Groundbreaking Work in the Field of Economics (That We’d Basically Already Figured Out)

Another addition , this time on the part of the OECD, to the growing body of economics literature on income and wealth inequality here attempts to highlight a causal relationship between inequality and a reduction in economic growth, particularly in long-term economic growth potential. For those readers not particularly interested in reading a 65-page economics paper, here is the key point the paper makes:

Drawing on harmonised data covering the OECD countries over the past 30 years, the econometric analysis suggests that income inequality has a negative and statistically significant impact on subsequent growth. In particular, what matters most is the gap between low income households and the rest of the population…It follows that policies to reduce income inequalities should not only be pursued to improve social outcomes but also to sustain long-term growth

None of this is surprising to me, nor, I should expect, would it be surprising to many of my readers. In fact, I believe I have made a similar point in prior posts, albeit not backed up with any sort of data whatsoever. Simply because it is intuitive and sensible, however, does not make it trivial. The impact of inequality on growth is a question that has been plaguing economics for years, and the relative paucity of income inequality research (relative to other questions in economics) has prevented a decent answer to this question from emerging. Given the recent trend toward empiricism in economics, this paper (and, indeed, others like it) could prove to be definitive, not only in allow economics to take a stand on the issue of income inequality, but to pay the necessary attention to it in the first place.

Of more practical relevance to the general public, however, is that findings such as these could help create an ideological alliance of convenience. Economists pride themselves on their non-partisanship (a suspect claim), but it is difficult to argue non-partisanship in a field that has effectively ignored questions of income distribution, despite being by far the most equipped to tackle these questions. You can hardly blame them- one could argue that it is not strictly possible to be non-partisan at all, as people are all subject to prior beliefs regarding fairness, justice and morality.

Ideology (or, at least, the Western conception of ideology) has tended to pit growth vs equality, long before any relationship between the two was clarified or even studied. The study above may indeed be a first step to breaking that false dichotomy. We will never turn socialists into growth hawks or capitalists into bleeding hearts, but we may approach a grudging consensus in which we all accept that economies require some base level of equality in order to grow. Holders of capital are also often holders of power, and holders of capital tend to put stock in what the economic consensus has to say. As such, it is crucial to expand and strengthen this consensus so that we may have a shot at reversing (or at least reducing) the trend in which Western economies have headed.


Why Doesn’t Anything Make Sense Anymore?

Often, we tend to forget that oil supply, and hence oil prices, are heavily influenced by cartels and political pressures as much (if not more so) than they are by the whims of commodity markets. The recent dip (or crash, depending on your degree of sensationalism) in oil prices seems to be an excellent example of the interconnectedness of global politics and economics, as well as the complexity of the political situation in the early 21st-century. It seems increasingly clear that the us vs. them mentality that got us through World War II and the Cold War no longer suffices, and that the survival of any one nation on the global arena depends on its ability to navigate the increasingly complex network of relations being built.

The consensus view on the recent oil price shock seems to be that it’s primarily the cause of Saudi Arabian manipulation. Specifically, the aim of this manipulation seems to be two-fold. Firstly, it is an attempt to control the effects of the shale oil boom that North Dakota is currently undergoing. It’s fundamentally a question of price elasticity of supply- Saudi Arabia knows that it has more than enough oil such that a downward shift in price will not hugely impact its coffers. The amount of extant shale oil, however, is much lower, and a price shift could affect not only shale oil revenue, but also investment in the booming shale oil industry. This apparent Saudi hostility to US interests is not new- the relationship between the Saudis and the US has always been a rather vitriolic alliance of convenience, at best; simmering hostility at worst.

The second goal of this price manipulations seems to be targeted toward Russia and Iran who, as large oil producers, effectively depend of oil revenues for balanced budgets and (broadly) functioning economies. Russia and Iran’s fingers in Syria, specifically their support for the regime of Bashar al-Assad, are a threat to the Saudi’s regional dominance, and weakening these two states may well serve as a decisive shift in the conflict. This move, coming several months into a Western effort to stop the spread of ISIS, also lends some credence toward the “the Saudis are totally funding ISIS,” which has as yet gone “unproven.”

