A Woman on a 20 Dollar Bill

A woman instead of a flawed president

I'm not a huge fan of the sociological discussions about the symbolic role of money. As readers of the blog would know I tend to follow a cartalist or chartalist view of money -- most discussion in the blog have been also associated with the cartalist conception of the role of dollar hegemony (here) -- which basically means that the origin of money is power. Keynes said in his Treatise on Money that: “money of account comes into existence along with debts, which are contracts for deferred payment, and price lists, which are offers of contracts for sale or purchase.... [and] can only be expressed in terms of a money of account” (p. 3). It's a unit of account, and someone has the power to decide what money is.

Having said that, it is true that money, as any other symbol of power, has implications for the functioning of society that go beyond the merely material ones related to the reproduction of society. Now there is a campaign to put a woman on the 20 dollar bill, replacing Andrew Jackson (better than the previous campaign to put Reagan in Hamilton's place). You can vote in their website, not that this would have any official role. You must choose three, but my real choice was Frances Perkins, first woman in the cabinet (FDR's labor secretary), and in many respects the main force behind some of the social policies of the New Deal.

Krugman is not a real Keynesian

From The Boston Globe:

Keynes’s insights have enormous practical importance, according to Lance Taylor and Duncan Foley of the New School. Temperamentally opposite — Foley a brilliant theorist, Taylor a pragmatist influential in developing nations — they jointly received the Leontief Prize for Advancing the Frontiers of Economic Thought at Tufts University’s Global Development and Environment Institute on Monday. But isn’t Keynes now mainstream? No, say Foley and Taylor. The mainstream still sees economies as inherently moving to an optimal equilibrium, as Wicksell did. It still says demand causes short-run fluctuations, but only supply factors, such as the capital stock and technology, can affect long-run growth.

Read rest here. Not a surprise for the readers of this blog.

The Gold Standard and the Depression

I have been teaching on this topic this week. One of the accepted views on the Depression is that countries that depreciated earlier recovered faster from the crisis. The classic paper by Eichengreen and Sachs sort of established the result.* The notion is the traditional one. Depreciation leads to lower prices in foreign currency, increased competitiveness and higher exports. Graph below shows the correlation between depreciation (since the exchange rate is measured as the foreign price of domestic currency, lower rate means depreciation).

The indexes show the difference between the exchange rate and export volumes in 1929 (100) and 1935. So in 1935 France had not left the Gold Standard and the exchange rate remained at 100, while the exports were close to 50% of their 1929 level. There seems to be a clear negative relation between the exchange rate depreciation and export performance. However, note that in the United Kingdom a depreciation of about 40% implied exports at around 75% or so of the 1929 level. Only Norway and Finland seem to have higher exports in 1935 than in 1929. This was not an external demand led recovery.

This suggests that if depreciation had a role it was more likely related to the space that breaking with the Gold Standard rules provided for domestic authorities to pursue expansionary policies at home. Note that in this context, the depreciation, as much as higher tariffs and other trade related policies, are less relevant for their role in stimulating external demand, than by their role in protecting domestic production.

In the US the group of economists that were in favor of the depreciation of the dollar (see the letter by Harvard economists J. Raymond Walsh, Lauchlin Currie, John B. Crane, John M. Cassels, Robert Keen Lamb and Alan R. Sweezy in support of FDR's depreciation policy in 1934; and yes that includes Currie, later advisor to Eccles, and Paul's brother Alan, a Keynesian, not a Marxist), were also in favor of domestic fiscal expansion, which was at the end of the day Keynes point too. You can see Keynes arguing why the abandonment of the Gold Standard would be a good thing here, at the beginning of John Kenneth Galbraith's documentary.

This is still an important point, since there are significant lessons, at least it seems to me, for the European periphery story, in particular Greece. Depreciation alone cannot do the job. But a combination of import substituting policies, to reduce external constraint problems, with expansionary demand policies might work.

* There are also issues related to the role of the Gold Standard in causing the Depression, since the crisis was international, and many authors think that this suggests that it must have international causes. Hence, the Monetarist contraction story, or the Keynesian consumption collapse story (including the more radical version in which income distribution plays a role) would be incomplete. In this view, the relatively high rate of interest, related to the not credible inter-war Gold Standard, would be the cause of the depression. This view, as I noted before, seems closer to Keynes' Treatise on Money than his GT.

Minsky's puppet explains the crisis

Monty Python's Terry Jones' documentary Boom Bust Boom with a Hyman Minsky puppet. What's not to like?

PS: The puppet at the end represents Hyman Minsky.

Taylor and Foley recipients of Leontief Prize live

2015 Leontief Prize went to Duncan Foley and Lance Taylor for their work on "Macroeconomics in the Age of Climate Change." Watch their talk live starting at 5:30 Eastern Time today here.

PS: If you missed it, they will post later video footage. Meanwhile here are the interviews with last years winners Angus Deaton and James K. Galbraith.

New Book: The Encyclopedia of Central Banking

New book on central banking, edited by L-P Rochon & Sergio Rossi, has recently been published. I have two chapters: 1. on Classical Dichotomy, & 2. on Dollar Hegemony.

See here.

