Thursday, October 30, 2014

If markets voted...

As I noted yesterday, the Wall Street Journal and The Economist long for a time in which markets, or people with means, voted, not the people in general. From the February 1, 1933 New York Times (p. 29).

If it is not clear, it says: “The Boerse recovered today from its weakness when it learned of Adolf Hitler’s appointment, an outright boom extending over the greater part of stocks." Markets are always right, aren't they?

Wednesday, October 29, 2014

The L-word

Lowflation is the new dirty word now. The Economist says that deflation, not lowflation, in Europe is the world's biggest economic problem. But they also suggest that low inflation (lowflation is the neologism; some suggest that the term was coined by Reza Moghadam from the IMF) is as bad as deflation. In a recent article they note that most countries are undershooting their official or unofficial inflation targets. The Economist says:
"In America, Britain and the euro zone central banks have a 2% target for inflation. In all three, it is below that target. In Italy, Spain and Greece, which have experienced wrenching crises and recessions, it is below zero (as it also is in Sweden and Israel). Japan, which finally escaped from deflation in 2013 after more than a decade of struggle, is battling not to return. Leave out the effects of a consumption-tax increase and inflation there is barely half way to its 2% target. Even in China inflation is below 2%, compared with a 4% central government target (see chart 1)."

They also suggest that the: "the catalyst for the latest deflation scare is ... [the fall in] the price of a barrel of oil ... from $115 at the end of June to about $85 today, prompting a sharp drop in headline inflation." Yes lower commodity prices might play a role, but it is the weak recovery and the excessively contractionary policies in developed countries that are to blame for lowflation.

The Economist at least gets the dangers of lowflation/deflation right, and it's pure Keynes. They say that: "The belief that money made tomorrow will be worth less than money today stymies investment; the belief that goods bought tomorrow will be cheaper than goods bought today chokes consumption." Keynes version of debt-deflation emphasized more the effects of falling prices on debt and investment that consumption, but is essentially the same point. He said: "if the fall of wages and prices goes far, the embarrassment of those entrepreneurs who are heavily indebted may soon reach the point of insolvency, — with severely adverse effects on investment."

Also, The Economist reports that even Wall Street economists (admittedly Buiter is an Old Keynesian with ties to Jim Tobin) like:
"Willem Buiter of Citigroup thinks this [fiscal expansion] would be a 'no-brainer' for America, which badly needs better public infrastructure and which can issue virtually unlimited volumes of treasury bills thanks to the dollar’s reserve currency status. In Europe, Mr Buiter says, the equivalent would be for the EU to permit peripheral countries to run larger deficits with the ECB independently initiating QE to buy the resulting bonds."
This is relevant, since today many expect the Fed to announce the end of QE. 

Markets and democracy

Meanwhile the Wall Street Journal and The Economist remind us that they think that markets (wealthy investors really) and not people should vote. Because when people vote there is: "much ruin in a nation." These are just the opening salvos in the battle for austerian policies in Brazil, as noted by Pedro Zahluth Bastos here (in Portuguese).

Monday, October 27, 2014

Ideology, theory and investment

Krugman is basically correct in today's New York Times to argue that investment is low because of ideology. In his words, the "inability to invest doesn’t reflect something wrong with 'Washington'; it reflects the destructive ideology that has taken over the Republican Party", which ultimately is based on "an overwhelming hostility to government spending of any kind." And he is also correct that the solution would be the "obvious policy response to this situation: public investment."

The graph below shows Gross Capital Formation (investment) as a share of GDP. It is at a low level indeed. And the recovery since the Great Recession has been moderate at best.
Krugman in his post seems to suggest that, since "America has been awash in savings" and there is a "mismatch between desired saving and the willingness to invest", then this is what "has kept the economy depressed." Notice that this diagnostic would be perfectly compatible with the confidence fairy that he argues always against. If the government didn't cause investors to be unwilling to invest, everything would be okay, or so the argument would go (remember that Krugman likes his fairies too; in his argument the Fed has to increase the expectations of future inflation and that would lead to investment), since savings are large enough to finance investment.

