Big Lie of 2010 No. 9: We are all middle class

Canadians like to think of themselves as middle class. Notice the fan fare attached to the release of Hulchanski’s and co. study on the trend toward the hollowing out of the middle class.

I had always thought the term “middle class” a little pedantic in light conversation and of dubious merit in an academic setting as it was just too broad of a descriptor–a hanging signifier if I may be permitted–a choose your own adventure work of fiction if you will. But its neo-Weberian pedigree with its black mould like grip on the bulk of the Canadian intelligentsia has ensured that it remains the ontological “work-horse”, plotting along in the back of most educated Canadians self understanding. It never fit the facts (that is indeed why term kept on stretching: plumbing lower then floating higher). Like the statue of liberty and its vacant promise of equal refuge to all, the term is above all an ideological and not a scientific category which expands as needs be with the comfort of the academic’s good conscious.

The big lie then (No. 9) is not that somehow we have finally discovered that the last thirty years have been very unequal. Indeed we knew this; and we know this. No the big lie is not about inequality and the crystal meth that neoliberalism is to that trajectory,but, rather, it is the attempt, by otherwise reputable economists, to paper it over by trying to claim that in fact the great divide is not between those who work for capital and capitalists but between age classes of workers; i.e., workers and retired workers, with the latter being conceptualized as the capitalist class. The degree of dishonesty here is on par with the regular reality defying dissembling of the Fraser Institute.

The idea that wealth disparity is largely a function of age is nothing less than an attempt to paper-over the basic divide between those who work for someone else and those that employ others.

It is all fine and dandy if you want to try to paper this reality over with the idea that the real economic cleavage is between workers earning present wages and workers drawing down differed wages. The problem is that to make this argument the case would have to be, to quote myself from elsewhere that:

“All financial assets WERE somewhere around GINI = 0 AND WERE concentrated in the the generational cohort of say 60 +.

I was also thinking that IF air-planes did not fly but rather traversed the earth on round pneumatic devices they might more properly be called buses.”

However, the need of respectable economists to reduce us all to middle class is as much a Weberian as an Austrian hangover which in terms of intellectual history should not be all that surprising. The term middle class has long been a sop to a faux egalitarianism that attempts to sweep away real class divisions by throwing everyone into the same sink and calling everyone a dirty dish.

On this score I will take Conrad Black’s antiquarian hooliganism over earnest but nonetheless dissembling simplifying assumptions.

At least with the Canard I know exactly why I am not invited to the table: in Conrad’s house the Doctors came in through the servants entrance.

How positively upper middle class of him?

Mankiw was right, incentives do matter

It turns out that Greg Mankiw perhaps was *mostly* right: incentives do matter. To understand to what extent and how far my dear readers you will have to do three things.

First you will have to read Mankiws original article here. Then you will have to watch this 10 minute long animated lecture here (h/t Marc Lee) and then you will have to read Iglika’s post over at the Progressive economics blog. I know that is about 30 minutes of your time dear reader but I promise you will be rewarded for doing your homework and be equipped to make a difference.

My take away from the three homework assignments is this. If we combine Iglika’s post with Marc’s video link and reflect back on Mankiw’s now infamous article in the NYT we are left with one of three conclusions.

A) Mankiw is wrong.

B) The type of intellectual work he does is akin to basic mechanical manipulation of say moving a mountain of manure from spot X to spot Y.

C) A & B are correct if, and only if, Mankiw does not generalize from what he does for work to what real professionals do for work.

Take away is that both incentives and the type of work being done matter.

David Henderson makes one good point on Canada’s budget triumph

Note, if you are pressed for time just scroll to the last paragraph for the punch-line.

Seems like everyone is picking on poor David Henderson of GMU for his working paper Canada’s budget triumph. The thrust of the paper is that Paul Martin Jr’s 1996 budget proves that through austerity you can spur economic growth. Or simply stated, that austerity = stimulus. As Stephen Gordon–and Stephen is no pinko progressive–pointed out, the paper is disingenuous in two major respects.

First, private sector employment had already recovered by 1996. And second, interest rates had fallen nearly 9% from the onset of the recession prior to the 1995-96 budget. This in and of itself probably helps explain why private sector employment had recovered prior to the 95-96 austerity budget. As Stephen also points out interest rates would fall another 500 basis points after the austerity budget to their lowest level in living memory (exaggeration but close given what counts for memory these days). The culmination of which was a massive depreciation in the CAD dollar such that Canadian exporters got a 10% boost in their competitiveness without having to lift an eyebrow. The bottom line is this: Henderson’s paper is wrong because the austerity budget came after the recovery had well begun in Canada and was further helped along by interest rate cuts and a depreciating dollar.

