Do Economists Have Any Answers?

I am asked repeatedly what the solutions are to the problems that occur with globalization and increasing inequality, but the answers I give are not the answers people are looking for. Economists have done a good job documenting and highlighting the problems, but have had far less to say on how to overcome them. As I noted in comments where I first posted the remarks below, the remarks were a bit rushed. But I decided to post them anyway as a challenge to my colleagues to start answering this question. We are asked repeatedly what the answers are to the problems we've identified, growing inequality, wage stagnation, outsourcing of jobs, the changing social contract, you know the list, but we have not given satisfactory policy responses, at least not according to the comments I get.

So, this copy of the comment I threw together is intended to get the conversation started and encourage others to contribute thoughts, not be the final word on the topic:

What should we do about globalization and growing inequality? Making a comparison to the medical profession, it may be that while we can diagnose some conditions clearly, we have no effective cure for them (though there are economists hard at work daily hoping to change that, just as medical researchers are trying to find cures for their set of ills), it requires waiting for the system to "heal" itself over time.

Economists can suggest healthy diets (e.g. monetary and fiscal policy), but that is no guarantee that the economy will not get sick anyway and when it does, we don't always have the cure at hand, though I do think we have, for the most parts, prescriptions to help the economy heal faster. But people want instant cures, a pill to take that makes it better now, not a long difficult road to recovery.

Education, worker retraining, those sorts of things aren't cures, they simply (hopefully) speed the healing process along, and sometimes that can be a much longer process than any of us like.

I know a lot of you like to beat us up because we don't have the answers, and it's useful to motivate us to look all that much harder, but I'm not any more embarrassed for our profession because we can't solve every problem than doctors are who can't cure the common cold. And (this will make some of you mad) they, like us, have to listen to a lot of folk remedies that supposedly work, be told they are idiots, etc. And though every once in awhile the folk remedy is valid, generally the suggestions come from people who really don't understand all facets of the problem. You can't argue with them, they really believe their folk remedies work, so it's best to listen to them attentively, smile and nod, and not engage.

But that's pessimistic. My economics tells me that there will be winners and losers from things like free trade and that the winners will [generally] have enough to compensate the losers and still be better off themselves. So my solution would recognize this reality and, along with all the things we need to do to help the economy heal, it would also redistribute income in a way that produces far more winners and far fewer losers. But I don't think we have the political will to do that yet, the understanding that everyone will still be better off after the redistribution, though the the GOP's change of heart to allow consideration of a vote on the minimum wage is one sign that this is being recognized.

Policies can protect people from losing jobs, but I think that's a recipe for stagnation in the long-run. Policy can help people get new jobs faster, that's where education, retraining, etc. come in, but that hasn't worked as well as we would like (but that's not an excuse to stop trying and my solution involves these things even though so many of you object to such policies). Policy can raise income for lower income groups, that's where minimum wages, negative income taxes, redistribution policy, etc. come in. These help ease the globalization transition by transferring income to affected groups and hence make it easier to accept politically, but it's not clear they make the transition occur any faster.

Finally, we can hope the electoral process results in a change in the use of political power to bring about transfers of income toward higher levels. We have enough trouble dealing with the economics driving such changes, we don't need legislation that makes it even worse.

I think part of the silence is that economists have no instant cure for problems that occur with globalization. We think it's necessary for our long-run health, and we can recommend policies that aid the recovery process, but perhaps our silence is because we've been waiting for some economist working hard to have a "Eureka" moment and announce to all of us a cure is at hand. Until that happens, we will be stuck with less satisfying rehabilitative solutions.

So, smart economists everywhere, what do we tell people when they look to us for answers to the problems that come with globalization and rising inequality? Do we say we can help some, but not all that much and it's a long, hard road to recovery, or do we have a more positive message to deliver? If so, how do we get the message out? Some of you will deny a problem exists and assert this is just a matter of public perception and the workings of a free market rewarding the most productive among us, and you can argue that position, but I think there is evidence of justfiable discord.

One final question, it would also help if we pointed to our policy successes. Where would you tell people to look in the microeconomic and macroeconomic arenas for examples of successful policies recommended by economists? I'll cite a couple that come to mind. Since my main interest is Fed policy, those policies come to mind first. For a recent example, I think our monetary policy response to oil price increases is far superior to our response thirty years ago to the shocks that hit in the 1970s. That's not to say the response has been perfect, but we've learned since the 1970s and policy has improved considerably.

Second, and related to the poor performance of the 1970s, an example of necessary painful policy (though it had an unusually fast healing period) was the monetary policy induced recession of the early 1980s needed to establish the Fed's commitment to fighting inflation. This led the way to the lower inflation rates that we saw in subsequent years and perhaps has a direct relationship to the increased stability of GDP after the mid 1980s.

Third, policies such as Federal Deposit Insurance on bank deposits, bank examination, the implementation of increased capital requirements after the S&L failures, and other measures have stabilized the financial system. There are those who would prefer an unregulated financial sector, but they are in the minority. When I compare the banking system now to, say, the banking system before the Great Depression I count these regulations as a clear successes in terms of stabilizing this important sector.

There are other places to point to as well, and the microeconomic literature may provide an even more extensive set of examples since the set of policies and markets to apply them to is so much larger, but I'll leave those for others to talk about should they choose to respond. And I expect there will be some who disagree that the cases I cited constitute success stories, and that perspective should be heard as well.

Comments

[James Kroeger]

Let me see if I can refine the question for the "Democrat economists" out there who very much want to believe that they are relevant in some way to the fortunes of the underprivileged.

Why is it that you guys/gals find it so difficult to endorse optimization as an ultimate policy goal? Optimize investment. Optimize the production and consumption of Real Wealth. Optimize employment. Optimize the position of wage earners in the Labor Market. Optimize the consumption of wealth experienced by every economic class, even The Wealthy. Why is it that you are so afraid to advocate an optimally functioning economy?

The answer is because you collectively fear advocating any policy that might create "anxiety" within the financial markets regarding inflation. I understand why Democrat economists are loath to associate themselves with "higher inflation solutions." What I don't understand is why they are afraid to discuss it on a theoretical level.

For the sake of argument, wouldn't we actually be better off in real terms if politicians and bankers and investors could find a way to accept higher inflation rates? The answer is an unequivocal yes. Isn't that something that we can all agree on? Imagine an educational campaign that is so successful, even the members of the Federal Reserve Board agree that everyone would be better off in real terms if all members of the financial sector accepted higher inflation rates. Yes, that's a highly stylized assumption, but what if that could be achieved? Woundn't we all be better off?

This is what I find disappointing about those who can somewhat accurately be described as Democrat economists. Is it impossible for them to entertain purely theoretical constructions for the sake of argument? Must they only be willing to embrace "solutions" that can be expected to be passed by Congress in the next election cycle?

I understand that this Folk Remedy is very tedious to serious economists, Mark. I ask only that you smile and nod, listen attentively, and give some consideration to actually engaging in at least a limited discussion. :)

[Mark Thoma]

I do, and will. Thanks.

[camille roy]

My understanding is that current industial powers developed under tariff regimes. Is that a failure of economic theory?

What about a back of the envelope estimation of what it means for the world economy to "be sick" and what it means to the world economy "to heal itself"?. I honestly don't know what you are talking about. Is this a reference to declining wages in the developed world, and (hopefully) rising wages in the developing world, to meet in the middle somewhere. Is that what you mean by "healing itself"?

