Archive for the ‘Political Economy’ Category

economists’ views on UK policy issues

Sunday, April 19th, 2015

UK political parties have issued manifestos in preparation for the upcoming general election. The politicians have had their say. What type of manifesto might we expect from professional economists? Tim Harford, FT ‘undercover economist’, interviewed seven top British economists and asked them what policies they would implement were they in charge of running the country. He found a surprising degree of consensus, possible only because he deliberately ignored economists known to have extreme political views.

My selection of economists was mainstream — no Marxists or libertarians — but arbitrary. There is no pretence of a representative survey here. But there were common threads, some of which may surprise.

Let’s start with the deficit which, if we are to judge by column inches alone, is the single most important economic issue facing the country. Yet with the chance to push any policy they wished, none of my economic advisers expressed any concern about it. ….

Economists have a reputation for being low-tax, free-market champions. Yet none of my panel fretted about red tape, proposed any tax cuts or mentioned free trade. Other untouched issues included the National Health Service, immigration and membership of the EU. Nobody suggested any changes to the way banks are regulated or taxed. ….

So what would the UK look like with my board of economists in charge? We’d have more borrowing and considerably more investment — in housing, in big infrastructure, in science and in green cities. Taxes seem unlikely to fall but they would be rationalised, with a focus on energy efficiency and a transparent taxation of income and housing wealth. Inequality would be in the spotlight.

The economists seem happy to leave the politicians to their usual arguments about the EU, immigration, the price of beer and the problem of tax-dodging. Noting that every party makes similar promises about funding the National Health Service, the economists have let it be.

Tim Harford, “The economists’ manifesto“, Financial Times, 18 April 2015 (metered paywall).

Tim Harford’s ‘board’ contains the following economists: Nick Stern (LSE), Jonathan Haskel (Imperial College, London), Gemma Tetlow (Institute for Fiscal Studies), Simon Wren-Lewis (Merton College, Oxford), Diane Coyle (University of Manchester), John van Reenen (LSE), Kate Barker (author of the 2004 Barker Review of Housing Supply). For details, read Mr Harford’s full column in today’s Financial Times.

the rise and fall of AEI

Tuesday, April 7th, 2015

Journalist David Warsh marks the recent death of conservative economist John Makin (born 1943) by reviewing his positive contribution over three decades to the American Enterprise Institute (AEI). The AEI is a privately funded, conservative ‘think tank’ founded in 1938 and based in Washington, D.C.

In 1984, AEI hired Makin, a University of Chicago PhD, as part of an effort to improve its tarnished image as a serious research institute.

A few years earlier, WSJ editorial writer Jude Wanniski had used a year in residence at AEI as a planform from which to launch his 1978 best-seller, The Way the World Works: How Economies Fail – and Succeed, one of the first in a series of works by various authors that later  would be deemed “neo-conservative.”

With its twin contentions, that personal tax cuts would pay for themselves by boosting growth, and that the Smoot-Hawley Tariff Act of 1930 had caused the Great Depression, the book caused no end of embarrassment among the traditionally conservative economists at AEI.

With the election of Ronald Reagan in 1980, the AEI moved towards the center of the economic debate, hiring Makin, among others. There began in Washington what was, in retrospect, a golden age of consensus.

Today the most peripatetic figure among the AEI’s roster of experts is probably attorney Peter Wallison ….

The basic cause of the 2008 financial crisis, he [Wallison] argued [in 2011], was simple. It was government housing policy, particularly the two giant government- sponsored enterprises, Fannie Mae and Freddie Mac,that bought mortgages from banks, savings and loan associations and other lenders,

A new book by Wallison, Hidden in Plain Sight: What Really Caused the World’s Worst Financial Crisis and Why It Could Happen Again (Encounter, 2015) extends the argument that that government policies were solely to blame ….

No sensible analyst thinks that political pandering to poor people is a sufficient explanation of the crisis. Probably not since Wanniski’s The Way the World Works has the gap been so great between a non-economist writing for a think-tank and the relevant community of professionals. John Makin stayed the course, remained well within the limits of matters on which experts can be expected to legitimately disagree. AEI has gone back to cranks.

