ONE EQUATION TO RULE THEM ALL

Internets denizen Edward Lambert writes:

My view is that the answer lies in understanding effective demand... the primary concept of Keynes which has never been given a proper equation. I am researching a new equation that describes Keynes' view of effective demand...

Effective Demand >= Real GDP*effective labor share/(composite utilization of labor and capital)

Thus, effective labor share >= (composite utilization of labor and capital)

Effective labor share is determined by cycle limits of capacity utilization. For the US, effective labor share is 0.762*labor share index (non-farm business sector) since the 60's.
This equation has described the end of all business cycles since the 60's. We are right now again hitting the effective demand limit according to this equation. The limit could rise at this time extending the business cycle, which happened at the end of 90's and a bit before the crisis.

Very few are expecting the end of the business cycle now. The Fed and ECB are trying to keep the BC alive with long run low nominal rates. Will it work? Will the instability be too great? We will see.

In effect, there is an experiment going on right now with this equation of effective demand. If it turns out to identify the end of this business cycle, when few expect it, we will have made progress in understanding recessions. The equation can predict the potential end of a business cycle years in advance.

The equation is doing a great job so far in determining that potential GDP is much lower than the CBO originally thought.
Here is a synopsis.

http://effectivedemand.typepad.com/ed/synopsis-of-the-effective-demand-research.html

He links aprovingly to John Taylor who wanted to raise rates in 2011. LOLWUT?

Game of Thrones

Game Of Thrones overtakes The Sopranosas HBO’s biggest series ever

thoughts

If I had the time and energy I'd learn more about the zero lower bound and Scott Sumner's problem with it.

Zero lower bound

The Zero Lower Bound (ZLB) or Zero Nominal Lower Bound (ZNLB) is a macroeconomic problem that occurs when the short-term nominal interest rate is at or near zero, causing a liquidity trap and limiting the capacity that the central bank has to stimulate economic growth. This problem returned to prominence with the Japan's experience during the 90's, and more recently with the subprime crisis. The belief that monetary policy under the ZLB was effective in promoting economy growth has been critiqued by Paul Krugman, Gauti Eggertsson, and Michael Woodford among others. Milton Friedman, on the other hand, argued that a zero nominal interest rate presents no problem for monetary policy. According to Friedman, a central bank can increase the monetary base even if the interest rate vanishes; it only needs to continue buying bonds.^[1] Other economists point out that there are more efficient ways to adjust the money supply.^[2][3]

EDIT: Simon Wren-Lewis on the ZLB.

I'd also look into the debate over Piketty's "r" or return on wealth. Critics say it will automatically go down as r slows. Apparently Piketty and others have the data which says it hasn't gone down as growth slows.

How does Piketty calculate "wealth" in the wealth to income ratio. Does he include liquid assets?

Also, since 1980 or so, growth has been 2-3 percent.* Piketty guesses it will slow in the future. Return on wealth has been 4-5 percent. Inequality has risen because wealth is concentrated.

1) are the critics saying that the return on wealth will come down as growth slows? What is their reasoning? 2) what were the growth rates and return on wealth during the Thirty Glorious Years of post-WWII social-democracy?

comment at DeLong's blog:

"Not according to Piketty. See table 2.5. From 1980 to 2012, annual growth in real GDP per head has been 1.7% globally, 1.8% in Europe, 1.3% in "America". There's a considerable element of embedded wishful thinking in the common assumption of much higher rates. In the US, this may be driven by the failure to allow for population growth."

K21

OVER AT EQUITABLE GROWTH: TRYING, YET AGAIN, TO COMMUNICATE THE ARITHMETIC SCAFFOLDING OF PIKETTY'S "CAPITAL IN THE TWENTY-FIRST CENTURY": THURSDAY FOCUS: JUNE 5, 2014 by DeLong

Isabella Kaminska on the economic mechanics which bring r back down as g slows.

See this: http://qz.com/215281/dont-believe-brokers-the-government-or-thomas-piketty-your-property-values-wont-grow-faster-than-your-paycheck/

And also my German sunseeker posts. Savers will put up a fuss about yield compression, but eventually if there isn’t $ denominated growth either the cashflows associated with their wealth will dwindle and the mark to market value of their assets will begin to fall with it, or the government or some other agent will have to step in to debase the relative value of those returns in $ terms. It is the process of bringing r down to g which creates capital crises. When g outperforms r, on the other hand, you have the opposite problem, one in which capital is under priced in relative terms.

interfluidity

Welfare economics: the perils of Potential Pareto (part 2 of a series) by Steve Randy Waldman

What's an economist? A person who knows the price of everything and the value of nothing.

The Pernicious Prison of the Price Theory Paradigm by Steve Roth

negative interest rates and the Euro

The ECB is about to introduce negative rates. Can it save the euro? by Matt O'Brien

Why Negative Rates Won't Work In The Eurozone by Frances Coppola

So much for the zero bound by Scott Sumner

You're Gonna Go Far, Kid

plutonomy

Plutonomy revisited by Doug Henwood

Business Insider has a write-up of a BoA Merrill Lynch report that declares that, the FT’s quibbles aside, Thomas Piketty is essentially right, and the super-rich is where the action is, so invest accordingly. (Never mind that Piketty utterly destroyed, in the most gracious manner imaginable, the newspaper’s economics editor Chris Giles’ half-assed critique.) The BoA Merrill report was written by Ajay Kapur, who is quoted by BI as saying: 

When wealth and income are as concentrated as they are, and expected (a la Piketty) to get even more so, examining the ‘average’ consumer or ‘average’ investor makes little sense. Examining the fat tail – the behavior of the plutonomists, rather than that of the multitudinous many – is more advantageous to investors. Plutonomists determine and dominate spending and investment decisions and their magnitudes. Any analysis that does not tease out the skewed global income and wealth distribution, but focuses on the average is flawed from the start and is incomplete, as we step into its deeper extremes. 

