Was Bob Heilbroner a leftist?

Janek Wasserman, in the book I commented on just the other day, titled The Marginal Revolutionaries: How Austrian Economists Fought the War of Ideas, suggests in his conclusion that Robert Heilbroner "was one of the foremost American leftists." He also seems to suggest that Heilbroner's criticism of modern economics, which had become too formalistic and paid too much attention to Schumpeter's analysis and not enough to the other Schumpeterian category, vision, and that, hence, economics was moving away from the worldly philosophy, seems to be an endorsement of Austrian methodology and the Austrian aversion to excessive formalization.

Having known Heilbroner at around this time -- I arrived at the New School in 1995 -- I must say that this is not an accurate picture about Bob or his views about the economy or the moment that we were going through at that time. Or at least it paints a partial and incomplete view.

It is hard for me to think of Heilbroner as a leftist, if by that one means a radical critic of capitalism, a socialist, or a Marxist. He was none. Even though he did engage with Marxists and their ideas, which were obviously very much part of the New School. He was open and pluralistic for sure. But he was a traditional liberal, a liberal in the Adam Smith sense, although his views on Adam Smith, particularly if you read his most famous book, The Worldly Philosophers, were very conventional. He assumes there that Adam Smith was a precursor of marginalism, in a way, and of some view of market efficiency in a neoclassical way.

The theory of value to which Adam Smith subscribed, which was a variation of the labor theory of value, was not supply and demand. Profits were a residual, and not the remuneration the services rendered by capital. Supply and demand in the labor market was not central to the determination of wages, which were set at subsistence given the lack of bargaining power of workers. Class conflict and class structure were central to Adam Smith in ways that are irrelevant for neoclassical economics and for marginalism. I only attended a few classes of his history of thought course, with Will Milberg, back then, but my impression is that he agreed with his professor, Schumpeter, when he discussed his ideas in The Worldly Philosophers, and said that: 

“... the labor theory of value which everyone knew to be wrong and therefore did not have to be reckoned with. Schumpeter now came forward with a brilliant answer to this vexing question. Profits, he said, did not arise from the exploitation of labor or from the earnings of capital. They were the result of quite another process. Profits appeared in a static economy when the circular flow failed to follow its routinized course.”*

Btw, Schumpeter was an Austrian economist, so the notion that in his coverage of authors (in The Worldly Philosophers) he was biased against them is preposterous.**

More importantly, Bob was very much for some sort of minimal state., in ways that were not completely dissimilar from some Austrians. I recall a conference in 1997 that gave birth to what is now referred to as Modern Money Theory, or MMT, we had a discussion during a coffee break about the Maastricht debt and deficit limits in the European Union. To my surprise, he suggested that he was very much in favor of those limits, a view that certainly would not put him together with leftists, but with very conservative right-wingers within Europe. When I questioned why he would be in favor of the 3% deficit and 60% debt limits, both as percentages of GDP, he suggested something to the effect that there should be some sort of control over the size of the state. He was very much for a limited state in ways that most progressives and leftists in the 20th century were not for.***

That should be a qualifier on his views on the view that he was a lefty. That should also color some of his views on the collapse of the Soviet Union, and the legacy of Mises and other Austrians that were decidedly against the communist/planning experiment. But if he was, as almost all moderate liberals of the '50s and '60s for some degree of welfare provisions (at some point Hayek was too, btw), and not for the upturning of capitalism, this camouflages his concerns about capitalism that were more pronounced than the sort of cheer-leading climate of the time was. His views were not this sort of celebration of the victory of capitalism. He had from early on been concerned with the environmental limits of capitalism, something that is also true of John Kenneth Galbraith, and of the limits of capitalism. He was also concerned with consumerism, because of the environmental issues.

So he was certainly more critical of, and remained critical of, certain aspects of capitalism without being a radical, or I wouldn't even say a lefty. He was very much, something that Austrians are not, which was some sort of version of a classical liberal in terms of his political views (Keynes too, btw). Clearly, in modern times, were Austrian economics is at the core of the paleo-libertarian, alt-right phenomenon, Bob seems like a raging communist. That makes as much sense as Austrian economics. But that's my two cents on the topic.

* I discussed this in my history of the New School's department here. 

** In fact, the book was originally published in 1953, way before the resurgence of Austrian economics in the 1970s. The coverage of authors was not revised, and the fact that the book ends with Schumpeter should be seen as pretty significant. Schumpeter that always felt he did not receive the recognition he deserved (and that went to Keynes) would have approved. Obviously he is not Austrian enough for the paleos.

*** Another anecdote. I remember that Michael Woodford came to the New School for a talk on Maastricht's limits as a precondition for price stability. Bob sat in the front row (I was all the way in the back). Woodford proceeded to say that he was not going to discuss the institutional issues, but would proceed from a general equilibrium model, and so on. Bob discreetly (as possible as it was being in the front row) got up and left. He was vindicated at the end!

Paul Davidson (1930-2024) and Post Keynesian Economics

Paper on Paul with Tom Palley and Jamie Galbraith published by ROKE. From the abstract:

"Paul Davidson was a critical figure in the preservation of John Maynard Keynes’s ideas, sticking with them when they were out of fashion. He was also key to the survival of the Post Keynesian school. Davidson endorsed Keynes’s liquidity preference theory of interest, and he emphasized fundamental uncertainty as a central feature of economic reality, essential to making sense of a monetary economy. His greatest legacy is the Journal of Post Keynesian Economics, the intellectual home for a generation of Post Keynesian economists. Without his efforts, the heterodox economics community would be significantly smaller than it is now."

Full paper available here.

