Modern Money Theory in the Tropics: A Reply to Agustin Mario

Our reply to a very inaccurate discussion of our views on MMT by Agustin Mario. From the abstract:

This paper responds to some inaccuracies on the discussion of our views on Modern Money Theory (MMT), as discussed by Agustin Mario. We believe that while is correct in noting that autonomous spending generates taxes, and fiscal balances are a result, MMT authors overlook the difficulties in pursuing expansionary fiscal policy in the developing countries. These are limited by the existence of an external constraint that cannot be solved with a flexible exchange rate policy regime. Foreign reserves and capital controls are needed.

In particular, I want to emphasize that the notion that we said in any place, or that it is implied that Esteban and I believe in supply side constrained growth is preposterous, and is either done in bad faith or complete ignorance. The main issue again is that we do not believe in free capital mobility and flexible exchange rates for developing countries, something that apparently Warren Mosler was defending down in Argentina a few weeks ago, asking for lower rates of interest, floating rates and fiscal expansion in complete disregard of the inflationary and contractionary impact that devaluation would have, and the limits imposed on fiscal expansion.

I also want to emphasize this particular reply to Mario:

Mario (2021, 364) says that “[t]o borrow in foreign currency is not a need but a policy choice.” The naïve conclusion is that debt in foreign currency can be completely avoided. The argument is akin to suggesting that breathing in an environment that is polluted is not necessary, just a decision, even if one lives next to a polluting factory and is too poor to move. Developing countries must import intermediary and capital goods, by their nature of being behind in the technological development ladder and being integrated into the complex division of labor of the modern world economy. That is unavoidable, and not a policy choice. Countries that are excluded, by the imposition of sanctions by the United States show the alternative. Developing countries should, obviously, minimize the amount of foreign debt they incur, and this should be at a level that is sustainable, with exports growing faster than the interest rate on foreign debt (Cline and Vernengo 2016).

And that is why reserves matter. This phrase, that we cite again, is something that no economist from a developing country would have written, for obvious reasons: 

on a floating exchange rate, a government does not need to fear that it will run out of foreign currency reserves (or gold reserves) for the simple reason that it does not con- vert its domestic currency to foreign currency at a fixed exchange rate.

In our view, exchange rates should be managed (and that implies raising interest rates to preclude depreciations sometimes is required), capital controls and accumulation of reserves are a must, and fiscal policy should be pursued to the limit of the external constraint.

Course/discussion: A very short Introduction to the theory of value and distribution

A few years back in Colombia, we discussed with a group of students about a possible reading group of Sraffa's Production of Commodities by Means of Commodities (PCMC).  After the pandemic I thought that the experience with Zoom perhaps created the conditions for that. But I also have a concern expressed here several times (see here and here) about the lack of understanding of the theory of value and distribution and its importance for policy analysis, and not just among mainstream economists.

At any rate, I decided to give 6 Lectures online (that I will record and post eventually) on the theory of value and distribution. It will cover from before Adam Smith to modern times. Authors discussed will include Smith, Ricardo, Marx, Marginalist ones (Clark, Marshall, Wicksell), Sraffa, Samuelson and Garegnani.  The Capital Debates, and the Modern Intertemporal Marginalist approach will also be discussed. 

This will not be an advanced seminar for graduate students that already know quite a bit about these topics, but for advanced undergraduates and perhaps masters students in mainstream programs (or heterodox ones that do not cover these issues), which have limited understanding of the theory of value and distribution. Readings will include the relevant chapters or papers by the main authors in the original (not a textbook, even though I will suggest a few; and yes, some chapters of PCMC too). I intend to have a discussion session after each lecture (which will not be posted online). If you are interested email me with a brief explanation of your background and why this would be relevant for you to mv587062@gmail.com.

Dates, Zoom links and a syllabus will be provided for those that participate (yes, it is free).

The economic and social consequences of the war on Europe and Italy

By Sergio Cesaratto

With a certain pride I remember having already mentioned for some years, within the framework of my economic courses, political realism in international relations and International Political Economy. I did so in academic contexts in which an uncritical Europeanism based on liberal thinking prevailed (and prevails) according to which the world is divided into good and bad. The book, which I suggested for reading to my students (Sorensen 2005), published in Italian by Bocconi University Press (Egea), had some pages dedicated to the enlargement of NATO to the East, dutifully presenting the opposite thesis. In particular, an important letter addressed in 1997 to President Clinton by 50 eminent personalities opposed to such an enlargement was cited (McGuire 1998). Since those years the signs of growing Western aggression and mounting Russian anger have been evident. I had approached Political Realism at the suggestion of a book in which a profound Italian jurist and philosopher of law, the late Danilo Zolo (see e.g. Zolo 2009) expressed his scepticism about humanitarian wars. My interest as an economist was naturally directed towards the debate in the field of International Political Economy between, on the one hand, liberal and Marxists supporters of cosmopolitanism (albeit for different reasons) and, on the other, supporters of economic nationalism à la Robert Gilpin. A scholar, the latter, of liberal faith, but who did not confuse ideals with crude economic reality. As I find myself teaching International Economics again next year, I will not fail to make students think about these issues.

