Inequality and Stagnation by Policy Design

By Thomas Palley (guest blogger)

This paper argues the mainstream economics profession is threatened by theories of the financial crisis and ensuing stagnation that attribute those events to the policies recommended and justified by the profession. Such theories are existentially threatening to the dominant point of view. Consequently, mainstream economists resist engaging them as doing so would legitimize those theories. That resistance has contributed to blocking the politics and policies needed to address stagnation, thereby contributing to a political vacuum which is being filled by odious forces. Those ugly political consequences are unintended, but they are still there and show the dangerous consequences of the death of pluralism in economics. The critique of mainstream economists is not about “values” or lack of “change”: it is about academic practice that suppresses ideas which are existentially threatening.

Read rest here.

Godley-Tobin Lecture - Friday 1st March11:30am - 12:45pm

Please note the change in date and venue. Bob Rowthorn's Godley-Tobin Lecture. titled “Keynesian Economics: Back from the Dead?” It will be Friday 1st March, in the Central Park West Room, at the Sheraton New York Times Square Hotel 11:30am - 12:45pm

On the unfolding coup in Venezuela

I recommend this video with an interview with Lucas Koerner that is in Caracas about the situation there on the Real News Network.

Still time to save the euro

New book edited by Herr, Priewe and Watt. Free download at the website (both pdf and for e-reader). I've only seen it now, and have been reading the great chapter by Cesaratto and Zezza. But look forward to others by Uxó, Álvarez and Febrero, Priewe, Bibow, Dullien, Simonazzi, Celi and Guarascio,  and Bofinger to mention a few.

Read full book here.

On the crisis in Venezuela

I wrote a few entries over the last few years that might be useful to understand what is going on in Venezuela. This one from 2016, tries to explain how the crisis is related to an old problem, the dependence on oil exports and the balance of payments constraint. Venezuela can't manage to get beyond the oil dependence in the boom, since a sort of Dutch Disease sets in. One can certainly blame the Chavista governments for not breaking with that dependence, but in all fairness conservative governments also were unable to do it. In the period of a fall in international oil prices a crisis normally occurs (this one is probably already worse than the Caracazo).

Here for context the data on exports (note that about 90 percent of exports are basically oil, and those go mostly to the US that has refineries that specialize in the Venezuelan oil).

The numbers are from the World Bank Development Indicators up to 2016, and then I use the IMF estimates of growth (actually decline) from the World Economic Outlook database. So this is a brutal collapse, something the US government is doing, even at the price of some costs to local refineries, in order to promote regime change in Venezuela. Whatever your views on Maduro and the Chávez period, note that the US is fine with Saudi Arabia. Trump and Dems before too. And remember that Obama tightened the embargo as one of his last measures. Double standards are incredible, and difficult to defend.

Mind you with the collapse of exports and the fiscal capacity of the state, the economy collapsed too, and so did imports. The embargo makes imports of almost everything impossible and heightens the humanitarian crisis, and the refugee problem. It is somewhat hypocritical, to say the least, to complain about the humanitarian crisis and not acknowledging the US role and the embargo in causing it.

Note also, that in the absence of dollars, not only imports collapse, but payments on foreign denominated debt too. Hence, the close possibility of a complete financial meltdown. Not only default will take place, but scarcity of almost anything imported (including food essentials) and the rapid depreciation of the currency would lead to hyperinflation. If you want to understand external crisis in general read this entry, and for hyperinflation go to this one.

On the complex issues of democracy in Venezuela read this entry from 2017, and this one from 2018. For those that think that the current coup, or any coup including a military one would reduce violence (the opposite is more likely to happen) read this.

Bob Rowthorn's Godley-Tobin Lecture

The Unreal Basis of Neoclassical Economics

By Al Campbell, Ann Davis, David Fields, Paddy Quick, Jared Ragusett and Geoffrey Schneider

originally posted here

Introduction
Ten years after the financial crisis, we still find mainstream economists engaging in overly simplistic analysis that does not accurately capture the dynamics of the real world. People studying economics need to know that the principles of mainstream economics are hopelessly unrealistic. In this short article, we demonstrate that the ten principles of economics in Gregory Mankiw’s best-selling textbook are divorced from reality and reflect an extreme and unwarranted bias towards unregulated markets.[ii] Mankiw’s “Ten Principles of Economics” should more accurately be titled “Ten Principles of Unrealistic Neoclassical Theory.”

Mankiw’s Principle #1:  People Face Tradeoffs/There is no such thing as a free lunch.
Mankiw ignores the historical determination of the distribution of resources and the crucial distinction between those whose income comes almost entirely from the performance of labor and those whose income comes from their ownership of capital. As a result he is unable to recognize the political power that results from the concentration of wealth in the capitalist class, and to analyze the distributional impact of decisions in which those who gain are often significantly different from those who lose. In addition, history is full of accounts of forcible appropriation of resources that appeared to be “free” to those who acquired them.

Mankiw’s Principle #2:  The Cost of Something Is What You Give Up to Get It/Opportunity Cost
Insofar as individuals are able to make decisions, their choices can be described as “giving up” one opportunity in order to take up another. This tells us nothing about the determination of the choices that are available to them. The “choice” of a worker as to whether to take on a dangerous job or face eviction from a home requires a very different analysis than one suitable for a discussion of the choice between apples and oranges. On a different level, an analysis of the “trade-off” between income now and increased income in the future requires an understanding of ecological limits to the growth of material production.

Mankiw’s Principle #3:  Rational People Think at the Margin.
Neither consumers nor producers, nor humans in many other social roles, generally act on the margin. The assertion of marginal analysis that decisions must be such as to equate marginal benefit with marginal cost is simply a restatement of the first derivative condition resulting from maximization subject to a constraint, rather than a reflection of real human choice. Mainstream theory then defines behavior according to this mathematical construction even though it does not govern actual choice in the real world. But more important is the presumption that all decision-making is guided by the well-being of isolated individuals, and thus that “rationality” consists of behavior that maximizes the benefit of the individual decision–maker. This dismisses the fact that people are social animals whose decision-making recognizes the interaction between individuals, and it ignores how in the real world people make decisions considering their whole situation under possible alternatives, material restraints, imperfect information, their cognitive abilities, the existing power structures, and culture.

Mankiw’s Principle #4:  People Respond to Incentives.
This is tautological. Furthermore, models based on monetary incentives by selfish, isolated individuals and firms in perfectly competitive markets are unrealistic and ignore crucial real world issues. Monetary incentives are not all that matters. In the real world people make many decisions on the basis of their evaluation of the resulting well-being of many people beyond themselves, or on social and cultural norms.

Mankiw’s Principle #5:  Trade Can Make Everyone Better Off.
Trade can increase total production, but trade has distributional impacts, with winners and losers. Trade in modern capitalism tends to foster inequality while undermining wages and working conditions for many laborers. This principle promotes unregulated trade, but unregulated trade has not proven to be the best route to economic development, nor is it good for all people. In the real world, infant industries, immiserating growth, terms of trade shocks, and increasing inequality render this principle useless as a policy guide.

