The Slack Wire

Are Wages Too High?

Here’s a good one for the right-for-the-wrong-reasons file.

David Glasner is one of an increasing number of Fed critics who would like to see a higher inflation target. Today, he takes aim at a Wall Street Journal editorial that claims that the real victims of cheaper money wouldn’t be, you know, people who own money — creditors — as one might think, but working people. Higher inflation just means lower real wages, says the Journal. Crocodile tears, says Glasner — since when does the Journal care about wage workers? So far, so good, says me.

“What makes this argument so disreputable,”he goes on,

is not just the obviously insincere pretense of concern for the welfare of the working class, but the dishonest implication that employment in a recession or depression can be increased without an, at least temporary, reduction in real wages. Rising unemployment during a contraction implies that real wages are, in some sense, too high, so that a falling real wage tends to be a characteristic of any recovery, at least in its early stages. The only question is whether the falling real wage is brought about through prices rising faster than wages or by wages falling faster than prices. If the Wall Street Journal and other opponents of rising prices don’t want prices to erode real wages, they are ipso facto in favor of falling money wages.

And here we have taken a serious wrong turn.

Glasner is certainly not alone in thinking that rising prices are associated with falling real wages, and vice versa. And he’s also got plenty of company in his belief that since the wage is equal to the marginal product of labor, and marginal products should decline, in the short run higher employment implies a lower real wage. But is he right? Is it true that if employment is to rise, “the only question” is whether wages fall directly or via inflation? Is it true that unemployment necessarily means that wages are too high?

Empirically, it seems questionable. Let’s look at unemployment and wages in the past few decades in the United States. The graph below shows the real hourly wage on the x-axis and the unemployment rate on the y-axis. The red dots show the two years after the peak of unemployment in each of the past five recessions. If reducing unemployment always required lower real wages, the red dots should consistently make upward sloping lines. The real picture, though, is more complicated.

As we can see, the early 2000s recovery and, arguably, the early 1980s recovery were associated with falling real wages. but in the early 1990s, employment recovered with constant real wages — that’s what the vertical line over on the left means. And in the two recessions of the 1970s, the recoveries combined falling unemployment with strongly rising real wages. If we look at other advanced countries, it’s this last pattern we see most often. (I show some examples after the fold.) So while rising employment is sometimes accompanied by a falling real wage, it is clearly not true that, as Glasner claims, it necessarily must be.

This is an important question to get straight. There seems to be a certain convergence happening between progressive-liberal economists and neo-monetarists like Glasner on the desirability of higher inflation in general and nominal GDP targeting in particular. There’s something to be said for this; inflation is the course of least resistance to cancel the debts. But we in the party of movement can’t support this idea or make it part of a broader popular economic program if it’s really a stalking horse for lower wages.

Fortunately, the macroeconomic benefits of a rising price level don’t depend on a falling real wage.
More broadly, the idea that reducing unemployment necessarily means reducing wages doesn’t hold up. It’s wrong empirically, and it involves a basic misunderstanding of what’s going on in recessions.

Yes, labor is idle in a recession, but does that mean its price, the wage, is too high? There is also more excess capacity in the capital stock in a recession; by the same logic, that would mean profits are too high. Real estate vacancy rates are high in a recession, so rents must also be too high. In fact, every factor of production is underutilized in recessions, but it’s logically impossible for the relative price of all factors to be too high. A shortfall in demand for output as a whole (or excess demand for the means of payment, if you’re a monetarist) doesn’t tell us anything about whether relative prices are out of line, or in which direction. If we were seeing technological unemployment — people thrown out of work by the adoption of more capital-intensive forms of production — then there might be something to the statement that “unemployment … implies that real wages are, in some sense, too high.” But that’s not what we see in recessions at all.

Glasner is hardly the only one who thinks that unemployment must somehow involve excessive wages. If he were, he’d hardly be worth arguing with. It’s a common view today, and it was even more common before World War II. Glasner quotes Mises (yikes!), but Schumpeter said the same thing. More interestingly, so did Keynes. In Chapter Two of the General Theory, he announces that he is not challenging what he calls the first postulate of the classical theory of employment, that the wage is equal to the marginal product of labor. And he draws the same conclusion from this that Glasner does:

with a given organisation, equipment and technique, real wages and the volume of output (and hence of employment) are uniquely correlated, so that, in general, an increase in employment can only occur to the accompaniment of a decline in the rate of real wages. Thus I am not disputing this vital fact which the classical economists have (rightly) asserted… [that] the real wage earned by a unit of labour has a unique (inverse) correlation with the volume of employment. Thus if employment increases, then, in the short period, the reward per unit of labour in terms of wage-goods must, in general, decline… This is simply the obverse of the familiar proposition that industry is normally working subject to decreasing returns… So long, indeed, as this proposition holds, any means of increasing employment must lead at the same time to a diminution of the marginal product and hence of the rate of wages measured in terms of this product.

So, wait, if Keynes says it then it can’t be a basic misunderstanding of the principle of aggregate demand, can it? Well, here’s where things get interesting.

Keynes didn’t participate much in the academic discussions following the The General Theory; the last decade of his life was taken up with practical policy work. (As Hyman Minsky observed, this may be one reason why many of his more profound ideas never made into postwar Keynesianism.) But he take part in a discussion in the pages of the Quarterly Journal of Economics, in which the “most important” contribution, per Keynes, was from Jacob Viner, who zeroed in on exactly this question. Viner:

Keynes’ reasoning points obviously to the superiority of inflationary remedies for unemployment over money-wage reductions. … there would be a constant race between the printing press and the business agents of the trade unions, with the problem of unemployment largely solved if the printing press could maintain a constant lead…  [But] Keynes follows the classical doctrine too closely when he concedes that “an increase in employment can only occur to the accompaniment of a decline in the rate of real wages.” This conclusion results from too unqualified an application of law-of-diminishing-returns analysis, and needs to be modified for cyclical unemployment… If a plant geared to work at say 80 per cent of rated capacity is being operated at say only 30 per cent, both the per capita and the marginal output of labor may well be lower at the low rate of operations than at the higher rate, the law of diminishing returns notwithstanding. There is the further empirical consideration that if employers operate in their wage policy in accordance with marginal cost analysis, it is done only imperfectly and unconsciously…

Viner makes two key points here: First, it is not necessarily the case that the marginal product of labor declines with output, especially in a recession or depression when businesses are producing well below capacity. And second, the assumption that wages are equal to marginal product is not a safe one. A third criticism came from Kalecki, that under imperfect competition firms would not set price equal to marginal cost but at some markup above it, a markup that will vary over the course of the business cycle. Keynes fully agreed that all three criticisms — along with some others, which seem less central to me — were correct, and that the first classical postulate was no better grounded than the second. In what I believe was his last substantive economic publication, a 1939 article in the Economic Journal, he returned to the question, showing that it was not true empirically that real wage fall when employment rises and exploring why he and other economists had gotten this wrong. The claim that higher employment must be accommpanied by a lower real wage, he wrote, “is the portion of my book which most needs to be revised.” Indeed, it was the only substantive modification of the argument of the General Theory that he made in his lifetime.

I bring all this up because — well, partly just because I think it’s interesting. But it’s worth being reminded, how much of our current economic debate is  recapitulating what people were figuring out in the 1930s. And it’s interesting to see how just how seductive is the idea that high unemployment means that “real wages are, in some sense, too high.” Even Keynes had to be talked out of it, even though it runs counter to the logic of his whole system, and even though there’s no good theoretical or empirical reason to believe it’s true.

