Poor Economics

Not as far behind the curve as usual (less than a year), I just finished reading Poor Economics by Banerjee and Duflo.  It’s well-written and certainly worth a close look by anyone interested in global poverty, which should be everyone.  Here are some reactions on my part:

1. At times the perspective of the book flirts with nominalism.  It seems to claim that only bottom-up perspectives and actions can meaningfully change the world: the search for a better “health policy” may be a chimera, for instance, while there is much we can do to improve the performance of this particular clinic in this region.  My guess is that the authors would not go this far and would say that they are simply redressing an imbalance—that previous analysts of health and other policies were too prone to make sweeping judgments at an altitude too far above ground level, and that it is time to become more fine-grained.  Fine, but I would like them to say this more clearly.  To put it a bit differently, interventions are needed at all levels, from the village (or even lower) to the international, and in an ideal world our experiences in each would inform how we go about the others.  To continue the example, just as national health policies should reflect what one has learned from the close study of a particular clinic, one would go about health policy at the village level differently depending on decisions taken higher up (for instance regarding what kinds of investments to make in training health professionals).  Maybe this wider view will show up in their next book.

2. The book works best in the later chapters that are more traditionally “economic”, such as those on insurance and credit; the early chapters are less successful.  The reason is not hard to find: the authors are rather narrowly trained as economists, and they do not cite much literature outside their own field.  An instructive example is their misuse of the term “iron law of oligarchy”, which dates to Michels’ study of the organizational structure of syndicalism.  It is not nitpicking to point this out: Michels is one of the canonical texts in the field of political sociology, and almost every sociologist knows his theory.  Inadvertently, B&D are telling us they do not have a background in social theory.  Of course, everyone cannot know everything, and we need a division of labor in the study of poverty, just as in any other domain.  But economists should know their limitations going in and make an effort to at least acquaint themselves with the thinking of other specialists on the topics they are studying.  The chapters on education and health, for instance, would have been much stronger if there were more attention given to what education and public health analysts have been saying and doing.

3. Even within economics the authors are rather narrow.  This is striking, because their spirit and instincts are generous, even though their analytical toolkit is not.  One telling example which runs through the entire book is their depiction of the “poverty trap”.  They present it as the hypothesis that there are increasing returns to some kinds of investment, so that at low levels of investment there is insufficient incentive to invest more.  This is good as far as it goes, but it doesn’t acknowledge other mechanisms.  If you think about a poverty trap as a kind of multiple equilibrium, you would expect three different varieties.  There are two kinds of static multiple equilibrium processes, increasing returns (the B&D hypothesis) and interaction (sufficiently strong cross-effects between the elements of an interactive system).  In addition, there is a third, dynamic basis, adjustment processes that alter the initial conditions (hysterisis).  The first of these, the B&D version, is the most widely “approved” within the economics profession; the third has made inroads beginning with the Sonnenschein-Debreu-Mantel intervention of the 1970s and the subsequent equilibrium unemployment literature, but is still on the margins; the second remains utterly heretical and is confined to cranks and misfits like me.  How does this translate to poverty?  Hysterisis is about how the coping mechanisms of poor people, which may be necessary to alleviate the worst effects of their situation, can also reinforce their situation.  Fatalism as a psychological strategy illustrates this.  Interactive traps would be those in which multiple economic, social and political factors combine to entrap individuals in poverty and are mutually reinforcing, so that it is not possible to make progress on any one front alone.  These are not idle speculations.

4. The authors are self-aware culturally but not politically-economically.  They are refreshingly honest about their preconceptions as outsiders from a much more prosperous background, and their learning process is one of the main themes of the book.  At the same time, there is no discussion at all about where their funding comes from, why some projects are funded and not others, who funds their local partners and why, etc.  This is important not only because there really are competing agendas in the world of development research and policy (surprise), but also because their approach is expensive.

