How unwieldy is your bureaucracy?

The economic reporting on the New York Times is not always very sharp, to say the least. If you read Dean Baker's Beat the Press you should know. Their reporting on Latin America is not much better, I should add. So it's no surprise that their reporting on the economies of the region is weak and a bit biased. Simon Romero tells us recently that in Brazil's "once-booming economy stalls, ... [and] 'super salaries, as they have become known here, are feeding newfound resentment over inequality in the nation’s unwieldy bureaucracies." The piece is on the high wages of some public sector workers in Brazil.

Note that Brazil's economy has not boomed since the early 1980s. Yes it grew fast right after the 2009 recession (7.5% in 2010) because of expansionary fiscal policy, but the reversal of the fiscal stimulus has led to less than 1% growth last year. Between 2003 and 2011 average growth rate was 3.9% (3.6% between 2003 and 2012), good but not a booming economy by any means. But that's fine, the confusion about Brazil's performance is quite common, in fact.

So how large is the public sector bureaucracy in Brazil? According to ILO's LABORSTA total government employment in 2009 was around 10.2 million workers, for a population of slightly less than 200 million. So close to 5.1% of the population. In the US, according to the same source, approximately 22.5 million workers out of a population of close to 310 millions in 2010 were in the public sector. In other words, around 7.2% of the population are public sector employees. And remember that in the US that would be only the civilian public sector employees. If you add the military, which is much larger in the US than in Brazil, then the Brazilian bureaucracy is not that unwieldy. Not particularly large or complex.

But yes the article shows that some workers make huge amounts of money. But is that the norm? Using again the same data source, for the year 2002 (the last one in the series) the ratio of public administration to financial sector wages in Brazil was 0.5, while the comparable number for high income countries would be closer to 0.8 (see this IMF paper for more comparisons). In other words, public sector workers in Brazil on average make less than comparable workers in developed countries. Put clearly, the public sector is not large and its workers are not overpaid.

Don't get me wrong inequality is a problem in Brazil, and corruption, if there is any (which is what the piece suggests), and lack of transparency should also be combatted. But the idea that inequality in Brazil is caused by the high wages of a few public employees, or that this is what is behind the poor economic performance in Brazil is a joke.

The roots of inequality in Brazil run deep (even though inequality fell in the last few years), and if anything is associated with real wages that are too low, public and private sector alike. Median wages have increased only slowly, while minimum wages have grown at a more healthy speed during the Workers' Party administrations. Growth has stalled because fiscal and monetary policy have been tight, even if the latter has loosened a bit in the last year and half. It is time for the reporters at the 'Grey Lady' to stop demonizing the public sector as the cause of all problems. Reagan was wrong, government sometimes is the solution not the problem.

A Global New Deal: Three lessons from Argentina

As noted by Richard Kozul-Wright and Jayati Ghosh finance-led globalization has failed. In Argentina we discovered that early on, having applied all the reforms of the Washington Consensus by the early 1990s, only to fail spectacularly in 2001-2. Our crisis was worse than the one during the Great Depression, and preceded the Great Recession by 6 years, which put us on the path of reforming the reforms relatively early. In fact, I suggest that certain lessons from the recent Argentine experience would be valuable for the construction of "a global new deal allowing different economic strategies providing benefits for all."

The first fundamental lesson from the Argentine experience is that foreign debt should be maintained to a minimum, and that negotiations with creditors have to be on the basis of ability to pay, putting the well being of the population ahead of interest payments. It is important to note that the default and restructuring of debt obligations is a normal procedure in capitalist economies. Argentina took advantage of the inevitable situation to promote a significant reduction of foreign obligations. Austerity measures at home could be reversed, as a result, and conditional transfers allowed for a rapid reduction of extreme poverty.

Note that even after successful renegotiation and resumption of payments, Argentina has not been free from harassment. Vulture Funds have been able to, at least temporarily, seize Argentine property, the International Monetary Fund (IMF) has recently menaced with the possibility of expulsion, and Credit rating Agencies still have the power to treat Argentina debt as junk. For that reason a New Deal must strengthen the position of debtor countries, reduce the power of Vulture Funds and other bad citizens of the international financial community, increase the voice of developing and debtor countries within the IMF, and create an international rating agency that is not captured by financial interests of creditors.

A second fundamental lesson from Argentina is that ... Read the rest here.

Yellen to Washington, D.C.: Fiscal Austerity Slows Recovery

By Thomas I. Palley

Last Monday, Federal Reserve Vice-Chair Janet Yellen gave the keynote speech at an AFL-CIO economic policy conference on restoring shared prosperity.

Dr. Yellen began by noting that the Federal Reserve “is the only agency assigned the job of pursuing maximum employment.” She then went on to acknowledge “the gulf between maximum employment and the very difficult conditions workers face today.” That gulf is the reason behind the Federal Reserve’s on-going actions to strengthen the recovery and why there is continued need for “forceful action to increase the pace of economic growth and job creation.”

Read the rest here.

The New Issue of ROKE is Out

You can get the papers here. There is a critical review of Michael Cohen's book on the Argentine economy after the default that I wrote, also available here.

