by Arjun Jayadev and J. W. Mason

Last year marked a watershed: For the first time in history, growth in renewable generation exceeded global growth in electricity output, causing fossil fuel power generation to decline for the first time on record. But 2025 also saw the beginning of a historic surge in energy demand from AI. Just four companies — Amazon, Google, Microsoft, and FaceBook – are expected to spend over $1.5 trillion, one quarter of all U.S. fixed investment, on new datacenters in the coming year.

These twin shifts, and the balance between them, will be central to the future of both carbon emissions and energy prices. But they also tell us something fundamental about how the economy works. Because while both these investment booms take place through markets, in the sense that their inputs are purchased and their output are sold, neither is a response to market demand. These two engines of global growth are being directed by something very different from what we traditionally think of as market signals.

The reaction from economists and business commentators to the surge of investment into these sectors has been a mix of exhilaration and fear. On the one hand, these investments promise genuinely revolutionary change, but on the other they violate deep-seated ideas of how the economy is supposed to work.

The expansion of solar-panel production has pushed far past the limits of profitability. Yet despite a drumbeat of warnings of overcapacity and collapsing prices, production keeps growing.

AI investment is, if anything, even more unmoored from profitability. Unit costs for computation have been estimated to be as much as eight times greater than what is being charged for them. Add to this the immense capital expenditures required, and it is far from clear that there is any viable business model for the AI services currently flooding the market. Anthropic’s recent decision to throttle back its less-expensive subscription tiers for Claude code users was, arguably, a recognition of this reality.

Economics teaches us that markets guide resources to their most profitable uses. Resources are allocated based on the relationship between prices and costs. Where the sales price of something is above the cost of production, businesses will add capacity to produce more of it; where the price is below production costs, businesses will scale back or exit. But in both green energy and AI, as in many historical investment booms, that is not what is happening. The resources move first, and the profits come later – or perhaps not at all.

Some experts fear we are fearing another bout of irrational exuberance — a misallocation of resources on a vast scale, this time colored with an appealing green or silicon hue. But from our point of view, the most important question about these investment booms is not whether they are irrational. It is what they reveal about how capitalism has always worked. Decisions about what industries will be built up and which will be abandoned are guided not by the invisible hand of the market, but by the hidden planners of finance.

True, the US AI boom is largely private, while the Chinese solar boom is driven by the country’s public sector. But this is less of a difference than it first appears. Investment in both cases reflects conscious decisions of a small group of people—venture capitalists in one case, government officials in the other. Indeed, given the Chinese model of devolved industrial policy with intense competition between local governments, decisions about investment may be more centralized in the US version.

When investors pour funds into ventures that promise profits years or decades from now, they are not responding to the market. They are making a conscious choice – or a plan – to reorganize the economy. The AI and green-energy industries illustrate this dynamic in especially dramatic form. But any business that operates at a loss (as almost all do in their early years) is doing so in defiance of market signals. How long a business can operate at a loss, and how high profits must be to justify expanding or even remaining in existence, are fundamentally questions about financing.

Finance exists precisely to allow production to depart from market signals. Money organized through finance is a bet on, and a catalyst for, a particular vision of the future.

The extravagant promises and, often, utopian visions, that accompany great investment booms function as coordination mechanisms. They align expectations, justify losses, and stabilize beliefs so that resources can be committed to loss-making industries until they become profitable.

In the language of John Maynard Keynes, such moments are driven less by calculable returns than by “animal spirits”—the fragile, shared confidence that induces investors to act in the face of a fundamentally unknowable future. “Enterprise,” as he wrote, “only pretends to itself to be mainly actuated by the statements in its own prospectus… Only a little more than an expedition to the South Pole, is it based on an exact calculation of benefits to come.” The combination of animal spirits and organized finance is what allows investment to move in advance of profit.

In this environment, money does not operate as a neutral means of exchange. In great waves of investment like we are seeing today, organized money is the instrument through which production is redirected, futures are selected, and value is constructed. All of this happens not in response to the market, but in defiance of it.

Among leading economists, Joseph Schumpeter was among the few to focus on the transformative role of finance. Credit’s essential role in innovation, in his view, has more in common with central planning than with traditional markets. Loans to entrepreneurs, he wrote, are “what corresponds in capitalist society to the order issued by the central bureau in the socialist state.” A loan is, in effect, an order saying: This business has the authority to take whatever labour and resources its project requires up to some certain amount. The hundreds of billions flowing into AI compute and solar manufacturing are precisely the result of such orders. Far from passive reactions to known future profits, they are reshaping the terrain on which future profitability will be assessed.

Finance is planning. To organize money is to select some futures and foreclose others, permitting certain transformations while making others impossible. In green technology, that planning reflects the priorities of the Chinese state, which has channeled both public and private investment into solar manufacturing, battery technology, and electric vehicles. It harnesses markets to do so, but the shift is taking place at a scale and speed that markets alone could never achieve. A similar story is unfolding in AI: The investment boom reflects the convictions of a small number of tech CEOs and venture capital principals. Their commitment to AI reflects their vision of the long-term future of humanity as much as it does expectations of profit.

Once we clear away the idea of monetary neutrality and the role of markets, we can see finance for what it is – what science fiction writer Kim Stanley Robinson called a “Ministry of the Future.” Markets are not an alternative to planning, but the medium through which planning takes place. Which leaves us with the real question: Are the futures being planned for us the ones that we want?

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Arjun and I wrote this op-ed back in May, when Against Money was published. We didn’t manage to do anything with it then, but it feels just as relevant now. Speaking of Against Money, you can order it from the publisher’s website here, or from Amazon; it’s also available in many bookstores.

Also, a note: I am going to try to start posting more regularly on this blog. For the rest of 2026, I am going to aim for one post per week. There’s nothing in particular that you need to do with this information, I am just putting it down here as a marker.

I apologize for lack of content on this blog-slash-newsletter lately. Among other excuses, I’ve just been elected chair of the John Jay Economics Department. Many of you know how that goes. A chair is not a boss, they are just the department’s representative with the university, and the person to whom various administrative tasks are delegated. For example, our department will be hiring this year. I don’t decide on who we hire – every full-time faculty member gets an equal vote. But I am the one who has to make sure that all the forms are filled out.

(As an aside for another time, it is worth noting how much of what has been, at least pre-Trump, one of America’s most successful export industries, is run in practice as a bunch of little worker cooperatives.)

One thing I am still making time for is interviews and events for Against Money. I was talking about the book on a podcast just today, a business and finance one as opposed to the more political ones we have mostly been on. It was a great discussion, but at the end the host asked, “OK, though, Mamdani — this guy’s a communist, right?” There are a couple ways one could respond to that. What I said is the same thing I said to a journalist from The Guardian recently: Socialism is a word for much of what municipal governments already do. Governing as a socialist just means doing more of it and better.

That interview isn’t yet up yet. But some other Against Money content is.

First, a very thoughtful review just came out in The American Prospect, by Jeff Sklansky, with the nice headline “The Class Struggle in Your Wallet.” Money is a topic on which people, especially people who might want to review a book like this, have, quite understandably, their own deeply held views, debates they’re deeply invested in; it can be hard to step back and approach things from a different direction. So I appreciate that Sklansky so generously approached the book on its own terms. I was especially pleased that he zeroed in on the magic mirror as a master metaphor for our vision of money. (At one point “The Magic Mirror” was in the running for the book’s title.)

Sklansky’s one big criticism of the book is that we focus too much on conflicting ideas about money, and neglect more concrete political conflicts. It is a fair criticism. That said, there are reasons we wrote the book the way we did: It is a record of our own escape from the fly-bottle of orthodox thinking about money, which we hope others will be able to follow; we wanted a book that could possibly be read in 25 years, as opposed to one tightly linked to the struggles of the moment. But it remains true that there is a different set of questions, the foundational political questions of what is to be done and who is to blame and which side are you on, that the book does not really address.

Or as Sklansky puts it:

Mason and Jayadev derive a more radical social-democratic prescription from Keynes’s diagnosis of the Great Depression than he did. Against Money sparkles with critical lessons to guide progressive fiscal and monetary policy and financial reform today. But to understand why capital’s power to oppress has proven more enduring than Keynes anticipated, this extraordinarily provocative study should be coupled with a searching examination of the class structure of modern money itself.

I agree that the book could have done more of this, though I think it did some — the section on the euro crisis, for instance, is an example of how a more realistic view of money can reveal vectors of power that are hard to see otherwise. But yes, the conscious political effort to (re)establish markets and money as the governing logic of coordination, even as the actual needs of production often point the other way, is an essential part of the story and should have been foregrounded more than it was. That’s something we’ll do better in the next project, I hope.

Doug Henwood makes a somewhat similar critique towards the end of our interview on his excellent radio show/podcast Behind the News. “I’m very fond of this Antonio Negri quote, ‘Money has one face, that of the boss’,” Doug says. “You play with concepts like that, but then often turn away, and find non-monetary ways of living hidden amidst the getting and spending. Your conclusion has us stepping out of the getting and spending world, and into the sunshine. That all seems a little too easy. There’s not a lot of politics in the book, in terms of the exercise of power and challenging power. So what about the politics of money?”

One point of the book is that it may be easier than we think! Or at least, that the biggest difficulties are not where we think they are.

When we talk about “the economy” at a high level of abstraction, we often speak of a”market economy” or a “capitalist economy,” as if the whole world of production was organized on a single principle. This is the case whether we draw our abstractions from textbook economics or the Marxist tradition. But when we take a more fine-grained look at the ways production is actually organized, we see a great many areas where the pursuit of profit is not the motivator, and even more where activity is not organized through markets and prices. Public schools (and academic departments), libraries, courts, families, churches and militaries are all things that exist in the world we live in. Wherever production involves specialized expertise, professional norms and standards play an essential organizing role. And even for-profit corporations are internally planned economies — hierarchical and often despotic, yes, but not at all markets.

What has to be overcome, then, is not so much the logic of money itself, but rather the political power, the capacity for organized violence, that is exercised in the name of, and legitimized by, money and property.

Again, the lines of authority within production seldom have anything to do with property rights. You probably have a job, or have had one. How does your boss exercise authority over you? Almost certainly, it’s because of a position they occupy within some formal organization, not because of something they personally own. Ownership is the language in which the hierarchy is justified and understood. But it is not the organizing principle of the workplace.

As Marx argues so powerfully in Chapter 13 of Capital, the gains of modern industry have come through cooperation between workers on a vastly larger scale than in previous societies. The surplus that is claimed by capital comes from organized human cooperation; capital ownership is simply the way positions in this immense division of labor are assigned. Money is not organizing production, it is a badge or emblem of authority within the social bodies through which production takes place. So-called “capital markets” don’t allocate investment, and “capital flows” don’t involve movement of tools and machines; in both cases, what is involved is tradable claims to authority over production. Or as Marx puts it, management of industry is a function of capital ownership only in the same way “as in feudal times, the functions of general and judge were attributes of landed property.”

The point is that we systematically misperceive organized human cooperation, and the essentially political hierarchies that govern it, as a system of market exchanges of commodities. What we are trying to do in the book is the same thing, in my mind at least, that Marx was trying to do — to escape “the bewitched, distorted, and upside-down world haunted by Monsieur le Capital and Madame la Terre” and see the concrete human relationships and political choices hidden behind seemingly objective economic categories.

When we look at things this way, it seems to me, then one answer to Doug’s question is that clarifying the limited the role of money is in the organization of production is an important preliminary step toward challenging the tyranny exercised in its name. And as Marx also emphasized, a meaningful socialist politics can only be built on tendencies and forms of cooperation that already exist in the society we live in. So, again, to me, seeing those non-monetary ways of living already around us is an essential part of a project to systematically expand them.

I admit that we spend more time on the first half of this argument than the second, on clearing away the mystifications than on where to go afterward. It is clear in my mind that the arguments we make about GDP, the interest rate and so on are steps toward a larger vision of social transformation; but it might not be as clear to readers of the book. And this is a limitation. But on the other hand, I also think of another quote that Doug is fond of, from Adorno, that “The demand for positive proposals is like the demand for papers from the police.” It is true, as the man said, that the goal is not just to understand the world but to change it. But one does sometimes need to first step back and think carefully about how to think about things. The demand to move on to the practical politics must sometimes be, if not refused, at least deferred.

Anyway, this exchange was just the last part of the conversation — the rest of it was a wide-ranging and enjoyable discussion of the book with someone who understands its subject matter as well as anyone. I say this about everything I share, but in this case especially, please do give it a listen. And then stick around for the stimulating conversation with Moira Weigel about the Right and theory that follows it, where you will learn that Palantir CEO Alex Karp got into the automated surveillance business only after writing a dissertation on Adorno.

We also had a good discussion of the book on the New Books Network. One nice thing about them is that they go through a book chapter by chapter, inviting you to summarize each one. I’d never heard of them before, but they seem to put up a dozen episodes a day, on a wide range of interesting-looking books. There are so many podcasts! There’s a funny bit late in the show The Good Place where the angels, since they no longer admitting anyone to heaven, turn out to be passing their time listening to podcasts. Which makes sense — who else could follow all of them?

I was also recently gave a virtual talk to a group from the Institute for New Economic Thinking’s Young Scholars Initiative. This was part of a conference on “Money As If Finance Mattered,” and features a whole bunch of very interesting scholars. (YSI consistently puts together very good events, in my experience.) My own talk was about why debates about monetary neutrality matter, and the larger, and often unrecognized, implications if we take the non-neutrality of money seriously.

Finally, we had a great discussion of the book with the Polycrisis book club. Polycrisis is Tim Sahay’s and Kate McKenzie’s newish climate vertical at Phenomenal World. Polycrisis prints a ton of interesting stuff on the intersection of climate with broader economic and political questions; I definitely recommend reading it. (You should also be following Tim’s epic threads on Bluesky.) One nice thing about this conversation was that it gave us a chance to get into the significance of our thinking about money for climate questions, something which we initially planned to spend a chapter on in the book but ultimately had to drop.

Speaking of Phenomenal World, their growing media empire is one of the most exciting things going on in leftwing media these days — it occupies a rare and vital niche of offering space for scholars to make long and rigorous but politically engaged arguments for a broad non-specialist audience. In some ways, arguably, it’s the closest US equivalent to New Left Review and its Sidecar blog — a model that a lot of other people have tried to replicate less successfully. It’s certainly the most exciting new outlet for the kind of writing I’m interested in that has come along in the past few years.

I feel obliged to mention here that Phenomenal World founding editor Jack Gross was briefly student in the economics MA program here at John Jay. Does everyone who studies economics at John Jay go on to found a major new online journal? Well no; but a remarkably high proportion end up doing something similarly impressive. Admissions, unfortunately, are closed for this year. But please do spread the word about us to people who might think about applying in the future.

I first started thinking about economics thirty years ago, during the (first) tech boom.

This was the era of “irrational exuberance,” the phrase coined by the recently deceased Alan Greenspan and made famous by Robert Shiller. I wrote a review of Shiller’s book of that title for In These Times — one of my first published articles. My first paper in graduate school was a replication of a paper by Brad DeLong and Larry Summers, which argued that seemingly excessive stock valuations could be explained by rational investors extrapolating recent earnings growth into the future.

All of which is seeming at least a little bit relevant today.

Between the start of 1995 and the end of 1999, the price-earnings ratio for the S&P 500, as measured by Shiller, more than doubled, from 20 to nearly 44. Then over the next three years, it fell back nearly as far. Today, price-earnings ratios by the same metric are just shy of 40, not far from the peak of the first tech boom. Everything old is new again, it seems. (Except that, as Paul Krugman notes, people generally liked the products of the first internet companies.) So the obvious question is whether this is also a bubble — whether the second half of the late-1990s story will get a rerun as well.

There are many people out there with highly specialized expertise whose whole job is to think about stock valuations. I am not one of those people! If you are looking for investment advice, you have come to the wrong blog.

But I do think I have something to add.

Most of what makes financial-analyst jobs hard has to do with specific companies and specific markets. Things get easier when we are looking at the stock market as a whole. (And that is where my own background in heterodox macro is more likely to help.) When we are talking about corporate equity in the aggregate, rather than individual securities, some arithmetic comes into play that helpfully limits the space of possibilities.

One way to think of a share is that it gives a claim on future payments by the corporation that issued it. This is not all that a share is — as Arjun and I stress in Against Money, it’s important to keep sight of financial assets’ existence as concrete objects with their own specific properties, and not reduce them to simply a future cashflow. But certainly the cashflow it gives claim to is one very important property of a share.

Again, the value of share is not reducible to present value of expected (in either the statistical and/or psychological sense) future payments. But those should act as an anchor. Unless we have good reason to think there is a change on value market participants put on future payments, we should expect share prices to vary roughly in proportion to them. And even if we think valuation of shares can vary indefinitely with respect to payments they give claim to, it’s worth knowing how much of current share prices would have to be explained in these terms, and how much can be explained by variation in the payments.

In the rest of this post, I am going to look at the US nonfinancial corporate sector. This means excluding the 20-25% of corporate equity issued by financial businesses, and including closely-held corporations as well as those listed on public exchanges. This is mainly because that’s the universe for which it’s easiest to get consistent data. But I also think it’s a reasonable thing to be interested in substantively.

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If we look at nonfinancial corporate equity over the 80 years since World War II, here is what we see:

The figure shows the total value of nonfinancial corporate equity,as a share of potential GDP. (I am skeptical of potential as a measure of actual economic potential, but here it is just functioning as a trend, to smooth out short-term changes in the denominator.) This, I would argue, is the most straightforward measure of the value of the stock market in broad social terms — how much claim wealth in this form gives on social labor and its products. This is also, of course, the metric used by Piketty.

As the figure shows, stock market value in that sense has had three long upswings. The first peaked in the late 1960s at 0.9, the second in 2000 at 1.6, and the third is ongoing, with the ratio currently at 2.3. (The data in this post is drawn from the Fed’s Financial Accounts, and goes through the first quarter of 2026.) Over the long run, there is a clear upward trend, especially over the past 15 years. (The dotted line shows the post-WWII average.) By this metric, the current stock market boom has now run well ahead of the late 1990s one.

How should we think about this?

Logically, the value of corporate equity relative to GDP must reflect a combination of four factors: value added in the corporate sector as a share of GDP; corporate profits as a share of their value added; payouts to shareholders as a percentage of profits; and the value placed by markets on each dollar of payouts.

In other words, if corporate stock is worth more relative to GDP, that can be either because more of GDP is now happening in the corporate sector; or because more of the income from that activity is going to profits; or because more of those profits are being paid out to shareholders (rather than retained in the firm); or because financial markets place a greater value on each dollar of payment. Or of course some combination of those.

We can write this as an accounting identity:

equity/GDP = value added/GDP * profits/value added * payouts/profits * equity/payouts

As with any accounting identity applied historically, it is useful insofar as it corresponds to (1) categories in the relevant data, and (2) distinct causal factors we believe to be at work.

For the first term, we are, again, using all nonfinancial corporate equity, which includes closely held as well as publicly-traded corporations, and the BEA’s estimate of potential GDP. (Both are in current dollars.) Value added is defined, as usual, as sales less the cost of non-labor outputs. Profits are after tax (and of course also after depreciation); conceptually, these are the funds potentially available for distribution to shareholders.

Payouts I am defining as dividends less net new equity issues. That share repurchases are conceptually equivalent to dividends is not, I think, too controversial at this point (though it creates a lot of headaches). We are also adding shares retired through cash acquisitions, and subtracting shares issued whether in IPOs or otherwise. This might seem odd at the level of an individual firm, but at the aggregate level these other flows seem clearly equivalent to buybacks and dividends. If firm A buys up all the shares in firm B for cash, that is a payment from the corporate sector to shareholders, just as if firm A were buying back its own shares. Similarly, new shares issued are a reduction in the aggregate payments from the corporate sector to shareholders just as a reduction in dividend payments would be.

It might sound strange to define IPOs (which generally are quite exciting for stock market participants) as equivalent to dividend reductions (which generally are not.) But this is where the aggregate perspective matters. Shareholders as a whole already own all the equity of the corporate sector as a whole. An IPO is a payment from shareholders to the corporate sector, exactly like buyback is a payment from the corporate sector to shareholders, without in either case any change in aggregate ownership rights. Or looking at it from another point of view, new corporations are in general competing with existing firms; the profits flowing out to shareholders of the new firm are to a first approximation deductions from the profits flowing to claimants on existing firms. Nice for the shareholders in the new firm, if it succeeds; but no use to shareholders as a class.

Finally, the valuation term asks, in effect, what is the market price of a dollar of income from the corporate sector. It’s analogous to the price-earnings or price-dividend ratios one sees at the level of individual corporations or indexes, though not identical given the nonstandard (but, I would argue, appropriate) way I have defined payouts. Here it also functions as the residual term, reflecting any change in the value of equity not explained by the other factors.

The figures below show the values of each of these terms over the past 80 years. What do we see?

We will start with the first term, corporate value added as a share of GDP. This shows how much of economic activity takes place in the corporate sector, and is potentially available for shareholders.

As it turns out, the corporate value added term does not do anything interesting. Yes, it is modestly lower (around 50 percent) after 2000 than its average in the earlier decades (53 percent), suggesting that all else equal, we might expect the value of corporate equity to be slightly lower relative to GDP in the 21st than in the 20th century. But this change is very small compared with the movements in the other terms. This factor might be important if we were comparing the US to other countries, but it is not part of the story here.

Next, profits:

Profits as a share of value added shows much more variation, falling by half in the 1980s, then rising in this century, in two big jumps — one after 2000 and the second over the past five or so years. While the corporate share of GDP doesn’t vary by even 10 percent over the whole period, profits as a share of value added are fully three times greater today than they were for much of the 1980s.

The third term is payouts.

Payouts (as I’ve defined them) also show large variation, rising from a bit under 40 percent of profits in the early decades to over 80 percent in more recent ones. The timing here is a bit different — though there is plenty of short-term variation, the long-run shift happens in a single big jump in the early 1980s. (This was the topic of an essay in my dissertation, which I never managed to publish as an academic article but did turn into a report for the Roosevelt Institute.) This term gets relatively little attention in discussion of stock prices, but it seems to me that it is as fundamental as profits to any discussion of long-term trends in the value of corporate equity.

Finally, the valuation term shows a lot of short- and medium-term variation but, perhaps surprisingly, no long run trend. Today’s ratio of around 40 is close to what we see in the 1950s and 1960s.

Again, what we are measuring with this last term is the ratio of equity value to shareholder payouts, including net share repurchases. The big spikes in the early 1970s and in 2000 are because those years saw exceptionally high new equity issues, which means very low payouts by my metric, and therefore very high ratios of equity value to payouts.

It is more common to talk about equity in relation to earnings, on the implicit assumption that profits are of equal value to shareholders whether they are paid out or not. I’ve shown this latter ratio below. But personally, I do not think that that is a good assumption. Shareholders evidently care a great deal about payouts — why else would companies pay dividends and make share repurchases? I think it is important to distinguish between corporations and the shareholders who exercise claims on them — the former are not simply the personal property of the latter. From this point of view, it is more natural to talk about valuation in terms of the price shareholders place on the income they actually get from corporations, as opposed to the underlying profits.

All of these series (except the last one) are combined in the next figure, which is really the whole point of this post. If you take one thing from one I’ve written here, this picture is it.

Equity value relative to GDP and its components, 1947-2026:

For this figure, I’ve converted the values to logs. This has the big advantage of converting the multiplicative relationship to an additive one, so that we can visually see the contribution made by each of them. But it can make interpreting the figure a bit tricky. Here, zero is the average value over the full period; positive one is a value about 2.7 times greater than the average, while negative one is a value about one-third of the average. The black line similarly describes the deviation of the equity-GDP ratio from its full-period average; the heights of the bars correspond to the contribution each term makes to that deviation. The data is quarterly; for all the terms except equity, I use rolling one-year averages.

As we can see, the log of the equity-GDP ratio is currently about 1.1 above its long-run average, corresponding to a value nearly three times greater. (2.2 today, versus a long run average of 0.85.) Just over half of this (0.53) is explained by higher profits relative to value added, 0.19 is explained by higher payouts relative to profits, and 0.36 is explained by the valuation term.

So already we can see that a simple explanation of today’s high equity values is going to be incomplete. Relative to the long-run average, we have three distinct factors each of which explains a significant share of today’s higher values.

Another thing that jumps out from the figure is that the previous historical peaks in equity values reflect quite different mixes of these components.

In the 1960s, profits as a share of value added were, for a while, well above average, though not as high as today; but the fraction of those profits flowing out to shareholders was much lower. Thus the much lower ratio of equity to GDP, despite comparable valuation ratios.

In the late 1990s, profits as a share of value added were much lower — less than 5 percent at the height of the tech bubble, compared with 10 percent in the 1960s and 15 percent today. But the fraction of profits paid out to shareholders was historically high, averaging over 100 percent for the 1998-2000 period. It’s worth noting in this context, also, that the collapse of equity value in the 1970s reflected a fall in shareholder payouts much more than in profitability; this is perhaps important context for the shareholder revolt that followed.

The big takeaway from this decomposition is that we should be cautious about assuming the stock market is overvalued — that we’re in a bubble, that this is another bout of irrational exuberance — simply because equity prices are high relative to the historical norm. Shareholders have it better than the historical norm, too. Corporations are more profitable. And more of those profits are flowing out to them. A bit of exuberance might be rational, under the circumstances.

On the other hand: If we focus on just the past 20 years, as in the figure below, the picture looks a bit different.

Yes, both profits and payouts are high relative to their long-run averages; but those shifts mostly came earlier, while the big rise in equity prices is more recent. Apart from the relatively brief collapse in profits during the Great Recession, almost all the variation in equity prices over the past two decades comes from the valuation term, rather than changes in the underlying payments to shareholders.

This is even more true over the past two years — equity values have increased sharply while profits have been stable and aggregate payments to shareholders have fallen, as dividend growth has stalled and net equity issue has turned positive. As a share of GDP, the net payments flowing from corporations to shareholders today are very close to where they were a decade ago; but corporate equity is worth 60 percent more. It’s hard to avoid the conclusion that either equity was undervalued in the mid-2010s, or it is overvalued now.

So which side do we focus on? Over the long run, most — tho not all — of the increase in the value of wealth in the form of corporate equity, is explained by what we might call fundamentals — the flow of payments to owners of that wealth. Over the short to medium run, on the other hand, almost all of the increase in the value of equity comes from valuation, and whatever financial-market dynamics drive that. Or as the old saying goes, in the short run the market is a voting machine, but in the long run it’s a weighing machine.

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I want to say a bit more about the profits and payouts parts of the picture.

That high stock prices reflect to some extent a high level of corporate profits seems to be reasonably well understood, at least based on recent coverage in the Financial Times. This of course does not mean that high stock prices are justified, or sustainable; it just shifts the question to how justified or sustainable the high profits are.

This goes double to the extent that high valuations are based on an expectation of further increases in profits, as this recent FT piece suggests:

Wall Street’s expectations for company profit growth are rising at the fastest pace since the post-pandemic rebound, fuelling concern that an “earnings bubble” could be forming in the estimates that have underpinned the US stock market’s rally.

Analysts are now forecasting a 25 per cent increase in S&P 500 company earnings for the coming year, according to Bloomberg data, boosted by a resilient US economy and the AI boom.

However, just ahead of the second-quarter earnings season, some investors are growing concerned about the speed at which analysts’ estimates are rising…

This Alphaville piece goes further, saying that “supernormal profits are unsustainable, because they always are.” I don’t know about that. I don’t know if there’s any reason to think the profit share is stationary, to use the statistics jargon — apart from a dip in 2008-2009, profits as a share of value added have been greater than their long-run average in every year of this century, and seem to be getting farther from it. Capital really has won some lasting victories in the class war.

