The Slack Wire – Page 41

A Quick Note on Rent Regulation

I really want to write about the household debt-dynamics paper, but first a quick followup to yesterday’s rant:

Even more fundamental than the arguments I mentioned yesterday, the thing about rent control is that rents contain an element of, well, rents. (Separating the two senses of the word so cleanly has got to count as a big victory for right-wing ideology in economics.) This is especially true because buildings are so fricking long-lived. The average age of a multi-unit residential structure in the United States is about 30 years. In most cities with rent regulations, it’s much higher. For instance, the building I live in was built in 1902. The significance of this is that, even if an asset lasts forever, the share of its present value — which is what matters for the decision to buy/build it — that comes from the later years of its life goes arbitrarily close to zero. Say the discount rate is 6 percent. Then 95 percent of the value of a perpetuity comes from the returns in the first 50 years. 99.7 percent comes from returns in the first 100 years. In other words, even if the exact future rents of the building over its whole life were known with certainty, the rent being paid today would have had essentially zero effect on the decision to undertake the expense of putting up my building 110 years ago. Which means that it is not in any way compensation for that expense. Which means — apart from the costs of maintenance and improvements, which rent regulations always allow landlords to recoup — the rent I am paying is pure economic rent.

(This, by the way, is how economics classes should frame the question of rent control. Students would actually learn something! — like about discount rates, and the age of the capital stock. Just wait til I write my textbook.)

So the Econ 101 point isn’t just a gross oversimplification — tho it is that — it’s substantively wrong even in its own abstract terms. It’s analyzing the market for the services of very long-lived assets as if it were the market for currently produced goods and services. In some respects, apartment buildings are analogous to intellectual property. The difference, of course, is that charging market rents doesn’t (usually) result in apartments being left unoccupied, so there aren’t the same kind of efficiency losses from enforcing perpetual property rights in apartment buildings that there are from perpetual copyrights. But there aren’t efficiency gains, either; it’s purely a distributional question. Regulation that only limited rents in buildings older than 50 years (which, as it happens, is more or less what we have) wouldn’t have any effect on the supply of new housing, it would be a pure transfer from landlords to tenants.

Of course, the landlords are still in control of the buildings, so they’ll allocate units somehow, just not on the basis of price. The haters will say that it will be on the basis of race/ethnicity and social ties; more plausibly, it will be on evidence of responsibility, sobriety, steady habits, etc. (which, ok, sometimes the same thing); or maybe it will just be by luck. But in any case housing will be more available to those with less income, which is pretty much what affordable means.

(And then we should really get into the actual circumstances that precipitate rent control, namely an unforeseen increase in housing demand, together with regulations that (for better or worse) make it hard to increase the supply. Obviously, to the extent that a windfall increase in demand for housing in a given area (perhaps even in part thanks to their existing tenants) increases rents, and new entry is difficult, landlords are recipients of pure monopoly profits which can be taxed or regulated away at no social cost. That rent regulations are almost always part of a second-best solution in the context of other, development-restricting regulations that boost market rents, should also be a staple of intro textbooks. It isn’t.)

The Dynamics of Household Debt

Regular readers of this blog will remember some interesting discussions here a few months ago of the dynamics of public debt. The point — which is taught in any graduate macro course, but seldom emphasized in public debates — is that the change in debt-GDP ratios over time depends not just on government deficits or surpluses, but also on growth, inflation and interest rates. In particular, for the US, the UK and many other countries [1], the decline in debt/GDP in the postwar decades is entirely due to growth rates in excess of interest rates, with primary surpluses contributing nothing or less than nothing.

An obvious extension of that discussion is the question, What about private debt? After all, the rise in private leverage over the past few decades is even more dramatic than the rise in public leverage:

Sectoral Debt as Share of GDP, 1929-2010. Click to embiggen.

So what if you apply the same kind of decomposition to private debt that is done for public debt, and ask how much of the change in sector’s debt in a given period is due to changes in borrowing behavior, and how much is due to changes in interest rates, growth rates, and or inflation? Surprisingly, no one seems to have done this. So Arjun Jayadev and I decided to try it, for household debt specifically, with (IMO) some very interesting results. A preliminary draft of our paper is here.

I’ll have more on the content shortly, but if you’re interested please take a look at the paper. We’re in the process of revising it now, and any comments/questions/thoughts on making it better would be most welcome.

… or Possibly Social Scientists?

On the other hand!

