Bill Mitchell — Donald Trump’s tariff hikes are not good policy

I am generally not in favour of trade protection. I grew up in a country that had very extensive protection (tariffs, import quotas) on manufacturing goods, which was justified on a number of grounds – capacity to shift to defense industries; stable employment; and more abstractly, an expression of becoming a ‘modern’ nation, leaving our agrarian roots behind. The initial move to impose high tariffs was that a young industry would take time to develop – the so-called infant industry argument, which goes back to the 1790 Report on Manufactures written by American economist Alexander Hamilton. The problem is that the infant never really grew up and the tariffs just became a cosy rent-sharing margin for unions and multinational corporations. Meanwhile consumers paid excessive prices for deficient-quality motor vehicles (among other products). It is clear that as trade opens up there are workers and regions that lose – and lose badly. The answer is not try to reinvent the past through protection. Rather, it is to use the government’s fiscal capacity to create new opportunities in these regions to ensure that workers disadvantaged by import competition can transit into new jobs with stable incomes. That option is often overlooked because modern governments have become obsessed with austerity. And, as I argue below, that obsession will in the context of Donald Trump’s tariff hikes, work against the European nations that are running ridiculously large current account surpluses....

Bill Mitchell – billy blog
Donald Trump’s tariff hikes are not good policy
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Ramanan — More Free Trade Orthodoxies

Nice post on trade, citing Joan Robinson and Nicholas Kaldor.

The Case for Concerted Action
More Free Trade Orthodoxies
V. Ramanan

Lars P. Syll — Dani Rodrik’s Ten Commandments

Longish and detained, but worth a read if you are following this debate.

Lars P. Syll’s Blog
Dani Rodrik’s Ten Commandments
Lars P. Syll | Professor, Malmo University

Zac Tate — Capitalism is losing support. It is time for a new deal.

The financial crisis has led many to question the legitimacy of capitalism. The verdict, 10 years on, has not been favourable. In an opinion poll by YouGov, three-quarters of German adults, two-thirds of Britons and over half of Americans believe that, “the poor get poorer and the rich get richer in capitalist economies”.

Their sense of injustice is not only a reaction to bank bailouts, years of austerity and corporate scandals. The challenge is fundamental. There is a growing awareness in the rich world that most of the benefits of technology and globalization flow to people who own investible capital and to the well-educated, while the costs are borne by unskilled workers, local producers and people who have little property and savings.

The problem, however, is not capitalism itself. Instead, the issue lies with policies that extended the role of the free market beyond sensible limits. These have undermined the essential bargain between labour and capital, and pushed those with few assets into precarious working lives.

Rawer forms of capitalism are unsustainable if too many people do not have capital. Restoring faith in the system requires making amends, and rethinking how capitalism creates and distributes value....

Here we go again. These are the issue that Keynes faced at the time of the Great Depression. He came forward to save capitalism from socialism by moderating it.

This article is a useful backgrounder.

In this situation, demands for fairness have centered around two ideas. Either there must be a significant redistribution of wealth so that everyone has a fair stake in the economy. Or policymakers must reintroduce protections against market forces for those without the insurance of investible capital. Thomas Piketty, in his bestselling book Capital, advances the first solution; Dani Rodrik, in Straight Talk on Trade, promotes the second.

Each of these should be considered as parts of a new deal on capitalism. But there is also a third strand that looks to the future and responds to the thirst for something new. It says that capitalism itself must be redesigned. Private enterprise and public policy need to be realigned to the creation of public value and this requires changing how we think about economics....

In 2016, Mazzucato published Rethinking Capitalism, a collection of articles from distinguished thinkers who challenge the conventional wisdom on a range of topics from fiscal policy to inequality. It concludes that many of our economic theories are not only inadequate but lead to poor policies that often have harmful impacts.

Mazzucato argues that to nurture public value, the state has a key role to play. The state uniquely has the time-horizon and the financial and organizational capacity to create and shape new markets. Embedded in the innovation process with firms and research institutes, it can also influence both the rate and direction of technological development.…

Unfortunately, no mention of MMT and the fiscal space its understanding opens up to use.

World Economic Form
Capitalism is losing support. It is time for a new deal.
Zac Tate | Economic strategist, Hottinger Group

See also

A Goldman Sachs banker [Bobby Vedra] has likened the UK under Jeremy Corbyn to “Cuba without the sunshine” in a nervy attack on the Labour leader at the Super Investor private-equity conference in Amsterdam.

