Showing posts from October, 2013

Debt cycles, underdevelopment and debt forgiveness

Laurent Dubois argues in a very good op-ed in the NYTimes that Caribbean countries should receive reparations for slavery. It also raises the question of the responsibility for the accumulation of foreign debt, and the fact that lender countries might be the ones to blame. For example, Dubois tells us that:
"Haiti won its freedom 1804, but in 1825 it agreed to pay an indemnity to France in return for diplomatic recognition. The money was used to compensate French plantation owners.
In 2003, Haiti’s president, Jean-Bertrand Aristide, called on France to repay the 1825 indemnity, which he blamed for his country’s poverty. The argument was historically sound: to pay France, Haiti had had to borrow money from French banks, entering a century-long cycle of debt." Long cycles of indebtedness have in fact reduced the ability of developing countries to grow. They reinforce the limits imposed by the external constraint, that is, the need to export enough to import …

David Warsh on Marriner Eccles

David Warsh from Economic Principals has written a nice post on Marriner Eccles. I particularly think he hits the nail when he argues that: "Eccles embodied a peculiarly Mormon ethic of public service, full of frontier practicality (as Boston often has represented Puritan ideals and Philadelphia Quakerly ways). His was a role reprised by Willard “Mitt” Romney, who, as governor of Massachusetts, put a mandatory health insurance reform in place, presumably as the model for a national plan. (Romney eventually buckled under Tea Party pressure and disavowed the aim.)" Although it is not well-known early Mormon doctrine was closer to Socialism that one might think, with an emphasis in redistribution and cooperative work (see for example this paper on "Communism among Mormons"; subscription required).

For more on Eccles go here and here. For a discussion of the LDS social ethic of cooperation the classic book by Leonard Arrington, Building the City of God, is a must rea…

Is Obama a Big Government Socialist?

Yes, you know the answer to that one. At any rate, there is a nice graph (which I somehow missed before) on spending growth in different administrations (source here).
As one can see, Obama is the one with the lowest rate of growth in public spending. Note also that Clinton is the one with the second and third lowest rates. Dems are the party of small government. Something discussed in this forum a while ago.

Desperately seeking the natural rate of interest

The Economist Free Exchange (FE) blog gets into the debate of where is the elusive natural rate of interest. I've already discussed Krugman's views (see here and here) that the natural rate of interest is negative, and that's why we need fiscal policy, something that he refers to as the Liquidity Trap. FE suggests that William White, formerly from the Bank of International Settlements (BIS) and now from the Organization for Economic Cooperation and Development (OECD), believes that the natural rate is higher than the monetary rate.

According to FE White believes that: "the Wicksellian natural rate must be high and monetary policy too loose because low rates have encouraged all sorts of yield-chasing behavior." If one reads White's paper, we find that he says more precisely the following:
"Moreover, given this particular way of thinking and noting that the financial rate is now constrained by the ZLB [zero lower bound interest rate], this gap can only be…

Avinash Persaud on the risks of bail-ins

A bail-out is when an outside entity, like external investors, a central bank or an international organization like the IMF, rescues an indebted bank or firm or even a country by injecting money. A bail-in, in contrast is when the creditors are also forced to bear some of the burden of the adjustment. Persaud, a well known financial economist, has recently argued (subscription required) that contingent convertible notes, known as CoCos, convertible notes that can be converted into equity according to specified events, and that "automatically bail-in creditors when banks run into trouble" are no better then fool's gold.

Why should we care? Here is an insider of financial markets, that worked at JP-Morgan in the 1990s, and was a member of the UN Commission of Experts on Reforms of the International Monetary and Financial System (the so-called Stiglitz Commission; Report here), suggesting that these instruments "are a throwback to the failed philosophy at the heart of…

How much is JP Morgan really paying for their fraud?

If you read the news it seems that JP-Morgan Chase, the biggest US bank, has agreed to pay US$13 billions on fraud charges for their mortgage practices leading up to the financial crisis. Bill Black, author of the fantastic and properly titled book The Best Way to Rob a Bank Is to Own One, argues that the number is inaccurate.
So more like US$6 billions. Out of profits of more than US$20 last year, and god knows of how much they made out of their fraudulent practices.

