Steve Fazzari on Inequality, the Great Recession, and Slow Recovery

Mainstream discussion of the 2007-08 recession in general do not discuss income inequality, even though it was central to explain the increasing indebtedness of the private sector. Steve Fazzari, with Barry Cynamon, have written a paper that puts inequality at the center of the slow recovery. From the abstract:

Rising inequality reduced income growth for the bottom 95% of the income distribution beginning around 1980, but that group’s consumption growth did not fall proportionally. Instead, lower saving put the bottom 95% on an unsustainable financial path that eventually triggered the Great Recession. An original decomposition of consumption and saving across income groups shows that the consumption-income ratio of the bottom 95% fell sharply in the recession, consistent with tighter borrowing constraints. The top 5% ratio rose, consistent with consumption smoothing. In the recession’s aftermath, the inability of the bottom 95% to generate adequate demand helps explain the slow recovery.

The role of increasing debt in the consumption boom is illustrated by the two figures below, which show that personal consumption demanded a higher share of disposable income, particularly after the 1980s, and that household debt also increased after the 1980s.

Read the whole paper here. 

Rescuing Sartre From Anachronistic Individualism

In this updated version, see here, István Mészáros lucidly rescues Jean-Paul Sartre's existentialist anthropology from the philosophical hermeneutic watershed of anachronistic individualism. The author critically examines evidence for a complementarity between Sartre's phenomonological ontology with historical-materialism, while paying particular attention to how Sartre's work is largely contributive to the Marxist Humanist attention to forms of social consciousness. What is stressed is that although Sartre rejects the 'dialectics of nature', this is not a total rejection of the dialectical method, since Sartre's attention to issues of morality are squarely placed in a historically-specific social context, specifically with respect to the parameters and social practices of capitalism, whereby, in similar fashion to Marx's concern with the dialectical contradictions between authentic human development and alienation, 'nothingness', or 'free will', is limited by the extent to which the actually existing physical world forces mankind to be subservient to constrained subjectivities, of which meaningful sense of self and dignity are lost in translation.

PS: Note that Mészáros is often considered part of Marxist Humanism, a school that emphasizes Marx's early writings, in particular his Economic and Philosophical Manuscripts. Mészáros most famous book is on Marx's theory of alienation here (and where he applies Marx's theory of alienation to reassessing the socialist alternative, and the conditions for its realization, is here). For the more directly relevant economic aspects of Marx's critique and reconstruction of the surplus approach one only needs to read his Theories of Surplus Value and, obviously, Capital (and the extent to which Piero Sraffa revived Marxist Economic Theory - see here & here ). Mind you, this is not to suggest an epistemological break in Marx's work, as authors like Louis Althusser have propounded. For debates on the supposed structural discontinuity, see here (subscription required) and here.

Lars P. Syll: Shiller & Roubini's Fears of Swedish Housing Bubble Justified

By Lars P. Syll

The Swedish Riksbank has according to Lars E.O. Svensson been pursuing a policy during the last fifteen years that in reality has made inflation on average more than half a percentage units lower than the goal set by the Riksbank. The Phillips Curve he estimates shows that unemployment as a result of this overly “austere” inflation level has been almost 1% higher than if one had stuck to the set inflation goal of 2%. What Svensson is saying, without so many words, is that the Swedish Fed for no reason at all has made people unemployed. As a consequence of a faulty monetary policy the unemployment is considerably higher than it would have been if the Swedish Fed had done its job adequately. So far, so good — I have no problem with Svensson’s argument about the inadequacy of the Swedish inflation targeting policies. However, what makes the picture more complicated is that we do have a housing bubble in Sweden — it’s not just a figment of imagination the “bad guys” use to intimidate us with. [That said, I, of course, in no way want to imply that central bank interest rate targeting (and/or accommodations) is the best way to counteract housing bubbles. Far from it.]

Read the rest here.

Post-Apartheid Economic Policy in South Africa: Putting Mandela's Legacy in Perspective

The coverage on Mandela, no doubt one of the greatest leaders of the 20th century, and essential for the ending of Apartheid, was as it is often the case a bit simplistic, which actually reduces the struggles he had to fight to relatively simple and manicheistic choices between good and evil (e.g. like in Bush's famous "if you're not with us, you're against us," meaning with the terrorists). His actually legacy is considerably more complex, and a few publications had noted it (see here for three myths about his political legacy, including the racist notion that without him blacks would have murdered all whites; h/t Butch Montes).

His economic legacy is also considerably more complicated than what one might expect, and there was virtually no coverage in the press about it. John Pilger in Counterpunch relates how Mandela was in neogotiations with the Apartheid regime since the early 1980s, and that "the apartheid regime’s aim was to split the ANC [African National Congress] between the “moderates” they could “do business with” (Mandela, Thabo Mbeki and Oliver Tambo) and those in the frontline townships who led the United Democratic Front (UDF)." He further quotes an ANC Minister suggesting that their policies were Thatcherite and saying: “You can put any label on it if you like…but, for this country, privatisation is the fundamental policy.”

He suggests that by the time Mandela was freed in 1989, the Apartheid regime had already helped build up a tiny black elite, supported by crony relations with the regime, which led to increasing the inequality among blacks. He argues, further, that: "Mandela, too, fostered crony relationships with wealthy whites from the corporate world, including those who had profited from apartheid. He saw this as part of 'reconciliation'." His conclusion is that even though racial Apartheid is over, economic Apartheid is very much alive.

