Posts tagged with ‘economics’
The Economist reviews Martin Wolf’s The Shifts and the Shocks: What We’ve Learned—and Have Still to Learn—from the Financial Crisis, and shows a centrist going rogue. The world economy has not healed itself following the last bust in 2008 because the systemic issues have not been addressed: there is too much of a reliance on banks and too little effort into making our financial systems resilient. Wolf seems to have seen through the fog of confusion arising from the crash of the economy, and he sees we are in the postnormal, where everything has changed.
The Economist, The world economy: How to fix a broken system
Mr Wolf’s proposals stem from an exhaustive assessment of the origins and contours of the crisis, which make up the bulk of the book. Plenty has already been written on this; “The Shifts and the Shocks” contains little that has not been said elsewhere. Mr Wolf’s contribution is comprehensiveness and a piercing logic in piecing the disparate elements together. He weaves the macroeconomic and financial elements of the crisis, its origins and aftermath, into an all-encompassing analysis. Along the way he demolishes many of the popular explanations—such as that the mess was due to greedy bankers or to loose monetary policy—as too simplistic.
The result is convincing and depressing; there are no quick fixes. The origins of the crisis lie in the revolutionary changes in the structure of the global economy and finance in the 1990s and early 2000s (these are the “shifts” of the book’s title). The macroeconomic shift was the emergence of a “savings glut” as countries from China to Germany saved more than they invested, pushing down real interest rates. Both at a global level and within the euro area financial innovation and freer capital mobility transformed these excess savings into huge cross-border capital flows, sending asset prices and credit soaring and, in the process, creating an inherently fragile financial system. Unfettered finance transformed the savings glut into a credit bubble. And in both cases the bursting of that bubble worsened the savings glut, as households, companies and governments in Europe slashed their spending.
Mr Wolf argues that the post-crisis recovery has been feeble because too many policymakers failed to understand this dynamic. Rather than accepting that bigger fiscal deficits would be the natural counterweight to private thrift, politicians pushed for austerity. Far too little emphasis was put on restructuring unpayable debts. At the same time, the underlying causes of the savings glut have, if anything, become stronger as deeper factors such as rising inequality have kept overall spending weak. Larry Summers, a Harvard economist, has argued that the rich world faces “secular stagnation”. Mr Wolf also believes that weak demand is here to stay. So, too, is the fragility of finance. Despite “manic rule making” he argues that banks are still a powder keg, with insufficient capital, and are liable to wreak havoc when they blow up.
This grim assessment leads Mr Wolf towards radicalism, both in macroeconomic and financial reforms. His more moderate suggestions include requiring banks to hold vastly more capital and the creation of insurance schemes that allow emerging economies, the most plausible engines of demand, to import capital safely and sustainably. But moderate change may not be enough. Pushing his analysis to its logical conclusion, he argues that the only way to deal with today’s underlying problems—a fragile financial system and a secular weakness in demand—may be to move away from bank-based credit altogether and rely on permanent budget deficits financed by central banks. Forcing banks to match their deposits with safe government bonds would reduce the risks of bank crashes and encourage a healthier reliance on equity finance. Permanent money-financed deficits would, in turn, provide a safer way to sustain spending than private-asset booms and busts. If done responsibly, they need not cause inflation.
Radical to admit that the financial markets are not self-regulating. The next step is to move control of the financial system out of the hands of those who make money by manipulating financial markets.
There are some things too important to run by wagering.
I suggest that we learn to think about capitalism coming to an end without assuming responsibility for answering the question of what one proposes to put in its place. It is a Marxist—or better: modernist—prejudice that capitalism as a historical epoch will end only when a new, better society is in sight, and a revolutionary subject ready to implement it for the advancement of mankind. This presupposes a degree of political control over our common fate of which we cannot even dream after the destruction of collective agency, and indeed the hope for it, in the neoliberal-globalist revolution. Neither a utopian vision of an alternative future nor superhuman foresight should be required to validate the claim that capitalism is facing its Götterdämmerung. I am willing to make exactly this claim, although I am aware of how many times capitalism has been declared dead in the past. In fact, all of the main theorists of capitalism have predicted its impending expiry, ever since the concept came into use in the mid-1800s. This includes not just radical critics like Marx or Polanyi, but also bourgeois theorists such as Weber, Schumpeter, Sombart and Keynes.
