John Quiggin

The biggest theoretical issue in macroeconomics is “what causes unemployment”. As discussed in the last post, the classical answer, that unemployment is caused by problems in labor markets, is obviously wrong as an explanation of the simultaneous emergence of sustained high unemployment in many different countries. Unemployment is a macroeconomic problem.

The central macroeconomic policy issue, then, is “what, if anything, can macroeconomic policy do to move the economy back to full employment”. If you accept that, under current conditions of zero interest rates, there’s not much positive that can be done with monetary policy[1], and you stay within the bounds of mainstream policy debate, this question can be restated as “how effective is expansionary fiscal policy” or, in Keynesian terms, “how large is the fiscal multiplier in a depression”.

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Following up my previous post, I want to look at the main areas of disagreement in macroeconomics. As well as trying to cover the issues, I’ll be making the point that the (mainstream) economics profession is so radically divided on these issues that any idea of a consensus, or even of disagreement within a broadly accepted analytical framework, is nonsense. The fact that, despite these radical disagreements, many specialists in macroeconomics don’t see a problem is, itself, part of the problem.

I’ll start with the central issue of macroeconomics, unemployment. It’s the central issue because macroeconomics begins with Keynes’ claim that a market economy can stay for substantial periods, in a situation of high unemployment and excess supply in all markets. If this claim is false, as argued by both classical and New Classical economists, then there is no need for a separate field of macroeconomics – everything can and should be derived from (standard neoclassical) microeconomics.

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When econbloggers aren’t arguing about cyborgs, they spend a fair bit of time arguing about the state of (mainstream) macroeconomics[1], that is, the analysis of aggregate employment and unemployment, inflation and economic growth. Noah Smith has a summary of what’s been said, which I won’t recapitulate. Instead, I’ll give my take on some of the issues that have been raised (what follows is inevitably monkish wonkish)

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The re-emergence of gun control as an issue in the US has led to a fair bit of discussion of Australian experience. As is now normal on any issue, the political right has relied on Fox News factoids bearing no relation to the truth. But even for those seeking accurate information, it hasn’t been easy. AFAIK, there is no good place to go for an accurate summary of an issue that evolved in Australia over several decades. So, I’ll offer my own, based largely on recollection but with links where I can find them.

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Glenn Greenwald contrasts the horror over the Newtown mass murder and the immediate political reaction with responses to the deaths of children in US drone attacks. He focuses his criticism particularly on Obama supporters.

While there are many different views, and combinations of views, my perspective (as a non-American who would have voted for Obama) is a bit different. Until Newtown my perspective on US gun violence and drone attacks was pretty much identical

• They are horrible
• I thought Obama would change things for the better, but they changed for the worse (no action on semi-automatics, spread of concealed carry and stand your ground, expansion of the drone war)
• Given the attitudes of the majority of Americans, little hope for improvement
• Repubs would be even worse

I think most of these views were shared by most participants in the “lesser evil” debate before the election. But what strikes me in retrospect is that the entire debate was focused on drones and related issues. Implicitly, I and I think, most others, regarded gun control as a cause so thoroughly lost that Obama couldn’t be blamed for abandoning it. The Trayvon Martin case changed this a bit, but not much. By contrast, Newtown showed that the apparent pro-gun consensus was if not illusory, at least fragile. In his trademark ‘lead from behind’ style, Obama captured the new consensus and seems likely to push it forward.

The hopeful reading of this is that public opinion about drones could change just as radically, if public understanding improved. At the moment, it’s hard to see that happening without some truly horrible shock, like a drone wiping out a primary school. Perhaps, however, the widespread view among those who have actually examined the drone war, that it’s both cruel and counterproductive, may start to seep into public discussion, as part of a reaction against the culture of violence that supports both drones and guns.

