The Means to Prosperity: Fiscal Policy Reconsidered

The book is now out in paperback. The kindle edition is still the cheapest. The original version was out in 2005, and already said that fiscal policy was necessary for a more sustainable recovery (note the Bush one wasn't particularly good). I think it's still worth reading. By the way, as far as I know it contains the last published paper by Robert Eisner.

The US as a Global Risk Generator

By Kevin Gallagher

The U.S. economy continues to have a hard time recovering from the biggest financial crisis since the Great Depression.

So the last thing one would expect the U.S. government to do is to engage in policies that open the floodgates to severe risks in financial markets once again.

And yet, that is precisely what's going on.

For all the attention that is paid to the Federal Reserve's "tapering," what Washington has in its crosshairs is something quite different.

It is putting massive pressure on the Commodity Futures Trading Commission (CFTC) and the Security and Exchange Commission (SEC).

Unless concerned policymakers — and the public at large — act quickly to counter that pressure, the disastrous past — a financial industry running amok — may well be not just be the United States' national, but our common global future.

How is this even possible?

Even though the U.S. Congress passed the Dodd-Frank financial reform law a few years ago as a bulwark against reoccurring financial crises, the legislation actually left most of the key decisions — the actual detailed rule-making to rein in the financial industry — for later.

Read the rest at The Globalist.

The weakening global economy

The graph below shows the evolution of world GDP, and it is clear that the global economy is slowing down (source here), from a growth rate of more than 4% after the crisis to around 2% this year.

In particular, the slowdown is taking place in rich countries, but also in the emerging markets, with the exception of the BRICs. However, note that within the BRICS, Brazil slowed down significantly, from 7.5% in 2010 to around 1% last year, and Russia slowed down somewhat (from 4.6% to 3.5% in the same period) from levels that were not that impressive, while China and India also slowed down, but still maintain high levels of growth (slightly below 8% and around 6%, respectively).

In other words, China and India are growing, but the others not so much. Not a very good scenario. Austerity has been winning globally, and a global Keynesian push is more needed than ever.

More evidence that austerity does NOT work

The US government continues on a quest to show that austerity does not work. The BEA announced that growth in the 1st quarter was revised down to 1.8 percent (see graph below).

From the report is clear why we have a slowdown. Yes consumption grew less than expected, but the culprit is government spending that has been falling by almost any measure. From the BEA news release:

"Real federal government consumption expenditures and gross investment decreased 8.7 percent in the first quarter, compared with a decrease of 14.8 percent in the fourth. National defense decreased 12.0 percent, compared with a decrease of 22.1 percent. Non defense decreased 2.1 percent, in contrast to an increase of 1.7 percent. Real state and local government consumption expenditures and gross investment decreased 2.1 percent, compared with a decrease of 1.5 percent."

So, we are convinced; can we change policies now?! 

Evgeny Preobrazhensky and Raúl Prebisch on development

Andrés Lazzarani and Denis Melnik have a new paper on two pioneers of economic development.

From the abstract:

This article surveys the views on economic development of two protagonists of developmental policy in the former Union of Soviet Socialist Republics (USSR) and Latin America: Russian economist Evgeny Preobrazhensky (1886-1937) and Argentine economist Raúl Prebisch (1901- 1986). Although the two thinkers started from different analytical premises and developed their theories in diverse social and political settings, there is a basic commonality between the two since the examination of the nature and causes of economic backwardness became the mainstay for stepping up their own economic policies to trigger a developmental process. Each in his own way advanced the idea that backwardness is not a necessary first step of economic development, to be overcome only through economic policies that encourage thriftiness and entrepreneurship and avoid excessive state interference in the economy. To the contrary, for them, backwardness is a result of the dependence of a capital-poor economy on the world economic system. Their studies of backwardness highlighted not only economic, but also political and social obstacles that the peripheral countries must face in their strategies to move toward sustainable development.

Read the full paper here or here.

Jamie Galbraith wins the Leontief Prize

Jamie Galbraith, together with Angus Deaton, has won the 14th Leontief Prize. From the Global Development and Environment announcement:

“For too long many economists have viewed rising inequality as an inevitable consequence of economic development,” says GDAE Co-director Neva Goodwin. “But recent economic upheavals call for a new approach to understanding the causes and consequences of inequality. Angus Deaton has demonstrated that inequality is about much more than income differences, focusing on how inequality affects the health and well-being of societies. James Galbraith has shown that inequality isn’t an outcome driven by factors outside of our control, but instead is often a direct result of the policy choices we make.”

More here. Jamie's father was the first recipient back in 2000, together with Amartya Sen. For a full list of recipients go here.

Keen on Krugman and the endangered heterodoxy

Steve Keen replies to Krugman (who was commenting on a post by Noah Smith), again, on whether neoclassical economics has done a good job during the crisis. Krugman's point is that we should evaluate models, and how well they can manage to explain the crisis, and not individuals, or how well they have predicted the crisis. Arguably there is a correlation between the two. Individuals using more sensible models should do better, but obviously good luck, or a certain personal ability that transcends the particular model (and underlying theory being used) might also have a significant impact on predicting outcomes.

Mind you, the broader point that Paul makes is that the mainstream model (an ISLM with a natural rate is what he has in mind, and a few imperfections) has done pretty well. I have dealt with Paul's claims in more than a few posts (see here) and will not deal with that. What I think is relevant that was raised by Steve is that there is no evidence, in spite of the great expectations that several heterodox groups harbored, for an improvement in the profession, and changes in what they teach and use for policy advice.