Note that, as discussed several times in this blog, investment basically responds to income growth (in all fairness sometimes Krugman remembers this, and his column today says correctly that "Corporations are earning huge profits, but are reluctant to invest in the face of weak consumer demand"). The accelerator works. So investment is low because the recovery is weak. That's why government spending is the solution. Because the Federal government can inject autonomous spending. That also means that savings is the endogenous variable (autonomous spending, which includes public investment, determines income, and the part not consumed of income would be saved).

It is important to get this right to avoid the confidence fairy argument. Not just ideology has been a problem, but also the reluctance of reasonable mainstream economists to part with the neoclassical theory of investment, in which the latter depends on its productivity and, hence, its remuneration (or expected remuneration). In this sense, as I have said before, Krugman's arguments would be more coherent, and stronger from the point of view of evidence, if he parted with neoclassical theory. On the ideology front he is fine, he knows that sometimes government is the solution.

Friday, October 24, 2014

Frederic S. Lee

Sad news for the heterodox community, Fred Lee has passed away. He was a tireless builder of institutions, an activist for Post Keynesian, and institutionalist economics, creating space for heterodox economists and he will be sorely missed. Below one of his last presentations.

Check also his website here. His short bio from the website below.
I attended a small state college in Maryland where I majored in history and took a bit of philosophy. After graduating in 1972, I took some more philosophy courses. But then I got interested in economics and began reading books and articles by Smith, Ricardo, Marx, J. B. Clark, Schumpeter, Joan Robinson, Keynes, Kalecki, Sraffa (or at least I tried to) and others. After working in Saudi Arabia for a couple of years, I returned to the States and attended Colombia University (1976-77) where I picked my undergraduate economic courses. While there I read about everything I could find on costs, pricing, the determination of the mark up, and the business enterprise; and the economists I read included Philip Andrews, Adrian Wood, Harcourt, Hall and Hitch and many others. Because I was a Post Keynesian economist (although I did not know it), it was suggested to me that I go talk to an economists called Alfred Eichner. I did so and became part of the Post Keynesian movement. After Colombia, I went to the University of Edinburgh for a year; and then returned to Rutgers University where I got my Ph.D. My teachers included Jan Kregel, Paul Davidson, Nina Shapiro, and Eichner. In my first year, I took an independent study with Kregel and he told me that I should read the Keynes-Harrod letters regarding the General Theory which had just been published. I did so and wrote a paper which became the basis of my first article, "The Oxford Challenge to Marshallian Supply and Demand: The History of the Oxford Economists’ Research Group." I left Rutgers to take up a one-year teaching position at the University of California-Riverside; and after 3 years there I obtained a tenured position at Roosevelt University in Chicago. In 1990 I went to England where I taught at De Montfort University in Leicester for the next decade. In August 2000 I moved to Kansas City to take up my current at UMKC.

My research interests are Post Keynesian microeconomics, Post Keynesian industrial organization, and the history of economics in the 20th century, with special emphasis on the history of heterodox economics. I am currently writing a monograph on Post Keynesian microeconomic theory. In addition, I am engaged in three other projects, the history of heterodox economics in the United Kingdom since 1945, market governance in the U.S. gunpowder industry, 1865 to 1900, and Congressional response to the problem of corporate size, monopoly and competition, 1945 to 1980. This last project is quite exciting because it enables me to explore the administered price controversy, examine in detail various institutional economists such as Walton Hamilton and John Blair, and examine the way neoclassical economists used their institutional power to suppress heterodox economics. These four projects are generating a great many but more specific projects that are just perfect for Ph.D. dissertations.
PS: Barkley Rosser has written a nice post on Fred here. Other posts by Stephany Kelton, Lars Syll, David Ruccio and others have been linked here.