More on the possibility and risks of a recession

So both the (inverted) yield curve and the Sahm rule indicate a recession. This together with two months of slower employment creation, and the slightly higher unemployment rate, has many wondering whether the economy will crash soon. I discussed before -- a while ago, before the pandemic recession, that had nothing to do with the yield curve -- why an inverted yield curve doesn't necessarily mean a forthcoming recession. The Sahm rule, like the inverted yield curve has an impressive track record. It suggests that if three month moving average of the rate of unemployment rises 0.5 or more above the minimum of the same averages for the previous twelve months a recession is under way. Figure below, although scale doesn't help, shows that we are at 0.57 for last August [ominous music here].

This is essentially an a-theoretical measure, contrary to the yield curve which could have different explanations, including the Wicksellian one used by the mainstream. It expresses basically a trend. Unemployment rates go up in recessions, and after a while going up, you're basically in one. The two episodes in which it fails, as far I can tell, were in 1959 and 2003. No clear reason for why, as opposed to housing market measures that failed in 1951, 1967, and perhaps now (if you believe me), because of two wars (Korea and Vietnam) and fiscal packages (Bidenomics).

In a few weeks now, the Fed is very likely, almost certainly really, going to reduce interest rates. I don't expect that to stimulate the economy much, and it certainly will not create any danger about an inflationary resurgence. Also, as I noted on Marketplace a week or so ago, there are some positive signs about the economy. Real wages at the bottom are growing, and consumption went up. And no, you should not be concerned with the low savings rate. I was a little less sanguine that I sound in that short soundbite, but overall I think that's correct.

Sure enough a recession could certainly imply a return of Trump, and Trumponomics. I doubt that it would cause inflation and that his election would deepen the recession, as some had argued. Not because tax cuts for the wealthy would stimulate the economy. But the truth is that Republicans in power don't care about the deficit or debt. They care about cutting social benefits, and about facilitating the lucrative relations between the corporate sector and government. What Jamie Galbraith called the Predator State. Trumponomics shares with Reaganomics, and other GOP supply side voodoo economics notions, a persistent characteristic. It is always against unions and higher wages, and always for lower taxes for the wealthy.

Dems are less consistent, but certainly less keen on both (and Kamala seems to have accepted Bidenomics and the pro-union agenda). The problem with that is that it has opened the door for right wing populism. The differences with previous versions of conservative economics are subtle, and in some sense rhetorical, since they do very little for working people. On right wing populism economics and their connection to the working class, and the problematic relation of Dems with the working class, I suggest the recent piece by Kim Phillips-Fein on the London Review of Books. She says:

"In 1968 George Wallace talked to a working class that was afraid of dispossession. Trump speaks to workers too, but more directly uses the language of money and corporate success; his appeal derives from identification with the boss -- reflecting the extent to which he seeks to win the allegiance of small business owners. Just as American political institutions have been hollowed out since the 1960s, so has the country's political economy, in ways that have helped to increase Trumps' appeal."

The self-made man myth, an American neologism (Henry Clay, if I'm not wrong), is incredibly corrosive. I hope I'm right and we can avoid a recession, and Trump.

The Gift of Sanctions

Jamie Galbraith presented, at the EPS session at the ASSA Meetings in San Antonio, the paper published by INET. As he said there: "Despite the shock and the costs, the sanctions imposed on the Russian economy were in the nature of a gift." A type of invisible hand effect, by which the unintended effect of the policy that should supposedly benefit US allies (Ukraine) has the unintended effect of helping its alleged enemies (Russia).

From the abstract:

This essay analyzes a few prominent Western assessments, both official and private, of the effect of sanctions on the Russian economy and war effort. It seeks to understand the main goals of sanctions, alongside bases of fact and causal inference that underpin the consensus view that sanctions have been highly effective so far. Such understanding may then help to clarify the relationship between claims made by economist-observers outside Russia and those emerging from sources inside Russia – notably from economists associated with the Russian Academy of Sciences (RAS) – which draw sharply different inferences from the same facts. We conclude that when applied to a large, resource-rich, technically proficient economy, after a period of shock and adjustments, sanctions are isomorphic to a strict policy of trade protection, industrial policy, and capital controls. These are policies that the Russian government could not plausibly have implemented, even in 2022, on its own initiative.

Download paper here.

 

What's Left of Cambridge Economics?

A new piece by Jamie Galbraith on Project Syndicate, that reviews some recent books, but deals essentially with what happened to heterodox economics, a theme that has been treated here often (on the definition of heterodox economics go here). Jamie provides an apt definition, on the basis of what he got at Cambridge back in the 1970s. In his words:

When I attended the University of Cambridge in 1974-75, I read Keynes, met Piero Sraffa, listened to Joan Robinson, and studied with Kaldor, Luigi Pasinetti, Richard Goodwin, Ajit Singh, Wynne Godley, Robin Marris, and Adrian Wood. Back then, it was understood at Cambridge that markets do nothing like what Coyle claims they do. Just as Einstein had erased Euclid’s axiom of parallels, Keynes’s General Theory had long since obliterated the supply curves for labor and saving, thereby eliminating the supposed markets for labor and capital.

It followed that the prices of production were set by costs(mostly labor costs and interest rates), while quantities were determined by effective demand. Markets were not treated as if they were magical. It was obvious that most resources and components did not move under the influence of an invisible hand.

Read the full review here. 

Galbraith on the Texas Energy Debacle

This piece shows very clearly the limits to deregulation in the case of energy markets. Jamie's oped was published in Project Syndicate, and a slightly different version is available here at INET, in which we find out that radical free market policies ended up in what he termed 'selective socialism.' The relevant paragraph:

the price mechanism failed completely. Wholesale prices rose a hundred-fold – but retail prices, under contract, did not, except for the unlucky customers of Griddy, who got socked with bills for thousands of dollars each day. ERCOT was therefore forced to cut power, which might have been tolerable, had it happened on a rolling basis across neighborhoods throughout the state. But this was impossible: you can’t cut power to hospitals, fire stations, and other critical facilities, or for that matter to high-rise downtown apartments reliant on elevators. So lights stayed on in some areas, and they stayed off – for days on end – in others. Selective socialism, one might call it.

