IMF surcharges

A long demand by progressive economists demanding the end of the surcharges that the IMF imposed on developing countries has had a positive outcome, with the executive board reducing them. The statement by Kristalina Georgieva can be read here. A strong effort on this by Joe Stiglitz, Martín Gúzman, Kevin Gallagher, Mark Weisbrot, to cite a few should be noted. I had recently signed the letter below favoring this policy.

"Dear International Monetary Fund Board of Directors,

This Friday October 11, 2024, the International Monetary Fund (IMF) is expected to announce reforms to its policy on charges and especially surcharges, which levies extra fees on countries whose debts have surpassed certain size and time thresholds. We the undersigned urge the IMF to meaningfully reform its policies, especially on surcharges.

Research shows that IMF surcharges are procyclical and regressive, extracting higher lending rates and fees from countries during financial crises when they should be investing in their own recovery. For years, researchers and advocates have documented how the current surcharge policy prevents low and middle-income countries from regaining financial stability, including by piling on higher borrowing, and preventing access to international markets. Surcharges increase the total potential annual interest rate imposed by the IMF to almost 8%. Moreover, the arguments put forward in defense of the surcharges have shown to have little if any validity.

We are concerned by reports that the IMF is not considering significant reforms that would remedy the flaws inherent in its surcharge policy. We fear that the IMF is instead contemplating insufficient half-measures. Tinkering at the edges will not help ensure global stability. The IMF itself projects that the number of countries paying surcharges will keep increasing. Already, 675 million people live in low- and middle-income countries whose taxpayers are projected to pay the IMF roughly $2 billion just in surcharges every year for the next five years. Every one of those dollars is a dollar not spent on health, education, and the clean energy transition. If the IMF Board maintains its current system of charging the taxpayers of already struggling, indebted countries extra surcharge fees, which cushion its general reserves, its members cannot expect that we will perceive the Fund as the steward of global financial stability that it was founded to be and confidence and trust in the Fund will diminish."

For the list of signatories go here.

More on the possibility and risks of a recession

So both the (inverted) yield curve and the Sahm rule indicate a recession. This together with two months of slower employment creation, and the slightly higher unemployment rate, has many wondering whether the economy will crash soon. I discussed before -- a while ago, before the pandemic recession, that had nothing to do with the yield curve -- why an inverted yield curve doesn't necessarily mean a forthcoming recession. The Sahm rule, like the inverted yield curve has an impressive track record. It suggests that if three month moving average of the rate of unemployment rises 0.5 or more above the minimum of the same averages for the previous twelve months a recession is under way. Figure below, although scale doesn't help, shows that we are at 0.57 for last August [ominous music here].

This is essentially an a-theoretical measure, contrary to the yield curve which could have different explanations, including the Wicksellian one used by the mainstream. It expresses basically a trend. Unemployment rates go up in recessions, and after a while going up, you're basically in one. The two episodes in which it fails, as far I can tell, were in 1959 and 2003. No clear reason for why, as opposed to housing market measures that failed in 1951, 1967, and perhaps now (if you believe me), because of two wars (Korea and Vietnam) and fiscal packages (Bidenomics).

In a few weeks now, the Fed is very likely, almost certainly really, going to reduce interest rates. I don't expect that to stimulate the economy much, and it certainly will not create any danger about an inflationary resurgence. Also, as I noted on Marketplace a week or so ago, there are some positive signs about the economy. Real wages at the bottom are growing, and consumption went up. And no, you should not be concerned with the low savings rate. I was a little less sanguine that I sound in that short soundbite, but overall I think that's correct.

Sure enough a recession could certainly imply a return of Trump, and Trumponomics. I doubt that it would cause inflation and that his election would deepen the recession, as some had argued. Not because tax cuts for the wealthy would stimulate the economy. But the truth is that Republicans in power don't care about the deficit or debt. They care about cutting social benefits, and about facilitating the lucrative relations between the corporate sector and government. What Jamie Galbraith called the Predator State. Trumponomics shares with Reaganomics, and other GOP supply side voodoo economics notions, a persistent characteristic. It is always against unions and higher wages, and always for lower taxes for the wealthy.

Dems are less consistent, but certainly less keen on both (and Kamala seems to have accepted Bidenomics and the pro-union agenda). The problem with that is that it has opened the door for right wing populism. The differences with previous versions of conservative economics are subtle, and in some sense rhetorical, since they do very little for working people. On right wing populism economics and their connection to the working class, and the problematic relation of Dems with the working class, I suggest the recent piece by Kim Phillips-Fein on the London Review of Books. She says:

"In 1968 George Wallace talked to a working class that was afraid of dispossession. Trump speaks to workers too, but more directly uses the language of money and corporate success; his appeal derives from identification with the boss -- reflecting the extent to which he seeks to win the allegiance of small business owners. Just as American political institutions have been hollowed out since the 1960s, so has the country's political economy, in ways that have helped to increase Trumps' appeal."

The self-made man myth, an American neologism (Henry Clay, if I'm not wrong), is incredibly corrosive. I hope I'm right and we can avoid a recession, and Trump.

Two letters to The Economist about Donald Harris and what they reveal about ideology

 

Spaghetti economics: Shootout at Harvard Square

There were two letters about the poorly written (not the English, always impeccable, contrasting to my spaghetti English, which is always slightly off, like the Westerns) piece that The Economist had on Donald Harris. One by Robert Blecker, Steve Fazzari and Peter Ho, setting the record straight on the breadth and depth of Harris' contributions to economics. On this, they echo what the Post said about Harris' policy advice in his native Jamaica. The subtitle of the Post piece said: "An unconventional economist at Stanford, Donald J. Harris pushed strikingly nonideological economic solutions to the nation of his birth." Harris was (and still is, from what I can assume) a reasonable man, both as a scholar concerned with knowledge, and as a policy advisor. Nonideological being the key word.

The other one, that I reproduce in full, is by Professor Avinash Dixit, who says:

"You say that Mr Harris 'proposed that firms must choose from a 'book of blueprints', which need different capital goods' in his book published in 1978. Alas, that had been proposed more thoroughly and rigorously in 1953 in a brilliant paper by Edmond Malinvaud, for which he should have won a Nobel prize. And Robert Dorfman, Paul Samuelson, and yes, Robert Solow, whom you cite as author of the aggregate capital-growth model, covered it more comprehensively in a book from 1958. Perhaps the mathematics of all this were beyond the capacity of the so-called Marxists of Cambridge."

