Sunday, October 30, 2011

The political economy of flat taxes

The GOP has revived this season the ghost of the flat tax. Cain is for the 999 plan (whatever that is) and Perry for a 20% flat income tax (see here, for example). I haven't seen any particular analysis of the Perry plan so far, but it won't be much different from the Cain breakup. For example, the Tax Policy Center (here) shows that Cain's plan would increase the federal taxes of the lowest quintile by 18.3% while reducing that of the top 0.1% by 17.9%.  And that's not class warfare! You don't need to be a rocket scientist to know that when you hear flat tax it's all about reducing the taxes of the rich.

Taxation was, by the way, always a key concern of classical political economy (it's there in the title of Mr. Ricardo's Principles). One of the most famous tax proposals of the 19th century, Henry George's single land tax, was in fact based on the 'Ricardian' theory of the rent. That is, the idea that landowners derive their income (rent) from ownership, and that their income (for a given level of output) detracts from profits and the possibilities of accumulation, required a tax to transfer income against wealthy landowners.

The interesting thing is that since the old classical surplus approach makes it clear that class conflict is essential for understanding the functioning of the economy, it does not try to disguise the issue of taxation as not having distributive consequences.

Thursday, October 27, 2011

Utah is number 1

A graduate student brought to my attention the study here that classifies universities according to economic freedom (liberty). The Econ Dept at the University of Utah is number one (if you exclude Canadian universities) in the liberty-reducing (see graph below; click to enhance) index. We hate freedom here!
If you read the paper you'll find out that the liberty-enhancing and liberty-reduction indexes depend on what types of petitions the faculty signs. So if you sign a petition for free trade and against protectionism (a Club for Growth thing), to oppose tax hikes (the so-called Death Tax; yes they do use that term in the paper), to warn against the risks to Social Security (i.e. want to cut benefits) then you're for liberty. But if you sign a petition against the Bush tax cuts, to increase the minimum wage, or to show concern about global warming (they call it climate change; I know) then you're against liberty.

I'm proud to be against liberty then. By the way, we beat other heterodox depts, like UMass Boston and Amherst, right after the U, and the New School and UMKC that don't register at all.

PS: I just noticed that they are color blind. The liberty hating lefties should have been blue not red!

Wednesday, October 26, 2011

Historians and the surplus approach

An interesting feature of the literature in history, particularly when related to ancient history, is that ideas that are clearly in the tradition of classical political economy, that is the developments from William Petty to Marx including mainly, but not uniquely Quesnay, Smith and Ricardo, are often used in contrast with the dominant supply and demand approach of the literature in economics. The typical discussion of development presumes that it was the surplus obtained with the domestication of plants and animals, and the transition from hunter/gatherer to agricultural societies, that allowed specialization (the division of labor) and the development of social classes.

The figure below comes from William McNeill's classic The Rise of the West, and the essential concept of surplus is at the center of the stage.

In that sense, historians, contrary to economists (even economic historians) do not tend to fall into the trap of describing markets as autonomous institutions that are disconnected from society. Also, historians tend to think in terms of classes, and restrict individual behavior to the kinds of actions that are related to the underlying social class. That is true in several popular books like Jared Diamond's Guns, Germs and Steel.

Galbraith on long term growth

Link to the interview here, where he says that we need to spend ourselves out of the stagnant economy.

PS: Here link to his upcoming conference on the European crisis.

Sunday, October 23, 2011

G20 Meeting

Yep nothing much will happen. My take here on TripleCrisis.

Commercial Policy in Latin America

Last week I taught my Raúl Prebisch class, in my Latin American Economic History and Development course, dealing with Import Substitution Industrialization (an annual thing now). The classic paper in English was published in the American Economic Review of 1959. The masters' students have to read the original paper. This follows my two previous posts (here and here) on trade. A few things that are important to notice.

Prebisch clearly says that industrialization (and hence the expansion of domestic production) is an inevitable part of the process of development, something that has been often forgotten as if strategies based on services or intensive agriculture are alternatives to industrialization. We still live in industrial societies (not post-industrial ones), and industry remains the main source for productivity growth (something that was referred to as Kaldor's Second Law of development).

