“It’s About Ideas, Stupid”
Jeff Madrick
The title of this post, by regular Triple Crisis contributor Jeff Madrick, references the adage “It’s the economy, stupid!”—coined by leaders of Bill Clinton’s successful 1992 presidential campaign, as a reminder to emphasize economic issues. Madrick, however, argues that both major political parties in the United States are afflicted by bad economic ideas, especially simplistic “invisible-hand thinking.” These bad ideas, he argues, result in bad policy, including a view of government deficits as an unmitigated evil, a fixation with very low inflation rates, and a tolerance of excessive inequality.
How much do ideas in economics matter? I raise the issue because I just published a book called Seven Bad ideas: How Mainstream Economists Have Damaged America, and some commentators have doubted the potency of ideas themselves. At the heart of the damage I describe—stagnant wages, inequality, a dearth of public investment, a growing class culture, repeated financial crises—is an over-simplified faith in the invisible hand, which in mainstream thinking not only rules individual markets fairly but also the entire economy with no interference from government. Demand and supply will meet as prices shift to establish a balance between then two. The faith in such general equilibrium continues strong because partly it makes economics so much easier to do. It also conforms to the ideological turn in America against trust in government.
There is absolutely no proof that general equilibrium actually exists, however, which Jonathan Schlefer has taken pains to point out. I’d argue the Democrats got a whipping in the mid-term elections because of such faith in the invisible hand and related ideas—to put it simply, because of bad economic ideas. I will explain further.
Economists will always deny that they take the invisible hand that seriously. They acknowledge that for it to work as Adam Smith suggested requires many assumptions: a free flow of information, complete lack of monopoly power, a pure and simple mechanism to discover the right price. It is a metaphor for how markets could work, not how they do work.
But as I stress in the book, it is too alluring an idea. Kenneth Arrow, who understands its limitation better than anyone, called it one of the most important contributions in history of intellectual thought. James Tobin called it one of the greatest economic ideas of all time. But, as I say, this idea is so beautiful, it overpowers good sense.
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Final Dodd-Frank Rule Won’t Address Incentives, Lax Regulation, or Size of Banks
Gerald Epstein
Regular Triple Crisis contributor Gerald Epstein, of the University of Massachusetts and the Political Economy Research Institute, speaks with The Real News Network’s Sarmini Peries about the 2010 Dodd-Frank Wall Street Reform law. Prof. Epstein notes two key problems with the law’s final rules: While Dodd-Frank includes a provision to prevent banks from merging, it does nothing to reduce the size or complexity of banks that are “already too big, they’re already too complex, they’re already too hard to manage.” Meanwhile, the new law’s rules about banks holding onto risky securities, he suggests, is a “red herring,” since the real problem is that “too big to fail” banks expect to be bailed out in the event of a crisis.
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Messages from the End of the World
Martin Khor
Imagine our world getting more and more polluted, and little space left for the Earth to absorb more pollutants before all kinds of disasters take place.
And imagine that we have not yet found the solutions to really slow down the emissions or to prevent the catastrophe that lies ahead.
This look into our scary future was evident at the recent meeting in Copenhagen to finalise the last climate change report of the IPCC (inter-governmental panel on climate change).
The IPCC produces the most comprehensive reports on the state of climate change. Over a thousand scientists came together to produce three huge reports on science, adaptation and mitigation.
And then a synthesis report was finalised at the Copenhagen meeting, with hundreds of government representatives going over, debating and finally approving a “summary for policymakers” (SPM) together with the authors.
The synthesis report and its SPM make very interesting reading. You can find information on the damage that climate change has already caused, and the many more harms that lie ahead.
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Dis-integration, Unemployment, and Instability: Brought to Europe by TTIP
Timothy A. Wise
What could the Transatlantic Trade and Investment Partnership (TTIP) do to help Europe recover from its current economic crisis? According to a new study by my colleague, Jeronim Capaldo, the US-EU free trade agreement could make just about everything even worse than it is now. (See the executive summary here and the full paper here.) Using a new UN economic model that avoids some of the false positives that come with assuming away things like unemployment, Capaldo shows that TTIP would likely cause trade among EU countries to decline, unemployment to increase, and labor’s share of national income to fall. European countries would also open themselves up to greater financial instability, rising asset bubbles, and possible contagion from fluctuations in U.S. financial markets. Capaldo’s model and study suggest what will happen if policy-makers fail to reverse the austerity-fed decline in the purchasing power of working people.
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What We’re Writing/What We’re Reading
What We’re Writing
Cornel Ban, Is There More Room to Negotiate with the IMF on Fiscal Policy?, Global Economic Governance Initiative (GEGI)
Sunita Narain, Making Sense of Green Building Rating, Down to Earth
Leonce Ndikumana, Better Global Governance for a Stronger Africa: A New Era, a New Strategy, Political Economy Research Institute (PERI)
Matias Vernengo, Some Thoughts on Currency Crises and Overshooting, Naked Keynesianism
What We’re Reading
Jeronim Capaldo, The Trans-Atlantic Trade and Investment Partnership: European Disintegration, Unemployment and Instability, Global Development and Environment Institute (GDAE)
Rania Antonopoulos, Sofia Adam, Kijong Kim, Thomas Masterson, and Dimitri B. Papadimitriou, After Austerity: Measuring the Impact of a Job Guarantee Policy for Greece, Levy Economics Institute of Bard College
Prabhat Patnaik, Dilma Rousseff’s Victory, IDEAs
Triple Crisis welcomes your comments. Please share your thoughts below.