Fiscal expansion, what fiscal expansion?

The data on Federal spending since 2000 can be a little surprising. The graph below shows real federal government spending since 2000 (blue line). Note that the expansion from 2000 to 2008, from the last year of Clinton to the last of Bush, was of around 35%. The increase from the last year in the Bush administration up to last year, the last in Obama's first mandate, of slightly less than 20%, most of it in 2009.

The problem is that State and Local spending has decreased (red and green), so overall the increase since the recession (2007-8) has not been particularly large. The type of spending is also relevant to understand the effects on the economy as a whole. In the Bush years the biggest expansion was on defense, while in the Obama administration welfare spending has increased the most as a result of the crisis. Mind you, spending on welfare has decreased since the beginning of the recovery, while military spending slowed down, but has still continued to increase.

Lost in translation

Reading a paper by Luigi Pasinetti (2001, p. 153)* on the evolution of Sraffa's thought. There I found this gem from Sraffa's archived (and not published yet) papers:

"It is terrific to contemplate the abysmal gulf of incomprehension that has opened itself between us and the classical economists. Only one century separates us from them: [then the following sentence, here reproduced in italics, is added as a footnote] I say a century; but even ½ a century after, in 1870, they did not understand it. And during the preceding century an obscure process of ‘disunderstanding’ had been going on. How can we imagine to understand the Greeks and the Romans? [then the following sentence, again here reproduced in italics, is added as a footnote] Or rather, the extraordinary thing is that we do understand, since we find them perfect, Roman law and Greek philosophy. The classical economists said things which were perfectly true, even according to our standards of truth: they expressed them very clearly, in terse and unambiguous language, as is proved by the fact that they perfectly understood each other. We don’t understand a word of what they said: has their language been lost? Obviously not, as the English of Adam Smith is what people talk today in this country. What has happened then?"

This is exactly why HESA students in Utah have a T-shirt that says: "I've read Adam Smith, and understood it."

* Pasinetti, L. (2001), "Continuity and Change in Sraffa’s Thought: an Archival Excursus," in T. Cozzi and R. Marchionatti (eds.), Piero Sraffa’s Political Economy: a Centenary Estimate, London: Routledge.

And Now for Something Completely Different

Robert Paul Wolff, Emeritus Professor of Philosophy and African American Studies at UMass, has a great series of posts (still ongoing, first one here) on what he has being doing, which describes the evolution of his research on Marxist economics. In his last installment he says that:

"A good deal of Theology, Philosophy, History, Political Science, Sociology, Anthropology, and of course Economics is devoted to answering ... three questions.

The three questions are:

1. Who Gets the Surplus?
2. How do the Surplus Getters get the Surplus? and
3. What do the Surplus Getters do With the Surplus After They Get It?"

This suggests that the surplus approach is actually the unifying theme of social sciences. Seems about right.

PS: Of course modern mainstream economics has abandoned the notion of the surplus, and has tried (still is trying with some degree of success, I might add) to colonize other social sciences.

A New Deal for Global Development

An e-discussion group on development strategies after the Millennium Development Goals (MDGs) co-organized by Richard Kozul-Wright and Jayati Ghosh is available here. They also published a manifesto for a New Deal for Global Development here. There lots of discussions and blog posts (e.g. Butch Montes, Dani Rodrik, and yours truly). Check it out.

Palley on Modern Money Tree (MMT) economics

Tom Palley published a new paper on MMT, available here. From the abstract:

Money, fiscal policy, and interest rates: A critique of Modern Monetary Theory 

This paper excavates the set of ideas known as modern monetary theory (MMT). The principal conclusion is that the macroeconomics of MMT is a restatement of elementary well-understood Keynesian macroeconomics. There is nothing new in MMT’s construction of monetary macroeconomics that warrants the distinct nomenclature of MMT. Moreover, MMT over-simplifies the challenges of attaining non-inflationary full employment by ignoring the dilemmas posed by Phillips curve analysis; the dilemmas associated with maintaining real and financial sector stability; and the dilemmas confronting open economies. Its policy recommendations also rest on over-simplistic analysis that takes little account of political economy difficulties, and its interest rate policy recommendation would likely generate instability. At this time of high unemployment, when too many policymakers are being drawn toward mistaken fiscal austerity, MMT’s polemic on behalf of expansionary fiscal policy is useful. However, that does not justify turning a blind eye to MMT’s oversimplifications of macroeconomic theory and policy.

While agreeing on many theoretical principles the paper suggests that oversimplification limits the understanding of the complexities of policy making.

Heterodox Central Bankers

"Virtually every monetary economist believes that the CB [Central Bank] can control the monetary base and…the broader monetary aggregates as well. Almost all of those who have worked in a CB believe that this view is totally mistaken…"

Charles Goodhart (1994, p.1424).

Goodhart, C. A. E. (1994) "What should central banks do? What should be their macroeconomic objectives and operations," Economic Journal, 104, November, pp. 1424-36.