That is one natural way to look at profits — as a distributional variable. But there’s another way of looking at them, from the demand side.

We know, as readers of Keynes, that an increase in investment automatically creates an equal quantity of additional saving. If, furthermore, there’s little or no incremental saving out of wage income (a reasonable assumption, in my opinion) and if the fiscal balance and trade balance don’t change significantly (perhaps less reasonable, but we’ll go with it) then this additional saving must take the form of an increase in profits. This relationship is often known as the Kalecki-Levy profits identity, and is one bit of heterodox economics that has established a foothold in finance and the business press. The same identity says that an increase in the fiscal deficit or trade surplus should similarly lead to an equal increase in aggregate profits.

Exploring the math of this and the extent to which it is a reasonable first approximation of real-world dynamics would be an interesting exercise for another post. But it raises another point which I think is very relevant for thinking about the current situation: Even if the AI companies themselves are not particularly (or at all) profitable, AI-related investment spending is probably an important factor in raising aggregate profits. Just like the California gold rush generated plenty of profits for somebody, even if the vast majority of prospectors themselves went broke.

Or as this recent FT piece puts it:

The AI boom is lifting the fortunes of hundreds of formerly drab industrial, utility and mining companies as investors turn to the “picks and shovels” needed to build and power vast data centres. …

The companies benefiting include Caterpillar, best known for construction equipment but now supplying generators for data centres, 150-year-old German engineering company Hochtief, which will enter the Dax later this month, and Nucor, a steel supplier that has credited “white hot” AI demand for a “tsunami of earnings power”. …

The vast amounts of electricity needed for AI training are also fuelling demand for specialised power management, high-voltage electronics and cooling technologies. This has led to big interest in traditional suppliers of electrical equipment…

You could think of it like this: As long as there is strong investment demand and easy financing for it, the profits will be there …. but not necessarily for the companies carrying out the investment and getting the financing.

And this, perhaps, is the point where the macro perspective needs to give way to the micro one. Because it may be that, yes, in the aggregate, an ease in financing brings forth additional investment, which generates enough profits to justify the initial financing. But debt must be paid back not in the aggregate, but by the specific companies that incurred it. If the investment is one place and the profits are somewhere else, then at some point somebody’s survival constraint is going to be violated.

And I think I will end this post here.

I very much want to discuss the payouts piece of the equation, which in my mind is as important as profits, and much less discussed. But this post is already too long, and has taken much too long to write. So the payouts piece should be along, well, if not this month, then next month for sure, or anyway sometime soon.

Two reminders: First, my book with Arjun Jayadev, Against Money, is out now from University of Chicago Press. You can order it from the publisher’s website here, or from Amazon; it’s also available in many bookstores.

Second, July 15 is the deadline to apply for admission to the John Jay economics MA programfor Fall 2026. We are always looking for more students who want to understand the economy in order to change it.

My name is J. W. Mason. I am an associate professor and chair of the economics department at John Jay College, CUNY, and a senior fellow at the Groundwork Collaborative. It’s a pleasure to address the Committee on Government Efficiency, several of whose members I worked with back in my days as the Policy Director of the New York Working Families Party.

I am here today to speak in opposition to any measure to create stricter rules for the use of City reserve funds, or to enshrine limits on reserve-fund withdrawals in the New York City Charter. I believe that the City needs greater short-term flexibility in budgeting, not less.

Economics suggests two broad principles for thinking about the City budget position.

First, over the long run, growth city expenditure needs to match growth in revenue. Unlike the federal government, the city cannot run deficits indefinitely, nor can it use long-run debt to fund current expenditure.

Second, over the short run, adjustments in response to unexpected shocks to revenue or program costs should fall on those areas of spending with the greatest intertemporal elasticity of substitution. In other words, when faced with a mismatch between current revenues and current expenditure, the adjustment required in order to bring them into balance should as much as possible fall on those budget items for which a dollar of spending next year is a close substitute for a dollar of spending this year.

The first of these principles, presumably, is accepted by everyone here. The second one is less familiar. But it is also implicitly accepted by everyone when it comes to periods of a year or less.

New York City, like many governments has very large short-term fluctuations in revenue. Between quarters, the average change in tax receipts is 13 percent; the average change in total receipts is 10 percent. It is not unusual to see total City revenues fall by 10 percent from one quarter to the next, or to see tax revenues fall by as much as 15 percent over a quarter, as they did between the first and second quarters of this fiscal year. (New York City Comptroller, “New York City Quarterly Cash Report”.)

Figure 1. Source: New York City Comptroller, New York City Quarterly Cash Report; and author’s analysis

No one believes that short-term variation in the timing of city receipts should lead to city departments cutting (or increasing) spending by 10 or 15 percent, simply because relatively little tax revenue comes in the second quarter compared with the first. Everyone, I think, agrees that these short-term fluctuations should be entirely absorbed on the city’s balance sheet via short-term borrowing or changes in the city’s cash holdings.

That is not controversial. But what I would add is that, economically, there is no sharp line separating periods of less than a year from periods of more than a year. The same logic that tells us that variations in revenue or program costs over the course of the year should be entirely absorbed on the balance sheet, suggests that variation over a period of few years should also be primarily absorbed in this way.

It is true that the timing of tax revenue means there are greater fluctuations in revenue from quarter to quarter than from year to year. But the city still faces substantial variation in revenue from year to year, much of which is temporary. In recent years, we’ve seen city revenues increase by over 10 percent in some years, by as little as 1.5 percent in other years. It is far preferable to see spending rise steadily at the average rate of revenue growth, than to have big increases in spending in some years and cuts in real terms (which a 1.5 percent growth in spending would be) in other years, in an effort to achieve balance in each fiscal year. Variation in revenue from year to year is often temporary, and reverses the next year; and even if slower revenue growth turns out to be persistent, a gradual adjustment to the new situation is almost always preferable to an abrupt one.

Again, this principle is well understood at the level of practical budgeting. That is the reason that the city has reserve funds in the first place. And it is why, historically, the city has often used surpluses to prepay future years’ expenses rather to increase spending. (See New York City Comptroller 2022, “Preparing for the Next Fiscal Storm: Setting Guidelines for NYC’s Rainy Day Fund.”)

The items in the city budget that are most intertemporally elastic — most substitutable between one year and the next — are fund contributions. A dollar contributed to the fund next year is almost as good as a dollar contributed this year. If we were to contribute nothing to a given fund this year, and double the contribution next year, the overall funding position would be almost the same. In general, if the total contributions over some period are unchanged, there is very little economic cost to shifting those contributions around in time.

(Strictly speaking, the value of a dollar’s contribution this year relative to one next year is given by (1 + r)/(1 + g), where r is the average return on fund assets and g is the average growth rate of the economy or of City revenues. With a target return of 7 percent on City funds and an average annual growth of City revenues of 4 percent, that implies that a dollar contributed next year is the equivalent of 97 cents contributed this year.)

This is much less true of other city expenditures. If we were to shutter the city’s libraries this year, and double library spending next year, the overall value of library services provided to the public would be far less than with a stable level of spending. Additional hours of libraries open next year are a very poor substitute for hours the libraries are closed this year. The same goes for fire and police services, education, and most other public services.

In principle, capital expenditures are more substitutable -- a major road improvement, say, is almost as valuable if it is carried next year as this year. But in practice, the process by which projects are approved makes them hard to shift around in time — a project that has passed all the necessary hurdles to go forward in one year cannot necessarily be deferred to a later year or advanced to an earlier one. So in practice, the least costly way to address unexpected changes in City revenues or program costs is via contributions to or withdrawals from the city’s reserve funds — a category in which I would include the Retiree Health Benefit Trust and the Budget Stabilization Account as well as the Revenue Stabilization Fund and General Reserve.

The proposals to mandate contributions to the reserve funds and limit withdrawals from them would reduce this flexibility, and create greater instability in other categories of city spending. Perversely, they would force the burden of adjustment onto budget items that have less intertemporal substitutability. This is the opposite of what we should be trying to achieve. The budget needs more short-term flexibility, not less.

A number of these proposals involve formulas that are intended to allow flexibility when economic conditions warrant it, but not otherwise. For example, a recent proposal from the Comptroller’s office suggests that except in the event of natural disasters or similar catastrophic events, withdrawals from reserves should be permitted only once there have been two quarters of declining employment in the city. (New York City Comptroller 2026, “Strengthening the City’s Rainy Day Fund.”)

Since the idea of tying withdrawals to economic conditions may seem appealing, I want to explain why it is not a workable solution. There are four reasons, in my view, why hard rules based on economic data are not practical.

First (as the Comptroller’s proposal acknowledges, but other similar proposals do not), reliable macroeconomic data is often unavailable in real time; most economic data is subject to substantial revisions which can dramatically change the initial numbers.

For local employment, the final data are not released until a full year after the period which it covers, and are often quite different from the initial data. For example, in 2025, the jobs data as initially released showed a respectable gain of 50,000 jobs over the year. But the numbers have been subsequently revised downward and the most recent numbers show no job growth over the year at all.

Figure 2. Source: Bureau of Labor Statistics, State and Metro Area Employment, Hours, and Earnings; and author’s analysis

This does not mean that we should not use the most current economic data, of course. But data whose final value is not available until a year after the fact, and where the initial release may be very different from the revised value, needs to be used cautiously and weighed alongside other evidence on the state of the economy. It is not a suitable basis for imposing hard rules on the city budget.

Second, while national economic data is available sooner than for local areas, these are also unsuitable for budget rules, since business cycle dynamics in New York City can be quite different from national dynamics. For example, the 1990 recession was quite mild at the national level — employment fell by only about 1 percent and had fully recovered within two years of the end of the recession. But in New York, it was much more severe, with fully 10 percent of jobs lost and employment not returning to pre-recession levels until a decade later. (See the figure nearby.) This was also the case for the 2000 recession. The 2007-2009 recession, on the other hand, was milder in New York City, with employment returning to pre-recession levels two years after the recession ended, compared with five years nationally. So a rule based on national economic data may be a poor fit for local conditions.

Figure 3. Source: Federal Reserve Bank of St. Louis

A rule based on recessions, which has also been suggested as a trigger for drawing down reserve funds, combines both of these problems. The National Bureau for Economic Research often does not announce recession turning points until a year or more after the fact, and the timing of downturns may be significantly different at the local and national levels.

Third, even if we had reliable data, economic indicators do not move in sync, and it is not always obvious which is the appropriate one to use.

For New York City, as for most local governments, the single most important source of revenue is the property tax, which in recent years accounts for between 40 and 50 percent of all City tax revenue. Property tax receipts depend on property values, and these can move quite differently from employment or output. For example, while the 2007-2009 recession was, as noted, fairly mild in New York in terms of employment, home prices saw a steep and lasting fall — average New York home prices were lower in 2017 than they had been a decade earlier in 2007. (This is also shown in the previous figure.) Given the city’s reliance on property taxes, this is arguably more important than employment conditions. A rule based on employment would not necessarily give a good sense of the economic conditions that are most relevant for the city budget position.

Finally, in practice, data-based rules create arbitrary cutoffs and thresholds. The nature of rules is to impose hard binaries — either withdrawals from the reserve funds are permitted or they are not. But in practice, economic conditions may be quite similar in periods when the threshold is not quite reached as in periods when it is, and whatever indicator is used as the basis of a rule will, in reality, only be one of many pieces of information relevant to economic and budget conditions. Policymakers in the moment can weigh various considerations to decide whether it is appropriate to draw down or to add to reserves; a predefined rule does not allow this flexibility.

More generally, advocates of rules for city reserve funds need to grapple with the full implications of such rules. The city will, inevitably, face unforeseen changes in its revenues and in the cost of the services it provides. The impact of these changes must be absorbed somewhere in the budget. Given the city’s limited ability to control its revenue, especially in the short run, shocks that are not absorbed in the balance sheet will in general, be absorbed by changes to the level of city services provided. Ensuring a steady rate of contributions to the employee retiree health benefit fund sounds like a good thing, in isolation. But, obviously, stable contributions to the fund do nothing to reduce instability in city revenues or program costs. So a rule imposing a more stable path of contributions to the fund necessarily imposes more instabilityelsewhere in the city’s budget. And cutbacks to funding for the school system, or for public safety, will have persistent costs that cannot be made good in future years in the way that a shortfall in fund contributions can be.

A myopic focus on stabilizing contributions to city trust funds (which is of course desirable in isolation) can blind us to the very large costs of instability in the provision of public services. It is certainly true that the City, unlike the federal government and even more than the State, is constrained in its ability to issue debt, and cannot fund ongoing deficits through new borrowing. Nor, of course, can the city’s financial assets be spent down indefinitely. In this sense, it is absolutely correct that public expenditures must be managed so as to keep them in line with revenue growth over time. It is unfortunate, however, that the idea of responsibility has been narrowed to mean only a focus only on financial outcomes, and not on the no less critical responsibility for consistent provision of the public services that New York’s residents and businesses depend on.

Even short-term reductions in the provision of education, public safety, transportation, health and other services can have lasting effects. Among other things, public services are directly relevant to decisions by both families and businesses about whether to move to, or remain in, the City, and thus have important consequences for the City’s future tax base. When faced with a tradeoff between consistent contribution to city reserve funds and consistent provision of public services, the former has no better a priori claim to be considered the “responsible” course than the latter.

A related mistake, in my view, is the idea that policymakers will systematically err on the side of overspending unless restrained by hard budgetary rules. Both common sense and history suggest that while this sort of error certainly occurs, there is no reason to think it is any more common than the opposite error, of excessive resort to spending cuts to close budget gaps and insufficient use of balance-sheet flexibility.

There is no reason to assume policymakers will systematically err on the side of irresponsibly drawing down reserves; it is just as plausible that they will underutilize them. This is clearly the case at the state level, where the State made no drawdowns from the Tax Stabilization Fund or Rainy Day Reserve Fund in either the 2000 or 2007-2009 recessions despite substantial falls in tax revenue, instead resorting to other, more costly measures to close the state budget gap. (New York State Comptroller, “The Case for Building New York State’s Rainy Day Reserves”.) In general, there is no reason to think that today’s policymakers, who would impose this rule, are any more likely to strike the right balance between the balance-sheet position and public service provision than the future policymakers who would be bound by it. The one thing we know for sure is that future policymakers will be better informed about future economic and budget conditions than we are today.

To be clear, I think the existence of city reserve funds is a very good thing. Given the constraints on city borrowing, adequate reserve funds are essential to maintaining stable provision of city services in the face of unexpected shocks. It is appropriate for the City to contribute more to these funds in years when revenues are usually high, while drawing them down in years when revenue growth is weaker. And it may well be that the ideal funding of city reserves is greater than it has been historically.

There is nothing wrong with thinking about guidelines or targets for reserve funds. What I urge you to reject, however, is enshrining a hard limit on the use of reserves in the City Charter. The goal of maintaining reserves should be to provide future administrations with greater flexibility, not less, in responding to future challenges.

Thank you.

Two reminders: First, my book with Arjun Jayadev, Against Money, is out now from University of Chicago Press. You can order it from the publisher’s website here, or from Amazon; it’s also available in many bookstores.

Second, July 15 is the deadline to apply for admission to the John Jay economics MA program for Fall 2026. We are always looking for more students who want to understand the economy in order to change it.

There has been plenty of discussion of the decision, both supportive and critical. But there’s one aspect of it, of particular interest to me, that has not been mentioned: Two out of the mayor’s six appointees to the board are recent graduates of the John Jay MA program in economics, where I teach.

I’m very proud of my former students Sina Sinai and Lauren Melodia, who I know carefully studied the evidence and considered the full range of options before voting for the freeze. Lauren is also doing important work as the Director of Economic and Fiscal Policy at the Center for New York City Affairs, where she is producing a great deal of valuable research, most recently on working conditions in childcare. She’s recently been joined by David Lee, another John Jay graduate, who formerly worked as Legislative Director for New York Assemblymember Ron Kim and is now writing about fiscal policy at the Center.

Elsewhere on the rent regulation front, Anisha Steephen, a current student at John Jay, just released a major report from the Roosevelt Institute on rent regulation as financial regulation, which I hope to be writing more about soon.

This is what students from the John Jay economics program do. For a small program that’s existed for less than ten years, we have an impressive number of students out in the world contributing to progressive political projects.

Also in the housing space, consider Paul Williams. After finishing his MA with us a few years ago, he established the Center for Public Enterprise, where he now has a dozen staff, and has done as much as anyone to make the case that local government can be a major investor in housing, as well as in energy and other areas. This is a critical part of the both-and approach — boost supply and strengthen tenant protections — that defines the Mamdani agenda on housing.

Other current and former John Jay MA students include policy staff for socialist elected officials like State Senator Julia Salazar and former Representative Jamaal Bowman; the legislative director for the UAW; the chief of staff for former New York City Councilmember Carlina Rivera and State Senator Kristen Gonzalez; and analysts and researchers at various government agencies, including several at the Bureau of labor Statistics. Journalists like Aída Chavez (of The Intercept and The Nation) and Kate Aronoff (of The New Republic, and author of A Planet to Win: Why We Need a Green New Deal) were also students here. Jack Gross, founder of the outstanding web journal Phenomenal World, and Nathan Tankus, of the essential newsletter Notes on the Crises, were also briefly students here. (Neither got degrees, but the work and the community matter more than the credential.)

Why am I sharing this? Is it just to brag? Well, partially. I am very proud of what we’ve done with this program over the past decade, and of the students who have passed through. And to update Hillel, if you don’t talk about your own work, who will talk about it?

But there’s also a more specific and timely reason: For the next two weeks, we are still accepting applications for Fall 2026. And I suspect that readers of this newsletter must know a few young (or not so young) people interested in studying heterodox economics at a public university in New York City.

If you know someone who might fit that description, here is the pitch.

Unlike most economics programs, John Jay is unapologetically committed to a progressive, policy-oriented approach, and to heterodox traditions in economics. While the John Jay program offers the same core economics training you’d receive in other graduate programs, it is one of the few places where Marx, Keynes and other great radical thinkers are also central to the curriculum. Our students and faculty see the study of economics both as an end in itself and as a way of contributing to the most pressing struggles in our society.

While many of ours students take up roles in politics, advocacy, journalism and policy research (like on the Rent Guidelines Board) many others continue on to PhD programs. In one recent year, we had an entering class of 15 and eight students who went on to PhD programs, a proportion I suspect very few other MA programs in the country could match, even at much more prestigious institutions.

John Jay College is located at 59th St. and 10th Ave., near Columbus Circle in the heart of Manhattan. All classes in the MA program meet in person one day a week in the evening. Most students take three classes per semester and finish the program in two years, but there is no penalty for going at a different pace.

For anyone who has lived in New York State for at least one year as of September, full-time tuition is $5,545 per semester. This is pro-rated for those taking fewer classes, so the total cost for the program is approximately $22,000 regardless of the time over which it is completed. (This is less than a quarter the tuition at many comparable programs.) For non-resident full time students tuition is somewhat higher, but still cheap compared with most graduate programs.

There’s an online application here. Only the statement of purpose and transcript is required by July 15; recommendation letters can come in later.

There is no requirement to have previously studied economics; our students come from a wide range of backgrounds and many have undergraduate degrees in the humanities, physical sciences or other fields. We are less interested in what classes people have taken than in their intellectual curiosity, a willingness to work hard, and a commitment to using economics training to help change the world.

Does coming to John Jay guarantee that you’ll play a leading role in building municipal socialism? Obviously not. But based on our track record, it does seem to improve the odds.

A reminder: My book with Arjun Jayadev, Against Money, is out now from University of Chicago Press. You can order it from the publisher’s website here, or from Amazon; it’s also in many bookstores.

"Money is a collective hallucination. Reading Against Money is like suddenly waking up and realizing you've been lying in a tank of fluid with electrodes stuck in your spine." ― Daniel Davies, author of Lying for Money

The other day, Laura and I were standing on the subway platform, on our way to see Boots Riley’s I Love Boosters (which was excellent), when a young man walked up to us. Well, up to me. “Are you the author of this book,” he asked; he had a copy of Against Money. I said that I was, and asked him if he’d read much of it. Two chapters in so far, he said; he used to follow me on Twitter; he had a pen if I could sign it.

I feel like this is an experience authors of academic books don’t get to have very often. Though I suppose it’s more likely than most places in Park Slope.

I had another nice experience at a reading at Pilsen Community Books in Chicago, a lovely little collectively-owned bookstore I had never been to before. Not a lot of people showed up, but Gabe Winant and I had a good discussion with those who were there. One person in the audience introduced himself as an organizer for UNITE HERE. We had a good conversation about what motivates workers to join unions, which, today, is practically a matter of defying a totalitarian surveillance state. It’s not mainly about pay, we agreed, it’s about self-respect; or as an organizer I worked with years ago put it, it’s the one’s chance in someone’s life to say “Fuck you” to their boss.

Anyway the discussion went on and toward the end of it a young man in the back asked the question people always ask: ok, but what can I do? What is there to do? I had some answers; Gabe had some better ones, but still not fully satisfactory. Afterwards the young man came up to talk to us. So did the union organizer: What do you do for a living, he asked him. “Oh, well, I just quit my old job” the young guy said. “So, how would you like to work in a hotel?” Afterward they were adjourning to a coffee shop nearby. If the event results in that guy becoming a salt for the hotel workers union, then I would say it was an evening well spent.

There are some other responses to Against Money that I am also eager to share.

Our first two reviews are out. One, in Jacobin, is by Mona Ali, whose scholarship on international finance and power I’ve long admired. The second is in Reuters, by Jon Sindreu. Jon is someone I’ve interacted with online for a number of years. He’s a journalist professionally; despite (or because of) that, I feel like he is more in tune with Arjun’s and my particular Keynesian vision than almost any economist I know.

Both reviews are insightful and generous and thoughtful – exactly the kinds of reactions to the book I would have hoped for. One thing I particularly appreciated about both of them is that they don’t just respond to what is in the book, but take its core idea — the difference between money -world with its own internal logic, and the world of productive activity that it interacts with but is distinct from — and carry it in new directions. I think it reflects well on the usefulness of this perspective that they are both able to apply it to other questions that we might have discussed in the book but did not.

Both of them highlight global imbalances as an area where the conflation of money payments with material things is especially pervasive. At the aggregate level, “saving” is just an accounting residual, the difference between total incomes generated from production and consumption spending. As Keynes long ago pointed out, saving is never a constraint at the macro level; any change in investment spending (or the government fiscal balance or the trade balance) mechanically generates an equal change in aggregate saving. Mistaking this accounting category for a quasi-physical substance that can move from place to place — a misapprehension that is ubiquitous in discussion of international trade and finance — leads to all sorts of wrong conclusions, like the idea that financial conditions in the United States are a function of our trade balance with China.

Another area Mona’s review points toward is the idea of degrowth. There is a longstanding desire among economists to regard measures like GDP as reflecting in some sense human wellbeing or happiness, an impulse we criticize at length in the book. But there is a somewhat analogous tendency on the part of some environmentalists to see GDP as a measure of physical throughput or real resource use, so that decarbonization and other sustainability goals necessarily imply a lower path for GDP. The original outline for the book had a chapter called “Planet Money and Planet Earth,” which did not make it in. But we would have argued, as Mona suggests, that to think clearly about the economy and the environment, we need to give up on the idea of a single scalar and turn toward more granular, physical measures, like say, to use her example, the area of tree coverage.

Among other things recognizing money as autonomous and self-referential change the way we think about the productive side of the economy. (This is something Arjun and I have written about elsewhere, but also didn’t get into this book; maybe the next one.)

The view that you get from an economics textbook is that output is effectively a homogeneous substance merging from a production function — a certain quantity of labor and capital goes in one side, and a certain amount of stuff comes out the other. This is an example of seeing concrete reality in the image of money, which really is homogenous — the equivalence of one unit of money to any other unit of money is one of its defining characteristics.

But in reality, production consists of all kinds of complicated forms of specialized cooperation between people; changing what people are making or the conditions under which they make it involves frictions which grow more severe the faster the changes must be made. We may be able to ignore this in the case of gradual, incremental changes in production, and just say that the next unit of spending results in the next most valuable thing that can be produced. In that case, we can describe the system in terms of a level of spending and a corresponding level of aggregate output. But as soon as the changes get larger or faster, the frictions imposed by the real-world heterogeneity and embeddedness of production become impossible to ignore.

As Sindreu highlights in his review, the conflict between the money-like vision of production and its concrete social reality has come more sharply into view in recent years.

Take the Covid 19 pandemic. Governments had no trouble conjuring $11 trillion for fiscal stimulus. Yet most of the money went to keeping the economy humming, with only about a tenth overall going to the health sector. No amount of paper wealth could procure nurses, masks, hospital beds and vaccines in time to make a difference to the virus’ early spread. Consider also the energy shocks of 2022 and this year, U.S. President Donald Trump’s trade spats, the AI revolution and the war in Ukraine. The relevant metrics in these cases have been barrels of oil, critical minerals, computing power and stockpiles ​of ammunition. A larger GDP helps fund such purchases, but doesn’t necessarily translate into a greater capacity to build or procure them when they’re actually needed.

To me, an interesting aspect of this is the way it challenges the sort of Keynesian macroeconomics that I teach as well as the standard production-function view. The high ground on which retreating Keynesians made their last stand a generation ago was that short-term fluctuations in activity are the result of shifts in the volume of spending, not the productive capacity of the economy. When output falls in a recession or depression, it’s because something has reduced the capacity to make money payments, not the capacity for real production. The alternative, advancing from the freshwater redoubts of Chicago and Minnesota and Rochester, was the “real business cycle” view — that scarcity and allocation are the only economic problems at the macro as well as the micro level, in the short run as well as the long. For people like me, rejecting this view was the starting point for our engagement with macroeconomic theory.

And yet … wasn’t the pandemic downturn a kind of real business cycle? Thanks to the fiscal response (in the US at least), the flow of money payments was not interrupted. The loss of employment and output was precisely due to a sudden loss of capacity for real productive activity.

As Sindreu stresses, the possibility of disruption on either side — in the web of money payments or in the concrete activity of production — reinforces the need to maintain the conceptual distinction between them. The two cases are very different! What is harder to say is whether the pandemic and subsequent disruptions were a one-off; or whether they were a harbinger of future and especially climate related disruptions to the supply side, as Isabella Weber has suggested; or if they should lead us to rethink historical fluctuations as well. It’s not an easy question! For my part, what I still say in the classroom is: “business cycles are always the result of changes in demand … except for the pandemic.”

One more example: the importance of distinguishing between real and financial provision for the future. At an individual level, they are equivalent: If I want to eat in retirement, the way I provide for that is by amassing claims against society in some financial form. But this does not carry over to aggregate level. Many economists, notes Sindreu, think that funded pension schemes, which back promises to retirees with a pot of financial assets, are more sustainable than pay-as-you-go scheme.

but they’re wrong. … If higher measured wealth doesn’t map onto more physical production in the future…, the ageing problem remains unsolved: while an individual retiree may be able to run down assets to boost consumption, society as a whole will still ⁠need enough workers ​to produce the goods and services demanded.

Here as elsewhere, the problem is that from the point of view of the individual participant in the system, the mapping of money payments on real things is an objective fact: If I pay for so much more of this, I will have to accept less of that. But at the level of the system as a whole, it is not.

