USA 2017 Q1 Sectoral Balances Update

Sectoral analysis provides a key framework for understanding the macroeconomy. GDP is a flow representing the value of all goods and services produced in a specific time period. This flow can be tracked in two different ways, on the spending side and on the income side. On the spending side the GDP components are: consumption (C), investment (I), government spending (G), and the difference between exports (X) and imports (M)–or just net exports (X-M). On the other hand, the income that makes up GDP, is consumption (C), savings (S), and taxation (T). These two ways of measuring GDP are two sides of the same coin, a product of double-entry accounting, and must always be equal.

Thus sectoral analysis comes from equating and simplifying the spending and income views on GDP. You can follow the math on the wikipedia page here, but after equating these two different views and simplifying we end up with the equation (S – I) = (G – T) + (X – M). These are our three sectors of analysis. The private sector surplus/deficit is defined by the difference between savings and investment (S – I). The government surplus/deficit is its spending minus the amount it takes back in taxes (G – T). And finally, the foreign sector surplus/deficit is the amount of exports by the country less the amount it imports (X-M). We can see this identity visually in the following graph. You can hover your mouse over specific bars to see specific values and dates. 

The graph setup this way shows how government fiscal deficits (orange bars) make their way towards the rest of the world or into the private sector. Why have we had a persistent current account deficit (green bars) since at least 2000? Well, the rest of the world wants US dollars. We want to import their goods and services. Since the US is a net importer of goods and services, we are a net exporter of US dollars. Thus some of the deficit each quarter makes its way out of the country. The rest of the deficit makes its way into the domestic private sector (blue bars). The private sector is composed of households and businesses. The great recession was caused due to poor household balance sheets, among other things. If you were following the sectoral balances graph closely in 2000-2008, you could see how the private sector was continuously indebted, both households and businesses. This was unsustainable.

The government deficit expanded post recession due to automatic stabilizers, repairing poor household balance sheets. This muddling on continues today. The past few years have seen domestic business go into debt, although the last two quarters have shown a slight surplus. Households and institutions have maintained a surplus since 2008. From a purely sectoral balances perspective, as long as we maintain our government deficit and the rest of the world continues to want US goods and services, the US private sector seems poised to continue muddling along. Splitting households into top 10% and bottom 90% would be an interesting exercise to see how these modest surpluses have been distributed. I will keep an updated quarterly graph here on The Minsky’s as FRED releases data. I hope you found these graphs useful and insightful. 

 

Trump’s Cuba Policy Will Hurt, Not Help Cubans

In a speech showing no regard to Cuban’s historical sensitivities, Trump announced from Miami that he was “canceling the last administration’s completely one-sided deal with Cuba.” By that he meant reversing from Obama’s policy of engagement with Cuba to the old sanctions-based approach. The decision has been extensively criticized, from both the left and the right of the political spectrum, in Austrian-economics outlets and on  Cuba’s socialist state media. Even some Republican members of Congress opposed and distanced themselves from this policy, and The American Conservative said Trump was reversing to a “failed,” “brain dead” policy which “will end up strengthening [Castro].”

The stated goal of the policy is to enforce compliance with the Embargo and the tourism ban, take a tougher stand on human rights abuses in the island, and to contribute to the economic, political empowerment of the Cuban people. Despite all the Cold War-style rhetoric in his speech, Trump is not actually “canceling” the whole deal with Cuba. According to the White House policy fact sheet, the embassies will remain open, maintaining diplomatic relations between the two countries, and Cuban-Americans’ travel and remittances are not impacted by the policy. As American University professor William LeoGrande recently put it, the plan is  a “compromise between Cuban-American hard-liners’ demands that he reverse every aspect of Obama’s opening, and the pleas of U.S. businesses that he not shut them out of the Cuban market.”

However, the new policy approach will not exactly economically empower the Cuban people, since Cuban private sector entrepreneurs will be hit the hardest by a key policy change—the enhancement of the travel ban for American citizens. While Americans can still travel to the island in groups through a licensed tour company, prohibiting travel under the individual people-to-people license is likely to reduce the number of American visitors—the same citizens that Paul Ryan once praised as “our best ambassadors” of democratic values—which will result in the opposite of the intended policy goal.

Cuban Entrepreneurs Will Take The Hit

The more immediate effects of Trump’s measures will hit Cuban private businesses in the tourism industry. A recent survey found American travelers are directly supporting Cuban entrepreneurs economically. According to the survey, 76 percent of American visitors stayed at casas particulares (privately-owned houses), 99 percent ate at privately-owned restaurants, 85 percent traveled in private taxis, and 86 percent bought art, crafts, or music from independent artists. As a result of a lower number of American visitors, we can expect Cuban Airbnb hosts—Cuba is Airbnb’s “fastest-growing country…with over 22,000 listings,” bar and restaurant owners and their employees, taxi drivers, etc. to see their incomes reduced. This hurts the very same people the policy claims to “empower.”

