Why You Don’t See the Aggregate Supply—Aggregate Demand Model in the Econ Blogosphere

Introductory textbooks are supposed to give you simplified versions of the models that professionals use in their own work.  The blogosphere is a realm where people from a range of backgrounds discuss current issues often using simplified concepts so everyone can be on the same page.

But while the dominant framework used in introductory macro textbooks is aggregate supply—aggregate demand (AS-AD), it is almost never mentioned in the econ blogs.  My guess is that anyone who tried to make an argument about current macropolicy using an AS-AD diagram would just invite snickers.  This is not true on the micro side, where it’s perfectly normal to make an argument with a standard issue, partial equilibrium supply and demand diagram.  What’s going on here?

I’ve been writing the part of my textbook where I describe what happened in macro during the period from the mid 70s to the mid 00s, and part of the story is the rise of textbook AS-AD.  Here’s the line I take:

The dominant macro model, now crystallized in DSGE, is much too complex for intro students.  It is based on intertemporal optimization and general equilibrium theory.  There is no possible way to explain it to students in their first exposure to economics.  But the mainstream has rejected the old income-expenditure models that graced intro texts in the 1970s and were, in skeleton form, the basis for the forecasting models used back in those days.  So what to do?

The solution has been to use AS-AD as a placeholder.  It allows instructors to talk about both prices and quantities in a rough market context.  By putting Y on one axis and P on another, you can locate any macroeconomic outcome in the upper-right quadrant.  It gets students “thinking like economists”.

Unfortunately the model is unsound.  If you dig into it you find contradictions that can’t be papered over.  One example is that the AS curve depends on the idea that input prices for firms systematically lag output prices, but do you really want to argue the theoretical and empirical case for this?  Or try the AD assumption that, even as the price level and real output in the economy go up or down, the money supply remains fixed.

That’s why AS-AD is simply a placeholder.  It has no intrinsic value as an economic model.  No one uses it for policy purposes.  It can’t be found in the econ blogs.  It’s not a stripped down version of DSGE.  Its only role is to occupy student brain cells until the real work of macroeconomic instruction can begin in a more advanced course.

If I’m wrong I’d like to know before I cut off all lines of retreat.

The Return of MaxSpeak

Hi folks. After the long hiatus, the urge to return to blogging is overwhelming. The revival will be constrained in a number of ways, given my place of employment. I can't be sure how much I will get done, since writing will be limited to weekends and evenings. This site -- EconoSpeak -- will go on with its bad self. The reason for posting here is I need a MaxSpeak fan who is also an HTML whiz to help me get the old site back up and running. Ideally this would include resurrecting the fabulous archives and comments. There may be some compensation possible, in addition to the eternal glory. (Definitely free advertising if you code for a living.) To get responses I've set up a hotmail account that will live and die just for this purpose. Use my name with middle initial b, no periods. Hotmail.com has turned into outlook.com.

The Flight of Sergei Guriev

"Better Paris than Krasnokamensk," Sergei Guriev tweeted shortly before departing from Moscow for Paris, where his wife Ekaterina Zhuravskaya, is a professor at the Paris School of Economics, Krasnokamensk being a notorious prison camp.  He is officially visiting at Sciences Po temporarily, but most think he has left Moscow for good, resigning from his position as Rector of the New Economic School (NES, although "Russki Ekonomicheski Shkola" in Russian ("Russian Economic School"), and known there as "RESH" rather than "NES," sort of like how Russian food stores in the US have titles in English such as "International Food Market," while the sign in Russian says, "Russki Magazin," ("Russian store")), even though officials at NES (RESH) say that he is only on leave or on vacation, or whatever.  He has also reportedly resigned from a board overseeing Russia's largest bank, the still partly state-owned and trusted by the grandmothers to hold their money, Sberbank.

This sudden departure must be viewed as very significant.  The 41-year old Guriev, a Chechen who made it to and in Moscow from the sticks, has played a unique role in Moscow in recent years, both advising former President and now Prime Minister Medvedev, while also maintaining links with dissidents such as Andrei Navalny and coauthoring a report criticizing the second round of jailing of oil baron, Mikhail Khodorkovsky, and also serving as the leading link between western economists such as Andrei Shleifer and the rising economists in Moscow, such as those at NES (RESH) and its rival, the Higher Economic School (VWISH), both of them started since the end of the Soviet Union.  The simplest explanation is that he may simply have been trying to be too many things to too many people and sides, but one of them would not put up with it any longer.