PS: Posted here with an entry on Bretton Woods by Omar Hamouda.

On the blogs

Architects of Miscalculation: Behind the White House’s Sanctions Against Venezuela -- Mark Weisbrot on why "Washington is still some ways away from the hemispheric equivalent of Nixon’s trip to China in 1972."

Greek Debt: Do the Right Thing -- Dmitri Papadimitriou on the ongoing Greek crisis.

How to Raise Wages -- Lawrence Mishel and Ross Eisenbrey, from EPI, on policies that strengthen workers' power to bargain for higher wages.

Suzanne de Brunhoff (1929-2015) -- Well-known Marxist scholar has passed away recently, but I haven't seen any obituary so far.

Robin Hahnel on the Fed & the pressure to raise interest rates

From The Real News Network

Translating from Fed speak, Janet Yellen is doing everything within her power to slow down the pressure that she's under to start raising interest rates here in the United States. We actually have a news network that today sort of asked the question, is Janet Yellen too socialist? And I think that's actually a good way for people to sort of understand what's going on. As much as any chairperson of the Federal Reserve Bank of the United States can be, she is actually trying the best she can to act in the interests of the general public, which is quite unusual. And so she is trying to delay as long as possible raising interest rates in the United States, mostly because she doesn't want to derail the sort of slow and tepid recovery that's going on and she understands that raising interest rates prematurely and too rapidly would have the significant danger that it would slow our recovery. And she's pointing out that there is no sign that there is inflation on the horizon, that the only reason the Fed should have to be raising interest rates really is if there is inflationary pressure and if there is a danger of inflation. And the people trying to convince the Fed to raise interest rates keeps claiming that we need to do this to prevent inflation, but they have no evidence on that side.

Originally posted here, with full transcript. Video below.

The Economic Education of JFK: Arthur Okun's recollections

JFK with Dillon (first to JFK's right) and Heller (standing behind Dillon)

Nate has posted on JFK State of the Union address in 1963, when the tax cut was proposed to deal with the high level of unemployment of about 5.7 percent. Transcripts from an interview with Arthur Okun (of Okun's Law fame) conducted by David McComb and deposited at the LBJ Library tell the story of how that came to be.

Walter Heller was the chairman of the Council of Economic Advisers (CEA) at this time. Here is Okun on the CEA's views of the economic problem early in the JFK administration:

"The economist's diagnosis of the ills of the economy right at the start in 1961 was that it had been over-sedated with an excessively restrictive budget, which had so sapped its strength that you weren't getting the revenues from that budget; and therefore the budget looked as though it wasn't restrictive. Still you had a deficit, but the deficit was associated with trying to get too big a surplus and therefore holding down incomes and profits to the point where the revenues weren't coming in. We developed a concept called the 'full employment surplus' of trying to show where the budget would be if the economy was on a high employment growth path and trying to show that basically you had a much too tight budget, and that from the economist's point of view the right medicine was one of a more stimulative budget which would bring the economy to full employment, reduce unemployment,  strengthen investment, give us a lot more output for which there were and remain very urgent uses.  Obviously, this would mean in the short run that you'd have to do things which would make the budgetary deficit a lot bigger."

This was not the view held by Douglas Dillon, the then Secretary of Treasury, and a Republican one might add, and initially wasn't either Kennedy's view, since he had promised a balanced budget. As Okun's says: "There's no question that from the outset Dillon and Heller were giving President Kennedy quite different advice." Dillon remained a balanced budget defender. Okun tells the story of JFK's conversion to the Heller side.

"An amusing incident that I recall hearing about—President Kennedy made some statements that seemed to be wiggling off the hook of this balanced budget commitment at a press conference in August or September '61 . Dillon called him the next day and told him that we'd upset foreign bankers and urged him to clarify what he meant and reaffirm his determination. Walter, who had been delighted by the President's ability to see this more pragmatically, was told that Kennedy felt he had to do this, that he did indeed reaffirm that and that there was a balanced proposal in the fiscal '63 budget, which never materialized at all. I think the key manifestation of Kennedy's conversion to the Heller creed was the commencement address that Kennedy gave at Yale in June 1962, which was something—he really wanted to do this. And it was clear—again operating on other people's stories—he wanted a myth-exploding speech, and he ordered that it be focused on economic policy. He really went after the balanced budget myth as the key myth that needed to be destroyed."

On the substantive issue of what made JFK change his mind Okun is unclear, but Heller was central. And not just regarding the disputes within the administration. he says:

"I don't really know just how much of what kind of communication there was between Heller and President Kennedy. I know there was a flood of paper that went from the Council to the White House. Even after Kennedy was personally sold there was a further educational problem of convincing the public and convincing the Congress… Heller did a great job of public education. He got a lot of press attention to… try to popularize a notion that an underemployed economy was a great national waste. One of my first tasks on the Council was to try and estimate what our potential was. That estimate of potential output I guess remains my best known professional contribution as an economist. It's widely referred to as Okun's Law.’"

