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September 16, 2009

Economist's View - 6 new articles

"Wages are Barely Growing"

Here's one of the twelve graphs from the latest Economic Outlook from John Fernald of the SF Fed:

[For more on wages, see here, then here.] Some quotes from the outlook:

On balance, it's probable that the economy has reached bottom and begun its slow recovery. The course going forward surely won't be smooth or painless, and clear risks remain.

With the lingering effects of declining wealth, a poor job market, weak income growth, and tight credit, consumption growth outside of motor vehicles has remained anemic.

Despite the risks, we still expect the return to positive output growth to begin in the current quarter. We expect the recovery will gradually pick up steam over the next year or two.

The current recession is longer than any recession since 1933 and, in terms of GDP, is as deep as any in the post-war period. Yet the forecast for recovery is anemic compared with historical experience. The relative weakness reflects in part continuing tight credit conditions for households and businesses as financial institutions and markets slowly heal. At the same time, as noted earlier, consumer spending is likely to remain relatively weak. In the forecast, it takes 11 quarters, until the third quarter of 2010, just to get GDP back to its pre-recession level.

With the weakness in wage growth and the overall high degree of slack in the economy, little inflation pressure is evident in the near term.

[For more on how much we need to make up to close the GDP gap, and for the risks of a "double-dip," see here.]


"The Origin of Development as Cover for Imperialism and Racism"

Bill Easterly says economic development was "a new justification for colonial rule to replace the unpopular and increasingly implausible idea that they were a superior race destined to rule inferior races":
How the British Invented "Development" to Keep the Empire and Substitute for Racism, by William Easterly: During the early years of World War II, Japan won major victories (such as the capture of Singapore) against the British and threatened India. Japanese propaganda pointed to British racism and offered themselves as the defenders of non-white peoples. The British feared that non-white people in the colonies might side with the Japanese rather than their colonial masters. The British had to come up with a new justification for colonial rule to replace the unpopular and increasingly implausible idea that they were a superior race destined to rule inferior races. In response, they invented the concept of economic development.
This story is told in an undeservedly obscure book by Suke Wolton, 2000, Lord Hailey, the Colonial Office, and the Politics of Race and Empire in the Second World War, (I have this thing for obscure development history books; this one is ranked #4,399,430 on Amazon)
The Japanese charge of British racism was certainly correct. They were so racist they thought even nonwhites acknowledged their own inferiority, like when Julian Huxley referred to the natives' "childlike belief in the white as an inherently superior being." After World War I, the Americans and British shot down a League of Nations resolution for Racial Equality proposed by the Japanese. The Colonial Office said in 1939 "most Africans are still savages."
But during the dark days when the British were losing World War II, the racism was no longer allowed to be so explicit. The Labor Minister in 1941 banned the N word for Africans and "coolies" for Indians. The Colonial Office further told the BBC that the N-word should be "discouraged" on the radio. A further breakthrough caused the BBC to drop the word "native."
But something more positive was needed to put the Empire in a good light. A long-time colonial official, Lord Hailey came up with the idea in 1941 of redefining the Empire's mission as "promotion of native welfare." (I guess he didn't get the BBC memo about "native.") And he argued the colonies could only develop with Britain's help (sound familiar?) In short, Hailey said:
A new conception of our relationship…may emerge as part of the movement for the betterment of the backward peoples of the world, which stands in the forefront of every enlightened programme for …postwar conditions.
To repress independence movements, however, Hailey made a distinction between political development and economic development: "Political liberties are meaningless unless they can be built on a better foundation of social and economic progress." (A line that autocrats have been using ever since.) The Colonial Office thought many colonies "little removed from their primitive state," so "they will probably not be fit for complete independence for centuries."
Of course, changing the language from racist to economic development did not mean racism suddenly disappeared. As Wolton shows, "the white Western elites still believed in their fundamental superiority." In the end, Wolton says, "The major powers would continue to be able to determine the future of the colonial territories – only this time the source of their legitimacy was based less on racial difference and more on their new role as protector and developmental economist." After the war, even more officials went out to the Empire in what became known as the "second colonial occupation."
Why does this history matter today? After all, the Empire fell apart much sooner than expected, and racism did diminish a lot over time. And I do NOT mean to imply guilt by association for development as imperialist and racist; there are many theories of development and many who work on development (including many from developing countries themselves) that have nothing to do with imperialism and racism.
But I think the origin of development as cover for imperialism and racism did have toxic legacies for some. First, it meant that the concept of development was determined to fit a propaganda imperative; it was NOT a breakthrough in thought by economists. Second, it followed that development from the beginning would stress the central role of Western aid to help the helpless natives (which shows up in the early development theories like the "poverty trap" and the "Big Push," and the lack of interest in local entrepreneurs and market incentives). Third, the paternalism was so extreme at the beginning that it would last for a long time – I still think it is widespread today, especially after today's comeback of the early development ideas in some parts of the aid system. And this history also seems strangely relevant with today's "humanitarian" nouveau-imperialism to invade and fix "failed states" like Iraq and Afghanistan.
Membership in the development elites is far more diverse than in Lord Hailey's time, but I fear that, to use Wolton's words, "in the end, the elites still believe in their fundamental superiority."


