The bridge to austerity and stagnation

I have always emphasized in the blog the importance of  the Principle of Effective Demand and the pitfalls of Say’s Law, as central to understand Keynesian economics. Keynesianism is about that and NOT about the rigidity of wages, or the interest rate, or even fundamental uncertainty (something to which Keynes had to appeal to defend his ideas from 1937 on, as a result of retaining the marginalist notion of the marginal efficiency of capital). Very often that is an abstract discussion, hard to follow for students. I'm in the middle of teaching this again this semester (first time I taught Intermediate Macro was in 1993 at the Universidade Federal Fluminense, UFF).

A recent paper by Guilherme Haluska, Franklin Serrano, and Ricardo Summa (2026) provides a good empirical look at these theories in action. The authors analyze the period from 2015 to 2022 in Brazil, a phase marked by a radical shift toward fiscal austerity, labor reforms, and a rigid constitutional cap on government spending. This policy shift, famously dubbed "The Bridge to the Future," was predicated on the neoclassical belief that cutting public spending would boost confidence and reduce interest rates, thereby triggering an explosion of private investment and export-led growth.

The results, as the authors demonstrate, were exactly the opposite: the bridge led straight to stagnation. By utilizing a demand-led growth framework, they show that the sharp contraction in public investment and social spending actually dragged down aggregate demand. Far from being crowded in, private business investment fell as a share of GDP because firms, facing a shrinking domestic market and stagnant consumption, had no incentive to expand capacity. In other words, the accelerator works. As often emphasized in this blog.

The paper serves as a powerful contemporary reminder that, as Keynes argued and as we have noted in many prior posts (too many to link), when the state retreats from its role in managing demand, the market often fails to find a natural path back to prosperity, leaving the economy trapped in a low-growth equilibrium.

PS: A version of that, linked in the blog before, here. For a few similar posts suggesting Brazil has no fiscal problems, see this from 2024, or this one, this one from 2019, and this one from the beginning of the Brazilian stagnation period in 2015 (check how correct, in your view, my predictions were).

On the Language of Economics on NPR's Marketplace

Last December, I spoke with Sean McHenry for a segment on NPR’s Marketplace about the meanings behind the words economists use. While only a short excerpt aired today, the full exchange dove into the philosophical, historical, and political layers that underlie economic language, especially through the lens of Adam Smith and the evolution of economic thought.

We began with Smith, not the pop-icon version who supposedly preached markets above all else, but the Smith who drew from Newtonian mechanics to describe economic processes. Smith’s idea that market prices gravitate toward natural prices wasn’t just a metaphor, it was grounded in his belief that economic laws were as natural and immutable as the laws of physics. This analogy wasn't poetic fluff; it was the intellectual architecture of 18th century economics.

This matters because metaphors shape how we understand the world. Terms like natural rate of unemployment or neutral interest rate don’t just describe, they legitimize. They imply inevitability, naturalness, and neutrality, even when real-world consequences (job loss, mortgage spikes) are anything but neutral.

Smith's project was a materialist science concerned with the accumulation of wealth. For him the natural functioning of the economy did not lead to optimal outcomes. Still, the intervention of the mercantilist and feudal institutions impaired the natural process of wealth accumulation. After the marginalist revolution of the late 19th century, interventions affected the natural tendencies of the market to produce optimal outcomes. That is the world in which we still live, when it comes to economists metaphors. Meaning a world in which markets do produce optimal outcomes, unless there imperfections.

We also discussed the ideological undertones of terms like churn in labor market language. While economists may use it as a tidy description of movement in and out of jobs, for someone who's lost work, the term can feel like a euphemism that sanitizes real economic pain. It's this kind of language, precise, clinical, but emotionally distant, that can obscure the lived experience behind the data. The notion is that there might be pain, but in the long run that will not be a problem (Keynes was reacting to this notion with his famous quote about all being dead in the long run).

In my history of thought course at Bucknell, I walk students through how economic terminology evolved, from classical theories of value to modern utility and preference-based models. We interrogate the shift from political economy to economics, and what gets lost when we strip politics (class conflict) from the analysis. Even terms that seem neutral, like neutral interest rate or natural rate of unemployment, are packed with assumptions about how markets work, very often skewing issues of power, and distributional conflict.

