things worth reading – Page 3

Review of Mark Wilson’s Destructive Creation

The new issue of Dissent has a review by me of Mark Wilson’s Destructive Creation: American Business and the Winning of World War II. (At the Dissent site the review is still paywalled.)

World War II is a weirdly neglected topic in US economic history. Lots written about the Depression, of course, and then we seem to skip straight to the postwar period. But there’s a lot to learn from the wartime experience, including some important lessons for today’s debates around potential output and the responsiveness of labor force participation and productivity to demand conditions. Wilson’s book is not helpful on those particular questions, but it has a lot of interesting material on its own topic of how relations between private business and government shifted during the war. Anyway, you can read the review here.

Readings: A Couple New Papers on Fiscal Policy

From the NBER working paper series — essential reading if you want to follow what the mainstream of the profession is up to — here are a couple interesting recent papers on fiscal policy. They offer some genuinely valuable insights, while also demonstrating the limits of orthodoxy.

Geographic Cross-Sectional Fiscal Spending Multipliers: What Have We Learned?
Gabriel Chodorow-Reich
NBER Working Paper No. 23577

Gabriel Chodorow-Reich has a useful new entry in the burgeoning literature on the empirics of fiscal multipliers — a review of the now-substantial work on state-level multipliers. Most of these papers are based on spending under the 2009 stimulus (the ARRA) — since many components of its spending were set by formulas not responsive to local economic conditions, cross-state variation can reasonably be considered exogenous. (Another reason the ARRA features so heavily in these papers is, of course, that the revival of mainstream interest in fiscal multipliers is mostly a post-crisis phenomenon.) Other studies estimate local multipliers based on other public spending with plausibly exogenous regional variation, such as that involved in a military buildup or response to a natural disaster.

How do these local multipliers translate into the national multiplier we are usually more interested in? There are two main differences, pointing in opposite directions. On the one hand, states are more open than the US as a whole (or than other large countries, though perhaps not more than small European countries). This means more spillover of demand across borders, meaning a smaller multiplier. On the other hand, since states don’t conduct their own monetary policy (and since the US banking system is no longer partitioned by state) the usual channels of crowding out don’t operate at the state level. This implies a bigger multiplier. It’s hard to say which of these effects is bigger in general, but when interest rates are constrained, by the zero lower bound for example, crowding out doesn’t happen by that channel at the national level either. So at the zero lower bound, Chodorow-Reich argues, the national multiplier should be unambiguously greater than the average state multiplier.

Based on the various studies he discusses (including a couple of his own), he estimates a state-level multiplier of 1.8. He subtracts an arbitrary tenth of a point to allow for financial crowding out even at the ZLB, giving a value of 1.7 as a lower bound for the national multiplier. This is toward the high end of existing estimates. For whatever reason, Chodorow-Reich makes no effort to even guess at the impact of the greater openness of state-level economies. But if we suppose that the typical import share at the state level is double the national import share, then a back-of-the-envelope calculation suggests that a state-level multiplier of 1.7 implies a national multiplier somewhere above 2.0. [1]

It’s a helpful paper, offering some more empirical support for the new view of fiscal policy that seems to be gradually displacing the balanced-budget orthodoxy of the past generation. But it must be said that it is one of those papers that presents some very interesting empirical results and is evidently attempting to deal with a concrete, policy-relevant question about economic reality — but that seems to devote a disproportionate amount of energy to making its results intelligible within mainstream theory. We’ll really have made progress when this kind of work can be published without a lot of apologies for the use of “non-Ricardian agents.”

The Dire Effects of the Lack of Monetary and Fiscal Coordination
Francesco Bianchi, Leonardo Melosi
NBER Working Paper No. 23605

The subordination of real-world insight to theoretical toy-train sets is much worse in this paper. But there is a genuine insight in it — that when you have a fiscal authority targeting the debt-GDP ratio and a monetary authority targeting inflation (or equivalently, unemployment or the output gap), then when they are independent their actions can create destabilizing feedback loops. In the simple case, suppose the monetary authority responds to higher inflation by raising interest rates. This raises debt service costs, forcing the fiscal authority to reduce spending or raise taxes to meet its debt target. The contractionary effect of this fiscal shift will have to be offset by the central bank lowering rates. This process may converge toward the unique combination of fiscal balance and interest rate at which both inflation and debt ratio are at their desired levels. But as Arjun Jayadev and I have shown, it can also diverge, with the interactions the actions of each authority provoking more and more violent responses from the other.

I’m glad to see some mainstream people recognizing this problem. As the authors note, the basic point was made by Michael Woodford. (Unsurprisingly, they don’t cite this recent paper by Peter Skott and Soon Ryoo, which carefully works through the possible dynamics between the two policy rules. [2]) The implications, as the NBER authors correctly state, are, first, that fiscal policy and monetary policy have to be seen as jointly affecting both the output gap and the public debt; and that if preventing a rising debt ratio is an important goal of policy, holding down interest rates and/or allowing a higher inflation rate are useful tools for achieving it. Unfortunately, the paper doesn’t really develop these ideas — the meat of it is a mathematical exercise showing how these results can occur in the world of a representative agent maximizing its utility over infinite time, if you set up the frictions just right.

[1] For the simplest case, suppose the multiplier is equal to (1-m)[1/(1-mpc)], where m is the marginal propensity to import and mpc is the marginal propensity to consume. Then if the state level import propensity is 0.4 and the state level multiplier is 1.7, that implies an mpc of 0.65. Combine that with a national import propensity of 0.2 and you get a national multiplier of 2.3.

[2] The paper was published in Metroeconomica in 2016, but I’m linking to the unpaywalled 2015 working paper version.

What Recovery: Reading Notes

My Roosevelt Institute paper on potential output came out last week. (Summary here.) The paper has gotten some more press since Neil Irwin’s Times piece, including Ryan Cooper in The Week and Felix Salmon in Slate. My favorite headline is from Boing Boing: American Wages Are So Low, the Robots Don’t Want Your Jobs.

In the paper I tried to give a fairly comprehensive overview of the evidence and arguments that the US economy is not in any meaningful sense at potential output or full employment. But of course it was just one small piece of a larger conversation. Here are a few things I’ve found interesting recently on the same set of issues. .

Perhaps the most important new academic contribution to this debate is this paper by Olivier Coibion, Yuriy Gorodnichenko, and Mauricio Ulate, on estimates of potential output, which came out too late for me to mention in the Roosevelt report. Their paper rigorously demonstrates that, despite their production-function veneer, the construction of potential output estimates ensures that any persistent change in growth rates will appear as a change in potential. It follows that there is “little value added in estimates of potential GDP relative to simple measures of statistical trends.” (Matthew Klein puts it more bluntly in an Alphaville post discussing the paper: “‘Potential’ output forecasts are actually worthless.”) The paper proposes an alternative measure of potential output, which they suggest can distinguish between transitory demand shocks and permanent shifts in the economy’s productive capacity. This alternative measure gives a very similar estimate for the output gap as simply looking at the pre-2008 forecasts or extrapolating from the pre-2008 trend. “Our estimates imply that U.S. output remains almost 10 percentage points below potential output, leaving ample room for policymakers to close the gap through demand-side policies if they so chose to.” Personally, I ‘m a little less convinced by their positive conclusions than by their negative ones. But this paper should definitely put to the rest the idea (as in last year’s notorious CEA-chair letter) that it is obviously wrong — absurd and unserious — that a sufficient stimulus could deliver several years of 4 percent real growth, until GDP returned to its pre-recession trend. It may or may not be true, but it isn’t crazy.