It seems to me that the decline in living standards expected of the developed world under this scenario must be huge. And if not, why not? I feel I'm adrift between orders of magnitude here, and I'd like a little guidance as to what you are suggesting is reasonable, thanks.

[Blissex]

«Some of you will deny a problem exists and assert this is just a matter of public perception and the workings of a free market rewarding the most productive among us, and you can argue that position, but I think there is evidence of justifiable discord.»

But your desolation that economists don't have much of an answer and some say no answer is needed is unsurprising: if the central ''truth'' of economics is that factor compensation is necessarily equal to marginal productivity, nothing indeed can be done (and all the sponsors of the conservative parties are wasting their money and efforts paying for favourable legislation, as it is ineffectual).

The statistics then show clearly that in 1930-40 the marginal productivity of the top 1% of income earners (relatively) halved, stayed (relatively) constant for next 40 years, and then (relatively) doubled again in 1990-2000. It is not for an economist to worry why, but only to worry then the productivity of the top 1% decreases, because prosperity necessarily and always trickles down, while of course supply creates its own demands, and everything works outs in the end.

If there are (un-American of course!) economists that disagree, the complete dominance of the Debreu/Lucas story means that there are no widely shared paradigms and models with which to discuss alternative interpretations (something that the un-American may regard as not entirely coincidental).

Suppose for example that some (un-American) economist reckoned that such income share shifts depend on shifts in economic power relations among groups of people: the obvious answer would be identify such shifts, their causes, and how to redo or undo them.

But most economist would reject such an attitude as betraying the eternal verities of their profession, and a descent from the certainty of pure mathematics and a descent into ''sociologism''.

But how many economists would admit to practicing ''sociologism'', and look to antecedents like Smith, Ricardo, Keynes or Galbraith, instead of Walras, Debreu or Lucas or Fisher?

[James Killus]

This is a tangent to your original remarks, but it bears saying.

I've noticed that arguments in favor of globalization and free trade are almost always economic, while cultural arguments about globalization are almost invariably negative. Why is that?

I listen to music that is clearly the product of several continents, African and European elements mixed together for centuries in North America , the Carribean, Latin America (to say nothing of my taste for the South Indian flute). I like Thai food, sushi, and Tex-Mex (among others). "Bollywood" is named that for a reason, and it isn't because it's a purely native product, and the current trend in Hollywood is remaking Japanese anime as live action films, with more than a little Hong Kong martial arts flick thrown in.

I don't think that anyone reading this would have any problem making a list of a few dozen more examples of cultural "hybrid vigor." These sorts of things are hard to monetize in the first place, and and it's even more difficult to do the financial accounting for it. But that doesn't mean that it does not make life richer.

I imagine that one could also try to fit the multi-cultural narrative into a "winners and losers" storyline, but it seems to me that this misses the point. This is part of what drives culture and what drives economics. Without this sort of cross-fertilization, culture stagnates and the main "losers" of cultural globalism are those who prefer that stagnation.

[Blissex]

«For the sake of argument, wouldn't we actually be better off in real terms if politicians and bankers and investors could find a way to accept higher inflation rates? The answer is an unequivocal yes.»

I find this kind of position quite mad, in part because inflation does have its costs (and the higher it is the harder it is to stabilize it, according to many decades of experience, for one thing).

Besides ''Easy Al'' has done whatever he could to create inflation, and he has succeeded quite famously, in the form of asset inflation in the USA and wage inflation in India/China, and it is not sure either have benefited wage earners in the USA very much.

Indeed, there are some very good arguments that current inflation rates are rather underestimated by most of the indexes currently used; some analysts reckons that if it were measure in the same way it was 30 years ago, inflation would be calculated to be around 8% now, and even the highly ''domesticated'' indexes quotes widely are occasionally running a bit wild (prompting calls for their adjustement).

But whether we already have relatively high inflation and where, looking at the top 1% share of income, the increase in share in 1990-2000 is just one of the striking aspects of it, which are:

* That share halved roughly in 1940-1950.
* It remained constant 1950-1990.
* It doubled in 1990-2000.

The crucial feature is that the top 1% share stayed remarkably constant at around 8-9% through periods of both high and low inflation in 1950-1990. It is hard to see now how higher inflation might matter to improving equality.

In any case my impression is that we shall soon see high and sustained inflation, as too many powerful vested interests with a heavy debt and obligation burdens have to be bailed out (the Federal Government, state governments, houseowners, older corporations, ...).

And my impression is that it will make inequality worse, as inflation normally benefits owners of real assets or their proxies (house, stocks) and those whose jobs are protected and have pricing power; it usually hits those who own financial assets (pensions for example) or unprotected jobs.

[js paine/slink]

" I think our monetary policy response to oil price increases is far superior to our response thirty years ago to the shocks that hit in the 1970s'"

is there somewhere i can read your thoughts on this

[vorpal]

I tell people that economists aren't capable of solving economic problems. They aren't smart enough to rise above all of the dogmatic gobbledy-gook they are taught in school. The dogma usually takes the form of labels such as, "Neo-Classical", "liberal", "conservative", "Keynesian", etc... This is because there are two different questions in economics that often get conflated.

1) What are the desired consequences of economic policy?
For example: Do we want maximum GDP growth, or do we wish to achieve a certain income distribution?

2) What policies would achieve the desired consequences?
For example: Should we raise taxes, or should we cut them, if so, what should we tax and/or not tax?

[vorpal]

Here's a solution to the US trade imbalance:
1) Tax imports.
2) Subsidize exports with the import tax receipts.

At the right import tariff rate, this would balance trade because foreign goods would be more expensive domestically and domestic goods would be cheaper abroad.

This is as simple as it gets. Yet it is anathema to economists. They respond, "Yeah but, the currencies should balance trade...".
In theory this is correct, but economists lack the brains to understand that the time scale for this effect could lead to global instabilities that could be disastrous. They lack the imagination to realize that policies need to put in place that ensure trade balance in a timely way and that currency valuations are not getting this done.

"Blind faith in your leaders, or in anything, will get you killed." - Bruce Springsteen

[Mark Thoma]

slink/js paine:

On the empirical side, I just have in mind the performance of the two economies. There may be big underlying pressures building and some day I could look back and say "what a dumb policy that was" given what we know now, but so far the performance seems much better.

On the theoretical front I am thinking of the Taylor principle -- the idea that interest rates must increase more than one-for-one with inflation -- as the better response (as opposed to chasing inflation upward as in the 1970s).

This is supported by the Gali/Gertler and other results about New Keynesian models being indeterminate when the response is less than one-to-one (though this is admittedly somewhat controversial, it does give a theoretical basis for the better outcome).

Orphanides would disagree and say this isn't true with real-time data, but support also comes from splitting the sample pre and post 1980 (or 1982 for some) and estimating a Taylor rule. When you do, the coefficients on inflation is less than one before 1980 and greater than one after.

But by whatever theoretical and empirical justification, I see the Taylor principle along with the switch to ff targeting as the big innovations, and the evidence from comparing outocmes (to date) in the two periods.

[James Kroeger]

I find this kind of position quite mad, in part because inflation does have its costs...

Oh? You say inflation has its costs? Let's do a little cost-benefit analysis...