Second, even if there is strong growth of productivity in the primary sector, these tend to be passed to prices and benefit the consumers, mostly in developed countries, whereas at least part of the increases in productivity in the other two sectors are retained by workers in the form of higher wages. So the problem of industrialization is associated to the ability to keep in the developing countries the fruits of technological progress, and not with protectionism for the sake of domestic special interests. Further, the workers expelled from the primary sector (if productivity is to grow there) must be incorporated in the other sectors, and as a result a preoccupation with what he calls (following Lewis) 'surplus manpower' (p. 255).

Last but not least, it's worth again emphasizing on the question of protection (since Prebisch is seen often as the Devil by Free Traders*), that Prebisch (p. 259) notes clearly that: "protection by itself does not increase productivity."

* The typical attitude is I did not read it, and I did not like it. The aversion of the mainstream to Prebisch is so strong that Dani Rodrik confesses in his Prebisch Lecture (see the irony?!) that a month before he had not read any of his works. Basically he found out that Prebisch: "did not favour indiscriminate protection. He anticipated his later critics by recognizing that trade protection on its own would not lead to increased productivity in manufactures, and that it might even resuit in the opposite."

Friday, October 21, 2011

More on "free" trade

In a recent post I promised to develop the critique of the dominant trade model, the so-called Heckscher-Ohlin-Samuelson (HOS) theory. While the Ricardian concept of comparative advantage is based on the labor theory of value (and is compatible with modern versions of that theory, as developed by Sraffa), and its results hold if the assumptions are realistic (limited capital mobility, and a fixed level of employment, the latter could result from domestic demand policies), the HOS is an application of the marginalist theory of value and distribution and it suffers from that theory's inconsistencies.

The HOS theory says that a country exports the goods that are intensive in the use of the factor of production that is abundant in the country. A country with lots of workers, and according to theory cheap labor, would produce goods that are labor intensive and export them, while importing capital intensive goods. The graph below illustrates the argument.
If there are two goods (a and b), and one (a) is always more capital intensive (bigger capital-labor ratio) than the other (b), and in both goods we have that as capital intensity increases (larger K/L ratio) the rate of interest falls, then as the rate of interest falls the relative price of the capital intensive good with respect to the labor intensive one falls too. In other words, in a capital abundant country, capital intensive goods would be cheap, and specialization would be guided by the relative prices.

The capital controversy showed that there is no reason, in a world with multiple capital goods, to have a monotonic decreasing relation between capital intensity and the remuneration of capital. One way in which that effect could be represented would be with a capital intensity reversal in the production of goods a and b, as shown below.

In that case, as the intensity of capital increases (K/L goes up) at first, as before, a is the capital intensive good, but now there is a switch and b becomes the capital intensive good at lower rates of interest. The consequence is that for a part of the process as the capital-labor ratio increases the price of a with respect to b increases, but after the switch, the other part of the process, it decreases. The relative abundance of capital and labor is not a guide for relative prices anymore, and as a result, neither can it determine patterns of specialization.
As a result it is not generally true that trade depends on comparative advantage based on relative scarcities of factors of production. This suggests (as the critique of the Ricardian version of the model) that absolute advantage, lower costs, might be more important than conventional wisdom suggests. Also, it implies that history and institutions are central to understand patterns of trade specialization.

The seminal work in this area was done by Ian Steedman, extending the ideas of Sraffa to foreign trade. The classic papers have been collected in Steedman's edited book Fundamental Issues in Trade Theory.

Wednesday, October 19, 2011

Jamie Galbraith on the European crisis

Here is the link to Jamie's take on the European crisis. Mike Mandel and Dan McCrum two journalists, are also part of the talk. I'm increasingly surprised that there is a concern that the European Financial Stability Facility (EFSF), the bailout fund, is NOT large enough. As I said before, the Greek debt is not that large, and the European Central Bank (ECB) can buy just a fraction of Greek debt and solve all problems (by the way Jamie makes that point very clearly: that the ECB can print as many euros as they wish to). It's difficult to get this whole thing, as Jamie says Greece is being destroyed, and for what exactly? To make an example.

