The BBC reports that the Obama administration has designated $50 billion dollars for infrastructure improvements as part of efforts to jump-start the US economy. The claim that the project will help jump-start the economy is contestable, but difficult to prove either way.
Broadly speaking, there are two influential schools of macroeconomic thought. One is the Keynesian or demand-side school, which blames the collapse of demand for economic malaise. During economic downturns, it is the government’s job to make up for the shortfall by employing people, purchasing things, and inducing private actors to do the same. This is the principle behind public works projects, temporary tax cuts, and programs like “cash-for-clunkers.”
By contrast, the neoclassical or supply-side school argues that prolonged economic problems are the result of the economy’s inability to produce an adequate level of goods and services. The government’s response to economic downturn ought to consist of making it easier for individuals to supply labor and firms to supply goods and services. This is the rationale behind permanent tax cuts for all (including corporations and the rich), deregulation, and a reluctance to extend unemployment benefits.
Though economic in nature, these two claims tend to accompany differing assumptions and values about human nature. Put crudely, the Keynesian approach favors the consumer, in hopes that the producers will follow. The neoclassical one favors the producer, in hopes that the consumers will follow.
Of course, all humans are both consumers and producers. But which role is more important? In a crisis, should we try to induce people to buy things, or to induce them to work? Should workers and consumers be favored over entrepreneurs and companies?
There is of course some middle ground between the two extremes. Maybe the answer lies in a bit of both.
Image by Flickr user Cain and Todd Benson used under a Creative Commons Attribution License
Project Syndicate has an ongoing series by Columbia University economist Jagdish Bhagwati on “The Open Economy and its Enemies.” There is more or less a consensus among economists that free trade promotes economic growth; the law of comparative advantage still holds nearly two centuries after it was formulated. But the opinions of both the public and other social scientists are more ambivalent.
Competition is the means by which actors in an open economy are disciplined. But competition generates losers and winners, too –at least in the short run. Non-economic concerns with free trade include growing inequality, the constant displacement of people under conditions of ruthless competition, environmental degradation, the globe-spanning hazards of mutual dependency, and national security.
Critics of free trade may accuse economists of linear thinking for ignoring the messiness of reality. But economists might equally accuse critics of free trade for ignoring the bottom line –that increased wealth will expand the possibilities of what a society can accomplish.
The free trade debate, like many others, asks how willing we are to trade increased levels of wealth for other values, and under what conditions. Not surprisingly, this debate tends to come to the fore in times of economic uncertainty.
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Equality butts heads with freedom
Jonathan Martin and Ben Smith write at Politico that a new debate about first principles and the role of government has replaced the social issues at stake during the “culture wars” of the last three decades.
This dispute over first principles is deeply entwined with questions of national identity and the appropriate role of the government in the economy.
On one extreme is a minimalist state, in which the government is responsible for little more than upholding the rule of law and providing for a common defense. On the other extreme is a socialist state in which the government manages all facets of economic activity.
Neither extreme applies to any industrialized country today. Rather, the modern world is populated by welfare states of various stripes.
Charles asks some provocative questions in his post today about the role of government versus the power of the market to lift people out of extreme destitution.
But his approach, which focuses on individual responsibility and government constraint, begs the question by assuming, first, that all government action counts as a constraint on liberty and, second, that all individuals are capable of personal responsibility.
This account is not baseless, but it leaves little space for one reason people may suffer: structural barriers to opportunity and liberty. Read more
Should the poor be allowed to choose?
The New York Times reports that malnutrition and starvation remain stubbornly entrenched decades after India’s Green Revolution, which modernized agricultural practices, massively increased agricultural yields and eliminated the specter of famine.
The existing government food distribution system relies on bureaucratic rationing, through which the poor are given ration cards to purchase food from government-run distributors. It is notoriously inefficient and plagued by corruption. Some reform proposals emphasize improving monitoring and delivery within the system. Others favor entirely dismantling the system, replacing it with vouchers or cash payments to the needy. Read more
Last week, Obama signed into law an extension of unemployment benefits to 99 weeks. Supporters of the extension argue that it is a sensible thing to do when the economy is in dire straits, and that the presently unemployed deserve a safety net to shelter them from circumstances not entirely of their doing. Opponents argue that the extension will delay economic recovery by discouraging people at the margins from working. Although economic in nature, these arguments speak to the basic assumptions that both sides have about human preferences.