Right, back to empirics. Here are a few more graphs, showing, like the US one above, unemployment on the vertical axis and real hourly wages on the horizontal. Data is from the OECD.

The first picture shows five Western European countries in the decade before the crisis. The important part is the left side; what you see there is that in all five countries unemployment fell sharply in the late 90s/early 2000s, even while real wages increased. In Belgium, for example, unemployment fell from 10 percent to a bit over six percent between 1996 and 2002, at the same time as real wages rose by close to 10 percent. The other four (and almost every country in the EU) show similar patterns.

 

The second one shows Korea. The 1997 Asian crisis is clearly visible here as the huge spike in unemployment in the middle of the graph. But what’s relevant here is the way it seems to slope backward. That’s because real wages fell along with employment in the crisis, and rose with employment in the recovery. Over the same period that unemployment comes back down from 8 to 4 percent, the real wage index rises from 70 to 80. This is the opposite of what we would expect in the Glasner story.

The third one shows Australia and New Zealand. Australia shows two periods of sharply falling unemployment — one in the 1980s accompanied by flat wages (a vertical line) and one in the 1990s accompanied by rising wages. Of all these countries, only New Zealand’s recoveries show a pattern of falling unemployment accompanied by falling real wages — clearly after 1992, and for a quarter or two in 2000.

You may object that these are mostly small open economies. So while the real wage is deflated by the domestic price level, the real question is whether labor costs are rising or falling relative to trade partners. If employment and wages are rising together, that probably just means the currency is depreciating. I don’t think this is true either. Countries often improve their trade balance even when real wages as measured in a common currency are rising, and conversely. That’s “Kaldor’s paradox” — countries with persistently strengthening trade balances tend to be precisely those with rising relative labor costs. But that will have to wait for a future post.

UPDATE: In comments, Will Boisvert calls the graphs above the worst he’s ever seen. OK!

So, here is the same data presented in a hopefully more legible way. The red line is unemployment, the blue line is the real hourly wage. The key question is, when the red line is falling from a peak, is the blue line falling too, or at least decelerating? And the answer, as above, is: Sometimes, but not usually. There is nothing dishonest in the claim that, in a recession, unemployment can be reduced without a decline in the real wage.



“Ten People Acting Together Can Make a Hundred Thousand Tremble Separately”

Suresh’s excellent post on the Occupy Wall Street movement reminded me of Hannah Arendt’s On Revolution. It’s a funny book; I don’t know if it’s much read today. One of its innovations, or eccentricities, is to place the American Revolution not just in the revolutionary tradition, but right at its center. Another is the focus on the idea of “public happiness” — the idea that there’s a distinct kind of wellbeing that comes from participation in collective decisionmaking. And most relevant to the current conversation, is its emphasis on the role of local councils — non-elected but representative — in every revolutionary situation, from 18th century New England town meetings to the soviets of 1918. These have independently developed, she argues, the”federal principle” — the idea that democratic politics consists not in selecting leaders who then exercise power on behalf of the public, but rather of local bodies delegating specific tasks to more centralized bodies.

The connection to the Occupy movement is perhaps obvious, though Arendt isn’t one of the writers people usually associate with this kind of politics. Her insistence that broad participation in public life is an end in itself, even the highest end, is a nice corrective to people who are impatient with the inward-looking nature — meetings about meetings! — of a lot of conversations around OWS. And the General Assembly structure looks different when you imagine them as proto-soviets. Of course the US today isn’t anywhere close to a revolutionary situation, and one can’t imagine General Assemblies exercising dual power. Or more precisely, there’s no way anything like that will happen; people are imagining it, that’s the point. Maybe the best evidence that Arendt is onto something important is that her book, written in the 1960s mostly about the politics of the 1780s, has distinct echoes not just of OWS, but of popular movements around the world, like the idea of “delegation” rather than “representation” coming out of Venezuela and Bolivia. 

I think the connection is interesting enough,it’s worth putting some long quotes from On Revolution here. Which requires us to deploy the new-to-Slackwire technology of the fold. So, after it, Arendt.

While the [French] Revolution taught the men in prominence a lesson of happiness, it apparently taught the people a first lesson in “the notion and taste of public liberty”. An enormous appetite for debate, for instruction, for mutual enlightenment and exchange of opinion, even if all these were to remain without immediate consequence on those in power, developed in the sections and societies… It was this communal council system, and not the electors’ assemblies, which spread in the form of revolutionary societies all over France. Only a few words need to be said about the sad end of these first organs of a republic which never came into being. They were crushed by the central and centralized government, not because they actually menaced it but because they were indeed, by virtue of their existence, competitors for public power. No one in France was likely to forget Mirabeau’s words that “ten men acting together can make a hundred thousand tremble apart.” …

“As Cato concluded every speech with the words, Carthago delenda est, so do I every opinion, with the injunction, ‘divide the counties into wards’.” Thus Jefferson once summed up an exposition of his most cherished political idea… Both Jefferson’s plan and the French societes revolutionaires anticipated with an utmost weird precision those councils, soviets and Rate, which were to make their appearance in every genuine revolution throughout the nineteenth and twentieth centuries. Each time they appeared, they sprang up as the spontaneous organs of the people, not only outside of all revolutionary parties but entirely unexpected by them and their leaders. Like Jefferson’s proposals, they were utterly neglected by statesmen, historians, political theorists, and, most importantly, by the revolutionary tradition itself. Even those historians whose sympathies were clearly on the side of revolution… failed to understand to what an extent the council system confronted them with an entirely new form of government, with a new public space for freedom which was constituted and organized during the course of the revolution itself. …

The ward system was not meant to strengthen the power of the many but the power of “every one” within the limits of his competence [shades of Hardt and Negri]; and only by breaking up “the many” into assemblies where every one could count and be counted upon “shall we be as republican as a large society can be”. In terms of the safety of the citizens of the republic, the question was how to make everybody feel “that he is a participator in the government of affairs, not merely at an election one day in the year, but every day”…

If the ultimate end of revolution was freedom and the constitution of a public space where freedom could appear, the constitutio libertatis, then the elementary republics of the wards, the only tangible place where everyone could be free, actually were the end of the great republic whose chief purpose in domestic affairs should have been to provide the people with such places of freedom and to protect them.”

Shorter Hannah Arendt: We are our demands.

Demands, Democratization, and OWS

In formal political economy, Acemoglu and Robinson have a famous theory of democratization, which might illuminate the splits inside OWS. Non-democracies are characterized by elite control of the policy making process. Occasionally, non-elites are able to solve their collective action problems and temporarily threaten the elites with rebellion. Elites can respond to this threat by repressing, temporarily reforming, or democratizing. When a movement is weak, it can be easily repressed. If it is a bit stronger but not overwhelmingly powerful, elites might alter a few policies here and there, but not change the identity of who gets to decide future policies. Because politics is fickle and promises aren’t worth anything unless they are institutionalized, the temporary policy changes won by a political movement aren’t going to last unless the identity of the people deciding policy in the future changes. A sad example of a regime’s worthless promises is the 1381 Wat Tyler peasant rebellion, where the king promised amnesty to the anti-landlord rebels, only to have them hanged once they put down their arms. Zuccotti square is our pitchfork, and we shouldn’t put it down for non-credible promises from our elites. But what is a credible promise? What could we demand that would last and work well after we’ve gone back to normal life (in my case referee reports and regressions)?

