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Economic theory Ideology

Magic numbers and the math stick

Economics is often associated with numbers. We are bombarded with economic data: GDP, unemployment, inflation, debt, exchange rates, market indices…the list is seemingly endless. While many of these numbers change – we are encouraged to cheer when they rise, jeer when they fall – there are others that are presented as fixed, immutable boundaries between good policy and bad. These are magic numbers that aspire to reduce economic policy decisions simple rule-following. Upon closer inspection, the magic of these numbers may turn out to be nothing but pixie dust. Breaking the illusion, however, risks a real mathematical headache.

Last week, another nail was applied to the already tightly-shut coffin of what had until recently been considered a magic number in economics. In a series of influential papers, Carmen Reinhart and Kenneth Rogoff purported to show that a country’s public debt becomes a sizeable burden on economic growth once it exceeds 90% of GDP. This 90% threshold was used by governments, international institutions, lobby groups and others to create and influence public policy across the globe. Many countries either willingly undertook or were – more or less gently – nudged into undertaking destructive austerity programs to lower debt levels below this magic threshold.

An IMF study published last week indicates that the RR studies, as they’ve come to be called, use a much too short, one-year time-frame to measure the effects of public debt on GDP growth. Taking a longer view is not only much more appropriate, it shows there to be no discernible negative effect of higher public debt on GDP growth – and certainly no clear threshold like that posited by Reinhart and Rogoff. This latest study comes on top of another published last year by graduate students from the University of Massachusetts-Amherst, which uncovered  not only serious methodological flaws in the RR studies, but also simple errors in how data was entered into Excel spreadsheets. Together, these errors were responsible for the emergence of such a clear threshold. In short, the accumulated weight of critiques of the RR studies has largely shown these studies to be…to put it bluntly, wrong. The magic 90% number turns out to truly be a conjurer’s trick.

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Austerity Canada

Another (budget) day, another dollar (cut): Canada’s slow-motion austerity

Yesterday’s federal budget was a non-event. Indeed, the no-surprises budget was itself no surprise: the Conservatives have long done their fiscal policy dirty work in omnibus bills and other dark corners scattered throughout the legislature, Crown corporations and federal agencies. This leaves the media circus of budget day a very stereotypically Canadian mix of polite and boring. Canada’s is a slow-motion austerity and the current budget is a continuation.

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Economic history in the present Minimum wage Workers

Economic history in the present: The wage fund and the minimum wage

How many bushels of wheat do you make a year? While this is not the most relevant question to be asking about wages today, some of the discussion around the minimum wage is taking inspiration from a very old economic idea according to which questions like this would be right at home. The idea is that of a “wage fund”: a fixed amount of total wages available to an economy for a given period that dictates the average wage. If such a fund exists, then any aim to raise wages within the period for which the fund is fixed will inevitably end up harming workers – most likely those with the lowest wages and the least power. Today’s arguments against increasing the minimum wage at times mirror this flawed logic – and for reasons that, oddly enough, reflect on why the theory was discarded in the first place. (Click here if you want to skip the history and get to the present; otherwise read on.)

wagefund2

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Economic theory

The facts are capitalist

There has been a curious debate in the past week within the world of economics blogging. It started with a post by Chris House on the contrast between a “well-known liberal bias” within the academy generally and the decidedly more conservative bent of most members of economics departments. House attributes this contrast to a conservative bias in economic facts – by this he means that much of mainstream economic theory agrees with a more right-wing view of the world. Take, for example, the view that minimum wages lower employment or that government regulation has negative effects on business efficiency. Noah Smith answered this  provocation by arguing that the positions taken by most economists are actually closer to the beliefs of the American centre-left, by which he means that much attention is focused on the trade-offs between efficiency and equity. And the debate has moved on from there.

