Paul Mason has an article today [about the impending end of cash](http://www.theguardian.com/commentisfree/2016/feb/15/crime-terrorism-and-tax-evasion-why-banks-are-waging-war-on-cash). The subtitle asks “But what would a cashless society mean for freedom?” but sadly the article itself has little to say on the subject. It isn’t hard to see, though, that the end of cash would give governments almost unlimited power to deny resources to those they consider undesirable. We’ve already seen this with the way that the Obama administration successfully pressured the major credit card companies to block donations to WikiLeaks. And it is a key component of the UK’s rather horrible Immigration Bill 2015 which has as a central purpose to create a “hostile environment” for people who lack authorization to be on the territory of the state by, inter alia, “working with banks and building societies to restrict their access to bank accounts”. In practice this means that people whose right to remain is cancelled could almost immediately lose access to the resources they need to fight the administrative decision against them. History shows that technologies that are first piloted against one group of people can be extended to others. We face a future where people deemed by the executive to be problematic in some way could lose access to all means of payment. At least with cash you can subsist on the margins of society; without it, government control is potentially total. Perhaps this is coming sooner than we think?
From the category archives:
Economics/Finance
Thomas Piketty’s *Capital in the 21st Century* tells us a great deal about the evolution of inequality in wealth and income over a long period and how that distribution is likely to evolve unless we intervene. What Piketty does not do is to tell us why inequality is bad or why people care about inequality, although we can glean some knowledge of his personal beliefs here and there. In what follows I draw on some aspects of Rousseauvian moral psychology to suggest that the reasons people care about inequality matter enormously and that because some people value inequality for its own sake, it will be harder (even harder than Piketty thinks) to steer our societies away from the whirlpool of inequality. [click to continue…]
One of the problems I have with the term “secular stagnation” is that it implies condition relevant to the very long term, say, the coming century. Such long run conditions presumably have to arise from fundamental causes in demography and technology. That’s the kind of argument that Piketty makes with his r > g theory of rising inequality. There are some good arguments for the view that the depressed state of the global economy, and particularly that of the more developed countries, can be explained in this way. But it shouldn’t be implied in the name of the problem. I’ve argued in the past that technology, specifically the Internet, doesn’t explain growing inequality,
The key quote from that New Left Project article, responding to Tyler Cowen’s The Great Stagnation
The global crisis stopped economic growth, not only in the US, but in countries far inside the technological frontier like Greece; while it had hardly any impact in, for example, Australia, which avoided the initial financial crises and used Keynesian fiscal stimulus to offset shocks flowing from the global economy.
A further reason for scepticism about technological stagnation is that this explanation has been advanced in recessions and depressions ever since the beginning of the capitalist business cycle in the nineteenth century. Such claims represent the flipside of the equally common claim, made during every period of sustained expansion, that the economy has entered a New Era of untrammelled growth. The most recent episode of this kind was the ‘irrational exuberance’ of the 1990s, fuelled by optimistic claims about the potential economic implications of the Internet, which was opened to commercial use by the US Congress in 1992, and by capitalist triumphalism exemplified by Fukuyama’s The End of History.The collapse of the ‘dotcom’ bubble was softened by the housing bubble that developed shortly afterwards (again, not at all a new phenomenon), but the result was only to worsen the inevitable crash in 2008. The similarity of these events to previous bubbles and busts is good reason to doubt that they represent, or that they have inaugurated, a new phase in the evolution of capitalism.
In my last post on private infrastructure finance and secular stagnation, I suggested a bigger argument that
The financialization of the global economy has produced a hugely costly financial sector, extracting returns that must, in the end, be taken out of the returns to investment of all kinds. The costs were hidden during the pre-crisis bubble era, but are now evident to everyone, including potential investors. So, even massively expansionary monetary policy doesn’t produce much in the way of new private investment.
This isn’t an original idea. The Bank of International Settlements put out a paper earlier this year arguing that financial sector growth crowds out real growth. But how does this work and what can be done about it?
The financial sector is an intermediary between savers and borrowers (for investment or consumption). So, the costs of running the financial sector and the profits generated in that sector must be included in the margin between the rates of return by savers and those paid by borrowers, or else they must be shifted on to society at large (for example, through bailouts or tax subsidies).
I’m still organizing my thoughts on this, so what I have are some ideas rather than a fully formed argument.
First, if the financial sector is unproductive, how can it be so large and profitable in a market economy?