In Acemoglu and Robinson, when protesting citizens have enough political power, they demand and win democracy instead of just redistribution. In this way, democracy is a commitment device, ensuring that non-elites get to decide policies even after they have demobilized from the streets. If one admits that de jure U.S. politics, while democratic in form, has certain parts of it (e.g. monetary policy, financial regulation, tax policy) captured by elites regardless of the politician in power, then this democratization model becomes pretty applicable. Perhaps it took Obama’s election and subsequent ineffectiveness to really communicate the extent of elite capture of U.S. politics, although the evidence has been accumulating for decades. In any case, many of the folks in Zuccotti square think that electoral politics is completely run by the rich, and so it takes street politics to force reform. The problem is, as in Acemoglu and Robinson, that mobilization is generally temporary: you don’t get people protesting on the streets for years. A lasting victory would depend on converting this mobilization into institutions and durable policy gains.

The claim that OWS is partially a democratization movement has been made by Hardt and Negri. I think they are right, because from the inside it exhibits the fractures that all democratization movements face. Social democrats want the movement to cash in the temporarily political energy for economic policies to generate economic growth right now. I understand this, as political power via the street mobilization and media is fleeting and there is a worry that we will lose it before we actually secure anything at all. But the radicals claim a bigger, better demand: “real” democracy. The ability to set policy is worth much more than any particular policy, and democracy is the institutional setup that gives everybody the ability to participate in setting policy.

So radicals want the movement to continue to try and build political power so that we can demand not just financial transactions taxes or even a jobs program, but all that and the ability to have a say over all kinds of other decisions, from incarceration to the environment. This is why the overarching concern for the anarchists is to build the organizational architecture of the occupation, growing its semiotic and spatial reach. This makes the whirring of activity around Zuccotti square an amplifier for all the popular economic justice struggles, from Sotheby’s workers to anti-foreclosure activism to movements to democratize the Fed. I like the metaphor of OWS as a wildlife garden for a left political ecology, which is attracting and cultivating a biosphere of demands, grievances, ideologies and cultural practices to evolve a stronger left. This is also why we are sometimes accused of having a “grab bag” of disconnected issues: its because one of the promises of the movement is power for the majority over all kinds of decisions, instead of making demands from the incompetent and decadent elites that currently make those decisions. Its part of the idea that this is just the beginning; we have a long winter and a longer struggle ahead, and need to use this moment to set ourselves up for building more political power in the medium run. So we’re not going to coalesce and harden into “demands”, but instead continue to nurture a culture of a thousand different demands and recruit people and develop a hegemonic agenda (that we don’t have yet!). But the promise of that power and hegemony is grander: democratic control over policy making writ large. Occupy Everything, until we get all our demands and we don’t have to make any more.

Disgorge the Cash!

It’s well known that some basic parameters of the economy changed around 1980, in a mutation that’s often called neoliberalism or financialization. Here’s one piece of that shift that doesn’t get talked about much, but might be relevant to our current predicament.

Source: Flow of Funds



The blue line shows the after-tax profits of nonfinancial corporations. The dotted red line shows dividend payments by those same corporations, and the solid red line shows total payout to shareholders, that is dividends plus net share repurchases. All three are expressed as a share of trend GDP. The thing to look at it is the relationship between the blue line and the solid red one.

In the pre-neoliberal era, up until 1980 or so, nonfinancial businesses paid out about 40 percent of their profits to shareholders. But in most of the years since 1980, they’ve paid out more than all of them. In 2006, for example, nonfinancial corporations had after-tax earnings of $800 billion, and paid out $365 billion in dividends and $565 in net stock repurchases. In 2007, earnings were $750 billion, dividends were $480 billion, and net stock repurchases were $790 billion. (Yes, net stock repurchases exceeded after-tax profits.) In 2008 it was $600, $470, and $340 billion. And so on. [1]

It was a common trope in accounts of the housing bubble that greedy or shortsighted homeowners were extracting equity from their houses with second mortgages or cash-out refinancings to pay for extra consumption. What nobody mentioned was that the rentier class had been doing this longer, and on a much larger scale, to the country’s productive enterprises. At the top of every boom in the neoliberal era, there’s been a massive round of stock buybacks, which you could think of as shareholders cashing out their bubble wealth. It’s a bit like the homeowners “using their houses as ATMs” during the 2000s. The difference, of course, is that if you took too much equity out of your house in the bubble, you’re the one stuck with the mortgage payments today. Whereas when shareholders use businesses as ATMs, those businesses’ workers and customers get to share the pain.

One way of thinking about this increase in the share of profits flowing out of the firm, is in terms of changing relations between managers and the owning class. The managerial capitalism of Galbraith or Berle and Means, with firms pursuing a variety of objectives and “owners” just one constituency among many, really existed, but only in the decades after World War II. That, anyway, is the argument of Dumenil and Levy’s Crisis of Neoliberalism. In the postwar period,

corporations were managed with concerns, such as investment and technical change, significantly distinct from the creation of “shareholder value.” Managers enjoyed relative freedom to act vis-a-vis owners, with a considerable share of profits retained within the firm for the purpose of investment. … Neoliberalism put an end to this autonomy because it implied a containment of capitalist interests, and established a new compromise at the top of the social hierarchies… during the 1980s, the disciplinary aspect of the new relationship between the capitalist and the managerial classes was dominant… after 2000, managers had become a pillar of Finance. 

When I’ve heard Dumenil talk about this development, he calls the new configuration at the top a “loving marriage”; the book says, less evocatively, that today

income patterns suggest that a process of “hybridization” or merger is underway. … The boundary between high-ranking managers and the capitalist classes is blurred.

The key thing is that at one point, large businesses really were run by people who, while autocratic within the firm and often vicious in defense of their privileges, really did identify with the particular businesses they managed and focused their energy on their survival and growth, and even on the sheer disinterested desire to do their kind of business well. You can find a few businesses that are still run like this — I’ve been meaning to write a post on Steve Jobs — but by far the dominant ethos among managers today is that a business exists only to enrich its shareholders, including, of course, senior managers themselves. Which they have done very successfully, as the graph above (or a look at the world outside) shows.

In terms of the specific process by which this cam about, the best guide is chapter 6 of Doug Henwood’s Wall Street (available for free download here.) [2] As Doug makes clear, the increased payouts to shareholders didn’t just happen. They’re the result of a conscious, deliberate effort by owners of financial assets to reassert their claims on corporate income, using the carrot of high pay and stock for mangers and the stick of hostile takeovers for those who didn’t come through. Here’s Michael Jensen spelling out the problem from finance’s point of view:

Conflicts of interest between shareholders and managers over payout policies are especially severe when the organization generates substantial cashflow. The problem is how to motivate managers to disgorge the cash rather than investing it at below the cost of capital or wasting it on organization inefficiencies [by which Jensen seems to have mostly meant high wages].

Peter Rona, also quoted in Wall Street, expresses the same thought but in a decidedly less finance-friendly way: Shareholders “take pretty much the same view of the corporation as a praying mantis does of her mate.”

You don’t see the overt Jensen-type arguments as much now that management at most firms is happy to disgorge all of its cash and then some. But they’re not gone. A while back I saw a column in the business press — wish I could remember where — expressing outrage at Apple’s huge cash reserves. Because they should be investing that in new technology, or expanding production and hiring people? Of course not. It’s outrageous because that’s the shareholders’ money, and why isn’t Apple handing it over immediately. More than that, why doesn’t Apple issue a bunch of bonds, as much as the market will take, and pay the proceeds out to the shareholders too? From the point of view of the creatures on Wall Street, a company that prioritizes its long-term growth and survival is stealing from them.

