Showing posts from June, 2013

The Means to Prosperity: Fiscal Policy Reconsidered

The book is now out in paperback. The kindle edition is still the cheapest. The original version was out in 2005, and already said that fiscal policy was necessary for a more sustainable recovery (note the Bush one wasn't particularly good). I think it's still worth reading. By the way, as far as I know it contains the last published paper by Robert Eisner.

The US as a Global Risk Generator

By Kevin Gallagher

The U.S. economy continues to have a hard time recovering from the biggest financial crisis since the Great Depression.

So the last thing one would expect the U.S. government to do is to engage in policies that open the floodgates to severe risks in financial markets once again.

And yet, that is precisely what's going on.

For all the attention that is paid to the Federal Reserve's "tapering," what Washington has in its crosshairs is something quite different.
It is putting massive pressure on the Commodity Futures Trading Commission (CFTC) and the Security and Exchange Commission (SEC).

Unless concerned policymakers — and the public at large — act quickly to counter that pressure, the disastrous past — a financial industry running amok — may well be not just be the United States' national, but our common global future.

How is this even possible?

Even though the U.S. Congress passed the Dodd-Frank financial reform law a few years ago as a bulwa…

The weakening global economy

The graph below shows the evolution of world GDP, and it is clear that the global economy is slowing down (source here), from a growth rate of more than 4% after the crisis to around 2% this year.
In particular, the slowdown is taking place in rich countries, but also in the emerging markets, with the exception of the BRICs. However, note that within the BRICS, Brazil slowed down significantly, from 7.5% in 2010 to around 1% last year, and Russia slowed down somewhat (from 4.6% to 3.5% in the same period) from levels that were not that impressive, while China and India also slowed down, but still maintain high levels of growth (slightly below 8% and around 6%, respectively).
In other words, China and India are growing, but the others not so much. Not a very good scenario. Austerity has been winning globally, and a global Keynesian push is more needed than ever.

More evidence that austerity does NOT work

The US government continues on a quest to show that austerity does not work. The BEA announced that growth in the 1st quarter was revised down to 1.8 percent (see graph below).
From the report is clear why we have a slowdown. Yes consumption grew less than expected, but the culprit is government spending that has been falling by almost any measure. From the BEA news release:
"Real federal government consumption expenditures and gross investment decreased 8.7 percent in the first quarter, compared with a decrease of 14.8 percent in the fourth. National defense decreased 12.0 percent, compared with a decrease of 22.1 percent. Non defense decreased 2.1 percent, in contrast to an increase of 1.7 percent. Real state and local government consumption expenditures and gross investment decreased 2.1 percent, compared with a decrease of 1.5 percent." So, we are convinced; can we change policies now?!

Evgeny Preobrazhensky and Raúl Prebisch on development

Andrés Lazzarani and Denis Melnik have a new paper on two pioneers of economic development.

From the abstract:
This article surveys the views on economic development of two protagonists of developmental policy in the former Union of Soviet Socialist Republics (USSR) and Latin America: Russian economist Evgeny Preobrazhensky (1886-1937) and Argentine economist Raúl Prebisch (1901- 1986). Although the two thinkers started from different analytical premises and developed their theories in diverse social and political settings, there is a basic commonality between the two since the examination of the nature and causes of economic backwardness became the mainstay for stepping up their own economic policies to trigger a developmental process. Each in his own way advanced the idea that backwardness is not a necessary first step of economic development, to be overcome only through economic policies that encourage thriftiness and entrepreneurship and avoid excessive state interference in the …

Jamie Galbraith wins the Leontief Prize

Jamie Galbraith, together with Angus Deaton, has won the 14th Leontief Prize. From the Global Development and Environment announcement:
“For too long many economists have viewed rising inequality as an inevitable consequence of economic development,” says GDAE Co-director Neva Goodwin. “But recent economic upheavals call for a new approach to understanding the causes and consequences of inequality. Angus Deaton has demonstrated that inequality is about much more than income differences, focusing on how inequality affects the health and well-being of societies. James Galbraith has shown that inequality isn’t an outcome driven by factors outside of our control, but instead is often a direct result of the policy choices we make.” More here. Jamie's father was the first recipient back in 2000, together with Amartya Sen. For a full list of recipients go here.

