What's the deal with MERCOSUR/SUL?

First there is the issue of whether it should be called MERCOSUL in Portuguese or MERCOSUR in Spanish. More people speak Portuguese, but more member countries speak Spanish. But that is not a real problem. The problem that almost nobody understands is that it is a Free Trade Agreement (FTA). While MERCOSUR/SUL is an alternative to the Free Trade Area of the Americas (FTAA) in the sense that it excludes larger integration with other regions, and the US in particular, it is a Free Trade Agreement (FTA), and was part of the neoliberal logic of integration that came to dominate in both Argentina and Brazil in the 1990s when the main agreements were signed. Per se the treaty is not better than the North American Free Trade Area (NAFTA), and the main advantage is that, given that the initial asymmetries between Argentina and Brazil were smaller than between Mexico and the US, the negative effects were also less significant.

There is little connection with the logic of integration that was defended from the 1950s onwards by the economists at the Economic Commission for Latin America (ECLA) – and the Caribbean, now (ECLAC) – which was based on industrial integration for the creation of economies of scale. In Prebisch's view the aim of integration was to support industrialization. In fact, to some extent the boom in South America – in contrast to Central America and Mexico – in the 2000s has been based on a peripheral integration with Asia, in particular China, that allows for the exports of commodities. In that sense, the Bolivarian project is based on a change in State ownership, wherever it was possible, and an increase in the State’s share of the absolute rents associated with commodity exports, and an increase in transfers programs. Something that has been named natural resource nationalism [on the problems of national resources and development strategies see the paper by Carlos Medeiros here].

The degree of industrial development has been limited in the region during the last decade (meaning import substitution re-industrialization), even if it is far from clear that deindustrialization has really occurred, that is, a Dutch Disease problem (I would argue there is almost no case for it). Also, integration of infrastructure or regional financial development have been limited at best, and most plans (like the Banco del Sur or Sul in Portuguese) remain in its early stages. But the limitations of the process of integration should not lead to the notion that we need more integration at any cost in the region. In fact, one of the great advantages of Brazilian external policy is that is has refrained from getting into FTAs and Bilateral Investment Treaties (BITs), preserving policy space, as noted by Kevin Gallagher.

It is important to emphasize that more trade does NOT depend necessarily on reducing the ability of the State to manage trade flows (what is often referred to as Free Trade; for critiques of the comparative advantage theories of trade see here, here and here). Trade integration should not be made at the expense of national development policies, and further integration, with Asia or even within the region, should take place, but subordinated to the development of national processes of industrialization. MERCOSUR/SUL too should be envisioned, less as a FTA, and more as an instrument of mutual support for those national strategies.

Teaching macro after the crisis

Wendy Carlin and David Soskice have an interesting post at Voxeu.org on "How should macroeconomics be taught to undergraduates in the post-crisis era." They explicitly follow, as in their manual, a New Keynesian framework. Which is an ISMP model with price rigidities, which are incorporated in a slow adjusting Phillips curve with imperfections (they refer to it as the ISPCMR model). Also, they add the financial system. I should make clear that in many respects it is an improvement on some of the newer manuals around, which since the 1990s have given less attention to the possibilities of crises, and have emphasized long term growth (presenting the Solow model in the initial chapters).

From a methodological point of view I would also agree with the notion that "undergraduates need a unified integrated model through which they can understand the major business cycle events of the past century and see how economic theories and policy regimes have evolved in response to these events." Mind you I would go further, it's not just the undergrads, but the profession that needs a unified integrated model to understand the functioning of the macroeconomy. The ad hoc nature of much of the macroeconomic field has been caused by the wrongheaded search for neoclassical microfoundations for macroeconomics. And the authors should be more forceful in denying the relevance of microfoundations.

Having said that, there are significant problems with their way of teaching macro, from my point of view. Carlin and Soskice suggest that "the most glaring absence in macroeconomic models and courses, [is] that of the financial sector." Mind you I would disagree, even if the financial sector is often an afterthought in most macro discussions for undergrads. The most glaring problem is the presence of a natural rate, which implies that in the absence of imperfections markets would produce full utilization of resources. Note that, in their model, Carlin and Soskice have a level of the rate of interest that equilibrates the goods market (IS) with stable inflation, and note that this would be for Woodford "the Wicksellian or natural rate of interest."

They think that they avoid the problem because in their model the equilibrium rate "changes whenever the IS curve shifts," which is of course a confusion, since that would be true of the Wicksellian rate of interest too. With changes in investment and savings (IS) behavior, that is, productivity and thrift the neoclassical natural rate must shift. The role of the central bank is to adjust the rate of interest to its natural level. Note that Carlin and Soskice confuse the fact that monetary and real shocks affect the economy with the notion that the economy described by their model is "an economy which is not self-stabilising."

