Economics/Finance

I have a piece in The National Interest, looking at various recent events including the latest round of the Argentinian debt crisis, in which a New York court ruled in favor of a group of ‘vulture’ investors, led by a New York billionaire, and the agreement of the US Department of Justice and Citibank, involving a financial settlement to avoid a lawsuit over bad mortgage deals and CDOs in the pre-crisis period.

My central observation is that while legal forms are being observed, these are obviously political processes, with outcomes reflecting relative political power rather than any kind of neutral application of the law. So, the international financial system is part of international power politics: it matters a lot that Citibank is a US bank, while BNP Paribas is French and so on. This is very different from the picture of a global, as opposed to international, financial system. Suhc a systemt, independent of, and standing in judgement on, national governments seemed to be emerging in the 1990s, but broke down in the financial crisis, when banks ran to their national governments for support.

As an illustration, I found this ad put out by the ‘vultures’. Try interchanging “US” and “Argentina” throughout and assuming an adverse judgement by an Argentinian court against the US government.

This is going to be a long and wonkish post, so I’ll just give the dot-point summary here, and let those interested read on below the fold, for the explanations and qualifications.

* The dominant model of unemployment, in academic macroeconomics at least, is based on the idea that unemployment can best be modelled in terms of workers searching for jobs, and remaining unemployed until they find a good match with an employer

* The efficiency of job search and matching has been massively increased by the Internet, so, if unemployment is mainly explained by search, it should have fallen steadily over the past 20 years.

* Obviously, this hasn’t happened, but economists seem to have ignored this fact or at least not worried too much about it

* The fact that search models are more popular than ever is yet more evidence that academic macroeconomics is in a bad way
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I’ve got a piece up at the Chronicle of Education, with the title Campus Reflections (paywalled, but there’s a version at my blog) making the point that a higher education system is, in important respects, a mirror of the society that created it, and that it helps to recreate. If that’s true, it follows that the idea of education as a route to equality of opportunity, let alone equality of outcomes, is misconceived. This idea has always been popular among social democrats and even more so by advocates of ‘The Third Way’, who needed it to justify their abandonment of policies aimed at equalising outcomes.

Thinking about the point in this more general context, I’d want to qualify the ‘mirror’ claim a bit. There have been important instances where access to education has been substantially more egalitarian than access to resources in general, so that education did serve to promote equality of opportunity and perhaps also some equalisation of incomes (since it reduced the correlation between access to good jobs and ownership of wealth). The creation of universal public education systems in the 19th century was one example. These systems were far from being equal: they typically streamed students along class lines. But even giving working class kids the basics of literacy and numeracy was a big step forward, and there were opportunities for the bright and determined to do much better than that. The GI Bill in the US was another (if readers can point me to a good source of more detailed info on this I’d be grateful).

But, to the extent that education is a market commodity, it will be allocated on the basis of ability to pay. So, in the absence of a strong policy push in the opposite direction, unequal access to education for young people will reflect the unequal wealth and income of their parents. The US higher education system, like the health system, mirrors the outcomes of labor and capital markets pretty closely. It does a great job for the 1 per cent who go to the Ivy League Schools (and whose parents are mostly in or close to the top 1 per cent of the income distribution), does an adequate but expensive job for the next 20 per cent or so, and leaves everyone else to take their chances.

Like lots of other readers of Thomas Piketty’s Capital, my big concern is not with the accuracy of the diagnosis and prognosis but with the feasibility of the prescription. Piketty’s proposal for a global wealth tax requires an end to the capacity of capital to escape taxation by exploiting the limitations of national taxations system, through tax havens, transfer pricing, artificial corporate structures and so on.

Given the limited record of success in past efforts to control global tax evasion and avoidance, Piketty is reasonably pessimistic about efforts in this direction. But the latest news from the OECD is remarkably positive. All members of the OECD (notably including evader-friendly jurisdictions like Austria, Luxembourg and Switzerland) have agreed to a system of automatic information exchange for tax purposes. Moreover, the “too big to jail” status of major banks engaged in facilitating tax evasion and money laundering, may finally be coming to an end.

On the face of it, the oft-repeated, but so far unjustified claim that “the days of tax havens are over“, may finally be coming true, at least for all but the wealthiest individuals. But the crackdown on individual tax evaders only points up the ease with which corporations (and individuals with the means to establish complex corporate structures) can avoid tax through a mixture of legal avoidance and unprovable evasion (for example, by illegal but unprovable internal transfers).