For most of my academic career, I’ve been working on (more precisely, trying to demolish) the idea of private investment in public infrastructure, exemplified by the Private Finance Initiative in the UK and the Public Private Partnerships program in Australia. Here’s my first published article on the subject, from 1996. I conclude that
The current enthusiasm for private infrastructure, like the enthusiasm for public ownership which it replaced, has been based more on ideological beliefs in the virtues of one sector and the vices of the other than on any systematic economic analysis …Analysis of the relative performance of the private and public sector in different phases of infrastructure provision suggests that, in most cases, the private sector will be most efficient in the construction phase but the public sector will be best equipped to handle the risks associated with ownership.
Twenty years later, this analysis seems finally to have been validated. The UK Auditor-General recently reported that
Analysis of the 2012-13 Whole of Government Accounts (WGA) implies that the effective interest rate of all private finance deals (7%–8%) is double that of all government borrowing (3%–4%)
As a result of the excess costs, and some spectacular failures, bipartisan enthusiasm for the PFI has finally turned to disillusionment. Here’s the Telegraph, correctly putting much of the blame on New Labour. And, for balance, here’s the Guardian. There hasn’t been a similar admission of failure in Australia, but the flow of PPP projects has greatly diminished, and most new ones rely on a substantial component of public capital.
Unfortunately, the failure of private finance hasn’t led governments to resume the high levels of public investment that prevailed in the Keynesian era of the 1950s and 1960s. So, even with central bank lending rates at zero, there has been no real recovery in infrastructure investment. Apart from the direct effect of lower investment, there’s a strong case that infrastructure investment increases the returns from private investment in general and therefore stimulates growth.
Nuance is nearly always appealing to academics. For a long time, that was true of my approach to economic issues, particularly including income distribution. When presented with simplistic populist solutions to inequality like “Make the rich pay!”, I was inclined to responses along the lines of “It’s more complicated than that”.
A big problem with “Make the rich pay!” is that with the kind of income distribution that prevailed in the mid-to-late 20th century, any change to income tax that would raise significant revenue would have to apply to the top quintile (20 per cent) of the income distribution. People in the top quintile of the income distribution mostly derive their income from (typically professional or para-professional) employment, don’t think of themselves as rich, and aren’t, in general, seen this way by others. So, the slogan didn’t match the implied policy.
But with the rise of the patrimonial society, that’s largely ceased to be the case. The top 1 per cent of the US population now get more than 20 per cent of all pre-tax income, considerably more than the total revenue of the Federal government. Within that group, the top 0.1 per cent have done better than everyone else, and the top 0.01 per cent even better.
So, taxing the 1 per cent more makes sense. I responded a little while ago to a piece trying to argue increasing the top marginal tax rate would make no difference to inequality. And while I was drafting this post, the NY Times came out with an article that reached broadly the same conclusion as mine.
There’s nothing inherently ludicrous in the suggestion that the very rich should pay most or all of the costs of sustaining a system that benefits them so greatly[^1]. And, as in the 1920s, the very rich are different from everyone else. Their wealth is derived primarily from capital, or from control over capital (as business owners or from the financial sector). And, while most of the current cohort of ultra-wealthy did not inherit large fortunes, that’s an inevitable consequence of the fact that there weren’t many large fortunes to inherit until recently. As Piketty demonstrates, a society dominated by large accumulations of wealth will inevitably one in which inheritance, rather than effort, education or talent, determines life outcomes.
Also, maybe of interest, this piece on the recently announced (but still secret) Trans-Pacific Partnership Agreement.
I have a piece up on ABC (~ UK BBC, not US ABC) discussion blog The Drum, making the point that most of the market value of a Bitcoin reflects the electricity wasted in the calculations needed to “mine” it, with the obvious disastrous implications for the global climate. Unsurprisingly, it’s provoked some vociferous, if mostly incoherent, responses from Bitcoin fans. Hoping to use the heat energy arising for some useful purpose.
Yes.
This, you might think, qualifies as another in the series “Short Answers to Silly Questions”. But a Brookings Paper study by William G. Gale, Melissa S. Kearney, and Peter R. Orszag reaches the opposite conclusion.
The study looks at increasing the top marginal tax rate (currently 39.6, applicable to incomes above $400k for singles), with the strongest option being an increase to 50 per cent. The proceeds are assumed to be redistributed to households in the bottom 20 per cent of the income distribution.
The headline finding is that the Gini coefficient is barely changed, as are other popular measures including the 99/50 ratio (the ratio of income at the 99-th percentile to 50-th percentile, that is the median). But the 99/10 ratio and 90/10 ratios change a lot, from 50 and 17 under current law to 37 and 12.5 with the redistribution.