David Warsh, “Back to Cranks“, Economic Principals, 5 April 2005.

Branko Milanovic on Adam Smith on inequality

Sunday, April 5th, 2015

Serbian-American economist Branko Milanovic has written a very interesting blog on Adam Smith’s opinion of those who occupied the top of the food chain in the 18th century. (Spoiler alert: Smith, unlike many of his professed admirers today, was no friend of the wealthy.)

[In Adam Smith’s 1776 treatise] “The Wealth of Nations” …, not only are the rich taken to task for their vanity, conceit, and concern with “trinkets, baubles and trifles”, as they were in [his earlier book] “The Theory of Moral Sentiments”, but … the origins of their fortunes are exposed and often found in spoliation, monopoly and “conspiracy against the public”, as in the famous passage:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.  It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary. (WoN, Book I, Chapter X)

Just think of Davos, Bilderberg and the Trilateral Commission.

Similarly, the rich civil servants never forget to overpay themselves,

The emoluments of offices are not … regulated by the free competition of the market, and do not, therefore always bear a just proportion to what the nature of the employment requires. They are, perhaps in most countries, higher than it requires; the persons who have the administration of government being generally disposed to reward both themselves and their immediate  dependents rather more than enough. (WoN, Book V, Chapter 2)

Now think of many governments across the world, from Azerbaijan to Zimbabwe, and international organizations from the World Bank to World Trade Organization.

And what is government?

Civil government … is in reality instituted for the defence of the rich against the poor, or of those who have some property against those who have none at all. (WoN, Book V, Chapter 1)

The last statement … is so similar to Marx and Engels’ one from the “Communist Manifesto” (government as “a committee for managing the common affairs of the bourgeoisie”) to be  practically undistinguishable.

Branko Milanovic, “Adam Smith, income inequality and the rich“, Global Inequality, 30 March 2015.

Branko Milanovic (born 1953) is currently visiting professor at City University of New York Graduate Center. He was formerly lead economist in the World Bank’s research department.

Milanovic’s blog post was stimulated by a 2010 publication of Harvard economist Amartya Sen:

Amartya Sen, “Adam Smith and the contemporary world“, Erasmus Journal for Philosophy and Economics 3:1 (Spring 2010), pp. 50-67.

I read Sen’s paper with great interest, and hope to blog on it sometime in the near future.

modern dictators

Sunday, March 22nd, 2015

Economist Sergei Guriev and his co-author, political scientist Daniel Treisman, examine new forms of dictatorship that are based on manipulation of information rather than mass violence. The full Working Paper “How Modern Dictators Survive: Cooptation, Censorship, Propaganda, and Repression” (March 2015) can be downloaded here. A summary can be viewed at the link below. Both versions are ungated, so can be accessed without registration or payment of fees.

Dictatorships are not what they used to be. The totalitarian tyrants of the past – such as Hitler, Stalin, Mao, or Pol Pot – employed terror, indoctrination, and isolation to monopolise power. Although less ideological, many 20th-century military regimes also relied on mass violence to intimidate dissidents. ….

However, in recent decades new types of authoritarianism have emerged that seem better adapted to a world of open borders, global media, and knowledge-based economies. From the Peru of Alberto Fujimori to the Hungary of Viktor Orban, illiberal regimes have managed to consolidate power without fencing off their countries or resorting to mass murder. Some bloody military regimes and totalitarian states remain – such as Syria and North Korea – but the balance has shifted.

The new autocracies often simulate democracy, holding elections that the incumbents almost always win, bribing and censoring the private press rather than abolishing it, and replacing comprehensive political ideologies with an amorphous resentment of the West. Their leaders often enjoy genuine popularity – at least after eliminating any plausible rivals. State propaganda aims not to ‘engineer human souls’ but to boost the dictator’s ratings. Political opponents are harassed and defamed, charged with fabricated crimes, and encouraged to emigrate, rather than being murdered en masse.

