If this is “secular stagnation”, I want my old job back

by Daniel on November 21, 2013

“When you write down all the good things you should have done, and leave out all the bad things that you did do, that’s memoirs” – Will Rogers

“Secular stagnation” is doing the rounds as a theory of why we’re in the mess we’re in, after this Larry Summers talk, which Paul Krugman is claiming basically summarises ideas that he’d also been talking about for the last few years. I am not sure about the extent to which anyone can claim priority on this though – as Krugman says, Summers is basically giving a clear expression of a set of ideas which have been ubiquitous for a long time, to the extent that I was making jokes along that line, ten years ago. I will follow Krugman in saying that I also had been thinking about a similar explanation of things since 2009, set out in cursory form here and in greater detail here[1].

Basically, the thesis is that since about the mid-1990s, it has been the case that it has only been possible to achieve anything like full employment in America during periods when the private sector has been chronically over-consuming and increasing its debt levels. The “natural rate of interest” consistent with full employment has been consistently negative all that time, and since there are good theoretical reasons[2] to presume that the natural rate of interest has some relationship to the natural rate of economic growth, this might be saying something rather depressing about the underlying growth potential of the developed world’s economy. And so on, and so forth.

Now it’s an interesting question, although not one on which I find myself with anything to say, as to whether we are stagnating secularly[3]. But the thing I do want to address is that, in the way in which the issue is being discussed historically, there is a lot of rewriting of the recent past.

Right from the start, you can see that there has been a lot of semantic drift in the word “bubble”. From having once referred to a specific model of how prices could depart from fundamentals in a rational expectations model, to referring to any general inflation of securities valuations, Summers and Krugman appear to be using “a succession of bubbles” to refer to “any period during which personal gross debt increased based on rising asset values”. As an opponent of linguistic inflation, I’m already prejudiced against this way of thinking of the economic history of the last two decades. But in describing the growth in debt as if it was a purely exogenous phenomenon, due to nothing other than animal spirits and irrationality, there’s a really dangerous kind of mistake being made.

It was policy! For more or less the entire period in question (call them “The Greenspan Years”), the growth of consumer spending, financed by increased consumer debt, was the main instrument of policy. I suppose I might be misremembering but I really don’t think I am, and I was there and I read a lot of FOMC minutes. The US authorities wanted to manage aggregate demand, but during the entire period, the fiscal authorities had either a deficit reduction target (Clinton) or a massive unfunded war (Bush), and so they made the goal of interest rate policy the management of consumer demand. This consumer demand was financed by debt, but nobody paid attention to this, in my opinion largely because the idea of stock/flow consistency didn’t really feature in the economic models they were using.

So here’s my version of the economic history of the pre-crisis years, and I suggest it’s at least as consistent with the facts as the “secstag”[4] hypothesis and has the advantage of having significantly fewer unexplained factors in it:

  • China starts to industrialise and NAFTA is passed.

  • This is experienced in the US economy as a step change in the marginal propensity to import, and a step change in the import component of investment (ie, outsourcing).

  • It is decided, for lots of reasons (including geopolitical ones), and quite possibly correctly, that Chinese industrial policy ought to be accommodated by domestic exchange rate policy

  • So there is a structural shortage of domestic demand

  • Which is probably exacerbated by the distributional effects of Chinese imports and NAFTA

  • For lots of reasons, but mainly the Clinton deficit target and the Bush war-financing constraint, fiscal policy is not used to make up the shortage of domestic demand

  • The distributional effects are also not addressed by redistributive taxation because hahaha are you kidding me

Policy is now in a box. The Federal Reserve has got a basically deflationary economy to deal with, and a fiscal policy constraint that is non negotiable. It has to set policy to deal with this demand shortfall. This gives you all of the observables of the “secular stagnation” hypothesis without having to take any particular position on the (on the face of it unrealistic, remember the Internet?) question of whether the 1997-2005 period was one of technological stagnation. Back to the narrative.

  • Interest rate policy is set to manage aggregate demand

  • Because the import intensity of investment spending has gone through the roof, domestic consumption demand is much more sensitive to interest rate policy than domestic investment demand

  • So, de facto, consumer spending and “consumer confidence” become the intermediate policy variables of interest

  • American consumers increase their consumption spending by dissaving from their net wealth

  • But the wealth in question is overwhelmingly housing wealth, so dissaving means taking on more debt

  • The Bankers (I bet you were wondering when we’d get on to them) accomodate this policy goal

  • But the fact is, you can’t get to an excessive debt ratio by responsible means, so the debt ratios of the US personal sector are in fact underpinned by a snake’s nest of silly and in many cases crooked financial instruments.

Oh yes, and to put the final cap on it, Alex Harrowell reminded me the other night that, as Doug Henwood demonstrated, in the USA the majority of that consumption growth was actually healthcare, so the consumption was basically non-discretionary in nature. Nice touch.

My point here is that none of this was unknown at the time. The US economic policy structure was aware that they were accommodating China and NAFTA, and aware that the tool of demand management was consumer spending. They might or might not have been aware that the consumer spending was financed by borrowing against housing wealth, but if they weren’t, they thundering well should have been. They got a structural increase in personal sector debt because they wanted one and set policy in order to create one. There’s no good calling it a “bubble” or a “puzzle” now that the shit’s hit the fan.

And so, welcome to the world you made guys. These are the consequences of globalization, entirely predictable and in fact predicted (by Dean Baker, among others). The final conclusion is probably the same as if it was a mysterious secular stagnation; fiscal policy. But the need for fiscal policy is such an obviously correct and obvious fact that more or less any economic argument is going to end up there unless it has major logical or accounting errors. But really – there is no need to tell ourselves ghost stories about animal spirits. There’s no puzzle here. We got this outcome because we wanted it.


[1] As you can see, that link goes to the blog which I decided to make non-public, because people were being nasty to me. I’ll put up the text of the post in question on CT in a short while.

[2] Of course, conversely, someone who was pernickety about their Keynes might note that there are very good theoretical reasons to believe that there is no reason at all to suppose that the equilibrium rate of interest in the market is going to be the same number as the full employment rate of interest. The case in which the two coincide is a very “special” case; it’s precisely the fact that there’s no reason to suppose they will which caused Keynes to write his “General Theory” and indeed to give it that title.

[3] Doesn’t look like a proper word but I think it is.

[4] Oh dear.

{ 261 comments }

1

Thomas Lumley 11.21.13 at 9:06 pm

“that link goes to the blog which I decided to make non-public” causing a number of us to have a sad.

2

geo 11.21.13 at 9:13 pm

We got this outcome because we wanted it.

Assumes a functioning democracy. Better: “We got this outcome because they wanted it.”

3

Daniel 11.21.13 at 9:18 pm

I am using “we”, as always, to refer to the economic policy community, and taking my share of collective responsibility while also reminding people out of the corner of my mouth that I thought it was a stupid policy at the time and repeatedly said so.

4

Robert Waldmann 11.21.13 at 9:26 pm

1. A wish is not a plan. Greenspan, Clinton and Bush might have wished for consumers to borrow and spend, but they had no way of forcing people to. A wish for high demand doesn’t cause a nationwide housing bubble, nor did it force Fuld or Greenberg to bet their firms on the safety of RMBS.

2. I don’t get your claims about fiscal policy. It wastight under Clinton and loose under Bush. War spending stimulates (in fact it is the number 1 classic instrument for exogenous fiscal stimulus). Also “Reagan showed deficits don’t matter” -R Cheney. The wars didn’t prevent further tax cuts. There is no evidence that US Republicans have any more respect for the Federal intertemporal budget constraint than for any otherconstraint.

3. Your etymology isincorrect. The word bubble was used long before there was a literature on rational bubbles. Have you heard of the “South Sea Bubble” ? Older people associate the word with Kindleberger. The original meaning is asset price increases caused by previous asset price increases and irrational extrapolation. The US equity bubble of the 90s and housing bubble of the 00s fit the classical definition, which had long been in use when Cournot invented the rational expectations assumption.

5

dsquared 11.21.13 at 9:39 pm

On 1), true they didn’t actually force people to hear up on housing, but it was the line of least resistance, and they knew this and it was an intended outcome of their policy. If policy had been bad for Wall Street profits during that period, you can bet that they would have found another way to achieve their goals.

On 2), war (particularly overseas war) is a very inefficient way to do fiscal policy, and it was pretty clearly nothing like enough to offset the negative distributional effects of real wage stagnation. The tightness or looseness of fiscal policy needs to be measured against demand conditions.

On 3) fair point, but the technical sense is IMO entrenched in economics and in any case my point here is that the outcome of the Greenspan years can’t be seen as a bubble in any sense at all – it was a locally rational response to the policy environment.

There’s more on this in my “Global bezzle” post, which I’ll put up soon (although you might have already read it on the private blog and presumably didn’t agree with it then either)

6

alkali 11.21.13 at 9:40 pm

Is the policy prescription here redistribution (via progressive taxation and otherwise) and public investment (infrastructure, R&D, etc.)?

7

dsquared 11.21.13 at 9:48 pm

Basically yes probably. You could do the same fiscal policy with tax cuts but my guess is that would be much less efficient

8

mpowell 11.21.13 at 10:05 pm

When you say fiscal policy, do you mean the size of the deficit? Because increasing the amount of redistribution through tax policy (while holding the deficit constant) does not obviously address the issues as you describe them. Or maybe it does in your opinion and could you please then explain?

9

Theophylact 11.21.13 at 10:08 pm

I certainly hope it wasn’t my comment about your taste in beer that caused you to privatize your blog, but I do miss it.

10

Daniel 11.21.13 at 10:21 pm

Because increasing the amount of redistribution through tax policy (while holding the deficit constant) does not obviously address the issues as you describe them.

Well, partly it does given sensible assumptions about marginal propensities to consume, but also there’s such a thing as the balanced budget multiplier. But in general, I think that fiscal policy should have been more demand-oriented in the 1990s, and more focused on dealing with the effects of real wage stagnation in the 00s. Which would have meant bigger deficits in the 90s and (as Robert Waldman says above), similar or smaller but less horribly inefficiently spent deficits in the 00s

11

geo 11.21.13 at 11:07 pm

Daniel @3: I am using “we” … to refer to the economic policy community

I wasn’t. I was referring by “they” to the people who decide on economic policy.

12

hix 11.21.13 at 11:25 pm

How nice of America to go through all that pain to accomdate Chinas rise.

Are you kidding me?

13

Patrick C 11.21.13 at 11:40 pm

Aren’t the secular stagnation folks arguing that it is caused by changing demographics due to baby boomer aging and retirements more than a reduced rate of technological growth?

14

reed 11.22.13 at 12:18 am

Sigh, the Internet and mobile communications were not fantasies; in the United States they were made manifest thanks to one trillion dollars of investment that in the aggregate returned capital with a small but non trivial profit. Forget the stock market going up and down: the point is that this was a huge, productive, private sector driven infrastructure spending program the benefits of which are realized daily and will be so enjoyed for decades to come.
The equivalent now would be national broadband and a replacement of the carbon-based power platform with efficient, cleaner generation, distribution and consumption.
A commitment to regulate to these twin ends would put an end to the talk of secular stagnation. I said, regulation.

15

Matt 11.22.13 at 12:53 am

This sounds like Rajan’s theory as well, if you want to speculate about pedigree. He wrote a book about it, Fault Lines, and also a Foreign Affairs article summarizing the book.

Also, re linguistic drift: “securities” shouldn’t be used interchangeably with “assets”; they are a subset of assets. Mortgages and houses, for example, are not securities.

16

Michael Pollak 11.22.13 at 1:11 am

Do you have any link to The Time When People Were Being Nasty To You? I missed that part and it sounds interesting.

17

Main Street Muse 11.22.13 at 1:24 am

Secular stagnation? Didn’t Lloyd Blankfein tell us this was God’s will?

“Basically, the thesis is that since about the mid-1990s, it has been the case that it has only been possible to achieve anything like full employment in America during periods when the private sector has been chronically over-consuming and increasing its debt levels.”

Since Reagan, wages have remained stagnant for the majority of Americans – health care costs have risen. When policy focuses on enhancing the pockets of the 1% a consumer-driven economy will have to rely on debt. Bit of a pickle!

18

david 11.22.13 at 1:26 am

It was a “bubble” in the sense that the “snake’s nest of silly and in many cases crooked financial instruments” was not under any particular pressure to be discovered, a la Galbraith’s ‘bezzle’. If it had been harder to persuade households to dissave, then the interest rate would have been slashed even more steeply, and more of the loans made toward corporate investment instead of residential construction.

19

Peter T 11.22.13 at 1:30 am

D2 may be right at the macro level, but that does not rule out lots of stupidity. Never mind the ninja loans – MERS drove a truck though 300 years of settled law, for the sake of some relatively piddly amount of fees. Designed and delivered by people who either had law degrees or had ready access to free legal advice on any scale needed. This is right up there with Kaiser Wilhelm levels of stupid. One may take the wrong road when confronted with a painful sociopolitical dilemma, but one does not have to mine the bridges one is crossing en route.

20

christian_h 11.22.13 at 2:14 am

Thanks Daniel, I think it really is important to put some agency into the picture. I am not sure I agree with the reasons you give for why a policy of debt-driven consumer demand was implemented – I’d mention the tendency of the rate of profit to fall here (although I suppose you could say that this was laos behind the drive to open China to US-structured capitalism in the first place, and there was a price to pay for it) but I agree with the thrust of this. It is generally interesting to me how mechanistic much of modern economics is (animal spirits may be added to the neoclassical model, but the state and its actions are mysteriously absent).

21

Asteele 11.22.13 at 2:15 am

What scares me is it turns out that Ross Perot may of been right.

22

David Newcomer 11.22.13 at 2:41 am

With regard to the formation of the snake’s nest this was interesting:
http://www.zerohedge.com/news/2013-11-20/course-empire-retrospective-us-housing-crisis

23

bad Jim 11.22.13 at 3:58 am

The missing fiscal policy represents a lot of infrastructure that could have been built, utilities undergrounded, bridges upgraded, rapid transit, many of the things one takes for granted in Europe, just for starters. Early education and child care. Energy efficiency and sustainable power generation. Remediation of environmental degradation. There was never a shortage of urgent needs, just an unwillingness to spend money on them.

24

Jonathan 11.22.13 at 4:09 am

Punctuation goes inside the quotations, loser.

25

Clay Shirky 11.22.13 at 4:09 am

Per this and your earlier post arguing that it makes no sense to separate the mortgage from the telecom and dot com bubbles, I am reminded of this:

Recession-Plagued Nation Demands New Bubble To Invest In
http://www.theonion.com/articles/recessionplagued-nation-demands-new-bubble-to-inve,2486/

Quoth The Onion:

“‘The U.S. economy cannot survive on sound investments alone,’ Carlisle added.”

26

Rakesh Bhandari 11.22.13 at 4:52 am

Summers was scooped by the old Onion headline: “Economy headed for another recession. Another Bubble Needed” Something like that. Oops! I see that Shirky just referred to it.

I thought Summers basic idea was quite simple: loose monetary policy has not been inflationary because even though it has indeed created bubbles in commercial real estate, high tech stocks and then residential real estate from the early 1990s to 2008, the real economy was operating so below its capacity that this additional demand only brought the economy closer to full employment levels.

I don’t think there is a lot of semantic inflation in referring to the S&L crisis, the Nasdaq imposition, the MBS bonfire as bubbles.

Why has the real economy suffered a secular stagnation?

Low population growth (Alvin Hansen redux; may have been the explanation that Summers was hinting at)

High debt levels now discourage new investments (Minsky)

The marginal efficiency of capital is depressed as a result of low output/capital ratios (classical Marx)

or new investments are not robust given that it makes little sense to add additional capacity given the weakness of final demand due to the upward redistribution of income (classic underconsumptionism/social democracy)

27

mclaren 11.22.13 at 7:03 am

Left out of all this seem two big sea changes in the global & American economy since the 1980s. The first sea-change occurred when the Reagan administration & congress revoked usury laws in response to the Volcker’s sky-high interest rates designed to kill inflation. Volcker’s rates did shut down inflation. But the usury rates never got re-imposed. Today, because of legislation in 1982, it’s legal in most states to charge as much as 200% or 300% interest (depending on the state) and predatory loan storefront shops take full advantage of this. Lest anyone imagine predatory loans are a marginal business off to the side somewhere, bear in mind that GE’s financial division, which is essentially a predatory loan operation, now accounts for 70% of the company’s profits. Predatory loans are not a small business. They are the central business of a lot of very large corporations, like CitiBank and Chase and GE.

Never before in American history has there been, as far as I know, an era in which the inflation was below 2% but it was perfectly legal to charge 35% on regular credit cards and in excess of 200% on title loans or payday loans. The only organizations that used to charge 35% interest rates in a low-inflation environment, as far as I know, were the mafia. Joey Bent-nose and his boys would charge you that kind of interest in a back alley — but it was never legal.

Ronald Reagan and his pet congress made loansharking legal. We now have the spectacle of legal loansharking extended to college loans, which cannot be legally discharged by bankruptcy. This is loansharking on a scale never dreamed of even by he mafia. A kid who graduates college with a $20,000 debt who defaults can find the amount s/he owes suddenly ballooning to $100,000 or more — and can’t discharge the debt through bankruptcy. This is something wholly new in American history.

The sheer amount of wealth now getting sucked up into loansharking is stupefying. Student college debt now exceeds total outstanding credit card debt — and the credit card debt is owed on cards that typically charge 35% interest or more. That’s a staggering amount of wealth getting sucked into a black whole of loansharking. If any economist wants to figure out why aggregate demand has fallen off a cliff, you can start there.

The second point is that with the fall of communism in 1991 and the opening of China to capitalism in 1989, you effectively doubled the available global workforce. This has had the effect of global wages you’d predict: it’s classic wage arbitrage. The wages of the lowest-paid Chinese peasants skyrocket to 50 cents an hour while the wages of the middle class in the developed world plummet.

Once again, no mystery.

I don’t hear anything in your tale of economic transformation about 35% predatory interest rates in a 1.5% inflation environment, and I also don’t hear anything from you about how the collapse of the Soviet Union unleashed hordes of Soviet scientists to work for peanuts competing with first-world engineers.

Richard Freeman has written about the explosive expansion of the global labor market between 1989 and 1991 in his paper “The Great Doubling: The Challenge of the New Global Labor Market,” 2006, available at his U. of Berkeley website here.

28

Belle Waring 11.22.13 at 7:14 am

Robert Waldman: whatever sort of disagreement you intend to have with my universally beloved cob-logger here, I think that you will find “[h]ave you heard of the ‘South Sea Bubble’?” to be in a class of questions that serve you ill, generally. The adjacent objection was not without merit! Just…just don’t, though. Imagine I am a helpful Park Ranger warning you away from a path which has collapsed into a pit of sulfuric acid. “Head this way, in the direction in which you proceed on the basis of a belief that Daniel here is totally wrong about everything, even what color his underpants are today, but nonetheless he is quite a clever fellow–an animal-cunning type of thing, prolly–and has so, so for fucking sure stuck his nose into Extraordinary Popular Delusions and The Madness of Crowds at some point.” Totes serious and amicable, friend. I am by chance full of love for my fellow man at this moment, because I am listening to Duran Duran’s “Last Chance on a Stairway.”

29

Chris Bertram 11.22.13 at 7:24 am

But the fact is, you can’t get to an excessive debt ratio by responsible means, so the debt ratios of the US personal sector are in fact underpinned by a snake’s nest of silly and in many cases crooked financial instruments.

Which in turn are made possible by the willingness of (parts of) the economics profession to argue that all uncertainty can be represented as risk and that, hence, all bad outcomes can be insured against.

30

David Khoo 11.22.13 at 7:50 am

Currency manipulation and financial repression by China and other East Asian nations probably belongs in this narrative too, by exacerbating the structural shortage of domestic demand. The US was considered the “consumer of last resort” for decades by the rapidly industrializing economies of Asia for a reason, after all.

31

Frank Shannon 11.22.13 at 8:41 am

In favor of the secular stagnation theory I don’t know why no one has mentioned that we hit peak oil in 2005.

32

Zamfir 11.22.13 at 8:41 am

Shouldn’t it be a prime function of the financial sector to determine when debt ratios are excessive, and price a further increase accordingly? If that had happened, the mechanism describe here would have encountered more pushback.

Or is the argument that given enough pressure to increase the debt ratio, the financial sector will naturally come up with bezzles to hide the risks?

33

Pete 11.22.13 at 9:43 am

determine when debt ratios are excessive

Excessive in whose opinion? But this is basically what happened in the mortgage/property bubble. $80k of debt on a $100k house is not excessive. If the value of the house falls to $70k, it’s not only excessive but underwater – but you’ve already lent the money.

34

bunbury 11.22.13 at 9:46 am

If I have this right Summers and Krugman are saying that things haven’t gone too well recently, 99% of US and EU citizens must agree, and that there doesn’t seem much that economic policy could have done about it and therefore there is a secular trend that is not a mere policy failure. This post on the other hand is describing a number of points where there were decisions made that might have had an impact. I think that’s clearly right but I still wonder how much could have been done and what things would look like if they had.

My first observation is that this is a local phenomenon. Most of the world has not stagnated. If the world is a Christmas cake, there is more cake and more icing but no more marzipan. That’s feels pretty rough if, as I do, you live in a corner of the world that is mostly icing and marzipan but a global governor could not be shedding too many tears.

Nevertheless I would like my policy makers to act in my interests so I am interested in what they could have done differently so I have some questions.

First must be what would the economy look like if there had been more stimulative fiscal policy over the last 20 years? Really really large public debts? Without being a paranoid hawk I wonder if that does not pose problems even if merely predicating an interest rate environment along Japanese lines.

Secondly would the effective policy have been to avoid NAFTA and improved trade with China? A Dani Rodrik hypothesis for the West?

A related question: was there a route through this change with better outcomes for the marzipan layer that would not have slowed things for the cake layer?

35

Zamfir 11.22.13 at 10:19 am

“Excessive in whose opinion?”

Excessive as used in DD’s post, where he says that you cannot get excessive debt by responsible means. I presume that ‘excessive’ in this context means something like ‘will eventually lead to financial crashes like we had a few years ago’.

If I get it right, DD’s view is that central banks (combined with foreign trade dynamics) were following a policy where some parts of the economy had to run up debts. Which parts depended on the specific of the local situation, and in many places this turned out to be consumers increasing their mortgages.

And this was ‘excessive’ in the sense that many borrowers eventually regretted the amount of debt they had taken on, lenders regretted the amount of loans they had outstanding, and the rebalancing (some of it voluntary, some through defaults) turned out to be a painful process with many, many side effects rippling through the entire economy.

And if I get DDs point correctly, he argues that if not mortgages, then some other part of the economy would have ended up in that situation of excession, given the policy of central banks. For example, the Greek government. He argues that the financial sector’s role was mostly to channel the pressure to the sector most willing to go into a excession, but they did not create the pressure nor the willingness.

At least, that’s what I get from these posts as his opinion, I might be misreading.

36

Jonathan Hopkin 11.22.13 at 11:05 am

I think we should ponder a bit more the question ‘secular stagnation for whom?’ All of these developments have coincided with an upwards redistribution of income and wealth, and the obvious conclusion is that, give or take the odd unpredicted shock, powerful interests in the financial and business community got what they wanted. If you can get richer by taking an ever greater slice of the pie, why bother growing the pie?

37

Sasha Clarkson 11.22.13 at 11:14 am

Krugman isn’t claiming priority: he’s just claiming that he and others have had similar ideas, which is undoubtedly true. He did however offer glowing praise to Summers’ presentation.

<blockquote cite="I’ve been thinking along the same lines, and have, I think, hinted at this analysis in various writings. But Larry’s formulation is much clearer and more forceful, and altogether better, than anything I’ve done. Curse you, Red Baron Larry Summers!”>

http://krugman.blogs.nytimes.com/2013/11/16/secular-stagnation-coalmines-bubbles-and-larry-summers/

38

Jonathan Hopkin 11.22.13 at 11:37 am

And with perfect timing, FlipChartRick articulates this angle here: http://flipchartfairytales.wordpress.com/2013/11/22/high-pay-low-pay-and-secular-stagnation/

39

Dsquared 11.22.13 at 12:30 pm

if you think about it globally (as I think you have to), it’s not quite as simple as a pure upward redistribution. It was a redistribution from the quintile which contains the developed world middle class to both the percentile above them and the two quintiles immediately below them. We can focus on the upward redistribution for domestic political purposes obviously, but a lot of the macroeconomic damage was caused by the exchange rate policy, and that was an indispensible part of the downward redistribution.

40

bob mcmanus 11.22.13 at 12:33 pm

34: Your link led to a lot of other links, but not this one

http://angrybearblog.com/2013/11/the-elephant-in-the-room-of-secular-stagnation.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+Hzoh+%28angrybearblog.com%29

Ed Lambert, Angry Bear, Effective Demand Blog, kinda of a Kaleckian with a strong emphasis on consequences of low labor share of national income.

“There is pressure on countries to continue pushing down labor share in order to increase national savings in an attempt to raise exports. Lowering labor share so broadly is bringing down the global economy, and more specifically the workable range of the Central bank rates. My view to resuscitate the CB rates is to either raise labor share, or shift the Central bank policy to lower expectations for the utilization of labor and capital. If the CBs acknowledge the constraining effect of low labor share on the utilization of labor and capital, they would realize their hopes for success with the ZLB are futile. They would realize that the costs outweigh the benefits of the ZLB since there is not as much spare capacity as they think. “

Hysteresis will reduce semi-permanently production capacity the longer we wait on raising labor share. I’m am open to suggestions as to the means and likelihood of rapidly raising labor share, since an accelerating labor share would give central bankers, and I suspect most economists heart failure.

