Tuesday, March 3, 2015

Internet access and development

Purple countries indicate less than 50% of the population has access to the internet. Basically Africa, Central America, México, the Caribbean, and the Andean region of South America (plus Paraguay and the Guyanas), Asia (including of course India and China, but not South Korea) and the Middle East (with a few exceptions, like Saudi Arabia). So there is a belt around the middle with countries further South (the Southern Cone of South America, including Brazil and Australia) and further North (North America and Europe, including the East and Russia) that are fine. Understanding internet access provides an alternative way to look at development.

PS: The Wall Street Journal is really about Facebook trying to expand in places with low internet access.

Monday, March 2, 2015

Kennedy's 1963 State of the Union

Prepping lectures for Intermediate Macroeconomics, and am using Kennedy's 1963 State of the Union as an in-class exercise. Kennedy's proposal to cut taxes by $13.5 billion ($103.11 billion today) is widely cited as an instance of explicit Keynesian policy making.

It is worth remembering that the measure was proposed when the economy was in recovery and unemployment was at roughly 5.7% - exactly where it stands now. Kennedy was of course assassinated before he could see the tax cut enacted, but it is striking how different the policy making mood was at the time.

We might smoke less than the characters of Mad Men, but in macroeconomic policy we have certainly moved backwards.

A selection of the State of the Union follows:

America has enjoyed 22 months of uninterrupted economic recovery. But recovery is not enough. If we are to prevail in the long run, we must expand the long-run strength of our economy. We must move along the path to a higher rate of growth and full employment.
            For this would mean tens of billions of dollars more each year in production, profits, wages, and public revenues. It would mean an end to the persistent slack which has kept our unemployment at or above 5 percent for 61 out of the past 62 months  and an end to the growing pressures for such restrictive measures as the 35-hour week, which alone could increase hourly labor costs by as much as 14 percent, start a new wage-price spiral of inflation, and undercut our efforts to compete with other nations.
            To achieve these greater gains, one step, above all, is essential—the enactment this year of a substantial reduction and revision in Federal income taxes.
            For it is increasingly clear—to those in Government, business, and labor who are responsible for our economy’s success—that our obsolete tax system exerts too heavy a drag on private purchasing power, profits, and employment. Designed to check inflation in earlier years, it now checks growth instead. It discourages extra effort and risk. It distorts the use of resources. It invites recurrent recessions, depresses our Federal revenues, and causes chronic budget deficits.
            Now, when the inflationary pressures of the war and the post-war years no longer threaten, and the dollar commands new respect—now, when no military crisis strains our resources—now is the time to act. We cannot afford to be timid or slow. For this is the most urgent task confronting the Congress in 1963.
            In an early message, I shall propose a permanent reduction in tax rates, which will lower liabilities by $13.5 billion. Of this, $11 billion results from reducing individual tax rates, which now range between 20 and 91 percent, to a more sensible range of 14 to 65 percent, with a split in the present first bracket. Two and one-half billion dollars results from reducing corporate tax rates, from 52 percent—which gives the Government today a majority interest in profits—to the permanent pre-Korean level of 47 percent. This is in addition to the more than $2 billion cut in corporate tax liabilities resulting from last year’s investment credit and depreciation reform.
            To achieve this reduction within the limits of a manageable budgetary deficit, I urge: first, that these cuts be phased over 3 calendar years, beginning in 1963 with a cut of some $6 billion at annual rates; second, that these reductions be coupled with selected structural changes, beginning in 1964, which will broaden the tax base, end unfair or unnecessary preferences, remove or lighten certain hardships, and in the net offset some $3.5 billion of the revenue loss; and third, that budgetary receipts at the outset be increased by $1.5 billion a year, without any change in tax liabilities, by gradually shifting the tax payments of large corporations to a more current time schedule. This combined program, by increasing the amount of our national income, will in time result in still higher Federal revenues. It is a fiscally responsible program—the surest and the soundest way of achieving in time a balanced budget in a balanced full employment economy.
            For this would mean tens of billions of dollars more each year in production, profits, wages, and public revenues. It would mean an end to the persistent slack which has kept our unemployment at or above 5 percent for 61 out of the past 62 months  and an end to the growing pressures for such restrictive measures as the 35-hour week, which alone could increase hourly labor costs by as much as 14 percent, start a new wage-price spiral of inflation, and undercut our efforts to compete with other nations.            To achieve these greater gains, one step, above all, is essential—the enactment this year of a substantial reduction and revision in Federal income taxes.
            For it is increasingly clear—to those in Government, business, and labor who are responsible for our economy’s success—that our obsolete tax system exerts too heavy a drag on private purchasing power, profits, and employment. Designed to check inflation in earlier years, it now checks growth instead. It discourages extra effort and risk. It distorts the use of resources. It invites recurrent recessions, depresses our Federal revenues, and causes chronic budget deficits.
            Now, when the inflationary pressures of the war and the post-war years no longer threaten, and the dollar commands new respect—now, when no military crisis strains our resources—now is the time to act. We cannot afford to be timid or slow. For this is the most urgent task confronting the Congress in 1963.            In an early message, I shall propose a permanent reduction in tax rates, which will lower liabilities by $13.5 billion. Of this, $11 billion results from reducing individual tax rates, which now range between 20 and 91 percent, to a more sensible range of 14 to 65 percent, with a split in the present first bracket. Two and one-half billion dollars results from reducing corporate tax rates, from 52 percent—which gives the Government today a majority interest in profits—to the permanent pre-Korean level of 47 percent. This is in addition to the more than $2 billion cut in corporate tax liabilities resulting from last year’s investment credit and depreciation reform.
            To achieve this reduction within the limits of a manageable budgetary deficit, I urge: first, that these cuts be phased over 3 calendar years, beginning in 1963 with a cut of some $6 billion at annual rates; second, that these reductions be coupled with selected structural changes, beginning in 1964, which will broaden the tax base, end unfair or unnecessary preferences, remove or lighten certain hardships, and in the net offset some $3.5 billion of the revenue loss; and third, that budgetary receipts at the outset be increased by $1.5 billion a year, without any change in tax liabilities, by gradually shifting the tax payments of large corporations to a more current time schedule. This combined program, by increasing the amount of our national income, will in time result in still higher Federal revenues. It is a fiscally responsible program—the surest and the soundest way of achieving in time a balanced budget in a balanced full employment economy.

