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Macrofoundations of Micro

July 22nd, 2014 4 comments

I was very pleased with my post on this topic, making the point that standard microeconomic analysis only works properly on the assumption that the economy is at a full employment equilibrium.

But, it turns out, exactly the same point, using the same title, was made by David Colander 20 years ago

Colander (1993), The Macrofoundations of Micro, Eastern Economic Journal, Vol. 19, No. 4 (Fall, 1993), pp. 447-457

And he wasn’t the first. The term and the idea have a long history, including a contribution by my UQ colleague Bruce Littleboy

The term macrofoundations, I suspect, has been around for a long time. Tracing the term is a paper in itself. Axel Leijonhufvud remembered using it in Leijonhufvud [1981] . I was told that Roman Frydman and Edmund Phelps [1983] used the term and that Hyman Minsky had an unpublished paper from the 1970s with that title; Minsky remembered it, but doubted he could find it and told me that he used the term in a slightly different context. I was also told by Christof Ruhle that a German economist, Karl Zinn, wrote a paper with that title for a Festschrift in 1988, but that it has not been translated into English. I suspect the term has been used many more times because it is such an obvious counterpoint to the microfoundations of macro, and hence to the New Classical call for microfoundations. While he does not use the term explicitly, Bruce Littleboy [1990], in work that relates fundamentalist Keynesian ideas with Clower and Leijonhufvud’s ideas, discusses many of the important issues raised here.

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Finance: global or international ?

July 19th, 2014 9 comments

I have a piece in The National Interest, looking at various recent events including the latest round of the Argentinian debt crisis, in which a New York court ruled in favor of a group of ‘vulture’ investors, led by a New York billionaire, and the agreement of the US Department of Justice and Citibank, involving a financial settlement to avoid a lawsuit over bad mortgage deals and CDOs in the pre-crisis period.

My central observation is that while legal forms are being observed, these are obviously political processes, with outcomes reflecting relative political power rather than any kind of neutral application of the law. So, the world financial system is part of international power politics: it matters a lot that Citibank is a US bank, while BNP Paribas is French and so on. This is very different from the picture of a global financial system independent of, and standing in judgement on, national governments that seemed to be emerging in the 1990s.

As an illustration, I found this ad put out by the ‘vultures’. To see my point, try interchanging “US” and “Argentina” throughout and assuming an adverse judgement by an Argentinian court against the US government.

ATFA-Full-Image

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In search of search theory

July 10th, 2014 37 comments

This is going to be a long and wonkish post, so I’ll just give the dot-point summary here, and let those interested read on below the fold, for the explanations and qualifications.

* The dominant model of unemployment, in academic macroeconomics at least, is based on the idea that unemployment can best be modelled in terms of workers searching for jobs, and remaining unemployed until they find a good match with an employer

* The efficiency of job search and matching has been massively increased by the Internet, so, if unemployment is mainly explained by search, it should have fallen steadily over the past 20 years.

* Obviously, this hasn’t happened, but economists seem to have ignored this fact or at least not worried too much about it

* The fact that search models are more popular than ever is yet more evidence that academic macroeconomics is in a bad way
Read more…

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The “job-killing” carbon tax

June 11th, 2014 155 comments

Tony Abbott hasn’t exactly covered himself in glory on his overseas trip. But he has found one ally: Canadian PM (at least until next years election) Stephen Harper, also a climate denialist. They made a joint statement denouncing carbon taxes as “job killing”. I didn’t notice any massive destruction of jobs when the carbon price/tax was introduced in 2012, but rather than do my own analysis, I thought I’d take a look at the government’s own Budget outlook, to see how many jobs they claim to have been destroyed by the carbon tax, and what great benefits we can expect from its removal. Here’s the relevant section of the summary (note that the outlook is premised on the Budget measures being passed)

The Australian economy is in the midst of a major transformation, moving from growth led by investment in resources projects to broader‑based drivers of activity in the non‑resources sectors. This is occurring at a time when the economy has generally been growing below its trend rate and the unemployment rate has been rising. During this transition, the economy is expected to continue to grow slightly below trend and the unemployment rate is expected to rise further to 6¼ per cent by mid‑2015.

In this environment, the Government is focused on implementing measures to support growth and jobs while putting in place lasting structural reforms to restore the nation’s finances to a sustainable footing. The timing and composition of the new policy decisions mean that the faster pace of consolidation in this Budget does not have a material impact on economic growth over the forecast period, relative to the 2013‑14 Mid‑Year Economic and Fiscal Outlook (MYEFO).

Since MYEFO, the near‑term outlook for the household sector has improved. Leading indicators of dwelling investment are consistent with rising activity, while household consumption and retail trade outcomes have improved recently, consistent with gains in household wealth. This is partly offset by weaker business investment intentions, particularly for non‑resources sectors.

The outlook for the resources sector is largely unchanged from MYEFO. Resources investment is still expected to detract significantly from growth through until at least 2015‑16, as reflected in the outlook for investment in engineering construction which is forecast to decline by 13 per cent in 2014‑15 and 20½ per cent in 2015‑16. Rising resources exports are only expected to partially offset the impact on growth. Overall, real GDP is forecast to continue growing below trend at 2½ per cent in 2014‑15, before accelerating to near‑trend growth of 3 per cent in 2015‑16.

The labour market has been subdued since late 2011, characterised by weak employment growth, a falling participation rate and a rising unemployment rate, although outcomes since the beginning of 2014 have been more positive. The unemployment rate is forecast to continue to edge higher, settling around 6¼ per cent, consistent with the outlook for real GDP growth. Consumer price inflation is expected to remain well contained, with moderate wage pressures and the removal of the carbon tax.