Keen on Krugman and the endangered heterodoxy

Steve Keen replies to Krugman (who was commenting on a post by Noah Smith), again, on whether neoclassical economics has done a good job during the crisis. Krugman's point is that we should evaluate models, and how well they can manage to explain the crisis, and not individuals, or how well they have predicted the crisis. Arguably there is a correlation between the two. Individuals using more sensible models should do better, but obviously good luck, or a certain personal ability that transcends the particular model (and underlying theory being used) might also have a significant impact on predicting outcomes.

Mind you, the broader point that Paul makes is that the mainstream model (an ISLM with a natural rate is what he has in mind, and a few imperfections) has done pretty well. I have dealt with Paul's claims in more than a few posts (see here) and will not deal with that. What I think is relevant that was raised by Steve is that there is no evidence, in spite of the great …

Only the left can save Greece

Is what Jamie Galbraith and Yanis Varoufakis say in the NYTimes op-ed. Note that Yanis tells us that the original title was: "'Why a Syriza victory is not against the interests of the United States or Europe.' [But] The NYT chose another title, not to [his] liking: 'Only the Left can save Greece.'

Next week in Rio

If you are in Rio de Janeiro next Friday don't miss the release of the new book of essays on the Brazilian economy.

Hysteresis and the natural rate

I've been teaching on the price and quantity interactions, and the natural rate or NAIRU (Non Accelerating Inflation Rate of Unemployment), that is the level of activity at which you have price stability. One of the papers assigned is the one by Franklin Serrano (here or here for a Spanish version; another assigned paper is this one by yours truly). By the way, I've dealt with the issue of hysteresis briefly before here, mostly to distinguish it from path dependency, following Setterfield (Serrano also suggests differences between heterodox and more conventional views on hysteresis).

As noted by Serrano, the research by Nelson and Plosser (1982) (here; subscription required) and Real Business Cycle (RBC) authors suggests that GDP follows a random walk, and as a result after a productivity shock (which they measure as changes in TFP, in spite of significant problems with that measure; see here) output does not return to its previous trend. The point is that once the output tre…

Free papers from ROKE

Articles by Arestis, Calcagno, Dullien, Fazzari, Palley, Pivetti, Pollin, Rochon, Zezza and others are available here for free download.

The Latin American left and its discontents

Since the election of Chávez, fifteen years ago, to the more recent re-election of Correa and the election of Maduro earlier this year, the left of center parties have been on the rise in Latin America. The list is long and includes the Kirchners in Argentina, Lula and Dilma in Brazil, Evo in Bolivia, Correa in Ecuador, Funes in El Salvador, the return of Ortega in Nicaragua, Tabaré and Mujica in Uruguay, and Chávez and Maduro in Venezuela. The Concertación (particularly the Socialists, Lagos and Bachelet), and Ollanta in Peru seem to be in a different category altogether. Lugo in Paraguay and Zelaya in Honduras were brought down by coups (yes they are still around), and López Obrador in Mexico was prevented from getting the job by fraud (these never vanish completely).

Overall the period was one of relatively fast growth for the region as a whole, particularly since 2003. And the recovery from the 2008-9 global crisis was relatively fast in most countries. Further, income inequality…

China's overvalued currency?

The Economist finally gets what we said long ago using their data. And the appreciation is bigger than what they think.

The Unfinished March

Dr. Martin Luther King Jr. gave his famous “I Have a Dream” speech at the 1963 March on Washington for Jobs and Freedom and many Americans know the speech quite well enough to paraphrase its concluding passages. What many fail to recall, however, is King's calling not just for legal rights, but for social & economic rights with respect to jobs and a living wage. The Economic Policy Institute has published a research brief that critically revisits this forgotten history - see here.

Duménil and Lévy and the Apotheosis of Capital

Graph below from Duménil and Lévy's (D&L) The Crisis of Neoliberalism (p. 61) [my previous post on their book here].
Note that contrary to the Fed's base rate, which is negative in real terms, the rates paid by corporations are relatively high. Note that firms my borrow to finance, not production, but to buy back stock and pay dividends, and enrich stockholders, including management. That's what happened according to D&L (see below, p. 62).
In other words, on average higher rates of interest (even if lower in periods of financial crises) sustain redistribution towards fat cats. The opposite of Keynes' euthanasia of the rentier indeed.

The paradox of Brazil

By Eduardo Crespo

Brazil has all the conditions to become a regional power able to push the entire region on the path of progress.

