I haven’t done one of these in a while, so from Thomas Huxley:
If a little knowledge is dangerous, where is the man who has so much as to be out of danger?
I haven’t done one of these in a while, so from Thomas Huxley:
If a little knowledge is dangerous, where is the man who has so much as to be out of danger?
I feel a little silly just typing that. I know what some of you are thinking – this cat is about to ignore around half of the macroeconomic theory built up over the last 80 years. Well I’m just getting started, so bear with me a while.
Firstly, this (click to enlarge):
If you ever wanted just one visual that encapsulates the inherent contradiction in post 1970’s capitalism, this is it. But what happened in the early 70’s to cause this disconnection? There are few theories and everyone favours their pet one, but I think it’s a mix of them all – the end of the Bretton Woods system of fixed exchange rates, the start of globalisation, oil price shocks, the beginning of the financialisation of the world economy and huge improvements in technology.
Now let’s look at the bigger picture of employment vs GDP per capita (for the US, data taken from the IMF’s World Economic Outlook database, using 1980 as the base year):
Note that the point of this is to show the separation, not what is happening at the margins, which still clearly indicates that a change in GDP correlates with a change in employment. Bar some recessionary blips, the trajectory of economic output has been far steeper than that of employment, which leads me to conclude that a significant feature of today’s economy is that employment no longer matters. And if employment no longer matters, then we can dispense with much of macroeconomic theory. If the long-run Phillips curve is indeed vertical (meaning that beyond a certain point, additional fiscal and monetary stimulus only leads to rising prices), then it is perhaps no surprise that, as I noted in this post, neither the Keynesian nor the monetarist approach is working to restore the economy to full employment. Further, what does “full-employment output” even look like now? There’s no longer any such thing. The old rulebook should be thrown away; it’s time to move away from old style left vs right economics, and find out what works today.
(I’ve updated the post to include this, from the same data set mentioned above; GDP per person employed. If employment mattered, ie if we expect to see a relationship between employment and output, this would be a much flatter line):
It’s my prediction that what will eventually replace neoliberal capitalism is a two-tier economy. We should stop giving our money to the financial sector, shop local, use public transport, cycle, recycle and use green energy wherever possible. With so many of us having less and less share of the economy, we need to make our share count. If employment no longer matters, let’s get to where our money doesn’t either. Let’s watch the mainstream economy collapse under the weight of its own contradiction – the idea that their income is somehow unrelated to our wages.
So I’ve finally got around to the post I promised would be my “next post” three posts ago, back in December! If I were Queen Penelope, what taxes would you be in for, and what could you expect in return?
There’s a mixture of left and right-wing ideas here, hence the title of the post. But here goes, in point form, and without any detailed description:
So there you have it – the complaints department is located below, in the comments section.
Let me be clear at the outset – I’m not a fan. I’m enjoying all the jokes – the Iron Lady rusting in peace, the possibility of privatising her state funeral, Thatcher the milk snatcher, and especially Judy Garland’s “Ding-Dong the Witch is Dead” storming up the charts, a huge embarrassment to the British government in the week she’s to be buried, but something they can do nothing about – a pure expression of public opinion, more pure even than an election.
But in the end an old lady has died; one who for the last twenty years was out of the public eye, and who I’m sure will me missed by her family, especially her over-privileged coup-sponsoring son Mark, who without her influence would be (and should be) languishing in either a South African or Equatorial Guinean jail.
There was one thing she did get right – she predicted that the single currency would be a disaster for Europe, and that the goal of the EU was federalisation, meaning essentially the end of the sovereign nation state in Europe.
Conservatives will always admire her for the way she broke the unions, privatised many state assets and demonised socialism. Leftists (I refuse to use the word “Liberal” – this is an economics blog and in economics “liberal” has an entirely different meaning to its political usage) will remember the poll tax (actually everyone will remember that), the closing of schools and hospitals, and the depletion of social housing.
And that’s just in Britain. To say that she was not loved in Ireland would be an understatement. For South Africans, she was known as a supporter of the apartheid regime (as was Reagan). Her treatment of and comments about Nelson Mandela won’t be forgotten easily; ironically the latter gentleman will probably be joining her rather too soon in whatever passes for an afterlife for you humans. Chileans will remember her providing sanctuary to Augusto Pinochet, and Argentinians, well let’s not even go there……..