The word “plutonomy” rang a bell, and sure enough we’ve been here before. Back in 2005 and 2006, in the bubbly days before the financial crisis and Great Recession, Kapur wrote a series of reports for Citigroup, his then-employer, on the topic. Citi did its best to stem the circulation of the reports, demanding that websites that posted them take them down. 

As a public service, lbo-news is reposting them. Evidently, the worst crisis in 80 years is not enough to keep the plutocrats down. 

Here are the links (all PDFs—and I changed them since my first posting to confuse Citi’s plutonomy sniffer): 

Plutonomy 1 (October 16, 2005)
Plutonomy 2 (March 5, 2006)
Plutonomy 3 (September 29, 2006)

unions

Via Yglesias, Josh Barro is against unions.

Piketty

Piketty on Colbert

net neutrality

John Oliver delivers the clearest, most hilarious, explanation of net neutrality you’ll see by Ezra Klein

Does Vox comment on Obama's apparent sellout?

How is it exactly that cable companies in the US don’t compete? by Joshua Gans (via Thoma)

And Oliver is delivered to us by the cable companies.

John Oliver may have crashed the FCC’s comments system

low interest rates

For Bonds, This Time is Different by Krugman

Bloomberg has an interesting piece on how high bond prices and low yields have been shocking investors who relied on old models. Some of this, I suspect, is because many people still — after all these years — haven’t wrapped their minds around the implications of a zero-lower=bound economy and the risks of a low-inflation trap. 

But it’s also true that structural change is happening fast — just not the kind of structural change people like to talk about. Never mind the stuff about skill mismatches and all that. What’s really happening fast is the demographic transition, with Europe very quickly turning Japanese:

And the US, although growing faster, also turning down sharply. 

Add to this the fact that what we thought was normal actually depended on ever-growing household debt, and it becomes clear that historical expectations about normal interest rates are likely to be way off. You don’t have to believe in secular stagnation (although you should take it very seriously) to accept that low rates are very likely the new normal.

Tim Duy on how Fed Policy keeps rates low by Scott Sumner

Garrett pointed me to a very good Tim Duy post on Fed policy:

The Federal Reserve has set reasonably clear expectations that rates will remain low for a long time. That path, however, seems to be a consequence of doing too little now to ensure a stronger recovery. In other words, the Fed seems to be taking a lower-rate future as a given rather than as a result of insufficient policy. Instead of acting to ensure a stronger forecast, they seem more interesting in acting to lock-in the lower path of activity. And that in turn will tend to lock in a low level of long-term rates. This, I think, is the best explanation for the inability of markets to sustain higher rates. It is simply reasonable to expect that the conditions which justify higher long rates will be met with tighter policy sufficient to contain growth to something closer to the current path of output than to current estimates of potential output. 

This is actually pretty close to Milton Friedman’s 1998 claim that rates in Japan were low because money had been tight. Or Nick Rowe’s upward sloping IS curve. Duy doesn’t use the term “tight money”, but the phrase “doing too little now to ensure a stronger recovery” implies money is tighter than Duy and I might consider optimal, and that easier money would eventually lead to higher rates. If you put aside my idiosyncratic definition of “easy” and “tight” money (I use NGDP growth, not interest rates and money growth as policy indicators), my views are actually similar close to those of a mainstream macroeconomist like Tim Duy. The substance of what we are saying on monetary policy and interest rates (and also monetary offset) is very close, once you get beyond framing effects. 

Have our views always been close on these issues? I’m not sure.

Game of Thrones and TV shows

AV Club reviews Game Of Thrones (experts): “The Mountain And The Viper”

AV Club reviews Game Of Thrones (newbie): “The Mountain And The Viper”

AV Club reviews Halt And Catch Fire: “I/O”

AV Club reviews Silicon Valley: “Optimal Tip-To-Tip Efficiency”

AV Club revies Veep: “Debate”

From Orphan Black's human clones to Halt and Catch Fire's PC clones.

Some great music, too. Halt and Catch Fire had the Magnificent Seven:



Silicon Valley had Green Day's Minority again over the credits:

K21

r>g meets c>l by Jared Bernstein

political economy

"As another Thomas—Pynchon—said: “If they can get you asking the wrong questions, they don’t have to worry about answers.”  Progressives have all kinds of ideas to shape a more equitable primary distribution.  But those ideas will never get much oxygen if we remain voluntary trapped in the cramped debate of a short-sighted economics."

Why is Capital So Much Stronger than Labor? by Jared Bernstein

Orphan Black

AV Club reviews Orphan Black: “Knowledge Of Causes, And Secret Motion Of Things”

K21

Capital Eats the World by Suresh Naidu

Chastity Bites

Waldman

Welfare economics: an introduction (part 1 of a series) by Steve Randy Waldman

Bend It Like Beckham

Just saw the movie again. Parminder Nagra's character Jess is destined by tradition to marry and become a mother and housewife. But she loves soccer (football) and is good it at. She gets to do what she wants with the help of her coach Joe, her father and her friends Jules and Tony. She didn't build that.

Elizabeth Bishop was allergic to peanuts.

She was in Brazil during the 1964 coup d'état.

Reaching for the Moon

Amy Poehler memoir

I was a fan of Upright Citizens Brigade way back when:

Just as I was a fan of Colbert on Exit 57.

The Normal Heart

The Media Forgets That AIDS Is Still an Epidemic, But Hollywood Doesn't. 'The Normal Heart' is a damning indictment of our government's negligence by Eric Sasson

Wow all of the actors were really, really good. Mark Ruffalo, Julia Roberts, Matt Bomer, Jim Parsons, Taylor Kitsch, Alfred Molina, etc. Brad Pitt was one of the executive producers.

Baker on Geithner

Stress Test: The Indictment of Timothy Geithner by Dean Baker

Geithner

Tim Geithner is wrong about FDR by Matt O'Brien

I saw Geithner on the Daily Show and he said the turn to austerity was too abrupt, but in reality he led the charge towards deficit reduction and famously said fiscal stimulus is like "sugar."

