This is Naked Capitalism fundraising week. 909 donors have already invested in our efforts to shed light on the dark and seamy corners of finance. Please join us and participate via our Tip Jar, which shows how to give via credit card, debit card, PayPal, or check. Read about why we’re doing this fundraiser, what we’ve accomplished in the last year, and our current target.
Yves here. Readers may know that we regularly savage neoliberal economics, which we often refer to as “mainstream economics.” For instance, that’s why we so often take aim at Paul Krugman, who despite his leftist inclinations, never takes them very far because he is intellectually hostage to a flawed, destructive orthodoxy.
We wrote an entire book, ECONNED, devoted to what is wrong with neoliberal economics and how fealty to its precepts produced the global financial crisis. Other economists, such as Steve Keen in his Debunking Economics, have provided even more exhaustive critiques.
Here masaccio makes a point that the many enthusiastic reviewers of Piketty’s Capital in the 21st Century have skipped over, namely, that his book indicts orthodox approaches and conclusions. Masaccio then focuses on a glaring example of where neoliberal economic theory does not match up with behavior, in its life cycle savings theory.
By Ed Walker, who writes as masaccio at Firedoglake. You can follow him at Twitter at @MasaccioFDL, and here’s his author page at Firedoglake.
In the US only one economic theory gets a hearing in any policy discussion. That theory, neoliberalism, has gotten a 42 year tryout, beginning with the inauguration of Ronald Reagan and running forward through today. It has proved to be wholly and totally wrong, and the more firmly politicians grabbed onto it, the worse things got. The final collapse, the Great Crash, could have been a sign that this theory is comprehensively wrong, and that we desperately need a new set of ideas for coping with the destruction. Instead, President Obama, chose to hire courtiers like Larry Summers, the Bankers’ Man at the Fed, Timothy Geithner, and a coterie of disciples of Robert Rubin to advise him. Together, they did everything they could to restore the power of the financial sector at the expense of millions of us. Within a few months, the neoliberals were back at it, demanding tax cuts and less government, insisting on crushing beleaguered homeowners, handing out more tax cuts, stripping the unemployment compensation of the involuntarily unemployed, and generally swaggering around like they owned the place. The neoliberal crowd won every single battle over the way the government responded to the nightmare. How is it possible for such a destructive theory to survive, let alone triumph in the wake of its disastrous results?
One reason among many is that practically everyone of every social class in the US is a true believer in one or another bastardized version of free market capitalism. The elites normally ignore the views of the lower class, those in the bottom 50% who have no wealth, but in the case of economics, it serves the interests of the richest that the poorest are the biggest supporters of rampant capitalism. Among the top half, there is near-universal support for neoliberal economics, in both of the mainstream parties, and in the media. The only difference seems to be the intensity with which those views are held, and the amount of pain they are willing to inflict on others in pursuit of the neoliberal vision.
A lot of college-educated people took one or two introduction to economics courses, and that was enough to cement in their minds the basic theories and the basic approach to the field. So, when they hear people talk about markets, they remember those simple graphs, and those simple exercises, and nod their heads wisely.
A lot of what we were taught in intro econ seems like common sense. The ideas are simple and catchy, and they seem to fit in with what we were told by our parents, and what little we then knew of the world. If the stories didn’t seem to quite fit our first jobs, we didn’t really notice, we just treated our new information as if it were a special case, and continued assuming that the rest of the world was different, more like our econ courses. In the aftermath of the Great Crash, it was much easier to blame someone for the problem, rather than question the basic theory. It was the savers in China, the greedy masses ready to lie to get in on the American Dream, or any one of the myriad excuses offered by the neoliberals and their flacks, all of who sprang into action to distract us from questioning the basis of their theories.
That helps explain why Capital in the Twenty-First Century by Thomas Piketty was such a sensation. Piketty gave US economics a try as a young grad student at MIT. He doesn’t think much of it, with its “childish passion for mathematics and for purely theoretical and often highly ideological speculation, at the expense of historical research and collaboration with the other social sciences.” 32. He shows how data can be pulled from old archives, sorted, cleaned up, and organized into useful forms. From these forms, we can learn what happened. From history and literature, we can see how people lived in those periods, and we can draw useful inferences.
That’s so different from the US form of the subject, where what to the layman looks like complicated math (it isn’t) pushes us away from our own examination of the ideas and towards acceptance of academic scholarship. We don’t think we can do better than the academics because we think they have some special expertise. The media treat these people like Possessors of the Truth, and delight in explaining how smart Larry Summers is, and how lucky we are to have him and his ilk handing out advice to politicians and hedge fund leaders.
