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Showing posts from June, 2011

Dr. Krugman and the natural rate of interest

 So I have said a few times here that, while Krugman has been extremely useful for Keynesians in recent policy debates, as a New Keynesian (neo-Wicksellian would be a better term for this school of thought), he is not properly a real Keynesian.  In a recent post he shows exactly my point.  He says:
"There is still a sufficiently low real interest rate that would produce recovery, but it’s a rate that’s hard to achieve." In other words, there is a rate of interest that would increase investment and bring about the full employment level of savings.  In this post he surprisingly seems to say that liquidity traps or lower zero bound limits (rigidities) for nominal rates do not matter.

The reason seems to be connected to the fact that creditors must have a positive effect on their net wealth in a deflationary balance sheet recession, and their spending should go up.  Hence, creditors should spend more with a slightly lower interest rate.  Wealth effects have been the traditiona…

You've been punk'd!

 Via Billy blog. The World Bank announced Madelyn Antoncic as its new Vice President and Treasurer. According to the president of the World Bank, Robert B. Zoellick:
“She brings to the Bank an extensive background in the financial industry and a demonstrated record of leadership, innovation, and integrity.” Yep, she does. She was Lehman’s Global Head of Market Risk Management.  She does have experience with bankrupting institutions!

How do you say devaluation in Greek?

Default is not the dirty word that nobody wants to say. Almost everybody now accepts that Greece will default. Several people will prefer to use the euphemism of “re-profiling debts,” but we all know what it means.  The interesting thing is that at least some authors, like Martin Wolf in a recent column, also acknowledged that default is not sufficient. The surprising thing that almost nobody asks is whether a default would actually solve the Greek problem.

Of course that would require understanding the problem in the first place. And herein lies the problem, since most people still argue that the Greek problem is fundamentally fiscal. In other words, in the conventional view the Greek government spent too much (and lied about it), and the solution must rely on the generation of sufficient fiscal surpluses to pay for the outstanding debt. Further, to obtain the funds it is assumed that austerity is the way to go, privatizing public firms, cutting public sector wages, and reducing pe…

Basel III and the BIS

Two news from Basel this Monday. None good. First, in their just released Annual Report, the Bank of International Settlements (BIS) complements the IMF's demands for fiscal contraction, with their own calls for monetary contraction.  In their view:

"Inflation risks have been driven up by the combination of dwindling economic slack and increases in the prices of food, energy and other commodities. The spread of inflation dangers from major emerging market economies to the advanced economies bolsters the conclusion that policy rates should rise globally. At the same time, some countries must weigh the need to tighten with vulnerabilities linked to still-distorted balance sheets and lingering financial sector fragility. But once central banks start lifting rates, they may need to do so more quickly than in past tightening episodes." It is bad enough not to have sufficient fiscal stimulus in the developed world, but to export the behavior of the ECB to other central banks w…

Real Wages in Argentina

So there has been some fuss about whether Argentina default was good or not for the economy, because of a terrible article in the New York Times (here). Krugman correctly noticed that this was nonsense and was praised by Dean Baker. I think that it is important to note the role of devaluation (and noted that in comments to both blogs), but wouldn't disagree with Krugman that it's important to emphasize that defaults are not followed by catastrophes and that Argentina is actually a terrible example if one wants to make the opposite case.

At any rate, an Argentine reader (using a pseudonym) got really angry with me, and said some obviously incorrect things about Argentina (and Brazil to boot). But one of his points shows that it is important to clarify at least one fact. The graph below shows real wages in Argentina, with official data, and data from alternative sources that can be obtained in a paper by Roberto Frenkel and Mario Damill (here).

Note that real wages in Argent…

Nation building

Jamie Galbraith compares Obama speech to JFK's American University speech (here).  And then picks up Obama's preoccupation with Nation building at home and asks:
"President Obama rightly stressed the need to restore our strength and prosperity at home: to create jobs, to rebuild infrastructure, to meet the challenges of energy and climate. In this he called us all to a “common purpose.” Will this vast task now get underway? Will a program follow? Will it dispel the deficit-and-debt doomsayers who degrade today’s economic debates?" Sadly, I doubt it. How can he do that and try to get more funds for his reelection from Wall Street (read more here)?  Hope springs eternal.

Argentina, Ecuador and Greece

Well ... not really about Greece, but this paper that has been finally published on Argentina and Ecuador (in the Journal of World-Systems Research) does say something for the euro area countries in trouble.

