It's the Austerity, Stupid: How We Were Sold an Economy-Killing Lie .. the first bit outed again ..
Once again, the Beltway fell for cherry-picked data—and you paid the price.
—By Kevin Drum | September/October 2013 Issue
Uncle Sam being squeezed by a belt Illustration by Zohar Lazar
It was the Excel error heard round the world.
In January 2010, as the global economy was slowly beginning to claw its way out of the depths of the Great Recession, the Harvard economists Carmen Reinhart and Ken Rogoff published a short paper with a grim message .. http://www.nber.org/papers/w15639.pdf?new_window=1 : Too much debt kills economic growth. They had compiled a comprehensive database of debt episodes throughout the 20th century, and their data told an unmistakable story: Time and again, countries that rack up high debt levels have gone on to suffer years—sometimes decades—of stagnation.
As economics studies go, it was nothing short of a bombshell. As its conclusions were invoked from Washington to Brussels, tackling the recession suddenly became less important than tackling deficits. For the next three years, stimulus was out, austerity was in, and the protests of critics were all but buried amid the headlong rush to slash spending.
But then, on April 15 of this year, a trio of researchers at the University of Massachusetts published a paper .. http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_301-350/WP322.pdf .. that took a fresh look at Reinhart and Rogoff's study. It turned out there was a problem: R&R had presented data from a list of 20 countries that filled lines 30 through 49 on a spreadsheet. But the formula that calculated the results relied on lines 30 through 44. Oops.
The solution to unemployment isn’t better-trained workers: Or, Systemic problems have systemic solutions
Monday, December 2, 2013 — Adam Kotsko
Following Chomsky’s advice, I follow the business press to see what the ruling class thinks is going on in the world, and more specifically, I subscribe to Bloomberg Businessweek, which occasionally allows reality to creep in (global warming is real, deficits aren’t always bad) as opposed to the more nakedly ideological Economist. Recently, for instance, they ran a piece on the minimum wage .. http://www.businessweek.com/articles/2013-11-27/what-a-higher-minimum-wage-does-for-workers-and-the-economy .. which included the fact that raising the minimum wage does not actually decrease employment outside of the artificial environment of Econ 101. Yet it also included this little gem:
----- “Raising the minimum wage is a short-term fix,” contends Wal-Mart’s [vice president for communications, David] Tovar. The long-term solution, he says, involves “expanding education, training, and workforce development.” -----
This kind of nonsense drives me absolutely crazy. It makes no sense to assume that changes in the composition of the workforce will lead to significant increases in aggregate employment levels. (There are cases where new industries arise and the type of skills they need are relatively rare, but in a highly-developed economy like the U.S., such phenomena are always going to be small niches.) Indeed, we have a kind of “natural experiment” in my own chosen profession, academia, where there has been a systemic increase in the qualification levels of entry-level professors. Your average applicant for an assistant professor job has done more teaching, published more, and presented at more national conferences than ever before. Strangely, however, universities don’t react to this embarrassment of riches by increasing the number of job openings. Instead, they take advantage of the opportunity to get instantly tenurable professors for cheaper entry-level wages — or even visiting or adjunct wages.
This is where some Econ 101 would come in handy — increasing the supply of something (for instance, high-skilled workers) decreases its price, all things being equal. In the academic example, all things are indeed equal, because administrative cost-minimization priorities remain determinative of the number of job openings. There’s no reason to assume that the situation would be significantly different in other industries, because the reality of our system is that the employers’ priorities determine the number of jobs available. If the government provides job training — or worse, provides loans that allow people to take on the cost of their own job training — the result will be the same as in academia: employers will get highly-trained workers without having to invest in them (i.e., for free), with no appreciable effect on the number of job openings available.