Of course you don’t need to read Against Money to observe that GDP is as fetishized by degrowth as by growth for its own sake, or to note that employing people to plant trees boosts measured output and employment just as much as employing people to cut them down. You don’t need to read Against Money to understand that a disruption to production like the pandemic is quite different from the financially-mediated falls in demand of other recessions, or to see that the meals eaten by tomorrow’s retirees must be cooked by tomorrow’s workers, regardless of what is in the Social Security trust fund.

What I hope the book contributes, is to show how these points are connected — that there is a larger worldview implicated in them. Our goal was to bring into light the ideas about money-world and its relationship to concrete production and other social domains, that are implicit in various debates but seldom foregrounded.

So, for example, rejecting a hard tradeoff between decarbonization and meeting people’s immediate material needs should change the way you think about global imbalances. Or — to take another example offered by Sindreu — if you see the strong element of conscious planning driving investment data centers in the US and green energy in China, this awareness of finance as planning should put you on guard against attempts to disguise the actions of the Bank of England as the objective judgement of decentralized bond markets.

Based on the range of fascinating questions that both Mona Ali and Jon Sindreu were able to connect to the arguments of the book, I think we had some success with this. The kinds of issues they brought up point in exactly the directions that we hoped conversations around the book might go. Along with the young people and union activists, these are the readers we were hoping for.

A few other bits of Against Money content.

Arjun was on the “This Is Hell” podcast, with Chuck Mertz, which also airs on WNUR 89.3FM Chicago and Lumpen Radio. I’m especially tickled by the latter, since I was friends with Lumpen co-founder Ed Marszewski and that crowd back in the 1990s, and used to hang out sometimes at the Marszewski family bar in Bridgeport.

I was on UpFront on KPFA for a generous 45-minute interview. (The interview itself starts about 12 minutes in.) Brian Edwards-Tiekert of UpFront is a dream interviewer — he had read the book deeply, summarized its key arguments better than I could, and asked thoughtful questions that connected these more abstract debates to the real world debates that are why we care about them.

Finally, I feel compelled to share this review from Amazon. Not just because it’s our first five-star review (though one might pause to consider how the motivating power of prestige and recognition points to the limits of money as a coordination device). But mainly because verified purchaser MudHen so clearly gets what we were trying to do:

Since everything is priced in money, it is all too easy to think, for example, that an object priced at $50,000 has $50,000 of “value” in it somewhere. The equation of price and value simultaneously reifies money (making it a commodity) and casts a veil over the entire material world. This causes us to confuse money and things. That confusion is the bedrock foundation of modern (marginal utility) economics.

Money-is-credit-is-debt points to an end to capitalism. Eventually the entire world is commodified and money is left just valorizing itself in an M-M1 loop which becomes increasingly divorced from use value. At some point, this becomes so ridiculous that everyone can see the problem: uses values are no longer increasing, while nominal (money) wealth is skyrocketing. The Americans are bonkers for their stock market, which is increasingly just a debt (M-M1) financial loop. As the country falls apart, it will become astonishing “wealthy” — and tens of millions of people will slide into functional poverty.

The penalty for confusing money and things is severe, but this book is hopeful. It may not be a matter of envisioning an alternative to capitalism (the hard problem of Jameson/Fisher), so much as the simple realization that most of our growth today is merely financial (number go up). To improve life for everyone, we will have to look beyond money.

Yes, that’s it. The road to a freer, more democratic and egalitarian society doesn’t involve redistributing money claims, but recognizing and building on the ways in which those claims are already and increasingly irrelevant to the activity through which we meet our collective needs.

Against Money is now out. It’s been spotted in a number of bookstores, including the Union Square Barnes and Noble, where it turns out to be shelved next to Marx’s Capital in the Business section.

As my friend Suresh said to me the other day, as writers we should think of books as landmarks for a larger body of thought, rather than self-contained arguments in themselves. That is certainly the case with this book. But I am glad to see this piece of the larger project out in the world.

We had two very nice launch events, one at the University of Massachusetts (where both of us went to graduate school) and one at John Jay College, my academic home now. Both events had a great turnout, and I very much appreciated the discussion with Christine Dean, Jerry Epstein and Perry Mehrling at the UMass event, and with Zach Carter at the John Jay one. For me, it was like celebrating the holidays first with your parents and relatives and then with your own family.

Unfortunately, we were not able to record the John Jay event; there was video of the UMass one, but I am not sure when it will be available. But there are a couple other conversations we’ve had about the book recently that I can share.

First is an episode that Arjun and I did with The Climate Pod. Despite the name (and usual focus) of the podcast, host Ty Benefiel had a lot of sharp and insightful questions about the nature of money and its relationship to the social and material world.

Second is an online roundtable we did with members of the Philosophy, Politics and Economics Society. This was a very nice conversation — I think philosophers and political theorists with a deep interest in money are perhaps the ideal readers for the book.

One thing I appreciated about both these conversations — and the two launch events — was the pressure our interlocutors put on us to bring out the real-world implications of our arguments, which the book itself is a bit light on. There is naturally a discussion of climate policy on The Climate Pod, but we also get into the pandemic response, democratizing the Fed, and other more real-world questions.

The book itself is primarily an attempt to get out of the flybottle of economic thinking about money, to borrow a phrase from Wittgenstein. But of course this is not just an academic critique — as Christine Desan observed at the UMass event, economics is not just another discipline, it offers a vision of the world that corresponds to the logic of life under the rule of capital. Or as she put it, “We are all in the flybottle.”

We’ve also recorded interviews with Nathan Robinson of Current Affairs, Brian Edwards-Tiekert of Upfront on KPFA, and Doug Henwood for his show Behind the News. I’ll post the links to those as they come out. As we mentioned to Doug, our original title for our book, at the very start of the project, was The Tyranny of Money. This was a nod to the closing lines of his Wall Street, which describes it as “a first draft for a project aiming to end the rule of money, whose tyranny is sometimes a little hard to see.” Like the fly in the bottle, it’s hard to escape when we can’t see the thing we are trapped in.

As readers of this newsletter may be aware, my book with Arjun Jayadev, Against Money, will be officially published next week. I’ve heard it’s already showing up in bookstores, though I haven’t yet seen it myself.

I’m writing this post now to call attention to two events around the launch of the book. First, next Tuesday, we are having a roundtable at the University of Massachusetts-Amherst, the mothership of radical economics in the United States, where both of us went to grad school. It’s in the Gordon Hall Conference Room at 4pm, and will also feature Christine Desan, Jerry Epstein, Perry Mehrling and Bob Pollin. These are four of the people who have done the most to shape my understanding of money and finance, so I’m thrilled to be have this chance to discuss the book with them.

Then on Friday, the official launch event will be held at John Jay College of the City University of New York, where I teach. In addition to me and Arjun, it will feature Zach Carter, author of the excellent Keynes biography The Price of Peace, and a couple of other interesting speakers. It’s from 6pm to 8pm in John Jay New Building room 9.64, at 524 W. 59th St.

Only a few of the readers of this newsletter can be found in Western Massachusetts, I know; somewhat more can be found in New York, but most, I assume, are in neither place. But if you will be located in one or both next week, you should consider coming to one or both events — both are free and open to the public. I hope to see some of you there.

Even in a friendly setting like this, it can be a challenge to explain what the real-world stakes are in debates over money. But as it happens, a Matt Levine column that came out the same day as the webinar offers a perfect application of one of the central themes of the book.

To be honest, this is not really surprising. You could almost think of our project as backfilling the economic theory behind Levine’s columns, which often describe a world far removed from the textbooks. “How Keynes explains last week’s Money Stuff” would be a decent elevator pitch for the book.

The lead item in this Money Stuff was about a hypothetical algae farming startup, and the financing thereof:

You start a startup with a far-fetched idea like genetically engineering algae to produce clean renewable fuel. You go out to investors to raise money. You say “we are going to genetically engineer algae to produce clean renewable fuel, if we succeed we will make a bajillion dollars, you want in?” The investors think that sounds cool, because it does. But they are responsible investors, they do their due diligence, they ask questions like “is that a thing” and “can you actually produce fuel algae” and “will it be cost-effective?” You do your best to answer their questions.

Do you exaggerate? Oh sure. That is the job of a startup founder. I once wrote, approximately:

What you want, when you invest in a startup, is a founder who combines (1) an insanely ambitious vision with (2) a clear-eyed plan to make it come true and (3) the ability to make people believe in the vision now. “We’ll tinker with [algae] for a while and maybe in a decade or so a fuel-[producing strain of algae] will come out of it”: True, yes, but a bad pitch. The pitch is, like, you put your arm around the shoulder of an investor, you gesture sweepingly into the distance, you close your eyes, she closes her eyes, and you say in mellifluous tones: “Can’t you see the [algae producing clean fuel oil] right now? Aren’t they beautiful? So clean and efficient, look at how nicely they [float in this pond], look at all those [genes], all built in-house, aren’t they amazing? Here, hold out your hand, you can touch the [algae] right now. Let’s go for a [swim].”

Of course, you are a startup founder; you are in essence a salesperson. Back at the lab, the algae scientists and chemical engineers and accountants are looking at your pitchbook in disbelief. “Wait, you’re telling investors that we can produce the fuel oil now? You’re telling them that we’ll have large profits in two years? Did you not read our latest status report?” The scientists and accountants are boring and conservative; it is their job to try to make the dream work in dreary reality. It is your job to sell the dream now.

(The brackets are there because he is repurposing text from an earlier column on AI.)

This is a story about finance, not about venture capital specifically. The details would be different if the algae company were getting a loan from a bank, but the fundamental situation would be the same.

I want to make a few points about this.

First, what’s being described here is not a market outcome. Nobody has yet purchased any fuel made from genetically modified algae. To the extent there are market signals here, they point in the wrong direction — at current prices, the cost of producing this fuel would be greater than what it would sell for. Nor has this business shown profits in the past — it’s a startup. Right now, the market is saying this is a value-subtracting activity. Funding it anyway is the opposite of what market signals are saying to do.

Funding the algae project is an explicit decision by someone in authority.1 It is a decision based on promises. It is based, precisely as Levine says, on dreams.

Joseph Schumpeter compared the function of banks under modern capitalism to Gosplan, the central planning agency of the old Soviet Union. Banks, through a conscious, deliberate decision, dedicate some fraction of society’s resources to some project that they have decided is worthwhile. “The issue to the entrepreneurs of new means of payments created ad hoc” by the banks, he writes, is “what corresponds in capitalist society to the order issued by the central bureau in the socialist state.”

What’s more, as Arjun and I write in Against Money, banks

are stronger in a certain way than any real central planner, because they have the authority to redistribute anything. A Soviet planner might assign a plant this many tons of some raw material, that much electricity, use of those parts of the transportation network. Money as the universal equivalent is a token granting the holder use of whatever they need. A loan then is a ticket to the entrepreneur saying, you have the authority to take whatever labor and other resources your project requires.

In this sense, markets are not an alternative to planning, they are a tool for planning. Money is the substrate within which planning takes place.

People used to talk about a “soft budget constraint” as a defining feature of the Soviet economy — enterprises could continue operating even if their costs exceeded their sales, as long as the planners saw some social value in their continued operation.2

Startups like the algae power company have the softest of soft budget constraints. They are able to incur substantial costs, often over many years, without any sales at all.

This is not some weird quirk of venture capital. This is a central purpose of finance – to direct society’s resources to some activity that has not yet been successful in the market, but that somebody think could be. The defining characteristic of an entrepreneur is that they are doing something new, something that has not yet been proved in the market, with funding provided by someone else. An entrepreneur by definition faces a soft budget constraint.

This is not, again, an anomaly, it is not a breakdown of the normal operation of capitalism. It is essential to what makes capital such a powerful force for transforming our material existence. And it needs to be central to our theoretical accounts of capital and of the investment process.

It certainly was for Keynes. As he famously observed in Chapter 12 of the General Theory,

a large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits—of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.

Enterprise only pretends to itself to be mainly actuated by the statements in its own prospectus, however candid and sincere. Only a little more than an expedition to the South Pole, is it based on an exact calculation of benefits to come. Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die;—though fears of loss may have a basis no more reasonable than hopes of profit had before.

It is safe to say that enterprise which depends on hopes stretching into the future benefits the community as a whole. But individual initiative will only be adequate when reasonable calculation is supplemented and supported by animal spirits.

Markets and the pursuit of private profit have existed for much longer than the their fusion with long-lived means of production command over wage labor that we call capital. One important reason for the failure of profit-seeking, through most of its history, to revolutionize production, is that these activities were subject to hard budget constraints and forced to adhere closely to market signals. Through most of their history, they couldn’t create new forms of production on the basis of dreams.

The algae company is getting access to real resources — authority over other people’s labor — because they have convinced a planner that their project is worthwhile.

Market socialists — whose belief in the virtue of markets is exceeded only, perhaps, by 19 year olds who have recently discovered Ayn Rand — like to ask how socialism can maintain the material accomplishments of capitalism without markets. But it isn’t markets that produced the genuine and immense material accomplishments of capitalism.

The initial investments in AI or algae farming — or automobiles or airplanes or antibiotics — are not a response to market signals. They are conscious choices by some group of people to try something that hasn’t been done before. We might like algae and dislike AI (I certainly do), but getting more of one and less of the other requires neither more nor less attention to market signals, which are not responsible for either one. It requires some substantive improvement in the planning system.

Now, some people might say: This planning is based on the hope of future profit, it will eventually have to be validated by markets. But it is not incidental that the market outcome and the pursuit of profit are mediated by conscious planning. They do not happen automatically. The judgement of the market can be deferred, in principle indefinitely. And there are many other projects that might equally well be validated markets, if their early stages were attractive to finance.

We must guard against the idea that the assessment of future profitability is rational or objective, an observation of existing facts about the world. This is one reason the Levine story is useful – it focuses our attention on the ways that financing decisions are made in practice. Making energy from algae is cool! As he says, this a critical aspect of the investment process. That should not be abstracted from.

There are many potentially profitable businesses that never get access to financing. The required return for most startups is very high, or effectively infinite. Manias may be essential to maintain an adequate level of investment. The irrationally high discount rate applied to future returns can only be offset by an irrationally high expectation of future profits. (See, as for much of this post, the current AI boom.)

Nor is it clear that future profit always is the motivation, certainly not the only one, and certainly in the early stages. It’s not incidental that Levine emphasis that algae energy could get funding in part because it is cool. It’s not, perhaps, incidental that OpenAI started its existence as nonprofit. The pursuit of profit is not always what motivates investment, especially when it involves fundamental departures from existing forms of production.

This conflict between the pursuit of profit and large-scale fixed investment goes back to the beginning of industrial capitalism. As Eric Hobsbawm observes in his classic account of the Industrial Revolution, the textile industry — small scale, labor-intensive — could develop through largely self-financed improvements on existing production methods serving existing markets. But the large-scale capital-goods industry, using novel techniques to serve a market that was only brought into existence by the Industrial Revolution itself, required something more. The pursuit of profit was an inadequate spur in the absence of some additional non-pecuniary motive.

No industrial economy can develop beyond a certain point until it possesses adequate capital-goods capacity. … But it is also evident that under conditions of private enterprise the extremely costly capital investment necessary for much of this development is not likely to be undertaken… For [consumer goods] a mass market already exists, at least potentially: even very primitive men wear shirts or use household equipment and foodstuffs. The problem is merely how to put a sufficiently vast market sufficiently quickly within the purview of businessmen.

But no such market exists, e.g., for heavy iron equipment such as girders. It only comes into existence in the course of an industrial revolution (and not always then), and those who lock up their money in the very heavy investments required even by quite modest iron-works … are more likely to be speculators, adventurers and dreamers than sound businessmen. In fact in France a sect of such speculative technological adventurers, the Saint-Simonians, acted as chief propagandists of the kind of industrialization which needed heavy and long-range investment.

The Saint-Simonians driving the investment boom of the 19th century, the rationalists and long-termists and Zizians driving investment in the 21st — perhaps it’s not such a far-fetched analogy. (Though personally I find Saint Simon more appealing.) However different the content, they are filling the same essential function. And that is the key point here — a system that relies on private initiative for irreversible commitments to projects that transform production, cannot be based on rational calculation, on objective market signals. The market outcomes of these kinds of projects cannot be known until long after the die is cast. A different kind of motivation is needed.

A related point: Nobody knows, right now, if the algae thing will work. Nobody knows if AI will turn out to be useful (I think not, or not very, but I am well aware I could be wrong.) The tradeoff is not about allocating real resources to their best use, among the known uses available. The tradeoff is not a quantifiable one between the expected returns on this project and the expected return on that project. If the algae thing doesn’t get funding — and we can be sure that many, many projects as well founded are not getting funded — the reason will not be because society had a more urgent use for those resources. It will be because people couldn’t figure out a way to cooperate — that the mechanisms to convert promises (or dreams) into command over labor did not operate in that case.

(A flip side of this vision, which I can’t go into here but is essential to the larger argument, is that society has resources to spare. Many many people’s time is being spent much less usefully than it could be.)

There’s another, more subtle point. It is not just that we don’t know how profitable these projects will be until someone finances them and they are carried out. There is not any fact of the matter about how profitable these projects are, even in retrospect, independent of how they are financed.

This is the point where Arjun’s and my argument may be challenging for a certain strand of Marxists. (It is not, I think, a challenge to Marx himself, who said a lot of different things on these questions, at different levels of abstraction.)

There is an idea — Anwar Shaikh offers a contemporary example — that the rate of profit is determined first, in production, and then the rate of interest is secondary, a special case of profit, governed by it, or a deduction from it. But we can’t say what the profitability of the algae business even is, prior to the question of what terms it is financed. At one rate of interest it may be very profitable, at another less so or not worthier pursuing at all.

Now maybe you will say: sure, anyone can make a profit if they get that free Fed money. But it’s not just that. The relative profitability of different projects depends on the term on which they are financed.

Let’s consider two projects. One will make energy from burning oil, the other from growing algae. The oil project is straightforward: 100 dollars laid today will yield 120 dollars worth of fossil-fuel energy a year from now. The algae project requires a lot more upfront costs — you have to first, you know, figure out how to make energy from algae. But your best guess is that $100 invested today will allow you to produce $50 worth of fuel from $10 worth of inputs every year starting 15 years from now.

So, which of these two projects should you commit your capital to? Which of them is more profitable?

The answer, of course, is that you can’t say until you know how the projects will be financed.

Partly this is just a simple matter of discount rates. In these narrow terms, the algae project is more profitable if the interest rate is 5 percent; the fossil-fuel project is more profitable if the interest rate is 10 percent. This specific example is hypothetical. But it is clearly true as a general matter that lower interest rates increase returns on renewable energy relative to fossil fuels.

More broadly we have to consider, for instance, whether the financing will have to be rolled over if, say, the project takes longer than expected. What are financing conditions are likely to be at that point? If the loan is due and can’t be rolled over and the project has not yet generated sufficient returns to repay it, then the return on whatever capital the entrepreneur put in themselves will be negative 100 percent. The chance of this happening — which, again, depends as much on future financial conditions as on the income generated by the project itself — has to be factored in to the expected returns.

We also have to consider the terms of the financing — what kind of collateral will be required? Will it have to be periodically marked to market? What control rights are demanded by investors or lenders? The viability of the project from the point of view of the person carrying it out depends as much on these considerations as on the physical problem of converting algae to energy.

I recall a Wall Street Journal article years ago – unfortunately I can’t find a link – on the economics of putting power plants on barges. There were technical issues pro and con, but the decisive advantage of putting a plant on a barge was that it is better collateral that way. Lenders are more willing to finance a power plant when they can physically tow it away in the event of default.

So if we are going to evaluate the profitability of a power plant on a barge versus one on land, we have to consider how important it is to keep lenders happy — how scarce or abundant financing is. We also have to consider other monetary factors. A big utility, or one guaranteed by a state, can be counted on to pay its debt, so collateral is less important than it is for a smaller business without public backing.

Another angle one could come at this from is that the distribution of profits has a variance as well as a mean. How much the higher moments matter, depends how confident we are that contracts will be honored in alls states of the world. It depends on how confident we are that short-term deficits can be financed and that only the long-term outcome matters. To the extent that that’s true, we should just focus on mean expected profits. But if defaults are possible, or if some claims on the income are senior to others — another core question of financing — then the higher moments matter too. We can’t evaluate the relative profitability of profits without thinking about the whole distribution, and how we do that will depend on who is providing the funding. Banks strongly prefer lower-variance projects, venture capitalists seem to positively prefer high-variance ones.

This is the fundamental point Hyman Minsky was making with his two-price model. It is why he insisted that money is not neutral. The price of long-lived assets depends on the interest rate (or as he put it, the supply of money), in a way that the price of current output does not. The price of a factory relative to the stuff coming out of it will shift as money (or credit) becomes scarcer or more abundant.

And of course it’s not just two prices. It’s a whole set of prices, for capital goods that are more and less long-lived and are more or less specialized to particular production processes. The more scarce money is, the higher will be the price of the power plant on the barge relative to the power plant on land.

Again, this is not just a time discount. It’s a discount for uncertainty. It’s a discount for commitment. It’s a discount on hopes and dreams relative to money on the table.

For every interest rate there is a different schedule of labor values. For every interest rate there is a different set of market signals. A tight-money market socialism does different things from a loose-money market socialism.

This is a version of Sraffa’s argument that one can’t calculate labor inputs for different commodities unless we already know the profit rate, which must be determined from outside the production process — for instance, he says, “by the rate of money interest.” Even if we assume that all production possibilities are already known and available, we can’t decide which are most profitable unless we know the terms on which production will be financed.

In the real world, again, the possibilities for production are not known in advance. And contrary to Sraffa’s preferred assumption of content returns to scale, industrial production tends to have increasing returns, implying the existence of multiple equilibria. But directionally, all these considerations point the same way. Easy money makes projects with longer-term returns, higher-variance or more uncertain returns, more specialized capital goods, more increasing returns, and greater departures from current production processes more attractive. Tight money, the opposite.

This would be true even if we knew the physical outcomes of all possible production processes in advance. And of course, this is very far from the case. Instead, someone has to make big, irreversible decisions based on what seems cool.

A central function of discourse around finance, and the stock market in particular, is to obscure this role of finance in shaping and directing production. The stock market creates the situation it pretends to reflect, in which one production process can be smoothly traded off against another.

If the algae-company investment is successful, it will eventually result in the creation of a listing on a stock market, creating a tradable claim on the future profits from algae trading. At that point, income from algae energy will have a market price reflecting its exchangeability with all sorts of other incomes. You will be able to swap a claim on one future dollar of algae-energy income with a claim on future income from any of thousands of other listed companies.

It is tempting to treat this exchangeability of claims as simply a fact of nature, to retroactively project it back to the whole process of building this company. It is tempting to treat the investment decision that created the algae company as a process of market exchange just like swapping one share for another.

Showing how a system of hierarchical authority and conscious planning presents itself as the operation of an anonymous market — that, in a sense, is what our book is trying to do.

This is the edited transcript of a talk I delivered on March 5 at the Heilbroner Center for the Study of Capitalism at the New School for Social Research in New York, at the invitation of Julia Ott. The talk is an attempt to explain what Against Money (my forthcoming book with Arjun Jayadev) is about, and why it matters. Earlier attempts can be found here and here. You can listen to the full recording of this talk, including some quite interesting questions from the audience, here.

Since we are at the Heilbroner Center, I thought I would begin with Robert Heilbroner.

Heilbroner is best known for his book, The Worldly Philosophers, a popular history of economic thought. There’s an interesting discussion in the introduction to later editions of the book about his struggle to come up with a title for it.

He did not want a title that included the word economist — he understood that a book about economists would have, at best, limited appeal. His initial thought was to call it “The Money Philosophers.” But after considering that, he decided that it didn’t really fit his subjects, because, money, for the most part, was not a major concern for them.

I think he was right to have those misgivings, and to instead choose the title he did. Because money, perhaps surprisingly, plays a rather small part in the history of economic thought.

The dominant view on money among economists, which you can find in almost unchanged from the 18th century down to any contemporary textbook, is that money is neutral. There is a real economy, a concrete existing world of labor, of technology, of human needs and of resources that can meet them, which all exists prior to and independently of money. It’s in this real world that relative values are established, and where the possibilities for production exist prior to any sort of measurement in terms of money. Things would be exchanged in the same proportions in the absence of money, or with any other difference form or quantity of money. Money is at best a numeraire, a mild convenience to help us describe relative values and simplify exchange that would happen on essentially the same terms without it.

Going back to 1752, we find David Hume writing:

Money is nothing but the representation of labour and commodities, and serves only as a method of rating or estimating them. Where coin is in greater plenty; as a greater quantity of it is required to represent the same quantity of goods; it can have no effect, either good or bad…

What we have here is the idea, first, that there is a quantity of goods already existing in the world before we measure it or rate it with money, and second, that the use of money to coordinate the exchange of goods, to measure the quantity of goods, has no effect on that quantity, either good or bad.

Now Hume himself went on to complicate this argument in interesting ways. But for many economists down to the present, this is where the story stops.

Variations on this are the central throughline in economic thought around money. Coming down to our century, we find Lawrence Meyer, who was recently a member of the Fed’s Federal Open Market Committee, saying,

Monetary policy cannot influence real variables, such as output and employment. This is often referred to as the principle of neutrality of money. Money growth is solely the determinant of inflation in the long run. Price stability, in some form, is the direct, unequivocal, and singular long-term objective of monetary policy.

Again we see the same notion that control over money or credit cannot affect real outcomes, such as output or employment. At most, it can affect the measurement of those outcomes in terms of prices, that is, inflation.

I could multiply many similar quotes from the centuries in between these two. The great exception is, of course, Keynes.

If you got an economics education in the Keynesian tradition, as Arjun Jayadev and I did at the University of Massachusetts, then you probably spent a great deal of time thinking about money. You might even have imagined yourself as a money philosopher, or on the path to being one, or at least you were interested in what the money philosophers had to say. And you will have seen, more or less clearly, that there’s an important connection between the organization of money, the form of money, and real outcomes in the economy.

As Keynes himself put it in a 1932 article, which was arguably the opening salvo of the Keynesian revolution, the theory he was looking for was

a theory of an economy in which money plays a part of its own and affects motives and decisions and is one of the operative factors in the situation so that the course of events cannot be predicted, either in the long period or in the short, without a knowledge of the behavior of money.

The Keynesian vision is one where the operation of money is central in driving real outcomes, that money plays an active organizing role in the economy, and that one can’t understand real outcomes without an understanding of money.

Of course, Keynes was not by any means the first person to think this way, to think that the world of money and the concrete organization of production cannot be separated. There’s a kind of samizdat tradition, “the army of cranks and brave heretics” that Keynes acknowledges as his predecessors, who have made similar arguments.

One very interesting early figure in this tradition is John Law. John Law is remembered today as a sort of con artist, or as an early example of the dangers of trying to manipulate real outcomes by the use of money, because of his proposals adopted by the French government to set up a bank that would issue paper currency backed by land in the New World and other proposals for financial reform, and for what we might even today call industrial policy.

These proposals were not successful. Their failure contributed to the problems of the French monarchy in the 18th century. But the interesting thing about him is that he was not just a monetary reformer, that he was a genuine theorist. Joseph Schumpeter even puts him in “the front rank of monetary theorists of all time.”

Law’s proposals were motivated by a vision of money, as he put it, as not being merely “the value that is exchanged” but “the value in exchange” — the activity that happens through the use of money creates new value that does not exist prior to it. Coming from a background in Scotland, he writes about a situation where there is both vacant land and idle labor. They can’t be put together, they can’t be used productively, in the absence of money — to provide coordination, as we would say today.

