Galbraith sur le conservatisme

Via Brad et Dsquare

(...) Contrast with rightwing politics. As I've posted earlier, the single most sensible thing said in political philosophy in the twentieth century was JK Galbraith's aphorism that the quest of conservative thought throughout the ages has been "the search for a higher moral justification for selfishness". Some rightwingers are not hypocrites because they admit that their basic moral principle is "what I have, I keep". Some rightwingers are hypocrites because they pretend that "what I have, I keep" is always and everywhere the best way to express a general unparticularised love for all sentient things. Then there are the tricky cases where the rightwingers happen to be on the right side because we haven't yet discovered a better form of social organisation than private property for solving several important classes of optimisation problem. But at base, the test of someone's politics is simple; if their political aim is to advance all of humanity, they're on our side, while if they have an overriding constraint that the current owners of property must always be satisfied first, they're playing for the opposition. Hypocrisy doesn't really enter into the equation with rightwing politics; you don't (or shouldn't) get any extra points for being sincere about being selfish.

Baisser ou ne pas baisser ?

Wolfgang Munchau donne quelques éléments de contexte historique intéressants en appui de la conception, malheureusement peu répandue ces derniers temps, qu'une baisse des taux d'intérêt ne nous sortira pas de la ratatouille (ou alors provisoirement, et au risque de déséquilibres pires à moyen terme). La citation en exergue résume bien l'argument.

“If stupidity got us into this mess, then why can’t it get us out?”– Will Rogers, late US writer and actor

We are certainly trying very hard.The stupidity that got us into our financial mess was low, and occasionally negative, real interest rates over long periods of time. Now that the bubble has burst, central banks are responding by cutting interest rates yet again.By the end of this year, if market expectations prove correct, the US Federal Reserve will have cut short-term rates by a full percentage point from their peak. It has become the policy orthodoxy of the early 21st century that central banks must overreact to asset-price induced economic downturns.This orthodoxy has its intellectual roots in past recessions. Burst asset price bubbles triggered the Great Depression in the 1930s and more recently cost Japan a decade of economic growth. What turned these crises into calamities was a string of policy mistakes. In both cases, central banks failed to respond to a sharp fall in inflation.Once deflation descended on the US and Europe in the 1930s and on Japan in the 1990s, the zero nominal interest rate rendered monetary policy toothless: since nominal rates cannot go below zero, negative inflation implies positive real interest rates. In such an environment, central banks lose their ability to provide sufficient stimulus. The lesson the current generation of policymakers has drawn is that the monetary policy has to react fast and decisively when an asset-price bubble bursts and threatens a recession.But that conclusion does not follow logically from historical observation. The mistake central banks made during those periods was to disregard a strong fall in inflation. It is our consensus today – and rightly so – that the ultimate purpose of monetary policy is to keep consumer price expectations anchored at some mildly positive inflation rate. Should those expectations fall dramatically, history has taught us that a central bank must act decisively to bring inflation back into target.But we are living in a very different environment. On the contrary, inflation expectations are rising everywhere, and this is not a statistical argument about the price of oil and food. US core inflation has been above the central bank’s comfort level for some time. And in the eurozone, even a strong euro has not stopped inflation from rising to 3 per cent in November. This year’s price increases may fall out of next year’s inflation indices, but what about next year’s price increases? We are already seeing evidence of those dreaded second-round effects. Whether it is Finnish nurses or German train drivers, Europeans are asking for wage increases to compensate for a loss of purchasing power. Some of these negotiated wage increases are no longer consistent with the inflation target and productivity developments.Just witness the furious debate on purchasing power that is raging in the French media. A perceived loss of purchasing power is often a first step towards a persistent increase in inflationary expectations. Long-term inflation expectations in the eurozone, as measured by interest rate futures, are running at nearly 2.5 per cent, which is not consistent with an official target of “close to but below 2 per cent”. While some forecasters expect eurozone inflation to slow next year, nobody predicts that it will fall below target, let alone turn negative.So the inflation outlook would justify a neutral policy stance at best. I agree that there is a non-trivial risk of a substantial slowdown in the US economy and maybe even a recession. But it is not clear to me that monetary policy is the right tool to deal with a slowdown that is not accompanied or caused by a decline in inflationary expectations.This is not a moral point. It is about what a central banker’s toolkit can realistically achieve. If a financial market generates a bubble, one would expect that asset prices would eventually fall back after the bubble has burst. Over long periods asset prices are self-correcting. If a central bank does not care about asset prices on the way up, but starts to target them on the way down, it risks stoking up inflationary expectations.Look at it in terms of insurance. Lower interest rates insure us against the risk of a slowdown, but we are paying a price by accepting new risks. Among the biggest are moral hazard and higher inflation in the future.The moral hazard argument is well known: banks reap the profits in the good times and beg for central bank support during bad times.Higher inflation is a more immediate concern. If it is tolerated, expect serious convulsions in global bond markets and serious disruption to the global flows of funds. If it is not tolerated, expect a policy shift in the opposite direction and at greater magnitude. Neither scenario is appealing.On balance, the benefits of a loose monetary policy are not nearly as one-sided as its advocates claim. A bias towards low interest rates got us into this mess. Low interest rates will not get us out of it. Central banks should keep their cool.

Réfutation empirique de la théorie de l'offre

Via Dean Baker, le papier de Holtz Eakin du CBO qui contient la réfutation empirique la plus achevée à ce jours des théories débiles de la clique supply side (Nicolas, un peu de lecture économique te ferait du bien...)

Buiter on the credit crunch

Buiter analyse le credit crunch et ses possibles conséquences sur l'économie "réelle", dans une optique raisonnablement optimiste mais qui contient ce joyau de citation (c'est la première fois que je vois cette idée, que je partage entièrement, exprimée de manière aussi brillamment claire et concise)

(...) From the point of view of the efficient allocation of resources in the medium and long term, the relative (probably even absolute in the short run) contraction in the size of the financial sectors of the advanced industrial countries is a desirable development, as for a number of years now, the private returns in the financial sector have exceeded the social returns by an ever-growing margin. Too much scarce analytical and entrepreneurial talent has been attracted into activities that, while privately profitable and lucrative, were socially zero-sum at best. In the short run, this cutting down to size of ‘Wall Street’ and ‘the City’ will inevitably have some negative side effects for Main Street also. However, the entire financial sector in the UK accounts for only about 7.5 percent of GDP, and the banking sector for no more than five percent of GDP. A sectoral depression will be painful, but of limited macroeconomic significance. In the medium and long term, moreover, a more balanced sectoral allocation of the best and the brightest will be beneficial.

Dean Baker on free trade

Ce post résume assez bien les vues de Dean Baker sur le libre échange. Ses conclusions en termes de "policy" sont discutables, mais son analyse a un certain charme polémique (en particulier la citation sur la corruption, qui est délicieuse)

Brooks Pushes Nonsense on Trade
David Brooks' column is full of nonsense on trade this morning. The point is to propagandize on behalf of current trade policy, which is taking a beating in popular opinion as of late. Brooks includes a wide range of factors which are somehow supposed to imply that the current trade policy is good.
Just to to take a couple of my favorites, Brooks points out from 1991 to 2007 the trade deficit grew to $818 billion from $31 billion. "Yet, .... during that time the U.S. created 28 million jobs and the unemployment rate dipped to 4.6 percent from 6.8 percent."
Let's see, according to my calculator, the sun came up 5,840 times during this period. Therefore, by Brooks logic, trade must facilitate astronomical processes. For those familiar with economic theory, the expected impact of trade would be on wages, not the number of jobs. And most workers have seen very small wage gains over this 16 year period as the bulk of the benefits of productivity growth have gone to highly-paid workers.
(...)
Brooks also extols the fact that the people in this country have lots of kids -- that's great if you like global warming, otherwise it doesn't seem like such a great thing. Perhaps the best line is that the United States "benefits from low levels of corruption." This is probably because actions like having a CEO wreck a company, and then get a hundred million dollar severance package, are perfectly legal.
But the most serious inaccuracy in the Brooks piece is the claim that "once there was a bipartisan consensus behind free trade." This is not true. The bipartisan consensus was behind trade policies that put less educated workers in competition with low-paid workers in the developing world. There has never been support for measures that would put our investment bankers, our lawyers, our doctors and our columnists in direct competition with workers in the developing world. (Perhaps Brooks does not know that if I opened a newspaper, and staffed it with foreign reporters and columnists who I quite explicitly paid one-half the wage of their comparably qualified U.S. counterparts, I would be arrested.)
The public has turned against trade policies that were designed to lower the wages of middle class workers and have had this effect. Brooks is among the small group of people who have benefited from these trade policies. Now he is unhappy, that's the story.
--Dean Baker
Posted by Dean Baker on November 27, 2007 5:29 AM Permalink

a risk-loving industry guaranteed as a public utility

Un pétillant article de martin wolf dit tout haut ce que tout le monde devrait penser tout bas : les banques ne sont qu'une forme de parasitisme dont les rendements constamment élévés ne se justifient que par l'exploitation (sans contrepartie) d'une garantie implicite du gouvernement ("pile je gagne face tu l'as dans le ...") .

J'aurais personnellement ajouté un problème fondamental de concurrence au tableau (après tout, l'existence sur longue période de profits hors norme au sein d'une industrie donnée est théoriquement la marque d'un fonctionnement imparfait de la concurrence - cf Big Pharma), mais voir le principal chroniqueur économique du FT prendre ce genre de position après plusieurs années de chants tonitruants à la gloire de la dérégulation financière et de la financiarisation de l'économie est déjà assez gratifiant comme cela...