There is a short video here too. 

World War II, not the New Deal, is the model for COVID-19 macroeconomic policies

Central planning (Socialism?) in democratic societies

There is a lot being written on the causes and cures for the economic consequences of the Coronavirus (COVID-19). The predictable distinction is among those that think that this is essentially a demand shock, mostly to services, and those that are concerned with the disruption to supply chains. And to some extent both are correct. But that is not the more relevant problem here, which is whether we need just more government or a change in the nature of the governmental interventions.

Neil Irwin, from the New York Times, provides a suitable and simple explanation of the demand shock story. Note that a demand shock often goes together with significant financial implications, as agents with reduced revenue tend to default on loans or payment streams to any liabilities. The Economist noted the risk associated with excessive corporate debt, and the possibility that the virus might trigger a debt-deflation type crisis in financial markets. On the fragility of corporate balance sheets see also this insightful piece by Michalis Nikiforos. Many economists have talked in favor of this interpretation, and certainly there is a lot to be said about this view, which I tend to agree with, by the way.

The fiscal expansion plans put forward by the administration have been mostly seen through the lens of a regular demand shock version of the recession. They include things like a bailout of certain sectors hit hard by the sudden decline in demand, like the airlines, and checks to those that have lost their jobs, besides the Fed injecting liquidity to reduce the financial effects of the demand shock. In that sense, not very different from the fiscal package and financial rescue of the 2008 crisis.

Of course, macroeconomic policies in 2008, even though they did preclude a fall in unemployment of the magnitude that had occurred in the 1930s during the Great Depression, were flawed in many ways. They did rescue banks, but left many to lose their houses for one (and Obama's Justice Department did not prosecute in any significant way the many financial excesses of Wall St); it was also probably on the smaller side, leading to a prolonged, but very slow, recovery, in which labor market conditions remained relatively poor for many workers, even with low levels of unemployment by the end. All things that increased the problems at the bottom of the income distribution and helped explain Trump's political victory in 2016. Hence, there is reasonable fear that these policies might not work well this time around again. Besides, there is a case to be made that this crisis is not fundamentally a demand shock.

A prominent defender of the latter is Dean Baker. He says: "Our problem is not creating demand in the economy, the problem is keeping people more or less whole for a possibly extended period in which much of the economy is shut down." And as he notes, sending checks to people directly will fall short of a solution. Checks will be irrelevant for many, that have secure jobs, and insufficient for many, since it will be too little, or because some people might be directly excluded from such programs, like undocumented immigrants with US born children. Dean's alternative is to send money directly to companies that would keep workers employed and inactive, helping in the recovery too. Of course this solution deals fundamentally with those in the labor market, and not with those in more precarious situations.

I see the problem as being essentially a demand shock, note that the increase in unemployment insurance applications was marked last week, to a great extent associated to Coronavirus layoffs. Obviously nobody would deny the supply side effects of the crisis, even though these are less disruptive in the short run, in my view. Nobody is being laid off because the company is unable to obtain intermediary goods for production, or at least not on significant numbers. It is the sudden collapse of demand that matters. But that misses the point of the kind of demand and supply shocks that have hit the economy. These are localized, uneven shocks and an efficient policy reaction requires targeted interventions. The kind of intervention we need is one that one the demand side tries to maintain the ability of families with cash flows problems (the ones laid off and those that were already outside the formal job market), and on the supply side that redirects production to the sectors that would experiment a surge in demand.

The most typical analogy in times of macroeconomic crises is the Great Depression, and progressives, not incorrectly go searching for ideas in the New Deal tool box. However, the New Deal was mostly about regulation, in its first phase, and about spending, in particular after the Roosevelt Recession. The kind of intervention we need is more akin to World War II, one in which government agencies have ample powers to requisite, produce or fund private corporations to produce what is needed as vital effort for survival, as alluded by Jamie Galbraith in his recent piece on the virus. For example, we need to reconvert the economy to produce more ventilators, which are in short supply, and also to ration the ability of families to hoard certain key central consumer goods, to preclude localized scarcity of essential items like hand sanitizer. We need planning, not just more government spending. And, yes, that means Socialism (or Social Democracy). This was something that no US citizen would have been surprised about, in particular after the incredible collapse of the market economy in the early 1930s, and it should not be a surprise that Socialism is somewhat more popular now. COVID-19 makes it clear why markets cannot cope with global crisis like a pandemic.

Another central element of the World War II effort was the generous and strategic concern with the global impact of US policies. Lend-lease, even before the US entry in the war, was central for allowing the UK resist the Nazi onslaught, and the subsequent program with the Soviet Union was crucial for them to be able to resist, and eventually win the war in the European front. In order to defeat Nazism, the US authorities were willing to cooperate with a Communist government, and provide significant resources. A similar approach should be used to deal with nations that are not seen as allied (like the Soviets then), but that in a particular context should be helped, like Iran, and Venezuela, which are and will be under extreme duress during the pandemic. The negative effects on the US image associated to the tightening of the sanctions, and the impediments to IMF loans under these circumstances, will be hard to reverse.

Finally, some think that this would be a short lived V-shaped recession. Meaning that once the main social distancing policies are lifted, the economy will recover swiftly. Note, however, that the duration of the measures is contingent on its own success. The more successful we are at flattening the curve, meaning reducing the contagion rate, to avoid overwhelming the health system, the longer the economic disruption will be, and the more we would need a planned economy.

PS: Portuguese translation here.

James K. Galbraith's Veblen-Commons award

Ritual and prestige among the Institutionalists

Jamie got the Veblen-Commons award, something his father received back in 1976. I introduced him, and as expected discussed a bit his contributions to economics, and the understanding of institutions. His most important contributions are on the field of inequality, and the work he has done with the University of Texas Inequality Project (UTIP).

