The Worldly Philosopher
The New School's department of economics is a leader in alternatives to mainstream economics. The purpose of this student-authored blog is to extend the legacy of Robert Heilbroner, author of "The Worldly Philosophers" and make the department a mecca for economists who are engaged, critical intellectuals.
- Published on Tuesday, March 03, 2015
This week's Worldly Philosopher, Anthony Bonen, discusses how even the best models for estimating the costs of adapting to climate change are still a guessing game.
Estimates of the social cost of carbon (SCC) focus almost exclusively on the net benefit/loss of mitigating climate change. The cost of adapting to the unmitigated impacts of climate change remains an even more elusive figure. Properly calculated, however, SCC should include both dimensions.
As discussed in an earlier SCEPA working paper, SCC model estimates of mitigation costs are notoriously difficult to pin down. But, after being asked to give a presentation on adaptation, I soon learned that there is far less certainty in these costs. For developing countries, estimating the cost of climate change adaptation is essential. Their success or failure in saving lives, reducing poverty and becoming resilient to climate change depends in large measure on how much support – financial, logistic and political – the industrialized world is willing to provide.
Systematic efforts to estimate the global cost of adapting to climate change began in earnest only in 2006 with a World Bank study of investment flows in the developing world .1 The second generation of adaptation estimates relies on impact-level assessments. The best example of these more detailed, but still top-down, studies is the World Bank's report . The IPCC's chapter on the Economics of Adaptation  calls it "[t]he most recent and most comprehensive to date global adaptation costs [in which] costs range from US$70 to more than US$100 billion annually by 2050." The conservative estimates for each of the 6 sectors are reproduced in Table 1.
- Published on Monday, February 02, 2015
This week's Worldly Philosopher, Ozlem Omer, discusses the flaws in the latest IMF policy recommendations for Turkey.
The December 2014 IMF Report is no exception. In it, the IMF warns Turkey that its persistent and large external debts make the country vulnerable to foreigners' willingness to lend - even though the Turkish economy has been growing 6% per year since 2010. The report criticizes Turkey's high inflation and foreign exchange rates, low interest rates, low levels of domestic savings, high external deficit, and, of course, increasing levels of private external debt. It predicts Turkey will likely face a dangerous reversal of capital flow. If foreign pension funds, rich foreign investors, and other countries stop lending money in Turkey, the nation could experience economic and social shocks exceeding the fallout from the 2009 recession.
The IMF suggests Turkey "curb its current account deficit and reduce the external deficit by boosting savings without decreasing investment—and lowering inflation to preserve competitiveness." In short, it calls for Turkish austerity.
- Published on Monday, January 19, 2015
This week's Worldly Philosopher, Ismael Cid, discusses how the decline in employer-sponsored retirement plans has forced a growing number of Americans to postpone retirement.
In his 1930 essay, "Economics Possibilities for Our Grandchildren," economist John Maynard Keynes predicted a future of increased living standards and 15-hour workweeks. He envisioned a rise in living standards - equivalent to what we have experienced over the last 85 years – that would allow us to devote our energies to non-economic purposes. In his words, "the lilies of the field who toil not, neither do they spin."
A future of longer and healthier lives proved right. Unfortunately, however, reality does not bear out Keynes' vision of security and leisure. In fact, it is the opposite. Increased life expectancies and the challenges of a graying population have encouraged some economists to champion a retirement policy described as "work until you drop."
SCEPA Director and retirement expert Teresa Ghilarducci recently described the growing problem of retirement insecurity behind this new reality. Rather than a savings problem, SCEPA research documents the underlying structural problem: employer sponsorship of retirement plans for prime-aged (25-64) workers declined from 61% to 53% from 2002 to 2012.
- Published on Monday, January 05, 2015
This week's Worldly Philosopher, Raphaele Chappe, questions the inequality in investor returns.
As discussed at great length in prior posts, Piketty has argued that inequality is directly linked to the return on capital r exceeding the growth rate of the economy g. Yet a fascinating (perhaps controversial, and less discussed) claim is that the average rate of return on capital is not the same for all investors depending on the size of the portfolio – in short, contrary to the efficient market hypothesis, some investors do earn higher returns in the long run.
