Three things I wish heterodox economists would quit talking about

Number 1.  Mainstream economics and heterodox economics

To be consistent it should be homodox economics and heterodox economics.  Those with routine knowledge of Latin would find nothing nefarious in such a distinction. Although we do have other names.  Why not apologetic economics and non-apologetic economics?  I am rather more fond of vulgar economics and economics.

Number 2.  Is mainstream, vulgar, apologetic economics scientific?

They think so, and so do I.  It is called scientific liberalism.

Number 3.  The capital controversy.

Vulgar economists don’t care.  See 1 and 2.


How Can a Political Scientist get this and many (freshwater) economists do not

O.k. I wrote this years ago. Maybe 2003, maybe 2005:

And while NKs accept the basic logic of the rational expectations augmented Philips curve (that is, that the NAIRU is semi-fixed in the long run) monetary and fiscal policy can nonetheless be deployed in the short- run so long as the cause of the deterioration in effective demand is not caused by adverse supply shocks such as an unemployment rate below the NAIRU, insufficient capacity or medium to long-run supply constraints.  This essentially amounts to a hawkish policy stance against inflation and support for less than full employment.[1]  Or alternatively stated, outside of a liquidity trap, NKs are almost indistinguishable in terms of macroeconomic policy from their new classical cousins.

[1] As we shall see below Shapiro and Stiglitz (1984) make the argument that unemployment (above its frictional level) is functional to aggregate efficiency.


Joseph Stiglitz: not a gliberal economist

Stiglitz prefaced his 2001 Memorial Prize Lecture with a clear explanation of what motivated his study in economics:

When I began the study of economics some forty one years ago, I was struck by the incongruity between the models that I was taught and the world that I had seen growing up, in Gary Indiana, a city whose rise and fall paralleled the rise and fall of the industrial economy. Founded in 1906 by U.S. Steel, and named after its Chairman of the Board, by the end of the century it had declined to but a shadow of its former self. But even in its heyday, it was marred by poverty, periodic unemployment, and massive racial discrimination. Yet the theories that we were taught paid little attention to poverty, said that all markets cleared – including the labor market, so unemployment must be nothing more than a phantasm, and that the profit motive ensured that there could not be economic discrimination. If the central theorems that argued that the economy was Pareto efficient – that, in some sense, we were living in the best of all possible worlds – were true, it seemed to me that we should be striving to create a different world.

Stiglitz is treated with much derision by other economists these days.  Some say it is because after the prize he became too populist.  As compared to who? Friedman? He went populist way before he got his memorial prize.

I suspect Stiglitz’s sins are rather the same as they have always been.  He came to study capitalism not defend it.  The new classical, Chicago (fresh water) side of the profession came to defend capitalism not understand it.  In a weird twist Stiglitz, a liberal economist, who attempts to understand capitalism is denounced as unscientific while those who merely came to obscure, cloak themselves in the garb of the scientist.  Such is often the case.

Fuck em, they don’t count.  Besides being brilliant Stiglitz was (still is) prolific.  Below I have reproduced his entire publication record until the date of his prize.  Next time you hear an economist slag Stiglitz ask for a copy of their publication record:

