Finance Has Become the Dominant Force in Shaping the Global Economy [feedly]

Finance Has Become the Dominant Force in Shaping the Global Economy
http://triplecrisis.com/finance-has-become-the-dominant-force-in-shaping-the-global-economy/

Lynn Fries of The Real News—reporting from the 2017 launch of the United Nations Conference on Trade and Development's Trade and Development Report—interviews the report's main author, Richard Kozul-Wright, Director of UNCTAD's Globalization and Development Strategies Division. In the interview, Kozul-Wright addresses the problems of a "hyperglobalized world … in which finance has essentially gained the upper hand in policy making." And he discusses the prospects for building alternatives to neoliberalism and austerity, up to and including a "Global New Deal."

Full text below the jump.

Lynn Fries: Welcome to The Real News. I'm Lynn Fries reporting from the UN Geneva on the 2017 launch of UNCTAD's flagship report, The Trade and Development Report as its main author, Richard Kozul-Wright, is given the floor at the UNCTAD Trade and Development Board meeting. Here is a clip of that meeting.

Richard Kozul-Wright: Finance—not trade, not technology—has been the dominant force shaping the trajectory of the global economy over the last 30 years. It would be nice to have a kind of killer diagram that would kind of summarize our position in one chart. I have not found that killer diagram.

We have 3 diagrams that speak to what we think are the problems with the hyperglobalized world—the problems of growing inequality, the problems of indebtedness, the problems of insufficient investment and the problems of increasing insecurity. We think those are 4 common features that one finds across developed and developing countries in the world that has become hyperglobalized. And to some extent these three charts, and again in the case for the United States, are an attempt to capture those kinds of dynamics.
The first chart on my left hand side is an indication of the widening gap between productivity—which is the blue line in this chart, hourly productivity in this case—and wages or compensation. The red line is hourly compensation. And in the case of the United States that divergence between what people are making and what people are being paid to make stuff has been rising considerably over the last four to five decades. But quite dramatically over the last 3 decades as real wages have essentially stagnated, in this case in the United States.

The middle graph, the orange line here is private capital formation. One of the arguments for financializing the world was this would be good for investors, good for investment. And of course it has been very good for paper investors, people who make their money out of rising asset prices. It has not been good for people who are investing long term in people and equipment and machinery which is essentially the yellow trend in the middle chart which has been declining systematically over the period of hyperglobalization. At the same time, the debt and particularly in this case household debt has been rising at a tremendous rate in the period of hyperglobalization. So it has not been good for investment and it has forced people into a level of indebtedness that we think is a source of serious instability.

And finally it is a world that doesn't really recover very successfully when problems occur. The final graph in this triplet is the recovery from 3 crises. The blue line is the recovery from the Great Depression, the green line is the recovery under Ronald Reagan from the post 1979, 1980 crisis and the red line is the recent recovery in the United States. And it has been tepid at best. And it certainly does not compare with the Reagan recovery, let alone the recovery in the 1930s.

And this is the same graph for the United Kingdom. I apologize that was a bias of my report. Similar kind of … you see similar trends. There are differences across countries, of course, the historical and policy differences. But the broad trends are surprisingly similar across the advanced world in terms of rising inequality, falling investment and rising debt particularly household debt, and slow recovery from crisis

So that's our understanding of a hyperglobalized world and the problems that policy makers should be addressing if they are going to try and build more inclusive and sustainable economies.

Lynn Fries: Joining us now to discuss this is Richard Kozul-Wright, Director of the Division on Globalization and Development Strategies here at UNCTAD. Welcome Richard.

Richard Kozul Wright: A pleasure to be here.

Lynn Fries: A major event in the 2017 launch of the Trade and Development Report is the presentation of the TDR to the UNCTAD Trade and Development Board. Give us some context on that.

Richard Kozul-Wright: Obviously our immediate audience for The Trade and Development Report is the members of UNCTAD itself. And UNCTAD is a universal body so it has full membership of both developed and developing countries. So the report is presented to the full membership at our Trade and Development Board each year. So they are first consumers of the ideas in this report. The Trade and Development Report is now 35 years old.

Lynn Fries: In the current debate over what is at the source behind the problems like rising inequality in today's globalized world, you do not point the finger at trade or technology, the usual suspects. Comment on that and more broadly on what differentiates the direction of your report from that of most other international institutions.

Richard Kozul-Wright: Well I think we are really taking the debate away from what we see as a slightly sterile polarization between trade and technology as the sources of inclusiveness, precariousness, insecurity. And saying, look, the way in which markets are being structured now by large financial and corporate bodies is at the source of this polarization and insecurity. And these very large private institutions have begun in fairly dramatic ways to corrupt the public sector. That's true both of the public sector at the national level and the public sphere at the international level. And so we need to find ways of mitigating that economic power without one hopes damaging the benefits that come with scale. Because there are advantages of having large big innovative firms that can undertake research and development and innovation. But if they become a law unto themselves rather than a law subject to wider democratic will and representation, then that is where the problem lies.

So we have to … getting back to the underlying systemic causes of why people have become disillusioned with the current state of affairs, it's not about trade. People are not disillusioned with trade. They know trade brings benefits as well costs. They are not disillusioned with technology. They know that technology has been transformative even as it has brought challenges to them. What they are disillusioned about is the way in which political representation has been corrupted by economic power. That is what really disillusions … this is what people are finding increasingly difficult to deal with. And they do not trust the people that claim to be representing them. And that is true at the international level of course as well as the national level. So the report, I think the real meat of the report is to get down to the systemic forces that are channeling economic power into political power and in the process reinforcing the economic power that is increasingly behind this polarized and fragmented and increasingly distant system that people are experiencing.