Geithner

HOW TIMOTHY GEITHNER FAILED HIS STRESS TEST by Mike Konczal

The Americans

AV Club reviews The Americans: “Echo”

The Americans’ showrunners walk through a terrific season character by character. Also: Discussion of the finale’s most devastating twists by Todd VanDerWerff

Great Clusterfuck

It Wasn't Household Debt That Caused the Great Recession by Heather Boushey

It’s not just that 7.4 million workers lost their job during the years of the Great Recession of 2007-2009 but also that the employment crisis continues to this day. While jobs are no longer being shed at the rate of 20,000 a day, the share of the U.S. population with a job fell to a low of 58.2 percent in November 2010 from a high of 63.4 percent in December 2006, but has only increased by a fraction of a percentage since then, hitting just 58.9 percent in April 2014.

...

Their story starts with an accumulation of debt—lots of it. After the Asian financial crisis in 1997, investors were looking for safe havens to park their money. What they wanted were AAA-rated bonds. What they got were mortgage-backed securities that were rated AAA but turned out to be junk. As we all now know—but most of us didn’t know at the time—Wall Street firms in the early 2000s began slicing and dicing and then reassembling mortgage debt into more and more exotic and risky mortgage-backed securities in ways that made them look risk-free. 

But, it wasn’t just that there was more securitization. It was that loans made to riskier borrowers were more likely to be securitized. This both drove the housing bubble and made the consequences of it popping all the worse. Mian and Sufi point out that between 2002 and 2005, the growth in mortgage credit and household incomes became negatively correlated, that is, credit expanded in areas where incomes were declining. This makes no sense: How can you pay back a loan if your income is falling? They point to academic research by Yuliya Demyanyk and Otto Van Hemert showing the profound consequences: By 2006, loans had become so disconnected from prudent business practices that “an unusually large fraction of subprime mortgages originated in 2006 and 2007 [became] delinquent or in foreclosure only months later.” 

As these foreclosures began to pile up, affected households cut back sharply on spending. Thus, the catalyst for Great Recession had begun two years before the dramatic demise of Lehman Brothers. In the second quarter of 2006, the collapse in consumption started with residential investment, which fell by a 17 percent annual rate. Non-residential investment didn’t begin to fall until late in 2008, but by then households had already pared back spending sharply. 

This fallout from the collapse of the housing bubble was amplified by the unequal distribution of net wealth. What Mian and Sufi find is that counties with the largest decline in total net worth—were the ones that cut back most on spending when house prices declined. As housing prices began falling in 2006, in counties where net worth had declined most, consumption fell by almost 20 percent, compared to only five percent for the entire U.S. economy. In contrast, even through 2008, counties that avoided the collapse in net worth saw almost no decline in spending. If debt had been more equally distributed then the decline in consumption would have been less dramatic and the recession would have been less devastating.

late capitalism and identity

Buzzfeed's founder used to write Marxist theory and it explains Buzzfeed perfectly by Dylan Matthews

I'm probably totally off but makes me think of Mike Judge's Office Space and Silicon Valley that combine relatively recent phenomena and identities like not very masculine technonerds and rap music.

dirigism and "free market" reforms

Modi's Role Model: Margaret Thatcher or Lee Kuan Yew? by John Cassidy

trade deficit

The Trade Deficit: The Biggest Obstacle to Full Employment by Dean Baker

K21

Piketty crossing the Delaware by John Quiggin

Game of Thrones

Game of Thrones (experts): “Mockingbird”

Game of Thrones (newbie): “Mockingbird”

debt loads

The Nonexistent Rise in Household Consumption by JW Mason

In our "Fisher dynamics" paper, Arjun Jayadev and I showed that the rise in debt-income ratios for the household sector is not due to any increase in household borrowing, but can be entirely explained by higher interest rates relative to income growth and inflation.

Pace Dean Baker and House of Debt. Or maybe not.

Diagnoses and Prescriptions: The Great Recession by Jared Bernstein

trade and currency policy

DeLong:

Ryan Avent: Secular Stagnation: Glut Busters: “A particular view about the macroeconomics of the pre-crisis period seems to be coalescing…. Since we haven’t solved the underlying savings glut, the American economy now has three options, according to this view: 1. Suffer through the same low growth (“secular stagnation”) that was characteristic of the early 2000s. 2. Use monetary policy to raise demand through higher asset prices and credit growth, restoring decent growth but creating a risk of new bubbles. 3. Use deficit-financed fiscal policy to absorb excess savings and boost demand, without relying on rapid growth in private credit. Certainly, parts of this story are correct. But is this really the best way to describe what was taking place?… One might… argue that the problem in the 2000s was not that the Fed haplessly created a bubble in order get the economy going again…. The problem was that it… ought to have done… was intervene aggressively in foreign-exchange markets to dampen the dollar’s rapid appreciation…. Doug Campbell… [and] Ju Hyun Pyun…. Now obviously, direct intervention in foreign-exchange markets is not the sort of thing America is supposed to do…. But this is a taboo that needs rethinking. Depreciations have historically been the most effective way to lift expectations for growth and inflation…. The Fed will not do any of the above autonomously. The decision to change the global monetary system will be political, just as it was in 1933 and in 1971, when American presidents made the necessary policy shift. Such decisions only tend to be made when the status quo is clearly untenable or when large political majorities demand a different course. Unfortunately, America’s secular stagnation mess does not seem likely to test either limit for some time to come.”

Great Clusterfuck

Reviewing Ryan Avent’s Review of Amir Sufi and Atif Mian’s House of Debt: Friday Focus: May 16, 2014 by DeLong

neoliberalism

The Italian Disaster by Perry Anderson

K21 and capital rate of return, i.e "r"

Piketty:

I think that here there is some confusion in these critiques between the interest rate and the rate of return to capital. The rate of return to capital is a much broader concept than just interest rates. If the rate of return on capital were really going to zero, as Summers seems to argue, then the capital share in GDP and the capital share in the economy would be going to zero. This has not been happening at all. Right now, including five years of total crisis, the capital share is much higher than it was twenty years ago in most developed countries. 