Stiglitz, J. E., “A Re-Examination of the Modigliani-Miller Theorem,” American Economic
Review, 59(5), December 1969a: pp. 784–793.
–, “Rural-Urban Migration, Surplus Labor and the Relationship Between Urban and Rural
Wages,” East African Economic Review, 1–2, December 1969b: pp. 1–27.
–, “On the Optimality of the Stock Market Allocation of Investment”, Quarterly Journal of
Economics, 86(1), February 1972a: pp. 25–60.
–, “Some Aspects of the Pure Theory of Corporate Finance: Bankruptcies and Take-Overs,”
Bell Journal of Economist, 3(2), Autumn 1972b, pp. 458–482.
–, “Approaches to the Economics of Discrimination,” American Economic Review, 62(2), May
1973a, pp. 287–295. (Reprinted in W. Darity and C. Boshamer (eds.), Economics and
Discrimination, Edward Elgar Publishing, 1993.)
–, “Taxation, Corporate Financial Policy and the Cost of Capital”, Journal of Public Economics,
2, February 1973b: pp. 1–34.
–, “Alternative Theories of Wage Determination and Unemployment in L.D.C.’s: The
Labor Turnover Model,” Quarterly Journal of Economics, 88(2), May 1974a, pp. 194–227.
–, “Incentives and Risk Sharing in Sharecropping”, Review of Economic Studies, 41, April
1974b: pp. 219–255.
–, “On the Irrelevance of Corporate Financial Policy,” American Economic Review, 64(6),
December 1974c: pp. 851–866.
–, “Theories of Discrimination and Economic Policy,” In Patterns of Racial Discrimination, G.
von Furstenberg, et al. (eds.), D.C. Heath and Company (Lexington Books), 1974d, pp.
–, “Incentives, Risk and Information: Notes Toward a Theory of Hierarchy,” Bell Journal of
Economics, 6(2), Autumn 1975a, pp. 552–579.
–, “Information and Economic Analysis,” in J.M. Parkin and A.R. Nobay, eds. Current Economic
Problems (Cambridge: Cambridge University Press), 1975b: pp. 27–52.
–, “The Theory of Screening, Education and the Distribution of Income,” American
Economic Review, 65(3), June 1975c: pp. 283–300.
–, “The Efficiency of Market Prices in Long Run Allocations in the Oil Industry,” in Studies
in Energy Tax Policy, G. Brannon (ed.), Cambridge: Ballinger Publishing, 1975d, pp.
–, “The Efficiency Wage Hypothesis, Surplus Labor and the Distribution of Income in
L.D.C.’s,” Oxford Economic Papers, 28(2), July 1976: pp. 185–207.
–, “Monopoly, Non-Linear Pricing and Imperfect Information: The Insurance Market,”
Review of Economic Studies, 44, October 1977a, pp. 407–430.
–, “Symposium on the Economics of Information: Introduction,” Review of Economic Studies,
44(138), October 1977b, pp. 389–391.
–, “Equilibrium in Product Markets with Imperfect Information,” American Economic Review,
69(2), May 1979a: pp. 339–345.
–, “On Search and Equilibrium Price Distributions,” In Economics and Human Welfare: Essays
in Honor of Tibor Scitovsky, M. Boskin (ed.), York: Academic Press Inc., 1979b, pp. 203–
–, “Pareto Optimality and Competition,” Journal of Finance, 36(2), May 1981, pp. 235–251.
–, “Alternative Theories of Wage Determination and Unemployment: The Efficiency Wage
Model,” in The Theory and Experience of Economic Development: Essays in Honor of Sir Arthur
W. Lewis, M. Gersovitz, et al. (eds.), London: George Allen & Unwin, 1982a, pp. 78–106.
–, “The Inefficiency of the Stock Market Equilibrium,” Review of Economic Studies, XLIX,
April 1982b: pp. 241–261.
–, “Information and Capital Markets,” in Financial Economics: Essays in Honor of Paul Cootner,
William F. Sharpe and Cathryn Cootner (eds.), Prentice Hall, New Jersey, 1982c, pp.
–, “Ownership, Control and Efficient Markets: Some Paradoxes in the Theory of Capital
Markets,” in Economic Regulation: Essays in Honor of James R. Nelson, Kenneth D. Boyer and
William G. Shepherd (eds.), Michigan State University, 1982, pp. 311–341.
–, “Self-Selection and Pareto Efficient Taxation,” Journal of Public Economics, 17, 1982e: pp.
–, “The Structure of Labor Markets and Shadow Prices in L.D.C.’s,” in Migration and the