There are many contributions that Jamie and UTIP have made. His use of the UNIDO payroll data, that he noted in his Godley-Tobin Lecture, has significant advantages over tax records and household survey data, and provides a different picture of global inequality. His use of the Theil decomposition is also original and provides new insights on inequality. And there is the more important contribution, his preoccupation with the macro-foundations of distribution theory.

I suggested, however, that perhaps his most provocative contribution to the understanding of economics and the evolution of institutions is in his notion of the Predator State, that in which private interest has taken over the commanding heights to promote the looting of what is left of the New Deal and Great Society project. This notion harks back to his father's famous trilogy -- American Capitalism, The Affluent Society and The New Industrial State (NIS), in particular the latter.

The evolution of of the bureaucratic state that was disappearing as his father wrote about it -- NIS was published in 1967 -- and its transformation into a predatory machine of the elites is central to understand inequality.

Galbraith on MMT and the Hyperinflation Boogeyman

From his recent piece: "Does this mean that 'deficits don’t matter'? I know of no MMT adherent who has made such a claim. MMT acknowledges that policy can be too expansionary and push past resource constraints, causing inflation and exchange-rate depreciation – which may or may not be desirable. (Hyperinflation, on the other hand, is a bogeyman, which some MMT critics deploy as a scare tactic.)"

Also, this: "And MMT is not about Congress ordering the Fed to use its “balance sheet as a cash cow.” Rather, it is about understanding how monetary operations actually work, how interest rates are set, and what economic powers the US government has. This, in turn, requires recognizing that the dual mandate is not a collection of empty words, but something that can – and should – be pursued on a regular and sustained basis.

There are practical, straightforward, and realistic ways for policymakers to meet this mandate. Implementing them would strengthen the country, not bankrupt it. And, contrary to opponents’ fears, global investors would not flee in terror from US government bonds and the US dollar."

MMT and its Discontents: Again (Wonkish and Longish)

Modern Monetary Theory (MMT) has been in the news again, and for good reasons. I actually had a post with the same title back in February of 2012, hence the again in the title. But now, with the irruption of Alexandria Ocasio-Cortez in the political scene ,and with the discussion of a Green New Deal (discussed here 7 years ago) and the feasibility of higher taxes (here, also long ago, among the many on the topic) taking the center of the political debate, MMT has become trendy. The rise of democratic socialist ideas, since Bernie's 2016 campaign, has brought the fiscal feasibility or responsibility, in the more conservative terminology, of such progressive  plans into the center of economic policy debates. Also, the fact that Stephanie Kelton a prominent MMTer is an advisor to Bernie, has brought significantly more attention on their views.

I have discussed Modern Monetary Theory in this blog for years (going back to April 2011, when I first found use of the term, to the most recent earlier this year after Olivier Blanchard American Economic Association presidential address last January), and have known the main MMTers going back to at least the mid-1990s, when I was at the New School and working as research assistant to Wynne Godley at the Levy Institute. I guess, I can be seen, to use the term employed by Doug Henwood in his recent Jacobin piece, as a fellow traveller (like Jamie Galbraith), even though I've been critical of some aspects, in particular when applied to developing countries (more on both Henwood and MMT issues in developing countries below).

There are many critiques, which deal with both theoretical issues, mostly concerned with the Functional Finance aspects of MMT, and with the policy and political effects of MMT advising to the left of center Democratic presidential candidates. Note that I will not try to define MMT precisely, since it is a hybrid of economic theories and policy proposals. I would assume that at core it is composed by the ideas of Chartalist and Endogenous Monetary views, Functional Finance, and an Employer of Last Resort (ELR) program as suggested by Greg Hannsgen in his recent presentation at the Eastern Economic Association (EEA), in sessions we co-organized (with the presence of Randy Wray presenting Stephanie Kelton's slides and Josh Mason; Stephanie was with Bernie at the rally in Brooklyn).

My comments will be, for the most part, directed at issues that fall within the Functional Finance part of MMT, and mostly about developed economies like the US (although, I'll have something to say about developing countries like Argentina or Brazil). I might add that Randy suggested that Functional Finance was a late addition to MMT, since this ideas were not known by MMTers in the mid-1990s or so. I think that the original source for the Functional Finance story was Ed Nell, who organized a conference at the New School back in 1997, I think, with Bob Eisner, and many other Old Keynesians. I had read Abba Lerner and Evsey Domar foundational papers in Ed's classes, and I think his influence on MMTers in this area is reasonable to assume.

Let me start with Paul Krugman's critiques of MMT, which have been clear and perhaps the most widely read (but there are many, including critiques by Tom Palley and Sergio Cesaratto here in the blog). So Krugman, in one of his most recent posts, starts by showing that there are many levels of the fiscal deficits that are compatible with full employment (not sure who thinks that this is wrong; I would add the same is true about the rate of interest, and that there is no natural or neutral rate of interest, a point that Keynes made back in the 1930s, and that is coherent with the capital debates, and, hopefully, it will be clear why this is relevant below). Then he argues more problematically, in my view, that crowding out is a serious concern, in his words: "The question then becomes one of tradeoffs: would the things the government could buy with a higher deficit be worth the lost private investment due to a higher interest rate?" But he knows well that the crowding out effect is empirically (if not theoretically) irrelevant, since investment is not particularly responsive to interest rates (he knows it's all about the accelerator); then he moves to the issue of the natural rate itself.

He seems to think two things (he can certainly correct me if I'm wrong). One, that MMT requires that you use monetary policy in order to achieve full employment. Two, that if you are in a situation of like the zero-lower bound, then the central bank cannot bring you back to full employment. That is, her assume that, using his own graph, the economy would be in position A.

Note that by his own argument you can go back to a point like B, with full employment by pursuing expansionary fiscal policy (be that an ELR or something else like traditional fiscal policy to expand infrastructure spending, for example; on this I should say that Randy suggested that he thinks traditional fiscal policy might be inflationary, and that's something perhaps would be compatible with Krugman; he noted how Minsky suggested that an ELR can be used as a buffer to control inflation). That is the IS would move up.