What are the benefits of a higher-inflation economy that is produced by a maintained Labor Shortage? Well, they are at the top of the chart. If we focus our attention on what is happening to the Real Economy during a Labor Shortage, it soon becomes clear that we would be enjoying an outcome that is true economic perfection. All those who are able-bodied & able-minded would be producing something of value. In such an economy, the production & consumption of wealth would be optimized. Investment would be optimized. When production & consumption & investment are all at optimal levels, society gets to experience an ideal economic achievement.

We would likely see an end to the phenomenon that we have always called Poverty. If all able-bodied and able-minded poor people are working, producing more real wealth, then much more money is going to be spent on poor people by poor people. Increased sales would prompt firms to increase the supply of goods and services available to the poor. Yes, the poorest people in the economy would still be the poorest people in the economy, but in real, material terms, the poor would experience an enhancement of both their standard of living and their economic security. Social pressure would mount on those who are idle. With fewer idle teens and young adults, crime would drop.

That's quite a list of mind-boggling benefits to stack up against the few "headache costs" that are so often mentioned by Inflation Worriers. What kind of costs do they bring up? How about the tremendous burden of having to change menu prices more often? How about the unthinkable cost of having to go to banks more frequently? These thoroughly laughable 'costs' are actually mentioned quite often by Inflation Worriers with a straight face. The truth is that these various 'costs' are quite miniscule when compared to the horrible cost of unemployment. Indeed, in the net, it would cost society nothing to eliminate unemployment through a Labor Shortage because all of the costs of higher-inflation would be overwhelmingly dwarfed by the cost-savings that would be reaped from a maintained Labor Shortage.

Inflation is always and everywhere harmless when it comes to the purchasing power of consumers. Yes, prices go up, but wages must also be going up, enough to cover the higher costs. This must be true, or we would not be able to logically blame the price increases on inflation. People may not gain in real terms from increases in disposable income that are due to inflation, but neither do they lose in real terms from inflation.

So you say inflation imposes costs? Well, so does production. But both are worth it because of the tremendous benefits that are to be gained.

[Blissex]

«"I think our monetary policy response to oil price increases is far superior to our response thirty years ago to the shocks that hit in the 1970s"

On the empirical side, I just have in mind the performance of the two economies. There may be big underlying pressures building and some day I could look back and say "what a dumb policy that was" given what we know now, but so far the performance seems much better.»

But the policy in the 70s was not a mistake: it was adopted for very good reasons, and damn the consequences. Just like now, it was all about politics (as a minor example remember deGaulle and dollar convertibility...).

Right now there is a clear choice between killing the economy and holding back inflation or giving a big present to the ''financial debtors/real asset owners'' party, and I suspect this is the actual policy, and it will only get worse.

Are real interest rates actually positive? Very modestly, compared to some widely trafficked and domesticated price indices. Not so positive, compared to what ''inflation'' (whatever that is) probably actually is like.

Is monetary aggregate growth moderating? Does not seem much like that...

[save_the_rustbelt]

I have come to the conclusion that there really is no solution, like a pig through a python this will run a course and something new will await in 20 or 30 years.

Apparently a majority or near-majority of Americans think our children will be worse off than we have been, which is dismal.

If there was one huge problem we could probably solve it, but this is an intricate puzzle with lots of pieces and I don't we have the will or the smarts to solve the puzzle.

After watching both parties deal with the Chinese during the past decade, whatever corporations want corporations will get (maybe a little less so with Rubin-o-nomics than Bush-o-nomics).

So many workers are either....

1) taking 40% cuts in compensation and benefits, or
2) moving into a low value job and never seeing a high value job...

...the equality will continue to grow. I pointed out in an editorial a couple of years ago that John Edwards made, in his best year as a malpractice trial lawyer, the same amount as 4 RNs would make in their lifetimes. Extreme example, yes, indicative of a trend, certainly.

Those who own the government (the top 5%) are not going to allow much change until the sluggishness ripples up or more likely there is a massive political change.

We have already started retirement accounts for our children (we haven't told them!) because we think they are going to get screwed, unless they end up in a very small elite (the top 5%).

How is that for pessimism?

[Blissex]

«Inflation is always and everywhere harmless when it comes to the purchasing power of consumers. Yes, prices go up, but wages must also be going up, enough to cover the higher costs.»

This is just handwaved mumbo-jumbo: wages may well go up, but which will go up more than inflation and which less? That depends on the bargaining power of the workers affected.

If you create an inflationary climate, it can well happen that prices go up faster than wages, as businesses may have more pricing power than workers. You can't just dreamingly assume that most of the benefits will go to the wage earners. If they had the pricing power, they would not be handing over their productivity increases now.

In some ways something similar has been going on for a few years in a semi-deflationary environment: because of chinese and indian competition, the price of goods/services that wage earners buy has often decreased, but the prices of local goods/services (e.g. houses, healthcare, education) that cannot be imported has gone up pretty fast, and wages have not been doing too well either.

Suppose you own a shop selling fashion. Bonanza! You can important much cheaper garments from China, hire much cheaper immigrant shop workers, and you can keep the retail price at the same level for a while, and then it goes down more slowly than your wholesale prices and labour costs.

The only problem is that the landlord is going to increase rent, because you cannot import the land and building from China or Mexico too, but you are still ahead.

This happens because the landlord and the shopowner have pricing power because the shop and its building are not in competition with chinese or mexican ones, but garment manufacturers and native workers are.

Now what happens if you create inflation? Well, who captures the benefit? Still the landlords and the shopowners, because they can rise their sell prices than their suppliers can rise theirs.

Inflation can make the lots of workers worse another way: some inflation makes real prices more fluid, and if some wages are sticky (such as the famously sticky minimum wage!) and thus less susceptible to being driven down by competition, inflation can remove that protection (as has happened to the minimum wage over time)...

[Blissex]

«If there was one huge problem we could probably solve it, but this is an intricate puzzle with lots of pieces and I don't we have the will or the smarts to solve the puzzle.»

Well, I think the puzzle is solvable (in principle, and indicated how), but that the top 5%-top 1% and their (well paid) advocates have so far utterly outtalked and outsmarted the ''little people''. As to that I am pessimistic.

Note: I also think that the moral theory expounded by Ayn Rand has liberated the wealthy (except billionaries) from much sense of obligation or compassion towards the little people, whom they now often see as parasitic exploiters whose only goal is the steal the legitimately earned rewards of the ''best and brightest''.

«I pointed out in an editorial a couple of years ago that John Edwards made, in his best year as a malpractice trial lawyer, the same amount as 4 RNs would make in their lifetimes.»

But to some extent extreme inequality has always been there, but much less visible, because it was wealth/capital based and not income/''salary'' based. Wealth is still far more unequal than even income...

What has been happening is that a category of people have been succeeding, with skill and determination, to get more political leverage both with respect to the merely wealthy (all those option grants etc. have transferred a very large amount of wealth from shareholders to managers) and from workers (all those bonuses for keeping wages down have done the same for workers).

«Extreme example, yes, indicative of a trend, certainly.»

And the trend is the rampancy of the ''manager'' class, those whose credentials and connections are ''virtual'', nontradeable, assets.

