Thursday, October 22, 2020

Tom Palley on What's wrong with Modern Money Theory

In the new issue of the Review of Keynesian Economics. From the abstract:

The essential claim of Modern Money Theory (MMT) is sovereign currency issuing governments, with flexible exchange rates and without foreign currency debt, are financially unconstrained. This paper analyses the macroeconomic arguments behind that claim and shows they are suspect. MMT underestimates the economic costs and exaggerates the capabilities of deficit-financed fiscal policy. Those analytic shortcomings render it poor economics. However, MMT's claim that sovereign governments are financially unconstrained is proving a popular political polemic. That is because current distressed economic conditions have generated political resistance to fiscal austerity, and MMT fits the moment by countering the neoliberal polemic that government lacks fiscal space because it is akin to a household.

Read rest here

Friday, September 25, 2020

Production of Commodities at 60

Video of the conference, without the long part before it starts that was on the Review of Keynesian Economics Facebook page.

At any rate,the three presentations by professors Serrano, Palumbo and Nell.

Tuesday, August 25, 2020

Reflections after a Post Keynesian Workshop

Jessica Finnamore (Guest blogger)

Heterodox economics refers to any school of thought which is not accepted by the economic mainstream, or neoclassical economics. Post-Keynesian economics is a heterodox school of thought which believes (amongst other things) in high levels of government intervention, fundamental uncertainty, and that the economy is demand-driven rather than supply-constrained (as neoclassical economics says). Keynes himself was concerned with creating theories which were realistic and was even willing to reject theories he had previously supported if empirical evidence disproved them.

Some Post-Keynesian ideas have been adopted into the mainstream; following the 2008 financial crisis, the mainstream had little to no explanation for what had caused the housing market crash and so they adopted the post-Keynesian idea of speculative bubbles, a phrase which is now frequent in mainstream literature. Post-Keynesian ideas are also relevant in the current pandemic, with the UK government pursuing expansionary fiscal policy such as furlough payments to stimulate the economy, something which Keynes believed in strongly.

Fortunately, I have a module on schools of thought in economics at my university (the University of Leeds), which explores heterodox ideas including post-Keynesianism, feminist economics, Austrian economics and Marxism, as well as discussing why pluralism is important in economics. However, I had already been studying economics for 2 years at school before I got to university, and we had never been taught that the graphs and theories we were learning came from mainstream economics. We were never shown the issues of neoclassical economics such as its failure to apply to the real world and the vast oversimplifications of its models. Furthermore, even at university, we have just one module on heterodox economics and the rest of the modules have a clear undertone of neoclassical theory.

Personally, I was driven to search for heterodox alternatives because I began to realise how unrealistic mainstream economics is and that means that neoclassical economics has led to many (if not all) of the issues in our society such as inequality and environmental damage. Heterodox schools such as post-Keynesianism are concerned with creating more realistic models and I believe this is where we have a greater need for pluralism in economics.

Sunday, August 23, 2020

Reflections after a Post Keynesian Workshop

Nicole L. Kormann da Silva (Guest Blogger)

I am from Brazil and I did my bachelor’s degree at Universidade Federal de Santa Catarina. I would say the course there can be relatively multidisciplinary and open to alternative approaches, but macroeconomics was mainly restricted to conventional textbooks and it was only during other classes like Political Economics and Economic Development of Brazil that some insights came across my mind: it was possible – and in fact there was already a structured body of work on it – to perceive economics from another starting point.

For me heterodox economics is a pluralist umbrella under which, among other schools, you find Post-Keynesian economics – PKE. I would say heterodox economics give us the possibility to rethink economics in a more realist term and grasp the intricacies that shape our society and the relations necessary for the reproduction of people and the system. PKE has its origins on the work of Keynes and Kalecki and understands that  e follow a historical trajectory permeated by things that cannot be calculated, and are affected by fundamental uncertainty.

