Archive for the ‘Political Economy’ Category

economic growth, war and inequality

Wednesday, April 16th, 2014

A book by French economist, recently published in English translation, is attracting considerable attention. Here are portions of one review of the book, which I have added to my ‘must read’ list.

French economist Thomas Piketty has written an extraordinarily important book. Open-minded readers will surely find themselves unable to ignore the evidence and arguments he has brought to bear. ….

Among the lessons is that there is no general tendency towards greater economic equality. Another is that the relatively high degree of equality seen after the second world war was partly a result of deliberate policy, especially progressive taxation, but even more a result of the destruction of inherited wealth, particularly within Europe, between 1914 and 1945. A further lesson is that we are slowly recreating the “patrimonial capitalism” – the world dominated by inherited wealth – of the late 19th century. ….

Yet the book also has clear weaknesses. The most important is that it does not deal with why soaring inequality – while more than adequately demonstrated – matters. Essentially, Piketty simply assumes that it does. ….

For me the most convincing argument against the ongoing rise in economic inequality is that it is incompatible with true equality as citizens. If, as the ancient Athenians believed, participation in public life is a fundamental aspect of human self-realisation, huge inequalities cannot but destroy it. In a society dominated by wealth, money will buy power. Inequality cannot be eliminated. It is inevitable and to a degree even desirable. But, as the Greeks argued, there needs to be moderation in all things. We are not seeing moderate rises in inequality. We should take notice.

Martin Wolf, “‘Capital in the Twenty-First Century’”, by Thomas Piketty“, Financial Times, 16 April 2014.

Martin overlooks the fact that Athenian society was very unequal. Only about 20% of Athenian residents were citizens. The vast majority – slaves, freed slaves, women and others – were excluded from voting and from participation in public affairs.

Martin is reviewing Capital in the Twenty-First Century, by Thomas Piketty, translated by Arthur Goldhammer (Harvard University Press, 2014). Read his complete review at the link above (free registration required).

GDP is a flawed measure of output

Wednesday, April 16th, 2014

Gross Domestic Product (GDP) has many flaws, some of which are well-known. It ignores unpaid work, for instance, including work done, mainly by women, caring for young children, the elderly, the infirm – even a spouse and adult children. The famous example from first-year economics is that GDP would go up if everyone took in their neighbour’s wash, charging each other for laundry services. With few exceptions (imputed rent for owner-occupied housing is an important one), GDP is a measure of market transactions.

FT columnist John Kay thinks that the problem is more serious than many realize. GDP, he explains, measures poorly even what it is supposed to measure.

At Oxford university, many students regard attendance at lectures as optional. So teachers who fail to enlighten or entertain end up talking to empty rooms. A malicious fellow student measured lecturing performance by computing the ratio of attendance at the start of a course to attendance at the end. The highest score was earned by the hapless teacher of a first-year course on national income accounting.

Few universities now offer such a course. They have responded, or pandered, to student preferences, and the economics curriculum has moved on. Not necessarily in a good way; national income accounting … is no longer well understood. ….

And national income accounting cannot handle the financial services sector. Reported output of financial services rose dramatically during the 2008 financial crisis. This nonsensical result arises because the measurement of financial services output is strongly influenced by the margin between average bank lending and borrowing rates, which increased sharply. When someone confidently quotes the contribution of financial services to national income, you can be sure they have no understanding of the esoteric concept of “financial services indirectly measured” (don’t ask). Only a few people in the depths of national statistics offices do. This problem casts doubt on the validity of reported growth rates both before and after the crisis.

It once puzzled me that many economists in the financial sector forecast and discussed GDP without knowing what it was. I have since realised the job of market pundits is not to forecast GDP but to forecast what the statistics office will announce is GDP, and that is not at all the same.

John Kay, “GDP is flawed – just not the way most people think“, Financial Times, 16 April 2014.

There is much more in the full column, which can be downloaded at the link or, in a few days, at www.johnkay.com

US cable barons

Monday, April 14th, 2014

Comcast’s proposed takeover of Time Warner Cable without doubt will be approved, paving the way for further monopolisation of US broadband. Why? According to FT columnist Edward Luce, it is a result of crony capitalism. It also helps that Comcast’s former chief lobbyist currently heads the Federal Communications Commission (FCC).

