Archive for the ‘Political Economy’ Category

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.

David Brat defeats congressman Eric Cantor

Saturday, June 14th, 2014

FT Columnist Christopher Caldwell comments on economist David Brat’s upset victory against Eric Cantor – the number two man in the US House of Representatives – in a Republican party primary.

Prof Brat was such a long shot that no national Tea Party association backed him. But it is right to call him a Tea Party man. He is an ideologue. Mr Cantor, by contrast, was a pragmatist. Tea Partiers … believe … Republican bigwigs represent their donors, who overlap and socialise with Democratic donors. Together they secure the things rich people want: low capital gains rates, high immigration, an agnostic culture. ….

It is a common error to look at the Tea Party ideology as just an intense, distilled version of the Reaganism Republicans have espoused since the late 1970s. The political scientist Norman Ornstein, for instance, speaks of a battle “between hardline conservatives who believe in smaller government and radical nihilists who want to blow up the whole thing”. This is wrong. What the Tea Party brings to the Republican party, for the first time in a century and a half, is a leaven of hostility to capitalism – or at least to crony capitalism. Republicans have been an anti-slavery party, a robber-baron party, a hard-money party, an anti-communist party and a Christian party, but they have always had a soft spot for businessmen.

No more. While Prof Brat professes to revere Ronald Reagan, he is not a supply-side dogmatist. …. He believes in free markets but does not assume every rich person is his friend.

Of the Wall Street executives he blames for the past six years of finance crisis and stagnation, he said on the stump last month: “Those guys should have gone to jail. Instead of going to jail, they went on Eric [Cantor]’s Rolodex, and they are sending him big cheques.”

Christopher Caldwell, “Brat reconnects Republicans with an angry electorate“, Financial Times, 14 June 2014.

Christopher Caldwell (born 1962) is an American journalist and senior editor at The Weekly Standard, a neoconservative opinion magazine founded in 1995 by William Kristol (born 1952).

House of Debt: Larry Summers on Mian and Sufi

Saturday, June 7th, 2014

[Atif Mian and Amir Sufi] argue that, rather than failing banks, the key culprits in the financial crisis were overly indebted households. Resurrecting arguments that go back at least to Irving Fisher and that were emphasised by Richard Koo in considering Japan’s stagnation, Mian and Sufi highlight how harsh leverage and debt can be – for example, when the price of a house purchased with a 10 per cent downpayment goes down by 10 per cent, all of the owner’s equity is lost. They demonstrate powerfully that spending fell much more in parts of the country where house prices fell fastest and where the most mortgage debt was attached to homes. So their story of the crisis blames excessive mortgage lending, which first inflated bubbles in the housing market and then left households with unmanageable debt burdens. These burdens in turn led to spending reductions and created an adverse economic and financial spiral that ultimately led financial institutions to the brink.

…. Households do not spend while they are still overly indebted, which precipitates slow growth even after banking is restored to health. Spending slowdowns are caused by household over-indebtedness, so of course they precede problems in the banking system. And, when consumers do not spend, businesses have less need to borrow to finance investment, inventories or receivables. ….

We all believed in 2009 what Mian and Sufi have now conclusively demonstrated – that reducing mortgage debt would spur consumer spending. And there was intense frustration with how few homeowners our programmes were reaching ….

Start where Mian and Sufi start, with … the notion that bankruptcy judges should be allowed to write down mortgage debt, and that permitting them to do so would increase the bargaining power of homeowners seeking relief. Although it is more complex than Mian and Sufi suggest, I believe on balance this would have been better public policy, and so argued vigorously in these pages in February 2008.

Why didn’t the administration push for such legislation? Simple. The judgment of the president and his advisers was that there was essentially no chance of it getting the requisite 60 votes in the Senate, where we were not even able to muster a simple majority.

Larry Summers, “Lawrence Summers on ‘House of Debt’“, Financial Times, 7 June 2014.

Harvard economist Lawrence Summers is reviewing House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again, by Atif Mian and Amir Sufi (University of Chicago Press, 2014).

Mian and Sufi are professors at Princeton and the University of Chicago, respectively.

Daniel Ellsberg on Edward Snowden

Wednesday, June 4th, 2014

Last Wednesday on national TV, Secretary of State John Kerry called NSA leaker Edward Snowden a coward and a traitor, comparing him unfavourably to Daniel Ellsberg, the former Defence Department employee who leaked the Vietnam War Pentagon Papers to the New York Times:

There are many a patriot – you can go back to the Pentagon Papers with Dan Ellsberg and others who stood and went to the court system of America and made their case. Edward Snowden is a coward, he is a traitor, and he has betrayed his country. And if he wants to come home tomorrow to face the music, he can do so.

Daniel Ellsberg, writing in the Guardian newspaper, explains that Snowden is not a coward. Times have changed. National security whistleblowers are now treated harshly. It is impossible for them to “make their case” from solitary confinement, or even in a courtroom.