PS: That also explains the media's need to continue lying about Argentina's post-default performance. Not only Greece must be an example, Argentina cannot be a good example of a default country doing well. On that see Dean Baker's post.

Crossing lines

David Ruccio has a great post on why there are no clear lines between research and policy advice, between advocacy and activism. The post was prompted by Krugman's justifications for not appearing in the Occupy Wall Street protests. I agree with Ruccio that it is possible to provide serious analysis and participate in social movements, and there are lots of examples of public intellectuals that do both well (Noam Chomsky, the late Howard Zinn, and Cornell West, shown above, come to mind). For example, here is the take from Kevin Gallagher and Mark Blyth in Occupy Boston.

Tuesday, October 18, 2011

Garegnani and the revival of the surplus approach


Last weekend Pierangelo Garegnani passed away in Rome. He was the main disciple of Piero Sraffa, and one of the most important heterodox critics of the mainstream marginalist (neoclassical) approach. A full account of his contributions to economics is well beyond what I can offer in this space, but here are a few highlights.

As early as 1961, while spending an academic year at MIT, he suggested during a presentation by Paul Samuelson that his results depended on the assumption that all sectors use the same capital-labor ratio. The final results of his critique were presented in Garegnani's paper "Heterogeneous Capital, the Production Function and the Theory of Distribution." His paper shows conclusively that the marginalist theory of value and distribution based on an aggregate production function is untenable. This of course builds on Sraffa's work in the Production of Commodities (PC). By 1966, in the famous Quarterly Journal of Economics (QJE) Symposium, Samuelson had admitted that the neoclassical parable was not defensible.

In his 1976 paper "On a Change in the Notion of Equilibrium in Recent Work on Value and Distribution" Garegnani argued that to avoid the problems associated with the aggregative marginalist model, the mainstream had switched to Arrow-Debreu (AD) General Equilibrium models, which did not use aggregative capital, but also did not assume a tendency to a uniform rate of profit, which implies that it can only be seen as a short run equilibrium. Further, Garegnani later argued that, beyond the problem of being stuck with a short run theory, the AD model was still open to the capital critique, since a notion of aggregate capital was still needed for the equilibration of savings and investment (see his 2003 paper "Savings, Investment and Capital in a System of General Intertemporal Equilibrium").

Garegnani was also the central author arguing that the recovery of the classical theory of value and distribution (and hence Marx) was not incompatible with the Principle of Effective Demand (PED), as developed by Keynes and Kalecki. His two papers in the Cambridge Journal of Economics show that a rejection of the marginalist notion that labor and capital markets tend to full employment depends on the rejection of the mainstream theory of value and distribution, and that Keynes' PED is fully consistent with the old and forgotten classical or surplus approach. He also actively contributed to the extension of the PED to the long run until the end of his life (e.g. his paper with Trezzini).

There are several other contributions, in particular his work on the interpretation of Ricardo and his debates with orthodox Marxists, which again follow in the steps of his teacher. His work is essential for those interested in the understanding of the functioning of capitalist economies, and the incapacity of the mainstream to provide a useful tool to analyze reality.

Jamie Galbraith on the jobs plan

Jamie's take on the plan. Here is the link.

Saturday, October 15, 2011

Sims is not Sargent

Below Steve's comment on Sims. Worth a whole post.

