Distribution and Conflict Inflation in Brazil under Inflation Targeting

I can't watch this either

For those interested in the Brazilian situation I highly recommend the recently published paper by Franklin Serrano and Ricardo Summa (Review of Radical Political Economics page here). From the abstract:

In this paper, we analyze Brazilian inflation under the inflation-targeting system from a conflict inflation perspective and show how the inflation target system only worked well when there was a trend of exchange rate appreciation. Later, the strengthening of the bargaining power of workers and rising real wages since 2006, combined with continuous nominal exchange rate depreciation after mid-2011, increased distributive conflicts and are ultimately behind the recent shift toward austerity.

 A preliminary version is available here.

A Tale of Two Currency Crises: A Short Comment

So the Turkish foreign exchange crisis is all over the news. But the Argentine one is less conspicuous in the international media. Turkey's economy has had many similarities with Latin American economies over the years, in terms of the incomplete process of industrialization, and the types of crises associated with neoliberal reforms over the last three decades. Note, however, that the Argentine nominal depreciation has been larger than the Turkish (the same is true if you go back to the previous big crisis in both countries in the late 1990s and early 2000s, respectively) and one should expect more coverage (perhaps Erdogan has worse press than Macri, but the authoritarian credentials of the latter should not be dismissed; neither the neoliberal ones of the former, I might add).

In all fairness the NYTimes does cite Argentina (and other emerging markets; not a fan of the term, as I think I discussed before on a post about... wait for it... an external crisis in Argentina and Turkey four years ago) in the piece about it today, saying that:

"For nearly 10 years now, the flood of cash from global central banks has financed shopping malls in Istanbul, booming cities in China and 100-year bonds in Argentina. Today, many of the malls are empty, property developers in China are riddled with debt, and Argentina has just submitted to a bailout from the International Monetary Fund."

That seems to suggests that the reason for the crisis is to some extent that central banks created too much liquidity (printed too much money), allowing too much spending (perhaps by the government, wink, wink, nudge, nudge, say no more: it's a fiscal problem), and that's why we are having these problems. However, the NYTimes does get the external problem, the current account, which I always suggest is the way you should go if you are looking for fundamentals (here another discussion from 4 years ago on currency crisis, this one more theoretical). The NYTimes says:

"A country runs a current account deficit if it takes in more money — in investments and trade — from foreigners than it sends to other countries. That leaves the country at the mercy of international investors to keep it afloat financially, and those investors could find other markets more enticing — particularly when emerging markets see their currencies lose value. That is precisely what forced Argentina to go to the I.M.F., the first major emerging market to take such a step during this period of uncertainty."

However, as I noted on my earlier post on the Argentine situation, while I do think that current account positions are the relevant fundamental (the other would be international reserves) for a currency crisis (and that fiscal positions are the result not the cause of a crisis, since they are in domestic currency for the most part), it worth noting that the Turkish situation is not, at least looking at recent data, particularly bad.

Note that there is a secondary axis for the Turkish current account as a share of exports (the right hand side one), and that Turkey has a much larger deficit with respect to exports than Argentina, but not one that is deterioration drastically (these are based on IMF estimates, btw). This suggests that the current account, even though it is crucial in the long run, is probably not driving the crisis (as I noted in May, I still don't the current account is the cause of the crisis; same post as above, btw).

The fact that this is a global phenomenon (the depreciation of currencies of developing countries) suggests that the hike of the interest rate in the US plays a role. It seems also that the financial deregulation and the financial position of some developing countries explain why they are having more trouble than others (e.g. Brazil, which is in the middle of a serious economic and political crisis, but sitting on top of US$ 380 billion in reserves). I haven't found more recent data (this from the World Bank goes only to 2016), but the graph below shows the short-term debt to international reserves ratio; the reverse of the Guidotti-Greenspan rule).

Clearly the ratio has been growing in both countries (mildly in Turkey) and is higher in Argentina. Argentina has also increased its debt exposure in dollars, and somewhat incredibly the central bank has announced that it will retire debt in pesos, and will use precious reserves in dollars for that (apparently with support from the IMF). This suggests that they are clueless about the causes of the crisis. The only solution at this point is higher interest rates (and in domestic currency to reduce demand for dollars) and significant restrictions on the foreign exchange market.

Nancy MacLean on constitutional economics and the conservative movement

Author of a great book on James Buchanan, that is certainly worth reading. The whole thing is related to Buchanan's constitutional economics and how it underpins the Koch's strategy to take over the country (and Pence is their guy, btw). The American Legislative Exchange Council (ALEC) that has been so influential in the far- right conservative movement take over of US politics at the State and local level (see this old piece in The Atlantic, or this in The Nation) has a plan for a constitutional convention and for 10 Libertarian Amendments that she discusses in the video (towards the end, 3:30 minutes into it), that has for the most part gone unnoticed (NYTimes had a piece on it a couple of years ago here). In all fairness, I didn't pay much attention until she said balanced budget amendment. I always thought that the best shot conservatives had at entitlement reform (read privatization of social security) was with a neoliberal democrat as president (in the mold of Clinton and Obama). But it seems that they are pushing for other ways too.

