More on the possibility and risks of a recession

So both the (inverted) yield curve and the Sahm rule indicate a recession. This together with two months of slower employment creation, and the slightly higher unemployment rate, has many wondering whether the economy will crash soon. I discussed before -- a while ago, before the pandemic recession, that had nothing to do with the yield curve -- why an inverted yield curve doesn't necessarily mean a forthcoming recession. The Sahm rule, like the inverted yield curve has an impressive track record. It suggests that if three month moving average of the rate of unemployment rises 0.5 or more above the minimum of the same averages for the previous twelve months a recession is under way. Figure below, although scale doesn't help, shows that we are at 0.57 for last August [ominous music here].

This is essentially an a-theoretical measure, contrary to the yield curve which could have different explanations, including the Wicksellian one used by the mainstream. It expresses basically a trend. Unemployment rates go up in recessions, and after a while going up, you're basically in one. The two episodes in which it fails, as far I can tell, were in 1959 and 2003. No clear reason for why, as opposed to housing market measures that failed in 1951, 1967, and perhaps now (if you believe me), because of two wars (Korea and Vietnam) and fiscal packages (Bidenomics).

In a few weeks now, the Fed is very likely, almost certainly really, going to reduce interest rates. I don't expect that to stimulate the economy much, and it certainly will not create any danger about an inflationary resurgence. Also, as I noted on Marketplace a week or so ago, there are some positive signs about the economy. Real wages at the bottom are growing, and consumption went up. And no, you should not be concerned with the low savings rate. I was a little less sanguine that I sound in that short soundbite, but overall I think that's correct.

Sure enough a recession could certainly imply a return of Trump, and Trumponomics. I doubt that it would cause inflation and that his election would deepen the recession, as some had argued. Not because tax cuts for the wealthy would stimulate the economy. But the truth is that Republicans in power don't care about the deficit or debt. They care about cutting social benefits, and about facilitating the lucrative relations between the corporate sector and government. What Jamie Galbraith called the Predator State. Trumponomics shares with Reaganomics, and other GOP supply side voodoo economics notions, a persistent characteristic. It is always against unions and higher wages, and always for lower taxes for the wealthy.

Dems are less consistent, but certainly less keen on both (and Kamala seems to have accepted Bidenomics and the pro-union agenda). The problem with that is that it has opened the door for right wing populism. The differences with previous versions of conservative economics are subtle, and in some sense rhetorical, since they do very little for working people. On right wing populism economics and their connection to the working class, and the problematic relation of Dems with the working class, I suggest the recent piece by Kim Phillips-Fein on the London Review of Books. She says:

"In 1968 George Wallace talked to a working class that was afraid of dispossession. Trump speaks to workers too, but more directly uses the language of money and corporate success; his appeal derives from identification with the boss -- reflecting the extent to which he seeks to win the allegiance of small business owners. Just as American political institutions have been hollowed out since the 1960s, so has the country's political economy, in ways that have helped to increase Trumps' appeal."

The self-made man myth, an American neologism (Henry Clay, if I'm not wrong), is incredibly corrosive. I hope I'm right and we can avoid a recession, and Trump.

Two letters to The Economist about Donald Harris and what they reveal about ideology

 

Spaghetti economics: Shootout at Harvard Square

There were two letters about the poorly written (not the English, always impeccable, contrasting to my spaghetti English, which is always slightly off, like the Westerns) piece that The Economist had on Donald Harris. One by Robert Blecker, Steve Fazzari and Peter Ho, setting the record straight on the breadth and depth of Harris' contributions to economics. On this, they echo what the Post said about Harris' policy advice in his native Jamaica. The subtitle of the Post piece said: "An unconventional economist at Stanford, Donald J. Harris pushed strikingly nonideological economic solutions to the nation of his birth." Harris was (and still is, from what I can assume) a reasonable man, both as a scholar concerned with knowledge, and as a policy advisor. Nonideological being the key word.

