As I mentioned in an earlier post, I am for the first time teaching a class in quantiative methods in John Jay’s new economics MA program.[footnote]If you’re curious about this program, please email me at profjwmason@gmail.com.[/footnote] One thing I’ve found is that the students, even those who have taken econometrics or statistics classes before, really benefit from an explanation fo how to read regression results — what exactly all the numbers you find in a regression table actually mean. I’m sure there is a textbook out there that gives a good, clear, comprehensive, accessible explanation of how to read regression results, but I haven’t found it. Besides, I like making my own materials. Among other things, it’s a good way to be sure you understand things yourself, and to clarify how you think people should think about them. So I’ve been writing my own notes on how to read a regression. They are on my teaching materials page, along with lots of macroeconomics notes and a few other things.
If you teach an introductory econometrics or statistics class, take a look, and feel free to use them if they seem helpful. Or if you are taking one, or just curious. And if anything seems wrong or confusing to you, or if you know of something similar but more polished and complete — or just better — please let me know.
By the way, these notes, like my macroeconomics notes, are written in latex using the tufte-handout package.
First act: Brash young(ish) hedge fund guy takes over iconic American business, forces through closures and layoffs, makes lots of money for his friends.
From the moment he bought into what was then called Sears, Roebuck & Co., he also maneuvered to protect his financial interests. At times, he even made money. He closed stores, fired employees and … carved out some choice assets for himself.
All seems to be going well. But now the second act: He gets too attached, and instead of passing the drained but still functioning business onto some other sucker, imagines he can run it himself. But managing a giant retailer is harder than it looks. Getting on a videoconference a couple times a week and telling the executives that they’re idiots isn’t enough to turn things around.
But the big mistake was even trying to. Poor Eddie Lampert has forgotten “the investors’ commandment: Get out in time.” That’s always the danger for money and its human embodiments — to get drawn into some business, some concrete human activity, instead of returning to its native immaterial form. Once the wasp larva has sucked the caterpillar dry, it needs to get out and turn back into a wasp, not go shambling around in the husk. This one waited too long.
Not even Lampert’s friends could understand why the hedge-fund manager, once hailed as a young Warren Buffett, clung to his spectacularly bad investment in Sears, a dying department store chain. … After 13 years under Lampert’s stewardship, Sears finally seems to be hurtling toward bankruptcy, if not outright liquidation. And, once again, Wall Street is wondering what Eddie Lampert will salvage for himself and his $1.3 billion fund, ESL Investments Inc., whose future may now be in doubt.
Oh no! Will the fund survive? Don’t worry, there’s a third act. Sears may have crashed and burned, but it turns out Lampert had a parachute – he set himself up as the senior creditor in the bankruptcy, and presciently spun off the best assets for himself.
Under the filing the company is said to be preparing for as soon as this weekend, he and ESL — together they hold almost 50 percent of the shares — would be at the head of the line when the remnants are dispersed. As secured creditors, Lampert and the fund could get 100 cents on the dollar… And Lampert carved out what looked like — and in some cases might yet be — saves for himself, with spinoffs that gave him chunks of equity in new companies. One was Seritage Growth Properties, the real estate investment trust that counts Sears as its biggest tenant and of which Lampert is the largest shareholder; he created it in 2015 to hold stores that were leased back to Sears — cordoning those off from any bankruptcy proceeding. He and ESL got a majority stake in Land’s End Inc., the apparel and accessories maker he split from Sears in 2014.
The fund is saved. The business crashes but the money escapes. The billionaire is still a billionaire, battered but upright, dramatically backlit by the flames from the wreckage behind him. Credits roll.
Among the small group of heterodox economics people interested in corporate finance, it is common knowledge that the stock market is a tool for moving money out of the corporate sector, not into it. Textbooks may talk about stock markets as a tool for raising funds for investment, but this kind of financing is dwarfed by the payments each year from the corporations to shareholders.
