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.



Welcome Wonkupy

When I first started reading blogs a decade ago (I’m pretty sure the first blogpost I ever read was one of these Eschaton posts on Trent Lott) there was a distinctly truncated Left in the blog world, especially on economics. Just mainstream liberals, conservatives, and libertarians as far as the eye could see. Which, what else is new, right? Except that it really wasn’t true of mailing lists, the predecessor medium, where you had super active lists like PEN-L and LBO Talk. I used to wonder if there was something specific about the formats that made mailing lists more hospitable to radical politics. Like, flatteringly, maybe we prefer collective discussions rather than one-man shows? Anyway, the question is moot now, because there’s certainly no shortage of left/radical blogs now, economics-oriented and otherwise.

All of which is a long-winded introduction to introducing a new progressive economics blog, Wonkupy. It’s by “Rotwang,” a very sharp comrade who needs to remain pseudonymous for professional reasons. It bills itself as “Occupy for wonks,” but my sense is it’s going to be more the other way round; well worth reading either way.

That said, I have some disagreements with his current post, arguing that criticism of private equity is a distraction. I put them in comments there, but since it touches on some regular themes at the Slack Wire, I thought I’d post an abridged version here.

Rotwang’s argument is that it’s wrong to suggest that buyouts and takeovers of firms by private equity funds and the like have any systematic effect on the way those firms are managed: profit maximization at the expense of workers and the pubic is the order of the day whether the bosses are vulture capitalists or just the regular kind. (It’s sort of a political-economic version of the Modigliani-Miller theorem.) Rotwang:

In [private equity] discussions, it is easy to focus on outright theft, abuse of borrowing, and inefficient government subsidies. We suggest this is not unique to PE, but is generic to Capitalism. One could imagine regulatory responses to such problems, but we insist the problems are part of the system, not tumorous growths on something otherwise fundamentally healthy. A narrow focus on PE glosses over the features it shares in common with Capitalism in general, now and throughout history. The narrow view plays to limited and ineffective remedies that fail to engage the long-standing, systematic problems of capital markets.

I disagree — tentatively on the substance, but emphatically on this way of framing it.

Suppose for the moment it’s true that the problems with private equity are no different from the problems with capitalism in general. I still don’t think that’s a valid reason to not talk about private equity in particular. After all, “X in general” is just all the specific instances of X. To the extent that the way productive enterprises are treated by PE firms like Bain is a representative example of why an economy oriented around the private pursuit of profit is incompatible with a humane and decent society, I don’t see what’s wrong with starting with it as a particularly vivid and timely example. Of course you have to then move on to a more general critique — there’s nothing that stops management at companies that aren’t subject to buyouts from acting like Bain, and many do — but a ban on discussion of particular cases doesn’t smooth the way to that general critique.

The other question is, is it really true that there is no difference between what a firm like Bain does and what a “normal” capitalist firm does? Rotwang writes, “From the worker’s standpoint, it makes little difference if her life is ruined by PE or by old management,” which is inarguable. But are we sure ruination is equally likely in either case?

It seems to me that while capitalist firms always pursue profit, and this pursuit is always ultimately inimical to the interests of workers, it’s not always equally single-minded. Managers want their firms (and themselves personally) to make money, but they also want them to survive, to grow, to gain market share, to be perceived as prestigious, cutting-edge, etc., and, in a non-trivial number of cases, to make genuinely good products by whatever objective standard of the business that they’re in. To the extent that finance exercises more active control of the firm, those other motives get subordinated to pure pursuit of profits. And I think that does tend to make life worse for their workers, and communities and customers, and everyone else who depends on the business as an ongoing enterprise.

No question, there is (or was; is Occupy still a thing?) a strong anti-finance vibe around OWS. There’s nothing wrong with criticizing that — especially in its weirder Ron Paulish forms — but it seems to me this is a case where “Yes, and” is distinctly preferable to “no, but”. For some people, a criticism of private equity may be an alternative to a broader critique of capitalism, but for many more, I suspect, it’s a starting point towards it.

