Thursday, September 26, 2013

Seth Ackerman And Mike Beggs On The Intellectual And Moral Bankruptcy Of Mainstream Economics

Seth Ackerman and Mike Beggs have an interesting article in Jacobin. They note:Marginalist economics arose as a reaction against the analysis of class conflict in classical economics.
  • Greg Mankiw's defense of the 1% is deeply muddled.
  • The Arrow-Debreu model's use as a benchmark reflects a "broken" "belief system".
  • Marx and Keynes developed different, but perhaps compatible views of political economy.
  • Post Keynesians developed anti-neoclassical elements in Keynes' theory and revived the surplus-based approach to political economy.I'll quote the last two paragraphs here:"But in the long run, radicals need something more from their economics. Class conflict is at the heart of the capitalist economy and the capitalist state, yet neoclassical economics will not acknowledge the fact. How, then, should we think about economics as a discipline and the question of inequality as its subject? At an individual level, there are truly great economists working in the mainstream — some harboring deeply humane instincts, and some even with good politics. As a body of knowledge, economics yields a flood of invaluable empirical data and a trove of sophisticated tools for thinking through discrete analytical questions.But as a vision of capitalist society, mainstream economics is simply hollow at its core — and the hollow place has been filled up with a distorted bourgeois ideology that does nothing but impede our understanding of the social world."

On The Ideological Function Of Certain Ideas Of Friedman And Barro

A Simple Keynes-Like Model
1.0 Introduction
I want to comment on an ideology that would lead to an acceptance of:
  • Milton Friedman's Permanent Income Hypothesis (PIH)
  • Robert Barro's so-called theory of Ricardian Equivalence
My claim is that Friedman and Barro were each responding, in their own way, to the (policy implications suggested by) Keynes' General Theory. So first, I outline, very superficially, some ideas related to the General Theory. I then briefly describe how Friedman and Barro each tried to downplay these ideas, before finally concluding.
I have a number of inspirations for this post, including Robert Waldmann's assertion that the denial of the PIH is consistent with the data; Brad DeLong noting Simon Wren-Lewis and Chris Dillow commenting on the incompetence of, say, Robert Lucas; and Josh Mason pointing out the nonsense that is taught in graduate macroenonomics about the government budget constraint and interest rates.
2.0 Governments Can End Depressions
The figure above illustrates some basic elements of Keynes' theory. This specification of a discrete-time, dynamic system includes an accounting identity for a closed economy, namely, that national income in any time period is the sum of consumption spending, investment, and government spending. And it includes a behavioral relation, namely, a dynamic formulation of a consumption function. In this system, consumption is the sum of autonomous consumption and a term proportional to national income in the previous period. One should assume that the parameter b lies between zero and one.
A policy consequence follows: government can lift the economy out of a depression by spending more. Government spending increases national income immediately. Through the consumption function, it has a positive feedback on next period's income, as well.
3.0 The Permanent Income Hypothesis
Suppose you are hostile to this policy conclusion and, like the current Republican party in the USA, dislike your fellow countrymen. How might you suggest a theoretical revision to the system structure to mitigate the influence of current government spending? One possibility is to suggest more terms enter the consumption function. With the proper manipulation, current government spending will have a smaller impact, since current income will have a smaller impact on consumption.
So, suppose the consumption function does not contain a term multiplying b by income lagged one period. Instead, assume b multiplies an unobserved and (directly) unobservable state variable which, in turn, is an aggregate of current income lagged multiple periods (Yt - 1, Yt - 2, ..., Yt - n). Call this state variable "permanent income", and assume the aggregation is a matter of forming expectations about this variable based on a number of past values of income.
This accomplishes the goal. Current government spending can directly affect current income. But to have the same size impact as before on future income, it would have to be maintained through many lags. The policy impact of increased government spending is attenuated in this model, as compared to the dynamic system illustrated in the figure. 4.0 "Ricardian" Equivalence
One can go further with unobserved state variables. Suppose that households consume based less on recent income, but, once again, on expected values of future income. And suppose that consumers operate under the mainstream economist's mistaken theory of a government budget constraint. So consumers expect increased income today, if it results from increased government spending, to be accompanied by some combination of future decreased government spending and increased taxes. So the same current upward shock to the system causes an expectation of a future downward shock.
This is the theory of Ricardian equivalence. And, like the PIH, it suggests that Keynesian effects are not as dependable as otherwise would be the case.
5.0 Conclusion
The above story portrays economics as driven by results favorable to the biases and perceived self-interests of the extremely affluent. One would hope that academic economics is not entirely like this.

Wednesday, September 25, 2013

S. Abu Turab Rizvi, Not Steve Keen

Notice the point about the need in neoclassical theory to assume that preferences satisfy Gorman's assumptions of identical and homothetic (non-varying with income) preferences:

"Extensions of the basic arbitrariness results to configurations of preferences and endowments which are in no way 'pathological', and are in fact more and more restrictive, indicate the robustness of S[onnenschein-]M[antel-]D[ebreu] theory.

For instance, an assumption which is often made to improve the chances of meaningful aggregation is that of homothetic preferences, which yields linear Engel curves and so no complicated income effects at the level of the individual. However, with only a slight strengthening of the requirements of Debreu's theorem, Mantel (1976) showed that the assumption of homotheticity does not remove the arbitrariness of A[ggregate] E[xcess] D[emand functions].

