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.

The Washington Post, Argentina’s “Renaissance” and the Milei Mirage

A recent Washington Post editorial, “Argentina’s renaissance continues,” offers a nearly perfect example of the Milei success story now circulating in the financial press. According to this view, inflation has fallen mostly as the result of the fiscal adjustment, exports are rising, as a result of market confidence, and Moody’s, Fitch and S&P have upgraded Argentina’s debt. The latter in and of itself shows that markets approve, and what else would you need, really? From this, the editorial concludes that Milei’s free-market reforms are working, that life is improving for Argentines, and that the country offers a model for other stagnant economies.

The problem is not that these developments are invented, but that the editorial provides the wrong explanation for them. Inflation fell primarily because the government slowed the rate of currency depreciation after Milei’s initial maxi-devaluation had pushed monthly inflation to roughly 25 percent and caused a collapse in real wages. Fiscal austerity contributed by producing a deep recession, weakening employment and reducing wage demands, but balancing the budget was not the central anti-inflationary mechanism. Exchange-rate stabilization reduced inflation, and austerity produced the contraction.

The same confusion appears in the discussion of the fiscal surplus. Argentina’s fundamental constraint is not the government’s ability to balance a budget denominated in pesos, but its capacity to obtain the foreign currency needed to pay external debts and finance essential imports. Milei inherited a heavily indebted economy with few reserves and has remained dependent on support from the IMF, China (the swap in 2024) and the United States (last year). A fiscal surplus may reassure creditors, but it does not create dollars, expand productive capacity or resolve the external constraint. Indeed, cuts in public investment may weaken precisely the productive capabilities Argentina needs in the longer run.

Nor did Milei create the export recovery, which is entirely related to foreign markets. Agricultural exports benefited from the end of the drought, while increased energy production reflects investments in Vaca Muerta and related infrastructure made before he came to office. Recession also reduced imports, mechanically improving the trade balance. The Post therefore credits free-market reform with the effects of favorable weather, previous investment, state-supported energy development and depressed domestic demand.

Credit-rating upgrades indicate that bondholders now believe they face a lower perceived risk of default.  That might or not be true (hint, probably not, and markets often make mistakes). They do not demonstrate that Argentine workers are better off or that a sustainable development model has emerged. The real questions concern wages, employment, poverty, public services, investment and the capacity to earn foreign exchange without repeated dependence on external borrowing. Milei may have achieved a politically important stabilization, but it remains fragile and externally dependent. What the Post calls a renaissance looks much more like another familiar Argentine cycle of austerity, financial enthusiasm and growing foreign obligations.

Óscar Ugarteche (1949-2026)

 

At the Institute of Economics in México in 2018

I was traveling attending a conference in Rio, and didn't have time to write a post on the passing of my good friend Óscar Ugarteche. IDEAS published an obit here. I met Óscar at UNAM many years ago (way before that photo, btw). Later, when I worked at the Central Bank of Argentina, I invited him to speak there. His work was an important influence on my own understanding of sovereign debt and the international financial architecture.

Óscar's central insight was that sovereign-debt crises should not be understood simply as the result of irresponsible borrowing or excessive government spending. They form part of recurrent international credit cycles. Periods of abundant liquidity and low interest rates encourage lenders to expand credit aggressively. When interest rates rise, commodity prices fall, or capital flows reverse, countries that appeared solvent suddenly face an external constraint and may be forced into default. The debt cycle is therefore produced by creditors and the international monetary system as well as by debtors.

Debt restructuring is necessary when the original payment schedule has become economically impossible, but the existing system is fragmented and biased. Bondholders, commercial banks, official creditors, multilateral institutions, and suppliers are treated through different forums, while multilateral institutions generally refuse to restructure their own claims. Collective-action clauses can limit holdouts within a particular bond issue, but they cannot coordinate all classes of creditors. Óscar therefore favored a comprehensive, multilateral sovereign-debt restructuring and arbitration mechanism capable of imposing comparable treatment and preventing vulture funds or individual creditors from benefiting from concessions made by everyone else.

 

His view of the IMF was correspondingly critical. He wrote a brief history of the IMF that is worth reading, but I think is only in Spanish. After the end of Bretton Woods, the Fund ceased to be principally an institution of international monetary stabilization and became, in his phrase, a kind of "policeman for the banks." It supplied finance and imposed adjustment so that private creditors could be repaid. Responsibility was placed almost entirely on debtor governments, while neither creditors nor the international financial conditions that produced the lending boom were held accountable. Conditionality imposed the costs on wages, public services, growth, and state capacity, while the United States remained largely exempt from the disciplines imposed on the Global South. His preferred alternative was to reduce the IMF's power, transfer stabilization functions to regional monetary funds, and create an independent international debt-arbitration framework.