In fact, the education of the President, Congress and the public was in Okun's view the main task of the CEA at that time. In his words:

"But this was the first item on the priority list that the doctor could order for a patient. The problem was that of getting the patient to take the medicine rather than knowing what to prescribe. It was that that put all the emphasis on Educating the President, the Congress, the public, making the case publicly—you know, really improving the packaging, the labeling, the palatability of the medicine rather than improving the prescription at that time. Obviously, we did a lot of economic analysis on how big a tax cut we'd like ideally, what the appropriate unemployment target might be, what could be done to supplement general fiscal policy through manpower programs, how well guideposts could help to fend off the evil day that inflation reared its ugly head, and all that. But I think still you'd find that the largest emphasis of the Council's activity was on the salesmanship of a product rather than on the development of a superior product, because that was what the real need was."

After Kennedy's assassination Heller's task of educating LBJ wasn't as difficult. Again, according to Okun:

"I don't think he had as much trouble breaking down the balanced budget myth all over again. I think that notion of fiscal orthodoxy had been pretty well dispelled. I'm not sure it ever played as much of a part in President Johnson's ideology as it perhaps had in President Kennedy's."

Of course the task is much harder these days, since the doctors don't understand the problem and their diagnosis is often incorrect. Rather than a problem of public education, there is a problem of educating the doctors, the economics profession. The balanced budget myth and fiscal orthodoxy are back with a vengeance.

Lapavitsas on Greexit

Costas Lapavitsas, who is now a member of parliament for Syriza, on Greexit, which he sees as the best option.

"There are three stages. First, as I said, is the negotiated, consensual, orderly exit. 

Second stage is recovery and that would depend very much on recovery of domestic demand which is very heavily repressed in this country. There are vast resources lying unused. Small and medium enterprises would be reactivated, that’s what would really restart the Greek economy. Not exports - this worship of exports is nonsense. 

But obviously that is not really a path for sustainable growth. What Greece would need after that would be an industrial policy to restructure its productive base, to integrate itself in the world economy on a different basis. That would take a few years. 

But Greece would be still part of a common market, as a member of the EU. So it is not so easy to go back to domestic demand and to the SMEs, because it would have to kick out the big companies that could still sell cheaper.

I believe that Greece could out-compete imports very easily. Unfortunately, wages have been destroyed during the last 5 years due to bailout policies. A devaluation of 15-20% (but no more since as I said the ECB would defend the exchange rate) would give a tremendous competitive advantage. Wages would then gradually rise again."

Read the whole interview here. My guess is he is assuming that it would give competitive advantage to domestic production, and allow for growth without increasing imports too much. Costas seems to be less hopeful about the effects on exports, which would seem reasonable. I would suggest that relying on the exchange rate would not be sufficient, and that some sort of import substitution would be necessary too.

Ernesto Screpanti on Marx's Labor Theory of Value and The 'New Interpretation'

New Working Paper by Ernesto Screpanti. From the abstract:

Marx’s theory of labour value is flawed. This note summarizes the main reasons why this is so. At the same time, it claims that the theory of exploitation does not depend on a labour embodied valuation and can be expounded by resorting to the theory of production prices. Almost all Marxists have now accepted this truth. Most of them have been convinced by a ‘new interpretation’ which has been able to translate the price of net output into an amount of ‘living labour’ and the rate of exploitation into a ratio between unpaid and paid labour. What produced such a surprising result is the use of labour productivity as a numeraire.

Read rest here.

For more on Marx and LVT, see here.

Janet Yellen and the weak labor market

Janet Yellen, basically in the same vein of what I suggested here, used the broader unemployment measure, called the U-6 by the Labor Department, which was 11% in February to argue that the labor market is not that well in the US.

Note that U-6 is total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force. And the number is very similar to my calculation of what unemployment would be if the participation rate had remained constant. One more reason not to hike the rate of interest any time soon.

Austerity Sucks: Mark Blyth on the follies of US budget policy

The following is from a presentation before the US Senate by Mark Blyth, author of “Austerity: The History of a Dangerous Idea” It is a scholarly rebuke of mainstream notions about public debt and investment in social welfare that are driving domestic economic policy.

My name is Mark Blyth and I am the Eastman Professor of Political Economy at the Watson Institute for International Studies and Brown University in Providence RI. I am also the author of a book entitled Austerity: The History of a Dangerous Idea (Oxford University Press 2013) a book, which oddly just received a national award in Germany, the country most associated with budgetary austerity. Given that irony is not a German national trait, it might be the case that even the Germans are re-thinking their stance on balanced budgets. As I shall show you today, it’s really not working out so well in Europe and it would be a disaster if it were tried here too.

And yet balancing the budget as a matter of principle is intuitive. After all, you can’t spend more than you earn. It is also appealing. After all, people want more money in their pockets rather than less, so spending ‘other people’s money’ now so that they would have less in the future because of debt interest repayments seems to be the height of folly. But balancing the budget because of these arguments is also folly. While they are intuitive, these arguments are systematically wrong, because they are based upon two faulty analogies: one drawn between households firms and states and another between savings always being good and spending always being bad. I begin by taking each in turn before giving more specific examples.

Read rest here. Blyth’s presentation is viewable here, starting at the 46:20 mark.