In their view, the monetary authority can move the economy to the equilibrium rate, but the equilibrium rate is not controlled by the authorities. I would suggest that the central bank actually has control of the key variable, which is not natural at all, and as Keynes suggested is conventional, the normal rate of interest. And that could be set at a level which will not lead to full employment, particularly for distributive reasons. In my view the essential feature of a more relevant macro model would be the elimination of the natural rate, the idea that the system has a tendency to bounce back to the trend, and the notion still in the Carlin and Soskice model that the output gap, the deviation from optimal output, has significant impact on inflation.

Further, in order to introduce the effects of the financial system, while it is welcome that the behavior of banking is introduced, the most important development of the last three decades, the increased financialization, and the shadow banking system, would be better incorporated by introducing the effects of debt and income distribution on the consumption function, which remains based on the permanent income in their model. And by the way, the model says nothing about how income distribution affects spending.Yet, the main reason behind the crisis has been the fact that workers had to get indebted, since income has stagnated. So income distribution has to be brought back to macroeconomics. Not enough Kalecki, with their New (but still neoclassical) version of Keynesianism, that is the problem with Carlin and Soskice.

Scenes from the Class Struggle

Dean Baker recent critique of Krugman is right on the mark (see the K-man reply here; yes he agrees with Dean, so nothing to see here really). What Dean suggests is that this (the 2007-9) recession was not a typical financial crisis and the financial sector is not precluding the recovery. And consumption is not being held by debt deleverage, being at below peak, but still quite high levels. Dean suggests that only government spending and exports would allow the economy to get out of the hole now.

As much as I agree with Dean that we need more government spending (I'm more skeptical about exports and the need for a devalued dollar, but that's a different story), I think that there is something to be said about consumption. Dean is looking at consumption as a share of disposable income, and measured that way consumption seems fine. However, when you look at the data on consumption expansion (at the BEA here) you see a few things. First, consumption is not consistently growing above GDP, in fact it is below in the last two quarters. Also, consumption of durable goods has never recovered since the crisis and still has negative growth rates. Finally, and more importantly, disposable income (in particular wages, that have been stagnant) could grow faster, and allow for faster growth of consumption rates without changing the consumption to disposable income ratio.

So I would argue that better income distribution and more consumption would be good too. Note that I'm not very fond of the 'New Puritan' argument against consumption, that sees consumerism as one of the worst things in modern society. In particular, the levels and patterns of consumption of the masses can and should expand, and not just in the US. Also, the logic of consumption is one of the few areas in which popular common sense ideas do get effective demand right.

Like Marge Simpson in the episode titled "Scenes from the Class Struggle in Springfield" (from 1996) when Lisa discovers a Chanel suit for Marge, but she is reluctant to buy it. But the Puritan in Marge eventually gives in to the Keynesian-consumptionist desires though.

Marge: It wouldn't be right to buy something just for me. If it were a suit we all could wear, maybe... -- Marge tries on a Chanel suit.
Lisa: Come on, Mom, you never treat yourself to anything.
Marge: Oh sure I do. I treated myself to Sanka not three days ago. -- You were out of Montreal Morn, I presume?
Lisa: Just buy [the suit]. You don't have to rationalize everything.
Marge: All right, I will buy it. It'll be good for the economy. -- All Keynesian models considered.

Chanel suits for the masses, that's a rallying cry one can believe in.

Graph of the Day: Frequency of Banking Crises

The graph below, from Alan Taylor's recent paper shows the frequency of banking crises around the world.

As you can see in between the Great Depression in the 1930s and the 1980s, with the beggining of financial deregulation there are NO banking crisis. As Taylor (p. 2) notes: "none [banking crises] at all occurred from World War 2 until the 1970s."That's how effective the regulation of the 1930s and the capital controls of the Bretton Woods era were.

PS: Any similarity with the graph on income inequality, that decreases after the Great Depression and grows after Reagan too, is NOT a coincidence.

The standard commodity and the labor theory of value

In a previous post I promised to deal with Sraffa's standard commodity (chapter IV of his Production of Commodities by Means of Commodities, PCMC). So here is a brief and simple explanation of this somewhat arcane topic. The standard commodity is basically a more developed version of Ricardo's corn model.

Ricardo, remember, wanted to explain the rate of profit, to show that tariffs on corn (not corn, grain imports really) would reduce the rate of profit, and as a result would be detrimental for capital accumulation (which was based on profits for him). To determine the rate of profit he needed to obtain the prices at which commodities were bought and sold. Yet, to get the prices he needed the uniform rate of profit earned on the production of those commodities.

His solution in the Corn Essay of 1815 was brilliantly simple. Assume that the economy produces corn by means of corn seeds and labor. So the total output consisted of corn, the wages paid to workers were also in corn, and of course the means of production advanced to produce corn were corn seeds. So the profit rate could be measured as the surplus left over after wages were paid over the amount of corn advanced for production. A physical ratio that was independent of prices [Note that tariffs would increase the rents of landowners and reduce the profits left over for accumulation].

