Oh my! Krugman jumps ship

Judging by Krugman’s online post today Same as he Ever Was, he has jumped off the good ship Obama. If Krugman is gone then that means a hole ship load of progressive activists are too (not that Paul leads them but rather is a bell weather of sorts). Watch demobilised progressives sit out the next congressional cycle and then the next presidential race. The republicans have won the day and perhaps the field through no merit of their own.

Same As He Ever Was

These days quite a few people are frustrated with President Obama’s failure to challenge conservative ideology. The spending freeze — about which the best thing you can say in its favor is that it’s a transparently cynical PR stunt — has, for many, been the final straw: rhetorically, it’s a complete concession to Reaganism.

But why should we be surprised? Here’s one from the vault. Two years ago, I was deeply frustrated with Obama’s apparent endorsement of the Reagan myth.

There was a lot of delusion among progressives who convinced themselves, in the face of clear evidence to the contrary, that Obama was a strong champion of their values. He wasn’t and isn’t……

EI Claims Up in September

The bulk of the descriptive meat is here:

“Continued large year-over-year increases in EI beneficiaries in large centres in the West

EI data by sub-provincial region, sex and age are not seasonally adjusted. Therefore, they are compared on a year-over-year basis.

In Ontario, the number of EI recipients more than doubled in 10 of its 41 large centres between September 2008 and September 2009. In the southern part of the province, Hamilton and Kitchener saw the fastest increases in the number of beneficiaries. In Hamilton, the number of EI recipients rose from 4,800 to 10,400, while in Kitchener, the number increased from 3,900 to 8,400. At the same time, the number of EI recipients in Toronto rose from 46,300 to 86,600.

In the northern part of Ontario, Greater Sudbury continued to experience a sharp year-over-year increase. The number of EI recipients rose from 1,500 in September 2008 to 3,900 in September 2009. At the same time, employment in Greater Sudbury declined, mostly in the natural resources sector.

The large centres of Alberta with the fastest year-over-year growth rates were Grande Prairie, Calgary, Medicine Hat, Red Deer and Edmonton. In Calgary, the number of people receiving regular benefits increased sharply from 4,000 to 18,800, while the number of beneficiaries in Edmonton rose from 3,800 to 14,900. These steep increases coincided with year-over-year employment losses for the province in manufacturing; natural resources; and retail and wholesale trade.

In British Columbia, 15 of its 25 large centres had twice as many beneficiaries in September 2009 compared with September 2008. In Vancouver, the number of beneficiaries increased from 12,600 to 31,300, while in Victoria, the number rose from 1,600 to 3,700. During this year-long period, employment losses in the province occurred in a number of industries, with the largest declines in construction; professional, scientific and technical services; manufacturing; and transportation and warehousing.”

The full report is here.

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.

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.”

Mr. Carney said he has a range of tools and he can use to dampen the blow of the currency’s rise, and signaled that any investor who thinks he’s shy to use them is making a mistake.

“Markets should take seriously our determination to set policy to achieve the inflation target,” Mr. Carney said. “Markets sometimes lose their focus. We don’t lose our focus.”

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.

Does Collective action by workers always increase unemployment?

Thinking out-loud

The answer to this question is almost a unanimously agreed upon yes across paradigms even within formalized Marxian models.  In the classic Marx-Goodwin formulation successful collective action by workers only serves to increase the long-run rate of unemployment: some workers maybe able to raise their wages but this will be balanced out in the aggregate by increased unemployment.  However, if as Shaikh (2003) points out the strength of labour endogenously influences the rate of technical change then workers can increase their wages in the aggregate (wage share) without causing an increase in long term rate of unemployment.

Shaikh sums up the case thus:

6. Summary and Conclusions

This paper has attempted to analyze the manner in which alternative macroeconomic frameworks portray the dynamics of the labor market. Two types of dynamics have been of interest, both of which depend upon the mutual interactions between the wage share and the employment rate. In disequilibrium dynamics, the issue is the manner in which these variables respond to imbalances in the labor market, while in growth dynamics the issue is their response to technical change and growth in labor supply growth. We examined the basic neoclassical, Keynesian, Harrodian and Marx-Goodwin models, since each embodies a particular approach to macroeconomics

Dynamics require explicit analysis of stability of various equilibria. But even the existence of a particular stable equilibrium need not imply that the economy will be at or even near that point. The analysis of the neoclassical model in Section 2 demonstrates that if real wages respond to the current excess demand for labor, then the labor market converges to a particular wage at full employment (Figure 1). But if real wages respond to the cumulative excess demand for labor, then the labor market would exhibit endless and possibly large fluctuations in real wages and excess labor demand, around but not at, the equilibrium real wage and full employment (Figure 2). This second type of response is reminiscent of Goodwin’s elegant representation of Marx’s argument about the reserve army of labor, except that in his model the center of gravity is a persistent level of unemployment, not full employment (Section 5). In any case, this type of disequilibrium dynamic remind us that we should be careful to distinguish between equilibrating paths and equilibrium points. At an empirical level, this cautions us not to confuse observed variables with their putative equilibrium levels.