We learn from Piketty that most of the assumptions that form the basis of economic theory are not tested against actual data. They rest on simple assertion accompanied by lots of hand-waving. Even the definitions are arbitrary, and shift about as needed to fit the theory. Academic advancement rests on coming up with some kind of intuition about the nature of the economy, and restating it in mathematical symbols to see if it fits with the existing pile of similar studies. Here’s a bald example:
The prudential regulation and supervision of the financial sector are meant to reduce systemic risk and other risks that arise from asymmetric information. They may therefore be of benefit to the regulated financial institutions themselves: precisely because of the systemic features of a financial system, each individual institution has an interest in the soundness of others. Hence, an institution may welcome regulations even if they impose compliance costs in the form of higher operating expenses and restrictions on its portfolio choices. The model presented here formalizes this intuition, and indeed suggests that in some instances financial institutions or at least a dominant group of institutions may favor regulations that are excessively restrictive relative to the social optimum.
That conclusion could just as easily have been drawn from the first two sentences. The math added nothing.
Throughout Capital, Piketty takes swipes at the assertions of neoliberal economic theory. He certainly isn’t the first person to suggest that individual intuitions of neoliberal economics are wrong. But he identifies so many that it begins to call into question the entire edifice of a theory that is obviously a failure in the real world. And, he postulates a new idea: that data can be used to test out the assumptions and even replace assumptions with facts. Reliance on data carries with it the message that we can’t assume that the future will be like the past, so our answers are always provisional. Finally, he arms the willing reader with the confidence to take on the entrenched economic elites.
As an example, let’s consider the life-cycle consumption theory of Franco Modigliani, which won him the economics version of the Nobel Prize. It says that people save in the present so they can consume later. In this theory, saving is a way to smooth out consumption over a lifetime; you consume less today so you’ll have money later when you need it, for college expenses for your children, unemployment, illness or retirement. This intuition is used today by economists such as Simon Wren-Lewis and Angus Deaton. The latter, a professor at Princeton, produced a paper in 2005 extolling the theory and claiming that was a powerful insight into the way things work. Among other things, it is used to create consumption functions.
Piketty takes it up in Chapter 11, discussing the amount of national wealth attributable to inheritance as compared to the wealth attributable to savings from labor income. Modgliani put out a couple of papers in the mid 80s arguing that as little as 20-30% of the total wealth of the US was the result of inheritance or lifetime gifts. Piketty thinks it’s higher. In his discussion, he points out that the theory implies that by the time of death, you have little or nothing left over to pass on to your heirs. It also implies that the elderly spend down their wealth in the years before their deaths. You don’t need to be an econometrician to check this out for yourself. There is plenty of recent data that anyone can find to check for themselves.
First, we know that the net worth of the bottom half of the population by income is very low. According to the 2013 Fed Survey of Consumer Finances, the median net worth of the lowest quartile is negative, and the median net worth of the next higher quartile is $31,300, down from $34,500 in the 2010 Survey. According to a different 2013 survey by the Federal Reserve, 52% of respondents would not be able to come up with $400 for an emergency without selling something or borrowing. About half of respondents have no plans for how they will retire. Obviously this half of the population isn’t saving, so the theory can’t be right as to them.
At the other end of the spectrum, we find the wealthiest decile, whose median net worth was $1.88 million according to the 2013 SCF. Few of these people will spend all their assets. Almost all will leave substantial wealth to their children and grandchildren, through bequests or through large lifetime gifts.
Somewhere in the 50th to the 90th percentiles there is no doubt a group of people who are saving, either for college for their kids, emergencies, or retirement. According to the 2013 Survey, about 60% of households in the third quartile saved money, and about 70% in the 75th to the 90th percentiles saved money. In the top decile, 80% were savers. For this purpose, paying down debt, including unsecured debt, counts as savings. These figures do not support the life-cycle hypothesis.
The Survey doesn’t support the prediction that the elderly spend down their wealth. About half the households with a head of household 65 or older were savers. That’s pretty much the opposite of the theory. There’s a study by the Chicago Fed reviewing data from Asset and Health Dynamics of the Oldest Old, data collected in surveys by workers at the University of Michigan. They started with about 7500 participants over the age of 70, including about 2500 older than 80, and about 800 spouses younger than 70, Data collection began in 1995, and the population was surveyed every two years.
The Chicago Fed study looks at the period 1995 to 2002. The principle result is that households in which no one died during the period did not consume their wealth, but instead adjusted their consumption to maintain their wealth. Households in which there was a death saw a decrease in wealth. In those households, the average wealth was $120K at the beginning of the period, dropping to about $60K at death. In the whole sample, average wealth among married was about $345,000. If their wealth decreased at the same rate in the period before death of both spouses, we might conservatively estimate that the total loss would be about $120K (which doesn’t allow for any additional accumulation of wealth). That supports the idea of some dissaving among the oldest almost all of it in the last year of life, but it also means that most who have wealth to start with end up with substantial wealth.
