Ah, history. Aint it wonderful?

SIR – Your obituary of Wynne Godley (May 29th) did an injustice to his considerable intellectual achievements in macroeconomics and his courage in going against the orthodoxy that has ruled the economics profession for the past three decades. That very orthodoxy is now under attack all across the world, its otiose theoretical constructions having been exposed to the harsh light of actual economic events. Godley’s contributions to macroeconomics include his 1978 work on pricing with Kenneth Coutts and William Nordhaus, the textbook written in 1983 with Francis Cripps that inspired the “New Cambridge” group, and his 2006 book on monetary economics, written with Marc Lavoie.

His often-cited success as a macroeconomic forecaster came about precisely because he developed a systematic framework for analysing the impact of potential developments, applied first to the British economy at Cambridge and subsequently to America’s economy at the Levy Economics Institute.

Instead of taking the trouble to address these contributions, your piece settled for personal gossip, ending with a snide comment that “against a background like this, a little waywardness in the world of macroeconomics seems entirely forgivable.”  (The Economist, 11 June 2010 – on-line here)

I agree whole-heartedly, and am happy to see this in print. Wynne Godley should be an inspiration to economists of all colours, a point seemingly forgotten in the original obituary, even if everyone, including The Economist,  is calling for a different approach to our subject.

Potential career directions passed before my eyes; would he think it was silly, would I be branded a radical, or worse, would it be seen as passe?  Around that point, or half a second later, my brain kicked in.I realised what an ass I was, for having this conversation with myself. Then I launched into an explanation of what post autistic economics meant (moving away from models that are separated from history, society and context), and why it mattered.

This is the first time, having a full time job as an economist, that I have been asked about that specific journal.  Now I know what to respond, and I know not to hesitate. What makes it worse is that I have known the answer to that question for two years. I guess with age and career comes the silly idea that your opinion and ideals don’t matter. Don’t believe that. Don’t hesitate.

Why did we have a Post-Autistic journal? Because it is noticed. Because it has an underlying message. Yes, it is controversial and provocative, but that is why it always stimulates a conversation from the uninitiated about what post autistic economics is. It is perfect for students and academics who want to stand up and make people pay attention. It is not the American Economic Review, the World Bank Economic Review or a Real World Economic Review. It is Post-Autistic economics. (Mitra-Kahn 2008: 265)

If you want to see more about the post autistic economics movement, then have a look. All back issues of the journal, with contributions from nobel winners and students is available for free. The fact that they changed the name of the journal to a very uninspiring “Real World Economic Review” is a shame, but notice how the website is still post-autistic. I’m not the only hypocrite around, I just hope the change the name of the journal back to it’s proper Post Autistic Economic Review.

“I have a six-year-old son. His name is Jin-Gyu. He lives off me, yet he is quite capable of making a living. I pay for his lodging, food, education and health care. But millions of children of his age already have jobs…

…Working might do Jin-Gyu’s character a world of good. Right now he lives in an economic bubble with no sense of the value of money. He has zero appreciation of the efforts his mother and I make on his behalf, subsidizing his idle existence and cocooning him from harsh reality. He is over-protected and needs to be exposed to competition, so that he can become a more productive person. Thinking about it, the more competition he is exposed to and the sooner this is done, the better it will be for his future development. It will whip him into a mentality that is ready for hard work. I should make him quit school and get a job. Perhaps I could move to a country where child labour is still tolerated, if not legal, to give him more choice in employment.”

I can hear you say I must be mad. Myopic. Cruel. You tell me that I need to protect and nurture the child. If I drive Jin-Gyu into the labour market at the age of six, he may become a savvy shoeshine boy or even a prosperous street hawker, but he will never become a brain surgeon or a nuclear physicist – that would require at least another dozen years of my protection and investment. You argue that, even from a purely materialistic viewpoint, I would be wiser to invest in my son’s education than gloat over the money I save by not sending him to school. After all, if I were right, Oliver Twist would have been better of pick-pocketing for Fagin, rather than being rescued by the misguided Good Samaritan Mr. Brownlow.” (Chang 2008: 65-6)

Therefore the Bad Samaritan in Chang’s title. He argues that free-trade policy-makers may mean well, through an incorrect understanding of their own history, but end up hurting developing countries through the policies they so assiduously pursue. Updating, and perhaps going further than his last book on the topic, Kicking away the Ladder (or “the purple one?” as a friend of mine put it yesterday), this books makes the argument in more detail that there is no reason for economists to recommend trade-liberalisation on the ground that it has always worked. In fact it looks as if most economic growth has coincided with periods of protectionism and infant industry protection. Everyone wants to be a brain surgeon it seems.