What Stephen does not explicitly remark on unfortunately–although he does implicitly by including public sector employment in his graph–is that the austerity budget and the cuts to the public sector contained inter alia helped keep labour markets very depressed. Indeed, it would take nearly 8 years for unemployment to drop to its post recession levels.

Paul Krugman picks up on Stephens remarks over at his blog which is fitting given that Henderson specifically tries to link the Canadian experience of 1996 to current American problems. As both Stephen and Paul point out the two simply are not amenable: private employment is not back to its pre-recession levels and the FED has no more room to reduce interest rates. It was a little disheartening that neither Stephen nor Paul chose to ask the question if the 1996 austerity budget nonetheless fit with the Canada of today. That is a more interesting question; namely, will austerity today produce the same results as it did (not) back in the mid 90s. My answer would be no for the following reasons.

Canada has been witness to a steady appreciation of its dollar. This means that much of the capacity in the manufacturing export sector is likely not coming back. To the extent that commodity exports will continue to thrive is of little importance from a labour market point of view because as pointed out in a previous post these sectors are employment lean sectors. That is, you need a 5 % increase in total value added, just to get one percent of growth in employment. So unless agriculture fishing and forestry are driving the commodity exports then resources are not going to make up for the loss of manufacturing jobs.

Second, and related to the first. Commodity markets are relatively strong (that is prices are high). This was not the case back in the 90s. Interest rates are already very low (1%) so there is not much stimulus to be gained there either and the BOC is not talking about funky QE tricks either (which probably would not work anyway). The implication on interest rates is doubly bad news for Canada. Not only is there not much room to cut rates, not much evidence to suggest it would but but there is also thus no instrument (politically viable that is) to depreciate the CDN dollar. The Canadian dollar is thus out of the stimulus picture as well.

The Canadian austerians, from the Federal government (and members of the loyal opposition), to the provincial governments, down to the op-ed pages of the Globe and Mail are busy clamouring for both tax cuts and fiscal austerity. And it looks like the corporate tax cuts are a done deal.

And this brings me to the one thing Henderson got right in his paper (pp17-19) but Stephen and Paul failed to note. Namely, Martin RAISED taxes including corporate and capital gains taxes but not personal income taxes in the 93 and 94 budgets. So I guess you can raise taxes on capital and not retard private sector employment growth. Who knew?

Brad Delong: In the Long Run we are all GOOOD!

Brad DeLong is one of those scribblers I just do not read much any more. First he widely shilled for neoliberalism and the litany; then woke up to find that free trade had not been the boon to Mexico it was supposed to be; then he discovered that all that was well did not end well in the motherland; then he was perplexed as to why the macroeconomic policy conversation was so ignorant; and now he seems to have gone full circle.

Alternative title:

Ready or not here I come right back where I started from. A suggested alternative title for:

Taking Hope in the Long View by J. Bradford DeLong.

Macro Models, Reality and Policy

Testimony of David Colander Submitted to the Congress of the United States, House Science and Technology Committee for the Hearing: “The Risks of Financial Modeling: VaR and the Economic Meltdown.”
September 10, 2009

Some non-economists have blamed the financial heart attack on economist’s highly technical models. In my view the problem is not the models; the problem is the way economic models are used. All too often models are used in lieu of educated common sense, when in fact models should be used as an aid to educated common sense. When models replace common sense, they are a hindrance rather than a help.

Modeling the Economy as a Complex System

Using models within economics or within any other social science, is especially treacherous. That’s because social science involves a higher degree of complexity than the natural sciences. The reason why social science is so complex is that the basic unit in social science, which economists call agents, are strategic, whereas the basic unit of the natural sciences are not. Economics can be thought of the physics with strategic atoms, who keep trying to foil any efforts to understand them and bring them under control. Strategic agents complicate modeling enormously; they make it impossible to have a perfect model since they increase the number of calculations one would have to make in order to solve the model beyond the calculations the fastest computer one can hypothesize could process in a finite amount of time…..

This recognition that the economy is complex is not a new discovery. Earlier economists, such as John Stuart Mill, recognized the economy’s complexity and were very modest in their claims about the usefulness of their models. They carefully presented their models as aids to a broader informed common sense. They built this modesty into their policy advice and told policy makers that the most we can expect from models is half-truths. To make sure that they did not claim too much for their scientific models, they divided the field of economics into two branches—one a scientific branch, which worked on formal models, and the other political economy, which was the branch of economics that addressed policy. Political economy was seen as an art which did not have the backing of science, but instead relied on the insights from models developed in the scientific branch supplemented by educated common sense to guide policy prescriptions.

