On Economic Traditions and the Sociology of the Knowledge

Marx & Smith vs Weber & Bentham 

I often use Randall Collins’ book Four Sociological Traditions in my class discussions and in my own work on the history of economic ideas. Collins’ discussion of economics as the first social science is instructive about how disciplines become autonomous from other fields. Economics emerged earlier than the other social sciences as an independent discipline, in his account, because states had practical reasons to collect information about taxation, trade, population, and public finance. Mercantilism created a body of empirical and administrative knowledge, and later writers, starting with William Petty (he cites François Quesnay and then Adam Smith rather than Petty), transformed these concerns into a more systematic intellectual discipline. Economics was able to establish itself institutionally before sociology because it had both practical applications and a relatively clear object of study.

Collins then shows how economics became increasingly professionalized during the nineteenth century. There is an extensive literature on that (on the American case see Coats, 1988). Classical political economy initially developed partly outside the universities, especially in Britain. In Germany, however, economics became more firmly tied to state administration and university training (on the German Historical School see Kurz, 2016). Later, marginalism and neoclassical economics helped turn economics into a more abstract and specialized academic discipline. Collins’s broader point is that the content of economic theory cannot be separated entirely from the institutional settings in which economists worked.

For Collins, ideas are produced inside social networks and institutions. Intellectual change occurs when institutional spaces open up, when new professional roles become available, and when communities of scholars compete over problems, methods, and prestige. In that sense, the rise of the social sciences – economics and, more interestingly, sociology itself – is a sociological phenomenon. The community makes the discipline.

Read rest here.

Anwar Shaikh (1945–2026)

 

With Anwar and Costas Lapavitsas at a conference in Tulsa

I was very saddened to hear of Anwar Shaikh’s passing. Anwar was one of the most important Marxian economists of his generation, perhaps together with David Gordon and Duncan Foley, at least in the US, both his colleagues at the New School.* He spent his career defending and developing the surplus approach in the broadest sense, against both mainstream economics and much of heterodox economics.

I disagreed with him on many things. On the theory of value, on Marx’s law of the tendency of the rate of profit to fall, on Say’s Law, and particularly on the determination of real exchange rates and purchasing power parity. In fact, an entire chapter of my PhD dissertation was devoted to his theory of exchange rates, which I regarded then, and still regard, as the main Marxist approach to the subject. The thesis was also critical of both mainstream and Post Keynesian theories of exchange rate determination, btw. I also disagreed with him on a number of policy questions, including the causes of inflation in many Latin American countries. These were not minor differences.

I also think that some of his work was creative and important in many respects, and closer to my views (not just issues of conflictive distribution associated to the surplus approach). His critique of comparative advantage influenced my understanding of the topic (also here). His work on the welfare state is something I often cite and use in classes. And his paper on the humbug production function was perhaps his most famous work.

Whether I agreed or disagreed with him, that never diminished my respect for him. Anwar was intellectually honest, genuinely pluralistic, and always willing to engage seriously with arguments with which he disagreed. That is rarer than it should be in economics. He believed deeply that alternative traditions in political economy had to be developed rigorously and confronted with both theory and evidence.

His work kept alive a broad classical and Marxian tradition centered on production, distribution, competition and the social surplus. The questions he insisted on asking were important ones, and his willingness to argue about them openly made heterodox economics better. He will be greatly missed.

PS: Bard College has an archive with his papers that is worth exploring.

* Sam Bowles would be another possible name, but I don't think he considers himself a Marxist anymore (and he might be right). I would also not put analytical or post-modern Marxists at this level. These are obviously debatable views.

Osvaldo Sunkel (1929–2026)

Osvaldo Sunkel, one of the last great figures of the original Latin American structuralist tradition, has passed away. A central figure at ECLAC, his work ranged from the structuralist theory of inflation and the historical-structural method to dependency, transnational capitalism, and environmental questions. Esteban Pérez Caldentey's biographical essay rightly presents him as an essential reference for Latin American economic thought, whose work remained concerned throughout with the specific historical and institutional conditions of development in the periphery.

Sunkel belonged to the extraordinary generation formed around ECLAC in the 1950s. His recent oral history for ECLAC is a wonderful account of that intellectual milieu: of studying development when there was barely yet a literature on the subject, and of the emergence of a genuinely Latin American way of thinking about development. ECLAC. 

For me, the loss is also personal. One of the reasons I decided to study economics was reading Sunkel's little book on the historical process of development and underdevelopment while still in high school in Rio, assigned by the geography teacher, Clóvis Dottori. The idea that development and underdevelopment were part of the same historical process, not stages in a linear progression from one to the other, was a revelation. The industrialization of England, and the deindustrialization of India were part of the same process. That was in the 1980s.

In the early 2000s we invited Sunkel to a conference in Rio, and I was fortunate to get to know him more closely afterward. The book Esteban and I wrote together is dedicated to him. A major loss for Latin American economics, and for me the passing of someone whose ideas helped set me on the path I followed.

Trump and Rubio fight to sway Brazil’s election and control the hemisphere

By Mark Weisbrot

One of the most important elections in recent Latin American history will take place Sunday in Brazil. Incumbent president Luiz Inácio Lula da Silva has recently been emphasizing the issue of national sovereignty. One reason: The challenger, Flávio Bolsonaro, has the strong backing of the Trump administration — and the U.S. has been intervening heavily on his behalf.

