Sitting next to Nelly*

One of the big questions about the shift to working remotely has been “what about new staff?”. To spell this out, the idea is that, while experienced workers can do everything they need to online, new employees will need personal contact to pick up tacit knowledge and firm culture. It’s inherent in the argument that these terms are difficult to define with any precision – if not, they could be formalised and taught.

This is part of a debate that’s been going on for a couple of centuries, between proposals for formal education in work-related skills and learning on the job, sometimes through apprenticeships and sometimes through “sitting next to Nelly”, that is, picking up the relevant skills by working with people who have already acquired them.

Before 1800, and with the partial exception of ministers of religion, on the job training was the only kind on offer. Since then, starting with lawyers and doctors, formal education has steadily expanded at the expense of on the job training, across a wide range of occupations and in many different countries with radically different labor markets. That includes some economies and industries where lifetime employment by a single firm has been the norm and others where work is largely done on a contract or ‘gig’ basis.

This process has always been contentious. Terms like “credentialism”, “overqualification” and “academic” (used pejoratively) have set the tone of much of the discussion. Nevertheless, there has been little evidence that the trend has been or will be reversed, and no one has managed to find, and sustain, a successful altern ative.

The work of hiring, ‘onboarding’, promoting and firing employees has not been exempt from the process. “Human resource management” emerged as a distinct profession in the second half of the 20th century, taking over much of this work from individual managers. HR departments have in turn begun to outsource some of these tasks to specialised firms such as headhunters and ‘separation management advisers’, though onboarding still appears to be done in-house for the most part.

The shift to remote working will provide another test of this process, at least when firms start hiring new staff on a large scale. Some of the concerns expressed about lack of in-person contact will probably prove to be well-founded (though not insuperable). Others, I think, will not. After a few in-person (and ideally one-to-one or small group) meetings to be introduced to new colleagues, most new hires will be able to learn the ropes through email and Zoom.

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Firm-specific skills and working from home

One of the central features of the debate about working from home is that it leads to the loss of random, but productive, encounters with colleagues. I’ve responded with the observation that some of my best research ideas have come from largely unplanned encounters on the Internet.

It’s just struck me that there is a conflict here between the interests of workers and those of firms and managers.

A lot of universities (or, more precisely university managers), think of themselves as developing and promoting a corporate brand. In this context, research collaboration within the university (particularly if it is trans-disciplinary) is viewed very positively, while collaboration with other universities is less well-regarded. But for individual academics, the big rewards come from high-profile work within tightly defined fields, which implies a desire for collaboration with other people in the same field who will, in general, be located elsewhere. While intra-university collaboration may be rewarded in internal promotion decisions, the outside opportunities are greatest for people with external collaborators. Those outside options are routinely used as a bargaining chip in negotiations over salary.

This issue isn’t specific to universities. Labor market theory distinguishes between firm-specific skills and general skills (which are of value to any employer). Back in 1964, Gary Becker made the argument that firms would be willing to pay the cost of firm-specific training for their workers, but not for general training which increases their outside opportunities. (This seems entirely convincing to me, although the empirical evidence I found on a quick search is both limited and inconclusive).

What applies to training also applies to serendipitous encounters. Collaboration with co-workers can enhance productivity within the firm, but doesn’t do much for your market value outside. Conversely, if workers enhance their productivity at home by making more use of industry discussion groups, Skype chats with people in other firms who are addressing similar problems, and so on, that enhances their bargaining power relative to their employers.

In this context, it’s striking that the hardest push for a return to the office is coming from the finance sector, led by JP Morgan. Even though textbook finance is all about hard numbers on earnings, risk and so on, the industry actually operates largely on personal contacts, networks and exchanges of favours, particularly information. That’s why it’s concentrated in a handful of global cities, and why so much attention is paid to issues like “poaching” of staff, no-compete clauses and the like. It’s obviously in the interests of employers to build up internal networks and control external interactions.

As with all these issues, my ideas here are provisional and almost certainly wrong in some respects. So, feel free to correct me.

The Economic Consequences of the Pandemic

That’s the title of the book I’m working on for Yale University Press, and also the theme of two articles I published yesterday.

One, in The Conversation, looked at the potential benefits of remote work and the likely struggle over who will get those benefits. Key paras

For the most part, disputes over sharing the benefits of remote office work will be hashed out between employers, workers and unions, in the ordinary workings of the labour market.