Economics has long striven to present itself as a hard science, borrowing the language and posture of physics. But unlike physics, economics deals with entrenched political structures and it is harder to separate the ideological and analytical elements in a particular theory. The profession’s reliance on technical jargon and tidy models sometimes masks the messy, contested, and deeply political nature of the economy itself.

As one of the editors of the upcoming fourth edition of The New Palgrave Dictionary of Economics, I’m part of a team trying to decolonize the dictionary, bringing in voices from underrepresented regions, grappling with the absence of concepts like power, and reassessing the dominance of certain Western-centric assumptions. I also it requires a return to some of the forgotten ideas of the classical political economy authors that made the political or socially conflictive element of the reproduction of society central to their analytical inquires (see my Palgrave lecture here).

Language is never just descriptive. It is to some extent normative. It tells us what to value, what to question, and what to accept as given. Political economy, at its best, can be a powerful tool for understanding and improving social conditions. But that requires constant reflection, not just on models and data, but on the words economists use, the histories economists tell, and the blind spots economists perpetuate.

You can catch the edited interview on NPR’s Marketplace with Sean McHenry here.

Central Bank Independence and the Role of the Dollar

The attack on the Fed's chairman, Jerome Powell, has correctly led to a rebuke of Donald Trump's behavior. That does not mean that the notion of central bank independence cannot be questioned, or that is necessary for either price stability or the international position of the dollar. These are just a few things that seem exaggerations that have been discussed recently. As I noted before, the return of central bank independence (rule based monetary policy), and the return of austerity, together with the critiques of tariffs (and the resurgence of free trade) have brought back the Victorian Consensus to the center of policy discussions. A terrible mistake.

But on the issue at hand, for example, Justin Wolfers suggested that inflation will accelerate as a result of the attack on Powell (and Lisa Cook, one might add). I discussed inflation here several times. There is no risk of anything even close to this kind of inflation, simply because what caused the increase in prices was, for the most part, the depreciation of the Turkish lira, and the pass-through in the US is very limited.

 

The graph below shows that there is a clear correlation between the two variables. Inflation in the US remains subdued (see today's BLS report, with inflation at about 2.7%, which is not that much above the target of 2%; also I still have to find someone that shows that 2% is much better than say 3% for any particular reason.)

 

Today, Barry Eichengreen suggested in his Financial Times column that:

 

Besides the issue that it is highly controversial that reducing interest rates would be highly inflationary, or that 2.7% is some sort of a problem, there is the issue of why would investors run from the dollar and cause a crash. In his view, ultimately a question of confidence. The conventional view is that a reserve currency must be backed by trust. Trust in the legal system, in the persistence of political stability, and the protection of property rights, and sound macroeconomic management. According to this perspective, actions like U.S. actions regarding Venezuela, tax cuts that increase the burden of public debt, threats to the independence of the Federal Reserve, or the rise of authoritarian politics under the Trump administration might undermine confidence in the dollar.

 

However, there's another view, one that I explore in a this paper, arguing that power, rather than trust, underpins reserve currency status. John Maynard Keynes famously compared money to language: the dominant currency is like the dictionary, and the one that writes the dictionary controls the language. From this standpoint, the dollar’s dominance is reinforced by U.S. geopolitical and military strength.

 

Barry correctly notes that the main argument against the demise of the dollar is that there is no alternative (not that TINA). He suggests that agents could run to gold, but essentially notes that gold is a bubble and that is very risky.

 

Neither the attack on the Fed, nor the intervention in Venezuela, to mention the two things that have been discussed the most in this eventful new year so far, would lead to inflation or a demise of the dollar. As Keynes said about Lloyd George, the leader of the Liberals, that he disliked (to put it mildly): "The difference between me and some other people, is that I oppose Mr Lloyd George when he is wrong and support him when he is right." Trump might be wrong about how he is going about changing the way we the US runs monetary policy. But on the need to reduce the rates, and the notion that central bank independence is not necessary for price stability, he might not be wrong.

 

PS: The rise of the dollar to hegemonic position between the collapse of the pound, the Tripartite Agreement in 1936 and Bretton Woods, occurred before the Treasury-Fed Accord of 1951 that made the Fed independent of the Treasury.

 

On vibecession and progressive thinking about the macroeconomy

The numbers for the American economy are finally out, with a delay of two months. Growth was 4.3 percent in the third quarter, which is fundamentally related to an expansion of consumption. Investment is flat (a bit negative actually, so much for the AI investment boom), and government spending is positive (but not much), mostly defense. In the previous two reports it was barely positive. There is also a contraction of imports. Normally, that would imply a slowdown of the economy, but in this case part of it might be associated with the tariffs.