In the early 1900s that two-part division broke down, and economists became a bit less modest in their claims for models, and more aggressive in their application of models directly to policy questions. The two branches were merged, and the result was a tragedy for both the science of economics and for the applied policy branch of economics.

It was a tragedy for the science of economics because it led economists away from developing a wide variety of models that would creatively explore the extraordinarily difficult questions that the complexity of the economy raised, questions for which new analytic and computational technology opened up new avenues of investigation.[1] Instead, the economics profession spent much of its time dotting i’s and crossing t’s on what was called a Walrasian general equilibrium model which was more analytically tractable. As opposed to viewing the supply/demand model and its macroeconomic counterpart, the Walrasian general equilibrium model, as interesting models relevant for a few limited phenomena, but at best a stepping stone for a formal understanding of the economy, it enshrined both models, and acted as if it explained everything. Complexities were just assumed away not because it made sense to assume them away, but for tractability reasons. The result was a set of models that would not even pass a perfunctory common sense smell test being studied ad nauseam.

Initially macroeconomics stayed separate from this broader unitary approach, and relied on a set of rough and ready models that had little scientific foundation. But in the 1980s, macroeconomics and finance fell into this “single model” approach. As that happened it caused economists to lose sight of the larger lesson that complexity conveys —that models in a complex system can be expected to continually break down. This adoption by macroeconomists of a single-model approach is one of the reasons why the economics profession failed to warn society about the financial crisis, and some parts of the profession assured society that such a crisis could not happen. Because they focused on that single model, economists simply did not study and plan for the inevitable breakdown of systems that one would expect in a complex system, because they had become so enamored with their model that they forgot to use it with common sense judgment.Italics added to original.

Stiglitz: Capitalism is Characterized by Big Bubbles and more

Stiglitz is one of the few (liberal) economists who is not suffering from a massive bought of cognitive dissonance owing to the GFC. This hour long interview with Joseph Stiglitz is well worth watching. Don’t have an hour? Then watch the first fifteen minutes.

Matt Taibbi on Class Welfare and the Crime of a New American Century

I encourage people to read Matt’s full blog post. Below I have reproduced what I think to be the most insightful elements: or when Matt hits high dough. Particularly when he argues that the causes of the great financial crisis were in fact legally sanctioned fraud carried out under the watchful eye of a bought and paid for state. And that really is the truth that dare not speak its name.

After the start of the GFC I wrote:

Hedge fund managers were before congress justifying their pay packages and arguing against regulation while pointing the finger of blame at the ratings companies for the crisis; aka scam, aka market failure. So which is it? Everyone agrees that crisis surely fits the bill, but the characterization of the crisis as originating in a scam or a market failure of epic proportions is being ruled out of court.

Here is the dilemma: characterize the crisis as a scam and then people will have to go to jail. The problem is that if this be a scam it involves almost every single major player in the financial and political establishment in the US. In short, call it scam and a huge swath of the US ruling class would be on the hook.

However, if the crisis is characterized as a massive market failure (and massive is no mere hyperbole, perhaps understatement) then 30 years of patient theoretical innovation in the dismal science not to mention the ideological underwriting service it played for the institutional restructuring of the past thirty years will have to be re-thought.

Here is the core of Taibbi’s recent take on the GFC:

What’s so ironic about this is that Brooks, in arguing against class warfare, and trying to present himself as someone who is above making class distinctions, is making an argument based entirely on the notion that there is an lower class and an upper class and that the one should go easy on the other because the best hope for collective prosperity is the rich creating wealth for all. This is the same Randian bullshit that we’ve been hearing from people like Brooks for ages and its entire premise is really revolting and insulting — this idea that the way society works is that the productive ” rich” feed the needy “poor,” and that any attempt by the latter to punish the former for “excesses” might inspire Atlas to Shrug his way out of town and leave the helpless poor on their own to starve.

That’s basically Brooks’s entire argument here. Yes, the rich and powerful do rig the game in their own favor, and yes, they are guilty of “excesses” — but fucking deal with it, if you want to eat.

And the really funny thing about Brooks’s take on populists… I mean, I’m a member of the same Yuppie upper class that Brooks belongs to. I can’t speak for the other “populists” that Brooks might be referring to, but in my case for sure, my attitude toward the likes of Lloyd Blankfein and Hank Paulson has nothing to do with class anger.