If you’re thinking, yes, economists have a reflexive pro-market bias, then there is one question in the Booth polls to which the answer will be surprising: Are CEOs overpaid? Remarkably, a large majority says Yes.

As a friend points out, this result would almost certainly have been very different a few years ago. The financial crisis, OWS and the new political discourse of the 99%, or something else? I don’t know, but progress is progress, and it should be acknowledged, and celebrated. We on the left are a little too invested in our grumpiness sometimes, I think. A lot of people, ok, were overly optimistic about the extent to which the orthodoxies in macro would be discredited by the crisis and Great Recession. But still, something has changed.

Case in point: This paper (ht: AD) by Thomas Philippon and Ariell Reshef, on wages in the financial industry. It’s the same paper, but look how the abstract changes from pre- to post-Lehman. Before:

Over the past 60 years, the U.S. financial sector has grown from 2.3% to 7.7% of GDP. While the growth in the share of value added has been fairly linear, it hides a dramatic change in the composition of skills and occupations. In the early 1980s, the financial sector started paying higher wages and hiring more skilled individuals than the rest of economy. These trends reflect a shift away from low-skill jobs and towards market- oriented activities within the sector. Our evidence suggests that technological and financial innovations both played a role in this transformation. We also document an increase in relative wages, controlling for education, which partly reflects an increase in unemployment risk: Finance jobs used to be safer than other jobs in the private sector, but this is not longer the case.

And after:

We use detailed information about wages, education and occupations to shed light on the evolution of the U.S. financial sector over the past century. We uncover a set of new, interrelated stylized facts: financial jobs were relatively skill intensive, complex, and highly paid until the 1930s and after the 1980s, but not in the interim period. We investigate the determinants of this evolution and find that financial deregulation and corporate activities linked to IPOs and credit risk increase the demand for skills in financial jobs. Computers and information technology play a more limited role. Our analysis also shows that wages in finance were excessively high around 1930 and from the mid 1990s until 2006. For the recent period we estimate that rents accounted for 30% to 50% of the wage differential between the financial sector and the rest of the private sector.

Look at the bolded phrases that appear in one abstract but not the other. In 2007, we have a story of skills, technology and compensating differentials. A year and change later, the star players are deregulation and rents, with technology demoted to “a limited role.” I don’t say this as a criticism of Philippon and Reshef, who deserve only credit for being willing to publicly change their beliefs in the face of new evidence. But this can cut both ways. That the same data can be, and is, used to tell such different stories, is a sign that there is something else going on here than disinterested social science.

Economists: Actively Evil Neoliberal Ideologues or Soulless Technocratic Hacks?

… or in other words, does economics (as it’s currently constituted) inherently promote a vision of markets for everything and no rights but property rights? (A vision that, obviously, conforms nicely to the interests of the owners of capital.) Or is the role of economics in upholding neoliberalism mainly the work of apolitical technicians, administrators and scientists manques, who could just as comfortably supply arguments for more regulation and a larger public sector if that’s what those in power were asking for?

Well, like nature vs. nurture, or whether to get the sweet brunch or the savory, it’s a debate that will never be fully resolved. (Go with savory, unless you’re, like, 12 years old.) But new evidence does sometimes come in.

Like those those polls of economists that the University of Chicago business school does; has everybody seen those? For those of us who’ve been debating this question, these things are a gold mine.

The latest question, on rent control, has Peter Dorman rightly exercised. As he points out, the question — whether rent regulations have had “a positive impact over the past three decades on the amount and quality of broadly affordable rental housing in cities that have used them” — omits the genuine goal of rent regulation, neighborhood stabilization:

The most compelling argument for rent control is neighborhood stabilization, the idea that social capital in an urban environment requires stable residence patterns. If prices are volatile, and this leads to a lot of residential turnover, the result can be a less desirable neighborhood for everyone. … not a single textbook treatment of rent control mentions stabilization as an objective, even though this is a standard element in the real-world rhetoric surrounding this issue.

I would just add that a diversity of income levels in a neighborhood is also a goal of rent regulation, as is recognizing the legitimate interest of long-time tenants in staying in their homes. (Not all rights are property rights!) So by framing the question purely in terms of the housing supply, the Booth people have already disconnected it from actual policy debates in a way favorable to orthodoxy. Anyway, no surprise, orthodoxy wins, with only a single respondent favoring rent regulation. (And I think that one might be a typo.) My favorite answer is the person who said, ” Rent control will have similar effects to any price control.” That’s the beauty of economics, isn’t it? — all markets are exactly the same.