L-P Rochon on Making sense of U.S. and Canadian labour market data

By Louis-Philippe Rochon

If you’re watching labour market statistics on both sides of the U.S. and Canadian border, you might think our economies are heading in very different directions. But a closer look shows that there are striking — and troubling — similarities. The U.S. economy seems to be outperforming expectations, according to labour market data released last week. In February alone, the it added more than 295,000 jobs; the 12th time in a row monthly job creation was at least 200,000. Job creation is widespread across all sectors and demographics, suggesting a firmly-rooted recovery. Unemployment has shrunk to 5.5 per cent, which is where it stood in May 2008. Finally, as the Secretary of Labour, Thomas E. Perez, boasted last week, February marks the first time in more than three decades that unemployment fell in all 50 states. What more could you say? Apparently, the U.S. is on course for a strong growth spurt, fuelling fear of inflation, which may convince the Federal Reserve to raise interest rates sooner than expected. But we mustn’t believe everything the man behind the curtain is saying. 

Read rest here.

On the blogs

Fun With Brad DeLong on TPP -- Dean Baker discusses Brad deLong timid defense of the Trans Pacific Partnership. Mind you I am less keen on the notion that a depreciated dollar would lead to more manufacturing jobs in the US, but at any rate we agree that Free trade Agreements hurt workers (here and in developing countries). FTAs are pro-corporation treaties

Yes David: Unemployment is Sometimes Involuntary -- Roger Farmer explaining the obvious to his friend David, and in the process criticizing Lucas. Always good in my book

Power from the People -- Florence Jaumotte and Carolina Buitron in the IMF's Finance & Development magazine note that the decline in unionization in recent decades has fed the rise in incomes at the top

A Tale of Two Economies? -- L-P. Rochon on the Canadian and US labor market weakness. And Canada is also far from full employment

Academic Freedom Watch: University of Manitoba

Based on an investigation conducted by the Canadian Association of University Teachers (CAUT), mainstream economists in the department of economics at the University of Manitoba, including the dean of faculty, have systematically marginalized heterodox professors. Robert Chernomas, a heterodox economics professor at the U of M, filed a grievance with university administration in 2009 claiming that the process for selecting a chair was “contrary to the collective agreement, unfair, unreasonable, and biased in relation to Dr. Chernomas.” Professor Chernomas had applied for the job but was not shortlisted by the committee. The committee eventually selected Pinaki Bose, an economics professor from the University of Memphis, in 2010. Since this appointment, according to Chernomos, heterodox professors have been "suppressed and isolated" to such an extent that they no longer hold any positions of authority or influence in the department.

Read rest here.

Seymour Harris on Post War Public Debt

Seymour E. Harris, 1897-1975

Seymour Edwin Harris was one of the pioneers of Keynesian economics in the US. He worked in the Office of Price Administration during the War, which was headed at some point by John Kenneth Galbraith, and was the chair of Harvard's Economics department. Galbraith suggests that: "President John F. Kennedy, shortly before he was killed, told of his intention of making Harris his next appointment to the Board of Governors of the Federal Reserve System." That was not meant to be.

His views on public debt show how widespread the ideas that would be labeled Functional Finance by Abba Lerner were among Keynesians in the 1940s. Most of the quotes below come from a paper on "Postwar Public Debt." The paper is in the book Postwar Economic Problems that he edited and is available here.

Note that there was no doubt that more debt was necessary to fund public investment in the post-war period. He says:

"We must not, therefore, be deterred from public invest­ment by these alarmists, if the postwar situation calls for public investment. Above all, we should assess the rising public debt in terms of the economy which must support it. There is no danger in a rising public debt which provides the income to finance it, or which grows in a developing economy."

An important point, often missed in current discussions of public debt, is that debts can be rolled over, and repayment is unnecessary. In fact, repayment might be a terrible idea and lead to deflationary forces and economic contraction.

"In answer to the contention that a permanent debt is a breach of faith, it is suggested that the obligation of the government is merely to provide the cash value of the bond on the date of maturity: the cash required may be obtained through sales of new bonds. Repayment of debt, moreover, may have deflationary effects; and the more impressed one is by the theory that our economy tends to stagnate, the more objectionable is the repayment of debt."

Further, accumulation of debt is not a problem. In an even more stark way than what Lerner would suggest later, Harris says that there might not be a clear limit to the amount of debt.

"Accumulation of debt will not bring ultimate collapse if the economy continues to grow. Tax capacity increases with the rise of income; and so long as the rise of debt charges is kept well within the limits set by a rising trend of income and capacity to pay taxes, no fears need be felt concerning a rising public debt.
...
In one sense, there is no limit to the growth of public debt, for, as debt charges rise, the taxation of holders of this debt may rise at an equal rate."

Finally, accumulation of debt does not bring the end of capitalism (one might argue the other way round, without debt, no capitalism) and the risk of inflation is minimal. 

"It may be a shock to many to learn that a public debt of $4,000 billion may be carried by the economy without a collapse of the capitalist system, a repudiation of the debt, or a great inflation. Yet the arithmetic of the problem suggests this conclusion."

He later qualifies suggesting that some inflation would take place if the economy approaches full employment. Note that at this point, in 1943, the fears were that after the war the situation of the 1930s, with economies struggling with unemployment would become the norm again. The famous paper by Samuelson suggesting exactly that is in this volume too.

