Thursday, May 31, 2007
Tuesday, May 29, 2007
More on Heterodox Economics
Monday, May 28, 2007
Heterodoxy and Conventional Wisdom in Economics
Mafia is probably a tad hyperbolic, but there is undoubtedly something of a code of omertà within the discipline. Just ask Alan Blinder and David Card. Blinder, a renowned Princeton economist and former Clinton economic adviser, has long been a zealous advocate of trade liberalization. But this past March, the Wall Street Journal ran a front-page article on Blinder's concerns about the massive dislocations that the current trade regime and outsourcing trends might bring for American workers. He suddenly found himself under fire from fellow economists for stepping out of line. Card, a highly esteemed economist at the University of California, Berkeley, caught flak for his heresy not on trade but on the minimum wage. In 1994 he conducted a study to see whether an increase in the minimum wage in New Jersey had the negative effect on employment that basic neoclassical theory would predict. He found it didn't. In fact, his regression analysis showed that, controlling for other factors, New Jersey gained fast-food jobs after increasing its minimum wage, compared with Pennsylvania, which hadn't raised wages. The paper attracted a tremendous amount of attention and criticism, and Card himself largely abandoned working on the minimum wage. In a 2006 interview, he explained his decision to leave the topic behind this way: "I've subsequently stayed away from the minimum wage literature for a number of reasons. First, it cost me a lot of friends. People that I had known for many years, for instance, some of the ones I met at my first job at the University of Chicago, became very angry or disappointed. They thought that in publishing our work we were being traitors to the cause of economics as a whole."
As Card's and Blinder's experiences show, the "mafia" still flexes its muscles, but there are also signs that its hold on power is slipping. While the discipline remains dominated by a "neoclassical" consensus that is generally pro-market and suspicious of government intervention, an explosion of new research programs and methods have provided strong evidence that many of the pillars of that consensus rest on a foundation of sand. In fact, just before the reception, AEA president George Akerlof, a Nobel laureate as respected in the profession as they come, gave what was in many senses a radical address, attacking some of the discipline's most basic assumptions about what drives human economic behavior. (Three men standing near me in the Friedman reception had referred to it as "crap.")
Much of the article is devoted to the state of non-mainstream schools of economic thought. At a place like Miami, you may not learn much about these marginalized heterodox economists. Who are they?
...Heterodox economists... are economists who don't "think like economists." Many point out that humans aren't rational, or not nearly as rational as the theory would have them be (and, further, that in the aggregate this creates market failures). Others point out that humans are social creatures, not individual agents, and their preferences and behaviors are forged by social structures: institutions, habits, social mores and culture all mediate and drive economic behavior. Others say that price and value aren't interchangeable and that prices don't arise from the simple intersection of supply and demand curves, while some argue that unequal power between different sectors of society affects how markets operate. Dissent from the mainstream of economics is not new; indeed, it's nearly as old as the profession itself. Marx was a kind of heterodox economist, as was Thorstein Veblen.On his blog, Dani Rodrik has (as always) a thoughtful response:
Hayes makes a number of good points about how ideology permeates a lot of thinking by orthodox economists. Anybody who strays from conventional wisdom is in danger of being ostracized. Some years ago, when I first presented an empirical paper questioning some of the conventional views on trade to a high profile economics conference, a member of the audience (a very prominent economist and a former co-author of mine) shocked me with the question "why are you doing this?"
On the other hand I have never found neoclassical methodology too constraining when it comes to thinking about the real world in novel and unconventional ways. See the Carlos Diaz-Alejandro rule here. To me it represents nothing other than a methodological predilection for deriving aggregate social phenomena from individual behavior--and as such it is a very useful discipline for any social science. You say people have some preferences, they face certain constraints, take others' actions into account, and go from there. Neoclassical economics teaches you how to think, not what to think.
I agree, though it is continually frustrating to see so many economists, and students of economics, thoughtlessly use (abuse) conclusions derived from assumptions of perfect competition and perfect information as cover for libertarian "free market" ideology. Smart economists like Rodrik recognize that we live in an imperfect competition/imperfect information world (and neoclassical tools can be useful in understanding it). Advice to students: don't leave college without reading Marx, Veblen and Galbraith (who coined the phrase "conventional wisdom").
Saturday, May 26, 2007
Mankiw: Thanks, China, for the Money
Suppose the U.S. President were to propose the following policy: "My fellow Americans, I have just asked the Congress to increase taxes on all of us. After they pass my tax increase, I will instruct the Treasury to lend the additional tax revenue to the government of China."As a professor of economic principles, Mankiw understands the identity: the current account + the capital and financial account = 0, so a current account deficit implies a capital and financial account surplus (aka a "capital inflow"). The main part of the current account is net exports (exports - imports), while the capital and financial account is investment - net savings. Net savings is private savings less the part borrowed by the government (on the rare occasions when the government runs a surplus, it adds to net savings).
Most Americans would, I suspect, be opposed to this proposal. They would see it as beneficial to China but without much benefit to the United States. With America eager to lend, China would enjoy lower interest rates. Why should Americans pay higher taxes to finance Chinese borrowing and spending?