Moreover, the possibility that consumers have to be very different, or that unusual endowment effects need to take place, in order for SMD-type results to hold was refuted by Kirman and Koch (1986): even supposing consumers to have identical preferences and collinear endowments does not remove the arbitrariness of the AEDs. Of course, if preferences are simultaneously identical and homothetic, AED is a proportional magnification of individual excess demand (Gorman, 1953; Nataf, 1953) and the whole economy behaves as if it were an individual (obeying the Weak Axiom of Revealed Preference in the aggregate), but this is an extremely special situation. The Mantel and Kirman-Koch theorems effectively countered the criticism of SMD theory raised by Deaton by showing that the primitives can be arrayed in ways which on the face of it are very congenial towards generating well-behaved results, yet the arbitrariness property of AEDs remains." -- S. Abu Turab Rizvi, "The Microfoundations Project in General Equilibrium Theory", Cambridge Journal of Economics, V. 18 (1994): p. 362.

In short, neoclassical economists have proved (by contradiction, in some sense) that neoclassical microeconomics is not even wrong and that methodological individualism has failed.

Saturday, September 21, 2013



A Superintendência da Caixa Federal informou na tarde desta sexta-feira que o sorteio das chaves das 1.440 Unidades Habitacionais do Residencial Terra do Sol I, II, III que seria realizado na próxima segunda-feira dia 15 foi adiado para o dia 22 do mês em curso. a solenidade terá inicio às 14 horas e será realizada no estádio Correião. Os mutuários devem comparecer munidos de seus respectivos. 

Friday, September 20, 2013

Who writes Science and Technology at the Economist?

A lot of journalists come to the AAAS meeting every year. And when I am faced with a lot of other journalists, I get asked a lot of the same questions about The Economist. I thought I'd answer a few of them. 
Who writes what in the Science section?
Such a question is understandable. The issue of who writes what is opaque, because we write anonymously. (More about this subject is in this document.) But just because we write without bylines does not mean we are secretive about what we write, or who writes about what.
You can always ask to be put in touch with the author of an article by calling the office, or you can use the Media Directory to find out who writes about what. There is even a web form which you can use to contact individual writers.
If you were to sift through this online directory, you could easily work out who does what so this is breaking no confidences. But before I go further, may I please ask that if you work for one of those dreadful media disks, please don't put our names on without asking first. For those uninitiated into the world of public relations, there are a number of companies that compile the names and contact details of every journalist on the planet, along with the things they are supposed to be interested in.
The end result is that anyone who buys the disk can send mass mail outs of their inane press releases to journalists. Its essentially a form of high-grade spam. It may be that for every hundred people who use such disks there is one legitimate person who just wants to get in touch with something appropriate, but the signal-to-noise ratio is so high with these disks that I always ask to be removed.

Who writes the Science and Technology at the Economist?
Geoffrey Carr, is the science editor, when he isn't editing he has particular interests in human evolution, genomics, biotechnology, AIDS, malaria and evolution.
Paul Markillie writes about technology, and writes about cars in our wonderful consumer magazineIntelligent Life, and stands in for Geoff when he is away.
Tim Cross, science and technology correspondent
Jan Piotrowski, science and technology correspondent
Charlotte Howard, our healthcare correspondent, covers medicine as well as the pharma industry for the business section)
James Astill, our energy and environment editor, covers climate change and other environment stories, and our online column green.view
Tom Standage, business affairs editor and editor of Technology Quarterly supplement
In addition to the writers mentioned we have a network of freelancers, correspondents and stringers around the world who contribute.
Similarly, science and technology section writers may write for other sections of the paper, such as Business (Robert Guest), International (Bruce Clark), or United States (Chris Lockwood).

Do you hire freelancers?
Some. But we don't pay well. For Science you should offer us things that are not in the main journals, and if there is a press release you should add value to this in some way with a new angle or piece of information that has not been used or picked up on. You should keep an eye on the kind of things that we write about if you want to pitch successfully.
Please don't email me pitches, I only edit from time-to-time and I prefer not to regularly receive pitches about things that I may decide to write on. Pitches should go to the science editor.

The Economist

The Economist explains itself...

I'm most frequently asked about The Economist: Why are your writers anonymousWhy does the Economist call itself a newspaper and not a magazineIs the Economist right or left wing? As we are celebrating our 170th birthday, a number of our writers have decided to answer some of these questions in our popular explainer blog. Other explainers include: how do we decide what to cover? And: why do we choose unusual names for our columnists?

It may be that we have good reasons for calling ourselves a newspaper but almost always, when I ring up people for the first time, I will say I am from the Economist magazine. It makes no sense to announce yourself as writing for the 'Economist newspaper' and initiate a bizarre conversation along the lines of:

"Oh, I read the magazine but I didn't know there was a newspaper as well".
"Well actually it is the same publication but we call it a newspaper..."
"Oh, why is that....?"
Cue long explanation which generally I find makes me sound like a prig for pointing out to loyal readers that they have been assuming they've had a magazine subscription for the last 20 years. No thanks. So I'm probably breaching some internal protocol, except I know a former deputy editor who had exactly the same problem and had solved it the same way, but I always say I'm from the Economist magazine. Even though its a newspaper.

Great. Glad we've cleared that up then.

Tuesday, September 17, 2013

Seth Ackerman And Mike Beggs On The Intellectual And Moral Bankruptcy Of Mainstream Economics

Seth Ackerman and Mike Beggs have an interesting article in Jacobin. They note:

  • Marginalist economics arose as a reaction against the analysis of class conflict in classical economics.
  • Greg Mankiw's defense of the 1% is deeply muddled.
  • The Arrow-Debreu model's use as a benchmark reflects a "broken" "belief system".
  • Marx and Keynes developed different, but perhaps compatible views of political economy.
  • Post Keynesians developed anti-neoclassical elements in Keynes' theory and revived the surplus-based approach to political economy.

