Showing posts from September, 2011

More deficits, not fiscal responsibility

So there is a short review of the Hinckley Forum debate here. Not bad, but the title is misleading, since nobody was for for fiscal responsibility in the way it is usually defined, i.e. fiscal contraction. By the way, fiscal responsibility, like fiscal consolidation, is one of those code words for adjustment, that should be avoided. At any rate, if you missed it, that is a reasonable summary.

PS: I also emphasized that uncertainty is not central for the current weak recovery, lack of demand is and Steve agreed that without more demand there will be no more confidence. In fact, Steve's plea was for public investment in infrastructure. That's a way of recovering confidence that I'm also for.

Lucas in context, Keynes out of context

Krugman decided to try his hand at history of macroeconomic thought in one of his last posts. That's great, since history of thought is essential to understand how we got here. It's also bad, since Krugman is still very much a mainstream author, and misses the point of Keynes' contributions, and the limitations of neoclassical (or more properly, marginalist) approach. He suggests correctly that the New Classical (NC)/Real Business Cycle (RBC) project was a failure, but both the reasons for that and his interpretation of the Keynesian project are misguided.

The first proposition in Krugman's reassessment of the recent history of macroeconomics, is that Keynesian models were ad hoc, and assumed wage and price rigidity. The whole of chapter 19 of the General Theory (GT) is about the effects of price and wage flexibility, and how it does not produce full employment. It was with Franco Modigliani's PhD dissertation, done at the New School for Social Research under Jaco…

Christina Romer gets it right on the deficit

Romer's column in the NYTimes, a few days ago, is certainly worth reading. She says among other things:
"Fiscal austerity, not more stimulus, is the answer. This argument makes me crazy. There’s simply no evidence that concern about the current deficit is a significant factor limiting consumer spending or business investment. And government borrowing rates are at record lows, suggesting that financial markets are not worried about the deficit, either... The best evidence shows that fiscal austerity depresses growth and raises unemployment in the near term. That’s the experience of countries like Greece, Portugal and Britain, which have embarked on drastic deficit reduction plans over the last two years. Cut the current deficit and you will raise unemployment, not lower it." It's high time for Keynesians, of any sort, that may have some influence with the President to be for fiscal expansion.

More on the "New IMF"

More evidence for the changes in our NIMF (New International Monetary Fund). In the executive summary to the last WEO, it argues that:
"Fiscal adjustment has already started, and progress has been significant in many economies. Strengthening medium-term fiscal plans and implementing entitlement reforms are critical to ensuring credibility and fiscal sustainability and to creating policy room to support balance sheet repair, growth, and job creation." That is, not only they want continuing fiscal adjustment, but also cuts to entitlement programs like pensions (in IMF-speak its entitlement reform; one more for the English-IMF/IMF-English dictionary). Because fiscal consolidation (they mean austerity, cutting spending and increasing taxes) will lead to growth and job creation. Sounds new, doesn't it?

So does the IMF think that the periphery of Europe should not continue to tighten fiscal policy? Here is what they have to say:
"In the economies of the periphery [of Eur…

The New IMF and Argentina

There has been a certain view, that was already quite popular around the time Strauss-Kahn still managed the IMF, that with Christine Lagarde the Fund has become less orthodox, not just regarding capital controls, but now also supposedly on fiscal issues. See for example the article in the NYTimes by Liz Alderman.

In the last World Economic Outlook, the Fund argues (WEO, p. 110) that Argentina's inflation results from excessively expansionary policies (no analysis backs this claim and the effects of a more devalued currency and commodity prices are not discussed) and suggests (p. 42) that monetary tightening is necessary. Also, the report continues the tone of the previous WEO, suggesting that in developed countries fiscal adjustment should continue to reduce the debt burden, and in developing ones, like Argentina, to avoid overheating.

