More on China and the US

So, if there is a reason for concern regarding China in the US, it is definitely the use of their developmental state to promote technological innovation.

And as the graph shows they are catching up on spending, at least. I'm not sure I agree with the WSJ here, but they are certainly moving into high tech areas like AI.

China and US Trade Tensions in one graph

The graph below illustrates the reasons for the concerns in the US and the somewhat erratic, but more combative position of the Trump administration.

Note, also, that China is closing the gap on R&D spending and on the technological front, at a faster pace that I would have predicted (more on that for a later post).

PS: I only got noticed this today, but Wolff's column is also about US-China relations. I suppose it's the topic now.

Modern Money Theory (MMT) vs. Structural Keynesianism

By Thomas Palley

A journalist sent me some questions about MMT. My answers are below.

1. What are the major flaws you see within Modern Monetary Theory?

(A.) I like to say that MMT is a mix of “old” and “new” ideas. The old ideas are well known among Keynesian economists and are correct, but the new ideas are either misleading or wrong.

The essential old idea, which everybody knows, is government has the power to issue money. We used to talk of “printing” money. In today’s electronic world we talk about “keystroke” money created by electronic credit entries.

Everyone knows that because government has the capacity to create money, it can always pay its bills and debts by printing money. But having the capacity is not the same thing as saying it should, which is the beginning of where MMT goes astray.

In economic debate and economic journalism there is a “demand for difference”. On one side you have extreme budget hawks who see every deficit as a dire existential threat. MMT is the counterpart to the hawks. And here’s the rub. MMT is needed as an anti-dote to austerity hawks, but neither make for good economic theory.

That creates a dilemma for progressive economists. On one hand, there is need for a powerful progressive polemic to counter neoliberal austerity polemic. The basic MMT message that government has a lot more fiscal space than mainstream economists say, is correct. On the other hand, MMT’s theoretical arguments are not novel, and are sometimes incorrect.

My past criticism has focused on MMT as economic theory (here and here for more academic references).

B) I have found it is difficult arguing with MMT economists because they tend to change their positions. But here are some objections I have made in the past.

Read rest here.

On the blogs -- The Measurement Edition

Here are 15 Common Data Fallacies to Avoid-- Jeff Desjardins at Visual Capitalist on some common mistakes. I like the McNamara fallacy, which is probably common in economics

Welfare Versus GDP: What Makes People Better Off-- Geoffrey Bannister and Alexandros Mourmouras at the IMF blog on alternative measures of well-being

Inequality and Poverty-- Chris Dillow at Stumbling and Mumbling on the limits of the Gini coefficient

A predator–prey model to explain cycles in credit-led economies

A paper in the new issue of ROKE by Óscar Dejuan and co-author. From the abstract:

This paper develops a predator–prey model to explain cycles in credit-led economies. The predator is the part of the financial sector that issues credit money for non-output transactions. It increases the indebtedness ratio and inflates bubbles that eventually have a negative impact on the real rate of growth (the prey). From this basis, we build a couple of models that may lead to self-contained or explosive cycles. Even in the first case, there is a risk of a financial collapse when certain variables move far away from their long-term equilibrium positions. In order to tame the cycle and avoid extreme positions, governments should ban the expansion of credit money for the purchase of assets and introduce permanent checks to risky credit.

You can read the whole paper here. 

Employment losses in historical perspective

My colleague Chris Magee sent this graphs around about employment losses during different recessions. The first one below show all the recession from the 1970s onwards.

The next one, which I modified to show just the Great Recession and the Great Depression, is below, and gives a sense of the dimension of the Depression.

The sheer size of the Depression is impressive. Even though the last recession is an outlier, it pales in comparison with the Great Depression. You can see in the graph very clearly the Roosevelt recession of 1937-38, and also the fact that the recovery was very slow, even though as one can see from the graph above the current recovery was also slow, by historical standards.

I'm not sure what lessons Chris derived from his graphs, but I would argue that is safe to say that both the macro interventions, the fiscal package and the alternative monetary policy(even if one might have criticisms about particular elements of both), and the more widespread existence of automatic stabilizers, worked very well and precluded another Great Depression. I would see that as some evidence in favor of the New Deal policies and institutions, which essentially were behind the macro policies, and of the importance of Keynesian ideas, which gave theoretical foundation to those policies.

Josh Bivens had a piece on EPI a few years back on the slow recovery which is still worth reading. Btw, his lessons seems to be that there was not enough fiscal stimulus, something that also explains to some degree the persistence of the Depression. I wrote, even longer ago, that one should also take into consideration the conditions of the labor market, and not just the employment recovery, to have a better picture of the economic conditions.

PS: I have done a similar graph with GDP losses comparing the US and Greece. That one indicates the costs of austerity (in Greece).

On the blogs -- Economic History Edition

When did sustained growth start?-- Dietrich Vollrath on a paper by Jane Humphries and Jacob Weisdorf, in which they show the increase in real wages in the 1600s and preceding the Industrial Revolution

Do we really care whether the profits from American Slavery were reinvested to spur faster growth or not?-- Brad DeLong on Gavin Wright's presentation on the topic of the centrality of slavery for economic growth and the Industrial Revolution

What Happened to The Standard of Living During the Gilded Age?-- Bradley Hansen on living standards during the latter part of the 19th century in the US (he suggests the situation was not as bad as some historians think)

Goodbye Lula, Hello Failed State

"We are building the Anti-Lula."