This, and The Economist piece itself, confirms the high degree of confusion about the meaning of the capital debates. The problem is not so much the lack of mathematical savvy of the Cambridge, UK, economists, Marxists or otherwise, but the lack of understanding of theory, by some very serious and important mainstream economists, and mainstream magazines (they do think they are a newspaper too, btw).

The Economist piece, commits the mistake that I suggested (see my old post on the Capital Controversies here) was typical of most incorrect views on the debates between the two Cambridges, and suggests, essentially, that it was an aggregation problem, and that:

"Mr Harris did not move on. In his 1978 book he developed a model of growth without an aggregate capital stock. Rather than the smooth 'production function' of Solow, in which the rate of saving and population growth determines capital per worker, Mr Harris instead proposed that firms must choose from a 'book of blueprints', which need different capital goods. Capitalists will compete to ensure the rate of profit is consistent across different industries, picking a blueprint based on the level of wages and profits in the economy."

That's why Dixit suggests that the choice of technique models in Malinvaud, and in Dorfman, Samuelson and Solow, using disaggregated notions of capital would avoid the circularity of the aggregative model. It is always the case that firms will choose, given distribution, the technique that minimizes costs. Of course, that's not the issue. The problem is that one cannot obtain a measure of capital that is independent of distribution, and hence, the idea that supply and demand in factor markets can determine the remuneration of capital and labor cannot stand. The classical concern with distributive conflict, both of Marx, but also of bourgeois economists, as he called them, Smith and Ricardo, becomes relevant again [meaning, if I need to clarify, the notion of conflict in the distribution arena was held both by critics of capitalism, and defenders of what Smith referred to as commercial societies].

Disaggregation does little to solve the problem. First, as noted by Garegnani, long ago, the abandonment of the notion of aggregate capital, and the notion of factors of production, came together with the view that means of production got their own rate of return, but also with the disappearance of the notion that the forces of competition lead to a normal and uniform rate of profit. The traditional long run method of economics, that was the theoretical foundation of the discipline, was abandoned. Further, it is still the case that, even with a disaggregated set of means of production, in the the aggregate, savings must be equalized to investment, and some process for that has to be used. That is why some notion of the quantity of capital was necessary for the mainstream [in recent times, mainstream economists and policy makers have started talking of the natural rate of interest again, a notion that had vanished more or less, and about very simplistic negative relations between investment and interest rates, w/o even knowing the logical problems associated with that, reinforcing problematic views about distribution].

In other words, forget the notion that firms actually face a book of blueprints, and that they can substitute and change the structure of production with relative ease, according to changes in relative prices, and that somehow that, by affecting the relative supply and demand for capital (many capital goods) and labor, would determine distribution, since that is obviously highly improbable in reality. Choices are more limited, and substitution irrelevant, at best. The Cambridge, UK, economists (and not only the Marxists; most were some kind of Post Keynesian, as The Economist notes) and Harris knew better. Distribution is determined by the relative bargaining power of workers and capitalists.

Samuelson knew enough, math and theory, to know when he was wrong. Mr. Dixit thinks his mathematical knowledge puts him above the rabble [the so-called Marxists of Cambridge, and Mr. Harris]. But what his letter [and the piece by The Economist] actually shows is lack of engagement with the theoretical argument, and, in contrast with Mr. Harris, an incredible amount of ideological bias. After all, the idea that distribution is according to effort, and that markets produce optimal outcomes is at play. It shouldn't be. He raised Malinvaud, I counter with Smith, which knew way less math than he does, for sure, but whose book is still worth reading.

Milei, Mankiw, and pagliarism in economics

I start teaching this week (tomorrow). One of the things we are encouraged to discuss with students is the issue of academic misconduct. One of those problems that always existed, and not just among students, and it is hard to say whether things are better or worse than before, even though everyone thinks it has worsened. Certainly AI has made things even more complicated. At least in my classes, AI has limited impact, since it is an average of what is out there, and that is conventional economics.

Economics, as a field, is also not particularly good, with fewer retractions than other fields. Carmen Reinhart and Ken Rogoff was never retracted, even though the mistake was acknowledged. More recently Francesca Gino and Dan Ariely were caught, essentially, fabricating data, and putting in doubt the whole sub-field of behavioral economics.

Over the last few years, and in particular since he was elected president, Milei's extensive plagiarism has been documented. In some of his books they even lie about his qualifications, saying he got a degree from the University of Buenos Aires (with high reputation in Argentina), and that he has a PhD from the University of California (not saying which one). Both untrue, of course. Now Noticias has uncovered further plagiarism, this time from Greg Mankiw's intro to microeconomics.

The examples above are copies, almost textual, of the Spanish version of text. The title of the book is at least original, Capitalism, Socialism and Democracy (no, just kidding, Capitalism, Socialism and the Neoclassical Trap; as all Austrians he confusedly thinks he is not neoclassical). At any rate, nothing surprising, besides the fact that Mankiw's publisher doesn't take action. Respect for property rights to attract investment, that is the basis, btw, of their theory. The jokes write themselves.

Pluralism & teaching in economics

My colleague and friend Geoff Schneider on teaching and pluralism in economics.  He was the director of the Teaching & Learning Center at Bucknell, when I arrived here, and I learned quite a bit from him. At any rate, worth watching it.

Challenges and Perspectives of International Monetary Policy

 

Carlos Pinkusfeld interviews Ramaa Vausdevan (Colorado State University) and Franklin Serrano (Federal University of Rio de Janeiro) to discuss the complex challenges of monetary policy in the international arena. Exploring issues such as financial globalization, the influence of large economies on the global monetary system, and the implications for developing countries, the experts offer important perspectives on the role of central banks and the effectiveness of monetary policies in the globalized economy. This is an essential debate for those who want to understand the direction of the world economy in a context of dynamic changes and growing uncertainty.

 

30 years of the Real Plan: Unoriginal Lessons from Latin American Stabilizations

 

Original thoughts

 

The 30 year anniversary of the stabilization plan that controlled high inflation in Brazil, the so-called Real Plan, just passed earlier in July. I wanted to write something about it, but it got buried with other things. Here just some very short reflections.

