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. 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. Perhaps it's not just 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.

History of thought traditions chart

Gary Mongiovi send me this version of my chart, that he nicely organized, that he will use in his own class, I'm glad to say. In mine Jeremy Bentham is at the top. I think Bentham is actually very useful precisely because he is a foil to Smith rather than a parallel “founder of economics.” He lets me establish very early the methodological distinction I want students to see. On the left side, classical political economy, with analysis centered on social classes, production and reproduction, the distribution of the surplus, and distribution as conflict that is embedded in historically/institutionally situated economic relations. On the other side, the Benthamite/utilitarian lineage, where the individual is the primitive unit, of analysis. The rational choice tradition that enshrines utility as the basis for evaluation, and ultimately allows the possibility of understanding social outcomes as the aggregation or interaction of individual decisions.*

 

That makes the marginalist revolution look less like something that appears ex-nihilo in the 1870s. Jevons in particular is much easier to understand as part of a longer individualist-utilitarian tradition. Bentham therefore gives the right side of the chart an intellectual prehistory analogous to the Petty–Quesnay–Smith/Ricardo prehistory on the left. The chart is not simply classical political economy versus neoclassical economics, in that sense. Also it is simply Keynesians (accept effective demand) versus non-Keynesians (accept Say's Law). It is closer connected to the methodological traditions. Some sit uneasily in their side (hence the dotted lines).

 

I hope it is useful to others, as it seems to have been for Gary. 

* Gary adds correctly Jean-Baptiste Say, Robert Malthus and Nassau Senior. I neglected them, perhaps because of my dislike of their work, that tries to derive something from Smith, but has a starting point in the rights side. A great and important addition.

Barry Eichengreen on Global Currencies

Barry Eichengreen's last book -- Money Beyond Borders: Global Currencies from Croesus to Crypto -- is great and worth reading, as almost anything he writes. This is specially the case, since it is his most ambitious work since Globalizing Capital: A History of the International Monetary System, first published in 1996. Other writings have been focused on much more narrow topics.

First, let me say two brief things before I even get to the book, that I just finished. This is NOT a thorough review, only just some impressions from reading without going into details. Second, Barry is incredibly generous intellectually and willing to discuss openly and to listen to people who he disagrees with, and that is not a minor matter in the current environment. He came to Kalamazoo College, and the University of Utah, when I invited him, and has a chapter in a book I edited two decades ago. He also debated with me on the cause of the collapse of Bretton Woods a few years back (video here; my paper here and his here in the same issue of ROPE, not ROKE). So, my critiques of the book are friendly critiques, mostly associated to the theoretical apparatus, since the book, like the earlier one, is incredibly rich in historical detail, and is a must read. 

My biggest issue with the book is that Barry treats the international monetary system, in analytical terms, as fundamentally a market equilibrium sustained by confidence, with states and geopolitics modifying that equilibrium. My view is that it is an institutionally constructed hierarchy sustained by state power, within which markets and confidence operate. For him, power largely follows successful international money. In my view, successful international money is to a considerable extent an expression of power. Barry gives too much causal priority to trade, confidence and network effects, and too little to the fiscal and military, I might say geopolitical, foundations of international money.

His historical sequence is, in an important sense, backwards. He tends to tell the story as one in which expanding commerce generates a demand for convenient, stable means of payment and particular currencies then emerge because traders converge on them. However, the monetary institutions that make those markets possible are already political constructions. The money of account, the enforceable debt contracts, the power to tax, and ultimately the hierarchy between different liabilities are constitutive of the monetary system rather than consequences of prior commercial development.

This is particularly important when it comes to the position of the dollar. Here the argument is somewhat circular.  The dollar is widely used because it is liquid and convenient, while it is liquid and convenient because it is widely used. My explanation puts considerably greater weight on the military, and geopolitical position of the United States. The dollar system was embedded in a political order organized by the United States after World War II, including alliances, security arrangements, international institutions, foreign lending and eventually the willingness of the United States to supply dollar liabilities to the rest of the world. Dollar hegemony cannot therefore be adequately separated from American hegemony.