The London Economic
UK would be like “Cuba without the sunshine” under Corbyn – says fat cat banker

Jack Peat

Dean Baker — Why Is It So Hard for Intellectuals to Envision Alternative Forms of Globalization

When it comes to critics of globalization with standing in the mainstream of the economics profession, few are better than Dani Rodrik. Nonetheless when it comes to laying out the indictment of the path pursued over the last three decades in a Washington Post interview, even he largely accepts the story that the basic story that “globalization” has some specific direction attached to it.

The point here is that globalization, meaning the greater integration of economies across the world, could have been designed an infinite number of ways. The way it was designed was intended to redistribute income upward, with those at the top of the income distribution using their political power to make changes that enhanced their wealth and power. The upward redistribution was not an accidental outcome of a process of economic integration: it was the purpose of this process.…

The is is short definition of neoliberal globalization — using political power to impose economic liberalism where it favors capital with free cross-border competition, one hand, and, on the other hand, to use policy, law and regulation also to favor capital by erecting and enforcing cross-border property rights that restrict competition. Classical liberalism was based on the first, laissez-faire, while neoliberalism adds government intervention to favor capital.

Dean Baker points out this was a choice. It did not have to be this way.

Beat the Press
Why Is It So Hard for Intellectuals to Envision Alternative Forms of Globalization
Dean Baker | Co-director of the Center for Economic and Policy Research in Washington, D.C

David F. Ruccio — Globalization—how did they get it so wrong?

There is perhaps no more cherished an idea within mainstream economics than that everyone benefits from free trade and, more generally, globalization. They represent the solution to the problem of scarcity for the world as a whole, much as free markets are celebrated as the best way of allocating scarce resources within nations. And any exceptions to free markets, whether national or international, need to be criticized and opposed at every turn.

That celebration of capitalist globalization, as Nikil Saval explains, has been the common sense that mainstream economists, both liberal and conservative, have adhered to and disseminated, in their research, teaching, and policy advice, for many decades.

Today, of course, that common sense has been challenged—during the Second Great Depression, in the Brexit vote, during the course of the electoral campaigns of Bernie Sanders and Donald Trump—and economic elites, establishment politicians, and mainstream economists have been quick to issue dire warnings about the perils of disrupting the forces of globalization.

I have my own criticisms of Saval’s discussion of the rise and fall of the idea of globalization, especially his complete overlooking of the long tradition of globalization critics, especially on the Left, who have emphasized the dirty, violent, unequalizing underside of colonialism, neocolonialism, and imperialism.

However, as a survey of the role of globalization within mainstream economics, Saval’s essay is well worth a careful read....

Occasional Links & Commentary
Globalization—how did they get it so wrong?
David F. Ruccio | Professor of Economics, University of Notre Dame

Peter Turchin — What Economics Models Really Say

A Review of Economics Rules: The Rights and Wrongs of the Dismal Science by Dani Rodrik (Norton, 2015)

Evonomics
What Economics Models Really Say

Peter Turchin | professor of ecology and evolutionary biology at the University of Connecticut

Lars P. Syll — Dani Rodrik a heterodox economist? You must be joking!

Lars writes:

Economics students today are complaining more and more about the way economics is taught. The lack of fundamantal diversity — not just path-dependent elaborations of the mainstream canon — and narrowing of the curriculum, dissatisfy econ students all over the world. The frustrating lack of real world relevance has led many of them to demand the discipline to start develop a more open and pluralistic theoretical and methodological attitude.
Dani Rodrik has little understanding for these views, finding it hard to ‘understand these complaints in the light of the patent multiplicity of models within economics.’ Rodrik shares the view of his colleauges Paul Krugman, Greg Mankiw and Simon Wren-Lewis — all of whom he approvingly cites in his book Economics Rules — that there is nothing basically wrong with ‘standard theory’ and ‘economics textbooks.’ As long as policy makers and economists stick to ‘standard economic analysis’ everything is fine. Economics is just a method that makes us ‘think straight’ and ‘reach correct answers.’

There are several major problems with conventional economics.

The first is that results are gained from very narrow scope conditions. The scope of the model is limited to areas where there is regularity accounted for by the model. Where irregularities occur, which is most most needs to be explained, is put outside the scope of the model and dismissed as unforeseeable exogenous shocks. That's just a cop out.

