Political Economy

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

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

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

This is a cross post of [a piece I’ve done for New Left Project](http://www.newleftproject.org/index.php/site/article_comments/predistribution_powerful_idea_or_window_dressing_for_austerity).

Back in 1875, Karl Marx had the sorry task of perusing the programme of the young German SDP. There was quite a lot he didn’t like, much of it due to the – as he saw it – bad influence of his rival Lassalle. One thing annoyed him immensely: the focus of the new German party on what he saw as the symptoms of capitalist class society rather than on the most basic structural features of that society. First among his targets was inequality, which the SDP was making a big thing about. Marx was scathing:

“Any distribution whatever of the means of consumption is only a consequence of the distribution of the conditions of production themselves. The latter distribution, however, is a feature of the mode of production itself. The capitalist mode of production, for example, rests on the fact that the material conditions of production are in the hands of nonworkers in the form of property in capital and land, while the masses are only owners of the personal condition of production, of labor power.”

One doesn’t have to buy into all the details of classical Marxism to see that he had a very good point. Since the early years of the 20th century, left-liberals and social democrats have been scrabbling around using the tax and benefits system to try to temper the gross inequalities that capitalism generates. Like Robin Hood, or maybe Robin Hood on prozac, they’ve cast themselves as taking from the rich and giving to the poor, without doing too much to address the question of how some people got to be rich and others “poor” in the first place.

[click to continue…]

Brad DeLong has a “post”:http://delong.typepad.com/sdj/2012/09/brad-delong-resmackdown-watch-cosma-shalizi-argues-that-brad-delong-is-an-atypical-economist.html#more defending his claim that the actually existing microfoundations of economics are based around Lockean theories of exchange. A detailed point-by-point response below the fold [also: “Cosma Shalizi”:http://cscs.umich.edu/~crshalizi/weblog/942.html ].

[click to continue…]

I don’t have much to say about the politics of the “new ECB proposal”:http://www.ecb.eu/press/pr/date/2012/html/pr120906_1.en.html that I haven’t said at “greater length”:https://crookedtimber.org/2012/01/03/the-ecb-method/ already. Matt Yglesias is “right”:http://www.slate.com/blogs/moneybox.html to see this as a power shift, but it’s one that’s been in the making for quite a while. The policy of ‘comply with our demands for austerity or we’ll pull the plug’ was executed through “confidential”:http://www.irishtimes.com/newspaper/frontpage/2012/0901/1224323462647.html “letters”:http://www.bbc.co.uk/news/business-15104967 rather than public announcements up to recently, but it was still the same policy. And I’m not sure that it’s a power _grab_ as such – I don’t think the ECB has planned this, so much as been pulled into a vacuum created by the corrosive cross-national politics of conditionality and implicit or explicit transfers.

Which brings us to the Bundesbank’s public opposition to the deal – it describes the purchases as “tantamount to financing governments by printing banknotes.” There’s a relevant quote in Harold James’ excellent forthcoming history of European Monetary Union, which I don’t want to talk too much about, since I’ll be reviewing it elsewhere. One of the very interesting discoveries he has made is a non-public speech that Helmut Schmidt, then the German Chancellor, made to the Bundesbank at a somewhat similar juncture in the 1970s. Germany was being pushed to support the then-European Monetary System (a complicated class of a dirty float that was supposed to lead, somehow, someday, to proper monetary union), but the Bundesbank wanted a stipulation that Germany could opt out of unlimited intervention, if this threatened domestic price stability. Schmidt secretly agreed (the precondition was discovered later), albeit with some hesitation. From the speech (which James quotes in extenso – there is plenty more juicy stuff that I’m leaving out):

bq. What interests me here is a part of the third point of your letter. I must say to you openly that I have quite severe misgivings about a written specification of this sort, a written specification of the possibility of an at least temporary release from the intervention. Let us first of all assume that it appeared tomorrow in a French or Italian newspaper. What accusations would the newspapers then make in editorials against their own Government who got them mixed up with such a dodgy promise with the Germans … In the matter itself I agree with you, gentlemen, but I deem it out of the question to write that down … there has been a beautiful saying in the world for two thousand years: ultra posse nemo obligatur. And where the ultra posse lies one decides for oneself. My suspicion is that, if it came to a real crisis, … the debtor countries clear out first and not the creditor countries. But it could perfectly well be the case that the creditor Federal Republic might one day have to clear out; it is all thinkable, only one cannot write such a thing down.

