Monday, January 16, 2017

The “Natural” Interest Rate and Secular Stagnation

New paper by Lance Taylor in Challenge Magazine. From the blurb:
Can America recover ideal rates of growth through interest-rate policies? This important analysis suggests that most economists misunderstand the issue. Updating Keynes, the analysis suggests that fiscal stimulus, labor union bargaining power, and more progressive income taxes are needed to support growth. (The article includes some algebra, which some readers may choose to skip.)
Read full paper here.

Sunday, January 15, 2017

On the blogs

On Ajit Sinha On Sraffa -- by Robert Vienneau; I also recommend the reply by Heinz Kurz to Sinha available here (subscription required). In particular, Kurz takes issue with how much of the early equations Sraffa developed were influenced by Marx's schemes of reproduction, and also with the notion that Sraffa didn't deal with counterfactuals, although I would use the term ideal types for what he discusses there

Infrastructure Delusions -- Paul Krugman, who predicted before a run on the dollar (his famous phrase was "it seems likely that there will be a Wile E. Coyote moment when investors realize that the dollar’s value doesn’t make sense, and that value plunges"), predicts that there will be no fiscal expansion (to be seen). The main reason? He asks: "who really believes that this crew is going to come up with a serious plan?" Yeah, who would predict this crew would win the election, right? Hope he keeps his prediction track record intact

The Calico Acts: Was British cotton made possible by infant industry protection from Indian competition? -- Pseudoerasmus on, well, the title gives it away. I disagree with the notion, implicit, that some degree of protection was not instrumental for industrialization, but he raises interesting points about the Calico Acts and their relevance for the mechanization of the cotton industry. At any rate, an informed post worth reading

Friday, January 13, 2017

Bill Gross and the Yield Curve

Tyler Durden at ZeroHedge, and others, are discussing Bill Gross's recent rant on his monthly letter to investors about the yield curve and the possibility of a Trump recession. Bill Gross sees in the decline of the 10-year bond rate since the early 1980s a secular (like Summers and his secular stagnation, it seems everything is secular now) trend, and concludes that the long term rate cannot go above 2.6% or so. In his words:
"So for 10-year Treasuries, a multiple of influences obscure a rational conclusion that yields must inevitably move higher during Trump's first year in office. When the fundamentals are confusing, however, technical indicators may come to the rescue and it's there where a super three decade downward sloping trend line for 10-year yields could be critical. Shown in the chart below, it's obvious to most observers that 10-year yields have been moving downward since their secular peak in the early 1980s, and at a rather linear rate. 30 basis point declines on average for the past 30 years have lowered the 10-year from 10% in 1987 to the current 2.40%... And this is my only forecast for the 10-year in 2017. If 2.60% is broken on the upside – if yields move higher than 2.60% – a secular bear bond market has begun."
The fear is, of course, that if the Fed continues to tighten monetary policy, then the yield curve (the difference between the long term rate and the base rate) would be inverted (see figure) and a recession would follow.
There is nothing secular about the falling rate long or short term rate, however, which Gross analyzes in nominal terms. The declining tendency is just the result of the lower rates of inflation, what Bernanke called the Great Moderation, even if the causes are not the ones he suggested. Sure enough, in real terms, the 10-year treasuries are also down, but I cannot see a trend.
What I suspect is going on in the graph above are three different phases, in which the long term rate has fluctuated around different levels. During the Golden Age (50s through 70s) the rate was relatively low, a result of tight regulation, and extensive capital controls, which allowed low rates at home. After the Great Inflation, with negative rates, and the Carter/Reagan/Clinton deregulation rates were considerably higher. What we observe in the 2000s is that after several bubble-led booms, nominal rates have been forced to the floor. But there is no secular trend associated to this, it is the result of policy choices given the macro and regulatory regime we have.

It's is perfectly possible, if Trump really promotes a fiscal expansion, that the base rate would rise, and the long rate too, keeping a positive yield curve, and a higher average real 10-year bond rate. Above 2.6% for sure. Not saying it will happen. Just that it is plausible, and there is no secular trend that precludes it.

Thursday, January 12, 2017

The World Health Organization warns of outbreak of virulent new ‘Economic Reality’ virus

New paper by Steve Keen. After Paul Romer accused mainstream colleagues of using phlogiston to explain phenomena they don't understand, now we have a better working hypothesis about what is happening with the mainstream. From the abstract:
A new virus, known as ‘Reality’, has started to afflict Mainstream Economists, causing them to reject the ‘as if’ arguments they used to use to justify their models. There is no known cure for the virus, and complete avoidance of ‘Reality’ is the only effective strategy to prevent infection.
Read full paper here.