That something has failed to happen, in spite of reasonable predictions that it would, does not mean that it will never happen; here, too, there is no inductive proof. I believe that this time is different, one symptom being that even capitalism’s master technicians have no clue today how to make the system whole again—see, for example, the recently published minutes of the deliberations of the Federal Reserve’s board in 2008, or the desperate search of central bankers, mentioned above, for the right moment to end ‘quantitative easing’. This, however, is only the surface of the problem. Beneath it is the stark fact that capitalist progress has by now more or less destroyed any agency that could stabilize it by limiting it; the point being that the stability of capitalism as a socio-economic system depends on its Eigendynamik being contained by countervailing forces—by collective interests and institutions subjecting capital accumulation to social checks and balances. The implication is that capitalism may undermine itself by being too successful. I will argue this point in more detail below.
The image I have of the end of capitalism—an end that I believe is already under way—is one of a social system in chronic disrepair, for reasons of its own and regardless of the absence of a viable alternative. While we cannot know when and how exactly capitalism will disappear and what will succeed it, what matters is that no force is on hand that could be expected to reverse the three downward trends in economic growth, social equality and financial stability and end their mutual reinforcement. In contrast to the 1930s, there is today no political-economic formula on the horizon, left or right, that might provide capitalist societies with a coherent new regime of regulation, or régulation. Social integration as well as system integration seem irreversibly damaged and set to deteriorate further. What is most likely to happen as time passes is a continuous accumulation of small and not-so-small dysfunctions; none necessarily deadly as such, but most beyond repair, all the more so as they become too many for individual address. In the process, the parts of the whole will fit together less and less; frictions of all kinds will multiply; unanticipated consequences will spread, along ever more obscure lines of causation. Uncertainty will proliferate; crises of every sort—of legitimacy, productivity or both—will follow each other in quick succession while predictability and governability will decline further (as they have for decades now). Eventually, the myriad provisional fixes devised for short-term crisis management will collapse under the weight of the daily disasters produced by a social order in profound, anomic disarray.
In summary, capitalism, as a social order held together by a promise of boundless collective progress, is in critical condition. Growth is giving way to secular stagnation; what economic progress remains is less and less shared; and confidence in the capitalist money economy is leveraged on a rising mountain of promises that are ever less likely to be kept. Since the 1970s, the capitalist centre has undergone three successive crises, of inflation, public finances and private debt. Today, in an uneasy phase of transition, its survival depends on central banks providing it with unlimited synthetic liquidity. Step by step, capitalism’s shotgun marriage with democracy since 1945 is breaking up. On the three frontiers of commodification—labour, nature and money—regulatory institutions restraining the advance of capitalism for its own good have collapsed, and after the final victory of capitalism over its enemies no political agency capable of rebuilding them is in sight. The capitalist system is at present stricken with at least five worsening disorders for which no cure is at hand: declining growth, oligarchy, starvation of the public sphere, corruption and international anarchy. What is to be expected, on the basis of capitalism’s recent historical record, is a long and painful period of cumulative decay: of intensifying frictions, of fragility and uncertainty, and of a steady succession of ‘normal accidents’—not necessarily but quite possibly on the scale of the global breakdown of the 1930s.
Wolfgang Streeck, How Will Capitalism End?
Benjamin Harrison, 1872
Great explanation of why economists seem to be wrong so often about economic policies.
Is the Fed tieing it shoe laces together by predicting high growth and then revising downward?
Binyamin Appelbaum, Fed Expected to Reduce Growth Forecast but Cut Stimulus
The pattern is striking. In every year since 2008, Fed officials have steadily reduced their initial expectations for economic growth. In each year except 2012, they had still overestimated the strength of the economy in June of the forecast year.
The consequences at times have been painful. Fed officials have said they did not act more strongly to stimulate the economy in the immediate aftermath of the recession because they expected the economy to rebound more quickly.
Fed officials argue that unanticipated economic setbacks have contributed to their failures of foresight, including spending cuts by federal, state and local governments, the European economic crisis and, most recently, an unusually cold winter.