Mankiw’s Principle #6:  Markets Are Usually a Good Way to Organize Economic Activity.
As there are no measurable units by which one can classify all specific economic activities in the real world as “good” or not, principle #6 is nothing more than a neoclassical ideological declaration of faith. Markets are human creations that operate differently in various economic systems, and the various existing and potential economic systems themselves are human creations. The first real question then is if under an existing system private capitalist markets driven by the profit motive do better than possible alternative human creations for providing the good or service, potentially driven directly by the desire to meet specific human needs. Important examples providing evidence of the inferior performance (efficiency and effectivity) of private capitalist market-driven systems are well run social security systems and single-payer health care systems. Avoiding the error of accepting the system as given, a deeper question would be if under some different economic system, which was not built to favor capitalist accumulation, alternatives could outperform profit-driven markets operating in capitalist systems.

Mankiw’s Principle #7:  Governments Can Sometimes Improve Market Outcomes.
Behind this assertion is the idea that markets are natural and could run without any government intervention, and that such natural markets tend to be efficient but sometimes are not quite optimal. In those cases the efficiency of markets could be improved by government tweaks. To the contrary, in the real world all markets are created by governments, which both establish the rules of the game and enforce them, and thereby determine market outcomes. If the government passes laws requiring that food be safe, that changes the market for food, and yields different market outcomes than if those laws did not exist. With this understanding, principle #7 is reduced to the not very profound statement that because governments create markets, they have the ability to create them with better or worse outcomes. Further, the issue always ignored by neoclassical economics of social divisions is particularly important for considering “better market outcomes”: better for whom? Market rules are shaped by power structures to benefit some classes and other social groups more favorably than others (for example capitalists at the expense of workers, First World countries at the expense of Third World countries, etc.).

Mankiw’s Principle #8:  A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services.
Higher GDP per capita does not necessarily result in a higher material standard of living for all people within, as well as between, countries. Furthermore, neoclassical economics operates with a definition of “standard of living” as the amount of goods and services consumed, so this principle reduces to the not quite tautological, but not very insightful, claim that the amount of goods and services consumed in a country depends on its ability to produce them. In the real world what people are concerned with is their quality of life, which includes social respect, power to act on one’s desires, conditions of work (and not just pay), social relations, and much more. Neoclassical economics does not address the extension of principle #8 to what people in the real world are actually concerned with, their quality of life, for which the goods and services produced are just one among many determinants.

Mankiw’s Principle #9:  Prices Rise When the Government Prints Too Much Money.
Since the neoclassical definition of “too much money” is the amount that makes prices rise, this is a tautology. In the real world the relationship between prices and the money supply is complex: expanding money might cause a jump in prices or it might cause no price increases at all, depending on many other things in the economy.  The applied policy transformation of this into the incorrect claim that “prices rise when the government prints more money” is an ideological artifice, used today to justify austerity policies and keeping wages low.

Mankiw’s Principle #10:  Society Faces a Short-Run Tradeoff between Inflation & Unemployment.
The relationship between inflation and unemployment is complex and does not follow a systematic pattern. By the 1970s data from the real world had caused textbooks to go from Phillips Curves to Shifting Phillips Curves to abandoning them entirely. In view of that experience, principle #10 of a short-term trade-off between inflation and unemployment has become a neoclassical ideological justification for challenging those who advocate policies that would reduce the rate of unemployment, by fostering fears of inflation that may never materialize.
In conclusion, Mankiw’s so-called “Ten Principles of Economics” ignore crucial realities of the economic world. In particular, Mankiw excludes power imbalances, inequality, social forces, development experiences, the realities of market behaviors, laws and outcomes, realistic measures of quality of life, and recent macroeconomic data from his principles. It is hard to imagine a less useful set of ideas to guide modern societies in designing a good economic system. Unfortunately, almost all other mainstream principles of economics textbooks parrot these same principles. Students of economics will have to look elsewhere for useful analysis of the economy and how to build a democratic economy and society that works for all.

References
Mankiw, Gregory. Principles of Economics, 7^th Edition. Stamford, Connecticut: Cengage. 2015.

End-notes
[i] In a subsequent article, we will offer a set of principles of radical political economy to provide a more realistic, alternative approach.
[ii] The authors are members of the steering committee of the Union for Radical Political Economics (URPE). The ideas presented in this article are those of the authors and not of URPE. The purpose of this article is to make readers aware that there are alternatives to the principles of economics put forth by mainstream economists. We synthesize the critiques of mainstream economics by radical political economists in order to give students and teachers ammunition to confront the unrealistic paradigm of neoclassical economics that currently dominates the profession.

Functional Finance, MMT and Blanchard's Presidential Address

So Olivier Blanchard gave the AEA presidential address at the Atlanta meetings earlier this year. If you missed it you can watch it here. The paper is also here. In all fairness, there is nothing new there. He notes the famous rule by Evsey Domar about sustainability of public debt, meaning that if the rate of interest on debt is lower than the rate of growth, debt-to-GDP ratios tend to be stable and you are in no danger in pursuing active fiscal policies.

Note that functional finance is in many ways compatible with Old Neoclassical Synthesis Keynesianism, and it should not be a surprise that New Keynesians accept some of the same arguments. Certainly Domar was an Old Keynesian in that mold, and although he was more difficult to classify, Abba Lerner the founder of functional finance accepted many marginalist arguments.

Blanchard actually is quite conventional and argues that public debt has negative welfare effects and reduces growth (forget this, that the Industrial Revolution was done on a pile, a huge pile, of public debt). He is very clear that he's not in general in favor of more debt, but only under the current circumstances, in which the rate of growth would be above the risk free interest rate of government bonds (that he calls the safe rate) and the marginal efficiency of capital (which really means he thinks in terms of a natural rate, in Wicksellian fashion).

Yet, of course, pundits went crazy. A typical reaction is from Desmond Lachman, and ex-IMF economist (i.e. worked for Blanchard), and fellow at the American Enterprise Institute in the Wall-Street Journal. Two things, one he suggests that Blanchard is a defender of MMT, which is a stretch. MMT involves more than functional finance, like a notion of endogenous and chartal money, and a policy preoccupation with full employment, often embodied in an Employer of Last Resort (ELR) proposal (that's a non exhaustive list). The second issue is that his whole argument is that the rate of interest will go up soon (as a result, presumably of foreign bond holders; in his words: "It’s more likely that investors, particularly from overseas, will demand higher government bond yields to compensate for the elevated inflation or default risk they see from an ever-increasing public debt ratio"). In other words, the foreign crowding-out of the old Mundell-Fleming model.

Of course, the are many problems with this arguments. The Fed has considerably more room than other central banks, and US bonds play a special role in the global economy. The dollar has been relatively appreciated, even with very low rates of interest, and the notion that something has to be done, even with some depreciation, is bogus. Depreciation is neither inflationary, nor contractionary in the US, in contrast to developing countries. The chances of higher inflation, are also subdued, even with the current long, but slow, recovery with low official unemployment. But it says something that there is all this crazy reaction about a very modest defense of fiscal expansion (note also that after Bernie, and AOC, MMT has become synonymous with fiscal expansionism, in ways that Keynesianism was before; naked Keynesianism, you might argue).

PS: If you are interested on the effects of monetization of public debt read this old post that replied to Krugman (who has warmed up to some functional finance/MMT ideas).

A global macroeconomics – yes, macroeconomics, dammit – of inequality and income distribution

Below the text of the first Godley-Tobin Lecture by James K. Galbraith.

