Argentina Between Anger and Fear

My piece in Phenomenal World on the Milei phenomenon, the possibility of dollarization, and the recent electoral results in Argentina. Read it here.

Exchange Rate Arrangements: Fix, Float, or Manage?

Updated version of a textbook chapter on exchange rate arrangements. It is for undergraduate use. From the abstract:

The paper tries to provide a concise summary of the main debates on exchange rate arrangements. It a simple taxonomy of exchange rate arrangements, fixed, flexible and managed, and a brief analysis of the main debates about their advantages and disadvantages. It emphasizes the different policy objectives of mainstream and heterodox schools of thought, suggesting that they tend to be more relevant than the specific defense of one particular exchange rate arrangement. In that sense, there are divergences on their preferences within schools of thought. The paper also discusses the causes of currency crises and the role of the dollar in the international monetary system.

Full paper can be downloaded here.

Lucas Teixeira on Inflation

The talk here. Recording is not the best, and the Power Point cannot be seen. It is available here for those interested.

Paper is here. From the abstract:

In the overlapping global emergencies of the pandemic, climate change and geopolitical confrontations, supply shocks have become frequent and inflation has returned. This raises the question how sector-specific shocks are related to overall price stability. This paper simulates price shocks in an input-output model to identify sectors which present systemic vulnerabilities for monetary stability in the US. We call these prices systemically significant. We find that in our simulations the pre-pandemic average price volatilities and the price shocks in the COVID-19 and Ukraine war inflation yield an almost identical set of systemically significant prices. The sectors with systemically significant prices fall into three groups: energy, basic production inputs other than energy, basic necessities, and commercial and financial infrastructure. Specifically, they are “Petroleum and coal products”, “Oil and gas extraction”, “Utilities”, “Chemical products”, “Farms”, “Food and beverage and tobacco products”, “Housing”, and “Wholesale trade”. We argue that in times of overlapping emergencies, economic stabilization needs to go beyond monetary policy and requires institutions and policies that can target these systemically significant sectors.

Minimum wage

Students will have a midterm soon. There will be some questions on the very likely shutdown (using the ISLM) and the minimum wage. The figure below shows the real (deflated with CPI) and nominal minimum wage for the US since 1939.

No surprises in the story. Minimum wage in real terms peaked in 1969, a culmination of an expansion that started in the 1950s. It fell significantly starting in 1979, with the Volcker shock and the fixed nominal minimum wage during the Reagan years, and never recovered the Golden Age peak. Since the 1970s, Dems managed to increase the rate in nominal terms (Carter, Clinton and Obama), but not reverse its decline in real terms. So far Congress has managed to stop the Biden administration attempts at raising the rate. And even when procurement contracts should give the executive some power over minimum pay, conservative judges have acted to stop it.

Dollar Hegemony, coming soon

The dollar's hegemony rests on the economic, military, and international political power of the USA. There have been two eras of dollar hegemony which were characterized by different models. Dollar hegemony 1.0 corresponded to the Bretton Woods era (1946-1971). Dollar hegemony 2.0 corresponds to the Neoliberal era (1980-today). The deep foundation of both models is USA power, but the two models have different economic operating systems. The articles in this book explore this and consider two further questions: what is the future of dollar hegemony? And: is there a better way of organizing the world monetary order? There has been considerable speculation of a drift to currency multipolarity but, so far, there is little evidence of that. The Chinese renminbi might join or displace the dollar as the world's hegemonic currency, but that will require China making significant changes to its financial markets and monetary policy. Dollar hegemony imposes significant costs on developing and emerging market economies, but the international political economy of systemic reform is fraught, making reform unlikely.

Book Presentation “India from Latin America. Peripherisation, Statebuilding, and Demand-Led Growth” by Manuel Gonzalo

A demand-led growth perspective of Indian development. Book available here. Comments by Alex Thomas.

The menace of the myth of General Pinochet’s Chilean economic miracle

By Thomas Palley

September 11, 2023, marks the fiftieth anniversary of General Pinochet’s military coup against Chilean President Salvador Allende. While it is now widely recognized that Pinochet authorized large-scale human rights abuses, there is an accompanying narrative that he also unleashed an economic miracle via embrace of Milton Friedman’s “Chicago Boys” vision of a market economy.