In the last few months of Brazil’s election campaign, Trump has met with Bolsonaro at the White House, imposed new tariffs on Brazilian goods and tried to send State Department officials to Brazil. (Both Brazilian and American officials said the presence of Trump administration operatives would cast doubt on the integrity of the voting there.)

A letter last week to Secretary of State Marco Rubio from 31 members of Congress documented additional hostile actions and concluded that “the United States is acting as an agent of interference and destabilization.”
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The election is forecast to be very close, and the sovereignty issue could be persuasive for swing voters.

Trump’s intervention undermines a basic and generally cherished right to self-determination, as well as the right to democracy itself. It is even clearly illegal under the Charter of the Organization of American States, to which the United States is a signatory.

Read rest here. 

Reflections on academic tenure prompted by events at The New School

By Thomas Palley

The New School is a historically progressive US academic institution that has fallen on hard times. Recently, it has been in the news because it has fired several tenured professors, invoking financial distress and institutional reorganization as grounds therefor. That has prompted some public debate.

Below are some brief thoughts on that debate. I think it has been a missed opportunity. It should have been used to discuss how to govern academia and remedy the system’s existing glaring failings. Instead, it has been used to tacitly defend the system.

Read rest here. 

The Economist Turns its Back on Reality

 

False equivalency? You bet*

 

The Economist just published one of its lead articles on the Brazilian election, with the rather dramatic title "Brazil turns its back on the future." The basic argument is not particularly original. Brazil is a country with enormous potential, but it does not grow enough, spends too much, has too much debt, and now voters are faced with two dismal choices that are both equally bad. Lula on the left and Flávio Bolsonaro on the right.

 

There are many problems with the piece (where to start?). The most obvious is the strange equivalence between Lula and Bolsonaro's son. The article itself recognizes that Lula is a democrat and that Flávio questions the reliability of the voting machines and has suggested that he might not accept an electoral defeat. It also notes, almost in passing, that his main political proposal is essentially to pardon his father, who was convicted for his role in the attempted coup after the 2022 election. These things are not exactly equivalent to being old and not cutting government spending enough.

 

The discussion of corruption is even stranger. I have said this many times over the years, but it's worth repeating. There is simply no material evidence that Lula personally received money from the corruption schemes associated with Petrobras or anything else (e.g. the infamous apartment). His enemies looked very hard (and they had every incentive to find something). Lava Jato was one of the most extensive anti-corruption investigations anywhere in the world. The leaked conversations from the so-called Vaza Jato, and the subsequent decisions concerning Judge Sergio Moro's partiality, hardly strengthened the argument that Lula was convicted on the basis of solid evidence. My view has always been simple on this matter. If there was evidence that Lula personally pocketed money, after all these years somebody would presumably have produced it. The absence of evidence is not evidence against its existence, but it makes a pretty strong case. Many politicians have been caught with Swiss accounts and other hard to explain funds. Not Lula.

 

The contrast with Flávio is remarkable. The old 'rachadinha' investigation alleged that millions of reais had been diverted through employees of his office.** The case was eventually derailed by judicial rulings excluding evidence, not by the discovery that the underlying transactions never took place. More recently Flávio had to acknowledge his relationship with Daniel Vorcaro after recordings contradicted his previous denials. He had arranged financing from Vorcaro for a movie glorifying his father (you couldn't make this stuff up), and Reuters reported that messages obtained in the Banco Master investigation showed the two referring to each other as "brother." Flávio denies that there was any quid pro quo or illegal conduct (yeah, sure, and I believe in Santa Claus). Yet The Economist manages to subsume the whole thing under the proposition that Brazil has a generic problem of "entrenched corruption," for which Lula and Flávio are somehow equally inadequate responses.

To be clear, corruption exists in Brazil. It exists everywhere. I see no particular reason to think that Brazil is uniquely corrupt (certainly compared with a United States in which the current president has repeatedly blurred the lines between public office and his private business interests). The relevant question is who did what, and what evidence exists. Corruption cannot simply be invoked as a magic word to erase rather obvious differences. One is forced to conclude that the newspaper's (as they refer to themselves; it's a magazine) writers are too gullible, or they don't really care about corruption at all. This is just a smokescreen for their real issue: the "fiscal problem." Their economic argument is perhaps more conventional, but not much better. On the economics they are closer to Flávio's views (I mean the people around him; he has no views on anything). 

According to The Economist, excessive government spending raises debt, which raises interest rates, which crowds out investment and prevents Brazil from growing (the old Treasury view Keynes fought in the 1930s; truly nothing new under the sun). Therefore Brazil needs deep spending cuts. Something like Milei, which they also keep promoting as somewhat of an example for the region. Renan Santos (who?), the libertarian candidate, apparently has the ideas that "match the moment most closely." That tells you how out of touch they are, and also why this is a disguised defense of Bolosnaro's kid, who had Milei in the launch of his campaign (and has an Econ advisor promising deep cuts like Milei; or as promised by Elon Musk's failed DOGE).