At any rate, what I had suggested all along throughout the year, in many debates, often against the grain, was that we were not on the verge of a recession because of tariffs, nor that tariffs would be inflationary. And I was correct. What happened is what I had suggested: we are seeing a continuous slowdown that had already started under Biden, simply after the expiration of many of the measures associated with the Pandemic and the fiscal expansion that followed it. Tariffs have not had a significant impact on quantities, and only a limited impact on prices. If they had an effect, it would be a one-off increase in the level of prices, not in the rate of growth of prices, meaning inflation. And inflation remains subdued.

There are a couple of things worth pointing out. First, there is this whole discussion about a “vibecession,” or whatever people want to call it. Most of the discussion, including this piece in the Financial Times, is not really about quantities. A recession is a decline in the level of output and employment. Employment numbers are not great, they reflect the slowdown of the economy. The last report in September, which I discussed here, does suggest that the economy is slowing down. Those things are connected. One of the few laws we have in macroeconomics, Okun’s law, tells us that a slowdown in the economy should be reflected in a softening of the labor market. But unemployment remains relatively low, so we are not in a recession, for what it’s worth.

The vibe is not one of recession, and it is also not really about inflation (really). The graph above from the Financial Times suggests that wages grew less than rents (shelter), largely due to high mortgage rates that feed into higher rental prices. Wages also grew less than food prices. So food and shelter are supposedly getting more expensive. But the wages shown there are average wages. Once you look at the wages of non-supervisory workers, those seem to be growing more or less at the same pace, still above average CPI inflation, and particularly close to rental inflation.

Wages at the bottom have not really lost much (red line). They did lose a little during the pandemic, but they recovered fast enough and have been growing at roughly the same pace as inflation.

Of course, there is a perception that things are not good, and things are not good for working-class people, but that does not mean that the problem is inflation. By suggesting that the problem is inflation, something Trump used against Biden, progressives miss the point. I have discussed how Bidenomics had been good in several respects, with many policies favoring working-class people, although many of them expired before the end of his term. The perception that things were not good was not because of inflation, but because the quality of jobs and the conditions facing the working class have been deteriorating for a generation, going back to the 1970s.

For a long period, productivity gains have not translated into better living standards or higher wages for people at the bottom. This is not a recent phenomenon. Anger has increased over time, and in particular after the failure to redress the injustices and unfairness of the system following the global financial crisis of 2007–2009, the so-called Great Recession. There was great hope that Barack Obama would bring a different kind of politics and economic policy, and the disappointment contributed to the backlash we see today.

People are now angry at Trump because of affordability issues, but this reinforces the idea that if Dems win and bring in someone not particularly different from Obama or Clinton, although Biden did move to the left of them, they may face the same problems. The issue is NOT inflation. I want to be absolutely clear: the issue is NOT inflation. That is what my graph above indicates.

The issue is the long run stagnation of wages, the quality of jobs, about future prospects, and about the inability of Dems to show that people will have a better quality of life in the future. Addressing this requires policies that promote higher minimum wages, that would have demonstration effects that would help lift wages more broadly; policies that tax the wealthy at higher rates so they are seen as contributing proportionally to the system; and policies that provide accessible healthcare. Healthcare in the United States is incredibly expensive and of poor quality compared to other advanced nations. The United States is the only advanced country without a single-payer national public health system, which makes it look, frankly, like an underdeveloped nation in this respect.

Also, progressives overemphasis on inflation will have a negative impact on macroeconomic debates, reinforcing very conventional views about how the economy works, as I noted in a piece I wrote for ProMarket, the magazine of the Stigler Center. This focus misses the real dangers facing the American economy. The real danger, as I have argued all year, is the Federal Reserve and its interest rate policy.

The slowdown of the economy suggests that the real issue is high interest rates. Shelter prices, which are the highest component in the graph, are being pushed up by high mortgage rates. These impact consumption more directly than any other mechanism. High interest rates may cause a recession in the United States, and the Fed needs to reduce rates much faster than it is willing to do (or at least that;s what it seems). Ironically, these strong GDP numbers may lead the Fed to keep rates relatively high because of the danger of inflation.