That side would be President Putin and those around him.  He was known to be unhappy about Guriev's support of Khodordovsky.  However, the reported investigation that was closing in on Guriev and was most likely to result in his arrest involved his relationship with Navalny, now imprisoned, who has been viewed as the main leader of the anti-Putin demonstrations of recent years that have combined aspects of the Occupy movements of the West with more traditional Russian dissident movements, such as gathering at the statue of Pushkin at the intersection of the Garden Ring road and Tverskaya street (formerly Gorky street) before setting off for wherever they would eventually end up to occupy before enduring breaking up and arrests by the police.  Navalny is in jail because of what his supporters say are trumped up charges involving advice he gave a regional leader about certain economic deals.  Supposedly Guriev sent money to Navalny, although that would not seem in and of itself to be a criminal offense, but perhaps the authorities will try to link Guriev to whatever it is that Navalny has been jailed for.  As it is, Russian blogs supporting Putin have been denouncing Guriev and claiming that he is corrupt and involved with many businesses (the latter is true, but essentially no evidence of the former has been put forward). 

However, it may well be that his worst crime has been serving as a top adviser to Medvedev, whom Putin used to need but apparently now views as a rival and a nuisance to be put in his place.  No better way to do that than to bust his top advisers.

It is far from clear what will follow from this.  Certainly a message has been sent.  If you want to advise the government or be involved in local politics, then just as with NGOs you had better not be involved with the political opposition to Putin and you had better not have too many foreign links.  Liberalizing think tanks and academic outfits like NES(RESH) and VWISH may be allowed to more or less do their things, mostly research and training people for Master's degrees in economics to go to the West to earn PhDs who have strong undergraduate credentials in math or physics, much like Guriev himself, who came out of such institutes in Vladikavkaz and Kiev to eventually get a PhD in applied math before getting an econ PhD at MIT prior to becoming Rector of NES in 2004.  People at these places will have to keep their heads down if they want to stay in business.

One can argue about whether the kind of economics that is being taught at NES and VWISH is what Russia really needs or not.  However, the existing institutions left over from the Soviet era such as Moscow State University or the Central Institute of Mathematical Economics (TsEMI) are either stuck in a leftover swamp of the Soviet era with little of use to say or are highly mathematical and theoretical, if at a high level, such as TsEMI, out of which the NES was formed with the two sharing the same building on Nakhimovsky street in southern Moscow.  TsEMI has such acclaimed figures as Econometric Society Fellow Victor Polterovich, but he and his colleagues tend to be far removed from policy discussions.  Thus it is not surprising that they would support the founding of NES, even if the latter may have gotten into hot water for it, or at least particularly its very active Rector.

In any case, whatever one thinks of Guriev's views on economics, he has been a critic of arbitrary power and corruption and a supporter of democratic opposition to this entrenchment and re-entrenchment of such power.  His sudden departure cannot be viewed as anything other than a very unfortunate sign of what is going on in Russia both politically and intellectually.

Barkley Rosser

Why has austerity led to disaster in Greece?

Greece is in sharp economic free-fall. “20% real decline since 2008” (as reported on 30th April 2013). In 2012 the real value of government revenues and spending reached a ten-year low.  However, because of the sharp economic contractions, government revenues and spending as a share of GDP reached an all-time high (44.7% of GDP and 54.8% of GDP respectively)....

Link:  Globe-Alive

Money or Power, or cheap Energy?

"…The international monetary system also now faces a clear and present danger: currency wars. Virtually every major country is seeking depreciation, or at least non-appreciation, of its currency to strengthen its economy and create jobs....The “target list” of manipulators for priority policy response identified... includes China, Denmark, Hong Kong, Korea, Malaysia, Singapore, Switzerland and Taiwan, which accounted for half the estimated amount of unjustified intervention in 2011 ....Japan should be put on a “watch list,” ... Most of the remaining intervention is by major oil exporters, both members of OPEC led by Saudi Arabia and non-members such as Norway and Russia. ...

....John Connally [four days after the Nixon shocks of August 1971 when a global currency war led the US to abandon the gold standard]:

“I appre­ciate the advice from you gen­tlemen and want to share my own phi­los­ophy with you before we break up: the for­eigners are out to screw us and our job is to screw them first. Thank you and goodbye.”

From C Fred Bergsten's 'Currency Wars, the Economy of the United States and Reform of the International Monetary System'

[Common denominator 1971, 2013:  Peaks in oil production.]

More Laffer Lies from the Jersey Shore

A follow to this post with a hat tip to Mark Thoma. Mark graphs the changes in real education student per student. While not as bad as what is happening in Mark’s state (Oregon), New Jersey has seen a 27% decline since 2008. Yet Governor Christie is claiming New Jersey has seen record education spending as it balances the budget with tax cuts for everyone. Does the New Jersey governor lie about everything?