«Those who own the government (the top 5%) are not going to allow much change until the sluggishness ripples up or more likely there is a massive political change. »

But those don't own the government, they just lease it via an ongoing sponsorship programme. If the bottom 95% woke up and contributed and vote more often... The really big impact of unions was not so much on collective bargaining, but the advised use of their political funds.

Now the trade unions of business, the Chambers of Commerce, the Business Roundtables, the Restaurant Associations of America, are almost the sole bidders for sponsorships. As Bruce Bartlett well said, this has moved the political opportunists from one side to another, and this has helped a lot the receiving side.

«We have already started retirement accounts for our children (we haven't told them!) because we think they are going to get screwed, unless they end up in a very small elite (the top 5%).
How is that for pessimism?»

Well, that is not pessimism, it is fairly wise anyhow.

But if either the less rich find a bit of backbone and leadership, or the richest discover that Ayn Rand moral theory is perhaps a bit too self serving, things could improve a lot.

[save_the_rustbelt]

"...But those don't own the government, they just lease it via an ongoing sponsorship programme...."

Best phrase of the day.

[hinz]

Why are the republican economists so loud these days. They want an inflationary spiral and stagflation ? We already tried that in the 70's. We are now at the turning point - inflation is accelerating. We either stop it now or we wait until 14 % interest rates are required and the stock market goes nowhere for the next generation ( actually we may already be at that one).

Where is the free trade. Is the currency devaluation debacle between competing mercantilists free trade ? Should we allow the Japanese and Chinese and Germans and whoever wants access to our markets to sell 10 X more in the US than they will buy from us ? Where is the demand for American goods that will balance it out ?

A trade imbalance like we are running is not trade.

Economists generally, are unable to put a value on non-monetary items. What is the price of freedom ? Does the lopsided transfer of goods with communist China increase our security and help secure our freedom ? The economic numbers indicate that it does not.

Does it increase our health ? Again, health care access in the US is falling. What is the cost of a less healthy America.

Is the American market "free" in the sense of cost of the infrastructure that supports it. It is not "free". There is a value, a store of wealth imbedded in our markets that the Republican economists do not value. Currently, I say that wealth is being harvested, given away, leaving Americans poorer for it. Don't it always seem, you don't know what you've got till it's gone.

One school of economists believe that stable prices are the key to sustainable economic growth. Sensible increases in the supply of money. Fair, not lopsided, trade with our neighbors. A large and stable middle class.

I don't think there is a good example in all of human history in which the full value of life, economically and otherwise, was attained with excessive wealth concentration.

[Blissex]

«"...But those don't own the government, they just lease it via an ongoing sponsorship programme...."
Best phrase of the day.»

Too kind, but as I argued that means that sponsorship is really up for grabs, it is not an irretrievable situation.

Note also that the sponsors of the republicans prefer to lease the government because of the cash flow and tax advantages :-).

[algernon]

James Kroeger,

You can't optimize anything very long by distorting the language with which economic participants communicate--to wit, prices. Accurate prices are the sine qua non of economic health.

[jalrin]

When I was a Poli Sci undergraduate, one of the first books they made us read was Aaron Wildavsky's Implementation which recounted the Commerce Department's efforts to use the techniques used to develop rural areas to revitalize Oakland, California in the mid 1960's and the 1970's. While the project was promising, it failed because the designers did not bother to consider the practical details of actually administering the plan before they started (hence the title of the book).

Economists remind me of those Commerce Department officials. They have been so certain that they know what is best with their globalization delusions, that no amount of actual reality seems to break through. The economics profession needs to wake up and realize that the compensation schema is junk unless the compensation actually materializes.. How are we supposed to sustain a compensatory regime if we first make its targets so powerful that they can do almost anything they want?

[dryfly]

I don't blame economist for globalization anymore than I blame astronomers for asteroids hitting the planet.

And in general I agree with STRB & the pig through the python analogy... that this too shall pass.

The one area I think economists are missing the boat - and they shouldn't - is that globalization is a mega event. A world changer forever. Economists are alive and witnessing a process as profound as when man went from hunter gatherer to agriculture or the industrial revolution.

And they are alive for it - here and now. The space outside their window is the laboratory where it is all happening. Economists generations from now would give their first born to be able to tease from stale data what today's economist can open their eyes and just *SEE* if only they would look.

Imagine walking the moors during the Great Clearances or stroll through Birmingham or Liverpool at the peak of the Industrial Revolution... and watch how people then actually lived, what they bought, consumed and threw away. Asking them questions and observing their behavior - real time.

We can't do that with those past events now. Today we can only guess from records & a few personal accounts. And from digs.

But a savvy economist can do that with globalization - today. Walk the factories of Shanghai - see the new 'Great Clearances' taking place in rural China, India, Meso America. Ask people what they think, why they do what they do.

They should be recording & measuring & putting it all down for scholars generations from now - besides taking a stab at analyzing it themselves. Basic observation. Things like how raw material gets to a factory in China... how the laborers migrate in from everywhere (and why)... how the capital plant & technology all come together... also from around the world... and how the electronic markets & central banks & hedge funds tie it all together, become the drivers.

I mean I think of how stuff moves around the planet I wonder is there really profit it this & how does the value flow - really flow - as the accounting doesn't necessarily capture it.

A few hundred years from now it will all be as mysterious as the Silk Road unless people wake up and pay attention & start observing, measuring & archiving the details (not just the aggregated data found in gov't & NGO reports).

[js paine/slink]

mark writes:

"On the theoretical front
I am thinking of the Taylor principle"

could anything be more important

firm level pricing behaviour
is not well comprehended
by any model and yet
the fed must act

to taylor or not to taylor

is there such a thing
as pre emptive precision

a soft landing
that's not luck

u might guess i have my questions
about the manner and fineness of control
over credit flows
really possible
simply thru raising ands lowering a policy rate

except in as much as its a signal
of an intentionby hook or crook
to change credit expansion rates
either up or down
channel by channel
market by market

at any rate thanx

your field focus is the fed
you carry no klass axe
i value your view
a great deal

[Ninjaplease]

Re: Dryfly,

If economists were to look out their window and see how most people experience globalization, they would be forced, if they were logical, to abandon any hope that globalization has ANY BENEFIT to regular people.

If you're an investor, it's fantastic.

If you're a worker, it's quite possibly the worst concept ever implemented.

The "Trust me, this pain is going to translate into a low-priced goods, high-value jobs bonanza" argument is worthless.

Please, never confuse science in which hypothesis must be proven or disproven with economics, and never ever ever call any economic theory a "Law" unless you're referring to Fraud or Grand larceny.

[Jason Shafrin]

Economist's arguments are not exciting to the general public because they are discouraging. Life involves tradeoffs?!?! Decreasing taxes while raising spending is not feasiable ad infinitum?!?!

Politicians promise much while having little evidence that their plans will bring success. Economists promise little, but do present rigorous evidence for their causes. Most people prefer listening to the former than the latter.

Economists do have an important role to play. Globalization may have reduced the amount of textile firms in the U.S., but it has also drastically cut the price of clothing for U.S. consumers. Economists must continue to fight to make people realize that just because people losing their jobs makes a more compelling news story, we must not forget the benefits trade liberalization has on our economy. Further, economists must always focus on analysis of the alternatives. Would protection of un-competitive American industries be good for the U.S.? This is likely true for certain individuals in the short run, but not in the long run.