Labor Market in Developing Countries, R. Sabot (ed.), Boulder, Colo.: Westview, 1982f, pp.
–, “Utilitarianism and Horizontal Equity: The Case for Random Taxation,” Journal of Public
Economics, 18, 1982g, pp. 1–33.
–, “Risk, Incentives and Insurance: The Pure Theory of Moral Hazard,” The Geneva Papers,
January 1983, 8(26), pp. 4–32.
–, “Information, Screening and Welfare,” In Bayesian Models in Economic Theory, Marcel
Boyer and Richard Khilstrom (eds.), Elsevier Science Publications, 1984a, pp. 209–239.
–, “Price Rigidities and Market Structure,” American Economic Review, 74(2), May 1984b: pp.
–, “Credit Markets and the Control of Capital,” Journal of Money, Banking, and Credit, 17(2),
May 1985a: pp. 133–152.
–, “Economics of Information and the Theory of Economic Development,” Revista De
Econometria, 5(1), April 1985b: pp. 5–32.
–, “Equilibrium Wage Distribution,” Economic Journal, 95, September 1985c: pp. 595–618.
–, “Information and Economic Analysis: A Perspective,” Economic Journal, 95(0), 1985d, pp.
–, “The New Development Economics,” World Development, 14(2), 1986a: pp. 257–265.
–, “Theories of Wage Rigidities,” in Keynes’ Economic Legacy: Contemporary Economic Theories,
J.L. Butkiewicz, et al. (eds.), New York: Praeger Publishers, 1986b, pp.153–206.
–, “Theory of Competition, Incentives and Risk,” in New Developments in the Theory of Market
Structure, J.E. Stiglitz and F. Mathewson (eds.), MacMillan/MIT Press, 1986c, pp.399–449.
–, “The Causes and Consequences of the Dependence of Quality on Prices,” Journal of
Economic Literature 25(1) March 1987a: pp. 1–48.
–, “Competition and the Number of Firms in a Market: Are Duopolies More Competitive
Than Atomistic Markets?” Journal of Political Economy, 95(5), 1987b, pp. 1041–1061.
–, “Design of Labor Contracts: Economics of Incentives and Risk-Sharing,” in Incentives,
Cooperation and Risk Sharing, H. Nalbantian (ed.), Totowa, NJ: Rowman & Allanheld,
1987c, pp.47–68.
–, “Learning to Learn, Localized Learning and Technological Progress,” in Economic Policy
and Technological Performance, P. Dasgupta and Stoneman (eds.), Cambridge University
Press, 1987d, pp. 125–153.
–, “On the Microeconomics of Technical Progress,” in Technology Generation in Latin
American Manufacturing Industries, Jorge M. Katz (ed.), The Macmillan Press Ltd. 1987e,
pp. 56–77.
–, “Efficient and Optimal Taxation and the New New Welfare Economics,” in Handbook on
Public Economics, A. Auerbach and M. Feldstein (eds.), North Holland: Elsevier Science
Publishers, 1987f: pp. 991–1042.
–, “Sharecropping,” in The New Palgrave: A dictionary of Economics, MacMillan Press, 1987g.
–, “Technological Change, Sunk Costs, and Competition,” Brookings Papers on Economic Activity
3, 1987h.
–, “The Wage-Productivity Hypothesis: Its Economic Consequences and Policy Implications,”
In Modern Developments in Public Finance, M.J. Boskin (ed.), Basil Blackwell, 1987i,
pp. 130–165.
–, “Human Nature and Economic Organization,” Jacob Marashak Lecture, presented at Far
Eastern Meetings of the Econometric Society, October 1987j.
–, “Economic Organization, Information, and Development,” in Handbook of Development
Economics, H. Chenery and T.N. Srinivasan (eds.), Elsevier Science Publishers, 1988a, pp.
–, “Money, Credit, and Business Fluctuations,” Economic Record, 64(187), December 1988b:
pp. 62–72.
–, “On the Relevance or Irrelevance of Public Financial Policy,” in The Economics of Public
Debt, (Proceedings of the 1986 International Economics Association Meeting), Macmillan
Press, 1988c: pp. 4–76.
–, “Why Financial Structure Matters,” Journal of Economic Perspectives, 2(4), 1988d: pp.
–, The Economic Role of the State, A. Heertje (ed.), Basil Blackwell and Bank Insinger de
Beaufort NV, 1989a, pp. 9–85.
–, “Financial Markets and Development,” Oxford Review of Economic Policy, 5(4), 1989b: pp.
–, “Imperfect Information in the Product Market,” in Handbook of Industrial Organization, 1,