I agree that this would be a strange and not very sensible policy for the U.S. government to pursue. But isn't it a bit odd that many Americans today are objecting to precisely the opposite of this policy. China is not borrowing from the U.S. government but is instead lending to the U.S. government by buying large quantities of Treasury bonds. The money used to buy these bonds could be returned to Chinese citizens in lower taxes. In other words, Chinese taxpayers are financing American spending and keeping our interest rates lower than they otherwise would be. And many Americans, including the President and Treasury Secretary, are complaining.
US: Trade deficit / Capital inflow
China: Trade surplus / Capital outflow
The essence of the US-China economic relationship is that China is sending goods to the US (we have a bilateral trade deficit), and is getting financial assets (e.g. government bonds) in return. Or, another way of saying the same thing is that China is buying American financial assets and paying for them with goods. China's purchases of assets finance investment in the US in excess of our national savings (which is low, partly due to the federal budget deficit). If we weren't able to borrow from the Chinese (and others), interest rates in the US would have to rise to equate our domestic savings with investment (i.e. increase savings and reduce investment until an equilibrium is attained). So, as Mankiw points out, arguably its the Chinese who should be unhappy with the US-China economic relationship.
Wednesday, May 23, 2007
The Condition of the Working Class in China
Tuesday, May 22, 2007
China at the Barbarians' Gate
There's recently been quite a boom in private equity (a prominent example is the recent Chrysler deal) for two main reasons: (i) low interest rates, which means that banks and investors are desperate for anything with a higher return and (ii) probably of less importance, the increased regulation and scrutiny of publicly traded companies in the wake of the corporate governance scandals (Enron, Worldcom, etc.) a few years ago has made operating privately more attractive. Oh, and maybe some "animal spirits" too.
The first big wave of what we used to call "Leveraged Buy Outs" (LBOs) back in the 1980's was famously chronicled in "Barbarians at the Gate." Supposedly the Chinese word for "foreigner" really means "barbarian"... so now the barbarians have Chinese at the gate.
Here's Daniel Altman's comment on the deal. Bloomberg's William Pesek says its a "Marriage of Two Bubbles" (if you read it you'll see that Asia's richest man has a very appropriate name, indeed).
Wednesday, May 16, 2007
Is "Finance" Justifiable?
On the op-ed page of the NY Times, Michael Kinsley chronicles the 17 times Avis rent-a-car has been sold or reorganized since its founding in 1946. Makes you wonder... Kinsley writes:
Modern capitalism has two parts: there’s business, and there’s finance. Business is renting you a car at the airport. Finance is something else. More and more of the news labeled “business” these days is actually about finance, and much of it is mystifying. Even if you can understand — just barely — how it works, you still wonder what the point is and why people who do it need to get paid so much. And you strongly suspect that the swirl of financial activity around Avis for the past six decades has had little or nothing to do with the business of renting cars.
Sunday, May 13, 2007
Evolution and Protectionism
Our primitive ancestors lived in a world that was essentially static; there was little societal or technological change from one generation to the next. This meant that our ancestors lived in a world that was zero sum -- if a particular gain happened to one group of humans, it came at the expense of another.
This is the world our minds evolved to understand. To this day, we often see the gain of some people and assume it has come at the expense of others. Economists have argued for more than two centuries that voluntary trade, whether domestic or international, is positive sum: it benefits both parties, or else the exchange wouldn't occur. Economists have also long argued that the economics of immigration -- immigrants coming here to exchange their labor for money that they then exchange for the products of other people's labor -- is positive sum. Yet our evolutionary intuition is that, because foreign workers gain from trade and immigrant workers gain from joining the U.S. economy, native-born workers must lose.
At the Economist's Free Exchange Blog, Will Wilkinson has some questions:
Evolutionary psychology helps illuminate why we have a tendency to in-group/out-group thinking, and why we are unlikely to grasp the nature of an ever-growing surplus from cooperation. But, as far as I can tell, it does little to help us understand why we draw the in-group/out-group boundaries where we do. Trade and immigration, as political issues, embody nationalist assumptions -- people and goods going over political boundaries. But the modern nation state is a new idea: there were no nation states in the environment of evolutionary adaptedness. And the modern nation state is vastly larger than the cooperative coalitions for which we are likely evolutionarily adapted. There is something distinctly unnatural about nation-level coalitions. The interesting question to me is how it is that we have come to see the co-members of our nation states as members of the relevant in-group. Iowans don't get testy when Minnestotans move in, but Texans get cranky about Mexicans? Why is that? People in Delaware don't fret a lot about their jobs being outsourced to South Dakota. Why not?
Have a Nominal Rigidity and a Smile
Slate's "Undercover Economist," Tim Harford writes about an extreme case: a bottle of Coke cost 5 cents for over 60 years. So, next time your grandparents pine for the good old days when a Coke only cost a nickel, you can explain to them how such price stickiness may contribute to economic downturns.
44 Out of 49 Economists Agree
The NY Times' Daniel Altman surveyed economists:
As for the other 44, well, you've heard that if you put all the economists end to end, they would not reach a conclusion...