But what about the other half of the workforce, who don’t have the option of working from home? In particular, what about the mostly low-paid service workers who depend on people coming into offices?

If the productivity gains made possible through remote work are to be shared by the entire community, substantial government action will be needed to make sure it happens.

The other article, in Inside Story, looks at the end of the goods economy and its replacement by an information and services economy, a transformation that’s been highlighted by the pandemic. An important implication is that investment demand by private firms is likely to stay low, even as greater public investment is desperately needed.

Tech firms like Microsoft, which now determine stock market values, don’t need much capital. The book value of Microsoft’s capital stock is less then 10 per cent of its market value. The rest is made up of intangibles, a polite word for monopoly-power network effects, intellectual property, and good old-fashioned predatory conduct.

Without any need for private sector investment, interest rates will remain low unless public investment picks up the slack. With the physical goods economy fading into the past, though, we don’t need more of the transport infrastructure projects governments automatically turn to at times like these. Rather, we need to invest in human services like health (mental and physical), education and childcare, and in information platforms that break the monopoly power of the tech giants.

These are the investments that will allow Australia to flourish in an economy dominated by information and services rather than industrial production.

Continuing on the monopoly theme, I did an interview with ABC’s Future Tense, which is now online

r < 0

A few thoughts on the fact that r < 0, where r is the real rate of interest on long-term (< 30 years) debt for developed country governments

Situation predates pandemic and has happened despite central bank attempts to resist it, such as abandoned attempt by Fed to raise funds rate in 2019. Extends to corporate bonds as well. Lowest investment grade BBB currently offering 2.38 which implies expected real return (net of inflation and expected loss from default) also below zero. Was 5-6 per cent before GFC

Same for publicly traded stocks on plausible estimates of future earnings

Implies r < g (nominal growth rate), contra Picketty. But corporate profits are high and (ultra) rich are getting (ultra) richer. Presumably profits are being creamed off as rents in some way. Brett Christopher’s forthcoming Rentier Capitalism is highly relevant

If r < 0, any public investment that generates sufficient income to cover costs improves public finances. If we take r as social discount rate, scope for socially beneficial increased public investment is vast. Implied policy: nationalise sources of rent: IP, monopoly platforms, financial sector etc

Intangibles = Monopoly

In a recent post, I pointed out that long-term (30 year) real interest rates on safe (AAA) bonds had fallen to zero, and suggested that this meant the end of capitalism, at least in the sense that the term was understood in classical economics. On the other hand, stock markets have been doing very well. So what is going on? This is a complicated story and I’m still working it out,
An important starting point is the fact that the most profitable companies, particularly tech companies, don’t have all that much in the way of capital assets compared to their market value. What they have is monopoly power, which has been increasing steadily over time. That benefits those who already own and control these firms, but it does not provide new investment opportunities.


I’ll start by looking at price-to-book ratios. Alphabet, which owns Google has a market value five times the book value of its assets https://www.macrotrends.net/stocks/charts/GOOG/alphabet/price-book The ratio is 15 for Microsoft and 21 for Apple. By contrast, for General Motors, the classic 20th century corporation, it’s just under 1.


For the corporate sector as a whole, the comparable measure is Tobin’s q ratio, which has been trending upwards since the late 1970s and is now near the all-time high reached during the dotcom bubble.

The value of companies like Apple, Google and Microsoft is made up primarily of “intangibles”. That term can cover all sorts of things, and is often taken to refer to some special aspect of the firm in question, such as accumulated R&D, tacit knowledge or ‘goodwill’ associated with brands.
R&D is at most a small part of the story. The leading tech companies spend $10 – 20 billion a year each on R&D https://spendmenot.com/top-rd-spenders/, a tiny fraction of market valuations of $1 trillion or more. And feelings towards most of these companies are the opposite of goodwill – more like resentful dependence in most cases.


A simpler explanation is that the main intangible asset held by these companies is monopoly power, arising from network effects, intellectual property, control over natural resources and good old-fashioned predatory conduct.


In this context, the crucial point about intangibles isn’t that they aren’t physical, it’s that they can’t be reproduced by anyone else. No one can sell a Windows or Apple operating system, even if they were willing to invest the effort required to reverse-engineer it. While there are competitors for the Google’s search engine (I recommend DuckDuckGo), there are huge barriers to entry, notably including the fact that the product is ‘free’ or rather supported by advertising for which all consumers pay whether they use Google or not.