"So are we."

In October 2002, Luiz Inácio Lula da Silva won Brazil’s presidential election and famously argued that hope had defeated fear. In fact, to preempt the fears of local and international finance elites, which threatened capital flight if the Workers’ Party (PT) candidate won, Lula had already signed the infamous “Letter to the Brazilian People” in which he pledged to follow relatively orthodox economic policies. Predictions about his government, and the global economy in general, were not particularly optimistic; fear was greater than hope in many quarters.

Sixteen years later, Lula—the leading candidate in Brazil’s October 2018 presidential election—has been convicted on corruption charges and could be jailed as soon as April 4, officially disqualifying him from the race. If so, we are likely to hear that the initial reasons for fearing Lula were wellfounded. Certainly the mainstream media will portray his imprisonment in that fashion, and Lula’s army of detractors is more than eager to wage attacks on him. In recent months, his campaign has been met with protests, and on March 26, two bullets struck his campaign caravan in southern Brazil. If Lula’s imprisonment plays out as is likely, Brazil will institutionalize a vast system of patronage and abuses the bureaucratic machine for personal gain via illegal payments and bribes, controlled by a right-wing cartel.

Read rest here.

The uses and abuses of economics

Alan Blinder wrote a few days ago in the Wall Street Journal that economic theory has been often abused by politicians. He refers to what he calls the Lamppost Theory of Economic Policy, the notion that: "Politicians use economics the way a drunk uses a lamppost—for support, not illumination." His concerns are fairly conventional. He says:

By 2020, higher spend­ing and tax cuts will push the fed­eral bud­get deficit above 6% of gross do­mes­tic prod­uct—higher than it ever was in the Rea­gan years. Even deficit doves like me think that’s far too high ab­sent a re­ces­sion. Pres­i­dent Trump may be tak­ing the U.S. into a mul­ti-­front trade war, against the ad­vice of al­most all econ­o­mists. And Amer­i­ca’s po­lit­i­cal lead­ers refuse to en­act a car­bon tax, the rem­edy for cli­mate change that al­most every econ­omist fa­vors.

If you read the piece, you would think that economists agree on everything, and that the reasons for the consensus is that the subject is highly technical, and in a sense scientific. So fiscal deficits that are relatively large are bad (unless there is a recession), free trade is always good, and a tax can fix a problem with an externality, like climate change.

The reason for politicians misguided behavior is not difficult to understand either, in Blinder's view. It is essentially a problem of time horizons, politicians must by the nature of their trade be impatient. In his words: "Political time horizons are notoriously short, perhaps extending only to the next election—or the next tweet. In contrast, economists’ time horizons can be agonizingly long—far too long for politics."

I have problems with many of those issues, even if I'm also not a fan of Trumponomics. Note that larger fiscal deficits, including a 6% one, even without a recession, might be acceptable, depending on how the government spends and taxes. If the government is borrowing in domestic currency, with low interest rates, taxing the wealthy, and spending to provide a wide safety net for the relatively poor I would be perfectly fine with that. And there would be no risk of debt sustainability issues or default. Note that, the higher spending would probably translate eventually into higher growth and, as revenue increased, lower deficits. As Blinder well knows, deficits are endogenously determined. The point is that my favoring of higher deficits, in some circumstances, is related to the question of who are the winners and the losers of alternative fiscal policies.

My biggest trouble is, probably, with the free trade assumption (and I discussed that recently here). I don't want to repeat the argument, but there should be significant disagreement within the profession on the benefits of free versus managed trade, since the evidence for free trade is incredibly weak. Free trade is simply a particular kind of trade management that favors some groups at the expense of others.

I also would favor a Green New Deal, a significant increase in the spending on green technologies, since I'm skeptical of substitution effects in general and, hence, of a carbon tax (I'm not against it, just skeptical that it would solve our problems). It seems to me that the biggest issue with global warming is that the distribution of its effects (and note that the benefits of the process of industrialization that caused the climate change in the first place were unevenly distributed) will be very unequal. In particular, developing nations would end up paying a higher price.

All of these issues, with fiscal, trade and environmental policies, seem to suggest that the main problem with the political use of economics is not the illegitimate use of economic arguments for political aims associated to the electoral cycle, that is, the short-termism of politicians. The problem is the very legitimate grievances that arise from the social effects of those policies. Trump is not giving tax cuts just to win elections, although that may play a role (yet, most people are for higher taxes on the wealthy), but also, and more importantly, to increase the rents of the wealthy.

That's why I would be very skeptical of Blinder's suggestion favoring a technocratic government, which would reduce the role of politics in economic policy making. In his words:

I have one final suggestion, though its scope is limited: Suppose we took some—certainly not most—economic decisions out of the hands of politicians, and put them in the hands of nonpolitical technocrats instead.

This is the sort of neoliberal argument used by the Chicago Boys in Latin America to suggest that there was no alternative. Market friendly policies were the only game in town, because they were a technical issue, not open to political dissent, instead of a strategy of a political minority to impose very unpopular policies that favored the wealthy. Trump should be defeated, and his policies rolled back, and for that Dems should field a left of center candidate with reasonable ideas favoring the majority (i.e. the working class), rather than propose undemocratic (technocratic) solutions.