I'll quote the last two paragraphs here:

"But in the long run, radicals need something more from their economics. Class conflict is at the heart of the capitalist economy and the capitalist state, yet neoclassical economics will not acknowledge the fact. How, then, should we think about economics as a discipline and the question of inequality as its subject? At an individual level, there are truly great economists working in the mainstream — some harboring deeply humane instincts, and some even with good politics. As a body of knowledge, economics yields a flood of invaluable empirical data and a trove of sophisticated tools for thinking through discrete analytical questions.

But as a vision of capitalist society, mainstream economics is simply hollow at its core — and the hollow place has been filled up with a distorted bourgeois ideology that does nothing but impede our understanding of the social world." -- Seth Ackerman & Mike Beggs

Crowd-sourcing an Award

Voting is open for the Economist Educators Best in Class Teaching Award, but only for this week. If you teach economics, you may want to review the finalists and vote. Click here to learn more.

Monday, September 16, 2013

International Trade References

If I amend my paper, I might want to say something about:

  • Bajona, Claustre and Timothy J. Kehoe (2006). Demographics in Dynamic Heckscher-Olin Models: Overlapping Generations Versus Infinitely Lived Consumers, Staff Report 377, Federal Reserve Bank of Minneapolis.
    • My model does not consider transition from autarky to a stationary with-trade equilibrium; this paper does in a model with a somewhat different structure.
    • This paper models dynamics by analyzing intertemporal equilibrium paths. The worth of such analysis is questionable since in any disequilibrium approach to such paths, the initial quantities of capital goods, taken as data in the model, vary. Any time to approach equilibrium is too long.
    • It is clear on the distinction between international trade in financial capital ("bonds" in the model) and international trade in capital goods (intermediate goods in the model).
    • The model could be improved by considering the ambiguity of a given endowment of capital in models with multiple capital goods. Does the given quantity of capital consist of a vector of intermediate goods, as in intertemporal equilibrium, or a numeraire quantity, as in the traditional and textbook HOS model?
    • The model could also be improved by recognizing the impossibility, in general, of classifying commodities as "labor-intensive" and "capital-intensive". Is this issue orthogonal to the issue of factor-intensity reversals in models of international trade?
  • Bhagawti, J. (1971). The Generalized Theory of Distortions and Welfare, in The Generalized Theory of Distortions and Welfare. Considers how the theory of comparative advantage does not justify laissez faire in international trade, given price distortions. Bhagwati was clearly ignorant of the fact that a positive interest rate and the existence of capital goods destroys the case for laissez faire. So he makes arguably incorrect statements: "...for a perfectly competitive system with no monopoly power in trade, ...the economic system will operate with technical efficieny (i..e., on the 'best' production possibility curve...">
  • Brewer, Anthony (1985). Trade with Fixed Real Wages and Mobile Capital, Journal of International Economics, V. 18, Iss. 1-2: pp. 177-186. Contains some neat (counter) examples, either with labor being used to directly produce consumer goods or with a circular structure of production. In other words, the structure of my example is distinct.
  • Dixit, A. and V. Norman (1980). Theory of International Trade, Cambridge Economic Handbooks. This supposedly demonstrates that, without a fixed interest rate distortion, free trade dominates autarky. Do I care about theorems that have no practical application in economics? On the other hand, if they explicitly mention capital and interest rates, I suppose I should reference this.
  • Lipsey, R. G. and Kelvin Lancaster (1956-1957). The General Theory of Second Best, Review of Economic Studies, V. 24, No. 1: pp. 11-32. They use international trade and tariffs as one of their examples. I do not know that they use the phrase "price distortion", or point out that the mere existence of capital goods with a positive interest rate constitutes a price distortion.
  • Parrinello, Sergio (2000). The "Institutional Factor" in the Theory of International Trade: New vs. Old Trade Theories. Comments on Krugman's new trade theory.
  • Prasch, Robert E. (1996) Reassessing the Theory of Comparative Advantage, Review of Political Economy, V. 8, Iss. 1. Is this article fairly summarized as being a criticism of the realism of assumptions?

Do I want to say something about surveys of economists showing their overwhelming support for "free trade"? Do I want to say something about how comparative advantage is an empirical failure in providing a straight-forward explanation of patterns of trade? That is, do I want to say something about the Leontief paradox? Do I need to reference additional textbooks on trade, e.g., Krugman, Obstfeld, and Melitz?

Do I need to even close my numeric example with utility maximization? I have found some economists struggle with the very concept of an open model. Certainly closing the model in a neoclassical manner makes my case quite strongly. I want to ensure that I am claiming merely to produce a simple numeric example, to simplify accepted ideas in the research literature that contradict textbook teaching.