 

There was a huge coverage in the media and several new books and papers written about it, including by several of the actual participants of the stabilization plan. If I have to leave one impression beyond the problems of all the mythology making, and the self-congratulatory mood of the whole thing, is that most of the analysts, including the economists that designed the plan, unlearned what they knew back then. People start defending some ideas because they are convenient, and next thing they end up believing their own half-baked justifications. The book shown above by three central figures in the conception and management of the Real -- Gustavo Franco, who wrote a dissertation under Jeff Sachs, with Lance Taylor in the committee that is worth reading, Pedro Malan, who was a very reasonable macroeconomist concerned with balance of payments problems in the 1970s, with a thesis supervised by Albert Fishlow, and Edmar Bacha, perhaps mostly known for his Belindia paper with Lance Taylor -- is a disappointment, but not a surprise. It suggests stabilization was possible because of the fiscal adjustment, and (this is somewhat interesting given the current debates in Argentina, where everybody wants a Plan) because the Plan wasn't really a plan, in the sense that it had no surprise measures. They mean, there was no price freeze.

The book is composed of short newspaper pieces, some previously unpublished but similar in size and style, over the last 30 years. The more recent are more illuminating for obvious reasons. The diagnostic is essentially that stabilization followed a serous fiscal commitment, an independent central bank concerned with inflation, and a flexible exchange rate to solve the external problem. There is almost nothing about the URV (Unidade Real de Valor), based on the Larida proposal, which was the center piece of the plans way of dealing with the realignment of relative prices during the transition to the new currency (one of the main problems with price freezes). Prices kept changing in cruzeiros, the actual currency, but remained fixed in URVs, that had a daily exchange rate with the cruzeiro. Then the cruzeiro was eliminated and the URV became the real, with a stable exchange rate with the dollar, one might add. Perhaps the lack of discussion can be blamed on the fact that neither Pérsio Arida nor André Lara-Resende participate in the book.

However, in a recent piece on Piauí, Lara-Resende, the more controversial and less conventional, at least these days, of the Real Plan forefathers, although he does say that the URV is the Columbus' egg that allowed to eliminate the problem of inertia, but then goes on to say that:

"Inflation is the result of a long process of fiscal disorder, that mirrors social demands and political conflicts, that cannot be resolved by the established institutional channels" (my translation).

In other words, inflation is caused by too much social spending and fiscal imbalances. The conflict is not, apparently one about income distribution, in the face of an external problem (foreign debt back in the 1980s). There is no mention of the exchange rate, the external obligations or the amount of reserves held by the central bank necessary to service the foreign debt.

Of course what allowed for the stabilization was the change in capital flows in the 1990s, in part the result of the lower rates in the United States after the financial crash of 1987, and more so after the 1991 recession, together with the Brady renegotiation of the external debt, that Brazil signed in 1992. By 1994 the reserves were reasonably large as can be seen below.

Reserves were very low in the 1980s, and that was the main reason for the failure of the heterodox plans, not just in Brazil, but in many other countries like Argentina. In May 1993, when Fernando Henrique Cardoso became Finance Minister, reserves were at about US$ 23 billion, and by the time the real became the currency, and the exchange rate between the real and the dollar was stabilized, reserves had more or less doubled (one can see the erosion of them after the 1999 crisis, and all of that is dwarfed by the accumulation of reserves that started in the second Lula government). There is a brief comment on the round-table at the Catholic University in which someone said that Gustavo Franco was instrumental in trying to keep the exchange rate stable, but it is almost an after thought.

This is lack of understanding of what allowed for stabilization in the 1990s, and not in the 1980s (in the case of Israel the US provided a large transfer of reserves to their central bank; stabilization by invitation, one might call it), is generalized. Many papers trying to find some specific element of the stabilization plans miss the fact that everybody stabilized in the 1990s, once dollars started flowing to the periphery.

At any rate, many other problems with these papers, books, round-tables, on Lula, and his views, on what would allow for higher growth now, on why price stability has been maintained, and so on. But the ideas are mostly conventional, unoriginal, and for the most part incorrect. They provide less knowledge now than what they knew back then.

Sharing Central Banks’ costs and profits of monetary policy in the euro area

By Sergio Cesaratto

A debate has developed in Europe (on Vox.eu and elsewhere) on the fiscal costs related to the interest payments that central banks in the eurozone are bestowing on commercial banks, a result of the way monetary policy is currently conducted. The implementation of monetary policy currently revolves around the ECB’s direct control of the interest rate paid on an abundant excess of bank reserves (relative to mandatory reserve requirements) (see Cesaratto 2020, chapter 7). This excess is the result of past quantitative easing (QE) operations whereby the eurozone’s national central banks (NCBs) bought government and corporate bonds by issuing reserves (liquidity). At the ECB’s current target rate of 3.75 per cent, banks are collecting considerable sums, more than 118 billion per year rebus sic stantibus. This also happens in other monetary areas, but there are European peculiarities.

Read rest here.

Very brief comments on Venezuela

The election in Venezuela is always contentious. I've written quite a bit about it over the years (see everything here; on the previous presidential election see here). Some have decided already that is a fraud, and sustain that the previous ones were also, although that is far from clear, and most likely Maduro (let alone Chávez) did win all the previous elections. This time around things are less clear. First of all, the opposition seemed more unified, even with the disqualification of Maria Corina Machado, a mistake by Maduro, both from a general preoccupation with democracy, and also, because the actual opposition candidate, Edmundo González Urrutia, might have been more effective.

In my view, the only way to know what happened one would have to check the data, and that is still not possible. Both Lula and Petro have asked for a peaceful recount of the votes. It is the only way to find out what actually happened. Same calls have been issued by reasonable opposition people like Francisco Rodriguez.

There is a great distance from saying that there were problems with the election, to suggest that is what fraudulent, and that Maduro is a dictator. Obviously Venezuela is flawed democracy. But, in all fairness, the US is very flawed too. A lot of people are excluded, some for questionable reasons, like being jailed, which disproportionately affects blacks and Hispanics, and several can't vote on a Tuesday, with limited numbers of polling places and not enough voting machines in poor areas, leading to much longer waiting times for working class people. Disenfranchisement is common here, and has been historically speaking. These are just some examples. And it would be an understatement to say that Trump, and many others, have authoritarian tendencies.

