On alternative views of welfare

 

 

Two traditions in economics 

I've been teaching a course on Public Policy, and had to deal with conventional manuals, which tend to be essentially micro and conventional in their approach. They all start from Pareto and market/government failure dichotomies. Classical, objective and materialistic conceptions of the public good are completely excluded. This short handout was used just to redress some of the problems of teaching from conventional textbooks. I also discuss extensively macro issues, of course.

Serrano, Summa and Marins on Inflation, and Monetary Policy

This is the full round table on Inflation and Monetary Policy organized by the Bucknell Institute for Public Policy (BIPP), with Franklin Serrano, Ricardo Summa and Nathalie Marins.

What is heterodox economics?

New working paper published by the Centro di Ricerche e Documentazione Piero Sraffa. From the abstract:

 This paper critically analyzes Geoffrey Hodgson’s definition of heterodox economics as the refutation of the orthodox view that emphasizes utility maximization as its main theoretical core, and his view that it is the fragmentation of heterodox economics that explains its subsidiary role within the profession. Hodgson’s views led to a series of responses, that criticize his definition, but also present significant problems of their own. The limitations of Hodgson and his critics’ views are contrasted with an alternative definition that emphasizes the importance of conflictive distribution and the principle of effective demand in the long run. The idea of a broad tent, from a sociological point of view, does not preclude the need for a clear analytical definition of heterodoxy. The broad tent should be seen as part of a strategy of survival.

Link here.

The 8th Godley-Tobin Lecture

Registration for the Zoom meeting here. After registering, you will receive a confirmation email containing information about joining the meeting.

Milei and real wages in Argentina

I was interviewed by Max Jerneck for his podcast, and he alerted me to this figure (see below), which apparently come from the Universidad Francisco Marroquín in Guatemala, that has made the rounds, and has been used by right-wing think tanks.

If you were to believe this, real wages fell after Milei's assumption. This is obviously sheer ignorance, or, more likely, an attempt to misinform and create doubts about the real effects of his policies. I had read a recent report by Centro de Economía Política Argentina (CEPA), and Julia Strada was very nice sending me the data for their own calculations based on the official INDEC data (note that this is not the issue, real wages dd fall, and recovered somewhat, but are below the initial level).

The problem with the graph, is that it starts with the line between Milei and the previous government in a way that seems that all the fall was before he was inaugurated in December 10, 2023. Arguably the problem comes from the fact that Milei started in December, but part of that month was still under the presidency of Fernandez. And with high inflation wages would be falling all the time, until a readjustment. This can be sorted out if we knew what caused the acceleration of inflation, and the rapid collapse of real wages, as a result of that. And we do, since inflation accelerated with a massive maxi-devaluation of the peso.

My graph below shows the real wage, with essentially the same trajectory, and the nominal exchange rate, which was depreciated by 100% (devalued by 50%), going from 400 pesos per dollar or so, to about 800 (left side) right after Milei's inauguration. I draw the line at that event, the depreciation of the peso.

As it can be seen, the depreciation of the nominal exchange rate, which accelerated inflation from about 12% to more than 25% in monthly terms (that is, it doubled inflation), led to a collapse of real wages. Most of the collapse (almost all) was after his policy decision to devalue the official rate. So wages are increasing, but from a low base, and that was caused by the current government.

Are we on the verge of a debt crisis?

This was my presentation at the Political Economy Research Institute (PERI) last summer. I was supposed to revise it, but never found the time. So it is now available on Substack. Fundamentally says that the current situation is very different than the debt crisis of the 1980s, and the period between the Tequila, in 94/95 and the Argentine Convertibility default in 2001/02.

Podcast on the first year of Milei's government in Argentina

PS: A comment about it appeared in a recent Guardian editorial. There is too much optimism about Milei 'success' in containing inflation, but also a lot of misunderstanding why he managed, and whether it is sustainable.

Inflation, real wages, and the election results

Almost everybody these days accepts at face value that the result of the election was heavily determined by negative perceptions about Bidenomics, and that, in turn, resulted from inflation. Inflation was high (it wasn't, at least not that much), and people were pissed off. This is not just Larry Summers, who had argued (incorrectly in my view) that inflation was caused the large fiscal packages of an excessive generous government.