Steve says:

"Even though the crisis has led the public to be more sceptical (sic) of economics in general, the dominance of neoclassical economics has if anything increased in academic institutions, while the Post Keynesian approach – to which I belong – is even more endangered than it was before the crisis began."

That seems about right. And I'm more skeptical about changes in the IMF and other key institutions than Steve. In part, the survival of austerity, and the respectability that the Reinhart-Rogoff bogus 90% debt result had are proof of that. Krugman's attachment to his conventional model is part of the problem.

PS: This post is a bit old, but, given the importance of the Journal of Economic Literature as a source for  reviews, my comments on Gorton and Metrick and what the mainstream learnt from the crisis is still pretty relevant, and apropos for this post. By the way, the problems with the two bubbles (dot.com and housing) were more evident for heterodox authors, since they did play a role in their theories, and overall heterodox authors were able to foresee the effects better than mainstream authors.

Only the left can save Greece

Is what Jamie Galbraith and Yanis Varoufakis say in the NYTimes op-ed. Note that Yanis tells us that the original title was: "'Why a Syriza victory is not against the interests of the United States or Europe.' [But] The NYT chose another title, not to [his] liking: 'Only the Left can save Greece.'

Next week in Rio

If you are in Rio de Janeiro next Friday don't miss the release of the new book of essays on the Brazilian economy.

Hysteresis and the natural rate

I've been teaching on the price and quantity interactions, and the natural rate or NAIRU (Non Accelerating Inflation Rate of Unemployment), that is the level of activity at which you have price stability. One of the papers assigned is the one by Franklin Serrano (here or here for a Spanish version; another assigned paper is this one by yours truly). By the way, I've dealt with the issue of hysteresis briefly before here, mostly to distinguish it from path dependency, following Setterfield (Serrano also suggests differences between heterodox and more conventional views on hysteresis).

As noted by Serrano, the research by Nelson and Plosser (1982) (here; subscription required) and Real Business Cycle (RBC) authors suggests that GDP follows a random walk, and as a result after a productivity shock (which they measure as changes in TFP, in spite of significant problems with that measure; see here) output does not return to its previous trend. The point is that once the output trend is affected there are persistent effects that change the trend itself, that is hysteresis. Fluctuations are variations of the optimal level itself.

Serrano correctly points out that "this means that the long run trend of output is not only partially determined by whatever drives short run output (presumably aggregate demand) but rather that potential output is actually fully determined by the trend of whatever drives actual output. As it is well known, this result of strong hysteresis in the output (GDP) series has been taken to provide evidence in favor of the 'real business cycles' strand of new classical macroeconomics in which the common element driving trend and cycle are factor supplies and their productivity." The natural rate or NAIRU is supply determined, but is variable (something that, in a different context, Robert Gordon would call the Time Varying NAIRU or TV-NAIRU).

Supply shocks imply that in a boom the potential output moves first, and actual output adjusts as individuals readjust to higher productivity. Hence, the output gap, if defined as the difference between actual and potential output, becomes negative. And if you believe in a Phillips curve and some sort of central bank monetary rule, a negative output gap suggests a deflationary pressure (and yes RBC authors do believe in endogenous money). Yes, that's what the RBC theory implies! In fact, according to Kydland and Prescott (1990): "the price level has displayed a clear countercyclical pattern."*

Serrano points out a simpler (Occam's Razor applies) explanation for the favorable evidence on hysteresis, namely that demand (in fact, the autonomous components of demand) determine potential output (the supermultiplier). Note that this approach does not require, as the RBC or the acceleracionist versions of the Phillips Curve, any definite relationship between prices and quantities. As noted here (and here) before, there is no reason to expect an unambiguous or systematic relation between prices and quantities, unless you think that prices are always driven by excess (or lack of) demand.

As Serrano argues the: "trend and the cycle indeed have a common nature as the empirical literature shows but this common nature reflects that both are explained by demand (not supply) factors" and "with full hysteresis in output levels and partial inertia on inflation, 'demand-pull' inflation is just a temporary phenomenon and therefore does not determine 'core' or persistent inflation." And it is hard not to agree on this with New Keynesians, and their dismissal of supply shocks as the main cause of business cycles. It is harder to agree with their insistence on a natural rate, even if it's variable.

* The obvious historical event they would have in mind is the stagflation of the 1970s. Note, however, that more often than not deflationary periods are contractionary, like the 1930s. Of course the oil shocks and the increase in costs can explain, together with wage resistance and price inertia, the inflationary pressures of the 1970s in a model that is perfectly compatible with demand driven recessions.

Free papers from ROKE

Articles by Arestis, Calcagno, Dullien, Fazzari, Palley, Pivetti, Pollin, Rochon, Zezza and others are available here for free download.

The Latin American left and its discontents

Since the election of Chávez, fifteen years ago, to the more recent re-election of Correa and the election of Maduro earlier this year, the left of center parties have been on the rise in Latin America. The list is long and includes the Kirchners in Argentina, Lula and Dilma in Brazil, Evo in Bolivia, Correa in Ecuador, Funes in El Salvador, the return of Ortega in Nicaragua, Tabaré and Mujica in Uruguay, and Chávez and Maduro in Venezuela. The Concertación (particularly the Socialists, Lagos and Bachelet), and Ollanta in Peru seem to be in a different category altogether. Lugo in Paraguay and Zelaya in Honduras were brought down by coups (yes they are still around), and López Obrador in Mexico was prevented from getting the job by fraud (these never vanish completely).