His last chapter -- that is particularly gloomy -- emphasizes the importance of trade and confidence, and how these build network effects.  In a section titled "Trading Places," he gives considerable weight to the fall in the US share of global exports. But that historical fact that should cause trouble for his argument. The problem he describes, the fall in the US share of world trade and output has fallen enormously while the international position of the dollar has changed remarkably little. China is an even clearer counterexample. It is central to world trade and manufacturing but the renminbi remains a relatively minor international currency.

His invocation of the Triffin Dilemma is particularly problematic. The original Triffin dilemma was specific to Bretton Woods. The United States promised to convert official dollar holdings into gold at US$35 an ounce. International liquidity required supplying dollar liabilities to the rest of the world, but the accumulation of those liabilities relative to US gold reserves eventually undermined confidence in their convertibility. More importantly, the world does not even require a US current account deficit to obtain dollar liquidity. Dollars and dollar claims can be supplied through through many mechanisms. Banks and offshore or shadow banks can create dollar liquidity, as can capital outflows from the US, or the swap lines from the Fed discussed by Barry.

Perhaps, from my perspective, the weakest case is the notion that there will be a point at which the US fiscal position will become unsustainable. The United States can certainly default on Treasury obligations. Congress could refuse to raise the debt ceiling, or the executive could refuse payment. An institutional or constitutional crisis could prevent payment. But that would be a politically imposed default, not an inability to obtain dollars. That distinction is crucial.

A government promising to pay US$100 when it is the issuer of dollars is fundamentally different from one promising to pay US$100 worth of gold or 100 euros. In the first situation the government has a nominal payment capacity that it lacks in the other two. This means suggesting that rising debt ratios could ultimately make Treasury liabilities impossible to service, as Barry suggests, reproduces the conventional analogy between the federal government and a private borrower. Not that deficits and debt might not have consequences. But default and danger to the dollar position is not one. In fact, it is the ability to spend and borrow only in its own currency that is the foundation -- what Anthony Brewer called the Fiscal-Military State -- of the the international position of the dollar.

He concludes that the dangers of a less and less trustworthy American economy, and the fact that there is no alternative to the dollar, might lead to a collapse and de-globalization process akin to the 1930s. But one can take the exactly opposite conclusion. Key currency status is not simply a beauty contest in which investors periodically choose the currency inspiring the most confidence. If there is no alternative system capable of performing the same functions, these developments do not automatically culminate in abandonment of the dollar. Inertia should simply lead to the continuation of the status quo, even if Trump is erratic and creates unnecessary turbulence. In fact, the recurring phenomenon in crises has often been exactly the opposite as what he describes. Global instability increases demand for dollars, even when the crisis originates in the United States. 2008 is the obvious example.

Barry is extraordinarily knowledgeable about the institutional and historical evolution and functioning of the international monetary system. He knows that geopolitics and military power matter. He DOES have a section in the last chapter on that. So he does not neglect the subject. But then he concludes that: "the fate of the dollar will rest on the willingness of America's leaders to uphold the rule of law, respect the separation of powers, and honor the country's commitments to its foreign partners." It is subsidiary and dependent on the institutions that create confidence on the dollar. In other words, he tends to absorb all of the political and geopolitical facts into an essentially conventional analytical structure rather than allowing them to generate a rival theoretical interpretation. In a sense, the historical narrative is richer than the theory used to organize it.

Sunstein on Hayek's Conservatism and Liberalism

 

The Road to Serfdom

 

Cass Sunstein has a new paper on Hayek's famous essay, "Why I Am Not a Conservative." Sunstein takes Hayek's self-description too seriously (see also his Substack post here). Hayek, he argues, was not really a conservative* because conservatives are too willing to use coercion in defense of traditional values, too suspicious of change, and insufficiently committed to pluralism. Hayekian liberalism, by contrast, is supposedly built around freedom and limits to coercion, spontaneous order, and tolerance.