PS: The book she refers to is by Mark Levin and the 11 amendments are these (according to Wikipedia, I haven't read the book, but will try to):

1. Impose Congressional term limits
2. Repeal the Seventeenth Amendment, returning the election of Senators to state legislatures;
3. Impose term limits for Supreme Court Justices and restrict judicial review;
4. Require a balanced budget and limit federal spending and taxation;
5. Define a deadline to file taxes (one day before the next federal election);
6. Subject federal departments and bureaucratic regulations to periodic reauthorization and review;
7. Create a more specific definition of the Commerce Clause;
8. Limit eminent domain powers;
9. Allow states to more easily amend the Constitution by bypassing Congress;
10. Create a process where two-thirds of the states can nullify federal laws;
11. Require photo ID to vote and limit early voting.

Institutions and Economic Development in Latin America

Almost a decade ago, The Economist had a cover story about the Brazilian economy taking off. Everything seemed fine, with the Brazilian economy on the verge of surpassing Britain and France, and on its way to economic development. Among the reasons given for the Brazilian success was the fact that the country had “established some strong political institutions.” But many other factors were cited, like fiscal restraint, an independent central bank, openness to foreign direct investment, and the rise of local transnational corporations. The Economist essentially reproduced a few of the policies of the so-called Washington Consensus as the main driver of the Brazilian success. And institutions played a central role, in particular the institutions that allowed for the market economy to thrive.

Read rest here.

PS: This was a short blog post for the UC Press and LASA blogs that I forgot to link to before.

Leo Panitch on Obama and Globalization

From the Real News Network:

This Real News segment with Professor Leo Panitch is worth watching for those that miss Obama (perhaps should be seen together with the reading of this piece on Mike Pence, for those that think that he would be much better than the orange one). At any rate, besides the fact that Obama was not even for more than a very moderate reform of the system, and that he still justifies globalization in neoliberal terms, it seems to me that Panitch (and Paul Jay) miss the main reference for Obama's speech (at least concerning the reduction in violence) which seems to be the work of Steven Pinker (his famous book on that was The Better Angels of Our Nature), and probably his new work, Enlightenment Now. And that says a lot about Obama intellectually.

It seems that Obama now embodies the famous phrase by Upton Sinclair according to which: "it is difficult to get a man to understand something, when his salary depends upon his not understanding it." Or his paid Wall Street gigs and fancy vacations with the global jet set.

Three Globalizations, Not Two: Rethinking the History and Economics of Trade and Globalization

 By Thomas Palley (Guest blogger)

The conventional wisdom is there have been two globalizations in the modern era. The first began around 1870 and ended in 1914. The second began in 1945 and is still underway. This paper challenges that view and argues there have been three globalizations, not two. The first half of the paper provides empirical evidence for the three globalizations hypothesis. The second half discusses its analytical implications. The Victorian first globalization and Keynesian era second globalization were driven by gains from trade, and those gains increased industrialized country real wages. The neoliberal third globalization has been driven by industrial reorganization motivated by distributional conflict. Trade theory does not explain the third globalization; capital’s share has increased at the expense of labor’s; and there can be no presumption of mutually beneficial country gains from the third globalization.

Read rest here.

Globalization Checkmated? Political and Geopolitical Contradictions Coming Home to Roost

By Thomas Palley (Guest blogger)

The deepening of economic globalization appears to have ground to a halt and the process may even unravel a little. The sudden stop has surprised economists, whose belief in globalization has strong parallels with Fukuyama’s (1989) flawed end of history hypothesis. The paper presents a simple analytic model that shows how economic globalization has triggered political and geopolitical contradictions. For the system to work, politics within countries and geopolitics across blocs must be supportive of the system. That is missing. The model is applied to a global economic core consisting of the US, China, and the European Union. It is revealing of multiple tensions, fracture lines, and contradictions. Within the US, globalization has delivered economic outcomes that have estranged the electoral bases of both major political parties. It has also delivered outcomes that are inconsistent with the US neocon geopolitical inclination. President Trump is a product of those forces, and he will likely prove to be a historically significant figure. That is because he has surfaced geopolitical contradictions that cannot be swept back under the rug. Ironically, his biggest impact may be on the European Union, particularly Germany, which is being compelled to recognize the neocon nature of the US and the vulnerabilities of dependence on US exports and technology. China was already aware of its vulnerabilities in those regards.

Read rest here.

What is the Central Bank of Argentina Actually Doing?

