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

We got this outcome because we wanted it.

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

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.

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

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?

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

Are you kidding me?

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.

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

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.

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).

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

Punctuation goes inside the quotations, loser.

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)

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.”

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.

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?

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?

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?

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

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.

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.

@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.

“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.

@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).
https://crookedtimber.org/2011/06/25/marxism-without-revolution-crisis/#comment-366173

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.

“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.

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.

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.

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

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.

“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.

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.

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

@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.

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?

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.

“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.

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?

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)

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.

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

@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?

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.

@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?

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

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

… oh. Of course.

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.

@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: 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.

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.

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.

@ 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.

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.

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

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?

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.

@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.

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.

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.

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.

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.

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.

> 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.

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.

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.

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.

“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.

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.

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.

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

@ 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?

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?)

(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.

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.

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.

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

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.

Duh? “think”, of course.

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

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.

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.

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.

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

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.

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.)

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

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.

” 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.

“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.

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.

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

@ 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.

“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

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.

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.

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.

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.

@ 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.

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.

> 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.

> 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.

@ 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**.

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.

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.
“

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?

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.

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).

@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.

BW,

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

This is why I like you.

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.

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.

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.

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.

“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.”

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.

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.

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?

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)

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.

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.

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.

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

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 . . .

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

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.

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.

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.

“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.

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?