Friday, February 28, 2014

Will Milberg on what is economics and why you may want to study it at the New School

Another teaser from the same conference. Heilbronner's and heterodox views of economics contrasted with Robbins' (and neoclassical) views. Full video here.

Michael D. Yates on Teaching Workers

By Michael D. Yates
Karl Marx’s famous dictum sums up my teaching philosophy: “The philosophers of the world have only interpreted the world in various ways; the point is to change it.” As I came to see it, Marx had uncovered the inner workings of our society, showing both how it functioned and why it had to be transcended if human beings were to gain control over their lives and labor. Disseminating these ideas could help speed the process of human liberation. From a college classroom, I thought that I could not only interpret the world, I could indeed change it.

Thinking is one thing; the trick is bringing thoughts to life. How, actually, does a person be a radical teacher? How, for example, can students be shown the superior insights of Marxian economics in classes that have always been taught from the traditional or neoclassical perspective—taught, in fact, as if the neoclassical theory developed by Adam Smith and his progeny is the gospel truth? My college expected me to teach students the “principles” of economics: that people act selfishly and independently of one another, that this self-centeredness generates socially desirable outcomes. And further, that capitalism, in which we, in fact, do act out of self-interest, is therefore the best possible economic system. Had I refused to do this and taught only Marxian economics, I doubt I could have kept my job.
Read rest here.

Anwar Shaikh on History of Thought and Joan Robinson

A little nugget from the first table at the New School conference on the State of the Worldly Philosophy. Whole thing here.

Thursday, February 27, 2014

New Working Paper By Passarella & Sawyer: Financialisation in the circuit

From The Abstract:
The relationships between financial systems and the macro-economy with emphasis on the saving-investment relationships and the nature of money are set out. A circuitist framework is extended to reflect some major features of the era of financialisation circa 1980.
Read the rest here.

* FESSUD is a multidisciplinary, pluralistic project which aims to forge alliances across the social sciences, so as to understand how finance can better serve economic, social and environmental needs. For more on the project, see here.

Wednesday, February 26, 2014

CEPR: North Carolina Proves Cutting Unemployment Insurance Pushes People Out of the Labor Force

By John Quinterno and Dean Baker
Last year North Carolina undertook a radical overhaul of its unemployment insurance system. Among the changes, legislators sharply reduced the amount and length of regular unemployment insurance, cutting the maximum weekly insurance amount by 35 percent and reducing the maximum duration of compensation from 26 weeks to, currently, 17 weeks. By implementing the cuts in weekly benefit amounts in July, North Carolina forfeited  its ability to participate in the federally-funded Emergency Unemployment Compensation program, and consequently, an estimated 70,000 individuals immediately lost long-term unemployment insurance, while another 100,000 individuals who still would have been eligible through the fall saw their insurance lapse  sooner than would have happened.
According to the legislation’s elected supporters, the overhaul was a “difficult decision” needed to fix “a welfare-dependent program” and push unemployed workers to get serious about finding a job--any job.  
We’ve now had some time to test this view and the initial results do not look promising for proponents of the cuts. The statewide unemployment rate has in fact fallen sharply since the cuts were implemented, dropping from 8.8 percent in June to 6.9 percent in December.  
This drop, however, did not come about because people rushed out and found jobs. Employment as measured by the household survey used to determine the unemployment rate rose by 41,364 persons (1 percent) between June and December, far too little to explain the sharp drop in the unemployment rate. According to the household survey, only 13,414 more persons (0.3 percent) were at work in December 2013 compared to a year earlier.
Read rest here

Palley Explaining Stagnation and Why it Matters

Larry Summers (here) and Paul Krugman (here) have recently identified the phenomenon of stagnation. Given that they are giants in today’s economic policy conversation, their views have naturally received enormous attention. That attention is very welcome because the issue is so important. However, there is also a danger that their dominance risks crowding out other explanations of stagnation, thereby short-circuiting debate.

Krugman has long emphasized the liquidity trap – zero lower bound to interest rates which supposedly prevents spending from reaching a level sufficient for full employment. Summers has added to this story by saying we have been in the throes of stagnation for a long while, but that has been obscured by years of serial asset price bubbles.

That is a good start to the conversation, but there are other views that dig deeper regarding the causes of stagnation.

Read more here.

