Virtual Forum: Economics Perspectives and Challenges in the Current Context

Virtual seminar in México, and in Spanish. To attend go to the Zoom page and register. And, yes, it should be Vernengo, with e.

New issue of ROKE is out

The April Issue of the Review of Keynesian Economics is now out. The issue contains a collection of articles covering a spectrum of important issues. It opens with a debate over New Developmentalism which pits development relying on macro prices (especially the exchange rate) against historical state-led development policies. Next, there is an article on the role of the wage share in determining exchange rates. Thereafter, there are several articles on Post Keynesian growth theory. One addresses the evolution of income and wealth inequality, while others empirically assess alternative approaches to theorizing demand growth.

Two paper are open: "A Structuralist and Institutionalist developmental assessment of and reaction to New Developmentalism" by Carlos Aguiar de Medeiros and "Making sense of Piketty's ‘fundamental laws’ in a Post-Keynesian framework: the transitional dynamics of wealth inequality" by
Stefan Ederer and Miriam Rehm.

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.

From Truncated Developmental State to Failed State in Latin America

I gave a talk last year in Argentina that forced me to think about the notion of the developmental state and its limits for Latin America. I discussed it in Mexico too, and I added a bit more about the notion of failed states, also discussed in my first presentation. This week I presented at Boston University, for the first time for a mostly English speaking audience. This is a brief summary of some of my ideas, based on those presentations.

National state formation in Latin America, during the last quarter of the 19th century, in what has been termed in the more conventional literature the 1st globalization, was related to the incorporation of the region in the networks of trade, finance, in particular in relation to the United Kingdom and the United States, and the European migratory flows.  On the other hand, the disintegration of the national states in the neoliberal period, starting with the collapse of the so-called Golden Age of Capitalism, is the result of the same necessity to promote the integration of the region in the global economy. Strong or weak state, but with the same objective, to promote the subordinate integration of the region into the global economy. It must be emphasized that it is NOT a Latin American phenomenon, and that the Failed State in the region corresponds to what James Galbraith has called the Predator State in the case of the US, which implies the use of the state to promote the private gains of corporations and the wealthy.

Neoliberalism is NOT a right-wing phenomenon, since the existence of progressive neoliberals, as denominated by Nancy Fraser, referring to left of center, or more appropriately centrists like Clinton and Obama. Right-wing and left-wing populism are to a great degree a reaction to Neoliberalism.

The concept of the developmental state is often used, but seldom analyzed more carefully. The narrative is often associated with the Asian experience in the post-war period, from Japan to China, including in particular South Korea. Conceptually the work of Chalmers Johnson, and his followers (e.g. Amsden, Chang, Evans, and Wade, to cite the most prominent) is central, building on a tradition that harks back to Friedrich List. But the logic of the developmental state is actually related to the American experience, and to the legacy of Alexander Hamilton, who was the inspiration for List, as noted by Cohen and DeLong, discussed here before. In my view, that should be extended to the British case in the 18th century, which was the ultimate inspiration for Hamilton in his 'Report on Manufactures.'

It seems reasonable that what John Brewer called the British Fiscal-Military State  (old post on that here) is the original developmental state. In my view, the central characteristic of the developmental state is its ability to borrow more or less without limit and also without the possibility of default. It is true that the British currency was effectively tied to gold from the early 1700s, but convertibility was suspended in periods of crisis like the Napoleonic Wars. At the core of the developmental state is the ability to spend, without external restrictions. It must have the hegemonic currency, or it must not have a significant shortfall of it.

Charles Tilly famous dictum according to which “war made the state, and the state made war” is correct. It must be complemented by the work by Jan Glete, which extends to the work by Roberts and Parker on the Military Revolution, and the role of a permanent navy and naval warfare in the formation of the state. Nicholas Rodger refers to the Fiscal-Naval State. War matters, but control of the sea matters even more. What is missing in Tilly, and his followers, is the peripheral state, and the relation of the latter with the developmental state. In this case, if we take the Asian case as paradigmatic, we could say that the state lost the war, and the loss made the developmental state.

The developmental state in the periphery appears in the post-war period, with the establishment of American hegemony. The reasons for the collapse of the 1st globalization are complex, but at a deeper level Charles Kindleberger suggested that the roots of the inter-war crisis, including the Great Depression, and the wars too, were associated to the decline of British hegemony and the slow emergence of the American one. But it is not the collapse of the British hegemony, neither the rise to dominance by the United States, that allowed for the appearance of a developmental state in the periphery, and arguably in Latin America too.

