Neoliberalism Hits a Speedbump?

The Wall Street Journal has an interesting article today, which begins, " More Asian governments are pressing businesses to hike wages as a way to prevent outbreaks of labor unrest, raising the specter of higher manufacturing costs for global companies -- and the products they sell world-wide."

The problem is that people in Asia lack the necessary naiveté to make capitalism work efficiently; i.e. to maximize exploitation.

"Political leaders say they have little choice but to act, as voters grow savvier about wage gains" elsewhere, which they can research on the Internet. Recent protests by low-income workers in places like Indonesia and Thailand have added to pressure on governments to raise wages."

"There is a genuine feeling that the low-wage segments [of Asia's population] haven't made much progress in recent years" as the gap between rich and poor has widened in some areas, said Edward Teather, an economist at UBS in Singapore."

What is wrong with Americans that they can be bamboozled to think that the current neoliberal policies are constructive of anything more than more of the same?


James Hookway, Patrick Barta, and Dana Mattioli. 2012. "China's Wage Hikes Ripple Across Asia." Wall Street Journal (13 March).

http://online.wsj.com/article/SB10001424052702304450004577279111724105828.html?mod=ITP_pageone_0

MMT Redux

I knew if I stuck my hat on a pole above the trenches, the MMT missiles would come flying.  Specifically, I hear two general arguments whizzing over my head:

1. Loans are not made out of reserves, silly!  Loans are simply made, and if the bank finds itself short of reserves at the end of the day it borrows them from the overnight market.  Lending and the quantity of reserves at any moment in time are decoupled.

2. The CB targets an overnight interest rate.  If an over- or undersupply of reserves puts pressure on that rate, the CB injects or soaks up reserves to maintain its peg.  Implication: the Treasury can borrow as much as it pleases, as long as the CB purchases whatever proportion of the bond issuance it needs in order to maintain its peg.  Notional measurements of “the money supply” have no independent significance.

Responses:

1. It is a fair criticism to say that textbook presentations of fractional reserve banking, including my own, are counterfactual; convenient exposition is, in this case, at odds with observed reality.  It should be borne in mind, however, that the money multiplier model, like conventional supply-and-demand models, operates at an aggregate level and is not truly microfounded.  (In S&D, prices are supposed to equilibrate in a perfectly competitive model, in spite of the definition of perfect competition as a state in which no agent has the ability to influence the market price.)  The money multiplier really specifies a limit at which further loans need to be backed by an infusion of new reserves.  (The MM has been getting fuzzier of late due to changes in financial institutions and instruments, not to mention international capital flows, but we’ll leave that aside.)  If banks were always fully lent, the CB would have sole control over “the” money supply through control over the monetary base: that would be one corner solution.  But banks are not fully lent at all times.  If banks were never fully lent, the CB would have no influence at all on monetary aggregates except through its ability to stimulate or discourage lending, but this is another implausible corner solution.  I take the middle road.

2. If the CB targets a nominal interest rate, it runs the risk of the following scenario: increased borrowing by the Treasury increases inflationary expectations, which reduce the real interest rate, perhaps even below zero.  This leads to ever-reduced lending standards and overheating (including bubblish activity), validating those expectations, disastrously.  Or the CB can target a real rate, but if inflationary expectations rise it is compelled to increase its nominal peg, dumping an increasing share of bonds on the market.  This looks like, and is, contractionary monetary policy.  The notion that a CB can passively accommodate any and all fiscal deficits strikes me as very strange.  To put it differently, there are two dubious corner solutions, one in which any exercise of fiscal expansion is completely vitiated by offsetting changes in inflation, and another in which there are no such changes.  I’ll take the old fashioned Keynesian view that the proportion of fiscal expansion absorbed by inflation roughly increases as the output gap decreases, a sensible—and empirically validated—middle position.

The Difficult Concept of a Global Market

According to poll results published in today’s New York Times,

Over all, 54 percent of poll respondents believed that a president can do a lot to control gas prices, as opposed to 36 percent who believe they are beyond a president’s control.

It appears that a majority of those polled have difficulty with the concept that prices in a global market are set globally.  I’m not surprised, because variations on the same mental hurdle show up in discussions of whether it matters if we import oil from country A or country B, or if oil prices are quoted in dollars or euros.