Tuesday, February 25, 2014

Jan Toporowski: Michał Kalecki and Oskar Lange in the 21st Century

It is possible to identify in The General Theory and Kalecki's work key ideas that they had in common.  The first is that in a capitalist economy output and employment are determined by business investment, so unless investment is high enough the economy is unlikely to be at full employment.  Secondly that investment determines saving, rather than the other way around.  Both men denounced the doctrine of the social value of thrift that so comforted the complacent Victorian bourgeoisie and that just made such a comeback today.  Finally, contrary to the Neoclassical and the Ricardian-Marxist view both men argued that wage rises would increase employment rather than decreasing it.  Underlying this commonality of view on how the capitalist economy works was a fundamental principle of the economic method that Kalecki explicitly employed to great effect and Keynes in a somewhat more haphazard way: the principle of the circular flow of income.  This is the idea that incomes are determined by expenditure decisions, rather than being decided in complex games of exchanging resources, capital or labor.  The principle goes back to the work of the French Physiocrat François Quesnay but had been lost to political economy by the 19th century with the ascendency of the idea that prices integrate individual exchange decisions, so all you need is correct prices.  Nevertheless, a hundred years ago the great Joseph Schumpeter recognized the importance of the circular flow of income...
See rest here

Monday, February 24, 2014

Trans-Pacific Partnership creating strange bedfellows

Nowhere is the national political divide more evident than on Capitol Hill. One topic, however, has had fairly consistent bipartisan support: free trade agreements. Since President Barack Obama took office, a few FTAs have been signed with approval by the Senate. That has been essentially true since the 1990s, when Bill Clinton and the New Democrats abandoned the traditional organized labor stance against free trade and signed the North American Free Trade Agreement, commonly known as NAFTA, with Canada and Mexico.

The current talk revolves around a proposed pact that has created some surprising partnerships. More about that in a minute. First, some background.

The Trans-Pacific Partnership, or TPP, the latest deal under discussion, is a free trade agreement between 12 countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States and Vietnam. These countries, for the most part, already have low tariffs and trade agreements among themselves. In fact, the U.S. already has trade agreements in place with six of the 11 nations included in the TPP.

More importantly, the TPP also excludes China, one the most important trade partners to the 12 possible partners. That's why the agreement should be seen more as part of the U.S. economic diplomacy rather than a traditional trade agreement. The U.S. is trying to increase the influence of U.S. corporations in the region at the expense of Chinese economic interests.

Read the rest here. Originally published in the Reading Eagle (you need to register for free to read the whole piece).

On the state of the worldly philosophy: reflections after a visit to the New School

 Dr. Vernengo I presume?

I am pessimist by nature (or nurture), I guess. So I never thought that the current crisis would lead to a collapse of mainstream economics. As I often point out to my students, in the US, it was the Great Depression, and the rise of the Neoclassical Synthesis that made Marginalism dominant. Up to that point the profession was dominated by an eclectic group that included many institutionalists, like Commons or Seligman, a non-Marxist defender of an economic interpretation of history, both of whom were presidents of the American Economic Association (AEA). Mitchell, another institutionalist that was president of the AEA, was the head of the National Bureau of Economic Analysis (NBER). And the administration was full of institutionalist economists during the New Deal. So a crisis might actually lead to the consolidation of a paradigm that was actually contradicted by the facts (yes, full employment of factors of production is hard to defend if you have 25% unemployment, but blame it on rigid wages and you're fine).

On the role of the New School in academia, the topic of our table with Rajiv Sethi and Ramaa Vasudevan, what I suggested, as my interpretation was rather broad, was it is the production of heterodox economists by means of heterodox economists (my definition of the heterodox camp here). In that, at least in the US, the New School is aided by three four other programs, namely Colorado State (CSU), UMass-Amherst, UMKC (Kansas), and Utah. Not sure what is the actual output of all these centers, but most newly minted PhDs end up finding jobs in academia, mostly public universities and liberal arts colleges, in government, in think tanks, and in organizations related to progressive activism from unions to environmental groups. In that respect, even though the profession is not likely to move closer to any heterodox perspective, there is space for heterodox economists to continue to do the kind of work that they were trained to do. In other words, if the crisis will not open new space for heterodox groups, at least not by default, it will also not close old doors.

There was a debate, to some extent represented in our table by the contrast of my and Rajiv's views, on whether to engage the mainstream or tear it down, as Ali Khan put it in another section. I have already written on that here (for a whole book in response to critics that suggest that heterodox authors do not engage the mainstream go here). Still not convinced that engagement is necessary, or that helps to advance the research agenda of heterodoxy. Sure enough that there are ideas here and there that might be useful, but that doesn't require engagement per se. Note that this also does not mean that the study of the mainstream can or should be abandoned. But as I noted, New School students, and heterodox economists in general, understand better the logic and meaning of the mainstream than neoclassical authors themselves (see my debate with Noah Smith here).