This dynamic is not difficult to understand, but the stupid views I’m critiquing sound better to people because they don’t want to believe that there’s a fundamental mismatch between the interests of workers and businesses (which one might characterize as some type of “struggle” between different economic “classes”). For the sake of communicability, then, I’ll put it in more “neutral” economic terms. Let’s say that we call the number of job openings the “demand” for workers and call the workers themselves the “supply” of workers. High unemployment in a developed country like the U.S. is basically always going to be a demand-side phenomenon (maybe a rapidly expanding developing country could experience skills-deficits with significant system-wide effects, but we’re well past that point in the First World). Changing the skill levels in the work force is a supply-side solution. Obviously there’s a mismatch here — in fact, by changing the composition of the work force to be more in line with stated employer preferences, but with no cost to employers themselves, you’re only going to increase their ability to sustain a high-unemployment equilibrium.
We need demand-side solutions, and since unemployment is a systemic problem, the solutions have to be systemic. One popular systemic solution is to produce higher aggregate economic activity, but the only agent that can choose to do that — the federal government — is basically hamstrung right now. Another solution would be to change laws (which by definition are system-wide effects) such that employers are forced to hire more workers. One example might be to decrease the full-time work week to 30 hours rather than 40 (and ideally, employers would also be forced to keep overall wages the same). Another would be to stop allowing employers to brutally exploit workers who fall into the category of “salaried” rather than “hourly” — if you really need 80 hours worth of work out of all your current employees, then you’d better damn well hire twice as many if they’re limited to 40 hours each.
Here again, we have encouraging examples in the “natural experiment” of academia: clues that accreditators (who have system-wide powers) might start taking employment conditions into account have led some universities to shift over to full-time, one-year contracts rather than patchwork adjunct courses. It’s possible, too, that the Department of Ed could make a top-down decision that the adjunct category has been abused and should be reserved for genuinely supplemental offerings or else genuine short-term staffing shortages — this won’t happen, obviously, but a man can dream. The one thing that we know absolutely for sure, however, is that better training and qualifications for academics don’t lead to more academic job openings.They just mean that universities get the benefit of a whole lot of free labor and free professional development with the people they do decide to hire. It’s a fantasy to assume the result would be different in any other industry.
---- It must be great to be a columnist for the Washington Post. You get to rewrite the same columns week after week. You never have to pay attention to facts and data or even make sure that you accurately present the arguments you criticize. Hence we have Robert Samuelson telling us this morning that "economists are in the dark."
Of course he is in large part right. Given its colossal failure in recognizing the risks of the housing bubble it would be reasonable for every university to shut down its economics program, recognizing that it has about as much use as a department of astrology. But Samuelson is shooting blanks when he tells us that Keynesian economics has been proven a failure by the downturn.
~~~~ [ please see these two paragraphs with a yellow background .. :) ] This conclusion is surely controversial because many economists attribute the weak recovery to misguided austerity, especially in Europe. Just follow the advice of John Maynard Keynes (1883-1946), they say. When the economy suffers a massive drop in private spending, government should offset the loss by increasing its budget deficits. Europe’s budget cuts were too aggressive, they say, while U.S. "stimulus" policies were not aggressive enough.
Perhaps history will vindicate this appeal to Keynesianism. Or perhaps not. The fact is that the United States did respond aggressively under both George W. Bush and Barack Obama. It certainly didn’t embrace austerity. Federal budgets ran massive deficits — $6.2 trillion worth from 2008 to 2013, averaging 6.4 percent of the economy (gross domestic product). Nothing like this had occurred since World War?II. Yet, the economy limped along. Why wasn’t this enough? ~~~~
Yes, well we have to keep Robert Samuelson away from the really big numbers, he might hurt himself. The reason it wasn't enough is because the shortfall in demand created by the collapse of the housing bubble was even bigger, as some of us yelled at the time. The loss in residential construction was around 4 percentage points of GDP. The loss in consumption due to the loss of housing bubble generated wealth was also around 4 percentage points of GDP. Throw in another 1 percentage point each for the reduction in state and local government spending and non-residential construction and you're up to 10 percentage points of GDP, that comes to almost 1.7 trillion in today's economy. ----
---- Florida editorial writers and some fellow Republicans are giving newly elected Gov. Rick Scott a thrashing over what can only fairly be described as his loony rejection of federal funding for the first leg of a high-speed rail line that backers hoped would eventually connect Tampa with Miami via Orlando. On the heels of Scott's incomprehensible decision, newly elected Democratic Gov. Jerry Brown says he's eager to see some of that Florida HSR money redirected to California, which has already received more money than any state for its ambitious 800-mile line.