This raises another problematic issue: the idea that anything Trump says must be wrong (that's often correct). However, Trump is correct in arguing that interest rates should be lower. He is also correct in saying that there is no particular reason why the Fed should be independent of political power. I would not argue for direct presidential control, but the Fed should be more accountable to Congress, and to the people. Fiscal policy is clearly political, it involves the executive proposing a budget and Congress approving it. The idea that monetary policy is not political, should not be politicized, and should not be subject to democratic scrutiny is deeply entrenched in conventional thinking, but there is no reason it should be. Why is there no representative of labor on the Federal Open Market Committee? Someone who could point out, for example, that high interest rates raise mortgage rates, push up rents, and keep inflation higher. That it affects access to credit and consumption.

In this sense, progressives have played a role in reintroducing very conventional ideas into macroeconomic discussion: the idea that inflation is more central than employment and activity in policy matters, because it counts more for electoral purposes, and that the central bank must be independent of political power.

That’s it for the year. I don’t think I’ll blog again until 2026, so happy holidays to all!

The future of heterodox graduate programs

I wanted to comment on recent developments affecting heterodox economics programs in the United States, developments that relate directly to my own experience at two such institutions: the graduate program at the University of Utah and the PhD program at the New School for Social Research, where I completed my doctorate almost twenty-seven years ago. I should add that my colleague Geoff Schneider is organizing a panel on the topic at the forthcoming ICAPE conference, in which both of us will be joined by Katherine Moos to discuss the issue.

Although these two programs, and other heterodox programs, are often lumped together, their histories could not be more different.

The University of Utah’s economics program emerged as something of a paradox. Its heterodox character dates back to the 1950s, shaped by broader political and institutional forces. On the one hand, the Red Scare and McCarthyism led to the persecution of left-of-center scholars, those deemed communist or socialist. On the other, the Lavender Scare targeted LGBTQ individuals in academia and public life. At the same time, the University of Utah sought to distance itself from a narrow association with the Church of Jesus Christ of Latter-day Saints and to attract a more secular and religiously diverse faculty. These dynamics created space for the hiring of Marxist scholars, some of whom arrived from Berkeley and elsewhere as they fled persecution. Utah thus became, somewhat unexpectedly, a refuge.

This coincided with the broader presence of Institutional economists in mid-century American academia. Together, these conditions allowed for the formation of several generations of heterodox economists. Figures such as Kay Hunt, who earned his PhD at Utah, later held tenure at UC Riverside, and eventually returned to Utah, exemplify the program’s intellectual lineage. [Kay used to tell the story that when Joan Robinson visited Utah for the Tanner Lectures on Human Values, he was the only person she requested to talk to, I suppose to the chagrin of his orthodox colleagues]. 

For over fifty years, Utah sustained a solid heterodox economics program, which was characterized by an emphasis on the history of economic ideas, at least until Kay retired and I left. That era now appears to be ending. The reasons are well-known and have been discussed on this blog before, particularly in connection with the expansion of business schools. Roughly two decades ago, the University of Utah’s business school began hiring its own microeconomists to teach economics internally. That small group gradually grew into a parallel economics department. As in the case of Notre Dame, this duplication reduced enrollments in the original economics department. In a conservative political environment, Utah being a deeply red state, this provided an opportunity for administrators to push for the consolidation of economics under the aegis of the business school.

At the end of the day, what is at stake is ideology. Business schools tend to promote a free-market worldview that, in my view, has no proper place in a university. I used to joke with my students in Utah that business schools are like strip clubs: they may have a role in society, but not in a university. That quip aside, there is a serious institutional problem here, one I have addressed before in posts on management education [see above link].

The New School presents a very different case. The origins of its Graduate Faculty lie in the University in Exile, created to shelter scholars fleeing Nazism. However, the New School did not become a distinctly heterodox economics hub until much later [see this post on the history of the New School, and this on my views on heterodox economics; on the latter see also this paper]. It was really in the late 1960s that Marxism and other heterodox traditions began to leave a strong imprint.

Because of its location in New York and the prominence of many of its faculty, the New School became arguably the most visible center for the formation of heterodox economists worldwide. Cambridge was never fully heterodox; UMass Amherst, though larger and extremely important, lacked the same visibility; and the reputations associated with the New School carried particular symbolic weight.

