Thursday, May 21, 2015

More on Secular Stagnation

Mauro Boianovsky and Roger Backhouse have written a brief post on the topic, based on a longer paper. As I understand the modern version, due essentially to Larry Summers, it basically suggests that there are insufficient investment opportunities, or a savings glut to use Bernanke's hypothesis, discussed here before. I explained why it doesn't seem particularly compelling story in that previous post. If public spending picked up in the US, so would private investment, and the savings glut would vanish. Yes global imbalances would increase. That would be good. Global imbalances would solve the 'secular stagnation' problem.

Note that the Summers' view is different than the Robert Gordon's view, but not incompatible with it, according to which the innovations of the third industrial revolution are less transformative than those of previous waves of technological change. As noted before also, since I believe the evidence for demand driven technological innovation is strong (something called Kaldor-Verdoorn's Law) I don't think there is much to this argument either. The Gordon hypothesis assumes that innovations are supply side determined, like most neoclassical economists, including Schumpeter.

Boianovsky and Backhouse point out something that I didn't know, since I didn't read Hansen's original paper on this, I might add, that the Turner's hypothesis about the closing of the Western frontier played a role in Hansen's stagnationist hypothesis. Not sure what's the mechanism, so I'll check and report back on that. Also they seem to suggest that Domar's debt sustainability condition depends on the Harrod-Domar model. That result, as far as I understand it, is completely independent of the growth model.

I should also note that the only forgotten author in this revival of the stagnationist thesis, is the most interesting of them all, namely: Josef Steindl, author of the 1952 classic Maturity and Stagnation in American Capitalism. Stagnation resulted from the oligopolistic structure of mature capitalism, in his view. Steindl was famously wrong, in the sense that the 1950s and 1960s were not a period of stagnation.* But at least his explanation pointed out in the direction of social conflicts imposed by the productive structure of advanced economies. As I said on my previous post on the topic, there is no secular stagnation problem, associated to lack of investment opportunities, in my view. There is a political problem that precludes more fiscal expansion, or in Steindl's terms, it's stagnation policy.

* An issue he discusses in his 1979 Cambridge Journal of Economics paper (subscription required).

Wednesday, May 20, 2015

Fraternity of Failure: The Alternative Version

By Thomas I. Palley

Hillary Clinton does not want to talk about past economic controversies. And it is easy to understand why. There is much that is troubling. But let’s not go along with her wishes. You can learn a lot by studying recent history and even more by watching how politicians react to that history.

The big “let’s move on” story of the Clinton campaign is the refusal to answer journalists. According to the Washington Post in the first 29 days after she announced her campaign she took just eight questions. The campaign’s response to all this? Blah. Reporters whining as usual.

Now, I’m not going to be impolite and focus on questions about the Iraq War which have been getting Jeb Bush in deep trouble with some liberals. Instead, I’m going to focus on economic policy which is my area of expertise. It also seems to be the focus of Mrs. Clinton’s campaign.

Read rest here.

Tuesday, May 19, 2015

Some Brief Thoughts on Paul Romer and Mathiness

Catching up with work after grading. Posting will continue slow for a few weeks. Just a brief note on the brouhaha that the Romer (Paul) paper has led to. I mostly read it in Lars blog. Lars quotes Romer as saying:
"About math: I have an undergraduate degree in physics.* I’ve seen clear evidence that math can facilitate scientific progress toward the truth. If you think that math is worthless or dangerous, I’m sure that there are people who will be happy to discuss this with you. I’m not interested. I’m busy. 
About truth and science: My fundamental premise is that there is an objective notion of truth and that science can help us make progress toward truth. If you do not accept this premise, I’m sure that there are people who would be happy to debate it with you. I’m not interested. I’m busy."
I should say that I only looked cursorily at the paper, which seems poor at best. The notion that: "Joan Robinson (1956) was engaged in academic politics when she waged her campaign against capital and the aggregate production function," misses the quite important logical point of the capital debates, which were acknowledged by none other than Paul Samuelson in his 1966 "Summing Up" (subscription required).