It’s fairly clear that the aim of the Saudis is a bipartite destabilization- finding the one political move they can make which would help to weaken both their neighbors to the North and their frienemies to the West. I have long been a critic of Saudi foreign policy- they have historically shown themselves to be far too willing to shake with one hand and backstab with the other. As such, the only sensible course of action given the Saudi’s latest move is to ensure that their plan backfires. Otherwise, the terrorists, quite literally, win.

The perennially unstable three-bloc system that pits the West against Russia-China-Iran against the Sunnis Middle East is inefficient, given that two of these blocs depend on the other for their energy needs, their budgetary health and their economic competitiveness. Similarly, although the Western bloc and the Russian bloc may differ in ideology, neither bloc would be opposed to a serious reigning-in of Islamic fervor around the world. Finally, while the current set up does not provide a sufficient bulwark against the rising tide of Islamism, the combined might of four of the world’s military forces might just do the job.

The problem here is that we’ve already gone down the rabbit hole far enough that the only way out, even if temporarily, is ratcheting up brinksmanship. I am fully aware that the suggestion I gave in the above paragraph is no solution at all. Fortunately, there is a genuine solution to this issue that is technically possible- to relegate energy policy to an independent, non-sovereign, international body- much as was attempted with capital policy as a result of Bretton Woods. Unfortunately, this solution is unlikely to be enacted until we’ve gone too far- human beings have a sad tendency not to see the writing on the wall. Even more unfortunately, this solution is far from perfect- nothing says “potential corruption” like “independent international body.”

Regardless of where we end up, it’s clear that “us vs them” is dead, buried and consummately rotting.

We’re All Friedmanites Now, IV (But for How Long?)

In the last three posts, I attempted to cover various issues related to the rightward shift in America’s economic policy- its history, its context and its effects. In the (thankfully) final chapter of whatever this is, I would like to offer some potential solutions (and, indeed, problem with those solutions) to the issue.

A big part of this issue is how economics is taught. As excited as I am to discuss economic pedagogy, I think doing so would run the risk of alienating my, like, seven regular readers. As such, I’ll touch upon them quickly and then move on to more prosaic concerns. Firstly, the focus on rational self-interest, I believe, has run its course. There needs to be a bigger focus on alternative decision-making in the economics curriculum. This should comprise not only a focus on behavioral economics, but also the role played by uncertainty, as well as the institutional, social and political context in which we make economic decisions. Secondly, there needs to be a debate on where the political center of mainstream economics lies. Clearly, Edward Prescott and Joseph Stiglitz cannot both claim to be dispassionate researchers despite their vastly different policy conclusions (I say this with a tremendous respect for Dr Stiglitz’s work.) Economists must either play a genuinely non-ideological position (difficult-to-impossible, given the inherently political character of our work), or be more forthright about their policy convictions (which everyone can pretty much tell anyway if they can read between the lines.) Similarly, adherence to particular economic schools needs to be toned down, and ideas should flow across these largely artificial boundaries more freely. Finally, the focus on static analysis- that is- analysis frozen in time must give way to more dynamic analysis. Static analysis need not be overthrown, as it provides a solid framework for analysis. But increasingly powerful computational tools for dynamic analysis are available every day, and we should avail ourselves of them. Agent-based computational economics is a very good start.

We cannot deny that a substantive political debate on inequality has begun. A very telling example of this debate is the speech Federal Reserve chairperson Dr Janet Yellen made a few days ago. Ten- even five years ago- we would have thought it a cold day in Hell when a nominally apolitical Fed chair would throw down a list of “center-left” talking points on the issue of inequality. It’s a testament to the gravity of the situation, and I would argue that characterizing these opinions (read: facts) as politically biased is unfair, given that these opinions (read: facts) are, in fact, facts. Dr Yellen (for whom I have tremendous respect, as she has broadly resisted the rightward drift in economics, actually takes non-mainstream approaches to economics seriously, and has broken into the upper-levels of the boys’ club) is actually the unbiased one- former Fed chairs, such as the ex-Ayn Rand associate Alan Greenspan are the partisans.

