Economics’ original sin: the exclusion of power
Jayati Ghosh deconstructs the multiple failings of mainstream economics – again, remarkably, in the IMF’s Finance & Development:
Much of what is presented as received economic wisdom about how economies work and the implications of policies is at best misleading and at worst simply wrong. For decades now, a significant and powerful lobby within the discipline has peddled half-truths and even falsehoods on many critical issues—for example, how financial markets work and whether they can be “efficient” without regulation; the macroeconomic and distributive implications of fiscal policies; the impact of labor market and wage deregulation on employment and unemployment; how patterns of international trade and investment affect livelihoods and the possibility of economic diversification; how private investment responds to policy incentives such as tax breaks and subsidies and to fiscal deficits; how multinational investment and global value chains affect producers and consumers; the ecological damage wrought by patterns of production and consumption; whether tighter intellectual property rights are really necessary to promote invention and innovation; and so on.
Why does this happen? The original sin could be the exclusion of the concept of power from the discourse, which effectively reinforces existing power structures and imbalances. Underlying conditions are swept aside or covered up, such as the greater power of capital compared with workers; unsustainable exploitation of nature; differential treatment of workers through social labor market segmentation; the private abuse of market power and rent-seeking behavior; the use of political power to push private economic interests within and between nations; and the distributive impacts of fiscal and monetary policies. The deep and continuing concerns with GDP as a measure of progress are ignored; despite its many conceptual and methodological flaws, it remains the basic indicator, just because it’s there.
Read her piece here.
Beyond cookie-cutter economics
Dani Rodrik writes – believe it or not, this is in the IMF’s monthly Finance & Development – in a biting critique of free-market orthodoxy:
Economists who want to be relevant and useful must offer concrete solutions to the central problems of our time: speeding the climate transition, creating inclusive economies, promoting economic development in poorer nations. But they must avoid cookie-cutter Econ 101 solutions. Their discipline offers much more than rules of thumb. Economics can help only if it expands our collective imagination instead of reining it in.
Read his piece here.
Hard times in a ‘good’ economy – 2
The political fallout could be huge:
Nevada has the worst unemployment rate in the country, gas and grocery prices are still among the nation’s highest, and the cost of housing here has soared. President Biden’s policies are squarely to blame, Republicans argue, and former President Donald J. Trump will fix it if voters return him to the White House.
Nevada’s unemployment rate has been cut in half since Mr. Biden took office, gas prices have dropped by nearly $2 a gallon since mid-2022, and more than 200,000 jobs have already been created as the state is receiving $3.3 billion in infrastructure investments. Democrats here say that the economy is finally on the upswing after Mr. Trump and the coronavirus pandemic drove it into the ground, and that re-electing Mr. Biden is critical to keeping it that way.
Which of these disparate economic pictures resonates most strongly with voters could make a difference come November in the critical battleground state.
Read more here.
Hard times in a ‘good’ economy – 1
The first in a series of posts on why, despite the fact that the U.S. economy is doing well by the usual measures of GDP growth and employment, the reality looks very different to many Americans:
On paper, Mr. Arias presents as an example of an improving economy. He is earning more than during the worst of the pandemic. He has health insurance, and is taking medication for his diabetes.
But he is earning less than half what he did before the unraveling began.
“It’s still hard,” he said. “You go to the store and buy $100 worth of groceries and there’s nothing in the car.”
Read more here.
The hacking of US foreign policy
Jeff Sachs writes:
American foreign policy is not at all about the interests of the American people. It is about the interests of the Washington insiders, as they chase campaign contributions and lucrative jobs for themselves, staff, and family members. In short, US foreign policy has been hacked by big money.
As a result, the American people are losing big. The failed wars since 2000 have cost them around $5 trillion in direct outlays, or around $40,000 per household. Another $2 trillion or so will be spent in the coming decades on veterans’ care. Beyond the costs directly incurred by Americans, we should also recognize the horrendously high costs suffered abroad, in millions of lives lost and trillions of dollars of destruction to property and nature in the war zones.
Read his opinion piece here.
Should we teach neoclassical economics?
Reflecting on this question, Louis-Philippe Rochon and Sergio Rossi quote Keynes:
“The master-economist must possess a rare combination of gifts… He must be mathematician, historian, statesman, philosopher — in some degree. He must understand symbols and speak in words. He must contemplate the particular, in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man’s nature or his institutions must be entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood, as aloof and incorruptible as an artist, yet sometimes as near to earth as a politician.”
Read more here.