In the case of growth dynamics, a second type of finding emerges. It turns out that in each of the four macroeconomic approaches, the paradigmatic case is one in which the organizational or institutional strength of labor has no influence whatsoever on the path of real wages and on the level of the wage share. In all of the approaches, it is technical factors and labor supply growth which determine the standard of living of workers. The degree of labor strength in the struggle over wages has no effect at all. In the neoclassical case, this is instanced by the ubiquitous Cobb-Douglas production function, in which the labor elasticity parameter directly determines the wage share. Hence the profit-wage ratio is entirely determined by production conditions. In the standard Keynesian case, the corresponding outcome arises from mark-up pricing, in which changes in money wages are said to cause equiproportional price changes. This not only leaves the real wage unchanged, but also implies that it is unchangeable. In the Harrodian framework, unemployment affects the wage share, which in turn affects the warranted rate of growth via the dependence of the savings rate on the wage share, a la Kaldor and Pasinetti. This feedback loop leads the system to stabilize around full employment in the long term. But it also implies that the wage share is completely determined by the rates of technical change and population growth, completely independently of labor strength. Finally, even in Goodwin’s classic formalization of Marx’s theory of the reserve army of labor, “class struggle” over wages has no effect whatsoever on the rate of surplus value. Indeed, greater labor strength would only serve to increase the long-run equilibrium rate of unemployment. This is a particularly unkind cut for a Marxian model.

Two critical questions are raised by the general theoretical finding that wage shares are independent of labor strength. First of all, it is at all empirically plausible? The stability of wage shares is a well-known “stylized fact.” But then so too are differences between wage shares across nations and across levels of development. Are these differences reducible to those arising solely from technical factors and conditions of labor supply?

Alternately, if social forces do indeed influence the wage share, how might such a mechanism operate? The key expression to consider is equation 15, in which the rate of change of the employment ratio depends solely on two critical variables: the rate of accumulation gK = s(u)R and the rate of mechanization gk, assuming that the rate of growth of the labor supply gn is exogenous.

v‘/v = gK – (gk + gn) = s(u)R – (gk + gn)                                            (15)

We saw that if the output-capital ratio R and the mechanization rate gk are exogenously given, then there is only one wage share u = u* consistent with a stable employment rate (i.e. with v‘/v = 0). But this conclusion would not be altered if R and gk, and indeed even gn , were to also depend on the wage share.21 What is needed, therefore, is some other mode of feedback between the employment rate and one of these variables. A particularly simple one is to suppose that the rate of mechanization depends not only on the wage share (i.e. indirectly on the employment rate through its effect on the relative cost of labor) but also directly on the employment rate (i.e. directly on the relative availability of labor). Rowthorn (1984, pp. 203-205) notes that this is precisely the argument in Marx.22 Then gk = f(u,v), and

v‘/v = gK – (gk + gn) = s(u)R – [gk(u,v)+ gn]                                      (15a)

The results of this apparently minor extension are dramatic. Suppose we consider the extreme case in which the wage share is now entirely determined by “class struggle,” so that u = u0. Then if v‘/v > 0 initially, the employment rate v will rise, which will raise the mechanization rate gk(u0, v), thereby bringing the employment rate back into balance. It follows that the same result would also obtain if we assume that the wage share depends on both “class struggle” and the employment rate. Thus the preceding simple modification completely reverses the general theoretical conclusion that the wage share is independent of labor strength, for now there is plenty of room for the influence of the relative strength of labor.

However, if the mechanism is technical change–the swapping of machinery for living labour–it strikes me that over the short run the Marxist model would have to say that unemployment must initially increase unemployment.  This is consistent with Marx’s observation that capital can always adjust to existing supply shortages through technological / organizational innovation. Surely this process takes time.  As Marx was well aware.   I think Marx’s position was that even in cases where capitalism managed to produce full employment that such a condition would not prevail for long do to the tendency to substitute away from labour.

Moreover, what about the case of successful collective action by workers in the face of not labour market shortages but rather excess supply aka unemployment?  It seems the inescapable answer is that such action would serve to increase the short term rate of unemployment even if over the medium to long term there were not any adverse effects.

This result undoubtedly sharpens the political question for unions during recessions.

Where are the provinces?

What I cannot figure out is why the provinces have not been more vocal on expanding both eligibility and the duration of benefits for EI given the EI program is a federal program and welfare is provincial. From a provincial point of view the more restrictive the EI program the greater the provincial welfare bills.  So why are the provinces not calling on the Feds to at least temporarily expand the program in  a meaningful way?  I doubt the provinces are worried about moral hazard.  So what has been going on?