A more thorough analysis of the failure of the post-Apartheid economic was presented a while ago in Patrick Bond's book Elite Transition: Form Apartheid to Neoliberalism in South Africa, were he argues that: "post-apartheid policy-makers drew all the wrong lessons from ‘international experience’ and hence prepared to amplify rather than correct apartheid-capitalism’s main economic distortions." These wrong lessons implied "very conservative economic policies--fiscal restraint, an independent Reserve Bank (hence inoculation from democratic inputs), trade liberalisation and co-optive labour policies." Mandela resisted fiscal policies that favored redistribution, and maintained fiscal conservatism in order to avoid inflation (a very conservative view of the causes of inflation).

Inequality remains incredibly high (a Gini of 63.1 according to the World Bank data), unemployment is also at really high levels (at around 25%), and the economy has not grown very much. The groups favored are those connected to mineral and energy export-oriented corporations, which has been enough to keep the old white elites and a few in the new black elites well enough while the vast majority not only is left out and with very low living standards (with a ranking in UNDP's Human Development Index of 121 out of slightly less than 190 countries, and life expectancy of 53.4 years), but also suffering from one of the worse HIV/AIDS epidemics in the world.

PS: Similar arguments were put forward by my colleague Geoff Schneider back in 2003 here (subscription required).

The Wisdom of Classical Realism In International Relations

The epistemological practicality of theory is to draw a unifying essence, a sensibility of coherence, to latent functions alleged to govern manifested social phenomena, so as to strive to apperceive a richer, fuller, more comprehensive view of our social world. In this sense, theory establishes the appropriate consciousness needed to untie the Gordian knot of social complexity, in order to surpass rudimentary assumptions concerning the nature of human social interaction. Accordingly, this invokes perspicacity, which is concerned with elucidating the intrinsic underlying causal relationships that ultimately rest on tendentious conceptions of what is to be determined as socially significant—the Hegelian ‘notion’ of truth submerged and contained within the confines of appeared ‘being’— that furnishes meaning and understandability. As Steve Smith (1996) argues, ‘theories do not simply explain or predict, they tell us what possibilities exist for human action and intervention; they define not merely our explanatory possibilities, but also our ethical and practical horizons’. 

The reason we must be concerned with theory [is because] all discussions of international politics […] proceed upon theoretical assumptions which we should acknowledge and investigate rather than ignore or leave unchallenged. The enterprise of theoretical investigation is […] towards identifying, formulating, refining, and questioning the general assumptions on which the everyday discussion of international politics proceeds. At its maximum, the enterprise is concerned with theoretical construction: with establishing that certain assumptions are true while others are false, certain arguments valid while others are invalid, and so proceeding to erect a firm structure of knowledge (Bull, 1972).

Social scientists develop, consider, and use, various theoretical orientations as ideational frameworks to provide explanatory accounts of social phenomena. Assumptions concerning the nature of social reality are thus fundamental; theory the perceivance of social reality via the process of social inquiry is not antonymous. Hence, theoretical lenses are structured by deeper philosophical commitments, and, as a result, will produce different types of stories, narratives, and debates that reflect those commitments (Sterling-Folker, 2009).  Theory is intrinsically normative for it incorporates a set of ‘prescriptions as to how men should conduct themselves’ (Bull, 1976). What Joseph Schumpeter labeled as ‘pre-analytical visions’ dictate modes of examination and inquisition. Second-order questions of ontology concerning the nature human agency, and its relationship to social structures, lies at the beginning of any theoretically induced social-scientific enquiry. The implication is that it is merely impossible to define a social problem without considering what is to be determined as problematic (Cox, 1992: 132). ‘Pre-analytical visions’ will lead to entirely different attitudes towards social settings, and, as such, will have pertinent implications for normative assessments of social phenomena. 

This then begs the question of whether or not one can accurately actually make reference to a single systematic body of knowledge when approaching the nature of social reality, given the likelihood of problems arising from explanatory specificity, scope, and intellectual nuance. Despite this caveat, however, it is possible to be pragmatic and place theories into Procrustean beds, especially when the context is the peculiar social apparatus of world politics.  With this mind, the rest of this essay examines the sociology of knowledge that underpins Realist theorizing in order to asses to what degree the tradition has rendered the field of international relations intelligible. 

The Wisdom of Classical Realism

Realism attempts to explicate perceived structures and tendencies of relations among nation-states in an objective state of anarchy.   An international authority, or world government, a superstructure of ‘political society’, in the Neo-Gramscian sense, which acts as universally socially legitimate magistracy, does not exist. That is, an institution uniquely concerned with the consideration, generation, and transformation of global common interests and understandings, so as to provide a broadly shared forum of appropriate rules and procedures, such that a democratic sociological imagination is universally manifested, is absent. 

The international community is without government, without a central authority to preserve law and order, and it does not guarantee the member states either their territorial integrity, their political independence, or their rights under international law. States exist, therefore, primarily in terms of their own strength or that of their protector states and, if they wish to maintain their independence, they must make the preservation or improvement of their power position the principal objective of foreign policy (Spykman, 1942: 446; cited in Parent & Baron, 2011).