Many of the arguments in my paper were also made in this valuable EPI report by Josh Bivens, reviving the old idea of a “high pressure economy”. Like me, Bivens argues that slow productivity growth is largely attributable to low investment, which in turn is due to weak demand and slow wage growth, which blunts the incentive for business to invest in labor-saving technology. One important point that Bivens makes that I didn’t, is that much past variation in productivity growth has been transitory; forecasts of future productivity growth based on the past couple of years have consistently performed worse than forecasts based on longer previous periods. So historical evidence gives us no reason see the most recent productivity slowdown as permanent. My one quibble is that he only discusses faster productivity growth and higher inflation as possible outcomes of a demand-driven acceleration in wages. This ignores the third possible effect, redistribution from from profits to wages — in fact a rise in the labor share is impossible without a period of “overfull” employment.

Minneapolis Fed president Neel Kashkari wrote a long post last fall on “diagnosing and treating the slow recovery.” Perhaps the most interesting thing here is that he poses the question at all. There’s a widespread view that once you correct for demographics, the exceptional performance of the late 1990s, etc., there’s nothing particularly slow about this recovery — no problem to diagnose or treat.

Another more recent post by Kashkari focuses on the dangers of forcing the Fed to mechanically follow a Taylor rule for setting interest rates. By his estimate, this would have led to an additional 2.5 million unemployed people this year. It’s a good illustration of the dangers of taking the headline measures of economic performance too literally. I also like its frank acknowledgement that the Fed — like all real world forecasters — rejects rational expectations in the models it uses for policymaking.

Kashkari’s predecessor Narayan Kocherlakota — who seems to agree more with the arguments in my paper — has a couple short but useful posts on his personal blog. The first, from a year ago, is probably the best short summary of the economic debate here that I’ve seen. Perhaps the key analytic point is that following a period of depressed investment, the economy may reach full employment given the existing capital stock while it is still well short of potential. So a period of rapid wage growth would not necessarily mean that the limits of expansionary policy have ben reached, even if those wage gains were fully passed through to higher prices. His emphasis:

Because fiscal policy has been too tight, we have too little public capital. … At the same time, physical investment has been too low… Conditional on these state variables, we might well be close to full employment. … But, even though we’re close to full employment, there’s a lot of room for super-normal growth. Both capital and TFP are well below their [long run level]. The full-employment growth rate is going to be well above its long-run level for several years. We can’t conclude the economy is overheating just because it is growing quickly.

His second post focuses on the straightforward but often overlooked point that policy should take into account not just our best estimates but our uncertainty about them, and the relative risks of erring on each side. And if there is even a modest chance that more expansionary policy could permanently raise productivity, then the risks are much greater on the over-contractionary side. [1] In particular, if we are talking about fiscal stimulus, it’s not clear that there are any costs at all. “Crowding out” is normally understood to involve a rise in interest rates and a shift from private investment to public spending. In the current setting, there’s a strong case that higher interest rates at full employment would be a good thing (at least as long as we still rely on as the main tool of countercyclical policy). And it’s not obvious, to say the least, that the marginal dollar of private investment is more socially useful than many plausible forms of public spending. [2] Kashkari has a post making a similar argument in defense of his minority vote not to raise rates at the most recent FOMC meeting. (Incidentally, FOMC members blogging about their decisions is a trend to be encouraged.)

In a post from March which I missed at the time, Ryan Avent tries to square the circle of job-destroying automation and slow productivity growth. One half of the argument seems clearly right to me: Abundant labor and low wages discourage investment in productivity-raising technologies. As Avent notes, early British and even more American industrialization owe a lot to scarce labor and high wages. The second half of the argument is that labor is abundant today precisely because so much has been displaced by technology. His claim is that “robots taking the jobs” is consistent with low measured productivity growth if the people whose jobs are taken end up in a part of the economy with a much lower output per worker. I’m not sure if this works; this seems like the rare case in economics where an eloquent story would benefit from being re-presented with math.

Along somewhat similar lines, Simon Wren-Lewis points out that unemployment may fall because workers “price themselves into jobs” by accepting lower-wage (and presumably lower-productivity) jobs. But this doesn’t mean that the aggregate demand problem has been solved — instead, we’ve simply replaced open unemployment with what Joan Robinson called “disguised unemployment,” as some of people’s capacity for work continues to go to waste even while they are formally employed. “But there is a danger that central bankers would look at unemployment, … and conclude that we no longer have inadequate aggregate demand…. If demand deficiency is still a problem, this would be a huge and very costly mistake.”

Karl Smith at the Niskanen Center links this debate to the older one over the neutrality of money. Central bank interventions — and aggregate demand in general — are understood to be changes in the flow of money spending in the economy. But a lon-standing tradition in economic theory says that money should be neutral in the long run. As we are look at longer periods, changes in output and employment should depend more and more on real resources and technological capacities, and less and less on spending decisions — in the limit not at all. If you want to know why GDP fell in one quarter but rose in the next (this is something I always tell my undergraduates) you need to ask who chose to reduce their spending in the first period and who chose to increase it in the first. But if you want to know why we are materially richer than our grandparents, it would be silly to say it’s because we choose to spend more money. This is the reason why I’m a bit impatient with people who respond to the fact that, relative to the pre-2008 trend, output today has not recovered from the bottom of the recession, by saying “the trend doesn’t matter, deviations in output are always persistent.” This might be true but it’s a radical claim. It means you either take the real business cycle view that there’s no such thing as aggregate demand, even recessions are due to declines in the economy’s productive potential; or you must accept that in some substantial sense we really are richer than our grandparents because we spend more money. You can’t assert that GDP is not trend-stationary to argue against an output gap today unless you’re ready to accept these larger implications.

The invaluable Tom Walker has a fascinating post going back to even older debates, among 19th century anti-union and pro-union pamphleters, about whether there was a fixed quantity of labor to be performed and whether, in that case, machines were replacing human workers. The back and forth (more forth than back: there seem to be a lot more anti-labor voices in the archives) is fun to read, but what’s the payoff for todays’ debates?

The contemporary relevance of this excursion into the archives is that economic policy and economic thought walks on two legs. Conservative economists hypocritically but strategically embrace both the crowding out arguments for austerity and the projected lump-of-labor fallacy claims against pensions and shorter working time. They are for a “fixed amount” assumption when it suits their objectives and against it when it doesn’t. There is ideological method to their methodological madness. That consistency resolves itself into the “self-evidence” that nothing can be done.

That’s exactly right. When we ask why labor’s share has fallen so much over the past generation, we’re told it’s because of supply and demand — an increased supply of labor from China and elsewhere, and a decreased demand thanks to technology. But if it someone says that it might be a good idea then to limit the supply of labor (by lowering the retirement age, let’s say) and to discourage capital-intensive production, the response is “are you crazy? that will only make everyone poorer, including workers.” Somehow distribution is endogenous when it’s a question of shifts in favor of capital, but becomes exogenously fixed when it’s a question of reversing them.

A number of heterdox writers have identified the claim that productivity growth depends on demand as Verdoorn’s law (or the Kaldor-Verdoorn Law). For example, the Post Keynesian blogger Ramanan mentions it here and here. I admit I’m a bit dissatisfied with this “law”. It’s regularly asserted by heterodox people but you’ll scour our literature in vain looking for either a systematic account of how it is supposed to operate or quantitative evidence of how and how much (or whether) it does.

Adam Ozimek argues that the recent rise in employment should be seen as an argument for continued expansionary policy, not a shift away from it. After all, a few years ago many policymakers believed such a rise was impossible, since the decline in employment was supposed to be almost entirely structural.

