bradford-delong.com: Grasping Reality with Both Hands 2017-01-16 15:44:07

Must-Read: Guido Alfani: Europe’s Rich since 1300: "Throughout this time, the only significant declines in inequality were the result of the Black Death and the World Wars...

...EINITE http://www.dondena.unibocconi.it/EINITE... has collected, systematically and with a uniform methodology, information about long-term trends in wealth inequality, and in the share of the richest, for many ancient Italian states as well as for a few other areas of Europe... from around 1300 to 1800.... Figure 1 shows the share of wealth of the top 10% between 1300 and 2010, using Piketty (2014) for the post-1800 period.... Remarkably, Piketty’s series for 1810-1910 shows the share of the richest growing at almost exactly the same pace as the I calculated for the series between 1550 and 1800....

Europe s rich since 1300 VOX CEPR s Policy Portal

In the seven centuries... we find only two phases of significant inequality decline. Both were triggered by catastrophic events: The Black Death.... Shocks occurred between 1915 and 1945 related to the two World Wars, as argued by Piketty 2014, pp. 368-370).... The share of the richest 10% today is about the same as that in Europe (or at least, Italy) immediately before the Black Death.... The long-term perspective of recent research requires us to move beyond the characterisation of inequality time dynamics provided by Kuznets....

During the early modern period (from around 1600) the prevalence of the rich grew almost continuously until the onset of the Industrial Revolution. The rich made up no more than 5% of the overall population during the Middle Ages and the first part of the early modern period...

Europe s rich since 1300 VOX CEPR s Policy Portal

I Have a Weblog!: Productivity! and Polanyi!

Shenzhen skyline 2015 Google Search

Editing a piece for http://vox.com. And sections that I loooooove are getting--rightly getting, I hasten to say: my editors are gods in human form whose judgment is superb--cut and dropped onto the floor.

But I have a weblog!


Productivity: Economists have tried to parcel out in multiplicative fashion the twenty-fold difference in the productivity levels of economies around the world --what factors double prosperity, and what factors increase it by only 10% or so? And they have found robust factors:

  • keeping your children in school--and making sure that the schools are good
  • saving and investing in capital
  • making markets competitive
  • virtuous circle effects, as investment that makes you richer allows you to save and invest more and keep your children in school longer.

But when all that is said and done, fully half of productivity differences seem due not to the machines you work with or the absence of monopoly or longer schooling, but to be simply in the (relatively local) air. People learn things from and are more productive when they are embedded in a successful community of engineering practice. That is the reason that in the early 19th century almost all U.S. textile mills headed for Lowell, MA; why Henry Ford and other auto producers all landed in Detroit; why Silicon Valley is Silicon Valley. An overly strong dollar disrupts the growth and maintenance of these communities of engineering practice that do so much to boost what economists call total factor productivity...


Polanyi: The mid-twentieth century Hungarian sociologist Karl Polanyi wrote that a market economy was a fine thing—it made great sense for individual businesses that made bread or ran streecars had to pass a market-profitability test in order to survive. But, he wrote, a market society is not. Attempting to implement a market society is very dangerous. Why?

  • Because a market society turns finance into a commodity—which means that the industry you work in and the kind of job you get have to in mass pass a market test.
  • Because a market society turns land into a commodity--which means that the community you live in has to in mass pass a market test.
  • Because a market society turns labor into a commodity—which means that attaining the standard of living you expect and feel you deserve has to pass a market test.

And people have very strong feelings about these three. People believe that they have a right to the standard of living they expect and deserve, to working in the particular industry at the kind of job that makes up a key piece of their identify, and to the stability of the community that they are used to. People believe they have rights to these things. Yet in a market society the only rights that matter are property rights.

And those rights are controlled by distant sinister people and forces far from the blood-and-soil realities…

And, in Polanyi’s analysis it least, it is the backlash to the late nineteenth and early twentieth century project of implementing a market society that triggered the totalitarian disasters which he watched and from which he fled.

But I digress…

bradford-delong.com: Grasping Reality with Both Hands 2017-01-05 02:27:48

Live from Chicago: American Economic Association: [The Nature of Capitalism and Secular Stagnation][]: Chair: Matias Vernengo...

