Piketty Responds To Financial Times Criticisms

Piketty has taken the time to produce a 10 page response to the FT article which raised methodological questions about his research.  The FT time critique is focused on the data in Chapter 10 of his book.  Piketty connects his response to the Appendix in his book which provides details on the choices that he made on data sources.  He also found fault with the data choices made by the FT that were used to raise questions about the growth in wealth inequality in Britain and the US. 

Piketty has provided an excellent response to the FT critique which raised questions about his objectivity as well as his calculations.  His calculations are well defended, and it would appear that the FT is guilty of the sins that it attributes to Piketty.  In particular, it changed the data sources that it used to develop its description of the growth of wealth inequality in Britain so that it countered Piketty's conclusions.  Piketty also cited research on wealth inequality in the US that was not available when he published his book.  The data reinforce the conclusions that he made in his book.

A Review Of How Putting A Price On Carbon Has Been Working In Some States and Nations

Economists like the system of putting a price on carbon in order to reduce carbon emissions.  The easiest method is to put a tax on carbon emissions, but it has been more popular to use the cap and trade system.  This article describes how the cap and trade system is working California and in some Northeastern states.  California spent a lot of time studying the problems that have emerged in the European system before implementing its plan.  California even funds projects in other states.  For example, a dairy farmer in Wisconsin is using funds from California to convert the methane from cow manure into electric energy.  Even though the farmer does not believe that human behavior is the cause of global warming, he was eager to use the funds from California to provide enough electricity to service over a thousand homes. 

This article provides a good primer on the pros and cons of market based approaches to reduce greenhouse gas emissions. 

Why Capitalism Should Not Eat Its Children

Mark Carney, the Governor of the Bank of England, did not mince words in a speech that he delivered at a conference on Inclusive Capitalism in London's version of Wall Street.  It is unlikely that stronger words have been spoken to audience of bankers who came to enjoy the great food and drinks that are traditionally served at these occasions.  I have posted some of the quotes from his speech.  They do not require much comment.

"Unchecked market fundamentalism can devour the social capital essential for the long-term dynamism of capitalism itself."

"Market economies have become market societies."

"Financial capitalism is not an end in itself, but a means to promote private investment, innovation, growth and prosperity"

"Global convergence has occurred along side internal divergence."

The last comment probably refers to the performance of protest parties in the recent European elections.  Globalization has reduced the income gap between rich and poor countries, but it has widened the income gap in rich countries.  That has provided fuel for the protest parties that are sensitive to the concerns that many have in rich countries about the loss of national sovereignty in an increasingly global economy.  Globalization that does not work for them is a threat to global capitalism.

Carney's speech may have made many in the audience uncomfortable.  They probably did not expect the Governor of the BOE to sound like a member of the "Occupy Wall Street" crowd.  Perhaps some of them will reflect on his message.  Its more likely, however, that they will go back to their offices and check on their progress for meeting their financial goals for the current quarter.  They have done their duty by listening to a sermon from a high priest of capitalism who asked them to repent for their sins.  Now its time to go back to work.

The Next Waves Of Automation And The Implications For Society

The global economy is being transformed by technology and the use of those technologies by firms to rationalize the process by which goods and services are produced and delivered to consumers.  Most economists no little about the way firms really work or the transformations that are underway.  Michael Spence is a Nobel economist who is an exception to that rule. This article provides an overview of the transformations that are taking place.  Technology has enabled firms to relocate production to take advantage of low cost labor.  Technology was also used to create supply chains that move intermediate products, from a variety of locations, to the source of final assembly.  That has allowed developing countries to grow by providing the unskilled labor for manufacturing the intermediate products, and the final assembly.  Consequently, developing countries have also become a source for final demand.  Technology is now making it possible to locate production wherever the demand exists.  Moreover, less labor will required to satisfy the demand.  Retail systems will also become more tightly coupled with productions systems.

I spent several years in the computer industry.  Part of that time was devoted to rationalizing the production system.  The production system depended upon forecasts from the marketing organizations.  Since forecasts are an imperfect indication of final demand, the production organization would make its own forecasts for final demand.  That usually led to inventory build up because it was less painful for production to carry excessive inventory than to it was to run short of the products that were sold by the sales force.  The only solution for this problem was to become less dependent upon forecasts.  That required us to cut the lead time required by production to produce the products that were actually sold. That proved to be very difficult. However, it is a mistake to believe that manufacturing is based upon large numbers of unskilled workers.  There are lots of highly skilled workers doing production engineering,  production management, inventory management, plant management etc. etc.  When manufacturing plants relocate, a lot of high skilled jobs are also relocated.

A good example of what is happening today in too look at the publishing industry.  The traditional system requires publishers to forecast demand, and sell their printed books to retailers for resale.  The publishers and the retailers have to bear the cost of inventory,  and the cost of lost sales when the right products are not in stock.  Today it is possible for a customer to go to the Amazon web site and order an electronic copy of the book.  Of course, Amazon also sells print copies of the books but selling electronic copies of books eliminates inventory costs, and no sales are lost because a book is out of stock. Customers get faster deliver, and they pay a lower price for the product.  In the process a lot of jobs are eliminated or transformed by the coupling of demand with production, and by electronic  delivery to any location where demand exists.  Spence argues that new technologies are changing the way in which products are manufactured.  It will be easier to produce the finished product wherever the demand exists and it will require less unskilled labor to do so.  Much of the skilled labor will also be provided by new technologies.  The rationalization of the process will increase productivity and cut the demand for many forms of labor.  New skills will be required to make the system work, but the net result is a lower demand for labor.  Small businesses, as well as large multinationals, are moving in the same direction.