Malthus, Ricardo’s nagging friend, suggested that this would not be true in a world in which there are more goods than corn. This is, in fact, correct. Once you have that the means of production and the surplus are not a single commodity you need a numeraire to sort out the problem, which brings about the problem of determining profits (distribution) independently from relative prices (value).

Ricardo’s solution in his Principles was the Labor Theory of Value, meaning to assume that relative prices were proportional to the amounts of labor directly and indirectly used in production. Lets say we have two commodities i and j, produced with a homogenous type of labor that is paid w and a normal rate of profit is obtained.

We have:

p_i = wl_i(1+r)
p_j = wl_j(1+r)

where l is the amount of labor used in production. Hence, the relative prices are proportional to labor ratios, since:

p_i/p_j = [wl_i(1+r)]/[wl_j(1+r)] = l_i/l_j

But Ricardo knew that his solution had a fatal flaw (and so did Marx, by the way). The problem is that once you introduce produced means of production it is not possible anymore to assume that relative prices would be exactly proportional to the amounts of labor directly and indirectly used in production. If for simplicity we assume that it takes time to produce the means of production, then we can re-write the price equations as:

p_i = wl_i(1+r)^ti
p_j = wl_j(1+r)^tj

where the superscript ti and tj stand for the time it takes to produce the means of production in sector i and j. Clearly relative prices would be proportional to labor incorporated if r=0 or ti=tj [that is, in Marx’s terms, no means of production or same organic composition of capital].

In any other situation you would have that prices depend on the proportion of labor to means of production, but also retroactively on the proportions of labor to means of production with which the means of production have been produced, or in the example above the time it took for the means of production to be produced [see paragraph 20 in PCMC, pp. 16-17 in the linked edition].

In general, you would have that some commodities would have a higher proportion of labor to means of production and some would have a lower proportion of the same ratio. Or, in terms of the example, some commodities would be above and some below the average time that would make prices proportional to labor. So in general there are surplus and deficit industries, with higher and lower proportions of labor to means of production in their production [see paragraph 17, pp.14-15].

Sraffa’s standard commodity is based on the possibility of building a composite commodity that would be produced in such a way that it would have the same proportion of labor to means of production than the means of production used in its production, and would be in the exact threshold between surplus and deficit industries [the proof that all prices systems have such a standard commodity is provided in a simple thought experiment in paragraph 37, pp. 30-31].

Note that the proportion of labor to means of production in the production of the surplus product, and in the production of the means of production could be measured in terms of the standard commodity, and, hence, as in Ricardo’s corn model, as a physical ratio independently from relative prices. Like the Ricardian (and Marxist) theory, the standard commodity implies that the rate of profit is determined by the material conditions of production and the need of reproducing the system, including the labor force. The amount of the surplus, or what is kept by workers, is independent of the determination of relative prices.

Not only is distribution determined by conflict, and the remuneration of capital is NOT dependent on the services rendered by ‘capital’ (the means of production) in the productive process, but also exploitation is possible and likely, since it is a common way of extracting surplus from society. Further, the standard commodity is perfectly compatible with a notion of a labor theory of value. Note that the standard commodity may command a certain amount of labor and as a result prices could be determined as ratios of labor commanded in a Smithian way [see paragraph 2, Appendix D, pp. 112].

First issue of ROKE will be published soon

The inaugural issue of the Review of Keynesian Economics will be published by the end of the week and will be available here. Here is the 'Manifesto' (Economics and the economic crisis: the case for change) of the editors (Thomas Palley, Louis-Philippe Rochon and yours truly). The papers in the first issue are by Sebastian Dullien, Alfredo Calcagno, Gennaro Zezza, Robert Pollin, Laurence Seidman, Philip Arestis, Hassan Bougrine, Aldo Barba and Massimo Pivetti.

Where is Waldo?

Several people asked me where the New School History of Economic Thought Website, developed by Gonçalo Fonseca with the help of Leanne Ussher, is now. As it turns it is still around here (h/t Humberto Barreto, from the also essential History of Economics Society). Enjoy!

PS: I should say it's a great resource, not just for teachers/students, and it should be preserved. The New School Economics Department, HES or the European Society for the History of Economic Thought (ESHET) should try to get Gonçalo on board and help him keep it alive.

What's the deal with PPP?

In a previous post I suggested that there might some problems with using Purchasing Power Parity (PPP) measures of income per capita, the traditional measure of well-being used by the World Bank, for example. And although some might think that the main problems are basically empirical, my fundamental preoccupation is theoretical (see this paper, which in fact comes from my thesis).

PPP was developed by Gustav Cassel as an extension of the Quantity Theory of Money (QTM) to international matters. The quantity of money determined domestically the internal price level, and the exchange rate was determined as the ratio of domestic and foreign prices (or vice versa depending on how you define the exchange ratio), or in dynamic versions, the change in the exchange rate was defined as the difference of the inflation rates.