5. Although B&D don’t seem to recognize it, their core recommendation regarding policy, that it be based on careful, ongoing assessment of outcomes, adheres to one of the major practitioner traditions of recent decades.  Its roots go back at least as far as Dewey’s “intelligent action”; another theoretical foundation is cybernetic theory, e.g. Stafford Beer.  (Schön’s reflective practitioner is not far from this either.)  The idea is that effective management requires a feedback loop incorporating information-gathering, analysis and plan revision, one that is built in from the beginning and operates continuously.  The idea has really taken hold in the “adaptive management” of natural resources, for instance in ecological restoration.  Academic readers of this blog may be familiar with it through the emphasis on assessment in effective teaching.  (You design your classes so that you get a continuous stream of information, in real time, on how students are learning, and you adjust your methods and content accordingly.)  I think the book would have benefitted enormously by making the connection between poverty policy and broader perspectives in management and the professions.

Potential Output

The recent debate between Bullard, Smith, Duy, our own Barkley Rosser, Krugman and others has been interesting and has caused me to reconsidered some of what I thought I knew on this topic.  In fact, this is the fourth time I have sat down to write a post; my first three are all deleted.

What I now think is this: the purpose of a potential output measure is to offer guidance to macropolicy.  Bluntly put, a sizeable output gap tells us we can and should use monetary and fiscal measures to boost demand; an output surplus tells us to cool it.  This is loosely associated with a notion of productive potential, in the sense that, as an economy approaches or exceeds this potential, extra demand is increasingly diverted into either price level increases, trade deficits or both.  In this sense, what we want from an estimate of potential GDP is that it performs adequately as a guide to demand management.

That said, is there a case that the collapse of the housing bubble in the last decade could lower the trajectory of potential GDP?  The answer, I think, is yes, possibly.  The reason is that potential output can well be altered by changes in the pattern of demand.  The extreme poster child for this is Eastern Europe post-1989: they had a capital stock poorly suited to producing internationally competitive goods, and the sudden opening of their economies precipitated a change in demand resulting in a collapse in potential output.  This is why their transitional slumps could not be cured solely by augmenting aggregate demand, for instance through fiscal deficits; the result would have been only some mix of more inflation and more trade deficits.

The deflation of the housing bubble may have revealed a similar mechanism.  Perhaps the mix of physical and human capital in our society was tilted toward a product mix (lots of suburban tract development) that will change under the new, post-bubble demand regime.  It is true that unemployment in construction is not elevated over that in other sectors, but that doesn’t answer the question of what level sectoral employment will rise to once aggregate demand shortfalls dissipate.  For this story to be statistically meaningful, however, two things need to be true.  First, the change in the pattern of demand has to be substantial and persistent: Americans must continue to demand less new housing for the foreseeable future.  This is not the same as saying, as Bullard has, that prices cannot resume their previous trajectory.  (We can experience a change in the price-quantity relationship.)  Second, our capital (physical and human) allocated to housing has to be on the clay rather than putty side of things, not just instantaneously, but over the span of many years.

Putting it this way makes the issue empirical.  You can embed these questions in various models (Solow, DSGE, your home brew), but whether the deflation of the housing bubble has caused a trajectory shift will come down to these two judgments.  Someone should look into this.

Under the North Star

I’ve just finished reading this classic Finnish trilogy by Väinö Linna.  It’s many things at once, a well-told story of three generations in a small village, a panorama of twentieth century Finnish history, and a Tolstoyan meditation on the themes of individual character, political principles and the gap between what we strive for and what our lives ultimately mean.

Volume II, The Uprising, is the most powerful of the three.  Its account of the socialist revolution of 1918 and the massacre that followed its suppression will be difficult to forget.  Much of its force, however, comes from the careful development of its human context in volume I; each individual sent before the firing squad is vivid, someone the reader knows and cares about.

The final volume, Reconciliation, is less effective, perhaps because, covering more decades in the same number of pages, it sacrifices depth.  None of the victims of the wars against Russia are really developed personalities (except for the first to die, whose portrait is an elaborate exercise in irony).  Even so, the account of the rise of fascism in Finland is detailed enough to permit comparisons to fascist movements in other times and places.

Under the North Star is gripping reading, but it is also a work of ideas.  It belongs on the shelf devoted to sagas of development, where the transformation from traditional to modern society—economic, political and cultural revolution—is lived by people whose frame of reference is the past, and who cannot begin to imagine where the future will take them.