The e-mail message had just one question: “Which factor was most important for the economy’s growth from mid-2003 through the end of 2006?”
....Forty-nine economists responded to my message, including many of the best-known names in the field. Of these, only five, about 10 percent, said that the tax cuts were the most important factor in the economy’s growth.
Two were Nobel laureates known for their conservative views — Robert E. Lucas Jr. of the University of Chicago and Edward C. Prescott of Arizona State University. Two other professors, Martin S. Feldstein of Harvard and Gary D. Hansen of the University of California, Los Angeles, qualified their answers by mentioning other factors.
Saturday, May 05, 2007
Fixing Global Warming: Cheap But Not Easy
Burning fossil fuels imposes a cost to society that is not reflected in their price. Economics says that it should be; and if it were, the price of using fossil fuels would rise in relation to the price of using renewable energy...
And what is the right price? The report says that to stabilise greenhouse-gas concentrations at 550 parts per million (a level most scientists think safeish) would require a price of $20-50 per tonne of carbon by 2020-30. That is along the lines of the carbon price established the European Emissions-Trading Scheme, which varied between $6 and $40 in 2005-06. It has not bankrupted the European economy so far. The IPCC’s economic models reckon, on average, that if the world adopted such a price the global economy would be 1.3% smaller than it otherwise would have been by 2050; or, put another way, global economic growth would be 0.1% a year lower than it otherwise would have been.
So, the costs of dealing with the problem are modest, and yet action may not be forthcoming because of a global public good problem:
The world would barely notice such figures; so one might think that climate change can be easily sorted. The problem, of course, is that the numbers work only if they are applied globally. If a few countries—even a few big countries—adopt a carbon price, it will make little difference. All the world’s big emitters need to do it. Which brings the world straight back to the problem that sank Kyoto. No country alone can make a difference, and it is in every country’s interest to ensure that everybody else bears the burden. As the IPCC report convincingly argues, the technology and the economics of this problem are easily soluble. It is the politics that is so difficult.On a related note, Lawrence Summers once famously offended many people by suggesting that rich countries should pay poor countries to take their pollution. The International Herald Tribune's Daniel Altman observed that the credit trading under the Kyoto accord has had the opposite result (see also this subsequent post). Of course, Summers, now the former president of Harvard, was just getting started.
Friday, May 04, 2007
When You Assume
Well I really, really did not want to do this--because it is a curmudgeonly thing to do--but having wandered (without professional license) into the politics of trade policy, I cannot avoid the economics. Especially since so many of the comments around my recent posts leave the impression that the economics of trade liberalization is cut-and-dried, with only politicians and ignoramuses standing in the way....Rodrik then ennumerates nine caveats (read them!). The broader point:
So here is a straightforward economics question: under what conditions will trade liberalization enhance economic performance?If you answered "under any and all," you flunk. Here is the correct answer...
The point is that unconditional supporters of free trade take a whole lot for granted. Our professional training prepares us to be analysts who can make contingent statements. Policy A is good if conditions X, Y, and Z are in place. Rule-of-thumb economists sweep all the caveats under the rug, and in the end, are not true to their training.
Wednesday, May 02, 2007
Last night, John ("P.C.") Hodgman explained the World Bank to Jon Stewart - here's the video from the Daily Show.
Also, Ken Rogoff imagines a secret internal memo from Wolfowitz to the World Bank staff (hat tip to Mankiw).
But, seriously, from the Washington Post, here's Sebastian Mallaby's column on the issue, and a defense of Wolfowitz from Andrew Young.
Tuesday, May 01, 2007
Bernanke: Risin' Up to the Challenge of Our (Trade) Rivals
In practice, the benefits of trade flow from a number of sources. By giving domestic firms access to new markets, trade promotes efficient specialization, permits economies of scale, and increases the potential returns to innovation...Also, the long run answer to the worry that we're "losing jobs":
Another substantial benefit of trade is the effect it tends to have on the productivity of domestic firms and on the quality of their output. By creating a global market, trade enhances competition, which weeds out the most inefficient firms and induces others to improve their products and to produce more efficiently.
If trade both destroys and creates jobs, what is its overall effect on employment? The answer is, essentially none. In the long run, the workings of a competitive labor market ensure that the number of jobs created will be commensurate with the size of the labor force and with the mix of skills that workers bring. Thus, in the long run, factors such as population growth, labor force participation rates, education and training, and labor market institutions determine the level and composition of aggregate employment.Conspicuous by omission is another prominent trade-related worry - the (stupendously huge) trade deficit. Of course, that's the issue where Federal Reserve policy might actually matter. Bernanke did offer an interesting hypothesis a couple of years ago (before he became chairman, of course).
Although the speech was given to the Montana Economic Development Summit, Bernanke failed to note Montana's gains from its comparative advantage in dental floss ranching.
Here's Macroblog's take on the speech.
Separately, two prominent Harvard economist/bloggers, Dani Rodrik and Greg Mankiw (nothing like tenure and a low teaching load to encourage blogging!) have been having a back-and-forth on trade issues. Economist's View has a summary and links.