The rich get substitution effects and the poor get income effects

*This post has been popular so imma top post it here.

It is pretty much understood that the basic orthodox labour market model is agnostic insofar as income and substitution effects are concerned. If for example real wages increase workers may choose to work less because they can consume more leisure with less hours of work or workers may work more hours because the opportunity cost of leisure has gone up. Which effects dominate workers’ incentives are not predetermined by the standard labour market model.

Implicitly, however, we can glean what mainstream economics tends to think are the incentives facing different classes (economic classes that is) of workers. In Mankiw’s recently ridiculed here, here, here and here article in the NYT, he argued the impact of a tax increase on the economic class of ‘workers’ at the top of remuneration scale was a decrease in the real wage which would be met by a substitution of more leisure for less work as the opportunity cost of leisure had been cheapened by the tax increase. Simply stated this class of workers would respond to a decline in their real wage with a union strike like reaction.

So far so good. I do not imagine it inconceivable that those workers with compensation packages that put them in the top 1% of income earners could choose to work less hours if they were faced with a wage cut with one important caveat. They would have to have the type of job which allowed them to control their hours of work and or have sufficient means to withdrawal from the labour market altogether aka independently wealthy. For example, an NHL hockey player cannot say to his coach I am playing one less game a year because of the increase in marginal tax rates; although he might try to make the team offset the tax increase with a higher salary. Thank god for salary caps.

However, when we turn to lower classes of workers we find that Mankiw argues that income effects dominate their incentives. In his introductory textbook he has the following to say about unemployment insurance:

So here Mankiw argues that workers respond according to income effects. Lowering unemployment insurance replacement rates would decrease unemployment because workers would have a greater income incentive to take a job.

What, therefore, accounts for the different reactions between these two classes of workers? Why that is will increased taxes on the rich (a decrease in the real wage) lead to a withdrawal from the labour market but a decrease in unemployment benefits (again a decrease in the real wage) increase the supply of labour. The answer of course is that most classes of workers are not independently wealthy and do not meaningfully control their hours of work. Workers have to work and outside of access to unemployment benefits they do not have the option of defecting from paid labour markets. Therefore whether income or substitution effects predominate is largely a function of class. Most classes of workers save for those at the very top respond to a decreased real wage either by seeking more hours of work through one of three ways: overtime, a second job or telling their teenager to go get a job and pay their own cell phone bill.

It is interesting that Karl Marx (well Smith too in some respects) were the first to recognize the differences between classes of workers what we once called proletarians and the bourgeoisie. But that is for another post.

The right of the community to know and love one another

Guest Post By Elleni Centime Zeleke

Hot on the the heels of my last post on romance and because I am still high from celebrating international women’s day I want to add a few more discussion points to the topic of love and capitalism.
I will start by restating some basic premises and then posing a question.

So, in the context of advanced capitalist societies self-interest is the only form of subjectivity that we are allowed to have access to. We believe that we can overcome the experience of being self-interested humans within the context of a romantic love relationship, but in fact the structure of our society is such that we can really never reconcile self-interest with the reproduction of longer-term cycles of community and collective life.

If we are rich or middle class enough,sometimes we survive as a couple and suffer the illusion that the needs of the individual have been reconciled with the needs of the collective (society). After all money can buy you love, houses, and comforts that keep the couple together and so it reconciles the couples desires with the needs of a consumer based society to reproduce itself.

So, to be sure in order to eat decent food coupling might in fact be a necessary institutional requirement of our time. But that is the point, it is a very historically specific institution, and as a social practice it is more akin to visiting the toilet than any real creative ambition.

Now, to be sure humans are also animals and so we make pragmatic choices in order to survive. It is better to piss in a toilet than to piss randomly and wherever the wind takes you.

But in this sense romance turns us into animals driven by instinct rather than self-critical thought.

Interestingly, we like to gaze at backward women in other countries and feel sorry for them because we see them as passive victims of patriarchy. But romantic coupling is a social arrangement produced in the context where we are all passive victims to narrowly defined goals that are motivated by self-interest rather than self-critical and collectively defined activity. And yet, as we have been saying, to act as a self-interested human being is not natural, it is a political project that we all accept in the advanced capitalist countries as nature and so we fashion our love and our behaviour accordingly.
In my previous post I told the story of the prisoner because he offered a different way of being in the world. His confidence in loving me came from the fact that he did not doubt for a moment that we shared the same world. As a loving man he insisted that the collective be the front and centre of any decision making, even if his body suffered to some degree because of that. His act of love was a sign of maturity that moves us beyond the animality that most romantic partners indulge in for the entirety of their lives.

Marx asked us to rethink whether it was possible to reconcile the right of poor people to survive with a regime of private property rights. I do think that a corollary to that question is whether it is possible to reconcile romantic love with the right of the community to know and love the world that we all have already made and need to remake together?

Understanding Corporate Tax Cuts: embracing conventional wisdom and coming to radical conclusions

Warning this post contains scenes of graphic illustration, it is not intended for short attention spans or people who can not locate coordinates in two dimensional space.  Viewer patience is therefore highly advised.

