The slow recovery has come to a halt

From the last press release of the Bureau of Economic Analysis (BEA):

"Real gross domestic product -- the value of the production of goods and services in the United States, adjusted for price changes -- increased at an annual rate of 0.2 percent in the first quarter of 2015, according to the 'advance' estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 2.2 percent."

So basically zero growth. And some people want higher rates of interest to preclude the danger of inflation. Oh brother.

Interview on neo-structuralism

The World Economic Association conducted and interview with Esteban Pérez Caldentey, Miguel Torres and Romain Zivy, from Economic Commission for Latin America and the Caribbean (ECLAC), on a recently published book on neo-structuralism by Alicia Bárcena and Antonio Prado (eds.), Neo-structuralism and Heterodox Currents in Latin America and the Caribbean at the Beginning of the XXI Century. From the interview:

What is neo-structuralism?

Neo-structuralism is a modern version of the structuralist current of thought which flourished in Latin America and the Caribbean in the 1950s and 1960s based on the thinking of a group of economists mostly based in ECLAC. Famous structuralists include Celso Furtado (1920-2004); W. Arthur Lewis (1915-1991), Raúl Prebisch (1901-1986), Juan Noyola Vázquez (1922-1962); Aníbal Pinto Santa Cruz (1919-1996); Osvaldo Sunkel (1929-) and Ignácio Rangel (1914-1994). The development of structuralism also benefited substantially from the work of economists such as Nicholas Kaldor and Michael Kalecki.

Structuralist thought emerged as a response to the development problems of Latin America and the Caribbean and dissatisfaction with orthodox responses. For structuralists underdevelopment was not due to exogenous forces or shocks or to bad policy, but it was rather an intrinsic feature of Latin America and the Caribbean ingrained in its own social and economic structure. Hence structuralism was a way to conceptualize the Latin American and Caribbean reality. Structuralism ‘became a practice, before being a policy and a policy prior to becoming a theory.’

Read rest here.

PS: I had written on the evolution ECLAC's economics and structuralism here before.

Free Trade Poll

Mankiw links to a poll in his defense of Free Trade in which a selected group of economists responded to two questions:

Question A: By lowering bargaining costs, fast-track negotiating authority for the president makes it more likely that the U.S. can conclude major trade deals

Question B: Past major trade deals have benefited most Americans

Not exactly whether they believe Free Trade based on comparative advantage holds as a theory. Note that one my think that trade is determined by absolute advantage, which would imply that some degree of trade management is required if a country is not to be out-competed by low cost countries, and still agree with both propositions.

So here a poll to see how many readers of this blog think the theoretical proposition is correct (and how many of these are economists).

Poll disabled; results above. So in contrast to Mankiw's results, most readers of this blog, including economists, think that comparative advantage does not always determine trade patterns. Free Trade might not be the best policy in that case. Maybe that means that there is a strong consensus among heterodox economists that free trade is not good for all countries involved. Likely, but this is hardly a reliable poll.

On free trade and economics consensus: a response to Mankiw

Mankiw tells us in his most recent NYTimes column that economists agree that Free Trade is good. He links to a poll in which, essentially, mainstream economists of different persuasions, some Keynesian and some not, and different political views, some liberal and some conservative, say that trade agreements are good. He backs his argument by suggesting that theoretically the argument is at the heart of the economics profession since the beginning; I guess an argument of authority.

And no better authority than Adam Smith. Mankiw says:

"The economic argument for free trade dates back to Adam Smith, the 18th-century author of 'The Wealth of Nations' and the grandfather of modern economics. Smith recognized that the case for trading with other nations was no different from the case for trading with other individuals within a society."

And it is true, Adam Smith was for laissez-faire, in general, and thought that less intervention in trade would be good. But there is in Mankiw's argument an implication that does not follow from careful analysis of Smith's doctrines, namely: that Adam Smith can be seen as a forerunner of modern neoclassical trade theory based on the Heckscher-Ohlin-Samuelson (HOS) comparative advantage argument (for the limitations of that theory go here).