Way to go, Martin

(...) So what we have is a risk-loving industry guaranteed as a public utility. One result has been insufficient capital. That permits splendid returns in good times. But the capital may well prove inadequate in bad ones. The loss of capital could well lead to a tightening of credit in the years ahead.
If so, the structure and regulation of banking might have to be reconsidered, again. One possibility would be higher capital requirements. This would lower peak returns and so reduce the chances of subsequent negative returns. Mr Smithers and Prof Wood suggest a 40 per cent increase in capital for the UK. Other possibilities are measures to make regulation easier: narrow banking is an old favourite, although hard to make work. Henry Kaufman, a highly experienced observer of credit markets, suggests intense scrutiny of banks deemed “too big to fail”.
What seems increasingly clear is that the combination of generous government guarantees with rampant profit-making in inadequately capitalised institutions is an accident waiting to happen – again and again and again. Either the banking industry should be treated as a utility, with regulated returns, or it should be viewed as a profit-seeking industry that operates in accordance with the laws of the market, including, if necessary, mass bankruptcies. Since we cannot accept the latter, I suspect we will be forced to move towards the former. Little can be done now. But when the recovery begins, we must impose higher capital requirements.

* ‘Do Banks Have Adequate Capital?’, Report 298, November 7 2007, http://www.smithers.co.uk/ (subscribers only);** Elroy Dimson and others, ‘Triumph of the Optimists’, Princeton University Press, 2002
martin.wolf@ft.com
Copyright The Financial Times Limited 2007

TAP Talks to Paul Krugman | The American Prospect

Il faut vraiment que je commande le dernier livre de paul K

TAP Talks to Paul Krugman The American Prospect

Et une référence des archives de Prospect, qui illustre comment il a, sur le sujet de l'inégalité, été un incroyable précurseur (tant dans la démonstration du problème que dans l'exposition de ses conséquences sur le débat public américain).

lien archive Prospect

Revenu du travail dans le PIB chinois

Dans the Economist cette semain, "Econonomic focus" revient sur les travaux de Louis Kuijs sur la croissance chinoise. LK apporte un éclairage macro-économique sur l'enfer capitalisto-fasciste qu'est devenu la Chine contemporaine. La dystopie chinoise combine, on le sait, les pires aspects du capitalisme libéral le plus dur avec l'absence des libertés fondamentales les plus élémentaires. Bien sûr, nos optimistes ahuris de the Economist ne posent pas le débat en ces termes, mais ils lui apportent un élément important, avec un article d'une concision et d'une clarté superbes.

L'élément principal de l'analyse de Kuijs est que la part relative des revenus du travail en Chine a baissé constamment de 96 à aujourd'hui, d'environ 53% du PIB à moins de 40%. C'est assez contre intuitif (le contraire devrait se produire si la Chine suivait les traces des autres économies asiatiques), et c'est la principale cause de l'absence d'un rééquilibrage de l'économie chinoise vers la consommation intérieure (au détriment de ses exportations, rééquilibrage que le crétin journaliste économique de base ne cesse de prédire depuis dix ans).

C'est surtout la principale conséquence d'un système de croissance orienté vers les biens de consommation et d'équipement (à forte intensité capitalistique) au détriment des services, et d'un système politique qui ôte aux travailleurs toute possibilité d'améliorer leur sort. Les mineurs de Carmaux en bavaient, mais au moins Jaurès pouvait les soutenir sans finir avec une balle dans la tête facturée à sa famille...

framboise mécanique censurée en Chine !

Greatwallofchina.org permet de vérifier, pour une url, si le firewall chinois bloque ou non l'url.

I'm out !

(j'imagine que c'est plutôt blogger qui l'est dans son ensemble. Lien via epicurean dealmaker)

Why the Left should learn to love liberalism | vox - Research-based policy analysis and commentary from Europe's leading economists

Un très intéressant article qui tente de montrer comment la question des réformes n'est pas nécessairement "de droite", et comment on peut la défendre dans le cadre d'un programme de gauche. Le principal mérite de cet article est de mettre en évidence le fait que le rejet de la "réforme" (au sens transition vers plus de flexibilité et de marché) ne sert le plus souvent qu'à protéger des intérêts particuliers et des privilèges (la question de la réforme des régimes spéciaux en France est une illustration parfaite de ce point).

Revolucion liberalista ! siempre !


Why the Left should learn to love liberalism vox - Research-based policy analysis and commentary from Europe's leading economists

what's good for gm is no longer good for America

Via Naked Capitalism, un pointeur sur un article de greider dans the nation qui présente un argument intéressant sur l'impact du libre échange (tel qu'il se construit aujourd'hui - la notion de "libre" est en effet hautement discutable).
Si on résume l'argument, les entreprise échangent profits (aux US) contre GDP (dans les pays émergents), ce qui se traduit mécaniquement (aux US) par un accroissement des revenus du capital (profits) au détriment des revenus du travail. Le premier étant beaucoup moins bien réparti que le second, il n'est pas difficile de faire le lien avec l'accroissement insensé des inégalités que connaît la société américaine depuis une vingtaine d'années.
L'article a aussi l'intérêt de passer au lance flammes l'argument imbécile, malhonnête, et pourtant largement répandu (entre autres par des publications comme the economist) selon lequel il suffirait aux sociétés occidentales de mieux former leur force de travail pour compenser les effets de la globalisation.

