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Orlando Letelier (1976): The ‘Chicago Boys’ in Chile: Economic Freedom’s Awful Toll: Hoisted from the Archives

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Orlando Letelier (1976): The ‘Chicago Boys’ in Chile: Economic Freedom’s Awful Toll: 'It would seem to be a common-sensical sort of observation that economic policies are conditioned by and at the same time modify the social and political situation where they are put into practice. Economic policies, therefore, are introduced in order to alter social structures. If I dwell on these considerations, therefore, it is because the necessary connection between economic policy and its sociopolitical setting appears to be absent from many analyses of the current situation in Chile. To put it briefly, the violation of human rights, the system of institutionalized brutality, the drastic control and suppression of every form of meaningful dissent is discussed (and often condemned) as a phenomenon only indirectly linked, or indeed entirely, unrelated, to the classical unrestrained “free market” policies that have been enforced by the military junta. This failure to connect has been particularly characteristic of private and public financial institutions, which have publicly praised and supported the economic policies adopted by the Pinochet government, while regretting the “bad international image” the junta has gained from its “incomprehensible” persistence in torturing, jailing and persecuting all its critics...

...A recent World Bank decision to grant a $33 million loan to the junta was justified by its President, Robert McNamara, as based on purely “technical” criteria, implying no particular relationship to the present political and social conditions in the country. The same line of justification has been followed by American private banks which, in the words of a spokesman for a business consulting firm, “have been falling all over one another to make loans.”

But probably no one has expressed this attitude better than the U.S. Secretary of the Treasury. After a visit to Chile, during which he discussed human rights violations by the military government, William Simon congratulated Pinochet for bringing “economic freedom” to the Chilean people. This particularly convenient concept of a social system in which “economic freedom” and political terror coexist without touching each other, allows these financial spokesmen to support their concept of “freedom” while exercising their verbal muscles in defense of human rights.

The usefulness of the distinction has been particularly appreciated by those who have generated the economic policies now being carried out in Chile. In Newsweek of June 14, Milton Friedman, who is the intellectual architect and unofficial adviser for the team of economists now running the Chilean economy, stated: “In spite of my profound disagreement with the authoritarian political system of Chile, I do not consider it as evil for an econ omist to render technical economic advice to the Chilean Government, any more than I would regard it as evil for a physician to give technical medical advice to the Chilean Government to help end a medical plague.”

It is curious that the man who wrote a book, Capitalism and Freedom, to drive home the argument that only classical economic liberalism can support political democracy can now so easily disentangle economics from politics when the economic theories he advocates coincide with an absolute restriction of every type of democratic freedom. One would logically expect that if those who curtail private enterprise are held responsible for the effects of their measures in the political sphere, those who impose unrestrained “economic freedom” would also be held responsible when the imposition of this policy is inevitably accompanied by massive repression, hunger, unemployment and the permanence of a brutal police state.

The Economic Prescription & Chile’s Reality: The economic plan now being carried out in Chile realizes an historic aspiration of a group of Chilean economists, most of them trained at Chicago University by Milton Friedman and Arnold Harberger. Deeply involved in the preparation of the coup, the “Chicago boys,” as they are known in Chile, convinced the generals that they were prepared to supplement the brutality, which the military possessed, with the intellectual assets it lacked.

The U.S. Senate Select Committee on Intelligence has disclosed that “CIA collaborators” helped plan the economic measures that Chile’s junta enacted imme diately after seizing power. Committee witnesses maintain that some of the “Chicago boys” received CIA funds for such research efforts as a 300-page economic blueprint that was given to military leaders before the coup. It is therefore understandable that after seizing power they were, as The Wall Street Journal put it, “champing to be unleashed” on the Chilean economy.

Their first approach to the situation was gradual; only after a year of relative confusion did they decide to implement without major modification the theoretical model they had been taught at Chicago. The occasion merited a visit to Chile by Mr. Friedman himself who, along with his associate, Professor Harberger, made a series of well-publicized appearances to promote a “shock treatment” for the Chilean economy—something that Friedman emphatically described as “the only medicine. Absolutely. There is no other. There is no other long-term solution.”

These are the basic principles of the economic model offered by Friedman and his followers and adopted by the Chilean junta: that the only possible framework for economic development is one within which the private sector can freely operate; that private enterprise is the most efficient form of economic organization and that, therefore, the private sector should be the predominant factor in the economy. Prices should fluctuate freely in accordance with the laws of competition. Inflation, the worst enemy of economic progress, is the direct result of monetary expansion and can be eliminated only by a drastic reduction of government spending.

Except in present-day Chile, no government in the world gives private enterprise an absolutely free hand. That is so because every economist (except Friedman and his followers) has known for decades that, in the real life of capitalism, there is no such thing as the perfect competition described by classical liberal economists. In March 1975, in Santiago, a newsman dared suggest to Friedman that even in more advanced capitalist countries, as for example the United States, the government applies various types of controls on the economy. Mr. Friedman answered: “I have always been against it, I don’t approve of them. I believe we should not apply them. I am against economic intervention by the government, in my own country, as well as in Chile or anywhere else.”

This is not the place to evaluate the general validity of the postulates advanced by Friedman and the Chicago School. I want to concentrate only on what happens when their model is applied to a country like Chile. Here Friedman’s theories are especially objectionable—from an economic as well as a moral point of view—because they propose a total free market policy in a framework of extreme inequality among the economic agents involved: inequality between monopolistic and small and medium entrepreneurs; inequality between the owners of capital and those who own only their capacity to work, etc. Similar situations would exist if the model were applied to any other underdeveloped, dependent economy.

It is preposterous to speak about free competition in Chile. The economy there is highly monopolized. An academic study, made during President Frei’s regime, pointed out that in 1966 “284 enterprises controlled each and every one of the subdivisions of Chilean economic activities. In the industrial sector, 144 enterprises con trolled each and every one of the subsectors. In turn, within each of ‘these 144 manufacturing enterprises which constituted the core of the industrial sector, a few shareholders controlled management: in more than 50 percent of the enterprises, the ten largest shareholders owned between 90 and 100 percent of the capital.”

On the other hand, studies also conducted during the pre-Allende period demonstrated the extent to which the Chilean economy has been dominated by foreign-based multinationals. As Barnet and Müller put it in Global Reach, “In pre-Allende Chile, 51 percent of the largest 160 firms were effectively controlled by global corporations. In each of the seven key industries of the economy one to three firms controlled at least 51 percent of the production. Of the top twenty-two global corporations operating in the country, nineteen either operated free of all competi tion or shared the market with other oligopolists.”

From 1971 to 1973, most of the monopolistic and oligopolistic industries were nationalized and transferred to the public sector. However, the zeal with which the military dictatorship has dismantled state participation in the economy and transferred industries to foreign ownership suggests that levels of concentration and mo nopolization are now at least as high as they were before the Popular Unity (Allende) Government.

An International Monetary Fund Report of May 1976 points out:

The process of returning to the private sector the vast majority of the enterprises which over the previous fifteen years, but especially in 1971-73, had become part of the public sector continued [during 1975]…. At the end of 1973 the Public Development Corpo ration (CORFO) had a total of 492 enterprises, includ ing eighteen commercial banks…. Of this total, 253 enterprises…have been returned to their former owners. Among the other 239 enterprises…104 (among them ten banks) have been sold; sixteen (including two banks) have already been adjudicated, with the completion of the transfer procedure being a matter of weeks; the sale of another twenty-one is being negotiated bilaterally with groups of potential buyers.

Competitive bidding is still to be solicited for the remaining enterprises. Ob viously the buyers are always a small number of powerful economic interests who have been adding these enter prises to the monopolistic or oligopolistic structures with in which they operate. At the same time, a considerable number of industries have been sold to transnational corporations, among them the national tire industry (INSA), bought by Firestone for an undisclosed sum, and one of the main paper pulp industries (Celulosa Forestal Arauco), bought by Parsons & Whittemore.

There are many other examples to show that, as far as competition goes, Mr. Friedman’s prescription does not yield the economic effects implicit in his theoretical model. In the first half of 1975, as part of the process of lifting regulations from the economy, the price of milk was exempted from control. With what result? The price to the consumer rose 40 percent and the price paid to the producer dropped 22 percent. There are more than 10,000 milk producers in Chile but only two milk processing companies, which control the market. More than 80 percent of Chilean paper production and all of certain types of paper come from one enterprise—the Compañia Manufacturera de Papeles y Cartones, controlled by the Alessandri interests—which establishes prices without fear of competition. More than fifteen foreign brands are offered in the Chilean home appliances market, but they are all in the hands of only three companies, which assemble them in Chile and determine their retail prices.