In the heterodox camp, many have suggested that more should have been done to control greedy corporations, that caused inflation by hiking their mark ups. In this view, price controls might have been helpful (often some examples of other countries, like Spain are used). While some of these would have been good, they depend on the previous existence of national mechanisms to, for example, control the price of energy (even easier if one has a national oil company),  of a national Value Added Tax on food that could be reduced to alleviate cost pressures. As I noted in the INET video, the best policy would have been to try to increase wages above inflation, and perhaps the best national tool was the minimum wage, but Biden and the Dems in Congress failed to pass an increase (Trump and the GOP are against the existence of a minimum wage, let alone a higher one).

At any rate, as I noted before, real wages at the bottom of the income distribution did go up, going back at least to the Clinton era, as it can be seen below.

However, that about the relative position of the workers at the bottom, nor about the fact that during the Pandemic period (and at the beginning Trump was still the president) real wages for the non managerial workers basically stagnated (even fell a little bit from the peak).

And, as noted before, this does overlook the fact that real wages for an extended period, going back to the 1970s, has more or less stagnated (individuals, obviously, might be doing better, as they get promotions and so on; but people know that their parents could have a better life with a working class salary back in the 1970s).

The key is not inflation, but that real wages have not been growing enough to provide a sense that people's lives are improving. If the left clings to the demonization of inflation, the ultimate lesson would be that fiscal policy was the problem (not the greedy corporations, but the inefficient government; both stories are incorrect, see why on my Catalyst piece). And we will make it so much more difficult for the next Democratic administration and the progressives within that coalition. Many on the left took the wrong lesson from the 1970s, that inflation was a problem, and that balanced budgets were necessary to win elections. That certainly was reinforced by the Clinton administration. To conclude that inflation and excessive spending was the problem with Bidenomics will make things worse.

In terms of feasible strategies that would have positive economic effects, and generate immediate electoral advantages, Dems should concentrate on higher minimum wages as a catalyst for better labor market conditions (the effects spread to other wages, and it is a simple slogan that people readily understand, and Trump would have been forced to remain silent or come out against it).

Very brief note on the Brazilian real and the fiscal package

 

The Brazilian real depreciated last week (full meltdown might be a bit of a hyperbole), and in many quarters there has been a suggestion that it is now undervalued, and that would somehow be connected to the dangers associated with the fiscal position, and the willingness of the Lula government to push the spending cuts, and the tax changes, with cuts for those at the bottom of the income distribution and hikes at the other end (more on the fiscal story in a bit).

The obvious reason for this is that the Brazilian basic interest rate was coming down from its post-pandemic high, and probably, and in spite of all the pressure from progressives and heterodox economists, it was a bit too low. As it can be seen, as the SELIC rate came down, the exchange rate started, eventually, to depreciate. This will have some impact on inflation, but it is nothing that should be of any significant concern. A higher SELIC, and a few interventions by the Brazilian Central Bank (BCB) should be more than enough to stabilize the exchange rate.

The fiscal situation does not require any adjustment, and certainly not one for next year, and not at the expense of reducing government outlays on education and health. Brazil managed to grow more than predicted by markets since Lula's election, because the fiscal rules were taken with pragmatism and the adjustment has been delayed. If the government goes through with the spending cuts, expect growth to decelerate, and the fiscal accounts to worsen.

This is exactly what Dilma tried in her first government, then backtracked, and then adopted in the aftermath of her victory in 2015, leading to the worsening of the fiscal results, and the impeachment (not that this is on the table; but the political future certainly is if Lula cannot deliver growth and better income distribution). Btw, the changes in the taxes are a good thing.

Milei's Psycho Shock Therapy

My short piece for Dollars & Sense on Milei's economic program is out now, here. An early version is available here. Btw, this is the 50th anniversary issue. By coincidence, 20 years ago, a piece of mine on Brazil (and the Lula government back then) was also published on Dissent on their 50th anniversary issue.

The Milei piece was written in June and revised around September. Now it seems more clear that they might receive some fresh money from the IMF, which will allow them to continue to pushing the adjustment well into next year, and, perhaps beyond. Note that this is exactly what the same team during the Macri administration. Try to cut spending in domestic currency (now more drastically) and, hence, debt in pesos, and increasing indebtedness in dollars. The money will probably come in, and as the interest rate differential remains negative, it will probably not lead to the accumulation of reserves. To be seen.

