Friday, August 30, 2019

Argentina’s infernal cycle

It is by pure coincidence that I spent the last ten days in Argentina while the country sped to one of its periodic disastrous economic crises. The purpose of this post  is simply to share some of my impressions. I do not claim that they are necessarily right because some of them are clearly out of my area of expertise.

I knew that the economic situation had deteriorated, and I read with some surprise that Alberto Fernandez won hands down against Mauricio Macri in a mock elections but, like many foreigners, I did not even understand what that mock election was. In the English-language press it was dubbed a “primary” and while, in some formal ways, it was indeed a primary, fundamentally it was something else, as I will explain below  

The first thing to realize is that everything that in the last month or so could go wrong did. So let’s start with the mock election, PASO by the Spanish language acronym. It was supposed to be a primary where, on the same day, voters would choose a candidate, among several from their own party, who  should run in the presidential election. More or less like Democrats in the US choosing among various Democratic candidates, and Republicans likewise among various Republicans. But in this year’s PASO each party had only one candidate. There was thus no inter-party choice at all. The vote became a giant election  poll. The fact that almost 50% of voters, under the conditions of obligatory vote valid for both the PASO and the general election, decided to vote in the Fernandez  “primary”  (16% more than the number voting in the Macri “primary”) thus indicated a clear intent of vote in the real election. 16 percentage points seems like an unbridgeable gap for Macri.  

Thus the result of this weird mock election transformed the sitting president into a lame duck president with four months yet to go  before the presumed new president takes over (two months until the election, and then two months before the formal transfer of power). The all but certainty of Fernandez’ win spooked foreign investors (Alberto is running on a ticket with Cristina Fernandez de Kirchner, the former president and widow of Nestor Kirchner) and Argentina’s debt, in the midst of an IMF negotiation,  was downgraded. It also produced the first signs of a run on the peso.

The political situation could not have been worse for economic stability. Macri maintains the hope of a remontada, or winning from behind, and his economic policy is, I suppose, now predicated on that political calculation. Fernandez is seen as a future president, but at this time, he has no economic power whatsoever. Clearly, the situation would have been better if Fernandez could become immediately the new president, or if PASO had not taken place. As it is, the most destabilizing political situation is afoot.

One adds to that economics. With the devaluation of the peso (during the ten days that I was there, the peso went from 56  to a dollar to 62, that is devalued by some 10% in ten days), a dollarized economy like Argentina is immediately exposed to increased inflation. It is now running at 50% annually, but is likely to accelerate. In a country where all economic decisions are dollarized, every increase in the value of the dollar implies higher peso prices. The loss in peso’s value makes the dollar ever more attractive as the store of value, and the expectation of further inflation and peso devaluation exacerbates the demand for the dollar and the flight of capital abroad.

Time becomes, like in all high inflations, crucially valuable. A peso received tomorrow is not of the same value as the peso received today. Some stores are thus accepting only cash payments or debit cards; not credit cards. In my experience, this is still an exception, but it could soon become more widespread.   

At the same time, the economy is contracting at an annual rate of about 2% which obviously means lower incomes and higher unemployment. Poverty is estimated at almost 40% of the population. Real earnings of people paid in pesos will decline (as nominal peso incomes fail to catch up with inflation) and their incomes in dollars will decrease even further. In such conditions, the Church has just asked the president to declare a food emergency and to presumably freeze prices of food. Rationing cannot then be far behind.  

We thus get to a situation of an infernal cycle where everybody tries to save themselves by converting all pesos into dollars which only gives an additional incentive to those who have not yet converted all their pesos to do it as promptly as possible.

I was in Greece where the euro withdrawals were limited. I saw some signs of panic but I think that the Argentine short-term situation is worse. The euro continued to be the store of value and the unit of transaction; the problem was the shortage of the euros like the shortage of the dollars in Argentina, but there was (obviously) no danger of hyperinflation.

To stop this infernal cycle which is essentially driven by politics and lack of confidence one needs massive inflows of foreign exchange. The fear is voiced at times in Buenos Aires that even that might not help if most of that inflow is immediately sent abroad. But clearly there must be such a substantial inflow that would be sufficient to stop speculation and capital flight and reintroduce some stability. Argentina seems to me to be in a situation where the short-term dominates all other concerns. It is like a patient that is bleeding, and the role of the doctors is not to ask whether the patient has health insurance or not but to rush him to the emergency room. All other considerations about the rescheduling of the debt and the rest can, I think, take place only when a modicum of stability is reintroduced. 

The role of the IMF is crucial. It lent enormous amounts of money to Greece. There is no reason why Latin America should be treated differently than Europe.

Production and then distribution, or distribution and production together

In a recent contribution  to an excellent volume on histories of global inequality (edited by Christian Olaf Christiansen and Steven Jensen) Eli Cook in a piece entitled “Historicizing Piketty: The Fall and Rise of Inequality Economics” discusses the reasons why inequality has been practically  exiled from the mainstream economics during the entire second half of the 20th century. Cook’s is a very nice exercise in the history of economic thought that shows how a topic that was once at the center of economists’ interests (it suffices to read only the first paragraphs of Ricardo’s Principles to see that) was gradually shifted to the margins, so much so that Martin Feldstein, one-time president of the American Economic Association, could declare that all concerns with income or wealth inequality are the product of “envy” and “spiteful egalitarianism”.