Thatcher's legacy economic

Margaret Thatcher's economic legacy was prompted by the 1976 Labour government's capitulation to the IMF – but she took it much further.
It is ironic that Margaret Thatcher’s funeral is to take place at St. Paul’s in the City of London. The world around Wren’s great monument is beginning to unravel as a result of the liberalisation forces she helped unleash. Banks are bankrupt, thousands of jobs lost, and the City’s hard-won reputation for honour and fair play is now in tatters.
The most fundamental economic action of the Thatcher era was to intensify the liberalisation of the financial sector. This was dictated by the City and endorsed by early monetarist economists.
The 1970s inflation was caused originally by this liberalisation and expansion of credit, at domestic and international level: too much money chasing too few goods and services. The Lawson boom of the late 1980s in the wake of attempted government retrenchment came as the money supply again became unhinged. Since the start of the liberalisation of finance at the end of the 1960s, the world economy has been on a roller-coaster, driven by repeated cycles of financial excess, inflations, economic failure and retrenchment. The almost unanimously celebrated 1992-2007 boom was an illusion made possible only by a debt inflation of a more severe kind than that of the 1930s.
As the debate over her legacy rages, economists are loud and united in the claim that Thatcher "fixed" the economy. Economists like Professor van Reenan of the LSE make vague assertions about improvements to the supply side, or to competitiveness. These hark back to arguments deployed by the original monetarists – Samuel Brittan of the FT; Brian Griffiths now of Goldman Sachs and an adviser to the Archbishop of Canterbury; and Peter Jay, ex-economics editor of the BBC. They were arguments used to justify liberalisation, and these policies caused the economy to deteriorate in every conceivable way. 
An examination of the post-war economic experiences of Britain was included in a 2010 PRIME report, "The Economic Consequences of Mr Osborne". 1976 is a key date: the point at which the Labour Government allegedly yielded "Keynesianism" to the IMF’s "reforms" that preceded and anticipated Thatcher’s policies.
The most obvious economic headlines pre- and post-1976 are:
  • Unemployment averaged 2.3 per cent a year before reform and after 1976 rose to average 7.7 per cent a year;
  • GDP growth was 2.7 per cent a year before reform and 2.2 per cent a year afterwards; and
  • Income distribution narrowed almost every year before reform. 
And then the real transformation occurred. "The scale of the rise in inequality over the '80s was unparalleled both historically and compared with most other developed countries" according to the IFS in a 2011 report.
It is also a myth that the Golden Age that preceded liberalisation was burdened by an overreliance on the state, or the public sector.
Before Thatcher came to power, the UK had a thriving manufacturing sector. In 1970, 33 per cent of the economy was accounted for by manufacturing. Today that proportion is 10 per cent. Before Thatcher, the owners of firms felt confident to invest: in real terms, capital investment grew by 4.6 per cent a year before her reforms and only 2.6 per cent afterwards.
Economic activity extended beyond the state and traditional manufacturing; there was a golden age of theatre, of design and of course of popular music. Britain could afford healthcare and education for all; secondary and higher education was free; a safety net protected the few that had no work, and a working pension system looked after the old.
Contrary to the economic profession’s consensus, since reform, the size of government has grown as a share of the economy:
  • The broadest measure of the size of government, general government expenditure as a share of GDP, grew from 37 per cent to 41 per cent, post Thatcher.
  • In terms of the public finances, public debt measured as a share of GDP fell by an average of 5 percentage points a year in the period before Thatcherism. It rose by 1.3 percentage points per year in the period afterwards. 
This growth is of course not the positive result of more government spending on goods and services or of government investment. Rather, it represents the costs of the failure of reform. As the economy deteriorated, the cost of welfare and interest payments rocketed.
In all this debate economists forget what the economy is for. It is not for the rich, or just about "growth" or "competitiveness". Rather, it provides an outlet for human creativity, and meets humankind’s deep desire to work. It creates frameworks that nurture and protect the young, the vulnerable and the old; that ease the adversities and enhance the pleasures of life for all those that live within it.
On these terms the reforms promoted by the economics profession and implemented by Thatcher have failed the people of Britain – catastrophically. 

Sunday, September 15, 2013

Summers Kaput

Here is the letter from Summers to the President, withdrawing his name. We certainly can't say that Summers is incapable of doing the right thing at the right time. I'm sure there are some sighs of relief in the Federal Reserve System. I would think Janet Yellen's appointment is all but assured, but the Washington Post doesn't think so.

Friday, September 13, 2013

Sluggish Growth: What's Going On?

As we're approaching the 5th anniversary of the Lehman collapse, and everyone seems to want to write about the fallout from the financial crisis, now seems a good time to take stock of the macroeconomic consequences of that event. The first chart shows the log of U.S. real GDP, and the linear trend that best fits the whole post-1947 time series.
That's quite stunning. In terms of our standard measure of aggregate economic activity, the U.S. economy did not "recover" from the previous recession in the usual sense. Real GDP is far below the post-World War II trend, and is growing at a rate less than the average growth rate over the period 1947-2013. If you have read Reinhart and Rogoff's book, maybe this doesn't surprise you. Reinhart and Rogoff tell us that recoveries from financial crises tend to take a long time - financial crisis shocks have very persistent effects. So, if we think that Reinhart and Rogoff know what a financial crisis is, and all those previous crises really have something in common with our experience in 2008-09, then that gives us something to go on. Maybe what we're seeing in the above chart is related to financial factors.

But what exactly are the financial shocks associated with a financial crisis, and how do those shocks propagate themselves? Unfortunately, Reinhart and Rogoff aren't going to tell us much about that. What's going on? I think most economists recognize that policy played some role in causing the financial crisis - if only through poor regulation - but does our current sluggish growth path represent some dramatic failure of economic policy post-crisis? Are policymakers such dummies that they have failed to implement obvious solutions? Is there some unusual market failure at work that we have failed to understand? Or is what we're seeing actually the best possible outcome we could have hoped for, given what happened in 2008-09?