Elon Musk (& Vivek Ramaswamy) on hardship, because he knows so much about it

I noted (here on the blog and also here) that I didn't think predictions about inflation acceleration and a recession as a result of a a second Trump presidency seemed probable. Yes, he would cut social spending, but would likely expand defense spending, and the tariffs would have a level effect on prices, but not a persistent one on the rate of change (inflation). This was before the rant by Elon Musk on spending cuts and the need for real hardship. Elon suggested cuts of 2 trillion dollars which would obviously, if they were to pass, cause a major recession (I discussed that on the Rick Smith Show). Now Elon and Ramaswamy suggest cuts of about 500 billion. Still a huge number, more than 1.5% of GDP, that would certainly provoke a recession. They say (read it in full here):

They suggest that the Pentagon doesn't know how it spends the money, which is true, but make no mistake, they are going for Medicare and Medicaid (particularly the latter; easier to take money from the poor than the elderly). I still doubt that they will cut spending significantly overall, and that there's anyone concerned with the deficits in the incoming administration. That's actually one of the few good things (although how they are going to spend, and tax, will cause a lot of pain).

On that, on the hardship, that is forthcoming, I'm reminded of this interview by Arthur Okun (yesterday a kid was presenting on his ideas in my history of thought class), on the push back on the higher taxes and sacrifice arguments within the White House early on the JFK administration. He said:

I do expect that some people will be forced to sacrifice. I'm still skeptical about the fiscal adjustment. But I have been wrong before.

PS: Note that back then, as now, extra spending for defense reasons encountered no real concern. The idea to raise taxes was a political gimmick from JFK's advisors. Not push back from Congress.

The second coming of Trumponomics

Donald Trump will be the first president since Grover Cleveland, also a New Yorker, to have two non consecutive terms in the presidency. The reasons for this are beyond my abilities to analyze, but it is clear that he did get the votes of people in the lower levels of income, that had voted for Biden in 2020 (but not for Hillary in 2016) and went decisively for Trump. One may say that the populist vote in favor of tariffs, often associated with working class interests, was part of the explanation. But Bidenomics (on that see this and this) had incorporated that and more.

I do think that economic factors were central for the outcome of the election. However, I think there is a simplification in suggesting it was inflation. Many people have suggested that, including many progressives, like, for example, Doug Henwood, which is correct in emphasizing the mistake of the Harris campaign in veering right (and that perhaps Dems will mistakenly veer even more to the right).

However, I tend to think that when people say that inflation is one of their main concerns, and that should be taken seriously, what they mean is that their wages are low. Nobody would care if inflation was even a bit higher if their wages increased significantly above inflation. And sure enough the minimum wage that has not increased since 2009 has been at historical lows. However, once we look at the earnings from those at the bottom, as shown below, we that while they did fall from May 2020, even before inflation accelerated, until June 2022, they have recovered and are higher than before the acceleration of inflation. However, they are essentially barely above the levels of the early 1970s.

In other words, real wages recovered, and have been growing more or less since the second Clinton administration, but they have been essentially stagnant, and there are many reasons for the working class to be angry. You could use other variables to show the same (without the issue of inflation), like the share of wages and salaries in Gross Domestic Income (below) that fell from about 50 to close to 42%. Bernie's insurgency on the left was no mere accident, and its interdiction within the Democratic Party has made it possible for a Era of Trumponomics, as it is now clear.

What working class people, that flocked to Trump in 2016 and now, and had voted for Biden in 2020 (and Obama in 2008, and also in 2012 when the candidate was Romney), are saying is our incomes are insufficient. Not that inflation is high. The working class is not Monetarist, even if some of their intellectuals are. Why my caution on inflation, you may ask. Because the main lesson from mainstream Dems will be that inflation caused the defeat (echoed by many progressives), rather than economic hardship and inequality, and that this, in turn, was caused by excessive fiscal expansion, and that balanced budgets are needed. Exactly the wrong lesson.

Inflation was not caused by the fiscal packages, it did not cause the defeat, and it actually is back down and, for the most part, excepting supply-side shocks, will remain low, since the bargaining power of the working class is weak (soon to be weaker), and there is NO significant distributive conflict (all stuff I said on my piece in Catalyst at the beginning of the inflationary bout in the summer of 2022).

