The Ukraine war and Europe’s deepening march of folly

By Thomas Palley

In her book The March of Folly: From Troy to Vietnam, the historian Barbara Tuchman explores the perplexing question of why countries sometimes pursue policies that are fundamentally contrary to their own interests. That question has acquired renewed relevance as Europe has now enlisted in a deepening march of folly over Ukraine.

Failure to reject the march of folly will have grave consequences for Europe, but doing so is a huge political challenge. It requires explaining how Europe has been harmed by its Ukraine policy; how Europe stands to be further harmed by doubling-down on that policy; how the march of folly has been sold politically; and why the political establishment persists therewith.

Read rest here.

Brad DeLong Principles of Stabilization Policy and their Application

The 8th Godley-Tobin Lecture in full. No edits, and not the best lighting, but audio and images of PowerPoint are clear.

Policy Parlor with Stephanie Kelton

My conversation with Stephanie during her visit to Bucknell University.

The behavior of the nominal exchange rate between the Brazilian Real and the dollar in 2024

By Nathalie Marins, Ricardo Summa & Daniel Consul (Guest bloggers)

Currency devaluations can disrupt developing economies by raising import costs and food prices, which in turn reduces real wages. This impact is particularly detrimental to lower-income households, which typically allocate a substantial portion of their income to essential goods. Consequently, when the local currency weakens, governments encounter increased political pressure due to rising prices that erode purchasing power. Throughout 2024, the Brazilian real faced a continuous process of depreciation that intensified in December, prompting headlines accusing recent fiscal policy decisions of triggering a full-blown currency crisis. However, a closer look at the data suggests that external financial factors, monetary and exchange rate policy choices, and a short-term “flight to quality” played a far more significant role in driving this depreciation. In the following pages, we will examine the behavior of Brazil's currency in 2024 and explore the factors behind this trend.

Read rest here.

On alternative views of welfare

 

 

Two traditions in economics 

I've been teaching a course on Public Policy, and had to deal with conventional manuals, which tend to be essentially micro and conventional in their approach. They all start from Pareto and market/government failure dichotomies. Classical, objective and materialistic conceptions of the public good are completely excluded. This short handout was used just to redress some of the problems of teaching from conventional textbooks. I also discuss extensively macro issues, of course.

Serrano, Summa and Marins on Inflation, and Monetary Policy

This is the full round table on Inflation and Monetary Policy organized by the Bucknell Institute for Public Policy (BIPP), with Franklin Serrano, Ricardo Summa and Nathalie Marins.

What is heterodox economics?

New working paper published by the Centro di Ricerche e Documentazione Piero Sraffa. From the abstract:

 This paper critically analyzes Geoffrey Hodgson’s definition of heterodox economics as the refutation of the orthodox view that emphasizes utility maximization as its main theoretical core, and his view that it is the fragmentation of heterodox economics that explains its subsidiary role within the profession. Hodgson’s views led to a series of responses, that criticize his definition, but also present significant problems of their own. The limitations of Hodgson and his critics’ views are contrasted with an alternative definition that emphasizes the importance of conflictive distribution and the principle of effective demand in the long run. The idea of a broad tent, from a sociological point of view, does not preclude the need for a clear analytical definition of heterodoxy. The broad tent should be seen as part of a strategy of survival.

Link here.

The 8th Godley-Tobin Lecture

Registration for the Zoom meeting here. After registering, you will receive a confirmation email containing information about joining the meeting.

Milei and real wages in Argentina

I was interviewed by Max Jerneck for his podcast, and he alerted me to this figure (see below), which apparently come from the Universidad Francisco Marroquín in Guatemala, that has made the rounds, and has been used by right-wing think tanks.

If you were to believe this, real wages fell after Milei's assumption. This is obviously sheer ignorance, or, more likely, an attempt to misinform and create doubts about the real effects of his policies. I had read a recent report by Centro de Economía Política Argentina (CEPA), and Julia Strada was very nice sending me the data for their own calculations based on the official INDEC data (note that this is not the issue, real wages did fall, and recovered somewhat, but are below the initial level).

The problem with the graph, is that it starts with the line between Milei and the previous government in a way that seems that all the fall was before he was inaugurated in December 10, 2023. Arguably the problem comes from the fact that Milei started in December, but part of that month was still under the presidency of Fernandez. And with high inflation wages would be falling all the time, until a readjustment. This can be sorted out if we knew what caused the acceleration of inflation, and the rapid collapse of real wages, as a result of that. And we do, since inflation accelerated with a massive maxi-devaluation of the peso.

My graph below shows the real wage, with essentially the same trajectory, and the nominal exchange rate, which was depreciated by 100% (devalued by 50%), going from 400 pesos per dollar or so, to about 800 (left side) right after Milei's inauguration. I draw the line at that event, the depreciation of the peso.

