection between rising GDP and increased use of fossil fuels. Even leaving aside climate change concerns, that means that faster growth may well be cut off by a spike in oil prices. [1] The second objection is that the link between higher growth and better labor-market outcomes may not be as tight as Summers suggests. In Brian’s view, things like public investment may not do much for incomes at the bottom because the

U.S. labour market is obviously segmented. The “high skill” segments are doing relatively well… Non-targeted “demand management” (such as infrastructure spending) is probably going to require creating jobs for college-educated workers. (You need an engineering degree to sign off on plans, for example.) It is a safe bet that the job market for college graduates would become extremely tight before the U-6 unemployment rate even begins to close on its historical lows. This would cause inflationary pressures…

This suggests that the focus should be on direct job-creation programs for people left out of the private market, rather than policies to raise aggregate demand.

Since I am (very slowly) making an argument that there is space for more expansionary policy, evidently I disagree.

Before saying why, I should add one other argument on Brian’s side. One reason to be against “growth” as a political project is that higher GDP does not increase people’s wellbeing. In my view this is clearly true for countries with per-capita GDP above $15,000-20,000 or so. This is a moderately respectable view these days, though obviously a minority one. For most economists the case for growth is still so obvious it doesn’t even need stating — having more stuff makes people happier.

I don’t believe that. But I still think it’s worth arguing that there is more space for expansionary policy to raise GDP. For three reasons:

First, I think Summers and Cochrane are right (!) about the importance of tight labor markets to raise wages, flatten the income distribution and increase the social power of working people more broadly. I don’t think you would have had the mass social movements of the 1960s and 70s (even on such apparently non-economic ones as feminism and gay rights) if there hadn’t been a long period of very tight labor markets. [2] The threat of unemployment maintains the power of the boss in the workplace, and that reinforces all kinds of other hierarchies as well.

Corollary to this, I’m not convinced that the labor market is as segmented as Brian suggests. I think that in many cases, people with more credentials get to the front of the queue for the same jobs, as opposed to competing for a distinct pool of jobs. It seems to me the historical evidence is unambiguous that when overall unemployment falls there are disproportionate gains for those at the bottom.

Second, I think the idea of a hard ceiling to potential output is an important part of the logic of scarcity that hems in our political imagination in all kinds of harmful ways. Yes, infrastructure spending, and sometimes also increased social spending, even a basic income, can be presented as measures to boost demand and output. But you can also look at it the other way — these are good things on the merits, and the claim that they will boost output is just a way of defusing arguments that we “can’t afford” them. To me, the policy importance of saying we are far from any real supply constraint is not that higher output is desirable in itself (apart from its labor-market effects); it’s that it strengthens the argument for public spending that’s desirable for its own sake.

Third, on a more academic level, I think the idea of a fixed exogenous potential output is one of the most important patches (along with the “natural rate of interest”) covering up the disconnect between the “real exchange” world of economic theory and the actual monetary production economy we live in. Assuming that the long-run path of output is fixed by real supply-side factors is a way of quarantining monetary and demand factors to the short run. So the more space we open up for demand-side effects, the more space we have to analyze the economy as a system of money claims and payments and coordination problems rather than the efficient allocation of scare resources

 

[1] As it happens, this was the the topic of the first real post on this blog.

[2] The best discussion of this link I know of is in Armstrong, Glyn and Harrison’s Capitalism Since 1945. Jefferson Cowie’s more recent book on the ’70s makes a similar case for the US specifically.

 

(I wrote this post a month ago and for some reason never posted it.)

 

UPDATE: There’s another argument I meant to mention. When I look around I see a world full of energetic, talented, creative people forced to spend their days doing tedious shitwork and performing servility. I find it morally offensive to claim that a job at McDonald’s or in a nail salon or Amazon warehouse is the fullest use of anyone’s potential. When Keynes says that we will build “our New Jerusalem out of the labour which in our former vain folly we were keeping unused and unhappy in enforced idleness,” he doesn’t have to mean literal idleness. In a society in which aggregate expenditure was constantly pushing against supply constraints, millions of people today who spend the working hours of the day having the humanity slowly ground out of them would instead be developing their capacities as engineers, artists, electricians, doctors, scientists. To say that most of the jobs we expect people to do today make full use of their potential is a vile slander, even if we are only measuring potential by the narrow standards of GDP.