A Macro trend that worries me a bit

Published by Anonymous (not verified) on Mon, 12/02/2018 - 11:30pm in


Economics, Piketty


10 Year Treasury Rate - 54 Year Historical Chart; source: Macrotrends.

Let me start with two claims I will not pursue in this post: (i) I am very confident that the price of Bitcoin is a bubble (some other time about that). I honestly don't know (ii) if last week's market correction was the start of a downward trend in stock prices or just a minor hiccup in a long-run bull market. This post is not intended to make anybody money or to predict the future (say, in the manner of Donald MacKenzie who wrote about the Volatility Index just before it rose again).

Since 1980 headline interest rates have been in full decline. (The inflation adjusted curve has the same shape, but is slightly less striking. The early 70s had historically low real interest rates before the great run-up.) In what follows I treat this, for simplicity's sake as a free-standing cause (and abstract away from the political and economics reasons for this decline).* During this long decline, governments could borrow relatively easily, bond-investors grew rich without much effort, bankers could make easy money in virtue of their license to print money, and it was easy to make money in financial and real estate assets (which made retirement planning for upper-middle class families easy). That, together with stagnating wages, has had huge effects on income distribution (see Piketty).

Thirty-seven years is a long time.+ That's longer than the Berlin Wall stood; longer than (ahh) the thirty-years war. That is, expectations have been trained up on falling interest rates; business models and risk models across the economy rely on cheap credit and falling interest rates as an ordinary fact of life. For example, "most deposit models [of big European banks]  are based solely on a period of decreasing interest rates and hence might entail high model risk."  I suspect nobody really knows what the effects on the financial sector and real economy will be once interest rates have really bottomed.

Of course, even if interest rates have bottomed it does not follow they will go up. But I would think that inflation expectations will rise following the combination of tax-cuts, government deficits, discouragement of immigration, and persistent low unemployment.

Few active traders remember what it's like to be in a market in which interest rates go up regularly and systematically. The present financial sector is almost certainly not very robust in such an environment; Just recently the President of the Minnesota FED was adamant that "The biggest banks need more capital, and that’s the best way to protect taxpayers," {HT. Eric Winsberg} Almost certainly European big banks are in worse shape.++ Governments are surely not well prepared to borrow at substantially higher costs. Whatever the economic effects of (hypothetical) rising interest rates will be, they require very tough and politically unpalatable choices by regulators and governments unless we're really are on a higher economic growth trend. (But that's not obvious given aging populations. [Again, if immigration is really curtailed that will worsen matters.])

Now, since the last great recession, neo-Fascist parties and sentiments have been growing in popularity all over the world. Leaving aside, say, Greece (which has suffered greatly economically), this has happened during peacetime, relatively low inflation, and -- despite all the challenges -- relatively prosperous times.** So my worry is, if interest rates rise, and there will be another severe bout of economic dislocation and hardship, will neo-fascism get its lucky break? For my suspicion is that it's precisely when reliable expectations are thwarted that people are willing to be receptive to radical alternatives.

*Undoubtedly, Volcker, the decline of unions, automation/computers, and the astounding  integration of world markets have something to do with all of this.

+Yes, there have been periods when interest rates seemed to move back up a bit.

++Why? Well, the European stress test has been unreliable, and the European banks have not really been recapitalized nor restructured since the Great Recession.

**My assumption being that war and high inflation are the most fertile breeding ground for fascism.

On Spooner and Basic Capital.

Published by Anonymous (not verified) on Mon, 15/01/2018 - 11:47pm in

The inevitable result of these principles would be that the class of employers, who now stand between the capitalist and laborer, and, by means of usury laws, sponge money from the former, and labor from the latter, and put the plunder into their own pockets, would be forced aside; and the capitalist and laborer would come together, face to face, and make such bargains with each other, as that the whole proceeds of their joint capital and labor would be divided between themselves, instead of being bestowed, in part, as now, as a gratuity, upon an intermediate intruder. The capitalist would not only get all he now gets as interest, and the laborer all he now gets as wages, but they would also divide between themselves that sum which now goes into the pockets of the employer. What portion of this latter sum would go to the laborer, and what to the capitalist, would depend upon the circumstances and bargains in each particular case. The probability is that for the first few [36] years after these principles went into operation, capitalists would ask and obtain a pretty high rate of interest. The competition among laborers, in their bids for capital, would produce this effect. But as the general safety of the system should be tested, and as laborers should gradually make accumulations, which would serve as some security for loans, and as the business of banking should be increased, the rate of interest would gradually decline, until—probably within ten or twenty years—capital would go begging for borrowers, and the current rate of interest would probably not exceed three or four per cent. And all the proceeds of labor and capital, over and above this interest, would go into the pockets of the laborer.--Lysander Spooner (1846) Poverty: Its Illegal Causes and Legal Cure, 