(Exception to the final generalization: the author permits one character to speak for him, so there is a consistent voice for reason and humanitarianism amid the turmoil.  An interesting question is whether this is an effective rhetorical strategy.)

A Job Market Story

Noah Smith tells his economics job market story over at Noahpinion, and it inspires me to tell one of mine.  (Bravo, Noah, not just for landing a good job, but for doing it nonrobotically.)  I have a lot of stories, because I was on the market a long, long time.

In this case, the time was December 1987, the place was Chicago, site of the annual economics meetings that year.  I had just completed my dissertation, a theoretical treatment of wage compensation for dangerous work.  (My chair was Herb Gintis, an extraordinarily generous and helpful advisor.)  I had sent out a whole slew of applications but had landed hardly any first interviews.

My plane landed in Chicago just as a powerful snowstorm was blanketing the city.  Since O’Hare closed for a while, the beginning of the meetings was disrupted, and the entire event felt a bit surreal.  I had some extra time the first morning—OK, with few interviews I had a lot of extra time all the way through—so I decided to get some exercise.  My hotel’s fitness room was shut down for renovations, and they were giving away vouchers for a health club down the street.  I went down to the concierge desk to pick up mine.

Standing next to me was a woman of about my age, also picking up a voucher.  Since neither of us quite knew where we were going, and the snow was blowing furiously in the wind, we decided to find our way together.  I asked where she was from; she said the Duke school of public policy, and she was at the meetings to recruit.  Amazing, I said, since I’m on the market, and I had applied to Duke public policy, and I was sure I would get an interview, since I am really a policy person, but I didn’t.

She asked about my dissertation, and I described it.  (The snow was fierce.)  She seemed very interested.  Why hadn’t they scheduled me, she wondered.  Then she asked what school I was from.  UMass-Amherst, I said.  There was an uncomfortable silence.  You could see her face simply drop, as if it were about to fall off.  “Um, don’t they have a lot of Marxists there?”

Well, that was that: no last minute possibility at Duke.  And it went downhill for the next half-dozen years, desperate and unproductive job-hunting with a smattering of amusing stories along the way.

The best comeback lines occur to you too late.  I wish I had calmly replied, “Don’t worry, it’s sort of like AIDS.  You can’t get it from casual contact.”

Bullard On Duy On Bullard On Potential Output

Mark Thoma at economists view has provided a reply by James Bullard, President of the St. Louis Fed, to Tim Duy's commentary on his speech at the Union League Club in Chicago on how he thinks that the housing bubble collapse could have reduced the growth of potential output, along with his criticisms of the standard public projections of potential output, http://economistsview.typepad.com/economistsview/2012/02/james-bullard-responds-to-tim-duy.html . I would like to comment on this given the nearly universal perception (including posts here by several folks) that Bullard does not seem to understand that the projections are based on the Solow growth model, particularly given that Bullard is one of the more open-minded and knowledgeable figures involved in decisionmaking at the Fed. What is going on here?

To get at this one needs to read the links Bullard provides, most notably the 2009 paper by Basu and Fernald published by the St. Louis Fed on potential output. He notes that they argue that there are competing definitions of potential output. One is essentially long run growth, which should be tied to a growth model of some sort. The other is a shorter run one that they argue should be the equilibrium of a flexible price New Keynesian DSGE model. They argue that rather than the standard one-sector Solow model, what fits the data better is a two-sector model that focuses on technological change the capital goods sector (although they do a lot of handwaving about aggregate Frisch labor elasticities). In effect, they offer four different alternatives within the short-run case: one-sector vs two-sector and flexible price versus sticky prices models, ultimately supporting the two-sector-flexible price one. This plethora of choices lies behind Bullard's unhappiness with most projections of potential output.

