Brad Delong Wrong Yet Again and Again and Again: oh why can’t we have smarter reform liberals
Scandalum Magnatum, takes Brad Delong to task for botching Kelecki in a recent post.
Brad DeLong damns Kalecki with praise:
I WAS EXPECTING A 6% PRODUCTIVITY GROWTH QUARTER, BUT THIS IS RIDICULOUS!!!
Productivity increased 9.5 percent in the nonfarm business sector during the third quarter of 2009 as unit labor costs fell 5.2 percent (seasonally adjusted annual rates). In manufacturing, productivity increased 13.6 percent while unit labor costs fell 7.1 percent…
Back in the 1930s there was a Polish Marxist economist, Michel Kalecki, who argued that recessions were functional for the ruling class and for capitalism because they created excess supply of labor, forced workers to work harder to keep their jobs, and so produced a rise in the rate of relative surplus-value.
For thirty years, ever since I got into this business, I have been mocking Michel Kalecki. I have been pointing out that recessions see a much sharper fall in profits than in wages. I have been saying that the pace of work slows in recessions–that employers are more concerned with keeping valuable employees in their value chains than using a temporary high level of unemployment to squeeze greater work effort out of their workers.
I don’t think that I can mock Michel Kalecki any more, ever again.
To which Mike responds:
Well I don’t think DeLong knows much about Kalecki.
In Kalecki’s general model of the business cycle, gross profits fall in recessions just as the pre-3Q-2009 DeLong would have expected them to, because investment and hence total demand declines. The effect on profit and wage shares depends on how much total output and employment fluctuates alongside it, and in fact, on how much labour businesses keep (under)employed – exactly the reason DeLong gives for the worldview he maintained before 3rd-quarter 2009 data came along and shattered it.
In “Distribution of National Income” (1956) Kalecki writes that the wage share excluding salaries “does not seem to show marked cyclical fluctuations”. [p. 66 in his 1971 'Selected Essays' book] But once salaries are included, “the ‘real’ wage and salary bill… can be expected to fluctuate less during the course of the cycle than the ‘real’ gross income of the private sector.” [pp. 75-76] Therefore, the wage+salary share increases in a recession. He gives theoretical reasons – mainly that salaried workers’ employment and pay does not vary so much with output – and runs a regression on US data 1929-41 to back it up. This is exactly the opposite of deLong’s representation.
Kalecki does not use the Marxian value terminology, so DeLong’s use of ‘relative surplus value’ is odd.
DeLong seems to be vaguely remembering and mashing into Kalecki’s business cycle theory his infamous 1943 essay “Political aspects of full employment”, although here too Kalecki clearly argues that less-than-full employment is bad for profits: “It is true that profits would be higher under a regime of full employment than they are on average under laissez-faire; and even the rise in wage rates resulting from the stronger bargaining power of the workers is less likely to reduce profits than to increase prices…” [p. 141]
But full employment was likely to meet political opposition from ‘business leaders’ and ‘captains of industry’ (he also never says ‘capital’ or ‘the ruling class’) because of (i) ideological prejudice against Government deficit spending and (ii) any expansion of public investment “which may foreshadow the intrusion of the state into the new spheres of economic activity” [p. 142], and (iii) dislike of the social and political consequences of greater working class confidence that comes with full employment. ‘Rentiers’ would have an additional reason: the erosion of their wealth from more rapid inflation. Kalecki thus predicted a political alliance between rentiers and the intellectual representatives of big industry, “and they would probably find more than one economist to declare that the situation was manifestly unsound.” [p. 144]
DeLong’s account of Kalecki’s views is thus completely misleading. But there’s some wholesale inventories data out today that might just make him rethink everything he thought he knew about Joan Robinson.