The main contributions of PKE in my opinion lay on its very fundamental aspects. They break with the economicism of the mainstream, that reduces economics to a technical matter, making clear that the macroeconomics is not the sum of decisions made by rational agents. PKE permit us to comprehend that there are different roles to private and public agents and we cannot treat them as equals, in particular when it comes to their ability to expand demand and eliminate unemployment. Besides, economics is permeated by class struggle and distributive conflict. This leads us also to a political dimension, like Kalecki make clear: full-employment might be constraint not for lack of theoretical knowledge, but by political interest. Lastly, preferences for liquidity enter the system and the principle of effective demand tells us that just by a great coincidence demand matches supply with full employment of resources. This has important implications for policy-making.

Celso Furtado – a Brazilian economist – once told in a graduation speech: “The greater the responsibility of men of thought the more intense is the process of transformation of the society in which they live”. He was talking with the economic students of 1959 of Universidade de Minas Gerais, but I believe it applies to all those who decide to follow the field. So that is more or less what brought me to study PKE. I was questioning myself “how can you really change something looking at it through a framework that does not represent it?” To build solid economic knowledge and from it derive policies and the path for development I would have to understand how the real world functions and acquire the tools to work within it.

World-Systems Analysis in a Critical Juncture

The 44th Annual Conference on the Political Economy of the World-System takes place during a critical juncture for both the field of world-systems analysis and for the world-system itself. The first four sessions of the conference bring together papers that reconstruct the theoretical and methodological lineages of world-systems analysis by recuperating neglected foundational texts and by putting the world-systems perspective into dialogue with other critical approaches in the social sciences. The next four sessions deploy tools provided by a world-systems perspective to analyze the multiple intertwined social, political, and economic challenges of the current juncture, illuminating the global crisis and unfolding systemic chaos.

For registration and the program go here.

Saturday, August 22, 2020

Reflections after the Post Keynesian Economics Workshop

By Santiago Graña Colella (Guest blogger)

During my bachelor’s degree, I have little access to heterodox literature. What is worst, in most subjects, it was explained that the economy works in a particular fashion everywhere and every time, but without stating that this way was one interpretation of the economy, particularly the neoclassical interpretation. Consequently, most students do not know many alternatives to the economic theory thought to them and after five years (in Latin America) end up thinking that the economy works as in a neoclassical world and that any attempts of applying alternative economic policy it is following an ideological foundation. In this sense, I think it is important to promote heterodox ideas, because it allows critical students to know which schools of thought that are different from the neoclassical school. The problem, however, is having access to heterodox papers and having heterodox teachers within the courses taken. Personally, only in the last years of my bachelor, I had access to some heterodox courses, but this was the exception.

While the division between orthodox and heterodox is somehow necessary it is difficult to select a criterion to define each group. Some authors like Lavoie (2014) derive their classification from the value theory each school considers and sociological features. Other authors like Vernengo prefer to take a more theoretical definition separating strands by the assumptions or mechanisms consider in each school. Finally, mainly among student organizations, there is a more instrumental definition where orthodox is associated orthodox to models and mathematics and heterodox to more social approaches. It is understandable that, after years of neoclassical indoctrination, with models and maximization functions as main tools, critical student movements end up being against the utilization of these tools. However, this last definition is somehow flawed since some heterodox schools such as the post-Keynesian and some part of Marxist school use mathematics and, some orthodox authors, such as the Austrian, reject the use of mathematics.

I believe that heterodox economy should englobe schools which consider that, in the current economic system, there is a group (women, workers, poor people, developing countries) which cannot achieve another group (men, capitalist, reach people, developed countries) better position due to intrinsic mechanisms of the system and therefore, the state intervention is needed to overcome this situation. Differently, orthodox believe, that despite some failures that should be fixed, the intrinsic mechanism of the economic system leads to an optimal outcome and that state intervention will only be needed exceptionally.