Lula's problem, in my view, has been almost exactly the opposite. His government has been far too concerned with fiscal restraint. As I noted in my previous post, the government has accepted a fiscal framework designed essentially to constrain the growth of government spending, and the evolution of Bolsa Família is illustrative of how cautious fiscal policy has remained. If you accept a demand-led, view of growth (admittedly The Economist and most of the profession does not), this matters enormously. Government spending is one of the central sources of autonomous demand. If autonomous expenditures grow slowly, demand grows slowly, and induced investment will also grow slowly. There is no mysterious mechanism by which cutting spending produces the private investment necessary to accelerate growth. The confidence fairy has been around for a long time in discussions of Brazil (and has not acquired much empirical support with age).

Even the debt argument is somewhat circular. High interest rates themselves increase the government's interest bill and therefore public debt. Then the higher interest bill is presented as evidence that fiscal policy is unsustainable and government spending must be reduced. The political intention should be straightforward to understand. High rates transfer income toward rentiers, increase the fiscal deficit, and then the resulting deficit becomes an argument for cutting social expenditure. I discussed essentially the same mechanism recently in another context.

But the really egregious aspect of The Economist piece is political. The newspaper (okay I'll play ball) likes to portray itself as a defender of classical liberalism (although economically it has been closer to neoliberalism for a very long time). Yet when confronted with an election between a conventional center-left president who has respected democratic institutions and an authoritarian candidate who questions elections, wants to free the leader of an attempted coup, has a long history of corruption allegations (that are pretty credible), and comes from a political milieu with well-documented connections to Rio's militias (that he doesn't deny, BTW), the decisive issue apparently remains whether somebody is willing to cut government spending deeply enough. Fiscal austerity, it seems, trumps liberal democracy. That says considerably more about The Economist than it does about Brazil. Shame on them!

 

* There is a little joke on bets, that Lula tried to regulate, and now has forbidden. 

** There is also the issue of his chocolate store, with crazy high profits (and all involving cash deposits), used to launder the proceeds of the scheme. The funny thing is that there was a chocolate shop not far from my dad's apartment (that was in Buenos Aires, so no connection), that was always open, but over many years, I never saw a single client. And while other, seemingly more profitable, shops went out of business, this one persevered. I always joked that it was a front for something. Apparently it is true, chocolate shops are a good front for the mafia.

Potosí/Buenos Aires/Rio de Janeiro/Luanda

My encounter with Sergio Bagú, and I mean his books, was prompted many years ago by my old teacher Carlos Lessa. He mentioned Bagú's classic work on the colonial economy and was surprised that an Argentine didn't know who Bagú was. I have been reading him ever since. I was reading the book in the photo for something I've been writing, and I posted it on Instagram. In part, because they discuss economic views in a similar period, I also posted the one by Rodolfo Puiggrós, who shares some theoretical and methodological assumptions related to Marxism.

Someone noted that the Puiggrós book emphasizes the famous (notorious?) Plan of Operations often attributed to Mariano Moreno, and certainly that is the position in that book (there's a whole chapter dedicated to prove the originality of the Plan, and Moreno's authorship).* In my view, this has been debunked decisively by Diego Bauso's book, Un plagio bicentenario. El "Plan de operaciones" atribuido a Mariano Moreno. Mito y realidad. Bauso's argument is that Moreno could not have written the Plan as we know it, because it contains material dating from after his death, and the evidence for that is strong. The text would therefore be a later construction, probably originating in Carlota Joaquina's circles (the Spanish born, Portuguese queen, in Rio de Janeiro), intended to portray the Rio de la Plata revolution, and Moreno in particular, as a Jacobin and dangerously radical.

But, as I noted in replying to some comments, the fact that the document is a forgery does not make it historically uninteresting. Its authors evidently thought that this was a plausible representation of Moreno and of the revolutionary current associated with him. In fact, plausible enough that others would believe it, as many in fact did and some still do. Bauso removes the Plan as a direct source of Moreno's ideas, but he does not eliminate the problems of the "Moreno era" that Puiggrós interpreted through it. The fundamental disputes between the free trade groups and the defenders of the old monopolies, and the meaning of political independence.

At any rate, I noted too that my favorite book by Puiggrós is his Historia Económica del Río de la Plata, a more ambitious work than the one on Moreno. Incidentally, Puiggrós lived in the same street as my father's family in the 1930s or 1940s (I'm not exactly sure), around the time he was writing these books. I should write a longer post on this book. But it is worth saying a few things. 

For Puiggrós, economic facts do not exist autonomously. He doesn't write a history of what would become Argentina. Instead, he defines the Río de la Plata as one of the "vital arteries of world trade," whose contradictory development constitutes the subject of the book. More importantly, after the second founding of Buenos Aires it became clear that the Río de la Plata could serve as the most direct and efficient outlet for the silver of Potosí. It made considerable more sense that the traditional route through the Pacific, the Panamanian Isthmus, and the Caribbean. Puiggrós argues that, once this was recognized, the river became integrated into global trade, initiating a long struggle between protectionism and free trade. It implied the rise of the Atlantic economy, and the slow eclipse of the Peruvian Vice-royalty. 