Overall the period was one of relatively fast growth for the region as a whole, particularly since 2003. And the recovery from the 2008-9 global crisis was relatively fast in most countries. Further, income inequality and poverty tended to decrease, with the expansion of social spending. Yet, even though growth was more or less general, some countries did better than others, and not all can be simply attributed to the external conditions.

As noted by UNCTAD (2012, p. 58): "the income gap has narrowed in Latin America since the early 2000s, in parallel with a significant economic recovery. Between 2002 and 2010, the average regional Gini coefficient declined by 4 percentage points, and by even more in several countries in South America (Argentina, the Bolivarian Republic of Venezuela, Bolivia, Brazil, Paraguay and Peru). Together with significant improvements in external conditions, the general policy reorientation played a central role in achieving growth with better income distribution. On the macroeconomic side, many of the successful countries followed countercyclical fiscal policies, achieving fiscal balances through an increase in public revenues (including commodity rents) rather than by expenditure cuts." Note that the improvement in income inequality in the 2000s is not a global phenomenon (see figure below from UNCTAD, 2012, p. 56).

There are, obviously, problems, and not everything is perfect. The strategy of development is over-dependent on commodity exports in South America, and the export of people (directly through migration, and indirectly through maquilas; both cases of cheap labor) in Central America and Mexico (see more here or here for the full paper). And that implies that Import Substitution has not gone too far in this last decade. A risk of integrating once again as an exporter of commodities and cheap labor into world markets, this time around with the Asian periphery (i.e. China) rather than Europe and the US, is dangerous. Risks are associated to the instability of terms of trade, remittances and demand for consumption goods in developed countries.

But note that the opposition to the left of center governments has not changed its discourse from the Washington Consensus period. The alternative offered is basically the extension of bilateral Free Trade Agreements (FTAs) and Bilateral Investment Agreements (BITs), like the one recently signed by Colombia, that ossify a peripheral integration into world markets, in the case of Colombia as an exporter of commodities, increasingly oil to the US (see here), which favors mostly transnational corporations and the powerful few in the region (for the Colombian FTA go here).  And ultimately, it is important not to forget that the US geopolitical project for the region is fundamentally one that expands 'free trade' in region (see here). Note that on the Pacific coast, with the exception of Ecuador, the US does indeed already have a FTA.*

MERCOSUR (or MERCOSUL in Portuguese) is the only alternative in town. And yes, it was originally thought as a regular FTA in the 1990s, but the current problems between Argentina and Brazil are a good starting point for a return to the old ECLAC idea that integration was necessary for productive reasons. That is, to increase the size of markets and the returns to scale associated to larger production levels. Development banks like the Bank of the South and the Brazilian BNDES could play a role in that, including pushing infrastructure integration, which is desperately needed. And for now MERCOSUR is there to preclude the expansion of more FTAs, which is in of itself a good thing.

Protesters in the region, the Brazilian ones being the more recent, are welcome and show a thriving civil society willing to demand more and better public spending on services (from transportation to education), less environmental degradation, and accountability from their representatives, and more. But note that while most protests are punctual and associated to specific problems within their respective communities, there are also in Latin America several groups that resemble the Tea Party in the US, in Latin America associated to middle class groups for the most part. They want the reversal of the policies of the last decade that have been good for the majority (including for them too). And like the Tea Party in the case of the US, if governments actually followed their demands they would actually hurt the poor. The cries against the 'populism' of the left of center governments is a thinly disguised demand for the return of the failed neoliberal policies of the 1990s.

* Ecuador, the exception, is interestingly enough dollarized, as are El Salvador and Panama, the only cases of dollarization with FTA. Mind you, while the US does not officially push for dollarization, informally the use of the dollar is always encouraged, and loans from multilaterals guarantee that a sizable amount of debt is in dollars. In a sense, dollarization cum FTA is the US project for integration with Latin America, which makes the European project, hijacked by neoliberals with the euro and Free Trade look good in comparison. Of course, go ask the Greeks, Irish, Italians, Spaniards, and Portuguese what are their views on the euro and the European neoliberal project of integration these days.

China's overvalued currency?

The Economist finally gets what we said long ago using their data. And the appreciation is bigger than what they think.

The Unfinished March

Dr. Martin Luther King Jr. gave his famous “I Have a Dream” speech at the 1963 March on Washington for Jobs and Freedom and many Americans know the speech quite well enough to paraphrase its concluding passages. What many fail to recall, however, is King's calling not just for legal rights, but for social & economic rights with respect to jobs and a living wage. The Economic Policy Institute has published a research brief that critically revisits this forgotten history - see here.

Duménil and Lévy and the Apotheosis of Capital

Graph below from Duménil and Lévy's (D&L) The Crisis of Neoliberalism (p. 61) [my previous post on their book here].

Note that contrary to the Fed's base rate, which is negative in real terms, the rates paid by corporations are relatively high. Note that firms my borrow to finance, not production, but to buy back stock and pay dividends, and enrich stockholders, including management. That's what happened according to D&L (see below, p. 62).

In other words, on average higher rates of interest (even if lower in periods of financial crises) sustain redistribution towards fat cats. The opposite of Keynes' euthanasia of the rentier indeed.

