The World Upsidedown: Progressives and the Return of the Victorian Policy Consensus

 

Eminent Victorian? 

The complete shitshow that US trade policy has become has led to a paradoxical result. Many progressive critics of Free Trade have all of a sudden become strong defenders of it, and highly critical of any kind of trade policy intervention. If Trump is against free trade, then it must be good. On top of that, the fear of inflation -- always a recurrent paranoia among more conservative policy makers -- has been exacerbated by the perception that tariffs will cause stagflation, and has led to a concern that Jerome Powell, the Federal Reserve (Fed) chairman, might be fired by Trump, even if that is more complicated than firing the Commissioner of the Bureau of Labor Statics (BLS). This, in turn, has led to some strong defense, by liberals and progressives, of an independent Fed.

Free trade and rule based monetary policy (at least not the Gold Standard) are back on the agenda. I should say many liberals, with strong influence among the establishment of the Democratic Party, are also not far from defending some degree of austerity after what they perceive as the excesses of Biden's fiscal policy. In that case, it would be a return to the policy consensus of the Victorian era, free trade, rule based monetary policy, and fiscal discipline. A setback, given that the profession was, not long ago, rethinking the so-called New Consensus in macroeconomics, and was moving away from more rigid inflation targeting, with the Fed adopting a more flexible approach, and more acceptance that persistent deficits and even a higher level of debt were not unsustainable.

It is clear that the tariffs will not bring back any significant number of manufacturing jobs back to the US (a longer discussion here; bottom line, wages are still high in the US, and production will shift to other places), but it is also true that trade policies, together with government procurement policies do play a strategic role in promoting technological innovation and economic growth. But the arguments have gone considerably beyond that. On the international arena, the paranoid style in economic policy advising suggests that the tariffs will bring the end of US hegemony, not just some adjustments on supply chains. It will bring a run against the dollar and dollar denominated assets. If it needs repeating, there is no risk to dollar hegemony, even if China has challenged US hegemony in some crucial sectors.

The next exaggerated fear is that tariffs will bring stagflation. On that, as I have discussed here (and here for Pandemic fears, that proved unfounded, notwithstanding Larry Summers' predictions; note that he blames Biden, and not pandemic supply-side shock for the 2022 inflation bout*), the risk of inflation, let alone high inflation, is relatively moderate. Sure enough tariffs will have some impact on the price level, but as much as the snags on the supply chain during the pandemic, this would translate only as a moderate and transitory shock, that will vanish fast. Actually, since the economy is slowing down, and wage bargaining has been eroded even further (on top of that with the weakening of the National Labor Relations Board), chances of inflation acceleration should take a back seat.

The risk of a recession does NOT come from the possible supply-chain problems that tariffs could cause, nor from the uncertainty (that vague and lazy way of saying that anything could happen; the uncertainty fairy), and neither from a possible profit squeeze that would lead to declining investment. It is actually, as I noted recently, the persistent of relatively high interest rates. Trump is NOT incorrect in criticizing Powell on this issue (the form might be wrong, but on substance he is correct). The housing market is affected, and that will have an impact on consumption, and that might cause a recession.

Further, many authors that used to correctly see the fiscal problems, at least temporarily, as secondary, are now concerned with the sustainability of US debt in domestic currency. Something that is absolutely irrelevant even if all three credit agencies have downgraded US public debt (that's material for another post).

Faced with Trump's economics agenda progressives have retreated from the policies that, at least on a conceptual level, were being developed after the 2008-9 financial crisis, policies that endorsed fiscal activism, unconventional monetary policy, and a healthy rethinking of industrial and trade policy (the latter mostly after Trump's first election, and Biden's so-called New Washington Consensus). Not only the notion is that fiscal policy was excessively lax, causing inflation, that monetary policy must remain contractionary, to avoid the inflationary pressures of the tariffs, but also that free trade and is central for US hegemony.