New School Economic Review (NSER) Call for Papers

Submission Deadline: February 20th 2015/Publication: May 2015

The NSER is a peer-reviewed, student-run economics journal that publishes original and high-quality articles. We encourage diversity of subject matter and writing style covering a wide range of topics in economics. Submissions can be in the form of but not limited to, scholarly articles, commentaries, book reviews, guest editorials, and announcements. The papers will be reviewed by a committee of New School alumni. The NSER welcomes submissions from academics, practitioners and students of all levels seeking to broaden and strengthen the foundational structure of the study of economic systems.

The NSER editorial board reserves the right to suggest both minor and substantive revisions to accepted works. Finally, following the standard practices of North American scholarly journals, the NSER is not in a position to offer payments for accepted and published manuscripts.

In preparing your submissions, we ask that follow the journal’s procedures and editorial practices. Papers should be submitted in PDF as well as either MS Word or LaTeX. We will accept submissions of a variety of lengths, however, please no longer than 25 pages. All papers should be in line with The Chicago Manual of Style.

All submission should be sent to There is no submission or publication fee.

Kind regards,

The New School Economic Review editorial board

See more here.

Thursday, October 23, 2014

Kicking away the ladder too

The table below comes from Broadberry and O’Rourke's The Cambridge Economic History of Modern Europe. It shows that national control of the money supply, the monopoly of emission, is a 19th century phenomena, something we discussed with L-P. Rochon in this paper back in 2003.
Note that before the mid-19th century period, which Charles Goodhart aptly calls the Victorian era, central banks had been created for supporting the State’s financing needs. Also, the role of lender-of-last resort (LOLR) in the late 19th century, associated to Bagehot, did not lead to a significant change in the Victorian preoccupation with price stability.

It is only with the Great Depression that the Victorian dreams of a self-adjusting economy with a tendency to full employment and an orderly division of labor, where the periphery only produced commodities and imported manufactured goods, were utterly shattered. In my view, an contrary to Goodhart, the crucial element on the rise of Keynesian Central Banks was the abandonment of Say's law, not of the Real Bills Doctrine, as we discuss here with Esteban Pérez.

I wrote a paper (in Spanish), when I was at the Central Bank of Argentina, that has not been published on these topics, titled 'Kicking Away the Ladder Too,' in obvious allusion to Ha-Joon Chang's use of List's expression. The point is that central banks were used as tools of economic development (the Bank of England for sure), but once central economies went up the ladder they kicked it, suggesting that central banks should only be concerned with inflation. Now that the Keynesian moment has passed, the mainstream has gone back to the inflation obsession.

Wednesday, October 22, 2014

On the blogs

Jean Tirole, A Practitioner Of New Industrial Organization -- Robert Vienneau discusses the new IO, based on game theory of the new 'Nobel' winner, and the old IO, which was based on the classical surplus approach and barriers to entry

Crony Capitalism, or Plain Old Capitalism? -- Arthur MacEwan dissects the right wing attack on the Export-Import Bank

These states, Part I and Part II -- Max Sawicky on how labor markets have done in States with gubernatorial elections

Capitalism, Episode 3

Episode 3 of Capitalism, in French though. English version coming soon.

Tuesday, October 21, 2014

Where revenue comes from

Not sure if I posted something similar before. At any rate, no surprises. Before the New Deal excise and other indirect taxes were the vast majority of the administration's revenue. Since then the individual income tax become the central source of revenue. Since the 1970s corporate income taxes fell, and were essentially compensated by higher payroll taxes. In other words, first more progressive, then more regressive. Updated data here.

Friday, October 17, 2014

Tony Aspromourgos on Piketty, future of capitalism, growth & theory of distribution

By Tony Aspromourgos

From the abstract:
This essay reviews Thomas Piketty’s Capital in the Twenty-First Century (2014). The focus is upon the conceptual framework and theoretical interpretation of the empirical findings assembled in the book, rather than those empirical findings themselves (which are, in any case, broadly incontestable). The core theoretical logic of the distributional dynamics is explained and subjected to scrutiny with respect to the theory of distribution in particular, but also the theory of growth. 
Read rest here. For other posts on Piketty, see herehereherehere, here, and here.