The Nation
The Establishment Rethinks Globalization
by WILLIAM GREIDER
[from the April 30, 2007 issue]
The church of global free trade, which rules American politics with infallible pretensions, may have finally met its Martin Luther. An unlikely dissenter has come forward with a revised understanding of globalization that argues for thorough reformation. This man knows the global trading system from the inside because he is a respected veteran of multinational business. His ideas contain an explosive message: that what established authorities teach Americans about global trade is simply wrong--disastrously wrong for the United States.
Martin Luther was a rebellious priest challenging the dictates of a corrupt church hierarchy. Ralph Gomory, on the other hand, is a gentle-spoken technologist, trained as a mathematician and largely apolitical. He does not set out to overthrow the establishment but to correct its deeper fallacies. For many years Gomory was a senior vice president at IBM. He helped manage IBM's expanding global presence as jobs and high-tech production were being dispersed around the world.
The experience still haunts him. He decided, in retirement, that he would dig deeper into the contradictions. Now president of the Alfred P. Sloan Foundation, he knew something was missing in the "pure trade theory" taught by economists. If free trade is a win-win proposition, Gomory asked himself, then why did America keep losing?
The explanations he has developed sound like pure heresy to devout free traders. But oddly enough, Gomory's analysis is a good fit with what many ordinary workers and uncredentialed critics (myself included) have been arguing for some years. An important difference is that Gomory's critique is thoroughly grounded in the orthodox terms and logic of conventional economics. That makes it much harder to dismiss. Given his career at IBM, nobody is going to call Ralph Gomory a "protectionist."
He did not nail his "theses" to the door of the Harvard economics department. Instead, he wrote a slender book--Global Trade and Conflicting National Interests--in collaboration with respected economist William Baumol, former president of the American Economic Association. Published seven years ago, the book languished in academic obscurity and until recently was ignored by Washington policy circles.
I asked Gomory if his former colleagues from the corporate world quarrel with his provocative message. "Most of them have never heard it," he said. "It's a pretty new message." He has discussed his reform ideas with some CEOs, "who said, Well, maybe we could do that. Others couldn't have disagreed more strongly."
Now Gomory is attempting to re-educate the politicians in Congress. He has gained greater visibility lately because he has been joined by a group of similarly concerned corporate executives called the Horizon Project. Its leader, Leo Hindery, former CEO of the largest US cable company and a player in Democratic politics, shares Gomory's foreboding about the destructive impact of globalization on American prosperity. Huge losses are ahead--10 million jobs or more--and Hindery fears time is running out on reform.
"We want to be a counter to the Hamilton Project," Hindery explains. "They have a sense of stasis that is more benign than I have. I don't think this is all going to work out." The Hamilton policy group was launched last year by former Treasury Secretary Robert Rubin to make sure the laissez-faire trade doctrine known as Rubinomics continues to dominate the Democratic Party. "We're never going to have the status of Bob Rubin," Hindery concedes. "But we're not chopped liver either. We have respectable business careers. You can't tell Ralph Gomory that he is 'smoke and mirrors,' because he wrote the book."
Gomory's critique has great political potential because it provides what the opponents of corporate-led globalization have generally lacked: a comprehensive intellectual platform for arguing that the US approach to globalization must be transformed to defend the national interest. Still, it will take politicians of courage to embrace his ideas and act on them. Gomory's political solutions are as heretical as his economic analysis.
At IBM back in the 1980s, Gomory watched in awe as Japan and other Asian nations captured high-tech industrial sectors in which US companies held commanding advantage. IBM invented the disk drive, then dropped out of the disk-drive business, unable to compete profitably. Gomory marveled at Singapore, a tiny city-state, as it lured American manufacturers with low-wage labor, capital subsidies and tax breaks. The US companies turned Singapore into a global center for semiconductor production.
"It was an unforgettable transformation," Gomory remembers. "And it was pretty frightening.
"The offer that many Asian countries will give to American companies is essentially this: 'Come over here and enhance our GDP. If you are here our people will be building disk drives, for example, instead of something less productive. In return, we'll help you with the investment, with taxes, maybe even with wages. We'll make sure you make a profit.' This works for both sides: the American company gets profits, the host country gets GDP. However, there is another effect beyond the benefits for those two parties--high-value-added jobs leave the U.S."
China and India, he observes, are now doing this on a large scale. Microsoft and Google opened rival research centers in Beijing. Intel announced a new, $2.5 billion semiconductor plant that will make it one of China's largest foreign investors. China's industrial transformation is no longer about making shirts and shoes, as some free-trade cheerleaders still seem to believe. It is about capturing the most advanced processes and products.
The multinationals' overseas deployment of capital and technology, Gomory explains, is the core of how some very poor developing nations are able to ratchet up their technological prowess, take over advanced industrial sectors and rapidly expand their share in global trade--all with the help of US companies and finance, as they roam the world in search of better returns.
The Gomory-Baumol book describes this as "a divergence of interests" between multinational firms and their home country. "This overseas investment decision may then prove to be very good for that multinational firm," they write. "But there remains the question: Is the decision good for its own country?" In many cases, yes. If the firm is locating low-skilled industrial production in a very poor country, Americans get cheaper goods, trade expands for both sides and the result is "mutual gain." But the trading partners enter a "zone of conflict" if the poor nation develops greater capabilities and assumes the production of more advanced goods. Then, the authors explain, "the newly developing partner becomes harmful to the more industrialized country." The firm's self-interested success "can constitute an actual loss of national income for the company's home country."
American multinationals, as principal actors in this transfer of wealth-generating productive capacity, are distinctively free to make the decisions for themselves without interference from government. They want profit and future consumer markets. Their home country wants to maintain a highly productive high-wage economy. Without recognizing it, the two are pulling in opposite directions--the "divergence of interests" most US politicians ignore, evidently believing church doctrine over visible reality.
The Gomory-Baumol book explains the dynamics with charts and equations for economists to study. For the rest of us, it is easier to follow Gomory's personal explanation of changing fortunes among trading nations. "What made America much wealthier than the Asian nations in the first place?" Gomory asks. "We invested alongside our workers. Our workers dug ditches with backhoes. The workers in underdeveloped countries dug ditches with shovels. We had great big plants with a few people in them, which is the same thing. We knew how, through technology and investment, to make our workers highly productive. It wasn't that they went to better schools, then or now, and I don't know how much schooling it takes to run a backhoe.
"The situation today is that the companies have discovered that using modern technology they can do all that overseas and pay less for labor and then import product and services back into the United States. So what we're doing now is competing shovel to shovel. The people in many countries are being equipped with as good a shovel or backhoe as our people have. Very often we are helping them make the transition. We're making it person-to-person competition, which it never was before and which we cannot win. Because their people will be paid a third, a quarter of what our people are paid. And it's unreasonable to think you can educate our people so well that they can produce four times as much in the United States."
As this shift of productive assets progresses, the downward pressure on US wages will thus continue and intensify. Free-trade believers insist US workers can defend themselves by getting better educated, but Gomory suggests these believers simply don't understand the economics. "Better education can only help," he explains. "The question is where do you put your technology and knowledge and investment? These other countries understand that. They have understood the following divergence: What countries want and what companies want are different."
The implication is this: If nothing changes in how globalization currently works, Americans will be increasingly exposed to downward pressure on incomes and living standards. "Yes," says Gomory. "There are many ways to look at it, all of which reach the same conclusion."
I ask Gomory what he would say to those who believe this is a just outcome: Americans become less rich, others in the world become less poor. That might be "a reasonable personal choice," he agrees. "But that isn't what the people in this country are being told. No one has said to us: 'You're probably a little too rich and these other folks are a little too poor. Why don't we even it out?' Instead, what we usually hear is: 'It's going to be good for everyone. In the long run we're going to get richer with globalization.'"
Gomory and Baumol are elaborating a fundamental point sure to make many economists (and political leaders) sputter and choke. Contrary to dogma, the losses from trade are not confined to the "localized pain" felt by displaced workers who lose jobs and wages. In time, the accumulating loss of a country's productive base can injure the broader national interest--that is, everyone's economic well-being.
"Our objective," Baumol told a policy conference last summer, "is to show how outsourcing can indeed reduce the share of benefits of trade, not only for those who lose their jobs and suffer a direct reduction in wages but can wind up making the average American worse off than he or she would have been."
The conventional win-win assurances, they explain, are facile generalizations that ignore the complexity of the trading system--the myriad differences in country-to-country relationships and the vast realm of government actions and policy interventions designed to shape the outcomes. "Many of our 'dismal science' colleagues speak unguardedly as though they believe free trade cannot fail, no matter what," Baumol said.
Some nations, in other words, do indeed become "losers." Gomory fears the United States is now one of them--starting to go downhill. When he and Baumol wrote their book, they figured US trade relations with China and India produced "mutual gain" for both ends. The United States got cheaper goods, China and India got jobs and a start at industrialization. But the rapid improvements in those two nations during the past decade, Gomory thinks, are putting the United States in the bind where their gain becomes our loss.
Essentially, the terms of trade have changed as more and more value-added production has shifted from the United States to its poorer trading partners. America, he explains, becomes increasingly dependent, buying from abroad more and more of what its citizens consume and producing relatively less at home. US incomes stagnate as the high-wage jobs disappear and US exports become a smaller share of the world total.
The persistent offshoring of domestic production is leading to a perverse consequence: The United States finds itself paying more for imports. The production that originally moved offshore to get low-wage labor and cheaper goods is now claiming a larger and larger share of national income, as the growing trade deficits literally subtract from US domestic growth. "All the stuff you were already importing from them becomes more expensive," Gomory explains. "That's why you can start going downhill--because you pay more for what you were previously getting." Put another way, one hour of US work no longer buys as many hours of Chinese work as it once did. China can suppress its domestic wages to keep selling more of its stuff, but that does not alter the fundamental imbalance in productive strength.
The US predicament is vividly reflected in the nation's swollen trade deficits, now running at nearly 7 percent of GDP every year. The country consumes more than it produces. It borrows heavily from trading partners, led by China, to pay for its "excess" consumption. This allows America to dodge--temporarily--a reckoning with its weakened condition, that is, falling living standards. But that will eventually occur, when Americans are compelled to reduce their consumption and pay off the overdue bills. Postponement will deepen the ultimate injury because, meanwhile, the trading partners will gain greater industrial capabilities, while US productive strength weakens further.
Americans can choose to blame China or disloyal multinationals, but the problem is grounded in US politics. The solution can be found only in Washington. China and other developing nations are pursuing national self-interest and doing what the system allows. In a way, so are the US multinationals. "I want to stress it's a system problem," Gomory says. "The directors are doing the job they're sworn to do. It's a system that says the companies have to have a sole focus on maximizing profit."
Gomory's proposed solution would change two big things (and many lesser ones). First, the US government must intervene unilaterally to cap the nation's swollen trade deficit and force it to shrink until balanced trade is achieved with our trading partners. The mechanics for doing this are allowed under WTO rules, though the emergency action has never been invoked by a wealthy nation, much less the global system's putative leader. Capping US trade deficits would have wrenching consequences at home and abroad but could force other nations to consider reforms in how the trading system now functions. That could include international rights for workers, which Gomory favors.
Second, government must impose national policy direction on the behavior of US multinationals, directly influencing their investment decisions. Gomory thinks this can be done most effectively through the tax code. A reformed corporate income tax would penalize those firms that keep moving high-wage jobs and value-added production offshore while rewarding those that are investing in redeveloping the home country's economy.
US companies are not only free of national supervision but actively encouraged to offshore production by government policy and tax breaks. Other advanced economies have sophisticated national industrial policies, plus political and cultural pressures, that guide and discipline their multinationals, forcing them to adhere more closely to the national interest.
Neither of Gomory's fundamental policy reforms--balancing trade or imposing discipline on US multinationals--can work without the other. Both have to be done more or less at once. If the government taxed US multinational behavior without also capping imports, the firms would just head out the door. "That won't work," Gomory explains, "because you will say to the companies, 'This is how we're going to measure you.' And the corporations will say, 'Oh, no, you're not. I'm going overseas. I'm going to make my product over there and I'll send it back into the United States.' But if you insist on balanced trade, then the amount that's shipped in has to equal the amount that's shipped out by companies. If no companies do that, then nothing can be shipped in either. If you balance trade, you are going to develop internal companies that work the way you want." Public investment in new technologies and industries, I would add, may not achieve much either, if there is no guarantee that the companies will locate their new production in the United States.
Essentially, Gomory proposes to alter the profit incentives of US multinationals. If the government adds rules of behavior and enforces them through the tax code, companies will be compelled to seek profit in a different way--by adhering to the national interest and terms set by the US government. Other nations do this in various ways. Only the United States imagines the national interest doesn't require it.
In recent months Gomory and Leo Hindery of the Horizon Project have been calling on Congress with these big ideas and getting respectful audiences. The two met with some thirty Democratic senators and Congressional staffers from both parties. Senator Byron Dorgan, with co-sponsors like Sherrod Brown, Russell Feingold and even Hillary Clinton, has introduced several bills to confront the trade deficits.
Gomory's concept for multinational taxation is a tougher sell amid Washington lobbyists because it goes right to the bottom line of major US corporations. On the other hand, this proposal has stronger intuitive appeal for citizens, who reasonably ask why multinationals are allowed to undercut the national interest when they enjoy all the benefits of being "American" companies.
Hindery's group is advocating Congressional action to arrange a "national summit" on trade, where all these questions can be thrashed out. The political system has never really had an honest, open debate on globalization in the past thirty years. The dogmatic church of free trade--"free trade good, no trade bad"--wouldn't allow it. As more politicians grasp the meaning of Gomory's analysis, they should start demanding equal time for the heretics.
Gomory's vision of reformation actually goes beyond the trading system and America's economic deterioration. He wants to re-create an understanding of the corporation's obligations to society, the social perspective that flourished for a time in the last century but is now nearly extinct. The old idea was that the corporation is a trust, not only for shareholders but for the benefit of the country, the employees and the people who use the product. "That attitude was the attitude I grew up on in IBM," Gomory explains. "That's the way we thought--good for the country, good for the people, good for the shareholders--and I hope we will get back to it.... We should measure corporations by their impact on all their constituencies.
"So in my utopian dream, we decide what we want from the corporations and that's how they make a profit--by doing those things. Failing that, I would settle for the general realization of this divergence and let people argue it out."
Some older CEOs and board members at least listen to him sympathetically. "They have grandchildren," he says. "They wonder too what's going to happen to our grandchildren. You can't get a vote around the corporate board table about, Is this good for the grandchildren? But you can talk to them and they'll worry about it and say, Well, maybe we need to do something."