The “Pinochet economic miracle” narrative is profoundly misleading. Worse yet, it is a political menace for two reasons. First, it risks tacitly promoting the notion that dictatorship may be legitimate to the extent it offers a road to prosperity. Second, the Pinochet regime embraced Neoliberalism which promotes anti-democratic tendencies by fracturing society. The claim of a Pinochet economic miracle lends support to Neoliberalism, thereby encouraging acceptance of Neoliberalism despite its anti-democratic proclivities.

For those reasons, debate over Pinochet’s economic policy remains of vital importance. The fiftieth anniversary of Pinochet’s coup is an opportunity to challenge the pernicious miracle myth which is increasingly part of the conventional wisdom.

Read rest here.

Structuralism, Classical Political Economy and Demand-led Growth

 

Roundtable with Esteban, and Carlos Bastos Pinkusfeld on Structuralism, Classical Political Economy and Demand-led Growth at the Instituto de Economia, at my alma matter earlier this summer.

Hysteresis in economics

 

Hysteresis, not hysteria

New paper by Thomas Palley. From the abstract:

This paper argues for broadening the application of hysteresis to institutions, policy lock-in, psychology, identity, and economic ideas. Hysteresis is an element of historical processes, and the real world is historical. That explains why hysteresis is pervasive and important. Hysteresis should be a fundamental building block of political economy. Expanding its application in economics is both an opportunity and a challenge. The opportunity is that it provides a means for incorporating political, sociological, and
psychological forces which economics tends to neglect. That will enrich economics and can also provide a mutually enriching bridge to other social sciences. The challenge is introducing such concerns raises questions about the character of economics’ knowledge claims, which is likely to trigger resistance from economists.

Serrano on conflict inflation and inertia (in Portuguese)

Must see video (but I'm sorry to say in Portuguese). The talk at the last Demand-led Growth conference not yet available was in English, but much shorter. Once that is published I'll link it here.

Lulismo’s Past and Present

Lula da Silva’s return to the presidency in Brazil has opened up the possibility of deepening democracy and expanding the scope of egalitarian advance for the Brazilian working class. In what ways might his administration pursue expansionary fiscal and redistributive policies that would improve the conditions of his political base?

In the latest print issue of Catalyst, Matías Vernengo explores the historical and contemporary contours of Brazil’s political economy and outlines how the Lula administration can trade a restrictive economic policy for a broadly redistributive one.

Read more here.

On Milei's economic plans for Argentina

 

Sturzenegger thanks Milei for his support while he was at the BCRA

Javier Milei's victory in the primary election has set alarms in Argentina. Many suggest that this was unexpected, and in a sense, given the more recent polls, it was. Also, many have suggested that his strong showing represents a protest vote, since he is a complete outsider, and that this is a repeat of the 2001/2 protests that demanded that all established politicians were ousted (que se vayan todos). But these are at best half truths.

Sure enough the vote on Milei represents a protest, but he is not really an outsider, even if he does come from the lower middle class. He is ensconced within the Argentine establishment that nurtured him in more than one way. He is at best an eccentric outcome of that Argentine establishment.

Note that he studied at the Universidad de Belgrano, and Universidad Torcuato Di Tella, both private universities, that normally cater to the elites in the country. He worked in several financial sector institutions, including Estudio Broda, founded and managed by Miguel Ángel Broda, a Chicago economist that has been part of the Argentine financial establishment for more than five decades. He was invited and interviewed in all the main media outlets of the country for years, and always treated as an economic expert, even if often he was there for his more colorful ideas and behavior.

Also, many of his current advisors had key positions in previous administrations. Roque Fernández, for example, was both president of the central bank and finance minister during the Convertibility period in which the exchange rate of the peso and the dollar was fixed, in a similar way to dollarization.

Milei and his plans, the two relevant ones (forget some of the crazy stuff that won't happen, like stopping all trade with China), namely, dollarization and closing the central bank, are not alien to the Argentine elites that he has served over the years, and that has provided him with jobs and media space. At the end of the day, all neoliberal experiments (the Military one between 1976 and 1983, the Peronist one with Menem between 1989 and 1999 and a bit beyond, and the Macri one between 2015 and 2019) included people that share similar ideas to Milei and his advisors, and some of them were involved in the previous neoliberal turns.