In Poverty, Spooner attacks usury laws, promotes free banking, and (as I discussed earlier) insists on complete debt forgiveness after a debt is due and been repaid to one's capacity. Thereby, Spooner hopes to promote a more equal economic regime -- he explicitly has in mind the conditions prevalent in early nineteenth century New England -- in which banks and capitalist employers are reduced in significance and a lot of us are independent economic agents with our own capital. He is a fierce critic of conditions that generate poverty and extreme wealth inequality. He argues that his scheme will generate not just higher average income, but also more equality. He thinks the rich will be less productive than  autonomous, middle class economic agents. He expects independent workers to more productive than wage-earning workers. He seems to think most firms will be limited in size.* Let's call this a Spooner economy.** This is relatively lightly regulated and with firm property rights and few sources of rent-seeking behavior.

Somewhat surprisingly he does not advocate for an estate tax, and this undermines part of the grounds of his egalitarian optimism. That is, Spooner thinks high returns to capital are primarily due to the structure of the banking sector, the bad regulation of credit, and capitalist modes of production. But he seems to miss the possibility that the wealth of the wealthy may grow at a faster rate than the growth in wages of the rest of us due to the growth of the economy (Piketty's famous formula, r > g). It is an open empirical question, if in a Spooner economy, Piketty's formula holds.

Before I return to Piketty, let me note that Spooner is a critic of financial intermediaries which both (a) profit from other people's labor and (b) because of lack of access to capital among the poor, make (i) wage-labor necessary, and thereby (ii) produce an economic hierarchy that sustains a small class of capitalists and a large working class. (As should be clear he is also a critic of forms of credit that create permanent indebtedness among the working poor.) In addition, and this is clear from the quoted passage above, his moral criticism of financial intermediaries is that the relationship between creditor and debtor becomes an impersonal one; it's not 'face to face.'  To adopt Steve Darwall's framework, in a Spooner economy, economic agents relate to each other in the second person. For Spooner production is a joint enterprise among independent and mutually interdependent economic agents with each getting its fair share.+ It is a remarkable vision, especially because it is articulated just as the industrial revolution and the large corporation are taking off full steam.

A natural extension of Spooner's position, while taking unequal initial conditions, or unfair historical legacies, and higher returns to capital seriously, absent significant estate taxes, is a basic capital scheme (as distinct from a basic income scheme). There are many variants on this. Ordinarily basic capital is understood as a  'one-off lump sum of financial capital paid to the individual on maturity' by the state (White 2011). If one  recognizes (i) that the largest investors are better positioned to profit from the cost of discovery (Brown et. al.: 2008) and (ii) that better endowed institutions tend to have higher risk-adjusted returns on their investments (Piketty 2014: 570-1), then ordinary basic capital scheme is not sufficient. One should find a way for the non-rich to grow along with the wealthy.*** In reflecting on a Piketty (without fully endorsing all of Piketty's claims), the influential mathematical economist, Debraj Ray, suggested (recall here) that "all [the world's] inhabitants must ultimately own shares of physical capital." (2014) By 'physical capital' Ray means land and financial assets. That is to say, if we want to make the growth of capital a joint enterprise each of us should (have a) share in its growth.



*It's unclear if recognizes that there may be barriers to entry in capital intensive industries; he also seems rather diffident about potential economies of scale.

**It's very similar to a Smithian economy, but Adam Smith is more friendly toward worker regulation and progressive taxes, including estate taxes.

+Some other time I will return to the benefits of impersonal mutual cooperation.