See the full interview from the Real News Network here.

More on part time jobs and Obamacare

I posted Dean's short answer to the question of whether the Affordable Care Act (ACA), aka Obamacare, led to an increase in temporary jobs. The GOP talking point being that firms cannot afford to pay, and prefer to reduce the hours of their workers so as to not be forced to pay health benefits. Below a figure from the Bureau of Labor Statistics (more here, or here).
Part time jobs are declining as a share of total employment, and stand now below the peaks of other recessions like the Eisenhower and Reagan ones. Note that the definition of part time refers to those who worked 1 to 34 hours during the survey reference week for an economic reason such as slack work or unfavorable business conditions, inability to find full-time work, or seasonal declines in demand.

Dean Baker on part time jobs and Obamacare

Dean Baker on the GOP's talking point that Obamacare has led to an increase in part-time jobs, since companies cannot afford to hire them full time. As it turns out a figment of their imagination.

More here.

Lawrence Klein author of The Keynesian Revolution has passed away

Lawrence R. Klein (1920-2013)
Lawrence Klein, of Klein-Goldberger US econometric model fame, and author of The Keynesian Revolution (here the Google Books link), and winner of the Sveriges Riksbank Prize in Memory of Alfred Nobel in 1980, has passed away. Klein was a Neoclassical Synthesis Keynesian (often referred to as Old Keynesian now, to distinguish him from the New Keynesians) that made his contribution by developing the empirical applications of the Keynesian model for the US economy.

The seminal work was done in the late 1940s and early 1950s in the context of the Cowles Commission. His book An Econometric Model of the United States, 1929–1952 was further developed in 1955 with his co-author (Arthur Goldberger), published as An Econometric Model of the United States 1929–1952, introduced the celebrated Klein-Goldberger model. The Cowles Commission Model still lives in Ray Fair's macro-econometric model, that maintains essentially the same methodology, resisting to the Luc…

Labor market numbers are out: more of the same

The slow recovery continues. According to the last Employment Situation Summary from the Bureau of Labor Statistics (BLS): "Total nonfarm payroll employment rose by 148,000 in September, and the unemployment rate was little changed at 7.2 percent, the U.S. Bureau of Labor Statistics reported today. Employment increased in construction, wholesale trade, and transportation and warehousing."
The figure above shows that the recovery continues at a very slow pace. And given the political impossibility of additional stimulus, it will likely continue this way. Rational economic policy is not in the agenda any time soon.

Open forum on the economic and political implications of the government shutdown and debt crisis.

If you are in the Lewisburg area, don't miss this event.

Open discussion on the economic and political implications of the government shutdown and debt crisis.

Discussion lead by:

Economic Professors Gregory Krohn and Matias Vernengo and Political Science Professors Chris Ellis and Scott Meinke

Thursday, Oct. 24, 11-12 PM
Bucknell University
Academic West Event Lounge
1st floor

25th anniversary of Horizontalists and Verticalists at ROKE

The new issue of ROKE is out. You can get it here. There is a special mini-symposium on Basil Moore's classic book. From the abstract of one of the papers from the symposium: In 1988 Basil Moore published his book Horizontalists and Verticalists: The Macroeconomics of Credit Money, which this year celebrates its 25th birthday. We discuss this book from today's perspective, and in particular whether Moore's main assertions have been validated or rejected by the development of central bank practice and academic monetary economics. We find that the book has impressively stood the test of time and, despite part of textbook economics still insisting on the money multiplier as an explanation for the money supply, it is not much of an exaggeration to say that we have all become ‘Horizontalists’ in the last 25 years.