The problem is that Sunstein accepts uncritically Hayek's definition of freedom and coercion. Hayek worried enormously about coercion by the state, but much less about the coercive power exercised through property relations, unemployment, and the dependence of labor on capital. If workers are disciplined by unemployment or if financial markets constrain what elected governments can do, these pressures appear as impersonal market outcomes rather than as exercises of power. Once coercion is defined that way, the conclusion is almost built in. Government intervention threatens liberty, while market relations embody it. No surprise there.

This is one reason why it is misleading to describe Hayek simply as a classical liberal. Hayek was one of the central architects of neoliberalism. Neoliberalism certainly borrowed the rhetoric of classical liberalism -- and tried to claim Adam Smith as a precursor (like Arrow and many General Equilibrium authors, btw)* -- but its theoretical foundations were quite different. Classical political economy did not possess the marginalist conception of markets as mechanisms that generate an optimal allocation of resources (understood here as suggesting that factors of production are fully utilized, that is, full employment and normal capacity utilization). Neoliberalism rests instead on the post-classical idea that markets are the privileged mechanism of social coordination. Hayek's emphasis on dispersed knowledge is simply one influential version of that argument.

And this distinction matters politically. If economic freedom is treated as the foundation of all other freedoms, then democratic attempts to regulate capital, redistribute income, strengthen unions, control capital flows, or guarantee full employment can themselves be represented as attacks on liberty. Political coercion can then be justified in the name of defending economic freedom. And Hayek certainly did, in his defense of both the Pinochet regime and the apartheid regime in South Africa, qualified as it might have been.

This helps explain something that often appears paradoxical about contemporary libertarians, like Javier Milei, who openly places himself in the Hayekian tradition. Milei combines an almost obsessive rhetoric of liberty with a willingness to repress protest and with a political discourse tolerant of Argentina's authoritarian and genocidal past. There is less contradiction here than one might think. If the liberty that matters most is the liberty of markets and property, then coercion directed against those who interfere with the market order can be presented as a defense of freedom. Hayek himself made the hierarchy quite explicit when he argued that a dictatorship could in some circumstances be more liberal than a democratic government. Democracy was valuable, but it was not the fundamental goal. The preservation of the market order came first.**

Keynes' liberalism points in almost exactly the opposite direction. Keynes remained a liberal, but in the New Liberal tradition associated politically with the Asquith Liberals, and New Liberals like Leonard Hobhouse. He did not identify liberty with laissez-faire. Mass unemployment, insecurity, financial power, and extreme economic dependence could undermine the actual exercise of political freedom. Certain economic freedoms could therefore legitimately be restricted -- through public investment, regulation, capital controls, full-employment policies -- in order to preserve a liberal political order.

The contrast can be stated very simply. Hayek (and Friedman too) argued that political freedom depends on economic freedom. Keynes effectively imagined the relation in reverse, and argued that political freedom may require limits on economic freedom.

This is also where Keynesian liberalism connects naturally with Franklin Roosevelt's Four Freedoms. Freedom of speech and freedom of worship belong to the traditional liberal concern with civil and political rights. But freedom from want makes Keynes' liberal argument explicit. Formal political liberty means much less if people lack the material conditions necessary to exercise it. If you are hungry, unemployed, or economically dependent, your political freedom may exist formally while being severely constrained substantively.

That is the issue Sunstein largely misses. The interesting question is not whether Hayek was really a liberal or a conservative. He was a neoliberal, obviously (a term that is absent from Sunstein's analysis; Mirowski suggests that neoliberals avoid using the term. Perhaps there is something to that). The relevant question is which freedoms take priority when freedoms conflict. Neoliberalism places market freedom first and is therefore willing, when necessary, to restrict democratic freedom in order to preserve it. Keynesian and New Deal liberalism reverse that ordering. Markets may have to be constrained so that political liberty remains meaningful.

* There has been a brouhaha over Chiara Cordelli's entry on Capitalism for The Stanford Encyclopaedia of Philosophy. I can see why some economists -- like Jesús Fernández-Villaverde -- have been critical of her use of the concept of equilibrium in Hayek and Friedman's view of the system. However, at the end I think Cordelli's views are vindicated. I responded to some of these critiques here and here. A longer post is probably required to deal with all the issues.