But the fact remains: Dr Yellen is a Fed chair, and while having a leader in the field of economics raise the issue is vital, there’s a limited amount monetary policy can do to alleviate inequality. Sure, a pro-growth monetary policy can help increase the size of the pie, which could then be distributed downward. But with today’s fiscal and incomes policies, that’s simply not a possibility. Clearly then, the solution is in fiscal and incomes policy. There are a few options, among others: a minimum wage hike, an expansion of the EITC, a wealth tax (i.e., a tax on assets), more progressive income taxation, increased education spending combined with an education policy overhaul. Of these options, the first two are politically viable in the immediate and the last one is politically viable only if the debt issue is solved (or people, rightly, start caring less about it). It seems hugely unlikely, however, that tax policies- the most powerful tool on the list- will be changed any time soon. This is a catch-22: political power is disproportionate because of inequality, and putting a big dent in inequality is difficult because of disproportionate political power.

Fortunately, the minimum wage debate is making gains in the political sphere. While it still has its discontents, some of America’s more progressive cities have already started the process of raising the minimum wage, and not before its time. Frankly, I believe that once we see that the effects of the minimum wage hike are slim-to-none, it’s only a matter of time before other cities, states and finally the federal government begin adopting better minimum wage policies. An even more viable option is expanding the EITC- as it is a targeted program that, theoretically, bears less influence on employment, there is a great deal of bipartisan agreement that it is a good framework for poverty alleviation. There seems to be a debate on whether to expand on EITC or raise the minimum wage- I see no reason why we cannot and should not do both.

Education is of key importance to the debate. Job market competitiveness requires more education as economies develop, and it should be intuitive to any reader that a more skilled workforce benefits from (and can create) greater opportunities. However, a feedback loop exists in education systems- greater income inequality reduces the quality of schooling in poorer areas, and poorer schools provide fewer opportunities for students. The skyrocketing costs of higher education (again, a function of the unique market power universities- especially private ones- hold) prevent decent skills training for those who need it most. There are two pressing concerns within the education debate, though- the first being that any decision to increase education spending and overhaul the school system will hit a debt roadblock. Debt is not actually all that important , but so long as we are convinced it is, we’re unlikely to see gains in this area. Secondly, a great number of highly educated people are still un- or under-employed. Education works, time and time again, but it is still not a panacea. A combination of growth, redistribution and education is required to affect a genuine shift in public well-being.

In light to the difficulty of solving the inequality issue, I have yet to believe we’re so far down the road that we should abandon all hope or start listening to Russell Brand. The least we can do is stay attuned of these issues, exercise what democratic rights we have left, and keep pushing for reform wherever we can. Perhaps a silver lining of politics not being all that polarized is that we’re all in the same boat- the same dingy, increasingly water-logged boat- together. We can use that. There are policy solutions available, but none of them will be all that useful if We don’t give a shit.

We’re All Friedmanites Now, III (or, the Putsch that Wasn’t)

“That [traditional economic theory] reached conclusions quite different from what the ordinary uninstructed person would expect, added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and consistent logical superstructure, gave it beauty. That it could explain much social injustice and apparently cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority.”

– J M Keynes

In the previous two posts, I described the general rightward drift in economic policy and its resultant effect on political and social values. In this post, I would like to sum up just how things ended up the way they did.

The above quote summarizes the overwhelming power that traditional economic theories hold on policy makers, economists and society at large. These theories afford a certain convenience and Candidian optimism to those concerned with these issues. To doubt these conclusions was not only to be unscientific, but also to be a depressive doubting Thomas in the face of general optimism. In fact, it was partly a result of a generally depressive attitude toward mainstream economic theory during the Great Depression that allowed Keynesian ideas of public expenditure, progressive taxation, research spending, social safety nets and moderate regulation to take hold to the extent they did. In addition, a persistent sense of competition between the Allies and the Axis, and later the West and the Soviet bloc, lent a sense of urgency to equitable, socially and democratically acceptable economic policies. Some economists would argue that Keynesianism helped save capitalism. I would agree, with the added conjecture that it did so by making capitalism resemble socialism.

