Disparate Models, Desperate Measures: The Convergence of Limits ∗

This chapter was originally written back in 2003 and published in 2005 in the volume edited by David Coates (god father to a Miliband son I think) Varieties of Capitalism, Varieties of Approaches.  The data contained inter alia is by now stale in one sense.  However in another sense the document holds up for its time and place in the early Anglo-American debates on neoliberalism.  The trends I analyzed–rising income inequality, reduced welfare state effort, eroding quality and conditions of work, and a secular decline in productivity growth–across the rich OECD zone regardless of which model of capitalism was being pursued were in fact, as I noted at the time, secular trends.  At the time, 2003, most academics still had their heads in the ground about inequality and the punitive dynamics of neoliberal labour market policies.   Indeed the  hegemony of neoliberalism was so complete at that time most social democratic intellectuals refused or were incapable of acknowledging the state of affairs.  Even worse many were actively crafting and implementing neoliberal policies.

In the above sense I think the chapter still holds up.  Moreover, it also holds up in terms of its main hypothesis that the advanced capitalist zone, despite being populated by nation states with very different institutions and public policy regimes, was producing increasingly poor outcomes for workers and citizens. For A version of the chapter “Disparate Models, Desperate Measures: The Convergence of Limits,” leave a comment to request the document.

∗This article was originally published in David Coates (ed.) Varieties of Capitalism, Varieties of Approaches. New York: Palgrave Macmillan, (2005). The version of the article reproduced herein may be reproduced on a not for profit basis subject to the GNU Free Documentation License and provided proper citation is provided.

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.

Varieties of Capitalism: A Critique

Abstract

The Varieties of Capitalism (VoC) has become the dominant approach in comparative political economy and enjoys wide application and attention in disciplines outside of political science and sociology. Indeed the VoC approach has enjoyed much attention in comparative industrial/employment relations (IR). This article undertakes a critical evaluation of the importation of the VoC paradigm into comparative IR. Inter alia, it is argued that the VoC approach, as it is presently configured, may have little to teach IR scholars because its basic theoretical concepts and methodological priors militate against accounting for change. This article begins with a summary of the routine problems researchers in comparative political economy and comparative IR have encountered when attempting to account for change within the constraints of the VoC paradigm. Here the focus is on the limitations imposed when privileging the national scale and the problems engendered by a heavy reliance on comparative statics methodology infused with the concepts of equilibrium and exogenous shocks. The article then goes beyond these routinely recognized limitations and argues that the importation of terminology from neoclassical economic theory, of which the original VoC statement makes foundational reference, further serves to constrain and add confusion to the comparative enterprise; namely, comparative advantage, Oliver Williamson’s neoclassical theory of the firm, the use of the distinction made between (im)perfect market competition in neoclassical economics and the fuzzy distinction made between firms, markets and networks.In the concluding section we argue that the VoC’s narrow focus on the firm and its coordination problems serve to legitimate IRs traditional narrow focus on labour management relations and the pride of place that HRM now enjoys in the remaining IR departments. Ultimately, however, the embrace of the VoC paradigm by comparative IR is a net negative normative move.

The full article can be found here

Occupy Movement: Inequality in Newfoundland and Labrador

Apparently the policy brief I wrote for the Newfoundland and Labrador Federation of Labour has been picked up by the Occupy Wall Street movement.  The brief can be found here.  The money shot from that brief would be the graph below.

Hats off to the Newfoundland Federation of Labour for broadening the conversation about economic inequality and development.

 

The Sensitivity Problem and the Social Sciences: Warn your students

This is a problem I am sure almost anyone who works with data runs into from time to time.  It is also something we need to teach our students.  Which I am sure we all do.  This post is simply elegant example of the problem.

We all know that definitions matter because sometimes the phenomenon we want to look at is very dependent on how it is defined.  Sometimes a small change in the underlying definition is not just sufficient to change the level but also the trend in the time series.  Take the US and the incidence of part time (PT) employment.   If you use the BLS definition of PT employment as anything below 35 hours then since the 1970s there has been an increasing trend in the incidence of part time employment.  If you use the OECD  definition you will arrive at exactly the opposite conclusion.

