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.

Reflections on a Pluralistic Economics Workshop

Tony BonenLast 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 to 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.

Read more: Reflections on a Pluralistic Economics Workshop

VIDEO: Social Cost of Carbon

This week's Worldly Philosopher, Anthony Bonen, discusses how economic modeling can help policy makers seeking to mitigate climate change by translating carbon emissions into social and economic costs.

The Political Economy of Unemployment Insurance

Ismael CidThis 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).

Read more: The Political Economy of Unemployment Insurance

Policy Debates In A Post-Piketty World

Raphaele ChappeThis 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.

Read more: Policy Debates In A Post-Piketty World

The Long-Run Consequences of Income Distribution

Rishabh KumarThis 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.

Read more: The Long-Run Consequences of Income Distribution

Must the Rich Grow Richer? Long-Term Trends in the Capital Share in Income

Gregor This week's Worldly Philosopher, Gregor Semieniuk, writes on the theoretical assumptions underlying Thomas Piketty's forecast of a growing share of income going to the rich.

The future share of total income that accrues as return on capital need not keep rising. The New School's Lance Taylor argues that the capital share trajectory rather depends on the assumptions in your model of growth and distribution. Taylor critiques Thomas Piketty who asserts in his celebrated book that the share of national income going to rich capital owners should rise in the 21st century, and may only be reduced by cataclysmic events such as wars or revolutions (Piketty 2014, p. 233). This post summarizes Taylor's argument.

Read more: Must the Rich Grow Richer? Long-Term Trends in the Capital Share in Income

A Debate on Mainstream Economics: A Gadget is a Dangerous Thing

Anthony Bonenby Worldly Philosopher Anthony Bonen

Recently, Paul Krugman (here, here and here) has taken a keen interest in a heterodox economist’s critique of mainstream economics (and not for the first time). In reponse, Tom Palley has issued solid rejoinders to Krugman and Simon Wren-Lewis. However, I fear the brilliant and (rightfully) esteemed Nobel laureate has missed the key point of heterodox’s frustration with marginal productivity theory. So, I follow his call to “continue to debate how we do economics.”

A key issue in distribution debates is the fair remuneration of capital and labor. Marginal productivity theory says, very basically, that the real wage and the (real) rate of profit are equal to the marginal increase in production added by the last unit of labor and capital, respectively.

Many economists, Krugman points out, do not believe this to be a cardinal truth of capitalist economies. Rather, he says [my emphasis]: 

"there are plenty of economists who are willing to use marginal-product models (as gadgets, not as fundamental truth) who don’t at all accept the sanctity of the market distribution of income."

That word – gadget – really stunned me. It sounds benign, innocuous even. Yet marginal product models are no mere “gadget”. They are the entrée for modern macroeconomics.

Read more: A Debate on Mainstream Economics: A Gadget is a Dangerous Thing

The Digital Revolution's Energy Costs

Gregor SemieniukThis week's Worldly Philosopher, Gregor Semieniuk, writes on the trade-off between increased computing power and climate change.

Many commentators believe that exponential increases in computing power will lead to tremendous improvements in human welfare - at almost no cost per additional unit, or "marginal" cost.

Erik Brynjolfsson and Andrew McAffee (BM hereafter) express this view in their new book, "The Second Machine Age," and give examples of new technologies that are only possible thanks to recent and ongoing advances in information technology: self-driving cars, real-time translation software, and smart robots that can be taught new movement routines by guiding their arms, rather than programming a new software.

While these innovations are truly breathtaking in their technological sophistication, the authors are wrong to assert that these products and services come at "almost zero marginal cost of reproduction" (BM p. 62). Information technology (IT) - and the "information economy" it fuels - is not energy-neutral. Rather, its energy needs are quite costly, coming from fossil fuels that emit greenhouse gases and continue to supply 80% of the world's energy.

Technologies' use of energy is also costly in its contribution to climate change, which is now widely agreed to have adverse consequences for human welfare (IPCC 2014 and Tony Bonen's blog; Duncan Foley (2013) examines IT's growth trajectory from a classical political economy perspective). Economists and policy makers need to re-examine the claim that life-improving digital technologies are cost-free after their initial development costs.