Some of the other ones are even better. Check out the one on education, which asks if all money currently being spent on K-12 education should be given out as vouchers instead. (Why not cash?) By a margin of 36 to 19 (or 41 to 23 when the answers are weighted by confidence) the economists vote, Hells yeah, let’s abolish the public school system. Presumably they’re mostly reasoning along the same lines as Michael Greenstone of MIT: ” Competition is likely beneficial on average. Less clear that all students would benefit leading to tough questions about social welfare functions” — which doesn’t stop him from signing up in favor of vouchers. The presumed benefits of competition are dispositive, while distributional questions, while “tough” in principle, can evidently be ignored in practice. On the other hand, props to Nancy Stokely of the U of C (strongly agree, confidence 9 out of 10) for spelling it right out: “It’s the only way to break the unions.” (Yes, that’s what she wrote.) So, hardly definitive, but definitely some ammo for Team Ideologue.

People sometimes say that academic economists just reflect the views of the country at large, or even the more-liberal-than-median views of other academics or educated professionals. And on some issues, that’s certainly true. (Booth also gets a solid majority in favor of drug law reform.) But come on. Replacing the public school system with vouchers is a far-right, fringe position in almost any significant demographic — except, it would seem, professional economists.

Back to rent control. Jodi Beggs enthusiastically endorses the consensus, but her conscience then compels her to add:

Techhhhhnically speaking [1], if none of the housing in an area was deemed “affordable” before the price ceiling, then the price ceiling could, I suppose, increase the quantity of affordable housing. (In fact, Pinelopi Goldberg specifically points this out.) [True. Goldberg’s answers in general are a beacon of sanity.] In most realistic cases, however, the rent control laws are going to make builders think twice about putting up residential properties and make potential landlords think twice about getting into the rental business.

It’s awfully hard not to read the drawn out adverb as a parapraxis, indicating resistance to the heretical thought that, in fact, economic theory gives no answer to the question of whether rent control laws increase or decrease the supply of affordable housing. More concretely, Begg’s “realistic cases” are a figment of her imagination, or rather her ideology; in all actual cases rent control laws, at least in major American cities (there are only a couple) only apply to units built before a certain date. In New York City, for instance, rent regulations DO NOT APPLY to anything built since 1974. Hard to believe that builders are thinking twice about putting up new buildings because of rent stabilization, when it hasn’t applied to new buildings in nearly 40 years. But hey, why should you have to actually know something about the policy you’re discussing, to walk through the old familiar supply and demand graphs showing why Price Controls Are Bad?

“Nothing dulls the mind,” says Feyerabend, “as thoroughly as a sequence of familiar notions.”

(I can’t resist putting down the quote in full:

Writing… [is] almost like composing a work of art. There is some overall pattern, very vague at first, but sufficiently well defined to provide … a starting point. Then come the details — arranging the words in sentences and paragraphs. I choose my words very carefully — they must sound right, must have the right rhythm, and their meaning must be slightly off-center; nothing dulls the mind as thoroughly as a sequence of familiar notions. Then comes the story. It should be interesting and comprehensible, and it should have some unusual twists. I avoid “systematic” analyses. The elements hang together beautifully, but the argument itself is from outer space, as it were, unless it is connected with the lives and interests of individuals or special groups. Of course, it is already so connected, otherwise it would not be understood, but the connection is concealed, which means that, strictly speaking, a “systematic” analysis is a fraud. So why not avoid the fraud by using stories right away?)

Get Your Gaman On

The other day, I quoted Howard Davies explaining the big macroeconomic advantage of a country like Latvia over a country like Greece:

Latvia could make austerity work because they’d been in the USSR for 50 years, they were used to unpleasant and dramatic things happening. The population would accept incredible privation.

As a sort of followup, here’s a letter from one Mr. Zachary Pessin, in yesterday’s FT:

I have often thought that acclimatisation to a depressed economic environment is a state of mind that the Japanese have adjusted to… I first went to Japan in 1995 to live for a semester, then lived there full-time from 1999 to 2002. I have been every year since, save the last two. So, for 15 years I have seen how a generation of Japanese lost pride in their country, lost hope of an inspiring life and came to terms with the drudgery.

