Relevant and even prescient commentary on news, politics and the economy.

Economic Growth and Climate Change: Mistaking an Output Variable for an Instrument

Economic Growth and Climate Change: Mistaking an Output Variable for an Instrument

When I first started arguing against the degrowthers, I thought they were a small, uninfluential fringe, important only because they had a sway over a portion of the left—what we might call the Naomi Klein left.  That was then.  Today degrowth is entering the mainstream, as can be seen by the latest David Roberts piece in Vox.  Roberts reviews a discussion between several economists on the Institute for New Economic Thinking (INET) website.  (INET is a Soros-affiliated outfit whose mission is to push economics in a more progressive direction.)  The key article is by Enno Schröder and Servaas Storm; using historical data, they test for the potential of decoupling economic growth and carbon emissions, finding the scale of decarbonization we need is incompatible with economic growth—hence the need to reject economic growth as a social objective.  A similar perspective is provided by Gregor Semieniuk, Lance Taylor, and Armon Rezai, while a rebuttal comes from Michael Grubb.  All three papers are authored or coauthored by important figures in the academic left or center-left, and their point of dispute reflects the expanding influence of the degrowth perspective.

If I had more time I’d write up a response in the form of a paper.  (Actually I am writing a response, but it will be a book.)  For now a blog post will have to do.  Here’s what I think these estimable economists are missing:

1. Economic growth is not, not, not a policy variable.  There is no magic button available to society that delivers a given rate of economic growth, or degrowth for that matter.  It’s an outcome of a host of factors, some of which are controllable, others not.  Indeed, as we wait for quarterly GDP numbers to be revised several quarters later, we still don’t know what economic growth or contraction we’ve experienced.  It is true that politicians often speak of the need to adopt some policy or other for sake of economic growth, but at best they are proposing to push on one of the many factors that influences it.  There is no growth dial, and even if there were, twisting it a few notches would have almost no impact on carbon emissions, which need to fall by nearly 100% within two generations.

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Global Networks and Financial Instability

by Joseph Joyce

Global Networks and Financial Instability

The ten-year anniversary of the global financial crisis has brought a range of analyses of the current stability of the financial system (see, for example, here). Most agree that the banking sector is more robust now due to increased capital, less leverage, more prudent balance sheets and better regulation. But systemic risk is an inherent feature of finance, and a disturbance in one area can quickly spread to others through global networks.

The growth of financial markets and institutions during the 1990s and 2000s benefitted many, including those in emerging market economies that became integrated with world markets during this period. But the large-scale extension of credit to the housing sector led to property bubbles in the U.S., as well as in Ireland and Spain. The development of financial instruments such as mortgage backed securities (MBS), collateralized debt obligations (CDOs), and credit default swaps (CDS) were supposed to spread the risk of lenders in order to mitigate the impact of a negative price shock. However, these instruments and the extension of credit to subprime borrowers increased the vulnerability of financial institutions to reversals in the housing markets. Risk increased in a non-linear fashion as balance sheets became highly leveraged, and national regulators simply did not understand the nature and scale of these risks.

The holdings of assets across borders amplified the impact of the disruption of the U.S. financial markets once housing prices fell. European banks that had borrowed dollars in order to participate in the U.S. MBS markets found themselves exposed when dollar funding was no longer available. The gross flows of money between the U.S. and Europe increased the ties between their institutions and increased the fragility of their financial markets. It took the the establishment of swap networks between the Federal Reserve and European central banks to provide the necessary dollar funding.

John Kay has written about the inability to recognize and minimize systemic risk in financial systems in Other People’s Money: The Real Business of Finance. He draws from engineers the lesson that “…stability and resilience requires conscious and systematic simplification, modularity, which enables failures to be contained, and redundancy, which allows failed elements to be by-passed. None of these features—simplification, modularity, redundancy—characterized the financial system as is had developed in 2008.”

 

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Real Military Pay

Real Military Pay

Donald Trump lies about everything including military pay:

Trump Brags To Troops About A Fictional Giant Pay Raise He Got Them – The president told military personnel in Iraq that they’ll get a raise of over 10 percent, their first in a decade. But it’s 2.6 percent, and they get a hike every year.

