Tuesday, June 30, 2015

Greece on the verge

I'm in France for a talk at the Université de Paris XIII, invited by Jonathan Marie and Dany Lang. The Greek crisis looms large in everybody's minds. I gave a talk based on two papers, one published here, and the other (specifically on the Spanish crisis) just finished, which will soon come as a working paper. But I discussed to a great extent the debate between Sergio Cesaratto and Marc Lavoie on the nature of the European crisis, that is, whether it is a balance of payments crisis or a monetary sovereignty one.

Cesaratto argues that a balance-of-payment crisis is possible in a currency union, and that the financial crisis of the Eurozone is indeed such a balance-of-payment crisis. Arguably Pérez and Vernengo (2012; the one linked above) suggest the same, even though the paper was written to suggest that the crisis was not fiscal, as per the mainstream hypothesis, and the actual policies pursued by the Troika, which require fiscal adjustment as a solution (presumably because the problem was fiscal).

In the balance of payments or Cesaratto hypothesis, the problem would be that there are no federal transfer payments from the surplus to the deficit countries to help compensate the negative impact of CA deficits on GDP and budget balances. Or to make it more correct, it would be that there are no fiscal transfers from a federal government to the federated units, as has been shown is the case by Nate Cline and David Fields here for the US case.

Yet, as noted by Lavoie, the Eurozone crisis seems to have been caused instead mainly as the result of an initial banking problem, which transformed itself into a public debt problem. In other words, the currency issue, and the functioning of the monetary union seem to be at the core of the crisis, not a balance of payments one. The monetary union clearly eliminates exchange rate risk, but not country risk, which might explain the interest rate differentials between euro countries.

Marc suggests that the interbank payments system, the so-called TARGET2 (Trans-European Automated Real-time Gross Settlement Express Transfer System), used by the European Central Bank (ECB) can be seen as being at the heart of the problem. In his example, if a Spanish firm imports cars from a German firm, the ECB credits the German firm in a German bank and debits the Spanish one in his correspondent bank. There is no limit to the debit position that the Banco de España, the Spanish central bank, can incur at the ECB. The overdraft capacity of the ECB is unlimited.* So in this view the solution would be for the ECB overdraft capacity to create the conditions for the euro periphery to continue to function without austerity. Alternatively, this could be solved if the ECB bought bonds from the member countries.

However, the rules of the euro imply that the ECB cannot purchase sovereign debt, and, hence, the mechanism by which a risk free asset is normally created is precluded. The creation of the risk free asset is the essential function of the central bank in relation to financial stability. According to Lavoie the Eurozone setup should have incorporated a central bank that holds and purchases large amounts of securities issued by the participating national governments.

My argument, discussed briefly here before, is that the Cesaratto and Lavoie hypotheses are one and the same. The balance of payments and the monetary sovereignty views of the European crisis are two sides of the same coin. The fact that overdraft facilities involved in the TARGET2 system could be used to create credit to finance euro imbalances, or that the ECB could buy government bonds in the secondary market does not preclude the fact that the actual crisis is, in the absence of these policies, the result of the inability to manage a CA deficit. In his example, the origin of the debit position of the Banco de España is an import of German cars, which presumably corresponds to a current account deficit position.

In this sense, the European crisis is caused by the failures of the euro design, but it is also one that forces countries with banks that over-borrowed, or that over-imported, to adjust by reducing its imports through austerity, and, hence, increasing its ability to repay. Note that leaving the euro (in particular for Greece, i.e. Grexit), which would imply some degree of depreciation of the newly created currency, might not be sufficient (or even necessary) to solve the crisis. I discussed this here before. Yanis Varoufakis, the Greek finance minister, has also been skeptical about depreciation and Greexit.

* Marc compares TARGET2 to Keynes bancor, and suggests that Keynes might be, more than Mundell, the father of the euro. Two things come to mind. I think in principle, the adjustment rules based on austerity, are closer to Mundell than Keynes (poor Keynes, this institutional mess should not be pinned on him). Second, Keynes' plan also implies that there is a need for surplus countries to finance deficit ones. What really matters in this is who creates the overdraft, who has the power to create money, so to speak. Normally that has nothing to do with having surpluses. National governments are not in surplus against its subunits. Globally the US is a deficit country, and is still the one issuing the global currency.

