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Friday, September 27, 2013

Economists warn on Europe, plus Tyler Cowen and the end of common sense

Today, a letter in the Financial Times, a warning from economists, and Tyler Cowen's new book.
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The economists’ warning
Financial Times, September 23 2013
The European crisis continues to destroy jobs. By the end of 2013 there will be 19 million unemployed in the eurozone alone, over 7 million more than in 2008, an increase unprecedented since the end of World War II and one that will stretch on into 2014. The employment crisis strikes above all the peripheral member countries of the European Monetary Union, where an exceptional rise in bankruptcy is also under way, whereas Germany and the other central countries of the eurozone have instead witnessed growth on the job front. This asymmetry is one of the causes of Europe’s present-day political paralysis and the embarrassing succession of summit meetings that result in measures glaringly incapable of halting the processes of divergence under way. While this sluggishness of political response may appear justified in the less severe phases of the cycle and moments of respite on the financial market, it could have the most serious consequences in the long run.

As foreseen by part of the academic community, the crisis is revealing a number of contradictions in the institutions and policies of the European Monetary Union. The European authorities have taken a series of decisions that have in actual fact, contrary to announcements, helped to worsen the recession and widen the gaps between the member countries. In June 2010, when the first signs of the eurozone crisis became apparent, a letter signed by three hundred economists pointed out the inherent dangers of austerity policies, which would further depress the demand for goods and services as well as employment and incomes, thus making the payment of debts, both public and private, still more difficult. This alarm was, however, unheeded. The European authorities preferred to adopt the fanciful doctrine of “expansive austerity”, according to which budget cuts would restore the markets’ confidence in the solvency of the EU countries and thus lead to a drop in interest rates and economic recovery. As the International Monetary Fund itself recognises, we know today that the policies of austerity have actually deepened the crisis, causing a collapse of incomes in excess of the most widely-held expectations. Even the champions of “expansive austerity” now acknowledge their errors, but the damage is now largely done.

The European authorities are, however, now making a new mistake. They appear to be convinced that the peripheral member countries can solve their problems by implementing “structural reforms”, which will supposedly reduce costs and prices, boost competitiveness, and hence foster export-driven recovery and a reduction of foreign debt. While this view does highlight some real problems, the belief that the solution put forward can safeguard European unity is an illusion. The deflationary policies applied in Germany and elsewhere to build up trade surpluses have worked for years, together with other factors, to create huge imbalances in debt and credit between the eurozone countries. The correction of these imbalances would require concerted action on the part of all the member countries. Expecting the peripheral countries of Union to solve the problem unaided means requiring them to undergo a drop in wages and prices on such a scale as to cause a still more accentuated collapse of incomes and violent debt deflation with the concrete risk of causing new banking crises and crippling production in entire regions of Europe.

John Maynard Keynes opposed the Treaty of Versailles in 1919 with these far-sighted words: “If we take the view that Germany must be kept impoverished and her children starved and crippled […] If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict, will not limp.” Even though the positions are now reversed, with the peripheral countries in dire straits and Germany in a comparatively advantageous position, the current crisis presents more than one similarity with that terrible historical phase, which created the conditions for the rise of Nazism and World War II. All memory of those dreadful years appears to have been lost, however, as the German authorities and the other European governments are repeating the same mistakes as were made then. This short-sightedness is ultimately the primary reason for the waves of irrational-ism currently sweeping over Europe, from the naive championing of flexible exchange rates as a cure for all ills to the more disturbing instances of ultra-nationalistic and xenophobic propaganda.

It is essential to realise that if the European authorities continue with policies of austerity and rely on structural reforms alone to restore balance, the fate of the euro will be sealed. The experience of the single currency will come to an end with repercussions on the continued existence of the European single market. In the absence of conditions for a reform of the financial system and a monetary and fiscal policy making it possible to develop a plan to revitalise public and private investment, counter the inequalities of income and between areas, and increase employment in the peripheral countries of the Union, the political decision makers will be left with nothing other than a crucial choice of alternative ways out of the euro.

