Archive for the ‘Political Economy’ Category

publication alert: secular stagnation

Tuesday, August 19th, 2014

Vox, in collaboration with CEPR Press, has launched a free eBook, with chapters written by some of the world’s best-known macroeconomists and economic historians. The full text can be downloaded without charge, so there is no excuse for not reading it.

Economic growth is still anaemic despite years of zero interest rates. Is ‘secular stagnation’ to blame? What does secular stagnation really mean? And if it’s for real, what must be done?

Today, launches an eBook that gathers the views of leading economists including Summers, Krugman, Gordon, Blanchard, Koo, Eichengreen, Caballero, Glaeser and a dozen others (edited by Coen Teulings and me). Collectively, the chapters suggest that something historic is afoot.

Richard Baldwin, “Secular stagnation: Facts, causes, and cures – a new Vox eBook“, Vox, 15 August 2014.


The link above contains a summary of the 179-page book. The full text can be downloaded without charge as a pdf. This is the table of contents:

Coen Teulings and Richard Baldwin

1 Reflections on the ‘New Secular Stagnation Hypothesis’
Laurence H Summers

2 Secular stagnation: A review of the issues
Barry Eichengreen

3 The turtle’s progress: Secular stagnation meets the headwinds
Robert J Gordon

4 Four observations on secular stagnation
Paul Krugman

5 Secular joblessness
Edward L Glaeser

6 Secular stagnation? Not in your life
Joel Mokyr

7 Secular stagnation: US hypochondria, European disease?
Nicholas Crafts

8 A prolonged period of low real interest rates?
Olivier Blanchard, Davide Furceri and Andrea Pescatori

9 On the role of safe asset shortages in secular stagnation
Ricardo J Caballero and Emmanuel Farhi

10 A model of secular stagnation
Gauti B. Eggertsson and Neil Mehrotra

11 Balance sheet recession is the reason for secular stagnation
Richard C Koo

12 Monetary policy cannot solve secular stagnation alone
Guntram B Wolff

13 Secular stagnation: A view from the Eurozone
Juan F. Jimeno, Frank Smets and Jonathan Yiangou


inequality and poverty

Tuesday, August 12th, 2014

Professor Deirdre McCloskey has written a thoughtful column for today’s Financial Times. In it, she argues that the percentage of wealth owned by the richest members of society does not matter. What matters is the living standards of the poorest. Implicitly, she restricts her analysis to living standards within countries rather than looking at relative living standards across the entire world. The distinction is important.

In the UK since 1800, or Italy since 1900, or Hong Kong since 1950, real income per head has increased by a factor of anywhere from 15 to 100, depending on how one allows for the improved quality of steel girders and plate glass, medicine and economics.

In relative terms, the poorest people have been the biggest beneficiaries. The rich became richer, true. But millions more have gas heating, cars, smallpox vaccinations, indoor plumbing, cheap travel, rights for women, lower child mortality, adequate nutrition, taller bodies, doubled life expectancy, schooling for their kids, newspapers, a vote, a shot at university and respect.

Never had anything similar happened, not in the glory of Greece or the grandeur of Rome, not in ancient Egypt or medieval China. What I call The Great Enrichment is the main fact and finding of economic history.

Yet you will have heard that our biggest problem is inequality, and that we must make men and women equal. No, we should not – at least, not if we want to lift up the poor. ….

The Great Enrichment came from innovation, not from accumulating capital or exploiting the working classes or lording it over the colonies. Capital had little to do with it, despite the unhappy fact that we call the system “capitalism”. Capital is necessary. But so are water, labour, oxygen and pencils. The path to prosperity involves betterment, not piling brick on brick.

Taxing the rich, or capital, does not help the poor. It can throw a spanner into the mightiest engine for lifting up those below us, arising from a new equality, not of material worth but of liberty and dignity. Gini coefficients are not what matter; the Great Enrichment is.

Deirdre McCloskey, “Equality lacks relevance if the poor are growing richer“, Financial Times, 12 August 2014.

Deirdre McCloskey (born Donald McCloskey in 1942) is Professor of Economics, History, English, and Communication at the University of Illinois at Chicago  She is author of 17 books (all but one sole-authored). Her latest is Bourgeois Equality: How Betterment Became Ethical, 1600-1848, and Then Suspect (forthcoming, 2015). This is the third and last volume of “The Bourgeois Era” series. The first two books are The Bourgeois Virtues (University Of Chicago Press, 2006) and Bourgeois Dignity (University Of Chicago Press, 2010).