At the core of the problem is the ability to establish corporations in ways that make their true ownership impossible to trace. And, the jurisdiction most responsible for this is not a Caribbean island or European mini-state, but the “First State” of the US – Delaware, which has long been the preferred location for US incorporation by reason of its business friendly laws.

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The efforts of the right to discredit Piketty’s Capital have so far ranged from unconvincing to risible (Chris picked up a particularly amusing one from Max Hastings in the Daily Mail, to which I won’t bother linking). One point raised in this four-para summary by the Economist is that ” today’s super-rich mostly come by their wealth through work, rather than via inheritance.” Piketty does a good job of rebutting this, but for those who haven’t acquired the book or got around to reading it, I thought I’d repost my own response, from 2012.

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Gary Becker, University Professor of Economics and Sociology at the University of Chicago, has died at the age of eighty three. I am certainly not going to attempt an obituary or assessment. But something Tim Carmody [said on Twitter](https://twitter.com/tcarmody/status/463022768209285120) caught my eye: “People sometimes talk about ‘neoliberalism’ as a kind of intellectual bogeyman. Gary Becker was the actual guy.” In a somewhat similar way, people sometimes talked about ‘poststructuralism’ as a kind of intellectual bogeyman, and Michel Foucault was the actual guy. It is worth looking at what one avatar had to say about the other. Foucault [lectured on Becker and related matters in the late 1970s](http://www.amazon.com/The-Birth-Biopolitics-Lectures-1978–1979/dp/0312203411/). One of the things he saw right away was the scope and ambition of Becker’s project, and the conceptual turn—accompanying wider social changes—which would enable economics to become not just a topic of study, like geology or English literature, but rather an “[approach to human behavior](http://www.amazon.com/The-Economic-Approach-Human-Behavior/dp/0226041123)”. Here is Foucault in March of 1979, for instance:

> In practice, economic analysis, from Adam Smith to the beginning of the twentieth century, broadly speaking takes as its object the study of the mechanisms of production, the mechanisms of exchange, and the data of consumption within a given social structure, along with the interconnections between these three mechanisms. Now, for the neo-liberals, economic analysis should not consist in the study of these mechanisms, but in the nature and consequences of what they call substitutible choices … In this they return to, or rather put to work, a defintion [from Lionel Robbins] … ‘Economics is the science of human behavior as a relationship between ends and scarce means which have alternative uses’. … Economics is not therefore the analysis of the historical logic of processes [like capital, investment, and production]; it is the analysis of the internal rationality, the strategic programming of individuals’ activity.

Then comes the identification not just of the shift in emphasis but also point of view:

> This means undertaking the economic analysis of labor. What does bringing labor back into economic analysis mean? It does not mean knowing where labor is situated between, let’s say, capital and production. The problem of bringing labor back into the field of economic analysis … is how the person who works uses the means available to him. … What system of choice and rationality does the activity of work conform to? … So we adopt the point of view of the worker and, for the first time, ensure that the worker is not present in the economic analysis as an object—the object of supply and demand in the form of labor power—but as an active economic subject.

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We’re hoping to have a proper book event on Thomas Piketty’s _Capital in the Twenty-First Century_ in due course. That’s hard for those of us who have read it, because the book is so stimulating, so bursting with surprising facts and ideas, that there’s a lot to talk about. Still, I think I’ll permit myself to share a few thoughts that I had about the way in which reading Piketty might impact on teaching political philosophy, and, specifically, teaching Rawls and the difference principle.

_A Theory of Justice_ came out in 1971 and was composed during the period the French call the _trente glorieuses_ . During that period it was easy to believe that the power of inherited wealth had melted away and that we were living in a new era of more equal opportunity, with careers open to talents and income inequalities largely explained by the differences in talent and ability that the parties in the original position were denied knowledge of. To be sure, 1960s America (like 1960s Europe) hadn’t accomplished that social-democratic meritocratic ideal, but it was kind of visible in embryo, waiting to be born. Rawls’s book took us way beyond that, challenging the glib assumptions about desert that the winners flattered themselves with, but in its toleration of some inequality for the greater good (and particularly for the benefit of the least advantaged), Rawls’s view was recognizably connected to a then-emerging social reality.
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Salon has a couple of interesting articles about millennials. Tim Donovan focuses on the plight of young people without college education who are suffering the combined effects of long-term growth in inequality and the scarring that comes from entering the worst labor market in at least a generation[^1]. Elias Isquith has a piece debunking Rand Paul’s prospects of pulling the millennial vote (I’ve seen a few of these lately, which may or may not mean anything), which includes the following observation

Despite the fact that a whopping 51 percent of millennials believe they’ll receive no Social Security benefits by the time they’re eligible, and despite the fact that 53 percent of millennials think government should focus spending on helping the young rather than the old, a remarkable 61 percent of young voters oppose cutting Social Security benefits in any way, full stop.