Of course, any of the followers of the Chicago School would say that, with the liberalization of the interna tional market, as prescribed by the model, Chilean monopolies and oligopolies would be exposed to competition from abroad. However, that does not happen. Chile so lacks foreign currency that it cannot import what it needs, of even the most essential goods. Still more important is the fact that foreign enterprises are not interested in sending to Chile goods which could compete with those, manufactured by their own Chilean subsidiaries. Besides, in Chile the economic interests which control the manu facturing industry also control the financial apparatus and import activities. These groups are not disposed to compete with themselves. In short, the application of Friedman’s theories to the real world of Chile means that the industrialists can freely “compete” at whatever price levels they choose.

Other aspects of the brand of economics taught at the University of Chicago are conveniently ignored by the junta’s economic advisers. One is the importance of wage contracts freely negotiated between employers and workers; another is the efficiency of the market as an instrument to allocate resources in the economy. It is sardonic to mention the right of the workers to negotiate in a country where the Central Workers’ Federation has been outlawed and where salaries are established by the junta’s decree. It may also seem grotesque to speak of the market as the most effective instrument for allocating resources when it is widely known that there are practi cally no productive investments in the economy because the most profitable “investment” is speculation. Under the slogan “We must create a capital market in Chile,” selected private groups enjoying the junta’s protection have been authorized to establish so-called “financieras,” which engaged in the most outrageous financial specula tions. Their abuses have been so flagrant that even Orlando Saez, former president of the Chilean Indus trialists’ Association and a staunch supporter of the coup, could not refrain from protesting. “It is not pos sible,” he said, “to continue with the financial chaos that dominates in Chile. It is necessary to channel into productive investments the millions and millions of finan cial resources that are now being used in wild-cat specu lative operations before the very eyes of those who don’t even have a job.”

But the crux of Friedman’s prescription, as the junta never ceases to emphasize, is control of inflation. It should, according to the junta, enlist “the vigorous efforts of all Chileans.” Professor Harberger declared categori cally in April 1975: “I can see no excuses for not stop ping inflation: its origins are well known; government deficits and monetary expansion have to be stopped. I know you are going to ask me about unemployment; if the government deficits were reduced by half, still the rate of unemployment would not increase more than 1 percent.” According to the junta’s official figures, between April and December 1975, the government deficit was reduced by approxi mately the 50 percent that Harberger recommended. In the same period, unemployment rose six times as much as he had predicted. The remedy he continues to advocate consists of reducing government spending, which will reduce the amount of currency in circulation. This will result in a contraction of demand, which in turn will bring about a general reduction of prices. Thus inflation would be defeated. Professor Harberger does not say explicitly who would have to lower their standard of living to bear the casts of the cure.

Without a doubt, excessive monetary expansion con stitutes an important inflationary factor in any economy. However, inflation in Chile (or any underdeveloped country) is a far more complex problem than the one presupposed by the mechanical models of the monetarist theorists. The followers of the Chicago School seem to forget, for example, that the monopolistic structure of the Chilean economy allows the dominant firms to maintain prices in the face of falling demand. They also forget the role that so-called inflationary expectations play in generating price increases. In Chile, inflationary expecta tions have lately been approximating 15 percent per month. Looking ahead, firms prepare for rising costs by raising their own prices. This continuous price “leap-frogging” feeds a general inflationary spiral. On the other hand, in such an inflationary climate, no one with liquid assets wants to hold them. Powerful interest groups, operating without government control, can thus manipulate the financial apparatus. They create institutions to absorb any available money and use it in various forms of speculation, which thrive on and propel inflation.

The Economic Results: Three years have passed since this experiment began in Chile and sufficient information is available to con clude that Friedman’s Chilean disciples failed—at least in their avowed and measurable objectives—and particu larly in their attempts .to control inflation. But they have succeeded, at least temporarily, in their broader purpose: to secure the economic and political power of a small dominant class by effecting a massive transfer of wealth from the lower and middle classes to a select group of monopolists and financial speculators.

The empirical proof of the economic failure is over whelming. On April 24, 1975, after the last known visit of Messrs. Friedman and Harberger to Chile, the junta’s Minister of Finance, Jorge Cauas, said: “The Hon. junta have asked me to formulate and carry out an economic program primarily directed to eradicate inflation. To gether with a numerous group of technicians, we have presented to the Chilean authorities a program of eco nomic revival which has been approved and is begin ning. The principal objective of this program is to stop inflation in the remainder of 1975.” (The “group of technicians” is obviously Friedman and company.)

By the end of 1975 Chile’s annual rate of inflation had reached 341 percent—that is, the highest rate of inflation in the world. Consumer prices increased that same year by an average 375 percent; wholesale prices rose by 440 percent. Analyzing the causes of Chilean inflation in 1975, a recent report of the International Monetary Fund (IMF) says: “The cutback in government spending, with its adverse effects on employment, in housing, and public works, went significantly further than programmed in order to accommodate the large credit demands of the private sector.” Later on it states:

Overall monetary management remained expansionary in 1975. Moreover, continued high inflationary expectations and the public’s attendant unwillingness to increase its real cash balances greatly complicated the implementation of the monetary program.

Referring to private organizations which have begun to operate without any control, the report adds that the “financieras” have been allowed to operate beside the commercial banking system and at interest rates up to 59 percent higher than the maximum permissible banking rate. According to the same source, the “financieras” were operating in 1975 at an interest rate of 14 percent a month, or 168 percent a year; they obtained loans in New York at 10 percent to 12 percent a year.

The implementation of the Chicago model has not achieved a significant reduction of monetary expansion. It has, however, brought about a merciless reduction of the income of wage earners and a dramatic increase in unemployment; at the same time it has increased the amount of currency in circulation by means of loans and transfers to big firms, and by granting to private financial institutions the power to create money. As James Petras, an American political scientist, puts it: “The very social classes on which the junta depends are the main instrumentalities of the inflation.”

Concentration of wealth is not the marginal outcome of a difficult situation, but the base for a social project. The inflationary process, which the junta’s policies stimulated immediately after the coup, was slightly reduced in 1975 as compared to the unbelievable rate of 375.9 percent in 1974. Such a minor reduction, however, does not indicate any substantial approach to stabilization and seems on the whole utterly irrelevant to the majority of Chileans who must endure the total collapse of their economy. This situation recalls the story of a Latin Amer ican dictator at the beginning of this century. When his advisers came to tell him that the country was suffer ing from a very serious educational problem, he ordered all public schools closed. Now, more than seventy years into this century, there still remain disciples of the anec dotal dictator who think that the way to eradicate pov erty in Chile is to kill the poor people.

The exchange rate depreciations and the cutbacks in governmental expenditures have produced a depression which, in less than three years, has slowed the country’s rate of development to what it was twelve years ago. Real Gross Domestic Product (GDP) contracted during 1975, by nearly 15 percent to its lowest level since 1969, while, according to the IMF, real national income “dropped by as much as 26 percent, leaving real per capita income below its level ten years earlier.” The decline in the overall 1975 GDP reflects an 8.1 percent drop in the min ing sector, a 27 percent decline in the manufacturing indus tries and a 35 percent drop in construction. Petroleum extrac tion declined by an estimated 11 percent, while transport, storage and communications declined 15.3 percent, and com merce fell 21.5 percent. In the agricultural sector production appears virtually stagnant in 1975-76, with only an 0.4 percent variation from the previous agricultural year.

This stagnation has been caused by a combination of factors, including the con tinued rise in the cost of imported fertilizers and pesticides. The use of fertilizer dropped by an estimated 40 percent in 1975-76. The increase in import prices also accounted for the decline in production of pork and poultry, which are almost entirely dependent on imported feed. The re turn to the former owners of several million hectares of farm land that had been expropriated and transferred to peasant organizations under the 1967 Agrarian Re form Law, has also reduced agricultural production. As of the end of 1975 almost 60 percent of all agricultural es tates affected by the land reform—equivalent to about 24 percent of total expropriated land—has been subject to the junta’s decisions. Of this total, 40 percent of the agricul tural enterprises (75 percent of the physical acreage and more than 50 percent of the irrigated land) have entirely reverted to former owners.

In the external sector of the economy, the results have been equally disastrous. In 1975 the value of exports dropped 28 percent, from $2.13 billion to $1.53 billion, and the value of imports dropped 18 percent, from $2.24 billion to $1.81 billion, thus showing a trade deficit of $280 million. Imports of foodstuffs dropped from $561 mil lion in 1974, to $361 million in 1975. In the same period domestic food production declined, causing a drastic reduction in food for the masses of the popula tion. Concurrently, the outstanding external public debt repayable in foreign currency increased from $3.60 bil lion on December 31, 1974, to $4.31 billion on Decem ber 31, 1975. This accentuated Chile’s dependence on ex ternal sources of financing, especially from the United States. The junta’s policies have burdened Chile with one of the highest per capita foreign debts in the world. In the years to come the nation will have to allocate more than 34 percent of its projected exports earnings to the pay ment of external debts.