...Panelist(s): Bradford DeLong, University of California-Berkeley; Han Despin, Nichols College; William Lazonick, University of Massachusetts-Lowell; Deirdre McCloskey, University of Illinois-Chicago; Anwar Shaikh, New School...

The Neoliberal Bet: Tu Hoisted/W History

Cities

Hoisted from the Archives from 2000: The Neoliberal Bet: January 15, 2000 ; Our panelists--Robert Kaplan, Saskia Sassen, and Manuel Castells--are all seeing not a crowded, thirsty world, but a crisis of urban governance. We are becoming an urban world. Cities require a lot of public services to function well. And our panelists seem to have no confidence in the ability of city governments in what we call emerging market economies to deliver services--police, electricity, roads, schools.

Now to some degree this forecast of government failure is well-founded. Fifty years ago many of our predecessors were very confident of the future of social democracy in what we then called the third world. Governments would, people thought, fund rapid infrastructure programs, use tariffs and subsidies to push economic activity into industries of emerging comparative advantage, invest in their people, and use national-level tax and transfer programs to preserve an acceptable distribution of income.

But tariffs and subsidies turned out, more often than not, to be tools not for economic growth but for diverting income to the husband of the niece of the Vice Minister of Finance; infrastructure turned out often to become a full-employment program for political clients rather than a way of boosting national productivity, a lack of administrative reach allowed massive tax evasion. Large-scale not market but government failure.

Hence over the past two decades [before 2000] we have, collectively, reacted by betting the future of the world--made what we might as well call the neoliberal bet that privatization, deregulation, free trade, and international economic integration will reduce the damage done by government failure and increase the wealth generated by the market. And that perhaps in a generation emerging market economies can begin to successfully build the public services and soft--or hard--social democracy we are used to in the north.

It seems that our panelists may be saying that the peculiar needs of cities mean that we don't have time for this neoliberal bet to pay off, even if it were going to (eventually) pay off with enough time...

Missing the Economic Big Picture: No Longer so Fresh at Project Syndicate

Moons

Missing the Economic Big Picture: As former WTO Director-General Pascal Lamy said earlier this month in my hearing, quoting from a conversation between Wu Jincang and Chinese Sixth Buddhist Patriarch Huineng:

"When the philosopher points at the moon, the fool looks at the finger". Market capitalism is the moon. Globalization is the finger.

Between the Little Englanders' BREXIT vote and those currently installing Donald Trump in the American presidency in the belief that he will make America great again by negotiating very different "trade deals", there has been a lot of finger-watching this year.

Let's orient ourselves by looking at the economic growth, economic inequality, and economic policy moon today:

  1. Our technologies continue to leap forward at a remarkable pace, primarily in information processing but we hope, soon, in biotechnology as well.

  2. The measured pace of productivity growth in the North Atlantic at the frontier has fallen from the 2%/year we had grown used to expect since 1870 to about 1%/year. That is the average amount by which the real resources of making this year what we made last year declines.

  3. While Robert Gordon maintains that all of the true "game changers"--electric power, flight, modern sanitation--have been invented, he is almost surely wrong. Game changers change how we live and are, by and large, missed by the standard measurements of economic growth. Expect more game changers.

  4. Both measured productivity growth and game changers refer to production destined for the market. But a great deal of our true wealth lies within the household, as we combine market goods and services, our time, information, and communication to accomplish our ends. While the measured pace of productivity growth has fallen, all indicators are that the truest productivity growth--an increase in the ability of people to live lives they like--has been leaping forward due to synergies between information and communication technologies on the one hand and the goods and services we can produce for the market on the other.

  5. However, low-pressure economies plus the fact that we are making insufficient efforts in education mean that nearly everyone below the 80%-ile of the income distribution in a North Atlantic country has missed out on what measured economic growth (1) we have had for more than a generation. They have still benefited from (3), however.

  6. The fact that nearly everyone below the 80%-ile has missed out on (1) we have had has created strong Polanyiesque disappointed expectations: market capitalism has not delivered what it was expected to deliver and was supposed to deliver in terms of making a 1980-style life more affordable.

