Argentina on the verge: some very brief reflections

Brief visit to Argentina to visit my dad. Some brief reflections here. At any rate, it was perfectly timed with the news of the collapse of exports associated to the draught, which will lead to a decline in export revenues of the order of somewhere between 15 to 20 billion dollars. A problem, since Argentina already doesn’t have reserves and dollars are tightly controlled. This came with the news that the IMF had eased the international reserve targets, which were somewhat hard to reach even before the export news.

The drama was heightened by the banking crisis, and the additional rise of interest rates in the US, which makes a recession in the US, with global consequences, more likely. That was followed by the defense, by some well-known economists, of the notion that the country will not reach the fiscal targets either, and that a break with the IMF is in order. Note that the two things are not disconnected. The fall in exports, implies directly a fall in fiscal revenues from export taxes, and indirectly it reduces the ability to import that leads to a slowdown of the economy.

It should be clear that, although the short run situation is truly unsolvable, and that the issue is external, the lack of dollars, and not a fiscal problem, the situation does not require despair. Even inflation is associated to the depreciation of the currency, and the need for wage readjustments, leading to wage-exchange-rate spirals (yeah it is distributive conflict, even if now some heterodox economists think that is blaming workers). The reason for that is that the IMF knows as well as everybody that the fiscal revenues are going to collapse and that the targets will not be reached. My mom used to say, nobody can do the impossible.

So, the fiscal target will be eased for sure. Also, it is my understanding that there are no significant payments to be done this year to private creditors. And the only money that the IMF would give the country would be to pay the IMF anyway. The question is what happens after the elections this year, and with a new government, that will face significant external obligations in dollars.

A default cannot be discarded. But export revenues are bound to go up, not just because a fourth year of draught in a row would be incredible bad luck. Also, part of the gas pipeline that will allow the more intensive exploitation of natural gas in Vaca Muerta might be finished, and the export of lithium might get a boost. In other words, who ever gets elected might face a much brighter scenario next year. Hope springs eternal.

The Problem with the Problem with Jon Stewart (and Larry Summers)

Everybody in the heterodox community, in the United States at least, seems very happy with Jon Stewart's performance interviewing Larry Summers. And of course, Stewart is very good at this kind of stuff. But in all fairness, in this he is canalizing some of the ideological views of the left, which on inflation are fundamentally incorrect. 

Stewart presents at the beginning the adding up theory of inflation, thirty percent demand, twenty five percent wages and the rest corporate greed. His argument is that not all of inflation was caused by demand (I would say none of it was). He is correct on the fact that the stimulus during the pandemic was good and not exaggerated, and that monetary policy (the interest rate hikes are wrong). But he accepts the notion that the labor market is tight, which I think is less clear. I’m definitely in the minority on that. That’s perhaps something for a loner post. Below just the employment-population ratio, which suggests things are less rosy in the labor market.

Worse, Stewart’s explanation of inflation as price gauging by Exxon and Apple is simply incorrect, and here he is getting some progressive arguments that have logical problems. Higher oil prices were not caused by Exxon, that certainly benefited from them, and had higher margins. Note that firms certainly will pass any increase in their costs, including wages, to their prices. And, hence, margins might be readjusted and that plays a role in the increase in prices, that is the level. But firms cannot continuously increase prices, without passing the limit that would trigger the entry of competitors. Barriers to entry work so much.

Note that the problem with this kind of confused thinking is made clear by Stewart. For many progressives the idea that inflation is conflictive, and that there are wage-price spirals, is interpreted as suggesting that inflation is caused by workers. They are the bad guys. Hence, the need for an alternative bad guy, evil corporations (and corporate power is certainly excessive and should be curbed).* This is not the best way to think about the economy. Of course, there is nothing wrong with workers demanding higher wages, and it is only to be expected that corporations would resist, and without great government intervention and protections of workers’ rights, might often win. Conflict over wages is inherently also about the share of profits too.

If anything, it is the mainstream that has more difficulty in introducing conflictive inflation into their models, since distribution is ultimately endogenous and determined by relative productivity. At any rate, there is little reason to be concerned with conflict inflation. Workers are relatively weak, and that has not changed. On all of this see my paper forthcoming in ROKE here.

* Arguably Summers is blaming the bad government for excessive spending during the pandemic, and is just another case of good vs bad guys. That Summers knows a thing or two about the role of bargaining power and the macro-economy, and is less naïve that some heterodox economists have suggested, is given in this paper on the declining power of workers as an explanation of the problems of the US economy.

Tom Palley on the Causes and Consequences of the War in Ukraine

 By Thomas Palley

(1) The origins of the Ukraine conflict lie in the ambitions of US Neocons. Those ambitions threatened Russian national security by fuelling eastward expansion of NATO and anti-Russian regime change in the Republics of the former Soviet Union.

(2) The Ukraine conflict is now a proxy war. The US is using Ukraine to attack and weaken Russia.

(3) Russia will eventually prevail. We may already be approaching “game over” because Ukraine’s forces have been eviscerated. Ukraine is now press-ganging military conscripts in Kiev and Lviv.

