Sunday, November 21, 2010

Embarrassed by the Left

That’s all I can say after reading this dreadful critique of Krugman’s writings on Japan that appeared on Common Dreams, along with almost 100 responses, the vast majority utterly clueless.

The original article said, in a nutshell, that Krugman shows his economist’s blinders by criticizing Japan’s fiscal and monetary policies when they enjoy low unemployment, universal health care and other good things. Japan and Germany show us the way: economic growth is unimportant, what counts is having a healthy society. Growth is a chimera in the age of sustainability, anyway. We should listen to Germany’s criticism of profligate American borrowing, rather than lecturing other countries to become dissolute in our image.

The responses, except for just a few, praised this argument to the skies.

Allow one more indoctrinated economist to make these points:

1. Japanese and German living standards depend on the debt-financed consumption of the US and other net importing countries. That doesn’t mean their social achievements are worthless—far from it—but it indicates that the sustainability problem is not all ours.

2. The Japanese have kept going through the accumulation of a massive public debt. This has been possible only because they are a surplus country, so the debt can be domestically financed without cutting into finance for private investment. In other words, the economic policies Krugman criticized have not led to a Japanese meltdown only because of global imbalances, from which they benefit.

3. Economic growth is essential. If you divide up the world’s output equally among the world’s people, it falls well short of how we want to live. We need redistribution and growth. Greening the economy will also entail tons of investment, which we will have to afford somehow. On top of this, enviro-austerians confuse the growth of value (economic growth) with the growth of stuff (physical throughput). In the economy, better is more, but not necessarily the other way around (if the costs of stuff exceed their benefits).

I hate to say this, but reading the broad swath of opinion on websites like Common Dreams convinces me that the US left is nowhere near ready for prime time. There is a flippancy and anti-intellectualism that is as immature as anything you’ll find among the Tea Partiers. Did I mention that they have a conception of economics (slash the GDP!) that will relegate them to fringe political status in perpetuity?


The Reverend said...

It sounds similar to "the lack of economic perspective" you lamented in your post on Inside Job. In my experience, much of The Left (such as it is in America) doesn't do political economy.

JW Mason said...

The Japanese have kept going through the accumulation of a massive public debt. This has been possible only because they are a surplus country, so the debt can be domestically financed without cutting into finance for private investment.

Can you explain this? It's obviously not true in a strict sense -- it's not like there is some hard limit on the size of the public debt in a closed economy.

I guess by "only possible" you mean easier. But why is it even easier?

From an national accounts standpoint, private savings equals the sum (1) private investment, (2) net public borrowing and (3) the current account surplus (= foreign investment). For a given level of income and consumption, more of (1), (2) or (3) means less of the other. So a current account surplus should make it harder, not easier, to finance public borrowing, in that it requires a higher level of private saving for a given level of government borrowing.

The flipside is that the US current account deficit corresponds in an accounting sense to low US saving. So you are arguing that if we saved more, it would be harder for them to borrow. How's that work?

Peter Dorman said...

JWM: The simplest starting point is the version of the identity in which the sum of net public deficits and net private deficits is equal to the balance on the current account. Since Japan is a surplus country, it can run very large public deficits without any significant constraint on its ability to finance necessary private debt accumulation. (Because their private debt overhang discourages further private leveraging, of course, they are in the position of financing truly monumental fiscal deficits.)

Operationally, Japanese earn incomes in excess of their total expenditures. This is where their juice comes from. US incomes are less than expenditures; we must sustain our level of consumption + investment (public and private) with a net inflow of external funds.

Sandwichman said...

"Economic growth is essential."

What does Peter Dorman mean by "economic growth"? The GDP is a social accounting indicator. That means it is supposed to operate by different rules than a firm's accounts. When it doesn't, the result is not "growth," it is a category error. A mistake. It is the equivalent of double counting.

Dutch statistician Roefie Hueting calls this accounting anomaly "asymmetric entering." Italian economist Stefano Bartolini argues that a considerable amount of what today counts as "economic growth" is simply the substitution of costly market goods for destroyed free goods of nature and human relationships. You want growth? Cut off people's hands and the sales of prosthetics will soar.

I've posted links to Hueting's and Bartolini's analysis as well as to my manuscript, Jobs, Liberty and the Bottom Line at Ecological Headstand.

"Slash the GDP!"