  7. The past thirty years have seen the rise of an Overclass that exercises more relative economic power than even the robber barons of the Gilded Age. The reasons for its rise are not clear.

  8. While China has joined and India is joining the Pacific Rim in converging to North Atlantic levels of productivity and prosperity the rest of the world continues to lag behind: if it is no longer falling further behind the North Atlantic, it is only growing as fast as the North Atlantic, and not closing the productivity and prosperity gap.

These seven features of how market capitalism curbed and aided by social democracy are doing together make up the moon. Their combined and uneven development creates both elation and distress. Determining how to successfully manage the global trade system is an element, but only a relatively small element in context, of the social democratic task of managing market capitalism. And individual trade negotiations? They are definitely not the moon. Focus on the moon.

Regional Policy and Distributional Policy in a World Where People Want to Ignore the Value and Contribution of Knowledge- and Network-Based Increasing Returns

Preview of Regional Policy and Distributional Policy in a World Where People Want to Ignore the Value and

Pascal Lamy: "When the wise man points at the moon, the fool looks at the finger..."

Perhaps in the end the problem is that people want to pretend that they are filling a valuable role in the societal division of labor, and are receiving no more than they earn--than they contribute.

But that is not the case. The value--the societal dividend--is in the accumulated knowledge of humanity and in the painfully constructed networks that make up our value chains.

A "contribution" theory of what a proper distribution of income might be can only be made coherent if there are constant returns to scale in the scarce, priced, owned factors of production. Only then can you divide the pile of resources by giving to each the marginal societal product of their work and of the resources that they own.

That, however, is not the world we live in.

In a world--like the one we live in--of mammoth increasing returns to unowned knowledge and to networks, no individual and no community is especially valuable. Those who receive good livings are those who are lucky--as Carrier's workers in Indiana have been lucky in living near Carrier's initial location. It's not that their contribution to society is large or that their luck is replicable: if it were, they would not care (much) about the departure of Carrier because there would be another productive network that they could fit into a slot in.

All of this "what you deserve" language is tied up with some vague idea that you deserve what you contribute--that what your work adds to the pool of society's resources is what you deserve.

This illusion is punctured by any recognition that there is a large societal dividend to be distributed, and that the government can distribute it by supplementing (inadequate) market wages determined by your (low) societal marginal product, or by explicitly providing income support or services unconnected with work via social insurance. Instead, the government is supposed to, somehow, via clever redistribution, rearrange the pattern of market power in the economy so that the increasing-returns knowledge- and network-based societal dividend is predistributed in a relatively egalitarian way so that everybody can pretend that their income is just "to each according to his work", and that they are not heirs and heiresses coupon clipping off of the societal capital of our predecessors' accumulated knowledge and networks.

On top of this we add: Polanyian disruption of patterns of life--local communities, income levels, industrial specialization--that you believed you had a right to obtain or maintain, and a right to believe that you deserve. But in a market capitalist society, nobody has a right to the preservation of their local communities, to their income levels, or to an occupation in their industrial specialization. In a market capitalist society, those survive only if they pass a market profitability test. And so the only rights that matter are those property rights that at the moment carry with them market power--the combination of the (almost inevitably low) marginal societal products of your skills and the resources you own, plus the (sometimes high) market power that those resources grant to you.

This wish to believe that you are not a moocher is what keeps people from seeing issues of distribution and allocation clearly--and generates hostility to social insurance and to wage supplement policies, for they rip the veil off of the idea that you deserve to be highly paid because you are worth it. You aren't.

And this ties itself up with regional issues: regional decline can come very quickly whenever a region finds that its key industries have, for whatever reason, lost the market power that diverted its previously substantial share of the knowledge- and network-based societal dividend into the coffers of its firms. The resources cannot be simply redeployed in other industries unless those two have market power to control the direction of a share of the knowledge- and network-based societal dividend. And so communities decline and die. And the social contract--which was supposed to have given you a right to a healthy community--is broken.