There’s a complicated relationship here between the rise of monopoly and the development of the information economy in which the top tech firms operate. Information is the ultimate ‘non-rival’ good. Once generated by one person it can be shared with anyone else without diminishing in value. As the cost of communication has fallen, it’s become possible for everyone in the world to gain access to new information at essentially zero cost.
What this means is that there is very little relationship between the value of information and the ability of corporations to capture value from it. The protocols and languages that make the Internet possible are a public good, created by collaborative effort and made freely available. The information on the Internet is generated by households, business and governments using these protocols. Without these public goods, Google would be worthless. But because advertising can be attached to search results, ownership of a search engine is immensely profitable.


In turn, this means that traditional ideas about capital and investment are largely irrelevant in the information economy. More on this soon, I hope.

Now is the time to reduce overlong working hours

That’s the title of an article I published in Independent Australia last week. An important part of it was support for the German Kurzarbeit scheme, which pays most of the wages lost by employees when working hours are shortened due to the recession.

There’s a striking contrast with the push by Josh Frydenberg to allow employers to cut hours and wages at will. It’s pretty clear that the days of “we are all in this together” are fast disappearing.

The end of interest

Although my book-in-progress is called The Economic Consequences of the Pandemic, a lot of it will deal with changes that were already underway, and have only been accelerated by the pandemic. This was also true of Keynes’ Economic Consequences of the Peace. The economic order destroyed by the Great War was already breaking down, as was discussed for example, in Dangerfield’s Strange Death of Liberal England.

Amid all the strange, alarming and exciting things that have happened lately, the fact that real long-term (30-year) interest rates have fallen below zero has been largely overlooked. Yet this is the end of capitalism, at least as it has traditionally been understood. Interest is the pure form of return to capital, excluding any return to monopoly power, corporate control, managerial skills or compensation for risk.

If there is no real return to capital, then then there is no capitalism. In case it isn’t obvious, I’ll make the point in subsequent posts that there is no reason to expect the system that replaces capitalism (I’ll call it plutocracy for the moment) to be an improvement.

But first let’s look at the real 30-year bond rate. The US Treasury is currently offering an inflation-protected 30 year bond at a rate of -0.3 per cent. That is, if you buy the bond at say, age 35, you can get your money back, less a 10 per cent reduction in real value, when you are 65. This rate has fallen from 2 per cent, when the bond was introduced in 2010, and started declining sharply in late 2018, before the pandemic, and while the Federal funds rate was rising.

In thinking about the future of the economic system, interest rates on 30-year bonds are much more significant than the ‘cash’ rates set by central banks, such as the Federal Funds rate, which have been at or near zero ever since the GFC, or the short-term market rates they influence. These rates aren’t critical in evaluating long-term investments.

The central idea of capitalism is, as the name implies, that of capital. Capital is accumulated through saving, then invested in machines, buildings and other capital assets to be used by workers in producing goods and services. Part of the value of those goods and services is paid out as wages, and the rest is returned to capital, as interest on loans and bonds or as profits for shareholders. Some of the return to capital is saved and reinvested, allowing growth to continue indefinitely. Workers, on this account, can become capitalists too, by saving and investing some of their wages. At a minimum, they should be able to save enough, while working, to finance a decent standard of living in retirement.

But what happens if there is no return to capital? The collapse of interest rates on government means that’s already true for anyone who wants a secure investment. And the situation isn’t any different for the two remaining AAA-rated corporate borrowers, Microsoft and Johnson and Johnson. Microsoft is currently offering a rate of 2.5 per cent on 30-year bonds, and has exchanged lots of outstanding debt for new bonds at that rate (paying a 40 per cent premium for higher-interest bonds). That’s a real return of 0.5 per cent if you assume that the Fed sticks to its current 2 per cent target and hits it on average. (There’s a lot more room for inflation to surprise on the upside, in my view). If you allow a 15 per cent risk that Microsoft will go bankrupt some time before 2050, the expected real return falls to zero.

To complete the picture of returns to capital, we need to look at stock markets and corporate profits. That’ll be the subject of another post.

A trillion here, a trillion there, pretty soon you’re talking real money (creation)

As with most really neat sayings, the original (with billions, instead of trillions) is misattributed, in this case to the late Senator Everett Dirksen, a conservative Republican who nonetheless helped to write the 1964 Civil Rights Act. The saying can be traced back to an unsigned New York Times article in 1938, which said ““Well, now, about this new budget. It’s a billion here and a billion there, and by and by it begins to mount up into money”. This in turn improved on earlier versions going back at least to 1917
US GDP today (Over $20 trillion) is around 250 times as high, in dollar terms, as it was in 1938, so replacing billions with trillions isn’t much of a stretch.