The crisis per se opens space for new policies, without a doubt. But it is ultimately the Russian Revolution, and the Cold War, which provides an alternative to capitalism, that opens up space for both alternative policies in the periphery, but additionally for support by the new dominant hegemon in promoting development and lifting the external constraint, that I suggested was at the core of the possibility for a developmental state. In the Asian case, the very existence of the developmental state was to some extent tied to the special relation with the US within the geopolitical situation that included, not only the Soviet Union, but also communist China, North Korea, Vietnam, and the domino theory, according to which Asian economies would fall and become communist if a neighboring country also did. And that is without considering India, Indonesia and the non-aligned movement.

This generated the conditions for an American procurement policy for Asian firms. Daniel Immerwahr argues that Toyota, the firm famous for ‘just-in-time’ or flexible production methods that superseded Fordist mass production, was virtually broke at the beginning of the Korean War. The firm was saved by Pentagon purchases, which guaranteed demand, and the same time that it enforced standards, and transferred technology. In Latin America there was nothing similar to this. Volta Redonda, the first steel mill in Brazil, which depended on US technology transfer and resulted from the US military base in Natal during World War II, would pale in comparison. It was assumed, not completely incorrectly, that our elites would align themselves with the West, and that a communist revolution could not take roots in the region. When it occurred the long and harsh embargo on Cuba was imposed, and a similar one now on Venezuela. Sticks rather than carrots were used in the backyard.

In the case of Latin America, the legacy of the Monroe Doctrine, implied that the benevolent policy referred to as “development by invitation” by Immanuel Wallerstein, following the ideas of Arthur Lewis and revived more recently by Carlos Medeiros and Franklin Serrano, was never really a possibility.

The limited impact of the developmental state in the region, when compared with the Asian experience, should not be seen as a complete failure. The economies of the region grew relatively fast, and even an incomplete or developmental welfare state was created, as noted by Sonia Draibe and Manuel Riesco. Nor should the debt crisis of the 1980s, which closes the cycle, be seen as the result of state-led industrialization. In fact, it is the debt crisis that leads the region more decisively into neoliberalism, even if neoliberalism had started before with the Southern Cone at the forefront.

What has not been discussed in more detail is the role of the United States opening of China, and the role of development by invitation in Asia for the Latin American periphery. In the case of Latin America the end of the developmental period, and the opening up of China, has gone hand in hand with a reprimarization of production and exports in South America, and with a maquilization – which implies higher dependence on imported components – in Mexico and Central America. The new integration implies a peripheral integration with the Southern periphery. But the decision to open up Asia did not come from Latin America. It was an American decision, based on geopolitical calculations, isolate the Soviet Union, back then, and also to discipline the labor force in the center.

It is in this context that the failed state starts to take a hold in the region. But the failed state, defined broadly as one that is incapable to intervene coherently in the economy, or unable to maintain the monopoly of violence, is by no means a mistake. It is functional and necessary for the integration into the global economy. In contrast to the relatively strong state of the late 19th century needed to integrate our economies into the global markets, now, in the 2nd globalization, a weak state, incapable of defending the rights of the working class, is necessary. In the same sense that American elites abandoned their working class, and have weakened and promoted the destruction of the welfare state institutions, the same has taken place in Latin America, but in more dramatic fashion, since in the region the welfare state was already incomplete or truncated, to use Fernando Fajnzylber’s expression about our industrialization.

The protests in the region, and in the center, have opened the possibility for alternatives to neoliberalism, but it would be a mistake to presume that the latter is dead. In general, when left of center governments manage to get elected they must contend with managing the failed state left by neoliberalism.

Obamacare With a Public Option: Fool Me Twice Shame on Me

By Thomas Palley

There is an old saying “Fool me once shame on you, fool me twice shame on me.” That saying is relevant for the current healthcare debate in which former Vice-President Biden and elite Democrats are touting a reheated version of Obamacare with a public option. It is a case of trying to fool the American public twice.

Adding an Obamacare public option will not solve the healthcare problem. Worse yet, it misses an historic opportunity to heal the festering wound of healthcare via a single-payer system as proposed by Senator Bernie Sanders.

Read rest here.

Housing and Inequality in Utah

From the recent report, written to a great extent by David Fields:

Rising housing costs and stagnating real wages are the primary causes of worsening housing affordability in Utah. From 2009 to 2016 real income only grew at 0.31% per year while rent crept upward at a rate of 1.03% per year in 2017 constant dollars. Now, more than 183,000 low-income Utah households pay more than half their income for rent, becoming more likely to be evicted and moving closer to homelessness.

Housing has not received as much coverage in the discussions about inequality, and this is well wroth reading. 

