Links for May 5, 2017

Some economics content, for this rainy Friday afternoon:

 

Turbulence. Over at INET, Arjun Jayadev has posted the next in our series of “rebel masters” interviews with dissenting economists. This one is with Anwar Shaikh, who is, I’m sure, familiar to readers of this blog. Shaikh’s work resists summary, but the

broad thesis revolves around the idea that there is an alternative tradition-embedded in the classical approach of Smith, Ricardo and Marx which insists on understanding the world on its own terms rather than from an idealized economy from which the real world deviates. This approach focuses on what is termed “real competition” wherein competition between firms, each seeking to get the highest price they can, leads to a “turbulent gravitation” of prices around values. As such, there is never an equilibrium, but a dancing around some key deeper parameters.

As with all these interviews, there’s also some discussion of his own political and intellectual development, as well as of the content of his work.

I haven’t made a serious effort to read Shaikh’s big new book Capitalism. Given its heft, I suspect it will function more as a reference work, with people going to specific sections rather than reading it from front to back. (I know one person who is using it as an undergraduate textbook, which seems ambitious.) But if you want an admiring but not uncritical overview of the book as a whole, this review in New Left Review by John Grahl could be a good place to start. It’s written for people interested in the broad political economy tradition; it’s focused on the broad sweep of the argument, not on Shaikh’s position within current debates in heterodox economics.

 

The rich are different from you and me. [1] At Washington Center for Economic Growth, Nick Bunker calls attention to some new research on income inequality over the past 15 years. The key finding is that since the end of the 1990s, the rise in income inequality is almost all due to income from S-corporations (pass-through companies, partnerships, etc.) at the very top of the distribution. As a result, rising inequality shows up in tax data, but not in Social Security data, which captures only labor income. What do we take from this? First, the point I’ve made periodically on this blog: Incomes at the top are mainly capital income, not labor income. But there’s also a methodological point — the importance of constantly walking back and forth between your theoretical construct, the concrete social reality it hopes to explain, and the data (collected by somebody, according to some particular procedures) that stands between them.

 

What are foreign investors for? At FT Alphaville, Matthew Klein has a very interesting post on capital controls. As he notes, during the first decade of the euro, Spain was the recipient of one of “the greatest capital flows of all time,” with owners of financial assets all over Europe rushing to trade them for claims on Spanish banks. This created immense pressure on Spanish banks to increase lending, which in the event financed a runup in real estate prices and an immense quantity of never-to-be-occupied houses and hotels. (It’s worth noting in passing that this real estate bubble developed without any of the securitization that so mesmerized observers of the American bubble.) Surely, Klein says,

if you accept the arguments for regulating cross-border financial movements in any situation, you have to do the same for Spain. The country raised bank capital requirements and ran large fiscal surpluses, but none of that was enough. Plus, it didn’t have the luxury of a floating currency. Both the boom and bust would clearly have been smaller if foreigners had been prevented from buying so many Spanish financial assets, or even just persuaded to buy fewer bonds and more stocks and direct equity.

This seems right. But we could go a step farther. What’s the point of capital mobility?  If you don’t in fact want bank balance sheets expanding and shrinking based on the choices of foreign investors, what benefit are those investors providing to your economy? They provide foreign exchange (allowing you to run current account deficit), they provide financing (allowing credit to expand more), they substitute their judgement of future for domestic actors’. These are exactly the problems in the Spanish case. What is the benefit, even in principle, that Spain got from allowing these inflows?

 

There’s always a first time. Also from Matthew Klein, here is a paper from the Peterson Institute looking at historical fiscal balances and making the rather obvious point that there is little historical precedent for the surpluses the Greek government is expected in order to  pay its conquerors creditors. It is not quite true that no country has ever sustained a primary surplus of 3.5 percent for a decade a more, as Greece is expected to do; but such episodes are exceedingly rare.