Since the first and most important step in teaching is deconstructing erroneous priors, I hope those whose job it is to teach economics will address these misunderstandings as explicitly as possible.  Take time to find out what students think about how the global oil market works before launching into your prepared explanation.  Drill down to the underlying assumptions and hold them up for scrutiny.  Minute for minute, time spent on unlearning false knowledge is far more valuable than time spent on developing a more sophisticated grasp of the better stuff.

It was also help enormously if media outlets like the Times would make it clear that there are right and wrong answers to questions like the president’s control over gas prices.

Peter Diamond On The Slow Recovery Of Employment

I have just returned from the Eastern Economic Association meetings held in Boston over the weekend. Peter Diamond delivered the main plenary lecture on Saturday evening (2/10/12) on "Markets with Search Frictions." While I disagree with some things he said (He thinks the "natural rate" equals "NAIRU" [and that these are both meaningful concepts], and as always wants to "fix" social security, but these were not his main topics), he mostly gave a wise and knowledgeable presentation about the search model of unemployment, going back into its routes and noting many of its limitations and problems, as well as how it is useful, reminding everyone in the audience what fools those in the Senate are who think he is not qualified to serve on the Board of Governors of the Fed.

One general point he made that I had not really thought about, although once pointed out it is obvious, is that labor markets are seriously different from textbook supply and demand models in that there is never a really clearcut equilibrium. There are always vacancies, hence some "excess demand," and some official unemployoment, hence some "excess supply." All the imposed definitions of labor market equilibrium are thus arbitrary.

The most interesting remark to me came in reply to a question from the audience. He had stated in his main talk that "the matching mechanism has broken down during the recent recession." He was asked to elaborate. Drawing on research by Davis, Haltiwanger, and others, he broke it down to the micro sectoral level, although saying that more is going on than just that. But at that level, different sectors have different hiring rates. The one with the most rapid hiring rates is the one with the least hiring, construction. Some with slow hiring rates include education, health, and government. Not all of those latter are growing that much, but health is certainly one of the most rapidly growing. So, quite aside from broader macro issues (including possibly reduced mobility from underwater mortgages, although some studies claim this is not a factor), this sectoral pattern of how the recession has hit has slowed down the hiring/rehiring portion of the matching mechanism.

Outgoing president, Duncan Foley, also gave an excellent talk on physical limits to growth related to climate and energy, but, I shall not comment on that at length here and now (title, "Dilemmas of Economic Growth"), other than to say I largely agreed with it and he showed some very interesting statistics on various things that I had not seen before.

Why Larry Kotlikoff Is Not Getting My Vote for President

An economist is running for President with this opening:

Our country is at a critical juncture. Twenty-nine million Americans are out of work or underemployed. For most of those with jobs, real wage growth is a distant memory. Younger Americans are searching for the American dream and finding no-help-wanted signs. And millions of retirees are reeling from massive losses they've taken on their homes and life savings. The few doing well are doing very well, with income and wealth growing more unequal over time.

With such an outstanding diagnosis of the big economic issues, what progressive economist wouldn’t get behind his candidacy? Well this one - after I read his various “purple” plans, which all seem to be about austerity designed to eliminate what he claims is a long-term fiscal gap in excess of $200 trillion.

I’ll concede that we likely need a balanced approach of long-term spending reductions and more tax revenues and his proposal to have a progressive consumption tax is intriguing. Note, however, that extra revenues amounts to only 15 percent of his proposed long-term austerity, whereas Social Security is supposed to make up about 25 percent of the shortfall. This is from someone who correctly notes that retirees have lost much of their life savings while the elite are doing very well. Now putting 60 percent of the burden on health care reforms might sound right – but his website is short on specifics of how he chooses to accomplish this goal.

But none of this constitutes the main reason I’m not voting for Dr. Kotlikoff. The main reason goes to his point that we are far below full employment. So why does his campaign focus on austerity? We might as well be voting for Mitch McConnell for President.

Running on MMT

I’m going to regret this, but here is a short reaction to the Modern Monetary Theory (MMT) uprising, occasioned by reading (after some hesitation) Philip Pilkington’s MMT-inspired attack on IS-LM models over at Naked Capitalism.

1. I agree with the fundamental complaint MMTers have about the LM curve: it assumes a fixed money supply, so that changes in the speculative demand for money (due to i) have to be offset by changes in the transaction demand (due to Y): hence the upward slope.  (The slope is flat during a liquidity trap.)  But the money supply is not fixed; it has a substantial endogenous component.  Note the word “substantial”.

