Thursday, May 31, 2012

Obama is not Carter

Interesting post by Nate Silver at Five Thirty Eight on Obama and Carter comparisons. The important point Carter went up for re-election in the middle of a worsening economy, and Obama is up in the middle of a very poor recovery. I add my 2 cents with the graph below.

The graph shows private employment growth in the four years of the Carter administration, and for Obama the three first years and the average of the first four months of 2012. Note that by 1980 private employment fell 0.2%, and is invisible in the graph. In the case of Obama the trend is up, but slowing down. Obama could increase public employment to help the lackluster private demand, but that is another story.

Sunday, May 27, 2012

Parasites, vultures and other economic agents


The decision by Facebook cofounder, Eduardo Saverin, to relinquish his US citizenship led to a huge outcry, and to new bi-partiscan (a very rare event indeed) to tax him in advance and prohibit him from re-entering the country (the Ex-Patriot Act).  This is not a new phenomenon by the way. Kenneth Dart, inheritor to a styrofoam cup company and a few millions (billions?), renounced his US citizenship and became a citizen of Belize, a flight capital haven, in the 1990s for the same reason.

William McNeill differentiates between the micro-parasites and the macro-parasites, and Saverin and Dart are clearly in latter category. Macro-parasites also benefit from the host, and harm it in the process. And they evolve too. Dart is the owner of a Vulture Fund that made millions (700 or so) out of the Argentinean default back in the early 2000s.

Now, even though it has not received much attention, his Vulture fund has cashed US$ 400 millions out of the Greek payments after the last debt restructuring deal. Yep, there is where the money of Greek tax payers squeezed by the austerity programs of the EU and the IMF goes. Parasites and vultures exist, and will continue to thrive in capitalism, but there is no reason that governments should allow that to happen.

The impunite of parasites, vultures and other types of economic agents results from the lack of regulation with which corporations can act, and that has been the backbone of the neoliberal agenda. But I'll let the discussion of corporations for another post.

PS: Somebody reminded me that what Bain Capital and other private equity firms do is not very different from the parasitical behavior described above.

Saturday, May 26, 2012

How big was the stimulus?

The figure shows the rates of growth of total federal government spending in three periods 1930-36, 1941-45 and during the last recession and after, that is 2008-11.
The longest series is 7 years, and you see that spending growth peaked in the third year, but is visible even in the last year. World War II saw a massive increase in government spending. By the standards of those previous stimuli the last one has been moderate in size, and even worse, not sustained in time. In the third year the rate of growth of government spending was negative. That is, after the 2009 stimulus government spending fell in comparison to the previous year.

And yes the comparison with the Great Depression and the War is okay, since the size of the shock was by almost any measure as big as the one  back then.

Tuesday, May 22, 2012

De Grauwe moment: an impressively prescient prediction of the Eurozone balance of payments crisis

Sergio Cesaratto (Guest blogger)

In an article in the Financial Times written one year before the onset of the European currency union, Paul De Grauwe presented a farsighted conjecture of what could follow, something most economists have only recently realised.[i] Indeed, with the benefit of hindsight, the European crisis appears now as the nth ‘this time is different’ episode of the financial liberalisation sequence cum fixed exchange rates, capital flows from the centre to the periphery, housing bubble, current account (CA) deficit and indebtedness, default. Although I find Reinhart and Rogoff (2009) to be a poorly organised account of the history and nature of defaults, their title really conveys the sense of a recurring pattern of unfortunate events. The title of a seminal paper ‘Good-bye financial repression, hello financial crash?’ (Diaz-Alejandro, C. 1985) also sums up the essence of those events. In order to better appreciate prof. De Grauwe’s insight I introduce his article with some notes from a just published WP of mine “Controversial and novel features of the Eurozone crisis as a balance of payment crisis”.

