Larry Summers, the Congressional Progressive Caucus Budget, and the abandonment of fiscal policy [feedly]

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Larry Summers, the Congressional Progressive Caucus Budget, and the abandonment of fiscal policy
// Economic Policy Institute Blog

Federal budget season came and went this year without any budget proposal hitting the floor of the U.S. House of Representatives. This was an odd (and ironic) bit of incompetence by the GOP leadership, who couldn't even wrangle a majority to support their own budget proposal. But it was especially damaging to U.S. economic policy debates because it limited attention paid to the budget of the Congressional Progressive Caucus (CPC).

It's true that political gridlock has meant the only live macroeconomic policy debate in DC in recent years has been around monetary policy. And the Fed's decisions are important! But the abandonment of fiscal policy as a tool that could boost the economy, which began not soon after the recovery from the Great Recession began, is a real tragedy.

The need to resuscitate fiscal policy was usefully underscored in a widely-discussed speech by former Treasury Secretary and National Economic Council Chair Larry Summers earlier this week. Because the CPC and Larry Summers are perhaps not always thought of as completely in sync in policy debates, it's worth noting that Summers's remarks can be read as a ringing endorsement of the CPC budget. Some examples:

"I am here to tell you that the most important determinant of our long term fiscal picture is how successful we are at accelerating the economy's growth rate in the next three to five years, not the austerity measures that we implement."

The CPC budget includes substantial upfront fiscal stimulus (mostly front-loaded infrastructure investments projects) precisely to accelerate the economy's growth rate in the near-term.

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Social-democratic vs market-friendly progressivism [feedly]

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Social-democratic vs market-friendly progressivism
// Consider the Evidence

I learn from virtually everything I read by Mike Konczal, and agree with much of it. But the essay he and Patrick Iber have written on Karl Polanyi, progressivism, and the 2016 Democratic nomination contest leaves me with more questions than answers.

Iber and Konczal aim to highlight a tension within the American left between a "social democratic" vision of how to address social problems and a "progressive but market-friendly" vision. They say Bernie Sanders, a social democrat, believes access to education and healthcare should be a right, available to all persons regardless of income or wealth, whereas Hillary Clinton, a market-friendly progressive, thinks education and healthcare should remain market commodities, with access hinging at least partly on a person's ability to pay. Sanders, according to Iber and Konczal, "offers a straightforward defense of decommodification — the idea that some things do not belong in the marketplace — that is at odds with the kind of politics that the leadership of the Democratic Party has offered more or less since Carter."

What does treating education or healthcare as a right imply for policy?

Though Sanders favors free college for everyone, that isn't what he would provide. He proposes zero tuition (for in-state students at four-year public universities). But that wouldn't cover room and board, which costs $10,000 a year or more for a typical student. Offering "free" college that doesn't include room and board is a bit like offering "free" healthcare that covers the cost of surgery but requires patients to pay out of pocket for the hospital room. In the Sanders plan, low-income students, but not middle-income ones, "would be able to use federal, state, and college financial aid to cover room and board, books, and living expenses." So for Sanders, like for Clinton, college education wouldn't be genuinely decommodified.

That's the case in Sweden too, which is why a large portion of young Swedes leave college with fairly large student loan debt despite paying zero tuition. Earlier in the life course, Swedes benefit from high-quality child care and preschool. But while public funds heavily subsidize the cost, parents do have to pay for this early education, up to 10% of household income. Is Sweden failing to treat education as a right?

How about healthcare? I share Sanders' preference for a single-payer system, but that wouldn't necessarily decouple access to healthcare from one's income. Medicare pays, on average, only about two-thirds of elderly Americans' total medical expenses, so "Medicare for all" arguably wouldn't ensure everyone a right to what we think of as minimally adequate healthcare.

If we believe in a right to healthcare and education, shouldn't the same be true for food and housing? If so, does that mean everyone should receive a basic food allowance? A housing allowance? What if providing a meaningful housing allowance to all Americans turns out to be extremely expensive? Wouldn't we want to consider a policy that ensures housing for those least able to afford it but provides less help to those with higher incomes? That would be a "market-friendly" approach, in Iber and Konczal's formulation, but it might also be the best one.

To me, labeling Bernie Sanders' proposals "social democratic" and Hillary Clinton's "market friendly" obscures more than it clarifies. And applying an overarching principle, such as universal right to access, doesn't get us very far in figuring out the policy details for education (early, K-12, college), healthcare, food, housing, and more.

