Wednesday, March 13, 2019

Economics for Inclusive Prosperity

There are essentially two types of economists. The first are the garden variety ones, steeped in reductionist models and quantitative analysis, and pretty much ahistorical and single-disciplinary. They create straw-man worlds in which they locate their analysis and suggest baffling or naive solutions. Then there are the old-style political economists, steeped in historical and multi-disciplinary analysis, and engaging with real-world problems and advocating practical solutions.

For me personally, the most frustrating thing about economists in recent times has been the way they have sought to engage with the problem of the alarmingly widening inequality. The mainstream economists of all shades have reduced it to an analysis of the dynamics of different models of economic growth. They have completely glossed over its blindingly obvious real-world impact on the political economy, on the political power balance and capture of the process of making the rules of the game.

This reluctance inability to engage with issues of (political) power imbalances that constrains and enfeebles institutions, lowers the efficiency of transactions and information flows, and raises entry barriers and lowers competition is perhaps the biggest problem with economics today. Constrained by their own limited toolkit and ill-equipped to engage with other disciplines and dimensions of scholarship, they have been a deep disappointment.

In that context, Economics for Inclusive Prosperity comes out as a refreshing change. Suresh Naidu, Dani Rodrik, and Gabriel Zucman outline the excellent new initiative that proposes to use the tools of economics to advocate practical policies that promote "inclusive prosperity" in contrast to the "market fundamentalism" that dominate mainstream economic thinking. The series of essays reconcile rigorous economic thinking with real-world considerations and offer practical solutions for critical challenges that we face today. The underlying principle,
A willingness to subordinate textbook economic efficiency to other values such as democratic rule and egalitarian relationships among citizens. These proposals take Polanyi’s words to heart: to work well, crucial markets (including markets for labor, land, and capital) must be embedded in non-market institutions, and the “rules of the game” must be supplied by government.
A summary,
Arindrajit Dube proposes a system of wage boards, similar to the Australian system, where either administrators or tripartite boards negotiate wages at the industry-occupation-region level, thus setting minimum wages throughout the distribution. He finds that wage inequality would significantly fall as a result. Suresh Naidu discusses the more traditional U.S. labor movement, and how mechanism design, experiments, and behavioral economics can be mobilized to ease the pervasive collective action problem facing unions... Atif Mian discusses the role that inequality, together with capital flows from oil-rich countries and Asia, has played in generating a “glut” of U.S. savings, pushing down the real interest rate and increasing systemic risk. He shows how inequality generates instability in financial markets, but also how private macro-prudential contracting is thwarted because of externalities that contractors are not paying attention to and of specific tax and regulatory structures (e.g., Basel III risk weighting). Exploring the banking sector, Admati shows how banks, uniquely among financial institutions, are overexposed to debt, making them more vulnerable to bankruptcy and a threat to stability. Both authors point to a variety of good regulatory options, with Mian emphasizing credit contract repayments that are contingent on the aggregate state of the economy, and Admati favoring capital requirements and tax reforms that make debt look less attractive...

Gabriel Zucman proposes taxing multinationals by allocating their global profits proportionally to where they make their sales... Sandra Black and Jesse Rothstein use the best modern economics to provide a contemporary restatement of an old idea: government should provide public goods and social insurance... Anton Korinek takes up the increasingly important question of how new technologies affect labor markets and the distribution of income. The direction of technological change is not exogenous, he argues, and it depends on the incentives set both by markets and by governments. In particular, innovators may overestimate the social cost of labor, investing too much in technologies that replace labor... Korinek proposes that they similarly steer technology in the direction of innovations that have desirable distributive properties. They could, for example, promote AI systems that complement and augment the cognitive abilities of workers—along with mechanisms that ensure workers retain a substantial part of the surplus generated. Korinek also discusses how inelastic, complementary factors such as land or specialized skills might be taxed in response to technological change, and how the value of monopolies granted by the patent system is intrinsically inegalitarian since it transfers income from consumers to owners of firms... Dani Rodrik shows that trade agreements ought to include clauses that prevent competition on “unjust” margins, and his “social safeguards” would give countries a claim, justified by broad social support, on trade authorities that a restriction on trade is necessary to maintain the domestic social contract... Ethan Kaplan draws on a few decades of empirical political economy to suggest policies that could drastically alter the balance of political influence in the United States.
This is a great and simple touchstone for any policy making process,
Democratic political economy—where people’s influence on policy is roughly equal and political preferences are arrived at through open, well-informed public debate—must be considered for any policy proposals in 2019. Too many policy ideas break on the rock of government capture by special interests or systematically distorted presentations in the media... 
On power imbalances that are pervasive,  
Many of the essays share the theme of how power asymmetries shape our contemporary economy. Many economists dismiss the role of power because they think it cannot be studied rigorously or belongs outside economics. As Naidu puts it in his essay, “under conditions of perfect competition and information, there is no scope for power.” But asymmetries between different groups abound: who has the upper hand in bargaining for wages and employment; who has market power and who gets to compete; who can move across borders and who is stuck at home; who can evade taxation and who cannot; who gets to set the agenda of trade agreements and who is excluded; who can vote and who is effectively disenfranchised. Some of these asymmetries are traditional political imbalances; others are power imbalances that naturally occur in the market due to informational asymmetries or barriers to entry.
Policies that counter such asymmetries make sense not only from a distributional standpoint but also for improving aggregate economic performance. The policy essays tackle these asymmetries frontally and suggest ways of rebalancing power for economic ends. Unions and wage boards can rein monopsony power in labor markets (Naidu and Dube); putting sand in the wheels of financial globalization can enhance the fiscal capacity of the state (Zucman); regulating private finance can prevent crises (Admati and Mian); giving labor a greater say in trade agreements can improve the design of trade agreements (Rodrik); and restricting campaign contributions and making it easier for poorer people to vote can increase the accountability of the political system (Kaplan).

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