So, what’s in the capital share? With the capital share you can have interest payment, dividends, corporate profits (with some of it going into retained earnings which feeds capital gains), and you have rental income. If you make a sum of all these forms of capital payment, then the capital share has not been going to zero at all. 

I think that it is just wrong to take the interest rate on public debt as an indicator of the rate of return. Public debt is a very particular kind of asset: it provides liquidity services – that is, you can easily sell your Treasury bonds – and that is partly why people accept having relatively low returns in comparison to other assets. Also, we are not completely out of the financial crisis yet and we have had a lot of creative monetary policies that have kept interest rates low. 

I think that where Summers is right, and this is where he wants to get, is that we have been asking too much of creative monetary policies in recent years, pretty much everywhere – in the US, in the UK, and in the Eurozone – because at the end of the day we have this very low interest rate on some assets such as public debt or certain categories of short-term or medium-term loans, but this is creating bubbles in other assets – in real estate and in some segments of the stock market – and so you have huge return on some other assets at the same time as you have zero interest rates on the public debt. So in fact, this is probably amplifying the inequality in rates of return, in this huge heterogeneity of rates of return. 

My bottom line is that the average rate of return for all assets combined is not going to zero. It has been going down a little bit over the past 20 to 30 years because of the rise in the capital-to-income ratio, but it has declined less than the increase in the capital–income ratio, so that the capital share has actually increased. My second point is that you have a huge heterogeneity in rates of return between assets, and that having very low interest rates on certain assets, such as public debt in particular, is not necessarily a good thing because it stimulates very high bubbles in capital gains and rates of return on other assets at the same time.

IMF

Stop blaming the IMF for everything by Matt O'Brien

K21

Good piece by Porter.

The Politics of Income Inequality by Eduardo Porter

The Great Recession helped make a case for redistribution. Jason Furman, President Obama’s chief economic adviser, says that the administration’s initiatives — like higher income tax rates, subsidies to buy health insurance under the Affordable Care Act and expanded tax breaks for poor families with children — have produced “the most significant policy-induced reduction in inequality in at least 40 years.” Just the tax measures, Mr. Furman estimated, take off about half a decade’s worth of increasing inequality, as measured by the so-called Gini coefficient. 

Is this as good as it gets? For all the struggle on the part of the White House, the income gap keeps growing. Maybe this means that, in the absence of war, democracy can’t do much more.

Piketty:

I am not as pessimistic as a number of observers and reviewers seem to be after reading my book, and so I am sorry if my book made them pessimistic. The development of information technology and the internet also opens up new ways of spreading information, and new ways of mobilisation. I also believe in the power of ideas and books – and this can also contribute to the diffusion of information, and can try to contribute to a wider political mobilization.

a problem

Sorkin:

At another point, he cheerfully relayed a story that also appears in his book about the time he sought advice from Bill Clinton on how to pursue a more populist strategy: “You could take Lloyd Blankfein into a dark alley,” Clinton said, “and slit his throat, and it would satisfy them for about two days. Then the blood lust would rise again.”

Kaminska quotes Summers review of K21:

Even where capital accumulation is concerned, I am not sure that Piketty’s theory emphasizes the right aspects. Looking to the future, my guess is that the main story connecting capital accumulation and inequality will not be Piketty’s tale of amassing fortunes. It will be the devastating consequences of robots, 3-D printing, artificial intelligence, and the like for those who perform routine tasks. Already there are more American men on disability insurance than doing production work in manufacturing. And the trends are all in the wrong direction, particularly for the less skilled, as the capacity of capital embodying artificial intelligence to replace white-collar as well as blue-collar work will increase rapidly in the years ahead.

Larry Summers gets it wrong on Piketty and Robots by Colin Lewis (via DeLong)

The Americans

AV Club reviews The Americans: “Operation Chronicle”

Person of Interest

AV Club reviews Person Of Interest: “Deus Ex Machina”

How ‘Person’ Retains Interest at Episode 23 by Mike Hale

macro, pollution, inequality and capitalism

"Like pollution, inequality may be necessary correlate of important and valuable processes, and so should be tolerated to a degree. But like pollution, inequality without bound is inconsistent with the efficient functioning of free markets. If you are a lover of markets, you ought wish to limit inequality in order to preserve markets."

Should markets clear? by Steve Randy Waldman

REBELLIOUS ECONOMICS STUDENTS HAVE A POINT by John Cassidy

The Great Clusterfuck

What Caused Great Recession? Household Deleveraging or ZLB? by David Beckworth

Geithner

AND DAN DAVIES DELIVERS TIM GEITHNER'S SOLILOQUY AS THE EARL OF KENT IN "KING BARACK": MONDAY REAL-TIME SMACKDOWN WATCH by DeLong

Why Tim Geithner is wrong on homeowner debt relief by Atif Mian and Amir Sufi

Tim Geithner: More Banker Than the Bankers by Noam Scheiber

Game of Thrones

AV club reviews Game Of Thrones (newbies): “The Laws Of Gods And Men”

AV club reviews Game Of Thrones (experts): “The Laws Of Gods And Men”

Mad Men

AV Club reviews Mad Men "The Runaways." 

I weirdly prefigured(?) the HAL scene in this post from last Wednesday.

Orphan Black

AV Club reviews Orphan Black: "Governed As It Were Chance"

The Democrats on Piketty

Jason Furman, POTUS’s Chief Economist, on Inequality, Piketty, and Growth by Jared Bernstein

Um, brainstorming/spitballing here:

"–Jason seems less convinced than TP that r will remain stable amidst higher capital accumulation, slower growth, and lower interest rates. Who knows and I take his points. But it was interesting to hear Bob Solow, who knows a little bit about this, broadly support these aspects of TPs conclusions."

Haven't profits remained high these past 5 years? Solow writes "productivity growth has been running ahead of real wage growth in the American economy for the last few decades, with no sign of a reversal, so the capital share has risen and the labor share fallen."