It is presumed world politics is a dangerous jungle of insecurity. Given this precariousness, issues of survival are of import as they relate to rational behavior under less than ideal conditions—a predicament of coercion-by-force-of-circumstance that begets fear of besiegement at the behest of power-hungry competing nations. Chaos is the ‘form of control’ (Gilpin, 1981: 27), so to speak, that institutionalizes a mode of inter-state interaction which is, ipso facto, fundamentally aggressive. As a result, supreme political authority lies only at the level of the nation-state, as it is deemed the most functional institution of civil society for providing the public good of collective security; it is the secure monopolization over the means of violence at the micro-level which allows the ‘rule of law’ to seemingly reconcile palpable collective costs owing to potential clashes of interests among social classes (Carr, 1939: 296-297; Morgenthau, 1978:10-11). This betokens the incapacitation to envisage international relations as embodying a common stock of shared conventions, values, and cultural practices that can be readily drawn upon for purposes of solving global coordination problems, which if not solved, eventually lead to war between states. Hence, to ideate an undisputed social capacity of enlightened self-interest, which can be utilized for establishing an empyrean Lockean rational contractual world social order to eclipse the imperiousness of state solipsism, is a clear testament of naiveté. 

States do not perceive themselves as essential parts of a larger interconnected and interdependent social whole—Durkheimian ‘organic solidarity’—by which the essence of philosophical idealism can, over time and space, eschew the disharmony of world politics. States are Robinson Crusoe’s up against incontrovertible forces of insecurity as they interact with each other ; the “highest wisdom lies in accepting, and adapting to these forces” (Carr, 1939: 14). 

[...] the essence of all social reality [with respect to world politics] is the [state]. The building blocks and ultimate units of [international] political life are not the individuals of liberal through nor the classes of Marxism […] Realism […] holds that the foundation of [international] political life [is] [uncongenial relationships between states] (Gilpin, 1986: 304-205). 

International relations is thus what social theorist Karl Polanyi described as a disembedded market, that is, a one-shot prisoner’s dilemma game of how to achieve Machiavellian prudence, such that that the adverse effects of predation, due to the lack of escrow mechanisms to ensure collective confidence, are deterred. Hence, an acute sensitivity to a ‘security dilemma’—the collective action problem of ‘balance of power’ amidst a Clausewitzian ‘fog of war’—is presupposed. If any form of righteousness is espoused, it ultimately rests on the degree to a state harbors “the quality of power to compel, and that in fact the strong do what they have to power to do and the weak what they have to accept” (Thucydides, 1854: 360-365).

A classic text of the Realist paradigm is Hans Morgenthau's Politics Among Nations. The author attests that in a social world where conflicts of interests are endemic, moral principles of ethical justice, particularly with respect to modern social norms of convivial peace and cooperation, can never be fully concretized. Preponderating forces to govern interstate relations in order to tame the biopower of ‘human nature’, which asseverates that man is essentially ‘evil’ and ‘barbaric’—a ‘savage’—, are nil. In this sense, the ‘first image’ of world politics consists of a pandemonium of Hobbesian brutes galvanized by lust, diffidence, and pride, in which the quest for paramountcy fosters a war of all against all to continue indefinitely (Waltz 1991: 35). The bedlam conditions states to be indubitably hostile. The implication is that states are obsequious to a competitive strife of maximizing their sway. Esprit de corps is inconceivable; a dynamic is set in motion permitting states to pursue callous foreign policy objectives of Messianic fervor (Morgenthau, 1978: 338). 

For one to posit ecumenical jus naturae et gentium of a ‘Grotian conception of international society’, a Vatellian ‘law of nations’ , if you will, so as to inexorably extricate the means by which to achieve, teleologically, Kantian ‘perpetual peace’ premised on the elements of pacta sunt servanda is to not only engage in contrivance, but heedlessly lose oneself in pure fantasy. That is, such phenomenological aloofness ultimately amounts to a red herring of ‘hypothetical imperative’, in order to bolster a Platonic archetype that “presupposes [an] existence […] which actually does not exist” (Morgenthau, 1978: 559).  “There is something spectacular in the radical simplicity of a formula that with one sweep seems to dispose the problem of war once and for all” (Morgenthau, 1978: 558). “It is […] important not to make greater demands on human nature than its frailty can satisfy” (Treitschke, 1916: 590). The basis upon which one can view international relations as something less than bellum omnium contra omnes is chimerical; the essence of animus dominandi nullifies the ‘possible world’ of appetitus societatis. The supposition that a relatively pacifistic global commonwealth can be institutionalized is absurd. Ergo, despite illusory aspirations of catholic righteous indignation, “the ethics of international politics reverts to the politics and morality of tribalism [...]” (Morgenthau, 1978: 262). More the point, “when a nation invokes […] ‘the conscience of mankind’ […] it appeals to nothing real. It only […] only serves to underline the [unprincipledness] of the appeal” (Morgenthau, 1978: 279). Hence, “it is profitless to imagine a hypothetical world in which [states] no longer organize themselves […] for purposes of conflict (Carr, 1946: 231).