In the first half of 2017, Cuba received some 285,000 American visitors, an increase of 145 percent with respect to the same period in 2016. As a result of the enforcement of travel restrictions, the number of American visitors and the economic support they provide to the private sector could be greatly reduced. Cuban economist Pedro Monreal estimates direct losses to the Cuban private sector on the range of $14.7 to $20.8 million, in the second half of 2017 alone—and not including the spillover or multiplier effect that the private sector’s incomes may have in Cuba.

Additionally, the language in the regulations expands the definition of Cuban government officials ineligible to receive remittance payments from the U.S, which could potentially exclude a million Cubans from receiving remittances. These private transfers—typically to family members—are the lifeblood of the Cuban private sector economy, both as one of the main sources of funds for entrepreneurs to invest in their businesses and of income for national consumers. Thus, restricting these transfers will affect the standard of living of remittance recipients and also severely obstruct the development of a vibrant private sector on the island.

Cuba’s External Debt Commitments

Cuba has made efforts to renegotiate its outstanding external debt—on which the government defaulted in the 1980s—and to resume servicing its obligations in order to regain access to international finance. President Castro has already taken steps to improve the country’s creditworthiness by promising to honor the commitments resulting from agreements reached during the renegotiation of debt owed to other governments and private sector creditors. The most important agreement was with the Paris Club and its Group of Creditors of Cuba, in December 2015. The Group derogated the accumulated interests and brought down the total stock of debt from $11.1 billion to $2.6 billion—the original principal, to be paid over a period of 18 years. The first installment was already paid in October 2016, amounting to some $40 million. However, by depriving the Cuban government of foreign-currency income from the tourism industry, Trump might also be damaging the ability of the government to repay a debt owed to a number of U.S. ally countries. Moreover, damaging Cuba’s creditworthiness also affects the possibility of extending Cuba credits for the purchase of U.S. agricultural commodities, which is key to make U.S. exports more competitive vis-à-vis other foreign suppliers, and would provide the “greatest” boost to agricultural exports to Cuba.

Back to Cold War Politics amid Recession and Economic Reforms

The Cuban government had been implementing austerity for the past six years as part of a process to “update” Cuba’s economic system by reducing the role and size of the state in the economy. This process included tight controls over fiscal expenditures and massive layoffs from the state economy. For example, Cuban official statistics show that from 2010 to 2015, government employment was reduced at a rate of 117,000 jobs a year; removing around 585,600 jobs from the economy in that period. The assumption was that those workers would be absorbed by an expansion of the private and cooperative sectors—which indeed increased their ranks by 461,000 jobs, around 79 percent of the reduction in government employment. Thus, Trump’s measures will be affecting the most dynamic job-creator sector of the Cuban economy.

This comes at a time when Cuba is trying to shake off an economic recession from last year—when GDP contracted 0.9 percent—and is beginning to make payments to its international creditors for the first time in more than two decades. Thus, Trump’s measures do not only jeopardize the expansion and profitability of the private sector, it also threatens the economic and social development of the nation, in general, and, in particular, the ability of the leadership to successfully restructure and revitalize the economy so that it works for the many—while at the same time escaping a looming recessionary episode and fulfilling external debt commitments. All of which, again, will have a disproportionately negative effect on the Cuban people.

Cuba: Caught-up Between “Trumpian” Politics?

The decision to roll back the policy of engagement with Cuba once again shows Trump’s frequent inconsistencies. This policy is not about putting America first, as it hurts American companies doing business with Cuba and restricts the right of U.S. citizens to travel freely. It is not about human rights, as Trump deals with a number of countries with abysmal human rights records—e.g. Saudi Arabia, Turkey, Philippines. And, it is not about economically empowering the Cuban people, as they will be the first to feel the effects of a worsening economic environment, standing to lose some $21 million this year. Instead, this foreign policy seems to be all about American internal politics. About the vote Trump needed from Miami’s Rep. Mario Díaz-Balart for the healthcare bill to pass Congress. About renting Marco Rubio’s loyalty during the Senate Intelligence Committee’s hearing of former FBI Director Comey. And, it is about Trump’s crusade to destroy all of President Obama’s signature policies—whether it is climate change, health care, labor laws, or Cuba.

Think Uber’s Problems Stop at Its Management and Culture? Think Again.

Keep track of all of Uber’s problems with The Big List of Uber’s Controversies. 