The classic statement, as is often the case, is in Doug Henwood’s Wall Street:
Instead of promoting investment, the U.S. financial system seems to do quite the opposite… Take, for example, the stock market, which is probably the centerpiece of the whole enterprise. What does it do? Both civilians and professional apologists would probably answer by saying that it raises capital for investment. In fact it doesn’t.Between 1981 and 1997, U.S. nonfinancial corporations retired $813 billion more in stock than they issued, thanks to takeovers and buybacks. Of course, some individual firms did issue stock to raise money, but surprisingly little of that went to investment either. A Wall Street Journal article on 1996’s dizzying pace of stock issuance (McGeehan 1996) named overseas privatizations (some of which, like Deutsche Telekom, spilled into U.S. markets) “and the continuing restructuring of U.S. corporations” as the driving forces behind the torrent of new paper. In other words, even the new-issues market has more to do with the arrangement and rearrangement of ownership patterns than it does with raising fresh capital.
The pattern of negative net share issues has if anything only gotten stronger in the 20 years since then, with net equity issued by US corporations averaging around negative 2 percent of GDP. That’s the lower line in the figure below:
Note that in the passage I quote, Doug correctly writes “takeovers and buybacks.” But a lot of other people writing in this area — definitely including me — have focused on just the buyback part. We’ve focused on a story in which corporate managers choose — are compelled or pressured or incentivized — to deliver more of the firm’s surplus funds to shareholders, rather than retaining them for real investment. And these payouts have increasingly taken the form of share repurchases rather than dividends.
In telling this story, we’ve often used the negative net issue of equity as a measure of buybacks. At the level of the individual corporation, this is perfectly reasonable: A firm’s net issue of stocks is simply its new issues less repurchases. So the net issue is a measure of the total funds raised from shareholders — or if it is negative, as it generally is, of the payments made to them.
It’s natural to extend this to the aggregate level, and assume that the net change in equities outstanding similarly reflects the balance between new issues and repurchases. William Lazonick, for instance, states as a simple matter of fact that “buybacks are largely responsible for negative net equity issues.” 1 But are they really?
If we are looking at a given corporation over time, the only way the shares outstanding can decline is via repurchases.2 But at the aggregate level, lots of other things can be responsible — bankruptcies, other changes in legal organization, acquisitions. Quantitatively the last of these is especially important. Of course when acquisitions are paid in stock, the total volume of shares doesn’t change. But when they are paid in cash, it does. 3 In the aggregate, when publicly trade company A pays $1 billion to acquire publicly traded company B, that is just a payment from the corproate sector to the household sector of $1 billion, just as if the corporation were buying back its own stock. But if we want to situate the payment in any kind of behavioral or institutional or historical story, the two cases may be quite different.
Until recently, there was no way to tell how much of the aggregate share retirements were due to repurchases and how much were due to acquisitions or other causes.4 The financial accounts reported only a single number, net equity issues. (So even the figure above couldn’t be produced with aggregate data, only the lower line in it.) Under these circumstances the assumption that that buybacks were the main factor was reasonable, or at least as reasonable as any other.
Recently, though, the Fed has begun reporting more detailed equity-finance flows, which break out the net issue figure into gross issues, repurchases, and retirements by acquisition. And it turns out that while buybacks are substantial, acquisitions are actually a bigger factor in negative net stock issues. Over the past 20 years, gross equity issues have averaged 1.9 percent of GDP, repurchases have averaged 1.7 percent of GDP, and retirements via acquisitions just over 2 percent of GDP. So if we look only at corporations’ transactions in their own stock, it seems that that the stock market still is — barely — a net source of funds. For the corproate sector as a whole, of course, it is still the case that the stock market is, in Jeff Spross’ memorable phrase, a giant money hose to nowhere.
The figure below shows dividends, gross equity issues, repurchases and M&A retirements, all as a percent of GDP.
What do we see here? First, the volume of shares retired through acquisitions is consistently, and often substantially, greater than the volume retired through repurchases. If you look just at the aggregate net equity issue you would think that share repurchases were now comparable to dividends as a means of distributing profits to shareholders; but it’s clear here that that’s not the case. Share repurchases plus acquisitions are about equal to dividends, but repurchases by themselves are half the size of dividends — that is, they account for only around a third of shareholder payouts.
One particular period the new data changes the picture is the tech boom period around 2000. Net equity issues were significantly negative in that period, on the order of 1 percent of GDP. But as we can now see, that was entirely due to an increased volume of acquisitions. Repurchases were flat and, by the standard of more recent periods, relatively low. So the apparent paradox that even during an investment boom businesses were paying out far more to shareholders than they were taking in, is not quite such a puzzle. If you were writing a macroeconomic history of the 1990s-2000s, this would be something to know.