That is NOT to say that everything is fine with Maduro and Venezuela. Certainly he has authoritarian tendencies, and even if he is proved to be the actual winner, there were too many problems with the elections. However, these are only exacerbated by the sanctions imposed by the US, and the anti-democratic tendencies of the opposition, always ready to promote a coup, with US support. Lifting the sanctions, and a more rational American policy towards Venezuela could be the actual path for more democratic outcomes there. Hope springs eternal.

PS (8/4/24): It has been now almost a week, and the government has not provided all the information necessary for the recount of the votes and it looks increasingly like they won't do it. I still think that best solution, rather than acknowledging the victory of the opposition candidate, a mistake the US committed before, would be to lift the sanctions and engage in diplomacy, as Lula has been trying to do, in order to get the government to provide full vote tallies. After all, the US has engaged in diplomacy with much worse international actors.

Argentina on the verge

The big question in the case of Argentina, as always is when it will explode. If the current developments are an indicator of anything, it should be sooner rather than later. Note that the fundamental problems regarding the possible crisis and default are associated to the external debt in dollars (one has to repeat this all the time). It does not mean that there weren't other problems with the Argentine economy, but the domestic issues do NOT lead to a default (yes, that means the fiscal problems).

In spite of all the criticism of the Fernández government, and some of that is certainly correct (but not the fact that they didn't do fiscal adjustment or not enough industrial policy; it's the reserves idiot!), the increase in debt happened all during the Macri administration (2015-2019). Milei's 'plan' was to make a fiscal adjustment and devalue the official exchange rate to close the gap between it and the parallel exchange rate (the blue). The notion was that fiscal adjustment would solve the inflationary problem, caused in this view by monetary emissions to cover the fiscal deficits. Regarding the devaluation the logic was that the official rate was incompatible with the market determined one, and, hence, this was inevitable.

Milei depreciated the official exchange rate by more than a 100 percent, to reduce the parallel market premium, and implemented a draconian fiscal adjustment, that he claims has led to a balanced budget. In reality his adjustment is a bit of a sham, an accounting gimmick. For example, the distributor of electricity, privatized in the 1990s, has stopped payments to the producers, and the government is negotiating the bill, which will not be zero, even though that is what they show in the balances. Many other cuts are unsustainable. In this case, even the IMF has suggested that the measures have gone too far, and might have severe social consequences. Note that fiscal adjustment and depreciation are the traditional IMF policy prescriptions.

As a result of his measures, inflation accelerated to more than 25 percent per month in December right after the depreciation, and as the exchange rate depreciation moderated, inflation has decelerated, remaining for now more or less at the same level as before Milei’s inauguration, which corresponds to an annualized rate of about 180 percent. However, in the last month inflation increased again, from 4.2 percent in May to 4.6 in June.

More importantly, the exchange rate premium has started to increase again, as the parallel exchange rate depreciates more than the official one, and reaching a gap of 60 percent, before falling back to somewhere in the 40 something percent.

Of course the devaluation only managed to accelerate inflation, and reduce real wages, and the blue continued to devalue, since the expectations that the government will be able to stabilize the exchange rate are minimal, given the lack of reserves. The central bank is now intervening in the foreign exchange markets to reduce the gap. But all hinges on the ability to obtain dollars. And that's why we are on the verge of a crisis. The IMF will probably not pony up more dollars, even if Trump gets elected, which seems to be Milei's bet. And now Argentina will have to start make significant payments servicing the debt. Default is imminent, and there is an increasing need to acknowledge that the Argentine debt is unsustainable.

A bad day for whom? The Left for one

 

I blink, you lose!

Will Rogers supposedly said that he was not a member of any organized political party. He completed that noting he was a Democrat. That feeling is alive and well among Dems. The confusion caused by Biden's withdrawal seems to have led to many peculiar views among pundits and public intellectuals. Two typical reactions are the ones that are certain that Biden would have lost, and now with Kamala the election is in the bag, and the ones that suggest that the lefties in the party were wrong in supporting Biden. It's true that Biden was trailing in the polls, but it is unclear that he had already lost (although the chances were high), and even less that Harris will win for sure. I hope she does, to be clear, given the alternative.

But it seems only reasonable to assume that dropping the incumbent that, at least on domestic issues, presided over a fast recovery, and one that has favored those at the bottom of income distribution, is a bad idea (if he was to drop because of his cognitive issues, which were known, that window probably had closed in March, same date as LBJ stepped down, as some connected with the party had hinted). He was clearly pushed aside by donors, backed by the party establishment. And now Dems will have to defend the record, but also suggest that the person behind that record was not up to the task of running the campaign (not to mention the added problem of explaining how he still remains in the presidency, w/o invoking the 25th amendment, which the GOP is obviously going to call for, if they already didn't).

 

Blame the left, a winning strategy

As noted, the other common reaction was to suggest that Bernie, AOC and others in the Squad were completely wrong in supporting Biden, and, even with significant differences (and not just on foreign policy), thought that he was the best candidate. It is evident that Bidenomics has been reasonably good because he veered to the left, approved a large fiscal package, contrary to Summers and others associated with the party establishment, and that saved the economy from a recession. To some extent that was the legacy of Bernie's two runs for the presidency. He pushed the party to the left. The internal coup carried by donors and the establishment basically will move the party back to the right. One may dislike Bernie's views on this, but they are perfectly rational.

Finally, now the NYTimes and most party insiders are lionizing Biden as a selfless martyr for democracy. But if Harris loses in November (and again I truly hope she doesn't; as I noted Trumponomics will be much worse) he will be hang out to dry by the establishment and the media. He will be seen as responsible for the defeat, for his stubbornness and delay in leaving (and even, perhaps, for the inflation he caused with his fiscal plans; again, just to make sure, the latter is ludicrous). This is a defeat for Biden, and inevitably for his allies moving the party to the left.

Long ago, in 2016, before the election, I suggested that the results would be closer than they should be, because of the persistence of the neoliberals within the party. And after the election I noticed that Dems refused to learn that lesson. It seems that we are in the exact same place, with the same dangers as in 2016. The fact that Dems are incapable of organizing a coalition that includes the working class, and are dominated by donors in Wall Street and Silicon Valley is problematic. Hope springs eternal.