Edward Luce, FT columnist (and former speechwriter for Summers), author of The Retreat of Liberalism (a book that equates free markets and Western democracy with development) now tells us that the main sin of liberalism (which should be taken here in the American sense of progressivism, and not libertarian free market dogma) is intolerance. The excessive reliance on science during the pandemic, and the lack of free speech in academia, the press, and society at large. He sees that as a return to the Victorian era. In his words:

"... today’s liberal establishment looks more like a conservative one. Educated elites confect orthodoxy on what we should say and do. The resemblance to high Victorianism is more than passing. Victorians regulated manners and etiquette. They also dreaded the mob."

He is not completely wrong. The current liberal establishment, of which he is a member, resembles the Victorians, but it is in the renewed defense of an outdated economic policy consensus, free trade, hard money, and sound finance.

* In this interview Summers says: "I felt that the Biden administration was failing to pay attention to fairly elementary economic arithmetic with respect to the excessive stimulus that it launched in response to Covid. But in that case there was a logic in terms of insurance, adding to confidence and promoting employment. That was a policy with both benefits and costs, where I felt—and I think it has turned out this way—the costs exceeded the benefits. Here [Trump's policies] it seems like it’s almost all cost with very little benefit."

What’s driving inflation? Bucknell prof says maybe not what you think

My interview with Scott LaMar from WTFI, on inflation and the problems with demand-pull and oligopolistic inflation, for those interested in another iteration of the same. It's a bit longer than previous ones, and we go on some additional detail.

More on oligopolistic inflation (Greedflation)

Marc Lavoie has written this post on the current inflation debates, which received some attention. We had a conversation (I don't say debate because we mostly agreed, and the video is here, last September). I also recommend Julia Braga and Franklin Serrano's paper on Marc's chapter on inflation, which is relevant for the current debates. The debate rages, within heterodoxy, as if a lot of the ideas are new, but quite frankly they are a recap of discussions of the past, particularly for those that dealt with the extensive debates about inflation and hyperinflation in Latin America in the 1980s and 1990s.

That demand-pull inflation was not the cause of inflation, I think is accepted among heterodox authors, and increasingly so within the mainstream or at least the media, that mostly covers the mainstream. After an initial idyll with Larry Summers and the notion that excessively large fiscal packages during the pandemic had caused inflation, now his view that a prolonged period of relatively high (or at least higher) unemployment was necessary for stabilization has fallen out of favor. Disinflation has taken place with relatively low levels of unemployment (which, it's worth remembering measure very poorly the conditions in the labor market in our neoliberal era, and where there is more slack than noted due to significant numbers of discouraged workers). The coverage has changed from thinking Summers was right to dismissing his views. He was wrong both times.

I'm more concerned with the dominant view among progressives that inflation was caused by higher profit margins, associated to the excessive power of corporations. Something that has been called greedflation, by many commentators (see Robert Reich's recent column here), and that back when, in a distant past in another galaxy, we called oligopolistic inflation. So this is mostly a debate between neoliberal and progressive Dems (Republicans have been less relevant; for their view go to this conference/book including John B. Taylor, John Cochrane and others at the Hoover Institution; not very different than Summers, who was at the conference, at least conceptually, even if more hawkish, if that is possible).*

In particular, I think the main remaining issue is the question of the role of mark ups, or profit margins in the inflationary process. As I noted before, the idea of oligopolistic inflation is in some sense a reaction to the notion that wage resistance and wage-price spirals would imply that workers are responsible for inflation (in this reading as much as demand-pull inflation would require unemployment for stabilization, conflict inflation would imply the need for wage stagnation). Some heterodox economists have even suggested that wage-price spirals are sort of a myth.

Note that when workers manage to increase wages, then price making firms will try to recompose their margins and increase prices. And if workers are not satisfied, as prices go up again and real wages fall, then you get a spiral. Hence, the wage-price spiral is a reflection of distributive conflict, and that workers and capitalists are not satisfied with their relative shares. In that sense, inflation is neither wage-led nor profit-led, like accumulation can be. It is the result of incompatible income claims by both classes.

There is a simple model in this old paper for the Handbook edited by Phil Arestis and Malcolm Sawyer, in which I discussed the three causes of inflation for heterodox authors, supply shocks, inertia and conflict.