[…] realism refuses to identify the moral aspirations of a particular nation with […] moral laws that govern the universe […] The lighthearted equation between a particular nationalism and the counsels of Providence is morally indefensible, for it is that very sin of pride against which the Greek tragedians and the Biblical prophets have warned rulers and ruled. The equation is also politically pernicious, for it is liable to engender the distortion in judgment which, in the blindness of crusading frenzy, destroys nations and civilizations (Morgenthau, 1978:11).

The presumption of a fecundity to mechanically yield harmonious Elysian ‘right reason’ cannot apply “to the actions of states in their abstract universal formulation […]” (Morgenthau, 1978: 10). As duly noted above, the natural condition of international relations is inherently antagonistic, that is, it is perpetually riotous and tumultuous—a fracas of animosity of national vengeance. Accordingly, it is foolish to assume that reason privileges humankind the competency to construct a cosmopolitan Roussseauan ‘general will’. Hence, to ideationally concede some amicable intercontinental ‘imagined community’ is to regrettably fall prey to blinded optimism.

The immediate perceptible indication is that the substance of international relations is driven by a “desire for power-oriented prestige”, which “means [that] in [the] general practice [of world affairs] the glory of power over other [states]” reigns supreme. ‘Nationalistic universalism’ is a constant social force that “drives [states] to pose its own valuations and standards of action upon all other nations” (Morgenthau, 1978: 337). 

In a surrounding circumscribed by “opposing interests and of conflict among them” (Morgenthau, 1978:3), voraciousness undoubtedly structures the role expectations of states. Thusly, states are prompted to attach a certain subjective meaning to their world political acts, which is sociologically educed by reckoning that states are bounded by the stigma of of what Max Weber framed as instrumental rationality (zwekrational). That is, they interact with each other insofar as it is purposeful, in the sense described above, and, as such, is impelled by positional means-ends goal oriented behavior. World politics is Daniel Kahneman's laboratory of constrained optimization, whereby the motivations of states, with respect to how they approach matters of foreign policy, stem from innate desires to avoid subjection. As an Aristotelian fait social total, the aura of world politics is plagued by the Nietzschean metaphysics of an unrestrained ‘will to power’.  As such, the state must have, at all times, the means by which it can repel ‘external forces of wrongdoing, which can systematically undermine its ability to persevere in a nihilist world where ‘gladiators are fixed on one another’ in an invariable ‘posture of war’. The primary of the aim of states is to do the utmost in order to escape the possibility of being at the mercy of rivals. 

And since no nation can foresee […] miscalculations [of power dynamics], all nations must ultimately seek the maximum of power obtainable under the circumstances. Only thus can they hope to attain the maximum margin of safety commensurate with the maximum of errors they might commit. The limitless aspiration for power, potentially always present … in the power drives of nations, finds in the balance of power a mighty incentive to transform itself into an actuality (Morgenthau, 1978: 215).

Balance of power’ is the Mandevillian (or Poreto optimal, if you will) solution. That is, it is essential that states not put themselves in a position from which it cannot retreat without losing face, from which it cannot maneuver, without grave risks (Morgenthau, 1978: 550-558)—si vis pacem, para bellum. Beset by the constraining conditions, states are obliged arrange feasible plans to ensure preservation, namely, it is of due diligence that statesmen be blessed with virtù of raison d'État -- the Machiavellian notion of strategic prowess -- such that, ceteris paribus, the health and strength of the state is preserved.  It is primary that statesmen have the autonomy, as well as the flexibility to discern suitable foreign policy objectives germane to the national interest, which is upholding the independence and territorial integrity of the state to the fullest extent.  

The practical function of a theory of international relations has this in common with all political theory that it depends very much on the political environment in which it operates. In other words, political thinking is, as German sociology puts it, ‘standortgebunden’, that is to say, it is tied to a particular social situation (Morgenthau, [1961]1962: 72–3)

According to Morgenthau (1978: 5), “we must put ourselves in the position of statesman who [are forced to choose a given path of ] foreign policy under [anarchic] circumstances, and [as such] we [must] ask ourselves what we pursue if we were placed under the circumstances and had to choose from alternatives from which to successfully ensure the protection of the state in feral terrain".  Hence, what is primary is to interpret inter-state actions in world politics as not necessarily being derived by strict forces of social determinism, like the Neorealism of Kenneth Waltz, for instance, but from the angle of situational human agency. Morgenthau’s standortgebunden, as such, is intended, despite that that it can be interpreted as being psychologically-reductionist, to envisage the quagmires of international relations on the terms of those who are directly involved in shaping its dynamics - those statesmen embodied with the wherewithal to formulate geopolitical circumstantial determinations. In hindsight, it is not erroneous to cogitate that the essence of Realism is strikingly similar to the sociology of knowledge that mainstream neoclassical economics is predicated on. 

Reference list will be added

Must read from James Galbraith

In which he mostly decimates economists paddling in either fresh or salt water.  Jamie, self admittedly, prefers brackish water economics, but why not just let him tell the story.