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Millionaire Tax Flight Myth Debunked — Again [feedly]

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Millionaire Tax Flight Myth Debunked — Again
// Center on Budget: Comprehensive News Feed

An important study published today conclusively debunks the myth that raising state income taxes on the wealthy causes many of them to flee to lower-tax states.  It also shows that repealing state income taxes — a change the American Legislative Exchange Council (ALEC) and others are promoting across the country — likely won't attract rich business owners and workers with sought-after scientific and technological skills, let alone average families.

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Kansas City Fed: Regional Manufacturing Activity "declined modestly" in May [feedly]

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Kansas City Fed: Regional Manufacturing Activity "declined modestly" in May
// Calculated Risk

From the Kansas City Fed: Tenth District Manufacturing Activity Declined Modestly

The Federal Reserve Bank of Kansas City released the May Manufacturing Survey today. According to Chad Wilkerson, vice president and economist at the Federal Reserve Bank of Kansas City, the survey revealed that Tenth District manufacturing activity declined modestly.

"Regional factory activity continued to drift down in May, as weakness in energy and agriculture-related manufacturing persisted," said Wilkerson. "Still, firms expect a modest pickup in activity later this year."
...
The month-over-month composite index was -5 in May, which is largely unchanged from April and March readings ...
emphasis added

The Kansas City region was hit hard by lower oil prices.
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US productivity declines [feedly]

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US productivity declines
// Socialist Economic Bulletin

By Michael Burke
US productivity is set to decline for the first time in three decades, according to forecasts from the influential business research organisation the Conference Board. The level of productivity, which is the amount produced per hour of labour, is decisive for living standards. It is extremely difficult to increase the living standards of the mass of the population without increasing productivity, and impossible to do so on a sustained basis. The Conference Board is forecasting US productivity will decline in 2016.

The Financial Times quotes Bart van Ark, the Conference Board's chief economist saying, "Last year it looked like we were entering into a productivity crisis: now we are right in it". Fig.1 is the Conference Board chart reproduced from the FT. Rising productivity has been a feature of the US economy since the crisis of the early 1980s.

Fig. 1 Conference Board changes in US productivity -via FT

 

But the chart also shows US productivity growth has been exceptionally weak in the recovery phase since the 2008 crisis. This weakness or outright falls in productivity is a generalised feature of the advanced industrialised economies since the crisis.

The cause is easily identified. Weak productivity growth is associated with weak investment growth. Outright falls in productivity have followed declines in investment. This is the pattern evident in the US economy. Fig.2 below shows Federal Reserve Board of St Louis data on the level of real investment (Gross Fixed Capital Formation) in the US economy, which is falling.

 

Fig.2 Level of real Investment (Gross Fixed Capital Formation) in US

 

The level of productivity is expected to fall after the level of investment has already fallen. In effect, more workers will be attempting to produce goods and services with fewer machines to hand. As a result the level of that output per hour worked will decline. It is possible, for a period, to make the existing level of productive capacity work harder. But this simply accelerates the deterioration and dilapidation of that capital stock (its 'wear and tear') so the rate of consumption of capital exceeds the rate of investment. Net investment falls and with it the productive capacity of the economy as a whole.

Two further points are worth noting. First, the level of investment in the US economy never recovered its pre-recession peak and is now turning lower. The economic outlook is deteriorating as a result, not improving as the policy makers of the Federal Reserve Board seem to believe. 

Secondly, the chart clearly demonstrates that this was an investment-led downturn in the US economy. As the US led the whole world into crisis, therefore it is reasonable to state that the Great Recession was caused by the US investment decline. In the chart above the shaded area represents the period of the recession itself. Evidently investment declined long before the recession began. In fact, it was two years later that recession began, as investment peaked in the 1st quarter of 2006. As the financial crisis of 2007-2008 also followed the investment decline, the millions of words written in support of the idea that it was the financial crisis which caused the recession are factually wrong. It was the fall in investment which caused both the financial crisis and the recession.

Turning to the UK economy, a cottage industry has grown up attempting to obscure the fundamental forces driving the decline in productivity here. SEB has shown that it is the decline in investment, leading to a decline in the net capital stock which has caused the crisis of productivity here, and that all other explanations are spurious. In the words of the FT report, the UK may simply be the 'canary in the coalmine', its productivity decline a harbinger of what may happen to the Western economies generally.