The supporters’ argument implicitly assumes that the supply of labor is relatively inelastic; this corresponds to an argument that incentives will not strongly influence how much a person works. Work is something that most people prefer to have as a matter of self-respect or a desire to keep active. Since it is not for lack of desire to work that people are unemployed, they deserve assistance from the state.
The opponents’ argument posits that the supply of labor is relatively elastic, and that how much people work is very much influenced by incentives. In this thinking, leisure is a luxury that people want more of while labor is something grinding, burdensome and best forgotten. There is some empirical evidence pointing in this direction. The end of open-ended welfare under Clinton dramatically increased the employment rate of the urban poor.
There is surely a degree of truth to both arguments. Unfortunately, macroeconomics is still a young science and nobody has either perfect information or perfect theory.
Photo by Flickr user John McNab used under a Creative Commons Attribution License
A story over at Newsweek profiles three people who want to bring the estate tax back. The main arguments for this tax concerned the deficit:
To Julian Robertson, the founder of hedge fund giant Tiger Management and a major philanthropist, the economic and moral case for an estate tax increase was simple. “You get out of a credit crisis by getting your house in order, and in America’s case bringing your deficit down. This implies tax increases.” The fairest way to do it, he said, is to tax “the least deserving recipients of wealth, which are the inheritors.
I’ve written earlier this week about the concept of desert, but it is interesting to consider where the concept of fairness combines with desert in this and similar arguments.
Photo by Flickr user propertytaxonline used under a Creative Commons Attribution license.
Theories of desert and the distribution of wealth
An op-ed in The New York Times laments the existence of “dynasty trusts,” which allow rich Americans to provide generations of heirs with tax-free estates. The article argues that this will result in the rise of a new aristocracy, which is un-American.
Americans have always assumed that wealth comes and goes. A poor person can work hard, become rich and pass his money on to his children and grandchildren. But then, if those descendants do not manage it wisely, they may lose it. “Shirtsleeves to shirtsleeves in three generations,” the saying goes, and it conforms to our preference for meritocracy over aristocracy.
The assumption here seems to be that meritocracies are preferable because they only bestow wealth upon those who deserve it. What exactly does the concept of desert amount to? I will explore three possibilities. Read more
Many things have been blamed for the economic crisis, including easy credit, consumer (and banker) irrationality, poor regulation, unmonitored derivatives trading, the inappropriate use of government-sponsored enterprises, and the underlying forces of the global real-estate bubble. In a Project Syndicate article, Raghuram Rajan, a finance professor at the University of Chicago and former chief economist of the IMF, has a particularly interesting and unique take on the root causes of the crisis. According to Rajan, the proximate cause of the financial crisis was easy credit, with inequality at its root. Inequality led policymakers to pursue policies that encouraged consumption rather than addressing the root problem of stagnant middle-and-lower class incomes in an increasingly skill-biased economy.
So it turns out that inequality –- an issue generally seen as normative — may play an explanatory role in the most consequential economic challenge of our time. Could this be true of other things generally thought of in moral terms, such as freedom, order, peace, or justice? Are these only moral goods in their own right, or do they also have real bearing on outcomes that we might consider desirable?
Image used under a Creative Commons attribution license from Flickr user saxarocks
On Wednesday, the EU’s highest court ruled that Monsanto cannot prevent the importation of soy meal from Argentina, despite the fact that it is derived from a genetically modified soy bean patented by the company. In effect, the court decided that the offspring of patented seeds are not subject to the same legal constraints as the originals.
New knowledge can be costly to develop. Enticing private parties to innovate requires some mechanism by which initial costs stand a good chance of being recovered. Patents accomplish this by conferring a lawful (but temporary) monopoly on its holder.
But what is the proper scope of a patent? Should Monsanto be entitled to royalties from the offspring -pure or hybrid- of their proprietary seed design? Or does it unnecessarily stifle further innovation to give a patent holder unlimited control over their discovery and all derivatives of it?
Image used under a Creative Commons attribution license from Flickr user skasuga