The debate on corporate income taxes brings out a really nice teachable moment in that it provides an occasion to clarify the terrain of past present and likely future debates on macroeconomic policy.  In what follows I will hew closely to the standard story, but what I intend to show is that even within the terms of the conventional collective memory there is an important contradiction that helps clarify what the real debate over corporate cuts ought to be about.  Let me see if I can deliver.

The conventional account of history runs something like this.  By the 1970s and early 80s unions had become too strong, unemployment insurance and welfare programs too generous and together they produced highly distorting macroeconomic outcomes: high unemployment, high inflation and low output (referred to at the time as stagflation).  Let me just accept this account for argument sake because I think it represents the story in the back of the head of most policy makers and economists over forty.  Let us represent this conventional story by line A in the diagram below.  Notice the oscillating line around A.  That represents the economic cycle.  From the vantage point of policy makers and economists over forty  the problem with the Keynesians is that they were preoccupied with stabilizing those oscillations when they should have been preoccupied with moving the economy towards line B.  Line B represents an equilibrium in which both employment creation and output proceed in a balanced manner.

Point Y represents the bad equilibrium that Keynesians were unwittingly fixated.  In their drive to stabilize the macro economy via employment they gave short thrift to output and thus created an inflationary environment which produced increasing high levels of unemployment, low levels of output and high levels of inflation. In time policy makers and economists shifted their attention away from cyclical stabilisation to structural change .  That is, from attempting to smooth the oscillations around line A to moving the macroeconomic trajectory from line A to B.

Notice that point Y does not entail a lower level of employment but rather a higher level of output.  And this was what was so seductive about the supply side arguments of that time.  What they in fact said was that it was possible to maintain employment and increase output provided the appropriate structural reforms were undertaken.  Everybody and I mean everybody wanted lower inflation and higher employment.  And in the face of stagflation the punters got onside and away we went.

My argument is simply this.  After the largely successful attack on trade unions was accomplished, after the reform of both welfare and unemployment insurance programs were completed and within the context of free trade and capital mobility the real impact of he structural changes was to move the economy to line C point Z.  That is to say, even granting neoliberalism was not some radical attempt to reconfigure income and wealth distribution between economic classes the structural reforms were more successful than its antagonists imagined and thus instead of landing on trajectory B point Y we landed on trajectory C, point Z.

When therefore there is the call to cut corporate income taxes it explicitly assumes that the Canadian economy is still stuck on trajectory A point X.  But if in fact we are on trajectory C, point Z; we are thus in fact stuck at a bad equilibrium.  The move to further juice up output without a commitment to juice up employment is like the Keynesians of yore trying to smooth the oscillations around a bad equilibrium. But this time around it is employment which is lacking not output capacity.

What does this have to do with corporate tax cuts?  Corporate income tax cuts are suppose to be a stimulus to increase the output capacity of the Canadian economy over the medium to long term.  But if as is widely recognized output is not the problem but employment why are we even talking about supply side measures (i,e. corporate tax cuts)?

I think economists are still fighting the last war and not the war we are in.  And as any historian of war will tell you an army that does so will loose.

Update: this is not as radical an idea as it may appear: see this article in the business section of the Globe online.  The difference with Canada is that I think are debt growth is papering over the underlying bad equilibrium.

Precision is not perfection and perfection is not precision

Precision is not perfection. In fact (and it really is a fact) man (sic) ends where god begins. God is perfection but god is not precision. I start here not out of some seminary instinct but only to indicate that within the Judeo, Christian and Muslim traditions there is a similar understanding of perfection as against precision at work. We mortals often consider precision to be a hand maidens to perfection. It here where we err time and again. To be precisely blind is not to be perfectly blind. To be perfectly blind one would have to have no imagination; one would have to be incapable of transcending their lack of vision through the imagination to navigate the world (time and space).

Much of what constitutes the central debates within the academy is stuck in the false equivalence between precision and perfection. Nature V Nurture, rationality V irrationality, objective V subjective, materialist V culturalist understandings of things and of course the Daddy long legs of divides the natural V the social sciences.

It is not my intention here to start or finish a debate on ontological and epistemic concerns. Maybe some other time. What got me on to this subject was a blog post written over at the Slackwire in the comments sections we get the following response from Will Boisvert:

Instead of a realistic appraisal of workplace alienation, you have, like Marx, advanced a caricature of musical celebrity as your approved model of labor. This seems like another mystification. Surely Keith Richards is just a glittering cog in the Rolling Stones combine, one whose particular, limited job—the rote cobbling of salacious lyrics to hackneyed blues riffs—strikes me as degraded and unfulfilling. I don’t know, maybe it makes him feel exalted, the master of artistic wholes, but so what? You can’t run an economy on rock concerts. That you hold up the Richards figment, a cooler update of Marx’s composer sweating and straining with genius, shows me once again how deeply imbued Marxism is, for all its pretensions to a collectivist critique of society, with a romantic individualism that it insists must somehow undergird a mass economy.