** I should note that Hayek's critique of the negative effects of welfare states owes quite a bit to Carl Schmitt, who had close connections to the Nazi government, and has been an important source for American conservatism, as noted by William Scheuerman. Both associate the welfare state with the destruction of legal generality, and with a tendency towards authoritarian governments. Hayek explicitly invokes this Schmittian formulation, as noted by Scheuerman (see figure above from The Road to Serfdom).

Stirati on the NAIRU

Surprisingly there was no entry on the Non Accelerating Inflation Rate of Unemployment (NAIRU) in the New Palgrave Dictionary of Economics. There is, and remains there, one on Milton Friedman's Natural Rate of Unemployment, written by Michael J. Pries. Both are deeply interconnected concepts. In fact, Antonella Stirati, who I asked to write it, presents the NAIRU as a reformulation of Friedman's natural rate within models that allow for real wage rigidities and involuntary unemployment.

Despite differences in microeconomic foundations, both concepts imply a vertical long-run Phillips curve and share three central propositions. First, the equilibrium unemployment rate is determined independently of aggregate demand. Also, unemployment below it causes accelerating inflation. Finally, actual unemployment is eventually drawn back toward it.

In the standard wage-setting/price-setting model, the NAIRU is the unemployment rate required to reconcile workers' real-wage claims with firms' desired markup. Labor-market institutions (e.g. unemployment benefits, employment protection and union bargaining power) do not directly determine the real wage, which is constrained by productivity and the markup. Instead, they determine how much unemployment is required to discipline workers sufficiently to make wage claims compatible with the markup.

This framework generates a wage-price spiral whenever unemployment departs from the NAIRU. In New Keynesian versions, stronger aggregate demand first reduces involuntary unemployment. Then lower unemployment raises wage claims, which are assumed to pass fully into prices because the real markup is fixed. Monetary policy subsequently raises interest rates, reduces investment and aggregate demand, and restores unemployment to the NAIRU. Stirati emphasizes that this adjustment mechanism depends on two weak assumptions, one that interest rates reliably control private investment and demand, and then that departures from the NAIRU have a sufficiently strong and predictable effect on inflation.

 

The policy consequences are strongly supply-side. Because the NAIRU is attributed to labor-market institutions, reducing unemployment supposedly requires weaker employment protection, lower unemployment benefits, diminished union bargaining power and, sometimes, greater product-market competition. The whole neoliberal policy agenda. Keynesianism is impossible, since aggregate-demand policy can affect unemployment only temporarily, while permanently changing the inflation rate.

 

Her principal criticism concerns estimation. The NAIRU is unobservable, yet it is central to monetary policy, potential-output calculations and European fiscal rules. In practice, estimates are extracted from the trend of actual unemployment or chosen so that the estimated unemployment gap best explains inflation. Consequently, movements in unemployment that do not produce inflation are simply absorbed into a changing estimated NAIRU and relabeled as "structural." The resulting estimates are highly uncertain, frequently revised and closely track actual unemployment, often without corresponding changes in labor-market institutions.

 

The evidence is really against it. Major historical episodes completely contradict the model predictions. For example, persistently high European unemployment did not produce accelerating deflation. Or the low unemployment of the Clinton boom did not produce accelerating inflation, and the sharp post-2008 rise in unemployment did not cause sustained deflation. This suggests that the estimated NAIRU is less an independent structural attractor than a moving average of unemployment shaped by aggregate demand and capital accumulation.

 

The entry’s central argument is that all three defining properties of the NAIRU, its independence from demand, its role as an inflation barrier and its status as an attractor, are theoretically questionable and empirically unsupported. Nevertheless, the concept survives because it remains embedded in macroeconomic models and policy institutions, especially European fiscal policy.

 

The entry requires access to the Palgrave. But many of the same arguments are discussed in her Godley-Tobin Memorial Lecture, freely available here.

Neo-Mercantilism and the Return of Global Imbalances

In a recent Financial Times column, Martin Wolf argues that the United States and China are engaged in a "war of neo-mercantilists." China, in his view, is particularly well equipped for this struggle because of its enormous manufacturing base, high savings rate, technological advances and control over strategic supply chains, including batteries, solar panels, rare-earth processing and electric vehicles. The United States has important advantages of its own, particularly in energy and finance, but its industrial policy is less coherent.