One key Florida Republican, chairman of the House Committee on Transportation and Infrastructure John Mica, expressed dismay that he had been unable to sway Scott from rejecting the HSR funds, a decision he said (being charitable) "defies logic." Many Republican state legislators also are irked. In fact, a veto-proof majority of the Florida Senate is asking the federal government to give the state the $2.4 billion in HSR money even though the governor doesn't want it. ----
Tweet of the Day: The State wants every aspect of our lives to be transparent.
Defenders of market liberalism have appealed to technological explanations for growing inequality in the developed world. But the real cause is political.
First published: 31 March, 2014
The last fifteen years haven't been kind to market liberalism, at least as a factual hypothesis about the world. In 1999, it seemed that the future promised ever-rising stock markets, the end of the business cycle and prosperity for all. Beginning with the bursting of the dotcom bubble in 2001, these hopes have been dashed. It's now clear that for the vast majority of people in the US, and the majority of people in the developed world, the era of market liberalism has been one of slow income growth .. http://www.washingtonpost.com/blogs/wonkblog/wp/2013/09/17/the-typical-american-family-makes-less-than-it-did-in-1989/ , more precarious employment,[1] and more limited opportunity for those born outside the charmed circle with parents wealthy enough to give them a head start.
The obvious explanation for these outcomes is that growing inequality and stagnant living conditions reflect, and reinforce, the political power of the beneficiaries of this process, commonly referred to as 'the 1 per cent.' (Although even within the 1 per cent, the big gains have accrued to the '1 per cent of the 1 per cent,' and so on up to the handful of billionaires who control much of US politics).
The growing wealth and power of the 1 per cent has been driven by the expansion of the financial sector. The rise of finance has coincided with the collapse of those institutions which, in the ‘Great Compression .. http://www.nber.org/papers/w3817 ’ of the income distribution during the 1950s and 1960s, saw workers in the US and other developed countries capture a large share of growth. Domestically, these institutions included strong trade unions, an education system that promoted social mobility and macroeconomic policies that prioritised full employment. In global terms, at least in the First World, these institutions were backed up by the Bretton Woods system of fixed exchange rates, a system which included tight restrictions on international flows of capital, particularly short term flows of speculative capital.
This system broke down in the 1970s (the causes of this breakdown, which remain controversial, are discussed in my book Zombie Economics[ http://press.princeton.edu/titles/9702.html ] ).[2] The result was the rise, or rather resurgence, of a finance-dominated form of capitalism and its associated ideology of market liberalism.
Global capital flows now massively exceed .. http://en.wikipedia.org/wiki/Foreign_exchange_market .. the volume of trade and long-term investment. By some measures, the volume of outstanding financial assets is now approaching a quadrillion (i.e. a billion billion) dollars, mostly in assets and liabilities that are supposed to offset each other, such as interest rate swaps. The majority of corporate profits, and of top 1 per cent incomes, are derived from the management of these financial flows .. http://www.epi.org/publication/ib331-ceo-pay-top-1-percent/ .
The link between the financialisation of capitalism and the rise of the 1 per cent is direct and, now that the evidence is in (thanks largely to the work of French economist Thomas Piketty and the public advocacy of leading economists like Paul Krugman and Joseph Stiglitz), seemingly undeniable. But the fact that the evidence appears undeniable does not mean that it will not be denied: any proposition, no matter how absurd, will have plenty of defenders if it is useful to the dominant class and its ideology.
One counter to this observation has been to claim that increased inequality within the developed world is the necessary price of improved living standards in previously poor countries, above all China and India. I've addressed this point in Zombie Economics, but, for the moment, it is sufficient to observe that the 'Great Compression' of the 1950s and 1960s, mentioned above, coincided with rapid catch-up in Europe and Japan.