Read rest here.

What is heterodox economics? Some clarifications

Long ago I wrote on the meaning of heterodox economics. I suggested that it should be defined in its own terms, not as a reaction to the mainstream or orthodox approach, and as a unified set of propositions.[1] In other words, heterodox economics would be a set of principles that would be backed by a certain community. Of course, the sociology of that community would lead to some degree of debate and dissent within heterodoxy, as it is in fact the case within the mainstream. There is, one might add, significant confusion about the meaning of marginalist and neoclassical economics, and also there is no monolithic and consensual approach within the orthodoxy. The mainstream is somewhat fragmented, and there are more than a few neoclassical or marginalist schools. Some, like the Austrians, tend to think of themselves as heterodox, and evident confusion.

My preoccupation when I first wrote about this topic had been related to the argument by Colander, Holt and Rosser that heterodox economics should be abandoned, or that the labels orthodox/heterodox themselves meant little or nothing. For them, the mainstream itself was moving on, and that the best within the mainstream, the cutting edge as they called them, were breaking away with traditional neoclassical views. In my reply to them, I suggested that the mainstream was doing fine, and that it was not being abandoned by the best and the brightest. I argued that the mainstream had for a while a dual strategy. It maintained certain principles that purported to show that markets produce efficient outcomes, even if a significant part of the profession does not believe it is true in practice, and then proceeded to discuss a series of imperfections that are better suited for the complexities of the real world.

Read rest here.

The Enduring Relevance of Tobinomics

Krugman's lecture which will be published in the Review of Keynesian Economics (ROKE).

A new Pink Tide in Latin America?

 

Episode 52 of the Podcast Missão Desenvolvimento with Paulo Gala and Eduardo Crespo discussing the possible new Pink Tide in Latin America (in Portuguese).

Blog Moving to Substack (and first post)

"Where is Everybody?"

The blog will continue here for announcements, messages and links to more substantive pieces. But those will be posted from now on at Substack. I might also post videos in another platform. But more on that later. Link for first post (on whether the US is a failed State, something that got some traction during the pandemic, particularly in the aftermath of the January 6 riot) here.

Registration for the Godley-Tobin Lecture

Registration for the 5th Godley-Tobin Memorial Lecture, for those that cannot be at Bucknell University for the event, is now open here.

Some thoughts on inflation and what not to do about it

I have written extensively over the years on inflation and some of that is here in the blog (see this or this, or this more recently on Volcker the inflation dragon slayer, if you believe in fairy tales; there's way more if you search the blog; I also highly recommend this paper by Perry and Cline in ROKE, which is open, btw). My more recent piece on inflation came out recently in Catalyst, just before the war in Ukraine (on the war see this by Palley, and this old piece by Gary Leupp after the Crimean crisis in 2014), and the spike in oil, and foodstuff prices. But although this exacerbates things, the gist of my argument remains the same.

Inflation which had accelerated because of the supply constraints, and not because of the recovery or excess demand (sure the economy recovers fast in the US, but more than two million workers less are employed now than at the beginning of the pandemic; see figure below). It was all related to the pandemic and the problems in the supply chain, and logistic issues. Chips that affected the prices of cars, port and trucking issues, and even then energy prices that explained most of the increase (as I noted in my piece; see also the BLS report here).

This is all now exacerbated because of the war in Ukraine, which, together with Russia, produces a significantly large amount of oil, natural gas, and key food commodities like wheat. For example, both countries supply about 25 percent of global exports of wheat.

And wheat prices have certainly go up with the crisis (low point there before the spike is less than a month ago). Both energy and food are basic goods that entered in the production of everything, including themselves, and the implications of this are important.

Ricardian rent theory suggested that the extensive use of of lands of lower quality would increase the rent, squeeze profits and (given that wages for him were at subsistence, and accumulation depended on profits) lower accumulation. In this case the higher rents that oil producers, for example, would obtain would impact prices, and given the inability of workers in most places (including the US) to demand higher wages (blame it on years of lack of organization, decreasing unionization and so on, which are hard to reverse even in the current context of heightened mobilization as I suggested in the Catalyst piece), real wages will fall. So this would make the supply side effects of the crisis worse. Inflation will remain higher.

But as I noted in the paper, wage resistance, the propagation mechanism that fueled the distributive conflict back in the 1970s is dormant now, and nobody should expect high inflation (let alone hyper, which is a completely different story). Also, in principle the hike in prices should not have, any direct effect on growth. But the effects of inflation acceleration on the mood for more fiscal expansion in Washington will impact growth. And higher interest rates that are coming will impact too (although I think less) spending, and also cool down the housing market, and that will have effects on consumption too. So the likely effect is higher inflation and lower growth. Btw, in the piece I suggest that this is the return of the 70s, all with a victory of the GOP in the elections and with Biden playing the role of Carter (That 70s Show reunion).