My one criticism of Klein’s piece is that it is a little too uncritical of the idea that “market rates” are just a fact about the world. The Peterson paper also seems to regard interest rates as set by markets in response to more or less objective macroeconomic variables. Klein notes in passing that the interest rate Greece pays on its borrowing will depend on official choices like whether Greek debt is included in the ECB’s bond-buying programs. But I think it’s broader than this — I think the interest rate on Greek bonds is entirely a policy choice of the ECB. Suppose the ECB announced that they were fixing the interest rate on Greek bonds at 1 percent, and that they’d buy them as long as the yield was above this. Then private lenders would be happy to hold them at 1 percent and the ECB would not have to make any substantial purchases. This is how open market operations work – when a central bank announces a policy rate, they can move market rates while buying or selling only trivial amounts. If the ECB wished to, it could put Greece on a stable debt path and open up space for a less sociocidal budget, without the need for any commitment of public funds. But of course it doesn’t wish to.

 

Capital with Chinese characteristics. This new paper on wealth and inequality in China from Piketty, Zucman and Li Yang is an event; it’s a safe bet it’s going to be widely cited in the coming years. The biggest contribution is the construction of long-run series on aggregate wealth and the distribution of wealth and  income for China. Much of the paper is devoted, appropriately, to explaining how these series were produced. But they also draw several broad conclusions about the evolution of the Chinese economy over the apst generation.

First, while the publicly-owned share of national wealth has declined, it is still very high relative to other industrialized countries:

China has ceased to be communist, but is not entirely capitalist; it should rather be viewed as a “mixed economy” with a strong public ownership component. … the share of public property in China today is somewhat larger than – though not incomparable to – what it was in the West during the “mixed economy” regime of the post-World War 2 decades (30% in China today vs. 15-25% in the West in the 1950s-1970s). … Private wealth was relatively small in 1978 (about 100% of national income), and now represents over 450% of national income. Public wealth [has been] roughly stable around 250% of national income.

It’s worth noting that the largest component of this increase in private wealth is housing, which largely passed from public to private hands, The public sector, by Piketty and coauthors’ measures, continues to own about half of China’s non-housing wealth, including the majority of corporate equity, and this fraction seems to have increased somewhat over the past decade.

Second, income distribution has become much more unequal in China over the past generation, but seems to still be more equal than in the United States:

In the late 1970s China’s inequality… [was] close to the levels observed in the most egalitarian Nordic countries — while it is now approaching U.S. levels. It should be noted, however, that … inequality levels in China are still significantly lower than in the United States…. The bottom 50% earns about 15% of total income in China (19% in rural China, 23% in urban China), vs. 12% in the U.S. and 22% in France. For the time being, China’s development model appears to be more egalitarian than that of the United States, and less than Europe’s. Chinese inequality levels seem to have stabilized in recent years (the biggest increase in inequality took place between the mid-1980s and the mid-2000s)

The third story — much less prominent in the article, and of less important, but of particular interest to me — is what explains the observed rise in the ratio of wealth to national income. Piketty et al. suggest that 50-70 percent of the rise can be explained, in accounting terms, by the observed rates of saving and investment and their estimate of depreciation, while the remaining 30-50 percent is due to valuation changes. But in a footnote they add that this includes a large negative valuation change for China’s net foreign wealth, presumably attributable to the appreciation of the renminbi relative to the dollar. So a larger share of the rise in domestic wealth relative to income must be accounted for by valuation changes. (The data to put an exact number on this should be available in their online appendices, which are comprehensive as always, but I haven’t done it yet.)

This means that a story that conflates wealth with physical capital, and sees its growth basically in terms of net investment, will not do a good job explaining the actual growth of Chinese capital. (The same goes for the growth in capital relative to income in the advanced countries.) The paper explains the valuation increase in terms of a runup in the value of private housing plus

changes in the legal system reinforcing private property rights for asset owners (e.g., lifting of rent control, changes in the relative power of landlords and tenants, changes in the relative power of shareholder and workers).

This seems plausible to me. But I wish Piketty and his coauthors — and even more, his admirers — would take this side of the story more seriously. If we want to talk about the “capital” we actually see in public and private accounts, a theory that sees it growing through net investment is not even roughly correct. We really do have to think of capital as a social relation, not a physical substance.

 

On other blogs, other wonders.

Here’s a video of me chatting with James Parrott about robots.