2. But MMT jumps from one corner solution to another.  After rejecting the implausible notion that the money supply is fixed, always at a level determined by the money multiplier times the monetary base, it leaps to the equally implausible notion that the monetary base is completely decoupled from the money supply.  On this view, infusions or withdrawals of liquidity by the central bank influence only interest rates, and the banking system alters its credit creation to meet money demand at the policy-determined price.  Thus the volume of economic activity need have no bearing at all on interest rates; the central bank has a completely free hand.  Do I have this right?

My view is that corner solutions are usually wrong; at least they should be regarded with fierce skepticism.  It would take a lot to convince me that monetary aggregates are completely decoupled from central bank liquidity provision, just as I doubt they can be controlled by monetary policy.  Surely there are limits to credit creation, which we see in a raw form during those episodes in which reserve requirements are reset.  What’s wrong with saying that the money supply is jointly created by the central bank and the private sector as the latter responds to perceived lending (and other asset acquisition) opportunities?

(Note: this post is about just one issue in IS-LM modeling.  There are others, but I am saving them for a day when there is really nothing better to do.)

Libertarians for Social Democracy

Sign up Alex Tabarrok.  He has an excellent piece in the latest Chronicle of Higher Education extolling the apprenticeship systems of Germany, Finland, the Netherlands, Denmark, etc.  As well he should: they offer students from all class backgrounds a real opportunity to earn a middle class income, and they are central to the ability of these countries to maintain high standards of living in an even more open economic environment (Europe) than the one the US has to contend with.

Just one thing though.  What makes these apprenticeships so valuable for the students?  And why are employers willing to pay more for well-trained employees than dumbing down the jobs for minimum wages or simply outsourcing as much as possible?  Each country is different, but they all share part of two answers—labor market regulation and stakeholder corporate governance.  The first of these is especially crucial to mass apprenticeship: to maintain demand for high-end labor, there need to be rules mandating employment rights, credentials and, especially, unions.  To minimize outsourcing, labor and the community need a strong voice in corporate management.  In addition, the whole system is nurtured and nudged with multifarious forms of public subsidy.

To put it simply, if you want the social democratic educational strategy, you’re going to need a social democracy to go along with it.  I’m happy to have Alex on board.

Incidentally, how about this for a political platform: no high school graduate left behind.  There should be a public pledge, backed by dollars and ambitious programming, that every student who graduates from high school in America is guaranteed the opportunity to either earn a college degree or get placed in a job that pays a middle class wage.  All access barriers to education, training and apprenticeship ought to be removed, with students enjoying these benefits as a matter of right.  As long as a kid puts in the effort, public responsibility does not end until he or she has a solid foot in the door.  This is a universal deal, for everyone.

Ethical Conduct for Economists?

Is it an oxymoron?

The first group of papers has been posted for the online WEA conference, Economics in Society: the Ethical Dimension, among them Crisis, Credit and Credulity: the incredible circulation of a counterfeit idea by Tom Walker (AKA Sandwichman):

Abstract: Even as the first warning signs of the global credit crisis were emerging in 2008, the IMF published a working paper that sought to analyze the youth employment effects of early retirement schemes in Belgium but ignored the historical context of those policies as part of the response to an earlier crisis – the "steel crisis" of the 1970s and 80s. Instead, the authors dwelt on a dubious but well-worn fallacy claim that advocates of early retirement policies believe there is a "fixed amount of work to be done", a "lump of labor." In the context of the astonishing history of the fallacy claim, what might seem a questionable paradigm choice for the paper's authors constitutes an inexcusable ethical lapse for the economics profession. Not only is the fallacy claim notoriously unsubstantiated, it originated as a propagandist's forgery and gained currency as a viciously partisan polemic against trade unions. Subsequent textbook versions of the fallacy claim may have toned down the vitriolic rhetoric but their ad hoc rationalizations neglect to offer any substitute for the original's fabricated evidence for the alleged belief. Financial credit depends on trust and today that foundation of trust extends to the scientific knowledge and technical analysis of experts. What does the enduring credulity of economists toward a demonstrably counterfeit fallacy claim suggest about the prospects for the economics profession to confront and remedy its ethical failures?