Doug Henwood on Our Current Disorders

Blogging’s been light here lately. Sorry. In the meantime, you should read this:

if you combine net equity offerings—which, given the heavy schedule of buybacks over the last quarter century, have been negative most of the time since 1982—takeovers (which involve the distribution of corporate cash to shareholders of the target firm), and traditional dividends into a concept I call transfers to shareholders, you see that corporations have been shoveling cash into Wall Street’s pockets at a furious pace. Back in the 1950s and 1960s, nonfinancial corporations distributed about 20% of their profits to shareholders…. After 1982, though, the shareholders’ share rose steadily. It came close to 100% in 1998, fell back to a mere 25% in 2002, and then soared to 126% in 2007. That means that corporations were actually borrowing to fund these transfers. …

So what exactly does Wall Street do? Let’s be generous and concede that it does provide some financing for investment. But an enormous apparatus of trading has grown up around it—not merely trading in certificates, but in control over entire corporations. I think it’s less fruitful to think of Wall Street as a financial intermediary than it is to think of it as an instrument for the establishment and exercise of class power. It’s the means by which an owning class forms itself, particularly the stock market. It allows the rich to own pieces of the productive assets of an entire economy. So, while at first glance, the tangential relation of Wall Street, especially the stock market, to financing real investment might make the sector seem ripe for tight regulation and heavy taxation, its centrality to the formation of ruling class power makes it a very difficult target.

For a long while [after 1929], shareholder ownership was more notional than active. … But when the Golden Age was replaced by Bronze Age of rising inflation and falling profits, Wall Street … unleashed what has been dubbed the shareholder revolution, demanding not only higher profits but a larger share of them. The first means by which they exercised this control was through the takeover and leveraged buyout movements of the 1980s. By loading up companies with debt, they forced managers to cut costs radically, and ship larger shares of the corporate surplus to outside investors rather than investing in the business or hiring workers. … [In the 1990s,] the shareholder revolution recast itself as a movement of activist pension funds… the idea was to get managers to think and act like shareholders, since they were materially that under the new regime.

But pension fund activism sort of petered out as the decade wore on. Managers still ran companies with the stock price in mind, but the limits to shareholder influence have come very clear since the financial crisis began. Managers have been paying themselves enormously while stock prices languished. … The problem was especially acute in the financial sector: Bank of America, for example, bought Merrill Lynch because its former CEO, Ken Lewis, coveted the firm, and if the shareholders had any objections, he could just lie to them… It was as if the shareholder revolution hardly happened, at least in this sense. But all that money flowing from corporate treasuries into money managers’ pockets has quieted any discontent.

I do have some doubts about that last paragraph, tho — I suspect that “especially acute” should really be “limited to.” I don’t think it’s as if the shareholder revolution never happened — there still is, you know, all that money flowing into money managers’ pockets — but more a matter of quis custodiet ipsos custodes. If the function of finance is as overseers for the capitalist class — and I think Doug is absolutely right about this — then, well, who’s going to oversee them. Intrinsic motivation, norms and conventions, is really the only viable solution to this sort of principal-agent problem, and the culture of finance doesn’t do it.

Jim Crotty is also very worth reading on this. And I think he’s clearer that this kind of predatory management is mostly specific to Wall Street.


Elsewhere on the World Wide Web: Some UMass comrades have revived the internet tradition of the grudge blog with this interesting new blog, with the Stakhanovite goal of refuting (tho thankfully not fisking) every post Greg Mankiw makes. It’s an ambitious goal, especially since the average wordcount ratio of an anti post to its underlying Mankiw post is running around 50:1. But they’re managing so far. You should read it. And if anyone wants to take a swing at the pinata, I think they may still be looking for new contributors.

So why aren’t I contributing? Mainly because time is scarce and I am very lazy, so blogging-wise I’m tapped out just keeping up a trickle of content here. But also, to be honest, because I have some qualms about the anti-ness of the left in economics generally. Anti-Mankiw is a great project, and I have nothing but admiration for the students who walked out of Mankiw’s class. But there’s a certain assumption here that we on the left have a well-developed alternative economics, which the Mankiws of the world are ignoring or suppressing. If only that were true.

Right now I’m teaching macro, and I’m presenting basically the same material as everyone else. ISLM, AS/AD, and their open economy equivalents. How come? Well, partly because I feel a certain professional duty. Students signed up for a course in intermediate macroeconomics, not in J.W. Mason Thought. (That will be next semester.) But mainly because it’s the path of least resistance. I don’t know any good textbook that presents the fundamentals of macroeconomics from a genuinely Keynesian or radical perspective. And working up a course by myself would be vastly more work, and I don’t think I could do it justice. A downward sloping AD curve, let’s say, is absurd. There’s no real economy on earth in which the main effect of deflation is to stimulate demand via a real balance or “Keynes” effect. It pains me to even put it on the board. But what’s the counterhegemonic model of inflation I should be teaching in its place?