In sum, the data doesn’t support the life-cycle consumption theory. It might be a good idea, and lots of us might try a bit of it, but the facts say that most of us don’t do it. Let’s stop using it as an assumption. We should think of it as a bit of the Jenga Pile of neoliberal economics that we were able to pull out. How much do you have to pull out before the whole thing collapses?
55 comments
Comments are closed.
What’s really disgusting is how economists and policy makers could have used the differences between the data and the models to consider policies that could encourage the very things the models presume are good for everyone. So, not only economists make poor assumptions in their models, but they don’t even care enough about reality to see if their ideas could be made to work in the real world; it’s far easier to just assume that if the math works, then it’s all good.
Physics envy.
19th century physics envy.
I forget who said: “Physics is the only true science….all others are mere stamp collecting.” Need a quote boy.
As for the above post, dead on. A more valid economics would allow for the fact that many human behaviors including economic behavior are instinctual or habitual rather than rational. An example would be the miser who, remembering past poverty, saves money he will never spend or pass on. Of course irrationality is a hard thing for academics to deal with so they just ignore it. The truth is our scientific understanding of human behavior in all its various manifestations is still quite primitive. Literature steps in to try to fill the gap but economics also spends a lot of time “making up stories.”
I disagree with your example. A miser would still exhibit rational behavior by not spending his money. His actions are determined by external influences and are completely rational – you cannot prove otherwise.
Whether or not it perfectly fits a model or your “rational” definition is altogether a different point. Even meth users act in a rational manner. The lack of effort to understand the basis of this rational behavior, and to dig deeper, is one of the many problems with Neoliberal Economics and other schools of thought.
It’s not so much that orthodox economics is wrong to assume actors are always rational, it is that what is considered rational is exceedingly narrow, confined to whatever model happens to be in use or perpetuates the notion of free, self-regulating and self-equilibrating markets.
Ernest Rutherford called other sciences stamp collecting.
Neoclassicals don’t follow the natural sciences. They don’t seek to test their theories against empirical data. So powerful is the neoclassical religion that Alan Greenspan can say that financial markets are self regulating because each counterparty has a countervailing interest that ensures against cheating. With this nonsensical idea Alan pushes aside the history of financial fraud and what we read each day in the newspapers. And, the most amazing thing: nobody laughed. They called him Maestro, when they should have carted him off to the loony bin.
Anecdotal, cranky observation:
That dude “Professor” Daniel Gilbert, who shills for Prudential, make me crazy. All his sunny little spots assuring people that yes, the system works, and you, too, can retire comfortably if you just starting forking over your bucks NOW to Prudential. Oh, and by the way, you’re not saving nearly ENOUGH!
Yup, that’ll work for Wal-Mart temps, private security guards and Starbucks baristas. If they just live in their cars.
Gilbert need save nothing himself. Every month, thousands land in his bank account, like magic.
Neoliberals assume away items that don’t fit their models, and hope that others won’t notice.
They don’t deal with externalities very well, among other issues.
Add that to the seeming stranglehold of the Salty/Freshy people on DC and Wall Street thought and that combines to make for stagnation of ideas that don’t fit their notions.
There is quite an element of “Emperor’s New Clothes” in contemporary economics.
I know a lot of people who are quite successful in a variety of professions. These are good people with nice families and all kinds of responsibilities. Most of these folks have a very good idea what’s going on and just how corrupt this system is, but I could count on one hand how many are willing to give up anything, regardless of how questionable the mechanism is in attaining it, particularly if it has been approved by the high priests of society/their profession.
The genius of this system is that it allows participation at a multitude of levels. Once the individual enters the system, s/he becomes ensnared in the process which renders them helpless to fight against that which defines their very success. In come the high priests administering their notions and potions [rationalizations], and you have a life-long devotee of the system [as well as a miserable individual who must take solace in the rewards of game of selling-out, materialism].
The organization of society always leads to the same mess because human beings can not resist the temptation to receive something for nothing, the basis of all economic systems.
great comment
This post strikes me as unfortunately vague and nebulous.
“One reason among many is that practically everyone of every social class in the US is a true believer in one or another bastardized version of free market capitalism. The elites normally ignore the views of the lower class, those in the bottom 50% who have no wealth, but in the case of economics, it serves the interests of the richest that the poorest are the biggest supporters of rampant capitalism.”
That is such a broad generalization it doesn’t really explain anything. Bastardized is a prejudicial choice of words there, immediately framing any defense of market-based economics as beyond the bounds of acceptable discourse. Thus, good faith arguments for property rights and individual liberty and limited government and Constitutional rights and so forth and cautioning against the potential dangers of centralization and technocratic rules and collective violence are smeared by association with the various cover arguments for laissez-faire capitalism that have nothing to actually do with either capitalism or laissez-faire but are simply authoritarian propaganda.
