Brad DeLong responds to Brink Lindsey’s challenge to come up with some ideas for increasing economic growth, the kinds of ideas he would enact if he could wave a magic wand over the economy. DeLong suggests (i) NGDP level targeting by the Fed to counteract a Millian general glut; (ii) a 50% increase in K-12 teacher salaries in exchange for severe reductions in teacher tenure, and (iii) increasing legal immigration from one million per year to 2.5 million per year.
Now DeLong admits his ideas are smaller in scale than one might expect from an exercise in magic wand waving. But it seems to me that he really has not inhaled even a shallow draft of the magic wand spirit. Rather than a sample of small-bore magic, the piece reads more like a Third Way memo entitled “What I would propose if I were negotiating with Brink Lindsey and other Cato conservatives on a bipartisan economic policy package.” That point aside, I have a few reactions.
I anticipate a heavy round of election post-mortems tonight, with partisan operatives aplenty on hand to gather the flock together, minimize the challenges and dissuade people from trying anything truly interesting. There will be a lot of emphasis on the mere re-tooling of messages, tweaking of coalitions, massaging of morale and studious avoidance of deeper problems. But now is the time for a movement, not nodding obedience to the partisan hacks and established power brokers. It’s time to move toward rugged egalitarianism, and away from the exhausted postmodern neoliberalism that has poisoned our culture, degraded our democracy, driven huge wedges between competing groups of poor, working class and middle class citizens, and unraveled the social contract. Here’s the basic outline of a path, which has moral, political, economic and cultural elements:
1. A single, publicly-funded health care system for everyone, with care dispensed on the basis of need, not social rank or quantity of personal wealth.
2. Reduction in the size and scope of the financial sector, with the role of financial rent-seeking and Ponzi activity aggressively curtailed, and an end to obscene levels of personal compensation in that sector.
3. A commitment to 100% full employment: federal, state and local government must be engaged in the ongoing organization of flexible, well-run public enterprises that are prepared to offer a job to every person willing and able to work, and for whom the private sector has not generated a job.
4. An expanded role for strategic public investment in the future of our society, with a new mission-oriented emphasis on transformative public enterprises and renewed hope for a democratically chosen future.
5. An incomes policy,using the tax system and wage regulation to generate a much higher overall return going to labor, a much smaller share going to capital, and a greatly compressed gap between the top earners and the bottom earners.
6. Re-invigorated democracy at all levels – local, state and federal – with innovative new forms of participation and engaged governance, and reduction in the role of managerial elites.
7. Democratization of corporate governance, and promotion of innovative and more dignified forms of workplace organization.
8. Expansion of public education, including public educational opportunities that are offered intermittently across the lifespan. The cost of educating our young people especially must be borne by the whole society, and not thrown onto the backs of those young people themselves. All people must have access to the full riches of our culture and an education befitting the role and dignity of a fully responsible citizen.
9. A reform of public finance so that monetary and fiscal operations are more effectively and efficiently combined, and so that the full potential of the public’s monetary authority can be intelligently brought to bear on financing the development of our society and the management of our government.
10. A reorganization of work, including a move to a standard four-day work week in the formal economic sectors so that more time is opened up for all of us to fulfill the responsibilities of democratic participation in community self-government. Maintaining a functioning participatory democracy is hard work, and we must provide ourselves with the time needed to do that work. If we don’t, the powerful will do the governing for us.
11. A recognition of the fact that legislative bodies, the rule of law and the public treasury should the main drivers of public policy in the economic sphere; not the central bank. Nor should the central bank be “independent” of our democracy.
12. The creation of public banking options to finance human development and social transformation, and the elimination of wasteful and parasitical financial sector intermediaries that capture profits without adding essential value.
13. An expansion of the public role in retirement support, and a corresponding decrease in the role of private pensions and private retirement savings plans. Rebuild Social Security into a national pension plan fully sufficient for a dignified life after work for most Americans.
14. A re-commitment to the values of social engagement, democratic self-governance, civic pride and patriotism, and to the democratic virtues of deliberation, commitment to the truth, cooperativeness, rational discussion, and respect for democratically-achieved public choices and decision. The radical individualism of contemporary American life is decadent and destructive, and must end.
15. A restoration of the free traditions of a democratic society, and a rollback of oppressive elite surveillance, spying, prying and external control.
16. A democratic cultural renaissance which includes a confinement of commercial relationships and interactions to a more limited and appropriate domain; a rejection of the philistine commercialization of society and debasement of everyday life; the flourishing and flowering of the humane sphere; and the end of contemporary cult of violence, barbarism, cruelty, mindless competition and aggression as acceptable norms of moral and social life.