In February 2017, Susan Fowler published a blog post detailing the sexual harassment and gender discrimination she experienced during her time as an engineer at Uber, the ride-hailing company. Although this was not the first time that Uber had been accused of creating a workplace where pervasive sexism and discrimination thrive, Fowler’s piece struck a chord. It built on a wave of criticism of the company from an earlier public relations disaster — Uber’s missteps following protests of President Trump’s racist executive order at John F. Kennedy Airport starting on January 28th and the resulting #DeleteUber campaign — and emboldened others to report sexual and other misconduct at the company (215 complaints about its corporate workplace have been filed).

While the criticisms levied at Uber are generally applicable to Silicon Valley as a whole, public ire was now focused on Uber, which was having a public relations crisis seemingly every week. The one-time $70 billion-valued private company (five times more valuable than the grocery store Whole Foods, which has 431 supermarkets, and was recently acquired by Amazon) was under immense pressure from even investors too. In response, it agreed to two investigations, both led by law firms. One investigated the workplace complaints that had been lodged against the company, leading to the firing of over 20 employees as well as disciplinary action against others. The second’s task was to investigate Uber’s corporate culture and develop recommendations to restructure the company to try to address the root causes of the problems. This team was led by former Obama administration Attorney General, and former Uber advisor, Eric Holder.

The report from Holder’s team, released a few days ago, came up with 13 pages of recommendations, all of which were adopted by Uber’s board of directors. In general, they seek to bring Uber in line with the practices of a company of its size. Some of these are common sense: developing internal controls and processes in a variety of ways, eliminating bias by performing blind reviews, reducing the unusually high amount of power of key executives, giving the board of directors more power, creating oversight and audit committees, using compensation as a carrot and stick, etc. Other recommendations include ensuring that people with children can participate in company events, which is laudable. Where the proposal fails is in its recommendations for changing values and emphasizing diversity, which include training for staff, developing programs to attract qualified diverse candidates, and reforming the list of the company’s core values (from something that a frat boy would write to, no doubt, corporate-speak clichés). It also included symbolic changes, like renaming Uber’s “War Room,” the “Peace Room”.

While revamping Uber’s structure and setting a bunch of (corporate) priorities might seem like a positive change at the company, it’s important to keep a few things in mind. One is that the problems that Uber is facing with regards to its culture and diversity are pervasive in Silicon Valley. Uber might be especially bad in these areas right now, but the typical solutions are unlikely to make much of a difference at the company because they haven’t made much of a difference at most tech companies. There are complicated reasons for these failures, and there should be little confidence that these tired and hollow strategies will work.

Another is that Uber is a private company, with control intentionally held closely among certain people, like CEO Travis Kalanick, who is most responsible for Uber’s reprehensible culture. As the CEO and founder, he ultimately controls much of what happens at the company, whether the Holder recommendations are adopted, and whether they are taken seriously. The most important result from the Holder investigation — Kalanick’s decision to take leave and take on a supposedly diminished role at the company — was undoubtedly due to pressure from the investigation but still entirely Kalanick’s own decision (and he’s still the CEO). Lastly, while the recommendations wisely agreed to use compensation as a way to incentivize and punish managers for transgressions, in practice, out-of-control pay of CEOs and executives, regardless of performance, is a systemic problem among not only tech companies, but companies in general. Kalanick’s poor performance as head of Uber should lead to a pay cut, but it likely won’t.

Thus, the Holder report might have some good ideas about how Uber could be run better, although it is unlikely that Uber will fundamentally change. (Indeed, at the board of directors meeting to discuss the results of the report, an Uber board member made a sexist remark.) But what this conversation about Uber misses are the more fundamental questions about Uber and its business. The narrative that has emerged about the company since the beginning of this year is that Uber’s problems start and stop at its management (specifically, Kalanick) and culture, when they don’t.

The Big List of Uber’s Controversies is a compendium of the problems and controversies that have plagued the company since its founding in 2009. Many of these are related to the problems the company is very publicly dealing with now; others are not. The goal of the list is to point out that Uber’s problems are pervasive and fundamental to the company’s operations, yet not necessarily unique to the company (although Uber might be an outlier with regard to how poorly it is managed and structured). To that end, the controversies are divided into six categories: Business Practices; Social Costs; Misuse of Data and Software; Corporate Culture; Passenger Issues; and Driver Issues.

While the 79 controversies and problems currently on the list touch on many different and unique issues, there are themes that give some insight into the inner workings of the company and its problems, and demonstrate that Uber’s problems run much deeper than its culture or even the company itself.