Who’d have thought that Breitbart is the place to find federal government employment practices held up as an ideal?

At PERI, Anders Fremstad and Mark Paul have a nice paper on the distributional impact of different forms of carbon taxes.

Also at PERI, another whack at the Reinhart-Rogoff piñata.

I’ll be speaking at this Dissent thing on May 22.

 

 

[1] This phrase has an interesting backstory. The received version has it that it’s F. Scott Fitzgerald’s line, to which Ernest Hemingway replied: “Yes. They have more money.” But in fact, Hemingway was the one who said the rich were different, at a lunch with Maxwell Perkins and the critic Mary Colum, and it was Colum who delivered the putdown. (The story is in that biography of Perkins.) In “Hills like White Elephants,” Hemingway, for reasons that are easy to imagine, put the “rich are different” line in the mouth of his frenemy Fitzgerald, and there it’s stayed.

11 thoughts on “Links for May 5, 2017”

  1. I watched some Shaikh lectures on youtube a few months ago and thought they were great (I’d love to read his book but I think it would take me a solid year). Grahl’s NLR article’s notes that Shaikh’s view on competition is closer to what business schools teach. I still think the heterodox, by sticking to the real world, can conquer business schools.

    How have I never heard of Goodwin’s Lotka-Volterra-style model before?!

    Josh, I think if the quality of this blog was lower, people would be less intimidated and comment more. So let me help bring it down a notch. I just read Minsky’s JMK and I’m left wondering if it’s alright that I couldn’t completely following what’s going on with the part about the marginal efficiency of capital (financing from profits, financing from debt, supply of capital, rate of return, argh too many variables).

    1. How have I never heard of Goodwin’s Lotka-Volterra-style model before?!

      Clearly, you need to read more heterodox economists. 🙂

      Incidentally, there’s a minor but telling mistake in Grahl’s discussion of it. He says that workers are the prey and capitalists are the predators — but in the model it’s actually the other way around.

      Josh, I think if the quality of this blog was lower, people would be less intimidated and comment more.

      I think the actual problem is that I’ve mostly stopped commenting other places, especially Crooked Timber and Nick Rowe’s place, which used to be the main source of commenters here.

      I just read Minsky’s JMK and I’m left wondering if it’s alright that I couldn’t completely following what’s going on with the part about the marginal efficiency of capital (financing from profits, financing from debt, supply of capital, rate of return, argh too many variables).

      What specifically?

      1. The great thing about accumulating a folder full of PDF of books from LibGen is you can search them. Thanks to Lance Taylor and Axel Leijonhufvud I think I get it now.

  2. There is an “in principle” benefit to the movement of capital into Spain. (But let me be very clear that I’m not suggesting it works “in practice.”)

    The “in principle” benefit is that Spanish productivity was significantly lower than German prod. and this could largely be traced to a lack of capital investment (technology, machinery, arguably even research/education structures). “In principle” an inflow of capital allows for much needed investment…

    Of course, in practice, this falls down because there simply are not the financial structures (and this is not just a Spanish problem) to turn a capital inflow into productive investment. I’ll name 3 key problems, although I’m sure you’re well aware of them:

    1) Foreign investors like frictionless investment and often prefer short-term investment. This is rarely compatible with industrial development.

    2) As in so many places, the FIRE sector (thanks largely to the way politics has gone over the last 40 years or so) tends to give outsized returns compared to industry.

    3) Connected to (2) the expertise in lending for industrial development has withered as the bleed between retail banking and real estate made those divisions kings of the banking institutions. (In passing, this has been a problem in Spain for a long time because real estate forms the underpinning of a major long term growth area – tourism.)

