Al Campbell on Neoliberalism as an Attack on Labor

Izmir University Department of Economics Workshop on “The Great Meltdown of 2008: Systemic, Conjunctural or Policy-created?"

The Chutzpah of The Economics Profession

New discussion paper by Marion Fourcade, Etienne Ollion, and Yann Algan

From the abstract

In this essay, we investigate the dominant position of economics within the network of the social sciences in the United States. We begin by documenting the relative insularity of economics, using bibliometric data. Next we analyze the tight management of the field from the top down, which gives economics its characteristic hierarchical structure. Economists also distinguish themselves from other social scientists through their much better material situation (many teach in business schools, have external consulting activities), their more individualist worldviews, and in the confidence they have in their discipline’s ability to fix the world’s problems. Taken together, these traits constitute what we call the superiority of economists, where economists’ objective supremacy is intimately linked with their subjective sense of authority and entitlement. While this superiority has certainly fueled economists’ practical involvement and their considerable influence over the economy, it has also exposed them more to conflicts of interests, political critique, even derision.

Read rest here.

And for an excellent piece on the imperialism of mainstream economics in the social sciences, see this paper by Ben Fine (subscription required).

Argentina and the Vulture Funds

A short piece that appeared in the last issue of Challenge. From the conclusion:

"a rhetoric of debt forgiveness has been disseminated but indebted nations are still punished, and austerity measures are encouraged. Argentina’s fate in the hands of the vultures, like the countries in the periphery of Europe facing the austerity policies of the Troika (the European Central Bank, the European Union, and the International Monetary Fund), is just the most recent example of the limits of the globalization cum financialization process, and of the need to reform the international financial system. For now, the lesson of the Argentinean conflict with the vultures is that the American justice system asymmetrically favors the claims of creditors, and should be avoided at all costs."

Read here.

ILO's Global Wage Report: Nothing to be happy about

The GWR 2014/15 has been published and is available here. I'm sure I'll post more on it later. Here just one of the several things to take into account. Wages in advanced economies fell in 2008 and 2011, and have grown very little since the beginning of the crisis in 2008. Basically stagnated. Disaggregating by country you get the figures below.

The declines are in Japan, Italy, UK, Portugal, Ireland, Spain and Greece. Japan in eternal deflation, and the European periphery under Troika's adjustment programs. In Greece a collapse of about 24% since 2009. This is not only result of the austerity policies, but also of specific policies to reduce wages, like a 22% cut in the minimum wage for unskilled workers aged 25 and over and a 32% cut for those under 25, the weakening of collective bargaining, and the massive cuts in public wages and employment. Internal devaluation. But the recovery of the current account balance, I'd bet, is related to collapse of imports, not expanding exports (more on that later).

The mystery of productivity: what mystery?

Another old one. Trying to catch up after the Thanksgiving break. Mainstream economists seem always puzzled by productivity. It is the source of growth and a mystery (Helpman has a book titled The Mystery of Economic Growth). They refer to trends in productivity as puzzles, in particular the slowdown after 1973.

 

Alan Blinder: reminds us that after the surge in productivity growth, that for a while at least was referred to as the New Economy, associated to information technologies, has collapsed to even lower levels than the 1973-1995 period. He is, as a good mainstream author, quite puzzled. In his words, "quite surprisingly and still somewhat mysteriously, productivity growth plummeted [after 1973]... We are all in the dark."

In Jeon and Vernengo (2008) we suggest that labor productivity is endogenous, explained essentially by the expansion of demand, and old idea, implicit in Adam Smith's vent for surplus, and part of a well established empirical regularity, the so-called Kaldor-Verdoorn Law. In other words, it is the weak recovery, caused by a contractionary fiscal stance, and the slow pace of private spending growth as employment increases, that explains the poor performance of productivity. In this sense, the causes are considerably simpler, connected to macro policy, rather than the long-term pessimism of Gordon and Summers, which now talk about secular stagnation (see also this book).