(4) Once Russia imposes its will, the US will be forced to step back but it will have achieved its strategic goal of weakening Russia and separating Western Europe (especially Germany) from Russia.

(5) Ukraine will be effectively destroyed. It will be half-occupied by Russia; hundreds of thousands of Ukrainians will have died; millions will have fled; and the Ukrainian Nazis will be in charge of what is left.

(6) We have all been played by the Biden administration and the US Neocons.

The biggest losers are the ordinary people of Ukraine. They were cheated by the US Neocons of the possibility of a peaceful accord with Russia.

But we have all lost, especially Western Europe. Higher inflation and energy prices today; lost future economic opportunities; a worsened outlook for climate change; a dangerously deteriorated global security outlook that includes risk of nuclear war; and renewed militarism that will disfigure our societies for decades to come.

(7) Western Europe’s political elites are deeply culpable for their venal capitulation to US Neocon pressures.

(8) The US is guilty of provoking the war. But it will never be charged because this is a proxy war and it tacitly controls the International Court in The Hague.

Published originally here.

Neoliberalism, Keynesian Economics, and Responding to today's Inflation

 

 

Q&A Session

The lecture here. Note that it missed a few minutes at the beginning and the slides are not showing, with Professor Stiglitz at the upper right corner. It is still pretty engaging and wroth reading. There is a link to the slides that are not showing up. The actual lecture will be published in the first issue of ROKE in 2024.

 

I'll post link to the published version when it's done.

 

The American Political Economy Tradition

If Cohen and De Long (2016) are to be believed, there is an American Political Economy tradition, that harks back to Alexander Hamilton, that goes against the free market canon of the profession. In their view, the American Political Economy tradition consist of an interventionist approach to economic policy, that arguably should be seen as neomercantilist [1]. Classical political economy, as represented by their main figures in the United Kingdom, Adam Smith and David Ricardo, upheld the laissez-faire and free market tradition, and in this view the same would be true for the marginalist or neoclassical tradition. In that respect, some might see a continuity between both schools of thought and the American Political Economy tradition would be a somewhat heterodox tradition from its inception, at least on policy issues.

Read rest here.

On central bank independence, and Brazilian monetary policy

The issue is back in the news. This time in Brazil (it was briefly an issue here when Trump did not reappoint Yellen, and then complained about Powell's interest rate where too high). At any rate, I always thought that there were good reasons for skepticism about central bank independence (CBI). As noted by Massimo Pivetti in this old piece on the Maastricht Accord and the, at that time, plan for the euro, the main reason to be doubtful is related to the interaction of monetary policy and fiscal policy. And as Quantitative Easing in the post-Global Financial Crisis has shown, central banks have become again fiscal agents of the state (never stopped being that, in all fairness).

The other important reason alluded by Pivetti for doubting CBI is the effects of the interest rate on the exchange rate and balance of payments. This is a quote from Pivetti:

And one could add, through the exchange rate, the effects on inflation also matter. This can be illustrated by the discussion of the Brazilian case. Lula has been very critical of the policies of the Brazilian Central Bank (BCB), and of the higher interest rates, since the campaign last year, and some sort of a truce has been in the works, with him being less direct (or at least that has been reported).

At any rate, the notion is that the higher interest rate is inimical to growth, even though Brazil did grow with relatively high interest rates in his first two mandates. The important thing to note is that Brazil had back then a relatively high and positive interest rate differential, that is a domestic nominal interest rates higher than the sum of external interest rate (the US rate) plus the risk premium (e.g. J.P. Morgan's Emerging Market Bond Index, EMBI), plus the expected nominal devaluation. In fact, as the interest rate differential (here just the difference of the BCB's Selic rate, the Fed Funds plus the EMBI) was coming down, the exchange rate depreciated.

Note that inflation accelerated and has been above the BCB's target only in more recent times, and the exchange rate is only one component of that. The higher prices of energy commodities, and the snags on the supply chain matter in the Brazilian case too. But the higher interest rate, and the higher and positive differential, did allow eventually for the stabilization of the exchange rate.

There is ample space to discuss how high the rate should be, but I'm doubtful that it can be close to zero or very low as suggested recently by André Lara Resende (that since my last post on his views, see here, has move away from Cochrane's fiscal theory of the price level, and closer to MMT; I just read his new book and that seems to be the case; on Cochrane's views on inflation see this video, also with John Taylor and Kevin Warsh).

Below the BCB's Selic rate and the Fed Funds for a longer period, starting after the stabilization of the Real Plan in the 1990s.

 

As one can see (Selic on the left, and Fed Funds on the right), the hike in the Brazilian rate has accompanied the hikes in the US, which are totally unnecessary, in my view, since inflation is cost push and not demand pull, but that's another story. But the fact remains that the ability of central banks in the periphery to conduct monetary policy independently from what happens in the center is still curtailed. Note that the reduction of Brazilian rates, from higher levels (since a positive differential must be maintained to avoid capital flight and depreciation), was possible because the Fed Funds for the most part has been very low.

 

That's probably the more important discussion about the CBI. Not just independence from financial interests, as John Kenneth Galbraith used to suggest, but also the degree of independence in a world with a hegemonic currency.