Brief note in Spanish (no translation, sorry) on the long history of central banks and the current policies of the Argentinean central bank (BCRA). The gist of the argument is that while central banks where created to finance developmental states in the nascent merchant capitalist societies, in the periphery they tended to follow the Victorian model (implemented later) emphasizing inflation control as the main official goal. However, often, as in the recent case of the BCRA, they are used to accelerate inflation and fuel speculation, if that allows for lower real wages, which was Macri's administration not so hidden goal (from an old, but revealing interview).

IMF Programs: Past and Present

A roundtable with Daniela Gabor, Roberto Lampa and Pablo Bortz, on the IMF and its Programs this Thursday in Buenos Aires, organized by the Masters in Economic Development at the Universidad de San Martín (UNSAM).

A crisis gone to waste

My interview with INET from January 2017 at the ASSA meetings in Chicago. From the INET link:

After the Great Depression, global capitalism underwent serious reform. Why didn’t that happen after 2008?

Matias Vernengo, Professor of Economics at Bucknell University, explains how a crisis can reveal that the dominant neoliberal orthodoxy is in fact based on a shaky theoretical foundation. But for new economic thinkers to capitalize on that requires a clearly articulated alternative—one that existed during the Cold War, but is just coming into public discourse now.

Classical Political Economy and the Evolution of Central Banks

Casa di San Giorgio, an early central bank?

Paper presented twice is now published in the RRPE. It tries to bring the surplus approach tradition ideas to discuss the historical origins and the definition of what a central bank is and should do.

From the abstract:

The paper analyzes briefly the changing ideas on the role of money and banks from William Petty to Thomas Tooke, including the works of Adam Smith, David Ricardo, and Karl Marx. It analyzes the role of ideas in shaping the evolution of central bank regulation. Particular importance is given to the Bank of England’s inconvertibility period, from 1797 to 1821, and the ensuing debate in shaping Robert Peel’s Bank Act of 1844, which is often seen as the birth of modern central banking. The importance of the Say’s Law, and the inexistence of an alternative theory of the determination of output, is shown to play an essential role in the policy prescriptions of the so-called Bullionist authors, who won the debates that shaped central banking practices in the nineteenth century. The paper concludes with a brief analysis of what is a central bank according to the dominant (marginalist) mainstream of the profession, and what an alternative conception based on what may be termed classical-Keynesian political economy would be.

Full paper available here. 

At the Rick Smith Show on the Economy and the Exit from the WTO

I suggested my posts on Free Trade during the show. Here a series of posts that might be helpful.

Path Dependency and Football

So now that we are to the round of 16, I think my reply to Sanjay Reddy's question can be evaluated. Note that from the 16, 5 are from Latin America (Argentina, Brazil, Colombia, Mexico, and Uruguay), one from Asia (Japan) and 10 from Europe (Belgium, Croatia, Denmark, England, France, Portugal, Russia, Spain, Sweden, and Switzerland). Of those 6 have already won a World Cup (Argentina, Brazil, England, France, Spain and Uruguay) and 1 played at least a final (Sweden, lost against Brazil in 1958). Note that no countries from the Middle East or Africa passed the initial phase.

There is a good chance that the winner will be a previous champion. I wouldn't discount the possibility of a new champion, but in that case the likelihood is that it would be another European team (my bets would be on Portugal if CR7 plays incredibly for te rest of the tournament, or Russia being at home). Probably less likely, a Latin American one could also win (if Mexico plays like it did with Germany). But the best bet would be a previous champion.

Path dependency is really strong, and that suggests that games have been close not because the skills are more or less the same, but because it's relatively easy to play a defensive game and make it very hard for the good teams to move forward.

Why Manufacturing Still Matters

I've been reading in the spare time (not as much as I would like, and worse with the World Cup) Louis Uchitelle's Making It: Why Manufacturing Still Matters. I tend to agree with the general idea of the book and with many of the policy conclusions, even though I have some problems with minor points (for another post). As a result of this I went to check manufacturing output. There are many different statistics to check in the FRED database. Below a measure of industrial output.

And yes, it is below the peak from the previous recession. We were talking about this with Tom Palley, and it is clear to me that this statistics played an important role in the rise of left (Bernie) and right-wing (Trump) populism in the US. The failure of the Obama recovery to lift manufacturing, not just jobs, but output too is central to any political economy story about the last election.

Raúl Prebisch: Peripheral Development

Our book is out (in Spanish). You can buy it here. We have written a few papers in English if you are interested available here, and here, for example. my review of Dosman's biography is available here.

Football (soccer) and Capitalism

Not The Economist's field of expertise

The World Cup is about to start. The Economist has run a piece suggesting that "the World Cup [is] the fulfillment of some of our most cherished values." And yes the cherished values are essentially free trade, the raison d'être for the creation of the magazine (that has a problem of self-image and refers to itself as a newspaper), and more generally laissez-faire capitalism, of which the publication is one of the most important cheerleaders.

