ASSA 2022: part one – the mainstream

The annual conference of the American Economics Association (ASSA 2022) took place last weekend.  This year it was a virtual conference, but there was still a myriad of presentations and sessions in the largest academic economics conference in the world, with many of the big hitters of mainstream economics on the webinars.

I usually divide the conference sessions into two sections; first, the sessions based on the paradigms of mainstream economics ie. neoclassical, marginalist general equilibrium models; and second, the sessions based on radical heterodox economics (post-Keynesians, institutionalists and even Marxist models).  The former sessions are multi-fold and well attended; the latter, usually run by the Union of Radical Political Economics (URPE) are small and poorly attended.  But of course, the latter usually provide the richest addition to our understanding of political economy.

This year’s mainstream sessions were naturally dominated by what is happening and going to happen to the US economy, the world economy and the Global South as economies recover from the COVID pandemic.  Surprisingly, in one session former OECD chief economist, Catherine Mann was decidedly pessimistic about the long-term future of the US economy.  She saw the US as a chronically low investment and low productivity economy with high inequality and with little prospect of post-COVID of becoming one that is more equal and characterized by higher investment, strong labour markets and better productivity. “What if the boom from policy choices does not catalyze sustained private sector activity, will inflation spiral? If so, policies will need to retrench, leading to a bust.”, she warned. 

Mann asked herself the question, how do we get investment up?  Apparently, in surveys, more CEOs of major companies expect a continuance of low annual economic growth of 1.5-2.0% rather than more optimistic official expectations of 4%-plus.  And forecasts for increasing investment would only take capex levels back to that of 2019.  US companies are hoarding up to $3.17trn in cash and preparing to buy back even more of their own shares, while doubling mergers, rather than invest productively.  More mergers would reduce the very competition necessary for innovation in capitalist economies.  So Mann reckoned that US economic growth during the rest of the 2020s would be even lower than in the decade before (which I have called the Long Depression). 

In contrast, it was liberal left economist Joseph Stiglitz who sounded a note of optimism.  Lauding the boost to the US economy made by Bidenonomics ie fiscal spending on infrastructure, Stiglitz saw post-COVID as a possible “turning point for the US economy” to get out of its rut of low growth before COVID.  Stiglitz reckoned there were clear signs of a change in government economic policy towards Keynesian macro-management and also more action to reduce the huge rise in inequality of wealth and income over the last 40 years.  His evidence for this optimistic turning point was scant compared to the harsh reality of the data presented by Mann. 

Neoclassical anti-Keynesian John Taylor had no time for Stiglitz’s optimistic view of Bidenomics, arguing the limitations of fiscal spending.  His econometric models, Taylor said, showed increased economic growth after the pandemic would depend more on ‘structural policies’—reducing taxes, regulation, and liberalising financial markets and trade –rather than on Keynesian counter cyclical policies.  Indeed, in another session, in a similar vein, economists argued that capacity to increase fiscal deficits was limited.  The real way to avoid spiralling public sector debt from permanent budget deficits was to increase real GDP growth but if that stays low then budget surpluses will be required i.e fiscal austerity to stabilise runaway debt.  The Austerians were alive and well at this year’s ASSA.

Finally, Larry Summers, former Treasury secretary under Clinton and another Keynesian guru, summed up the confusion among the mainstream American economists, by arguing while Bidenomics with increased fiscal boosts were “the boldest policy experiment of the last 40 years”, they “could lead to rapid growth, stagflation, or recession – each with more or less equal probability.”  And as Jason Furman, the former economic adviser to Barack Obama, put it in another session, “it is impossible to work out when crises happen; as they could be just chance, like COVID was.” Well, that was helpful.  What none mentioned was that the so-called fiscal boost by Biden was falling away anyway and would be reversed within a few years.  So the ‘bold experiment’ was not really so bold, while deeper ‘structural measures’ were not on the agenda at all.

The immediate topical issue for mainstream macro economists at ASSA was rising inflation.  With the US annual inflation rate hitting 6%-plus, the highest rate in 40 years, the question at debate was whether the US Fed should move quicker in its monetary policy to douse the flames with interest rate hikes and/or reductions in bond purchases during 2022.  Depending on whether these economists thought rising inflation was the result of short-term supply bottlenecks or the result of excessive demand from low interest rates and fiscal boost, they took different sides on whether the Fed should speed up monetary ‘tightening’ or not. 