As I have said before, humans are, at a very deep and basic level, gift-exchange animals. We create and reinforce our social bonds by establishing patterns of "owing" other people and by "being owed". We want to enter into reciprocal gift-exchange relationships. We create and reinforce social bonds by giving each other presents. We like to give. We like to receive. We like neither to feel like cheaters nor to feel cheated. We like, instead, to feel embedded in networks of mutual reciprocal obligation. We don't like being too much on the downside of the gift exchange: to have received much more than we have given in return makes us feel very small. We don't like being too much on the upside of the gift exchange either: to give and give and give and never receive makes us feel like suckers.

We want to be neither cheaters nor saps.

It is, psychologically, very hard for most of us to feel like we are being takers: that we are consuming more than we are contributing, and are in some way dependent on and recipients of the charity of others. It is also, psychologically, very hard for most of us to feel like we are being saps: that others are laughing at us as they toil not yet consume what we have produced.

And it is on top of this evopsych propensity to be gift-exchange animals--what Adam Smith called our "natural propensity to truck, barter, and exchange"--we have built our complex economic division of labor. We construct property and market exchange--what Adam Smith called our natural propensity "to truck, barter, and exchange" to set and regulate expectations of what the fair, non-cheater non-sap terms of gift-exchange over time are.

We devise money as an institution as a substitute for the trust needed in a gift-exchange relationship, and we thus construct a largely-peaceful global 7.4B-strong highly-productive societal division of labor, built on:

  • assigning things to owners—who thus have both the responsibility for stewardship and the incentive to be good stewards…
  • very large-scale webs of win-win exchange… mediated and regulated by market prices...

There are enormous benefits to arranging things this way. As soon as we enter into a gift-exchange relationship with someone or something we will see again--perhaps often--it will automatically shade over into the friend zone. This is just who we are. And as soon as we think about entering into a gift-exchange relationship with someone, we think better of them. Thus a large and extended division of labor mediated by the market version of gift-exchange is a ver powerful creator of social harmony.

This is what the wise Albert Hirschman called the doux commerce thesis. People, as economists conceive them, are not "Hobbesians" focusing on their narrow personal self-interest, but rather "Lockeians": believers in live-and-let live, respecting others and their spheres of autonomy, and eager to enter into reciprocal gift-exchange relationships—both one-offs mediated by cash alone and longer-run ones as well.

In an economist's imagination, people do not enter a butcher's shop only when armed cap-a-pie and only with armed guards. They do not fear that the butcher will knock him unconscious, take his money, slaughter him, smoke him, and sell him as long pig.

Rather, there is a presumed underlying order of property and ownership that is largely self-enforcing, that requires only a "night watchman" to keep it stable and secure.

Yet to keep the fiction that we are all fairly playing the reciprocal game of gift exchange in a 7.4 billion-strong social network--that we are neither cheaters nor saps--we need to ignore that we are coupon clippers living off of our societal inheritance.

And to do this, we need to do more than (a) set up a framework for the production of stuff, (b) set up a framework for the distribution of stuff, and so (c) create a very dense reciprocal network of interdependencies to create and reinforce our belief that we are all one society.

We need to do so in such a way that people do not see themselves, are not seen as saps--people who are systematically and persistently taken advantage of by others in their societal and market gift-exchange relationships. We need to do so in such a way that people do not see themselves, are not seen as, and are not moochers--people who systematically persistently take advantage of others in their societal and market gift-exchange relationships. We need to do this in the presence of a vast increasing-returns in the knowledge- and network-based societal dividend and in spite of the low societal marginal product of any one of us.

Thus we need to do this via clever redistribution rather than via explicit wage supplements or basic incomes or social insurance that robs people of the illusion that what they receive is what they have earned and what they are worth through their work.

Now I think it is an open question whether it is harder to do the job via predistribution, or to do the job via changing human perceptions to get everybody to understand that:

  • no, none of us is worth what we are paid.
  • we are all living, to various extents, off of the dividends from our societal capital
  • those of us who are doing especially well are those of us who have managed to luck into situations in which we have market power--in which the resources we control are (a) scarce, (b) hard to replicate quickly, and (c) help produce things that rich people have a serious jones for right now.