The War on EI reform Commeth

Conservative economists are up in arms that anyone could suggest lowering the qualification requirements for workers wanting to access an insurance program they are obliged to contribute but for which they do not necessarily have access.

Case in point, Stephen Gordon an economist at Laval was interviewed on CBC and he had the temerity to assert that the opposition parties were purporting to return Canadians to the dark days of UI dependency where workers worked 10 weeks and then took a “vacation” (10-42 which he admits was a small group of “users”).   An honest look at the previous programme would conclude that although there was a small user base of “bilkers” the other group was more a victim of a defunct east coast growth paradigm, entrenched rural local business interests and governments bereft of vision (with some irony what we might call an “industrial policy” the very thing conservative economists hate).  It would in fact take the complete collapse of the fishery to provoke a fundamental rethink of the structural dependence by design aspect of the old UI system. Apparently this is wrong.  They still have not yet arrived at areal solution for the structural dependence on the EI program.

But all of this is beside the point.  No one in the opposition is suggesting a return to UI as a guaranteed income scheme.  Although I do not know why this should disturb a conservative economist?  Conservative economists tend to love programs which enforce some requirement to work.  Let us call this their Victorian vice.  Indeed the reason conservative economists like the WITB is because it gives an incentive to welfare recipients an incentive to work.  It is therefore somewhat perverse that they should prefer to exclude formally employed workers from the EI system so that they can go on welfare and then be incentivised to work through programs like the WITB.  In a bizarre twist during the interview Gordon suggested that while access to the program (which all workers are forced to contribute) should remain restricted those who do qualify should have their benefits increased!  A new moral milestone: not only a distinction between the deserving poor but a distinction of merit between deserving and undeserving workers:  All enough to make a good Victorian blush at the recognition of their Dickensonian sentiments.

But I digress.  Gordon even went further and conceded that relaxing the qualifying criteria would only benefit 2% more of the unemployed.  He went further to say that there were other ways to help the poor: such as beef up the GST rebate.  For a man who does not receive the GST rebate and is woefully ignorant of how much income replacement it would represent it was not only callous it was disingenuous.  It was disingenuous because Mr. Gordon knows full well the EI system should be well funded requiring no draws on general revenue. It was only a fleecing of the program which moved billions from the program to general revenue that voila the program needed extra funding.  As an aside, this is why the finance minister’s suggestion the increased EI payments are partly to blame for the increased deficit ring hollow.  It was that minister who raided EI to make room for his silly tax cuts.

But the point is this, there is no choice between increasing benefits or increasing eligibility if we make an honest accounting of how large the surplus was in the EI fund.  Similarly it is a false choice between beefing up the GST credit or the WITB program or extending eligibility.  The EI fund should be fat; it was raided to pay for silly tax cuts that even the economist in question wrote a long blog post against.  It is therefore disingenuous to turn around and make it a question of where money is best spent.  EI is paid for by employers and employees, the fund was fat, and it was depleted by a raid on what appeared to be its fat in good times.  In short, the trade off can only be posed if one accepts the hanky panky involved in the raiding of the EI fund.

The left and Cash Transfers to the Poor: A Rejoinder to Slander

This seems so elementary that it should not have to be pointed out. Lately it has not been in my nature to get in the way of an over the top, gross generalization founded on spurious sampling techniques paired with the terrorism of gotcha journalism, however, today I am feeling frisky.

Some Guy (SG) has a blog post up about how lefties hate direct cash transfers to the poor. I can’t make heads or tails of this claim including the two random citations of lefties provided: one an individual the other a think tank (now there is rigour if I ever saw it). Unfortunately even the random citations provided were poor choice because in the one case SG failed to read the article—I suspect he is hoping you will too.

But alas we all now know that economists are to be debated not trusted. Inter alia, Duncan Cameron argued for an increase in direct cash transfers to the working, unemployed and non working poor:

“By any measure, minimum wages, welfare payments, unemployment assistance have all declined since at least the inflationary period of the 1970s. All these programs need dramatic improvements.”

There is then some irony that SG should have given his post the title: “An overlooked anti-poverty strategy: giving money to poor people.” Seemingly for SG, an increase in the cash benefits to the poor, working poor and unemployed do not quality as “giving money to the poor” (I will explain why below). And unintended irony of all irony the research reported on SG”s blog on minimum wages concludes that increases in minimum wages under a 40-45% of an average hourly wages threshold has little to a positive effect on employment. Although having an indeterminate effect on poverty.

Hence, I suppose the need for direct cash transfers of one form or another. Like uhm maybe an increase in cash benefits for welfare and EI recipients as Duncan argued? No No No No! Shrieked the vanilla economist! I will explain why further on.