Indeed. Cut the crap out of the measure so that we know what we're talking about.

Sandwichman said...

The link to
Ecological Headstand in my previous post doesn't seem to work. So try this one.

Don Levit said...

I am curious how much of the government infusions the last 2 years has an impact on GDP?
Don Levit

Antti-Juhani Kaijanaho said...

Japanese and German living standards depend on the debt-financed consumption of the US and other net importing countries.

Isn't that exactly backwards? The US is consuming more than it is producing, thus its living standard (as approximated by consumption) depends on debt-financed consumption.

The net exporting countries like Japan and Germany are saving (or paying down past debts), not consuming as much as they could; they are indeed using their productive capability to fuel someone else's living standard instead their own.

If I am wrong here, I'll gladly listen to an explanation.

Peter Dorman said...

Sandwichman: We agree on the big discrepancy between GDP and any accurate measure of economic health. Changing what we produce and how we distribute it is not the same as a categorical denunciation of economic growth, however, and this is what I'm hearing from most of the left these days.

A-J K: If we lived in a gift economy, where everything produced is freely given away, you would be right. The Japanese and Germans would be models of generosity. But we live in a capitalist economy in which the motive for production is sale. Americans go into debt to buy Japanese and German (and Chinese and oily) goods, and our purchases make their production and incomes possible.

Incidentally, I would like to see a larger gift component in the global economy, but that is a topic for another day.

Sandwichman said...

Peter, I don't hear so much "categorical denunciation" as I do well-reasoned critiques, such as Peter Victor's, Tim Jackson's, CASSE's, Roefie Hueting's, Stefano Bartolini's, Juliet Schor's etc., etc., etc. (and mine). These are systematically, loudly and (frankly) contemptuously ignored by the broad spectrum of the mainstream and "traditional left". If you address these critiques you earn a platform for dismissing less-nuanced ones. Otherwise you're just cherry-picking easy targets.

Suffern AC said...

In defense of commentors who might not be economists, I was going to write the most assinine comment I could imagine so that your blog could be judged by the qulity of the commentors it attracts. But I am simply not creative enough.

That there is an anti-intellectual strain persistant and growing in the left, magnified by by blogging, is not surprising at all. It has been there a long time. What economists should not be shocked by is that in the current climate, the anti-intellectualism might be turned on them, regardless of political affiliation, and that non-economists instead turn toward economists and economist-like people who support their points-of-view. It is not easy for us outside your profession to figure out when economists have decided to be scientists and when they have decided to be disingenous and serve other social ends.

Japan and Germany are just foils for the idea that the "lost decades" are just awful for the Japanese, who, without growth, aren't exactly returning to the onion economy. Its a response to the same conservative story of the "failed welfare state", in which Canadians have been ruined by their healthcare system, begging for doctors to cure them while their government does nothing to help, completely powerless and unfree are they. It really doesn't matter (to them) if the response isn't based in reality - the original critique they are reponding to wasn't based in reality either.

That, plus the fact that I don't have three refridgerators in my house allows me to blame those that do for the "unsustainable growth" and consumerism that may or may not be leading the country and the world to moral and economic ruin. It might not be poltically practical to force (let alone ask) everyone to consume less, and I doubt that there would be much support for the idea, but what happens to accounting identities if we, say, just all buy a few less pairs of shoes and limit the number of refidgerators to 1 per housing unit? (That's the behavior and economic level I think you need to deploy your economic model, since that is the behavior they seem to be targeting.)

hapa said...

there's junky inherited wisdom to be sure, and standard literalness, but none of the peaksters are quite wrong that there's enough evil/stodgy powers-that-be out there to kill a 'bright green' future while it's still in diapers.

hapa said...

also when the US plays twice as much per person for comparable health outcomes, surpluses & deficits are not the issue, except maybe in that merkins use credit too often to solve market failures.

hapa said...


Sandwichman said...

The following estimate is from a letter to the editor of the Times of London from Sir William Armstrong, spokesman for the employers during the 1871 engineers' strike in Newcastle, England for the nine-hour day.

"It is easy to value the commercial gain to the men of a given reduction of time, but it is more difficult to define the loss to the employer. As a mere arithmetical question, a reduction from 59 to 54 hours a week represents a money gain to the workman of about 8 per cent. on the price of his labour. To the employer the direct loss is, of course, the same; but the indirect loss must be matter of estimate, varying in each particular instance. In my own case, I should certainly regard it as equal to the direct loss on wages, and I believe that engineers in general would concur in the substantial accuracy of this estimate. Upon this view the reduction of time claimed by our men would be attended with a gain to them of 8 per cent. on the amount of their wages, and of a loss to us equal to 17 per cent. on the same amount."

