MMT in Developing Countries at the Real News Network

Full transcript of the short interview here. Paper was linked before. Note that we say that Functional Finance does apply to developing countries, but that the insistence of the advantages of flexible exchange rates, as opposed to managed regimes with capital controls, are not correct.

Real World Economics Review

So the RWER has a whole issue on Modern Money Theory (MMT). I haven't read the whole thing yet (barely started). At nay rate on that later. Whole issue can be downloaded here. Enjoy!

Modern Money Theory (MMT) in the Tropics

Paper has been published as a PERI Working Paper.

From the abstract:

Functional finance is only one of the elements of Modern Money Theory (MMT). Chartal money, endogenous money and an Employer of Last Resort Program (ELR) or Job Guarantee (JG) are often the other elements. We are here interested fundamentally with the functional finance aspects which are central for any discussion of fiscal policy and have received more attention recently. We discuss both the limitations of functional finance for developing countries that have a sovereign currency, but are forced to borrow in foreign currency and that might face a balance of payments (BOP) constraint. We also analyze the limits of a country borrowing in its own currency, because there is no formal possibility of default when it can always print money or issue debt. We note that the balance of payments constraint might still be relevant and limit fiscal expansion. We note that flexible rates do not necessarily create more space for fiscal policy, and that should not be in general preferred to managed exchange rate regimes with capital controls. We suggest that MMT needs to be complemented with Structuralist ideas to provide a more coherent understanding of fiscal policy in developing countries.

Read full paper here.

Official Reforms and India’s Real Economy

By Sunanda Sen
(Former Professor, Jawaharlal Nehru University; Guest Blogger)

That the Indian economy is currently experiencing a slowdown is more than evident, both with the deliberations in different private circles and with official statements signalling a series of remedial measures , mostly focused on the ailing financial sector! However, as we point out, the ailing Indian economy has concerns that go beyond flagging GDP growth and the ailing financial sector.

Downturn in the economy 
As for the downturn, the country’s GDP growth rate has plunged into a low of 5% in the first quarter of the current financial year 2019-20 .The drop has been accompanied by a sharp deceleration in the manufacturing output and a sluggish growth of output in agriculture. Matching both, ‘consumption growth’ has also been weak.

A fact which remains less highlighted in current official concerns includes unemployment, at 7.1% of the labour force during September-December 2018 as reported in the Labour Force Periodic Review. Unemployment has been even higher for urban youth during the period, at 23.4%. Information as is available indicates on-going spread of job cuts in different manufacturing units and wide-ranging distress in rural areas with farmer suicides, which causes added concern.

There also are recent reports of a shrinkage in labour force participation ratio (the proportion of people who are willing to work), indicating tendencies of withdrawal syndromes on part of the unemployed – which have been largely in response to the grim employment prospects. Distress is further manifested in the large numbers of poverty stricken people - both in rural and urban areas –ranging from 22 % to 29% of aggregate population according to different estimates.

The grim facts relating to unemployment and poverty in the real economy of India make it evident that a drop in GDP growth is not just a matter concerning the dampened financial markets and their volatility. Downturns also speak of the real sector – of the dearth of sustainable jobs and the related poverty.

Looking at the prevailing concerns in India for the stagnating economy, analysts often ruminate on the steep drop in stock prices in India’s secondary market which started with the end of the temporary euphoria at end of the national election in May 2019 . One may recall the shooting up of the Sensex beyond 40,000 on June 4, 2019, far surpassing 37,000 on May 13. The index, slumping back to a low of 36,855 on August 30, has , at the time of writing, abruptly shot up, nearing 39,000 , which is a response to the magic wand of the tax bonanza announced on September 20. Causes cited for the earlier downfall include the volatile net flows of Foreign Portfolio Investments (FPI) - recording outflows of Rs 3,700 crore or above in a single month of July 2019. Above went along with the simultaneous drop on India’s foreign exchange reserves by nearly $1 billion between July 20 and July 26, 2019.

Policy measures announced
Concerns relating to the stagnating GDP growth and financial markets in the country has prompted the government to announce a series of measures since the recent official announcements started on August 23, 2019 . The measures included a scrapping of the surcharges on long and short term capital gains as were earlier proposed in the last budget; in a bid to help inflows of foreign portfolio investments. A few stimulant measures as suggested include an investment package of Rs 100 lakh crores on infrastructure, a Rs 70th crore liquidity injection to recapitalize banks and cheaper loans to facilitate property market and auto sector, along with a promise of additional purchases by government departments in auto market . Corporations have also been assured of a no- penalty clause if they fail to comply with the corporate social responsibility(CSR) clause, originally designed to help the underprivileged. Included in the package are also additional roll-backs, of taxes on the ‘super rich’- as introduced in the last budget - in income slabs over Rs 2 crore and beyond Rs 5 crore.