With that in mind, what should we think about the $2.4 trillion pandemic relief package, and the likelihood of huge demands for public expenditure stretching well into the future? And how much of this analysis is applicable to the world as a whole, where large scale government responses have been the norm rather than the exception.

The simplest way to finance a public expenditure program is to “print money”, or, more usually in a modern economy, to create monetary reserves that can be used to buy government bonds or other financial assets (so-called “quantitative easing”). That in turn means the government can spend, or lend, money without a net increase in the debt owed to the public (or to overseas bondholders). The magnitude can be measured by the monetary base.

The scope to expand the monetary base is limited, but more than enough to cover the immediate needs of the pandemic response. The response to the GFC led to an expansions of the monetary base from $1 trillion to $4 trillion between 2009 and 2015, after which it was wound back by about $1 trillion. It’s grown by nearly $2 trillion (about 10 per cent of GDP) in response to the pandemic, and more is likely to come

The ultimate constraint on money creation is inflation. That hasn’t been a problem lately and (as I’ll argue in more detail later) the world is in need of a fair bit of inflation, probably at an annual rate of about 4 per cent for the foreseeable future. It’s unclear how much expansion of the monetary base would generate this outcome, while avoiding the risk of a resurgence of inflation like that of the 1970s. But looking at the scale of the response that’s going to be needed for a meaningful Green New Deal (I’d estimate at least 5 per cent of GDP every year for the next decade at least), the amount that can be financed through money creation will be nowhere near enough. Substantial reductions in private consumption and investment will be needed to make room for the required public expenditure, and that can only be achieved through a combination of taxation and debt. More on this, and on global response soon, I hope.

The General Theory and the Special Theories

The title of my book-in-progress, The Economic Consequences of the Pandemic is obviously meant as an allusion to Keynes’ The Economic Consequences of the Peace, and one of the central messages will be the need to resist austerity policies of the kind Keynes criticised in his major work, The General Theory of Employment Interest and Money. That title, in turn was an allusion to Einstein*, and the Special and General theories of Relativity.

The special theory Keynes wanted to replace was that of classical economics, in which the economy always tends to full employment unless governments or unions get in the way. The implication of classical economics, articulated in the Great Depression by Mellon (“liquidate the rottenness”) and in the Lesser Depression by the advocates of “expansionary austerity” is that the correct government response to a recession is to cut taxes, cut spending even more so as to balance the budget, and let the private sector expand as it naturally will.

The disastrous failure of austerity, particularly in Europe, has put its advocates on the defensive. Nevertheless, the idea that deficits are always bad has plenty of intuitive appeal (think of Angela Merkel’s Swabian housewife carefully balancing the household books). Austerity has an even stronger hold on those in the policy elite whose thinking was formed in the “inter-crisis” period between the breakdown of the Bretton Woods system in the early 1970s and the Global Financial Crisis of 2008. That accounts for just about everyone in the political class aged over 40, with the exception of a handful of people who have stuck to positions taken in the 1960s or just afterwards, such as Jeremy Corbyn and Bernie Sanders** .

Public expenditure has expanded everywhere in response to the pandemic, and the need for more spending is going continue long after the pandemic is controlled, either by continued restrictions or the development of a vaccine. The fight against austerity will begin with the expiry of time-limited emergency measures, which will happen in the second half of this year (September in Australia and much sooner in the US).

But if we can fight off the push for austerity, there’s another special theory that needs to be dealt with. Modern Monetary Theory (MMT) is, in essence, based on the assumption that the economy is always in what Keynes called a “liquidity trap”. This is a situation where the economy is so depressed that cutting interest rates to zero has no effect on demand – people pile up money rather than spending it. The only solution is for the government to spend money creating jobs (expansionary fiscal policy). And, as long as the liquidity trap continues, governments can keep increasing spending, financed either by money creation or zero-interest bonds.