According to an approximate count, there are 848 sub-categories in the classification codes of the Journal of Economic Literature. Of these, five relate to income inequality. Two are classed under Microeconomics: D31 ‘Personal Income, Wealth and Their Distribution’ and D33 ‘Factor Income Distribution.’ Two are classed under ‘Health, Education and Welfare’: I14 ‘Health and Inequality’ and I24 ‘Education and Inequality.’ One is classed under Labor: J31 ‘Wage Level and Structure/Wage Differentials.’

Under Macroeconomics there is nothing, unless you count E25 ‘Aggregate Factor Income Distribution,’ which surely means the analysis of factor shares – Wages, Profits, Rent – also known as the functional distribution. Under International Economics there is no reference to inequality at all. Nor under Development Economics. Simon Kuznets, whose immortal 1955 presidential lecture predates – I believe – the JEL classification scheme, is spinning in his grave.

So if your interest is in the global macroeconomics of inequality – in the personal or household distribution or pay structures considered over time and across continents and countries, you are what is known in the technical literature as shit-out-of-luck. From a formal standpoint. So far as the American Economic Association is concerned, affecting the structure of journals and the assignment of referees, you have nowhere to publish, no place to go. It is, therefore, nice to be here.

Read rest here.

Trade and Finance

Teaching a course on international economics (trade and finance) for international relations students. More on that later. Just wanted to post the exports to GDP ratio for the world.

This is to give students a sense of the increase in trade in the last few decades, and also the relative stagnation since the 2008 Global Financial Crisis. Note that while exports are about US$ 23 trillion in a year, the daily turnover in the foreign exchange market is about US$ 5 trillion, according to the last time I checked the BIS Report.

I put the US recessions bars too. Note that it seems that US recessions always have a significant impact on the expansion of world exports.

Heterodox Journals and Impact Factors

I blogged about journal rankings a while ago. As I said back then, journal rankings matter in decisions about grants and academic promotions, and there are biases against heterodox journals. So even if there are many problems with those measures (read previous post), they are still relevant. The Review of Keynesian Economics (ROKE), founded by Tom Palley, Louis-Philippe Rochon (now at ROPE) and myself, has now an impact factor of 0.738 in last year’s Clarivate Report (Thomson-Reuters citation index, previously known as the Science-Social Science Citation Index, SSCI), up from 0.515 in the 2015 report.

For comparison, well-established heterodox journals were somewhat below, with the Review of Radical Political Economics scoring 0.377 and 0.579 in the same reports, and the Journal of Economic Issues scoring 0.573 and 0.580. The Cambridge Economic Journal, and Metroeconomica also improved and went from 1.311 to 2.070, and from 0.984 to 1.379. Many good heterodox journals are not even indexed.

On the topic of the importance of rankings for tenure you might want to read Heckman and Moktan's paper "The Tyranny of the Top Five Journals."

Raúl Prebish’s Unpublished Manuscripts on the Buenos Aires Lectures on Economic Dynamics

By Esteban Pérez Caldentey

Raúl Prebish’s Unpublished Manuscripts on the Buenos Aires Lectures on Economic Dynamics edited by Esteban Pérez Caldentey (ECLAC) and Matías Vernengo (Bucknell University), have been published in the ECLAC Review, August 2018

Raúl Prebisch (1901–1986), the Second Executive Secretary of the Economic Commission for Latin America and the Caribbean (ECLAC) which he joined in 1949 is mostly known for his long-run analysis and diagnostic of the development problem of Latin America, which he fully stated in “The economic development of Latin America and some of its principal problems” (1950), also known as Prebisch’s “Manifesto”.

However, prior to joining ECLAC Prebisch also devoted a great part of his time and career the analysis of business cycles in theory and in practice (he was the first Director General of the central bank of Argentina created in 1935 and Prebisch himself drafted the project for the bank). On the basis of his cycle analysis he began to develop a theory of dynamics which sought to introduce two elements that, according to Prebisch, were missing from the Classical and Keynesian analyses, time and space.

Prebisch argued that capitalist economies evolved and developed in growth cycles. From 1920 to 1944 his analyses of capitalism centered on Argentina and on the characteristics of its business cycle. He attributed the phases of the Argentinean cycle to external causes determined to a large extent by the policy and economic performance in developed countries (Great Britain and the United States).

Read rest here.

Link to CEPAL Review here.

The three caballeros: on populism and the economy

 

Cartoonish figures... and Disney toons too

With the incoming inauguration of Jair Bolsonaro in Brazil, the United States and the two largest countries in the Latin American region will have what the press has more or less universally and uncritically referred to as populist leaders in power. It has been very common in the press to compare Trump and Andrés Manuel López Obrador (AMLO) as right and left-wing populists. And although the term has not been applied as often to Bolsonaro, comparisons with Trump abound. Yet, while they do share certain characteristics, I would argue that populism is not one of them. The comparisons that make them all similar are at the end of the day caricatures.

Admittedly populism is a complicated and somewhat fuzzy term. It has a complicated history, and many in the developed world associate it with the old agrarian movements in Russia and the US, and can be seen as somewhat progressive. Alternatively, in Latin America it has been more often than not associated with the rise of Peronism in Argentina, and the affinities with Italian corporatist and fascist ideologies leads many to see it as somewhat reactionary movement.

The economic definition of populism, or what Dornbusch and Edwards called macroeconomic populism, is even more problematic. They basically suggested that running fiscal deficits would fit the bill. That makes the list of possible populist leaders almost all encompassing, and devoid of any relevance. I won't try to solve the question of what a good definition of populism is, but I'll try to explain why to emphasize the similarities between the three might not be completely accurate, and might distort understanding of what to expect ahead. Mind you, on some level, one expects that populism should deliver something for the people and should be the opposite of oligarchic regimes.

Trump and Bolsonaro are clearly associated with conservative ideas while AMLO might be seen as a lefty (note, however, that according to Cuauhtémoc Cárdenas, the son of General Cárdenas and an icon of the left in Mexico, that is not correct; see here, in Spanish). While Trump was brought to power by the votes in the Rust Belt (in Michigan, Pennsylvania and Wisconsin) dissatisfied with Free Trade policies that have affected the region, in Brazil and Mexico a fight against corruption (real or perceived) played a more important role (something stimulated by US interests in LA). In Brazil, during the Workers' Party (PT) administration income inequality decreased (and real wages went up). A mediatic-juridical coup brought down the government, and Bolsonaro represents the continuity with the coup. AMLO represents the dissatisfaction not just with the economic woes of Mexicans, but with the failures of democracy (including the return of PRI, Institutional Revolutionary Party, after two governments of PAN, National Action Party).

In the case of Brazil, the formerly nationalist Bolsonaro has actually appointed an openly neoliberal Chicago Boy to the newly enlarged economic ministry. While Trump and AMLO are less keen on Free Trade, it is unclear that this would be central to Bolsonaro and the opposite might be true (Paulo Guedes, his economic minister seems to dislike MERCOSUL, but not free trade). Also, while Trump trade disputes with China can be seen as part of a reaction to the latter's challenge to American Hegemony, and both that and the increase in military spending might extend for a bit the slow recovery and the bubbleized American economy, the tax cuts and the resistance to any kind of expansion of social spending will imply that very little of the growth trickles down to the less privileged in American society. In the two LA giants, austerity will, most likely if they follow through with their fiscal plans, lead to slow growth. Worse, they will be unable to use the US/China conflict to gain advantage for national strategies of development, but for very different reasons. In Brazil because Bolsonaro (and his fanatic foreign affairs minister) suggest direct alignment with American interests. In Mexico, because the new UMSCA ties the hands of the government in many ways (something that AMLO seemed to welcome, or at least did not think he should fight it).