Economists are caught in a catch 22: the problem is that in order to convince the general public that economists have valuable insights, economists must act more like politicians. However, if economists act more like politicians, they will lose their credibility.

[juan]

Ahh, globalization.

Lets see what 'comrade Trotsky' had to say in *1914* -

"The forces of production which capitalism has evolved have outgrown the limits of nation and state. The national state, the present political form, is too narrow for the exploitation of these productive forces. The natural tendency of our economic system, therefore, is to seek to break through the state boundaries. The whole globe, the land and the sea, the surface as well as the interior has become one economic workshop, the different parts of which are inseparably connected with each other. This work was accomplished by capitalism. But in accomplishing it the capitalist states were led to struggle for the subjection of the world-embracing economic system to the profit interests of the bourgeoisie of each country. What the politics of imperialism has demonstrated more than anything else is that the old national state that was created in the revolutions and the wars [5] of 1789-1815, 1848-1859, 1864-1866, and 1870 has outlived itself, and is now an intolerable hindrance to economic development.

The present war is at bottom a revolt of the forces of production against the political form of nation and state. It means the collapse of the national state as an independent economic unit.

The nation must continue to exist as a cultural, ideologic and psychological fact, but its economic foundation has been pulled from under its feet. .."

I would hope that the contradiction exposed - between the global economic and the national political - might be understood as a discontinuous process of combining and uneveness inherent to a system which must expand/overexpand, might even lead to a questioning of cherished assumptions.

[bakho]

The US has been underinvesting in its infrastructure and education for a long time. Why are poor urban and rural schools acceptable? Why are large class sizes acceptable? Where is the univeral internet wireless access?

Where is the investment in energy efficiency? Where are the programs to retrofit our buildings for alternative energy? Where are the programs to upgrade our water and sewer infrastructure? Why are we spending so much on our military and so little on our infrastructure?

Certain types of good paying jobs cannot be exported. Many of these build infrastructure at home. Because we are underinvesting in infrastructure, we are short on good paying jobs and infrastructure that can be used to support better paying jobs. To adequately do the job requires more revenue and that revenue would be transferred from the wealthy to workers in a manner that would expand the economy and benefit everyone.

[jalrin]

Dryfly,

Economists cannot go out and measure the things you describe because that would be too empirical. Economics rest its claim to superiority over the rest of the social sciences on their mastery of what my intorduction to Economics textbook called the "rigors of deduction." Pedestrian measurement is for sociologists and political scientists who do not have to come up with ways to make markets look like gods.

[js paine/slink]

"a discontinuous process
of combining and uneveness
inherent to a system
which must expand/overexpand....."

very abstract my friend

the trot lode stones
uneven and combining
have a specialized "wide ' application
among the acolytes of lthat firey red thinker

but they come off oddly
to non sectarian ears

unlike equally indistinct
talk
of dynamics
and entropy
orr the ree c's
catastrophe
chaos complexity

etc etc etc

these are perfectly useful frames
i suppose especially
when unevenly combined
with discontinuity
who knows
they might lead u
to an insightothers can't get to
but they are not an insight in themselves

any more then havng a shovel
that can dig into hill sides
is the discovery of a gold seam

btw and fwiw

quoting comrade trotsky
when he's hardly sounding
a unique perspective
way drag in
too much agenda

it displays
" cherished assumptions"
that might block a blog sphere
good hearted readership

quote some lesser soul
or pair of lesser souls

make the same point
of course
but without the 77 trombones

-----------------------------
you have helped the cause however
by
displaying
a fully realized
globalization meme
from back
in the great war era

we all need to recall
just how old
this nation state vs the world economy
"contradiction"
might really be

[js paine/slink]

dry fly

"I think of how stuff moves around the planet I wonder is there really profit in this & how does the value flow - really flow - as the accounting doesn't necessarily capture it"

nice open minded comment

[James Kroeger]

Blissex:This is just handwaved mumbo-jumbo: wages may well go up, but which will go up more than inflation and which less? That depends on the bargaining power of the workers affected.
I guess that when you made this statement you forgot that if/when Congress creates and maintains a labor shortage, the bargaining power of workers would be at an optimum; even unskilled workers would have significant bargaining leverage for the first time. Labor unions would actually begin to thrive again, since it would be much easier for them to negotiate favorable contracts. No, I'm not dreamily assuming this; I understand markets and so should you. In a labor market where there are more jobs available than there are people to fill them, workers are going to enjoy the optimal amount of compensation that is possible in a market economy, period.

It would be a relatively simple matter to provide government subsidies to those on fixed incomes. The only challenge here is coming up with accurate measures of inflation as it affects different income groups. That also is an extremely 'doable' undertaking.

In light of the above, I guess you can understand why your thread of reasoning concluding that landowners and shop owners would have market power over wage earners sounds like so much 'handwaved mumbo-jumbo' to me. :)

Here's the full argument...

[James Kroeger]

algernon:You can't optimize anything very long by distorting the language with which economic participants communicate--to wit, prices. Accurate prices are the sine qua non of economic health.In market economies, prices change. In healthy market economies, there is at least some inflation. I'll give you the historical record some day.

There is nothing that an economy featuring robust inflation (5%-25%) would impose on us that is not already imposed on us in our 2%-3.5% inflationary economy. Things just move a little quicker. When Epstein pointed out that "...moderate rates of inflation, inflation up to 20% or more, has no predictable negative consequences on the real economy: it is not associated with slower growth, reduced investment, less foreign direct investment, or any other important real variable that one can find..." he was telling us that investments continued to be made in the economies he studied, and projects were still planmed and financial people got by some how.

Bankers and finance professionals might have more uncertainty about future earnings/returns, but they will still make loans and they will charge premiums to cover some of that uncertainty. But none of that imposes an intolerable burden on the finance community, especially when you turn and take note of the fact that everyone is working and crime is dropping and people are richer in real terms than they ever were before.

Keeping millions of people unemployed in order to minimize the Uncertainty Of Return that bankers and financial investors have to deal with is an insanely stupid way to run an economy.

[James Kroeger]

If economists were to look out their window and see how most people experience globalization, they would be forced, if they were logical, to abandon any hope that globalization has ANY BENEFIT to regular people...If you're a worker, it's quite possibly the worst concept ever implemented.Ultimately, the problem with Free Trade is not that it eliminates jobs; after all, firm investments in machinery do the same thing. When fewer people were needed on the farm to produce the food we needed, more people became available to produce cars and refrigerators and airplanes. More desirable things are produced and become available for our consumption. As they become more plentiful, they become less expensive, more affordable.

Looking back over our economic history, it's just not possible for us to rationally dispute this fact. However, the benefit provided by free trade cannot be optimally enjoyed unless all those who lose their jobs to foreign competition are re-employed in other efforts to produce Real Wealth. Unfortunately, we cannot count on The Marketplace to make that happen.

Congress, however, can make that happen. If it were to increase its spending enough (on human capital investments and infrastructure), more jobs would be available than there are people to fill them. In that kind of jobs environment, wage earners would be in the driver's seat...

[Blissex]

«Economists promise little, but do present rigorous evidence for their causes.»

HAHAHAHAHAHAHAHAHA! This is one of the most ridiculously self serving, shameless examples of humbug I have seen in a long while.

To which economists does your statement apply?