There is positive hysteresis, I can cite Romer and others, but my guess is that it would take a decade of ten percent inflation to regain lost capacity.

41

Mandos 11.22.13 at 12:34 pm

Once again, it boils down to free trade and globalization. Economists keep telling us that the losers in develop countries can be compensated. LOL.

42

AndyfromTucson 11.22.13 at 1:09 pm

What about the exchange rate and the trade deficit? The beginning of the narrative correctly links the drop in domestic demand to an increase in imports from China mediated by exchange rate policy, but that is the last we hear about exchange rate policy. From there on the discussion, including in the comments, is about how to plug that demand gap created by exchange rate policy using fiscal and monetary policy. To use a crude metaphor, it’s as if someone has a tire with a slow leak and he spends all his time and energy coming up with rickety rube goldberg devices to capture the air coming out of the leak and pump it back into the tire instead of just plugging the stupid leak. We spend more money than we earn, and to make up the gap we must sell assets to, and/or borrow from (same difference), foreigners. All the “bubbles” of the past few decades have just been elaborate financial/economic/policy mechanisms to borrow the money from foreigners required to fill the trade deficit and then spend it domestically. We can continue to come up with new elaborate schemes to funnel money from foreign savers to domestic spenders, or we can shift gears and focus on exchange rate policy.

43

Random Lurker 11.22.13 at 1:12 pm

@bob mcmanus 36

I think a fast way to raise the labor share would be to lower the limit on the working week, say from 40 to 30h/week.

As the article you linked says, the problem is that each nation has a perverse incentive to lower its labor share of GDP to become more competitive; thus the real problem is: how do we get to a coordinated effort to raise the labor share of GDP at an international, world level?

44

Random Lurker 11.22.13 at 1:22 pm

@AndyfromTucson 38

The problem is that, China is underdeveloped relative to the “west”, and apparently needed big net export to industrialise, so your solution would be like to say: dear Chinese people, we realise that you are underdeveloped and poor, while we are industrialised and rich. We would like things to stay that way. Please don’t bother us anymore.

This is going to happen anyway, as China has an economy that is addicted to a super-high investiment rate, and ever growing export, so now that they can’t increase theyr exports anymore they are apparently going to have a really nasty crisis in the next years, unless they are able to rebalance their economy to an higer rate of consumption; so in the end they are going to have the same problems we have now.

It seems to me that the driving element of the global economy in the last tens of years has been capital accumulation more than growth in consumption, and this is the real problem more or less anywere.

45

Morgan Warstler 11.22.13 at 1:35 pm

You tell a story, that like Summers, misses the key feature.

Digital = Free, please I know you despise techno-libertarian, but just pause.

What we are experiencing is unlike any previous economic period, because we literally are “post scarcity” and I don’t mean the let’s all not work stuff, I mean Digital Socialism and Atomic Capitalism.

1. Each and every year the overall cost in real dollars of keeping people alive, socially connected, and entertained is becoming more digital and less atomic. We’re about to do to edu, govt. health, what we did to music, retail, etc.

2. This means there is nowhere left to put the money. It takes very little capital to start a global software company that can weave its way thru the entire planet supplanting all current atomic capital intensive methods of solving that problem.

3. This means there s nowhere left to put the money. If we copy and actually improve the $200K Harvard education and put it online for free to 300M Americans, that is $60T in non-GDP, and everyone is better off. This is Linux over Windows, but without the $1T in college debt product for the capital class to loan into.

4. This means there is nowhere left to put the money. Driverless cars get shared. Hotels get reduced by AirBnB, office space gets made worthless, bc everyone works from home or wherever they are on the globe, govt. offices get knocked down as govt. services become appified. A $100 smart phone becomes a civil right.

The idea of targeting a Nominal GDP Level Target of just 1% while we have 3%+ of RGDP and 2%+ of price deflation – AS PROGRESSIVES, you ought to start thinking about the value of everything costing less money year after year.

So finally, this is how and why we need to adopt Guaranteed Income / Choose Your Boss:

http://www.morganwarstler.com/post/44789487956/guaranteed-income-choose-your-boss-the-market-based

46

Mao Cheng Ji 11.22.13 at 1:35 pm

“The problem is that, China is underdeveloped relative to the “west”, and apparently needed big net export to industrialise”

This thought is so well-expressed that I can’t find a way to nitpick. But this:

“We would like things to stay that way. Please don’t bother us anymore.”

doesn’t necessarily follow. You could also say: “please find another way to industrialize”, and perhaps even “…and we’ll help you”. Something like that has been done: the marshall plan.

47

Mandos 11.22.13 at 1:42 pm

You could also say: “please find another way to industrialize”, and perhaps even “…and we’ll help you”. Something like that has been done: the marshall plan.

Yes, bingo. It’s so telling that the *only* way, apparently, to industrialize China is to turn Western consumers into debt peons.

48

Random Lurker 11.22.13 at 2:12 pm

@Mao 42

Which leads to the question: why do nations, such as China or Germany, want or need to be permanent net exporters?

In theory this seems to be an irrational thing: they get to consume permanently less than what they produce.

This has IMHO two reasons: on one hand, there is a sort of ladder of good (high added value) industries to bad (low added value) industries. Nations want to get up on the ladder, and thus try to lure business offering higer shares of profit.
On the other hand, businesses (Capitalists in Marx’s and Kalecki’s terms) are not utility maximizers, but capital accumulators, and thus this creates a sort of continuous constraint on demand, unless one nation is able to become a net exporter or to run up debt.

I will self aggrandize by saying that my “Marx + Minsky” theory, that I wrote in a comment two years ago on CT, still seems right (well, to me).
http://crookedtimber.org/2011/06/25/marxism-without-revolution-crisis/#comment-366173

49

notsneaky 11.22.13 at 2:34 pm

It is decided, for lots of reasons (including geopolitical ones), and quite possibly correctly, that Chinese industrial policy ought to be accommodated by domestic exchange rate policy

By the US? How? Unless by “accommodate” you mean “allow China this crazy privilege of setting the price for their own damn currency and then shrug, since we have a float”.

50

Kuba 11.22.13 at 2:36 pm

An important concept here is the lack of safe assets and too much deposits seeking safe investment. The CORE is definition of safe investment.

1) Its no longer consumption – due to demography, overall indebtness thanks to bubbles, no wage growth and globalization so the firms share of CAPEX in developed world is dropping, they consume retained earnings share buy backs and so on.

2) Its hardly government bonds, certainly not in Euro area, even if they are safe the interest rate is dropping fast on the safe ones – example my country Poland were due to sound economic situation we pay record low interest on bonds,

3) Housing – no-no;

4) Stock market – well its a bubble becasue of lack of other assets. But same as wine, post stamps, Krugers and what not.

So why is there no investment opportunities, while there are real challanges in front of ..well civilization none the less.

I think one of the reasons is the governments are not creating safe markets. By:

1) Not embedding the externalities in the price of ceratin goods. Think all CO2 emissions per kg tax. The zyllion investment opportunities appear immediately and in real economy none-the less; Not to mention gain for the future generations.

2) Harder one is by not working and reforming and helping and enforcing safety of investing in developing world. I mean it might be needed and profitable to build highway system in say Pakistan under condition that you will be able to safely own and charge for this business through 30 years or so…

3) Reluctance to enlarge fiscal position by investing in infrastructure also green from p1) but also in elemntary research and so on – more scientists in the public purse.

4) Buidling a market for more entertainment, education and leisure activities through mandating 3 day weekend?

Alas we are left with TPP negotiation where comapnies are better off investing in securing monopoly position through patents that go for countless years.

So regulation, global safe investment recycling mechanism and 3 day weekend – thas what we need.

And than in those regulated markets lets allow for the laissez faire all day long.

51

AndyfromTucson 11.22.13 at 2:37 pm

The Marshall plan involved the US loaning/giving money to a broke and broken European nations so that they could rebuild their infrastructure using US exports. China has gobs of infrastructure and gobs of savings.

China “needs” exports for economic growth because its citizens are huge savers. China hasn’t had to address the problem of their excessive savings rate because the US has promoted a strong dollar policy that drives up demand for Chinese exports by making them cheap. The US has been magnanimously absorbing the costs of this policy of promoting Chinese economic development (secular stagnation and various bubbles). I see no problem with the US saying “well China, it seems like you are doing pretty well now, heck, your infrastructure and industrial base is better than ours, so how about you absorb your citizen’s excess savings for a while without our help?” and then launch a weak dollar policy.

52

Mao Cheng Ji 11.22.13 at 2:38 pm

“In theory this seems to be an irrational thing: they get to consume permanently less than what they produce”

Well, maybe it’s just so that in a global capitalist economy with nation-states there is no equilibrium where you can control a small share of the global market: for any product X, either you flood the global market with it or some other nation will, and then you don’t produce it at all. Something like the Ricardo model. And capturing the global market to the extent where it could support a nation, that takes dedication. Those who succeed will become net exporters, those who fail net importers, and eventually they will be owned by the exporters.

53

ReturnFreeRisk 11.22.13 at 3:01 pm

Please keep asking these questions. It was policy both fiscal and monetary. Period.

However, I have a simple question in response to this “lack of demand” meme that keeps going around – Where do you see shortage of demand when from 1995-2007, we had an average unemp rate of 5% and were running huge trade deficits – more than full employment AND demand spilling over onto imports. BIG TIME. over consumption and over borrowing with low interest rates and bubbles. History is indeed being revised in front of our eyes.

54

Wonks Anonymous 11.22.13 at 3:04 pm

I’d take the Greenspan years over the current status quo where central bankers say we have to put up with unemployment because we wouldn’t want, heavens forbid, a slight increase in inflation, or (when that fails) because they’re adding bubble avoidance to their already-dual mandate.

55

Random Lurker 11.22.13 at 3:30 pm

@Mao Cheng Ji 47

I basically agree with this.
The problem IMHO is that nations don’t flood the global market by lowering the price of their exports, but by rising the profit share of the corporations that relocate in those nations.

56

JW Mason 11.22.13 at 3:47 pm

I would call this a version of secular stagnation, not an alternative to it.

In its most general form, secular stagnation is the claim that for some reason, aggregate desired expenditure tends to rise more slowly than aggregate income. So unless there is some deliberate intervention to raise desired expenditure, growth will be permanently demand-constrained.

The specific version we’ve seen is that a lack of major innovations (and perhaps slower population growth) has reduced desired business investment. And the proposed intervention is asset bubbles and/or negative real interest rates, which raise desired consumption and investment spending. But the logic of the argument is the same if its outsourcing rather than technology that has reduced gross investment per incremental unit of output, and if the proposed response is consumption-boosting redistribution.

57

Trader Joe 11.22.13 at 3:49 pm

@Andy from Tuscon

“and then launch a weak dollar policy.”

Exactly what would the Fed or Treasury be doing that they aren’t doing now to weaken the dollar? I would have thought that a 0% interest rate, a sizeable federal deficit, decades of rising federal spending (until this year perhaps) and $85 B/month of money stimulus would have been the outer bounds of something that would weaken a currency. Certainly nothing greater has ever been tried since maybe Louis XIV.

The Chineese peg their own exchange rate to other currencies, it only partially floats – if other currencies are weakened it doesn’t change the peg, in fact the reverse – it gives them less incentive to raise it.

58

genauer 11.22.13 at 4:08 pm

After Clay and Rakesh came up with the 2008 onion quote, I remembered it, and smiled.
And we have this new bubble, the bond bubble, which is bursting now. 30 yr muni bonds lost 10% in 3 trading days culminating on 6/25/2013, on average, and for some state specific funds with a market value 7.5% below NAV in addition, just for starters. We will see more of that in the coming years, when US&UK try to get out of QE. Easy to get in, and hard and tricky to get out. And I wish them the best, because havoc in their place also hurts me, one way or the other.

And now I am wagging my German finger: “We told you so” : – )

I was reading over the summer Wilhelm Röpke 1932 “Crisis and Cycles”, and it is the same old thing (“Die ewige Wiederkehr des Gleichen”). The western world had at least 2 long term cycles like that before 1932, lasting about 40+ years

59

Rakesh Bhandari 11.22.13 at 4:38 pm

In this context Akerlof and Shiller make an interesting point. Equity appreciation is often not so much the reflection of profit increases but their cause via various wealth effects. They have an interesting analysis of bubbles as well.

60

nathan matthew 11.22.13 at 4:56 pm

Brilliant posts.
Daniel , I’m a layman and one of the things i like about your posts is that you help me stop relsolving economic issues (In my head ) too quickly whilst still coming from a similar outlook politically.

I often feel your offering practical politicaleconomy advice in how to be a better leftie

you should write more.

61

Peter K. 11.22.13 at 5:01 pm

Agree in general with the post. Dean Baker’s narrative highlights the East Asian Crisis and China’s response to it which was to build up its reserves and “manipulate” its currency so it would never have to go to the IMF. The US could have used the cheap loans for a better fiscal policy but didn’t.

Clinton also scrapped his middle class spending bill over the concern that Greenspan would needlessly raise rates and cancel the increased demand out.

Krugman reminds us that economists were worried about “secular stagnation” after World War II, the idea being that once the war was over, the economy would revert back to Depression conditions. Part of why that didn’t happen was that the Fed tolerated higher inflation. Monetary policy could have done more under Bernanke but perhaps he did all that was possible without sparking more of a political backlash. Maybe Yellen will do more. Maybe I’ve missed it, but what seems lacking in this discussion is acknowledgment of the post-crisis fiscal austerity. In the U.S., Obama’s stimulus was canceled out by 50 little Hoovers balancing their budgets. After 2010, the Federal government had austerity and the sequester.

62

Peter K. 11.22.13 at 5:16 pm

“Oh yes, and to put the final cap on it, Alex Harrowell reminded me the other night that, as Doug Henwood demonstrated, in the USA the majority of that consumption growth was actually healthcare, so the consumption was basically non-discretionary in nature. Nice touch.”

This could change.
http://www.newyorker.com/online/blogs/johncassidy/2013/11/the-good-news-on-health-care.html#entry-more

Japan might be able to deal with its secular stagnation via Abenomics. Germany is paranoid about inflation and government debt. It’s industrial trade policy is sort of sound except that it would rather periodically write down the debts of those buying its exports rather than manage the Euro area to the benefit of all of the member economies including its own.

63

Nick Bradley 11.22.13 at 5:25 pm

shorter: we papered over wage stagnation — partially driven by trade shocks, partially by skill biased tech. change, partially by de-unionization, partially by immigration, partially by women entering the workforce — with massive amounts of consumer debt.

Part of me thinks that if we didn’t have the consumer debt plus-up, the middle class would have rose up with torches and pitchforks a decade ago. but then I realize that such an uprising would have never happened, and we would all just be a lot poorer….

64

bob mcmanus 11.22.13 at 5:42 pm

51:”$85 B/month of money stimulus would have been the outer bounds of something that would weaken a currency. Certainly nothing greater has ever been tried since maybe Louis XIV.”

People have apparently lost the sense of scale of what is possible, effective or necessary. As Krugman said, to change expectations and momentum, you have to get crazy.

From Wikipedia:

“Congress passed the Gold Reserve Act on 30 January 1934; the measure nationalized all gold by ordering Federal Reserve banks to turn over their supply to the U.S. Treasury. In return the banks received gold certificates to be used as reserves against deposits and Federal Reserve notes. The act also authorized the president to devalue the gold dollar. Under this authority the president, on 31 January 1934, changed the value of the dollar from $20.67 to the troy ounce to $35 to the troy ounce, a devaluation of over 40%.”

And it really wasn’t enough.

So today, that might mean $6 trillion printed and released in Spring 2009. But since money has flowed back to a weaker dollar as a safe haven in global turmoil, I would have doubled or tripled that, or printed and bought mortgage and foreign instruments til “they” made us stop. $15-30 trillion if necessary in a competitive devaluation scenario.

Banker of last resort, which the US is, has to act like a hegemon.

65

bob mcmanus 11.22.13 at 6:00 pm

And since that is the effective scale, when you are aiming at a major devaluation, you don’t mess around with borrowing.

Like FDR, you devalue by fiat, or just print.

How “do they make you stop?” By not buying, or demanding higher rates.

In other words, if you want inflation, you go out there and print til you get it. You’ll get it.

The hell with “the Zero Bound.” Let’s try 50 trillion.

Lots of forgotten economics around.

66

William Timberman 11.22.13 at 6:19 pm

And pack all the finger-shaking Germans off to the nearest Irrenhaus? Ganz unvorstellbar.

67

Trader Joe 11.22.13 at 6:22 pm

57-58 @bob
I agree with your general point – but what you’re really asking is what does it take to make the world abandon a de facto reserve currency. When the US devalued vs. gold in 1934 – gold was essentially the reserve currency of the world since most major economies were tied to it. In a world of fiat currency with no anchors – devaluation is significantly more difficult since everyone has printing presses with which to sterilize the actions of their trading partners (just ask Japan).

Since the Fin crisis there has already been >$6T of borrowing + nearly $3T of Fed buying which has the same effect and we will surely cross $10T within the year.

68

MG 11.22.13 at 6:36 pm

@mclaren #23 — yes, yes, 100% times yes on this post. Ordinary people are not seeing this “almost negative interest rate” just a select few.

So, yes to re-enacting the anti-ursury laws. And make people able to default on their student loans. And, bring back Glass-Steagall and break up those big banks.

I watched the movie “Trading Places” which is always enjoyable because the rich, corrupt guys lost their money. Not so today – I mean look at Jamie Dimon – still employed, still really rich.

69

Jason 11.22.13 at 6:40 pm

I have a heterodox take:

http://informationtransfereconomics.blogspot.com/2013/11/secular-stagnation-and-eu.html

I mention the best part in an update to that post. In this view “secular stagnation” appears to be entirely a computational problem — if we take Shalizi’s view of a market economy as a way to solve an optimization problem, then we can look at monetary policy as the amount of computing resources devoted to it. Additional resources have diminishing marginal utility as economies get bigger.

70

Peter K. 11.22.13 at 6:56 pm

Revisiting the debate between DeLong, Quiggen and Davies over the “Global Bezzel” I find I can’t decide who is more correct. The devil is in the details and it appears they disagree over the specifics of what happened (like with the shadow banking system). Essentially it sounds like a near-term versus long-term/structural argument with both agreeing on solutions. Maybe both are partially correct to a lesser or greater degree with some blame going to the bankers and some to the policy makers.

Another way to look it at the crisis is whether the problem was more one of liquidity and a massive credit crunch or one more of insolvency. I’m inclined more to the credit crunch / Minsky view because of the awfulness of post-crisis economic policy. If the original stimulus had been much larger and ongoing with more aid to state and local governments; if exports were encouraged with a weaker currency; if we hadn’t had fiscal austerity and the sequester since 2010, things would be much better even if the larger structural issues remained. Krugman talks of increased Social Security benenfits and 4 percent inflation.

Japan might show the way out of their secular stagnation with Abenomics. Did they have larger structural issues and increased income inequalities before their lost decades or was it largely failed responses to a collapsed real estate bubble?

71

Francis 11.22.13 at 7:01 pm

I could use a little help in following the logical connections between the first 3 bullet points and the result of a structural shortage of domestic demand.

What I think is going on is the following, but I would appreciate correction: China decided to industrialize and produce lots of goods. There were two possible outcomes. A. The dollar floats down to the point where Chinese goods are so expensive and American goods so cheap that there’s no major trade imbalance (but what mechanism controls currency exchange rates?), or B. The dollar doesn’t move against China currency, Chinese manufacturers pile up huge stacks of US dollars, US consumers pile up equivalent debt (is this right? where else do the US dollars come from?), and the Chinese manufacturers invest in US real estate.

We chose path 2 and had the triple impact of stagnant wages, rising debt and a bubble in real estate valuation.

This about right?

72

bob mcmanus 11.22.13 at 7:21 pm

Did [Japan] have larger structural issues

A catastrophically declining birthrate (though it has picked up since 2005, 1.26 => 1.41) and a cultural resistance to immigration. A weak safety-net that relies on unpaid or low paid women’s labor. An educational system that is expensive for the middle-class and UMC and almost useless for those below. Fiscal stimulus too reliant on pork-barrel construction. And more.

Japan is all messed up, but it’s messed up in a socially systemic way, and I don’t offer advice any more than I would to Russia after the Fall.

73

Bruce Wilder 11.22.13 at 7:28 pm

Contrast mclaren @ 23 on usury with this from dsquared:

All the lurid stories about sales forces on methamphetamine, forgery of documents and so on – I’m sure they happened, and it’s surely a good use of someone’s time to prosecute them. But they’re second order. They really are. At the end of the day, the economic function of the financial services industry is to reconcile the desire of savers to have instant access to their money, with the need to invest that money in projects that only pay back over time. In order to do that, you have to set a price to get people’s money into and out of their investments, and the process by which that amazingly complicated social reality is organised is 1) much more difficult an administrative task than you’d think, as evidenced by the near-total failure of all efforts to put it on a rational centrally planned basis (this, at base is why it’s so wonderfully well-paid), and 2) totally dependent on thick social institutions of trust and good faith. And because of 2), it’s a uniquely fertile environment for the kind of person who preys on thick institutions of trust and good faith. That’s the majority of the basis for regulation.

Belle Waring @ 24, helpful Park Ranger, warns me of the snake in the grass on this trail, and I approach passages like the above with a trepidation. I don’t know what work “they’re second order. They really are” is doing here in a paragraph that ends with “uniquely fertile environment for the kind of person who preys on thick institutions of trust and good faith”. Does the referenced administrative task pay so well, because it is done well, or done ill? There would seem to be some ambiguity.

I think the institutional trust and good faith is the zero order condition, and monetary and fiscal policy the second order business. So, the unmistakable tone of “I’m sure they happened, and it’s surely a good use of someone’s time . . . ” grates a bit on my idealism. Nevertheless, reality is being acknowledged here, albeit with some defensive reluctance, and so we must be grateful for the opportunity to have a conversation.

The alternative is to be lectured by Larry Summers, architect of at least some of the subject policy disasters, which he has now cleverly disowned — and been praised by Krugman for shrugging responsibility in public for the umpteenth time.

I’m with geo: while Daniel may well say “we” advisedly, the rest of us should be practicing with “they”, as a first step to recognizing the conflicts (and worse), which have been submerged by this absurdly abstract way of approaching and explaining policy, engaged in by Krugman, Summers, . . . .

If the political economy and its financial system and its policy-making institutions are a distributed information processing scheme, this scheme is having a remarkably difficult time coming to grips with reality. We are having a remarkably difficult time coming to grips with reality — “they” may or may not; “they” could just be lying out of habit and self-interest.

74

Ronan(rf) 11.22.13 at 7:43 pm

“All the lurid stories about sales forces on methamphetamine, forgery of documents and so on – I’m sure they happened, and it’s surely a good use of someone’s time to prosecute them. But they’re second order. They really are.”

I actually think that’s reasonable, but I’d add corruption, distributional politics and regulatory failure in the ‘periphery’ as being largely unimportant and so no longer relevant.

75

Rakesh Bhandari 11.22.13 at 7:50 pm

wrote this last night; seems to have been lost

@50 is well put.
___
Alvin Hansen developed a theory of secular stagnation. Schumpeter responded to it. On the one hand, he granted that there was a demographic drag. Feminism had discouraged child-bearning especially among bourgeois women; the “subnormals” had become, as he put it, “the great threat to humanity”. Keynes was haunted by the possibility of dysgenics as well as John Toye has shown. Secular stagnation theory was essentially biopolitical in Foucauldian terms.

But,on the other hand, Schumpeter thought the attempt to root secular stagnation in the monopolization of the economy was simply wrong. His debating partner at Harvard Paul Sweezy drew on the new economics of imperfect competition and Preobrazhensky’s theory of crisis.

****
Sweezy who was denied tenure however would later say what the person who would become President of Harvard has recently suggested. Sweezy (and Magdoff) wrote in Monthly Review as early as 1987, “Is the casino society a significant drag on economic growth? Absolutely not. What growth the economy has experienced in recent years, apart from that attributable to an unprecedented peacetime military buildup, has been almost entirely due to the financial explosion.”

***
When Japan appeared to be on the rise, the short-termism encouraged by Wall Street and incentivized by stock options was commonly seen as the principal source of real stagnation.
But the disgorging of cash via dividend payments is not the cause of but the result of a decline in real investment opportunities.
****

In After the Music Stopped Blinder tries to work out the meaning of a bubble, defined as a large price deviation of assets from their fundamental value.

76

Bruce Wilder 11.22.13 at 7:59 pm

Ronan(rf): I actually think that’s reasonable

You think the attitude is “reasonable”, because there’s a whole raft of issues, which are, in your opinion, “no longer relevant”. No longer relevant to whom? or to what?

77

Trader Joe 11.22.13 at 8:08 pm

@65BW
“this scheme is having a remarkably difficult time coming to grips with reality”

Dude, the market’s ripping, its all working except for gold which only the doom and gloomers love. Mortgages are cheap and credit’s getting even easier – they keep offering more. The Maseratti Quatroporte lease has less than 0.5% in it they just added features to the Amex Black card – life is good. The only question is whether bonsues will be paid before deposits are due on the next block at ONE 57, that would surely put a dent in the real estate market. Looks like reality is working just fine from here.