Lynn Fries: Explain what you mean by a hyperglobalized world. And why you see the deadweight of austerity, as you put it, as essentially the default macroeconomic policy of a hyperglobalized world.

Richard Kozul-Wright: For us the hyperglobalized world is a world in which finance has essentially gained the upper hand in policy making. Finance has essentially followed the idea that government is not the solution. Government is the problem. And so deregulation, privatization, liberalization have been the overarching policy mantra of the hyperglobalized world. And in that world when things go wrong, as they inevitably do, the macroeconomic response is always to cut—to cut government expenditure, to cut social services of one kind or another, to clamp down on wages even when the source of the problem is not spending of that nature. Cutting spending always becomes the default policy solution. And we have seen that again since the 2008-2009 crisis particularly in the advanced economies. And it has not worked. Inequality has continued to rise. Growth and the recovery have been historically slow. These are the slowest recoveries from an economic crisis that we have seen in the modern era. And finance has been able to resist any sort of serious attempt to rein in its influence. There have been attempts in the Basel discussions in the Financial Stability Board etc. So there has been an attempt but it's been weak and it's already being rolled back. So austerity is this kind of broad policy brush against which business as usual—the kind of predictable neoliberal policy agenda has been able to survive even as its impact has been shown to have been negative and destructive.

Lynn Fries: Comment on the outlook as you see it for moving beyond austerity towards the kind of Global New Deal you outline in the TDR.

Richard Kozul-Wright: You have to change the narrative. Obviously we are 30 odd years into a narrative about the world economy and related policy challenges that have been driven by the neoliberal agenda. That agenda has been challenged in recent years. I mean the financial crisis being the most obvious challenge to that but also the weakness of the post-crisis recovery. All pose a big challenge to this dominant narrative. But you can only move forward of course if you have an alternative narrative. And it is the job, I think, of an institution like UNCTAD and The Trade and Development Report to try and fashion an alternative narrative. And that is what the report does speaking primarily to policy makers at the national level of course. Because that is … they are the policy makers that can actually enact the changes. So the aim of the report is very much to change the narrative—that there are alternatives to neoliberalism both alternatives that we see today and also drawing on historical lessons. In this report, we hark back to New Deal, the 1930s effort in the United States to refashion the relationship between the economy, society and its citizens. Because we feel many of the imbalances and challenges of the 1930s have their analogue in imbalances and challenges today. And if it was done before in the 1930s why can't it be done again today. And that is where the report kicks off from.

Obviously a Global New Deal is not going to take place overnight. It is not something that one can wave a magic wand and shift 35 years of neoliberalism into a different direction. That is clearly not going to happen. But the kinds of pressures and tensions that we are describing in the global economy we think are forcing policy makers, often against their wishes, to think differently from the last 35 to 40 years. And it is to play on those concerns and those opportunities I think UNCTAD as an institution needs to do more of.
I think the important thing is not simply to focus on immediate political shocks—Trump or Brexit. I mean this is a problem that has been decades in the making. It is not something that has suddenly emerged in 2016 as a series of problems. The negative impact of austerity has been felt in developing countries beginning in the early 1980s. It was there in the debt crisis in Latin America and Sub-Saharan Africa. It resurfaced again after the Asian crisis in 1997. Austerity has a much longer history than the last few years. And looking at all those experiences I think we can comfortably say that it has not delivered on the promises that it claimed it would make which is to make a healthier and more dynamic and more productive economy. And so I think the—there is no alternative—which is a phrase that was hatched by Margaret Thatcher in the early 1980s has outlived its relevance in terms of the kinds of challenges—the problems of inequality, of instability, indebtedness, insecurity—that policy makers are grappling with today

There isn't an international governance system separately from the nation states that make up that system. And therefore you have to be talking, you have to persuade nation states that they need to change if the international governance system is going to change. That's clear. So you are pitching an argument not at some airy fairy level about the independence of multilateralism. It's how can governments … what do national level governments particularly the systemically important governments have to do to change the system in a way that we can begin to see improvements in the area that we are outlining in the report.

Pressure is building up to try alternatives. I think that is clear. One can see that in efforts in the United Kingdom … in the recent election. One can see it in the efforts of the European Commission to clamp down on monopoly power of leading IT companies, of tax evasion efforts that you see in the OECD, in the EU. There are efforts to address some of the kinds of abuses of power that we highlight in this TDR. Obviously, this has yet to amount to a concerted move away from neoliberalism. It is still picking at the edges but it is a mood shift. And I think it is the job of a report like the TDR to build on that change of sentiment and to offer a bolder vision about how these individual or isolated efforts to deal with the consequences of neoliberalism can be woven into a larger narrative and a broader set of policy initiatives which if implemented in a more concerted manner can provide the necessary policy alternative to deliver the inclusive and sustainable outcomes that governments have expressed their desire to achieve through the Sustainable Development Goals and other platforms.

Lynn Fries: Richard Kozul-Wright, thank you.

Richard Kozul-Wright: Thank you

Lynn Fries: And thank you for joining us on The Real News Network.