Response to Comments on "On Krugman"

Robert Levine responds to your comments on "On Krugman":

Response to comments on "On Krugman" by Robert Levine: The variety in content and style of the comments on my rumination "On Krugman" (and on Schumpeter, and on China and India) rather surprised me. So here is my response, or at least to

Those In prose.

First, let me try clear up two points on which I was apparently less than lucid:

1. My footnote mention of Galbraith was not intended to introduce his views or even his book, The Great Crash, 1929, into the debate on what seems to be known for the moment as the Great Recession. (If it turns down again, it may become Great Depression II, a la World War II.) Rather, it was a too indirect reference to the fact that his skepticism about mathematical and other rigorous theoretical economics would be likely to extend to all sides of the debate outlined by Krugman. It is a skepticism with which I agree. Richard Parker's John Kenneth Galbraith: His Life, His Politics, His Economics is an excellent and highly readable exposition, although it does lead one to wonder at points which of the views are Galbraith's and which are Parker's.

2. I am as dubious as any of the commentators about the regular periodicity of Schumpeter/Kondratieff waves. As a daily bike rider along Santa Monica beach, I am fully aware that waves arrive in all sizes and at a range of intervals. But they are nonetheless inexorable and difficult to model mathematically, were anyone to try. (To bring in the true predictability of the tides on which they ride, however, would probably push the metaphor too far.}

But the irregularity does not vitiate either the relevance to the current situation of Schumpeter's wave-producing concentrations of innovation and entrepreneurship, or their absence from the current debate. What lies outside all the models, conceptual as well as mathematical, on which the debate has been based, is that: inventions from the steam engine through the transistor to the world-wide web are transformed into innovations by profit-seeking entrepreneurs not terribly sensitive to interest rates or the state of consumer demand. Entrepreneurs' starry-eyed views of great wealth to be gained transcend these margins.

The information-revolution/dot-com-bubble provides a near-perfect example. Steve Jobs, Bill Gates, Larry Page and Sergey Brin, and the more diffuse set of progenitors of the internet, (and many others who missed, but you can probably Google their names up) thought they had billion-dollar breakthroughs. The interest rates charged on their initial financing may have changed some timing slightly; the demand for Burroughs electric calculators, Britannica encyclopedias, and communications via Western Union was unlikely to have been changed. The money, for the entrepreneurs and their venture-capital investors was in the huge gains from IPOs and subsequent developments.

Many of the secondary followers made big money too, but the wave extended inevitably into the silly dot.coms, and the bubble expanded and burst as it always does. Nonetheless, the result for was a true revolution in the ways of providing and distributing goods and services: the economy of 2008 would not be recognizable from 1978, nor was it predicted. (I think that the current housing/financial boom/bubble can be interpreted the same way, but that interpretation would have to be more complex.)