So fiscal and monetary contraction is their policy advice. The IMF forecasts a significant slowdown next year for Argentina (4.6% for 2012 down f…

Class warfare

Only now I saw this great video by Mark Fiori in Marie Duggan's blog.
Complements Krugman's column today. A must read.

The IMF still believes in fiscal austerity

In May, Olivier Blanchard, the head of the research department at the IMF, said:
"Earlier fears of a double-dip recession—which we did not share—have not materialized... The inventory cycle is now largely over and fiscal stimulus has turned to fiscal consolidation, but private demand has, for the most part, taken the baton." The lame excuse for this ludicrous forecast now is that:
"the initial U.S. data understated the size of the slowdown itself. Now that the numbers are in, it is clear that more was going on." In all fairness I criticized that view in May (here) and in July (here), since it was clear that fiscal austerity (Blanchard says consolidation, but he means reduction of spending and increases in taxes, that is austerity measures, which may not lead to a reduction in deficits, i.e. consolidation; one day I'll publish the IMF-English/English-IMF Dictionary) would not work.

Now that he admits that private demand has not taken the baton you think he woul…

If you’re surprised, that means that you were part of the problem

Back in July, in the midst of the debt-ceiling debate, Paul Krugman argued that those that were surprised by the GOP tactic of blackmailing the administration, threatening a default in exchange for cuts on social spending and the maintenance of the tax cuts for the rich were part of the problem. Normal was already not part of the GOP. I agree.

Now Krugman tells us that in this crisis a "lot of the blame goes to the economists, by the way, who abandoned what they used to know." But the thing is that the mainstream of the profession has been dominated by the academic equivalent of the Tea Party for a very long time. My point is that if you didn't know that economists forgot certain things about recessions, and never learned a few other things, you have not been paying attention and/or you must be part of the problem too.

Krugman knows this well, since he argued that:
“By the early 1980s it was already common knowledge among people I hung out with that the only way to get …

Hinckley Forum - Thursday 9/22 at 10:45

Roundtable on the Global Financial Crisis
Lance Girton, Professor, Economic Department, U of U; Minqi Li, Associate Professor, Economic Department, U of U; Steve Reynolds, Professor, Economic Department, U of U; Matías Vernengo, Associate Professor, Economic Department, U of U; Tom Maloney (moderator) Chair, Economic Department, U of U

Greek Debt is not that large

The NYTimes tells us that Greek debt is out of control, and financial markets fear that a default is around the corner.  It might be true, but the size is not a big problem. According to the Times:
"Total Greek public debt is about 370 billion euros, or $500 billion. By comparison, Argentina’s debt was $82 billion when it defaulted in 2001; when Russia defaulted, in 1998, its debt was $79 billion." The point of this is that it is supposed to be large even when compared to Argentina and Russia that defaulted. Note, however, that the GDP of the euro-17 (the 17 countries of the euro currency area) is around 12.3 trillion euros, and as a result Greek debt corresponds to slightly more than 3% of the euro-17 income.  It is true that the euro countries, or the ECB, may not want for political reasons to buy Greek bonds, but given its size and the potential risks it is puzzling, to say the least.

In Argentina and Russia that option was out of the table altogether, since debts were i…

The inflation monster

Kids are afraid of monsters, and so are Republican candidates apparently. The inflation monster that is. It really makes it hard to teach macro, since lots of students still think, because of the unrelenting 24 hour media coverage of GOP debates that since money supply increased (from about 7.5 to close to 9.3 trillions from Dec. 2007 until last July, using M2) we are in for a huge increase in prices. Hyperinflation should be around the corner.