It’s not just me. I know a number of people who are unapologetic Marxists in their own work, yet when they teach undergraduate macroeconomics, they use Blanchard or some similarly conventional text. It’s a structural problem. I don’t mean to defend Mankiw, but in some ways I think those of us on the left of the profession are more to blame for the state of undergraduate economics education. We spend too much time on critiques of the mainstream, and not nearly enough developing a systematic alternative. Some people criticize radical economists for just talking to each other, but personally I think we don’t talk to each other nearly enough.

The anti-Mankiw that’s needed, it seems to me, isn’t a critique, but an alternative; as long as we’re arguing with him, he still gets to decide what we’re talking about. That’s one reason I prefer to spend my time debating people like Krugman, DeLong, John Quiggin, and Nick Rowe, who I respect and learn from even when I don’t agree with them. (Another reason is that attention is a precious resource and I prefer giving the bit I get to allocate to people and ideas that deserve it.)

It’s true that the ideological policing in economics is very tight—but mainly at the top end, and even there mostly not at the level of undergraduate teaching. As far as I can tell, most places nobody cares what you do in the classroom; there’s already plenty of space for alternatives at schools that aren’t Harvard. But people mostly aren’t using that space. In my experience, even when people want to bring a “radical” perspective to undergraduate econ, that means presenting the mainstream models and then dissecting  them, which preserves the mainstream view as the default or starting point, when it doesn’t just leaves students confused. “Radical” economics almost never seems to mean simply teaching economics the way we radicals think it should be taught.

So yes, Occupy Mankiw, by all means. But maybe we should also think more about the classrooms we’re already occupying. Or as a graffito that should be familiar to the male fraction of anti-Mankiw says:

Start your own hit band or stop bitching

EDIT: If anyone reading this wants to suggest good models or resources for what an undergrad economics course ought to look like, I’d be thrilled to hear them.

FURTHER EDIT: Lots of suggestions. I need to walk back a little: There are more good alternatives to Mankiw  & co. than you’d guess reading this post. But the key point is still, we need to move past critique and develop our own positive views. As long we’re responding to him, he’s setting the terms of the conversation. Read about, say,  Paul Sweezy in the 1940s — he was so admired not because he had such a cutting critique, but because he so clearly and confidently offered an alternative. (And because he was so charming and good-looking, but that sort of goes with it, I think.) We’ll be getting somewhere when, instead of rushing to rebut everything Mankiw says, we can say, “Oh, is that guy still writing? Well, forget about him — here’s the good stuff.”

So, the good stuff.

I should have mentioned two excellent macro texts that, while they are too advanced for the students I’m teaching now, really comprehensively describe the state of the art alternative approaches to macro: Michl and Foley’s Growth and Distribution and Lance Taylor’s Reconstructing Macroeconomics. If, like me, you;re more more interested in short-term dynamics than growth models, you might get a little more out of the Taylor book, but both are very good.

In comments, NKlein suggests Godley and Lavoie’s Monetary Economics: An Integrated Approach, which I know other people recommend but I’m afraid I haven’t read (tho it’s on my Kindle), and mentions that Randy Wray and Bill Mitchell are working on a new textbook. I believe Wray currently teaches undergraduate macro at Kansas City using Keynes’ General Theory as the primary textbook, which is not a terrible idea (tho it would probably depend on the students.)

A lot of people like Understanding Capitalism, by Sam Bowles, Richard Edwards and Frank Roosevelt. Sam’s microeconomics textbook is also supposed to be good, if, god forbid, you have to teach that. (But the orthodox-heterodox divide doesn’t really exist in micro, I don’t think.)

Meanwhile, over on anti-Mankiw itself, Garth suggested — more or less simultaneously with this post — Steve Cohn’s Reintroducing Macroeconomics, and linked to a long list of heterodox texts. I’m only familiar with a few of the books on the list, altho most of the ones I do know are grab-bags of critical essays, which is not quite what I’m looking for. But clearly there’s a lot out there.

Does the Level of the Dollar Matter?

Mike Konczal has kindly reposted my back-of-the-envelope estimate of how much a dollar devaluation would boost US demand. (Spoiler: Not much.)

I am far from an expert on international trade and exchange rates. (Or on anything else.) Maybe some real economist will see the post and explain why it’s all wrong. But until then, I’m going to continue asking why Krugman and others who claim that exchange rates are an important cause of unemployment in this country, never provide any quantitative analysis to back that opinion up.

More abstractly, one might ask: Is the time it takes for demand to respond to changes in relative prices, minus the time it takes for exchange rate changes to move relative prices, greater than the time it takes for exchange rates changes to move relative costs (or to be reversed)? Just because freshwater economists say No for a bad reason (because relative costs adjust instantly) doesn’t mean the answer isn’t actually No for a good reason.