Is the US hypocritical to Criticize Russian Election Meddling?

By Thomas Palley

Thomas Carothers has recently written an article in Foreign Affairs, the prestigious elite journal published by the US based Council on Foreign Relations. The article asks is the US hypocritical for criticizing Russian election medlling?

Given the place of publication, the unsurprising conclusion is it is not. The problem is the US is a champion meddler. Consequently, the argument crumbles every time Mr. Carothers reaches for substance.

At the end of the day, the defense reduces to the claim that we (the US) are good and they are evil, so that our meddling is a net good and theirs bad: “the trends of US and Russian behavior are divergent, not convergent – with Russia on the negative side of the divide.”

That is a moral superiority defense which is doubly flawed. First, the US can still be a hypocrite. Second, framing great power international relations in terms of moral superiority quickly promotes crusader thinking, which is a grave menace to all.

Read rest here.

On the blogs

U.S.-China Relations in the Age of Trump-- An old post by James Fallows, from December 2016, but that I think makes sense to re-read now, after the trade wars with China have been really ignited. Btw, I also recommend Fallows last book, which was on China;

Managing Debt Vulnerabilities in Low-Income and Developing Countries-- Tao Zhang at IMF blog on debt vulnerability in developing countries. I wouldn't read too much on their preoccupations, and not even sure they know what the dangers are

Rethinking macroeconomics-- Martin Sandbu on the series of papers published by the Oxford Review of Economic Policy. Not very fond of the exercise which follows Blanchard's don't throw the water with the baby approach (meaning keep the natural rate hypothesis)

When Things Don't Fall Apart by Ilene Grabel

Ilene Grabel's new book, When Things Don't Fall Apart: Global Financial Governance and Developmental Finance in an Age of Productive Incoherence, is out. From Dani Rodrik’s Foreword:

“It happens only rarely and is all the more pleasurable because of it. You pick up a manuscript that fundamentally changes the way you look at certain things. This is one such book. Ilene Grabel has produced a daring and delightful reinterpretation of developments in global finance since the Asian financial crisis of 1997–1998.”

From the jack description:

In When Things Don’t Fall Apart, Ilene Grabel challenges the dominant view that the global financial crisis had little effect on global financial governance and developmental finance. Grabel’s chief positive claim is that the global crisis induced disconnected and ad hoc discontinuities in global financial governance and developmental finance that are now having profound effects on emerging market and developing economies. Most observers have failed to appreciate this phenomenon owing to a heroic narrative of social change that discounts all but grand, systemic ruptures in institutions and policy. The chief normative claim is that the resulting incoherence in global financial governance is productive rather than debilitating. In the age of productive incoherence a more complex, dense, fragmented, and pluripolar form of global financial governance is expanding possibilities for policy and institutional experimentation, policy space for economic and human development, financial stability and resilience, and financial inclusion. Grabel draws on key theoretical commitments of Albert Hirschman to cement the case for the productivity of incoherence. Inspired by Hirschman, Grabel demonstrates that meaningful change often emerges from disconnected, erratic, experimental, and inconsistent adjustments in institutions and policies as actors pragmatically manage in an evolving world. Grabel substantiates her claims with empirically-rich case studies that explore the effects of recent crises on established and new networks of financial governance (such as the G-20); transformations within the IMF; institutional innovations in liquidity support and project finance from the national to the transregional levels; and the “rebranding” of capital controls. Grabel concludes with careful examination of the opportunities and risks associated with the evolutionary transformations underway.

The book has been endorsed by Antonio Ocampo, Jayati Ghosh, Ha-Joon Chang, and Mark Blyth. It's a must if you're interested in the changes in the post-Bretton Woods financial architecture after the Global Financial Crisis of 2008.

On the blogs

A response to David Laidler’s review of Macroeconomics and the Phillips curve myth-- James Forder on the arguments of his book on the Phillips Curve

What to Watch on Jobs Day: Putting wage growth in perspective-- Elise Gould on a paper on wage stagnation

Outburst of conventional wisdom on trade merits caution-- Greg Hannsgen on the recent steel tariffs

GDP growth in Latin America

Writing a paper on Latin America. Nothing particularly relevant to report. I was just checking the date. Many sources to get the data. I suggest both the World Bank Development Indicators and the Conference Board Total Economic Database. At any rate, below GDP growth from the Golden Age (after the Korean War and up to Debt crisis) to the Neoliberal Era (starting in the 1990s).

Clearly growth has been more volatile and at lower rates. So much for the notion that Neoliberalism works.

Classical Political Economics and the History of Central Banks

As promised not long ago, here a short paper on the history of central banks presented at ASSA meeting in Philadelphia. The paper is short, given the submission policy. It discusses the growing literature on the origins of central banks, and essentially disagrees with Charles Goodhart, who is the authority on the topic.

The conventional argument is that central banks only become effectively central banks in the late 19th century when a concern with financial stability was developed and the function of Lender of Last Resort (LOLR) was more formally established. The notion is that up to that point central banks were essentially concerned with profit making, as private institutions, and that only when a concern with financial stability as a public good was developed is that they can be seen truly as public institutions (even if they remained private).