  • Uber hemorrhages massive amounts of its investors’ money every year and does not have a viable business model, absent major changes in the industry or the creation of a monopoly;
  • Uber’s success depends on attracting more investment and growing quickly, as well as anti-competitive practices: it has not created efficiencies or value that would justify its poor financial performance;
  • Uber uses misleading research and fantastic technology forecasts to distract from the dismal failure of its core business, taxi service;
  • Uber has large and sophisticated lobbying, public relations, and research departments, often involving former Obama administration officials, that deliberately misleads (and outright lies to) reporters, investors, regulators, and the public in order to justify and give cover to flagrant violations of the law, defend exploitative conditions, and paper over the problems with its business model;
  • Uber erroneously claims that it is a technology — not a taxi — company, and that the business conducted on its platform is “sharing” in order to evade responsibility;
  • Uber has inadequate internal controls for its data and software tools, leading to improper, and possibly illegal, access and use by employees, including to surveil critics and regulators;
  • Uber’s growth-at-any-cost mentality and poor management has led to a culture that ignores problems and creates a toxic culture and workplace for its employees — significantly and negatively impacting its drivers and passengers as well;
  • Uber’s past behavior suggests it has a complete disregard for the safety of its drivers and passengers until it is pressured to take action;
  • Uber manipulates its drivers, entices them to enter into exploitative arrangements (including their misclassification as independent contractors), opposes their unionization, and exerts undue influence over their working conditions, consistently lowering their pay; and
  • Uber’s operation has significant social costs with implications for public safety, public finance, access for those with disabilities, discrimination, investment in public infrastructure, and the regulated taxi industry as well as the taxi driving occupation.

Recent criticism of Uber is undoubtedly a good thing, but as this list demonstrates, its problems extend far beyond the individuals that run it or its corporate culture. With these problems, the fundamental question should not be whether Uber can reform its workplace culture, or whether Kalanick should stay on as CEO, or if he is overly important to the company. Rather it should be whether Uber, and companies like it, should be tolerated at all. In Uber’s case, it is unclear whether it is any better than regulated taxis broadly. Individuals might like Uber’s service — and that’s fine, and also to be expected, considering their rides are all subsidized by Uber’s investors — but policy should not cater what certain segments of the population want, especially if they don’t understand how the company operates.

Another important point is that Uber’s reckless behavior has been tolerated and excused because of its ascending position in the market. But as the clear industry leader today, that is part of the reason why it is now in the crosshairs, even though other ride-hailing companies suffer from some of the same problems as Uber. (Lyft eagerly capitalized on Uber’s misfortunes following the JFK protests, for example.) Importantly, they too have not developed ways to be profitable or more efficient than regulated, fleet-based taxis. Even Juno, the supposedly fair and ethical ride-hailing company that gave its drivers equity in its business, sold them out when it was acquired.

So, while some have suggested that the solution is simply to stop using Uber (and, ostensibly, to use competitors like Lyft or Gett), this is no solution at all. The solution is making sure that these companies are subject to the same regulations as traditional taxis, as well as that they comply with labor and other laws, all of which was unsurprisingly absent from the Holder report. This is the innovative idea that is also a solution to many of Silicon Valley’s problems, regardless of the industry.

Uber might not be able to survive if it started caring about the safety of its passengers, the exploitation of its drivers, or the social costs it shifts onto the rest of us (it’s in trouble already), but maybe it shouldn’t. As politicians plot with Silicon Valley to take over public infrastructure and to revamp the fundamental nature of work, maybe Silicon Valley shouldn’t either.

It’s gotta be true, because data says so

Data and statistics are everywhere, especially in economics. But we forget that empirical results are often manipulated, biased, or inconclusive. To ensure we design policies responsibly, we must meet empirical work with greater skepticism.

by Selim Yaman

In 2008, Doucouliagos and Ulubasoglu of Deakin University conducted a meta-analysis of 84 studies about democracy and economic growth. After evaluating 483 regression estimates from these studies, they find that every outcome about the political democracy and growth relationship is possible; they observe that  

  • 37% of the estimates are positive and statistically insignificant
  • 27% of the estimates are positive and statistically significant
  • 15% of the estimates are negative and statistically significant
  • 21% of the estimates are negative and statistically insignificant.

The link between inequality and economic growth is equally difficult to identify. Dominics et al (2006) make a meta-analysis of studies focusing on this relationship. According to their study, most of the regressions yield a negative relationship between inequality and economic growth. Yet, when used different estimation techniques and panel datasets, this negative effect vanishes. So, after analyzing a vast amount of empirical literature, no clear relation appears.

Data and statistics grew increasingly important in recent decades. Big Data came to play a large role in many fields, from technology to healthcare. Economics is no different; regression analyses had already been popularized by the neoliberal school of thought. Economics was intentionally made “a real science,” within which basic connections between phenomena could be established, like in physics.