So what to do about all this. Conservatives and orthodox economists have demanded fiscal and monetary restraint. That, of course would only work if inflation was demand driven. I won't say anything else here on that. It would be a waste of time. On the left there have been some alternative policies. Some suggested price controls (and don't get me wrong, I do think they can be effective, and where under certain circumstances, old post here). But price controls would require a bureaucracy capable of controlling prices, and an economy much more organized, and particularly one in which key parts of the supply chain are at home, like the planned economy during World War II, in order to work. This is not the case right now.

Anti-monopoly and regulation policies, which have also been floated by some progressives, are also not particularly useful. I won't go into the whole issue of what in Latin America we called the oligopolistic view of inflation (as I note in my piece the first Gilded Age was a period of deflation, and the this current Gilded Age had been, so far, one of a Great Moderation), but even if you assumed that regulation could do something, the timing would be too long to have any significant short term effect.

Some MMTers have suggested that a Jobs Guarantee (JG) is the way to stop inflation, and while I'm for a JG for employment security reasons, I'm very skeptical about its relevance for price stability (my general views on MMT and inflation in this long post here). The main idea is to control wage increases, but again those will be in the medium term subdued, in my view, and the distributive conflict will not spark a price-wage spiral like in the 70s.

The US will use its oil reserves, and will use its power to try to manage production by OPEC countries, not just Saudi Arabia, but even Venezuela (a mission already went and visited Maduro, and not Guaidó, not surprisingly). And this efforts will probably to some degree contain what could be an even worse increase in global prices.

As it turns out I think that in the short run there is little that can be done. Inflation will remain higher. Not high inflation, but higher than the very low that we experienced for the last 30 or 40 years in advanced economies. The problem is not inflation, but the fact that real wages will fall, and that this will be used as an excuse for contractionary policies. Also, in some parts of the world this would lead to food shortages, and heightened social conflicts. This is inevitable to some extent, and the result of higher prices for basic goods, which do affect distribution as noted by Ricardo (in his case a squeeze of profits). The question that nobody asks is what is the problem with 8 percent annual inflation if real wages kept up with it. There's no evidence that it would affect growth, and in order to have some impact and disorganize relative prices seriously it would have to be much, much higher (classic paper on that by Bruno and Easterly here). Essentially the best thing that can be done is not much, but that is not in the cards.

Beyond Vulgar Economics: Conceição Tavares and Heteredox Economics

My paper (in Spanish) for a book on social thinkers in Latin America edited by Marcelo Rougier and Juan Odisio, and that I presented in a few venues since 2020, is now revised and done. The book includes chapters on Raúl Prebisch, Aníbal Pinto, Víctor Urquidi, Celso Furtado, Juan Noyola Vázquez, Helio Jaguaribe, Aldo Ferrer, and Osvaldo Sunkel, besides mine on Maria da Conceição Tavares. A version available here.

Ukraine: what will be done and what should be done?

 By Thomas Palley

While rightly condemning Russia for its invasion, the mainstream media continues to selectively report the history behind these events. In my view, its omissions are intentional and contribute to the tragedy. They inflame public understanding, render a diplomatic resolution more difficult, and lock us into a worse trajectory.

Let me make further clear my argument: (1) President Putin is head of the Russian state which is under slow-motion implacable attack by US-led NATO. (2) After failing to secure a satisfactory diplomatic resolution, he has taken action to head off that attack.

If you accept those two propositions, the Ukraine story is massively more complicated than simply claiming Putin is an aggressor and we (the US) are good. There will be no lasting peace until that complexity is fully engaged.

Read rest here.

American Exceptionalism and the Liberal Menace: the US and Ukraine

By Tom Palley

American exceptionalism is the most dangerous doctrine in the world, and it has been on full display in the current Ukraine crisis. Worse yet, the loudest advocates have been America’s elite liberal class.

The doctrine of exceptionalism holds that the US is inherently different from and superior to other nations. That superiority means the US is subject to a different standard. Its actions are claimed to be benevolent and above international law, and the US is entitled to intervene at will around the world, including building a global network of military bases and garrisons that it would never permit another power to have.

Read rest here.

Review of Keynesian Economics is out!

We are delighted to announce the publication of Volume 10, Issue 1 of the Review of Keynesian Economics. We invite you to visit the website where you can read all the article abstracts and download two free articles.

The issue focuses on monetary macroeconomics. The lead article is Professor Marc Lavoie’s 2021 Godley-Tobin Memorial Lecture titled Godley versus Tobin on monetary matters. That is followed by an article by Federal Reserve economist Jeremy Rudd titled Why do we think that inflation expectations matter for inflation? (And should we?). Additionally, there is an article on the role of risk and uncertainty in Keynes’ and Kalecki’s interest rate theory; an article providing a modern theory of animal spirits founded on contemporary psychological theory; an article on pre-Keynesian application of Keynesian policies in the Great Depression; and an article augmenting the standard undergraduate upper-level macroeconomics model with hysteresis via the central bank’s estimate of the natural rate of interest.