Elsevier Science Publishers, 1989c, pp. 769–847.
–, “Incentives, Information and Organizational Design,” Empirica, 16(1), January 1989d: pp.
–, “Markets, Market Failures and Development,” American Economic Review, 79(2), May
1989e: pp. 197–203.
–, “Monopolistic Competition and the Capital Market,” in The Economics of Imperfect Competition
and Employment – Joan Robinson and Beyond, G. Feiwel (ed.), New York: New York
University Press, 1989f, pp. 485–507.
–, “Mutual Funds, Capital Structure, and Economic Efficiency,” in Theory of Valuation –
Frontiers of Modern Financial Theory, Vol. 1, S. Bhattacharya and G. Constantinides (eds.),
Totowa, NJ: Rowman and Littlefield, 1989g, pp. 342–356.
–, “Principal and Agent,” in The New Palgrave: Allocation, Information and Markets, J. Eatwell,
et al. (eds.), MacMillan Press, London, 1989h, pp. 241–253.
–, “Rational Peasants, Efficient Institutions and the Theory of Rural Organization,” in The
Economic Theory of Agrarian Institutions, P. Bardhan (ed.), Oxford: Clarendon Press, 1989i,
pp. 18–29.
–, Reflections on the State of Economics: 1988,” Economic Record, March 1989j, pp. 66–72.
–, “Using Tax Policy to Curb Speculative Short-Term Trading,” Journal of Financial Services
Research, 3(2/3), December 1989k, pp. 101–115.
–, “Some Retrospective Views on Growth Theory presented on the occasion of the
Celebration of Robert Solow’s 65th Birthday,” in Growth/Productivity/Unemployment, P.
Diamond (ed.), Cambridge, Mass.: MIT Press, 1990a, pp. 50–68.
–, “Peer Monitoring and Credit Markets,” World Bank Economic Review, 4(3), September
1990b: pp. 351–366.
–, “Another Century of Economic Science,” Economic Journal Anniversary Issue, 101(404),
January 1991a, pp. 134–141; The Future of Economics, J.D. Hey (ed.), Blackwell Publishers,
1992, pp. 134–141.
–, “Development Strategies: The Roles of the State and the Private Sector,” in Proceedings of
the World Bank’s Annual Conference on Development Economics 1990, 1991b, pp. 430–35.
–, “Introduction to Symposium on Organizations and Economics,” Journal of Economic
Perspectives, 5(2), Spring 1991c, pp. 15–24.
–, “The Invisible Hand and Modern Welfare Economics,” in Information Strategy and Public
Policy, D. Vines and A. Stevenson (eds.), Oxford: Basil Blackwell, 1991f pp. 12–50.
–, “Some Theoretical Aspects of the Privatization: Applications to Eastern Europe,” Revista
di Politica Economica, December 1991d, pp. 179–204.
–, “The Economic Role of the State: Efficiency and Effectiveness” Efficiency and Effectiveness
in the Public Domain. The Economic Role of the State, T.P. Hardiman and M. Mulreany (eds.),
Institute of Public Administration, 1991e: pp. 37–59.
–, “Banks versus Markets as Mechanisms for Allocating and Coordinating Investment,” in
The Economics of Cooperation: East Asian Development and the Case for Pro-Market Intervention,
J.A. Roumasset and S. Barr (eds.), Westview Press, Boulder, 1992a, pp. 15–38.
–, “Capital Markets and Economic Fluctuations in Capitalist Economies,” European Economic
Review, 36, North-Holland, 1992b, pp. 269–306.
–, “Contract Theory and Macroeconomic Fluctuations,” in Contract Economics, L. Werin and
H. Wijkander (eds.), Basil Blackwell, 1992c: pp. 292–322.
–, “The Design of Financial Systems for the Newly Emerging Democracies of Eastern
Europe,” in The Emergence of Market Economies in Eastern Europe, C. Clague and G.C.
Rausser (eds.), Cambridge: Basil Blackwell, 1992d pp. 161–184.
–, “Explaining Growth: Competition and Finance,” Rivista di Politica Economica (Italy),
82(169), November 1992e, p. 225.
–, “Introduction: S&L Bailout,” in The Reform of Federal Deposit Insurance: Disciplining the
Government and Protecting Taxpayers, J. Barth and R. Brumbaugh, Jr. (eds.), Harper Collins
Publishers, 1992f, pp. 1–12.
–, “Methodological Issues and the New Keynesian Economics,” Alternative Approaches to