I don’t hate these guys because they’re rich and went to fancy private schools. Hell, I’m rich and went to a fancy private school. I look at these people as my cultural peers and what angers me about them is that, with many coming from backgrounds similar to mine, these guys chose to go into a life of crime and did so in a way that is going to fuck things up for everyone, rich and poor, for a generation.

Their decision to rig the markets for their own benefit is going to cause other countries to completely lose confidence in the American economy, it will impact the dollar, and ultimately will make all of us involuntary debtors to whichever state we end up having to borrow from to bail these crimes out.

And from my perspective, what makes these guys more compelling as a journalistic subject than, say, the individual homeowner who took on too much debt is a thing that has nothing to do with class, not directly, anyway. It’s that their “excesses” exist in a nexus of political and economic connections that makes them very difficult to police.

We have at least some way of dealing with the average guy who doesn’t pay his debts — in fact our government has shown remarkable efficiency in passing laws like the bankruptcy bill that attack that particular problem, and of course certain banks always have the option of not lending that money (and I won’t even get into the many different ways that the banks themselves bear responsibility for all the easy credit that was handed out in recent years).

But the kinds of things that went on at Goldman and other investment banks, in many cases there are not even laws on the books to deal with these things. In some cases what we’re talking about is the highly complicated merger of crime and policy, of stealing and government, which is both fascinating from a journalistic point of view and ought to be terrifying from the point of view of any citizen, rich or poor.

Mankiw and ignoble GDP growth fictions

A great example of arguing from theory rather than fact. Is there any robust proof this is true? Not really, next to none. Clinton raised taxes and growth was higher than before he increased taxes. And the post war record of increasing taxes and robust growth suggest something else is going on then dreamt up by Mankiw. Anyway it must be nice to never have to check in with the facts and just read-off from the holy-writ. At this point Pravda was more enlightening…at least they tried to warp the facts to fit the line. Apparently the conservative wing of liberal economics is now both value and fact free.

Second, the Fed could easily overestimate the economy’s potential growth. In light of the large fiscal imbalance over which Mr. Obama is presiding, it’s a good bet he will end up raising taxes for most Americans in coming years. Higher tax rates mean reduced work incentives and lower potential output. If the Fed fails to account for this change, it could try to promote more growth than the economy can sustain, causing inflation to rise (bold added).

The Ignoble and Noble Prizes for Economics

For Immediate Release

The Real-World Economics Review Blog is holding polls to determine the awarding of two prizes:

The Ignoble Prize for Economics , to be awarded to the three economists who contributed most to enabling the Global Financial Collapse (GFC), and
The Noble Prize for Economics , to be awarded to the three economists who first and most cogently warned of the coming calamity.

It is accepted fact that the economics profession through its teachings, pronouncements and policy recommendations facilitated the GFC. We also know that danger signs became visible long before the event and that some economists (those with their eyes on the real-world) gave public warnings which if acted upon would have averted the human disaster.

With other learned professions entrusted with public confidence, such as medicine and engineering, it is inconceivable that their professional bodies would not at the very least censure members who had successfully persuaded governments and public opinion to ignore elementary safety measures, so causing epidemics and widespread building collapses.

To date, however, the world’s major economics associations have declined to censure the major facilitators of the GFC or even to publicly identify them. This silence, this indifference to causing human suffering, constitutes grave moral failure. It also gives license to economists to continue to indulge in axiom-happy behaviour. Nor has the economics establishment offered recognition to those economists who were not taken in by fads and fashion and whose competence, if listened to, would have prevented the collapse.

These two silences reveal a continuing moral crisis within the economics profession . The Ignoble and Noble Prizes for Economics are being offered as small first steps towards a cure.

Poll Procedures for the Ignoble Prize for Economics

Stage One: Nominations and Evidence

Nominations for both prizes are open to the international community of economists, rather than limited to a closed and secret shop. For each nominated economist an evidence page will be opened on to which people can leave evidential comments. In this way a documented case for (and against) each candidate will be built up.

I don’t know maybe we should have a prize for ignoble ideas. Efficient markets and rational expectations were pretty much baked into the reform and conservative wings of the profession. To single out Fama or Friedman seems odd. What about Krugman? He has authored how many papers with rational expectations sitting TDC? Progressive liberal economists need to take some blame for having played and purged along to get along. Economists, for the majority, were a pretty cozzy lot before the GFC. I am glad that after the GFC (and for one a faux noble) that some decided to break ranks ATF, but they enabled the general ideological climate as much as any putatively right-wing protagonist of the profession.