It's not. As anybody with common sense knows the velocity of circulation does change (fell from slightly more than 2 to around 1.7 for M2), and the increase in money supply has no effect on spending. Banks are not lending, since demand is not growing sufficiently (if in doubt search endogenous money, now known as MMT, Modern Monetary Theory). And inflation has been subdued as the graph below shows (2011 is an IMF forecast for CPI inflation), even more after the 2007-8 crisis.
Inflation has increased a little bit in 2011, fundamentally asso…

Robert Barro vs. Jamie Galbraith

Jamie Galbraith goes head to head with Robert Barro, in the enemy's territory (Bloomberg). Several important points raised by Jamie. Beware of the delirium about the post-1980s being the start of two decades of prosperity. In fact, medium income stagnated after that, and growth has been based on a series of unsustainable bubbles.

An update on the Eurocrisis

I was again on Background Briefing with Ian Masters, Pacifica News KPFK 90.7, Los Angeles.  You can listen the to whole program here.  Previous interview is here.

PS: I'm in the second part of the program at around minute 20.

Robert Barro does not believe in evolution

Okay, in all fairness he does not believe in expansionary fiscal expansions. But it is the same. All the evidence supports the functioning of the simple Keynesian multiplier. One might disagree about its size, but not its existence. Barro says that we are in:
"the third year of a grand experiment by the Obama administration to revive the economy through enormous borrowing and spending by the government." You would expect that at least when referring to the data he would be accurate, but evidence has nothing to do with how he understands the economy (remember this is the guy of Ricardian Equivalence, i.e. if the government increases spending, people raise their savings proportionally to pay the future anticipated taxes with no effect on output).

The graph below shows percent changes in total government spending and revenues since 2006.
As it can be seen, spending (in red) increased in 2008, as a result of the recession, but has been falling ever since. The deficits are caus…

Paul Davidson on Obama's job speech

Here is a link to an interview with Paul Davidson. He makes it clear why a payroll tax cut and other incentives to hiring will not be enough to create new jobs. Lower costs will not lead to hiring if there is no demand. It's not just basic economics, it's simple logic.

Lipstick on a Pig

While I understand the title may be culturally specific, almost surely the metaphor isn't.

The American Jobs Act, unveiled fairly vigorously by President Obama last night to a joint session of the Congress, is an attempt to dress up the employment disaster the US and other advanced economies are needlessly enduring.

The metaphor presumes that you share in the general notion that pigs lack pulchritude. The current lack-of-jobs status is about as ugly as it gets. And the address last night leaves it barely improved at best. This is the biggest economic crisis of the last four generations, and we get....lipstick?

It is conceivable that, if the program manages to survive the worst Congress in my memory, it could help. The various early modeling returns have it adding between 500K and 3 million jobs over three years. So Mark Thoma and Paul Krugman say it positively surprised them. How low have our expectations sunk? These normally very good economists know how to do much much better…

UNCTAD against fiscal austerity

The Trade and Development Report (TDR, 2011) has been published.  It says many important things, but I think that what stands out in the the current environment is its defense against fiscal austerity.  It says:
"The current obsession with fiscal tightening in many countries is misguided, as it risks tackling the symptoms of the problem while leaving the basic causes unchanged. In virtually all countries, the fiscal deficit has been a consequence of the global financial crisis, and not a cause. (...) Policymakers should not focus only on debt stock. They need to consider the relationship between the stock of debt and the flow variables, including interest rates and fiscal revenues that affect a country’s ability to support its debt. A major factor that influences changes in the burden of public debt is GDP growth: it is virtually impossible to lower high debt-to-GDP ratios when an economy is stagnant, unless the debtor obtains a significant debt reduction. Hence, the level of a c…

Cross post at TripleCrisis

The current policy consensus in the developed world (i.e. the United States and Europe) seems to be that fiscal austerity (the euphemism used these days is consolidation) is necessary. Christine Lagarde, the new Managing Director of the International Monetary Fund (IMF), said recently in the Financial Times that: “fiscal adjustment must resolve the conundrum of being neither too fast nor too slow.”

