Thursday, June 17, 2021

Garicano's conversations with economists

Luis Garicano has just posted a very interesting free e-book, "Capitalism after covid: Conversations with 21 economists." I was honored to be one of his interviewees, video here. Luis has a VoxEU column summarizing conversations, and twitter thread if you like reading such things. Luis is a great interviewer. 

This is not an endorsement of all the ideas! Luis found a wide spectrum of ideas, and I think that is the strong thing about the project. You can see how really smart people, on top of the latest academic research, come to still widely different conclusions about the current state of affairs and directions we should go. Though Luis is a pretty free-market Chicago guy, he did not impose that view which I find admirable. 

In particular, referring to the VoxEU column, I would take issue with 

The bulk of the shock was absorbed by the public sector budget. 

That the world could produce such a massive, coherent, and rapid economic response to the pandemic had a lot to do with the consensus that quickly emerged among economists on how best to respond to the unprecedented shock...

Unlike during the Great Financial Crisis, when there was an often-acrimonious debate between economists arguing for austerity and those arguing for stimulus, the priorities were clear: 

Central banks should be concerned with maintaining financial stability and providing limitless liquidity to debt markets. 

Governments should prioritise the maintenance of household incomes through generous support for workers’ incomes, albeit with different approaches in the US and Europe: significant expansions of unemployment insurance in the US and the general deployment of ‘Kurzarbeit’ in Europe.  

Governments should provide ample liquidity facilities to firms, making it possible for them to emerge as undamaged as possible by the lockdowns. 

Finally, large, debt-financed public investments would be needed to support the recovery. 

I  disagree loudly with just about all of this, and thereby especially enshrining these expedients as "consensus" ready to be deployed at even larger scale in the next pandemic. 

If there is consensus on anything it is that our governments completely bungled the public health aspect of this crisis, with the exception of a few countries like South Korea and Taiwan. The FDA and CDC are particularly at fault for blocking testing and vaccines. 

Why did covid produce an unprecedented economic collapse, while the 1958 and 1918 flus produced nary a blip of GDP? Because of the completely overdone business lockdowns. The economic shock was caused by the government not by the virus. What good did it do to run up government debts by trillions in order to send checks to retirees and people who were happily working? I'm sure everyone likes more money, but that has nothing to do with covid. Apparently half of expanded unemployment was stolen (I even got notice someone trying to file in my name). " large, debt-financed public investments would be needed to support the recovery." Consensus on that please? Not from here. The recovery is doing fine on its own, and adding more to the abstract sculpture taking place in the Central Valley under the auspices of a high speed train from Bakersfield to Modesto is not going to help. And why is nobody even thinking moral hazard? We now have enshrined a system in which nobody may lose money in a recession, asset prices will be propped up by central banks. Why not lever to the hilt? Why keep some cash around, as there will be no more buying opportunities? 

But that Luis interviews such good and prominent economists and finds support for this sort of boondoggle policy is interesting. 

Tackling inequality. Over the last few decades, inequality in household income and wealth has increased dramatically in the West.  

This is simply not a fact. (See Grumpy coverage of Austen and Spinter here.) Inequality in pre-tax pre-transfer income has increased. Who cares about that? Inequality of mark-to-market wealth has increased as founders stock values have risen. Who cares about that? 

Several interviewees explain the progress economists are making in tackling these problems. Atif Mian argues that to reduce inequality, policies must focus on achieving more equitable growth through a significant increase in public investment, and second, on addressing some of the legacies of the imbalances, particularly through an increase in the progressivity of taxation. 

Well, if you are a grumpy follower you will find there a well articulated points to disagree with. The US already has the most progressive tax system in the world BTW. And back to more high speed trains to nowhere.. 

Stefanie Stantcheva discusses how to design better taxes and how to improve people´s understanding of those issues. Oriana Bandiera highlights a significant shift in our understanding of poverty that implies that social assistance programmes, that traditionally were designed to subsidise consumption, should shift to being geared towards investment. Esteban Rossi-Hansberg discusses the concentration of talent and economic activity in cities and the extent to which the ‘Zoom revolution’ will upend this concentration and wonders whether that would be desirable, given the potential loss of positive externalities of physical proximity.

But here are some good-sounding innovative ideas, to give you a sense that economists don't just line up on typical left-right spectrum. I need to read those. 