The recent cancellation of the New School’s PhD program and its uncertain future are, in my view, primarily the result of financial and administrative decisions rather than a targeted ideological attack. For decades, the administration pushed the Graduate Faculty to be financially self-sufficient, despite the obvious fact that graduate programs almost never are. Typically, undergraduate programs or professional master’s degrees act as cash cows that subsidize PhDs. This reality was never fully accepted. Compounding the problem, the New School never provided substantial financial support to PhD students, and living in New York is extraordinarily expensive. As a result, the program’s importance was more symbolic than material in the long-term reproduction of heterodox economists.

I do not think these developments mean that heterodox economics is disappearing from the United States. Strong programs remain, notably at UMass Amherst and the University of Missouri–Kansas City, both of which in many ways seems to be doing quite well. There are also occasional heterodox economists who emerge from conventional programs, often thanks to a pluralist advisor. Nor do I see these closures as evidence of a heightened, coordinated attack on heterodox economics as such. Rather, they reflect the peculiar institutional histories of these two departments. That said, they are undeniably a blow and will have real effects on the heterodox groups.

There is also a broader structural challenge that affects all of higher education, but hits heterodox programs harder. The United States has reached a demographic peak in high-school graduates, and institutions now face a “demographic cliff.” Fewer students, rising costs, and the mistaken perception that college education is no longer relevant will reduce faculty hiring overall. Since heterodox programs are already more vulnerable, they will feel this pressure more acutely.

Ironically, heterodox economists are often better prepared to teach economics as political economy, making it more accessible and intellectually engaging for a broader public. Yet it is precisely in liberal arts colleges and public universities, where such strengths matter most, that job openings are likely to shrink. These are serious challenges we will have to confront going forward.

Make Argentina Crash Again

 

My article for The American Prospect on the Argentina situation was just published online. Argentina is far from being out of the woods. The expectation that the country will stabilize prices, float its currency, and build up reserves, and restart economic growth is a chimera. Despite market support for Milei’s program, the crisis remains unresolved. In my article, I explain why the challenges persist, an why this will end like the previous three neoliberal experiments, with a crash. While an immediate crash may not be on the horizon, it is somewhat inevitable. It's a matter of when, not if. And it may very well be with the next president, if the U.S. continues to financially prop Milei's government.

Note that contrary to the IMF, or Barry Eichengreen, who actually provided the IMF justification for floating rates more generally (as he explains there), I don't think to abandon the dirty float (band in this case) would be a good idea.* On that I think Milei's administration is correct. I even think that some degree, even more I think, of a reintroduction of exchange rate controls (the government reintroduced some controls on individuals, I must add) is necessary. Something that supposedly the IMF also favors. Capital controls as a macro-prudential measure in times of crises.

I also want to make clear that this is mostly about the current macroeconomic circumstances. The point is not to return to a world of Bretton Woods, with fixed exchange rates, and capital controls. It is clear that Brazil, for example, did much better than Argentina, with a dirty float and no capital controls. But, as noted by Fabian Amico, in a talk at Universidad Nacional de Moreno, recently, Brazil accumulated reserves in a different macroeconomic scenario.

Brazil accumulated foreign reserves (see graph), maintaining a positive interest rate differential (the domestic interest rate minus the foreign reference rate, the U.S. one, the expected depreciation, and a measure of country risk). We discussed that with Amico and Serrano a few years back (in Spanish). Note that as capital inflows allowed Brazil's central bank to accumulate dollars, the real appreciated in nominal terms. In Argentina where both left and right of center governments have 'appreciation fear' (and their fear is about the real rate, let alone the nominal one), that would be politically difficult.

Exchange rate depreciation at this point would lead to accelerated inflation, and to contractionary pressures. Of course, there might be a situation (they had more than a few over the years) in which, with low country risk, and high interest rates at home, leading to a higher differential that allows for the profitability of holding peso denominated assets to be higher than holding dollars, we might finally get on the road to stability. That would be orderly macroeconomic policy, and not draconian fiscal adjustment. At any rate, that doesn't seem to be the case right now.

Over the long-term, it is very clear that all the previous experiments with this kind of policy (fiscal austerity, financial deregulation, and trade liberalization) ended up in a crash. There is also little reason to believe that this time it will be different. 

* It goes without saying that I would also be against dollarization, something that Milei promised in his campaign in 2023, and that has been recently floated by Laurence Kotlikoff in the Financial Times. This suggests that the old bipolar consensus has not been completely abandoned in more mainstream circles.