The reference to the CPI effects of the carbon price (around 0.4 per cent) is, as far as I can tell, the only mention in the whole of the Economic Outlook statement.

Piketty and nitpicky (updated with link to Piketty’s refutation of FT)

May 30th, 2014 168 comments

I have a couple of pieces up on the topic that’s likely to consume much of my attention for some time to come: Piketty’s Capital in the 21st century.

Here’s a long review article at Inside Story focusing on the conditions that have made Piketty a bestseller. And here, at The Drum is my take on claims by Chris Giles at the Financial Times that Piketty’s data is fatally flawed.

Update Piketty has responded to the Financial Times. To sum up, as I said in the Drum piece, the criticisms are (mostly incorrect) nitpicks except for the point about UK wealth inequality. Here Piketty’s demolition is convincing. The FT hasn’t used a consistent series. Rather, it’s taken a recent survey estimate (likely to underestimate wealth) and spliced it onto older estate data to produce the counterintuitive finding that the inequality of wealth hasn’t increased.

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Piketty Crossing the Delaware

May 19th, 2014 50 comments

Like lots of other readers of Thomas Piketty’s Capital, my big concern is not with the accuracy of the diagnosis and prognosis but with the feasibility of the prescription. Piketty’s proposal for a global wealth tax requires an end to the capacity of capital to escape taxation by exploiting the limitations of national taxations system, through tax havens, transfer pricing, artificial corporate structures and so on.

Given the limited record of success in past efforts to control global tax evasion and avoidance, Piketty is reasonably pessimistic about efforts in this direction. But the latest news from the OECD is remarkably positive. All members of the OECD (notably including evader-friendly jurisdictions like Austria, Luxembourg and Switzerland) have agreed to a system of automatic information exchange for tax purposes. Moreover, the “too big to jail” status of major banks engaged in facilitating tax evasion and money laundering, may finally be coming to an end.

On the face of it, the oft-repeated, but so far unjustified claim that “the days of tax havens are over“, may finally be coming true, at least for all but the wealthiest individuals. But the crackdown on individual tax evaders only points up the ease with which corporations (and individuals with the means to establish complex corporate structures) can avoid tax through a mixture of legal avoidance and unprovable evasion (for example, by illegal but unprovable internal transfers).

At the core of the problem is the ability to establish corporations in ways that make their true ownership impossible to trace. And, the jurisdiction most responsible for this is not a Caribbean island or European mini-state, but the “First State” of the US – Delaware, which has long been the preferred location for US incorporation by reason of its business friendly laws.

Read more…

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Wealth: earned or inherited

May 7th, 2014 91 comments

The efforts of the right to discredit Piketty’s Capital have so far ranged from unconvincing to risible (there’s a particularly amusing one from Max Hastings in the Daily Mail, to which I won’t bother linking). One point raised in this four-para summary by the Economist is that ” today’s super-rich mostly come by their wealth through work, rather than via inheritance.” Piketty does a good job of rebutting this, but for those who haven’t acquired the book or got around to reading it, I thought I’d repost my own response, from 2012.

Read more…

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Stratification in tertiary education

April 28th, 2014 39 comments

When people call for a university system more like that of the US, they commonly have in mind the idea that Australia should have institutions like Harvard and Princeton, and a belief that more competition in tertiary education would bring this about. There are a couple of obvious problems with this.

First, high-status universities like this provide undergraduate education only a tiny proportion of young Americans. Around 1 per cent of the college age cohort attends high-status private institutions like the Ivy League unis, Chicago and Stanford, and this proportion has been declining steadily over time. Most of the Ivies enrol no more undergrads than they did in the 1950s. Adjusting for population, an Australian Ivy League would consist of a single institution enrolling perhaps a thousand students a year.

Second, the US experience shows that the idea of competition between universities is a nonsense. Harvard, Princeton and the rest were the leading universities in North America before the US even existed, and they are still the leaders today. The newest of the really high status universities is probably Stanford, founded in 1885. Competition between universities is pretty much the same as the competition between the Harlem Globetrotters and the Washington General.s

The reality of US education is a highly stratified system. Below the high-status private universities are the “flagship” state universities, which educate around 10 per cent of the college age cohort (again, a proportion that is declining, or at best stable).

After that, there are lower-tier state universities, two-year community colleges and, worst of all, for-profit degree mills like the University of Phoenix which exist largely to lure low-income students into debt and extract Federal grant money, with only a minority ever completing their courses.

Australia has always had a stratified system, but to a much lesser extent. (More on the history when I get a chance). The big question facing policy is whether to increase stratification, by widening the gap between the “Group of 8″ and the rest, or to treat tertiary education like other public services, available to all who can benefit from it, at the best quality we can provide for everyone.

University education systems mirror and recreate the society to which they belong. A highly stratified system, like that in the US and UK, reflects and reinforces a class-bound society in which the best thing you can do in life is to choose the right parents. We should be aiming at less stratification, not more.

Update Just by chance, one of the lead articles in the NY Times advises that, thanks to increased international intakes, the number of places for domestic undergraduates at the Ivies has fallen sharply

Tim Nicholls makes a little progress in thinking about privatisation

April 17th, 2014 24 comments

All through the Bligh government’s three year campaign to sell public assets, I challenged Treasurer Andrew Fraser to a public debate on the issue, or at least to a response to the criticisms I and other economists made of the government’s case. Fraser never responded: even when we spoke at the same event (to a friendly business-oriented crowd) he gave his speech and left before anyone else was allowed on the platform. Doubtless, he made the judgement that this was the politically clever thing to do: by sticking to events that could be scripted, and relying on the authority of Queensland Treasury, he maintained controlled of public discussion. We all know how that worked out.