It’s important data. I think it clarifies a lot and I hope people will make more use of it in the future.
We do have to be careful here. Some fraction of the M&A retirements are stock transactions, where the acquiring company issues new stock as a kind of currency to pay for the stock of the company it is acquiring.5 In these cases, it’s misleading to treat the stock issuance and the stock retirement as two separate transactions — as independent sources and uses of funds. It would be better to net those transactions out earlier before reporting the gross figures here. Unfortunately, the Fed doesn’t give a historical series of cash vs. stock acquisition spending. But in recent years, at least, it seems that no more than a quarter or so of acquisitions are paid in stock, so the figure above is at least qualitatively correct. Removing the stock acquisitions — where there is arguably no meaningful issue or retirement of stock, jsut a swap of one company’s for another’s — would move the M&A Retirements and Gross Equity Issues lines down somewhat. But the basic picture would remain the same.
It’s also the case that a large fraction of equity issues are the result of exercise of employee stock options. I suspect — tho again I haven’t seen definite data — that stock options accout for a large fraction, maybe a majority, of stock issues in recent decades. But this doesn’t change the picture as far as sectoral flows goes — it just means that what is being financed is labor costs rather than investment.
The bottom line here is, I don’t think we heterodox corporate finance people have thought enough about acquisitions. A major part of payments from corporations to shareholders are not distribution of profits in the usual sense, but payments by managers for control rights over a production process that some other shareholders have claims on. I don’t think our current models handle this well — we either think implicitly of a single unitary corporate sector, or we follow the mainstream in imagining production as a bouillabaisse in where you just throw in a certain amount of labor and a certain amount of capital, so it doesn’t matter who is in charge.
Of course we know that the exit, the liquidity moment, for many tech startups today is not an IPO — let alone reaching profitability under the management of early investors — but acquisition by an established company. But this familiar fact hasn’t really made it into macro analysis.
I think we need to take more seriously the role of Wall Street in rearranging ownership claims. Both because who is in charge of particular production processes is important. And because we can’t understand the money flows between corporations and households without it.
Arjun Jayadev and I have a new piece up at the Institute for New Economic Thinking, trying to clarify the relationship between Modern Monetary Theory (MMT) and textbook macroeconomics. (There is also a pdf version here, which I think is a bit more readable.) I will have a blogpost summarizing the argument later today or tomorrow, but in the meantime here is the abstract:
An increasingly visible school of heterodox macroeconomics, Modern Monetary Theory (MMT), makes the case for functional finance—the view that governments should set their fiscal position at whatever level is consistent with price stability and full employment, regardless of current debt or deficits. Functional finance is widely understood, by both supporters and opponents, as a departure from orthodox macroeconomics. We argue that this perception is mistaken: While MMT’s policy proposals are unorthodox, the analysis underlying them is largely orthodox. A central bank able to control domestic interest rates is a sufficient condition to allow a government to freely pursue countercyclical fiscal policy with no danger of a runaway increase in the debt ratio. The difference between MMT and orthodox policy can be thought of as a different assignment of the two instruments of fiscal position and interest rate to the two targets of price stability and debt stability. As such, the debate between them hinges not on any fundamental difference of analysis, but rather on different practical judgements—in particular what kinds of errors are most likely from policymakers.
I’m teaching a new class this semester, a masters-level class on research methods. It could be taught as simply the second semester of an econometrics sequence, but I’m taking a different approach, trying to think about what will help students do effective empirical work in policy/political settings. We’ll see how it works.
For anyone interested, here are the slides I will use on the first day. I’m not sure it’s all right, in fact I’m sure some of it is wrong But that is how you figure out what you really think and know and don’t know about something, by teaching it.
After we’ve talked through this, we will discuss this old VoxEU piece as an example of effective use of simple scatterplots to make an economic argument.
I gave a somewhat complementary talk on methodology and heterodox macroeconomics at the Eastern Economics Association meetings last year. I’ve been meaning to transcribe it into a blogpost, but in the meantime you can listen to a recording, if you’re interested.
Below the fold is a draft of a chapter I’m contributing to an edited volume on aggregate demand and employment. My chapter is supposed to cover macroeconomic policy and employment in the US, with other chapters covering other countries and regions.