Explaining the Prejudice that Keynesian Economics Is Obsessed with the Short Run

Follow them to their source and you’ll usually find that big rivers have many feeder streams.  The myth that Keynes was fixated on the short run has at least two, I think.

The first was the perception that Keynes wanted to shift resources from investment into consumption.  You can see this already in 1931 in the famous story about Hayek’s foray behind enemy lines at Cambridge (here quoting Joan Robinson as cited by Brad DeLong):

While the controversy about public works was developing, Professor Robbins sent to Vienna for a member of the Austrian school to provide a counter attraction to Keynes. I very well remember Hayek's visit to Cambridge on his way to the London School. He expounded his theory and covered a black board with his triangles. The whole argument, as we could see later, consisted in confusing the current rate of investment with the total stock of capital goods, but we could not make it out at the time. The general tendency seemed to be to show that the slump was caused by [excessive] consumption. R. F. Kahn, who was at that time involved in explaining that the multiplier guaranteed that saving equals investment, asked in a puzzled tone, "Is it your view that if I went out tomorrow and bought a new overcoat, that would increase unemployment?"' "Yes," said Hayek, "but," pointing to his triangles on the board, "it would take a very long mathematical argument to explain why."

The notion is that too much consumption sets in motion a process that results in too little investment and therefore (in Hayek’s formulation) too little employment in the long run.  Aside from the logical fallacies it entails, it has an intuitive basis in a Puritan view of how capitalism works.  (Smart people would not think themselves into fallacies like Hayek’s unless they were predisposed to believe them on some deeper level.)  The irreplaceable virtue of the capitalist is that he (and it was a he) restrains himself from consumption, and that this heroic abstention is the foundation for the growth in prosperity.  Keynesian policies are condemned for their refusal to abstain—indeed for their devotion to consumption in the here and now.  Surely this failure to take the long view will be punished somehow.

The second source of the myth of the eternal Keynesian short run comes from the debate between Samuelsonian Keynesians and new classical economists in the 1970s.  The classicals argued that in a properly specified general equilibrium model there could not be persistent shortfalls of effective demand, nor government policies that could “outsmart” economic agents and bring them to a collective outcome better than they could obtain themselves by their own wits in the marketplace.  Over the course of a decade or so a sort of Yalta emerged: Neo-Keynesians argued that frictions (especially sticky prices) could produce Keynes-type effects in the short run, but they ceded the long run to the new classicals, while the classicals (most of them) handed over the short run to the Neo-Keynesians.  Now almost every macroeconomics textbook gives you short run models that look sort of Keynesian and long run models that look sort of classical.

When these two streams come together they produce a mighty roar.  Yet it has to be said that (1) neither Keynes nor the tribe of Keynesians is emotionally or philosophically predisposed to favor the present over the future, and (2) there is no general distinction between the short and long runs in “real” Keynesian theory.  An economy can remain stuck in an underemployment equilibrium for years and years, as it did during the Great Depression and as it is in the process of doing today.  This comes at the cost of not only today’s living standards but foregone investments we should be making for the future.  When you put it this way it’s obvious.  It takes a combination of emotional investment in the concept of self-denial-and-reward and a peculiar truce among late 20th century macroeconomic modelers to render it invisible.

"What this country needs is another financial crisis"

That is just the headline in today's Washington Post for a column by semi-retired Allan Sloan, who says in the text, "What this country needs to get its act together is a good five-alarm financial crisis."  Really.  He does not mean it, as he gets worked up about Republicans possibly damaging US credit with another debt ceiling crisis later this year, but he certainly said it, and this is clearly a very strongly felt sentiment among Washington VSPs, even though we have still not come out of the high unemployment from the last financial crisis.  This is not what bothers him.  He seems upset that the stock market is doing well, housing prices are up, as are corporate profits, although he fails to mention that these have happened with inflation still below the Fed's target rate.  So what does he want out of this supposedly needed new financial crisis?

One is that we should have done something about banks being too big to fail.  I actually agree with him on this one.  However, he fails to note that part of how we got out of the last financial crisis without more bank failures than we had was by letting our very biggest banks buy up several of the smaller ones that were on the verge of failing.  What was his alternative?  I do not remember what he recommended at the time, but the main alternatives were either letting those banks go bust and paying off the depositers (which quite likely would have bankrupted the FDIC and thrown the expense on the taxpayers) or some sort of temporary nationalization such as the Swedes did in the 1990s.  Maybe one of those would have been better, and maybe we should have put in place some mechanism to break up the biggest banks so that some of their gobbled up subsidiaries can go back to failing, but it is not at all obvious to me that having another financial crisis is worth achieving any of these.