Alas, that’s not possible: a return to artisanal autonomy and holism would spell economic collapse and die-off. Given that reality, I think the liberal dispensation holds up rather well, if fully realized. Jobs may be–usually, must be–uninspiring, but with high pay and short hours they leave workers with money and time to draw satisfaction from family life, civil society and unalienated hobby labor.

First-off artisans never enjoyed total holism. This is just bullshit. What artisans did enjoy (more precisely put) was control over their contribution to greater projects. Marxism is not against a social division of labour, nor economies of scope or scale. When Marx speaks of socialism he speaks of both collective and individual labour. What Marx destroys is the firm distinction bourgeois political economy wants to draw between the two. And weirdly when Willy pops his head-up to defend liberalism he does so on the basis of the necessity of individual sacrifice to meet collective needs! And I quote:

Mass production–machine processes and mindless-cog specialization ruled by bureaucracy and scientific design–has long since achieved a craftsmanship and efficiency that “meaningful” artisan labor can’t rival. Does that mean that liberal capitalism leaves us no escape from a bifurcated, spiritually meaningless life of work-time alienation and leisure-time bacchanal? Well, no, actually; if people want the satisfying experience of tangible, creative, self-directed labor, liberal capitalism is happy to sell it to them. Such jobs are called “hobbies” and there is a vast industry–hardware and gardening stores, art-supply shops, cookbooks, blog-hosting websites–devoted to marketing them to consumers.

There is much here to send one to the intellectual toilet so let us take them in their measure. The cardinal error here is that no Marxist I know has ever argued against industrialism and the concentration and centralization that entailed. Indeed the question was always about who should have access to the profits earned there from. It was always understood that the key to human liberty was to be realized via the increasing social division and specialization of labour. The sticky wicket was always of two concerns: First, who controls this; and second ,who preforms it?

But then the comment is also irrecoverably tainted by the proposition that precision = perfection. There are some things in life where precision really helps: piston clearances; tire balancing; mother board assembly and the optics in microscopes. None of course are perfection. Scale down far enough and they will all be imprecise. But this level of imprecision can be perfect for the task for which they were designed. Precision is not perfection to repeat the meme.

I was (and still understand myself as) an accomplished artisan and the delicate balance between precision and perfection was always a question. Too precise = dead form, dead design: too slack simply = sloppy work. There is then also a difference to make between relaxed and sloppy. Look go to your local industrial design store an pick out some interesting espresso cups. The most high modernists among you might desire and therefore like the most symmetrical and thus industrial of offerings. But, let me give you a chance. Send me a photo of your favourite industrial form (espresso only) and I will bet you I can make you more comfortable with something hand (directly) made. Precision works against warmth and depth: slopiness makes us crave precision.

Artisanal production is hereticaly about perfection not precision but it is not imprecise. It is exacting. Hear doth end the lesson.

IMF research paper: “Inequality, Leverage and Crises”

A recently released research paper coming out of the IMF is worth your time. Particularly so if you find yourself making what you take to be a serious argument about the link between inequality and macroeconomic stability but can’t seem to get any respect. Over thirty years of neoliberalism it has been constantly argued that inequality was good for growth and economic stability; this IMF paper argues the opposite and has the neat feature that it is based in evidence rather than in elegant counter intuitive theory.

Below is the abstract for the research paper by Michael Kumhof and Romain Rancière (hat tip to Andrew Jackson over at PEF)

The paper studies how high leverage and crises can arise as a result of changes in the income distribution. Empirically, the periods 1920-1929 and 1983-2008 both exhibited a large increase in the income share of the rich, a large increase in leverage for the remainder, and eventual financial and real crisis.

The paper presents a theoretical model where these features arise endogenously as a result of a shift in bargaining powers over incomes. A financial crisis can reduce leverage if it is very large and not accompanied by a real contraction. But restoration of the lower income group’s bargaining power is more effective.

Retail sales in Canada: A tale of public and private consumption

The retail sales number released by statistics Canada this morning are not dismal but they are bad as in retail sales are down by -0.1% on a month over month basis (M/M). On a year over year (Y/Y) basis retail sales are up by a respectful 3.3%. For the present it is very much an open question as to how retail sales will finish the year.

However, if we take a look at a bar graph of retail sales what I find interesting is that public consumption, by which I mean personal consumption that directly projects a public image, although softening is nonetheless for the most part still solid. And this holds across durability categories. So for example auto sales are still relatively strong and so are clothing sales. What has dropped off and gone into negative territory is private consumption by which I mean personal consumption that the public do not necessarily see. So for example, while car sales are strong, parts are down; while home sales are still positive, home furnishing is negative; and while cloths are positive personal health products are down. In short, Canadian consumers are maintaining appearances while cutting back on those items that do not deliver the highest social bang for the buck.

Click for a crisper image.

In Thorstein Veblen’s theory conspicuous consumption the luxury end of public goods is the driver in booms. The more ostentatious displays of wealth the better: Jewellery ect. But that end of public consumption has gone negative. In short the status war aspect of public consumption has ended and now appearances are being maintained through cuts in other areas of consumption.

If this trend is at all robust; i.e., if it continues into the August and September numbers than we could well be seeing the end of consumption as an economic driver.