Comparative advantage implies that countries should specialize on the production of commodities for which they have a lower opportunity cost. Specialization would increase productivity domestically, and importation of goods for which other countries have a lower opportunity cost would lead to mutual advantageous trade to all parties involved. This was actually first noted by Ricardo and Torrens more than 40 years after the publication of the Wealth of Nations. Smith believed that absolute advantage, meaning lower costs of production, not comparative advantage determined trade patterns.

Smith thought that free trade was a better policy than protectionism, since he believed that trade would expand the potential markets for home producers, which would lead to more division of labor, that is, higher productivity, leading to lower costs, more access to external markets and additional growth. A cumulative process of export growth and higher labor productivity, referred to as the vent-for-surplus model, was behind Smith trade optimism. It is important to note, however, that Smith's vent-for-surplus works in both directions. Higher costs (e.g. higher real wages) may lead to loss of external markets, no incentives for additional division of labor, and stagnation of domestic industry. In his model, success breeds success, but failure breeds failure.

There were very good reasons for Smith to think that free trade would be good for England in the late 18th century, and there even might be good reasons in the United States now, or at least for American corporations that would gain access to markets abroad. But the argument is far from universal, and the dressing of Smith's theory in modern garb is dangerous (for a classic explanation of Smith views on trade go here; subscription required; or here; also needs subscription).

The idea of absolute advantage, used by Smith, suggests that there is space for managing trade. I noted before that the opposite of Free Trade is not Protectionism, but Managed Trade. Nobody really wants to be in a completely closed economy, probably not even North Koreans. And once you admit a certain amount of management, say for sanitary rules to avoid importing poisoned toys, for example, or for security reasons to preclude defense secrets to leak out, you are discussing what are the good reasons for managing trade. Perhaps employment should be one of the reasons for managing trade. Free trade versus protectionism is a false dichotomy. The question is: how much management and for the benefit of whom (and who bears the costs of more or less trade as a result).

Note that comparative advantage theorems assume that employment is fixed, in the Ricardian system perhaps below full employment, and in the modern neoclassical HOS theory at full employment. Not surprisingly, on employment Mankiw tells us:

"Economists respond that full employment is possible with any pattern of trade. The main issue is not the number of jobs, but which jobs. Americans should work in those industries in which we have an advantage compared with other nations, and we should import from abroad those goods that can be produced more cheaply there."

That full employment is possible with any pattern of trade is theoretically true. But from that does not follow that comparative advantage should guide trade. That is a theoretical non-sequitur and is simply wrong. The US could pursue using macroeconomic policies (not the lower taxes for the rich that Mankiw advocates, but that is another story) full employment.* That would lead to high current account deficits, which for the US, because of the privileged position of the dollar, are sustainable. But that is not true for most countries.

In that case, if free trade is pursued, absolute advantage might determine trade specialization, and lead to large current account deficits that would be unsustainable and lead to a balance of payments crisis, the need for austerity, with lower growth and unemployment following. Even in the US, patterns of trade integration might lead to the elimination of good manufacturing jobs being substituted by low paying service jobs, something that has led to trade unions' reasonable rejection of Free Trade Agreements (FTAs). In other words, "which jobs" one can get if one "import[s] from abroad those goods that can be produced more cheaply there [sic; that's actually absolute not comparative advantage]" might end up leading to lower wages at home.

For that reason it is hard to agree with Mankiw when he says that:

"People tend to underestimate the benefit from conserving on labor and thus worry that imports will destroy jobs in import-competing industries. Yet long-run economic progress comes from finding ways to reduce labor input and redeploying workers to new, growing industries."

And there is evidence for that. The most famous FTA signed by the US with Mexico, has not favored workers in Mexico or the US, the North American Free Trade Agreement (NAFTA), even if corporations and wealthy individuals have benefited in both countries as shown in these reviews of the evidence by Robert Blecker and Mark Weisbrot and co-authors. So if mainstream economists agree on this, once again it is because they ignore logic (that does no require for trade to be determined by comparative advantage) or evidence (which suggests that FTAs might hurt workers).