Macro-economics, A. Vercelli and N. Dimitri (eds.), Oxford University Press, 1992g, pp.
–, “Prices and Queues as Screening Devices in Competitive Markets,” in Economic Analysis of
Markets and Games: Essays in Honor of Frank Hahn, D. Gale and O. Hart (eds.), Cambridge:
MIT Press, 1992h: pp. 128–166. (IMSSS Technical Report No. 212, Stanford University,
August 1976.).
–, “Notes on Evolutionary Economics: Imperfect Capital Markets, Organizational Design,
Long-run Efficiency.” Paper presented at a conference at Osaka University, 1992i.
–, “The Role of the State in Financial Markets”, Proceeding of the World Bank Conference on
Development Economics, Washington, D.C., World Bank, 1993a: pp. 41–46.
–, “Consequences of Limited Risk Markets and Imperfect Information for the Design of
Taxes and Transfers: An Overview,” in K. Hoff, A. Braverman, and J. Stiglitz (eds.) The
Economics of Rural Organization: Theory, Practice, and Policy. New York: Oxford University
Press for the World Bank. 1993b.
–, “Perspectives on the Role of Government Risk-Bearing within the Financial Sector,” in
Government Risk-bearing, M. Sniderman (ed.), Norwell, Mass.: Kluwer Academic Publishers,
1993c: pp. 109–30.
–, “Some Theoretical Aspects of the Privatization: Applications to Eastern Europe,”
Privatization Processes in Eastern Europe, M. Baldassarri, L. Paganetto and E.S. Phelps (eds.),
St. Martin’s Press, Rome, 1993d, pp. 179–204.
–, “Economic Growth Revisited,” Industrial and Corporate Change, 3(1), 1994a: pp. 65–110.
–, “Endogenous Growth and Cycles,” Innovation in Technology, Industries, and Institutions, Y.
Shionoya and M. Perlman (eds.), The University of Michigan Press, 1994b, pp. 121–56.
–, Whither Socialism? Cambridge, Mass.: MIT Press, 1994c.
–, “Interest Rate Puzzles, Competitive Theory and Capital Constraints,” in Economics in a
Changing World, Fitoussi, Jean-Paul ed., (Proceedings of the Tenth World Congress of the
International Economic Association, Moscow, Volume 5. Economic Growth and Capital
and Labour markets.) IEA Conference Volume 111, New York: St. Martin’s Press, 1995a:
pp. 145–75.
–, “Social Absorption Capability and Innovation,” in Social Capability and Long-Term Economic
Growth, Bon Ho Koo and D.H. Perkins (eds.), New York: St. Martin’s Press, 1995b, pp.
–, “Some Lessons from the East Asian Miracle,” World Bank Research Observer, 11(2), August
1996, pp. 151–77.
–, “The Role of Government in Economic Development,” in Annual World Bank Conference
on Development Economics 1996, M. Bruno and B. Pleskovic (eds.), The World Bank, 1997a.
pp. 11–23.
–, “The Role of Government in the Economies of Developing Countries,” in E. Malinvaud
and A.K. Sen, eds. Development Strategy and the Management of the Market Economy. Oxford:
Clarendon Press, 1997b, pp. 61–109.
–, “More Instruments and Broader Goals: Moving Toward the Post-Washington Consensus,
The 1998 Wider Annual Lecture, Helsinki, January, 1998a .
–, “Towards a New Paradigm for Development: Strategies, Policies and Processes.” 9th Raul
Prebisch Lecture delivered at the Palais des Nations, Geneva, UNCTAD, October 19,
–, “Pareto Efficient Taxation and Expenditure Policies, With Applications to the Taxation
of Capital, Public Investment, and Externalities,” presented at conference in honor of
Agnar Sandmo. January 1998c.
–, “Interest Rates, Risk, and Imperfect Markets: Puzzles and Policies”, Oxford Review of
Economic Policy 15(2), 1999a, pp 59–76.
–, “Knowledge for Development: Economic Science, Economic Policy, and Economic
Advice”, Proceedings from the Annual Bank Conference on Development Economics 1998. World
Bank, Washington D.C. Keynote Address, 1999b: pp 9–58.
–, “On Liberty, the Right to Know and Public Discourse: The Role of Transparency in
Public Life” (Paper presented at Oxford Amnesty Lecture), 1999c.
–, “Toward a General Theory of Wage and Price Rigidities and Economic Fluctuations”,