Popularized by Martin Wolf (2012), the interpretation of the European crisis as a balance of payment (BoP) crisis is becoming dominant. Accordingly, the cause of the crisis must be found in the easier access for a number of peripheral EMU countries to the European financial markets at low nominal interest rates. Financial liberalisation and the removal of the exchange rate risk encouraged massive capital flows from core to periphery countries in the ‘periphery’ (e.g. Merler and Pisani-Ferry 2012). Credit-financed autonomous consumption determined a growth both of domestic demand and of nominal wages higher than in core-EZ. Higher inflation rates in the periphery determined low real interest rates, a further support to domestic demand. The growth of domestic demand was associated to a housing bubble in Spain and Ireland, and to the growth of public spending in Greece. This sequel of events, and its consequences, foreign indebtedness and ‘sudden capital stops’ are basically not so different from those that typically took place in developing countries and ended in sovereign defaults (Frenkel, Rapetti 2009: 688-89; Reinhart 2011: 27-9).

A traditional objection to the interpretation of the EZ crisis as a typical ‘this time is different’ crisis is that there cannot be a BoP crisis in a currency union. The question is that the EZ is a hybrid between a full currency union (which also implies a fiscal union) and a traditional fixed exchange agreement. One main difference with the latter is that in a currency union capital flights are automatically compensated by the CB, in the EZ by TARGET 2 (T2) (Febrero et al. 2012). As everybody knows, assuming zero variation of foreign currency reserves, the BoP sheet would read: CA + KA = 0, where KA is the capital account. Normally, in a two countries world, if country A has (all magnitudes are balances) a negative CAA-, country B symmetrically shows CAB+, then KAA + and KAB- (country B is lending to country A). Suppose country B does not lend to country A (so the CA flow imbalance is not financed), and even worse that there are capital outflows from country A (so the stock of debt acquired by B in the past is not rolled-over as it expires). Then both CAA- and KAA-, so that CAA + KAA < 0. What happens in a currency union is that through T2: CAA + KAA + T = 0, where T > 0 means that country A is overdrawing from its CB account. It is as if the ECB were creating foreign currency reserves in a fixed exchange rate system (Leppanen 2012); or as if the deficit countries were creating the international reserves, like the U.S. in Bretton Woods (I or II) (Kohler 2012); or better still, it is as if the EMU worked in an ultra-Keynesian fashion as an International Clearing Union (ICU), with even less prudence than Keynes envisaged (I suppose I am the first to note this similarity).[ii] With T2, the EZ country A has indeed an infinite overdraft possibility (Milbrandt 2012 CESifo). What has happened in the periphery from 2007/8 is that CAA- and KAA -, T+ and symmetrically in the core: CA +, KA +, T- (core-banks receiving hot money from the periphery and reducing their overdraft at their NCB).

Not so paradoxically, given the hybrid nature of the EMU: ‘If, in the framework of a political union, the euro central banks were integrated as dependent branches of the ECB, the consolidation of the branches would dissolve the Target balances in thin air.’ (Neumann 2012; also Ulbrich & Lipponer 2012 CESifo Forum). This makes clear that through T2 the ECB is acting as a regular CB: normally banks rely on the interbank market to finance their imbalances (when they fall short of reserves); if, in exceptional circumstances, this does not work the ECB just fills the gap. As Eladio Febrero wrote to me: ‘If you move your savings from a deposit in Banca Intesa to Unicredit, and the former has no reserves deposited in the Banca d’Italia, the latter would create money and then credit the reserve account of Unicredit so your money would be there now. Then Banca d’Italia would acquire a claim on Banca Intesa. …It should be noted that if Banca d’Italia in the example just above, or the European System of Central Banks (in this discussion on T2) does not provide the banking system with liquidity, the latter would collapse: there would be a bank run and the whole economic system would have very serious problems.’ So, in this respect EMU is not like, say, the EMS. If the ECB interrupts T2 (i.e. it stops acting as a CB with the peripheral banks) this is the end of the EMU. Of course, T2 is not the cause of the problems, but it prevents the EMU from exploding as the EMS did in 1992.