Trade heresy

T. Palley remet le couvert avec une critique acerbe des formes modernes du libre échange

Jack Welch’s Barge: The New Economics of Trade

The Brazenness of Big Pharma

Le statut de l'industrie pharmaceutique a évolué de façon étonnante sur les 10 dernières années. Lorsque, par le passé, j'évoquais le caractère indécent, non justifié (et par implication évocateur de problèmes de concurrence) des marges de la grosse pharma, je passais pour un illuminé. 10 ans plus tard les marges s'érodent, les pipelines se vident (et pourtant ce n'est pas faute de profits pour soit-disant financer une soit-disant recherche), et on voit passer des articles comme celui-ci :

naked capitalism: The Brazenness of Big Pharma

Au passage, un factoid intéressant : 45% de la recherche en nouveaux médicaments est financée par l'Etat... A rapprocher des arguments de Dean Baker, qui insiste depuis longtemps sur l'inégalité entre profits de la GP et sommes dévolues à la recherche médicale dans le monde (surprise, a est supérieur à b...)

Immobilier US, un beau graphique

A picture is worth a thousand words

The New York Times > Week in Review > Image > As Prices Soared, Warnings of a Bust ... But Reassuring Words, Too

Pronostics

Assez de palabres, voici mes prévisions perso :
US en récession : Q4 2007
France en récession : Q2 2008
et plus de 4 Q de récession dans les deux cas

Deconstructing economists' take on free trade

Par Rodrik, un lien vers un papier qui rejoint le sommet de la pile. J'aime beaucoup l'interprétation de rodrik (en rouge plus bas)

Dani Rodrik's weblog: Deconstructing economists' take on free trade

Citation :

Once in a while you come across a paper that makes you nod in agreement and go "yes!" with every sentence you read. Robert Driskill's Deconstructing the Argument for Free Trade is such a paper. Driskill is a distinguished economist who knows the theory of comparative advantage as well as anyone else. And his argument is not against trade per se, but about the manner in which economists present their arguments in public and in their textbooks. His main argument is that the standard renditions
gloss over a key issue the resolution of which is anything but obvious: What does it mean for a change in economic circumstances to be "good for the nation as a whole", even when some members of that nation are hurt by the change?
In other words, instead of sticking to what they are good at--analyzing trade-offs--economists typically engage in amateur normative political theorizing about what is good for society.

Private equity is good for you (?)

De temps en temps, des petits bouts d'information illustrent de manière poignante le degré de perversion absolue de certains aspects du système capitaliste contemporain.

More Profit and Less Nursing at Many Homes - New York Times

US-vs-Europe structural rigidities: A re-think

Un article intéressant sur les évolutions comparées de l'Europe et des USA sur certains critères macro économiques clés, dont la productivité. Vers le milieu de l'article, un point sur la mobilité sociale comparée des US et de certains pays européens.

US-vs-Europe structural rigidities: A re-think vox - Research-based policy analysis and commentary from Europe's leading economists

Citation :

Death of the American Dream

The strength and pride of America has traditionally been that it provides for a high level of social mobility. It is part of the “American Dream” in which the poorest of the poor can climb to the top of the social ladder in one generation. This dream has attracted millions of outsiders to the land of promise, away from old Europe, which was incapable of providing a future for the poor. The high social mobility has also worked as a “safety valve” that allows political acceptance of the high income inequality in the US. Finally, it has provided the basis for the extraordinary dynamics of the US economy. Developments of the last decades have shattered this American Dream. It now appears that many EU countries have created an environment in which it is significantly easier for the poor to climb the social ladder than it is in the US. Structural reforms will be necessary in the US if it wants to emulate the success of European countries in organising social mobility.
Figure 3

Source: Jäntti, M., Bratsberg, B., Røed, K., Raaum, O., Naylor, R., Österbacka, E., Oddbjørn, Björklund, A., and Eriksson, T., (2006), American Exceptionalism in a New Light: A Comparison of Intergenerational Earnings Mobility in the Nordic Countries, the United Kingdom and the United States, Institute for the Study of Labor (IZA), Discussion Paper, no. 1938

Inégalités - un update des recherches de Piketty et Saez

Piketty et Saez ont été des pionniers dans la mise en évidence de l'accroissement sensible des inégalités qu'ont connu les US depuis les années 80. Je viens de retrouver le post de Brad qui fait le tour de la question : Grasping Reality with Both Hands: Brad DeLong's Semi-Daily Journal

Et je ne résiste pas à la tentation de coller ce graphique

stein's law

If something cannot go on forever, it will stop.
--Stein's Law, first pronounced in the 1980s

Madison on tax

"We [the American colonists fighting in the War of Independence] have shed our blood in the glorious cause in which we are engaged; we are ready to shed the last drop in its defense. Nothing is above our courage, except only (with shame I speak it) the courage to TAX ourselves.
--James Madison, 1782"

lovely

Inflation chinoise

On commence à voir apparaître une inflation significative en Chine (annonce hier de nouvelles restrictions sur les prix des prduits de base, inflation ) 6/7+ ). C'est important, dans la mesure où elle témoigne d'une vulnérabilité chinoise aux impacts extérieurs (excédents courants, prix des matières premières) et intérieurs (élimination progressive de l'excès de main d'oeuvre, ou en tout cas rendements décroissants de la main d'oeuvre marginale) que l'on n'avait pas encore constatée.
Tom Palley donne de la situation une analyse claire, concise et assez convaincante.

Thomas Palley � Blog Archive � Inflation, Chinese Style

Moral Hazard is for suckers

C'est en tout cas ce que pense l'honorable Robert Reich

Robert Reich's Blog: Moral Hazard

Moral Hazard
One day while sitting on a beach last summer I overheard a father tussle with his young son about whether the child was old enough to take out a small sailboat. The father finally relented. "Go ahead, but I’m not gonna save you," he said, picking up his newspaper. A while later, the sailboat tipped over and the child began yelling for help, but father didn’t budge. When the kid sounded desperate I put down my book, walked over to the man, and delicately told him his son was in trouble. "That’s okay," he said. "That boy’s gonna learn a lesson he’ll never forget." I walked down the beach to notify a lifeguard, who promptly went into action. Letting children bear the consequences of their risky behavior -- what some parents call "tough love" -- is equally applicable adults, and conservatives have made something of a fetish out of it. A few weeks ago, as George W. announced a paltry plan to help out a few of the millions of homeowners who got caught in the sub-prime loan mess, he reiterated the credo: "It’s not government’s job to bail out ... those who made the decision to buy a home they knew they could not afford." It’s true that people tend to be less cautious when they know they’ll be bailed out. Economists call this "moral hazard." But even when they’re being reasonably careful, people cannot always assess risks accurately. Many of the mostly poor home buyers who got into trouble did NOT in fact know they couldn’t afford the mortgage payments they were signing on to. The banks and mortgage lenders that pulled out all the stops to persuade them to the contrary were in a far better position to know; after all, they had lots of experience at this game. So did the credit-rating agencies that gave these loans solid credit ratings, as did the financiers who bundled them with less-risky loans and sold them to other financial institutions, and the hedge fund managers who quietly tucked them into their portfolios.The real moral hazard in this saga started when Fed Chair Ben Bernanke cut the Fed’s discount rate (charged on direct federal loans to banks) and announced that the Fed would take whatever action was needed to "promote the orderly financing of markets." Translated, this means that lenders, credit-rating agencies, financial intermediaries, and hedge funds will be bailed out, one way or another, because they’re simply too big to fail. Note that behind every one of these institutions lie thousands of well-paid executives who would have lost big if the Fed didn’t come to their rescue. Even though they had more information and experience at risk-taking than the suckers who borrowed their money, and even though executives at the top of these instutions typically earn more in a day than the borrowers do in a year, moral hazard somehow doesn’t apply to them. When it comes to risky behavior in the market, America has a double standard. We’re told that economic risk-taking as the key to entrepreneurial success, but when big entrepreneurs take big risks that fail it’s amazing how often they get bailed out. Indeed, the history of modern American business is littered with federal bailouts, loan guarantees, and no-questions-asked reorganizations. Some are well known, such as the Chrylser bailout of 1979, the savings and loan bailout of 1989, and the airline bailout of 2001. Most occur in the relative dark, such as the 1998 bailout of giant hedge fund Long-Term Capital Management (courtesy of former Fed chair Alan Greenspan), the not infrequent bailouts of under-funded corporate pension plans by the government’s Pension Benefit Guarantee Corporation, price supports for big agribusinesses facing market downturns, or the current bailout of Wall Street being engineered by Ben Bernanke’s Fed. Behind every one of these bailouts are CEOs or financial executives who were rescued from their bad bets. CEOs get away with stupid mistakes all the time. Some, like Robert Nardelli, the former CEO of Home Depot, drive their company’s stock low that their boards eventually oust them. But they leave with eye-popping going-away presents nonetheless. (Nardelli got several hundrd million dollars on his departure.) If you’re an average American who gets canned from his job, even through no fault of your own, you probably won’t even get unemployment insurance (only 40 percent of job-losers qualify these days). Conservatives tell us that unemployment insurance reduces their incentive to find a new job quickly. In other words, moral hazard. Some CEOs use bankruptcy as a means of getting out from under pesky labor contracts they might have "known they could not afford" when they agreed to them (Northwest Airlines most recently, for example). Others use it as a cushion against bad bets. Donald ("you’re fired!") Trump’s casino empire has gone into bankruptcy twice -- most recently, last November, when it listed $1.3 billion of liabilities and $1.5 million of assets -- with no apparent diminution of the Donald’s passion for risky, if not foolish, endeavor. After all, his personal fortune is protected behind a wall of limited liability, and he collects a nice salary from his casinos regardless. But if you’re an ordinary person who has fallen on hard times, just try declaring bankruptcy to wipe the slate clean. A new law governing personal bankruptcy makes that route harder than ever. Its sponsors argued -- you guessed it -- moral hazard. Bush’s "ownership society" has proven a cruel farce for poor people who tried to become home owners, and his minuscule response to their plight just another example of how conservatives use moral hazard to push their social-Darwinist morality. The little guys get tough love. The big guys get forgiveness.

les origines du supply side

Jonathan Chait, journaliste à The New republic, vient de publier un livre qui retrace l'histoire de l'apparition des théories de l'offre dans le débat politique et économique américain. Le livre est polémique, mais traite d'un sujet fondamental : au-delà des USA, c'est en effet tout le discours politico-économique des années 80 à 2000 qui a été contaminé par ces idées.