Particularly, the post-Keynesian school is part of the heterodox group since has systematically mentioned the most distinctive features of capitalism and pointed out policies that could be applied by the state to overcome it. I believe that one of the main contributions of the post-Keynesian approach was disarming the neoclassical theory showing fundamental flaws in its analysis such as the one raised in the capital controversy. Furthermore, the post-Keynesian approach has evolved from their criticisms to the neoclassical school constructing logic and solid models that explain the economic process based on more realistic assumptions. However, there seems to be room for further development. Post-Keynesian has focused mainly on traditional macroeconomics issues like growth, distribution, and inflation without deeply analyzing the complexity of some other phenomena related to them such as poverty and the social dimension of development. Besides, other issues such as gender and environment are assessed with the same old perspective. For instance, some post-Keynesian papers regarding gender have tried to answer which is the effect of the gender gap on long-term growth, abstracting from the complexities that the gender issue has. However, these limitations can also be understood as opportunities for further developments.

Personally, after taking a mostly neoclassical bachelor, I decided to continue studying post-Keynesian economics because, despite a personal preference for macroeconomics and development topics, I considered that its economic theory always follows strong logical procedures and it is based in solid assumptions achieving, consequently, satisfactory policies recommendations. Furthermore, the post-Keynesian community has a lot of different strands that always raise interesting discussion within this school. Finally, as a general criticism of all heterodox schools, there is very little debate among them, which is needed to present a more solid discussion to the neoclassical hegemony.

Mainstream Economics/Sold Out?

I recently taught a short workshop (online) on Post Keynesian Economics (PKE) for Summer Academy for Pluralist Economics. I basically discussed the definitions of heterodox and Post Keynesian economics, and some critical issues in the theory of output, employment, money and inflation, and income distribution and growth. Students were from several countries, backgrounds, disciplinary fields and stages in their academic careers (from undergraduates to PhD candidates). I will post some brief reactions from a few students on their views on PKE and how they got interested in it, which I think might be of interest, since many have told me over the years that this blog was the only source they had on heterodox economics.

Tuesday, August 11, 2020

Friedman vs. Wicksell

Slowly, but steadily the Wicksellian concept of a natural, normal or neutral rate of interest is making a come back and becoming more relevant and cited than Friedman's natural rate of unemployment and its awkward twin the Non Accelerating Inflation Rate of Unemployment (NAIRU).

Note that up to Friedman's infamous presidential address the normal rate dominated the field. But in all fairness, even thought it has lost space it seems that Friedman's natural rate of unemployment has a lot of inertia, and might be with us for a while.

Friday, July 31, 2020

Wednesday, July 22, 2020

60 Years of Sraffa's PCMC: Watch the whole seminar here

Ed Nell, who shared his signed copy of PCMC
The whole Zoominar can be watched at the Review of Keynesian Economics' (ROKE) Facebook page here. It starts early with the live-stream, you can jump to minute 49 or so and watch from the onward.

Autonomous demand, capacity utilization, and the supermultiplier

New issue of ROKE is out. Check out the free papers by Serrano, Summa and Garrido Moreira, and by Fiebiger, beyond the intro by Summa and Freitas.

Tuesday, July 21, 2020

60 Years of Sraffa's Production of Commodities by Means of Commodities/ROKE Webinar

Tomorrow we will talk about this book that is the Rosetta Stone of the history of economic ideas (read post 6 below for more on that). I'm happy to have a great panel to discuss it. In the meantime below 7 previous posts on Sraffa's contributions to economics, which might be helpful for some.
  1. Sraffa and the Marshallian System
  2. Sraffa, Marx and the Labor Theory of Value (LTV)
  3. Sraffa, Ricardo and Marx
  4. The Standard Commodity and the LTV
  5. The Capital Debates
  6. Microfoundations of Macroeconomics and the Capital Debates
  7. Free Trade and the Capital Debates

Wednesday, July 15, 2020

Argentina: Past Industrialization Problems and Perspectives (in Portuguese)

Interview with Fausto Oliveira, economic journalist that produces the channel Brazilian Industrial Revolution. For those interested in the process of economic development and its relation to the process of industrialization in the periphery (and speak Portuguese) I highly recommend it.