As it can be seen, the depreciation of the nominal exchange rate, which accelerated inflation from about 12% to more than 25% in monthly terms (that is, it doubled inflation), led to a collapse of real wages. Most of the collapse (almost all) was after his policy decision to devalue the official rate. So wages are increasing, but from a low base, and that was caused by the current government.

Are we on the verge of a debt crisis?

This was my presentation at the Political Economy Research Institute (PERI) last summer. I was supposed to revise it, but never found the time. So it is now available on Substack. Fundamentally says that the current situation is very different than the debt crisis of the 1980s, and the period between the Tequila, in 94/95 and the Argentine Convertibility default in 2001/02.

Podcast on the first year of Milei's government in Argentina

PS: A comment about it appeared in a recent Guardian editorial. There is too much optimism about Milei 'success' in containing inflation, but also a lot of misunderstanding why he managed, and whether it is sustainable.

Inflation, real wages, and the election results

Almost everybody these days accepts at face value that the result of the election was heavily determined by negative perceptions about Bidenomics, and that, in turn, resulted from inflation. Inflation was high (it wasn't, at least not that much), and people were pissed off. This is not just Larry Summers, who had argued (incorrectly in my view) that inflation was caused the large fiscal packages of an excessive generous government.

In the heterodox camp, many have suggested that more should have been done to control greedy corporations, that caused inflation by hiking their mark ups. In this view, price controls might have been helpful (often some examples of other countries, like Spain are used). While some of these would have been good, they depend on the previous existence of national mechanisms to, for example, control the price of energy (even easier if one has a national oil company),  of a national Value Added Tax on food that could be reduced to alleviate cost pressures. As I noted in the INET video, the best policy would have been to try to increase wages above inflation, and perhaps the best national tool was the minimum wage, but Biden and the Dems in Congress failed to pass an increase (Trump and the GOP are against the existence of a minimum wage, let alone a higher one).

At any rate, as I noted before, real wages at the bottom of the income distribution did go up, going back at least to the Clinton era, as it can be seen below.

However, that about the relative position of the workers at the bottom, nor about the fact that during the Pandemic period (and at the beginning Trump was still the president) real wages for the non managerial workers basically stagnated (even fell a little bit from the peak).

And, as noted before, this does overlook the fact that real wages for an extended period, going back to the 1970s, has more or less stagnated (individuals, obviously, might be doing better, as they get promotions and so on; but people know that their parents could have a better life with a working class salary back in the 1970s).

The key is not inflation, but that real wages have not been growing enough to provide a sense that people's lives are improving. If the left clings to the demonization of inflation, the ultimate lesson would be that fiscal policy was the problem (not the greedy corporations, but the inefficient government; both stories are incorrect, see why on my Catalyst piece). And we will make it so much more difficult for the next Democratic administration and the progressives within that coalition. Many on the left took the wrong lesson from the 1970s, that inflation was a problem, and that balanced budgets were necessary to win elections. That certainly was reinforced by the Clinton administration. To conclude that inflation and excessive spending was the problem with Bidenomics will make things worse.

In terms of feasible strategies that would have positive economic effects, and generate immediate electoral advantages, Dems should concentrate on higher minimum wages as a catalyst for better labor market conditions (the effects spread to other wages, and it is a simple slogan that people readily understand, and Trump would have been forced to remain silent or come out against it).

Very brief note on the Brazilian real and the fiscal package

 

The Brazilian real depreciated last week (full meltdown might be a bit of a hyperbole), and in many quarters there has been a suggestion that it is now undervalued, and that would somehow be connected to the dangers associated with the fiscal position, and the willingness of the Lula government to push the spending cuts, and the tax changes, with cuts for those at the bottom of the income distribution and hikes at the other end (more on the fiscal story in a bit).

The obvious reason for this is that the Brazilian basic interest rate was coming down from its post-pandemic high, and probably, and in spite of all the pressure from progressives and heterodox economists, it was a bit too low. As it can be seen, as the SELIC rate came down, the exchange rate started, eventually, to depreciate. This will have some impact on inflation, but it is nothing that should be of any significant concern. A higher SELIC, and a few interventions by the Brazilian Central Bank (BCB) should be more than enough to stabilize the exchange rate.

The fiscal situation does not require any adjustment, and certainly not one for next year, and not at the expense of reducing government outlays on education and health. Brazil managed to grow more than predicted by markets since Lula's election, because the fiscal rules were taken with pragmatism and the adjustment has been delayed. If the government goes through with the spending cuts, expect growth to decelerate, and the fiscal accounts to worsen.

This is exactly what Dilma tried in her first government, then backtracked, and then adopted in the aftermath of her victory in 2015, leading to the worsening of the fiscal results, and the impeachment (not that this is on the table; but the political future certainly is if Lula cannot deliver growth and better income distribution). Btw, the changes in the taxes are a good thing.