Labor numbers (or lack of) and the Trump economy

 

The elephant in the room? 

The long-delayed September employment numbers are finally out, and the news is mixed, much as expected. The economy added 119,000 jobs, while the unemployment rate ticked up slightly from 4.3% to 4.4%, still close to what the profession calls the natural rate, or what most people would simply call full employment. That's obviously not the best picture of the labor market. As always, the broader U6 measure gives a clearer picture of labor market slack (in my understanding), and it stands at 8%. We still don’t have the official October numbers, but private-sector estimates suggest a much weaker figure, around 40,000 jobs, driven partly by continued losses in manufacturing and in federal employment. The only clearly expanding sector remains health services.

This labor-market softness, that led to the earlier firing of the head of the BLS (will Trump fire someone else?), reinforces something I’ve said for a while here in the blog. The economy is slowing, but we are not yet in a recession.

Meanwhile, inflation continues subdued rather than accelerating. The September CPI report shows year-over-year inflation at 3%. Importantly, the largest price increases, electricity and utilities, used cars, and medical care services, other than shelter (more on that below), have nothing to do with tariffs. Studies suggesting tariffs added roughly 0.7 percentage points to inflation seem plausible, but that is far from the stagflation many predicted. If there is a remaining inflationary concern, it is shelter costs, driven not by tariffs, but by structural housing shortages and, in the short run, the Fed’s high interest-rate policy, which keeps mortgage rates, and rents, elevated.

Paradoxically, the Fed is now sustaining inflation by keeping rates high, and by bringing them down too slowly (perhaps the only thing I would agree with Trump*), while also risking a recession by tightening consumer credit and depressing construction. Consumption has already flattened (from last CEA report). At the same time, government spending, which continues at a healthy pace, and bubbles in crypto and AI continue to prop up activity.

Affordability concerns (see Mamdani's election and Trump's decision to reduce tariffs) remain real, but they have less to do with inflation per se, which has fallen sharply since late 2022, and more to do with the fact that real wages at the bottom, although rising (above CPI for non-supervisory employees), start from very low levels. People feel squeezed because they are squeezed.

That won't change any time soon. Trump is bound become very unpopular (in many ways, he already is), and his policies will not help people at the bottom. Dems don't need to do much, actually. Perhaps avoid self-inflicting wounds. [Unpopular view here: the shutdown was a mistake they should have avoided, since there was no way of winning; Trump wanted to shutdown the government, because Republicans do NOT care if it doesn't work. Cut medicare? No problem. Cut SNAP? Go ahead. But these callous policies will make them very unpopular].

Let me conclude in a more cheerful mood. For me that is. So here’s a small victory lap. The dire predictions that high tariffs would produce stagflation were wrong. Tariffs are now at their highest average level since the 1930s, around 17%, up from 2%, according to Yale's Budget Lab, yet they did not trigger either runaway inflation or a recession on their own. Stagflation is NOT the elephant in the room. Slowdown of the economy, which was already under way, and subdued inflation, close to the target. If we want to avoid a recession, and if we are serious about affordability, for both reasons, contrary to conventional wisdom, the Fed should begin cutting rates sooner rather than later.

* Obviously that doesn't mean I'd agree with his intervention at the Fed (we will know more on that once the SCOTUS rules on that next year). 

Chapter on the history of monetary policy for the Elgar Companion to the Economies of Latin America and the Caribbean

My paper with Esteban Pérez has been published and is available now here. From the abstract of our chapter:

Monetary policy in Latin America has evolved in five different phases. The first one is characterized by the establishment of the first central banks adhering to a gold standard. The second phase is marked by the abandonment of the gold standard and the adoption of discretionary over rules based monetary policy. The third phase consists in the generalized adoption of developmental and inward industrialization goals by central banks. The fourth phase places price stability as the key overriding objective of monetary policy. The last phase focusses on the adoption of inflation targeting within an open economy context. The evolution of monetary policy in the region is closely related to the developments in the external sector and with the needs associated with the integration with the global economy. The chapter will emphasize the relative difficulties of insulating the region from external monetary and financial volatility and the limitations faced by monetary institutions to promote economic development with price stability.

An earlier version can be read here. 