Most economists I hear usually promise a lot, and support their promises with Debreu/Lucas based theorems. Enough said...

«Economists are caught in a catch 22: the problem is that in order to convince the general public that economists have valuable insights, economists must act more like politicians. However, if economists act more like politicians, they will lose their credibility.»

Very very funny too! Because economists surely don't act as politicians, oh no...

There are some reasons why economists do get an audience: one is that a skeptical public still hopes that credentials matter; another is that some economists occasionally have some data to mention. But usually it is that most economists are moderately good at being ''high brow'' politicians :-).

[johnchx]

STR wrote: "If there was one huge problem we could probably solve it, but this is an intricate puzzle with lots of pieces and I don't we have the will or the smarts to solve the puzzle."

Excellent point.

To push Mark's medical analogy a little further, asking economists to "fix" the economy (in the sense of fixing the income distribution the economy creates) is a bit like asking a doctor to change the sex of a one-week embryo.

We know a certain amount about embryos and how they develop. But most of what we know is about how the process can go awry. We know about a lot of things you *shouldn't* do, in order to avoid certain kinds of negative outcomes. But that doesn't mean that we know enough to successfully alter the course of "normal" development to get the specific results we'd like. We can't give an embryo blue eyes, or change its sex; we don't know how, and if we tried, we'd surely make a mess of it.

The "state of the art" in economics isn't too different. We know about certain things that cause harm, and most economic advice is negative: don't do X, because it leads to hyper-inflation; don't do Y, or you'll get shortages and black markets. But the fine details of the development of an economy...the Sheffield cutlery districts, the internal combustion engines, the iPods and pet rocks and mood rings...are as surprising and mysterious to economists as they are to anyone else.

dryfly wrote: "They should be recording & measuring & putting it all down for scholars generations from now - besides taking a stab at analyzing it themselves. Basic observation."

Another excellent point. I suspect that some of this is being done, but we could probably do a lot more. I'd particularly like to see observations at different scales: micro-studies of individual villages, households and small firms, as well as the macro-trends a the regional, national and global levels.

[MarkedExcess]

Economists Without Answers should stop advocating trade policies that aren't working.

That's the answer...

[Richard]

Mark,

You make an analogy between the medical profession and the economic profession. I'll grant you the (perhaps dubious) analogy. But one thing that the medical profession has achieved which the economic profession has not is a clear vetting of rigorous research versus more dubious claims. Claims about home remedies are roundly criticized by physicians; even lucrative excesses of pharmaceuticals are given caustic reviews in JAMA. But does the economic profession speak with one voice about supply-side economics, and is any such unity conveyed to the media? Are economists in private practice willing to back good research or what is good for the bottom line?

The public trusts professionalism only to the extent that such professionalism seems empirically grounded, and the members of its profession are willing to uphold such research even when it forgoes short-term gains.

[johnchx]

Richard wrote: "But does the economic profession speak with one voice about supply-side economics, and is any such unity conveyed to the media?"

I'd say yes, and yes. And the media doesn't care.

To further elaborate the analogy, media coverage of economics is very much like media coverage of the science of diet and nutrition. The "accepted" professional advice on these topics is well known and rather dull. So the media -- that is, the *entertainment industry* -- brings us an endless parade of fads and "alternative science."

And yes, behind every fad diet is a credentialed M.D., to the continuing annoyance and embarrasment of the mainstream of the profession.

[johnchx]

MarkedExcess wrote: "Economists Without Answers should stop advocating trade policies that aren't working."

Well...that's a little like saying, "If you can't tell me how to give my baby blue eyes, stop telling me not to drink during the pregnancy."

[Movie Guy]

U.S. Economy - Who, What, When, Where, Why, and How

Mark,

Appreciate the discussion. It's a positive step toward creating greater openness on major issues and concerns.

In my judgment, it would help if you would consider framing the presentation differently.

The issue isn't simply whether economists have the answers to x,y,z. Broader considerations are the primary issues, though the lack of substantial opinions and statements by economists on occasion create concerns. Let's break it down into workable groupings.

The primary issues for understanding the performances of the United States economy are:

(1) what are the national economic policies, are they sound, and if not, why not;
(2) what were the near-term subsequent adjustments to the national policies;
(3) were those policy adjustments successful and in whose opinion;
(4) which entities of the economy benefited the most from such policy adjustments, and are the economic gains distributions fair and balanced, or as fair and balanced as possible;
(5) do further policy adjustments need to be made and why;
(6) is accountability for economic policy decisions clearly defined, and do key economists have any skin in the game;
(7) is the United States receiving the best economic policy advice and consent from its economists, are their views aired openly and concisely to the public, and are they thinking clearly from macro to micro perspectives with primary focus on U.S. economic needs and desires, including those of all of its citizens;
(8) is the United States suffering from groupthink among its economists, and if, how is this problem corrected (groupthink definition by Irving Janis - "A mode of thinking that people engage in when they are deeply involved in a cohesive in-group, when the members' strivings for unanimity override their motivation to realistically appraise alternative courses of action.");
(9) do U.S. economists suffer from excessive peer pressure in public forum communications, publishing, and thinking, and if so, how do we stop these fraternity club practices; and
(10) most importantly, how does the United States build the most viable and equitable economy for its citizens, their standards of living and its businesses going forward, and are national economic policies aligned to maximize support for such national goals.

I would like see such discussions for each major national economic policy. Otherwise, comments are swirling around in the wind and I'm not convinced that there is as much value in that type of exercise. We never take the time to briefly summarize each national economic policy from a macro to micro perspective, creating an future use outline for proper understanding. We should change that in the interests of all readers and participants.

I recommend that separate master posts be created for each major national economic policy, including the government url links for (1) and (2) above. Then add existing analysis by think tanks and key economists (provide subject url links only), and thereafter engage in poster discussions with a reasonably sound footing.

The master posts could be bundled together under a sidebar or top anchored post link titled "National Economic Policies" which could be easily accessed by posters. Posters could continue to build on these policy discussions as opposed to watching such efforts get buried under newer posts, which is too frequently the case in blog communications.

A list of national policies posts could include (at a minimum):

Currency Valuation Policy
Deficit Financing and Public Debt Policy
Economic Development Policy
- Small and Mid-size Business Development Policy
- Education Policy
- Research and Development Policy
- Business Investment/FDI Policy
Environmental Policy
Infrastructure Policy
- Energy Policy
- Transportation Policy
Income Inequality
Labor Policy
- Labor Standards Policy
- Minimum Wage Policy
- Immigration Policy
- Unemployment Compensation Policy
Monetary Policy
National Defense Policy
Social Services Policy
- list all social services subpolicies
Taxation Policy
- Personal Taxation Policy
- Business Taxation Policy
- Investment/FDI Taxation Policy
Trade Policy
- Domestic Trade Policy
- International Trade Policy

[Lord]

I do wonder if we are underinvesting in education and R&D. Since taxes absorb a third of income, government should provide at least a third of educational costs. Do they? We over rely on markets to solve all our problems, but it was a communist country that brought us into the space age.

[Movie Guy]

Yes, it's true that I didn't fully round out the policies list above. For example, I overlooked at Water Supply Policy, Wastewater Treatment Policy, Waste Disposal Policy under Infrastructure Policy.

It's just a rough outline.