If you can’t make your payments, you will get downgraded, and in turn you will have to pay more.  The high risk countries, in terms of their ability to pay interest, are not the usual suspects. The scary candidates are Hungary and Italy, with 9.9% and 10.2% of their government income dedicated to interest payments! Portugal, Ireland, UK and Spain have the highest deficits in Europe as a percentage of Government income, but the UK has no problem servicing its interest (it is 4.8% of government income). The others are close to the EU average (6%) with interest costing 6.9% (Por), 6.2% (Ire), 5.2% (Spa) of government income. Malta and Belgium look like worse bets with 7.8% and 7.9%…

The safe bets, who have the lowest deficits in Europe, Debt-GDP ratios below 40%, and interest payments taking up no more than 5% of government income are: Bulgaria, Denmark, Estonia, Luxembourg, Finland and Sweden. So the Baltics and Scandinavians are seemingly fine. That leaves the risky countries as Portugal, Ireland, Greece, Spain, Hungary, Italy, and T… The child in me wishes there was a European country starting with T… That aside, I think the last two are probably as risky as Greece, with the other three less cause for concern. You heard it here first ;-)   [And the data is here if you want to check it out]

How much did you not manage to cover?

The full explanation, and the data, is available here. So where does all that leave us. I don’t know, but perhaps the deficit doesn’t need to hit zero over night, so maybe you don’t need cover the whole thing immediately. But wouldn’t it be nice?

Avoiding all this, and playing with US census data on family income distribution, it can be done differently. Take the median and mean family income (turns out it’s $61,355 and $78,845), and with a bit of linear extrapolation you can work out the income that the ‘middle’ of the income distribution earn, or the 50% of the population who earn between the mean-median and those evenly distributed around it.  (In the below graph, population as a percentage of total are at the top of the bars).

So what does that all mean? Well, the middle class, in terms of the ‘middle’ 50% of families, starts at approximately $40,000 p.a. It ends somewhere slightly above $100,000, and indeed there are more people below the middle class than there are above. So if you have a household income of $40,000 you are unofficially middle class.  Approx 30% of the population live below the middle class threshold and 20ish percent are above. None of this is exact, and we don’t know what the top of the distribution looks like, but we can say that society is not exactly even. The U.S. Gini coefficient has been rising, and peaked (temporarily?) in 2006 at 47, standing at 46.6 in 2008. What the recession will bring I don’t know. The poverty threshold in the US for a four-person family is $22,050, which leaves a lot of people under the line, as indicated by this beautiful graphic. From light to dark it illustrates the Poverty rates from 5% (light pink) to >40% (darkest red).

Courtesy of Wikipedia Commons

It seems to be getting darker and redder towards the middle and the bottom… Curious that.

At one point there was some muttering in the corridors that the New School Economics Department might be able to attract this kind of funding. After all, it has been a mainstay of pluralist approaches to economics for decades – and is arguably the leading American non-mainstream school. UC Riverside, Amherst, Utah and Kansas City could likewise be considered pluralist in the US, with SOAS in the UK and the Cambridge University lecturers in Political Economy equally good places to start with such funding. Instead we’ve started with Oxford, and according to the Times:

It is the first of a dozen or so that Mr Soros hopes to set up at leading universities worldwide. Inet is talking to Cambridge as well as higher education universities in Germany, France, China, Italy and the United States, where there have been discussions under way with Princeton, Columbia and New York University.

Princeton, Columbia and NYU? While I appreciate that Dixit, Sala-i-Martin, Woodford and Rubinstein are good people,  they are hardly going to challenge the theories and work which gave us the kind of economics that can’t handle this crisis. I mean, they wrote those theories in the first place! Ok, so Krugman, Stiglitz and Easterly offer a glimmer of hope that such money would be well spent, but lets be honest, they don’t really need it. The funding starved departments who encourage students to think critically about the mainstream needs to get its act together, otherwise Mr Soros will just be adding another brick to the wall.

Some of the papers had stock-flow consistent models or purely theoretical models built around the quantity theory of money and similar devices and this led to some debate after the issue of a standard fiat money was raised. The argument was made that any fiat money needed a denominator, be it a price level, gold ingots, goods bundle or something which it could base its value on. I suggested that this was not the case, and there were several cases where paper money had been based on ability to pay taxes in that currency. The Maryland Dollar (1720-70)  and French Asignat (1790s) were both examples of this, and papers presented by Farley Grubb and Patrice Baubeau had earlier talked about them, so it seemed an obvious thing to say. The problem is that economists don’t like modelling, or thinking about,  money not based on a common denominator. “It feels wrong” was a comment made. The irony is that not only does it feel wrong, but in set theory, which all our economic modelling in this field is based on, it is wrong. Ben Fine has made the point in a paper well worth reading that money as a variable ‘M’ would be mathematically inconsistent if it values itself and stood as a measure of value for all other goods. Ironically that is exactly what fiat money does, and to avoid that in modelling we use M/x, where x is some denominator which, sadly, makes the money a relative price and not money at all. Funny thing money…