(Tongue firmly in cheek)

78

Ronan(rf) 11.22.13 at 8:09 pm

No longer relevant to any narrative that wants to sell banking sector shenanigans as second order. Thats fine with me if thats carried through to it’s logical conclusion and applied to the shenanigans in the periphery in the 00s. Global crises have global causes etc..

(btw Bruce, I wasnt taking a dig at you above, your comment just highlighted that section which Id skimmed over initially)

79

genauer 11.22.13 at 8:12 pm

@ Peter K

your “the Fed tolerated higher inflation”

US inflation was actually 1.3%, from 1951 to 1965, start and stop year picked for minimum number, but 1947 to 1972 it is 2.4%.

Germany is not paranoid, and where would you have any evidence for that we
“periodically write down the debts of those buying its exports” ?

And to put this into perspective, Germany had solid trade surplus since 1951, but we spent all this money, on vacations, and, smaller part, paying back debt, reparations.
In 2003 the accumulated current account (CA), what really matters, was ZERO.

That we have now a little CA bonanza for a few years, because our cars and production machines are temporarily in high demand, is clearly no reason to go into overdrive, like the common commodity curse or dutch disease, whatever you name it.

80

JW Mason 11.22.13 at 8:47 pm

The correct analytic framework here is a Harrod-type growth model.

To maintain full employment, an economy must grow at the “warranted rate” gw. gw = s * c – d, where s is the savings rate desired by households and c is the incremental output-capital ratio, and d is the depreciation rate. The dynamics of this system are unstable: if actual growth is below the marginal rate, excess capacity will develop and businesses will reduce investment; the lower demand will reduce output, taking the economy further from the warranted growth rate. Symmetrically, a growth rate above the warranted rate induces businesses to increase investment, again taking the economy away from the warranted growth rate.

(The warranted growth rate is the rate that will result in stable utilization of capital, so the investment decisions of businesses and the savings decisions of households remain consistent. It is not necessarily the potential growth rate in any broader sense. If we follow Samuelson and make a big deal about factor substitution, then there will be unemployment of labor if and only if there is underutilization of capital. But nothing else in the story changes.)

The question then is, what happens to an economy growing at its warranted rate if one of the parameters changes? Suppose that the desired savings of households increases, or the value of new capital required to produce an incremental unit of output falls? Then the warranted growth rate gw increases. If there is no other obstacle to a higher growth rate, and if there is some independent source of additional demand to get the economy onto the new higher growth path, then this is a good thing: Higher savings and/or more productive capital translate into a faster growth of incomes. On the other hand, if there is some other obstacle to faster growth (a balance of payments constraint, for example, in the Chenery two-gap model), or if there is no independent factor raising demand to get the economy onto the higher growth path, then a higher warranted rate is a bad thing. It means that if the old growth rate continues, the economy will tend to develop excess capacity. In this case, perversely, an increase in the economy’s productive potential can lead to lower actual output. This is the “secular stagnation” case.

Both the Summers-Krugman story and Daniel’s story are applications of this model. Daniel is saying that outsourcing increased c for the US, and for various reasons policy was not able to reduce s to compensate.

81

JW Mason 11.22.13 at 8:48 pm

Sorry, that should be ” if actual growth is below the WARRANTED rate, excess capacity will develop”.

82

genauer 11.22.13 at 8:51 pm

the key trigger to financial crisis is typical private debt,

see e.g. some Warren Brussee “The second Great Depression 2007 – 2020″, published in 2005, based on japanese data.

And when you look on G-7 data, account for homeownership, there is no German exceptionalism

http://worthwhile.typepad.com/worthwhile_canadian_initi/2013/11/what-determines-long-run-private-debtgdp-ratios.html?cid=6a00d83451688169e2019b00d2fb89970b#comment-6a00d83451688169e2019b00d2fb89970b

83

hix 11.22.13 at 8:59 pm

The dollar is already below ppp compared to hum, every single other high developed country. But why not try to outdevalue China and Poland on a ppp basis. That will do the trick.

84

AndyfromTucson 11.22.13 at 9:34 pm

@Trader Joe 57

“Exactly what would the Fed or Treasury be doing that they aren’t doing now to weaken the dollar?”

I am no expert on exchange rate manipulation, but I am sure there is more that could be done than is being done. The Chinese maintain their peg to the USD by market operations; Maybe the Fed could start buying huge quantities of yuan on currency exchanges and start building up yuan reserves like other nations build up USD reserves? Take actions to promote some other currency like the Euro or even the Yuan as the international reserve currency?

85

Rakesh Bhandari 11.22.13 at 10:04 pm

I think JW Mason is right to present the secular stagnation model in terms of the Harrod model, but the theory pre-exists that model.

Politically the theory of secular stagnation came to be tied to underconsumption.

So to just sketch the theory….

It was assumed that the growth in the means of production implies a growth in the quantity of consumption goods but consumption power (k+ v) lags relative to productive power. [k=capitalists' own consumption]

Sweezy insisted that he (and Otto Bauer on whom he drew) was not offering a simple underconsumption theory. He underlines that special circumstances can keep the tendency towards underconsumption latent; uc can be counteracted by new industries, population growth, and faulty investments. Secular stagnation meant the end of special circumstances. Here Sweezy converged with his colleague Alvin Hansen.

This theory of an underconsumption undertow as Jim Devine calls it today seemingly depends on it being true that a growth in the means of production implies a proportionate growth in the output of consumption goods. But Marx’s own volume II schema show that overall growth is possible even if Div I (means of production) is growing relatively faster than Div II.

86

JW Mason 11.22.13 at 10:11 pm

The notion that the bilateral US-China exchange rate is a major factor in aggregate demand in the US does not pass the test of basic arithmetic. US imports from China are less than 3% of GDP, exports to China less than 1%. Generous estimates of the price elasticities would be 1 for imports from China and 1.5 for exports to China. So a 20% devaluation gets you an improvement in the US trade balance with China of aroun 0.9 percent of GDP. That’s not much, but it’s not nothing. But the thing is, there are other countries in the world besides the US and China. Some part — almost certainly the largest part — of the substitution away from Chinese-made goods would be to imports from other low-wage countries. In addition, to the extent that Chinese producers “price to market” (i.e. accept lower profit margins to maintain their market share) the actual price change would be less than the exchange rate change, and so the change in the bilateral trade balance would be smaller than the 0.9 above.

There is no plausible story in which Chinese exchange rate policy is a major factor holding down demand for US goods.

87

john c. halasz 11.22.13 at 10:14 pm

@79:

U.S. Inflation: 1946, 8.3%; 1947, 14.4%; 1948, 8.1%. After that, the Fed stopped pegging rates low, as it had since 1933. But it took care of the 120%/GDP war debt quite nicely.

88

john c. halasz 11.22.13 at 10:20 pm

@39:

I think you’d have to take a look at the global wage/labor share to get a bead on the issue.

More generally, in response to a number of comments above, (which I’m too lazy to go back and sort through), what ever happened to the notion that firms compete, but nations do not (at least economically speaking), since mutual growth is mutually beneficial. Is it that corporations no longer compete, because somehow they have gotten nations to do their bidding?

89

JW Mason 11.22.13 at 10:24 pm

Rakesh, you’re right. But there is a basic difference between Marx’s model and Harrod’s. Marx assumes that capitalists are compelled to invest all the surplus available to them. So there is no independent investment function in his (implicit) model, so the problem of keeping desired saving and desired investment equal does not arise. A growth rate below the warranted rate, in Marx’s world, does not lead to lower investment and unemployment. Instead, capitalists continue investing beyond what is needed for proportionate growth, so the capital-output ratio rises. Since the profit share (we assume) cannot rise indefinitely, eventually a rising capital-output ratio must result in a falling rate of profit.

But note that in marx’s model, just like in Harrod’s, as long as the actual growth rate is at the warranted rate then balanced growth is possible, no matter what parameters we choose. It’s only once something outside of the model pulls growth below (or above) the warranted rate that the instability sets in. in the case of Harrod, that is a familiar recession, with falling employment capacity utilization. In the case of Marx, the same situation presents itself (at least initially) as overheating, with investment creating more new capital that can be profitably absorbed. Armstrong, Harrison and Glyn (in Capitalism Since 1945) describe the crisis of the 1970s in exactly these terms. How long such a situation can continue depends on essentially financial factors — a falling rate of profit only interferes with accumulation when it leaves capitalists unable to service their debts. With high inflation and/or forebearance by creditors, growth below the warranted rate can continue indefinitely if capitalists behave in a “Marxian” rather than a “Keynesian” fashion.

90

dsquared 11.22.13 at 10:45 pm

I should add that I found JW Mason’s post on functional vs “sound” finance very helpful in understanding the underlying issues here.

91

Random Lurker 11.22.13 at 10:49 pm

@john c. halasz 88

“what ever happened to the notion that firms compete, but nations do not (at least economically speaking), since mutual growth is mutually beneficial.”

In the 19th century there was the theory of “infant capitalism”. Today, the “new trade theory” actually looks like infant capitalism on steroids, since it says that the more valuable trades tend to concentrate in a few centers because of network effects, implicitly leaving out a large periphery with not valuable trades.

92

Collin Street 11.22.13 at 11:17 pm

Marx assumes that capitalists are compelled to invest all the surplus available to them.

… oh. Of course.

93

JW Mason 11.22.13 at 11:37 pm

dsquared@90 – thanks! Means a lot coming from you.

94

mulp 11.23.13 at 12:24 am

Since Reagan, pillage and plunder of capital has been the rule, capitalism replaced by barbarian economics of the powerful taking from the weak.

The trillions of dollars in spending called for by civil engineers on water systems, levies, roads and bridges, railroad beds, ports, electric grids, building energy efficiency did not occur suddenly, but instead were the result in the faith that capital gains in value in defiance of nature and entropy.

Spending on maintaining and increasing the real productive capital assets of the nation would have required higher taxes, higher user fees, higher rates, and historically these occur only by government policy that prevents free riders.

To pay for the welfare system given the free movement of production requires shifting from corporate taxes to instead a VAT which will levy a tax on imports to tax the value added outside the place of consumption, while rewarding the exports of goods by rebating the VAT on export. The rest of the world has settled largely on a 15% VAT, so the US adopting the VAT would put US manufacturers on equal footing while taxing Apple massively on the China production laundered through a tax haven to dodge all taxes. iPhones sold in the EU pay a 15% VAT to support their health care and welfare system, but Apple contributes nothing in the US.

But we don’t have a 40 cent gas tax because hiking the gas tax 125% like Reagan did in 1983 would be radical leftist socialism that would kill tens of millions of jobs. After all, if the gas tax revenue is spent building bridges, not a single job will be created because government spending never creates jobs. But the equivalent of a 50-60% tax cut has not resulted in wiser investment, unless you consider investment in Pets.com to be wiser than investing in a new bridge in Minneapolis in the 90s so people would not have been killed in 2007.

95

Ronan(rf) 11.23.13 at 12:38 am

Has anyone read Michael Pettis’ The Great Rebalancing? I think he makes something similar to this argument, though I’ve only read bits and pieces so far.. any opinions on his positions if so?

96

john c. halasz 11.23.13 at 1:31 am

@91:

I was being deliberately a bit faux-naif, but, after all, that line about firms but not nations competing, was a standard line from Krugman in the 1990′s, the co-inventor of “new trade theory”. But what I want to counteract is the TINA/economic positivism tendencies of a portion of the commenters here at CT, as if there weren’t/aren’t always alternative possibilities and centers of decision-making the sort and choose from such alternatives, if not unilaterally, unconstrainedly, or with perfect foresight.

D^2′s “macro-economic problems have macro-economic causes” line seems to appeal to well-known GDP accounting identities and specifically Godley’s correct stock-flow consistent interpretation of them. But such accounting identities don’t amount to or provide “causal” explanations, but rather just constrain such explanation, (such that violating them invalidates any proposed explanation). Lecturing us small fry on what we already mostly know doesn’t provide an explanation for, say, persistent CA imbalances, or housing bubbles, (which are due to credit-enhanced inflation of implicit land-rents, not to actual increases in productive value), or the failure of mere “credit intermediation” to adequately allocate capital to productive purposes.

And no one seems to want to latch on to the notion of fictitious capital here.

97

JW Mason 11.23.13 at 1:35 am

Sorry for the self-promotion, but I have just put up a post on secular stagnation that I think is complementary to Daniel’s.

98

bob mcmanus 11.23.13 at 2:43 am

97: Ok, I liked your post and I loved just loved Randy Wray’s. I am with him 150% and his economic theory should and will be implemented…after the Revolution.

My point in pushing back on the Zero Bound is not really to push a prescription but as a thought experiment…what if the Fed drove the S & P to 25000 by Christmas…in order to make the point that it isn’t really macroeconomic conditions or theories or schools that are pushing policy but class expectations and politics.

The 1% think they have it all under control and are doing very well in fact. They want bubbles, and they are probably gonna get them. We are not going to get 7% inflation or a New New Deal or an accelerating labor share and I am not sure why we are discussing it.

The question is, can the 99% take control or change that perception without an apocalypse and the answer is not clear to me. The Crash of 2008 was pretty scarey.

I am actually not that pessimistic. This Will Fall. But the kind of 20th Century social democratic politics that allowed 20th Century macroeconomics is over. Marx is over and Keynes is over. You can tell by the 75-yr-old ideas being pushed in a brand new world of radically altered social conditions.

99

bob mcmanus 11.23.13 at 2:49 am

And no one seems to want to latch on to the notion of fictitious capital here.

The joke is you ask a question of a post-structuralist and he hands you a bibliography.

Everything has been financialised and is now fictitious and performative.

100

William Timberman 11.23.13 at 2:50 am

No need to apologize, JW. Like the OP, your piece, and your blog generally, are very helpful to those of us trying, without benefit of a formal education in economics, to puzzle out just exactly how so many smart people a) were so mistaken about our prospects, and b) so sure, even now, that they’re the only game in town.

101

Roger Lindsley 11.23.13 at 3:44 am

I really think that you are leaving out the most important aspect of this narrative, technology and automation have produced incredible gains in productivity at the cost of skilled labor. Technology and automation are owned by capital holders.

The other parts of your narrative are spot on, Americans chose to cash in equity on their homes and the incentive to make this lending available is ALL in the secondary financial market, if MBS’s, CDO’s, and CDS did not exist, there would have been smarter lending.

In hindsight, history will mark this period as the information/automation age where wealth redistribution took a radical wrong turn and damaged humanity fundamentally. In a period where access to basic resources could be extended to humanity en masse, we are instead seeing a re-feudalization with corporations carving out international fiefdoms and people struggle evermore to survive. It is an age of artificial scarcity placing social stability itself on the chopping block.

102

Dr. Hilarius 11.23.13 at 4:46 am

The emphasis on subprime loans seems misplaced to me. They were and remain a problem as well as a symptom of unregulated lending where loan quality was alleged not to matter any longer. But there were many more real estate loans, while not subprime, that simply made no sense other than as speculative properties waiting to burn the last and greatest fool. More like hand grenades than hot potatoes.

As a very small real estate investor starting in the 1990s I witnessed the changes in lending practices and prices. By 2005, for example, condos on Maui were priced so that even with 20% down and prime interest rates on a 30-year mortgage, monthly payments were 2-3 times the highest possible rental rate. And that doesn’t even include often steep HOA dues. Would-be buyers and realtors all chanted mantras like “nobody’s making any more real estate” as answering all questions. Some buyers of these inflated properties have been able to keep up with payments following the price declines in 2007-2008 but are stuck with mortgages far above market value. Prices have rebounded, albeit well below peak bubble prices, so some of the pain has lifted. In Hawaii, at least, there will be a continuing demand for property, unlike tract houses in Las Vegas which will deteriorate faster than any possible market recovery.

Whether including unwise, but not subprime, loans into the analysis changes conclusions I have no idea. But a lot of illusory capital vanished with these loans.

103

Ronan(rf) 11.23.13 at 11:40 am

“Like the OP, your piece, and your blog generally, are very helpful to those of us trying, without benefit of a formal education in economics..”

Yeah, I’d second that. Having read through the two OPs and JW’s posts and a number of comments they’re really helpful and interesting, even if I still dont actually fully understand a lot of the specifics or have the ability to actually judge any of this.

104

genauer 11.23.13 at 12:22 pm

@ john c. halasz

My numbers are 1946 18.1%, 1947 8.8%, 1948 3.0%. Probably different indices. Both series are a cumulative 30%. That took the 120% debt/gdp from 120 to 90%. But the subsequent reduction to 37% until 1973 (numbers from the top of my head) came during a time, which Reinhart / Rogoff called financial repression, at low inflation. The interesting thing is, that at this historic turning point 1973 a James O’Connor wrote about “The fiscal crisis of the state” : – )

Just before the oil crisis was also the height of union power, highest share of GDP for labor, but some described that as the working class “living in a world of pain”

And bringing it back to topic, after WWII US labor was in a unique position, with the competition in Europe and Japan wiped out. In the last 20 years more and more emerging countries became effective competition as well, and that means, that the exagerated share for US labor is slowly shrinking. Nothing bad about that, just natural. And it will go on, and you better get used to it.

105

Tom 11.23.13 at 1:38 pm

Thought provoking piece. I agree with much of it but would quibble with some parts. I agree that policy encouraged rapid expansion of credit to households. Indeed this is the world those “guys” created. I don’t see anything wrong with using the word “bubbles” to refer to excessive credit expansions that led to investment bubbles. Excessive credit expansions and investment bubbles don’t really appear separately, so it hardly seems worth resisting the natural tendency to think of them as one and the same thing.

As for whether “secular stagnation” exists, I think there has obviously been a lasting slowdown of the long-term growth rates of developed economies, but it’s somewhat misleading to describe that growth slowdown as “stagnation.” Change hasn’t slowed – change is as rapid as ever.

Demographics is one reason for slower growth. It’s not anything to worry about, I think. Slowing of the growth rate of output per capita is something to worry about.

Reasons for that are many. I agree globalization has been a huge factor driving change in the developed world, but I think it’s affects have been positive and negative. Without it, the developed world would have more manufacturing, but manufactured goods would cost much more. The developed world would be poorer overall and have lower average living standards. Resources might have been pulled away by cost-inefficient developed-world simple manufacturing from cost-efficient productivity frontier industries, slowing technological advancement.

What we are seeing is not stagnation, but rapid changes in the global economy and the developed world. As the developed world produces more and better of some things, it imports and outsources more of others, and more of its less skilled population is left idle.

I doubt understand how fiscal or monetary stimulus could lift the long-term growth trend. Those seem to me to be merely counter-cyclical smoothers of short-term growth rates.

Ultimately two things will determine our success: technology and education. A lot of Keynesians talk a lot about the unemployment rate, but they don’t seem to know much about who the idle people are or think much about how to get those people productively contributing, other than the simplistic “raise aggregate demand” credo.

106

Guy that first realize secular stagnation 11.23.13 at 5:47 pm

Hi..

I have been saying we have that for years…..

Never mind robert Gordon for the moment. Since the 70 s, the US economy stop growing. It was structural, permanent lowering of growth. The same trend is true of Japan, and Germany.

Looking behind the economic hood, you have cartels, monopolies that favor capital, over labor. IP laws, and noncompetion contracts means firms can save more, while consumers have to consume more with consumer debt. This is not even to the very end yet.

In the 70 s, the US also designed a global financial system that benefits itself. It sucks up funds from developing countries into developed countries. The neoliberal policy of kicking away the ladder for developing countries. The problem is as capital rush from poor countries into developed countries, subsiding developed countries consumption, it also make developed countries uncompetitive base for either manufacturing, or service. So, since the US cannot produce, it can at least consume, financed from foreign capital, which is exactly what happend.

107

Rakesh Bhandari 11.23.13 at 6:06 pm

Josh,
I have an old textbook written by Benjamin Higgins. He compares Harrod to Hansen, and argues that while Hansen was characterized as a pessimist, his analysis implies that fiscal and monetary policy can successfully counteract secular stagnation while Harrod’s model lays bare the difficulties of achieving growth without inflation and the likelihood of small imbalances becoming amplified. That’s the conclusion. I have read the chapter on Hansen, and will try to get to the one Harrod.

108

geo 11.23.13 at 6:33 pm

Counterpunch weighs in on “secular stagnation”:
http://www.counterpunch.org/2013/11/22/blowing-bubbles-with-paul-krugman/

109

Rakesh Bhandari 11.23.13 at 7:05 pm

Inequality (or the income trap) need not lead to droopy demand, as the Counterpunch piece says. Krugman argued around 1/13: “So am I saying that you can have full employment based on purchases of yachts, luxury cars, and the services of personal trainers and celebrity chefs? Well, yes. You don’t have to like it, but economics is not a morality play, and I’ve yet to see a macroeconomic argument about why it isn’t possible.” Actually Andrew Trigg has modeled the possibility of luxury consumption-driven growth in the pages of Science and Society.

110

Ed 11.23.13 at 7:47 pm

Suggestive.

But I’m trying to reconcile the “yellow peril” theme with this:

“Oh yes, and to put the final cap on it, Alex Harrowell reminded me the other night that, as Doug Henwood demonstrated, in the USA the majority of that consumption growth was actually healthcare, so the consumption was basically non-discretionary in nature. Nice touch.”

And can you “show us the model,” as Krugman would say, rather than a farrago of a lot of suggestive points?

111

Robert 11.23.13 at 8:40 pm

For what it is worth, my name thinks to a three-year old exposition of the Harrod-Domar model and what is suggests about macroeconomic performance when income distribution is quite unequal.

For me, the policy problem is not solely about getting our rulers to adopt functional finance. It is about putting in place appropriate institutions for our generation, including internationally. Bretton Woods was a compromise from what Keynes wanted, but quite successful up to Nixon. Ending Bretton Woods is one Nixon decision I do not blame him for, since the strains had become too big by then. But nothing has successfully been put in its place since then.

112

bob mcmanus 11.23.13 at 8:44 pm

108: Thanks geo

Counterpunch linked to Heiner Flassbeck on Krugman, Martin Wolf, secular stagnation and since somebody asked above, especially Abenomics and Japan.

With their “two tiered economy,” Japan has had reasonably flexible labor markets for decades, with women taking the brunt of the precarity.

113

Bruce Wilder 11.24.13 at 7:27 am

Krugman (quoted by Rakesh Bhandari above):

“So am I saying that you can have full employment based on purchases of yachts, luxury cars, and the services of personal trainers and celebrity chefs? Well, yes. You don’t have to like it, but economics is not a morality play, and I’ve yet to see a macroeconomic argument about why it isn’t possible.”

This isn’t Krugman at his finest, though it is characteristic of his worldview — he’s said as much for years. As a matter of economics, it is also wrong.

Ironically, it is wrong because, while economics may not be a morality play, the economy sort of is. The kinds of things a society has to do, to tilt production and consumption heavily toward private, luxury goods is going to result in poverty and unemployment or underemployment of labor. Anyway, it isn’t hard to work out various cross-confirming intuitions why extremes of income distribution are not consistent with full-employment — assuming, of course, you’re not trapped in highly stylized abstractions.

Just to take one off the top: high unemployment is, itself, a means of altering the distribution of income — it’s a way to get to a distribution of income weighted toward private, luxury goods for a small minority. Extraction is another way to get a highly concentrated distribution of income: also not good for employment.

Tackling the issue from a supply-side direction: there’s the whole logic of specialization and increasing returns: the mass-production economy wants to be egalitarian. Highly unequal societies, in producing so much for the very rich, are fighting against the efficient path, impoverishing people to make a few enormously wealth. If you prefer to cast the problem from a slightly different angle, highly unequal societies leave a lot of people without access to the capital and public goods they need to be employed productively.

The distribution of income is the distribution of incentives, and some highly unequal distributions are inherently inefficient, because they leave lots of people without adequate insurance or capital, desperate or frightened: high rates of secular unemployment or underemployment are going to be among the manisfestations of that inefficiency.

If the logic escapes you, the world is chock full of illustrative examples.

114

john c. halasz 11.24.13 at 8:32 am

@104:

High post-war inflation and pegged rates did take care of an nice initial chunk of the federal debt. (No doubt production switching and high pent-up demand with high household savings from the war were key causative factors for that useful inflation). The war debt, of course, was never paid off, but rather diminished as % of GDP through NGDP growth, (though the resort to inflation was a unique advantage of U.S. $ hegemony, not available to its allies or new partners). But it’s really that total debt/GDP ratio that counts and not just the gov. debt, (and that stabilized by the mid-1950′s at 150% for 25 years).

For the rest, why are you focusing on the advantages to U.S. labor and not to U.S. capital? And, of course, there is a difference between relative and absolute growth; a relative decline in growth share needn’t imply a decline in absolute growth. So I don’t get your right-wing sense of inevitability and schadenfreude.

@109:

Of course, one can construct a model to “prove” anything is possible. The question is rather whether that model is realistic, sustainable or really optimizing. So one can have an economy dedicated to luxury goods, (with likewise high mark-ups) as a prime source of demand, which would also require a high value of capital assets and high capital incomes. But the question is how sustainable would such an economy be, at least measured by capitalist norms requiring investment for productivity increases. Such stagnant economies are actually the historical norm and certainly stagnant or declining economies have existed in the orbit of the capitalist world. But are they somehow optimal in sustaining returns to re-invested capital, (as the putative system goal, not my personal preference)?