American Economic Review 89(2), May 1999d: pp. 75–80.
–, “Responding to Economic Crises: Policy Alternatives for Equitable Recovery and
Development.” The Manchester School 67(5) Special Issue 1999e, pp. 409–427.
–, “Whither Reform? Ten Years of the Transition”, Proceedings of the Annual Bank Conference
on Development Economics 1999, Washington, D.C.: World Bank, 2000a: pp. 27–56.
–, “Capital Market Liberalization, Economic Growth, and Instability” in World Development,
Vol. 28, No. 6, pp. 1075–1086, 2000b.
–, “Formal and Informal Institutions” in Social Capital: A Multifaceted Perspective. P. Dasgupta
and I. Serageldin (eds.), The World Bank: Washington, DC, 2000c: pp. 59–68.
–, “The Contributions of the Economics of Information to Twentieth Century Economics,”
Quarterly Journal of Economics, November, 2000d, pp. 1441–1477.
–, “Democratic Development as the Fruits of Labor,” Working Paper, Progressive Economics
Papers, January 2000e.
–, “Some Elementary Principles of Bankruptcy” in Governance, Equity and Global Markets
(Proceedings of Annual Bank Conference for Development Economics in Europe June 21–23, 1999) La Documentation Francaise, 2000f.
–, “Challenges in the Analysis of the Role of Institutions in Economic Development,” Villa Borsig Workshop Series 2000: The Institutional Foundations of a Market Economy. Gudrun Kochendorfer-Lucius and Boris Pleskovic (eds.), German Foundation for International Development (DSE), 2001a: pp 15–28.
–, “From Miracle to Recovery: Lessons from Four Decades of East Asian Experience,” Rethinking the East Asian Miracle. Shahid Yusuf ed. World Bank, Washington, D.C., 2001b. 538
–, “Principles of Financial Regulation: A Dynamic Approach,” The World Bank Observer 16(1), Spring 2001c: pp. 1–18.
–, “Crisis y Restructuración Financiera: el Papel de la Banca Central” Cuestiones Económicas 17(2), 2001d: pp. 3–24.
–, “Quis Custodiet Ipsos Custodes?” in Governance, equity, and global markets: the Annual Bank Conference on Development Economics, Europe, J. E. Stiglitz and Pierre-Alain Muet (eds.)
World Bank, New York, Oxford University Press. 2001e: pp 22–54.
–, “New Perspectives on Public Finance: Recent Achieves and Future Challenges”, Journal of Public Economics (84), forthcoming, 2002.
Stiglitz, J. E. and A. Weiss, “Credit Rationing in Markets with Imperfect Information,”
American Economic Review, 71(3), June 1981: pp. 393–410.
–, “Alternative Approaches to the Analysis of Markets with Asymmetric Information,”
American Economic Review, 73(1), March 1983a, pp. 246–249.
–, “Incentive Effects of Termination: Applications to the Credit and Labor Markets,” American Economic Review, 73(5), December 1983b, pp. 912–927.
–, “Credit Rationing and Collateral,” in Recent Developments in Corporate Finance, Jeremy
Edwards, et al. (eds.), New York: Cambridge University Press, 1986, pp. 101–135.
–, “Credit Rationing: Reply” , American Economic Review, March 1987, pp. 228–231.
–, “Banks as Social Accountants and Screening Devices for the Allocation of Credit”, Greek Economic Review, 12(0), Supplement, Autumn 1990, pp. 85–118.
–, “Asymmetric Information in Credit Markets and Its Implications for Macro-economics,”
Oxford Economic Papers, 44(4), October 1992, pp. 694–724.
–, “Sorting Out the Differences Between Screening and Signaling Models,” in M.O.L.
Bacharach, M.A.H. Dempster and J.L. Enos, eds., Mathematical Models in Economics. Oxford
University Press, Oxford, 1994.
Stiglitz, J. E. and M. Wolfson, “Taxation, Information, and Economic Organization,” Journal of the American Taxation Association, 9(2), Spring 1988, pp. 7–18. (Paper presented for delivery to the American Accounting Association, August 1987.).
Stiglitz, J. E. and S. Yusuf “Development Issues: Settled and Open” in Frontiers of Development
Economic: The Future in Perspective, Gerald M. Meier and Joseph E. Stiglitz (Eds.), Oxford University Press, May 2000, pp 227–268