PS1: Of all the neoliberal Dem's bad ideas, and their willingness to veer right, the best, by far, was Aaron Sorkin's suggestion that they should nominate Mitt Romney.

PS2: Note that no Republican candidate for president has earned 51% the popular vote since 1988. W got 50.7 in 2004, with 9/11 the war and all. And that was the only time a GOP candidate won the popular vote after 1988. Both Bush in 2000, and Trump in 2016 lost it. And Trump is truly unpopular (but might win). But the fact that is going to be close suggests that the Democratic establishment is also very unpopular. Their refusal to learn and promote candidates like Bernie is not a mistake, it is consistent with their own economic interests.

PS3 (8/18): It seems increasingly that Kamala's chances have increased, and that a Trump resurgence is less likely (not impossible, sadly). In part, that is because she seems to have basically accepted the move to the left (on economic issues) that was promoted by Biden, and that is clear from her choice of vice president, someone supported by Unions, and by Bernie Sanders. A pivot to the left, rather than the middle.

Development Finance, External Constraints and Effective Demand in Maria da Conceição Tavares' Thought

 

A panel about Maria da Conceição Tavares with talks by three of her disciples and students, Ricardo Bielschowsky, Carlos Medeiros and Franklin Serrano.

Podcast with about the never ending crisis in Argentina

Podcast with about the never ending crisis in Argentina with Fabián Amico, and myself and interview by Carlos Pinkusfeld Bastos and Caio Bellandi from the Lado B do Rio Revista, and sponsored by the Centro Celso Furtado (Carlos is the director). In Portuguese (but fine if you speak Spanish or at least Portuñol).

Trumponomics vs. Bidenomics: The good, the bad and the stupid

The debate between Biden and Trump is on everybody's mind. And for good reason, the future of the global economy, and the well being of the planet are always at stake in American elections. I, of course, will restrict my brief comments here to the economy, and what the alternatives might entail. But the analysis of the impacts of both programs, if one can talk of programs per se, is very poor, to say the least.

Broadly speaking there has been increasing agreement on a tougher policy with respect to China, what Jake Sullivan referred to as a New Washington Consensus. Many see this as a revival of industrial policy. This is of course suggests some continuity with the Trump policies, even though I would suggest that only with Biden there was a clear plan to re-shore manufacturing jobs, particularly with chips and electric vehicles. Trump basically just hiked tariffs. Both protectionism and the continuity make some liberals (I would say neoliberal progressives, to use Nancy Fraser's term, nervous. For example, Edward Luce's anxiety is that Biden agrees too much with Trump. He says: "both Biden and Trump are vowing to travel in the same direction. But Trump would do so in leaps and bounds."

Note that in all fairness, the US never really stopped doing industrial policy. As noted by Fred Block, even with the problems of the Military-Industrial-Sillicon-Valley Complex, a hidden developmental state. The main new element in the "New" Washington Consensus is really that the US will be less willing to promote economic development by invitation in the case of China. As the IMF policies seem to indicate, for the rest of the world, the old consensus is in place. In that respect, the anxieties of liberals on this are exaggerated.

But that's not all. According to Luce, based on a report* from Moody's, "Trump’s policies would trigger a recession by mid-2025. Unemployment and inflation would jump. The bottom half of US income distribution would suffer the most." He concludes that: "The economic consequences of Trump would be a disaster." This was reinforced letter by 16 Nobel economists warns that: "Many Americans are concerned about inflation, which has come down remarkably fast. There is rightly a worry that Donald Trump will reignite this inflation, with his fiscally irresponsible budgets." This is flatly incorrect. Tax cuts (or their extension) and tariffs wouldn't cause inflation and a recession. Worst case scenario there would be a one time increase in prices, but again the bargaining power of the working class is at low point. So no danger of inflation there. And neither would affect the ability the government to spend. On that Republicans are normally less fiscally conservative when in power than Dems (see old roundtable on that here). And it actually it is a critique that misses the point of why Bidenomics is much better than Trumponomics.

Inflation was not caused by Biden's fiscal packages, as I have insisted several times here (see this paper). And Trump's tax cuts would also not be a problem from that perspective. The point is that Trump would be, in his domestic agenda, more of the trickle down agenda or Republicans going back to Ronald Reagan. Cutting taxes for the wealthy and making it harder for minorities and the poor (often minorities) to access welfare programs. It would be distributively problematic. Inflation is not the risk. The problem with Trump's policies is that they hurt the very working class (many in unions, and certainly white folk) that might vote for him. It would be stupid for unions and other progressives to support Trump.

The good thing about Biden is that he, in part because he had more union connections, and in part because he has moved towards the left (certainly Bernie played a role here), was bold in his fiscal policy, and that might have been instrumental in avoiding a recession (that the Fed was almost engineering). Contrary to Obama, with his mild post-bubble program, and Hillary, Biden has moved to a more traditional Dem (New Deal would be a stretch perhaps) logic of tax and spend.

Eight years ago Hillary had a completely different economic agenda, and that actually explained, to some extent, why Trump ended up winning. I noted that it was likely in this post from before that election, right after a debate, in which I said: "This [election] is going to be way closer than it should be." I also noted that the problem with Hillary was that: "The fact that she has not fully renounced Clintonomics, i.e. financial deregulation, austerity (End of Welfare as we know it) and free trade, is a problem for the progressive base of the party. She walked back some of these, mostly after pressure from the Bernie campaign, but is unclear that these changes would stick."

That these divisions are still relevant within the Democratic Party is clear in the primary in New York that pitied Bowman and Latimer, the former with support from Bernie and the latter from Hillary. Bernie said that "the race 'one of the most important in the modern history of America' and a contest between 'the billionaire class' and ordinary citizens," according to the Financial Times. So if one wants to criticize Trumponomics, the issue is that his agenda is the pro-billionaire one (Wall Street and Silicon Valley agree and have closed the funding gap). Biden is the leftest president since Lyndon Johnson (he is clearly to his right, and LBJ was no commie). He also is not the best possible candidate. He has one unbeatable quality though: he is NOT Trump.

* Mark Zandi is the main author of the report, and he can be seen as another neoliberal progressive, aligned with the pro-business part of the Dems.

Brief note on public debt and interest rates in Brazil

Robin Brooks, previously the chief economist at from the Institute of International Finance (IFF), and now at Brookings, suggests Brazil needs austerity, and, here is the punch line, that would promote growth (laugh track here).