And then there’s the wealth percentile. If we’re going to create a category of people who have no meaningful wealth in the American system of political economy, it is more like the bottom 80% than the bottom 50%.
Finally, this mindset diminishes the actual debates going on. Many Millennials openly identify as socialist. Many of our most important issues today, like environmental protection and the two-tiered justice system and bank bailouts, cut across the traditional political tribal lines so carefully manicured by the intellectual shills. To say that poor people are the biggest supporters of neoliberalism is just silly, a kind of blame-the-victim mentality that results in attention being deflected from the institutional rot in our nation’s supposedly educated institutions like universities and hospitals and courts and media. It is hilarious to think that impoverished black men growing up in communities destroyed by the drug war like being assaulted by our police state. And it’s also hilarious to call this creeping authoritarianism free market capitalism.
Truthfully almost all the writers (not necessarily the posters though) on this site are believers in some form of capitalism (maybe lambert the least so, as he’s expressed interest in worker co-ops etc). They mostly just want a better regulated capitalism and not to use a capitalist model in say healthcare delivery.
I don’t particularly fault that, but if most Americans are going to be lumped in with “everyone of every social class in the US is a true believer in one or another bastardized version of free market capitalism” that’s broad enough to catch a lot.
Capitalism isn’t bad IF the capital is roughly evenly owned. The ancient Hebrews saw to that with a usury ban and periodic agricultural land redistribution.
We’ve gone the opposite way by redefining usury to mean only high interest rates and by encouraging wealth concentration via government subsidies for private credit creation. And who are the most so-called creditworthy? Yep, those who are already rich.
Brought to you by the same mob via rational self interest tropes in the guise of deregulate – underfund anything that might take the shinola off Gawds Country.
Skippy… BTW what does agrarian sociopolitical economics from 5000 – 2000 years ago have to do with today?
That statement is a contradiction in terms: under capitalism wealth isn’t evenly distributed, and no system under which wealth is (more or less) evenly distributed would be recognizable as capitalism.
In fact as Karl Marx correctly pointed out the dynamic inherent in capitalism leads inexorably to greater wealth concentration and hence rising inequality over time.
One could argue that capitalism doesn’t necessarily have to result in greater inequality if activist public policy works to redistribute at least some wealth from haves to have nots. The problem is that there is only one brief historical period, roughly from 1950 to 1980, where this actually happened on a large scale, and in retrospect it looks increasingly like this was due to particular historical circumstances (most importantly the experience of the Great Depression and World War II, coupled with the rise of Communism as a major ideological challenger to capitalist hegemony) that are unlikely to be repeated. Note also that in this period inequality wasn’t primarily attenuated through democratization of capital ownership (as Marx had advocated) but rather by income redistribution, largely through tax policy (which is what Piketty advocates). Heterodox economists like Richard Wolff (whose name btw should appear on progressive sites far more than it does) argue that this is exactly why gains in reducing inequality have proved to be unsustainable: ultimately political power is rooted in ownership of capital, so narrowly based capital ownership is fundamentally incompatible with a functioning democracy (as opposed to the sham democracy we actually have – the PTB pretend that we have a say in how we are our governed, and we pretend to believe them).
The logical conclusion is that sustaining public policies that reduce inequality over the long term actually requires a large scale redistribution of capital and not just income. This would imply that it is not possible for a society to be both “capitalist” and “equal” at the same time. That’s too much for many progressives to wrap their heads around so they persist in clinging to the belief that you can, so to speak, have your cake and eat it too.
If the median net worth of the top 10% is $1.88 million, that means that 5% have more than that. It also means that fewer than 5% will have anything meaningful to pass along. Makes you wonder about the broad base of support for right wing politicians, including ‘New Democrats’.
“To say that poor people are the biggest supporters of neoliberalism is just silly, a kind of blame-the-victim mentality that results in attention being deflected from the institutional rot in our nation’s supposedly educated institutions like universities and hospitals and courts and media.” This is a valid point.
I think it makes a lot more sense to say that many poor people have been duped into accepting some neoliberal nostrums as true, while at the same time they are often ill-equipped to “connect-the dots” of their own, more critical, observations into a robust, comprehensive critique of the status-quo.
There is a tremendous amount of energy, talent, and resources put into maintaining the mythology of everyone having the “opportunity” to hit it big in our system.