The idea that isolation (And from what really? From publishing in the more prestigious journals? From having Ivy League chairs? Or from reality? You choose, but I'll rather be part of the group that was not surprised by the crisis, like Baker, D'Arista, Epstein, Galbraith, Godley, Palley, Pollin, Taylor, Zezza, Wray, etc., and many more) does not allow for the development of reasonable ideas or to have influence is also questionable. In all fairness, by the 1830s, Ricardian economics, and the main propositions of the surplus approach were forgotten and modified in incoherent ways by the likes of Nassau Senior, Stuart-Mill and others. A German philosopher studying alone in the British Museum was able to reconstruct and advance the classical ideas. Yes his academic influence was small at best, but I would be surprised if someone suggested he had no influence (and I don't mean politically, but strictly as an economist). All the same, by the 1930s most of these ideas were again forgotten and misrepresented, and an Italian scholar, working in isolation, while editing Ricardo's works, also reconstructed and advanced on the classical ideas. And on top of that, the 1930s provided the idea of effective demand, and the possibility of upturning Say's Law in the long run. All of these achievements have NOT been lost, in part, because places like the New School continue to produce heterodox PhDs.

This time around there is no need to reconstruct everything from scratch. There is a wealth of accumulated knowledge, and the shoulders of giants to stand upon. Yes, one can be pessimistic about the profession as whole, and probably should be, as Foley seemed to be in the last section, arguing that the heterodox moment after the crisis was really brief. But that is the norm for heterodox authors. And this time around we have the New School!

CEPR on Union Advantage for Black Workers

By Janelle Jones and John Schmitt
Since at least the early 1970s, and likely earlier, unionization rates for black workers have been higher than for other racial groups in the United States. As sociologists Jake Rosenfeld and Meredith Kleykamp (2012) have recently written, the labor movement has been “a remarkably inclusive institution vital for its economic support of African American men and women.” Nevertheless, the share of unionized black workers has been falling almost continuously since the early 1980s, reflecting a trend also seen in the workforce as a whole. In this report, we review the most recent data available to examine the impact of unionization on the wages and benefits paid to black workers. These data show that even after controlling for factors such as age and education level, unionization has a significant positive impact on black workers' wages and benefits.The union advantage is particularly strong for black workers with lower levels of formal education.
Read the rest here.

Saturday, February 22, 2014

Weisbrot on why the European authorities are still punishing Greece

Mark Weisbrot
Alexis Tsipras has a tough job. He is leader of the Syriza Party of Greece, a left party that has risen meteorically in the past three years: from 4.6 percent of the vote in 2009 to 27 percent last June. It is now the most popular party in the country and Tsipras could be the next Prime Minister. Unlike most of the eurozone's leaders, he knows what is wrong with Greece and the eurozone, and so does his party: austerity. "We have become the guinea pig for barbaric, violent neoliberal policies," he said at a forum at Columbia University Law School last week, in which I participated. Tsipras notes that Greece's fiscal problems could be resolved if the rich paid their taxes. The IMF's latest numbers [PDF] concur on this: according to the Fund, "annual uncollected net tax revenue [is] at 86 percent of collections in Greece, against an OECD average of 12 percent."
Read rest here.

Friday, February 21, 2014

The State of Worldly Philosophy at the New School in 2014: Conference Program

For those around New York, tomorrow (Saturday, February 22, 2014) is the conference announced here before, on The State of Worldly Philosophy at the New School in 2014, organized by the Economics Student Union (ESU) at the New School for Social Research (11th floor on 6 E 16 St). Program is available here. Hope you can make it.

Raúl Prebisch on Cyclical growth and center-periphery interaction

New Working Paper at the IDEAs Network. From the asbtract:
Prebisch believed that understanding the evolution of capitalist economies over time and in different contexts required a general cycle approach, which he labeled ‘dynamic economics’, encompassing all the different areas of economic activity. His dynamic economics stemmed from a critique of both neoclassical and  Keynesian theories, which Prebisch viewed as static representations of capitalism. His dynamics was first applied to a closed economy and then to a center-periphery context. These combined the notion that profit is  the driving motive of  economic activity with a process of forced savings and the idea that the time lag between income circulation and the derived demand, and the time taken in the productive process was the main source of cyclical fluctuations. Prebisch’s dynamic theory, which he never completed, influenced his Development Manifesto (1949).
Full paper available here. From the conclusion:
The long process of development of Prebisch’s economic ideas, which did not stop with his famous Development Manifesto in 1949, from the 1920s culminated in the late 1940 with his dynamic theory. The essence of Prebisch’s dynamic analysis, in which cycle and growth went hand in hand, was the introduction of time lags in a process of continuous disequilibrium. In his model fluctuations result from the difference in the time-period for incomes to circulate within the productive process with the time period required for final production to be brought and sold on the market. In this respect, he was part of a broad tradition of authors trying to formalize macro-dynamics in the wake of the Keynesian Revolution. He maintained elements that were Keynesian in spirit with others that were decidedly neoclassical, while at the same time introducing elements of the old classical school, as it should be expected in a period of transition in the economic profession, and also in an author that was brought up intellectually in a rather eclectic environment.