Smith concludes his post by making explicit the key assumption behind both pieces: that there are facts and then there is the ideological perception of those facts – that the facts are in some way neutral, but can conform to one point of view better than another. There is a long line of social theory and philosophy that challenges this assumption of independence. Here, it is tempting to quote Gramsci on ideology, or Foucault on power, or a host of other authors. That would, however, take the conversation into a space completely alien to House and Smith. So nevermind Gramsci, here is mainstream Anglo-American philosopher of science Hilary Putnam on the relation between facts and values:

I argued that the picture of our language in which nothing can be both a fact and value-laden is wholly inadequate and that an enormous amount of our descriptive vocabulary is and has to be ‘entangled’… for example, to draw the distinction between courageous behaviour and behaviour that is merely rash or fool-hardy…depends precisely on being able to acquire a particular evaluative point of view. ‘Valuation’ and ‘description’ are interdependent.

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Technology

Questions for robots

Eighty years ago, Keynes famously predicted that within a century people would need to work no more than three hours per day. High living standards aided by technological breakthroughs would give human beings satisfying, minimal work and plentiful leisure, while robots and machines took over menial and repetitive labour. Less than twenty years before Keynes’ prediction is set to expire, reality has turned out quite differently.

Across the global North and South, those lucky to have jobs are working long hours. Factories across the global South, in China, Bangladesh and elsewhere, run around the clock with workers often clocking in for shifts over 12 hours at a time. Even the average US worker today works more hours annually than a medieval peasant. Western European countries, long considered social democratic bulwarks against the regime of relentless work, are not far behind and legislation shortening working time is under attack, despite stagnant employment.

Despite these trends, the argument that robots are set to make workers obsolete is still here. The technology revolution that finally fulfills the promise of labour-saving technology is always just around the corner. It is thus no surprise that today there are those who argue that this time the changes are real: technology is finally ready to displace workers like never before. Move over, cheap labour from the global South, there’s a new competitor in town in the race for the bottom. The bogeybot du jour has a white collar, takes its subsistence wage in watts and won’t even think about signing a union card.

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Canada Privatization

Strategy, or escape from the privatization matrix (Canada Post, Part 2)

The endgame of the current rounds of cuts at Canada Post is some form of privatization. In the previous post, I argued that privatization proceeds differently depending on context. Many factors – I focused on whether a public service provider is exposed to competition and is profitable – can have an impact. The result of replacing public with private provision can be reached through a rapid sell-off, a slow attrition of services, or anything in between. Fortunately, the path to be taken by Canada Post is not yet drawn. Yet while privatization is not an inevitability, the window to effectively prevent it will not stay open for very long. Here are some thoughts on the privatization strategies possible at Canada Post and the anti-privatization strategies to fight them.

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Canada Privatization

Diagnosis, or into the privatization matrix (Canada Post, Part 1)

There is little doubt that Canada Post’s recently-announced plan to eliminate home delivery, raise prices and lay off thousands of workers is not aimed solely at streamlining operations, but is likely a prelude to future privatization of postal delivery in Canada. Canada Post is ripe for the picking: it is a profitable, socially-useful public enterprise with n updated, nation-wide infrastructure of retail outlets, other properties, vehicles and IT systems. One bad year in 2011, when the post office recorded a loss  due in part to rotating strikes and a 2-week lockout, has been used to create an image of unsustainability and justify the current cost-savings plan.

Any future privatization attempt can play out in a number of ways. While we typically think of privatization as a sell-off – the government transferring ownership of a public service provider into private hands – the exact nature of the transition between public and private service provision can take on a number of unique forms. Breaking a concept as broad, and at times nebulous, as privatization into more concrete and discrete strategies not only makes it easier to analyze particular episodes, but also aids in developing effective opposition.

I propose one way to differentiate between privatization strategies that is simple and universal. Four possible strategies emerge based on answers to two questions. First, are the majority of operating expenses of the public service to be privatized covered by internal revenue or government funds? Second, is the public service provider exposed to private competition before privatization? Looking at these two questions simultaneously produces the following grid of privatization strategies that can be used to assess what may lie in store for Canada Post and compare this to other privatizations, in particular those of postal services in other countries.