Government announcements on August 30, in the next round, relaxed several rules on single-brand retail, contract manufacturing, coal mining and digital media for FDIs. Another important measure has been the dilution of the current 30% domestic sourcing norms for single brand retail trading in the country.

Official announcements on August 30 also related to the mergers of public sector banks , by combining the ‘bad’ ones with the stronger ones, thus reducing the total number of PSBs to 12. The move is supposed to coordinate with the promised recapitalization plan of Rs 70 th crores, as announced at end of the previous week.

Finally, a big tax bonanza, with rates cut from 30% to 22% has been mentioned on September 30. Above, according to a credit rating agency, Crisil, amounts to a tax savings of Rs 37,000 crores for the 1000 listed corporations. By the same estimates, the expected aggregate tax loss for the government amounts to Rs 1.45 crore; which, incidentally, exactly matches the sum received by the government from the Reserve Bank of India. Remedial official measures, addressed to mend the on-going regressive impact of the Goods and Services (GST) tax on the economy, are also on the cards, with several cuts in this indirect tax on specific items.

How effective to revive the economy?
Sops as above as tax relief - to portfolio as well as corporate investors within and outside the country – while effective in temporarily stimulating the secondary stock market, may not work to reverse the tendencies for the stagnation, even in the financial sector and let alone in the real economy. Contrary to what was expected, the initial response of the stock market continued to be rather non-committal over nearly a month between August 23 and September 20th when the big tax bonanza package was announced. It is possibly too early( and nearly impossible) to project the stock market movements in future. Still more doubtful is an expected positive impact of all above policy moves on capacity creation via the market for initial primary offers (IPOs) - short of which there can be no expansion in the real economy of output, investment and employment.

The stark realities relating to the contrasts between the real and the financial economy reflect itself in the low value of the initial Primary Offers (IPOs). As is well known, the latter indicate new physical investments rather than financial transfers alone as in the transactions of shares in the secondary stock market. A revival of the stagnating real economy demands additional investments in physical terms with related expansions in jobs. Little of those are likely to be fulfilled by a boom in the secondary market of stocks and the related gains on speculative and short term investments. Also in terms of simple national accounts, capital gains or losses relating to the portfolio investors in the secondary stock markets are always treated as ‘transfers’ between parties, and as such not even considered in calculating the GDP in their first round. Possibilities, however, remain of net injections/withdrawals of real sector demand by agents who face capital gains/losses , which deviates from their underlying inclinations to further speculate in the market. However, while the proposed tax benefits will further widen the inequalities within the country, little of those may finally be channeled beyond the speculative zone of stock markets and real estates.

Additions to corporate savings, if generated, will not generate real investments unless demand for the latter is forthcoming in the market. This comes as the home truth that Keynes spelt out more than 80 years back in the context of the Great Depression of 1929-30! Sops to speculation in the market and the lenient tax breaks for super rich as well as corporations may only help to invigorate the current spate of speculation, in stock markets (or even on real estates and commodities) further.

Official concerns as such for the public sector banks sound more than deserving, given the issues with the near bankrupt NDFCs (or shadow banks ) with their easy access to the formal banking sector which generated a large part of the on-going NPAs. In our judgement, the vacuum created with shrinking banking facilities and branches and the total absence of development banks will continue to provide space to the NBFCs and their malfunctioning.

Research, as available indicates how the corporations have made use of credit from banks to meet their liabilities ( as interest payments on past debt as well as payments of dividends to share-holders), replicating a typical Ponzi strategy. Simultaneously investments by corporations have switched from the real to the financial sector with offers of better earnings on financial securities. Corporations, in the process, also have often taken recourse to bankruptcy while adding further to NPAs held by banks. Finally, NPAs also resulted from the absconding and corrupt clients of banks who could run-away with their liabilities. One wonders if the change in governance as suggested by the recent mergers which aim to combine the weak banks with the stronger ones (in terms of current performance ), will help in lifting the PSBs from the current mess.

Incidentally, the soft-pedaling by the RBI with four consecutive cuts in the repo rates, while signalling a nod to expansionary monetary policies, will work to lower the lending rates of banks only if there will be a pick-up of credit demand from the public. And that in turn demands more of investment/consumption demand, especially from the real (rather than the financial) sector. This is because the growth of credit supply is determined by credit demand and not the other-way round! This does not rule out possibilities of additional borrowings at the lower rates to finance speculation in financial markets, which will not help revival of the real economy.

Pattern of stagnation in India’s real economy
As already emphasized in the preceding sections of this commentary, a country’s GDP growth alone hardly indicates the country’s level of development, which include employment, social security and absence of poverty. Recognizing above is important in the context of the ailing Indian economy that is currently subject to concerns more pressing than the plunging financial sector.

Mention can be made here of the structural changes in the Indian economy , with changing relative contributions of its three major sectors.Those include the share for services moving up to 50% and above since the early 1990s and the respective industry and agriculture shares stalling around 25% and 19% or less since then.