Potosí produced the silver and generated enormous demand. The regions that would later become northwestern Argentina (Córdoba, Tucumán, etc.) became integrated into that market by supplying mules, food, textiles, wine, and other goods. Buenos Aires connected this area to the Atlantic. And this is where Brazil entered the network. The Spanish imperial monopoly tried to force trade through official channels, but economic geography pushed it in another direction. The Portuguese and Brazilian commercial networks offered a much more direct link between the Atlantic and the South American interior.

This may be one of Puiggrós' strongest points. He does not treat smuggling and contraband as deviations from the normal colonial economy. Contraband was a structural response to the contradiction between the Spanish legal monopoly and the economic space that was actually taking shape. The economy of the Río de la Plata, and what would become the Argentine territory were forged in the nexus between the silver mining economy of the Alto Peru, and the slave economy of Brazil and Africa. He analyzes what would be later discussed by Luiz Felipe de Alencastro in his great book O Trato dos Viventes. 

The port of Buenos Aires was the essential nexus between the mining economy of the Altiplano and the Atlantic world. It connected Potosí-Baires-Rio-Angola in a chain of international trade, with silver and slavery flowing in opposite directions. If the Brazilian economy was forged outside of Brazil as Alencastro suggests, in the economic space of the South Atlantic, between Rio and Luanda, one could retrospectively say that the point of Puiggrós, even though he doesn't say it quite so explicitly, is that Argentina's economy was forged outside of Argentina, in the nexus of those two spaces, the silver-mining economy of the Alto Peru and the Southern Atlantic slave-economy.

This is why I tend to think that Historia Económica del Río de la Plata is Puiggrós' best book. In some of his other works he falls more easily into relatively rigid Marxist categories. In this one, although the Marxist analytical apparatus is still present, the historical subject takes precedence over the framework. He sees networks and regional complementarities. The circulation of silver and enslaved people generate customs revenues that extend beyond the immediate waterways of the Río de la Plata. He sees that the relevant economic region does not necessarily coincide with the nation state.

Puiggrós recognized early on that the colonial Río de la Plata could only be understood as part of a trans-imperial economy linking Potosí, Brazil, and the Atlantic through silver, contraband goods, and enslaved labor. Half a century later, Alencastro reconstructed the South Atlantic side of that same space with far more extensive documentation and the slave trade as its organizing principle. 

* If I'm not wrong, in his book on Moreno, Bagú sides with those that think that Moreno did not write the Plan of Operations. 

 

People eat GDP. They don’t eat democracy. On the Brazilian elections

Maria da Conceição Tavares famously said that "nobody eats GDP, they eat food." I agreed with Conceição about many things, but on this I have my doubts. Conceição was really criticizing the notion that growth has to come first and then distribution would be possible, a proposition associated, in Brazil, with the dictatorship. Obviously, distribution matters. Conceição's broader point was that growth accompanied by wage compression and greater inequality does not necessarily improve the conditions of ordinary people. In the 2014 interview (in Portuguese) in which she made the famous remark, she emphasized that, despite weak growth during the Dilma government, employment and income distribution had not deteriorated, which for her was what mattered. Fair enough.

But the slogan sometimes is taken too far, as a generalized critique of GDP (my old defense of GDP). GDP is not an abstraction disconnected from people's material lives. It is the production of goods and services, including food, housing, health care and all the other things people consume. More importantly, there is a clear direct connection between GDP growth and employment creation (normally expressed in Okun's Law). So, material well-being is tied to GDP growth. In addition, people tend to vote on the basis of their economic circumstances. Most people do not go to the voting booth to preserve democracy. This has some relevance for the current political debate in Brazil, and for Lula's prospects of reelection in a few weeks.

When Lula was elected in 2022, I argued that the central difficulty facing the new government was economic. Brazil had endured what was essentially a lost decade after the crisis that began in 2015. The spending ceiling and the broader commitment to fiscal conservatism threatened to limit the government's capacity to generate a much stronger recovery, expand social expenditures and raise real wages at the bottom. I wrote at the time that fiscal conservatism would have to be fought not only against the opposition but also within Lula's very broad governing coalition. I developed the same argument at greater length shortly thereafter in Catalyst. My point there was explicitly political. An economic recovery and vigorous growth were a precondition for the preservation of democracy. Returning to economic orthodoxy, I argued, risked persistent stagnation and could create the conditions for the return of the extreme right.  The broad coalition with ex-social democrats (PSDB in Brazil; the party of Lula's rivals, including his current vice-president Geraldo Alckmin) was of secondary importance in my view. The political coalition could not preserve democracy in the face of an economy that did not put growth and distribution at the center.

Worse the political coalition strengthened, inside the progressive coalition, the hand of the fiscal conservatives that would push against a more vigorous expansion of government investment and larger increases in wages and social transfers. All in the name of appeasing the markets and obtaining credibility, with the objective of achieving a (primary) fiscal surplus, which was finally attained this year (and was highly publicized and commemorated in government circles).

Note that Brazil did recover, and did pass its previous 2014 GDP peak in 2022 (see below). However, the economy can be in considerably better shape than it was under Bolsonaro and still not be doing well enough. An unemployment rate near historical lows is certainly good, as is 3% growth when compared to stagnation. But after a lost decade, the relevant comparison is not simply with the immediately preceding government. The relevant question is how rapidly living standards are improving and whether policy could have produced a stronger recovery.