JERZY OSIATYŃSKI 1941-2022

By Jan Toporowski*

Jerzy completed his matriculation at Juliusz Słowacki Liceum in Warsaw and went on to study economics in the elite foreign trade faculty of the Main School of Planning and Statistics (Szkoła Główna Planowania i Statystyki SGPiS – now reverted to its pre-War name of the Main School of Commerce Szkoła Główna Handlowa). He completed his PhD there and by then had fallen into the circle of economists around Michał Kalecki, who lectured on the economics of capitalism and convened seminars on economic planning and development economics. Jerzy started teaching, and was remembered as a charismatic teacher who made himself available to students and was willing to explain, instead of just repeating dogmas. His brother Wiktor became a well-known writer. A concert-pianist sister married an Englishman and left Poland to live in London.

In 1963 he joined the ruling Polish United Workers’ Party, a natural move for a socialist with ambitions to have a voice in political discussions, if only on the topic of socialist economic and political reform. Kalecki (who never joined any party) was criticising the economic plans being implemented by the government, and the younger generation of Party members, most notably Jacek Kuroń and Karol Modzelewski, were demanding democracy. This would have been a polite discussion were it not for rising discontent in the country at large over shortages of food and other basic articles of consumption, the result of the government’s economic mismanagement.

In the wake of the Six-Day War in 1967, the government tried to redirect criticism towards internal enemies who sympathised with the Israeli defeat of Poland’s Arab allies. Outraged by this accusation by inuendo from a government that claimed to be of the Left, Osiatyński went to a meeting of his Party cell to demand that the Party leader, Władysław Gomułka state clearly who were the internal enemies sympathetic to international Zionism. Osiatyński was expelled from the Party.

Worse was to follow. Public institutions started drawing up lists of Jewish staff who were to be sacked and expelled from the country. Most of Poland’s Jewish population had been killed by the Nazis during the War. The poorer sections of the communities that survived left for Israel after the establishment of that state, leaving only the assimilated Jewish people, who no longer considered themselves to be particularly Jewish, in the middle and professional classes. A particular target after March 1968 were student protestors who were accused of abusing their privileges in a workers’ state by criticising that state while living off the labour of ‘ordinary working people’. Osiatyński’s doctoral thesis on ‘Comparative advantage in the analysis of economic growth factors in socialism’ (Korzyści komparatywne w analizie czynników wzrostu gospodarki socjalistycznej)prepared under the supervision of Kazimierz Łaski, was failed. (It eventually passed, under the formal supervision of Henryk Fiszel, in 1973, after the fall of Gomułka).

Very few institutions were able to resist the purge of Jews and ‘revisionists’ who wanted a more democratic socialism. Among those institutions was the Polish Academy of Sciences, whose staff had no teaching duties and so were unable to corrupt revisionist-minded students. Here Tadeusz Kowalik was leading a research group that was publishing the collected works of Oskar Lange. Following the death of Kalecki in April 1970, a job was created for Jerzy to edit the collected works of Kalecki.

Support came from Kalecki’s friends in Cambridge UK, where Joan Robinson helped to secure visiting fellowships for Osiatyński and Kowalik. In Cambridge Osiatyński acquired a taste for Stilton cheese and material for his post-doctoral thesis (praca habilitacyjna) on the Cambridge capital controversies, that was published in Poland in 1978 under the title Kapitał, podział, wartość: kryzys ekonomii neomarginalistycznej (Capital, distribution, value: the crisis of neomarginalist economics). Between 1979 and 1988, six volumes of works by Kalecki appeared in Polish with Osiatyński’s extensive background notes. There were other visits to the Institute for Development Studies at Sussex University and Oxford University. In 1988, his book on Kalecki’s economics of socialism Michał Kalecki on a Socialist Economy was published by Palgrave, with a foreword by Włodzimierz Brus, despite Kalecki’s disagreement with Brus over market socialism, that Osiatyński made clear in his book.

Both Osiatyński and Kowalik became involved in supporting the workers’ movement Solidarity that emerged in the 1970s and in the informal study groups that were set up to discuss forbidden literature. When the first semi-free elections were held in 1989 Osiatyński was elected to the Polish Parliament and started a political career. He was appointed Minister of Planning in the first non-Communist Government of Tadeusz Mazowiecki, taking over the premises of the old Planning Commission where Kalecki had worked and criticised. By then the Ministry had been reduced to providing economic forecasts while at the Finance Ministry Leszek Balcerowicz with his adviser Jeffrey Sachs pushed through the shock therapy that devastated the Polish economy for the next two decades, and eventually brought to power the present right-wing populists (a fine example of Kalecki’s belief that the immiseration of the working class brings out the worst as well as the best in all classes).