To which I would add that when I read Delong’s post I was sure he was channelling Paul Mattick:
“Both Marx and Keynes, then, though for different reason, recognize the capitalist dilemma in a declining rate of capital accumulation. Keynes diagnoses its cause as a lack of incentive to invest. Marx, looking behind the lack of incentive, finds the reason for it in the social character of production as a production of capital. Keynes does not regard crisis and depression as necessary aspects of capital formation; they are such only under laissez-faire conditions, and then only in the sense that the economic equilibrium does not include full employment. For Marx, however, a continuous capital accumulation presupposes periods of crises and depression, for the crisis is the only “equilibrium mechanism” which operates in capitalism with regard to its development. It is in the depression period that the capital structure undergoes those necessary changes which restore lost profitability and enable further capital expansion.”
Paul Mattick (1955), “Marx and Keynes”
So here we have three very different views of recessions and depressions and the way forward:
Keynes insufficient investment which can be remedied by augmenting effective demand (in a liquidity crisis);
Kalecki in accord with Keynes but sees political limits to full employment policies as a solution to aggregate demand and investment;
In Marx interpreted by Mattick, crises restore a particular balance between productivity growth, wages and profits–with the restoration of profits hinging on rapid productivity growth and declining wages. Over at Angry bear just this scenario seems to be playing itself out in the US. Productivity was running 9.5% and wage share of output is declining at an increasing pace. Someone here is being vindicated.
That said, maybe Brad is just rehashing his own understanding of Marx, and like Keynes confesses to have never read him. Hence, it is of little surprise that Brad should make a mash-up of, what are for him, random Marxists and pin his tail on the wrong donkey. Just using the word “Marxist” is akin to the most vulgar of profanities for Brad and thus a display of his necessarily macho character so he thinks.
Someday leading liberals in the US will have to confess that they, like their Republican counterparts, are no Angles when it comes to accurate representation. Further they will have to admit that much of what passes itself off as economics is really political economy–a confession that I am fine with.
Gun Registry Gone: Good Lesson in Lack of political Imagination
Some months ago I wrote about what I found problematic with the dogmatic proposition that the existing long gun registry was all good. Any opposition party could have introduced a private member’s bill which amended the existing legislation in three ways:
One: Abolish registration fees. If registering long guns is a public good than it should be paid for by everyone
Two: Abolish renewal: Once registered long guns are registered for life with two caveats. When the owner moves he or she needs to notify the registry of their new address. In the event of sale the seller must notify the registry and send the contact details of the buyer. The existing legislation does not require renewal of certificates. Last time I take the say-so of the anti-registration camp. Always verify with primary sources where possible.
Three: exempt .22. One already needs a PAL to own one and registration of this hobby riffle is simply too extreme (unless of course someone can show me the violent crime stats for .22 rifles).
Condition one effectively kills the too onerous argument.
Condition two kills the tax grab argument.
Condition three demonstrates a minimal knowledge of arms.
But of course long gun registration became mothers milk and anyone talking against it was put in the Nestle camp. Maybe the opposition parties will learn how to deal with *easy* wedge issues someday, but I am not holding my breath.
Heteros start a new Economics Blog
There is a new economics blog on the internets staffed by a venerable group of heterodox heretics. This can only be a good thing as homogeneity is overrated. The Real World Economics Review Check it out.
The Nonsense of Planning
By Paul Mattick 1939
III.
The major part of the theories of planning hitherto devised can be appraised only as literature, since their authors have refrained from touching upon the laws by which capitalist relations are governed. Their starting point was always discontent with existing conditions. They noted, as anyone may readily do, what was ably set forth by Hoover’s Research Committee on Social Trends: that society’s capacity for producing commodities is continually increasing at a more rapid rate than the purchasing power of the population, that the ratio of employment fails to keep step with the improvement of the productive machinery, and that the means of communication between nations change more rapidly than the reorganization of international relations. In brief, the rate of growth of the social forces of production is such and the forms assumed by them are such that the social relations can not be adapted to these forms, but are breaking them down. The natural conclusion, namely, that these backward relations must be swept aside, never occurs to the theoreticians of planning and can not occur to them, since they are theoreticians of planning only within the existing social relations. So they try to turn history backward and to arrest this painful growth of the social capacities, after the manner of those lovely Japanese ladies who bandage their feet in order to keep them dainty. In both cases, the actual result is simply maiming.