On the blogs

Is there a stock bubble?  Dean Baker joins the NYT debate 

Frothiness in the global economy Nouriel Roubini

Citi's Leveraged Super Senior CDO 2.0  Eric Ben-Artzi

The Big Casino Doug Orr

Enforced flexibility Free exchange

Evidence that lower corporate tax rates don't create jobs Yves Smith

Does anybody really want to solve this mess? On the European Crisis

Pablo G. Bortz* (Guest Blogger)

It has been more than five years since Ireland had to rescue its failing banks. Almost four since the beginning of the crisis in Greece. Something similar for the explosion of the housing bubble in Spain. France is submerged in a persistent recession, like Italy. A 0.1% “growth” in a quarter is celebrated as an irrefutable proof of the “success” of the austerity programs. In the most realistic scenario, the Eurozone face a long decade of stagnation, high unemployment and rising social tensions. Many of the solutions are disregarded, never considered, such as a fiscal union or Eurobonds. Others are sabotaged, such as the banking union. Debt restructures are postponed for years, even though their necessity is plain to see. Somebody may ask, why hasn’t the Eurozone crisis been solved by now? At this stage, it is hard to avoid the conclusion that the crisis has not been solved because there is no intention to solve it. But who does not have that intention?

Some countries performed better than others, so one cannot safely state that no country succeeded in this period. However, there are sectors that did succeed. In this piece I want to focus on one of such sectors, with a huge influence in the decision-making spheres of European politics, which faced high risks at the beginning and throughout this stormy period, but which has seen events develop in its favor and now is starting to push towards the split up of the Eurozone. I will not present new information, but I do intend to briefly offer an interpretation of why they have done better than most and why are they in the position they are. I am talking about the big German banks. I also hope to make clear convincingly what economic benefits the German government has obtained by playing along with the interests of the banks, except in very specific situations, about which more will be said later.

The basic underpinning of this post is illustrated by graphs 1 and 2. Both show the exposure of German banks to selected countries of the periphery, based on data from the BIS (Table 9d of the Consolidated Banking Statistics). The black curve in graph 2 corresponding to Cyprus is measured in the right-hand-side axis.

The crisis of 2008 hit German banks severely, not only because they had bought significant volumes of asset-based securities in the US, but also because they had financed housing (and commercial property) bubbles in the periphery. Considering that their exposure to Ireland amounted to 137% of the Irish GDP, it is no surprise that the burst of the Irish housing bubble, among other measures, forced the German government to rescue Hypo Real Estate. But that was not the only public help they got: it is well known by now that the ECB forced the Irish government to make good the guarantees extended on the debt of its major banks. In any case, the financial crisis forced a certain retreat of German banks from periphery countries, though the same holds for the US. Around the second quarter of 2009 the situation had stabilized and they were willing to lend once again to these countries. 

The Eurozone crisis was triggered in the last quarter of 2009 and early 2010, with the change in government in Greece and the recognition of its falsified statistics and bigger-than-expected fiscal deficits. At that moment, it became evident that Greek debt was not sustainable, that the government would not be able to face its commitments on its own, and that help was needed, either as a loan, as a debt restructure, or as both. Heck, even Keynes explicitly said that in situations like these a rescue was unavoidable, and he wrote that seventy years ago!

Eventually, loans were granted in exchange for the conditions already known by everybody. A debt restructure was implemented in October of 2011, and a second one followed suit some months later. However, that word “eventually” took a long time to materialize: those measures were implemented years after the burst of the crisis. In the meantime, as the graphs show, German banks substantially reduced their holdings of Greek debt (particularly avoiding the second Greek default), selling their holdings to the ECB, now a major creditor of Greece and other European countries with one of the worst implemented buying programs ever, and the European Financial Stability Facility/European Stability Mechanism (ESM) (check page 17-18). In Spain they also pulled out, before the required bank capitalization was implemented through loans from the ESM. In Cyprus they also pulled out, when it was clear that the Cypriot banks would need another bailout due to the impact of the first Greek default. The Cypriot bailout took place almost a year and a half after the first Greek PSI. That was the main benefit that German banks (and French banks too) got from the way the crisis was “managed”: time. Time to pull out, to heal wounds, to offload their holdings into the hands of the public sector, both at the national and the continental level.

Probably the first indication that the worst had already passed was the fact that Deutsche Bank did not participate in the Long Term Repurchase Operation 2 in February 2012. By the second quarter of 2012, that is, a quarter before Draghi announced the Outright Monetary Transaction (OMT) Program, the claims of German banks vis-a-vis Spanish and Italian debtors hit the floor, and the downward trend regarding Irish borrowers decelerated. They also got time regarding the implementation of the banking union and its different components. Whatever problems the German banks may have, their exposure to the European countries in difficulties is not a major one, perhaps not even a problem at all. And they do not need to lend to these troublesome economies: they have a booming housing market at home to feed.

The time German banks enjoyed to reduce their exposure to periphery debt was obtained by the German government (in particular the German Ministry of Finance), the Bundesbank and the ECB (especially during Trichet’s term). Blaming the “reckless spending spree” of Greek, Spanish, Irish and Italian governments, they refused to acknowledge any possibility of debt restructuring. The EFSF was instrumented when Greece was already bankrupted, and the increase on interest rates (as investors flee the countries) was used as a threat in order to force governments to implement austerity policies. We all know this. We all know the reluctance of the ECB to act as a lender of last resort, and then when they finally decided they had to buy some debt, they did it badly. Compare that performance with the announcement of OMT: without actually buying any bonds, the ECB has succeeded in lowering interest rates.

The Greek default is also illustrative. First it was plainly rejected; later they figured out that Greek public debt in the possession of the private sector had to be written down by 21%, later on they extended to 50%, and eventually it was around 70% NPV. Those changes took months.