The employment situation as currently prevail in the Indian economy include 90% or more people struggling to eke out a survival in the informal sector while the organized formal sectors within industry and services offer 10% or less of jobs, thus pushing the majority of the working population to the dark terrains of the unorganized and informal jobs.

As for the sectoral pattern of employment, agriculture has remained the largest provider, at 48.9% of aggregate employment in the economy during 2011-12. Almost all of above are purely in an informal capacity , thus fetching little of the benefits which are usual when labour is formally recruited. As for jobs available in the industrial sector, the organized sector (dealing with the registered factories employing 10 or more workers ) provides less than 11% of aggregate employment in the country. Of above more than four-fifths are employed on a purely contractual or temporary basis with none of the benefits that normally accompany formal jobs. A recent estimate points at the low employment elasticity of aggregate output at 0.08%, which today is even lower than 0.18% during 2009-11. Much of the above is due to the lower absorption of labour in the production process due to the use of capital-intensive technology. In addition, growth rates are found to be higher in the capital as well as the skill intensive products - as compared to the average growth for industry as a whole.

The service sector, currently providing more than one-half of the GDP, has only a marginal contribution in employment. Data available from the Labour Bureau indicate that of an aggregate 140-150 million jobs in the services sector during 2015, only 26 million were with the organized sector. The remaining jobs, mostly in petty production units and self-employment, include, in our view, large numbers with disguised unemployment in the informal sector.

Services in the organized sector also include the ‘sun-rise sector’ , comprising of the Information Technology-Business Processing Organizations ( IT-BPO). Their contribution to jobs has been rather minimal , as can be expected in terms of their use of capital and skill intensive technology. Growth in India’s services sector is concentrated in activities related to finance, real estate and business services (FINREBS). It needs to be noticed that the FINREBS has a rising share, both in relation to the service sector itself , as well as relating to the GDP. In fact shares of the FINREBS not only have escalated over time but have continued to rise, even with declining GDP growth rates. Thus the growth of the service sector including the FINREBS, as can be expected, while contributing to GDP growth, have failed to contribute much in terms of employment or real activity, an aspect which helps to understand the underlying paradox of high GDP growth with unemployment.

The sectoral contributions as above brings home an explanation of the slow growth in jobs and related poverty– and that too for the majority of the labour force employed in the informal sector who are denied of sustainable wages and benefits as well as job security.

Need for an expansionary policy
While there is an urgent need for public expenditure as investments as well as social sector outlays, the Indian government abides by its self-imposed limits on fiscal deficit to GDP ratios, which restrains additional public expenditure. The dictum is provided by the Fiscal Restraint and Budget Management Act (FRBMA) of 2003 which was voluntarily enacted by the ruling government, largely to attract foreign investments.. Given that the theory of ‘austerity’ as a measure of investment revival by controlling inflation is much discredited at levels of analysis and policies, we find no reason why the country should continue to stick to such measures .

It needs to be recognized that official expenditure remains a per-requisite to stimulation of private spending, especially in the current context of a demand deficient domestic economy as in India. A departure, if effected, from the ineffective policy prescriptions of the mainstream economic theories of fiscal restraint can be expected to generate a climate of expansion within the country.

Considering the gravity of the situation, this is the moment for a call to the state to act and not just protect finance capital which include the speculators who operate in stock markets, the super-rich who are disgruntled and pose the threat to move offshore to avoid the newly imposed surcharges on higher income slabs, to provide relief to the bankers misallocating funds in search of quick and illegitimate gains, or even to protect and incentivize the corporate sector, the former for a negligence to the much too small a benevolence they were subject to in terms of their obligations to fulfill the CSR, and the latter as investment inducements.

We can conclude that it will be a limited exercise on part of the officialdom to view the financial market performance as a true gauge of performance of the economy as a whole.

Indeed, the Indian economy is in dire need for an alternate course of action. The state must focus and restore the real economy with channels to revive investment, employment and other social goals for the majority.
_________________________
An earlier version of the paper was published in Economic and Political Weekly on September 1, 2019

New Book on Roy Harrod

Esteban Pérez Caldentey has just published a new book on Roy Harrod for the collection edited by Anthony Thirlwall. From the description:

This landmark book describes and analyzes the original contributions Sir Roy Harrod made to fields including microeconomics, macroeconomics, international trade and finance, growth theory, trade cycle analysis and economic methodology. Harrod’s prolific writings reflect an astounding and unique intellectual capacity, and a wide range of interests. He became Keynes´ biographer and wrote a volume on inductive logic. At the policy level, Harrod played a central role in the formulation of the Keynes´ Clearing Union plan for international monetary reform. He also actively participated in British politics and government and gained recognition as an expert in the field of international economics. Yet, until now, Harrod has remained an underrated economist, commonly misunderstood and misrepresented. This is the first major intellectual biography of Harrod to be published.

For more and to buy it go here. 