In fact, the anti-labor stance (so much for his populist credentials) is the defining characteristic of Trumponomics. The tax cuts for the wealthy are recycled supply-side economics. The tariffs, which everyone sees as his hallmark, and something that he introduced in his first presidency, and in some ways has been maintained by Biden, are less relevant in some ways. First, contrary to some hyperventilating the tariffs will not reignite inflation, but would at worst increase the price level. Second, and more importantly, it is unclear that this is not like the infamous wall, that he would have built, and Mexico would have paid for, in his first term, more imaginary than real. His possible Treasury Secretary has already said in the Financial Times that: "Trump’s pledge to impose sweeping tariffs on imports as a 'maximalist' threat that could be altered during talks with trading partners." In his words: "It’s escalate to de-escalate."

Tariffs are just a tactic to deal with China. The anti-labor stance will be seen soon at full display in the National Labor Relations Board, that during Biden has been the most pro-labor since the 1960s, perhaps. Where we should expect a tremendous backlash, other than labor issues, is on health, and immigration, and these again have significant impact on the working class. His government will make things worse for workers, and will open the opportunity for left wing populism. If the Dems learn the lesson. A big if. Hope springs eternal.

Currency substitution in Argentina

 

"I have invited an economist that was active in the dollarization of Ecuador to illustrate the wonders of the process."

A paper with Santiago Graña on dollarization in Argentina published in the PSL Quarterly Review. From the abstract:

Currency substitution defined as the use of foreign currency in the domestic economy is a relatively common phenomenon in developing countries. While mainstream economics has analyzed it in some detail, the same is not the case in heterodox economics. This paper proposes an analytical approach to evaluate the effects of currency substitution and its relationship with exchange rate dynamics; it provides an empirical investigation of orthodox and alternative views for the case of Argentina. The orthodox view emphasizes the role of fiscal deficits financed by monetary emissions, while alternative views emphasize the importance of external vulnerabilities, both associated with current and financial account deficits as the source of currency substitution. We find some support in favor of the alternative or heterodox perspective on currency substitution or dollarization.

Read the full paper here.

Paul Davidson (1930-2024) and Post Keynesian Economics

Paper on Paul with Tom Palley and Jamie Galbraith published by ROKE. From the abstract:

"Paul Davidson was a critical figure in the preservation of John Maynard Keynes’s ideas, sticking with them when they were out of fashion. He was also key to the survival of the Post Keynesian school. Davidson endorsed Keynes’s liquidity preference theory of interest, and he emphasized fundamental uncertainty as a central feature of economic reality, essential to making sense of a monetary economy. His greatest legacy is the Journal of Post Keynesian Economics, the intellectual home for a generation of Post Keynesian economists. Without his efforts, the heterodox economics community would be significantly smaller than it is now."

Full paper available here.

The Economist and the American Economy

It takes something for me to say that The Economist is probably right. Sure enough the cover of The Economist, which has led to many critiques, sarcastic comments, and plain mockery by some friends on the left, was a bit hyperbolic. But the main argument of the piece -- basically that the American economy did pretty well in the recovery from the Pandemic, and that the United States has done well when compared to other advanced economies, and better than it did in the last few recoveries, which is not the case with China, which still grows faster, but has slowed down -- is correct.

Regarding the recovery, it is clear that the US has outperformed most economies, and it is also true that to a great extent that is due to the fiscal packages from the Pandemic, including the Biden ones, that were derided by many, including many Dems, like Larry Summers (and inflation, which resulted from the supply chain problems, in the absence of significant conflict went down pretty fast).

 

Not only this was the first recovery that was NOT jobless in a while, as can be seen by the fact that real GDP went back to trend, it also puts in doubt the notion that there is some fundamental secular stagnation problem with the US economy.

There are, no doubt, structural issues, like increasing inequality, and an hegemonic challenge from China*, but no significant reason that dooms the economy to grow less in the long run. The lower growth was a result of policy decisions, not structural problems. As Steindl would have said, stagnation policies. Had Obama (and then Trump) pushed for a more robust fiscal expansion after the 2008/9 Great Recession as Christina Romer wanted (and contrary to what Larry Summers advocated) then the growth rate would have been higher, and perhaps even the deficits (as a share of GDP, with GDP growing faster) would have been smaller.