The Bundesbank has been the main opponent to any measure that can reasonably help (in some measure or the other) struggling governments. In fairness, they didn’t even want those countries in the Eurozone to begin with. They opposed OMT, the buying of public debt, either because it was (in their interpretation) explicitly prohibited by the Treaty of Maastricht, or against its “spirit”. They reject the idea that ESM can lend directly to banks (instead of lending to governments); they are rejecting (or seeking to restrict) the supervision of German banks by the ECB, and rejecting any possibility of a redemption fund at the European level in case some money is needed in banks liquidation processes without burdening national governments. They have rejected granting a banking license to ESM. This position aims at securing the advantage of German banks vis-a-vis their competitors in the Eurozone, who are crippled not only by the poor state of their borrowers’ finances but also, in the periphery, by the interaction with the public sector’s finance, either as debtors, or as possible rescuers.

The government, in turn, takes more or less the same line as the Bundesbank. After all, because of this crisis the interest rate it pays is at a record low, allowing some savings of around 10 billion euros. Small and medium-size German companies, at the heart of the German economic success and an important source of votes for the CDU, are paying interest rates almost 2% lower than equivalent and equally competitive Italian SMEs, for instance. Germany is becoming the major destination for young and skilled migrants that want to escape the grim and hopeless situation in their own countries. German officials are explicitly encouraging this movement, which is worsening even further the long-term prospects of the economies affected. In some sense, it is actually quite hard to escape the conclusion that Germany is “stealing population” from the periphery.

But there were a couple of circumstances in which the views of the Bundesbank and the German government diverged. Strangely enough, in those episodes it seems that the Ministry of Finance agreed more with the Bundesbank than with the Chancellor. One such episode is the aforementioned dispute, described in the article from Der Spiegel, concerning the inclusion or not of Italy in the euro. The other major event was the vote in the Governing Council of the ECB regarding the implementation of OMT.

That proposal won with a result of 23 positive votes and 1 negative vote. And there are two German officials. Joerg Asmussen, a member of the Executive Board, voted in favor of OMT, while Jens Weidmann, the president of the Bundesbank, voted against it. This highlights, in my view, that when the time comes Angela Merkel is willing (much more than Schauble) to do the bare minimum effort in order to save the Eurozone.

The Bundesbank is not willing to do so. It is not willing, because major German banks do not need the Eurozone any more. Not only they dislike the measures that are on the table to regulate them, linked to the banking union (even though the German government is fighting tooth and nail to defend them); not only because they have to focus on healing their wounds from other messes (like their derivatives exposure and lawsuits in the US) and strengthening their capital ratios: but also because if, for instance, Greece leaves, there might be new opportunities for purchasing assets at an even lower price and realizing huge capital gains. Heads I win, tails you lose.

I will not discuss the benefits for periphery countries of leaving the Eurozone, as the big German banks (and the Bundesbank) want them to do. In my view, these benefits exist and are sound and solid. But even if they agree on this, the periphery should not expect any support from German banks. They will not oppose further austerity packages, but they will oppose any favorable measure. The measures that would solve the Eurozone crisis while keeping everybody on board are relatively easier to implement, from a strictly economic point of view, than the whole set of measures required for periphery states to leave in an orderly fashion and succeed as independent states. However, the political willingness in Brussels (and Berlin and Frankfurt) to cure the crisis is non-existent, and the views range from desire to keep starving the ill countries, to complete disregard for their fate.

*Ph.D. Candidate, Delft University of Technology. I am very grateful for the comments and suggestions of Frances Coppola, Jan Kregel and Matías Vernengo, though the views and possible mistakes of this article should be attributed only to myself.

Don't Believe The Hype!

 

The latest news is that the U.S. unemployment rate slipped to to a five-year low of 7 percent in November, apparently an encouraging sign for the American economy.

The US Labor Department notes that employers added 203,000 jobs, nearly matching October’s revised gain of 200,000; this supposed strengthening of the job market is likely to fuel speculation that the Fed may start to scale back bond purchases when it meets later this month (according to Mark Weisbrot, however, this would not necessarily be a good idea - see here)

Before we get swindled, let's look at some data; according to the Economic Policy Institute, millions of potential workers are still sidelined and if we were to count those who have fallen out of the labor force due to discouragement, the real picture is as follows:

• Total missing workers, October 2013: 5,660,000;
• Unemployment rate if missing workers were looking for work: 10.3%;
• Official unemployment rate: 7.0%.

For tables & charts: see here; for info on methodology: see here.

Bilateral Investment Treaties and the Supreme Court or Do Cry for Argentina

Even though the Doha Round of the World Trade Organization has been completely stalled with little progress, which is really not a bad thing for most developing countries, the trade agenda of developed countries continues to advance with bilateral Free Trade Agreements (FTAs) and Bilateral Investment Treaties (BITs) [we discussed the Colombian FTA here].

These treaties are even more restrictive than the WTO, and reduce the policy space of developing countries, by imposing more severe and restrictive policies on property rights, judicial jurisdiction in disputes with foreign investors, government procurement policies, management of capital flows, etc. In this sense, it is important to note the recent dispute between Argentina and the British BG Group, that invested on Metrogas, a natural gas distributor in Buenos Aires (now controlled by the YPF, the nationalized oil company), in the early 1990s after Argentina signed a BIT with the UK to promote foreign investment (for all the BITs signed by Argentina go here).