Wednesday, January 11, 2017

The Nature of Capitalism and Secular Stagnation

McCloskey, Lazonick, Despin, and Shaikh (I'm covered)

The joint AEA/URPE session was very lively, but suffered from the last minute absence of Brad DeLong. He did send the notes of what he was going to discuss here. On the topic of stagnation per se only Hans Despin suggested that it was an important phenomenon, but not necessarily for the same reasons Larry Summers and Brad De Long. It was unclear to me, however, that his views were based on a demand side story, and, hence, that this was more like Steindl would call it a question of stagnation policy. All the others, for different reasons were against the idea of secular stagnation.

Deirdre McCloskey, who said she was an Austrian economist (and no, that doesn't make her heterodox, just a different version of the orthodox marginalist approach), argued vigorously against it. I was a bit surprised that nobody pushed back on her explanation of growth as based on ideas, and the notion that the movement of the marginal productivity of capital (that she drew in an imaginary blackboard as being downward sloping) to the right is what explains improved livings standards. I mean I agree that capital accumulation does not explain growth (it's the other way round, growth of demand explains capital accumulation, but nobody there believed in that, other than me, and I was just the moderator), but at this point the notion of downward MPK curves should receive more criticism among heterodox economists.

Lazonick and Shaikh had more to debate on the nature of capitalism, in particular with McCloskey, and the reasons for technological innovation, with both emphasizing the role of the state in promoting technical change, rather than the idea of the innovator as a superhero.

PS: I was going to film it, but the memory card jammed, and in spite of all the technological advancement, we're left only with oral history.

Tuesday, January 10, 2017

An increase in rents is behind the rise in inequality

Eileen Appelbaum

Eileen Appelbaum delivered the David Gordon Memorial Lecture at the Chicago Meetings of the Union of Radical Political Economics (URPE). The lecture, and the comments by John Schmitt will be published later in the Review of Radical Political Economics (RRPE). The gist of the argument is that ever stronger corporations use their dominant position in markets, patent and copyright protections, and their political influence to obtain favorable regulations and tax breaks to earn monopoly rents at the expense of consumers. She noted that the evidence suggests that inequality has increased more between establishments (firms) than within them, which is impressive given the increasing gap between management and plant salaries. She cited the work by Richard Freeman on how two thirds of the increase in inequality is caused by between establishment differences.

Freeman argument was made popular by his two clones story. According to him:
"consider two indistinguishable workers, you and your clone. By definition, you/clone have the same gender, ethnicity, years of schooling, family background, skills, etc. In 2006 you/clone graduated with identical academic records from the same university and obtained identical job offers from Facebook and MySpace. Not knowing any more about the future than the analysts who valued Facebook and MySpace roughly equally in the mid-2000s, you/clone flipped coins to decide which offer to accept: heads – Facebook; tails – MySpace. Clone’s coin came up heads. Yours came up tails. 
Ten years later, Clone is in the catbird’s seat in the job market — high pay, stock options, a secure future. You struggle. Back to university? Send job search letters to close friends? Ask distant acquaintances to help? The you/clone thought experiment may seem extreme, but recent research that I have conducted with colleagues finds that the earnings of workers with near-clone similarity in attributes diverged so much by the place they worked that rising inequality in pay among employers has become the major factor in the trend rise in inequality."
This, the fact that workers with similar skills get paid significantly different wages, suggests to her that the old story that inequality results from skill-biased-technical-change (SBTC) is incorrect, and that the power of corporations to extract rents can be seen as a New Labor Segmentation, which is superimposed on the old one, researched by David Gordon and his co-authors.

I am looking forward to the publication of her paper.

Monday, January 9, 2017

ICAPE and the Future of Pluralism in Economics

ICAPE is the acronym for the unwieldy named International Confederation of Associations for Pluralism in Economics. The organization has been somewhat inactive in the recent past, but it seems ready to increase its activities in the near future under the direction of my colleague Geoff Schneider. Here are his remarks on the future of Pluralism at the last ICAPE conference at Roosevelt University in Chicago.
Program from last conference, where these remarks were presented is here.

Wednesday, January 4, 2017

American Economic Association Meeting in Chicago

I'm off (URPE program here). Pretty busy, and won't post for a while. Talk to each other ;)

PS: Mainstream micro is terrible at describing too, btw. And there are a few heterodox macro people that aren't that bad at describing.

Monday, January 2, 2017

Diffusion and technological change

Map above shows the spread of chess from its original invention in India to the rest of Eurasia. There is an interesting analogy here with the diffusion of a game and of technology. Technological diffusion is a slow process, but an essential one, in which a significant part of the improvements are made. Gun technology, which also started in Asia, and discussed here before, is another case in point. And sometimes the latecomer has an advantage (Gerschenkron's the advantage of backwardness, a topic also discussed by Veblen). Nothing much to say about it, just a neat map. For more on the difficulties of understanding technical change go here and here.