PS: In the Brazilian case, the really important question for the Lula government will be his ability to increase spending beyond the fiscal ceiling. That, and the ability to eliminate hunger, and reduce poverty rates, would determine the political success of his administration.

Price and Prejudice

Working paper on the Post Keynesian Economics Society website. From the abstract:

The current debate on the causes of inflation is dominated by a particular view of what caused the inflationary acceleration in the 1970s, the so-called Great Inflation. In this view inflation is always and everywhere a demand phenomenon and requires contractionary monetary policy to be kept under control. The alternative view put forward by many heterodox authors emphasize what might be termed the oligopolistic view of inflation. In this paper we trace the limitations of both views for the center and the periphery. 

Download paper here.

Barkley-Rosser Jr. (1948-2023)

 

At the ASSA in San Diego, before the pandemic

It is hard to believe that Barkley has passed away. I met Barkley long ago, when I was still a PhD student in the 1990s, at the Eastern Economic Association Meeting, which still is one of the organizations that congregates both mainstream and heterodox economists with some degree of interaction. Perhaps the only such conference that still exists in the US. Barkley moved in between the mainstream and the heterodoxy. He should be seen, to a great extent, in the way he described the heterodoxy, as trying to break away from orthodox thinking. Although I disagreed about that definition as a description of heterodox economics, I think his definition reflected very well what he was trying to do.

His view of heterodoxy was based on the idea that the mainstream was ossified and didn't capture the complexity of actual economies. In part, he dealt with that by assuming non-linearities, and discontinuities and noting the unrealistic character of rational maximizing assumptions in a complex world. However, I think some of his most interesting work had an institutional character and was based on his joint work with his wife Marina on comparative economic development, in its third edition now.

He was the founding editor of the Review of Behavioral Economics, having been before the editor of Journal of Economic Behavior & Organization, he was interested in Econophysics (he wrote the entry for the New Palgrave). He was also a blogger for one of the oldest and best established econ blogs, EconoSpeak (a short entry after his death). He was, of course, the co-editor of the New Palgrave. A great loss for the profession and all that knew him.

Paul Krugman's Godley-Tobin Lecture

 

Krugman and the editors of ROKE

 

Paul Krugman's lecture, reflecting on the contributions of James Tobin is now published by the Review of Keynesian Economics. The paper can be downloaded here.

 

The 6th Godley-Tobin Lecture will be delivered by Professor Joseph Stiglitz. More information will be made available soon. Registration here.

New book: Varieties of Capitalist Experience

Over the past twenty years there has emerged a compelling new discourse on varieties of capitalism. That discourse has an appealing common sense which challenges the view there is no alternative to free market capitalism. The initial view had a microeconomic focus that made firms the fulcrum of analysis. It distinguished between liberal market and coordinated market economies. Subsequently, there has emerged a second-generation literature which adopts a macroeconomic perspective that emphasizes differences in drivers of growth. This book provides a collection of essays that engage those second-generation concerns and questions. 

More info here.

Luigi Pasinetti (1930-2023)

Pasinetti, Garegnani and the president of Italy in 2010

Last week, in my senior seminar on the history of economic thought, I made the kids read a paper by Pasinetti on "Progress in Economic Science", which was published in a book edited by Boehm, Gehrke, Kurz and Sturn. It's a short defense of pluralism in economics on the basis of the co-existence of Kuhnian paradigms, with a relatively optimistic view of the possibility of progress, in a discipline in which, as he noted, the object of analysis is changing continually, the ideas of the researchers might affect the functioning of the object of study, and value judgments cannot be avoided, in part because they affect everyday material conditions. As he said: "It is enough to think of the devaluation of a currency, or of the movements of wages and salaries, to realize how deeply these phenomena affect everybody’s pocket."

Sadly Pasinetti has died yesterday. He was perhaps the last great name of the Anglo-Italian Cambridge School, that tried to put the works of the classical authors and Marx and the Keynesian Revolution together, and intimately associated with the work of Piero Sraffa. I remember reading a paper on how the school could be divided in a more Marxian strand (with Pierangelo Garegnani as the main author) and a Ricardian one, around Pasinetti. This also had political implications with Pasinetti representing the center right Christian Democrats, and Garegnani on the left, linked to the Communist Party. I once told that to Garegnani, who dismissed the idea of Sraffian schools.*

Pasinetti will be remembered for his work on the Cambridge distribution models, the famous Kaldor-Pasinetti model, the participation in the capital debates, and his work on a classical model of structural growth. Personally, his book on the theory of production (Lectures on the Theory of Production) and his discussion and critique of the Maastricht fiscal limits remain the two of his contributions that influenced me the most.

I should note that this comes after a series of deaths in the profession that have significantly affected the heterodox community, and me personally. Vicky Chick, with whom I was supposed to work for my PhD, and Jim Crotty, two of the more creative thinkers within Post Keynesian economics have passed. Also, on a personal note, Nilüfer Çagatay, my colleague in Utah, and Barkley Rosser, the co-editor of the New Palgrave passed away this month. The heterodox community is in mourning.