Originally published at The Real News Network.
Triple Crisis welcomes your comments. Please share your thoughts below.

Triple Crisis is published by

 -- via my feedly newsfeed

Taking a Crack at Neoliberalism [feedly]

Taking a Crack at Neoliberalism
http://rodrik.typepad.com/dani_rodriks_weblog/2017/11/taking-a-crack-at-neoliberalism.html

Here is the back story for my new piece "Rescuing Economics from Neoliberalism," just out in the Boston Review.

I have never been a fan of the term "neoliberal." It has never been quite clear what it means. Nor is it obvious who today's neoliberals are. Thatcher, Reagan, Pinochet in their day, yes. But today?

Nevertheless, the term is widely used by its many critics to condemn in quite broad brush terms a certain way of thinking of the role of the market in society. There are more careful exegeses that give neoliberalism a more precise meaning and a specific historical trajectory (see here and here). But in public discourse the term has become a loose cannon – or to use perhaps a more appropriate metaphor -- a spray gun directed at one's intellectual opponents.

I was happy to keep myself out of the ring on what neoliberalism is or isn't. Then a few months ago Leon Wieseltier wrote to me out of the blue, and effectively cajoled me to write to a piece on the subject for what was going to be his new journal. He had seen the galleys of my new book which had apparently convinced him that I was the man for the job. So I set myself upon the task.

As it turned out, Wieseltier's new journal was cancelled before its first issue came out. (In case you have missed it, here is the story). His publishers were kind enough to release the rights for the piece, and Josh Cohen was nice enough to want to publish it in the Boston Review.

Here is the core of it:

That neoliberalism is a slippery, shifting concept, with no explicit lobby of defenders, does not mean that it is irrelevant or unreal. Who can deny that the world has experienced a decisive shift toward markets from the 1980s on? Or that center-left politicians—Democrats in the United States, Socialists and Social Democrats in Europe—enthusiastically adopted some of the central creeds of Thatcherism and Reaganism, such as deregulation, privatization, financial liberalization, and individual enterprise? Much of our contemporary policy discussion remains infused with norms and principles supposedly grounded in homo economicus.

But the looseness of the term neoliberalism also means that criticism of it often misses the mark. There is nothing wrong with markets, private entrepreneurship, or incentives—when deployed appropriately. Their creative use lies behind the most significant economic achievements of our time. As we heap scorn on neoliberalism, we risk throwing out some of neoliberalism's useful ideas.

The real trouble is that mainstream economics shades too easily into ideology, constraining the choices that we appear to have and providing cookie-cutter solutions. A proper understanding of the economics that lies behind neoliberalism would allow us to identify—and to reject—ideology when it masquerades as economic science. Most importantly it would help us develop the institutional imagination we badly need to redesign capitalism for the twenty-first century.

For the full piece, go here.

PS. Many thanks by the way to Adam Kirsch and Lev Mendes for their work on the original piece.

 -- via my feedly newsfeed

Dani Rodrik Indicts Neoliberalism -- both the term, and the reality

Our wisest economist, IMO, speaks up!

Rescuing Economics from Neoliberalism

DANI RODRIK

As even its harshest critics concede, neoliberalism is hard to pin down. In broad terms, it denotes a preference for markets over government, economic incentives over social or cultural norms, and private entrepreneurship over collective or community action. It has been used to describe a wide range of phenomena—from Augusto Pinochet to Margaret Thatcher and Ronald Reagan, from the Clinton Democrats and Britain's New Labour to the economic opening in China and the reform of the welfare state in Sweden. 

The term is used as a catchall for anything that smacks of deregulation, liberalization, privatization, or fiscal austerity. Today it is reviled routinely as a short-hand for the ideas and the practices that have produced growing economic insecurity and inequality, led to the loss of our political values and ideals, and even precipitated our current populist backlash.

As we heap scorn on neoliberalism, we risk throwing out some of its useful ideas.

We live in the age of neoliberalism, apparently. But who are neoliberalism's adherents and disseminators—the neoliberals? Oddly, you would almost have to go back to the early 1980s to find anyone explicitly embracing neoliberalism. In 1982, Charles Peters, the longtime editor of The Washington Monthly, published an essay called "A Neo-Liberal's Manifesto." It makes for interesting reading thirty-five years later, since the neoliberalism it describes bears little resemblance to today's target of derision. The politicians whom Peters names as exemplifying the movement are not Thatcher and Reagan, but Bill Bradley, Gary Hart, and Paul Tsongas. The journalists and academics whom he lists include James Fallows, Michael Kinsley, and Lester Thurow. Peters's neoliberals are liberals (in the U.S. sense of the word) who have dropped their prejudices in favor of unions and big government and against markets and the military.

The use of the term "neoliberal" exploded in the 1990s, when it became closely associated with two developments, neither of which Peters mentions. One was financial deregulation, which would culminate in the 2008 financial crash—the first that the United States had experienced since the interwar period—and in the still-lingering euro debacle. The second was economic globalization, which accelerated thanks to free flows of finance and to a new, more ambitious type of trade agreement. Financialization and globalization have become the most overt manifestations of neoliberalism in today's world.

That neoliberalism is a slippery, shifting concept, with no explicit lobby of defenders, does not mean that it is irrelevant or unreal. Who can deny that the world has experienced a decisive shift toward markets from the 1980s on? Or that center-left politicians—Democrats in the United States, Socialists and Social Democrats in Europe—enthusiastically adopted some of the central creeds of Thatcherism and Reaganism, such as deregulation, privatization, financial liberalization, and individual enterprise? Much of our contemporary policy discussion remains infused with norms and principles supposedly grounded in homo economicus.