Oh, and he is all upset that the budget deficit is going down and so fast! He warns that some of the revenue boosts are temporary, and of course down the road we shall face those inevitably higher interest rates on the national debt, the usual boogey-man.  But then, of course, he gets to the standard whine of the VSPs, we did not cut Social Security, Medicare, or Medicaid!  What a waste of a financial crisis!  Tank the markets and send the unemployment rate back above 10% so that we learn the error of our ways and definitely cut those future benefits now so that we won't have to worry in the future about how they might be cut in the future!  Ultra gag.

OK, OK.  I must admit that in the end he really does not mean it.  In his final paragraph he tells us, "I don't want to see a crisis, and I hope our alleged leaders, who aren't stupid, bestir themselves before one strikes.  But I sure wouldn't count on it. Too bad for them.  Too bad for us."  However, if what he thinks they need to do is to cut the social safety net to shreds, then let us just sit quivering in fear of the crisis that he forecasts we face if we fail to follow his humble advice.

Barkley Rosser

Lafferism as Part of the New Jersey Gubernatorial Race

New Yorkers may be looking forward to spending this holiday weekend at the reopened Jersey shore and Governor Christie is certainly patting himself on the back for this. There is also a battle of whether his tenure as governor has led to some magical supply side miracle. His own ads paint a picture of how a reversal of Corzine’s alleged tax& tax and spend&spend has led to a New Jersey miracle. His ads makes four claims: (1) employment has soared: (2) everyone got tax cuts; (3) spending may have been cut and still is at record levels (for at least education spending) at the same time: and (4) he has balanced the budget. Of course, this is a replay of Reagan’s 1984 campaign known as “Morning in America”. That one can claim spending is both up and down at the same time is something one would only imagine that Lawrence Kudlow might do. But let’s start with his claim that he has balanced the budget. Mark Magyar challenges Christie’s budget games thusly:

Governor banks on one-shots, property-tax rebate delay, Medicaid savings, and Internet gaming to bridge budget gap

Barbara Buono has also fired back noting that some New Jersey residents are paying more in taxes because of this property tax rebate delay. Bloomberg adds:

New Jersey’s public pension deficit swelled 13 percent to $47.2 billion in fiscal 2012 as the state continued to make partial contributions to its retirement plans. The system had about 64.5 percent of assets needed to cover promises to current and future retirees as of July 1, 2012, compared with 67.5 percent a year earlier, when the gap stood at $41.7 billion, according to data posted on the state Treasury Department’s website.

In other words, the state government is supposed to be making larger contributions to the public pension funds than Christie in counting in his allegedly balanced budgets. To claim that he has balanced the budget is simply put – accounting fraud. Buono is also challenging Christie’s claim as to some alleged employment miracle but noting that the state’s unemployment rate remains very high. If one looks at the Bureau of Labor Statistics reporting for New Jersey’s employment situation, this matter becomes much clearer. New Jersey’s employment situation over the past 20 years has basically mirrored the nation’s. During Clinton’s 8 years, state employment rose by 437,658 and its unemployment rate was quite modest at the end of this period. Since January 2001, the net increase in employment has been a mere 78,600. Our graph shows both employment and labor force since January 2001. Employment basically flat lined during Bush43’s first term but rose to almost 4.3 million by the end of 2007. Then the Great Recession hit and New Jersey’s employment plummeted to around 4.1 million by the end of 2009. Now it is true that employment has partially recovered since then but also note that the labor force has also been growing over the same period. New Jersey’s employment situation is still dismal even if the current governor wants to claim he has been some alleged Laffer style miracle.

How The National Security State Bites Itself In The Behind

I am not a fan of the Patriot Act or the aggressive actions by President Obama to bust leakers and spy on the US population, and so forth.  This extends to the recent "scandal" over the Department of Justice seizure of phone records of Associated Press reporters, the only one of the current three scandals that I think may merit this label.  Nevertheless, a pushback is coming from certain parties that while the DOJ's move appears to have been for political revenge that the AP released its story prior to the administration publicly releasing it, even if the release came after national security issues were resolved, that in fact the underlying situation that the story dealt with was indeed a very serious national security matter that ended up getting botched by the release of the story.