Furman tax on the wealthy went down in 1997 page 16. 

my comment

Sorry about the long comment. Piketty and Furman give one a lot to think about. I feel like Furman doesn't really grapple with the economic history (and policy history) of the last 40 years and how it differs from the post-war years.

Furman assumes we'll get to full employment one of these days."I am confident that we will finish digging out of the hole left by the Great Recession ...But even after we do, we will still face the major challenges..."

The problem is the shampoo economy and the Republicans blocking fiscal action. There's also the secstags with not enough investment for growth.

I don't understand why he feels r will lower along with g. For the past 5 years, profits have been high as growth has been slow. As Obama himself has said, labor hasn't shared in productivity gains for a while. It doesn't seem like Furman fully examines this issue. Solow writes "productivity growth has been running ahead of real wage growth in the American economy for the last few decades, with no sign of a reversal, so the capital share has risen and the labor share fallen."

On the other hand, as Baker has written in his review of K21, there are lot of low hanging fruit policies some which Furman mentions like infrastructure spending. Or even if the Fed switched to an NGDP level path target. Labor did share in productivity gains in the tight labor market of the late 90s, so it's doable. (Interesting that Furman writes "although all of these capital tax rates remain below what they were prior to 1997.")

My takeaway from Piketty is ultimately that shrinking r so that it is less than g is what matters. Reforms are worthwhile to the extent they strengthen the political push to make that happen. Because otherwise you get an oligarchical doom loop. Because as good as the New Deal and Great Society reforms were, they didn't prevent the recent rise of r over g and the return of Gilded Age levels of inequality.

It is interesting that Furman chose to deliver this speech which mentions "race-to-the bottom" national tax incentives in Ireland, a known haven. It may be that it's a race between keeping a lid on inequality and the process of global arbitrage playing itself out. In his review Baker mentions the waning days of China as a low-wage haven.

Community and the darkest timeline

Community was a funny show.

About it's cancelation, Joel McHale just tweeted "#darkesttimeline."

The Black Keys

The Black Keys on SNL tonight with Charlize Theron.

comedians, TV and the 1 percent

N.O. favorite Sarah Silverman was on both Marc Maron's and Louis CK's season openers. Josh Brenner returns in Maron's second season according to the previews for next week. He was in The Internship with Vince Vaughn and Owen Wilson and plays Big Head on Silicon Valley.

Louie's first episode had him subbing for Jerry Seinfeld's opener at a private benefit gig for heart disease research attended by billionaires and "trillionaires" in the Hamptons. It reminded me of the video below from Alice in Chains. Louie's bit about chickens was about how they are stupid and don't revolt. Kind of like the masses, I thought. Was that the subtext? He jokingly asked if the benefit was a "soul cleaning."

QE and the Green Lantern Left

Naked Capitalism is circulating this piece by Paul Gambles, managing partner of the MBMG Group.

Smith buries the lead:

Foremost among those economists is Prof Steve Keen: a long-time proponent of the alternative view, endogenous money. Having co-presented with Prof. Keen, I've been taken with the way that his endogenous money beliefs stand up to 'the common sense test.'

A problem: "New" Democrats, Clintonoids, Rubinites, et al.

What Timothy Geithner Really Thinks

Obama’s Top Economist Has Some Problems With Piketty’s Book

Global Lessons for Inclusive Growth by Jason Furman

Inflation

There’s still no reason to be afraid of the inflation monster by Matt O'Brien

Predictions and Prejudice by Krugman

Profits

Where do profits come from? by Yglesias

NGDP level path targettting

Morning Must-Read: David Beckworth: The Seesaw Approach to Monetary Policy by DeLong

David Beckworth: The Seesaw Approach to Monetary Policy: “‘A NGDP target aims to stabilize total dollar spending.

It is one target that has embedded in it both the supply of and the demand for money (i.e. total dollar spending = money supply x velocity of money). The beauty of a NGDP target is that the Fed does not need to know what is exactly happening to the money supply or money demand. All the Fed only needs to worry about is the product of the two components. There is no need to track the money supply or estimate money demand. By focusing on total dollar spending, the Fed will be fostering a stable monetary environment where movements in money supply and money demand are offsetting each other.

Another way of saying this is that if the Fed targets the growth path of NGDP it will be taking a seesaw approach to monetary stability. That is, endogenous changes in the money supply will be automatically offset by changes in money velocity and vice versa…. Now to be clear, most money is inside money–money endogenously created by banks and other financial firms–and the Fed only indirectly influences its creation. However, it does so in an important way by shaping the macroeconomic environment in which money gets created…. By successfully stabilizing the expected growth path of total dollar spending, the Fed will be causing this seesaw process to work properly…. Even though the Fed was not officially targeting NGDP, it effectively seem to be practicing the seesaw approach to monetary policy over much of the Great Moderation period…. One way, then, to view the Fed’s job is that it should aim to keep the monetary seesaw process working properly. For a long time it did that, but failed spectacularly in 2008-2009. It would be whole lot easier going forward if the Fed explicitly adopted a NGDP level target.

The Americans

AV Club reviews The Americans: “Stealth”

Harron

Canadian Mary Harron went to Oxford and dated Tony Blair. Moved to New York City and helped start and wrote for Punk magazine. Makes movies like American Psycho.

Waldman

Interfluidity's sister's book a phenomena.

New Yorker review

I'm patiently waiting for Waldman's Piketty review just as I'm patiently waiting for The Winds of Winter.

secstags and trade

Three Charts on Secular Stagnation by Krugman

Back in the Old Days, Rich Countries Were Supposed to Run Trade Surpluses by Dean Baker

Paul Krugman outlines his story of secular stagnation in a blogpost this morning. The odd part of the story is that the trade deficit is nowhere in sight. The punchline is that a slower rate of labor force growth should lead to a reduction in demand. The simple arithmetic is that if the rate of labor force growth slows by 1.0 percentage point, then this would be expected to reduce investment by 3.0 percentage points of GDP. 