Une discussion sur le livre a été tenue sur le tpm cafe, et inclut une contribution de Krugman.

Par ailleurs, Chait a livré un résumé de son livre sur le site de TNR

Le plus étonnnant dans cette histoire, c'est l'absence total de crédibilité intellectuelle des fondateurs de cette doctrine. Les autres piliers de la pensée conservatrice américaine (Hayek, Schumpeter, Strauss) avaient au moins une véritable envergure intellectuelle, mais la description de Laffer et de ses acolytes évoque plus la faisande de bas étage que l'académie.

Extrait :

How economic crackpots devoured American politics.
Feast of the Wingnutsby Jonathan Chait Post date: 09.03.07Issue date: 09.10.07
This article is excerpted from The Big Con: The True Story of How Washington Got Hoodwinked and Hijacked by Crackpot Economics by Jonathan Chait. Click here to purchase it.

American politics has been hijacked by a tiny coterie of right-wing economic extremists, some of them ideological zealots, others merely greedy, a few of them possibly insane. The scope of their triumph is breathtaking. Over the course of the last three decades, they have moved from the right-wing fringe to the commanding heights of the national agenda. Notions that would have been laughed at a generation ago--that cutting taxes for the very rich is the best response to any and every economic circumstance or that it is perfectly appropriate to turn the most rapacious and self-interested elements of the business lobby into essentially an arm of the federal government--are now so pervasive, they barely attract any notice.
The result has been a slow- motion disaster. Income inequality has approached levels normally associated with Third World oligarchies, not healthy Western democracies. The federal government has grown so encrusted with business lobbyists that it can no longer meet the great public challenges of our time. Not even many conservative voters or intellectuals find the result congenial. Government is no smaller--it is simply more debt-ridden and more beholden to wealthy elites.
It was not always this way. A generation ago, Republican economics was relentlessly sober. Republicans concerned themselves with such ills as deficits, inflation, and excessive spending. They did not care very much about cutting taxes, and (as in the case of such GOP presidents as Herbert Hoover and Gerald Ford) they were quite willing to raise taxes in order to balance the budget. While many of them were wealthy and close to business, the leaders of business themselves had a strong sense of social responsibility that transcended their class interests. By temperament, such men were cautious rather than utopian.
Over the last three decades, however, such Republicans have passed almost completely from the scene, at least in Washington, to be replaced by, essentially, a cult.
All sects have their founding myths, many of them involving circumstances quite mundane. The cult in question generally traces its political origins to a meeting in Washington in late 1974 between Arthur Laffer, an economist; Jude Wanniski, an editorial page writer for The Wall Street Journal; and Dick Cheney, thendeputy assistant to President Ford. Wanniski, an eccentric and highly excitable man, had until the previous few years no training in economics whatsoever, but he had taken Laffer's tutelage.
His choice of mentor was certainly unconventional. Laffer had been on the economics faculty at the University of Chicago since 1967. In 1970, his mentor, George Shultz, brought him to Washington to serve as a staffer in the Office of Management and Budget. Laffer quickly suffered a bout with infamy when he made a wildly unconventional calculation about the size of the 1971 Gross National Product, which was far more optimistic than estimates elsewhere. When it was discovered that Laffer had used just four indicators to arrive at his figure--most economists used hundreds if not thousands of inputs--he became a Washington laughingstock. Indeed, he turned out to be horribly wrong. Laffer left the government in disgrace and faced the scorn of his former academic colleagues yet stayed in touch with Wanniski, whom he had met in Washington, and continued to tutor him in economics.
Starting in 1972, Wanniski came to believe that Laffer had developed a blinding new insight that turned established economic wisdom on its head. Wanniski and Laffer believed it was possible to simultaneously expand the economy and tamp down inflation by cutting taxes, especially the high tax rates faced by upper-income earners. Respectable economists-- not least among them conservative ones--considered this laughable. Wanniski, though, was ever more certain of its truth. He promoted this radical new doctrine through his perch on The Wall Street Journal editorial page and in a major article for The Public Interest, a journal published by the neoconservative godfather Irving Kristol. Yet Wanniski's new doctrine, later to be called supply-side economics, had failed to win much of a following beyond a tiny circle of adherents.
That fateful night, Wanniski and Laffer were laboring with little success to explain the new theory to Cheney. Laffer pulled out a cocktail napkin and drew a parabola-shaped curve on it. The premise of the curve was simple. If the government sets a tax rate of zero, it will receive no revenue. And, if the government sets a tax rate of 100 percent, the government will also receive zero tax revenue, since nobody will have any reason to earn any income. Between these two points--zero taxes and zero revenue, 100 percent taxes and zero revenue--Laffer's curve drew an arc. The arc suggested that at higher levels of taxation, reducing the tax rate would produce more revenue for the government.
At that moment, there were a few points that Cheney might have made in response. First, he could have noted that the Laffer Curve was not, strictly speaking, correct. Yes, a zero tax rate would obviously produce zero revenue, but the assumption that a 100-percent tax rate would also produce zero revenue was, just as obviously, false. Surely Cheney was familiar with communist states such as the Soviet Union, with its 100 percent tax rate. The Soviet revenue scheme may not have represented the cutting edge in economic efficiency, but it nonetheless managed to collect enough revenue to maintain an enormous military, enslave Eastern Europe, fund ambitious projects such as Sputnik, and so on. Second, Cheney could have pointed out that, even if the Laffer Curve was correct in theory, there was no evidence that the U.S. income tax was on the downward slope of the curve--that is, that rates were then high enough that tax cuts would produce higher revenue.
But Cheney did not say either of these things. Perhaps, in retrospect, this was due to something deep in Cheney's character that makes him unusually susceptible to theories or purported data that confirm his own ideological predilections. (You can almost picture Donald Rumsfeld, years later, scrawling a diagram for Cheney on a cocktail napkin showing that only a small number of troops would be needed to occupy Iraq.) In any event, Cheney apparently found the Laffer Curve a revelation, for it presented in a simple, easily digestible form the messianic power of tax cuts.