In this regard one might think that if the EZ was a real Federal State, the financial crisis would be a ‘normal’ domestic crisis: if some local banks and some local governments (deprived of monetary sovereignty) are not solvent, nobody would talk of a BoP crisis. Even considering the grand scale of the EZ crisis, a ‘normal’ state would intervene by socializing part of the local government and banks’ debt, imposing austerity and balanced budgets on them; saved banks would be nationalised, restructured or shut down. The CB would cooperate by sustaining the sovereign/federal debt. At the same time the Federal administration would use fiscal transfers to attenuate the crisis. Fine, but this is not Europe! If it were, it would manage to solve the situation without too much hardship.

The question is that the EZ is a hybrid, in between a fixed exchange rate system among independent countries and a fully integrated economy, sharing the possibility of a BoP crisis with the former and national banking principles with the latter. In this spurious set up the ECB has acted somewhat similarly to the FED: through T2 and LTRO it is injecting liquidity and absorbing toxic assets as collateral, letting insolvent local banks and governments survive (although the lack of direct ECB intervention to sustain sovereign debts is putting the solvency of the Spanish and Italian governments in jeopardy by letting the sovereign spreads to explode affecting the in turn the solvency of domestic banks that carry plenty of their bonds).[iii] A fiscal pact has been imposed, but there is no Federal government assisted by a SCB on hand to heal the local states and banks. To sum up, the EZ crisis is not a classical fixed exchange rate crisis (as De Grauwe foresaw) ; it is not a domestic financial crisis; it is what it is: a BoP crisis in an imperfect currency union. If the union were perfected, the crisis could be solved in the same way as a traditional domestic crisis. If it is not perfected, it is an unedited BoP crisis with a still unwritten final.

References

CESifo (2012), Forum Volume 13, Special Issue January.

De Grauwe Paul (1998), The Euro and the Financial Crises, Financial Times, February.

Diaz-Alejandro, C. (1985)Good-bye financial repression, hello financial crash, Journal of Development Economics 19, 1-24.

Febrero E., Uxó J., Bermejo F. (2012), El funcionamiento del sistema TARGET2 desde la Gran Recesión. Una aproximación desde la óptica del circuito monetario, XIII JORNADAS DE ECONOMÍA CRÍTICA, Sevilla, February.

Frenkel R. and Rapetti M. (2009) A developing country view of the current global crisis: what should not be forgotten and what should be done, Cambridge. Journal of. Economics. (2009) 33 (4): 685-702.

Keynes, J.M. 1980. Activities 1940–1944. Shaping the Post-War World: The Clearing Union, Collected Writings of John Maynard Keynes, A. Robinson and D. Moggridge (eds), volume 25. London: Macmillan.

Kohler K. (2012) The Eurosystem in Times of Crises: Greece in the Role of a Reserve Currency Country?, in CESifo (2012) 14-22

Leppänen O. (2012) Eurosystem TARGET balance deviations call for cautious changing of the EU banking landscape, http://www.voxeu.org/index.php?q=node/7884
Merler S., Pisani-Ferry J. (2012), Sudden stops in the euro area, Bruegel Policy Contribution, March.

Milbradt G. (2012) The Derailed Policies of the ECB, iun CESifo (2012), 43-49.

Reinhart C.M., and Rogoff K.S. (2009) This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press, Princeton.

Reinhart C.M., (2011) A Series of Unfortunate Events: Common Sequencing Patterns in Financial Crises, Rivista di Politica Economica, Vol 100 Nopp. 11-36

Ulbrich J. and Lipponer A. (2012) Balances in the Target2 Payments System – A Problem?, in CESifo (2012): 73-76.

Wolf M. (2012), Why the Bundesbank is wrong , Financial Times 10 April.

Notes:

[i] Hat tip Paolo Borioni and Ronny Mazzocchi.