From the abstract:
The paper draws lessons from the failed Argentine experience with convertibility to highlight the dangers of dollarization in Ecuador. Argentina’s currency peg to the US dollar was successful in reducing inflation but given the overvalued real exchange rate, created burgeoning twin deficits and a chronic dependency on foreign capital. Ecuador too suffers from chronic current account imbalance. In contrast to Argentina, Ecuador seems to be relying on remittance income to close its external financing gap. Though perhaps this model is less unstable than that of relying on foreign capital it is no more sustainable. The paper closes with a realistic critique of this development strategy.

Mr. Krugman and the Ancients

 The preliminary paper posted by Krugman for the Cambridge conference on the 75th anniversary of the publication of the General Theory (GT) is an interesting piece. Not fundamentally for what it says, which is nothing new if you read his blog. Something along the lines liquidity traps imply that you need fiscal policy, and we are at one right now. But it is revealing piece about what mainstream Keynesians understand about the evolution of macroeconomics, and how much knowledge has been lost with the rise to dominance of the neoclassical/marginalist approach.

First, it is important to note that by the time of the New Deal and the Keynesian Revolution American academia was dominated by institutionalism. Mitchell was the head of the National Bureau of Economic Research, John Maurice Clark at Columbia was one of the leading figures of the profession and was the president of the American Economic Association in 1935, and so on. Yes, neoclassical economics dominated in England, with Marsh…

Is Growth in China Investment-Led?

 The general confusion, in both the mainstream and some heterodox groups, about the Asian development model is surprising, to say the least.  Martin Wolf, in a recent column (subscription required or here for free), says regarding the Chinese growth prospects that:
"Happily, China has close cultural and economic similarities with these east Asian successes. Unhappily, China shares with these economies a model of investment-led growth that is both a strength and a weakness. Moreover, China’s version of this model is extreme. For this reason, it is arguable that the model will cause difficulties even before it did in the arguably less distorted case of Japan." The notion is that high rates of savings, associated to repression of consumption, and the absence of a social welfare net, lead to high rates of investment, which explain the incredible performance of Asian economies over the last 60 years or so, starting with Japan, followed by the Tigers, and then China.  The danger…

Retire at 55

 Jamie Galbraith says that the United States is short about 16 million jobs compared to what the economy would need to have. His solution is simple.  He suggests opening a three-year window allowing boomers to retire at 55 with full benefits to boost the economy. There is a short radio interview here.

Keynes' False Dawn

Jamie Galbraith paints a grim picture of the short lived infatuation with Keynes in policy circles after the crisis.  He says:
"In the high crisis just two years back, the cult of John Maynard Keynes saw a dramatic revival. Deficits were acceptable, stimulus plans became law, books entitled Return of the Master and The Keynes Solution rushed into print. Enthusiasts spoke of a “new New Deal.” Today, although the economy has not recovered, and although unemployment remains near 9 percent, none of this remains.

Barack Obama declined to become a third Roosevelt. His Bernard Baruch proved to be Robert Rubin. There is no Wagner in the Senate, no Eccles or Currie at the Federal Reserve. The agencies that harbored Leon Henderson and the young John Kenneth Galbraith do not exist. If Keynes were alive today and came to visit, one wonders who in official Washington would see him.

The new dawn of the Keynesian idea has gone dark." He suggests that the reasons are not associated to the r…

Reckless lack of discipline?

You expect the IMF, and other conservative institutions and economists, to come up with the same old sound finance stuff. It is more distressing when Dr. Doom (as Nouriel Roubini is known among his friends) says, on an otherwise reasonable column  (subscription required) about the likely break up of the eurozone, that interest rate convergence led to "a reckless lack of discipline in countries such as Greece and Portugal." The point is that at least in these two countries the problem was fiscal, and not the euro, the lack of competitiveness and speculative bubbles.
 The graph above shows the primary balance in Germany and the three little PIGs that were forced into ECB/IMF adjustment programs (yep, the big bad wolf in this story). Primary balances show the difference between spending and revenue, excluding interest payments. Note that Ireland had surpluses until the crisis, and Greece and Portugal are not substantially different than Germany until the crisis. And the worst …

What is the correct Keynes solution

Paul Davidson at Triple Crisis.  Most of the post is about Keynes' views on money, and how, contrary to the mainstream, for Keynes money is not neutral. He says:
"In Keynes’s solution to our global economic problems, the primary function of well organized and orderly financial markets is not to optimally allocate capital. Instead it is to provide liquidity so that holders of financial assets traded on such markets “know” he/she can make a fast exit and liquidate their portfolio position at a price close to the previous market price at any time he/she fears something bad is going to happen in the future. For business firms and households the maintenance of one’s liquid position is of prime importance if bankruptcy is to be avoided. In our world, bankruptcy is the economic equivalent to a walk to the gallows." True, but the important point now is that we are at an Eccles' moment.  In other words, monetary policy is like "pushing on a string."  We need fiscal…

Always hopeful for signs of intelligent life

 And usually disappointed. However, I awoke early, and before my brain was adequately caffeinated, stumbled into a place I wouldn't normally venture (h/t Mark Thoma). And, wonder of wonders, found, ummm, maybe embers of economic intelligence.