The Bundesbank’s ostentatious dissent from the ECB program is plausibly both a genuine statement of disagreement, and an implied statement that there are stark limits to what Germany will bear – that if the program does turn into unlimited support for weaker states, Germany will exercise its _ultra posse_ and pull out of its obligations. This threat doesn’t have to be explicit to be understood. This in turn highlights the complexity of the expectations that the EU has to manage at the moment. On the one hand, the EU wants to convince financial markets that this is all going to work – that the ECB will do whatever is needed to keep EU going, in the hope that this calms down expectations, so that it doesn’t actually have to use the big bazooka. On the other, the EU (and in particular Germany) wants to convince countries such as Spain that ECB support is conditional on politically ruinous austerity measures. The Bundesbank’s public disavowal of ECB policy arguably makes the latter argument a little more credible, by signalling that this is the best deal that Spain is likely to get. However, by hinting at the limits of German support, it also suggests that the ECB’s ‘unlimited support’ may in practice be more limited than it sounds, generating the risk of market uncertainty.

Gene Wolfe writes in the _Book of the New Sun_ of an executioner:

bq. a certain Master Werenfrid of our guild who in olden times, being in grave need, accepted remuneration from the enemies of the condemned and from his friends as well; and who by stationing one party on the right of the block and the other on the left, by his great skill made it appear to each that the result was entirely satisfactory.

The EU will have to do its damnedest to emulate Master Werenfrid if it wants to pull this off.

My last post about migration focused on the predictions of economists about the effects of open borders. Commenter Oliver made the point, surely correctly, that, given social, cultural, economic, and political feedback effects, it is simply impossible to know. But there are other ways of thinking about the issues other than looking at the aggregate consequences. For example, we can focus on the rights of individuals to seek new lives, associates and opportunities and on the rights of groups, peoples, states and nations to exclude outsiders. The unilateral right to exclude is well-represented in the literature, especially be the work of Christopher Heath Wellman (see his contribution to the excellent Debating the Ethics of Immigration: Is There a Right to Exclude? (with Phillip Cole arguing the opposite cases)).

Such works, though, typically address the issues at a somewhat idealized level, asking what rights (properly constituted legitimate democratic) polities do or don’t have. That doesn’t necessarily provide adequate guidance in the actual world; nor does it tell voters who think their state has the right to exclude whether or not to support exclusionary policies. Those strike me as very pertinent questions. Proponents of highly liberalized migration policies are often chastised for being insufficiently alive to the political realities. But a fair response to the self-styled realists is to ask, given the way things are, what they are actually prepared to countenance.
[click to continue…]

How would open borders affect the well-being of the world’s population? I’ve spent much of today reading what some economists have to say about this and there seems to be something of a consensus that if people were able to move freely across borders, to live and work where they chose, then the people who moved from poor countries to rich ones would enjoy massive benefits. One author, Michael Clemens, “raises the possibility of a doubling of global income”:http://www.cgdev.org/files/1425376_file_Clemens_Economics_and_Emigration_FINAL.pdf (PDF); another, John Kennan, “envisages a doubling of the incomes of the migrants”:http://www.nber.org/papers/w18307.pdf?new_window=1 . Either way, the gains are huge: put those poor people into the institutional and capital contexts of wealth countries and they would do much much better.
[click to continue…]

(Since my attempt to make a point in a somewhat offhand and popularizing way seems to have been at the expense of clear communication, let me have another try, this time in a duller and more academic mode.)

Rawls has an idea of a feasible utopia, a well-ordered society, taking the form of a property-owning democracy,[1] in which distributive outcomes are programmed into the basic institutions via incentives attached to rules such that citizens, pursuing their own good within those rules, are led to bring about those outcomes. Importantly, those outcomes have the properties that they guarantee the worth of the basic liberties to citizens (material inequalities don’t undermine political equalities) and the difference principle is satisfied. This conception of what the just society would look like is important in responding to critics like Nozick, because, contra Nozick, the holdings that individuals have in the Rawlsian just society result from history: people are entitled to what they have because they have the rewards that have come from some action specified in advance by the rules (such as a net salary for doing a certain job or the winnings associated with a fair bet).[2] However the system as a whole is designed such that the invisible hand brings about just (or at least tolerably just) outcomes. A Rawlsian feasible utopia therefore satisfies someone like Hayek’s understanding of the rule of law: the government isn’t constantly intervening, trying to realize some antecedently decided-upon distributive pattern; rather the preferred distributive pattern emerges automatically from the normal operation of the system. Of course, this isn’t exactly laissez-faire: since the government does have the job of constantly adjusting the rules (such as, but perhaps not even mainly, tax rates) because left to itself entirely the system would drift away from its distributive “target” and the political equality of citizens would be undermined.
[click to continue…]