 

He wrote the entry on "Sovereign Default" for the New Palgrave Dictionary of Economics. An interesting point that he discusses is the forgotten history of the Confederate external debt. While cases of defaulters that do not pay their debts are almost nonexistent, contrary to common belief about deadbeat countries, Óscar discussed in his entry the only  historical exception, which involved the unresolved debts of several former Confederate and Southern states, with Mississippi providing Óscar's principal example of outright and permanent debt repudiation.

 

In Óscar's account, the decisive role of the US government during the 1930s was to construct the legal and diplomatic conditions under which confederate debt could remain unpaid and eventually disappear. The federal government denied any responsibility for contracts entered into by individual states and claimed that it lacked the constitutional power to compel Mississippi and the other states to pay. The Eleventh Amendment also protected states from suits brought by foreign citizens. At the international level, the southern bloc in the Senate had repeatedly inserted reservations into arbitration treaties precisely because arbitration might reopen the repudiated Southern debts. Ugarteche says that in 1930 the United States prevented the creation of an international arbitration tribunal in Geneva for fear that the bonds would be brought before it. This left British bondholders without either access to the debtor states through diplomacy or a neutral international court.

 

Óscar's hypothesis is that after World War II, the United States effectively forgave Britain’s inter-Allied war debt, and British bondholders may in return have abandoned their claims against the American states. In other words, the power of the US made the enforcement of debt contracts impossible and then helped shape the postwar settlement in which the claims disappeared.

Robert Blecker (1956-2026)

Robert with Jane, that also passed away recently

I've just heard the news that Robert Blecker passed away. I've known him since the 1990s, when I was a graduate student at the New School. His books on the US economy for EPI were particularly important for the work I did with Wynne Godley on the external accounts of the Levy macro model.

He will be remembered for his several contributions to Post Keynesian open macroeconomics. His contributions include extending Kaleckian theories to open economies, in particular the distributive implications of wage-led and profit-led regimes, advancing debates over balance-of-payments-constrained growth and Thirlwall's Law, and extensive work on exchange rates, Mexico, NAFTA and international trade policy.

ROKE devoted its the 2nd issue, this year to his work. You can read about his work in this article by Ricardo Summa, Gustavo Bhering and Nathalie Marins in the introduction to the symposium.

Decolonizing Keynesian Macroeconomics by Jayati Ghosh

 

The 9th Godley-Tobin Memorial Lecture was delivered by Professor Jayati Ghosh, from UMass, Amherst, one of the leading development economists. Jayati argues that Keynesian economics must be further “decolonized” by recognizing how financial globalization and currency hierarchies constrain developing countries. Even fiscally disciplined poorer countries face higher borrowing costs, capital volatility, and reduced policy autonomy, so effective Keynesian policy requires tighter regulation of finance and reform of the international monetary system.

Smith, Hamilton, and the Revenge of the Mercantilists

Heinz Kurz recently gave a very stimulating lecture, "The Wealth of Nations (WN) at 250: The Revenge of the Mercantilists" at the Federal University of Rio de Janeiro, and I was the commentator. His central point was that Adam Smith has been badly served by both his admirers and his critics. Smith was not the apostle of selfishness, laissez-faire, and the minimal state imagined by later free-market ideologues. Political economy was, for him, a branch of the science of the statesman, concerned with the institutions and policies required to promote prosperity, liberty, and justice.

Kurz rightly emphasized Smith’s distrust of merchants and manufacturers. Smith understood that business interests do not automatically coincide with the public interest. Merchants frequently seek monopoly, protection, and political privilege. The “mercantile system” was objectionable not simply because it involved state intervention, but because the state had been captured by particular interests. This reminded me of what Bob Heilbroner used to say, the enemy in the WN is not the state, but monopolies.

Kurz also criticized the revival of economic nationalism associated with Donald Trump. Trump’s policies reproduce some of the errors criticized by Smith, especially the obsession with bilateral trade balances and the confusion of particular corporate interests with the national interest. But Trumpism is not really a restoration of historical mercantilism. Mercantilism was part of a broader process of state formation, institutional development, naval power, public finance, and industrial transformation. Trump has tariffs, but no coherent development strategy.