The notion that it is the fiscal balances that determine the interest rate on public debt, and that fiscal deficits and high debt must imply high interest rates has no correlation with reality. Imagine the rate of interest that Japan would have if that was correct. In the case of Brazil the higher interest rates are entirely associated to Central Bank decisions.

In fact, if one looks at the correlation between interest rate and the size of public debt as a share of GDP, the correlation is weak, statistically insignificant, and negative. That is, higher debt is associated with lower interest rates by the central bank.

Let alone that the idea of expansionary fiscal contraction has been completely debunked with the austerity policies that followed the European crisis more than a decade ago. Ask Tories in the UK how well that worked!

New Clarivate Rankings

 

ROKE continues to improve it's ranking (based on the Clarivate Impact Factor measure) among heterodox journals. An old discussion about that here. You can see how much we went up since the last time I posted about this here and here.

Paul Davidson (1930-2024)

 

Paul (I'm next to him) and the Brazilians at the UMKC, PK Conference in 2002

Paul has passed away a few days ago. He wasn't in good shape for a while, and this was expected. He lived a long and productive life. I wasn't personally close to him, even though I met him several times from the mid-1990s onward. He went to two conferences I co-organized at the Federal University in Rio, always with Louise, which was a central figure of Post Keynesian (PK) life, and basically run the Journal of Post Keynesian Economics (JPKE) for him.

He was more effective as an institutional organizer, and as an observer of economic reality (and his main book was called Money and the Real World) than in his theoretical endeavors. His views on Keynes stayed close to the flawed discussion of the Principle of Effective Demand in chapter 3 of the General Theory, and an insistence on the importance of uncertainty and non-ergodicity in Keynes' work, that proved to be somewhat of a dead alley for PKs. He also emphasized the ideas of Tony Thirlwall, and his export-led model of growth, as a central PK contribution to economic theory. Finally, he tended to accept the views of Robert Skidelsky on Keynes' intellectual development, who, as I noted here, accepted a conventional on interpretation of Keynes' ideas, relying on imperfections to explain unemployment, even if he provided a much needed accurate biography of Keynes (in contrast to Harrod).

JPKE, that he created with Sidney Weintraub, and help from John Kenneth Galbraith among others, was central for a generation of PKs. He was part of the Trieste Summer Conferences that, in the early 1980s, that included many heterodox groups, and was the closest to Marc Lavoie's broad tent in real life, but failed to provide a unified view, and an alternative to mainstream marginalist theory. Many thought that the PK project was sectarian, and could not incorporate other views. I tend to think that the failure resulted from the fragmentation of the mainstream, that was reflected in the fragmentation of the heterodoxy, and were part of the era. Certainly not Paul's fault, who, at least in my experience, was very open and willing to debate, even if he did stick to his views. At least, not his personal fault.

When LP (Rochon) invited me to start a new journal, more or less at the time Paul was substituted as the editor of the JPKE by Jan Kregel and Randy Wray, on PK monetary economics, I suggested we needed a journal that would bring other Keynesians into the conversation. Hence, the Review of Keynesian Economics (ROKE).* Paul wrote to me once he knew about the new name of the journal. I knew from him that they had thought of naming their journal the Journal of Keynesian Economics, but the acronym would have been JOKE, so they opted for Post Keynesian, and the name stuck to the school of thought. He wasn't happy. But he understood that our project was very different.

Ours was not a journal to propagate the ideas of the heterodox followers of Keynes, and to emphasize the notion that effective demand mattered, at times that Keynesians were under attack with the neoliberal turn, and the rise of Monetarism and New Classical economics (Paul was in the book of debaters with Milton Friedman, that included also Jim Tobin, and a few other more conventional Keynesians). Ours was an attempt to recreate a Keynesian big tent (not an heterodox one) to reinforce the commonalities with all Keynesians (in spite of the many differences).

Paul was combative, forceful in his discussions, particularly about Keynes' legacy, and a key figure in the preservation of Keynesian ideas, when those were considerably less popular, and the profession moved incorrectly away from the Keynesian Consensus. Later many would gladly talk about the return of the master. Paul never abandoned him, and he was right. A great loss for the profession.

* On that see Tom Palley here and my discussion of Bob Solow's role here.

Dollar dominance and the international monetary hierarchy

Our panel at the UNICAMP conference last Thursday, with Mark Schwartz, and Andrés Arauz.

Lula's fiscal problems

Almost everything that’s wrong with conventional views on fiscal policy is on display in this column (well written and clear) by one of the key journalists from Folha de São Paulo, Vinicius Torres Freire. He suggests that the current fiscal adjustment is not credible. For him, this is a confidence crisis, caused by Lula’s insistence on attacking the central bank policy and his lukewarm support for the adjustment. Why the adjustment is necessary, he never asks. It’s evident, for any educated or serious person, one must conclude. Debt is too high, spending cannot go on forever. These are truisms, and if repeated long enough they do seem right.

The problem of course is that the Brazilian fiscal problems (note that it is unclear why deficits that are not particularly large by historical or comparative standards and debt that grew as a proportion of GDP, but is in domestic currency and can be rolled over without any trouble routinely, are a problem) started when the economy stopped growing in 2015. And that’s when PT tried to promote an adjustment to appease the radical right. It was only then that public debt started growing as a share of GDP (see graph). We know how well that strategy worked out for Dilma.

In my Catalyst piece from last summer, I suggested that the problems Lula would face would be within his own coalition. The fiscal conservatives inside his coalition, and, in particular, those on the left and within PT, which include his own Finance Minister, Fernando Haddad. Haddad truly and earnestly believes, as much as Torres Freire, that the path to growth is through fiscal consolidation, lower deficits and debt, obtained in his view mostly by increasing revenue (his critics and the 'markets', read the traders on Faria Lima, would prefer cuts on social spending), and obtaining investment grade, which would lead to an investment boom.