The risks of these treaties should be clear by now. In the aftermath of the 2001/02 crisis the Argentine government froze the prices of gas, besides defaulting on foreign debt and devaluing its currency, leading to significant losses to the BG Group. Even though the BTI implied that the UK firm had to first sue in Argentina, they filed for arbitration in the US and the arbitration panel argued that the post-crisis measures in Argentina had restricted BG Group’s access to courts or renegotiation awarding the company around US$183 millions.

Now the case is at the Supreme Court and Todd Tucker tells us that "based purely on the tenor of the oral arguments, I would predict some type of BG Group victory." Note that if this ruling is actually favorable to the BG Group then it is clear that the well-being of the population (unemployment reached 23% almost, and poverty skyrocketed after the crisis) which benefit from the freezing of gas prices, is to be put behind the interests of international investors.

Lars P. Syll On What’s wrong with IS-LM?

By Lars. P. Syll

Yesterday, David Fields of Naked Keynesianism wondered what was my position on the fact that many heterodox economists would consider the IS-LM framework “to still be relevant if given enough flexibility without neoclassical synthesized elements.”

I will sure come back on this when time admits a more thorough analysis, but let me start by giving at least a tentative answer — focusing on where I think IS-LM doesn’t adequately reflect the width and depth of Keynes’s insights on the workings of modern market economies.

Read the rest here.

Prabhat Patnaik - Finance and Growth Under Capitalism

By Prabhat Patnaik

Once we reject Say’s Law and recognize that capitalism is prone to deficiency in aggregate demand, we have to accept that sustained growth in this system requires exogenous stimuli. By exogenous stimuli I mean a set of factors which raise aggregate demand but are not themselves dependent upon the fact that growth has been occurring in the system; that is, they operate irrespective of whether or not growth has been occurring in the system. Moreover, they raise aggregate demand by a magnitude that increases with the size of the economy, for instance with the size of the capital stock. They are in other words different from “erratic shocks” on the one hand, and “endogenous stimuli”, such as the multiplier‐accelerator mechanism, on the other: the latter can perpetuate or accelerate growth only if it has been occurring anyway.

Read rest here.

Keynes on the causes of the Great Depression

By 1932 a draft of the General Theory (GT) was basically finished, including the central concept of effective demand, and Keynes have moved away from the Wicksellian framework of the Treatise on Money (TM). From a policy point of view the new view implied that the cause of the Great Depression was less the high rates of interest (above the natural rate), and the emphasis on the Gold Standard, that had dominated his views in the TM, to a more straightforward blame on reduced spending in the US.

In The Means to Prosperity from 1933, in which most of his policy views were expounded (and published before the GT) Keynes argues that:

Note that he clearly suggests that the global crisis had its epicenter in the US. Also, even though he is concerned with the role of expenditure in the level of activity, he still refers to the recovery as having price effects ('raising world prices').

PS: Arguably those authors like Eichengreen and Temin that emphasize the role of the Gold Standard remain closer to the TM and its Wicksellian framework (which would make sense for New Keynesian authors), while Romer, even though she remains firmly wedded to the idea of a natural rate, would be closer to the Keynes of The Means to Prosperity and the GT. See older post here.

ISLM: a further explanation and a defense

I noted before  the traditional representation of the ISLM is problematic. Yet as I also noted the ISLM model can accommodate changes that incorporate the criticisms of classical-Keynesian, post-Keynesian and other heterodox groups. There is no need for an investment function based on the marginal productivity of capital and the principle of substitution. The accelerator can be incorporated, and the inverse relation with the rate of interest would result from the effects of interest rates on other components of demand. Also, endogenous money can be incorporated easily, and for the most part this has been done in New Keynesian models (the ISMP).

In the post (linked by David here) that prompted this sort of defense of a changed ISLM, Lars Syll correctly notes that New Keynesians are often right on policy, but incorrect on theory. And I for the most part agree with Lars intentions. Yet, he suggests that the problem lies in that:

"If macroeconomic models – no matter of what ilk – assume representative actors, rational expectations, market clearing and equilibrium, and we know that real people and markets cannot be expected to obey these assumptions, the warrants for supposing that conclusions or hypothesis of causally relevant mechanisms or regularities can be bridged, are obviously non-justifiable."

As I noted in my debate with Noah Smith, the problem with marginalism (neoclassical economics) is NOT rationality, utility maximization or supply and demand (not quite the same list raised by Lars). Here I would add that although one can certainly add heterogenous agents, assumptions that simplify and assume representative agents maximizing profits, for example, are not really problematic at all. Classical political economists and Marx did assume something like that and still did not reach the conclusion that the system was efficient in the sense of providing full utilization of resources.

Also, the idea that agents use all information per se is not necessarily bad (Tom Palley favors some sort of rational expectations, which he refers to as model consistent; see his old manual here). The problem is that the model used, by New Classical and other mainstream authors, has logical problems. Last but not least equilibrium per se is not a bad concept (on this there is the whole thing that Post Keynesians have inherited from Joan Robinson that makes things confusing for many heterodox economists). Equilibrium is actually quite essential for long-term analysis. And I would actually argue that it is relevant since it DOES have real world applications. In other words, real economies do fluctuate around long-term equilibrium positions that are sub-optimal.