[JRossi]

Listen attentively, smile and nod, not engage. Except for the listen attentively part, you could be a doctor!

[Movie Guy]

Mark,

Here's an example of what I am suggesting for master posts of each major national economic policy:

U.S. Taxation Policy

Background

Major Federal Tax Bills
Omnibus Budget Reconciliation Act of 1993
Small Business Job Protection Act of 1996 - (I haven't found a good summary for this tax bill, but this is an example of including the correct background reference, though I have provided good source info thus far.)
Tax Relief Act of 1997
Economic Growth and Tax Relief Reconciliation Act of 2001
Job Creation and Worker Assistance Act of 2002
Jobs and Growth Tax Relief and Reconciliation Act of 2003

Analysis of U.S. Taxation Policy - Questions:

(1) Is U.S. Taxation Policy sound, and if not, why not;
(2) what were the near-term subsequent adjustments to national taxation policy; [see CBPP and TPC for updates]
(3) were those policy adjustments successful and in whose opinion; [see CBPP and TPC for updates]
(4) which entities of the economy benefited the most from such policy adjustments, and are the economic gains distributions fair and balanced, or as fair and balanced as possible; [see CBPP and TPC for updates]
(5) do further policy adjustments need to be made and why; [see CBPP and TPC for updates]
(6) is accountability for U.S. Taxation Policy decisions clearly defined, and do key economists have any skin in the game;
(7) is the United States receiving the best U.S. Taxation Policy advice and consent from its economists, are their views aired openly and concisely to the public, and are they thinking clearly from macro to micro perspectives with primary focus on U.S. economic needs and desires, including those of all of its citizens;
(8) is the United States suffering from U.S. Taxation Policy groupthink among its economists, and if, how is this problem corrected (groupthink definition by Irving Janis - "A mode of thinking that people engage in when they are deeply involved in a cohesive in-group, when the members' strivings for unanimity override their motivation to realistically appraise alternative courses of action.");
(9) do U.S. economists suffer from excessive peer pressure in public forum communications, publishing, and thinking on the subject of U.S. Taxation Policy, and if so, how do we stop these fraternity club practices; and
(10) does the current U.S. Taxation Policy provide for a viable and equitable economy for its citizens, their standards of living, and its businesses going forward, and is U.S. Taxation Policy and other national economic policies aligned to maximize support for such national goals.

Think Tank Analysis:

Center for Budget and Policy Priorities (CBPP); and here
Tax Policy Center (TPC)

Further Analysis:

(Your remarks or other selected references.)

Poster Comments:

[It appears that using such a format makes sense. It doesn't have to be a lengthy initial main post. But it could be a OneStopShop for info on the national policy under review.

I believe that (1)-(6) and (10) should always be included in the above list of general questions. Obviously, the think tank list will grow or shrink depending on the level of interest expressed by such groups. And your Further Analysis, however brief or extensive sets the stage for a good discussion.

The beauty of the initial post structure is that your original post can be updated (as you do with other main posts) and you can bring it back front and center to the blog discussion anytime you desire - you can set it up to pop right back in the existing line up of posts (something I haven't seen you do thus far).

I hope that you give this approach some consideration. Quite a few of us are tired of hunting and seeking old information that has been posted, and we know that summaries do not exist as master posts don't exist. This is a general weakness among most econ blogs. And the pace of adding new posts is fairly astonishing. So, it's easy to lose track of posts, even with your existing Categories.

Master posts on key subject matter would help. National policies could be a good starting point.

You can't imagine how many individuals have discussed this matter in emails and on the telephone.]

[anne]

JRossi

"Listen attentively, smile and nod, not engage. Except for the listen attentively part, you could be a doctor!"

Nice, and I am trying :)

[JRossi]

I have no problem with economists not having all the answers. My problem is the unjustifiable confidence with which economic and political(not your field, I know)diagnoses and prescriptions seem to be promulgated in the press. And I'm really not blaming the economics profession for this--it's really probably a problem with journalism more than anything else, but it is bothersome. And as someone not in the field, whom should I believe? Economists would increase their prestige and credibility if they would be more cautious when speaking to the public. Robert Shiller is exemplary in this respect. I heard him on NPR talking about the housing market several weeks ago. He said several times that no one knows really what will happen in the near term. He talked about balance of probabilities and past patterns. He didn't help me to decide whether to buy or sell a house, but he didn't insult my intelligence either.

[anne]

Lord:

"I do wonder if we are underinvesting in education and R&D. Since taxes absorb a third of income, government should provide at least a third of educational costs. Do they?"

Yes; we are underinvesting, but in what way and might we know by how much? Interesting and important to think through....

[Winslow R.]

I agree blogs could use another round of evolution. I'd add additional statistical feedback on comments would allow posters to see if comments are being 'heard' but great blog already.

I'd like to have seen economists give alternatives ways to Keynsian spend our way out of the 2001 slump. Was it only a choice between a 'mission to mars' and 'invading iraq'? How about a 1000 economists signing a document saying lets spend 2 trillion on ______ instead?

James Kroeger offers an alternative policy with 'full employment' just needs to make it a price stabilization policy instead of an inflationary policy to avoid getting bogged down but why is he not 'engaged' in a meaningful discussion? Have we had a 'full employment' post yet?

[Tymbrimi]

The economy, and the policies that created it, are just perfect. Exports are up 40% from the previous year. :) Productivity growth, one of the most important of economic metrics, is the highest it's been in decades. :) We have full employment, and wage growth is accelerating, especially at the lower levels. If Republicans can maintain their control of Congress, America will be well served. :)

U.S. output and capacity rise for June
The 0.8 percent jump in output could signal inflation to the Federal Reserve.
July 17 2006: 9:40 AM EDT
WASHINGTON (Reuters) -- Output at U.S. factories, mines and utilities rose by a bigger-than-expected 0.8 percent in June and capacity use also topped expectations in signs of a hot economy that could weigh on an inflation-wary Federal Reserve.

Capacity use rose to 82.4 percent, the highest rate since 82.5 percent in June 2000, the Federal Reserve reported on Monday.

Analysts were expecting a 0.4 percent gain in industrial production and a capacity use rate of 81.9 percent.

The 6.6 percent rise in industrial production in the second quarter was the largest quarterly rise since a 7.7 climb in the fourth quarter of 1999.

The 82 percent capacity use rate for the April-June quarter was the highest since an 82.6 percent use rate in the second quarter of 2000. Manufacturing output in June rose at 0.7 percent on gains in automotive production, while mining output jumped 1.2 percent and utilities output climbed 0.7 percent.

Manufacturing capacity use was 81.1 percent, the highest since May 2000.

Find this article at:
http://money.cnn.com/2006/07/17/news/economy/output.reut/index.htm

[James Kroeger]

Winslow:James Kroeger offers an alternative policy with 'full employment' just needs to make it a price stabilization policy instead of an inflationary policy to avoid getting bogged dow...Maybe so, Winslow, but I really think it is necessary to fight the INFLATION IS EVIL argument head on in order to win the day for a full-employment policy. It is simply not the horror it is made out to be. No, I'm not recommending Robust Inflation as an end in itself, but am simply saying that IF spikes in inflation rates between 5%-25% are necessary in order for us to obtain a sustained, modest labor shortage, then we should eagerly embrace that bargain.