So it's unclear what the fuss is all about. If it is because the Fed could, in the MMT story (not sure Functional Finance authors would say that), print money to finance the deficits and bring the economy back to full employment, then the concern might be that it would be inflationary, in a Monetarist sense that printing money might be the cause of inflation. But that does not seem to be his preoccupation (I dealt with the issue of monetization of debt back in May 2011 in a reply to Krugman, who was back then, not surprisingly, criticizing MMT). His concern seems to be that the rate of interest would not go up. But of course, there could be a flat interest rate close to zero, a horizontal monetary policy (MP) line, and the expansion of the IS could be achieved bringing the economy to full employment (right below the C and B points with a zero interest rate).

But that doesn't seem to be the issue either. My guess is that he thinks that the problems is more like the one below, from an older post by him, in which the natural rate of interest is negative (my discussion of that here), and the Fed cannot lead the economy to full employment.

So his point is that the Fed cannot make it because it cannot bring the economy to the natural rate of interest, the one that is compatible with full employment and stable prices. He then goes on to criticize Stephanie on her critique of the natural rate, and tells us that: "So what purpose does claiming that the natural rate is a meaningless concept serve? It looks to me like sophistry – word games intended to confuse what should be a simple issue."

I'm not sure what Stephanie said about the natural rate, but I think it is well-established that the natural rate concept is problematic (note that on this some MMTers have said things I would disagree;  e.g. Forstater and Mosler suggest here that the natural rate of interest is zero; my discussion of that here). So I think the position that Krugman attributes to her is correct. Paul Samuelson would agree, as he did when he admitted that the capital debates had shown that neoclassical parables cannot hold (on the capital debates read this old post). So let me explain it briefly. There is no sophistry, just pure logic.

The capital debates show that with factor price reversals, when one good can be said to be capital-intensive at one level of the wage-profit ratio, and labor intensive at another level of the same ratio, there is no monotonic inverse relation between investment and the rate of interest. The investment schedule could look like the one below (my graph), with portions that have a negative slope and some in reverse, and if savings (determined by the level of income as in Keynes' principle of effective demand, rather than a Ramsey inter-temporal model) is given as in the graph below, then there might be no natural rate of interest. Keynes was explicit about that in the General Theory. That means that the monetary authority can set the rate of interest, what Keynes referred to as the normal rate, that was conventional, and that fiscal policy can be used to bring the economy to full employment. Btw, I think that overall Krugman and Kelton agree on that. Krugman says he's defending the theory, not the policy proposals, since he thinks they agree on that.

The point is NOT that the state can do whatever it wants, even though it has a lot of space, but that at the end of the day monetary policy is central for the ability to pursue fiscal policy, and the monetary authority can keep (unless it's forced by law not to do it; and that would bring up the discussion about the rise of the neoliberal idea of independent central banks) interest rates low enough to allow for fiscal expansion without debt growing at a very fast pace. Think of Marriner Eccles during the New Deal (chairman of the Fed at that time; search the blog for more on that). This is the argument that Josh Mason did, in a different way in our session with Randy at the Easterns. Note, also, that even though politically it was acceptable for the Fed to keep interest rates low, at 2.5 percent during the Depression and World War II, by the 1950s political pressures by financial markets and rentiers forced the Fed-Treasury Accord, and things changed (even though rates remained relatively low).

I'll comment briefly on two additional critiques of MMT, the one by Larry Summers, the ex-Treasury Secretary and advisor to the Clintons and Obama, and the one by Doug Henwood, an influential Marxist (see my discussion of his comments, and others, on Marx for the New York Times here), and writer of a very good book on Wall Street. I am sorry to say that both have too many arguments of authority and ad hominem attacks on some MMT authors, which I'm not interested in discussing. But there are a few substantive issues. One is the danger of inflation (that I'm glad Krugman seemed less keen on) and the others are on MMT and developing countries, and the political relevance and practicality of MMT proposals (here most critics have in mind the Bernie/Ocasio agenda of Medicare for all, cheap or free college tuition in public institutions, a jobs guarantee, and a Green New Deal).

I'll start with Henwood. His major issue is inflation, I would say. He says: "That brings us to the next problem: inflation. When the printing presses run freely, it’s not only reactionaries who think that runs the risk of spiraling prices. As I was researching this piece, many people to whom I described MMT, from Democrats to Marxists, brought it up as a worry. MMTers are coy about the topic — they never say how much is too much, and they profess great confidence in their ability to control it." Let me start by saying that inflation has not been a problem in 40 years, while wage stagnation is a central one. But if one is concerned about it, at least one should get the correct analytical tools to discuss it.

He tells us that: "The standard view of the Weimer inflation is that the German economy, severely damaged by World War I and forced to make huge reparations payments to the victors, wasn’t up to the task — it just didn’t have the productive capacity, and its citizens were both unwilling and unable to pay the necessary taxes. So instead the government just printed money and spent it, not only to pay its own bills, but to support bank lending to the private sector." First, that's NOT the standard view of the hyperinflation in Germany. You can read here the standard story, and I cite even a conservative historian like Niall Ferguson admitting that the monetarist story embraced by Henwood is NOT the dominant view among historians. The notion that the economy was at full capacity (didn't have productive capacity) and that printing money caused inflation is what Cagan thought about it. A more refined and somewhat structural story is the dominant view actually. In my view, it is clear that debt in foreign currency (not domestic), and, hence, the external problems of the current account, that forced depreciation, together with wage resistance are at the core of the hyper., German and many others.

In addition, it's worth emphasizing that the US is not Weimar Germany, in the sense that even with much larger fiscal deficits, debt would still be in domestic currency, and no significant pressure for depreciation would arise. The role of the dollar as reserve currency is not really under significant jeopardy. Certainly, there might be questions of inflation if we reach full employment, and that's a different issue (I'll come back to the topic below when I discuss Summers and the political feasibility of MMT sponsored plans). But the kind of alarmism of even suggesting that the US would be on the verge of hyperinflation is not serious. I won't comment on other primary mistakes like the notion that the rise of Nazism is associated to the hyper, when it is clearly connected to the Depression and deflation a decade later.