But the looseness of the term neoliberalism also means that criticism of it often misses the mark. There is nothing wrong with markets, private entrepreneurship, or incentives—when deployed appropriately. Their creative use lies behind the most significant economic achievements of our time. As we heap scorn on neoliberalism, we risk throwing out some of neoliberalism's useful ideas.

The real trouble is that mainstream economics shades too easily into ideology, constraining the choices that we appear to have and providing cookie-cutter solutions. A proper understanding of the economics that lies behind neoliberalism would allow us to identify—and to reject—ideology when it masquerades as economic science. Most importantly it would help us develop the institutional imagination we badly need to redesign capitalism for the twenty-first century.   

 Neoliberalism is typically understood as based on key tenets of mainstream economic science. To see those tenets, without the ideology, consider a thought experiment.

A well-known and highly regarded economist lands in a country he has never visited and knows nothing about. He is brought to a meeting with the country's leading policymakers. "Our country is in trouble," they tell him. "The economy is stagnant, investment is low, and there is no growth in sight." They turn to him expectantly: "Please tell us what we should do to make our economy grow."

The economist pleads ignorance and explains that he knows too little about the country to make any recommendations. He would need to study the history of the economy, to analyze the statistics, and to travel around the country before he could say anything. But his hosts are insistent. "We understand your reticence and we wish you had the time for all that," they tell him. "But isn't economics a science, and aren't you one of its most distinguished practitioners? Even though you do not know much about our economy, surely there are some general theories and prescriptions you can share with us to guide our economic policies and reforms."

Economists tend to be very good at making maps, but not good enough at choosing the one most suited to the task at hand.

The economist is now in a bind. He does not want to emulate those economic gurus he has long criticized for peddling their favorite policy advice. But he feels challenged by the question. Are there universal truths in economics? Can he say anything valid (and possibly useful)?

So he begins. The efficiency with which an economy's resources are allocated is a critical determinant of the economy's performance, he says. Efficiency, in turn, requires aligning the incentives of households and businesses with social costs and benefits. The incentives faced by entrepreneurs, investors, and producers are particularly important when it comes to economic growth. Growth needs a system of property rights and contract enforcement that will ensure those who invest can retain the returns on their investments. And the economy must be open to ideas and innovations from the rest of the world.

But economies can be derailed by macroeconomic instability, he goes on. Governments must therefore pursue a sound monetary policy, which means restricting the growth of liquidity to the increase in nominal money demand at reasonable inflation. They must ensure fiscal sustainability, so that the increase in public debt does not outpace national income. And they must carry out prudential regulation of banks and other financial institutions to prevent the financial system from taking excessive risk.

Now he is warming up to his task. Economics is not just about efficiency and growth, he adds. Economic principles also carry over to equity and social policy. Economics has little to say about how much redistribution a society should seek. But it does tell us that the tax base should be as broad as possible and that social programs should be designed in a way that does not encourage workers to drop out of the labor market.

By the time the economist stops, it appears as if he has laid out a full-fledged neoliberal agenda. A critic in the audience will have heard all the code words: efficiency, incentives, property rights, sound money, fiscal prudence. Yet the universal principles that the economist describes are in fact quite open-ended. They presume a capitalist economy—one in which investment decisions are made by private individuals and firms—but not much beyond that. They admit—indeed they require—a surprising variety of institutional arrangements.

So has the economist just delivered a neoliberal screed? We would be mistaken to think so, and our mistake would consist of associating each abstract term—incentives, property rights, sound money—with a particular institutional counterpart. And therein lies the central conceit, and the fatal flaw, of neoliberalism: the belief that first-order economic principles map onto a unique set of policies, approximated by a Thatcher–Reagan-style agenda.  

Consider property rights. They matter insofar as they allocate returns on investments. An optimal system would distribute property rights to those who would make the best use of an asset and afford protection against those most likely to expropriate the returns. Property rights are good when they protect innovators from free riders, but they are bad when they protect them from competition. Depending on the context, a legal regime that provides the appropriate incentives can look quite different from the standard U.S. style regime of private property rights.

This may seem like a semantic point with little practical import; but China's phenomenal economic success is largely due to its orthodox-defying institutional tinkering. China turned to markets, but did not copy Western practices in property rights. Its reforms produced market-based incentives through a series of unusual institutional arrangements that were better adapted to the local context. Rather than move directly from state to private ownership, for example, which would have been stymied by the weakness of the prevailing legal structures, the country relied on mixed forms of ownership that provided more effective property rights for entrepreneurs in practice. Township and Village Enterprises (TVEs), which spearheaded Chinese economic growth during the 1980s, were collectives owned and controlled by local governments. Even though they were publicly owned, entrepreneurs received the protection against expropriation they needed. Local governments had a direct stake in the profits of the firms and hence did not want to kill the goose that lays the golden eggs.

Good economists know that the correct answer to any question in economics is: it depends.