* The other would be the Smithian one, with Sylos-Labini as the main leader, and a Socialist bent in politics.

A common currency for the Mercosur

 

 Actual proposal by Haddad and Galípolo at Folha de São Paulo

Lula's visit to Argentina, during the  Community of Latin American and Caribbean States (CELAC) meeting, brought about a brief discussion of the possibility of a common currency. I have discussed here (as well as many guest bloggers) both currency unions, in particular the euro, and it's consequences. Note that the FT piece linked suggested that the common currency was the first step in a long process. I doubt it, in part because, if the end goal is a real currency union, it would be a terrible idea. The actual proposal by the current finance minister, Fernando Haddad, and one of his collaborators, Gabriel Galípolo, falls short of a common currency area. It is still a bad idea.

The idea is to reduce the use of the dollar for bilateral transactions, and Haddad and Galípolo, in their piece for Folha de São Paulo last year, suggested that this would stimulate integration and trade. It is unclear that even that is correct. And there are other experiences with that kind of instrument in the region (e.g. the SUCRE in Ecuador, not the old currency, but the compensation mechanism).

The question about the proposal, which includes the creation of a digital currency and a central bank of the south, is what purpose does it serve. Haddad and Galípolo had suggested that it would further integration. That seems unlikely. Most of the integration has been done with Mercosur, and the most important way to integrate the countries in the region would be productively. The common currency won’t solve the Argentine external problems associated to the lack of dollar reserves either. And it won’t solve the Brazilian issue of how to deal with the political problem of the self-imposed fiscal ceiling limit, which make no sense, and constrains the ability of the government to promote growth and reduce inequality.

It is also unclear that anything beyond some general discussions would take place, and not just because the conditions are very different, and Argentina does not have dollar reserves, and hence the peso would depreciate considerably more with respect to the sur (the tentative currency) than the real would (note that the peso has depreciated way more than the real with respect to the dollar, and that to some extent explains the inflation differentials).

More importantly, Argentina has presidential elections this year, and it has to avoid a default on external obligations, something that is not the case in Brazil, obviously. In my view, the point of this announcement was purely political, and to suggest that the integration between the two countries, one with a threatened economy, the other with a threatened democracy, is a priority. Both left of center presidents stand together. Of course, the right place for this is UNASUR, not the Mercosur, and talks should be explicitly political. There is no circumstance in which a movement in the direction of a common currency makes any sense.

Alternative approaches to the history of economic ideas

Teaching two history of thought classes this semester. One more traditional, focusing on the evolution of the theories of value and distribution, and another one, my regular senior seminar, on the co-evolution of ideas and policy in the United States. For the former I used a short piece by Peter Boettke on the reasons for reading the original sources (and they do read a fair amount in my class). The blackboard (pictured above) is based on his discussion. I changed the titles and the definition of the logic a little bit.

The archeological approach tries to understand the analytical views of authors in their own historical context, while the theoretical reconstruction tries to understand its relevance for modern theory. BTW, the divide between archeological and theoretical reconstruction was basically what students came up by themselves when asked why one would read the original contributions. The second one corresponds to the Whig version of the history of economic thought, and the contrarian or radical view, with the former seeing linear progress in the development of the discipline (a history of mistakes), and the latter presuming that there are important contributions that have "been submerged and forgotten" and that should be recovered for a critique of economic theory.

I would put Donald Winch as a representative of the Archeological/Whig view, and Blaug as the Theoretical/Whig one, even though I put there Stigler and Schumpeter (in part because Boettke talks about Stigler; it is not clear where he would put him, at least to me). My suggestions for the Radicals are Ronald Meek and Piero Sraffa (the former a student of the latter), respectively, for the Archeological and Theoretical.

The 1920-21 recession

 

Calvin Coolidge and Andrew Mellon

A new paper by Ahmad Borazan on the 1920-21 recession, often seen in libertarian and Austrian circles as an example of a laissez-faire recovery. From the abstract:

The US recovery from the 1920–21 recession has been presented as a triumph of laissez-faire policies and a serious challenge to Keynesian economics. This study interrogates this claim by using previously unutilised data and examines the historical development of the early 1920s recession and recovery. The study refutes the laissez-faire view and shows that the recovery indeed fits Keynes’s perspective. The deflationary recession was largely engineered by the Federal Reserve a la 1980s Volker disinflation. The recovery closely followed the reversal of tight monetary policy and was propelled by exceptionally long pent-up private consumption and residential spending. The recovery initiated the Roaring Twenties boom of weakened organised labour, rising income inequality and mounting private debt. This private debt-led boom proved unsustainable and was fraught with risks that contributed to the severity of the Great Depression. Although the recovery was not driven by fiscal policy, it cannot be seen as driven by price flexibility either.

Full paper here.

New book on the crisis of economics and teaching in Latin America

 

The book (in Spanish) titled "Economía en crisis : la enseñanza de la economía en Latinoamérica y los límites de la teoría ortodoxa" [Economy in Crisis: The teaching of economics in Latin America and the limits of orthodox theory] is edited Andrés Jose Maria Lambertini; Ignacio Silva Neira. The introductory chapter on the role of neoliberalism and its resilience in the region is by Esteban Pérez and myself. There's a webinar with Carolina Alves and Gabriel Porcile, besides the editors.