The problem with mainstream theory is the notion of a natural rate, which is based on the principle of substitution which allows for 'factors of production' to be fully utilized. These are the problems that Keynes, by negating the idea of a natural rate, and Sraffa, by showing the logical problems of the principle of substitution, undermined. An ISLM without the natural rate is not only possible, but actually reasonably good as a tool for analyzing real economies.

PS: Note that Keynes wrote to Hicks on the ISLM that: "I found it very interesting and really have next to nothing to say by way of criticism." Keynes did not criticize the investment function in Hicks model, but note that this problem also was integral to the General Theory (GT). And yes Keynes was being nice, but he was nice too about Harrod's review of the GT, but did tell him that he did not mention effective demand.

Lars P. Syll On Krugman's Fuddy Duddy Defense of Economic Orthodoxy

By Lars P. Syll

“Sorta-kinda New Keynesian” economist Paul Krugman now has learned from Francesco Saraceno — who links to yours truly — that “some people are attacking” him for “defending an economic orthodoxy that has failed.” Let me just start with an observation on Krugman’s allusion (“simple models”) to IS-LM. This, of course, comes as no surprise, since we who have followed Krugman’s writings over the years, know that he is very fond of referring to and defending the old and dear IS-LM model.

Read rest here.

Jan Kregel: The Continuing Risk of Derivatives

The End of Endless Growth?

In my assigned role as the (anti) Thomas Robert Bannister (Malthus), I thought I would return to the blog after a far-too-long hiatus with this post to share recent work. Note that this work is the other main area of research beyond my dissertation interest of the role of energy revolutions in economic history. I'll return to that one given recent posts here, but for now:

This work asks many questions, the fundamental one being do we really need to radically change behaviours to attain zero growth, or, what do we really mean by zero growth?

The conditional answer is that our world can achieve zero total growth (in the expected lifetimes of some of us) while still having per-capita GDP growth. The key, wearing my anti-Malthus hat, is population-conditional. To introduce the topic, here is a figure from my model that shows GDP levels peak at about 2080. I think that is a very radical outcome, with many implications. It is based on several forecasts, including the current UN low population forecast.

The only other forecast I'll mention for now is that the per-capita real GDP increases through the forecast period. The second-largest caveat is the large forecast error bands; I'll simply note that at least I show them. Most climate models (of which this is a member) eschew error estimates. I can do so because I use empirical forecasting methods.

So, peak GDP levels in 2080 with continuing real per-capita output growth (forever). A surprising result certainly to me. The largest caveat in this method is the population curve you believe we are on. I'll discuss that in a future post. For now, just enjoy that a (credible?) model exists that allows the zero-gowth crowd and the lift-the-poor crowd to coexist on the same model path.

I will monitor questions. This will be my EEA talk; just a heads-up for those who wish to stockpile (potatoes and other) ammunition.

Lars P. Syll On How to Get Away With Scientific Fraud With Economics Textbooks

By Lars P. Syll

As is well-known, Keynes used to criticize the more traditional economics for making the fallacy of composition, which basically consists of the false belief that the whole is nothing but the sum of its parts. Keynes argued that in the society and in the economy this was not the case, and that a fortiori an adequate analysis of society and economy couldn’t proceed by just adding up the acts and decisions of individuals. The whole is more than a sum of parts. This fact shows up already when orthodox – neoclassical – economics tries to argue for the existence of The Law of Demand – when the price of a commodity falls, the demand for it will increase – on the aggregate. Although it may be said that one succeeds in establishing The Law for single individuals it soon turned out – in the Sonnenschein-Mantel-Debreu theorem firmly established already in 1976 – that it wasn’t possible to extend The Law of Demand to apply on the market level, unless one made ridiculously unrealistic assumptions such as individuals all having homothetic preferences – which actually implies that all individuals have identical preferences.

This could only be conceivable if there was in essence only one actor – the (in)famous representative actor. So, yes, it was possible to generalize The Law of Demand – as long as we assumed that on the aggregate level there was only one commodity and one actor. What generalization! Does this sound reasonable? Of course not. This is pure nonsense!

Read rest here.

James Galbraith Lectures Peter Schiff About Fiat Money

A part of the video was previously posted here.

Marie Duggan on Steven Kates and the role of History of Economic Thought

Marie has reviewed Kates' recent book on the role of history of economic thought in what he correctly sees as a crisis in the profession. She tells us:

Steven Kates warns us that if the history of economic thought (HET) leaves the field of economics, economics will lose a good bit of its theoretical heart (p. 27). He makes this argument against two opposing straw men. The first is those who define an economist as someone who can apply sophisticated econometric techniques to data. The other is the view among HET practitioners that since HET has been shunted aside within economics by mathematics, the wise make allies with historians. He views this latter as dangerous to economics as a discipline: “The core issue is whether the subject area of the history of economic thought adds to the study of economics. The question is not whether there are a thousand other uses of HET” (p. 67). 

This book acts as a wake-up call that practitioners in HET may have an honorable role to play in reversing the decline of theory in our profession. That’s a big task, and Kates certainly has the fighting spirit.

Read the whole review here.