Masters of Money: BBC Documentary on Marx, Keynes, and Hayek

The one on Keynes below. I already noticed before that Hayek is not really an intellectual of the same stature of Keynes, or Marx one might add. In terms of Austrians, in fact, Schumpeter might be the only one that is on the same league (even if I disagree with almost everything he wrote, the exception being his discussion of the Tax State).

A few interesting people are interviewed. Peter Clarke and Will Hutton, for example, the former author of a really good book on the political struggle to develop Keynesian policies. They also have some less interesting ones, like Mervin King, the ex-governor of the Bank of England, and Ken Rogoff, of Rogaine and Braveheart fame, complaining of very high debt levels now which preclude the space for fiscal expansion ("there is no magic bullet," he says).

The outcome is not particularly good. The discussion of Treaty of Versailles and German hyperinflation is completely biased presenting a Monetarist interpretation that is not dominant among historians. It also spreads the myth that the fact that the New Deal helped end the Great Depression is a myth. Worse, the interpretation of Keynes is based on chapter 12 of the GT. It's also about confidence, animal spirits and uncertainty.

There is also a discussion of Bretton Woods, and although they do suggest that deficit countries could not do the whole adjustment, there is no discussion of the role of capital controls and financial regulation. Oh well.

Triffin Dilemma and the collapse of Bretton Woods

Harry Dexter White and Keynes at Bretton Woods

I had promised to post on this a while ago. According to Triffin Dilemma view the US economy could not guarantee the convertibility of dollars into gold at the fixed parity, since the supply of gold did not keep pace with the increase in the level of income in the world economy. The U.S., on the other hand, provided liquidity to the world economy, increasing the supply of dollars, to avoid creating a liquidity problem. So the ratio of dollars to gold was not fixed, and the parity was unsustainable. The excess supply of dollars caused, in this view, a confidence crisis. The Bretton Woods system failed because the fixed parity commitment was not credible, in the context of an expanding economy.

For heterodox Keynesians (I prefer the term classical-Keynesian), the abandonment of the fixed parities is not connected to the loss of credibility in the face of an expanding economy. This view emphasizes the role of financial liberalization in the collapse of the Bretton Woods regime. The use of capital controls during Bretton Woods implied that the rate of interest was in general low, to promote high employment, and the cost of reducing the remuneration of financial capital. The abandonment of the fixed parity system and the increasing mobility of capital allowed for interest rates to be kept at higher levels favoring financial interests.

In that sense, the end of Bretton Woods was, to some extent, a policy decision. Contrary to the collapse of the Gold Standard and the pound, the role of the dollar as the key currency (reserve and vehicle currency) did not end with end with the collapse of Bretton Woods. In other words, if lack of confidence in the dollar would have been the cause one would expect a run on the dollar and a new hegemonic currency to replace it.

My Bretton Woods entry for the Elgar Companion to Post Keynesian Economics can be read here, and downloaded here. There is a slightly modified entry for the 2nd edition, but I don't have a link to that one yet.

The rise of vulgar economics and the end of dissent

Funny thing, the rise of vulgar economics, which I discussed before (here, here, and here; see also this and this papers for more on the topic) didn't just lead to the ostracism of heterodox approaches to economics. It also led to a significant decrease in the debate within the mainstream. Or at least is what the figure below, from the interesting blog post by Joe Francis, seems to indicate. At some point in the 1960s, more than 20% of the papers in the main journals were a reply, a comment or a rejoinder to the work of someone else. Not anymore.

It is clear that the Great Depression and the Keynesian Revolution seemed to increase debate within the mainstream, and that, as Joe says, the: "decline in debate... appears to have been associated with the emergence of a ‘neoliberal’ hegemony from the 1970s onwards." That's essentially correct.

And the decline in debate explains why Lucas could say in the early 1980s that: "at research seminars, people don't take Keynesian theorizing seriously anymore; the audience starts to whisper and giggle to one another." And also why if you wanted to publish you basically had to accept the crazy New Classical models. Krugman admitted to that before, as I've already noticed. He argued that: “the only way to get non-crazy macroeconomics published was to wrap sensible assumptions about output and employment in something else, something that involved rational expectations and intertemporal stuff and made the paper respectable.” You must remember, you don't publish, you don't get tenure. So crazy models became the norm.