Probably the most serious presentation of how this particular situation turned into a totally screwed up mess is by Walter Pincus in today's Washington Post, Pincus being arguably the dean of military-intelligence reporters in Washington, whose credibility was reinforced by his standing against the MSM's rush to support the Bush rush to war before the US went into Iraq.  In any case, I have little doubt that his presentation is accurate, and way too complicated and subtle for any of the main parties currently shouting about "scandal" right now to be able to process or figure out substantially, although to me, and probably against Pincus, who seems to be sympathetic to the government trying to crack down on leaks in at least this case, these kinds of messes are what one gets in an overly vigorous National Security State such as the US seems to have become.

The underlying situation does appear to be something much more serious than the usual tripe, and one upshot of the mess has been to damage cooperation between US, British, and Saudi intelligence regarding fighting against genuine terrorist plotting.  So, al-Qaeda in the Arabian Peninsula (AQAP) has long plotted to make bomb attacks against the US, including against airplanes and in the US itself.  Saudi intelligence managed to get a double agent into the AQAP in Yemen who volunteered to be a suicide bomber on a plane and obtained a bomb to take out a commercial plane.  He then managed to get this to US intel, with it ending up in a US lab for inspection.  The AP story that came out was that US intel had foiled a plot to bomb an airplane, including that the bomb was in US hands, although leaving out all the details about the Saudi double agent, with AP holding off on the story until various immediate national security concerns were supposedly taken care of. 

There were two problemswith this, however.  One was that this was during the presidential campaign, and also that the CIA had planted a story that was publicized by White House Press Chief, Jay Carney, a week before the AP story to the effect that al Qaeda was under control and not a threat to Americans.  This was actually to fool the AQAP, although it was generally intepreted as being a campaign claim regarding Obama's foreign policy prowess in dealing with terrorists. 

So, when the AP story came out it appeared that rather than being a triumph of US anti-terrorism policy, it was interpreted as undercutting this political claim by Obama, and showed that Obama was lying about what was going on for political gain, a mini-scandal of the campaign.  In order to minimize this political damage, the administration then proceeded to let out further information regarding the whole situation, particularly some of the details regarding the Saudi double agent and the cooperation with the British and the Saudis.  The upshot of this was to shut down that whole operation and reportedly to damage this cooperation.

So it goes, as the old saying says, what a tangled web we weave, when first we seek to deceive.

Barkley Rosser

Oklahoma Relief Funding: Would Robert Barro Agree with Senator Coburn?

TalkingPointsMemo notes that while Oklahoma Senator Tom Coburn welcomes FEMA relief for the destruction caused by yesterday’s tornado:

Oklahoma Republican Sen. Tom Coburn will seek to offset federal aid to victims of a massive tornado that blasted through Oklahoma City suburbs on Monday with cuts elsewhere in the budget. "That's always been his position [to offset disaster aid]," a spokesman told the Huffington Post Monday night. "He supported offsets to the bill funding the OKC bombing recovery effort."

Two questions: (1) has Coburn always been so consistent on the issue of offsetting surges in government spending; and (2) is this form of consistency really optimal fiscal policy? On the first – I would submit the answer is no unless Coburn demanded that the cost of the disaster known as the 2003 Iraq War be offset. On the latter – let me turn to a 1989 paper by conservative economist Robert Barro, which was published in the Journal of Economic Perspectives. The paper was entitled The Ricardian Approach to Budget Deficits and is often cited as Barro’s case for optimal tax smoothing. Barro noted that transitional increases in government spending were best handled by temporary deficits with taxes set to cover the present value of government spending over the long-run. In short, temporary increases in government spending should not be currently offset as Senator Coburn suggests. Barro often cites wars as an example of transitional increases in spending albeit wars represents very sizeable changes as compared with the more modest FEMA expenditures for any particular natural disaster. I have to admit, however, that ten years ago a few of us worried that the neocon zest for invading other nations might represent a permanent increase in government spending. And yet Republicans back then did not want to finance their zest for war with tax increases. Go figure! But back to natural disasters such as the Oklahoma tornado or Hurricane Sandy. If these were truly unusual events only temporarily raising government relief spending, I suspect Dr. Barro would disagree with Senator Coburn’s call for offsets. Then again – some have worried that we are in for a new era of more natural disasters. If the expected cost of disaster relief has risen, then the Senator may have a point. But shouldn’t the offset be in the form of higher taxes and not a cut in things like Social Security spending?

Financialization and the Incredible Shrinking Time Horizon

Reading this excerpt from an interview with UNCTAD economist Heiner Flassbeck posted at Naked Capitalism prompts these thoughts on how financialization has altered the way capitalism functions.