Figure 1. A privatization matrix.
Figure 1. A privatization matrix.
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Categories
Minimum wage Workers

The political aspects of the minimum wage

Discussion of the minimum wage can easily slide into a technocratic back-and-forth that ignores the vital political aspect at play. We can see this in much of the response to the report just released by the Ontario government’s Minimum Wage Advisory Panel (MWAP). Andrew Coyne, for example, once again argues that a basic income is a better solution to poverty than increases in the minimum wage. The question, however, should not be one of which single tool is best for fighting poverty, but how we can build the most effective toolkit, one that also puts political power into the hands of the poor. Poverty is multi-faceted and, while low-wage work is only one potential aspect of being poor, the minimum wage has effects beyond providing much-needed higher incomes.

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Economic theory Value

There is no good value

A piece in the Financial Times from several days ago has finally pushed me to scribble down a few initial thoughts on value – a topic I been thinking about more and more. Titled “The attack of the rentier killers”, the article argues that the wealthy who hold and receive income from assets will fight low interest rates and rising inflation tooth and nail because it lowers the value of their assets. Paul Krugman has recently picked up on this topic as well, while the notion that only sustained low interest rates can “euthanize” a dangerous, politically-motivated rentier class originally comes from Keynes.

There is much to be said about this claim. One question is whether there currently exists a well-defined rentier class whose interests are opposed those of a class of capitalist producers. The growth of finance and its increasing integration into all other aspects of the economy challenge this idea. Furthermore, the current application of extraordinary monetary policy has produced a combination of low interest rates and low inflation. The former decreases the flow of gains from interest-bearing assets; at the same time, the latter means that all assets better maintain their value. Finally, current policy has led to a greater concentration of assets (I posted some thoughts on this here), which has disproportionately benefited the wealthy.

In writing this, however, I was motivated by a smaller point that comes right at the end of the Financial Times article:

Based on [the previous] analysis, the surest sign that our society is on the verge of […] a secular stagnation story is the increasing frequency and severity of bubbles today. But if they’re really symptomatic of the death throes of the rentier class, then perhaps they shouldn’t be feared by central bankers at all?

Instead, central bankers should start thinking about ways to create entirely new forms of positive value in society based on social, educational, sustainable or even humorous activity? Carbon credits, RINs, energy rationing units, brownie points and Dogecoins, and so forth.

I want to focus on the phrase “positive value.” I take this to be opposed to “negative value.” A likely example of the latter would be the financial returns that accrue to rentiers while asset price bubbles are being inflated; with the problem being that these same bubbles also end up harming others when they burst. The argument is that rather than continue to allow for the creation of financial bubbles that have negative economic impacts, we should instead create sinks into which rentiers can pile their money looking for higher returns, but which will also be socially-useful. Tongue firmly planted in cheek, the author even suggests feel-good brownie points as a worthwhile “positive value”-generating asset bubble vehicle.

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Technology

The more things change… Amazon’s “anticipatory shipping” and the village square

Media outlets recently publicized Amazon’s patent for what it calls “anticipatory shipping.” The premise is as simple as it is creepy: Amazon will charge and ship items before customers have the chance to buy them themselves. In other words, Amazon knows what you want and is happy to spare you the trouble and effort of actually buying it, simply delivering the item –and, of course, your bill.

Here is the fruit of the information technology revolution. A giant corporation with which a person might have no face-to-face contact has complete enough psychological profiles that it can anticipate wants. Mass media brought us the creation of wants without our knowing, now the internet takes it one step further: the item that you didn’t know you wanted shows up at your doorstep unannounced. Hooray.

One common critical reaction to such innovations involves a retreat into the past. For the very youngest generations, it might ironically involve a wistful look back at the anonymity offered by the megamall. For most, however, the argument is that things were once different: people knew each other and many everyday transactions were based on personal relationships. Sure, the butcher knew your favourite cut of meat – but it was your butcher, not a computer knowing what you wanted. “If only we could go back to a world where relationships mattered.”

The problem with this argument is that it does not challenge what is truly wrong with something like “anticipatory shipping”. Even personal relationships can be embedded in a problematic economic logic. In many ways, in fact, today’s information-based economy is becoming more and more akin to that of the village square of the past. The anonymity of the past several decades may have been just a brief interlude during which information-processing capabilities lagged behind production capabilities.

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