SCEPA Blog

newSchool 0148 scepa 12132010

 

Capitalism Book Launch PosterCapitalism: Competition, Conflict and Crisis” is a new book on modern capitalist economies by Anwar Shaikh, professor and chair of the economics department at The New School for Social Research.

Based on fifteen years of research, Shaikh documents how standard economic assumptions - perfect competition, perfect firms, perfect knowledge and rational expectations - don’t describe or reflect reality.

Instead, he does something new. He develops theory from real behavior and real competition. From this fresh and practical perspective, he redefines conventional economic ideas such as supply and demand, wage and profits, growth, unemployment, inflation, inequality, and the recurrence of economic crises to offer an alternative framework for understanding the economics of capitalism.

5:30pm, Friday, February 12th
The New School
Wolff Conference Room
6 East 16th Street, Room 1103
RSVP

Books will be available for purchase at the event.

Shaikh is a professor of economics at the New School for Social for Social Research. He is an associate editor of the Cambridge Journal of Economics, and was a senior scholar and member of the Macro Modeling Team at the Levy Economics Institute of Bard College from 2000 to 2005. In 2014, he was awarded the NordSud International Prize for Literature and Science from Italy’s Fondazione Pescarabruzzo. His intellectual biography appears in the most recent edition of Eminent Economists II published by Cambridge University Press (2014), along with similar essays from thirty prominent economists including seven current Nobel Prize Laureates.

The event is co-sponsored by The New School for Social Research and the Schwartz Center for Economic Policy Analysis (SCEPA) and is free and open to the public.

NYTThe retirement crisis is forging unlikely alliances. The New York Times’ Mark Miller writes about how SCEPA director Teresa Ghilarducci and Blackstone President Tony James have joined forces to advocate for replacing 401(k)s with a mandatory retirement savings program on top of Social Security.

Since Dr. Ghilarducci first proposed Guaranteed Retirement Accounts (GRA) in 2009, the effort for reform has gained steam as policymakers recognize the chasm between what experts recommend people save and what they actually do. Most Americans, even in the upper-middle class, have saved nowhere near enough for retirement.

The will for reform is present abroad and at home. Britain, Australia, and New Zealand implemented mandatory retirement programs within the last generation - to great success. In Britain, workers can expect to receive 71% of their salary in retirement. Three U.S. states have enacted universal pension plans since 2012, and another 23 are considering a variety of proposals. According to Ghilarducci, state action is a response to federal inaction, and state policymakers would prefer federal reform.

Last month, the U.S. Treasury debuted its myRA program, which makes government-sponsored starter IRA’s widely available. However, because myRAs are voluntary and small, their impact will be limited. Nonetheless, the program reflects a broad recognition of the need for reform. The Ghilarducci-James alliance is another indicator that a comprehensive federal plan is both necessary and possible.

Exponential FitExponential probability distributions describe many natural phenomena because of the principle of conservation of energy. They also describe the distributions of economic variables, such as income, stock returns, and exchange rate changes, but exactly why is unclear.

In the December 1st seminar hosted by SCEPA and The New School’s Economics Department, New School Economics Professor Paulo dos Santos offered an explanation for why these distributions appear so often in economics, and a possible application of his reasoning. In a presentation on “The Distribution and Regulation of Tobin’s q,” dos Santos described the Scaling Principle: that the behavior of economic variables is best understood as comparisons of realized values to expected values. For example, income may appear to be exponentially distributed because the relevant economic value is not the exact amount of money individuals earn, but the ratio of their income to average income

Professor dos Santos also presented his research on the historical distribution of Tobin’s q, the ratio between the market value of a corporation’s liabilities and the replacement value of its assets. He calculated Tobin’s q for over 20 thousand firms over a period of more than 50 years, yielding 200,000 observations. Its distribution is centered around one, but with significant deviation. Exactly why this is so is unclear, but dos Santos has provided the first comprehensive estimate of the distribution of Tobin’s q, which can be used to develop and evaluate past and future theories about its behavior.

Sanjay ReddyNew School Economics Professor Sanjay Reddy is known for his multidisciplinary approach to economics, looking at the mathematical and philosophical underpinnings of economic theories and policies. It’s no surprise, then, that his new INET blog post, “Externalities and Public Goods: Theory OR Society?,” investigates these two concepts from all angles.