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Dani Rodrik. 'm profiled

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I'm profiled...
// *Dani Rodrik's* weblog

by the IMF, in their magazine Finance & Development. Here is the link. The piece is written by the IMF's Prakash Loungani, who has gone back and fished out vignettes that even I had forgotten. Here is the opening:

The triumph of markets over the state appeared almost complete in the early 1990s. The collapse of the Soviet Union and the fall of the Berlin Wall had discredited the role of the state in commanding the economic and political life of citizens. The political scientist Frank Fukuyama proclaimed in 1992 that the spread of democracy and capitalism around the globe would henceforth make history somewhat "boring." Among economists, markets—already held in fairly high regard—gained further esteem. Prominent left-leaning economists like Larry Summers admitted to a "grudging admiration" for such champions of the global spread of free markets as Milton Friedman.

But Harvard economist Dani Rodrik refused to join the party. Instead, he warned that globalization—the process of economic integration of nations through trade and finance—may have gone too far. In a 1997 monograph, he said there was a "yawning gap" between the rosy view of globalization held by economists and "the gut instincts of many laypeople" to resist it. In the United States, he noted, "a prominent Republican," Pat Buchanan, had just run "a vigorous campaign for the presidency on a plank of economic nationalism, promising to erect trade barriers and tougher restrictions on immigration" (themes pushed two decades later by Republican Donald Trump in his campaign for the 2016 presidential nomination).

Rodrik's warnings that the benefits of free trade were more apparent to economists than to others were prescient. His skepticism about the benefits of unfettered flows of capital across national boundaries is now conventional wisdom. His successful attack on the so-called Washington Consensus of policies to generate economic growth has made governments and international organizations like the IMF and the World Bank admit that there are many policy recipes that can generate growth. That the phrase "one size does not fit all" has become a cliché is due in no small part to the influence of Rodrik's work. "We didn't understand how right he was," says David Wessel, a former Wall Street Journal economics writer now at the Brookings Institution's Hutchins Center.

Loungani also has a separate article in the same issue titled "Neoliberalism" Oversold?" (co-authored with Jonathan Ostry and David Furceri).

A lengthy profile of me and a critique of financial globalization in the same issue of the IMF's flagship magazine? What is the world coming to?

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I'm profiled... [feedly]

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I'm profiled...
// *Dani Rodrik's* weblog

by the IMF, in their magazine Finance & Development. Here is the link. The piece is written by the IMF's Prakash Loungani, who has gone back and fished out vignettes that even I had forgotten. Here is the opening:

The triumph of markets over the state appeared almost complete in the early 1990s. The collapse of the Soviet Union and the fall of the Berlin Wall had discredited the role of the state in commanding the economic and political life of citizens. The political scientist Frank Fukuyama proclaimed in 1992 that the spread of democracy and capitalism around the globe would henceforth make history somewhat "boring." Among economists, markets—already held in fairly high regard—gained further esteem. Prominent left-leaning economists like Larry Summers admitted to a "grudging admiration" for such champions of the global spread of free markets as Milton Friedman.

But Harvard economist Dani Rodrik refused to join the party. Instead, he warned that globalization—the process of economic integration of nations through trade and finance—may have gone too far. In a 1997 monograph, he said there was a "yawning gap" between the rosy view of globalization held by economists and "the gut instincts of many laypeople" to resist it. In the United States, he noted, "a prominent Republican," Pat Buchanan, had just run "a vigorous campaign for the presidency on a plank of economic nationalism, promising to erect trade barriers and tougher restrictions on immigration" (themes pushed two decades later by Republican Donald Trump in his campaign for the 2016 presidential nomination).

Rodrik's warnings that the benefits of free trade were more apparent to economists than to others were prescient. His skepticism about the benefits of unfettered flows of capital across national boundaries is now conventional wisdom. His successful attack on the so-called Washington Consensus of policies to generate economic growth has made governments and international organizations like the IMF and the World Bank admit that there are many policy recipes that can generate growth. That the phrase "one size does not fit all" has become a cliché is due in no small part to the influence of Rodrik's work. "We didn't understand how right he was," says David Wessel, a former Wall Street Journal economics writer now at the Brookings Institution's Hutchins Center.

Loungani also has a separate article in the same issue titled "Neoliberalism" Oversold?" (co-authored with Jonathan Ostry and David Furceri).

A lengthy profile of me and a critique of financial globalization in the same issue of the IMF's flagship magazine? What is the world coming to?

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