[ii] Indeed Keynes regarded the ICU as an extension of the principles that govern a national banking system, the same principle that informs T2. In 1941 he even called it ‘Currency Union’. In famous passages, he wrote: ‘In short, the analogy with a national banking system is complete. No depositor in a local bank suffers because the balances, which he leaves idle, are employed to finance the business of someone else. Just as the development of national banking systems served to offset a deflationary pressure which would have prevented otherwise the development of modern industry, so by extending the same principle into the international field we may hope to offset the contractionist pressure which might otherwise overwhelm in social disorder and disappointment the good hopes of the modern world. The substitution of a credit mechanism in place of hoarding would have repeated in the international field the same miracle, already performed in the domestic field, of turning a stone into bread’ (CW 1940-44: 75). But he was also very cautious: ‘In only one important respect must an International Bank differ from the model suitable to a national bank within a closed system, namely that much more must be settled by rules and by general principles agreed beforehand and much less by day-to-day discretion. To give confidence in, and understanding of, what is afoot, it is necessary to prescribe beforehand certain definite principles of policy, particularly in regard to the maximum limits of permitted overdraft and the provisions proposed to keep the scale of individual credits and debits within a reasonable amount, so that the system is in stable equilibrium with proper and sufficient measures taken in good time’ (CW 1940-44: 45).

[iii] The Greek, Irish and Portuguese governments are already insolvent. Note also that the solvability of Spanish banks is anyway precarious after the burst of the housing bubble.

A leader for the ILO


Vijay Prashad writes on the very important election for the head of the International Labour Organization, and the need to support Jomo K.S. a progressive economist, in particular in the middle of the current global crisis. He says:

On May 28, a select group of delegates will enter a room in the International Labour Organization (ILO) in Geneva to elect the body's next Director-General. Nine candidates are in line for the post. The ILO's byzantine process revolves around a tripartite structure, with the employers (the International Organisation of Employers), the workers (largely the International Trade Union Confederation, ITUC) and the governments sharing the task of selecting the next Director.
Read the rest here.

Monday, May 21, 2012

Newspeak, Europe and economics

The German representative on the board of the European Central Bank (ECB), Jörg Asmussen, says that the debate on growth versus austerity is the "wrong debate" since "we [who?] need both." Of course what he means by growth measures is labor market reforms, meaning more flexibility to fire workers (yes with more than 20% of unemployment in Greece and Spain, and double digits for the eurozone it seems that firing workers is really hard in the old continent). That would supposedly reduce the cost of workers, i.e. lower wages, and, as a result firms will hire more workers, even if nobody is buying their goods. And you wonder why things are the way they are in Europe?

PS: For a debunking of the idea that labor market flexibility is necessary for full employment, or that labor market protections cause unemployment, read this paper.

Saturday, May 19, 2012

A time to reap


Conceição Tavares worked hard and now is time to reap the benefits. From Marx21 (hat tip Tomas Rotta).
Renowned professor and economist Maria da Conceição Tavares received yesterday, May 17th 2012, the highest scientific prize granted by the Brazilian government. The national foundation for scientific research (CNPq) awarded Conceição Tavares for her lifetime theoretical and practical achievements. Tavares has influenced generations of students, scholars, and state officials. The significance of the award is that it goes to a female Marxist economist. Dilma Rousseff, Brazil’s first female president and herself a former student of Conceição Tavares, personally handed the prize. During the official ceremony Dilma made clear in her brief speech that “Conceição Tavares treated economics as it should be treated, as political economy.”
Read the rest here.

PS: By the way, while it's true that Conceição was certainly influenced by Marx, it's far from clear that one could call her Marxist rather than say Structuralist. Her famous 1978 full professor dissertation (you had to write one to get a chair at a public university then) is basically Kaleckian, and was clearly influenced by Keynes. And as any Brazilian economist she was heavily influenced by Marxist historian Caio Prado and by the quintessential Brazilian structuralist Celso Furtado, beyond several structuralists at ECLAC, like Prebisch and Anibal Pinto. A more detailed story here.