The chapter is mostly based on material I’ve pulished elsewhere, mainly my Roosevelt papers “What Recovery?” and “A New Direction for the Federal Reserve.” My goal was something that summarized the arguments there for an audience of (presumably) heterodox macroeconomists, and that could also be used in the classroom.
There is still time to revise this, so comments/criticisms are very welcome.
In response to my earlier post on climate change and aggregate demand, Lance Taylor sends along his recent article “Economic Growth, Income Distribution, and Climate Change,” coauthored with Duncan Foley and Armon Rezai.
The article, which was published in Ecological Economics, lays out a structuralist growth model with various additions to represent the effects of climate change and possible responses to it. The bulk of the article works through the formal properties of the model; the last section shows the results of some simulations based on plausible values of the various parmaters. 6 I hadn’t seen the article before, but its conclusions are broadly parallel to my arguments in the previous two posts. It tells a story in which public spending on decarbonization not only avoids the costs and dangers of climate change itself, but leads to higher private output, income and employment – crowding in rather than crowding out.
Before you click through, a warning: There’s a lot of math there. We’ve got a short run where output and investment are determined via demand and distribution, a long run where the the investment rate from the short run dynamics is combined with exogenous population growth and endogenous productivity growth to yield a growth path, and an additional climate sector that interacts with the economic variables in various ways. How much the properties of a model like this change your views about the substantive question of climate change and economic growth, will depend on how you feel about exercises like this in general. How much should the fact that that one can write down a model where climate change mitigation more than pays for itself through higher output, change our beliefs about whether this is really the case?
For some people (like me) the specifics of the model may be less important that the fact that one of the world’s most important heterodox macroeconomists thinks the conclusion is plausible. At the least, we can say that there is a logically coherent story where climate change mitigation does not crowd out other spending, and that this represents an important segment of heterodox economics and not just an idiosyncratic personal view.
If you’re interested, the central conclusions of the calibrated model are shown below. The dotted red line shows the business-as-usual scenario with no public spending on climate change, while the other two lines show scenarios with more or less aggressive public programs to reduce and/or offset carbon emissions.
Here’s the paper’s summary of the outcomes along the business-as-usual trajectory:
Rapid growth generates high net emissions which translate into rising global mean temperature… As climate damages increase, the profit rate falls. Investment levels are insufficient to maintain aggregate demand and unemployment results. After this boom-bust cycle, output is back to its current level after 200 years but … employment relative to population falls from 40% to 15%. … Those lucky enough to find employment are paid almost three times the current wage rate, but the others have to rely on subsistence income or public transfers. Only in the very long run, as labor productivity falls in response to rampant unemployment, can employment levels recover.
In the other scenarios, with a peak of 3-6% of world GDP spent on mitigation, we see continued exponential output growth in line with historical trends. The paper doesn’t make a direct comparison between the mitigation cases and a world where there was no climate change problem to begin with. But the structure of the model at least allows for the possibility that output ends up higher in the former case.
The assumptions behind these results are: that the economy is demand constrained, so that public spending on climate mitigation boosts output and employment in the short run; that investment depends on demand conditions as well as distributional conflict, allowing the short-run dynamics to influence the long-run growth path; that productivity growth is endogenous, rising with output and with employment; and that climate change affects the growth rate and not just the level of output, via lower profits and faster depreciation of existing capital.7
This is all very interesting. But again, we might ask how much we learn from this sort of simulation. Certainly it shouldn’t be taken as a prediction! To me there is one clear lesson at least: A simple cost benefit framework is inadequate for thinking about the economic problem of climate change. Spending on decarbonization is not simply a cost. If we want to think seriously about its economic effects, we have to think about demand, investment, distribution and induced technological change. Whether you find this particular formalization convincing, these are the questions to ask.
I’ve gotten some pushback on the line from my decarbonization piece that “wartime mobilization did not crowd out civilian production.” More than one person has told me they agree with the broader argument but don’t find that claim believable. Will Boisvert writes in comments:
Huh? The American war economy was an *austerity* economy. There was no civilian auto production or housing construction for the duration. There were severe housing shortages, and riots over housing shortages. Strikes were virtually banned. Millions of soldiers lived in barracks, tents or foxholes, on rations. So yeah, there were drastic trade-offs between guns and butter (which was rationed for civilians).