Some brief thoughts on Argentina's ongoing crisis and the IMF's role in it

Argentina's peso depreciated significantly after the primary elections last month, with the clear victory of the opposition. The crisis has come full circle now with the re-imposition of capital controls, and with the default on domestic bonds, the latter a puzzling and clearly unnecessary measure, since it was in domestic currency (Standard & Poor's says it's a selective default, whatever that means, and Fitch called it a restricted default). So here a few things that might be useful to understand what is going on.

So how did we get here? As I noticed recently here, the collapse has nothing to do with fiscal problems. They hardly ever do, since the debt that matters is the one in foreign currency. First, let's clarify what were the problems that Macri faced in December of 2015, at the beginning of his term. Yes, inflation was high, but real wages were not low, and in many ways the persistent depreciation of the peso, during Cristina Kirchner last term, and the increases in wages explained that. Note that inflation did not cause the low growth during the last part of the previous administration. So inflation was less of a problem at that point, and one that Macri should have emphasized less (contrary to what most think, as I said even before the government started, Macri had no intention of reducing inflation, at least not initially, since the plan was to let nominal wages adjust by less than it, and reduce real wages).

The real cause of low growth was the Balance of Payments (BoP) problem. More specifically, the current account that was negative, and in the absence of reserves, imposed a constraint on growth. Imports of essential goods, basics like energy, and the service of debt, at a time that Vultures closed access to international markets, were the real problem that he faced. But there were no issues about a possible default. Reserves were low, but sufficient to face short term obligations, and low growth allowed the current account to be under control. There was NO POSSIBILITY OF A DEFAULT. What Macri proceded to do, eventually with the support of the International Monetary Fund, is what caused the current crisis.

Actually, during the governments of Néstor and then his wife Cristina, from 2003 to 2015, total debt in foreign currency fell, and the ratio of foreign denominated debt to exports, which measures the sustainability of debt, since exports provide the dollars needed to service the debt, went down significantly from about 450 to below 100 percent. This was the result of two renegotiations of debt (in 2005 and 2010), and of the recovery of the economy and exports too. But note that even after the end of the commodity boom in 2011, the ratio did not go up again.

So the problem was lack of growth and not default. And all the conventional media coverage about the fears of a return of a Populist government are evidently bogus on the face of that graph. It is clear that the borrowing in foreign currency, the one that Argentina has problems paying, were during the Macri government. He is the irresponsible one, and not because of excessive fiscal expansion for social programs, but simply for borrowing in foreign currency.

The question is then why did the Macri administration borrow huge amounts of dollars. Foreign debt went from around US$ 70 to close to 160 billion, btw. And while one can speculate about motives, the fact is that most of the money went to capital flight, in oder words, the central bank sold the dollars to try to preclude the depreciation of the currency. Mind you, Macri said back in 2016 that lifting capital controls was fine, and that contrary to the Cassandras, nothing bad happened. Yes, not immediately, but the point was exactly this. Now we are on the verge of a default.

The IMF largest package in its history, of about US$ 56 billion, was provided to Argentina in 2018, and it has essentially supported the capital flight strategy of Macri. Again, one can speculate about the IMF's motives, but the fact is that they have provided the money for the policies pursued by this administration, and given the circumstances that the next government will inherit, it will have a great deal of power in allowing the country avoid or not a default. Note that when the loan was provided, the IMF requested austerity, and did not ask about capital controls. So for all the talk about changes at the IMF, this was essentially your grandma's IMF.

Central Bank Independence: A Rigged Debate Based on False Politics and Economics

No pressure!

By Thomas Palley (guest blogger)

The case for central bank independence is built on an intellectual two-step. Step one argues there is a problem of inflation prone government. Step two argues independence is the solution to that problem. This paper challenges that case and shows it is based on false politics and economics. The paper argues central bank independence is a product of neoliberal economics and aims to institutionalize neoliberal interests. As regards economics, independence rests on a controversial construction of macroeconomics and also fails according to its own microeconomic logic. That failure applies to both goal independence and operational independence. It is a myth to think a government can set goals for the central bank and then leave it to the bank to impartially and neutrally operationalize those goals. Democratic countries may still decide to implement central bank independence, but that decision is a political one with non-neutral economic and political consequences. It is a grave misrepresentation to claim independence solves a fundamental public interest economic problem, and economists make themselves accomplices by claiming it does.

Read rest here.

50 years of the journal Problemas del Desarrollo

I'll be in Mexico, with a group of distinguished local economists for this event. In Spanish, but very likely it will be streamed. Will post more about it.

Interview for the Argentinian Radio

I was interviewed yesterday about the situation in the country (Cítrica Radio, Siempre Es Hoy). Interview was cut short as a result of a bad connection. The audio of the part of the program I appear is here.

MMT in the Tropics

For those in the New York City area, I'll give a talk at my alma mater on Modern Monetary Theory in the Tropics. Meaning really developing countries (including some in temperate areas).