Thursday, October 16, 2014

Development and Change Forum 2014

All papers are, at least for now, open for download here. Codrina rada's assessment of UNCTAD's Trade and Development Report 2012 is, for example, available here. Guy Standing's discussion of the precariat is here. Enjoy!

Wednesday, October 15, 2014

Tuesday, October 14, 2014

More on the IMF and fiscal policy and Blanchard's rethinking of macroeconomics

I wrote a few days ago on the IMF's persistent views on fiscal policy, and how these views are rooted in an unchanged perception of how the macroeconomy works.  The new Fiscal Monitor tends to support my previous position. The policy recommendations, in the case of advanced economies, suggest that:
"Fiscal efforts in the last five years have stabilized the average debt-to-GDP ratio. Nevertheless, it is still expected to exceed 100 percent of GDP at the end of the decade. It is important to continue to reduce debt to safer levels and rebuild fiscal buffers.
Further fiscal adjustment is needed in most advanced economies to bring down debt ratios to safer levels... reining in age-related Debt (percent of GDP) spending could reduce longer-term fiscal risks."
Why debt ratios have to fall is an incognita, given that we now know that there is no evidence for a 100 percent, or any other for that matter, threshold that leads to lower growth. And it's really annoying that they still want to cut spending on pensions, and perhaps push for privatization (even Chile's famous case now is not an example anymore). For developing economies:
"the time has come to rebuild the fiscal buffers used during the crisis, and to strengthen the institutional fiscal policy framework."
In this case, the notion is that inflation is around the corner, and, hence, that 'emerging' markets are close to full employment. In sum:
"Fiscal consolidation is called for in many economies, advanced and emerging, to reduce high public debt ratios and rebuild fiscal buffers used during the crisis."
More importantly the IMF warns that the higher rates of interest in advanced economies might lead to a crisis in the developing world. They say:
"The historical record indicates that the unwinding of monetary policy support in advanced economies can have a material impact on emerging market public debt costs and on the incidence of fiscal stress episodes."
This suggests that emerging markets have to make an additional effort to promote fiscal adjustment, since the interests costs will go up soon. I'm not only very skeptical about the idea that developing economies are close to their potential output levels, but also about the risk that interest rates will grow substantially in advanced economies. Just check the IMF growth forecasts for the developed world, and you'll see that the probability of higher rates of interest anytime soon are exaggerated.

In addition, Blanchard, the IMF counselor, has published a new paper in line with his previous effort to re-think and evaluate macroeconomics. The interesting thing is that now he suggest more openly that there is a certain consensus between Rational Expectations authors like Lucas and New Keynesians like him and say Krugman. He tells us that:
"the old fresh water/salt water distinction has become largely irrelevant... Fifty years ago, Samuelson (1955) wrote: 
'In recent years, 90 per cent of American economists have stopped being 'Keynesian economists' or 'Anti-Keynesian economists.' Instead, they have worked toward a synthesis of whatever is valuable in older economics and in modern theories of income determination. The result might be called neo-classical economics and is accepted, in its broad outlines, by all but about five per cent of extreme left-wing and right-wing writers.'
I would guess we are not yet at such a corresponding stage today. But we may be getting there."
The consensus is the New Keynesian (NK) model as represented by Clarida et al (1999) and Woodford (2003), neo-Wicksellian really, but that's another story. Funny thing though. According to him: "One striking (and unpleasant) characteristic of the basic NK model is that there is no unemployment!" He explains that this can be circumvented by assuming that:
"unemployment arises from the fact that the labor market is a decentralized market, where, at any time, some workers are looking for jobs, while some jobs are looking for workers... this implies that the wage—and by implication, the cost of labor, employment, and unemployment—depends on the nature of bargaining... It allows one to think about the effects of labor market institutions on the natural rate of unemployment."
Doesn't matter how much lipstick you put on a pig, it's still a pig. The search model proposed basically suggests that unemployment results from frictions, and it would still be true that to solve it, eliminating frictions and reducing wages would lead to the ubiquitous natural rate. Truly Gattopardo Economics, as Tom Palley has called it.