Chris Sims' classic 1980 paper "Macroeconomics and Reality" still echoes, or should, among macro model builders and macro econometricians. He could not possibly be clearer about the "incredible" restrictions that models often impose, and proposed a way forward, the VAR in its many forms.
That method has evolved to the point where, for example, good econometricians can recast a DSGE model in VAR form and see if it survives the data. Often they don't, a recent example being Peter Ireland's DSGE so soundly rejected by Katarina Juselius.
The rub is in the qualifier good. This is not easy stuff to do correctly. But its power is worth the sweat. Sims has been homaged over his prize by Mark Thoma here, and by Jim Hamilton, the time series bible author here.
A very favorite story is when Sims, Robert Litterman, and Thomas Doan, all either at the Minneapolis Fed or U of Minnesota in the 80's, "took on" their big models with a small VAR and outforecast them by a bunch. They soon left, maybe excommunicated? But Sims and Litterman at least landed on their feet...Litterman just retired as head statistician at Goldman Sachs. So the Sims triumph validates a reality first approach, meaning data before theory, and with the tools we now have and careful work, this method will become ever more influential in applied macro. Sims has also contributed to Bayesian approaches to macro modeling.
I totally miss the logic of the pairing with Sargent, but such is academic politics.
I agree.

PS: Links are there in the two here in Steve's post, and in the title of Sim's paper and Juselius name.

Wednesday, October 12, 2011

Esther-Mirjam Sent on Sargent and more

As Kevin Gallagher noted, the contributions of Sargent and Sims are quite different and should be analyzed separately. Ester Mirjam-Sent is certainly the most qualified and discerning critic of Sargent's work, and anybody interested in understanding his (Sargent's) contributions to economics should read her extensive research on his ideas. A good start is her paper in the Cambridge Journal of 1997 (here).

Her concerns are more with the evolution of his thinking about rationality, from rational to bounded, which is a central pillar of neoclassical economics. She notes that Sargent's preoccupation with rationality (which should be contrasted with Simon's views) was to strengthen the theoretical foundations of neoclassical economics. I tend to be more concerned with the critique of those foundations, rather than with the question of how rational behavior leads (or not) to efficient market results.

One important area, in which I have done some research, is hyperinflation theory. Sargent basically is responsible for extending the Cagan model (his classic paper is here) and suggesting that beyond a monetary reform, a credible fiscal adjustment was essential for stabilization. In that sense, while Sargent maintained the fiscal fundamentals of hyperinflation, he suggested that expectations did have a role to play. As Carlos Bastos reminded me recently, here is a critique of Sargent's contribution published in the Economic Journal (subscription needed; portuguese version here). For an alternative discussion of inflation/hyperinflation go here, and for a survey of the literature here.

PS: Sent was one of the faculty members that left Notre Dame after the administration dismantled the heterodox program there. For more on that read here.

Monday, October 10, 2011

Re-writing history

By the way, in the middle of the several comments praising the winners of the Sveriges Riksbank Prize in Economics there will be a lot of misplaced acclaim. Here is one example from the Huffington Post:
"Sargent famously weighed in on the fight against inflation in the early 1980s. Many economists believed it would take years of high interest rates to bring inflation down. But Sargent believed that inflation could be tamed much faster if the Federal Reserve acted enough to break the public's expectations that prices would continue to rise rapidly. That is basically what happened: Then-Fed Chairman Paul Volcker raised interest rates so quickly and so much that inflation expectations were shattered."
So now, if you believe this report, Sargent and Lucas were right about the costless disinflation of the 1980s. Forget that disinflation had to do with falling commodity prices, caused by the hike in interest rates, and with the weakening of the labor force, which faced what was, in the US up to that point, the worse recession since the Great Depression. Unemployment in the US reached 11%, but it was inflationary expectations that mattered. And the Huff Post is a progressive site, isn't it?!

A beautiful blind

Sylvia Nasar wrote a new book (the old and famous was the one on Nash's mind and life) on the history of economic ideas. Robert Solow is not too happy, since he thinks the book is superficial, and spends too much time on the economists lives and on what he thinks are second rate minds (e.g. Beatrice Webb, and I suspect for him Joan Robinson too). I did not finish reading the book, and hence will not review it here now, but I can comment on Solow's review, which is quite misguided.

In fact, the preoccupation with policy issues and the general context in which theories are developed is one of the good aspects of this book. In this sense, Nasar's book is in the direct line of descent of those, like Robert Heilbroner, that think that economics is (and should be) about the great questions (accumulation and the wealth of Nations, the quintessential themes of classical political economy) and that the economist's vision is as essential as, if not more so, than the analytical tools utilized.