It seems clear that the very concept of mathiness is murky at best.** Some mathematical concepts are fine, some aren't. The criteria seems to be Romer's personal preferences. Mind you, the quote above is one of the few things in that post that is clear and on the mark. Math is just an instrument. If Romer spent the time to read Sraffa's short monograph, he would have to conclude (mathematical logic requires it) that mainstream notions about relative prices associated to relative scarcity are not logically tenable. Progress would imply discarding illogical models. He is busy, though.

I should add that, in general, I'm in agreement with Lars critique of Romer. However, the problem to me seems to be less concerned with the use of mathematical models because "the real world is fuzzy, vague and indeterminate," which it clearly is, but with the logical inconsistencies of the neoclassical model per se. It is the kind of models that Romer uses (and the authors he criticizes too) that are problematic, not the fact that he formalizes his ideas in mathematical models. That's why it's a bit funny that he thinks that some RBC or New Classical authors are the problem, because presumably they fool you with math or, as one of the definitions of mathiness suggests, the words that these authors use to describe their mathematical results do not accurately convey what the math shows.

Sure enough, there are important elements in economic theory that cannot be easily formalized, and that does not mean that objective understanding is impossible. I haven't seen the formalization of the concept of mode of production, but that does not mean that the definition of capitalism is devoid of meaning. My two cents.

* This has been amended in the last version. Now reads: "I studied physics as an undergraduate." As it turns, some economists DO have physics envy. But you know what this means. He knows math people. He is an authority. Arguments of authority are so sciency, aren't they?

** At least two definitions are possible it seems. Logically incorrect mathematical arguments that are defended anyway (Romer would incur on this version of mathiness), or a discrepancy between the mathematical model and the underlying economic theory (the one Romer suggests some in the mainstream incur). They are not necessarily equivalent.

Sunday, May 17, 2015

On the blogs

How Should Economics be Taught? -- Vicenç Navarro on the need for more interdisciplinary and about Podemos in Spain (h/t Mike Norman). Don't get me wrong, interdisciplinary is certainly good, but the problems with economics are within the discipline. Doesn't help much to have historical and political perspective if the economic model suggests markets are self-regulated with a tendency to the natural rate of unemployment.

How to Justify Teaching the Worst of Economics to Non-Economists -- Ingrid Harvold Kvangraven also on teaching. Should have posted this one a while ago, but missed it.

Blaming Keynes -- Simon Wren-Lewis response to Niall Freguson's FT pirce. How well has the UK done under the Tories? His reply: "growth in GDP per head under Labour averaged 1.5% even though it included this recession, but average growth from 2010 to 2014 was only 1% when we should have been seeing a rapid recovery."

Paul Romer on math masquerading as science -- Many entries on Romer's paper. Lars Syll provides a good entry to this debate.

Friday, May 15, 2015

Central Bank of Ecuador Journal's Call for Papers

The journal, Cuestiones Económicas, is being re-launched. I had a paper published back in 2001, pictured above. And have been invited to be a member of the board now. Call for papers (in Spanish) here. Interestingly, the paper is not the one on Ecuador and dollarization (for that one go here).

Wednesday, May 13, 2015

Stiglitz (and others) on the Vulture Funds

From yesterday's panel on "Reforming the Future: Lessons from Sovereign Debt Restructuring" held at the Atlantic Council. Close to the 11 minute mark Stiglitz says that Griesa's decision on Argentina and the Vulture Funds was "very peculiar" and that it made restructuring almost impossible.

Tuesday, May 12, 2015

More Jobs, Flat Wages: Trade and the Trade Deficit Continue to Hurt Us

By Thomas Palley

April’s Employment Report showed a gain of 223,000 jobs and a further one-tenth percent decline in the unemployment rate to 5.4 percent. The good news is the report shows the economy continues to nudge forward and create jobs for newcomers into the labor force. The bad news is the economy is not growing fast enough to raise wages.