OK, so let us grant that there is a lot of fuzziness with regard to what the proper projection of potential output is from this perspective. But does this translate to a reasonable argument that the potential may be a lot lower than the standard one-sector Solow model projection in the recent period due to the bubble and its collapse? This seems to boil down to the claim that the projections most are using amount to being based on unsustainable growth rates based on the bubble period. Well, maybe, although Basu and Fernald do not directly address this, nor do they offer how to estimate how potential output calculations should be made to overcome this problem.

As it is, I think there is a case to be made that the collapse of the bubble did reduce the growth of potential output, by most methods of estimation. I note that I do not see Bullard making the argument I am making specifically or explicitly in either his original talk or in his reply to Tim Duy, but perhaps it or some variation of it was lying behind his arguments.

The basis of this argument is that the fall in output following the collapse of the bubble has reduced the rate of real capital investment. Of course, the sharpest decline was in the real estate construction sector, the part of the economy that was most severely distorted by the housing bubble, and we should expect that part of investment to remain reduced for some time. However, it is not clear that reducing this will damage the productivity of investment in factories, machinery, and equipment, which is the real core of the growth of capital stock that increases potential output. Nevertheless, the sharp reduction of aggregate demand has almost certainly reduced the rate of this sort of potential-output-increasing investment.

So, the massive and sustained reduction of aggregate demand following the collapse of the housing bubble and its impact on the financial sector, has reduced the growth of factories, machinery, and equipment, which in turn has reduced the growth rate of potential output below what it would have been if the housing bubble had been ended without all the unpleasant impacts on aggregate demand that accompanied it (beyond the reduction in demand for housing construction).

I do not know if this is what Bullard was trying to get at in his various attempted explanations of what he has said, but I think that it is a more or less coherent story that does fit with his general argument.

Welcome to the Future—It’s Just Starting Now

Like many of you, I have had a queasy feeling about the loss of privacy in the digital era.  Every online transaction and communication is out there for monitoring, profiling, packaging and retailing, and no promise by a company or government is going to change this.  The commercial implications are troubling enough, but what about the future?  What happens when a really bad government comes along and uses this information for outright repression?

Well, the future is now.  Read this chilling report on the use of new surveillance technologies to control what you can read about such matters as state-sponsored torture (the Kiriakou case) and corrupt insider contracts in the “war on terror” (Sterling).

If it had been Obama and not Google that campaigned on the slogan “Don’t be evil”, we could accuse him of breaking a promise.

Bullard and How We Measure GDP Gaps

Noah Smith had an early and excellent take down of Jim Bullard that included:

So, basically, what we have here is Bullard saying that the neoclassical (Solow) growth model - and all models like it - are wrong. He's saying that a change in asset prices can cause a permanent change in the equilibrium capital/labor ratio.

Tim Duy had another excellent take down of Mr. Bullard that included:

Estimates of potential GDP are not simple extrapolations of actual GDP from the peak of the last business cycles. They are estimates of the maximum sustainable output given fully employed resources. The backbone of the CBO's estimates is a Solow Growth model. So I don't think that Noah Smith is quite accurate ... Bullard can't be saying the Solow growth model is wrong because he doesn't realize that such a model is the basis for the estimates he is criticizing.

I was curious as to how much difference this makes so I extrapolates 2007QIV real GDP by assuming growth equal to 0.5% per quarter for the next four years and compared the GDP gap predicted this Bullard approach (GAP*) to the GDP gap one would get using the CBO estimate for potential GDP. Either way – we are still far below full employment.

A Little More on Rent Control

After posting on this subject a few days ago, I’ve been raked over the coals in the conservative Blogosphere, principally in the Arnold Klingdom.  I am accused of thinking I possess a “superior wisdom”, since I disagree with the majority of economists on this issue.  I ignore “mountains of data” and base my agnosticism on sheer ignorance.  I am really the worst of the worst.

I could rest my case on a simple defense: my post was not about rent control, which I haven’t studied, but on the doctrinaire treatment of the topic by economic textbooks.  Even if they’re ultimately right, they’re right for the wrong reasons, and that matters when the issue is how to use economics as a tool for thinking.