Monday, June 29, 2015

Stiglitz and Krugman on Troika’s Attack On Greek Democracy

By Joseph Stiglitz
The rising crescendo of bickering and acrimony within Europe might seem to outsiders to be the inevitable result of the bitter endgame playing out between Greece and its creditors. In fact, European leaders are finally beginning to reveal the true nature of the ongoing debt dispute, and the answer is not pleasant: it is about power and democracy much more than money and economics. Of course, the economics behind the program that the “troika” (the European Commission, the European Central Bank, and the International Monetary Fund) foisted on Greece five years ago has been abysmal, resulting in a 25% decline in the country’s GDP. I can think of no depression, ever, that has been so deliberate and had such catastrophic consequences: Greece’s rate of youth unemployment, for example, now exceeds 60%.
Read rest here.

By Paul Krugman
It has been obvious for some time that the creation of the euro was a terrible mistake. Europe never had the preconditions for a successful single currency — above all, the kind of fiscal and banking union that, for example, ensures that when a housing bubble in Florida bursts, Washington automatically protects seniors against any threat to their medical care or their bank deposits. Leaving a currency union is, however, a much harder and more frightening decision than never entering in the first place, and until now even the Continent’s most troubled economies have repeatedly stepped back from the brink. Again and again, governments have submitted to creditors’ demands for harsh austerity, while the European Central Bank has managed to contain market panic.
Read rest here.

Tuesday, June 23, 2015

Bielschowsky on Furtado's "Economic Growth of Brazil"

Celso Furtado (1920-2004)

The International Journal of Political Economy, edited by Mario Seccareccia, had a special issue on Celso Furtado. There were articles by Ricardo Bielschowsky, James Cypher, and Rosa Freire d'Aguiar, Furtado's widow, among others. Below Bielschowsky's paper on Furtado's opus magnus, titled "Furtado's Economic Growth of Brazil: Masterpiece of Structuralism."

From the abstract:

This survey article reviews Celso Furtado’s most famous book and argues that he convincingly used the central elements of the Prebisch-ECLAC analytical construct—strucuturalism—to organize and study the economic history of Brazil from its discovery until the mid-twentieth century. Furtado shows how, throughout Brazilian history, successive cycles of economic growth before industrialization (mainly, the production of sugarcane in the Northeast in the seventeenth century, the gold cycle in Minas Gerais in the eighteenth century, and coffee production in the Southeast in the nineteenth and early twentieth centuries) have created, and thereafter perpetuated, some major characteristics of Brazilian underdevelopment: low production and lack of export diversity, as well as structural heterogeneity, specifically, a vast underemployed sector existing side by side with a high productivity modern sector.

Read rest here.

Monday, June 22, 2015

Greece Has Made Tough Choices. Now It's the IMF's Turn

By James K. Galbraith

The International Monetary Fund's chief economist, Olivier Blanchard, recently asked a simple and important question: "How much of an adjustment has to be made by Greece, how much has to be made by its official creditors?" But that raises two more questions: How much of an adjustment has Greece already made? And have its creditors given anything at all?

In May 2010, the Greek government agreed to a fiscal adjustment equal to 16 percent of GDP from 2010 to 2013. As a result, Greece moved from a primary budget deficit (which excludes interest payments on debt) of more than 10 percent of GDP to a primary balance last year -- by far the largest such reversal in post-crisis Europe.

Read rest here.

Friday, June 19, 2015

On Keynes and the Quantity Theory

Slow posting will continue for quite a while. Backlogged with work. At any rate, I've been reading (almost done now) Richard Davenport-Hines new book on Keynes, Universal Man: The Lives of John Maynard Keynes. Nothing new really. And that should not be a surprise after the biographies by Skidelsky and Moggridge.