That’s the headline for a piece I published in The National Interest last week. Opening paras

Among the unchallenged verities of U.S. politics, the most universally accepted is that of the crucial strategic and economic significance of oil, and particularly Middle Eastern oil. On the right, the need for oil is seen as justifying an expanded and assertive military posture, as well as the removal of restrictions on domestic drilling. On the left, U.S. foreign-policy is seen through the prism of “War for Oil,” while the specter of Peak Oil threatens to bring the whole system down in ruins.
The prosaic reality is that oil is a commodity much like any other. As with every major commodity, oil markets have some special features that affect supply, demand and prices. But oil is no more special or critical than coal, gas or metals—let alone food.

This piece expands on my earlier argument that the US has no national interest at stake in the Middle East, just a set of mutually inconsistent sectional interests and policy agendas. I don’t talk about climate change explicitly, but we’ll never have a sensible debate about climate change until oil is demystified.

For quite a while, I’ve been arguing that the simultaneous occurrence of sustained depression in most developed countries provides fairly conclusive evidence that both new classical macroeconomics and standard versions of real business cycle theory cannot explain actual macroeconomic outcomes. That argument is directed both against US-based economists like Casey Mulligan and Narayana Kocherlakota, who are trying to explain the US experience in terms of problems specific to the US labor market[1] and to European advocates of austerity who blame the crisis in peripheral European countries on (mostly falsely) alleged government profligacy in those countries.

An immediate implication, drawn out here by Paul Krugman, is that the success or otherwise of the limited stimulus undertaken by the Obama Administration should be assessed by comparison to the performance of other countries, most of which undertook less stimulus, returned to austerity faster, and have experienced correspondingly weaker growth (as some Oz tweeps are pointing out, he might have mentioned Australia, which undertook a big stimulus and avoided recession altogether).

But, as Megan McArdle snarks here, there’s an implication more appealing to Republicans. If Obama can’t be blamed for a global recession, neither can Bush. Although McArdle’s argument isn’t watertight (the US is big enough that US actions have a big effect on the world as a whole), the conclusion is broadly correct. There’s plenty of blame to go around for the Global Financial Crisis and the subsequent depression, and the Bush Administration deserves only a small share. Bush’s main contribution was to introduce unfunded tax cuts at a time when the budget should have been in surplus, thereby reducing the fiscal space available for stimulus when the crisis came. But, given the weakness of the stimulus and the ferocity of the political response, it’s not clear that was a binding constraint in any case.

The primary culprit is market liberal economics, which may be considered both as a set of ideas with its own internal logic and as an expression of the class interests of those who benefit from the finance-dominated form of capitalism that produced the crisis and has prevented any recovery. My book Zombie Economics is a critique of market liberalism considered as an economic theory, showing how market liberalism produced the crisis. Colin Crouch’s Strange Non-Death of NeoLiberalism gives more of the class interpretation, explainign why these discredited ideas remain dominant.

A while ago, I posted about the supposed capture of the ‘white working class’ by Republicans, pointing out that the term was being used to refer to those with less than college education. On more traditional measures of class, such as income, the Democrats do much better, though still getting only about half the vote.

In response to this post a number of commenters pointed out that the data was not disaggregated by region, and that the South was anomalous. A couple of things I’ve seen recently support this. Here’s Charles Blow, reporting that 90 per cent of white voters in Mississippi supported Romney. Kevin Drum observes that Obama won about 46 percent of the white vote outside the South and 27 percent of the white vote in the South. Here’s a bit more from The Monkey Cage.

It strikes me that the best way to understand the distinctive characteristics of US voting patterns is to to treat “Southern White ” as an ethnicity, like Hispanic. With that classification each of the major parties becomes an coalition between a solid bloc vote from an ethnic minority and around half the votes of the “non-Southern white” ethnic majority, which is more likely to vote on class lines. The question then is which ethnic/class coalition is bigger. As in other countries, voting for the more rightwing party is correlated, though not perfectly with higher incomes and (conditional on income) lower education, and to shift according to broader ideological movements.
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Every Armistice Day I write more or less the same post, and every time I do, I’m struck by how hard it is to draw the obvious conclusions from the evidence of war during my lifetime (the last 50 years or so). For around half that time, the US has been engaged in a large-scale war, with Australia as an ally/client. The wars have cost thousands of American, and hundreds of Australian, lives, and trillions of dollars, while wreaking death and destruction on a far more massive scale in the countries in which they have been fought. The outcomes have ranged from total defeat to unsatisfactory partial victories. In no case have there been benefits remotely commensurate with the cost, for either side (for all the millions of lives lost, is Vietnam much different now than if the war had never been fought?). In most of them, the case for war was built on blatant lies and in the remaining cases, the lies started as soon as the guns opened fire. The claims of military and foreign policy “experts” have proved to be false more often than not.