Gliberalism: Keynes and the new classics

At one point I believed this:

The ontology of capitalism which animated the multifarious reform projects was quite distinct from that which underwrites the neoliberal vision. In Keynes’ classic formulation, as set out in the General Theory, capitalist economic systems are best understood by a stable underemployment (of labour and savings) equilibrium. Moreover, such a condition arises endogenously from the normal functioning of capitalist markets. Keynes summarized his ontological stance thus:

In particular, it is an outstanding characteristic of the economic system in which we live that, whilst it is subject to severe fluctuations in respect of output and employment, it is not violently unstable. Indeed it seems capable of remaining in a chronic condition of sub-normal activity for a considerable period without any marked tendency either towards recovery or complete collapse. Moreover, the evidence indicates that full, or even approximately full, employment is of rare and short-lived occurrence (emphasis added, pp. 249-50).

Despite whatever misgiving other reformists might have had with the particular lines of causation (or lack thereof) in Keynes’ model, or with the appropriate target and form of intervention, the ontological conceptualisation of capitalism as system which required persistent state coordination and intervention enjoyed a broad subscription in the postwar epoch.


Now I think I am tempted to believe that the mainstream has not really changed ontological visions.  What has changed is that rational expectations and the NAIRU essentially serve to say: “yes capitalism is characterized by a ‘technical’ underemployment equilibrium but it is optimum and thus is not an underemployment equilibrium.”

So maybe neoliberalism should be called ‘gliberalism’.  Which is way more catchy than ‘unapolgetic apologia.’ 


Talking about public debt: dumb, dumber and dumbest

As austerity is all the rage among policy making elites I thought it would be a good time to talk about ways of measuring public debt.  Here I will deal with the dumb way, the dumber way and dumbest way to talk about debt.

The usual way to talk about public debt is to express it as a ratio of debt to GDP.  The first problem wit this metric, however, is that there is no agreement between economists on what is a stable level of debt to GDP.  There does seem to be some agreement that sovereign governments (currency sovereigns) with their own nationally issued currency do not face any hard boundary on the debt to GDP ratio.  They may be output constrained, but they are never money (debt) constrained.  It is also generally agreed that subservient governments (those without central banks and their own currency, i.e., a province, a state, a member of the EMU) are money (debt) constrained.  Although, even here, there is no agreement on debt to GDP ratios.  the EU and IMF have chosen 120% as the health threshold for Greece.  None of the Canadian provinces are  even close to that level even if you throw in federal debt.  But then why would you throw in federal debt?  The federal government can always honour its Canadian dollar denominated debt obligations.

Lastly, when talking about GDP it can be measured quarterly, yearly or by the decade.  If I measured Canada’s debt to quarterly GDP I would, by definition, quadruple the ratio.  Similarly, if I measured debt as a percent of GDP per decade, I could reduce the ratio by more than a factor of ten (assuming the economy grows).

So which one do we choose?  If we think of GDP as an income stream it probably makes more sense to measure debt as ratio of GDP over 10 to 20 years (or maybe based on the term structure of the public debt).

Think about it.  When you go to bank for a mortgage they try to figure out what your income will likely be over the amortization period not one year, or one quarter.  So debt to annual GDP ratios are a pretty dumb way to talk about public debt.

Take heart though, there even dumber ways to talk about public debt.  Unfortunately for Newfoundland and Labrador, their premier has decided to have the dumber conversation.  The Globe reports that:

She [ms Dunderdale] also wants to bring down per capita debt – the highest in Canada – to the national average within 10 years.

I appreciate it is hard to sell soft-austerity to what was once a have-not province, that went without for a generation or more, only to be swamped by a tsunami of oil and gas profits.  Nonetheless, talking about debt per capita while not the dumbest conversation to have is dumber than it ought to be.

Measuring debt per capita is even more meaningless than debt per annual GDP.  Here is why.  First, demographic composition.  As Lana Payne, head of the Newfoundland and Labrador Federation of Labour, has pointed out, population increases can be driven by a growth in the economically inactive population.  Your debt per capita ratio goes down but your debt per economically active has gone-up.

Second, and somewhat linked to first, debt per capita says nothing about income.  What matters in Newfoundland (or anywhere else) is debt as a percent of GDP (subject to the limits discussed above).  Dunderdale is acting as though that when a family makes a mortgage application it is accepted or declined based on the size of the family and not household income.  This is disingenuous.  Ms Dunderdale knows better and so does her finance minister and so do the economists working for them.

The only dumber way, the dumbest way, is to talk about absolute public debt in nominal terms.

The real issue about public debt and budget deficits is what they are being used for and the capacity of the economy to absorb those investments.  The federal government, Ontario and Newfoundland and Labrador should be having that conversation.  Instead they are rehearsing respectable dogma.


Should Ontario Become an Independent Country?

Ok just forget how crazy the question sounds.  The recent wrangling between Ontario and Alberta over the value of the Canadian dollar, oil output and the decline of manufacturing in Ontario (and other provinces east of Ontario) raises some reasonable questions about the Canadian monetary and fiscal union, aka the Confederation of Canada, aka, British North America, aka Canada.