The idea that “Social security won’t be around long enough for me to collect it” is a hardy perennial, and thinking about it led me to the following observation:

It’s now possible for someone to have spent their entire working life believing that Social Security would not last long enough for them to receive it, and now to have retired and started collecting benefits. This belief has been prevalent at least since the early years of the Reagan Administration when it was pushed hard by David Stockman, and I’m going to date it to the first big “reform” of the system in 1977. Someone born in 1952, who entered the workforce in 1977 at the age of 25, would now be turning 62 and eligible to collect Social Security.
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The UK’s Institute for Public Policy Research has just published a new report on immigration, “A fair deal on migration for the UK”. Given the recent toxicity of the British debate on migration, with politicians competing to pander to the xenophobic UKIP vote, it is in some ways refreshing to read a set of policy proposals that would be an improvement on the status quo. Having said that, the status quo is in big trouble, with the Coalition government having failed to reach its net migration target (the numbers are actually going the wrong way) and with open warfare breaking out between ministers. Given the current climate, however, this probably marks the limit of what is acceptable to the Labour Party front bench (who have notably failed to oppose the current Immigration Bill), so it represents a marker of sorts, albeit that it is a strange kind of thing to be masquerading as a progressive approach.

The report is structured around the need to respond to the current “crude restrictionist” approach to immigration and positions itself by rejecting other views which it characterizes as “failed responses” (pp. 9-10). Leaving aside the “super pragmatist” approach which is actually remarkably close to their own, these are the “super-rationalist” and the “migrants rights activist” approaches, the first of which consists of telling the public clearly what the current social scientific research says and the second sticking up for a vulnerable group on grounds of justice. Since both of these groups have strong grounds for doing what they are doing — telling the truth and fighting injustice, respectively — it seems rather tendentious and self-serving to represent them as being simply failed attempts to do what the IPPR is trying to do, namely, influence senior politicians.
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Open borders advocates often advance an argument in terms of a duty to help the global poor. Poor people who succeed in making the journey to more advanced economies are usually more productive; those who are locked out of such economies by hard border controls are kept in dire poverty, often within sight of great riches. And those who are admitted are often an important source of income to family left behind. Those who defend border controls and the right of states to exclude often make the following move: they concede a duty to help the poor, but say that such a duty can be discharged in ways other than admitting poor would-be migrants to wealthy countries. In particular, they argue that such a duty could be discharged by supporting the economic development of poor countries via development aid (Christopher Heath Wellman is an example).

But the problem with such an argument is that it has two parts. The first (conditional) part, says that it is false that we must open our borders to discharge our duty of assistance IF we can discharge that duty some other way. The second empirical part is the claim there is another way, because development aid is an effective way of helping the global poor that is comparable in its beneficial effects to (much more) open borders. In other words, the claim by philosophers and political theorists that the duty could be discharged by development aid needs to be backed up by sound economic evidence that development aid really is an effective means of helping the global poor. Economists such as William Easterly are skeptical that we know enough about economic development to make effective use of development aid. They may be wrong, but philosophers and political theorists shouldn’t make the easy argumentative move to development aid as an alternative to (more) open borders without being sure that the economics supports them.

Paul Krugman has an interesting piece in which he argues that huge disparities in incomes undermine the dignity of the worst-paid workers. This sentence struck me most:

we live in the age of the angry billionaire, furious if anyone should suggest that his wealth doesn’t entitle him to acclamation as well as luxury.

On that topic, I’m inviting all American billionaires to attend a talk at the Stanford Center for Ethics in Society on Thursday where I will be arguing that the billionaire has a duty not to be rich. [If you’re not a billionaire, you’re equally welcome.] I think there are a couple of good arguments to give for this view, including arguments along the line that Chris wrote here recently. I’ve presented these arguments before to British, Dutch and mixed European audiences, and am curious whether the reactions of Americans will be different.

I’m prepared to be surprised. Even more so given a scene that happened on Sunday at a plantation in Louisiana that I visited, after a great tour in which I learnt a lot about the horrible conditions under which slaves had been working so that the plantation owners could build their wealth:

Me [asking a sales person in the plantation shop]: “How much should I tip the tour guide? What is the custom?”
Sales person: “Whatever you feel like.”
Me: “But I have no idea. I live in a country where we don’t tip anyone.”
Sales person: “Really? That’s not a good idea!”
Me: “We don’t tip because we pay decent wages.”
Sales person (with voice raised) “But that is socialism!”