Here the Carta de João Pessoa (in Portuguese) published by the Centro Celso Furtado is very useful. It begins from the proposition that Brazil's long-run problem is insufficient growth and explicitly says that socioeconomic development is unthinkable without economic dynamism reflected in GDP growth. More strongly, it calls faster growth a necessary condition for productive development, better distribution and welfare.

It also makes an important fiscal point I've been making for years in this blog. Faster growth itself raises revenue and creates room for public spending, whereas fiscal adjustment can generate a vicious circle that restricts growth and worsens the fiscal balances.

Lula's third term promoted a recovery and most macroeconomic indicators are reasonably good. The new fiscal regime implemented by Fernando Haddad and his team permitted a partial recovery in spending, especially through social benefits, the minimum wage and social expenditure, and that this contributed to moderately faster growth and better social indicators. But the Carta also emphasizes that the new framework retained spending limits and primary balance targets, added mechanisms for expenditure blocking, and left many spending categories far below earlier per capita peaks. Its diagnosis of the debt issue is especially pertinent. It suggests that for 2023–25 period estimates of average GDP growth of 3%, against a 6.3% real interest rate on gross public debt, imply that the interest-growth differential rather than the primary balance is the central source of upward debt dynamics.

The Carta argues that the present fiscal and monetary arrangements continue to restrict growth, particularly public investment. Its simulations suggest that a different combination of lower real interest rates, greater public investment and progressive taxation could produce growth closer to 4% while eventually reducing, rather than increasing, the debt-to-GDP ratio.

These arguments seem particularly relevant now that Lula is facing a tough reelection and possibly even a loss against Bolsonaro's son, Flávio. There is a growing tendency among parts of the Brazilian left to explain the government's political difficulties by appealing to everything except the possibility that economic policy has simply not delivered enough. One version emphasizes the continuing institutional struggle over democracy, and the Supreme Court scandal.* Another argues that the economy has actually performed well, but that Brazilians somehow fail to perceive their improved circumstances.

On this, there is a striking parallel between the debate over Bidenomics in the United States and the more recent discussions in Brazil. In the context of the American "vibecession," I made precisely the same point that, while the economy was growing, it wasn’t growing enough. I was skeptical of the triumphalist interpretation of Bidenomics from the beginning. The turn back toward fiscal policy and industrial policy was important, and Biden's policies were substantially more favorable to labor than those of his Democratic predecessors. But I argued in 2023 that on both fiscal and industrial policy "rhetoric is stronger than action."

In the Brazilian case a recent piece (in Portuguese) by Laura Carvalho and Guilherme Klein provides a thoughtful version of this argument. Not the naïve version that everything is great, and people didn't notice. They know that the economy is now not doing as well as it did during Lula's first two administrations, and that it could be doing better. But they emphasize the contrast between relatively favorable aggregate indicators and considerably more pessimistic popular assessments of the economy, and discuss several reasons for that gap, including the legacy of inflation, indebtedness, comparison with the much stronger social mobility of the earlier Lula period, changing aspirations and the frustrations of younger workers. Those are all relevant considerations. But there is another interpretation that inverts the emphasis. Perhaps it's not fundamentally a misperception (even if there is some of that). Perhaps the improvement has not been large enough to compensate for what was lost over the previous decade. The alternative is to take dissatisfaction seriously as information about material conditions. The question then becomes not why people fail to appreciate 3% growth, but whether 3% growth after a lost decade was enough. And the economic evidence can't be reduced to an argument of perceptions if we accept the Carta's diagnosis.

In the Brazilian case, the concern with fiscal responsibility – in the narrow sense of obtaining primary surpluses to appease financial markets – has been strong. The handling of Bolsa Família is particularly instructive. The government has just announced a 15% increase in the minimum payment, from R$600 to R$691, explicitly to compensate for accumulated inflation since 2023. It is the first inflation adjustment of the base benefit of the Lula administration. The R$600 floor itself, however, dates from the Bolsonaro government, when the R$400 Auxílio Brasil payment (the name Bolsonaro gave to Bolsa Família) received an additional R$200 (yeah, that's right, a 50% increase!). The evolution of the basic benefit is revealing of how cautious fiscal policy has remained during Lula's third term.

This brings us back to democracy. Perhaps people do perceive their material circumstances reasonably well. Obviously, people care about democracy. They care about corruption, and the supreme court crisis will have some effects. Elections should not be reduced mechanically to GDP growth (or low inflation; however the Fair model does very well). But democratic institutions cannot substitute for material well-being. Governments cannot assume that defending democracy will compensate indefinitely for disappointing growth in income and living standards. That is the danger in turning economic dissatisfaction into a communications or perception problem.