Power Relations and American Macroeconomic Policy

The whole debt-ceiling and government shutdown raised the American angst about its international role in the world economy. Several pundits see the US increasingly as a weak or weaker player in international relations. An antidote for these views about the 'Decline of the American Empire' is provided by Franklin Serrano's paper (h/t Revista Circus & Alejandro Fiorito) "Power Relations and American Macroeconomic Policy, from Bretton Woods to the Floating Dollar Standard", which can be downloaded here. From the intro:
"The purpose of the present work is to try to show the strategic importance of the policy of defending the international position of the U.S. dollar and also of the general orientation of American macroeconomic policies to: 1) the victory of the capitalist side in the Cold War ; 2) the subsequent reestablishment e increase of the bargaining power of the property owning classes relative to the working class in the U.S.A. and finally 3) to the…

Real wage growth in the center and the periphery

From the International Labor Organization's Global Wage Report 2012/13 the rates of growth of real wages around the globe.
Note that Eastern Europe and Central Asia and Asia (China playing a big role) lead the pack. Developed countries basically have stagnant wages and the Middle East is the only region with some real contraction.

Note that these are rates of growth, and that levels are very different in each region. According to the report (p. 10):
"The hourly rate of pay varied from almost US$35 in Denmark, through a little more than US$23 in the United States, to US$13 in Greece, between US$5 and US$6 in Brazil, and less than US$1.50 in the Philippines. Using a different and non-comparable methodology, total hourly compensation costs in manufacturing were estimated at US$1.36 in China for 2008 and at US$1.17 in India for 2007 (United States Department of Labor, Bureau of Labor Statistics, 2011)." These levels are measured in current exchange rates (not Purchasing Pow…

Measures of under-development: Dreze and Sen on India

And now for something completely different. Yes, we need a break from the fiscal cliff (do we still use that term?). So how about something that is not depressing (just kidding). Table below comes from Drèze and Sen's recent book on India (see here).
Note that India and South Asia lag considerably with respect to other developing country regions when it comes to child undernourishment and stunting, with 43% and 48% of the children under 5. These provide additional measures of the problems faced by India.

Doomsday is the day after tomorrow: what would the default do?

There are many stories about doomsday, i.e. the breaching of the debt-ceiling limit of US$16.7 trillion, which would basically force a balanced budget amendment on the Federal government. As I noted, and Dean Baker too (although I disagree that if the dollar was not the key currency it would mean more jobs, but that's for another post), it is unlikely that the default would lead to a dollar crisis. The position of the dollar is relatively safe, if nothing else because Europe and Japan are in crisis, and China's currency is not convertible.

On the other hand, the default will impose severe austerity. Note that deficits have been falling since Obama took office, as can be seen in the figure below, from about US$1.5 trillion, in the first year of the Obama administration (inherited from Bush) to around US$1 trillion last year, and an estimated smaller number this year (without a default).

If a balanced budget was imposed the immediate impact would not be a decrease of spending o…

A Nobel for the Tea Party? Fama thinks Obama is a Socialist

If you read in Spanish I wrote this little note on the last Bank of Sweden Prize in Memory of Alfred Nobel. Also, you may want to read the interview given by Eugene Fama to John Cassidy from the New Yorker in 2010. He says many things, but I would like to point out just a few.
John Cassidy (JC): So what caused the recession if it wasn’t the financial crisis?  Eugene Fama (EF): (Laughs) That’s where economics has always broken down. We don’t know what causes recessions. Now, I’m not a macroeconomist so I don’t feel bad about that. (Laughs again.) We’ve never known. Debates go on to this day about what caused the Great Depression. Economics is not very good at explaining swings in economic activity.  ...  JC: There were some people out there saying this was an unsustainable bubble…  EF: Right. For example, (Robert) Shiller was saying that since 1996.  JC: Yes, but he also said in 2004 and 2005 that this was a housing bubble.  EF: O.K., right. Here’s a question to turn it around. Can yo…

Student loans are the only bubble still around

Debt deleveraging has taken place in the mortgage market as well as in the credit card market, but not in the student loans market. And that is reflected in the delinquency rates.
Student loans have now a higher delinquency rate than the other two categories. And this is only getting worse with the terrible labor market conditions.

For more see the story in Mother Jones.

The Bank of Sweden gives the prize for the efficient market hypothesis

Lars Syll was right, the Bank of Sweden awarded the Sveriges Riksbank Prize in Memory of Alfred Nobel to Eugene Fama for the Efficient Market Hypothesis (EMH). Lars Peter Hansen and Robert J. Shiller were also recognized for the work on the statistical tests about rational bubbles and for providing evidence that suggests that the EMH might not work, respectively. Even if tempered by Shiller, a New Keynesian that writes with Akerloff, it is still pretty audacious to give Fama and the EMH a 'Nobel' after the last financial crisis. If you had doubts about the state of the profession, and the resilience of the mainstream, this should wipe them out.