Wolf's argument is closely connected to the old debate on global imbalances, that has been recently revived and analyzed by Adam Tooze, who correctly notes some of its limitations.* Like the earlier discussions of the "global saving glut," exchange-rate manipulation and excess Chinese saving, Wolf's column interprets China's persistent trade surplus as a central source of international instability. Weak Chinese domestic demand and an allegedly undervalued renminbi allow China to export its excess production, forcing other countries to absorb deficits and suffer the contraction of their tradable sectors. The "second China shock" is thus presented as a more technologically sophisticated version of the same basic imbalance.

China's surpluses create adjustment problems for other countries, and its industrial exports can undermine manufacturing elsewhere, as they did in the US (see this old post). But Wolf's argument places too much weight on macroeconomic imbalances as the source of Chinese power. China did not acquire its position in electric vehicles, telecommunications, renewable energy, machinery and artificial intelligence simply because its exchange rate was depreciated or because its savings rate was high. An undervalued exchange rate can assist industries that already exist. It cannot create technological capabilities, engineering knowledge, supplier networks or integrated industrial systems. Here both the role of the Chinese developmental state, and the US own openness to the Chinese economy, in what has been called development by invitation, played a role.

These capabilities resulted from a long process of industrial policy, public investment, directed credit, technology acquisition and the protection and expansion of domestic firms. The trade surplus is better understood as one manifestation of this productive transformation than as its fundamental cause. China could raise wages, expand consumption and reduce its external surplus while retaining most of its industrial and technological power. Conversely, a revaluation of the renminbi would not recreate the productive capacities that have disappeared in the United States. It would require industrial policy in the US, which by the way, was never completely abandoned either (see here).

The focus on imbalances also obscures the monetary and financial hierarchy of the international system. Wolf treats China as a major creditor and the central manufacturing economy. The latter is correct, but the dollar remains the principal international currency, US financial markets remain the main destination for global wealth, and the Federal Reserve remains the ultimate provider of international liquidity. In other words, the notion that the US is a debtor that depends on funding from China is an analytical misconception rooted in a misconception about the working of the international monetary system. The United States can run external deficits in its own currency in a way that no peripheral economy, and not even China, can. This is no burden imposed on the United States by foreign savings. It confuses US strength, its financial power, with a weakness.

The conflict between China and the United States is therefore not adequately described as a confrontation between a surplus country and a deficit country. It is a struggle between China's growing productive and technological power and the continuing monetary, financial and geopolitical power of the United States. Global imbalances are part of this conflict, but they are not its underlying explanation. Wolf sees many of the relevant facts, but the old language of savings, exchange rates and current accounts prevents him from fully connecting them.

The literature on the imbalances is built on a fundamentally misleading premise, that global imbalances reflect excess saving in some parts of the world flowing into the main deficit country, the US. In that story, the rest of the world finances American excess consumption. But this reverses causality. It is not Chinese or German thrift that drives the system, but the central role of US demand, finance, and the dollar. Capital does not passively flow from savers to borrowers. It is actively created within a hierarchical monetary system in which the United States occupies a privileged position. The US expenditures lead to higher level of activity globally, without any danger of US default.

From this perspective, the persistence of global imbalances is not puzzling at all. It is structural. The dollar-based international system requires US deficits and the accumulation of surpluses elsewhere. This is not a temporary distortion, nor a pathology to be corrected, but a defining feature of contemporary capitalism. As noted above, the real asymmetry is not between surplus and deficit countries per se, but between those that issue internationally accepted liabilities and those that do not. The United States is not simply another deficit country. It is the anchor of the system.

* Adam Tooze had discussed the global imbalances, in a more perceptive way than the older debate, recently. Tooze's central argument is that the language of "global imbalances" is an old framework that obscures new forces (Trump, AI, China, fiscal crisis). In this case he is debating Michael Pettis (see Pettis more recent reply here). Pettis revived J. A. Hobson's idea that inequality within leading economies generates underconsumption, pushing capital outward and producing geopolitical conflict. Applied to the present, this suggests that domestic imbalances in countries like China generate export surpluses and capital outflows, which in turn create tensions with deficit countries like the United States. Tooze correctly points out some of the historical and institutional limitations of the analogy, but falls short of providing an analytical critique.