The existence of coordination problems, creates the possibility that money is not just a yardstick for exchanges that would have happened regardless, but opens up new possibilities for cooperation — that there can be new value created by money that did not exist in the world prior to it. This is the opposite of the argument made by Hume and others and in principle opens up the possibility of creating real wealth, of transforming the real world through the manipulation of money.

We can trace a line forward from Law to Alexander Hamilton, a more successful advocate for financial reform in the context of a program of national development. Hamilton is not usually thought of as an economic theorist, but his writing in the “Report on Manufactures” and other proposals for developing American industry drew importantly on a vision of a more elastic and flexible monetary system.

Interestingly, one suggestion that Hamilton made for increasing the supply of “monied Capital” was for the federal government to permanently maintain a large debt. Anticipating contemporary heterodox economists, he argued that rather than crowding out private investment, federal borrowing would in effect crowd it in, because government debt was a close substitute for money — a source rather than a use of liquidity, as we might say.

We can follow this line on to Henry Thornton and the anti-bullionists in the early 19th century, who saw a flexible system of bank money as better suited than a rigid gold standard for promoting real economic activity. And then on to Thomas Tooke, who Karl Marx considered “the last English economist of any value,” and to Walter Bagehot and American monetary economists like Allyn Young, and then on to Schumpeter and of course Keynes himself and his successors.

What do these heterodox thinkers on money have in common?

From our point of view, first, they all see money not as a distinct object existing in a definite quantity, but as one end of a continuum of financial instruments or arrangements. They see money as a subset of credit. Schumpeter says that when thinking about money we “should not start from the coin,” we should not start from the discrete object that we call money. Rather we should, as all of these thinkers did to one degree or another, imagine a whole system of credit arrangements, some of which can be classified for various purposes as money. He distinguishes a “money theory of credit,” which most economists hold, from a “credit theory of money,” which is what he prefers. The starting point, the atomic unit, is the promise, not the exchange.

Second, and this is a central theme of our book, these thinkers all saw the interest rate as the price of money, rather than the price of savings. An important part of John Law’s argument for his financial reforms was that it would allow a lower rate of interest by making money more abundant. Walter Bagehot insisted that interest was the price of money, not of saving as orthodoxy has it.

The liquidity theory of interest is arguably the analytic keystone of Keynes’ General Theory. This question of whether the interest rate represents a real constraint, a trade-off between stuff today and stuff tomorrow, the price of savings or loanable funds, versus whether it is a fundamentally financial price set in financial markets as the price of money or liquidity, is a through line in debates over money.

More broadly, there is the idea of money as a facilitator or enabler of economic activity, as a vehicle for transformation of the real world, versus the idea of money as a passive measuring rod or numeraire. Connected with this is the idea that money requires some form of active management. The orthodox view of money, along with seeing it as fundamentally or at least ideally neutral, has always looked for some kind of automatic rule to regulate credit and money.

Going back to Hume again at the beginning of this tradition, he at some points argued that banks should not exist. He wrote that the best bank would be one that took coins and kept them locked up until their owner came back for them, without creating credit in any form.

That is the extreme version of this position, but in less extreme forms there’s a constant attraction to the idea that bank credit should reproduce some natural logic of exchange, and not have any independent effect on economic activity. We can see it in the 19th century in the form of the real bills doctrine and of the gold standard — two different approaches to creating an automatic mechanism for regulating the creation of money and credit. Later in the century there were ideas of strictly capping the amount of paper money that could be produced, or separating the lending and payments functions of banks — an idea that constantly recurs in right-wing ideas for monetary reform. Behind this there was often the idea of an “ideal circulation,” where whatever the concrete form that money took, it should mimic the behavior of a pure metallic currency.

Then in the 20th century we get Milton Friedman’s idea that central banks should follow a strict money supply growth rule — an updated version of the cap on banknote issuance imposed on the Bank of England in the 1840s. And more recently we have the Taylor rule and similar rules that are supposed to guide the behavior of central banks. Some right-wing legislators have even proposed writing the Taylor rule into law, so the Federal Reserve would no longer have any choice about monetary policy.

What all these rules have in common is the idea that there is some kind of autopilot that you can put the management of money and credit on, so that it no longer involves any active choices, public or private — so that money will manage itself.

This goes with the idea that even if money is not always neutral in practice, that it ought to be neutral. It goes with the the idea that there is some set of natural outcomes dictated by the real material choices facing us, by the problem of scarce means and alternative ends that Lionel Robbins defined as the problem of economics, that there is an objective best solution to the trade-offs facing us as a society — and if money is telling us to do something else or allowing us to do something else, that is a problem. We need to make money automatic so that we can return to this genuine non-monetary set of trade-offs that we are trying to solve.

In other words, when we think of money as neutral, that implies a specific kind of views about social reality in general. If we think of money as a transparent window onto a pre-existing world of goods, a pre-existing set of relative values, a pre-existing set of opportunities and resources facing us, then we are going to see the world itself as fundamentally money-like. We are going to see the existence of prices, the division of social reality into discrete commodities with ownership rights attached to them, as a basic fact about the world, which money is simply revealing to us.

When we see money as a distinct institution, as a distinct social technology of coordination, then we can see the rest of the world as being different from that. We can see all the ways in which the process of production, all the ways we organize our society are different from what happens in markets and different from what is mediated by money. We can see the world not as a set of existing commodities that need to be allocated to their best use to satisfy human needs but as an open-ended collective project of transforming the material world.

This second view is what Keynes called the monetary production paradigm.

In the 1932 article that I earlier suggested could mark the beginning of the Keynesian revolution, Keynes distinguished a real exchange view of the economy from a monetary production view. The real exchange view he associated with the traditional view of money as neutral — it’s a vision of a world in which fundamentally the economic problem is barter. So for instance Paul Samuelson’s famous textbook, the most influential economics textbook of the 20th century, says that we can reduce essentially all economic problems to problems of barter.

In this world, the economic process is fundamentally about exchanging real things. Production is just a special case of exchange. You put in your capital, I put in my labor, we get a definite amount of output out that we divide in proportion to what we put in, on terms that we all knew and agreed on in advance.

The real exchange view of production was perfectly expressed by Keynes’ Swedish contemporary Knut Wicksell, the originator of the modern approach to monetary policy. He described economic growth as being like wine aging in barrels. We’d like to drink the wine today, because that would be nice; but on the other hand if we leave it to age in the barrel for longer it will improve in quality. The wine is already there, we know how much there is and how much better it will be next year. All the possibilities are defined in advance. We just have to decide what pace of drinking it will bring us the most pleasure.

A monetary production view of the world, on the other hand, is one in which the economic process is a one of collectively transforming the world. This is an active process that structured and mediated by money, and organized around the accumulation of money. In this view of the world, production is a cooperative human activity whose possibilities are not knowable in advance.

In this monetary-production paradigm, the fundamental constraint is not scarcity; the economic problem is not allocation. The fundamental constraint is coordination. When we stop imagining the world in terms of discrete commodities being combined in different ways, and start imagining it in terms of human beings cooperating (or not) to do things together, the problem becomes: How do we coordinate the activity of all these different people? What does it take to allow cooperation on a larger scale, between people who don’t have pre-existing relationships?

That is the problem that economic life is seeking to solve. And in particular, we argue, it is the problem that money helps solve. By its nature, this is not a problem that we can know where the opportunities are in advance. This uncertainty about the possibilities of the future is a fundamental component of Keynes’ vision, and is linked to the centrality that money has in his vision.

So far all of this has been pretty abstract. Let’s turn now to some of the implications of these questions for the real world. Because, after all, these debates are only interesting insofar as they help us become masters of the happenings of real life. They’re interesting insofar as they give us some ability to intervene in the world around us. The reason that Arjun and I wrote this book is that we came to feel that many of the concrete problems that we were interested in, and that other people are interested in, require a different view of money to make sense of them.

Let me give an example. The two of us wrote a number of papers some years ago, which were in some ways the starting point of this book, about the rise in household debt between 1980 and 2007. Between 1980 and 2007, household debt in the United States rose from roughly 50 percent of GDP to 100 percent of GDP. This was something you were very aware of if you were beginning your life as an economist in the 2000s, and it became even more interesting in the wake of the financial crisis of 2007–2009, which the rise in household debt seemed like one of the underlying causes of.

In general, when people talk about rising household debt they attribute it to rising household borrowing. Much of the time, people don’t even realize that those are two different things. There are articles where the title of the article is something like “explaining the rise in U.S. household debt” and then the first sentence of the article is, “why are U.S. households borrowing more than before?” Or even, “why are households saving less than before?” But these are different questions!

Of course it is true that insofar as someone borrows more money, their debt will rise; and if their income is unchanged their debt to income ratio will rise. This might in principle involve dis-saving, if the debt is financing increased consumption. In reality, though, it almost certainly doesn’t, since the great majority of debt is incurred to finance ownership of an asset.

Setting aside the dissaving claim — which is almost always wrong, though you hear it very often — it is true that an increase in borrowing implies an increase in debt. But your debt-income ratio can change for other reasons as well.

Think about two people who buy houses: If one person buys a larger house, or a house in a more expensive area, or if they make a smaller down payment, then they will certainly owe more money over time than the other person. But if one person buys a house when the prevailing interest rate is low and the other buys an identical house with an identical downpayment when interest rates are high, and they each devote an identical part of their income to paying their mortgage down, then over time the debt of the person who bought when interest rates were low will be lower than the debt of the person who bought when interest rates were high. If you are fortunate enough to buy a house with a low mortgage rate then over time your debt will be lower than somebody who wasn’t so fortunate.

This is even more true in the aggregate. If you see households devoting a certain share of their income to purchasing the services of homes that they live in that they own, those same payments are going to result in in more debt when interest rates are high and less debt when interest rates are low.

We also know that if you’re looking at a debt to income ratio, then as a ratio that has a denominator as well as a numerator. A more rapid increase in incomes — either what we call real incomes or incomes that rise because of inflation — will reduce that ratio of debt to income. And we know that if debt is written off, if the borrower defaults, then the debt ratio will also come down.

All of these are factors that influence the level of debt independent of what we think of as the real flows of expenditure and the income. So what Arjun and I did — which is very simple once you think of doing it — is take various periods of time and see how much of the change in debt income ratios over each period is due to changes in borrowing behavior and how much is due to these other factors. We called the other factors, the ones independent of current expenditure and income, Fisher dynamics, for Irving Fisher.

Fisher, incidentally, is an interesting figure in this context. On the one hand he was a very important advocate of this sort of neutral-money real-exchange vision we are criticizing. But he also in the 1930s wrote very persuasive account of the Great Depression in terms of financial factors — “The Debt Deflation Theory of Great Depressions” — where he explained the depth of the Depression by the fact that debt burdens rose even as borrowing fell, because prices and nominal incomes fell much faster than interest rates

Our point was that this dynamic is not unique to the Great Depression. Any time you have higher or lower inflation, or higher or lower interest rates, that is going to affect debt burdens exactly the way it did in the Depression. And what we found is that if you’re looking at this rise in household debt to income ratios between 1980 and 2007, essentially all of it is explained by these other factors, these Fisher dynamics, and none of it is explained by increased borrowing. If you compare the period of rising household debt after 1980 to the previous two decades of more or less constant debt-income ratios, people were actually borrowing more in the earlier period than in the later period.

The difference is that the interest rates facing households were much lower in the 1960s and 1970s than they were after the Volcker shock. The Volcker shock raised interest rates for households, and they stayed high for longer than the policy rate did. And during the 60s and 70s compared with the 1980 to 2007 period as a whole, inflation was significantly higher. (Real income growth was also a bit higher in the earlier period but that plays a smaller role.)

So what we have here is not a story about real behavior. It’s not a story about borrowing, about income and expenditure. All of these stories that we heard from both the left and the right about why household debt had risen — it’s because people have grown impatient, their time preferences shifted or they are competing over status or it’s inequality — none of this is relevant, because people were not in fact borrowing more.

Stepping back here, we can think of a set of monetary variables that scale up or scale down the weight of claims inherited from the past. Both interest rates and inflation function to change the value of claims in the form of debt inherited from the past, relative to incomes being generated today; and by the same token interest rates change the value of promises about future payment relative to incomes today. In an environment of abundant credit and low interest rates a promise about something you can deliver in the future, or an income you will receive in the future, is more valuable — it gives you a greater claim on income today. In an environment of low interest rates, what you will do, or can promise to do, in the future matters more; in an environment of high interest rates, and low inflation, what you did do in the past, the income you did receive, matters more.

This monetary rescaling of claims inherited from the past and claims generated by promises about the future, relative to income in the present — this is something that is constantly going on, in addition to whatever real activity people are carrying out. And many of the monetary outcomes that we’re interested in — like debt-income ratios — are fundamentally driven by this rescaling process and not by real activity.

So these historical changes in household debt are a concrete application of the larger perspective that we’re trying to develop in this book.

Another important application is the interest rate. How we think about the interest rate is central to a lot of the debates between different perspectives in economics, or maybe more precisely, it’s where the differences between them become visible, become unavoidable.

One way I think about it: Imagine trying to lay a flat map over globe. You can do it if your map is of just a little portion of the globe — we all know we have flat maps of various places that all exist on a sphere in reality, and they work okay. But if you try to put your flat map over the whole globe it’s not going to work — either you’re going to have to crumple it up somewhere or it’s going to rip somewhere. The interest rate then is one of the sites where the flat map of this vision of the economy as a process of market exchange rips, when we try to fit it over a world of active transformative production through human cooperation into an unknown future.

The way that you’re taught to think about the interest rate, if you get an economics education, is that it’s the price of savings, or loanable funds — it’s a trade-off between using the pot of resources that currently exist for consumption or for making the pot bigger in the future. We think, so much stuff was produced, some people have it, and if they don’t need it right now they can lend it to somebody else who’s going to use it to carry out production, which will mean more stuff in the future. In this view the interest rate is the price of consumption today in terms of consumption tomorrow.

Interest, in this view, is a fundamentally non-monetary phenomenon: It’s a question of the real trade-offs imposed by people’s material needs and the material production they’re capable of.

This is a long-standing view — we can go back 200 years to Nassau Senior describing interest and profit as the reward for abstinence. By “abstinence” he means the deferring of enjoyment. The term has a nice moralizing religious tone to it, but the fundamental point is that the interest rate is the return on consuming later rather than earlier. We can find exactly the same thing in, let’s say, Gregory Mankiw’s textbook today. To quote:

Saving and investment can be interpreted in terms of supply and demand. In this case, the ‘good’ is loanable funds, and its ‘price’ is the interest rate. Saving is the supply of loanable funds … Investment is the demand for loanable funds—­ investors borrow from the public directly by selling bonds or indirectly by borrowing from banks.

Here, again, we have a certain amount of stuff — it already exists — and you can either use it now, or defer your enjoyment of it by lending it to somebody else who will use it productively. One striking thing about Mankiw’s formulation is that he makes a point of saying that it’s a matter of indifference whether this happens through banks or not.

So in this vision, the interest rate is a trade-off between goods today and goods tomorrow, or goods used in consumption and goods used in production. But the fundamental problem, as soon as we start thinking about this in a real-world setting, is that it doesn’t seem to match up at all with the interest rate as we actually observe it.

One of the first things you learn if you get a Keynes-flavored economics education, but also something that anyone who deals with this stuff practically realizes, is that when you go to the bank to get a loan, the bank is not making that loan out of anybody’s savings. A bank makes a loan by creating two offsetting IOUs. There is the bank’s IOU you to you, which we call a deposit, and your IOU to the bank, which we call a loan. The deposit is newly created in the process of making the loan — it’s what used to be called fountain pen money, it’s ledger money, it consists of two offsetting entries in a ledger. Nobody’s savings are involved. Nobody else needs to defer their consumption to allow you and I to write IOUs to each other.

There’s a very nice explainer from the Bank of England on how banks create money which you can look up online, that lays this out very clearly. I assign it to my undergraduates every year. It’s not a secret that loans, in the real world, do not involve somebody taking some goods that they have in their possession and bringing them to some kind of central clearing house where somebody else can check out the goods to use in some production process. When you get a loan, you’re not receiving a bag of cash that someone else brought into the bank. You’re getting a deposit, which is just a record kept by the bank. Fundamentally, a loan is the creation out of thin air of two offsetting promises of money payment.

Now of course when you receive your promise from the bank — in other words, your deposit — you will normally use that to acquire title to some goods and services, or authority over somebody else’s labor. But the loan itself did not require anyone to have already decided to let you use those goods. It did not require anyone’s prior act of saving.

Of course anybody can write an IOU. You and I could sit down and write promises to each other, just as you and the bank do when you get a loan. The key thing about the bank, here, is that its promise is more credible than yours. If I ask for your bicycle and promise to give you something of equal value down the road, you probably won’t agree. But I can make that same promise to bank, and the bank can then make that promise to you. And that’s fine.

This is why Hyman Minsky, the great theorist of finance, said that the defining function of banks is not intermediation, but acceptance. You can’t get a claim on labor, on real resources, simply by promising you’ll do something useful with them. But a bank might accept your promise, and then the promise that it makes to you in return can can be transferred on to other people in return for a claim on real resources, which you can use to create new forms of production that otherwise wouldn’t exist. And this is the other side of the Keynesian vision — the fact that banks can create money by lending allows for the reorganization of productive activity in new ways that wouldn’t be possible otherwise.

If you’re a business owner, say, you can now expand your business, because the bank’s promise is more credible than your promise. You as a business owner cannot hire workers simply by saying this business is going to be successful and I’ll give you a share in it — well, if you’re in Silicon Valley sometimes you can, but most businesses can’t. The bank’s promise is more credible — unlike yours, it will be accepted by workers as payment. You can use this loan created out of thin air to carry out new activities, to create things that did not exist before.

The problem for the orthodox view is that banks exist. Banks exist and, to anyone taking a naive look at capitalism, they seem rather important. Trading money claims is evidently pretty central to the way that we organize our activity.

Central banks also exist, and influence the terms on which banks make loans, even though they themselves don’t do any saving or investing. If you believe the story in the Mankiw textbook that the supply of savings is being traded against the demand for investment and that’s what determines the interest rate — well, a central bank is neither providing loanable funds nor is it using loanable funds for investment, and it doesn’t restrict the terms on which anyone is allowed to make private contracts. So how could it influence the price of loanable funds?

Wheres if we think of the interest rate as being a combination of the price of liquidity — flexibility — and a conventional price set in asset markets, then it is much easier to see the critical role of banks, and why central banks are able to influence it. This is something we spend a lot of time on in the book.

Now, once common way of reconciling the idea of a savings-determined “real” interest rate with the monetary interest rate we see in the real-world financial system is through the notion of a “natural interest rate”. This is the idea that, ok, there is here on Earth an interest rate that is set within the banking system that has to do with the terms on which promises of money payments are made. But there’s another interest rate that exists in some more abstract world, which we can’t see directly, but somehow corresponds to the way goods today trade off against goods tomorrow, or the way they would trade off if markets functioned perfectly. This second interest rate is what’s called the natural rate. The actual rate might not always follow it. But it should.

As an aside, I should say that this sort of transformation of a descriptive claim, that is supposed to be a statement about how things actually work, into a prescriptive claim about how things shouldwork, is very common in economics.

We can find a very nice statement of this view from Milton Friedman on the natural rate of interest and its cousin the natural rate of unemployment, where he describes them as the rates that would be

ground out by the Walrasian system of general equilibrium equations, provided there is embedded in them the actual structural characteristics of the labor and commodity markets, including market imperfections, stochastic variability of demands and supplies, the cost of information about job vacancies and mobility, and so on.

In other words, if we could somehow make a perfect model of the economy, then we could calculate what the natural rate would be, and that’s the thing we should be trying to achieve with our policy influencing the interest rate. Obviously, as soon as you start thinking about it, this doesn’t make sense on multiple levels. But it’s a very attractive formulation precisely because it papers over this gap between a theoretical and ideological vision of interest that sees it as a real trade-off between the present and future, and the actual concrete reality of interest that is determined in financial markets on the basis of liquidity and convention.

So again, if you come more recently, you look at Jerome Powell talking about monetary policy in a changing economy, a speech he gave a few years ago. There he introduces the idea of r*, the natural rate of interest, by saying, “in conventional models of the economy, major economic quantities such as inflation, unemployment, and the growth rate fluctuate around values that are considered normal, natural, or desired.”

I think that’s a very nice illustration of the thinking here, because normal, natural, and desired are three different things, and this r*is conflating them all together. Which is it? Is it normal, as in typical or average? Is it natural? (What would it mean for an interest rate to be artificial?) Or is it desired? In fact, it’s whatever the central bank wants. But the slippage between these different concepts is essential to the function of ideas like the natural rate.

Think of the transmission in a car: You’ve got a clutch, because the engine is turning at one speed, and the wheels are turning at a different speed. If they just join up, you’re going to shatter your drive shaft. So you have two discs that can turn independently of each other, but also exert some force on each other, so you get a smooth connection between two systems that are behaving in different ways. In this case r* is the clutch between theory that’s going one way and the reality, which the central bank has to acknowledge is going in a different way. The ambiguity of the term is itself normal, natural, and desired.

So then Powell continues, these natural values are “operationalized as views on the longer-run normal values of the growth rate of GDP, the unemployment rate, and the federal funds rate, which depend on fundamental structural features of the economy.” Here again there is a conflation between the things that the central bank is trying to do, things that are the sort of normal, average, expected, long-run outcomes, and things that are in some sense determined by some set of non-monetary fundamentals independent of monetary activity. And again, you get a controlled slippage between these different concepts.

There’s another nice version of this from a group of economists associated with the European Central Bank. They say, at its most basic level, the interest rate is the price of time, the remuneration for postponing spending into the future. So this, again, this is Nassau Senior.

It’s abstinence. It’s the price of waiting for your enjoyment. So this sounds like something that should be purely non-monetary.

This is r*. And then the ECB economists say, “while unobservable, r*provides a useful guidepost for monetary policy as it captures the level of interest rates which monetary policy can be considered neutral.”

I just love the idea of an unobservable guidepost. It’s a perfect encapsulation of how the natural rate concept functions.

Because, of course, what’s really going on here is the central bank sets the interest rate at a level that they think will achieve their macroeconomic objectives, whatever they are. Inflation is too high. We need a higher interest rate. Unemployment is too high. We need a lower interest rate. Maybe we’re concerned about the exchange rate. Maybe we’re concerned about the state of financial markets. Whatever they’re most worried about, they choose an interest rate that they hope will help.

And then after the fact, they can say, well, we wrote down a model in which this would be the interest rate, so therefore it is the natural interest rate. There’s no genuine content there — r* and the associated models are just a way of describing whatever you’re doing as conforming to a natural outcome that is dictated by the fundamentals out of your control, as opposed to a conscious political choice that prioritizes some outcomes above others. This sort of ideological construct is fundamental in depoliticizing one of the main sites of economic management in modern economies.

And this is an important part of the story that we’re trying to tell in this book. The problem, if you believe in a more egalitarian, democratic, or socialist vision of the economy, is not simply, is not even mainly, that right now the world is organized through markets, and we’re going to have to come up with some better economic system to replace markets. The reality is the world is not primarily organized through markets. What we have, very often, are imaginary market outcomes being claimed as the unobservable guideposts so that people with authority claim to be following them. We have an ideological system that allows processes of power and planning to present themselves as somehow representing or standing in for market outcomes.

Another area where I think this comes through very clearly is in the history of the corporation. We wrote a lot on this which we were, unfortunately, not able to fit into this book — it will be in another book. But it’s a good illustration of the larger vision we are trying to develop.

If you look at the way people talk about our economy, almost across the political spectrum, they will describe it as a market economy. We have all kinds of outcomes that are dictated by markets, decisions about production are guided by prices, the economy is organized through market exchange.

And, at least among economists, the way we talk about production implicitly treats it as just a special kind of market.

This is certainly the way economic textbooks approach production. We talk about labor markets, and capital markets. We imagine production as a process where someone purchases a certain amount of labor and a certain amount of capital, puts them in a pot, and gets a certain amount of salable output at the other end.

But when you look at how corporations work, it’s very clear that they are not organized as markets. They’re not internally structured through money payments — yes, of course, workers have to paid a wage to show up, but once they are there there isn’t some kind of market for their services. The boss just tells them what to do. Nor are corporations organized internally around the pursuit of profit, though that obviously guides how they relate to the outside world.

Now, historically, we can find cases of businesses whose internal structures are more market-like. Some of the first large corporations were organized through what were called inside contractors. You would you hire a skilled craftsman, artisan, who comes and works in the physical space, but is responsible for hiring their own assistants, buying their own materials, working them up and then selling them on to the next inside contractor.

That turned out to be not a very good of organizing a corporation, even when they were they producing the sort of thing — clothing, say — that could in principle be made by independent artisans. It didn’t work at all for large-scale industrial production. It’s obviously not the way corporations are organized today. We would argue that a central through-line of the history of the corporation is a fundamental conflict between the organization of production in large-scale, ongoing, socially embedded forms, and the logic of money and markets that surrounds them, and that the claims upon them by wealth holders continue to be exercised through.

If we go back to what many people would consider the first modern corporation, the East India Corporation, we find right at its beginning the first conflict between shareholders and managers. The original structure had been a kind of pooling of resources between a number of independent merchants for joint operations in the East for 20 years, after which they would sell any remaining assets, divide up the profits, and dissolve the corporation. That was the legal form.

But the East India Corporation turned out to be very successful at its mix of trade and piracy. People have argued that this hybrid of trade and warfare was really Europe’s specialty, the one thing it did better than the rest of the Old World. In any case, East India Company was very successful at it. But — and this is the key thing — it required a big investment in forts, soldiers, local political alliances. Things that can’t just be sold off and divided among the partners.

So after 20 years, this is a very successful enterprise, and the people running it would like to keep operating it and believe they can do so profitably. And now the shareholders are saying, it’s time to divide everything up. But of course, if you sell off the forts and so on, they’re no longer of any value. And so there was a long conflict —legal, political — that ended with the managers winning, the shareholders losing, and the corporation being allowed to continue operating.

Losing the legal fight turned out to be good news for the shareholders. The company continued paying out large dividends. It never once raised any funds in the stock market. It continued operating and paying dividends for hundreds of years out of its own profits.

There are two interesting things about this story, to me.

First of all, right from the beginning, we have a conflict between an ongoing process of production which has real material benefits, and the claims by the elite against that process, which they would like to exercise in the form of money. If you operate forts and you have ships and you have your local allies, then you can carry out trading and trading-slash-piracy activities that you can’t do without those things. But once you’ve laid out money to build a fort, you own a fort. It remains a fort. You can’t turn it back into money. And you, as a wealth owner, put your money out to get more money. You don’t want to be master of a fort. You want a liquid financial claim that you can trade.

The other point is that the financial side of the operation is not about pooling money. It’s not about raising capital.

The East India Company, again, continues having shareholders, continues paying dividends in order to satisfy their claims, despite never raising funds from the stock market over the next 200 years of their existence. Whatever the stock market is doing here, it’s not a system for getting real resources into the corporation.

We can find this same principle down through the history of the corporation. When in the beginning of the 20th century we see the generalization of the corporate form, it’s not a process where large-scale investment required raising more funds. The problem that the corporation is solving is that you have large-scale enterprises with long-lived specialized fixed assets, on the one hand, and wealth owners, on the other hand, with claims on those enterprises — often the owners of smaller enterprises that merge into one larger one, or the heirs of the founder — who don’t want an interest in this particular company. They want money. And so the function of the corporate form is to allow the conversion of ownership rights into money — to enable payments that will satisfy these claimants, so that their authority over the production process can be pooled, their smaller interests can be assembled into a larger whole.