Unemployment rate is actually higher than you might think

That's what the Economic Policy Institute says (see here). The 'missing workers' are fundamentally discouraged workers. I calculated a while ago the unemployment level maintaining the higher participation rate of the late 1990s, and also found significantly larger rate of unemployment (see here).

The Economist thinks bubbles are rational

Or at least is what they suggest in the popular blog Free Exchange. They bring back Peter Garber's research on the Tulipmania, and more recent research by Earl Thompson, which suggests that "the market for tulips was an efficient response to changing financial regulation." They conclude by arguing that:
"It is easy to claim that bubbles are irrational. They seem to represent a deviation of prices from fundamental values—and they contradict basic economic theory. But there has been little attempt to understand how speculation actually works. The example of tulipmania shows the importance of doing that—rather than relying on lazy quips about 'animal spirits' or irrationality."The notion is related to the idea of the Arrow-Debreu models in which short term prices (they don't have long term prices associated with a uniform rate of profit) do reflect the fundamental values associated to the preferences of agents and the given technology and factor endow…

Gallagher on Why Trade Deals Must Allow for Regulating Finance

From the Global Economic Governance Initiative (GEGI).
APEC leaders gather in Bali this week to discuss the Trans-Pacific Partnership (TPP) agreement, among other topics. In this opinion article that will appear this week in the Bangkok Post, Jakarta Post, China Daily and other Asian papers via the Globalist, GEGI's Gallagher urges reform of the TPP. Based on new GEGI research with Chilean and Malaysian economists, Gallagher argues that the TPP should have safeguards that allow nations to regulate cross-border finance to prevent and regulate financial crises. Read the whole thing here.

Lars Syll on the Sveriges Riksbank Prize

Lars Syll had a nice post recently on the forthcoming (next Monday) Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. He argues that a likely candidate would be Eugene Fama, for exactly all the wrong reasons, which is apparently what guides most of these prizes in economics anyway. And indeed Fama has perennially been in the short list. Reuters (here) has a different list with three teams of possible winners: Angrist, Card and Krueger for labor economics, Hendry, Pesaran and Phillips for time series econometrics, and Peltzman and Posner for economic regulation (deregulation more likely). And Reuters was correct on the Physics prize, but this year Higgs was a shoe-in.

PS: The 'Nobel' might up for grabs, but Janet Yellen will be the next chairperson of the Fed.

Tom Palley on Endogenous Money

New paper by Tom Palley titled "Horizontalists, verticalists, and structuralists: The theory of endogenous money reassessed."

From the abstract:
This paper uses the occasion of the twenty-fifth anniversary of Basil Moore’s book, Horizontalists and Verticalists, to reassess the theory of endogenous money. The paper distinguishes between horizontalists, verticalists, and structuralists. It argues Moore’s ho- rizontalist representation of endogenous money was an over-simp- lification that discarded important enduring insights from monetary theory. The structuralist approach to endogenous money retains the basic insight that the money supply is credit driven but reme- dies horizontalism’s omissions and over-simplifications. Twenty-five years later, horizontalism has largely morphed into structuralism. The theoretical challenge going forward is to develop the role of money and finance in a Keynesian theory of output determination. As regards monetary policy, the challenge is how…

Crooks, Liars, Idiots and Plutocrats: On the deep causes of the government shutdown

Economic historian Carlo Cipolla famously noted that human beings fall into four basic categories: the martyr who takes an action and suffers a loss while producing a gain to others; the genius or prodigy who takes an action by which he/she makes a gain while yielding a gain also to society; the crook (and liar too) who takes an action by which he/she makes a gain causing others a loss; and the stupid person who causes losses to others while deriving no personal gain and even possibly incurring losses. At first glance, the shutdown of the government and the looming debt-ceiling crisis seem to indicate that we are dealing with idiots, the likes of Michele Bachmann, Ted Cruz, Louie Gohmert, Steve King, and other Tea Party Republicans.

See more at Triple Crisis Blog.