Not only heterodox economists were kicked out of mainstream departments, and had to create their own journals in the 1970s, but also the pressure within the mainstream to conform and silence dissent was strong indeed. Note that many, like Blanchard and Woodford for example, in the mainstream continue to suggest that there is a lot of consensus between New Keynesians, and Real Business Cycles types. In fact, they say there is more agreement now than in the 1970s. How is the consensus methodology in macroeconomics, you ask. From Blanchard's paper above:

"To caricature, but only slightly: A macroeconomic article today often follows strict, haiku-like, rules: It starts from a general equilibrium structure, in which individuals maximize the expected present value of utility, firms maximize their value, and markets clear. Then, it introduces a twist, be it an imperfection or the closing of a particular set of markets, and works out the general equilibrium implications. It then performs a numerical simulation, based on calibration, showing that the model performs well. It ends with a welfare assessment."

And yes that is also the basis of New Keynesian models. The haiku basically describes the crazy models in which reasonable results must be disguised if you're to be taken seriously in academia. When everybody agrees, there is little need for debate. And you get stuck with crazy models. The lack of debate within the mainstream to this day is also, in part, what provides support for austerity policies around the globe, even when it is clear that they have failed.

Mitchell and Clark on the business cycles

Starting my seminar on business cycles this week. Mainly theories and then a discussion of both Great Depression and Recession. In the US the original authority, and the intellectual driving force of the analysis of the cycle which started at the National Bureau of Economic Research (NBER), was undoubtedly Wesley Clair Mitchell. The figure above comes from an early analysis of global cycles published in the New York Times back in 1926 (subscription required). The Times quotes him saying that there was: "a trend in the direction of a world economy in which all nations will prosper or suffer together." In other words, a tendency to a global cycle.

In fact, Mitchell is often remembered more as a founder of the NBER and of the quantification of business cycles than his role as a disciple of Veblen and a founder of American Institutionalism.* His institutionalism, however, is often reduced to empiricism. In other words, Mitchell generally is not considered as a theorist. Howard Sherman suggests (subscription required), however, that: "embedded in his theory, but not made explicit in those terms, is a theory of the multiplier and the accelerator." In other words, a Keynesian approach to the cycle.**

This is consistent with the work we published with Luca Fiorito on another institutionalist from Columbia, namely: John Maurice Clark. As we noted then, the fact that the less mechanical, and also non-neoclassical version of Keynesian ideas, basically in contrast to the so-called Neoclassical Synthesis, was relegated to secondary status in the US in part explains how Keynesianism was reduced to a simple case of rigidities and imperfections. Not surprisingly the multiplier-accelerator interaction as the basis of the cycle, even though the empirical evidence for both components is strong, is not part of the mainstream macroeconomic textbooks.

* He was also one of the founders of the New School for Social Research in 1919.

** Mind you he did write with Arthur Burns, who eventually became a Monetarist associated with Milton Friedman and the chairman of the Fed, a famous NBER book on the cycle.

Is Krugman open to debate?

So I used to post some comments on Krugman's blog, but over the last few years when I post something in it doesn't get published. The Kman likes conversation, provided nobody calls him up on his bs. So in his critique of heterodox economists he said:

"So if you [presumably heterodox economist] go around claiming that model-oriented, quantitative economics gave rise to austerity mania, you’re getting the story all wrong. Worse, you are in effect covering up for the austerians’ intellectual sins."

My comment was:

"Have the courage to publish my comments (which have been banned for years now). If you claim to be a serious person open to debate. Seriously, heterodoxy is NOT about model-oriented, quantitative economics giving rise to austerity. It is about a model that against logic and evidence suggests that the market returns to its natural rate unless there are imperfections. And in that sense, even New Keynesian like you that defend more fiscal stimulus miss the point."

Let's see if he publishes it.* Note that my point is that there are plenty of formalizations of heterodox economics [not all the same; my preferences are well known for readers of the blog, namely: effective demand in the long run with some sort of supermultiplier]. There are some heterodox authors against formalization, but also some neoclassicals (some Austrians, in particular). But the main differences between heterodox and orthodox economists are about causality and NOT about formalization. On debate and monologue in economics see this.

PS: If you want a formalized growth model as an example go here. For one on inflation here.

* Update: Shaming does work. It was published.