The FCC is dominated by senior former cable industry officials. And there is barely a US elected official – from President Barack Obama down – who has not benefited from Comcast’s extensive campaign financing. As with the railway barons of the late 19th century, he who pays the piper picks the tune.

The company is brilliantly effective. Last week, David Cohen, Comcast’s genial but razor-sharp executive vice-president, batted off a US Senate hearing with the ease of a longstanding Washington insider. …. One or two senators, notably Al Franken, the Democrat from Minnesota, offered sceptical cross-examination about the proposed merger. But, for the most part, Mr Cohen received softballs. ….

The public’s indifference to the rise of the internet barons is also assisted by lack of knowledge. Americans are rightly proud of the fact that the US invented the internet. Few know that it was developed largely with public money by the Pentagon – or that Google’s algorithmic search engine began with a grant from the National Science Foundation. It is a classic case of the public sector taking the risk while private operators reap the gains. Few Americans have experienced the fast internet services in places such as Stockholm and Seoul, where prices are a fraction of those in the US. When South Koreans visit the US, they joke about taking an “internet holiday”.

US average speeds are as little as a tenth as fast as those in Tokyo and Singapore. Among developed economies, only Mexico and Chile are slower. Even Greeks get faster downloads.

Edward Luce, “The power of the US cable barons must be challenged“, Financial Times, 14 April 2014.

Mexico and Chile joined the OECD club of wealthy nations, but does this mean that they are now “developed economies”?

limits on campaign contributions: a conservative view

Saturday, April 5th, 2014

United States journalist Christopher Caldwell does not like the Supreme Court’s removal of donation caps that prevented individual contributors from backing more than nine national candidates at a time.

Previous blogs on this subject can be accessed here and here.

In his decision, Chief Justice John Roberts wrote for a plurality of his [Supreme Court] colleagues that political speech during a campaign is the most important kind of speech – and ought to be the most protected. ….

That is inspiring. But Mr Roberts is as wrong in practice as he is right in principle. The aggregate limits in the US electoral system are meant to fight corruption but the only kind he recognises is the kind in which a politician offers a rich benefactor a legislative quid pro quo. Most corruption is not like that. More common is an inequality of access to politicians, about which Mr Roberts professes himself unconcerned. ….

The mystery is why removing these caps was a matter of such desperate constitutional importance in the first place. …. Why do donors need to be able to fund 10 candidates when they will be represented by only one congressman? Does backing candidates in distant constituencies not violate the Anglo-American tradition of “representation”? If one takes this tradition – and the idea of citizenship – seriously, it is admirable for an Alabaman to back a candidate in his own state’s Senate race, but meddlesome to back one in New Hampshire.

Christopher Caldwell, “A decision right in principle but wrong in practice“, Financial Times, 5 April 2014.

Christopher Caldwell (born 1962) is senior editor of The Weekly Standard, a neoconservative magazine edited in Washington, D.C.

Obamacare is flawed, but working

Friday, April 4th, 2014

Via Mark Thoma, here is a snippet from Paul Krugman’s column in today’s New York Times.

The crucial thing to understand about the Affordable Care Act is that it’s a Rube Goldberg device, a complicated way to do something inherently simple. … Remember, giving everyone health insurance doesn’t have to be hard; you can just do it with a government-run program…, extending Medicare to everyone would have been technically easy.

But it wasn’t politically possible,… health reform had to be run largely through private insurers, and be an add-on to the existing system… And, as a result, it had to be somewhat complex. … It’s a system in which many things can go wrong; the nightmare scenario has always been that conservatives would seize on technical problems to discredit health reform.

Paul Krugman: Rube Goldberg Survives“, Economist’s View,4 April 2014.

There is more at the link, and even more at the NY Times (metered paywall).

Gary Silverman has an op-ed in today’s Financial Times that complements Krugman, and is worth reading in its entirety.

