Football Coaches are the New Welfare Queens

Conservatives always complain about the 'Welfare Queens' and the excessive benefits of the public sector workers. Graph below shows the highest paid public sector workers in the US.

For one I'm in favor of cutting expenses with most of these privileged public sector workers.

The Closed Society and Its Friends: Friedman, Hayek and the rise of Neoliberalism

I just wrote a review of Daniel Stedman Jones's book Masters of the Universe: Hayek, Friedman, and the Birth of Neoliberal Politics, which will be published in the Social Science Journal later this year. So I don't intend to say to much here.

But one thing that was striking about the rise of the post-New Deal Neoliberalism, starting with the Mont Pelerin Society, is that they tended to group in organizations that were closed, not particularly democratic, and somewhat dogmatic, with a single or unique view on the relevance of market mechanisms, which allowed no space for individual dissent on where to draw the line between markets and the state. One should not be surprised that Friedman and Hayek provided qualified support for such examples of closed societies as Pinochet's Chile.

By the way, on Friedman's forecasting abilities one quote from the book, a letter from Friedman to Samuel Bittan, is worth noticing. He predicted that: "destruction of its [Britain's] democratic society ... would come from the left." Yes, because Wilson and Callaghan were revolutionaries in disguise!

More on the dollar as a reserve currency

Figure below shows the most recent data from the IMF's Currency Composition of Official Foreign Exchange Reserves (COFER).

The dollar remains more or less in the same place with 62% of allocated reserves being in dollars. The euro is a distant second. Data available here. For more read this. By the way, the graph provides a short list of the limited number of currencies that do serve as international reserve currencies. Most only marginally.

Wage and Profit-led Growth

New Working paper at the Levy Economics Institute with Esteban Pérez Caldentey. From the abstract:

We argue that a fundamental difference between Post-Keynesian approaches to economic growth lies in their treatment of investment. Kaleckian-Robinsonian models postulate an investment function dependent on the accelerator and profitability. Some of these models rely on the importance of profitability, captured by the profit share, to make the case for profit-led growth. For their part, Kaldorian models place the emphasis on the accelerator. More important, investment is a derived demand; that is, it is ruled by the adjustment of capacity to exogenous demand, which, in turn, determines the normal level of capacity utilization.

In our view, the Kaldorian approach is better equipped to deal with some of the issues relating income distribution to accumulation with effective demand in the long run. We develop a Kaldorian open-economy model to examine the conditions under which an increase in real wages can produce profit or wage-led growth, showing that the limit to a wage-led expansion is a binding external constraint. The role and limitations of wages as a determinant of growth are further examined through spectral techniques and cycle analysis for a subset of developed economies. The evidence indicates that real wages are positively related to growth, investment, and capacity utilization. It also highlights the role of finance in sustaining expansions, suggesting that debt-led growth should not be identified with profit-led growth.

Read the rest here.

Austerity, Not Uncertainty, Is the Scary Part of Fiscal Shutdowns

There is a general consensus that annual fiscal policy fights hurt the economy’s recovery. Many people, however, get the story quite wrong. It has nothing to do with 'uncertainty'; rather, it's the unfortunate fact that the brouhaha, in the final instance, leads to smaller budget deficits, i.e. 'austerity', significantly diminishing the level of effective demand.

It’s austerity that is reliably damaging to recover efforts, not uncertainty. And each year’s fiscal drama has tended to produce another dose of austerity. The very large reduction in the budget deficit between 2009 and 2012, combined with the extraordinarily slow pace of recovery over this same time period is not a coincidence. This should be a lesson to evidence-based policymakers: You should be much more worried about accepting more austerity as the price of ending the fiscal drama than any damage caused by the drama itself.

See rest here .

Balance of Payments Adjustment and the Euro Crisis

It is worth remembering that according to Eichengreen (1996, p. 25) “the most influential formalization of the gold-standard is the price-specie flow model of David Hume. Perhaps the most remarkable feature of this model is its durability: developed in the eighteenth century, it remains the dominant approach to thinking about the gold standard” (for a critique go here).

The idea is that, at least in a fixed exchange rate regime, inflation and deflation do all the work of adjusting the balance of payments (BOPs). Modern versions add credibility and all that (which includes austerity) for the stabilizing flows of capital to work. Why do I bring this up? Because of Martin Wolf's column (subscription required) in the Financial Times today, which has the graph below.