But the most dramatic result of the economic policies has been the rise in unemployment. Before the coup, unemployment in Chile was 3.1 percent, one of the lowest in the Western Hemisphere. By the end of 1974, the jobless rate had climbed beyond 10 percent in the Santiago metro politan area and was also higher in several other sections of the country. Official junta and IMF figures show that by the end of 1975 unemployment in the Santiago metro politan area had reached 18.7 percent; the corresponding figure in other parts of the country was more than 22 percent; and in specific sectors, such as the construction industry, it had reached almost 40 percent. Unemployment has con tinued to climb in 1976 and, according to the most conservative estimates, in July approximately 2.5 million Chileans (about one-fourth of the population) had no income at all; they survive thanks to the food and cloth ing distributed by church and other humanitarian organi zations. The attempts by religious and other institutions to ease the economic desperation of thousands of Chilean families have been made, in most cases, under the sus picion and hostile actions of the secret police.

The inhuman conditions under which a high percentage of the Chilean population lives is reflected most dramati cally by substantial increases in malnutrition, infant mortality and the appearance of thousands of beggars on the streets of Chilean cities. It forms a picture of hunger and deprivation never seen before in Chile. Families re ceiving the “minimum wage” cannot purchase more than 1,000 calories and 15 grams of protein per person per day. That is less than half the minimum satisfactory level of consumption established by the World Health Organization. It is, in short, slow starvation. Infant mortality, reduced significantly during the Allende years, jumped a dramatic 18 percent during the first year of the military government, according to figures provided by the U.N. Economic Commission for Latin America. To deflect criticism from within its own ranks against the brutal consequences of layoffs, the junta in 1975 established a token “minimum employment program.” However, it covers only 3 percent of the labor force, and pays salaries amounting to less than $30—a month!

Although the economic policies have more mercilessly affected the working classes, the general debacle has sig nificantly touched the middle-class as well. At the same time, medium-size national enterprises have had their expectations destroyed by the reduction in demand, and have been engulfed and destroyed by the monopolies against which they were supposed to compete. Because of the collapse of the automobile industry, hundreds of machine shops and small industries which acted as sub contractors have faced bankruptcy. Three major textile firms (FIAD, Tomé Oveja and Bellavista) are working three days a week; several shoe companies, among them Calzados Bata, have had to close. Ferriloza, one of the main producers of consumer durables, recently declared itself bankrupt. Facing this situation, Raul Sahli, the new president of the Chilean Industrialists’ Association, and himself linked to big monopolies, declared earlier in the year: “The social market economy should be applied in all its breadth. If there are industrialists who complain because of this, let them go to hell. I won’t defend them.” He is so quoted by André Gunder Frank in a “Second Open Letter to Milton Friedman and Arnold Harberger,” April 1976.

The nature of the economic prescription and its results can be most vividly stated by citing the pattern of domestic income distribution. In 1972, the Popular Unity Govern ment employees and workers received 62.9 percent of the total national income; 37.1 percent went to the propertied sector. By 1974 the share of the wage earners had been reduced to 38.2 percent, while the participation of property had in creased to 61.8 percent. During 1975, “average real wages are estimated to have declined by almost 8 percent,” according to the International Monetary Fund. It is probable that these regressive trends in income distribution have con tinued during 1976. What it means is that during the last three years several billions of dollars were taken from the pockets of wage earners and placed in those of capi talists and landowners. These are the economic results of the application in Chile of the prescription proposed by Friedman and his group.

A Rationale for Power: The economic policies of the Chilean junta and its re sults have to be placed in the context of a wide counter revolutionary process that aims to restore to a small minority the economic, social and political control it gradually lost over the last thirty years, and particularly in the years of the Popular Unity Government.

Until September 11, 1973, the date of the coup, Chilean society had been characterized by the increasing participation of the working class and its political parties in economic and social decision making. Since about 1900, employing the mechanisms of representative democ racy, workers had steadily gained new economic, social and political power. The election of Salvador Allende as President of Chile was the culmination of this process. For the first time in history a society attempted to build socialism by peaceful means. During Allende’s time in office, there was a marked improvement in the conditions of employment, health, housing, land tenure and education of the masses. And as this occurred, the privileged do mestic groups and the dominant foreign interests perceived themselves to be seriously threatened.

They have failed to destroy the consciousness of the Chilean people. The economic plan has had to be enforced. Despite strong financial and political pressure from abroad and efforts to manipulate the attitudes of the middle class by propaganda, popular support for the Allende government increased significantly between 1970 and 1973. In March 1973, only five months before the military coup, there were Congressional elections in Chile. The political parties of the Popular Unity increased their share of the votes by more than 7 percentage points over their totals in the Presidential election of 1970. This was the first time in Chilean history that the political parties supporting the administration in power gained votes dur ing a midterm election. The trend convinced the national bourgeoisie and its foreign supporters that they would be unable to recoup their privileges through the democratic process. That is why they resolved to destroy the demo cratic system and the institutions of the state, and, through an alliance with the military; to seize power by force.

In such a context, concentration of wealth is no acci dent, but a rule; it is not the marginal outcome of a difficult situation—as they would like the world to believe—but the base for a social project; it is not an economic liability but a temporary political success. Their real failure is not their apparent inability to redistribute wealth or to generate a more even path of development (these are not their priorities) but their inability to convince the majority of Chileans that their policies are reasonable and necessary. In short, they have failed to destroy the consciousness of the Chilean people. The economic plan has had to be enforced, and in the Chilean context that could be done only by the killing of thousands, the estab lishment of concentration camps all over the country, the jailing of more than 100,000 persons in three years, the closing of trade unions and neighborhood organizations, and the prohibition of all political activities and all forms of free expression.

While the “Chicago boys” have provided an appearance of technical respectability to the laissez-faire dreams and political greed of the old landowning oligarchy and upper bourgeoisie of monopolists and financial speculators, the military has applied the brutal force required to achieve those goals. Repression for the majorities and “economic freedom” for small privileged groups are in Chile two sides of the same coin.

There is, therefore, an inner harmony between the two central priorities announced by the junta after the coup in 1973: the “destruction of the Marxist cancer” (which has come to mean not only the repression of the political parties of the Left but also the destruction of all labor organizations democratically elected and all opposition, including Christian-Democrats and church organizations), the establishment of a free “private economy” and the control of inflation à la Friedman.

It is nonsensical, consequently, that those who inspire, support or finance that economic policy should try to present their advocacy as restricted to “technical consid erations,” while pretending to reject the system of terror it requires to succeed.


#equitablegrowth #hoistedfromthearchives #politicaleconomy #fascism #notebookslouching #2019-10-28

Note to Self: Industrial Policy in Korea: Readings:

Alice Amsden (1989): Asia's Next Giant https://www.google.com/books/edition/Asia_s_Next_Giant/j0E9qKIqD-cC chs. 1-6...

Nathan Lane (2019): Manufacturing Revolutions: Industrial Policy and Networks in South Korea https://delong.typepad.com/lane-korea.pdf...

L.E. Westphal: (1990): Industrial Policy in an Export Propelled Economy: Lessons from South Korea’s Experience https://delong.typepad.com/files/westphal.pdf

Ha-Joon Chang (1993): The political economy of industrial policy in Korea." Cambridge Journal of Economics 17.2 (1993): 131-157 https://delong.typepad.com/files/chang.pdf

Rodrik, Dani. "Getting interventions right: how South Korea and Taiwan grew rich." Economic Policy 10.20 (1995): 53-107 https://delong.typepad.com/files/rodrik-korea-taiwan.pdf

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From October 11, 2018: Worthy Reads

stacks and stacks of books

Worthy Reads from Equitable Growth:

  1. I remember debating Columbia is Glenn Hubbard in Houston about the inheritance tax a few years ago. He claimed that the cultural and educational transmission of wealth from him to his children was more important then inheritance, hence there should be no inheritance taxes. That argument did not seem to make sense to me. And it now looks as though his initial claim that inheritance was less important was wrong: Elisabeth Jacobs and Liz Hipple: Are Today’s Inequalities Limiting Tomorrow’s Opportunities?: “An individual’s place on the economic distribution is supposed to reflect individual effort and talent, not parental resources and privilege. Yet this perspective ignores the mounting evidence of the myriad ways that poverty and economic inequality foreclose equality of opportunity...

  2. I have never understood why the other justices on the Supreme Court do not differ to Justice Breyer on antitrust issues. They really ought to. They do not: Howard Shelanski and Michael Kades: Competitive Edge: Judge Kavanaugh-Would he increase the divide between the public and judicial debate over antitrust enforcement?: "Over the past decade, the Supreme Court has, with one exception that we discuss below, followed a path of reduced enforcement, reflected in decisions weakening prohibitions against vertical restraints...

  3. Our Gabriel Zucman Is getting a very welcome increasing share of global attention for his very important tax haven work. His is a research team very much worth supporting an expanding: Matt O’Brien: Inequality is worse than we know. The super-rich really do avoid a lot of taxes: "On the legal end of the spectrum... companies shift their profits to show up in low-tax jurisdictions.... According to Berkeley economist Gabriel Zucman and his co-researchers... as much as 40 percent of all multinational profits and 50 percent of U.S. ones...