China relied on a range of such innovations, each delivering the economist's higher-order economic principles in unfamiliar institutional arrangements. Dual-track pricing, which retained compulsory grain deliveries to the state but allowed farmers to sell excess produce in free markets, provided supply-side incentives while insulating public finances from the adverse effects of full liberalization. The so-called Household Responsibility System gave farmers the incentive to invest in and improve the land they worked on, while obviating the need for explicit privatization. Special economic zones provided export incentives and attracted foreign investors without removing protection for state firms (and hence safeguarding domestic employment). In view of such departures from orthodox blueprints, calling China's economic reforms a neoliberal turn, as critics are inclined to do, distorts more than it reveals. If we are to call this neoliberalism, we must surely look more kindly on the ideas behind the most dramatic poverty reduction in history.

One might protest that China's institutional innovations were purely transitional. Perhaps it will have to converge on Western-style institutions to sustain its economic progress. But this common line of thinking overlooks the diversity of capitalist arrangements that still prevails among advanced economies, despite the considerable homogenization of our policy discourse.

What, after all, are Western institutions? The importance of the public sector, for example, in the club of rich Organization For Economic Cooperation and Development (OECD) countries varies from a third of the economy in Korea to nearly 60 percent in Finland. In Iceland, 86 percent of workers are members of a trade union; the comparable number in Switzerland is just 16 percent. In the United States firms can fire workers almost at will; French labor laws require employers to jump through many hoops first. Stock markets have grown to nearly one-and-a-half times national income in the United States; in Germany, they are only a third as large, representing one-half of national income.

The idea that any one of these models of taxation, labor relations, or financial organization is inherently superior to the others is belied by the varying economic fortunes that each of these economies have experienced over recent decades. The United States has gone through successive periods of angst in which its economic institutions were judged inferior to those in Germany, Japan, China, and now possibly Germany again. Certainly comparable levels of wealth and productivity can be produced under very different models of capitalism. We might even go a step further: today's prevailing models probably come nowhere near exhausting the range of what might be possible (and desirable) in the future. 

The visiting economist in our thought experiment knows all this and recognizes that the principles he has enunciated need to be filled in with institutional detail before they become operational. Property rights? Yes, but how? Sound money? Of course, but how? It would perhaps be easier to criticize his list of principles for being vacuous than to denounce it as a neoliberal screed.

Still, these principles are not entirely content free. China, and indeed all countries that managed to develop rapidly, demonstrate their utility once they are properly adapted to local context. Conversely, too many economies have been driven to ruin courtesy of political leaders who chose to violate them. We need look no further than Latin American populists or Eastern European communist regimes to appreciate the practical significance of sound money, fiscal sustainability, and private incentives.

Of course economics goes beyond a list of abstract, largely common sense principles. Much of the work of economists consists of developing stylized models of how actual economies work and then confronting those models with evidence. Economists tend to think of what they do as progressively refining their understanding of the world: their models are supposed to get better and better as they are tested and revised over time. But progress in economics happens differently.

Economists study a social reality that is unlike the physical universe of natural scientists. It is completely man-made, highly malleable, and operates according to different rules across time and space. Economics advances not by settling on the right model or theory to answer such questions, but by improving our understanding of the diversity of causal relationships. Neoliberalism and its customary remedies—always more markets, always less government—are in fact a perversion of mainstream economics. Good economists know that the correct answer to any question in economics is: it depends.

The economists who let their enthusiasm for free markets run wild are in fact not being true to their own discipline.

Does an increase in the minimum wage depress employment? Yes, if the labor market is really competitive and employers have no control over the wage they must pay to attract workers; but not necessarily otherwise. Does trade liberalization increase economic growth? Yes, if it increases the profitability of industries where the bulk of investment and innovation takes place; but not otherwise. Does more government spending increase employment? Yes, if there is slack in the economy and wages do not rise; but not otherwise. Does monopoly harm innovation? Yes and no, depending on a whole host of market circumstances.

In economics, new models rarely supplant older models. The basic competitive-markets model dating back to Adam Smith has been modified over time by the inclusion, in rough historical order, of monopoly, externalities, scale economies, incomplete and asymmetric information, irrational behavior, and many other real world features. Yet the older models remain as useful as ever. Understanding how real markets operate necessitates different lenses at different times.

Perhaps maps offer the best analogy. Just like economic models, maps are highly stylized representations of reality. They are useful precisely because they abstract from many real world details that would get in the way. Realistic full-scale maps would be hopelessly impractical artifacts, as Jorge Luis Borges described in a short story that remains the best and most succinct explication of the scientific method. But abstraction also implies that we need a different map depending on the nature of our journey. If we are traveling by bike, we need a map of bike trails. If we are to go on foot, we need a map of foot paths. If a new subway is constructed, we will need a subway map—but we wouldn't throw out the older maps.      

Economists tend to be very good at making maps, but not good enough at choosing the one most suited to the task at hand. When confronted with policy questions of the type our visiting economist faces, too many of them resort to "benchmark" models that favor laissez-faire. Knee-jerk solutions and hubris replace the richness and humility of the discussion in the seminar room. John Maynard Keynes once defined economics as the "science of thinking in terms of models joined to the art of choosing models which are relevant." Economists typically have trouble with the "art" part.

I have illustrated this too with a parable. A journalist calls an economics professor for his view on whether free trade is a good idea. The professor responds enthusiastically in the affirmative. The journalist then goes undercover as a student in the professor's advanced graduate seminar on international trade. He poses the same question: Is free trade good? This time the professor is stymied. "What do you mean by 'good?'" he responds. "And good for whom?" The professor then launches into an extensive exegesis that will ultimately culminate in a heavily hedged statement: "So if the long list of conditions I have just described are satisfied, and assuming we can tax the beneficiaries to compensate the losers, freer trade has the potential to increase everyone's well being." If he is in an expansive mood, the professor might add that the effect of free trade on an economy's long-term growth rate is not clear either and would depend on an altogether different set of requirements.