Old-Keynesian IS-LM AD-AS macroeconomists, who still exist, much to the surprise of many of us, think they have an answer. However, I've found the arguments based on that paradigm turn into a web of contradictions, so there's not much point in taking those arguments seriously. As George Bernard Shaw said
Never wrestle with pigs. You both get dirty and the pig likes it.
New Keynesians, on the other hand, are serious people. They have models, which incorporate bits and pieces of well-accepted economic theory, and they fit those models to data. The New Keynesian story about the recent recession is that there is a shorthand for a financial crisis shock - it's a preference shock. Consumers became much more patient during the financial crisis, and that patience has persisted. Unfortunately, given that type of shock, conventional monetary policy cannot correct the ensuing sticky price problem, because of the zero lower bound on the nominal interest rate. With no movement in anticipated inflation, the adjustment that has to occur is a reduction in consumption and output.

But prices will adjust over time of their own accord, and the sticky-price inefficiency (relative prices out of whack) will go away. The question is, how quickly does this happen? Is this a case of "in the long run, we're all dead," or what? Well, considerable effort has gone into studying price adjustment at the micro level, of late, so we know something about this. The best summary of evidence, to my knowledge, is in Klenow and Malin's chapter from the recent edition of the Handbook of Monetary Economics. Klenow/Malin conclude, among other things, that the average length of time between price changes is about one year. That's a longer period than what Bils/Klenow reports, which was a period of four months. The difference seems to be due to the fact that Klenow/Malin choose to exclude price changes from sales, for example. Toothpaste could be priced at $2.00, go on sale for a week at $1.50, then go back to $2.00, and Klenow/Malin would not count that as a price change. So they seem to be bending over backward to make prices look more sticky. But even if all prices change once every year, if we suppose that there was one financial-crisis shock that occurred in the fall of 2008, then five years later we won't have much residual inefficiency due to price stickiness. Further, Klenow/Malin report that prices are more flexible for goods that are cyclically sensitive, i.e. sectors of the economy for which employment and output are more variable relative to trend. Since those are the sectors where the friction would have to matter in delivering the large drop in output we're seeing in the first chart, it's hard to see why a New Keynesian sticky price mechanism is explaining what we're seeing.

Further, what we should be seeing, according to New Keynesian models, is real GDP returning to the post-war trend, and a gradual increase in the inflation rate as that happens, as we should be climbing the New Keynesian Phillips curve. But that's not what's happening. People at the Fed and elsewhere are using New Keynesian models as forecasting tools - that's in part why they've been over-optimistic. In a New Keynesian model, a shock hits, and there is some direct effect from the shock (what the frictionless model delivers) and the indirect effect from the sticky price friction. Ultimately the indirect effect dies out, and the economy returns to it's TFP-growth-driven trend. Whether the nominal interest rate is at the zero lower bound will make a difference, as away from the zero lower bound monetary policy can give quicker adjustment of relative prices. But sellers are not going to change their prices any more or less quickly because the nominal interest rate is zero than otherwise, everything else held constant.

There's an additional puzzle associated with that idea. The next chart shows my crudely constructed measure of TFP (total factor productivity), using annual capital stock data (available only up to 2011), and household-survey employment.
There's no particular problem with TFP growth. Indeed, TFP grew at a relatively high rate in 2010 and 2011. The average rate of growth from 2000-2011 is about 0.9%, which is lower than the post-WWII average of about 1.2%, but that's not bad, given the effects of two recessions over that period. Thus, the U.S. economy is very productive, but the quantity of labor input is really low, as we all know.

Speaking of employment, it's useful to look at what is happening across sectors of the U.S. economy. The next chart shows some selected components of employment, for the period 2000-2013.
I've normalized each time series to 100 at the first observation. The key message here is dispersion - employment growth has differed markedly across sectors over this period. Employment in durables and nondurables manufacturing fell by about 30% over the thirteen-year period while, at the other end of the spectrum, employment in education and health care grew by almost 40%, and in leisure and hospitality by more than 20%. Construction, which was an employment-growth sector until 2006, suffered the largest employment decline during the recession. Thus, some of the dispersion in employment growth is the result of the recession (construction), but a good part is the result of secular changes in the composition of employment. This is important, as we want to understand more about these long-run changes in sectoral activity - what is due to technology, what is demand shifts, what might be due to the financial factors at work during the recession.

I've written before about how it is difficult to square the experience we've had with sectoral shifts with sticky price theory. Relative stickiness in prices has implications for secotoral employment over the business cycle, but those implications are not consistent with the above picture.

What about wage stickiness? That's certainly important in the Keynesian narrative, though New Keynesians tend to think more about sticky prices. Suppose, for the sake of argument that a particular worker's wage had been stuck at its pre-financial crisis nominal level until now. How much would that worker's wage have declined in real terms by mid-2013? The answer depends on when the worker's wage became stuck. If it was in January 2007, the decline would be 12% (using pce inflation); if in December 2007, 9%; and if when Lehman went down, 6%. That's large in any case, and that's with zero adjustment over 5 or 6 years. You think wage stickiness matters over that length of time, or that wage stickiness somehow explains the drop in employment we saw in the construction sector? I don't think so.

Another useful exercise is to look at the time series for the components of GDP since pre-recession times. The next chart shows these, leaving out net exports.
Then, compare that to what we see for the 1981-82 recession. In the next chart, I've made the sample period the same length as in the first chart, and the first observation is the same number of quarters before the beginning of the recession, the way the NBER dates it.
First, focus on government expenditure. At the turning point in the recession, that's actually higher, relatively, in the recent recession than in 1981-82. You can see the effects of the stimulus and, if you believe in stabilization policy, the timing is really good - government expenditure is high at the turning point, and until mid-2010, before declining. That decline is interesting, as you might think - if you listen to people who argue that the multiplier is really large - that this would have been a disaster. But I don't see the multiplier at work when I stare at that chart. Consumption just keeps growing at a steady rate, though that rate is lower than what we usually see coming out of a recession - for example, look at what happened in the 1981-82 recession.