Sraffa has a theorem to the effect that, given to economies with identical physical capital stocks and outputs, the one with the higher rate-of-profit/lower wages would have a higher value of output, higher value of capital and higher capital-to-output ratio. Of course, that’s not any actual comparison between economies, but rather a static comparison between two states of the same abstract model. But it makes some sense in “market” terms, since wages and prices are rough obverses of each other, (i.e. it’s the real purchasing power of wages that count), so low wages would amount to high prices, a higher value of output, and since, given two identical set of capital, the one yielding the higher rate-of-profit would command the higher market price, (which comparison is roughly what stock markets are supposed to do). But presumably Sraffa’s point, since the physical quantities are postulated as identical, is that this amounts to a monetary illusion, a “negative Wicksell price effect”, in the jargon. It’s at least suggestive of why the fictitious inflation of capital assets might contradict what capital is actually for and how it might reproduce itself (or maybe something else).

But to return to the original topic, is the notion, if not the exact term, of “secular stagnation” actually new or hasn’t it accompanied economic thought since its inception? When Smith was writing there was a perception of something historically new, growth in output per capita, and the question to be addressed was the sources of such new productive surpluses. The question of the limits of such growth naturally arose, though Smith only gave it a nodding glance. But certainly Ricardo took it seriously. And Marx then used his Hegelian concept set to suggest how capitalism would always at once erect and breach its own limits, progressing through its own crisis tendencies, recasting the notion more dynamically. Not that I’m exactly in agreement with the secular stagnationist school among the few remaining schools of Marxian economists. But given the natural resource, environmental, and population limits we now face, maybe the diagnosis and prognosis of our condition could be met with a good deal more seriousness and creativity than the apologetics of the likes of Larry Summers can muster.

115

Metatone 11.24.13 at 11:25 am

To me where the Krugman “abstract possibility of full employment with high inequality” thing runs into the weeds is in the details of reality. Much like the details of finance can cause unseen problems, so the details of employment and desires causes unseen problems for the abstract model.

Still, I think the easiest thing is simply to look out there at the world. Lots of unemployment, youths who would leap at a chance of a job at cheap wages. No particular sign of the world’s 1% employing more people in the servant economy.

116

JW Mason 11.24.13 at 2:03 pm

I’m sorry to see Bruce Wilder and John C. Halasz succumb to the liberal theodicy that what’s best for capital is what’s best for everyone.

117

Mandos 11.24.13 at 2:58 pm

By the way, I wrote up a version of this story (re trade and consumer spending) way back when.

118

William Timberman 11.24.13 at 3:03 pm

Non-economists do have one advantage in debates such as this one: not being equipped to speculate about how you fix what is so obviously broken, we can focus more narrowly on the question of what it’s all for. The relationship of capital to labor and their respective contributions to production, and thus, presumably to the general welfare, look a lot different depending on the angle of your perspective, and there are an awful lot of angles to investigate — enough to keep all sorts of economists and other agnostics scratching their heads forever and ever, amen.

It might be more intellectually satisfying, at least in view of the re-emergence of scenarios so recently thought by all to have been banished forever, to debate the nature of evil than the imperatives of capital. An old scholasticism made new again by refugees from the tedium of monetary policy — it’s a sure crowd-pleaser, even if it won’t fill anyone’s belly. And as Marx pointed out so long ago, the price of a ticket is also considerably lower, even though the Jesuits, obedient as ever to the Divine Will, keep doing their best to raise it.

119

JW Mason 11.24.13 at 4:06 pm

I should have said more clearly earlier, I think the OP is right. Managing aggregate demand with monetary policy in an environment where business investment is not very responsive to the availability of finance, implies that larger interest are adjustments will be needed, and there will be large swings in household expenditure and household borrowing. The only thing I would add is that changes in corporate governance also reduce the sensitivity of investment to monetary policy, since funds flowing into the firm through credit markets are now likely to flow right back out to shareholders.

120

Bruce Wilder 11.24.13 at 5:13 pm

JW Mason: I’m sorry to see Bruce Wilder and John C. Halasz succumb to the liberal theodicy that what’s best for capital is what’s best for everyone.

huh?

JW Mason @ 119

Disinvestment. That’s the concept you’re looking for, I think.

121

Rakesh Bhandari 11.24.13 at 6:10 pm

I think people will find illuminating in this context David Colander’s explanation of the
structural stagnation thesis.
http://modernecon.org/structuralstagnationsummary/
Colander is not defending it, just laying it out.
In this account stagnation seems ultimately rooted in an overly strong dollar. Or perhaps not. Perhaps this theory implies that now that the economy cannot be sustained by asset inflation resulting from monetary policy, labor markets will have to be deregulated and anti-trust policy weakened and of course regressive taxation imposed for stagnation to be overcome.

122

Bruce Wilder 11.24.13 at 8:10 pm

William Timberman @ 119: It might be more intellectually satisfying, at least in view of the re-emergence of scenarios so recently thought by all to have been banished forever, to debate the nature of evil than the imperatives of capital.

I usually think what people mean to do when they re-ify “capital” and “capitalism” as monolithic agents, is to bottle evil and put a label on the outside of the bottle. While neoclassical economists, whether in their Panglossian (Friedmanite Chicago) or technocratic (Krugman) costumes, are studiously trying to avoid any recognition of evil, like children trying to protect their parents from parental incompetence, striving to be better children than their parents deserve, because to face the reality of parental shortcomings, which are potentially lethal for the child, is too frightening.

Can we “debate” the nature of evil? When we “meet the enemy, and he is us”, can we make friends? Or, banish ourselves? Does either course even make sense?

Humans love dichotomies. A and not-A is the beginning of every Aristotelian walk-about. Good and evil are just another pair of bookends on the shelves of philosophy, along with free-will and determinism, being and becoming, etc. And, when we finish our sojurn in the garden of speculation, the takeaway is either the unity of the world or the discovery of a vitally important excluded middle, hidden by an interlocutor’s sleight of hand or our own too fixed a point of view.

Light and dark. Hot and cold. Up and down. Life and death. These sorts of false dichotomies are resolved by a recognition of the essential unity of the world, underlying our subjective experience. There’s only light, only heat. If good and evil survive our attempts to find the underlying unity of the world, it is because good and evil cannot be separated from our subjective experience, because they “exist” only in our moral will and perception, and the social relations our moral being engenders in cooperation-and-conflict with other moral beings.

At its best, politics is about using enlightened thought to resolve conflict into productive cooperation; politics is thinking and making choices — intelligent adaptation to circumstances. I thought the original post illustrated quite well the principle that choices have consequences and our choices have had consequences, and, still, it can be hard to own up to that power. Its the 21st century, collective version of Oedipus Rex and the Birth of Tragedy: our fate is not in the hands of the gods, it is in our own feeble will, and character is destiny, and woe is us, as a result.

Most of us wisely avoid existential awareness of the sheer infinitude of choice and consequence in our personal lives, and TINA or the market god or partisan Manichaeism or whatever-floats serves a similar need for computational economy in considering political choices. I, myself, invest my vanity in the attempt to walk and chew gum at the same time. I see economics as a series of paradoxes and dilemmas and conflicts, all of which can only be resolved with practical imperfection on a temporary basis. I find myself saying, “and” where others use “but”. It is a very small thing. Regardless, “for now we see through a glass, darkly” seems to me the central admission of the thesis of secular stagnation, and I don’t get it — to me, reality is slapping us silly, trying to wake us up. Maybe lying to ourselves and others — pretending, denial — comes close to the nature of evil.

123

Bruce Wilder 11.24.13 at 8:18 pm

labor markets will have to be deregulated and anti-trust policy weakened and of course regressive taxation imposed for stagnation to be overcome.

hair of the dog? Because nothing gets one over a hangover like going on another bender.

124

William Timberman 11.24.13 at 9:29 pm

BW @ 122

Ask and it shall be given you… That’s about as fine a short discourse on the nature of evil as I’ve read (or heard) in quite a few years. The humanist’s creed — us being the measure of all things, etc. — began somewhere right around where you claim it did, and it could just as easily end there if, as you say, more of us could find it in ourselves to heed the slapping of reality and hoist ourselves up off the couch.

125

mattski 11.24.13 at 11:44 pm

BW @ 122

Is this a self critique? I can’t tell. I mean, ‘reifying capitalism’ is everyday chicken soup here at CT.

While neoclassical economists, whether in their Panglossian (Friedmanite Chicago) or technocratic (Krugman) costumes, are studiously trying to avoid any recognition of evil

One the one hand you’re critiquing the inadequacy of our dichotomies. OTOH you’re chastising genuinely brilliant folks like PK for failing to uphold such! (And besides which, for all practical purposes I think you’re all wet here anyway.)

Seriously, what do you mean by ‘evil?’ If you ask me–I know, you didn’t–evil is merely the upper limit of ignorance. The red line on the tachometer of human folly. If you want to understand the banality of evil it is only necessary to see into the nature of ignorance. And, surely, excessive trafficking in words like ‘socialism’ and ‘capitalism’ is a classic instance of blinding ourselves via attachment to ideas.

If this is secular stagnation, I want my old job back.

Exactly. Because what we are trying to do is make the market economy work better. That doesn’t preclude improving society via cultural means as well, but for the purposes of this blog post, that is what we’re talking about.

126

Anders Widebrant 11.25.13 at 12:24 am

> The Bankers (I bet you were wondering when we’d get on to them) accomodate this policy goal
>
> But the fact is, you can’t get to an excessive debt ratio by responsible means, so the debt ratios of the US personal sector are in fact underpinned by a snake’s nest of silly and in many cases crooked financial instruments.

This (and parts of the bezzle post) strikes me as a little bit too cute on behalf of the bankers. Consider Guantanamo Bay, which employs a set of medical professionals to accomodate the policy goal of keeping their prisoners alive. As it turns out, this goal can’t be accomplished without resorting to forcibly feeding the inmates. But unlike banking, the medical profession has developed means to recognize and condemn such actions taken by their members.

Now you might object that a) the real story here is the wicked policy goal and b) it’s not so easy as all that to detect bad banking practices. Which is a) true, and protests from professional organizations help highlight that and b) you seem to be doing a pretty good job of it.

127

Bruce Wilder 11.25.13 at 7:04 am

mattski @ 125

Go back to my comment @ 113. Consider the distribution of income, and how highly unequal distribution of income can come about, and be maintained, as a practical matter. If you assume evil doesn’t enter into it, then, I submit, you are an economist.

mattski: excessive trafficking in words like ‘socialism’ and ‘capitalism’ is a classic instance of blinding ourselves via attachment to ideas

I agree with you there.

128

Richard Kroll 11.25.13 at 8:03 am

50 years is a long time to wait for mainstream economists to start discussing the effects of the second law of thermodynamics on the economy – even if they haven’t realized yet that this is what they have to deal with.

With only sun energy entering our closed earth system, as declining natural resources are mined in concentrated form and scattered around the world as “products”, its energy must ultimately provide not only our daily needs but also what is required to reverse the entropy of those resources we need to reuse.

Steady-state, non-growth economies are in the future of all nation states. The only argument open is how fast this will happen.

129

mattski 11.25.13 at 7:18 pm

BW @ 127

Bruce, glad to hear you see the problems with labels like capitalism similar to the way I do. I would add that, ISTM, you have a habit of falling back on those kinds of terms.

If you assume evil doesn’t enter into it, then, I submit, you are an economist.

Well… as I asked above, what do you mean by evil?! Does the word shed light? Frankly, I don’t think it does. It is short hand for, “GAK! I DO NOT LIKE THIS!”

So, while you and I agree that extremes in income inequality are undesirable, I don’t put it down to “evil”. I put it down to human feelings, feelings like fear, desire, doubt, jealousy, etc. And the fact that I have direct knowledge of these feelings helps me understand how large gaps in income come about without resort to gross generalizations like “evil.”

130

Bruce Wilder 11.25.13 at 10:00 pm

I’m a conceptual thinker, and I’m trying to keep my comments mercifully brief, so, yes, I probably do tend to load too much into some broad terms, though I try to avoid making “capitalism” an agent. I also object to uncritical use of the term, “market economy”, as you wielded it above, especially in a context, like analysis of the distribution of income, where it is misleading. The economies of developed countries are not organized primarily around markets — there are very few actual markets, so it’s at best an appeal to a metaphor outside a few commodities and finance securities. The developed economies exhibit a lot of hierarchical organization, and how much anyone gets paid for their labor (and to a large extent, how much anyone gets paid for their ownership and financial claims) is a matter of where they are in a hierarchy. Bosses, generally, get paid more — often a lot more. Large business corporations greater or more effective protections for property claims. The increase in income inequality in the U.S. over the last 40 years is in large part attributable to both a large share going to capital and a larger share of labor income going to top executives.

The supernatural connotation of “evil” is just a little play against the tendency of some economists to characterize the “market economy” of their imagination as “natural”. I would feature greed, indifference and sadistic cruelty among the feeling set motivating evil behavior, adding to the list you offered.

An archetypal relationship, driving the distribution of income, is, imho, the relationship between the boss and the worker. It’s a negotiated relationship, bearing characteristics of “market” relationships and hierarchical, authoritarian relationships. Value is being created as a result of the relationship between boss and employees, of employees doing what the boss tells them to do, and then that value is distributed among the employees, the boss, and, presumably, the owners of capital — the sunk-cost investment in tools, organization of production processes, advertising, etc.

If there were no ignorance — as you put it — if the complete information of textbook economics obtained, each factor would be paid its marginal product, and the boss would allocate resources in an efficient manner, such that the marginal cost of each resource equaled its marginal product. We don’t live in that world of complete information; we live in a world of deep uncertainty and limited understanding. The boss isn’t just allocating resources; the boss is telling employees what to do, prescribing behavior by rule, as a way of both discovering and making use of scarce information. In other words, the boss is managing the employees. How productive an employee is, is an outcome of management discretion and skill, and employee compliance and conformance. And, the employees themselves are employed to control the production process — labor “input” isn’t a metered service, for which “marginal product” is easily measurable. But, even if “marginal product” could be determined, it would be an outcome of management’s discretion in how the boss makes use of the employee, and of essentially political choices about how to make the hierarchical employment contract — “do what the boss says, or be fired” — effective, in the sense that being fired represents a loss the employee wishes to avoid.

The hierarchical relationship could be a benign one, in which the employee is made highly productive by enlisting in the hierarchy, and is paid an above-market-wage as a result — in other words, shares in the economic rents enjoyed by the hierarchy. Losing the job means returns to the market wage, which is less, and therefore a loss the employee wishes to avoid. The loyalty of the employee may be bought, not just with a super-market wage, but generous benefits, pension, and various implicit-contract assurances. The result is not a purely egalitarian income distribution, but it is mutually beneficial, nevertheless; the hierarchical relationship makes everyone better off — it pays the worker to have a competent, well-motivated boss.

One way you can get to a more unequal distribution of income is to make it in the boss’s interest to screw the employees, to find less benign ways to make the employees fear losing their jobs, so that they don’t have to be paid high wages, or be rewarded for loyalty. Break the union. Disable government regulation of labor markets. Promote macroeconomic policy, which results in high rates of unemployment. The business organization may be less productive overall, as the remaining employees are unhappy or less well-managed, and macroeconomic demand is a bit slack, but the boss and capital enjoy both larger incomes and a larger share of income, even if total income is diminished by these strategies. The Waltons have a $100 billion and tens of thousands of their employees cannot even get their managers to commit to a stable schedule for low-paid, part-time work.

I don’t think an economy can get to the extremes of income and wealth distribution without corrupting the relationship between boss and worker, or between the firm and the consumer, for that matter. And, reflexively, an economy, which has gotten to an extreme of income and wealth distribution, cannot help but see the powerful abuse the weak. I don’t think I am registering only a personal preference — as if a taste for justice was equivalent to a taste for vanilla ice cream.

131

Jessica 11.25.13 at 10:04 pm

Sigh. Late to the party again.
I propose another possible factor at work: that knowledge-driven production requires a different set of rules in order to function well. (Because the real productivity gains require that the knowledge be turned loose, but no one yet knows how to do that and simultaneously compensate/motivate those who do the work. )
Thus the internet and telecommunications infrastructure do not set off the wave of development that, for example, electrification did. For lack of productive investments (that could function within social organization for thing-driven production), investment flowed into financial shenanigans and arbitraging between wage levels in the first world and the newly accessible (to multinational capital) Chinese and ex-Soviet block work forces.

132

Bet Mulligan 11.25.13 at 11:40 pm

I didn’t read anything about systemic, massive frauds in your post. And no, I’m not just talking about the MBSs or CDO era.

Miss you.

133

Bet Mulligan 11.25.13 at 11:41 pm

aka vachon

134

lark 11.26.13 at 2:19 am

“It is decided, for lots of reasons (including geopolitical ones), and quite possibly correctly, that Chinese industrial policy ought to be accommodated by domestic exchange rate policy”

It’s a symptom of our malaise that western intellectuals cannot discuss these matters without falling all over themselves to agree with giving economic precedence to Chinese and other poor folks, as long at they are not American. Nationalism being the Big Bad and all that.

I think there are problems with these trilled apologias and I fear that decades of alienation of the mass of long suffering Americans is not without consequence. I for one can see no reason at all to trust the intellectuals, who don’t sing like canaries, they mutter into their palms in the corners with terrible guilt at making any noise at all, when the cause has a nationalist taint.

135

john c. halasz 11.26.13 at 5:24 am

@130:

“If there were no ignorance — as you put it — if the complete information of textbook economics obtained, each factor would be paid its marginal product, and the boss would allocate resources in an efficient manner, such that the marginal cost of each resource equaled its marginal product.”

But if there is large-scale joint and several production, the notion of a marginal product of a factor of production is indeterminable and effectively meaningless. Furthermore, not just perfect information, but complete markets and perfect competition are required to make out the alleged marginal products of factors: it would be the effects of market competition that would generate the information. So the fairy-tale of distribution in accordance with the marginal products of the factors of production, whereby efficiency and just desserts (yummy!) are identified, scarcely accords with socio-economic reality, or even adequately defines the terms to be equated.

Then again, though I think I understand what you mean by “hierarchy” as a necessary feature of large-scale productive organization. But socio-economic structure is not determined by such hierarchies. Rather such organizations do compete with each other across something like “markets”, but it is less a market that determines optimal output and more a competition for market control. Countervailing power must also be subject to hierarchical organization, if only to counteract the same, but the resulting systemic structurings don’t resolve into either an overall equilibrium or any center of hierarchical control. Rather plenty (or most) people will be grasping for the short end of the stick, and how short the end and how big the stick are at issue.

“Capital” is a reification of productive capacity, but productive capacity is itself produced by…, and to what (projectively constructed, rather than fictitiously pre-given or “natural”), social or systemic ends? That question would be the difference between capitalism or its potential alternatives, not merely a blinding attachment to “big ideas”. On the other hand, it is important to maintain the distinction between functional explanations and normative criticisms, even if, as I usually put it, the fact/value distinction is equally necessary and impossible. “Evil” is not a helpful term of denunciation, if only because evil is not a singular essence with a singular root, nor really is mere corruption, since it’s relative to institutional norms being effectively in place, which is always at issue. And are norms to be reduced to merely functional significance, whereas something can’t become dysfunctional without having ever been functional in the first instance, eh? But moralistic denunciations, an unfortunate habit of liberal types, just tend to obscure the sources of conflicting “moralities”, rather than gaining a peek at the “meta” level of shifting institutional orders. All sorts of “evils” then get set into play, whereby “goods” and “evils” change places in the dance. But that doesn’t come down to the sort of crude pop psychology of grab-bag motives that Mattski wants to reduce it to, nor to the mere ignorance that he himself complacently puts on display.

136

D. C. Sessions 11.26.13 at 1:33 pm

BW @130:

Let’s not overlook the fact that there can be a net value to the boss from screwing the employees from simple sadism (or other rewards of power for power’s sake.) Human perception of wealth is relative, and once you get to the the “man who has everything” point there is (nearly?) as much reward in making others poorer as there is in making oneself richer — and it’s often much easier to accomplish.

137

mattski 11.26.13 at 4:50 pm

But that doesn’t come down to the sort of crude pop psychology of grab-bag motives that Mattski wants to reduce it to, nor to the mere ignorance that he himself complacently puts on display.

??? I confess this baffles me, john.

But, Bruce, appreciate your response and hope to reply later today.

138

JW Mason 11.26.13 at 5:30 pm

Jessica makes an important point.

When the surplus is appropriated through control of tangible capital goods, capitalists cannot maintain their share of the surplus without devoting a large fraction of their revenue to currently produced goods. This means that even if capitalists don’t consume out of profits, a relatively modest growth rate is enough to keep desired expenditure equal to full-capacity output. But as surplus appropriation becomes more directly social in character — where it appears directly as a legal title to the product of society’s collective activity, for instance in the form of IP rents — capitalists need to spend a smaller share of their revenue on currently-produced goods in order to maintain their share of the surplus. In the limit, where all profits were rents of this kind and no consumption out of profits, we could only have expenditure equal to income with profits of zero.

The solution in this case (assuming we take the basic parameters of the system as given) is to somehow induce capitalists to spend a greater fraction of their revenue, either for their own consumption or as a condition of maintaining their claim on the surplus. (Since the consumption of the rich is motivated by status competition, these two alternatives are really the same.) This is one way of seeing the functionality of bubbles, and of a wasteful financial sector more generally.

It may be that to make sense of this conversation we need to draw on Veblen as well as on Marx and Keynes.

139

Rakesh Bhandari 11.26.13 at 5:45 pm

Great post, Josh. Very perceptive!

Hansen/Sweezy argued–and Summers echoed–that to the extent that today’s innovations are not very capital-using (true?) the economy could suffer excessive saving. In this case even when capitalists do have do spend on currently produced goods to maintain their surplus, they do not have to invest a large share of it. Perhaps monopoly too reduces the share of surplus that firms would have had to spend on currently produced goods to maintain their share of surplus.

Yet if we think of rent-collectors as indulgent spendthrifts–spending for today because they are not investing for the future–then perhaps we can count on them to spend most of their income.

140

St. Geralds Catholic Monastrey 11.26.13 at 6:29 pm

St. Gerald Catholic Monastery is a charity home which gives out loans to support and help those in need.
Here at St Gerald Monastery, we know exactly what it feels like to have been turned down by banks and finance companies who were previously tripping over themselves to lend you money, we understand that whatever has happened in your past doesn’t mean that your future will be the same, we believe not only in second chances but we believe that by helping people now they will be given something to build upon.We are a religious monastery,we have our Monasteries in London and Nigeria West Africa respectively. We are located at Registered office: 15 Lamb’s Passage, London EC1Y 8TQ. 23 Monastery Estate road, Wuse 2 Federal Capital Territory,Abuja, Nigeria.Email : stgeraldsmonasteryfinance@admin.in.th
Give and it shall be given unto you, good measures pressed down shaking together and running over.Provided you can afford the monthly payments and have a guarantor you can apply for a guarantor loan with us.It is our priority to render this help to those in need of it as a religious firm, to savage people from the high rate of internet scams.Like many of our customers you may be using ‘payday’ loans regularly to try and balance your household finances, by taking a term loan with us you could have a lower monthly payment over a 2 to 6 year term. Many of our customers borrow from us to pay off other more expensive loans or credit cards and like the idea of only having to pay 1 lender each month, our guarantor loans can also be used for any purpose for example, home improvements, buying a newer car, the money can be used for almost anything it’s your choice.

* Are you financially Squeezed?
* Do you seek funds to pay off credits and debts
* Do you seek finance to set up your own business?
* Are you in need of private or business loans for various purposes?
* Do you seek loans to carry out large projects
* Do you seek funding for various other processes?

We offer the following types of loans:

*Commercial Loans.
*Personal Loans.
*Business Loans.
*Investments Loans.
*Development Loans.
*Acquisition Loans .
*Construction loans.
*Business Loans And many More:

Your Satisfaction and Financial Success is Our Aim. We are hope to
hear from you soon:

LOAN REQUEST

NAME:
NATIONALITY:
ZIP CODE:
ADDRESS:
GENDER:
DATE OF BIRTH:
MOBILE NO:
OCCUPATION:
MONTHLY INCOME:
COLLATERAL/ NON COLLATERAL ?
REFEREE
LOAN AMOUNT:
LOAN DURATION:
PURPOSE OF LOAN:
WEBSITE LINK WHERE YOU HEARD ABOUT US:

PAYMENT OPTIONS:

Payment by bank to bank transfer (48 hours )
Payment by bank certified check ( 9 days )
The First option which is by bank to bank transfer, loan funds are transferred directly into your account with the aid of our bank,in this option, applicant must have to send down his or her full bank information to enable us make the transfer and it takes maximum 48 hours for the funds to be transferred into your account.As for the last option, a certified check is made out by our bank as a draft, which can be cashed by clients anywhere in the world, it takes 4 working days to get to the applicant and 5 days for the check to be cleared.Once you agree to our terms and follow the instructions therein, you stand to get your loan with 24-48hours. This depends on your seriousness and urgency in obtaining the loan.
Furthermore be informed that you will also need a form of Identification which can be either a Driver’s License or your working Identity card.In acknowledgment to this mail, we can start the processing of your loan.
Contact us now via email stgeraldsmonasteryfinance@admin.in.th

141

JW Mason 11.26.13 at 7:39 pm

Perhaps monopoly too reduces the share of surplus that firms would have had to spend on currently produced goods to maintain their share of surplus.

Yes. I’ve been playing with the idea that capitalism has long periods where markups are low relative to fixed costs, and expenditure tends to un ahead of income, alternating with long periods where markups are high relative to fixed costs, and expenditure tends to fall short of income.