Snowden would come back home to a jail cell – and not just an ordinary cell-block but isolation in solitary confinement, not just for months like Chelsea Manning but for the rest of his sentence, and probably the rest of his life. His legal adviser, Ben Wizner, told me that he estimates Snowden’s chance of being allowed out on bail as zero. (I was out on bond, speaking against the Vietnam war, the whole 23 months I was under indictment). ….

Without reform to the Espionage Act that lets a court hear a public interest defense – or a challenge to the appropriateness of government secrecy in each particular case – Snowden and future Snowdens can and will only be able to “make their case” from outside the United States.

As I know from direct chat-log conversations with him over the past year, Snowden acted in full knowledge of the constitutionally questionable efforts of the Obama administration, in particular, to use the Espionage Act in a way it was never intended by Congress: as the equivalent of a British-type Official Secrets Act criminalizing any and all unauthorized release of classified information. ….

John Kerry’s challenge to Snowden to return and face trial is either disingenuous or simply ignorant that current prosecutions under the Espionage Act allow no distinction whatever between a patriotic whistleblower and a spy. Either way, nothing excuses Kerry’s slanderous and despicable characterizations of a young man who, in my opinion, has done more than anyone in or out of government in this century to demonstrate his patriotism, moral courage and loyalty to the oath of office the three of us swore: to support and defend the Constitution of the United States.

Daniel Ellsberg, “Snowden would not get a fair trial – and Kerry is wrong“, The Guardian, 30 May 2014.

the wealth inequality debate

Tuesday, June 3rd, 2014

I enjoy reading the letters section of the Financial Times, and often find it to be the best part of the newspaper. Today is no exception. A reader in the USA responds eloquently to last Thursday’s equally eloquent letter from a reader in Switzerland.

Sir, I’m getting tired of the wealth inequality debate …. Robert Frost settled the debate decades ago: “The world is full of willing people, some willing to work, the rest willing to let them.”

Alexander Ineichen (Zug, Switzerland), “Inequality statistics are of limited use“, Financial Times, letter to the editor, 29 May 2014.

 

Sir, Alexander Ineichen … writes from the tax haven of Zug, Switzerland, that he is getting tired of the wealth inequality debate ….

For him, … there are two groups of people: the deservedly prosperous workers and the deservedly poor shirkers.

But he has apparently failed to realise that the world also includes the over-remunerated, the idle rich, and the working or disabled poor.

And that the increasing concentration of income and wealth is due less to increasingly concentrated productive talent and work, than to a concentration of inherited privilege, transmitted through inherited fortunes and private education, and to dysfunctional corporate governance.

Graham Hacche (Washington, DC, US), “The poor are not simply shirkers“, Financial Times, letter to the editor, 3 June 2014.

Those who write letters to the editor are unpaid volunteers, so I feel justified in quoting freely from their work. Nonetheless, I appreciate that FT employees must work long hours selecting and editing letters for publication. It is difficult to extract a small portion of a short letter, so I keep the number of postings to a minimum.

“populist” and “liberal”

Monday, June 2nd, 2014

… refer to distinct political ideologies, on each side of the Atlantic. As an old saying goes, “The US and the UK are divided by a common language.”

It is only an adjective. But it has been dealt a disservice this week and I feel a responsibility as a citizen of the American republic to mount a defence.

I speak of the word “populist”, which has been thrown around with gusto lately to describe the anti-EU factions that gained seats in elections to the EU Parliament. ….

[In] our Merriam-Webster dictionary of the English language, … a populist is defined as “a member of a political party claiming to represent the common people” or “a believer in the rights, wisdom, or virtues of the common people”. You will note that there are no national, racial or religious qualifiers. ….

Populist is hardly the best word to describe chauvinistic leaders such as Marine Le Pen of France’s National Front or Heinz-Christian Strache of Austria’s Freedom party.

You don’t have to be an expert on contemporary European politics to realise that these politicians aren’t exactly believers in “the rights, wisdom, or virtues of the common people”, as the dictionary puts it. They are believers in the rights, wisdom and virtues of their people. There is a difference.

Gary Silverman, “An all-American cheer for populism“, Financial Times, 30 May 2014.

 

Sir, Gary Silverman mounts a defence for “populist”, complaining about its pejorative use on this side of the Atlantic. Here is a deal: we Europeans will rehabilitate “populist” when Mr Silverman’s countrymen stop using “liberal” as a term of abuse.

Tom Hayhoe, “Europeans will rehabilitate ‘populist’ if Americans will stop using ‘liberal’“, Financial Times, letter to the editor, 2 June 2014.

The Oxford English Dictionary (OED) defines as “populist” as “A person who supports or seeks to appeal to the concerns of ordinary people”, without national, racial or religious qualifiers. This is very close to the Merriam-Webster definition, so the European usage that upsets Mr Silverman must be new.

UK and US definitions of “liberal”, in contrast, differ markedly.

OED: “(In a political context) favouring individual liberty, free trade, and moderate political and social reform.”

Merriam-Webster: “believing that government should be active in supporting social and political change”

The UK definition of “liberal” is used throughout the world (not just in Europe), with emphasis on limited government and free trade. The contrasting American definition is found, to the best of my knowledge, only in the US. An American “liberal” in the rest of the world would be described as a social democrat or democratic socialist.