There are many of these, pardon the directness, garbage pieces that suggest that football (soccer for the gringos) explains the working of capitalism (see, for example, this popular book). And, yes, the most obvious explanation for the confusion is that football does not explain the market or globalization, or how the world works, or any other way of expressing modern capitalism. It's the other way round, capitalism explains football.

In the magazine's view, the reasons for why football explains economic success is that it is somewhat like a decentralized market, and provides, like an invisible hand, when not curtailed by State intervention, one would guess, for the best to win. A no less Darwinian (or Spencerian) survival of the fittest than often advocated for economies. In their words:

Football can also teach countries how to spot and hone human capital. The best performers not only have systems for finding gifted children, but also ways of spotting late developers who failed to make the first cut. Their academies turn out intelligent, creative players rather than dribbling automatons. Then, if they are clever, they drop their best footballers into a competitive market.

The idea is that in places where there are free market like mechanisms to find the best players you end up with the best teams that go on to win the World Cup. There are too many problems with this view, both with the view of how the economy and capitalism work, but also about football. I will tackle just a few.

Think about the notion that markets select the winners, which are the best players, as an analogy of markets selecting the best firms, the best economic practices. Development is just a question of open and free (unregulated) markets. Yet, the actual record for that is thin at best. It is well known now that even the English experience that led to the Industrial Revolution (IR) in the 19th century was far from being a laissez-faire story. Not only the boom was related to a huge increase in the size of public debt, and the financing of a vast Fiscal-Military State, but also the size of the bureaucracy increased significantly.

"British bureaucracy doubled in size during the 18th century. At the beginning of the century, state employees were estimated at 12,000, a number that had grown to 16,267 by 1797, and 24,598 by 1815," according to Roger Morriss. In other words, the state size doubled during the IR. Markets themselves require a significant amount of regulation. And here the example used by Ha-Joon Chang regarding child labor is always illustrative. Note that during the IR children were exploited working long hours in inhuman conditions (Hamilton suggested in his Report on Manufactures the positive effects of factories, since they would put idle children and women to work). Eventually, after a lot of social pressure (Marx and Engel's Manifesto demands the abolition of child labor) the freedom of firms to hire free willing children was curtailed. Markets are by definition a set of norms and regulations, and the very notion of a completely unregulated market is a bit of a ruse.

Now let's think about football. What country has won the most, you ask. Brazil, with 5 wins in 1958, 1962, 1970, 1994 and 2002, and 2 final losses in 1950 and 1998. Note that Brazil is not a developed country. Nor the US, or Sweden (advanced economies, even if very disimilar in many ways) have ever won a (male) World Cup. The link between development, and the quality of the football played is not particularly strong. Also, I might add, World Cups are tournaments, with elimination games, subjected to chance and luck, and not championships in which every team plays against the other, and the winner is the one that won more points overall. Hungary in 1954, the Netherlands in 1974, Brazil in 1982, and Argentina in 2014 (that's my view, some might have different candidates) were, arguably, the best teams, but did not win the World Cup.

The Economist tries to suggest that authoritarian regimes, with more closed societies, and one would assume markets, would do worse in the World Cup. They do say that "dictatorships are rubbish at football." And they note that Argentina in 1978, under General Videla, was the last time a country ruled by a dictatorship has won. The list should also include Italy in 1934 and 1938 under Mussolini, and Brazil in 1970 under General Medici. The argument is a bit hollow. Brazil, again, has won with both dictatorships and democratic governments (and so did Argentina in 1986 with Maradona and the return of democracy, which sadly doesn't win games). In all fairness, football has nothing to say about capitalism or why nations fail (or not).

The development of capitalism, on the other hand, does say quite a bit about football. Football, or the rules set by the British in Victorian times, that have changed little, I might add, emerged during the first era of globalization. The game spread with the spread of English manufacturing products, and the trade routes. Teams often appeared in ports, like Boca and River in Buenos Aires, or Santos in Brazil. Also, the elites in developing countries copied not only the patterns of consumption of the wealthy in developed economies, but also their hobbies, and football spread to the posh clubs of developing countries. In that high class environment, black players were often discriminated. In Rio de Janeiro followers of Fluminense still are referred to as 'pó de arroz' (baby powder), since players of African descent tried to camouflage the color of their skin to be able to play (Vasco da Gama was the first team to field black players, in the 1920s).

Football developed in places connected by trade with the British, and where patterns of consumption were being imitated, which explains why some parts of Latin America were early developers. Arguably, in many parts of Asia and Africa, income levels were too low for the patterns of consumption of the British upper classes to spread. Or in the United States the patterns of consumption followed their own trajectories, since at this point, the US was becoming the center of global consumption and imposing its own patterns of consumption on the globe. Accident, and history play a role. But it says a lot that the American version of football did not take off as the British one, meaning that institutions are path-dependent. By the way, that path-dependency also explains why more or less the same national teams keep winning. Tradition is a very strong predictor of who would win the cup. Kids don't play football (soccer) in the US, since their sports icons are in other fields.