So, if these policies were so vital in maintaining stability and growth across the Western world, how did they come to be unseated with such force? The traditional story, often repeated in economics textbooks, claims that it was the combined economic stagnation and inflation of the 1970s (often termed stagflation) that caused these policies to be overthrown. Critics of Keynesianism such as James Buchanan and Robert Lucas claimed that Keynesian theory, which deals with economic variables in aggregate, “lacked microfoundations,” i.e., were inconsistent with the principle of rational, individual self-interest on which mainstream microeconomic theory is based.

This story would be more credible if there were not strong evidence that certain economists and policy makers were beating against the door of Keynesian theory, basically from the day the post-war Keynesian consensus was established. In 1947, a group of free market economists and policy makers founded the Mont Pelerin Society– a society dedicated to the maintenance of “freedom,” and resistance against the creep of “totalitarianism.” The cast list of the Mont Pelerin Society is an interesting one, it has included members such as Friedrich Hayek (Keynes’ chief intellectual rival), Ludwig von Mises, Milton Friedman, Chicago School economists Ronald Coase, James Buchanan and Gary Becker (the founders of rational choice theory– the idea that not only are economic actors all rationally self-interested, but also that this assumption on the human psyche can be applied to decision making in all spheres of human endeavor.) The society included a Chancellor of West Germany, a President of Italy, several Pulitzer Prize-winning journalists, and 22 of Ronald Reagan’s 67 economic advisors.

The stated purpose of the society being what it was, combined with the not insignificant wealth and influence of its members certainly raises some questions as to whether it was a simple set of concurrent economic problems which brought the greatest period of stability, growth and development the Western world had yet seen to an end. The development of neat, internally consistent theories like rational choice held the same scientific appeal that Keynes attributed to mainstream economic theory. Not surprising, as it consisted of little more than applying these ideas to a broader sphere. The ease with which these ideas can be spread when its pioneers play the role of educators and policy advisors can greatly speed up their acceptance. The sheer amount of social power that the Mont Pelerin Society and its political allies held ensured that these ideas could be enforced. All they needed was a convenient excuse, and, with stagflation, they got it. (Never mind that the stagnation was little more than a typical, if somewhat prolonged recession, and the inflation was largely caused by fiscal pressure from the Vietnam War and oil price hikes.)

The most devious trick of the Mont Pelerin Gang was convincing several generations of budding economists that their obvious putsch was not a putsch at all, simply by throwing a few graphs and a couple of sentences of text into the textbook. Keynes had rightly noted the role of power and wealth in maintaining theories. In a sense, he had made one of the few accurate predictions any economist has ever made, and with it, signed his own death warrant.

In the next and final post, I will discuss what, if anything, can be done to get us out of this hole.

We’re All Friedmanites Now, II (or, Ayn Rand was a Nazi)

In the previous post, I focused on how the rightward drift in America’s political economy has led to a political polarization that is more imaginary than we care to admit. In this post, I want to focus on how economic conservatism is secretly turning us all into social conservatives.

As much as it pains me to admit this, I had a libertarian phase. It was 2006. Unemployment was low and the stock market was hitting new peaks every day. A little knowledge is a dangerous thing, and I had not yet studied enough economics to realize that many assumptions on which “market fundamentalism” was based were empirically unfounded. I am and have always been convinced that social liberalism is sensible, if only for the fact that, in a broadly democratic society, socially liberal views keep a person more or less on the good side of history. But insufficient study of undergraduate economics had put my fiscal/economic views on shakier footing.

Like many libertarians, I was content with separating my economic views and my social views. In fact, the two-axis model of political categorization was pioneered by David Nolan (a founder of the Libertarian Party) and distributed by Advocates for Self-Government, a noted libertarian advocacy group. If you ask me, this form of categorization is a convenient model to allow libertarians to look like they’re not actually conservatives, and thus win adherents who would ordinarily write them off. This plan seems to have worked. Unfortunately, economic concerns cannot be teased away from broader political concerns quite so easily. Economics and politics are inherently interlinked- no economic structures or organizations can exist without a political/institutional basis to house them. This has been the view of countless economists throughout history. With a more substantive view of the political economy, it is difficult to categorize libertarians as anything other than conservative advocates of that status quo.