Perhaps the more interesting stuff in Blinder's piece is his discussion of what the 'serious people' in the mainstream consider the natural rate to be. He says:

"the 'central tendencies' in the Federal Open Market Committee’s latest published forecasts range from 5.2% to 5.5% for the 'full-employment' unemployment rate, and from 2% to 2.3% for the potential GDP trend."

Note that Blinder also thought that the speed limit was around 2% back in the late 1990s (here his debate with Bluestone and Harrison). And yes he is a Keynesian (a New Keynesian). With friends like this...

A periodization of Latin American development in the Robinsonian tradition

New Working Paper available here. From the abstract:

This paper analyzes Joan Robinson’s growth model, and then adapted in order to provide an exploratory taxonomy of Growth Eras. The Growth Eras or Ages were for Robinson a way to provide logical connections between output growth, capital accumulation, the degree of thriftiness, the real wage and illustrate a catalogue of growth possibilities. This modified taxonomy follows the spirit of Robinson’s work, but it takes different theoretical approaches, which imply that some of her classifications do not fit perfectly the ones here suggested. Latin America has moved from a Golden Age in the 1950s and 1960s, to a Leaden Age in the 1980s, having two traverse periods, one in which the process of growth and industrialization accelerated in the late 1960s and early 1970s, which is here referred to as a Galloping Platinum Age, and one in which a process of deindustrialization, and reprimarization and maquilization of the productive structure took place, starting in the 1990s, which could be referred to as a Creeping Platinum Age.

John Cochrane on Deflation

This is a bit old. Cochrane, the medieval dark lord of macroeconomics (Krugman suggests he has been an example of the Dark Age of Macroeconomics), has taken issue with the notion that deflation is a big problem. He suggests that: "Friedman long ago recognized slight deflation as the 'optimal' monetary policy, since people and businesses can hold lots of cash without worrying about it losing value." He explains that the reason for fears of deflation are associated to debt-deflation (the other two arguments are less relevant, namely: sticky wages and space for a higher inflation target).

He argues, however, that debt-deflation is not a problem. For him:

"Again, a sudden, unexpected 20% deflation is one thing, but a slow slide to 2% deflation is quite another. A 100% debt-to-GDP ratio is, after a year of unexpected 2% deflation, a 102% debt-to-GDP ratio. You’d have to go decades like this before deflation causes a debt crisis."

In his view, small amounts of deflation are not  enough to lead to a collapse of the economy. And he says the dreadful deflation spiral never happened, not even in Japan. So don't be afraid, deflation is actually kind of good.

He is talking about the general price level, and clearly we haven't have significant deflation in the Consumer Price Index (CPI) or other broad inflation index since the 1930s. Yet, as the graph below shows we did have significant asset price deflation in the US, with housing prices falling by 31% or so, not just 2%, right before the recession.

In other words, there was significant collapse of prices that bankrupted several homeowners. The problem  was not just the negative effects of price adjustments on spending though. Cochrane supposes that all adjustments are on prices, since the economy has a tendency to move back to its natural output (unemployment) level. Crises (debt crises) are not just caused by the increase in the real value of debt (debt-deflation), they are more often than not the result of the collapse of the ability to pay, for countries when the value of their exports collapse (negative terms of trade shock), for individuals when they lose their jobs.

The problem is that with less prospects of growing demand (consumption, that was affected by stagnant wages and asset price deflation), and more so after the collapse of Lehman and the severe contraction in credit, firms fired about 9 million workers, reinforcing the negative quantitative effects of lower demand. The multiplier (which Cochrane thinks doesn't exist) works in both directions. So even small amounts of deflation, in an economy with quantity adjustments, might cause significant problems (and quantity adjustments are not the result of any wage rigidity, even if those exist, since no firm would hire an additional worker, not even at a lower nominal wage, if demand is not growing).

Think of Greece for example, where deflation (CPI deflation) is the result of contractionary policies that also led to the skyrocketing of unemployment, now at more than 25%.