UPDATE: Ah, here’s the piece I was thinking of: Forget iPad, it’s time for iGetsomemoneyback. From right before the iPad launch, it’s a gem of the rentier mindset, complete with mockery of Apple for investing in this silly tablet thing instead of just handing all its money to Wall Street.

Why is Apple hoarding its cash? A company spokesman explains: “We have maintained our cash and strong balance sheet to preserve the flexibility to make strategic investments and/or acquisitions.” … Steve Jobs really doesn’t need an acquisitions warchest of around $30 billion … He should start handing back this money to stockholders through dividends. … The money belongs to stockholders: Give. Indeed Jobs should go further. Apple should — gasp — start borrowing, and hand that money back, too.
Disgorge the cash!

SECOND UPDATE: Welcome to visitors from Dealbreaker, Felix Salmon and Powerline. If you like this, other posts here you might like include Selfish Masters, Selfless Servants; The Financial Crisis and the Recession; What Do Bosses Want?; and in sort of a different vein, Satisfaction.

[1] There’s something very odd going on in the fourth quarter of 2005: According to the Flow of Funds, dividend payments by nonfinancial firms dropped to essentially zero. The shortfall was made up in the preceding and following quarters. I suspect there must be some tax change involved. Does anybody (Bruce Wilder, maybe) have any idea what it is?

[2] John Smithin’s Macroeconomic Policy and the Future of Capitalism is also very good on this; it’s subtitle (“the revenge of the rentiers”) gives a better flavor of the argument than the bland title.

This Is What Democracy Looks Like

I haven’t Occupied Wall Street, have you?

The protests are great — more anger, please! — but I don’t have any particular insight into them. And those of us without first-hand knowledge should probably defer to those who do. Except, I want to think critically about one common criticism of the protests: that they lack a clear statement of what they’re about.

It’s not clear how much this is really true. But still, one can say, isn’t there something circular about the idea of “Occupy Wall Street”? It’s not identified as a movement against bank bailouts or foreclosures, or for jobs or free elections or socialism. It’s a movement to, well, occupy Wall Street — a protest to hold a protest.

I think there’s an important sense in which this is true. And in which it’s always true — in which, indeed, it’s the whole point.

If you’ve ever been to one of these things, you know that the most successful chants are the self-referential ones, like “Whose streets/Our streets!” and “This is what democracy look like.” (Or “We’re here, we’re queer” and “We shall not be moved.”) Whatever the ostensible reason for the protest, the real content is always simply We Are Here.

This is most obvious, and most powerful, when the participants are people who are not supposed to be political agents or be seen in public at all: The early civil rights and gay rights protests, undocumented immigrants today. The message is, We exist. Think of the Memphis sanitation workers strike, with its signs reading, “I AM A MAN.” But it also works if the “here” is a setting that is not supposed to be political. The flipside, as everyone knows, is that a protest of recognized citizens at a place and time designated by the authorities is politically meaningless.

Most of us very seldom experience ourselves as political agents, in the sense of being active participants in the collective decision-making of our community. For better or worse, most of the time we delegate collective decision-making to specialists who represent us more or less faithfully, as the case may be. The only reason for protest — for any kind of mass politics — is that this system has broken down. The message of any protest is: There is a political subject, a We, that is not being represented. This, in the broadest possible way, is what the “99%” rhetoric is saying, and why it resonates. At some point, if a when movements like this are successful, some new more legitimate form of representation will be established, as people form new collective identities and new norms of collective action. But it’s foolish to criticize an assertion of the failure of representation for not itself being an effective representative, with a specific set of demands and a strategy to carry them out.

It’s a long time since I read any Habermas, but he has a passage somewhere about how politics is necessarily an open-ended discussion, a process for deciding a question that could in principle be resolved in many ways. So anything that becomes routine, that becomes part of the regular process of social reproduction, is no longer political. You can find a similar argument in Hannah Arendt, and Luciano Canfora makes it very powerfully. Democracy, he says, isn’t a form of government, like in civics class and Civilization. It’s something that happens, occasionally and intermittently. Any mechanism can be captured; you can’t institutionalize rule by the non-rich, as long as there are rich. To assert ourselves we have to heckle from the sidelines, or once in a while storm the field.

With a legitimate system of political representation, the question is what we should do and how to do it. Without one, we first have to establish that “we” exist.

UPDATE: Once you start looking for this stuff, it’s amazing how consistent it is. Pull up a photo of the protests at random, and there’s at least even odds you’ll see a sign with some self-referential message: “I am a human being, not a commodity,” “We are the 99%“, etc. Here’s a particularly nice example:

“We” are made up of the people here with signs. Exactly.

UPDATE 2: Matt Stoller, who’s actually spent time there, says the same thing: 

What do the people at #OccupyWallStreet actually want? What are their demands? For many people, this is THE question. So let me answer it. What they want, is to do exactly what they are doing. They want to occupy Wall Street. They have built a campsite full of life, where power is exercised according to their voices. It’s a small space, it’s a relatively modest group of people at any one time, and the resources they command are few. But they are practicing the politics of place, the politics of building a truly public space. They are explicitly rejecting the politics of narrow media, the politics of the shopping mall. To understand #OccupyWallStreet, you have to get that it is not a media object or a march. It is first and foremost, a church of dissent, a space made sacred by a community. … There’s no way to agree or disagree with a church or a carnival.

Quasi-Monetarism: A Second Opinion

(Anush Kapadia, who knows this stuff much better than me, writes in with some comments on the last few posts. I accept this as a friendly amendment, and don’t disagree with any of it. I agree with particular enthusiasm with the points that we should be talking about liquidity, not money; that the the link between any quantifiable money stock and real activity had broken down by the early 1980s if not before (my point was only that it wasn’t entirely obvious until the great financial crisis); that to make sense of this stuff you need a concrete, institutionally grounded account of the financial system; and that for that, a very good place to start is Perry Mehrling’s work.)

Some cavils:

The meaningfulness of monetary aggregates depends on the configuration of the credit system. In a world of tight banking regulations, the monetarist assumption that “there’s a stable relationship between outside money and inside money” worked fine precisely because regulations made it so. Once those regulations break down, the relationship between outside and and inside money transforms. As the mainstream understands, “the rapid pace of financial innovation in the United States has been an important reason for the instability of the relationships between monetary aggregates and other macroeconomic variables” (Bernanke, “Monetary Aggregates and Monetary Policy at the Federal Reserve: A Historical Perspective,” FRB 2006).

Thus your claim that “Between 1990 and 2008, this [monetarist] story isn’t glaringly incompatible with the evidence” is not entirely true. Post-deregulation, money demand (“velocity”) became quite unmeasurable, breaking the link between the two sides of the quantity equation. “Behavior” had already changed significantly by the late 1960s, i.e. just as the monetarists were gaining the upper hand in the battle of ideas. (Note that the Fed eventually stopped measuring M3; but not everyone did: http://www.shadowstats.com/charts/monetary-base-money-supply).