The 6th Palgrave-Macmillan Lecture: On Decolonizing Economics and the New Palgrave Dictionary

 

The project of the new edition of The New Palgrave Dictionary of Economics is an effort to build an economics "without gaps," challenging the historical tendency of the profession to neglect certain topics, perspectives, and geographies. In my talk, I note that the original 1894 edition and 1987 revival, while monumental achievements, inevitably reflected their respective historical moments, the consolidation of the Neoclassical school, the rise of free-market ideas, and an inherent Eurocentric view of the profession. 

This historical narrowing, where the breadth of perspectives often diminished over time, resulted in "blank spaces," particularly concerning the Global South, non-traditional lines of inquiry, and scholars outside of the established European and North American academic centers. The modern project seeks to address these omissions, ensuring the Dictionary remains a pillar of the field while reflecting a more complete record of economic thought.

The term decolonizing the Dictionary translates into several concrete actions that embody a pluralism with purpose. This includes commissioning entries on the Global South and by scholars based there (like Krishna Bharadwaj and Víctor Urquidi), recovering neglected histories of thought (such as the School of Salamanca and figures like Ibn Khaldun), and introducing newly salient topics like "neoliberalism" or ones about which there is renewed interest like "imperialism."

The goal is not to replace the profession's core but to broaden and re-balance the map, maintaining analytical rigor while highlighting lines of inquiry that standard narratives often overlook. This re-balancing is deemed necessary after 2008-9 global financial crises exposed the profession’s analytical blind spots, ensuring that future economists, regardless of their background or focus, find their work and history represented.

 

Policy-Constrained Growth: Government spending and economic recovery in Brazil during Lula's third term

By Ricardo Summa, Guilherme Haluska and Franklin Serrano

Despite headwinds from higher interest rates in the US and at home, the Brazilian economy is nevertheless emerging from a period of prolonged stagnation. After growing an average of 0.2 percent a year between 2015 and 2022, national growth averaged 3.3 percent annually during 2023–2024, the first two years of President Lula’s third term. Though quite modest in comparison to the massive social needs of a developing country, this is still better than expected.1 Part of Brazil’s recent positive performance has been due to growing exports, to be sure. But the bulk of Brazil’s current economic growth stems from a cause the government itself has been reluctant to recognize: expansionary fiscal policy, which has generated sufficient demand to counteract these forces of contraction.

Read rest here. 

Election in Argentina boosted investor confidence, but is it sustainable?

My interview with Deutsche Welle on the Argentine election and the economy. I also had the opportunity of talking with Newsweek on Trump's strategy for Latin America.

Argentina, Economic Science and this year's "Nobel"

Trump wanted the Peace one, Milei the one in Economics

A few random thoughts about some recent news. Today, Javier Milei met with Donald Trump at the White House. Trump reportedly warned that the United States “will not be kind” to Argentina if Milei does not win the upcoming elections. That statement seems to suggest that the much-discussed “rescue” of the Argentine peso may be tied to domestic electoral results — something that Treasury Secretary Bessent had already hinted at when he announced the possibility of a US Treasury rescue package for Argentina.

No surprise there. But the situation brings back memories of earlier crises — particularly the 2001–2002 collapse, when Argentina defaulted after a long neoliberal experiment of liberalization, deregulation and privatization under the Menem administration. The current crisis, which began with the 2018 IMF program, is in many ways a continuation of that same process.

Back in 2002, the crisis caught one economist in particular by surprise: Rudi Dornbusch. Writing in the Financial Times, Dornbusch argued that Argentina could not be trusted to govern itself and proposed that its fiscal and monetary policy should be overseen by a foreign board of central bankers — a shockingly neocolonial suggestion, even for that time ["I'm shocked, shocked I tell you"]. I wrote a short letter to the Financial Times in response, which you can find here, mocking this absurd idea.

Two decades later, we are still dealing with the same problems. The “cleanup” of the 2002 mess took place under the so-called populist governments of Néstor and Cristina Kirchner, through two major debt renegotiations in 2005 and 2010. During that period, Argentina’s debt-to-export ratio — a measure of repayment capacity — improved significantly [see my piece on Challenge on that and the Vulture Fund negotiations that Macri ended up finishing in a favorable way to the Vultures; you know on what side he is]. Yet the Macri administration (2015–2019) more than doubled the foreign debt once again, setting the stage for the current crisis [on the doubling of debt see this piece with Matias De Lucchi; whole issue, scroll down].