Implicit in this view is also the notion that central banks would have a tendency to overissue paper money, in times of booms, which would help their profitability, and that constraining that ability, but at the same time allowing them to act as LOLR was central for financial stability. The first part of the argument, the notion that inflation is caused by the overissue of paper money, derives from the Bullionist controversies and the Bank Charter Act of 1844.

The point of the paper is that early public banks (essentially Italian and Dutch banks that preceded the the Swedish and English central banks) were central banks because they did have a public concern considerably before than their LOLR function was developed. They were fiscal agents of the state concerned with providing a stable unit of account and a secondary market for public debt allowing the expansion of the State.

The paper tries, in that sense, to connect the discussion of the origins of central banks with the extensive literature on the Fiscal-Military State and its relevance for the process of capitalist development.

On the blogs

Trying to resurrect my brief look at blogs during weekends. So here are three post/entries/op-ped pieces worth reading (look at this space for three or four of these every Sunday):

Will bourgeoisie ever rule the Chinese state?-- Branko Milanovic on Arrighi's question. Funny thing is this weekend I was re-reading Adam Smith in Beijing, since I'm giving one of the keynote speeches at the Political Economy of World Systems (PEWS) meeting in April at Fairfield University (the other being Immanuel Wallerstein. Btw, looking at my notes on the side of the book, I seemed to complain back then (bought the book in 2009 in NY) the absence of a discussion of the Fiscal-Military State in Arrighi.

Trump's steel tariffs are mere political theater-- James Galbraith's piece on The Guardian. More or less like mine suggests that the effects will be small (he doesn't suggest that free trade is good, as others on the left) and that the reasons are essentially political (the special election in PA). I was thinking more long term, but along the same lines here.

The PowerPoint Philosophe-- David Bell debunking Steven Pinker’s new book on Enlightenment Now, his latest Panglossian pamphlet about how we do live in the best of all possibles worlds.

Basil Moore (1933-2018)

Basil Moore

I first met Basil in 2000 or 2001, which was quite late, since I've read his work as an undergraduate back in the late 1980s. I was Assistant Director of the Center for Economic Policy Analysis (CEPA, now the Schwartz Center) at the New  School, and we invited him for a talk, which was about his forthcoming (at that time) book Shaking the Invisible Hand: Complexity, Endogenous Money and Exogenous Interest Rates  which was published considerably later (my review here).

Basil came down from Wesleyan, were he was for most of his career before retiring to South Africa, and we had an interesting debate on the relevance of the Keynesian (not the monetary one, on that we agreed) multiplier, which he considered a mistake, and on dollarization, which, at least at the time, he favored. The biggest surprise in my conversations with him that day and after that was what seemed to be a lack of understanding of how much the mainstream had incorporated the notion of endogenous money, in Wicksellian fashion. And I should note that the mainstream has not acknowledged the relevance of Post Keynesians, like Basil, in pushing them into the endogenous money camp.

My debates with him showed how much Post Keynesians could disagree both on theoretical and policy issues, and dispelled any notion that this was a group with monolithic or closed views on economic issues. In fact, it suggests that Posties should be seen more as a collection of schools, that depart from some aspects of marginalism/neoclassical economics.

Basil's contributions were essentially associated to the notion of endogenous money, more in line with the Kaldorian tradition, in which central banks accommodate to money demand, than to the Minskian notion of financial innovation. He was, together with Paul Davidson, Alfred Eichner, Hyman Minsky and Sidney Weintraub a key founding member of the American Post Keynesian School, perhaps less recognized than the others, and being the most focused on a particular topic. I'm sure that many obituaries will discuss his contributions in depth. At any rate, a loss for the profession, and for those of us that enjoyed his pluralistic openness to alternative views.

Andrea Ginzburg and Anthony Brewer

These were two great economists, that I never met, and that sadly have passed away. I would recommend this paper by Andrea Ginzburg, with Annamaria Simonazzi, on foreign debt cycles, and this paper by Anthony Brewer on the effects of capital mobility on the Ricardian comparative advantage model. Their contributions are certainly much more relevant than these two papers, but I think this provide a good example.

The left and the return of protectionism

So if you believe a simplified version of conservative views on the economy, Trumponomics is pretty contradictory (and yes they are contradictory, even if one may doubts about why). Tax cuts should lead to growth, via supply side economics, and the recently proposed tariffs on steel and aluminum do exactly the opposite. Protectionism (not a very good name, I prefer managed trade, as I discussed here before) has made a come back, but while many heterodox economists have suggested that 'free trade' is not always beneficial to all, and those concerned with the fate of manufacturing and the working class in the United States have decried Free Trade Agreements (FTAs) over the years, it seems that the association of these ideas with Trumponomics has made them less keen on the recent tariff proposal.