According to Cook there were three developments that led to the loss of centrality that the questions of distribution originally had in economics: theory of marginal productivity of the factors of production, the turn toward utility, and the Pareto optimality.*  

What pervades these three developments and is, in my opinion, the key issue is whether production and distribution are seen together as one process, or are seen as two, loosely related, processes. The latter approach is characteristic of neoclassical economics. Production is considered as a prior and economics is regarded as a science that ensures maximization of production. That output can be later, using political decisions, redistributed to help those who are poor but one has to do it carefully in such a way that the next round of production is not adversely affected by the wrong incentives coming from too much redistribution. In such a view of the world, almost any redistribution is seen as injurious to the process of maximization of output.

But perhaps more fundamentally, redistribution is regarded as lying outside of economics, in the political domain. This is, as Cook shows, clearly enunciated by Samuelson in his Economics. Economists thus appear as seemingly modest in  their claims. Like the engineers of societal production they are in charge of output maximization under conditions of given endowments and technology. Self-denyingly they leave the task of redistribution to those who are more qualified than them: to the politicians.

Yet as economics has gradually come to dominate social sciences and government decision-making, this seeming self-restraining  had come to be seen from what it is: an attempt to ignore as many of distributional issues as possible. If redistribution is the province of the politician, and the politician should be above all else an economist, then clearly redistribution should be an exception to be used sparingly. Cook rightly emphasizes the role played in this by the so-called First and Second Welfare Theorems. The First shows that, under idealized conditions of perfect competition, market produces the outcome that cannot be improved without making somebody else’s condition worse. This is economics. But it is then argued, in the Second Welfare Theorem that, if, for some reason, we change endowments or resort to lump-sum taxation, the distribution of incomes can be altered (although it would still remain Pareto optimal). But that second part, it is averred, is not the topic of economics but of political scientists or politicians. So the economists can cheerfully ignore it and make all distributional concerns secondary or marginal.

The classical  view of economics was rather different. It saw production and distribution as a single process. If endowments were differently distributed, the structure of production would be different, and the power of various classes would be different. It is very clear in Ricardo that landowners receive their income solely based on a monopoly over land, not thanks to any useful activity they perform. So changing their endowment or taxing them cannot be bad. (Of course, the same view is present in Henry George.) It is also clear in Marx that under different modes of production, the structure of production, relative prices, and individual incomes would be different. Distribution of endowments and the way production is organized are thus organically linked.  

While neoclassical economics envisages the economic world as:
Production => distribution => production
classical economics sees it as:
Distribution of endowments => production => re-distribution of endowments.

It is for that reason that in Marx (and of course among the Neo-Ricardians from Sraffa onwards) factor prices are seen as being determined prior to production (say, through relative power of labor vs. capital). This in turn makes the composition of output different under different systems: if workers are more powerful, wage rate will be higher relative to interest (profit), and labor-intensive commodities will be more expensive etc. Or similarly, as Marx says in his famous paragraph, relations of production become forces of production: if relations of production (basically, the distribution of endowments) are, at a given stage of development, inefficient (say, slavery leads to a waste of effort), maximum output that can be achieved under such a system will be less than what can be achieved under a more efficient social system. Production is thus seen as fully interdependent with distribution. The neoclassical idea that production and distribution can be neatly separated and considered almost in isolation from one another is exploded. This is the crux of the matter, and I think the reason for the divergence between the classical and neoclassical schools in their views of, and interests in, inequality.

Luckily, things are changing—but not as fast as they should. We still do not have textbooks or courses that deal with inequality of income or wealth as such. Inequality is often seen as an anomaly or a problem that may be relevant for the “Third World” societies only. This is so obviously wrong  that insisting on how wrong it is, is almost superfluous. But so long as this is not fixed economics will continue to remain divorced from real life.

* It is interesting, and perhaps a bit ironic, that that the Pareto optimum which strictly speaking rules any redistribution (since any redistribution of received incomes must make somebody worse off) was defined by the same person who introduced the empirical study of interpersonal inequality.  

Saturday, August 10, 2019

How to create an ethical country, if not the world: Part 2 review of Paul Collier’s “The future of capitalism”

This is the second part of my review of Paul Collier’s “The future of capitalism”. The first part is here.

In this review of Collier’s policy recommendations, I will break the discussion into three parts, following Collier’s own approach: how to make companies more ethical, families stronger, and the world better.

Ethical firm. Collier argues that, in order for companies to be seen as ethical and to offer their workforce meaningful jobs, companies should include workers in management, give much more power to the middle-level management, and do profit-sharing. These are all well-taken recommendations, and I believe, like Collier, that they would increase companies’ profitability in addition to providing “better” jobs. The question however is how many companies nowadays can afford to provide such meaningful and (relatively) stable jobs because of fast-evolving changes driven by globalization. Nevertheless the idea is correct.  