This is a story of a demand gap that could be hard to fill, but how does that compare to a trade deficit that peaked at just shy of 6.0 percent of GDP in 2005 and is still close to 3.0 percent of GDP today? Why are we not supposed to be worried about this cause of a shortfall in demand? 

Back in the days before the United States began running persistent trade deficits, the standard theory held that rich countries like the United States should be running trade surpluses. The argument was that capital was plentiful in rich countries, therefore they should be exporting it to poor countries where capital is scarce. This would lead to both a better return on capital and also allow developing countries to grow more rapidly. 

We have seen the opposite story in the United States, especially after the run-up in the dollar following the East Asian financial crisis. This has contributed in a big way to the "secular stagnation" problem, but for some reason there continues to be a reluctance to talk about it. (No, being the reserve currency does not mean we have to run a trade deficit.)

Person of Interest

AV Club reviews Person Of Interest: "A House Divided"

"Thou shalt not make a machine in the likeness of a human mind."

The Butlerian Jihad

The moment of Singularity:

"Open the pod bay doors, HAL."

And the computer in Mad Men.

Humanity is obsolete, vestigal in the mind of a certain type of AI. I think Root, Finch and the Machine are humanity's humanism and ethical reason, whereas Samaritan and Greer are (symbolize?) humanity (and capital's) technological/utilitarian/"instrumental" reason. Money is free speech. Corporations are people. National security trumps civil liberties and privacy concerns. But the system can "evolve" or devolve beyond what was intended. Power corrupts and democracy is subverted. People are "safer" from terrorist threats but they've lost their rights and say in how their government is run. Taxation without representation.

wage inflation

More on the Important New Blanchflower/Posen Paper by Jared Bernstein

Kondratiev wave

Kondratiev wave

History rhymes.

http://www.youtube.com/watch?v=3_XswHm514w

K21 & history's rhymes

"History does not repeat itself, but it does rhyme." Mark Twain

The open question is politics. DeLong on the rate of profit and the domesticated/wild versions of Piketty:

That Piketty has no real theory of what determines the rate of profit, and so doesn't have a real theory of wages either. This is what led toMatt Rognlie's complaints and his claims that Piketty ought to be saying that the processes of wealth accumulation he identifies (a) reduce the salience of the rich--that although they own more wealth relative to a year's national income they receive a smaller share of national income--and (b) amplify the real incomes of the not-rich and (c) lead not to less but more income inequality. 

This criticism is, I think, in large part a consequence of criticism (1): if you have a physical-factor-of-production definition of "capital" in the forefront of your mind, it is a very natural criticism to make. Piketty seems to need an additional argument here: that control over wealth shapes politics, and that politics will make sure that the rate of profit does not fall too far--that wealth is not allowed to compete with itself and so lower the rate of return and boost wages substantially as the process of wealth accumulation continues. It seems to me that Piketty has a good case here. But I think he needs to make it. 

If he were to make it, what would he say? Suresh Naidu, I think, lays out the issues rather well. He speaks of the "'domesticated' version of [Piketty's] argument... a story about technology and the world market making capital and labor more and more substitutable over time, and this is why r does not fall very much as wealth accumulates.... This is story that is told to academic economists, and it is plausible, at least on the surface..." The problem for Piketty is that it is only plausible. There are the Matt Rognlie's who believe that capital and labor are not (yet) that substitutable (if they ever will be), and consequently that capital accumulation raises the bargaining power of labor by enough to guarantee rapidly-rising real wages and probably a rising labor share and thus a decreased salience of capital ownership in income if not in wealth. They look forward to at least a partial euthanasia of the rentier, and see the process of accumulation that Piketty describes as an equalizing rather than an unequalizing process. Thus, I think, the 'domesticated' version of Piketty--the one that speaks of wealth-as-productive capital, and of the return to wealth as the marginal physical product of that capital times the value of undifferentiated output, is relatively weak. 

Suresh, however, does not believe in the 'domesticated' Piketty. He writes: "There is another story... that the rate of return on capital is set much more by institutions, norms and expectations than by supply and demand.... I think the production approach is less plausible... housing [with land] plays such a large role... [i the 'domesticated' version] average wages would have increased along with K/Y [if factors are paid marginal products].... The (really great) sections from the book on corporate governance actually suggest something quite different... a gap between cash-flow rights and control rights.... This political dimension of capital, the difference between the valuation written down in the balance sheet and the real power to dispose of the asset, is something that the institutional view of capital can capture better than the marginal product view..." And here we have passed out of neoclassical economics entirely. Factors of production are no longer paid their marginal products. Instead, wealth controls government. Government sets barriers to keep those kinds of property that the wealthy control safe from competition and earning their rents. The government is an executive committee for managing the affairs of the ruling class. And, as a bonus, the property rights system acts as a fetter on the process of economic development because it is tuned not toward equalizing private and social values but toward enriching the already-rich. 

As Suresh points out, if you adopt the 'domesticated' version of Piketty, then, first of all, nothing can be done save for progressive taxation: "This is, I think, also a fruitful interpretation of what was at stake behind the old capital controversies.... If it is just a very high substitutability... labor market reforms are... off the table, as firms just replace workers with machines if you try to raise the wage..." In the 'domesticated' version, the market is working: labor is low-paid because it is not very valuable and capital is high-paid because it is very useful indeed. Plus, I would add, the 'domesticated' version is subject to Matt Rognlie's critique in a way that the wild version is not. 

But by now we have arrived at the point that Piketty needs to write another book--a book about control rights and cash flow rights and the political economy of distribution and the state, a book that is (mostly) hidden behind Piketty's assumption that r will not fall by much as W/Y rises...

The history is that social democratic reforms were made in the Progressive era to lower the r/g ratio, but it wasn't enough as the oligarchs led the world into crisis and war. Crisis and war (and inflation and taxes) lowered the r/g ratio and the rich lost control of the government and politics. Social Democrats used the opening to push through more reforms. Growth increased. But even so the wealth-income ratio was already starting to climb again. In the 70s things stalled (productivity growth?) and in the 80s the Reagan counterrevolution was on as the wealth-income ratio continued to increase, g shrank and r increased. This continued throught the Clinton-Bush-Obama years as inequality increased to Gilded Age levels and history rhymed.