***Again, it's not clear if these empirical relations hold in a Spooner economy.

De Grouchy's Egalitarian Philosophy of Law

Published by Anonymous (not verified) on Thu, 26/10/2017 - 5:05am in

In order for the fear of a sentence to be effective and beneficial the sentence must not outrage. Its justice must be perceptible to average reason, and it must especially awaken the conscience, at the same time as it punishes its silence and slumber. But this will not be so (a) if sentences are too strong and instead of inspiring horror against crime, appear barbarous and unjust themselves; (b) if they do not punish the injustices committed by the rich against the poor; (b*) if, when these injustices are not subject to sentences, the laws do not prevent them in other ways; (c) if a judge can arbitrarily harden or soften a sentence; (d) if there are privileges, hereditary, personal or local which offer a legal loophole, direct or indirect. Then the people are tempted to see criminal laws as made against them and in favor of the rich, as the result of an association designed to oppress them. Then they hate more they fear these laws that no longer inform their conscience because they outrage their reason, and this hatred is enough to overcome fear in strong souls and in all those made bitter by the joint feeling of injustice and need.--Sophie de Grouchy, Letters on Sympathy, translated by Sandrine Berges, Letter 8.

ln the quoted passage Sophie de Grouchy, whose Letters on Sympathy (hereafter Letters) is attached to her translation of Adam Smith's Theory of Moral Sentiments (hereafter TMS) echoes the strategy I attributed to Cesare Becciara's Crimes and Punishment recently. She relies here on a barbarous vs civilized distinction not so much to justify imperialism or cultural superiority, but in order to claim that the Europeans are (often) barbarians. While she agrees with Beccaria that bad law too often fails to deter and (unintentionally perhaps) ends up encouraging law-breaking, she thinks the the main point of law is not so much deterrence (as Beccaria thinks), but rather to help cultivate virtue: "to awaken... conscience." This it does not by imposing morality by, say, the punishment of sin; but rather by leaving people mostly alone and by paying attention to incentives (recall this post): “The incentive to behave unjustly, when it is based on need, is therefore extremely rare in the absence of bad laws,” (Letter 7 [and recall this post for more].) In addition, she favors making the law fairer (about which below), more impartial (by removing discretion (c)), and (again following Beccaria) making punishment more proportionate to harms done--for laws that too harsh fail to deter (see a).

Underlying De Grouchy's vision is the idea that law must be intelligible to those governed by it. (This is not quite in Beccaria, but the idea goes back to Plato's Laws.) Then it can perform its proper function of moral education (awaken...conscience), while simultaneously for its authority rely on the good opinion of those it rules (justice must be perceptible to average reason). She puts this in striking language: "by preserving their natural rights, the social order would put men in the best position to bring about mutual respect." (Letter 8.) If the law offends against ordinary moral sense it will undermine its proper function and creates outrage (“for the fear of a sentence to be effective and beneficial the sentence must not outrage.). If the legal system generates anger the law undermines itself by reducing compliance and undermining virtue, both are needed for social order.*

So far I have emphasized De Grouchy's debts to Beccaria (and Voltaire's commentary on it). But De Grouchy's interest in the way law can facilitate moral equality is distinctive. In fact, in the quoted passage at the top of this post (see b&d), she recognizes that wealth inequality can undermine the rule of law: laws must be fair and not favor the wealth by exempting from the law -- a common feature of feudal society -- or by being biased toward wealth (a common feature of most legal systems in practice.) To be sure Beccaria is not indifferent to wealth inequality; he promotes luxury consumption in order to combat what we may call the Piketty effect: "The pleasures of luxury are not the principal sources of this happiness; though, by preventing the too great accumulation of wealth in few hands, they become a necessary remedy against the too great inequality of individuals, which always increases with the progress of society." (Ch. 32, p. 123; this echoes Hume and Smith.) He is clearly sensitive to the idea that concentrated wealth is bad politically.

Thus, De Grouchy claims that one way to promote a proper rule of law is, then, to reduce inequality directly: “Let us only remove the extreme inequality that puts the poor too far from the rich to be known by them, and the rich too far from the poor to see them, and to let the voice of humanity reach their heart; and then unexpected misfortunes will become rarer and will certainly be mended.” (Letter 8) The comment is made in the context of her discussion of the nature of law, but here, too, she is (and this echoes Adam Smith's TMS) clearly focused on the moral effects of inequality and advocates political and legal action to combat it directly.


*That is, she is not a critic of political anger as such (recall this post on Srinivasan's criticism of Nussbaum), but she thinks it is a sign worth taking seriously--a call to reform by those in power if they wish to preserve social order.

