David Roberts at Vox.com wrote about one of my favorite topics for getting passionately angry, then quickly depressed about the state of the world.
Mining company buys other mining company; acquisition turns out to be huge failure; company goes bankrupt; executives get bonuses. Oh and workers get left out in the cold.
The first Congressional hearing I had the good (or bad) fortune to attend was related to the company acquired in this story: Massey Energy. In 2010, the company’s Upper Big Branch mine in West Virginia collapsed, killing 29 miners. MSHA found that flagrant safety violations contributed to the explosion and collapse (of course Congressional conservatives *blamed* MSHA, the regulator, for the safety violations; talk about a formative experience in Capital Hill).
In a victory for justice, Massey’s CEO was convicted… of misdemeanor conspiring to violate mine safety laws (… but not on felony charges for lying to investors and federal officials). He might even face jail time. You don’t hear much talk about those 29 miners, and you certainly won’t read much about the thousands welfare benefits are gutted by executives like those at Alpha Natural Resources, which bought Massey only to go under itself. Even after a cheeky US Trustee report from the Department of Justice, the employees benefits are gutted and the executives get their bonuses. C’est la vie.
I like the way Mr. Roberts sums it up:
Alpha is not the first coal company to go bankrupt in the past few years. It won’t be the last. And if history has demonstrated anything, nobody is more brutal and ruthless in their treatment of coal miners than coal companies.
Under the byzantine laws governing corporate capitalism, these companies can simply restructure; assets and tax liabilities are shuffled around like chess pieces, yet somehow when it’s over, nobody is responsible for the promises made to workers. They just get shuffled off the board.
Executives, however, always get their bonuses.
I found this piece at Politico (Politico!) extremely interesting, in that morbidly, depressing way only an in-depth account of the Koch brothers can be [here’s another from a few years ago].
Their ‘libertarian’ movement has been planned since at least the 1970s:
Reading the papers from 40 years ago, it’s not hard to recognize the Koch political movement we see today—a vast and complex network of donors, think tanks and academic programs largely cloaked in secrecy and presented as philanthropy, leaving almost no money trail that the public can trace. And it’s these techniques Charles first championed decades ago that helped build his political faction—one so powerful that it turned fringe ideas William F. Buckley once dismissed as “Anarcho-Totalitarianism” into a private political machine that grew to rival the Republican Party itself.
It’s hard to tell if these people actually believe this pseudo-economic, pseudo-philosophical babble (I guess some of it is real philosophy), or if this is purely self-interest, where they’ve constructed the most comprehensive strategy to capture and attack government that I could even imagine. It is almost too bizarre to believe, and impossible to know what to think: their family’s money partially comes from industrializing Stalin’s Soviet Union, their strategy for indoctrinating U.S. college students partially comes from the Nazi’s Hitler Youth model, and their father praised Mussolini’s suppression of Communists as an original member of the John Birch Society.
I loved this speech by Dr. Gertjan Vlieghe (a member of the Bank of England’s Monetary Policy Committee). He talks about how, in the past, we would think about the economy as being on a stable growth path, where the economy is hit by small shocks and quickly reverts to the mean. The problem for the current crisis is that mean-reversion is built into many of the economic models, but the economy isn’t reverting to the mean. That’s part of the reason the Fed (and nearly everyone else) has done a really bad job with economic forecasting:
I really enjoyed this blog post from Eric Lonergan. It provides a nice, short primer on 5 main mental frameworks for thinking about the economy: Keynesian, classical, rational expectations, Minskyian, and Marxian.
I get the impression that you probably haven’t seen much Marx- or Minsky-inspired economic analysis in the NYTimes or WSJ in the past. As researchers continue to think about income and wealth inequality, and incorporating the financial system into models of the macroeconomy, it is almost inevitable that we’ll have to revisit and relearn (and empirically test the theories of) Marx and Minsky. This recent book review helps explain why Minsky matters and how he predicted and helped explain the trends leading to the financial crisis and Great Recession decades before they happened.
Though mainstream economists might avoid calling their work an extension of Marx, I think research moving forward is going to focus more and more on the allocation and distribution of resources, which are political and social issues as much as economic. That makes it uncomfortable territory for a lot of economic theory, and hopefully a ripe area for new thinking. But, as we learned from Keynes and Minsky, the future is inherently and completely unknowable (maybe economic inequality will reverse, we’ll never have another financial crisis, and climate change will stop tomorrow, who knows?).
Fed Chair Janet Yellen just responded to Ralph Nader’s terrible letter arguing with the Fed over zero interest rate policy. Nader apparently has no grasp on basic macroeconomics. The rationale for the policy is that the Fed’s job is to keep interest rates at the best possible place for maintaining stable inflation and full employment. By this metric the Fed has been failing for 6 or so years because interest rates have been too HIGH, not too LOW (inflation is below the Fed’s 2% target and inflation is just now returning to the low levels that are considered ‘full employment’).