  4. As Hal Varian of Google and Berkeley said a decade ago, the right solution to the housing finance crisis was for everybody in the United States to default on their mortgage and move one house to the right. The policies pursued by the Obama administration wound up being very effective at rescuing banks and their shareholders, option holders, and executives, keeping them from experiencing financial harm. They proved totally ineffective at helping homeowners in distress: Corey Husak: How Not To Help Distressed Mortgage Borrowers: Evidence From The Great Recession In The United States: "The federal government has been criticized by many for failing to provide adequate assistance to U.S. homeowners who were financially devastated by the housing crisis and subsequent Great Recession and its aftermath in the late 2000s. New evidence suggests that even when assistance was given, it was poorly designed...

  5. We do not have to have a society in which the most important economic decision you make in your life is your choice of parents: Lily Batchelder: The “Silver Spoon” Tax: How to Strengthen Wealth Transfer Taxation: "30 percent of the correlation between parent and child incomes—and more than 50 percent of the correlation between the wealth of parents and the wealth of their children— is attributable to financial inheritances. This is more than the impact of IQ, personality, and schooling combined...

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Income and Wealth Distribution, or, Watching Professional Republicans Sell Their Souls Back in 1992: Hoisted from the Archives

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I have long wanted an undergraduate to write a senior thesis about this episode. I have never found one to advise to do so:

Hoisted from the Archives: The income distribution came on to the stage that is America's public sphere between February 14 and December 12, 1992. And the rhetoric of "X% of gains in per capita income over years Y-Z went to the top W%-iles of the income distribution" became a one in American political-economic discourse over that time period as well. Over those ten months then-New York Times economics reporter Sylvia Nasar wrote eight stories about income inequality in America. All of them were pitched at a high substantive and intellectual level—they would have fit into the New York Times's later Upshot (which has recently refocused at a less analytically-substantive level as concerned with "politics, policy, and everyday life"). This was, needless to say, very unusual for the New York Times.

Sylvia's first story addressed the peculiar fact that the "80's Boom", as Reagan Republicans and the New York Times called it, had seen the poverty rate not diminish but rise. Sylvia attributed that rise to union-busting, and a growing disparity between high- and low-wage jobs springing from a decline in relative manufacturing employment and possibly from boosted high-wage white-collar productivity from computerization. Her second story, on March 5, took a turn. Instead of continuing to investigate the causes of rising poverty and wage stagnation in a decade of supposed boom, it focused on "who had reaped the gains" from "the prosperity of the last decade and a half". It highlighted the "Krugman calculation". It began:

Populist politicians, economists and ordinary citizens have long suspected that the rich have been getting richer. What is making people sit up now is recent evidence that the richest 1 percent of American families appears to have reaped most of the gains from the prosperity of the last decade and a half. An outsized 60 percent of the growth in the average after-tax income of all American families between 1977 and 1989—and an even heftier three-fourths of the gain in average pretax income—went to the wealthiest 660,000 families, each of which had an annual income of at least $310,000 a year...

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Weekend Reading: Paul Krugman: The Rich, the Right, and the Facts: Deconstructing the Inequality Debate

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Paul Krugman (Fall 1992): The Rich, the Right, and the Facts: Deconstructing the Inequality Debate https://prospect.org/economy/rich-right-facts-deconstructing-inequality-debate/: "During the mid-1980s, economists became aware that something unexpected was happening to the distribution of income in the United States. After three decades during which the income distribution had remained relatively stable, wages and incomes rapidly became more unequal.... During 1992 this genteel academic discussion gave way to a public debate, carried out in the pages of the New York Times, the Wall Street Journal, and assorted popular magazines. This public debate was remarkable in two ways.... The conservative side displayed great ferocity.... Conservatives chose to take an odd, and ultimately indefensible, position. They could legitimately have challenged,,, on the grounds that nothing can, or at any rate should, be done about it. But with only a few exceptions they chose instead to make their stand on the facts to deny that the massive increase in inequality had happened... [in] an extraordinary series of attempts at statistical distortion. The whole episode... is a sort of textbook demonstration of the uses and abuses of statistics.... The combination of mendacity and sheer incompetence displayed by the Wall Street Journal, the U.S. Treasury Department, and a number of supposed economic experts demonstrates something else: the extent of the moral and intellectual decline of American conservatism.... Fortune has long carried out annual surveys of executive compensation; and since the mid-1970s compensation of top executives has risen far faster than average or typical wages.... Surveys carried out by the University of Michigan have also shed useful light on income distribution.... There is also anecdotal evidence: Tom Wolfe... soaring demand for apartments in Manhattan's 'Good Buildings'... his Bonfire of the Vanities arguably tells you all you need to know about the subject...

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My Job as the Economist Here Is to Do the Numbers...

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Council on Foreign Relations: The Future of Democracy Symposium: Session Two: Economics, Identity, and the Democratic Recession: My job as the economist here is to do the numbers.

Over the past forty, fifty years we’ve seen some alleviation of—call them gender hierarchies. Women, even women who are high school dropouts are making more money adjusted for inflation now than women were back in 1981. And that progress spreads up the distribution, so that the group that’s done at least as well as anyone else are women with advanced degrees in America. For them, America is fulfilling the promise that people thought or expect to have of it...

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Sixteen Worthy Reads for August 30, 2018

Worthy Reads at Equitable Growth:

  1. IMHO, this is closely akin to William Julius Wilson's "the declining significance of race"—i.e., the rising significance of class: Robert Manduca: How rising U.S. income inequality exacerbates racial economic disparities: "In 1968... median African American family income was 57 percent of the median white American family income. In 2016, the ratio was 56 percent. The utter lack of progress is striking...

  2. How much of this correlation is causal? And how much is associational? I do not think we really know, in spite of studies of the build-out of broadband in France. The U.S. is a very different country. Nevertheless, I for one think that it is long past time to put universal broadband in the same bucket as basic sanitation and rural electrification—as something that is part of the citizens' share of being an American: Delaney Crampton: Why accessibility to broadband matters in reducing economic inequality in the United States: "A strong correlation between household income and in-home connectivity—a pattern that persists across both rural and economically depressed urban communities...

  3. Austin Clemens: Schumer and Heinrich Introduced a Bill to Create New Measures of Economic Growth: "Very excited.... @HBoushey and I have written extensively about the need to track growth not just for the economy as a whole but for Americans at every point along the income curve...

  4. Kate Bahn sends us to NPR's Planet Money: Kate Bahn: My Girl Joan Robinson: "My girl Joan Robinson is discussed in this episode of @planetmoney on underrated economists https://www.npr.org/sections/money/2018/08/22/641002632/the-underrated-economists...

  5. Newly-arrived at Equitable Growth, Will McGrew retweets Matthew Yglesias quoting Ryan Cooper: Will McGrew: Matthew Yglesias: "Ryan Cooper: 'There was no skills gap, nor an innovation shortage, nor an explosion of stay-at-home dads. There was a collapse in aggregate demand that was left to rot, while a lot of people who should have known better made things worse...'

  6. Equitable Growth alumnus Nick Bunker reminds us of this WCEG working paper from a year and a half ago: Emmanuel Saez, Thomas Piketty, and Gabriel Zucman: Economic growth in the United States: A tale of two countries: "We combine tax, survey, and national accounts data to build a new series on the distribution of national income...

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Note to Self: Neoliberalism and Its Discontents: "Since the recession a decade ago, free-market economics (also known as neoliberalism) has been questioned on multiple fronts. As the dominant governing strategy for the past 40 years—including the Democratic administrations of Bill Clinton and Barack Obama—the Left today is increasingly challenging neoliberalism. Indeed, as the primaries approach, many former Clinton and Obama officials are even openly challenging the 'power of markets' belief. In his new book, A Crisis Wasted, Reed Hundt, chair of the Federal Communications Commission under Clinton and a member of Obama’s transition team, makes the argument that Obama missed an opportunity to push for a new progressive era of governance, a miscalculation that ultimately hobbled his administration. Hundt is not alone on this score. In a viral Vox article earlier this year, former Clinton administration economist Brad DeLong said that the Democratic Party has and should move past market friendly neoliberals like himself. Please join us for a very special conversation between Hundt and DeLong about the limits of, and challenges to, free-market economics with Joshua Cohen, co-editor of Boston Review. WHERE: Outdoor Art Club, One West Blithedale, Mill Valley, CA 94941. WHEN: Monday, September 9, 2019, 7:00 pm - 9:00 pm (PST)...