Meanwhile, the Sandwichman has compiled a list of economists, journalists and a few politicians over the past decade or so who have invoked the fraudulent fallacy claim, either in unvarnished credulity or with malice aforethought:

Peter Antonioni, David Autor, Ryan Avent, Martin Neil Baily, James Banks, Bruce Bartlett, Andrew Biggs, Matthew Bishop, Olivier Blanchard, Walter Block, Richard Blundell, Tito Boeri, Axel Börsch-Supan, Antoine Bozio, Samuel Brittan, Michael Burda, Pierre Cahuc, Laura Carstensen, Philip Coggan, Peter Coy, Diane Coyle, Andrew Coyne, Bruno Crepon, Clive Crook, Ed Crooks, Michael Cuneo, Reginald Dale, Jaap de Koning, Klaas de Vos, Werner Eichhorst, Carl Emmerson, Marcello Estevão, Sean Flynn, Thomas Friedman, Ed Glaeser, Robert Gordon, Jonathan Grubel, Matthew Hancock, Alister Heath, Ruth Hubbard, Jennifer Hunt, Will Hutton, Richard Jackman, Juan Jimeno, Alain Jousten, Adriaan Kalwij, Arie Kapteyn, Laurence Katz, Joshua Katz, Achim Kemmerling, Jacob Funk Kirkegaard, Dylan Kissane, Francis Kramarz, Paul Krugman, Simon Kuper, Jason Kuznicki, Oliver Landmann, Richard Layard, Ruth Lea, Mathieu Lefebvre, Melanie Luhrmann, Landis Mackellar, John Macnicol, Bill McBride, Francois Melese, Giles Merritt, John Micklethwait, Kevin Milligan, Jack Mintz, Casey Mulligan, John Munro, Stephen Nickell, Kristian Niemetz, Gilles Paquet, Jamie Peck, Sergio Perlman, Pierre Pestieau, Christopher Rhoads, Matt Ridley, Nick Rowe, Filipa Sá, Gilles Saint-Paul, Xavier Sala-i-Martin, Thorsten Schank, Amity Shlaes, John Shoven, Robert Simmons, Hans-Werner Sinn, Dennis Snower, Guy Standing, Nigel Stanley, Will Straw, Timothy Taylor, Marian Tupy, Ernst van Koesveld, Matthias Weiss, Niels Westergaard-Nielsen, Alan Wheatley, Charles Wheelan, David Willetts, David Wise, Tim Worstall, Asghar Zaidi, Jeffrey Zax, Klaus Zimmermann, Andre Zylberberg

He who gives credit to the calumny before he has investigated the truth is equally implicated. -- Herodotus

More on Mankiw’s Defense of the Carried Interest Loophole

My take on what Greg wrote is here. It seems Alec MacGillis made the same point much more forcefully finishing with this gem:

If Mankiw is so bothered by the carpenter’s fate after the closing of the carried interest loophole, then he should be pushing for the equalization of the tax rate for investments and earned income.

But Alec does one better by finding a 2007 Mankiw oped that advocated closing this loophole. But give Greg a break as he is advising someone who flip flops on just about everything!

Macro and Micro: The Case of Balance Sheet Recessions

To continue some random thoughts about the role of microeconomics in macro, consider the notion of a balance sheet recession.  Like most others who came to see this as an essential ingredient of the current crisis, my route was via the financial balances framework—for instance, the Wynne Godley version.  I saw the problem in aggregate/net terms: the US household sector in the mid 00's was running up unsustainable debt loads, especially through the medium of the housing bubble.

This is a purely macroeconomic perspective, and one can go a long way with it.  Nevertheless, one can go even further by filling out some of the microeconomic aspects.

One that has attracted a lot of attention is the role of inequality between households.  This takes us from net to gross balances: the accumulation of large debts among some households adds fragility and eventually drag to the system notwithstanding the net wealth accumulation of other households.  The inequality/debt nexus has been examined at a purely macro level, but to dig further we would need to disentangle the threads: which households in particular are going into hock, what motivates them to do this, how are collateral constraints imposed or lifted, etc.  Even with statistical controls, aggregate analysis can only point to association, not causal pathways.

But there are other micro aspects to household balances that are worth exploring.  Some that occur to me are:

1. How can we call the turn?  Through what channels do debtors come to revise downward or upward their reference point for when debt is “too much”?  Most debtors, after all, do not experience default.  What persuades them to shift from debt accumulation to deleveraging?  And what persuades them that they have paid down enough debt and can begin borrowing again?