Eventually, in response to this breakdown, the Fed quits its ill-conceived monetarist experiment and targets price rather quantity, specifically the Fed Funds rate. Thus “changing the stock of base money” has not been “the instrument of central banks, at least in theory, since the early 20th century.” Since the empirical and theoretical tractability of “the money supply” gave way, monetary control moved to the price of central-bank refinance, i.e. “the price of liquidity.” [1]

Price-based control works by acting on the leverage capacity of the balance sheets “downstream,” most immediately those in the primary dealer system. (Mehrling, New Lombard Street). Modulation of this capacity is effected through changes in the price of refinance—the bailout price—for these dealers, thereby changing their bid-ask spread. So changes in the prices of the assets in which they make markets are a key transmission mechanism to changes in interest rates.

The effect interest rates have on investment and/or consumer demand itself depends on the configuration of the credit system, i.e. how investment and consumption are financed. The price of credit might not be as important as its quantity for investment, but the former might be very important for consumption and thus aggregate demand.

So you can get a recession thanks to insufficient aggregate demand if you have a credit system that ties consumption to finance. The reason is the same as that which enables what Mehrling calls “monetary policy without sticky prices,” i.e. the leverage capacity of (in this case, consuming) balance sheets. If people are stuffed with debt, their “excess demand for money” basically represents a demand for liquidity to pay down their debts. Extra income will go first and foremost towards deleveraging rather than consumption; this of course is Richard Koo’s Minsky-flavored lesson from Japan.

Given the current configuration of the system, a coordination problem of the kind referred to would mean that those with spare lending capacity can’t find those with spare borrowing capacity. Yet in sectoral terms, its only households that are truly overleveraged: government is only political so and business are relatively okay. The problem is to get the big balance sheet with the spare capacity online again; of course, that is a political problem.[2] Boosting liquidity qua “the money supply” will simply pass through to paying down debts before it starts to affect consumption and thereby investment. In short, we might be some time, especially if we abstract away from the institutional configuration of the credit system.

[1] This signaled a return to pre-WWI “banking school” methods employed by the Bank of England, modulo differences in the respective credit systems: commercial paper for the trade-credit-based English system and government paper for the postwar US system. The Fed in our own period seems to be feeling its way to dealing in paper other than the government’s (QE I), something that is appropriate given the importance of non-government debt in the present system.

[2] Incidentally, Morris Copeland’s analogy of the credit system as an electric grid works much better than Fisher’s “currency school” vision of money as a liquid. See http://www.nber.org/books/cope52-1.

What’s the Matter with (Quasi-)Monetarism?

Let’s start from the top.

What is monetarism? As I see it, it’s a set of three claims. (1) There is a stable relationship between base money and the economically-relevant stock of money. [1] That is, there’s a stable relationship between outside money and inside money. (2) There is a stable velocity of money, so we can interpret the equation of exchange MV = PY (or MV = PT) as a behavioral relationship and not just an accounting identity. Since the first claim says that M is set exogenously by the monetary authority, causality in the equation runs from left to right. And (3), the LM aggregate supply curve is shaped like a backward L, so that changes in PY show up entire in Y when the economy is below capacity, and entirely in changes in P when it is at capacity.

In other words, (1) the central bank can control the supply of money; (2) the supply of money determines the level of nominal output; and (3) there is a single strictly optimal level of nominal output, without any tradeoffs. The implication is that monetary policy should be guided by a simple rule, that the money supply should grow at a fixed rate equal to (what we think is) the growth rate of potential output. Which is indeed, exactly what Friedman and other monetarists said.

You can relax (3) if you want — most monetarists would probably agree that in practice, disinflation is going to involve a period of depressed output. (Altho on the other hand, I’m pretty sure that when monetarism was officially adopted as the doctrine of the bank of England under Thatcher, it was claimed that slowing the growth of the money supply would control inflation without affecting growth at all. And the hedge-monetarism you run into today, that insists the huge growth in base money over the past few years could show up as hyperinflation without warning, seems to be implicitly assuming a backward-L shaped LM AS curve as well.) But basically, that’s the monetarist package.

So what’s wrong with this story? Here’s what:

The red line is base money, the blue line is broad money (M2), and the green line is nominal GDP. The monetarist story is that red moves blue, and blue moves green. Between 1990 and 2008, this story isn’t glaringly incompatible with the evidence. But since then? It’s clear that the money multiplier, as we normally talk about it, no longer has any economic reality. There might still be tools out there to control the money supply. But changing the stock of base money — the instrument of central banks, at least in theory, since the early 20th century — is no longer one of them. Monetary policy as we knew it is dead. The divergence between the blue and green lines is less dramatic in this graph, but if anything it’s even more damning. While output and prices lurched downward in the great Recession, the money supply just kept chugging along. Milton Friedman’s idea that stable growth of the money supply is a sufficient condition for stable growth of nominal GDP looks pretty definitively refuted.

So that’s monetarism, and what’s the matter with it. How about quasi-monetarism? What’s the difference from the unprefixed kind?

Some people would say, There is no difference. Quasi-monetarist is just what we call a New Keynesian who’s taken off his Keynes mask and admitted he was a Friedmanite all along. And let’s be honest, that’s sort of true. But it’s like one of those episodes in religious history where at some point the disciples have to acknowledge that, ok, the prophecies don’t seem to have exactly worked out. Which means we have to figure out what they really meant.

In this case, the core commitment is the idea that if PY is too low (we’re experiencing a recession and/or deflation) that means M is too low; if PY is too high (we’re experiencing inflation) that means M is too high. In other words, when we talk about insufficient aggregate demand, what we’re really talking about is just excess demand for money. And therefore, when we talk about policies to boost demand, we’re really just talking about policies to boost the money stock. (Nick Rowe, as usual, is admirably straightforward on this point.) But how to reconcile this with the graph above? You just have to replace some material entities with spiritual ones: The true M, or V, or both, is not visible to mortal eyes. Let’s say that velocity is exogenous but not stable. Then there is still a unique path of M that would guarantee both full employment and stable prices, but it can’t be characterized as a simple growth rate as Friedman hoped. Alternatively, maybe the problem is that the monetary authority can only control M clumsily, and can’t directly observe how far off it is. (This is the DeLong version of quasi-monetarism. The assets that count as M are always changing.) Then, there may still be the One True Growth Rate of M just as Friedman promised, but the monetary authority can’t reliably implement it. Or sublunary M and V could both depart from their platonic ideals. In any case, the answer is clear: Since it’s hard to get MV right, your rule should be to target a steady growth rate of PY (nominal GDP). Which is, indeed, exactly what the quasi-monetarists say. [2]

So what’s the alternative? I’ve been arguing that one alternative is to think of recessions as coordination failures, which could happen even in an economy without money. I’m honestly not sure if that’s going to turn out to be a productive direction to go in, or not. But in terms of the monetarist framework, the alternative is clear. Say that V is not only unstable, but endogenous. Specifically, say that it varies inversely with M. In this case, it remains true — as it must; it’s an accounting identity — that MV = PY. But nonetheless there is nothing you can do to M, that will affect P or Y. (This situation, by the way, is what Keynes meant by a liquidity trap. It wasn’t about the zero lower bound.)