The essay is part of Reddy’s “Reading Mas-Colell” blog series, for which he and New School PhD student Raphaele Chappe provide critical commentary on the widely used microeconomics textbook “Microeconomic Theory” by Andreu Mas-Colell, Michael Whinston, and Jerry Green. In this installment, he explores the historical development and competing definitions of the concepts of externalities and public goods.

Many economists view externalities and public goods as technical concepts with precise definitions, but Professor Reddy reminds us that social issues are generally subjective. “The extent to which public goods are provided depends on who we see as part of ‘ourselves’ and what we see as ‘ours.’” Policy responses to simple externalities, such as congested roads or localized pollution, are relatively straightforward. But solutions to epochal challenges like climate change require social, political, and institutional perspectives. In these cases, the “right” answer is more elusive.

Matthew P DrennanIt’s well known that the causes of the crash of 2008 and the subsequent Great Recession were a housing bubble and a financial crisis. But what were the long-term trends that brought the American economy to the edge of the cliff?

In the November 24th seminar hosted by SCEPA and The New School Economics Department, UCLA Professor of Urban Planning Matthew Drennan named income inequality as the decisive factor behind the crisis. In a talk based on his recently released book, “Income Inequality: Why it Matters and Why Most Economists Didn’t Notice,” Drennan argued that growing inequality directed income gains to the top sliver of the income distribution, leaving middle-class workers experiencing stagnant or falling incomes. To keep up with consumption, these households took on unsustainable debt, often leveraged through home equity.  As we know, the collapse of the housing market then caused indebted households to default at unprecedented rates, setting off a massive global financial crisis.

Drennan focused on the average propensity to consume (APC), an economic statistic that measures the ratio of total consumption to total income. When the APC rises, workers are either saving less or going into debt. Many mid-twentieth century economists had predicted that the APC would remain constant. Instead it rose quickly, as income gains accrued mostly to the wealthy, and middle- and low-income earners spent more of their take-home pay to keep up. For Drennan, this was because stagnant or falling wages forced most Americans to reduce savings rates or take on the unsustainable debt that was the root cause of the financial crisis.

Book CoverOn November 21, 2015, Institutional Investor published Mark Henricks’ review of SCEPA Director Teresa Ghilarducci’s new book, “How to Retire with Enough Money and How to Know What Enough Is” (available December 15th). He describes the book as a basic guide to retirement security for low- and middle-income earners, containing the standard prescriptions (save early, save often, and delay taking Social Security until you’re 70) while offering much more.

Specifically, Henrick calls Ghilarducci’s guaranteed retirement account (GRA) proposal her “primary intellectual contribution to retirement planning.” GRAs are nationwide mandatory savings plans to which workers and their employers would split a contribution of at least 5% of their income. Funds would be pooled and invested in low-cost index funds, managed by the federal government.

GRAs are the solution to what Henricks identifies as the big takeaway from the book: the failure of the “do-it-yourself” retirement savings experiment of the past 35 years. When people are left to rely on employer-sponsored retirement accounts - to which only half the workforce has access - they don’t save enough. Most Americans over age 50 have less than $30,000 in their retirement accounts. This trajectory leaves half of Americans with a food budget under $5/day in retirement.

Ordinary savers aren’t to blame, given the one-two punch of wage stagnation coupled with the complexity of long-term planning in the 401(k) system. Rather, the lack of retirement savings is a systemic failure with a simple and straightforward policy solution: GRAs.

In “A Missed Business Opportunity: Senior Centers That Are Actually Fun,” Dr. Ghilarducci suggests that more and better senior centers are not only an untapped market for entrepreneurs, but also cost-effective for government.

In the U.S., there are about 5,000 adult-daycare centers for a quarter of a million seniors. The remainder of the 40 million Americans over age 65 are a large and unserved market.

The services offered to Japan’s seniors represents the possibilities in the U.S. Last year, 60 casino-themed senior centers opened in Japan, reflecting a desire for “adult” entertainment. The owner of one new casino told the Financial Times that most centers are “too childish.”