This is not a system for raising funds for investment. It’s a system for consolidating authority. It’s a system for reconciling the need for large-scale, long-lived organizational production, on the one hand, with the desire of the wealthy to hold their wealth in a more money-like form, on the other. As William Lazonick says, the corporation is not a vehicle for raising funds for investment, it’s a vehicle for distributing money to the wealthy. The origin of the corporation as we know it is as a vehicle for moving funds out of productive enterprises to asset-owners.

We can see this same conflict in the shareholder revolution of the 1980s, where people like Michael Jensen argued that the existing managers of corporations were too focused on the survival and growth of the enterprise as such. Managers were too interested in the particular productive process that they were stewards of, as opposed to generating money payments to shareholders, to finance.

What we see again and again is that production depends on ongoing relationships — many of them, obviously, hierarchical, others based around cooperation, or on what David Graeber calls baseline communism, or on people’s intrinsic motivation to do their work well. But not on arm’s-length market relationships.

Our argument is that, yes, under capitalism, money expands itself by being committed to production. But there is a fundamental conflict between the logic of production and the logic of money.

Through the whole history of capitalism we have this conflict. Owners of money want more money. So they commit their money — their claim on society — to some particular enterprise, which they hope will return more money to them in the future. But in the meantime, the participants in that enterprise want to operate it, expand it, according to its own particular logic. Almost everyone here has probably encountered Marx’s formula M-C-P-C-M’. But the point that Arjun and I are trying to call attention to, is, how, or whether, C’ turns back into M’ is a tricky political question.

From the point of view of particular enterprise, the conversion back to money appears as a kind of imposition, a demand from outside. The enterprise can reproduce itself on its own terms with a claim on certain use values for which it produces other use values in return.

Where money is necessary — this is important — is where something new is being done, where there’s a need to organize production in some new way, for coordination between strangers who don’t have a relationship with each other. Money is genuinely productive insofar as the development of our productive capacity requires breaking up existing ways of organizing production, dissolving existing relationships, extinguishing obligations, and starting from square one.

Money should be seen as a specific kind of technology of social coordination. It’s a way of organizing human activity in new ways that it hasn’t been organized before.

One way to think of this is of money as a sort of catalyst. On the one hand, it acts as a social solvent. It breaks up existing relationships, as Marx and Engels famously described in the Communist Manifesto— “all that solid melts into air”. It replaces social ties with the callous cash nexus.

We can all think of examples of this. Money is a way of erasing relationships. A money payment replaces some ongoing connection between people. It takes an existing obligation and it extinguishes it. Money is a tool for breaking social ties, for replacing production that’s organized through ties of affinity, of affection, of kinship, of obligation, with arms-length cooperation between strangers, who could walk away from each other and never see each other again. Money says, we are done, we are settled, we owe nothing more to each other.

But that is only the first step. Because after we have broken up these smaller social molecules, these smaller-scale structures of production, after we have broken up the organization of production through a family, a village, a guild, that is not the end of the story.

Money facilitates cooperation among strangers, and it makes strangers out of family and friends. But people do not remain strangers. People who are engaged in cooperative activity of whatever kind form new social ties and new connections. This is partly because, organically, human beings connect to each other, and partly because the activity of production requires it.

Production requires cooperation beyond what you can get through arms-length transactions. It requires intrinsic motivation, it requires trust, it requires people’s desire to do their job well and their loyalty to other people. And it requires, at least in our society, command and hierarchy, which in turn requires some form of legitimacy. People have to know who can give what commands.

All of that involves the creation of social relationships. You can see money as a moment, in which older, smaller-scale forms of cooperation are broken up, creating the possibility for the reassembly of their components into larger forms of cooperation, larger-scale cooperation. The organization of society through money is a temporary stopping point.

What’s interesting is that if you go back to the late 19th century, the early 20th century, this was something many people perceived as almost inevitable. If you read the next-to-last chapter of Capital, Marx’s vision is essentially this: Having broken up the older forms of small-scale property and small-scale production and reassembled human activity in the form of large-scale cooperation, an extensive division of labor, production based on conscious scientific knowledge — after all that, it will be, he says, “infinitely less violent” to replace that with socialism than it was to break up all of those smaller structures earlier. Does Marx say that we’ll just look out the window one day and say, oh, hey, it’s socialism? No. But it’s not that far off.

Or similarly, you can find Keynes writing in the 1920s saying that the most striking fact about the world that he sees around him is the tendency of large enterprises to socialize themselves. Corporations, having been established to carry out some particular purpose, to produce some concrete use value, becomes oriented towards the production of that use value. They cease to be oriented towards producing profits for their shareholders.

This is, in some sense, the same story that shareholder advocates like Michael Jensen told in the 70s and 80s. Except that they saw it not as the march of history, but as a problem to be overcome. And this is the point that we come back to in our book. In practice, productive activity is overwhelmingly organized in non-market ways. But acknowledgment of this fact is profoundly threatening to elites, whose claim on society is expressed in terms of money.

This is the point. We don’t see how much of our life is already organized in non-market ways.

We all of us in this room came here for non-market reasons. None of us was paid to be here. None of us came here because a market signal told us to.

There are, obviously, payments that organize the operation of this building. But there is also an activity taking place in this room, in this building, that is not a market outcome, that is not organized through money payments, that doesn’t produce or respond to price changes.

Education is an activity that is particularly resistant to organization through markets and money payments and the pursuit of profit. But it’s not unique. Many of us came here on the MTA, an institution that was set up originally according to the logic of markets and money payments. But that didn’t work for running a transit system. The MTA didn’t become public because of an ideological crusade to socialize it. It became public because it could not simultaneously fulfill its social function while still being operated profitably. So the state had to take it over.

What we see around us is that the organization of production in practice calls for non-market forms — money does not perform the coordinating role that it purports to. But what we also see is that the structures of hierarchy and authority in our society very often justify themselves and legitimate themselves as if they were forms of market coordination. Money and property rights become badges of authority that are worn by the people who in fact issue commands through systems of hierarchy and personal domination.

The great challenge that we face if we wish to transform this system is not that we need to find new forms of non-market coordination. It is to find ways of democratizing the forms of planning and hierarchy that exist. We do not have to ask, well, how do we organize production without markets? — because we already do.

The great challenge is the enormous resources of violence in the hands of money owners, and their willingness to see the existing organization of collective action wrecked rather than allowing it to socialize itself, no matter how strongly the actual needs of production point in that direction.

The problem — the fundamental problem, at this moment it feels clearer than ever — is how to overcome the enormous powers of coercion and violence in the hands of those whose status and authority is expressed through money.

(This piece was originally published at Phenomenal World, in cooperation with the New York Policy Project.)

With the failure of Eric Adams’s last-ditch effort to stack the Rent Guidelines Board (RGB), Mayor Zohran Mamdani is now in a position to fulfill his promise to freeze the rent.

The nine-member RGB sets maximum rent increases for New York’s million-plus rent-regulated apartments, determining rents for over half of the city’s renters. They are tasked with balancing the interests of tenants and building owners, considering a wide range of factors including the cost of operating rent-regulated buildings, the cost of living for tenants, and the overall state of the housing market. In practice, they have wide discretion. The RGB delivered a rent freeze — a 0 percent increase in regulated rents — three times during the De Blasio administration.

Most discussion of rent regulation in New York City focuses on the legal intricacies of who, where, and when the RGB guidelines will bite. But this risks losing sight of the bigger-picture questions about the financial terms on which housing is bought, owned, and sold in New York City—terms which may have to fundamentally change to make affordability possible in New York City.

To understand the implications of a rent freeze, we need to think about the broader economics of housing in New York. Any discussion of rent regulation has to grapple with the fact that owners of residential buildings pay most of their rent earnings not on maintenance or operations, but to service their debts to their creditors. With the kind of leverage typical for investor-owned residential buildings, any significant slowing of rent growth is likely to see many building owners unable to make their mortgage payments.

The great majority of residential buildings have rental income well above their operating costs, and they could be profitably operated even with rents much lower than today’s. So in principle, there is space for the RGB not just to freeze the rent, but roll back regulated rents by some significant percent. The big obstacle to a mandated rent reduction is not the real costs of providing housing, but the financial commitments inherited from the past. A building underwater on its mortgage is unfortunate for the owner; it can be disastrous for tenants. A plan to freeze regulated rents, or even to limit them to modest increases, needs to be combined with a plan to ensure a quick resolution for apartment buildings in financial distress.

Waiting for a market solution to this dilemma through the bankruptcy courts would be disastrous for tenants, who would bear the brunt of cost savings in the form of decaying living conditions while landlords wait for a better deal. Instead, the city’s plan to freeze or reduce rents must be combined with a quick resolution for apartment buildings in financial distress. This resolution must take account of the major dynamics that shape the rental market in the city—high rent burdens, inadequate investment in previous decades, and the distinct circumstances of landlords controlling old buildings versus developers looking to build new ones. After a rent freeze, true housing affordability will call for a model of alternative, including public, ownership.

The rent-stabilized market

It’s easy enough to predict the argument against freezing the rent—without rent increases, many building owners will face financial distress, leading to deferred maintenance or abandonment. A recent piece in The City describes how property owners have struggled to make mortgage payments and cover operating expenses:

Every month, Langsam Property Services collects dozens of rent checks from two buildings it manages in The Bronx. But that’s not enough to cover the mortgage and operating expenses. So every month, the buildings’ owner sends another check—for at least $30,000, just to meet the mortgage.

The kinds of buildings…where all or almost all of the apartments are rent regulated…face extreme financial distress. Rent increases failed to keep up with costs for most of the last decade, and changes to state law in 2019 made it virtually impossible to renovate vacant units and raise the rents, putting such landlords in a bind…A four-year rent freeze could result in the kind of abandonment that happened in the 1970s.

It’s important to take these concerns seriously. I don’t think the landlords quoted here are lying when they describe their difficulties paying their mortgages. But we should distinguish between debt service and other costs. Operating and maintenance costs reflect the actual costs of operating a building in the city. Debt service, on the other hand, reflects how much the current owner paid for the building.

Combining these two sets of costs is common in discussions of rent regulation. Another recent story, for instance, quotes the executive director of the Association for Neighborhood and Housing Development: “You can’t continue to run a building without paying the mortgage and without paying your insurance.” Insurance is indeed a cost of running a building, but the mortgage is not. At most, it is a cost of owning it.

As we think about the economics of rent regulation, we should keep this distinction clear. Operating and maintenance costs are necessary costs of providing housing; mortgage payments are not. Essentially none of the debt owed by owners of rent-regulated buildings is construction loans, and very little of it is financed capital improvements. The cost of servicing that debt is not part of the cost of providing housing. It rather reflects how much the owner has borrowed against it. The problems faced by owners of rent-regulated apartment buildings look very different in this light.

There is plenty of data on the incomes and expenses of residential buildings in the city, in particular the detailed (though not always complete) records of the New York City Department of Finance (DOF). Research and advocacy organizations like the Furman Center and the Community Service Society regularly put out useful reports based on this. For present purposes, the RGB’s annual Income and Expense Study, based on the DOF data, is enough to give the broad picture.

In buildings with rent stabilized apartments, reports the RGB, rent averaged $1,600 per unit; landlords on average collected another $200 per unit from other income sources—parking, retail space, cell-tower rent, and so on. Maintenance and operating costs, meanwhile, averaged a bit less than $1,200 per unit, including taxes (a bit over $300 per unit) and insurance (almost $100 per unit, and the component that has increased most rapidly in recent years). For the average rent-regulated building, net income is around $600 per unit, about 50 percent above operating costs.

This relationship between costs and income seems fairly stable over time, albeit with some short-term ups and downs. Over the past two years, landlord income has increased by 15 percent, while costs have increased by only 10 percent. But this was in large part making up for the pandemic period, when income increased more slowly than rents. Over the long run, the two have kept pace almost exactly—over the past twenty years, landlords’ incomes have increased at an average annual rate of 3.8 percent, while their costs have increased at 3.7 percent.

These averages mask a great deal of variation across individual buildings. Still, over 70 percent of buildings with rent stabilized units had operating and maintenance costs less than 80 percent of income, and fewer than 10 percent had operating and maintenance costs greater than income. This minority of buildings are a serious concern, and their numbers do seem to have increased somewhat in recent years, but they remain a fraction of rent-regulated buildings.

Yes, if rents on stabilized units were frozen forever, there would come a point when operating costs exceeded income for an increasing share of buildings. But why are building owners facing distress today? The answer in most cases is that they borrowed too much to buy buildings at inflated prices, based on an expectation that rents would rise faster than they actually did.

Landlord economics

The price that an investor will pay for a building, and the size of the mortgage that bank will give them to do so, is a function of the rent that the building is assumed to generate in the future. Lenders will typically accept a debt-service ratio of 1.25, and some will go as low as 1.1, meaning that they will lend as long as the expected rental income net of operating costs is 1.1 to 1.25 times as great as the payments the mortgage requires each month. To say that a building’s net rental income is 1.25 times its debt service costs is the same as saying that 80 percent of rental income after operating costs will go to mortgage payments, if the building performs as expected.

Furthermore, investors in multifamily buildings often refinance in order to extract equity when a building has increased in value. Say a building is valued at $10 million and is currently carrying a mortgage of $7 million, meaning that the owner’s equity is worth $3 million. If a lender would be willing to accept the building as collateral against $8 million of debt, the owner can take out a new mortgage, reducing their equity to $2 million and leaving them with $1 million in cash—which they will presumably put toward acquiring another building.

This sort of “cash-out” refinancing was seen as a troubling aberration when it became popular among homeowners during the 2000s housing boom. But for real-estate investors, it is an established business practice—borrowing against one’s existing properties is the easiest way to finance the acquisition of new ones. From an investor’s point of view, a building carrying a smaller mortgage than what lenders would accept is money left on the table. Careful observers of the housing market believe that this kind of equity extraction may account for the bulk of the debt carried by rental properties in the city.

This means that even buildings that have not changed hands in many years often carry mortgages close to the maximum debt-service ratio that lenders will allow. Research by the University Neighborhood Housing Program based on data from the government-sponsored enterprise Freddie Mac (which purchases a large share of mortgages on New York apartment buildings) finds that residential buildings in the city, on average, pay out about 80 percent of their net operating income as interest payments. This suggests that building owners are normally operating close to maximum leverage. For most buildings in the Freddie Mac sample, interest payments are a larger cost than all operating expenses put together.

Whenever rents rise more slowly than expected when a building was purchased or refinanced, there is a good chance that the owner will be unable to meet their mortgage payments, even if rental income is still comfortably above operating costs—as is the case in the majority of buildings.

Rent growth below buyers’ (and lenders’) expectations is a particular problem with buildings that were bought or refinanced prior to the 2019 reform of the New York State rent laws. These investors hoped to win substantial increases in rents for regulated units or remove them from regulations entirely, using a number of loopholes that allowed landlords to kick out their current tenants and rent out the units at a higher rent. Since the 2019 reform, this is nearly impossible. As a result, many buildings purchased in the 2010s cannot generate income commensurate with what was paid for them.

To be clear, the rent reforms were a major positive step for housing affordability. The expected increases in rental income could only have been realized, in most cases, by evicting current tenants and attracting higher-income ones. But losing the possibility of replacing current tenants with higher-paying ones has left the owners of these buildings in a financial hole.

A future with lower rents?

This overhang of overvalued, overmortgaged buildings is presumably a major reason why there has been so little activity in the market for multifamily buildings in recent years, with the volume of sales less than a third of what it was a decade ago. How then should we think about landlord complaints—many of them genuine — that a rent freeze will leave them unable to service their debts?

First of all, it should be clear that if buildings’ rental income is inadequate given their debt payments, the reason is lower than expected rents—not rent regulation per se. If an Abundance-style program of supply-side reforms delivered enough new construction to substantially bring down rents, building owners like those quoted in The City would face the exact same difficulty. Any slowing of rent growth will create financial distress for building owners who borrowed on the expectation of rising rental income.

There might be steps the city can take to reduce costs for building owners—insurance being the most promising avenue—but the potential savings are limited. Major improvements in housing affordability will entail reducing rental income for existing buildings. At the end of the day, tenants’ housing costs are owners’ incomes; lower gross income for landlords is just the flip side of more affordable rental housing. The housing agenda must then explicitly include a strategy for property owners whose debts cannot be paid in an environment of lower rents.

One might ask, why does the public need to be involved? Perhaps this is an issue to be left to owners and lenders. Either the bank writes down the loan, or else it forecloses, and the building is sold to someone else at a more realistic price. The trouble is what happens during the transition: the foreclosure process can drag on for years, and financially distressed owners are likely to prioritize mortgage payments over maintenance and upkeep, allowing buildings to fall into disrepair at great cost to their tenants and to whomever ends up owning the building. Landlords will stop paying for gas before they give up control of their buildings.

The lower the rent increases allowed by the RGB, the more urgent code enforcement becomes as a complement to housing affordability measures. Otherwise, what landlords give up in rent increases, they will try to claw back in reduced maintenance. At the same time, a successful affordability policy means that many buildings will be worth less than what their owners paid for them. Someone is going to have to bear those losses. It’s important to proactively shape how that happens, rather than wait for the market to work itself out.

One approach would be for the city to work with landlords and creditors to negotiate mortgage write-downs in return for hard commitments to a higher standard of maintenance and improvements. The response to the failure of Signature Bank could be a model. Signature was a major lender for multifamily buildings in New York; a considerable part of its portfolio of loans to owners of rent-regulated apartments ended up in the hands of the Community Preservation Corporation (CPC). CPC agreed to loan modifications in return for clear commitments by landlords to address building and habitability code violations. The city could push other holders of mortgages on underwater buildings to make similar deals.

CPC had the big advantage of already owning the loans. As a third party, the city government might struggle to bring lenders and building owners to the table. Another option, promoted by the mayor’s new Director of the Office to Protect Tenants, Cea Weaver, would be for the city to move aggressively to take ownership of buildings that can’t make their mortgage payments.

There are also a nontrivial number of buildings where operating costs exceed rental income. These are especially common in the Bronx, where past underinvestment may have contributed to today’s costs, and many are already owned by nonprofit Community Development Corporations (CDC). CDCs have a fundamentally different business model than the investors who own most of the city’s rental buildings. They use far less leverage, and, while almost all are rent-regulated, they tend to charge rents below the legal maximum.

The economic challenge here is quite different from that of most buildings in the city. The problem is less financing, and more the very low incomes of families living in these buildings, combined in many cases with underinvestment and neglect by prior owners. The solution here will involve operating subsidies. While the details of this are beyond the scope of this piece, subsidies to building operators are generally to be preferred to subsidies to tenants, which may be captured by landlords in the form of higher rents. The city’s Multi-Family Water Assistance Program is a good example of a targeted subsidy to affordable housing operators.

The situation of these genuinely distressed buildings should not be confused with that of the larger group of rental buildings where net income is positive, but insufficient to cover mortgage payments. In these cases, we must avoid two outcomes. The first is weakened rent regulations, which would make tenants pay for landlords’ speculative overborrowing. The second is allowing buildings to remain for an extended period in the hands of owners who will eventually lose them. If the current owner is going to give up the building, that needs to happen as quickly as possible. The threat of forced sale can be helpful to incentivize a quick settlement, even when it is not carried out.

Expanded public ownership is not just a long-term vision; it is an essential part of the solution to an immediate problem. The fundamental issue is that landlords are being squeezed by high debt costs from one side, while they aren’t able to charge higher rents, and they can’t cut costs without sacrificing habitability, which effective code enforcement will prevent. Under these conditions, some building owners will indeed face unsustainable losses.

The role of public ownership, in this sense, is to provide an escape valve, a way for owners to exit their position without running the danger of an extended foreclosure process. The pressure on landlord incomes will be a source of great anger and scare stories in the press, but this is also precisely what gives the city leverage to force creditors to write down debt and move toward alternative models of ownership. It is worth pursuing genuine savings that the public can deliver, like pooling insurance.

It would be a big mistake to simply offer relief to stressed landlords by exempting buildings from the rent laws. That would only pass the costs off to tenants without resolving the structural problem that undergirds the rental housing market—the mismatch between debt loads and affordable rent growth.

Even worse, allowing higher rents in response to financial distress would give other landlords hope that if they hold out longer, they will be able to avoid a resolution. Any hint of flexibility on the rent freeze could leave us in the worst of both worlds—a situation where building owners cannot pay their bills, but won’t give up ownership because they are hoping for higher rents in the future. An ironclad commitment to the rent freeze and to stringent code enforcement is essential to bring landlords and creditors to the bargaining table.

Landlords vs. Developers

The city’s leverage in negotiations with private landlords will implicate the broader politics of housing. Building more housing was a central plank of Zohran Mamdani’s platform. For the foreseeable future, that will require private developers and contractors, who control the specialized expertise, labor and resources required. NYCHA, for all its challenges, successfully operates buildings for over half a million New Yorkers. But it doesn’t put up new housing, nor is there yet any non-profit developer equivalent to the CDCs that manage so much of the city’s affordable housing. So if the city is going to gain more affordable housing, it has to offer sufficient returns to the businesses that will put it up.

The case of private landlords is different. The market rent for apartments in New York does not reflect the cost of construction; rather, it is determined by the balance between the demand for housing and an effectively fixed supply. Market rents in much of the city are significantly higher than the cost of maintaining and operating buildings. Unlike the payments to developers and contractors, most payments to landlords are rents in an economic sense.

In a recent post, the conservative journalist Josh Barro describes the emerging Mamdani-DSA housing policy mix as capitalism for developers, communism for landlords. He intends this provocative phrase to express skepticism about the coherence of the program. But it seems to me that, from an economic perspective, this is exactly the combination we want.

From the standpoint of private business, to lay out $10 million to build a new apartment building that you will operate or sell for a profit or to buy a similar existing building for $10 million may be roughly equivalent options. But from a social perspective, these options are completely different—one is creating something valuable for society, the other is trying to divert existing value in your direction.

Can we really split developers and landlords in this way? After all, even if very few buildings are owned by the same entity that developed them, the developer’s profit comes from selling the building. If old buildings generate lower net incomes and sell at lower prices, won’t this discourage new development?

Politically, the alliance between developers and landlords may be difficult to break. But economically, it is absolutely possible to reduce the rents on old buildings without meaningfully reducing the incentive to build new ones. The reason is discount rates.

Housing is distinct from other commodities in its lifespan: the median age of a New York apartment is about eighty years. A building’s major costs—construction and land acquisition—were often incurred decades ago. This means the link between price and production costs is much weaker.

Economists conventionally count interest costs as part of the cost of production. This is reasonable for a business that issues debt to finance inventories or relatively short-lived capital goods. But it is emphatically not the case for housing in an older city like New York, where the vast majority of debt owed by landlords was incurred to finance ownership of a long-existing building rather than the construction of a new one.

Looking at it from the other direction, a typical investor in a new housing development might expect a return of 20 percent; lenders accept an interest rate that might be on the order of 8 to 10 percent. These returns are equivalent to discount rates; to say that a developer requires a return of 20 percent, is equivalent to saying that they put a value of about 80 cents on a dollar of income a year from now. At a discount rate of 8 percent, a dollar fifty years from now has a present value of about 2 cents; at a discount rate of 20 percent, it’s worth one-hundredth of a cent. This means that the rent a building will command decades from now plays essentially no role in the decision of whether it’s worth building today.

No rational investor would pay money to build an apartment that will come into existence decades from now. But the nature of real estate is that ownership today implies ownership into the indefinite future. If you put up a building in order to rent it out next year, the building ten, twenty, one hundred years from now comes along for the ride. Given the age of the city’s housing stock, this means that the rent paid in a typical New York apartment has no relationship to the building’s construction costs; those were paid long ago. To the extent that landlord income exceeds the operating and maintenance costs of the building—and, again, it does on average by a margin of 50 percent—then that rent is also a rent in an economic sense: a payment in excess of the cost of producing something. The fact that these economic rents are not necessarily captured by the current building owner does not change this.

In this sense, buildings are a bit like intellectual property, which also lasts longer than the economic horizon of the businesses that produce it. The economic argument for rent regulation is a bit like the argument for limiting patents and copyrights to a finite period.

For housing in a city like New York, there is no reason to think that the market price provides a useful signal about the balance between value to consumers and cost of production. What, then, is a reasonable rent for older residential buildings? Arguably, it should be limited to operating costs plus a moderate margin. Rent payments above this are simply a transfer from tenants to building owners (and their creditors).

Housing as a public utility

Real estate investors generally expect much of their returns to come from capital gains—an increase in the property’s market value rather than the rental income it generates. Since buildings are normally valued at a multiple of their rental income, this means that owners expect not just high rents relative to operating costs, but steadily rising rents over time. If rent growth shifts onto a more affordable trajectory, owners will see lower returns, even if their buildings continue to generate a positive income for them. Under these conditions, the kinds of private investors who currently own much of New York’s housing stock might prefer to not.

This is not an argument against moving in that direction. But it is a reason for thinking carefully about how the losses will be shared out, and how to ensure that lower returns for investors and creditors do not hinder the ongoing payments that are needed to operate housing—utilities, maintenance, and so on. Public ownership is an essential tool here. So too is tenant organizing, including demands that landlords open their books as a condition of any kind of relief.

On January 1, after Mayor Mamdani was sworn in at the old City Hall subway station, the Washington Post crowed that his midnight inauguration was actually a tribute to private industry, since the city’s first subway system, the IRT, was built by a for-profit company.

It is true that New York’s first subway system, the IRT, was privately owned. But one could read this history in a different way. City government did not take over the subways out of any ideological commitment to public ownership. Most city leaders in the early twentieth century (the IRT-hating John Hylan excepted) were happy to leave the subway in private hands. The problem was that a comprehensive system with affordable fares became incompatible with acceptable returns to private investors. The need to rescue the private system from financial crisis was why the city took over, and the state later established the MTA.

Perhaps decades from now, we will be able to tell a similar story about housing. Today, New York City’s rental market is defined by two colliding forces: tenants’ need for affordable rents, and landlords’ need to repay their creditors. Only public ownership offers an escape from the mounting pressure. If New York moves towards a model of social housing, it will be because public ownership is consistent with stable rents in a way that ownership by private investors fundamentally is not.

Thanks to Michael Kinnucan and Jacob Udell for helpful comments on this piece, and to Conor Smyth for research assistance.

Brett Christophers, The Price is Wrong: Why Capitalism Won’t Save the Planet. I originally picked this up with the intention of writing something about it, which I did not end up doing. It was a frustrating read to me — I like the author and am very sympathetic to his broader worldview, and there’s a lot of specific information in this book that is valuable and compelling. But I am unconvinced by the book’s central argument.

A proper critique of the book deserves far more space, which I still hope to give it at some point. But here’s the short version.

The core of Christophers’ argument is that while the cost of renewable energy is falling rapidly, that does not mean that the private power companies will adopt it. They are motivated by profit, and renewables, despite being cheaper, are not more profitable. So a transition away from fossil-fuel based electricity generation will also require a transition to public ownership, or to a non-capitalist economy more broadly.

I believe down to my bones that moving away from the pursuit of profit as the organizing principle of social life is possible, and necessary, and matters for almost everything. But I don’t think Christophers’ argument gets you there.

There are a couple basic problems with his argument. First, profit is the difference between the sale price of a commodity and its cost of production. So to say anything about differences in profit, across technologies or industries or over time, one needs to analyze the determination of cost and price independent of each other. But Christophers doesn’t do this. He instead frames his analysis in terms of the awkward portmanteau “cost-price.”