In 1992, Jerzy had his chance at the Finance Ministry. But by then it was too late. The damage to Poland’s industrial infrastructure and institutions had been done, and the Finance Ministry reduced to little more than fending off demands for debt repayments. Political commitments coincided with the publication by Oxford University Press of the English edition of Kalecki collected works, from 1990 to 1997, now in seven volumes. He threw himself into consultancy work in Post-Communist countries on behalf of multilateral financial institutions. But his political career could not survive the fragmentation of the liberal social democratic politics on the fringes of the old ruling party. In 2001 he lost his parliamentary seat. However, he retained his position in the Institute of the History of Science at the Polish Academy of Sciences (Instytut Historri Nauki Ekonomicznych Polskiej Akademii Nauk) until 2004, when he moved over to the Economics Institute of the Academy. In 2010 he was appointed economic adviser to the Polish President Bronisław Komorowski. Three years later he resigned from this position to become a member of the Monetary Policy Committee of the Polish central bank, Narodowy Bank Polski.

In 1990, he hosted at his flat in Warsaw a reunion of his colleagues from SGPiS who had lost their jobs and been forced into exile in the 1968 purges. He felt very keenly their exile and their eventual passing away. This was particularly so in the case of Kazimierz Łaski, who had directed the work of both Kalecki and Osiatyński at SGPiS in 1960s, and had been exiled to Austria. Łaski died in 2015. Osiatyński arranged for the publication of Łaski’s exposition of Kaleckian macroeconomics, in his Lectures in Macroeconomics, and its translation into English, published by Oxford University Press in 2019. In 2018 he visited London for the last time, meeting up with Geoff Harcourt, an old friend from Cambridge, at the launch of the second and final volume of Jan Toporowski’s biography of Kalecki. In 2019 he helped to put together a conference at the OECD in Paris, commemorating the 75th anniversary of the Bretton Woods conference by exposing the criticisms made by Kalecki and Raul Prebisch of the Keynes and White Plans. I was working with him on editing the conference volume when he entered hospital in January. He died on the 4 February.

Jerzy Osiatyński was awarded the title of Professor in 1989. In the following year he was given an honorary doctorate by New York University. He leaves a widow, Elżbieta.

* I am grateful to Dr. Grzegorz Konat of SGH for additional information and corrections to an earlier draft.

Classical Political Economy or the Surplus Approach

Here our other conversation with LP Rochon, about the chapter on Classical or Surplus approach authors. My co-author, Suranjana Nabar-Bhaduri and I talk about the Real Bills Doctrine, Bullionism, Say's Law the implications for theories of crisis. And about several authors, Smith, Ricardo, Tooke and more.

Rational expectations, New Classicals, and Real Business Cycles Schools

  

A video conversation with LP Rochon and my co-author Bill McColloch on our chapter for the forthcoming book on the history of ideas. Many topics, including Friedman vs Lucas relevance, the Lucas critique, the empirical turn in the profession, and more. More info on the book soon.

2022 Godley-Tobin Memorial Lecture: Paul Krugman

The editors of ROKE are pleased to announce that Professor Paul Krugman has agreed to give the 2022 Godley–Tobin Memorial Lecture. Professor Krugman is Distinguished Professor of Economics at the Graduate Center of the City University of New York. He has also taught at MIT, Princeton University, and Yale University. Like James Tobin, Professor Krugman was awarded the Nobel Memorial Prize in Economics (2008) and the American Economics Association’s John Bates Clark Medal (1991).

Professor Krugman’s work has focused on international economics and macroeconomics. He is a prominent American public intellectual who is widely recognized for his regular column in The New York Times. The title of Professor Krugman’s lecture is “The enduring relevance of Tobinomics”.

The lecture will be held at Bucknell University, Lewisburg, PA on April 20, 2022, at 5.00pm and it will also be live streamed.

What's Left of Cambridge Economics?

A new piece by Jamie Galbraith on Project Syndicate, that reviews some recent books, but deals essentially with what happened to heterodox economics, a theme that has been treated here often (on the definition of heterodox economics go here). Jamie provides an apt definition, on the basis of what he got at Cambridge back in the 1970s. In his words:

When I attended the University of Cambridge in 1974-75, I read Keynes, met Piero Sraffa, listened to Joan Robinson, and studied with Kaldor, Luigi Pasinetti, Richard Goodwin, Ajit Singh, Wynne Godley, Robin Marris, and Adrian Wood. Back then, it was understood at Cambridge that markets do nothing like what Coyle claims they do. Just as Einstein had erased Euclid’s axiom of parallels, Keynes’s General Theory had long since obliterated the supply curves for labor and saving, thereby eliminating the supposed markets for labor and capital.

It followed that the prices of production were set by costs(mostly labor costs and interest rates), while quantities were determined by effective demand. Markets were not treated as if they were magical. It was obvious that most resources and components did not move under the influence of an invisible hand.