There are many little issues here and there, which is inevitable, given Keynes' own contradictions, and the overwhelming number of interpretations of his work. There is one point, which is repeated by Davenport-Hines, based on a monetary interpretation of the development of the Principle of Effective Demand (PED), which I think is completely misguided. He says that: “Keynesian economics developed from its progenitor’s rejection of the quantity theory of money [QTM].” Not really. The theory developed from the rejection of Say's Law. The rejection of the QTM is a side effect.

In fact, in terms of the monetary views, Keynes had moved from the QTM in his Tract in 1923, to a Wicksellian model in his Treatise in 1930, with endogenous money, to having exogenous money, and, in that respect being closer to the QTM, in the General Theory (GT) in 1936. Many posties like the Treatise more than the GT for that reason. I prefer the GT, since it has investment and savings being adjusted by income (PED), rather then the rate of interest. And he at least tries to get rid of the notion of a natural rate of interest in the GT.

Davenport-Hines gets closer to the real contribution of the GT, and the reasons for its development, when quoting Austin Robinson, who said in 1947:
“a great step forward in economic thought when Keynes insisted that we should have a general theory – a theory which was valid not only with full (or near-full) employment, but also with unemployment – and that we should know clearly which of the propositions of economics were universally valid, and which were valid only in conditions in which it might be true that an increase of one activity was possible only at the expense of another activity. In the Cambridge thought of my time I believe that no single forward step has been so important.”
The real revolutionary thing in the GT is that the system does not have a tendency to full utilization of resources, no natural rate.* Full employment is one possibility. That's why his theory was general. What Keynes was trying to reject is the neoclassical version of Say's Law, that implies that changes in the rate of interest guarantee that investment equilibrates to full employment savings.

In fact, changes in aggregate demand, and that would include increases in the exogenous supply of money, would have inflationary consequences with full employment. Keynes' views on inflation remained very conventional, as they had been during the German hyperinflation, based on excess demand.

* To do that requires getting rid of the marginal efficiency of capital, but that's another story.

Thursday, June 11, 2015

Inequality, the Financial Crisis and Stagnation

By Thomas Palley

This paper examines several mainstream explanations of the financial crisis and stagnation and the role they attribute to income inequality. Those explanations are contrasted with a structural Keynesian explanation. The role of income inequality differs substantially, giving rise to different policy recommendations. That highlights the critical importance of economic theory. Theory shapes the way we understand the world, thereby shaping how we respond to it. The theoretical narrative we adopt therefore implicitly shapes policy. That observation applies forcefully to the issue of income inequality, the financial crisis and stagnation, making it critical we get the story right.

Friday, June 5, 2015

Beyond Laissez-faire? Seriously?

As I noticed, posting will continue a bit slow for a while. So this is a bit old. Noah Smith suggests that the profession is leaning in a liberal, meaning moderately lefty, direction. He tells us, however, that:
"although there’s a growing consensus that something about U.S. economic policy needs to be changed in a more liberal direction, there isn't any consensus on what. Laissez-faire may have reached the end of its shelf life, but we don’t yet know what is going to replace it."
He praises Reagan-Thatcher's policies for their simplicity. I guess Occam's Razor is the criteria here. Not uncommon, as I noted before, that was Krugman's defense of free trade not long ago. He might be right on the lack of consensus on what to do, even though his minimal program from the discontented seems plausible enough, more fiscal expansion, less free trade agreements, higher wages (start with the minimum) and more regulation of finance.

Note, however, that this policy consensus, is open to a lot of dissensus, and not only on details of policy (e.g. more fiscal expansion where, infrastructure, health, defense? Do we increase the taxes on the wealthy too? And so on). The vast majority of those that now defend these policies do it from an essentially unreconstructed marginalist view (mostly New Keynesians). So the policy defense does not stem from different models (Mankiw, a New Keynesian as much as Krugman and DeLong would not endorse any of these 'left' policies), but from their policy preferences. I would suggest that left leaning economists using mainstream models have a harder time showing that their policy prescriptions are coherent with their theory (they need all kinds of imperfections, and ad hoc assumptions).