The deflation is not particularly large, less than 2% actually. But the policies that cause the Great Depression levels of unemployment, and weaken the labor force, and lead to lower nominal wages, are the same that explain the deflation. In Greece deflation per se is not the problem. The lack of expansionary demand (fiscal) policy is. The problem is the obsession with low inflation, which leads to an overly contractionary policy stance. And that's what most authors that complain about deflation actually mean. For Cochrane Greece is fine, one would imagine, after all deflation is less than 2%. I suppose the natural rate of unemployment is probably 25% for him.

Quotes

 

"Of the tendencies that are harmful to sound economics, the most seductive and, in my opinion the most poisonous, is to focus on questions of distribution." Robert Lucas Jr. (see here, last paragraph).

"Political Economy you [Malthus] think is an enquiry into the nature and causes of wealth; I think it should rather be called an enquiry into the laws which determine the division of the produce of industry amongst the classes who concur in its formation." David Ricardo (see here).

Both cannot be right.

Dean Baker on The Paid Vacation Route to Full Employment

 

By Dean Baker:

The economics profession has hit a roadblock in terms of being able to design policies that can help the economy. On the one hand we have many prominent economists, like Paul Krugman and Larry Summers, who say the problem is that we don't have enough demand to get us back to full employment. There is a simple remedy in this story; get the government to spend more money on items like infrastructure, education, and clean energy. This is a simple story, but politically it is a non-starter. Few Democrats are prepared to push for anything more than nickels and dimes in terms of increased spending, nothing close to magnitudes that would be needed. As far as the Republicans in Congress, it would be easier to convert the Islamic State folks to Christianity. (We could also boost demand by lowering the dollar and thereby reducing the trade deficit, but economists don't talk about that one.) The other side of the professional divide in economics doesn't have much to offer on full employment because they say we are already there. The argument goes that people have dropped out of the labor force because they would rather not work at the wage their skills command in the market. In this story, we may want to find ways to educate or train people so they have more skills, but unemployment is not really a problem in today's economy. The notion that seven million people (the drop in population adjusted employment since the start of the recession) just decided they don't feel like working, doesn't pass the laugh test outside of economic departments and corporate boardrooms. This leaves us stuck with a policy prescription - more stimulus - that has zero political prospect any time in the foreseeable future. There is an alternative.

Read rest here. 

Rosnick & Baker on The Wealth of American Households

By David Rosnick and Dean Baker

From the Abstract:

This paper presents data on the wealth of households by age cohort based on new data from the 2013 Survey of Consumer Finances (SCF). It shows that the upward redistribution of wealth continued between 2010 and 2013. As a result, most households had less wealth in 2013 than they did in 2010 and much less than in 1989, the first year examined. This is in spite of the fact that households were much less likely to have traditional defined-benefit pensions than in prior decades.

Read rest here.

Economists Without Borders (Economistes Sans Frontières)

By Thomas Palley

Inspired by the work of Doctors Without Borders (Médecins Sans Frontières), I have recently started a project called Economists Without Borders (Economistes Sans Frontières). Its purpose is to inoculate the global economy against the virus of neoliberalism. Last week, I had two difficult “missions” to Vienna and Warsaw.

In Vienna, I confronted an outbreak of the neoliberal globalization – free trade strain of the virus. Without doubt, this is the most virulent and dangerous of all strains. People who get infected become blind to all evidence, deaf to all argument and prone to intellectual condescension. Massachusetts Avenue in Washington DC is a hot zone of infection. The bad news is that if you are over forty and infected it is doubtful you can be cured. However, younger patients have a chance of recovery. Here is the anti-viral I prescribed titled “The Theory of Global Imbalances: Mainstream Economics vs. Structural Keynesianism”.