Friday, May 18, 2012

Central Bank Independence not so well intentioned failure

Chris Giles, the economics editor of the Financial Times, thinks, rather surprisingly, that central bank independence (CBI) has been a failure, in England at least. In his own words: "with the benefit of hindsight, the first 15 years of BoE [Bank of England] independence should be seen as a well-intentioned failure."

His views hinge on the question of public control of central bank behavior. For Giles a well informed public could have pushed the BoE to act more boldly after the 2007 financial crisis, and to be more prepared for the global crisis that started with the Lehman collapse in 2008.

While I agree that CBI has been a failure -- and not just in England (yep ECB is what I'm thinking) -- and also agree that there is no reason why fiscal policy is more directly scrutinized, than monetary policy, by the people's representatives in parliaments in most countries, I would disagree that the mistakes have all been well intentioned [that might also explain why the BoE is fighting reforms, something that puzzles Mr. Giles].

The problem actually lies in the fact that a CBI is by definition not coordinating with the Treasury on fiscal policy, and in some cases might be forbidden to do basic things like buying government debt. The justification is the fear of inflationary pressures, while the truth might be closer to Kalecki's view that fiscal and monetary policy are used to maintain a significant level of unemployment to keep workers in line. The intentions behind CBI are not so pure as Mr. Giles assumes.

CBI means that the objectives of monetary policy are not to be discussed by the public. In the case of England, as well as Europe (and even the US), the problem is that more fiscal policy is needed, and more support from their central banks should follow.

Tuesday, May 15, 2012

Letter of support for the new central bank law in Argentina

The prevailing ideology over the last thirty years has been that the only legitimate task of central banks everywhere is control of inflation. This has frequently been through the application of an "inflation target", a maximum rate of increase of some measure of aggregate price changes. The practical consequence of setting the "fight against inflation" as the primary objective has been to reduce substantially the policy options of central banks. Even more, this narrow approach prevents the coordination of monetary policy and fiscal policy, essential to successful countercyclical interventions.

In Argentina in the 1990s economic policy operated under the burden of an extreme form of this narrow approach, a "currency board" regime, involving a fixed exchange rate to the dollar and a monetary base strictly linked to foreign exchange reserves. During 1997-2002 the weaknesses inherent in this monetary policy created disaster, economic collapse and high inflation.

In March of this year, the Argentine government proposed a new central bank mandate, that would repeal the currency board rules and broaden the institution's mandate to multiple objectives including growth, more equitable distribution, sectoral credit allocation, and price stability. The Congress passed and President Cristina Fernandez signed it into law the new mandate.

We, economists working in the United Kingdom, applaud the Argentine government and the Congress for this farsighted approach to monetary policy. The new mandate allows the current and future governments to choose between wise and foolish economic policies, while the previous law institutionalized the latter.

George Irvin
Costas Lapavitsas
Terry McKinley
Jan Toporowski
John Weeks
(SOAS, University of London)

Ann Pettifor
(Prime Economics)

G. C. Harcourt
Ha-Joon Chang
Gabriel Palma
(Cambridge University)

Malcolm Sawyer
Gary Dymski
Annina Kaltenbrunner
(University of Leeds)

Guy Standing
(University of Bath)

Engelbert Stockhammer
(University of Kingston)

Ozlem Onaran
(University of Westminster)

John Grahl
(University of Middlesex)

Sarah Bracking
(University of Manchester)

Kalim Siddiqui
(University of Huddersfield)

Hulya Dagdeviren
(University of Hertfordshire)

Michael Burke
(Socialist Economic Bulletin)

Published in Spanish in Página/12 (thanks to John Weeks for providing the original English version)

Monday, May 14, 2012

Greeks pay their fair share

Krugman suggests that we might be close to the end, if Greece is unable to form a government and ends up out of the euro, which seems increasingly likely. One thing that everybody seems to agree is that in the Greek case fiscal issues did play a role. So here is some food for thought, are Greeks taxed at lower rates than citizens of other OECD countries?
The overall tax revenue as a share of GDP is actually a bit lower than the German, but not much, and is higher than the US, according to OECD data. There are differences on what kinds of taxes Greeks and Germans pay, with the Greek paying more on goods and services and less on income (i.e. a more regressive tax structure). But, for what is worth, tax revenues are not way off with respect to other countries.