Emiliano Brancaccio and Riccardo Realfonzo (Sannio University, promoters of “the economists’ warning”), Philip Arestis (University of Cambridge), Wendy Carlin (University College of London), Giuseppe Fontana (Leeds and Sannio Universities), James Galbraith (University of Texas), Mauro Gallegati (UniversitĂ  Politecnica delle Marche), Eckhard Hein (Berlin School of Economics and Law), Alan Kirman (University of Aix-Marseille III), Jan Kregel (University of Tallin), Heinz Kurz (Graz University), Alfonso Palacio-Vera (Universidad Complutense Madrid), Dimitri Papadimitriou (Levy Economics Institute), Pascal Petit (UniversitĂ© de Paris Nord), Dani Rodrik (Institute for Advanced Study, Princeton), Willi Semmler (New School University, New York), Engelbert Stockhammer (Kingston University), Tony Thirlwall (University of Kent).

Tyler Cowan is out with a new book: Average is Over" on the impact of new technology on the economy. I have found Cowan to be widely quoted, avidly followed and not really worth listening. So I didn't read the book.

Cowan is an embarrassment to economics. The premise that disruptive technology will turn everyone into either collaborators with the robots or hapless victims of the changing economic order is nonsense. In interviews Cowen suggests that the slashing of jobs during the crisis and its aftermath was due more to sober CEOs looking down the road five, ten, fifteen years, then cutting the deadwood now.

A note from another source:
However, the more specific message of the book is rather sober: Cowen doubts that all that many people in America at least have the focus and capacity for work and concentration to turn themselves into complements for robots rather than being substituted by them. And so far there is certainly plenty of evidence that routine work in many sectors of the economy, in the middle-skilled, middle-income bracket, is being away by computerization, either directly through automation or indirectly through offshoring. About 60% of the jobs lost during the US recession have been in mid-wage occupations. Wages for the median male worker declined by about 28% between 1969 and 2009, this with no nuclear war, no asteroid striking earth, or other disaster. Nor is this disappearing middle of the income distribution just a US phenomenon: last week’s report on UK incomes from the Resolution Foundation pointed to similar evidence. Cowen writes: “The obvious and direct beneficiaries [of ever-more powerful computers] will be the humans who are adept at working with computers. … That means humans with strong math and analytic skills, humans who are comfortable working with computers because they understand their operation.” He argues that the scope of the phenomenon in the wider economy will only grow, pointing to driverless cars and taxi driver jobs, for example. Or think of those dreadful machines that are replacing supermarket cashiers.

You can perhaps begin to see why I don't listen to him very often. Is this pathetic explanation going to be the explanation for a reversion to feudalism?

Having not read the book and with no intention to do so, we offer up only the following observations:

One, the window of so-called average, mid-level prosperity, the middle class, opened in 1940 and began closing sometime in the 1980s. Previous human history, prior to the welfare state and big government, did not witness the prosperity of the common man.

Two, Productivity from the so-called technological disruption is not so much greater since the crash.

Three, Construction as in housing and physical infrastructure, teaching and health care, resists the kind of automation Cowan describes. If we ever start investing in public goods, we won't have to deal with the robots.

Four, The declining middle class we are now witnessing will take down the future middle class because of demand dynamics.

Five, The disparity in incomes is not at all the result of skill or robots, but of power, parentage and position. The 1% is not composed of technological geniuses, at least for the most part, but of the legacy rich and those who have learned to sell, manipulate or bargain. This disparity between what Veblen -- Thorsten Veblen -- called the industrial class -- the makers of things and providers of services -- and the leisure class -- the owners and sellers or resellers of things -- is what is returning after the short window of equality. The underclass is returning, not for any technological reason, but because of power arrangements, easily seen when wages don't follow productivity up, but profits and high-end non-worker incomes do.

Six, The future does not have to be made up like a science fiction novel, like Cowan does. It is right in front of us, with the collapse of the climate and the 1% in power. Technology is energy-intensive, the entrenched powers of fossil fuel industries not withstanding, absent a miracle breakthrough in energy -- which we have not seen and which is almost as unlikely as robot partners becoming the elite of the future -- and noting that the natural gas boom is not being captured for climate change mitigation -- absent a miracle, the climate collapse is another face of technological fetishism.

Seven, to any of those listeners who may be considering borrowing big to get education in one of these sure-fire upscale jobs, we remember the tech boom and some of our friends who took their computer science degrees to the help desk. We remember the finance boom and the six figure salaries right out of business school. So before you lever up to do something you don't really want to do, consider pursuing what you do what to do -- and our thanks to young environmental scientists and scholars for seeing what the future is really about -- maybe the trends will come back to you.

This was recorded prior to our hearing an On Point interview with Cowan. The following is an excerpt:


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