In essence all of his predictions were correct. Expansion of debt did not lead to the collapse of capitalism in the US, or to high inflation (which occurred in the 1970s, but for other reasons, when debt was much lower in terms of GDP than in the 1940s). In fact, the capacity to repay grew so much, that as a share of GDP debt payments dwindled.  A good lesson, other than how to use Excel, for Reinhart and Rogoff.

PS: Hat tip to Nahuel Guaita.

US Interstate Transfers and the Euro Crisis

by Nathaniel Cline and David Fields

It is recognized among heterodox economists that the fiscal crisis some Eurozone countries faced (and are facing) is the result not of internal fiscal excess but of fundamental imbalances made worse by the adoption of a common currency. Indeed, as Wynne Godley pointed out (in several pieces) long ago, European structural payment imbalances will not be automatically corrected by market forces. In this case a common currency without centralized fiscal powers will potentially exacerbate the balance of payments problems of member countries. Some countries will be permanently outsold, and under the current arrangements, are forced to make large income adjustments to resolve their balance of payments.

As a result, many (even in the mainstream) have suggested that a common fiscal union would resolve the problems these countries face. Comparisons have been made to the US whose member states enjoy a common currency with a substantial federal fiscal system that redistributes funds among the states. Residents of states pay taxes to the federal government and states receive government expenditures (through federal programs, grants, salaries, and other means). However the payments states receive are decided upon different ground than the taxes they pay. Thus a state like Mississippi pays very little in taxes, but receives a substantial amount of government spending. In contrast, states like Minnesota pay in to the system much more than they receive.

In normal times this prevents large balance of payments crises from emerging between states. Mississippi is thus permitted a higher average growth rate than would otherwise be implied by their balance of payments.

It is misleading however to assume from these large transfers that simple fiscal transfers between states would resolve Europe's fiscal problems. In a recent presentation to the Eastern Economic Association, Dave Fields and I argued that in fact, the US did not respond to the crisis by transferring large amounts of money between states as it does in normal times.

The key point was that US federal government went into deficit to transfer money to states as a whole. The relevant transfer in the crisis was then not among states, but between states and the federal government. What is needed then is a Euro deficit which would finance all member states, and not necessarily transfers between say Germany and Greece in the middle of a crisis.

The degree of interstate transfers in the US is shown below. Note that between 2004 and 2007 it appears that the federal government is actually a net drag on the states. This is likely not quite correct because the expenditures in the chart do not count expenditures which cannot easily be allocated among states (like for instance federal interest payments).

The Degree of Interstate Transfers 2004-1013

Source: Expenditures provided by the Pew Fiscal Federalism Initiative, tax data from the IRS, author's calculations

The issue can be seen clearly too if the transfers are broken down by state as is done in the chart below. One can see that by 2009, only a few states remained net contributors to the system while the others all became net recipients (including by the way both California and Texas). 

Fiscal Transfers Between the States 2008-2009

Source: Expenditures provided by the Pew Fiscal Federalism Initiative, tax data from the IRS, author's calculations

How bad is unemployment?

So the unemployment rate is 5.5%, which some suggest is the upper limit of the calculations for the natural rate (some estimates suggest between 5.2 and 5.5%). And yes those measures are plagued by logical problems, let alone the empirical problem that the natural rate seems to be tied to the actual rate. At any rate, given the relevance of actual unemployment for the Fed policy it would be nice to know what the actual rate of unemployment means.

It is worth remembering that the rate of unemployment depends on the participation rate that, as can be seen below, has been falling since the late 1990s. The question is how would the unemployment rate look like if the participation rate remained at the same level it reached at the end of the Clinton boom.

This calculation was done before (here and here), and the new graph is below showing that unemployment would be at a much higher rate.

In fact, the rate of unemployment (u*) would be a bit more than double the current rate of unemployment (u) if the participation rate remained at 67% of the labor force. That might explain why real wages have not increased much in this recovery. The recovery is even weaker than it looks. 

More Jobs, Still Weak Wage Growth: The Federal Reserve Must Wait

By Thomas Palley

February’s employment report showed a gain of 295,000 jobs and a decline in the unemployment rate to 5.5%. The report is another in a string of strong employment reports, but it also contains depressingly familiar news about weak wage growth and millions of workers still short of work.

Job gains were spread widely across all sectors, with particularly strong gains in the service sector. Construction added another 29,000 jobs despite bad weather, and manufacturing added 8,000 jobs. The only significant weaknesses were in mining (down 8,000) and petroleum and coal products (down 6,000), reflecting lower energy commodity prices.

On the other side of the ledger, there continues to be abundant labor supply. Though the unemployment rate ticked down to 5.5%, there are still 8.7 million unemployed workers, another 6.6 million workers who are working part-time but want full-time work, and a further 6.5 million workers who would enter the labor force if a job were available. That totals 21.8 million workers who would like more work, which provides clear evidence we are still far from full employment.

Read rest here.

Is Venezuela a threat to the US?

