Friday, July 22, 2016

Trump, Hillary and Free Trade

So, besides the nativist, xenophobic, and racist appeals to the darker side of American society, Trump speech was all about trade, and its effects on the working class. That is clearly the strategy for November, and Hillary is, for obvious reasons, weak on that subject. I don't think Trump even thinks Bernie supporters would vote for him, but his appeal to them last night was for them not to vote for Hillary.

Trade matters, even if Trump has no clue why. As, I have explained several times (go here, here or here for the basics of the theory, here  for a brief discussion of the loss of political support for Free Trade Agreements, FTAs) free trade is a bit of a misnomer. Nobody is for purely free trade or complete protectionism. The real discussion is about managed trade, and for what purposes one should manage it. While most economists agree that trade should be managed for phytosanitary rules and defenses purposes, there is unwillingness to accept that the quality of employment and real wages matter too.

Trade matters, because what one country produces matters. Complex products with higher value added are more likely to lead to the incremental innovations that are behind the wealth of nations. Trade agreements that ossify the production structure in sectors with low levels of technological dynamism lead to lower growth, and employment. In the US, certainly, since the entry of China in the WTO there has been a significant collapse of manufacturing jobs (see discussion here), which has not implied lack of technological dynamism per se, but has had a significant impact on the old manufacturing belt, which happens to affect many swing states in this election.

That is why it would be a huge (yuge, really) mistake if Hillary chooses Tim Kaine over Sherrod Brown as a running mate. Both are senators from swing states, but only Brown would be credible as a critic of FTAs. Don't get me wrong. I don't think that if she chooses Sherrod Brown her positions on trade could be trusted blindly (see here, for example; Obama too was critical of FTAs before he was elected). But it would send a signal that the constituency (mostly related to labor) within the party that would want a less pro-business approach to trade would have a voice in the White House (btw, I wouldn't trust Trump's views on trade; given his proposals on taxes, his administration would be the most pro-business since Calvin Coolidge).

Thursday, July 21, 2016

The Gospel of Co-operative Capitalism: Acolytes and Apostates

Bill McColloch published a new PERI Working Paper, which deals with the same issues, in a very different way, raised in the last chapter of his dissertation. From the abstract:
The present paper seeks to locate the Bhaduri-Marglin (B-M) model as an historical outcome of the Left's internal disputes over the prospects for social democracy. In better  contextualizing the B-M model as a historical response to the perceived political economic failings of the social compromises upon which the growth of post-War advanced capitalist economies had rested, both the model’s popularity and its potential limitations can more easily be understood. Though the B-M framework has frequently come to be referred to as the neo- or post-Kaleckian growth model, such labels perhaps obscure the model's diverse ancestry. The model constituted an attempt to reconcile seemingly incompatible theoretical perspectives, and to highlight those special conditions that made possible a ‘Golden Age’ of social democracy. Moreover, they sought to show that the conclusions of Keynesian social democrats and of radical Marxists could be viewed as two possible outcomes of the same broadly Keynesian theoretical framework in which investment played a leading role. While this synthesis has fostered a vast literature and useful dialogue, it is argued that it should, nevertheless, be seen as the outcome of a generation Left social scientists that had become deeply skeptical of the possibility of egalitarian redistribution under capitalism, and of the political ambitions of Keynesian and social democratic parties.
The paper explains to some extent the political economy of the rise of the profit-led models within radical economics.

Wednesday, July 20, 2016

Minsky's financial instability hypothesis

From Boom, Bust, Boom. Not the best explanation, but accessible. In this version is all about confidence, which is not particularly heterodox. Btw, slow posting will continue until mid-August.

Thursday, July 14, 2016

On the possibility of a recession, again

So the yield curve is really flat, not inverted, but really flat, and that has many  (or here) afraid of an impending recession. The fear is basically associated to the inverted yield curve (see below: when the blue line is above the red and green lines, there is an inverted yield curve, with a high short rate and lower longer rates, signaling a recession) which is really flat, and the danger that the Fed will rise the rate in the next meeting in a few weeks.
Yield Curve (click to enlarge)
Blanchard, cited in one of the WSJ pieces above, thinks that the Fed might be forced to hike interest rates, since the economy, presumably is close to the natural rate, that is, to full employment and inflation is a danger. Note that Blanchard is suggesting that the 2% target should be upheld, even though he was against this when he was at the IMF.

I think this is misguided on many levels. On the theoretical front the reliance on the natural rate is problematic, of course. The notion that we are close to full employment is doubtful to say the least, given that participation rate has not recovered much at all since the last recession. Real wages have not grown that much either, and with lower commodity prices the risk of higher inflation (if one is concerned not just with core inflation) is not particularly high. The FOMC should leave the short run rate unchanged. But that is not enough. The Eccles mantra should be repeated more often. Monetary policy is like pushing on a string, in a situation like this one. We need fiscal stimulus.