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Income Inequality in the World
Arthur MacEwan, Guest Blogger
Arthur MacEwan is professor emeritus of economics at the University of Massachusetts-Boston and a columnist for Dollars & Sense magazine.
In many countries in the world—including most of the high-income countries and the most populous lower-income countries—the distribution of income has become more unequal. If we look at the income differences among countries, however, the situation has become more equal because per capita income has generally increased more rapidly in lower-income countries than in higher-income countries—but with important exceptions. And if we look at income distribution among all the people in the world—accounting for inequality both within and between countries—it seems that in recent decades the very high degree of inequality has remained about the same.
Distribution Within Countries
Take a look at Tables 1 and 2, which show the changes in the distribution of income within selected countries, several high-income and several low- or middle-income, over roughly the last two decades. The measure of income distribution used in these graphs is the ratio of the total income of the highest-income tenth of the population to the total income of the lowest-income tenth of the population.
Table 1: Inequality in Selected High-Income Countries, Mid-1990s and Recent Years: Ratio of Income of Highest Income 10% to Income of Lowest Income 10%*
| Mid-1990* | 2011 | |
| Canada | 7.2 | 8.5 |
| France | 6.1 | 7.4 |
| Germany | 6 | 6.9 |
| Italy | 10.9 | 10.2 |
| Norway | 5.4 | 6.6 |
| Spain | 10.3 | 13.8 |
| Sweden | 4.1 | 6.3 |
| United Kingdom | 9.2 | 9.6 |
| United States | 12.5 | 16.5** |
* For the U.K. the figure is for 1999; for Spain the figure is for 2004; for France the figure is for 1996. For all others the figures are for 1995.
** The U.S. figure is for 2012.
Source: OECD
The first thing that stands out in Table 1 is that the U.S. income distribution is substantially more unequal than those of any of the other countries. Also, the absolute increase by this measure of inequality is greatest in the United States. However, with the sole exception of Italy, all the countries in Table 1 experienced rising income inequality.
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Tobacco, Health, and Trade Rules
Martin Khor
Smoking cigarettes is the number one preventable cause of death. Six million people die each year from tobacco use and this number will rise to eight million by 2030, most of them in developing countries.
Almost 200 countries signed the World Health Organisation’s Tobacco Control Convention and are obliged to take measures to curb tobacco use.
But the industry has hit back. A big tobacco company, Philip Morris, has taken Uruguay and Australia to tribunals under bilateral investment treaties, claiming billions of dollars in compensation for the two countries’ measures to have big warning signs and small or no brand logos on cigarette packets.
Under trade agreements like the Trans-Pacific Partnership Agreement (TPPA), companies can similarly sue governments, claiming loss of profits resulting from policy measures. At the World Trade Organisation, cases are also being taken against countries for their tobacco control measures.
Now for the good news. Many governments are fighting back against the Big Tobacco onslaught, with Malaysia taking a lead role on two important fronts: the Tobacco Control Convention and the TPPA.
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Trapped in a Recession
C.P. Chandrasekhar
When the recently held annual meetings of the IMF and the World Bank ended, the only news to report was that confusion and disagreement afflicts the leaders and institutions charged with jointly managing the international economy. The absence of certainty and agreement was specially visible with respect to one issue: whether governments should revert to using fiscal policy measures and not just monetary policy initiatives to revive a global economy poised to slip into another deep recession.
Years of “quantitative easing’ or injection of liquidity into the system through bond purchases by the US Fed, and similar moves elsewhere in the developed world, have helped return the banks that triggered the crisis back to profit. But it has not served other equally or more important objectives affecting other players. For example, it has done little to enhance credit flows to producers and homeowners or revive demand. The net result is that while finance flourishes, the real economy remains steeped in recession. Moreover, the surge in cross-border flows of capital to emerging markets that the easy money policy resulted in, has made exchange rate and monetary management in those economies difficult, and threatens to destabilise their financial and currency markets as the policy is wound down.
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In Memory of Fred Lee
In Memory of Fred Lee
Triple Crisis sadly reports the passing of economist Fred Lee, described by our regular contributor Matías Vernengo as “a tireless builder of institutions, an activist for Post Keynesian, and institutionalist economics, creating space for heterodox economists.” As Matías puts it, Fred Lee “will be sorely missed.”
See Matías’s blog post in tribute to Fred Lee at Naked Keynesianism, here. See Fred Lee’s own narrative of how he became a heterodox economist, here.
What We’re Writing
Jayati Ghosh and C.P. Chandrasekhar, The Cotton Conundrum
S. Ibi Ajayi and Leonce Ndikumana, Capital Flight from Africa: Causes, Effects, and Policy Issues; selected chapters available as Political Economy Research Institute (PERI) working papers.
What We’re Reading
Transnational Institute, Shifting Power: Critical Perspectives on Emerging Economies
Jeronim Capaldo, The Trans-Atlantic Trade and Investment Partnership: European Disintegration, Unemployment and Instability
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Is Financial Fraud Too Complex to Prosecute?
William K. Black, Guest Blogger
This interview with William K. Black (University of Missouri-Kansas City) appeared originally at The Real News Network. Prof. Black describes why the U.S. Department of Justice has failed to prosecute executives at financial institutions that helped to detonate the recent crisis. It is not, Black argues, that the bankers were engaged in “rocket science” too complex to prosecute, but that the lack of prosecutions is “a matter of will and a matter of ideology.” His writings on this and other subjects can be read at New Economic Perspectives.
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