Friday, May 11, 2012

Central Bank (what is it good for?)

If you ask Ron Paul, yep ... absolutely nothing! Jamie Galbraith has a different view, and he told it to Paul, the chairman of the House Sub-Committee On Domestic Monetary Policy. He said:
"We cannot escape the need for a central bank. The United States before the Federal Reserve Act suffered from chronic deflation and financial panics; for this reason the period from 1873 to 1896 was known as the Great Depression, until the 1930s got that title. In the past century only the communist countries dispensed with central banks and private banking firms, and this arrangement did not serve them well. For this reason, I cannot join in supporting bills that would repeal the Federal Reserve Act or bar lending by commercial banks."
He also argued in favor of the Humphrey-Hawkins Act (note that he was a member of the team that drafted the legislation). The Fed mandate is important for him, and this is how he justifies it why he and his monetarists colleagues alike worked to draft:
"The “dual mandate,” which was expressed as “to promote full employment, production, and real income, balanced growth, adequate productivity growth, proper attention to national priorities, and reasonable price stability” in the preamble of the Humphrey-Hawkins Act and as “maximum employment, stable prices and moderate long-term interest rates” in the Federal Reserve Act.
My staff colleagues were committed monetarists. They believed that the Federal Reserve should pursue a policy of monetary control, to contain inflation. But they did not try to dictate that to the Federal Reserve. Nor would I have tried to dictate the pursuit of full employment over all other policy goals. Writing economic theory into law is dangerous and we steered clear of it as best we could."
Read the rest here.

Thursday, May 10, 2012

Free Trade and Inclusive Development

By Suranjana Nabar-Bhaduri

One of the central elements in the development of any country is the creation of economic activities that transform the production structure by significantly increasing labor productivity, or the amount of production per worker. By helping to absorb more people into quality employment, the creation of such activities helps to generate a more inclusive and sustainable path of long-run economic growth. While economists and policy-makers accept the necessity of this transformation, there are differing views on the policies that developing countries should follow to achieve this transformation.

Many Western countries and institutions, such as the International Monetary Fund (IMF) and the World Bank, argue that minimizing the role of the State in economic activity, and opening up the economy to external markets is vital to achieving this transformation. But other economists (e.g., Prebisch 1959, Cimoli and Correa 2002, and Ocampo 2005) stress that active industrial and employment generation policies are also essential ingredients for this transformation, and that it is necessary to complement liberalization with such policies.

Read the rest here.

Tuesday, May 8, 2012

Why economists fail

The new book (and the accompanying blog) by Daron Acemoglu and James Robinson Why Nations Fails is a popular version of their academic papers (several with Simon Johnson, the ex IMF chief economist) on the topic [brief summary here]. The main idea is that institutions and not geography or culture are the key to economic development. That is for the most part true.

They use South and North Korea (and Nogales, México and Arizona) as an example of countries that share the same culture and geography, but have very different institutions, and, as a result, a huge disparity in income per capita. Jared Diamond is correct to point out that, in part, technology is geographically determined. No plants and animals to domesticate, and provide for a large surplus (Diamond uses the old classical notion of surplus), and higher population density (with the diseases and immunities associated to those Germs) and no advantages associated to a more developed division of labor (Diamond is also Smithian in that sense), with the consequent development of technology (Guns and Steel). But the problem is that this won’t help you understand why England and not China industrialized (the opposite extremes of the Eurasian continent).