Note that many political scientists, for example Marcos Nobre here, suggest that somehow the problem is that Lula needs to negotiate with the so-called Centrão, the clientelist groups in congress that control voting and have a grip on governability. In that view, he is between the rock of lack of governability, and the hard place of macroeconomic instability. In other words, he either continues with the clientelist policies that allowed all governments to deal with congress since the return of democracy, but pays the price of not being able to deliver the fiscal results necessary,  or he confronts them and does the adjustment, and keeps stability (and growth), but might have his agenda blocked. In this view,  price stability and growth go hand in hand, since fiscal restraint also allows for lower interest rates, which would be instrumental for growth. If Lula negotiates with the Centrão he would also spend on unnecessary things rather than the crucial things that are needed for growth, including in the green transition, in this view. The notion is that whatever he does, the likelihood is that the extreme right (the right without fear) might return (even without Bolsonaro).

Of course, that's a false dilemma. Brazil has no fiscal problem. The best way to consolidate, reducing debt, if that is deemed essential, would be promoting growth, and investing (public investment), including on a green transition, and that would allow the ratio of debt to GDP to fall, even if debt per se went up. The main problem for Lula is that many in his own party, and his key ministers are promoting an adjustment that might force him to miss the mandatory minimum expenditures on education and health, that would preclude providing the increases in wages of public sector workers, and the minimum wage, that would help promote a recovery. So Lula's fiscal problems are not what you might think, an economic constraint on his ability to spend. Brazil has no fiscal problems, which are always political problems, and has not have any serious external issues either, a recurrent theme gong back for more than two decades and discussed here, more recently (and here and here, the last one with links to 7 additional posts, to give a few examples over the years). Lula's problem is fiscal conservatism.

Bidenomics and other ugly ducklings

The media and a good chunk of the policy wonks are surprised that Biden does not get the deserved recognition for the relatively good state of the US economy, and that as a result he is suffering in the polls. There are two separate, but interrelated, causes for that. The most obvious can be defined in one word, inflation. The second, is related to the fact that, even though the recovery from the pandemic was fast, the economic situation for most working class people has not been great for a long while. In other words, the recovery from the pandemic brought back a situation with which most of the people at the bottom of the income distribution were struggling. I'll deal with inflation, which is the one that everybody is discussing in the news.

Regarding inflation, two things have been negative for Biden. A lot of the mainstream (liberal) and conservative media blames Biden's fiscal package in early 2021 and, perhaps to a lesser extent, the 2022 Inflation reduction Act, for the acceleration of inflation. As do many economists connected to the Dems, more prominently Larry Summers. That view also underpins the Fed's interest rate hikes.

The interest rate hikes could have caused a recession, but now that seems to have been clearly avoided. Traditionally the mechanism is through the impact of the interest rate on residential investment, which is critical for consumption patterns. The graph below show residential investment, that fell before every recession. There were two previous false alarms, in 1951 and 1967, where the Korean and Vietnam wars, and the spending associated to those, came to the rescue. Here, it seems the extra fiscal spending which was highly criticized came to the rescue. Also, the government shutdown, which was always a possibility, and would have reduced spending (and was my biggest fear in terms of a possible recession), never materialized.

The acceleration of inflation, as I discussed several times here (see this paper and this one too, or this INET video),  was caused by supply side constraints during the pandemic, and the shocks to key prices, particularly energy and food commodities after the war in Ukraine. Since there is no significant wage resistance, it was expected that inflation would recede and fall once the shocks passed. No surprises there. And wages are winning against inflation, ad can be seen below. The wages of non-supervisory workers were growing below CPI in the early phase of the inflation acceleration, and are recovering now.

So one may very well ask why are people so angry about inflation. If one looks at the BLS resports it is clear that energy prices, early in the war, and then rents, after the Fed hiked interest rates, had higher increases than the general CPI. The graph below shows that.

This is relevant, since, for lower income people, the impact of higher energy and rental prices impact more than proportionally their ability to spend. In other words, people have less money after paying for gas and housing (and gas impacts transportation and some food items). So most people have felt the inflationary acceleration and they had to tighten the belt somewhat to maintain the same life style.

PS: The yield curve is inverted, and has been for a while and that makes some people nervous. I discussed back in 2019 why an inverted yield curve might not necessarily imply an impending disaster.

Maria da Conceição Tavares (1930-2024)

(1930-2024)

Maria da Conceição Tavares passed away last Sunday. She was among the key thinkers of the Latin American Structuralist School, often associated with the Economic Commission for Latin America (ECLA). In her case, Anibal Pinto, who was her teacher in a ECLA course in the early 1960s, and Celso Furtado, who was never formally her teacher, were her major influences. She was instrumental in introducing Kalecki in Brazilian academic circles, and in her debate with Furtado on the possibilities of growth in the late 1960s (Furtado defended a stagnationist thesis) she started to move in the direction of demand-led growth theories. She also noted in the mid-1980s that the diplomacy of the dollar (and the end of Bretton Woods) essentially implied that American Hegemony was stronger than ever. She was associated to the failed stabilization plans of the 1980s (in particular the Cruzado Plan), and was critical of the neoliberal policies of her friend Fernando Henrique Cardoso, and her co-author José Serra. She was a member of congress (I should say I did work for her campaign back in 1994), and she was close to the Workers' Party administrations. Her contributions both to academia and to Brazilian politics were without comparison, and she will be missed.

For those that read in Spanish, here a paper I wrote a few years ago on her contributions to heterodox economics. It was published in this book edited by Juan Odisio and Marcelo Rougier on several key Latin American thinkers.

An obit written with Esteban Pérez is available here.

My short piece on Solow and his relation to the Review of Keynesian Economics

(1924-2023)

Robert Solow, who was a member of the editorial board of the Review of Keynesian Economics (ROKE), died in December 2023. Solow holds a special place in the history of macroeconomics, and he was a strong supporter of the ROKE project. In this brief note I want to honor Solow’s contribution to economics and to place on record his contribution to ROKE.

Histories of macroeconomics tend to emphasize the disputes between Keynesians and Monetarists, at least up to the 1970s. Those disputes very often pitted Milton Friedman against either Paul Samuelson, with whom he alternated in a famous Newsweek column, or James Tobin who was, perhaps, the most prominent of Friedman’s opponents when the Journal of Political Economy edited a debate with Friedman’s critics. In the broader cultural wars, Friedman was often pitted against John Kenneth Galbraith, and his Free to Choose series was seen as a response to the latter’s BBC series The Age of Uncertainty. Solow appears, if at all, as Samuelson’s co-author of a paper on anti-inflation policy (Samuelson and Solow 1960), which is widely viewed as introducing the Phillips curve to the American economics profession.