The paradox of Brazil

By Eduardo Crespo

Brazil has all the conditions to become a regional power able to push the entire region on the path of progress.

Beyond having a large domestic market, there is no reasonable expectation of an external constraint in the near future. Brazil has 380 billion dollars in reserves, its foreign debt is negligible, the impact of the international crisis was irrelevant and it can even borrow in its own currency in international markets. It has large and efficient state organizations such as Petrobras, Embrapa and BNDES. It was particularly favored by the commodity boom and exports increased with the agricultural boom. For the first time in history a tropical country became a major food exporter. And if that weren't enough, large oil reserves were discovered.

And yet, despite all these promising signs, the economic performance of Brazil has been disappointing. In 2011 and 2012 growth rates were 2.4% and 0.8% respectively. The early 2013 data also suggest a poor performance. The Brazilian economy grows less than the world average and has among the lowest rates in South America. What's wrong with Brazil? The explanation is not in the economy. It is in politics. Leaders and business elites have a marked distrust of the social effects of growth. The rise in real wages and the gradual advancement of the popular sectors creates cracks in the traditional mechanisms for social control. The reaction, almost instinctive, imposed by Dilma Rousseff, was to apply the self inflicted stagnation therapy, based on fiscal adjustment, wage stagnation* freezes and pro-business measures such as tax cuts and exchange rate devaluation."

Read the rest (in Spanish) here (h/t Marcia Pressentin for link and translation).

* Note of the editor: Average wages have not grown much, while the minimum wage has increased significantly in the last decade.

PS: One clarification. Objectively the protests in Brazil started with a demand for reduction in the cost of public transportation, which could be seen as a demand for more public spending in transport infrastructure. But that has sort of morphed into something else. The suggestion, not from Eduardo, but from this blogger is that the paradoxical lack of growth in Brazil might have something to do with what is going on.

Wage Participation and Unemployment in Developed Countries

It is well known that real wages in the developed world have stagnated in the last 4 decades. The figure below shows that wage participation in GDP has fallen too (source here).

This has been associated to higher levels of unemployment. A reduction of around 3% in compensation has been associated to an increase of about 5% in unemployment. The connection is the Kaleckian (Marxist) notion (see Kalecki, 1943) that higher unemployment weakens the bargaining power of workers. The advanced economies do look wage-led, in this simple graphical representation.

Lars Syll on the meaning of neoclassical economics

Lars Syll also replied to Noah Smith on the meaning of neoclassical economics here and here.

What is really neoclassical economics?

So Noah Smith thinks that I, Lars Syll and Steve Keen, and other heterodox bloggers (in which he adds Austrians; you see why they should teach History of Thought?* For a discussion of the meaning of heterodox economics, including why Austrians are not so, go here) use the term neoclassical economics as a pejorative term. In fact, in the post he links to, in which I do criticize his views on Graber's work, I do say this on neoclassical economics: "mainstream (neoclassical) notions about debt are really problematic." So nothing derogatory or abusive is suggested. What is said there is that certain views of that particular school of thought are not necessarily free of problems. So no, neoclassical is not a slur.

But before I get back to what I think Noah is trying to get to, we need to address the actual meaning of neoclassical economics. For starters neoclassical is a bit of a misnomer. Veblen invented the term to suggest continuity between the old classical school and the new marginalist school of his time, fundamentally based on Laissez Faire providing an intellectual link between both groups. But the continuity between classical authors and marginalists is not defensible, once one goes beyond certain policy stances and concentrates on the main theoretical propositions of both schools [in this respect the book by Krishna Bharadwaj is still worth reading]. But we are to some extent stuck with the name. So be it.

The core propositions in neoclassical economics are associated to what Garegnani referred to as the data of the system, that is, the variables that are taken as exogenous and allow explaining the functioning of the system, namely: the endowments of factors of production, the preferences of the economic agents, and technology. On the basis of these variables the supply and demand functions of all goods, including the so-called factors of production (capital, labor and land), can be determined, and as a result the relative prices of all goods and the efficient allocation of resources is established. Central to the approach is that supply and demand for labor and capital determine the remuneration of these factors of production, and as a result, and in contrast to classical political economy and Marx, income distribution is endogenously determined [there are insurmountable problems with this theory, as Paul Samuelson accepted, subscription required; for more go here]. And there are differences between the old version of neoclassical models based on the notion of a long term equilibrium (which is what is still taught in undergrad courses) and the intertemporal version, but for our purposes we can just omit the differences.

Note that Noah says that neoclassical economics is: "Assumption of individual rationality, utility maximization, and supply/demand." But this is at best incomplete, and at worst simply incorrect. Yes they assume individual rationality, but that was also true of classical authors like Smith, Ricardo and Marx, who wouldn't assume that capitalists did not rationally pursue profits. And a more relevant discussion would be about types of rationality, substantive or bounded (like in Simon, but I'll leave that for another post). And also, social utility, not personal individual subjective utility, was essential for classical authors, since nothing that didn't have use value (utility) would be produced. Finally, market prices, but not long term natural or production prices, were determined by supply and demand, and disequilibrium played a role in gravitation towards normal prices. So the three characteristics are not enough to distinguish Ricardo and Marx from Marshall or Noah Smith. The essential thing is that supply and demand determine the long term normal prices of everything including factors of production (endogenous distribution).