Read the full review here. 

On the origins of Sraffa's equations

Giancarlo de Vivo suggests that the Sraffian equations come from Marx's schemes of reproduction, and that the inspiration was in a footnote from the editor, Karl Kautsky, in the Theories of Suplus Value. Here a letter from Maurice Dobb and Piero Sraffa to Kautsky, from 1929, asking to use his edition as the basis for an English translation (originals in Kautsky's archives):

De Vivo's views are discussed in a book edited by Massimo Pivetti, which is certainly worth reading (I have the Spanish edition). I never thought of this genealogy of the Sraffian price equations as being controversial, but I have been re-reading some discussion about Sraffa's contributions between Pierangelo Garegnani and Marxist authors (from the 1970s) as a result of the events related to the latter's ten year death anniversary, and it did strike to me that it is unclear to most Marxists how closely related the prices of in the Production of Commodities are with Marx's work.

The IMF’s 2018 Stand-By Arrangement with Argentina: An Ultra Vires Act?

A good paper by Karina Patricio and Chris Marsh that deserves a wider readership, in particular if you are interested on the International Monetary Fund (IMF) and it's policies. The paper argues that the IMF agreement is legally void, and might lend support (the authors do not say so) to a more radical view, suggesting that Argentina should not pay. From the abstract:

The 36-month exceptional access Stand-By Arrangement (SBA) with the Republic of Argentina approved by the International Monetary Fund (IMF) in June 2018, later augmented in October 2018, represents the largest programme in the history of the Fund. The programme, however, has failed in all its core objectives. While the programme has been subject to macroeconomic critiques, this is the first study that integrates such analyses into a comprehensive legal evaluation, with resort to general Public International Law, the law of the IMF and, where international law is uncertain, relevant analogies with English private law.We introduce the hypothesis that the SBA violated the core purposes of the IMF as per its Articles of Agreement and, therefore, constitutes an ultra vires act. To explain why, we proceed as follows. Section 1 provides the legal foundations of our analysis. First, it explains the ultra vires doctrine in international law and outlines key considerations drawn from case law of the International Court of Justice for the recognition of ultra vires acts. Second, it draws on core provisions of the Articles of Agreement to discuss relevant purposes of the IMF, as well as a set of authorisations and limitations to its powers established in the treaty to achieve such purposes. Section 2 draws on macroeconomics to discuss how those substantive rules were violated in the SBA in a way that is too manifest to be open to reasonable doubt, thereby raising suspicion that the SBA’s approval was ultra vires. In particular, the programme was characterized by egregious assumptions and accounting inconsistencies that meant the objectives were impossible to attain. Section 3 considers the impact of the IMF’s recently published Ex-Post Evaluation of Exceptional Access Under the SBA on our legal analysis. Section 4 draws on the premise that the SBA’s approval constituted an ultra vires act to discuss the potential legal implications of its invalidity. Section 5 concludes this piece by summarising its key findings and reflecting upon the need for clarification on the legal validity of the SBA, as well as further scholarly research on ultra vires lending by the IMF.

Read full paper here. This is in accordance with recent critiques on the IMF role by Joe Stiglitz and Kevin Gallagher. Note that the IMF itself has done a mea culpa of sorts on the lending to Argentina (see here).

The US and Russia: beware of Neocons and liberals preaching democracy promotion

 By Thomas Palley (guest blogger)

Every week my e-mail box receives a steady stream of articles aimed at cultivating public animus to Russia. The articles are always wrapped in a narrative in which Russia is a threat to democracy in Ukraine, Eastern Europe, and elsewhere. The effect is to create public support for hardline action (economic and/or military) against Russia.

The insidious underside of this campaign is it paves the way for a scenario in which Ukraine provokes Russia, thereby drawing a Russian response that is then used as a pretext for US engagement. In such circumstances, the public would have been primed for action and would almost certainly fail to disentangle the truth.

What is terrifying is the scope of the stream, which spans the spectrum from far-right to center-left.

Read rest here.

A Materialist-Institutionalist Model of Capitalist Social Reproduction

By David Fields (guest Blogger)

One of the defining features of classical political economy, particularly Marx, is the schema of a class system based on those who control the means of production, capitalists, and those who do not, wage labor. Yet, the intricacies of capitalist reality are more complex. As such, is it possible to formulate a model that better captures integrated social processes? Below is my attempt to do just that.

This model, in my view, allows for greater attention to be devoted to analyzing the extent to which particular forms of social status and social class, allowing for intersectionality, are reproduced by general cultural conditions that affect the social division of labor, which, in turn, shape said conditions, ensuing different forms of social stratification. It provides for more detailed social comparisons of socially inferred, though, not mutually exclusive, categories of social standing that illuminate the degree to which social gradients of social mobility and social positioning, which have wide ranging implications regarding life chances, translate into nested sets of social inclusion and exclusion, producing unequaly distributions of social functions (i.e., power differentials) that foster social segmentation, which capitalism requires to sustain itself. Hence, it is a dynamically recursive abstraction to acutely examine the underlying relations that generate social hierarchies with respect to economic outcomes. It allows for more elaboration of what actually facilitates the social inequalities, taking into consideration intersubjective social processes of social judgment that generate social positions of rank, which, altogether, by definition, foster uneven role sets and role expectations in capitalist society.