Palma and Galbraith on Inequality

The Washington Post had a story (h/t Esteban Perez) recently about the ratio of inequality between the 10% richest and the 40% poorest, which they suggest is named the Palma ratio, after Chilean economist Gabriel Palma (see figure below).
 The figure suggests that the US is very unequal more so than some African countries and several in Asia, including, for example India. As expected Latin America is very unequal.

Note, however, that if one looks at the World Bank data (figure below), with the Gini coefficient criticized in the article, one also finds that the US is more unequal than India and is close to some African countries levels of inequality.

Yet, as noted by Jamie Galbraith long ago (see here), using the Theil index instead, and more importantly data on manufacturing wage inequality, a different picture emerges (see figure below).

In this case,as the authors say: "Higher inequalities are seen in Latin America, Africa, Russia, and South Asia, with the highest in a broad …

How big is the federal public debt?

Once one discounts the amounts held by the Federal Reserve and other federal agencies and trusts, like the Social Security Trust Fund, it is around 60% of GDP, as shown in the figure below.
This is not high by historical standards. It is far from clear also that if we used the gross value of 100% of GDP that would be a problem. Further, low rates of interest imply that borrowing is not expensive. In short, there is no rationale for not raising the debt-ceiling. If you had any doubts.

Jamie Galbraith: Government Doesn’t Have to Borrow to Spend

When the Treasury writes a check, a bank credits an account. That's money creation. Treasury bonds absorb money, but aren't needed.

Jamie Galbraith on endogenous money and US Debt in NYTimes:
The debt ceiling was enacted in 1917 for one purpose: to fool the rubes back home. Just as Congress started running up debts to pay for the war, they voted in the ceiling to pretend otherwise. And that is why whenever reached, it must be raised.

The debt ceiling is also an anachronism. It is based on the idea that the government must raise money from elsewhere, before it spends. That was true in the days of gold. It hasn't been true, for this country, since at least the creation of the Federal Reserve back in 1913.

In the modern world, when the Treasury writes you a check, your bank credits your account. That's how money creation works. The Treasury then issues bonds to absorb that money. Banks like this because bonds pay more interest than reserves. But there is nothing economic…

Whose cut is it anyway? Not defense, that's for sure

Graph above shows what agencies where hit the hardest by the shutdown (source here). Defense is almost untouched when compared to Education.

Government jobs since the crisis

The figure above shows all employees, not just the federal ones. The spike in 2010 is related to the census. And yes we are below the levels we had at the beginning of the crisis. Shutdown will not help.

USA For Sale!

In this animated video (above) created by Mark Fiore for the Center for Media and Democracy’s “Outsourcing America Exposed” project, Outsourcing Eddie shows us the many ways in which America is for sale.

Government Shutdown: It's the Poor Who Lose

The U.S. government has begun a partial shutdown of government programs, following a failure across the House and Senate to agree on a stop-gap budget proposal before its midnight deadline.

As Imara Jones at Colorlines points out, "the parts of the government affected by the shutdown disproportionately impact economic opportunity programs for the working poor." Here is a brief overview of the likely unsavory effects as a result of egregious congressional chicanery:

Health needs delayed: The 110 million Americans already in Medicare—the government health program for the elderly—and Medicaid—the federal and state partnership to provide health insurance to the working poor and their children—will continue to receive the services and treatment that they need. However new applications to these programs will be delayed until the government reopens.

Impaired ability to fight disease: The Centers for Disease Control will scale back the monitoring of the spread of infectious diseas…

Government shutdown and the debt-ceiling again

So it's happening, even though it seemed unlikely at some point. The government is shutting down, and around 400,000 federal workers will go immediately without pay (see here). Many of the comparisons are with the previous shutting down in November 1995, during the Clinton administration. Yet, back then the economy was in the middle of a boom, predicated on a bubble, but a boom nonetheless. And also, as revenues were increasing, the economy was back then on its way to fiscal surpluses, and lower debt levels. So no debt-ceiling catastrophe loomed in the horizon. Now a debt-ceiling limit may lead to cuts in spending of the order of around US$ 600 billion dollars. So a weal recovery may turn into a recession. Long live austerity!