It’s true that there were no new cars produced during the war, and very little new housing.8 But this doesn’t tell us what happened to civilian output in general. For most of the war, wartime planning involved centralized allocation of a handful of key resources — steel, aluminum, rubber — that were the most important constraints on military production. This obviously ruled out making cars, but most civilian production wasn’t directly affected by wartime controls. 9 If we want to look at what happened to civilian production overall, we have to look at aggregate measures.
The most comprehensive discussions of this I’ve seen are in various pieces by Hugh Rockoff.10 Here’s the BEA data on real (inflation-adjusted) civilian and military production, as he presents it:
Civilian and military production in constant dollars. Source: H. Rockoff, ‘The United States: from ploughshares into swords’ in M. Harrison, ed, The Economics of World War II
As you can see, civilian and military production rose together in 1941, but civilian production fell in 1942, once the US was officially at war. So there does seem to be some crowding out. But looking at the big picture, I think my claim is defensible. From 1939 to its peak in 1944, annual military production increased by 80 percent of prewar GDP. The fall in real civilian production over this period was less than 4 percent of prewar GDP. So essentially none of the increase in military output came at the expense of civilian output; it was all additional to it. And civilian production began rising again before the end of the war; by 1945 it was well above 1939 levels.
Production is not the same as living standards. As it happens, civilian investment fell steeply during the war — in 1943-44, it was only about one third its prewar level. If we look at civilian consumption rather than output, we see a steady rise during the war. By the official numbers, real per-capita civilian consumption was 5 percent higher in 1944 – the peak of war production — than it had been in 1940. Rockoff believes that, although the BLS did try to correct for the distortions created by rationing and price controls, the official numbers still understate the inflation facing civilians. But even his preferred estimate shows a modest increase in per-capita civilian consumption over this period.
We can avoid the problems of aggregation if we look at physical quantities of particular goods. For example, shoes were rationed, but civilians nonetheless bought about 5 percent more shoes annually in 1942-1944 than they had in 1941. Civilian meat consumption increased by about 10 percent, from 142 pounds of meat per person in 1940 to 154 pounds per person in 1944. As it happens, butter seems to be one of the few categories of food where consumption declined during the war. Here’s Rockoff’s discussion:
Consumption of edible fats, particularly butter, was down somewhat during the war. Thus in a strict sense the United States did not have guns and butter. The reasons are not clear, but the long-term decline in butter consumption probably played a role. Ice cream consumption, which had been rising for a long time, continued to rise. Thus, the United States did have guns and ice cream. The decline in edible fat consumption was a major concern, and the meat rationing system was designed to provide each family with an adequate fat ration. The concern about fats aside, [civilian] food production held up well.
As this passage suggests, rationing in itself should not be seen as a sign of increased scarcity. It is, rather, an alternative to the price mechanism for the allocation of scarce goods. In the wartime setting, it was introduced where demand would exceed supply at current prices, and where higher prices were considered undesirable. In this sense, rationing is the flipside of price controls. Rationing can also be used to deliver a more equitable distribution than prices would — especially important where we are talking about a necessity like food or shoes.
The fundamental reason why rationing was necessary in the wartime US was not that civilian production had fallen, but because civilian incomes were rising so rapidly. Civilian consumption might have been 5 percent higher in 1944 than in 1940; but aggregate civilian wages and salaries were 170 percent higher. Prices rose somewhat during the war years; but without price controls and rationing inflation would undoubtedly have been much higher. Rockoff’s comment on meat probably applies to a wide range of civilian goods: “Wartime shortages … were the result of large increases in demand combined with price controls, rather than decreases in supply.”
Another issue, which Rockoff touches on only in passing, is the great compression of incomes during the war. Per Piketty and co., the income share of the top 10 percent dropped from 45 percent in 1940 to 33 percent in 1945. If civilian consumption rose modestly in the aggregate, it must have risen by more for the non-wealthy majority. So I think it’s pretty clear that in the US, civilian living standards generally rose during the war, despite the vast expansion of military production.
You might argue that even if civilian consumption rose, it’s still wrong to say there was no crowding out, since it could have risen even more without the war. Of course one can’t know what would have happened; even speculation depends on what the counterfactual scenario is. But certainly it didn’t look this way at the time. Real per capita income in the US increased by less than 2 percent in total over the decade 1929-1939. So the growth of civilian consumption during the war was actually faster than in the previous decade. There was a reason for the popular perception that “we’ve never had it so good.”