Dave Jamieson even notes that Bill Kristol has called out Trump on this whopper. But to me this is not the story. The real story is that Trump thinks our troops are stupid. As I read this sad account, I thought of a classic paper by Robert Lucas on the role of monetary policy in the New Classical model. Lucas postulated several island economies each with one individual who observes his own wage but not the general price level. Business cycles were generated by unexpected changes in the money supply which drives up everyone’s wages but people have yet to catch on to the fact that the general price index had also increased. I always found this an odd way of explaining persistent changes in output since most people shop at least on a weekly basis. But maybe the soldiers during the Vietnam War did not know their at home spouse and kids were facing higher grocery prices. But with the internet and advance telecommunications, this story is not tenable today even for our soldiers overseas. Dave links to this informative source:

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The US Postal Service in a Parallel Universe

The US Postal Service in a Parallel Universe

Imagine that, instead of the dinosaur of a postal service we have today—the product, among other things, of congressional insistence that no government outfit can compete with private business in lucrative new markets—we had an entrepreneurial, innovative public dynamo.  In this other universe, the USPS was always on the lookout for new opportunities to build on its postal infrastructure, providing better services to the public while broadening its revenue stream.

USPSʹ, this better but hypothetical twin, greeted the arrival of the internet a generation ago with anticipation.  Yes, it was obvious that email would be a threat to its core business of moving mail, but there would also be new possibilities for people to shop and do other business remotely.  If a postal customer goes online to find a new product to clean his bamboo floor and decides to buy it, somehow that product has to find its way to its new owner.  This is a job for the post office!

Driven by the urge to leverage its vast delivery infrastructure, USPSʹ years ago set up a website for remote shopping.  They encouraged producers to list their goods by making it free; the postal service stood to profit from providing the logistics for any transaction, so there was no need to cream any revenue from the site itself, meaning no need to sell advertising.  Of course, they hired top programming talent to make the site as searchable as possible and improve the online shopping experience for simplicity and transparency.  The idea of allowing users to review and rate products was imported from other sites and found to be reasonably effective.

Over time, our hypothetical USPSʹ became something like Amazon, but Amazon wedded to the delivery infrastructure of the traditional postal service.  No Jeff Bezos got to be a gazillionaire out of it, there was no crass commercialism and as a public institution it was amenable to democratic input.  The health information and products site, co-managed with the National Institutes of Health, was a big hit.

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Actually, Only Banks Print Money

by Steven Roth (originally posted at Asymptosis)

Actually, Only Banks Print Money

I’m thinking this headline will raise some eyebrows in the MMT community. But it’s not really so radical. It’s just using the word money very carefully, as defined here.

Starting with the big picture:

You can compare the magnitude of these asset-creation mechanisms here. (Hint: cap gains rule.)

The key concept: “money” here just means a particular type of financial instrument, balance-sheet asset: one whose price is institutionally pegged to the unit of account (The Dollar). The price of a dollar bill or a checking/money-market one-dollar balance is always…one dollar. This class of instruments is what’s tallied up in monetary aggregates.

 

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Taxes Up 30%!

Taxes Up 30%!

A couple of months ago yours truly complained a bit about some fiscal dishonesty coming from Team Trump:

He was basically lying to us hoping the public would be too stupid to realize that when the price level rose by 2.5% during the same period, we are talking about a 2% real decrease in tax revenues.

But if we look at customs duties we do see an increase in a category that represents a very modest part of Federal tax collections. Back in the 3rd quarter of 2017, these collections were a mere $38,428 million but by the 3rd quarter of 2018, they had risen to $51,383 million. A 33.7% nominal increase in a year represents a 31% real increase. Team Trump take a bow! Of course this is not only an inefficient means of collecting taxes but also one likely to hit the average Joe the most. It is also a drop in the bucket and pales to the reduction in real tax revenues from that income tax giveaway to the well to do.