In Warsaw, I confronted an outbreak of Milton Friedmanism which is one of the oldest strains of neoliberal virus. Friedmanism is a gateway virus that weakens defenses against other neoliberal strains and younger minds are particularly susceptible to it. The good news is that if diagnosed early there is a good chance of recovery. However, if treatment is delayed, intellectual ossification and closed-mindedness sets in. This ossification is almost always associated with inflation obsessive compulsive disorder and austerity fever. Here is the treatment I recommend titled “Milton Friedman’s Economics and Political Economy: An Old Keynesian Critique”.

Restoring Shared Prosperity: A Policy Agenda From Leading Keynesian Economists, December 2013, PDF available at www.thomaspalley.com, book available at Amazon.com.

Cooney & Vernengo on the Global Crisis of Capitalism

Professors Matias Vernengo and Paul Cooney discuss their analyses of the global economic crisis.

Amitava Dutt on Pluralism (or lack thereof) in Economics

The recent issue of ROPE is an excellent symposium on nature of pluralism (or lack thereof) in contemporary economics. This following article by Amitava Dutt is quite insightful.

From the abstract:

Recent debates about the nature and desirability of pluralism in economics suffer from a lack of clarity about the meaning of pluralism. This paper attempts to remedy some aspects of this problem by distinguishing between different dimensions of pluralism, that is, epistemological, ontological, methodological, normative and prescriptive dimensions. Although, in principle, these dimensions are distinct, they are difficult to keep apart because of the relations that exist in terms of choices made in the different dimensions. It is argued that the recognition of these distinctions and relations allows for a resolution of some of the debates about pluralism.

Read rest here (subscription required), and for an introduction to the symposium by John Davis, see here (subscription required).

Tom Weisskopf on 50 Years of Radical Political Economy

From the abstract,

I examine first how radical political economy (RPE) has evolved over the last five decades, as the overall political climate in the United States has shifted increasingly to the right. I explore how this political shift, as well as new developments within mainstream economics, have altered the focus of much of RPE and the activities of many of its practitioners. I then offer suggestions to radical political economists as to the future orientation of RPE.

Read rest here (subscription required).

And for other posts on the nature & evolution of radical political economy, see here & here.

Elizabeth Warren on Fed Appointments

Warren says that Obama should pick nominees for the Board of Governors vacancies that would "look out for Main Street, not big banks." More precisely:

"The five sitting governors have a variety of academic and industry experience, but not one came to the Fed with a meaningful background in overseeing or investigating big banks or any experience distinguishing between the greater risks posed by the biggest banks relative to community banks. By nominating people who have a strong track record in these areas and who have a demonstrated commitment to not backing down when they find problems, the administration can show that it is taking the Fed’s supervision problem seriously. Nominating Wall Street insiders for the Board of Governors would send the opposite message."

 I have a few names in mind.

Did the New Deal help in the recovery?

I have posted on this before (e.g. here and here, but there is more). Here a short excerpt from Joshua Hausman dissertation, supervised by Barry Eichengreen and Brad DeLong. He suggests in this particular paper that the 1936 Veteran Bonus was essential for the expansion of consumption and growth in 1936. Table below show aggregate data. Note that most of the accelerated expansion is explained by consumption (one might add, investment is derived demand and follows the accelerator, but that's another discussion).

He says: "All this is not easily explained by factors other than the bonus. Monetary factors were if anything contractionary in 1936. Broad money supply growth slowed from 14 percent in 1935 to 11 percent in 1936. And in August 1936, the Federal Reserve raised reserve requirements."

Hausman correctly notices that monetary policy had little effect on the boom in 1936, which fits what Eccles thought about that, and also about the role of monetary policy in the 1937-8 recession. The recession was for Eccles caused by a fiscal contraction largely due to two factors, the new Social Security Law that went into effect, increasing taxes, without initially disbursing payments, and the end of soldier’s bonus payments, which would add support to Hausman's story. Yep, multipliers (effective demand) work.