“Yikes,” you’re probably thinking, “Lost pride, lost hope and drudgery? That sounds awful — we’d better figure out fast how to avoid it.” Well, if that is what you’re thinking, then you’d better think again. Losing hope is the whole point. The Japanese, Pessin says, are

a decade ahead of us in dealing with the world we now live in. … Perhaps you know the Japanese term gaman, which is effectively translated as “to persevere valiantly through pain or difficulty; stoic determination”. This too will be another import from Japan, because they have been living in the House of Gaman for almost 20 years now, and we Americans are just arriving. And make no mistake, the deleveraging that must continue across the US economy for at least another five to eight years at best will keep us walking the precipice of deflation for at least that long. There will be a need for gaman.

I don’t know how much pain or drudgery is in store for Zac Pessin personally, given that he is President and Chief Executive of the Distributed Capital Group; you can find him here crowing about double-digit returns on his investments in sub-Saharan Africa. But it’s nice of our masters to let us know about the sacrifices we will be expected to make on their behalf.

Those who take the meat from the table
Teach contentment.
Those for whom the taxes are destined
Demand sacrifice.
Those who eat their fill speak to the hungry
Of wonderful times to come.
Those who lead the country into the abyss
Call ruling too difficult
For ordinary men.

Noah Clue

Hey you guys! You know how unemployment has been, like, real high for years now, and nobody knows why? Noah Smith has figured it out:

an economic principle often overlooked by progressives: There is sometimes a tradeoff between wages and employment levels (which is another way of saying that labor supply curves slope up and labor demand curves slope down). If economic “frictions” or the actions of policymakers hold wages up when economic forces are trying to push wages down, unemployment will often result.

I think he learned it in an economics class!

You remember how there were these economic forces in 2007 that decided wages had to go down, but we got all these new policies to raise wages like, you know, all those wage-raising things that Bush did? Well, that’s why unemployment went up by 5 points in less than two years.

I mean, it’s so simple when you think about it. “Labor demand curves slope down,” that’s all you need to know. We learn that the first year of micro, supply curves slope up, demand curves slope down. Demand for labor, demand for cottage cheese, doesn’t matter, they’re just the same. Why do they even bother offering courses in macro?

It’s funny, though: Wasn’t there some guy who wrote a whole book about why lower wages don’t raise employment? Maynard, or some weird name like that? Well, Noah’s never heard of him, or of his book (the General Theory of something?) but he can’t be worth bothering with, can he? after all, he didn’t even realize that demand curves slope down! Which is all you need to know.

Of course, lower wages won’t help employment if there is already an excess supply of labor. If people are already willing to work for less than the going wage, telling them they should accept less than the going wage can’t be the solution. What would we call a situation like that? How about … “involuntary unemployment”? But Noah Smith is too smart for that, he knows that could never happen. He knows that markets always clear, employment is always at the intersection of the labor supply curve and the labor demand curve, so the only way to raise employment must be to move the labor supply curve downward. It’s just Econ 101, and Econ 101 is never wrong.

Of course, if you think that wages are equal to the marginal product of labor, the demand curve for labor will only slope downward when the marginal product of labor is falling — which might not be the case when output is far from potential. But Noah Smith knows that demand curves always slope downward, so there can’t be any range of output over which the mpl is more or less constant.

But wait, what if labor markets are monopsonistic? Then the observed labor demand curve can slope upward. And monopsony in labor markets doesn’t require a company town, all it requires is that a firm’s labor costs are rising in employment. Or in other words that if a firm cuts wages moderately, it will lose some but not all of its workers. (Crazy talk, I know.) Which is the natural result of labor market models with search frictions. This is one reason why the most rigorous empirical studies of legislated wage changes show no sign of a downward sloping labor demand curve. But Noah Smith doesn’t need to trouble his beautiful mind with empirical evidence, or learn any of that silly labor economics stuff, because he knows that labor demand curves slope downward. He learned it in introductory micro!

And then there’s that little difference between labor and cottage cheese, that wages make up the large majority of producers’ variable costs. So we have to think general equilibrium here, not just partial. Prices, in the first instance, are set as a markup over marginal costs. [1] So if you reduce money wages, you don’t reduce real wages by as much, because you reduce the price level as well. That means deflation, which is … let’s see, not always super great for employment. That Maynard dude wrote something about that too, I think, and so did some other old guy, Hunter or Trapper or something. Apparently there was this crazy idea that falling wages and prices were a problem back in Ancient Rome, or maybe the 1930s (same thing). But Noah goes to a good graduate school, so he knows that no real economist bothers with dusty old stuff like that. After all it’s not like there are any lessons we could learn from the Great Depression, or the Punic Wars or whatever it was. Not when we know that labor demand curves slope down!