I published not long ago on the sanctions imposed on Venezuela, in the middle of the easing of relations with Cuba. Now the US has imposed additional sanctions on Venezuela, and declared that the country is "an extraordinary threat to the national security of the United States." That this statement is, at face value, ridiculous is fairly evident. The sanctions are imposed allegedly on the basis of violations of human rights, which is also not credible, since the US (not just in the past, but right now) supports governments with a very poor record on human rights. In Latin America the US gives full support to the government of Colombia were human rights violations are the norm.

The media coverage in the US about Venezuela is, as noted by Mark Weisbrot, worse than the coverage during the build up to the Iraq war. I normally don't discuss non-economic issues in the blog. But it is worth listening to Mark on the Diane Rehm show today. Note that as Mark says, it is the US that is isolated on Venezuela, with almost all the governments in the region decrying the US policies. And as he says, there are problems with the economic policies in Venezuela (and other left of center governments in the region), but nothing justifies the US support for "regime change" in Venezuela, in particular, and the region. And no the government is NOT a dictatorship. Not only it was elected in clean elections, but also the vast majority of the media is anti-Chávez and they do have freedom of expression, as Mark notes, probably more than in the US.

Note that the pressure on Venezuela takes place at the same time that in many countries, the right wing forces which historically have received support from US administrations, both Republican and Democratic ones, are pushing for impeachments and veiled threats of coups. Part of the reason for right wing pressure, and the hate these left of center governments have generated on the wealthy and the middle classes (which in the past were for military coups) is, as noted by Bresser-Pereira in Brazil, related to the improvement of income distribution and the conditions of the poorest in the region. Note that the region is the exception in the last decade, with inequality falling, even if it is still high.

PS: Beyond the political questions, which of course do have an economic impact, there is very little sensible written about the long run problems of growing with abundance of foreign currency (something often referred to as a resource curse or Dutch Disease). A precursor to that discussion can be found in the work of Celso Furtado, written in 1957, when he was at the Economic Commission for Latin America (ECLA). See more here.

"The Question of Confidence" According to Marriner Eccles

From an address at a Conference on "Debt, Taxation, and Inflation" organized by the Wharton Institute of the University of Pennsylvania in May 8, 1936, and held at the Waldorf-Astoria in New York. In his words:

"Leaving aside plans which involved fundamental and far-reaching changes in our whole economic organization, the solutions offered to the country in 1933 were of two main types. On the one hand there were those who contended that all that was needed was the restoration of confidence. They insisted that it was essential to balance the budget... On the other hand there were those who, like myself, felt that recovery in the present situation could only be achieved by bold and aggressive intervention by the government, largely through underpinning the entire private credit structure which had collapsed, and undertaking to restore purchasing power through relief, public expenditures and other measures.
...
What businessman would have added to his plant, when he already possessed a great amount of excess capacity, merely because he read that the budget had been balanced? It is difficult to understand why people would be expected to invest money in new enterprise when existing investments were becoming less profitable every day. It should not require any great insight to understand that a reduction of government expenditures while everybody else as a matter of self-protection was being forced to reduce expenditures, could only accentuate the processes of deflation by reducing buying power.
...
A belief that industry would have voluntarily entered upon capital expenditures in 1933 if the government had restricted its expenditures and raised taxes is unrealistic to the highest degree. It displays an utter miscomprehension of the considerations that influence a business man in planning expenditures. There must be reason to believe that capital expenditures can be profitably made before they are undertaken."

Note that this argument builds on a clear comprehension of the accelerator mechanism. Firms buy machines when  they expect demand to increase and, hence, higher profits. In this sense, the empirical evidence on the accelerator should be relevant not just to show that low interest rates are not sufficient for expanding demand, but also to put a nail in the coffin of the confidence fairy. Austerity hurts confidence and private investment.

The vulture passes

Yep, not the condor. So it's my short note in Página/12 (in Spanish), the Argentine newspaper, on the future of the external debt negotiations. Note that the short summary on top suggests, since this is a debate, that the return of a neoliberal project would lead to increasing external debt. And that might be true, yet, as I note in my piece it is not true that external debt is always bad, since one can use it for diversifying exports (and reducing structural heterogeneity), reducing imports (the old import substituting industrialization strategy) and making the balance of payments more sustainable in the long run.

I might add then that the use of foreign debt, with caution, is not necessarily neoliberal. At any rate, neoliberal is a complicated term, often used to refer to things one does not like. Unlike neoclassical economics (or marginalism more properly) it does not have a precise meaning. I would imagine that in this context is used to refer to pro-business, pro-liberalization, laissez-faire policies that characterized the Washington Consensus and the 1990s in Argentina. And yes that would be a terrible model to go back to.

On the blogs

Via Max Sawicky

Remembrance of NAIRUs past -- Krugman on the previous failed views that we were at the NAIRU. Note that he doesn't complain about the very notion of the natural rate, just that others don't get it right. Glad that he doesn't want to stop the economy, because unemployment is at 5.5%, but can he tell us what the natural rate is?