The source may not surprise the less cynical reading this, but it certainly surprised me: Bill Dudley, President of the Federal Reserve Bank of New York, owner of open market operations, and permanent member of the FOMC. Bill addressed the Foreign Policy Association, and his text is worth reading.

Especially the section about half way down, where he clearly explains the policy implications of (but doesn't attribute) Wynne Godley's triple balance stock flow consistent approach.

And he understands the challenges of rebalancing the world economy.

He doesn't spend quality time on debt sustainability, caving to the current austerian meme for the most part, and thus does not tackle the unemployment equilibrium/deficient effective aggr…

Rogoff on the euro and common currencies

Ken Rogoff wrote a peculiar op-ed (subscription required) on the euro.  He correctly points out that the euro is very close to breaking up, and that the alternative would be to "deepen into a fiscal union."  His comment on what exactly the fiscal union would mean is criptic.  He says that the euro would fail "because European leaders are constitutionally incapable of making tough decisions on how to trim periphery debt burdens."  Does he mean that the fiscal adjustments imposed on the periphery are not tought enough? Or is he favoring a renegotiation of the debts, admiting that they cannot be paid?  It seems that his options are either more fiscal adjustment or default.

Default could be an option, don't get me wrong, in particular, because the ECB is not going to monetize the debt of the periphery.  But the interesting thing is that, either way, he does not even consider that the debts in the periphery are in euros, and the ECB can actually print euros.  And…

Many Economies, Just One Medicine

The IMF in its last Fiscal Monitor suggests that developed countries must adjust because public debt is growing out of hand, and Latin American (and other developing regions) should do fiscal adjustment because their economies are overheated.First, the graph below shows public debt in four developed countries. It is clear that in all debt-to-GDP ratios went up after the crisis. In other words, public debt is the result of the crisis not is cause.  It is important, also, to remember that the crisis has destroyed private wealth (even though governments went out of their ways to compensate some for their losses, in particular the big banks that got us into the crisis).  If private debt falls, and with it private demand, then public demand (spending) has to increase to compensate, unless one wants lower levels of activity.  So it is far from clear that the increase in public debt is problematic at all, and surprising that the “reformed” IMF already is pushing for contraction (note that th…

Glenn Hubbard's family

Mark Blyth sent a nice letter  (subscription required) to the Financial Times.  You must remember that "Give it your Best Shot" Hubbard (of Inside Job fame) was the Chairman of Bush's Council of Economic Advisors, and a cheerleader of tax cuts for the very wealthy.  Hubbard had written an op-ed in the FT (no need to read it, since it's really bad) saying that public debt is out of control.  Of course he is still against taxes for the wealthy.  First Mark gets correctly the point that public debt is not analogous to private debt and lectures the economist (that should have known this):
"the Hubbard family does not issue its own script, owe itself money, borrow other people’s savings with their own paper, or allow new entrants into the family on the basis of skills and contribution to taxes." Then he points out that:
"the blame for the current predicament lies in the “discretionary spending binge of the past decade”, which would be the cost of bailing…

Lucas and Intelligent Design

A friend send me Lucas' Milliman Lecture at the University of Washington (Krugman commented here).  Lucas argues that this crisis was like the depression the result of a significant monetary contraction (he believes in Real Business Cycles, RBC, but only when it is convenient apparently), and suggests that Friedman and Schwartz Great Contraction interpretation of the Depression is correct.  For him recovery was slow (in spite of unemployment falling from almost 25% to around 9% from 1933 to 1936!) because the government intervened and demonized businessmen.  This is basically the same piece of ideological propaganda that Amity Shlaes in her book The Forgotten Man (terrible book, by the way) has been pushing around.

Certain things have to be said again and again because some people keep repeating lies until they become credible.  The New Deal did work (see here)!  Unemployment did fall significantly, and when they tried fiscal adjustment in 1937 (fall in expenses associated with p…

Is there a European crisis?

Jamie Galbraith has his doubts that the crisis in Greece and other peripheral European countries should be called European.  You can hear the audio of his talk here.  His point is that, while it is true that the European confederate organization with weak fiscal links is a problem, the crisis was a global financial crisis with the epicenter in the United States.  The European problem is that the model of integration is a failed one to bring the convergence of the periphery to the income per capita levels of Germany and France.