More importantly, Prebisch stands alone among his contemporaries in trying to explain the cyclical growth of the global economy as the result of the interaction of center and periphery, in which the international division of labor matters. Not only Prebisch introduces the specificity of the problems of managing the peripheral economy, but also he is unique among the economists dealing with cyclical growth to discuss the importance of the change in the global center in the inter-war period from the United Kingdom to the United States.

His conception of the institutional and historical specificity of economic dynamics would eventually develop into what Structuralists at ECLAC would refer to as the Historical-Structural method of analysis, which analyzed the process of structural transformation of underdeveloped economies in historical perspective. In this sense, his understanding of capitalist dynamics, right before he wrote the Development Manifesto and became the Secretary General of ECLAC, was based on a theory that purported to be general and encompassing well beyond the problems of peripheral countries with declining terms of trade, which became the trade mark of his contributions to economic analysis.

Thursday, February 20, 2014

The United States of Poverty and Inequality

Over the last three decades the wealth of the nation's very richest 1% has grown ten times that of the average worker, and over that time period that same elite has captured more than half of the entire income increases, leaving the bottom 99% to divide the remaining gains. This is all based on a new state-level study by the Economic Policy Institute (EPI), The Increasingly Unequal States of America: Income Inequality by State, which looks at how inequality has seized hold of the national economy both in the generation leading up to the great recession of 2008 and in the several years following the so-called 'recovery'.
The levels of inequality we are seeing across the country provide more proof that the economy is not working for the vast majority of Americans and has not for decades; it is unconscionable that most of America’s families have shared in so little of the country’s prosperity over the last several decades. 
Check out the state-by-state map on inequality generated by the study.

And for a recent analysis by Dr. Gerald Friedman on the so-called 'recovery', see here

Wednesday, February 19, 2014

Palley on The Limits of Minsky’s Financial Instability Hypothesis as an Explanation of the Crisis

I am not sure if this was posted before on Naked Keynesianism; nevertheless, here it is (from Monthly Review).
Thomas I. Palley sent John Bellamy Foster the following article in October 2009 for publication in Monthly Review, accompanied by this note: “I’m hoping it might provoke some discussion and also generate some dialogue and consensus between Marxists (like yourself) and structural Keynesians (like myself).” Palley’s piece addressed (along with much else) the article “Monopoly-Finance Capital and the Paradox of Accumulation” by John Bellamy Foster and Robert W. McChesney in the October 2009 issue of Monthly Review. In the same spirit of promoting dialogue between Marxists and Keynesians on the present crisis, we agreed to publish his contribution, together with a response by Foster and McChesney:
Aside from Keynes, no economist seems to have benefited so much from the financial crisis of 2007-08 as the late Hyman Minsky. The collapse of the sub-prime market in August 2007 has been widely labeled a “Minsky moment,” and many view the subsequent implosion of the financial system and deep recession as confirming Minsky’s “financial instability hypothesis” regarding economic crisis in capitalist economies.
For instance, in August 2007, shortly after the sub-prime market collapsed, the Wall Street Journal devoted a front-page story to Minsky. In November 2007, Charles Calomiris, a leading conservative financial economist associated with the American Enterprise Institute, wrote an article for the VoxEU blog of the mainstream Center for Economic Policy Research, claiming a Minsky moment had not yet arrived. Though Calomiris disputed the nature of the moment, Minsky and his heterodox ideas were the focal point of the analysis. In September 2008, Martin Wolf of the Financial Times openly endorsed Minsky: “What Went Wrong? The Short Answer: Minsky Was Right.” And in May 2009, Paul Krugman posted a blog titled “The Night They Reread Minsky,” which was also the title of his third Lionel Robbins lecture at the London School of Economics...
See rest here

Tuesday, February 18, 2014

Gerald Friedman - Whose Recovery?

