Real-World Economics Review Blog

from Lars Syll

Econometricians typically hail the evolution of econometrics as a “big success”. For example, Geweke et al. (2006) argue that “econometrics has come a long way over a relatively short period” … Pagan (1987) describes econometrics as “outstanding success” because the work of econometric theorists has become “part of the process of economic investigation and the training of economists” …

These claims represent no more than self-glorifying rhetoric … The widespread use of econometrics is not indicative of success, just like the widespread use of drugs does not represent social success. Applications of econometric methods in almost every field of economics is not the same as saying that econometrics has enhanced our understanding of the underlying issues in every field of economics. It only shows that econometrics is no longer a means to an end but rather the end itself. The use of econometric models by government agencies has not led to improvement in policy making, as we move from one crisis to another …

The observation that econometric theory has become part of the training of economists and the other observation of excess demand for well-trained econometricians are far away from being measures of success … The alleged success of econometrics has led to the production of economics graduates who may be good at number crunching but do not know much about the various economic problems faced by humanity. It has also led to the brain drain inflicted on the society by the movement of physicists, mathematicians and engineers to economics and finance, particularly those looking for lucrative jobs in the financial sector. At the same time, some good economists have left the field or retired early because they could not cope with the success of econometrics.

Imad Moosa / RWER

Mainstream economists often hold the view that if you are critical of econometrics it can only be because you are a sadly misinformed and misguided person who dislikes and does not understand much of it.

As Moosa’s eminent article shows, this is, however, nothing but a gross misapprehension. Read more…

from Ikonoclast  (originally a comment)

n C21 Piketty was exposing the automatic outcomes of an axiom-based legal law, regulation and financial system. The real economy is a real system (obviously). The financial economy is a formal system whose operations are prescribed by its axioms. Our system of legal laws, regulations, financial rules and financial calculations (bookkeeping and national accounts) is a formal, prescriptive system founded on ideological property axioms and calculated out via prescribed operations in the numéraire (money or financial capital). The RWER article even happens to mention one property axiom of the modern system: the axiom “for unlimited private accumulation.”

The expression r>g was not put forward by Piketty as a “law”. He put it forward as a tendency under certain conditions. The full expression of the tendency was;

If r>g then inequality increases. Read more…

from Dean Baker

Apparently at the New York Times the answer is no. Elisabeth Rosenthal, who is a very insightful writer on health care issues, had a column this morning warning that we may face very high prices for a coronavirus vaccine. She points out that this is in spite of the fact that the government is paying for much of the cost of the research. Rosenthal then argues we should adopt a system of price controls or negotiations, as is done in every other wealthy country.

While her points are all well-taken, the amazing part is that she never considers the simplest solution, just don’t give the companies patent monopolies in the first place. The story here is the government is paying for most of the research upfront. While does it have to pay for it a second time by giving the companies patent monopolies.

There is no reason that the government can’t simply make it a condition of the funding that all research findings are fully open and that any patents will be in the public domain so that any vaccines will be available as a cheap generic from the day it comes on the market. Not only does this ensure that a vaccine will be affordable, it will likely mean more rapid progress, since all researchers will be able to immediately learn from the success or failures of other researchers.

It is amazing that this obvious route is not being considered in public debate. Government-granted patent and copyright monopolies are one of the main ways in which we generate inequality. Bill Gates would still be working for a living without them.

At a time when the country is newly focused on racial inequality, it is striking that reducing the importance of the factors that generate inequality in the first place is not even up for discussion. This is fitting with the good old “White Savior” theory of politics.

Rather than changing the government-created structures that generate inequality, they would rather have the beneficent government push policies that reverse some of the inequality government structures created in the first place. I suppose this route is more appealing to the liberal psyche, but it ignores economic reality, and also at the end of the day, is likely to be less effective politically.

from Steven Pressman and RWER issue no.92

Thomas Piketty established his professional reputation by using income tax returns to measure income distribution over long time periods in several nations. Long before Capital in the Twenty-First Century (hereafter C21) appeared, Piketty (2001; 2003; & Saez, 2003) showed that, in many capitalist countries, income flowed to the top 1% (really the top .1%). C21 made two new contributions – a theory to explain this phenomenon, r>g, and a policy solution, taxing wealth.

Surprisingly, C21 became an international best seller. Nonetheless, it was criticized by a broad array of economists. Heterodox economists objected to the economic theory Piketty used to explain rising inequality. Neoclassical economists disliked his policy proposal and understood that neoclassical economics didn’t support Piketty’s explanation of rising inequality. And many economists criticized Piketty’s data and his interpretation of the distributional facts (see Pressman, 2016).

Piketty’s follow up, Capital and Ideology, was published in France last fall; an English version appeared in March of 2020. There are many similarities between the two books. Both are massive tomes,¹ well-written and packed with economic data. Both use the term “capital” when really talking about wealth. Finally, literary references abound to support key points.