Read more: The Digital Revolution's Energy Costs

The Social Cost of Carbon as a Lower Bound for Policy

This week's Worldly Philosopher, Anthony Bonen, writes on economists' contribution to efforts to mitigate against climate change.

tony bonen image 4On Sunday, the IPCC Working Group III, Mitigation of Climate Change, released its latest report, and the news isn’t good. The report says (to no one’s surprise) that governments around the world have failed to act against climate change. The result has been rapid increases in greenhouse gas (GHG) atmospheric concentrations and rising temperatures around the world (see figure). The silver lining (silver sliver?) is that climate change mitigation is eminently affordable if – a big if – governments start to invest now.

It is time for economists to step up and help politicians take this supremely reasonable and moral action to invest. This can be done by improving economic models of climate change and, even more importantly, clearly communicating the limitations of our models.

The Financial Times reports that the costs of “an ambitious fight against climate change will reduce annualised economic growth by somewhere between 0.04 and 0.14 percentage points” versus a scenario of zero mitigation efforts. This compares to a welfare loss of between 0.2% and 2.0% of global GDP if average global temperatures rise by a further 2°C (IPCC, WGII SPM, p. 19). A finance degree is not necessary to decide between these two investment choices.

Yet, these two headline costs, -0.14% (maximum loss if mitigation) versus -0.2% (mininimum loss if no effort), are generated from extremely different data, which leaves the latter open to charges of, at best, uncertainty and, at worst, fantasy. The cost of investing in renewable energy, carbon capture and green transportation are based on real, observable markets and technologies. But the cost of unmitigated climate change? This comes from integrated assessment models’ estimates of the social cost of carbon (SCC).

The SCC metric is the net present value cost of an additional ton of CO2 emissions (tCO2). That is, how much welfare society stands to lose from a marginal increase in carbon emissions, translated into current U.S. dollars. Undoubtedly, there is an enormous degree of uncertainty regarding the nonlinear and variegated impacts of temperature increases on the environment, economy and society.

Although we don’t like to admit it, monetizing the cost of climate change involves a lot of guesswork. We already know that unabated climate change will bring devastating consequences for many peoples and communities around the world. So, are economists adding anything by putting a price tag on these impacts? Put another way: is it worthwhile for economists to compute the social cost of carbon?

Read more: The Social Cost of Carbon as a Lower Bound for Policy

Is the 'Better Off Budget' an End to Austerity as We Know It?

Katherine MoosThis week's Worldly Philosopher, Katherine Moos, writes on austerity and the social safety net.

In the wake of the financial crisis, we have witnessed a number of policy measures that have increased the financial fragility of workers by cutting benefits and social safety net programs. In the United States, there have been repeated calls to cut Social Security – by raising the retirement age or by adjusting benefits to the Chained CPI – legalese for cuts in entitlements that would have disastrous effects, especially for the poor.

However, at the most unlikely time, there have also been calls to expand Social Security benefits. Last year, Senator Harkin (D-IA) introduced legislation that would link benefits to the consumer price index for elderly consumers, CPI-E, that factors in additional costs faced by retirees such as higher healthcare expenses. The bill garnered the support of Senators Brown (D-OH), Begich (D-AK), Schaltz (D-HI), and Warren (D-MA). Congress Member Sanchez introduced the House version of the bill in September, which has since obtained 55 co-sponsors. While neither version has moved in Congress, this legislation seems to have emboldened other members to push for progressive reforms.

More recently, the Congressional Progressive Caucus (CPC) introduced its "Better Off Budget" for fiscal year 2015. It includes a number of fiscal policy measures that signal support for expanding Social Security. CPC Co-Chairs, Representatives Raúl M. Grijalva (D-AZ) and Keith Ellison (D-MN), issued a statement that the Better of Budget "reverses the damage [that the] austerity agenda has inflicted on hard-working families." The budget would create 8.8 million jobs, repeal the sequestration cuts, change the tax code to create tax relief for low and middle-income working families, and expand retirement and health benefits. The budget is also estimated to reduce the federal deficit by more than $4 trillion in 10 years.

Read more: Is the 'Better Off Budget' an End to Austerity as We Know It?