A typical example is the recent op-ed by Jared Bernstein and Dean Baker in WAPO, and I cite them exactly for my respect for their economic views in general, and their commitment to progressive causes. In their view: "The bigger dangers to our economy are twofold. One, that our trading partners will retaliate by taxing our exports to them, thus hurting a broad swath of our exporting industries, and two, by leading an emboldened, reckless Trump administration to enact more bad trade policy." Essentially, they agree that tariffs would have a negative effect on employment, but perhaps not as big as some Cassandras have suggested, and that this 'bad protectionist' policies would continue. A similar argument can be found in Brad DeLong's op-ed, another progressive economist, in which he argues that the tariff is a tax hike for consumers. Brad, I should note, has recently published a very good book in which he praises the Hamiltonian system, that is,  the use of managed trade to promote industrial development (I discussed it here).*

It's worth remembering that while on other issues Trumponomics is essentially Reaganomics (low taxes for the wealthy and increased military spending), on trade his views are a break with more recent Republican positions (and hence the push back in his own party against the tariffs) and closer to what many Dems, particularly those connected with trade unions, often defended. He has not signed TPP, has really started renegotiating NAFTA (something Obama promised to do as a candidate, but did not deliver as president) and now has imposed some tariffs (like, btw, Bush, so I'm not suggesting this is unprecedented; just that he has been more consistent on this topic).

Don't get me wrong, I'm not a big fan of Trumponomics, or even in particular of these tariffs. And this will not work probably, but the reasons are not the ones adduced by progressives. Their basic argument is that retaliation by other countries will make them innocuous. In all fairness, the US is already more 'protectionism' (manages trade) than most people understand. The ability to use trade treaties and organizations for defending the country's own advantage is considerably tilted in favor of advanced economies and their corporations that can use loopholes to creatively avoid rules and continue to subsidize their industries (and agricultural sector). The US use of the defense department, again used by Trump, is typical. Poor countries some times lack the basic technical capabilities (lawyers and economists) to face the trade teams of advanced economies. The complexity of the WTO dispute settlement process, the geopolitical role of the US and the importance of US markets for many developing countries render it a very ineffective tool for the interests of less developed economies.

It should not be a surprise that American corporations continue to thrive in international trade (it's the American working class that is in trouble). Manufacturing is doing well, with the support of what Fred Block has termed the hidden developmental state in the US. So the problem is not that tariffs could not work. In all fairness, tariffs together with significant expansion of domestic spending on infrastructure (and more steel demand), with a vigorous defense of trade unions, with higher minimum wages, with policies to improve income distribution, like progressive taxes on the wealthy, to strengthen the domestic market might actually be part of a Hamiltonian strategy of economic growth. Note also that the whole point of imposing tariffs is to depend less on exports and more on domestic markets, so that to some extent retaliation should matter less. A more closed (not closed, but more so, like Keynes suggested in his National Self-Sufficiency piece of 1933) international economic order, to role back of some of the excesses of the neoliberal, pro-corporate globalization process, used to be be, and should be, on the agenda of the left.

The problem, then is less the tariffs per se, and more the fact that the Trumpian agenda is empty, and has nothing for the working class. That was my biggest concern reading the progressive economists complaints about Trump's trade views. Their solutions are to stop protecting patents and professionals, that is more 'free trade,' and a more depreciated currency (I'll leave my skepticism about this one for another post, at any rate I discussed this before). While I'm more sympathetic to the skepticism on property rights, note that China, in part, thrives, exactly because they do explicitly infringe the rules on patents (the first Geely car was a knock off of a Mercedes, and they bought Volvo to have access to foreign technology; there are many examples; it's worth noticing that the US did that in the past too). That would not necessarily be good for American corporations. To weaken doctors, lawyers and other middle (and upper middle) class professionals is certainly not the way out of the hole for the American working class.

The political danger of these views, which I think still dominate the liberal wing of the Democratic Party, is considerable. I think, that even if his policies turn out not to be very helpful (for the reasons I outlined, meaning lower wages and protections for workers, lower taxes for the wealthy and corporations and so on) his true dislike of globalization and free trade policies would strengthen his position with working people in the Rust Belt, which were central for his victory (maybe you think it was Russia... oh, well). As I noticed before the election, this would make things so much hard for Dems in elections. I said back in September 2016 that: "Note that this doesn't mean he [Trump] is going to win the election. Demographic changes make it harder for Republicans to win now, since Dems get more of the electoral college to start with. And I hope he doesn't, btw. But there are good reasons to be afraid. This is going to be way closer than it should be." And so it was.

I'm afraid that his trade policies, and the Dems position that effectively are to his right (like Hillary, but not Bernie) would make it more likely (hopefully not enough) for a longer period of Trumponomics than it is acceptable. This suggests that a good chunk of Dems are stuck in the model that Mark Lilla has referred to as identity liberalism (see his book here), and have become vulnerable to right wing populism. It's getting increasingly difficult to have hope in the dark.

PS: For discussions of trade policy see this two previous entries which provide a simple discussion of the Ricardian and neoclassical models of trade and its limitations. I would also recommend the paper by Robert Wade linked here.

* There are many others that have written on this in the last couple of days. Paul Krugman could, arguably enter the list of progressives here, but he has been consistently more of a free trade guy. Krugman complain is more macro than the others. In his view, the Fed would hike rates, since we are close enough to full employment and any additional gains from the tariffs will be eroded, even without retaliation from other countries. In part, that would happen because higher interest rates would lead to inflows and an appreciation of the dollar (see here).

The Godley-Tobin Lecture by James K. Galbraith

Presenting the Lecture

Here is the audio file of Jamie Galbraith inaugural Godley-Tobin Lecture. Due to the weather he recorded the lecture before hand. The paper will appear in the Review of Keynesian Economics (ROKE) soon. Jamie presents a macro discussion of income distribution, which he correctly points out has been absent from most discussion of inequality in recent times.