Eileen Appelbaum on Private Equity & Retirement Savings

By Eileen Appelbaum

The decline in worker pensions creates a challenge for private equity (PE) funds. The funds currently get about a quarter of their capital from public-sector pension funds and another 10 percent from private-sector pension funds. But defined benefit pension plans, once enjoyed by most private-sector workers, have been largely dismantled by corporations. And public-sector pension plans have come under attack in recent years as part of a larger effort by politicians in some states to weaken or destroy public-sector unions. Private equity is worried that the goose that lays the golden eggs it relies on is on the endangered species list. With the industry so dependent on workers' retirement savings, its future growth prospects are likely to be tied to its ability to tap the estimated $6.6 trillion in 401(k) accounts.

Read rest here.

Banks pay fines, but nobody goes to jail

I posted on this before. The Department of Justice was prosecuting banks for rigging the foreign exchange markets, and now banks agreed to pay fines, more than a billion for Citigroup and J.P. Morgan-Chase.

Fines now have exceeded 200 billion as a result of illegal activities, but nobody yet went to jail. Impunity persists. Full story here.

Mariana Mazzucato on the state and innovation

Not a huge fan of TED talks (quite the opposite indeed). But this one is well worth your time. Turns out that the great innovative entrepreneur of Schumpeter dreams is the Leviathan of his nightmares. Oh well.

Rethinking wage vs. profit-led growth theory with implications for policy analysis

By Thomas Palley

The distinction between wage-led and profit-led growth is a major feature of Post-Keynesian economics and it has triggered an extensive econometric literature aimed at identifying whether economies are wage or profit-led. That literature treats the economy’s character as exogenously given. This paper questions that assumption and shows an economy’s character is endogenous and subject to policy influence. This generates a Post-Keynesian analogue of the Lucas critique whereby the econometrically identified character of the economy depends on policy rather than being a natural characteristic. Over the past twenty years, policy has made economies appear more profit-led by lowering workers’ share of the wage bill and tax rates on shareholder income. Increasing workers’ wage bill share increases growth and capacity utilization regardless of whether the economy is wage-led, profit-led or conflictive. That speaks to making it the primary focus of policy efforts.

Read rest here.

PS: Tom's paper is in the standard Kaleckian approach in which investment is a function of capacity utilization and some measure of profit (rate or share; both are related). The so-called Kaleckian model suggests that investment is to some extent autonomous (independent of income) and not simply derived demand. With Esteban Pérez we have criticized the Kaleckian (not Kalecki, which did not develop these family of models, which are in effect a result of Joan Robinson's model) here. In our view, the distinction between profit and wage-led in a model with an independent investment function is problematic. In a sense, although we have a different (Kaldorian, based on the supermultiplier) modelling strategy, we agree with Tom's conclusion, namely: the system only appears to be profit-led, since "increasing workers’ wage bill share increases growth and capacity utilization." That's unambiguous, and should be a policy goal.

The Global Crisis of Capitalism

 

Next Week in New York at the John Jay College

Money supply, inflation and velocity

Grading. Slow posting as a result. Reading lots of replies on the Triffin Dilemma (more on that later). Interestingly many students, following the textbook (Montiel's International Macroeconomics) suggest that printing dollars was a way of dealing with the dollar shortage problems of the 1950s, as if the Fed was concerned with international liquidity problems when deciding on monetary policy. At any rate, several also suggest that money printing leads to inflation (no qualifier, like the economy must be at full employment, or something like that). Figure below for recent times.

As can be seen the huge increase in money supply basically led to a reduction of the velocity of circulation. That's why inflation has been tame, and yes we are not at full employment (we rarely are). Back to grading.

James Galbraith on Effective Governance To Spur Innovation

The United States’ deep political polarization is blinding the nation from seeing what it takes to create an effective innovation economy.

UNCTAD report shows the size of austerity

The last Trade and Development Report has been published a while ago. As always, a must read. The graph below shows the change in real government spending and also compares the actual real government spending with long-term government spending growth.