The first case would describe situations where market power, in the aggregate, has yielded lower quasi-rents than the fixed costs that were incurred to gain that market power, while the latter would describe situations where market power has yielded quasi-rents greater than the fixed costs incurred to gain it. (Including, of course, situations where the market power was not gained by incurring costs at all, but was granted by the state or otherwise simply acquired.)

In classical theory — Marxist as well as mainstream — this divergence should not be possible because capitalists will disinvest in the sectors with lower quasi-rents and invest more in the sectors with higher. But since both capital assets and the liabilities that finance them are very long-lived, that kind of profit-seeking is still compatible with these long swings.

One interesting implication is that we would expect a greater degree of monopoly power to be associated with lower prices, rather than with inflation as we might naively expect. (And as Abba Lerner thought.) But I’m not sure if this is a productive way of thinking about what’s happening in the real world.

142

Rakesh Bhandari 11.26.13 at 7:58 pm

Is your point that there is no theory of barriers to entry in classical theory?

143

JW Mason 11.26.13 at 8:05 pm

I’m not sure how important barriers to entry are. I am still thinking about this….

144

SoU 11.26.13 at 8:13 pm

@ 143 -
it would seem that barriers to entry is an important variable mediating between the fixed costs and level of market power discussed in #141, no?

145

Bruce Wilder 11.26.13 at 10:45 pm

Economic rents mediate between sunk-costs and market power in a way that’s more directly relevant to what Jessica was saying.

It’s most exaggerated in information sectors, but sunk costs and fixed costs have dominant in most manufacturing and distribution. At least since the late 1980s, it has become untenable, for example, to load overhead onto “direct labor” as an accounting heuristic, which was the practice for more than 50 years — the change has been that profound.

Jessica’s comment made me think of Kontratieff cycles: the Second Industrial Revolution (1870 – 1930) in which electricity was a driving force contrasting with the computing and communications revolutions (1975-2035?), with the former coinciding with the run-up of petroleum and the latter, the run-down.

There was a Schumpeterian contest going on in the Second Industrial Revolution, between the rentiers of the landed aristocracy and of coal, iron and textiles, on the one hand, and the new American and German industries of oil, steel, chemicals and electricity. The British Long Depression of the late 19th century resulted from the slow grinding down of rents. The upstart Americans discovered the joys of protectionism and ate the British lunch with protective tariffs, which spurred one American industry after another. The older industries — coal and railroads and textiles — settled into a long slow grind of rent erosion and “normal” profits, partly offset by financialization and the switch to making tools and capital equipment (where the Germans and Swiss were superior to the British).

Agriculture drew in additional resources — more people, more land — until the 1890s. After WWI, agriculture in the U.S. had to both find capital and shed resources — a contradictory imperative — in order to realize the gains to galloping technological advances, and to supply the agricultural surplus necessary to urbanizing growth.

Electricity made possible the generalized industrial mass-production processes that drove the huge increases in labor productivity that occurred after 1910, broadening and accelerating into the 1930s and 1940s. The new industries often had a go-go period, followed by a long, slow toboggan run of incremental progress: this was exemplified by the auto industry. Building the railroads in the 19th century required enormous capital accumulation; an auto assembly plant could finance itself initially from accounts payable, by selling the car before it had to pay for the parts. Later on, after WWII, automakers struggled to hold onto enough capital to get through their cycles of new models and industrial renewal. It’s those cycles of industrial renewal, which have been exploited to ship production off to China, even as the relentless incremental improvements have reduced the labor requirements of industrial processes to often astoundingly trivial levels. (The example that most impressed me was the high-end, $1000 washer with direct labor content of $50, even at union wages.)

Only rarely was anything ever more than displaced by the Second Industrial Revolution. Edison famously remarked that his goal was to make candles a luxury, not to eliminate them. Telegrams survived the advent of the telephone. Horses were still providing transport in the Second World War. The great Clippers reached their peak of development resisting steam into the 1890s. The theme was proliferation: horses plus railroads plus autos plus trucks plus airplanes.

The computer and communications revolutions have had a different character, with convergence eliminating vast capitalized structures, of production and distribution. The telegraph is finally gone, killed not by the telephone, but by the computer. The book may well be eliminated in our lifetimes.

Quasi-rents have to sink, as Jessica suggests, if past technological advances and accumulation are to be available as fodder for economic progress. Then, there’s that whole peak oil, overpopulation, limits to growth, climate change thing looming in front of us.

146

Bruce Wilder 11.26.13 at 11:31 pm

john c. halasz @ 135

what can I say, but “yes”?

Narrative arguments are hypnotic. They start out by using some shiny idea, logical nugget or paradox to distract the conscious mind and induce a trance, during which the unconscious mind is open to suggestion, and a whole train-load of emotional associations can be unloaded. Debates (dialectic?) resemble Freudian therapy in a way: a hopeless battle of transference and counter-transference, as therapist and patient try to hypnotize each other, or wake the other up out of trance, as seems tactically advisable. (In the Freudian process, the client spontaneously “remembers” her past — there’s a word for that, I’ve forgotten . . . aman…? It is not completely unlike the political trope of invoking a golden age or a founder’s ideas.) One side makes a concession, and by that concession tries to gain control of a particular, strong emotional association, and from there to substitute their own narrative train to their desired destination. Alternatively, a strong contradiction is introduced as a wake-up call; a gambit to use the openness to critical awareness as an opportunity to change direction.

A sufficiently elaborate political or economic theory is a dreamworld, familiar to its inhabitants, its dreamers, and carrying prescribed meanings and emotional values, which can be ritualistically recited. It’s why slogans and bumperstickers can be so powerful in politics, if they trigger deep emotional associations planted by more elaborate narratives. (See News, Fox) Dreamworlds are magical. Meaning drives cause-and-effect. And, these are shared dreamworlds, socially significant sources of personal and political identity.

It’s amazing, really, that humans have ever acquired any capacity for functional analysis, especially regards our own social arrangements, but whatever capacity we have is in constant tension with that drive for meaningful narrative. That necessary, but impossible fact-value distinction can be, at its best, the hypnotist waking the subject up with a snap of his fingers.

Anyway, that’s a long prologue to saying that economics is stultified by being trapped in a powerful narrative, a kind of magic spell. Rakesh linked above to a short piece by David Colander, author, I guess, of an economics textbook of the unrelentingly conventional variety:
http://modernecon.org/structuralstagnationsummary/
It is a remarkably good illustration of economics as hypnotic, neoliberal narrative — in other words, a complete, ripe horror show. [For those playing at home without a degree in economics, any time an economist professes to teach "macro" with an "AS/AD" (aggregate supply / aggregate demand) model, it is safe to assume said economist is a moron or a liar or both, and skip ahead.] One of the masterful hypnotic maneuvers is denying that he’s taking any position: “I don’t take a position about whether the structural stagnation view is the correct view . . . I present it because it raises precisely the type issues that I think we should be raising”, while endorsing austerity in all its destructiveness as a remedy for structural problems. “No one wants austerity for austerity’s sake”, he declares piously, before predicting, “labor markets will have to be deregulated and anti-trust policy weakened and of course regressive taxation imposed for stagnation to be overcome”. Of course.

I don’t know what can be done with Colander’s analysis, except to contradict it all — in toto. It’s evil. And, you’re right, “evil” doesn’t denote or identify a thing. It blends too easily into a popular brand of empty, purity liberalism.

It was Rakesh’s quoting Krugman — I assumed accurately — that provoked the comments that led to my exchange with Timberman and, then, mattski. If I were feeling generous, I would presume that, when Krugman claimed he had never heard a “macroeconomic argument” for why full-employment in a rich man’s economy is not possible, he was using the modifier, “macroeconomic” as a weasel word, to exclude the panoply of arguments to which I alluded, some of which he has surely encountered. It’s a critical weasel word for Krugman’s devotion to the Keynesian-ism of the original neoclassical synthesis as a technocratic solution: effective policy can be neutral with regard to income distribution, so let’s sidestep all the “misunderstanding” about business confidence, inflation fears and austerity, and just do it and “end this depression, now”.

I’m deeply ambivalent about Krugman, and his role as establishment Cassandra — the prophet always right, never to be believed. (Is that by design?) His praise for Summers’ apologetics just heightens my disgust. And, of course, his anti-institutionalism, on full display, provokes me, as well.

But, it’s that “misunderstanding” nonsense that gives Colander cover. And, I think Timberman might be right, the right course is to first step back to the terra firma of moral analysis without the wind-up of competing esoteric analyses of how a market economy works. Then, let the full force of commending, say, regressive taxation to overcome “stagnation” hit us in the face. See it as a conflict of raw interest. Not as a difference of opinion over the size and role of government, or similar nonsense. Not as a legitimate difference of opinion at all. But, as the ambition of a malevolent power — malefactors of great wealth, if you like. That’s how and why I’m willing to use “evil” as a term, though with some sense of ironic detachment — because I think we so desperately need to step back from this early 21st century parody of liberal consensus, and see, clearly, that what some powerful people want is not a “mistaken” version of the common good, but actually destructive and cruel, and must be opposed with moral fervor.

Clearly, the “secular stagnation” thesis has stirred things up. Josh Mason, on his blog, rather optimistically asserts that it may be moving the stagnant dialectic of macroeconomics decisively forward. (What’s liberal theodicy, and when did either John or I, of all people, show that we had fallen victim to it?)

147

ralph 11.26.13 at 11:53 pm

Daniel, if I asked very nicely, would you be willing to mail me and explain how I might be invited to read your blog? I recall the nastiness, and the change had me a sad. At the time I was busy and forgot to ask; I ask now, having remembered the value quite clearly.

148

JW Mason 11.27.13 at 12:22 am

(What’s liberal theodicy, and when did either John or I, of all people, show that we had fallen victim to it?)

It’s the idea that what is good for economic growth must be good for human beings. Maybe full employment in a rich man’s world is perfectly possible. So what? Just means we need to set our sights beyond full employment.

149

William Timberman 11.27.13 at 2:23 am

One thing probably still needs to be said even in the wake of some pretty brilliant stuff here at the end of a long thread, which is that it’s not only professional economists who’ve fallen victim to a kind of self-induced epistemological Verwirrung. Consider President Obama’s Nobel prize acceptance speech: what on earth was he thinking? Why didn’t his brain short out? Why didn’t ours?

Economists at least have the excuse that they’re trying to analyze a system which has a very large, perhaps unknowable, number of variables well enough to give us at least some reliable clues to right action. The moral confusions of a few aren’t necessarily an indictment of the ambitions of their entire profession, however much it may call their own character into question. In the President’s case, however, it would be a trivial thing for him to know better. That he doesn’t, or pretends he doesn’t, is definitely an indictment of his character. That his speech is considered unremarkable by so many of us is just as definitely an indictment of ours.

150

mattski 11.27.13 at 2:30 am

Bruce,

A sufficiently elaborate political or economic theory is a dreamworld, familiar to its inhabitants, its dreamers, and carrying prescribed meanings and emotional values, which can be ritualistically recited.

You don’t see the irony in a person of your extraordinary prolixity writing this?

I thought I might respond at some greater length here, but seeing JW Mason write,

Maybe full employment in a rich man’s world is perfectly possible. So what? Just means we need to set our sights beyond full employment.

I don’t think I should. Because my impression is you would trust JWM’s motives and intellect more than mine anyway. And he plainly allows that Krugman could well be right.

*Reminder: Krugman was not expressing a preference. He was, laudably in my view, keeping his own moral preferences in check in pursuit of scientific accuracy.

151

mattski 11.27.13 at 2:34 am

Just means we need to set our sights beyond full employment.

Agree 100%

152

Ed Herdman 11.27.13 at 2:40 am

Speaking of dreamworlds, though, I have to wonder whether Bruce is more on target in that quote than William Timberman’s description of the “system with [...] variables” insofar as that it’s incomplete. I’m thinking of the completeness of axiomatic systems here (I assume that’s pretty amateurish of me). I don’t have anything else, sorry; the comments are great.

153

Bruce Wilder 11.27.13 at 4:48 am

the idea that what is good for economic growth must be good for human beings.

Not an idea to which I subscribe.

154

JW Mason 11.27.13 at 5:22 am

I don’t know what’s in your heart, Bruce. Just know what you write.

155

Bruce Wilder 11.27.13 at 5:40 am

Show me. Maybe, the denotation will make more sense to me than the description.

156

JW Mason 11.27.13 at 1:20 pm

I was responding to this:

while economics may not be a morality play, the economy sort of is. The kinds of things a society has to do, to tilt production and consumption heavily toward private, luxury goods is going to result in poverty and unemployment or underemployment of labor. Anyway, it isn’t hard to work out various cross-confirming intuitions why extremes of income distribution are not consistent with full-employment — assuming, of course, you’re not trapped in highly stylized abstractions.

157

Peter T 11.28.13 at 4:54 am

The thread gave me, as they say, furiously to thin. Thanks. Pity it is dying, but there will be another.

158

Peter T 11.28.13 at 4:54 am

Duh? “think”, of course.

159

john c. halasz 11.28.13 at 8:24 am

Yeah, what do I know, J.W.? I’m not a conceptual thinker; I just think in hieroglyphs and emoticons.

160

Ronan(rf) 11.28.13 at 1:04 pm

I’ll put this forward, as the alternative to Bretton Woods

http://www.thenation.com/article/174366/empire-states-pankaj-mishra#

and see what people say

161

JW Mason 11.28.13 at 5:50 pm

Yeah, what do I know, J.W.? I’m not a conceptual thinker; I just think in hieroglyphs and emoticons.

Hey now. I know you’re a very smart guy, I learn a lot from your comments. I just think sometimes you make mistakes. I’m sure you think I’m mistaken sometimes too, and I’m sure sometimes you’re right. Nobody’s capacity for thought needs to be impugned.

162

john c. halasz 11.28.13 at 11:57 pm

You engaged in snark and willful misinterpretation, J.W., so lacking in time, I just thought I might return the favor.

But now that I’ve escaped from the annual familial kidnaping, I’ll just point out that the optimization framework belongs to the profession, (scarcely a science), of economics, and “full employment” (of all “resources”, not just labor) is the generic name for such optimal functionality or “efficiency”. And addressing the topic at hand in such widely accepted conventional terms seems a relevant conversational tack. (I don’t bother discussing things in terms of surplus-value here, because it would just invite unnecessary distractions, especially from the least informed. And beside, Marx is for aficionados, a complex and befuddling thinker who requires much effort to understand). But, of course, if one doesn’t want to address things in the capitalist conventions of profits and wages, one can just bump up the level of abstraction a bit and speak of investment and consumption functions and allocations and distributions between them, which has complete generality for advanced production economies, and allows one to discuss the criteria, procedures and institutional frameworks that would determine them, since the problems of realizing investment and inter-sectoral coordination and expanded reproduction under continuing technical change, hence “business cycles”, would apply to all the alternatives. I’m not particular about just which vocabulary to use, since, being a hermeneutic guy, for whom interpretation is just as fundamental a human activity as labor, I think one should try to be able to translate between them. The point is really to grasp the functional reasons behind prevailing arrangements, if only to understand how something that maybe once was robustly functional has become rampantly dysfunctional. Which is why the tendency toward moralistic denunciation,- (“greed!”, in which case one might as well appeal to original sin, though I’m no Pelagian),- is just distracting, obstructing understanding, even as the tendency toward ex post rationalization, which D^2 seems to partly display, is equally irritating. But I don’t know if you understand how difficult it is to get across to ordinary people even the most basic economic concepts. (Your students have at least signed up for the course). Early on in “Occupy”, one fellow was telling me how all production should be for immediate consumption. I was stunned, -(no capital or intermediate goods?)- and replied quickly, that, no, planned obsolescence was more of a problem. And it turned out later that this guy who is still somewhat affiliated, is a professor of computer science at the local military college. It’s amazing what performative contradictions people can carry around in their heads- and not just there. (But you get a lot of that “small is beautiful”, Harrington-Jefferson yeomen republic of virtue stuff here in VT. At least he wasn’t talking about “chemtrails”). So maybe, even though this is CT, cheap one-upmanship is not exactly in order, eh?

At any rate, the topic here was “secular stagnation” and financial bubbles. And I and I think B.W. were arguing that, though there might be a number of distributional shapes that are compatible with a functioning economy, 1%/99% isn’t one of them. (Krugman specifically cites the example of NYC, which elsewhere I dubbed the Singapore fallacy, highlighting an imperial city-state, while ignoring its role in the larger regional or international economy). And the point is the distorting effects of serial financial bubbles, which stove-pipe incomes to the top based on large accumulations of essentially fictitious capital based on dis-investment, which leaves a shortfall and imbalance in both the investment and consumption functions, i.e. a fundamental economic dysfunction. Yes, the “market system” does have self-equilibriating tendencies, but it thereby can just as well be equilibriating fundamental underlying disequilibria,- until it can no longer do so. That seems to me plain enough. And that has nothing to do with punching beyond the functional horizon of “full employment”, rather than falling way below it. Besides which, if you do really want to get beyond such a horizon, then IMHO pushing for full employment is precisely the way to bring about such a “dialectical” reversal. We could use a large healthy dose of wage-push inflation over here, right now, eh? At any rate, I’ll be out with the gang with our signs and leaflets at Walmart tomorrow, trying to publicly make that very point, singing our carol, (“God bless you merry shoppers, let nothing you dismay/ Walmart has low low prices to go with your low pay…”)

David Collander BTW co-authored early on the MAP proposal with Abba Lerner, which paine is so enamored of. I don’t know exactly what’s become of him since, but I think his theoretical work concerns complexity economics. However, his website says his political orientation is that of activist classical liberalism in the tradition of Keynes and Hayek, which just sounds bizarre. I don’t know how one should take his “explanation” as linked to above.

163

mattski 11.29.13 at 3:28 pm

Yes, the “market system” does have self-equilibriating tendencies, but it thereby can just as well be equilibriating fundamental underlying disequilibria,- until it can no longer do so.

Until the sky falls?

I am very curious what JW Mason makes of john @ 162. If a point cannot be made reasonably concisely, is there a point there?

164

William Timberman 11.29.13 at 3:47 pm

mattski @ 163

If a point cannot be made reasonably concisely, is there a point there?

If you have to ask, you probably can’t afford it. Which is not to make light of your complaint so much as to say that I get a lot out of JCH’s comments. Although I suppose you could argue that some are too long, I often find myself wishing they were even longer, especially when, just before they leave off, I feel myself on the brink of understanding something I’d never even considered before. I often have the same experience with Bruce Wilder’s comments, although those are generally easier to digest, being, as they are, much closer to my own habits of thinking.

165

john c. halasz 11.29.13 at 11:34 pm

mattski:

Who appointed you hall monitor? As far as I can tell, this is your POV:

“Because what we are trying to do is make the market economy work better”

What do you mean by “we”, Kemosabe?

In an earlier thread, you undertook to animadvert against those who questioned the “neutrality of money”, without any apparent recognition that the phrase refers to a quite specific economic doctrine, (though others choose to answer your objection with anthropological generality). Here you seem signally unaware of all that palavering amongst economists about “Bretton Woods 2″ and their failure to recognize a long brewing housing bubble until, at best, late in the day, and then declare that “subprime is contained”, despite the fact that it was a far more general credit bubble, (involving not just CRE, but also corporate loans, and a vast apparatus of structured securitization and derivatives). Oh! And then a global financial crash and economic crisis occurred, from which “we” have scarcely recovered, nor likely soon, yet I am apparently cast in the role of chicken little and declaring heavenly failures?

If that’s your idea of “concision”, then I want no part in your subblime complacency or apparent ignorance.

166

mattski 11.30.13 at 5:01 am

john,

I expect some hostility here on the grounds that I tend to challenge what I consider dogmatic thinking. Your reactions seem out of scale to me. I’m not the hall monitor, I’m a person who thinks the left loses traction when it becomes excessively parochial.

Frankly, I think you and Bruce have a habit of consoling yourselves (William too!) with a lot of technical sounding rhetoric that is more ‘ritualistic’ (Bruce’s phrase) than anything else. If you don’t want to make the market economy work better… well, try selling your alternative–whatever that is–to the rest of the country, and best of luck to you.

167

bob mcmanus 11.30.13 at 10:07 am

As much as I appreciate the craft of BW and JCH, I can’t help but feel they are like, so twentieth century and I am looking for some 21st century minds because this time it’s different. It really is, the old categories and narratives and praxis don’t apply. I don’t know my ass from my elbow on this stuff, but after a couple years, I have a clue, just a clue, as to where to look, what kind of discourse and a few names. tiqqun of course, but hell, they are 15 years ago.

http://www.e-flux.com/announcements/issue-46-accelerationist-aesthetics-guest-edited-by-gean-moreno/

Steven Shaviro, Franco Berardi Bifo, Mark Fisher

No, this isn’t just hipsterism. We all went post-industrial (unionism and Fordism died) in the 70s, 2-3 freaking generations ago.

168

Bruce Wilder 11.30.13 at 11:05 am

Do you think Larry Summers is trying to make the economy work better, in any sense we ought to credit?

169

john c. halasz 11.30.13 at 11:32 am

I think it can be taken as read the the resurfacing of the “secular stagnation” meme, whether by Summers, Robert Gordon or (gnk!) Tyler Cowen, contains a goodly measure of bad faith. But saying so would offend the sensibilities of those who believe in a pure theoretical intentionality and invite the charge of resorting to a fallacious ad hominem, (which umbrage-taking is often the comical argumentative move made by those who don’t realize that it is not their integrity, but their veracity that is being impugned).

He’s perhaps a better link to what Bob is trying to get at:

http://criticallegalthinking.com/2013/05/14/accelerate-manifesto-for-an-accelerationist-politics/

170

William Timberman 11.30.13 at 12:52 pm

bob mcmanus @ 167

As they say, bring it on. It’s also worth saying, though, that it isn’t new ideas we need, much less a new label, but new implementations. The ideas have been around for a long time, even in some of their supposedly brand-spanking-new configurations. We’ve even thought of one or two of them ourselves as long ago as your Seventies, or even earlier.

The truth is, it’s always time to get serious. If you can manage to get a whole bunch of people serious at the same time, the rest should be a piece of cake, no? Not that it matters one way or the other, but I’m not betting against you.

171

D. C. Sessions 11.30.13 at 1:57 pm

jch@162:

Yes, the “market system” does have self-equilibriating tendencies

AKA “negative feedback” (as it’s called in control theory.)

Alas, negative feedback is not only compatible with instability, it’s a key component in a lot of unstable systems. Witness what happens when most people try to drive on ice. Negative feedback with a time lag is a great way to produce a reliably unstable system.

172

Ronan(rf) 11.30.13 at 2:16 pm

I guess my only problem with all the analysis is, we never get given the alternative. (In a real political economy, not one imagined in perfect distributional equilibrium where we’re forever moving towards social democratic Utopia.)

173

JW Mason 11.30.13 at 4:51 pm

If you don’t want to make the market economy work better… well, try selling your alternative–whatever that is–to the rest of the country, and best of luck to you.

The alternatives are all around us. Only a fraction of productive activity is organized in profit-making private businesses, and only a small fraction is organized through markets. (Look at all the work we’re doing on this thread.)

Keynes believed in something like secular stagnation, and he said explicitly that the increasing share of long-lived capital and the tendency toward satiation of consumption needs was not compatible with continuing to organize the economy around the profit motive. With a building or railroad — not to mention a brand or a new productive technique — likely to last for decades, it’s simply impossible to reliably predict its lifetime output, and if investors are risk-averse, they will systematically undervalue far-future yields. This problem only gets worse as interest rates fall and more of the present value of an asset depends on the situation in the distant future. In the 19th century this was tolerable because many assets were shorter lived, businesses were more often run owner-managers who valued investment and growth for its own sake, and a high propensity to consume on the part of most of the population meant that full employment did not require that high investment. But even by the 1920s, Keynes thought, this was an insurmountable problem for capitalism — especially since the financial system would not deliver sufficiently low interest rates in any case.

“Comprehensive socialization of investment” was not just a throwaway line in the General Theory. Keynes believed it. And I think that, regardless of the political commitments of Summers and co, that’s where the logic of secular stagnation will lead them too. That’s one reason I think it is such a approve development intellectually.

The alternative for JMK was not central planning, and it was also not what we think of as “Keynesian” demand management. Rather it was the management of all enterprises using long-lived assets by autonomous nonprofit entities according to their own professional norms and their own judgement of the public good. The university, the voluntary hospital, the orchestra or theater, the major newspaper, but also the formally for-profit utility or Bank of England (legally still a private bank in his day) he thought were the beginnings of a transition in that direction. Today you might add some tech companies, which (at least claim to) care more about their self-appointed mission than about profits, and don’t face effective financial pressure to change that.

The best discussion of this side of Keynes’s thought is Jim Crotty, Was Keynes a Corporatist?

174

JW Mason 11.30.13 at 5:32 pm

Shorter above: it’s the “market economy” that is utopia. Economic life is steadily socializing itself.

175

mattski 11.30.13 at 5:44 pm

The alternatives are all around us.

That is fine. What that suggests to me is semantic quibbling between “alternatives” and “tweaks.” Let’s make it work better, to me, means let’s trim it here (regulate the financial sector more aggressively,) expand it there (enable public corporations if you like) and make it work better for all of us.

From your Crotty link,

[Keynes] called with equal enthusiasm for the state to
adopt powerful industrial policies to regulate enterprise and industry behavior.

Emphasis added.