But that's not the surprising thing in Noah's piece, at least to me. He's nonchalant about the assumption that the shelf life of laissez-faire policies has somehow expired. It is true that Keynes had suggested that laissez-faire was dead long ago, in 1926. But that proves exactly the policy resilience of laissez-faire. In fact, I would argue that the theoretical persistence of misguided (illogical and lacking evidence) mainstream positions often results from the advantage that these models provide for defending laissez-faire.

So laissez-faire is doing fine. And note that austerity is doing fine, in the US, in Europe, in Latin America, and is still being pushed by the IMF in their actual programs (forget the research department suggesting that sometimes it doesn't work; these views never apply to the real world). FTAs are also doing fine, and pushes for increasing the minimum wage or for more regulation of finance continue to be contested and fought back fiercely. We're far from the end of laissez-faire.

Monday, June 1, 2015

More on the War on Tenure

From Inside Higher Ed:
It’s been a tumultuous year for faculty members within the University of Wisconsin System, from threats to the Wisconsin Idea to a proposed $300 million budget cut to Governor Scott Walker’s suggestion that professors do more work to compensate for the slash. But many professors and other observers said the roller coaster hit a new low Friday afternoon when the state Legislature's powerful Joint Finance Committee approved, by a vote of 12-4, the elimination of tenure from state statute, along with adding new limits to the faculty role in shared governance and procedures for eliminating faculty members in good standing outside of financial exigency.
Read rest here.

Sunday, May 31, 2015

On the blogs

On Matters Of Macroeconomics, Even A Beautiful Mind Can Go Astray -- Ramanan on Nash's monetarists views when it comes to macroeconomics. Bob Pollin had told me about Nash's presentation in Amherst and how he held views that were akin to gold bugs.

Expect little, and you will be rewarded: part three -- Max Sawicky on the tax aspects of the progressive agenda, and how it does not include income from capital in the tax base. There are other 3 posts on the agenda to combat inequality.

From boring banking to roaring banking, part 1 -- Alejandro Ruess, from Dollars & Sense, interviews Jerry Epstein. And yes banking should be boring.

Thursday, May 28, 2015

More on currency crises and the euro crisis

I wrote a while ago about currency crises (see here). There I suggested that classical-Keynesian or post-Keynesian views on currency crises invert the causality between fiscal and balance of payments problems in a currency crisis. Currency crises are not caused by excessive fiscal spending financed by monetary emissions, which would lead to inflation, and eventually after a run on the currency and depletion of reserves to a devaluation, but on current account problems.

There two key problems with the conventional view. On the one hand, the very monetarist notion that increases in money supply have direct impact on prices, and no effect on quantities. That would be an extreme natural rate hypothesis. But also that these models presume that fiscal deficits and debt denominated in domestic currency are the problem in currency crises, when the relevant debt is the foreign one, related to the current account deficit, and denominated in foreign currency. In other words, whereas default in the former is not possible, in the latter it clearly is. The mismatch between government receipts in domestic currency and foreign debt obligations in foreign currency is the key problem in currency crises.

Fiscal deficits might play a role in a currency crisis, but it is ultimately an indirect one. If the fiscal deficit, by leading to an increase in the level of activity (not prices) leads to a current account deficit, then it does exacerbate the external constraint of the economy, and might contribute to the eventual depreciation. Note that this suggests that the variations of the level of income are more relevant for the adjustment of the balance of payments, than changes in the exchange rate, something noted for the case of peripheral economies, in particular Argentina during the Gold Standard, by A. G. Ford (for a discussion of that go here).

In a classical-Keynesian view the fiscal crisis might be a result of the currency crisis, and not vice versa (as I discussed for Brazil here). If the crisis leads to a recession, then fiscal revenues collapse, and spending increases, particularly unemployment insurance expenditures, welfare spending, and transfers, exacerbating the fiscal problems. Further, the central bank might hike the domestic interest rate, to preclude capital flight and further devaluation and that would have an additional effect on interest payments on domestic debt, also worsening the fiscal stance.