That is what she refers to as “Goldilocks fiscal consolidation,” that is, cut spending and increase taxes, but slowly please! She repeated this view in her talk at the Jackson Hole conference, arguing that in order to obtain “credible” consolidation governments must implement: “measures that change the rate of growth of entitlements, health or retirement.” In other words, cut spending and increase taxes fundamentally on social programs that benefit overwhelmingly the poor.

Read the rest here.

Public debt is too small

That's what Alex Izurieta says in his last paper (available here). He provides several important points to justify this view. First, once one excludes the debt owned by intra-government institutions the net debt-to-GDP ratio is around 60%. Not particularly large. Second, since 2009 government spending has faded away in its contribution to growth is turning negative, which means that in the absence of other sources of demand, the government is the only thing between us and a protracted recession. More importantly, since agents are in a "liquidation phase", that is still dealing with the consequences of falling assets prices on their balance sheets, then:
"to recover from a financial crisis, the ideal instrument is government support in the form of public debt, i e, government liabilities that are transferred to the balance sheets of private sector agents as their assets." Not very likely to happen, but the reasons are not economic, and the solution is within th…

On General Equilibrium (GE)

Nice post (and rare, since this kind of topic is often not dealt with) on GE by Alejandro Nadal at TripleCrisis.  In my view, the problem is less that equilibrium per se does not exist, as Nadal seems to suggest, but the particular notion of equilibrium that has come dominate economics after Arrow-Debreu and the Capital Debates.  I highly recommend the paper by Fabio Petri (here) for those interested on the subject.

Macro vs. Micro

A debate on the relation between micro and macroeconomics has been raging in the mailing list of the Societies for the History of Economics (SHOE; yep that's the acronym they went for!).  The main question being discussed is whether micro-foundations are necessary for coherent macroeconomic theory. I have argued in a previous post that, in fact, this is the other way round, macro-foundations for microeconomics are essential.

From a history of thought point of view, it is important to note that the distinction is a relatively modern one, starting in the 1930s.  The term macroeconomics was first used, most likely, by Ragnar Frisch in his lectures notes in 1933-34, and first used in print by Jan Tinbergen and Eric Lindahl in 1936 and 1939, respectively (for a full discussion see Vela Velupillai, 2009; subscription required).  Keynes did not use the term in his General Theory, even though the book is considered the foundational book of macroeconomics. To a great extent the work of J…

More on the employment news

Just to add to Steve's discussion of the terrible jobs situation, the graph below shows that the stimulus was enough to reverse the downward trend in non-farm employment (to download go here), but not enough to maintain a healthy recovery.

By mid-2010, when the stimulus package started to wind down, employment creation basically stalled. There is some additional employment growth after the late 2010 fiscal package, but that is gone now.  Only in May 2010 more than 400K jobs were created. I'm all for the government hiring workers if the private sector doesn't, as in Steve's proposal, but I'm sorry to say that I don't think Obama, let alone Congressional Republicans, will move in that direction.
PS: Some of the employment creation in 2010 was the result of direct government hiring for the Census, by the way.

Stunningly disastrous news on employment

Net ZERO new jobs in August (BLS report here). As in nada, nothing, nadir... pick your favorite disaster-evoking word. The only possible silver lining is if things are now "bad enough" that the momentum for doing what non-"regular" economists (a slam on Barro's most recent lunacy; subscription required), that is economists who understand and fundamentally believe Keynesian macro models, know how to do.

This is the worst job performance since 1945, I just heard, but haven't verified.

President Obama needs to lead. Meaning capture the essence of fixing the problem and communicate it in a compelling way.

My proposal for that is simple: 400,000 new jobs per month, private and public, we desperately need them all. Hell or high water. At this point arguing over the details means absolutely nothing -- we must commit to creating any kind of job that moves us toward 400K.

Given this truly abysmal news, maybe it should be hell AND high water. C'mon Mr. Presid…

The Colombia FTA again

If you missed my piece on the Colombia Free Trade Agreement, then you can read it at Triple Crisis; it is posted with a link to the original at NACLA.