Further, he connects his concern with the data (the UNIDO data that his team at UTIP has worked on for years now) to Wynne Godley's preoccupation with data consistency and accuracy. He also noted that James Tobin's preoccupation with the role of monetary variables, which Wynne certainly admired, is central to understand global inequality. We were very happy to have Jamie give the inaugural lecture, not just because we expected a great presentation, but more importantly because having interacted with both Godley, at the Levy, and with Tobin, at Yale and while he was in the staff at the US Congress, he was in a unique position to provide a thoughtful evaluation of their importance for what I referred (following Wynne) non-hyphenated Keynesianism to the understanding of economics.

Theotônio dos Santos (1936-2018)

Theotônio dos Santos, one of the main authors of the Latin American Dependency School, has passed away. I had some minimal contact with him, seeing some of his talks as an undergraduate, and then at a few conferences were we could talk a bit more, including after I had published this paper.

When I was a student, I might add, I was basically taught that there were two dependency school traditions, and often the Marxist one, in which Theotônio and André Gunder Frank were the key figures, was seen, at my alma mater (the Federal University of Rio de Janeiro) at least, as the lesser one, with the Structuralist school, of Fernando Henrique Cardoso, being the 'good' one. In retrospect, given the political views (and some of the economic views too) that Cardoso came to defend from the late 1980s onwards, with his adherence to Neoliberalism, I must conclude that my teachers might have been wrong.

An obituary in Portuguese here.

The inaugural Godley – Tobin Memorial Lecture

The inaugural Godley – Tobin Memorial Lecture at the Eastern Economic Association meetings in Boston on Saturday March 3, 11.30am – 12.50pm. The lecture pays tribute to both Godley and Tobin's emphasis on being non-hyphenated Keynesians (more on that for a later post).

The lecture is sponsored by the Review of Keynesian Economics (ROKE) and will be delivered by Professor James K. Galbraith, whose talk is titled “A global macroeconomics – Yes, macroeconomics damn it – of inequality and income distribution.”

It will be held in Gardner A & B of the Boston Sheraton. If you are attending the EEA meetings, I hope you will attend.

Was Keynes a Keynesian?

Mike Beggs wrote an interesting Review of the book In the Long Run We Are All Dead (which I started, but have not finished yet). Beggs argues that: "Marx lived long enough to declare himself 'not a Marxist.' Keynes was not so lucky. Followers would make the distinction between 'Keynesian economics' and 'the economics of Keynes.' But by then the word had well and truly transcended the man." That's not altogether correct.

Dave Colander retells the Abba Lerner story of Keynes' famous presentation at the Fed in 1943, which according to Colander might be the source for the Alan Meltzer (based on Terence Hutchison) argument that Keynes indeed did say "I am not a Keynesian," where Keynes was essentially against deficit spending, and that Evsey Domar, who was next to Lerner, "whispered: 'He ought to read the General Theory'."

Leaving aside the fact that the GT, in fact, does not deal with fiscal deficits, but more inscrutably with the socialization of investment, there is a certain amount of truth that Keynes was not always Keynesian, in the simple sense of for fiscal expansion. But that essentially puts an emphasis on Keynes' economics as essentially concerned with economic policy.

As I noted recently, Keynes arguments for public works precede the GT, and the book was published when the worst of the Great Depression was already over, clearly and expressly with a theoretical preoccupation. That is why Mann's view, which is central to his book, seems somewhat misguided. For him:

“Keynes and Keynesianism were not 'resurrected' following the financial meltdown of 2007–2008, because neither was ever 'dead,' however hard some mainstream economists might have tried to convince us otherwise. Capitalist modernity, in fact, is and always has been Keynesian on the inside.”


In his view, Keynesianism is just a name for the mechanism by which liberal capitalism tries to save itself from the contradictions that overwhelm the system in periods of crisis. And he is not wrong that Keynes is resurrected every so often (one can say the same about Minsky, now that most crisis have a financial/bubble component too).

My point is that Keynes notion that there is no unique (natural) level of employment around which the system fluctuates, and that it normally oscillates around sub-optimal levels was never actually adopted by the mainstream. What is often resurrected is the mainstream version of Keynesianism. Instead of the perennial persistence of Keynesianism, a more accurate description would be the idea that the Keynesian Revolution was really aborted.

Talk of military intervention in Venezuela is absurd

In early February, US Secretary of State Rex Tillerson embarked on a Latin America tour aimed at promoting "democratic security". But just before he set off on his trip, he speculated on the possibility of a military coup in Venezuela.

"In the history of Venezuela and South American countries, it is often times that the military is the agent of change when things are so bad and the leadership can no longer serve the people," he said at an event at the University of Texas at Austin.

Tillerson's comments came six months after US President Donald Trump threatened military action in Venezuela.

Full piece published by Al Jazeera here.

Cohen and DeLong on Hamilton's Report on Manufactures

Hamilton's Reports, posthumous 1821 edition

Stephen Cohen* and Brad DeLong, in their highly readable book Concrete Economics: The Hamilton Approach to Economic Growth and Policy (if you haven't, go buy a copy now), argue that “Alexander Hamilton [was a] major economic theorist. His theory of economic development, first set out in his famous Report on Manufactures (1791), not only reshaped America’s economy but was channeled by Frederich List half a century later to play a central role in Germany’s rapid industrialization, and still later became a canonical text in Japan." Further they suggest that: “This Hamiltonian project was contrary to Ricardo’s canons of comparative advantage as well as Smith’s free markets. It was bold. The direction of economic activity was not commanded, but it was not left unguided either."