A second problem is assuming static conditions when conditions are dynamic and change significantly over time. Societies are historical phenomena and when conditions change significantly, then the time frame needs to be set to zero to capture the new conditions. For example, in finance and economics, the global monetary system changed when Bretton Woods was adopted and again when Nixon ended the convertibility of the dollar into gold at a fixed rate for international settlement. Reinhart and Rogoff made this error in their historical study of debt that became the foundation for the "expansionary fiscal austerity" that was supposed to lead to recover after the Global Financial Crisis. NOT!

The third problem is even more serious in that they it undercuts the whole enterprise of pseudo-science that tends to affect social science including economics, especially when the natural sciences are taken as a standard to be emulated in social science. The subject matter is deeply different. The operation of the laws of nature in natural science is necessary logically, whereas human behavior is contingent and regularity is based on habit structure, custom, cultural tradition and institutional arrangements, none of which are necessary and change historically. This making this mistake by conflating natural and social science substitutes ideology for science and constitutes pseudoscience.

Philosopher of social science Daniel Little explains this in his post, Ideologies, policies, and social complexity, at  his blog Understanding Society.

According to the premises of this approach, we are not well served by imagining that there are simple, largescale forces that drive the outcomes in history. Examples of efforts at overly simplified explanations like these include:

• Onerous conditions of the Treaty of Versailles caused the collapse of the Weimar Republic. 
• The Chinese Revolution succeeded because of post-Qing exploitation of the peasants.
• The Industrial Revolution occurred in England because of the vitality of English science. 

Instead, each of these large outcomes is the result of a large number of underlying processes, motivations, social movements, and contingencies that defy simple summary. To understand the Mediterranean world over the sweep of time, we need the detailed and granular research of a Fernand Braudel rather than the simplified ideas of Johann Heinrich von Thunen in the economic geography of central place theory.

In situations of this degree of underlying complexity, it is pointless to ask for a simple answer to the question, "what caused outcome X?" So the Great Depression wasn't the outcome of capital's search for profits; it was instead the complex product of interacting forms of private business activity, financial institutions, government action, legislation, war, and multiple other forces that conjoined to create a massive and persistent economic depression.

This approach has solid intellectual and ontological foundations. This is pretty much how the social world works. But this ontological vision about the nature of the social world is hard to reconcile with the large intellectual frameworks on the left and on the right that are used to diagnose our times and sometimes to prescribe solutions to the problems identified.

An ideologue is a thinker who seeks to subsume the sweep of history or current events under an overarching narrative with simple explanatory premises and interpretive schemes. The ideologue wants to portray history as the unfolding of a simple set of forces or drivers — whether markets, classes, divine purposes, or philosophies. And the ideologue is eager to force the facts into the terms of the narrative, and to erase inconvenient facts that appear to conflict with the narrative....

This approach only works empirically restrictions are introduced, e.g., by choosing scope conditions are so limited that that the assumptions are confirmed in a narrow range, or by making ad hoc adjustments after the fact, or by selecting data to fit the model, or by handwaving.

Lars P. Syll’s Blog

Dani Rodrik a heterodox economist? You must be joking!

Lars P. Syll | Professor, Malmo University

James Kwak — Ideas, Interests, and the Challenge for Progressives

This is a follow-up on a debate begun by Mike Konczal and joined by Dani Rodrik.

It's an important debate to be having about political economy but I don't think it can be resolved as a political matter in the way it is framed without bringing in Post Keynesian economics, MMT, and Institutionalism, from the side of economics, and sociology and political science as well. Moreover, it is basically a philosophical debate that hangs on differences in world views and ideologies. 

The fundamental question is what living a good life in a good society entails, individually and socially, as well as in terms of social, political and economic liberalism.

The Right has Friedrich Hayek's The Road to Serfdom and Milton Friedman's Capitalism and Freedom. The Left has John Kenneth Galbraith's The Good Society and Economics and the Public Purpose. All are dated and need to be revised for current conditions.

The coalition on right that was dominated by the GOP establishment has collapsed with the party breading between populist and establishment wings, and faces an uncertain future after this election. The dominance of the New Democrat establishment was seriously challenged by the Sanders "insurgency" and the dynamics of US demographics suggest that to Democrats that unless they change they face the same establishment- populist schism in which the Republicans are now enmeshed.

James Kwak certainly has it right that the challenge is to come up with a long term approach rather than a short term fix to regain the white working class that began to abandon the Democratic Party. Nixon's Southern Strategy broke the lock on the solid South that the Democrats had had after Reconstruction and flipped it to the GOP, while civil rights sealed the deal. Working class Democrats then defected wholesale to the GOP as "Reagan Democrats." Now the male white working class seems to be owned by right-wing populism.