Despite these similarities, there are many changes. Gone are r>g and any analysis of inequality that rests on neoclassical economic theory. Capital and Ideology contains a different perspective on the causes of inequality. As its title proclaims, it is our beliefs that are crucial. Piketty undertakes a broad sweep of history to argue that the degree of inequality we get depends on how people see inequality and that this varies from time to time and from place to place. A progressive ideology, leading to greater equality during the 20^th century, ran out of steam by the end of the century. It was replaced by the view that markets increase human well-being. There is also a new policy proposal – broader representation on corporate boards.

This paper examines Piketty’s changing views on the causes of inequality and the policy solutions needed to remedy the problem. Section 2 provides a brief overview of some general perspectives on understanding income inequality. Section 3 focuses on how C21 views the causes of inequality. Section 4 then discusses the causes of inequality according to Capital and Ideology. Section 5 looks at key policy proposals to reduce inequality in both books. Section 6 concludes.  read more

 

from Lars Syll

Thus luxury is being hollowed out. For in the middle of general fungibility, happiness clings without exception to what is not fungible. No exertion of humanity, no formal reasoning can alter the fact that the clothing which shimmers like a fairy-tale is worn by the one and only, not by twenty-thousand others. Under capitalism, the utopia of the qualitative — what by virtue of its difference and uniqueness does not enter into the ruling exchange relationship — flees into the fetish character. But this promise of happiness in luxury presupposes once more privilege, economic inequality, precisely a society based on fungibility. That is why the qualitative itself turns into a special case of quantification, the not-fungible into the fungible, luxury into comfort and in the end into senseless gadgets. In such a circle the principle of luxury goes to pieces even without the leveling tendency of mass society, over which the reactionaries sentimentally fuss and fume. The inner composition of luxury is not indifferent to what useless things, through their total embedding in the realm of usefulness, experience. Its remainders, even objects of the greatest quality, already look like junk.

T. W. Adorno

from Girol Karacaoglu and RWER issue no.92

The growing disparity across generations, in their access to material sources of wellbeing such as income and wealth (including housing), has been well documented (Ingraham 2019, Wolf 2018). Figure 2 provides an example referring to the growing disparity of wealth across generations in the USA (Ingraham 2019).

As Ingraham explains, “baby boomers – those born between 1946 and 1964 – collectively owned 21 percent of the nation’s wealth by the time their generation hit a median age of 35 in 1990. Generation X (born from 1965 to 1980) came of age during the era of wage stagnation and growing inequality ushered in by the 1970s and ’80s.

When the typical Gen Xer reached 35 in 2008, his or her share of the nation’s wealth was just 9 percent, less than half that of boomers at a comparable point in life. Millennials haven’t hit the 35 mark yet – that won’t happen until about 2023 – but their financial situation is relatively dire. They own just 3.2 percent of the nation’s wealth. To catch up to Gen Xers, they’d need  to triple their wealth in just four years. To reach boomers, their net worth would need a sevenfold jump.”

In terms of sources of future wellbeing, there are emerging concerns on a much wider front than simply material sources: “Looking forward, there is no room for complacency. As storm clouds gather on the horizon, mainly from environmental and social challenges, all OECD countries need to take action if they are to maintain today’s well-being for future generations.  read more

from Lars Syll

Cody Fenwick: What drives the biggest misunderstandings about government debt in our national conversation?

Everything is wrong. The way we talk about federal government debt is, from my perspective, we say things like we’re borrowing from China and foreigners. Hillary Clinton said when she was secretary of State that it’s a national security threat. People talk about it representing a liability to all of us, so we hear people talk about “your share [of the national debt],”  a burden on future generations, that it ultimately has to be paid back, that it’s going to require higher taxes in the future. I could keep going.

So what connects all these misunderstandings? Are we thinking of the government too much like a household or a business?  Read more…

from Marshall Auerback and RWER issue no.92

In the daily TV press conferences that New York Governor Andrew Cuomo conducted throughout the spring, he referred to COVID-19 as “the great equalizer.” In the sense that anybody can be infected by the virus, the governor is right. Yet after several months, the data shows clearly the impact is unequally landing on the shoulders of people of color and all but the wealthiest. The health impacts and absence of economic measures to protect them are so extreme that Cuomo’s statements are more than hollow – they are cruel cover-ups.