By Gerald Friedman
There is a story that when the late union leader Walter Reuther was given a tour of a GM plant, a manager introduced him to a set of the company’s new robots.  The manager challenged Reuther to say how he would organize the robots into the UAW.  The union leader supposedly responded by asking: how will General Motors sell cars to the robots?  While American unions have failed to organize the workers in the new economy’s factories, its capitalists seem to have figured out a good answer to Reuther’s question. We shouldn’t be surprised that conservative politicians and orthodox economists are calling for the Federal Reserve to end its program of monetary ease and for the Federal government to end its program of extended unemployment insurance.  Believing in Say’s Law and the virtues of unregulated markets, they have never been comfortable with state action to help the unemployed; instead, they have long argued that the only proper role for government is to protect price stability and the integrity of banking system. What should surprise us is that so few in the business community are pushing back against these ideologues in support of policies to bolster economic growth and employment.  Robert Reich asks whether capitalists and managers have forgotten the basic Fordist compromise, in which businesses rely on affluent workers to consume their products? If a rising tide lifts all boats, don’t capitalists benefit when unemployment falls and workers have more to spend?  And shouldn’t they support policies that bring the tide in?
See rest here

On Marginalism Versus Neoclassical Economics

In a recent post by NK, (see here), it was mentioned that when teaching macroeconomics, especially from a heterodox perspective, "one and has to deal, as always, with the confusion generated by all manuals (to a great extent Keynes' fault for using the term classical for everybody that came before him) between the old classical political economy tradition and the marginalist (or neoclassical, other misnomer, this one Veblen's fault) school." Perhaps the paper by Tony Lawson, "What is this 'school' called neoclassical economics" (see here, subsciption required), and "Sraffa and his arguments against marginism," by Maria Christina Marcuzzo and Annalisa Roselli (see here, subscription required), can be of assistance... 

Monday, February 17, 2014

Palley on the limitations of MMT once again

Tom Palley's new paper on MMT titled "Modern money theory (MMT): the emperor still has no clothes" is out. From the abstract:
Eric Tymoigne and Randall Wray’s (T&W, 2013) defense of MMT leaves the MMT emperor even more naked than before (excuse the Yogi Berra-ism). The criticism of MMT is not that it has produced nothing new. The criticism is that MMT is a mix of old and new, the old is correct and well understood, while the new is substantially wrong. Among many failings, T&W fail to provide an explanation of how MMT generates full employment with price stability; lack a credible theory of inflation; and fail to justify the claim that the natural rate of interest is zero. MMT currently has appeal because it is a policy polemic for depressed times. That makes for good politics but, unfortunately, MMT’s policy claims are based on unsubstantiated economics.
 The full paper is here.

Sunday, February 16, 2014

Mark Blyth on What's So Dangerous About Austerity?

From Truthout
Austerity: The History of a Dangerous Idea, a book written by Brown University Professor of International Political Economy Mark Blyth and published last year by Oxford University Press, is one of the most important works to have emerged in recent years on the religion of austerity, the new dogma in neoliberal economics that is so perniciously enforced today in the peripheral countries of the Eurozone (Greece, Italy, Ireland, Portugal, and Spain) and loved by Republicans and all sorts of right-wingers in the United States. In his book, Blyth exposes how dangerous the policy of austerity has been in the past and explains why it resurfaced in the aftermath of the 2008 global financial crisis. With his critical analysis of austerity, Professor Blythe also provides a damning critique of orthodox economics and shows that class politics is very much alive in the actions of today's governments and the rich.
Read rest here

On principles courses, DeLong, Krugman and the limits of the mainstream

'cause it has no implications...

In a previous post, Anonymous commented: "Brad DeLong has been posting slides from one of his classes going over supply and demand (and quotas and price ceilings, market equilibrium, etc.) on his blog. They're pretty entertaining and filled with pop-cultural references. I was wondering what a Post-Keynesian perspective on them might be."

I promised to check Brad's posts and provide a short answer. So here it is. In fact, this semester I am teaching an intro course, something I haven't done since my time in Kalamazoo College. This is not a regular course for me to teach, in other words, like say intermediate macro. At Bucknell all intro courses provide more than the neoclassical (marginalist) perspective. While Brad starts with a neoclassical version of supply and demand (see here) on the basis of Krugman's intro textbook, we start with history and history of ideas, based on a discussion of the classical authors and Marx (here, here and here) and only then get to the supply and demand approach (here). In fact, I am also using Krugman's textbook, together with Heilbronner and Milberg's The Making of Economic Society and additional readings.

In other words, while there is a need to teach the basics of what the mainstream of the profession thinks it is relevant, it is also important to provide critical alternatives to the mainstream. The liberal arts education in the US allows for a lot of flexibility and for the introduction of alternative perspectives. The textbooks (almost all neoclassical) tend to fudge the fact that the notion that economics is about rational choices of individuals faced with scarcity is relatively new (the Marginalist Revolution of the 1870s)*, and quite different from the old classical (or surplus approach) tradition of the material reproduction of society.

