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Showing posts from February, 2012

Wealthy people were more likely to steal candy from children

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Heterodox Central Bankers III

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Raúl Prebisch (1901-1986)
Raúl Prebisch on the adoption of foreign exchange controls by the Argentinean central bank in 1943:
“This capital [short-term capital] went to further inflate the categories of goods or assets that were already inflated, and did not translate, except in very rare occasions, in a real increase in the production of the country… the measures adopted by the government permit to make an exception, to allow the inflow of these capitals if it is shown that these are oriented towards the increase in real production…” (Obras, 1919-1949 Vol. IV, p. 183; General Manager, Central Bank of Argentina, 1935-1943). In other words, short-term speculative flows should be constrained, but long-term flows for productive activities are fine.

Cesaratto on 'Monetary Mercantilism'

Sergio Cesaratto on what one might term national views on the European crisis, in particular on orthodox German views. Very instructive. He says:
It obviously makes little sense to blame Germany or any other country for the European crisis. Each dominant class joined the European Monetary Union (EMU) in its own interest or pretending to do so for its respective country. If the collective design of the EMU has failed, the responsibility is not of one single country: each national elite has made its own calculations and they should all have known that Europe was not an optimal currency area. We cannot know, of course, what would have happened to Europe or to single members of the Eurozone (EZ) without the EMU. Less excusable is, especially for major countries, not to appreciate and change national policies that are particularly inconsistent with the EMU. Unfortunately this is far from happening. Read the rest here.

A farewell to growth?

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 It has been common for certain progressive groups to suggest that better income distribution and no growth, or even degrowth more recently, would be better than the capitalist driven consumerist growth process [for a critical review of this literature go here]. Several different strands of thought are involved in this view, and it would probably be worthwhile to disentangle them all.

First, there is an obvious Malthusian flavor to this view, going back to the dire predictions by the Club of Rome in the early 1970s, as a result of limited availability of non-renewable resources. Peak oil has been predicted a few times since. And yes it may very well happen in the near future, but somehow I doubt it. Remember that we moved away from coal and steam engines to oil and combustion ones, not because coal disappeared or became truly scarce, but simple because technological change made it less important as a source of energy (and yes we still burn a lot of coal).

In that sense, our problem is…

Yanis Varoufakis report on Greece

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MMT and its discontents

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The Washington Post had a substantial profile on what is now termed Modern Monetary Theory (starts with Jamie Galbraith, and then goes on to the Kansas version of post Keynesian economics). A few reactions in the blogosphere. Two worth noticing are by Dean Baker and Jared Bernstein that provide qualified support.

Dean suggests that beyond fiscal deficits stimulus should also come from monetary policy (lower interest rate), and a more depreciated dollar. My guess is that, at least the Kansas MMTers would be fine with both, but suggest that lower rates of interest are not much in play now. But from what I understand a depreciated dollar has been seen as part of a solution by most progressive economists. Randy Wray, for example, is certainly less concerned with the size of a trade deficit than Dean, since the US is the issuer of the key currency [I have less confidence on flexible exchange rates as a way of solving balance of payments constraints in developing countries, but I'll le…

Put down your Sargent textbook and step away from the econometrics!

The confusion among mainstream economist is amazing. Mark Thoma in his recent post on our under-performing economy highlights this fact. While going through various models illustrating the GDP gap he makes this statement:
“One way to think of these models is that variation in the red line arises from supply shocks, and variation around the red line -- shown by the blue line -- represents demand shocks. Thus, under this interpretation, the first two models assume that all variation in the economy is due to demand shocks. This is clearly incorrect -- certainly supply shocks matter too -- and therefore these models may not give a very good measure of the gap.”

What is simple amazing about this post and statement is that it is wrong on so many levels. The red line (GDP trend) Thoma is referring to is his trend generated from a regression run on the blue line (actual GDP). If the blue line represents demand, the red line is an average of that demand over the whole data set, not supply! Yes…

Amity Shlaes is a Keynesian after all!

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 Amity Shlaes has argued that the New Deal made things worse in the United States, prolonging the Great Depression in her popular book The Forgotten Men (for a devastating critique go here or here). Now she tells us that it was not so. True to her conservative convictions she argues that nation building abroad is a good thing. The explanation of why nation building is actually a good thing is where she gets confused and argues on the basis of Keynesian logic.

She says that countries that were occupied by American troops grew faster, and even uses the multiplier effect to show the consequences of troop withdrawals. She is aware that this is a bit dangerous, and suggests that "the usual explanation for the growth would be the multiplier effect. ... but multiplier effects don’t last, just as stimuli don’t last at home." Hence, even though the multiplier works, it does not work forever.