If anything, COVID-19 has been little more than a novelty for the 1 percent and a dystopian nightmare for the rest of us. The U.S. now has the highest number of cases in the world. Nearly 2.1 million people have been infected by the disease and more than 115,000 people have died, according to data from Johns Hopkins University. Had we experienced a repeat economic crash more along the lines of what happened in 2008, that might have forced a true reckoning and consequent reform in our system. Instead, we have a pandemic that is facilitating public looting under the cover of a collective surgical mask as it is entrenching pre- existing inequities. A toxic mix of racial, financial, and geographic disadvantage is literally proving to be a death sentence. Read more…

from Dean Baker

The Washington Post ran a piece on how patterns of globalization may be changed due to the pandemic. It is more than a bit confused in not distinguishing short-term effects from long-term effects and its inability to distinguish between problems caused by fiscal policy and policies caused by the fallout from the pandemic.

The headline for the piece on the Post’s homepage is “Covid-19 is erasing decades of economic gains achieved through globalization.” The subhead is “The way we travel, work, consume, invest, interact, migrate, cooperate on global problems and pursue prosperity has likely been changed for years to come.”

Literally nothing in the piece supports the claim in the headline and insofar as items in the piece support the subhead it is at least as likely to be positive as negative. The gist of the piece is that we have seen a massive reduction in trade and travel as a result of the pandemic. While some of this may prove to be permanent, the piece gives us no reason to believe that the bulk of trade will not return to normal once the pandemic has been brought under control, either with effective treatments or with a vaccine.

In terms of travel, any enduring effect is likely to be largely positive. An enormous amount of resources is now wasted on business travel and conventions that can be just as effectively performed on-line. This realization will free up a large amount of resources for more productive uses, such as health care, child care, and stopping global warming. Of course, less travel by itself will be a big help in reducing worldwide  greenhouse gas emissions. Read more…

from Norbert Norbert Häring

A turmoil has engulfed the faculties of economics at the University of Chicago and Harvard. A German economist was first suspended on accusations of racism in Chicago, then rehabilitated. An article in Harvard’s flagship Quarterly Journal of Economics (QJE) is accused of a colonial attitude. The authors justify themselves.

The article describes how a German economist, Harald Uhlig,caused a vritable shitstorm, fuelled not least by Paul Krugman and Justin Wolfers, Even the former president of the US Federal Reserve and current chair of the American Economic Association, Janet Yellen, demanded publicly that Uhlig be relieved of his role as editor of the prestigious JPE, after Uhlig had made a number of callous remarks and provocative comparisons on his blog and on Twitter about protesters against the violent death of George Floyd and about the Black Lives Matter-Organization.

After a black economics professor tweeted that he had been sitting in Uhlig’s classroom in 2014 when Uhlig had first made derogatory remarks about Martin Luther King and then turned to him in a sarcastic manner to ask whether he might have hurt anyone’s feelings. The next day, the Federal Reserve Bank of Chicago suspended Uhlig’s consulting activities and the Chicagos Flaghip Journal of Political Economy (JPE) temporarily suspended his role as editor. However, on June 22 he was reinstated, after the University had judged that he had done nothing wrong. Read more…

from Dean Baker

from Lars Syll

When we cannot accept that the observations, along the time-series available to us, are independent, or cannot by some device be divided into groups that can be treated as independent, we get into much deeper water. For we have then, in strict logic, no more than one observation, all of the separate items having to be taken together. For the analysis of that the probability calculus is useless; it does not apply. We are left to use our judgement, making sense of what has happened as best we can, in the manner of the historian. Applied economics does then come back to history, after all.

I am bold enough to conclude, from these considerations that the usefulness of ‘statistical’ or ‘stochastic’ methods in economics is a good deal less than is now conventionally supposed. We have no business to turn to them automatically; we should always ask ourselves, before we apply them, whether they are appropriate to the problem at hand. Very often they are not. Thus it is not at all sensible to take a small number of observations (sometimes no more than a dozen observations) and to use the rules of probability to deduce from them a ‘significant’ general law. For we are assuming, if we do so, that the variations from one to another of the observations are random, so that if we had a larger sample (as we do not) they would by some averaging tend to disappear. But what nonsense this is when the observations are derived, as not infrequently happens, from different countries, or localities, or industries — entities about which we may well have relevant information, but which we have deliberately decided, by our procedure, to ignore. By all means let us plot the points on a chart, and try to explain them; but it does not help in explaining them to suppress their names. The probability calculus is no excuse for forgetfulness.

John Hicks’ Causality in economics is an absolute masterpiece. It ought to be on the reading list of every course in economic methodology.

from Peter Radford

The biography of Keynes by Zachary Carter ends on a decidedly wimpy note.  The concluding chapter is devoted to the financial crisis of 2008 and the subsequent half-hearted sort-0f-Keynesian policy response.  Whilst Carter seems fine with his condemnation of neoliberal policies and is clear about the abject failure of the notion that financial markets act in either a self-correcting or a rational manner, he then goes on to ask why Keynesianism has proven to be so politically weak:

“But pointing the finger at neoliberalism raises uncomfortable questions for Keynes and his defenders.  Why has Keynesianism proven to be so politically weak, even among ostensibly liberal political parties and nations?  The Keynesian bargain of peace, equality, and prosperity ought to be irresistible in a democracy.  It has instead been fleeting and fragile.  Keynes believed that democracies slipped into tyranny when they were denied economic sustenance.  Why, then, have so many democracies elected to deny themselves economic sustenance?”