Going forward, it appears that the US is divided between white males on the right and white females and non-whites on the left. This divide has economic roots but it is not fundamentally economic. Therefore, an economic approach can only be a part of the overall approach that progressives take politically.

The Baseline Scenario

Ideas, Interests, and the Challenge for Progressives

James Kwak

ht Mark Thoma at Economist's View

Paola Subacchi — Free Trade in Chains

This is significant. The research director of Chatham House is agreeing with Joseph Stiglitz, Stephen Roach, and Dani Rodrik that political liberalism supersedes economic liberalism. This is a several of neoliberal doctrine.

Britain's Chatham House is one of the premier Western policy think tanks, comparable to Brookings Institution in the US, for example. As such it is the center for generation of Western policy formulation and the propaganda to promote it.

Project Syndicate is a major organ through which Western propaganda is disseminated publicly to forge group think.

This may sound like conspiracy theory. Elites will forcefully deny that this is either the intention or even happening. I agree that for most part it is not intentional, although there is some of that, too. (You know who your are.).

Michael Polanyi, Karl's equally brilliant brother, pointed out the role of tacit knowledge as a shaper of thought. Tacit knowledge is not random thoughts stored in the memory bank, but rather it is highly structured and manifests as world views and ideologies. The Western elite are trapped in liberalism as both a world view and a ruling ideology, although they may disagree about some of the details. They are, however, not very cognizant of the paradoxes of liberalism that arise within it.

Economic liberalism — "free markets, free trade, and free capital flows" — creates issues not only economically but also politically and socially. When group think draws on tacit knowledge and applies ideology reflexively, then the paradoxes of liberalism that emerge in societies generate dysfunction and created "surprise."

Addressing increasing dysfunction rising as "populism" as a reaction to liberal establishment group think is what this article is about. But the elite has not figured out the dynamics of the process just described and are trapped in a quagmire of their own creation because they cannot see the forest for the trees.

So I am happy to see Chatham House waking up somewhat, but the world would be better off they just disband.

Project Syndicate
Free Trade in Chains

Paola Subacchi | Research Director of International Economics at Chatham House and Professor of Economics at the University of Bologna

Dani Rodrik — It’s a war of ideas, not of interests

Note that what is required here is not one more well-designed program. It is a narrative, a marketing device – a bumper sticker.

Must-read. Short.

Dani Rodrik is correct but changing minds, let alone a cultural mindset, is easier said than done. But without doing it, progressivism is wandering in a swamp of identity issues.

It's about building a vision and articulating it persuasively through a narrative that Joe and Jane Sixpack can relate to and identify themselves and their cohort with.

Here again I come back to the enduring question, "What does it mean to live a good life as an individual in a good society."

Dani Rodrik's weblog

It’s a war of ideas, not of interests
Dani Rodrik

V. Ramanan — The World Needs A Kaldorian Response

Before the crisis, the economics profession believed in two orthodoxies:

1. crude version of Monetarism, which treats the stock of money as exogenous and also claims that fiscal policy is impotent.
2. free trade.

While policy response following the 2008 crisis have made economists realize that the first orthodoxy is wrong, they are yet to realize the orthodoxy of the second. As Joan Robinson said in her 1973 article, The Need For A Reconsideration Of The Theory Of International Trade, “there is no branch of economics in which there is a wider gap between orthodox doctrine and actual problems than in the theory of international trade”. The recent consensus of the economics profession on the debate about the UK EU referendum highlights it. Instead of the invisible hand, we need a visible hand, i.e., a coordination at the international level. The leftist response as highlighted by Dani Rodrik are welcome but still leave the problem open. So one needs both this and a world-wide fiscal expansion with balance-of-payments targets.

The Case for Concerted Action
The World Needs A Kaldorian Response
V. Ramanan

Jason Smith — Economists should start calling them approximations

More on foundations and economic modeling.

Information Transfer Economics
Economists should start calling them approximations
Jason Smith

Noah Smith — Book Review: "Economics Rules"

Noah Smith reviews Dani Rodrik's new book. Useful.

Noahpinion
Book Review: "Economics Rules"
Noah Smith | Assistant Professor of Finance, Stony Brook University

Brad DeLong — Steve Pearstein: The Value and Limits of Economic Models

On Dani Rodrik's new book, Economic Rules.