But the single biggest thing which affects us all, in every way and every day, is that the right-wing economic policies implemented and cemented by Margaret Thatcher and her US counterpart Ronald Reagan in the early 1980s have led directly to the sidelining of the productive sector of the economy, in favour of the financial sector. The latter’s rampant and unregulated economic aggression is the overriding cause of the economic crisis we find ourselves in today.
Earlier this week Ashoka Mody, one of the original troika representatives when they took hold of the Irish economy last year, has admitted that austerity alone was a mistake.
Then the Taoiseach comes up with “well, hindsight is a wonderful thing.”. Yes, Enda, it is, but there was no need for hindsight when many economists, including Nobel prize winner Paul Krugman, economics popularist David McWilliams and your’s truly told you so back then. It’s information that can be found in standard textbooks for third-level economics studies.
But I suppose you need to be a VSP (Very Serious Person) to be taken seriously.
One of the questions I’ve always wanted to try to find an answer to is: Is there a level of economic growth at which our happiness (as in a general state of wellbeing) will start to decline?
That this is going to very difficult has never put me off; I believe it can be done, I just don’t know how yet, mainly because it’s going to take time to come up with reliable definitions that we can then attempt to measure. The subjective nature of happiness is only the start of the difficulties.
What has spurred my return to this question is the contrasting approaches to the latest global recession, and how none of them seem to be working. The spending approach of the US seems to be working marginally better than the austerity of Europe, but I fear the associated cost of this, huge deficits and unheard of levels of govt debt, compounded by monetary policy gone mad, are pushing the world economy toward a point of no return. By this I don’t mean apocalypse, just a painful re-set that in retrospect might not be such a bad thing. Things will not, and cannot, continue as they are.
Painting the picture with a very broad brush, this is what we have: unprecedented levels of economic activity, with most of the influence centred in the financial, not the productive, sector of the economy. Technological gains that have pushed output up, but with employment lagging behind, this coupled with downward pressure on wages since the 1980s has created a huge gap between what the economy is capable of producing (and is being pressured to produce by an out of control financial sector) and what people are capable of consuming. This results in consumption pressure, from direct means such as promoting easy credit and media-led lifestyle choices, to indirect ones such as built in redundancies and unnecessary packaging. This creates the credit bubbles that, when they burst, result in recessions. We then get slapped on the wrist for our poor choices, but are still encouraged to pay our debts and somehow find the money to keep the whole show on the road, while those who put the air in the bubble not only start again, but have the audacity to grade us on how we dance to their tune (the ratings agencies, fow whom I have a question: Once you’ve downgraded every country in the world, what then?).
I want to have a quick look at the US Federal Reserve, because the state of their finances is perhaps the best indicator of how things have changed in the last 30 years. In 1985 the balance sheet of the US Fed was just over 200 billion dollars. Holdings of US govt bonds accounted for about 80% of the assets, with notes in circulation making up abount 80% of the liabilities. In 2012, the balance sheet is over 2 trillion dollars, up tenfold since the 80s. This in itself is not the worry – you would expect your money supply to grow as your population does, and as the economy grows. But let’s look at the components: on the asset side, govt bonds are now about a third, with mortgage backed securities (including the crap that kick-started the economic collapse of 2008) another third. On the liabilities side, notes in circulation is down to about half, with the other half being the deposits held by commercial banks.
So what does this mean? Well the US Fed is buying up all the bad debt from banks, and also about 75% of the govt bonds being issued. They don’t exchange actual money for this, they increase the reserve deposit amount for that particular bank (whether it be a commercial bank or the US Treasury). It’s just an accounting entry. That bank can then proceed to lend out a multiple of it’s reserve deposit, the mechanism I described in this post. The purchase of govt bonds basically sets the interest rate; inflating the demand for the securities (by buying them up) increases the price, decreasing the yield, which is effectively the interest rate.
So currently we see interest rates near zero – this has always been the monetarist approach to stimulating an economy. But it’s not working. The US economy is recovering, but very sluggishly; and this with goverment spending at unprecedented levels (what’s it now – 16 trillion in debt?) and monetary policy reduced to buying your own products to make the demand seem high. This suggests to me that this time it might have gone too far. I mean it’s ok to buy up all the rubbish that’s already exploded in our faces once, and even to buy up your own securities and have a government in huge debt, as long as the rest of the world maintains its confidence in you. But you can’t keep it up forever, and when this one blows, that will be it.