Trump's victory in 2016 is, to some extent, the result of that choice too (and not prosecuting the Wall Street crooks, in my view), and Kamala has failed to adopt a more populist tone during the campaign, which I hope does not end up leading to another turn to the far right. The limits to growth have been political, and the Dems have played a role in that. Paradoxically, Biden had moved to the left on that (his willingness to promote a more healthy fiscal expansion).

* On the exaggerated fears of the end of American hegemony, also very common on the left, I'll write later.

IMF surcharges

A long demand by progressive economists demanding the end of the surcharges that the IMF imposed on developing countries has had a positive outcome, with the executive board reducing them. The statement by Kristalina Georgieva can be read here. A strong effort on this by Joe Stiglitz, Martín Gúzman, Kevin Gallagher, Mark Weisbrot, to cite a few should be noted. I had recently signed the letter below favoring this policy.

"Dear International Monetary Fund Board of Directors,

This Friday October 11, 2024, the International Monetary Fund (IMF) is expected to announce reforms to its policy on charges and especially surcharges, which levies extra fees on countries whose debts have surpassed certain size and time thresholds. We the undersigned urge the IMF to meaningfully reform its policies, especially on surcharges.

Research shows that IMF surcharges are procyclical and regressive, extracting higher lending rates and fees from countries during financial crises when they should be investing in their own recovery. For years, researchers and advocates have documented how the current surcharge policy prevents low and middle-income countries from regaining financial stability, including by piling on higher borrowing, and preventing access to international markets. Surcharges increase the total potential annual interest rate imposed by the IMF to almost 8%. Moreover, the arguments put forward in defense of the surcharges have shown to have little if any validity.

We are concerned by reports that the IMF is not considering significant reforms that would remedy the flaws inherent in its surcharge policy. We fear that the IMF is instead contemplating insufficient half-measures. Tinkering at the edges will not help ensure global stability. The IMF itself projects that the number of countries paying surcharges will keep increasing. Already, 675 million people live in low- and middle-income countries whose taxpayers are projected to pay the IMF roughly $2 billion just in surcharges every year for the next five years. Every one of those dollars is a dollar not spent on health, education, and the clean energy transition. If the IMF Board maintains its current system of charging the taxpayers of already struggling, indebted countries extra surcharge fees, which cushion its general reserves, its members cannot expect that we will perceive the Fund as the steward of global financial stability that it was founded to be and confidence and trust in the Fund will diminish."

For the list of signatories go here.

More on the possibility and risks of a recession

So both the (inverted) yield curve and the Sahm rule indicate a recession. This together with two months of slower employment creation, and the slightly higher unemployment rate, has many wondering whether the economy will crash soon. I discussed before -- a while ago, before the pandemic recession, that had nothing to do with the yield curve -- why an inverted yield curve doesn't necessarily mean a forthcoming recession. The Sahm rule, like the inverted yield curve has an impressive track record. It suggests that if three month moving average of the rate of unemployment rises 0.5 or more above the minimum of the same averages for the previous twelve months a recession is under way. Figure below, although scale doesn't help, shows that we are at 0.57 for last August [ominous music here].

This is essentially an a-theoretical measure, contrary to the yield curve which could have different explanations, including the Wicksellian one used by the mainstream. It expresses basically a trend. Unemployment rates go up in recessions, and after a while going up, you're basically in one. The two episodes in which it fails, as far I can tell, were in 1959 and 2003. No clear reason for why, as opposed to housing market measures that failed in 1951, 1967, and perhaps now (if you believe me), because of two wars (Korea and Vietnam) and fiscal packages (Bidenomics).

In a few weeks now, the Fed is very likely, almost certainly really, going to reduce interest rates. I don't expect that to stimulate the economy much, and it certainly will not create any danger about an inflationary resurgence. Also, as I noted on Marketplace a week or so ago, there are some positive signs about the economy. Real wages at the bottom are growing, and consumption went up. And no, you should not be concerned with the low savings rate. I was a little less sanguine that I sound in that short soundbite, but overall I think that's correct.

Sure enough a recession could certainly imply a return of Trump, and Trumponomics. I doubt that it would cause inflation and that his election would deepen the recession, as some had argued. Not because tax cuts for the wealthy would stimulate the economy. But the truth is that Republicans in power don't care about the deficit or debt. They care about cutting social benefits, and about facilitating the lucrative relations between the corporate sector and government. What Jamie Galbraith called the Predator State. Trumponomics shares with Reaganomics, and other GOP supply side voodoo economics notions, a persistent characteristic. It is always against unions and higher wages, and always for lower taxes for the wealthy.