This, I think, is what we actually observe, not just right now, but in general. “The” interest rate is the price of liquidity, that is, the price of money. [3] And what kinds of activity are sensitive to interest rates? Well, uh … none of them. None, anyway, except for housing. When an economic unit is deciding on the division of its income between currently-produced goods and services vs. money, the price at which they exchange just doesn’t seem to be much of a consideration. (Again, except — and it’s an important exception — when the decision takes the form of purchasing housing services from either an existing home, or a new one.) Which means that changes in M don’t have any good channel to produce changes in P or Y. In general, increases or decreases in M will just result in pro rata decreases or increases in V. Yes, it may be formally true that insufficient demand for goods equals excess demand for money; but it doesn’t matter if there’s no well-defined money demand function. A traditional Keynesian expenditure function (Z = A + cY) cannot be usefully simplified, as the quasi-monetarists would like, by thinking of it as a problem of maximizing the flow of consumption subject to some real balance constraint.

So, monetarism made some strong predictions. Quasi-monetarism admits that those predictions don’t hold up, but argues that the monetarist model is still the right one, we just can’t observe the variables in it as directly as early monetarists hoped. On some level, they may be right! But at some point, when the model gets too loosely coupled with reality, you’ll want to stop using it. Even if, in some sense, it isn’t wrong.

Which is all to say that, even if I can’t find a way to disprove it analytically, I just can’t accept the idea that the question of aggregate demand can be usefully reduced to the question of the supply of money.

[1] The simplest form of the first claim would be that the money multiplier is equal to one: Outside money is all the money there is. Something like this was supposed to be true under the gold standard, tho as the great Robert Triffin points out, it wasn’t really. Over at Windyanabasis, rsj claims that Krugman, a closet quasi-monetarist, implicitly makes this assumption.

[2] In practice, despite the tone of this post, I’m not entirely sure they’re wrong. More generally, Nick Rowe’s clear and thorough posts on this set of questions are essential reading.

[3] I’ve learned from  Bob Pollin never to write that phrase without the quotes. There are lots of interest rates, and it matters.

Are Recessions All About Money: Quasi-Monetarists and Babysitting Co-ops

Today Paul Krugman takes up the question of the post below, are recessions all about (excess demand for) money? The post is in response to an interesting criticism by Henry Kaspar of what Kaspar calls “quasi-monetarists,” a useful term. Let me rephrase Kaspar’s summary of the quasi-monetarist position [1]:

1. Logically, insufficient demand for goods implies excess demand for money, and vice versa.
2. Causally, excess demand for money (i.e. an increase in liquidity preference or a fall in the money supply) is what leads to insufficient demand for goods.
3. The solution is for the monetary authority to increase the supply of money.

Quasi-monetarists say that 2 is true and 3 follows from it. Kaspar says that 2 doesn’t imply 3, and anyway both are false. And Krugman says that 3 is false because of the zero lower bound, and it doesn’t matter if 2 is true, since asking for “the” cause of the crisis is a fool’s errand. But everyone agrees on 1.

Me, though, I have doubts.

Krugman:

An overall shortfall of demand, in which people just don’t want to buy enough goods to maintain full employment, can only happen in a monetary economy; it’s correct to say that what’s happening in such a situation is that people are trying to hoard money instead (which is the moral of the story of the baby-sitting coop). And this problem can ordinarily be solved by simply providing more money.

For those who don’t know it, Krugman’s baby-sitting co-op story is about a group that let members “sell” baby-sitting services to each other in return for tokens, which they could redeem later when they needed baby-sitting themselves. The problem was, too many people wanted to save up tokens, meaning nobody would use them to buy baby-sitting and the system was falling apart. Then someone realizes the answer is to increase the number of tokens, and the whole system runs smoothly again. It’s a great story, one of the rare cases where Keynesian conclusions can be drawn by analogizing the macroeconomy to everyday experience. But I’m not convinced that the fact that demand constraints can arise from money-hoarding, means that they always necessarily do.

Let’s think of the baby-sitting co-op again, but now as a barter economy. Every baby-sitting contract involves two households [2] committing to baby-sit for each other (on different nights, obviously). Unlike in Krugman’s case, there’s no scrip; the only way to consume baby-sitting services is to simultaneously agree to produce them at a given date. Can there be a problem of aggregate demand in this barter economy. Krugman says no; there are plenty of passages where Keynes seems to say no too. But I say, sure, why not?

Let’s assume that participants in the co-op decide each period whether or not to submit an offer, consisting of the nights they’d like to go out and the nights they’re available to baby-sit. Whether or not a transaction takes place depends, of course, on whether some other participant has submitted an offer with corresponding nights to baby-sit and go out. Let’s call the expected probability of an offer succeeding p. However, there’s a cost to submitting an offer: because it takes time, because it’s inconvenient, or just because, as Janet Malcolm says, it isn’t pleasant for a grown man or woman to ask for something when there’s a possibility of being refused. Call the cost c. And, the net benefit from fulfilling a contract — that is, the enjoyment of going out baby-free less the annoyance of a night babysitting — we’ll call U.

So someone will make an offer only when U > c/p. (If say, there is a fifty-fifty chance that an offer will result in a deal, then the benefit from a contract must be at least twice the cost of an offer, since on average you will make two offers for eve contract.) But the problem is, p depends on the behavior of other participants. The more people who are making offers, the greater the chance that any given offer will encounter a matching one and a deal will take place.

It’s easy to show that this system can have multiple, demand-determined equilibria, even though it is a pure barter economy. Let’s call p* the true probability of an offer succeeding; p* isn’t known to the participants, who instead form p by some kind of backward-looking expectations looking at the proportion of their own offers that have succeeded or failed recently. Let’s assume for simplicity that p* is simply equal to the proportion of participants who make offers in any given week. Let’s set c = 2. And let’s say that every week, participants are interested in a sitter one night. In half those weeks, they really want it (U = 6) and in the other half, they’d kind of like it (U = 3). If everybody makes offers only when they really need a sitter, then p = 0.5, meaning half the contracts are fulfilled, giving an expected utility per offer of 2. Since the expected utility from making an offer on a night you only kind of want a sitter is – 1, nobody tries to make offers for those nights, and the equilibrium is stable. On the other hand, if people make offers on both the must-go-out and could-go-out nights, then p = 1, so all the offers have positive expected utility. That equilibrium is stable too. In the first equilibrium, total output is 1 util per participant per week, in the second it’s 2.5.

Now suppose you are stuck in the low equilibrium. How can you get to the high one? Not by increasing the supply of money — there’s no money in the system. And not by changing prices — the price of a night of baby-sitting, in units of nights of baby-sitting, can’t be anything but one. But suppose half the population decided they really wanted to go out every week. Now p* rises to 3/4, and over time, as people observe more of their offers succeeding, p rises toward 3/4 as well. And once p crosses 2/3, offers on the kind-of-want-to-go-out nights have positive expected utility, so people start making offers for those nights as well, so p* rises further, toward one. At that point, even if the underlying demand functions go back to their original form, with a must-go-out night only every other week, the new high-output equilibrium will be stable.

As with any model, of course, the formal properties are less interesting in themselves than for what they illuminate in the real world. Is the Krugman token-shortage model or my pure coordination failure model a better heuristic for understanding recessions in the real world? That’s a hard question!

Hopefully I’ll offer some arguments on that question soon. But I do want to make one logical point first, the same as in the last post but perhaps clearer now. The statement “if there is insufficient demand for currently produced goods, there must excess be demand for money” may look quite similar to the statement “if current output is limited by demand, there must be excess demand for money.” But they’re really quite different; and while the first must be true in some sense, the second, as my hypothetical babysitting co-op shows, is not true at all. As Bruce Wilder suggests in comments, the first version is relevant to acute crises, while the second may be more relevant to prolonged periods of depressed output. But I don’t think either Krugman, Kaspar or the quasi-monetarists make the distinction clearly.