Finally, Reihan Salam wants to enlist me for the socialist flank of a genuinely populist Trumpism. This is the flipside of criticism I’ve sometimes gotten for making this argument — doesn’t it just provide intellectual ammunition for the Bannon wing of the administration and its calls for vast infrastructure spending, which is also supposed to boost demand and generate much faster growth? Personally I think you need to make the arguments for what you think is true regardless of their political valence. But I might worry about this more if I believed there was even a slight chance that Trump might try to deliver for his working-class supporters.

[1] Kocherlakota talks about total factor productivity. I prefer to focus on labor productivity because it is based on directly observable quantities, whereas TFP depends on estimates not only of the capital stock but of various unobservable parameters. The logic of the argument is the same either way.

[2] I made similar arguments here.

EDIT: My comments on the heterodox literature on the Kaldor-Verdoorn Law were too harsh. I do feel this set of ideas is underdeveloped, but there is more there than my original post implied. I will try to do a proper post on this work at some point.

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.

2016 Books

Here’s what I read in 2016. There’s probably a couple books I’m forgetting.

Munif – Cities of Salt. Munif was a dissident Saudi writer who spent his later life in exile in Syria. I happened to pick up this book on a recent visit to hi son Yasser’s house (we went to grad school together) and couldn’t put it down. It’s set in the 1930s in an unnamed Arabian country, and tells the stories of ordinary people who are variously enriched, displaced, and wrecked by the establishment of the oil industry. It has a bit of the structure of something like One Hundred Years of Solitude, though without the magic. One unusual thing about it is its use of collective protagonists — various individuals drift in and out, but a great deal of the narration is from the point of view of “the villagers,” “the pipeline workers,” “the townspeople,” etc. Munif’s sympathies are obviously with those uprooted by the alliance of American business and indigenous royalty, and with their overt and covert resistance to it, but he’s also clear-eyed about the limits to their capacity for collective action and their lack of any usable political language for what is happening to them. It’s the first book in a series. Two others are available in English, beautifully translated by Peter Theroux; the remaining two sadly are not, apparently because Theroux has been occupied translating books by Naguib Mahfouz.

Mantel – The Assassination of Margaret Thatcher. These stories were mostly just ok. I picked them up because, like everybody, I loved the Thomas Cromwell novels Wolf Hall and Bring Up the Bodies. (The tv miniseries was also quite good.) But what she’s doing here doesn’t work as well. What she’s doing is mostly something very specific: writing realistic fiction with the conventions of the gothic. Almost all of them are written from the perspective of subordinates and outsiders, and almost all of them involve a building sense of unease and dislocation. Sometimes this mix of social realism and horror succeeds, as in the title story and in The School of English, about a servant who was raped by her employer under circumstances that never quite come into focus. But more often it doesn’t, like in the embarrassing misfire Harley Street, where the shocking revelation is that two of a woman’s coworkers are lesbians. Oh well. I hope she’s working on the third Cromwell book.

Beckert – Empire of Cotton: A Global History. This magnificent book is certainly the best nonfiction I read this year. Perhaps the best way to show the concrete reality of capitalism is by following the chain of a single commodity from start to end — Mardi Gras Made in China s a classic example. With cotton Beckert has picked the ur-commodity. It’s all here: from the rise of Europe and the origins of wage labor, through imperialism and emancipation, the changing organization and financing of trade, to the developmental state. He’s especially good on two points. First, that the organization of production always comes down to control of labor. Second, that incorporation into the global economy didn’t simply mean swapping one mix of commodities produced and consumed for another, but a thorough reorganization of society, not just once but continuously as people’s life choices and circumstances became increasingly dependent on developments in distant markets. And he has an almost miraculous ability to produce exactly the right quote, the perfectly telling anecdote, at every point in the story. I’d love to know how he organizes his files.

Davis – Late Victorian Holocausts. I assigned it for a class – one of the best ways of finally getting to something you should have read years ago. It’s an extraordinary book — as suggested by the title, a comprehensive guide to Europe’s war against humanity in the 19th century, but also a timely exploration of the political and social consequences of climate change — a sort of prequel to my friend Christian Parenti’s Tropic of Chaos. Davis is a master of this kind of thing — he somehow combines the core historical narrative, the political-economic analysis, the key statistical information and the telling quotes in a completely organic way. (I happened to reread a bit of City of Quartz recently and it’s the same — holds up very well.) The Brazil, China and Africa chapters are powerful, but the stuff on India is just brutal. The name Richard Temple should have the same resonance as the name Josef Mengele.

Bagchi – Perilous Passage: Mankind and the Global Ascendancy of Capital. This is I’d planned to assign parts of this in my economics history class but in the end I didn’t use it. It’s a global history with a particular focus on assessing historical changes in wellbeing, especially in the periphery of the Europe-centered world system. In some ways it seems like an attempt to put Sen’s ideas about capabilities and functionings into a historical framework. It’s not a bad book, but the stories I wanted to use it for are told more vividly elsewhere, like the Beckert and Davis books.

Coates – Between the World and Me. I don’t have anything really to add to what everyone else has said about this book. It deserves the praise it’s gotten. If you haven’t read it, you should.

Isherwood – A Single Man. A lovely little novel about a bereaved gay academic in early-1960s California. Although all the specifics are captured very well, in some ways all these are beside the point. The real subject is the way our unitary self dissolves, on closer examination, into various roles we play, personae we adopt, based on the circumstances we find ourselves in. I suppose the bereaved part of the package is the most important for this purpose, since it removes the central, stabilizing social context of the narrator’s life. I guess the pre-stonewall gay part is important too, since it deprives him of a standard set of social forms and rituals that would make sense of his new condition. But the core idea is conveyed as well by the scene of him observing himself driving on an LA freeway: “an impassive anonymous chauffeur-figure with little will or individuality of its own, the very embodiment of muscular co-ordination, lack of anxiety, tactful silence, driving its master to work.” One other thing I like about this book: It’s one of the only campus novels that somehow manages to tip into neither nasty satire nor sententious harrumph. He conveys both that teaching is an almost religious vocation, standing intercessor between your students and a world that’s much bigger and older and deeper than them; and that it’s just a job. The Tom Ford movie entirely misses the point.

Hicks – The Crisis in Keynesian Economics and Critical Essays in Monetary Theory. I read through quite a few essays in these collections after reading some fascinating pieces by Axel Leijonhufvud on Hicks and his work. I didn’t get as much out of them as I had hoped. Hicks famously described his later work as a struggle to escape from the neoclassical framework of his best-known work, Value and Capital, but I don’t know how well he succeeded. I think I prefer Leijonhufvud’s Hicks to Hicks’ Hicks.

Reardon – Handbook of Pluralist Economic Education. I wrote a review of this, which should be coming out in the Review of Keynesian Economics at some point.

Diski – In Gratitude. I’ve been reading Diski’s essays and reviews for a while in the London Review of Books (which is objectively better than the NYRB, by the way). This is her memoir of, first, being semi-adopted by the novelist Doris Lessing as a teenager, and, later, dying of cancer. It’s a lovely book. It’s a playful but rigorous self-inventory; like a lot of the best memoirs, it conveys the the sense of being a spontaneous confession while benefiting from careful construction.