Industry Concentration In The US Is On The Rise

One of the axioms in economics is that competition is the force which causes firms to provide value to its customers.  Of course, competition is not good for profits and it constrains firm growth.  This article describes the growth in industry concentration in the US.  It is especially high in the technology industries for several reasons.  They tend to purchase start ups that might become rivals and they are protected by intellectual property rights.  The result is less value for consumers and a constraint on innovation.   Most industries in the US are oligopolistic.  A small number of firms provide most of the output, and that has been true for many years.  As the economy becomes more centered around technology, however, the degree of industry concentration has increased.  Moreover, other industries, such as healthcare services, are becoming more concentrated.  Hospitals are merging, and they are buying up medical practices that had been run by physicians. 

Governments, of course can restrain the growth in industry concentration.  It would appear, however, that this has not been a priority.  AT&T is attempting to acquire Direct TV, Comcast has acquired Time Warner, and their competitors are looking for acquisitions.  Perhaps there is a relationship between the increase in concentration and the value that US consumers get from their Internet providers.  Consumers in the US pay higher prices per unit of bandwidth than consumers in many other countries.  We deregulated the telecommunication industry in order to encourage more competition.  We now have a less regulated industry and increasing levels of concentration.

Why GDP Per Capita Growth Does Not Improve Well Being In Rich Countries

Ed Dolan raises an old debate and he provides his answer in this article.  The old debate centers around the relationship between GDP growth and well being.  GDP is a crude measure of what is produced in an economy.  Therefore, it makes sense to ask whether growth in per capita GDP correlates with well being.  Dolan compares the growth in per capita GDP with growth in the Social Progress Index (SPI) which is used as a measure of well being.  Growth in per capita GDP is strongly correlated with the growth in SPI in poor nations.  The correlation weakens, however, when per capita GDP reaches $25,000.  The US has a very high per capita GDP score but it ranks very low on the SPI curve.  Dolan concludes that the US should focus on improving the output of the economy instead of focusing on growth in per capita GDP.  He makes some suggestions about how that might be accomplished.  We don't need an economy with zero growth.  An economy with a focus on growth in SPI can be achieved without harm to the environment.  That does not imply that we should do nothing to stimulate growth in a recession.  It is important to keep the economy on its long term trend line.

Most people would agree with Dolan that GDP is poor measure of social well being, and that governments should pay more attention to well being.  Some nations do that better than the US and we could learn from them if we chose to do so.  That, of course, is what politics is all about.  It would also make more sense to focus on median PPI per capita.  The median is less sensitive to extremes than the average as a measure of central tendency. 

Paul Krugman On The EU Reaction To The European Election

Paul Krugman was disturbed by one of the explanations offered for the rise of protest parties in much of Europe.  Krugman believes that it was a mistake to move to a common currency.  One of the EU leaders disagrees. He argues that the current problem in Europe is due to a lack of will.  The troubled states failed to implement austerity measures. The protest vote has nothing to do with the euro. Krugman has his explanation for how the euro led to a misallocation of funds to the southern states which used the money to finance a real estate boom.  The common currency made it impossible for currency devaluation to work its magic.  The imposition of austerity measures on the troubled states were also counterproductive according to Krugman.  He fails to see how other factors may have contributed to the rise of protest parties in Europe.

The UKIP Party in the UK won 28% of the vote in the election.  The UK has its own currency so we need another explanation for the protest vote in the UK.  Krugman might argue that the Cameron government chose to implement austerity measures when it could have used fiscal policies to moderate the recession.  In other words, the protests in the UK are in response to a bad policy decision.  That is wishful thinking, and it is not supported by the facts.  Eurokepticism is one of the platforms of the UKIP Party.  It is a response to a sense that England should not sacrifice its sovereignty.  This is also related to the rise in immigration in the UK.  Some feel that immigrants are negatively affecting the job market and that they are responsible for many social and cultural problems in the UK.  The leader of the UKIP Party stated that the election signaled a rejection by the people of an effort to turn decision making over to technocrats in Brussels.  These themes are consistent with those that boosted votes for protest parties in much of Europe.  The UK may have exported the protest movements to the rest of Europe.

The consequences of this trend in Europe are serious, and they are only partially explained by slow economic growth.  The protest parties in Europe also have a lot in common with the Tea Party in the US.  It opposes the technocrats in Washington; it is strongly nationalistic, and it has a strong anti-immigration bias.  Since the US has a two party system the Tea Party was forced to find a home in the Republican Party.  It has caused the Republican Party to move strongly to the right.  In the UK it will force the Tory Party further to the right, and it may replace the Liberal Democratic Party in a coalition government with the Tories.  This form of populism is always with us.  The inability of governments to solve many social and economic problems has enabled entrepreneurial leaders to build political organizations to tap latent populism to their advantage.  Unfortunately, the Socialist Party in France; the Labour Party in the UK, and the Democratic Party in the US, have abandoned the latent populism in their countries to the far right which has harvested it to their advantage.