If you wanted to take this analysis seriously, you would focus on the fact that in a competitive market, price tends toward marginal cost. If marginal cost is constant or falls with the level of production, and if fixed costs are substantial, then producers in a competitive market will face losses; such an industry won’t be viable in the long run. This was the situation of railways, for instance, in the late 19th century, which experienced repeated episodes of vicious price wars ending in general bankruptcy.

But capitalism is, of course, capable of producing railroads; this is because capitalism, despite some of its defenders’ claims, does not in general involve competitive markets. What we can say is that an industry like renewable energy, or railroads, requires a sufficient degree of monopoly power to enable it to recover its fixed costs. This is less of a problem for fossil fuels, where costs of production are a larger part of overall costs.

This problem is exacerbated by the specific way that electricity is priced in many markets, where the price is determined by the costs of the marginal producer. This was fine in an era where high-cost facilities would come online only when demand was high, raising profits for the rest of the industry. But when the marginal producer is a solar or wind facility, the price won’t cover fixed costs and the industry will make a loss. Christophers lays this out very well, and there’s no question it’s a real problem. But we should be clear: It’s a problem with how electricity prices are currently regulated. Not with clean energy or capitalism as such.

Second, let’s suppose that price-setting is such that a lower-cost production method will definitely lead to lower profits. Does that mean that profit-seeking capitalists will not adopt that method? Well no. Because there’s a critical distinction here between the individual enterprise, where production techniques are chosen, and the industry as a whole, where prices are set. If I can produce the same commodity at a lower cost than my competitors, then my profits will definitely increase. Perhaps, once the new method is generally adopted, everyone’s profits will be lower. But so what? I’m a capitalist! My own profits, now, are what I care about.

I admit that I am a little surprised that someone writing in the Marxist tradition doesn’t seem to have considered this possibility. This sort of collective-action problem among capitalists is the whole story of the tendency of the rate of profit to fall in Volume III of Capital. And it’s been a central subject of debate for Marxist economists ever since. I don’t necessarily expect Brett Christophers to have a settled view on the validity of the Okishio theorem. But I would kind of hope that he knows this conversation exists.

This is all very critical; but, to be clear, there’s a great deal in the book that is useful and insightful. The problem is, the conclusion that the concrete material points to is that we need better rules for regulating electricity prices. If you want to get to an argument against organizing production on the basis of profit, you would need to start from somewhere else.

At the beginning of each year, I try to write a post about the books that I read in the previous year. This time, I found myself writing so much about some of the books that the post was getting unmanageably large. So I’ve split it in two. This is part one; part two will follow.

Geoff Eley, Forging Democracy: The History of the Left in Europe, 1850–2000. This book should be required reading for anyone who wants to build on the traditions of radical politics, especially those in conversation with Marxism. If you read this blog, and you haven’t read this book, you should go read it. (You can come back here in a month or whenever when you’re done.)

This is a genuine history of movements, not of parties or political leaders or theorists. It’s striking how many of the quotes are attributed to roles (“a contemporary union leader”, “a Vienna suffragist”) rather than to named individuals. The book’s title is well chosen: The central theme that project of socialism is extension of collective self-government to all of social life, including the organization of production. Socialism, in other words, is simply a continuation of the struggle for political rights.

The term social democracy — which today suggests an anodyne reformism — meant originally a program to extend democratic principles from the demarcated political sphere to the rest of society, in particular the economy. The party, let’s not forget, that the Bolsheviks and the Mensheviks were factions of, was the Russian social democratic party. This continuity between from the battle for democratic rights — and later against fascism — to socialist politics comes through very clearly here.

Again, this is not a history of socialist parties, and much of the book — especially in the earliest and latest, post-1968 sections — is devoted to non-electoral formations. But party politics is central, and for good reason. In many ways it was socialists who invented modern political parties. Electoral politics was originally an arena for competition between personality- and patronage-based fractions of the elite. It was only once socialists and their labor allies invented mass organizations for contesting the ballot that centrist and conservative parties developed in response. There is an important figure-ground reversal here from the Whiggish liberal conventional wisdom in which parliamentary politics is the ground on which socialist politics occupies (usually small) part.

One thing you will come away from this book with is a sense of how much the terrain of political struggle has shifted over time. It’s like a 500-page working-out of the William Morris line that “men fight and lose the battle, and the thing that they fought for comes about in spite of their defeat, and when it comes turns out not to be what they meant, and other men have to fight for what they meant under another name.” It is tempting, today, to look back on the debates of the past as having had right side and wrong side, and to think that what we learn form them is to take correct position rather than the incorrect one. But what a history like this makes clear is that the right and wrong positions, to the extent we can identify them even in retrospect, were right and wrong with respect to conditions at the time of that debate. What was wrong at one time may very well be right at another — or simply irrelevant.

Which doesn’t mean that we shouldn’t learn from the past, or that there isn’t a great deal to learn from it.

One lesson that comes through clearly is how much the progress over the past 200 years has been won in a few brief windows. Advances for human freedom and equality are real and, so far, irreversible; but they have been episodic rather than incremental. Besides the period of the French Revolution (outside of the scope of the book), the two great periods of revolutionary change are the decade or so during and following the two world wars. The basic contours of electoral democracy were only firmly established in the wake of the revolutionary transformations of the First World War; the welfare state, the recognition of women’s humanity and the end of colonial empires in the wake of the Second.

The thing to remember here is that these changes were not inevitable. They did not just happen. They were the result of titanic struggles from below — struggles which however were often aiming at other goals, which they often failed to achieve.

A few other throughlines. One is that working-class movements have been led by relatively privileged workers. Unskilled workers are capable of occasional convulsive uprisings, but at the the core of sustained working class institutions have been workers with some degree of autonomy and social power — skilled artisans in the 19th century, machine workers and then educated white-collar white workers in the 20th. Another sustained theme: Utopians are essential to more practical movements. A vision of a radically different world provides the energy required for even incremental improvements.

Perhaps the most important lesson of the book is that the great left victories have come when radical, disruptive anti-systemic mass movements have worked in concert with parties of government. The same people, the same organizations can never be both; but each requires the other. To put it another way: The content of elections comes from the possibility of riots and barricades, the value of riots comes from the possibility of state power. The existence of political democracy in any substantive sense is the flip side of the possibility of disruptive challenge from below.

All this is very abstract; most likely you either already agreed with it, or you don’t. If you want nuance, evidence, concrete examples — well then you have to read this book.

Han Kang, Human Acts and We Do Not Part. Thanks to Arjun for introducing me to Kang; these are two of the most powerful novels I’ve read in quite a while. The two books have a similar structure: Each takes a historic atrocity by Korea’s US-backed military governments — the Gwangju uprising of 1980 in Human Acts, the lesser known but even bloodier Jeju massacres of 1948-49 in We Do Not Part — and follows the aftermath down to the present, exploring how people live with its memory. In both there is a certain supernatural aspect to the afterlife of the victims. Both ask how it is possible to live when one knows that one’s government, one’s country, the respectable people in authority, have committed indescribable crimes that have never been accounted for.

Human Acts begins in the midst of the Gwangju uprising and then moves forward in time, looking at the events from the perspective of various participants — two young men who were killed, a blue-collar worker who was imprisoned and tortured, a journalist, a publisher struggling with military censors, a writer who resembles Han Kang. We Do Not part goes in the other direction, starting with a Kang-like writer (perhaps the same one) in a personal crisis, whose act of kindness for a friend carries her backward to the mass murder of suspected communists at the start of the Korean War. It ends with an indelible image of hope in darkness that is almost, but not quite, extinguished.

Both are beautiful books; I cannot recommend them too highly.

Brett Christophers, The Price is Wrong: Why Capitalism Won’t Save the Planet. I originally picked something up with the intention of writing something about it, which I did not end up doing. It was a frustrating read to me — I like the author and am very sympathetic to his broader worldview, and there’s a lot of specific information in this book that is valuable and compelling. But I am unconvinced by the book’s central argument.

A proper critique of the book deserves far more space, which I still hope to give it at some point. But here’s the short version.

The core of Christophers’ argument is that while the cost of renewable energy is falling rapidly, that does not mean that the private power companies will adopt it, because they are motivate day profit, and renewable, despite being cheaper, are not more profitable. So a transition away from fossil-fuel based electricity generation will also require a transition to public ownership, or to a non-capitalist economy more broadly. I believe down to my bones that moving away from the pursuit of profit as the organizing principle of social life is possible, and necessary, and matters for almost everything. But I don’t think Christophers’ argument gets you there.

There are a couple basic problems with his argument. First, profit is the difference between the sale price of a commodity and its sale price. So to say anything about differences in profit, across technologies or industries or over time, one needs to inside the determination of cost and price independent of each other. But Christophers doesn’t do this, instead framing his analysis in terms of the awkward portmantaeu “cost-price.”

If you wanted to take his analysis seriously, you would focus on the fact that in a competitive market, price tends toward *marginal* cost. If marginal cost is constant or falls with the level of production, and if fixed costs are substantial, then producers in a competitive market will face losses; such an industry won’t be viable in the long run. This was the situation of railways, for instance, in the late 19th century, which experienced repeated episodes of vicious price wars ending in general bankruptcy. But capitalism is, of course, perfectly capable of producing railroads; this is because capitalism, despite some of its defenders’ claims, does not in general entail competitive markets. What we can say is that an industry like renewable energy, or railroads, requires a sufficient degree of monopoly power to enable it to recover its fixed costs. This is less of a problem for fossil fuels, where costs of production are a larger part of overall costs.

This problem is exacerbated by the specific way that electricity is priced in many markets, where the price is determined by the marginal producer. This was fine in an era where high-cost facilities would come online only when demand was high, raising profits for the rest of the industry. But when the marginal producer is a solar or wind facility, the price won’t cover fixed costs and the industry will make a loss. Christophers lays this out very well, and there’s no question it’s a real problem. But we should be clear: It’s a problem with how electricity prices are currently regulated. Not with clean energy or capitalism as such.

Second, let’s suppose that price-setting is such that a lower-cost production method will definitely lead to lower profits. Does that mean that profit-seeking capitalists will not adopt that method? Well no. Because there’s a critical distinction here between the individual enterprise, where production techniques are chosen, and the industry as a whole, where prices are set. If I can produce the same commodity at a lower cost than my competitors, then my profits will definitely increase. Perhaps, once the new method is generally adopted, everyone’s profits will be lower. But so what? I’m a capitalist! My own profits, now, are what I care about.

I admit that I am a little surprised that someone writing in the Marxist tradition doesn’t seem to have considered this possibility. This sort of collective-action problem among capitalists is the whole story of the tendency of the rate of profit to fall in Volume II of Capital. And it’s been a central subject of debate for Marxist economists ever since. I don’t necessarily expect Brett Christophers to have a settled view on the validity of the Okishio theorem. But I would kind of hope that he knows this conversation exists.

This is all very critical; but, to be clear, there’s a great deal in the book that is useful and insightful. The problem is, the conclusion that the concrete material points to is that we need better rules for regulating electricity prices. If you want to get to an argument against organizing production on the basis of profit, you would need to start from somewhere else.

Cixin Liu, The Three Body Problem. There was some mix-up last Christmas last year, where two copies of this were purchased and no one was sure whether they were for me, the 13-year old, or my college-age nephew. I think I was the only one of the three of us who eventually read one. For all the attention it’s gotten, I thought it was … ok. Or rather, the first two-thirds, which combined a slice of life from the last 50 years of Chinese history with a weird and unsettlingly out-of-focus mystery, was pretty good; and the last third, which rushed to tie up and explain everything, deflated most of what the first part had promised. At the end of the day, real human history and relationships offer much richer alien world than anything might work out about a hypothetical civilization on some other planet.

Michael Lewis, Who Is Government? I sent my post on teachers — which I was very pleased with; you should read it if you have not — to N+1 before putting it up on the blog. They didn’t go for it, but they did ask me to review this book. I read it, but didn’t end up writing the review. I’d kind of got the larger points I wanted to make out of my system with the teachers post, and there wasn’t enough substance in the book to do much with on its own.

The book, anyway, is edited by Michael Lewis; it’s an edited collection of admiring essays on federal employees, two by Lewis himself, the half-dozen others by various Atlantic-Harper’s-Washington Post type writers. Lewis’s essays are by a wide margin the best — whatever else you say about him, he really is a master of this type of storytelling. It helps that he chose interestingly offbeat subjects — a mine safety enforcer and an infectious-disease specialist — rather than the approved cop-astronaut-soldier palette of approved public occupations that the rest of the portraits are drawn from. I wouldn’t necessarily recommend buying this book; but if you see a copy in one of those little free library boxes on the street, you should take it out, read the two Lewis pieces, and then donate it to another one.

John Kay, The Corporation in the 21st Century. As I’ve mentioned, Arjun’s and my next book is on the contradictions of the corporation. (Our working title is Relations of Production.) So I’ve been reading a bit on that, for instance this. This book has a tremendous number of fascinating stories and sharp observations — it’s a goldmine for someone else writing on the corporation — but the whole is perhaps less than the sum of its parts. Still, there are lots of good bits. Here is one passage that I appreciated:

“Neither Amazon nor Apple has raised any money from shareholders since their IPO, and neither is ever likely to in the future. Past stockholder investment represents less than .01 per cent of the current value of these businesses. Modern companies are typically cash-generative before they reach a scale at which they become eligible for a listing on a public market. The purpose of the IPO is not to raise capital but to demonstrate to earlier investors and employees that there is value in their shareholdings and to enable some to realise that value. The objective of listing on a stock exchange is not to put money into the business but to make it possible to take money out of the business.”

Kay has some interesting ideas about the diminishing importance of capital ownership as such to the organization of production and the generation of profits. But to me, anyway, the book is more interesting for the examples than for the larger argument they’re meant to support.

Katya Hoyer, Beyond the Wall: East Germany, 1949-1990. This is a history of East Germany that strives for a sympathetic perspective without flinching from the facts. Unfortunately, the latter are not very cooperative with the former.

I am probably an ideal reader for this book — you will find few people more willing to dispute the idea that the good guys won the Cold War, or to defend the record of actually existing communism. And Hoyer does a good job complicating the story of East versus West. She emphasizes, for example, that Stalin had no interest in creating a separate German puppet state, and consistently directed Communist leaders there to focus on maintaining their legitimacy in an eventual united Germany; the idea of building a separate socialist state int he East was a local initiative. She notes that expropriation of private businesses in the East was not nearly as immediate or complete as Cold War mythology suggests, with many former owners willingly remaining as managers of their enterprises under state ownership. (Not so different from an IPO, when you think about it.) She makes the interesting and, to me, convincing argument that in the early years, migration to the west was the result of success as much as failure — the East combined an excellent technical education and training system with a very flat distribution of income, creating a large stratum of moderately privileged engineers and skilled workers who saw the opportunity for greater privilege in the West.

But ultimately, whatever the successes (gender equality is another important one) it’s hard to find much positive to say about the East German leadership, and Hoyer’s story ends up being a rather dismal one. Keynes was very far from a Communist, but when he looked at the Soviet Union 100 years ago, he recognized that something new and important and genuinely promising was being attempted — that “beneath the cruelty and stupidity of New Russia some speck of the ideal may lie hid.” One could still say that. It would be much harder to say it about the cruelty and stupidity of the Ulbricht-Honecker regime.

Alice Munro, The Progress of Love. This is not Munro’s very best work — I would give that to Dear Life, Friend of My Youth, Friendship, Courtship, Loveship, Marriage and perhaps Runaway — but it’s certainly not her worst. And honestly even her worst is good.

As I noted on last year’s list, while I am generally on the side that says you can and should judge artistic work by the author’s personal conduct, I haven’t been able to give up Munro; I’ve been rereading her work since the revelations about her daughter came out. I’ve dipped into various collections but this is the one I reread in full.

When you reread in that light, it’s striking how many stories there are about neglectful mothers who lose, or almost lose a young daughter, or who could have lost one if not for some miracle. (Very often it’s to drowning — I don’t know what that means.) The self-involved mother and (nearly) drowned child moment is one of a number of situations and characters she keeps coming back to in her stories — rereading, it’s more striking how many of them are variations on a few themes.

This repetition to me is one of the things that’s fascinating about Munro. It’s almost like she’s a scientist— she has some fundamental problem she’s working over, an experiment she keeps rerunning under slightly different conditions to see if the results change. Which points to, I think, the difference between her and Allen, Polanski, etc. — like them she failed as a human being, but unlike theirs her art is conscious of that failure and struggles with it. If Woody Allen could make a movie about a brilliant young female writer struggling with the attention of a lecherous older man, I might give him another chance.

Philip Stern, Empire, Incorporated: The Corporations That Built British Colonialism. This is a comprehensive account of the role of corporations in creating the British Empire over the 16th to 19th century. This is a topic I’ve been interested in for a while but don’t have any real background in, and the book really clarified and reshaped my understanding of it. And as a book, it’s exhilarating. It’s one of those impossibly comprehensive works of history by someone who seems to have read everything, and who has the perfect quote for any topic — the sort of book that makes you think that people in history graduate programs must learn some dark magic for note keeping.

From my point of view, it’s interesting for what it says about the idea that Arjun and I have been working on, as the corporation as a sort of social membrane between the logic of money and markets on the one hand and the socially embedded relationships through which production is actually organized, on the other. From this point of view — which we are hoping to developing in our next book, though I don’t want to put a date on it — the tensions between finance and production, between shareholders and managers, are not a recent historical development. On the contrary, a site of conflict between distinct social logics is just what a corporation is.

Like several other books on this list, this deserves a long essay (and I had started to write one) but in lieu of that here’s a brief summary of some of the most interesting things I took from it.

First, the early modern corporations we are familiar with emerge out of a much broader and more diverse universe of organizations. This is I suppose obvious, but it tends to get effaced in accounts that are focused on the historical roots of modern corporations, which naturally focus on the lineages that survived. But for every East India Company or Hudson’s Bay Company, there are a dozen other joint stock companies organized around some mix of long distance trade and colonization, which weren’t successful enough to make it into most history books.

Maybe more interesting is the diversity of institutional forms. Corporations have always combined public authority with private profit, but the exact mix has varied. One important divide in early colonizing corporations was between what one might call a feudal or seigneurial model, which involved the creation of communities with a distinct identity and local relations; versus a mercantile model in which claims were subdivided without any horizontal connections between franchisees.

From the very beginning, there have been debates about whether corporations should be thought of as an extension of government or a form of private property. An important aspect of this debate was the question of whether corporations were created by public charters or patents, or whether the state was simply recognizing an existing set of relationships, as with the recognition of a marriage; or whether a corporation had no existence independent of the legal act that created it.

This was linked to a larger question of whether sovereignty — legitimate political authority — was sanitary or dispersed throughout society. Or as Stern puts it: “To someone who imagined civil society as a conglomerate of concentric and intersecting corporate bodies … corporations were alternative and natural sites where people might choose to associate and govern themselves, produced in the first instance not by the state but rather by the people that formed them.”

A central argument for organizing trade on the basis of the corporation — a delegation of sovereignty, or a recognition of existing organic connections — was, in the early modern period, a deep-seated idea that Europeans, or Christians (the equivalence of these categories is not a recent development) could not, as individuals, make any kind of agreement with non-Europeans. As Stern writes, paraphrasing Grotius, in Europe there was an existing political order that made private contracts possible; but “outside of Christendom,” Europeans could only make contracts if they first “bind themselves into a social contract under the protection of corporations.”

Historically, the corporate charter is cognate with both constitutions and patents; like the former, it was the basis of a delineated form of political authority, like the latter it gave exclusive rights to commercial activity in a certain sphere. Historically, there was a great deal of overlap in the language and legal forms used for each of them. Seeing the patent, the corporation and the constitution as variations on the theme of delegated sovereignty, is one of the more valuable things I got from this book.

Readers of this blog know I have a book coming out later this spring — Against Money, officially out on May 7. Plenty of money-related content coming between now and then.

But today I’m writing about a different book: Dear Mother, a collection of poems by Laura Tanenbaum, just out from Main Street Rag.

Laura and I have been married for quite a few years now, and known each other for quite a few more. We first met almost exactly 25 years ago, at a grad student party in Northampton Massachusetts. So it’s a funny coincidence that our first books are coming out within a few months of each other.

Laura is doing a reading from her book next Tuesday, January 27, at the Lofty Pigeon, a recently-opened bookstore in our south Brooklyn neighborhood. (The resurgence of independent bookstores is one positive development in the contemporary US that I would not have expected a few years ago.)

If you’re in New York and into poetry, you should stop by. Admittedly I am far from unbiased. But I think the poems are very good.

Here are a couple of them:

IN-LAWS

“In five years, I’m going to fall in love with a fish,” the four-year-old declares, over hard-boiled eggs, on a ninety-degree day, to no one in particular. “They will be rainbow-colored with gray and black stripes. I will teach them to walk on their fin so they can come to our house. And I will teach them how to breathe. I will say, ‘It’s easy, fish. Just breathe like you did in water; only, it’s air.’ ”

His brother tells him he might need to compromise. Maybe six months on land, six months in the water, like the high-powered couples do. No, he says, concerned. The fish has to come to him. I’m watching his concern, trying to see which plane of reality he’s accessing, except that I no longer know what I mean by this. I know only that the words “imagination” and “metaphor” are insufficient to the task. And so I take his side. After all, we’ve learned from David Attenborough that evolution has carried countless creatures from the sea to us, not one has reversed course. When you forget how to make gills, they stay forgotten.

All of this may be why, the next day, after the temperatures had plunged thirty degrees overnight and the NYC Parks department and I both failed to adjust—me without a jacket, them, blasting the sprinklers—I was the only one who didn’t rush to pull a child back from the flood. He stomped on every fountainhead, threw himself on the ground. When he came to me, shivering, and the only change of clothes I had was shorts, and I saw the mother who had frantically been calling her Juniper back from the brink shoot me the look reserved for the parents of bad-example children, it took everything I had not to shout, You don’t understand! He’s looking for his fishwife! Wants to learn to live in her world! Learning to be flexible! And aren’t they going to need that what with the world and everything… Because I’m sure that Juniper’s mother would understand. That, like me, she has trouble imagining the future these days. That she would be comforted as I am by the thought of my future self, a crone in a cave, welcoming in any creature still capable of both tenderness and survival, teaching my son to tend to her scales.

2001: A SLEEP ODYSSEY

When my mother died,
I was six months in.
His body the size of a melon slice;
her body vaporized.

The mothers warn:
Sleep now, sleep deep.
Soon you’ll be in bits,
every hour broken.

Three months to go:
A second child.
Horizon long
as the rocket’s destination.

But no sleep came.
It’s winter now.
Five years have passed.
The melon slice half grown.

When my mother died,
I was six months in.
Tonight we watch the skies.
This time rest rushes forth.

Deeper, rounder,
with padded edges,
a floating bottom.
I sleep through half of 2001.

Just as the mothers warned.
When I woke, it faced me:
that stupid floating baby,
whimpering like a lost doe.

The others wondered why the baby.
Was it back to the apes?
Back to their own losses?
Was it the need to obliterate?

I didn’t wonder.
When my mother died,
I was six months in.
The movie’s future firmly in the past.

I already knew.
Nothing worth living happens in order.
Whether you wake for the ending,
or jolt back, or whether you miss it all.

I am glad the proposals passed, for reasons similar to those laid out by Michael Kinnucan. While zoning changes are not a sufficient solution to the city’s housing problems, they are helpful -- and more important, they are a necessary condition for a bigger program of public investment in housing.

Support for the proposals was shared by many, but far from all, housing and tenant advocates in the city. Debates over the proposals reflected differences on political principle — how big a voice should local as opposed to citywide officials have over land use? — as well as on economic theory — how well does the housing market fit a simple story of supply and demand? But there are also some background factual questions where the answers tend to get assumed rather than directly debated, about what kind of housing gets built in the city right now.

So in this post, I wanted to assemble some factual information about recent housing construction in New York. For convenience — and because that’s how much of the data is organized — I am defining recent as meaning the period since 2010. Some of this is assembled from various reports and publications, but the bulk of it is my own analysis of the New York Housing and Vacancy Survey (HVS).

The dimension of new housing construction that is probably most visible is how geographically concentrated it is. About one-third of all the new housing built since 2010 is in just four of the city’s 59 community districts, along the East River in Brooklyn and Queens.

You can see this clearly in this map from the Department of City Planning, as the strip of dark blue running from Brooklyn Heights to Astoria. (The dark blue area in Manhattan reflects some major projects on the far west side, including Hudson Yards.) Brooklyn Community District 1, including Williamsburg and Greenpoint, added 30,000 new housing units between 2010 and 2024. Half a dozen miles away at the south tip of Brooklyn, District 10, with a similar population, added only 500.

The concentration of new housing in a few areas reflects a number of factors, including zoning changes under the Bloomberg administration and the disappearance of manufacturing from former centers like Long Island City. This helps explain the association in many people’s minds of new housing development with gentrification and rising rents.

Less immediately visible is how much this newly-built housing costs, and who lives in it. I haven’t seen a report focusing on these questions — though I expect one exists — so I thought I would see what I could say using the Housing and Vacancy Survey.

For those who aren’t familiar with it, the HVS is a survey conducted every three years ago by the Census on behalf of the New York City Department of Housing Preservation and Development (HPD). Its primary purpose is to help administer the city’s rent regulations, but it’s a useful resource for all kinds of housing research. It’s a decently large sample — about 10,000 observations — but what it makes it especially nice is that it combines administrative data on things like building size, location and rent-regulation status, with survey data on things like occupant characteristics and the unit’s state of repair.

The HVS is a good tool if we want to answer questions like, what is the median household income of people living in housing built since 2010? ($73,500, it turns out — but we’ll come back to that a bit further down.) The most recent HVS was conducted in 2023; to get a reasonable sample for smaller subgroups I combined it with the 2021 survey, with appropriate adjustments to the monetary variables.

Between 2010 and 2024, NY added just over 300,000 new units of housing, or a bit over 20,000 units a year. This is a respectable level of new building for the city by recent standards — comparable to the 2000s and 1970s, and faster than in the 1980s or 1990s — but less than in earlier periods of the 20th century. During the 1950s and 1960s, the city added over 30,000 units per year, and in the 1920s, over 70,000. A surprisingly large proportion of these houses are still here. For example, 729,000 housing units were built in the 1920s; according to the HVS, 718,000 of them were still present as of 2023. That housing lasts such a very long time is, to me, one of the central facts that makes it different from most commodities. (The other is that it’s located in a particular place.)

Of the housing units built between 2010 and 2023, about 10 percent are owner-occupied, a bit over 25 percent are unregulated market-rate rentals, and 60 percent are rent-regulated rentals. (There are also a small number of vacant units that are not for rent, and a very small number of new public housing units.)

It might be surprising that there are more rent-stabilized units than market-rate ones, given that rent regulations in New York by default apply only to large buildings built before 1974. There are two reasons for this.

The first reason is that a substantial fraction — 25 to 30 percent — of new housing built in New York in recent years has been subsidized affordable units. “Affordable” in this context is a term of art: It refers to housing that receives public subsidies, most importantly the federal Low-Income Housing Tax Credit, and in return is limited to renters (or occasionally purchasers) making below a certain income threshold — 80 percent of the area median income or some lower fraction. In New York, these subsidized units are also normally rent-stabilized. As the nearby figure from the Furman Center shows, the proportion of affordable-in-the-technical-sense units has fallen off somewhat in recent years, but is still substantial.

It’s important to note that while the figure shows “LIHTC” (Low Income Housing Tax Credit) units and “market rate units,” this is not a straightforward division. While most income-restricted units receive LIHTC subsidies, not all of them do; and units that do not receive operating subsidies or have income restrictions, and are thus counted in the market rate category here, may still be subject to rent regulation. A frequent source of confusion in housing debates is that terms like “public,” “owner-occupied,” “market rate” and so on cover a continuum of greater and lesser public involvement, with the various bundle of rights over and returns from a property divided up in different ways. In this post, I focus on rent-regulated versus unregulated units, where there is a reasonably sharp line.