* The inflation paranoia is somewhat surprising, with Taylor saying that: "The answer to the key question, 'Are We Entering a New Era of High Inflation?' is clearly 'yes,' unless monetary policy makers change policy." Note that this is not new. The late Allan Meltzer warned against the dangers of excessive monetary expansion after the 2008-9 crisis, saying back then: "the enormous increase in bank reserves —caused by the Fed’s purchases of bonds and mortgages — will surely bring on severe inflation if allowed to remain." So, you would have to really believe in the lags in monetary policy (more than a decade) for his prediction to make any sense.

Robert Reich on the Trans Pacific Partnership

I have posted on this topic here. For the problems of the conventional (mainstream) trade theory go here or the Ricardian here. For a discussion of alternative trade theories go here (and here).

The Flaw, inequality and the financial meltdown

Marie Duggan asked me about econ films the other day. Regarding the 2008 crisis Inside Job remains essential, but another documentary about the causes of the financial crisis, The Flaw directed by David Sington, is also worth watching. Around minute 22 you can see Louis Hyman (the short clip here is the initial part of that segment), Robert Wade and Robert Frank suggest that inequality was at the heart of the crisis. You can watch the whole thing on Youtube (for a fee) or on Hulu (with adds).

PS: An anonymous reader reminded me of Inequality for All by Robert Reich linked before here.

Stop bashing GDP!

So everybody hates the Gross Domestic Product! The New York Times and the Financial Times have recently published articles criticizing the main measure of production in the economy. This is certainly not new, and criticism of the value of GDP for certain purposes, as a measure of well-being, for example, have led in the past to the creation of other variables like the United Nations Development Programme's Human Development Index, which includes GDP per capita (actually Gross National Income per capita), life expectancy at birth and average years of schooling for adults.

In fact, the NYTimes article basis for the supposedly dramatic "Rise and Fall of the GDP" is it's inability to measure well-being, and in it the author emphasizes its disadvantages when compared to the HDI. The NYTimes piece quotes Sen, the godfather of HDI, complaining about the "silliness about identifying growth with development." Of course, since GDP is only about the material growth of the economy, it would be an incomplete measure of development.

The most common type of critique is that GDP does not count many things, like environmental degradation, or happiness (yep, I know; check Putnam's ideas in the NYTimes piece; talk about silliness), or almost all non-market transactions for that matter, or is slow to adjust to new products and services introduced in the market, and that it's not particularly good for understanding inequality (Robert Reich's complaint in FT's piece; check the full list of complaints in both articles linked above). The best defense is provided by William Nordhaus, who argues compellingly that: “if you want to know why GDP matters, you can just put yourself back in the 1930 period, where we had no idea what was happening to our economy.”

First, GDP is not a measure of everything, and it certainly has limitations. But it does measure relatively well the material production in a given year, and provides the basis for understanding the process of accumulation, which is central for understanding the dynamics of capitalism. And actually, if you look at functional distribution of income in the National Income and Product Accounts (NIPA), which are used to calculate GDP, you do have one of the best measures of income inequality! Yes growth of the flow of goods and services produced in a country in a year is not tantamount to development, but without growth developing countries cannot achieve the levels of well-being of advanced economies, so growth is kind of a pre-requiste (and yes, growth involves environmental degradation, and we should try to minimize it). Further, with GDP one can obtain a fairly good measure of productivity (labor productivity), which is the basis for the Wealth of Nations, if you believe that dude Adam Smith.

My beef with the profession is not the use of GDP growth as a measure of material progress, but the fact that a limited, supply-constrained, individual maximizing utility, market-friendly, neoclassical version of the process of growth and development is the dominant one. But GDP is fine. Like price indexes, which also are limited and sometimes inaccurate, is an essential tool for understanding the real world.

Inequality for All: comparing the Great Depression and the Great Recession

A short clip from Robert Reich's Inequality for All. Overall is fine. Mind you Reich uses the supply side fiction that education (skills) generates jobs, rather than demand. A very conventional neoclassical labor market story with an implicit Say's law argument. And he calls Alan Simpson, of the infamous Bowles-Simpson's National Commission on Fiscal Responsibility and Reform (which favors cutting entitlement spending, besides higher taxes), a lefty. But still a progressive guy with good intentions, and lots of relevant data and information.