While Trump has at least promised an expansion of infrastructure spending (and the infamous wall of shutdown fame too), making him somewhat populist in Dornbusch's definition, both Bolsonaro and AMLO promise austerity and balanced budgets. While AMLO wants to raise  raised (h/t Guillermo Matamoros) the minimum wage, there is no indication that Trump or Bolsonaro think a minimum wage should even exist.

Trump for all his anti-establishment rhetoric is no threat to the American oligarchy (Pence is in the pocket of the Koch brothers, if anything else needs to be said). I had suggested a while ago that with Bolsonaro Brazil could follow the path of Mexico or of 19th century Brazil, "an oligarchic state... in which the rents of a relatively stagnant... economy were distributed among a few powerful families, while the vast majority was left out." At least AMLO is trying to break with Mexican oligarchic traditions. It might not be enough. Happy old year!

A primer on the economics of immigration: a surplus approach perspective

This is definitely not my topic of research. So you may very well ask why would I venture to wrote about it, beyond the obvious reason that it is probably one of the most debated issues these days in the US, with the government shutdown being related to the now infamous wall. I am myself twice an immigrant, I descend from immigrants (my parents returned to their country of origin, but had emigrated, and on my mother side my grandfather was also an immigrant, and the same goes on my father's side a few generations before), I might add. But that is not the whole, or the most relevant, reason.

Most debates about immigration center on labor market issues, and discuss the issue analytically with the tools of marginalism. The conclusions, by definition, are the logical consequence of the assumptions in that model, and the reading of the evidence is biased by those theoretical concepts. Here is a place were the capital debates (go read this very old post) might be important for a policy issue that is in the news constantly and that should concern economists. Being in favor of a return to the old and forgotten method of classical political economy, or the surplus approach, and not having seen any discussion of the issue along those lines is what led me to write this brief post.

Let me start with a very simple representation of the conventional argument. In the conventional story, you have a market for factors of production (labor in this case), and equilibrium is obtained when the marginal productivity of labor equals the marginal disutility of labor, where firms maximizing profits and individual workers maximizing utility find the optimal solution, shown in point C in the figure below (with variables with their traditional meanings; note I use N for labor, since I leave L, for liquidity; yep, I still teach the ISLM with that pesky L in there).

In this case, the effects of immigration are relatively simple to understand. Mainstream economics suggests that immigrants would add to the labor force, increase the labor supply, reduce the real wage, and lead to firms hiring more workers and increasing production. Output and employment should go up, while real wages would go down. The effect on the wage bill (W/p * N) depends on certain assumptions, but certainly native workers lose to the extent that their real wages go down. Hence, a backlash against immigration by working class native groups should be expected.

This simple analysis abstracts lots of things, of course. Differences in the quality (skills) of workers, and immigrants, and what would happen in the presence of capital mobility (with profits going up, with lower real wages, and capital mobility, then new factories should move into the country to take advantage of lower wages and increase the demand for labor, eliminating any initial effects on real wages). A lot of the academic debate has been based on arguments along these lines (see, for example, the Card and Borjas debate on the effects of the Marielitos Cuban immigrants in Miami real wages in this nice Vox post). Note, also, that the evidence suggests that the effects of immigration on real wages of unskilled workers are relatively small (if you believe Card).

In this view, then, there are some acceptable reasons for workers to be concerned with immigration. Note that this says nothing about fiscal issues, which many conservatives also use against immigration, suggesting incorrectly that they do not pay taxes (they certainly pay sales taxes, and other local taxes, and given the low incomes of most unskilled workers, would not qualify for income tax anyway), and take advantage of public goods. However, there are many analytical problems with the assumptions of the model above.

Note that the basis of the marginalist (or neoclassical) model presented above is the principle of substitution. In other words, as labor becomes cheaper than capital, that is by assumption fully utilized, then firms hire more labor. So the lower wages guarantee the full utilization of labor. The intensity of labor increases as its remuneration falls, and the price of labor, as any other price in marginalist theories (Austrian too, although they sometimes confuse this) reflects the relative scarcity of the factor of production. Note that for classical political economy authors (including Adam Smith) real wages resulted from historical and institutional factors, and supply and demand were only one of the factors affecting them. Under the conditions they analyzed the economies of their time they assumed that real wages were essentially at subsistence level.

The capital debates become relevant because they essentially show that the substitution principle has logical problems, and they open the possibility to a return of the sort of historical and institutional analysis of the labor market of classical political economics. I will not discuss the whole issue here again (check that post linked above), but the essence of the argument is that sometimes when real wages go down instead of leading to firms hiring more workers, the opposite might occur. Think of a situation in which real wages fall, and as a result, there is less demand for the goods produced by the firm. Perhaps the firms goods are bought by workers themselves.  Even though labor is cheaper, there is no reason for the firm to hire more workers if they cannot sell their goods, and the income effect overwhelms the substitution effect (the capital debates suggest that the substitution effect may go in the wrong direction, on top of that). That's essentially what Keynes said on chapter 19 of the General Theory (in chapter 2 he basically accepts the marginalist demand curve above, which is problematic, and shows the limitations of the supply curve; my paper on reading Keynes after Sraffa, the key author of the capital controversy, here).

The point is that it cannot be guaranteed that immigration would lead to a reduction of real wages, at least not on the basis of the logic of the model above. The actual result is ambiguous. Classical political economy provides an alternative framework to look at the labor market effects of immigration. It is clear that an increase of the labor supply might affect negatively the bargaining power of the established workers. But note that this is not always necessarily the case. Arguably, in the case of many immigrants in the so-called first globalization (late 19th to early 20th century), in which significant amounts of Socialists and Anarchists from Eastern and Southern Europe came to the US (and other parts of the Americas), the effect was to raise the class consciousness and the combativeness of the working class, helping strengthen some unions.

And the reverse is true, a country that experiences emigration might actually lose key workers, and unionization rates might decrease. In the last 30 years or so, the US has experienced an increase in the population of immigrants, many came from Mexico of course, and yet both countries have experienced a decrease in unionization rates (see here for Mexico). This suggests that other forces are in action, and that wage stagnation might be related to those policies, and not just, or not even fundamentally, as a result of the flows of workers from one country to the other.

Note also that classical political economy authors assumed that output was given in their discussion of distribution, and that separation of the theories of output and employment (dominated by Ricardian Say's Law, that was not a necessary feature of classical thinking, and that can be superseded by the Keynesian Principle of Effective Demand) allows us to understand other aspects of immigration. In other words, the level of output and employment would depend on autonomous spending (demand), and immigrants can easily be accommodated in society without displacing the native workers. Of course that would depend to a great extent on the government macroeconomic policies (not just fiscal and monetary policy, but also the setting of minimum wages, industrial and trade policy and so on).

In this view, it is less the effects of immigration on the labor market (along neoclassical lines of reducing real wages and increasing employment) that matter. It has been the policies that actually led to lower growth, lower union participation, trade policies that favored the loss of manufacturing jobs that have created the conditions for real wage stagnation. In that sense, it is those policies that are responsible for the backlash against immigrants among large groups of resident (native) workers, that could be exploited politically by right-wing populists, often with fascistic and authoritarian tendencies (not just in the US). Immigrants are actually escaping from similar neoliberal policies in their countries of origin.