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Is Plutocracy Really the Biggest Problem?: No Longer Fresh at Project Syndicate

Is Plutocracy Really the Problem by J Bradford DeLong Project Syndicate

Project Syndicate: Is Plutocracy Really the Biggest Problem?: After the 2008 financial crisis, economic policymakers in the United States did enough to avert another Great Depression, but fell far short of what was needed to ensure a strong recovery. Attributing that failure to the malign influence of the plutocracy is tempting, but it misses the root of the problem:

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A Year Ago on Equitable Growth: Fifteen Worthy Reads On and Off Equitable Growth for August 9, 2018

stacks and stacks of books

Worthy Reads from Equitable Growth and Friends:

  1. J. Bradford DeLong: The Ahistorical Federal Reserve: "Economic developments over the past 20 years have taught–or ought to have taught–the US Federal Reserve four lessons. Yet the Fed’s current policy posture raises the question of whether it has internalized any of them.... The proper inflation target... should be 4% per year.... The two slope[s of] the Phillips Curve... are smaller.... Yield-curve inversion... monetary policy is too tight.... Principal shocks have not been inflationary...

  2. Mark Paul, Khaing Zaw, Darrick Hamilton, and William Darity Jr.: Returns in the labor market: A nuanced view of penalties at the intersection of race and gender - Equitable Growth: "Multiple identities cannot readily be disaggregated in an additive fashion. Instead, the penalties associated with the combination of two or more socially marginalized identities interact in multiplicative or quantitatively nuanced ways...

  3. Raymond Fisman, Keith Gladstone, Ilyana Kuziemko, and Suresh Naidu: Do Americans want to tax capital? Evidence from online surveys: "Our regression results yield roughly linear desired tax rates on income of about 14 percent... positive desired wealth taxation... three percent when the source of wealth is inheritance, far higher than the 0.8 percent rate when wealth is from savings.... These tax rates are consistent with reasonable parameterizations of recent theoretical optimal wealth tax formulae...

  4. Equitable Growth: #JOLTS: "The quit rate... historically high level.... The ratio of unemployment-to-job openings trended upward slightly in June to just under 1.0.... The Beveridge Curve continues to be at levels similar to those in the expansion of the early 2000s...

  5. Bridget Ansel and Heather Boushey (2017): Modernizing U.S. Labor Standards for 21st-Century Families: "Boosting women’s economic outcomes [via] paid family leave, fair scheduling, and combatting wage discrimination...

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Enormous Possibilities in China...

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Note to Self: There are immense possibilities in China.

On the screen earlier today we saw Chinese military politician Peng Dehuai, who did command the army that inflicted the greatest defeat on an American army ever in the retreat from the Yalu River. But during the years of the Great Leap Forward he was the Chinese politician who did most to serve the people. And we are desperately short of his like in both Beijing and Washington, both of which are facing very different but, I think, equally grave crises of governance. Sp here is a poem he wrote in 1958 on an inspection tour of the Great Leap Forward famine:

Grain scattered on the ground, potato leaves withered;
Strong young people have left to make steel;
Only children and old women reap the crops;
How can they survive the coming year?
Allow me to raise my voice for the people!

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A Year Ago on Equitable Growth: Twenty Worthy Reads On and Off Equitable Growth for August 2, 2018

stacks and stacks of books

Worthy Reads from Equitable Growth and Its Network:

  1. Anybody looking back at economic history cannot help but note that female physical autonomy and its absence has played an absolutely huge role. Kate Bahn and company are pulling together the evidence that this is not just history—that it still matters a lot in America today: Kate Bahn: Understanding the link between bodily autonomy and economic opportunity across the United States: "All of these connective threads are examined in a forthcoming paper of mine...

  2. Seattle is pursuing (a version of) social democracy in one metropolitan area. In the 2010s we learned from some of our laboratories of democracy (cough, Kansas, Wisconsin) what really not to do. Will Seattle provide a model for what we should do?: Hilary Wething: Seattle: Paid Sick Leave And Workers’ Earnings Dynamics: "Utilize administrative data from Washington state to study the impact of Seattle’s paid sick time ordinance on:...

  3. Let me welcome Will McGrew, who sends us to a very insightful study of government failure and bureaucratic blockage in the New Orleans school system. Since we economists do not have an effective grammar of government failure, there is a tendency (on my part at least) to somewhat overlook it: Will McGrew: "A timely and necessary piece from Haley Correll: quality public schools should be available to all kids in New Orleans, not just those whose parents have the time, information, and resources to navigate the complex application system..."

  4. In my opinion, Arindrajit Dube is one of the best economists around in figuring out what we should control for and why in order to achieve real econometric identification. The contrasting pole is simply to throw in a bunch of controls until you have produced the numbers you want. In my view, we do not teach what should be controlled for and how enough, so people pick it up on the fly. Arindrajit has picked it up, and is a master: Arindrajit Dube: Minimum wages and the distribution of family incomes in the United States: "I find that a 10 percent increase in the minimum wage reduces poverty among the nonelderly population by 2.1 percent and 5.3 percent across the range of specifications in the long run...

  5. Lyndon Johnson said: "You do not take a person who, for years, has been hobbled by chains and liberate him, bring him up to the starting line of a race and then say, 'You are free to compete with all the others,' and still justly believe that you have been completely fair. Thus it is not enough just to open the gates of opportunity. All our citizens must have the ability to walk through those gates.... It is not enough just to open the gates of opportunity. All our citizens must have the ability to walk through those gates.... Equal opportunity is essential, but not enough." However, one of our problems is that that does not seem to be working for even those African-Americans who can and do walk through all of our society's formal and status gates to opportunity: Khaing Zaw, Jhumpa Bhattacharya, Anne Price, Darrick Hamilton, and William Darity, Jr.: A College Degree and Marriage Fail to Yield Significant Wealth Gains for Black Women: "[In] the story of the American Dream... a college education is viewed as a key driver of upward mobility and the primary vehicle to eradicate racial differences...

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A Year Ago on Equitable Growth: Fifteen Worthy Reads On and Off Equitable Growth for July 26, 2018

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TOP MUST REMEMBER: What I call 'Bob Rubin's End-of-Meeting Questions'. Ask them! They really work!: Annie Duke: Thinking in Bets: Making Smarter Decisions When You Don't Have All the Facts: "In fact, questioning what you see or hear can get you eaten. For survival-essential skills, type I errors (false positives) were less costly than type II errors (false negatives). In other words, better to be safe than sorry, especially when considering whether to believe that the rustling in the grass is a lion. We didn’t develop a high degree of skepticism when our beliefs were about things we directly experienced, especially when our lives were at stake...

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A Year Ago on Equitable Growth: Twenty Worthy Reads from the Past Week or so: July 19, 2018

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TOP MUST REMEMBER: Here is the website for Zucman, Wier, and Torslavon's work on missing profits from tax avoidance and tax evasion (yes, I have decided I should spend some time occasionally listing paper authors in reverse alphabetical order): Gabriel Zucman et al.: The Missing Profits of Nations: [Working paper][1], June 2018. [Online appendix][2], June 2018. [Presentation slides][3], June 2018...


Worthy Reads on and from Equitable Growth:

  1. Here is the website for Zucman, Wier, and Torslavon's work on missing profits from tax avoidance and tax evasion (yes, I have decided I should spend some time occasionally listing paper authors in reverse alphabetical order): Gabriel Zucman et al.: The Missing Profits of Nations: [Working paper][1], June 2018. [Online appendix][2], June 2018. [Presentation slides][3], June 2018...

  2. I have not yet welcomed the extremely sharp Kate Bahn to Equitable Growth: Equitable Growth: Kate Bahn: "Her areas of research include gender, race, and ethnicity in the labor market, care work, and monopsonistic labor markets.... She was an economist at the Center for American Progress. Bahn also serves as the executive vice president and secretary for the International Association for Feminist Economics.... She received her doctorate in economics from the New School... and her Bachelor of Arts... from Hampshire...

  3. Wealth inequality measures have been grossly understating concentration because of tax evasion and tax avoidance in tax havens: Annette Alstadsæter, Niels Johannesen, and GabrielZucman: Who owns the wealth in tax havens? Macro evidence and implications for global inequality: "This paper estimates the amount of household wealth owned by each country in offshore tax havens...

  4. The "optimal tax" literature in economics has always been greatly distorted by the fact that models simple enough to solve bring with them lots of baggage that leads to misleading—and usually anti-egalitarian and anti-equitable growth—conclusions that would not follow if we had better control over our theories. Here Saez and Stantcheva make significant progress in resolving this problem: Emmanuel Saez and Stefanie Stantcheva: A simpler theory of optimal capital taxation: "We first consider a simple model with utility functions linear in consumption and featuring heterogeneous utility for wealth..

  5. Very much worth reading from Equitable Growth alum Nick Bunker: Nick Bunker: Puzzling over U.S. wage growth: "Hiring has not been particularly strong during this recovery...

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It is macro: recession, weak recovery, catastrophe, and then superweak recovery...

I confess I do not get this from Paul Krugman.