Literature:

Bourdieu, Pierre, 1984, Distinction: A Social Critique of the Judgment of Taste, translated by Richard Nice, Cambridge, MA, Harvard University Press.

Durkheim, Emile, 1995 [1915], The Elementary Forms of Religious Life, New York, Free Press.

Marx, Karl, 1967 [1867], Capital, Volume 1, New York, International Publishers.

Tilly, Charles, 1998, Durable Inequality, Berkeley, CA, University of California Press

Veblen, Thorstein, 1998 [1899], The Theory of the Leisure Class. Amherst, NY,Prometheus Books.

Weber, Max, 1968 [1946] “Class, Status and Power,” pp. 180–95 in From Max Weber: Essays in Sociology, translated by Hans H. Gerth and C. Wright Mills, New York, Oxford University Press.

On Garegnani's contributions to economics

My initial comments at the seminar on the legacy of Pierangelo Garegnani's contributions to economics organized by the Italian Post Keynesian Network. The full seminar here.

Part Two of the interview at Radio UNAL

More on the same issues, with a discussion of Piero Sraffa and the surplus approach (this week there will be an event on the legacy of Pierangelo Garegnani). In Spanish again.

On the Worldly Philosophy at Radio UNAL

Interview in Spanish to Radio UNAL with Óscar Morillo. We discuss the the origins of political economy and their importance and the continuous relevance for the understanding of modern capitalism. Link here.

Garegnani: Ten Years After

This event organized by the Italian Post Keynesian Network. I wrote about Garegnani's contributions when he passed away here in the blog. We will discuss some of the issues he raised, but also the new directions of Sraffian economics.

 

Review of Keynesian Economics issue on Financialization

Volume 9, Issue 4 of the Review of Keynesian Economics is now available. The issue is devoted to the twin topics of “financialization” and the “macroeconomics of international finance”. The first paper by Michael Hudson analyzes the impact on distributional outcomes of adding capital gains to and subtracting rent seeking activity from GDP. The second paper examines financialization’s rolling sector dynamics whereby it loads the economy with debt. The third paper by Esteban Pérez Caldentey and Matias Vernengo explores how financialization has fostered premature deindustrialization in Latin America. The fourth paper by Biagio Bossone looks at the implications of the actions of international portfolio actors for policy sovereignty. The fifth paper empirically examines the effectiveness of controls on international financial capital flows. The last paper explores whether recent developments regarding China’s currency reflect capital flight or internationalization of the renminbi.

Financialization revisited: the economics and political economy of the vampire squid economy

New paper by Thomas Palley. From the abstract:

This paper explores the economics and political economy of financialization using Matt Taibbi’s vampire squid metaphor to characterize it. The paper makes five innovations. First, it focuses on the mechanics of the “vampire squid” process whereby financialization rotates through the economy loading sector balance sheets with debt. Second, it identifies the critical role of government budget deficits for the financialization process. Third, it identifies the critical role of central banks, which are the lynchpin of the system and now serve as de facto guarantors of the value and liquidity of private sector liabilities. Fourth, the paper argues financialization imposes a form of policy lock-in. Fifth, it argues financialization transforms popular attitudes and understandings, thereby generating political support despite poor economic outcomes. In effect, there is a politics of financialization that goes hand-in-hand with the economics. The paper concludes with some observations on why mainstream macroeconomics has no equivalent construct to financialization and discusses the disquieting unexplored terrain that the economy is now in. 

Read rest here.

The Biden administration should ignore the debt ceiling

The administration run excessive budget deficits, and accumulated too much debt in the face of successive economic crises. As a result, it was forced to compromise politically in order to avoid a catastrophic default, and the subsequent political crisis brought about chaos, and the collapse of the established institutions. Of course, this is not a cautionary tale about the United States. It is a description of the economic crisis that led to the French Revolution.

But in spite of the apocalyptical rhetoric in Washington nothing like this is even faintly possible in the case of the United States. Public debt in the US is in domestic currency, the safest financial asset, and not owed to foreign bankers or in foreign currency, which is not controlled by the administration. It is also not debt in an asset the administration does not control like gold, as it was the case in Ancien Régime France, or the US itself before the end of Bretton Woods. More importantly, political representation, and democratic control over the public purse provided the conditions to sustain expanding budgets and public debt in the American case. The debt reflects, for good or for bad, the democratic decisions of the people. The only reason public debt has become an issue is the existence, for arcane political reasons, of a debt ceiling.