Lewin – The Soviet Century. I picked this up at a Verso event. I’m not sorry I read it, but I wouldn’t really recommend it. (Any ideas what one book you should you read on the history of the Soviet Union?) It’s chronological but not comprehensive — he’s really only interested here in how the system worked politically — how decisions were made, carried out, and justified. There’s some interesting material here on the day to day realities of the Soviet administration. But there’s not enough context on what concrete outcomes resulted all this reshuffling of departments and reassignment of personnel. (The iconic red army soldier on the cover is a bit of a tease – there’s almost nothing here on World War II itself, only its repercussions for bureaucratic politics.) Lewin is evidently a Trotskyist of some sort — we are constantly being reminded of how stalin betrayed the promise of the revolution and the genuine accomplishments of the 1920s. As far as perspectives on the Soviet Union go, this is a respectable one, but it seems like at this point we should be aiming for a dispassionate account of how the system worked and what it did and did not do, without reenacting the debates of 100 years ago.

Hood – 722 Miles: The Building of the Subways and How They Transformed New York. I’d expected this classic history to be, you know, sandhogs battling the Manhattan schist. There is some of that, but much more about the political and financial aspects of the story which, to me, are even more interesting. It develops and complicates the vague — “private subways abetted real estate speculation but became unprofitable after WWI so the government took them over” story I’d vaguely had in my head before.

The book does support the idea that the economics of private subways only really make sense in conjunction when they’re built by large-scale real estate developers; no other private actor can internalize their positive externalities. But the private to public transition is more complicated. It is true that, thanks to inflation and the nickel fare, the private lines saw big losses in the 1920s and 1930s. But because of the long-term contracts signed before the war, under which the city owned the tracks on which the privately-owned trains ran, the losses were mostly borne by the public; the private companies were mostly profitable. So the private-public question was less economic, and more directly ideological, than I had realized. Early on, there was very strong resistance to the idea of government-operated subways — state legislation forbidding public operation was passed when proposals were first floated. Public subways were explicitly seen as a step toward socialism. But a bit later, in the Progressive era, there was a serious push for a government run subway as a sort of public option to compete with August Belmont’s monopoly, and the Public Service Commission briefly operated some short connecting lines. this early foray into public subways was abandoned, but only as a result of complex set of negotiations counterbalancing the goals of holding down fares through competition; extending the existing system in a rational way; and encouraging development of outlying areas. (The last goal also supported by the progressives in order to move workers out of dense immigrant neighborhoods in Manhattan.) As is often the case when you read history, what in retrospect looks like a logically unfolding inevitable development, on clsoer examination could easily have gone in other ways.

Saki – The Unrest Cure. Oscar Wilde’s wit without his weirdness (mostly) or his politics (at all). Kept me occupied for half a dozen subway rides.

Ferrante – My Brilliant Friend, The Story of a New Name, Those Who Leave and Those who Stay, and The Story of the Lost Child. These remarkable books deserve much more than I can write about them. Luckily, lots of other people have written about them! Purely as fiction, they are highly effective – they are the sort of novels you can’t stop reading, but that you constantly want to stop reading to make them last longer, and to think about what you’ve just read. As to the substance: Some people see the tragedy of the book that Lila, the central character, never leaves Naples — that her talent and energy and intelligence go to waste there, instead of developing into some useful and rewarding career as they would have elsewhere. I don’t agree. I don’t think we’re meant to imagine that anything important would have been better if she’d followed the narrator Elena to a middle-class, professional life in the North. I think we should take the narrator seriously in her reflections at the start of the third book. She says that she once saw the stasis, brutality and hopelessness of her childhood neighborhood as geographically specific. So she thought the solution was to

get away for good, settle in well-organized lands where everything really is possible. I had fled … Only to discover, in the decades to come, that I had been wrong… the neighborhood was connected to the city, the city to Italy, to Europe, Europe to the whole planet. And this is how I see it today: it’s not the neighborhood that’s sick, it’s not Naples, it’s the entire earth… And shrewdness means hiding from from oneself the true state of things.

I think if there’s a failure in the book, it’s the shrewd, practical Elana’s. I think Lila’s choice is the one we’re meant to admire — to keep trying to push through the immovable barriers of corrupt, violent Naples. To me, she comes across as almost Dostoyevskyan figure, a Myshkin unable to make the reasonable compromises we all make with an unreasonable world. In this reading, the radical political milieu of the middle books is more than just dramatic backdrop, though it certainly functions as that. The insurgent New Left of the 1970s, whatever its failures, was reacting to same basic problem as Lila — what do you do when you find the world you’ve been born unjust, nonsensical, and intolerable? Of course the usual answer is you do what you can to make things a bit better, incrementally — after all they are getting better — that way, with luck, lies a respected and remunerative career. This choice — which, again, almost all of us make — is represented in the books by the repulsive Nino. Whereas Lila (and the communist Pasquale, the books’ most purely admirable figure) represents the other choice, not to reconcile yourself. I feel like the books could have taken their epigraph from Mario Savio: “There is a time when the operation of the machine becomes so odious, makes you so sick at heart, that you can’t take part; you can’t even passively take part, and you’ve got to put your bodies upon the gears and upon the wheels, upon the levers, upon all the apparatus, and you’ve got to make it stop.”

Streeck – Buying Time: The Delayed Crisis of Democratic Capitalism. I originally read this hoping to write a review of it. But I took too long and now Streeck has another one. Still planning to write the review, which will now have to be of the two books, so will save my thoughts til then.

Eicher – The New Cosmos. I like reading about science and I loved Carl Sagan as a kid, so this was an easy sell. I enjoyed reading it — if it’s the sort of thing you like, you’d probably enjoy it too — but I wouldn’t say it’s anything special. He does make a strong case that demoting Pluto from planethood was the wrong call.

Ascher – The Works and The Heights. I got these two books mainly to read to my son, who like many five-year-olds is very interested in public works, infrastructure and engineering. (Brian Hayes’ magnificent Infrastructure, with its gorgeous photos, has been preferred dinnertime reading for a while.) But they aren’t kids’ books — I learned quite a lot from them — especially from The Works, which is about all the normally unregarded machinery and labor that makes New York City, well, work. Did you know about the Sandy Hook pilots, who still guide freighters into New York Harbour? Did you know that New York is one of the few major cities where storm runoff and sewage flow together, and that until the 1980s, the upper west side of Manhattan had no sewage treatment facilities and dumped its raw waste right into the Hudson? Did you know that New York still has an operational steam-tunnel system, which provides the heat for many of Manhattan’s iconic buildings as well as steam for dry cleaners, hospitals, etc.? Did you know that six inches of snow is the cutoff for all the city’s garbage trucks to be converted to snowplow service? I didn’t know any of that, and it’s good stuff to know.

Johnson – The Making of Donald Trump. At my parents’ house at Christmastime, my father was reading this. Laura picked it up and started saying, “Wait! did you ever hear this…?”, so I started reading it too. It’s a page turner. Now personally, I think it’s a mistake to personalize the political situation; I think we’re better off talking about what “the Republicans will do” than what “Trump will do.” And of course the fundamental terms of politics don’t change with elections. Still, I hadn’t realized just how vile this person is. Did you know that he cut off the medical coverage of his newborn grandnephew in neonatal intensive care, to force the parents to settle an inheritance dispute? Good times.

Links for October 6

More methodenstreit. I finally read the Romer piece on the trouble with macro. Some good stuff in there. I’m glad to see someone of his stature making the point that the Solow residual is simply the part of output growth that is not explained by a production function. It has no business being dressed up as “total factor productivity” and treated as a real thing in the world. Probably the most interesting part of the piece was the discussion of identification, though I’m not sure how much it supports his larger argument about macro. The impossibility of extracting causal relationships from statistical data would seem to strengthen the argument for sticking with strong theoretical priors. And I found it a bit odd that his modus ponens for reality-based macro was accepting that the Fed brought down output and (eventually) inflation in the early 1980s by reducing the money supply — the mechanisms and efficacy of conventional monetary policy are not exactly settled questions. (Funnily enough, Krugman’s companion piece makes just the opposite accusation of orthodoxy — that they assumed an increase in the money supply would raise inflation.) Unlike Brian Romanchuk, I think Romer has some real insights into the methodology of economics. There’s also of course some broadsides against the policy views of various rightwing economists. I’m sympathetic to both parts but not sure they don’t add up to less than their sum.