More adult-daycare facilities and increased participation could also ease financial pressure on Medicare. At such facilities, seniors are often in constant contact with professionals, who may notice symptoms before they become serious, preventing costly emergency room visits and hospital stays.

The U.S. has three types of adult-daycare facilities: social, medical, and specialized. Medical and specialized centers focus on rehab and managing conditions like Alzheimer’s and Diabetes. Social centers provide a hub for seniors to connect for meals and recreational activities. Both seniors and the insurance companies that pay for their care would prefer more of all three kinds of adult daycare centers.

Perhaps we have a new use for Atlantic City’s abandoned casinos!

Sanjay ReddyWhat’s the best way to evaluate international differences in living standards? How can we compare the value of 100 dollars to an American with 100 taka to a Bangladeshi?

In the November 17, 2015 seminar hosted by SCEPA and The New School Economics Department, New School Economics Professor Sanjay Reddy presented his research on the most appropriate choice of price index. According to Reddy, the most commonly used price indices are deeply flawed. However, with careful reasoning, informative and honest indices are achievable.

Reddy is critical of the most widely used methods for constructing price indices. While cynics claim that a perfect index number doesn’t exist, so anything goes, Reddy argues that certain indices are most appropriate for certain circumstances. Just as we use scales to measure weights and rulers to record heights, we should use different indices for different purposes as long as they fit the task at hand and are used consistently. For example, you can’t answer the question “who’s taller?” by measuring one person’s height and another’s weight.

The most widely used approach to constructing price indices is a “representative agent” model, where researchers assume that individuals are rational utility-maximizers, and infer budget constraints and utility functions from observed consumption behavior. According to Reddy, this approach is unconvincing. It may not be an accurate description of how people make decisions, and it fails to satisfy the axioms of the consumer choice theory on which it relies.

Instead, Professor Reddy proposes a set of criteria from which a more reliable price index can be constructed. His own project, The Global Consumption Consumption and Income Project (GCIP), aims to provide a more comprehensive understanding of how a country’s well-being evolves over time and can be compared internationally.

Lopamudra BanerjeeWho is more vulnerable to natural disasters?

At the November 11th economics seminar hosted by SCEPA and The New School’s Economics Department, New School Economics Professor Lopamudra Banerjee argued that a household’s location in the class structure of a social system is a more important indicator of its chance of experiencing physical exposure to an extreme phenomenon in the environmental system, like flood, than the household's geographic location in a region of hazards. 

Banerjee draws on extensive data on natural disasters in Bangladesh, Tanzania, Indonesia, and on her own field research, to better understand why only some households experience exposure to disaster events.

At first pass, the data suggest that exposure to natural disasters is a matter of randomness. Taken alone, a household’s level of education, volume of assets, or value of expenditures doesn’t correlate convincingly with its likelihood of experiencing disaster exposure.

Upon closer look, Banerjee finds that risk of exposure is best predicted by the “composition of capital” owned by a household, rather than its volume of capital, per se. And, it is this composition of capital (which takes into account both non-material embodied assets like the level of education of household members, and material physical assets used as means of production) which indicates the most likely class situation of the household in the social structure. The notion of class situation employed here is a particular reading of German sociologist Max Weber’s ([1922] 1978) original concept.

In terms of her empirical analysis of the patterns of disaster exposure in a population, Banerjee's results suggest that the most vulnerable group are what Weber called the “petty bourgeoisie,” property owners with relatively low income, assets, and education. While the more wealthy members of a population can afford to protect their possessions from natural disasters, and the more poor members have little to lose and the flexibility to relocate; the class of petty bourgeoisie might be less nimble to move away from harm's effect when a disaster event occurs in their region of location; and therefore, bear greater risk of exposure in the event of a disaster. They own just enough that they have something to lose and cannot move, but not enough to protect their property from natural disasters.

Banerjee’s research shows that the more wealthy and well-educated are not necessarily immune from natural disasters. Vulnerability is best understood as a function of the complex intersection of characteristics that determine social class.

*Note: Presentation slides reflect research in progress and are not for citation.

Kim Clark interviewed ReLab Director Teresa Ghilarducci for Money Magazine on the state of retirement security. The article, "How to Solve America's Retirement Crisis," discusses how America’s current retirement system is failing, evidenced by declining coverage rates and traditional pension plans, as well as the high fees associated with 401(k)-type plans.