In the neoliberal world of economics, you are free from complicated, theoretical discussions, and able to draw firm conclusions. Unlike more nuanced fields like sociology or political science, neoliberal economics allows for simple, elegant arguments. With the help of mathematical modeling and statistical results, arguments take up just a few pages. This neoliberal methodology sounds pretty good in the first place: Direct scientific results, no chit chat. But it’s not as simple as it looks.

To what extent we can trust these statistical methods or the economists that use them? Economists can easily manipulate data to fit their ideological stances, or to comply with their initial hypothesis. Errors rooted in research design create unreliable results too: the type of the data used, the selection of the sample, differences in evaluation methods of estimates, availability of data, direction of causation, regional/country specific characteristics all influence the results. They jointly create a big divergence among empirical macroeconomic studies, leading to a conundrum in many questions.

These problems are not confined to economics; as the use of econometric methodology expands to other fields, the risk contained in data-interpretation increases. Say, there are studies on how religiosity levels affect people’s career paths. Knowing that even the large, carefully executed polls have failed at predicting Brexit, Trump’s victory, and Labour’s success in the UK, how can we trust other surveys to teach us about religion or social preferences? How can someone even build a theory on such data? Above all, how can these studies shape policy designs?

Some of the empirical studies that resulted in wrong conclusions remain unharmed in the ivory tower of academia, desperately waiting for a rare reader. But many of these studies do integrate to the real world, either through policy-making (top to bottom) or through media outlets (bottom to top).

Via the policy-route, developing countries have been one of the victims of empirical studies. The Washington Consensus, for example, suggested fiscal consolidation and trade liberalization. Later, however, it became clear that this was bad advice; copying the economic institutions from the Western world North and applying them to developing nations without considering country-specific environments can be devastating. While the Washington consensus was an elegant argument and supported by data from the West, it failed to account for the complexities of the Global South.   

The second route of influence is the media; when people read the news and encounter headlines like “a recent study found…”, it sparks their attention. But that recent study’s sample size can be very low, and its data can be deficient, and neither editors in the media nor readers will be aware.  To them, the study’s seemingly conclusive result are what is important.

To avoid that we act on false conclusions, academics, policy-makers, and media professionals all carry the responsibility to treat their empirical findings with skepticism. If it was physics, then a causal relationship based on data could be trusted. But for economics and politics, human factors create complications that statistical methods cannot always handle. Overall, it’s better not to overly believe in statistics, because data says so.

About the Author
Selim Yaman works at TRT World Research Centre. Yaman received his BSc from the Economics Department of Boğaziçi University. He is currently a graduate student in Political Economy of Development, at SOAS in London.

What is the Minimum Wage that Will Employ Everyone?

It is official, the unemployment rate in the US has dropped to its lowest level in 16 years. Economists all around the country must be tapping themselves in the back and buying each other drinks in congratulations, right? Wrong. Despite the official drop in joblessness, we have a decline in labor participation, an increase in the “skill gap” in the labor force (i.e. unemployed workers’ skills do not match those needed by open jobs) and, arguably most importantly, wages that fail to rise fast enough.

For starters, the latest reports show that the year-over-year wage growth rate has been stagnating; it reached 2.5 percent since last year, which is just marginally above inflation. It is difficult to determine exactly why people drop out of the labor force, but we can speculate that some do so because of the lack of pay increases. Whatever the reason, the dropout is a significant part of the declining unemployment rate—e.g. the May report shows that 429,000 people dropped out of the labor force. A nation with a population that is actively leaving the labor force and that deals with stagnant wages is a nation facing serious socioeconomic problems.

The problem at hand, then, is a question economists have been dealing with for ages: how can we increase earnings and employment at the same time? Common economic understanding would argue that we have to choose between higher wages and more jobs. The main argument against minimum wage hikes is that it would increase unemployment. That claim is factually untrue (just look at Seattle) and there are a number of ways to address the issue. At The Minskys we have tackled this topic several times, and shown that a decent minimum wage does not have to reduce the number of jobs out there. One way to have both is with a Job Guarantee (JG) program.

One of the more interesting consequences of a JG program is that it would create a de-facto minimum wage without the need of actually raising the minimum wage. The JG wage would become the minimum wage for the entire economy. Workers receiving less than the JG wage would be inclined to take a JG job, and employers would have to raise their salary offers in order to keep their workforce. Given the impact of the pay offered by the program, it is important that the JG wage rate be thoroughly discussed.

The JG literature has a large number of works focused on the topic of wages. Some suggest the pay to vary with skill-level. Others advocate for JG wages to be the same as they would be in the market.  But having multiple compensation packages would make the logistics and application of a JG program much more complicated.