Humanity (the self-interested 99 percent and the enlightened 1 percent) can't counteract the politics and policies which lead to dynastic, patrimonial capitalism. You have Gilded Age levels of inequality after the first industrial revolution. This leads to crisis and war as the unenlightened 1 percent are not very enlightened. (They'd rather back Hitler than succumb to creeping communism. Nationalism, scapegoating and war rather than lower the r/g ratio.) After the mushroom clouds over Hiroshima and Nagasaki, it starts all over again.

economic history

MARX, ROSTOW, KUZNETS, GERSHENKRON: SEPTEMBER 9, 2007 by DeLong

Game of Thrones

AV Club reviews Game Of Thrones (experts): “First Of His Name”

AV Club reviews Game Of Thrones (newbies): “First Of His Name”

housing bubble

Nope, Robert Samuelson Is Wrong Again, the Housing Bubble Did Cause the Recession by Dean Baker

Minsky

BBC radio show on Minsky.

"Stability is destabilising."

Orphan Black (or Michael Huisman is my hero)

AV Club reviews Orphan Black: "Mingling Its Own Nature With It"

Wow Michael Huisman's Cal and Daario are romancing Maslany's Sarah Manning and Clarke's Daenerys Targaryen, respectively, on Saturday and Sunday nights, respectively.

(Tyrell and Dany's blue and Lannister red.)

I hear Huisman's on the show Nashville as well romancing another amazing woman.

textbook vs. heterodox

Skidelsky's review:

But towards the end of the 19th century, discussion of the class inequality of rewards faded away. The marginalist revolution— direct precursor of the mathematical economics of today—dropped the attempt at social realism, by positing a perfectly competitive market economy with numerous “agents,” each of whom would receive the value of his “marginal product”— the exact amount he added to economic value. The existence of power in the market was recognised only in the form of “monopoly”—a single firm in an industry being able to set the price of its product, a problem to be tackled by regulation or trust-busting laws. This new, marginal analysis was intended to bypass the unsettling distributional issues raised by the classical economists. The claim that the market paid every producer what he was worth undercut the socialist argument for redistribution. 

In his massive book, Capital in the 21st Century, Thomas Piketty, a professor at the Paris School of Economics, revives the economics of David Ricardo and Karl Marx. His thesis is simple. The growing concentration of capital in fewer hands has enabled its owners to keep it relatively scarce and thus valuable. Agricultural land has dropped out as a factor of production, but urban real estate has taken its place. Capitalist societies therefore have a natural tendency to generate a highly unequal distribution of wealth and income
...
Deeply impressive in its style and learning, Piketty’s argument is nevertheless incomplete. His story is about the super-rich racing ahead of the rich (and everyone else) since the 1980s. He explains this by the power of the rich to set their own pay and the ease with which they can transform their super-salaries into capital. But there may be another explanation, which is that digital technology actually increases the marginal product of the top performers in all fields of endeavour, creating a global elite of superstars who are distinguished from the rest by their exceptional talents. This is the view of Erik Brynjolfsson and Andrew McAfee in their new book The Second Machine Age. To the extent that “technology increases the reach, scale, or monitoring capacity of a decision- maker,” it makes managers more “valuable.” This implies that supermanagers get higher pay because they are more productive, not just because they can set their own salaries. 

Digital technology can also boost rewards to superstar writers and performers. For example, digitisation and globalisation have “supercharged the ability of authors like JK Rowling to leverage their talents… Rowling’s stories can be captured in movies and video games as well as text, and each of those formats… can be transmitted globally at a trivial cost.”

debate: textbook vs. heterodox

Hangups of the Heterodox (Vaguely Wonkish) by Krugman

Thomas Piketty and the Ghost of Joan Robinson by Dean Baker

The New Keynesian conspiracy by Nick Rowe

May Day

It's International Workers' Day, here's the case for higher pay by Yglesias

Queering the Strike by Corey Robin

The fading buds of May by Chris Bertram

The Americans

AV Club reviews The Americans: “Yousaf”

The Bechdel Test

The Bechdel test is fine just the way it is by Caroline Siede

bookshops

Why radical bookshops are an essential strand of political culture by Ally Fogg

Full employment

Political Aspects of Full Employment by Michal Kalecki

Palley and marginal theory

The flimflam defense of mainstream economics by Thomas Palley

The essence of Keynes’ economics was the liquidity preference theory of interest rates and rejection of the claim that price and nominal wage flexibility would ensure full employment. New Keynesians abandon both. They replace liquidity preference theory with loanable funds interest rate theory and they use price and nominal wage rigidity to explain cyclical unemployment.

...In my view, it is better labeled new Pigovian economics since it relies on market imperfections and frictions, which were the hallmarks of Pigou’s economic thinking. That makes for bitter irony as Pigou was Keynes’ greatly respected intellectual opponent in the 1930s and his thinking now passes under the Keynesian banner, displacing Keynes’ own ideas.

This is where it gets complicated:

The “no conceptual failure” claim also stretches the truth. The list of failures includes failure to anticipate the crisis; underestimating the effectiveness of fiscal policy in recessions; failure to incorporate the demand effects of debt and the dangers of debt-deflation; failure to incorporate the demand effects of income distribution; and failure to anticipate secular stagnation. In contrast, heterodox economists did well on all these counts.

 Links?

The Fed and the Financial Crisis by Yglesias

Obamacare

GOVERNOR BESHEAR: 413,000 SIGN UP FOR HEALTH CARE IN KENTUCKY: LIVE FROM THE ROASTERIE CXLIII: APRIL 29, 2014 by DeLong

Vox

Three weeks of Vox. Comment section is coming this summer.

