Here is a good overview of President Obama’s economic legacy from PBS’s Paul Solman. Did his efforts to turn the country around after the 2008 financial crisis constitute a robust recovery, or too little, too late? Economics correspondent Paul Solman assembled a panel of economic experts to discuss employment across racial groups, the types of jobs created and the obstacles the president faced in enacting his economic agenda. Some of the comments are as follows:
- He saved us from a great depression.
- Over 15 million jobs have been added; 22 million more people have health insurance coverage than they did before.
- If we characterise an economy as being in a catastrophe at unemployment rates greater than 8 percent, the black unemployment rate is still above 8 percent. So, frankly, black Americans are still in a great depression, or great recession at the very least.
- The failure by the Obama administration to focus on economic growth.
- A long-term infrastructure program would have made a great deal of sense, and frankly still does today. But that’s not what the Obama administration proposed. I think we need to have a more holistic structural agenda for lower-income Americans, rather than just treating it as a problem of recession and recovery.
- We needed bolder, stronger, more fundamental, not tinkering, ideas to really structurally change the U.S. economy.
You will no doubt have heard about the battle of ideas – Keynes v Hayek. In the 1930’s this was probably the most famous debate in the history of economics – the battle of ideas -government v markets.
Now there is Chinese version of the debate:
Justin Lin (Keynes) versus Zhang Weiying (Hayek) – both are Professors at Peking University. Lin is on the right of the image below.
Their latest debate is about industrial policy and the concept that the government can set the example of how to run successful industries – in the 1980’s textiles and today renewable energy. Although China’s growth record would seem to justify this some have seen these state run industries produce little innovation. Lin believes that countries that have a comparative advantage should receive help from the government whether it be in the form of tax cuts or improved infrastructure. Furthermore, because resources are limited the government should help in identifying industries which have earning potential. This assistance includes subsidies, tax breaks and financial incentives — aimed at supporting specific industries considered crucial for the nation’s economic growth.
Zhang sees this industrial policy as a failure in that he believes government officials don’t know enough about new technologies. He uses the example in the 1990s, when the Chinese government spent significant money on the television industry only for the cathode ray tubes to become outdated. He is also concerned about industrial inertia with local officials following the central government’s direction which tends to lead to an overcapacity. Zhang, however, credited the free market — not politically motivated government subsidies — with game-changing innovations that benefit society eg. James Watt and the steam engine, George Stephenson’s intercity railway, and Jack Ma’s innovative online marketplaces under Alibaba.
China’s ongoing transition to a market-based economy has relied on labour, capital and resource-intensive industries. But the transition’s negative side effects have included structural imbalances and excess capacity in certain sectors. Moreover, some state-owned enterprises such as telecoms have been challenged by disruptive innovators, such as social networks.
Zhang said industrial policy can foster greed. For example, companies may collude with government officials to win special favours. And policymakers can make mistakes, given that even the most well-informed intellectual cannot always predict market trends. Other economists have contributed to the debate stating that a lot of the most successful companies have not had any government assistance in their early years.
However the debate is sure to continue – what works best ‘Markets or Governments’?
The Economist – 5th November 2016
I posted on this issue last year when Kim Hill (Radio NZ) interviewed Paul Mason – author of Post Capitalism (now out in paperback). Mason makes the point that we are going to live through a long transition from capitalism – the state and the market to post capitalism which is the state, the market and the shared collaborative economy. With technology taking a lot of the jobs in traditional industries in the UK he states that further development in this sector is not the way of creating new jobs. He talks about delinking work from wages by just paying people to actually exist – rather than tax to exist.
Liam Dann (NZ Herald) wrote a piece about Amin Toufani’s presentation at SingualrityU summit in Christchurch where he talked about people in the labour force having to learn, unlearn, and learn again – unlearning should be core competency. However as there maybe many people who will struggle with this concept Toufani believes that a universal basic income (UBI) may need to be adopted – see RSA video below.
Recent events – UBI
- Switzerland held a referendum on a basic income in June this year but it was comprehensively turned down.