* And also there is not tendency to a natural rate of unemployment, which Mankiw, of course, also defends.

On the blogs

Roland Fryer wins the John Bates Clark medal -- Tyler Cowen shares the info, with a link to the AEA official announcement. The prize is a freakonomics prize. Fryer, for example, suggests that paying minority kids for grades might be a solution for inequality. He is also in favor of charter schools (my personal experience in SLC was terrible I should add). For a methodological critique of the freakonomics project see this book by Ben Fine.

Economists Actually Agree on This: The Wisdom of Free Trade -- Greg Mankiw repeats this inanity. Het tells you that: "Among economists, the issue is a no-brainer." No brain is right. Based on the Heckscher-Ohlin model. Turns out that the HO model falls with the capital debates. See here. And lots of reasonable economists going back to Hamilton and List, to Chang and Samuelson have noted that Free Trade does not always hold.

A New Deal for Greece -- Yannis Varoufakis, because not all economists sold out, or are just stupid.

New book on the Brazilian economy

If you read in Portuguese this book by Professor Carlos Medeiros is a must. If you don't, learn Portuguese, and read his book. Meanwhile read this paper, on a different topic.

Strange bedfellows on TPP

I had noted before that Obama was on the same side than some Republicans on the Trans Pacific Partnership (TPP), and on the role of Free Trade Agreements (FTAs) in general. Yesterday, Paul Ryan and Ted Cruz co-authored an op-ed in the Wall Street Journal in favor of fast track authority, which they avoid saying is giving power to Obama and strangely suggest it would empower Congress, and the TPP.

So not only is Obama for TPP, and he thinks that Elizabeth Warren is wrong in opposing it, but he agrees with Ryan and Cruz. By the way, Hillary is not much better on the free trade (and Bill signed NAFTA), even though it seems that she has not endorsed the TPP deal... yet. So mainstream Dems are on trade in bed with corporations, together with the GOP, which is pretty unified on this topic as far as I can tell. The recurrent problem is that there is no party for labor anymore. And not just in the US.

PS: For theoretical arguments against Free Trade go here and here.

Blanchard on rethinking macroeconomic policy

Here is Blanchard's summary of the last conference. Nothing much happening in all fairness, and certainly little impact on the policy advice that the IMF provides. On regulation, perhaps higher reserves is Blanchard's solution, and on monetary policy a higher target (which he does not discuss this time) and perhaps a defense of QE. But he only asks whether "the Fed [should] return to intervening only at the short end of the yield curve, or are there good reasons for continuing to intervene along the curve?" No mention that intervening at the long end provides space for expansionary fiscal policy by reducing interest rates (the real reason for QE).

On fiscal policy the same. There is an admission that, contrary to Reinhart and Rogoff, there is no threshold above which debt-to-GDP hurts economic growth. The discussion of the debt-to-GDP ratio has vanished from the last WEO (Apr. 2015). This is good, since in the previous one (Oct., 2014) the IMF still argued that: "many advanced economies have little fiscal space available given still-high debt-to-GDP ratios and the need for further consolidation." Blanchard repeats the language of the last WEO. He says:

"But how to assess what the right goal is for each country? This remains to be done. It has become clear that there is no magic debt-to-GDP number. Depending on the distribution of future growth rates and interest rates, on the extent of implicit and explicit contingent liabilities, one country’s high debt may well be sustainable, while another's low debt may not. Conceptually and analytically, the right tool is a stochastic debt sustainability analysis (something we already use at the IMF when designing programmes). The task of translating this into simple, understandable goals remains to be done."

Interestingly, the policy advice remains the same. For example, on Japan the last WEO says that: "risks to public debt sustainability remain a key concern given high public debt ratios, and a credible medium-term strategy for fiscal adjustment with specific measures is urgently needed to maintain market confidence." And for the US: "the priority remains to agree on a credible medium-term fiscal consolidation plan to prepare for rising aging-related fiscal costs; this plan will need to include higher tax revenue." In Europe, you ask? Well, for the IMF: "in a number of countries, elevated public debt and high fiscal deficits highlight the need for fiscal consolidation." And with lower oil prices: "most oil exporters need to recalibrate their medium-term fiscal consolidation plans." So oil importers might have more fiscal space, wouldn't they? But WEO tells us that: "continued fiscal consolidation, steady implementation of reforms, and external financing are needed to maintain macroeconomic stability" in those countries too. Wait, who doesn't need fiscal consolidation according to Blanchard and his WEO report?