Beyond having a large domestic market, there is no reasonable expectation of an external constraint in the near future. Brazil has 380 billion dollars in reserves, its foreign debt is negligible, the impact of the international crisis was irrelevant and it can even borrow in its own currency in international markets. It has large and efficient state organizations such as Petrobras, Embrapa and BNDES. It was particularly favored by the commodity boom and exports increased with the agricultural boom. For the first time in history a tropical country became a major food exporter. And if that weren't enough, large oil reserves were discovered.

And yet, despite all these promising signs, the economic performance of Brazil has been disappointing. In 2011 and 2012 growth rates were 2.4% and 0.8% respectively. The early 2013 data also suggest a poor performanc…

Wage Participation and Unemployment in Developed Countries

It is well known that real wages in the developed world have stagnated in the last 4 decades. The figure below shows that wage participation in GDP has fallen too (source here).
This has been associated to higher levels of unemployment. A reduction of around 3% in compensation has been associated to an increase of about 5% in unemployment. The connection is the Kaleckian (Marxist) notion (see Kalecki, 1943) that higher unemployment weakens the bargaining power of workers. The advanced economies do look wage-led, in this simple graphical representation.

Lars Syll on the meaning of neoclassical economics

Lars Syll also replied to Noah Smith on the meaning of neoclassical economics here and here.

What is really neoclassical economics?

So Noah Smith thinks that I, Lars Syll and Steve Keen, and other heterodox bloggers (in which he adds Austrians; you see why they should teach History of Thought?* For a discussion of the meaning of heterodox economics, including why Austrians are not so, go here) use the term neoclassical economics as a pejorative term. In fact, in the post he links to, in which I do criticize his views on Graber's work, I do say this on neoclassical economics: "mainstream (neoclassical) notions about debt are really problematic." So nothing derogatory or abusive is suggested. What is said there is that certain views of that particular school of thought are not necessarily free of problems. So no, neoclassical is not a slur.

But before I get back to what I think Noah is trying to get to, we need to address the actual meaning of neoclassical economics. For starters neoclassical is a bit of a misnomer. Veblen invented the term to suggest continuity between the old classical school and the …

James Galbraith in Greece

In Thessaloniki on June 11, James Galbraith with Alexis Tsipras and Yanis Varoufakis. The full video of Jamie's speech can be seen here. Audio available here. Enjoy!

More on David Graeber’s Debt

Indebted? No problem we have a (minimum wage) job!
David (Fields) posted a link to Geoff Ingham’s review of Graeber’s book. Graeber is an anthropologist, recently hired by the London School of Economics, and that has often been associated with the Occupy Wall Street movement. Note that several mainstream economists have posted recently on the topic, and have been, as is often the case, barking at the wrong tree. Two mainstream takes on Graeber that are typical are from Noah Smith and Brad DeLong.

Noah wrote a post, a while ago, on David Graeber's views on debt. According to him Graeber is "a sort-of-leftish guy with a tendency to fight with other people on the left." Noah would be, by the same token, a sort of neoclassical-liberalish (in the American sense of progressive) economist fighting other people within neoclassical economics. And here lies the problem, because mainstream (neoclassical) notions about debt are really problematic, and there is quite a bit that coul…

O sacred hunger of pernicious gold! What bands of faith can impious lucre hold?

Sociologist Geoffrey Ingham has written a review of David Graeber's Debt: The First 5,000 Years, which can be viewed here (subscription required). According to Ingham, while Graeber's monumental inquiry is much to be admired, there is quite a bit of room for critical refutation, specifically with respect to the exact nature of money, and its essence as a moral base for economic life.

The other Dutch Disease

Simon Wren-Lewis and Paul Krugman have written complaining about Dutch contractionary policies, noting, as should be obvious to any reasonable observer, that is is a huge mistake. Graph below shows Dutch rates of growth, and it's clear that the economy is in a recession (the estimate for 2012 growth rate is from here).
Funny thing, if you look at the 1960s, the period of the infamous Dutch Disease, when the discovery of natural gas supposedly impacted negatively the Dutch manufacturing sector (and should have had a negative effect on productivity and growth), then you see that the economy was doing way better than in the post-1973 period. Perhaps we should rename the disease associated with financial liberalization, and monetary policy focused only on inflation (and the austerity policies that often go hand in hand) as the real Dutch Disease.