Noah then points out that papers that deal with the issues in the core are almost not published. He says that publication of papers that deal with the theoretical core fell "from over half of top-journal econ papers in 1963 to less than 28% in 2011." As it should be, in particular with a core that has been revealed to be so full of problems since the capital debates. And yes, most developments like the Acemoglu et al. paper (discusses here in various places by Cesaratto and I, also here) are orthogonal to the core. But these are developments outside the core, but still within the so-called protective belt of the neoclassical paradigm or research program (for protective belts and paradigms go here and here). The problem is that they still presume that the neoclassical theory in the core holds. Note that they suggest that a minimal government that protects private property rights is enough for development, something that goes hand in hand with the neoclassical core. So a lot of the time what seems to be the use of neoclassical economics as an insult is just frustration about the inconsistencies that appear between the empirical research in the protective belt and the incoherence in the core.

Mind you, as students and newly minted PhDs like Noah have never heard or read on the capital debates, and have not been exposed to the authors of the surplus approach and Marx (besides reading less in other disciplines in the social sciences) it is not surprising that the term neoclassical is seen as an insult hurled at them by crazy and older heterodox economists. But it's not. Don't get me wrong, the core of neoclassical economics is not good or bad in itself, but it is logically flawed.

* By the way, it should be required at both the graduate and undergraduate level, since many graduate students come from other disciplines. A discipline that does not understand its own history is bound to move blindly rediscovering old truths, accepting already discarded myths, and forgetting useful ideas. And you might have, also, the paradoxical situation of a neoclassical economist that does not know what neoclassical economics is (like Dave Chappelle's black white supremacist).

PS: Note that Noah is not responsible for the definition of neoclassical economics he uses, which was lifted from Wikipedia. And yes Wikipedia is not the best source.

James Galbraith in Greece

In Thessaloniki on June 11, James Galbraith with Alexis Tsipras and Yanis Varoufakis. The full video of Jamie's speech can be seen here. Audio available here. Enjoy!

More on David Graeber’s Debt

Indebted? No problem we have a (minimum wage) job!

David (Fields) posted a link to Geoff Ingham’s review of Graeber’s book. Graeber is an anthropologist, recently hired by the London School of Economics, and that has often been associated with the Occupy Wall Street movement. Note that several mainstream economists have posted recently on the topic, and have been, as is often the case, barking at the wrong tree. Two mainstream takes on Graeber that are typical are from Noah Smith and Brad DeLong.

Noah wrote a post, a while ago, on David Graeber's views on debt. According to him Graeber is "a sort-of-leftish guy with a tendency to fight with other people on the left." Noah would be, by the same token, a sort of neoclassical-liberalish (in the American sense of progressive) economist fighting other people within neoclassical economics. And here lies the problem, because mainstream (neoclassical) notions about debt are really problematic, and there is quite a bit that could be learned by the profession from anthropologists like Graeber (or sociologists like Ingham; see for example this book).

Noah's complaint seems to be that David is confusing or confused or both. In his words: “his [Graber’s] pronouncements on the subject are vague or seemingly contradictory on all of the questions listed above.” In all fairness, Debt is a very long book, which deals both with one might call a Chartalist view of money, and (in my reading) a vaguely Marxist (certainly non-neoclassical) view of the functioning of the economy, but discussing the evolution of debt and economic development more or less since the beginning of Civilization.

But the basics are not difficult to get. Money does not appear as the efficient mechanism to reduce transaction costs (avoid the double coincidence of wants) in barter economies, but is the result of certain social groups ability in imposing a unit of account. As Keynes put it in his Treatise on Money: “money-of-account, namely that in which debts and price and general purchasing power are expressed is the primary concept of a theory of money.” And what is behind money of account is the power to determine what is the unit to be used, or as Keynes says, the power “to enforce the dictionary but also to write the dictionary.” Further, the classical political economy (and Marxist) approach, is not about market efficiency (not even for Adam Smith by the way, but that’s for another post) of individuals making uncoordinated decisions, but about capital accumulation in particular historical conditions, which involve class relations.

So debt is not bad per se, or good (Noah thinks that David’s point is that debt is bad, or something, as he says). Debt is an instrument that can be used by a social group to extract surplus from other social groups, from the elites in early civilizations that could command work from peasants and determine the means by which they were going to be compensated for their work, to countries that need to pay their debts in a foreign currency (normally dollars, which became the dominant currency after the victory in World War-II). Debt is then a way to force social groups and countries into situations of dependency (Noah himself is probably still paying student loans, with interests that he does not control, since he was told this is the respectable path to a happy life; yes he had a choice, but what are the choices for middle class kids with no money for college? Working for Taco Bell?).

Mind you, not all debt is bad. For example, the increase in debt to pay for unemployment insurance during this crisis is good, and in fact, too small to do any good (yes we need more spending and more debt). But not the kind of private, unsustainable debt that shackles workers to badly paid, unrewarding jobs, or that forces countries into economic arrangements that are contrary to their national interests (it was the debt crisis of the 1980s that forced most Latin American countries to accept the Washington Consensus policies).

Brad's complaint is more complicated to describe, and he is angrier it seems, but it appears to be associated to the fact that he believes David is not open to criticism, while his book contains too many factual mistakes. And yes there are some controversial points in David’s book, unavoidable in a book that is this ambitious and inter-disciplinary on top, including in chapter 12 (not sure why Brad was specially picky with that chapter). I do have also some disagreements on minor issues, but overall the framework of analysis seems to correctly point out the relevant social conflicts that arise from debtor/creditor relations, which have been absent in the mainstream analysis. At any rate, my two cents on the issue.