Even though there is a debate about whether the economy needs an additional fiscal boost or not, nobody thinks seriously that the disruption caused by a default and interruption of government functions, with a shutdown, would be a good idea, particularly not during a pandemic. The economy is certainly not a full employment, and about five million workers that had jobs before the pandemic are unemployed. Inflation, although a concern, does not result from an economy close to full employment, but from the disruptions associated with the supply chain during the pandemic. Interest rates on public debt remain low, and there is no reason for austerity measures in the midst of a still uncertain recovery. In fact, most economists, and a good part of the public opinion, think that the visible decline in American economy results from lack of investment, not just on basic infrastructure, but also on the wellbeing of population. 

If there is a perception of a national crisis, it is not about a fiscal one, but one about declining hegemonic power, and about the rise of China (with the Sinophobic undertones noted by Tom Palley). The solution requires investment in the future, in the kinds of things that are both popular and part of the broader Biden agenda, boosting the safety net programs, and investing in green technologies, promoting cleaner economic growth. That these investments are necessary is not particularly controversial, given the size of the social crisis at home, and the global environmental crisis, let alone in the context of a pandemic crisis that seems will become endemic.*

The debt ceiling debate is purely a political instrument used by Republicans to preclude Democrats from implementing their budgetary priorities. This is not an economic crisis, it is a political crisis and requires a political solution. The most cited solution for the current crisis would be to mint a one trillion-dollar platinum coin, that would allow the Treasury to continue spending (e.g. Paul Krugman here). As Zachary Carter said in the Washington Post, only an absurd solution could save the US from an absurd problem. However, trust in the existent political institutions might be the best solution for the impasse. The Biden administration should simply declare that the debt ceiling is unconstitutional, move forward, and continue to make payments even if the debt ceiling is breached. Congress cannot enforce the debt ceiling, and the Treasury can continue to pay until the courts decide on the merits of the case. The issue should be decided by the courts.

There are two possible objections to this strategy. The first one is that an impasse may imply that the US would be technically in default, and that chaos would ensue. However, if the Treasury continues to pay, the worst consequences could be averted. As noted, everybody knows this is a political problem and there is no real question that the US cannot pay. The other concern is that the Supreme Court could presumably determine that the debt ceiling is constitutional after all. That is, to be clear, a possibility. However, it should also be clear that the Roberts court is strongly probusiness and that financial and corporate interests in general are against a default that would hurt the economy. But in the case the court decides to commit economic suicide for no good technical reason, this might still be the right move. Perhaps then there would be enough support to eliminate the debt ceiling through the legislative process, eliminating the filibuster.

* There is, of course, some debate within the Democratic Party, with Senators Manchin and Sinema probably precluding a larger fiscal package.

On the irrelevance of inflation expectations: the return of the working class

There are many myths about the Phillips Curve and the so-called Monetarist Counter-Revolution of the 1960s and 1970s. Forder's book is a good read on some of these issues. Jeremy Rudd's recent paper is also a must read, and has now been accepted for publication in the Review of Keynesian Economics (ROKE).

It debunks the myth about the importance of inflationary expectations for explaining the Great Inflation of the 1970s, and casts doubts about the Monetarist Counter Revolution, the Rational Expectations one, and that would include the more recent New Keynesian developments that include a lot from both. Rudd's paper suggests that there is a simpler explanation for the acceleration of inflation back then, and the Great Moderation since the 1990s. In his words:

"Another way of stating this point is that an important feature of inflation dynamics after the mid- 1990s appears to be the lack of a strong wage–price spiral (or of any significant year-to-year feedback between wage growth and inflation)... An observation about the actual nature of the 'wage bargaining process' is helpful at this point."

Old Keynesian stories about cost-push versus demand-pull inflation come back to mind. He suggests essentially that worker's wage bargaining power has been weakened, and that reflects in less impact of labor costs on actual inflation. Again, in his words:

"We can make a reasonable case that reactions of labor costs to actual inflation were an important feature of the inflation process in the 1970s. In particular, without this channel’s being present, it is nearly impossible to explain why movements in food prices left a durable imprint on core inflation—unlike energy, which can plausibly be viewed as a broader input to industry, changes in agricultural prices shouldn’t act like a cost shock to firms outside the food sector."

This suggests a preoccupation of the profession with more concrete, objective causes of inflation dynamics, and that bargaining power of the labor class matters. Martin Sandbu has suggested a few months ago in his Financial Times column that:

"To be precise, we may be witnessing the manifestation of two outmoded ideas: that the relative power of economic classes alters macroeconomic outcomes; and that macroeconomic policy tilts that relative power."

Sandbu also noted that in this recession it is Michal Kalecki, not Keynes, the old and forgotten master that we should bring back from the dead. While I do think that Kalecki should always be remembered and was and continues to be relevant, it is less clear that the wage bargaining position of the working class will recover anytime soon. Sure, if Dems manage to pass the more robust social spending bill, with the extra US$ 3.5 trillion, things would look a bite better. Hope springs eternal.