Collier then moves to what may be the most intriguing recommendation in the book and that goes beyond the usual “let’s have higher and more progressive taxes”. He looks at the big divide between the successful global cities (like New York and London) and their left-behind hinterlands. The success of metropolises  comes from economies of scale, specialization, and complementarity (gains of agglomeration). People can specialize because the demand for specialized skills is high (the best tax accountants are located in New York not in small dilapidated cities). Companies can enjoy economies of scale because the demand is high and specialized workers benefit from complementarity in skills from other workers with whom they are in close geographical and intellectual contact.  

So who are the main winners from metropolises' success, asks Collier? People who own land and housing (as housing prices skyrocket) and highly skilled professionals who, after paying higher rents, still make more in  global cities than elsewhere. Collier’s suggestion then, based on his work with Tony Venables, is to tax heavily these two groups of people, i.e., to introduce supplemental taxes which would be geographical: tax housing and high income individuals living in London.

How to help hinterland catch up? Use the money collected in London or New York to give subsidies to large cluster-like companies (like Amazon) if they set they businesses in the left-behind cities like Sheffield or Detroit. One can quibble with this idea but the logic of the argument is, I think, quite compelling, and the taxation suggested by Collier has the advantage of going beyond the indiscriminate increase in taxes for all. We are talking here of targeted taxation and targeted subsidies. This is the lieu fort of Collier’s book.

Ethical family. I am less enthusiastic about the suggestions in this area. Here Collier is at his most conservative although that social conservatism is masked under the cover of scientific studies that show that children living in “full” families with two heterosexual parents are doing much better than children living with one parent only.  

Collier almost implies that (say) mothers should stay in unloving or abusive relationships so that there would be both parents present in the family. Such families should, according to Collier, be given support and for all children public pre-K and K education should be free (very reasonable). Collier also very persuasively describes manifold advantages that the children of the rich receive, not only through inheritance but through intangible capital of parental knowledge and connections. This type of social capital inheritance is not a well-researched topic and I hope this changes since its importance in real life is substantial.

Collier displays clear preference for “standard” families and even some “social eugenics” as when he criticizes UK policy that provides free housing and since 1999 extra benefits for single mothers to have encouraged “many bear children who will not be raised well” (p. 160).

The argument that parents should sacrifice themselves (regardless of the psychic cost) for children is also dangerous. It leads us to a family formation of the 19th century when women often lived in terrible marriages because of social pressure not to be seen as abandoning or not caring for their children. This is neither a desirable nor a likely solution for today. An ethical family should consider interests of all members equally, not subjugate the happiness of some (mostly mothers) to that of others.

Ethical world. Collier has surprisingly little to say about the ethical world. His ethical world is a world largely closed to new migration which Collier rejects based on a not unreasonable view going back to Assar Lindbeck and George Borjas of cultural incompatibility between the migrants and the natives. Interestingly, Collier does not quote either of these two authors nor any others. (The book is directed at the general audience so the mentions of other authors are extremely rare except when it comes to Collier himself and a few of his  co-authors).

It is slightly disconcerting that Collier who has spent more than three decades  working on Africa has almost nothing to say about how Africa and African migration fits into this “ethical world”. There are only two ways in which  he addresses migration.

First, migrants or refugees should stay in countries that are geographically close to the source countries:  Venezuelans in Colombia, Syrians in Lebanon and Turkey, Afghanis in Pakistan. Why the burden  of migrants should be exclusively borne by the limitrophe countries that are often quite poor is never explained. Surely, an ethical world would require much more from the rich.

Second, he argues that the West should help good companies invest in poor countries in order to increase incomes there and reduce migration. But how is this to be achieved is never explained. It is mentioned almost as an afterthought and is considered deserving of two sentences only (in two different parts of the book). This is in contrast with a detailed explanation, discussed above, of how governments should encourage and subsidize large companies to relocate to second-tier cities. Could a similar scheme be designed for investments in Africa? Nothing is said.

Further, where does it leave African migrants crisscrossing the Mediterranean as I write? There are no geographically close countries where they could go (surely not to Libya) nor can they wait for years in Mali for the Western companies to bring them jobs.  Again, nothing is said on that. It is not surprising that Collier is very supportive of Emmanuel Macron whose anti-immigration policy is quite obvious, and of Danish Social Democrats that are in the process of creating a kind of national social democracy with new laws that practically reduce immigration to a trickle. Collier favors Fortress Europe although he does not say so explicitly.

In keeping with his anti-immigration stance, Collier argues that migration is not an integral part of globalization.  Why –in principle- goods, services and one factor of production (capital) should  be allowed to move freely while another factor of production (labor) is to remain stuck is not clear. Surely, the fact that trade is driven by comparative advantage and migration by absolute (p. 194) is not the reason to be against migration. On exactly the same grounds, one could be against movement of capital too.

In conclusion, I think that the recommendations regarding the “ethical firm” and metropolis-hinterland divergence are spot on; the recommendations on “ethical family” are a combination of very perceptive and sensible points, and a view of the family that at times comes from a different age, and almost nothing is said about an “ethical world”. This latter is a big omission in the era of globalization, but perhaps Collier was solely interested in how to improve nation-states.