Wicksell was very critical of Cassel's theory, as I note in my paper [there were significant personal differences between the two main authors of the Swedish school, beyond their divergences on economic theory]. He basically suggested that the rate of interest, the natural rate determined by the productivity of capital and the savings decisions of economic agents, was the key variable, not the money supply. Hence, the bank rate, if it was lower than the natural rate, would not only generate his famous cumulative process of inflation, but it would also lead to flows of capital, provided that it was not in line with the bank rate of interest in other countries, and would basically determined the foreign exchange rate [note that Wicksell, and not the Keynes of the Tract, as is often argued, is the first, in 1919, to defend what we would today refer to as the uncovered interest parity condition].

From our perspective what matters here is that, even within the marginalist approach, the notion that the Quantity of Money, and prices, determine the equilibrium exchange rate is ultimately incorrect, once money is endogenous, as Wicksell assumed [note that the modern consensus in macroeconomics, both the New Keynesians and the so-called New Neoclassical Synthesis, assume an exogenous rate of interest, using some sort of rule, typically a variation of Taylor's rule]. Further, if we assume free capital movement, which implies a uniform rate of profit, marginalism would require that capital would flow to places in which it is scarce, and eventually (in the long run) the rate of profit or the natural rate of interest would be equalized.* Hence, the exchange rate that would be establish after the process is complete, would correspond to the uniform natural rate, which governs the bank rate, which as we saw is what Wicksell suggested determines exchange rate. So there must exist a natural exchange rate that corresponds to the natural rate of interest (and the natural rate of unemployment and its correspondent real wage, Friedman would argue).

It is obvious that there are 'imperfections' and the natural rate of interest is not equalized in the real world, so the exchange rate also deviates from the natural rate. But that isn't the main problem with the mainstream view. As we saw, the capital debates undermine the theoretical basis for a natural rate of interest, and hence for a natural exchange rate (or a natural rate of unemployment for that matter). Hence, it is the Keynesian (and Sraffian) institutional rate of interest, as determined by monetary authorities that rules the roost. The conventional rate of interest is then connected to a conventional exchange rate [then institutional factors become relevant, like the existence or not of capital controls, etc.].

Leave aside the theoretical problems of purchasing power parity measures, since they are NOT attractors of the actual exchange rates [the reasons why Argentina had a 1 to 1 exchange rate with the dollar for a decade, or Greece has a 'fixed' parity too are political and institutional], and even if for some purposes you may want to use PPP rates as a measure of material welfare, one may also be interested in actual market exchange rates for other purposes. Indeed, for most of the relevant matters that concern economic well being, particularly in peripheral countries, like the capacity to repay foreign debt and avoid default and import capital goods to promote growth, it is the market exchange rate that is central to convert incomes in different countries into a common numeraire.**

* The fact that capital does NOT flow to developing countries is something that still puzzles very much mainstream economists like Robert Lucas (see here).

** Which means that China is considerably less developed than Argentina and Brazil, even if it is growing fast, it has a regional hegemonic project, and is, by sheer size, one of the most important economies in the world.

Is China Buying the World?

That's the name of the excellent book by Peter Nolan. Part of what he suggests is behind the Chinese success is that the "government has refused to privatize the commanding heights of its economy" (p. 13). In fact, the large role played by the State, in particular State-Owned Enterprises, is clear in the data. According to this report on Chinascope:

"Of the top 500 companies in China, 316 are State-Owned Enterprises (SOEs). They account for 82.82 percent of the total revenue, 90.40% of the total assets, and 81.88% of the total profit of these 500 companies. The top 10 most profitable companies are all SOEs, including three oil companies and five banks."

Mind you, Nolan's point is that in crucial industries, for example aircraft (see also James Fallows' China Airborne), US based firms that control sensitive technology (in aircraft there is a symbiotic relation between military spending and civilian innovation) are deeply interconnected with the catch up process in China (remember this?).

It's not so much that China is buying the world, as much as developed (mostly, but not uniquely, US based) country's firms that are using Chinese markets to expand its worldwide domination. Think of Apple/Foxconn as an exemplary case. Chinese development is a combination of State-led growth with a heavy dose of foreign participation in the development of the more technologically advanced sectors, and an increasing role for the domestic market (and yes they slowed down to some 7.8% growth now, it seems).

That is why it's also important not to be swayed by the view that China is becoming a developed country contesting US hegemony. Even if the performance of China is impressive, China is still a country doing the transition to an urban-manufacturing society, and is an earlier stage of the process of development when compared to the most advanced Latin American economies (see here).*

PS: As I noted in the comments to the post in the link above, in current dollars, Chinese GDP per capita is around 6000, while Argentine and Brazilian GDP per capita are closer to 12,000.

Not so fast, the premature recovery problem

There is a certain brouhaha about the speed of the recovery. John Taylor says financial crises do not lead to slow recoveries (also Michael Bordo here). On the other hand, Krugman (and also Reinhart and Rogoff here) say that slow recoveries from financial crises are the norm. At stake, obviously, whether Romney is right and Obama is at fault for the slow recovery. Don't get me wrong, I would tend to agree that recoveries are relatively slow after a financial crisis, since deleveraging is a slow process.