All of the above is in some sense a prolegomon to a thoughtful, intelligent, and practical piece by Noah Smith:

Noah Smith: Four Ways to Help the Midwest: "When... Michigan, Pennsylvania, Wisconsin and Ohio voted for Donald Trump, they... roll[ed] the economic dice...

It’s not clear yet whether President-elect Trump will or can follow through on his promises to revamp U.S. trade policy...

Note: given his hires, it is pretty clear that he has chosen not to. But let me let Noah go on:

It’s even more dubious whether that will have any kind of positive effect on the Midwest...

Let me say that it is clear that they won't: a stronger dollar from higher interest rates and more elite consumption from tax cuts for the rich are likely to produce another chorus of the song we heard in the 1980s under Reagan, which was a disaster for the midwest and for the Reagan Democrats of Macomb County. But let me let Noah go on...

His promises resonated.... The Midwest needs help.... “The largest declines [in economic mobility have been] concentrated in states in the industrial Midwest states such as Michigan and Illinois.”... [The] Democrats[']... targeted tax credits and minimum-wage hikes is nothing more than a Band-Aid [because]it ignores the importance of jobs, for dignity and respect, for mobility and independence, and for a feeling of personal value and freedom. Handouts ease the pain of poverty, but in the end, Midwesterners--like most people--want jobs, and they went with the candidate who promised them.

Nor should we simply encourage Midwesterners to move to more vibrant regions. As economist and writer Adam Ozimek has noted, many people can’t easily abandon the place where they grew up, where their friends and family are, and where they often own homes....

Conor Sen has a big idea that I like--a bailout of public-employee pension obligations in the Rust Belt.... But that’s just a first step. I propose four new pillars....

  1. Infrastructure: Sick economies and shrinking population have left Rust Belt states and cities unable to pay for infrastructure improvements. As a result, many cities look like disaster areas. The federal government should allocate funds to repair and improve the Midwest’s roads, bridges and trains, and to upgrade its broadband....

  2. Universities:.... The Midwest has a number of good schools (I went to one of them for my Ph.D.), but more could be built, and existing universities could be expanded. Perhaps even more importantly, local and state governments in the Midwest could work with universities and local companies to create more academic-private partnerships and to boost knowledge industries in places like Ann Arbor, Michigan, and Columbus, Ohio. As things stand, Midwesterners tend to move away as soon as they graduate from college....

  3. Business Development: Some cities in Colorado have embraced a development policy it calls economic gardening. The program helps provide resources for locals to start their own businesses. It furnishes them with market research and connects them with needed resources....

  4. Urbanism: Tech hubs like San Francisco and Austin, Texas, are using development restrictions to keep their population densities in check. That gives Midwestern cities an opening to attract refugees from the high-rent metropolises of the two coasts. Cities like Detroit and Cleveland can work on creating neighborhoods that are attractive to the creative class, while allowing housing development to keep rents cheap. College towns like Ann Arbor can reduce their own development restrictions and allow themselves to become industrial hubs....

Governments -- federal, state and local -- can revitalize the long-suffering Rust Belt. Some locations have already begun this transformation -- Pittsburgh, which is rebuilding a knowledge economy based around Carnegie Mellon University and undertaking various urban renewal projects, provides a great blueprint. Targeted regional development policy can prepare cities in the Midwest for the industries of the future, whatever those may turn out to be. And it can reassure the people living in these areas that their government hasn't forgotten them.


Cf.: Musings on "Just Deserts" and the Opening of Plato's Republic | Monday Smackdown: The Ongoing Flourishing of Behavioral Economics Makes My Position Here Look Considerably Better, No? | Inequality: Brown University Janus Forum | Noah Smith Eats Greg Mankiw's Just Desserts

Weekend Reading: John Steinbeck: The 1930s: A Primer: „Everyone Was a Temporarily Embarrassed Capitalist“

Il Quarto Stato

Weekend Reading: John Steinbeck: The 1930s: A Primer: "Except for the field organizers of strikes, who were pretty tough monkeys and devoted...