The debate rolled on in various sessions – but interestingly, one thing was agreed, that rising inflation was not caused by wage rises.  The data showed only modest wage rises and indeed less than price inflation, so real wages were falling.  So it’s not the workers’ fault.  The worry for the mainstream was that workers might react to price rises by trying to compensate through strikes etc to get higher wages.  That would be disastrous for the profitability of capital and could return the US economy to the wage-price spiral of 1970s that led to ‘stagflation’ and eventually sharp rises in the cost of borrowing and a huge recession.  So both the Keynesians and neoclassicals were agreed on avoiding ‘excessive’ wage rises.

But does monetary policy work anyway in controlling ‘aggregate demand’ and inflation.  The evidence in boosting growth in the Great Depression of the 1930s was no – and even Keynes agreed back then.  And the evidence of the last 30 years of slowing inflation below central bank targets suggests that monetary easing had little effect then.  So the idea that tighter monetary policy will control inflation is very dubious.  Nevertheless, some post-Keynesians apparently think that central bank policy rates can control interest rates across the economy and so control inflation.

While the mainstream was divided on whether the US economy was likely to recover on a faster footing or just sink back into the low growth depression pre-COVID, there was pretty much agreement on the weak prospects for the rest of the world, particularly in the Global South. Deficits will fall, but debt will rise.  Current World Bank chief economist, Carmen Reinhart reminded attendees at another session that the pandemic slump had been truly global, with 90% of world’s nations in slump.   Things were much worse than in the Great Recession of 2008-9 especially for emerging economies and even for China and India, two economies which avoided a major recession back then.  Indeed, 60% of low-income economies, the poorest, are in ‘debt distress’ ie they cannot ‘service’ their debts.

In another session on emerging economies after COVID, leading international economist, Barry Eichengreen noted that “the relative dearth of bank failures and financial accidents speaks to stronger macro- and micro-prudential policies that will similarly serve emerging markets well going forward.”  But debt has risen sharply and there is the interruption to schooling and human capital formation. So “changes in global supply chains and a faster pace of automation will make the traditional pathway to higher incomes more difficult for many middle-income countries.” Economist Franziska Ohnsorge did a study of the impact of deep recessions on potential growth. Recessions leave a legacy of lower potential growth four to five years after their onset. So the ‘scarring’ of economies has a lasting impact of recessions.  She concluded that the pandemic “will steepen the already-expected slowdown in potential growth over the coming decade.”

But what about the longer-term for the advanced economies?  Can the major capitalist economies turn round their low productivity growth rate and open up a new era of life? Again, in a session on the future of the world economy, Catherine Mann doubted it.  As she put it: “Many people talk about ‘returning to normal’ after the pandemic finally is under control. We have to hope that the global economy does not return to the pre-pandemic ‘normal’. Productivity has been too low, inequality too high, globalization in retreat, and climate change unchecked.” She did not expect much change. 

Again, in contrast, liberal left Joseph Stiglitz was more confident that productivity could rise because of better global agreements on cooperation (!).  And other mainstream presenters argued that the pandemic slump had “accelerated the development and adoption of digital technology solutions in pursuit of business and economic continuity and resilience.”  So “there is a reasonable chance that the post-pandemic global economy will experience a surge in productivity and growth, even as it moves into and through an energy transition in pursuit of sustainability.”  Mary Amiti reckons that productivity ‘spillovers’ from innovating multinational enterprises can increase productivity in smaller firms in the same sector by about 10% after five years.

That optimism was not repeated by the leading economist studying the impact on productivity from the digital AI technologies.  Daron Acemoglu reckoned that AI had so far had little impact on improving productivity in economies.  Diffusion had not spread from tech sectors to other sectors or any boost in profits.  His answer was that businesses should not just aim to make profits as their target but aim for better production!  It seems that the great story of innovation out of COVID is still what veteran neoclassical economist Robert Solow (now 97 years old) famously said in 1987 about the computer age: “I see innovation everywhere, except in the statistics.”

There were two other big themes in the mainstream section of ASSA: climate change and carbon emissions; and China.  The mainstream deals with global warming and climate change purely from the aspect of the market ie what should the carbon price be to encompass the ‘social costs’ of carbon emissions.  Economists in the Society for Benefit-Cost Analysis session discussed the latest estimates for carbon market prices to mitigate carbon emissions.  They all concluded that carbon pricing was still way too low in carbon markets that existed.  Prices needed to be at least $100/t and that estimate had been rising all the time since such estimates were made.