One could broadly claim that the libertarian focus on the market forces them to neglect issues like poverty and social inequality which disproportionately affect the working classes, thus causing systematic intolerance toward a large sector of society. Similarly, there is overwhelming evidence, perhaps best presented in the Price of Inequality and Capital in the 21st Century by Joseph Stiglitz and Thomas Piketty respectively, that growth in capital markets almost always favors the holders of capital, causing wealth concentration, which can cause disproportionate political power and democratic deficits in the absence of sufficient campaign finance laws. For me, these two points are enough to characterize economic conservatism as inherently socially conservative, but these are broad judgments, and it would help to consider a few concrete examples.

Libertarians are opposed to gender-based equal wage laws on principle. Their defense for this (which tends to be their defense for any of their views) rests on the fact that such equal wage laws constitute an unwanted intrusion into the free market. Similarly, libertarians are philosophically opposed to anti-discriminatory laws in hiring because (you guessed it) they constitute an unwanted intrusion into the free market. But, in any free market, an economic actor is just that- an economic actor and nothing else. No non-economic aspect of their personality should come into play, and their wage should be determined only by market forces. So, clearly, whatever is keeping ethnic minorities out of jobs, or female wages below male wages, is actually a reflection of some sort of institutional status quo. It could even be argued that these institutional realities might themselves constitute an intrusion on the market which prevents people from being paid their market wage. As such, libertarians use the free market defense to maintain an inequitable and inefficient, culturally-based status quo. Does that sound like social liberalism?

Living as we are in a Friedmanite America, progressives can alleviate their guilt by rightfully supporting such socially liberal causes as racial equality, environmentalism or LGBT rights. But economic and social views are not as easily separable as we like to think. As long as we continue to ignore the systematic economic issues our country faces- persistent unemployment, inequality of opportunity, poor public transport provisions and systematic exclusion (among others)- many of which disproportionately affect the working class, we will continue our lurch toward an oligarchical, quasi-fascistic economic and social organization.

For the record, my libertarian phase ended when I read The Great Transformation by Karl Polanyi, which you all should too, especially as it’s freely available online.

In the next post, I’ll try to discuss just why things turned out the way they did.

We’re All Friedmanites Now I, (or, Polar Opposites?)

The other day I came across this article which makes the claim that America is now more divided politically than it is than it ever has been, and that political divisions now outweigh racial and religious divisions in American society. Although I do see clear signs of political segregation every day (it’s difficult for me to claim, for example, that I have a large number of friends who disagree with me politically- I live in New York), I am skeptical of the fact that these political divisions might now outweigh deep-seated racial divides in America. But that’s not strictly the point of this post. Rather, I would like to address the fact that this and other studies of political polarization ignore the shifting meanings of liberal and conservative in America over the past 30 years.

Several other studies seem to confirm my suspicions that these divisions are chiefly driven by the rightward shift of the Republican Party and other conservatives. We see a small but vocal number of Republicans embracing or at least espousing the hard-right ideals of Ayn Rand. Such beliefs would have been unthinkable in serious politics in the 70s. Can this be chalked up purely to the fact that the right-wing has become more right-wing? Unlikely. I would argue that, at least in regard to economic and fiscal issues, Americans, left or right, have drifted to the right.

In 1969, Nixon famously embodied the economic spirit of the times by declaring “we are all Keynesians now.” This was an era where Republican Presidents like Eisenhower spearheaded massive public works programs (such as the interstate system), levied 92% upper income tax rates and railed against the military-industrial complex. We can’t forget that programs such as the Department of Environment Protection and OSHA were set up by Nixon. Economists now considered unabashedly liberal, such as Paul Samuelson, Arthur Okun and Robert Solow were considered centrist technocrats perfectly suitable to advise politicians of both parties. As mentioned in Thomas Piketty’s Capital in the 21st Century, income inequality was considered a blight, inherently anti-American, and was kept low through policies that most voters saw as necessary.

By 2001, economist Larry Summers, equally embodying the spirit of his time, declared “we are all Friedmanites now.” By the end of Clinton’s terms in office, financial, communications and transportation markets had all been deregulated. The top tier tax rate had been reduced to 35%. Many of the Great Society reforms had been gutted. Labor unions were a bare shell of what they once were. Income inequality went from being unmentionable because it was anti-American to being unmentionable because denying it was anti-American. Much of the national welfare system had been peeled back, having been replaced with workfare programs by that great liberal leader, Clinton.