To find the best wage rate for JG jobs, a few parameters should be considered. First, the JG framework is to create jobs that provide at least a minimum “subsistence” rate, so that workers can  live a decent life. As such, it is clear that the JG wage should at least be the current federal minimum wage of $7.25 an hour. Second, the goal of the JG is not, and should never be, to replace the private sector. So, the JG wage should not exceed the average wage paid in the private sector ($25.31 in 2016). This creates an upper limit.  

With these lower and upper limits in place we can raise the floor or lower the ceiling, ultimately arriving at the proper wage rate paid by this full employment policy. Recent polls show that Democrats, Republicans and Independents—in their majority—all support raising the minimum wage to $10.10 an hour, which suggests that there may be widespread political support to increasing the minimum wage.We can raise the lower limit further after we consider the per capita income in the US, which would put the fair minimum wage at $12.00 an hour. The lower limit of $12 an hour is appropriate since it is marginally above the poverty rate of $11.53 for a household with two children where only one of the parents is employed.

A good point within that range is the $15.00 hourly wage rate. Legislation regarding this wage rate has recently been approved in cities such as Seattle, Los Angeles, and the state of New York. There is also a movement by workers demanding that it becomes the floor in the fast food and retail industries. It seems appropriate, therefore, to follow these cities and movements by determining the going wage rate for a JG program to be set at $15.00 an hour. After all, a national JG cannot pay less than locally established minimum wages. On the other hand, the guarantee of a job in, for example, Seattle paying $15.00 per hour, while surrounding areas are offering lower pay could saturate one area in detriment of another.

As previously discussed, the JG wage would become the minimum wage to the entire economy. Consequently, workers who currently earn less than the $15.00 an hour rate would receive a raise. In total, accounting also for the ripple effects faced by workers in the $15.00 to $19.00 range, roughly 64.7 million workers would receive a wage increase, which means 43.5 percent of the labor force would see their wage income go up. To avoid inflationary pressures, allow for seamless implementation, and contain possible—albeit historically improbable—negative employment effects from the minimum wage hike, the transition to this wage through the implementation of the JG program will have to be done incrementally.

The Job Guarantee is an effective way to solve the three major problems currently facing the American labor market: the skill gap, the dropout of workers from the labor force, and most importantly the stagnant wages. We have empirically observed that wage increases not only do not increase unemployment, but they also serve as a catalyst for economic growth and towards social equity. The US economy has plenty of needs that can be fulfilled by giving well-paying jobs to its unemployed. The $15/hour wage is not only fair, it is a necessary measure to ensure the prosperity of this nation.

Greece has a Private Debt Crisis and We Can Blame the Troika

The Greek public debt debacle and the bailout received by the government from the European Central Bank (ECB), the European Commission (EC), and the International Monetary Fund (IMF) – referred to collectively as the “troika” – has been making headlines for years. However, very little attention has been paid to the debt crisis in the Greek private sector. An alarmingly high portion of private sector borrowers is behind on their debt payments, and the Greek banking system currently has one of the highest ratios of delinquent loans in the European Union.

This collapse of debt prepayments is a direct result the policies imposed by the Troika and threatens the future of Greek economic growth. After the Greek government required financial assistance from international creditors, it was forced to introduce draconic austerity measures to repay its debt. Cutbacks to state services, collapses in incomes, and an increasingly unstable economic environment contracted spending, therefore, eliminating future cash flows that private entities expected to use to repay their debt. The result has been a spiral of collapsing demand and shrinking growth.   

Greece’s accession to the Eurozone was followed by a largely ignored, rapid, and unsustainable build-up in private sector debt. Once the Greek government was forced to impose severe austerity measures and the economy collapsed, the private debt crisis followed. Now, the large ratio of delinquent loans held by Greek banks is adding to the factors hampering economic growth. For Greece to recover, its private debt problems need to urgently be addressed with an approach that offers relief to both borrowers and lenders.

 

This article was originally published by the Private Debt Project. Read the entire article here.

 

The full article highlights how the mismanagement of the Greek sovereign debt problems triggered the current private debt crisis. We show the rapid growth in private debt, document the macroeconomic context that pushed to Greece into a depression, and explain how these factors created a private debt crisis. Then, we discuss some of the existing proposals for addressing a large number of loan delinquencies and their limitations, and finally, propose other approaches to tackle this pressing problem.

Doughnut Economics – Grab a pencil, draw a doughnut!

Many of us know we need to rethink economics, but Kate Raworth actually did it. Envisioning the economy as a doughnut, two boundaries become clear. If we fall into the doughnut’s middle hole, human needs fail to be met. If we drop off of the outer edge, life is unsustainable.