And all of these points are just about the most direct economic consequences of immigration. There are other issues that are as relevant beyond economics. And it goes without saying that both immigrants and refugees (in particular those that result from US direct or indirect intervention abroad) deserve humane treatment, even if the conventional mainstream story was correct and immigration did cause inequality.

Galbraith versus Piketty on Inequality

A new paper by James k. Galbraith has been published in Development & Change. It's along the lines of his arguments in the Godley-Tobin Lecture delivered earlier this year, and to be published in the Review of Keynesian Economics (ROKE) in January. Basically, we need a macro story for inequality (which Piketty r-g framework tries, but ultimately fail to provide) and that the payroll data that Galbraith uses provides a more accurate measure of inequality than the tax records favored by Piketty and his co-authors.

From the abstract:

This article reviews the World Inequality Report 2018, a large collaborative data project based on the work of Thomas Piketty and the late Anthony Atkinson, which critiques the entire literature of inequality measurement from survey data and purports to provide superior, unprecedented and reliable coverage of income and wealth inequalities over the entire world, based primarily on tax records. The article examines three major issues: the coverage provided by tax data in the world economy, the consistency of tax data with other sources of information on income inequality, and the peculiarities of tax‐based measurement of inequality in the United States. Then a comparison is made with measures drawn from other forms of administrative data — specifically payroll records — which are generally more consistent with records of inequality measured in household surveys than are tax records. Following this, the article discusses the analysis of wealth and wealth inequality before offering a few closing remarks about policy.

Read full paper here. 

Financialization and the low burden of public debt

Financialization is a fuzzy concept. There are many definitions, and none is clear cut, at least to characterize the changes of the last 40 years or so, which is the period most authors associate with financialization. I'm not suggesting it's not a useful concept though.* In some sense, financialization refers to the last phase in the capitalist system (even if there are ways in which one might argue that capitalism was always financialized).

At any rate, going to the point I wanted to make, the financial burden of public debt went down in the 2000s, but that is not necessarily a good sign. I was trying to check the financial burden of public debt (i.e. the total spending on interests, out of total current spending) in the United States. The figure above shows that the financialization (ha, another possible definition) of the budget started with the Volcker shock, and ended more or less with the collapse of the dot-com bubble in the early 2000s.

The hike in interest rates in the late 1970s increased the financial burden of public debt, and with the lower output growth -- associated not just to higher interest rates and its effects on consumption, but also higher unemployment and lower wages which additionally impacted private demand -- debt dynamics was on the unstable side of the Domar rule (r > g) and public debt increased significantly in a peaceful period that was for the most part prosperous.

Public debt normally increased in periods of crises or of external threats (wars). In other words, public debt was an instrument for the preservation of society for the most part. There was also an agreement that public debt was a necessary instrument for the accumulation of capital, and it provided a secure asset for the functioning of the financial system. Btw, that was a point that was contentious, and not everybody accepted the Hamiltonian notion that public debt could be, to some degree, a blessing. Think of Andrew Jackson's payment of debt, and the various modern Cassandras afraid about the debt burden on future generations.

The rise of public debt since the 1980s (with the minor decrease in the late 90s) has served a very different purpose. While part of it can be seen as the reaffirmation of American Hegemony, with the increased military spending of the Reagan years (still low if compared to the heights of war, hot or cold), much of it was the result of lower taxes for the wealthy. The accumulation of debt was, like the hike in interest, necessary to discipline the labor class and control inflation.

In part, the result of that perverse use of public debt accumulation is that private agents have ramped up private debt in order to compensate for income stagnation. Think about college kids accumulating more debt to compensate the reduced public support for public universities. That of course goes hand in hand with the fact that most booms now are associated with some bubble (stock market, dot-com, housing, etc), or in the absence of a bubble we end up with a moderate lack luster recovery (the last decade), and what is confusedly described as 'secular stagnation.' The flip side is that the low burden of debt on this side of the 2000s, is not benign like the one from the 1950s to the 1970s, which was closer to what Keynes' notion of the euthanasia of the rentier.

It reflects the needs of the economy to maintain private debt under control in a relatively unstable economy. Something that is still necessary to the extent that labor is still very much being disciplined by macro and micro policies that keep wages under control.

* For a relatively recent discussion of the meaning of financialization and its relevance see Epstein (2015) here, and for an older discussion see Palley (2007) here.

Middle Income Trap or the Return of US Hegemony

Short essay in Spanish for the special (40 year anniversary of the journal Coyuntura y Desarrollo, published by the Fundación de Investigaciones para el Desarrollo, FIDE). It is essentially a critique of the concept of middle-income trap and the idea of how the demographic transitions (discussed here before) affect the process of development. It suggests that the deindustrialization of the Latin American periphery results as much from the decisions in the hegemonic country to open up China, as from the decisions of the local elites to adopt neoliberal policies to punish its labor class. It is also noted that the deindustrialization of the central countries (particularly the US) should be taken with a certain degree of skepticism (see this old post), since manufacturing output went up (even if manufacturing employment has gone down, at least since the entry of China in the WTO), and the US maintains a significant leadership in key industrial sectors (let alone the military; see also this more recent post).

Garegnani on Sraffa and Marx, with an intro by Petri

The Review of Political Economy has done a great service to those interested in political economy, and in particular those concerned with the revival of the surplus approach. It has published the manuscript of Pierangelo Garegnani's unpublished paper.

From Fabio Petri's introduction:

In the last year of his life, Pierangelo Garegnani (1930–2011) worked on revising a paper on Marx’s labour theory of value drafted 30 years before, which had remained unpublished. This revised paper is what is reproduced below. 

The paper had been read at a 1980 Conference on Marx in Bielefeld, Germany. It was a new version, in English, of the paper ‘La teoria del valore: Marx e la tradizione marxista’, published, together with an early Italian version of Garegnani (1984) as well as some other material, in Garegnani’s Marx e gli economisti classici (1981: pp. 55–90); the project had originated in a series of articles published in the Italian weekly Rinascita in 1978 and 1979. In the opening page of an essay on ‘The Labour Theory of Value: ‘Detour’ or Technical Advance?’, Garegnani (1991: pp. 97 and 113, endnote 4) announced the present work as forthcoming, but in fact the paper did not go to print. In September 2010 Garegnani resumed working on the paper, to add to it a further Section IX concerning more recent discussions on Marx and the labour theory of value. He intended to co-author this additional Section with me, and it is from the ensuing collaboration that I have obtained the typescript of the Bielefeld paper, dated 1981, titled ‘The Labour Theory of Value in Marx and in the Marxist Tradition.’ On why this 1981 paper was still unpublished 10 years later, what went wrong with its publication in 1991, and why then the paper remained dormant for nearly 20 more years, Garegnani supplied little information. About these questions one can only wait for when an examination of his papers and correspondence – a vast task yet to be commenced – will possibly allow for a well-founded historical reconstruction of his choices. 

Unfortunately Garegnani passed away in October 2011, before a draft of the additional Section IX could be achieved (see Petri [2015] for further details). But in that last year he also worked on revising the Bielefeld paper, that is the first eight sections of the intended new paper. The result of the revision is presented here. Although not a final version ratified by the author, it is a fully autonomous paper, and quite definitive: the draft contains no incomplete sentences or notes by Garegnani indicating that certain points might need further work. Relative to the 1981 version, it contains additional observations and stylistic improvements, but no changes in the basic arguments. 