* Interestingly enough, in the US the profession was not dominated by neoclassical economics until the 1930s and 1940s, when the rise of Keynesian economics, in the Neoclassical Synthesis version, brought it to the forefront of research, teaching and policy influence. Samuelson's 1948 Economics, the forerunner of all mainstream textbooks, did probably more than any other book to make neoclassical economics the dominant view. Before that the profession in the US was dominated by a potpourri of eclectic and institutionalists authors that held the main teaching positions and were at the head of key institutions like the American Economic Association and the National Bureau of Economic Research (NBER).

Friday, February 14, 2014

The middle class in macroeconomics and growth theory

Tom Palley models the role of the middle class in economic growth. From the abstract:
This paper presents a three class growth model with labor market conflict. The classes are workers, a middle management middle class, and a “top” management capitalist class. The model introduces personal income distribution that supplements conventional concerns with functional income distribution. Endogenously generated changes in personal income distribution can generate endogenous shifts from profit-led to wage-led regimes and vice-versa. A three class economy generates richer patterns of class conflict because the middle class has shared interests and conflicts with both capitalists and workers. Changes that benefit the middle class do not necessarily increase growth or employment or benefit workers.
The full paper is available here.

Tuesday, February 11, 2014

Investment, interest rates and the accelerator: more evidence for the US

Not that is really necessary. But the evidence continues to be overwhelming. Christian Schoder in a recent paper (here; subscription required), following in the steps of the classic paper on the subject by Fazzari et al. (1988) and looking at the micro data on investment concludes that:
"Overall, demand constraints seem to be crucial factors contributing to the slowdown of accumulation in times of economic distress relative to credit market conditions. In contrast to the prediction of the financial accelerator literature that credit constraints tighten in the downturn (relative to demand constraints) as net worth deteriorates, the cash-flow coefficient does not exhibit a clear counter-cyclical pattern.

We further find that the most tremendous declines in business investment which occurred in the contexts of the recessions in 1982, 1990, 2001 and 2008/09 were driven by the demand side of the capital market rather than the supply side since, during these times, an improvement of investment opportunities reflected by an expansion of sales growth and Tobin’s q, on average, induced firms to raise investment to a disproportionately large extent whereas an easing of credit constraints, on average, provoked only a disproportionately small expansion of investment."
In other words, cost of capital variables, that are measured at the firm level using a CAPM model and approximating by the ratio between interest payments and stock of debt, are not significant. Sales, i.e. demand, is what drives investment. And yes that means that more government demand was needed. In his words:
"The results suggest that investment tended to be driven by adverse demand rather than supply conditions during the most severe recessions. Especially, the decline of investment after the financial meltdown in 2007–2008 is associated with inferior demand conditions compared to supply conditions. This view is consistent with the chronicles of US fiscal and monetary policy stance regarding the management of aggregate demand and credit flow. Our policy evaluation implies that the policy attempts to stabilize demand were insufficient in order to stabilize investment in the recent economic crisis."
That's what the recent evidence suggests. No surprises here.

John Weeks - The Economics of the 1%: Neoliberal Lies About Government

From The Real News Network
NOOR: So one of the chapters in your book is titled "Lies about Government", and you start off the chapter by talking about fake economics, which is the term you use to describe mainstream neoliberal economics. And you say it includes as a central message the inherent inefficiency and intrinsic malevolence of governments at all levels. Talk about what you mean and how governments and their role in our economy is so vilified and why that's done.
WEEKS: It derives from a basic ideology that says that everybody and everybody in the world is a consumer and that you derive your pleasure in life from consuming, which, if you reflect on it, obviously is a pretty sick idea. I mean, people who actually behave that way I think are rather unhappy people. But at any rate, if you take that position, if you take that analytical position, then it follows that taxes are a burden--they take away an individual's ability to consume. And they are--some of it may be absolutely necessary. You might say that that's the more benign wing of this school of economics, which I refer to as fakery. And so they begin by saying everybody's a consumer. Taxes should be as small as possible so you can go out and consume. And anything that can be produced through the private sector should be produced by the private sector. And then, in addition to that, if it ends up being produced through the government, it will be produced inefficiently; that is, there are some things you can't avoid, one presumes. You can't have a private fire department. They would just go and put out the fires of the people that paid, not the ones next door that hadn't. But most things, you should go from the private sector, 'cause the government is inherently inefficient.
See rest here

Monday, February 10, 2014

Peak everything!