*Please note the labels on the graph are inverted: fix to come.

What is interesting is that for the other national cases that I am presently looking at the definition only changes the level not the trend.  That is to say, in the case of Canada the long term trend is towards the increasing incidence of part time employment even if on different definitions the prevalence is greater or lesser.  So in the case of the US you can literally come to an opposing conclusion just by a subtle shift in the underlying definition of the phenomenon being investigated.   Econometricians regularly face this problem and it will not do to simply choose one of the two definitions.  Say you want to “test” the proposition that unemployment rates are correlated with the incidence of  PT employment.  Based on the US case you have good reason to believe that the results are definition dependent and you know the definition is arbitrary as the underlying phenomenon is a relative concept.  I would be interested to know what econometricians council when they face this sensitivity problem.

Towards an adult conversation about Canadian labour markets

Have you ever heard the urban legend about how such and such generation of Canadians are lazier than the past generation?  Or the One about how this generation just does not want to work and why we need to make sure EI under-insures job loss to guard against loafers taking advantage of the system?  I have.  In fact I heard that story for all of my adolescent and adult life despite the fact that I took any job that was on offer since the age of 13.  I thought myself to be a rather industrious exception to the layabout tendencies of my generation.  But like most self perceptions and ruling policy narratives it turns out it is, scientifically speaking, unadulterated bullshit.  By which I mean that that the facts neither fit my self stylized superiority  complex nor the policy meme about the need to restructure labour market institutions to deal with the pragmatics of a generation beset by a pampered recalcitrance towards work.  Again, scientifically speaking, by which I mean the facts do not fit the narrative, it is total bullshit.
Here is what the data says .  In the graph below I have plotted two metrics of the propensity to work.  The first is simply the total amount of employment divided by the total population aged 15-64.  The second is total employment divided by total population.  Notice the two series more or less track each other.  Also notice they both trend upwards.  Significance? Let us take the first metric, in 1960 around 58 percent of all Canadians between 15 and 64 were employed in paid labour markets by 2008 around 74 percent were employed.  What does that mean? It means that generationally speaking more of us work than ever before in the history of Canada in paid labour markets.  And this holds true for the second metric (line below the first plot).

Having been disabused of the usual suspects what then accounts for the increasing levels of employment insecurity since the sixties.  In short the answer is the supply of labour and the demand for labour.  Simply put supply has been increasingly outstripping demand.  Don’t believe me then look at the data.  In the graph below I have simply subtracted the growth in employment from the growth in the population between 15 and 64 years of age.  A negative reading means population growth is higher than employment growth.  Take a look at the trend line.

Canadians are supplying far more labour for hire than they ever have.  What has changed is that the economy is simply not absorbing the labour supply available.  So two questions arise.  Why are Canadians supplying so much paid labour and why can’t aggregate demand match aggregate supply?  Answers to those question will have to wait for another post but those are the serious questions.

Note: All data are from the OECD.  Click on graphs for enlarged and clear images

A little perspective on GDP growth or does policy matter?

These are odd times.  Not one policy seems to get floated these days which does not include in the tag line that it will be good for economic growth.  And it is not just tax cuts for the rich or corporations which get rationalized as such: everything from eating organic to getting a post secondary education are all said to be good for economic growth.  What all these claims have in common is that they are patently false if real GDP per capita growth rates is anything to go by(1).  What is more, in almost every advanced capitalist country the obligatory policy meme has been that policy X will be good for GDP growth.  The reality is that since the 1960s it would appear nothing has been particularly good for GDP growth from financial liberalization to the increasing consumption of soy “milk”*.  The hard facts are illustrated in this (below) graph of real GDP growth per capita:

I do not know about you but does anything strike you as patently obvious about the trend rate of growth for these advanced capitalist countries?  Anything, anything at all.  Well in case you missed what they all share in common, with perhaps the exception of the UK, is that it has been a toboggan run since the 60s. Sure the Netherlands gets a bump and then reverts to mean; and sure the UK runs horizontal for a time; and sure Japan descends from mount Fujimori making Whistler look like a bunny hill but the overall undeniable fact is that things have been going down hill since the 60s.  That is, despite all the fan fare behind deregulation, privatisation, free trade, corporate income tax cuts, bicycle helmets, tofu, gay liberation and the Prius; in terms of real GDP per capita growth things have been going down hill.