David Glasner’s interesting comment on Romer makes in passing a point that’s bugged me for years — that you can’t talk about transitions from one intertemporal equilibrium to another, there’s only the one. Or equivalently, you can’t have a model with rational expectations and then talk about what happens if there’s a “shock.” To say there is a shock in one period, is just to say that expectations in the previous period were wrong. Glasner:

the Lucas Critique applies even to micro-founded models, those models being strictly valid only in equilibrium settings and being unable to predict the adjustment of economies in the transition between equilibrium states. All models are subject to the Lucas Critique.

Here’s another take on the state of macro, from the estimable Marc Lavoie. I have to admit, I don’t care for way it’s framed around “the crisis”. It’s not like DSGE models were any more useful before 2008.

Steve Keen has his own view of where macro should go. I almost gave up on reading this piece, given Forbes’ decision to ban on adblockers (Ghostery reports 48 different trackers in their “ad-light” site) and to split the article up over six pages. But I persevered and … I’m afraid I don’t see any value in what Keen proposes. Perhaps I’ll leave it at that. Roger Farmer doesn’t see the value either.

In my opinion, the way forward, certainly for people like me — or, dear reader, like you — who have zero influence on the direction of the economics profession, is to forget about finding the right model for “the economy” in the abstract, and focus more on quantitative description of concrete historical developments. I expressed this opinion in a bunch of tweets, storified here.

The Gosplan of capitalism. Schumpeter described banks as capitalism’s equivalent of the Soviet planning agency — a bank loan can be thought of as an order allocating part of society’s collective resources to a particular project. This applies even more to the central banks that set the overall terms of bank lending, but this conscious direction of the economy has been hidden behind layers of ideological obfuscation about the natural rate, policy rules and so on. As DeLong says, central banks are central planners that dare not speak their name. This silence is getting harder to maintain, though. Every day there seems to be a new news story about central banks intervening in some new credit market or administering some new price. Via Ben Bernanke, here is the Bank of Japan announcing it will start targeting the yield of 10-year Japanese government bonds, instead of limiting itself to the very short end where central banks have traditionally operated. (Although as he notes, they “muddle the message somewhat” by also announcing quantities of bonds to be purchased.) Bernanke adds:

there is a U.S. precedent for the BOJ’s new strategy: The Federal Reserve targeted long-term yields during and immediately after World War II, in an effort to hold down the costs of war finance.

And in the FT, here is the Bank of England announcing it will begin buying corporate bonds, an unambiguous step toward direct allocation of credit:

The bank will conduct three “reverse auctions” this week, each aimed at buying the bonds from particular sectors. Tuesday’s auction focuses on utilities and industries. Individual companies include automaker Rolls-Royce, oil major Royal Dutch Shell and utilities such as Thames Water.

Inflation or socialism. That interventions taken in the heat of a crisis to stabilize financial markets can end up being steps toward “a more or less comprehensive socialization of investment,” may be more visible to libertarians, who are inclined to see central banks as a kind of socialism already. At any rate, Scott Sumner has been making some provocative posts lately about a choice between “inflation or socialism”. Personally I don’t have much use for NGDP targeting — Sumner’s idée fixe — or the analysis that underlies it, but I do think he is onto something important here. To translate the argument into Keynes’ terms, the problem is that the minimum return acceptable to wealth owners may be, under current conditions, too high to justify the level of investment consistent with the minimum level of growth and employment acceptable to the rest of society. Bridging this gap requires the state to increasingly take responsibility for investment, either directly or via credit policy. That’s the socialism horn of the dilemma. Or you can get inflation, which, in effect, forces wealthholders to accept a lower return; or put it more positively, as Sumner does, makes it more attractive to hold wealth in forms that finance productive investment. The only hitch is that the wealthy — or at least their political representatives — seem to hate inflation even more than they hate socialism.

The corporate superorganism. One more for the “finance-as-socialism” files. Here’s an interesting working paper from Jose Azar on the rise of cross-ownership of US corporations, thanks in part to index funds and other passive investment vehicles.

The probability that two randomly selected firms in the same industry from the S&P 1500 have a common shareholder with at least 5% stakes in both firms increased from less than 20% in 1999Q4 to around 90% in 2014Q4 (Figure 1).1 Thus, while there has been some degree of overlap for many decades, and overlap started increasing around 2000, the ubiquity of common ownership of large blocks of stock is a relatively recent phenomenon. The increase in common ownership coincided with the period of fastest growth in corporate profits and the fastest decline in the labor share since the end of World War II…

A common element of theories of the firm boundaries is that … either firms are separately owned, or they combine. In stock market economies, however, the forces of portfolio diversification lead to … blurring firm boundaries… In the limit, when all shareholders hold market portfolios, the ownership of the firms becomes exactly identical. From the point of view of the shareholders, these firms should act “in unison” to maximize the same objective function… In this situation the firms have in some sense become branches of a larger corporate superorganism.

The same assumptions that generate the “efficiency” of market outcomes imply that public ownership could be just as efficient — or more so in the case of monopolies.

The present paper provides a precise efficiency rationale for … consumer and employee representation at firms… Consumer and employee representation can reduce the markdown of wages relative to the marginal product of labor and therefore bring the economy closer to a competitive outcome. Moreover, this provides an efficiency rationale for wealth inequality reduction –reducing inequality makes control, ownership, consumption, and labor supply more aligned… In the limit, when agents are homogeneous and all firms are commonly owned, … stakeholder representation leads to a Pareto efficient outcome … even though there is no competition in the economy.

As Azar notes, cross-ownership of firms was a major concern for progressives in the early 20th century, expressed through things like the Pujo committee. But cross-ownership also has been a central theme of Marxists like Hilferding and Lenin. Azar’s “corporate superorganism” is basically Hilferding’s finance capital, with index funds playing the role of big banks. The logic runs the same way today as 100 years ago. If production is already organized as a collective enterprise run by professional managers in the interest of the capitalist class as a whole, why can’t it just as easily be managed in a broader social interest?

Global pivot? Gavyn Davies suggests that there has been a global turn toward more expansionary fiscal policy, with the average rich country fiscal balances shifting about 1.5 points toward deficit between 2013 and 2016. As he says,

This seems an obvious path at a time when governments can finance public investment programmes at less than zero real rates of interest. Even those who believe that government programmes tend to be inefficient and wasteful would have a hard time arguing that the real returns on public transport, housing, health and education are actually negative.

I don’t know about that last bit, though — they don’t seem to find it that hard.

Taylor rule toy. The Atlanta Fed has a cool new gadget that lets you calculate the interest rate under various versions of the Taylor Rule. It will definitely be useful in the classroom. Besides the obvious pedagogical value, it also dramatizes a larger point — that macroeconomic variables like “inflation” aren’t objects simply existing in the world, but depend on all kinds of non-obvious choices about measurement and definition.

The new royalists. DeLong summarizes the current debates about monetary policy:

1. Do we accept economic performance that all of our predecessors would have characterized as grossly subpar—having assigned the Federal Reserve and other independent central banks a mission and then kept from them the policy tools they need to successfully accomplish it?

2. Do we return the task of managing the business cycle to the political branches of government—so that they don’t just occasionally joggle the elbows of the technocratic professionals but actually take on a co-leading or a leading role?