Bernie Sanders: Nothing to Fear Except Fear Itself

By Thomas Palley

“The only thing we have to fear is fear itself.” Eighty-seven years ago those were the words of Franklin Delano Roosevelt in his 1933 inaugural speech. Today, they resonate with Senator Bernie Sanders’ presidential campaign, which confronts a barrage of attack aimed at frightening away voters.

Fear is the enemy of change and the friend of hate. That is why both sides of the political establishment are now running a full-blown campaign of fear-mongering against Sanders.

The Democratic Party establishment likes the economy the way it is and wants to prevent change. Donald Trump and the Republicans have made themselves the party of hate. Both therefore have an interest in promoting fear, which explains the strange overlap in their attacks on Sanders.

Read rest here.

Scott Carter's talk on Sraffa

If you are in London go see Scott Carter talk on Sraffa tomorrow, organized by Andrés Lazzarini. Time: Friday Feb. 14, (11:30 to 13:30). Location: Margaret McMillan Building, MMB room 224, Goldsmiths University of London, New Cross, SE14 6NW

Robert Shiller's Godley-Tobin Lecture

Godley-Tobin Lecture later this month in Boston, during the Eastern Economic Association Meetings.

Do current times vindicate Keynes and is New Keynesian macroeconomics Keynesian?

Thomas I. Palley, Esteban Pérez Caldentey and Matías Vernengo

Professor Robert Rowthorn delivered the second annual Godley–Tobin lecture in New York City on 1 March 2019. The title of his lecture was ‘Keynesian economics – back from the dead?’ and it is published in this issue of the Review of Keynesian Economics. The lecture was attended by a large audience and the Question & Answer session provoked a stimulating discussion. Prompted by that discussion, we thought it would be interesting to invite some leading economists to independently address Professor Rowthorn's lecture topic. This symposium is the outcome of that invitation.

We are living in a time which many believe has a distinctly Keynesian character. That is captured in the belief that many economies appear to suffer from aggregate demand shortage or, at least, a proclivity to demand shortage. It is also captured in the revival of the concept of ‘economic stagnation,’ which was an idea that had much traction in the 1930s and 1940s but then fell away in the 1950s with the post-war boom and the non-reappearance of depression-like conditions.

Another Keynesian feature of the times is the character of macroeconomic policy, particularly fiscal policy. Following the financial crisis of 2008 and the Great Recession it spawned, there was a global turn to sizeable coordinated fiscal stimulus. Though that turn was truncated (Keynesians would say mistakenly), its legacy remains in place in the sense that discretionary counter-cyclical fiscal policy is back. That is evident in the renewed widespread belief among economists and policymakers regarding the value of fiscal stimulus to combat recessions, though the details of when, how, and how much are still contested. That contrasts with the situation before the Great Recession when the mainstream consensus was that discretionary counter-cyclical fiscal policy was largely ineffective.

Read rest here

From the last issue of ROKE with free papers by Rowthorn and Eichengreen.

A Stock Market Boom is Not the Basis of Shared Prosperity

By Thomas Palley

The US is currently enjoying another stock market boom which, if history is any guide, also stands to end in a bust. In the meantime, the boom is having a politically toxic effect by lending support to Donald Trump and obscuring the case for reversing the neoliberal economic paradigm.

For four decades the US economy has been trapped in a “Groundhog Day” cycle in which policy engineered new stock market booms cover the tracks of previous busts. But though each new boom ameliorates, it does not recuperate the prior damage done to income distribution and shared prosperity. Now, that cycle is in full swing again, clouding understanding of the economic problem and giving voters reason not to rock the boat for fear of losing what little they have.

Read rest here.

Summers on secular stagnation, the ISLM, and the liquidity trap

Two short clips from Lawrence Summers talk at the ASSA meeting in San Diego. So he first says that secular stagnation is more plausible now than before. He sees that it can be explained as a shift of the IS curve backwards. His IS has a somewhat marginalist foundation, with a natural rate, and a fairly conventional story for investment. Of course, the negative shift has bee compensated by some sort of stimulus, that is now weaker. I would say a smaller multiplier that affects the slope of the IS would make more sense.

And he does say in the next clip that the IS is steeper, and the LM is flat, or that we are in a liquidity trap. Again, I think it's not really that, and simply a policy decision of the Fed, inevitable given the circumstances, perhaps.

He also, is not optimistic on monetary policy, and is pushing for expansionary fiscal policy. And certainly, even if there are many differences in the way I would portray the current macroeconomic situation, in particular the causes of the slow recovery and what he calls secular stagnation, on the policy issue we are not that far.

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.