Lara-Resende on Milei

 

Straight jackets of our own making

André Lara-Resende has published a long analysis of Javier Milei's Argentina, subtitled "microeconomic successes and macroeconomic mistakes." The essay is particularly significant because it confirms the considerable evolution of Lara-Resende's thinking on money and inflation. It also returns him to the subject with which he first became closely associated, namely: inertial inflation and the stabilization proposals that eventually to the Real Plan. His critique of Milei's macroeconomic policy is broadly correct. Yet his account remains limited by a conventional institutionalist interpretation of Argentine decline and, more importantly, by the failure to place the exchange rate and the external constraint at the center of the inflation and stabilization story.

The evolution is worth emphasizing. In earlier writings, Lara-Resende while rejecting the crude Quantity Theory of Money had accepted to a great extent John Cochrane's Fiscal Theory of the Price Level (FTPL). Inflation was not directly caused by the stock of money, but it remained fundamentally a fiscal phenomenon. For him expectations of future fiscal imbalances supposedly determined the current price level. As I noted several years ago (link above), endogenous money and occasional references to Knapp, Lerner and Modern Money Theory (MMT) were then being used to defend relatively conventional conclusions, essentially fiscal adjustment, pension reform, trade liberalization and a smaller, less patrimonialist state. The language was new, but fiscal dominance and austerity remained at the center of the argument.

Lara-Resende had already moved away from Cochrane and closer to MMT by the time of his more recent book. However, as late as his discussion of the thirtieth anniversary of the Real Plan, he still described inflation as the result of a prolonged process of fiscal disorder reflecting social demands that could not be accommodated through existing political institutions. This remained a fundamentally fiscal interpretation of inflation, even if clothed in a more sophisticated account of money and expectations.

In the new essay, the break is much more explicit. Lara-Resende now directly criticizes the FTPL. He correctly notes that the theory depends on expectations about fiscal results extending indefinitely into the future. Since these expectations are unobservable, any persistence of inflation can be rationalized after the fact by claiming that the public does not believe the fiscal adjustment will last. Milei has produced primary and even nominal fiscal surpluses, yet inflation has not immediately disappeared. The FTPL response is simply that people expect future governments to return to fiscal irresponsibility (a possible Kicillof government). As I joked (on Twitter after a comment from an Argentine econ prof.) if the plan works its Milei's success, if it fails it's the Peronist fault (heads I win, tails you lose, essentially). A theory that can explain every possible result in this way cannot be falsified, as Lara-Resende correctly notes. This is a welcome and substantial change from Lara-Resende's earlier position.

His positive argument returns to the inertial inflation approach developed at the Catholic University, in the 1980s. Inflation may initially be caused by a variety of factors, fiscal disequilibrium, excess demand, distributive conflict and supply shocks, but, once it has persisted for a sufficiently long period, indexation and backward-looking price formation give the process a life of its own. Wages, prices and contracts are repeatedly adjusted on the basis of past inflation. Even after the original shock has disappeared, yesterday’s inflation becomes the floor for today's. I have issues with this notion of multi-causal inflation, that still puts too much emphasis on demand pull factors (more on that below).

From this perspective, continued fiscal and monetary contraction is not only ineffective but unnecessarily destructive. Once the original inflationary pressures have been removed, austerity creates recession and unemployment without eliminating the mechanisms that reproduce inflation. This is Lara-Resende's central criticism of Milei's macroeconomics. The government has treated inflation as the consequence of deficits and monetary issuance, imposed a severe fiscal contraction, and obtained a deep recession and higher unemployment. Yet the inertial component of inflation persists. He basically thinks Argentina now is Brazil in the 1990s (not an Orloff effect, a reverse one, Argentina is Brazil yesterday, so to speak).