The aim and contents of the paper were summarized at some length by Garegnani himself when announcing it in the opening page of the 1991 essay. In that summary, which can now be read as an introduction to the arguments contained in the paper here submitted to the public, Garegnani (1991: p. 97) stresses that the paper is devoted to further confirming the thesis, advanced in Garegnani (1984), that the role of the labour theory of value in the classical approach and in Marx was the ‘technical’ one of providing a ‘measurement independent of distribution, of product, wages and means of production,’ thus allowing a determination of the rate of profits as the ratio of net social product to capital advances, surmounting, in the only – albeit imperfect – way concretely available at the time, the (apparent) vicious circle of a rate of profits dependent on relative prices in turn dependent on the rate of profits. With particular regard to Marx, Garegnani explains, the confirmation is achieved by showing that the traditional interpretations that attribute other roles to the labour theory of value ‘have little foundation in Marx’s own work. This applies in particular to the readings often made of some characteristic concepts of Marx, like his distinction between ‘inner’ and ‘apparent’ relations of the bourgeois system, the distinction between ‘abstract’ and ‘concrete’ labour, the representation of the wage as ‘value of labour power’, or the sense in which Marx refers to labour exploitation – a sense which, as he explicitly states, has little if anything to do with the labour theory of value.’ These interpretations ‘have indeed made it difficult to comprehend a large part of Marx’s theoretical work’. No attempt at diplomacy here! The published 1991 essay is then presented as an appendix to that still unpublished paper, defending the latter’s arguments against the views on Marx’s labour theory of value expressed by Samuelson, Baumol, Myrdal, Meek, Morishima, and Sen. 

There remains to indicate why publishing this paper today is deemed important. The main reason is that Garegnani’s understanding of the role of the labour theory of value in Marx (and of the correct reading of those ‘characteristic concepts of Marx’) appears to be scarcely known outside Italy [1], a fact that has helped the frequent placement of his overall approach in the ranks of an allegedly anti-Marx ‘Sraffian school’. This reaction is hardly surprising in the light of the substantial diversity of Garegnani’s theses from the long-dominant ones. So dominant was the tradition attributing to the labour theory of value indispensable roles other than the one indicated by Garegnani – for example, the role of proving labour exploitation – that it is not difficult to understand that the spontaneous reaction of scholars steeped in the traditional interpretation may have been one of skepticism, if not of hostility, toward a view which, by claiming that nothing is lost by replacing the labour theory of value with Sraffa’s equations, seemed to reject fundamental elements of Marx’s assessment of the nature of the capital–labour relation. The absence of a detailed exposition in English of the arguments Garegnani supplies in support of his views has made it difficult to give those arguments the attentive consideration warranted by the recognized depth of thought of the author. The publication of the present paper aims at making such adequate consideration possible [2]. 

The criticism, in the last sections of the paper, of two Italian scholars absent from recent debates does not seem to be outdated either, because views similar to those they expressed are still present today. The near identification one finds in Lucio Colletti’s (1924–2001) writings of the concepts of fetishism, alienation, and abstract labour continues the long (and still alive) tradition stressing the ‘qualitative’ roles of Marx’s labour theory of value, and has been influential outside Italy too (see, for example, Foley 1982: p. 46, fn. 5). The argument put forward by Claudio Napoleoni (1924–1988), that outside the labour theory of value one cannot view profits as the fruit of exploitation [3], is representative of a widely shared view that helps us to understand the reluctance of many Marxists to replace the labour theory of value with the correct analysis of prices as provided by Sraffa. 

Independently of how convincing it will be found, this paper questions the idea of a so-called ‘Sraffian school’ antithetical to Marx. Leaving aside the analytical and even philological legitimacy of referring to Sraffa’s work and its later developments as any new particular ‘school’ distinct from the modern reappraisal of the classical approach to value and distribution, the paper shows that no such counterposition is applicable to a scholar highly representative of that line of thought, in whose view Marx’s overall approach actually turns out to be strenghtened, rather than challenged, by the correct determination of rate of profits and prices achieved with Sraffa.

Notes

[1] The publication in 1985 of a French version of the Bielefeld paper (Garegnani 1985), also containing a short appendix criticizing Rowthorn (1974), does not seem to have been widely noticed: I have found it cited in only one (unpublished) paper concerned with Marx’s theory of value, Chattopadhyay (2000).

[2] And at supplying at last the needed background to the 1991 essay.

[3] Napoleoni’s argument is available in English in Napoleoni (1991). Garegnani does not cite this article, presumably because of the little time he had to work on the last three Sections, which have remained almost unchanged from the 1981 version.

Most of these issues were briefly tackled in this old post.  Read paper by Garegnani here.

H/T to Franklin Serrano and Sergio Cesaratto for bringing the paper to my attention.

Jamie Galbraith on Robert Skidelsky's new book Money and Government

The review was just published in American Affairs.

The Past and Future of Political Economy

by James K. Galbraith

In this remarkable work, Robert Skidelsky—historian, biographer, and tribune of Keynesian ideas in the House of Lords—unites his experience, knowledge, and talents in a sweeping account of money and power. His topic is not money and power in the familiar (one might say Trumpish) sense of the use of one to obtain the other. Rather, he presents an intellectual history of the control over money as an instrument of state power.

Whether money ought to be conceived as such an instrument is a matter of historic controversy and remains a contested theme in political economy. On one side are those who justify government control over money as a tool of policy: mercantilists, imperialists, war-fighters (as a point of practical necessity), and the followers of John Maynard Keynes. On the other side we find those seeking a stable, automatic, rule-bound economy, independent of politics and in the effective service of creditors over debtors, rich over poor. Here we find David Ricardo, Irving Fisher, Milton Friedman, and—until mugged by reality in 2008—Ben Bernanke. This is the battleground of silver against gold, of bank credit versus specie, of easy money versus tight, of full employment against inflation-targeting as the prime goal of policy. Money and Government brings these battles and their principals into crisp focus over centuries of mostly British but also American political economy.

Read rest here.

Arguments for austerity, old and new

Here what I think may be is Fernando Cardim de Carvalho's last published paper (who passed away recently), published in Intervention. From the abstract:

Much of the criticism directed at austerity programs implemented after the 2007/2008 financial crisis, more forcefully in the eurozone, have relied on the same arguments Keynes and others raised against the (British) Treasury View developed in the 1920s and 1930s. Austerity, however, has been proposed most insistently in the 2010s by European authorities, led by the German Federal Ministry of Finance, the Bundesfinanzministerium (BMF). While the arguments for austerity then and now share some common elements, there are enough original arguments being presented by the BMF to make many of the criticisms ineffective. The paper reconstructs both views, the Treasury's and the BMF's, to show and evaluate their similarities and their differences.

There is also an obituary by Fernando Ferrari here (subscription required).

