Endogenous policy

In a justly criticised piece in the FT, Morgan Stanley’s Ruchir Sharma says:

My team also found a statistically significant link between periods of rising government debt and slow GDP growth. These studies cannot show causation, but the consistent link between growing deficits and weakening growth is unlikely to be coincidence. 

True, it’s unlikely to be coincidence. What is likely, though, is that the causality runs from a weak economy to rising government debt. Slow growth causes rising government debt not just because it depresses tax revenues and raises welfare payments but also because it causes governments to loosen policy.

Sharma’s failure to give due weight to this obvious possibility is an egregious example of a widespread error – an inability to appreciate that policy is endogenous. This arises from the very language of economics. We tend to speak of policy as “interventions”, as if policy-makers were outside the economic environment, stepping in only to meddle or to correct a market failure (delete according to ideology). But in fact, policy-makers are an inescapable part of the environment, and their beliefs and actions are influenced by it and vice versa.

Another example of this type of error is when it’s said – often by a type of Austrian economist – that QE and zero interest rates have pushed asset prices up to “artificial” levels, as if policy were an unnatural deviation. But this is wrong on two counts. For one thing, the only prices that matter are those at which assets actually change hands; it is your imaginary counterfactual world that is artificial. And for another, it’s likely that policy measures to reduce interest rates only reflect economic forces such as low growth and capitalists’ reluctance to invest.

That error reflects a wider and longer-standing one – one that dates back to Smith’s claim that humans have a natural “disposition to truck, barter, and exchange”. It’s the idea that markets are natural and thus that interventions are unnatural. But this is not the case. Markets were, wrote (pdf) Polanyi, “incidental to economic life” before capitalism, and a market society is, wrote David Graeber, a “relative newcomer.”: Ellen Meiksins Wood is also good on this. There’s nothing artificial about state involvement in the economy; it’s been going on for centuries.

It’s not just people with daft ahistorical ideas about markets who fail to see the endogeneity of policy. Here are some other examples.

1. A few years ago, the Independent ran a series in which people said what they’d do if they were PM. This told us plenty about the writers, and nothing about politics. The Prime Minister and his policies don’t fly in from outside to rescue us like the Thunderbirds. They are the outcome of socio-economic structures that select for policies and individuals, and not necessarily the best.

2. Sarah O’Connor describes how “some benefits of a higher minimum wage can leech away in an under-regulated labour market” as employers cut overtime pay or hours or simply fail to comply with it. What this omits is that such under-regulation is no accident. It’s endogenous – a consequence of the power of capital to resist what few demands there are for tighter labour market regulation.

3. Several recent books, such as Lindsey and Teles’ The Captured Economy, Case and Deaton’s Deaths of Despair and Thomas Philippon’s The Great Reversal describe the rise of rent-seeking and cronyism in the US and advocate policies to counteract it. It is, however, wrong to think that rolling back cronyism is merely a matter of policy-makers knowing what to do. It also requires a favourable balance of class power. And right now, (some) capitalists have the power (pdf) to bend government to their will. Crony capitalism is endogenous – the result of capitalist power. Reversing it significantly requires a diminution in that power.

4. Donald Trump did not become president because Americans suffered a collective knock on the head from which they recovered last November. His popularity is instead the result of socio-economic conditions. The “white anxiety” which he exploited is, says Jonathan Metzl, “a problem, not just of individual minds or attitudes, but of larger social and socioeconomic structures.” Part of the story here is that these structures contributed to industrial decline and a loss of income and status among some voters. Trumpism, says Samuel Farber, is “a right-wing response to the objective conditions of economic decay.” And, adds Branko Marcetic, it is “the logical, some would say predictable, product of the failures of not just Barack Obama, but decades of neoliberal politics.” Back in 2006 Ben Friedman showed that economic stagnation fuelled racism, intolerance and anti-democratic sentiment. Trumpism vindicates that view. Unless these socio-economic conditions are significantly changed, we risk seeing a re-emerging of some form of Trumpism.

My point here is to challenge a particular view of politics which is perhaps widespread among centrists. It’s the belief that we could have better policies if only we were governed by people of intellect and goodwill. But this misses a big fact – that actually-existing capitalism tends to militate against good government by, for example, promoting cronyism, managerialism and reaction and selecting against technocrats. Liberal, technocratic government requires that we challenge capitalism.

Comments

[Nick Drew]

"That error reflects a wider and longer-standing one – one that dates back to Smith’s claim that humans have a natural “disposition to truck, barter, and exchange”. It’s the idea that markets are natural and thus that interventions are unnatural. But this is not the case. Markets were, wrote Polanyi, 'incidental to economic life' before capitalism"

Well he's wrong. Man moved on from subsistence farming a very long time ago, in many cultures.

You are right that interventions are natural - but so, most definitely, are markets.

The only qualifier is to say that not every human has that natural trading disposition. But a high % do (check any playground), and have done for millenia: and that's all you need. And activity at the margins impacts the whole.

[jim]

Traditionally the oldest profession is said to be prostitution but I would suggest it is in fact running a protection racket. For as soon as UG started with family and friends knocking out stone axes and bartering them around, then 10 nanoseconds later IG and family and friends would pay them a visit, 'nice little business you got here...'.