3. Or do we extend the Federal Reserve’s toolkit in a structured way to give it the tools it needs?

This is a useful framework, as is the discussion that precedes it. But what jumped out to me is how he reflexively rejects option two. When it comes to the core questions of economic policy — growth, employment, the competing claims of labor and capital — the democratically accountable, branches of government must play no role. This is all the more striking given his frank assessment of the performance of the technocrats who have been running the show for the past 30 years: “they—or, rather, we, for I am certainly one of the mainstream economists in the roughly consensus—were very, tragically, dismally and grossly wrong.”

I think the idea that monetary policy is a matter of neutral, technical expertise was always a dodge, a cover for class interests. The cover has gotten threadbare in the past decade, as the range and visibility of central bank interventions has grown. But it’s striking how many people still seem to believe in a kind of constitutional monarchy when it comes to central banks. They can see people who call for epistocracy — rule by knowers — rather than democracy as slightly sinister clowns (which they are). And they can simultaneously see central bank independence as essential to good government, without feeling any cognitive dissonance.

Did extending unemployment insurance reduce employment? Arin Dube, Ethan Kaplan, Chris Boone and Lucas Goodman have a new paper on “Unemployment Insurance Generosity and Aggregate Employment.” From the abstract:

We estimate the impact of unemployment insurance (UI) extensions on aggregate employment during the Great Recession. Using a border discontinuity design, we compare employment dynamics in border counties of states with longer maximum UI benefit duration to contiguous counties in states with shorter durations between 2007 and 2014. … We find no statistically significant impact of increasing unemployment insurance generosity on aggregate employment. … Our point estimates vary in sign, but are uniformly small in magnitude and most are estimated with sufficient precision to rule out substantial impacts of the policy…. We can reject negative impacts on the employment-to-population ratio … in excess of 0.5 percentage points from the policy expansion.

Media advisory with synopsis is here.

On other blogs, other wonders

Larry Summers: Low laborforce participation is mainly about weak demand, not demographics or other supply-side factors.

Nancy Folbre on Greg Mankiw’s claims that the one percent deserves whatever it gets.

At Crooked Timber, John Quiggin makes some familiar — but correct and important! — points about privatization of public services.

In the Baffler, Sam Kriss has some fun with the new atheists. I hadn’t encountered Kierkegaard’s parable of the madman who tells everyone who will listen “the world is round!” but it fits perfectly.

A valuable article in the Washington Post on cobalt mining in Africa. Tracing out commodity chains is something we really need more of.

Buzzfeed on Blue Apron. The reality of the robot future is often, as here, just that production has been reorganized to make workers less visible.

At Vox, Rachelle Sampson has a piece on corporate short-termism. Supports my sense that this is an area where there may be space to move left in a Clinton administration.

Sven Beckert has edited a new collection of essays on the relationship between slavery and the development of American capitalism. Should be worth looking at — his Empire of Cotton is magnificent.

At Dissent, here’s an interesting review of Jefferson Cowie’s and Robert Gordon’s very different but complementary books on the decline of American growth.

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:

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.

Links for July 27, 2016

Labor dynamism and demand. My colleagues Mike Konczal and Marshall Steinbaum have an important new paper out on the decline in new business starts and in labor mobility. They argue that the data don’t support a story where declining labor-market dynamism is the result of supply-side factors like occupational licensing. It looks much more like the result of chronically weak demand for labor, which for whatever reason is not picked up by the conventional unemployment rate. This is obviously relevant to the potential output question I’m interested in — a slowdown in the rate at which workers move to new firms is a natural channel by which weak demand could reduce labor productivity. It’s also a very interesting story in its own right.

Konczal and Steinbaum:

The decline of entrepreneurship and “business dynamism” has become an accepted fact … Explanations for these trends … broadly fall on the supply side: that increasingly onerous occupational licensing impedes entry into certain protected professions and restricts licensed workers to staying where they are; that the high cost of housing thanks to restrictions on development hampers individuals from moving… But we find that the data reject these supply-side explanations: If there were increased restrictions on changing jobs or starting a business, we would expect those few workers and entrepreneurs who do manage to move to enjoy increased wage gains relative to periods with higher worker flows, and we would expect aggressive hiring by employers with vacancies. … Instead, we see the opposite…

We propose a different organizing principle: Declining business dynamism and labor mobility are features of a slackening labor market … workers lucky enough to have formal employment stay where they are rather than striking out as entrepreneurs …

Also in Roosevelt news, here’s a flattering piece about us in the New York Times Magazine.

John Kenneth who? Real World Economics Review polled its subscribers on the most important economics books of the past 100 years. Here’s the top ten. Personally I suspect Debt will have more staying power than Capital in the 21st Century, and I think Minsky’s book John Maynard Keynes is a better statement of his vision than Stabilizing an Unstable Economy, a lot of which is focused on banking-sector developments of the 1970s and 1980s that aren’t of much interest today. But overall it’s a pretty good list. The only one I haven’t read is The Affluent Society. I wonder if anyone under the age of 50 picked that one?

Deflating the elephant. Here is a nice catch from David Rosnick. Brank Milanovic has a well-known graph of changes in global income distribution over 1988-2008. What we see is that, while within most countries there has been increased polarization, at the global level the picture is more complicated. Yes, the top of the distribution has gone way up, and the very bottom has gone down. But the big fall has been in the upper-middle of the distribution — between the 80th and 99th percentiles — while most of the lower part has has risen, with the biggest gains coming around the 50th percentile. The decline near the high end is presumably working-class people in rich countries and most people in the former Soviet block —who were still near the top of the global distribution in 1988. A big part of the rise in the lower half is China. A natural question is, how much? — what would the distribution look like without China? Milanovic had suggested that the overall picture is still basically the same. But as Rosnick shows, this isn’t true — if you exclude China, the gains in the lower half are much smaller, and incomes over nearly half the distribution are lower in 2008 than 20 years before. It’s hard to see this as anything but a profoundly negative verdict on the Washington Consensus that has ruled the world over the past generation.

By the way, you cannot interpret this — as I at first wrongly did — as meaning that 40 percent of the world’s people have lower incomes than in 1988. It’s less than that. Faster population growth in poor countries would tend to shift the distribution downward even if every individual’s income was rising.

Does nuclear math add up? Over at Crooked Timber, there’s been an interesting comments-thread debate between Will Boisvert (known around here for his vigorous defense of nuclear power) and various nuke antis and skeptics. I’m the farthest thing from an expert, I can’t claim to be any kind of arbiter. But personally my sympathies are with Will. One important thing he brings out, which I hadn’t thought about enough until now, is the difference between electricity and most other commodities. Part of the problem is the very large share of fixed costs — as the Crotty-Minsky-Perelman strain of Keynesians have emphasized, capitalism does badly with long lived capital assets. A more distinctive problem is the time dimension — electricity produced at one time is not a good substitute for electricity produced at a different time, even just an hour before or after. Electricity cannot be stored economically at a meaningful scale, nor — given that almost everything in modern civilization uses it — can its consumption be easily shifted in time. This means that straightforward comparisons of cost per kilowatt — hard enough to produce, given the predominance of fixed costs — can be misleading. Regardless of costs, intermittent sources — like wind or solar — have to be balanced by sources that can be turned on anytime — which in the absence of nuclear, means fossil fuels.