Probably the most important feature of the data in the two charts is the difference in the behavior of investment. In 1981-82, investment declines by about 12% from the first observation, then rebounds significantly, to the extent that it grew more than consumption and output by mid-1983. In the last recession, investment declined by more than 30% from the beginning of 2007 to mid-2009, and in second quarter 2013 was still about 5% lower than in first quarter 2007. Thus, if there is something we should be focusing on, it's not multipliers and consumption, but why investment is so low. That low level of investment, over a five year period, has now had a significant cumulative effect on the capital stock. Thus, we've got OK growth in TFP, but growth in factor inputs is low. That's the key story, from a growth accounting point of view.

So, what to make of this?

1. There are many frictions to think about. (i) There are financial frictions. Limited commitment and private information, coupled with a low supply of safe assets, can lead to the misallocation of capital and labor in the economy, for example. (ii) There are distortions caused by inefficient taxation and subsidies - for example in the housing sector. (iii) There is inefficient regulation at work, particularly in the financial sector, as we know well. (iv) Heterogeneity and private information in the labor market creates matching frictions, which can be exacerbated by sectoral shifts, and by financial frictions. With all that to think about, why focus on sticky wages and prices? Some people want to take the persistent level decline in GDP, and the persistently low GDP growth rate, as indications that sticky wages and prices are really important, when they should be thinking the opposite. As sluggishness persists, this casts further doubt on sticky wage and price frictions as being the source of the problem. People who cling to those sticky ideas, particularly the Old Keynesians, are either being lazy, or are simply unimaginative.

2. What should policy be doing? This is not a problem for monetary policy. The real effects of Fed actions, outside of crisis periods, are small and transitory at best. Whether by accident or design, the Fed has been doing a good job of controlling inflation, and should focus on that. If there are remedies to the poor real-side performance of the U.S. economy, those are fiscal remedies. There are plenty of things to think about: (i) further financial reform; (ii) housing and mortgage market reform - get rid of housing subsidies, Fannie Mae, and Freddie Mac, for example; (iii) health care: Congress should stop fussing about Obamacare - which is imperfect, but nevertheless an improvement - and do something useful for a change; (iv) education: If you believe the cross-country test results, the quality of American education in K-12 is declining, and we know there are huge disparities in access to good education. Some work points to a big payoff from early childhood education; (v) the problems in the north side of St. Louis, and in many other American cities, look very similar to those in the poor countries of the world. The problems may seem intractable, but we should be putting more effort and resources into solving them.

David Landes

Here is the NY Times obituary of the great Harvard economic historian.

Wednesday, September 11, 2013

Wynne Godley On Front Business Page Of New York Times

The New York Times, even outside of their editorial pages, seems to think their readership should know about the non-mainstream economists I generally like:

I predict that this profile of Godley will get a more positive response from Post Keynesians and advocates of endogenous money than their profile of Warren Mosler did. One caveat: I think Godley was more about using his stock-flow consistent modeling to identify unsustainable trends, than to quantitatively predict the course of, say, Gross Domestic Product (GDP) over the next n quarters. (He also accepted the conclusions of the Cambridge Capital Controversy.)

Update: I should have noticed that the Jonathan Schlefer is the author of the article on Godley. L. Randall Wray comments.

Tuesday, September 10, 2013

Utility Maximization For A Numeric Example Of International Trade

Overlapping Generations
1.0 Introduction

The theory of comparative advantage does not justify free trade in consumer goods. The mainstream textbook presentation is just logically mistaken. I have proven these claims in a paper building on work staring from a third of a century ago. My paper provides a numeric example. I have previously presented the production side of another numeric example here. My paper concludes with an utility-maximizing closure, but I have decided that this part of my paper could be improved. Accordingly, this post provides a simple overlapping generations example to combine with my previous numeric example in the blog post.

2.0 Overlapping Generations

Accordingly, consider an Overlapping Generations (OLG) model in which each agent lives for two years. Each agent works in the first year of their life and is retired in the second year. They are paid their wages at the end of the year in which they work. They can choose to save some of their wages for consumption at the end of the second year of their life.

Suppose each agent has the following utility function:

U(x20, x21, x40, x41) = (x20 x40)γ(x21 x41)1/2 - γ, 0 < γ < 1/2


  • x20 is the quantity of wine consumed at the end of the first year of the agent's life.
  • x21 is the quantity of wine consumed at the end of the second year of the agent's life.
  • x40 is the quantity of silk consumed at the end of the first year of the agent's life.
  • x41 is the quantity of silk consumed at the end of the second year of the agent's life.

In the numeric example, 4,158 agents are born each year in country A, and 3,969 agents are born each year in country B. Since wine and silk enter the utility function symmetrically, equal amounts of wine and silk are consumed each year in each country in a stationary state, given an (international) price of silk of unity. Although all agents are assumed identical in a given country, agents may vary across countries. In particular, difference in the parameter γ in the utility function between countries can rationalize the difference in income distribution between the two countries in the example.