It will be in Spanish with English subtitles. You can register here.

Cycles: empirics and the supermultiplier theory

 

New paper on the empirical evidence of the relevance of the supermultiplier for explaining economic cycles by Ricardo Summa, Gabriel Petrini, and Lucas Teixeira. From the abstract:

The demand-led supermultiplier growth model proposes that business investment is induced by income while autonomous expenditures determine economic growth. The most known versions of the model are presented at high levels of abstraction, focusing on general analytical properties and dynamic stability conditions. Based on those versions, Nikiforos et al. (2021) argue that the supermultiplier model cannot generate business cycles compatible with the empirical observation. In this paper, we show that this conclusion is a consequence of the misspecification of the variable chosen to represent the investment share, which includes business and residential investment. As the separation of those expenditures is a central point in the supermultiplier theory, we estimate a VAR model for the US economy (1967-2020) using only the data on business investment share instead. This procedure re-establishes an important feature to the supermultiplier theory, the mechanism of capital stock adjustment, as the empirical results points to the business investment share generally lagging the cycle. Finally, we make some remarks on how to discuss the business cycle from the supermultiplier perspective. We argue that for the supermultiplier, the business cycle depends less on the mechanism of capital stock adjustment than on the behavior of the autonomous components of demand and changes in the multiplier components. As the latter two are influenced by political, social and institutional factors, each business cycle has its own narrative.

Download here.

Kalecki's alternative to Keynes and White and its consequences

Partial video (my fault) of the conference about the book edited by the late Jerzy Osiatynski and by Jan Toporowski published by Oxford University Press. Our chapter on Prebisch with Esteban Pérez is available in a preliminary version here.

Public vs private debt

I was teaching about deficits and debt this last week. If you know me and follow this blog, you'd know that I always emphasize the importance of the distinction between debt in domestic currency and debt in foreign currency. Functional finance authors (and MMT too) are correct in noting that a country cannot default on debt in its own currency (for a model of a currency crisis and default, in foreign currency go here; as afar as I know the only formalization of a PK alternative to the Krugman model).

At any rate, teaching about the US for mostly US kids, that is not an important distinction, since the US has only debt in its own currency. Most of them thought that the current levels of public debt are too high (with respect to what you may ask, the ability to repay or the kind of society we live in?). I would hope that by them most of them tend to think that we do not have enough public debt. I mean the amount of homeless people, or the windshield washers in the corners of the streets, suggest that we need more public spending. The graph below shows the break between public and private debt in the US.

It is clear that the amount of public debt shrank from about 50 percent of total debt in the early 1950s to something around 10 percent right before the 2008 financial crisis, and most of the growth was in the financial sector. Since then public debt has grown to about 30 percent. Household and corporate debt did increase over time, but not much. The important lesson in the case of an economy like the US (with debt in its own currency) is that public debt is safer than private debt, since the government cannot default and its spending does affect the level of activity and the ability of the private sector to thrive.

Kalecki's Alternative to Keynes and White's Plans its Consequences

 

Webinar on Kalecki and his views on the Bretton Woods agreement. To register go here.

Savings Glut, Secular Stagnation, Demographic Reversal, and Inequality: Beyond Conventional Explanations of Lower Interest Rates

 

New Working Paper published by the Political Economy Research Institute (PERI). From the abstract:

Interest rates have declined over the last 40 years, a period of increasing inequality. The steady decline in interest rates has been interpreted by and large as resulting from a decline of the natural rate of interest. This paper surveys the main explanations associated with the notion of a decline in the natural rate of interest, including the savings glut and the secular stagnation hypothesis. It analyzes the views according to which demographic forces were behind the decline, and might perhaps be associated to a future rise of the same natural rate. It also discusses the view according to which the role of inequality has been also to affect the natural rate of interest. Finally, views that discuss the role of monetary and financial factors, including the so-called global financial cycle literature, are discussed. It is argued that the conventional view suffers from logical and empirical problems that are ultimately insurmountable. A brief critique of the notion of a natural rate of interest, and alternative monetary theory of the decline of interest rates, as determined exogenously by the monetary authority of the hegemonic country, the United States, is proposed.

Read paper here.

Lula's election and what lies ahead

It's been a while since I wrote about the Brazilian crisis (a summary of the previous catastrophic election here). In part that election and the continued crisis explains why I have written less, not just about Brazil. This has been a long economic depression that started in 2015 (see graph), with a coup in 2016 and since 2018 the added problem of a right-wing authoritarian regime that won an election that was only possible with the political proscription of Lula. But at least the political problems have started to be solved with this election.

 

Source: IMF. Peak in 2014 (2022 estimated)

The Lula election last Sunday is a redemption story, no doubt. Not only because there was no prove of his corruption, even if corruption existed,* and even though the international press, including the reputable media continues to refer to him as an ex-convict. Corruption is a problem, but the one that matters is associated to the needs of governance in Congress, and the current Bolsonaro government has dealt with payments to members of congress through the so-called secret budget. And that will not vanish, and that could cause problems in the future. But in all fairness, the size of that and the implications in terms of the functioning of the political system, let alone for economic growth or the well-being of the population are far from clear.