But officials have also acknowledged that the impact of those setbacks appears to reflect an underlying weakness in the economy that they did not anticipate.
Josh Bivens, director of research and policy at the left-leaning Economic Policy Institute, said economic conditions in recent years had few precedents, making it hard to predict the pace of the recovery. Traditional models assume the Fed can restore growth by cutting interest rates, but the Fed has held interest rates near zero since late 2008, and that has proved insufficient. That has left forecasters guessing, he said.
“You can definitely be sympathetic with them,” he said. “We’re just in uncharted territory.”
Fed officials have adjusted by gradually backing away from their assumption that the economy will rebound strongly. Officials make an initial forecast two years before the beginning of a given year. Those long-range forecasts reflect their views of the economy’s potential more than the conditions that are likely to prevail at that time. And for the last five years, Fed officials have steadily reduced their expectations. In 2009, they estimated that growth in 2012 would run as high as 4.8 percent. Last year, they estimated that growth in 2016 would run no higher than 3.3 percent.
Such slow adjustments are typical, researchers have found. William D. Nordhaus, a professor of economics at Yale, found in a benchmark 1985 paper that forecasters are anchored to their opinions. “We break the good or bad news to ourselves slowly, taking too long to allow surprises to be incorporated into our forecasts,” Mr. Nordhaus wrote.
The Fed is no better than other market watchers: they are all caught in the postnormal fog, unable to peer into the uncertain future. But the consequences of the irrational exuberance of the Fed’s projections are much more significant than an investment fund guessing wrong on Apple. It seems that the optimism may be another tool in the Fed’s bag to influence behavior of other parties, but this rapidly turns into the boy who cried wolf.
A protegé of the French economist Thomas Piketty, Gabriel Zucman has researched the mystery of international balance sheets showing increasing liabilities: Where’s the money?
Rich people and cash-rich companies are hiding it in tax havens:
Jacques Leslie, The True Cost of Hidden Money
GABRIEL ZUCMAN is a 27-year-old French economist who decided to solve a puzzle: Why do international balance sheets each year show more liabilities than assets, as if the world is in debt to itself?
Over the last couple of decades, the few international economists who have addressed this question have offered a simple explanation: tax evasion. Money that, say, leaves the United States for an offshore tax shelter is recorded as a liability here, but it is listed nowhere as an asset — its mission, after all, is disappearance. But until now the economists lacked hard numbers to confirm their suspicions. By analyzing data released in recent years by central banks in Switzerland and Luxembourg on foreigners’ bank holdings, then extrapolating to other tax havens, Mr. Zucman has put creditable numbers on tax evasion, showing that it’s rampant — and a major driver of wealth inequality.
Mr. Zucman estimates — conservatively, in his view — that $7.6 trillion — 8 percent of the world’s personal financial wealth — is stashed in tax havens. If all of this illegally hidden money were properly recorded and taxed, global tax revenues would grow by more than $200 billion a year, he believes. And these numbers do not include much larger corporate tax avoidance, which usually follows the letter but hardly the spirit of the law. According to Mr. Zucman’s calculations, 20 percent of all corporate profits in the United States are shifted offshore, and tax avoidance deprives the government of a third of corporate tax revenues. Corporate tax avoidance has become so widespread that from the late 1980s until now, the effective corporate tax rate in the United States has dropped from 30 percent to 15 percent, Mr. Zucman found, even though the tax rate hasn’t changed.
Mr. Zucman’s tax evasion numbers are big enough to upend common assumptions, like the notion that China has become the world’s “owner” while Europe and America have become large debtors. The idea of the rich world’s indebtedness is “an illusion caused by tax havens,” Mr. Zucman wrote in a paper published last year. In fact, if offshore assets were properly measured, Europe would be a net creditor, and American indebtedness would fall from 18 percent of gross domestic product to 9 percent.
So, another wrinkle in the new abnormal economics: the wealthy can skew the system to pile their shekels higher and higher, meanwhile manipulating the system so that national policies reinforce the massive inequality of our economy.
Welcome to the postnormal.
The way the world’s financial markets ‘work’ has ceased to follow classical models, and now the experts cannot track risk. Welcome to the postnormal.