Thursday, July 9, 2020

Webinar on COVID and the Argentinean situation (in Spanish)

For those interested, I suggest listening only to Amico's talk if you already heard a version of my COVID talk.

Thursday, June 25, 2020

Policies for Prosperity

The webinar on Policies for Prosperity organized by LP Rochon, and with Tom Ferguson, Mario Seccareccia, and Anna Maria Variato. There was some glitchy at the beginning and Tom's talk was not recorded. Mine starts in minute 29.

Wednesday, June 24, 2020

Power and dominance in the Colonial and Post-colonial times

By Sunanda Sen (guest blogger)

The recent uprising and protests, in a large number of the White-settled countries in connection with the murder of an unarmed Black-American, George Floyd by a White policeman on duty in Minneapolis has re-opened pages of history relating to unequal power , with state- sanction of White supremacy over ‘others’ having a subordinate status. As history unfolds it, the over-powered included the slaves acquired from Africa, the indentured labour shipped from tropical Asia, while colonies like India providing the flow of unpaid ‘drain’ of surpluses from taxes collected within. The pattern of racial dominance seems to have continued , even today, in the incapacitated George Floyd’s choking to death.

One observes the vehement reactions to the murder on part of the present generation, both Whites and the non-Whites, mostly from Northern America and Britain. This comes not only with the claim that ‘Black Lives Matter’ but with questionings of repressive policies in the past, with oppression of the African slave community in US and elsewhere, and of labour from the tropics. The anger reflects itself in massive protests by the youth in different corners of USA as well as in Canada, followed by the overthrown statues in UK. The dismantling include the statue of Edward Colson in Bristol , the Deputy Governor of the then Royal African Company which had the monopoly in England, from 1662, of trade in precious metals and slaves along the west coast of Africa. Colson. organised transport of 84000 Africans to different parts of the world as slaves. Well- connected to the ruling elite including the Royalty, Colson made a fortune while leaving a mark in Bristol in terms of various buildings which continue to bear his name today.

Protests in England, spread beyond Bristol to Oxford and London, has not been just targeting the symbolic presence of the colonial era in statues of leading statesmen and wealthy traders of Britain in years of Britain’s global supremacy. The voices bring to the fore the need for a re-read of colonial history - the modality of the colonial past engineered by statesmen like Robert Clive, Cecil Rhodes and even Winston Churchill - rewarded for the successful handling of colonial matters. While this may mean further academic research on issues relating to Colonialism , the anti-racist messages, hopefully, will also help in arresting the adversities faced by sections of society identified as the ‘other’ by the White community.

Digging up the historical records of oppression, one recalls , in US, the African slaves in the background of the Civil War, and the Colonial past for the British Empire, details of which may help in excavating further details of the mode of persecution. One comes across the loot of the taxed revenue from Colonial India by Britain, the ruling nation , all in the pretext of meeting the so-called ‘Home charges ’ to meet overseas expenditure.As pointed by Indian nationalists like Dadabhai Naoroji the tribute paid could be characterized as a Drain of resources! One also needs to reckon ,in a similar context, the oligarchy between the Secretary of State for India in London and British silver merchants who collided to keep out Bombay silver traders and banker like Chunilal Saraya from silver trade as needed for coinage in India. Similar instances of coercion, malpractices and misappropriation abound in the history of British domination in Colonial India.