On the blogs

‘What are economists for? To make people laugh’: vale, Charlie Hebdo’s Bernard Maris -- Steve Kates on the late Bernard Maris, a post-Keynesian economist and victim of the attack on Charlie Hebdo

Unemployment and Productivity Growth -- JW Mason on productivity growth and Verdoorn's Law among other things

Secular stagnation: a neo-paleo-Keynesian perspective -- Roger Farmer on secular stagnation, Larry Summers' style, and neo-paleo-Keynesian economics (wow, is that a thing now?!)

Orthodoxy, Heterodoxy, and Ideology -- Krugman on orthodoxy and heterodoxy (as always he discusses something else, distorting the meaning of heterodox as being against formalization, and not the acceptance by the mainstream of the natural rate hypothesis and the need for imperfections; this was discussed here before and in many other posts)

Unemployment down, participation rate too

The Bureau of Labor Statistics has published the new Employment Situation Summary. The unemployment rate is down to 5.6%, and again (like in November 2014) more than 200K (252K in December, in fact) jobs were created (as I noted here a healthy recovery should create more or less double that number). But, at the same time, labor force participation rate edged down by 0.2%, and the employment to population ratio remained constant. The number of employed workers increased by a bit more than 110K, so now the rate of unemployment is falling both because some additional workers find jobs, but also as a result of less workers in the labor force. Not terrible, not good enough. My concern is that as we edge towards what the mainstream believes is full employment (aka the natural rate), somewhere closer to 5.2% or so, the pressure for less stimulative monetary policy (fiscal is a lost case right now) will increase.

PS: Note that average hourly earnings decreased a little bit. So no indication that we are close to full employment and wages are going up.

Sachs is wrong on Krugman and the recovery

Washed out, has-been pop icon and Bono

Jeffrey Sachs, Columbia professor and the foremost advocate for development aid to save development countries, attacks again. Back in the 1980s he was a neoliberal advisor to the governments of Bolivia (on stabilization), and Poland (on transition to a market economy, favoring the so-called 'shock therapy') among others. He was also the director of the Harvard Institute for International Development (HIID), which was basically a consultancy oriented institution, at the time of the Harvard-Russia Aid Scandal.*

Now in a recent op-ed he criticizes Krugman (and essentially anybody that believes that the current recovery in the US is not that good) on his predictions about the recovery. The argument is basically that, in spite all fears of lack of fiscal expansion, the economy has done pretty well. In his words:

For several years, and often several times a month, the Nobel laureate economist and New York Times columnist and blogger Paul Krugman has delivered one main message to his loyal readers: deficit-cutting “austerians” (as he calls advocates of fiscal austerity) are deluded. Fiscal retrenchment amid weak private demand would lead to chronically high unemployment... Yet, rather than a new recession, or an ongoing depression, the US unemployment rate has fallen from 8.6% in November 2011 to 5.8% in November 2014. Real economic growth in 2011 stood at 1.6%, and the IMF expects it to be 2.2% for 2014 as a whole. GDP in the third quarter of 2014 grew at a vigorous 5% annual rate, suggesting that aggregate growth for all of 2015 will be above 3%. So much for Krugman’s predictions.

This is not very different than the message the White House has been pushing on, he only forgot to say that the Dow Jones has hit new records. And yes GDP is recovering (and the fiscal package of 2009 was important, as well as fiscal transfers to states, which reduce the contractionary stance of local and state governments), but when you look the figure below (real GDP growth) it is clear that this recovery does not compare well with the Clinton or even Bush-II boom, which were not particularly good recoveries historically.

And that's not all. Not only the recovery is slow, but also the benefits are not evenly distributed, with employment recovering little (the unemployment rate is not the best measure in this case), as can be seen below with the employment to population ratio.

Not surprisingly real wages have not recovered much. So labor markets are weaker than what the numbers presented by Sachs suggest. Finally, note that the recovery has been so weak that many mainstream Keynesians, like Larry Summers, now are talking about secular stagnation. The ghost of Alvin Hansen is haunting mainstream economics.

* USAID gave the HIID a huge grant to advise the Russian government on privatization. The head of the team, Andrei Shleifer (and his hedge-fund wife), attempted to steal from better-qualified competitors Russia’s license to sell mutual funds, and was later sued and found guilty by the courts of conspiring to defraud the US government. Shleifer had to pay back millions and was stripped of his Whipple V.N. Jones Professor of Economic chair due to ethics violations, but it has been argued that he managed to preserve his position at the university due to cronyism, i.e. basically his close relation to Larry Summers, who was by then Harvard's President. David Warsh has told the details of the story.