His proposal follows directly from this diagnosis. Not surprisingly he wants a Real Plan for Argentina, that should adopt a process of deindexation inspired by the Brazilian Unidade Real de Valor (URV), a virtual, indexed unit of account would allow prices to be expressed in a stable unit while the existing currency continued to depreciate. Once relative prices had been coordinated in the virtual unit, it could be transformed into the new national currency. The URV would therefore break the link between past and current inflation without requiring an even deeper recession.

Lara-Resende also rightly rejects dollarization. Money is a public institution and an essential part of national sovereignty. Dollarization would place Argentina under the monetary governance of the United States without giving Argentines any political representation in that governance. All of that is a major improvement over monetarism, the FTPL and Milei's fantasies about abolishing the central bank.

The problem is that Lara-Resende combines this somewhat heterodox macroeconomics with a rather conventional account of Argentina's long-term development. He starts from the familiar assertion that Argentina was once a rich and educated country, comparable to the advanced European economies, and that its subsequent decline constitutes a great historical mystery. The explanation is then sought in Mancur Olson, Douglass North, Daron Acemoglu and James Robinson. In other words, entrenched interest groups, corporatist coalitions, excessive regulation and the institutional inheritance of Peronism blocked creativity, investment and growth. This is the basis for Lara-Resende's distinction between Milei's successful microeconomics and mistaken macroeconomics. Federico Sturzenegger's deregulation campaign is presented as a potentially productive attack on the bureaucratic, corporatist and patrimonialist state inherited from Peronism. Milei's radicalism may have been useful, in this view, because it made possible a rupture with the Peronist legacy that has haunted Argentina since the middle of the twentieth century.

There are several problems with this story. Most importantly, Argentina was never really a developed country. It had a high income per capita during the Belle Époque, but high income derived from natural-resource rents is not the same thing as development. Saudi Arabia also has a high income per capita. Argentina was a kind of "beef-state" (instead of a petro-state) as I call it in this paper (in Portuguese), prosperous under the highly specific conditions created by its integration into the British-centered international economy, but dependent on manufactured imports, foreign finance and the export performance of a narrow primary sector. Its productive structure did not have the autonomy, technological capabilities or capacity to produce capital and intermediate goods characteristic of a developed economy. The collapse of British hegemony, the international division of labor and the Gold Standard therefore undermined the foundations of the agro-export model. It was not simply a rich, developed society mysteriously ruined by bad institutions.

The Peronist decline thesis is equally simplistic. Peronism cannot explain eight decades of decline because, among other obvious reasons, Peronism was frequently proscribed and excluded from government. More fundamentally, the evidence does not show that state-led industrialization produced Argentina's decisive economic collapse. Economic performance from the postwar period to the mid-1970s was far from disastrous. Per capita income maintained its position relative to the United States between roughly 1950 and 1975, and the 1964–74 period was particularly dynamic (not the Brazilian "Miracle", but pretty good). The major second phase of relative decline began after 1976 (more precisely 1975 with the Rodrigazo, but I'm splitting hairs here), when the military dictatorship abandoned industrialization and adopted the liberalizing policies of José Martínez de Hoz. The neoliberal period from 1976 to the collapse of Convertibility produced essentially no per capita growth over more than two decades.

The decision to abandon industrialization was not the inevitable consequence of its economic failure. It was inseparable from distributive conflict and the attempt to weaken organized labor and reverse the increase in the wage share associated with Peronism. The so-called Argentine Pendulum, discussed by Marcelo Diamand. Besides it happened in almost all countries, including Brazil that supposedly did not have Peronism, and had a much stronger industrial bourgeoisie (se my discussion here, in Spanish). Argentina's difficulty was that the expansion of domestic demand and real wages increased the demand for imported capital and intermediate goods. This repeatedly ran against the balance-of-payments constraint. The resulting stop-and-go cycles intensified distributive conflict, but they do not prove that higher wages, industrialization or state intervention were the source of long-term decline.