This currency crisis story might have some relation to the current debate between Marc Lavoie and Sergio Cesaratto on whether the European crisis should be seen as a a monetary sovereignty problem (Marc) or balance of payments crisis (Sergio). Both would agree that the crisis is not the result of fiscal problems, as described above. Even in Greece, that had higher fiscal deficits than others, the relevance of those deficits, and the enforcing of brutal austerity afterwards, has been associated to the current account. Note that in common currency areas, like the United States, federal fiscal transfers (and not just inter-state transfers) would allow for imbalances to continue without leading to contraction of output to reduce the regional balance of payments constraints, as noted by Nate Cline and David Fields here.

Alternatively, in the absence of fiscal transfers from a federal European government, if the European Central Bank (ECB) had the ability to buy euro denominated bonds of peripheral countries and keep their borrowing costs low, fiscal policy could be used by member countries, without risk of default. That's what Marc Lavoie has argued, that at the heart of the problem there is a monetary sovereignty problem. Basically the ECB could transform what is effectively a foreign currency problem, since peripheral countries have a constraint in euros, into an essentially domestic problem with no risk of default. On the other hand, it is also true that the manifestation of the euro crisis is in the form of a regular balance of payments problem, as noted by Sergio Cesaratto. In a sense, both are correct. The imbalances in the current account, which Sergio puts at the center, become relevant because in the absence of fiscal transfers, and of a monetary authority providing a zero risk asset for governments to borrow in times of crisis, as emphasized by Marc, the adjustment is done by variations of the level of income.

The difference might lie not so much in the diagnostic, which is basically the same (they also agree on Keynesian fashion that the current account adjustment is done by variations in quantities not prices), but on the policy alternatives. Sergio's emphasis seems to suggest that exit is the best alternative. Marc's views would indicate that reforming the institutions would be better (mind you, they might think differently, I'm suggesting what the different emphasis might imply). It is unclear to me that depreciation and exit from the euro would solve the problems of peripheral countries (on the role of depreciation on solving the external problem in Greece, that is, Greexit, go here). On the other hand, the reform of the European institutional framework has proceeded at pace that seems too slow for the magnitude of the problems faced in the peripheral countries. There is no good alternative.

PS: The Troika's solution is austerity, since the the crisis is seen as a fiscal problem, as in conventional currency crises models. And the ECB should in that framework remain concerned only with inflation.

Wednesday, May 27, 2015

Rochon on Lavoie

The Progressive Economics Forum holds its annual meetings at the Canadian Economics Association (CEA) conference. This year we are at Ryerson University, Toronto, Thursday, May 28 to Sunday, May 31, 2015.

Introducing Marc Lavoie 
May 29, 2015

By Louis-Philippe Rochon

I am very honoured to be introducing this year’s guest speaker.

When I was asked to introduce him, I found myself in a bit of a conundrum.

After all, how can I possibly do this in just 5 minutes?  I mean it is impossible to do justice to his work over the last 35 years in such a short time.  His CV by the way is 40 pages long. So one would need quite possibly a good hour to cover all the important features of our guest’s distinguished career.

Marc Lavoie obtained his doctorate from Sorbonne Paris 1 in 1979 and arrived at the University of Ottawa the same year.  It was only a few years later, in 1983, I believe, that I had him as a professor.  I took Introduction to Post-Keynesian Economics  (with a hyphen!) largely because nothing else fit my schedule.  I must admit I was a bit reluctant to take the course as other students were telling me to stay away. But, I did anyways and the rest, as the old saying goes, is history.

Marc has a long – very long – list of publications.  To wit, he has published, at last count, over 120 peer-reviewed journal articles and 71 book articles; he has written 10 books, and edited another six.

Among the books he has written, we have an excellent first-year textbook, co-written with his colleague of 35 years, Mario Seccareccia, who was also my professor.

There is also a book that has contributed to the emergence of an entire new approach, the so-called stock-flow consistent approach, which has seduced a great many young, and not so young, scholars.  Today, there are a great many articles and conferences dedicated to that approach.

The book, Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth, was co-written with Wynne Godley, and, like many of his other books, has had a tremendous impact on post-Keynesian economics.  It is safe to say that Marc has single-handedly given great empirical “legitimacy” to heterodox economics.