PS: Full address available here.

Mark Weisbrot on Latin American Growth

This was one of the several presentations at the Eastern Economic Association meetings. Mark suggested that the the period of high growth from 2003 to around 2008, was not related essentially to the commodity boom, although "commodity exports did not lead growth but helped avoid balance of payments problems."* He argued that the IMF's loss of influence was also important. This point, which I think is essentially correct for many left of center governments, was discussed later over lunch. I argued, and I guess so did Esteban Pérez and Ricardo Summa, that the IMF still does have influence indirectly, now internalized in the training of several of the local bureaucrats that are for devaluation and fiscal austerity as a solution for, real or imaginary, external crises and inflationary pressures.

Two important caveats to the good news of growth, better income distribution and lower poverty that he discussed. We are "still long way from achieving pre-1980 growth rates, when industrial and development policies were common [and] exchange rate problems can still cause trouble." On the latter, in particular, the Argentinean and Venezuelan stories, with negative real rates of interest, and a large gap between official and black market exchanges was emphasized. Not sure what he would say, but I think he would agree that if growth remains lackluster in the near future for the region, then it would have more to do with the domestic policy choices that with an overwhelming need for adjustment.

* His paper on that with David Rosnik here.

Friday, February 27, 2015

Eastern Economic Association Meeting in New York

Will be at the Eastern Economic Association Meetings, that will take place from today, Friday to Sunday at the Sheraton New York Times Square Hotel, New York, NY. Program here. Back to blogging on Monday.

Thursday, February 26, 2015

The Economist is concerned with debt-deflation

Or so it seems (see here; subscription required). They say: "If falling prices endure, then debts, fixed in nominal terms, are harder to pay." Indeed. As Keynes had said back in 1936: “if the fall of wages and prices goes far, the embarrassment of those entrepreneurs who are heavily indebted may soon reach the point of insolvency, — with severely adverse effects on investment.”

In other words, if prices fall, indebted agents owe in real terms more than before. This could affect both firms and consumers. If the price of houses fall, but the mortgage debt remains the same, consumers own more debt in real terms and consumption might fall. In the same vein, if prices are falling and the firm nominal debt is fixed, the real debt increased and investment might decline. Keynes emphasized the role of investment. The sequence of events is given by:

P↓⇒(Debt/P)↑⇒I↓⇒Y↓

The Economist basically argues for Central Banks to change the inflation target. The Blanchard and Krugman idea, even though The Economist does not propose 4% as the new one. I would still argue for fiscal policy. The whole inflation target idea is a confidence fairy too (as noted before).

Wednesday, February 25, 2015

The U.S. Federal Reserve and Shared Prosperity

By Thomas Palley

The Federal Reserve is a hugely powerful institution whose policies have an enormous effect throughout the economy. For that reason, it is doubtful the United States can achieve shared prosperity without the policy cooperation of the Fed.

Now, with the economy stronger, there is debate over whether the Federal Reserve should raise interest rates. That conversation is important, but it is also too narrow.

It keeps policy locked into a failed status quo which has seen the Fed consistently take care of Wall Street first, while placing the concerns of Main Street a distant second. Though the Great Recession has triggered some policy shift toward helping ordinary Americans, much more is needed.

Read rest here.

Yellen says that interest rates will remain low for a while


Patience is the new buzzword. Yellen correctly noted that even though the economy is recovering: "too many Americans remain unemployed or underemployed, wage growth is still sluggish and inflation remains well below our longer-run objective."

Tuesday, February 24, 2015

Jean Tirole is afraid of heterodox economics

Jean Tirole says heterodox economics encourages "relativism of knowledge" and is "the antechamber of obscurantism." The response from the Association Française D'Économie Politique (AFEP) is here. The context is the creation of a new section of the National Council of Universities (CNU), which would incorporate heterodox approaches to economics, which was discussed here and here before.