To the economic planners, it is a question of diminishing the productive capacity and at the same time of increasing the purchasing power. In the course of this two-fold process a time must come when the disproportion now existing between the two wall be eliminated and the way prepared for a harmonious interplay. Whatever pains the theoreticians may take to work out their theses down to the least detail, all these pretty games will be very much wasted so far as capitalism itself is concerned. To the capitalists, the problem of planning as a quite one-sided and practical matter, namely, the conversion and adaptation of their productive apparatus and of their business to the automatically contracting relations of the market and to the changes within the economic structure -as brought about through monopolization, cartellization and trustification-in order to win for themselves as much as possible of the social profit. What actual “planning” takes place would take place even without decisive modifications-even if the various brain trusts did not exist-and precisely upon the prescribed basis of the natural market tendencies under monopolistic lassez-faire. The “planning” does not change the social mechanism, but this mechanism functions today in a manner which falls in with the theories of the planners. It expanded the productivity of society in order then, on the ground of this expansion, to contract it. This capitalistic sabotage is not determined by any plans whatsoever,-the plans merely make it known-, but by the planlessness of the existing economic system. Capitalist planned economy is therefore nothing more than “planned planlessness,” or more simply stated-nonsense. With the acceptance of the present economic system as the only one for all time there can, of course, be no insight into the fact that any planning within it can only be a fanciful one; the present economic system really permits no genuine conscious economy at all. To talk of planning from the standpoint of commodity production is just as interesting as to hear a blind man lecture on van Gogh.
Belief in Global Warming is being like a Marxist: You read it in the Wall Street Journal First
That is genius. Worrying about how humans organize themselves into ultimately counter-productive and anti-social systems and then suggesting that none of it is natural and that we ought to do something about it is just crazy and apparently the hallmark of religious thinking. But hey we have naturalized the state failure–market failure–state failure cycle why not global warming too? Rinse and repeat.
Lunacy on Loonie spreads to the Department of Finance via the Bank of Canada
At some point we are going to have to throw in the towel and conclude that there is a concerted effort to promulgate the noble lie. It was one thing when the business press argued that the BOC faced technical limits to their capacity to retrench the value of the Canadian dollar, and yet another thing when almost every commercial bank economists pushed the same fallacy. But now no less than the BOC and the Department of Finance, respectively incarnate in Carney and Flaherty, are pushing the same argument. The FP reports:
Bank of Canada Governor Mark Carney said on Tuesday that foreign exchange intervention did not usually work without complementary policy moves.
“I agree with what the governor of the bank said yesterday …. that it is a limited tool,” Mr. Flaherty told reporters.
At least Carney was smart enough to add the vague qualification “complimentary policy moves.” Flaherty of course stripped it down to the most elegant version of the Nobel Lie. For those looking for further detail about why it is simply not true that the BOC is constrained in its capacity to devalue the dollar go over to worthwhile Canadian and read the series of posts on this subject.
So I am curious why would the BOC who most definitely knows what Worthwhile Canadian knows be misleading the public? The only thing I can come up with (because I do not assume people are dumb) is that the neither the BOC nor the Canadian government has any interest in a policy that would be largely regarded as one of competitive devaluation. So instead of fight the policy issue out in public on its merits they are attempting to smother it under a “technically not feasible” argument. That is, they are doing what the BOC always does. Depoliticize and dispense .
The most noble lie
Tough talking Carney retrenched dollars rise. Or did he?
You would be really mad if you took my analysis and went long on the Canadian dollar especially if you found out I had taken a short position. None of what you hear, half of what you see. But seriously can we credit Carney with the non-trivial ( near 5 cent) decline in the Canadian dollar. Maybe, but only if you can give him credit for talking down the TSX as well.