It is true that there was already some pickup in growth in 1940, before the US entered the war (but rearmament was already under way). But there was no reason to think that faster growth was fated to happen regardless of military production. If you read stuff written at the time, it’s clear that most people believed the 1930s represented, at least to some degree, a new normal; and no one believed that the huge increase in production of the war years would have happened on its own.
Will also writes:
War production itself was profoundly irrational. Expensive capital goods were produced, thousands of tanks and warplanes and warships, whose service lives spanned just a few hours. Factories and production lines were built knowing that in a year or two there would be no market at all for their products.
I agree that military production itself is profoundly irrational. Abolishing the military is a program I fully support. But I don’t think the last sentence follows. Much wartime capital investment could be, and was, rapidly turned to civilian purposes afterwards. One obvious piece of evidence for this is the huge increase in civilian output in 1946; there’s no way that production could increase by one third in a single year except by redirecting plant and equipment built for the military.
And of course much wartime investment was in basic industries for which reconversion wasn’t even necessary. The last chapter of Mark Wilson’s Destructive Creation makes a strong case that postwar privatization of factories built during the war was very valuable for postwar businesses, and that acquiring them was a top priority for business leaders in the reconversion period. 11 By one estimate, in the late 1940s around a quarter of private manufacturing capital consisted of plant and equipment built by the government during the war and subsequently transferred to private business. In 1947, for example, about half the nation’s aluminum came from plants built by the government during the war for aircraft production. All synthetic rubber — about half total rubber production — came from plants built for the military. And so on. While not all wartime investment was useful after the war, it’s clear that a great deal was.
I think people are attracted to the idea of wartime austerity because we’ve all been steeped in the idea of scarcity – that economic problems consist of the allocation of scarce means among alternative ends, in Lionel Robbins’ famous phrase. Aggregate demand is, in that sense, a profoundly subversive idea – it suggests that’s what’s really scarce isn’t our means but our wants. Most people are doing far less than they could be, given the basic constraints of the material world, to meet real human needs. And markets are a weak and unreliable tool for redirecting our energies to something better. World War II is the biggest experiment to date on the limits of boosting output through a combination of increased market demand and central planning. And it suggests that, altho supply constraints are real — wartime controls on rubber and steel were there for a reason – in general we are much, much farther from those constraints than we normally think.
The International Economy has asked me to take part in a couple of their recent roundtables on economic policy. My first contribution, on productivity growth, is here (scroll down). My second one, on green investment, is below. But first, I want to explain a little more what I was trying to do with it.
I am not trying to minimize that challenge of dealing with the climate change. But I do want to reject one common way of thinking about those challenges — as a “cost”, as some quantity of other needs that will have to go unmet. I reject it because output isn’t fixed — a serious effort to deal with climate change will presumably lead to a boom with much higher levels of employment and investment. And more broadly I reject it because it’s profoundly wrong to think of the complex activities of production as being equivalent to a certain quantity of “stuff”.
There’s a Marxist version of this, which I also reject — that the reproduction of capitalism requires an ever-increasing flow of material inputs and outputs, which rules out any kind of environmental sustainability. I think this mistakenly equates the situation facing the individual capitalist — the need to maximize money sales relative to money outlays — with the logic of the system as a whole. There is no necessary link between endless accumulation of money and any particular transformation of the material world. To me the real reason capitalism makes it so hard to address climate change isn’t any objective need to dump carbon into the atmosphere. It’s the obstacles that private property and the pursuit of profit — and their supporting ideologies — create for any kind of conscious reorganization of productive activity.
The question was, who will be the winners and losers from the transition away from carbon? Here’s what I wrote:
The response to climate change is often conceived as a form of austerity—how much consumption must we give up today to avoid the costs of an uninhabitable planet tomorrow? This way of thinking is natural for economists, brought up to think in terms of the allocation of scarce means among competing ends. By some means or other—prices, permits, or plans—part of our fixed stock of resources must, in this view, be used to prevent (or cope with) climate change, reducing the resources available to meet other needs.
The economics of climate change look quite different from a Keynesian perspective, in which demand constraints are pervasive and the fundamental economic problem is not scarcity but coordination. In this view, the real resources for decarbonization will not have to be with- drawn from other uses. They can come from an expansion of society’s productive capabilities, thanks to the demand created by clean-energy investment itself. Addressing climate change need not imply a lower standard of living—if it boosts employment and steps up the pace of technological change, it may well lead to a higher one.