Last year, at a Milei event, Federico Sturzenegger, who worked for Domingo Cavallo at the end of Convertibility and was the head of the Central Bank (BCRA) during the Macri government, while noting that dollarization was not the best solution, and suggesting that central bank independence is not enough, went on to defend a common currency (interestingly enough the same plan of Grabois, the lefty in the Peronist primary). Milei's victory, if it happens (which is still not a sure thing), and his plans would not be significantly different than the previous neoliberal plans, and the consequences would be as negative as before.*

I have written quite a bit on the negative effects of dollarization (old book on that here). I'll leave a more detailed discussion for a later post. The important thing I want to note at this point is that, if there is a way of obtaining the dollars necessary for dollarization, then that would also allow for holding the exchange rate stable, precluding a large devaluation, and even to bring down the difference with the parallel (blue) dollar. Of course, that would imply resolving not only the financial external constraint that Argentina faces now, but also dealing with the payments (in dollars) to the IMF, which, at least at this point, seem to be beyond the country's capacity to repay. Formal dollarization wouldn't solve those problems, and would generate many new ones.

* That's not the only connection with the other neoliberal experiments. In all of them there were direct violations of human rights, or explicit support for the violators of human rights, and that's true also in Milei's case.

Some brief thoughts on Bidenomics

 

There has been a lot of writing about Bidenomics (a name that might stick, like Reaganomics; nobody really thinks of Clintonomics as a thing) recently. It is fundamentally about the return of industrial policy, even if I personally think that this is less momentous than what people think. Don't get me wrong, both the rediscovery of fiscal policy after the 2007-9 recession (no fiscal packages after the 1990-91 or 2001 recessions, but packages after both 2007-9 and Pandemic in 2020), and the rediscovery of industrial policy, in part because of the rise of China, and in part because of the Pandemic/Chain supply shock, are important. And Bidenomics might stick because it announces a New Washington Consensus, that at least in theory abandons the neoliberal stances of the old one (see Jake Sullivan's speech).

My concern is that on both counts, the macroeconomic or fiscal front, and on the microeconomics, or industrial policy front, rhetoric is stronger than action. Or that it will be, at any rate. I'm not trying to blame Biden (or his team) for not breaking (or not enough) with conventional views. I mean I might have my views on how lefty or progressive (or even pro labor) Biden is (he did sign vote for every Free Trade Agreement possible, but he is allowed to change his mind). My concern is how much the common sense within the Democratic Party has changed. And while the the 2007-9 recession had moved many Dems and their advisors to rethinking about the macroeconomic consensus (not long ago Larry Summers was saying posties were right, and the economy had no tendency to full employment), the Pandemic inflation has done the opposite, as I noted here.

If the lesson was that Summers had been wrong (and Christina Romer right) on the size of the fiscal package needed for a fast recovery back then, now it seems that most economists (in the mainstream) agree with the notion that excess demand (particularly the last fiscal package early in 2021, and less the Pandemic ones, but that's another story) caused inflation, and the Fed fell behind and was correct in raising rates substantially. Note that the mechanism by which the Fed would reduce inflation is the conventional one, higher unemployment, less demand, lower prices (Summers, ironically, is one of the few actually that brings up the issue of bargaining power of workers with lower unemployment). And this diagnosis remains even though the level of unemployment didn't go down (after the recovery) at the same time that inflation came significantly down.

Of course, there's room still to discuss whether the Fed (together with the freezing of fiscal spending growth for next year by Congress) will end up throwing the economy into a recession or not. But either way, part of the legacy of the last crisis will be to reinforce the conventional new consensus model. Note, however, that the political risk is huge. Because Biden is forced to defend the notion that the economy (that recovered fast from the pandemic, no doubt) is doing great. And of course, the pre-Pandemic situation was far from ideal, and there's a reason why over the last decades a right-wing, blue collar movement has emerged. On that, trade policies were central, and the new industrial policy should play a role.

On the industrial policy front, it is worth remembering the existence of what Fred Block called the hidden developmental state, which suggests that the US always did industrial policy. But I doubt that the main effect of the New Washington Consensus will be to bring back many manufacturing jobs. Most of the ones that the establishment wants to move away from China (or at least part of the establishment, Adam Posen's views suggest that some are in doubt, about the movement away from the old one) will move to other Asian countries, like Vietnam and India.

At any rate, there are some reasons to be mildly skeptical about Bidenomics from a progressive perspective. Of course, I do think this is a huge improvement on Clintonomics, which was just Reaganomics, but more fiscally conservative.