Mainstream Economics Has Failed, Part 2

From the 1950s to the 1980s economics was transformed methodologically. The ambition among leading economists was to elevate their academic discipline to something that resembled physics in methodological rigor. The transformation included the creation of the Swedish central bank's Nobel Memorial Prize in Economics in 1968.

Disdainfully referring to good old political economy as "chit chat" and "opinionizing", the modern breed of economists built their entire professional existence around the formidability of econometrics. Regressions, it was said, could tell truth from falsehood and establish a system of laws in economics that would have the same reliability as the system of laws in physics. 

Quantitative analysis is never wrong in social sciences - on the contrary, it is necessary to establish a bridge from theory to reality and, not to forget, in the other direction as well. But the difference between quantitative analysis in physics and in economics is that physics does not deal with matter that has a will of its own. The laws of classical mechanics, which stood model for the methodological transformation of economics, always apply - as opposed to laws of economics which apply only when individuals are motivated to act in accordance with them. 

Basic Income Is Not Libertarianism

In politics, some issues are more important than others. Some ideas are better than others. If you want to participate in the public policy arena, the proper way to allocate your time is to concentrate on the important and the good, as it will help you build positive messaging and a constructive dialogue. 

Sometimes, though, it is not possible to ignore the bad ideas. Ever since libertarian presidential candidate Gary Johnson announced, back in June, that he likes the idea of a "universal basic income" I have tried to ignore it. However, the idea of a basic income refuses to die away, and has in fact gained some troubling support among libertarians in general. 

After having received a couple of questions about Johnson's support for the basic income idea I therefore decided to look into the debate over the issue. What I found prompted me to write this article. 

What is "basic income"?

Mainstream Economics Has Failed, Part 1

One of the long-standing themes in my macroeconomic writing is the structural decline in growth in the Western world. Recently others have slowly began to give the sluggish growth the attention it so desperately needs. One of the better examples is a new report for JP Morgan where economic analysts Michael Hood and Benjamin Mandel write:

Considerable dissatisfaction among policymakers and voters surrounds economic performance in developed and merging economies alike. Despite very supportive monetary policy stances, growth is running at a weak pace by historical standards. To a large extent, this sluggishness reflects a structural slowdown in potential growth, driven by demographic changes. Given that estimates of these trend rates are uncertain, though, central banks have continues to explore ways of boosting demand, acting in increasingly unconventional fashion ... But now these actions appear to have come close to their limits. As a result, calls for greater use of fiscal stimulus have grown louder. 

Before we move on, a note of caution.

The Structural Weakness of the U.S. Economy

Yesterday, Monday Sept 23, the Wall Street Journal noted:

[Donald Trump] wants to raise spending for the Pentagon and triple the number of immigration and customs officials; double the amount rival Hillary Clinton proposes for infrastructure; allocate $20 billion to expand school choice and $2.5 billion for guaranteed paid maternity leave. And more. He is proposing more than $4 trillion in tax cuts, and vowing not to cut fas-growing entitlement programs like Medicare and Social Security. ... Mrs. Clinton is proposing a far bigger expansion of government spending than Mr. Trump, with tax increases to pay for it. She wants to spend more to lower or fully eliminate college cost for many young Americans, for example, and has proposed a big boost in spending for early childhood education. The result is a presidential campaign where neither of the two major party candidates is making a serious push to reduce the size and scope of government.

Clinton's tax-and-spending plans are well within the realm of what the modern Democrat party represents: a steady advancement of the American welfare state right up to the point where it equals, even surpasses, its Scandinavian brethren. 

Basel III: A Key to Perennial Deficits?

In the aftermath of the 2008 global economic crisis, governments around the world adopted new capitalization requirements for financial institutions. Known as Basel III, these regulations have been sold as a way to strengthen shock absorption in the banking industry, to improve its risk management and enhance transparency.

However, just like most government regulations, Basel III comes with unintended, and potentially catastrophic, consequences. At the heart of the problem is the new structure of capitalization requirements that give strong preferential treatment to government debt – regardless of its credit rating.

The core of the problem is that financial institutions do not need the same rate of own capital in purchasing bonds from governments as they do for buying private equity. The lower capitalization rates apply to government bonds generally with at least AA- rating.

The big can of worms is opened by the proviso saying that banks can buy domestic-government debt at any credit rating, with less own capital than if they buy prime-credit private equity.

Is Life After the Welfare State Possible?

My paper for the Institutional Research conference in Boston Sept 2-4 has been accepted and published by the Journal of Insurance and Financial Management. Here is the abstract:

Recent macroeconomic trends primarily but not exclusively in Europe suggest that the welfare state is not conducive to growth and prosperity. European welfare-state economies have experienced a longterm decline in GDP growth, private consumption and domestic absorption; and a long-term increase in unemployment. Macroeconomic data suggest a correlation between the expansion of the welfare state and the decline in economic growth. Given that the welfare state is antithetical to growth and prosperity, is it possible to reform it away? This paper develops a framework for this question, identifying strict conditions under which welfare state retrenchment or termination is possible.