The seminar will take place on Tuesday, September 17, from 4 to 6 pm, at the New School campus close to Union Square (6E 16th St #1009). The department goal, I've been told, is to bring together graduate students and faculty, but, if tradition is worth something, others will be also welcome.

About the New School Econ Dept read this. About MMT see this and this, but there is more on the blog if you search.

Larry Summers on the necessity of fiscal expansions

As noted before, Larry Summers argues that Post Keynesians and original Keynesians (arguably Keynes and those close to him) did not think in terms of imperfections. The op-ed version of the Tweets here. He says, on the topic of secular stagnation and the lower zero bound that:

This formulation of the secular stagnation view is closely related to the economist Thomas Palley’s recent critique of “zero lower bound economics”: negative interest rates may not remedy Keynesian unemployment. More generally, in moving toward the secular stagnation view, we have come to agree with the point long stressed by writers in the post-Keynesian (or, perhaps more accurately, original Keynesian) tradition: the role of particular frictions and rigidities in underpinning economic fluctuations should be de-emphasized relative to a more fundamental lack of aggregate demand.

And he concludes

Instead of more old New Keynesian economics, we hope, but do not expect, that this year’s gathering in Jackson Hole will bring forth a new Old Keynesian economics.

The label is a bit clumsy, but the logic is perfect. And the policy conclusion is also pretty clear and in line with more progressive Dems:

What is needed are admissions of impotence, in order to spur efforts by governments to promote demand through fiscal policies and other means.

He may be angling to be Bernie Sanders Treasury Secretary, and he's doing a good job. 

Economic Terrorism

My interview on the Argentinean crisis with Javier Lewkowicz from Página/12 is available here. In Spanish, though.

Larry Summers on Effective Demand

On of the issues between more mainstream Keynesians and their more heterodox counterparts is whether frictions are central for Keynesian results or not. Since the Neoclassical Synthesis the conventional view is that some rigidity or friction was behind the problems of unemployment, be that the liquidity trap (the Keynesian case with the flat LM, since Hicks 1937), the rigidity of wages (since Modigliani 1944), or some other coordination problem (mostly in the New Keynesian literature).

In this recent thread (worth reading all) Summers (as shown above) notes that posties might have been right on emphasizing the fundament issue of effective demand. That of course is closer to what Keynes himself would have thought. The paper he cites, by Tom Palley, co-editor of the Review of Keynesian Economics (ROKE) is free and available here.

The inverted yield curve and the recession

The inverted yield curve, as it is well-known, indicates a forthcoming recession. I used it last year to suggest that the recession was not in the near horizon. The conventional explanation follows Wicksellian ideas (see this old post). In the Wicksellian story, one can think of the 10 year bond rate as a proxy for the natural rate of interest, and the Fed Funds for the monetary or banking rate. Hence, whenever the short-term rate (Fed Funds) is above the long-term one, it would be reasonable to assume that borrowing short-term is a bad idea, there is not enough borrowing, and investment falls short of savings. Lower investment would be the cause of the recession, and of deflationary forces.

Graph below show the difference between the 10-year bond rate and the Fed Funds, which I have noted I prefer to the more common 10-2 spread, since the Fed Funds is more clearly a policy variable, dependent on decisions of the FOMC.

And the yield curve has turned negative, which does indicate (look at the past in the graph) a high likelihood of a recession. But I remain skeptical, even though according to the BEA GDP growth slowed down a bit in the second quarter, and the trade deficit fell, due to lower imports (that decreased more than exports), both signs of a slowing economy.

First let me explain that you don't need to believe that the inverted yield curve would cause the recession because the monetary rate is above the natural rate of interest. You may very well think that there is nothing special or natural about the long-term rate. Post Keynesians often think in terms of uncertainty, and the role of expectations. Note that the fears of a recession in this case are related to a collapse of investment (this is the view of certain posties, for example, John Harvey here, that provides always reasonable and clear analysis; he claims to be skeptical about the yield curve).

In the Wicksellian story the high short-term rates (in comparison to the natural) discourage investment too. Here the idea of the marginal productivity of capital plays a central role, while posties would suggest that expectations are more important. But the mechanism is the same. Higher interest rates would lead, along an investment curve that is negatively sloped with respect to interest, to lower levels of investment. You could park your money in short-term securities, and avoid investment.*

But there is no reason to take a marginalist or Wicksellian version of the story. While for WIcksell the natural rate is not a policy variable, that might not be the case with the long-term rate (the 10 year government bonds). In fact, both rates can be influenced by the central bank, and the Fed has a history of switching to longer term securities after a crisis. After the 2008 Global Recession, the Fed increased its holdings of long-term government bonds, maintaining a low interest rate for government debt, and also bought significant amounts of Mortgage Based Securities. Buying long-term bonds pushes their price up, and reduces its remuneration. So lower tong-term rates have been a result of policy decision to some extent.