This is also why the New Institutionalist framework is inadequate. Institutions certainly matter, but not simply because they protect property rights, reduce regulation or prevent rent seeking. The relevant institutions are also those that sustain domestic demand, promote investment and technological capabilities, and relax the external constraint. A supply-side discussion of entrepreneurship and incentives misses the role of the state in creating markets, financing innovation, coordinating investment and securing access to foreign exchange. The supposedly successful East Asian economies did not develop by reducing the state to the protection of property rights. They relied on industrial policy, credit allocation, exchange controls and extensive public-private coordination. Milei is also getting the micro wrong, in other words.

This brings us to the principal limitation of Lara-Resende's inflation analysis. Inertia is important, but the stability of the nominal exchange rate is more central to Argentine inflation than his discussion suggests. He attributes the inflationary acceleration during the second half of 2023 largely to Milei's threat to abolish the peso and the central bank. That threat certainly encouraged the flight from the domestic currency. But the more direct mechanism was the depreciation of the peso, first the devaluation imposed under the IMF agreement while Sergio Massa was still minister, and then Milei's own maxi-devaluation after taking office. In a highly dollarized peripheral economy dependent on imported inputs, depreciation passes rapidly into domestic costs and prices. It also reduces real wages and sets off distributive attempts to recover lost income.

Money creation accommodates this process. It does not initiate it. Similarly, the fiscal adjustment did not produce disinflation. It produced the recession and the collapse in real wages. Milei reduced inflation by holding the exchange rate under control after the initial devaluation. That exchange-rate stabilization has depended on intervention, restrictions of various sorts and, crucially, access to external finance. Lara-Resende comes close to acknowledging this. He warns that Milei's combination of fiscal, monetary and exchange-rate policies is a familiar recipe for recession and a balance-of-payments crisis. He also notes that an unusual intervention by the United States prevented the program from collapsing when external payments came under pressure. But these observations remain somewhat detached from his explanation of disinflation. External financing appears as something necessary to prevent a later crisis, rather than as an essential condition for maintaining the exchange-rate anchor that made the reduction of inflation possible in the first place.

The same issue qualifies the proposed Argentine URV. The URV was undoubtedly an ingenious solution to the coordination and relative-price problems created by chronic inflation. But it does not explain by itself why the Real Plan succeeded in the 1990s when the heterodox stabilization plans of the 1980s failed. Brazil introduced the Real after the Brady restructuring, the return of capital flows to Latin America and a substantial accumulation of international reserves. The URV became a new currency that could be maintained at a relatively stable exchange rate against the dollar. The external conditions for stabilization had changed. In the 1980s, the foreign debt crisis, scarcity of dollars and continuous depreciations repeatedly undermined domestic price stabilization, and stabilization was possible after the Brady Plan allowed for the entry of new funds. An Argentine URV might help break indexation, to the extent that this is a problem (most indexation is to the dollar anyway in the Argentine case). It cannot create dollars, finance essential imports, service foreign-currency debt or defend the conversion rate of a new currency. Without an external strategy, reserve accumulation and controls capable of managing capital flows (in the short run) and imports, a new unit of account would eventually confront the same constraint as the peso.

Lara-Resende's intellectual evolution should therefore be welcomed. His rejection of the FTPL, his return to inertial inflation, his criticism of austerity as an instrument of stabilization and his rejection of dollarization all represent real advances. He is now much closer to a genuinely heterodox view of money and inflation than he was when he first became associated with MMT. But his interpretation remains incomplete.

Argentina's problem is not that an already developed economy was destroyed by Peronist regulation and fiscal irresponsibility. It is that a peripheral economy never completed its industrial transformation, repeatedly encountered the external constraint, and eventually abandoned its most successful development strategy in favor of liberalization, financialization and recurrent dependence on foreign borrowing. Inertia helps explain the persistence of inflation, although in the Argentine case, informal dollarization is more relevant. The exchange rate and the availability of dollars explain its major accelerations, the conditions under which stabilization becomes possible, and why Argentine stabilization programs so often end in another external crisis.

Podcast on Adam Smith with Heinz Kurz

Here the podcast with Carlos Pinkusfeld Bastos, from the Federal University of Rio, and the Centro Celso Furtado, and Professor Heinz Kurz, on Adam Smith, and the new Neo-Mercantilist trends.