Consider two ways an enterprise can be privately owned and managed.  (For simplicity I will talk about two discrete models, but of course there is a continuum between them.)  In the first way, which I’ll call institutional, a set of residual claimants are tied to the enterprise: there are substantial exit costs to their ownership, and thus they are forced to accept less diversification of their wealth portfolio than would otherwise be optimal—for them.  They could be family members with longstanding ties to the enterprise, perhaps dating from some ancestral founding, top executives whose career paths do not easily extend horizontally to other enterprises, perhaps because of a perception that firm-specific knowledge is critical in executive competence, or investment banks or other intermediaries who hold long-term equity positions.  It has to be emphasized that, from a purely risk-weighted wealth maximization point of view, such tied asset positions are unfavorable.

The second way, which can be called financial, takes the form of possession of paper claims on the enterprise tradeable in liquid markets or executive positions also tradeable for comparable positions in other enterprises.  Exit costs, in other words, are much lower.  This greatly reduces the risk of those in positions of transitory ownership and control: the owners can maintain a diversified and shifting portfolio of equity positions, while the executives can preserve outside employment options that substantially reduce the variability of expected permanent income.

In a world of perfect foresight or unitary ("rational") expectations it could be shown that these two models converge.  In the real world of fundamental uncertainty, asymmetric information and conflicting expectations they don’t.  Rather, the institutional approach compels owners and managers to extend their time horizons and lower their discount rates when forecasting future performance of the enterprise to which they are tied.  The availability of low-cost exit reduces this incentive for comparable parties under the financial approach.

One consequence of a longer-term orientation is an incentive for greater investment, and an important venue for this investment is the enterprise’s workforce.  A high-investment personnel strategy is one in which more resources are devoted to cultivating human capital and worker attachment to the firm.  The latter is fostered through internal labor markets, rent-sharing and a more favorable, or at least less resistant, attitude toward worker voice.  (This also depends, of course, on the production regime; under a technologically regimented regime such as one finds in commodity mass production like apparel, the drive system can coexist with a long-term orientation.)  Financialization is linked to inequality and greater precariousness of work because there is little incentive to expend resources in the present to capture the return to investments in the workforce that materialize (uncertainly) well into the future.

There is also a political economic dimension to financialization.  Those who are wealthy or hold positions at the top of organizational pyramids have disproportionate influence over public policy everywhere.  If personal interests play a central role, directly or indirectly via ideology, in the kinds of policies economic elites favor, one would expect systematic differences between these two varieties of capitalism.  Perhaps the most important is that the sort of sectoral jockeying one associates with institutionalized capitalism will give way to policies that are favorable to wealth-holders in general.  Such policies will be those that promote capital mobility, reduce effective taxes on financial income, limit inflation or intensify disinflation, and backstop credit market positions.  Again, I am not claiming that economic elites necessarily operate from a stance of naked self-interest; in fact, it is more likely that they will base their claims on sophisticated arguments that these things are in the public interest, as developed, for example, by like-minded economists.

So why the wave of financialization?  The key, in my opinion, is to recognize that tying one’s fortune to any particular enterprise is always costly.  Active entrepreneurs do this because their commitment to the enterprise, during this stage, is irreplaceable: there is simply no option for them to diversify their investments.  Beyond this, elites seek diversification if they can get it.  One reason institutional capitalism has prevailed in certain times and places is that rules were put in place to require it; labor laws, for instance, have served this function in many countries.  Capital market regulations have also sheltered tied investors, in effect subsidizing their commitment to particular enterprises.  This suggests that one reason we have seen the shift toward financialization is the dismantling, in most countries, of such rules.  (The European Union has been explicit in opposing any national regulation that sheltered tied investors in the name of the single capital market.)  Another factor is globalization, which is both a consequence of capital liberalization but also an inducement to it: as geographically dispersed markets with radically different economic opportunities and price structures are integrated, the costs of inhibiting capital mobility go up.  At the same time, cultural shifts have taken place which devalue the kinds of commitment on which institutional capitalism depends and even celebrate the wealth of those who time their ship-jumping with exquisite accuracy.  In the world we live in today, a radical lack of commitment to any specific enterprise is the default position, at least among those at the top of the hierarchy, and conscious social intervention is required to create countervailing pressures.

Two political observations to conclude:

1. Elites recognize as a fundamental conceptual point that a short-term orientation is dangerous.  Of course, the point of financialization is that they dare not point this gun at themselves.  Thus they project their concerns onto the public sector: it is government’s short-sightedness in fiscal matters alone that causes financial instability.  This is a nice option, enabling them to adopt the posture of one who is wise and thinks in the long run while resisting any proposal that would cause them to forego their own private short-run orientation.