PS: The comic strip above, Mafalda, got it right back in the 1960s. Her mom asks her to pick up her knitted sweater she left on the floor, and she says that she doesn't need to obey, since in her playdate with her friends she was a president. Her mom, astutely as Mafalda perceives, tells her she is the World Bank, the Paris Club and the IMF. Even kids in the periphery know who is really in charge.

Massimo Pivetti on Interest Rates and Gross Profit Margins In Recent Experience of Advanced Capitalism

From a paper prepared for the colloquium “What have we learnt on Classical economy since Sraffa?” Paris, October 2014
According to the monetary explanation of distribution, as elaborated over the past 25 years on the basis of a well known suggestion by Sraffa, the normal rate of profit would be arrived at in each sphere of production by adding up two autonomous components: the rate of interest on long-term riskless financial assets, plus a normal rate of profit of enterprise, viewed as a component of normal production costs and reflecting objective (or widely perceived as objective) elements of risk attached to each different productive employment of capital. Since the normal margins for profit, given production techniques, depend on normal profit rates, the same two variables, the rate of interest and the rate of the profit of enterprise, would govern also the course of net normal profit margins in the different production spheres. For any given set of profits of enterprise, the long-term rate of interest would thus act in the economy as the regulator of the ratio of prices to money wages. Once the normal profit of enterprise in each sphere of production is taken as given, in that it is determined separately from both the rate of interest and the rate of profit, attention is focused in this approach on the rate of interest.
Read rest here.

Monday, October 13, 2014

In Memoriam of Angelo Reati: "A Note on Some Misunderstandings of Sraffa's System"

From Review of Radical Political Economics:
Author Angelo Reati, an independent scholar and former United Nations economist based in Brussels, was killed in a cycling accident in July 2013. Angelo was a meticulous and open-minded scholar who believed deeply that economists have a responsibility to work towards the achievement of a more humane and more just society. His death is a great loss to the community of progressive economists. The editors wish to express their respect and affection for this true gentleman, true scholar, and true friend of humanity.
Reati's last paper, titled "A Note on Some Misunderstandings of Sraffa's System", can be seen here (subscription required).

Friday, October 10, 2014

Heinrich Bortis on Europe's Need For Classical-Keynesian Political Economy

By Heinrich Bortis
Based on theoretical reasoning this article suggests that a radically new conception of Europe is required to get out of the present economic and political crisis situation. Neo-liberal Europe must give way to a social-liberal Europe...Europe needs a new type of economic theory, classical-Keynesian political economy to wit, to shape institutions and socio-economic policies
Mind you, it's not just Europe that needs CKPE...

Read rest here (N.B. the article starts on page 4).

Thursday, October 9, 2014

Special Real-World Economics Review Issue on Thomas Piketty's 'Capital'

Special Real World Economics Review issue on Thomas Piketty’s Capital, featuring authors James K. Galbraith, Dean Baker, Jayati Ghosh, Michael Hudson, David Colander, Robert Hunter Wade, Lars Syll, to name a few.

See whole issue here.

For a recent debate at the New School between Anwar Shaikh, Heather Boushey, and Thomas Piketty, himself, see here.

Noam Chomsky on the Corporatization and ‘Death’ of American Universities

The following is an edited transcript of remarks given by Noam Chomsky to a gathering of members and allies of the Adjunct Faculty Association of the United Steelworkers in Pittsburgh, Pennsylvania:
The effective owners are the trustees (or the legislature, in the case of state universities), and they want to keep costs down and make sure that labor is docile and obedient. The way to do that is, essentially, temps. Just as the hiring of temps has gone way up in the neoliberal period, you’re getting the same phenomenon in the universities. The idea is to divide society into two groups. One group is sometimes called the “plutonomy” (a term used by Citibank when they were advising their investors on where to invest their funds), the top sector of wealth, globally but concentrated mostly in places like the United States. The other group, the rest of the population, is a “precariat,” living a precarious existence.
Read rest here.