At any rate, that is a secondary issue. The problems that Lula and his coalition will face are on the economic front. And not because Brazil is facing a serious crisis, like neighboring Argentina. This is the worst economic crisis in Brazilian history, but is purely political, and has been aggravated by the decisions taken by the Brazilian authorities, starting in 2015 with Dilma, trying to stave off the coup, and then with Temer and Bolsonaro.

The main problem is the limit on government spending, the ceiling that would limit the ability of the government to promote not just a more solid recovery, but more importantly one that allows for increasing real wages for those at the bottom. Fiscal rules were put in place for this reason, for the possibility of a left of center government, and that is why financial markets were convulsed by Lula's talk this week, and the real devalued. Not that it matters much.

There will be some arrangement that will allow the expansion of spending to cover the social transfers, and some additional social spending that was left out of Bolsonaro's last budget. But fiscal conservatism will be something that will have to be combated throughout the next four years, and not just from the opposition. Many within the government's complex coalition will be for austerity. There will be plenty of time to talk about that, and I would normally be pessimistic.

However, two things make me a bit optimistic (which is not very characteristic). It is important to differentiate what Lula does from what he says, or even what he believes. This is true of many on the left in Latin America. Before the previous Pink Tide, two decades ago, I was more concerned with the pleas for fiscal responsibility of many on the left. As it turns out, many of the progressive governments did expand social spending, and promoted an acceleration of growth, including Lula, and a significant expansion of real wages. Someone will say, this is not 2003, and there is no commodity boom that will lead to growth, or at least the easing of the external constraint.

However that was not what explained the Brazilian growth in the first Lula government. The external constraint was eliminated to some extent by the boom in commodity prices, but the fundamental source of foreign reserves was financial, and resulted from the relatively high remuneration for assets in domestic currency. That was to some extent possible because interest rates in advanced economies have been low in the center, and they will likely remain low (even if they are increasing right now). So on that front it is possible to expect an acceleration of government spending, and higher transfers to the relatively poor, with higher real wages at the bottom. Besides, Bolsonaro is gone, and that should be reason enough to be optimistic about the future.

* There is no evidence of Lula's personal corruption. The infamous Triplex apartment, for example, is clearly not his, and he never benefited in any other proven way. Many Latin American politicians, including Eduardo Cunha, which was instrumental in Dilma Roussef's impeachment, does appear in the Panama Papers. Paulo Maluf had undeclared accounts in Switzerland, just to name another Brazilian politician for whom there is objective, material evidence of corruption. To suggest that Lula knew about corruption, is more or less like saying that FHC knew about the buying of votes in congress to allow for his reelection (or many other issues during his government). In other words, is to say the obvious.

Comments on the history of the Review of Keynesian Economics on its tenth anniversary

By Thomas Palley

This Fall (October/November 2022) marks the tenth anniversary of the founding of the Review of Keynesian Economics (ROKE). The founding co-editors were Louis-Philippe Rochon, Matias Vernengo, and I. At the beginning of 2018 Louis-Philippe Rochon stepped down to become sole editor of the Review of Political Economy and he was replaced by Esteban Pérez Caldentey.

Since then, ROKE has further enhanced its reputation, becoming a leading heterodox economics journal as measured by its Clarivate citation score. It also has premier standing for official research assessment purposes in France, Italy, and Brazil.

Active plans for the journal were set in motion in late 2011 and the first issue was published in Autumn 2012. That first issue includes a founding statement by the three co-editors which lays out the motivation for establishing the journal, its scope, and its purpose. The statement is on ROKE’s website. I think it has aged very well and there is not much in it that I would change today. I encourage people to read it. 

Read rest here.

Palley on the history of the Review of Keynesian Economics

Here a short video. I do offer a few remarks. I would add that Louis-Philippe was central not just in the initial discussions that we had going back two decades now, to when we were at Kalamazoo College, but in getting Elgar into the journal business. Not sure Elgar would have done that without LP convincing them. This happened at the time that the Journal of Post Keynesian Economics (JPKE) was transitioning from Paul Davidson editorship, to the Jan Kregel and Randy Wray period.

I suggested Tom to LP, since he had been our teacher at the New School, and I thought three would be a better setting for adjudicating differences between the editors. Tom wanted a journal more open to other traditions. I would say in my view the reasons are not exactly connected to pluralism, as Tom discusses in the clip, and more to the restoration of a political alliance that was more or less in place during the Golden Age, between neoclassical synthesis Keynesians like Bob Solow (who is a member of the board) and people like Joan Robinson. That's why I suggested the Godley-Tobin lecture that in my view makes that alliance explicit. In that sense, the plan, that was originally in LP's plan a post-Keynesian journal related to monetary issues, to not compete directly with the JPKE, became the non-hyphenated Keynesian journal.