Yes, the trade deficit crowds-out traditionally-male blue-collar import-substituting manufacturing jobs, but imports crowd-in traditionally-male blue-collar wholesale trade jobs, and finance traditionally-male blue-collar construction (and capital-goods manufacturing) jobs. If you look at all traditionally-male blue-collar—wholesale, construction, manufacturing, and mining)–what you get is not a story of the trade deficit, but rather a story of (a) macro shocks to aggregate demand, and (b) the long-run technology-and-preferences trend—some of which is automation.

NAFTA is nowhere.

The 2002-2007 bilateral-trade "China shock" is simply not a terribly big deal for the country as a whole: employment in traditionally-male blue-collar occupations was flat. A big deal for places that found their manufactures competing with new imports from China, yes. But not for blue-collar traditionally-male employment in the country as a whole.

For the country as a whole, it is aggregate demand—2001-3 recession, weak recovery, 2007-9 catastrophe, and then superweak recovery—with a supporting role for technology-and-preferences:

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Paul Krugman: "Yang asserts that automation destroyed lots of manufacturing in the midwest, [but] you don't have to be a protectionist to realize that the acceleration of job loss after 2000 was mainly about the surging trade deficit:

18 Paul Krugman on Twitter And while Yang asserts that automation destroyed lots of manufacturing in the midwest you don t have to be a protectionist to realize that the acceleration of job loss after 2000 was mainly about the surging

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Making it real that we live in the "second gilded age"...

I am hearing from a number of people that columns like this one and its ilk by Paul Krugman and our other compadres are bloodless, and ineffective. They do not convey any sense of what is happening.

So let me make it more concrete:

The top 0.01% of American workers—now some 15000—this year have incomes, including capital gains, of about 500 times the average. Typical incomes in America today, including capital gains and benefits, are perhaps 300 a working day. The gulf between them and average income is large: average income is about 800. Thus 15000 workers in the top 0.01% of income this year receive an average of 400,000 dollars a day.

How could one go about spending that? Suppose you decided this morning that you wanted to rent the 2000 square-foot Ritz-Carlton suite at the Ritz-Carlton San Francisco hotel for the week of next Memorial Day, and did so. That would set you back 6000 for seven nights. You would still have to spend 394,000 more today to avoid getting richer: to avoid getting richer you would have to spend 16,667 an hour, awake and asleep, day in and day out.

One way to think about the spending of these 15000 superrich is that they are, collectively, through their spending employing 7,500,000 who are dedicated to making them happier and advancing their purposes, whatever they may be. And a large proportion of them are bosses, partially constrained by their obligation to advance the purposes of the organizations they work for, but free to shape and interpret those purposes as they wish. Guess average is effectively the unconstrained boss of only 3 more: that makes 20,000,000 of us who are paid to directly and indirectly and who are thus are focused on advancing the top 0.01%'s particular and idiosyncratic purposes. Is that likely to be a healthy society?

And then there are the rest of the top 0.1%—not 15,000 but 135,000 each on average one-ninth as well-off—who must spend and reinvest not 400,000 but 45,000 a day, but who are collectively of the same economic weight as the top 0.01%, and thus have another 20,000,000 of us working for them: paid to directly and indirectly and thus focused on advancing the top 0.1%'s particular and idiosyncratic purposes as well:

Paul Krugman: Notes on Excessive Wealth Disorder: "How not to repeat the mistakes of 2011.... What’s really at issue here is the role of the 0.1 percent, or maybe the 0.01 percent—the truly wealthy, not the '400,000 a year working Wall Street stiff' memorably ridiculed in the movie Wall Street. This is a really tiny group of people, but one that exerts huge influence over policy.... Raw corruption.... Soft corruption.... Campaign contributions.... Defining the agenda... [which] I want to focus on... a particular example that for me and others was a kind of radicalizing moment, a demonstration that extreme wealth really has degraded the ability of our political system to deal with real problems... the extraordinary shift in conventional wisdom and policy priorities that took place in 2010-2011, away from placing priority on reducing the huge suffering still taking place in the aftermath of the 2008 financial crisis, and toward action to avert the supposed risk of a debt crisis...

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Robo-Apocalypse? Not in Your Lifetime: No Longer Fresh at Project Syndicate

Robo Apocalypse Not in Your Lifetime by J Bradford DeLong Project Syndicate

No Longer Fresh at Project Syndicate: Robo-Apocalypse? Not in Your Lifetime: "Will the imminent “rise of the robots” threaten all future human employment? The most thoughtful discussion of that question can be found in MIT economist David H. Autor’s 2015 paper, “Why Are There Still so Many Jobs?”, which considers the problem in the context of Polanyi’s Paradox. Given that “we can know more than we can tell,” the twentieth-century philosopher Michael Polanyi observed, we shouldn’t assume that technology can replicate the function of human knowledge itself. Just because a computer can know everything there is to know about a car doesn’t mean it can drive it. This distinction between tacit knowledge and information bears directly on the question of what humans will be doing to produce economic value in the future... Read MOAR at Project Syndicate

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Refinding the Path Toward Utopia: An Intake from "Slouching Towards Utopia?: An Economic History of the Long Twentieth Century 1870-2016"

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Recall the pre-1913 post-1800 progress of humanity in the direction of a utopia of material abundance.

The classic Industrial Revolution period—1800 to 1870—had seen material productivity and living standards rise by perhaps one-quarter worldwide, with an average growth rate of perhaps one-third of a percent per year. Growth had been faster—greater than one-half percent per year—in the countries that were to become the G-7, even though two of its future members, Italy and Japan, as of yet showed few signs of significant industrial-era growth. Then 1870-1913 the modern corporation, the industrial research lab, the manufacturing value chain, plus globalization—the land and submarine telegraph cable, the iron-hulled screw-propellered ocean-going steamship and the railroad, and global migration—pulled the world forward with a large jerk: a more than tripling of growth, with a more than doubling of growth rates in the industrial core that was to become the G-7 and substantial participation elsewhere even where factories were not build. A Mexico, for example, saw its productivity levels double between 1870 and 1913. An Argentina, for example, saw its productivity levels triple. And growth in Italy and Japan for the first time kept pace with that in their future G-7 partners.

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John Maynard Keynes (1926): The End of His ""The End of Laissez-Faire": Weekend Reading

Il Quarto Stato

Weekend Reading: John Maynard Keynes (1926): The end of his "The End of Laissez-Faire": "These reflections have been directed towards possible improvements in the technique of modern capitalism.... There is nothing in them which is seriously incompatible with... the essential characteristic... the dependence upon an intense appeal to... money-making and money-loving instincts.... I may do well to remind you... that the fiercest contests and the most deeply felt divisions of opinion are likely to be waged in the coming years... round... questions... psychological or, perhaps, moral...

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Yes, Societal Well-Being Depends on a Very Strong Distributional Bias Along the Lines of "To Each According to Their Need". Why Do You Ask?

Il Quarto Stato

At least half of our wealth comes from the ideas and investments of those who are now dead. And as we grow richer, that proportion grows as well. None of the living have any just exclusive claim on any portion of this cornucopian storehouse of technologies. The dead have no just claim on it either: respect for their legacy does not entail honoring their wishes as to its use, if that honoring upsets the principle of equal opportunity. Thus the most bedrock moral-philosophical principal is that more than half of our wealth is held in common for the human community to distribute as it decides is good.

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Raymond Aron (1955): Nations and Ideologies: Weekend Reading

This is the best expression of the end-of-ideology "managerialism" theses of the Great Post-WWII Keynesian Boom—Les Trente Glorieuses. It is remarkably early: 1955. And it is 100% correct that those who tried to apply a pre-WWI socialist or a Leninist frame to the state of the world after World War II were hopelessly wrong, and would up naked on the moon. And that is if they were lucky. Aron, of course, took the defeat of fascism as the Red Army turned Hitler's Berlin into rubble in 1945 as permanent. And Aron mistook the Eisenhower wing of the Republican Party for the beast. And maybe he would have been right if not for Goldwater:

Il Quarto Stato

Raymond Aron (1955): Nations and Ideologies: "WE are becoming ever more aware that the political categories of the last century—Left and Right, liberal and socialist, traditionalist and revolutionary-have lost their relevance. They imply the existence of conflicts which experience has since reconciled, and they lump together ideas and men whom the course of history has drawn into opposing camps. How can one describe as "extreme Left" the Soviet regime which identifies society with the state? Is it possible to see it as a continuation of the struggle against arbitrary rule, or as favouring individual freedom and the control of government by the governed? Or again, when a parliament of "Pashas" is dissolved by a group of army officers sincerely concerned for national independence and economic progress, who then establish a military dictatorship, what is the correct word to describe their regime?...

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Modern Assembly Line

Note to Self: Comment on Richard Baldwin: The Globotics Upheaval: Globalization, Robotics, and the Future of Work: Start from the observation the the human brain is a massively-parallel supercomputer that fits inside a breadbox and draws 50 watts of power.