Sergei Guriev and Daniel Treisman, “The new authoritarianism“, VoxEU, 21 March 2015.

Sergei Guriev is Professor of Economics at Sciences Po-Paris. Daniel Treisman is Professor of Political Science at UCLA.

return of Luddite anxiety

Saturday, March 14th, 2015

FT ‘undercover economist’ Tim Harford has written an excellent column on resurgence of ‘Luddite anxiety’. The Luddites were English textile workers who protested from 1811-17 by smashing new power looms that threatened to destroy skilled jobs.

The full column is recommended reading. Here are two excerpts that caught my eye:

[W]e can all see … that technology has made us richer while employment is as high as ever. (The least appreciated job-creating invention may well have been the washing machine, which helped turn housewives into women with salaries.)

and

[T]he Luddites weren’t idiots who thought that machines would destroy jobs in general; they were skilled workers who thought that machines would devalue their specific jobs and their specific skills. They were right about that, and sufficiently determined that stopping them required more than 10,000 troops at a time when the British army might have preferred to focus on Napoleon.

Tim Harford, “Man v machine (again)“, Financial Times,14 March 2015 (metered paywall).

 

Fukuyama on Putnam on inequality

Sunday, March 8th, 2015

Stanford political scientist Francis Fukuyama reviews Harvard political scientist Robert Putnam’s latest book: Our Kids: The American Dream in Crisis (Simon & Schuster, 2015).

[M]uch of the current debate about inequality has a strangely abstract quality, focusing on the excesses of the 1 per cent without really coming to terms with what has happened to the American middle class over the past two generations. Into this void steps … Robert Putnam, with a truly masterful volume that should shock Americans into confronting what has happened to their society. ….

The data in Our Kids parallel many of the findings in Charles Murray’s 2012 book Coming Apart: The State of White America 1960-2010. Putnam, however, does not have Murray’s libertarian blinders and recognises that government policies such as the Morrill Act of 1862 and the 1944 GI Bill were critical in reducing inequality in earlier periods of American history. The final chapter of Our Kids focuses on policy solutions, and runs through a familiar list of interventions ….

Putnam points out [though] that schools have only a limited impact on life outcomes when compared to that of friends and family …. Putnam compares two high schools in California’s Orange County, one high-performing and one dysfunctional, where the villain is not per-pupil spending but the neighbourhoods in which the schools are located. Residential sorting shuts off poorer communities from any contact with richer ones and is the underlying cause of low educational outcomes. ….

In Bowling Alone (2000), he worried that a variety of indicators showed a steady decline in social capital and trust among Americans. ….

Our Kids picks up where Bowling Alone left off, showing that while the decline of social capital and trust has cut across all economic classes in America, it has been much more severe among the less educated. Social isolation and distrust contribute heavily both to poor job prospects and lack of political participation within this group.

Francis Fukuyama, “‘Our Kids’, by Robert Putnam“, Financial Times, 7 March 2015 (metered paywall).

Fukuyama (born 1952) is best known for his book The End of History and the Last Man (1992).

Putnam (born 1941) is a decade older than Fukuyama. His much celebrated (and criticized) Bowling Alone: The Collapse and Revival of American Community (2000) was an expanded version of a 1995 essay, “Bowling Alone: America’s Declining Social Capital”.

lobbyists and sex workers

Saturday, February 28th, 2015

This post is not about lobbyists’ payment to sex workers for services rendered (nor vice versa). Rather, it is about difficulties both groups face in legal collection of fees for services rendered.

Economist John Kay explains that only five years ago did the US Supreme Court begin to classify lobbying as a remunerative activity worthy of judicial protection. Previously, the court ruled that an agreement to lobby for pay, like an agreement to provide sex for pay, is “pernicious in its character”, so unenforceable. Sex workers, presumably, are still unable to appeal to courts for collection of unpaid bills.

