Monday, December 30, 2019

Raúl Prebisch as a Central Banker and Money Doctor


Here we edited with Esteban Pérez and Miguel Torres some unpublished manuscripts from Prebisch related to the Federal Reserve missions, led by Robert Triffin, to the Dominican Republic and Paraguay, in which he emphasizes the need of capital controls in peripheral countries that did NOT have the key hegemonic currency. There is also a discussion of Keynes and White's plans for Bretton Woods, which were partially published before. In Spanish. Happy New Year!

Wednesday, December 25, 2019

What to expect from the incoming government in Argentina

The government in Argentina has less than two weeks at this point. It is too early to pass judgment. But we can look at the legacy of the Macri administration, and indicate a few things about the current strategy. A paper I have just received from Fabian Amico, that will soon be published in Circus, will be invaluable for my very brief comments here (the new issue of Circus and his paper will eventually be linked here, in Spanish).

The first thing that should be evident is that the 4 years of the Macri administration, that were supposed to restore economic growth, something that had faltered since 2011, essentially as a result of an external constraint, were a failure. Using IMF data, the average GDP growth in the period was -0.2 percent. Yep, negative. Amico uses a local activity index and the results are visibly not very different (his numbers give an overall decline of 1.7 percent for the whole period).

Macri's administration also lifted capital controls, paid the Vulture Funds more than US$ 9 billion, and open the doors to additional foreign borrowing. The Macri government had put all of their bets on the notion that growth would come from private investment and exports, rather than the combination of government spending and higher wages, which allows for higher consumption. Below you can see how well that worked out for them.

As it should be clear only exports grew (Amico calls, aptly, the Macri period an export-led stagnation one), and not as a result of the real devaluation, since they grew at about 2 percent per year, more or less in tandem with the growth of global GDP. So much for the notion that devaluation provides space for policy, and higher growth. The collapse of government consumption, and the fall in real wages were crucial to explain the poor performance. Investment followed the accelerator and collapses with the fall in GDP.

The real depreciation of the exchange rate, as is well-know, affects negatively the real wages, that fell approximately 30 percent during his government, and as I had noted back in 2015, that was the real objective of his government. In that sense, one can say that his government did achieve its main goal. The participation of wages in total income fell 8 percent, as shown below.
The worst mistake was the increase in foreign debt in foreign currency, of course, the currency crisis and the return of the IMF, which I've already discussed (here and here) so I'll not delve again into this.

The Fernández administration, and the new Finance Minister, Martín Guzmán, are doing what was expected, and what seems reasonable under the current circumstances. The increased the retentions, taxes on exports, mostly of the agribusiness sector, started to tax assets held abroad, and eliminated taxes on assets held domestically in pesos, which are measures to try to increase the reserves in dollars. This will certainly complemented with measures to alleviate hunger, and poverty, including the pensions of the elderly poor. They are most likely in negotiations with the IMF to avoid a default, and that is crucial for the success of the economic program.

As Fernández said, his administration inherited the chaos. But there are reasons for hope in the dark.

Sunday, December 15, 2019

A Conservative win will create a neoliberal hot zone and dissolve the UK: here’s how to stop it

By Thomas Palley

I could not get this op-ed (written November 6, 2019) published as it was a mix of too dull & didactic, and too partisan or not partisan enough. Anyway, in the wake of the election, I think it was analytically spot on so I have decided to post it. Also, it makes clear the very special circumstances of the UK election. It is a gross distortion to extrapolate from the UK to the US. Unfortunately, that is exactly what elite US media (e.g. New York Times) and neoliberal Democrats are now doing.
Opinion polls are predicting the Conservative Party will romp home in the UK’s upcoming general election. Unfortunately, given the party’s current extremist inclinations, that stands to transform the UK into a neoliberal hot zone and also dissolve the UK within a decade.

The costs of a Conservative winA Conservative majority government will quickly implement a Brexit that inflicts significant economic and political injury. Additionally, it will double-down on neoliberalism which has already done so much damage.