So her point is that if the multiplier has only limited effects then it is not a Keynesian arg…

Too many things wrong (Sargent and Field edition)

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 And not enough time to blog about all of them. Two that seem to be really important and worth noticing in recent debates around the blogosphere among the chattering classes are the idea  (subscription required) that State Defaults after the Jacksonian economic crisis were good to establish US credibility, and the notion that Total Factor Productivity (TFP) was essential for the US recovering from the Great Depression.

Very briefly I’ll discuss why these two propositions are just wrong. Sargent argues that by guaranteeing State debts the Hamiltonian system created moral hazard, and that the States defaults of the 1840s, which resulted from this arrangement, were instrumental in creating a credible fiscal commitment to sound finance. In his words: “in refusing to bail out the states in the early 1840s … the federal government reset its reputation vis-à-vis the states, telling them in effect not to expect it to underwrite their profligacy.” The lesson for Europe is let the periphery d…

Reviewing the reviewers of the crisis

From Triplecrisis:
Gary Gorton and Andrew Metrick have just produced a survey on the vast literature on what happened during the last financial crisis (and to a lesser extent why it did) titled “Getting Up To Speed on the Financial Crisis,” to be published by the Journal of Economic Literature. They used only 16 documents, between papers from ‘top journals,’ reports and speeches and congressional testimonies. It must be noted that the objective of the review is to provide “a one-weekend-reader’s guide” to the crisis.

The biggest problem with their paper is not the limited number of documents reviewed, which seem to be fairly representative of conventional views on the financial crisis, but the limitations of what the mainstream of the profession knows about the crisis, and worse, what the profession clearly does not know it does not know, the unknown unknowns, so to speak. And that is why ignoring heterodox and progressive contributions has been very harmful for the profession. Read t…

Failing grade for econ courses

From Remapping Debate:
"Until the 1980s, undergraduate students in economics were generally required to take a course in economic history or the history of economic thought, or both. Over the last twenty years, however, those requirements have been dropped from the curriculum in nearly all undergraduate programs, and even many graduate programs do not require them. This ahistorical view of economics, according to David Ruccio of Notre Dame, deprives students of fundamental knowledge about the field they are studying and how it has developed. “The implication for students is that what exists now has always existed and will always exist,” he said. “It allows for the impression that there is only one perspective on economics and ignores the multiplicity of perspectives that have existed and exist today.” Julie Nelson, chair of the economics department at the University of Massachusetts Boston, agreed. “Not having those courses removes the context from the theories and makes them seem l…

Long-term versus short-term debt

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In a previous post I have referred to the Fiscal-Military State, and Brewer's classic book on it. It is worth remembering, for those afraid about debt these days, that public debt in the UK during the Napoleonic Wars peaked at more than 250% of GDP.

One of the important ways in which the British were able to out-finance the other major European powers, fundamentally France, during the 18th century was the ability to borrow long at at low rates. The graph below shows the proportion of unfunded to funded debt (from Brewer's book). The UK rapidly moved from almost 100% of unfunded debt to less than 10%.

Funded debt, was debt for which specific taxes were set aside to service it, and it tended to be long-term, while unfunded debt was usually short-term debt. Debt service consumed a great amount of the budget, but that was simply the result of the incredibly large amount of debt, since interest rates remained relatively low. I guess the lesson is that long term debt in your own cur…

Heterodox central bankers II

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"At the present time we are still in the depths of a depression and, beyond creating an easy money situation, there is very little, if anything, that the Reserve organization can do toward bringing about recovery. One cannot push a string. I believe, however, that if a condition of great business activity were developing to a point of credit inflation, monetary action could be very effective in curbing undue expansion. That would be pulling a string."
Marriner S. Eccles Chairman, Federal Reserve Board March 4-20, 1935.
"The factor of unutilized capacity appears to furnish the decisive answer to the argument that if the budget had been balanced the resulting restoration of confidence would in itself have led to recovery. There is nothing in balancing the budget that would lead to an absorption of excess capacity and hence make it profitable for business to increase its disbursements for plant and equipment. On the contrary, balancing the budget, by curtailing the incom…

Heterodox central bankers

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"Our national debt we will owe to ourselves. The cost of interest service and gradual repayment that is collected in taxes from one generation will be paid to the same generation. The debt will be held wholly within the United States and by our citizens. It will present none of the impossible problems that accompany an external debt. If we fail in the future to make democracy worth while, it will not be the size of the public debt that defeats us. It will be because we have not learned how to use these great resources - human and material - to provide full employment and a high standard of living for all our people."

Chester C. Davis President, Federal Reserve Bank of St. Louis November 14, 1942

Europe's suicide (com)pact

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The draft of the fiscal compact, hailed as a masterpiece by Angela Merkel, was released yesterday (see here). Note article 3.1.a. which says that "the budgetary position of the general government shall be balanced or in surplus." This is more stringent than the old Stability and Growth Pact (SGP) that the fiscal compact supersedes. The consequences of fiscal austerity are already dramatic, and the notion that more of the same can actually have a positive effect is simple madness.