Critics have long argued that the Bank of Canada’s single minded attention to price stability, i.e., inflation, and to a single policy instrument, i.e., the interest rate, was both too crude and too cruel.  Too cruel because it makes unemployment the site of dynamic economic dynamic adjustment and too crude because it is both geographically insensitive and structurally daft.

Here I will put the cruel to one side and consider the crude.  Interest rate adjustment is a crude way to attempt to manage the macro-economy.  Think about the regional dimensions.  If you exclude Western Canadian growth the beavers teeth look not nearly so sharp, or as long.  The present interest rate regime is probably too low for western Canada and too high for eastern Canada.  Suggesting that, all things being equal, the Canadian dollar is probably too high and too low.  Too low for the resource sector and too high for manufacturing.

Federal tax policy has not helped either.  The unilateral decrease in corporate income tax rates deprived the federal government of resource revenue while having little if any impact on investment in the manufacturing sector.   The west did not need a GST rebate the east did.  And to add insult to injury, the Federal government has decided to move to an austerian footing.  Again viewed through the lens of the west probably not a totally idiotic position to take (countercyclical one might say).  Viewed from the east, however, a completely counter-productive, pro-cyclical policy.

All of which raises the question if Ontario, or indeed if all of the provinces east of Manitoba, would not be better off with their own federal government and their own central bank.

O.k. time to remember how crazy the question was.  Not that crazy after all.  But it is only a sane question because macroeconomic policy (fiscal and monetary policy) is so cruel and crude.


The mercenary qualities of liberal economists

Here is Mankiw circa 2007:

Thursday, July 19, 2007

The Taxation of Carried Interest

Several people have asked me my views on the taxation of carried interest. It is a complicated issue, and I don’t pretend to be an expert on tax law, but here goes.

Deferred compensation, even risky compensation, is still compensation, and it should be taxed as such. Paul Krugman hit the nail on the head with this question:

why does Henry Kravis pay a lower tax rate on his management fees than I pay on my book royalties?

The analogy is a good one. In both cases, a person (investment manager, author) is putting in effort today for a risky return at some point in the future. The tax treatment should be the same in the two cases.

One hedge fund manager told me that the initial value of the carried interest should be taxed as ordinary income and then the subsequent returns should be taxed at the capital gains rate. Maybe so, but taxing the terminal value as ordinary income (as is being proposed) seems strictly better for the manager in present value. It is as if the manager put the initial value of the carried interest in a tax-deductible IRA, deferring tax on this compensation until the money is withdrawn at a later date. The proposed reform, therefore, does not seem excessive.

John Berry’s recent article on carried interest suggests that the Bush administration is opposed to reform. If so, I fear the administration is on the wrong side of the issue.

Update: The FT reaches the same conclusion.

Here is Mankiw Circa 2012 after a series of lengthy contortions:

Capital Gains, Ordinary Income and Shades of Gray

Critics of current law think it is unfair that these private equity partners are taxed at capital gains rates, whereas other high-income individuals like doctors and lawyers pay the much higher tax rates for ordinary income. It is a reasonable point, and some reform may well be appropriate. But as the tax situations of Abe through Earl illustrate, it is not obvious what the best approach would be. Not all problems have easy answers.

How to resolve the puzzle? As per Wiki

From 2003 to 2005, Mankiw was one of President George W. Bush‘s top economic advisers, and was chairman of the national Council of Economic Advisers (CEA). In November 2006, Mankiw became an official economic adviser to then-Massachusetts governor Mitt Romney‘s political action committee, Commonwealth PAC.[15] In 2007, he signed on as an economic adviser to Romney’s presidential campaign.[16]

Mitt Romney on capital gains and carried interest:

So Mitt needed obfuscation and it appears Mankiw delivered.

Now, ask me if I am shocked or outraged?  Nope, not in the least.  Economics is after all a social science.

HT Econospeak


Peggy Nash or Bust

OK time to get off the fence.  There are presently two visions of social democracy at play within the NDP.  One that wants to drag the NDP further to the neoliberal centre and one that wants to take a pause and rethink the value of social democrats’ accommodation with neoliberalism.  In this sense it is Peggy Nash or bust.

Stop closing your model

The classical theorists resemble Euclidean geometers in a non-Euclidean world, who discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight—as the only remedy for the unfortunate collisions which are occurring.  Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry.

John Maynard Keynes, The General Theory (1936)