Heterodox Central Banking in the Periphery

Our paper with Esteban Pérez on Prebisch's missions as a Money Doctor during the Fed-led missions directed by Triffin to Paraguay and Dominican Republic has been publish in Research in the History of Economic Thought and Methodology. From the abstract:

Traditionally, monetary policy in Latin America followed the recommendations of the missions of the monetary “doctors” who defended an independent central bank and a pro-cyclical monetary policy, adhering to the automatic adjustment of the gold standard. A key function of central banks was to support fiscal stability. The effects of the Great Depression and its aftermath in the periphery countries questioned these recommendations and gave way to a shift in monetary policy. An illustrative example is provided by the creation of the Central Bank of the Argentina Republic (BCRA) under the auspices of Raúl Prebisch, and the technical assistance missions of the United States Federal Reserve to several Latin American countries some of which were led by Robert Triffin. Prebisch actively participated in mission to Paraguay and the Dominican Republic bringing the experience he had acquired as director of the BCRA and the tools devised to adapt monetary policy to a changing external context and circumstances. The use of the discount window and exchange controls, among other instruments, was seen in this new view as necessary to pursue counter-cyclical policies and to provide support for industrialization and full employment in the periphery.

Read rest here. 

The End of Brazilian Democracy

As noted in my previous post on this, there was a good chance that the Neo-Fascist candidate Jair Bolsonaro would win the election in Brazil. And he did, with approximately 39 percent of all votes. There are only a few things that I want to point out about this.

The Workers' Party (PT) candidate received about 32 percent of all votes. Note that 29 percent or so did not vote, in one way or another. So PT maintained almost one third of the electorate in this election, while its rival in the previous 6 elections (PT was the winner or close runner up going back to 1989), the Social Democrats (PSDB), has vanished. And the defeat of PT was possible only with years of judicial harassment, the illegitimate imprisonment of the party leader (Lula), the blocking of his candidacy, precluding him from giving interviews, and the relentless media campaign against PT, tarnishing the party as corrupt. In that sense, the result is not unexpected, and puts in question the meaning of democracy in Brazil, to say the least.

The second important point is that the economic situation will certainly not improve, for those that think that the Brazilian problem was  simply  political instability. In fact, the incoming administration would be a more radical version of the neoliberal post-coup government of the last two years. They are trying to negotiate social security reform, meaning cutting off benefits, and partial privatization, before the end of the year to avoid the political costs associated with it. That on top of the labor reform that was approved last year. The notion is that one would allow for higher savings, since people would be forced to save for retirement, and the other would allow for lower wages, with one leading to higher investment and the other to higher employment. Of course, the logic behind that is hard to sustain, and the evidence regarding this kind of structural reforms is very clear about their failures. Expect lower wages, and higher poverty in old age. And no growth.

The rest is based on the vague rhetoric of the minimal state, meaning spending less (and also taxing less), liberalization and privatization, with a strong geopolitical alignment with the United States (meaning leaving aside even right wing governments in Latin America, like Macri in Argentina). The question is whether they will really promote fiscal adjustment. Paulo Guedes, the incoming minister of the economy (with the finance and planning ministries unified) has suggested that a zero deficit will be pursued (an idea that seems that of an ideological fanatic rather than someone with experience in this matters). It also seems that there will be a greater willingness to allow for a more depreciated real, perhaps creating an exchange rate target. Note that these discussions were very superficial and went hand in hand with the revived idea of using the external reserves for financing the buying of public debt in reais.

I'm more skeptical than Luis Nassif about the the possibility of higher growth related to the competitiveness of a depreciated real. Btw, this was a well-known New Developmentalist proposition, and I'm not sure how it fits with Guedes's Chicago Boy credentials. At any rate, if that happens expect more inflation, and additional contractionary effects of the depreciation. On the second point, the use the reserves to pay down debt in reais there is nothing good to say. It's preposterous. There is no need to use dollars to finance debt in domestic currency. And the whole point of that huge pile of dollars is to avoid a crisis like the Argentine one.

Perhaps, the last two issues that I want to emphasize are the more important ones, and somewhat counter intuitive, relating to his relation to populism and corruption. There is a widespread view that the incoming president is nationalist and that somehow links him to other right-wing populists in the world, like Trump. While it's true that his origins are in a sort of right-wing militaristic nationalism, it is clear that he was willing very fast to shed any ideas regarding the protection of national economic interests. His economic policies will promote free trade and privatization, and will go in the opposite direction of the global trends. Unlike Trump that has been somewhat nationalistic in his trade renegotiations with the North American partners and more clearly with China, Bolsonaro will give up any leadership role in Latin America and discard Mercosul. In part that is the result of Bolsonaro adapting to the needs of the political system in Brazil, and understanding that in order to get elected he would have to signal to the local elites his willingness to promote neoliberal policies.

And that's the most important thing that everybody missed with his election. No, he is not the result of the vote of people tired with corruption. Some (perhaps many) uninformed voters might have that as their main reason for voting him. He's an entrenched politician, with almost three decades in congress (even if an irrelevant one). Bolsonaro is the enthronization of the corruption, meaning the normal back and forth pork barrel politics that allows for policies to be passed in congress. He is the product of that. The elites thought they could use congress, for the impeachment, and the Car-Wash (Lava-Jato) operation against corruption to deliver the government to a PSDB candidate. They failed partially. Bolsonoro rather than the PSDB was the lucky inheritor of the destruction of Brazilian democratic institutions.

But the coalition that was behind the coup is still in power. That is clear with the acceptance of a cabinet position by Sergio Moro, the Car-Wash judge.* That is, the same coalition that allowed all administrations to govern since the return of democracy will be put in place with an increasing role of smaller parties (many connected to Evangelicals; this should be part of another discussion, since it did have a role in his rise, but here again he used that more than representing these movements). And the corruption will continue, but it will not be investigated.

People that voted for him were tired of the inability of PSDB to win elections, and they were essentially anti-PT because they hated the social improvements of the good decade of growth and inequality reduction. The key to the victory was wiping out of one third of the vote, creating high levels of abstention. These are people in the middle, that decided that between a right-winger flirting with authoritarian rule and PT there was no good alternative (and the media, including the international one, facilitated that message). Perhaps, the epitome of that behavior was the ex-president Fernando Henrique Cardoso. Even Cardoso, that Bolsonaro had suggested in the past should have been murdered by the military, said he would not vote for him, but did not endorse Haddad, the PT candidate.

So in my view, the one third of the vote indicates that PT will remain, in spite of all these pressures, the main left of center party in the country in the near future. PT is NOT dead (we will see in the next few years, but that's my bet). Second, expect neoliberal policies to worsen the economic crisis in course. Bolsonaro is not a nationalist in the mold of Trump, although he has authoritarian tendencies, and democracy is at risk. And he is the result of a corrupt bargain to promote the return of the same ruling elites that were in place before PT. How long can he govern without economic recovery, you may ask. Look south to Argentina for an answer. Three years into a disastrous administration it's still unclear that the Peronist left could mount a viable alternative in next year election. So we will have very though years ahead.

* He is the judge responsible for Lula's process, and that paved the way to Bolsonaro's victory (even though he probably preferred a PSDB victory) is going to be the equivalent of the attorney general, the minister of justice.

The Global Crisis: Beyond Secular Stagnation

My talk last year (2017) at the Critical Economics Summer School of the Unviersidad de Valldolid (in Spanish). It was great to meet and interact with lots of progressive thinkers in Spain.