I have made the argument (in my strictly unprofessional, amateurish way) at blogs like The Volokh Conspiracy (where I was viewed as a flaming Marxist) that “capitalism” as we know it and “socialism” as we know it and speculate about it, will quite possibly merge with the passage of time. One way that I thought to imagine this is by asking what happens as frictions are slowly eroded out of an economy due to improvements in information technology and information accessibility. Well, profits tend to recede, no?

176

mattski 11.30.13 at 5:49 pm

JWM @ 174

Sounds to me like we’re making a very similar argument, and quibbling, as I said, over (ultimately ego-based) matters of posture.

177

JW Mason 11.30.13 at 6:14 pm

Mattski,

Yes, I think we probably agree. It’s interesting, by the way, to read the end of Capital Vol. 1 and find there is no suggestion that capitalism will end with violent revolution — on the contrary, Marc explicitly says that the end of capitalism will be “infinitely less violent” than the bourgeois revolutions that established it. Not is there any mention of a fall in the rate of profit. What Marx says is simply that capitalism establishes such an extensive division of labor, integrates the productive activity of people so directly, and effectively eliminates private property ownership and markets through the consolidation of production into a few giant enterprises that, in effect, one day people just look out the window and say, “hey, it’s socialism.”

But I think the disagreement over words still matters. Incremental evolution from the economy we live in, yes; but not from a “market system”.

178

Alex K. 11.30.13 at 6:16 pm

” With a building or railroad — not to mention a brand or a new productive technique — likely to last for decades, it’s simply impossible to reliably predict its lifetime output, and if investors are risk-averse, they will systematically undervalue far-future yields. “

Predicting the lifetime output of a capital asset is not needed — you just need to predict that its output is going to be larger than the estimated cost. Furthermore, you don’t get to introduce animal spirits into the investment conversation and then claim that they will behave precisely in the way that makes your argument work. Plenty of animal spirits will be overoptimistic about the prospect of a particular capital class; see the overinvestment in networking capital of the late nineties.

Nor is the (fairly idiotic) idea of shielding large enterprises from market discipline very compatible with deep skepticism about predicting the future. It is precisely because prediction is hard that you need a diversity of investment attitudes and the selection mechanisms of the market.

For what it’s worth, there are alternatives to the secular stagnation hypothesis, alternatives that are compatible with every single stylized fact that Larry Summers brings in support of his thesis. This secular stagnation fashion in macroeconomic story telling will pass soon enough.

179

JW Mason 11.30.13 at 6:38 pm

(fairly idiotic)

I wonder, what is an aside like this doing for you? I was going to reply to your comment. Now I won’t.

180

Alex K. 11.30.13 at 6:42 pm

“I wonder, what is an aside like this doing for you?”

It reflects a visceral dislike of socialization of capital ideas, since I lived in a communist system. I can abstain from expressing it, but it is there nevertheless.

181

mattski 11.30.13 at 6:52 pm

But I think the disagreement over words still matters. Incremental evolution from the economy we live in, yes; but not from a “market system”.

JW,

I am interested in why you feel the disagreement over words is material. You know, when I say, “market economy,” I don’t believe I am denying the public and quasi-public sector aspects of our system. Not at all.

Is it controversial to refer to our system as a “mixed economy?” I don’t think so. Most people understand “mixed” to refer to market aspects and public or government managed aspects. In as much as the “market” aspect is an important and for some people, a defining one, what is the problem with the term?

I get the impression a lot of this is about mental associations. Maybe (maybe!) when I think of “market economy” I am more focused on small business, and you are more focused on large, mega-capital enterprise. I don’t know. But I have trouble imagining your average person accepting the idea of living in a world where people are NOT free to start up businesses on their own. Fwiw.

182

Rakesh Bhandari 11.30.13 at 6:57 pm

Look forward to reading the Crotty paper on the socialization of investment

here is a helpful interpretation. “Was Keynes a Socialist” in Galbraith and Darity’s
textbook Macroeconomics (Houghton/Mifflin, 1994):

“Keynes immediately added that such a socialization of investment ‘need not
exclude all manner of comporomises and of devices by which public authority
will cooperate with private initiative.’ Moreover, only investment planning
was involved : ‘Beyond this no obvious case is made out for a system of
State Socialism which would embrace most of the economic life of the
community.’ After all, argued Keynes, ‘It is not the ownership of the means
of production which is important for the State to assume. If the State is
able to determine the aggregate amount of resources devoted to augmenting
teh instruments and the basic rate of reward to those own them, it will
have accomplished all that is necessary.’

“Keynes was serious then when he expressed enthusiasm for the social
philosophy of the idiosyncratic Argentinean emigre Silvio Gesell, whom
Keynes described as a ‘strange and unduly neglected prophet” albeit a
‘crank.’ Gesell had striven to construct, quite explicitly, what Keynes
corrected described as an ‘anti Marxian socialism.’ And Keynes himself,
while contemplating a ‘somewhat comprehensive socialization of investment,’
was insistent that his own scheme would avoid authoritarianism while
‘preserving’ the desirable aspects of ‘present day capitalistic
individualism,’ namely the twin goods of ‘efficiency and freedom.’ However
unless steps were taken to end the unemployment crisis, Keynes feared, few
would continue to put up with the ills of ‘present day capitalistic
individualism.”

On the the topic of the falling rate of profit, Marx does underline in Capital volume I that the rise of the organic composition of capital is the most important tendency. That is equivalent to a falling rate of profit. It’s true that due to capital-saving innovation Marx thought that the OCC would rise less quickly than technical composition of capital and that a crisis-induced devaluation of capital could lower the value composition of capital. Still Marx clearly thought that due to the rise of the OCC which is the expression of the effect of the value composition of capital due to technological change alone the value composition of capital would also rise, which is to say that there is a powerful tendency for the rate of profit to fall, though compensated by a rising mass of profit as a result of an increase in the absolute level of investment.
The centralization of capital which Marx discusses in detail in Capital vol I results from the depression in the profit rate, leading to the elimination of weaker firms and their absorption by stronger capitals. Centralization of course can itself raise the profit rate due to the elimination of duplicate staff in bigger enterprises and the opportunity it affords surviving firms to slow down the rate of profit through what Schumpeter called co-respective competition.

183

mattski 11.30.13 at 7:02 pm

It reflects a visceral dislike of socialization of capital ideas

But, Alex, the conversation would have been so much better if you had just “sat on that shit.”

184

Rakesh Bhandari 11.30.13 at 7:02 pm

slow down the rate of accumulation through co-respective competition and thereby slow down or counter-act FROP

185

mattski 11.30.13 at 7:09 pm

Nor is there any mention of a fall in the rate of profit.

I guess Marx didn’t anticipate amazon.com!

186

SoU 11.30.13 at 7:14 pm

@ JW in 173/4, in particular.

this reminds me of an interesting debate i witnessed about 5 years back. it was at some symposium or whatever. between two professors of mine, the first of whom was arguing the whole: capitalism has become global, nation state is behind but secondary to this process, the tendrils of capitalist empire are reaching into all of the creative and post-fordist work patters, and ‘the only way out is through’ in that the alternative lies with this newly global subjectivity produced by the new lines of 21st century globalizing capital. you’ve probably read the book.

the other individual – she was arguing what i kinda categorize as the ‘UMass approach’. y’know, taking from resnick and wolff the critique of essentialism in approaching the question of the ‘logic(s) of capital’. building on gibson-graham regarding non-capitalist spaces existing within (and being necessary for) capitalism in all its forms and instances. something about the real field of production being internally differentiated and the excessive focus on the mode of production/reproduction (in wake of Althusser) effectively marginalizing already non-capitalist forms of work in the real world, precluding the exploration of these spaces of non-capitalism for use in constructing a post capitalist politics. i know these are very clumsy sketches of the positions, but i think you can flesh them out yourself and it was a long time ago so i dont recall as best i could.

suffice to say – this whole interplay (it was less of a debate than an ongoing conversation over the many days of the conference) was very, very interesting. at the end of it all, i found myself sympathetic to the UMass line of argument, but still could not fully bite down.

the counterpoint that i never thought was adequately addressed was this – so many of those spaces ‘outside of capitalism’ are in effect helping the logic of profits and markets operate more smoothly. for example: caring work done in the home is solving through non-capitalist means the symptoms of a profit driven health system; creative work done autonomously and shared freely blunts the feelings of alienation brought on by neo-lib. etc. basically – regarding these non-capitalist spaces: yes- they exist (all around!), and yes- the are ‘outside’ the logic of capital. But, what if their effect, in the aggregate, is the dampening of the contradictions of the profit motive, to the point that they act less as a space for cultivating alternatives, and more so as a ‘pressure valve’ for capitalist social life. These spaces where society steps in to perform these necessary functions not done by capital offer a retreat from market relations for individual subjects, but at the level of the social they are supplementing capitalism, and do nothing in the way of a coherent alternative.

Her rejoinder was something along the lines of how they help us conceptualize new patterns of social life and new subjectivities , and some very strong criticisms of her interlocutor’s points, but never really seemed to ‘get there’ as a full rebuttal.

what you say above sounds a lot like my own dream where market relations, if they exist at all, are really just a sideshow for people still caught up with the materialism bug. but how do you bring those crucial sectors of production into the fold when monied interests are clasping so tightly to them? how do you turn these non-capitalist spaces that already exist into a foundation for a genuine alternative? ive always imagined it thusly: first, a UBI (universal income scheme), which over the long term –> some sort of minor crisis of production b/c of the incentive effects, which (somehow) –> a change from a UBI in $$s to a UBI in goods, which –> a sort of ‘public option’ for people on the labor market, where all on the UBI are accoutable for doing all the work needed to sustain it. there is also the sort of social-investment vehicle scheme of Seth Ackerman over at jacobin which is interesting.

this is all a very round-about way of trying to prompt some lengthier thoughts from you, or others, who are better acclimated to this literature than myself. i think it is a big leap from ‘non-cap spaces already exist, all around us’ to “Economic life is steadily socializing”. not that you can’t make the jump, its just im interested in seeing the steps.

187

Rakesh Bhandari 11.30.13 at 7:21 pm

really interesting post and questions. To what extent are non-market relations in the form of norms already within markets. That is, as Kaushik Basu, to what extent are markets affected by people having a trained incapacity to engage in certain forms of rational self-maximizing behavior as a result of norm internalization or socialization? Is it misleading to think in terms of strict dichotomies such as market and social relations or capitalist and non-capitalist aspects of life?

188

Ronan(rf) 11.30.13 at 7:27 pm

“this is all a very round-about way of trying to prompt some lengthier thoughts from you, or others, who are better acclimated to this literature than myself. i think it is a big leap from ‘non-cap spaces already exist, all around us’ to “Economic life is steadily socializing”. not that you can’t make the jump, its just im interested in seeing the steps.”

Yeah, I’d second that

I’ll also put this here

http://www.democracyjournal.org/30/capitalism-redefined.php

To see if there’s anything worthwhile in it

189

William Timberman 11.30.13 at 7:36 pm

To see a convergent set of arguments here, which I think I do, is as welcome as it is anomalous. Are John C and JW actually looking at different parts of the same elephant, or if we dare to grant ourselves a little optimism, at different facets of the same jewel? I’d like to think so.

As JW says, the comprehensive socialization of investment isn’t a new idea, not even at the exact moment when Keynes supposedly nailed it down. Its inevitability has been assumed by all sorts of folks who looked seriously at the arc of capitalism, and at the constraints of resources and population which, in the long term, looked likely to force capitalism to evolve into something else. Of course, nobody got right what those constraints were, or how long it would take to butt up against them, but that’s a testament to capitalism’s cleverness and flexibility, not a judgment on its ultimate success or failure. Eternity is, after all, a helluva long time. (That it can also be defined as timelessness is fine for religious and other epiphanists, but not directly relevant here.)

What we’re faced with now, I think, assuming that strictly rational analysis could be our only motivation, is not a shortage of answers to the question of what is to be done? but a well-funded reaction which prevents us from deploying any of them until the sponsors of that reaction are defeated and driven from the field. There’s no great mystery about where the reaction in question has come from, but no real clue so far how to stop it short of the point at which its own internal contradictions cause it to self-destruct. The reason we’d hate to have to wait that long is also simple enough: a lot of what we’ve collectively built over the past 200 years could be brought down with it.

One point that hasn’t been emphasized so far, except by Bruce W., is the extent to which not just the left, but the gentle-souled social democrats of the post-war consensus underestimated both the power of reaction in post-war liberal societies, and also its resilience. It might be worth saying something more about its sources in particular.

The triumph of casino capitalism — and predatory capitalism, and disaster capitalism, and all the other noxious little capitalisms — had its own inevitability. When faced with decreasing returns on fixed capital investments in a technological environment that could render them unprofitable and pointless in what looked like the blink of an eye, you could be Safeway, and accept a 2% (or 3% or whatever) ROI in exchange for dominance in a relatively stable market with proven tools of demand management. (Never mind about the barriers to entry.) You could also, with a little luck and a little genius, perhaps, be Steve Jobs and overturn your whole industry, if you could persuade enough itchy plutocrats to take the roller coaster ride with you, and enough Chinese to work for almost nothing. Or you could be Gordon Gecko, and abandon the rest of the economy, and society itself, for the roulette table. The latter choice was clearly the most attractive to the most smartfellas, not only because so little risk produced such great rewards, but also because the casino was so easily defended against raids from the rest of society’s interests, and their principal agent, the government. Many of us still seem to be stunned by what that much cash could buy, in how short a time, and just how much confusion it could introduce into the mechanisms we relied on for political redress from the collateral depredations of our transformed economies. We’ll recover, I think — the process, as JW says, has already begun. Will it be in time to stave off the consequences of the resource and population constraints whose time now seems to have come ’round at last? Bruce, I gather, thinks it unlikely — at least in his darker moments he does. To be honest, I think he has a point, but I plead ignorance, and leave the rest to those who clearly know a great deal more than I do about the forces involved.

190

JW Mason 11.30.13 at 7:47 pm

I have trouble imagining your average person accepting the idea of living in a world where people are NOT free to start up businesses on their own.

But we already live in such a world. That’s the point.

191

JW Mason 11.30.13 at 7:50 pm

For those who want to “see the steps” — fair question. The Crotty piece describes Keynes’ answer to it.

Rakesh – the Galbraith-Darity thing only refers to the General Theory. But Keynes had been writing about this stuff since the 1920s, and toned it down in the GT.

192

mattski 11.30.13 at 8:45 pm

But we already live in such a world. That’s the point.

Well, yeah. (I thought it was my point!) A world where functioning markets are an integral part of the landscape. Because if we didn’t have functioning markets people would not start up businesses.

193

Bruce Wilder 11.30.13 at 9:43 pm

I find the problem of my own posture, troubling and unresolved.

I feel about Larry Summers — not the man personally so much as Summers as the exemplar of a certain sort of establishment “neoliberal” policy economics, nephew of Samuelson and Arrow, friend of Krugman and DeLong, advisor to Presidents, former Treasury Secretary, former President of Harvard, etc., etc. — as Mary McCarthy famously regarded Lillian Hellman: “every word she writes is a lie, including ‘and’ and ‘the’”.

We are trapped by false phrases and frameworks of thought, so clichéd and well-oiled, that, by design, we can see neither the nature of our present predicament nor “the alternative”, as we may ruefully refer to the thought we can not quite manage to think. The thesis of “secular stagnation”, as the OP had it, has, as its theme, our collective helplessness, a learned helplessness taught by Summers and company.

There’s power in giving things their right name, and the power to hide things in giving false names. In the great conversation of conservative libertarians and neoliberals, which dominates the discourse, from which we derive what passes for “serious” discussion of economics, every premise is the wrong premise, every assumption a false and misleading assumption. I’ve gone over this territory many times and I conclude, against every inclination of my own temper, that one cannot demur singly. Its all wrong, from the bland “market economy” to the groundless obsession with Walrasian stasis. The errors start on the first day in Econ 101, with a careless embrace of dogmas of “perfect competition” and “market failure” that creates a semantic drift tide of 1st-best economics, which overwhelms good sense and, even, core theorems of economics, itself (of which the doctrine of the second-best stands as but one of many examples — the 1st best economics of market failure analysis, which is reflexively trotted out by mainstream economists of all political leanings with arrogance and ignorance is contradicted by their own proven doctrines!).

It’s kind of silly, sometimes, when young economists-in-training — or even an old lion, like Krugman — will, in the most supercilious tones — allow that . . . of course, economists know that in refutation of what they regard as a strawman argument against their own habitual strawman arguments. And, it is true, many popular criticisms are fatuous calls for a Monty Python economics (Now for something completely different . . . ), but, really, though fatuous doesn’t help — even or especially the pleas for religious tolerance from the self-described heterodox — it does have to be completely different, but it also has to be better, to actually derive intuition from critical method and logical vetting of ideas and the judicious weighing of evidence, and not just pretend to do so.

There’s an easy power in the rhetorical apparatus of 1st-best neoclassical economics: without knowing any fact you don’t stylize yourself for the occasion, you can spin out a self-assured analysis in the manner of Matthew Yglesias, fighting the good fight against the licensing of barbers. It’s crap, but it’s easy crap, and, apparently, if you are corrupt enough, it can be made to pay really, really well, as Larry Summers, himself, surely has demonstrated. It is also destroying our capacity for democratic self-government, because it doesn’t let us think aloud or debate intelligently about what we are doing, or why. Economics — sound, reasonable economics — is vital to an educated public, and we don’t have it available.

It’s not a market economy. “Market failure” cannot be premised on a norm of market success without government intervention, because every market only exists in a framework of public goods provided by government. Hierarchy is the rule. Disequilibrium is the rule. Regulation is the rule. Technology cannot be disregarded as an unanalyzed residual — Solow’s growth model is silly and foolish. The alleged neutrality of money “in the long-run” makes no sense. You shouldn’t be able to assume away money or the distribution of income willy-nilly, and still be taken seriously. Real problems of resource limitation and congestion costs and externalities threaten to overwhelm us, and we’re prattling about secular stagnation in a Keynesian framework, which can barely explain an inventory cycle? Really!?

The actual economy, the actual facts are more complicated than we can really comprehend, and any understanding we might have of how a particular set of institutions can be made to work is, inherently, limited to the particular, with no clear path to generality, without an analytic framework. And, yet, no analytic framework can be made to comprehend the whole — if we combine realistic assumptions of deep uncertainty — we can no longer calculate a result. And, that’s the critical insight, I think: the economy, itself, is our calculating engine, vaster by far than any model of it, and it gets hung up — as it must by necessity — by problems, which have no solution in our present state of knowledge (or perhaps any practically conceivable state of knowledge). And, politics must paper over these unsolved, unsolveable problems, which the technocrats cannot handle, instead of politicians handing these problems to the technocrats and the rest of us wondering why we habitually get catastrophe handed back, by the arrogant and corrupt Summers of our world.

Spengler seems wiser to me than Keynes: Optimism is cowardice. Acceleration is what makes gravity such fun.

Human population has overshot the carrying capacity of the earth by an order of magnitude and there is not the slightest indication that humans can coordinate self-restraint among 7 or 10 billion people.

Brad DeLong, that weathervane, I notice, is ready to abandon “neoliberal” to its new use as a political pejorative, is most assuredly not willing to abandon the weakmindedness by which he helped to promote the catastrophic policies that earned “neoliberal” its new status; “equitable growth” for our era of collapse and catastrophe — oh, joy.

194

Bruce Wilder 11.30.13 at 9:54 pm

mattski @ 191

We don’t have “functioning markets” in the vast majority of industries. We have other structures and relationships, but if we don’t give them appropriate names, we can not see them, describe them, or observe their changing under dint of policy choices, we don’t even know are being made.

195

William Timberman 11.30.13 at 10:12 pm

An appeal to the moderators: for the first time, I have a comment that’s been stuck for some hours in moderation. I thought at first that it was maybe too long, but it doesn’t seem to be longer than the longest of those already published. It’s not anything that the world or CT can’t quite contentedly live without, but I did sweat over it a bit, and, well….

196

William Timberman 11.30.13 at 10:52 pm

Thank you, moderator(s). There should be a paragraph break after …the rest of society’s interests, and their principal agent, the government, but that’s due to my own editing failure.

Nice thread, this, especially toward the end. My thanks to all who took part.

197

Mao Cheng Ji 11.30.13 at 10:57 pm

“It reflects a visceral dislike of socialization of capital ideas, since I lived in a communist system. “

Afaik the marxist point is not about socialization of capital, but about socialization that’s taking place inside (especially the large) capitalist firms. Microsoft, for example, has 100,000 employees, operating in the environment of planning and cooperation, rather than competition. ‘Market’ signals from the outside become less and less meaningful. But I’m sure someone already mentioned this.

198

Ed Herdman 11.30.13 at 11:16 pm

@ Mao Cheng Ji:

Microsoft has lost a full decade of growth potential in part due to the corrosive influence of abusing the stack ranking system of employee evaluation. Now, I won’t say the Marxist is wrong in trying to make things to simple in this case, because I possibly don’t know what you mean by “the environment of planning and cooperation” exactly.

At the same time I agree that market forces have been less influential on Microsoft due to socialization forces within the company – but stack ranking was certainly provoked by an understanding that they had to get focused to compete.

Of course there are too many examples of Microsoft being caught up in its own culture and unresponsive to the outside world – the classic one is Bill Gates reportedly rejecting the company’s advanced early developments in smartphones because the interfaces didn’t look like Windows and it didn’t look like an obvious way to develop “core markets,” i.e. flog Windows and Office. Turn around a decade later, and the iPhone alone is making more money for Apple than all of Microsoft’s offerings. (There’s a Vanity Fair article from last year about all this.)

I think Microsoft has tried to preserve a more varied stable of promising research directions, almost like recreating an academic institution, but this discounts the ability of employees as individuals to preserve expertise from project to project. Apple isn’t perfect here either; top-rank meddlers have often made things miserable for anybody who hasn’t drunk the cocktail of the hour.

199

Alex K. 11.30.13 at 11:48 pm

“Afaik the marxist point is not about socialization of capital, but about socialization that’s taking place inside (especially the large) capitalist firms. Microsoft, for example, has 100,000 employees, operating in the environment of planning and cooperation, rather than competition. ‘Market’ signals from the outside become less and less meaningful.”

Yet the economic graveyards are filled with the bones of what were once large and powerful firms. Those market signals can’t be all that weak.

Schumpeter used to suffer from the delusion that managers of large firms really know what they are doing, not only in the narrow technological domain specific to their industry (which is reasonable enough) but also in the larger context of the market ecology. Under such an assumption, his hypothesis that we only need the managers and not the risk taking investors seems reasonable. Galbraith used to take such assumptions seriously as late as 1967.

But this assumption is complete nonsense, managers are more or less clueless about the consequences of their action in the larger market ecology, hence we need to rely on market selection processes and let bad investments fail, if we want a reasonable simulacrum of a good allocation of scarce resources.

200

Bruce Wilder 12.01.13 at 1:16 am

Alex K, I live in Hollywood and have had some truck with our local industries, and I can assure you that the managers in question have absolutely no interest in “market selection processes”, except to buy them or bury them, as opportunities arise. They are busy writing contracts, which deprive consumers of every legal right, except to pay, and pay and pay.

JW Mason @190 makes the point that we already live in a world in which individuals are not “free” to startup businesses. And, yet, mattski and Alex K apparently cannot hear. Does anyone imagine a Ted Turner could found a CNN in today’s media industry environment? A generation ago, complex rules kept the corporate borg from uniting strategic direction of everything, kept companies from monopolizing geographically and across media. A television network had to go to independent producers for most of their creative product, for example, so, yes, there was an arena there, at that interstice, for “market competition” (misnamed I would argue, by the “market” metaphor, but) an opportunity for entrepreneurs and for reality to be heard above the din of corporate culture and backbiting.

A generation ago, when music was distributed on compact discs, the CDs were priced, roughly $12 to $15 — not, I might mention, a “market price”, but an administered one. (Can any one hear that: not a “market price”!? Prices are among the most fundamental data in economics, and the economists lie about even that.) With 10 to 20 songs on a CD, that worked about to around $1 per song, discounting the crap songs in the bundle. And, that’s where Apple’s iMusic Store started out — an administered price of $1 a song, which they’ve been edging upward (!). Just think about what that means. That $12 CD, back in the day, paid a whole army of people in retail stores, in manufacturing and distribution — that’s all gone; the resources employed are miniscule, the artists mostly get screwed as they always did, and the price hasn’t changed — if anything, it appears to have increased, the “competition” from Amazon and Google and minor independents notwithstanding. And, the consumer, legally, appears closer now to “renting” rather than owning. It’s a small thing, salient, which is why I cite it, but quantitatively unimportant I suppose, but also illustrative of how the rentiers, and their obsession with authoritarian IP are killing us in this era of secular stagnation.

201

Bruce Wilder 12.01.13 at 1:20 am

Schumpeter, having witnessed the fall of the Hapsburgs, after 900 years of fomenting chaos to make themselves rich, was also sure that Americans were wrong to fear the concentrations of wealth that might lead to an hereditary aristocracy. He could be a bit of an idiot.