The problem with this special theory is that a successful application implies destroying the conditions under which it works. Once the economy reaches full employment, any increase in public expenditure requires a corresponding reduction in private expenditure. The only sustainable way of achieving this is through taxation, and the only just way of doing it is through progressive taxation, with those in the top decile of the income distribution giving up a bit more consumption, and those in the top 1 per cent giving up a lot more. MMT advocates, like Stephanie Kelton kind-of admit this, but continuously seek to dodge the point. Here for example MMT advocates Nersiyan and Wray suggest that the Green New Deal can be financed without “taxing the rich” (a problematic term for progressive income taxation, since so few people admit to being rich) relying instead on “well-targeted taxes, wage and price controls, rationing, and voluntary saving”. “Well-targeted taxes” turns out to be a euphemism for a payroll tax surcharge, the most regressive form of broad-based tax.

Nersiyan and Wray draw on Keynes’ proposals in “How to Pay for the War”, which do include measures such as rationing and deferred pay, as well as large trade deficits. But the central point underlying Keynes analysis was that the war could not last forever. One way or another, the struggle with Hitler would be decided. In these circumstances, and with the total mobilisation needed for a life-or-death struggle, measures like deferred pay and rationing represent a way of sharing a necessary sacrifice. These were additional to, not a substitute for, steep increases in income and consumption taxes

A permanent change, like the original New Deal or a Green New Deal can’t be sustained with temporary wartime expedients or expansionary fiscal policy. What is needed is a transfer of resources from private consumption and privately directed investment to public use. That can be achieved through various forms of predistribution, reducing the incomes of those receiving an excessive reward at present, or through taxation. While both need to be pursued, it’s unlikely that predistribution can do all the work.

Keynes got this right in 1937, when he said “the boom not the slump is the time for austerity at the Treasury”.

*This just struck me, but of course I’m not the first to notice. Here’s James K Galbraith, attributing it to Robert Skidelsky. Still, good company to be in and Galbraith says not many others have made this point. And, it has been pointed out on Twitter, Pigou made much the same point in his critical 1936 review.

** If I had ever achieved any political influence, I would also fall into the category

The Economic Consequences of the Pandemic

That’s the title of a book I’ve agreed to write for Yale University Press (their editorial director) Seth Ditchik commissioned my previous two books, Zombie Economics and Economics in Two Lessons when he was at Princeton UP.

When we first discussed the book, I took the view that most of the writing would have to be done after November, since the outcome of the US presidential election would be crucial to developments in the US and globally. I’m now working on the assumptions that
(a) Biden will be the next president
(b) he will have a workable majority in Congress.
(c) mainstream Democrats recognise the need for radical change, and Biden will align with the mainstream position as he always has done

The first of these assumptions was problematic until recently, but seems safe enough to work on now. The third, I’ll leave for comments.
That leaves the question of a workable majority. Roughly speaking, I mean that the Dems have enough votes in the Senate to abolish or restrict the filibuster and pass the kind of program I’ll be advocating (allowing for a couple of defections, that would be 52 or more). Winning that many seats is still a stretch on current polling, but not out of reach.

The immediate question is that of how to get rid of the filibuster. Doing so pre-emptively would be problematic in all sorts of ways. Biden needs to start with the 2008 Obama playbook of reaching out across the aisle in the spirit of bipartisanship. But unlike in Obama’s case, once the proffered hand (or perhaps elbow bump) of friendship is slapped down, as it surely will be, Biden needs to point to his electoral mandate and whip up the necessary votes. Obama realised this, to some extent, in his second term, but by then he had a hostile Congress.

More concretely, I’d suggest starting with health care. Biden should call on the Repubs to drop their endless campaign against Obamacare, and work together on fixing the health systme. He should start with a proposal to expand Medicaid to all states, with incentives redesigned to get around (at least arguably) the Supreme Court’s 2012 ruling that States had to have a “genuine choice”. Biden should offer the Repubs a chance to have a say in the framing of the legislation with the aim of bringing the country together.

Politically, this ought to be a no-brainer for the Repubs. The fact that Oklahoma voters just passed a referendum to expand Medicaid over the opposition of the governor, ought to make it clear that this is a fight they can’t win. But given that they are still fighting to abolish Obamacare, it seems unlikely that they will see this.

Even if Congress passes the legislation, it could still be invalidated by the Supreme Court. But, unlike 2012, this would be a fight that Roberts couldn’t win, since Congress could keep tweaking the law and sending it up again. Repeated rulings in favor of the Republicans on an issue where they have almost no public support https://www.kff.org/medicaid/poll-finding/data-note-5-charts-about-public-opinion-on-medicaid/ would provide the ideal case for expanding the Court so as to nullify the Gorsuch and Kavanagh appointments.

This isn’t the only test case Biden could use. But it seems like an obvious place to start.