Justin Fox has a “piece”:http://blogs.hbr.org/fox/2012/08/the-wall-street-book-everyone.html on Doug Henwood’s wonderful book, _Wall Street_

bq. These days, it’s not hard to find people who question the role that financial markets play in our economy, who argue that shareholder value is a flawed metric of corporate success, who say that linking pay to financial markets is a big mistake. In 1997, though, such arguments were pretty close to unheard of. Which is what makes Doug Henwood’s book _Wall Street,_ published that year, such an amazing document. Along with explaining in clear if caustic terms how financial markets work, the book prefigures almost every criticism of the financial system that’s been levied since the crisis of 2008. An overleveraged housing market? Check. A link between financial sector growth and income inequality? Check. A natural tendency toward instability in financial markets? Check. … There’s a saying in investing that “being early is the same as being wrong.” It’s not _quite_ like that in intellectual endeavors, but Henwood clearly hasn’t gotten his due. That’s partly because he was early, partly because he operates in an ill-defined border zone between journalism and academia, partly because, well, he’s a crotchety leftist. But he was describing a lot of important problems with the workings of our capitalist system at a time when practically everyone else was proclaiming the brilliance of the shareholder-dominated Wall Street way. We should have been listening to him then, and we should be rereading him (or reading him for the first time) now.

The “book is available for free download here”:http://wallstreetthebook.com/ (with a suggested donation to the author, who got a relative pittance for writing it; left-leaning publishers sometimes treat their authors like shit). It’s every bit as good as Fox says it is and better – there’s a very strong argument that it’s the best leftwing book on actually-existing-capitalism that’s been written in the last couple of decades. It _is_ a little out of date – a lot has changed in the intervening years. I would love to see an extensively updated second edition, both for purely selfish reasons, and because I think that it could play an important intellectual and political role (most people on the left don’t understand how finance markets actually work). From various conversations, I’m sure that I’m not the only person who thinks this. The obvious way to get such an edition going – if Doug were interested in writing it – would be a Kickstarter or similar. But it might help encourage Doug to do this if there were some evidence of public interest beforehand (again: if he wants to do this – I have not consulted him before writing this). Hence this post – if you would be prepared to kick in to see this book written then say so in comments, or elsewhere as you like. I’m in for a commitment of $100 or over myself (nb that this is _not_ a suggested donation – more a credible commitment and a signal that I personally really, really would love to see this book come into being).

Hi there liberal rule-of-law fetishists!

Now that I’ve got your attention, I’d like to mention something that’s been bothering me. This idea that we all order our affairs under a system of predictable rules sounds very nice, but I do wonder whether it’s compatible with some of the other things that you seem to be signed up for. Some of you, I know, are worried about this so-called 1 per cent, and even about the 1 per cent of the 1 per cent: the people who own lots of stuff. Not only do they own lots of stuff, but they own the kind of stuff that is useful if you want to own even more stuff. That’s how it goes. And, of course, they also have the means to bring about a favourable “regulatory environment”, so that they get to hold onto that stuff.

Now I suppose you want to do something about that? Yes? One option would be to let them hang onto all their existing assets – after all, they got them justly (or at least non-criminally) according to the rules of the system they themselves helped to formulate – but to introduce a new system of rules (call it a “basic structure” if you like) that works to the greatest benefit of the least advantaged. Assume you have the knowledge to design it with the distributive effects you want (big assumption that!). Let that system grind away for long enough – a few generations perhaps – and you’ll have shifted things a little bit in the right direction. (Assuming, that is, that the 1 per cent don’t use their residual wealth and influence to throw you off-track as soon as you hit the first bump.)