From there we move to Tribal Chiefs, War Lords, Kings and Presidents and a whole support structure. Today this is dressed up nicely and politely and Brenda will not personally give you a good bashing if you don't pay tribute, but she knows a lot of people who will. A cynic might suggest it is this support structure that represents the first version of whoring.

As society grows so products like bread and flour are added to stone axes - Smith's truck and barter. But underlying this is surely Meikins' protection racket. Now we might rail against this but shortly after UG and IG have their standoff another actor appears from across the valley - AG and all his mates who have decided IG has got a good racket going and it would be nice to add it to AG's racketeering empire. Cue trumpets, priests and classical literature.

How does this help with economic stagnation? If UG corners the market in cheap stone axes and bread and flour other peoples have to find other work. But ultimately there really is a lump of work if UG works really hard - unless we can invent some new product of figure a way to undercut UG. Snag is that technological invention has slowed, we have grabbed the low hanging fruit and nature does not give up her secrets easily.

Further, our own protection racketeers find it more profitable to do business with UG rather than here at home. Whilst peddling a cover story concocted by lackeys who are paid by the racketeers. As things stand our own racketeers have no incentive to go and bash UG or to build stone axe factories at home. Ultimately UG and friends have enough sense to build axe and bread and flour productions all over while sharing the spoils with racketeers at home and abroad. Nice little business but ultimately a protection racket.

[Blissex]

«QE and zero interest rates have pushed asset prices up to “artificial” levels, as if policy were an unnatural deviation. [...] policy measures to reduce interest rates only reflect economic forces such as low growth and capitalists’ reluctance to invest.»

Please, please how can we respect the argument that "low growth" and other conditions such that there is "reluctance to invest" result in capital assets becoming much more "valuable"?
If interest rates were low because of "low growth" and "reluctance to invest" then obviously there would be a glut of assets and asset prices should be *crashing*.

There are two huge misunderstandings here:

* As JM Keynes pointed out, interest rates are not the price of capital, but the (opportunity) cost of staying liquid, that is the price of not investing (investing means becoming less liquid).

* The cost of liquidity is driven the demand of liquidity, as in "low growth" and "reluctance to invest", only other things being unchanged, that is the supply remaining constant; but other things have not remained unchanged, as the surge in leverage and thus the supply of liquid credit has been largely driven by policy, despite "low growth" and "reluctance to invest".

The obvious reason for the policy of enormously increasing the supply of liquid credit (reflected in the amazing ballooning of central bank balance sheets) is purely "exogenous", the overwhelming and indeed "artificial" *political* necessity to bail-out the balance sheets of deeply insolvent (because of looting) "favoured" sectors of the economy by creating a massive "wealth effect" as indeed explicitly argued by most relevant central banks.

The argument that policy is often endogenous is fine, including H Minsky's argument that stability endogenously leads to instability, but currently low interest rates are a really bad example of that.

[Blissex]

«As things stand our own racketeers have no incentive to go and bash UG or to build stone axe factories at home.»

What has happened in many anglo-american places with reaganista/thatcherite cultures is that their elites have decided to largely be rid of their own servant classes, because the servant classes of other people are cheaper and more obedient,

Their logic is that if the tailor who lives on your same street can do a suit for $500 and the tailor who lives on the other side of town will do it for $100 plus $10 to have it biked to you across town, why should you fund the expensive living standards of your immediate neighbour by limiting your own living standards? Get rid of him! (assuming that you don't yourself depend on the custom of the tailor who lives on your same street).

[rick shapiro]

Hoping that social equity will eliminate Trumpism is not realistic. It's true that status panic has led many people into the nihilistic rage that led to Trump's election, and that amelioration of laissez-faire impoverishment and powerlessness can wean some people away from it; but the last two elections have revealed a dangerous fact about America. Tens of millions of Americans, particularly evangelicals, have contempt for democracy, and yearn for a despotic king, echoing the kingdom of heaven.

[Blissex]

«a dangerous fact about America. Tens of millions of Americans, particularly evangelicals, have contempt for democracy, and yearn for a despotic king, echoing the kingdom of heaven.»

But the evangelicals usually are not "woke" fanatics, so where is that evangelical yearning for a despotic king like Hillary to take them to the kingdom of heaven where all racists, misogynists, anti-transgenderists, anti-gay evil monsters are instantly and forever blacklisted from media and education and jobs and cast in the outer darkness to gnash their teeth?

[ltr]

January 24, 2021

Coronavirus

US

Cases   ( 25,702,125)
Deaths   ( 429,490)

India

Cases   ( 10,668,356)
Deaths   ( 153,503)

UK

Cases   ( 3,647,463)
Deaths   ( 97,939)

France

Cases   ( 3,053,617)
Deaths   ( 73,049)

Germany

Cases   ( 2,147,740)
Deaths   ( 52,777)

Mexico

Cases   ( 1,752,347)
Deaths   ( 149,084)

Canada

Cases   ( 747,383)
Deaths   ( 19,094)

China

Cases   ( 88,991)
Deaths   ( 4,635)

[ltr]

January 24, 2021

Coronavirus   (Deaths per million)

UK   ( 1,438)
US   ( 1,293)
Mexico   ( 1,149)
France   ( 1,118)

Germany   ( 629)
Canada   ( 503)
India   ( 111)
China   ( 3)

Notice the ratios of deaths to coronavirus cases are 8.5%, 2.7% and 2.4% for Mexico, the United Kingdom and France respectively.