Sunday, January 1, 2017

On the blogs

Tariffs and the Trade Balance -- In which Paul Krugman tells us that "capital flows do depend on the potential for trade in goods and services." Hm, so no possibility of capital flows associated to purely financial gain or security? Nobody holds US treasuries just because it's the safe asset in global markets?

Kansas and the myth of trickle-down tax cuts -- Jared Bernstein on Kansas experiment with supply side economics. A bit old, but worth reading

A Socialist Market Economy With Chinese Contradictions -- Lord Turner on the risk of a Chinese crisis, not caused by financial collapse (he correctly points out that: "Most of the debt is owed within the state system... and the government could simply write off bad debts and recapitalize banks, financing the operation with either borrowed or printed money"), but by capital flight

Saturday, December 31, 2016

Economists who passed away in 2016

These (below) are the ones I remember, but there are certainly more. Here, with links to obituaries: Karl Case, Aldo Ferrer, Lloyd Shapley, Thomas Schelling, Charles L. Schultz, Lester Thurrow, Robert Tollison. The only one I met was Ferrer, in a few conferences in Argentina and Brazil. Two "Nobel" (Central Bank of Sweden) Prize winners among the departed. Interesting that Shapley said about his prize that: "I consider myself a mathematician and the award is for economics. I never, never in my life took a course in economics." So I'm not sure he should be on this list (or there should be a prize like that one). Of the non-economists discussed in this blog, the most prominent loss in 2016 was the historian William McNeill. He is one of the authors from other social sciences that I suggest, like say Jared Diamond or David Graeber, that use the surplus approach analytical framework, more akin to old classical political economy than modern marginalist (neoclassical) economics. And Keynes is still dead, 70 years ago this year, but there is always hope for an intellectual revival.

PS: Sad addendum, Tony Atkinson passed away.

Monday, December 26, 2016

History of Central Banks Tutorial - Before Central Banks II

As promised, one more installment on the history of central banks, and why the early Italian (and Spanish and Dutch) public banks were not seen as central banks. We must start with Italian banking. Even though the Medici Bank is probably the most well-known of the Italian banks of the Renaissance period the two key cities to understand the development of modern banking, and the precursors of central banks, are Genoa and Venice. And as noted before, central to the story is the emergence of public debt, one of the few innovations that was not known in antiquity.

The records for the floating of public debt go back to 1149 in Genoa and to 1164 for Venice. Local governments essentially sold the rights to collect taxes for a determinate period in exchange for a fixed amount of money. Public debt was originally compulsory,  since the city-states were always hard-pressed for funds, and constantly fighting for their very survival in economic and political terms, in the complicated and unstable political disputes between the Papacy and the Holy Roman Empire. Public debt was also relatively illiquid, since it was difficult to transfer the tax farming rights.

Over time public debt become voluntary, rather than compulsory, perpetuities were issued, and secondary markets for government bonds developed.  In other words, public debt was an early and persistent feature of the Italian financial markets. The importance of public debt was that it provided a relatively secure asset for the functioning of the financial system, even when in reality there were periods of crises and situations in which interest payments were interrupted and consolidations of older debt took place frequently. Unlike private debt in which there is little recourse in case of default, the latter was considerably less likely in the case of public debt. Historically disputes between creditors and debtors are at the center of class conflict. Debt peonage, were the creditor coerces the debtor to repay with work, or debtor’s prisons, for those unable to repay, were common solutions for the problem of private default until the 19th century (see David Graeber's Debt).

Public debt was denominated in local currency, and a formal commitment from the local government to match taxes to the required needs to service debt was relatively easy to obtain, in particular since the merchant class and bankers, the creditors of the state, had a hand in the administration of the city-state.  Except perhaps in the case of the complete collapse of the economy, associated to military defeat, the possibility of default was limited. Public debt could be sold and bought in secondary markets and it could be used as collateral by the banking system.

Banks, then, reemerged in Europe after the crusades in the context of the commercial revolution, which connected long distant trade between the Levant and the fairs in Champagne and other northern European markets through the Italian city-states.  In the context of pre-modern Europe, with political and economic fragmentation, and with a significant large number of currencies, one of the central activities of early bankers was to provide foreign exchange.  Traders required not only exchange services, but also the ability to transfer funds from one place to the other, and the international settlement of accounts was useful not just for traders with business in many cities, but also for the church.

Moneychangers and bankers operated in a world with an extensive number of currencies, and coins that were often debased, with an actual metallic content below its face value.  As noted by Peter Suppford in Money and Its Use in Medieval Europe, not only there were a myriad of coins, but also, and more importantly, there were as many units of account. In fact, many coins that actually disappeared continued to be used as units of account, what Spufford refers to as ‘imaginary money.’