Subsidies to renewables energy and other carbon mitigating technologies would not do the trick either, because they were too small and too targeted.  A key factor in getting the price right was the discount rate used to reflect the costs to GDP now of pricing carbon emissions against the future.  Gernot Wagner of New York University showed that the discount rate was set too high by most studies (4%), leading to an estimate of the social price of carbon emissions that was way too low.  Half that rate was required and maybe lower.

And as for regulating fossil fuel output, that also was inadequate if not actually making things worse.  US economist Ashley Langer reckoned that “regulated U.S. electricity markets have transitioned from coal to natural gas more slowly than restructured markets.” In the long-run, “utilities decide which plants to retire and in which new technologies to invest. So regulation slowed the energy transition from coal to natural gas.”

As for China, all the mainstream sessions appeared to be designed to show China as failing economically and conducting nefarious economic policies abroad, especially with other poorer countries. Panle Jia Barwick said that if the Chinese authorities deregulated firm entry into markets, productivity would rise across the board. ie more freedom for capitalist firms would benefit the economy.  And Jun Pan reckoned that favourable credit terms to state enterprises by state banks meant that non-state firms were losing their long-standing advantage over SOEs in profitability and efficiency. Presumably, this was bad news. 

But another study by Zheng Michael Song showed that those private companies that worked closely with state enterprises had increased the “aggregate output of the private sector by 1.5 to 2% a year between 2000 and 2019.”  So the state sector was an essential positive factor for the capitalist sector.  On a wider note, Meg Rithmire characterised China as ‘state capitalist’ but in a special sense, namely that a resurgent ‘party-state’ model has emerged, “motivated by a logic of political survival”, rather than the ‘familiar conceptualizations of state capitalism’.

On foreign policy and activity, China came in for a hammering by mainstream analysis.  China’s loans and FDI outflows to other countries, mainly to the global South, have come under scrutiny in recent years.  Carmen Reinhart noted that outflows are not just through state financial institutions but increasingly from China’s capitalist sector, which constituted the main channel for foreign portfolio investment outflows. Christoph Trebesch made a systematic analysis of the legal terms of China’s foreign lending through 100 contracts between Chinese state-owned entities and government borrowers in 24 developing countries in Africa, Asia, Eastern Europe, Latin America, and Oceania, and compared them with those of other bilateral, multilateral, and commercial creditors. He concluded that the contracts showed China “as a muscular and commercially-savvy lender to the developing world.”  Can this be bad? 

Well, in another session, presenters claimed that China hid the amount of debt that borrowers had got themselves into.  Apparently, 50% of China’s lending to developing countries is not reported to the IMF or the World Bank. “These “hidden debts” distort policy surveillance, risk pricing, and debt sustainability analyses.”  But do they put the borrowing emerging economy states into a ‘debt trap’ any more than do the IMF and World Bank and other private sector lenders in the Global North?  Actually, the evidence shows that China’s loans are much more manageable to service than the IMF’s.  It’s just that emerging economies are so poor and already heavily in in debt, that debt distress has risen sharply during COVID.

My next post will cover the sessions of the heterodox and radical presentations.

12 thoughts on “ASSA 2022: part one – the mainstream

  1. One point of clarification. You say economists “took different sides on whether the Fed should speed up monetary ‘tightening’ or not” and earlier in the paragraph say the debate is over how fast bond purchases should be reduced. But as far as I’m aware quantitative tightening involves selling bonds as opposed to just reducing how many you are buying. I believe the Federal Reserve engaged very briefly in quantitative tightening, i.e. selling bonds, in 2018 but had to stop when the reaction from financial markets wasn’t good. Reducing the level of QE isn’t the same as tightening

    1. Mathew Of course you are right. Tapering bond purchases is not the same as selling them. There was a debate among the mainstream about whether to first taper purchases and then reduce the stock by allowing bond maturity to expire and then raise the policy rate OR the opposite OR do both together. I am not sure it makes much difference – maybe hiking rates will hit equities more while ending QE will hit bonds more.