If there is no magic number, they found a loophole and are arguing for a magic range it seems. Whatever the situation fiscal consolidation seems to be a solution. Given that Blanchard's conference is about rethinking policy, not theory, which presumably is doing fine, shouldn't one expect some change in policy advice?

Equality of opportunity vs. equality of outcomes

Campaign season started, and it is way too long if you think about it. At any rate, the discussion of how the GOP is for equality of opportunities, not outcomes, is already in the air. Sen. Marco Rubio has already suggested that.

If we assume that social mobility is a proxy for equality of opportunity and take some measure of inequality, say a Gini, as a proxy of equality of outcomes, one might get a sense of their relation. The figure below is from the book The Spirit Level and shows the data for a few countries.

Social mobility is measured as the correlation of income between different generations. As it turns, it seems that there might be a negative relation between inequality of outcomes, which is high in the US and the UK, with equality of opportunity (social mobility), which is low in those same countries.

Note that this is a limited set of countries, and that social mobility is not exactly equality of opportunity. But this is indicative that equality of opportunity might also lead to equality of outcomes. My guess is that many GOP candidates that pay leap service to the idea of equality (of opportunity) would not like this kind of result.

PS: Graph below is more comprehensive.

Source is  available here.

On the blogs

Crowding In and the Paradox of Thrift -- Krugman praises Blanchard and the IMF research department. He too has rediscovered, but it was a few years back in his case, the accelerator. No word from him on why then all IMF policy advice is based on supply side reforms and why Blanchard thinks the priority in the US is fiscal consolidation. My take here. Note that here you have the typical organized hypocrisy story, the research department says reasonable things (accelerator), while the policy advice continues to be the same.

The economist's manifesto -- Tim Harford ask economists for policy advice. Often a terrible idea. Proposals are to abolish national insurance entirely (in my view the worst of all proposals) and replace it with higher rates of income tax, increase property taxes, to spend more on urban development, and R&D and infrastructure. Wren-Lewis proposes a rule for monetization of fiscal deficits when interests rates are at the zero bound. Not too bad.

What Causes Recessions? -- Noah Smith gives the traditional New Keynesian answer, shocks and price rigidities. No mention of endogenous cycles, meaning those that result from the normal functioning of the system. On that go here.

Claudio Sardoni on the possibility of a Marxist explanation of the current crisis

New ROKE paper by Claudio Sardoni. From the abstract:

The object of the paper is to explore whether, or to what extent, a Marxian explanation of the current capitalist crisis is possible. The answer is that, although Marx’s theory offers important insights to understanding the ultimate causes of capitalist crises, it is not able to provide a fully satisfactory explanation of typical crises of contemporary capitalism. In particular, Marx’s analysis cannot account for the long periods of stagnation following the eruption of financial and economic crises. In Marx’s analytical context, crises are followed by recovery and growth in a relatively short span of time. It is argued that the main reason for Marx’s inability to explain crises of contemporary capitalism is that he developed his analysis by considering free-competitive economies, whereas modern economies are characterized by monopolistic competition. A more satisfactory explanation of the current crisis requires going beyond Marx’s original contributions.

Read rest here (subscription required).

Sanford Schram on how the welfare system is designed to keep the poor poorer

Sanford Schram, professor of political science at Hunter College, argues that the welfare system in the United States, as it is currently institutionalized, marks the poor as deviant, and, thus, manufactures their otherness in order to reinforce, or buttress, anti-welfare antipathy.

Off the air

On my way to give the keynote speech at the Omicron Delta Epsilon International Economics Honor Society induction ceremony at San Francis College. If it's filmed, which is unlikely, I'll post it. Back tomorrow.