It remains to outline in more detail a demonstration of these claims. The agent is faced with the following mathematical programming problem:

Given p, w, and r
Choose x20, x21, x40, x41
To maximize U(x20, x21, x40, x41)
Subject to:
(x20 + px40)(1 + r) + (x21 + px41) = w(1 + r)
x20 ≥ 0, x21 ≥ 0, x40 ≥ 0, x41 ≥ 0

Three independent marginal conditions arise in solving this optimization problem:

(∂U/∂x20)/(∂U/∂x21) = 1 + r
(∂U/∂x20)/(∂U/∂x40) = 1/p
(∂U/∂x21)/(∂U/∂x41) = 1/p

These three marginal conditions, along with the budget constraint, constitute a system of four equations in four variables. Its solution is:

x20 = γ w
x21 = (1 - 2 γ) w (1 + r)/2
x40 = γ w/p
x41 = (1 - 2 γ) (w/p) (1 + r)/2

The total demand for, say, wine to consume at the end of each year is summed over workers and retirees in that year:

X2 = lTotal(x20 + x21)
  • X2 is the quantity of wine demanded in a given country each year.
  • lTotal is the annual endowment of labor in the given country.

A similar equation arises for the demand, X4, for silk:

X4 = lTotal(x40 + x41)

One can use the above equations to close the with-trade case in my numeric example, at least in cases where the interest rate is not too big. In the latter sort of cases, I might want to consider models in which agents either work or retire for more than one year. At any rate, agents, in this extension, will live for more than two years, and more than two generations will be alive in any given year.

3.0 Autarky

An autarky for my model of production is closed with this model of utility-maximization. A degree of freedom does not exist. The condition that both wine and silk both be produced leads to the determination of the wage and the price of silk as a function of the interest rate.

The equality of savings and investment is an equilibrium condition. In the above model, savings, S, is:

S = lTotal(w - x20 - p x40)

Using the aforementioned price equations, one can express savings as:

S = lTotal(1 - 2 γ)/(l1R + l2),


R = 1 + r

Investment, I, is a numeraire quantity of capital, found from an indirect demand from consumer goods:

I = (l1 X2 + l3 X4)w

Once again, using the price equations, one can express investment as a function of model parameters and the interest rate:

I = lTotal[2 γ + (1 - 2 γ)R](2l1l3R + d)/[2 (l1R + l2)2 (l3R + l4)]


d = l1 l4 + l2 l3

The equilibrium interest rate and, hence, the (domestic) price of silk and wage are found by equating savings and investment. I am hoping that this solution is sufficient to guarantee the quantities demanded of wine and silk lie on the Production Possibilities Frontier (PPF).

4.0 Numeric Values

In the numeric example, prices are specified. Wine is taken as the numeraire. The price of silk on the international market is unity. The wage is (1/200) units wine per person-year in country A and (1/194) units wine per person-year in country B. The interest rate is 20% in country A and 5% in country B. Let the parameter of the utility function be as follows in the two countries:

γA = 47/99
γB = 89/378

Then the quantities of wine and silk demanded for consumption are as in Table 1. But the entries in Table 1 are taken from my numeric example. So this utility-maximization model does, in fact, close the model of production and international trade used in the numeric example, at least in the with-trade case. When I worked out the autarky case, though, I ended up with a negative interest rate in the two countries.

Table 1: Selected Results for the Numeric Example
With-Trade Specialization
EndowmentsCountry AlTotal,A = 4,158 person-years
Country BlTotal,B = 3,969 person-years
International Price of Silkp = 1 Unit wine per Unit silk
Wine ConsumptionCountry A10 1/2 Units wine
Country B10 1/2 Units wine
Total22 Units wine
Silk ConsumptionCountry A10 1/2 Units silk
Country B10 1/2 Units silk
Total22 Units silk
5.0 Conclusion

I have constructed a numeric example in which trade in consumer goods unambiguously leaves the Production Possibilities Frontier (PPF) rotated inward, as compared with autarky, for country A. And I have rationalized, in a way consistent with neoclassical theory, why a positive interest rate exists and varies between countries in the with-trade equilibrium. But I have not found an example in which the corresponding autarkic equilibrium is consistent with positive interest rates in the two countries in the example.

Appendix: Definition of Parameters and Variables
  • γ: A parameter of the agent's utility function.
  • γA: A parameter of the agent's utility function for country A.
  • γB: A parameter of the agent's utility function for country B.
  • I: National investment.
  • R: 1 + r.
  • S: National savings.
  • U(x20, x21, x40, x41): The agent's utility function.
  • X2: The quantity of wine demanded yearly in a given country, summed across all agents.
  • X4: The quantity of silk demanded yearly in a given country, summed across all agents.
  • d: A parameter relating to the relative labor intensity of wine and silk production.
  • lTotal: The total endowment of labor in a given country; that is, the number of agents born each year.
  • x20: The quantity of wine the agent consumes at the end of the first year of his life.
  • x21: The quantity of wine the agent consumes at the end of the second year of his life.
  • x40: The quantity of silk the agent consumes at the end of the first year of his life.
  • x41: The quantity of silk the agent consumes at the end of the second year of his life.
  • p: The price of silk (in unit's wine per unit silk).
  • r: The interest rate.
  • w: The wage (in unit's wine per person-year).

Friday, September 6, 2013

What To Think Of This Alex Rosenberg Piece?

Alex Rosenberg writes on Free Markets and the Myth of Earned Inequalities.

What should we think of this essay? Philosophers of science, as I understand it, tend, these days, to take the consensus viewpoint in the sciences they examine as a given. They do not, in their professional role, advocate some overarching, context-free, scientific rationality and attempt to dictate to each specific science. Rather, they are engaged in trying to understand how scholars reason in specific disciplines. Furthermore, if one wants to be effective in practical policy advice, one might want, as a rhetorical strategy, to show how your policy conclusions follow from consensus views, no matter how mucked up that consensus may be. So I can understand how, sometimes, Rosenberg might be inclined to take neoclassical economics as given.