Another book is his Introduction to Post-Keynesian Economics. First written in French for the famous Repères series, I had the privilege of translating it in English (something by the way I will never do again, and I think Marc will agree on that!), and it has also been translated into Spanish, Japanese, Mandarin, with Italian and Korean translations in the works. I hear a Klingon version is next!

His most recent book, a greatly expanded version of his quintessential 1992 tome, is by any definition an essential book for anyone wanting to learn about post-Keynesian and heterodox economics. Indeed, Post-Keynesian Economics: New Foundations, in my opinion, towers high above all other books on the topic, and offers readers great insights into the essential features, both micro and macro, of post-Keynesian economics. In my opinion, this book is already a classic. I am certain, in several decades from now, it will be regarded as one of the greatest written on Post-Keynesian economics.

Among his edited volumes, I want to point to three in particular.  His most recent with Fred Lee (2013) In Defense of Post-Keynesian Economics and Heterodox Economics: Response to their Critics, is an excellent collection of articles addressing directly the many critics of heterodox economics.

Another book, entitled Money and Macroeconomic Issues: Alfred Eichner and Post-Keynesian Economics (2010), reflects on the great work of Alfred Eichner, an economist who has greatly influenced Marc’s thinking.  It is a book, which was co-edited by Mario Seccareccia and myself.

Finally, another great book, co-edited with Mario Seccareccia, on Central Banking in the Modern World: Alternative Perspectives (2004) has many excellent articles on credit, money and central banking.

Now, while many here know his writings in economic theory, monetary theory and policy, fiscal policy, endogenous money, growth theory, price theory, Marc also has a whole other life in sports economics. This is perhaps a reflection of his avid interest in sports, having been named not once, but twice, Carleton University’s Male Athlete of the Year (1973-74, 1974-75).  He is greatly passionate about fencing, for which he not only won the Canadian national senior championship in sabre seven times, but also represented Canada in the 1975, 1979 and 1983 Pan-American Games (where he finished 4th in the individual event in sabre in 1979). He also participated in the Commonwealth championships in 1974 (4th), 1978 (2nd) and 1982, and competed at the 1976 and the 1984 Summer Olympics.

He is currently Managing co-editor of the European Journal of Economics and Economic Theory: Intervention, and is on the editorial board or Executive Board of 13 journals, including my own journal, the Review of Keynesian Economics. He has lectured around the world, in far too many places to list.

There is no doubt that Marc’s contribution to economics and to post-Keynesian economics in particular has influenced a generation of scholars. Many regard him, and rightly so, as one the greatest scholars in the heterodox tradition. I concur.

As an example, I am currently editing a set of 3 anthologies in post-Keynesian economics for Edward Elgar.  So last month, out of curiosity, I posted a few messages on FB, asking the over 200 post-Keynesian and heterodox economists I know there from around the world, which was their most influential article on monetary theory.  Of those who replied to me by email, close to 80% stated that’s Marc’s 1996 article in the Scottish Journal of Political Economy was probably the most important post-Keynesian article on endogenous money, with another 15% mentioned his 1996 article in Money in Motion.

In closing, I need to mention one last important contribution.

Above, I often interchanged the word post-Keynesian for heterodox.  This was deliberate. It reflects Marc’s deep passion for a unified heterodox approach.  Where many of our colleagues, including myself, see differences and quarrels, Marc sees similarities and bridges among the various heterodox traditions; where some argued for the exclusion of some approach from the post-Keynesian family, Marc insisted on casting a large post-classical tent, and pointed to what united us rather than divided us.  This has been a consistent theme throughout his career and his writings.

I am running out of time.  Well, like I said, it is difficult to do justice to his long career in such a short time, and this was the root of the conundrum I faced. But well, upon deeper reflection, I guess there really is no conundrum.

I don’t need longer than 5 minutes, I am happy with less. Since in the end, we all agree, our distinguished guest needs no introduction.

Ladies and gentlemen, Marc Lavoie

For more information on the PEF at the CEA, see here.