2. Related to the first question, is the tendency toward overshooting symmetrical?  That is, we know debtors tend to overshoot on the way up, leading to the fabled Wiley Coyote moment.  Is there also a tendency to pay down beyond the level needed for debt sustainability?  If so, there might be interventions that could moderate the contractionary impetus of balance sheet recessions without impinging on needed adjustment.

3. For policy purposes, and here we enter the realm of the Lucas Critique, we should want to know the extent to which household perceptions of actual and desired leverage are intertemporal: do people think about their financial situation only in its immediate state, or do they incorporate some notion of permanent income?  If the latter, do temporary fiscal infusions provide less perceived balance sheet relief than the raw numbers would suggest?  Are these effects of different magnitude for different households?  Note that these questions are entirely empirical and can’t be addressed through armchair speculation, no matter how many clever wrinkles one adds to a textbook intertemporal optimization model.

What I hope this example demonstrates is that it is possible to see a large role for microeconomic research in macroeconomics without making metaphysical claims about foundations or demanding ritual obeisance to general equilibrium.  In fact, freeing macro from these constraints is also freeing micro.

Can You Say Sonnenschein?......I knew you could

What bothers me about the current discussion on the relative merits of micro-founded versus non-micro-founded macro is the crazy idea that RBC/DSGE models are micro-founded. These are representative agent models, people! They are micro-founded models of a macroeconomy consisting of one agent, and so we should by all means use them whenever we come across such an economy, and good luck with that. Unfortunately, the macroeconomy we'd like to understand has many agents. And any attempt to apply general equilibrium analysis to such an economy is faced with an insurmountable problem. Hugo Sonnenshein showed conclusively that aggregate excess demand functions, aggregated from "well-behaved" individual excess demand functions, can behave any way you like - arbitrarily. Just sayin'.

The Real Problem with Microfoundations

Suppose you lived in a world in which there were two branches of economics, micro and macro.  Microeconomics in this world is rigorous, precise, honed over many decades of increasingly sophisticated analysis, and confirmed in almost every empirical test.  It is axiomatic, its propositions invested with mathematic certainty.  It has proved its worth in one application after another.  Macroeconomics, alas, is everything micro isn’t.  The axiomatic structure is missing; much theoretical work is essentially ad hoc.  Data are thinner and models are at risk of failing the first out-of-sample challenge.  Even outright embarrassment is a continuing problem: leading macroeconomists often make predictions that are not simply wrong, but profoundly, cosmically wrong.  It’s a crap shoot.

If this were your world, wouldn’t you want to base your macro on micro to the fullest possible extent?  Bend and squeeze the good, rigorous stuff as far as you can, so you could minimize the use of the dubious macro ad hocery?

I think something like this is in the back of the minds of most macroeconomists.  Optimization models, general equilibrium----these are things we know to be right and true, so the more we can use them to generate macro models, the more solid our ground.  Arguments with more apparent technical content that are sometimes trotted out don’t really change the situation.  Take the Lucas Critique: we need to take into account how people’s behavioral patterns will change in response to changes in policy.  This is certainly true, but it is another matter entirely to put your faith in models of optimizing individuals (or clone armies) as the vehicle for understanding behavioral shifts.  Whatever the purpose, If I believed in micro they way most economists do, I would be for microfoundations too.

Here’s the rub, though: micro is just as squishy, in its own way, as macro.  The axiomatic architecture has nothing to do with science, elegant as it may appear to those who have devoted years of their life to mastering it.  Yes, micro is absolutely internally consistent.  So what?

Optimization is a formal technique, something you can do with a sufficiently specified utility mapping and choice set, but it is not descriptive of the actual behavior of individuals or organizations.  Equilibrium can be identified in models constructed by economists, but there are few real-world markets in which stationarity is observed for very long.  (Disequilibrium dynamics are observed, but adjustment is the ill-behaved child of microeconomics, the one who smashes the furniture and is sent to bed early so that proper equilibrium conditions can hold forth.)  General equilibrium theory in particular is a dead-end project, useful only for establishing the myriad ways real world economies are incapable of achieving such timeless bliss.  Their welfare properties do not even hold asymptotically: getting closer to a an equilibrium state (achieving equimarginal conditions in more markets) does not guarantee Pareto superiority over positions further away.  And of course, the convenient construct of a representative agent has no justification whatsoever in microeconomic analysis.