But having had my curiosity piqued, I decided to do a quick literature search.  Sure enough, there is a large literature out there.  I glanced at a few models with their statistical implementations and formed a few reactions.  I will spare you here, since it takes more than a couple of hours to know what’s what in a serious field of study.  But I noticed that two review essays from the 1990's seem to hold pride of place.

Edgar Olsen, a veteran rent control researcher, wrote one of these in 1998 for Regional Science and Urban Economics.  A sample quote:

“Although economists have strongly held views about the effects of rent control, they have provided little convincing empirical evidence in support of these views [Olsen, 1990] and their theoretical analyses typically ignore relevant features of actual rent control ordinances and important responses to them [Olsen, 1988].”

And Richard Arnott asked whether it is “Time for Revisionism on Rent Control?” in the Journal of Economic Perspectives in 1995; his answer was yes.

But of course there was further work in the 00's, and no doubt the subject will look different a few years from now.  The one conclusion I can draw at this point is that a sweeping condemnation of rent control derived from elementary supply and demand analysis (in a frictionless market with no externalities) isn’t a very good way to enter the debate.

UPDATE:  It's not enough to know the US experience with rent control.  I've found out that Germany has had a national system of rent control for decades; it is widely seen as successful, and, as far as I know, no major party has proposed getting rid of it.  Maybe German readers of this blog (all three of you?) will want to chime in.  Once again, this proves nothing, but it does suggest that simplistic, doctrinaire judgments rendered by economics textbooks are not much to go on.  This is not an argument for rent control; it's an argument against the textbooks.

"Why is plagiarism unacceptable?"

The following statement on plagiarism comes from the Université de Liège:

WHY IS PLAGIARISM UNACCEPTABLE?

George Osburne and Crowding-out

Paul Krugman reminds us of a June 22, 2010 speech by George Osburne where he made his case for fiscal austerity. These words jumped out at me:

Higher interest rates, more business failures, sharper rises in unemployment, and potentially even a catastrophic loss of confidence and the end of the recovery ... An economy where the state does not take almost half of all our national income, crowding out private endeavour.

The entirety of this speech reads like standard Republican fare with its call for cuts in government spending but no new taxes. To be fair, however, the advice given by the members of the Council of Economic Advisors to President Lyndon Johnson back in 1966 worried about higher interest rates and crowding-out. But the economy then was at full employment and the Federal Reserve was already raising interest rates to avoid demand pull inflation. We can’t blame Johnson’s Keynesian advisors for the lack of political will to adopt fiscal restraint when needed.

But the UK and the US economies over the past few years have been very different. As Osburne noted interest rates have been low but that is a reflection of very weak aggregate demand and staggering GDP gaps. Let’s turn to a recent speech by Christina Romer to see what Barack Obama was thinking just after the 2008 elections:

The very first meeting I ever had with the President-Elect was on exactly this topic. I was in Chicago in mid-November 2008 for my job interview. The President-Elect began the discussion by saying that the economy was very sick and there was not much more the Fed could do—so we needed to use fiscal policy.

The President-Elect back then seemed to be paying close attention to the liquidity trap blog posts by Paul Krugman. Alas – the actual fiscal stimulus we got was too little and not sustained. I’m sure defenders of the President could counter by noting that the Republican leaders have been uttering the nonsense we say from George Osburne back on June 22, 2010. I guess the best way to close my blog post is to turn the microphone back to Dr. Romer:

The one thing that has disillusioned me is the discussion of fiscal policy. Policymakers and far too many economists seem to be arguing from ideology rather than evidence. As I have described this evening, the evidence is stronger than it has ever been that fiscal policy matters—that fiscal stimulus helps the economy add jobs, and that reducing the budget deficit lowers growth at least in the near term. And yet, this evidence does not seem to be getting through to the legislative process. That is unacceptable. We are never going to solve our problems if we can’t agree at least on the facts. Evidence-based policymaking is essential if we are ever going to triumph over this recession and deal with our long-run budget problems.