Fortunately, there are solutions, both for individual savers and through government policy. In the article, Ghilarducci gets into specifics, but for the long-term, recommends Guaranteed Retirement Accounts to ensure retirement security across the board.

The AtlanticIn “What Happens When Low-Wage Workers are Given a Stake in Their Own Company,” SCEPA Director Teresa Ghilarducci writes about Texas grocery chain HEB’s recent announcement that it will give 15% of the company to its 55,000 employees.

HEB workers who meet a certain tenure threshold will get an equity stake valued at 3% of their salary and an additional $100 in stock per year going forward.

HEB’s move is not without support. Economists on both the left and right advance the idea of efficiency wage theory, or employers offering compensation above market rate to attract talent and reduce turnover. Social theorists have long discussed how worker ownership gives workers a stake in the success of their company. John Stuart Mill advocated industrial cooperatives, and Robert Owen experimented with utopian communities during the industrial revolution. More recently, Democratic presidential candidate Hillary Clinton has proposed a tax break that would encourage companies to share profits with their workers.

But HEB’s decision is best viewed in the context of recent developments in the labor market. The unemployment rate is finally approaching its pre-crisis level, and activists are becoming increasingly vocal about low pay and poor working conditions. If this is what workers get when the unemployment rate is 5%, what might happen if it falls even further?

The AtlanticIn “How to Help the Middle Class Retire Comfortably at No Extra Cost,” SCEPA Director Teresa Ghilarducci discusses the federal government’s main tool for encouraging retirement savings: tax expenditures. At $120 billion per year, tax breaks for retirement savings represent the second largest federal tax expenditure, just below health insurance and above mortgage interest and charitable giving.

Unfortunately, this money is not spent equitably or effectively. The majority of it accrues to the top 20% of earners, who are more likely to have employer-sponsored retirement savings accounts and have higher taxes to avoid. Recent research shows these tax breaks aren’t having their intended effect. High-earners who benefit from them would be saving anyway, and just shift their money to retirement accounts to lower their tax rates.

This money could be better spent. Instead of giving most of the $120 billion to wealthy households to encourage saving they would have done anyway, we should divvy it up equally to support everyone’s need to save for retirement. This would amount to about $800 per worker per year, which would give workers around $100,000 in savings by the time they retire.

While we still need a comprehensive solution to the retirement crisis in the form of Guaranteed Retirement Accounts, reforming inefficient and ineffective tax breaks for retirement savings is a good start. It represents a huge increase for the roughly half of American households who have no retirement savings whatsoever.

Economics Professors Mark Setterfield of The New School and Eduardo Bastian of the Federal University of Rio de Janeiro have a message for post-Keynesian economists: take inflation seriously.

Setterfield and Bastian presented their research on “A Simple Analytical Model of the Adverse Effects of Inflation” at the November 3rd weekly seminar series hosted by SCEPA and The New School Economics Department.

To “poke post-Keynesians in the ribs” so they consider the downsides of higher inflation, Setterfield and Bastian developed a framework to show the negative effects of rapidly rising prices on economic growth. Drawing from conflicting-claims inflation theory and Kaleckian growth theory, their work shows how different “inflation regimes” arise, ranging from low and stable price increases to out of control hyperinflation. The conclusion was clear: if inflation takes off, it can be hard to control and have adverse effects for economic growth.

bookIn their book on Atlantic City’s casino industry, economists Ellen Mutari and Deborah Figart tell a familiar story: financialization and the push for profits have left workers with less pay and more stress.

On October 27th, Mutari and Figart presented their research in the seminar series hosted by SCEPA and The New School’s Department of Economics. Mutari and Figart both teach at Richard Stockton College, just outside of Atlantic City in New Jersey.

A combination of industrial research and in-depth interviews with current and former casino workers let Mutari and Figart paint a comprehensive picture of the modern gaming industry. In the early days, casinos provided good stable jobs to tens of thousands of people in Atlantic City. But recently, as casinos are increasingly owned by private equity firms and hedge funds, job quality has plummeted.