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Paul Ryan wouldn’t recognize a free market if one bit him

(Dan here…lifted from Robert’s Stochastic Thoughts)

Paul Ryan wouldn’t recognize a free market if one bit him

Robert Costa and Mike DeBonis wrote an excellent retrospective on the career of Paul Ryan‘He was the future of the party’: Ryan’s farewell triggers debate about his legacy

They are quite harsh, but not, I think, quite harsh enough.

My comment:

This is an excellent article. Tough but fair with no sugar coating but also no discourtesy. However, there is one clear error. Costa and DeBonis wrote ” to apply free-market principles to create opportunities in impoverished communities. The tax bill included a provision creating low-tax “opportunity zones,””

Establishing opportunity zones might be good policy, but such zones are completely inconsistent with free market principles. The idea is to tilt the playinf field in order to favor the poor. The free market principle utterly rejected by advocates of opportunity zones is that the government shouldn’t play favorites and should leave market incentives unaffected except as absolutely necessary to raise funds for necessary purposes.

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Neoliberalism as Structure and Ideology

Neoliberalism as Structure and Ideology

As someone who has looked at the world through a political economic lense for decades, I am restless with the “cultural turn”.  Once upon a time, it is said, the bad old vulgarians of the left believed that economic structure—the ownership of capital, the rules under which economies operate and the incentives these things generate—were everything and agency, meaning culture and consciousness, were nothing.  The latter was sometimes claimed to be derivative of the form.

Then we had a cultural turn.  Now it seems it’s all about consciousness and ideology, of which economic structures are a pale reflection.  Neoliberal ideology is said to have seeped its way into the heads of intellectuals, journalists and politicians—perhaps even the public at large—and this explains things like deregulation, privatization and the ubiquity of outsourcing and global value chains.  It’s even possible to have 500-page treatises about the failures of capitalism that make no reference at all to the empirical structure of the economy, only modes of thought, as I point out here.

According to this view, the various failings of our society, from the inability to act on climate change to mass incarceration to the imposition of market logic on higher education, all converge as consequences of neoliberal hegemony.  But what is neoliberalism?  It is usually described as a philosophy, born sometime between the fall of the Hapsburgs (Slobodian) and the postwar convening of the Mont Pèlerin Society (Mirowski et al.), and surely there is truth to these well-documented accounts.  But should we understand the past four decades or so as primarily the product of a sea-change in thought, the end result of these precursor currents?

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Rah Rah Economics

Rah Rah Economics

Greg Mankiw read Trumponics by Art Laffer and Stephen Moore so we don’t have to:

When economists write, they can decide among three possible voices to convey their message. The choice is crucial, because it affects how readers receive their work. The first voice might be called the textbook authority. Here, economists act as ambassadors for their profession. They faithfully present the wide range of views professional economists hold, acknowledging the pros and cons of each … The second voice is that of the nuanced advocate. In this case, economists advance a point of view while recognizing the diversity of thought among reasonable people … The third voice is that of the rah-rah partisan. Rah-rah partisans do not build their analysis on the foundation of professional consensus or serious studies from peer-reviewed journals. They deny that people who disagree with them may have some logical points and that there may be weaknesses in their own arguments. In their view, the world is simple, and the opposition is just wrong, wrong, wrong. Rah-rah partisans do not aim to persuade the undecided. They aim to rally the faithful.

Guess which voice Laffer and Moore used throughout their book. While I appreciate Mankiw’s three categories – one has to wonder how we should place some of the over the top arguments for the 2017 tax cut by Republican economists not in this White House. Mankiw to his credit writes:

 

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Real retail sales very positive; industrial production decent

Real retail sales very positive; industrial production decent

Real retail sales for November, together with the revisions for October, were very positive.

While November sales, both nominally and adjusted for inflation, increased +0.2%, October sales were revised upward to a nominal +1.1%. On an inflation adjusted basis, that translates to +0.8%.

As a result, as of November both real retail sales and real retail sales per capita set new records:

 

The latter has turned negative more than one year before both of the last two recessions, and so supports the case for no recession in 2019.  The former, on a YoY% basis, tends to be a decent if noisy short leading indicator for employment. Here what YoY growth in real retail sales looks like:

 

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