202

AJ 12.01.13 at 4:41 am

> They might or might not have been aware that the consumer spending was
> financed by borrowing against housing wealth, but if they weren’t, they thundering
> well should have been. They got a structural increase in personal sector debt
> because they wanted one and set policy in order to create one. There’s no
> good calling it a “bubble” or a “puzzle” now that the shit’s hit the fan.
This D^2 post makes an excellent, excellent series of points which lead to a massively compelling counterpunch to Krugman. I want to point out one or two or three minor semantic points here- the words “they wanted one” is used here because they did nothing to stop the massive increase in personal sector debt (that this was happening was known to everyone then – except those living under a rock), and the words “There’s no good calling it a “bubble”" is used here to mean that one can’t simply come up with a post-facto theory to accommodate what was a well known problem with the U.S. economy at the time. Also, “We got this outcome because we wanted it.” should be taken to mean that this is exactly what the careful calibrations of the economists was leading us towards.

Now, to come to Krugman’s argument (from the linked post):
> Unless labor force participation not only stops declining but starts rising
> rapidly again, this means a slower-growth economy, and thanks to the
> accelerator effect, lower investment demand.
It seems odd to tie it all down to tie it to population growth itself. As I mentioned in the other thread, what is happening in the employment picture is not just high rates of unemployment but -concurrently- a significant number of open positions in the same economy. This phenomenon almost certainly cannot be pinned down to merely demographics.

203

AJ 12.01.13 at 4:56 am

IMHO, there is one piece missing in Dsquared’s argument. I will plan to write this up as a counter-thesis at some point (no promises – I simply might decide not to). I am much too busy for the next 2 weeks to do this right away. And I might have other things to do afterwards.

204

AJ 12.01.13 at 5:07 am

> To what extent are non-market relations in the form of norms already within
> markets. That is, as Kaushik Basu, to what extent are markets affected by people
> having a trained incapacity to engage in certain forms of rational
> self-maximizing behavior as a result of norm internalization or socialization?
“as Kaushik Basu”? There is something missing here.

Whatever it is that is causing this massive unemployment and slow growth, I can tell you one thing- that thing ain’t norm internalization.

205

AJ aka AJtron the Invincible 12.01.13 at 5:21 am

@ William Timberman:
> Consider President Obama’s Nobel prize acceptance speech: what on earth
> was he thinking?
Surely you are referring here to the fact that Obama should not have gotten a Nobel? I am quite confidnt in my assessment that he should not have been given a Nobel.

> That his speech is considered unremarkable by so many of us is just as definitely
> an indictment of ours.
It ain’t an indictment of me. I have said this many times and I will say it again – Obama did not deserve the Nobel.

The basic problem is that bullsh***ing has no immediate consequences and so everyone bullsh**s. Including the President. It seems to be built into the American system. I see quite a bit less bullsh***ing in Britain. America is country built on bullsh**.

206

AJ 12.01.13 at 5:23 am

@ William Timberman:
> Consider President Obama’s Nobel prize acceptance speech: what on earth
> was he thinking?
Surely you are referring here to the fact that Obama should not have gotten a Nobel? I am quite confidnt in my assessment that he should not have been given a Nobel.

> That his speech is considered unremarkable by so many of us is just as definitely
> an indictment of ours.
It ain’t an indictment of me. I have said this many times and I will say it again – Obama did not deserve the Nobel.

The basic problem is that bullsh***ing has no immediate consequences and so everyone bullsh**s. Including the President. It seems to be built into the American system. I see quite a bit less bullsh***ing in Britain. America is country built on bullsh**.

207

AJ 12.01.13 at 5:27 am

@Rakesh- perhaps yours was just a passing comment. I learn a lot from your comments, so do please commenting. I was merely making a minor counter-point in passing.

208

Rakesh Bhandari 12.01.13 at 5:28 am

I mean to say as Basu “argues”, sorry for leaving that out.

Yes, while Basu argues that “norms” may influence which one of multiple equilibria in certain contexts–he gives the example of high teacher truancy rates in certain school districts–he does not say that norms always matter in terms of any and all economic outcomes.

However, one could obviously argue that the weakening of the trained incapacity to consider certain rationally self-maximizing behavior did lead to fraudulent financial activity, which did play some role in the financial crisis and the unemployment that resulted.

One could also argue that cross-sectional variation in the responses of the unemployed to the financial crisis has at least a partially cultural explanation.

The market is always in culture and culture in the market.

209

Alex K. 12.01.13 at 5:31 am

“I live in Hollywood and have had some truck with our local industries, and I can assure you that the managers in question have absolutely no interest in “market selection processes”, except to buy them or bury them, as opportunities arise.”

Of course they don’t. Given the chance, they would gladly use the cry for more regulation as an opportunity to construct a shield against competition. In other industries this is a pretty successful tactic, as we have representatives of pharmacy chains sitting on committees that approve the opening of new pharmacies; we have committees that get to decide whether “there is a need” for a new hospital in an area. The solution is vigilance against monopolies.

But “monopolies are bad” is not a very good demarcation criterion among political philosophies.

210

Alex K. 12.01.13 at 5:36 am

Here is Paul Krugman on subjects related to what we discussed, in a review of Galbraith’s “The Good Society:”

“Admittedly, Galbraith did at one time have a distinctive economic theory that might perhaps have justified his disbelief in painful choices. A generation ago, in The New Industrial State, he offered an image of an economy that was becoming increasingly dominated by General Motors-type corporations–giant firms, freed by their size and power from the rigors of competition, run by technocrats who pursued bureaucratic imperatives rather than serving the interests of the stockholders. In effect, he argued that capitalism would soon cease to be a market system in any meaningful sense, and that the trade-offs inherent in such a system would therefore soon be irrelevant.

But time has not been kind to that theory. We have not become an economy of GM-sized corporations; in fact, large corporations play a considerably smaller role in the economy now than they did when he wrote his book, and for that matter GM itself is a lot less immune from market pressures than it used to be. Rather than evolving away from a market economy and the constraints it imposes, we are now more firmly ruled by the Invisible Hand than ever before. And indeed one wonders if Galbraith himself is still a Galbraithian; while a few turns of phrase from The Affluent Society and The New Industrial State resurface in The Good Society, for the most part the book is very old-fashioned Keynesianism. Again and again, the book espouses views that had a strong following in the 1950s but have since been abandoned by nearly all researchers in the face of logic, evidence, and experience. Galbraith does not bother to argue that the old conventional wisdom was right and that the new conventional wisdom is wrong; often it seems that he is simply unaware that other people’s ideas have changed.

211

QS 12.01.13 at 6:24 am

^ When did Krugman write that? Seems demonstrably wrong. Perhaps the economy isn’t run by bureaucratically-driven large corporations, but it’s still driven by monopolies and cartels. Barry Lynn’s 2010 book is pretty convincing on this subject.

212

Bruce Wilder 12.01.13 at 7:45 am

AJ: America is country built on bullsh**.

Rakesh Bhandari : one could obviously argue that the weakening of the trained incapacity to consider certain rationally self-maximizing behavior did lead to fraudulent financial activity, which did play some role in the financial crisis and the unemployment that resulted. One could also argue that cross-sectional variation in the responses of the unemployed to the financial crisis has at least a partially cultural explanation.

Was AJ asking for examples?

213

Bruce Wilder 12.01.13 at 8:07 am

Google says Krugman published that review in September 1996. I read the whole thing. What a fool.

214

QS 12.01.13 at 8:40 am

He wouldn’t make the same argument today, given the cartelization of the finance industry, the fact that TBTF got even bigger post-crisis, and the austerity agenda. He’s become fervently Keynesian.

Whether the difference between 2013 and 1996 Krugman demonstrates political flexibility/weakness or intellectual strength/weakness/dishonesty is up for debate.

215

john c. halasz 12.01.13 at 9:49 am

O.K. This is belaboring the obvious. So anyone who is amongst the cognoscenti, please ignore. But, for those who are asking for the “alternatives”, as if TINA were an argument rather than just apologetics for the status quo, it’s not hard at all to come up with policy proposals. The problem is coming up the power to implement them.

It’s reasonable to divide things up between the short-, medium-, and long-run. In the short-run, debt reduction/restructuring, fiscal deficit spending, (which BTW provides needed private sector savings), inflation and debt monetization form an overlapping set of functionally equivalent solutions. In fact, in abstract economic theory, there is a broad consensus, (including the likes of Rogoff), that the sooner a financial crisis is dealt with and bad debts are eliminated from the “system”, the quicker and more robust the recovery. The failure to put the financial system into public receivership and systematically deal with allocating the losses of debt write-downs from the get-go, (which are partly merely financial and partly real economic losses, due to the distortionary effects of an “asset-based economy”), is why “we” are trapped in a “secular stagnation”, a.k.a. avoided and displaced depression. (D^2 says it occurred because “we” intended it, but those of us who are not economists and who long foresaw the impending crisis had no such intentionality). QE and political deadlock are scarcely an “alternative”, but rather a consequence of delusionally (and lucratively) attempting to restore the status quo ante, in accordance with prevailing dogma. Of course, really addressing the crisis involves a transfer of “wealth”, which is the rub, since, according to me, the maldistribution of wealth and income is a key cause of the implosion, if not yet the explosion. Since wealth, as Adam Smith taught early on, is not a pot of gold, but rather consists in productive capacity, and the disconnect between financial returns and productive improvements underlies much current economic “activity”.

In the medium-run, lotsa of re-structuring of production and its cost-structures needs to occur, (which “macro-economics” in its abstraction to aggregate levels ignores). But precisely not in accordance with neo-liberal dogma, (for which “unit labor cost” is the key to everything). Rather there are hosts of economic rents to be vacuumed up and re-distributed to produce a more viable set of “signals” between productive organizations. And there needs to be an extension of the social insurance and regulatory functions of the state to deal with the dislocations involved. And then there is the “ultimate” issue of fixing the dysfunctional international FX and trade regime.

In the long-run, “we” need a radical transformation of our infrastructure and productive capital stock to deal with global environmental and resource challenges. We have about a generation left, or till 2050, for that to be substantially under way and partly realized, if we are to preserve anything like a civilized life based on advanced productive capacities. And that will involve at once a massive destruction of the “value” of currently incumbent capital, both financial and real, and, at the same time, a massive amount of new investment in alternative technological and organizational bases. It’s doubtful that anything like historical capitalism could achieve such a transformation. A good deal of public investment and publicly guided indicative planning would be required to bring it about at the very least. A carbon tax-and-rebate scheme who be just a start. But if capitalists refuse to invest, because of short-term horizons, states are the only obvious alternative. And international coordination between states, rather than giving corporations free reign with extra-territorial “rights”.

So the problem is not really about “economics”; it’s really about power. And what B.W. calls “learned helplessness” and I call bad faith, which prevailing economics induces. For those who what to ride the tiger and endlessly rationalize the status quo, be my guest: internet bytes are reasonably free, (thus far). But one can realistically only argue about ways and means, the sequencing and coordination of “steps”, not about the “big picture” and the need for such steps.

216

john c. halasz 12.01.13 at 10:09 am

Oh, one last point, maybe directed at some of the contributions of R.B. above, as to whether “socialized norms” are a potential source of resistance and whether the collapse of such norms is the source of our afflictions. Often enough, the problem is rather over-socialization (or what one is being socialized to or for). Yeah, I’m looking at you, sour-puss Germans, (among other examples).

217

Ronan(rf) 12.01.13 at 2:33 pm

“makes the point that we already live in a world in which individuals are not “free” to startup businesses And, yet, mattski and Alex K apparently cannot hear. ..so, yes, there was an arena there, at that interstice, for “market competition” (misnamed I would argue, by the “market” metaphor, but) an opportunity for entrepreneurs and for reality to be heard above the din of corporate culture and backbiting.”

There must be some analysis done on this though.
My entirely anecdotal impression (based specifically on Ireland) was before the late 80s/90s you *couldnt* get a loan for a business, so the only chance you had to start a business was to inherit one or have independent capital to invest yourself. (Or be on close terms with *someone* – bank manager preferably)
I obviously don’t think Ireland’s dysfuntions can be generalised, but ..

218

AJ 12.01.13 at 2:40 pm

@212 (Bruce Wilder) – now that was really funny. Made me LOL.

Rakesh’s second sentence is okay. After your comment, the first sentence has me in splits.

219

Ronan(rf) 12.01.13 at 2:54 pm

“So the problem is not really about “economics”; it’s really about power. “

Of course, but any solution that wants to wish away power isn’t feasible, so TINA if we are looking to ignore the fact that states/corporations/institutions/organisations/individuals do *to some (large) extent* have divergent interests, and will use the political process to implement policies in their interests.

I still cant see how, specifically, you reform the international trade and FX regime to encourage more humane and socially beneficial outcomes:
What about this, from a link above:

“In After Empires, his granular new history of UNCTAD, Giuliano Garavini, a historian at the University of Padua, recovers a golden opportunity in this ill-fated attempt by the third world to recalibrate world trade. In the 1970s, European officials, emboldened by their first steps toward economic integration, started looking to the Global South as a “most favored [trading] partner” in an effort to reorient the global economy in a new direction, against Anglo-American wishes. Two Dutch socialists—Sicco Mansholt, the president of the European Commission, and Jan Tinbergen, the Nobel Prize–winning economist—led the charge to pin the political identity of the European Union on improving the lot of its southern neighbors. Their program was swept away by the oil crisis, but Garavini’s superbly researched history shows how determined Europeans were in honoring the interests of the South—to the point of considering radical plans for the nationalization of Western industries and global financial redistribution.

Nixon and Kissinger may have fretted, but few American economists viewed the New International Economic Order as a threat to the basic structure of the liberal world order. If anything, it signaled that the third world was prepared to accept the benefits of mutual trade and foreign investment and put aside dreams of world revolution. When a socialist like Nyerere called for the third world to develop its own multinational corporations and insurance firms, these economists could only smile with approval. There is an additional phenomenon that has thwarted any revision of the world order: the push for economic liberalization that began in the early 1970s, first in Chile under Pinochet, followed by Anwar el-Sadat’s and Hafez al-Assad’s programs of Infitah in Egypt and Syria. By the end of the decade, China under Deng Xiaoping and Pakistan under Mohammad Zia ul-Haq were experimenting with foreign investment—not exactly an incentive for Western leaders to sit down with the band of intransigents gathered around Algeria’s Houari Boumediene and El Jefe. As Vijay Prashad shows in The Poorer Nations, which covers the same territory as Garavini in a polemical key, the real turning point came when Western-trained economists in the Global South started calling for austerity in the place of Nyerere’s “growth with equity.” From the same quarters that gave rise to the New International Economic Order came third world technocrats willing to draft their own structural adjustment programs.”

If one is to believe that there has to be a *huge* redistribution of wealth from rich to poor (globally) and a lessening of global inequality, how do you go about it?
It seems clear that the two best options (so far) are (1) less restriction on immigration (2) investment of Northern capital in the South. Both those policies are pretty unpopular domestically in western countries, so what are you to do?

220

mattski 12.01.13 at 4:15 pm

BW,

I find the problem of my own posture, troubling and unresolved.

This is why I like you.

221

mattski 12.01.13 at 4:44 pm

Bruce,

We don’t have to throw it all away and start over. Although we can, and frequently do, have semantic arguments boiling down to the difference between incremental change and ‘starting over.’

May I offer you a cup of Joe?

222

mattski 12.01.13 at 4:52 pm

Getting caught up on this thread, so apologize for sloppy efforts. But here,

JW Mason @190 makes the point that we already live in a world in which individuals are not “free” to startup businesses.

I think that’s a whoopsie, Bruce.

223

mattski 12.01.13 at 5:58 pm

Re-reading 190 I am now not at all sure what JWM meant.

224

JW Mason 12.01.13 at 6:28 pm

Bruce is right. I meant we already live in a world whwre the vast majority of people have no chance of ever starting their own business.

225

mattski 12.01.13 at 6:45 pm

224

Are you saying that about the developed world or only “the whole world?” I don’t think you can plausibly say that about, for example, the USA.

Equally, (not accusing you of this, but) there is an implication in your claim that any barrier to entry in business is necessarily unjust. So the analogy of not allowing a person to play in a tackle football game unless they have a certain level of training and fitness… Or, in business, if you can’t show a capacity to work hard and save some capital, why should anyone take a risk on you?

226

JW Mason 12.01.13 at 7:09 pm

Talking of the developed world. The point is that the development of capitalism reduces the role of private property and markets. Justice has nothing to do with it.

227

mattski 12.01.13 at 7:30 pm

JWM,

“We already live in a world where people are not free to start up businesses on their own.”

This does not comport with my experience… at all. Aren’t you making a perhaps melodramatic caricature?

228

JW Mason 12.01.13 at 7:44 pm

The fraction of people who work in enterprises owned by their own families has dropped steadily over the past two hundred years, from near 1 to around 0.1 in the contemporary US. Continued consolidation in agriculture, retail etc make it likely that number will continue to drop.

At one point, it was reasonable to think if wage labor as a temporary stage on the way to business ownership. But today, the statement that most people will never own their own businesses is an in controversial statement of fact.

229

Rakesh Bhandari 12.01.13 at 7:56 pm

Another way around this: redefine wage labor as entrepreneurship–borrowing to invest in human capital formation, taking risks, building your own personal brand!

230

Alex K. 12.01.13 at 8:19 pm

“But today, the statement that most people will never own their own businesses is an in controversial statement of fact.”

Maybe, but this is a completely different claim than the implausible:

“we already live in a world where the vast majority of people have no chance of ever starting their own business.”

which also is not even close to justifying the implausible:

“the development of capitalism reduces the role of private property and markets.”

231

Ronan(rf) 12.01.13 at 8:32 pm

It’s a positive, I would have thought, for the left, the fact that most won’t own a small business. Isn’t that the libertarian dream, ‘ a country of small shopkeepers and interstellar travel’ ?
As per Keynes above, a corporatist political economy melding with the state is surely the desired outcome (for those on the left)

232

John Quiggin 12.01.13 at 8:51 pm

A side point is that many (most?) small retail businesses are now franchisees. A franchisee operating in a shopping mall is, in many ways, more like a worker who has to supply their own tools than like an independent business owner.

233

john c. halasz 12.01.13 at 9:03 pm

@219:

TINA means in the first place that nothing else is conceivable or intelligible, beyond a highly restricted possibility set. “We” have “secular stagnation” because “we” want it: i.e. the PTB recognize that unsustainable trends, such as global CA imbalances, require adjustment, but will only allow what keeps them in control of the process and maintains their rent-sucking apparatus. But there may nonetheless be “non-linearities” to their schemes and it’s by no means sure that they are sustainable anyway. (Are we really just to rely on the “Pigou effect”?) So the first order of business is, as B.W. said, to call things out by their true names and put such claims into question. It’s not about the economics of poverty, but the poverty of economics. (And that prevailing economics is not just an ideology or “religion”, but an operative techno-structure that both reflects and effectuates dominant interests). So yeah, it’s really about power, which isn’t something to be merely “wished away”, because of the banal observation that there are “divergent interests”, but involves engaging in conflict and contestation, not just over reified “interests”, but over interpretations and the institutional designs that determine “interests”.

As to the international trade and FX regime, admittedly that a tall order, but getting to something like the I.C.U./Bancor proposal is what is required, (effectively replacing the WTO). Since global CA imbalances and vast unmoored financial flows are a key factor in the ongoing GFC. And the point is not just to restore balanced trade, but to restore to national governments a much greater degree of policy autonomy, to suit their respective circumstances and conditions. (Also, international coordination on climate and environmental issues seems all the more unlikely without trade balance and coordination). It was a strange and perverse arrangement to have the U.S., once the most productive industrial economy in the world and still a very rich nation, importing capital to the tune of 1.25% of global output, when, obviously, there are vast and urgent investment needs (and returns) in the “developing” world. (And, no, that was not an arrangement that benefitted ordinary American workers). You can go back in his archives to find Brad DeLong, self-proclaimed “card-carrying neo-liberal”, puzzling over the fact that the “Washington Consensus” resulted in such an outcome, vs. its ostensible intention of opening up “developing” nations to further investment. And investing in the poor 85% of the world is not a matter simply of “justice”, but of functionality and survival on this planet. Though a real perplexity is what exactly is to become of all those $ the U.S. has kited. China at least seems to be using some of its huge $ hoard for outward investment, (since, oddly, it can’t us it to re-capitalize its banks or sop up domestic debt loads). But if they are not to be used to buy U.S. exports, at whatever devalued rate, then the only other alternative is to buy U.S. assets. (So you can see why the U.S. power structure might be inclined toward denial).

There’s no doubt that “realistically”, there’s little hope for fundamental change through political means in the near term, short of some catastrophic events. The politics here in the U.S. is thoroughly rancid, with its deadlocks fully bought and paid for, and U.S. political elites, for all their preening, are grotesquely incompetent, when not certifiably insane. (And Europe isn’t much better). But that’s no excuse for self-complacent resignation, let alone the sort of over-socialization I mentioned above.

234

Bruce Wilder 12.01.13 at 9:50 pm

Ronan(rf) @ 217: There must be some analysis done . . . My entirely anecdotal impression (based specifically on Ireland) was before the late 80s/90s you *couldnt* get a loan for a business . . .

I suppose this goes directly to my point about popular/policy economics, and its Econ 101 foundation, being all lies all the time.

The typical toy model is a flow of funds from ultimate savers to ultimate investors passing through banks (or financial markets), regulated by an interest rate valve — a model, which is, to use the technical term, total bollocks. It’s not what happens at all, completely mistakes the function of financial institutions and pretty much marks out the economists, who base their reasoning on it, as blind, deaf and dumb — really dumb as in stupid.

In a world of variability and uncertainty, the big problem of any economic venture is risk. Capital investment is sunk-cost investment, which means that there’s no inherent guarantee of a return on investment, even from a business viable in the short-term. The ability to earn a return on sunk-cost capital investment depends on possession of economic rents, or to cast it in other terms, “market power”. Firms are organized around the ability to generate economic rents from the exercise of management discretion and the legal rights of ownership.

In this world, banks don’t channel a flow of funds. Banks simply extend credit as an aspect of managing a fully functional payments system. The example I’ve given in comments before, to illustrate, is imagine Joe Blow, expert, is laid off by his long-time employer, Acme Corp. Joe Blow has some important skills, acquired from long experience working at Acme Corp, which he believes could be the basis of a consulting gig. In other words, he has legal rights (assuming he hasn’t been coerced into some one-sided “contract” with Acme, which somehow applies even after Acme stops paying him) to strike a bargain for services, and his ability to produce high-value services at a low marginal cost will be enhanced in comparison to potential alternatives (“competitors” in market-speak) by his sunk-cost investment in experience and knowledge. Consulting will be the best use of his time and accumulated experience, and he expects to earn a (quasi?) rent on his experience.

Joe Blow goes to a bank for a loan, but it’s not a flow of funds to invest in skills and experience — he has skills and experience, that’s why he thinks he can make a go of being a consultant. He goes to a bank, because his household portfolio is not appropriately geared to operating a business, where he will be expected to market his services, do work under contract, submit invoices and wait for payment. His expected income may well be higher than it was as a salaried dweeb at Acme, but it will be much more variable and risky, and in the meantime, he will have rent to pay, and office and marketing expenses, etc. So, he takes out a mortgage on his house and deposits the proceeds at the bank, which then gives him a line of credit, and . . . voila! . . . he has the working capital to operate a business. As far as a flow of funds is concerned, the bank has lent him his own savings and home equity: if there’s an ultimate saver and ultimate investor, he’s both.

The bank isn’t really channelling anything. It’s function is to maintain the integrity of the payments system and enable viable businesses to use the payments system to get on with doing business.

The interest rate isn’t a valve — in fact, there is no such thing as a singular “interest rate” — the very notion of a single interest rate is so ignorant and stupid, it makes me want to spit. What there is, in a well-functioning financial system is a yield curve: a stable array of interest rates, in which longer terms yield higher returns, and higher risks yield higher returns (without risk, which is inherently a “bad” becoming, in itself, valuable). Arbitrage and bureaucracy keep the value of money(-over-time) stable and predictable, so that the unit of account is useful for calculation and deal-making. The supply of money savings is rarely scarce enough to exert any influence on interest rates whatsoever; usually money savings are, if anything, too abundant, and the really critical thing that banks do is resist the constant pressure to channel the accumulating pool of savings into toxic investments, with a negative present value.

The key — and as john c. halasz often points out to us, omitted — concept is economic rent. The myth of the Friedmanite narrative of the “market economy” is reward to the virtuous, but that’s not how it works, at all. How it works is returns to power, in the form of economic rents.

The increasing “inequality” which plagues the American economy is the pooling up of income in the hands of a few powerful rentiers, who increasingly resist paying taxes, and who lend out their fictitious capital in usury or extractive ponzi schemes (aka the bubble economy).

There’s nothing one can do with financial capital divorced from ownership claims (aka fictitious capital), but make mischief with usury. A functional financial system provides useful insurance, but a dysfunctional one needs bubbles to introduce financially idiopathic risk to increase returns on “insurance”, which just become predation.

A core truth of social democracy is that using the state to provide insurance cheap can be very, very efficient. It’s a slam dunk argument, as far as the fundamental economic analysis is concerned, but I think it has been very feebly made by the current generation, partly because the mega-rich are so willing to fund specious propaganda to the contrary.

The American practice of funding college education with student loans is insane. For generations, the U.S. funded education primarily through property taxes, because economists had correctly figured out that economic growth tended to channel income to property owners. So, investing in education to achieve economic development required tieing funding of that investment to where the returns would tend to show up: in the value of real estate. Educated people would crowd into cities, to realize value from education in commercial and industrial interactions, driving up rents. Professionals can use their expertise and credentials as a source of power and economic rents, with which to act independently in the economy. But, none of that works, if a college education comes at the price of debt peonage.