    1. The “in principle” benefit is that Spanish productivity was significantly lower than German prod. and this could largely be traced to a lack of capital investment (technology, machinery, arguably even research/education structures). “In principle” an inflow of capital allows for much needed investment

      Right. But it is critically important here to recall that “capital flows” are not physical movements of machinery, technical knowledge, etc. (We are talking about portfolio flows here.) There are only two ways that portfolio inflows can allow greater real investment. First, they can finance a current account deficit – investment can be higher if some of the investment goods and/or displaced consumption can be imported. Second, they can allow banks or other financial intermediaries to extend more credit than they would otherwise be able to. (I don’t think the second actually applies in a modern financial system, but we are talking at the level of principle here.) So even in an ideal world, the only ways portfolio inflows can boost investment and productivity in Spain is some combination of larger trade deficits, and a bigger expansion of credit, than would otherwise be possible. There is no way, even in principle, for portfolio inflow to boost investment except through tehse two channels. So if big trade deficits and credit booms are not desirable then there is no possible benefit to financial inflows.

      So while I agree with your three points, I think they are secondary here. The problem isn’t just the way financial markets operate in practice — altho that is a problem too — but that there is no logical way for financial flows to deliver their supposed benefit except by producing exactly the conditions that we are now told were the roots of the disaster.

  3. Re: “What are foreign investors for?”
    It depends wether you have a debtor-pull or a creditor-push view of financial flows.
    a) If you have a debtor-pull view, it is the fault of Greece that lured Germany to lend, in order to mantain an higher than equilibrium level of consumption; the same goes for Spain, and the U.S.A. is also luring the poor Chinese into lending money that will never be paid back.
    This is more or less the “German view”, and the solution is for Greeks to lower prices to become more competitive (and accept a somehow lower standard of living). I think that this is also basically the austrian theory of financial crises.
    In this view, foreign investors would be useful but only if their money is invested in productive ways, otherwise a crisis will ensue later (as debt baloons relative to income).
    I think that this view is BS, for reasons that I will explain later.

    b) If you have a creditor-push view of financial flows, then the culprit are the Germans that pushed credit to the Greeks, the moneyholders of all the EU pushing a financial bubble on Spain, and the Chinese forcing the U.S.A. into a negative trade balance, with bad consequences for working class americans.
    I am more sympathetic with this view but, the question is, how can creditors “push” financial flows unto debtors?

    In my opinion, the question should be viewed from a different perspective:

    – suppose that a country, the U.S.A., is in a situation of underconsumption. Then the U.S.A. might go into “stimulus mode”, or lower the interest rate, or make another choiche that stimulates demand through the creation of debt.
    – but some of this stimulus will leak outside to other countries, say China, that will now have an incentive to stay overcompetitive and grow through the other contry’s debt-generated demand.
    – this second country will then pursue policies that make it more competitive, basically by reducing consumption and likely wages (at least in some areas of production).
    – the first country will then be in the situation where it either accepts a very serious recession/stagnation, squeezes internal consumption, and tries to become more competitive, or has to double down in debt, that impies accepting foreign financial flows.
    – even if the first country squuezes internal consumption enough as to not be a net importer, this doesn’t really solve the problem as now the two countries are locked in a sort of reciprocal “austerity war”, and will likely both have just stagnation.

    So in the end creditors “push” debt on the debtors in the sense that debtor are forced to choose between stagnation/recession and acceptance of debt/financial flows.

    However this could happen also with internal financial flows, not just with international flows, so I think that focusing only on the “international” part of the story distorts the picture.
    The main problem IMHO is just that some of the “surplus” has to be recycled into demand for final consumption goods through debt, wether this happens across nations or inside a country it doesn’t change much.

  4. As always, very interesting links and commentary.

    About the video chat about robots, my theory is that it is partly about the center left’s response to Trump’s (and to a lesser extent Sander’s) anti-globalization and outsourcing rhetoric from last year’s Presidential campaign. Corporate media editors and “thought leaders” seized on it as a response to the apparent popularity of the idea that trade policy is to blame.

    As your co-panelist said, there are some real world anecdotal examples of driverless cars and kiosks possibly taking jobs in the future. You hit on my hobby horse (and Dean Baker’s lately*) that it’s mostly about the Federal Reserve and macro policy.

    This seems to be a (purposefully?) huge blind spot when it comes to corporate media.

    * Baker has been wondeful lately:
    https://thebaffler.com/salvos/the-wrongest-profession-baker

  5. As I’m currently reading Shaik’s Capitalism, I’ll point out that this blog is actually cited in the book in the chapter on international trade.

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