If people say that their material circumstances have not improved enough, perhaps the first question should not be why they fail to understand how successful economic policy has been. Perhaps economic policy has not been successful enough. James Carville's old line remains useful. It's the economy, stupid! Or, to turn Conceição's line around. People eat GDP. What they don't eat is democracy.**

* I won’t go deeply into the Supreme Court scandal. The simple story is that a banker (Vorcaro) bribed politicians (mostly from the right-wing coalition that controls Congress) and judges (including several of the Supreme Court), in order to get public funds (mostly from pension funds), with false promises of humongous gains, that never materialized. While Flávio Bolsonaro is directly implicated (there are audios of him asking for millions of dollars, and evidence that he and his family received the money), there is no evidence of Lula and those close to him having benefited from that. (quite the opposite; the scandal is being investigated because of Lula's government). However, Justice Alexandre de Moraes (who was not appointed by Lula), who is seen as a key enemy of Bolsonaro given his role in his imprisonment resulting from the attempted coup, is also implicated, since his wife also received bribes from Vorcaro. So, Lula is paying the price for the notion that the enemy of my enemy is my friend.

** Another person that I truly admired, like Conceição, Raúl Alfonsín, famously said that "with democracy... we eat." He paid a high price, because democracy did NOT deliver.

Debt, Default and the Special Relationship

While revising Óscar Ugarteche's entry on "Sovereign Default" for The New Palgrave Dictionary of Economics, I was struck by a historical connection that deserves more attention. Óscar discusses the rather forgotten history of Confederate and Southern debt after the Civil War. That led me back to Jay Sexton’s excellent Debtor Diplomacy: Finance and American Foreign Relations in the Civil War Era, 1837–1873, and from there to David James Gill’s The Long Shadow of Default, on Britain’s First World War debts to the United States, which I had used for another paper on Keynes and the negotiations of the British and inter-Allied debts in the inter-war period.

Taken together, they tell an interesting story about debt and the so-called special relationship. Sexton emphasizes that the nineteenth-century United States was a debtor country whose development and even territorial expansion depended heavily on British, finance. Foreign indebtedness therefore shaped American diplomacy.

After the Civil War, this included the political settlement with Britain, the treatment of Confederate obligations, and the refinancing of the enormous Union debt. The United States declared Confederate debts void and did not assume them after victory. British creditors certainly lost money, but Britain ultimately accommodated the American settlement rather than making assumption of Confederate debt a condition for restored relations, which could have been a possible outcome. Note that this was an unilateral repudiation of the Confederate debts, that the British government might not have accepted.

Britain had never recognized the Confederacy as an independent sovereign state, only as a belligerent. That gave London a perfectly respectable legal basis for accepting the US contention that there had been no state succession. From Washington's perspective there was no vanished sovereign whose public debt passed to a successor, merely an unsuccessful rebellion. Indeed, Sexton shows how aggressively Washington asserted this theory after the war. The victorious Union claimed Confederate property on the premise that the Confederate government had never possessed lawful existence. But that was itself a contestable position. Britain could have said, in effect, you cannot simultaneously treat the Confederacy as sufficiently belligerent to generate international rights and obligations during the war, acquire its assets after victory, yet disclaim all its liabilities. The British chose not to pursue that line.

Not only that, but London continued to provide the capital that helped finance American development. The role of the Morgan House, particularly after the collapse of Jay Cooke's bank in the Crisis of 1873 is worth noticing (I'm reading on the side Liaquat Ahamed's book on that, btw).

This mattered because the United States still faced an external constraint. Under the gold standard, payments required, for practical purposes, obtaining the international means of payment centered on the pound sterling. In that respect the problem was not fundamentally different from the later dollar constraint faced by peripheral countries like Argentina right now. The post-bellum political and financial settlement eased that constraint. Essentially the British limited their claims, while maintaining access to its financial markets.

Fast-forward to the inter-war period and the positions were reversed. The First World War transformed Britain from creditor to debtor vis-à-vis the United States. Gill shows that Britain eventually stopped servicing its wartime obligations in 1934. The debt, btw, was never formally forgiven and remains technically outstanding, a fine point that was missed by Óscar. Effectively, it is the same result. The British didn't pay. But more importantly, as both Gill and Óscar note, the consequences for Britain were remarkably mild compared with what the standard sovereign default literature might lead one to expect. Britain was not permanently excluded from American finance, and the United States subsequently provided enormous assistance during and after the Second World War.

There is a symmetry worth emphasizing. Britain accommodated the rise of the United States, and the United States subsequently accommodated Britain's relative decline. Debt obligations that could have become major sources of conflict were subordinated to broader geopolitical objectives. Perhaps that is one way of thinking about what might be called development by invitation. Britain, through political accommodation, made the external constraint of the US considerably less binding. Later, the United States softened the financial consequences of Britain's loss of international primacy.

The important qualification is that this sort of flexibility has rarely been extended to peripheral countries. Latin American defaults, in particular, have normally brought creditor pressure, conditionality, prolonged negotiations and harsh adjustment. Even when the blow is lessened to allies, like Milei in Argentina, the adjustment at home is severe.

The history of Anglo-American debt relations is therefore useful precisely because it reminds us that there is nothing automatic about the supposedly inviolable rules of sovereign debt. Whether a sovereign debt remains enforceable is not determined simply by the sanctity of contract. It is determined through political settlements among states. Which debts must be paid, which can be forgotten, and which defaults can be accommodated have always depended heavily on international power relations and creditor-debtor hierarchy. It is ultimately a geopolitical matter.