The obvious conclusion is that war is almost always a mistake as well as a crime.

Yet it seems impossible to get away from the assumption that war, or the threat of war, is a reliable method of achieving desired outcomes.

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Before engaging in another round with Casey Mulligan, I’d like to say that, while I find most of his arguments implausible, I don’t think he’s silly for making them. Given the position he’s trying to defend, these are the best arguments available. And that position is widely shared, not only by economists much more famous than Mulligan but by lots of governments and policymakers. Most mainstream opponents of Keynesianism are committed, one way or another, to the view that persistent high unemployment must be caused by problems in labour markets. But it’s much easier to talk in vague general terms about rigidities and structural imbalances than to present an operational explanation for the sustained high US unemployment of the last four years. Mulligan at least makes the attempt, which is more than most of the New Classical/Chicago/Real Business Cycle school have done, and necessary if there is to be any progress in the debate.

Replying to my criticism of his NY Times column, Mulligan suggests that I should have read his book. Perhaps so, but the column is presented as a critique of Krugman’s book, not a plug for Mulligan’s, and I responded in that light. His latest post mentions a couple of points where he draws on the book, but for the moment I’m going to continue to rely on data published elsewhere.

Mulligan responds to my points in reverse order, which makes sense, because his response to my central point is by far his weakest. The big difficulty for an explanation of post-2008 unemployment based on US welfare policies (unemployment insurance and food stamps) is that many other countries with radically different labor markets and policy responses experienced a big and sustained increase in unemployment at exactly the same time, following the global financial crisis of late 2008. In particular, lots of countries introduced austerity policies involving sharp cuts in the kinds of benefits Mulligan is criticising. Mulligan’s response to this evidence is handwaving. First he says that I haven’t calculated the implied changes in marginal tax rates, although its pretty obvious that most of them will be reductions. Then he resorts to US exceptionalism, saying

Finally, if marginal tax rates were found to be constant in Estonia (the only specific country that Professor Quiggin points to), does that mean that marginal tax rates do not matter in the U.S.? Please let me know so I can notify American economists that Estonia is our ideal laboratory, and notify policymakers that they can safety hike marginal tax rates to 100 percent without noticeable consequences.

That’s pretty startling for someone representing a school of thought which usually treats economic laws as having the same universal applicability as those of physics.

To try and make sense of an argument like Mulligan’s you’d have to start with the financial crisis as a global shock, then claim that, if only governments had sat on their hands, recovery would have been rapid. Instead, the argument would run, governments acted to alleviate the lot of the unemployed and thereby made things worse. That would be a coherent explanation for simultaneous and sustained increases in unemployment – the only difficulty is that it’s directly contrary to the facts.

It’s worth making the distinction here between changes and levels. Lots of European countries have high marginal tax rates and generous unemployment benefits, relative to the US. But, in many of the worst hit countries, benefits have been greatly reduced. By contrast in the US, benefits are very low but at least some have been increased. If, like Mulligan, you want to argue in terms of changes, then Europe should have seen reductions in unemployment (which was previously higher than the US). In reality, there is very little correlation between labor market policies and changes in unemployment. What has mattered has been exposure to the initial financial sector shock and/or subsequent austerity policies, exactly as Keynesian analysis would predict.

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I don’t have a vote in the US election and, even if I had taken the necessary steps, I would be unlikely to live anywhere my vote counted, with the possible exception of northern Virginia. On the other hand, as someone who lives on the same planet as 300 million or so Americans, I do have a stake in the outcome.