Another entry in my peek at peaks series. These are (highly) contingent forecasts for the future of the macroeconomy and the planet. While there is plenty of statistical uncertainty to go around in such forecasts, the main contingency is which UN population forecast you believe in.

Most of my figures are based on the "low" forecast for two reasons. One, that is the one we are closest to. Two, that is the one we should be on, or one even lower.

Tonight's figure forecasts peak carbon dioxide flux (or flow) into the atmosphere from human-driven energy consumption.

The forecasts assume continuation of current trends, no special fiddling.

If you believe the low population forecast, the peak flux is in 2045, at a level (flow) about a third more than in 2008.

So there is good news - there is a peak - and bad news - we may fry before we reach it. We need radical energy solutions to address that. I am working on it. Really.

Here is the graph. Enjoy, question, comment.

Say's Law of Markets: Classical and Neoclassical versions

Teaching macroeconomics, and having to deal, as always with the confusion generated by all manuals (to a great extent Keynes' fault for using the term classical for everybody that came before him) between the old classical political economy tradition and the marginalist (or neoclassical, other misnomer, this one Veblen's fault) school.

Not all classical authors accepted Say's Law, to which Keynes' Principle of Effective Demand (PED) was contrasted, but all neoclassical authors do accept it (last week the Societies for the History of Economics, aka SHOE, had a very confusing discussion on Say's Law, in which this simple fact got completely lost by a few debaters). Marx certainly was critical of Say's Law.

Ricardo in chapter XXI of his Principles famously says:
"M. Say has, however, most satisfactorily shewn, that there is no amount of capital which may not be employed in a country, because demand is only limited by production. No man produces, but with a view to consume or sell, and he never sells, but with an intention to purchase some other commodity, which may be immediately useful to him, or which may contribute to future production. By producing, then, he necessarily becomes either the consumer of his own goods, or the purchaser and consumer of the goods of some other person. It is not to be supposed that he should, for any length of time, be ill-informed of the commodities which he can most advantageously produce, to attain the object which he has in view, namely, the possession of other goods; and, therefore, it is not probable that he will continually produce a commodity for which there is no demand."
The Ricardian notion is relatively simple. It suggests that the objective of production is consumption (what Marx would call later the "simplest form of the circulation of commodities," or simple exchange, where commodities are produced for exchange for commodities, with money being just an intermediary, C-M-C'). Further, Ricardo suggests that nobody would continue to produce something for which there is no demand over the long run. Yes there might be mistakes and excess production, but over time producers learn from their mistakes. In this simple story if a capitalist saves, it is by definition because he intends to invest and be able to produce more in the future. Think of the corn model; the corn not consumed, for wages (for the reproduction of the system), goes by definition into expanded reproduction.

The Ricardian model has no adjusting mechanism between investment and savings, which are by definition one and the same. Also, there is no guarantee that the system fully utilizes labor resources, or that the system would be at full employment. The rate of interest was regulated by the rate of profit, and adjusted to its level in the long run, but it did not adjust savings and investment.

This is, in fact, the main difference between the old classical version of Say's Law when compared to the marginalist or neoclassical one. In the neoclassical version the rate of interest (the natural rate of interest indeed) becomes the adjusting mechanism in what is often referred to as the Loanable Funds Theory (LFT) of the Rate of Interest (for a simple discussion of Wicksell's version of the LFT go here). Now an excess supply of funds (savings) for investment would be eliminated by the tendency of the monetary rate of interest to equilibrate with the natural rate, guaranteeing that investment is at the level of full employment savings. Investment can deviate from the equilibrium level of savings only in the short run, and neoclassical theory (including Wicksell of course; a few in the SHOE discussion seemed confused about this) would accept Say's Law in this new version in the long run. Note that in order for a rate of interest to lead to increasing investment demand, it must be the case that labor is fully utilized, and firms decide to substitute labor for capital. In the marginalist version Say's Law implies full employment in the labor market.

Keynes' Principle of Effective Demand, by suggesting that savings were simply a residual (income not spent), famously argued that, instead of supply creating its own demand, it was autonomous spending decisions (which Keynes associated with investment) generated income and, hence, made the supply effective. It was the variations of the level of income that made the adjustment of savings to investment possible, and there was no guarantee that autonomous spending would provide for the full utilization of resources.

For a thorough analysis of Keynes' PED, this book remains in my view one of the best around.