The Real Bills Doctrine and the Persistence of Monetarism

The Real Bills Doctrine (RBD) suggests that the central bank passively provides liquidity to the system.* The name of the doctrine results from the notion that banks only discount real bills, associated with the functioning of the economy, in particular for international trade that was essential in the 18th century when the doctrine was developed. In terms of central banking policy, the RBD fundamentally meant that there was no need to lean against the wind, and money supply should adjust to the needs of trade. It is generally presumed that in the 1930s a more activist position – leaning against the wind – was developed.

In particular, Allan Meltzer in his A History of the Federal Reserve seems to believe that the RBD was the main cause of the Depression and that its abandonment was essential for the recovery from the Great Depression, since, in his view, the increase in money supply was the crucial element in the recovery, rather than the New Deal policies. Meltzer (2003, p. 282 and…

The Trade Deal Scam

From Dean Baker
As part of its overall economic strategy the Obama administration is rushing full speed ahead with two major trade deals. On the one hand it has the Trans-Pacific Partnership which includes Japan and Australia and several other countries in East Asia and Latin America. On the other side there is an effort to craft a U.S.-EU trade agreement. There are two key facts people should know about these proposed trade deals. See rest here.

Fiscal Conservative to head the Council of Economic Advisors

Jason Furman will be the new chairman of the CEA (see here). He is a veteran of the White House and a Democratic insider. He is also a fiscal conservative associated with Robert Rubin's Hamilton Project, whose mission calls for "combining public investment, a secure social safety net, and fiscal discipline." Yes discipline as in balanced budgets or 'sound finance', as they say, and lower spending, including reforming entitlements (aka privatizing social security, which is the real meaning of 'secure social safety net'). So don't expect any stimulus coming from the Obama team anytime soon. Obama seems to be stuck with the austerian paradigm.

Time to Retire Greenspan and Trichet’s Pensions

From Dean Baker:

Remarkably, the two individuals who bear the greatest responsibility for the global economic disaster, former Federal Reserve Board chairman Alan Greenspan former president of the European Central Bank Jean-Claude Trichet, do not appear to be suffering at all for their failure. Both are living comfortably and continue to be sought out for their so-called expertise on economic policy. This should infuriate reasonable people everywhere.

See rest here.

Ronald Reagan, the Tea Party, and the Reasons for Recurrent Crises

A follow up on the last post. If FDR and his promise of the Economic Bill of Rights would have implied a completion of the New Deal, it is quite obvious that Reagan was the undoing of it. But that's often not recognized. Bill Maher's new rules last Friday got it right.
Yes Reagan was the original tea bagger, and income inequality, lower growth and more financial instability are the result of his administration. Dean Baker has said that, in a more technical way if you will, in his book The United States Since 1980.

The unfinished project of the New Deal

Saw today (again, but this time with my son) Capitalism a Love Story. At the end there it was Roosevelt's Second Bill of Rights as a reminder of unfinished business. Below the most important part from the State of the Union address.
The whole speech can be read here. In the essential the Bill of (Economic) Rights asked for:
"In our day these economic truths have become accepted as self-evident. We have accepted, so to speak, a second Bill of Rights under which a new basis of security and prosperity can be established for all regardless of station, race, or creed.  Among these are:  The right to a useful and remunerative job in the industries or shops or farms or mines of the Nation;  The right to earn enough to provide adequate food and clothing and recreation;  The right of every farmer to raise and sell his products at a return which will give him and his family a decent living;  The right of every businessman, large and small, to trade in an atmosphere of freedom from un…

How Fiscal 'Responsibility' Creates Unemployment

By John T. Harvey
"Today’s employment data showed, once again, very little change (BLS News Release). The administration has been announcing for some time that the recovery is well underway, but that’s hard to justify. It’s a bit like saying that a patient is on the right track because their fever has dropped from 105 degrees to 104. While, strictly speaking, it’s true, the situation continues to be so serious that a relapse could easily occur." See rest here.

A Basic Mistake in Krugman's post

Gustavo Lucas (Guest Blogger)

In a recent post Paul Krugman says the following about the AS-AD model with a Taylor Rule:
"a rising price level doesn’t reduce demand through its effect on the real money supply, it reduces demand through its effect on the mind of Ben Bernanke." Does it make sense? An increase in the price level, positive inflation, implies a decrease in the real interest rate and hence an increase in the AD through consumption and/or investment:

i – p = r I´(r) < 0 C´(r) < 0 Y = C0 – ar Where r is the real interest rate, i the nominal one (the one used by the Central Bank), I'(r) means that the investment is negatively related to the interest rate, C'(r) is the same for consumption and Co represent the autonomous expenditures and a is the sensitivity of the output to the interest rate (that is, the IS equation).