PS: The idea of Chartal or Cartal money is defended by 'serious' mainstream authors, and central bankers like Charles Goodhart, by the way (here). Not that it makes it more relevant. Authority has (or should have) little relevance when it comes to scientific evidence.

O sacred hunger of pernicious gold! What bands of faith can impious lucre hold?

Sociologist Geoffrey Ingham has written a review of David Graeber's Debt: The First 5,000 Years, which can be viewed here (subscription required). According to Ingham, while Graeber's monumental inquiry is much to be admired, there is quite a bit of room for critical refutation, specifically with respect to the exact nature of money, and its essence as a moral base for economic life.

The other Dutch Disease

Simon Wren-Lewis and Paul Krugman have written complaining about Dutch contractionary policies, noting, as should be obvious to any reasonable observer, that is is a huge mistake. Graph below shows Dutch rates of growth, and it's clear that the economy is in a recession (the estimate for 2012 growth rate is from here).

Funny thing, if you look at the 1960s, the period of the infamous Dutch Disease, when the discovery of natural gas supposedly impacted negatively the Dutch manufacturing sector (and should have had a negative effect on productivity and growth), then you see that the economy was doing way better than in the post-1973 period. Perhaps we should rename the disease associated with financial liberalization, and monetary policy focused only on inflation (and the austerity policies that often go hand in hand) as the real Dutch Disease.

The Real Bills Doctrine and the Persistence of Monetarism

The Real Bills Doctrine (RBD) suggests that the central bank passively provides liquidity to the system.* The name of the doctrine results from the notion that banks only discount real bills, associated with the functioning of the economy, in particular for international trade that was essential in the 18th century when the doctrine was developed. In terms of central banking policy, the RBD fundamentally meant that there was no need to lean against the wind, and money supply should adjust to the needs of trade. It is generally presumed that in the 1930s a more activist position – leaning against the wind – was developed.

In particular, Allan Meltzer in his A History of the Federal Reserve seems to believe that the RBD was the main cause of the Depression and that its abandonment was essential for the recovery from the Great Depression, since, in his view, the increase in money supply was the crucial element in the recovery, rather than the New Deal policies. Meltzer (2003, p. 282 and p. 357) says: "the main reason for the failure of monetary policy in the depression was the reliance on an inappropriate set of beliefs about speculative excesses and real bills," and "passage of the 1932 legislation recognized that the real bills doctrine did not provide the flexibility (elasticity) to expand the note issue or prevent the crisis from deepening." In other words, the RBD led to too much contraction, and the Glass-Steagall Act signaled its abandonment.

This view, both of the causes of and the recovery from the Depression and about central banking practices, has been generally accepted and is canonical among economists and policy makers, Old Monetarists like Meltzer, or New Keynesians like Christina Romer, by the way. Friedman and Schwartz's A Monetary History of the United States is the locus classicus of the monetarist view of the Great Depression. Richard Timberlake suggests (here) that the RBD, not the Gold Standard was behind the Great Contraction. Barry Eichengreen is the main defender of the view that the Gold Standard (see here), not the RBD, was behind high rates of interest and contractionary monetary policy, a view not very different from that of Keynes in the early 1930s.

I point this out, since in this view money is essentially exogenous, contrary to the RBD, but also in contrast to the conventional New Keynesian model, which assumes some version of an interest rate rule (i.e. Taylor's Rule). I've already referred to this strange persistence of Monetarist ideas when it comes to economic history (here). I guess that is why Meltzer thinks that inflation is around the corner. By the way, I suggested somewhere else that is not clear that the Fed actually abandoned the RBD in the 1930s, and that a more Keynesian approach to monetary policy does not (in fact it shouldn't) require the abandonment of an endogenous money view.

* The RBD suggests that money is created according to the needs of trade. Hence, money cannot be issued in excess, and is endogenously created by banks. Adam Smith was an early proponent of the Real Bills Doctrine. The RBD is, in a sense, an early version of endogenous money and of some aspects of MMT.

The Trade Deal Scam

From Dean Baker

As part of its overall economic strategy the Obama administration is rushing full speed ahead with two major trade deals. On the one hand it has the Trans-Pacific Partnership which includes Japan and Australia and several other countries in East Asia and Latin America. On the other side there is an effort to craft a U.S.-EU trade agreement. There are two key facts people should know about these proposed trade deals.

See rest here.

Fiscal Conservative to head the Council of Economic Advisors

Jason Furman will be the new chairman of the CEA (see here). He is a veteran of the White House and a Democratic insider. He is also a fiscal conservative associated with Robert Rubin's Hamilton Project, whose mission calls for "combining public investment, a secure social safety net, and fiscal discipline." Yes discipline as in balanced budgets or 'sound finance', as they say, and lower spending, including reforming entitlements (aka privatizing social security, which is the real meaning of 'secure social safety net'). So don't expect any stimulus coming from the Obama team anytime soon. Obama seems to be stuck with the austerian paradigm.

Time to Retire Greenspan and Trichet’s Pensions

From Dean Baker:

Remarkably, the two individuals who bear the greatest responsibility for the global economic disaster, former Federal Reserve Board chairman Alan Greenspan former president of the European Central Bank Jean-Claude Trichet, do not appear to be suffering at all for their failure. Both are living comfortably and continue to be sought out for their so-called expertise on economic policy. This should infuriate reasonable people everywhere.