...most of the so-called Communists I met were middle-class, middle-aged people playing a game of dreams. I remember a woman in easy circumstances saying to another even more affluent: “After the revolution even we will have more, won’t we, dear?” Then there was another lover of proletarians who used to raise hell with Sunday picnickers on her property. I guess the trouble was that we didn’t have any self-admitted proletarians. Everyone was a temporarily embarrassed capitalist. Maybe the Communists so closely questioned by investigation committees were a danger to America, but the ones I knew--at least they claimed to be Communists--couldn’t have disrupted a Sunday-school picnic. Besides they were too busy fighting among themselves...

Question to Self: Germany

Germany does not have the rise of the overclass. And Germany does have the wage stagnation--even though it is done everything right to preserve manufacturing employment and nurture communities of engineering practicing excellence.

Can I take the Germany-U.S. comparison as strong evidence against the "globalization has driven wage stagnation" hypothesis?

bradford-delong.com: Grasping Reality with My Minions, My Machines, and My Mental Power… 2016-12-14 16:41:27

Live from Indianapolis: Erik Loomis: Trump's Lies to Workers: "Donald Trump’s absurd attacks on USW Local 1999 president Chuck Jones gives him the opportunity to respond...

...and note Trump’s lies to working-class Americans, as well as why Trump appealed to union members through those lies:

Then, a couple of weeks ago, Trump got involved. He sat down with Carrier leaders. Afterward, he announced that 1,100 jobs would be saved. When I first heard the news, I was optimistic. But I began to get nervous when we couldn’t get any details on the deal. I urged caution, but our members got their hopes up. They thought their jobs had been saved. When I met with Carrier officials last Thursday, I realized that that wouldn’t be the case. Though Trump said he’d saved 1,100 jobs, he hadn’t. Carrier told us that 550 people would get laid off.

Trump didn’t tell people that, though. When he spoke at our plant, he acted like no one was going to lose their job. People went crazy for him. They thought, because of Trump, I’m going to be able to provide for my family. All the while, I’m sitting there, thinking that’s not what the damn numbers say. Trump let people believe that they were going to have a livelihood in that facility. He let people breathe easy. When I told our members the next day, they were devastated.

I was angry, too. So I told a Washington Post reporter the truth — that Trump’s 1,100 number was wrong. When Trump read my comments, he got angry. Last night, he tweeted...

And we know what Trump tweeted. Jones concludes:

What I can’t abide, however, is a president who misleads workers, who gives them false hope. We’re not asking for anything besides opportunity, for jobs that let people provide for their families. These plants are profitable, and the workers produced a good-quality product. Because of corporate greed, though, company leaders are racing to the bottom, to find places where they can pay the least. It’s a system that exploits everyone.

Of course, the media’s response to this has been terrible, as outlets like Politico and CNN and others are referring to Jones as a “union boss.” This pejorative is inaccurate. Jones is an elected union leader with accountability to his members. This is the equivalent of Trump attacking Frank Sobotka and national media outlets then calling him a union boss.

I do think Jones really gets at why Trump’s lies are so appealing to wide segments of the white working class. Not only does he make them feel good for being white, he tells them what they want to hear when it comes to their jobs. It doesn’t much matter that these are lies later. If someone tells you that they will allow you to feed your family through a dignified job, that is an incredibly appealing message. And everyone who says that economic anxiety wasn’t an issue for white working class Trump voters in the Midwest has to reckon with that fact. Of course, it wouldn’t work for black and Latino working class voters because Trump’s message is racist. But the economic anxiety felt by all members of the working class is very, very real.

bradford-delong.com: Grasping Reality with My Minions, My Machines, and My Mental Power… 2016-12-06 19:16:50

Live from Nineteenth-Century London: John Stuart Mill (1848, 1871): Principles of Political Economy: "Hitherto it is questionable if all the mechanical inventions yet made have lightened the day's toil of any human being...

...They have enabled a greater population to live the same life of drudgery and imprisonment, and an increased number of manufacturers and others to make fortunes. They have increased the comforts of the middle classes. But they have not yet begun to effect those great changes in human destiny, which it is in their nature and in their futurity to accomplish.

Only when, in addition to just institutions, the increase of mankind shall be under the deliberate guidance of judicious foresight, can the conquests made from the powers of nature by the intellect and energy of scientific discoverers become the common property of the species, and the means of improving and elevating the universal lot...

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