Wednesday, October 8, 2014

Banks colluded to alter the price of foreign currencies says USJD

Ramanan suggested to me that this is old news. If it is I missed it the first time. At any rate the Department of Justice is prosecuting banks now for rigging the foreign exchange markets.

Baumol's disease Prize?

So Monday they'll announce the Sveriges Riksbank Prize (aka Nobel). Both The Guardian and Tyler Cowen at Marginal Revolution Blog bet on William J. Baumol, who was nominated for his work on entrepreneurism. Baumol would be a worthy winner for the 'Nobel.' But that's not his best work, in my view, since it relies on the same mainstream flawed supply-side stories to explain economic growth. But Baumol's Disease is an important insight, and one of the few regularities in economics treated like a scientific law and named after the economist that observed it, together with Okun's Law, Thirwall's Law, the Prebisch-Singer Effect, the Balassa-Samuelson Effect, and Kaldor-Verdoorn's Law.

PS: Baumol's contributions are extensive, from money demand, to history of ideas (including this paper on Say's Law, which is named after an economist, but is not a regularity and it's not really a law), to the analysis of productivity, including work with Marxist author Ed Wolff.

Tuesday, October 7, 2014

CIGI Senior Fellow Miranda Xafa on State of The Eurozone

Centre for International Governance Innovation Senior Fellow Miranda Xafa comments on the "State of the Eurozone" discussions which took place on October 6th, 2014 at the the German Marshall Fund of the United States in Washington, D.C. Xafa notes that the recent ECB announcement on asset purchases and the likelihood of a relatively successful forthcoming banking union may help to reduce Euro fragmentation and possibly ease credit issues. She cautions, nevertheless, that such structural reforms alone will not be enough to get the Eurozone out of its current long-run low-growth equilibrium.

New Book By Eric Helleiner - Forgotten Foundations of Bretton Woods, Int. Dev. & Making of Postwar Order

Professor Helleiner is an astounding international political economist and economic historian. His archival research is impressive, and his explications and understandings of international finance are not only lucid and prolific, but extensively articulate & eloquent. His new book on Bretton Woods, like many of his other works, is certainly a tour de force.
Eric Helleiner's new book provides a powerful corrective to conventional accounts of the negotiations at Bretton Woods, New Hampshire, in 1944. These negotiations resulted in the creation of the International Monetary Fund and the World Bank—the key international financial institutions of the postwar global economic order. Critics of Bretton Woods have argued that its architects devoted little attention to international development issues or the concerns of poorer countries. On the basis of extensive historical research and access to new archival sources, Helleiner challenges these assumptions, providing a major reinterpretation that will interest all those concerned with the politics and history of the global economy, North-South relations, and international development. The Bretton Woods architects—who included many officials and analysts from poorer regions of the world—discussed innovative proposals that anticipated more contemporary debates about how to reconcile the existing liberal global economic order with the development aspirations of emerging powers such as India, China, and Brazil. Alongside the much-studied Anglo-American relationship was an overlooked but pioneering North-South dialogue. Helleiner’s unconventional history brings to light not only these forgotten foundations of the Bretton Woods system but also their subsequent neglect after World War II.
See rest here.

Even the IMF thinks Vulture Funds are a problem

Since I criticized recently the IMF on its timid changes on macroeconomic policy advice, and the persistence of austerity based programs, it is worthwhile noticing that on the question of debt restructuring they have come clearly on the side limiting the power of Vulture Funds. In a new report on Sovereign Debt Restructurings the IMF suggests that:
The recent litigation involving Argentina has generated significant concerns regarding the impact that the New York court decisions may have on the overall restructuring process. In light of these concerns, there has been considerable progress in both the design and use of a modified pari passu clause that explicitly excludes the obligation to pay creditors on a ratable basis. It is recommended that the Fund support the widespread use of such a modified pari passu clause in international sovereign bonds.
Note that this might have an impact on future debt renegotiations, but is of little help for Argentina right now. But if the IMF is doing this, it means that the US Treasury is not particularly happy with judge Griesa's decisions.