In fact---although I haven't found a way to argue it properly just yet---I think it may be possible to sustain a general labor shortage while keeping average inflation rates in the upper-single-digits through the use of intelligently designed credit controls that absolutely limit the quantity of dollars that lending institutions (including non-banks) can lend out. (The Chinese seem to be doing even better than that with their sterilization bonds and key price controls.)

The 'inconveniences' that are associated with higher inflation rates seem extremely minor when you consider the extraordinarily positive benefits that society gets to experience (e.g., end of poverty-as-we-know-it) if it simply accepts those extra inconveniences/uncertainties.

[gordon]

Though I've got a lot of sympathy for Movie Guy's proposal for master posts, there is a lot of detail there which may be hard to organise. It's also sensible to take a really broad view and then work down, like this post from Fred Argy (written in and for Australia, but relevant to the US too).

[Winslow R.]

"I really think it is necessary to fight the INFLATION IS EVIL argument head on "

Full employment and inflation need to be disintangled as much as possible. I'd limit the argument to whether full employment requires any inflation (it doesn't as WWII proved) or could full employment be used to stabilize the price of labor (with a labor pool).

There may be a 'cost' to inflation but why would 'full employment' require inflation?

Mark does have some company:

On the Cost of Inflation

"...What about more modest inflation experiences? Stanley Fischer, using money demand estimates for the United States, calculated that lowering the inflation rate from 10 percent to 0 percent would generate a welfare gain of between 0.3 and 0.8 percent of output.3 While this figure may seem fairly modest, when applied to U.S. GDP for 1999, it implies a deadweight loss of between $28 billion and $74 billion.... "

http://www.clevelandfed.org/Research/com2001/0515.htm#three

[Mark Thoma]

Movie Guy:

It would be nice to have a running summary of issues, policies, etc.

This seems perfect for a Wiki. I am getting ready to teach a class next week and am in the process of pre-filming all my lectures to post (it's a monetary theory class) as a trial so I am pretty pushed for time and will be for the next five weeks. [It's pretty strange talking to a camera -- I set it up in a classroom with just me and the camera -- so we'll see how it goes. But I'm hoping the students will get more out of the class this way even though I'll have to accept that attendance will be down - particularly since it's 8-10 am]. But if someone wanted to set a Wiki up, I would try to help.

Mark

says...

Frankly, I find Movie Guy's detailed comments or outlines impossible to follow and prefer the blog just as it is which is entirely excellent.

says...

Clearing what I meant: simplicity on the internet is always welcome. This blog is entirely simple to access and read and search. There is no clutter.

[nyuk]

I find the "robust inflation" chatter amusing as long as it isn't coming from the Fed.

[James Kroeger]

I find the "robust inflation" chatter amusing as long as it isn't coming from the Fed.While you're chuckling to yourself, read what Epstein has to say about inflation rates that I call 'robust.'

[James Kroeger]

Full employment and inflation need to be disintangled as much as possible.

Perhaps a Full Employment Policy that promises "no inflation" would be more readily embraced before a Full Employment Policy that says "it doesn't matter if there is inflation." The first can be achieved by 'price setting' but I have to say that I have a [somewhat inchoate] bias at this time against government efforts to set the base price of labor.

Let's just say that the idealist in me prefers to create a labor market that doesn't 'just' eliminate unemployment, but which also gives employers a continuing incentive to curry the favor of their employees. But if it's that important to reassure detractors that full-employoment can be achieved without adding to inflationary pressures, then I'm all for it, Winslow...

[Winslow R.]

"The Conservative belief that there is some law of nature which prevents men from being employed, that it is 'rash' to employ men, and that it is financially 'sound' to maintain a tenth of the population in idleness for an indefinite period, is crazily improbable -- the sort of thing which no man could believe who had not had his head fuddled with nonsense for years and years"

Keynes

The only fuddleness I've noticed on this site is the view that the savings rate is 1:1 linked to the rate of growth of GDP.

[gordon]

Surely there is a generational thing going on with the inflation debate. The current generation of policymakers grew up in the 1970s when "stagflation" was the great economic problem. They are still fighting the battles of 35 years ago.

[Movie Guy]

If we did have summaries of U.S. national policies, we would be ahead of the game.

I believe such an effort could move the discussion up a level or two.

[Ninjaplease]

When the benefits of a concept, product, practice or service are not self-evident to the people who will be facing its effects, you're a salesman, trying to convince people that "they need" this or "its good for them." Maybe you're right in the long term AFTER this transitional period, but the way the system is setup, its to remove the bargaining power of workers and to drop wages.

HOW LONG IS THE TRANSITIONAL PERIOD?

WHEN WILL WE BE OUT OF IT?

WHY DIDN'T YOU PUT THE TRANSITIONAL STAGE WARNING LABEL ON YOUR GLOBALIZATION PRODUCT?

And with globalization, the used car you're pushing sucks.

[Winslow R.]

"So, this copy of the comment I threw together is intended to get the conversation started and encourage others to contribute thoughts, not be the final word on the topic:"

Only suggestion I see is true 'full employment' and not some number pulled from a hat but 0%.

Well, so much for a conversation you 'fuddled heads'. :)

[Barry]

Richard wrote: "But does the economic profession speak with one voice about supply-side economics, and is any such unity conveyed to the media?"

Johnchx: "I'd say yes, and yes. And the media doesn't care. "

Not really. One example would be Brad DeLong and Greg Mankiw. Brad beat up Greg for serving (wh*ring) for Bush, and even moreso once Greg got back to Harvard, and still repeated the Bush lie. However, Brad also recommends Greg's blog as one of the top sources of eonomic information. Since Brad has also stated that he doesn't have time to read sources which have proven to be liars, this is a contradiction. It seems that members of the 'brotherhood' have special rules.

[juan]

paine/slinky -

the point, as you finally noticed, was/is to do with something called the political vs something called the economic ,, Trotsky's statement of *1914* was certainly not grasped at that time, nor, as you demo, this time either. For example, we use national economic data no matter that this has become very anchronistic, an anachronism that's assisted in the further transform of economics into progressively more simplistic ideology progressively less able to even serve that, its primary function

Yes, if you want to grasp the system as it is, you must at least attempt to comprehend its motion, its inherent dynamics, themselves contradictions, something at which mainstream economics has proven to an abject failure.

Yes again, the process - there's that word - of combining drives uneveness; they interact, they contradict, they are unified, they move, and not as a sequence of photographs. Study the development of the organizational form called 'multinational' and somewhat more recently, 'transnational', as a concrete result and cause of capitalism's expansion. Study as well what has opposed and limited this and how the contradiction between national and global has led to greater degrees of state capitalism along with heightened nationalisms and sub-nationalisms,,conflicts,,,wars. Spend a few decades at it.

Nothing whatsoever 'cherished' about it other than its relation to observed reality, again something that mainstream econ failed at from at least the late 19th c. to date,,or perhaps you expect that supply/demand curves, general equilibrium, etc. are real no matter how disconnected. Then we are truly in the world of too abstract, a world that's failed to integrate the macro and micro for reasons of that 'world's' poor methodologies, false (though generally unquestioned) presuppositions and assumptions.

(Neoclassic-in general) economists have no answers for the very simple reason that they have not as yet understood the system which formed them; again perfectly understandable when the history of this 'economics' is studied in at least some depth. Which, you see, did happen to be the point.