Parallel to the drain of resources which consisted of the unpaid transfers of revenue from colonial India, there ran a parallel drain from India, which was the flow of indentured labour. Those were shipped to the British owned plantation islands in Mauritius, Demerera ( now Guyana) and Jamaica , to work in sub-human conditions , and to fulfil the commercial interests of the British elite owning such estates. The flow was much needed in the plantations as slavery was banned all over the British Empire by an Act passed in the British Parliament in 1938. Incidentally, the legislation, advanced by the slavery abolition lobby in England, was also motivated by their interest in achieving efficiency by having a ‘ free market’ of labour . However, the abotion of slavery, followed by other forms of deploying labour, was far from delivering a free labour market. As for planters, the easiest way to keep the former slaves attached to the estates was to have them as apprentices over a short period. It was virtually a forced scheme of four to six years for the former slaves above age six and a half , thus in effect a form of compensation to the planters. Moreover, the emancipated slaves were forced to provide 40½ hours a week of unpaid labor to their former masters over the six years of apprenticeship. The scheme ended by 1838, largely with reluctance of ex-slaves to continue as plantation workers .

By this time indenturing of labour from India started almost immediately with a fresh stream of involuntary workforce procured from there. Given the arduousness of the work and the sub subsistence wages the planters were ready to pay, it soon became apparent that it was only those who were too poor to pay their own passage to the islands would accept such employment . Thus the planters' targeted the denser populations of Asia which included those in the poverty and famine-stricken India. “Importation of East Indian Coolies", as pointed out by the Royal Commission of Labor ( 1892), “did much to rescue the sugar industry from bankruptcy”.

Details are available on the miserable state those workers faced in the distant islands, having been recruited with no knowledge of the destination or the terms of the make-believe contract. On reaching the workplace, their movements were under strict control with penalties including the whipping by cat-o-nine tails to inflict severe punishments. On the whole, the flow of the recruited Indians as above signified a parallel process of drain from the subcontinent, of people often ‘ignorant’ of the destination or the life waiting there.

Voyages to carry labour were organised ,among others, by the well connected Liverpool merchant, John Gladstone, familiar with the earlier slave trade. Owning estates in plantations and a shipping company he was responsible for initiating shipments of indentured labour from India by using the contact of Gillanders, Arbuthnot and Company in India with a request for the “… supply of 100 young, active, able-bodied” laborers on contract for his estates.” That he was powerful enough to stall a temporary ban on such shipping was evident with his success in persuading Robert Peel. British administration was very much supportive of the indenturing project which helped both investments on those estates by rich people in London City and the mercantile trade in processing raw sugar from there.

Power, based on proximity to ruling authorities, has been responsible for using race as a tool for subordination. This is evident in the continuing pattern of oppression, from the colonial era down to the current episodes of brutality in the most advanced regions . Refusal and disapprovals, on part of the current generation, to accept the past, will hopefully help to shape a future which conforms to humanity.

Friday, June 19, 2020

Di Bucchianico on Krugman and the Liquidity Trap

New paper on the problems of Krugman and the Liquidity Trap argument (some will be able to download if for free, and I recommend this version; however, there is a previous working paper linked at the bottom for those unable to open).

From the abstract:
Krugman’s ‘liquidity trap’ model constituted a ground-breaking contribution by attributing the long-lasting Japanese stagnation to a negative natural interest rate. Our critique to such a proposal will focus on three aspects. First, we will question the logical structure of the model, providing an alternative interpretation of its closure and arguing that aggregate demand has no crucial role in it. Second, we will argue that a negative natural interest rate can emerge only after a series of overtly restrictive assumptions in a model that does not treat capital and avoids long-run equilibrium analysis. Finally, we will discuss the mainstream literature which followed up until the recent rediscovery of the Secular Stagnation Theory. Within that line of literature, the key features of the ‘liquidity trap’ model continue to occupy a prominent role, thereby letting the critical issues that have been singled out resurface. Our conclusion is that the ‘liquidity trap’ explanation did not provide a satisfying rationale for Japan’s stagnation and cannot describe later economic predicaments either. A comparison with Post-Keynesian models shows their ability to offer insightful policy prescriptions without relying on those shaky theoretical foundations.
Note that an important part of the argument is the critique of the natural rate of interest, something we have done extensively over many years in this blog, and of the notion of a negative one in the context of Summers' discussion of secular stagnation (also done in this blog; see for example here and more recently here in the context of a debate with Stephanie Kelton and MMTers; btw her book is out and anybody wanting to reviewed it for ROKE send me an email; I look forward to reading it too).