Who reads the World Bank reports?

I don't. At least not regularly like I do with ECLAC, ILO, IMF and UNCTAD reports. There are a few ones that become highly controversial and had a broad readership, like the infamous East Asian Miracle Report back in 1993, written by a team that included Joseph Stiglitz, when the chief economist was Larry Summers, which presented the market-friendly approach to development, even if it made some concessions about the role of the State and industrial policy (basically saying that interventions that are market friendly are okay). The concessions to the role of State intervention were basically pushed by the Japanese government, that wanted to provide a theoretical framework more in accordance with its own development experience, and were resisted by the Bank's staff and the US. The market-friendly approach had been fully developed in the World Development Report 1991, the Bank's flagship publication.

Another World Development Report that was infamous was the 2000/2001 one. This one was on poverty, and the then chief economist Stiglitz brought Ravi Kanbur to lead the team that wrote it. The original draft gave more relevance to the empowerment of the poor than to growth (not much discussion of what causes growth, however, which would be more relevant, in my view), and it is said that Summers, US Treasury Secretary by that time, re-wrote several sections of the report. In particular, the Treasury did not want the World Bank to seem anti-globalization after the Seattle protests. Eventually Stiglitz and Kanbur resigned (Robert Wade wrote about the whole affair here).

The interesting thing is that with all this drama you would expect the readership of the World Bank reports to be huge. As it turns out, not so much.* This paper shows that:

"The World Bank invests about one-quarter of its budget for country services in knowledge products... About 13 percent of policy reports were downloaded at least 250 times while more than 31 percent of policy reports are never downloaded. Almost 87 percent of policy reports were never cited."

A lot of these are country specific reports. But given that a lot of the research is not properly autonomous, and is highly influenced by donors (meaning essentially the US Treasury), one wonders what is the purpose of the World Bank's research department.

* That is also likely true in academia, by the way. But you would expect the World Bank to have a broader readership than obscure academic journals.

Growth forecasts and Latin American underperformance

The Economist's growth forecast is out, available here. 2.9% for the global economy, somewhat below the IMF's forecast (in WEO, not sure if they updated that) of 3.8% for 2015. Map below shows that now the dual recovery is more complex. The US for one seems to be growing at a faster pace, even if the benefits are not felt by the vast majority, and the labor market is less tight than official unemployment indicates. Europe, and Japan continue basically stagnated.

On the other hand, most of the periphery will grow healthily. China's slowdown seems to be to a still impressive 7% or so. What region among the developing ones is the underperforming, you may ask. Drum roll, wait for it... yes, no surprise, Latin America [and for those that think that political instability matters a lot, note that the MENA region will do better]. On this one the IMF is in the same ballpark, as is ECLAC.

There are certainly effects from lower terms of trade, caused by lower commodity prices, but those are not evenly divided, and some countries in the region might actually benefit from lower energy costs (not the net exports of oil for sure; so Venezuela is in trouble). But not all countries in the region have been forced to slowdown for balance of payments problems. In fact, I would argue that so far this would be the exception.

While it is true that for the region as a whole the current account balance has deteriorated (as can be seen above, to around 2.3% deficit with respect to GDP; from ECLAC), it is still the case that low rates of interest in advanced economies (even in the US, if they increase, the likely scenario is that they will remain low) implies that the CA is within the sustainable range. In fact, Brazil, with a higher CA to GDP deficit than Argentina, should not have (and we are talking in the short run here) any trouble to finance its deficit even if it increased as a result of more expansionist policies (don't worry, that's not happenning anyway). And the reason Argentina (the main exception in the region) might not be able to grow more with a CA deficit that is relatively small is associated to the Vultures, and the lack of access to international financial markets (something that might or not be solved this year, which is also an election year).

So why is the region underperforming, if the CA is not in this particular circumstance a barrier to economic growth? As noted by Esteban Pérez here (and discussed here too), the problem in Latin America is that expansions tend to be weak when compared to other regions (including the last boom from 2003 to 2008). In other words, the macroeconomic stance in the boom tends to be excessively timid (sometimes outright contractionary), reducing growth in the expansionary period. This is fairly evident in the case of Brazil, where a fiscal adjustment is now in place (imposed by a left of center government without any pressure from the IMF, one might add), when the economy is almost stagnated and inflation is around the upper limit of the inflation target (6.5%), which is certainly not excessive, and unlikely to be the result of excess demand.