Imagine a lowly paid person observing how some of the least honest, and least competent, people at her workplace are paid the most. She also sees the extremely hard work of other colleagues, that is actually what keeps the enterprise afloat, taken for granted and poorly rewarded. In some rare cases that could lead her to question the entire system. A far more natural reaction is to focus on the individual shortcomings of the jerks “above” her in the hierarchy she knows and to fantasize about a better world– with better bosses. Sure enough, that better world is portrayed in convincing detail in the T.V. shows, movies, books and magazines she lives with. “American Idol” demonstrates that plucky, talented people can rise from obscurity.
Even the PowerBall works to keep the illusion alive. People just like her are interviewed on T.V., asked how they want to spend their sudden windfall. Maybe she knows a friend of a friend who has a cousin that started in the mailroom and now has a penthouse uptown, a house in the Hamptons and a fancy car. When a hungry, cold person lingers near a warm restaurant door she doesn’t want the restaurant to vanish. No, what she wants is somebody to help her get inside, sit down and have a meal.
What we need to work on is finding ways to let people understand that determined effort, solidarity, and mutual respect will accomplish more for them than magical thinking. A fantastic example I’m familiar with in Queens started with nothing more than some construction paper, colored pens, and motivation. A couple of young Latina women created cards that said (in Spanish) “We are proud to give paid sick days and a living wage to our valued employees.” They went around the neighborhoods and discovered that only a few employers could truthfully post such a sign in their window. Those few that were able to do so saw dramatic increases in business! Some others then tried to keep pace, and a new, virtuous cycle was created.
Blaming victims only leads to despair. Respecting and empowering all of our brothers and sisters is what will eventually allow us to build a better world.
Yep, agree overall. But I do bristle a little bit at the notion of people being duped. I would say quite the opposite, people targeted by our legal system and people in crappy jobs know they’re getting a raw deal.
If there is any lack of awareness of what’s going on, an inability to connect the dots, it’s higher up the food chain, so to speak.
The whole of economic theory, as I have stated before, is a fig leaf myth cover for the centuries old control of global finance by inherited families. Those reputed animal spirits are the decisions by the elite to have a consumptive and throw-away economy, the car culture over mass transit, ad nauseum. The elite have preyed on mankind’s hubris of believing we are enough gods that we can create religion and therefore having faith in the ongoing elite is just another step along that path.
The elite are relegating our species to a blind alley extinction by limiting humanities growth to the socially inbred DNA of the historical elite.
If you wish to read more analysis of Piketty, the Real World Economics Review 2014 Issue 69 is now available. It is a special issue on Piketty’s Capital. http://www.paecon.net/PAEReview/issue69/whole69.pdf
Thanks for the link, it looks quite valuable.
Yes many thanks for this link. I almost missed it.
Pertinent to this post on the problems capitalism creates I liked greatly one of Michael Hudson’s criticisms of Picketty’s solutions:
“A byproduct of this value-free view of wealth is that Piketty suggests an equally value-free remedy for inequality: a global estate tax with a progressive wealth and income tax. Not only is this almost impossible to enforce politically, but a general tax on wealth or income does not discriminate between what is earned “productively” and what is squeezed out by rent extraction or obtained by capital gains.”
Awareness of this latter with no good solution is a particular headache of mine currently. Being an armchair socialist I have been woken to the ugly fact that my retirement is predicated on me being an exploitative petty bourgeois rentier capitalist if I self manage ‘my’ assets or a mug if I leave the job to one of those nice fund managers. After a little exploration it is also evident that if I can successfully achieve the former I will need to become obsessed and fearful of market chaos and turn into a parody of scrooge, or if I choose the latter I will be not much different to one of those aging cruise liner drones.
Beyond that is the frightening scale of this phenomenon which shows how hard it will be to challenge. Here in Oz alone the current superannuation bucket is valued at $2 trillion and is projected to rise to $4-5 trillion in the next 5-10 years. In terms of wealth accumulation this approaches the entire combined ‘wealth’ of the 1000+ billionaires globally identified by Fortune magazine whose assets are far less liquid who are the normal straw men in this debate about wealth redistribution.
The conclusion here is clear. Any attempt to implement Picketty’s remedy of estate tax will immediately be met by a backlash from any aged people with separate assets on a scale that will make the Koch Bros manipulation of the climate change debate look like a trivial spat. And at the core of it all is the logic of capitalism.
I will always take Piketty one step higher. We are living in a post post-industrial world that is threatened by all the filth that the pre post-industrial world forgot to clean up in its pursuit of mirage profits. Piketty thinks taxes on profits or capital gains will smooth out the inequality. I think it will only prolong the pointlessness of this highly destructive system. And rationalize even more environmental destruction because can’t just ax the whole thing. Piketty points out the flaw in the system. But it will be left to every one of us to agree to a solution. And in the meantime, in the vacuum of understanding, neoliberalism is the only system we have. And yes it can change slowly
– but only painfully.