On Professor McCloskey’s home page, you will find a summary (Exordium) of Bourgeois Equality, and much more. It is worth a visit.

See also an earlier post:



finance and social mobility

Saturday, August 9th, 2014

This information is new to me. Financial services has a less than stellar reputation, but the sector does play an important role in social mobility, by providing ordinary folks an opportunity to move into the ranks of the super rich.

[T]he standing notion, especially in the land of opportunity, [is] that capital always flows to those who work hard enough for it. This is the core basis of the American Dream, a place where there are no barriers to super riches because hard work and ingenuity can always get you to the top level no matter what and that luck plays no part in it at all.

But this is simply not true. If you are of low or working class birth, the chances of becoming a gazillionaire by means of honest hard work alone are almost zero. Even in America. Yes, working hard can be the way to a better than average life, but it will never be enough to propel you to the ranks of the uber elite. To get there, you need to take risk and most poor people simply can’t afford to do that.

Consequently, in all of history, there have only been a few professions which have been able to project the average person with some level of security to the ranks of the uber rich: banking, money management and merchant trading. These all happen to be professions in which someone else is prepared to give you the capital to risk and, most importantly, to absorb your losses if they happen.

All other routes to obscene wealth are based either on huge amounts of risk and luck, pre-existing capital or, more sinisterly, muscle and manipulation.

Izabella Kaminska , “Piketty and the randomness of wealth“, FT Alphaville blog, 8 August 2014. (free access, registration required.)

There is much more in the full blog. Note to registered non-subscribers: FT blogs do not count against your monthly limit of 10 free downloads.

income inequality hinders growth

Wednesday, August 6th, 2014

The topic of income inequality and its effects has been the subject of countless analysis stretching back generations and crossing geopolitical boundaries. Despite the tendency to speak about this issue in moral terms, the central questions are economic ones: Would the U.S. economy be better off with a narrower income gap? And, if an unequal distribution of income hinders growth, which solutions could do more harm than good, and which could make the economic pie bigger for all? ….

Our review of the data, as well as a wealth of research on this matter, leads us to conclude that the current level of income inequality in the U.S. is dampening GDP growth, at a time when the world’s biggest economy is struggling to recover from the Great Recession and the government is in need of funds to support an aging population.

Economic Research: How Increasing Income Inequality Is Dampening U.S. Economic Growth, And Possible Ways To Change The Tide“, S&P Capital IQ, Global Credit Portal, 5 August 2014.

This is a long report, with many charts. What surprised me was not the analysis, but the conclusions, which I did not expect to see in a report from Standard & Poor’s.

HT Mark Thoma.



Milton Friedman on immigration

Wednesday, August 6th, 2014

There has been a lot of purposeful distortion, and some confusion, over what Milton Friedman said about immigration. ….

I have Friedman on video stating precisely what he believes about immigration. And, instead of giving you half quotes, like the anti-immigration crowd does, I want to give you his precise words. What follows are direct quotes from Friedman in his lecture, What is America. ….

I’ve always been amused by a kind of a paradox. Suppose you go around and ask people: ‘The United States before 1914, as you know, had completely free immigration. Anybody could get in a boat and come to these shores and if landed at Ellis Island he was an immigrant. Was that a good thing or a bad thing?’

You will find that hardly a soul who will say that it was a bad thing. Almost everybody will say it was a good thing. ‘But what about today? Do you think we should have free immigration?’ ‘Oh, no,’ they’ll say, ‘We couldn’t possibly have free immigration today. Why, that would flood us with immigrants from India, and God knows where. We’d be driven down to a bare subsistence level.’

What’s the difference? How can people be so inconsistent? Why is it that free immigration was a good thing before 1914 and free immigration is a bad thing today? Well, there is a sense in which that answer is right. There’s a sense in which free immigration, in the same sense as we had it before 1914 is not possible today. Why not?

Because it is one thing to have free immigration to jobs. It is another thing to have free immigration to welfare. And you cannot have both. If you have a welfare state, if you have a state in which every resident is promised a certain minimal level of income, or a minimum level of subsistence, regardless of whether he works or not, produces it or not. Then it really is an impossible thing. ….

Look, for example, at the obvious, immediate, practical example of illegal Mexican immigration. Now, that Mexican immigration, over the border, is a good thing. It’s a good thing for the illegal immigrants. It’s a good thing for the United States. It’s a good thing for the citizens of the country. But, it’s only good so long as it’s illegal.