Yet, that is not the main issue about this debate. The point is that ALL involved agree that the system has a natural (automatic) tendency to move back to the trend. Bordo refers nicely to Friedman's 'plucking' model. He reminds us, how it works:

"Friedman imagined the U.S. economy as a string attached to an upward sloping board, with the board representing the underlying long-run growth rate. A recession, in this view, was a downward pluck on the string; the recovery was when the string snapped back. The greater the pluck, the faster the bounce back to trend."

So the deeper the recession was, the faster would the recovery be. In other words, for the GOP economists (Taylor in this case) Obama is aborting holding back the economy and precluding what should be a premature or fast recovery. However, the point the critics make is that debt deleveraging makes the recovery slow, but it is more or less automatic anyway. Government is necessary to speed up something that markets, if they weren't imperfect, would do.

Krugman ideas are based on a recent paper on what he called the Fisher-Minsky-Koo model. Steve Keen has provided a full critique of a previous version here (h/t Lord Keynes who also provides an invaluable bibliography on debt deflations here). The essential point that generates an imperfection in the case of Krugman's model is that an external shock (a Wile E. Coyote moment in his terms, since agents finally notice the floor is gone) brings down the natural rate of interest, which becomes negative for a while (see my discussion on Krugman and the natural rate here). In that case, monetary stimulus is not capable of getting the economy naturally back on track, since the interest rate cannot fall below zero, and as a result agents cannot increase consumption enough to bring full employment automatically.

Hence, in the New Keynesian model of debt-deflation the change from more conventional neoclassical models is that they allow for a sudden (and exogenous) reduction in the debt limit that agents can borrow to reduce the natural rate. It's a financial shock (not a real one) that makes the rate of interest that would equilibrate investment with full employment savings (the inverse of consumption) negative. Agents suddenly understand that they would need a negative interest rate to satisfy their intertemporal consumption plans. From a post-Keynesian (I prefer classical-Keynesian but who cares), the problems are not related at all with the natural rate (yes the capital debates have shown that this makes no sense, where did I read that before?). So deleveraging has a direct effect on the ability of consumers to spend, and there would be no automatic bounce back if the equilibrium rate was not negative.

You may think it is a minor issue, and from a policy point of view it certainly the differences are minor. However, note that the New Keynesian version of the recovery suggests that markets are fundamentally, in the long run, efficient (again against logic and evidence) which is an essential totemic myth that they need to preserve.* And that has policy implications. Recoveries from financial crises are slow, as Krugman says, but not because the natural rate is negative. It is a political problem that involves class conflict. It is because agents that cannot consume out of wages (which have stagnated) cannot borrow themselves out of the crisis, and the federal government, the only one that can, will not do it for political reasons (to keep workers demands in line). That's why heterodox economists are not just for expansionary fiscal policy (and don't think that if the Fed signals more inflation investment confidence will pick up), but argue for higher wages, stronger unions, and debt relief.

* Let alone the funny thing that both sides in this dispute are basically arguing that the economy gravitates around a trend that is exogenous and attracts the actual economy (in a stronger or weaker way), and the way they actually measure the gravitational center (the natural trend) is by averaging the actual rates.

PS: And no, it's not a joke, they do actually sell that T-shirt!

Explaining the Sveriges Riksbank Prize and the Post-Modern Mainstream

The so-called Nobels (not original Nobels, and the Nobel family is against them; I tend to dislike the criteria for the winners, which leaves out Harrod, Kahn, Kaldor, Kalecki, Prebisch, Robinson and Sraffa, to mention a few, but not the prize per se, after all Myrdal and Leontief did get it) are out (here for a journalistic account), and it went to Lloyd Shapley and Alan Roth. I won't explain anything about the Gale-Shapley algorithm, which is not my area of research, even though I sat back in the early 1990s in course taught by Marilda Sotomayor who co-authored some papers with both Gale and Roth. My concern is what it means a prize for a matching algorithm and its applications and the current state of economics science.

The algorithm is actually less about matching preferences, even though that is the most common description, than you might think. For example, one of the practical uses is related to matching kidney donors and recipients, andrather than subjective preferences the matching involves sorting out problems related to the compatibility of immune systems. It is more of an engineering problem really. Arindrajit Dube is right that this is a Nobel for planning, if you think about it (h/t Mark Thoma for pointing this out). Also, the stability of the matches (the fact that there is no mutually preferable match) is irrelevant in this context, since who would 'divorce' a kidney that is perfectly compatible from an immunologically point of view (what, you didn't like the kidney's political views?), or which kidney for that matter wouldn't be satisfied with its match?*

It is particularly important that this prize has little to do with the core of neoclassical economics. Yes, the algorithm is about exchanges, and individual decisions, and hence about allocation, and surely has little if anything to say about production (let alone the social relations of production). However, note that it is an idiosyncratic rule, not a general proposition based on the principle of substitution, according to which relative scarcities determine relative prices and individual choices.