Containing the new leviathan.  It is quite likely that, after the unprecedented policy response to the pandemic, governments will grow permanently larger, leading to an increase in interventionism and, potentially, crony capitalism, as Daron Acemoglu argues. Different countries will sharply diverge in their response to this “critical juncture”. The ones who better succeed will introduce stronger democratic institutions to keep governments in check, as both Acemoglu and Lucrezia Reichlin argue. We also need to improve the way public organisations are managed, a focus of the interviews with Raffaela Sadun and Carol Propper.  Wendy Carlin explains how balancing this larger role for the state requires building a stronger and more resilient civil society – strengthening the ‘third pole’.

This all sounds really interesting. Economics and economists are most interesting when out of the political boxes! 

Tackling climate change. ... Reducing carbon emissions, as Michael Greenstone explains in his interview, must be the only priority – not to be confused with delivering the goodies to voters. 

Voters and interest groups. Mother Gaia does not care if the electric car charging stations and solar panels are made in the US by union members or made in China at a tenth of the cost. 

Yet, after the pandemic, as Nick Stern argues, investing in tackling climate change is the best way to invest for the post-pandemic recovery. 

I will not pre-judge, but if this is more broken windows fallacies and create more jobs by using spoons not shovels, I will be skeptical. 

In sum, this looks interesting throughout and a good view into the spectrum of analysis that economists are bringing to contemporary issues. 

The list of interviewees is 

Debt sustainability

Markus Brunnermeier: Let’s compare the central bank to a race car
John Cochrane: Throwing money down ratholes
Jesús Fernández-Villaverde: Economists and the pandemic
Agnès Bénassy-Quéré: How to design a recovery plan

Tackling inequality

Oriana Bandiera: Overcoming poverty barriers
Stefanie Stantcheva: Taxes and social economics
Esteban Rossi-Hansberg: Will working from home kill cities?
Atif Mian: The savings glut of the rich

A more balanced globalisation

Dani Rodrik: Globalisation after the Washington Consensus
Pol Antràs: Is globalisation slowing down?
Michael Pettis: Trade wars are class wars

Containing the new leviathan

Daron Acemoglu: The Great Divergence
Wendy Carlin: The Third Pole
Lucrezia Reichlin: Democratising economic policy
Carol Propper: Targets and terror
Raffaella Sadun: Management for the recovery

Promoting innovation and curbing the power of digital giants

Philippe Aghion: Is ‘cutthroat’ capitalism more innovative?
John Van Reenen: The Lost Einsteins
Fiona Scott Morton: What should we do about big tech?

Combatting global warming

Nicholas Stern: Zero-emissions growth
Michael Greenstone: The real enemy here is carbon


  1. A simple observation. How much of your public debt explosion and it's lack of fiscal prudence is because interest rates are so low? You hear so many economists use that to justify everything. That suggests to me that fiscal prudence could return once interest rates rise again.

  2. I take issue with wealth inequality. The ability to grow wealth via unrealized capital gains and then pass it on to heirs without being taxed via a variety of structures, basis step-ups, etc. strikes me as "un-American." (is our tax system still progressive if we account for that?).

    As far as I'm concerned, a country in which 30%+ of wealth is inherited can no longer call itself a meritocracy. Which is fine if that's what we want...but we should be more honest about how we brand ourselves.

    1. Leaving aside the issue of whether wealth can buy you a good job or buy you a college degree or whatever.

      I've always regarded it as interesting that a rich man or woman if they were so inclined could take all of their wealth cash it out into dollar bills and light it on fire. But if they gave it to their heirs, this is considered a perverse act and should be discouraged. But why? What if it is the will of the person who earned this money fairly to give it to his children or her children and let them enjoy a life that they presumably themselves didn't get to enjoy in their youth. Is it fair to enforce our notions of right or just or cosmopolitan on to others who value their money in a certain capacity?

    2. I don't think it's perverse behavior; it strikes me as fairy rational. But to incentivize such behavior through tax-advantages is absolutely at odds with the notion that America is a meritocracy or can ever achieve anything resembling equality of opportunity.

      The national narrative that binds us is very much one of meritocracy and equality of opportunity. It's what we teach our children (or at least we used to). The math is fuzzy i'm sure but i've seen estimates as high as 50% for the percent of wealth that's inherited. There are absolutely two starting points in life: one for those who inherit money and one for the rest.

      We all wonder these days why there is so much angst towards the system. I believe a big part of it is that our national narrative no longer binds us as people can see that it's simply not true. I'd suggest we either re-work our narrative (not really a meritocracy) or stop giving tax breaks to those to pass on fortunes.

    3. But how does inherited wealth create a lack of meritocracy hold up in the data? Most of the very rich are entrepreneurs who came from the middle class. It's not as if Dale Carnegie's heirs created Amazon or Microsoft.