This professor is rather different from the one the journalist encountered previously. On the record, he exudes self-confidence, not reticence, about the appropriate policy. There is one and only one model, at least as far as the public conversation is concerned, and there is a single correct answer regardless of context. Strangely, the professor deems the knowledge that he imparts to his advanced students to be inappropriate (or dangerous) for the general public. Why?

The roots of such behavior lie deep in the sociology and the culture of the economics profession. But one important motive is the zeal to display the profession's crown jewels in untarnished form—market efficiency, the invisible hand, comparative advantage—and to shield them from attack by self-interested barbarians, namely the protectionists. Unfortunately, these economists typically ignore the barbarians on the other side of the issue—financiers and multinational corporations whose motives are no purer and who are all too ready to hijack these ideas for their own benefit.

As a result, economists' contributions to public debate are often biased in one direction, in favor of more trade, more finance, and less government. That is why economists have developed a reputation as cheerleaders for neoliberalism, even if mainstream economics is very far from a paean to laissez-faire. The economists who let their enthusiasm for free markets run wild are in fact not being true to their own discipline.

How then should we think about globalization in order to liberate it from the grip of neoliberal practices? We must begin by understanding the positive potential of global markets. Access to world markets in goods, technologies, and capital has played an important role in virtually all of the economic miracles of our time. China is the most recent and powerful reminder of this historical truth, but it is not the only case. Before China, similar miracles were performed by South Korea, Taiwan, Japan, and a few non-Asian countries such as Chile and Mauritius. All of these countries embraced globalization rather than turn their backs on it, and they benefited handsomely.

China's phenomenal economic success is largely due to its orthodox-defying institutional tinkering.

Defenders of the existing economic order will quickly point to these examples when globalization comes into question. What they will fail to say is that almost all of these countries joined the world economy by violating neoliberal strictures. China shielded its large state sector from global competition, establishing special economic zones where foreign firms could operate with different rules than in the rest of the economy. South Korea and Taiwan heavily subsidized their exporters, the former through the financial system and the latter through tax incentives. All of them eventually removed most of their import restrictions, long after economic growth had taken off. But none, with the sole exception of Chile in the 1980s under Pinochet, followed the neoliberal recommendation of a rapid opening­-up to imports. Chile's neoliberal experiment eventually produced the worst economic crisis in all of Latin America. While the details differ across countries, in all cases governments played an active role in restructuring the economy and buffeting it from a volatile external environment. Industrial policies, restrictions on capital flows, and currency controls—all prohibited in the neoliberal playbook—were rampant.

By contrast, countries that stuck closest to the neoliberal model of globalization were sorely disappointed. Mexico provides a particularly sad example. Following a series of macroeconomic crises in the mid-1990s, Mexico embraced macroeconomic orthodoxy, extensively liberalized its economy, freed up the financial system, sharply reduced import restrictions, and signed the North American Free Trade Agreement (NAFTA). These policies did produce macroeconomic stability and a significant rise in foreign trade and internal investment. But where it counts—in overall productivity and economic growth—the experiment failed. Since undertaking the reforms, overall productivity in Mexico has stagnated, and the economy has underperformed even by the undemanding standards of Latin America.

These outcomes are not a surprise from the perspective of sound economics. They are yet another manifestation of the need for economic policies to be attuned to the failures to which markets are prone, and to be tailored to the specific circumstances of each country. No single blueprint fits all.

Before globalization took a turn towards what we might call hyper-globalization, the rules were flexible and recognized this fact. Keynes and his colleagues viewed international trade and investment as a means for achieving domestic economic and social goals—full employment and broad-based prosperity—when they designed the global economic architecture in Bretton Woods in 1944. From the 1990s on, however, globalization became an end in itself. Global economic arrangements were now driven by a single-minded focus on reducing impediments to the flows of goods, capital, and money across national borders—though not of workers, where the economic gains in fact would have been much larger. 

This perversion of priorities revealed itself in the way trade agreements began to reach behind borders and remake domestic institutions. Investment regulations, health and safety rules, environmental policies, and industrial promotion schemes all became potential targets for abolition if they were deemed to stand in the way of foreign trade and investment. Large international firms, rendered footloose by the new rules, acquired special privileges. Corporate taxes had to be lowered to attract investors (or prevent them from leaving). Foreign enterprises and investors were given the right to sue national governments in special offshore tribunals when changes in domestic regulations threatened to reduce their profits. Nowhere was the new deal more damaging than in financial globalization, which produced not greater investment and growth, as promised, but one painful crash after another.

Neoliberalism must be rejected on its own terms for the simple reason that it is bad economics.

Just as economics must be saved from neoliberalism, globalization has to be saved from hyper-globalization. An alternative globalization, more in keeping with the Bretton Woods spirit, is not difficult to imagine: a globalization that recognizes the multiplicity of capitalist models and therefore enables countries to shape their own economic destinies. Instead of maximizing the volume of trade and foreign investment and harmonizing away regulatory differences, it would focus on traffic rules that manage the interface of different economic systems. It would open up policy space for advanced countries as well as developing ones—the former so they can reconstruct their social bargains through better social, tax, and labor market policies, and the latter so they can pursue the restructuring they need for economic growth. It would require more humility on the part of economists and policy technocrats about appropriate prescriptions, and hence a much greater willingness to experiment.