17. An all-out assault on plutocracy as it exists presently, and a standing, vigilant commitment to combat the excessive concentrations of wealth that can lead to the re-emergence of plutocracy in the future.
18. Recognition of the fact that the institutions of property are a creation of human beings. They exist to serve humanity, and when they fail, they should be changed to serve humanity better. Democratic peoples must be willing to work together to control capital for the general good, and not be controlled by it.
19. A grassroots international movement committed to building global solidarity on behalf of democracy, human development, social and economic equality, planetary health, sound government, religious tolerance, openness, human rights and dignity. A global struggle must be waged against tyranny, plutocracy, greed, corruption, oligarchy, corporate control, and secrecy.
20. Rejection of the seductions of dystopian gloom and hopelessness. Artists must help us envision the world in which we have succeeded in regaining control over our lives, and have gotten to work transforming and healing our planet and building cooperative human society. Such a world is possible, so indulgence in dystopianism is lazy and cowardly.
The world of the 21st century is shaping up as a struggle between the forces of democratic political community and human solidarity on the one side, and concentrated private capital, avarice, hierarchical control and the commercial debasement of the human spirit on the other side. Don’t listen to the hacks. They fear change, and often work for the bad guys.
There is an important debate going on about just how progressive a tax system has to be in order to serve progressive political ends. The debate was instigated by Edward Kleinbard, writing in the New York Times. Kleinbard argues that we should avoid steep increases in taxes on the rich in favor of “boosting revenue over all,” on the grounds that the American tax system is already the most progressive in the world, and that in any case we should focus on the progressivity of the entire fiscal system, not just the taxation side of that system. Some of the more interesting critical discussions of Kleinbard have been produced by Mike Konczal, Steve Waldmann and Matt Bruenig.
From my vantage point, building a bit on the neo-socialist approach I sketched in my previous post, much of the current debate about taxing the rich is misconceived. Contrary to Kleinbard, I believe we do need to tax the rich much more heavily. But the primary point of these taxes is not to finance the spending side of the nation’s fiscal program. Here are the two key points I think need to be made:
The best reason to tax the very rich heavily is, initially, to make them less rich.
The best subsequent reason to tax riches heavily is to prevent people from becoming very rich again.
The long-term goal of neo-socialist political economy is to build a more equal and a more democratic society, a society in which we have done everything we realistically can to level the vast differences in income, wealth, social status, education, political power, cultural participation and human dignity that currently prevail in the United States. Toppling the looming citadels of concentrated private wealth will help to advance democracy, broad prosperity and justice. That’s a good enough reason to do it, all issues of public revenues aside.
Here is a fact: every country in the developed world possesses an economy that combines capitalist and socialist forms of organization. It seems to me that this fact is something that used to be more widely understood and accepted. The economies of the mid-to-late 20th century emerged from long processes of contentious struggle between classical liberal, socialist and traditionalist ideas, and had all arrived at different combinations of those various elements. We used to call these economies “mixed economies”, and almost all educated people understood that we all lived in such economies. We debated which ones were better than others: which produced more prosperity, or more happiness, or more justice.
People disagreed, frequently intensely, but often understood at the same time that these disagreements were mostly practical disagreements about getting the right mix, and that the pure textbook forms of capitalism, socialism, communism, or whatnotism were abstract, purifying ideals that each left out various important aspects of human nature, and were thus too high for humanity.
Most people who pushed in a socialist direction understood that you can’t plan everything all the way down to the smallest pizza shop, and that you shouldn’t eliminate all of the confidence, personal pride and creativity that come from accepting some measure of individual control over private property. Most people who pushed in a capitalist direction didn’t really want private firms running all the law courts, militaries, schools, parks and highways, and recognized that a civilized and harmonious human society shouldn’t be based on the bestial norms of wilderness competition, with its cruel, Sisyphean struggles for dominance and survival. And most traditionalists understood that the kingdom of heaven is not of this earth.
Here are three charts showing what I think are some very important aspects of the economic state of contemporary America. The first shows net stock dividend payments as a share of gross domestic product:
As you can see, the percentage is now higher than it has been at any point since 1929. The second chart shows wages and salaries as a share of gross domestic product:
And in this case, the ratio is lower than at any time since 1929. Finally, here is a chart showing rental income as a share of gross domestic product:
Jonathan McCarthy at Liberty Street Economics flags the slow rebound in consumer spending as one contributor to the sluggish pace of economic growth in the post-2009 recovery. According to McCarthy:
Discretionary expenditures have picked up noticeably over recent quarters but, unlike spending on nondiscretionary services, they remain well below their pre-recession peak.