Oh and hey, there’s another difference between labor and cottage cheese! (Who’d have thought?) Wages are also a source of demand. Pop quiz for Noah Smith: Which is a more important component of final demand, consumption out of wages, or net exports? Yeah, that would be door number one. So maybe, just maybe, whatever competitive advantage lower wages yield in lower unit labor costs might be offset by lower consumption demand by wage-earners? And that’s assuming that changes in wages are fully passed through into the relative price of tradables, and that trade flows are price-elastic. [2] But hey, you know what happens when you assume: it makes you an … economist. Now, if it were the case that wages were an important source of final demand, and if output is demand-constrained, then lowering wages might not raise demand for labor, even if labor markets were fully competitive and if changes in nominal wages translated one for one into changes in real wages. But that’s unpossible! because, as we all know, the demand curve for labor slopes down.

Well, but demand doesn’t matter, since Noah knows — he learned it in school — the economy is always at full employment. If we observe fewer people working, it can’t be because aggregate demand has fallen, it can only be because an artificially high price of labor has led to substitution away from labor to other factors of production. It couldn’t possibly be the case that when unemployment is high, capital is underutilized as well too, could it? Because that would mean that the wage share and the profit share were both too high, which is like saying that x>y and y>x. So no, we couldn’t possibly observe anything like this:

Because we know — it’s economics 101 — that high unemployment can only ever be the result of substitution away from labor because of changes in relative prices, not a lower level of output for the economy as a whole. Altho, gosh, it sure looks like capacity utilization falls in recessions just like employment does, which would suggest that cyclical unemployment has nothing to do with the relative price of labor.

So, ok, we can forget Keynes and all that old nonsense. And let’s ignore the effect of nominal wage changes on prices. And put out of our mind any question about whether the marginal product of labor is really declining over current levels of output, or about imperfect competition in labor markets. And we’ll ignore the role of wages as a source of demand. And we’ll unlearn any information we might have accidentally picked up about the empirical relationship between wages and employment, or about the Great Depression. And we’ll stick our fingers in our ears if anyone suggests that unemployment today is associated with demand constraints on output rather than substitution away from labor. And then we can be as smart as Noah Smith! And we’ll know how to fix unemployment:

In Germany, labor unions often negotiate wage cuts in order to preserve long-term employment levels. I think we should look at doing something similar.

You guys, wage concessions! Has anybody in the US labor movement ever thought of that? I bet it will work great! It’s pretty ballsy of Noah Smith to stand up against Big Labor, but someone’s got to, right? I mean, unions represent almost 7 percent of the private workforce. If someone is holding wages above the level that Economic Forces want them to be at, who else could it be?

Hey, I wonder if any other countries are getting advice from smart economists like Noah Smith, and are fixing all their problems by cutting wages? You know, I think there are some. How about Latvia? The authorities there were all, like, wages are going down. And guess what? While in the US unemployment has gone from 5% in 2007 to over 8% today, in Latvia it went from 5% to … 14%? Well, who cares about some little Baltic country, let’s talk about the UK. They got real wages down by 2.7 percent last years (2.1 percent nominal growth less 4.8 percent inflation.) And hey, look at employment — it’s skyrocketing continuing to fall, and now the lowest it’s been since 2003.

You know what? I’m beginning to think that “labor demand curves slope down” might not be the best way to think about unemployment. Maybe it is helpful to know something about macroeconomics, after all.

[1] Or equal to marginal costs if you like; the point is the same.

[2] I’ve presented some evidence on whether trade flows are responsive to relative costs in practice in these posts.

The Capitalist Wants an Exit, Facebook Edition

In today’s FT, John Gapper reads the Facebook prospectus. [1] And he doesn’t like what he sees:

There is still time to cancel its IPO and the filing provides plenty of reasons why it ought to… It begs a question if a company trying to raise capital from investors cannot think of anything to do with the money. Yet this is Facebook’s predicament – as it admitted in its filing on Wednesday, its cash flow and credit “will be sufficient to meet our operational needs for the foreseeable future”. … So what are its plans for the additional $5bn it may raise from an IPO? It intends to put the cash into US government bonds and savings accounts…

Gapper, looking at the IPO from the perspective of what it does for Facebook the enterprise, understandably thinks this is nuts. Why incur the costs of an IPO and the ongoing requirements of a public listing, if you have so little need for the cash that you are literally just planning to leave it in a savings account. But of course, the purpose of the IPO has nothing to do with Facebook the enterprise.