People rightly compare the scale of the transition to clean technologies to the mobilization for World War II. Often forgotten, though, is that in countries spared the direct destruction of the fighting, like the United States, wartime mobilization did not crowd out civilian production. Instead, it led to a remarkable acceleration of employment and productivity growth. Production of a liberty ship required 1,200 man hours in 1941, only 500 by 1944. These rapid productivity gains, spurred by the high-pressure economy of the war, meant there was no overall tradeoff between more guns and more butter.
At the same time, the degree to which all wartime economies—even the United States—were centrally planned, reinforces a lesson that economic historians such as Alexander Gerschenkron and Alice Amsden have drawn from the experience of late industrializers: however effective decentralized markets may be at allocating resources at the margin, there is a limit to the speed and scale on which they can operate. The larger and faster the redirection of production, the more it requires conscious direction—though not necessarily by the state.
In a world where output is fundamentally limited by demand, action to deal with climate change doesn’t require sacrifice. Do we really live in such a world? Think back a few years, when macroeconomic discussions were all about secular stagnation and savings gluts. The headlines may have faded, but the conditions that prompted them have not. There’s good reason to think that the main limit to capital spending still is not scarce savings, but limited outlets for profitable investment, and that the key obstacle to faster growth is not technology or “structural” constraints, but the willingness of people to spend money. Bringing clean energy to scale will call forth new spending, both public and private, in abundance.
Of course, not everyone will benefit from the clean energy boom. The problem of stranded assets is real— any effective response to climate change will mean that much of the world’s coal and oil never comes out of the ground. But it’s not clear how far this problem extends beyond the fossil fuel sector. For manufacturers, even in the most carbon-intensive industries, only a small part of their value as enterprises comes from the capital equipment they own. More important is their role in coordinating production—a role that conventional economic models, myopically focused on coordination through markets, have largely ignored. organizing complex production processes, and maintaining trust and cooperation among the various participants in them, are difficult problems, solved not by markets but by the firm as an ongoing social organism. This coordination function will retain its value even as production itself is transformed.
UPDATE: Followup post on the World War II experience here.
This is really just an exercise in using R to produce maps from the Census’s public use microdata sample, something I haven’t done before. But the content may be interesting – it shows the geographic distribution of households with incomes above $300,000 across New York State.
This piece also includes the often-heard claim that buybacks reward the shareholders who sell but not those who continue holding their stock. Given that buybacks are made at the market price, and that their state goal is to raise the share price, this claim has never made sense to me.
I’m sure this isn’t literally true but I can’t think of any others.
The use of “cash” in this context is a nice illustration of how moneyness describes a continuum, not a distinct set of assets.
We can see this at the firm level to some extent, but it’s not at all straightforward to go from the data reported by publicly-traded corporations in Compustat or similar databases to the aggregate statistics. And while corporate filings do report acquisition spending, they don’t say anything about whether the acquired companies were already publicly traded, which is essential for this purpose.
The use of stock as payment for acquisitions is a nice demonstration of Minsky’s dictum that “anyone can make money” — that it isn’t a monopoly of the state or even the banking sysetm.
In the jargon, this is a calibrated model. To economists calibration means picking values for model parameters based on what seems reasonable. The alternative to a calibrated model is an estimated one, where the parameters are picked based on statistical tests.
It would take quite a bit of work to figure out exactly which of these assumptions is driving the results.
Since the housing stock is long-lived, the lack of new construction didn’t do much to reduce the supply of housing. Limits on construction were outweighed by the shift into military housing, so average persons per dwelling actually fell a bit during the war. That said, Will is right that there were acute housing shortages in some cities that were centers of wartime production.
The best source on the mechanics of wartime planning is Paul Koistinen’s Arsenal of World War II.
Rockoff himself has made the same comparison with the response tf climate change, and reached the same conclusion: The experience of wartime “mobilization suggests … that large scale projects involving the building of alternative energy sources or moving populations from low lying coastal areas could … probably could be accomplished without seriously endangering current living standards.” That said, he adds the caveat that a WWII-scale mobilization might require a similar political consensus that the country faces an “existential and immediate threat.”