Dems are less consistent, but certainly less keen on both (and Kamala seems to have accepted Bidenomics and the pro-union agenda). The problem with that is that it has opened the door for right wing populism. The differences with previous versions of conservative economics are subtle, and in some sense rhetorical, since they do very little for working people. On right wing populism economics and their connection to the working class, and the problematic relation of Dems with the working class, I suggest the recent piece by Kim Phillips-Fein on the London Review of Books. She says:

"In 1968 George Wallace talked to a working class that was afraid of dispossession. Trump speaks to workers too, but more directly uses the language of money and corporate success; his appeal derives from identification with the boss -- reflecting the extent to which he seeks to win the allegiance of small business owners. Just as American political institutions have been hollowed out since the 1960s, so has the country's political economy, in ways that have helped to increase Trumps' appeal."

The self-made man myth, an American neologism (Henry Clay, if I'm not wrong), is incredibly corrosive. I hope I'm right and we can avoid a recession, and Trump.

Two letters to The Economist about Donald Harris and what they reveal about ideology

 

Spaghetti economics: Shootout at Harvard Square

There were two letters about the poorly written (not the English, always impeccable, contrasting to my spaghetti English, which is always slightly off, like the Westerns) piece that The Economist had on Donald Harris. One by Robert Blecker, Steve Fazzari and Peter Ho, setting the record straight on the breadth and depth of Harris' contributions to economics. On this, they echo what the Post said about Harris' policy advice in his native Jamaica. The subtitle of the Post piece said: "An unconventional economist at Stanford, Donald J. Harris pushed strikingly nonideological economic solutions to the nation of his birth." Harris was (and still is, from what I can assume) a reasonable man, both as a scholar concerned with knowledge, and as a policy advisor. Nonideological being the key word.

The other one, that I reproduce in full, is by Professor Avinash Dixit, who says:

"You say that Mr Harris 'proposed that firms must choose from a 'book of blueprints', which need different capital goods' in his book published in 1978. Alas, that had been proposed more thoroughly and rigorously in 1953 in a brilliant paper by Edmond Malinvaud, for which he should have won a Nobel prize. And Robert Dorfman, Paul Samuelson, and yes, Robert Solow, whom you cite as author of the aggregate capital-growth model, covered it more comprehensively in a book from 1958. Perhaps the mathematics of all this were beyond the capacity of the so-called Marxists of Cambridge."

This, and The Economist piece itself, confirms the high degree of confusion about the meaning of the capital debates. The problem is not so much the lack of mathematical savvy of the Cambridge, UK, economists, Marxists or otherwise, but the lack of understanding of theory, by some very serious and important mainstream economists, and mainstream magazines (they do think they are a newspaper too, btw).

The Economist piece, commits the mistake that I suggested (see my old post on the Capital Controversies here) was typical of most incorrect views on the debates between the two Cambridges, and suggests, essentially, that it was an aggregation problem, and that:

"Mr Harris did not move on. In his 1978 book he developed a model of growth without an aggregate capital stock. Rather than the smooth 'production function' of Solow, in which the rate of saving and population growth determines capital per worker, Mr Harris instead proposed that firms must choose from a 'book of blueprints', which need different capital goods. Capitalists will compete to ensure the rate of profit is consistent across different industries, picking a blueprint based on the level of wages and profits in the economy."

That's why Dixit suggests that the choice of technique models in Malinvaud, and in Dorfman, Samuelson and Solow, using disaggregated notions of capital would avoid the circularity of the aggregative model. It is always the case that firms will choose, given distribution, the technique that minimizes costs. Of course, that's not the issue. The problem is that one cannot obtain a measure of capital that is independent of distribution, and hence, the idea that supply and demand in factor markets can determine the remuneration of capital and labor cannot stand. The classical concern with distributive conflict, both of Marx, but also of bourgeois economists, as he called them, Smith and Ricardo, becomes relevant again [meaning, if I need to clarify, the notion of conflict in the distribution arena was held both by critics of capitalism, and defenders of what Smith referred to as commercial societies].