I think you can see where I’m going by now. If you really want a shift in the distribution of wealth and income, if you really really want it, then realistically you’re going to have to use state power to do a bit of _ex post_ redistribution. You’re going to have to take stuff from some people and give it to others. Doesn’t necessarily have to be that total Marxian expropriation of the expropriators: a comprehensive programme of debt cancellation would fit the bill. Life is about making choices: and you’re going to have to choose. Is it outrageous to dispossess someone of the wealth they acquired under the rules of the game; or are you going to say that substantive fairness sometimes matters more?

Now I know there are some wrinkles there. What about predictability? What about incentives? Sure. (Of course the predictability of stable property rules is a bit overstated: all those people who got their houses repossessed when the economy went bad didn’t see that coming!) You might have to duck and weave. You might have to convince property owners that you’ll only go so far and no further. But don’t kid yourselves that you can do the redistribution you want and treat the rule of law as absolute. If robbing the rich appals you, become a libertarian instead.

(UPDATE: Well I’ve clearly managed to confuse a bunch of people with this post. Probably a consequence of trying to make a serious point in a knockabout style. I had in mind not any old garden-variety idea of the rule of law but something a bit more specific, namely that society ought to be run according to predictable rules that provide individuals with certainty that their efforts won’t be nullified by state action, a view associated with Hayek but endorsed by Rawlsians. So _mea culpa_ for that.)

A short note on something I’d like to have time to write about at further length someday. There’s a common perception among US lefties that Northern European states like Germany are (or at least were, until recently) the land of milk, honey, and organized capitalism. But actual European social democrats have more complicated feelings about organized capitalism than most of their American counterparts. “Helen Callaghan and Martin Höpner”:http://www.mpifg.de/people/hc/Publications/documents/2011-12-16%20Changing%20Ideas%20resubmitted%20to%20WEP.pdf have an interesting recent paper on this topic. As they point out, German social democrats used once upon a time to be in favor of organized capitalism, comfortable monopolies and so on. But then – Hitler!

bq. Organized capitalism appears conducive to leftist aims as long as the focus is on its contribution to economic coordination, and this explains the supportive attitudes of the German left up to the early 1930s. However, besides economic coordination, organized capitalism also affects political organization, as German labor leaders learnt painfully during the Nazi period. The radical reversal of attitudes after World War 2 reflects updated beliefs regarding the political consequences of organized capitalism, and the greater weight assigned to political over economic considerations. … Far from being a fleeting phenomenon, Leftist support for competition policy and market-enhancing corporate governance reforms has characterized German party politics throughout the post-war period. … During the “seven-year cartel battle” that led to the toothless competition law of 1957, the SPD supported the liberal ideas of chancellor Ludwig Erhard (CDU), unlike the majority of CDU/CSU representatives. … The joint-stock law reform of 1965, which ended up smaller than intended, featured a similar constellation. … Passage of a company network dissolution act that would have limited bank shareholdering in industrial companies was only prevented by the SPD’s removal from office in 1982. In 1998, during debates over the Control and Transparency Act introduced by Helmut Kohl’s CDU/CSU/FDP coalition, Social Democrats emerged as more favorable to radical corporate governance reforms than the Christian Democrats …. In 2001, during negotiations on the Takeover Act, the SPD turned down CDU demands to strengthen managerial defenses against hostile takeovers.

The logic here is pretty straightforward. Social democrats would like an organized economy in the best of all possible worlds. However, the more organized the economy is in actually existing capitalism, the more _political power_ accrues to big industrialists, and the more likely it is that they will use that power in the political realm in ways that disadvantage labour. Hence, the question of whether or not to favor an organized economy is an empirical one, and under many circumstances, leftists can be vehemently, and entirely consistently, in favor of market competition (albeit for political as well as/instead of economic efficiency reasons).

While I don’t have time to write much on this today, it’s relevant in the US as well as the EU context. “Karl Bode”:http://arstechnica.com/tech-policy/2012/07/op-ed-verizon-willfully-driving-dsl-users-into-the-arms-of-cable/ has an interesting piece in _Ars Technica_ on Verizon’s cable strategy.

bq. Back in April, you may recall that Verizon stopped selling standalone DSL, taking us back to the stone age of broadband when users were forced to bundle a costly landline they might no longer want. … Verizon has numerous reasons for wanting its DSL services to die off, including the fact that newer LTE technology is cheaper to deploy in rural areas and easier to keep upgraded. But one of the driving forces is that Verizon is eager to eliminate unions from the equation, given that Verizon Wireless is non-union. None of this is theory; in fact, it has been made very clear by Verizon executives. … It’s all an ingenious play by Verizon, though it will have a massive competitive and connectivity impact on the US broadband market that will be studied for decades. What’s most amazing is that nobody (analysts, regulators, or the press) seems to have really noticed what Verizon is up to: turning a massive swath of the country from a marginally competitive duopoly with union labor into an even less competitive and more expensive cable and telco non-unionized cooperative monopoly.