 You should be weary of people who seek to get the “first lick” on a young impressionable brain. Paul Samuelson knew that by writing a successful economics textbook, he could influence how students frame the economy, and thus the world. From the 50’s to the 70’s, his textbook was the most widely used in introductory economics courses. Today, that role has been given to Gregory Mankiw’s “Macroeconomics” (see the Open Syllabus Project). Both view the economy in the same narrow way, with the same simple pictures that don’t seem useful today. Raworth’s Doughnut Economics breaches the pattern and envisions a new economics, for a new generation with clearly defined challenges and scant tools to solve them.

For so many years, the principle goal of economics, and thus the economy, has been GDP growth. Growth for whom or through what means wasn’t nearly as important as just ensuring there was in fact growth. Raworth emphasizes the importance of framing, and if you ask an economist what picture they foresee for GDP, they often describe an upward exponential function.

Thankfully, many young students that I’ve met recognize that infinite growth is unsustainable. Hopefully, their generation can popularize a GDP graph in the shape of a sideways S, respecting the upper bound to growth we have to live within. Enter Raworth’s doughnut. In Raworth’s framework, the outside of the doughnut reflects an upper bound we can not pass based on environmental limits of our planet. The inside of the doughnut reflects a social foundation we can not let crack, the necessities for humanity to thrive.

The goal should no longer be growth, but ensuring we take care of our social foundation and respecting our environmental ceiling. Raworth calls this balanced space in the middle the safe and just space for humanity, and that’s the goal we should direct ourselves toward. We can not ignore who growth is leaving behind, or what damage this growth is doing to our planet. These bounds are the crucial factor for Kate’s “doughnut.” They can move us beyond a narrow single measure called GDP, to looking at all the interconnected measures that are so important for our livelihood.

Once we’ve moved beyond the single measure, we have to also abandon the single neoclassical narrative that espouses the godlike nature of “the market”. The market, the household, the state, and the commons all have a place in the big picture, and different challenges have to be faced by different actors. The neoclassical story tells us there is a “tragedy of the commons,” what if that story was actually the tragic one? Kate takes a stab at the characters of the old narrative, and offers us a new script for them.

EARTH, which is life-giving—so respect its boundaries 

SOCIETY, which is foundational—so nurture its connections

THE ECONOMY, which is diverse—so support all of its systems

THE HOUSEHOLD, which is core—so value its contribution

THE MARKET, which is powerful—so embed it wisely

THE COMMONS, which are creative—so unleash their potential

THE STATE, which is essential—so make it accountable

FINANCE, which is in service—so make it serve society

BUSINESS, which is innovative—so give it purpose

TRADE, which is double-edged—so make it fair

POWER, which is pervasive—so check its abuse

The big picture story requires the next generation of economists to be savvy with systems thinking. The old economics used mechanical equilibrium thinking, where economies trend towards a static state. A new economics recognizes the flaws of this equilibrium thinking, recognizing like Minsky said that “stability is destabilizing.” A new framework for economics will recognize the different feedback loops that influence the economies stability.

The language of complexity, evolution and systems needs to infiltrate economics. We need to be thinking about how we can design a resilient economy, one that can resist shocks. We need to look at the big picture, understanding the sources and sinks of different resources. We have to know where our food comes from, ensuring it is distributed properly, and we have to know where our plastic is being disposed, ensuring it’s not destroying the planet. We have to get familiar with the language of stocks and flows, the stores of resources and also their movements. These will be our new tools.

Raworth’s story gives hope to the young economists that are bent on saving the dying planet we’ve inherited. Her vision for a new economics, and the new economy, align with the work we’ve been doing here at The Minskys. Even better though, she has produced a frame for which we can better espouse our ideas. We started out thinking about systems – the sources and sinks of money creation. We’ve recognized the physics envy of mainstream economics. We understand the need to nurture human nature, so maybe we should be studying the grants in the economy and not just monetary exchanges. Without this, we’ll fall inside the doughnut’s hole, where there is no paid maternity leave, and austerity all around. We’ve also thought about ways not to breach the doughnut’s bounds, with a Green Job Guarantee, Basic Income, or Community Currencies for example.

Raworth’s doughnut frames the important aspects of the economy, and is simple to use. Observe your local community! Do you see human needs not being nurtured? That means we’ve breached the inside of the doughnut. Do you see irresponsible damage being done to our home, the earth? Then we’ve breached the outside of the doughnut. We have to design solutions to keep us in the doughnut. We’re all economists now, because we have to be. The future is pretty bleak for humanity without a planet to stand on.

If you too wish to start thinking like a 21st century economist, be sure to check out the book in it’s entirety here. There are also a series of animated shorts here. After that, it’s as simple as grabbing a pencil and drawing a doughnut.