Now there’s a new Treasurer, pushing the same arguments. I challenged Tim Nicholls to a debate on the “StrongChoices” campaign[1]. I don’t suppose he’s going to respond in person, but he has at least acknowledged my criticisms (as reported by Paul Syvret) and attempted to rebut them in this piece in the Courier-Mail.

Nicholls’ argument is confused, as the case for asset sales has always been, but he does make at least some progress. The usual magic pudding is in evidence: selling assets is supposed to repay debt, finance new infrastructure spending and obviate the need for higher taxes to maintain services, all at the same time.

But there is one point of light: responding to my observation that the StrongChoices website counts the interest savings from selling assets and paying down debt, but not the foregone earnings of public enterprises, Nicholls says

the value of a government-owned asset is not the same in private sector hands. Governments are not well placed to act nimbly when it comes to changing markets and commercial decisions. Who thinks the value of Telstra would be the same if it reverted back to full government ownership? What about the Commonwealth Bank?

While Nicholls’s specific examples don’t work well (see below), he at least expresses the right general principle. Privatising assets is a good deal for the public if their sale price is greater than their value in continued public ownership (and assuming that the gain isn’t achieved by raising prices or reducing service quality). Indeed, that’s true of every kind of sale: there’s a net benefit only if the item sold is worth more to the buyer than to the seller.

So, there’s a simple fix for the StrongChoices website. Instead of quoting the total sale price for assets, give an estimate of the difference between the sale price and the value in continued public ownership. I did this for both of Nicholls examples, the Commonwealth Bank and Telstra (all three “tranches”) and found a net loss to the public in every case except T2, the second Telstra tranche where the value was inflated by the Internet bubble. Even in that case, we would have done far better off by selling the overvalued Internet assets and using the proceeds to buy back the rest of Telstra, as I advocated at the time, just before the bubble burst.

fn1. If, as has been reported, the Queensland Government paid good money to a PR firm for this ludicrous name, then there is certainly an opportunity to cut waste and efficiency by dumping.

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Polls and punters

April 15th, 2014 21 comments

I’ve written a few times about the idea that betting markets provide a more accurate guide to political outcomes than do polls or ‘expert’ judgements or statistical models (which usually incorporate polls along with economic and other data). The problem is that, close to an election, they all tend to converge. So, the best time to do a comparison is early in the election cycle. Right now there’s quite a sharp contrast. The polls have had the (federal) ALP and LNP just about level for months, but the betting markets have the LNP as strong favorites.

One possible explanation is that governments generally do worse in polls than in election, so that the polls underestimate the government’s support. I’ve heard this claimed, but never seen any systematic evidence to support it. Another possibility is that market participants know something that’s not reflected in the polls. I’m sceptical on this.

The final possibility is that betting markets this far out from the election are thin and inefficient. If that’s right, then the odds for Labor look very favorable. I’m not going to bet myself (I did OK on my one foray into the US Republican primaries, but the hassle involved was too much to make it worthwhile), and I’m not giving betting advice.

Still, I’d be interested in responses from those among my fellow economists who’ve claimed efficiency properties for betting markets. I guess Andrew Leigh is precluded from commenting, and Justin Wolfers is a long way from the action in Oz, but I’m sure there must be others willing to jump in

Categories: Economics - General, Oz Politics Tags:

Why nuclear power worked once in France and might work again in China

April 4th, 2014 181 comments

That’s the question I looked at a while back in this piece in the National Interest, which I was too busy to post about at the time. TNI’s headline, which I didn’t pick, is the more definitive ‘China Can Make Nuclear Power Work‘. The key point is that, when France embarked on a crash program to implement nuclear energy in the early 1970s, all the right ingredients were in place: a centralised state in which a skilled technocratic elite could push projects through without much regard to public opinion, the ability to fix on a single standardised design, low real interest rates and preferential access to capital, and the ability to fix pricing structures that eliminated much of the risk in the enterprise.

Over time, these factors were eroded, with the result that as the program progressed, the cost per megawatt of French nuclear plants tripled in real terms. As the Flamanville fiasco has shown, whatever the secret of French success 40 years ago, it has been well and truly lost now. And the picture is equally bleak for nuclear power in other developed countries. New nuclear power is far more expensive than renewables, even after making every possible allowance for the costs of intermittency, the various subsidies available, and so on. That’s why, despite the vast range of different policy settings and market structures in developed countries, the construction of new nuclear plants has been abandoned almost everywhere.

But China today looks, in many respects, like France in the 1970s, a technocratic state-capitalist society with the capacity to decide on, and implement, large scale projects with little regard to anyone who might object. If nuclear power can be made to work anywhere, it’s probably in China.

Obviously, pro-nuclear commenters like Hermit and Will Boisvert are welcome to have their say on this one.

Categories: Economics - General, Environment Tags:

Inequality is caused by ideology, not technology

April 2nd, 2014 63 comments

I’ve just had an article published at New Left Project, under the title Don’t Blame the Internet for Rising Inequality. Much of it will be familiar, but I want to stress a particular, and I think novel, critique of the idea that skill-intensive technology is responsible for rising inequality

while technology explains the decline of the middle and working classes relative to the professional and managerial class, even this latter group has barely maintained its share of national income since the 1980s. The real gains over this period have gone to a subset of the top 1 per cent, dominated by CEOs, other senior managers and finance industry operators. This group has nearly quadrupled its real income over the past 30 years, far outpacing the professional and managerial class as a whole.