This issue of whether people can start a new business, in any practical sense, needs more careful attention. In the U.S. more than half the labor force now works for organizations with more than 500 employees (– a larger proportion, I believe, than when Krugman wrote that review, or when Galbraith wrote the books that made him famous). (How that statistic is compatible with prattling about a “market economy” escapes me entirely.) I gave one example of how deregulation has eliminated an opportunity for creative entrepreneurship in the entertainment business, by allowing giant corporations the “freedom” to own production companies, but Alex K couldn’t hear it. The same pattern of centralizing strategic direction could be detected everywhere, if our idea of economics allowed us to see them. The issue of the relationship of banks to professional appraisers is a critical one to the corruption underlying the housing bubble, and raises similar issues, issues, which really are not well covered by the tired tropes of “market” failure analysis misapplied in our economy of hierarchies.

235

mattski 12.01.13 at 9:51 pm

Bruce @ 194: We don’t have “functioning markets” in the vast majority of industries.

JWM @ 226: The point is that the development of capitalism reduces the role of private property and markets.

OK, so we have arrived, apparently, at the point where the left (the Left!) is the defender of markets and property. And yet, when someone dared to suggest that we try to make the market economy work better a minor shit-storm ensued…

And, JW, I don’t dispute there may be a macro trend away from small business ownership. That doesn’t falsify the proposition that people are basically free to start businesses. And you know what? People DO start businesses. All the time.

I don’t dispute that there are perverse effects produced by big finance. I’ve seen it myself anecdotally here in Vermont, for example, with a certain large coffee company. When Wall St. starts throwing money at a promising business all sorts of autonomy is suddenly lost. Community-mindedness is diminished. Well, this sucks, I agree. We need to tweak the rules. But as far as I can make out, many folks here are stuck in unproductive and contrarian habits of thought.

236

Bruce Wilder 12.01.13 at 11:14 pm

mattski, just to keep things on point:

Do you think Larry Summers is trying to make the economy work better, in any sense we ought to credit?

237

Ronan(rf) 12.01.13 at 11:39 pm

A general question re Bretton Woods aswell, if anyone knows.

My (limited) impression has been that the final agreement was, to put it crudely, a US/British compromise which primarily shaped the institutions that regulated the international economy in US interests, (which is all fine, as far as it goes). But because the focus was on US interests and developing Europe post world war 2, it didn’t make any serious attempt to aid economic development (and was at times counterproductive) in smaller and /or poorer countries.
Though according to a book that’s coming out by Eric Helleiner (with chapters online) this is wrong, North-South relations and global development was built into a lot of the institutions, and the space to have genuine,global eonomic growth was possible under BW.

Does anyone know anymore about that? Have any reading recs etc?

238

Ronan(rf) 12.01.13 at 11:59 pm

Also thanks jch and Bruce W (Bruce I enjoyed that – or if not enjoyed (that’s laying it a bit thick)learnt from it, at least, for sure)

239

Main Street Muse 12.02.13 at 12:36 am

John Quiggen, please cite the source that says most small biz can be found in malls. I’d love to see that research.

In terms of Bretton Woods… I want to know what entity and/or government is tying its economic development to the bit coin… I simply do not understand a currency created by a digital figment and not a government.

To Bruce Wilder, that the bank’s function is to maintain integrity of payments clearly isn’t working and hasn’t worked, and will likely remain dysfunctional until TBTF is stopped.

And remember, funding college loans with debt is a post-Reagan phenomenon. Great for banks for a good long while – great for admins at university levels. Not great for students or professors in any way, shape or form.

240

JanieM 12.02.13 at 1:15 am

And remember, funding college loans with debt is a post-Reagan phenomenon. Great for banks for a good long while – great for admins at university levels. Not great for students or professors in any way, shape or form.

Given that the banks and universities are sure to get their $ because the loans are federally guaranteed, you can add “the rest of us” (ordinary taxpayers) to the list of people for whom this isn’t a great arrangement.

241

Ed Herdman 12.02.13 at 1:41 am

Funding college loans with debt is not a good arrangement for colleges operating in the context of factors that drive students away. The debt burden (especially in the recent economic climate) is one of these. We know there’s a problem because the average income of students (or student’s families) seems to be increasing, which is another way of saying that college is less egalitarian than it used to be.

There are a lot of colleges expanding programs that are quick to administer and cheap for the students – everything from entering agreements with local community colleges, administering short-term programs (i.e. nursing degrees, retraining, other stuff that used to be called trade or vocational training as well) and more.

On top of all that, colleges have seen a lot of cuts. I read the year’s speech from the Dean of my College of Arts and Sciences: Millions of cuts over the last few years, and the most cuts within the last year. And this is happening while the school at large is diversifying and expanding – the geology department has won some important contracts, and there’s new agreements with a nearby law school and a nearby medical school.

Maybe we could torture the statement “good for administrators” to say “the pot of money the entire university has to play with is expanding” but we all know that this isn’t true – I don’t see them able to just shut down entire departments; they certainly don’t have the appetite for it.

242

john c. halasz 12.02.13 at 2:47 am

Ronan(rf):

I don’t have any reading recommendations, (though others please chime in). But from memory, I can offer a rough sketch account.

Bretton Woods began as a negotiation between the U.S. and the U.K. over repaying the Brits large war debt to the U.S.. with Keynes and Harry White the principal representatives of their respective Treasuries and direct negotiators, though operating on general orders from higher-ups. After that matter was settled, (with the Brits feeling the Americans had driven a hard bargain), discussion turned to the architecture for a post-war economic order, and much of the design for Bretton Woods came from Keynes’ thinking, with an American veto. Keynes intent was to devise an international trade and FX system that would encourage trade in goods and services, while discourage free flows of financial capital. And that would allow for maintaining international CA balances within limits, in order to allow national governments policy discretion in devising their fiscal, monetary and regulatory regime to suit their own conditions and circumstances. A fixed rate/adjustable peg system would allow for countries that ran into trouble to devalue in an orderly fashion without too much disruption. Capital controls were a key requirement for the system to work. Keynes proposed that all international transactions be channeled through an “International Clearing Union”, with an artificial unit of account, (i.e. not itself tradable or convertible) he dubbed “Bancor”, to which all national currencies would be pegged, which IIRC was to itself be pegged to a basket of 30 key commodities. If CA deficits or surpluses deviated from a certain annual band, (IIRC 2%), the countries would be taxed from the trade surpluses accumulated in the ICU, such that deficit countries would be incentivized to devalue, while surplus countries would be incentivized to reflate their domestic economies and thus eliminate their excessive surpluses. The idea was to put most of the burden for re-balancing on the surplus countries, which would have room for expansionary domestic policy, rather than on deficit countries, which would suffer a bit, but would not be subject to harshly deflationary adjustments. The Americans vetoed that proposal, insisting instead that the U.S.$ be the peg for the international system, itself nominally pegged to gold. At the time, the U.S. was 50% of g;pbal production, (due to the devastation of the War), and a huge international creditor, with vast gold reserves. And, of course, the U.S. wanted to be sure that the debts owed to it would be repaid in “hard” currency, even as it partly dealt with its own war debt through inflation. But it also was in the U.S. interest to redevelop the economies of the RoW as its future trading partners and as targets for the export of its surplus capital. The IMF was to help countries with balance-of-payment problems and the World Bank was to loan money for development projects in the post-war reconstruction. This compromise proposal was then put to delegates from the other nations at the conference in Bretton Woods NH for ratification. In addition, the 1948 Havana Charter was ratified by some 60 nations, with one notable exception (guess who?), so GATT, which was originally intended as a stop-gap measure became permanent, until it was transformed into the WTO.

This system worked rather well while it lasted. Global economic growth was at its highest level in the entire history of capitalism,- (only the export boom in the naughties partly approached that level briefly, though we know how that story ended),- and the curious thing is that it didn’t seem to matter exactly what sort of economic regime countries had, whether liberal capitalist of authoritarian state socialist-nationalist, most all countries seemed to grow together. (IIRC U.S. growth in the 1950′s wasn’t all that good averaging something like 2.2% with several sharp recessions and it was only in the 1960′s that the U.S. really boomed with 4% growth and full employment. But perhaps the heavy burden of military spending as % of GDP was to blame, since it has a low multiplier, .6-.7). It’s hard to fully assess the “North/South” effects, since at the beginning much of the “South” was still colonized and only gradually came on line. But Brazil, for example, managed to successfully industrialize with an import-substitution policy and several new African countries enjoyed commodity export booms early on, (with population growth and resource depletion pressures and corrupt and despotic misrule contributing to subsequent decline, not just “neo-imperialism”, though its hard to judge just what would have happened if the Bretton Woods framework had remained in place).

But the flaws in the initial system eventually blew it apart. The “Triffin dilemma” meant that the $ had to maintain a high and stable value, even as the U.S. had to run CA deficits to supply the RoW’s demand for reserves. And thus the U.S. was also issuing more $ than were actually backed by gold. (The “euro-dollar” market developed in London to recycle those excess $ abroad, beginning the yoking of the U.K economy to its financial sector). Finally rising inflation in the U.S., partly due to the Vietnam War, meant that the U.S. needed to devalue the $, (since with a fixed rate system, a country running a high inflation than the RoW is de facto appreciating its currency), but it couldn’t, since the $ anchored the whole system of pegs. Marxian-leaning types would add that, as Europe and Japan recovered and re-industrialized, the various national oligopolies increasingly butted against one another, lowering their rates-of-profit, even as labor expectations we rising from the prior boom. So Nixon unilaterally scuttled the whole system, resulting in the sudden implementation of a global system of floating FX rates and the stagflation crisis of the 1970′s. Commodities and especially oil were priced in now unmoored $, (which OPEC especially resented, since they experienced a real depreciation of their prime export), and monetary policies were misaligned by the sudden regime change. (European resentment at the unilateral move was very much at the origin of the formation of the now disastrous Euro). The technocrat in charge of implementing the new policy, an Under-secretary of the Treasury for International Affairs, Paul Volcker, remarked at the time,” Well, we’re just going to have to outrun them”. The deliberate, if groping and uncertain rise of the global regime of hegemonic neo-liberal policies was very much an attempted “solution” to the post-Bretton Woods stagflation. But we’re seeing the end of that story now too, in terms of practical efficacy, if not of ideological potency.

243

bob mcmanus 12.02.13 at 3:16 am

Re:Bretton Woods

Varoufakis, The Global Minotaur and before that, Modern Political Economics, which contains a half preceding what is a shorter version of GM where Varoufakis provides a technical history of economics and “explains” 2008. Nash-Arrow-Debreu, neo-classicalism rising undead etc. V also has an active blog.

Varoufakis (with Joseph Halevi and others) discusses a “Global Plan” implemented immediately after Bretton Woods in order to create minor currency regions around Germany and Japan. The idea to send US capital to those regions in order to create effective demand in East Asia and Europe.

V claims it was consciously reversed by Nixon, Connelly, Volcker around 1970 and the US decided to deliberately devalue the dollar yet retain sovereign status while attracting foreign capital in truckloads, spike commodity prices, etc. In order to maintain both fiscal and trade deficits. Asset inflation, wage suppression and near-zero interest rates were always part of the plan in order to make American assets safe and attractive.

I can cut and paste if anyone wants more. Excellent book.

244

mattski 12.02.13 at 4:00 am

Bruce @ 236,

Yes, I do, Bruce. Summers is a difficult personality. He is arrogant, abrasive and generally hard to stomach. Those unfortunate qualities do not disqualify him from having a) insight into our economic issues or b) genuinely altruistic thoughts.

As a rule, Summers pisses me off. Frankly, I trust Krugman’s judgement re LS, and from what I can glean of his presentation at the IMF conference I think he really, actually cares about the general state of our society.

245

john c. halasz 12.02.13 at 4:19 am

@244:

In 2007, Summers got up on his soapbox and called out what he called “the prophets of doom”, singling out among others Paul Volcker, who’d declared in 2004 that there was at least a 75% chance of a financial crisis in the U.S. within 5 years. Great timing as always, Larry!

246

jb 12.02.13 at 4:58 am

True, that statement was pretty drastically wrong, but I’d say that doesn’t affect his benevolence, but his competence.

247

bob mcmanus 12.02.13 at 12:00 pm

I understand well how relatively incoherent and inarticulate I am

“The best recent writings on the essence of money have adopted ideas that
I developed, that is, that money is for the practical world what God is for
the theoretical world, that it constitutes the alienation of the idea of social
value, in silver alloy from the Catholic point of view, or in paper money
from the Protestant point of view. In other words, money is simply the
inorganic symbol of our present social production that has broken free
from our rational control and therefore dominates us.” …Moses Hess, quoted by David McLellan, quoted by Amitra Nelson

Re: JCH’s accelerationist link above

As usual, it turned me off because of the tone “we have to have a plan, we have a plan”
I like tiqqun because they really don’t have a plan.

For me, Marx’s labor theory of value is a methodological collectivism. In order to understand finance and financialization, you start at the street by looking at how abstract labor creates value. You start and understand that finance is created by the young woman working at the noodle shop thinking about the blouse she wants to buy. This is the accelerationism I am interested in. My historical materialism says that young woman is transforming both the base and the superstructure in her everyday life, according to the changing technologies.

Value is social relations, labor and only labor creates value, the sum total of social relations is the political economy. If labor is not creating our political economy then it can not transform or sublate it.

I am somewhat aware of the dangers of spontaneism. But I think vanguardism and reformism are not only more dangerous, it is frankly objectively wrong. The post-industrial post-capitalist reality is that power has been democratized (unevenly), and you, me, or Larry Summers are no longer in charge.

The labor theory of value commits me to a view of economics as a minor branch of sociology and social theory.

PS: The corollary is that, for instance, the Patriarchy is created and maintained in large part by women, and like the workers and Capitalism, will disappear when they realize it.

248

Bruce Wilder 12.02.13 at 6:33 pm

I’m too lazy to commit to the dubious proposition that labor creates value. Any child knows that wishes create value. Marx’s classical economic analysis just seems like so much drudgery to shutter the window against Tinkerbell — like that’s ever going to work.

The accelerationist thesis only makes sense to me as a pessimist’s credo; things are spinning out of control and no plan is going to save us. It is not the earnest insistence on a plan that repulses me; it’s the unwillingness to follow one’s own logic into the darkness. Neoliberalism is not causing our fundamental circumstances — it’s political interior decoration not architecture — and no “progressive” alternative, however earnest, is going to save us from any pain, except the pain we are causing ourselves by trying to avoid pain, by trying to preserve what cannot be preserved.

Our thinking is constipated by this insistence on optimism, when optimism cannot be truthful. People get hung up on the silly “stupid or evil?” because they cannot quite face the possibility that neoliberalism isn’t a bad plan, or a plan gone wrong, but their(as opposed to our) plan , the plan of people, who realized the ship is sinking more than a decade ago, got their jewels out of the safe, and went to the lifeboats, and will only sound such alarms as are profitable to them. I don’t know what anyone gets out of thinking Larry Summers (or Barack Obama!) benevolent, but that’s the state of political consciousness for lots of people — it’s a long way from realizing Larry Summers doesn’t matter any more, his job is done, and so much the worse for most of us.

It’s a little late to take the Archdruid’s wry advice: Collapse now and avoid the rush. We still have to work ourselves up to embracing collapse, though. Not something that “progressive” politics wants to do, obviously . . .

249

mattski 12.02.13 at 9:34 pm

Bruce,

?!
You ask if I think LS is trying to make the economy work better. Then,

I don’t know what anyone gets out of thinking Larry Summers (or Barack Obama!) benevolent, but that’s the state of political consciousness for lots of people — it’s a long way from realizing Larry Summers doesn’t matter any more, his job is done, and so much the worse for most of us.

This is just a rant, and not one of your better ones.

250

Ronan(rf) 12.02.13 at 11:18 pm

That’s interesting jch, thanks

On Nixon removing the US from the gold peg;
why was this done, do you think, was it (1) inevitable (ie no way to maintain the system/service US deficits), (2) political (not willing to risk a deeper recession for electoral reasons), (3) geopolitical (?? was the new system generally more favourable – for whatever definition of favourable – to US interests ??) (4) ideological (5) incompetence (on this point, I was reading a book – Oil Kings – relatively recently on Nixon/Kissingers Twin pillars policy in the Gulf in the early 70s (leading up to the oil crisis) What came through was not only that they (Kissinger particularly) didn’t understand the economics (they were encouraging the Shah to increase oil prices so he could buy weapons from the US) but they really didn’t care. For them the grand strategy diplomacy was the important factor, the economics not so much)

I’d assume it’s probably some combination of all the above, so what I’m more getting at is do you think, with a Democrat admin, the outcome would have been different? Or was BW always going to fall apart?

bob
I actually have the Global Minotaur somewhere around the house but havent got around to it yet. I’ll have a look at it next, the reports I’ve heard are decent

251

Ronan(rf) 12.02.13 at 11:41 pm

ps those 5 reasons obviously aren’t meant to be exhaustive, I’m open to more suggestions (notably pressure from specific interests, which I should have included. )

252

JW Mason 12.03.13 at 12:53 am

Do you think Larry Summers is trying to make the economy work better, in any sense we ought to credit?

The question wasn’t addressed to me but I will answer anyway.

The fundamental problem is that an economy with private, profit-seeking provision of finance and of long-lived capital goods is vulnerable to violent swings between boom and crisis, and to persistent operation below (some measure of) full capacity. For various reasons, these problems tend to grow worse as capitalism develops. The solution is various forms of macro regulation — private investment is progressively replaced by public spending, and the scale and direction of credit is determined by the central bank. The problem is, these interventions blur the line between the political sphere and the sphere of decentralized, objective market relations that are supposed to compose the economy. And this line between public and private is the key ideological basis for the power and privileges of wealth ownership. So the challenge for someone like Summers is to expand the sphere of conscious planning via the state sufficiently to prevent the economy from tearing itself apart, while preserving the appearance of the economy as a domain of unplanned private activity.

One of the interesting things about the secular stagnation discussions is how they have brought this dilemma into the open. Here is Krugman, explaining the logic of Paul Samuelson’s economics textbooks:

How could you get anyone to take all that stuff about the perfection of markets seriously after what had just happened? By first teaching them that monetary and fiscal policy could be used to ensure fully employment.

Note that Krugman is not writing this as criticism — he would like to get back to the Samuelson approach.

Another way of stating the idea of a permanently negative “natural rate” of interest is that there has been a permanent downward shift in private investment demand, so that aggregate expenditure now falls short of income at full employment. One solution to this would be a permanent increase in public spending to bring aggregate expenditure back up to income at full employment. Another solution would be to encourage a shift away from wage labor, to bring full employment down to a lower level of expenditure. But both of those imply a shift from market to non-market activity. So the solution that is instead proposed is negative interest rates — that is, to penalize holders of liquid wealth sufficiently that they are compelled to purchase currently produced goods and services instead. This way, it will appear that the higher level of expenditure is freely chosen by private agents and we can “take all that stuff about the perfection of markets seriously” again.

So in answer to Bruce’s question, I think the answer is Yes — in the sense that Summers recognizes that the economy is not self-regualting, that allowing it to act freely will destroy the conditions for its own continued existence, and that the only solution is an expansion of the domain of conscious social choice at the expense of the domain of the “market.” I think that when the choice is socialism or barbarism, someone like Summers prefers socialism. He just wants to get there as slowly as possible.

253

Ronan(rf) 12.03.13 at 1:52 am

Anyone interested, “Reinterpreting Bretton Woods: International Development and the Neglected Origins of Embedded Liberalism” by Eric Helleiner goes into the North/South developmental aspects of BW and is available online (I can’t link as it goes straight to pdf, but g**gle the title and itll be there)

254

Peter T 12.03.13 at 5:41 am

One thing that occurred to me after reading this thread is that there is a common supposition that the solution to our problems will be primarily economic. If, however, the problems are environmental, then macro-economic arrangements are a secondary issue. The choice is not necessarily between socialism and barbarism, but between treating the economy as a primary good and treating it as a means to another end – broadly the sustained maintenance of civilised life on earth. We may be at the start of an inflexion point, where the 50-odd years we have seen the economy as the central focus of our collective life gives way to something else. In another 50 years, economics may well be a minor academic discipline, while the news is taken up with the pronouncements of the Chairperson of President’s Council of Environmental Advisors.

255

Ronan(rf) 12.03.13 at 4:27 pm

So, and this is the last thing I’ll post on it, from what I can make out in a dilettantish way, the response to debt crises usually falls on a centre/periphery axis. On the periphery (African, Latin American debt crisis) debts are reclaimed, then structural adjustment programs are implemented. In the centre theyre dealt with sensibly (debt negotiation on l/t plans to repay bondholders/or to recapitalise banks/etc, QE .. ) The response to Southern Europe falling somewhere between these two extremes. (This is simplistic and probably wrong but not really necessary to what comes next)

Wouldnt the solution be (from a reformist liberal perspective) not changing the FX and trade regime, or stricter banking regulation, but an acceptance that bubbles etc will occur, so the relevant international institutions should be reformed to respond to *every* financial crisis as if it occurs in the centre and is, by extension, a systemic threat (with no moral judgements attached)

Obviously this isnt a particularly realistic aspiration, but then what is.

256

john c. halasz 12.03.13 at 5:35 pm

Actually, the sort of crisis we’ve had in the “center” resembles the sorts of crises that have long afflicted the “periphery”: we’re all debt-peons now.

But to answer your suggestion, no, neither bubbles, nor persistent CA imbalances are good intentional policy, and there’s some correlation between the two.

257

Bruce Wilder 12.03.13 at 5:42 pm

Wouldnt the solution be (from a reformist liberal perspective) not changing the FX and trade regime, or stricter banking regulation, but an acceptance that bubbles etc will occur

That’s not actually a solution; that’s giving up on competent public policy.

This goes to why I asked whether people thought Larry Summers wanted to make the economy “work better”. “Work better” is a pragmatic dodge — the premise of the phrase seems to be that we can skip first principles and go right to functional, practical results, and are more likely to agree on results than principles — but leave the ambiguity aside; my qualification was, work better in any sense we ought to credit.

Bubbles are a failure of public policy and they are the money economy failing to function. Bubbles are prices that are wrong and demand that is wrong, and people working and investing foolishly, as a result. (In the U.S. housing bubble, there was a whole lot of fraud — fraud is economically dysfunctional. It wouldn’t be a liberal reform to declare the acceptance of theft, recommend everyone buy insurance against loss, while laying off the police and repealing the criminal law.) Secular stagnation is economic dysfunction. A negative unnatural interest rate is economic dysfunction.

mattski is mad at me because I said, truthfully, that I don’t understand how people can treat Larry Summers, at this late date in his disreputable career, as sincere. Larry isn’t warning us against secular stagnation; he’s prescribing secular stagnation. He’s worked hard to get us here, to create a bubblicious thoroughly financialized economy. Where we are is the outcome of choices “we” made — meaning that Larry Summers and his colleagues made.

This is not in any way to deny that there are constraints and consequences. Any sensible policy is going to deflate assets and there will be substantial business cycle consequences for that. Like any engine or machine, the economy functions imperfectly, with frictions and frictional losses, with efficiency well below the theoretical limit. It would be a significant reform of economics as a discipline to study and take account of that limit of practical efficiency, instead of declaring zombie ideas, like the EMH or rational expectations as theoretical dogma, as support for reactionary conservative nonsense. But, a functional system of money doesn’t feature bubbles or negative policy interest rates as policy. We don’t imagine the guy, who drove the car into the ditch, is an expert driver.

258

Ronan(rf) 12.03.13 at 5:53 pm

“That’s not actually a solution; that’s giving up on competent public policy.”

You’re right, it was poor phrasing on my part. Not *give up* on the other solutions (banking regulation etc)but to accept financial crises as a fact of life for the forseeable future and concentrate on reforming international institutions to meet financial crises in the most ‘sensible’ (humane, apolitical, responsible) way possible.

Not that that contradicts what you’re saying. I’m not really fully committed to this idea, and it does seem kind of stupid on rereading.

259

Bruce Wilder 12.03.13 at 6:05 pm

A friend counsels me that I’m sliding a bit close to the edge of “Larry is evil”, and it is obscuring the important point that politics involves conflicting interests, and bad policy is frequently the outcome of political stalemate between conflicting interests, or, as in our present case, the inability of the general interest to organize politically.

Simon Johnson, formerly with the IMF, and author of Thirteen Bankers and principal at the Baseline Scenario blog, has made the useful point that the pattern of financial crises and their resolution in the global South is one of political conflict among kleptocrats coming to a boil. The crisis is resolved only when at least one faction loses its grip on the loot. That’s the kind of realism I’d like to see emerge into political consciousness in the first world.

260

mattski 12.03.13 at 6:42 pm

A friend counsels me that I’m sliding a bit close to the edge of…

Shower your love on this friend!

I’m not mad at you, Bruce. I’m just beating my pet hobby-horse to death, perhaps in a similar manner to other folks here. Clearly, I’m not going to change many peoples minds and so at some point it would behoove me to give it a rest, BUT, to reiterate, in my mind at least my goal is better, more persuasive lefty arguments. If the discussion here is such that your average person would be baffled/repelled by it, I don’t think that’s such a great thing.

JW,

Another solution would be to encourage a shift away from wage labor, to bring full employment down to a lower level of expenditure.

I don’t understand this. Can you explain it to me?

261

john c. halasz 12.04.13 at 12:18 am

A pop-rock theory of revolution and a hall monitor’s idea of political correctness. Great! Now we’re making progress!

Comments on this entry are closed.