Disaggregation does little to solve the problem. First, as noted by Garegnani, long ago, the abandonment of the notion of aggregate capital, and the notion of factors of production, came together with the view that means of production got their own rate of return, but also with the disappearance of the notion that the forces of competition lead to a normal and uniform rate of profit. The traditional long run method of economics, that was the theoretical foundation of the discipline, was abandoned. Further, it is still the case that, even with a disaggregated set of means of production, in the the aggregate, savings must be equalized to investment, and some process for that has to be used. That is why some notion of the quantity of capital was necessary for the mainstream [in recent times, mainstream economists and policy makers have started talking of the natural rate of interest again, a notion that had vanished more or less, and about very simplistic negative relations between investment and interest rates, w/o even knowing the logical problems associated with that, reinforcing problematic views about distribution].

In other words, forget the notion that firms actually face a book of blueprints, and that they can substitute and change the structure of production with relative ease, according to changes in relative prices, and that somehow that, by affecting the relative supply and demand for capital (many capital goods) and labor, would determine distribution, since that is obviously highly improbable in reality. Choices are more limited, and substitution irrelevant, at best. The Cambridge, UK, economists (and not only the Marxists; most were some kind of Post Keynesian, as The Economist notes) and Harris knew better. Distribution is determined by the relative bargaining power of workers and capitalists.

Samuelson knew enough, math and theory, to know when he was wrong. Mr. Dixit thinks his mathematical knowledge puts him above the rabble [the so-called Marxists of Cambridge, and Mr. Harris]. But what his letter [and the piece by The Economist] actually shows is lack of engagement with the theoretical argument, and, in contrast with Mr. Harris, an incredible amount of ideological bias. After all, the idea that distribution is according to effort, and that markets produce optimal outcomes is at play. It shouldn't be. He raised Malinvaud, I counter with Smith, which knew way less math than he does, for sure, but whose book is still worth reading.

Milei, Mankiw, and pagliarism in economics

I start teaching this week (tomorrow). One of the things we are encouraged to discuss with students is the issue of academic misconduct. One of those problems that always existed, and not just among students, and it is hard to say whether things are better or worse than before, even though everyone thinks it has worsened. Certainly AI has made things even more complicated. At least in my classes, AI has limited impact, since it is an average of what is out there, and that is conventional economics.

Economics, as a field, is also not particularly good, with fewer retractions than other fields. Carmen Reinhart and Ken Rogoff was never retracted, even though the mistake was acknowledged. More recently Francesca Gino and Dan Ariely were caught, essentially, fabricating data, and putting in doubt the whole sub-field of behavioral economics.

Over the last few years, and in particular since he was elected president, Milei's extensive plagiarism has been documented. In some of his books they even lie about his qualifications, saying he got a degree from the University of Buenos Aires (with high reputation in Argentina), and that he has a PhD from the University of California (not saying which one). Both untrue, of course. Now Noticias has uncovered further plagiarism, this time from Greg Mankiw's intro to microeconomics.

The examples above are copies, almost textual, of the Spanish version of text. The title of the book is at least original, Capitalism, Socialism and Democracy (no, just kidding, Capitalism, Socialism and the Neoclassical Trap; as all Austrians he confusedly thinks he is not neoclassical). At any rate, nothing surprising, besides the fact that Mankiw's publisher doesn't take action. Respect for property rights to attract investment, that is the basis, btw, of their theory. The jokes write themselves.

Pluralism & teaching in economics

My colleague and friend Geoff Schneider on teaching and pluralism in economics.  He was the director of the Teaching & Learning Center at Bucknell, when I arrived here, and I learned quite a bit from him. At any rate, worth watching it.

Challenges and Perspectives of International Monetary Policy

 

Carlos Pinkusfeld interviews Ramaa Vausdevan (Colorado State University) and Franklin Serrano (Federal University of Rio de Janeiro) to discuss the complex challenges of monetary policy in the international arena. Exploring issues such as financial globalization, the influence of large economies on the global monetary system, and the implications for developing countries, the experts offer important perspectives on the role of central banks and the effectiveness of monetary policies in the globalized economy. This is an essential debate for those who want to understand the direction of the world economy in a context of dynamic changes and growing uncertainty.