Symposium on "Milton Friedman’s Presidential Address at 50"

Here all the links to the papers of the last issue of the Review of Keynesian Economics:

• Thomas Palley and Matías Vernengo: Milton Friedman’s Presidential Address at fifty

• Robert Solow: A theory is a sometime thing 
• Robert J. Gordon: Friedman and Phelps on the Phillips curve viewed from a half century’s perspective
•  David Laidler: Why the fuss? Friedman (1968) after 50 years 
• Roger E. A. Farmer: The role of financial policy 
• James Forder: Why is labour market adjustment so slow in Friedman’s presidential address? 
• Thomas Palley: Recovering Keynesian Phillips curve theory: hysteresis of ideas and the natural rate of unemployment 
• Antonella Stirati and Walter Paternesi Meloni: A short story of the Phillips curve: from Phillips to Friedman… and back? 
• Servaas Storm: The wrong track also leads someplace: Milton Friedman’s presidential address at 50 
• Louis-Philippe Rochon and Sergio Rossi: The relationship between inflation and unemployment: a critique of Friedman and Phelps

The budget, the fragile recovery and the next recession

I'm not a forecaster. I do macro, and worked for Wynne Godley at the Levy, but I feel that there are too many dangers in forecasting. Wynne was also, btw, more concerned with what he called medium term scenarios, than pinpointing when a recession would take place. The obvious joke applies here. Economists have predicted 10 of the last 9 recessions. Having said that let me do the exact opposite and throw caution to the wind.

So I'm going out on a limb here. Everybody thinks the recession is around the corner. I'm more skeptical. Let me start by looking at what Martin Wolf has said in his last column, since he seems to be close to what consensus views would argue. He resuscitates old views about confidence cycles. For him: "Bull markets, it is said, climb a wall of worry... so much optimism was already in the prices of financial assets — in the US, above all — that once worry returned they had nowhere to go but down." He suggests that a "jump in risk aversion" might trigger the recession.

Worse, he suggests, following the IMF (that has changed its mind, according to many), that the US government has not helped by embarking on a highly irresponsible, pro-cyclical fiscal expansion on top of what the IMF labels 'already unsustainable debt dynamics'." In other words, expansionary fiscal policy will promote a crash by sapping the confidence of financial markets. Presumably we need sound finance.

The worst risk for him comes from populism, particularly in the US. He notes:

"The biggest shift of all is in the US. Last week, President Donald Trump broke a longstanding taboo by condemning recent tightening by the Federal Reserve. Under him, the US has also embarked on an assault on the World Trade Organization’s dispute settlement system and an open-ended trade war with China."

As I noted in my previous post on this, the biggest risk in my view comes from monetary policy in the context of a relatively fragile and slow recovery, even if it is a very prolonged one. The yield curve (see below; I use the Fed Funds and the 10 year bond rather than the 10-2 spread, since the Fed Funds is more clearly a policy rate, and gives you the result of policy actions) is closing, but if the Fed does not raise the basic rate too fast, there is a chance for the slow expansion to continue.

Note that there are other indicators that suggest that even though the recovery is not great, it may continue for a while. For example, if one looks at Gross Fixed Capital Formation, it is clear that an initial downturn seems to have subsided (like in the mid-1980s), and that the system got a second wind.

Capacity Utilization in Industry shows a similar picture. Note that this does not mean that the recovery is strong by any means. But last week the news, in spite of the unstable financial markets, were if anything indicating that the economy may continue on this path. I'm referring to fiscal news.

The budget deficit increased. That in and off itself says nothing, since the deficit is endogenous. In part the deficit went up as a result of tax cuts (a lot going to corporations and the wealthy). But also higher spending, quite a bit on defense. So there is a lot to complain about how money is being spent and how taxes are being collected. But that provides a modicum of stimulus. Trump, one should note, actually was more accurate on this than Wolf. He said that there is no fiscal danger, and that the US runs no risk of default (so why would financial markets be concerned with that), since the US can print money. Note that printing money might have consequences, but these are not the ones orthodox economists often suggest (see more here).

Contrary to Wolf I don't think that the trade wars would affect significantly the US economy. It might affect China, and certainly will have effects on the supply chains of US corporations. It might lead to higher prices, but it's implausible that it would bring the economy to a halt. The American economy depends on domestic demand. Nothing much will be affected by the trade war on that front. Also, while I think that student debt (and car loans too) are out of control, and will have implications, it's not clear that these, by themselves would cause a recession, in the way that mortgage loans did last time. They might not affect domestic demand to the same extent, at least not in the short run.

If there is a risk (besides monetary policy) is the persistence of financial speculation and the shadow financial sector, as represented by for example Collateralized Loan Obligations (CLOs), which have been going to high risk non-financial corporate firms (like Sears). But that does not mean that a recession is around the corner, and this weak recovery can (arguably) prolong itself for a few more quarters. Hey, conceivably it might go on until the 2020 election, giving Trump a serious shot at reelection (and that's not a happy thought).

US technological hegemony

Where the Digital Things Are

I have suggested for a while here (this entry from May 2011) that deindustrialization in the US has not meant a decline in technological hegemony. Consider big tech digital firms in that respect. From the new Trade and Development Report:

The widening gaps across firms have been particularly marked in the digital world. Of the top 25 big tech firms (in terms of market capitalization) 14 are based in the United States, 3 in the European Union, 3 in China, 4 in other Asian countries and 1 in Africa. The top three big tech firms in the United States have an average market capitalization of more than $400 billion, compared with an average of $200 billion in the top big tech firms in China, $123 billion in Asia, $69 billion in Europe and $66 billion in Africa. What has been significant is the pace at which the benefits of market dominance have accrued in this sector: Amazon’s profits-to-sales ratio increased from 10 per cent in 2005 to 23 per cent in 2015, while that for Alibaba increased from 10 per cent in 2011 to 32 per cent in 2015.

For a country in decline, the US corporations are doing surprisingly well. Again, the problem of deindustrialization is one of the consequences for working class people, and inequality. American corporations, capitalism if you prefer, is doing fine. Workers not so much (and hence Trump).

Brazil is Falling Under an Evil Political Spell

By Thomas Palley (guest blogger)

Brazil is falling under an evil political spell. The leading candidate in the presidential election is Jair Bolsonaro, an extreme right-wing politician. It is as if voters are sleepwalking their way to destruction of Brazilian democracy. Under the spell’s influence, they have become blind to the truth about Brazilian politics and blind to their better nature.

Read rest here.

Bob Solow on Friedman's Presidential address and the natural rate failure

His full paper was published in the Review of Keynesian Economics. He reminds us that it was a talk to undermine 'eclectic Keynesianism' about which he says:

Milton Friedman's famous presidential address of 1968... aims to undermine the eclectic American Keynesianism of the 1950s and 1960s, the habits of thought to which Joan Robinson attached the (unintentionally) complimentary label of ‘bastard’ Keynesianism. I will only say a little about what that was. In fact, the adjective ‘eclectic’ is meant to remind you that it was not a tight axiomatic doctrine but rather the collection of ideas in terms of which people like James Tobin, Arthur Okun, Paul Samuelson and others (including me) discussed macroeconomic events and policies.

More substantively, he argues, correctly my view, that Friedman's misperception model was not accurate, and that the Volcker shock was not caused by any misperception. In fact, Solow suggests that:

So the Fed was in fact able to control (‘peg’) its real policy rate, not for a year or two but for at least six years, certainly long enough for the normal conduct of counter-cyclical monetary policy to be effective.

Note that this is the real, not nominal rate. But perhaps Solow's most important conclusion, drawing from the evidence and Blanchard's more recent contributions is that: "findings imply that there is no well-defined natural rate of unemployment, either statistically or conceptually." In that regard, I think that Solow goes further than Blanchard, and I'm glad he does.