Surely the answer is obvious.  Indeed, the answer is littered throughout the previous pages of Carter’s book.

Neoliberalism as it cohered in the second half of the twentieth century was essentially a reactionary effort to undermine democracy. Read more…

from Asad Zaman

The previous post (Three Mega-Events Which Shape Our Minds) explains the importance of history in shaping the world we live in. Historical events (facts) by themselves are not meaningful until they are linked together into a coherent narrative. The mortar which connects the facts must be supplied by our minds, and can never be asserted with certainty. The fact that we can never be certain about the narratives which connect and explain history has led to two polar mistakes. The positivist mistake is to renounce narratives, and focus solely on the facts. This makes it impossible to make sense of history, which deprives us of a rich storehouse of human experience. In effect, it means that we must start afresh every day, since the past makes no sense. The other extreme is the post-modern view that anything goes. Since we can never be certain, all narratives we create to connect and explain historical facts are equally valid. Neither of these extremes is correct. We cannot operate without narratives, because all of our actions are based on goals, and on judgments regarding the relative efficacy of different actions in achieving these goals.  read more

from Dean Baker

I have long been a big fan of a vacant property tax. As the old saying goes, you tax what you want less, and why would we want vacant properties. This is especially likely to be relevant in many high-priced cities where the demand for commercial real estate is likely to go through the floor due to an increase in telecommuting.

As cities mull many types of tax increases to deal with pandemic caused budget shortfalls, a vacant property tax should stand out as a productive alternative. The economy would be best-served by having landlords quickly recognize that their property is not worth as much as it use to be, and therefore lower rents to keep it occupied. This will be good for keeping old businesses and supporting new ones, since rent is major expense for most businesses, especially small businesses.

At the end of the day, recognizing reality is likely to be good for  landlords, since they don’t  make money on vacant property.  Of course landlords are often not very good at economics. Both Donald Trump and Jared Kushner are major property owners.

from David Ruccio

Before he was killed, George Floyd worked as a truck, a bouncer, and a security guard. Ahmaud Arbery worked at his father’s car wash and landscaping business, and previously held a job at McDonald’s. Breonna Taylor was a certified Emergency Medical Technician who had two jobs at hospitals in Louisville, Kentucky. Eric Garner worked as a mechanic and then in New York City’s horticulture department for several years before health problems, including asthma, sleep apnea, and complications from diabetes, forced him to quit. Trayvon Martin was the son of a program coordinator for the Miami Dade Housing Authority and a truck driver; he washed cars, babysat, and cut grass to earn his own money.

All of them, and most of the other African Americans who have been killed in recent years (by the police or other Americans), were members of the black working-class in the United States. Read more…

from Lars Syll

The most expedient population and data generation model to adopt is one in wh

ich the population is regarded as a realization of an infinite super population. This setup is the standard perspective in mathematical statistics, in which random variables are assumed to exist with fixed moments for an uncountable and unspecified universe of events …

This perspective is tantamount to assuming a population machine that spawns

individuals forever (i.e., the analog to a coin that can be flipped forever). Each individual is born as a set of random draws from the distributions of Y¹, Y°, and additional variables collective

ly denoted by S …

Because of its expediency, we will usually write with the superpopulation model in the background, even though

the notions of infinite superpopulations and sequences of sample sizes approaching infinity are manifestly unrealistic
.

In econometrics one often gets the feeling that many of its practitioners think of it as a kind of automatic inferential machine: input data and out comes casual knowledge. This is like pulling a rabbit from a hat. Great — but first you have to put the rabbit in the hat. And this is where assumptions come into the picture. Read more…

from Ikonoclast (originally posted as a comment)

There is clearly a strong correlation between science denialism and COVID-19 case rates in developed and semi-developed countries. Capitalism has an ambivalent relationship with science. Capitalists love production science and technology, including of course mining, industrial, consumerist, military, security, control and persuasion techs but they hate impact science. The impact sciences of course measure the impacts of science and technology (and natural events) on the biosphere, environments, plants, animals and humans. Capitalism does not want any interference from impact science knowledge getting in the way of profits for the few.

https://insideclimatenews.org/news/08042020/science-denial-coronavirus-covid-climate-change

When it comes right down to it Capitalism is anti-science. To accept only the answers you want (from production science) and to deny the answers you don’t want (from impact science) is unempirical and not in the spirit of the proper holistic (complex systems) application of science. Cherry-picking evidence and science disciplines for promotion and demotion on the basis of ideology is not a characteristic of a science-guided or an ethics guided society. Read more…