Henwood is on firmer ground, actually, when he discusses the external limits. Yes, indeed, for most developing countries like Argentina or Brazil, the ability to pursue expansionary fiscal policy is severely limited by the balance of payments constraint. Considerably before full employment, the patterns of consumption and investment may require too many imports, particularly of intermediary and capital goods, and even with capital controls, interest rates might be hiked to avoid capital flight and depreciation. Depreciation does solve the external problem, often by throwing the economy in a recession, and not because it stimulates exports. There is extensive discussion of that in the blog about it. Sometimes MMTers sounded like New Developmentalists in Latin American suggesting that depreciation would solve the external constraint and that capital controls were not even necessary. I don't think Randy believes that (or Stephanie), but it was certainly something that Warren Mosler believed in the past (whether he changed his mind I can't tell). But again the debate seems to be about the feasibility of MMT in the US (that's why I didn't emphasize in my comments on the roundtable the differences of debt in domestic and foreign currency, something I always do, as noted by Josh).

So that leads me to the last critique, the one by Larry Summers in his recent piece in WAPO. Summers says that: "Modern monetary theory... is the supply-side economics of our time" and that "these new ideas [about the importance of fiscal deficits] are being oversimplified and exaggerated by fringe economists who hold them out as offering the proverbial free lunch: the ability of the government to spend more without imposing any burden on anyone." He also says in Monetarist fashion that printing money would lead to hyperinflation. In his words: "As the experience of any number of emerging markets demonstrates, past a certain point, this approach leads to hyperinflation. Indeed, in emerging markets that have practiced modern monetary theory, situations could arise where people could buy two drinks at bars at once to avoid the hourly price increases. As with any tax, there is a limit to the amount of revenue that can be raised via such an inflation tax. If this limit is exceeded, hyperinflation will result." Again, emerging markets, like Germany, borrowed in foreign currency, that they cannot print. It was often the depreciation of the currency, the increase in the prices of imported goods, and the wage resistance of workers that led to hypers, and the central bank printed money afterwards, with money being endogenous. A foreign debt or external problem, not a fiscal one.

But there might be a danger of inflation (not hyper) if Bernie wins the election and manages to pass Medicare for all, free college, a Job Guarantee and actually spend some money on infrastructure, and to do something about global warming, without significant reshuffling of spending. Here is where I think the question of the supposed naïveté  of MMTers comes to play, with Henwood suggesting that they shirk the question of fiscal choices, and with Summers saying they resemble voodoo economics, the supply-side of the left (mind you supply-siders are many things, but certainly not naïve). I think, first of all, that the dangers of inflation are exaggerated, for several reasons. First, the labor market is not as tight as normally suggested. The number of people discouraged and out of the labor force is relatively large. Second, there are positive effects of growth on productivity (the Kaldor-Verdoorn effect, search on the blog too), so the supply constraint is not fixed, rigid at one given level (people said the natural rate of unemployment was 5 percent or higher just a few years back; again check past blog posts). Third, the bargaining power of unions, and workers in general, is not particularly strong, and it would take sometime to pick up.

More importantly, there is no chance that a Bernie presidency (and that's in and of itself a big if) would have both houses and could implement even a little bit of the program presented. Mind you if it happened we would probably get to full employment in a couple of years, and get increases in wages, and perhaps some inflation. But some inflation might be good, in particular if it allows for higher real wages, something sorely needed. How much inflation? Difficult to say, but the structure of the Fed is not going to vanish, and higher rates would be used to discipline the labor class, with the support of many neoliberal Dems. The limit will come probably before full employment and the capacity limit of the economy is reached (yes inflation happens before the capacity limit, because it's often cost push, and the sort of demand pull stuff Summers and Henwood are afraid about is not that common). In other words, the limits to fiscal expansion would be political, not economic, and there is no reason for the left to be up in arms against an imaginary enemy. Hyperinflation is like the the windmills for the Quijote. The giants to attack are actually the ones pointed out in the progressive agenda, like lack of spending on health, education and the environment, and MMTers have been instrumental in getting these ideas in the political discourse, and moving the Dems to the left.

But taxes matter too. Here is where the MMTers refusal to acknowledge that taxes on the wealthy are necessary is a political mistake (not all I've been told, but some for sure, as I've heard that criticism). Note that from the logical point of view they are not incorrect in suggesting that causality goes from spending to taxes, like it goes from investment to savings. It's implicit in the Keynesian/Kaleckian model in which autonomous spending (government spending is in there) determines income through a multiplier process. And taxes, like savings, grow with income. But it is important to note that politically (again this is not analytically, but politically) countries that went for a more ample Welfare State opted to tax their citizens, particularly their more wealthy citizens, at a higher rate. Tax increases on the wealthy should be (and are) part of the progressive agenda. It has an important distributive effect, and it makes the spending politically acceptable. At this juncture, however, even Blanchard says that we should just borrow, since interest rates are low, and will remain low.

The crucial point is that overall MMTers have been helpful in moving the Dems in the right direction (the right direction is to the left), and that is a good thing. The problem with Dems is not the existence of a few social democrats or socialists in their midst. In fact, even being generous there will probably be just three democratic socialists in the presidential primaries (Bernie, and, perhaps, Warren and Tulsi). The problem is the vast majority of neoliberals that still dominate the party. The same could be said about MMT. The problem is not the exaggerated propositions of MMTers, but the excessive fear of inflation when there are too many relevant problems to be concerned with.