The report says: "on the whole, governments in developed countries adopted contractionary fiscal stances from mid-2010 to the end of 2013, when compared with the long-term trend." My only surprise was that France is not in the austerity group. The European periphery, and the US, are actually leading the austerity effort.

PS: In the US spending peaked in the 3rd quarter of 2009, and then it has been basically contracted ever since (here).

Unemployment down to 5.8 percent

Employment rose by 214,000 in October, and the unemployment rate fell to 5.8% according the last BLS report. The good news is that the labor force participation rate didn't change much since April. 

Hence, the employment-population ratio edged up to 59.2 percent in October, as can be seen above. Yep, still really low.

Some thoughts on currency crises and overshooting

So I've been teaching an international finance class, after a long while I might add. The discussion of currency crises models I think is interesting, since it is very revealing of the mainstream assumptions about the long run. Typical discussion would imply that in the long run the Quantity Theory of Money (QTM) and Purchasing Power Parity (PPP) hold. PPP means simply that the exchange rate adjusts for differences between the domestic and foreign price levels. Hence, we have that S =P/P*, where the star indicates foreign variable. If in addition we believe with the QTM that the central bank (CB) controls prices by controlling the money supply, then the CB can control the exchange rate indirectly.

In the figure below the 45o line shows the equilibrium levels of the exchange rate (S) as the price level, which is related to the money supply. Now suppose that the central bank fixes the exchange rate at S1 (the graph is based on Dornbusch representation in his classic paper; for now disregard the QQ curve). If the money supply is below the level that corresponds to P1, then the fixed exchange rate is too depreciated for the current stock of money, stimulating exports, discouraging imports, and leading to Current Account (CA) surpluses. In this case, the central bank would accumulate international reserves. The accumulation of reserves leads to increasing money supply and the economy moves to a new equilibrium.

If the central bank follows the rules of the game and it is credible (and the assumptions are also valid, meaning the economy has a tendency to full employment and increase in money supply only affect prices) then the money supply increases/decreases with the CA surpluses/deficits and the system converges to a stable equilibrium. However, if the commitment to the fixed-peg is not credible, and the rules of the game are not followed, then problems might arise. Imagine a situation in which the monetary authority continues to print money, to finance fiscal deficits for example, and the fixed exchange rate would now be below its equilibrium value (below the 45o line). Beyond the equilibrium point the central bank would start losing reserves. At some point, say when the money supply reaches the money supply level compatible with P2, the stock of reserves would be depleted. At this point, the central bank cannot defend the exchange rate anymore and the exchange rate jumps to S2. The Krugman model basically assumed exactly this, with the difference that if agents have rational expectations (perfect foresight in this case), then they would have an advantage to try to speculate against the currency before reserves are exhausted.*

In the model above the currency crisis occurs because the CB does not follow a monetary policy consistent with the fundamentals, that is, prints too much money to finance the government. Although, not immediatly obvious the model above is a simplified version of the Mundell-Fleming (MF) model, in the long run, when prices rather than income is the adjusting variable.In this case, the MF model can be represented with the exchange rate and prices, rather than output, as the adjusting variables. The QQ curve is a downward sloping curve, since higher prices increase money demand (or reduce the real money supply), leading to a higher rate of interest and a more appreciated exchange rate (lower S). Note the QQ curve is just the old LM for an open economy.

Also, because the QTM and PPP hold it must be true that increases in money supply lead to higher prices which lead to a proportional change in the nominal exchange rate, for a given foreign price and foreign money supply. In other words, the 45o degree line which corresponds to the proportional changes in domestic prices and the nominal exchange rate must still hold. We can derive the IS curve too, which would be upward sloping, but it is unnecessary, since if PPP holds then the economy must be in the long run on the 45o degree line.**