For example, Solow complains that the book does not spend enough time discussing the theoretical achievements of Alfred Marshall. The fact, that somebody, with Solow's credentials, can write that after Piero Sraffa's devastating critique of Marshallian partial equilibrium (still in all textbooks, by the way), as if his technical achievement was not simply incoherent and irredeemably incorrect is a testimony about the poor state of our discipline.

Solow's complaints about Nasar discussion of Keynes are more puzzling, since he should be as neoclassical synthesis Keynesian be very comfortable with the 'developments' of Keynesian theory within the mainstream, which are after all the dominant model (the New Keynesian model with an IS, a monetary rule and a Phillips curve). He was instrumental in the creation of the current macroeconomic consensus, and his growth model (for which he won the Sveriges Riksbank Prize, also known as the Nobel in economics, although it's not one of the original Nobels) is the dominant view on growth. If the profession has failed, Solow is certainly responsible for it to a great extent.

If anything the problem with the book is that it shares with the mainstream (including Solow) a certain view of economics, and progress in the discipline, that has been established since the rise of marginalism in the latter part of the 19th century. In this view, there is a direct line of descent from Smith and Ricardo to Marshall (via Stuart Mill) to modern economics. According to this approach, the critical authors are, not the true heirs to classical political economy (that is from Smith/Ricardo to Keynes/Kalecki, via Marx), but critics of some aspects of capitalism that seem to have more heart than brains.

In all fairness, however, it's not surprising that a journalist/writer that is not an specialist economist buys the conventional wisdom on the history of ideas. The conventional history of ideas texts are fundamentally, like the parable in Bruegel's painting, written by blind professors to guide their blind students.

PS: The Sveriges Riksbank has been awarded to two professors (Sargent and Sims) that most likely believe that government intervention in the middle of the crisis is worse than some version of laissez faire. This is the reason, not the predictions about the end of times, why this is a dismal science.

Saturday, October 8, 2011

On 'free' and managed trade

In one my last posts I promised to talk about "free trade." As I said the name itself is a misnomer, much like "free market." Not just because it suggests that those that oppose it are somehow against freedom, but mostly because it vaguely indicates that trade and markets are like natural phenomena, which would spring out if only government restrictions were eliminated.

In fact, it is well known, at least since Polanyi's classic, that the key markets in capitalist economies (those for land, labor and money) were slowly created by the interplay of social conflicts articulated through the political process and that their very existence results, in part, from the power of the State. Thus, simplistic and manicheistic views on the relation between the State versus the 'free' market miss the point of how States and markets co-evolved historically.

For example, the Bank of England, created in 1694, obtained the monopoly of money creation only after the Bank Charter Act of 1844, something that resulted from the victory of the City (financial interests) over the country banks (closer to commercial interests). The money issuing monopoly would be impossible without the backing of the government (and its monopoly of violence). The same can be said about international trade transactions. For example, it is well known that the period of the so-called first globalization (1870-1914) saw a significant increase in the volume of world trade. However, several regions actually became more 'protectionist,' i.e. increased the tariffs on trade (see Paul Bairoch for a good discussion on the topic).

In Latin America the higher tariffs allowed government revenue to increase, which, in turn, created the conditions for national armies to reduce domestic conflicts, and centralize administration, provide guarantees for foreign lenders, and fund the construction of railroads and ports. Without tariffs and higher government revenue the integration into world markets would not have been possible.

That does not mean that everybody in Latin America (or in other regions for that matter) did benefit from the increase in international trade during the period [it's worth remembering that in Mexico, towards the end of the period, peasants did revolt against the Porfiriato in the so-called Mexican Revolution of 1910]. It was not 'free' trade that produced growth, but the management of trade to produce commodities for the center (a particular project supported by local elites and international financial and commercial groups) that led to growth (with high levels of inequality).