Going Beyond Exchange

Traditional economics reveals the dynamics of exchange. But is that all there is? Late economist Kenneth Boulding recommends that we look further. Once we consider that some transactions only go one way, we can see the economy in a different light.

If you’re a high school student and you’re hungry for lunch, you may go out and buy yourself a sandwich. You give the deli guy five bucks, and he gives you a BLT. That’s exchange! But where did your five dollars come from? If you’re lucky, your parents gave it to you. Just like they gave you breakfast, your clothes, and a home to live in. And what did you give them? Probably your dirty laundry.

Modern-day, Western world parenting is an example of a one-way exchange. Parents provide for their children because the market doesn’t. And they do so without expecting much in return. Upon reaching adulthood, none of us receive an invoice detailing the costs we incurred. If we did, we’d probably be quite disturbed. In some cultures, children “pay back” by supporting their parents when they are older. But in the West, retirement plans, social security, and old-age homes have largely removed that expectation too.

Economist Kenneth Boulding advocated for such one-way exchanges, or “grants”, to be included in our study of the economy. Grants make up a big part of our distribution of resources, he argues, but economists have limited themselves to the study of exchange. To construct a more holistic framework in which both systems are fully represented, Boulding introduces “Grants Economics,” which adds to our understanding of the economy both at the micro-level (grants within the household) as well as at the macro-level (grants from the government*).

Boulding distinguishes grants by their motivating force. In the example of parental care, the motivating force is one of love. Parents provide for their children because they care about them. Charity, scholarships, and much of government transfers fall into the same category. But each economy also contains grants based on threat. If you’re about to buy your deli sandwich, and an armed robber comes in, you may hand over your money because you’re scared of getting hurt. That’s a grant as well.

Every system, he explains, contains elements of exchange, love-based grants, and threat-based grants. But their respective shares in the total economy vary. To visualize this, Boulding presents a triangle, the corners of which represent a pure exchange-system, a pure love-based grant system, and a pure threat-based grant system. All the points inside the triangle represent different proportions in which the three systems can be combined. Where in the triangle we are, and where we are going, is the question.

At times, Boulding adds, the love-based grants economy may grow to compensate for failure in the exchange economy. If, for example, a hurricane strikes, we recognize the exchange system cannot support the situation, and make donations (grants) to fill the gap. But if we feel the efficiency of our grants is inadequate, the grants economy may shrink again. Only if perceive our grant to be able to be more useful in the hands of the grantee than in our own, do we want to provide it.

Since the 1970s, Boulding’s work has largely been forgotten. Perhaps because his definition of a grant, and the distinction between love and fear can be fuzzy at times, or because the scope of the theory is so vast. Nevertheless, the framework deserves credit for its potential to open our eyes to all the different ways in which resources are distributed. It can get us to think about the nature of our transactions.

Today, it may look like our current economy is increasingly based on exchange. Whereas we used to call a friend to help us assemble a new IKEA couch, many people may now use Handy to book an hour of paid-labor from someone they never met. Later that day, they may log in to TaskRabbit to hire someone for an errand. With the help of modern technology, Interactions that we would otherwise do without asking much in return are becoming two-way transfers.

At the same time, exchange continues to fail us, making large numbers of people rely on grants. In 2016, one in seven Americans received food stamps. That’s 43 million people for whom exchange is not bringing enough food on the table. On the other end of the income distribution, it may seem like things are different. But half of young adults (many with families of a high socio-economic status) rely on financial help from their parents. That’s a grant–typically with less of a stigma than food stamps–but a grant nonetheless.

These trends, and our potential path in the triangle raise various questions. How equal is our access to grants? Should we supply more grants (even a basic income?) or should we boost exchange (perhaps with a job guarantee?) Do we think we’re moving more towards a system based on love, in which care for one another dominates? Or are we finding it tough to get grants out of people unless we threaten them into providing them? Is there an ideal point in the triangle? Can we get there? Ponder on it. Boulding did so too, and being the only economist to sprinkle his books with poetry, he put his thoughts as follows:

 

Four things that give mankind a shove
Are threats, exchange, persuasion, love

But taken in the wrong proportions
These give us cultural abortions

For threats bring manifold abuses
In games where everybody loses

Exchange enriches every nation
But leads to dangerous alienation

Persuaders organize their brothers
But fool themselves as well as others

And love, with longer pull than hate
Is slow indeed to propagate

                                – Boulding, 1963

*Sometimes, of course, the lines between exchanges and grants are blurry. If we use taxes toward social security, and cash in at old age, that might be better described as a deferred exchange. If we, however, find ourselves on unemployment benefits, food stamps, rent support that we receive without having made an equal contribution, we can speak of a grant.