Although I am in the midst of reading Piketty’s opus, I am far enough into the thesis to have noticed some glaring blindnesses, particularly in the discussion of labour dis-equities. Although Piketty maintains education reduces wage inequality, it is nothing other than his vaunted education which provides the dis-equality of professional/managerial wages – an obvious blind-spot. Piketty goes on to point out the era of least wage inequality was due to education; a much more obvious cause of reduced inequality is the presence of strong labour unions that had the ability to balance corporate power under the blessing of benign government policy. My dollar is with the later explanation. Piketty’s neglect of labour is likely a signature of an economic theory that is oblivious to all economic sources of production other than the entrepreneur and the monopoly that sustains that platitudinous delusion of free market orthodoxy.
Well, we’ve got strong labor unions here in France and with his background I would think he’d include it in his calculations. Maybe Piketty’s data didn’t support that argument? Not that I’m against the idea of strong unions!
Of the various criticisms of Piketty I’ve read, I think the disrespect shown to labor and the power of labor unions to win a fair labor share is probably one of the strongest. I take the reason to be that he, like a lot of people, have written off labor as a factor in the near term. When Obama won in 2008 with Democratic control in Congress, he did nothing for labor, despite the massive work done by unions to elect him, and the small dollar contributions that made up nearly half of the hundreds of billions Obama raised.
That continues to the present day. The attacks on public unions, especially teachers, are generally not contested by Democrats, and where they are, it’s because of strong outside leadership, like that of Diane Ravitch for the teachers. At the leadership level of labor, there is no effort to hold any of the congressionals or the President accountable for their disrespect.
That has to change, and it won’t change until labor refuses to support corporatist Dems even if that means defeat in specific elections, and even it that brings problems for the short run. Especially in the House, it’s pretty clear that the Democratic Party isn’t serious about winning. They back corporatist candidates, and the DCCC under Steve Israel doesn’t contest any of the leadership or committee heads from the Republicans.
Strengthening labor unions, with card check and a strong Labor Department, especially its lawyers, and strong leadership at the Solicitor General’s office could make a big difference in the distribution of income, and eventually wealth distribution.
“That has to change, and it won’t change until labor refuses to support corporatist Dems”
Yes, yes, a thousand times yes!! The most encouraging thing I’ve noticed in the last couple of years are how many rank and file union members are starting to question their “leadership” on this very point. I mean, holding the national convention in a right-to-work-for-less state without any union hotels? What a slap in the face!!
I’m hoping that Obama’s support for TAFTA and the TPP will be the straws that break the camel’s back.
Absolutely agree. Equalization of wages was evident from the 50s on. But a broad increase in education to the middle classes mainly did not flow through until the 1960s and 1970s. My parents benefitted from unions but they did not get the education privileges I was lucky enough to enjoy without the burdens the current generations are being forced to take on by in large by professionals who benefited from near free tertiary education. The hypocrisy of the latter is galling.
Labor unions?! Here’s the problem with your thesis. Two words…global economy. Labor intensive manufacturers are not just competing with other domestic producers. They are competing with the world. Given that, they must move their industrial base to a low labor cost venue, or they will die. This is precisely why we are seeing union labor shrinking steadily in private industry.
Stronger tariffs are necessary. People sometimes cite the troublesome effects on the U.S. economy of the Smoot Hawley Tariff Act of 1930. However, in 1930, the U.S. was a lot like China is today: a major manufacturer and exporter, so it was easy for other countries to retaliate. Nowadays, how are foreign countries going to retaliate against U.S. tariffs? Will they refuse to buy the products that the U.S. hasn’t manufactured for decades?
completely wrong. In 1930 only about 3% of GDP was from trade. Today it is 15%. A trade war would be devastating. Still, you will find a lot of politicians advocating for tariffs. But you won’t find any economists that will.
I’m willing to revise my opinion. What’s your source for the percentage of GDP of U.S. exports in 1930?
I should point out, though, that readers of NC know that if all economists agree on something, there’s a good chance they’re wrong.
Okay, I found some information. Exports were indeed a smaller fraction of the U.S. GDP in 1929-1930 than at present. However, unlike today, exports exceeded imports.
http://www.econdataus.com/tradeall.html
shows exports in 1929 and 1930 to be $5.24 billion and $3.84 billion. Imports were $4.40 billion and $3.06 billion, respectively in 1929 and 1930. The U.S. GDP was $104 billion in 1929 and $92 billion in 1930. Source:
http://www.measuringworth.com/usgdp/
So your percentage for 1930 is approximately correct. Thank you for teaching me something.