Mutari and Figart describe three dimensions for evaluating job quality: pay and benefits, ability to foster a sense of well-being, and the provision of dignity and meaning. Their interviews with casino workers revealed that all three have eroded. One particular trend is “de-skilling,” where jobs are routinized to make workers replaceable. Shuffling machines, for example, are displacing dealers, which was once a skilled occupation whose workers took pride in the finesse and showmanship their work required.

This is not just an expose of the casino industry, but a metaphor for the economy. The same trends that have devastated workers in Atlantic City are playing out in cities and towns across the country. When financial firms make bets on companies and workers’ livelihoods are left to chance, the economy itself becomes more and more like a casino.

SCEPA Director Teresa Ghilarducci takes on an old and misinterpreted explanation for people's failure to adequately prepare for retirement in"The Real Reason People Don't Save Enough for Retirement." Put simply, it's because we are different. Some of us have characteristics that lead us to save more, others don't.

The topic here is the Big Five Personality Traits, known as OCEAN (or CANOE), which stands for Openness, Conscientiousness, Extroversion, Agreeableness, and Neuroticism. Angela Duckworth, a professor of psychology at the University of Pennsylvania, has researched the connection between personality types and savings. Her findings are not tremendously surprising: those who are most conscientious--efficient, organized, and careful--are most likely to be successful savers.

What does this mean for retirement policy? Victorian-era social reformers enacted financial literacy campaigns, especially for young girls, to thrust conscientious upon them. Today, most boards of education impose compound interest exercises on their elementary school students to imprint good saving behavior in their DNA. Several states make their fourth graders play stock-market and IRA-inspired games in class.

Changing personalities is hard at best. And is it a worthy goal? Diverse personalities produce the variation in opinions, ideas, and products that make life interesting and exciting. Instead, we should implement retirement reform that is effective regardless of personality type by creating Guaranteed Retirement Accounts: mandatory, pooled savings accounts into which workers and their employers contribute every year. GRAs would allow Americans to enjoy the dignified retirements they deserve, regardless where they come down in the "Big Five."

SCEPA Director Teresa Ghilarducci takes on an old and misinterpreted explanation for people's failure to adequately prepare for retirement in,"The Real Reason People Don't Save Enough for Retirement." Put simply, it's because we are different. Some of us have characteristics that lead us to save more, others don't.

The topic here is the Big Five Personality Traits, known as OCEAN (or CANOE), which stands for Openness, Conscientiousness, Extroversion, Agreeableness, and Neuroticism. Angela Duckworth, a professor of psychology at the University of Pennsylvania, has researched the connection between personality types and savings. Her findings are not tremendously surprising: those who are most conscientious--efficient, organized, and careful--are most likely to be successful savers.

What does this mean for retirement policy? Victorian-era social reformers enacted financial literacy campaigns, especially for young girls, to thrust conscientious upon them. Today, most boards of education impose compound interest exercises on their elementary school students to imprint good saving behavior in their DNA. Several states make their fourth graders play stock-market and IRA-inspired games in class.

Changing personalities is hard at best. And is it a worthy goal? Diverse personalities produce the variation in opinions, ideas, and products that make life interesting and exciting. Instead, we should implement retirement reform that is effective regardless of personality type by creating Guaranteed Retirement Accounts: mandatory, pooled savings accounts into which workers and their employers contribute every year. GRAs would allow Americans to enjoy the dignified retirements they deserve, regardless where they come down in the "Big Five."

Economists Jasmina Arifovic and Janet Hua Jiang found that public information, regardless of its validity, can affect how people make decisions during times of financial crisis.

On October 13th, Arifovic presented a lecture on her research as part of an economics seminar series jointly hosted by SCEPA and The New School's Economics Department. Arifovic currently serves as director of the Centre for Research in Adaptive Behaviour in Economics and professor of economics at Simon Fraser University.

Economists have long been interested in whether non-fundamental economic factors, known as "sunspots," can cause or exacerbate financial crisis. Though the concept seems to run counter to the standard economics assumption of rationality, sunspots have been incorporated into important theoretical models of economic crises.

Arifovic's research focuses on measuring the effects of sunspots through controlled experiments. She enlists undergraduates to play a simple game. Given a "bank account" and information about possible rates of return, they decide whether or not to withdraw their funds.