Many would argue that these economic reforms “worked.” Yes, they did increase economic growth after the malaise of the 70s. How could they not? All of a sudden, there were new markets investors could pour money into. The removal of regulations in financial markets allowed for the development of new financial instruments, opening up whole new markets which didn’t exist before. All of this would naturally lead to economic growth. But accompanying this economic growth was a consistent rise in productivity accompanied by no gains in the real wage, a meteoric rise in income inequality, and a persistent over-financialization of the economy which now means that the well-being of the average American is held hostage by the whims of financial markets.

We see egghead academics and liberal NPR columnists discussing these issues in the news every day, but when figures like Paul Krugman and Joseph Stiglitz bring them up, they’re labelled as shrill, unrealistic nerds. When politicians like Elizabeth Warren and Bernie Sanders raise these issues on the floor, they’re accused of trying to turn America into France. Fringe though they may be, no one seems to question Rand Paul or Paul Ryan’s commitment to America in the same way, and the ability of the Tea Party to hold mainstream Republicans hostage cannot be replicated by the handful of Northeastern social democrats peppered throughout both houses of Congress.

All of these facts raise some questions: how polarized are we really? Is polarization really a concern if we’re all concentrated around an increasingly narrow political mainstream in which political leanings are basically defined by ones views on a handful of social issues?

I thought I could summarize my thoughts on this topic in a few paragraph, but it’s looking like this post will have to be continued.

Congratulations, Dr Tirole

It was announced today that Jean Tirole, an economist known for his pioneering work on market power imbalances and regulation, has been awarded this year’s Nobel in economics. Tirole’s work is indeed ground-breaking and hugely useful, given the fact that market power and regulation remains insufficiently studied in mainstream economics literature. As such, his Nobel victory is refreshing, and very much deserved. Unfortunately, those who deserve Nobels don’t always get them. The awarding of the Nobel to a market power scholar brings to mind the second greatest travesty in Nobel history- the refusal to accept Dr Joan Robinson into the Nobel fold. (The biggest travesty, of course, is the fact that the Nobel was denied to Rosalind Franklin and awarded instead to Francis Crick.)

Robinson was a ceaselessly brilliant scholar and a pioneer in a wide range of sub-fields within economics. In fact, I doubt Tirole’s work would have been possible without Robinson’s The Economics of Imperfect Competition, which not only introduced the first theoretical framework for studies of market power, but also attempted to answer the question of male-female wage differences, an issue which remains of paramount importance today.

Robinson authored one of the first growth theories- years before Roy Harrod, Evsey Domar or Robert Solow attempted the same. Her growth theory featured income distribution as a central player, an aspect of economics which we may only be clawing back toward in a post-Piketty world. Perhaps most impressively, she codified the field of development economics as we know it. Robinson was as accomplished a mathematical economist as she was an economic historian and philosopher, and her work on the role of ideology in economics remains unparalleled (too bad it bit her on the ass, Nobel-wise) Clearly, we have a stronger need for a revival of Robinson’s ideas now than ever.

In spite of reams of Nobel quality work, Robinson was denied the prize, and her name remains little more than a footnote, at best, even in graduate level economics literature. It did not help her case that she followed a left-wing interpretation of Keynesian economics and pursued friendships and collaborations with noted members of the Communist Party. Much like Franklin, perhaps the biggest strike against her was the possession of an inconvenient set of genitals, especially in a field which beats out even the hard sciences in “boy’s club” tendencies.

Clearly, for all their claims to be dispassionate, the Nobel committee still falls prey to certain biases. Conferring the prize on Robert Shiller and Eugene Fama, or Gunnar Myrdal and Friedrich Hayek, in the same year is a good start, but systematically denying others is unacceptable.

We cannot bring Robinson back to life to correct this imbalance. But perhaps working economists can reappraisal her work, expand on it, and save it from the brink. And we can only hope that ideologically or genitally “inconvenient” but deserving researchers like Esther Duflo and Thomas Piketty will not be unfairly denied the Prize when the time comes.