2. It is truly unfortunate that the rise of financialization and its political economic fallout has coincided with the emergence of a drastic problem whose solution depends on governments’ adopting much longer time frames than ever before, climate change.

Is The Decline In US Budget Deficits Merely "Interesting"?

In yesterday's Washington Post, the execrable Robert J. Samuelson declared, "So the latest deficit numbers, although interesting, settle nothing.  They don't provide a road map for long-term budget discipline or resolve the debate over the short-term effects of deficits. They do not provide an excuse for both Congress and the White House to postpone genuine discussion an decisions."  And what, pray tell, should those "genuine" discussions and decisions deal with?  Well, of course, the fave topics of the Washington Very Serious People (VSPs), cutting Social Security and Medicare for those naughty and undeserving baby boomers.

He makes his disdain for the recent austerian moves by the US government clear in an earlier passage of this pathetically silly column: "Nothing of consequence has changed.  A few numbers have shifted slightly. That's all."  Really?  So, shall we play (Bill) Clintonian games over the defintions of "consequence" and "slightly"?  I mean we are talking about a budget deficit that is now more than a quarter less than it appeared to be just a few months ago. "Slightly," of no "consequence."  Really?

Not that good old RJS is completely out of it.  He recognizes that major austerian moves have been made recently in the US on both the spending and taxation side, however stupid and ignorantly put in place.  So, the major spending cut has been the Sequestration, something that was never supposed to happen, a cooked-up nightmare that was supposed to scare the two US parties into negotiating the "Grand Bargain," much loved by DC VSPs, that would really take an ax to those "entitlements" for some sort of figleaf tax increase, but in the end failed to overcome the deep partisan divides in the nation, with, in the end, the GOP embracing this massive stupidity as their own.

As it has been, the GB has happened, if not in the way the VSPs would approve, a New Year's tax increase in the form of letting the Bush tax cuts for high income people expire, along with letting those for middle and lower income fica tax payers also expire, along with the blunt and stupid Sequestration. Curiously, while these appear to have reduced US GDP growth by at least as much as 1/2%, all the media noise has been about the increase in taxes for the rich, even as most economists observe that the bigger hit to GDP growth is coming from the fica increase.  In any case, the combo of these spending cuts, however mindless, and tax increases, have, along with continued US GDP growth led to these "interesting" budget deficit decreases.

Anyway, RJS and his VSP pals are really annoyed by all this.  RJS sneers at economists who supposedly are upset about this deficit reduction.  But in fact nearly none of them are bothered at all by the deficit reduction; they are upset at the growth-slowing policies that led to it, which RJS actually recognizes without realizing how this fine point distinction undermines his position, and, of course, he has been loudly calling for such austerian policies repeatedly, particularly if they include cuts in Social Security and Medicare in line with the VSP consensus.

Needless to say, as usual, RJS fails to mention the reduced rate of increase in medical care costs, the main source of the scary scenarios that keep the VSPs up at night.  As it is, he views the slight improvements this year as part of some sort of random walk process ready to be offset next year: "They moved in a favorable direction.  Next time, they might go the other way."  Sure, Robert.  Bet on it.

Barkley Rosser

The Odd Coupling: Asking the Wrong Questions about "Decoupling" Environmental Impacts from Economic Growth

(Cross posted from the Economics and the Common Conference communication platform.)

The great green panacea for salvaging the market/state economic growth model from its own environmental consequences is that it may somehow be possible to "decouple" GDP growth from resource consumption. The rationale for decoupling GDP is summarized in the 2011 United Nations Environmental Programme report, Decoupling Natural Resource Use and Environmental Impacts from Economic Growth:

Decoupling at its simplest is reducing the amount of resources such as water or fossil fuels used to produce economic growth and delinking economic development from environmental deterioration. For it is clear in a world of nearly seven billion people, climbing to around nine billion in 40 years' time that growth is needed to lift people out of poverty and to generate employment for the soon to be two billion people either unemployed or underemployed.

Critics of economic growth have pointed out that even though relative decoupling of resource use from GDP has always been characteristic of industrial society, absolute decoupling – in which the amount of resource consumed actually decreases, even as the market economy continues to grow – has never happened. The Sustainable Development Commission's report, Prosperity Without Growth, for example, explained that greater efficiency in resource use also saves money and that money gets spent on even more goods and services resulting in a rebound effect, also known as the Jevons Paradox. "In short, relative decoupling sometimes has the perverse potential to decrease the chances of absolute decoupling."