Read the rest here.

Monday, May 7, 2012

Three part interview with Jamie Galbraith

At the German website NachDenkSeiten (here, here and here for the English transcripts). In the last one, important to note his views on why the Obama fiscal package and the momentary Keynesian period was insufficient for recovery. He says:
"The crisis imposed a momentary intellectual discipline and a resurgence, a reassertion of Keynesian principles. But that discipline did not extend into decision-making circles, at least not deeply enough, and it was overridden by, let's say, existing protocols, existing habits of thought and action that had developed in policymaking circles. And those protocols and habits precluded taking adequate action. What I mean by that specifically is that you had ways of making forecasts which were intrinsically too optimistic, intrinsically assumed that you were going to return to a baseline over a five-year time frame. And that meant that you were not going to get even presented to the president the possibility that the crisis was on the scale of the 1930's."
This has important implications for Europe, which since yesterday, will have a Socialist in charge in France. Also, on what has happened with left of center parties around the globe.
"What were historically left parties both in the United States and Europe, equally true of the Democrats and the SPD and the PS in France have adopted what would have been in earlier times considered to be right-wing orthodoxies, particularly with respect to budget deficits, public debt. So they can pretend to be in favor of solidaristic social policies, but unfortunately unable to do anything in the face of the realities they allegedly face" [italics added].
As far as I can tell only in Latin America, some left of center parties, that had moved to the right in the 1990s, returned to the fold in this century. As he notes, in the case of the US and Europe the collapse of the Soviet Union played an important role in the political changes of the 1980s and 1990s. In Latin America the return of left was associated to a more significant collapse of the neoliberal model. One can hope that the obvious collapse of the austerity programs in the developed world would lead to a revival of the left. Hope springs eternal.

Friday, May 4, 2012

No gentlemen are bankers

Pure logic, according to Ernest Nagel (and James Newman) at least. In the classic book on Gödel's theorem the following example appears:
Where g stands for gentlemen, p for polite, and b for bankers, with the bar on top meaning not. So gentlemen are contained in polite, bankers are contained in not-polite, so it follows that gentlemen are contained in not-bankers. Of course you can substitute polite with other epithets. But they got it right. As I said, it's pure logic.

Krugman is right on Argentina

Fair is fair; I often point out when he is wrong, so I must admit he is 100% correct this time around (see my most recent comment on the topic here). By whatever measure you want Argentina has grown more than Brazil in the last decade. And yes (for the nuts in Krugman's comment section), Argentina has more inflation as a result of more nominal depreciation and more wage resistance. He did not say everything is perfect in Argentina, just better (much better, as a matter of fact) than with the neoliberal model. And that was the point of Matt Yglesias too.

Thursday, May 3, 2012

Happy ending at UNCTAD XIII

Or at least for now, is what Deborah James says. Note that the contentious paragraph on UNCTAD's mandate that the US State Department didn't like reads tha UNCTAD would:
"continue, as a contribution to the work of the UN, research and analysis on the prospects of, and impact on, developing countries in matters of trade and development, in light of the global economic and financial crisis."
Yep, that is unacceptable indeed. After all you ask, what crisis?

Fed up with the full empoyment target?

The debate on Bernanke's views on inflation targeting -- whether it should be 2 or 4% -- as I noted in a previous post is peculiar, to say the least. After all the Fed has a dual mandate, and inflation preoccupations have to be tempered by the pressing question of unemployment. The preoccupation in some quarters is that the Fed has already accepted as a matter of fact that it has single mandate (see here and here). It seems to me that critics (e.g. Krugman, DeLong and others) are correct for the wrong reasons.