While I generally agree with the main points of the book (my major issues are with the notion that technical change was driven by scarcity of labor, and the need to economize labor along marginalist lines), I would qualify a bit the argument on the break with the Smithian/Ricardian classical political economy (or surplus) approach to economics.

Certainly Hamilton is not Ricardian in the sense that he suggests that the pattern of specialization should not follow comparative advantage (a notion not fully developed until Ricardo's own work a few years later, and simultaneously and independently by Robert Torrens). But note that for Ricardo Free Trade was part of a strategy of reducing the rent of landlords, which resulted from the use of lands of lower quality which were the consequence of the embargo first, and then the Corn Laws. In that sense, Ricardian Free Trade was a strategy of industrialization for England (as much as Hamilton's project was for industrialization in the US). It is also true that Hamilton was breaking with the laissez faire tradition of Smith and classical authors in general. But he was not precisely Mercantilist or Cameralist, in the sense that a reading of the Report clearly shows he understood that the wealth of nations derived from the division of labor, and not from the accumulation of bullion and trade surpluses.++

Hamilton believed, not unreasonably, that manufactures were more prone to the adoption of machinery, and indicates that manufacturing countries are more opulent than merely agricultural countries. In other words, he seemed to believe that what is produced matters, and that manufacturing would further the division of labor that was at the heart of the wealth of nations. That is why there is some importance in the Cohen and DeLong book emphasis on Hamiltonian trade management, and the willingness to use tariffs and bounties (subsidies). Note that the conventional view among economists increasingly tries to deny that this was central for Hamilton. For example, Douglas Irwin argues that: "Although the report is often associated with protectionist trade policies, Hamilton’s proposed tariffs were quite modest, particularly in light of later experience. This reflected his emphasis on using tariffs to generate fiscal revenue to fund the public debt; indeed, the country’s finances were his top priority, not discouraging imports for the sake of domestic manufacturers."

However, the Report itself seems pretty concerned with the differences between agricultural societies and manufacturing ones, arguing that: "nations merely agricultural would not enjoy the same degree of opulence, in proportion to their numbers, as those which united manufactures with agriculture." He cites England and the Cotton Mill developed there as something to be emulated, and that it can only be done with a certain degree of trade management (on free trade versus managed trade see this).

Hamilton is explicit on a strategy that we would call today as import substitution industrialization, and argues that: “The substitution of foreign for domestic manufactures is a transfer to foreign nations of the advantages accruing from the employment of machinery, in the modes in which it is capable of being employed, with most utility and to the greatest extent. The cotton mill invented in England, within the last twenty years, is a signal illustration of the general proposition, which has been just advanced.” Interestingly, he does not cite the use of steam engines, which was still not prevalent, but notes the use of the water wheel, and the extensive use of female and child labor (the latter as a positive development). In this regard, he seems more au courant than Adam Smith, with his pin factory, about what would later be termed the Industrial Revolution.

Moreover, Hamilton suggest that manufacturing and agriculture should be complementary, and argues that manufacturers would provide an outlet for the production of the agricultural sector. The Smithian notion of a vent for surplus, but a domestic one is utilized by him. He argues that: “It is evident, that the exertions of the husbandman will be steady or fluctuating, vigorous or feeble, in proportion to the steadiness or fluctuation, adequateness, or inadequateness of the markets on which he must depend, for the vent of the surplus, which may be produced by his labor; and that such surplus in the ordinary course of things will be greater or less in the same proportion. For the purpose of this vent, a domestic market is greatly to be preferred to a foreign one; because it is in the nature of things, far more to be relied upon.”

The relevance of the ideas related to managed trade seem to be again on the agenda with the rise of right wing populist governments, in particular here in the United States, and the skepticism about Free Trade and Globalization.

* Stephen Cohen was the co-author with John Zysman of a very influential book in the 1980s called Manufacturing matters: the myth of the post-industrial economy which is also still worth reading.

++ In the Report on a National Bank he explicitly says that: “it is immaterial what serves the purpose of money, whether paper or gold and silver; that the effect of both upon industry is the same; and that the intrinsic wealth of a nation is to be measured, not by the abundance of the precious metals, contained in it, but by the quantity of the productions of its labor and industry.”

What About the New Tax Law?

New Event from the Susquehanna Progressives. Drop by if you're around the area. Info below.

"As activists we need to understand the history of US tax policies, how they have changed since the 50's and why, the affect on our social fabric and what the new tax bill will mean for the health of our nation (Presentation followed by Q&A)."

Presenter: Matías Vernengo, Professor of Economics, Bucknell University

Thursday, February 22 | 7:00 - 8:30 PM
Community Zone, Market Street in Lewisburg 7-8:30

Keynes' intellectual influence: the theorist vs the pamphleteer

Keynes' 1933 and 1929 pamphlets, respectively

One of the many unfair criticisms of Keynes' General Theory (GT) is that is badly written or somewhat incomprehensible. Note that Keynes started to write it in 1932, four years into the Depression, and two years after publishing the Treatise, which he probably thought was going to be his Magnus Opus. In other words, by the time he started to write the GT the worst part of the Depression was coming to an end (the UK had abandoned gold in 1931, and the US would start the New Deal the following year). Keynes' policy advice, mostly about the need to abandon gold and promote public works was not based on the GT, which came considerably later. The idea of an employment multiplier, even before Richard Kahn developed the concept, can be found in one of the pamphlets depicted above (Can Lloyd George Do It?).