By the 1920s football started to professionalize, and the markets, cherished by The Economist, for ball players became relevant. The professionalization of sports started in the 1920s, but the crisis of of capitalism in the 1930s, reduced the impetus of free market forces. Teams were not all powerful, and given the structure of clubs in many countries, football was not yet a business like the others. The backlash against capitalism meant that sports, and football were used by nationalist and populist (mostly right wing) regimes to promote national pride. Hitler, that was invested in the success of the Olympic Games in Berlin in 1936, wanted to win the World Cup in France in 1938, but Mussolini's Italy thwarted his plans.

It is with the end of World War II and the victory of the allies, and the with the rise of American hegemony, that football slowly becomes a business like any other. The fundamental impulse for the changes came after the collapse of Bretton Woods, and the Neoliberal turn in the global economy. Increasing market integration and financial deregulation, facilitated the rise of modern football. Clubs became business, with the rise of the European super leagues, imitating the US market. Note that this is the period of the rise of American football (with the creation of the Super Bowl in 1967) and the professionalization of tennis (the 1970s). Even the US tried to develop a market in the 1970s, with Pelé joining the New York Cosmos.

Players were bought and sold in markets, and still are. In the early times, rarely a player would become even moderately wealthy. Several players that would put to shame even the great of these days ended in poverty (Mané Garrincha comes to mind). Very few players are unionized, and most of them do not make the huge amounts of a Messi or a Neymar. Not only, free markets are not a solution for the wealth of nations, but the free market model for football has been detrimental for players and for the sport. Something similar could be said about other sports (I'm thinking about the NBA finals, and the overwhelming dominance of the Warriors). At any rate, The Economist should stick closer to their field of expertise.

PS: I'll probably blog a bit more about football during the World Cup.

Financialization in Latin America

New book edited by Martín Abeles, Esteban Pérez Caldentey and Sebastían Valdecantos. From the description:
The chapters in the book analyze the logic and effects of financialization in developing economies, peripheral financialization so to speak, in particular in Latin America. The first chapters look at the topic from a historical and conceptual angles, and then the latter chapters concentrate on specific manifestations like the influence of financialization on productive investment, spending on Research and Development (R&D), the characteristics of Foreign Direct Investment (FDI), monetary policy management, and the composition of foreign debt. The variety of approaches utilized in this volume reflect ECLAC's historical preoccupation of analyzing the condition that would make possible a macroeconomics at the service of economic development.

Venezuela is about to explode

A leftist candidate won a close election in a South American country, threatening US interests in the region. The US president asked the CIA to "make the economy scream" to undermine governance and bring regime change, even if by violent means.

I am referring, of course, to Salvador Allende's election in Chile, and Richard Nixon's reaction, which eventually led to Augusto Pinochet's coup, one of the most bloody in the troubled history of the region.

The reelection of Nicolas Maduro last Sunday has led to the denunciation of the election in the US, with Vice President Mike Pence calling the elections "a sham", and suggesting the imposition of more economic sanctions.

Read rest here.

Lula da Silva is a political prisoner. Free Lula!

Three hundred academics and public intellectuals joined to launch a manifesto denouncing the detention of the former Brazilian president and current Presidential candidate Lula da Silva. The petition discusses in detail the arbitrary nature of the trial conducted by Judge Sergio Moro against Lula da Silva, stating that he is nothing less than a political prisoner. The document asserts that the international community should treat him as such and demands his immediate release.

Read more here (your truly signed too).

Integration, spurious convergence, and financial fragility: a post-Keynesian interpretation of the Spanish crisis

Here is to another crisis like this one!

Paper co-authored with Esteban Pérez that was a Levy Institute working paper is published. From the abstract:

The Spanish crisis is generally portrayed as resulting from excessive spending
by households associated to a housing bubble and/or an excessive welfare spending beyond
the economic possibilities of the country. We put forward a different hypothesis. We argue
that the Spanish crisis resulted, in the main, from a widening deficit position in the non-
financial corporate sector and a declining trend in profitability under a regime of financial
liberalization and loose and unregulated lending practices.

Full paper available here.

On the URPE Blog - The Video Edition

Pedagogy and Heterodox Economics
This round-table discusses a range of topics on teaching heterodox economics, including MMT.

The Dynamics of Capitalism: Money and Financialization
Greta Krippner – The Power of Abstraction: Marx on Money and Credit
Aaron Sahr – From Pen Strokes to Keystrokes: the Production of Money in Early and Contemporary Capitalism

Michael Löwy: Marxism and Romantic Anticapitalism
Michael Löwy is Emeritus Research Director at the CNRS (French National Center for Scientific Research) Lecturer, École des Hautes Études en Sciences Sociales.