This is where I would place the emphasis somewhat differently. The historical success of the Italian City States, Netherlands, Britain, and later the United States rested not simply on trade protection and some degree of what today is called industrial policy. It depended on the construction of a fiscal and monetary architecture based on the so-called Military-Fiscal State. Taxation, public debt, public banks, central banking, infrastructure, where central elements of the Military-Fiscal, and Fiscal-Naval, state. These institutions made sustained developmental policy possible. Trump revives the rhetoric of mercantilism while neglecting the other elements that successful countries actually used. I discussed why Trump's protectionism would not birng back manufacturing jobs here.

Kurz’s discussion also raises an old notion about Smith’s “Physiocratic prejudice.” Following a line of interpretation originating with Piero Sraffa, Kurz argues that Smith continued to give agriculture and “corn” a privileged position within his analytical system, even though Smith explicitly rejected the Physiocratic doctrine that agriculture alone was productive. On an analytical level, there is no doubt that Professor Kurz is correct and that the foundation of the Smithian growth model is Physiocratic. 

Kurz's argument is subtler than simply saying Smith believed only agriculture was productive. Instead, Kurz reconstructs Smith's analytical system in Sraffian terms and argues that Smith distinguishes "necessaries" (corn) from luxuries. Corn is treated as the only genuine basic commodity, because every production process ultimately requires workers' subsistence. Manufacturing therefore cannot become the independent engine of cumulative growth. Consequently Smith retains what Sraffa calls a "Physiocratic prejudice." Notice that Kurz's criticism concerns the architecture of Smith's growth theory, not Smith's explicit statements about productive labor.

Tony Aspromourgos provides a counterpoint, with a more direct textual reading of Smith. Textually, Smith clearly regarded manufacturing, transportation, and commerce as contributors to the social surplus. Aspromourgos stresses that Smith rejected the Physiocratic view outright: "The capital error of this system ... seems to lie in its representing the class of artificers, manufacturers and merchants, as altogether barren and unproductive." He notes that Smith systematically repudiates the Physiocratic limitation of productive labor to agriculture in Book IV of WN. This reflects the difference between a historical-institutional reading of Smith's aims and the theoretical basis of his model.

Ronald Meek, in a classic paper, suggests another way of looking at the issue. Smith was not primarily constructing a timeless model of production in the manner of Ricardo or Sraffa. His central concern was historical development, in particular the movement from hunting to pastoral, agricultural, and commercial society, and the corresponding transformation of property, law, government, and social classes. Agriculture may therefore be historically central without being the only analytically productive sector.

This has implications for the interpretation of Alexander Hamilton, and Hamiltonian protectionism, often defended as the first in a long line of American protectionists, an American School, as Michael Hudson has called it.* Hamilton’s Report on Manufactures should not be read as a theoretical rejection of Smith. Hamilton relied on distinctly Smithian mechanisms, the division of labor, the extent of markets, the vent for surplus that created demand for agricultural output. His disagreement concerned the policies appropriate to a new, agrarian republic rather than the underlying theory.

Hamilton did not believe that the policy appropriate to an already industrial and financially developed Britain could simply be transferred to the United States. Public credit, a national bank, taxation, and the encouragement of manufacturing were historically specific applications of political economy to American conditions. In that sense, Hamilton was not a mercantilist in Smith’s pejorative meaning. He was a Smithian developmental statesman.

Paradoxically, Jefferson’s agrarian ideal was closer to the Physiocratic privileging of agriculture, while Hamilton’s emphasis on manufacturing, urbanization, finance, and the division of labor was closer to the dynamic elements of Smith’s commercial society. Kurz’s lecture therefore provides an excellent starting point for recovering a Smith who was neither a free-market ideologue nor an opponent of developmental statecraft.

* On the American School or Political Economy Tradition see my substack post here. 

Right-Wing Populism Did Not Kill Neoliberalism

My new piece is out in Jacobin. I argue that neoliberalism is not dead simply because governments now use tariffs, sanctions, subsidies, or industrial policy more openly. The core of neoliberalism was never only about free trade, but the insulation of markets and capital from democratic control. Right-wing populism has changed the rhetoric, but it has largely preserved the underlying neoliberal order. Contemporary right-wing populism should not be mistaken for a clean break with neoliberalism.

Donald Trump's tariffs, sanctions, and attacks on globalization are often presented as a rejection of the old free-market consensus. But the underlying arguments remain deeply neoliberal. The entrepreneur is still the hero (Tech and crypto-bros). Government is legitimate when it protects national business, punishes foreign competitors, or clears obstacles to private accumulation. Tariffs are sold less as a challenge to markets than as a way of restoring a supposedly fair market order against cheating foreigners, bureaucrats, and global elites.