EDIT: Thanks to anonymous commenter for a couple typo corrections, one of them important. Crowd-sourced editing is the best.

Also, you could think of my babysitting example as similar to a Keynesian Cross, which we normally think of as the accounting identity that expenditure equals output, Z = Y, plus the behavioral equation for expenditure, Z = A + cY, except here with A = 0 and c = 1. In that case any level of output is an equilibrium. This is quasi-monetarist Nick Rowe’s idea, but he seems to be OK with my interpretation of it.

FURTHER EDIT: Nick Rowe has a very thoughtful response here. And my new favorite econ blogger, the mysterious rsj, has a very good discussion of these same questions here. Hopefully there’ll be some responses here to both, soonish.

[1] Something about typing this sentence reminds me unavoidably of Lucky Jim. This what neglected topic? This strangely what topic? Summary of the quasi-what?

[2] Can’t help being bugged a little by the way Krugman always refers to the participants as “couples,” even if they mostly were. There are all kinds of families!

Are Recessions All About Money?

There is a view that seems to be hegemonic among liberal economists, that recessions are fundamentally about money or finance. Not just causally, not just in general, but always, by definition. In this view, the only sense in which one can speak about aggregate demand as a constraint on output, is if we can identify excess demand for some non-produced financial asset.

In the simplest case, people want to hold a stock of money in some proportion to their total income. Money is produced only by the government. Now suppose people’s demand for money rises, and the government fails to increase supply accordingly. You might expect the price of money to rise — that is, deflation. But deflation doesn’t restore equilibrium, either because prices are sticky (i.e., deflation can’t happen, or not fast enough), or because deflation itself further raises the demand for money. It might do this by raising precautionary demand, since falling prices make it likely that businesses and households won’t be able to meet obligations fixed in money terms and will face bankruptcy (Irving Fisher’s debt-deflation cycle). Or deflation might increase demand for money by because it redistributes income from net borrowers to net savers, and the latter have a higher marginal demand for money holdings. Or there could be other reasons. In any case, the price of money doesn’t adjust, so government has to keep its quantity growing at the appropriate rate instead. From this perspective,  if we ever see an economy operating bellow full capacity, it is true by definition that there is excess demand for some money-like asset.

This sounds like Milton Friedman. It is Milton Friedman! But it also seems to be most of the liberal macroeconomists who are usually called Keynesians. Here’s DeLong:

there was indeed a “general glut” of newly-produced commodities for sale and of workers to hire. But it was also the case that the excess supply of goods, services, and labor was balanced by an excess demand elsewhere in the economy. The excess demand was an excess demand not for any newly-produced commodity, but instead an excess demand for financial assets, for “money”…

How, exactly, should economists characterize the excess demand in financial markets? Where was it, exactly? That became a subject of running dispute, and the dispute has been running for more than 150 years, with different economists placing the cause of the “general glut” that was excess supply of newly-produced goods and of labor at the door of different parts of the financial system.

The contestants are:

Fisher-Friedman: monetarism: a depression is the result of an excess demand for money–for those liquid assets generally accepted as means of payment that people hold in their portfolios to grease their market transactions. You fix a depression by having the central bank boost the money stock…

Wicksell-Keynes (Keynes of the Treatise on Money, that is): a depression happens when there is an excess demand for bonds… You fix a depression by either reducing the market rate of interest (via expansionary monetary policy) or raising the natural rate of interest (via expansionary fiscal policy) in order to bring them back into equality….

Bagehot-Minsky-Kindleberger: a depression happens because of a panic and a flight to quality, as everybody tries to sell their risky assets and cuts back on their spending in order to try to shift their portfolio in the direction of safe, high-quality assets… You fix a depression by restoring market confidence and so shrinking demand for AAA assets and by increasing the supply of AAA assets….

From the perspective of this Malthus-Say-Mill framework Keynes’s General Theory is a not entirely consistent mixture of (1), (2), and (3)…Note that these financial market excess demands can have any of a wide variety of causes: episodes of irrational panic, the restoration of realistic expectations after a period of irrational exuberance, bad news about future profits and technology, bad news about the solvency of government or of private corporations, bad government policy that inappropriately shrinks asset stocks, et cetera. Nevertheless, in this Malthus-Say-Mill framework it seems as if there is always or almost always something that the government can do to affect asset supplies and demands that promises a welfare improvement

That’s an admirably clear statement. But is it right? I mean, first, is it right that demand constraints can always and only be usefully characterized as excess demand for some financial asset? And second, is that really what the General Theory says?

The first answer is No. Or rather, it’s true but misleading. It is hard to talk sensibly about a “general glut” of currently produced goods except in terms of an excess demand for some money-like financial asset. But recessions and depressions are not mainly characterized by a glut of currently produced goods. They are characterized by an excess of productive capacity. Markets for all currently-produced goods may clear. But there is still a demand constraint, in the sense that if desired expenditure were higher, aggregate output would be higher. The simple Keynesian cross we teach in the second week of undergrad macro is a model of just such an economy, which makes sense without money or any other financial asset. (And is probably more useful than most of what gets taught in graduate courses.) Arguably, this is the normal state of modern capitalist economies.

I’ll come back to this in a future post, hopefully. But it’s important to stress that the notion of aggregate demand limiting output, does not imply that any currently-produced good is in excess supply. [1]

Meanwhile, how about the second question — in the General Theory, did Keynes see demand constraints as being fundamentally about excess demand for money or some other financial asset, with the solution being to change the relative price of currently produced goods, and that asset? Again, the answer is No.

In his explanation of the instability of capitalist economies, Keynes always emphasizes the fluctuations in investment demand (or in his terms, the marginal efficiency of capital schedule). Investment demand is based on the expected returns of new capital goods over their lifetime. But the distribution of future states of the world relevant to those returns is not just stochastic but fundamentally unknown, so expectations about profits on long-lived fixed capital are essentially conventional and unanchored. It is these fluctuations in expectations, and not the demand for financial assets as expressed in liquidity preference, that drives booms and slumps. Keynes:

The fact that a collapse in the marginal efficiency of capital tends to be associated with a rise in the rate of interest may seriously aggravate the decline in investment. But the essence of the situation is to be found, nevertheless, in the collapse of the marginal efficiency of capital… Liquidity preference, except those manifestations which are associated with increasing trade and speculation, does not increase until after the collapse in the marginal efficiency of capital.  

It is this, indeed, which renders the slump so intractable. Later on, a decline in the rate of interest will be a great aid to recovery and probably a necessary condition of it. But for the moment, the collapse in the marginal efficiency of capital may be so complete that no practicable reduction in the rate of interest will be enough [to offset it]. If the reduction in the rate of interest was capable of proving an effective remedy by itself, it might be possible to achieve a recovery without the elapse of any considerable interval of time and by means more or less directly under the control of the monetary authority. But in fact, this is not usually the case.

In this sense, Keynes agrees with the Real Business Cycle theorists that the cause of a decline in output is not fundamentally located in the financial system, but a fall in the expected profitability of new investment. The difference is that RBC thinks a decline in expected profitability must be due to genuine new information about the true value of future profits. Keynes on the other hand thinks there is no true expected value in that sense, and that our belief about the future are basically irrational. (“Enterprise only pretends to itself to be actuated by the statements in its prospectus … only a little more than an expedition to the South Pole, is it based on an exact calculation of benefits to come.”) This is an important difference. But the key point here is the bolded sentences. Keynes considers DeLong’s view that the fundamental cause of a downturn is an autonomous increase in demand for safe or liquid assets, and explicitly rejects it.