The other one, that I reproduce in full, is by Professor Avinash Dixit, who says:

"You say that Mr Harris 'proposed that firms must choose from a 'book of blueprints', which need different capital goods' in his book published in 1978. Alas, that had been proposed more thoroughly and rigorously in 1953 in a brilliant paper by Edmond Malinvaud, for which he should have won a Nobel prize. And Robert Dorfman, Paul Samuelson, and yes, Robert Solow, whom you cite as author of the aggregate capital-growth model, covered it more comprehensively in a book from 1958. Perhaps the mathematics of all this were beyond the capacity of the so-called Marxists of Cambridge."

This, and The Economist piece itself, confirms the high degree of confusion about the meaning of the capital debates. The problem is not so much the lack of mathematical savvy of the Cambridge, UK, economists, Marxists or otherwise, but the lack of understanding of theory, by some very serious and important mainstream economists, and mainstream magazines (they do think they are a newspaper too, btw).

The Economist piece, commits the mistake that I suggested (see my old post on the Capital Controversies here) was typical of most incorrect views on the debates between the two Cambridges, and suggests, essentially, that it was an aggregation problem, and that:

"Mr Harris did not move on. In his 1978 book he developed a model of growth without an aggregate capital stock. Rather than the smooth 'production function' of Solow, in which the rate of saving and population growth determines capital per worker, Mr Harris instead proposed that firms must choose from a 'book of blueprints', which need different capital goods. Capitalists will compete to ensure the rate of profit is consistent across different industries, picking a blueprint based on the level of wages and profits in the economy."

That's why Dixit suggests that the choice of technique models in Malinvaud, and in Dorfman, Samuelson and Solow, using disaggregated notions of capital would avoid the circularity of the aggregative model. It is always the case that firms will choose, given distribution, the technique that minimizes costs. Of course, that's not the issue. The problem is that one cannot obtain a measure of capital that is independent of distribution, and hence, the idea that supply and demand in factor markets can determine the remuneration of capital and labor cannot stand. The classical concern with distributive conflict, both of Marx, but also of bourgeois economists, as he called them, Smith and Ricardo, becomes relevant again [meaning, if I need to clarify, the notion of conflict in the distribution arena was held both by critics of capitalism, and defenders of what Smith referred to as commercial societies].

Disaggregation does little to solve the problem. First, as noted by Garegnani, long ago, the abandonment of the notion of aggregate capital, and the notion of factors of production, came together with the view that means of production got their own rate of return, but also with the disappearance of the notion that the forces of competition lead to a normal and uniform rate of profit. The traditional long run method of economics, that was the theoretical foundation of the discipline, was abandoned. Further, it is still the case that, even with a disaggregated set of means of production, in the the aggregate, savings must be equalized to investment, and some process for that has to be used. That is why some notion of the quantity of capital was necessary for the mainstream [in recent times, mainstream economists and policy makers have started talking of the natural rate of interest again, a notion that had vanished more or less, and about very simplistic negative relations between investment and interest rates, w/o even knowing the logical problems associated with that, reinforcing problematic views about distribution].

In other words, forget the notion that firms actually face a book of blueprints, and that they can substitute and change the structure of production with relative ease, according to changes in relative prices, and that somehow that, by affecting the relative supply and demand for capital (many capital goods) and labor, would determine distribution, since that is obviously highly improbable in reality. Choices are more limited, and substitution irrelevant, at best. The Cambridge, UK, economists (and not only the Marxists; most were some kind of Post Keynesian, as The Economist notes) and Harris knew better. Distribution is determined by the relative bargaining power of workers and capitalists.

Samuelson knew enough, math and theory, to know when he was wrong. Mr. Dixit thinks his mathematical knowledge puts him above the rabble [the so-called Marxists of Cambridge, and Mr. Harris]. But what his letter [and the piece by The Economist] actually shows is lack of engagement with the theoretical argument, and, in contrast with Mr. Harris, an incredible amount of ideological bias. After all, the idea that distribution is according to effort, and that markets produce optimal outcomes is at play. It shouldn't be. He raised Malinvaud, I counter with Smith, which knew way less math than he does, for sure, but whose book is still worth reading.