PS: And yes, the story of why the hyphen in the JPKE, as told to me by Paul Davidson, is that it couldn't be the Journal of Keynesian Economics, since the acronym would be JOKE! The term post-Keynesian (or is it Post Keynesian) already existed, but in my view it was the JPKE that sedimented its use, and in a sense that was an accident.

Some thoughts on radical environmentalism and heterodox economics

Ecological economics emerged in the 1970s, as a sub-field of mainstream economics, using some of the conventional tools of neoclassical economics, but trying to move away from it, not only regarding some of the theoretical choices, but also distancing from some of the ethical concerns of the mainstream (Holt and Spash, 2009). Even though there were precursors to ecological economics, in particular the work of Kenneth Boulding, Nicholas Georgescu-Roegen and Karl William Kapp, it is clear that the profound crisis of capitalism in the early 1970s, and the preoccupations with population growth, famine, and exhaustible resources, exacerbated by the oil shocks, were central for the sudden prominence of environmental concerns within the economics profession.  Paul Ehrlich’s book, The Population Bomb, and the celebrated report on The Limits to Growth, published by a Massachusetts Institute of Technology (MIT) team and the Club of Rome marked a significant cultural shift, and the beginning of the international concern with the ecological limitations of human activity.

The 1970s was also a period of significant macroeconomic turbulence, with the collapse of Bretton Woods, stagflation and a crisis that brought about the end so-called Keynesian Consensus. It was in this period of crisis of Keynesian economics that an heterodox alternative to the mainstream was developed. In part for that reason, Ecological Economics is seen as being critical, and part of the broader heterodox tradition. But their are good reasons to be skeptical about this view.

Read rest here.

Peter Temin on "Keynes, Then and Now"

 

This will be part of the 10 year anniversary of ROKE. Register here.

Beyond vulgar heterodox economics: a note on the legacy of Pierangelo Garegnani (1930-2011)

My paper, in Italian, which was a modified version of a talk last year, has been published in Moneta e Credito, and is available for download here.

Thinking about Inflation: A conversation with Marc Lavoie

The conversation on inflation with Marc Lavoie at the Fields Institute in Toronto. I think that there was an agreement, between us, and most people in the room that the oligopolistic view of inflation does not hold water. I tried to discuss the Argentinean case on the basis of a piece that I co-wrote with Fabián Amico and Franklin Serrano, published in the local version of Le Monde Diplomatique online. A longer version, also in Spanish, here. An English version is in the works, btw.

Lance Taylor (1940-2022) and his legacy

With Lance in Beijing (2001)

I took Lance’s macro class in the Fall of 1995 at the New School for Social Research (NSSR), and then was his Teaching Assistant for two years. The book we formally used was Income Distribution, Inflation and Growth: Lectures on Structuralist Macroeconomic Theory, in which the terms (not the concepts) for wage-led and profit-led economies were first used (at least that's what I think; profit-led does not appear in the index, I must note). But classes were based on his notes, on what became his next book Reconstructing Macroeconomics (he thanked me for all the input in my copy; I had to learn how to read his handwriting, which was not easy). In many ways, my thinking was influenced more by the Sraffian professors at the NSSR, both John Eatwell (I was also his TA in the micro class) and Ed Nell (who really was the first to discuss functional finance in my classes), in part because the blend of Cambridge left-of-center Keynesianism and Latin American Structuralism, that Lance exposed, was more familiar to me coming from Brazil.

My plan was to work on inflation theory (and I did write a conflict model, that can be seen as being in Lance’s tradition later on; in my view his best book is the one that is less formal, and is on inflation, his Marshall Lecture at Cambridge, Varieties of Stabilization Experience; at the time I first read it I didn't know that the title was a quote from Henry James; the other candidate is his book with Eatwell Global Finance at Risk. Both are more books than manuals). But I started working with Wynne Godley on his stock-flow model for the joint Center for Economic and Policy Analysis (CEPA) and Levy Economic Institute project. A year into the project I told Lance that it would make sense if I worked on something related to the project, namely the sustainability of the US external account. Lance was very nice about it, and not only went along, but also provided funding, since I received CEPA’s dissertation grant.

I ended up writing something that was very close to Massimo Pivetti’s monetary theory of distribution. The theory at least. Lance provided comments and feedback, and, at some point, told me that I was obsessed with this monetary distribution thing (I was, indeed). But he also provided support, and his criticism was always constructive. Lance was the best supervisor one could have. He guided the work with frequent conversations, read and criticized what I gave him to read, and, after it passed certain standards, approved it, even if it wasn't exactly a Lance Taylor dissertation. He never tried to mold my thinking, or force me to work on own his terms. Sadly, that isn’t the norm in academia. I think he had been lucky with his supervisor too. He once spoke fondly of Hollis Chenery (his supervisor; not his mentor, which I think was Rosenstein-Rodan; I might be wrong), because he protected the radicals, which were under pressure in the late 1960s at Harvard. His intellectual generosity, among several other qualities, is something that will be deeply missed.