But asking whether relative decoupling of GDP from resource consumption can eventually result in absolute decoupling is asking the wrong question. As the decoupling.report clearly indicated, GDP growth is not advocated as an end per se but as a means of generating employment.

Although GDP growth and employment are indeed highly correlated, the growth rate of GDP among the industrially developed countries (OECD) between 1991 and 2009 was about three times as fast as the growth rate of employment. To put this in perspective, energy consumption in the OECD countries increased over the last two decades at roughly the same pace as employment. In other words there has been virtually no relative decoupling of energy consumption and employment in the wealthier countries.

Globally the situation is even worse. From 1991 to 2009 world GDP increased by 93 percent. Employment increased by 33 percent and energy consumption increased by 36 percent. So even though energy consumption per dollar of GDP fell by nearly 30 percent over that period, energy consumption per employed person increased by two and a half percent. If the purpose of GDP growth is job creation, it makes absolutely no sense to talk about the energy intensity of GDP while ignoring the energy intensity of jobs.

As Thomas Pynchon wrote in Gravity's Rainbow, "If they can get you asking the wrong questions, they don't have to worry about answers." What happens when we start asking the right questions? "When we try to pick out anything by itself," John Muir wrote in My First Summer in the Sierra, "we find it hitched to everything else in the Universe." Industrial jobs are hitched to energy consumption which is hitched to GHG emissions. The right question, then, is how can we unhitch human flourishing from natural resource consumption and environmental impacts? 

Giacomo D'Alisa and Claudio Cattaneo ask the right questions in their research on "Household work and energy consumption: a degrowth perspective." Their research reveals the dangers, in terms of energy consumption, of promoting so-called "economic growth" through the substitution of commodity-based economic activity for household-based production.

The Buen Vivir movement that originated with the indigenous people of the Andes asks the right questions. Barbara Unmüßig, Wolfgang Sachs and Thomas Fatheuer summarize that movement's core principles in their Critique of the Green Economy:

Firstly, the good life is contrasted with development, which is seen as unilinear and imposed from above. According to this view, development is a mental process as well as a socioeconomic one. The aim is nothing less than a decolonization of the imagination.

Secondly, there are different narratives of Buen Vivir in different cultural traditions. Indeed, there are different nations – the Bolivian constitution describes the country as plurinational – each with their own language, history, social forms and ways of adapting to natural conditions. Biological diversity begets cultural diversity and vice versa.   

Thirdly, it is a community-based narrative that emphasizes relationships with one’s fellow humans, the plant and animal world and the cosmos instead of starting with the individual as the Western tradition does. Buen Vivir means living well with the surrounding world, which includes both the natural environment and other people. 

Fourthly, the forests, land and seed are to be tended jointly; collective work and machines are also common property. Social rules and methods can change, but in ways that the community decides. 

Fifthly and finally, nature is the basis of humans’ existence and they are part of the community of all living beings. Mountains and rivers, plants and animals are included in the common narrative as living subjects with whom one can converse.

The Texas Environmental Law Center and Our Children’s Trust asked the right question when they brought suit to have the atmosphere declared a public trust. As David Morris reported in On the Commons, Peter Barnes proposed treating the sky as a public trust in his 2001 book, Who Owns the Sky. Barnes's idea was the basis for a "cap-and-dividend" bill proposed in the U.S. House of Representatives in 2009. In July 2012, Judge Gisela Triana, of the Travis County, Texas, District Court ruled in favor of the plaintiffs.

In The Moon Belongs to Everyone, I traced the way that "everything is hitched to everything else" back from greenhouse gas emission to hours of industrial employment and proposed that the most direct way to cap emissions would be to cap hours of paid work. My policy proposal may not be the final answer but I think I'm asking the right questions.

Is the Stock Market Undervalued?

Gillian Tett sees a soaring stock market and frets that we are experienced a bubble. Antonio Fatas and Paul Krugman calmly remind us of the fundamentals. Paul notes that the stock price rally tracks earnings growth which implies we have not seen much in the way of an increase in the price to earnings ratio whereas Antonio notes:

interest rates are low because of a trend that started in the mid 2000s of increased saving in some emerging markets and the effects of the great recession that increased saving in advanced economies and made investment collapse. When no one wants to invest or consume, interest rates are low. And they are unusually low this time because the patterns of investment and saving are driven by a crisis that is very large compared to historical patterns. As a reminder, interest rates are low everywhere not just in countries where quantitative easing is taking place

Wait – with lower interest rates, the question should be why hasn’t the price to earnings ratio increased? In other words, with higher earnings and lower interest rates, shouldn’t stock prices be even higher?