The graph below shows the effective Fed Funds rate in the last three recessions (represented by the shaded areas). The rate of interest falls in all three during or just before the recession.
Further, after the trough of the recession the Greenspan Fed took 46 and 35 months to start raising the rate in the previous two recessions. So far, 35 months after the last trough, the Bernanke Fed has not increased the rate. This time around it has done Quantitative Easing allowing for lower long term rates too, which was not done during the Greenspan era. If anything the Fed has done more now than under Greenspan, and unless you believe in the inflation expectations fairy, the old Eccles maxim is still true, monetary policy now is like pushing on a string.

So how is that critics of the Fed are correct and I believe that the dual mandate (full employment and inflation) is gone. Well look at the graph below. It shows the Fed Funds, again, with the 10 year Treasury bonds rate.
Notice that the Fed eventually raises the Fed Funds sufficiently to surpass the bond rate, and invert the yield curve. The point is to slowdown the economy, and avoid full employment. Even in the 1990s, when Greenspan allowed the bubble to continue and unemployment to fall below the then official limit of 6%, he eventually took action, when wages started to increase. Full employment has not been a target, but keeping workers demands for higher wages checked has been very much part of the reaction function. Jamie Galbraith has written about it (go here for a technical paper). So the Fed has a single target mandate, but is not an inflation target, it is a "fear of full employment target."

The Fed can do practical things like helping distressed borrowers (with defaulted or underwater mortgages), but it cannot directly increase spending, and in the absence of private spenders (domestic or foreign), or local governments, it must be the federal government. Bernanke is not the problem right now. Geithner is (and so is Congress).

PS: The New Keynesian view that if you increase expected inflation spending goes up is now defended by Brad DeLong. He says: "an extra $100 billion of quantitative easing boosts the expected price level ten years hence by 1%--and boosts expected inflation after the next decade by an average of 0.1%/year. That is enough to spur higher spending and a more rapid and satisfactory recovery." I'm not against QE per se, the idea of maintaining long term rates low. But the notion that it would lead to inflation (printing money generates inflation) and that expected inflation generates a boost in productive spending is clearly another confidence fairy story.

Wednesday, May 2, 2012

Galbraith on Summers and deficit spending

Letter to the Financial Times published today as 'Dr Summers performs a medical miracle.'
From Prof James K. Galbraith

Sir, Whence comes Lawrence Summers’ medical knowledge? He writes of palliatives, of misdiagnosis, and states that “treating symptoms rather than causes is usually a good way to make a patient worse” (“Growth not austerity is the best remedy for Europe”, April 30).

As to cures, Prof Summers writes of “a need to raise retirement ages, reform sclerosis-inducing regulations and restructure benefit programmes”. Yet he presents no evidence that these matters caused our troubles, and of course they didn’t – unsupervised bankers and ambitious economists did. Blaming the elderly and poor is just a prejudice, common to people who have easy jobs and private means. Bleeding them (gradually, of course) is a medieval practice.

And yet, on the main point, Prof Summers gets it right. He does this by mistaking a symptom (recession) for a cause, and then prescribing a palliative (deficit spending). A minor medical miracle, perhaps!

The irony is that a real doctor would likely approve. After all, fever-reducers and pain relievers, from aspirin to morphine, are in widespread medical use and have been for many years.

So “Dr” Summers is on the right track for now, but as his methods show, he is still very dangerous to the sick.
Originally published here.

Not entirely debauched by economics

The quote of the week (I should instate it as a policy) comes from a letter from Piero Sraffa to Joan Robinson:
"If one measures labour and land by heads or acres the result has a definite meaning, subject to a margin of error: the margin is wide, but it is a question of degree. On the other hand if you measure capital in tons the result is purely and simply nonsense. How many tons is, e.g., a railway tunnel? If you are not convinced, try it on someone who has not been entirely debauched by economics. Tell your gardener that a farmer has 200 acres or employs 10 men – will he not have a pretty accurate idea of the quantities of land & labour? Now tell him that he employs 500 tons of capital, & he will think you are dotty – (not more so, however, than Sidgwick or Marshall)."
That was in 1936. The reference comes from this paper by Velupillai on Krishna Bharadwaj’s contributions to economics.