Note that the countries in crisis, Greece, Ireland, Italy, Portugal and Spain have already adjusted their BOPs (in this case their trade balances). Yet the adjustment is more Keynesian than Humean, or to be more precise, it follows the analysis of A.G. Ford, who argued that peripheral countries, like Argentina, adjust their current account deficits with a good old recession not by lowering domestic prices. And yes, Wolf is right, the specie-flow would only work in a parallel universe.

How stimulative has fiscal policy been?

Not much. Particularly after the initial stimulus spending came to a halt, as you can see in the figure below.

In part this is the result of GOP obstructionism, but also follows Obama's early move to emphasize a balanced approach to the deficit and debt 'problem,' meaning higher taxes and lower spending. Now, it seems, the consensus is that the shutdown will fail, but that does NOT mean that there is more stimulus in the pipeline. So we'll move to the next menace soon, the debt ceiling. Again.

US CEO-to-Worker Compensation Ratio: A Radical Redistribution of Income

As EPI noted in this recent paper on the ratio of CEO to average worker pay, from 1978–2011, CEO compensation grew more than 876 percent, more than double the growth of the stock market and remarkably faster than the growth of annual compensation of a typical private-sector worker, up a meager 5.4 percent. The increased divergence between CEO pay and a typical worker’s pay over time is revealed in the CEO-to-worker compensation ratio, as shown in the figure. This ratio measures the gap between the compensation of CEOs in the 350 largest firms and the workers in the key industry of the firms of the particular CEOs.

See rest here.

Central Banking in theory and practice

Clarida, Turner, Galbraith & Vernengo

Live-streamed Fed talk w/ James Galbraith, Lord Turner, and Matías Vernengo tonight 6:30 p.m. Go here.

The position of the dollar was enhanced by the crisis

The BIS Triennial Central Bank Survey shows that over the last three years the position of the dollar as key currency has become more dominant. The figure below shows the turnover by currency and currency pairs.

You can see that the dollar was on one side of the operation 87% of the time, compared to 84.9% three years ago. The euro has lost some ground. Also, the average daily turnover in foreign exchange markets in April was around US$ 5.3 trillion.

Andrés Velazco on the future of developing economies

Andrés Velazco, finance minister under Bachelet (and you wonder why the economic policies of Socialist governments are all but), tells us that according to Diaz-Alejandro "the combination of high commodity prices, low world interest rates, and abundant international liquidity would amount to economic nirvana for developing countries." And he goes on to suggest that all growth in the region over the last decade was fueled by external conditions, which now are basically gone.

While Diaz-Alejandro is certainly correct about the positive effects of the unlike external conditions it is far from clear that growth during the last boom in Latin America is only explained by external conditions, and that we should expect necessarily higher international interest rates and/or lower terms of trade.

Yes the Fed announced that they will end QE, and that (even the speculation that would happen) led to some run to quality, with more demand for American bonds, and depreciation of developing countries currencies. But the statement of the Federal Open Market Committee (FOMC) is very clear that to: "support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens."

This is a topic we already discussed in the blog before. In particular while lifting the external condition allows for faster growth, it's clear that certain countries grew faster than other, irrespective of the size of the positive effect on terms of trade (see here). Also, it is not clear that the growth in commodity prices is all related to a booming demand, particularly in China. As noted before, Franklin Serrano there are structural causes, associated to the supply side, the long term costs that might be part of the explanation for the terms of trade trends.

In one thing Mr. Velazco is correct, "conservative governments viewed industrial promotion as some dirigiste relic from the past, and avoided it," and left of center government were not particularly good at promoting industrial development. I'm glad he does not think industrial policy is a mistake. In that sense, if the economies of Latin America grow less it might a for their inability to expand demand (contrary to the 'good macro' policies advocated by Velazco), and for their inability to diversify exports and reduce the balance of payments constraint, rather than simply because the external conditions worsened.

Entrepreneur vs. undertaker

The graph below was prompted by a question to the Society for the History of Economics (SHOE) sent by Steve Kates, and by a response by José Menudo, on the use of the French term entrepreneur in English.

According to Prof. Menudo the first use in English is by Stuart Mill, in 1848. Note, however, that more widespread use only takes place considerably later in the 1920s. The alternative used before, undertaker, has other uses as well, but the comparison might still be useful.

Income inequality and stagnation again

Brief post, prompted by comment on previous post. Below the Mean Household Income Received by Each Fifth and Top 5 Percent.

Note that in real terms the bottom has had no gains since the early 1970s really. And that's true of the lowest three quintiles. Only the two highest quintiles have seen some increase in income, but at least at this level of aggregation since the 2000s there is no growth at the top too (if you open up the top 5 percent, things might change). Data here.