House of Debt

In their book,  House of Debt, Atif Mian and Amir Sufi  provide evidence on the causes of the Great recession and what explains the slow recovery and structural weaknesses affecting the most advanced economies. The main argument is that "debt fueled boom artificially boosted household spending from 2000 until 2006 and the collapse of house prices forced a sharp pull back because indebted households bore the brunt of the shock"

Some may argue that the authors have overstated the importance of  housing and household debt in explaining the crisis but there is new evidence which seems to support that argument, which obviously does not explain the whole thing. As some other authors, like Piketty, inequality does play a role in triggering the debt spiral. 

See new evidence here on Mian-Sufi's thesis. 

Inequality dampens economic recovery

A report shows that high inequality contributes to slow down growth and therefore matters for policy makers. The interest of that research is not that it brings new advances into the study of inequality - . The authors of that report are economists of Standard & Poor"s, the rating agency which provides information and analysis for investors in financial markets. This is a recognition that unequal income distribution represents a major risk and not an asset for an economy which seeks to recover from a deep crisis.

The S&P economists write : "Our review of the data, as well as a wealth of research on this matter, leads us to conclude that the current level of income inequality in the US is dampening GDP growth, at a time when the world's biggest economy is struggling to recover from the Great recession and the government is in need of funds to support an aging population". 

The analysis which underpins that conclusion is quite straightforward. The wealthy tend to save more as a share of their income, as a growing part of the national income goes to the top-income group. As a result, there is a contraction of demand for goods and services to support strong growth. The income gap has been bridged with debt which fed a boom-bust cycle of financial crises. Therefore, high inequality becomes self reinforcing, as the wealthy use their resources to influence the political system toward policies that help maintain that privileged situation, such as low tax rates or low estate taxes and underinvestment on education and infrastructures. 

These ideas are not new, going back originally to John Maynard Keynes' theory and  recent work made by Thomas Piketty and Atif Mian and Amir Soufi. The novelty is that they go mainstream, beyond the academic debate on economic inequality and the left wing circles. But the policy prescriptions of the authors of that report are poor trying to avoid discussions about taxation and the social welfare system and focusing only on the need for higher investment in education as a key driver for growth.    

This is unfortunately just part off the problem. Tackling inequality requires bold measures, including redistribution of income and job creating investment plans to boost  sustainable growth. 

The end of innovation?

An American scientist, Jan Vijg, from the Einstein College of Medecine of New York, revived the discussion on science which has traditionally opposed optimism and pessimism. In a book called "the American technological challenge",  he has elaborated a detailed graph, reproduced recently in a journal  which compiles a list of 300 macro-inventions from 500 B.C. until 2010 and which demonstrates that innovation reached a peak in the 70s then declined in following decades. 

The author of the research has, nevertheless pointed out that it is not technological decline but a slow down of the pace of innovation. This trajectory may have some commonality with other evolved civilizations, such as China under the Song dynasty or Islam in the Middle Age. One of the causes may be saturation. According to a study by Jones and Azoulay from MIT, an average R&D worker was seven times more productive in 1950 as one today in terms of contribution to innovation and growth, probably because he could focus on frontier research rather than keeping up with scientific developments in his own field - and this why there more people working in R&D than in the past. 

However, the main obstacles to innovation are cultural factors. Relative welfare improvements lead to a lesser aversion to risk, and the institutions tend to slowdown, rather than stimulating technological development.  Hence the question : what can be else invented? Are we really condemned to give the best of our intelligence and creativity to make small improvements to inventions made by others in the past? True, we cannot ignore the great transformation of the Seventies- the music, the desire to change the world, the civil rights and so on - and the big technological push with the invention of the personal computer (1975), the cellular phone (1978), the walkman (1979) and even the first project of Internet by Tim Berners-Lee (1980).  

R. Gordon supports the idea that big innovation is behind us:  in a recent article, he suggests that the process of economic growth as it happened over the last 250 years will not persist forever. The sources of economic progress may derive from other factors such as education, energy gains or demography rather than innovations.

Are pessimists such as Vijg and Gordon right? The Economist argues that there are strong arguments for a certain optimism. The first one is that there is a time lag of 5 to 15 years between the investments in technology and the improvements in productivity levels. Therefore, the most modern technologies are actually not reflected in current statistics (as Solow used to say about information and communication technologies which are everywhere but in productivity statistics). The second argument is that new technological developments are hindered by rigid institutions which block the potential for growth and productivity.

The debate is quite complex as it involves both historical and spatial dimensions. If they are more innovations, it does not mean that they will have a greater impact today. Moreover, globalization of technology has resulted in stagnant incomes and declining employment in the US and Europe. As Marx and Schumpeter explained, the crisis of capitalism generates a tendency toward technological progress as part of a process of 'creative destruction' but it does not mean that innovation alone will be enough to boost growth and may coexist with a prolonged period of stagnation. 

Just a final note. A few centuries ago, Niccolo Macchiavelli wrote: 

There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things. For the reformer has enemies in all those who profit by the old order, and only lukewarm defenders in all those who would profit by the new order, this lukewarmness arising partly from fear of their adversaries … and partly from the incredulity of mankind, who do not truly believe in anything new until they have had actual experience of it.

Noam Chomsky (2014) "How to Ruin an Economy; Some Simple Ways"

Noam Chomsky (2014) "How to Ruin an Economy; Some Simple Ways"

https://www.youtube.com/watch?v=6mhj-j0z-fk

We should think about how to lay the foundations of a good society  based on market economy coupled with social justice starting from Adam Smith, Marx, Keynes and Galbraith.  Unfortunately, governments have not drawn the right lessons from the global crisis pursuing self interest and selfish policies without caring for the poor and unemployed.

The Politics and Economics of Inequality

The other Europe

Today, millions of Europeans will vote to designate their representatives of the European Parliament and indirectly the president of the European Commission. These elections are of paramount importance for the future of Europe. However, during the national campaigns, there was little debate about Europe as if the main issues were of a different nature as the populist parties claim 

In fact, national problems are inseparable from the destiny of Europe. Today, no nation-State could survive alone in a globalizing world without belonging to a wider entity which ensures fair competition, cooperation and solidarity among its members. This was the project put forward by J.Delors and those who supported it in perfect continuity with the original vision of the 'founding fathers'.

The European problem is not only about relaxing austerity and allowing more freedom to finance investments, decide on the level of employment, tackling insufficient purchasing power and the weakness of demand. These are all important questions but they are not the only ones. The objective that we must propose is that of the building of a European federal State, with powers at least in a number of highly sensitive areas, such as a genuine fiscal policy, a common defense, an immigration policy, a common energy policy where a transfer of sovereignty would be desirable.

 The promotion of an European culture, science and technology, social cohesion and the reduction of inequalities in wealth distribution should be pursued not only by each national government but by the European authorities.

Europe is already but not completely the guardian of human rights and citizenship, but this ownership must be preserved and extended. The European Parliament should become the legislative seat of democracy and control of an executive power entrusted to the European Commission. It should appoint the members of the Commission and also the president of the European Union or to entrust it to the direct election by the European citizens. The United States of Europe is the ultimate goal to be achieved, gradually but persistently.

These are the goals of a renewed European project. In this regard, the European parliament should become a fundamental institution along with a reinforced role of the European Commission and the European Central Bank whose powers should be extended.

Responsible citizens should vote to pursue these objectives. Unfortunately, irresponsibility is gaining ground in all European countries. Our only hope is that it will not prevail as an outcome of these elections.

Débat Martin Schulz - Thomas Piketty