[In 1874] the [US] Supreme Court … [ruled that a] contract to lobby government … was contrary to public policy and hence, like an agreement to sell sex, unenforceable in the courts. Paid lobbying, said Mr Justice Swayne, was “pernicious in its character”. But this was only the beginning of his denunciation. “If any of the great corporations of the country were to hire adventurers to procure the passage of a general law with a view to the promotion of their private interests,” he thundered, right-minded men “would instinctively denounce the employer and employed as steeped in corruption and the employment as infamous”. ….

But in Citizens United in 2010, the same court held that the expression of views you were paid to hold was no longer “an infamous employment, steeped in corruption”, but an activity deserving of the protection awarded to free speech under the First Amendment. That contentious decision probably did not, in the end, seal the outcome of the 2012 election — though the tide of political donations that it unleashed will surely decide a presidential contest before long. Americans may look back on Justice Swayne as the wiser judge. “If the instances (of paid lobbying) were numerous, open, and tolerated,” he predicted, “they would be regarded as measuring the decay of the public morals and the degeneracy of the times.”

John Kay, “What did the US Supreme Court have to say about Sir Malcolm Rifkind in 1874?“, Financial Times, 25 February 2015 (ungated link). Published earlier in the FT with the title “Good lobbyists augment legislators’ work”.

Noah Haynes Swayne (1804-1884) was a Republican politician, the first Republican to be appointed as a justice to the US Supreme Court. He was in office from 1862 to 1881.

In response to Mr Kay, the Deputy Chief Executive of the Chartered Institute of Public Relations (London, UK) describes lobbyists’ service to clients as legitimate, positive and useful.

John Kay … draws on another age to summarise the problems of the present and denigrates the modern lobbying industry, which is a legitimate business service and a positive and useful part of our democracy.

Modern lobbyists service their clients and employers by helping them understand legislative and political processes and to create ethical and achievable objectives within them. They are highly skilled at introducing information into political dialogue in the most effective way to assist in the achievement of these objectives. Good lobbyists know their interests are best served by enabling legislators to exercise their critical judgment based on a range of relevant, balanced information.

Phil Morgan, “Good lobbyists augment legislators’ work“, letter to the editor, Financial Times, 27 February 2015 (metered paywall).

communicating with stories

Saturday, February 28th, 2015

 

FT columnist Simon Kuper writes that it is difficult to sell political ideas without a story.

The best story (as the authors of the New Testament knew) is about attaining paradise. In politics, the right traditionally locates paradise in the past. The Conservative MP Laura Sandys once told me her party instinctively tended towards “a mythical view of the 1950s, when everyone had a rose arch in the garden, the children came home smiling from school, and the father from his secure job at 5.30. There was no crime or antisocial behaviour, and everyone respected authority.”

The left used to locate paradise in the future: think of Bill Clinton’s “the boy from Hope”, or the British Labour party’s fabulously unimaginative “Forward, not back” of 2005. Since the financial crisis the left has lost its optimism, so that the US Democrats now locate paradise in the Clintonian 1990s ….

Messianic movements locate paradise in the afterlife. That is Isis’s great story: ditch your PlayStation, come to Syria, build the caliphate, die with your place in history assured and collect your virgins in heaven. ….

If you want to be heard, you need a story. But the corollary is: if you don’t want to be heard, don’t tell a story. Be boring. Banks and Brussels both do that brilliantly.

Simon Kuper, “How to make people listen“, Financial Times, 28 February 2015 (metered paywall).

To read the rest of Mr Kuper’s column (highly recommended), click on the link above.


 

the human capital controversy

Sunday, February 22nd, 2015

Back in the 1960s there was a famous debate between economists (led by Joan Robinson and Piero Sraffa) of the University of Cambridge in England and economists (led by Paul Samuelson and Robert Solow) of MIT in Cambridge, Massachusetts. The debate, known as “the Cambridge capital controversy“, was over measurement and aggregation of physical capital. The Cambridge (England) economists argued that aggregate physical capital could not be measured without reference to the rate of return on capital. Cambridge (Massachusetts) generally agreed that the Cambridge (England) side won, though many professors of economics continue to teach aggregate production functions and economic growth theory as though the debate never took place.