The other thing to recognize is that Keynes never mentions the zero lower bound. He describes the liquidity trap as theoretical floor of the interest rate, which is above zero, but nothing in his argument depends on it. Rather, he says,

The most stable, and least easily shifted, element in our contemporary economy has been hitherto, and may prove to be in the future, the minimum rate of interest acceptable to the generality of wealthowners. (Cf. the nineteenth-century saying quoted by Bagehot, that “John Bull can stand many things, but he cannot stand 2 percent.”) If a tolerable level of employment requires a rate of interest much below the average rates which ruled in the nineteenth century, it is most doubtful whether it can be achieved merely by manipulating the quantity of money.

This is an important part of the argument, but it tends to get ignored by mainstream Keynesians, who assume that monetary authority can reliably set “the” interest rate. But as we see clearly today, this is not a good assumption to make. Well before the policy rate reached zero, it had become effectively disconnected from the rates facing business borrowers. And of course the hurdle rate from the point of view of the decisionmakers at a firm considering new investment isn’t just the market interest rate, but that rate plus some additional premium reflecting what Keynes (and later Minsky) calls borrower’s risk.

So, Keynes thought that investment demand was subject to wide, unpredictable fluctuations, and probably also a secular downward trend. He doubted that very large movements in the interest rate could be achieved by monetary policy. And he didn’t think that the moderate movements that could be achieved, would have much effect on investment. [2] Where did that leave him? “Somewhat skeptical of the success of a merely monetary policy directed toward influencing the rate of interest” at stabilizing output and employment; instead, the government must “take an ever greater responsibility for directly organizing investment.”

Of course, DeLong could be misrepresenting Keynes and still be right about economic reality. But we need to at least recognize that aggregate demand is logically separate from the idea of a general glut; that the former, unlike the latter, does not necessarily involve excess demand for any financial asset; and that in practice supply and demand conditions in financial markets are not always the most important or reliable influences on aggregate demand. Keynes, at least, didn’t think so. And he was a smart guy.

[1] The other point, to anticipate a possible objection, is that the investment decision does not involve allocation of a fixed stock of savings between capital goods and financial assets.

[2] The undoubted effectiveness of monetary policy in the postwar decades might seem to argue against this point. But it’s important to recognize — though Keynes himself didn’t anticipate this — that in practice monetary policy has operated largely though its effect on the housing market, not on investment.

Don’t Let Nobody Walk All Over You

Here’s a heartening story from the old neighborhood:

An 82-year-old great-grandmother cried tears of joy Friday as nearly 200 neighbors rallied in her support on the day she was to be evicted. Mary Lee Ward was granted a reprieve when the owner of the Brooklyn house where she lives agreed to continue meeting with her lawyers next week. “You have to stick with it when you know your right,” Ward told the cheering crowd. “Don’t let nobody walk all over you.” 

Ward, who fell victim in 1995 to a predatory subprime mortgage lender that went under in 2007, has been battling to stay in the Tompkins Avenue home for more than a decade. A city marshal was supposed to boot Ward from the one-family frame house Friday, but didn’t show as her lawyers sat down with an assemblywoman and the home’s owner. … “I hope they realize that they can never really win,” Ward said. “I will not compromise.”

Why don’t we see more of this kind of thing? There are millions of families with homes in foreclosure, and millions more heading that way. Being forcibly evicted from your home has got to be one of the most wrenching experiences there is. And yet as long as you’re in the house, you have some real power. And the moral and emotional claims of someone like Ward to her home are clear, regardless of who holds the title. Someone just has to organize it. Here, I think, is where we are really suffering from the loss of ACORN — these situations are tailor-made for them.

Still, there is some good work going on. I was at a meeting recently of No One Leaves, a bank tenant organization in Springfield, MA. Modeled on Boston’s City Life/Vida Urbana, this is a project to mobilize people whose homes have been foreclosed but are still living in them. Homeowners who still have title have a lot to lose and are understandably anxious to meet whatever conditions the lender or servicer sets. But once the foreclosure has happened, the homeowner, paradoxically, is in a stronger negotiating position; if they’re going to have to leave anyway, they have nothing to lose by dragging the process out, while for the bank, delay and bad publicity can be costly. So the idea is to help people in this situation organize to put pressure — both in court and through protest or civil disobedience — on the banks to agree to let them stay on as tenants more or less permanently, at a market rent. In the longer run, this will discourage foreclosures too.

It’s a great campaign, exactly what we need more of.

But there’s another important thing about No One Leaves: They’re angry. The focus isn’t just on the legal rights of people facing foreclosure, or their real chance to stay in their homes if they organize and stick together, it’s on fighting the banks. There’s a very clear sense that this is not just a problem to be solved, but that the banks are the enemy. I was especially struck by one middle-aged guy who’d lost the home he’d lived in for some 20 years to foreclosure. “At this point, I don’t even care if I get to stay,” he said. “Look, I know I’m probably going to have to leave eventually. I just want to make this as slow, and expensive, and painful, for Bank of America as I can.” Everyone in the room cheered.

Liberals hate this sort of thing. But it seems to be central to successful organizing. Back when I was at the Working Families Party, one of the things the professional organizers always talked about was the importance of polarizing — getting people to articulate who was responsible for their problems, who’s the other side. It was a central step in any house visit, any meeting. And from what I could tell, it worked. I mean, it’s foolish of someone like Mary Lee Ward to say, “I will not compromise,” isn’t it? Objectively, compromise is how most problems get solved. But if she didn’t have a clear sense of being on the side of right against wrong, how would she have the energy to keep up what, objectively, was very likely to be a losing fight, or convince her neighbors to join her? Somebody or other said there are always three questions in politics. You have to know what is to be done — the favorite topic of intellectuals. But that’s not enough. You also have to know which side you are on, but that’s not enough either. Before you devote your time and energy to a political cause, you have to know who is to blame.

A while back I had a conversation with a friend who’s worked for the labor movement for many years, one campaign after another. If you know anyone like that, or have been part of an organizing drive yourself, you know that in the period before a union representation vote, an American workplace is a little totalitarian state. (Well, even more than usual.) Spies reporting on private conversations, mandatory mass meetings, veiled and open threats, punishment on the mere suspicion of holding the wrong views, no due process. And yet people do still vote for unions and support unionization campaigns, even when being fired would be a a personal catastrophe. Why, I asked my friend. I mean, union jobs do have better pay, benefits, job security —  but are they that much better, that people think they’re worth the risk? “Oh, it’s not about that,” he said. “It’s about the one chance to say Fuck You to your boss.”

Hardt and Negri have a line somewhere in Empire about how, until we can overcome our fear of death, it will be “carried like a weapon against the hope of liberation.” When I first read the book, I thought that was pretty strange. But now I think there’s something important there. Self interest, even enlightened, only takes you so far, because when you’re weak, your self-interest is very often going to be in accomodation to power. I’m not sure I’d go as far as Hardt and Negri, that we have to lose our fear of death to be free moral agents. But it is true that we can’t organize collectively to assert our rights in our homes and our jobs as long as we’re dominated individually by our fear of losing them. Some other motivation — dignity,  pride, anger or even hatred — is needed to say, instead, that nobody is going to walk all over you.