CoP Flop
Econ4’s Jim Boyce breaks down the disappointment of the latest CoP (Conference of Parties) climate summit, and a path forward:
The climate crisis is not an all-or-nothing phenomenon. We have already entered an era of crisis, and this will intensify in the years ahead. The real question is how bad it will get. And that depends on what we do today. There is never a point where all is lost, because it can always get worse. Nothing could be more irresponsible than to throw up our hands and say, “Game over.”
Read more here.
It’s time to get prepared
Gus Speth of the Next System Project writes:
Perhaps sooner than most think, there should come a point when public demand in the United States for corrective action to free us from fossil fuels is sufficiently intense that, if Congress and a unified NGO community are prepared, then at that point decisive, major legislative action could finally be possible. That is the moment for which we must be ready, but for which we are not prepared today. Delay at that point could be tragic. Simultaneous with the demand for action, climate devastation will be rising steadily, and societies could eventually enter a new realm in which careful climate mitigation prescriptions and international cooperation are steadily foreclosed as societies struggle mainly with the consequences of the emerging climate chaos.
Read more here.
How plutocrats opt out of democracy
In a review of Crack-Up Capitalism by Quinn Slobodian, Daniel Immerwahr highlights the political consequences of tax havens and other capital-friendly enclaves – or loopholes – in the world economy:
For market radicals, it’s been a liberation. Although traditionally they’ve dreamed of a borderless world, now they’re seeking an intricately bordered one. “If we want to increase freedom,” the billionaire venture capitalist Peter Thiel has advised, “we want to increase the number of countries.” The more jurisdictions there are, the thought goes, the easier it is to go sovereignty shopping.
For Slobodian, however, this isn’t liberation but “secession.” Corporations and the rich, by channeling their activities into small, exceptional spaces, have escaped the reach of states. The result is a “radical form of capitalism” that evades public accountability—or even scrutiny. An economy of zones, islands, and enclaves also means, Slobodian contends, a “world without democracy.”
Read more here.
Private ughuity
Yes, as through this world I’ve wandered
– Woody Guthrie, The Ballad of Pretty Boy Floyd
I’ve seen lots of funny men;
Some will rob you with a six-gun,
And some with a fountain pen.
The modern-day counterpart to plunder of Dust Bowl farmers goes by the anodyne name of “private equity.” Two new books rip off the veil to explain how it works. Reviewing them, Kim Phillips-Fein breaks it down:
Private equity firms create nothing and provide no meaningful services—on the contrary, they actively undermine functional companies. Far from creating jobs, companies owned by private equity see the number of people they employ shrink by an average of more than 4 percent within the first two years after purchase—if they survive at all…. one in five large companies taken private in a debt-financed deal declares bankruptcy within a decade.
The authors describe private equity funds running the companies they purchase into the ground. A common maneuver, for instance, is to mandate that a newly acquired hospital or factory sell off its buildings and land—even if the business has no reason to do so other than to pay back the debt the fund incurred to purchase it. In the long term, this means the company is left to pay rent on the same properties it once owned. Often it’s stuck paying property taxes, insurance, and upkeep despite no longer owning the property.
Other tactics include forcing acquired companies to pay “dividend recapitalizations,” in which they borrow to pay dividends to new owners, or myriad advisory and management fees…. The acquired companies find themselves weighed down by costs they had never borne before.
When the Carlyle Group purchased ManorCare, the second-largest nursing home chain in the United States, for example, the first thing it did was require ManorCare to sell its real estate. This allowed Carlyle to recoup the money it had borrowed to finance the deal, but forced the chain to pay nearly $500 million in rent annually to keep using its buildings. It was also saddled with $61 million in “transaction fees,” followed by an additional $27 million over nine years in advisory fees. To cover these new costs, ManorCare faced intense pressure to scrimp on patient care, laying off hundreds of workers. Its health code violations rose by more than 25 percent between 2013 and 2017. At the same time, it forced patients to undergo pointless therapies that Medicare would cover, sometimes with absurd consequences—as in the case of an eighty-four-year-old man who was brought to group therapy even after he became verbally unresponsive and his doctor had authorized end-of-life care. Nonetheless, ManorCare declared bankruptcy in 2018.
Private equity seeks out low-wage industries (food service, retail, health care, and security are its largest sectors) in which the consumers are unlikely to complain and in which it can economize brutally without fear of lawsuits. Many of the companies purchased by private equity funds are those that cater to the poor, sick, and vulnerable: payday loan companies, ambulance companies, hospitals, nursing homes, hospices. A slew of prison services (food, collect phone calls, health care, ankle monitors, even debit cards given to prisoners upon release) are provided by companies owned by private equity firms.
The books are Plunder: Private Equity’s Plan to Pillage America by Brendan Ballou and These are the Plunderers: How Private Equity Runs – and Wrecks – America by Gretchen Morgenson and Joshua Rosner. Read the review here.