Financing vs. Spending Unions: How To Remedy The Euro Zone’s Original Sin

By Thomas Palley

In economic policy, timing isn't everything, it's the only thing. The euro zone crisis has been evolving for over seven years, making it difficult to time policy proposals. Now, the shock of Brexit has created a definitive political opportunity for reforming rather than patching the euro. With that in mind, I would like to revive an earlier mistimed proposal for a euro zone "financing union." The proposal contrasts with others that emphasize "spending unions." But first some preliminaries.

Read full text here.

Tuesday, July 12, 2016

Rental assistance and social hardships

Austerity hurts in many ways. Here is a way in which social spending has profound social effects in the long run. From a recent report from the Center on Budget and Policy Priorities: "Rental assistance sharply reduces homelessness, housing instability, poverty, and other hardships. A growing body of research also finds that rental assistance can improve families’ health, as well as children’s chances of long-term success, particularly if it enables families to live in safe, low-poverty neighborhoods with good schools." The graph below shows one of the many long term effects.
Children that move to better neighborhoods, with better schools, end up having better academic performance, and more chances of higher earnings in the future. That we do not spend more money into this kind of social policies is incomprehensible. Yeah, we need to build a wall, that's the solution to make America great again!

Monday, July 11, 2016

Archives and the history of economic ideas

For the archives, of course

As it maybe be painfully clear by now, posts will remain relatively sparse during the rest of the summer break. I recently attended the History of Economics Society (HES) meetings at Duke University, as I noted here. I attended less sessions that I would have liked, but it was enough to confirm the increasing emphasis that has been accorded to archival research. That is, probably, the result that now, slightly more than a 100 years since the professionalization of economics, there are enough archives of dead economists. One can think of Sraffa's edition and reinterpretation of Ricardo's works as the seminal archival work in the history of economic ideas.

Archival research has been more common in economic history, and more often than not as a source for quantitative data, at least within the Cliometric tradition that dominates the mainstream. I should add that I think that archival research is certainly relevant, and both on my work on Marriner Eccles and Raúl Prebisch (in the latter case based on some unpublished manuscripts at Economic Commission for Latin America and the Caribbean in Santiago, accessed by Esteban Pérez) I have done some. I have published recently an unpublished review of Keynes' General Theory, by Lauchlin Currie, and advisor to Eccles, and a letter from Gerhard Colm to John Maurice Clark, based on archival research done by co-author Luca Fiorito.

But the use of archives can certainly be abused. It may be simply a way to finding either precursors to modern ideas, or what are often seen as mistakes in the process of finding the accepted theory. My feeling, and I certainly might be wrong, is that the general discussion at the HES meeting tends to emphasize the supposedly linear process of development of ideas, from early versions of modern thinking to the present. In this case, archival research is only about the mistakes and insights of early writers.

In this interpretation of the history of ideas, the distinction between early classical political economists and marginalist (or neoclassical) authors is for the most part lost. The slow process by which marginalism took over the eclectic post-classical (post-Ricardian) paradigm is also not understood. The rise to dominance of neoclassical (mainstream) economics took place in the United States, surprisingly in a sense, with the Keynesian Revolution and the rise of the so-called neoclassical synthesis. Before that the profession in the US was more eclectic, with Institutionalists, influenced by the German Historical School, being more prominent. At any rate, a more pluralistic view of the profession would suggest that archives are relevant because they also provide a window on relevant ideas that have been forgotten and discarded (not necessarily for logical problems or lack of evidence) after the rise of marginalism.

Wednesday, July 6, 2016

Betrayed Again: TPP’s Unconvincing Economic and National Security Arguments

By Tom Palley

Voters of all stripes have recognized the Trans-Pacific Partnership (TPP) as another betrayal of working people, and they have resoundingly rejected it. Despite that, President Obama continues to push it, to the extent of possibly seeking passage in a “lame duck” session of Congress.

President Obama’s pushing of the TPP is recklessly irresponsible politics that benefits Donald Trump who is the outsider candidate. Hillary Clinton is the insider who has touted her links to President Obama, and she still lacks credibility regarding her TPP opposition because of her past endorsement.

In the current dangerous political climate there is no room for error. Yet, that is what we have. Clinton has refused to condemn the TPP in the Democratic Party platform, setting herself up for Trump. Not only does she risk handing the issue to Trump, giving him the economic high-ground, she also sets herself up as “crooked Hillary”. She was for the TPP, then she was against it, and now she is for it again? That plays into voters’ worst assessment of her character.

As for President Obama, he must be made to realize that every time he pushes the TPP, he might as well be campaigning for Donald Trump.

Read rest here.

Friday, July 1, 2016

The Puerto Rican crisis in one graph

I published a while ago a link to a piece by Argeo Quiñones and Ian Seda on the situation in Puerto Rico. Below a graph of GDP (in constant prices).

Clearly the economy started to collapsed in 2007, more or less with the US recession. The difference is that there has been no recovery in Puerto Rico. Not surprisingly there is talk about Prexit (an exit from the US; even though the entry was incomplete and subordinate).