As I often say to my students, in Latin America we do not need the IMF anymore. We have internalized it. Many heterodox economists are for devaluation and fiscal adjustment, the old mantra of the IMF, now disguised as progressive economics. Oh well.

Samuelson as a historian of economic thought

Steven Medema, together with Anthony Waterman, has published a series of papers by the late Paul Samuelson on the history of economic thought. Note that the scale and the range is more impressive than I expected. As they say in the intro:

"Paul Samuelson once referred, self-disparagingly, to 'the 5 per cent of my published papers that deal with the history of economic science' (54, 3). But D.P. O’Brien (2007, 336) regards this as a 'significant underestimate.' Nearly 140 articles, essays, or memoirs listed at the end of this volume, appearing over a period of forty-four years from 1946 to 2009 and comprising perhaps 20 percent of his scholarly publications, are clearly identifiable as studies of the history of economic thought."

I only know a bit of his writings on the Keynesian Revolution, and on Marx, who he famously, and incorrectly in my view, labeled as a "minor post-Ricardian." Now I learn that Samuelson thought also that Ricardo, in his estimation, was "the most overrated of economists."

I suppose that his views on Ricardo help understand his reservations about Marx. Also, and so far I have read the introduction (so I am relying on the editors), he seems to side with Malthus in his debate with Ricardo. Again, that makes sense. At any rate, worth reading and more to follow.

PS: It occurs to me that Samuelson's interest in Sraffa (he wrote an entry for the 1987 edition of the Palgrave, and according to Eatwell, wanted to write the main entry), who is cited profusely in the volume, the ultimate interpreter of Ricardo (and for me of Marx too), is no coincidence. 

Internal devaluation and the Greek crisis

Last month, using the ILO's Global Wage Report, I noticed that real wages in Greece had collapsed by an outstanding 24% since 2009. Further, I suggested that my guess was that this internal devaluation was NOT the cause of the improvement in the current account (CA), which as can be seen below did in fact improve (2014 is an IMF estimate).

The question is whether real exchange rate depreciation, in this case a reduction of real wages, since the  nominal exchange rate is fixed (so to speak) with respect to other Euro countries, was a significant force behind the improvement in the CA balances.  Note that the improvement is basically all due to the collapse of imports, since the growth of exports (both shown below) has been basically zero (again 2014 figures are estimates).

Lower real wages had an impact, if they did, on demand, not in leading to higher exports associated to lower domestic costs. In other words, less demand associated to lower wages and a collapsing domestic economy is what has allowed for the rebalancing of the external accounts. If there are any doubts, below you can see the high correlation between GDP growth and the collapse in import growth.

This suggests that devaluation, be that internal as it has been so far, or external as leaving the Euro might imply, is not necessarily enough to solve the current crisis.

The meaning of Structuralism: a very short reply to Krugman

Praying at the altar of the Natural Rate

So the K-man explains what's the meaning of structural variables (structural confusion indeed). In his words: "Normally, what we mean by 'structural' — usually as opposed to 'cyclical' — is 'something that can’t be cured with higher demand'." He complements this definition with a comment: "there used to be a Latin American school of thought which saw inflation as structural, but I don’t think it ever made much sense."

So first the definition. Yes, structural is the antipode of cyclical (well duh), but it is by no means something that cannot be affected (cured if you think of unemployment as a disease) by demand. The only reason to think that the trend cannot be affected by demand is because Krugman believes (based on faith, since logic and evidence are against it) on the Natural Rate. Output is supply constrained in the long run, in his view. Actually, you can bring the average rate of unemployment (the trend or structural one, not the fluctuations) down by expanding demand. During the Golden Age of capitalism, average (structural) unemployment was lower, since there was a macroeconomic regime in place that allowed for consistent demand pressure and higher rates of growth. It involved capital controls and on average low rates of interest, high government spending in defense and infrastructure (in the case of the US), and increases in wages with productivity, so workers could expand consumption.