The important thing in the paper is that it goes beyond the capital debates critique, and shows the extra restrictions needed for Krugman to get his results, including some interesting thoughts on the problems associated with intertemporal models.

PS: ROKE will soon publish a paper by Serrano, Summa and Garrido Moreira (Fall issue) in which other limitations of the negative natural rate are explored.

PS': Link to working paper here.

Tuesday, June 16, 2020

Policies for Prosperity: from COVID-depression to Sustainable Growth

With Tom Ferguson, Mario Seccareccia, and Anna-Maria Variato, organized by L-P. Rochon. Next Monday on a computer near you.

Monday, June 15, 2020

Summer (Winter down in Argentina) School on Advanced Topics in Heterodox Economics

The whole program here. In Spanish. The opening table with Martín Abeles and I, Monday, July 27th at 10am (Buenos Aires time; 9am, EST). Instructors include: Pablo Bortz, Ariel Dvoskin, Germán Feldman, Manuel Gonzalo, Roberto Lampa, Pablo Lavarello, Andrés Lazzarini, Marga Olivera, Veronica Robert, Sebastián Valdecantos, and Nicolás Zeolla. It's a great opportunity!

Friday, June 5, 2020

Course on the Argentinean Economy in Portuguese

For those interested in the Argentinean economy, and that can understand Portuguese, I'm teaching a virtual course on the Rise and Fall of Argentina with my friend Paulo Gala. Some teasers are available here. Below the first class.

Btw, my suggestion is that basically there's no fall, if the economy never rose in the first place.

Wednesday, May 27, 2020

The Political Economy of the COVID-19 Crisis in Latin America

Following my talk on the same topic, on the same venue, now someone that might know a bit more about what's going on, particularly in Brazil. Professor Mazat will talk this Friday, and I highly recommend it. To register go here. Btw, Numa is Professor of Development Economics in the Institute of Economics at Federal University of Rio de Janeiro, my alma matter.

Friday, May 22, 2020

Debt default or negotiated solution?

An Argentinean default is neither new, nor a surprise, perhaps, even for a casual observer of the ups and downs of international bond markets. One may want to follow Oscar Wilde’s Victorian governess advice and omit the chapter on the fall of the peso as being ‘too sensational.’ But an Argentinean default now, after the Great Shutdown provoked by the coronavirus pandemic, would be the harbinger of a generalized sovereign debt crisis for emerging markets that would engulf the global economy, and make the recovery slower and more painful, including in the United States and other advanced economies. It may also undermine the US position in the global economy.
The Argentinean government’s debt restructuring proposal to the private creditors expired Friday, May 8th, with a limited number of adherents. In particular, large institutional investors did not accept the terms offered by Martín Guzmán, the finance minister, which would have implied a cut of about sixty percent of the principal, and a moratorium on payments for three years. This proposal, one might add, was for the most part designed before the coronavirus crisis, and the collapse of the global economy. The main preoccupation of the proposal was to put the external debt of the country on a sustainable basis, meaning in line with its ability to pay, which depends on its exports, the only secure source of dollars.

Black Rock, Fidelity, PIMCO and other investment funds that hold enough of Argentinean debt to preclude any rescheduling, want a cut of around forty percent, and have enough influence to hold out for a better deal (this guy here says Black Rock is the fourth branch of government). Since Argentina did not make a payment of interest of approximately US$ 500 million in April 22nd, today the country could be officially in default (grace period expires today, even if government extended negotiations). In the absence of a negotiated solution with the main bondholders the default is inevitable. The impasse is established, and the question is how can the stalemate be broken. Only the U.S. government holds the key for a negotiated solution.