It’s too bad that savers aren’t making high returns from interest rates on cash in their savings accounts, but as has been pointed out… it’s mostly very rich people who have lots of money sitting around in their savings accounts, and it is mostly well-to-do people who live off of interest earnings. What Yellen does not elaborate on in her response letter is that seniors/retirees are overwhelmingly poor, and many rely almost exclusively on Social Security. If you want to help extremely poor seniors: expand Social Security!
Yellen also does not mention that many of the factors keeping interest rates extremely low are secular (meaning longer-term factors), not related to the Federal Reserve. Importantly, demographics in the U.S. make it much harder to sustain higher levels of growth and corresponding higher interest rates: the U.S. population is aging and the population will grow more and more slowly, meaning that possible economic growth will presumably be slower in the future. This means that it is increasingly unrealistic to believe that most seniors can live off of retirement savings/interest, and it becomes more important for retirees to have fixed sources of income. Nowadays that’s pretty much Social Security (defined benefit retirement plans have mostly been destroyed).
[Sidenote: another policy solution to deal with persistently low interest rates is significant expansion of immigration into the U.S. — this used to be one of the great ‘conservative’ economic ideas… not so today…]
Unfortunately, the Fed cannot (/should not) comment on these types of policy issues (presumably because the Fed keeping it’s nose out of Congress’ business means Congress will keep it’s nose out of the Fed’s policy decisions… that arrangement isn’t working out well right now as Congress tries to tighten its grip on the Fed and Milton Friedman turns over in his grave).
Prof. Brad Delong reminds us that Alexander Hamilton, an important U.S. founder and economic thinker, expounded on the importance of government debt… in 1781:
Speaking within moderate bounds our population will be doubled in thirty years; there will be a confluence of emigrants from all parts of the world; our commerce will have a proportionable progress, and of course our wealth and capacity for revenue.
It will be a matter of choice, if we are not out of debt in twenty years, without at all encumbering the people.
A national debt if it is not excessive will be to us a national blessing; it will be powerfull cement of our union. It will also create a necessity for keeping up taxation to a degree which without being oppressive, will be a spur to industry; remote as we are from Europe and shall be from danger, it were otherwise to be feared our popular maxims would incline us to too great parsimony and indulgence. We labour less now than any civilized nation of Europe, and a habit of labour in the people is as essential to the health and vigor of their minds and bodies as it is conducive to the welfare of the State. We ought not to Suffer our self-love to deceive us in a comparison, upon these points.
He also made a related argument in favor of the establishment of a national bank, a chain of logic with which some GOP Presidential candidates should probably acquaint themselves. Continue reading
Researchers are looking at why the public have trouble understanding economics (beyond being lied to and misled by public figures). David Leiser and Zeev Kril find (via Chris Dillow) that apparently…
The human mind, they say, “is not particularly equipped to think about economics”:
People are remarkably poor at combining causal links into a system [and] are ill-equipped to cope with the aggregate effects of the individual decisions of many people…Thinking in terms of how an interlocking system of causal links produces an emergent outcome does not come naturally to laypeople.
This helps explain the bias against markets of which John Rentoul and Bryan Caplan have complained: because people underestimate the tendency of emergent processes to produce benign outcomes, demands for price and rent controls are stronger than most economists think they should be.
Faced with this complexity, say Leiser and Krill, people resort to metaphors – the most notorious being that governments should manage the public finances as if it were a household. Worse still, they are often overconfident about the applicability of these metaphors. Both of these habits were encapsulated by the silly BBC Question Time audience member who was so ably corrected by Yanis Varoufakis.
There is, though, another heuristic laypeople use, which Leiser calls the “good begets good heuristic” (pdf). He shows that people believe that good things cause good things to happen, and bad things to cause bad things. For example, they think a rise in unemployment is associated (pdf) with a rise in inflation because both are bad – in contradiction of the standard economists’ belief in a short-term Phillips curve.
Such a belief, whilst irrational, is not always wrong*: the standard Phillips curvedoesn’t jump out of the UK data, in part because supply shocks are common. What might be more problematic is that people think government spending is bad, and so associate it with rising unemployment.
I’ve got three observations here. First, the poor public understanding of economics is NOT a partisan matter. It leads both to anti-market attitudes and to anti-Keynesian ones.
Second, the issue here is not confined to the UK: the bad habits described by Leiser can be found among Israelis, Americans and Australians (and I suspect Europeans too) as well as Brits.
Thirdly, our political and social institutions do not adequately correct these problems, and might exacerbate them. Politicians and the media tend to pander to misconceptions rather than correct them: Mr Varoufakis’s reply to that audience member was welcome because it was so rare. There seems little effort to educate the public in economics: the BBC, perhaps because of its commitment to due impartiality, has failed. And I’m not sure academia can or will do the job. It’s not just economists who should lament this, but everyone who cares about the quality of our democracy.
* The distinction matters; rationality is about how beliefs are formed, rightness about their congruence to reality. You can be rational but wrong or irrational but right.
The household vs government analogy is particularly frustrating.