The significance of the evening was not the conversion of Cheney but the creation of a powerful symbol that could spread the word of supply-side economics. If you try to discuss economic theory with most politicians, their eyes will glaze over. But the Curve explained it all. There in that sloping parabola was the magical promise of that elusive politician's nirvana, a cost-free path to prosperity: lower taxes, higher revenues. It was beautiful, irresistible.
With astonishing speed, the message of the Laffer Curve spread through the ranks of conservatives and Republicans. Wanniski evangelized tirelessly on behalf of this new doctrine, both on the Journal's editorial pages and in person. As an example of the latter, one day in 1976, he wandered by the office of a young representative named Jack Kemp. He asked to talk to Kemp for 15 minutes, but he wound up expounding on the supply-side gospel to the former NFL quarterback for the rest of the day, through dinner, and late into the night. "He took to it like a blotter," Wanniski later recalled. "I was exhausted and ecstatic. I had finally found an elected representative of the people who was as fanatical as I was."
Adherents of supply-side economics tend to describe the spread of their creed in quasi-religious terms. Irving Kristol subsequently wrote in a memoir, "It was Jude [Wanniski] who introduced me to Jack Kemp, a young congressman and a recent convert. It was Jack Kemp who, almost single-handed, converted Ronald Reagan to supply-side economics." The theological language is fitting because supply-side economics is not merely an economic program. It's a totalistic ideology. The core principle is that economic performance hinges almost entirely on how much incentive investors and entrepreneurs have to attain more wealth, and this incentive in turn hinges almost entirely on their tax rate. Therefore, cutting taxes-- especially those of the rich, who carry out the decisive entrepreneurial role in the economy--is always a good idea.
But what, you may ask, about deficits, the old Republican bugaboo? Supply- siders argue either that tax cuts will produce enough growth to wipe out deficits or that deficits simply don't matter. When Reagan first adopted supply-side economics, even many Republicans considered it lunacy. ("Voodoo economics," George H. W. Bush famously called it.) Today, though, the core beliefs of the supply-siders are not even subject to question among Republicans. Every major conservative opinion outlet promotes supply-side economics. Since Bush's heresy of acceding to a small tax hike in 1990, deviation from the supply-side creed has become unthinkable for any Republican with national aspirations.
The full capitulation of the old fiscal conservatives was probably best exemplified by Bob Dole, the crusty old Kansan once thought synonymous with the traditional Midwestern conservatism of the GOP. Early on, Dole had openly scorned the supply-siders. "People who advocate only cutting taxes live in a dream world," he said in 1982. "We Republicans have been around awhile. We don't have to march in lockstep with the supply-siders." By the time he had risen high enough in the party to gain its presidential nomination, Dole had no choice but to embrace the Laffer Curve. He chose Jack Kemp, an original supply-side evangelist, as his running mate and made a 15 percent tax cut the centerpiece of his campaign.
George W. Bush's fidelity to tax- cutting runs even deeper. He took as his chief economic adviser Larry Lindsey, a fervent supply-sider whose book, The Growth Experiment, defended Reagan's tax cuts. He picked as his running mate yet another original supply-sider in Cheney, who summed up the new consensus by declaring (according to the former treasury secretary, Paul O'Neill), "Reagan proved deficits don't matter." Bush has poured every ounce of his political capital into cutting taxes, having signed four tax cuts during his administration; when fully phased in, they will reduce federal revenues by about $400 billion a year. Bush and his staff repeatedly tout tax cuts as an all-purpose cure. Bush can endorse even the most radical supply-side claims--"the deficit would have been bigger without the tax-relief package," he asserts regularly--without raising eyebrows. So deeply entrenched is the devotion to supply-side theory that, even in the face of large deficits and a protracted war, not a single Republican of any standing has dared broach the possibility of rolling back some of Bush's tax cuts. As Robert Bart- ley, The Wall Street Journal's editorial page editor, boasted, "Economists still ridicule the Laffer Curve, but policy- makers pay it careful heed."
Like most crank doctrines, supply- side economics has at its core a central insight that does have a ring of plausibility. The government can't simply raise tax rates as high as it wants without some adverse consequences. And there have been periods in American history when, nearly any contemporary economist would agree, top tax rates were too high, such as the several decades after World War II. And there are justifiable conservative arguments to be made on behalf of reducing tax rates and government spending. But what sets the supply-siders apart from sensible economists is their sheer monomania. You could plausibly argue that, say, Reagan's tax cuts contributed around the margins to the economic growth of the 1980s. But the supply-siders believe that, if it were not for Reagan's tax cuts, the economic malaise of the late '70s would have continued indefinitely. They believe that economic history is a function of tax rates--they insisted that Bill Clinton's upper-bracket tax hike must cause a recession (whoops), and they believe that the present economy is a boom not merely enhanced but brought about by the Bush tax cuts.
It doesn't take a great deal of expertise to see how implausible this sort of analysis is. All you need is a cursory bit of history. From 1947 to 1973, the U.S. economy grew at a rate of nearly 4 percent a year--a massive boom, fueling rapid growth in living standards across the board. During most of that period, from 1947 until 1964, the highest tax rate hovered around 91 percent. For the rest of the time, it was still a hefty 70 percent. Yet the economy flourished anyway. None of this is to say that those high tax rates caused the postwar boom. On the contrary, the economy probably expanded despite, rather than because of, those high rates. Almost no contemporary economist would endorse jacking up rates that high again. But the point is that, whatever negative effect such high tax rates have, it's relatively minor. Which necessarily means that whatever effects today's tax rates have, they're even more minor.
This can be seen with some very simple arithmetic. As just noted, Truman, Eisenhower, and Kennedy taxpayers in the top bracket had to pay a 91 percent rate. That meant that, if they were contemplating, say, a new investment, they would be able to keep just nine cents of every dollar they earned, a stiff disincentive. When that rate dropped down to 70 percent, our top earner could now keep 30 cents of every new dollar. That more than tripled the profitability of any new dollar--a 233 percent increase, to be exact. That's a hefty incentive boost. In 1981, the top tax rate was cut again to 50 percent. The profit on every new dollar therefore rose from 30 to 50 cents, a 67 percent increase. In 1986, the top rate dropped again, from 50 to 28 percent. The profit on every dollar rose from 50 to 72 cents, a 44 percent increase. Note that the marginal improvement of every new tax cut is less than that of the previous one. But we're still talking about large numbers. Increasing the profitability of a new investment even by 44 percent is nothing to sneeze at.
But then George Bush raised the top rate to 31 percent in 1990. This meant that, instead of taking home 72 cents on every new dollar earned, those in the top bracket had to settle for 69 cents. That's a drop of about 4 percent--peanuts, compared to the scale of previous changes. Yet supply-siders reacted hysterically. National Review, to offer one example, noted fearfully that, in the wake of this small tax hike, the dollar had fallen against the yen and the German mark. "It seems," its editors concluded, "that capital is flowing out of the United States to nations where from each according to his ability, to each according to his need' has lost its allure."
Here is where a bit of historical perspective helps. If such a piddling tax increase could really wreck such havoc on the economy, how is it possible that the economy grew so rapidly with top tax rates of 70 and 91 percent? The answer is, it's not. It's not even close to possible. All this is to say that the supply-siders have taken the germ of a decent point--that marginal tax rates matter--and stretched it, beyond all plausibility, into a monocausal explanation of the world.

Aside from popular articles in places like the Journal's editorial page, two classic tomes defined the tenets of supply-side economics: Wanniski's The Way the World Works and George Gilder's 1981 manifesto, Wealth and Poverty. Both have had enormous influence, and both capture the feverish grandiosity that is the hallmark of the Laffer Curve acolytes. Here is what makes the rise of supply-side ideology even more baffling. One might expect that a radical ideology that successfully passed itself off as a sophisticated new doctrine would at least have the benefit of smooth, reassuring, intellectual front men, men whose very bearing could attest to the new doctrine's eminent good sense and mainstream bona fides. Yet, if you look at its two most eminent authors, good sense is not the impression you get. Let me put this delicately. No, on second thought, let me put it straightforwardly: They are deranged.
Gilder was not an economist when he wrote Wealth and Poverty. Until then, he was known primarily for having written a pair of anti-feminist tracts, and his notoriety derived mainly from his penchant for making comments such as "There is no such thing as a reasonably intelligent feminist." Wealth and Poverty, though, launched him as an eminent defender of supply-side economics just as adherents of the new creed had been catapulted into power. Gilder articulated the new philosophy of the Reagan era in admirably straightforward fashion. "To help the poor and middle classes," he wrote, "one must cut the taxes of the rich."
In reflecting the new prestige Republicans wished to see afforded the rich, Gilder defended capitalists as not merely necessary or even heroic but altruistic. "Like gifts, capitalist investments are made without a predetermined return," he wrote. In fact, while capitalists may not be sure of their exact return, they do expect to make more than they put in, which makes an investment unlike a gift in a fairly crucial way. Yet there was enough of an audience for such sentiments that Gilder's book sold more than a million copies. President Reagan handed the book to friends, and advisers such as David Stockman hailed its "Promethean" insight. Wealth and Poverty, reported The New York Times, "has been embraced by Washington with a warmth not seen since the Kennedys adopted John Kenneth Galbraith."
From the beginning, Gilder betrayed signs of erratic thought, and not merely in his misogyny. In a 1981 interview with The Washington Post, he declared, "ESP is important to me. I learned that it absolutely exists. A roommate and I were sharing an apartment, and another man in the building was a psychic. He taught me how to do it." In the mid-'80s, Gilder's career took an abrupt turn. He became fascinated with microprocessors and took time off to learn the physics of the new technology. This led him, by the mid-'90s, to stake out a position as the most wild-eyed of the technology utopians who flourished during that period, and he ended up publishing a newsletter that offered stock tips. Some of his pronouncements were obviously crazy even at the time. These would include his advice to short Microsoft stock in 1997, his claim that Global Crossing (now bankrupt) "will change the world economy," and general techno-giddiness, such as his claim that, because of online learning, within five years "the most deprived ghetto child in the most benighted project will gain educational opportunities exceeding those of today's suburban preppy."
In the fevered stock bubble of the 1990s, though, some of Gilder's prognostications seemed to pan out, at least for a while, and, at its peak, his newsletter attracted a subscription base worth $20 million, making him fabulously rich. In 2000, Gilder used some of his lucre to purchase the American Spectator, a monthly conservative magazine best known for investigating the details of President Clinton's personal indiscretions, both real and imagined. Gilder turned the Spectator into a shrine to Gilderism, a fusion of supply-side utopianism and techno-utopianism. He installed his cousin as editor and ran both a lengthy excerpt as well as a favorable review of his own book.
The crowning touch of Gilder's ownership was a lengthy interview with himself in the June 2001 issue. Among other musings on display were Gilder's familiar ruminations on feminism: "Christie Whitman is an upper-class American woman ... almost none of them have any comprehension of the environment. Almost all of them are averse to science and technology and baffled by it." His financial success seemed to have propelled Gilder to even greater heights of hubris, his Promethean insights greeted by his employees with awed deference:
TAS: In the late 1970s and early '80s, you led the intellectual debate on sexual issues from the conservative side. In the 1980s your book Wealth and Poverty transformed the way people thought about capitalism. And then you wandered off to study transistors. Why did you do that?Gilder: I thought I had won those debates. Whenever I actively debated anybody, they didn't have any interesting arguments anymore, so I thought I should learn something I didn't know about.
In presenting the interview with their boss, the Spectator's editors promised: "An equally wide-ranging talk with George will be an annual event." Alas, it never recurred. As the tech bubble burst, Gilder and his investors found their wealth spiraling downward. Despite Gilder's frantic reassurances--"Your current qualms will seem insignificant," he promised in late 2000--his subscribers deserted him. In 2002, he confessed to Wired magazine that he was broke and had a lien against his home. "Most subscribers came in at the top of the market," Gilder later explained, "So the modal experience of the Gilder Technology Newsletter subscriber was to lose virtually all of his money. That stigma has been very hard to overcome."
Nonetheless, Gilder soldiers on. Today, he champions the theory of intelligent design. Once again, he can see the truth that has eluded all the so-called experts. Who could have foreseen such a tragic downfall? Actually, there was one man visionary enough to presage Gilder's fate: Gilder himself. In Wealth and Poverty, one of Gilder's arguments for more sympathetic treatment of the rich held that "the vast majority of America's fortunes are dissipated within two generations. ... In a partial sense, a rich man resembles a gambler betting against the house." This is a terribly inapt description of the American economy. (It is the rare homeless shelter that caters to descendants of the Rockefeller or Morgan family fortunes.) But it turned out to be a precise description of Gilder's own fortune. Wealth and poverty, indeed.
s influential as Gilder and his book were, they were not nearly as influential in legitimating supply-side theory as Wanniski or his book. This isn't terribly reassuring, though, because Wanniski (who died in 2005) made Gilder look like the model of sobriety. The literary and intellectual style of The Way the World Works is immediately familiar to anybody who has ever sorted submissions at a political magazine. It is the manifesto of the misunderstood autodidact--an essay purporting to have interpreted history in a completely novel and completely correct way, or to have discovered the key to eternal prosperity and world peace, or some equally sweeping claim. The Way the World Works fits precisely into this category, except that, rather than being scrawled longhand on sheaves of notebook paper and mass-mailed to journalists, it was underwritten by the American Enterprise Institute, has been published in four editions, and features introductions attesting to its genius from such luminaries as Bartley and the columnist and ubiquitous pundit Robert Novak.
For supply-side evangelists, there is almost nothing that their theory cannot explain. For instance, in his book, Wanniski uses the Laffer Curve as a model for all of human development, beginning with young babies: "Even the infant learns to both act and think on the margin when small changes in behavior result in identifiable price changes.'" Parents, too, must abide by the Curve:
The parent who does not understand that there are two tax rates that yield the same revenue is a poor political leader in the family unit, and should not be surprised if the prohibitively taxed infant rebels in one way or another--becoming an incorrigible terror (revolutionary) or withdrawing into himself (the only form of emigration open to a child).
This thought produces a footnote: "The wise ruler will never surround his adversaries with no-nos.'" Wanniski then runs through a number of historical rulers wise and unwise, concluding with his observation that "Kennedy's determination to box in Cuba, which included plans to assassinate Fidel Castro, left Castro no avenue but the assassination of Kennedy."
Apparently, nothing in human history defies Wanniski's attempts to involve the Laffer Curve. He goes on to write: "When Hitler came to power in 1933, fascinated with Mussolini's syndicalist style, he--like Roosevelt--left tax rates where he found them." Can you see where this is going? Yes: "Although he left the explicit tax rates high, [Germany] did chip away at the domestic and international wedges. The economy expanded, but in so distorted a fashion that it compressed the tension between agriculture and industry into an explosive problem that Hitler sought to solve through Lebensraum, or conquest [sic]." You, dear reader, may have thought that Nazi ideology led to the invasion of Poland, but, thanks to Wanniski, you can see that the underlying cause turns out to have been high taxes. (It is amazing that Bill Clinton's tax hike did not lead him to invade Canada.)
Republicans did not find these obvious signs of wingnuttery troubling. Indeed, Wanniski's book hastened his astonishingly rapid rise. Five years before he wrote his book, Wanniski knew nothing about economics. Within a few years, he had formulated a new creed and sold it to a series of powerful opinion leaders and politicians. By 1977, the Republican National Committee formally called for an across-the-board tax cut modeled on the one proposed by Wanniski's closest disciple, Kemp. The next year, Congress enacted a capital gains tax cut that he lobbied for in the halls of the Capitol and championed in the Journal's columns.
Two years after the publication of his book, Wanniski found himself advising Ronald Reagan, who ran for president on ideas Wanniski had devised. But, in time, the same qualities that made him such an effective evangelist for supply-side economics--his gregariousness, his naïveté, his absolute faith in his own correctness, and his ability to persuade others of the same--did him in. Wanniski gave an interview in 1980 about the battle for Reagan's mind among his advisers, all but openly saying that the candidate was a creature of his staff. This brought about his quick expulsion from the inner circle. In 1995, fearing that the supply-side agenda was stagnating, Wanniski came up with the idea of persuading Steve Forbes, the millionaire publisher and Laffer Curve devotee, to run for president. After Wanniski lashed out at the Christian Coalition strategist Ralph Reed, though, he became a liability to the campaign he had created and was shut out. The next year, after the GOP nominee Bob Dole named his acolyte Jack Kemp to share his ticket, Wanniski again won a place of influence.
It was around this time that Wanniski's nuttiness began manifesting itself in ways that even conservatives could recognize. Wanniski began meeting with and defending Louis Farrakhan, the head of the Nation of Islam, explaining, "I expressed my belief that Jewish leaders fear he could lead the black electorate away from the Democratic Party and into opposition of support for Israel." And Farrakhan is far from the only unsavory character Wanniski embraced. He likened Slobodan Miloevi to Abraham Lincoln. He met with the lunatic conspiracy theorist and convicted felon Lyndon LaRouche and hired a number of his followers at his economic consulting firm. ("[T]hey're not trained in demand-model economics," he explained to BusinessWeek with undeniable logic.) And Wanniski championed Saddam Hussein, even to the point of denying that the late Iraqi dictator had ever used chemical weapons against the Kurds. ("There is no possibility that Saddam gassed his own people," he wrote.)
Such statements, combined with his erratic behavior, eventually made Wanniski an outcast within the GOP. His expulsion from the party's good graces was consecrated, in a sense, by a series of short editorial items in the conservative Weekly Standard in the mid-'90s, ridiculing his nutty views on Farrakhan and Iraq. But, while Wanniski himself is remembered as a nut by most conservatives, his primary doctrine has lost none of its influence. The Standard continues to publish editorials saying such things as "the supply-side Laffer Curve has worked." So Wanniski is now viewed as a nut on all matters save the very thing that is the font from which all his nuttiness springs. His personal influence has never been lower, but his ideological influence has never been greater. "It is no exaggeration to say that the recent history of the United States would have been far different were it not for Jude Wanniski," wrote Novak. The scary thing is that he's right.