Dornbusch's trick, which was considered the first New Keynesian model (featuring both rational expectations and price rigidities), is that the nominal exchange rates adjusts faster than prices, then an increase in money supply would shift the QQ (LM) curve upwards. An increase in money supply reduces the domestic interest rate, leading to a depreciation of the currency. The economy moves from point A to point B. Then as depreciation increases net exports, and a lower rate of interest leads to more investment, there will be excess demand in the goods market, and for an economy that is at full employment, prices would go up. As prices go up, then the economy moves down the new QQ’ curve from point B to C, since with higher prices money demand increases and the rate of interest must increase (less than the initial decrease) causing some appreciation (less than the initial depreciation). At the new equilibrium the exchange rate is more depreciated than at the original equilibrium, but because of the short run rigidity of prices, the exchange rate overshoots its equilibrium value in the short-run. The point was that even if markets were efficient, in the sense that with price flexibility they tend to full employment and to the equilibrium exchange rate (PPP), the use of the exchange rate to deal with shocks might lead to excessive volatility.

There are many problems with the long run MF model (meaning the one solved in the S-P space). The obvious one is the notion that price flexibility leads to full employment, something that Keynes long ago suggested was NOT the case. Although Keynes was aware of the possibility of the system returning to full employment with price flexibility, he suggested that if lower prices had a negative impact on firms that are indebted, then investment would fall. In his own words: "indeed if the fall of wages and prices goes far, the embarrassment of those entrepreneurs who are heavily indebted may soon reach the point of insolvency, — with severely adverse effects on investment." In other words, with price flexibility the IS shifts back, and there is no tendency to full employment. That means that one should stick with the solution of the model in S-Y space, if one wants to introduce the open economy (one such model, without full employment and many other mainstream characteristics is available here).

Alternative (classical-Keynesian, post-Keynesian or whatever you prefer to call them) models would not only emphasize the role of quantity adjustments, but also the the sustainability of the current account (CA), rather than fiscal deficits in the explanation of currency crises. While conventional currency crises models of all generations (including the more heterogeneous 3rd generation models) suggest that at the heart of currency crisis there is a fiscal crisis, post-Keynesians emphasize terms of trade shocks and hikes to foreign rates of interest, highlighting the role of the balance of payments constraint in currency crises. Note that the economy in this view is not at full employment, and, hence the effect of fiscal expansions is not on prices, but on the level of activity. Higher level of income leads to increasing imports and a deteriorating CA. It’s the deteriorating CA and not the fiscal deficits that matter and the CA position might worsen even if the fiscal accounts are balanced. Further, after a currency crisis the central bank hikes the rate of interest, increasing the costs of debt-servicing, and, hence, government spending, at the same time that the recession reduces the revenue, leading to a weakening of the fiscal accounts. In this case, it is the external currency crisis that causes the domestic fiscal crisis. Causality is reversed. My two cents.

* Later models, like Obstfeld's, shown that if the costs of defending the parity are high, for example because in order to preclude the loss of reserves associated with a currency attack, the central bank hikes the rate of interest and pushes the economy into a recession, then there is a chance that self-fulfilling speculation might lead to a crisis.

** The IS curve would be positively sloped and steeper than a 45o line, since depreciation creates excess demand in the goods market. To restore equilibrium, domestic prices would have to increase, though proportionately less, since an increase in domestic prices affects aggregate demand, both via the relative price effect and via higher interest rates.

PS: I had posted before on my course here, were there is a link to Serrano and Summa's critique of the MF model.

Keynes is all you need

From BusinessWeek:

Is there a doctor in the house? The global economy is failing to thrive, and its caretakers are fumbling. Greece took its medicine as instructed and was rewarded with an unemployment rate of 26 percent. Portugal obeyed the budget rules; its citizens are looking for jobs in Angola and Mozambique because there are so few at home. Germans are feeling anemic despite their massive trade surplus. In the U.S., the income of a median household adjusted for inflation is 3 percent lower than at the worst point of the 2007-09 recession, according to Sentier Research. Whatever medicine is being doled out isn’t working. Citigroup (C) Chief Economist Willem Buiter recently described the Bank of England’s policy as “an intellectual potpourri of factoids, partial theories, empirical regularities without firm theoretical foundations, hunches, intuitions, and half-developed insights.” And that, he said, is better than things countries are trying elsewhere.