Tirole suggests that unless you publish in mainstream journals, and get the approval of people in authority, that won the "Nobel" (Bank of Sweden), Clark or the Yjro Johannson award, you should not count. Heterodox economists are basically: "a disparate group, in trouble with the assessment standards that are internationally acknowledged."

He uses his authority as a "Nobel" winner, to reduce the space for alternative views on the functioning of the economy. Note that in his pursuit of closing spaces for heterodox economists, which would not per se diminish the space for mainstream views, he uses the book by Piketty to show how concerned the mainstream is with important issues in the real world. And Piketty's book is certainly very problematic as a discussion of inequality.

With the criteria of normal science Galileo was an obscurantist. We all know that the established journals publish the conventional wisdom, and that these are closed to heterodox authors for reasons that have little to do with quality. Scientists too follow customs and conventions, and even fashions, which often are disconnected from logic and evidence, as any reader of Thomas Kuhn would know. Tirole does not address any substantive issue. The idea that the mainstream neoclassical theory suggests that markets produce optimal outcomes, and economies move to the natural rate, even in the face of the current crisis, is basically okay with him, and he does not feel he needs to explain why [this is not just Tirole, Krugman keeps repeating that conventional analysis did well during the crisis too, but at least he deals explicitly with the issue; see this, and for a discussion of how little the mainstream has learned from the crisis go here].

Krugman himself recognized he published things that were not correct, and that was part of a strategy to get published. In his words:
“By the early 1980s it was already common knowledge among people I hung out with that the only way to get non-crazy macroeconomics published was to wrap sensible assumptions about output and employment in something else, something that involved rational expectations and intertemporal stuff and made the paper respectable. And yes, that was conscious knowledge, which shaped the kinds of papers we wrote." [Italics added]
Respectability is what gets you published in mainstream journals. Willingness to wrap your ideas in crazy models. So that is the problem with the French heterodox authors. They are not sufficiently hypocritical.

The question is why a powerful economist like Tirole is so afraid about heterodox economists. For one, students, and regular people, know when they are been taught crazy models. And if you have something sensible to compare it to, you might be in trouble. Not only you must wrap sensible ideas in crazy models, you must suppress sensible ideas. If nothing else is in indictment of the Nobel in economics, Tirole attitude is. He might be considered 'respectable', since he has the right credentials, but his behavior is disreputable.

Call for Papers: URPE Reader

The Union for Radical Political Economics (URPE) has put a call for papers for the new reader. The last reader was titled Political Economy and Contemporary Capitalism and was published in 2000. I had a chapter on trade and finance (here). It provided an alternative to the mainstream in a variety of topics, including foreign financial crises, health care, social security, and welfare reform, while at the same time demonstrating the variety of heterodox (alternative) approaches available to economic inquiry. It was essentially an academic tool showcasing the latest work in heterodox research. This would be an excellent opportunity for young scholars, and very welcome for those teaching economics, in particular after the failure of the mainstream regarding the 2008 Global Crisis.

Monday, February 23, 2015

Honey, I shrunk the middle class

The definition of middle class jobs is arbitrary and not particularly good. From the NYTimes story, it seems it's basically wages between 35 and 100k per year. At any rate, less jobs in manufacturing and more in services, particularly in health jobs, like nurses. Also, a gender bias, with an increase in female participation in the middle income jobs. And yes, increasingly these jobs require a college education. So more nurses and less machine operators, or something like that. The problem is that with this the size of the middle class is effectively shrinking (see graph below).
This suggests that the majority in the US is not middle class anymore. The divided society between the haves and have nots is becoming the defining characteristic of the US.

It's all up to Merkel: Galbraith on the Greek Crisis

"Is Greece’s fate in the hands of Angela Merkel? One leading economist with close ties to Greek finance minister Yanis Varoufakis says that the primary obstacle to compromise is a dramatic division within the German government, with one faction demanding that Greece fully adhere to its previous commitments, and another powerful group advocating compromise."

Read rest here.

PS: Listen also to this interview here.

PS': And Jamie thinks that the agreement was good, as I did notice Saturday that it was Mario Nuti's and my own view.

Saturday, February 21, 2015

On the blogs

Kakistocracy -- Mario Nuti on the Greek negotiations, up to the agreement reached the other day. Note that he sees the extension as a good thing. So do I. I don't think Greece caved, as many on the left have been saying. This is an agreement were everybody can claim victory. Greeks got more time, which they need, Germans didn't make concessions, at least not very early in the process.

Warning: too much finance is bad for the economy -- The Economist, following research from Cecchetti at the BIS. And yes they are right, but for the wrong reasons. Finance hurts not because the genius that would have gone to physics ends up in the hedge fund. The reason is too much unregulated finance is prone to crisis.

Human Capital Controversy -- David Ruccio on the debate that followed Branko Milanovic's post on ditching human capital, with Nick Rowe among others.

Graph/Table of the Week: Wage Compression -- The URPE post, with a link to Ezra Klein's discussion of the Obama economy.