Book Review: The Contradictions of Capital in the Twenty-First Century: The Piketty Opportunity edited by Pat Hudson and Keith Tribe

Published by Anonymous (not verified) on Wed, 18/10/2017 - 12:27am in

In The Contradictions of Capital in the Twenty-First Century: The Piketty Opportunity, editors Pat Hudson and Keith Tribe bring together contributors to respond to, and build upon, the possibilities offered by Thomas Piketty’s Capital in the Twenty-First Century. While George Maier would have welcomed more attention on the broader cultural, political and social facets of inequality beyond an economic frame, this is an intellectually stimulating collection that will be of particular use to those undertaking research projects examining inequality today. 

The Contradictions of Capital in the Twenty-First Century: The Piketty Opportunity. Pat Hudson and Keith Tribe (eds). Columbia University Press. 2017. 

Find this book: amazon-logo

Riding on the back of the economic crisis and the Occupy Movement’s role in reigniting the inequality debate, Thomas Piketty’s seminal work Capital in the Twenty-First Century fell not only into the centre of many academic discussions but also the public zeitgeist. By the start of 2015 it had already sold over 1.5 million copies, hitting number one on the New York Times bestseller list for nonfiction and is now reportedly being adapted into a documentary film. Pat Hudson and Keith Tribe’s new edited collection of responses, titled The Contradictions of Capital in the Twenty-First Century: The Piketty Opportunity, follows a slew of reactions ranging from press responses to dedicated special issues from academic journals.  In this context, it is worth considering the contribution that the collection offers: does it go beyond what has already been offered in previous responses to Piketty? What does it add to the debate?

It is important to note from the beginning that the primary focus of the volume is economic. The book’s blurb describes its intention as ‘helping to cement a lasting place for inequality in the future agenda of economics and economic history’ – clearly positioning itself in relation to an economic lens. Despite claims within the book that a full understanding of inequality requires a ‘cultural, political and sociological approach as well as economic analysis’, no real space is given to these frameworks for understanding inequality, which will be a disappointment to some who wish to see inequality theorised and discussed in wider terms.

The book begins with a section on concepts and models, consisting of three chapters. This part offers a mixed bag of broad insights which will be useful to both scholars of inequality and those with a more general interest. The section, however, delivers little in the way of newness. Space is given to a critique of Piketty’s conflation of capital and wealth, along with a discussion of the assumptions underlying the Cobb-Douglas model and how these might challenge Piketty’s work. However, these arguments have been previously and comprehensively articulated in a 2014 paper by Yanis Varoufakis. The volume nonetheless retains the advantage of talking about these issues in a more accessible vernacular that will translate across disciplines. This is demonstrated in the chapter on inequality by Tribe, which is engaging and intellectually stimulating to a wide audience. The section overall provides a sound and appealing overview of the historical lessons that have led us to the current trends driving research on inequality, as well as insights into the challenges that remain.

Image Credit: Thomas Piketty, Sao Paolo, September 2017 (Fronteiras do Pensamento / Greg Salibian CC BY SA 2.0)

Subsequently, the second and third sections of the book, titled ‘Piketty in Western National Contexts’ and ‘Piketty: Global Commentaries’ respectively, offer Piketty’s work a new level of contextualisation by looking more attentively at regional political and policy currents. These contexts, it is argued, underpin, but also go beyond, the aggregated data that was presented and analysed within Capital. These chapters respond to critiques of Piketty being overly focused on building abstract economic laws of capital, and do important work to ground debates of economic inequality within specific political contexts. Along the way, the contributors raise questions regarding how issues such as hyperinflation in Germany, labour reforms in France and growth in developing countries, especially those within Africa and Asia, relate to the bigger pictures of inequality painted by Piketty, adding necessary nuance. Space remains throughout these chapters to develop geographic arguments further.

Hudson provides the concluding chapter, tying together the strands of argument developed throughout the book. The outcome is the identification of a series of areas where there is a strong indication for further research on capital and inequality. Hudson correctly notes the national boundaries placed upon inequality in Piketty’s work, and the need for research that transcends these, especially in the globalised context of increased labour and capital mobility. But this argument could be extended further: for instance, there is certainly scope to interrogate access to these mobilities. As an extension of this, how do inequalities work at the sub-national level, in the context of the geographically isolated?