Galbraith versus Piketty on Inequality

A new paper by James k. Galbraith has been published in Development & Change. It's along the lines of his arguments in the Godley-Tobin Lecture delivered earlier this year, and to be published in the Review of Keynesian Economics (ROKE) in January. Basically, we need a macro story for inequality (which Piketty r-g framework tries, but ultimately fail to provide) and that the payroll data that Galbraith uses provides a more accurate measure of inequality than the tax records favored by Piketty and his co-authors.

From the abstract:

This article reviews the World Inequality Report 2018, a large collaborative data project based on the work of Thomas Piketty and the late Anthony Atkinson, which critiques the entire literature of inequality measurement from survey data and purports to provide superior, unprecedented and reliable coverage of income and wealth inequalities over the entire world, based primarily on tax records. The article examines three major issues: the coverage provided by tax data in the world economy, the consistency of tax data with other sources of information on income inequality, and the peculiarities of tax‐based measurement of inequality in the United States. Then a comparison is made with measures drawn from other forms of administrative data — specifically payroll records — which are generally more consistent with records of inequality measured in household surveys than are tax records. Following this, the article discusses the analysis of wealth and wealth inequality before offering a few closing remarks about policy.

Read full paper here. 

Jamie Galbraith on Robert Skidelsky's new book Money and Government

The review was just published in American Affairs.

The Past and Future of Political Economy

by James K. Galbraith

In this remarkable work, Robert Skidelsky—historian, biographer, and tribune of Keynesian ideas in the House of Lords—unites his experience, knowledge, and talents in a sweeping account of money and power. His topic is not money and power in the familiar (one might say Trumpish) sense of the use of one to obtain the other. Rather, he presents an intellectual history of the control over money as an instrument of state power.

Whether money ought to be conceived as such an instrument is a matter of historic controversy and remains a contested theme in political economy. On one side are those who justify government control over money as a tool of policy: mercantilists, imperialists, war-fighters (as a point of practical necessity), and the followers of John Maynard Keynes. On the other side we find those seeking a stable, automatic, rule-bound economy, independent of politics and in the effective service of creditors over debtors, rich over poor. Here we find David Ricardo, Irving Fisher, Milton Friedman, and—until mugged by reality in 2008—Ben Bernanke. This is the battleground of silver against gold, of bank credit versus specie, of easy money versus tight, of full employment against inflation-targeting as the prime goal of policy. Money and Government brings these battles and their principals into crisp focus over centuries of mostly British but also American political economy.

Read rest here.

The Godley-Tobin Lecture

Tobin and Godley

The Review of Keynesian Economics (ROKE) created of the Godley-Tobin Lectures, an annual lecture to be delivered at the Eastern Economic Association meetings. James Galbraith provided the first lecture, to be published in the first issue of 2019.

Wynne Godley and James Tobin represent the best among Keynesian economists. Both scholars insisted they were non-hyphenated Keynesians, meaning Keynesianism transcends the political disputes that often accompany economics. There is a deeper scientific validity to Keynesianism, something we reaffirmed in our inaugural statement of purpose for ROKE [see Palley, Rochon, and Vernengo, 2012].

Wynne Godley was an Oxford-trained economist, influenced by Philip Andrews and the views of the Oxford Economic Research Group on full-cost pricing. He was also a Treasury economist and Head of the Department of Applied Economics, University of Cambridge. He is remembered for the sophistication of his stock-flow consistent macroeconomic models that gave him a prescient sense of the unsustainability of the dot.com and housing bubbles in the 1990s and 2000s. Godley died in May, 2010.

James Tobin was educated at Harvard University and spent most of his career at Yale University. He was also a member of the celebrated Council of Economic Advisers (1961-62), during the Kennedy administration. His accomplishments and contributions to the profession are too many to cite, but it is specifically worth mentioning that he won both the John Bates Clark Medal (1955) and the Nobel Memorial Prize in Economic Sciences (1981). Tobin died in March, 2002.

Tobin and Godley shared an interest in stock–flow consistent macroeconomic modelling, a belief in the appropriateness of macroeconomic modelling based on aggregate functions rather than microeconomic parable models, and a belief in the importance and feasibility of full employment.

The Godley-Tobin lectures are intended to celebrate the intellectual achievements of Wynne Godley and James Tobin. We also hope the lectures will contribute to advancing their macroeconomic approach and interests, and help rescue macroeconomics from the narrow theoretical frame within which it is currently trapped.

The editors of ROKE [Tom Palley and yours truly] are pleased to announce that Robert Rowthorn has accepted to give the second annual Godley-Tobin lecture at the 2019 meetings of the Eastern Economic Association, in New York City. Professor Rowthorn is Emeritus Professor of Economics at Cambridge University and a life Fellow of King’s College.

He was also a long-time colleague of Wynne Godley at Cambridge University.

The Godley-Tobin Lecture by James K. Galbraith

Presenting the Lecture

Here is the audio file of Jamie Galbraith inaugural Godley-Tobin Lecture. Due to the weather he recorded the lecture before hand. The paper will appear in the Review of Keynesian Economics (ROKE) soon. Jamie presents a macro discussion of income distribution, which he correctly points out has been absent from most discussion of inequality in recent times.

Further, he connects his concern with the data (the UNIDO data that his team at UTIP has worked on for years now) to Wynne Godley's preoccupation with data consistency and accuracy. He also noted that James Tobin's preoccupation with the role of monetary variables, which Wynne certainly admired, is central to understand global inequality. We were very happy to have Jamie give the inaugural lecture, not just because we expected a great presentation, but more importantly because having interacted with both Godley, at the Levy, and with Tobin, at Yale and while he was in the staff at the US Congress, he was in a unique position to provide a thoughtful evaluation of their importance for what I referred (following Wynne) non-hyphenated Keynesianism to the understanding of economics.

The inaugural Godley – Tobin Memorial Lecture

The inaugural Godley – Tobin Memorial Lecture at the Eastern Economic Association meetings in Boston on Saturday March 3, 11.30am – 12.50pm. The lecture pays tribute to both Godley and Tobin's emphasis on being non-hyphenated Keynesians (more on that for a later post).