The other argument from defenders of market liberalism has been to focus on technological rather than political explanations for widening inequality. There are two, seemingly contradictory, versions of this argument.
One, put forward by Erik Brynjolfsson and Andrew McAfee in The Race Against the Machine, claims that the spectacular progress of information and communications technology has tipped the scales of factor markets against labour and in favour of capital. The core argument is that artificial intelligence technology is doing to white collar jobs in the twenty-first century what automation and robotics did to blue collar jobs in the twentieth.[3]
The other, advanced by Tyler Cowen in The Great Stagnation, maintains that technological stagnation outside infotech implies permanently lower growth. Cowen dates the beginning of this period of stagnation to the 1970s.[4]
Despite having almost the opposite view of technological progress to that espoused by Brynjolfsson and McAfee, Cowen, in his latest book, Average is Over, agrees with their view that the growth of inequality is the result of skill-intensive information technology.[5]
Cowen's argument fails to convincingly explain why the global crisis stopped economic growth, not only in the US, but in countries far inside the technological frontier like Greece; while it had hardly any impact in, for example, Australia, which avoided the initial financial crises and used Keynesian fiscal stimulus to offset shocks flowing from the global economy.
A further reason for scepticism about technological stagnation is that this explanation has been advanced in recessions and depressions ever since the beginning of the capitalist business cycle in the nineteenth century. Such claims represent the flipside of the equally common claim, made during every period of sustained expansion, that the economy has entered a New Era of untrammelled growth. The most recent episode of this kind was the 'irrational exuberance' of the 1990s, fuelled by optimistic claims about the potential economic implications of the Internet, which was opened to commercial use by the US Congress in 1992, and by capitalist triumphalism exemplified by Fukuyama's The End of History.[6] The collapse of the ‘dotcom’ bubble was softened by the housing bubble that developed shortly afterwards (again, not at all a new phenomenon), but the result was only to worsen the inevitable crash in 2008. The similarity of these events to previous bubbles and busts is good reason to doubt that they represent, or that they have inaugurated, a new phase in the evolution of capitalism.[7]
The Race Against the Machine argument does help to explain increasing wage dispersion between educated professionals (roughly, those in the top 20 per cent of the income distribution) and other workers. For professionals, computers and telecommunications technology are labour-augmenting, allowing knowledge workers to do more with less clerical and administrative support. By contrast, for routine and semi-skilled workers, technology tends to displace labour. This divergence has been reflected in a steady increase in the ‘college premium’ and in the sharp decline .. http://economix.blogs.nytimes.com/2012/10/22/the-uncomfortable-truth-about-american-wages/ .. in real wages and employment rates for males without college education (median earnings for men in this group fell by 41 per cent from 1970 to 2010).
But, as Paul Krugman .. http://krugman.blogs.nytimes.com/2014/01/17/why-we-talk-about-the-one-percent/ .. and others have pointed out .. http://krugman.blogs.nytimes.com/2011/11/01/graduates-versus-oligarchs/http:/krugman.blogs.nytimes.com/2011/11/01/graduates-versus-oligarchs/ , while professionals and knowledge workers have done better than others, the growth in their incomes has been steady rather than spectacular, and if anything slower than in the 1950s and 1960s. Moreover, their economic insecurity has increased in important respects. While declining social mobility has meant that the children of parents in the top quintile of the income distribution have a better chance of remaining there than in the past, the cost of the necessary college education has soared. More importantly, the growing gap between the top 20 per cent and the rest of the population makes the consequences of downward mobility much more severe.
In short, while technology explains the decline of the middle and working classes relative to the professional and managerial class, even this latter group has barely maintained its share of national income since the 1980s. The real gains over this period have gone to a subset of the top 1 per cent, dominated by CEOs, other senior managers and finance industry operators. This group has nearly quadrupled its real income .. http://www.nytimes.com/2014/01/20/opinion/krugman-the-undeserving-rich.html?_r=0 .. over the past 30 years, far outpacing the professional and managerial class as a whole.