The Euro Greek Crisis again shows the poverty of austerity -- Arestis and Sawyer on European madness

Noah and Nick, too -- Max Sawicky on Noah Smith and Nick Rowe

Oscar Ugarteche on German Debt Reduction

"The largest debt problems in terms of GDP faced in financial history have belonged either to the United States or to European Governments. Large debt problems in developing and emerging nations have usually stemmed out of a drop in GDP size due to a fall in export earnings and a rise in interest rates. The reason is that creditors stop lending at a certain point and start restructuring existing debt which leads to debt growth but it is not really new lending. In major nations, lending goes on as the strategic reason for borrowing has normally been justified: a war. As a result, the leading debt reduction and innovative management schemes are related to these. Contrary to the impression generated by extensive works on the Latin American and African debt, it is the under researched European and US historical debt that must be looked into in order to understand some historical solution patterns to debt problems. Current European very high debt levels (over 90% of GDP) are due partially to accumulated current account deficits of over 3% of GDP for over a decade plus the cost of bank rescues in 2009-2010 plus some countercyclical policy costs. Greece has additional debt due to major infrastructure works. It entered the Euro with a high debt level (around 100% of GDP) but the total GDP amount shrunk 33.3% from 55,318 million euros to 36,866 million euros in constant terms between 2007 and 2013 as a result of austerity policies. If GDP had remained stagnant, the index would be 131% and not 174.9% and rising."

Read rest here.

Eatwell on the relevance of pure theory

Eatwell on the relevance of theory for policy debates, introduced by Arestis. John used to say in class that no debate was ever solved by empirical analysis.

Hat tip to Alejandro Fiorito and Franklin Serrano.

Is labor productivity still pro-cyclical? Okun's Law is still fine

So there has been some talk about productivity not being pro-cyclical anymore. This is based on the notion that labor productivity increased during the last few recessions. Robert Gordon is the main source of this view. That is, it would seem that labor productivity is now anti-cyclical. Note that pro-cyclical productivity is what is behind Okun's Law. So below the data, from Fred. Labor productivity, the difference between real GDP growth and civilian employment growth and real GDP growth itself.

It is hard to look at the graph and suggest that the two variables are not positively correlated, even for the post-1980s period. But it is true that if you look at the shaded areas, which represent recessions, it seems that productivity fell before, and was already recovering in that period, at least since the Bush senior recession. This is more about the timing of the recessions, and how these are measured by the NBER, than about the strength of the pro-cyclical relation between productivity and output.

There are a few additional problems with Gordon's views. Note that Gordon does not explicitly deal with the structural relation between labor productivity and growth, the so-called Kaldor-Verdoorn effect, and that's why he finds that the Okun effect is weaker overtime. I had written before on this here (or here), and noted that the Okun coefficient has always been around 2 (by the way, with updated data still is; more on that on a latter post).

The inability to separate the cyclical and structural components of the relation is what causes the change in the short run coefficient (the Okun one). It is still true that as economies grow, productivity picks up, since producers try to adapt to increasing demand by utilizing more effective methods of production.

Internet access and development

Purple countries indicate less than 50% of the population has access to the internet. Basically Africa, Central America, México, the Caribbean, and the Andean region of South America (plus Paraguay and the Guyanas), Asia (including of course India and China, but not South Korea) and the Middle East (with a few exceptions, like Saudi Arabia). So there is a belt around the middle with countries further South (the Southern Cone of South America, including Brazil and Australia) and further North (North America and Europe, including the East and Russia) that are fine. Understanding internet access provides an alternative way to look at development.

PS: The Wall Street Journal is really about Facebook trying to expand in places with low internet access.

Kennedy's 1963 State of the Union

Prepping lectures for Intermediate Macroeconomics, and am using Kennedy's 1963 State of the Union as an in-class exercise. Kennedy's proposal to cut taxes by $13.5 billion ($103.11 billion today) is widely cited as an instance of explicit Keynesian policy making.

It is worth remembering that the measure was proposed when the economy was in recovery and unemployment was at roughly 5.7% - exactly where it stands now. Kennedy was of course assassinated before he could see the tax cut enacted, but it is striking how different the policy making mood was at the time.

We might smoke less than the characters of Mad Men, but in macroeconomic policy we have certainly moved backwards.

A selection of the State of the Union follows:

America has enjoyed 22 months of uninterrupted economic recovery. But recovery is not enough. If we are to prevail in the long run, we must expand the long-run strength of our economy. We must move along the path to a higher rate of growth and full employment.
            For this would mean tens of billions of dollars more each year in production, profits, wages, and public revenues. It would mean an end to the persistent slack which has kept our unemployment at or above 5 percent for 61 out of the past 62 months  and an end to the growing pressures for such restrictive measures as the 35-hour week, which alone could increase hourly labor costs by as much as 14 percent, start a new wage-price spiral of inflation, and undercut our efforts to compete with other nations.
            To achieve these greater gains, one step, above all, is essential—the enactment this year of a substantial reduction and revision in Federal income taxes.
            For it is increasingly clear—to those in Government, business, and labor who are responsible for our economy’s success—that our obsolete tax system exerts too heavy a drag on private purchasing power, profits, and employment. Designed to check inflation in earlier years, it now checks growth instead. It discourages extra effort and risk. It distorts the use of resources. It invites recurrent recessions, depresses our Federal revenues, and causes chronic budget deficits.
            Now, when the inflationary pressures of the war and the post-war years no longer threaten, and the dollar commands new respect—now, when no military crisis strains our resources—now is the time to act. We cannot afford to be timid or slow. For this is the most urgent task confronting the Congress in 1963.
            In an early message, I shall propose a permanent reduction in tax rates, which will lower liabilities by $13.5 billion. Of this, $11 billion results from reducing individual tax rates, which now range between 20 and 91 percent, to a more sensible range of 14 to 65 percent, with a split in the present first bracket. Two and one-half billion dollars results from reducing corporate tax rates, from 52 percent—which gives the Government today a majority interest in profits—to the permanent pre-Korean level of 47 percent. This is in addition to the more than $2 billion cut in corporate tax liabilities resulting from last year’s investment credit and depreciation reform.
            To achieve this reduction within the limits of a manageable budgetary deficit, I urge: first, that these cuts be phased over 3 calendar years, beginning in 1963 with a cut of some $6 billion at annual rates; second, that these reductions be coupled with selected structural changes, beginning in 1964, which will broaden the tax base, end unfair or unnecessary preferences, remove or lighten certain hardships, and in the net offset some $3.5 billion of the revenue loss; and third, that budgetary receipts at the outset be increased by $1.5 billion a year, without any change in tax liabilities, by gradually shifting the tax payments of large corporations to a more current time schedule. This combined program, by increasing the amount of our national income, will in time result in still higher Federal revenues. It is a fiscally responsible program—the surest and the soundest way of achieving in time a balanced budget in a balanced full employment economy.
            For this would mean tens of billions of dollars more each year in production, profits, wages, and public revenues. It would mean an end to the persistent slack which has kept our unemployment at or above 5 percent for 61 out of the past 62 months  and an end to the growing pressures for such restrictive measures as the 35-hour week, which alone could increase hourly labor costs by as much as 14 percent, start a new wage-price spiral of inflation, and undercut our efforts to compete with other nations.            To achieve these greater gains, one step, above all, is essential—the enactment this year of a substantial reduction and revision in Federal income taxes.
            For it is increasingly clear—to those in Government, business, and labor who are responsible for our economy’s success—that our obsolete tax system exerts too heavy a drag on private purchasing power, profits, and employment. Designed to check inflation in earlier years, it now checks growth instead. It discourages extra effort and risk. It distorts the use of resources. It invites recurrent recessions, depresses our Federal revenues, and causes chronic budget deficits.
            Now, when the inflationary pressures of the war and the post-war years no longer threaten, and the dollar commands new respect—now, when no military crisis strains our resources—now is the time to act. We cannot afford to be timid or slow. For this is the most urgent task confronting the Congress in 1963.            In an early message, I shall propose a permanent reduction in tax rates, which will lower liabilities by $13.5 billion. Of this, $11 billion results from reducing individual tax rates, which now range between 20 and 91 percent, to a more sensible range of 14 to 65 percent, with a split in the present first bracket. Two and one-half billion dollars results from reducing corporate tax rates, from 52 percent—which gives the Government today a majority interest in profits—to the permanent pre-Korean level of 47 percent. This is in addition to the more than $2 billion cut in corporate tax liabilities resulting from last year’s investment credit and depreciation reform.
            To achieve this reduction within the limits of a manageable budgetary deficit, I urge: first, that these cuts be phased over 3 calendar years, beginning in 1963 with a cut of some $6 billion at annual rates; second, that these reductions be coupled with selected structural changes, beginning in 1964, which will broaden the tax base, end unfair or unnecessary preferences, remove or lighten certain hardships, and in the net offset some $3.5 billion of the revenue loss; and third, that budgetary receipts at the outset be increased by $1.5 billion a year, without any change in tax liabilities, by gradually shifting the tax payments of large corporations to a more current time schedule. This combined program, by increasing the amount of our national income, will in time result in still higher Federal revenues. It is a fiscally responsible program—the surest and the soundest way of achieving in time a balanced budget in a balanced full employment economy.

PS: Full address available here.

Mark Weisbrot on Latin American Growth

This was one of the several presentations at the Eastern Economic Association meetings. Mark suggested that the the period of high growth from 2003 to around 2008, was not related essentially to the commodity boom, although "commodity exports did not lead growth but helped avoid balance of payments problems."* He argued that the IMF's loss of influence was also important. This point, which I think is essentially correct for many left of center governments, was discussed later over lunch. I argued, and I guess so did Esteban Pérez and Ricardo Summa, that the IMF still does have influence indirectly, now internalized in the training of several of the local bureaucrats that are for devaluation and fiscal austerity as a solution for, real or imaginary, external crises and inflationary pressures.

Two important caveats to the good news of growth, better income distribution and lower poverty that he discussed. We are "still long way from achieving pre-1980 growth rates, when industrial and development policies were common [and] exchange rate problems can still cause trouble." On the latter, in particular, the Argentinean and Venezuelan stories, with negative real rates of interest, and a large gap between official and black market exchanges was emphasized. Not sure what he would say, but I think he would agree that if growth remains lackluster in the near future for the region, then it would have more to do with the domestic policy choices that with an overwhelming need for adjustment.

* His paper on that with David Rosnik here.