But perhaps looking to the pre-recession peak as a benchmark for setting our present hopes is unrealistic. Here is a graph of total household fixed residential investment plus personal consumption expenditures, viewed as a share of total personal income:
George Cooper continues to have doubts about Thomas Piketty’s famous inequality r > g, which says that the rate of return to capital is greater than the rate of growth of national income. Cooper raises those doubts in connection with a recent post of mine in which I attempted to dispel some of the confusion surrounding Piketty’s inequality by making it clear that the rate of return to capital is not any kind of growth rate. But Cooper doesn’t raise any serious objections to Piketty’s inequality, at least so far as I can tell. In fact, Piketty’s inequality ought to be regarded as among the least controversial points Piketty makes in Capital in the Twenty-First Century.
The thought experiment I introduced was designed to clarify certain fundamental points about the conceptual relationship between wealth, income, the rates at which wealth and income grow, and the rate at which the ownership of capital is rewarded by income. Without going back over the whole thought experiment, let me summarize what I take to be the essential takeaway points:
Several people have asked me for a more mathematically precise formulation of Thomas Piketty’s Second Fundamental Law of Capitalism, as well as a more careful statement of its proof and of the boundary conditions over which the proof applies, with some attention to the unusual and exceptional cases. I have written up some notes that are an attempt to comply with those requests. While I have attempted to be as precise as possible in laying out the proof, I have tried to avoid introducing any more rigor than is absolutely necessary for an informed reader to understand how the proof goes through. I have assumed a familiarity with reasoning about limits at the level of elementary calculus.
The notes can be downloaded here.
Justin Wolfers has posted some slides purporting to deal with the arguments of Thomas Piketty’s Capital in the Twenty-First Century. Unfortunately, the discussion outlined in Wolfers’s slides suggests that while he has read some of the more prominent recent responses to Piketty – including Lawrence Summers’s review of Piketty in Democracy: A Journal; a recent paper by Per Krussel and Tony Smith on Piketty’s second fundamental law of capitalism; and some posted comments on Piketty by Debraj Ray – he doesn’t seem to have read much of Piketty himself. I say this because Wolfers repeats some of the same interpretive errors that appear in those other works, despite the fact that the errors are quite easy to avoid, and even obvious, to anyone who has worked directly with Piketty’s text.
I commented on some of Debraj Ray’s criticisms of Piketty in my post “Why Is r > g So Significant for Piketty?” And I dealt obliquely with some of the Krussel and Smith arguments in “Piketty’s Second Fundamental Law and Some Fallacious Reasoning about Savings.” I will likely return again to these critics’ arguments again in future posts. I also dealt with the interpretive errors springing from Summers’s review in my post “Summers’s Review of Piketty: Underestimating the Argument for the Forces Driving Inequality.” Summers errs in attributing to Piketty (i) the view that wealth grows at the rate of return to capital, (ii) the view that as long as the return to capital exceeds an economy’s growth rate, wealth-to-income ratios will tend to rise and (iii) the tacit presupposition that returns to capital are 100% reinvested. Matt Bruenig has posted two fine new pieces this week, here and here, that challenge Wolfers on errors that seem to have their source in Summers, and has already dealt with most of the key points I would make on that score. But I would like to add just a bit to his discussion of the relationship (or rather lack of relationship) between the growth of wealth and the rate of return to capital.
Neil Irwin, looking at the latest US economic data, finds an ugly fly in the ointment of our economic recovery – such as it is – that lends a stinking savour to the odors wafting from the labor scene:
The latest economic data out Tuesday morning was generally good. Home building activity rebounded nicely in May after weak results in April. Consumer prices rose 0.4 percent in May, such that inflation over the last year is now 2.1 percent, about in line with what the Federal Reserve aims for.
But that inflation news carried with it a depressing side note. Now that the May Consumer Price Index has been published, it is possible to determine inflation-adjusted hourly earnings for the month. And the number isn’t good.
Average hourly earnings for private-sector American workers rose about 49 cents an hour over the last year, to $24.38 in May. But that wasn’t enough to cover inflation over the year, so in “real” or inflation adjusted terms, hourly worker pay fell 0.1 percent over the last 12 months. Weekly pay shows the same story, also falling 0.1 percent in the year ended in May.
Pause for just a second to consider that. Five years after the economic recovery began, American workers have gone the last 12 months without any real increase in what they are paid.
Strangely, faced with these indications that our soi-disant recovery is a completely bogus affair as far as American workers are concerned, Irwin’s mind immediately turns, as so many mainstream minds seem to turn in these days of social and political paralysis, to yet more neurotic worrying about deliberations inside the conclave of monetary alchemists who run the Fed: