Encyclopedia of Central Banking

So LP Rochon has edited this Encyclopedia, with Sergio Rossi.

LP sent me the entry on Bretton Woods Regime, by Omar Hamouda, as a teaser.

"Bretton Woods is a location, period of history, beginning of an era in the twentieth century, birth of an international organization, but, most of all, an international monetary system to regulate trade, peg currencies to one standard, and maintain a regime of fixed exchange- rate parity.

In July 1944 at Bretton Woods, New Hampshire, 44 nations under official British and American leadership set up economic measures for post- war reconstruction. The US dollar – pegged to gold – was approved as the new monetary standard. Two new insti tutions were also established with specific tasks: the Stabilization Fund (International Monetary Fund, IMF), a “special organization” (Horsefield, 1969, p. 39), to be a watchdog facilitating and promoting trade through monetary stabilization, and the International Bank for Reconstruction and Development (World Bank), with the role of providing member nations with “necessary capital not otherwise available except possibly on too costly terms” (ibid.)."

Read rest here.

Masters of Money: BBC Documentary on Marx, Keynes, and Hayek

The one on Keynes below. I already noticed before that Hayek is not really an intellectual of the same stature of Keynes, or Marx one might add. In terms of Austrians, in fact, Schumpeter might be the only one that is on the same league (even if I disagree with almost everything he wrote, the exception being his discussion of the Tax State).

A few interesting people are interviewed. Peter Clarke and Will Hutton, for example, the former author of a really good book on the political struggle to develop Keynesian policies. They also have some less interesting ones, like Mervin King, the ex-governor of the Bank of England, and Ken Rogoff, of Rogaine and Braveheart fame, complaining of very high debt levels now which preclude the space for fiscal expansion ("there is no magic bullet," he says).

The outcome is not particularly good. The discussion of Treaty of Versailles and German hyperinflation is completely biased presenting a Monetarist interpretation that is not dominant among historians. It also spreads the myth that the fact that the New Deal helped end the Great Depression is a myth. Worse, the interpretation of Keynes is based on chapter 12 of the GT. It's also about confidence, animal spirits and uncertainty.

There is also a discussion of Bretton Woods, and although they do suggest that deficit countries could not do the whole adjustment, there is no discussion of the role of capital controls and financial regulation. Oh well.

Triffin Dilemma and the collapse of Bretton Woods

Harry Dexter White and Keynes at Bretton Woods

I had promised to post on this a while ago. According to Triffin Dilemma view the US economy could not guarantee the convertibility of dollars into gold at the fixed parity, since the supply of gold did not keep pace with the increase in the level of income in the world economy. The U.S., on the other hand, provided liquidity to the world economy, increasing the supply of dollars, to avoid creating a liquidity problem. So the ratio of dollars to gold was not fixed, and the parity was unsustainable. The excess supply of dollars caused, in this view, a confidence crisis. The Bretton Woods system failed because the fixed parity commitment was not credible, in the context of an expanding economy.

For heterodox Keynesians (I prefer the term classical-Keynesian), the abandonment of the fixed parities is not connected to the loss of credibility in the face of an expanding economy. This view emphasizes the role of financial liberalization in the collapse of the Bretton Woods regime. The use of capital controls during Bretton Woods implied that the rate of interest was in general low, to promote high employment, and the cost of reducing the remuneration of financial capital. The abandonment of the fixed parity system and the increasing mobility of capital allowed for interest rates to be kept at higher levels favoring financial interests.

In that sense, the end of Bretton Woods was, to some extent, a policy decision. Contrary to the collapse of the Gold Standard and the pound, the role of the dollar as the key currency (reserve and vehicle currency) did not end with end with the collapse of Bretton Woods. In other words, if lack of confidence in the dollar would have been the cause one would expect a run on the dollar and a new hegemonic currency to replace it.

My Bretton Woods entry for the Elgar Companion to Post Keynesian Economics can be read here, and downloaded here. There is a slightly modified entry for the 2nd edition, but I don't have a link to that one yet.

The rise of vulgar economics and the end of dissent

Funny thing, the rise of vulgar economics, which I discussed before (here, here, and here; see also this and this papers for more on the topic) didn't just lead to the ostracism of heterodox approaches to economics. It also led to a significant decrease in the debate within the mainstream. Or at least is what the figure below, from the interesting blog post by Joe Francis, seems to indicate. At some point in the 1960s, more than 20% of the papers in the main journals were a reply, a comment or a rejoinder to the work of someone else. Not anymore.

It is clear that the Great Depression and the Keynesian Revolution seemed to increase debate within the mainstream, and that, as Joe says, the: "decline in debate... appears to have been associated with the emergence of a ‘neoliberal’ hegemony from the 1970s onwards." That's essentially correct.

And the decline in debate explains why Lucas could say in the early 1980s that: "at research seminars, people don't take Keynesian theorizing seriously anymore; the audience starts to whisper and giggle to one another." And also why if you wanted to publish you basically had to accept the crazy New Classical models. Krugman admitted to that before, as I've already noticed. He argued that: “the only way to get non-crazy macroeconomics published was to wrap sensible assumptions about output and employment in something else, something that involved rational expectations and intertemporal stuff and made the paper respectable.” You must remember, you don't publish, you don't get tenure. So crazy models became the norm.

Not only heterodox economists were kicked out of mainstream departments, and had to create their own journals in the 1970s, but also the pressure within the mainstream to conform and silence dissent was strong indeed. Note that many, like Blanchard and Woodford for example, in the mainstream continue to suggest that there is a lot of consensus between New Keynesians, and Real Business Cycles types. In fact, they say there is more agreement now than in the 1970s. How is the consensus methodology in macroeconomics, you ask. From Blanchard's paper above:

"To caricature, but only slightly: A macroeconomic article today often follows strict, haiku-like, rules: It starts from a general equilibrium structure, in which individuals maximize the expected present value of utility, firms maximize their value, and markets clear. Then, it introduces a twist, be it an imperfection or the closing of a particular set of markets, and works out the general equilibrium implications. It then performs a numerical simulation, based on calibration, showing that the model performs well. It ends with a welfare assessment."

And yes that is also the basis of New Keynesian models. The haiku basically describes the crazy models in which reasonable results must be disguised if you're to be taken seriously in academia. When everybody agrees, there is little need for debate. And you get stuck with crazy models. The lack of debate within the mainstream to this day is also, in part, what provides support for austerity policies around the globe, even when it is clear that they have failed.

Mitchell and Clark on the business cycles

Starting my seminar on business cycles this week. Mainly theories and then a discussion of both Great Depression and Recession. In the US the original authority, and the intellectual driving force of the analysis of the cycle which started at the National Bureau of Economic Research (NBER), was undoubtedly Wesley Clair Mitchell. The figure above comes from an early analysis of global cycles published in the New York Times back in 1926 (subscription required). The Times quotes him saying that there was: "a trend in the direction of a world economy in which all nations will prosper or suffer together." In other words, a tendency to a global cycle.

In fact, Mitchell is often remembered more as a founder of the NBER and of the quantification of business cycles than his role as a disciple of Veblen and a founder of American Institutionalism.* His institutionalism, however, is often reduced to empiricism. In other words, Mitchell generally is not considered as a theorist. Howard Sherman suggests (subscription required), however, that: "embedded in his theory, but not made explicit in those terms, is a theory of the multiplier and the accelerator." In other words, a Keynesian approach to the cycle.**

This is consistent with the work we published with Luca Fiorito on another institutionalist from Columbia, namely: John Maurice Clark. As we noted then, the fact that the less mechanical, and also non-neoclassical version of Keynesian ideas, basically in contrast to the so-called Neoclassical Synthesis, was relegated to secondary status in the US in part explains how Keynesianism was reduced to a simple case of rigidities and imperfections. Not surprisingly the multiplier-accelerator interaction as the basis of the cycle, even though the empirical evidence for both components is strong, is not part of the mainstream macroeconomic textbooks.

* He was also one of the founders of the New School for Social Research in 1919.

** Mind you he did write with Arthur Burns, who eventually became a Monetarist associated with Milton Friedman and the chairman of the Fed, a famous NBER book on the cycle.

Is Krugman open to debate?

So I used to post some comments on Krugman's blog, but over the last few years when I post something in it doesn't get published. The Kman likes conversation, provided nobody calls him up on his bs. So in his critique of heterodox economists he said:

"So if you [presumably heterodox economist] go around claiming that model-oriented, quantitative economics gave rise to austerity mania, you’re getting the story all wrong. Worse, you are in effect covering up for the austerians’ intellectual sins."

My comment was:

"Have the courage to publish my comments (which have been banned for years now). If you claim to be a serious person open to debate. Seriously, heterodoxy is NOT about model-oriented, quantitative economics giving rise to austerity. It is about a model that against logic and evidence suggests that the market returns to its natural rate unless there are imperfections. And in that sense, even New Keynesian like you that defend more fiscal stimulus miss the point."

Let's see if he publishes it.* Note that my point is that there are plenty of formalizations of heterodox economics [not all the same; my preferences are well known for readers of the blog, namely: effective demand in the long run with some sort of supermultiplier]. There are some heterodox authors against formalization, but also some neoclassicals (some Austrians, in particular). But the main differences between heterodox and orthodox economists are about causality and NOT about formalization. On debate and monologue in economics see this.

PS: If you want a formalized growth model as an example go here. For one on inflation here.

* Update: Shaming does work. It was published.

On the blogs

‘What are economists for? To make people laugh’: vale, Charlie Hebdo’s Bernard Maris -- Steve Kates on the late Bernard Maris, a post-Keynesian economist and victim of the attack on Charlie Hebdo

Unemployment and Productivity Growth -- JW Mason on productivity growth and Verdoorn's Law among other things

Secular stagnation: a neo-paleo-Keynesian perspective -- Roger Farmer on secular stagnation, Larry Summers' style, and neo-paleo-Keynesian economics (wow, is that a thing now?!)

Orthodoxy, Heterodoxy, and Ideology -- Krugman on orthodoxy and heterodoxy (as always he discusses something else, distorting the meaning of heterodox as being against formalization, and not the acceptance by the mainstream of the natural rate hypothesis and the need for imperfections; this was discussed here before and in many other posts)

Unemployment down, participation rate too

The Bureau of Labor Statistics has published the new Employment Situation Summary. The unemployment rate is down to 5.6%, and again (like in November 2014) more than 200K (252K in December, in fact) jobs were created (as I noted here a healthy recovery should create more or less double that number). But, at the same time, labor force participation rate edged down by 0.2%, and the employment to population ratio remained constant. The number of employed workers increased by a bit more than 110K, so now the rate of unemployment is falling both because some additional workers find jobs, but also as a result of less workers in the labor force. Not terrible, not good enough. My concern is that as we edge towards what the mainstream believes is full employment (aka the natural rate), somewhere closer to 5.2% or so, the pressure for less stimulative monetary policy (fiscal is a lost case right now) will increase.

PS: Note that average hourly earnings decreased a little bit. So no indication that we are close to full employment and wages are going up.

Sachs is wrong on Krugman and the recovery

Washed out, has-been pop icon and Bono

Jeffrey Sachs, Columbia professor and the foremost advocate for development aid to save development countries, attacks again. Back in the 1980s he was a neoliberal advisor to the governments of Bolivia (on stabilization), and Poland (on transition to a market economy, favoring the so-called 'shock therapy') among others. He was also the director of the Harvard Institute for International Development (HIID), which was basically a consultancy oriented institution, at the time of the Harvard-Russia Aid Scandal.*

Now in a recent op-ed he criticizes Krugman (and essentially anybody that believes that the current recovery in the US is not that good) on his predictions about the recovery. The argument is basically that, in spite all fears of lack of fiscal expansion, the economy has done pretty well. In his words:

For several years, and often several times a month, the Nobel laureate economist and New York Times columnist and blogger Paul Krugman has delivered one main message to his loyal readers: deficit-cutting “austerians” (as he calls advocates of fiscal austerity) are deluded. Fiscal retrenchment amid weak private demand would lead to chronically high unemployment... Yet, rather than a new recession, or an ongoing depression, the US unemployment rate has fallen from 8.6% in November 2011 to 5.8% in November 2014. Real economic growth in 2011 stood at 1.6%, and the IMF expects it to be 2.2% for 2014 as a whole. GDP in the third quarter of 2014 grew at a vigorous 5% annual rate, suggesting that aggregate growth for all of 2015 will be above 3%. So much for Krugman’s predictions.

This is not very different than the message the White House has been pushing on, he only forgot to say that the Dow Jones has hit new records. And yes GDP is recovering (and the fiscal package of 2009 was important, as well as fiscal transfers to states, which reduce the contractionary stance of local and state governments), but when you look the figure below (real GDP growth) it is clear that this recovery does not compare well with the Clinton or even Bush-II boom, which were not particularly good recoveries historically.

And that's not all. Not only the recovery is slow, but also the benefits are not evenly distributed, with employment recovering little (the unemployment rate is not the best measure in this case), as can be seen below with the employment to population ratio.

Not surprisingly real wages have not recovered much. So labor markets are weaker than what the numbers presented by Sachs suggest. Finally, note that the recovery has been so weak that many mainstream Keynesians, like Larry Summers, now are talking about secular stagnation. The ghost of Alvin Hansen is haunting mainstream economics.

* USAID gave the HIID a huge grant to advise the Russian government on privatization. The head of the team, Andrei Shleifer (and his hedge-fund wife), attempted to steal from better-qualified competitors Russia’s license to sell mutual funds, and was later sued and found guilty by the courts of conspiring to defraud the US government. Shleifer had to pay back millions and was stripped of his Whipple V.N. Jones Professor of Economic chair due to ethics violations, but it has been argued that he managed to preserve his position at the university due to cronyism, i.e. basically his close relation to Larry Summers, who was by then Harvard's President. David Warsh has told the details of the story.

Who reads the World Bank reports?

I don't. At least not regularly like I do with ECLAC, ILO, IMF and UNCTAD reports. There are a few ones that become highly controversial and had a broad readership, like the infamous East Asian Miracle Report back in 1993, written by a team that included Joseph Stiglitz, when the chief economist was Larry Summers, which presented the market-friendly approach to development, even if it made some concessions about the role of the State and industrial policy (basically saying that interventions that are market friendly are okay). The concessions to the role of State intervention were basically pushed by the Japanese government, that wanted to provide a theoretical framework more in accordance with its own development experience, and were resisted by the Bank's staff and the US. The market-friendly approach had been fully developed in the World Development Report 1991, the Bank's flagship publication.

Another World Development Report that was infamous was the 2000/2001 one. This one was on poverty, and the then chief economist Stiglitz brought Ravi Kanbur to lead the team that wrote it. The original draft gave more relevance to the empowerment of the poor than to growth (not much discussion of what causes growth, however, which would be more relevant, in my view), and it is said that Summers, US Treasury Secretary by that time, re-wrote several sections of the report. In particular, the Treasury did not want the World Bank to seem anti-globalization after the Seattle protests. Eventually Stiglitz and Kanbur resigned (Robert Wade wrote about the whole affair here).

The interesting thing is that with all this drama you would expect the readership of the World Bank reports to be huge. As it turns out, not so much.* This paper shows that:

"The World Bank invests about one-quarter of its budget for country services in knowledge products... About 13 percent of policy reports were downloaded at least 250 times while more than 31 percent of policy reports are never downloaded. Almost 87 percent of policy reports were never cited."

A lot of these are country specific reports. But given that a lot of the research is not properly autonomous, and is highly influenced by donors (meaning essentially the US Treasury), one wonders what is the purpose of the World Bank's research department.

* That is also likely true in academia, by the way. But you would expect the World Bank to have a broader readership than obscure academic journals.

Growth forecasts and Latin American underperformance

The Economist's growth forecast is out, available here. 2.9% for the global economy, somewhat below the IMF's forecast (in WEO, not sure if they updated that) of 3.8% for 2015. Map below shows that now the dual recovery is more complex. The US for one seems to be growing at a faster pace, even if the benefits are not felt by the vast majority, and the labor market is less tight than official unemployment indicates. Europe, and Japan continue basically stagnated.

On the other hand, most of the periphery will grow healthily. China's slowdown seems to be to a still impressive 7% or so. What region among the developing ones is the underperforming, you may ask. Drum roll, wait for it... yes, no surprise, Latin America [and for those that think that political instability matters a lot, note that the MENA region will do better]. On this one the IMF is in the same ballpark, as is ECLAC.

There are certainly effects from lower terms of trade, caused by lower commodity prices, but those are not evenly divided, and some countries in the region might actually benefit from lower energy costs (not the net exports of oil for sure; so Venezuela is in trouble). But not all countries in the region have been forced to slowdown for balance of payments problems. In fact, I would argue that so far this would be the exception.

While it is true that for the region as a whole the current account balance has deteriorated (as can be seen above, to around 2.3% deficit with respect to GDP; from ECLAC), it is still the case that low rates of interest in advanced economies (even in the US, if they increase, the likely scenario is that they will remain low) implies that the CA is within the sustainable range. In fact, Brazil, with a higher CA to GDP deficit than Argentina, should not have (and we are talking in the short run here) any trouble to finance its deficit even if it increased as a result of more expansionist policies (don't worry, that's not happenning anyway). And the reason Argentina (the main exception in the region) might not be able to grow more with a CA deficit that is relatively small is associated to the Vultures, and the lack of access to international financial markets (something that might or not be solved this year, which is also an election year).

So why is the region underperforming, if the CA is not in this particular circumstance a barrier to economic growth? As noted by Esteban Pérez here (and discussed here too), the problem in Latin America is that expansions tend to be weak when compared to other regions (including the last boom from 2003 to 2008). In other words, the macroeconomic stance in the boom tends to be excessively timid (sometimes outright contractionary), reducing growth in the expansionary period. This is fairly evident in the case of Brazil, where a fiscal adjustment is now in place (imposed by a left of center government without any pressure from the IMF, one might add), when the economy is almost stagnated and inflation is around the upper limit of the inflation target (6.5%), which is certainly not excessive, and unlikely to be the result of excess demand.

As I often say to my students, in Latin America we do not need the IMF anymore. We have internalized it. Many heterodox economists are for devaluation and fiscal adjustment, the old mantra of the IMF, now disguised as progressive economics. Oh well.

Samuelson as a historian of economic thought

Steven Medema, together with Anthony Waterman, has published a series of papers by the late Paul Samuelson on the history of economic thought. Note that the scale and the range is more impressive than I expected. As they say in the intro:

"Paul Samuelson once referred, self-disparagingly, to 'the 5 per cent of my published papers that deal with the history of economic science' (54, 3). But D.P. O’Brien (2007, 336) regards this as a 'significant underestimate.' Nearly 140 articles, essays, or memoirs listed at the end of this volume, appearing over a period of forty-four years from 1946 to 2009 and comprising perhaps 20 percent of his scholarly publications, are clearly identifiable as studies of the history of economic thought."

I only know a bit of his writings on the Keynesian Revolution, and on Marx, who he famously, and incorrectly in my view, labeled as a "minor post-Ricardian." Now I learn that Samuelson thought also that Ricardo, in his estimation, was "the most overrated of economists."

I suppose that his views on Ricardo help understand his reservations about Marx. Also, and so far I have read the introduction (so I am relying on the editors), he seems to side with Malthus in his debate with Ricardo. Again, that makes sense. At any rate, worth reading and more to follow.

PS: It occurs to me that Samuelson's interest in Sraffa (he wrote an entry for the 1987 edition of the Palgrave, and according to Eatwell, wanted to write the main entry), who is cited profusely in the volume, the ultimate interpreter of Ricardo (and for me of Marx too), is no coincidence. 

Internal devaluation and the Greek crisis

Last month, using the ILO's Global Wage Report, I noticed that real wages in Greece had collapsed by an outstanding 24% since 2009. Further, I suggested that my guess was that this internal devaluation was NOT the cause of the improvement in the current account (CA), which as can be seen below did in fact improve (2014 is an IMF estimate).

The question is whether real exchange rate depreciation, in this case a reduction of real wages, since the  nominal exchange rate is fixed (so to speak) with respect to other Euro countries, was a significant force behind the improvement in the CA balances.  Note that the improvement is basically all due to the collapse of imports, since the growth of exports (both shown below) has been basically zero (again 2014 figures are estimates).

Lower real wages had an impact, if they did, on demand, not in leading to higher exports associated to lower domestic costs. In other words, less demand associated to lower wages and a collapsing domestic economy is what has allowed for the rebalancing of the external accounts. If there are any doubts, below you can see the high correlation between GDP growth and the collapse in import growth.

This suggests that devaluation, be that internal as it has been so far, or external as leaving the Euro might imply, is not necessarily enough to solve the current crisis.