Textbook micro should not be a basis for pre-certifying real micro modeling and empirical work, much less macro.  In fact, economics does not offer any specifically “scientific” concept or method around which we should be compelled to standardize, which leaves us with no substitute for thinking through every significant problem from the ground up.  Consider this not a loss but a gain.  With less a priori baggage, macroeconomics might develop the habit of pruning in the face of disconfirmation, treating Type I error with the seriousness real scientific work demands.  Hell, there can even be lots of serviceable micro within macro, but it will be empirically grounded and institutionally specific—finance, corporate investment, markets in real estate and consumer durables, stuff like that, populated by humans and not rational cyborgs.

A Weak Defense of a Low Tax Rate on Carried Interest

Mark Thoma links to two articles that should be read at the same time. First up is Greg Mankiw:

WHAT is carried interest? And why does it get the tax treatment it does? … If we are going to tax capital gains at a lower rate, one question necessarily arises: What is a capital gain, and how can we distinguish it from ordinary income? The answer seems simple. If you have a job, the money you are paid for your work is ordinary income. If you buy an asset at one time and sell it later for a higher price, the profit you made from holding it is a capital gain. But is it really that easy? Consider five examples, and see if you can identify what is ordinary income and what is a capital gain:

His fourth example was:

Dan is a real estate investor and a carpenter, but he is short of capital. He approaches his friend, Ms. Moneybags, and they become partners. Together, they buy a dilapidated house for $800,000 and sell it later for $1 million. She puts up the money, and he spends his weekends fixing up the house. They divide the $200,000 profit equally.

In his defense of the current treatment of carried interest, he writes:

This brings us to Dan and his partnership with Ms. Moneybags. The tax law treats this partnership as exactly equivalent to Carl’s situation. In this case, however, the $200,000 capital gain is divided into halves: some of it goes to Ms. Moneybags, who provided the cash, and some goes to Dan, who provided the sweat equity. Once again, nothing is treated as ordinary income. In some ways, this treatment makes sense. After all, Dan is doing half of what Carl did, so why should he have to pay a higher tax rate than Carl did on that half of his income?

As I read this question, my first thought was – maybe we should raise the tax rate on capital income to equal the tax rate on ordinary income. David Cay Johnston provides an interesting discussion of whether the proposed reduction in the corporate profit tax rates is really a reduction in the taxation of capital income or is indirectly a reduction in the tax burden on wages with this gem:

On the face of it, the AEI argument suggests workers should be joining the calls for Congress to cut corporate income tax rates. But, if the argument is correct, then workers should also be calling for cuts in their own income taxes and an end to reduced rates on dividends and capital gains.

EXACTLY!

Ongoing Confused US Discussion Of Internal Iranian Politics

Tomorrow is the Iranian parliamentary election that I have suggested might lead to lowering of tensions with possible renewed talks on the nuclear issue and a possible drop in the price of oil. Maybe, but before the election I want to note how garbled and misleading discussion in the US media of internal Iranian politics is and has been pretty much consistently. This generally arises from a combination of ignorance and a desire to have simple stories told about good guys vs bad guys. This has been going on basically since 1979.

So, the discussion has always been put in terms of "moderates," supposedly the good guys likelier to be more amenable to US policy interests, and "hardliners," supposedly the bad guys less likely to be so. In the years immediately following 1979, the focus seemed to be on economic policy attitudes. So, the "moderates" were the supposedly more pro-free market types while the "hardliners" were the supposedly more socialist types. Funny thing was that for what probably mattered in terms of attitudes to the US, the free market types based in the bazaars were much more hardline on theological issues compared to the socialists. Indeed, when the social reforming Khatami was surprisingly elected in 2001 over Rafsanjani, he brought back some of the pro-socialist types into economic policymaking over the more pro-free market types that the more socially and theologically conservative Rafsanjani had in place.

Now we come to today's discussion. One reads that the current race is between two sets of "arch-conservatives." However, one is viewed as more "moderate," the other less so. The supposedly more moderate group is led by President Ahmadinejad, whose supporters are currently a minority in the Majlis. The majority "hard(er)liners" are supposedly the supporters of Supreme Leader Khamene'i. Frankly, I think this is junk fed to dumb western media types by Ahmadinejad supporters.