Look at Canada.  For all the bluster and loud pronouncements about which policy and what size of government was going to tank or reinvigorate the economy the reality is that the last five decades have been characterized by ever lower real GDP growth rates regardless of who was in power and what policies were pursued.  Does this mean policy does not matter?  Of course not.  Policy matters tremendously.  Good policies alleviate poverty which is good for public health and the quality of life of the poor; a strong system of unemployment insurance provides a bridging loan and helps match workers to jobs for which they are qualified(2); a good education, like a garden, improves the quality of life and the autonomy of citizens; exercise helps us keep our form and tax public health care less.

All true.  But do any of those things necessarily boost GDP growth per capita?  And if they don’t maybe we need to stop trying to justify them on those terms and justify them on their merits. If policies such as privatisation, free trade, tax cuts for the rich and corporation cannot be proven to increase GDP per capita growth, which they can’t, then let their boosters provide an alternate rationale.  I am all ears.

*Bean juice from a cow?

1. Of course if we make the right assumptions we can claim that in absence of all of these things GDP growth would have been worse.

2.Skill mismatching is rarely considered by those advocating shortening search times.

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.

Flaherty`s Flatulence is no Laffering Matter: The Revenge of Zombie Gas Coming to an Election Near You

I am not going to spend much time dissecting the claims made by the Finance Minister in the block quote below. Indeed over at the PEF both Erin Weir and Andrew Jackson have pointed out the myriad of ways in which the Finance minister is simply dissembling on the issue. At the heart of the matter is not an economic “law” but rather a cocktail party joke once told by a republican operative and an economist to the Ford administration.

Two things clench the deal for me. Even if we believe abstractly that there is a Laffer curve no one has shown that we are in fact on the right hand side of the dissecting line vertically running through the centre of the curve. Second as Andrew and Erin have pointed-out the Department of Finance itself does not believe it either as all their estimates say exactly the opposite: decreased corporate income taxes will lead to decreased *not* increased corporate income tax revenue. So whatever appeal the Laffer curve has to economists owing to their counter-intuitive Straussian like need to be separated from the uninitiated masses, the rather conservative chaps in the Department of Finance are not buying it. Not that that is the ultimate test of veracity, it is just that if a Conservative Finance minister can’t get one of the most conservative ministries to stump for him or his beloved curve it would seem to indicate the we are indeed dealing with a Zombie idea born out of Voodoo economics aka the supply-side school.

“There’s a false assumption there which is really dumb – that is, by reducing business taxes , we reduce business tax revenue to the Government of Canada. That’s simplistic and, in fact is wrong. If we look at the tax revenues of the Government of Canada – corporate income tax revenues – they have gone up during the time that we have been reducing the tax burden.”

Perhaps what the minister is saying is that in an economic upswing that even though the percentage of corporate income taxes as a percent of GDP will decline they will nonetheless get absolutely bigger even if their relative share is diminishing. I can imagine this happening. But so what? The real issue here is who is going to pay for the deficit. If corporate tax rates do not provide the same relative share of total income tax revenue as a percent of GDP then that shortfall will have to be made-up somewhere else. What Flaherty is really saying is that either public austerity or further increases in individual taxes either through sales or income taxes are in the cards.

Now no conservative government is going to run an election on the promise of tax increases so it is going to have to be the former. So the real stench hanging in the air from Flaherty’s emission of Zombie gas is the question as to which services are going to be cut? I do not expect the conservatives, given Flaherty’s dissembling, are going to be honest with the electorate. Rather it is going to be a cake and eat it too election campaign–more of the hear no evil; see no evil; do lots of evil–we have seen so much of in Canadian politics.

But hey it is a democracy and if the electorate wants to fall for all this hand-waving who am I to criticise?

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.