A similar debate is now taking place, over human rather than physical capital. Noah Smith (HT Mark Thoma) provides a nice overview for those are interested.

Is “human capital” really capital? This is the topic of the latest econ blog debate. Here is Branko Milanovic, who says no, it isn’t. Here is Nick Rowe, who says yes, it is. Here is Paul Krugman, who says no, it isn’t. Here is Tim Worstall, who says yes, it is. Here is Elizabeth Bruenig, who says that people who say it is are bad.

Noah Smith, “Is human capital really capital?“, Noapinion, 21 February 2015.

Noah Smith offers an alternative view: human capital requires owners to work (give up leisure time) to obtain a return from it, so the more leisure is valued relative to other things, the less valuable human capital is. This will be different for each person. In consequence, you are “entitled to your own modeling conventions and definition of terms. So whether human capital is capital is up to you.”

This is an interesting, complex debate. I am still thinking about it but, as TdJ readers might predict, I am most persuaded by the arguments of Carleton University economist Nick Rowe. Before turning to Branko Milanovic and Nick Rowe, however, I would like to emphasize two points that are not always appreciated by participants in this debate. First, financial capital is not capital in an economic sense. Nick makes this point clearly, but others confuse financial capital with physical capital. Financial capital – stocks, bonds and the like – are just pieces of paper, IOUs. They are claims of lenders, and the loans may even have been made for the purpose of consumption rather than investment.

Second, even if human capital is a useful category of income-producing assets (and I think it is), it is as difficult to measure as physical capital is. In fact, it is probably even more difficult to measure. This does not really matter though, as it is impossible to measure aggregate assets of either asset apart from (only in theory!) the present value of the future income the assets produce. The problems of measurement of human capital are  very similar to the problems of measurement of physical capital. For example, if I purchase an automobile which I use for pleasure, and also – as an Uber driver – to generate income, part of the purchase represents investment (addition to physical capital) and part is consumption. Similarly, part of the expense of schooling represents investment (for the purpose of earning more income than I would without skills) and part is consumption (the satisfaction of obtaining knowledge and the ability to better understand the world in which I live).

There is much, much more at the links above. Bloggers will no doubt continue to debate this issue for weeks and months (years?) to come. Here, to get you started, are brief quotes from Branko Milanovic (on the ”No’ side of the debate, and from Nick Rowe (on the ‘Yes’ side, the one that I support):

If “human capital” and “real” capital are the same thing, how can there be a conflict between labor and capital?  If profits and wages are the same thing, why should we fight about distribution? You have your form of capital (which just happens to look like labor), and I have mine, which just happens to look like T-bills and stocks.

Branko Milanovic, “On ‘human capital’ one more time“, Global Inequality, 19 February 2015.

 

What we call “labour” is as much capital as labour. The wages on “labour” are as much a return to capital as they are a return to raw labour.

Some labour needs very little investment to make it productive; other labour requires a lot. Some labour gives a high return on investment; other labour gives a low return. It’s all different.

“Human capital” is not a synonym for “labour”. It tells us something important about the investment needed to make labour productive.

Nick Rowe, “Human Capital” and “Land Capital“, Worthwhile Canadian Initiative, 14 February 2015.

Once again, I encourage you to click on the links above, to get a feel for the full debate.

what is “sharing economy”?

Saturday, February 21st, 2015

It is an increasingly important portion of the “market economy”, providing consumers with goods and services, for a price.

[A]lthough “the sharing economy” is a widely used term, broadly meant to describe person-to-person sharing of resources, most economists I’ve run into gag on the term. Companies like Uber drive you where you want to go, for a price. Companies like Airbnb let you stay in someone’s home or apartment, for a price. eBay had almost $1 billion in profits last year. This isn’t “sharing.” It’s perhaps better called the “finding productive uses for underutilized capital” economy.

Timothy Taylor, “Who are the Uber Drivers?“, Conversable Economist, 18 February 2015.