In order to solve this murder mystery we will have to return to the scene of the crime. What seems to have stuck in the quick of SG was this offending remark by Duncan on EITCs as a generalized strategy for poverty reduction:

“Not even the Toronto Star editorial board seems to have noticed the problem is much wider than the working poor, and the solution greater than an earned income tax credit — aka a handout — so that lousy employers can continue to pay poverty wages.”

Clearly EITCs are SG’s preferred poverty reduction strategy—no matter that EITC’s do not have robust evidence to support the claim that they reduce poverty. In the US for example, where the program is much more robust than in Canada, the maximum benefit is around 2,700$ per year for a family with two children and around 500$ for a family without kids. And here is the kicker the EITC is phased out fully at 37,000$ for a two child two working parent family and 24,000$ for two individual no children family. I find some irony in the fact that my middle class baby manual tells me that children cost around 10,000$ a year. Therefore the idea that a 1,300$ (max) a year per child EITC in the US could be held up as major strategy to combat poverty is well simply farcical—albeit better than a kick in the ass I suppose. In any case, this is clearly where the unintended irony of a virgin gives way to self-satirisation—hardly edifying.

But the more important question is why would an economist be flogging EITCs as (a) the only form direct cash transfers should take; and (b), at the same time misrepresent the scheme as a poverty reduction scheme? The second is easier (i.e., more simple) to explain than the first. Classic misdirection—the first learned trick of magicians, pick pockets and con-artists (all of which I have infinite respect for outside of the academy).

However, the first question is more painfully answered. You see back in some early graduate seminar vanilla economists (well actually all economists because all economists have to be able to converse with vanilla economists but the reverse is not true—although some vanilla economist are capable of cross paradigm conversations) are given a tutorial on welfare policy analysis. The problem is that traditional cash transfers from say welfare or EI create an incentive for poor people not to work. All things being equal, why work if your welfare benefits will be clawed back and your earned income will be taxed? The basic thrust of the EITC is that it makes it so that work pays. And this is the real thrust of the EITC—making sure the incentive structure is designed so that the poor have an incentive to work and not layabout on the dole. It is about getting people off of welfare—which may or may not be a good thing—but it is not about poverty alleviation.

As an aside it was this I think Duncan was reacting to. Somewhat perversely, EITC’s act as a subsidy to minimum wage employers in two ways. On the one hand, they increase the labour supply of minimum wage workers thereby ensuring increased slack in their labour markets and thus downward pressure on average minimum wages. And on the other hand, they provide a subsidy to employers because the tax credit mitigates workers demand for higher wages. Perhaps this is why the program enjoys such bi-partisan support in the US.

In sum, EITCs are politically palatable because they “reward hard work” and shun the welfare system while giving the appearance of a concern about poverty. they keep in tact and rejuvenate that old Victorian separation between deserving and undeserving poor (never mind that the welfare system already reproduces this logic through extensive monitoring and what has been over the last twenty years increasing paltry benefit rates with increasingly restrictive qualification criteria).  They are, if taken in isolation as the only tool, a politically expedient, ideologically driven, and an ineffective poverty alleviation strategy sometimes garbed up in progressive rhetoric.

I welcome an honest conversation about a robust poverty alleviation strategy for Canada.  If only vanilla economists would try to meaningfully participate by jettisoning their predetermined policy preferences and erroneous characterizations of other members of the policy community. I for one am ready for a new conversation on poverty reduction in which everything is on the table–and not just facile ideological preferences masquerading as the new true social science.

Bank of Canada Beats a Retreat on Optimism

Well I do not mean to brag but I did argue at the time, along with others, that Mark Carney and the BOC were being overly optimistic to which the usual suspects countered that the BOC had super superior models and modelling acumen. So it was, as it is now that Super Mark and the BOC are beating a hasty retreat from their rosy optimism. The globe reports:

The Bank of Canada cut its benchmark lending rate to the lowest possible, and promised to leave it there for as long as a year in order to fight a recession that is deeper and will last longer than previously thought……

The central bank now predicts that Canada’s gross domestic product will shrink by 3 per cent in 2009, compared with a January estimate for a 1.2-per-cent contraction.

The Bank of Canada also abandoned its relatively optimistic estimate that the economy would rebound to expand 3.8 per cent in 2010. The recovery will be far more muted, with an expansion of 2.5 per cent in 2010, the central bank said.

Mr. Carney and his chief advisers on the governing council are trying to restore confidence amid Canada’s first recession since 1992. Employers have shed more than 270,000 jobs since the country fell into a recession in the fourth quarter, a period during which factories produced at only 75 per cent of their capacities, the lowest rate on record…..

Hmm…maybe we start taking fiscal policy a little bit more seriously now and not its faux ami tax cuts?

Related:

Erin Weir on BoC rate cut.  Better Late Than Never