Thursday, June 30, 2016

Why Negative Interest Rate Policy (NIRP) is Ineffective and Dangerous

By Thomas Palley

NIRP is quickly becoming a consensus policy within the economics establishment. This paper argues that consensus is dangerously wrong, resting on flawed theory and flawed policy assessment. Regarding theory, NIRP draws on fallacious pre-Keynesian economic logic that asserts interest rate adjustment can ensure full employment. That fallacious logic has been augmented by ZLB economics which claims times of severe demand shortage may require negative interest rates, which policy must deliver since the market cannot. Regarding policy assessment, NIRP turns a blind eye to the possibility that negative interest rates may reduce AD, cause financial fragility, create a macroeconomics of whiplash owing to contradictions between policy today and tomorrow, promote currency wars that undermine the international economy, and foster a political economy that spawns toxic politics. Worst of all, NIRP maintains and encourages the flawed model of growth, based on debt and asset price inflation, which has already done such harm.

Read more here.

Wednesday, June 29, 2016

Exchange rate depreciation and exports: the evidence

In this blog we discussed several times the reasons why exchange rate depreciation is not necessarily a panacea for current account problems (see for example here and here on Argentina depreciation before the last one with the Macri administration, here on the Europe, here in general about the idea of a Sustainable and Stable Competitive Real Exchange Rate or SSCRER, and here on the role of the exit from the Gold Standard during the Depression). Exchange rate skepticism suggested that depreciation often works because it is contractionary, and it worked by causing a recession and reduced imports. The optimists, like the so-called New Developmentalists pointed out to the positive impact on exports.

Now a new paper by Filippo di Mauro and others (h/t Pablro Bortz) at shows that the exchange rate has a reduced role in the explanation of exports shares for European and Asian countries. As the authors suggest:
"An obvious reason for the low explanatory power of price competitiveness is that a large part of trade involves intermediates products – i.e. inputs used within rather well established global value chains (GVCs) – and is thus far less influenced by pure exchange rate considerations."
That is the steady increase in Chinese global export shares have less to do with their currency manipulation (something briefly discussed here) and more to do with the strategic decisions of firms on where to locate their supply chains. The authors conclude:
"By disentangling the impact of exchange rate changes on trade results, we have shown that the underlying assumption of the ‘currency wars’ discussion – that devaluations bring about substantial export gains – may be severely flawed."
The evidence seems to suggest that depreciation does not stimulate the type of substitution that would lead to external equilibrium, neither on the import or export side, and that a devalued currency is no substitute for industrial policy. Of course evidence, once John Eatwell noticed, has not solved any economic debate so far.

Tuesday, June 28, 2016

Trading Up: A Critical Perspective on Jobs, Governance and Security in US Trade Policy

This Tuesday June 28, 2016, the AFL-CIO is holding a conference titled “Trading Up: A Critical Perspective on Jobs, Governance & Security in U.S. Trade Policy,” from 9:00 am to 5:00 pm in Washington, DC. The full program is here. Participants include Joseph Stiglitz, Dean Baker, Tom Palley, Rob Scott, Jeff Faux, among others.

You can join online for what should be an lively and insightful debate—especially given recent developments around the Brexit and the Trans-Pacific Partnership (TPP).

You can watch the conference here and join in the discussion online using #BetterTrade. Please tweet any questions for panelists to conference organizer Celeste Drake (@cdrakefairtrade).

Monday, June 27, 2016

Dvoskin and Petri on the relevance of the capital debates

Ariel Dvoskin and Fabio Petri just got their paper published in Metroeconomica. From the abstract:
Among the recent interventions in the capital controversy, the debate between Paola Potestio and Kurz & Salvadori has raised important issues. We agree with Potestio's rejection of the legitimacy of a value endowment of capital but we disagree with her dismissal of the relevance of reswitching and reverse capital deepening: these phenomena are very important because they undermine the demand-side role of the conception of capital as a single factor. For the marginal approach to be plausible, this demand-side role had to imply the stability of the savings-investment market even in shorter time frames than those required by a complete adaptation of the ‘form’ of capital; this was taken by Marshall to authorize doing without a given endowment of value capital, which opened the door to the shift to the modern neo-Walrasian versions of the marginal approach. With proof from Hayek, Hicks, Malinvaud, and Lucas we argue that a continuing belief in traditional time-consuming marginalist disequilibrium adjustments based on capital-labour substitution is the hidden reason why the claim often made by contemporary marginalist economists, that the economy can be assumed to be all the time on the equilibrium-growth path, is not found patently unacceptable. The true microfoundation of DSGE macromodels is not intertemporal equilibrium theory, but the time-consuming adjustment mechanisms on whose basis the marginal approach was born and accepted, and on whose basis monetarism was then able to re-assert a pre-Keynesian view of the working of the economy.
You can read the preliminary version at the Siena working paper series here. The idea that the capital debates is a central issue in macroeconomics has been discussed recurrently in this blog.