Yet Solow is, in many ways, the central figure of ‘American’ Keynesianism, and he was awarded the 1987 Nobel Prize in Economics. His work was central to the building of what Samuelson referred to as the Neoclassical Synthesis, which was dominant during the post-war era up to the 1970s. This synthesis combined microeconomic competitive general equilibrium theory, Keynesian macroeconomics, and Solow’s (1956) Neoclassical growth theory. It gave short-run space for Keynesian policy effectiveness but asserted a long-run belief in market forces and Say’s Law, which Solow defended in his growth model and in the Cambridge debates with more heterodox Keynesians. Additionally, Solow contributed decisively to the development of what eventually would be called New Keynesian Economics, with the development of the efficiency wage model in the late 1970s. He lived long enough to see fiscal policy rehabilitated after the Great Recession of 2007–2009, and to see what many view as the return of Keynesian Economics.

Read rest here.

Debt cycles and the long term crisis of neoliberalism

My talk at the IDEAS/PERI conference a few weeks ago. As I said there, I hate to be the optimist in the room, but I'm a bit more skeptical about the risks of a generalized sovereign debt crisis in the Global South. The two papers I cite are these (in their PERI Working Paper versions) two (one and two).

Esteban Pérez Caldentey on the Ideas of Raúl Prebisch

Esteban Pérez's talk at the University of Chile, about Raúl Prebisch, about whom we have written several papers. This is in Spanish.

Keynes’ denial of conflict: a reply to Professor Heise’s critique

Tom Palley reply to response about his paper on Keynes lack of understanding of class conflict. In many ways, this is how Tom discusses Keynes lack of understanding of old classical political economy. Tom is correct in pointing out that:

"Kalecki (1933 [1971]) began the process of incorporating conflict into the Keynesian paradigm, but there is much more to be done regarding recognizing conflicts’ implications for economic theory and recognizing the multiple fora in which it appears."

Of course, Kalecki was building on Marx and classical political economy. Read the full reply here.

The Argentina of Javier Milei

A seminar organized by the Association for Heterodox Economics with myself, Ramiro Álvarez and the Argentine Senator Carolina Moisés.

Atonella Stirarti's Godley-Tobin Lecture

There was a problem during the 7th Godley-Tobin Lecture. I disconnected everyone when I was trying to fix a problem with Professor Stirati's presentation, and I didn't notice until much later. The worst part is that the recording was lost. I'm posting here the PowerPoint presentation for those interested. We will also post the link for the published version of the lecture, which will be open also on the website of the Review of Keynesian Economics (ROKE).

On the Heritage Foundation Freedom index

My interview with Rick Smith on the Heritage Foundation Index and its tenuous relationship with anything that can be called freedom, economic or otherwise.

Association for Heterodox Economics' Webinar: The Argentina of Javier Milei

 April 16th 2024 10am New York / 3pm London

Since the beginning of the military dictatorship in March 1976, pro-market visions were imposed by violating human rights in the darkest period of Argentina’s history and occupied political thought for more than four decades, even in democracy. Although these ideas had a brief pause in the period 2003-2015, they are still in force and now more than ever under the new administration of Mr. Milei. Mr. Milei has imposed a huge depreciation of the national currency, reducing the purchasing power of workers, and an adjustment of public spending by dismissing more than 50,000 public employees under the slogan of efficiency. Inflation has reached 200% per year and poverty has reached 60% under his administration, which has been in place for less than 5 months. As a heterodox community, we wish to better understand the social and economic consequences of the Milei government and discuss the possible alternatives Argentina now faces. Zoom Registration here.

Speakers:

Ramiro Álvarez is a postdoctoral fellow at the Centre for Political Economy and Development Studies at the National University of Moreno (Argentina). He is a specialist in the Political Economy of Argentina. After his Master in Economic Development at the National University of San Martín (Argentina) he did his PhD at the University of Siena (Italy). Ramiro teaches basic and advanced economics at different Argentinean universities. He has been a guest professor at the Autonomous University of Santo Domingo due to his studies in Political Economy and he published many papers analysing the political “pendulum” in Argentina, and its impacts on income distribution and growth.

Matías Vernengo is Full Professor at Bucknell University. He was formerly Senior Research Manager at the Central Bank of Argentina (BCRA), Associate Professor of Economics at the University of Utah, and Assistant Professor at Kalamazoo College and the Federal University of Rio de Janeiro (UFRJ). He has been an external consultant to several United Nations organizations including the Economic Commission for Latin America and the Caribbean (ECLAC), the International Labor Organization (ILO), the United Nations Conference on Trade and Development (UNCTAD) and the United Nations Development Program (UNDP). He has eight edited books, two books and more than one hundred and twenty articles published in scientific peer reviewed journals or book chapters. He specializes in macroeconomic issues for developing countries, in particular Latin America, international political economy and the history of economic ideas. He is also the emeritus founding co-editor of the Review of Keynesian Economics (ROKE), and co-editor in chief of the New Palgrave Dictionary of Economics.

María Carolina Moisés is a distinguished Argentine politician and political scientist with a rich career dedicated to public service and political advocacy. Beginning her political journey with foundational education from the University of Belgrano, where she earned a degree in Political Science, she has been a pivotal figure in Argentine politics. Her early academic achievements were complemented by international exposure through a program at the University of Berkley, Boston, which broadened her perspective on governance and public policy. Carolina’s political career is marked by her tenure as a National Senator for Jujuy since December 10, 2023, showcasing her continued relevance and leadership in Argentine politics. Prior to this role, she served as a National Deputy for Jujuy from December 18, 2017, to December 10, 2023, and previously from December 10, 2005, to December 9, 2009, where she was known for her passionate advocacy and significant legislative contributions, including her involvement in the landmark Audiovisual Media Law. As a speaker, María Carolina Moisés brings a wealth of experience, a profound understanding of political dynamics, and a visionary approach to addressing contemporary challenges. Her career is a testament to her unwavering dedication to public service, making her an inspiring figure in Argentine politics and beyond.

Beyond the NAIRU, 7th Godley-Tobin Lecture by Antonella Stirati

 

The 7th Godley-Tobin Lecture in a bit more than a week. For those not in Boston registration here.