PS: Here and here two parts of an interview for the radio program Debates Económicos of the Universidad Nacional de Colombia (in Spanish). 

Monday, October 6, 2014

Piketty debates Shaikh and Boushey at the New School

Piketty at the New School's Schwartz Center for Economic Policy Analysis (SCEPA). I personally don't agree with Anwar that Piketty is working in the critical tradition that includes Smith, Ricardo, Marx, Keynes and Kalecki (around minute 51). But worth watching in full.

Saturday, October 4, 2014

Bill Black: Too Big to Jail

Bill Black author of the fantastically titled The Best Way to Rob a Bank is to Own One on Bill Moyers explains why nobody has been prosecuted in Wall Street after the 2008 crisis. 

How Much has the IMF Changed in Response to the Global Crisis?

Following the 2008 Global Crisis the notion that the International Monetary Fund (IMF) has moved away from orthodox views on a range of issues, but particularly regarding the need for austerity, has been pervasive. For example, Paul Krugman has argued, in his influential blog, that Olivier Blanchard, IMF’s director of research (or economic counselor) is “helping make at least one international institution less austerity-mad than the others.”

So what is this new view, exposed by Blanchard? For example, in the preface to the last World Economic Outlook, Blanchard tells us that:
Potential growth in many advanced economies is very low. This is bad on its own, but it also makes fiscal adjustment more difficult. In this context, measures to increase potential growth are becoming more important—from rethinking the shape of labor market institutions, to increasing competition and productivity in a number of nontradables sectors, to rethinking the size of the government, to examining the role of public investment.
Read rest in Triple Crisis here.

Friday, October 3, 2014

What macroeconomic policies were relevant for unemployment reduction in Latin America?

I was reading the book by Giovanni Andrea Cornia on Falling Inequality in Latin America, which suggests that the reduction of the skill premium and macroeconomic policies, together with the expansion of social assistant, in particular but not only by left of center governments, is behind the trend. I'll have more on some of the issues related to the skill premium, which rely heavily on both neoclassical labor market and trade theories. However, the chapter on the macroeconomic causes of reduced inequality caught my eye. The chapter, a previous version can be found here, written by Mario Damill and Roberto Frenkel says that:
"A competitive RER [Real Exchange Rate] provides a conductive environment for growth and development. This view has long been stressed by development economists* and recently documented in many econometric studies. The growth-enhancing attributes of a competitive RER operate through the enhancement of tradable sector profitability."
The idea is that a depreciated currency allows for more exports, less imports, a more relaxed current account, and higher levels of activity and employment. The real depreciation is expansionary. Also, the paper suggests that fiscal policies had been during the last decade more restrictive, and presumably this was a good thing. They say:
"...many countries implemented fiscal rules, fiscal responsibility laws or took discretional decisions oriented at correcting the pro-deficit bias of the past. In many countries these changes contributed to a generalized improvement in fiscal results as well as to a declining trajectory of the outstanding public debt."
Not clear why public debt in domestic currency was a problem. Arguably, they think that fiscal restraint was relevant for supposedly allowing for more price stability, since Frenkel usually has argued that inflation has been caused by excessive demand, which was also conducive to reduction in inequality.

However, the evidence in favor of these views is very thin at best. In fact, the whole mechanism by which a depreciated RER would lead to higher growth, lower unemployment and some improvement on income distribution, which is the change in relative prices and the effects on exports and imports, is never discussed. As I pointed out before, the best evidence still suggests that depreciation is contractionary (see the paper by Fiorito, Guaita and Guaita here, in Spanish).