 

30 years of the Real Plan: Unoriginal Lessons from Latin American Stabilizations

 

Original thoughts

 

The 30 year anniversary of the stabilization plan that controlled high inflation in Brazil, the so-called Real Plan, just passed earlier in July. I wanted to write something about it, but it got buried with other things. Here just some very short reflections.

 

There was a huge coverage in the media and several new books and papers written about it, including by several of the actual participants of the stabilization plan. If I have to leave one impression beyond the problems of all the mythology making, and the self-congratulatory mood of the whole thing, is that most of the analysts, including the economists that designed the plan, unlearned what they knew back then. People start defending some ideas because they are convenient, and next thing they end up believing their own half-baked justifications. The book shown above by three central figures in the conception and management of the Real -- Gustavo Franco, who wrote a dissertation under Jeff Sachs, with Lance Taylor in the committee that is worth reading, Pedro Malan, who was a very reasonable macroeconomist concerned with balance of payments problems in the 1970s, with a thesis supervised by Albert Fishlow, and Edmar Bacha, perhaps mostly known for his Belindia paper with Lance Taylor -- is a disappointment, but not a surprise. It suggests stabilization was possible because of the fiscal adjustment, and (this is somewhat interesting given the current debates in Argentina, where everybody wants a Plan) because the Plan wasn't really a plan, in the sense that it had no surprise measures. They mean, there was no price freeze.

The book is composed of short newspaper pieces, some previously unpublished but similar in size and style, over the last 30 years. The more recent are more illuminating for obvious reasons. The diagnostic is essentially that stabilization followed a serous fiscal commitment, an independent central bank concerned with inflation, and a flexible exchange rate to solve the external problem. There is almost nothing about the URV (Unidade Real de Valor), based on the Larida proposal, which was the center piece of the plans way of dealing with the realignment of relative prices during the transition to the new currency (one of the main problems with price freezes). Prices kept changing in cruzeiros, the actual currency, but remained fixed in URVs, that had a daily exchange rate with the cruzeiro. Then the cruzeiro was eliminated and the URV became the real, with a stable exchange rate with the dollar, one might add. Perhaps the lack of discussion can be blamed on the fact that neither Pérsio Arida nor André Lara-Resende participate in the book.

However, in a recent piece on Piauí, Lara-Resende, the more controversial and less conventional, at least these days, of the Real Plan forefathers, although he does say that the URV is the Columbus' egg that allowed to eliminate the problem of inertia, but then goes on to say that:

"Inflation is the result of a long process of fiscal disorder, that mirrors social demands and political conflicts, that cannot be resolved by the established institutional channels" (my translation).

In other words, inflation is caused by too much social spending and fiscal imbalances. The conflict is not, apparently one about income distribution, in the face of an external problem (foreign debt back in the 1980s). There is no mention of the exchange rate, the external obligations or the amount of reserves held by the central bank necessary to service the foreign debt.

Of course what allowed for the stabilization was the change in capital flows in the 1990s, in part the result of the lower rates in the United States after the financial crash of 1987, and more so after the 1991 recession, together with the Brady renegotiation of the external debt, that Brazil signed in 1992. By 1994 the reserves were reasonably large as can be seen below.

Reserves were very low in the 1980s, and that was the main reason for the failure of the heterodox plans, not just in Brazil, but in many other countries like Argentina. In May 1993, when Fernando Henrique Cardoso became Finance Minister, reserves were at about US$ 23 billion, and by the time the real became the currency, and the exchange rate between the real and the dollar was stabilized, reserves had more or less doubled (one can see the erosion of them after the 1999 crisis, and all of that is dwarfed by the accumulation of reserves that started in the second Lula government). There is a brief comment on the round-table at the Catholic University in which someone said that Gustavo Franco was instrumental in trying to keep the exchange rate stable, but it is almost an after thought.

This is lack of understanding of what allowed for stabilization in the 1990s, and not in the 1980s (in the case of Israel the US provided a large transfer of reserves to their central bank; stabilization by invitation, one might call it), is generalized. Many papers trying to find some specific element of the stabilization plans miss the fact that everybody stabilized in the 1990s, once dollars started flowing to the periphery.

At any rate, many other problems with these papers, books, round-tables, on Lula, and his views, on what would allow for higher growth now, on why price stability has been maintained, and so on. But the ideas are mostly conventional, unoriginal, and for the most part incorrect. They provide less knowledge now than what they knew back then.