A sunspot is then introduced: a sequence of randomly generated public announcements forecasting how many people will choose to withdraw. When economic conditions are safe or precarious, participants ignore the sunspot. But when conditions are uncertain, they incorporate it into their decisions.

She concludes that in times of uncertainty, behavior is sensitive to publicly available information, even when the information is unrelated to economic fundamentals. The policy implications are clear: public officials and business leaders should pay close attention to the wording of their public statements during times of crisis or uncertainty, when those statement may be more potent than usual.

In "Leisure Inequality: What the Rich-Poor Longevity Gap Will Do to Retirement," SCEPA Director Teresa Ghilarducci looks at the inequality in end-of-life experiences between the rich and the poor. She begins with a startling fact from the 20th century: between 1930-1960, while the life expectancy of rich men increased by eight years, the life expectancy of poor men was unchanged. Though Social Security and Medicare have improved the end-of-life experiences of poor and middle-class Americans, a chasm remains between the golden year experiences of the rich and poor.

One difference is how the children of wealthier Americans are more prepared to guide their parents through later-life. She tells of a friend of hers who recently wrote her about the difficulties of navigating the medical, financial, and legal challenges arising from her father's end-of-life care. She says they have taken her "nearly to the limits of my intellectual capacity" - and she is a health-care policy expert with a PhD!

Her friend's point summarizes decades of research. Gaps in class, education, and income translate into gaps in end-of-life care. Wealthy, educated Americans tend to have educated children who can help them make the best end-of-life decisions and are likely to be with them at the end of their lives. This has important implications for retirement policy. Cutting benefits by raising the retirement age will force lower-income Americans, who haven't experienced a large increase in longevity, to work longer and miss out on their golden years.

UNCTAD logoOn October 6th, The New School hosted the release of the United Nations Conference on Trade and Development's (UNCTAD) 2015 Trade and Development Report, which made the bold conclusion that the international financial and monetary systems are failing to foster sustainable international development and require immediate reform to avoid persistent stagnation.

According to UNCTAD's Elissa Braunstein, economics professor at Colorado State University, any economic statistic - such as GDP, debt levels, or trade volume - will prove that developing countries have not fully recovered from the financial crisis and global recession. She described three main challenges confronting the international monetary system: 1) regulating international liquidity, 2) managing shocks; and 3) easing the burden of current account adjustment.

While these challenges are best solved by long-term financing and productive investment, the current system is dominated by private capital, which is focused on short-term, low-risk investments and pro-cyclical, exacerbating downturns.

"Managing the persistent volatility of financial short-term flows requires an internationally coordinated policy response," UNCTAD Secretary-General Mukhisa Kituyi said, not merely a financial correction with few serious consequences for the real economy.

The report calls for reforms at the national level, including the "judicious use" of capital controls and credit allocation policies, supplemented by global measures that discourage speculative financial flows and at the regional level, including more substantial mechanisms for credit support and shared reserve funds.

The event was sponsored by the New School for Social Research. William Milberg, dean of The New School for Social Research, provided introductory and closing remarks.

World Bank logoThe World Bank announced with great fanfare that the number of people living in poverty has fallen by almost 500 million between 1980 and 2012. However, as reported in The Economist Magazine, SCEPA Economist Sanjay Reddy is concerned the Bank overestimates the reduction in global poverty - and ultimately the efforts needed to combat it - by using one dimensional measurements that cannot fully capture the breadth and depth of poverty.

The new estimates are based on an increase in the Bank's poverty line from $1.25 per day to $1.90 per day. In their paper, "$1.90 Per Day: What Does it Say," Reddy and co-author Rahul Lahoti are critical of the World Bank's threshold, stating that half the world's population is in countries where $1.90 today buys less than $1.25 did in 2005.

According to Reddy, using a "single source" to determine poverty is inadequate, lacking a "standard for identifying who is poor and who is not that is consistent and meaningful." Instead, he calls for the use of holistic measures that focus on "identifying the real requirements of human beings to attain income-dependent human capabilities."

Reddy's preferred measure, the Global Consumption and Income Project (GCIP), provides a comprehensive method to measure material well-being both within and across countries. Using this rubric, Reddy reports that - rather than decreasing - the absolute number of poor increased in 2012 when compared to 1980 or 1990 under different poverty lines.