As Gary Rondeau's comment on my initial piece noted, the World Dynamics models of Forrester and Meadows do cover such systemic changes. But they are not models referenced in the current debate. Additionally, although it is in bad taste to continue to refer to one's own writings, I will mention one more of mine, "Thinking Big", in the Milken Institute Review, first quarter 2001 (too early to be on line, but hard copy reprints available FREE at www.rand.org/pubs/reprints/RP938) in which I discussed the deep cultural reasons why the U.S. leads (led?) the world in entrepreneurship.

Which introduces the other subject of my piece and the comments—China, India, et al—about which I have less to say because my rumination was more ruminative. The fast-developing countries have based their development thus far on combining our technology with their low wages (a combination made possible by the information revolution). But Chinese and Indian peoples, noted centuries ago for their inventions, have been in recent years among the most innovative—the technology/low-wage nexus being a major case in point.

Even if we are not on the way to losing our entrepreneurial advantage, however, that which has happened and continues to happen is profoundly disruptive. Whether or not the changes can be understood as a "negative" Schumpeterian phenomenon as I suggested, they are fundamental changes in the real global economy that cannot be coped with very well using either saltwater or freshwater models.

None of this is intended to suggest that the debate or its models are trivial. They may not, as I have suggested, cover the basic causes of our current troubles, but they do treat with the melioration of the results. And melioration is crucial: left alone as they were before 1933, the downsides of Schumpeter/Kontratieff waves and lesser cycles have in the past caused immense human misery and immense, if pre-nuclear, wars. They must be meliorated better than they were in the first half of the 20th century.

And I will end this comment on comments as I did my initial contribution. Depending on Schumpeterian innovation on the one side, and developing-country competition on the other, we may be in for a long trough—the "secular stagnation" of the 1930s. In that case, I am firmly on the ultra-Keynesian (and what may be the Krugman) side with regard to means of melioration. Secular stagnation may mean secular deficits; so be it, it is better than the alternatives.


links for 2009-09-15


What's Wrong with Macroeconomics?

Some recent contributions to "what's wrong with macroeconomics?":

Added 9/15: Added 9/16:

Also:

[This list is incomplete, so please add any I've missed in comments.]


A Model for Reform?

The financial reform enacted after the Great Depression didn't come without effort:

In Original Reformer, a Model, by Brady Dennis, Washington Post: The last time Washington enacted sweeping financial reform, more than 75 years ago, the catalyst was a cigar-smoking, Sicilian-born immigrant named Ferdinand Pecora.

A former New York prosecutor, Pecora was the last in a series of investigators hired to examine the causes that led to the stock market crash of 1929 for the Senate Committee on Banking and Currency. In early 1933, the newly-elected Democratic president, Franklin D. Roosevelt, gave the bulldog lawyer his blessing to dig deep into the excesses that had plunged the nation into the Great Depression.

The result was a relentless investigation, 12,000 pages of transcripts that laid bare abuses on Wall Street and failures of Washington to adequately regulate the nation's financial system. Pecora's efforts provided a basis for reforms that would alter Wall Street and maintain relative stability in the banking industry until the recent crisis. These included legislation that for the first time regulated the sale of securities and helped establish the Federal Deposit Insurance Corp. and the Securities and Exchange Commission. ... [...continue reading...] ...

The last three paragraphs of the article and the last sentence in particular give the key to making financial reform work:

... Whatever regulatory changes ultimately emerge from Congress, they alone may not be enough. In his book, Pecora -- who went on to become an SEC commissioner under its inaugural chairman, Joseph P. Kennedy Sr., and later a New York Supreme Court judge -- warned that laws themselves "are no panacea; nor are they self-executing."

On the day that Franklin Roosevelt signed the Securities Exchange Act into law in 1934, Pecora was in attendance. At one point, the president turned to Pecora and asked, "Ferd, now that I have signed this bill and it has become law, what kind of law will it be?"

"It will be a good or bad bill, Mr. President," Pecora said, "depending upon the men who administer it."

Update: Another lesson.

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