Do you believe, as I do, that climate change is the great challenge facing humanity in the next generation? Then this is a very strong argument for nuclear power. Whatever its downsides, they are not as bad as boiling the oceans. Still, it’s not a decisive argument. The big other questions are the costs of power storage and of more extensive transmission networks — since when the sun isn’t shining and the wind isn’t blowing in one place, they probably are somewhere else. (I agree with Will that using the price mechanism to force electricity usage to conform to supply from renewables is definitely the wrong answer.) The CT debate doesn’t answer those questions. But it’s still an example of how informative blog debate can be when there are people both sides with real expertise who are prepared to engage seriously with each other.

On other blogs, other wonders. Here is a fascinating post by Laura Tanenbaum on the end of sex-segregated job ads and the false dichotomy between “elite” and “grassroots” feminism.

This very interesting article by Jose Azar on the extent and economic significance of common ownership of corporate shares deserves a post of its own.

Here’s a nice little think piece from Bloomberg wondering what, if anything, is meant by “the natural rate” of interest. I’m glad to see some skepticism about this concept in the larger conversation. In my mind, the “natural rate” is one of the key patches covering over the disconnect between economic theory and the observable economy.

Bhenn Bhiorach has a funny post on the lengths people will go to to claim that low inflation is really high inflation.

Books You Could Read

Here are some books I’ve read recently.

W. Arthur Lewis, The Evolution of the World Economic Order

This little book may have the highest insights-per-page density of any economics book I’ve read. This isn’t an unmixed blessing — what you’re getting here are the distilled conclusions of a lifetime’s work in development economics, without any of the concrete material that led to them. The central theme — among many fascinating side-trips — is a basically Ricardian vision of a three-class society in which conditions in agriculture fundamentally determine the possibilities for capitalist development, and landlords are the great enemies of progress.

Among the book’s many virtues is the way it demonstrates how Ricardo’s theories of trade has much more radical implications than the free-trade-is-good bromides it’s usually deployed in support of. As Lewis points out, the Ricardian model clearly shows that it is in the interests of the rich countries that poor countries develop their capacity to produce goods they are already specialized in (i.e. follow their comparative advantage). But it is in the interest of the poor countries themselves (except for the landlords) to develop their capacity to produce the goods currently produced by the rich countries.

Charles Sellers, The Market Revolution

Originally I’d picked up some other history of the pre-Civil War United States. It referred dismissively to the idea that resistance to wage labor and to production for profit had been important to political and social developments in the early United States, and referenced The Market Revolution as the leading example of this now-discredited view. Ah, I thought, that’s the book I should be reading. I was not disappointed. The transition from use-value production by family units to market production by wage (and slave) labor turns out to be a very effective tool for organizing a general political and social history of the US from the end of the War of 1812 to the 1840s.

Richard Dawkins, The Ancestor’s Tale

I’d had this sitting around for ages and for some reason picked it up when I was unpacking a box of books. It’s a history of evolution, told through the conceit of a pilgrimage from modern humans back to the origins of life. Each pilgrim represents the last common ancestor of us and some other group of organisms. It may not be obvious at first but there is a definite number of such meeting points, no more than a few dozen, though obviously there is quite a bit of uncertainty about the more distant ones. It’s a very effective device for telling the story of evolution in an unfamiliar way, and, thankfully, Dawkins’ cranky politics are confined to a few footnotes.

Richard Werner, Princes of the Yen

Someone recommend this book to me in comments on this blog. It’s an original retelling of the story of Japan’s long postwar boom and long post-1980s stagnation that puts monetary policy at the center of both.

The basic argument is that the distinctive features of Japanese capitalism are a product of wartime mobilization, not some ancient features of Japanese culture; Werner’s claim that 1920s Japan was as liberal as the US or UK on most economic dimensions is consistent with other things I’ve read. The central feature of wartime planning that was preserved after 1945 was direct allocation of credit by the state — not officially, but via “window guidance” to banks on the desired volume and direction of lending. Initially this was controlled by the Ministry of Finance but in the 1980s, Werner argues, the Bank of Japan became increasing independent, and the key decisionmakers there — the “princes of the yen” of the title — saw their control over credit as a tool to dismantle the distinctive features of postwar Japanese capitalism. His claim that the crisis was deliberately provoke and prolonged in order to push through a broader agenda of liberalization is highly relevant as a precedent for what’s happening in Europe today — though I have to admit that his evidence for it is more suggestive than dispositive.

Ray Madoff, Immortality and the Law

I stole this from Mike Konczal when I was visiting him last year; he was using it for a piece in The Nation. It’s a fascinating discussion of a question I’d never thought about much before — the legal status of dead people.

The argument is that the US is an outlier, in that it grants dead people no rights over their bodies — instructions about the disposal of remains have no legal force — but grants wealthowners almost unlimited freedom to dispose of their property however they wish. In most European countries, by contrast, children and other family members are entitled to a substantial share of the estate regardless of the wishes of the deceased. Piketty, incidentally, is critical of these rules, on the grounds that they reinforce inherited wealth, but the US has its own ways of maintaining fortunes across generations. As Madoff points out, the “rule against perpetuities” now exists only in law school classrooms. While at one time it was possible to leave wealth in trust only for named individuals, it is now perfectly possible to set up a trust to benefit your decendents unto the last generation. Even better, you can keep your property itself in the trust, allowing your heirs only an income, or the use of it (as with a house); this protects it from the taxman, your children’s creditors, and their own spendthrift ways. Of course the law is not the whole story here; whether the US has the norms and institutions to actually maintain such perpetual wealth remains to be seen.

Elizabeth Kolbert, The Sixth Extinction

If you’ve read Kolbert’s pieces on climate change in the New Yorker then you know what this book is like. It’s a good, readable summary of what we know about the mass extinction currently underway. There’s nothing really new here, but one thing I did learn from it is how much of what’s happening is due to factors other than warming per se. Ocean acidification is responsible for the extinction of coral, which may be completely gone by the end of the century; invasive species and the dissemination of pathogens is the main factor in the decline of bats and amphibians. No matter how familiar you think you are with this stuff there’s always something that hits you. I remember my fascination and disgust as a child when I learned there were frogs that swallowed their eggs and hatched the tadpoles in their stomachs. It turns out there aren’t anymore.

Christopher Boehm, Moral Origins: The Evolution of Virtue, Altruism and Shame

The central claim of Boehm’s previous book is that all the small bands of foragers we know of — the closest analogues to the societies that existed for 99 percent of human history — are strictly egalitarian, with no one (among adult males) allowed to assume authority over anyone else. This contrasts with the modern world of kings, cops and bosses, and even more so with the rigid dominance hierarchies of our nearest primate relatives. And yet there is a striking parallel between the alliances that dominant chimpanzees form to defend their top spot, and the alliances that entire groups of human beings form to prevent anyone from occupying the top spot in the first place.

Boehm’s idea — which I like a lot, though I don’t have any expertise — is that the same basic behavioral patterns, presumably with the same genetic underpinnings, can produce dramatically different kinds of society. An intense dislike of having people above you, plus the ability to form alliances against anyone who tries to move up in the ranks, are the ingredients for a world of chimpanzees, baboons, mafiosos and orcs, where everyone is jealously guarding their spot in the hierarchy and ready to violently retaliate against usurpers who try to cut ahead of them. But the same vigilance against anyone trying to put themselves above you can equally give rise to the absolute democracy of hunter-gatherer bands, or today to political movements like Occupy Wall Street.

The main thing the newer book adds to the story is a more explicit argument that egalitarian norms arose through natural selection, along the same lines as people like Bowles and Gintis. I am not sure this evolutionary turn is a step forward. Like all evolutionary psychology, this consists largely of speculative just-so stories. And it loses one of the most interesting ideas in the earlier work, that the same behavioral building blocks can give rise to both hierarchical and egalitarian forms of society.