  2. Thank you Michael for enduring and reporting back. It seems that everything was considered, analyzed and discussed except the elephant in the room. Can the FED act against inflation without crashing the markets? Everything else is quite irrelevant. If the $54 trillion ‘too big to fail’ share market crashes, it is game over, lights out, end of days. The economy will be decked. The good news is that if this comes to pass, you and I will finally agree that we are now in a depression.

    1. And you know what’s more frustrating?

      This is the moment when wage earners in poor countries (I don’t like “Global South” and “underdeveloped” is too euphemistic for my taste) get skin in the game whether we want or not.

      Consider Brazilians like me. Some of us know a shock of major proportions is coming. Proverbially, when the rich countries get a cold, we go into the ICU with pneumonia, as far as the economy goes, China being the exception but then again it’s an economic powerhouse in itself.

      But there’s very little we can do to protect our savings. Savings accounts aren’t safe: the government froze all savings accounts for more than a year in 1990, to reduce the money supply and curb inflation. Treasury bonds, which in Brazil can be traded by anyone, not just authorised banks as US bonds, aren’t safe either: poor countries default on their bond-denominated debt every now and then – last time in 1984 in our case. Other financial instruments, like funds or stocks, are even riskier for the inexperienced. Private pension funds are on scarcely more solid ground.

      That leaves what, the Swiss franc?

      Policymakers in central bankers and finance ministries could be forgiven for living under extreme stress that their decisions can cause economies to tank – except I don’t think they’re all that stressed about the well-being of wage earners.

    2. UCBP,

      I find it disturbing what you might take as good news.

      If there is a crash of the proportions suggested, then the people who will suffer the most will be the working class.

      1. Henry you are right of course. I apologize for the choice of words. I thought about it afterwards and came to the same conclusion. However Michael and I have disagreed on the characterization of the period for such a long time that overexuberance got me.

      2. Just read a financial commentator pointing out that it took 60 years for the global markets to recover the 1929 losses so he expects after this crash it will take up to 2090 to recover. Doubt capitalism will be around by then.

  3. Michael’s reporting of the conference proceedings reminds me of the old joke:

    Why is der as many ‘orses arses as there is ‘orses – because there is one arse per ‘orse – or is der two?

    Replace “‘orses arses” with opinions and “‘orses” with economists and there it is.

  4. The minutiae of China’s export of capital might be of interest to the mainstream economists. But did they identify the main points about it: 1) China exports capital for the same reasons that other monopoly capitalist countries do (outlets for investment, to muscle into foreign markets, and to assure supplies of raw materials); and 2) China is an expanding power that now contends to redivide the outlets for investment, markets, and raw materials at the expense of the established imperialist powers.

    And if the mainstream economists ignored what Lenin observed and explained about imperialism, it is unfortunately a good bet that the radical ASSA sessions did likewise. Maybe there was an exception?

    1. Points 1 and 2 are true in a general, ahistorical, phenomological sense that ignores aspects of China’s trade relations that are far from typically bourgeois, as well as 500 years of Western capitalism’s violently formed and maintained colonial/imperialist history. Revolutionary China was and remains a departure, not a continuation of the imperial system. Some of the leaderhship have even appeared wearing Mao jackets rather than well-tailored suits!

  5. Meanwhile, China’s inflation is under control:

    Looks like Marx’s inflation theory (a direct derivation of the Value Theory) is correct. This inflationary pressure we’re seeing right now doesn’t arise from disruptions in supply and demand or any monetary policy, but from a restructuring of capitalism: the USA simply doesn’t generate enough value to justify all the USDs it is printing, hence it is importing more commodities than it can consume (hence the containers glut from the West Coast).

    In fact, we can make the case that, if it was not for the intense and immense dollar printing process since 2020, the USA’s inflation would be even more out of control (although it could go either way: deflation or even greater inflation).

    Trump and Biden made the right decision all along: they used the fact the USA issues the universal fiat currency to keep the USA economy afloat as best as it can. Dollar printing is saving the USA economy (at least, buying it the most time possible). The American elites also took the right decision to “financialize” during the 1980s: if it wasn’t for this massive outsourcing process, capitalism would probably have collapsed a long time ago, due to a sharp fall of the profit rate.

    Capitalism cannot and will not be saved. But historians 300 years from now will make the conclusion the capitalist elites from the Post-War made all the correct decisions possible from the viewpoint of their own class.

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