The International Monetary Fund (IMF), the United States government, and other international creditor groups like the Club of Paris have been unusually supportive of Argentina. The IMF that had lent US$44 billion to Argentina between 2018 and 2019, has openly argued that the Argentinean debt is unsustainable, providing support for the rescheduling proposal. The U.S. government that has been a harsh critic of center left governments in the region, has had good rapport with the new government of Alberto Fernández, and his vice-president, the ex-president Cristina Fernández de Kirchner, with whom relations were considerably less friendly in the past.

As Jagdish Bhagwati famously implied with the notion of a Treasury-IMF-Wall-Street complex, the connections between the financial sector, the United States government and the multilateral organizations run deep. The current Treasury Secretary, Steve Mnuchin, as it is well-known, worked at Goldman Sachs, and he is the last of a long list of Wall Street connected government officials. Only the United States would have the clout to influence bondholders to come to the table with a reasonable counter offer. This would be of interest not only to Argentina, and its creditors, since a default would lead to years of litigious disputes that would only be sorted out by the courts, but for the United States and its global standing in the midst of the pandemic.

The collapse of international trade and of the price of commodities, the disappearance of remittances and revenues from tourism, coupled with the normal flight to safety will put other developing economies, that were not on the verge of collapse like Argentina, on unsustainable paths too. Most of these debts are denominated in dollars. The exorbitant privilege associated to the international position of the dollar comes with some requirements, as Charles Kindleberger famously noted. It requires acting as a global lender of last resort, providing counter-cyclical demand in times of distress. The U.S. is already doing some of these, with the Fed offering swap lines for central banks of a few countries, but it has blocked other initiatives like the expansion of the IMF’s Special Drawing Rights. Certainly not enough, and debatable whether it is enough even for domestic purposes (let alone other problems noted here, like the notion that the federal government would allow subnational units to go bankrupt)

Even more important in the context of the pandemic, particularly for the U.S. global standing, would be to allow countries that are indebted in dollars to default. These countries need the international reserve currency for the importation of essential medical equipment and pharmaceutical goods. The crisis has, if anything strengthened the position of the dollar in the short run, but there are dangers.

A financial crisis in the middle of a pandemic could have enormous human consequences, and it could also create the conditions for an eventual reduced role for the dollar. The pandemic has exacerbated the dispute between the United States and China, and the latter has already expanded its global lending in renminbi for years. It is also trying to provide medical support for affected countries in the region, to reduce criticism about its role in the pandemic, and now has stepped in to provide medical support. Argentina too has received medical equipment from China. If the U.S. is perceived as unresponsive, it is not inconceivable that China, if it follows a more generous credit policy, could be favored by the crisis.

The best possible outcome would be a negotiated solution, which would probably fall somewhere in between the Argentinean government offer and what would make the big institutional investors not loose money in the short term. Somewhere between a forty and a sixty percent haircut. That would allow the Argentinean government to deal with what really matters, the pandemic, and perhaps expand its spending without fear of external consequences. The U.S. Treasury and the IMF should back more vocally such a solution. Time is running out.

Wednesday, May 6, 2020

On the Argentinean debt renegotiation (in Spanish)

My interview on with María Iglesia and Cecília Camarano for the program Reperfiladas (in Spanish, obviously) on the Argentinean debt restructuring.

Restructuring Argentina’s Private Debt is Essential


Argentina's creditors are being asked to accept a proposal that would reduce their revenue stream but make it sustainable. A responsible resolution will set a positive precedent, not only for Argentina, but for the international financial system as a whole.

Read rest and list of signatures here.

Thursday, April 30, 2020

Some brief thoughts on the Great Shutdown

First GDP numbers of the Great Shutdown were out yesterday. As it can be seen in the graph, GDP shrunk by about 4.8%. The data reflects only the first weeks of the stay at home lockdown of the economy in March, as the BEA report points out. Numbers will get considerably worse.
You must add to this the increase in unemployment insurance claims, which since the crisis started has gone up by more than 26 million, as reported by the Labor Department. Note that the unemployment rate is still at 4.4% and that it would take a while for numbers to reflect the collapse in jobs. Also, the series are measured in different ways, so many that lost their jobs, and filed for benefits (and might not even have received them) will not look for jobs (what would be the point), and, as a result would not count as unemployed. Expect the participation rate to fall. At any rate, the true unemployment rate as we speak, 26 plus another 5 million or so unemployed before the crisis, would be closer to about 19%. This is a crisis of biblical proportions.