Perhaps it’s about time we stopped using the word “recession” and started to recognise that unemployment is no longer a result of bad macroeconomic policies foisted upon us by our ideological rivals (as neither ideological approach is working). Instead, we need to see it as a sign that the economic system as a whole has let us down, that consumers just can’t keep pace with the level of output, and no amount of easy credit is going to make a bad situation look different – we’re starting to see it for what it is. Unemployment should be our signal that bigger is not better any more.
When I said before that we’re all responsible for Neoliberalism, I meant it. There’s no global conspiracy foisting this upon us, although there are players who benefit, and they are certainly not complaining. But we’ve all bought into this philosophy that we must achieve economic growth at all costs; the management of every corporation in the world is under pressure to deliver better results than the previous year, every year. But by cutting labour costs they are ultimately cutting off the branch they are sitting on – each one just thinks it won’t happen to them.
Can we find a way of using technology to actually make our lives easier, instead of just producing more? Couldn’t we use the enormous technological gains we have made to benefit more people – imagine an approach that values employing more people each to do less work, keeping production levels constant. And making benefits for unemployed people a mainstay of any civilised economy. This can be done in such a way that incentives to work and make profits are not removed, but this approach will result in a more even distribution of the fruits of the economy’s labour – not as an end to itself, but with the ultimate goal of ensuring a market place where everything that is produced can be sold without the need to go into debt.
In my next post I’ll be looking at my proposed tax and spending regime that will be designed to encourage the type of economic responses that I believe can save capitalism from itself.
I’m a little embarrassed that my previous, rather nasty post was at the top of the home page for so long. I haven’t posted since August! The human has changed jobs and only recently acquired a new netbook that I’m now appropriating. Anyhow, I’m going to make my right-wing bashing a bit more measured going forward. And what better place to start than the Laffer Curve, that piece of economic fantasy from the 1980’s that every now and again gets dragged out and dusted off. Given the supply-side tendencies of the current US vice-presidential hopeful Paul Ryan, such theories are very much in vogue right now.
The theory behind the Laffer curve (originally, so legend would have it, drawn on a napkin during a 1974 meeting) is essentially sound, and intuitive. If you accept that a government cannot raise any revenue at a tax rate of zero percent, or at a rate of 100 percent, there must be a rate somewhere in between at which revenue is maximised. Where the fantasy comes in is with any attempt to show where this point is. Indeed, any attempts to actually plot data for any given country shows a series of disconnected dots not even resembling a curve. The problem with data of this nature is that it is very difficult to establish what effect the tax changes alone have on the economy. Any study that could actually show that the Laffer curve is more than just a warm feeling in the conservative bosom would be big news indeed, especially with the current ideological war raging in the US.
So when I saw this video, I was intrigued:
Firstly I had a bit of a chuckle over what Tim Groseclose had to say about his economics textbook from 1984. My economics textbook from the same era has this to say about it: “Again, things did not turn out as supply-siders hoped. The tax cuts of 1981 did not generate additional tax revenues. Government deficits ballooned.” Oops!
But Groseclose claims we were all misled. And the really interesting bit is that he cites the Romer and Romer study from 2007 as evidence that the curve peaks at a 33% tax rate. He makes a big deal out of the fact that Christina Romer was an economic adviser to President Barack Obama, and the Romers are liberals. Of course, the king of all arguments from authority is one delivered by your ideological foe but supporting your position. Unfortunately for Groseclose, the Romer study does no such thing.
Here’s the study. I’ve spent a few days getting to grips with it, econometrics not being my thing much at all. The Romers isolated the effects of tax changes implemented for mainly ideological reasons, and conclude that such a tax increase has a significant negative effect on GDP (the study did not cover effects on government revenues). It doesn’t show anything we didn’t already know (although it’s great to have the data), that specific, targeted tax changes can be very effective in changing economic behaviour. This is what I’ve been saying for a long time, and it’s why I support the Irish government’s low corporation tax rate; something I’ve been criticised for by some of my more left-leaning friends.
But Groseclose must have some brilliant insight that he’s not sharing with the rest of us when he claims if you “do the math” you come to 33% as a revenue-maximising tax rate. I can’t figure it out and I’m not the only one. Even his fans are scratching their heads over that one. Come on Tim Groseclose, you owe it to conservatives everywhere to show us the math and prove us supply-side sceptics wrong.