This is a major problem for the Race Against the Machine hypothesis. Much of the growth in income share of the top 1 per cent occurred before 2000, when the stereotypical CEO was a technological illiterate who had his (sic) secretary print out his emails. Even today, the technology available to the typical senior manager—a PC with access to the Internet, and a corporate intranet with very limited capabilities—is no different to that of the average knowledge worker, and inferior to that of workers in tech-intensive specialities.

Nor does the ownership of capital explain much here. Even for tech-intensive jobs, the capital and telecomm requirements for an individual worker cost no more than $10,000 for a top-of-the-line computer setup (amortized over 3-5 years), and perhaps $1000 a year for a broadband internet connection. This is well within the capacity of self-employed professional workers to pay for themselves, and in fact many professionals have better equipment at home than at work. Advances in information and communications technology thus can’t explain the vast majority of the growth in inequality over the past three decades.

On the same day as this came out, Paul Krugman was demolishing another version of the argument, the zombie idea that current high unemployment in the US is due to a “skills gap” which apparently emerged on the day Lehman Brothers collapsed.

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What happiness conceals

March 31st, 2014 48 comments

For quite some time, I’ve been saying that research effort into the economics of happiness would be better devoted to researching unhappiness. I’ve now presented this argument in the excellent online magazine Aeon, with the takeaway

So, perhaps we need a new research programme, to examine how unhappiness really works. Does hunger, or unemployment, or the loss of a family member to preventable illness make you a stronger and better person? Is striving after more and better possessions more fulfilling than satisfaction with what you have? It’s obvious from the way I’ve posed these questions what I believe the answer to be. But genuine research into the economics of unhappiness might yield some surprising answers to such questions as these, and reveal new questions that we have never before considered.

King Cotton is dead, long live King Gas

March 21st, 2014 32 comments

I have a post up at The National Interest, arguing that embargoes imposed by commodity export countries in pursuit of geopolitical objectives rarely, if ever, work. Opening paras:

At the beginning of the Civil War, the leaders of the South were, as is normal at the outset of war, confident that their superior military prowess would yield a rapid victory. But the Confederates had another reason for confidence: their possession of a near-monopoly in the market for the most important commodity of the day: cotton.

Like oil in the twentieth century, cotton was vital to the industrial economies of the nineteenth, and particularly that of Britain, the preeminent naval and military power of the day. And the Southern United States was the world’s dominant producer of cotton, accounting for 77 percent of British imports in the 1850s.

Rhetoric about ‘King Cotton’ matched the most hyperbolic claims about ‘energy superpowers’ to be heard today. In 1858, South Carolina senator James Hammond said ‘old England would topple headlong and carry the whole civilized world with her…. No, you dare not make war on cotton. No power on earth dares to make war upon it. Cotton is king.’

The most immediate application, obviously, is to Russia and gas. Feel free to discuss the broader issues raised by the Ukraine crisis.

Categories: Economics - General, World Events Tags:

Capabilities as menus: A non-welfarist basis for QALY evaluation (Crosspost from Crooked Timber)

March 9th, 2014 9 comments

This is a contribution to a discussion of Sen’s capability approach, taking place at Crooked Timber. It’s a bit too wonkish for the CT readership, it seems, and maybe the same here, but I’ll toss it up anyway.

Most of the discussion of capabilities has concerned poor/developing countries. Moreover, most of it has been qualitative rather than quantitative. One consequence is that, although the idea of capabilities has been around for a while now, its impact on the policy process in developed countries has been modest at best.

My own work on capabilities, represented by an article[1] published last year in the Journal of Health Economics has also had a modest impact, but for very different reasons. While not strictly quantitative, it’s mathematical, more so than the average reader of JHE tends to be comfortable with, and its direct relevance to policy is limited by the fact that we are, at least to start with, not addressing distributional issues.

The main objective is to explore the idea that capabilities can provide a basis for allocating health care resources based on the QALY (Quality-Adjusted Life Year) measure. in previous work, we looked at the “welfarist” idea that policy should be based on maximizing lifetime expected utility. It turns out that, considered purely as a technical problem, this can’t be done, except in very special cases. The appeal of capabilities is that they provide a non-welfarist (or at least ‘extra-welfarist’ in that it is more than a simple expected utility maximization) rationale for policies involving scarce resources like health care.

Read more…

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Unmasking Austerity

February 16th, 2014 57 comments

I’ll be at Unmasking Austerity in Adelaide on Tuesday. I’m going to talk about Commissions of Audit and the following question occurred to me.

Have such Commissions ever achieved anything of the kind you might expect from auditors, that is, detecting and fixing Fraud, Inefficiency and Waste? In this context, I’m not interested in proposals to kill government programs the Commissioners don’t like, privatise public assets, contract out public sector work and so on. I am interested in work showing that public programs are being defrauded and proposing checks that would fix the problem, cases of duplication between agencies and levels of government that can be fixed with substantial savings, cases where governments are wasting money by paying obviously excessive prices for services etc.

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Work and beyond (crosspost from Crooked Timber)

February 10th, 2014 27 comments

A little while ago, Ross Douthat tweeted a link to this Aeon article of mine, reflecting on Keynes ‘Economic Possibilities for our Grandchildren’, which gave rise to some interesting discussion (Memo to self: Find out about Storify). Now he’s addressed the topic in the New York Times, linking directly to Keynes essay. There’s some interesting food for thought here. Unfortunately, it’s mixed up with some silly stuff reflecting his job as the NY Times token Republican, in which capacity he has to do some damage control over the exposure of the latest Repub lie saying that Obamacare will cost 2.5 million jobs. As Douthat delicately puts it “this is not exactly right”. But, although his heart clearly isn’t it, he tries to construct a narrative in which the Repubs might be right for the wrong reasons, or, in an even less-felicitous defence, mean-spirited and inaccurate but justified by the success of Reaganism thirty years ago.