For 6,000 years, since the domestication of the horse, human backs, human thighs, and human fingers have becoming less powerful as sources of economic value, as animals and machines have increasingly competed with and substituted for them. Up until recently, however, every domesticated animal every machine had required a microprocessor. And the highly-productive decentralized societal division of labor of enormous extent created huge and increasing amounts of need for white-collar information processing: the accounting, control, transmission of information, and purveyance of misinformation jobs that are most of what people like us here do. Thus while human backs and thighs and fingers became less powerful as sources of economic value as time passed, human brains become more valuable. But now we have robots which contain their own microprocessors, and software 'bots that handle huge amounts of the white-collar information processing. So the job-creating aspects of technological creative destruction are now open to question

From this standpoint, we can worry along either of two dimensions:

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Cosma Shalizi (2011): Dives, Lazarus, and Alice: Weekend Reading

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Weekend Reading: Cosma Shalizi (2011): "They've traded more for cigarettes / than I've managed to express"; or, Dives, Lazarus, and Alice: "Let us consider a simple economy with three individuals. Alice is a restaurateur; she has fed herself, and has just prepared a delicious turkey dinner, at some cost in materials, fuel, and her time. Dives is a wealthy conceptual artist1, who has eaten and is not hungry, but would like to buy the turkey dinner so he can "feed" it to the transparent machine he has built, and film it being "digested" and eventually excreted2. To achieve this, he is willing and able to spend up to $5000. Dives does not care, at all, about what happens to anyone else; indeed, as an exponent of art for art's sake, he does not even care whether his film will have an audience. Huddled miserably in a corner of the gate of Dives's condo is Lazarus, who is starving, on the brink of death, but could be kept alive for another day by eating the turkey...

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Economics, Identity, and the Democratic Recession: Talking Points

Event: Tu 2019-04-09 10-11am CFR: 58 E. 68th St., New York, NY:

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The Data

  • 1970s a bad decade for real incomes—oil shocks, environmental cleanup, baby boom entry into the labor market
  • End of 1970s sees shift to "neoliberalism" to fix the "excesses of social democracy"
  • Since 1980: males and those with low education have seen their expectations of what their lives would be like bitterly disappointed
    • Male high school graduates down by 17%
    • Males with advanced degrees up by 25%
    • Whites have not been disappointed more economically—what William Juilius Wilson called the "declining significance of race"
      • Save, perhaps, for Black women with BAs...
    • Sociological disappointment in addition?
    • Within-household economic disappointment?
    • Other aspects of the economic besides income?
      • Occupation and occupational stability
      • Employment stability

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On MSNBC Right Now... As Always, Much More to Say than I Could...

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2019-04-05 12:30 PM PST: Ali Velshi: MSNBC Live

TALKING POINTS

Greetings:

I bring you greetings from Laura Tyson, whose office I was hanging out here for an hour or so this morning.

The background is a green-screened one:

  • That is not what it looks like here right now.
  • It is a very grey, rainy, foggy day—the latest in more than a month of storms that have come down on us from the north.
  • This is the first time in my life Berkeley has had this early-spring weather pattern
  • Global warming is going to be much more than just the-climate-marches-north-by-three-miles-a-year and we need stronger air conditioners.

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Still Haunted by the Shadow of the Greater Recession...


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Barry Ritholtz (2016): The Counterfactual: "States, those so-called laboratories of democracy, have been engaging in a variety of different policy experiments.... Consider the following... "fourteen states begin the new year with higher minimum wages"... and, during the next few years, minimum wage increases are scheduled to take place in California, New York, Oregon and elsewhere. Regardless of your views... we will get a huge run of data in the coming years. Whatever your beliefs may be, you should pay attention to this data to learn if they are well-supported or not. We also see similar experiments taking place in tax policy.... During the past few years, we saw big tax cuts in Kansas, Louisiana and New Jersey, with big tax increases in others...

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Note to Self: _A Comment on Development Engineering: With respect to "doing good versus doing well"...

From an economist's point of view, the economy is a decentralized societal calculating machine. It looks at everybody, and tries, in a utilitarian way, to increase social welfare—which it roughly defines as summing everybody's well-being, with each person's well-being weighted by their lifetime wealth. This produces a system in which incentives are, and "doing well" achieved by, increasing resources that produce things for which rich people have a serious Jones.

Serving the global poor is not going to do that. Som making a living serving the poor requires focusing on one of two things:

  1. Finding an organization—a government or an NGO—that is willing to some degree to commit resources to bend this market logic of "to those who have, more shall be given"

  2. Find some people who have skills and resources and industry that are somehow blocked from the sight of the world market, and figure out a narrow strategic intervention that will makes those resources visible—and hence valuable.

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Talking Points and Snippets from Commonwealth Club January 25, 2019 Forecast Event

3 Month Treasury Bill Secondary Market Rate FRED St Louis Fed

Forecasting: Because of the shutdown, we are flying much more blind than we would like to be. We are not getting the normal data flow. Thus there is more than the usual level of uncertainty. Given that:

  • I believe there is something like an 80 percent probability that Europe is now in a small recession.
  • The Chinese government continues to say that all is well.
  • But somehow six percent fewer cars were bought in China in late 2018 than in late 2017.
  • Over the past half century the reliable recession signal has been yield-curve inversion—since 1965 eight inversion signals: one false (1998), one near-recession (1966), and six recessions.
  • There have been no recessions not signaled by a yield-curve inversion.
  • The Federal Reserve currently plans are to invert the yield curve in June.
  • Neither Steve Moore nor I understand why the Fed thinks that this is a good thing to do.

In the last yield-curve inversion, in 2006, they were worried about an inflationary spiral breaking out because of rising oil prices—they should not have been worrying about it, but they were. In the yield-curve inversion before that, in 2000, they were worried about the dot-com bubble. There is nothing like either of those going on now.

Some people think the Federal Reserve is about to back off. Some people think that this time really is different—that the bond market is spooking at shadows this time. Give each of these a 25% chance of being right, and you have to say that there is a 50% chance the U.S. will be in recession in a year and a half. We hope the recession, if it comes, will be a small one. We hope we will, somehow, dodge the bullet and not have a recession.

But, at least as I see it, that is the forecast: a 50% chance of 1.5%-2.5% growth over the next year and a half, and a 50% chance of negative growth.

If you want a more precise forecast, my advice is to consult your Magic-8 Ball.

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Commonwealth Club Talking Points (January 25, 2019): Forecasting and Steve Moore Edition

The Embarcadero Google Maps

The Shutdown: Let's review the bidding: Pelosi, Ryan, McCarthy, Schumer, McConnell, Trump reached a deal. Deal passes Senate unanimously. Trump watches "Fox and Friends". Trump announces he won't sign the deal. Paul Ryan—desperate not to embarrass Trump more—won't let the House vote on the deal. Ryan goes out and Pelosi gets in on January 4, and Pelosi passes the deal through the House. But because it is a new congressional session, the Senate's approval has expired. And McConnell—desperate not to embarrass Trump more—is now holding things up in the Senate.

From Pelosi and Schumer's standpoint, the big problem is this: they reach a new deal with Trump, Fox and Friends finds some reason to slag it, Trump backs out again.

The right, rational response to this situation is for Pelosi, McCarthy, Schumer, and McConnell to strike deals and then pass them with veto-proof majorities. But McCarthy and McConnell are too scared of Trump and not concerned enough about the well-being of the country to do that.

2.5 million people aren't getting their paychecks and 800,000 are getting very little work done. That's about a 0.5%—10 billion over the past month—hit to the economy. We won't see that because of oddities in the how the public sector is folded into official statistics, but it is there. Will there be a multiplier applied to it? In a year I will have the data so that then I will be able to look back and tell you. I cannot tell you now...

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Robert Waldmann (2016): Dynamic Inefficiency: "Is public debt a burden?... It is possible in theory that the answer is no and that higher [initial] public debt causes permanently higher [balanced-growth path] consumption and welfare.... This is called dynamic inefficiency. The standard result from simple models is that an economy is dynamically inefficient if r is less than g where r is the real interest rate and g is the rate of GDP growth...

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Three Papers and Four Graphs and Tables: The Top Marginal Tax Rate

If Arindrajit Dube and I do start our Economic Home podcast, I think that each 30 minute segment should concentrate on two or three (or four) papers and two or three (or four) graphs and tables. Our first proposed topic is the top marginal tax rate. Are these the right papers? Are these the right graphs and tables?

Www ucl ac uk uctp39a PikettySaezStantcheva pdf

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Be the Podcast You Want to See in the World!

We are going to need more monkeys Google Search

The very sharp Arindrajit Dube was, as one does, procrastinating on twitter:

Arindrajit Dube: Somehow I find the econ podcast space is mostly occupied by ideological right wingers, as opposed to people interested in an open minded, evidence informed economics. Who am I missing?

And my instantaneous reaction was: BE THE PODCAST YOU WANT TO SEE IN THE WORLD!

Brad DeLong: Let's start a podcast!

Arindrajit Dube: Wait Brad, is this a serious offer? :-)...