WCEG — The Equitablog
Must-Read: Steve Pearstein: The Value and Limits of Economic Models
Brad DeLong

Jason Smith — Thought experiments in alternate universes

In a sense, Rodrik is saying economic models are thought experiments in alternate universes. Those alternate universes are created from the different economic assumptions. The picture above has a collection of universes with positive, negative and zero cosmological constant; however, the assumptions in economic models of perfect competition or satiation of preferences (or transitive preferences themselves) create e.g. different Arrow-Debreu universes with different properties.

What it comes down to is that if you want to use your alternate universe model to address policy in our universe, you're going to have to:

1. Have fundamental theory that tells you when the assumptions are valid
2. Empirically determine the assumptions are valid
3. Prove that your model is independent of your assumptions
4. Some combination of the above three

Information Transfer Economics
Thought experiments in alternate universes

Jason Smith

Picketty et al — Austerity Has Failed: An Open Letter From Thomas Piketty to Angela Merkel

The never-ending austerity that Europe is force-feeding the Greek people is simply not working. Now Greece has loudly said no more. 

As most of the world knew it would, the financial demands made by Europe have crushed the Greek economy….

The Nation
Austerity Has Failed: An Open Letter From Thomas Piketty to Angela Merkel
Heiner Flassbeck, former State Secretary in the German Federal Ministry of Finance; Thomas Piketty, Professor of Economics at the Paris School of Economics; Jeffrey D. Sachs, Professor of Sustainable Development, Professor of Health Policy and Management, and Director of the Earth Institute at Columbia University; Dani Rodrik, Ford Foundation Professor of International Political Economy, Harvard Kennedy School, and Simon Wren-Lewis, Professor of Economic Policy, Blavatnik School of Government, University of Oxford

Dani Rodrick — Greek elections, democracy, political trilemma, and all that

The problem is the chain of events that could be unleashed if Germany and others mismanage the consequences of a Syriza victory. 

In particular, Angela Merkel may well believe that the rest of the euro zone is now sufficiently insulated from the consequences of a Greex exit from the euro. And she may be right. But she may be wrong too. A Grexit would set a precedent, and markets may sense Spain's future in the euro is no longer assured. Much will depend on the way the game will be played by all sides and on market psychology. Which means there is huge uncertainty about the outcome.

Dani Rodrick's Weblog
Greek elections, democracy, political trilemma, and all that

Dani Rodrick | Albert O. Hirschman Professor in the School of Social Science at the Institute for Advanced Study.

Felix Salmon — Who’s to blame for the emerging-market crisis?

Paul Krugman and Dani Rodrik are out with dueling op-eds on the subject of the latest bout of financial-market craziness in places like Argentina and Turkey. Both men have been following emerging-market crises for decades; both indeed, are world-class experts on such episodes. What’s more, both economists have a broadly left-liberal worldview: there’s no deep ideological or philosophical rift here. And yet the two seem diametrically opposed.

Reuters — Econoblog
Who’s to blame for the emerging-market crisis?
Felix Salmon

Who's to blame. First, the institutional structure imposed under neoliberalism that rests on the myth assumption of "free markets, free trade, and free capital flows." Secondly, the requirement that the economy and therefore, the financial system as well, be run  by capital for capital preservation and accumulation, the myth assumption being that capital formation is the sine qua non of growth, which includes the myth assumption that "growth" is identical with greater prosperity. 

Of course, this is only part of the mythology which is ultimately to blame for recurrent social, political and economic problems. But it is an important part of it. There is no fix in an ill-designed or broken system without overhauling the system, or at least reforming it in a major way.

Neoliberalism is not only antithetical to democracy but also incompatible with distributed prosperity.

 

Ramanan on trade — Dani Rodrik and Joan Robinson

Perhaps it is the main aim of this blog to argue how the sacred tenet of free trade is devastating to the world as a whole and why a sustainable resolution of a crisis can only be achieved by new international agreements on how to trade with one another combined with coordinated demand management policies with an expansionary bias.

The Case for Concerted Action
“Free Trade Doctrine, In Practice, Is A More Subtle Form Of Mercantilism”
Ramanan

Until political leaders, economists and policymakers start treating the global economy as a closed system and also a complex adaptive system that functions as key in the ecological life-support system of humanity, the current insanity called neoliberalism will prevail, resulting in incalculable human misery, social turmoil, political repression, maldistribution, waste of valuable resources, and damaging externalities, including military adventurism and war.