Game of Thrones

AV Club reviews Game Of Thrones (experts): “Oathkeeper”

AV Club reviews Game Of Thrones (newbies): “Oathkeeper”

Game of Thrones

Tywin Lannister: Your mother’s dead. Before long I’ll be dead, and you and your brother and your sister and all of her children, all of us dead, all of us rotting underground. It’s the family name that lives on. It’s all that lives on. Not your personal glory, not your honor… but family. You understand? 

[Jaime nods quietly. Tywin thrusts the knife at the table and wipes his hands clean with a cloth] 

Tywin Lannister: You’re blessed with abilities that few men possess. You’re blessed to belong to the most powerful family in the kingdoms. And you’re still blessed with youth. And what have you done with these blessings, eh? You served as a glorified bodyguard for two kings… one a mad man, the other a drunk.
…
The future of our family will be determined in these next few months. We could establish a dynasty that would last a thousand years… or we could collapse into nothing, as the Targaryens did.

—————
Interesting that Stannis’s Hand Davos had the princess Shireen write to the Iron Bank of Bravos on behalf of Stannis. What will the Iron Bank think when the letter from Stannis has all the lowercase “i”s dotted with hearts?

bloglist

I've added two blogs, Crooked Timber and The Money Illusion, to my bloglist even though I often disagree with the posts and commenters. Still, they are often very thought-provoking.

Baker on Krugman

Paul Krugman and the Economics Fringe by Dean Baker

Orphan Black

AV Club reviews Orphan Black: "Governed By Sound Reason And True Religion"

taxing captial and labor

K is not capital, L is not labor by Steve Randy Waldman

He posted the link in the comment section in response to this: 

Capital income is taxed more heavily than wage income by Scott Sumner

In the comments Waldman wrote:

Scott,
No.
It is not surprising to me that some theories suggest the optimal rate on capital is zero, but that’s not what you expressed in this post (and those theories are wrong). You said “captal income is taxed more heavily than wage income”. That is false. It is an assertion of fact that cannot be redeemed without abusing common language. 

Your second claim is more interesting. You argue on the basis of present value that taxation renders the present value of future consumption endowed by saving less than consumption that could be enjoyed today. But taxation has very little to do with that. To compare the present value of current consumption and of future consumption, we need a rate of return and a discount factor. If the rate of return is higher than our discount factor, we will find that the PV of future consumption is higher than that of present consumption. If our rate of return is lower than the discount factor, we will find the opposite. Capital effect the rate of return actually available for future consumption, so if we choose a discount factor a priori, we might find that under some circumstances your assertion is true: taxes cause future consumption to be less valuable than present consumption. But under some circumstances, the rates of return even after capital taxes is higher than the discount rate, and your argument is false, or the average rate of return is is lower than the discount rate even before taxes, so taxes aren’t the issue and your argument is false. 

To distinguish these circumstances we need to determine the discount rate we intend to use to compute present value. At a certain level, that is arbitrary. I might claim to require $120 next year to be as satisfied as I would be with $100 in consumption today, so my discount rate is 20% and saving is not worthwhile with or without taxes. Or, I might be flush today and worried about a very uncertain future, and so be satisfied if I can have $80 a year from now for deferred $100 in consumption, in which case my discount rate is -20%, and taxes I might pay against a 5% opportunity don’t much discourage me. 

Rather than rely upon subjective time preferences, the usual approach to this issue is to assume that people discount future income at the best rate they can achieve at the level of risk they are willing to bear. Even if I’d be minimally content with $80 next year, I won’t except less than $105 if I can easily earn $105 by putting my money in the bank. So we use current market rates of return as our discount rate. 

But, and crucially, this logic requires that we use after tax market rates of return as our discount rate. If bank interest rates are 5% but interest is taxable at 5%, then the opportunity I will be satisfied with is 4%, and that is the rate by which future income would conventionally be discounted. Of course, that 4% may be much more or much less than the discount rate of my time preference, but market rates, after tax market rates, determine the rate by which I will actually judge alternative consumption paths. I’ll eat today if that 4% is too little, I’ll save if it’s too much. In either case I’ll value $104 in the future at no more than $100 today, because I’d only need $100 today to turn that into $104. 

So, tautologically, you are mistaken. Under the scenario you describe, the PV of $86.58 14 years from now is precisely $50 today.

M83 - Midnight City

(a young Piketty. M83 is a French band.)

net neutrality

Does Chairman Wheeler's new proposal mean the end of network neutrality? by Timothy B. Lee

Piketty

Class warfare justified? by Robert J. Samuelson

How capitalism enriches the few rather than the many by Harold Meyerson

Piketty

If r > g then we'll get societies like in Elysium and Continuum. 

Piketty

Jedediah Purdy on Capital in the Twenty-First Century

OVER AT THE WASHINGTON CENTER FOR EQUITABLE GROWTH: THE DAILY PIKETTY: SOME MORE REVIEWS OF PIKETTY by DeLong

Disgorge the cash

Disgorge the Cash by J.W. Mason

Krugman on 2008

 Frustrations of the Heterodox

It is true that economists failed to predict the 2008 crisis (and so did almost everyone). But this wasn’t because economics lacked the tools to understand such things — we’ve long had a pretty good understanding of the logic of banking crises. What happened instead was a failure of real-world observation — failure to notice the rising importance of shadow banking. Economists looked at conventional banks, saw that they were protected by deposit insurance, and failed to realize that more than half the de facto banking system didn’t look like that anymore. This was a case of myopia — but it wasn’t a deep conceptual failure. And as soon as people did recognize the importance of shadow banking, the whole thing instantly fell into place: we were looking at a classic financial crisis. 

What about the lousy policy response — austerity and all that? The key point here was that policymakers weren’t basing their decisions on conventional economics. On the contrary, they decided to blow off textbook macroeconomics and embrace exotic doctrines like expansionary austerity and a mysterious growth cliff at 90 percent debt relative to GDP. The disastrous policy responses that have perpetuated the slump are the result of mainstream economics having too little influence, not too much.