By the way, his lack of appreciation for Structural theories of inflation is also based on this obsession with the Natural Rate. For him all inflation is caused by excess demand (it turns out that Krugman is a Monetarist). Latin American structuralists pointed out that the changes in the structure of production created cost push causes for inflation. Logic and evidence suggest that they were right. By the way, same reason you shouldn't, as Krugman isn't, afraid about inflation in the US right now. Not close to full employment, and bargaining power of labor class at all time low, with no wage cost pressures. For a slightly longer discussion see this entry on the meaning of structuralist macroeconomics, and this one on the evolution of Latin American Structuralism which is still around (yep, the news of our demise are greatly exaggerated).

PS: I believe that you cannot understand inflation unless you have some structuralist view of it. For more go here.

A brief and dispassionate note on 'GDP'

The book, not the concept. I've been reading "GDP: A Brief but Affectionate History." First, I should say I personally like brief and simple. Better than long, drown-out and complex. That's why I'm not sure why it's presumed that brief must somehow be antagonistic, and brevity should be tempered by affection. At any rate, I do like the GDP concept.

It measures material production, which is a key feature of capitalist economies, centered on the accumulation of material wealth. It was not designed to measure everything. Certainly not sustainability. Or happiness, for that matter. And although Diane Coyle, author of the book, suggests that it can't be used as a measure of well-being, GDP per capita is certainly employed as an index of welfare, even though no serious (I don't mean mainstream) economist would take GDP per capita as the only indicator of development. Finally, it isn't a measure of inequality, but functional income distribution, the shares of labor and capital compensation in total GDP, is actually one of the best measures of inequality. So yes, GDP does have its flaws (for an accessible discussion of the limitations of GDP go here, and for my views here).

Note that Kuznets apparently was against including government spending, in particular defense expenditures, as part of GDP, according to Coyle, since in his view it didn't increase well-being. That proposition is not uncontroversial. A lot of government spending, including in defense, is central for technological innovation, and, hence, for higher productivity growth and increasing living standards. The internet (as well as driverless cars and many other things) that I'm using to post this piece is the result of DARPA's investment -- the Defense Advanced Research Projects Agency, a defense department agency.

This suggests to me that we owe more to the British Keynesians, Richard Stone and James Meade, that basically created the methodology of of the National Accounts during World-War-II, than to Kuznets (all three won the Sveriges Riksbank Prize, by the way, but Meade's wasn't related to national accounting). And, in a sense, it is what Coyle suggests when she argues that:

“It [Keynesian economics] became the basis for a more interventionist approach to government economic policy from the 1940s onward, using both fiscal policy (the level of tax and spending) and monetary policy (the level of interest rates and availability of credit) to target a higher and less volatile rate of growth for the economy. The use of these tools was developed more fully by other economists after Keynes’s early death in April 1946. Postwar policymakers still bore the scars of the Great Depression and pounced on the economic theories of Keynes and his successors as a means of averting a repetition of that crisis. Crucially, the development of GDP, and specifically its inclusion of government expenditure, winning out over Kuznets’s welfare-based approach made Keynesian macroeconomic theory the fundamental basis of how governments ran their economies in the postwar era. The conceptual measurement change enabled a significant change in the part governments were to play in the economy. GDP statistics and Keynesian macroeconomic policy were mutually reinforcing. The story of GDP since 1940 is also the story of macroeconomics. The availability of national accounts statistics made demand management seem not only feasible but also scientific.”

This is essentially correct, yet it might be misinterpreted as suggesting that the National Income and Product Accounts (NIPA) are intrinsically Keynesian, as some far right supply-siders have argued. Nothing in the NIPA implies that causality goes from autonomous spending to income, as in Keynes' Principle of Effective Demand, and the accounts are compatible with a model based on Say's Law (not that I personally think that's a good idea).

It only means that by the time the National Accounts were developed, a version of Keynesian economics, as it turns the Neoclassical Synthesis, had more or less become the mainstream interpretation of how the macroeconomy works. The same is true of say econometrics, and macro econometric models, like the Klein-Goldberger, which was Keynesian, and would not lead a reasonable person to conclude that econometrics is Keynesian (Keynes was, in fact, skeptical about it).

The Forgotten Bubble

Over the years I've heard of a new story about the 1920s. Mostly in class comments or in the papers of my undergraduate students. First in Utah, now here at Bucknell. The notion is that the 1920-21 recession was solved by laissez-faire policies. This fits the revisionist view about the Great Depression defended by Amity Shlaes and others. In other words, the depression was prolonged by the New Deal policies (I discussed those here).