More interesting though, is Douthat’s discussion comparing idealised hopes for a post-work society with the reality in which well-educated professionals are working longer hours than ever, while many at the bottom end of the income distribution, particularly poorer men have withdrawn from the formal labour force altogether (presumably, relying on disability benefits or scraping a living in the informal economy). One possible solution to this problem, is simply to give the poor more money, for example, in the form of a basic income, and not worry about whether they choose to work. Douthat isn’t too happy about this idea, saying

Both “rugged individualist” right-wingers and more communitarian conservatives tend to see work as essential to dignity, mobility and social equality, and see its decline as something to be fiercely resisted. The question is whether tomorrow’s liberals will be our allies in that fight.

But this position elides a bunch of crucial issues.

First, while work may be necessary to “dignity, mobility and social equality” in a market society, it certainly isn’t sufficient. For unionised US workers in the mid-20th century, earning middle-class incomes in relatively secure jobs and expecting better for their children, work was, arguably both necessary and sufficient to achieve a fair measure of these things. But an at-will employee, juggling two or three tenuous jobs that pay $7.25 an hour, and looking at a steady decline in real income, is scarcely getting much in the way of dignity, let alone mobility or social equality.

Equally importantly, market work isn’t the only kind of work people can do, and certainly not the most valuable. Most obviously, there’s the raising of children. The US the developed countries that does not provide any kind of paid parental leave, and even the legislative provision for unpaid leave (12 weeks a year for mothers in firms with more than 50 employees, nothing for fathers) is incredibly stingy. The idea that the ‘rugged individualists’ who block any improvements to these conditions actually care about the dignity of the working class is simply laughable.

I don’t need to tell Douthat any of this. It’s all in his book Grand New Party with Reihan Salam, notably including a proposal for a full year of paid parental leave. The book received cautiously respectful reviews from many in the centre and centre-left, but fell entirely flat with its intended audience in the Republican Party.

I’ll have a bit more to say about the kind of technological determinism that seeks to explain labour market polarisation as arising from computers and the Internet a bit later. For the moment, I’ll repeat the conclusion of my Aeon essay that a response to technological change that will preserve the link between work, dignity and equality will require both a reduction in total hours of work and an expansion in the range of social contributions regarded as work, beyond those that generate a market return

Read more…

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Macroeconomics made easy?

February 10th, 2014 10 comments

In my book, Zombie Economics, I started the account of macroeconomics with the observation

Macroeconomics began with Keynes. Before Keynes wrote The General Theory of Employment, Interest, and Money, economic theory consisted almost entirely of what is now called microeconomics. The difference between the two is commonly put by saying that microeconomics is concerned with individual markets and macroeconomics with the economy as a whole, but that formulation implicitly assumes a view of the world that is at least partly Keynesian.

Long before Keynes, neoclassical economists had both a theory of how prices are determined in individual markets so as to match supply and demand (“partial equilibrium theory”) and a theory of how all the prices in the economy are jointly determined to produce a “general equilibrium” in which there are no unsold goods or unemployed workers.

I went on to observe how the pre-Keynesian approach had been revived by the “New Classical” school, and how the apparent convergence with “New Keynesian” economics had been shown to be illusory after the failure of Dynamic Stochastic General Equilibrium models to deal with the 2008 financial crisis and the subsquent, still continuing, depression.

With all of this, though, I still never thought of academic macro, in either saltwater or freshwater form, as being a simple reversion to the pre-Keynesian notion of general equilibrium, with no concern about aggregate demand or unemployment, even in the short run. It turns out that, at least for a large segment of the profession, this is quite wrong. I’ve just received a book entitled Big ideas in Macroeconomics: A nontechnical view by Kartik Athreya, an economist at the Richmond Federal Reserve who made a splash a few years back with a piece entitled Economics is Hard. Don’t Let Bloggers Tell You Otherwise, which, unsurprisingly, did not endear him to bloggers. As a critic of mainstream macro, I’m briefly mentioned, and I just got a review copy.

The new book is an attempt to simplify things, and indeed it has proved enlightening to me and also to Herb Gintis who contributes a blurb on the back, commending it as an accessible and accurate description of the dominant way of thinking about macroeconomics.

The easiest way to see why the book is so striking is to list some topics that do not appear in the index (and are not discussed, or only mentioned in passing, in the text). These include: unemployment, inflation, recession, depression, business cycle, Phillips curve, NAIRU, Taylor Rule, money, monetary policy and fiscal policy.

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New Old Keynesianism (crosspost from Crooked Timber)

January 23rd, 2014 13 comments

The term “New Old Keynesian” was coined by Tyler Cowen a couple of years ago, to describe the revival of the view that the Keynesian analysis of recessions caused by lack of aggregate demand is relevant, not only in the short run (in this context, the time taken for wage contracts to reset, say 2-3 years) but in the long run (5 years or more) as well. When Cowen was writing, in September 2011, the New Depression could still, just about, be seen as a short run phenomenon[1]. In particular, the anti-Keynesian advocates of austerity in the US, UK and Europe were predicting rapid recovery.

As 2014 begins, it’s clear enough that any theory in which mass unemployment or (in the US case) withdrawal from the labour force can only occur in the short run is inconsistent with the evidence. Given that unions are weaker than they have been for a century or so, and that severe cuts to social welfare benefits have been imposed in most countries, the traditional rightwing explanation that labour market inflexibility [arising from minimum wage laws or unions], is the cause of unemployment, appeals only to ideologues (who are, unfortunately, plentiful).