Lance was open to alternative methods, and approaches, what he called closures (certainly more than I am), and his comparative method was influenced by other disciplines, the qualitative "thick descriptions" a la Clifford Geertz that he liked. I actually ended up reading a bit of Geertz because of my conversations with Lance, particularly when I was the assistant director at CEPA (he was the director) and he organized a book on several comparative studies of liberalization in peripheral countries (the one on Brazil, which was supposed to appear in a previous volume, and should have been written by Edward Amadeo, was eventually written by me; photo above is from one of the conferences that led to that book). Geertz saw anthropology, as he famously put it, "not [as] an experimental science in search of law but an interpretive one in search of meaning." The thick description was essentially the interpretive work of the ethnographer. Lance took that view, in some sense, of economics, blending the description of the historical and institutional features of peripheral countries, with relatively simple models in what Paul Krugman (a co-author; Paul's first paper was the one on contractionary depreciations with Lance) called the MIT or Solow type models (my only other model in that sense, is the currency crisis one that puts Krugman's one upside down).

 

I tend to think that this methodological stance is Lance most enduring legacy, and the one that had the most influence on my own work. Most discussions of his work emphasize the gap models (which I think are problematic, the savings and fiscal gaps in particular), or the stagnationist model of growth, which builds on Bob Rowthorn's seminal Neo-Kaleckian growth model (and also on Amitava Dutt's model, which I think was part of his dissertation work under Lance). Some might even think that it was the reversal of his views on the role of exchange rates in development, his paper with Roberto Frenkel on stable and depreciated exchange rates as engines of growth (which can be seen in line with Luiz Carlos Bresser-Pereira and Jaime Ros views, and as being at the center of New Developmentalism). Others might think it's his work on Social Accounting Matrices that prefigured, and went hand in hand with his appreciation for Wynne Godley's stock-flow consistent models (on Wynne's methodological stance, see this old post).

In a way, all these models, and others (I could have added the Minsky crisis one, that is often neglected), to some extent show the use of models for Lance. He was somewhat eclectic, and use them to illustrate some of the issues with developing countries. But for him that had to be complemented by the interpretive thick descriptions. In my view, the models per se were less relevant for Lance, who was an unorthodox lefty that remained so, as someone remembered recently, even as the whole world moved to the right in the 1980s, and 1990s (he told me that a director of research at the World Bank, that had become a neoliberal, told him in his last visit to that institution, if he wasn't ashamed for still defending those structuralist views). And he did leave MIT for the NSSR, which was a strong signal of his political views. The simple model allowed him to tell the stories.

I have a tendency to prefer greater consistency in the models, and I'm less keen on accepting some possibilities of neoclassical/monetarists closures for the real world. But his methodology, which in some sense contrasts with the large stock-flow models that my other mentor (Wynne) liked, is certainly something I think it is a more fruitful way of thinking about macroeconomic problems. But again the specific models per se are less relevant, and the thick description that they illustrate with simplicity matter more.

Modern Money Theory in the Tropics: A Reply to Agustin Mario

Our reply to a very inaccurate discussion of our views on MMT by Agustin Mario. From the abstract:

This paper responds to some inaccuracies on the discussion of our views on Modern Money Theory (MMT), as discussed by Agustin Mario. We believe that while is correct in noting that autonomous spending generates taxes, and fiscal balances are a result, MMT authors overlook the difficulties in pursuing expansionary fiscal policy in the developing countries. These are limited by the existence of an external constraint that cannot be solved with a flexible exchange rate policy regime. Foreign reserves and capital controls are needed.

In particular, I want to emphasize that the notion that we said in any place, or that it is implied that Esteban and I believe in supply side constrained growth is preposterous, and is either done in bad faith or complete ignorance. The main issue again is that we do not believe in free capital mobility and flexible exchange rates for developing countries, something that apparently Warren Mosler was defending down in Argentina a few weeks ago, asking for lower rates of interest, floating rates and fiscal expansion in complete disregard of the inflationary and contractionary impact that devaluation would have, and the limits imposed on fiscal expansion.

I also want to emphasize this particular reply to Mario:

Mario (2021, 364) says that “[t]o borrow in foreign currency is not a need but a policy choice.” The naïve conclusion is that debt in foreign currency can be completely avoided. The argument is akin to suggesting that breathing in an environment that is polluted is not necessary, just a decision, even if one lives next to a polluting factory and is too poor to move. Developing countries must import intermediary and capital goods, by their nature of being behind in the technological development ladder and being integrated into the complex division of labor of the modern world economy. That is unavoidable, and not a policy choice. Countries that are excluded, by the imposition of sanctions by the United States show the alternative. Developing countries should, obviously, minimize the amount of foreign debt they incur, and this should be at a level that is sustainable, with exports growing faster than the interest rate on foreign debt (Cline and Vernengo 2016).

And that is why reserves matter. This phrase, that we cite again, is something that no economist from a developing country would have written, for obvious reasons: 

on a floating exchange rate, a government does not need to fear that it will run out of foreign currency reserves (or gold reserves) for the simple reason that it does not con- vert its domestic currency to foreign currency at a fixed exchange rate.

In our view, exchange rates should be managed (and that implies raising interest rates to preclude depreciations sometimes is required), capital controls and accumulation of reserves are a must, and fiscal policy should be pursued to the limit of the external constraint.