Read rest here.

On the blogs

For Whom the Wall Fell? -- Branko Milanovic's analysis of the effects in Eastern Europe of the transition to capitalism. Not good, by the way. Few success stories, and mostly associated to commodity booms. Worth reading also his response to Andrei Shleifer's view that the transition was a success.

Trapped in a Recession -- C.P. Chandrasekhar discusses why we are back in a "situation where finance capital is back to profitability and is thriving but the real economy and the rest of the system is mired in recession." In one word, austerity.

Obituary: Frederic S. Lee (1949-2014) -- Tae-Hee Jo has published a nice obituary with more biographical detail than previous ones.

IMF Response to the Financial and Economic Crisis -- Independent Evaluation Office (IEO) report on the IMF's role during the Great Recession. They suggest that: "The IMF’s record in surveillance was mixed. Its calls for global fiscal stimulus in 2008–09 were timely and influential, but its endorsement in 2010–11 of a shift to consolidation in some of the largest advanced economies was premature." I am more critical, as you know, but it is good that their evaluator noticed that the IMF has pushed for austerity too soon.

PS: And yes the last one is not really a blog post. But it's related to a previous blog post of mine. ;)

Foster and Yates on Piketty & The Crisis of Neoclassical Economics

Michael D. Yates kindly asked me to post a link to his new MR article, co-authored with John Bellamy Foster, on Piketty & the current state of mainstream economics; comments & feedback are welcomed.

Not since the Great Depression of the 1930s has it been so apparent that the core capitalist economies are experiencing secular stagnation, characterized by slow growth, rising unemployment and underemployment, and idle productive capacity. Consequently, mainstream economics is finally beginning to recognize the economic stagnation tendency that has long been a focus in these pages, although it has yet to develop a coherent analysis of the phenomenon. Accompanying the long-term decline in the growth trend has been an extraordinary increase in economic inequality, which one of us labeled “The Great Inequality,” and which has recently been dramatized by the publication of French economist Thomas Piketty’s Capital in the Twenty-First Century. Taken together, these two realities of deepening stagnation and growing inequality have created a severe crisis for orthodox (or neoclassical) economics.

Read rest here.

For other posts on Piketty, see here, here, here, here, here, and here.

The IMF, Austerity and the Ebola Crisis in West Africa

Recently I posted (and here) on the relative persistence of IMF policies on the fiscal front. As noted by Rick Rowden, the IMF has, at least temproraily, lifted its ban on fiscal expansion in West Africa, as a result of the ebola crisis. Christine Lagarde, the Fund's Managing Director said:

"It is very rare for the IMF to say that, but on this occasion I will say it: It is good to increase the fiscal deficit when it's a matter of curing the people, of taking the precautions to actually try to contain the disease. The IMF doesn't say that very often."

No they don't. Rick explains in his Foreign Policy piece how the IMF has an impact on heath outcomes with its austerity policies. He says:

"the harmful effects of IMF policies on health systems are not direct; it's not as if the IMF comes in and directly tells a country to spend less on public health. Instead it's a two-step process: First the IMF policy targets constrain overall national spending levels, and this then limits the spending available for long-term public investment, including for the health infrastructure. Consequently, chronic and sustained underinvestment in public health infrastructure has become the norm in many countries, year after year, over the last few decades."

And yes, Rick knows that the IMF has not caused the ebola crisis with its austerity policies, it has just made them worse. He concludes that:

"But if the international community is serious about addressing chronic under-investment in the public health systems in these countries, it will also have to revise the obvious shortcomings of IMF fiscal and monetary policies."

I had written on the IMF and the use of aid for health spending in relation to the HIV/AIDS crisis in Africa. The paper was published by the United Nations Development Program's Poverty Center and is available here.