So, on the face of it, Cowen’s “New Old Keynesianism” looks pretty appealing. But what are the alternatives? Leaving aside anti-Keynesian views for the moment, the terminology suggests four logical possibilities: Old Old Keynesianism, Old New Keynesianism, New Old Keynesianism and New New Keynesianism.

But do these logical possibilities correspond to actual viewpoints, and, if so, whose?

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Philadelphia Story (crosspost from Crooked Timber)

January 8th, 2014 26 comments

I’m on the way back from bitterly cold Philadelphia at the moment after attending the meetings of the American Economic Association (and a bunch of related societies). I was at a very interesting session on long-run discounting, which had a panel of six with (as is common) one woman[^1]. Looking around the room, I realised that the panel was actually balanced (inside econometric joke) when compared with the audience, which was about 90 per cent male.

I don’t think that the academic economics profession is quite as male-dominated as that. Some casual discussions suggested a couple of hypotheses:

(i) There were some parallel sessions on gender issues for which the audience was mostly female (not surprising, but kind of ambivalent)

(ii) Men were more likely to attend the sessions while female colleagues were more likely to be on the hiring teams. For those unfamiliar with this exercise, a large part of academic conferences consists of academics sitting in hotel rooms for days on end while a string of recent PhDs give a 15 minute pitch on a piece of research (their ‘job market paper’) followed by a ritual Q&A (a plausible but depressing story)

I get the impression that academic philosophy is even worse than economics, but that most other disciplines are better. Any thoughts?

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Mixed thinking about markets

December 29th, 2013 48 comments

I was enjoying my Xmas break too much to deal with the silliness of the Institute of Public Affairs. But Chris Berg was hard at work, writing a piece in which he claimed all the technological progress of the past two centuries as products of the “the market economy and consumer society”, and I guess I should respond.

Berg points to a comparison between a 19th century Xmas picnic in the outskirts of Melbourne, involving arduous and expensive travel, and costly communication, and the ease with which people in wealthy countries can travel, communicate and enjoy plentiful food today.

This would be a reasonable line of argument if Berg were defending the status quo. But of course he is not. He wants to argue that all the good things that have happened in the last two centuries are the product of the “market economy”, and that we should therefore scrap our existing social arrangements in favor of radical reforms in which market forces are given free rein.

In reality, modern society is characterized by a mixed economy, in which large components of economic activity take place outside the market, within households or through publicly funded and provided services. Even within the private business sector, the majority of activity takes place within corporations whose internal operations are characterized by central planning, not markets.

All of this reflects the fact that a pure market economy doesn’t work well. Rather than list all the problems which have led modern societies to constrain the role of markets (environmental pollution, inequality and so on), I’ll focus on the one discussed by Berg, that of technological innovation. Information is what economists call a public good: making it available to one person doesn’t reduce its usefulness to others. And while it’s possible to keep useful information secret for a while, it gets harder and harder over time. So, a pure market system often doesn’t provide much of a reward to people who come up with new ideas.

All sorts of solutions to the problem have been developed. They include patents (a temporary grant of government-enforced monopoly), prizes and awards, and publicly funded research institutions such as universities. These interventions played a crucial part in most of the innovations discussed by Berg. Most notably, the university sector developed the Internet, which makes debates such as this possible.

Berg’s argument is an example of a characteristic fallacy among advocates of market liberalism. Beginning with the fact that all modern societies are, in some sense, capitalist, they point to the successes of modern society to argue in favor of a particular version of capitalism (free markets, on the US model but taken even further) and against others that have been more successful in terms of human welfare (various forms of social democracy) or that might exist in the future.

I guess it’s possible to find symmetrical kinds of fallacies on the left, but I’ll leave that to commenters.

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Gillard on equal marriage

December 14th, 2013 70 comments

I’ve long been mystified by Julia Gillard’s position on equal marriage, and her almost complete silence on the matter. However, on a recent Google search, I found this, which left me even more mystified than before

“I do understand that the position I took on gay marriage perplexed many people, given who I am and so many of my beliefs. I’ve actually had lot of conversations with many of my old friends about this, some of whom have got a different view than me.

“But, I’m a lot older than you,” Ms Gillard told the young man, “and when I went to University and started forming my political views of the world, we weren’t talking about gay marriage indeed as women, as feminists, we were critiquing marriage. If someone had said to me as a twenty year old, ‘what about you get into a white dress to symbolise virginity, and you get your father to walk you down an aisle and give you away to a man who’s waiting at the end of the aisle’, I would have looked with puzzlement and said ‘what on earth would I do that for?’.

“I’m conscious that these may be views that have dated and that the way people interpret marriage now is different to the kinds of interpretations that I had. I think that marriage in our society should play its traditional role and we could come up with other institutions which value partnerships, value love, value lifetime commitment. You know, I have a valuable lifetime commitment and haven’t felt the need at any point to make that into a marriage. So I know that that is a really different reasoning that most people come at with these issues, but that’s my reasoning.

So, apparently she used to be against marriage altogether, but now wants to promote alternatives. If I read her correctly, she proposes to do this by stopping some people from getting married at all, while retaining “traditional” marriage for others. Is the idea that we could gradually extend the ban, for example, by prohibiting various kinds of mixed marriage until no-one at all could get married? Or is there some more coherent argument I’ve missed here?

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Peak aluminium?

November 30th, 2013 76 comments

The announcement that Rio Tinto is to close its alumina refinery at Gove struck me for a number of reasons, starting with the fact that members of my family are affected by it. First up it’s worth noticing what’s mentioned (the high dollar and low aluminium price, which flows through to bauxite and alumina) and what isn’t (the carbon tax and legislation for its removal). Having claimed that he was going to save industries like alumina and aluminium smelting from the carbon tax “wrecking ball”, Abbott is now shown up, once again, as a fraud[1].