Other sources, which I haven’t bothered to record (sorry, it’s getting late), indicate that the current export share of U.S. GDP is in the range that you specified. It seems to be somewhere between 13% and 15%. However, as I mentioned above, the U.S. imports now exceed exports. So it’s not clear to me what effect increased tariffs would have. They would reduce U.S. imports, and foreign retaliation would reduce U.S. exports, but it seems to me that the U.S. would suffer less than the other countries.
Yes, imports do exceed exports, but many jobs are involved with the process of importing. By the same token, imports and just competition in general mean lower prices for everyone…especially the poor. Note what Paul Krugman has to say: “Opponents of global trade, whatever their intentions, are doing their best to make the poor even poorer.” — NYTimes, April 22, 2001.
Just because Krugman said it, doesn’t mean that it’s true, as has been proven time after time here at NC. A huge number of jobs have been lost because American products are being manufactured abroad. Those U.S. jobs that are associated with imports would still exist in different forms if those products were manufactured in the U.S. Whatever is manufactured in the U.S. still has to be transported, either to other parts of the U.S. or to other countries.
Some of the U.S. exports really aren’t even exports. The U.S. “exports” timber to foreign countries, where it is used to manufacture furniture, and then the furniture is imported back into the U.S.. That’s an absurd waste of fuel. The timber should be converted to furniture in the U.S., thereby saving fuel, and reducing the emissions of greenhouse gases.
May I suggest that you read David Ricardo and look under the heading “comparative advantage”. While you are at it, please point me to some articles where legit economists are recommending raising tariff barriers.
The Appeal to Authority is well know logical fallacy. Aside from that, I agree that tariffs can be bad. If a country’s exports significantly exceed its imports, then they should avoid tariffs. But if a country’s imports significantly exceed its exports, then it makes excellent sense to have tariffs.
But our ultra rich oligarchs profit, whether products are manufactures in the U.S., China, Mexico, or Bangladesh, so they choose a system which maximizes their profits at the expense of the 99.9%. In that system, products are manufactured at horrors such as the Wintek factories in China. U.S. tariffs would benefit everyone.
Vatch…when 100 out of 100 authorities agree, that should at least get your attention. Every Econ 101 text on the market discusses comparative advantage as a fact. As far as imports exceeding exports, that has always been the case. We have the largest single market in the world, and virtually everyone sells to us. If we were to start erecting barriers, virtually everyone else would retaliate. I shudder to think about the consequences.
But once again, perhaps there as an economist out their who would recommend trade barriers. Please, please produce his writings on the subject. I’d love to see how he spins it.
Ha-Joon Chang has written about the benefits of protectionism, including tariffs.
Of course you are correct that most economists disapprove of tariffs and protectionism, and in an economic context I disapprove of tariffs if a country’s exports significantly exceed its imports. Most economists also failed to predict the crash of 2008.
In addition to economics, there are environmental and human rights reasons to support protectionism or tariffs. If a manufacturing country lacks adequate environmental safeguards, and amazingly enough, regulation in many countries is much laxer than it is in the U.S., then that manufacturing country has a cost advantage over the countries that try to protect the environment. In such cases, protectionism is not only beneficial, but it is a moral imperative.
Well most countries that have exports exceeding imports are small and often poor. If the US erects barriers, you will drop them into recession. There would be a ripple effect across the globe. Then the larger countries would retaliate. You can see where this is going.
As far as human rights, should we be imposing our values on other sovereign nations?! Countries need to work out their own destiny without us imposing our western values on them. Historically this has never worked out well. Regarding environmental pollution, every country in an early growth phase ignores these issues. But as they climb the economic ladder, they produce EPA-like structures. China has had terrible environmental issues…but as predicted, they are now in a serious clean-up phase. In the 1960’s in US we had nasty air and water problems. Today these issues are in the distant past.
At any rate, if you think you can bring an end to the global economy, go to it. Good luck.
LOL! Where did I say that I want to put an end to the global economy? I do want to put a stop to some of the abuses that occur, and I strongly suspect that most of the people who read Naked Capitalism want to do the same.
Please provide evidence that China is in an environmental “clean up phase”. What actions have they taken? Links, please.
http://www.forbes.com/sites/ckgsb/2014/08/06/chinas-air-pollution-better-than-reports-indicate
Thanks for the article; I hope its true, but I remain skeptical. So far, China’s efforts to control pollution are about as effective as Obama’s efforts to control criminal baking activity. That is, completely ineffective. In the article, I notice dates like 2016 and 2020. Why aren’t there any dates like 2014? It also says that some polluting companies were ordered to leave Beijing. But they weren’t ordered to leave China, so they’ll just continue polluting elsewhere in the country. There’a also nothing about efforts against water pollution in this article.