If I had a vote that might be decisive, I would vote for Obama. Despite having failed to mention climate change in the campaign, or to push at all hard for the Waxman-Markey bill for an emissions trading, he has put in place regulations that will significantly reduce US emissions, to the point where the announced target of a 17 per cent reduction between 2005 and 2020 looks achievable. Regulation isn’t the most efficient means of reducing emissions, but I’m happy to leave that choice to the US political system.

If Obama wins, fuel efficiency regulations for cars and emissions limits for power stations will be locked in, and there will be hope for more in the future. If Romney wins, they will be repealed or not enforced. That’s enough reason for me to hope that Nate Silver’s odds are right.

Chicago is about as close to the American heartland as you can get and still be in a major city (the infamous Heartland Institute is located there, for example), but even so, I’d expect a professor at the University of Chicago to be aware that the USA is not the only country in the world. That’s not true, apparently, of Casey Mulligan, who claims that the continued weakness of employment in the US is due to policies introduced in 2008 and 2009, which ” greatly enhanced the help given to the poor and unemployed — from expansion of food-stamp eligibility to enlargement of food-stamp benefits to payment of unemployment bonuses — sharply eroding (and, in some cases, fully eliminating) the incentives for workers to seek and retain jobs, and for employers to create jobs or avoid layoffs.”

Mulligan’s claims about US policy are dubious at best (see over fold), but there’s a much more critical problem with his argument. If US unemployment is caused, not by a demand shock but by the mistaken policies of the Obama Administration, why did unemployment move in the same way, and at the same time, in many different countries? Did Iceland expand its food stamp program? Does Estonia pay unemployment bonuses? Sadly, no. And while many countries adopted Keynesian policies in the immediate aftermath of the Wall Street meltdown, others did not, and most have now switched to the disastrous policy of austerity. An even clearer demonstration is given by the Great Depression, where nearly all governments pursued austerity policies after 1929 (Mark Blyth’s soon-to-appear Austerity: The History of a Dangerous Idea tells the story)>

This isn’t just a problem for Mulligan. The simultaneous occurrence of a sustained increase in unemployment in many countries, with different institutions and policies undermines any explanation of unemployment that works at the national level. That includes all forms of New Classical Economics, in which unemployment arises from labor market “distortions”, as well as Real Business Cycle theories (except if you stretch the idea of a technology shock to the point where “technology” effectively means “aggregate demand”).

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Gary E. MacDougal (The Wrong Way to Help the Poor, 10/10/12) claims that the Federal government currently spends an average of $87000 a year on the typical family of four living in poverty. MacDougall’s calculation is out by a factor of at least four and probably more.

MacDougal’s source, Michael Tanner of Cato, treats all means-tested programs as anti-poverty programs. This includes the Earned Income Tax Credit, Family Tax credit and other programs for the middle and working classes. As Tanner admits, these programs have at least 100 million recipients, and probably many more. So, the average payment is less than $10 000, not the $20, 610 Tanner estimates.

It gets worse. The number of recipients doesn’t include children or adult dependents, but MacDougal’s calculation does. His family of four would include at most two benefit recipients, and would therefore receive less than the poverty line income of $23 050.

Undeterred by the ferocity of recent naval warfare, I had something to say about US Middle East policy in The National Interest recently. It’s essentially an elaboration of this post, in which I presented a comprehensive policy program which will, at least, never be beaten for succinctness.

Given that I was publishing in The National Interest, I didn’t raise any questions about the assumptions implicit in the term “national interest”. But, for the CT audience, I’ll spell out that nothing in my argument changes if you replace it with “US ruling class interest” or similar. The Middle East policy views and objectives of the US ruling class (however defined) are just as incoherent and unachievable as those of the US polity as a whole.

Opening para gives the flavor

The foreign-policy debate between Barack Obama and Mitt Romney is expected to spend a lot of time on the attacks on embassies in Libya and Egypt, which were either sparked by an absurdly bigoted anti-Islamic film or used this film as cover for a pre-planned terror attack. Whatever its value as a debating point, this episode has laid bare the bipartisan incoherence of U.S. policy toward the Middle East.