There is no question that Milton Friedman said that in the welfare society “illegal immigration” is precisely the kind of the immigration that the country needs. The xenophobes have turned his views inside-out. They will pay lip-service to legal immigration and damn illegal immigration. The fake libertarians, social conservatives, and racists try to make it sound as if Friedman was against illegal Mexican migrants. In reality he said that such immigration is “a good thing” for everybody concerned. And his reasoning is that this is the closest thing to pre-1914 immigration possible in today’s welfare state. Friedman says this is the paradox of government intervention that turns an illegal act into a beneficial one, while legal immigration is a potential problem. Notice that the groups that quote Friedman never quote his saying that illegal Mexican immigration is good.

“What Milton Friedman really said about immigration”, Classically Liberal, 5 February 2008.

It is often said that a classical writer is one whom everyone cites but few read. By that measure, Chicago economist Milton Friedman (1912-2006) is now a classical economist!

economics: the “dismal science”

Thursday, July 31st, 2014

Nearly everyone knows that economics is known as a “dismal science”, but few know how economics came to receive the label. Timothy Taylor explains, in an essay published in the latest issue of a quarterly publication of the IMF.

The “dismal science” is the most prominent verbal hand grenade lobbed at economics. But economists who know the history of the wisecrack wear it as a badge of honor.

In an 1849 essay, the historian and essayist Thomas Carlyle wrote that the subject of political economy was “a dreary, desolate, and indeed quite abject and distressing one; what we might call, by way of eminence, the dismal science.” But Carlyle’s essay, titled “Occasional Discourse on the Negro Question,” is an argument that poor black laborers in the West Indies suffer from “the vices of indolence and insolence.” For them to achieve virtue, he argued, the “idle Black man in the West Indies” should “be compelled to work as he was fit.” Carlyle wasn’t only a racist. He believed that poor people around the world of all races “the whitest alike and the blackest” should experience “the divine right of being compelled (if ‘permitted’ will not answer) to do what work they are appointed for.”

In short, Carlyle called economics a dismal science because it was built on ideas like “letting men alone” and “ballot-boxes,” or what we would call personal freedom and democracy.

John Stuart Mill, the economist and political philosopher, published a scathing critique of Carlyle’s essay in 1850. Mill pointed out that the rich often oppressed the poor and that when the actions and attitudes of the poor seemed uncooperative or dysfunctional, it stemmed from the negative incentives caused by oppression rather than any defect of character. Mill ended with this thought: “Though we cannot extirpate all pain, we can, if we are sufficiently determined upon it, abolish all tyranny.” In the actual historical debate over the dismal science, the enlightened economist is the clear-cut winner.

Timothy Taylor, “Economics and Morality“, Finance & Development (June 2014), pp. 34-38.

Taylor provides numerous historical and philosophical insights that readers may not be aware of. I, for one, did not know that 19th century Christians opposed not only gaming and sale of alcohol, but also the purchase of life insurance.

In 19th century America, buying life insurance was considered a morally unacceptable practice of gambling against God, until it was transformed—-by a promotional campaign directed at churches—-to become viewed as a prudent way of showing love for family.

Timothy Taylor is Managing Editor of the Journal of Economic Perspectives and blogs here. In his day job, he teaches economics at Macalester College in St. Paul, Minnesota.

what is GDP?

Saturday, July 5th, 2014

Simon Kuznets, the Belarusian-American economist often credited with inventing GDP [gross domestic product] in the 1930s, had severe reservations about the concept right from the start.[British economist Diane] Coyle told me, “He did a lot of the spade work. But conceptually he wanted something different.” Kuznets had been asked by US president Franklin Delano Roosevelt to come up with an accurate picture of a post-crash America that was trapped in seemingly interminable recession. Roosevelt wanted to boost the economy through spending on public works. To justify his actions, he needed more than just snippets of information: freight-car loadings or the length of soup-kitchen lines. Kuznets’ calculations indicated that the economy had halved in size from 1929 to 1932. It was a far more solid basis on which to act.

When it came to data, Kuznets was meticulous. But what, precisely, should be measured? He was inclined to include only activities he believed contributed to society’s wellbeing. Why count things like spending on armaments, he reasoned, when war clearly detracted from human welfare? He also wanted to subtract advertising (useless), financial and speculative activities (dangerous) and government spending (tautological, since it was just recycled taxes). Presumably he wouldn’t have been thrilled with the idea that the more heroin consumed and prostitutes visited, the healthier an economy.