My question to Peter Dorman is: can you identify the major error in the calculation? There are three errors, one trivial, one 'theoretically naive' and one whopper of a mistake. What's the big one?

cian said...

While not wishing to defend the commentators on commondreams and sharing the general disdain for anti-intellectualism on the left, I think your argument is seriously flawed for various reasons:

1) It is perfectly possible for growth to occur which results in the majority of people becoming poorer (arguably this is the story of the last 30 years in the US) due to either productivity increases through technology, or the gains being captured by capital.

2) Inversely it is perfectly possible for zero growth to occur, but for the majority of people, at least for a period of time to become wealthier. Again it depends upon distribution.

3) Not all growth is necessarily positive, as Sandwichman argues correctly above. This is far too simplistic a metric. One could construct a simple model where net growth was zero, but which was inarguably better. Perhaps better driving leads to fewer accidents, and the resulting economic activity in that area greatly decreases, while growth elsewhere continues.

4) One reason that we need a certain amount of growth is due to debt. If we don't get a certain level of growth, debts can't be paid and so this leads to a cascade of economic problems that relate to debt repayments, etc. However this is a situation that relates to a particular form of capitalist economy. Now its possible that this is the best way to run an economy, or whatever, but its equally possible that it isn't.

5) A more efficient society would be one that consumed less for the same net output, or better output. The USA is a grossly inefficient society, so I think the USA could be substantially improved, while GDP remained static. At least theoretically. Certainly the metric of GDP doesn't seem the most important here.

art said...

cian -

the handy though not necessarily proper term is immiserising growth.

['not neccesarily proper' since it's associated with Bhagwati's terms of trade argument while other conditions, state capture for example, can bring agout same: rising GDP AND INCREASING POVERTY]

Jack said...

"...can you identify the major error in the calculation? There are three errors, one trivial, one 'theoretically naive' and one whopper of a mistake. What's the big one?"
Not b eing an edconomist, but rather having had been a psychologist by graduate education, it seems obvious that what the man has not taken into account is that the reduced hours of work are likely to lead to more effective work during the hours of work resulting from reduced fatigue. I believe that it has been exstablished that the last hours of work in an individual's work day are the least productive hours at work. Therefore, the calculation of lost productivity cannot be accurately assumed, but must instead be measured during the actual work time.

To my mind that is one of the most serious errors of the "scientific" economists. They place far too much assurance on their assumption. A kind of contradiction of terms. The formula that I suggest for this erroneous thinking regarding the quality of their assumptions is;
A(x)=(Ex)(Ex), where A=Assumption and E=Error. It would be productive for the field of economics to take S.S. Stevens to heart when they decide to measure phenomenon.

Eleanor said...

I just finished a book which argued, I thought pretty strongly, that growth as we usually think of it cannot continue. The consequences of pollution and the exhaustion of resources are too great. The book quoted James Lovelock as saying that at the end of this century most land is going to be desert or scrubland, most of the ocean is going to be dead, and the human population of the planet is going to be one billion.

media said...

i think the anti-intellectualism is pretty prevalent on the left (to be contrasted with the deep analyses of the tea partiers) but i think it can partly be traced to the so-called professional intellectual classes, such as professional economists. this post alone as discussed by 'sandwichman' more or less illustrates the issue----rather than make a coherent argument, one makes some half baked one. (reminds of religious people worrying about sinners, who they kick out the church, and then taljk sh-t about for a living; symbiosis).

the other route, seen in professional journals, is to make the same case, and then say 'ok, if you need some intellect, we'll write down the utility function with hyperbolic discounting, plug it into a dsge model, apply a perterbation approximation using its stochastic quantized variant, and show why we need 'growth' but also that 'more is not neccesarily better'. fit for econometrica.

(the older post on 'container' economics however was pretty good).

possibly the underlying problem is that talk is cheap---it explains blogs, glen beck, common dreams etc. electrons should revolt. (i have hear possibly the signature of spacetime may change, so maybe electric charges can reverse too, like the earth's magnetic field. lets only hope.)

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