The lecture is sponsored by the Review of Keynesian Economics (ROKE) and will be delivered by Professor James K. Galbraith, whose talk is titled “A global macroeconomics – Yes, macroeconomics damn it – of inequality and income distribution.”

It will be held in Gardner A & B of the Boston Sheraton. If you are attending the EEA meetings, I hope you will attend.

Godley-Tobin Lecture at the EEA in Boston

James k. Galbraith on inequality at the EEA in Boston. Don't miss it!

Sunday Reading: Economic Letters of Note

Rick Holt edited a superb book with John Kenneth Galbraith's letters from the 1930s until his death in 2006. He wrote to everybody, friend and foe, and displays his usual wit. Here I reproduce parts of his letter to Joan Robinson, that he wrote after having invited her to give the Ely Lecture (subscription required).

The letter is from January 12, 1972. It says:

Dear Joan:

Many thanks for your note. If the meetings were slightly less stuffy and neoclassical than usual, it was owing more to you than to anyone else...

The president of the Association, as I think I said once in New Orleans, has powers closely paralleling the President of Italy, but perhaps less. Indeed this is the way in which all establishments maintain themselves. One diffuses power through people who are reliably like of mind. But I hope to have some slight influence on the Journals, and I'm going to make a particularly determined effort to revise hiring practices in the profession... A good deal has been done in the past couple of years to put the problems of the black and Spanish-speaking minorities on the professional conscience. Discrimination against women remains in some degree the most blatant.

Would you... write me a little more complete observation and complaint... Sometimes the knowledge of an unsatisfied clientele produces some results.

Love, 

John Kenneth Galbraith

I was lucky to see Galbraith give a talk (subscription required) at the New School back in November 1998. Great book. Buy two copies!

The Godley-Tobin Lectures

The Review of Keynesian Economics (ROKE) is honored to announce the creation of the Godley-Tobin Lectures, an annual lecture to be delivered at the Eastern Economic Association meetings.

Wynne Godley and James Tobin represent the best among Keynesian economists. Both scholars insisted they were non-hyphenated Keynesians, meaning Keynesianism transcends the political disputes that often accompany economics. There is a deeper scientific validity to Keynesianism, something we reaffirmed in our inaugural statement of purpose for ROKE [see Palley, Rochon, and Vernengo, 2012].

Wynne Godley was an Oxford-trained economist, influenced by Philip Andrews and the views of the Oxford Economic Research Group on full-cost pricing. He was also a Treasury economist and Head of the Department of Applied Economics, University of Cambridge. He is remembered for the sophistication of his stock-flow consistent macroeconomic models that gave him a prescient sense of the unsustainability of the dot.com and housing bubbles in the 1990s and 2000s. Godley died in May, 2010.

James Tobin was educated at Harvard University and spent most of his career at Yale University. He was also a member of the celebrated Council of Economic Advisers (1961-62), during the Kennedy administration. His accomplishments and contributions to the profession are too many to cite, but it is specifically worth mentioning that he won both the John Bates Clark Medal (1955) and the Nobel Memorial Prize in Economic Sciences (1981). Tobin died in March, 2002.

Tobin and Godley shared an interest in stock–flow consistent macroeconomic modelling, a belief in the appropriateness of macroeconomic modelling based on aggregate functions rather than microeconomic parable models, and a belief in the importance and feasibility of full employment.

The Godley-Tobin lectures are intended to celebrate the intellectual achievements of Wynne Godley and James Tobin. We also hope the lectures will contribute to advancing their macroeconomic approach and interests, and help rescue macroeconomics from the narrow theoretical frame within which it is currently trapped.

As the Editors of ROKE, we are also pleased to announce that James K. Galbraith has accepted to give the inaugural Godley-Tobin Lecture, at the 2018 meetings of the Eastern Economic Association in Boston. Professor Galbraith will also join the Editorial Board of the journal.

James K. Galbraith was a colleague of Wynne Godley at the Levy Economics Institute and a student of James Tobin at Yale University.

Thomas Palley, Louis-Philippe Rochon and Matías Vernengo
Co-editors of ROKE

Will Trumponomics be expansionary?

Deficit vultures

A few days ago, Trump announced South Carolina Rep. Mick Mulvaney to be the director of the Office of Management and Budget. He is a Tea Party nut (he was for Rand Paul, and might have libertarian tendencies), and more importantly a fiscal hawk, and for a balanced budget amendment. Mulvaney is really for cutting spending, including, somewhat surprisingly, military spending, even if he thinks that defense is the first priority of the federal government.

So this has created a certain uncertainty about what direction fiscal policy will take in the next administration. Tyler Durden at Zero Hedge has said that: "it is difficult to reconcile this appointment, with the market's increasingly conventional view of Trump as an "out of control" spender." I may be wrong, but I think Mulvaney would be as adept to balanced budget, and strict debt-ceiling limits as a budget director, as an old fashioned tax and spend Democrat. But without the taxes, of course. So I still believe that there will be an increase in deficits, and it's likely that defense and infrastructure spending increase, while taxes, for corporations and the wealthy go down.

Trumponomics is Reaganomics. And as much as fiscal hawks preach the advantages of low deficits, and reduced spending (on entitlements), they do increase both once in power. By the way, I do expect an assault on entitlements. I don't believe that the deep convictions about debt management are in general. It's basically strict fiscal rules for Dems, and loose rules and pork barrel spending for the right wingers. It's predatory capitalism, as Jamie Galbraith would call it. Another interesting nugget in the Durden post, is that Mulvaney is in favor of full privatization of Freddy and Fannie, something that I'm sure would be okay with real state broker in chief.

Galbraith's intro and Global Security Panel

EPS Symposium: Policy Challenges for the New US President: Global Security: Russia, China, Europe and Latin America from Thea Harvey on Vimeo.