Piketty points to the fact that the wealthiest individuals in the world have earned annual returns of 6.8% per year since 1987, compared to the world average of 2.1%. Using university endowments as a case study, he also points to higher endowments earning higher returns in the long run (see Tables 12.1 and 12.2 in Piketty, 2013). Other research confirms that rich universities are getting better returns and do seem to benefit from better asset selection abilities.
Finance tells us that higher returns for wealthier investors could be achieved in two ways. First, by taking on more "risk" and investing in stocks with higher "beta," or products with embedded leverage (such as derivatives). Second, by getting a higher return per unit of risk than what should be expected given the beta. This second component is known as the "alpha," measuring the return above the risk-adjusted performance of a benchmark index and (supposedly) a measure of the skill of the active asset manager. We can imagine that factors such as better information (or even insider information), arbitrage opportunities, or advanced tax planning can generate considerable alpha. Piketty points to significant economies of scale associated with the size of the portfolio.
Do higher returns to high net-worth individuals or institutions come from an ability to take more risk or from higher alphas?
- Published on Monday, December 08, 2014
This week's Worldly Philosopher, Kyle Moore, exposes the disproportionate burden raising the retirement age would put on Black Americans.
Recent years have seen a spike in both traditional and social media coverage of violence against black youths. The creation of the viral hashtag #BlackLivesMatter, most recently associated with the Ferguson, MO police killing of unarmed black teenager Michael Brown, captures this shift in public attention towards the long prevalent issue.
There is another segment of the black population whose lives are being undervalued in 2014. Elderly blacks' lives are not properly accounted for as changes to retirement policy are considered in Washington. Policymakers are using the fact that the "average" American's life span is increasing to justify raising the retirement age to 70, in spite of black Americans not sharing equally in this increase in life span. If black lives do indeed matter for the old as well as the young, then policymakers will have to grapple with the persistent and growing disparities in life span and sickness between the elderly black and white populations.
Black Americans Live Shorter Lives than White Americans—For Men, the Gap is Growing
Even though the "average" American is living longer at age 65, there are still significant gaps in life span between elderly black and white American men and women. In a policy note on racial disparities in longevity (life span) and mortality (risk of death), I look at the creation of a gap in expected years of life between black and white men at age 65. Starting in 1950, this gap in longevity has grown steadily to almost two years in 2010. For women the changes have been more mixed, with a gap in life span growing between 1950 and 1980, and shrinking between 1980 and 2010 to a one year difference.
Black Americans Don't Make it to Retirement Without Activity Limitations
In a follow-up note on racial disparities in morbidity (sickness), I look at black and white Americans' expected years free from activity limitations in relation to the current full retirement age. While Whites can expect to live 67 years without being somehow debilitated by sickness, just barely reaching the current full retirement age, Blacks can only expect about 61 years. This means elderly Blacks face the reality of having to either work while physically impaired, or applying for often stigmatized disability benefits.
If #BlackLivesMatter to Policymakers, Retirement Policy Should Account for Racial Disparities
Throughout the two policy briefs mentioned and a longer white paper on the subject, I discuss what researchers consider to be the major causes for these trends, and potential ways to reverse them. Differences in socioeconomic status account for over two-thirds of the gap in life span and for a significant portion of the differences in activity limitations as well. That being said, measures to address gaps in income and education level could go a long way towards increasing black American life spans and decreasing their rates of sickness.
The creation of the viral hashtag #BlackLivesMatter provides an opportunity to hold our government responsible for ensuring that black American life is adequately valued, no matter the age. Just as both traditional and social media have brought attention to young black life being cut short through direct violence, we should also direct our attention to the conditions leading to elderly black life being cut short indirectly. These conditions, as well as the realities faced by elderly black Americans, need to inform policymakers' decisions as they consider changes to retirement policy.
- Published on Thursday, November 20, 2014
This week's Worldly Philosopher, Anthony Bonen, discusses the need for and possibilities of opening the field of economics to a diversity of approaches.