What does this mean? Two things:
(i) As is well known, the Gini coefficient is a lousy measure of income inequality, much more sensitive to the middle of the income distribution than to the tails
(ii) The proposed redistribution would substantially improve the welfare of the poor, with most of the burden being borne by taxpayers in or near the top 0.1 per cent.
It’s obvious, as the authors note, that the 90-50 measure won’t change, since neither group is affected (there’s no simulation of behavioral responses which might have indirect effects). But, since the 99-th percentile income is very close to $400k, there’s very little impact on this group either. But the tax, as modelled, raises a lot of money from the ultra-rich incomes. As a result, distributing the proceeds at the bottom of the distribution raises incomes substantially, which explains the big changes in the 90-10 and 99-10 ratios.
The real lesson to be learned here, one I came to pretty slowly myself is that old-style measures looking at quintiles or even percentiles of the income distribution are no longer very relevant. The real question, in the economy of Capital in the 21st Century is how much should go to the ultra-rich.
For a generation (fifteen years) or more I’ve been writing and rewriting the same piece about the silliness of the “generation game”, the idea that one’s year of birth matters more than class, gender or race in determining life outcomes and attitudes. But this is a zombie idea that can never be killed.
Stephen Rattner in the New York Times is the latest example, with a piece showing that US Millennials (those born after 1980) are doing much worse than previous generations at the same age, despite higher levels of education. Rattner notes the role of the recession, now nearly a decade old, but then jumps to the conclusion that it is the Baby Boomers, as a group, who are to blame. His only evidence for this is the long-discredited claim of a looming crisis in Social Security.
Rattner doesn’t present any evidence about the recent experience of non-Millennials, but his piece leaves the impression that the experience of doing worse than older cohorts at the same age is uniquely Millennial. So I thought I’d do his work for him, and dug out this graph prepared by Doug Short 
As can be seen, the group suffering the biggest loss, relative to older cohorts at the same age, are those households with heads aged 45-54 in 2013, a mix of late Boomers (for aficianados, this group is called Generation Jones) and early X-ers. But the main point is that median household income is falling for all groups except the 65+ cohort (mostly called Silents in the generation game). Part of this is due to declining household size, but (IIRC) household size has stabilized recently as forming a new household has become less affordable.
Rattner doesn’t mention, even once, the obvious and well-known explanation for the fact that median income is falling while mean income rises. This can only occur if the distribution of income is becoming more skewed, with the top tail (the 1 per cent) benefiting at the expense of everyone else.
Following up on Noah Smith’s marvellous definition of derp, I thought I would add the first person to give the declension of this irregular verb
* I can’t see this happening
* You regularly restate your tight (low probability) prior
* He herped a flerp of derp, the twerp
Chris has already pointed out the failure of the core European institutions in their response to the global financial crisis. One excuse that can be made for these institutions is that they are still in the process of development, and were ill-prepared, intellectually and institutionally, for an event so far outside their experience. The ECB and EC developed in a period when controlling inflation and stabilizing government debt were the key imperatives, and they responded to the crisis accordingly.
No such excuse can be made for the third member of the Troika, the International Monetary Fund. The IMF has understood from the start that the austerity policies it has imposed are economically unsound and a repetition of past failures. And yet it has been unwilling and unable to do anything else.
I’m writing a longer post on economists and the TPP for the Monkey Cage, and perhaps another post about the idea of “mood affiliation” for here (short version – I don’t think it at all does what its advocates want it to do) but in the meantime, a specific response to this post by Tyler Cowen. Tyler, partly perhaps as a result of an argument I had with him and Noah Smith on Twitter, argues that:
I’m familiar with studies showing estimated economic gains from TPP in the neighborhood of $1.9 trillion (pdf). Given the past performance of trade models, I am willing to believe that might be an overestimate. So let’s cut those gains roughly in half to say a trillion. (That said, if I understand the Peterson document correctly, they are not even trying to incorporate gains from reallocation on the production side, as might result from comparative advantage or dynamic specialization; in this sense $1 trillion may be a considerable underestimate of the upside.) That is still a sizable sum of economic gain. What would convince me to oppose TPP if is somebody did a study showing the following: when you use a better trade model, use better data, and/or add in the neglected costs of TPP (which are real), those gains go away and indeed become negative.
This is fundamentally the wrong way to think about these models. If as Tyler accepts, thinking about TPP primarily in Ricardian terms is likely to lead one ‘substantially astray,’ then starting from a Ricardian model and stipulating that you’ll lower the expected benefits by half to give your opponents a bit of a leg up, is fallacious. Specifically, it’s a weaker version of the Iraq war fallacy that Daniel identified in his 1 minute MBA.