When the Fed decided to reduce its holdings of long-term securities it basically announced that the interest rate on the long-term bonds would go up. But last year the Fed announced that the program would slowdown and eventually end by this summer. So it basically reversed its previous policy stance, at the same time that it was increasing the short-term rate, presumably because the economy was beyond full employment (or the natural rate of unemployment, if you believe in Friedman's Wicksellian story; for the Fed description of its policies go here). And changes in interest rates and in the structure of rates should have significant effects on the balance sheets of agents spending, and affect the level of activity.

However, I wouldn't expect investment to be the key variable affected by higher short-term interest rates. Indebted agents would cut spending immediately if higher interest rates put pressure on their budgets, either because they have to pay higher interest or because they can borrow at less favorable terms. And sure lower consumption would then impact investment. Firms seeing that consumption is not too strong, would curtail investment, following the so-called accelerator. So I can live with the story that an inverted yield curve, because of a significant and fast increase of short-term rates, can lead to a recession.

And that might happen sooner than I think. But I'm still unsure about the reasons for expecting that immediately. Note that trade is more often than not blamed for the coming recession. See, for example, Greg Ip, from the Wall Street Journal, here, suggesting that trade and not the Fed would be the one blamed for the recession in the future. But as I noted before, I would expect the impact of tariffs to be stronger in China than in the US, and to be more on prices than on quantities. So expect more inflation, and some disruption of the production chains, but not a recession. And the government budget deal seems to inject some additional fiscal stimulus. Perhaps not enough, and perhaps other forces would be sufficient to throw the economy into a recession. But I still think the case for an immediate recession is still not a slam dunk. The slow recovery might continue for a while. But certainly things look worse now than when I wrote last year.

* Yes, that is open to the capital debates critique.

ICAPE call for papers

Geoff Schneider sent a reminder that the deadline (9/4) for the ICAPE call for papers, for the San Diego conference next January 5 and 6, is just a couple of weeks away. See details for submitting a paper, panel or workshop proposal. in the following link. The main topic is Policy, Politics and Pluralism: Pluralistic economics for the post-Trump era.

As we approach the 2020 elections, it is an opportune time for heterodox economists to articulate their vision for modern economic policies that would better serve the interests of people and the environment. Already, heterodox ideas are gaining traction, from Modern Monetary Theory to the Green New Deal. Possible topics are:

• What key theoretical and empirical issues should contemporary economists be confronting?
• What are the best theories and policies that pluralistic economists have to offer to address the major problems facing contemporary society?
• How do those theories and policies improve upon mainstream economic analysis?

All conference submissions must be completed using the following Google Forms:

Individual Paper submissions: https://forms.gle/Uq8oj6m5dZa1Rdqm9

Complete Panel submissions: https://forms.gle/PdQKsrweWboVCFZ96

Roundtable or Workshop submissions: https://forms.gle/fjM38Ca2x9QZvU7T9

As you will see in the Google Forms, each participant must provide a name, professional title, affiliation, phone and email. Each paper/roundtable/workshop must include an abstract of up to 400 words (2800 characters), a short abstract of up to 100 words (700 characters), and 3 key words.

For additional information, contact Geoff.Schneider@Bucknell.edu.

Thirlwall’s law at 40

Table of contents of the next issue of the Review of Keynesian Economics

Thirlwall’s law at 40
Esteban Pérez Caldentey and Matías Vernengo

Why Thirlwall’s law is not a tautology: more on the debate over the law
J.S.L. McCombie

Endogenous growth, capital accumulation and Thirlwall’s dynamics: the case of Latin America
Ignacio Perrotini-Hernández and Juan Alberto Vázquez-Muñoz

Thirlwall’s law and the terms of trade: a parsimonious extension of the balance-of-payments-constrained growth model
Esteban Pérez Caldentey and Juan Carlos Moreno-Brid

Thirlwall’s law, external debt sustainability, and the balance-of-payments-constrained level and growth rates of output
Gustavo Bhering, Franklin Serrano and Fabio Freitas

Growth transitions and the balance-of-payments constraint
Excellent Mhlongo and Kevin S. Nell

New Structuralism and the balance-of-payments constraint
Gabriel Porcile and Giuliano Toshiro Yajima

Is Indonesia’s growth rate balance-of-payments-constrained? A time-varying estimation approach
Jesus Felipe, Matteo Lanzafame and Gemma Estrada

Thoughts on balance-of-payments-constrained growth after 40 years
A.P. Thirlwall

The return of populism or Argentina on the verge of collapse

The Argentinean primary elections, which are very peculiar and take place all at once with all parties, were last Sunday. The primaries made some sense when the Peronist party was all divided and that allowed the main candidate to proceed, but with the move of Cristina Kirchner to the vice-presidential spot next to Alberto Fernández, and the unification of a good part of Peronism (in particular Sergio Massa), the primaries become essentially an anticipated election. And Peronism won resoundingly, with 47 percent of the votes, considerably more than the 32 percent the neoliberal Mauricio Macri obtained.