In order to provide evidence for the positive effect of the RER on growth Damill and Frenkel used a partitioned regression. First they regress growth of GDP on the real exchange rate, they make a residual variable, GDP not affected by RER, and then regress unemployment change on the residual GDP and the RER, in what they term a variation of Okun's Law (sic). They find that unemployment is affected by the exchange rate, but to say that the model is misspecified, and that suffers from an omitted-variable bias is an understatement.

The current account in Latin America improved mostly because of a positive terms of trade (TOT) shock, and was not the result of a depreciated RER, which at any rate as the authors note, was almost at the same level as before the boom by the end of 2000s [that's why Frenkel keeps asking for depreciation to promote growth]. The improved TOT were relevant because they allowed for fiscal expansions without leading to current account problems, and on top, the expansion of the economy allowed for increasing tax revenue and balanced fiscal accounts. In other words, the fiscal rules were not the cause of primary fiscal surpluses, but the result of the economic boom.

Fiscal expansion, and the expansion of real wages, were certainly more important for the reduction of unemployment. The authors are correct, however, in emphasizing the role of employment generation in reducing poverty and inequality. Note, also, that as real wages expanded all countries experienced RER appreciation, but the evidence suggests that income expansion is what led to a reduction in current account surpluses. That's why depreciation cum fiscal adjustment, that Frenkel correctly connects (in Spanish) with IMF policies, are not the solution.

By the way, unemployment fell because GDP grew, and the old and simple Okun's Law, without the exchange rate, still works very well.

* In fact, many development economists starting with Hirschman and the Diaz-Alejandro, later formalized by Krugman and Taylor, suggested the opposite, that depreciation was contractionary. See here.

Financialization and the Resource Curse in Brazil

"Financialization and the Resource Curse: The Challenge of Exchange Rate Management in Brazil"

By Kevin P. Gallagher and Daniela Magalhães Prates
Indeed, Brazil has been blessed and cursed with high commodity prices (from 2003 to mid-2008 and 2009-2011) and low interest rates in the core economies after the 2008 global financial crisis. Such an environment, coupled with the high domestic policy rate and the sophistication of the Brazilian financial system, has made Brazil a much sought after destination for carry trade operations through short-term financial flows that are largely transmitted through the foreign exchange derivatives market. Speculative operations into this market have accentuated the upward pressure on the exchange rate, which has come with higher commodities prices, leading to what we refer to here as a financialization of the resource curse (pp. 2).
Read rest here.

Thursday, October 2, 2014

Duncan Foley and Lance Taylor win Leontief Prize

GDAE will award its 2015 Leontief Prize for Advancing the Frontiers of Economic Thought to Duncan Foley and Lance Taylor. This year's award, titled "Macroeconomics in the Age of Climate Change," recognizes the contributions that these researchers have made to our understanding of the relationships between environmental quality and the macroeconomy.

“Our Institute’s work has been much influenced, and has greatly benefited, by the ways in which Dr. Foley and Dr. Taylor have crossed the boundaries between economics and other disciplines to produce the kind of rigorous analytical work that the Leontief Prize was created to recognize,” said GDAE Co-Director Neva Goodwin. “Dr. Taylor’s research has integrated relevant social relations into macroeconomic models, and is of critical importance for understanding present and future environmental realities and challenges. Dr. Foley’s unique approach to combining research on political economy with advances in statistics and a broad grasp of the relevant data has produced a deeper appreciation of the policy consequences of economists’ choices in theories and models.”

The ceremony and lectures by the awardees will take place in the spring of 2015 at Tufts University; further details will be forthcoming.
For more go here.

Kaldor-Verdoorn's Law for Latin America

The Kaldor-Verdoorn’s Law (KVL) suggests that the rate of growth of labor productivity is determined by the expansion of demand. In other words, KVL suggests that there is a strong correlation between the growth of labor productivity and the rate of growth of economic activity.

The graph shows KVL for 7 Latin American Economies between 1950 and 2006. For similar analysis for the US see this paper.