This has been a general trend in neoclassical economics since their defeat in the capital debates demonstrated that the latter proposition does not hold water. The use of the disaggregated General Equilibrium model (as I argued here with Kirsten Ford and Nate Cline) has not been able to change the problems from a logical point of view, and that's why they still use the aggregative model to give policy advice (i.e. structural reforms in Europe to cope with unemployment, meaning lower wages so firms hire the cheap 'factor of production').

It is also why prizes for game theory based research are popular with the Swedish bankers that make decisions about who is an authority in this profession. Game theory is an instrument that fits well the post-modern version of the mainstream, in which everything is possible (but the 'free' markets are still the mantra). So beyond the question of what practical use this particular algorithm might have, there is a deeper question of the bankruptcy of the mainstream, that pretends to be more general and flexible, when is exactly the opposite. It is internally illogical and incoherent, but increasingly attached to the dogmatism of 'free' markets, which has become just a way to defend the interests of the wealthy and corportaions (any similarity to the Conservative movement, and the current GOP in the US, is NOT a coincidence).**

* I'm not suggesting that the algorithm works perfectly in the real world. In fact, in Brazil the National Association of Graduate Economic Centers (ANPEC, in Portuguese), following Marilda's lead, adopted the system in 1997 to match students with centers to produce a stable matching, that is, there would be no mutually preferable matches. Note that before good students were sometimes left without a graduate center, since they were not chosen by anyone (even though some students that had lower grades did), and a few centers were left with empty vacancies. However, as noted in this dissertation supervised by Marilda (in Portuguese), the algorithm did NOT work, and a stable matching was not achieved, with the same problems taking place as before. The algorithm was abandoned the following year.

** Supply-side economics, New Classical and Real Business Cycles authors (as I claimed in another post) are the equivalent in economics to Intelligent Design in Biology, and the GOP has adopted all of these views as part of their world view.

Free Lunch with Paul Davidson at the University of Chicago

If you are near by, do not miss Paul Davidson's talk in Friedman's backyard. The talk is October 17, from 12:00pm to 1:00pm at the Rosenwald Hall, Room 015, University of Chicago (1101 E. 58th Street).

And yes they will provide a FREE LUNCH, brought to you buy the Association of Sarcastic Economists (no, just INET).

Fiscal consolidation, what does it mean really?

There are a few ways you can look at the term fiscal consolidation. Fiscal consolidation is often (in IMF-speak) equated with lower spending and higher revenues, which are policy instruments not outcomes. A more rational way of looking at consolidation is that it is about lower deficits and debt, which are outcomes. The point is that in general it is expansionary fiscal policy (higher spending and lower taxes) that lead to fiscal consolidation (lower deficits and debt), since expansionary policies increase income and revenue.

Hence, lower spending and higher taxes should be properly called fiscal austerity. And austerity, even if you do not follow functional finance, is contractionary. Mind you, it is not just the IMF that confuses consolidation with austerity.

Larry Summers in his recent op-ed on British economic policy says that:

"Britain must change the pace of fiscal consolidation to stand a chance of avoiding a lost decade. Rather than starving public investment, now is the time to add to confidence by making plans for structural reforms to contain the growth of public consumption spending over time. It is also time to take overdue measures to promote exports and, after years of appropriately low investment, to restart housing investment. But when demand is needed for growth and the private sector is hanging back, the first priority must be for the public sector to stop exacerbating the contraction."

Yes, he wants more spending (or lower taxes, God knows). But not much. Note that this continues to be the position of the IMF, even if the IMF has sort of admited that fiscal multipliers are larger than they previously thought (something that has made Krugman very happy; here too). In the last IMF Fiscal Monitor (October, 2012) you can read:

"With downside risks to the global economy mounting, policymakers must once again tread the narrow path that will permit them to continue strengthening the public finances while avoiding an excessive withdrawal of fiscal support for a still-fragile economic recovery."

I for one think that Europe and the US need a huge fiscal stimulus, and forget about consolidation. Consolidation is the result of economic growth and fiscal expansion is the best way to get it.

PS: And by the way, that's what was said in the Trade and Development Report 2011, which basically was a reply to the IMF's lukewarm pro-austerity views.

Bob Pollin's new blog

Yeah, a new blog! No really, since there are lots of blogs, but few that are this promising. From Bob's first post:

Yes, another blog is now being launched into the world as I type these words. Does the world really need yet another blog? Obviously, there are lots and lots of them already out there—many, many bad ones, but some good ones as well. There are even lots of good ones out there already dealing with economics and economic policy, which is the focus on this blog as well. So why take up more cyperspace with this blog, on top of all the other ones already going strong?