The High Yield Low Risk Anomaly

I have posted on this previously, but want to provide a link and more detail. The link is old, to the 2011 Credit Suisse Yearbook, out a year ago, an article entitled "The quest for yield," by Elroy Dimson, Paul Marsh, and Mike Staunton, on pp. 15-23 of credit_suisse_global_investment_yearbook_2011[1].pdf . I note that so far there has not been a single academic publication on the gist of this paper, that over the last 20 years in 19 out of 21 countries, buying annually reconfigured high yield stock portfolios provided both higher returns and lower risk than alternative investment strategies. Needless to say, this is an anomaly that violates CAPM, the Efficient Market Hypothesis, and several other sacred cows of conventional financial economics theory.

Of the 21 countries studied, the only ones where the "yield effect" was negative, higher yield portfolios underperformed lower yield ones on returns over 20 years, were New Zealand and Ireland, not exactly major markets. The yield effect was highest in Austria, France, and Japan.

The more crucial matter is risk, given that standard portfolio theory dating from Markowitz, if not much earlier, is that risk and return are positively related, not negatively (although another violation has been the matter of home asset bias, where most would do better on both risk and return by internationally diversifying portfolios more than they do, although this has been known and much studied in the academic lit for a long time, unlike this matter). So in Figures 8 and 9 one finds the crucial findings, both across all countries and then broken down for them individually, comparing high yield, low yield, zero yield, and country index funds. For the varying yields, it is monotonic, with risk rising as yield declines using both standard deviation and beta, and also with the Sharpe ratio declining (return per extra unit of volatility) across the yields from high to zero. It is a closer call in comparing with the country index funds, which do better than the lower yield strategies on all of these. However, it is only on standard deviation that index beats high yield, but just barely, 21.4 to 22.6. High yield beats index on beta, 0.89 to 1.0, and simply tromps it on the Sharpe ratio, 0.42 to 0.30.

So, how is this explained? Well, it is not likely it is chance, and while there might be some tax effect, the authors provide arguments why this is probably not the case or only minimally so at most. This leaves a behavioral explanation: people overbuy low yield growth stocks in bubbles that end up being more volatile because they crash so much harder. Looks pretty reasonable to me, but nobody in academic economics or finance is talking about this at all.

Charles Murray versus Art Laffer

David Frum and Paul Krugman notice a passage in “Is the White Working Class Coming Apart?” that suggests that the income effect may dominate the substitution effect when it comes to the labor supply curve:

As of 2009, a very bad year economically, the median hourly wage for drivers of delivery trucks was $13.84; for carpenter’s helpers, $12.63; for building cleaners, $13.37. That means $505 to $554 for a forty-hour week, or $25,260 to $27,680 for a fifty-week year. Those are not great incomes, but they are enough to be able to live a decent existence – almost twice the poverty level even if you are married and your wife doesn’t work. So why would you not work if a job opening landed in your lap? Why would you not work a full forty hours if the hours were available? Why not work more than forty hours?

Paul comments:

But this argument applies just as much to the rich as to the poor. And strange to say, you never do find conservatives arguing that we shouldn’t worry about higher tax rates on the rich, because they’ll just work harder to be able to afford those luxury goods; or that a higher inheritance tax probably expands work effort, because it would force the Paris Hiltons of this world to go out and get real jobs.

Art Laffer wanted us to believe just the opposite – that higher tax rates would induce Paris Hilton to work less. In other words, the Laffer curve presumes a very strong substitution effect and a very weak income effect. I guess Charles Murray’s assertion here questions the underlying premise of the Laugher Curve!

Quote: What was the true cause of western inflation in the 1970s?

“The estimated fraction of total inflation attributable to oil price increases had a median value of only 15% for 1973-74, or 9% over the longer period of 1973-76 ....We conclude that American inflation caused by the Federal Reserve System as an exogenous source of world inflationary trends. Because of the unwillingness of their central banks to appreciate or float their currencies until in extremis, the nonreserve countries too caught the American disease. …”

The International Transmission of Inflation

By Michael R. Darby, James R. Lothian

Some Thoughts on Greek “Reforms”

Enough has been said for now on the sins of commission in the Greek austerity program.  (See Floyd Norris in today’s New York Times for an excellent dissection.)  I’m interested in what has been left off the agenda.