Immanuel Wallerstein: The Contemporary Relevance of Marx
Immanuel Wallerstein – Marx’s Capital ​after 150 Years: Critique and Alternative to Capitalism (York University, Canada)

Richard D. Wolff: Linking Trump and Marx’s Critique of Capitalism
Richard D. Wolff Professor of Economics Emeritus, University of Massachusetts, Amherst, and currently a Visiting Professor in the Graduate Program in International Affairs of the New School in New York.

Yanis Varoufakis: Is Capitalism Devouring Democracy?
Economist and fierce EU critic Yanis Varoufakis considers the need for a radically new way of thinking about the economy, finance and capitalism.

Das Kapital after 150 years – a lecture by Riccardo Bellofiore
Riccardo Bellofiore is professor of Political Economy at the University of Bergamo (Italy), where he teaches Macroeconomics, Monetary Economics, History of Economic thought and International Monetary Economics.

Robert Paul Wolff on Karl Marx – Lecture Series
A series of lectures by Robert Paul Wolff on the thought of Karl Marx:

Nancy Fraser: Marx and Feminism
Nancy Fraser on Marx’ and Engels’ view of social reproduction, the tension between class, gender, and race, and the need for a “Feminism for the 99%”.

Capitalism and the Expropriation of Nature: The Strategic Discourse of Ecosocialism
John Bellamy Foster on nature, capitalism, Marx, and the discourse of Ecosocialism.

Fernando Cardim de Carvalho - RIP

Fernando, Cardim for most in Brazil, and Carvalho in the US and abroad, has sadly passed away. I took his macro class back in 1992 at the Federal University in Rio, before he actually moved there definitely as full professor two years later. We used his book Mr. Keynes and the Post Keynesians (still somewhere here in my bookshelf) as a textbook, even though most of the course was based on several papers.

From that period I remember reading his papers on time and expectations, which were two of his main concerns within post-Keynesian economics. Although much of his course was theoretical, most of his later work seemed to be related to the workings of international financial institutions, and real world macro issues. He wrote extensively, and there are papers on the role of the IMF, and critiques of the idea of central bank independence, besides discussions of the Brazilian economy. My favorite paper is based on his discussion of Keynes' political views, and to what extent his policy proposals can be seen as close to social democracy. A great loss for the profession, for his students, and for his friends.

Top Blogs

No 'On the Blogs' section last Sunday (was traveling) and slow to react to events (at a pedagogy seminar for a couple of days, learning about teaching techniques). At any rate, the good news is that Naked Keynesianism has been featured in the Intelligent Economist's Top 100 Economics Blogs of 2018. According to them they have "made an effort to create a well-balanced list which contains blogs of all kinds political affiliations, schools of economic thought, and beliefs, in particular by focusing on smaller blogs and female economists." Pluralism does work, after all.

A brief comment on the Argentinian Crisis

This was faster than even I expected (for my views on what Macri meant as soon as he was elected see this and for a more recent assessment go to this post). Let me first say that I don't think is quite like the 2001/02 crisis. It is unlikely that there will be a default anytime soon. The level of reserves is at about US$ 56 billion, and the IMF is happy to finance the very Neoliberal government of Macri (because the IMF has changed a lot, remember?).

The economy with Macri has not performed very well, as expected. Inflation has remained high, since the depreciation of the peso has persisted, and that was no accident. It allowed to erode real wages, which I noted from the beginning was part of their goals. Also, the rate of growth has been lackluster, and if the IMF is to be believed real GDP growth in his first two years was on average at around 0.5 percent. Again, I don't think that has been a central concern (even if they suggest the opposite). Note that again a relatively low rate of growth (as per Okun's Law) leads to slow job growth (formal unemployment is above Cristina Kirchner), and less wages pressures. In Argentina, economic policy is truly geared towards containing wage resistance, when you get a Neoliberal administration.

Macri's policies are essentially the same as the Neoliberal policies of Menem (and his finance minister Domingo Cavallo, who is back, and defending Macri), minus the fixed exchange rate system. The notion was that a flexible exchange rate with inflation targeting would basically provide the same price stability as Convertibility in the 1990s, without the balance of payments problems that led to the 2001-02 debacle. Btw, this idea that one could use either a very rigid or a very flexible exchange rate regime (but nothing in between, and certainly not capital controls) was really the exchange rate policy of the Washington Consensus and was made famous by Stan Fischer as the Bipolar Consensus.*

So Macri liberalized the foreign exchange market, further liberalized imports, in crucial sectors where there was a significant repressed consumption by the middle and upper classes, like electronics, and that led to a significant increase in imports, not matched by increases in exports (even with the depreciation of the peso; as it turns the depreciation of the currency is inflationary, and by reducing real wages, contractionary, but it does not increase exports by a lot, which depend on foreigners incomes for the most part; who could have foreseen such an effect!), and they resort to foreign borrowing to close the gap. Again using IMF numbers, that are estimated for 2017 (and I should note and not very reliable since inflation data is also not very good. A bit enervating given how much the opposition to the Kirchners complained about the quality of inflation data, and the notion that would not happen with them) we get the following picture for the current account (CA).