After the election there was a run on the peso, with a depreciation of almost 30 percent, and no significant intervention from the Central Bank. To add to the problems, Macri, the incumbent president, blamed the run on the voters.  In his view, they basically do not know how to vote, and by bringing back the spectrum of populism, and the implication was default, they scared the markets. It's all about confidence.

There are many problems with his arguments, and the policies he proposed the following they, after he apologized (after all he still needs the votes of those that do not know how to vote in October, when the actual election takes place). First and foremost, the fact that the problems faced by this government are the result of their own decisions to increase significantly the amount of debt in foreign currency. As I noted before here, it doubled in this government, after having being significantly reduced in the previous one (and after the renegotiation of debt with 93 percent of bondholders in 2005 and 2010; I must insist that default was in 2002, before Kirchner, in spite of what the Wall Street Journal said recently).

Yes, it is true that by the time Macri was elected in 2015 the country had an external problem. Meaning that the current account was moderately negative, and there were no inflows of capital in a world awash in capital, and reserves were low. But most countries were able to attract flows with moderately higher rates than the international ones. I expected the depreciation and higher inflation in the beginning of Macri's government to bring down real wages. And fiscal adjustment was to be expected too, in order to increase unemployment and reduce the bargaining power of unions.

But he had space, after that, for borrowing in international markets in domestic currency, at higher interest rates, and in domestic markets, and he could have in the process obtained significant amount of dollars (locals buying high paying bonds in domestic currency) to prop up the reserves. That would have led to growth, possible stabilization of prices (with some appreciation of the currency), and accumulation of reserves, reducing the external vulnerability of the economy. The fact that they borrowed in dollars, allowed the depreciation of the currency, losing control of inflation, increased the obligations in foreign currency to a level that an agreement with the IMF was necessary, and that adjustment forced the recession (besides the contractionary effect of the devaluation) was unexpected, to say the least. It is almost impossible to fathom why he would pursue policies that would make his reelection very difficult.

To things should be said in this context. One is that the agreement with the IMF supposedly was in place to allow to maintain the exchange rate in the forty something level, and with that, perhaps, at least not accelerate inflation and help with reelection. A politicization of the IMF that the international organism should have resisted. Also, many people able to buy dollars at forty something (now that they are at around sixty) won significantly. So those that bet on a depreciation (and promoted capital flight) won. And financial markets certainly did. This government has many friends in the markets. The other is that the agreement with the IMF ties the hands of the next government. And in my view that's no accident.

The measures he announced to counter the crisis (see this FT story), essentially "increases in the minimum wage, loans for small and medium-sized businesses, student grants, subsidies for poor families with children and a floor for income tax, as well as a freeze on petrol prices" (the later freeze was, apparently, now eliminated) will not have an economic, and most likely also not an electoral effect. FT is correct, it's too little too late. Not only the size of the measures is small, but also the inflationary and contractionary effects of this massive depreciation will dwarf any possible benefit of a moderate stimulus.

So Fernández is the virtual new president, and Cristina his vice-president. And the left of center is most likely back in power in Argentina. The notion that the left was done in the region has been exaggerated. As I noted more than three years ago here it was a stretch to think that most people wanted a return of neoliberal policies in the region. I noted that Brazil was divided, and I think still is, with significant resistance to Bolsonaro, and that Macri had only won by a very a narrow margin. Note that the return of the left in Argentina comes with significantly less degrees of freedom than in 2003. Not only there's an IMF agreement that would need to be renegotiated (and they must do it to avoid a default), but also the international scenario is much less favorable. But my take is that the new government will be able to avoid default, and restore some degree of coherence to economic management, allowing for lower inflation, and moderate rates of growth (on the low end, but at least growth) and reduction of unemployment and poverty. More on that in another post the near future.

Class conflict, Economic Development and the Brazilian Crisis

Last summer readings

The issue of class conflict and its relation to accumulation of capital was central for classical political economists of the surplus approach. That tradition has survived in political science mostly through the work of Marxist authors. And in many recent discussions of the Brazilian crisis, that started with the 2013 protests, the 2015 turn in economic policy, the 2016 mediatic/parliamentary coup against Dilma, and the 2018 unlawful jailing of Lula and fraudulent elections of Bolsonaro, the theme of class and the role of the bourgeoisie has been widely discussed.

The book by Armando Boito Jr. (pictured above) is, perhaps, the best of those that analyze the role of class alliances and the anti-PT (anti-Workers' Party) backlash that led to the Brazilian economic collapse. The main argument is that PT had built an alliance with what he calls, following Poulantzas, the internal bourgeoisie, in particular after the fall of Palocci and the rise of Mantega in the Finance Ministry, and that this alliance fell apart in the end of the first Dilma administration. This internal bourgeoisie included many of the industrialist connected with the construction sector, the agro-business and the metal-mechanic complex, and was dependent on the internal market, while the external bourgeoisie, more favorable to the neoliberal policies of Fernando Henrique Cardoso and his social democratic opposition party (PSDB), was connected to financial markets and the international economy.