In short, the same set of economic elites have crashed the economy multiple times. Domingo Cavallo, Menem’s finance minister and architect of the 1990s convertibility plan, reappeared at the end of the De la Rúa government in 2001. Federico Sturzenegger, who was at the central bank during Macri’s failed experiment in 2018, is now serving as Milei’s Minister of Deregulation. This revolving door of orthodox technocrats has brought Argentina back to the IMF, and now possibly to a US Treasury rescue, for the third time in a generation.

What’s frustrating is how the narrative never changes. The mainstream explanation — repeated recently by a well-known economist from the Di Tella University — is that Argentina’s problems are caused by irresponsible “populists.” In his version, written in academic jargon about sunspots and expectations, the blame somehow always falls on Peronists, whether they are in power or not. If the economy collapses, it’s because investors fear a Peronist comeback; if it booms, it’s despite them. Don't worry, it won't.

This kind of argument says a lot about the state of the economics profession, perhaps more than about Argentina’s actual economy. Instead of looking at straightforward indicators — who increased the foreign debt, how exports performed, whether external repayment capacity was sustained — many economists hide behind highly subjective assumptions disconnected from reality.

This is part of a broader problem in Latin American economics: what my colleague Franklin Serrano calls “brain damage” — not “brain drain.” The issue isn’t that talented economists leave the country, but that many return from US PhD programs armed with orthodox models that have repeatedly failed our economies. They bring back the intellectual framework that justifies the very policies that keep generating crises.

This brings me to another bit of recent news: the so-called Nobel Prize in Economics (technically, the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel). This year’s award went to Philippe Aghion Peter Howitt, and Joel Mokyr for their contributions to what’s broadly called “Schumpeterian growth theory” — work that connects innovation and technological change to economic growth. Surprising and soul crushing news to Milei, who wanted the prize for stabilizing the economy (a miracle according to Niall Ferguson).

Aghion and Howitt's models attempt to explain long-term growth by endogenizing productivity — the famous Solow residual. They borrow Schumpeter’s language of innovation and creative destruction, though often in a far more formal framework. In that sense, the connection to Schumpeter is more symbolic than substantive. Still, compared to some recent laureates, this year’s selection is a relatively defensible choice. Their models are certainly more in line with Schumpeter that some of the heterodox neo-Schumpeterian models.

Joel Mokyr, a historian, has written extensively on the cultural roots of the Industrial Revolution. His work offers a deeply Eurocentric — also, and more importantly, culturalist and supply-side — interpretation of why growth took off in Europe. While I disagree with much of that perspective, it’s undeniable that the Industrial Revolution did begin in Europe, and any serious account must explain that historical specificity. The problem is less Eurocentrism per se than the exclusive focus on supply factors, ignoring the demand and institutional dimensions that Keynesian and structuralist economists once emphasized. In that sense, I welcome the recognition of a historian among the laureates. But I also lament the profession’s retreat from the richer, more historically grounded analyses of scholars like David Landes, whose The Unbound Prometheus offered a more balanced view of the Industrial Revolution — one attentive to the demand aspects of economic growth.

Perhaps the real lesson — both from Argentina’s crises and from this year’s “Nobel” — is that economics still struggles to learn from its own history.

How the IMF and US helped loot and entrap Argentina with debt

 

Friends with benefits 

By Thomas Palley

Argentina is back in the news with renewed financial turmoil spurred by President Milei’s poor political standing. That poor standing is the product of anger with Argentina’s dire economic performance and massive corruption within Milei’s administration, and it augurs poorly for his party’s performance in the forthcoming October 2025 election.

In response, the IMF and US have jumped into action to save Milei’s government. The IMF had already provided a $20 billion bailout in April 2025. Now, the US government has provided another $20 billion (in the form of a central bank currency swap line). Furthermore, the US has expressed willingness to provide additional stand-by credit and even purchase Argentine government debt.

The media has focused on Argentina’s long troubled financial history, the difficult inflation situation President Milei inherited, and President Trump’s political affinity with Milei. However, that fails to explain why the IMF and US have provided such huge assistance to Argentina, given its lack of credit worthiness.

The support for Milei should be understood as a continuation of past lending to Presidents Macri (2015-2019), and Menem (1989-1999). The purpose is to entrench Neoliberalism in Argentina and entrap it with dollar debt. It is supported by local elites because they are the beneficiaries of Neoliberalism, and they also get to loot the Argentine state via the process of debt entrapment.

Read rest here.