Now if even an ordinary American, working on a former slavery plantation where he is every day reminded of a past of exploitation and gross violations of human dignity, believes that ‘decent wages’ implies ‘socialism’, then I start to understand that Krugman faces an uphill battle generating a reasonable debate about income inequality and human dignity. Let’s just hope that my encounter at the plantation wasn’t representative for the range of categories in which people are thinking.

In my book, Zombie Economics, I started the account of macroeconomics with the observation

Macroeconomics began with Keynes. Before Keynes wrote The General Theory of Employment, Interest, and Money, economic theory consisted almost entirely of what is now called microeconomics. The difference between the two is commonly put by saying that microeconomics is concerned with individual markets and macroeconomics with the economy as a whole, but that formulation implicitly assumes a view of the world that is at least partly Keynesian.

Long before Keynes, neoclassical economists had both a theory of how prices are determined in individual markets so as to match supply and demand (“partial equilibrium theory”) and a theory of how all the prices in the economy are jointly determined to produce a “general equilibrium” in which there are no unsold goods or unemployed workers.

I went on to observe how the pre-Keynesian approach had been revived by the “New Classical” school, and how the apparent convergence with “New Keynesian” economics had been shown to be illusory after the failure of Dynamic Stochastic General Equilibrium models to deal with the 2008 financial crisis and the subsquent, still continuing, depression.

With all of this, though, I still never thought of academic macro, in either saltwater or freshwater form, as being a simple reversion to the pre-Keynesian notion of general equilibrium, with no concern about aggregate demand or unemployment, even in the short run. It turns out that, at least for a large segment of the profession, this is quite wrong. I’ve just received a book entitled Big ideas in Macroeconomics: A nontechnical view by Kartik Athreya, an economist at the Richmond Federal Reserve who made a splash a few years back with a piece entitled Economics is Hard. Don’t Let Bloggers Tell You Otherwise, which, unsurprisingly, did not endear him to bloggers. As a critic of mainstream macro, I’m briefly mentioned, and I just got a review copy.

The new book is an attempt to simplify things, and indeed it has proved enlightening to me and also to Herb Gintis who contributes a blurb on the back, commending it as an accessible and accurate description of the dominant way of thinking about macroeconomics.

The easiest way to see why the book is so striking is to list some topics that do not appear in the index (and are not discussed, or only mentioned in passing, in the text). These include: unemployment, inflation, recession, depression, business cycle, Phillips curve, NAIRU, Taylor Rule, money, monetary policy and fiscal policy.

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In the UK the press and commentariat have been in a huff about Labour’s proposal to levy income tax at 50% on incomes above £150,000. This is supposedly “anti-business” and “sends the wrong signal”, despite the fact that the top rate was higher under Thatcher. Much noise also about the danger that “wealth creators” (whoever they are) may leave and go off to other jurisdictions, concern unaffected by the fact that lots of other countries tax those on high incomes at a steeper rate. All of this is to be expected of course, as is the fact that journalists, who, when spouting right-wing guff, claim to be “reflecting” the views of their readers, continue to spout it when those readers disagree, as in this case.
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The term “New Old Keynesian” was coined by Tyler Cowen a couple of years ago, to describe the revival of the view that the Keynesian analysis of recessions caused by lack of aggregate demand is relevant, not only in the short run (in this context, the time taken for wage contracts to reset, say 2-3 years) but in the long run (5 years or more) as well. When Cowen was writing, in September 2011, the New Depression could still, just about, be seen as a short run phenomenon[1]. In particular, the anti-Keynesian advocates of austerity in the US, UK and Europe were predicting rapid recovery.

As 2014 begins, it’s clear enough that any theory in which mass unemployment or (in the US case) withdrawal from the labour force can only occur in the short run is inconsistent with the evidence. Given that unions are weaker than they have been for a century or so, and that severe cuts to social welfare benefits have been imposed in most countries, the traditional rightwing explanation that labour market inflexibility [arising from minimum wage laws or unions], is the cause of unemployment, appeals only to ideologues (who are, unfortunately, plentiful).

So, on the face of it, Cowen’s “New Old Keynesianism” looks pretty appealing. But what are the alternatives? Leaving aside anti-Keynesian views for the moment, the terminology suggests four logical possibilities: Old Old Keynesianism, Old New Keynesianism, New Old Keynesianism and New New Keynesianism.

But do these logical possibilities correspond to actual viewpoints, and, if so, whose?

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