Kuznets lost his battle. Modern national income accounts include both arms sales and investment banking services. They don’t distinguish between social “goods” – say, spending on education – and social “bads” (or necessities) – say, gambling, repairing the damage after hurricane Katrina or preventing crime. (Countries without much crime miss out on related economic activity such as security guards and repairing broken windows.)

David Pilling, “Has GDP outgrown its use?“, Financial Times Magazine, 5 July 2014.

Mr Pilling is the FT Asia Editor. His article is long, well-written and very informative. Highly recommended!

Diane Coyle’s short (168-page) new book on the subject is titled GDP: A Brief But Affectionate History (Princeton University Press, 2014)

Stiglitz on deregulation of oligopolies

Saturday, June 28th, 2014

Corporate interests [after the second world war] argued for getting rid of regulations, even when those regulations had done so much to protect and improve our environment, our safety, our health and the economy itself.

But this ideology was hypocritical. The bankers, among the strongest advocates of laissez-faire economics, were only too willing to accept hundreds of billions of dollars from the government in the bailouts that have been a recurring feature of the global economy since the beginning of the Thatcher-Reagan era of “free” markets and deregulation. ….

While Wall Street executives used their high-retainer lawyers to ensure that their ranks were not held accountable for the misdeeds that the crisis in 2008 so graphically revealed, the banks abused our legal system to foreclose on mortgages and evict people, some of whom did not even owe money.

Joseph E. Stiglitz, “Inequality Is Not Inevitable“, Opinionator, New York Times, 27 June 2014.

This is the last article in The Great Divide series, moderated by Joseph Stiglitz.

Columbia University economist Joseph Stiglitz (born 1943) shared the 2001 Nobel Memorial Prize in Economic Sciences with George Akerlof and Michael Spence “for their analyses of markets with asymmetric information”.

neoconservative mayhem

Monday, June 23rd, 2014

Although jingoism would bring Obama a higher rating in the opinion polls, his courage lies in not falling into this trap. People forget – thanks to the mayhem caused by the neo-cons – that Obama hardly has any options in Syria, Iraq or for that matter in Crimea, or at the best only risky ones.

MKC, commenting on Edward Luce, “America’s neocons have been jolted back to life“, Financial Times, 23 June 2014.

Another FT reader (“August”) writes “Haven’t you liberals done enough harm to the world? You keep supporting a complete idiot in foreign and domestic affairs, Mr. Obama, who isn’t an American in the strict sense of the term.”

August labels Mr Luce (a UK citizen, born 1968) as ‘liberal’, and describes President Obama (a US citizen, born 1961) as ‘non-American’ and ‘complete idiot’, but does not elaborate.

Edmund Phelps at lunch with the FT

Tuesday, June 17th, 2014

Martin Wolf interviews Columbia University economist Edmund (Ned) Phelps. Mr Wolf’s report is peppered with comments that Phelps made during their long conversation. Here is a small sample.

“[To stimulate innovation] it’s necessary to start with a national conversation on the importance of creativity and discovery …. I’m not against a big government. I’d love to have colossal employment subsidies, to revolutionise the terms on which low-wage workers are employed, and, if there are some exciting initiatives that the government could take to open the way for more innovation, that would be great. But we’ve got to stop all this social protection. We’ve got to use that tax money for things like low-wage employment subsidies – subsidising work, subsidising innovation maybe, subsidising investment maybe.”

What about unemployment benefit? Medicare? “I’m not against social insurance. In my ideal world, wage rates would be so pulled up at the bottom by employment subsidies that everybody would be able to afford good levels of medical and retirement insurance in private markets. But we don’t live in that world. So, I would be loath to crusade against social insurance.”

I suggest that it is difficult to draw the line between the “social insurance” he favours and the “social protection” he condemns “Yes. We have got to protect the indigent. But social protection is out of control now.”

Wouldn’t he also accept that government can provide unemployment insurance and health insurance better than the private sector can?

“Yes, I understand there are flaws in private insurance markets. But the balance of advantage might have been in favour of private insurance if we had distributed the fruits of work more justly.” ….

Phelps believes passionately that creativity allows individuals to live fuller lives and remake the world. He is a true American, in a good way.

Martin Wolf, “Lunch with the FT: Edmund Phelps“, Financial Times, 14 June 2014.

Edmund Phelps (born 1933) won the 2006 Nobel Memorial Prize for “his analysis of inter-temporal tradeoffs in macroeconomic policy”. TdJ has highlighted aspects of his work on previous occasions, for example here, here, and here.