As Peters's early manifesto attests, the meaning of neoliberalism has changed considerably over time as the label has acquired harder-line connotations with respect to deregulation, financialization, and globalization. But there is one thread that connects all versions of neoliberalism, and that is the emphasis on economic growth. Peters wrote in 1982 that the emphasis was warranted because growth is essential to all our social and political ends—community, democracy, prosperity. Entrepreneurship, private investment, and removing obstacles (such as excessive regulation) that stand in the way were all instruments for achieving economic growth. If a similar neoliberal manifesto were penned today, it would no doubt make the same point.

Critics often point out that this emphasis on economics debases and sacrifices other important values such as equality, social inclusion, democratic deliberation, and justice. Those political and social objectives obviously matter enormously, and in some contexts they matter the most. They cannot always, or even often, be achieved by means of technocratic economic policies; politics must play a central role.

But neoliberals are not wrong when they argue that our most cherished ideals are more likely to be attained when our economy is vibrant, strong, and growing. Where they are wrong is in believing that there is a unique and universal recipe for improving economic performance to which they have access. The fatal flaw of neoliberalism is that it does not even get the economics right. It must be rejected on its own terms for the simple reason that it is bad economics.

--

John Case
Harpers Ferry, WV

The Winners and Losers Radio Show

7-9 AM Weekdays, The Enlighten Radio Player Stream, 

Sign UP HERE to get the Weekly Program Notes.

Check out Socialist Economics, the Enlighten Radio website, and 

The Poets and Mechanics Quaker Worship Group

FRBSF FedViews [feedly]

FRBSF FedViews
http://economistsview.typepad.com/economistsview/2017/11/frbsf-fedviews.html

 "A major contributor to low inflation is the health-care services sector":

FRBSF FedViews: Adam Shapiro, research advisor at the Federal Reserve Bank of San Francisco, stated his views on the current economy and the outlook as of November 9, 2017.

Despite disruptions from the recent hurricanes, real gross domestic product (GDP) has continued to grow at a moderate pace. After a strong second quarter, real GDP grew at an annual rate of 3% in the third quarter, according to the "advance" estimate by the Bureau of Economic Analysis. We forecast that GDP will grow in the fourth quarter at an annual rate of 2.6% and average 2.5% for 2017. As monetary policy continues to normalize over the next two to three years, we expect growth to gradually fall back to our long-trend growth estimate of 1.5%.

The recent fires in Northern California were the most devastating in the state's history, causing billions of dollars in property damage, thousands of displaced residents, and tragic loss of life. While the full effect of the fires on the local economy is still being determined, the economic impact on the entire United States is likely to be modest as the affected areas are not sizable business or population centers.

The U.S. economy added 261,000 jobs in October, reflecting not only individuals returning to work who had been kept home by the hurricanes, but also the strong labor market. Job gains have averaged close to 160,000 over the past six months, well above the amount needed to absorb the flow of new workers into the labor force.

The unemployment rate stands at 4.1% as of October. We expect the unemployment rate to decline below 4.0% by the middle of 2018 as the economy continues to strengthen. Monetary policy accommodation will ease over the longer run, and we expect the unemployment rate to gradually return back to our estimate of the natural rate of 4.8%.

The yield curve continues to flatten as short-term rates rise while longer-term rates remain relatively steady. At the November meeting, the Federal Open Market Committee (FOMC) kept the target range for the federal funds rate unchanged at 1 to 1.25% and announced it is proceeding with the balance sheet normalization process initiated in October.

Inflation continues to remain below the FOMC's target of 2%. The personal consumption expenditures (PCE) price index rose 1.6% over the past 12 months, while the core PCE index, which removes volatile food and energy prices, rose 1.3%. As the labor market continues to tighten, we expect inflation to gradually reach the FOMC's target of 2% by 2019. 

Inflation fluctuates with the overall economy but also in response to factors that are more industry specific. The degree of price sensitivity to overall economic conditions and other factors varies across sectors. Prices in some sectors, such as housing, restaurants, and recreation services and goods, are relatively more sensitive to overall economic conditions, while prices in other sectors, such as health-care, financial, and communications services, are relatively more sensitive to industry-specific factors.

The inflation rate for prices in sectors that tend to be sensitive to the overall state of the economy have moved back up to pre-recession levels, in line with the improvement in economic conditions. By contrast, the inflation rate has fallen for sectors that tend to be more sensitive to industry-specific factors and is currently holding down inflation.

A major contributor to low inflation is the health-care services sector, which currently makes up about one-fifth of core personal consumption expenditures and tends to be relatively insensitive to economy-wide conditions. Health-care services inflation has declined steadily, falling from an average above 3.0% in the mid-2000s to close to 1.0% over the past five years. 

The decline in health-care services inflation is mainly attributable to ongoing mandated cuts to Medicare payment growth, which also tend to affect payments in the private health-care market. Medicare payments to hospitals, for example, have been flat for the past five years. Some of the payment growth cuts are permanent, which are likely to cause some continued drag on inflation in the future, despite a strengthening economy. 