The second reason for the high proportion of rent-regulated units is that most new housing built outside of Manhattan during this period was eligible for the 421-a property tax exemption. (421a expired in 2022, but its replacement provision, 485x, functions similarly.) This gives long-term exemptions from property taxes — as long as 40 years in some cases — in return for certain conditions, including participation in rent stabilization. As a result of these programs, even though tent stabilization is not compulsory for any housing built since 1974, in practice newer housing in New York are more likely to be rent stabilized than older ones.

I personally agree with critics who argue that these tax exemptions are a wasteful and inefficient way to promote new housing construction. The problem for developers is financing the start of the project — a tax exemption decades from now is essentially worthless to them, while for the city, with its longer horizons, it is still costly. In effect, 421a is paying for housing in a currency that is worth much less to the recipient than to the payor. Put another way, the public sector ought to have, and in practice generally does have, a much lower discount rate than the private sector. This used to be a big part of debates on the economics of climate change. But it’s also relevant to housing. The common thread is the long time periods involved. Be that as it may, 421a does seem to have resulted in a very large fraction of new housing being rent-stabilized.

The fact that perhaps a quarter of the new housing produced in New York is income-restricted affordable units — surely the highest proportion in any major US city — does not get much attention in discussions of housing, as far as I can tell. Nor does the fact that the large majority of new housing is rent-stabilized — I wasn’t aware of it myself until quite recently. But both of these seem like important facts.

Let’s move on to how much these recently-built apartments rent for, the question that got me started writing this post. The median rent for rent-regulated apartment built since 2010 is $1,800, while the median rent for an unregulated (i.e. market-rate) apartment built since 2010 is $3,200.

To be sure, the comparison of rents in stabilized versus unregulated apartments is a bit tricky, because these are not the same types of apartments. As the figures nearby show, unregulated units are more likely to be in Manhattan, and are somewhat larger on average — studios and one-bedrooms make up 70 percent of recent rent-stabilized units, compared with 60 percent of recent unregulated ones. One thing that surprised me looking at these numbers was how few larger rental units are being built, market-rate or otherwise.

Since 421-a subsidies are not generally available in most of Manhattan, the rent-stabilized units there are mostly subsidized affordable units. So in Manhattan, recently-built market-rate apartments rent for almost twice as much as equal-size stabilized ones. Meanwhile, in Brooklyn regulated units rent for only about one-third more than unregulated ones, and in Queens and the Bronx rents for the two classes of apartments are essentially the same. (Staten Island has hardly any new housing of any kind.)

The distribution of rents by regulation status is shown in the figure below, which is perhaps the main thing you should take from this post.

Here we see that there are more 35,000 rent-regulated apartments built since 2010 that rent for less than $1,000, and barely 5,000 unregulated apartments renting for that little. But while most regulated apartments rent for less than $2,000, more than a quarter rent for over $3,000 and about 10 percent rent for over $4,000. Meanwhile, about 70 percent of unregulated units rent for between $2,000 and $4,000, while a quarter rent for less than $2,000 and 10 percent for more than $5,000.

Again, these differences are in part due to the fact that unregulated apartments are somewhat larger, and considerably more likely to be located in Manhattan, compared with rent-regulated apartments.

For recently-built rental units as a whole, the median rent is $2,000, with one-third renting for less than $1,100 and one-third for more $3,000; 10 percent rent for more than $4,500. This is somewhat higher than rents in older buildings -- for the city as a whole the median rent is $1,670. (If we compare one-bedrooms only, the comparison looks similar.)

There are obviously many more ways one could slice this, but these numbers give a useful benchmark: If we are talking about a newly built market-rate apartment in New York, we should think about an apartment renting for around $3,200. If we want to get a bit more granular, we could think of one-bedroom apartment in Brooklyn renting for $2,200 a month, a 2-bedroom in Brooklyn renting for $3,800, or a one-bedroom in Manhattan renting for $4,700 — these would be typical examples of recently built market-rate apartments. (Though the sample size gets uncomfortably small as we slice the data on more dimensions.)

A nice thing about the HVS is that it lets us do the same analysis for incomes.

The short answer here is that median household income for residents of recently-built owner-occupied units, median income is $161,000. For rent-regulated apartments, median household income is $54,000; for unregulated apartments, it’s $117,000. For recently-built rental units as a whole, the median household income is $73,000.

As it happens, $73,000 is almost identical to median household income for the city as a whole. The $117,000 median income for residents of recently-built market rate rentals, meanwhile, is close to the 67th percentile for the city as a whole — in other words, two thirds of households have incomes below this, and one third have incomes above it.

The issues with geography and unit size are not as relevant here. But for the half or so of rent-regulated units that are also subsidized and income-restricted, resident incomes will of course be lower. The median income in unregulated apartments is more than twice as high in Manhattan as Brooklyn — $205,000 versus $90,000 — while the median rent in rent-regulated apartments is only about 25 percent higher.

The figures nearby shows the distribution of recently-built regulated rentals, unregulated rentals, and owner-occupied units by household income and by per-capita income, which is arguably more relevant. (Note that the income categories are slightly different for the two figures.)

As you can see, the majority of recently-built rent-stabilized units — 78,000 out of 134,000 — are occupied by households with income below $75,000, approximately the city median. About 15,000 of them, however, are occupied by households with incomes above $250,000. The distribution of incomes in unregulated units is flatter — a bit over 10,000 have tenants with incomes under $40,000, and about the same number have tenants with incomes with incomes above $250,000. Incomes are much higher in owner-occupied units. Nearly half — 10,000 out of 22,000 — are occupied by households with incomes above $250,000.

The picture looks a bit different when we turn to per capita incomes. For comparison, the median per-capita household income in New York City is $36,000. The majority (about 55 percent) of rent-regulated new apartments are occupied by households with incomes below this. But only about one-third of unregulated apartments are. Interestingly, when we look at per-capita income, owner-occupied units are no longer so disproportionately likely to be occupied by households with very high incomes. In New York City, evidently, homeowners are much more likely to have larger families.

How should one evaluate these numbers? My goal in this post is just to bring some facts into view. I’m not so much trying to make a substantive policy argument, as trying to make the debate more concrete and specific, at least in my own head. In some ways, the best case for this post would be that people would very different views about housing policy could find something in it they could use.

That said, what prompted me to start looking at these numbers were claims, in the runup to the election, that simply making it easier to build will not help with affordability, since private development won’t produce affordable housing, or will only produce luxury housing.

To be clear, these are two different claims. Or to put it another way, affordability in the everyday political sense is different from affordable as a term of art in housing policy.

Housing the is not affordable, in the technical sense, may still be helping with affordability in the broader sense, by offering better housing options for people who are not wealthy. A family of two New York public school teachers might have a combined income of $150,000 or so, putting them outside the income limits for subsidized affordable housing. But they may nonetheless have real problems finding reasonably-priced housing, especially if they have kids; and new construction might improve their situation even if it is not affordable in the technical sense.

What does this data say about these questions?

Perhaps unsurprisingly, the HVS data supports the claim that, in the absence of subsidies, private developers will not build much deeply affordable housing. One way of looking at this: About 20 percent of New York households have incomes below $20,000; but in unsubsidized units built since 2010, only about 6 percent of tenants have incomes below this level.

Another way of looking at it: The median New York household has an income of $73,000; for them not to be rent burdened, by conventional standards (30 percent of income going to rent), they should pay no more than $2,000 per month. But nearly 80 percent of the unregulated apartments (as well as 30 percent of rent-regulated apartments) built since 2010 rent for more than this. And many of the ones renting for less are studios or one-bedrooms, which will not be suitable for many households with incomes near the median.

So, the claim that allowing more private development will not by itself produce much housing affordable to lower-income New Yorkers, seems consistent with the data.

Now, any economists or abundistas reading this will want to jump up, and point out that even if newly-built housing is not affordable for many New Yorkers, it can still help them. The people who move into the newly built units are going to live somewhere, after all; and if these new ones weren’t available, they would be bidding up the price of the existing housing stock. Turning an old sugar refinery in Williamsburg into luxury apartments may not directly provide affordable housing in Williamsburg, but it takes the pressure off the rental market in other neighborhoods that the trust-fund hipsters might otherwise move to.

Ok, you guys can sit down, you’ve made your point. And it’s a valid one -- there is definitely some truth to this. How much truth, and what factors might work in the other direction, is beyond the scope of this post. Here, I’m just trying to get my arms around the difficult-enough question of what rents and incomes look like in the newly-built housing itself.

Returning to the central question of how affordable newly-built housing is, it’s worth recalling that 20-25 percent of new housing is affordable in the sense of being income-restricted and receiving ongoing subsidies, and a majority of new housing opts into rent regulation. So focusing on the unregulated segment may be a bit misleading, especially in the context of the ballot proposals. A more sensible comparison might be between recently-built housing in the aggregate, and older housing. The next couple of figures do that.

Here we see the distribution of rents in newer and older buildings. Note that the vertical scale is share of units in that age group, as opposed to the absolute number of units as in earlier figures.

What we see is that while there are a substantial number of new units with moderate rents, there are many more high-rent units in the newer buildings. About 15 percent of units built since 2010 rent for more than $4,000, compared with just 3 percent of older units.

Of course, new units are different from older units in other ways -- location, size and so on. But if we limit the analysis to, say, just one-bedroom apartments, the pattern is basically the same.

If anything, the excess of recent units at the high end is even clearer in this case.

Then again, one could look at the same numbers the other way. 15 percent of new units rent for over $4,000 and 30 percent rent for over $3,000, compared with just 3 and 8 percent, respectively, of older units. But that means that 70 percent of new units rent for under $3,000; and about 40 percent rent for less than $2,000 -- which is, again, the threshold for rent burden for the median-income New York household.

So if we look at the housing that is being built in New York now, it is absolutely true that it is disproportionately luxury housing intended for the rich. Although not necessarily for the very rich -- Andrew Cuomo’s $8,000-a-month Upper East Side apartment would be in the top 2 percent of rents among recently-built units. But disproportionately is not the same as exclusively. It is not true that recently-built housing is exclusively luxury units for the highest-income New Yorkers.

We can take this question on more directly by looking at household income among tenants in recently-built rental units as opposed to older ones. This is shown below.

Surprisingly, the distribution of incomes across newer and older apartments is much closer than the distribution of rents. High-rent apartments are much more overrepresented among newer apartments than high-income tenants are.

On reflection, this is not surprising. Thanks to rent regulations (and also to smaller landlords who don’t aggressively raise rent for current tenants) many current tenants are paying well below market rent. Remember, rent regulations in New York limit only rent increases. So one might even say, that if the rent regulation system is effective, it will inevitably result in newly-built apartments renting for significantly more than existing ones. And inevitably, many of those older rent-regulated buildings will be occupied by higher-income households.

Note, also, that newly-built apartment have a slightly higher proportion of very low income tenants than older ones do. This reflects the substantial fraction of subsidized affordable units, and is another reason to reject the “only luxury units are being built” claim.

What do we take from all this?

There are two things that surprised me the most, looking at these numbers. First was the large fraction of rent-regulated units -- more than two-thirds of the units built since 2010. I had always thought of rent regulations in New York as applying almost exclusively to older buildings, but in fact, of the all the age categories in the HVS, post-2010 buildings have the highest proportion of regulated rentals.

Second was the preponderance of smaller apartments among recently built housing. 55 percent of the units built since 2010 are studios or one-bedrooms, compared with 38 percent of older units. Units with three bedrooms or more, meanwhile, account for only 10 percent of recently-built units, compared with a full third of older ones.

This second fact leads to the first of my policy takeaways: When we are talking about housing affordability, we need to think about what kind of housing, as well as its cost.

Most goods are fungible: If your family consumes more milk, or gas, or electricity, then you pay more for it, but the price of the next gallon or kilowatt is the same as the last. Buying a gallon of milk is essentially the same as buying two half-gallons. Housing is different: You can’t just rent some extra square feet when your family gets bigger, you need a whole new home. Building more SRO-type units, as some people advocate, would help address affordable housing at the low end; but it wouldn’t do anything to solve the problems of rent-burdened families.

This non-fungibility of housing was eloquently described by Sam Stein in a New York Review of Books piece a few years ago:

Housing will never be as elastic as households. This is not only because construction is complicated in a city as crowded as New York, but also because there is a fundamental difference between people and things. Households change shape over time and can recompose rapidly during an emergency like a pandemic. But despite the work of inventive architects, our housing tends to stay more or less the same. ... There is nothing quite as concrete as concrete.

To be clear, the solution is not as simple as simply requiring developers to build more larger units. As this report from the Fiscal Policy Institute observes, this approach could be counterproductive, discouraging new housing construction of all kinds. But it is certainly something to consider in the design of subsidies or social housing programs.

My second policy conclusion was touched on a bit earlier: We need to be careful about what we mean by affordable. A lack of housing is an acute problem for the very poor. But many people with higher incomes also struggle with housing costs. The figure below shows the share of households paying over 30 percent of their income in rent -- the conventional definition of rent-burdened.

As the figure shows, almost all low-income renters are rent-burdened, while almost no high-income households are. But a surprisingly high fraction of middle-income households are rent-burdened by the conventional standard. If we look at households in the middle third of the income distribution, from approximately $40,000 to $120,000, 45 percent of the renters pay more than 30 percent of their income in rent. (And in New York, the large majority of people in this income range rent.)

When we are talking about affordable housing, we should not just be talking about housing for very low-income people, with the implicit assumption that everyone else is adequately served by the existing housing market. We should be talking about a problem with the private provision of housing in general.

Two more points speak more directly to the ballot proposals. On the one hand, “build more housing” is a valid and important policy goal. Even if there were no gains to affordability, simply having more people living in New York (and other dense cities) is a win for humanity, for all sorts of reasons I do not need to go into here. But as the HVS data shows, new housing is helping with costs as well. A large fraction of the housing being built in recent years has been relatively affordable, and is occupied by households in the lower and middle parts of the income distribution.

A corollary of this: Rent-regulated housing rents for significantly less than market-rate housing, and houses people with significantly lower incomes. We can certainly ask whether our subsidy dollars could be spent more efficiently. I personally think that the long-term tax credits are not the right approach; if we want to trade future tax revenue for present housing production, we would do much better to issue bonds backed by that future revenue, and provide the subsidies up front. But for present purposes, the key point is that these subsidies do produce affordable housing.

On the other hand -- my final policy point -- the fact that recently-built unregulated apartments rent for so much more than existing apartments, and have such disproportionately higher-income tenants, should make us more skeptical of claims that land-use reform, by itself, will substantially reduce housing costs. It could be that rents in newer apartments are high because not many of them are being built, so that is what the market will bear. But it also could be that rents in newer apartments are so high because that’s what private developers require in order to build them.

There may be some truth to both of these views, of course; but I suspect there is more to the second. In which case, while land-use reforms like the three ballot proposals are desirable and important, they will need to be complemented with public interventions in the financing and development of new housing to have a real impact on affordability.

One final point, on the politics, and a final picture, not from the HVS data.

I started this post back before the election, before setting it aside for a while. At that point, I was concerned that misperceptions about the current state of the housing market might be fueling opposition to the ballot proposals. People who care about affordable housing might oppose making it easier to build if they thought that the only housing being built in the city was luxury apartments for the rich.

Now that the election is over, we can see who actually did oppose the measures, and who supported them. Below is the map for Proposal 2, with yes votes in green; the other two would look similar.

What do we see? Well, obviously, this looks like the map of the mayoral election. Not exactly -- the proposals carried all of Manhattan, while the Upper East Side voted for Cuomo. But by and large, the areas that voted yes on the proposals are the areas that voted for Zohran Mamdani.

I think this tells us something important about the politics of housing. There’s an argument one often hears, that the politics of housing cut across conventional left-right lines -- that arguments against new housing is often made on environmental or anti-gentrification grounds, and come from people who are, in other respects, on the left side of the political spectrum.

Now I would not say there is no truth to this idea. It’s probably most true in the Bay Area, but it’s not limited to there. During the fights over the Atlantic Yards development here in Brooklyn, I personally observed houses with both the iconic “In this house...” and “We love brownstone Brooklyn” signs; needless to say, most New Yorkers do not live in brownstones.

But it’s easy to exaggerate the importance of this combination of views. In the real world, the vast majority of opponents of higher-density housing are not liberals who fly rainbow flags and donate to the Sierra Club; they are conservative homeowners who, not to put too fine a point on it, don’t want Black people moving into their neighborhoods.

Of course there are sincere progressives and socialists who believe that building more housing will only raise rents; and it’s worth trying to persuade them that, in fact, more development, even private development, is an essential part of a broad public program for housing affordability.

But those people are not the main obstacle. The people who are against building more housing are, by and large, the same people who will oppose any program to raise living standards by redistributing income and power and expanding the role of the public sector. There’s no special housing politics. It is the same old lines of left versus right.

If you found this post valuable and want to support my work, please consider pre-ordering my book Against Money, coauthored with Arjun Jayadev, which will be released by the University of Chicago Press this coming May. You can preorder the book from the publisher here, or from Amazon here.

Yet in the midst of this crisis, Sri Lanka is living with one of the strangest paradoxes in global monetary policy: extraordinarily high interest rates in an economy grappling with deflation. For much of the last three years, the country has had some of the highest real interest rates in the world despite being in a serious macroeconomic crisis, struggling with debt distress, and facing strong disinflationary forces.

The Central Bank’s latest Monetary Policy Report (August 2025) acknowledged the depth of disinflation. Headline inflation fell below the target of 5 percent for three consecutive quarters, driven largely by energy and food prices. Most recent data suggests that inflation moved from negative territory to slightly above zero (still well below its target). And yet, nominal rates are stuck at a punishing 8 percent.

By the conventional logic of monetary policy, none of this makes sense.

Economics textbooks describe monetary policy in terms of a “Taylor rule” linking the policy rate to the level of inflation and the output gap, or difference between actual output and an estimate of potential output. When output falls short of potential or inflation is below target, the central bank should choose a lower interest rate; when output is above potential or inflation is above target, the central bank should choose a higher rate. The hard cases are when these signals point in opposite directions.

Sri Lanka today is not a hard case. Inflation well below target and a depressed real economy are both textbook signals to cut. And Sri Lanka’s inflation is not even trending upward. Meanwhile, the latest version of the Bank’s own monetary policy report shows Sri Lanka further below target now than a year ago. And since 2017, the share of the country’s population that is employed has fallen by a full four points, according to the World Bank – a sure sign of an economy operating below potential. And that is only the tip of the iceberg, where the informal sector accounting for more than sixty percent of the labour force is devastated without affordable credit for production. The choice to maintain current high interest rates under these conditions is impossible to square with any conventional understanding of monetary policy.

Debt Dynamics and the Case for Cuts

Beyond the macro textbook case, there is a more pragmatic argument for lower rates: debt sustainability. The change in a government’s debt-GDP ratio does depend not just on current expenditure and revenue. It also depends on economic growth and interest on debt accumulated from the past. The larger the debt ratio currently is, the stronger the effect of those factors, relative to current budget choices.

With public debt close to 100 percent of GDP, debt sustainability in Sri Lanka is highly sensitive to interest costs. A few points difference on interest rates can shift the debt trajectory from a stable or falling debt ratio to one that is explosively growing.

The August 2025 report notes that credit to the private sector has expanded by 16 percent year-on-year despite deflation, but government borrowing costs remain elevated. Treasury bill yields, though down somewhat after the May rate cut, still hover at levels far above inflation. Maintaining real rates in the double digits in an economy with falling prices is not “prudence”—it is a form of fiscal self-harm-and a serious missed opportunity for helping a population that has been waterboarded by austerity over the past three years.

Countries in debt crises have long known that the denominator of debt to GDP ratios (nominal GDP) matters as much as the numerator. Consider the case of Greece in the years after the euro crisis. After years of rising debt, the Greek government was forced to turn to brutal austerity and cost-cutting, and managed to reduce its total debt by 15 billion euros – an amount equal to nearly 10 percent of GDP. Yet during this same period, the debt-GDP ratio actually rose by some 30 points, because Greek GDP fell so much faster. The Greek case is extreme, but the point is a general one: austerity in the name of fiscal sustainability can be self-defeating, if it destroys the conditions for economic growth.

This is the risk that Sri Lanka is currently running. High rates in a deflationary economy are the worst of both worlds: they raise interest payments while suppressing growth. By contrast, lower rates would both reduce financing costs directly and support growth.

Inflation Comes from Abroad, Not from Home

So what does the central bank think it is doing? The monetary policy report is striking in its near-exclusive focus on “price stability,” as if Sri Lanka were the United States or the Eurozone. Yet around 40 percent of Sri Lanka’s consumer basket is food, with a large additional share being energy. These prices depend more on global conditions and supply shocks than domestic demand. Raising or lowering policy rates will have little effect here. For a small open economy like Sri Lanka, inflation targeting in the textbook sense is often an imported delusion.

A more realistic goal for the central bank in a small open economy is external balance. Appropriate monetary policy can help stabilize the balance of payments, and avoid destabilizing swings in capital flows. But if the Bank’s true concern is the external sector, its public statements do a poor job communicating this.

More importantly, the case for high rates looks equally questionable from this point of view. The central bank projects a current account surplus in 2025, meaning the country is accumulating rather than losing foreign exchange. This is a continuation of large positive balances in 2023 and 2024, thanks to strong remittances and rising tourism receipts. Gross official foreign exchange reserves climbed to over USD 6 billion in the first half of the year, despite debt service outflows. After a large devaluation in early 2022, the rupee has been stable recently, with no sign of reluctance by foreign investors to hold Sri Lankan assets.

In short: there is no evidence for an external financing crisis that could justify the Bank’s punishingly high domestic interest rates. To the contrary, the surplus liquidity in money markets reported by the Central Bank suggests that external conditions are ripe for further easing.

Misplaced Caution

The Monetary Policy Report cites “uncertainty around global demand” as a reason for caution. But this makes no sense: What matters for monetary policy is the level of rates, not the change in them. An interest rate of 8 percent is no less discouraging for investment just because rates were even higher a year ago. The central bank is like a driver on an open highway who insists that they need to drive well below the speed limit now, because if there is bad traffic ahead, they will want to speed up.

Sri Lanka’s monetary policy is clearly aimed less at economic conditions on the ground than at pleasing external actors — the IMF, World Bank and its other creditors. The high interest rates and increasing foreign reserves signal a willingness to place the interest of foreign creditors ahead of the country’s own people and businesses. But if super-tight money triggers a renewed crisis and another default – as is possible – it won’t even end up helping the creditors. .

A Policy for Recovery, Not Austerity

There is little evidence that high rates are serving their stated purpose of stabilizing inflation (missing on the downside is as bad as missing on the upside) or protecting the external balance. They are, however, choking domestic recovery and worsening the government’s already fragile finances.

It is not too late for a change in direction. After several years of flat or falling output, Sri Lanka’s economy grew 4.8 percent in the first quarter of 2025, with rebounds in industry and services. To be sure, this is to some extent just a bounce back from the depressed conditions over the last few years. But it suggests that with appropriate policy, renewed growth is possible. Monetary restraint risks instead prolonging the crisis.

Conclusion

Sri Lanka needs a monetary policy for recovery, not austerity. With inflation below target, external accounts stable, and growth still tentative, holding rates at 8 percent is indefensible. The Central Bank should cut immediately, while keeping an eye on capital flight – which, unlike inflation, is a genuine danger from cutting too fast. Doing so would not only support economic revival but also improve the country’s fiscal trajectory—helping Sri Lanka climb out of its debt trap, rather than prolonging it.

History is clear: countries escape debt traps through growth, not through endless austerity. Sri Lanka cannot grow if credit is starved and government finances are bled by high interest bills. This is a critical moment to think about a pivot.

Previously published on Project Syndicate and in The Daily FT newspaper in Sri Lanka.

After a gap caused by the government shutdown, employment numbers are back. The Bureau of Labor Statistics conducted its September surveys as usual and released the usual report based on them, albeit a month delayed. The October surveys were not carried out, which will have longer-term repercussions for U.S. economic data; but for now we can focus on what the September data say about the state of the labor market and the economy.

In my mind, the data highlight three key economic facts about the current moment: The post-pandemic fiscal response succeeded in spurring a rapid recovery, the stalling labor market is exacerbating inequality, and perhaps most urgently, a recession looks increasingly likely.

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U.S. employment data is a complicated beast, assembled from three main data sources.

Employment and unemployment rates, along with various personal characteristics, come from the household survey, conducted by the BLS each month of a large sample of US households. The overall population, along with distribution across basic demographic categories of age, sex, and race, comes from the US census. Census numbers are updated at the start of each year and use projected population increases for the periods in between. Finally, total employment numbers, and their distribution across industries, come from the establishment survey, conducted across a sample of U.S. employers. Because of the immense range of sizes of US businesses and the unpredictable rates at which new businesses are born and existing ones die, contacting a representative sample of businesses is more difficult for businesses than households — the source of the large revisions employment numbers are often subject to.

These three sets of numbers combine to provide the indicators in each month’s Employment Situation report. But because they come from different sources, they are not always consistent with each other.

The big puzzle in the September data is the combination of steady growth in total employment and the continued rise in unemployment. Based on the establishment survey, employment rose by 119,000 between August and September; over the past year, employment is up by 1.3 million, or 0.8%. Yet the household survey shows that the unemployment rate increased by 0.1% in the past month; over the past year the unemployment rate is up by 0.3%, while the labor force participation rate is down by a similar amount. Between rising unemployment and falling labor force participation, there has been a fall in the employment-population ratio of 0.4%, from 60.1% a year ago to 59.7% today.

The only way that all these numbers can be correct is if the working-age population grew by 1.5%. Yet the census estimates used by the BLS show an increase in the working age population of just 1% over the past year And since the census makes its population projections at the start of each year; this 1% growth does not reflect the immigration crackdowns this year; so actual growth in the working-age population was probably slower, possibly much slower. One recent paper from the Dallas Federal Reserve Bank estimates that true growth of the working-age population over the past year might be just 0.25%.It is mathematically impossible for employment to grow by 0.8%, the employment-population ratio to fall by 0.4%, and the working-age population to grow by just 1% (let along 0.25%).

All of these numbers cannot be correct. Either actual population growth was faster than we think; or employment growth was slower; or the employment rate is lower (and the unemployment rate higher) than the official numbers say.In my view, the household survey is the most reliable piece of the puzzle; I would be very surprised if the unemployment or laborforce participation rates get significantly revised. The most likely possibility, in my opinion, is that subsequent revisions will show that employment growth was significantly slower than what the current numbers suggest. It’s not impossible that, despite everything, immigration-driven labor force growth has remained strong. But it is more probable that job growth will be revised down.

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Turning to the substance of the report, there are three big stories we should keep in mind as we look at the September numbers.

The first big story is that the economic response to the pandemic really worked. Indeed, there is a good case that it was the most successful example of countercyclical policy in US history.

In early 2020, the US experienced the sharpest fall in employment and economic activity in our history. There was good reason to fear that the immediate supply-side disruptions of the pandemic would lead to a collapse in demand, as businesses without sales shut down and laid-off workers stopped spending. But instead, just three years later, the employment rate for people of prime working age (25-54) was higher than it was just before the pandemic and not far short of its all-time high in early 2000.

As the figure nearby shows, this rapid recovery is in marked contrast to other recent recessions, where prime-age employment rates remained below their pre-recession peak for many years into the recovery — as long as 12 years, in the case of 2007.