In February 2006, the conservative journal Policy Review published an essay that was shockingly heretical, though perhaps unintentionally so. In it, Carles Boix of the University of Chicago argued that there is a link between democracy and economic equality:
In an unequal society, the majority resents its diminished status. It harbors the expectation of employing elections to drastically overturn its condition. In turn, the wealthy minority fears the outcome that may follow from free elections and the assertion of majority rule. As a result, it resorts to authoritarian institutions to guarantee its social and economic advantage.
Of the many taboos that prevail among conservatives, the one forbidding any serious discussion of inequality is perhaps the strictest. Any forthright examination of this topic will lead one quickly to the realization that American society has been spreading apart rapidly for three decades and that Republican economic policies have without a doubt contributed mightily to this gulf. So conservatives usually ignore the subject of inequality, except perhaps to minimize its scale or importance.
Why, then, did Policy Review, which is published by the staunchly conservative Hoover Institution, open its pages to such apostasy? Well, it didn't intend to. Boix's essay (which was brilliant and widely discussed) concerned the inculcation of democracy abroad and did not deal directly with the United States. And the circumstances Boix envisioned--mainly, developing countries attempting a transition to democracy--are different from those in an advanced democracy. Americans, fortunately, do not have to worry about kleptocrats, political violence, and massive vote fraud.
But, while Boix's theory may be less applicable to the United States than it is to the Third World, it is still somewhat true. Indeed, this theory offers an uncannily precise description of what has happened in American politics over the last 30 years. The business lobbyists have turned the Republican Party into a kind of machine dedicated unwaveringly to protecting and expanding the wealth of the very rich. As it has pursued this goal ever more single-mindedly, the right has by necessity grown ever more hostile to majoritarian decision-making for the obvious reason that it's hard to enlist the public behind an agenda designed to benefit a tiny minority. The old ways of conducting politics have broken down in the face of this onslaught. The mores of the old Washington establishment--the assumption of some basic intellectual goodwill on both sides, the focus on character over substance, the belief in compromise--all developed during an era when there were few ideological differences between the parties. The old ways may have done a decent job of safeguarding the national interest when the great moderate consensus prevailed, but they have proven unequal to the challenge of a more ideological time.
All this has happened at the same time as a massive increase in income inequality, which is exactly what Boix's theory would predict. In the same essay, Boix marvels at the fortunes amassed by autocratic ruling elites throughout history:
Rulers such as the Bourbons, the Tudors, or the Sauds seize an important part of their subjects' assets. For example, at the death of Augustus (14 a.d.), the top 1/10,000 of the Roman Empire's households received 1 percent of all income. In Mughal India around 1600 a.d., the top 1/10,000th received 5 percent of all income.
Presumably, readers looking at these numbers are supposed to gape in astonishment at the sheer inequity of those autocratic regimes. But the numbers are less astonishing when you compare them to those in the contemporary United States, which Boix does not. As of 2004, the top one-ten-thousandth of Americans earned over 3 percent of the national income--a somewhat smaller share than that earned by the Mughal elite but several times higher than that enjoyed by the wealthiest Romans.
Meanwhile, the gap between Americans and Mughals is closing rapidly. Since the late '70s, the share of national income going to the top 1 percent has doubled. The share of the top 0.1 percent has tripled, and the share of the top 0.01 percent has quadrupled. This gulf was widened precisely at the same time that the right, growing ever more plutocratic and suspicious of popular demands, was battering away at the culture of American democracy. Many people have looked at the depredations of the Bush era--the bizarre cult of personality, the anti-intellectual demagoguery, the incessant flouting of norms, the prostrate media--as the product of the president's character, or Karl Rove's machinations. But it is, in the main, the consequence of a cult-like fringe taking control of a political party and using it to wage class warfare on behalf of a tiny minority.

Jonathan Chait is a senior editor at The New Republic.

The death of manufacturing

Après l'article sur Baumol, place à Palley. Palley est un économiste dit "marginal", en ce qu'il s'oppose clairement au consensus néoclassique, et qu'il est à ce titre considéré comme un pariah. Ses analyses sont cependant suffisamment claires pour mériter de fréquentes citations par les économiste de centre gauche américains. En l'occurrence, c'est Yves Smith qui nous y renvoie, ce qui est inhabituel.
Palley, comme ex-économiste de l'AFL, a une sensibilité particulière à l'importance du manufacturing. Cette sensibilité n'est pas générale, elle est même souvent tournée en dérision (il n'y a pas si longtemps The Ec. expliquait en parlant de l'Angleterre qu'il était préférable d'avoir des gestionnaires de hedge funds plutôt que des usines).
Faisant partie de ceux qui considèrent qu'une solide base de manufacturing est essentielle à la santé d'un pays, en raison d'externalités positives qui vont au-delà de sa contribution au PIB, je ne peux qu'être intéressé par l'argument de Palley. Le problème d'une telle position est qu'elle amène forcément à confronter la question du libre échange, et qu'il s'agit d'une pente glissante vers des conclusions auxquelles je ne suis pas encore prêt.