[rsm]

Ben Friedman's thesis contradicts the Easterlin Paradox.

The 1930s is an exception. The 2020 US election also debunks Friedman's claim.

The 1970s were very free and tolerant of self-expression than now.

Friedman is wrong.

[Paulc156]

@rsm. 2020 election and more generally the periods preceding and following it are arguably reflective of enhanced levels of both racism/intolerance and contempt of democracy. It's a bit contrived to only look at the result of that election don't you think?

Not sure about Friedman 're easterlin...but surely there's a difference between rising incomes that all participate equally in sharing of gains and on the other hand rising inequality where some amass fabulous wealth whilst others can only look on with a mix of envy and resentment.

[ltr]

January 26, 2021

Coronavirus

UK

Cases   ( 3,689,746)
Deaths   ( 100,162)

Deaths per million   ( 1,471)

Germany

Cases   ( 2,163,113)
Deaths   ( 54,390)

Deaths per million   ( 648)

[rsm]

The problem with Friedman's analysis is that it starts from an assumption: more is better. Higher growth is better because people have more money. The flaw in Friedman's reasoning is that growth is not ergodic, and more money doesn't buy happiness anyway. Swing bands enjoyed ergodicity-defying success in the 1930s and their music created a more tolerant society despite depressed overall GDP growth. The distorted political measure of GDP was irrelevant. Same as now: protestors on the left, perhaps with more time because of high unemployment, made a lot of noise before the election calling for more racial tolerance. And yes, the left's embrace of censorship represents a concomitant rise in intolerance.

Things are much more complicated then the simple story Dillow and Friedman want to tell, that growth is good for tolerance. The problem is that measurements of growth should include error bars that are so wide, you can tell any story you like about growth and tolerance. Friedman's is just one shakily-reasoned tall tale.

[ltr]

The flaw in Friedman's reasoning is that growth is not ergodic...

[ I got me and ergodic and me are better. Why not try to write clearly? ]

[ltr]

January 27, 2021

Coronavirus

UK

Cases   ( 3,715,054)
Deaths   ( 101,887)

Deaths per million   ( 1,496)

Germany

Cases   ( 2,179,679)
Deaths   ( 55,358)

Deaths per million   ( 660)

[ Impossibly saddening. ]

[Big Nose]

Debt, Govt Debt.

Sorry tldr;

It is just #newmoney made to look like debt because of the ways BONDS work. They were introduced to whitewash slaving money.

It is very handy way of telling who is the patsy in the room.

They believe it to be real debt.

#newmoney under 'the people's democratic control. It is what they fear. No profit.

Try flowcharting the path of #newmoney to were the point where taxes are paid.

[rsm]

Ergodicity means everyone experiences the same GDP growth. This is clearly wrong, but Dillow assumes it even though he should know better. See Ole B. Peters on why GDP is not ergodic: my fortunes can tank even as the economy is reported to grow. In the 2000s the economy was hot but I did not benefit. Friedman simply ignores my individual experiences when he assumes growth applies uniformly across the population. He cherry-picks his examples to make his tall tale sound plausible. I tell a different tale based on my personal experience, but that simply gets thrown out due to the ergodicity assumption. Dillow elsewhere criticizes ergodicity in economics, but here he blindly slips back to it when claiming growth is related to tolerance. He's telling himself a s9tory in his head and deletes my experience because it doesn't fit his little story. This microfoundation is treated as if it does not exist. I don't count for Dillow or Friedman. They would be happier if I silently disappeared.

[ltr]

Ergodicity means everyone experiences the same GDP growth....

[ Thank you for the explanation, since the definition did not help. This helps me understand the argument. ]

[ltr]

A question I am becoming increasingly troubled by is, how long will it take for per capita GDP in Britain to reach the level of 2007 again? After Brexit, increasingly distancing the country from trade with China because Britain cannot get over being a colonial empire strikes me as terribly harmful for Britain.

[Paulc156]

@rsm. Still appears fairly uncontroversial to me that marked disparities and divergence in growth of income will fuel resentment which may manifest in intolerance or disdain for outsiders, which may be migrants or ethnic minorities. Whats important is not neccessarily plain vanilla real GDP but divergences of income and wealth between a small number of individuals and the rest of society. The sort of into!erance and resentment exploited by the likes of a Mussolini, a Peron, a Farage or Donald Trump takes place against such a background.

However this will be more pronounced in an environment of low or falling growth in aggregate GDP than in one where GDP is rising more strongly.

[ltr]

Still appears fairly uncontroversial to me that marked disparities and divergence in growth of income will fuel resentment...

[ I would add abuse and misery to resentment. I think this basic to what social democracy is about. Why then are the British willing to be led away from social democracy? ]