Source: BLS, Groundwork Collaborative analysis

Some people might say that this reflects the difference in the nature of the shock — that the pandemic was inherently a more short-lived interruption to economic activity than the financial disruptions that triggered earlier recessions. But this misses the way that falls in demand can perpetuate themselves, even once the initial source is removed. Businesses that close down in a crisis do not immediately re-open once the crisis is resolved. When people lose jobs, their reduced income and spending will lead to lower demand elsewhere in the economy; this will depress output and employment regardless of the reasons for the initial job loss.

These effects of demand are now well-known to economists under the label hysteresis — today, it is widely agreed that even temporary demand shortfalls can lead to persistent falls in economic activity that greatly outlast the initial shock.There were good reasons to think, in 2020, that this was the path the economy was headed down. Businesses that closed during the pandemic would struggle to reopen; people who lost their jobs, even temporarily, would have to cut back on spending, reducing demand even in sectors of the economy not affected by the pandemic itself. And this would be compounded by a wave of foreclosures and debt defaults; even if the recession didn’t start with a financial crisis, it might have developed into one.

The reason this did not happen was because of the scale of the response from the federal government. For the first time in US history, the government fully replaced the income lost in an economic crisis. So there were no knock-on effects to demand and no permanent scarring to the labor market. That — and not the nature of the shock — is the most important reason why the recovery from the pandemic looked so different from earlier business-cycle recoveries.

This enormous policy success has been crowded out in people’s memory by the subsequent inflation. So it’s worth stressing that this is why the Biden administration was right to make a big stimulus measure its first priority on coming into office.

As you can see in the figure, while there was a strong recovery in the second half of 2020, employment growth was much slower in early 2021. It is easy to imagine, in retrospect, that employment rates might have plateaued somewhere well short of their pre-pandemic levels.

Indeed, this is what forecasters at places like the Congressional Budget Office were predicting at the time. In February of 2021, they projected that it would take more than twice as long for total employment to reach pre-pandemic levels as it did in reality. And they were projecting an overall employment population ratio for mid-2025 of 57.5% — more than two full points below September’s actual ratio. The fact that rapid employment growth resumed a few months after the passage of the American Rescue Plan isn’t proof of a connection. But it is certainly suggestive.

Apart from a few months in 2024, today’s prime-age employment rate of 80.7% has been exceeded in only one earlier period, from late 1997 to early 2001. So while there are certainly reasons for concern in the most recent job report — which I will get into in the next two items — the most important thing we should remember is that this historically high employment rate was not inevitable or solely the result of anonymous economic forces. It is the fruit of good policy choices made a few years ago.

*

The second big story reinforced by recent jobs numbers is that labor market conditions matter for inequality. We can see this today in the much larger rise in unemployment among Black workers.

If one pillar of textbook macroeconomics that has had to be revised in recent years is the idea that demand conditions have no lasting effects on the economy, a second is that labor market conditions only matter for the overall pace of wage growth. The distribution of wages across individuals, in this older view, depends on their “human capital” and other individual characteristics.

But what’s become very clear is that the state of the labor market matters more for some workers than for others. For people whose employment is protected by long-term contracts and credentials, or who are the sort of people that employers prefer — college-educated white men in their prime working years — employment outcomes may be relatively insensitive to the state of the labor market. But for workers in more contingent, precarious employment arrangements, or from groups less favored by employers — Black workers, young people looking for their first jobs, those without college degrees — their prospects depend much more on the balance of power in the labor market. When you are last hired, first fired, your situation depends very strongly on how much hiring and firing is currently going on.

Arguably this has always been true. But it’s become more widely recognized among economists and policymakers in recent years. Not long before the pandemic, for example, Fed Chair Jerome Powell acknowledgedthe role of weak demand — due in part to poor monetary-policy choices — in exacerbating inequality. This is something previous chairs had disavowed responsibility for.

During the immediate recovery from the pandemic, these distributional effects were positive, as a strong labor market disproportionately benefited those most likely to be left out. In 2021 and 2022, wages at the bottom of the distribution rose substantially faster than those higher up. Similarly, in the strong labor market of the late 2010s, the Black-white gap in unemployment rates fell to historically low levels. In the even stronger labor market of the post-pandemic recovery, it fell even more — in 2023, the gap between the Black unemployment rate and the overall rate briefly fell below 1.5%, the smallest gap on record. (See the figure nearby.)

But over the past year, as the labor market has softened, wage growth at the bottom has begun to lag the growth in wages higher up. And the unemployment rate among Black Americans has risen much faster than among other groups. Over the year ending in September, according to the most recent BLS numbers, the unemployment rate for Black workers is up 1.8 points, compared with a rise of just 0.1 points for white workers.

When Black unemployment started rising sharply compared with the overall rate over the summer, there was the possibility it was a statistical blip. But September’s report confirms that this is a real trend. This is deeply concerning in itself. But it’s also a reminder that keeping up demand and tight labor markets are not just important from a macroeconomic perspective; they are also powerful tools for social justice along other dimensions. And conversely, of course, weak labor markets exacerbate other forms of inequality — as we are seeing now.

*

The third big story in recent jobs reports is that a recession looks increasingly likely.

In recent years, discussions of recession have often focused on the Sahm Rule, a rule of thumb based on a comparison of the past three months’ average unemployment rate with the lowest three-month average from the previous twelve months. The rule that Claudia Sahm proposed — originally as a trigger for enhanced unemployment benefits, rather than as a forecasting tool per se — was a threshold of 0.5, i.e. an average unemployment rate over the past three months at least half a point higher than the lowest rate in the past year. In recent decades, this has inevitably signaled a recession.

As the figure nearby shows, this threshold was briefly reached in mid-2024, without any official recession. The indicator has since receded back toward zero — not because the unemployment rate has come down, but because the big rise in unemployment came in 2023, and has now moved beyond the rule’s window. Since then, measured unemployment has been fairly stable.

It is worth thinking about why a rule like this might work in the first place. The critical fact about the world highlighted by the Sahm rule is that moderate increases in unemployment are, historically, almost always followed by much larger increases. This is not something that just happens to be true. It reflects a basic fact about how the economy works: Income creates spending, and spending creates incomes. This positive feedback loop is what powers growth — when businesses undertake new investment projects, that spending circulates through the economy, creating additional income and spending that, in the aggregate, justifies the investment spending.

But this process can also work in reverse. A fall in spending leads to a fall in incomes, which leads to a further fall in spending. The difference between these two feedbacks is the reason our economy experiences distinct periods of expansion and recession, rather than a smooth range of different growth rates.

There are metaphors that are widely used in talking about business cycles that capture the idea of tipping points or phase transitions. An airplane has a stall speed: if it slows down a bit, it flies a bit slower, but if it slows down too much then it stops flying entirely and falls to the ground.* A car trying to go up an icy hill needs to build up a enough speed to make it to the top; if it goes faster than this, it will arrive at the top going faster, but if it goes slower, it will slip back down and won’t make it to the top at all.

The idea that a certain level of growth in demand is required to prevent a sharp fall in demand is a familiar one in practical economic discussions, even if it’s not always stated clearly. It’s implicit in the idea of business cycles and recessions as distinct phenomena in their own right, as opposed to just labels of convenience for unusually large random shocks. There are many reasons why this sort of “stall speed” might exist, but two of the most important are the “accelerator” mechanism linking investment and demand, and the limited financial buffers possessed by most households.

We needn’t go into the details of these stories in this post; the key point for present purposes is that there are good reasons why a small fall in employment or expenditure is likely to reverse itself, but a large enough fall will snowball into an even bigger one. This is why the Sahm rule is not just a historical accident, but captures an important business-cycle regularity.

The unemployment rate is our most timely indicator of the overall level of economic activity. A large rise in unemployment is not just a negative outcome in itself; it indicates a fall in spending and activity that will have further effects. Over the past two years unemployment has risen by almost a full point — too slowly to trigger the Sahm rule, but a large enough rise that, based on historical experience, we would expect to be near the recession tipping point. At the least, it suggests a situation in which any new negative shock — an abrupt slowdown in data-center investment, for instance — could send the economy out of what the great Keynesian economist Axel Leijonhufvud described as the “corridor of stability,” and into a recessionary spiral.

*

One final point: There is no reason to think that this data is distorted or politically biased.

Attacks on professional norms are a hallmark of the Trump approach to governance. But while the administration can certainly interfere with timely collection and publication of data, and while, even in the best of times, there are serious challenges to constructing meaningful summaries of all the myriad forms of economic activity, there is no reason to think there is political interference in the employment data. More than that: I would say there is strong reason to believe that there isn’t. Given the deep commitment to the civil servants at the BLS and other national statistical agencies, if there were any pressure on them to change the numbers, we would certainly hear about it.

* More on the idea of a stall speed here.

For my part, in the past couple weeks I’ve been on three different panels and done four interviews on the Mamdani policy agenda. Two of the panels were not recorded, but I thought I’d share the other one and three of the interviews. (The fourth doesn’t seem to have aired yet.) Perhaps you still are looking for Mamdani content, perhaps especially if it’s focused on the challenges of running the city than the election itself. And presumably if you are reading this you have some interest in my point of view. You could listen to them, I suppose, while you’re cooking, or exercising, or in your car, or from a portable speaker on your bike, or gathered your family around the computer with mugs of warm cider — however you prefer to consume your audiovisual content.

The first one, from October 14, is a roundtable organized by Dissent, with me, the indefatigable tenant organizer and housing advocate Cea Weaver, and City Councilmember Chi Ossé, another rising star of the New York left. This was a great conversation, with, though you can’t see it in the video, an enthusiastic and mostly quite young audience — very different from the crowd you used to expect at a Dissent event.

Also from mid-October, is a podcast interview with the Swedish researcher Max Jerneck (there’s a brief introduction in Swedish, which you can skip unless you happen to speak it.). It’s a long conversation, which covers a lot of ground: the first 50 minutes are on Zohran, then there’s 10 or 15 minutes on Trumpism, and the last 20 minutes or so are about Against Money. This was a nice combination from my point of view, since it was an opportunity to try to link the arguments in the book, which are mostly at a fairly abstract level, with more immediate political questions. There’s also a YouTube version, if you want to see me gesticulating; if I’d known he was posting the video, I would have cleaned up my home office first. The YouTube version also lets you see this funny picture Max pulled from the Nobel Prize Committee’s writeup of this year’s winners, which makes “household savings” literally the driving motor of growth — a nice example of the conceptual framework that the book is trying to help free us from.

Post-election, here is an interview with Sasha Linden Cohen on the show Background Briefing. Among other things, we talk about the politics and economics of free (and fast!) buses. Perhaps the key point to make there is that this is a more common policy than you might think. For example, here (via Doug Henwood) is an ad in the Financial Timesfrom the government of Luxembourg, touting their free transit system.

It’s worth emphasizing here, also, that one of Zohran’s accomplishments in the legislature was creating a pilot program with one free bus line in each borough. So far, this has been quite successful, with ridership on the free lines up by about a third compared with other lines, and no sign that they are cannibalizing service from other parts of the system. If one votes for a pilot program — as large majorities in both houses of the legislature did in this case — then it is presumably because adopting the idea across the board seems at least plausible.

A second post-election interview was with Brian Edwards-Tiekert on UpFront on KPFA, where I am a somewhat regular guest. (I come on about 33 minutes in.) On this one, we talk more about the campaign itself — both the organization of it, and the campaign as a cultural phenomenon. We also talk quite a bit about Zohran’s housing program (which is also the focus of the Dissent roundtable), and about what kind of cooperation can be expected from state government.

One point I made here, which I think has been underappreciated through this whole campaign, is how much national Democratic like Schumer and Jeffries are not typical of New York’s Democratic officials. Even in the primary, Zohran Mamdani got more endorsements from the City Council than Cuomo did. By the general election, almost every important city and state elected Democrat was with him. (His final pre-election rally, where the state’s top three officials served as the warm-up act for Bernie Sanders and AOC, drove this home.) This does not mean that there won’t be serious resistance to his agenda — especially insofar as it involves raising taxes on the rich — but it’s a mistake to imagine an ideologically coherent “establishment” opposing him. I think a lot of Democrats right now, including many self-identified centrists, are not at all sure what they should be doing in this moment, and would be happy to get behind a Zohran-type program if it looks like a winner. Chuck Schumer may see his number one job as “to keep the left pro-Israel,” but Kathy Hochul assuredly does not.

Finally, here’s an unexpected interview from Election Day. While I was out with the kids on one last get-out-the-vote canvass, we were stopped by someone doing video interviews for her YouTube channel (because of course we were, this is 2025). I wasn’t prepared to do much with this platform, but the kids really rose to the occasion.

It’s a point that is, on one level, obvious, but one that I feel does not get sufficiently foregrounded: LLMs are, as the name says, language models. Given a corpus of text, they create a set of probabilities such that, for any given input, you can calculate the probability that, following a certain input, a certain word should come next. They are, in other words, tools for transforming material that people have put up on the internet.

On one level, again, everyone knows this. It’s what critics mean when they call these programs“stochastic parrots.” It’s what the companies that make them are thinking about when they talk about the problem of training data. But I don’t think we think about it enough when we think about what these things actually are.

We’ve been primed by generations of science fiction stories to imagine machines that think, think well or poorly, helpfully or malevolently. But maybe we would have a better understanding of LLMs — of what they do well as well as what they do poorly or not at all – if we thought of them not as thinking machines but as windows: windows onto the thinking that people have already done.

There is no thinking going on when you enter a query into ChatGPT, in the sense of an abstract model of the world that can be manipulated and then expressed in words. With the LLM, the words are all there are. The reason an LLM can answer a factual question is because someone has posted text on that specific question. The reason they make nice pictures is because there are an immense number of pictures on the web, with descriptive text attached. The reason they are such good coding buddies is because people have posted immense numbers of code snippets (and also because code is so nicely grammatical.)

If you’re impressed that an LLM can give you a stat block for your DnD campaign (one genuinely positive use case I’ve seen) or answers to your economics homework or text for a form letter, what you should really be impressed by is that so many people have posted versions of exactly that over the past 30 years.

People talk about the software and the chips. And sure, it does need a whole lot of chips. But the real secret is that people have posted this immense amount of useful text on the web, for free. That’s where the magic comes from.

OK, they didn’t post it all for free – a lot of it was produced for money. But none of the text that LLMs draw on was produced for sale to LLMs. All of it is free from their point of view. What they are drawing on is the positive externalities of people communicating with each other, for their own reasons, on the web. What LLMs are doing, fundamentally, is reaping the benefits of a vast spontaneous, directly social, decommodified decentralized production of use values.

When we look at the useful stuff that LLMs give us, we should not think, how cool this technology is. We should think, what an amazing range of useful work people are willing to share online, freely, without any monetary compensation. The machine is the least interesting part. It’s just summarizing it for us.

What makes LLMs work as a business is precisely that all this text is decommodified, as far as they’re concerned, it’s free. As they themselves say, they’d have to shut down if they had to pay for their training data. Yet all that data is the product of human labor. This cutting edge of capitalism – the biggest part of new business investment – rests on a substrate of communism.

People who criticize OpenAI and the rest of these companies for not adhering to copyrights are completely correct about their hypocrisy, and about the inconsistent application of the law. But they mostly get the correct resolution backward, in my opinion. Where we want to get to is a world where information is free for everyone, not one where OpenAI and company also respect the gates. You might ask: why does that follow? To which I would say: LLMs themselves demonstrate the value of making content, in the broadest sense, universally available for free.

The lesson we should be taking from LLMs is the immense social value there is in having all kinds of material – all kinds of products of human intellectual labor – freely available online. They should be reminding us of the early utopian promise of the web.

But now we must turn this around. The other side, of course – of course! – is that the companies making LLMs are not doing so with the goal of more easily sharing the material that people have made freely available on the web. They are doing so with the goal of enclosing it, of converting the products of free human activity into commodities.

The problem we have to deal with is that these companies are selling access to the freely shared products of human social activity, as the product of their own particular capitals. (And also that they are encouraging people to use it for dumb or pointless or socially destructive purposes.)

Worse: The project of enclosing and commodifying the world of online communication destroys what made it valuable in the first place. It’s the opposite of the tragedy of the commons – as if the villagers’ animals grazing on the green were what fertilized it and made it valuable in the first place. This case, where joint use of common resources maintains rather than degrades them, is, I suspect, the more usual one in traditional farming and pastoral communities. In any case, it certainly applies to the information commons – private appropriation is incompatible with collective activity that maintains them. Can’t expect people to keep posting on Reddit if all they hear back is AI slop.

Still , I think it’s important – especially for those of us who are deeply skeptical of “AI” as a business – to not lose sight of the genuinely positive and transformative aspect of this technology: the window it gives onto the possibilities of free, decommodified cooperative production.

The great debate going forward is not about this specific technology. (Though it is, to be clear, about its enormous energy demands. The real question is the about the conditions under which people will continue to be able to share the products of intellectual work with each other on the web.

The issue is not what “AI” will or will not do. The issue is how we can take advantage for the tremendous opportunities for sharing the products of actual human intelligence, which were opened up by the internet, but have been increasingly closed off by its commercial overlords.

I should stress: I am not a labor economist, or an expert on labor-market data. To the extent I add value here, it’s from applying a a more systematic Keynesian perspective. I also know people who read my posts but don’t read more specialized economics content, who would appreciate a discussion of recent employment data. If people find this useful, perhaps I’ll do more of these posts in the future. Note that a number of the figures here come from Brian Dew’s excellent chartbook.

The headline numbers were relatively weak employment growth, and a downward revision to employment numbers from earlier this year. Employment was up a bit less than 1.5 million over the year ending in August, by the establishment survey. This is not just slower than the post-pandemic recovery, but well below the consistent two million jobs per year that were being added prior to the pandemic. The headline in the Financial Times was typical: “US companies put brakes on hiring after Donald Trump’s tariffs hit.”

The article begins:

The American industries most exposed to trade turmoil have slammed the brakes on hiring and in many cases begun to lay off workers, causing growth in the US labour market to grind to a halt.

It’s worth pausing over this sentence for a moment, to call attention to something that should be obvious, but not always foregrounded: Hiring decisions are made by employers. Businesses choose a level of output based on current or anticipated demand for their products. They then choose a level of employment based on how many workers they need to produce that output. The “labor market” is not a textbook market, in which the quantity sold depends on both supply and demand.¹ The quantity of employment depends solely on demand. Where labor market conditions matter is for wages and working conditions, though this is better thought of in terms of bargaining power than labor supply.

The point here is that if we are trying to explain why the employment numbers are what they are, we need to think about demand for current output, and perhaps business expectations about future demand. Labor supply explains nothing about why employment is growing so slowly today, or why it was growing more rapidly last year.

At the same time, it is true that the working-age population is now growing more slowly than it was a year or two ago. 2024 now appears to have had the greatest number of immigrants, in absolute numbers, in US history. Much lower immigration this year, along with the secular fall in natural growth, means the working-age population is probably growing quite a bit slower now; but because of the way the BLS constructs its population estimates, this will not show up in the official data until next January. Again, slower population growth has no direct effect on actual employment, which depends strictly on demand the side. But it does mean that slower employment growth implies a tighter labor market than it otherwise would. I’ll come back to this point at the end of this post.

The fist question that the KPFA interviewer asked me was about the revisions to the earlier 2025 employment numbers, which reduced job growth for the 12 months ending this past March by 911,000 — in absolute terms, the largest revision since the data has been collected in its modern form. I did not have a definitive answer to this one. What I do think, as I said on the show, is that first, US economic data, despite all of DOGE’s efforts to date, remains probably the best in the world, and the revisions are an integral part of maintaining its quality; and second, that there is plenty of other evidence we can look at that shows a clear picture of a weakening labor market, so there is no need to try to read something into the revisions.

The one thing to add is that the revisions refer to the establishment data. BLS data comes from two fundamental sources — a survey of households that is used to produce statistics on people’s employment status, and a survey of businesses that is used to produce statistics on total employment and its distribution across industries.

Since both of these are surveys, they need to be combined with some independent measure of the size of the relevant population to turn shares into numbers. The same survey results combined with different estimates of the overall population, will result in changes in the absolute numbers of people employed. But will not affect the share of individual demographic groups employed or unemployed, or the distribution of employment across different types of employers.

Guy Berger has a thorough discussion of these issues on his blog. I’ve reproduced one of his figures below.

For the establishment survey, the independent measure of the population size comes from Quarterly Census of Employment & Wages (QCEW), which generates counts of establishments and employees based on payments into the unemployment insurance systems which almost all private employers must participate in.

While the establishment survey does a good job capturing changes in the number of workers at a given establishment (along with changes in pay, hours, and so on), it cannot, by its nature, tell us anything about changes in the total number of establishments. That’s where the benchmark from the QCEW is needed, which — given the lags in collecting and assembling the data — comes some months after the initial BLS data is released.

What all this means is that revisions are likely to reflect changes in the numbers of establishments — births and deaths — rather than anything related to employment at individual businesses. The big downward revision for the first half of the year implies that either more businesses closed than the BLS model had assumed, or fewer new businesses opened (or both). It’s hard for me to see how this could have any direct connection with the immigration crackdown.

In any case, we have plenty of better evidence that the labor market is weakening. Despite the stable headline unemployment rate over the past year, it is clear that the bargaining position of workers relative to employers is substantially worse than it was a year or two ago.

A central fact about the post-covid economy was the extremely tight labor market, which was very favorable to lower-wage and less privileged workers. Overshadowed by inflation, the very favorable conditions for workers aren’t a central part of our narrative of the economy during those years. (They also don’t fit a neat political narrative, since the strong post-covid labor market under Biden was in some ways a continuation of a strong pre-covid labor market under Trump I.) They mainly show up in the negative form of employers’ complaints.

But what looks like a labor shortage from one side looks like an abundance of jobs from the other. As Arin Dube and his coauthors pointed out in an important paper, the three years after 2020 reversed a full quarter of the rise in wage inequality of the previous four decades.

Yet this period was hardly perceived as an economic success story. The obvious reason is inflation: while wages did rise faster than prices at the bottom of the distribution, most of the compression described by Dube and his colleagues took the form of wages higher up the scale falling in real terms.

Another explanation, which I argued for here, is that while those at the bottom of the distribution did well in terms of wages, they experienced a major loss of non-wage income (and economic security more broadly) as the pandemic welfare state was withdrawn. (Stephen Semler recently added some new evidence supporting this view here.)

Another way to reconcile the big relative gains for those lower down the distribution, with the very negative perceptions of the economy: The combination of tight labor markets and rising prices was good specifically for people who sell their labor on a free market. It was bad for people who enjoy the protections of professional credentials, unions, public employment or other sources of stable employment conditions: In this case, protection from the short-term vagaries of the labor market was a negative.

It’s worth noting in this context that almost all the outsized wage gains of the post-pandemic period went to people who switched jobs; it’s easier to jump ship for a better offer if you are a janitor or roofer or cashier, than if you are a teacher or lawyer.

Add to that the wave of tech layoffs in 2023 (as companies realized they’d over extrapolated from the pandemic shift to online activity) and you have a period in which the labor market was much worse for the sort of people whose voices are loudest in the public conversation than for those without big megaphones.

In any case, that period is over now. The great compression of wage income ended in late 2023; over the past two years, low-wage workers have lost ground relative to other wage-earners. The great reshuffling has ended too: Quits, new hires and job openings are all back down to pre-pandemic levels. This is still a reasonably strong labor market, but it is not a historically tight one, as it was a couple of years ago. There was a period when Jerome Powell would mention, at every press conference, the need to “rebalance” a labor market that was tilted too far in favor of workers, and against employers. He’s not using that language now, and with good reason.

Quits, in particular, are a strong indicator of workers’ bargaining power. On the one hand, people’s willingness to leave their current job is a vote of confidence in their ability to find another one (or reflects the fact that they already have); on the other hand, the threat of quitting is the main practical leverage that most workers have over their boss. The historically high rate of quits over 2021-2023 was an important sign of a labor market unusually friendly to workers; its subsequent decline suggests one that no longer is.

One way of thinking about the balance of bargaining power in the labor market is the Beveridge curve, which compares the share of jobs vacant with the share of workers unemployed. William Beveridge, who came up with this measure, considered a one to one ratio — shown as dotted line in the figure — a normal, appropriate balance, but there’s nothing sacred about that.

The figure nearby shows this metric for the US for the past 25 years. Points in the upper left correspond to a tight labor market — few unemployed workers and lots of unfilled positions, meaning workers have relatively more leverage. Points in the lower right are the opposite — lots of unemployed workers and few unfilled jobs, so that prospective employers can pick and choose and workers have to take what they can get. Points higher up on the right correspond to what’s known as structural unemployment — lots of people want to work, and there are businesses that want to hire, but for some reason they can’t connect with each other.

The pandemic, not surprisingly, was, by this metric, the outstanding recent period of structural unemployment. (There was also a persistent shift in the structural direction after the financial crisis, suggesting a lasting post-crisis mismatch between jobs and workers in addition to weak demand.) 2022, on the other hand, is way up in the upper left of the figure. With two openings for every unemployed person it was, arguably, the best time to be looking for a job in our lifetimes.

But job openings have been drifting down steadily, and unemployment has been creeping up. A couple of months ago, openings per unemployed person fell below one. There are questions about how reliable the vacancy measure is, especially when comparing over widely-separated periods; but by this metric, it’s a worse market for jobseekers not just than the exceptional recovery from the pandemic, but than the last couple pre-pandemic years as well.

It’s worth noting, as Powell did in his most recent press conference, that the balance in the labor market reflects both weaker demand for labor, and a shrinking (or at least more slowly growing) pool of available workers. The “curious balance” (in Powell’s words) between these two trends is why unemployment has held steady despite what now seems to have been a very sharp fall in employment growth over the past year. Weak employment growth leads to less slack in the labor market if the potential workforce is also growing more slowly.

Does this mean that anti-immigrant policies are working, at least as far as the labor market is concerned? No, it does not.

For a given level of demand, a smaller laborforce does mean a more favorable market for workers. But the condition “for a given level of demand” is key. If immigration is sharply down from 2024 levels, that means fewer people available for jobs. But it also means less spending. Immigrants are a source of demand as well as labor supply, a basic fact that is often forgotten in discussions of the economics of immigration. So while lower immigration may help explain why unemployment has held steady despite much slower hiring, that does not mean that unemployment would be higher in a world where 2024 levels of immigration had continued. In that hypothetical world, businesses would be selling more and hiring would be stronger.

One thing we can say for sure: There is no reason to think that the immigration crackdown has disproportionately benefits native-born workers. There has not been a surge in employment among the US born, despite some claims to the contrary from the administration.

In an excellent post, Jed Kolko walks through the data on this, and explains the source of the confusion. The problem is similar to the one we discussed earlier around the revisions to the establishment survey. The BLS surveys households, but updates the total population only once a year, based on the census; in between it uses projections from the previous census. So if fewer people answering BLS questionnaires say they were born abroad — either because there really are fewer immigrants, or because immigrants are more wary of speaking to government officials — then, mechanically, the BLS must assume a greater native-born population. (Since, again, the total population numbers are fixed until the next census update.) As Kolko convincingly shows, this statistical artifact explains the entire apparent surge in native employment.

An easy way to confirm this is to look at the employment-population ratio for native-born respondents. (These sorts of ratios are not affected by the population rebasing.) And if we do, we see that the employment-population ratios for US-born workers are lower, not higher, than they were a year ago.

Whatever is going on in the labor market, “native workers are benefiting from reduced competition from immigrants” isn’t it.