Furthermore, I accept some of the points of this essay. I can see how one might describe increased inequality in income distribution as part of a process of cumulative causation. Winners in competitive markets will tend to use their gains as a source of political power. And with that power, they will try to rewrite the rules of the game to gain even more. So competitive markets will lead, endogenously, to non-competitive markets. Is Rosenberg influenced by Dean Baker or Chris Hayes here?

In what sense do people born with better endowments deserve more because they earn more with those endowments? I think Rosenberg is correct to raise this question. (In agreement with Adam Smith, I question whether inborn talents have much to do with the distribution of income.)

I also agree with the general conclusion that government is violating no ethical norm when it institutes redistributive taxation. I would argue for the current need for such policy in the United States on the basis of the lack of sustainability of trends for the last third of a century.

But I think the following observations undermine much of the economics that Rosenberg draws on in his essay: Arrow and Debreu's proof of the Pareto efficiency of a static "competitive" General Equilibrium does not have much to do with the magnificent dynamics that Adam Smith and the classical economists were arguing about. Furthermore, price-taking in General Equilibrium Theory is a model of central planning (by the so-called auctioneer), not of competition. In actually existing capitalist economies, prices are formed in a range of institutions. Even when price-taking occurs, that occurrence depends on existence of certain algorithms for matching bids and offers, say, on the Chicago Mercantile Exchange. Marginal productivity, correctly understood, is not a theory of distribution; it is a theory of the choice of technique. Thus, marginal productivity cannot be correctly cited in an argument that, under competitive capitalism, agents earn what they get. Does Rosenberg know about reswitching examples, in which the same relative quantity flows in production are compatible with vastly different (functional) distributions of income? Besides, as Joan Robinson asked, in what sense is the ownership of capital productive?

A Striking Labor Market Fact

John Lott points out the following: "So far this year there have been 848,000 new jobs. Of those, 813,000 are part time jobs.... To put it differently, an incredible 96% of the jobs added this year were part-time jobs."

Update: Here is the CEA take on this general topic.  And this is from the San Francisco Fed.  I found the following chart of interest.

 Part-time employment as a share of total employment for selected groups

This shows that part-time work is notably higher than it has been historically for prime-age workers with little education (no more than a high school degree).  Whether this is just due to a weak labor market or other more structural changes is an open question.

Thursday, September 5, 2013

How Canadians are Different from Americans, but similar to Germans

I don't always keep track of goings-on in the Old Country but this article tells us, if nothing else, that the Canadian Finance Minister, Jim Flaherty, is rather confused. Flaherty says he doesn't like QE (quantitative easing), which would be OK, as long as he could come up with some semi-coherent reasons. But, Flaherty says:
The Americans tend to emphasize creating more jobs and less concern about the accumulation of public debt and printing more money, with which I’ve never agreed. The Germans tend to be more prudent and frugal like Canadians tend to be.
First, Flaherty doesn't seem to understand that managing the size of the public debt is actually his job, and not the job of the central bank. Central banks may indeed be venturing into the traditional territory of the fiscal authority by engaging in QE, as QE looks more like debt management (altering the maturity structure of the outstanding government debt) than traditional monetary intervention. But QE cannot change the total quantity of consolidated government debt outstanding, only the composition of the debt, except perhaps indirectly. Further, in present circumstances in the U.S., QE is not "printing money." QE consists (in the QE3 operation currently underway) of swaps of interest-bearing reserves for long-maturity government debt and mortgage-backed securities. The reserves in question currently look more like short-maturity government debt than they look like anything we might want to call "money."

The really funny part of the quote above involves Flaherty's unflattering view of profligate Americans. Apparently he hasn't been talking to the Americans who think of their government as ridiculously austere. Somehow Flaherty thinks that Canadians are more like Germans. I just don't see it. This reminds me of a joke, which goes something like this: Canada could have had American technology, British government, and French culture. Instead it got French government, British technology, and American culture.

Wednesday, September 4, 2013

Ronald Coase, 1910 - 2013

Elsewhere, on Ronald Coase:

  • An obituary in the New York Times.
  • John Cassidy offers an appreciation.
  • Mike Konczal explains that Coase's unintentionally undermines propertarianism (sometimes called "libertarianism").
  • Discussion of Coase at Crooked Timber.
  • An older piece, from Deidre McCloskey, arguing that the "Coase theorem" is misleadingly named.

Past posts from me:

  • The Coase Theorem does not describe market transactions.
  • Elodie Bertrand shows shows Coase was mistaken about lighthouses.
  • Michael Albert argues that building a law and economics approach on the Coase theorem encourages bullying and nasty behavior.

Related past posts from me:

  • Transactions costs make a nonsense out of the textbook theory of the firm under perfect competition.
  • America institutionalists had combined law and economics before Coase's work was picked up.

Tuesday, September 3, 2013

Ronald Coase has died

Here is the news from the University of Chicago.

Marginal Tax Rates under Obamacare

Back in 2009, I pointed out in a NY Times column that President Obama's healthcare reform would involve substantial increases in implicit marginal tax rates.  I am delighted that Casey Mulligan is now giving the issue some serious attention in two new NBER working papers (here and here).  He reports:
This paper calculates the ACA’s impact on the average reward to working among nonelderly household heads and spouses. The law increases marginal tax rates by an average of five percentage points (of employee compensation), on top of the marginal tax rates that were already present before the it went into effect....Measured in percentage points, the Affordable Care Act will, by 2015, add about twelve times more to average marginal labor income tax rates nationwide than the Massachusetts health reform added to average rates in Massachusetts following its 2006 statewide health reform.