A more logical discussion, for all these reasons, should not be about 'free' trade versus protectionism, but about what type of managed trade a given society wants, and who benefits from the different trade arrangements. For example, in current discussions about bilateral and multilateral trade agreements the issues of investment and property clauses are essential. The dispute is mostly about those that want to protect the interests of corporations (e.g. property rights, access to foreign courts, elimination of financial regulations forbidding sending profits abroad, etc.), and those that might have alternative interests (e.g. protecting domestic jobs, creating national capacity for industrial innovation, the environment, etc). In fact, for specific cases, like defense or sanitary and phytosanitary rules, it is well established that trade should be regulated, i.e. not 'free' but managed (for discussions of some current problems with the 'free' trade agenda see here and here).

But the problems for the defenders of 'free' trade are not limited to the inconsistencies of their policy positions. In fact, despite the general agreement on 'free' trade by academic (mainstream) economists, the theoretical foundations for their position are very shaky. The basis for the argument harks back to David Ricardo's Principles (and also to the parallel work by Robert Torrens). Ricardo argued that if England and Portugal traded without imposing tariffs it would be mutually beneficial, even if Portugal was better at producing both goods being traded, cloth and wine. The reason is simple. Even if Portuguese workers were more productive than their English counter-parts at producing both goods, they might be better at producing one of them (say wine) and would still benefit from putting all their efforts behind the activity at which they excelled.

In other words, the argument for trade without tariff or other restrictions was based on the the idea that trade is equivalent to access to better technology. The Portuguese could specialize in what they are better technologically, and obtain through trade the things that they do not produce. The English would have also access to better wine. Both would get cloth even if the English were less effective at producing it. The message is: specialization is the wealth of the nations.

However, what is often missed in the discussion is that the Ricardian argument for comparative advantage, as it is the case with all economic models, depends upon certain special assumptions, and that those premises responded to Ricardo's own political views. First, Ricardo assumed that all workers that were employed in wine production in England would find jobs in cloth production, and that all workers in the cloth sector in Portugal would be able to work in the wine sector. Say's Law of Markets, that suggests that general demand crisis do not take place domestically was extended to external markets too. Workers are always employed by definition (not necessarily full employment for Ricardo). Further, Ricardo assumed that capital was immobile, that is, even if it was cheaper to produce from Portugal (given its higher productivity and lower costs) and export to England, English capitalists would prefer to maintain their capital in England and produce in the home country.

Note that if any of those assumptions is violated Ricardo's argument falls apart. In other words, if workers in England and/or in Portugal in the displaced sector cannot find jobs in the other sector, it is unclear that all benefit from 'free' trade. Also, if capitalists can and do move from country to country (interestingly enough Ricardo descended from a family of bankers emigrated from Portugal to Italy, then to the Dutch Republic and finally to England) then in his example the lower costs (absolute advantage) of Portugal would determine that both cloth and wine would be produced there. England would be in a difficult situation importing both goods and condemned to grow at a lower pace, which is exactly the opposite of the historical situation (for an analysis of Anglo-Portuguese trade after the Methuen Treaty of 1703 that allowed Portuguese wine to be exported to England free of taxes and the same for English textiles into Portugal see Sandro Sideri's Trade and Power).

The reasons for Ricardo's special assumptions are very well-known. Ricardo represented financial and industrial interests, and was a harsh critic of the Corn Laws, the tariffs on imported grain imposed after the Napoleonic Wars, that favored the landed and aristocratic classes, defended by his friend Robert Malthus. Ricardo assumed that wages were at the subsistence level, and that tariffs on the importation of grain would lead to the use of more and less productive land in England for their production, increasing the rent accrued by the landowners. For a given output, and fixed wages, the higher rent would necessarily reduce profits, and capital accumulation. In other words, the special assumptions (which Ricardo thought relevant for the particular case of England in that particular historical context) were instrumental in his argument for the elimination of tariffs on grain imports. His was a progressive argument for industrialization and against the agrarian aristocracy (for a discussion of Ricardo's political views see Milgate and Stimson's Ricardian Politics).

Generalizations of the Ricardian argument can only be defended if his assumptions (including that displaced workers do find jobs and there is no capital mobility) are also thought to be generally valid. More modern arguments for 'free' trade rest on the so-called Heckscher-Ohlin-Samuleson (HOS) model, that is fraught with logical problems, and even less defensible than the generalization of Ricardian views, but I'll deal with those in another post.