Tom Palley on September 11: An American Tragedy

By Thomas Palley 

The 9/11 attack on the World Trade Center and Pentagon has resulted in a catalogue of self-inflicted disasters for the US. It was exploited by the worst elements of our political system to create a surveillance society, increase military spending, and strengthen US imperialism abroad. Those steps were taken in the name of making us safer, exploited our fears, and were wrapped in the flag. Everyone asked "How it happened." No one asked " Why it happened." No one considered that perhaps “They came here because we are there.”

The consequences have been dire. Our reaction to 9/11 has locked in a vicious political spiral from which escape is doubtful. As other countries respond to our imperial militarism, that provides our imperial militarists (liberal and conservative) with the justification for demanding more military spending, more war, and more surveillance. 

Read rest here. 

Milei's Bible: Missing Pages and Misread Passages

 

Inflation and other biblical plagues 

Tom Palley recently posted an interesting piece by Gabriel Levinas, "Milei's Bible is Missing Entire Chapters," on his website (in Spanish for those that read in it). Palley notes that Levinas's argument about Javier Milei also applies, in his view, to Donald Trump.

Levinas's central point is that Milei's characteristic rhetorical method is not necessarily to say things that are simply false, but to take one part of reality and present it as if it were the whole. Thus, Milei finds in Jewish tradition property, individual responsibility and freedom, while conveniently overlooking its equally strong concern with the poor, the indebted and obligations toward others. The same method appears in his celebration of freedom while routinely attacking journalists, economists, artists and politicians who disagree with him, and in his tendency to collapse radically different political traditions into the single category of communism (also part of Trump’s playbook). As Levinas nicely puts it, one does not have to falsify a book if one simply tears out the inconvenient pages.

Levinas applies the same argument to the economy. Inflation has fallen, and denying that would itself amount to selecting only the convenient facts. But inflation is not the whole economy. There are also wages, pensions, employment, consumption, productive activity, business failures and household indebtedness. The official story of fiscal balance, falling inflation and recovery can therefore coexist with a very different economy experienced by workers and households.

I would go somewhat further on the economic side. The problem is not simply that the government emphasizes inflation while neglecting other indicators. The explanation of the fall in inflation itself leaves out some rather important chapters. Milei began with the enormous December 2023 devaluation, which initially accelerated inflation and produced a drastic decline in real wages. By March 2024, according to the IMF, real wages were 17% below their November level and private consumption had fallen sharply. In my view, that compression of real wages should not be regarded as an unfortunate by product of the stabilization program. It was central to the adjustment.

The subsequent stabilization rested essentially on two anchors, the low real wages and a stable nominal exchange rate. The fall in wages and fiscal contraction compressed consumption, domestic demand and imports. At the same time, after the initial maxi-devaluation, the government held the exchange rate to a predetermined crawl, initially just 2% per month (then 1%), even while domestic prices were increasing much faster. This was hardly the free market determination of the exchange rate suggested by Milei's rhetoric. Indeed, the Argentine central bank itself explicitly described the exchange rate rule as a complementary anchor contributing to the decline in inflation.

Nor was maintaining that exchange rate strategy simply the product of domestic fiscal virtue. It depended crucially on official external financial support. In June 2024 China rolled over the activated portion of its currency swap, worth approximately US$5 billion, precisely when Argentina's foreign exchange position remained extremely fragile. The same month the IMF provided additional funds. Later came the much larger IMF program and, in 2025, extraordinary support from the Trump administration, including a US$20 billion US Treasury swap line and direct Treasury purchases of Argentine pesos.

To put it clearly, besides the missing chapters in Milei's narrative, as suggested by Levinas, he has misread the chapters he kept. The stabilization was not a libertarian experiment in allowing markets freely to find their equilibrium. It was a rather recognizable stabilization program based on real wage compression and an exchange rate anchor, sustained by substantial official international financing. Inflation did come down. Fiscal policy explains the harshness of the adjustment, and it should be clear, was NOT relevant for stabilization (other than indirectly by weakening the bargaining power of workers, and reducing pressures on the demand for dollars for imports). Explaining how inflation came down tells a rather different story from the one Milei likes to tell. His Bible might be missing some pages, but the ones that are left are read in a peculiar way.

Is Keynesianism dead? The Pandemic recovery suggests that is NOT the case

Andy Haldane asks in the Financial Times whether Keynesianism is dead. His argument is familiar. Fiscal policy worked when government debt was low, but after the enormous interventions following the financial crisis, COVID and the Ukraine war, public debt has become so large that fiscal stimulus may now be ineffective or even contractionary. Households anticipate future taxes, bond markets raise borrowing costs, and central banks tighten in response. What has become known as a Ricardian argument, and the older and traditional Treasury view. Haldane even resurrects the old argument about expansionary fiscal contractions, citing Ireland, Denmark and the eurozone periphery. There is a rather obvious problem with this story. The most recent large scale Keynesian experiment worked exceptionally well.