The reasons for the collapse of PT's coalition are complex, but essentially tied to the change in economic policies in 2011, the now infamous New Economic Matrix, referred to as the FIESP Agenda, by Laura Carvalho, in her useful book Valsa Brasileira, that promoted lower interest rates, a more depreciated currency, and tax incentives, rather than vigorous public investment in infrastructure, as the main tool for economic expansion. This was then exacerbated after Dilma's narrow win in 2014, when in 2015 she did a volta face on election promises and started a fiscal adjustment program.

As we discussed here before, the protests in Brazil started earlier, in 2013, and they came essentially from the left, with complaints about public transportation costs in São Paulo. But by 2015 the protests were clearly of a different nature. They were less about economic conditions, and more about corruption and the middle class was prominent among the protesters hitting pots (paneleiros) against the Workers' Party administration. In Boito's story is the break up of the coalition, and the abandonment of the Workers' Party by the internal bourgeoisie that marks the beginning of the crisis. In part, it seems, by the failure of the economic agenda (the FIESP Agenda, here this name is more revealing, since it marks that it was connected with industrialist interests) would be central for this.

Note that the policy turn precedes the protests. Note also that the complete turn in the economic policy, with the prioritization of austerity follows the electoral victory in 2014, and the nomination of Joaquim Levy to the Finance Ministry in 2015, arguably hoping to conciliate with a very hostile opposition that was vowing not to accept the electoral results the following day after the election (the defeated candidate, Aécio Neves, said so in the Senate in so many words). In many ways, like Vivek Chibber argued more generally about the State-led developmental phase, it is the national bourgeoisie that becomes the main constraint on growth.

While for the most part I agree with this analysis, I am not completely convinced about the break between a National or Internal bourgeoisie that is more industrialist, and an International or Neoliberal branch of the elites that is more financial, which is at the center of Boito's argument. For one, the differences between the internal and a more international one, and the industrial and financial one are less clear than suggested. The subdivisions might be exaggerated. Boito is careful and notes that FIESP supported both the more monetarist groups around Palocci, and also the Neo-Developmentalist groups linked to Mantega. A finger in every pie, so to speak. And that's a general problem with similar discussions within Marxism, and the whole division of financial capital and industrial capital. At the end of the day, capital is fungible, and even though one might have particular groups concentrated in one or other sector, it is relatively easy to diversify and move from one to the other. Jessé de Souza's book, also pictured above, provides a more direct critique of the role of the elites as a block (I have my issues with some of his critiques of certain Brazilian social scientists, but that's probably something for another post.

Boito, also, perceptively notes the role of the middle class. He does not emphasize it, but notes that it was particularly important in the use of the juridical system as a political element to bring down the Workers' Party. The prosecutors and the judges of the Car Wash (Lava-Jato), now increasingly less credible with all the revelations of abuse of power in their investigations as shown by The Intercept, are members of what he calls the upper middle class. I should note here the role of the United States, which trained some of these bureaucrats, including Sérgio Moro, then judge, not Attorney General of the Bolsonaro administration. Not just an elite that was committed to maintaining a backward system, the Elite of Backwardness in a possible translation of Jessé de Souza's expression, but a middle class of backwardness.

I see a parallel, with many caveats of course, to what happened in Chile with Allende. In that case, it seems that the causes for the demise of the state-led accumulation regime, as much as the retraction of the Keynesian welfare state in the advanced countries during that period, was related to its political limitations and what has been termed the Revolt of the Elites, by Christopher Lasch. In the Chilean case, the ideas of the so-called Chicago Boys were initially rejected even by the Conservative Party, and there was a significant consensus in society about the need to expand the welfare state. For example, the nationalization of copper, which had started during the Christian Democratic government of Frey, was passed in Congress with support not just from left-of-centre parties but also with support from centrist parties. In some respects, the Chicago Boys, with their ideas about liberalization and privatization, acted as a Leninist revolutionary vanguard.

In part, this was possible because the success of the state-led industrialization had created a middle class and an incipient industrial bourgeoisie that was susceptible to the fears of a communist takeover and was willing to support a violent coup to repress class conflict. It was the reaction to the political changes of the state-led industrialization period that increasingly led to the incorporation of marginal sectors of society that created the conditions for the neoliberal turn. Fears that were stoked by the United States, which provided support for the coup. In similar fashion, the success of the Workers' Party (sure there were mistakes in economic policy, but overall the economy grew, and inequality was reduced), and the improvement of the conditions in the bottom created sufficient fears in the upper and middle classes to provide support for a coup. And again the US seems to have played a role, now using other methods, with lawfare at the center of the strategy.

PS: If you want to know more about Brazil just click on the label below, and organize by date. There are posts going back to the beginning of the crisis in 2013.