And the public chimed in:

Suresh Naidu: Do it!
Matthew Yglesias: You guys should do this for real
Robert Waldmann: You really do have to do the podcast (or block me). I will tweet complaints until you do it.
Aaron Sojourner: It would be incredibly valuable service.
Erik: Do it!
Dr. A. Duus Pape: I'd subscribe in a heartbeat.

Arindrajit Dube: God damn it Brad now Matt Y is on board and I am seriously screwed...

So it looks like we may be doing this for real—once a week, half-hour chunks, starting out as amateur hour only. First topic: thinking about what marginal tax rates on the rich should be.

What say you all?

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If you have not already read all of the WCEG's top 12 of 2018, go read them now: Equitable Growth: Top 12 of 2018: "The effects of wealth taxation on wealth accumulation and wealth inequality.... Why macroeconomics should further embrace distributional economics.... The links between stagnating wages and buyer power in U.S. supply chains.... U.S. income growth has been stagnant. To what degree depends on how you measure it.... Income inequality and aggregate demand in the United States.... Presentation: U.S. Inequality and Recent Tax Changes.... The latest research on the efficacy of raising the minimum wage above $10 in six U.S. cities.... Competitive Edge: There is a lot to fix in U.S. antitrust enforcement today.... Labor Day is a time to reflect on reviving workers’ power in the U.S. economy.... Kaldor and Piketty’s facts: The rise of monopoly power in the United States.... How the rise of market power in the United States may explain some macroeconomic puzzles.... Puzzling over U.S. wage growth...

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Stephanie Victoria: "I'm a say this lil story then I'm gon' let'chall get back to tweeting...: Recently, I discovered a grocery story even bougie-er than Whole Foods in my new 'hood. My addition to the list of 'approved negroes after 6PM' recently went through so my neighbors have stopped staring at me & the resident coons only give disapproving looks on trash day instead of their usual 'don't start no trouble' slave talks in the hallway...

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Noah Smith: Unions Did Great Things for the American Working Class: "Politically and economically, unions are sort of an odd duck. They aren’t part of the apparatus of the state, yet they depend crucially on state protections in order to wield their power. They’re stakeholders in corporations, but often have adversarial relationships with management. Historically, unions are a big reason that the working class won many of the protections and rights it now enjoys...

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Paul Krugman: The Economics of Soaking the Rich: "Diminishing marginal utility is the common-sense notion that an extra dollar is worth a lot less in satisfaction to people with very high incomes than to those with low incomes. Give a family with an annual income of $20,000 an extra $1,000 and it will make a big difference to their lives. Give a guy who makes $1 million an extra thousand and he’ll barely notice it. What this implies for economic policy is that we shouldn’t care what a policy does to the incomes of the very rich. A policy that makes the rich a bit poorer will affect only a handful of people, and will barely affect their life satisfaction, since they will still be able to buy whatever they want...

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We May Well Not Be at Full Employment Yet...

FRED Graph FRED St Louis Fed

In the context of overall labor-market utilization trends, the rise in the household-survey estimate of the unemployment rate in December relative to November is worth a note:

  • First, the rise in the unemployment rate is due predominately to yet another increase in labor force participation. It's not that people found it harder to find and keep jobs—it's that people who had thought it would be hard concluding that it will be easier, and so starting to look.

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Trade and Distribution: A Multisector Stolper-Samuelson Finger Exercise: Hoisted from 2008

Il Quarto Stato

Hoisted from 2008: Trade and Distribution: A Multisector Stolper-Samuelson Finger Exercise: This argument of an inconsistency between free trade and the well-being of the majority of potential voters rests substantially on the two-factor example of the Stolper-Samuelson result. It does not fare too well when we generalize to a situation in which there are a number of different factors—even if the ownership of the abundant factors of production is very concentrated indeed... https://delong.typepad.com/stolper-samuelson_finger_exercise-1.pdf

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Not Only No Wage But Minimal Investment Boosts from Trump-McConnell-Ryan...

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The so brilliant as to be goddess-like Chye-Ching Huang gets this one, I think, wrong: In response to: Jared Bernstein: "For the [Trump-McConnell-Ryan tax] cuts to have more than near-term growth impacts, they’d have to boost biz investment a lot more than we’ve seen so far, though these are early days. Both WSJ and Slate show “muted” investment results..." She writes: Chye-Ching Huang: "My concern is the frame that "growth' is what we should be focused on. If what we care about is how workers are doing—and GOP lawmakers claimed the 2017 tax law would help workers—we should focus on the metric that directly shows how they're doing! If the claimed point of tax cuts for corporations was to raise wages, we should first and foremost look at real wage rates to assess the results...

But those economists shilling for Trump-McConnell-Ryan committed not just to wage increases, but to a particular mechanism for wage increases: (1) U.S. a small open economy -> (2) tax cuts produce a huge jump in investment -> (3) faster growth -> (4) factor shares revert -> (5) higher wages.

To see whether this argument makes sense we can—and should—look at this causal mechanism at every one of its five steps.

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Would Small Minimum Wage Increases Raise or Have No Effect on Employment?

Il Quarto Stato

That is the current question—would (small) minimum wage increases have no effect on employment because labor-supply curves are steep, or would they boost employment by curbing employers with monopsony power from pushing both wages and employment below their competitive equilibirum values? Yet you would not know it from the very sharp and good-hearted ex-New York Times labor beat reporter Steven Greenhouse. What is he doing? He is, I think, reflexively saying "both sides!": Steven Greenhouse: "Some argue that it's foolish to support a higher minimum because it could reduce employment. But there's a huge debate among economists on this. One school—see David Neumark—finds that a higher minimum reduces employment. The other—see Arin Dube—finds little effect on employment...

Now this is simply wrong. The majority of economists believe that raising the minimum wage from its current level would significantly boost the incomes of the working poor and have little adverse effect on employment. A large minority of economists believe that raising the minimum wage would actually increase employment—that employers currently use their monopsony power to push wages and employment below their competitive equilibrium values, and that a higher minimum wage would reduce their ability to do this and so boost both. The majority and the large minority all, however, agree that there is uncertainty here. It is only a small minority of economists who follow David Neumark on this—who are confident that a higher minimum wage now would have a noticeable negative effect on employment. Thus Steve gets it wrong.

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The Federal Reserve Is Raising Interest Rates Again for Probably All The Wrong Reasons: Last Month Over at Equitable Growth

The Federal Reserve is set to raise interest rates again for probably all the wrong reasons Equitable Growth

Last Month Over at Equitable Growth: The Federal Reserve Is Set to Raise Interest Rates Again for Probably All The Wrong Reasons: The meeting [last month] of the Federal Open Market Committee—the principal policymaking body of the U.S. Federal Reserve system—[was] overwhelmingly likely to raise the benchmark interest rate it controls, the Federal Funds rate. The rate, which governs short-term safe nominal bonds, is likely to go up by one-quarter of a percentage point, from the range of 1.75 percent to 2 percent per year to the range of 2 percent to 2.25 percent per year. That would make it a little more expensive to borrow and spend and a little more attractive to cut spending and save. Thus, there would be a little less spending in the economy, and so a few fewer jobs. Economic growth would be a little slower. The U.S. economy would be a little less resilient in the face of adverse shocks to resources or confidence that might generate a recession. These are all minuses—small minuses from a 25-basis-point increase in the Federal Funds rate, but minuses nonetheless.

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Development and Security

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Not what I said at the Blum Center Development Lunch today: more what I wish I had said—albeit it is still incoherent and disorganized:

Let me begin with three direct responses to points Michael Nacht made. Let me then try to—briefly—propose a framework, perhaps a framework for analysis, perhaps merely a framework for convincing people in the national security community that they should take issues of economic development seriously, and so give large grants so that the Berkeley development community can do more things—things closely related to what we would be doing anyway.

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Note to Self: Books for Econ 210a: Introduction to Economic History (Spring 2019)

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Blum Hall B100: Plaza Level: 2 PM: Bill Janeway: The Digital Revolution and the State: The Great Reversal

http://delong.typepad.com/the-digital-revolution-and-the-state--book-talk.pdf

Bill Janeway: Doing Capitalism in the Innovation Economy 2.0 https://books.google.com/books?isbn=1108471277: "The innovation economy begins with discovery and culminates in speculation. Over some 250 years, economic growth has been driven by successive processes of trial and error: upstream exercises in research and invention and downstream experiments in exploiting the new economic space opened by innovation...

...Drawing on his professional experiences, William H. Janeway provides an accessible pathway for readers to appreciate the dynamics of the innovation economy. He combines personal reflections from a career spanning forty years in venture capital, with the development of an original theory of the role of asset bubbles in financing technological innovation and of the role of the state in playing an enabling role in the innovation process. Today, with the state frozen as an economic actor and access to the public equity markets only open to a minority, the innovation economy is stalled; learning the lessons from this book will contribute to its renewal...

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