Average hourly earnings for production & non-supervisory workers, who are eighty percent of the workforce, are up just 1.85 percent over the past year. In April, the rate of wage increase actually declined.

The broad (U-6) measure of unemployment stands at 10.8 percent, which is far above the level of past economic cycles. Furthermore, unemployment is widespread across all business sectors. The labor force participation rate also remains at a historically low level, indicating that many workers stand ready to re-enter the work force when jobs become available. Together, these conditions show labor supply is plentiful and there is no threat of inflationary shortages.

Read rest here.

Monday, May 11, 2015

Comparative Austerity: Does Cameron re-election show that austerity works?

Here, as per the comments, an update picture of austerity in the UK in comparison to Greece and the US. I added Germany too this time. Data from the International Monetary Fund (IMF, WEO Database). Figures for 2014 and 2015 are estimates.

This graph shows total government expenditures rather than just consumption. Note that the UK has pursued austerity, but it has not been particularly more austere than the US. Germany has pursued moderate, very moderate, fiscal expansion. The decline in government spending in Greece has no parallel, as should be expected, since the country was forced to pursue austerity policies.

Again, this shows that David Brooks notion "that there were two countries that did what we call austerity," meaning Germany and the UK, and that is connected to the fact that "the two strongest political leaders right now in Europe are Angela Merkel and David Cameron," so that this is a vindication of austerity policies is, as I had noted before, preposterous.

Sunday, May 10, 2015

On the blogs

The Problem of Human Capital as a Factor of Production -- Mike Isaacson on the problems of human capital, beyond those raised by Branko Milanovic not long ago, which as Mike notes it's often used to endogenize the Solow residual.

Lost in Translation (Personal and Trivial) -- Paul Krugman on the dubious quality of translations. The old saying is correct, traduttore, traditore. Perhaps he is better in Italian or Japanese, who knows.

Graph/Table of the Week: Consumption Inequality -- URPE Blog on a new paper by Sanjay Reddy.

Friday, May 8, 2015

David Brooks wrong on austerity: it's not what they say, but what they do, that matters

So just heard David Brooks say at the PBS News Hour -- it says something about the state of media in this country that PBS (not surprised about the NYTimes) would have such a blatant ideologue as a commentator -- suggest that the election in the UK, which is doing better than other countries in Europe, proves that austerity works.

Obviously the UK economy sucks, and Labor promised austerity too, but the point is that Brooks suggested that the UK (and Germany) had austerity while others didn't. Not that he checks data ever. So I did. Below government final consumption in constant prices in Greece (blue) and the UK (red).

As you can see it's true that the UK has done better, simple because of less austerity, in fact, looking at just government consumption the UK doesn't seem to be pursuing austerity at all. So the fact that the governments in the UK and Germany are for austerity, while the current Greek one, at least nominally, it's not, does not mean that they do pursue austerity more aggressively than the rest of Europe. Unless Brooks thinks that what matters is what you say, not what you do.

PS: Below the same comparing the US and Greece. The US actually is more austere than the UK, but not nearly as much as Greece.

Labor market results

Grading finals. Very slow posting. BLS published the Employment Situation Summary and labor markets suggest that the slow recovery continues. A bit more than 220k jobs created in April, and the unemployment at 5.4%. Wages still basically stagnant.

Wednesday, May 6, 2015

'Fear the Economics Textbook:' the response to the Keynes/Hayek video

I wasn't a big fan of the Keynes/Hayek video. Mostly as I noted before more than once (here, for example), because Hayek was not really that relevant in the history of economic ideas. Keynes was debating with Pigou and Robertson, that is, the marginalist tradition in Cambridge going back to Marshall. Hayek was dispatched early on by Sraffa. Oh well, here the response video.