But that is not my main concern. There are many ways in which fiscal and monetary policy could mitigate the worst effects of the crisis. The problem for me is that almost nobody is talking about the size of the effort that would be required for the economy to get out of this deep hole. Imagine that unemployment does get to something like almost a third of the labor force, as suggested by some Fed officials.

I've been playing around with some scenarios. This is not forecasting, which I don't consider a particular useful approach. This scenario is based on very simple assumptions using a simple Keynesian (yes, as in Keynesian cross) model, and some simple stock-flow accounting definitions, even though I don't have a fully consistent accounting model (on that and Godley and stock-flow models see this old post). I also assume certain parameters and sizes of shocks (even though I played with different numbers; on Godley and his view of the role of parameter estimation and model architecture see this other old post). Other than the simple multiplier (in this scenario of 1.2) and Okun's Law (3:1 ratio in this case), there are only assumptions about autonomous spending (government in this case, with some assumptions for this year at least informed by current events), and my concerns are essentially about what those mean in terms of the political economy of fiscal policy.
So, in my scenario output falls by about 8% next year, and recovery starts immediately, but GDP only surpasses the previous level in 2022/23, in the third year of the crisis. That's with a lot of fiscal stimulus, by the way. And in part the result of that is that the debt-to-GDP ratio goes to, in this scenario, about 180%, after 9 years (I had others with considerably more). Japanese levels of debt. I see no problem, but not everybody agrees, and, of course, that's the problem. Since the social forces that push for austerity are still around.
The scenario also implies that unemployment spikes (less than the number I gave above; so I guess a lot of discouraged workers and disguised unemployment), and it takes almost a decade to come down to reasonable numbers.

As with Godley, my interest in this is NOT to make predictions. I have no clue if this is going to happen or not (most likely not). My point is that in all my scenarios, huge fiscal stimulus was followed by moderate stimulus (not austerity*), and yet in all the debt-to-GDP ratio would go considerably up. It shouldn't be a surprise. In a crisis with a collapse in demand, that destroys jobs and income, and that workers and corporations are heavily indebted, it is unavoidable that the federal government would be required to pick up the tab, run higher deficits, and accumulate debt.

But are we prepared for that scenario? Republicans already called for less government, less taxes, and reduction in all types of spending (particular social spending, which is frankly nuts in the context of a pandemic). More surprisingly, Mitch McConnell seems to want States and municipalities to go bankrupt, that is, not do the normal thing in federations, which is to make the only entity with ability to borrow in its own currency to borrow (at zero rates really) and transfer resources. He basically wants the US to look more like Europe, and not the more social spending part, but the absence of a federal fiscal pact part. That's dangerous. And a Biden presidency (oh man, this hurts!), if it happens (consider the alternative; is it too early for a beer?), would have to deal with that and discussions about the debt ceiling (am I glad a grabbed a beer?). Oh well.

* In my scenarios, austerity makes things worse, making the recovery slower, and tax revenue growth too, btw.

PS: The other post on Godley's approach to macro modeling here.

Tuesday, April 28, 2020

Das Adam Smith problem

A short lecture on Adam Smith's problem for a Principles class. This might be of more general interest, and perhaps something to watch during the quarantine. The book I used for the lectures on history of economic ideas was Heinz Kurz's Economic Thought: A Brief History, a book that I highly recommend. The discussion here is heavily influenced by Tony Aspromourgos' book The science of wealth: Adam Smith and the framing of political economy, another one you should read if you have the opportunity.

Tom Palley on What's wrong with Modern Money Theory

In the new issue of the Review of Keynesian Economics. From the abstract: The essential claim of Modern Money Theory (MMT) is sovereign curr...