[T]here is an implicit civil rights dimension to President Barack Obama’s Affordable Care Act. It’s not easy to talk about this in the US, because it’s not easy to explain – to others or ourselves – why the health insurance coverage figures are so skewed by race in the first place.

But it’s a reason to root for Obamacare, for all its flaws. The plan was never perfect. It isn’t the single-payer system that many on the left really wanted. Nor is it the kind of thing that is going to turn on the Republican party and its mostly white supporters, either.

Obamacare isn’t even close to covering all the uninsured. It was big news this week when the White House said it had reached its target of signing up 7m people for private health insurance exchanges. Millions more are benefiting from provisions in the law expanding Medicaid coverage for the poor and enabling children to stay on their parents’ insurance until age 26. But universal coverage remains only a dream.

Gary Silverman, “Why Obamacare is a civil rights issue“, Financial Times, 4 April 2014.

Yesterday’s FT editorial on this subject is also worth a look. It concludes:

[I]t is time for the Republicans to give up on their promise to repeal Obamacare. They offer nothing in its place. Moreover, millions of uninsured Americans will continue to go empty-handed in Republican- controlled states that have rejected the new Medicaid funds. This is unacceptable. Having demonised the law and popularised myths about “death panels”, Republicans risk being caught on the wrong side of history. The party should resist the temptation to exploit public confusion about the reform for short-term gain at the polls in November.

The bigger prize is to be associated with a law that is long overdue. The reform has its flaws, and they merit attention. It will be costly to small businesses and it incentivises employers to reclassify employees as part-time. But it is rapidly becoming a settled fact of the US economy. Republicans must change their mantra from repeal to reform.

The lasting legacy of Obamacare“, Financial Times, editorial, 3 April 2014.

more on the blow to US democracy

Friday, April 4th, 2014

Further to yesterday’s post, today’s Financial Times has a report on the same subject. (Note: It is a news article, not an editorial, nor an op-ed.) The rest of the report can be downloaded at the link below (metered paywall, free registration required).

The conga line of Republican presidential aspirants who traipsed to Las Vegas at the weekend to pay homage to conservative super-donor, casino magnate Sheldon Adelson, looked prescient a few days later.

On Wednesday, the US Supreme Court struck down as an unconstitutional restriction on free speech a cap on political donations, handing overnight greater power to wealthy political patrons such as Mr Adelson.

The decision in some ways just reroutes the cash that is pouring into US politics at record levels, by vastly increasing the total amount of money that an individual can legally give to parties and candidates.

But few doubt the ruling will mean more money overall, with Michael Toner, a former Republican-aligned head of the Federal Election Commission, saying “tens of millions” of extra funds could be raised.

Richard McGregor, “US parties expect flood of cash after removal of donations cap“, Financial Times, 4 April 2014.

 

another blow to US democracy

Thursday, April 3rd, 2014

Yesterday, the US Supreme Court made it easier for wealthy individuals to dominate political spending. The court, in a 5-4 decision, removed a cap of $74,000 every two years in donations to political action committees (PACs). The campaign contribution limit of $2,600 per candidate per election remains in place. Congress established contribution limits in the 1970s, when public faith in the electoral process fell because of the Watergate scandal. Perhaps voters’ trust of elected politicians has been restored. But why, then, are unelected Supreme Court justices – rather than elected members of Congress – making it easier for the wealthy to influence politics?

Everyone knows that money talks. But today, the Supreme Court made it official: political donations are speech. Therefore, they ruled, the right to free speech guaranteed by the First Amendment applies to them too. And that means removing the limits. ….

The Center For Responsive Politics estimates that 0.4% of Americans ever donate more than $200 to political campaigns, and 0.1% of them ever give more than $2500 in a single donation. In the entire country, only 591 donors ran into the aggregate giving limit during the 2012 campaign season, “accounting for only $34.1 million of the estimated $3.1 billion” raised and spent. ….

The danger in the [Supeme Court's] McCutcheon ruling lies not so much with the aggregate donations to particular candidates. In many races, $2600 is comparatively small potatoes and a few extra donations of that size scattered around probably won’t change the system all that much.