After all, it is Ahmadinejad who is a Holocaust denier, not Khamene'i. The latter has called for the Israeli government to disappear, but he has never called for "eliminating Israel" as claimed by many commentators. Ahmadinejad is regularly identified as being more willing to negotiate with the US about nuclear weapons, but it is Khamene'i who has issued the fatwa against nuclear weapons.

We all worry that factions of the Revolutionary Guards are for nuclear weapons and that one of their hotheads will initiate an attack on US naval forces in the Persian Gulf. But it is Ahmadinejad who came out of the Revolutionary Guards, not Khamene'i, so frankly, this entire discussion has been an embarrassingly muddled mess.

Free Trade Ad Absurdam

The last thing a defender of free trade should want is to find herself on the same side as Jagdish Bhagwati.  Exactly because the arguments against laissez-faire on the international front are so strong, we need someone to remind us what is at risk when we mess with trade.  Too bad Bhagwati isn’t the guy.  In Defense of Globalization in particular was a big disappointment.  We tried using it in class to provide some friction to the alter-globalization voices, but students just tore it apart.

His latest screed in defense of trade orthodoxy comes on with the force of a handful of packing peanuts flung angrily into space.  Let’s look at his arguments.

“The first misconception is that exports create jobs, while imports do not....”  His rebuttal is that exporters often use imported parts, and shippers create jobs when they ship imports.  But what is the counterfactual here?  If he is opposing the idea that we should simply stop imports at the border and suffer without them, then he has a point.  His argument says nothing, however, against policies designed to replace imports with domestically produced products.  Moreover, it is absolutely the case that an import constitutes a leakage from a national macroeconomy, while an export constitutes an injection.  That’s not mercantilism, it’s basic accounting.

“Second, the credo “Trade, not aid” has given way to the mistaken belief that trade matters less than foreign assistance.”   Huh?  The problem with trying to manage trade flows is that it leads to an excess of foreign aid?  Where did he come up with this?  In reality, (1) rich countries have flagrantly failed to meet the aid targets enshrined in the Millennium Development Goals, and (2) it is the poorest countries, where current account deficits are structural and persistent, that the need for trade policy is most acute.  (Specifically, these countries need strategic investments, stakeholder-oriented pubic and private sector governance reforms and industrial policies to achieve external sustainability.)

“Third, many believe that manufactures deserve preferential support.”   Here Bhagwati makes the error of conflating a specific preference, for manufacturing, with a general preference for achieving approximate balance between imports and exports, whatever the sectors.  But let’s give him the benefit of assuming that a belief in the importance of manufacturing is more interventionist than, say, an exaggerated attachment to intellectual property protection.  What is his case against singling out manufacturing?  Simply that lots of famous people say you shouldn’t do this.  I’m not kidding: read the original.  There isn’t a single substantive point in his missive that considers the pro-manufacturing position and rebuts it.  Actually, manufacturing is important, not only for potentially high-productivity jobs but also for the kind of innovation that depends on bringing abstract ideas and hands-on skills together.  I’m writing this from Germany, and I can guarantee that preferential support for manufacturing is gospel over here, and that it works.

“Finally, the financial sector has come to be viewed as the bane of morality....The quasi-Marxist view that our morality stems from our economic position overlooks the moralizing role of family, religion, culture, and art.”  And now we get the ethical case: reject quasi-Marxism and pay no attention to the extraordinary concentration of wealth in a few hands.  In passing, we should note that he gets the Marx part absolutely backwards: Marx claimed repeatedly that ethical systems are relative to historical period and social position, and that one could not deduce the desirability of socialism from the ethical superiority of workers over capitalists.  (Granted, he did make lots of snide remarks about the rich, but he also spread his cynicism around to other classes.)  The main point, however, is that the ethics of plutocracy is almost orthogonal to debates over trade policy.  One can stuff finance back into a little box, with modest pay and privileges, and leave trade alone, or one can be a trade hawk and a finance dove.  This final argument isn’t an argument at all.

Face it, Bhagwati isn’t even listening.  He has no idea what the arguments are of those who worry about trade and social standards, or trade and ecological sustainability, or trade imbalances, inequality and the volatility of global finance.  He has written many clever papers based on a set of implausible assumptions (like trade always balancing at the margin), and he has no clue how to respond to those who question those assumptions.  My students, who think his priors are bonkers, found only incoherent bluster.