One set of costs concerns the deepening of neoliberal policies that push austerity and increase income inequality. The other set of costs concerns Brexit.

Read rest here.

Monday, December 9, 2019

Central Banks, Development and the Argentinean Economy

My interview (in Spanish) on central banks, development and some moderate optimism about the forthcoming Argentinian government of Alberto Fernández.

Paul Volcker's legacy

Paul Adolph Volcker (1927-2019)

Paul Volcker has passed away, and many obits (NYTimes here) and blog posts will be published in the next couple of days. Most likely, the majority will suggest how Carter appointed him to bring down inflation, a courageous decision, that might have costed him the election, and how Volcker went on to stabilize the so-called Great Inflation. Volcker was the head of the New York Fed from 1975 to 1979, before he was appointed chairman of the Fed in that year. He can be seen as the anti-Marriner Eccles, the first chairman properly speaking, and Roosevelt's central banker. Volcker was the quintessential Monetarist central banker, and his tenure is symbolic of the rise of Neoliberalism,* as much as Eccles' tenure was the symbol of the New Deal social democratic values.

It is important to remember that Volcker actually imposed Milton Friedman's monetary growth targets as the Fed policy, for the first time, since central banks, the Fed included, had traditionally acted by managing the interest rate, rather than trying to control the monetary aggregates. That policy was a failure and was short lived, being abandoned still during his tenure as chairman. Charles Goodhart noted that every time a central bank tried to control a monetary aggregate, the previously stable relationship between that monetary aggregate and economic activity broke down. This became know as Goodhart's Law.

But the Volcker interest rate shock was part of the set of policies that brought inflation down, even if the effects were not necessarily the ones anticipated, and the mechanism not the one assumed by Monetarist theories. It was NOT the result of lower monetary emissions, as much as the fact that higher interest rates, significantly higher, and the recession that followed, together with the opening of the American economy to foreign competition led a large increase in unemployment. The worst recession since the Great Depression, and that reduced the bargaining power of workers.

The other consequence of the interest rate shock, and the more profound globally, was the appreciation of the dollar, which showed that the dollar was still the key currency globally,** and the collapse of the Mexican economy after a default, which led to the so-called Debt Crisis of the 1980s, which not only hit the Latin American periphery, but many countries in Eastern Europe, helping also in the eventual collapse of real socialism. Asian economies, and their Japanese creditors, were hit by the crisis, but managed better the problems of debt overhang, being able to continue to borrow and avoiding the collapse in growth known as the Lost Decade.

Volcker left the Fed in 1987, followed by Alan Greenspan, who was responsible for the deregulation of financial markets (e.g. the end of Glass-Steagall) more than any other person, perhaps. The legacy of financial deregulation is well-known, with a succession of bubbles, and rescues by the Fed of "too-big-to-fail" institutions. Volcker was a critic of financial deregulation after the crisis, suggesting famously that only the ATM was a useful financial innovation. The Volcker Rule, introduced with the Dodd-Frank legislation, forbade banks of using their own accounts for making some investments in derivatives and other financial instruments. In many ways, this was too little, too late.

If you read the regular obits and pieces in the media, I am sure his legacy will be defined fundamentally for achieving low inflation. He would be the father of what Ben Bernanke called the Great Moderation. But his policies are also co-responsible for lower growth rates, on average, wage stagnation, and increasing financial instability, in the center and the periphery.

* And yes Neoliberalism started with Carter, not Reagan, even if the latter was considerably more radical in his pursue of conservative policies.

** It is worth noticing that Volcker was the under secretary for international affairs during the Nixon Administration when the system of Bretton Woods collapsed, and the dollar was allowed to float. In a sense, he was there for the depreciation and then appreciation of the dollar, and the imposition of what has been termed the dollar diplomacy. In other words, he proved that abandonment of Bretton Woods was NOT the abandonment of a dollar based international monetary regime.

UNCTAD INET-YSI Summer School 2020

Register here . I will be talking about Myths about monetary policy, inflation targeting and central banks.