A new book by James Grant, The Forgotten Depression, suggests exactly that the recovery in 1922 was the result of the lack of government intervention. The notion is that there was no fiscal stimulus, and yet the economy recovered. By the way, the book also suggests that the cause of the recession was the Fed's policy. I guess it was the first Fed caused crisis in this view, in line with Friedman's explanation of the Depression as the Great Contraction.

There is a relatively well-know and established story about the 1920s recovery and boom, which does not suggest that laissez-faire is a good idea. It suggests that it was a consumption boom associated to a bubble, and, hence, unsustainable leading to a collapse. The 1920s is when debt-driven consumption of mass produced goods became the norm, and when a whole set of new goods were available for the middle class (e..g cars, refrigerators, radios, etc.). A good description of that story can be found in Livingstone here (subscription required). In other words, in spite of wage stagnation, worsening income distribution, and lack of government stimulus the roaring twenties were possible as a result of private debt accumulation. And you know how well that ended.

There was also a housing bubble. Ahmad Borazan, who is working on these topics at the University of Utah, pointed out to me the paper by Eugene White on national housing bubble that bursted in 1926. In that respect it is worth noticing that bubbles and speculation on land were central for almost all booms and busts in the 19th century, as seen in the figure below.

Note that there were financial crashes in 1819, 1837 and 1857, often associated to higher rates of interest in the UK, the main financial center back then, and to the collapse of commodity and asset prices. Housing bubbles seem to be the modern version of land speculation, when the frontier has vanished, and they seem to have played a role in the Great Depression and the last crisis.

PS: Figure above comes from Reynolds Nelson's A Nation of Deadbeats.

America’s wealth gap is widest on record

From Pew Research Center:

A new Pew Research Center analysis of wealth finds the gap between America’s upper-income and middle-income families has reached its highest level on record. In 2013, the median wealth of the nation’s upper-income families ($639,400) was nearly seven times the median wealth of middle-income families ($96,500), the widest wealth gap seen in 30 years when the Federal Reserve began collecting these data.

Read rest here.

How Stimulative Has Fiscal Policy Been Around the World?

So a student asked me if I wrote something about how fiscal policy should have been more stimulative after the crisis. The paper written in 2010 with Esteban Pérez seems to hold well after more than 4 years. From Challenge Magazine's short intro:

The current credit crisis and worldwide policy response have resurrected the reputation of fiscal policy. But the authors contend that it is still widely misunderstood. Many of those who now support fiscal stimulus—such as more government spending—have a limited view of its usefulness, one advocated by the pre-Friedmanite economists of the University of Chicago. It stands in contrast to the more thorough Keynesian revolution, which they argue now more than ever needs to be understood. The result has been far smaller fiscal stimulus packages than are necessary to return nations to rapid growth.

I still like more the original title: All is quiet on the fiscal front. We were worried that fiscal stimulus was not big enough, and concerned that the IMF and governments were overly optimistic about the economy's tendency to full employment. Sounds about right. The Keynesian moment was short lived indeed.

New Website For Union For Radical Political Economics (URPE) Up and Running

The official website for Union For Radical Political Economics (URPE) has been refurbished, with a new layout design, including new drop-down menus, etc. See here.

Business Schools, Liberal Arts Education and Heterodox Economics

So we're having a discussion about the new Management College at Bucknell. Traditionally resources are the main problem in the relation between business schools and economics departments. Often, as in the University of Utah, were I was before, there are issues related to the curriculum, in particular if the economics department is heterodox. In a liberal arts environment, the issues are not only associated to resources, but also to the teaching of what is assumed to be more practical knowledge or marketable skills in a milieu in which the main goal of education is to develop the essentials for civic life, where critical thinking and the ability of learning how to learn are at the center of the curriculum.

Is it possible? Or would the management goals undermine the liberal arts experience. Note that many think that liberal arts education is doomed anyway (an old topic by the way). The fear is that students cannot (given tuition costs) afford the luxury of an education for education's sake, but need 'practical knowledge,' that would be useful in the market (the market analogy was used freely in the faculty meeting). I have my doubts about how useful 'practical knowledge' is compared to a broad education that prepares citizens to think independently and critically about the world, but that's difficult to evaluate, I guess.