The same point applies more broadly to the new industrial policy, which was never completely abandoned in the United States or Western Europe, one might add. States may subsidize national champions, direct investment, or protect selected sectors. Yet they can still treat profitability, competitiveness, shareholder value, and private returns as the ultimate criteria of success. Protectionism is not, by itself, an alternative to neoliberalism. Nor is a larger state. States have always intervened in markets. The question is whether intervention changes the social hierarchy of power or merely uses public resources to secure a more competitive capitalism.

Read it here.

On the Fiscal-Military State

The fiscal-military state was not simply a state that spent more on war. It was a new institutional form in which taxation, public debt, public banking, naval procurement, bureaucracy, and war-making capacity were joined together. I discuss it in a longer post on substack. I argue that the British case shows how this system became a foundation of capitalist development. Also, ancient Athens shows that public finance and naval power could be constitutive of state formation much earlier, but it lacked the permanent funded debt, central banking, and capitalist financial system that made Britain distinctive.

Jane D’Arista, 1932–2026

 

From the right, at the top and only the back of the head, José Antonio Ocampo, then Robert Blecker, and then Jane. I'm next to her to the left. In 2000, I think

I was saddened to learn of the passing of Jane D’Arista, economist, poet, and one of the most insightful analysts of money, finance, and financial regulation of her generation. Jane died on July 4 at the age of 94.  I had been in contact with her last year about her lovely memoir. Her long career included work as a staff economist for the US House Banking and Commerce Committees, as a principal analyst at the Congressional Budget Office, and later as a teacher and researcher at Boston University, PERI, the University of Utah, and The New School. She authored important work on the evolution of U.S. finance, monetary policy, regulation, and financial crises, including The Evolution of U.S. Finance and All Fall Down.

Her memoir tells the remarkable story of how she became an economic analyst almost by accident. Hired initially to organize the papers of Congressman Wright Patman, she entered the world of banking policy through archives, hearings, investigations, and congressional staff work. From Patman’s populist battles against concentrated financial power, to her work on the Reconstruction Finance Corporation, the Federal Reserve, foreign bank regulation, offshore banking, and the CBO, Jane learned economics from the inside of institutions. That practical knowledge gave her work unusual depth. She understood finance not as an abstract market mechanism, but as a political and institutional structure shaped by law, power, public purpose, and regulation. She famously anticipated the concept of shadow banking in the early 1990s, referring to it as the parallel banking system.

 

Jane between me and Robert Blecker at an event at American University honoring her late husband in 2018

I was fortunate to meet Jane while working for Lance Taylor at The New School. She was incredibly generous with younger economists and a profound source of wisdom. During my time at the University of Utah, she taught briefly, and she later visited the Federal University of Rio de Janeiro, my alma mater, for a conference I co-organized. I am deeply saddened by her passing, but grateful to have had the opportunity to know her.

Jane belonged to a tradition of economists who took institutions seriously, understood the dangers of unregulated finance, and believed that public policy could and should discipline financial power. She will be missed, but her work remains essential reading.

Prices, Quantities, and the Problem of Inflation

A recent exchange on X (Tweeter) pointed to a paper that proposes to separate demand from supply-driven inflation by looking at the relation between prices and quantities. According to the paper, if both rise, inflation is treated as demand-driven (as shown below). If prices rise while quantities fall, it is treated as supply-driven (no figure, but easy to visualize, a shock to Ys, the aggregate supply). The problem is that this does not identify the cause of inflation.

Prices can rise because of higher costs (e.g. energy, imported inputs, etc.) while quantities increase for independent reasons (e.g. increase in government transfers to the unemployed). The economy may be recovering, public spending may be growing, credit may be expanding, or firms may be drawing on unused capacity. In that case, prices and quantities rise together, but it does not follow that demand caused the price increase (old post on why prices and quantities can and should be treated as analytically separate here).

The real issue is capacity. Higher demand becomes inflationary when it encounters binding limits on production. But full capacity is not fixed or directly observable. It depends on the technology, on the availability of labor and inventories, on access to imported inputs, and sector-specific bottlenecks. There are many measures of capacity utilization, non perfect, obviously. Most of my discussion of why the inflationary acceleration of the pandemic was not demand driven is based on looking at different measures of that.

A growing economy can therefore have rising prices and rising output for many different reasons. Cost pressures may push prices up while demand supports expanding production. The sign of price and quantity changes cannot tell us which force caused inflation. The procedure classifies observed co-movements. It does not establish the structural source of inflation. To do that, one must examine costs, mark-ups, distributional conflict, supply disruptions, and the actual conditions of production, not simply whether prices and quantities move in the same direction.