The aim of this blog will be to develop, extend, and debate the themes that I present in my new little book, Back to Full Employment. In my view, creating a full employment economy is absolutely crucial to creating a decent society—that is, a society in which everyone has the right to earn a reasonable living through their own efforts or the efforts of family members and friends. It’s that simple a point. But at the same time, it turns out to be not so simple. There are large numbers of controversial economic issues around 1) how to get to full employment; 2) how to stay there, once there; and 3) whether full employment should be a basic goal of economic policy to begin with.

Read the rest here.

The last Marxist? Or shortchanging Hobsbawm

(1917-2012)

According to The Economist, Eric Hobsbawm, who has just died on October 1st, was the last of the Mohicans, I mean Marxists. Its news to me. In my view, the surplus approach which was brought back by Sraffa and builds on Marx is the ONLY coherent economic theory left standing. Marginalism (i.e. neoclassical economics) is nothing but a profession of faith, after the capital debates.

Among other things, because there is a role for historical and institutional analysis in the surplus approach, related to both the theories of distribution and accumulation, the work of Hobsbawm and other surplus approach historians is essential. The obituary was very thin on his contributions to our understanding about key issues in capitalist development.

The review of his contributions in The Economist's obituary was typical of what was written in the press (see also here; the exception here). A lot about his life, and range (yes I know he liked jazz, who doesn't?!), but his research was not quoted at all. Comments on his books were almost always restricted to the surveys on economic growth since the Revolutions, the so-called Age of Trilogy.

According to The Economist:

"That Marxist tag threatened to tarnish his reputation, when his lucid and scholarly books on what he called the long 19th century, from 1789 to 1914 (“The Age of Revolution”, “The Age of Capital”, “The Age of Empire”), on nationalism and on labour movements deserved, and won, an audience well beyond leftist circles and academe.

Defiant, Mr Hobsbawm championed Marx to the last. For his intellectual force; for his grasp of the world as a whole, at once political, economic, scientific and philosophical; and not least for his conviction, as relevant in 2008 as in 1848, that the capitalist system, with its yawning inequalities and naked greed, would inevitably—irresistibly—necessarily—be destroyed by its own internal tensions, and would be superseded by something better."

Marxism not only is not relevant, but it almost tarnished his reputation. There is no mention of what was, in my view at least, his major book, namely: Industry and Empire. His book is part of the tradition that suggests that the Industrial Revolution (IR) was demand driven, not supply constrained (like David Landes used to believe in the 1960s, in his Prometheus Unbound). Further, he argued that external demand (as Phyllis Deane) was crucial, and he insisted that without colonial markets, particularly in India (i.e. without Empire) there would be no Industrial Revolution. Imperialism and the search for global hegemony are joined at the hip with the development of Capitalism.

Also, there is nothing about his views on the standard of living debate during the Industrial Revolution.  To modern economic historians like Jeff Williamson and Peter Temin (subscription required) the IR had a positive impact on the living standars of the working class. Hobsbawm, like other Marxist historians, e.g. E.P.  Thompson, was on the pessimist side of the debate. For a modern pessimistic view see Charles Feinstein (subscription required too).

Hobsbawm was not just a popularizer of history, he was central for important debates in the Marxist tradition, which should be central for understanding of modern capitalism. Hobsbawm's theoretical underpinnings of his views of capitalist development, by emphasizing demand, are in the tradition of what we refer in this blog as classical-Keynesianism. Marx's views on distribution as conflictive, which are part of the broader surplus approach tradition, are essential for Hobsbawm contributions to economic history, and show why Marx is still relevant and required reading for anybody that wants to understand capitalism (i.e. the world we live in).

PS: Other central Marxists contributions to historical analysis are associated to the transition to capitalism, and Dobb and Sweezy are still required readings. Note that Marxists suggest that the origins of capitalism are associated to institutional changes in the productive structure (which might be pushed by expanding demand), and not as a result of cultural or geographical matters.

Heterodox Central Bankers on Debt Deleveraging

Arturo O'Connell is an advisor to the president of the Central Bank of Argentina. He has not given a talk at the last conference, but here is his recent talk "The Challenge of Deleveraging and Overhangs of Debt" at the Institute of New Economic Thinking (INET).

Heteredox Central Bankers and Systemic Crisis

Anwar Shaikh's talk at the Central Bank of Argentina is now available at Revista Circus (h/t Alejandro Fiorito). Anwar's talk, as suggested before, looks at the current crisis from a long term perspective suggesting that this is the first of the 'depressions' of this century, a phenomenon that is recurrent in capitalist societies.

Heterodox Central Bankers and Microcredit

Jayati Ghosh's presentation at the Central Bank of Argentina was a harsh critique of microcredit, which according to her has "gone from hero to zero" in less than a decade. Jayati relies on Bateman and Chang recent critique of microfinance, which suggests that microfinance is actually a barrier to economic growth and poverty reduction. A lot of the microcredit experience in India resembles a loan shark operation, with very high rates and heavy penalties, and is part of a broader drive to liberalize financial markets. It is important to note the perverse effects that fads in economic development might have on policy making.