      I also question the term tax advantages because it assumes that everything should have 100% tax and what we want to encourage should be lower. I take the opposite view that we should be taxing only as much to sufficiently raise revenues to fund programs that are absolutely necessary. And those taxes should be levied in the most efficient way possible and issues of fairness should be left to the side because those are value judgements.

    4. James,

      "It's not as if Dale Carnegie's heirs created Amazon or Microsoft."

      I believe you are thinking of Andrew Carnegie (Steel magnate from Pennsylvania).

      On inherited wealth:

  3. Go Grumpy!

    I was talking to a friend last night, and we are both just wags, but I said to him soon it will be 100 years since the Great Depression and yet top macroeconomists are still ardently debating the causes and proper treatment thereof.

    In the collection of interviews seen above it is disappointing to see nothing about housing, which has become ruinously expensive in many regions of the planet, not just in the US. The entire Anglosphere, and most developed regions, that are still growing. Seoul, for example. Urbanization plus property zoning has toxic results.

    Inequality? A lot of people would be happy if you could just cut the rent in half.

    Michael Pettis has very interesting ideas and I think international trade is never free, fair, or foul. What is strange, people talk about Singapore as a free market entrepot when it is really a dirigiste economy---but much of the Asian Pacific and parts of Europe are somewhat like Singapore.

    Can developed economies really turn city after city into a Detroit, but say we must honor "free trade"? If Silicon Valley had been blown off the map by a government-backed technopolis, would the commentary about free trade be so cosmopolitan?

    Despite all my reservations, I roughly agree with Mr Grumpy, especially about the self-imposed disaster, the reaction to covid-19.

    Money-financed fiscal programs, as opposed to debt financing, are also an interesting idea, but would require a lot of prudence.

    But in the end, I still say, "Go Grumpy!"

  4. I consider myself to be Keynesian. However, this type of statement is senseless:"providing limitless liquidity to debt markets". There are some eventual serious problems: inflation, devaluation, growing interest rates ... Printing money is the universal solution?. Of course, no.

  5. Well...

    Once in a while, like Dr. Cochrane, I find bones to pick. Here's one in particular. Please don't get the idea I'm being a contraian for the sake of being one. Remember the Argument Shop from Monty Python? Trying to avoid that.

    Here we go:

    "I disagree loudly with just about all of this, and thereby especially enshrining these expedients as 'consensus' ready to be deployed at even larger scale in the next pandemic."

    I have to ask - was there really a better alternative? Theories and models eventually all get put to the test.

    From my point of view, what really forced thus fiscal and monetary bazookas to be deployed was due to people being selfish and not being properly informed. People not wearing masks, going to super spreader events, and other irresponsible actions forced the government to respond in a big way.

    Options: authoritarianism. Get the police and military to enforce lockdown rules. Not exactly a democratic thing a free society would tolerate.

    Point is, I think the consensus is pointing fingers at the wrong culprit for all this debt madness. There is also the factor of systemic unpreparedness to deal with a pandemic. Hospitals were not designed to handle such things. Operations in the supply chain were not pandemic proofed.

    Do I think I'm right? Partially. I know there are other factors involved, but in the end it's the interaction of then all that produced this condition. As to causation, pretty clear.

    Not doing anything to preserve the people and capital infrastructure of our economy and society would have been supremely irresponsible. But there's plenty of that going around.

    I think economists like the idea of Utopia, where institutions always do the perfect thing. It certainly keeps them all busy, dreaming up their version of Utopia. However, it's clear that on the whole society stumbles forth. The time inconsistency problem makes short term and long term planning severely imperfect, especially when a pandemic creates uncertainty and fear. An economy should provide a basic level of trust so that people can maximize well-being. But, it always costs something. Never free.

  6. I disagree with you about the impact of the last two pandemics.

    Economists have had a hard time explaining the short but severe 1957-58 recession. There was no fiscal tightening, or war, and Fed tightening before the recession was minor. James Hamilton tries to blame an oil shock from the Suez crisis, but the timing is all wrong.

    Q1:1958 had the sharpest decline in quarterly real GDP on record until 2020. That overlapped with the Asian flu pandemic. We were saved because we got flu vaccines fast. If you don't buy my story, tell me a better one.

    As for the 1918-1919 pandemic (which continued into 1920), it is hard to separate the impact from the end of the war and demobilization and the new Fed's actions to reverse wartime inflation. But there were two recessions in a row, one that started in August 1918 and one that started in January 1920. Moreover, data quality for that time period is poor. I conjecture that the pandemic had a strong impact, but it was compounded by other important forces.