Susanne Walker and Liz Capo McCormick, Unstoppable $100 Trillion Bond Market Renders Models Useless - Bloomberg
If the insatiable demand for bonds has upended the models you use to value them, you’re not alone.
Just last month, researchers at the Federal Reserve Bank of New York retooled a gauge of relative yields on Treasuries, casting aside three decades of data that incorporated estimates for market rates from professional forecasters. Priya Misra, the head of U.S. rates strategy at Bank of America Corp., says a risk metric she’s relied on hasn’t worked since March.
After unprecedented stimulus by the Fed and other central banks made many traditional models useless, investors and analysts alike are having to reshape their understanding of cheap and expensive as the global market for bonds balloons to $100 trillion. With the world’s biggest economies struggling to grow and inflation nowhere in sight, catchphrases such as “new neutral” and “no normal” are gaining currency to describe a reality where bonds are rallying the most in a decade.
“The world’s gotten more complicated and it’s a little different,” James Evans, a New York-based money manager at Brown Brothers Harriman & Co., which oversees $30 billion, said in a telephone interview on May 30. “As far as predicting direction up and down, I don’t think they have much value,” referring to bond-market models used by forecasters.
In an economy where secular stagnation has taken hold, and the world’s currencies are spiraling in a liquidity trap, it appears we are still in a crisis; but people are spending a great deal of time talking about heading off the next one.
A hundred trillion being invested in bonds because investors can’t accurately gauge risk, and the degree of complexity and uncertainty continue to rise, and — despite the hype about big data — no one seems to know where things are headed.
Josh Freedman and Michael Lind look back to the New Deal and forward to a new social contract. Will we have a continuation of the ruinous “low-wage” social contract that is now in effect, a shift to the Nordic social state, or a third alternative?
What, then, would a better social contract look like?
First, we could accept the basic shape of the low-wage economy while softening its edges by asking government to do even more. With higher taxes on the wealthy, Washington could use the tax code to provide poor and middle-class families more generous means-tested subsidies to pay for childcare, education, and healthcare. Since the Clinton era, much of the Democratic Party has embraced this version of the social contract. It is essentially the model behind Obamacare.
The downside, besides the challenge of raising taxes, is that subsidies don’t guarantee affordability. They can even encourage industries to raise their prices; see, for example, the proliferation of cheap student loans, which have not made college much more affordable. What’s more, means-tested programs for the poor often lack the political support needed to keep them strong.
Another possibility, which would please many progressives, would be to nudge the economy toward a social democratic model such as that of Scandinavia. This social contract would entail high wages, a high cost of living, and a universal welfare state paid for with high, relatively flat taxes.
But transplanting the Nordic model as a whole to the U.S. would be difficult in the face of fierce resistance to higher levels of spending. It would also be hard to import a system of benefits paid for by broad and flat taxes, like payroll taxes and consumption taxes, on a country like the U.S. with much greater inequality.
In our own work at the New America Foundation, we have outlined a third idea we call the “middle-income social contract.” It assumes that many service industries won’t be able to offer their workers middle-income salaries, which means that, in addition to raising wages somewhat, the government will have to take a more active role in making essential services like education, child care and health care more affordable. The best way to do this is to provide these programs directly, such as through universal Pre-K, single-payer health insurance, or subsidies to the states for taking care of the elderly. Policymakers can begin to build a middle-income social contract by raising the federal minimum wage closer to a true living wage and expanding public early education, both of which are widely popular proposals.
The current low-wage social contract between American workers, employers, and the government has been a raw deal for most Americans. Just as the New Deal contract shifted to the low wage model, we need to shift once again to a system more suited to the current economy and needs of workers and citizens. The options for the next social contract are many—we just have to choose the right one.
I believe that we are on the path toward government provided education (pre-K through college), health and elderly care, and greatly strengthened social security, all paid for through higher taxes on the wealthy and business. We will simply have to wait for the GOP to be made insignificant through changing demographics.
Of course, many libertarians — including the tech sector — will be opposed, but there is a split there for social liberalism, like education.
But this will be the front and center political battlefield for the next presidential elections. The core question: How much does the State have to do to ensure equality, both in opportunity and in services?
A great snapshot.