In the short run, the obvious policy implication is that the RBA needs to be firmer in pushing the dollar down. It was, I think, a mistake to hose down talk of direct intervention, as was done recently. Given our declining terms of trade, we should be closer to $US0.80 than $US0.90 now, and heading down further.

The bigger question of interest, though, is the future of aluminium. The big story of the past 10-20 years has been the massive growth of production in China, driven by cheap coal-fired power and lots of subsidies. That’s driven prices down to historically low levels (inflation-adjusted, probably record lows). Production in Australia is now clearly uneconomic, but even the Chinese are losing billions.

Declining prices have driven steady growth in demand for aluminium. Since the supply of recycled aluminium is dependent on past production, there has been a multiplied effect on demand for primary aluminium, which is the big driver of greenhouse gas production in this industry.

The general assumption (as with most trends) has been that these trends will continue indefinitely. But it’s clear that prices have to rise just to cover costs, and will rise further as China starts to price the local and carbon costs of coal-fired electricity. Moreover, in technological terms, aluminium is definitely a 20th century commodity. Its inherent properties of lightness and strength gave it great advantages, but it is now being displaced in advanced uses by carbon fibre and in some basic uses by lightweight steels.

So, it seems to me quite plausible that aluminium demand could stabilise over the next decade or two, with the result that most demand can be met by recycling rather than energy-intensive production of primary aluminium from bauxite (via alumina).

Note: I topic-banned regular commenter Hermit from talking about aluminium smelters, as it become an idee fixe. The ban is lifted for this post.

fn1. Has any new PM ever been shown up so comprehensively in such a short time? Not in my memory, which goes back to Harold Holt, and includes some shockers.

Categories: Economics - General, Environment Tags:

Wall Street isn’t Worth It

November 15th, 2013 55 comments

That’s the title of my new piece at Jacobin, which links back to a variety of discussions at Crooked Timber, in particular this one from Ingrid Robeyns. Mankiw, whom Ingrid cites, offers an implicit defence of the 1 per cent, implying though not quite asserting, that the gains accruing to those in this group (largely senior executives and the financial sector) have been the price we pay for a process that benefits everyone, yielding a Pareto improvement. As Ingrid says, Pareto improvements aren’t as self-evidently desirable as Mankiw assumes. My argument focuses on Mankiw’s factual premise, concluding that the expansion of the financial sector has made the majority of people worse off. This implies that a response to the global financial crisis focused on attacking the financial sector is feasible as well as being, in my view, politically necessary as an alternative to rightwing populism.

Jacobin doesn’t appear to have a comments section, so feel free to comment and criticise here. I’ve had an interesting discussion with Daniel on Twitter already, but it’s not really a great medium when more than a few people are involved.

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Colin Clark lecture

November 14th, 2013 4 comments

I presented the Colin Clark lecture today, on the topic “National Accounting and the Digital Economy: The Case of the NBN’

Synopsis

Colin Clark’s greatest contribution to economics was his pioneering role in the construction of national accounts. In the industrial economy of the 20th century, the central problem in the national accounting was the need to avoid double counting, by measuring only the value added at each stage of production. This problem is closely related to that of benefit-cost analysis for public projects. In the 21st century digital economy, value is primarily derived from the flow of information rather than physical inputs and outputs. This creates new problems for national accounting, and for benefit-cost analysis. One example of these problems is the question of how to evaluate alternative proposals for the National Broadband Network.

Paul Syvret covered it in the Courier-Mail. I also did an interview with Steve Austin on the local ABC 612[1], which started off with a brief discussion of Rudd’s economic legacy, and another for AM on Radio National which didn’t make it to air.

The slides are here

fn1. Illustrated with a slightly goofy candid shot, taken in the ABC Green Room

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Pandora Post-mortem

November 10th, 2013 107 comments

I have a piece in the Guardian responding to the pro-nuclear film Pandora’s Promise. The core of my argument is that, in most countries, political resistance to nuclear power is no longer the primary problem – the big difficulty is with the economics. The key paras

he fact that the world has not turned to nuclear power as a solution to climate change is a matter of economics. In the absence of a substantial carbon price, nuclear energy can’t compete with coal and other fossil fuels. In the presence of a carbon price, it can’t compete with wind and solar photovoltaics. The only real hope is that, if coal-fired generation is reduced drastically enough, always-on nuclear power will be a more attractive alternative than variable sources like solar and wind power. However, much of the current demand for “baseload” power is an artifact of pricing systems designed for coal, and may disappear as prices become more cost-reflective.

To put the point more sharply, if we are convinced by the arguments of Pandora’s Promise, what would the makers of the film have us do? Stop protesting against nuclear power? Most of us did so decades ago. Abandon restrictions on uranium mining and export? The Australian government has done so already, with barely a peep of protest. The only remaining restrictions on exports to India relate to concerns about nuclear weapons proliferation, not nuclear energy, and seem likely to be dropped in any case. Give nuclear power a level playing field to compete against renewables? In the US at least, nuclear power is already treated more favourably than alternatives, leaving aside the massive subsidies already handed out in the 20th century. The same is true in many other countries that have sought, with limited success, to promote a nuclear renaissance.