See rest here.

Ronald Reagan, the Tea Party, and the Reasons for Recurrent Crises

A follow up on the last post. If FDR and his promise of the Economic Bill of Rights would have implied a completion of the New Deal, it is quite obvious that Reagan was the undoing of it. But that's often not recognized. Bill Maher's new rules last Friday got it right.

Yes Reagan was the original tea bagger, and income inequality, lower growth and more financial instability are the result of his administration. Dean Baker has said that, in a more technical way if you will, in his book The United States Since 1980.

The unfinished project of the New Deal

Saw today (again, but this time with my son) Capitalism a Love Story. At the end there it was Roosevelt's Second Bill of Rights as a reminder of unfinished business. Below the most important part from the State of the Union address.

The whole speech can be read here. In the essential the Bill of (Economic) Rights asked for:

"In our day these economic truths have become accepted as self-evident. We have accepted, so to speak, a second Bill of Rights under which a new basis of security and prosperity can be established for all regardless of station, race, or creed. 

Among these are: 

The right to a useful and remunerative job in the industries or shops or farms or mines of the Nation; 

The right to earn enough to provide adequate food and clothing and recreation; 

The right of every farmer to raise and sell his products at a return which will give him and his family a decent living; 

The right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad; 

The right of every family to a decent home; 

The right to adequate medical care and the opportunity to achieve and enjoy good health; 

The right to adequate protection from the economic fears of old age, sickness, accident, and unemployment; 

The right to a good education. 

All of these rights spell security. And after this war is won we must be prepared to move forward, in the implementation of these rights, to new goals of human happiness and well-being."

And we are still waiting for implementation.

How Fiscal 'Responsibility' Creates Unemployment

By John T. Harvey

"Today’s employment data showed, once again, very little change (BLS News Release). The administration has been announcing for some time that the recovery is well underway, but that’s hard to justify. It’s a bit like saying that a patient is on the right track because their fever has dropped from 105 degrees to 104. While, strictly speaking, it’s true, the situation continues to be so serious that a relapse could easily occur."

See rest here.

A Basic Mistake in Krugman's post

Gustavo Lucas (Guest Blogger)

In a recent post Paul Krugman says the following about the AS-AD model with a Taylor Rule:

"a rising price level doesn’t reduce demand through its effect on the real money supply, it reduces demand through its effect on the mind of Ben Bernanke."

Does it make sense? An increase in the price level, positive inflation, implies a decrease in the real interest rate and hence an increase in the AD through consumption and/or investment:

i – p = r

I´(r) < 0

C´(r) < 0

Y = C₀ – ar

Where r is the real interest rate, i the nominal one (the one used by the Central Bank), I'(r) means that the investment is negatively related to the interest rate, C'(r) is the same for consumption and Co represent the autonomous expenditures and a is the sensitivity of the output to the interest rate (that is, the IS equation).

I am supposing that the inflation is increasing. If inflation does not increase, we do not have any effect on the economy. So, in any case, when Krugman says that the increase in the price level ‘reduces demand through its effect on the mind of Ben Bernanke’ actually means ‘the increase in price level reduces demand through the IS-LM model’ – that does not have monetary policy rule. However, he is explicitly talking about the AD-AS model with monetary policy rule... So, in the end it should be re-stated as ‘the increase in price level reduces demand through the mind of Paul Krugman, since it actually increases demand.’

Johan Gustaf Knut Krugman or Naked Wicksellianism

Dr. Krugman, I presume

Lance Taylor has a new paper on Krugman's liquidity trap model, showing that it is fundamentally Wicksellian, rather than Keynesian. In fact, Krugman has put his Naked Wicksellianism on display recently (see here). You should read the whole paper, but as a teaser, here is what Lance says about Krugman's policy stance (that the Fed should stimulate inflationary expectations to increase investment):

In a Knut-shell (very punny) Wicksell is okay, but Keynes is better.

Fiscal Austerity Is Undermining Long-Term U.S. Economic Prospects

Well, here is the effect of austerity: lower effective demand->lower level of activity->economic stagnation. From Center for American Progress:

"The graphs presented below illustrate the costs of austerity from a different angle: the long-term costs of allowing so many productive people and assets to lay idle. By allowing the continuation of the widespread unemployment of workers and potentially productive assets—also known as capacity utilization (see sidebar)—we are forgoing investments in new technology and in the technical skills and productivity of the U.S. workforce that drives economic growth. In other words, as a result of fiscal contraction and the acceptance of a protracted economic recovery, the potential for the U.S. economy to grow is shrinking. The analysis presented here shows that this shrinking will cost the U.S. economy $433 billion and 2 million jobs by 2019."

See rest here.

Austerity failed in Greece

Yep, that does not sound like news. It is well known and the graph below, from a report by the Center for American Progress, just confirms it.

From the report (p. 19):

"Over the past several years, Greece repeatedly imposed ever-more dramatic austerity measures. They have raised their retirement age, cut public pensions, cut pay and benefits for public-sector workers, closed schools, cut funding for public health and for defense, reduced subsidies to local services, and laid off thousands of government workers.50 The end result is that in 2012, real government spending per person in Greece had fallen by more than 22 percent since 2009. And yet government spending measured as a share of gross domestic product was actually higher in 2012 than it was in 2009.