    1. This comment has been removed by the author.

    2. Anonymous,

      "The Recession of 1958 was in part due to dramatic declines in the automotive industry during 1957 and early 1958. It had been a record year for sales in 1955 with the industry selling almost 8 million automobiles, but this extraordinary surge in sales served to reduce demand in the following few years."

      "Sales had declined to 6.1 million in 1957 and just 4.3 million by 1958, making 1958 the worst year for auto sales since World War II. Manufacturing had declined 47 percent by the end of the recession, and Michigan experienced 11 percent unemployment, the highest of any state at that time."

      A pandemic flu doesn't explain the concentration of decline in 1957-58 to a singular industry (automotive).

      The anecdotal evidence suggests that cars were overbuilt - production increased from about 4.8 million in 1952 to over 8 million in 1955 while population grew at about 2% annually.

      Yes, more households were becoming multiple vehicle residences, but once that extra demand was filled, the pace of car sales slowed to a replacement pace.

  7. "Inequality in pre-tax pre-transfer income has increased. Who cares about that?"

    Well I do, for one. The idea of skyrocketing pre-tax/pre-transfer inequality, offset by a tax/transfer system that must constantly expand just to keep pace strikes me as... pretty awful?

    The trouble with those who harp on pre-tax/pre-transfer inequality is not that they've identified the wrong PROBLEM, but rather that their SOLUTIONS are wanting. To state what should be beyond obvious, increasing taxes and transfers will not reduce pre-tax/pre-transfer inequality. What's perhaps less obvious, but just as true, is that minimum wages are also unlikely to work.

    So I guess what I'm saying is that while we may share a distaste for the primary solutions thrown about to "solve" income inequality, that doesn't mean the problem isn't real. We just need to find a way to ensure the cure isn't worse than the disease.

  8. "Oriana Bandiera highlights a significant shift in our understanding of poverty that implies that social assistance programmes, that traditionally were designed to subsidise consumption, should shift to being geared towards investment. "

    She means future consumption. But poverty, which sucks, is a lack of present consumption. Don't be poor lady!

  9. The remarks by Sir Nicholas Stern were unenlightening. Ecclesiastes is the better read.

    The interview with Michael Pettis was deeply interesting and in contrast to Sir Nicholas's remarks, greatly enlightening for anyone who has an interest in macroeconomics. It reminded me that the discussion around the FTPL is detached from international finance and economics. The points Pettis raised in the interview identified areas that the FTPL could usefully incorporate.

    Daron Acemoglu was quite emotional over certain failures that occurred during the 2020 pandemic months. Economics is apparently not a dry subject in some schools.

    Lucrezia Reichlin provided insights into the Italian dilemma. She seems to know who's who on the Italian economics scene. The interview was quite insightful.

    Wendy Carlin added a third dimension to the economics of organizations. It was long on management behaviour aspects.

    Raffaella Sadun comes at the subject from the perspective of the business school and case studies. Her work is heavily empirical in nature. The business school approach differs greatly from the school of economic science. More hands on; oriented to the practical.

    Time ran out before the end was reached. If one were forced to go through it again, Sir Nicholas's talk would be a definite 'one to miss'.

  10. On this blog almost a decade ago, you wrote about how if consumption were all that mattered, stimulus checks should be sent to theives and criminals due to their high propensity to consume. It seems Congress took your advice.

  11. Journal of Economic Perspectives, Vol. 35, Issue 3, Summer 2021.
    View Full Issue

    "Symposium: Washington Consensus Revisited" -- 4 articles that complement the interviews that Luis Garicano made available and are discussed in the blog posting.

    "Some Thoughts on the Washington Consensus and Subsequent Global Development Experience" (#5)
    Michael Spence
    Full-Text Access (Complimentary) [ ] | Supplementary Materials

    "The Baker Hypothesis: Stabilization, Structural Reforms, and Economic Growth" (#6)
    Anusha Chari, Peter Blair Henry and Hector Reyes
    Full-Text Access (Complimentary) [ ] | Supplementary Materials

    "Washington Consensus in Latin America: From Raw Model to Straw Man" (#7)
    Ilan Goldfajn, Lorenza Martínez and Rodrigo O. Valdés
    Full-Text Access (Complimentary) [ ] | Supplementary Materials

    "Washington Consensus Reforms and Lessons for Economic Performance in Sub-Saharan Africa" (#8)
    Belinda Archibong, Brahima Coulibaly and Ngozi Okonjo-Iweala
    Full-Text Access (Complimentary) [ ] | Supplementary Materials


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