My starting premise is that the fundamental cause of Greece’s lack of competitiveness is not its wage level but its pervasive clientelism.  The beef against the national railway, for instance, is not that workers were overpaid, but that jobs were dished out as payoffs without any regard for the country’s transportation needs.  Taxes aren’t collected because tax sheltering is another payoff, in this case for the benefit of a higher income class.  Cartels carve up markets, and regulators look the other way—more payoffs and more waste.  One way to think about Greece is that it has the kind of economy Italy would have if it were all Mezzogiorno.

Although the complexities and national distinctiveness of the Greek political economy cannot be capture by any single model, a reasonable first approximation would be that the country is in the grip of a deeply-entrenched system of clientelism that spans nominally public and private sectors.  By clientelism, I mean a system in which patrons extend material benefits (jobs, tax shelters, monopolistic profits) to clients in return for offers of loyalty (votes, support in conflicts with other bigwigs, etc.).  The theory of clientelism was the topic of a paper I presented at the ASSA meetings in Chicago.

The troika has not directly targeted Greek clientelism, but what should we expect the unintended consequences of its demands to be for this de facto regime?  For instance, if numerical targets are imposed that result in public sector layoffs, will this lessen the grip of clientelism or make it even stronger?

I don’t think theory alone can answer such questions, but it can shed light on the mechanisms through which clientelistic relations operate and are either reinforced or broken.  Here are a few questions that come to mind:

Who controls which public sector jobs will be eliminated?  If some of the jobs are “honest” and others “payoffs” (I realize the reality is not so dichotomous, but this is an attempt to jumpstart a thought process), how will layoffs be apportioned between them?  If payoff jobs become more scarce, will they rise in value?  Will patrons be able to extract even more loyalty from clients by offering favors in a depleted environment?

If the minimum wages on which current payment formulas depend are cut by more than 20%, will the formulas themselves become more flexible, and therefore more susceptible to clientelistic manipulation?  Who gets to decide this?  Will an economy-wide salary freeze reduce clientelist discretion or displace more of it to the enforcement apparatus?

As state capacity falls, will this increase the scope for clientelistic relations according to the principle that the disinterested rule of law is a principal alternative to clientelism, or will it reduce the exercise of clientelism within the public sector itself—or both?  Will the state become more susceptible to the privatization of public goods (like public services) by officials using them to purchase personal loyalty?  In other words, which state capacities are likely to decline fastest and furthest?

Social scientists have become skilled at analyzing a wide range of institutions, such as markets, businesses, political parties and bureaucratic administration, but there has been no systematic investigation of clientelism corresponding to its status as one of the fundamental structures of social organization.  As a result, important questions about the Greek economy and society are not even being asked, much less investigated.

EU Labor Commissioner’s Praise of US Macroeconomic Policy

Ian Talley notes how Laszlo Andor is virtually alone among EU officials condemning their fiscal austerity:

An over-reliance on slimming government budgets is feeding the euro zone’s recession, European Union Labor Commissioner Laszlo Andor warned in an interview. “We need a smarter fiscal consolidation than before, which means that the wrongly calibrated fiscal consolidation measures probably contributed to the deceleration of growth and this second dip,” the EU Commissioner for Employment, Social Affairs and Inclusion said after meetings with the Obama administration, International Monetary Fund and World Bank officials this week. Although the job of labor commissioner isn’t one of the heavyweight roles within the commission, Andor’s comments are one of the first times a top European Union official has publicly suggested that the broad focus on austerity has been harmful to the European economy.

In the U.S. there has been a debate between the political hacks in the Republican Party who think President Obama has worsened our economic performance by excessive fiscal stimulus and the realists who argue that we did not have sufficient fiscal stimulus. Mr. Andor seems to be of a different mind:

The commissioner said he spent much of his time in Washington studying how the U.S. was able to spur demand and cut persistently high unemployment levels. The U.S. government and the Federal Reserve have greater flexibility than the E.U. or the European Central Bank, a lesson he said that has application in Europe.

It only shows how incredibly awful European aggregate demand policy has been when our anemic efforts to restore full employment are seen as a guide to their macroeconomic policies!