How could that be? How does a country cut real spending per capita by about 22 percent in four years and still end up with higher spending as a share of the total economy? It can happen if all those spending cuts send the economy into a tailspin. And that is precisely the trap that Greece finds itself in today. From 2009 to 2012 Greek GDP declined by more than 17 percent, in real terms."

Yes they finally get that is better to move the denominator up, rather than reduce the numerator. More importantly, it's interesting that the CAP is now asking to reverse the sequestration cuts in the US and move back to a more expansionist fiscal stance. It's good to see Dems, and their think tanks becoming more Keynesian.

Austerity: The History of a Dangerous Idea

Professor Mark Blyth's new book: 'Austerity: The History of a Dangerous Idea'

"Conservatives in both Europe and the United States have succeeded in casting government spending as reckless wastefulness that has made the economy worse, and have advanced a policy of draconian budget cuts--austerity--to solve the financial crisis. We are told that we have all lived beyond our means and now need to tighten our belts, but this view conveniently "forgets" where all that debt came from. Not from an orgy of government spending, but as the direct result of bailing out, recapitalizing, and adding liquidity to the broken banking system. Private debt has thus been rechristened government debt, and those responsible for generating it have got off scot-free, placing the blame on the state and the burden on the taxpayer."

Read rest here.

Social Security and Medicare Reports Little Changed From 2012

From Dean Baker:

"The 2013 Social Security and Medicare Trustees’ reports were little changed from 2012. The Social Security Trustees report showed a slightly larger shortfall over its 75-year planning horizon, with the projected shortfall rising from 2.67 percent of payroll in the 2012 report to 2.73 percent of payroll in the newest report. The reason for this small increase was the change in the 75 years covered with 2087 replacing 2012 in the projection period" (rest - see here).

Garegnani on Sraffa, Ricardo and Marx

I was going to write something about the Ricardian roots of Marx, but in all fairness a lot of ink has already been spilled on the subject. Here is the reply to the question about the relation between Sraffa and Marx, given by Garegnani in 1978 (here for the whole interview; subscription required):

"The conception which some people have of this relationship [Sraffa and Marx] seems to me quite misleading. And in order to reach a correct understanding of it, we first have to grasp the true relationship between Marx and Ricardo. I have argued elsewhere that this latter relationship should be seen in terms of a strict continuity at the level of economic analysis. Of course, unlike Ricardo and the classical economists, Marx sought to show that the capitalist mode of production is no more permanent than the modes which came before it. But this does not contradict my previous point, since it is perfectly normal that a given theoretical approach should reveal to one author a series of consequences that were not brought to light by his predecessors. That was precisely the relationship, for Marx, between his ‘critique of political economy’ (that is, his demonstration of the transitory character of capitalism) and the work of Ricardo. In fact, Marx deduces the transitory character of capitalism from a kernel of analyses whose object is what he often called ‘the inner nexus of bourgeois economic relations’—essentially, the antagonistic relationship between wages and profits. Now, as Marx himself repeatedly stated, this ‘inner nexus’ was discovered by the classical economists, and analysed especially in Ricardo’s theory of surplus-value and profits. It was precisely this theory which he took up and developed in his ‘critique’. Once this continuity between the classical economists and Marx has been understood, it is easy to grasp the true relationship between Sraffa and Marx. For a revival of the classical approach is possible only if it starts from the highest point of development attained in the past—that is to say, the point at which we find it in Marx’s work."

This is why in the forthcoming documentary on Capitalism, written and directed by documentary filmmaker Ilan Ziv and organized around key historical debates and thinkers, I argued that Marx should be, contra-Samuleson, be seen as a major Ricardian.

On Sraffa and the labor theory of value this is what Garegnani had to say:

"This brings us back to the second of the three aspects of Sraffa’s work: namely, his proposed solution to the problem of value based on more general hypotheses than those which assert that commodities exchange in accordance with the labour embodied in them. Solving this problem and abandoning the labour theory of value are, in reality, two sides of the same coin: any living theoretical approach has to develop, undergoing modification and modifying its own propositions. Now, it is indeed sometimes said that Sraffa has thrown Marx’s economic theory into crisis. But in order to understand this point of view, we must recall the significance attached to the labour theory of value by that Marxist tradition which arose at the end of the nineteenth century, following the marginalist attack on Marx. I have argued elsewhere that the positions developed at that time were of an essentially defensive character; and that they reflected a temporary state of theoretical weakness which is now, largely thanks to Sraffa, in the process of being overcome.

This being said, however, it is important to remember that Sraffa created only the premises for a revival of the classical and Marxist theoretical approach. He did this by clarifying anew the basic elements of that approach, and by providing a solution to the problems of value-theory that had remained unanswered. It would thus be a mistake to seek in Production of Commodities what is not actually there: to seek, that is, a theory of capital accumulation and crises, or even a theory of the way in which relations between the two social classes determine the division of the product between wages and profits. I would maintain that, so far as all these problems are concerned, Sraffa refers us to the place where they receive the most advanced treatment in the framework of this theoretical approach—essentially to Marx’s Capital, and to all the work which has to be done in order to develop Marx’s ideas in conformity with the present state of reality and economic knowledge."

Note that Sraffa suggested that his solution, based on the standard commodity, could be interpreted as akin to Smith's labor commanded theory of value, and as such could (and I would say should) be seen as a logically coherent version of the labor theory of value (discussed in this previous post).

PS: As I was writing this I saw that Robert Vienneau has just posted on the same topic here.