As he said, the book was basically for his fellow economists. More importantly the book marked a theoretical break with neoclassical economics (which he sadly called classical, creating more confusion than needed), one that was NOT necessary to promote public works or expansionary fiscal policy that would come to be associated with Keynesianism (he was advocating that before he reached the main conclusions of the GT). The point of the book was that, even with price and wage flexibility, the economic system did not have a tendency to full employment (that means you must wait for chapter 19, when wage flexibility is introduced, to get his main argument).

The fact that the Keynesian Revolution led to a reinterpretation of Keynes on the basis of rigid wages (or interest rates) or some other kind of imperfection in more modern versions of mainstream Keynesianism, suggests that to some extent Keynes the pamphleteer was more effective than the theorist, which is not altogether surprising, since Keynes was indeed very good at writing for greater audiences, and became internationally known as a result of his pamphlet on the Treaty of Versailles.

This is my list of his most influential essays or pamphlets:

• The Economic Consequences of the Peace
• The Economic Consequences of Mr. Churchill
• The End of Laissez-Faire
• Can Lloyd George Do it? (with H. Henderson)
• Economic Possibilities for our Grandchildren
• The Means to Prosperity
• My Early Beliefs

Arguably someone may put How to Pay for the War in the list of important pamphlets. He basically wanted to finance war with taxes, and was concerned with demand pull inflation.

Alan Blinder on Fiscal Adjustment

Alan Blinder published recently two columns on the WSJ (here and here) on the need to exercise fiscal restraint. In both cases he complains that the fiscal deficit is too large. Note that he is not saying that this is always the case, he emphasizes that in the second and most recent piece. The reason, as always, is that we are close to full employment. In his words:

"... today we are back at full employment, or perhaps beyond it, ad economic growth kooks solid. The economy doesn't need fiscal stimulus."

Blinder one must note was strongly for hiking rates in the mid to late 1990s, when he was the vice chairperson at the Fed, exactly for the same reasons (see this old piece in The American Prospect).  So at least he is coherent. We cannot grow too fast, since that would cause inflation. And we have a tendency to be at full employment (note that a few years back almost everybody said full employment, the natural rate, was about 6%, not the 4% or so we have). But if he is coherent, he has also been almost always wrong.

And we are not at full employment. The employment-population ratio (seen below) has finally started to recover in the last three years, but it is still well below the peak before the recession, and the participation rate (not shown but available here) has been stagnant.

That means that too many people remain discouraged about the situation in the labor market, and that when we look at broader measures of unemployment that look at those marginally attached to the labor market the level of unemployment is closer to 8% (see here). And let's not forget that the last two decades saw an impressive decline in manufacturing jobs that reduced the availability of good jobs. So the issue is not just the number of jobs, but the quality of those. It should NOT be a surprise that Trump won in some Rust Belt states.

Dems, and their economists (like Blinder), should be more sensible about the need to create more jobs, and particularly good jobs if they want to regain the White House and Congress. I would suggest that austerity is a terrible strategy. This is what you should expect from the Progressive-Neoliberal branch of the party, as it was aptly called by Nancy Fraser.

Investment Rate, Growth and Accelerator Effect in the Supermultiplier Model: the case of Brazil

A new paper by Julia Braga, that she will present at the next Eastern Association Economic Meeting in Boston. From the abstract:

"This paper investigates the role of demand in the productive investment evolution in the Brazilian economy. First, it assesses the long-run relationship between investment rate and GDP growth, taking annual data since 1962 until 2015. We then construct a “Final Demand” index and estimate its impact on productive investment growth rate, taking quarterly data since 1996q1 until 2017q2, highlighting a shift in the aftermath of the 2008 world economic crisis. The results support two hypotheses of the Supermultiplier model of Freitas and Serrano (2015) and Serrano, Freitas and Behring (2017) for the Brazilian economy: 1) non-capacity creating expenditures lead productive investment; 2) there is a very slow adjustment of the investment rate to demand growth, as described by the flexible accelerator process."

Read full paper here.

Demand Drives Growth all the Way

New paper by Lance Taylor, Duncan Foley and Armon Rezai. From the abstract:

"A demand-driven alternative to the conventional Solow-Swan growth model is analyzed. Its medium run is built around Marx-Goodwin cycles of demand and distribution. Long-run income and wealth distributions follow rules of accumulation stated by Pasinetti in combination with a technical progress function for labor productivity growth incorporating a Kaldor effect and induced innovation. An explicit steady state solution is presented along with analysis of dynamics. When wage income of capitalist households is introduced, the Samuelson-Modigliani steady state “dual” to Pasinetti’s cannot be stable. Numerical simulation loosely based on US data suggests that the long-run growth rate is around two percent per year and that the capitalist share of wealth may rise from about forty to seventy percent due to positive medium-term feedback of higher wealth inequality into its own growth."

Read full paper here.