- Finland is going to run a U.B.I. experiment in 2018
- Y-Combinator, a Silicon Valley incubator firm, is sponsoring a similar test in Oakland USA.
Why has the UBI become such a popular talking point?
- The automation of a lot of jobs has left people very concerned about redundancy.
- The modern economy can’t be expected to provide jobs for everyone
- The UBI is easy to administer and it avoids paternalism of social-welfare programmes that tell people what they can and can’t do with the money they receive from the government.
- Potentially drives up wages and employees will compare their wages with the UBI.
- Easier for people to take risks with their job knowing there is the UBI to fall back on.
- It takes away the incentive to work and lowers GDP
- UBI – not cheap to administer and would likely cost 13% of GDP in the US
- In the Canadian province of Manitoba where the UBI was trialled, working hours for men dropped by just 1%.
- The UBI would make it easier for people to think twice about taking unrewarding jobs which is a good consequence.
- In the developing world direct-cash grant programs are used very effectively – Columbian economist Chris Blattman.
- In New Jersey young people with UBI were more likely to stay in education
If the U.B.I. comes to be seen as a kind of insurance against a radically changing job market, rather than simply as a handout, the politics around it will change. When this happens, it’s easy to imagine a basic income going overnight from completely improbable to totally necessary.
James Surowiecki – New Yorker – 20th June 2016
I came across this interview on PBS News (Making Sense of Financial News) in which Paul Solman interviews economic historian Adam Tooze about the historical context of Trump’s economic policies. Tooze wrote an excellent book about the economics of World War II Germany entitled “The Wages of Destruction” – well worth a read.
He refers to Trump’s policies as nationalism, with a commitment to the redevelopment of American manufacturing and industrial jobs. He cites the following historical events which Trump has seized ownership of.
- 1933 and 1938 – the New Deal under President Franklin D. Roosevelt and the origins of the modern public sector – government-driven infrastructure spending.
- 1950s, in which the Eisenhower administration brings about the modern interstate highway system.
He does have concerns about Trump’s aggressive trade policy of protecting United States manufacturing industries and sees a depreciating US dollar, higher US interest rates and a collapse in the market for US debt. However Trump’s rhetoric only applies to approximately 15% of the US labour force. Tooze believes that the appeal of Trump to the voters was that he offered hope for ordinary Americans to be able to earn a living based on the historical context of nationalism.
Jeffrey Sachs wrote a very good piece in the Boston Globe regarding the way forward for the US economy. Some interesting data:
- 1.4% GDP between 2009-2015 when it was projected at 2.7%
- 81% of Americans experienced flat or falling incomes between 2005-2014
- 1980 – top 1% earn 10% of income
- 2015 – top 1% earn 22% of income
- 10% unemployment in October 2009 – dropped to 4.9% today. Mainly caused by those of working age leaving the labour force entirely.
- Employment relative to working age (25-54) in 2000 was 81.5%. In 2015 it was 77.2%
- US Treasury debt owed:
- – 2007 = 35% of GDP
- – 2015 = 75% of GDP
- – 2026 = 86% of GDP – forecast
- – 2036 = 110% of GDP – forecast
Issues with the US Economy
US manufacturing jobs have shifted overseas – remember NAFTA. Northern Mexico saw a huge influx of US companies as they took advantage of cheaper labour costs.
Automation – the advent of smart machines seems to be shifting income from workers to capital, driving down wages and leading to frustration of low wage workers.
As well as debt sustainability the US economy needs to shift its reliance on carbon-based energy to non carbon energy sources – hydro, wind, solar etc. Some have argued that the US has simply run out of big new inventions to sustain growth levels but ultimately the world has got to change its model as resources will eventually run out. We can’t keep relying on people buying more and more stuff to maintain growth or the Chinese building more cities and blowing up and rebuilding bridges.
Jeffrey Sachs argues that sustainable development works best when it focuses simultaneously on 3 big issues:
- Promoting economic growth and decent jobs
- Promoting fairness to women, the poor, and minority groups
- Promoting environmental sustainability.