Given that it doesn’t need capital…, why the IPO? … Facebook’s motivation is clear: to gratify its venture capital investors and employees. This is not a cynical statement; it is a quote from Mr Zuckerberg’s letter to new shareholders. “We’re going public for our employees and our investors,” he writes. “We made a commitment to them when we gave them equity that we’d work hard to make it worth a lot and make it liquid, and this IPO is fulfilling our commitment.”

In terms of Silicon Valley’s logic, it makes sense… For the company itself, however, the logic is far less obvious. As a corporate entity, Facebook could clearly thrive without seeking new shareholders, whose main purpose is to allow the insiders to get rich and eventually exit.

As I’ve written before, the function of the stock market in modern capitalism is to get money out of corporations, not put money into them. The social problem they are solving is not society’s need to allocate scarce savings to the most promising investments, but wealth-owners desire to free their fortunes from particular firm or industry and keep them as claims on the social product as a whole.

[1] It’s been said before, but can I just point out how unbearably stupid is the FT’s policy of actively discouraging people from excerpting their articles?

Davies on the Disorder in Europe

My friend Jen writes about informal labor markets in South Africa. She was telling me the other day about street vendors who make their living buying packs of a dozen pairs of socks and selling them pair by pair. In that same spirit of finding a niche in the very last step of the distribution network, I thought I would pass on some material from a talk I attended last week by Sir Howard Davies. It’s below the fold, with occasional comments from me in brackets. A lot may seem familiar, but enough was new to me — and Davies is high enough up in this world; he’d had dinner the night before with Charles Dallara — that I think it’s worthwhile to put down my notes in full.

There are six and half questions to ask about the Euro system. Is the crisis over? Why did anyone think it would work? Why did it take so long to fall apart? Are the responses to date sufficient? What more is needed? Why even bother? And the half question, what’s it all mean for the UK?

To question 1, no surprise, the answer is No. “The ECB has been making really good policy for a country that doesn’t exist.” The fundamental problem of pan-European banks with no pan-European regulator or lender of last resort is no closer to being resolved; “some sticking-plaster has been applied,” that’s all.

On question 2, there were three reasons:

Some people said, “Yes, you will need a fiscal authority, but it will happen.” Europe policy in general has developed through a process of leap forward, then retrofit. And after all, it says right in the treaty “Ever closer union.”

Other people thought the stability and growth pact would ensure appropriate policy.

A third group of people, including Davies, believed something like, “Yes, these economies are very different, with different labor market institutions and so on, but without the option of devaluation they will be forced to converge.” Periodic devaluations had allowed southern European countries to avoid structural reform, but now everyone would have to behave like the Germans.

Well, all these views were wrong. Why? Three reasons:

– Maastricht turned out to be the high point of enthusiasm for federalism. Every single vote on additional federalism has said, No.

– The SGP turned out to be both too tight, in that it didn’t leave enough space for countercyclical fiscal policy, and too loose, in that it had no enforcement mechanism. [So it sounds like Davies would be on board with John Quiggin’s “hard Keynesianism.”]

– Lower interest rates were not used for fiscal consolidation. [This seems wrong to me, at least for Italy and Spain.] And there was no convergence to German levels of productivity.

On question 3, the first answer was that the first decade of the euro was, in Mervyn King’s unfelicitous coinage, NICE — Non-Inflationary with Consistent Expansion. And the ECB, while prohibited from buying government bonds directly, bought them in secondary markets at equal rates, meaning there was no pressure for fiscal discipline on member states. [Again, I’m resistant to this story, except for Greece and maybe Portugal.] Davies recalls talking to a Morgan Stanley bond dude, explaining how he marketed Greek debt: “A Greek bond is just like a German bund, except with an extra three points of interest.” There was a real market failure here, says Davies, and the banks that ended up holding this stuff (all European, by the way, American institutions have successfully elimianted almost all their exposure) deserve their haircuts.

[It would be interesting to explore the idea that an unsustainable current account deficit is precisely one that can only be financed with an interest rate premium.]