This is a major problem for the Race Against the Machine hypothesis. Much of the growth in income share of the top 1 per cent occurred before 2000, when the stereotypical CEO was a technological illiterate who had his (sic) secretary print out his emails. Even today, the technology available to the typical senior manager—a PC with access to the Internet, and a corporate intranet with very limited capabilities—is no different to that of the average knowledge worker, and inferior to that of workers in tech-intensive specialities.
Nor does the ownership of capital explain much here. Even for tech-intensive jobs, the capital and telecomm requirements for an individual worker cost no more than $10,000 for a top-of-the-line computer setup (amortized over 3-5 years), and perhaps $1000 a year for a broadband internet connection. This is well within the capacity of self-employed professional workers to pay for themselves, and in fact many professionals have better equipment at home than at work. Advances in information and communications technology thus can't explain the vast majority of the growth in inequality over the past three decades.
A final version of the technological argument, most prominent during the globalisation euphoria of the 1990s, attributes the rise of the financial sector itself to technological advances in communications, which allow the ownership of assets worth billions of dollars to be shifted around the world in the blink of an eye. There is a grain of truth in this claim. Information technology has enabled much more complex transactions than in the past, and thereby contributed to the increase in gross flows. And automated High Frequency Trading reduces the time involved in a transaction from seconds to microseconds.
Nevertheless, a focus on technology conceals more than it reveals. Capital flows were limited for most of the twentieth century not by capacity but by political crisis and design. Capital was just as mobile in the late nineteenth century, following the connection of international markets by telegraph. Keynes's elegiac description of pre-1914 conditions is worth recalling for those who see global capital mobility as a recent development.
--- The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages; or he could decide to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend. ---
Keynes' description, written in the 1920s, was full of irony, reflecting the fact that the seeming permanence of this structure belied its vulnerability, not only to geopolitical events like war but to the inherent instability of financial markets.
In the longer historical view, there is nothing unique about the current crisis. The truly exceptional period in the history of capitalism was, rather, the Bretton Woods era, when developed economies enjoyed decades of strong economic growth, full employment and a degree of income equality never approximated before or since. This era is long past, and the specific conditions that created it cannot be reproduced. Nevertheless, there is no reason to think that the losses of the past few decades are irreversible. The broad outlines of a political programme to accomplish this are obvious enough to be shared by everyone from centre-left Democrats like Elizabeth Warren to the inchoate radicalism of Occupy Wall Street.
The primary thrust of any strategy under current circumstances must be an attack on the wealth and power of the financial sector and the 1 per cent (for practical purposes, these may be treated as one and the same). That means more progressive taxation, an increase in total levels of taxation and expenditure and a substantial tightening of regulation of the financial sector, with the aim of making that sector much smaller and less rewarding than it is at present. Such a strategy would represent a transformation of capitalism similar to that which occurred after 1945 and, in reverse, in the 1970s. This would be a great achievement in itself. More speculatively, it might, given the public good nature of much of the Internet, lay the basis for a further transformation in which the power of private capital ceased to dominate the global economy.
John Quigginis an Australian Laureate Fellow in economics at the University of Queensland, and an adjunct professor of agricultural and resource economics at the University of Maryland College Park.
[1] Jacob S. Hacker, The Great Risk Shift: The Assault on American Jobs, Families, Health Care and Retirement—And How You Can Fight Back (Oxford UP, 2006).
[2] John Quiggin, Zombie Economics: How Dead Ideas Still Walk Among Us (Princeton UP, 2010).
[3] Erik Brynjolfsson and Andrew McAfee, The Race Against the Machine: How the Digital Revolution is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy (Digital Frontier Press, 2012).
[4] Tyler Cowen, The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better (Dutton Adult, 2011).
[5] Tyler Cowen, Average is Over: Powering America Beyond the Age of the Great Stagnation (Dutton, 2013).
[6] Francis Fukuyama, The End of History and the Last Man (Free Press, 1992).
[7] See Robert J. Shiller, Irrational Exuberance (Princeton UP, 2005).
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