PS: My paper "What Do Undergrads Really Need to Know About Trade and Finance" might provide a more detailed discussion of some of the issues above. Robert Vienneau has posted here elements of the Sraffian critique of the HOS model.

Wednesday, October 5, 2011

On China and Jobs

It is true that whenever the economy grows trade deficits tend to become larger, and the United States, which has had persistent deficits since the early 1980s, is particularly prone to those. Dean Baker has been the most vocal defender of a weak dollar (mostly as measure to boost local manufacturing jobs, since a depreciated currency protects local production; here for example a recent piece). Krugman too has recently argued for a more depreciated dollar and also for trade restrictions against China (see here for a recent one).

In all fairness, I have a few concerns with these line of thought, and not because I am (or ever was) a "free trader", like Krugman (by the way Free Trade is a terrible misnomer and there are serious problems with the conventional arguments for it; theme for another post, I guess).

First, in the case of China, the exchange rate has appreciated a lot since the crisis as can be seen in the graph below (Data from the Economist Intelligence Unit).
Further, when measured by changes in wages (labor costs) the real appreciation since 2007 has been of around 27%, 10% more than when measured by prices, since real wages grow relatively fast in China. Further, China has grown since 2007 at an average of 10.5% per year. In other words, China is growing and revaluing its currency; not sure what more can be expected on that front. Blaming China for lack of fiscal stimulus in the US seems, not just futile, but wrongheaded.

Another important point often missed in these discussions of the exchange rate is that a depreciated currency, everything else constant (economists do like a ceteris paribus condition) implies lower real wages, since imported goods tend to be part of the workers' consumption basket. Hence, if you favor a depreciated dollar, but tend to be for workers (which are getting to bear the brunt of this crisis, as is always the case), then compensating measures are needed to increase real wages without reducing competitiveness (other costs must be reduced, or profit margins would have to be squeezed; that's just the algebra).

Finally, my perennial question, raised before here, so if US deficits are larger, but we give the Chinese dollars, and they hold dollar denominated assets, what's the downside again?

PS: Concerned about the dollar? Go here.

Monday, October 3, 2011

La vie en foreclose

That's right, not through pink glasses (i.e. rose). Randy Wray, Charles Whalen and Stephen Roach, all in the same page, asking for debt relief as essential for recovery, since most consumers are still de-leveraging from the housing bubble.

Both Keynes and Irving Fisher suggested that debt-deflation was at the heart of the Great Depression, and in that case debt relief for households should be at the center of the recovery. In the 1930s, the New Deal did provide a lot of debt relief for farmers, on top of trying to raise the prices of agricultural commodities (in order to help famers). Now more is needed in the housing front. The figure below shows how much the debt of the non-financial sector has fallen since the beginning of the crisis.
From the peak in 2008, it has fallen around US$ 700 billions. It's likely to continue. The problem is that consumer spending was tied to the ability to obtain credit, i.e. of getting indebted. And mortgages were central for consumers.

Sunday, October 2, 2011

The euro is not money of account in Greece anymore

In Argentina, when the crisis got to the worst stage and reduced revenue and spending cuts were at the peak, local governments started using token currencies to pay state workers. The Buenos Aires province started paying its workers in patacónes, which became an alternative to the official currency, the peso, in 2001. In Greece we are already there. Local networks in which transactions take place using an alternative unit of account are taking place. These, if I understand correctly, are private and for the most part electronic networks, rather than public, as in the case of Argentina. No actual currency is being printed (as the 100 patacónes shown above).

At any rate, they go to the heart of the money question, i.e. they serve as alternative units of account.  Money is, after all, the unit of account that allows economic calculation to take place and facilitates the creation of credit and debit networks. Keynes said in his Treatise on Money that: “money of account comes into existence along with debts, which are contracts for deferred payment, and price lists, which are offers of contracts for sale or purchase.... [and] can only be expressed in terms of a money of account” (p. 3). This indicates that the euro is not playing that crucial role of money for the Greek people anymore.