The views expressed are those of the author, with input from the forecasting staff of the Federal Reserve Bank of San Francisco. They are not intended to represent the views of others within the Bank or within the Federal Reserve System.

 -- via my feedly newsfeed

What to Watch on Jobs Day: Signs of tightening across the economy [feedly]

What to Watch on Jobs Day: Signs of tightening across the economy
http://www.epi.org/blog/what-to-watch-on-jobs-day-signs-of-tightening-across-the-economy/

Today is Latina Equal Pay Day, marking how far into 2017 a Latina worker would have to work in order to be paid the same wages as her white male counterpart was paid in 2016. As I illustrated in great detail, it is obvious that this wage gap between Latina workers and white non-Hispanic male workers is significant and persists across the wage distribution, within occupations, and among those with the same amount of education. Sizable gaps in the economic outcomes of various U.S. populations are striking and significant. This is one reason why it is imperative that the economy returns to full employment.

On Friday, the BLS will report the latest numbers on the labor market. Payroll employment growth was particularly weak (i.e. negative) the previous month due in part to the hurricanes, particularly in Texas. I expect there to be some bounce back in the October numbers. To uncover the meaningful trend, I would urge analysts to average the last two months rather than take either one as independent information. In order to just keep up with the working-age population growth, the U.S. economy needs to add at least 90,000 jobs a month. Given that September saw a drop of 33,000 jobs, I hope to see strong enough payroll growth in October that would be indicative of a return to the road to full employment.

The last time the U.S. economy was at genuine full employment was 2000 when the unemployment rate averaged 4.0 percent over the year and fell below 4.0 percent for five months, notably without sparking an inflationary spiral. While the overall unemployment rate is a useful metric, it masks important differences across the economy. The value of a full employment economy is even greater for workers with historically higher unemployment rates, for instance, young workers and workers of color. Young workers, for instance, experience unemployment rates about two times as high as prime-age workersand nearly three times as high as older workers.

While most demographic groups have seen impressive improvement in their unemployment rates throughout the recovery, we need to make sure we keep the bar high (or low in the case of the unemployment rate). For instance, while the black unemployment rate approaches its 2000 level, the black population has become increasingly more credentialed over the last 17 years. Therefore, the achievement of a similar unemployment rate does not mean that the economy is as strong for black workers as it was in 2000, confirmed by looking at black prime-age employment-to-populations ratios or unemployment rates within educational attainment groups. While black workers typically have much higher unemployment rates than white workers, tight labor markets disproportionately benefit them by inducing employers to hire them at faster rates and push their unemployment rate down disproportionately in coming years.

Not only are jobs be more plentiful in a full employment economy, but wage growth is stronger as well. Workers at the middle and bottom of the wage distribution rely most heavily on tight labor markets for strong wage growth. My colleague Valerie Wilson has demonstrated that the wage growth of black workers is more responsive to aggregate labor market changes than those of white workers. That means in bad times they see disproportionate losses and in good times they see disproportionate gains.

For the benefits of a growing economy to reach all corners of the labor market, black and Hispanic as well as white, young as well as prime-age, and high-school-educated as well as college-educated, the labor market has to be allowed to tighten up enough to push up wages and opportunities for all. While we cannot see some of these dimensions in the monthly jobs report—and many we do see should be viewed in longer term trend because of data volatility—the simple fact of the economy continuing to recover and absorb a larger and larger share of the population into the ranks of the employed means we are continuing on the all-important road to full employment.

 -- via my feedly newsfeed

Strengthening collective bargaining is essential to reforming the rigged economy [feedly]

Strengthening collective bargaining is essential to reforming the rigged economy
http://www.epi.org/blog/strengthening-collective-bargaining-is-essential-to-reforming-the-rigged-economy/

Yesterday, Democratic lawmakers released another plank in their "Better Deal" agenda. The policy proposals included focus on strengthening workers' collective voice and ability to negotiate for better wages and working conditions. These are critical components of any meaningful attempt to reform an economy that is rigged against working people. They are essential to creating a fair economy. And they stand in stark contrast to Republican efforts to further advantage those at the top with a tax proposal that would provide 80 percent of its benefits to the top 1 percent—households that currently have incomes of around $730,000 or more.

While the Republican tax proposals will do nothing to help boost workers' wages or overall economic leverage, today's "Better Deal" agenda would help to address these issues by promoting workers' freedom to organize and bargain collectively. The steady decline in unionization over the last 40 years has led to rising inequality and stagnant wages for the American middle class. Not only do union workers earn higher wages, unions have strong positive effects on the wages of comparable nonunion workers, as unions help to set standards for industries and occupations.

Figure A

Working people understand that the economy is not working for them and broadly support the right to organize. In fact, the majority of American workers would vote for union representation if they could. However, current policy fails to ensure that workers have this basic freedom. As private employer opposition to organizing has intensified, policymakers have failed to ensure that the law responds to the realities of the modern workplace. American workers deserve policies that boost our wages and restore our economic leverage and bargaining power. The agenda Democratic lawmakers introduced yesterday would make important strides toward this goal. Ensuring that working people can freely choose to join a union and bargain for better wages and working conditions, that workers are able to exert economic leverage when negotiation fails, and that employers who infringe on workers' freedoms face meaningful penalties is important. In fact, this was the promise of the National Labor Relations Act enacted over 80 years ago. Now, lawmakers need to work to again make this agenda a reality for America's workers.

 -- via my feedly newsfeed