Question 4, the adequacy of the response. “The problem is that they are focused on the last crisis and the next crisis, but not on the current crisis.” By which he means that they are putting in place rules that would have helped if they’d already been in place years ago, while ignoring the ways in which “responsible” fiscal policy will exacerbate the current downturn. The problem right now is that austerity just makes the growth picture worse, and that the European “rescue capacity” is too small.

Question 5, what more is needed. In the short run, a better firewall is needed to prevent contagion from the worst-hit countries and institutions. In the longer run, Europe needs (a) some system for Europe-wide public borrowing (one idea would be for debt up to, but not above, the SGP levels to be backed by the community as a whole); and (b) a pan-European bank regulator and lender of last resort. But the Germans won’t go for it.

Which brings us to Question 6. Wouldn’t some countries be better off leaving? Greece’s departure is probably inevitable, he said. But it poses major challenges — even if you had an agreed-on procedure for converting Greek euros to the new Greek currency, which euros are the Greek ones? “If the coin says Greece, no problem. Greek government bonds, ok, those are Greek. And if you are living in Greece and have an account in a Greek bank, then that is probably a Greek euro. But, I have a boat in Greece and an account at Barclay’s in Athens. Are those Greek euros? I hope not. How about someone living in Athens but with a bank account in London, is that a Greek euro?” And beyond those technical problems, there are even worse political problems, that should make exit the last possible resort. Because, who will benefit from the failure of the euro, politically? In France, the fascists — Marie le Pen based her whole campaign around it. “In Greece, it would be the anarchists and the communists, they’re the only ones who have been against the euro.” [OH NOES the anarchists.] The communists in Hungary, Sinn Fein in Ireland, etc. “Only in the UK can you say that the Euro-skeptics are not mad people.”

Nonetheless, Greek exit is probably unavoidable. “My hunch is that Greece will not make it,” because they lack social capital. The Irish are stoic, they will accept lower pay and higher taxes. They say, ah well, we had a good few years but it had to end. Not the Greeks, they won’t pay taxes. [There was a shaggy-dog story in here about local officials in Spain and Greece competing to see who can waste more EU money.] Gas costs $6 a gallon in Greece because it’s almost the only thing the government can reliably tax. “Latvia could make austerity work because they’d been in the USSR for 50 years, they were used to unpleasant and dramatic things happening. The population would accept incredible privation.” The Greek population, sadly, will not.

And on the last half question: If the solution is “more Europe,” that will be a big problem for the UK. Cameron is a Euro-skeptic; it’s not just because he’s responding to popular opinion, but nonetheless popular opinion is heading that way. The UK is going to face increasing pressure to detach itself from the EU.

And a few other observations, from the Q&A:

“You can’t imagine Italy having an unelected government for long, but they are urgently engaged in some necessary reforms that would otherwise be impossible.”

There has never been a referendum in favor of the euro.

German wages have not gone up, German property values have not gone up, why should ordinary Germans feel like they are the beneficiaries of the euro and want to do more to save it? [Sounds like an argument for Thomas Jørgensen’s “Drink finer wines, drive nicer cars, and party harder!” platform.]

Most likely, Greece will have a disorderly exit, and that will concentrate the minds of European policymakers to take the necessary steps to prevent a repeat. Avoiding future defaults will require some kind of collective guarantee of Euro-area bonds, but Germans won’t accept that until it’s clear that the altenrative is catastrophe. So, “Greece may have to perform this service.”

The alternative is for Greece to do what Latvia did, structural reforms, get rid of anti-competitive policies. The problem is, you don’t have a full technocratic government in Greece, you still have elected officials with real power. [And that, I think, is what it all comes down to.]

Dividing the Spoils

In response to the last post, commenter 5371 asks, “An anti-managerial counterrevolution which the managers themselves ended up leading?” Fair question, here’s my answer:

I think there is a very convincing story in which the emergence of the modern corporation in the early decades of the 20th century, and then the vast expansion of the federal administrative apparatus in the New Deal and (especially) World War II, created a class of professional managers with substantial autonomy from the notional owners of capital. (Not as cohesive as the enarques in France, but the same kind of stratum.) As managers of firms they pursued a variety of objectives, of which providing a satisfactory (not maximal) flow of payments to shareholders was just one among others.

At some point (in the late 1970s, let’s say) this arrangement broke down, with conflicts both between managers and owners over the fraction of surplus flowing to the latter, and between owners and workers, over the size of the surplus, with mangers basically on the side of owners. The second of these conflicts was, in some sense, more fundamental, but the first one was also real and important.