Until the Chinese start doing something more effective than talk, the United States needs to do something against the unfair cost advantage that the Chinese manufacturers have.
If you have ever had any course work in international econ, one of the early topics deals with growth cycles. They all have the same pattern if the growth is rapid. It is always followed by environmental issues that are ignored. But ultimately in almost every situation, they reach a critical mass, a tipping point where structures are put in place to address the problem. We see China now in the embryonic stage of that process…which is exactly what would be expected from historic examples.
Oops — I meant “criminal banking“, not “criminal baking“. I’m sure everyone understood my meaning; I’m just trying to imagine the Pillsbury Dough Boy in handcuffs!
I see there is a reading comprehension problem here. Labour arbitrage was not a management policy prior to the surreptitious final capture of the government (under Reagan) by the neoliberal agenda. Regulatory capture is what it is called, Bill Black speaks eloquently and often on the subject, it would behove your horizons to acquaint yourself with those observations and implications. Labour arbitrage was used as a way to destroy labour’s political power and signal to labour the level field provided by government in negotiations was no longer – PATCO became the signal victim for this policy. Added to this was the Federal Reserve Bank’s abuse of wage increase as cause for inflation begun in the prior Carter administration when (in clear hindsight) price inflation was the result of manufacturing cost increases due to energy costs, labour cost was always reactive to price inflation, prices being controlled by big business. That, and that alone began the death of the middle classes. Your carts and your horses are in a strange array, and global economy was another decade and a half down the pike where what you are maintaining may make any sense at all. By the by, what I wrote basically said: Income inequality was at its minimum when labour power was at its maximum. What that has to do with global economics is sophistry.
Labor wars go back much further than the 80’s. Nonetheless, the crucial question is not about the past, but the future. You can whine and pound your breast as much as you like, but because of globalization, private industry unions are dying a slow death. At least the public unions are treading water…..for now.
I stand corrected, there is something more than a reading comprehension problem here. Fortunately, I am not under contract to suss that out, that would put me into a much higher income category for tax purposes.
Corporate globalization is an unmitigated disaster for all peoples the globe over. There was no economic or any other law that necessarily entailed the US abandonment of its own working men and women in pursuit of the presumed fruits of ‘comparative advantage’ – rather the long, deliberate, relentless, often brutal pursuit by the most powerful interests in the US (having ‘outgrown’ the mere immense wealth, power and status they had attained within the US and world as a leading exporting/importing nation) of an ever-more-effectively lawless, supranational global corporate regime backed by the colossal US military.
The doctrine of ‘comparative advantage’ is lethally toxic in an age of mobile capital and technology, essentially unlimited labour and a meteoric race to the bottom of human misery and environmental destruction. Anyone paying real attention could see this coming decades ago as US-centred, oligarchic global corporate neoliberalism took flight from political restraint – always under the “freer trade” false flag of convenience.
What seems so difficult about understanding the corporate capture of the federal government was marked by that government’s abandonment of the level-playing-field policy between labour and capital in the cited incident. Labour arbitrage came later after the regulatory way had been cleared to do so. Just because some ignorant fool’s thesis was the end of history does not absolve the requirements of memory nor do the purchasing decisions of the Texas School Board make the damage done by their decisions any less harmful to public accountability. History is not fungible but is capable of greater illumination and understanding, your commentary does not provide those qualities, sorry.
Excellent analysis, Mr. Walker. Having read Piketty carefully, your analysis fits the Piketty work perfectly.
In case its of interest I note here there is no reference to Naomi Klein’s new book “This changes everything” http://www.theguardian.com/books/2014/sep/19/this-changes-everything-capitalism-vs-climate-naomi-klein-review which identifies a very different but equally and arguably more important economic Gorilla problem – the impact of the capitalist system on the natural environment.
I would have liked to see some comments side by side given NC’s good record on highlighting this little old externalities. I aldo wonder does Picketty touch on the interaction? (anyone?)
I did wondered at least if the Real World Economics had addressed this issue/interaction of equity v. environmental solutions (I dont have Picketty’s book) see http://www.paecon.net/PAEReview/issue69/whole69.pdf – as it provides a cross section of progressive economic thought.
Appallingly in the entire latter’s 182 pages of their special edition there is not a single reference to ‘environment’ or ‘climate change’ and only a single footnote to the effect ecosystems/ecology is something to consider when transforming capitalism.
We still apparently have even further to go.
There is some place for a “childish passion for mathematics.” Ronnie Reagan was elected 34 years ago, not 42 as Ed suggests. Tricky Dick Nixon was still President in 1972. Don’t undermine an excellent argument. Let me also share an anecdote contrary to the “life-cycle savings” fallacy: my 91-year old father recently passed away, and he lived for years on Social Security while sitting on his not insubstantial life savings.