Place à l'artiste

The Fed and America’s Distorted Expansion
The U.S. economy has been in expansion mode since November 2001. Though of reasonable duration, the expansion has been persistently fragile and unbalanced. That is now coming home to roost in the form of the sub-prime mortgage crisis and the bursting house price bubble.
As part of the fallout, the Federal Reserve is being criticized for keeping interest rates too low for too long, thereby promoting credit and housing market excess. However, the reality is low rates were needed to sustain the expansion. Instead, the root problem is a distorted expansion caused by record trade deficits and manufacturing’s failure to fully participate in the expansion.
If the Fed deserves criticism it is for endorsing the policy paradigm that has made for this pattern. That paradigm rests on disregard of manufacturing and neglect of the adverse real consequences of trade deficits.
By almost every measure the current expansion has been fragile and shallow compared to previous business cycles. Beginning with an extended period of jobless recovery, private sector job growth has been below par through most of the expansion. Though the headline unemployment rate has fallen significantly, the percentage of the working age population that is employed remains far below its previous peak. Meanwhile, inflation-adjusted wages have barely changed despite rising productivity.
This gloomy picture justified the Fed keeping interest rates low. However, it begs the question of why the economic weakness despite historically low interest rates, massive tax cuts in 2001 and huge increases in military and security spending triggered by 9/11 and the Iraq war?
The answer is the over-valued dollar and the trade deficit, which more than doubled between 2001 and 2006 to $838 billion, equaling 6.5 percent of GDP. Increased imports have shifted spending away from domestic manufacturers, which explains manufacturing’s weak participation in the expansion. Some firms have closed permanently, while others have grown less than they would have otherwise. Additionally, many have reduced investment owing to weak demand or have moved their investment to China and elsewhere. These effects have then multiplied through the economy, with lost manufacturing jobs and reduced investment causing lost incomes that have further weakened job creation.
The evidence is clear. Manufacturing has lost 1.8 million jobs during the expansion, which is unprecedented. Before 1980 manufacturing employment hit new peaks every expansion. Since 1980 it has trended down, but it at least recovered somewhat during expansions. This business cycle it has fallen during the expansion. The business investment numbers tell a similar dismal story, with spending being much weaker than in previous cycles.
These conditions compelled the Fed to keep interest rates low to maintain the expansion. That policy worked, but by stimulating loose credit and a house price bubble that triggered a construction boom. Thus, residential investment never fell during the recession and has been stronger than normal during the expansion. Construction, which accounted for 5 percent of total employment, has provided over twelve percent of job growth. Meanwhile, higher house prices have fuelled a borrowing boom that has enabled consumption spending to grow despite stagnant wages. This explains both increased imports and job growth in the service sector.
The overall picture is one of a distorted expansion in which manufacturing continued shriveling while imports and services expanded. This pattern was carried by an unsustainable house price bubble and rising consumer debt burdens, and that contradiction has surfaced with the implosion of the sub-prime mortgage market and deflation of the house price bubble.
The Fed is now trying to assuage markets to keep credit flowing, and it will likely soon lower interest rates. On one level that is the right response and it may even work again – though it does increasingly seem like sticking fingers in the dyke to prevent the flood. However, the deeper problem is the policy paradigm behind the distorted expansion, which is where the Fed is at fault and where it deserves criticism.
The ideological and partisan Alan Greenspan wholeheartedly endorsed corporate globalization and promoted the White House and Treasury’s unbalanced expansion policies. The Fed’s professional economics staff also seems to have dismissed domestic manufacturing’s significance and endorsed corporate globalization in the name of free trade. Consequently, the Fed has tacitly supported the underlying policy paradigm that has given rise to America’s distorted expansion. Despite talk about reducing global financial imbalances, the Bernanke Fed still seems locked in to this paradigm and that is where constructive criticism should now be directed.
Copyright Thomas I. Palley

Productivity in an age of services

Yves Smith renvoie aujourd'hui à un article fouillé de Thomas Palley (keynésien bien connu et économiste de l'AFL CIO) qui livre une analyse intéressante, et malheureusement possiblement juste, des causes de la situation actuelle.
Avant de discuter l'article, YS fait référence à "Baumol's disease", qui est bien expliquée dans cet article

Is Productivity Growth Back In Grips of Baumol's Disease?
By BRIAN BLACKSTONEAugust 13, 2007; Page A2
Is Baumol's disease back?
Named for economist William Baumol, the theory argues that the labor-intensive nature of some services acts as a constraint on productivity growth in an economy that increasingly produces services. It's relevant again years after some economists pronounced it "cured."
Between the mid-1970s and mid-1990s, annual productivity growth in the U.S. nonfarm business sector averaged about 1.5%. In the past decade, it has averaged about 2.6%. For a couple of years in the early 2000s it was near 4%, and Mr. Baumol's idea looked destined to join others in economics that looked good in theory but wrong in practice.
Yet last week's downward revisions of U.S. productivity growth for the past three years suggest that the trend is closer to 2%, and shows that productivity growth has slowed for four straight years.
At the same time, employment in traditionally less-productive sectors such as health care and leisure is growing rapidly, while employment in higher-productivity business services is growing more slowly; in manufacturing and retail trade, it is flat or shrinking. Therein may lie clues into whether the recent dip in productivity growth is a major turn or a temporary lull.
That's where Baumol's disease comes in.
In the 1960s, Mr. Baumol, now at New York University, and William G. Bowen, an economist who later became president of Princeton University, argued that because productivity growth in labor-intensive service industries lags behind that in manufacturing, productivity growth in service-oriented economies tends to sag.
Their famous example was a classical string quartet -- there are always four players in a quartet and it always takes about the same amount of time to perform a set piece of music. You can't get any more music out of the same number of musicians over that same period of time. Broadening that to other types of services, the implication is that rich countries such as the U.S. that tend to veer toward services would face higher prices as wages and costs rise.
But something happened in the last decade.
The information-technology boom led to rapid efficiency gains not just in the production of high-tech equipment, as expected, but also in services such as retailing -- which had long been assumed to have little prospect for much improvement. The quartet can now be heard on iPods and even cellphones, meaning that even if musicians themselves aren't more productive, the methods of distribution are.
In fact, it is in services -- particularly in retail and wholesale trade, in something called the "Wal-Mart effect" -- where economists credit a good part of productivity gains in the late 1990s and early 2000s. That led Brookings Institution economists Barry Bosworth and Jack Triplett to conclude in an influential 2003 paper that Baumol's disease "has been cured."
Along similar lines, a pair of economists from the Federal Reserve -- Carol Corrado and Paul Lengermann -- argued in a recent paper that much of the growth in the U.S. economy since 2000 can be accounted for by strong multifactor productivity growth -- which includes labor as well as inputs such as capital and materials -- in industry, a "remarkable turnaround" in finance and business services, and an "end to the drops" in productivity in personal and cultural services.
Still, the Fed economists and their co-authors estimated that from 2000 to 2004, multifactor productivity growth averaged just 0.2% a year in personal and cultural services (which include health care, social assistance, recreation and food services, among others), compared with almost 2% for finance and business, 2.6% for distribution and 5.4% for high tech.
Sectors where productivity is high and average labor cost low "are those things that can be automated and mass-produced," Mr. Baumol, now in his mid-80s and still teaching, said in an interview. "And things where labor-saving is below average are things that need personal care -- these are health care, education, police protection, live stage performance... and restaurants."
Uh-oh.
U.S. job growth has been concentrated in those latter sectors. More than half of the 1.6 million jobs added in the private sector in the past year have been in food services, health care and social services. Food services alone account for more than 20% of all new jobs this year, including government.
Going back to Baumol's disease, it still takes a bartender the same two minutes it always has to make a gin-and-tonic. And an "end to the drops" in productivity referred to in the Fed paper may not be enough to sustain living standards over generations.
While there's surely a cyclical component to recent job gains and losses -- areas such as health care and personal services tend to lag the business cycle -- there are longer-term forces at work.
Population aging will shift more of the U.S. economy toward one-on-one services. The Labor Department estimates that between 2004 and 2014, seven of the 10 fastest-growing occupations will be in health care, and health-care employment will double the national average. Employment in leisure and hospitality will also outpace the average, though not by as much.
"If what we're starting to see is an increase in personal services -- nursing homes, care for the elderly -- as they become bigger and bigger, that would create a very important composition story," says Martin Baily, a productivity scholar at the Peterson Institute for International Economics, a Washington think tank.
If employment and sector-specific productivity trends continue, "I would start heading toward 1.5%" annual productivity growth over the long term, says Mr. Bosworth. Still, he doesn't think that will happen; he stands by his notion that Baumol's disease has been cured, in part because medical care -- the ultimate test of Baumol's theory because it's set to account for so much of the economy -- holds promise for "big productivity gains."
There are other reasons for optimism. The U.S. is very competitive globally in high-paying and high-productivity services, so any expansion of trade could positively affect the job mix domestically.
Asked whether Baumol's disease spells doom for productivity, its namesake replies "yes and no."
"It is true that in money terms our productivity will be slowed down by the shift in labor from agriculture, manufacturing and services like telecommunications into services like health care and education," Mr. Baumol says.
"But if you count the number of students who have graduated or the number of people who have been taken care of after a heart malfunction, that is not going down." And the benefits of education and health care, on future output, can be hard to measure.
As for the disease that bears his name, not only does Mr. Baumol say it hasn't been cured, he adds: "I can brag and apologize that we've made the longest-lasting [correct] prediction that's ever been made in economics."
Write to Brian Blackstone at brian.blackstone@dowjones.com1