China and Latin America

Back in the late 1960s and early 1970s the topic in economic development was the so-called Brazilian Miracle. Rates of growth were a staggering 7.5% on average, and in the last phase of the boom were in the two digit level. Forty years later the Brazilian economy is far from that kind of performance. Only the Chinese can boast such a miracle (at least so far). The graph below shows the relative performance of China with respect to both Argentina and Brazil from the 1950s until 2009.

The chart shows that until 1980 Brazil income per capita grew slightly faster than China, while Argentina did basically at the same rate, and both Latin American countries were considerably wealthier than China. By 2007 China's income per capita had surpassed that of Brazil and was approaching fast that of Argentina. Also, it is clear that in the 2000s the comparative performance of Argentina was better than that of Brazil.

These measures are with Geary-Khamis Purchasing Power Parity (PPP) 1990 dollars, which should be taken with some skepticism. From our perspective the important thing is that the data provides a good picture of the relative growth of China, even if the absolute level (whether the average Chinese is better off than the average Brazilian) might be less than precise. The source is from Fundación Norte y Sur, headed by Orlando Ferreres , but the original data (my guess is that with the exception of Argentina for the last few years) is from Angus Maddison.

I'll have more on the problems of PPP measures in a different post.

South facing unfavourable global conditions

By Ylmaz Akyüz

The high-growth performance of many developing countries in 2003 to 2008 and then their quick recovery from the 2008-9 global financial crisis was largely due to favourable external conditions, including the policies in developed countries. (This was analysed in the previous issue of South Bulletin). However, these conditions do not exist today and in fact the global conditions have turned unfavourable. Hence developing countries are now facing serious vulnerabilities and risks to their economic situation, with each category of countries facing their own specific problems. Developing countries have to consider changing their growth and development strategies, in light of the changing global situation.

Read the rest here.

Employment improves, but not much

The BLS Employment Situation Summary shows that 114,000 jobs were created, not a particularly big number, and unemployment fell to 7.8%. It is sort of good news that the employment-population ratio increased by 0.4 percentage point to 58.7 percent, since it had decreased in the previous two months. Yet, the overall trend in the employment-population ratio for this year has been flat.

Heterodox Central Bankers: Kicking Away the Ladder Too

Let me briefly comment on two additional and interrelated presentations at the Central Bank of Argentina's annual conference. Two of the presentations were important in dispelling the myth that central banks were historically only concerned with inflation, and not particularly relevant for economic growth. Jane Knodell presented a paper on the evolution of the US banking sector from the late 18th century up to the Civil War, including the First and Second Banks of the United States, which were in many ways like the Bank of England a quasi-central bank.

Jane's presentation very clearly shows that the main role of the First Bank of the United States was as a fiscal agent of the federal government, its liabilities used to collect revenue and meet federal payment obligations, including debt service, a similar role to the Second Bank. More importantly, she concludes that the closing of the Second Bank by Andrew Jackson had a positive effect on growth, since the evidence suggests that countries with central banks concerned with the Gold Standard, as they tended to be in the 19th century, grew less than the US.

Valerio Cerretano's presentation was on the little known, at least among economists, industrial intervention by the Bank of England and the Bank of Italy in the inter-war period. Both central banks became directly involved in the 1920s and 30s in the administration of industrial firms, through direct management or through participation in holding companies. In the case of Britain the Bank of England was essential for assisting reconstruction of traditional sectors (heavy industries and cotton) and development of innovative industries (man-made fibres, aluminium), some of which were crucial latter in the war effort.

In other words, central banks have been directly involved in the funding of the Treasury and the industrial sector in developed countries, but it seems that, as Ha-Joon Chang has suggested for the case of international trade, once they got up the ladder using their banks to promote development they kicked it, and argued that they should only promote price stability.

Heterodox Central Bankers

The annual conference of the Central Bank of Argentina was held this week. The theme was the role of the Central Bank in the process of development. Jamie Galbraith, the actual author of the draft of the Full Employment and Balanced Growth Act, also known as the Humphrey-Hawkins Act, which gives the Fed its triple mandate of full employment, growth, and reasonably stable prices, opened the conference after the talk by the president of the bank (the video of Jamie's talk is available here; h/t Revista Circus), Mercedes Marcó del Pont. Jamie warned against falling into the trap of assuming that the crisis has only one cause, and was very pessimistic about the possibilities of a more rapid and vibrant recovery in the developed world. Phil Arestis (presentation here) closed the conference, with more emphasis on regulation issues, and his assessment was equally pessimistic. If the policies of central banks, in particular the ECB, and the austerity measures in the developed world are not reversed soon a long period of stagnation might ensue, as Anwar Shaikh (shown above with Stuart Holland, Jamie, and the president of the central bank) reminded us.