Price controls and horseshit

Argentina has announced that informal price controls will be in place for the next few months. A good thing if you ask me. Yet, you can expect a barrage of criticism about the inefficiency of price controls in the media, and by 'expert' economists to follow. Note, however, that from 1941 to 1946, during World War II, the United States applied a very successful program of price controls. A good description can be found in John Kenneth Galbraith's A Theory of Price Control, in which he describes his experience as Commissioner of Prices.

An interesting story Galbraith used to tell (see here) is that they would have a sign to tell when some industrialist that wanted to hike prices tried to suggest that he would go broke if that didn't happen. They would move their index and middle fingers like the antennas of ants. The story went that this little ant rolled a dung of horseshit up a mound, and when it lost control of it, and the dung rolled down in the direction of the anthill, all the ants nervously signaled each other (moving their antennas) to "stop that horseshit."

Prices increased on average 5.8% annually between 1941 and 1946 (they accelerated a bit in 1947, after price controls were lifted, but didn't get out of control). Note that the rate of unemployment was at very low levels reaching 1.2% in 1944. This is not to say that all price control systems work perfectly, but that under certain circumstances they might be a useful way of controlling inflation.

PS: By the way, the US had an extensive bureaucratic machine to enforce the application of price controls. Also, certain shortages were considered acceptable during a war period. But note that similarly certain shortages should be normal in a developing country with a balance of payments constraint.

Seneca, Selma, Stonewall and Haymarket too

In his second inaugural President Obama referred to iconic events in the history of gender, race and gay rights, putting the idea of equality at the center of his agenda. While several pundits were surprised or offended, depending on their political leanings, with the liberalism of Obama’s discourse, and a few noted the momentous effect of pairing gay rights with gender and race, nobody (at least to my knowledge) complained about the conspicuous absence of workers’ rights.

Okay so maybe citing the notorious Haymarket riot and the martyrs of the Knights of Labor was too much to expect from an American president. In fact, Samuel Gompers and the American Federation of Labor (AFL), as it is well known, never had a positive view of the anarchists associated to more combative labor tactics. In part, that’s why while the whole world, knowingly or not, commemorates the Haymarket affair every May Day, Labor Day in the US is relegated to the first Monday of September. But still a nod to labor would have been essential to really claim that this is a president moving in a liberal direction.

Don’t get me wrong, I think the speech was great, and understand the difficulties of pushing a progressive agenda against a Republican party that refuses to engage in rational politics. But I’m still surprised of how low the idea of labor rights has sunk, that nobody even notices that they are not mentioned at all, this in a week in which we are told that the union membership rate was 11.3 percent, the lowest in almost a century.

Obama did talk about jobs, and the difficulties ahead, it’s true. And we should count our blessings, since things could have been much worse (not really a good campaign slogan though). The graph below shows the recovery in employment now compared with the Great Depression, and although slow, it’s clear that active fiscal and monetary policies stemmed a comparable fall in employment.

But that should not lead us to believe that thinks are all picture-perfect. Not only employment will take a long while to return to the pre-crisis level, but also the rate of unemployment (at 7.8 percent or so) is considerably higher than it is often understood. Since the late 1990s the participation rate, the number of workers in the labor force, has decreased from around 67 percent of population to less than 64 percent. In other words, discouraged workers that cannot find jobs, simply leave the labor market. If one were to recalculate the unemployment rate, but assume that those discouraged workers were still in the labor force (that is, using a participation rate similar to the late 1990s) then the level of unemployment would look like in the figure below.

 

The adjusted unemployment rate would be close to 12.5 percent. More importantly, it is clear that the labor market has been in bad shape throughout the whole 2000s. And, if anything things are getting worse for workers. The so-called “right-to-work” (RTW) laws, which are laws that prohibit unions from requiring a worker to pay dues even when the worker benefits from a union negotiated collective bargaining agreement, continue to expand, and with Michigan’s recent addition, now almost half States passed this union busting legislation. Also, restrictions on the ability of public employees to bargain collectively have been on the rise, as was prominently displayed in Wisconsin.

Note that RTW legislation seems to have a clear negative effect on real wages. If nothing else because union workers make more than non-union workers (the wage premium for union workers is 13.6 percent; see Table 4.33 in EPI’s State of Working America), and discouraging union membership then should have a negative impact on the wage mass. Note also that unionization does NOT really have a negative effect on employment (if this were true Swedes would all be unemployed), as noted by Jared Bernstein. By the way, this suggests that the evidence is that right-to-work legislation is to work creation as right to bear arms is to security of children in school. But we do live in a Doublespeak world in which job creators do not create jobs after all.

To stop this unrelenting campaign by corporations, that use State level legislation to undermine workers’ rights we need a national party willing to stand for those rights. So if not Haymarket, at least a reference to the National Labor Relations Act of 1935, the so-called Wagner Act, which protected the rights of unions, and spearheaded the prosperity of the so-called Golden Age. It’s great to expand the liberties of minorities, but it is also important not to forget that workers’ rights have been undermined by the rise of corporate power, and that work, as much as gender, race, ethnicity and sexuality, define who we are.

Originally published in Bob Pollin's Back to Full Employment Blog

How is that confidence thing working for you?

One comic strip is worth a thousand words. Nough said!