I’m not an expert on telcos, so can’t speak to the accuracy of this analysis. But if it’s right, it suggests a roughly similar logic. Labour unions prefer, _ceteris paribus_, to deal with large well-established incumbents than a congeries of smaller firms. The organizing costs are lower, and incumbents are more likely to have profits that they are prepared to share in order to guarantee predictability. However, once firms start getting _too_ big, they may be too powerful, in terms both of political and economic clout, for unions to bring to the negotiating table. They can furthermore redefine the market (as Verizon is plausibly doing) in ways that weaken unions and make it harder to organize. This makes me think that there’s more scope for a genuinely left-wing anti-monopoly movement (especially in sectors such as telecommunications, which are vulnerable to regulatory capture) than common perceptions would suggest. I’d really want to re-read JK Galbraith’s work to think this through properly. But since I’m crashing on a couple of deadlines, I’ll leave it for commenters to thresh out …

(probably the last post I’ll be doing on these issues for a while)

“Tyler Cowen has a further response”:http://marginalrevolution.com/marginalrevolution/2012/07/how-to-improve-firms-treatment-of-workers.html. His argument – I think I am presenting it correctly – is that regulation may not improve the lot of workers facing specific depredations, because firms will find other ways to screw them, leading to “indeterminate” outcomes, which might or might not be to workers’ long term benefit. His preferred alternative is an improved welfare state, which will enhance workers’ bargaining position vis-a-vis firms.
[click to continue…]

A response to “Matt Yglesias’s response”:http://www.slate.com/blogs/moneybox/2012/07/06/ten_theses_on_labor_market_regulation.html. I understand from email that his original post responding to me was intended to be read together with an “earlier post”:http://www.slate.com/blogs/moneybox/2012/07/04/labor_market_regulation_freedom_and_property_rights_are_red_herrings.html, where he separates out questions of freedom and economic efficiency, and argues, more or less, that the best way to increase the bargaining power of labour is by pushing full employment. This means that he does not, after all, treat market outcomes as being in some way natural. So consider those specific objections withdrawn. But I still think that there is something fundamentally wrongheaded about the way that he is analyzing these questions. And not only that – but Matt Yglesias himself (2004 vintage) would seem to agree with me.
[click to continue…]

“Matthew Yglesias has a post responding”:http://www.slate.com/blogs/moneybox/2012/07/05/life_is_good_for_skilled_workers.html to my post below. My original intention was to roll it into an update – I then decided it was worth responding to on its own because it exemplifies a number of common mistakes in thinking about markets. In order:

[click to continue…]

[This post was co-written by Chris Bertram, “Corey Robin”:http://coreyrobin.com/ and “Alex Gourevitch”:http://thecurrentmoment.wordpress.com/ ]

“In the general course of human nature, a power over a man’s subsistence amounts to a power over his will.” —Alexander Hamilton, Federalist 79

Libertarianism is a philosophy of individual freedom. Or so its adherents claim. But with their single-minded defense of the rights of property and contract, libertarians cannot come to grips with the systemic denial of freedom in private regimes of power, particularly the workplace. When they do try to address that unfreedom, as a group of academic libertarians calling themselves “Bleeding Heart Libertarians” have done in recent months, they wind up traveling down one of two paths: Either they give up their exclusive focus on the state and become something like garden-variety liberals or they reveal that they are not the defenders of freedom they claim to be.

That is what we are about to argue, but it is based on months of discussion with the Bleeding Hearts. The conversation was kicked off by the critique one of us—Corey Robin—offered of libertarian Julian Sanchez’s presignation letter to Cato, in which Sanchez inadvertently revealed the reality of workplace coercion. Jessica Flanigan, a Bleeding Heart, responded twice to Robin. Then one of us—Chris Bertram—responded to Flanigan. Since then, the Bleeding Hearts have offered a series of responses to Chris and Corey.

[click to continue…]