Last month, the University of Massachusetts Amherst hosted an eclectic group of New Schoolers at the 11th Annual Economics Graduate Student Workshop. As in past years, the discussions were engaging and, dare I say, inspiring. Representing as we do, marginal groups in the economics discipline, the engagement of UMass-Amherst and The New School's economics departments strengthens our ability to commit to economic pluralism. Although pluralistic and interdisciplinary approaches are desperately needed, their pursuit is not (*ahem*) optimal for the academic-career-minded graduate student. It is therefore essential that we be exposed to regular reminders that we – both our department and university – are not alone.
This year, the topics ranged from field studies of collective action in community-driven development in Brazil to critiques of Marxian models of technical change and an empirical analysis of how capital controls affect the real exchange rate.
Jessica Carrick-Hagenbarth's field study in Brazil evaluated eight cases of participatory development projects that supported income and infrastructure, such as fence building, irrigation and bee raising. Through a survey and interviews with project participants, she showed that strong links to extant social movements and community institutions helped avoid elite capture and free riding. Jangho Yang's Marxian critique argued that capital and labor are qualitatively different entities. Taking this incompatibility seriously shows that structural changes in the economy are not predetermined. Such changes are, instead, evolutionary. Finally, Juan Montecino's econometric analysis of exchange rate regimes posited that capital controls could be used to maintain under- or over-valuated currencies. He demonstrated that, by controlling (to some extent) the flow of capital into and out of an economy, policymakers could effect soft – if blunt – industrial policy.
The diversity of approaches represented in this sample is, unfortunately, rare in economics. When the conference comes back to New York City next year, we hope to bring together an even broader array of students from different departments in NSSR and from divisions across The New School. In so doing we would bring the university and the economics discipline closer to the ideals espoused by one of its founders.
- Published on Thursday, July 03, 2014
This week's Worldly Philosopher, Ismael Cid-Martinez, discusses the politics and economics of unemployment insurance.
The debate surrounding unemployment insurance (UI) returns to Capitol Hill. This is not entirely surprising. Amid the good news, today's report confirmed that a large shadow continues to loom over our labor market. Examining monthly changes in each category of unemployment by duration, we observe that long-term unemployment remains stubbornly high when compared to previous recoveries (see graph).
- Published on Sunday, July 13, 2014
This week's Worldly Philosopher, Raphaele Chappe, writes on the policy implications of Thomas Piketty's analysis on inequality.
We are in a post-Piketty world. Since my last blog entry, Thomas Piketty has received nothing short of a rock star treatment upon his U.S. visit. What are the policy debates we face if Piketty is right?
As the ratio of capital to income (which Piketty terms "beta") increases, Piketty argues there is no natural mechanism that would lead r (the rate of return on capital) to adjust downwards so as to perfectly compensate the impact on the distribution, placing emphasis on policies that might reduce r.
Taxation is one way to reduce r and Piketty's proposal is a progressive world-wide tax on wealth although many agree that this may prove politically unfeasible, especially in the absence of international legal cooperation. Other tax possibilities for fighting inequality include increasing tax rates on capital gains and dividends (which have been getting favorable treatment in the tax code as compared with labor income1), or simply combating tax evasion for the wealthy (see The Price of Offshore Revisited).2 In my own research, I plan to run simulations to test the effectiveness of such tax proposals, and their impact on the wealth distribution.
We could also consider labor-focused policies designed to increase the share of national income going to labor, such as raising the minimum wage, or giving workers direct participation in management and profit through employee ownership or other means. (For the use of national income and product accounts (NIPA) as a framework for studying how inequality will be affected by fiscal and other initiatives such as raising the minimum wage, see SCEPA working paper 2013-1).
In order to advocate for the best policy solutions, we may wish to understand the drivers for high profit rates in recent decades.
- Published on Sunday, June 22, 2014
This week's Worldly Philosopher, Rishabh Kumar, models the asymmetric distribution of income and examines its effect on the growth of the U.S. economy.
In a previous post, I highlighted some demand side limitations stemming from the asymmetric distribution of income and consumption in the United States. This entry examines the effect of this asymmetry on the future of U.S. economic growth and the possibility of secular stagnation.