As for fiction, I’ve recently read:

It’s a Battlefield, by Graham Greene

Q, by Luther Blissett

The First Bad Man, by Miranda July

The Lists of the Past, by Julie Hayden. (See Laura Tanenbaum’s review here.)

The Member of the Wedding, by Carson McCullers

The Progress of Love, by Alice Munro

Going after Caciatto, by Tim O’Brien

The Hunters, by James Salter

Cities of Salt, by Adulrahman Munif

Crow Fair, by Tom McGuane

My Brilliant Friend, The Story of a New Name, and Those Who Leave and Those Who Stay, by Elana Ferrante

I liked all of them a lot, would recommend them all. Maybe I’ll write mini-reviews in an another post. Or maybe not.

On Other Blogs, Other Wonders

Some links for Nov. 1:

A few links

This Friday, November 6, Mike Konczal and I will be releasing the next piece of the Roosevelt Institute Financialization Project, two reports on “short-termism” in American corporations and financial markets. One report, written by me, is a followup to the Disgorge the Cash report from this spring, addressing a bunch of the most common objections to the argument that pressure for high payouts is undermining investment. (Some of this material has appeared here on the blog, but a lot of it is new.) The other report is a ten-point policy proposal for addressing short-termism, written by Mike, me, and my former student Amanda Page-Hongrajook. There will be an event for the release in DC, featuring Senator Tammy Baldwin. Hopefully it will get some attention from policymakers and the press.

I was pleased to see this new paper from the central bank of Norway, which draws on my work with Arjun Jayadev on debt dynamics. The key point in the Norges Bank paper is that we have to think of debt as evolving historically, not chosen de novo in response to the current “fundamentals.” More concretely: given significant debt inherited from the past, an increase in interest rates will lead to higher, not lower, debt. The shorthand that change in debt is the same as new borrowing, is not a reliable guide to the historical evolution of leverage.

From the paper:

Macroeconomic models typically assume that households refinance their debt each period … with the implication that the entire stock of debt responds swiftly to shocks and policy changes. This simplifying assumption might be useful and innocuous for many purposes, but cannot be relied upon in the current policy debate, where a central question regards if and how monetary policy should respond to movements in household debt. The likely performance of such policies can only be evaluated within frameworks that realistically account for debt dynamics. …

The evidence that perhaps most convincingly points toward the need for distinguishing between new borrowing and existing debt, is the empirical decomposition of US household debt dynamics by Mason and Jayadev (2014). They account for how the “Fisher” factors inflation, income growth and interest rates have contributed to the evolution of US debt-to-income, in addition to the changes in borrowing and lending, since 1929. Their findings clearly show how the dynamics of debt-to-income cannot be attributed to variation in borrowing alone, but has been strongly influenced by the Fisher factors, and often has gone in the opposite direction of households’ primary deficits. …

Discussions of household debt tend to implicitly assume that variation in debt-to- income ratios reflect active shifts in borrowing and lending, which is misguided…. With plausible debt dynamics, interest rate changes have far weaker influence on household debt than a conventional one-quarter debt model implies. Moreover, with long-term debt the qualitative effect of a policy tightening on household debt-to-GDP is likely to be positive..

The bulk of the paper is an attempt to incorporate these ideas into a DSGE model, which I have misgivings about. But that hardly matters since they’ve so clearly grasped the important point.

In the other-than-economics department, here’s a New York Observer article by Will Boisvert from a little while back on universal pre-K. Will is not a big fan of New York’s universal pre-K program, or of the education-based arguments used to promote it. Now, as a New York City parent of a small child, I’m very grateful that UPK exists. And I’m very impressed that the DeBlasio team were able to roll it out as fast as they did — it’s hard to think of another universal entitlement that was implemented so quickly. But Will’s central critique seems on the mark to me. UPK is primarily a benefit for parents — we should mainly think of it as publicly funded daycare. But for various reasons, it’s been sold by its contribution to the human capital formation of 4-year olds, not by the ways it makes parenthood less of a burden for working- and middle-class families. Will’s argument — and here I’m not sure I’m with him — is that this has had real costs in the way the program is structured.

(Incidentally, one of my first published pieces was a rather unfriendly article about current Observer editor Ken Kurson.)

Over at the Angry Bear blog, the very smart Robert Waldmann has got himself worked up over the fact that real private investment has for the first times since 1947 surpassed real government consumption and investment (I > G in the language of the national income identity.) Unfortunately, there is no such fact.

“Real” I and G are index numbers; you cannot compare their magnitudes. All you can compare is dollars. And in terms of dollars, government consumption and investment, at $3.2 trillion, remains slightly higher than private domestic investment, at $3 trillion. In fact, Waldmann’s claim is almsot the opposite of the truth: the current expansion is the first one since the early 1970s in which private investment has not passed government final spending, at least not yet.

“Real” values are supposed to refer to quantities of stuff, not quantities of money. So Waldmann’s claim that real I is greater than real G is equivalent to the claim that the country is producing more kindergarten classes than steel. Talking about the change in the “real” quantity of steel, or in the “real” number of kindergarten classes, is in principle straightforward: just add up tons or bodies in classrooms, as the case may be. But how do you compare the two? Only via their prices. The problem is, the relative price of kindergarten classes and steel varies over time. So which is greater than which, and by how much, will depend on which year’s prices you use. In the case of I and G, if we use current prices, we find that G is slightly greater than I. If we use 2009 prices, as Waldmann does, we find that I is slightly greater than G. If we use, say, 1950 prices, we find that I is almost three times G. Which of these is “true”? None of them — when you’re comparing index numbers, absolute magnitudes are completely arbitrary. And again, when we compare dollar amounts, which are objective, we see that G remains comfortably above I. [1]

I’m not calling attention to this just to pick a fight. (UPDATE: Waldmann now agrees, so no fight to pick.) It’s because I think it’s revealing about the way inflation adjustment confuses people, and especially economists. Even someone as smart and critical-minded as Waldmann can get sucked into treating “real” values as objective measures of physical stuff.

I haven’t been following the Argentine elections closely, but it seems clear that the resolution of the Argentine default is an important frontline in the war between money and humanity. So we have to be interested in whether the elections are won by the candidate promising surrender to the creditors. On the larger set of issues at stake there, I recommend this piece by Marc Weisbrot, whose stuff on Argentina is in general very good.

There’s an interesting conversation going on about the “natural rate of interest.” Here’s one way to think about it. If the government buys enough peanuts, it can presumably raise aggregate demand to the economy to full employment, and/or to a level consistent with some inflation target. Should we call whatever peanut price results from this policy “the natural price of peanuts”? And is there any reason to think that this price, whatever it might be, will be the same as in a Walrasian economy that somehow corresponds to our own “in the absence of distortions or rigidities”? Now substitute bonds for peanuts — to talk about the natural rate of interest means answering both questions Yes.

Anyway, I think Tyler Cowen is mostly on target here.

I was talking about econ blogs at the bar the other night, and there was a general consensus that none of us read as many of them as we used to. Maybe the econblogging moment is over? Still, there are lots of them that are worth your time, if you’re reading this. Here are a few economics blogs I’ve recently started reading regularly: Perry Mehrling; Brian Romanchuk; Marshall Steinbaum. Perry has of course been writing great stuff for decades but he’s only recently taken up blogging. So I think there’s still some life in the format.

[1] Altho it is striking how the trajectory of G has flattened out under Obama. 2010-2015 is the first five-year period since World War II in which there was zero growth in nominal government consumption and investment. The only reason G is still above I, is because private investment fell so steeply between 2006 and 2010. So maybe Waldmann is onto something after all?