You then had a series of institutional changes that were intended to realign the interests of managers with owners, in terms of both conflicts. During the period of realignment, these changes took the form — at least at times — of open conflict, with recalcitrant managers forcibly removed by LBOs, etc. But over time, top management was effectively absorbed into the capitalist class proper, and stopped seeing themselves as the social embodiment of the firm as a social organism or representatives of society as a whole. At the same time, there does have to be continuous policing to ensure that management doesn’t deviate from the goal of maximizing payments to shareholders. That is finance’s other function, along with intermediation, and it’s this second function that has been responsible for finance’s growth over the past decades. (Along with the rents that financial institutions and asset-owners claim in the course of doing their enforcement work.)

So in terms of overt conflict between owners and managers, the shareholder revolution is over; the shareholders won. The fly in the ointment is that no one is policing the police, and unlike other institutional supports of the capitalist system (the actual police, say, or the legal profession or academia) they don’t have the right internal norms to make them reliable servants.

That’s how it looks to me, anyway. I realize this is just a set of assertions, which would need to be backed up with evidence/examples to convince anyone who’s not already convinced. As usual, I recommend Doug H.’s Wall Street (especially chapter 6, which I’m having my students read this semester) and Dumenil & Levy’s Crisis of Neoliberalism to see the argument developed properly. One of these days maybe I’ll write something substantive on it myself.

I should add, an interesting aspect of the counterrevolution of the rentiers is the way that the claim of shareholders on the maximum possible payments from “their” firms has become an accepted moral principle. There are lots of educated people, even liberals, who unquestioningly believe that it is morally wrong for managers to have any objectives except maximizing future dividend payments. E.g. look at this old Baseline Scenario post on Goldman Sachs’ relatively low 2009 bonuses, with the unironic title Good for Goldman:

Goldman did the right thing here.We all know that Goldman made a lot of money last year. … Many people think that it made that money because of government support, but that’s beside the point here; right now, this is purely a question of dividing the spoils between employees and shareholders.

Historically, investment banks have given a large proportion of the profits (here, meaning before compensation and taxes) to the employees. For example, in 2007 Goldman gave $20.2 billion out of $37.8 billion to its employees, or 53%. There are undoubtedly many reasons for this. … More insidiously, investment banking executives tend to see their employees as younger versions of themselves, which creates a sense of solidarity… Contrast this to, say, Wal-Mart, where top management has very little in common (socially, educationally, economically, politically, etc.) with the vast majority of their employees. As a result, investment bankers are overpaid. …

Goldman should reduce its per-employee compensation expenses even further, and should try to push the industry to a new equilibrium where the payout ratio is in the 30-40% range and average compensation for investment bankers is in the $300-400,000 range. And Goldman’s shareholders should apply pressure to make this happen; basically, they should try to squeeze labor.

I find this sort of thing fascinating. James Kwak is a liberal, one of the good guys. But it’s awfully hard not to read him here as saying it’s a good thing that Wal-Mart execs have nothing in common with the proles to distract them from serving their true masters, and that where a sense of solidarity does exist between managers and workers, it’s an “insidious” problem that needs to be stamped out. There’s nothing ironic in those “should”s.

Of course I’m no fan of traders, financial engineers, and the rest of the pirates, but as Kwak himself says, this is “purely a question of dividing the spoils.” So I don’t see why the silent partners who finance the privateers have any better claim than the guys with flintlocks and cutlasses, or why we should treat it as something to celebrate when the financiers get a bigger share of the take. [1] What’s strange is how many people, many not especially rich or conservative, have been somehow convinced that the biggest problem with businesses is that they aren’t run purely enough for profit, and that employees still have too much control over their work and pay. That in any conflict between owners and workers or managers, the social interest is obviously — obviously — on the side of the owners. It’s nuts.

[1] Ok, yes, about 15 percent of corporate equity is owned by pension funds. So yes, salaried workers (including me and probably you) do in some sense confront employees, at both Goldman and Wal-Mart, as owners. We can’t just say “the capitalist is the personification of capital” and be done with it, as Marx did; capitalist as economic function and capitalists as sociological category don’t coincide as nicely as they did in his day. But why should we let our little interest as junior capitalists dominate our much larger interests as workers, citizens, and human beings? Why should we assume that the claims on business exercised by virtue of capital ownership, are the only ones that are morally legitimate?

Doug Henwood on Our Current Disorders

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

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

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

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

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

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

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