Clearly the external situation has worsened significantly. Don't get me wrong, I don't think the recent run on the peso has been caused directly by the CA position. This is more like the long term problem. If you liberalize imports, and the patterns of consumption are such that imports explode, but your pattern of specialization is the production of commodities, and you solve this by borrowing in foreign currency, it cannot end up very well. And it won't. Btw, yes I did say back in 2016 that foreign debt driven growth was dangerous and eventually unsustainable at the time that Moody's was upgrading Argentina. So what caused the recent run on the peso, you ask. Not sure, to be frank.

The Fed in the US has been signaling higher rates (and they went up a bit), and that causes trouble for sure. And the Macri team, which has some from the Menem/de la Rúa Neoliberal Era (like Sturzenegger at the Central Bank), is not very competent (not sure why FT thinks they are pragmatic and in between the Neoliberals of Menem and the 'heterodox' of the Kirchners), and kept interest rate really low (for distributive reasons alluded above) allowing for depreciation. At any rate, the turbulence might be temporary, but the issue is not, and Argentina is headed for more problems.

* On this John Williamson, and his views on competitive exchange rates, did not reflect well what the consensus in Washington (meaning the IMF, World Bank and the US Treasury) really thought.

PS: If you read Spanish, you must check this short piece by Fabián Amico and Mariano de Miguel (h/t Edurado Crespo). Best I've read so far.

PS2: Forgot this one by Claudio Scaletta in Página/12, also worth reading, as everything Claudio writes.

Peter Nolan on China's Development and relation with the West

A bit old, from 2016, but not too old, and very apropos given the recent heightened trade disputes between the United States and China.

On the Blogs -- The Video Edition

Political Economy of World Systems (PEWS) Conference 2018

Steve Keen on Alternative Foundations for Macroeconomics -- Lord Keynes posted a video by Steve Keen

Bill Mitchell on the failure of economics -- Lars Syll linked to a lecture by Bill Mitchell

Life and Thought - Immanuel Wallerstein -- Jan Milch sent me the link to this video about Immanuel Wallerstein (both of us depicted above in the recent PEWS conference)

Corporate Debt in Latin America and its Macroeconomic Implications

New paper by Esteban Pérez and co-authors published by the Levy Institute. From the abstract:

This paper provides an empirical analysis of nonfinancial corporate debt in six large Latin American countries (Argentina, Brazil, Chile, Colombia, Mexico, and Peru), distinguishing between bond-issuing and non-bond-issuing firms, and assessing the debt’s macroeconomic implications. The paper uses a sample of 2,241 firms listed on the stock markets of their respective countries, comprising 34 sectors of economic activity for the period 2009–16. On the basis of liquidity, leverage, and profitability indicators, it shows that bond-issuing firms are in a worse financial position relative to non-bond-issuing firms. Using Minsky’s hedge/speculative/Ponzi taxonomy for financial fragility, we argue that there is a larger share of firms that are in a speculative or Ponzi position relative to the hedge category. Also, the share of hedge bond-issuing firms declines over time. Finally, the paper presents the results of estimating a nonlinear threshold econometric model, which demonstrates that beyond a leverage threshold, firms’ investment contracts while they increase their liquidity positions. This has important macroeconomic implications, since the listed and, in particular, bond-issuing firms (which tend to operate under high leverage levels) represent a significant share of assets and investment. This finding could account, in part, for the retrenchment in investment that the sample of countries included in the paper have experienced in the period under study and highlights the need to incorporate the international bond market in analyses of monetary transmission mechanisms.

Read full paper here. 

The end of neoliberalism?

A while ago I promised to return to this topic and discuss Mirowski's reply in the INET debate to my comment on his paper. And yes it's been quite a while since that debate. At any rate, I was at the Political Economy of World Systems (PEWS) conference last weekend, and we had some time to discuss Wallerstein (with him, I'm glad to say), his views on the structural crisis of capitalism. And someone (can recall who did) said something to the effect that the collapse of the economy in 2008 and the events after that (particularly the European situation with Brexit and the rise of right wing populism) suggest that the Neoliberal era is over (that was the title of a subsection of a chapter in David Harvey now classic book on Neoliberalism).

So let me tackle that issue, captured beautifully in Blyth's tweet above (mind you mark might have been talking just about Neoliberalism in the US, as Cornel West did here), and in the process make the two brief comments I wanted to add on Mirowski. And to make sure, I don't think the era of Neoliberalism is over, in the US or globally. In fact, in many places Neoliberalism is resurgent (certainly in Latin America; I'll have something to say on Argentina soon).

The first issue, before one can discuss whether it ended or not, is what it was. Mirowski says that neoliberals are not just or fundamentally neoclassical, libertarian, classical liberals, or conservatives, and that they have, to some extent, created the confusion. That is in a sense the negative definition of Neoliberalism.