Fibbers’ forecasts are worthless. Case after miserable case after bloody case we went through, I tell you, all of which had this moral. Not only that people who want a project will tend to make inaccurate projections about the possible outcomes of that project, but about the futility of attempts to “shade” downward a fundamentally dishonest set of predictions. If you have doubts about the integrity of a forecaster, you can’t use their forecasts at all. Not even as a “starting point”.
This isn’t to say that the Peterson Institute model that Tyler is working from is “fundamentally dishonest.” Although Alan Beattie notes that Peterson used to be “notorious for claiming trade deals would create thousands of jobs, cure scrofula and turn base metals into gold,” he accepts that they’ve gotten better under Adam Posen, (also, in fairness to the pre-Posen regime, this). But it’s highly problematic as a starting point for debate. As Jared Bernstein describes the results of the Peterson model in email conversation: “Only in DC-style econ would a number like 0.4% by 2025, derived from a model of a 29-chapter trade agreement that the modelers never saw, be taken seriously (Remember, we can’t accurately forecast monthly jobs numbers–yet we can somehow tell you to count on a miniscule change to GDP 10 years hence).”
I’ll have more to say about these issues in a follow up post. For now, just this. If you’re trying to build theoretical argument, you can reasonably ask someone to provide you with a better theory before you abandon your own. However, if you’re trying to advocate for a policy measure, and you accept that your preferred model is likely to lead people substantially astray, you don’t have any very good warrant for suggesting that this model should still anchor policy debate in lieu of someone coming up with a better one. Far better to admit ignorance (while berating the ignorance of your opponents as you like) and to accept that everyone’s views on the policy (including your own) are likely more the product of political values than dispositive evidence.
I’ve been looking again at a [two-year-old discussion on immigration policy between Jonathan Portes and Martin Wolf](http://www.niesr.ac.uk/blog/economic-objectives-immigration-policy-dialogue-martin-wolf#.VSeNLhcu2Lt), and particularly on Wolf’s take on the reasons that ought to inform policy. As far as I can tell, Wolf’s position is a kind of national-weighted consequentialism. Immigration policy is to be viewed as an aspect of economic policy, and the relevant considerations are simply whether a policy is beneficial to existing members of society, with no weight to be given to the interests of immigrants. Portes raises the interesting objection that, once we factor time into our national felicific calculus, then the well-being of future members who have yet to be naturalized ought to count, but this is a mere wrinkle in the argument. Wolf’s view is that
> countries are like clubs. They can decide who members are. Once you are a member, you matter to the club. If you are not a member, you don’t.
I hope that Wolf doesn’t mean what he says. The disanology between clubs and countries is pretty stark, since countries are compulsory associations which most people don’t have a choice about, whereas clubs are not. Moreover, most people think that countries do not have an unlimited discretion to decide on who their members are, that Nazi laws to remove citizenship from Jews were unjust, that policies that are blatantly discriminatory on racial or gender lines have no moral standing, whatever the insider electors think. We also, I hope, think that laws that condemn generations of minority permanent residents to non-membership — until recently a feature of German citizenship law — are unjust. So at best Wolf must mean that countries have a discretion to admit as members outsiders with no other moral claim to admission or membership.
The interesting question, then, when we have got the discretionary membership issue out of the way is what could justify national-weighted consequentialism? Whilst there might be all kinds of deontological reasons for states to favour insiders over outsiders (the global justice literature is about little else), in my experience, economists don’t think in those terms. Rather, they think of themselves as being consequentialists all the way down, and of rights, powers, permissions etc as being ultimately justified by outcomes. If I’m right that this is the picture, then the claim would have to be that a global system of nationally-weighted consequentialisms, perhaps by assigning the promotion of individual interests to particular states, gives rise to the best consequences overall. That’s an empirical claim, but one that is very very unlikely to be true since it locks so many people away from opportunities they would otherwise have to be productive and makes the world a poorer place as a result. So I’m still puzzled. What do *economists* think justifies national-weighted consequentialism?
I made this observation in comments on Chris’ ideal theory post, and got some pushback, so I thought I’d take a look back at the data
US Households in Poverty, 1959-2013
Both the number and the percentage of families in poverty dropped sharply during the 1960s when the “War on Poverty” was being waged actively, and remained near their all-time lows through the Nixon and Carter years until 1979, when the Volcker recession hit, followed by the election of Ronald Reagan. These events can reasonably be said to mark the point at which the government unequivocally changed sides.
The number of households in poverty has risen steadily since then and is now higher than in 1959, the year for which the poverty level was first defined by Mollie Orshansky. The poverty rate has remained consistently higher than in the 1970s, except for a brief deep at the peak of the late-1990s boom.
[click to continue…]