The danger comes from the other limit that was lifted: the cap of $74,600 in donations to the kind of political action committee that can give money to candidates. And there’s no secrecy there: if John Smith gives $5000 to the Political Party National Committee, everyone knows it. And when the Political Party National Committee then turns around and cuts a check for $5000 to the Jane Doe re-election campaign, most people can effectively connect the dots.

Now, without an annual limit, a donor can contribute to as many of these organizations as she or he wishes, just as that donor can contribute to more candidates. And that can have a much deeper or broader effect.

Kate Cox, “How To Buy A Politician: What Today’s Supreme Court Ruling Means For Consumers“, Consumerist, 2 April 2014.

Adam Smith on selfish and benevolent affections

Monday, March 31st, 2014

Tim Taylor has written a ‘mini-essay’ on this subject, ending with a reference to the revered Adam Smith:

It’s worth remembering that Adam Smith, the intellectual godfather of economics, reflected on selfishness and economics at the start of his first great work, The Moral Sentiments, published in 1759. The opening words of the book are: “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.” And later in the same chapter: “And hence it is, that to feel much for others and little for ourselves, that to restrain our selfish, and to indulge our benevolent affections, constitutes the perfection of human nature; and can alone produce among mankind that harmony of sentiments and passions in which consists their whole grace and propriety.”  Smith saw no contradiction in thinking about people as containing both selfishness and “benevolent affections,” and most people, even economists, seek a comfortable balance between the two depending on the situation and context.

Tim Taylor, “Does Economics Make You a Bad Person?“, Conversable Economist, 31 March 2014.

solving the problem of inequality

Saturday, March 22nd, 2014

Tim Harford, the FT Undercover Economist, has a four-step solution for the problem of income inequality.

By most measures, and in many countries, income inequality has been increasing for a generation. Some people don’t care, so here’s another way to look at the problem: over the past 20 years, the pre-tax incomes of the poorest 99 per cent in the US grew by just 6.6 per cent after adjusting for inflation. That is a pathetic one-third of 1 per cent per year. Those who aren’t worried about increasing inequality should still be concerned at such widespread stagnation of living standards.

So what is the solution? Here is a modest proposal to fix inequality in four easy steps.

The first step is to be precise. Are we using the Gini coefficient or the share of the top 1 per cent to measure inequality? Wealth, consumption or income? Before taxes and benefits or after?

This last question is often ignored but it makes a big difference. Consider Finland, France and Japan. Looking at pre-tax household incomes, Finland is the most unequal of the lot. But after the tax system has done its work, Finland is the least unequal. ….

The second step is to look at underlying causes rather than symptoms. ….

The third step is to reform redistribution … through the tax system. ….

Step four is to remember the small stuff. Inequality is a consequence of countless policy choices too trivial to trouble finance ministers: whether there are good teachers in most classrooms; whether poorer areas of town are safe at night and have access to affordable public transport; whether toddlers are receiving stimulating childcare; whether the pension system encourages savers without making millionaires out of slick middlemen. ….

Tim Harford, “Four steps to fixing inequality“, Financial Times, 22 March 2014.

There is much more in the full column (free registration required). Highly recommended.

the US slide into socialism

Tuesday, March 11th, 2014

Where is the evidence?

Yesterday’s jobs numbers revealed a shocking truth, at least for those who believe that President Obama is a socialist/communist/Marxist/Alinskyite.

As Floyd Norris at the New York Times points out, government now employs 15.9 percent of all Americans who have jobs. That is the lowest proportion since 2001, and almost a million less people than five years ago. Hardly what you’d expect from a pinko determined to turn the U.S. into a European-style socialist republic.

But the more serious point is that this slide in government employment has come at a time when there remain millions of unemployed people who could use a job.

John Aziz, “The U.S. now has the fewest government workers since 2001“, This Week, 8 March 2014.

I wonder if the definition of government employment includes soldiers, airmen and sailors. Conservatives in the US do not consider them real government employees. If they are included, how much of the decline in government jobs is due to a reduction in the number of Americans in uniform?