US growth has tended to focus on economic growth and neglect inequality and environmental issues. Future growth needs to focus less on current consumption but investment in future knowledge, education, skills, health, infrastructure and environmental protection. Furthermore if the investment is carried out efficiently the economy can growth in an environmentally safe as well as being fair. Good investment requires two things:
- Planning – need to overcome complex challenges for our future – e.g. energy
- Public investment – replacement of a crumbling infrastructure – roads, bridges, water systems, seaports etc
Jeffrey Sachs recent research measured how 150 countries performed with regard to sustainable development and the progress that countries will need to make to achieve the recently adopted SDGs – see image below. The Scandinavian countries came in top – Sweden, Denmark, Norway – the US was 22nd out of the 34 high-income countries whilst Canada was 11th.
Click the link below for an article on income inequality from the Boston Globe by Jeffrey Sachs
We discussed Contestable Markets in my A2 class today and I used this clip from Commanding Heights to show how regulated the US airline industry was during the 1970’s. Regulations meant that major carriers like Pan Am never had to compete with newcomers. However an Englishman named Freddie Laker was determined to break this tradition and set-up Laker airways to compete on trans-atlantic flights. He offered flights at less than half the price of what Pan Am charged. Alfred Kahn was given the task by the then President Jimmy Carter to breakup the Civil Aeronautics Board (the regulatory body) and he wanted a leaner regulatory environment in which the market was free to dictate price. There is a piece in the clip that shows how ludicrous some of the regulations were:
When I got to the Civil Aeronauts Board, the biggest division under me was the division of enforcement – in effect, FBI agents who would go around and seek out secret discounts and then impose fines. We would discipline them. It was illegal to compete in price. That means it was illegal to compete in the discounts you offer travel agents. So we regulated travel agents’ discounts. Internationally, since they couldn’t cut rates, they competed by having more and more sumptuous meals. We actually regulated the size of sandwiches. Alfred Kahn
When the CAB was closed down competition was the rule and the industry had vastly underestimated the demand for air travel at lower prices – a very elastic demand curve – see graph below.
In the A2 course contestable markets is a popular essay question and is usually combined with another market structure.
What is a contestable market?
• One in which there is one firm (or a small number of firms)
• Because of freedom of entry and exit, the firm faces competition and might operate in a way similar to a perfectly competitive firm
• The threat of “hit and run entry” from new firms may be sufficient to keep the industry operating at a competitive price and output
• The key requirement for a contestable market is the absence of sunk costs – i.e. costs that cannot be recovered if a business decides to leave a market
• When sunk costs are high, a market is more likely to produce an price and output similar to monopoly (with the risk of allocative inefficiency and loss of economic welfare)
• A perfectly contestable market occurs only when entry and exit into and out of a market is perfectly costless
• Contestable markets are different from perfect competitive markets
• It is possible for one incumbent firm to dominate the industry
• Each existing firm in the market produces a differentiated product (i.e. goods and services are not perfect substitutes for each other)
There are 3 conditions for market contestability:
• Perfect information and the ability and or legal right to use the best available technology
• Freedom to market / advertise and enter a market
• The absence of sunk costs
• Liberalisation of the US Airline Industry in the 1970’s and the European Airline Market in late 1990s
• Traditional “flag-flying” airlines faced new competition
• Barriers to entry in the industry were lowered (including greater use of leased aircraft)
• New Entrants – easyJet- Ryanair
Below is a great animation from RSA in which Ha-Joon Chang (South Korean institutional economist specialising in development economics) explains why every single person should know some basic economics. He pulls back the curtain on the often mystifying language of derivatives and quantitative easing, and explains how easily economic myths and assumptions become gospel. He mentions the nine schools of economic thought which are Austrian, Behaviourist, Classical, Developmentalist, Institutionalist, Keynesian, Marxist, Neoclassical and Schumpeterian. Furthermore, he makes the point that given the complexity of the world and the partial nature of all economic theories, you should be humble about the validity of our own favorite theory. Therefore keeping an open mind about its usefulness in society.
A lot of what he talks about is in his excellent book entitled “Economics: A User’s Guide”.