Hudson goes on to argue that political and social contexts cannot be sidelined: tax and distributive policy, labour rights, financial regulation and social democracy more generally have a part to play in future research into inequality. Notable space is also given to discussion of technology, its role in economic growth and the potential challenges to inequality. Once more, there is the potential to go further: the economic perspective that Hudson carries serves to frame her vision of political, social and digital contexts to the point that they can be directly translated into economic reasoning. Other scholars, from Karl Marx to contemporaries such as Beverley Skeggs and David Harvey, have done substantial work to conceptualise capital in more complex ways. There is a notable body of scholarship on the translation between capital and value; yet, there is still a need to bring such theorisations together with Piketty’s data, an opportunity that has been missed by the strictly economic focus employed throughout the volume.

Overall, Hudson argues that we must proceed by utilising the opportunities that Piketty has developed: ‘it will be necessary to question further the goals of growth and development: how to guarantee better social outcomes from economic growth, and how to reconcile growth with equity and sustainability’. These points aren’t particularly new and suffer from being overly broad in scope, but they are generally well argued and easy to agree with, offering inspiration to researchers. The work of the researcher will be to turn these wide aspirations into specific research projects to realise more novel insights.

The book ends with a chapter from Joseph Stiglitz and Ravi Kanbur. Despite the expectations that might surround a chapter from such renowned scholars, it stretches for a mere six pages, including references – the shortest contribution to the volume. Its position within the book is therefore somewhat questionable, coming after Hudson’s comprehensive chapter which draws a range of clear conclusions: Stiglitz and Kanbur simply add to this their desire for new theories of wealth and income distribution. As a result, the final chapter feels more like a simple addition of signatures to the manifesto that the book presents, rather than an original contribution in itself.

The real value of the collection is in the presentation of research opportunities. While The Contradictions of Capital in the Twenty-First Century offers little in the way of answers and suffered from a firmly drawn disciplinary boundary, dozens of original and important research questions can – with some work from the reader – be pulled from its pages. Furthermore, the book offers a useful background and guidance for those already researching inequality or those with a more casual interest. This makes the book somewhat useful for students and academics looking to design research projects at the forefront of the inequalities debate. Overall, Hudson and Tribe have edited an intellectually stimulating collection, while at the same time ensuring it is accessible to both interdisciplinary and non-academic audiences.

George Maier is a PhD student at the London School of Economics and Political Science, associated with the International Inequalities Institute. His current research relates to the changing relationship between capital and labour in the contexts of digital inclusion. He holds a master’s degree in Critical Theory and Political Science from the University of Nottingham. He tweets using the handle @GeorgeMaier

Note: This review gives the views of the author, and not the position of the LSE Review of Books blog, or of the London School of Economics. 

Thursday, 11 February 2016 - 1:39pm

Published by Matthew Davidson on Thu, 11/02/2016 - 1:39pm in

I'm reluctant to contribute to the Piketty backlash, as it seems to me to be mostly motivated by the unrealistic expectation that his book should have provided a comprehensive theory of everything. However this blog post from Alexander Douglas provides such a pithy account of the workings of public fiscal balances that it's worth recirculating. In response to the claim that "there are two main ways for a government to finance its expenses: taxes and debt," he writes:

Government spending isn’t financed by anything. The government pays for everything by crediting the non-government sector (employees, companies, foreign governments, etc.) with financial claims. Some of these claims are returned to the government in order to settle liabilities to the government (for instance in tax payments); others remain as financial holdings for the non-government sector. At any given moment the claims remaining as financial holdings constitute the whole of the ‘public debt’.

Tax revenue largely depends on the volume of spending. Decisions to spend rather than save are largely at the discretion of non-government agents. It is therefore very misleading to speak, as Piketty does, as if the government chooses to ‘finance its spending’ through taxation or debt. The amount of government spending that remains as ‘debt’ is largely up to the discretion of non-government agents choosing whether to hold onto financial claims or pass them on so that they can eventually find their way back to the government.

It therefore makes no sense to panic about government "budget" deficits, if you're not also going to bemoan private savings. Ironically, as it happens, private savings currently is a big problem, as corporations hand out mattress stuffing — in the form of dividends and share buybacks — rather than investing. Yet more ironically, the appropriate response is for the government to make up the investment shortfall through large fiscal deficits. Otherwise the economic stagnation rolls on until (sorry, I can't resist it) r>g.