I am supposing that the inflation is increasing. If inflation does not increase, we do not have any effect on the economy. So, in any case,…

Johan Gustaf Knut Krugman or Naked Wicksellianism

Dr. Krugman, I presume
Lance Taylor has a new paper on Krugman's liquidity trap model, showing that it is fundamentally Wicksellian, rather than Keynesian. In fact, Krugman has put his Naked Wicksellianism on display recently (see here). You should read the whole paper, but as a teaser, here is what Lance says about Krugman's policy stance (that the Fed should stimulate inflationary expectations to increase investment):

In a Knut-shell (very punny) Wicksell is okay, but Keynes is better.

Fiscal Austerity Is Undermining Long-Term U.S. Economic Prospects

Well, here is the effect of austerity: lower effective demand->lower level of activity->economic stagnation. From Center for American Progress:
"The graphs presented below illustrate the costs of austerity from a different angle: the long-term costs of allowing so many productive people and assets to lay idle. By allowing the continuation of the widespread unemployment of workers and potentially productive assets—also known as capacity utilization (see sidebar)—we are forgoing investments in new technology and in the technical skills and productivity of the U.S. workforce that drives economic growth. In other words, as a result of fiscal contraction and the acceptance of a protracted economic recovery, the potential for the U.S. economy to grow is shrinking. The analysis presented here shows that this shrinking will cost the U.S. economy $433 billion and 2 million jobs by 2019."
See rest here.

Austerity failed in Greece

Yep, that does not sound like news. It is well known and the graph below, from a report by the Center for American Progress, just confirms it.

From the report (p. 19):
"Over the past several years, Greece repeatedly imposed ever-more dramatic austerity measures. They have raised their retirement age, cut public pensions, cut pay and benefits for public-sector workers, closed schools, cut funding for public health and for defense, reduced subsidies to local services, and laid off thousands of government workers.50 The end result is that in 2012, real government spending per person in Greece had fallen by more than 22 percent since 2009. And yet government spending measured as a share of gross domestic product was actually higher in 2012 than it was in 2009. How could that be? How does a country cut real spending per capita by about 22 percent in four years and still end up with higher spending as a share of the total economy? It can happen if all those spending cuts send the econom…

Austerity: The History of a Dangerous Idea

Professor Mark Blyth's new book: 'Austerity: The History of a Dangerous Idea'
"Conservatives in both Europe and the United States have succeeded in casting government spending as reckless wastefulness that has made the economy worse, and have advanced a policy of draconian budget cuts--austerity--to solve the financial crisis. We are told that we have all lived beyond our means and now need to tighten our belts, but this view conveniently "forgets" where all that debt came from. Not from an orgy of government spending, but as the direct result of bailing out, recapitalizing, and adding liquidity to the broken banking system. Private debt has thus been rechristened government debt, and those responsible for generating it have got off scot-free, placing the blame on the state and the burden on the taxpayer." Read rest here.

Social Security and Medicare Reports Little Changed From 2012

From Dean Baker:
"The 2013 Social Security and Medicare Trustees’ reports were little changed from 2012. The Social Security Trustees report showed a slightly larger shortfall over its 75-year planning horizon, with the projected shortfall rising from 2.67 percent of payroll in the 2012 report to 2.73 percent of payroll in the newest report. The reason for this small increase was the change in the 75 years covered with 2087 replacing 2012 in the projection period" (rest - see here).

Garegnani on Sraffa, Ricardo and Marx

I was going to write something about the Ricardian roots of Marx, but in all fairness a lot of ink has already been spilled on the subject. Here is the reply to the question about the relation between Sraffa and Marx, given by Garegnani in 1978 (here for the whole interview; subscription required):
"The conception which some people have of this relationship [Sraffa and Marx] seems to me quite misleading. And in order to reach a correct understanding of it, we first have to grasp the true relationship between Marx and Ricardo. I have argued elsewhere that this latter relationship should be seen in terms of a strict continuity at the level of economic analysis. Of course, unlike Ricardo and the classical economists, Marx sought to show that the capitalist mode of production is no more permanent than the modes which came before it. But this does not contradict my previous point, since it is perfectly normal that a given theoretical approach should reveal to one author a series of c…