The experience of Cambridge and Oxford I think is relevant for the US liberal arts institutions, in particular the former which was central for heterodox economics until the 1970s or so. They did not have business schools until recently. In Cambridge the management program was in the engineering school and only in the 1990s it became independent as an institute, eventually becoming a school in this century (in Bucknell the major, became a school and now will turn into a college, but the idea is the same, it will get more independence to raise funds, hire faculty and establish its own curriculum).

The decline of heterodox economics at Cambridge, and its transformation into a second rate neoclassical department, which deserves thorough analysis (something I'm certainly not capable or planning to do), took place more or less at the same time that business became more relevant. The old Cambridge Keynesians retired (and passed away) in the 1970s and 1980s. Richard Kahn, Austin and Joan Robinson, Piero Sraffa, Nicholas Kaldor, and the neoclassical, but still Keynesian James Meade (by the way, the only one to get the Sveriges Riksbank prize in memory of Alfred Nobel) were the key figures. Harrod was at Oxford, but in a sense is a member of the same group, and perhaps the same applies to Hicks (the other neoclassical Keynesian winner of the Sveriges Riksbank prize), also from Oxford. Wynne Godley was the head of the Department of Applied Economics, brought from the Treasury by Kaldor, but even before he left in the 1990s, his team was defunded after Thatcher's conservative victory. A few token heterodox economists were left in the department, and a few still resist, but it is not a place were heterodox, critical thinking is taken seriously.

Note that I'm not suggesting that the rise of management and business are the cause of the demise of Cambridge Keynesianism. Both changes are very likely simply, and only in part, explained by the same general move, in British society and around the world, to embrace a market friendly ideology. While I'm, as I noted, skeptical about the value of 'practical' education, and cannot say for sure whether the liberal arts alternative is better, I've a fairly good idea about the value of heterodox economics.

The kind of economics that the old radical Keynesians taught at Cambridge is a better tool to understand the world than the neoclassical alternative that the department there embraced. Note that Godley was one of the few that actually forecasted the Thatcher recession (and probably got punished for that), as well as noting the limits of the dot.com boom and the housing bubble that led to the 2008 crisis (see here or here for his prescient views on the euro). Most of my heterodox teachers that were directly or indirectly influenced by the Cambridge Keynesians were not surprised by the crisis that left the mainstream of the profession puzzled. I would say that heterodox economics has practical value indeed. My feeling is that a liberal arts education is often more practical than practical knowledge.

New Book: The 2015 Hampton Reader, Selected Essays and Analyses from the Hampton Institute

A collection of essays and analyses from the The Hampton Institute - A Working Class Think Tank. Includes, articles by David Fields, and Hampton's most popular essays from 2013-14 in addition to exclusive content that can only be read here. From a follow-up to Sean Posey's timely analysis of Youngstown, Ohio as a microcosm of the post-industrial American "rustbelt" to Andrew Gavin Marshall's in-depth research on "the intellectuals and institutions of American imperialism," the 2015 Hampton Reader is sure to generate ideas, spark debate, and cultivate dialogue.

See here.

Book Review of Foster & McChesney's "The Endless Crisis: How Monopoly-Finance Capital Produces Stagnation and Upheaval from the USA to China"

The Endless Crisis: How Monopoly-Finance Capital Produces Stagnation and Upheaval from the USA to China. John Bellamy Foster & Robert W. McChesney Hardcover: 224 pages. Publisher: Monthly Review Press (September 1, 2012). Language: English. ISBN-13: 978-1583673133

By David Fields

Over-accumulation stemming from the so-called golden age of global capitalism has ensued an era of underconsumption as exemplified by low profit rates and chronic excess capacity. As such, what has taken place is an historical transformation towards the process of financialization. With an inability to absorb effectively economic surpluses, concerning the promotion of rising wages along with productivity, NFCs, or non-financial corporations, are coerced to paying a larger share of their internal funds, specifically via debt leveraging (including consumers), to financial institutions. These financial institutions, which are increasingly concentrated in the hands of fewer and fewer people, have become some of the most powerful actors. Increasing concentration of control within the financial sector lends credence to Marx's (1894: 544-45) argument that what Foster & McChesney call the age of monopoly finance capital is one in which

[t]he credit system, which as its focus in the so-called national banks and the big money lenders and usurers surrounding them, constitutes enormous centralization, and gives this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner-and this gang knows nothing about production and has nothing to do with it.

Read rest here.

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.