Compare the recovery from the Pandemic recession with the three previous US recoveries. The recoveries following the 1990–91, 2001 and especially 2007–09 recessions were notoriously jobless. After the Great Recession, output recovered painfully slowly and employment even more slowly. A decade after the crisis, I noted on this blog that the economy had taken roughly as long to recover as it had after the Great Depression, despite the much smaller initial decline. Fiscal stimulus had prevented another Depression, but it had been far too small and, crucially, was withdrawn too soon.

This slow recovery eventually generated an elaborate discussion of secular stagnation. Perhaps, it was suggested, mature capitalist economies simply suffered from a chronic shortage of profitable investment opportunities, an excessively high propensity to save, or a natural rate of interest so low that monetary policy could no longer produce full employment. I argued at the time that this put the causality backwards. There was no mysterious secular stagnation mechanism condemning the United States to slow growth. There were stagnation policies related to insufficient fiscal expansion and premature austerity.

The Pandemic provided something close to a natural experiment. This time the federal government responded on a much larger scale, first under Trump and then, importantly, with the Biden fiscal packages. And the recovery was dramatically faster. Real GDP returned to trend and, unlike the previous recoveries, employment came back rapidly too. As I noted in 2024, this was the first recovery in a long time that was not jobless, and the United States considerably outperformed most other advanced economies. The obvious difference was not some sudden disappearance of the structural forces supposedly producing secular stagnation. It was fiscal policy.

This is particularly awkward for Haldane because the large fiscal expansion occurred when the US public debt ratio was already very high. According to his argument, that is precisely when the fiscal multiplier should have become small or even negative. Instead, the largest fiscal intervention since the war produced the fastest recovery in decades. If high debt causes households to respond to government spending by saving in anticipation of future taxes, the Ricardian households evidently failed to show up when they were most needed by the theory.

Nor does the subsequent inflation rescue the argument. The Pandemic recovery certainly coincided with inflation, but that does not establish that excessive aggregate demand was its cause. The acceleration began amid extraordinary supply-chain disruptions and was reinforced by energy and commodity shocks. More importantly, inflation subsequently fell sharply without the large increase in unemployment that the excess-demand story implied would be necessary. I argued at the time that the Pandemic inflation was being used to revive the old New Consensus precisely when the experience of the recovery had cast doubt on it.

There is also something peculiar about Haldane's treatment of interest rates. He tells us that high government debt raises bond yields and thereby offsets fiscal expansion, the conventional crowding out argument, but then acknowledges that central banks have themselves raised short-term rates dramatically and engaged in quantitative tightening. Bond yields are not prices determined independently of monetary authorities by anonymous bond vigilantes (see my Jacobin piece). Central banks have considerable influence over the whole yield curve. To raise rates deliberately and then point to higher rates as evidence that fiscal policy has become unsustainable is rather circular.

None of this means that fiscal policy faces no limits. But those limits need to be correctly identified. For a government borrowing in its own currency, the fundamental domestic constraint is the availability of productive resources and the possibility of inflation, not an arbitrary debt-to-GDP ratio. Countries that do not issue the international currency face an additional external constraint because they cannot create the foreign exchange needed to purchase imported goods. That is quite different from treating a government's domestic-currency debt as if it were analogous to household debt. Keynes himself eventually came to distinguish sharply between what could be financed domestically and the genuine constraint created by the need for foreign resources. In the case of most advanced economies, and in all truth most but a few peripheral countries (those that didn't accumulate foreign reserves and have large payments in foreign currency, like Argentina), there is no significant limit to fiscal expansion.

Perhaps the greatest irony is that the Pandemic should have settled at least part of this debate. After years in which economists tried to explain weak growth through demographics, technology, a savings glut, the natural rate of interest and secular stagnation, a sufficiently large fiscal expansion produced rapid growth and an extraordinarily rapid labor market recovery. When fiscal support now begins to disappear, growth unsurprisingly slows again. As I noted recently, declining government expenditure is already exerting a negative influence on the US economy.

Haldane’s final invocation of the paradox of thrift is particularly odd. For Keynes, the paradox was that an attempt to save more by spending less reduces income through the multiplier, so that aggregate saving would fall, not rise. If governments respond to high debt by cutting expenditure, that is not the cure for the paradox of thrift. It is a textbook way of reproducing it.

The evidence favors Keynes' argument on the paradox of thrift. The sluggish recovery after 2008 followed an inadequate stimulus and a premature turn toward austerity, and the remarkably rapid recovery after 2020 followed an exceptionally large fiscal expansion. Keynesianism is not dead. If anything, the Pandemic recovery suggests that what had been mistaken for secular stagnation was largely the consequence of insufficient effective demand. What refuses to die is the belief that prosperity can be restored by governments spending less. The zombie is austerity!

Bond vigilantes or the revenge of the rentier?

My piece for Jacobin were I explain why higher bond yields are not at all a result of a fiscally irresponsible government being disciplined by bond vigilantes. They are, instead, a deliberate policy choice that shifts income from workers and borrowers to wealthy bondholders. Interest rates, at both end of the yield curve, are shaped by Federal Reserve policies rather than simply by market dynamics. Concerns about financial fragility are exaggerated, and the danger is that the higher yields, that lead to a higher interest rate bill, and a higher debt-to-GDP ratio, would be used politically for constraining social spending. Ultimately, this situation reflects political choices rather than financial necessity.