On a more positive sense, he argues that the role of the market is clearly central for Neoliberalism. Mirowski says:

"... neoliberal doctrine instead set out actively to dismantle those aspects of society which might resist the purported inexorable logic of the catallaxy, and to reshape it in the market’s image. For neoliberals, freedom and the market would be treated as identical. Their rallying cry was to remove the foundation of liberty from natural rights or tradition, and reposition it upon an entirely novel theory concerning what a market was, or should be."

In his view, Neoliberalism is a movement, and not simply a set of ideas (like for example, Keynesian macroeconomics or classical political economics). And again, I must emphasize that I do agree with him, that it is a movement that revolves around the Mont Pèlerin Society (MPS). He refers to the group as the Neoliberal Thought Collective (NTC). A scientific community in the same mold of Thomas Kuhn's normal scientists. Harvey, in the above mentioned book, argues that it is a movement whose goal is to reestablish the power of capital, and disembed capital from the welfare costs imposed during the Keynesian consensus era. And certainly that seems to be the glue of the group.

However, in his response to my comment, Mirowski suggests that I commit a mistake in suggesting that Neoliberalism is subsumed in (a subset of neoclassical economics). And of course, in a certain way, if you think of a movement, it would seem that I had it indeed incorrectly and that neoclassical might be part of the Neoliberal group, but many Neoliberals are not.

However, while it is true that in that sense Neoliberalism is broader than neoclassical economics, since its scope is wider, and less of school of thought than an ideological movement, it is also true that as a movement Neoliberalism must substantiate its arguments on the basis of a set of ideas (as Keynes dixit, ideas govern the world, not vested interests).

Neoliberalism could be seen as an ideological movement to promote the vested interested of capital, after the significant reforms of the Keynesian consensus, a Polanyian counter veiling movement created by the success of the expansion of the welfare state in advanced western economies. But it was an ideology built on the notion that markets provide the only organizing principle in society, an idea that is probably associated to Hayek and his Austrian School. Note that while Hayek, in particular after the intellectual defeat in the 1930s in his debates with the Cambridge Keynesians, turned to political philosophy as his main preoccupation, his economic views remained essentially unreconstructed.

Even though there are methodological differences between the Austrian version of marginalism and the Chicago School, to suggest as Mirowski does, that Hayek, and other Austrian scholars were not neoclassical is difficult since both are founded on the idea that relative prices depend on supply and demand.  All Neoliberals fall back into some form the mainstream marginalist story in which equilibrium prices are determined by supply and demand, including the prices of labor and capital, and that includes Hayek and Austrians. The market is the totemic myth that provides overall coherence to the movement, and an aura of scientific rigor to the policy proposals. Each clan would have their own version of the myth, so to speak, with the more common being the Arrow-Debreu General Equilibrium (GE) model, and the Austrians emphasizing the self-organizing principles of the market. In that sense, neoclassical economics is the theoretical foundation for all versions of Neoliberalism, whether Neoliberals understand it or not (some Austrians believe they are not neoclassical, but their confusion should not cloud our understanding of facts).

The second issue has to do with Mirowski's argument that “the real key to understanding modern economics is the absorption of the central tenet of markets as superior information processors within the heartland of cutting-edge microeconomics.” In fact, neither Hayek’s argument for the spontaneous, self-organizing nature of the market, nor the retreat to the validity and generality of the Arrow-Debreu GE model, both providing a flimsy response to the internal critiques of the marginalist model, were able to provide a simple policy relevant model. It was only the policy relevance of the Friedmanite simple macroeconomic model that created the conditions for the NTC to promote the economic policies that reversed the Keynesian consensus, not just theoretically, but in the real world of economic policy. That is, the return of the idea of the natural rate, even after being discredited by the capital debates (something I referred to as the return of vulgar economics).

Back to the end of Neoliberalism, now that one may understand my argument of why neoclassical economics is at the core of the movement. Almost a year and a half into the Trump experiment, what we got is a lot of rhetoric on protection, immigration and so on, but the only concrete thing is a tax cut for the wealthy. That Trump would not really be a populist was evident by his choice of Pence, a Koch financed career politician, as vice-president. Neoliberalism has survived the greatest financial crisis since the Depression, and is doing fine in both the GOP and the Democratic Party. The notion that it is dying because there is some push back and it is contested in some quarters is wishful thinking. Trump just provides a different flavor of the same.

Note that there is no serious change in the profession about the way we think, and neoclassical economics is doing just fine. I have been skeptical about the notion of changes in the profession after the crisis (and of the IMF policies too). The reason, the underlying theoretical reason, for the persistence of Neoliberalism in economic policy can be seen in the reluctance to abandon Milton Friedman's natural rate of unemployment concept by self-depicted (New) Keynesian authors.