The necessity of a unit of account to make economic calculation possible was certainly one of the reasons for the development of public banks, after all money is as noted by John Maynard Keynes essentially money of account. In this sense, money developed not as a device to facilitate transactions, i.e. the means of exchange, but as a result of the power of city-states, and merchant bankers to determine the unit of account (for the chartal origins of modern money see Rochon and Vernengo, 2003). The introduction of a unit of account, and a relatively safe asset were central not so much because they were needed to provide a payments system, as noted by some mainstream authors, although that was a positive externality, but because the determination a unit of account provided the ability to create a relatively safe asset, reduce the risk of default and support the expansion of the of the mercantile activities that were seen as required for the survival of the city state.

Public banks were the culmination of a process by which the state tried to both fund its activities at a relatively low cost, creating in the process a secure asset to anchor financial markets, and that a unit of account was established by the Prince. The question then is why the public banks that preceded the Bank of England (BoE) are not often seen as central banks in the proper acceptation of the word.

One reason for the neglect of the previous public banks derives from a certain view of what central banks do, which, in turn, results from a particular perspective about the functioning of macroeconomic variables. In the conventional view, central banks must provide banknotes, a means of payments, to facilitate exchange but cannot provide too much of them, otherwise inflation would follow. But given the risks of bank runs they must be willing to provide liquidity in moments of crisis (lender of last resort function, LOLR). That is why banknotes and the LOLR function are often seen as the hallmarks of central banking.

Presumably the reason why the initial public banks are not considered central banks is that they were not emission banks. Early public banks provided a centralized clearing system that was guaranteed by the state. In the case of the Banco Giro, the successor to the Rialto in Venice, and the Bank of Amsterdam they had a monopoly over the clearing mechanism. However, there was an active exchange of the lire de paghe, the money of account, of the Banco di San Giorgio as bank money, and, hence, at least some precedent to the emission banks. Besides a giro system, in which credit and debit accounts are centrally cleared might be as powerful to provide liquidity as a system of banknotes.

In that sense, it is a bit arbitrary to consider the BoE, or the Bank of Sweden for that matter, as the first central banks. The most likely reason why that has become common sense is that all the other public banks vanished in the post-Napoleonic Wars period. The reasons for their disappearance, is certainly tied to the disappearance of autonomous municipalities, but the causes are more profound. Note that the rise of public banks follows more or less the evolution of control of trade with Asia, first the Mediterranean control of trade with the Levant, and subsequently the transfer of the dynamic center to the Atlantic, once the Portuguese had opened the trade routes around Africa. In other words, what city-states did not have was an edge in the process that was central for economic development, the control of the trade routes with the East. Also, there were technical problems associated with the printing of paper currency (Eric Helleiner in his The Making of National Money, shows that only in the late 19th century, with the technical advances in counterfeiting is that the State could impose territorial currencies)

In addition, neither the Mediterranean city-states, which were politically fragile, nor the Dutch Republic, which was under constant threat of the Spanish and French crowns, controlled a large domestic economy that could rival with the emergent nation states in terms of political and military power. England, on the other hand, was the first nation state with a public bank large enough to benefit from the positive effects of the expansion of international trade with the Orient, and that could challenge the military hegemony of other European powers.

More importantly, with the advantage of hindsight, it is clear that the financial revolution in England in the 18th century, even if it was in part an evolution of a long process of development of financial practices and institutions in Western Europe, was indeed groundbreaking, and occurred right before the Industrial Revolution. It is the eventual victory in the Napoleonic Wars, and the rise to global hegemonic power that made the Bank of England, retrospectively, the first central bank. By then the rules of what a central bank should actually do where changing according to the interests of the British industrialists and merchants, and that view, the Victorian view of central banks became dominant. And history, including the history of central banks, is written by the victors.

PS: To read the first two posts in the Tutorial series just click on the label below History of central banks.

Sunday, December 25, 2016

On the blogs: End of Year, Before Doom, Edition

How the Obama Coalition Crumbled, Leaving an Opening for Trump -- Nate Cohn, and sorry, but it wasn't Putin or Comey, it was white working class people in the Rust Belt. In one word, Neoliberalism. And yes Cohn uses the term working class. And it wasn't turnout. Cohn says: "Mr. Trump made gains in white working-class areas, whether turnout surged or dropped." Facts should matter.

The Revival of the Working-Class Concept: Trump, the Class Struggle and the (Somewhat Overstated) Specter of Fascism -- Gary Leupp on the only positive thing of this campaign season, the return of class analysis. The US is not classless, and the working class is not happy with Neoliberalism.

A BRIEF TIMELINE OF VERY BAD YEARS, FROM 2016 TO 65,000,000 B.C -- Ryan Bort and 65 million bad years. I'm sure 2017 will suck too!