Two of the leading environmentalists quoted as supporting nuclear power are Mark Lynas and George Monbiot. They have some interesting reactions to the recent announcement that EDF will build a nuclear reactor, Hinkley C, under a deal with the UK government. Monbiot sees it as a disaster, going for massively expensive Generation III technology when the alternative was to build an Integral Fast Reactor, a design with lots of theoretical advantages but one that has never been built (other breeder reactors have been expensive failures). Lynas, writing before the announcement has a more sanguine view of the cost. Lynas compares the “strike prices” offered by the UK government for various renewables, ranging from 100stg/MWh for onshore wind, to 305stg/MWh for experimental technologies like wave and tidal energy. Offshore wind (the only source without severe supply constraints in the UK context) comes in at 150 and large-scale solar at 125. These are guaranteed for 15 years from 2014. Hinkley has as strike price of 92.50, for 35 years from the estimated start date of 2023.

Read more…

Categories: Economics - General, Environment Tags:

The end of the coal boom

November 4th, 2013 188 comments

A bit over a year ago, I put up a post with the same title as this one, except that it ended with a question mark. At that point, most of the authorities I cited took the view that the decline in the world price of steaming coal was just a blip. In fact, prices have kept on falling and are now, in real terms, not much higher than they were in 2004. More importantly, there is now no expectation of a recovery any time soon. The clearest evidence of that is the abandonment or deferral of a string of proposals to create or expand coal export terminals, most recently by BHP at Abbot Point. Investors are desperately trying to get out of the most recently completed project, at Wiggins Island.

A few observations on this

* It’s common for participants in the Australian debate to claim that the rest of the world is going ahead with coal-fired power stations and fossil fuel projects at an unprecedented rate. That was the view that motivated these port expansion projects, and it’s been falsified as clearly as it can be by their abandonment.

* Much of the discussion about climate mitigation is based on the assumption that Australia can decide how much or how little of the burden we should bear. Leaving aside the risks of a free rider strategy, our status as a coal-exporter means that the biggest impacts will arise from decisions made overseas

* Finally, for some light relief here’s former Queensland Treasurer Andrew Fraser (paywalled) citing the now-abandoned Abbott Point project as evidence of the benefits of the Bligh government’s asset sales program, of which he was the biggest booster. It will be interesting to see if he now changes tack and claims that the state was lucky to get of these assets when it could (a more plausible line, but both dubious and contradictory of his previous position).

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Colin Clark Memorial lecture: National Accounting and the Digital Economy – the Case of the National Broadband Network,

October 28th, 2013 13 comments

I’ll be presenting the Colin Clark Memorial lecture on 14 November.

Colin Clark’s greatest contribution to economics was his pioneering role in the construction of national accounts. In the industrial economy of the 20th century, the central problem in the national accounting was the need to avoid double counting, by measuring only the value added at each stage of production. This problem is closely related to that of benefit-cost analysis for public projects. In the 21st century digital economy, value is primarily derived from the flow of information rather than physical inputs and outputs. This creates new problems for national accounting, and for benefit-cost analysis. One example of these problems is the question of how to evaluate alternative proposals for the National Broadband Network.

The talk is bundled with a lunch at Customs House, which (from past experience) will be very pleasant, but fairly expensive, so this event is mostly going to appeal to people whose employers can pay. For those who aren’t in this category, or who aren’t in Brisbane, I’ll post a link to the slides after the event.

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The macro foundations of micro (crossposted at Crooked Timber)

October 25th, 2013 57 comments

Twitter alerted me to an amusing exchange between Chris Auld, posting a list of “18 signs you’re reading bad criticism of economics and Unlearning Economics, responding with 18 Signs Economists Haven’t the Foggiest. UL suggests that Stephen Williamson manages an impressive 9 out of 18 in his review of Zombie Economics (my response here with more from Noah Smith.

Scoring myself against Chris Auld’s list, I’d say I’m in the clear. But quite a few commenters on Zombie Economics have made complaints along the lines of his point 1, that I focus too much on macroeconomics (and finance). The implication is that, even if macro is totally wrong, only a minority of economists do it, and microeconomists are in the clear.

This defense doesn’t work, at least not in general.

Read more…

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Why do we *still* have a Nobel Prize in Economic Sciences?

October 15th, 2013 35 comments

Ingrid Robyens at Crooked Timber links to some fascinating discussion from Philip Mirowski of the role of Swedish domestic politics in the establishment of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, with emphasis on the way in which claims of “scientific” status for economics helped the claim of the Swedish central bank to independence from government.

In the broader context, it seems pretty clear that, if the idea had arisen even a few years later, it would have been rejected. In 1969, economics really did seem like a progressively developing science in which new discoveries built on old ones. There were some challenges to the dominant Keynesian-neoclassical synthesis but they were either marginalized (Marxists, institutionalists) or appeared to reflect disagreements about parameter values that could fit within the mainstream synthesis.

Only a few years later, all of this was in ruins. The rational expectations revolution sought, with considerable success, to discredit Keynesian macroeconomics, while promising to develop a New Classical model in which macroeconomic fluctuations were explained by Real Business Cycles. This project was a failure, but led to the award of a string of Nobels, before macroeconomists converged on the idea of Dynamic Stochastic General Equilibrium models, which failed miserably in the context of the global financial crisis. The big debate in macro can be phrased as “where did it all go wrong”. Robert Gordon says 1978, I’ve gone for 1958, while the New Classical position implies that the big mistake was Keynes’ General Theory in 1936

The failure in finance is even worse, as is illustrated by this year’s awards where Eugene Fama gets a prize for formulating the Efficient Markets Hypothesis and Robert Shiller for his leading role in demolishing it. Microeconomics is in a somewhat better state: the rise of behavioral economics has the promise of improved realism in the description of economic decisions.

Overall, economics is still at a pre-scientific stage, at least, as the idea of science is exemplified by Physics and Chemistry. Economists have made some important discoveries, and a knowledge of economics helps us to understand crucial issues, but there is no agreement on fundamental issues. The result is that prizes are awarded both for “discoveries” and for the refutation of those discoveries.

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