Source: Globe Investor
We do not do spin…We don’t lose our focus: Carney the rain maker
Listening to Mark Carney talk tough is like watching Stephane Dion pound his fists on the table. Well ok a little more credible than that. Being a former GS man you know he knows people who know people. Some of which I should think are quite unpleasant characters. Problem is there is not really a robust connection between the value of the Canadian dollar and inflation or deflation. Currency traders probably know this…at least more than they have some version of the standard (and empirically dubious) model in their head. So when Carney says “we take our inflation target seriously.” Currency traders likely shrug and say: “we are banking on it.”
Carney’s problem (well actually the manufacturing sector’s problem) is that the BOC does not care about the level of activity in exports. It only cares about their target. Full stop. So unless deflation increases in some way that can be definitively linked to the appreciation of the CAD–which is doubtful–the BOC is not going to do anything.
Are currency traders and Bank economists dumb as a sack of hammers?
The short answer is no despite what has been argued here and here. Bank economists may be a comfortable and no doubt arrogant bunch (imagine combining the natural arrogance of economists with the comfy smugness of Canadian bankers… thankfully a cocktail party I will never be invited to). But do we really believe they do not understand the difference between raising and lowering the value of a currency and the different mechanisms required for each? I think they probably do.
So does Erin Weir over at the Progressive Economics Forum. He makes a cogent case why bank economists may be arguing (erroneously) that the BOC does not have the resources to intervene in fx markets to depreciate the CDN dollar. In a nut-shell Erin argues that the CDN banks are looking to do a little foreign financial asset shopping and that a high CDN dollar makes that prospect even more lucrative. I like this explanation because it does not rely on bank economists being stupid, but, rather, hard-working employees serving their employers to the best of their abilities. And I if that requires misdirection so be it. Let me put it this way: I think they are bank employees before they are economists.
When it comes to economists and bankers I always prefer rational actor models. But hey ad hoc explanations are always amusing. And insinuating that people are stupid does allow one to feel superior I suppose.
Next comes currency traders. Are they as dumb as a sack of hammers? Again I think not. Aggressive if jittery risk takers…you bet…stupid nope. They have played this game before and it is called chicken. I bet they do not think the BOC has the nerve to go into the fx markets in big way, that the BOC does not want the precedent; that it does not want to fuel the notion that the value of the CDN should be set be fiat etc., etc.
Sure, yesterday the loonie lost two cents on Marky Marc’s: “I really mean it this time, I just might do something.”
Today it was back up a cent by noon trading.
The game of chicken is on.
Forget the Bank of Canada: We need an INVITE program to stem appreciation of the CDN Dollar.
If what we are worried about is an overvalued CDN dollar which is caused by speculative flows then why the focus on the Bank of Canada? Exchange rates are not really in the BOC’s mandate. Sure in the case where an appreciating CDN dollar is causing further deflationary pressures it could be argued that exchange rates are within the purview of the Bank’s mandate.
But the BOC is a conservative (in both the ideological and cultural sense) institution. Canada does not face the same structural dynamics (problems) as the UK and the US. And thus I doubt arguments for non-conventional monetary policy responses are going to get very far with the Bank. Moreover there are downside risks to pursuing unconventional monetary policy. We might get a lower exchange rate at the expense of perverse side-effects. So forget the BOC; leave them out altogether.
Thankfully, however, when it comes to exchange rates there are policies available to the government. On such policy could be called an Investment Inflow Tax Equilibration program (INVITE). It would work like this. A simple 2% tax on all inward portfolio investment (as Brazil just announced) would help stop appreciation in its trax. Second if we really think much of the dollar’s appreciation is being driven by gas and oil then an additional 2% tax on all oil and gas investment inflows regardless of the type (portfolio or direct) would help further dampen the speculative plays in that sector. The terminator seed on the INVITE program would be when Canada’s manufacturing sector returned to some degree of health.