Sunday, February 9, 2014

Unintended Consequence of Austerity America - Union Rep Share Grew in Private Sector

Reacting to new data from the Bureau of Labor Statistics on union membership, EPI President Lawrence Mishel said:
New data for 2013 on the number and share of workers with union coverage show some interesting trends. Private sector union coverage increased but was offset by an erosion in the public sector, leaving overall union coverage essentially unchanged (a decline of less than 0.1 percent, so rounding up becomes a 0.1 percent decline).  The increase in private sector collective bargaining coverage in 2013 is noteworthy because it happened in 2007 and 2008 but otherwise hasn’t happened since 1979. This was driven by increased union employment in manufacturing and construction, where more than thirty-five percent of net new jobs were covered by collective bargaining agreements. Union coverage has increased in some states that may be unexpected. For instance, private sector union coverage increased in each of the last two years in Virginia, North Carolina, Georgia, Kentucky and Tennessee. Improvements in the private sector have been offset, however, by erosion in the public sector. Between 2012 and 2013 union coverage in the public sector fell from 39.6 to 38.7 percent. The starkest change was in Wisconsin, where union coverage in the public sector fell from 53.4 percent in 2011 to just 37.6 percent in 2013. This suggests that the erosion of public sector union coverage reflects the new anti-collective bargaining policies implemented in several states.
See here.

***It is important to note that much of the growth is due to the offset of job loss in the public sector as a result of austerity along with, as mentioned above, the implementation of anti-collective bargaining "right to work" laws...***

Jane D'Arista - Tapering of Quantitative Easing Is Throwing Emerging Markets into Chaos

From The Real News Network
Emerging markets have been reeling since the beginning of the new year. The currencies and stock markets of Argentina, South Africa, Turkey, among other countries, have declined substantially, prompting their central banks to increase interest rates to stem the outflow of capital. The emerging-market rout, the worst start to a year on record, is widely believed to be related to the winding down of the U.S. Federal Reserve's quantitative easing program.Now joining us to discuss this is Jane D'Arista. She's a research associate with the Political Economy Research Institute, or PERI, at the University of Massachusetts, Amherst, where she also cofounded an economist committee for financial reform called SAFER, or Stable, Accountable, Fair and Efficient Financial Reform.
See here

Saturday, February 8, 2014

The madness of austerity in one graph in historical perspective

Same graph David posted (from Mother Jones) with one addition, total government employment in the period just before  and after the 1990-91 recession together with the 2007-8 one [also I don't show private employment].
The bump of the 1990 census is less visible than the 2010 one. But the obvious difference is the increase in the 1990s and the decrease now.

The Madness of Austerity in One Chart

From Mother Jones
January's job numbers were fairly dismal, but the bad cheer wasn't equally spread. Private sector employment, as usual, increased—by 142,000 jobs last month. At the same time, public sector employment declined. Government employment at all levels was down 29,000 in January.Aside from the brief census blip in early 2010, this has been the usual state of affairs for the past four years, ever since the recession officially ended. The chart below shows public and private sector employment indexed to 100 at the end of the recession. Private sector employment is up 6.8 percent. Public sector employment is down 3.4 percent. And that's during a period when population grew 2.3 percent. On a per capita basis, government employment has declined more than 5 percent since 2009, and it's still declining.This is the price of austerity. If public sector employment had been growing normally during this period, we'd have about a million more jobs than we do now and the unemployment rate would probably be below 6 percent. We are our own worst enemies.
See more here.

Friday, February 7, 2014

New Book: Advanced Introduction To International Political Economy by Benjamin J. Cohen

‘Benjamin J. Cohen’s Advanced Introduction to International Political Economy evaluates the fragmented intellectual landscape of international political economy and suggests points of conversation, if not integration, among its varied elements. His analysis is wide-ranging and balanced, geographically and in its examination of a variety of standpoints; it is engaging in its combination of sympathy and criticism. All advanced students of the field will benefit from reading it.’
– Robert O. Keohane, Princeton University, US
See here

On the blogs...

Why widening inequality is hobbling equal opportunity Robert Reich

Why is America not very good at providing public goods? Noah Smith

NPR tells listeners that the debt is a "huge problem" Dean Baker

Year in Review (2013) Unlearning Economics

Second-Order Journalism Paul Krugman

When conventional success is no longer possible... Charles Hugh Smith

The danger of trusting corporations to lead the fight against world hunger  Timothy A. Wise

Thursday, February 6, 2014

More on the 'emerging' markets crisis

The Lex column in the FT today also argues that the crisis is going to get much worse in developing countries. Their argument is based on the current account deficits. I've discussed that yesterday here. Note that the figure used to illustrate the point shows the current account as a share of GDP (as a share of exports is always better, since it gives a sense of the amount of the country's source of hard currency), and also the stock market, which seems to be doing better in countries with surpluses.
The figure actually shows that the only two countries with relatively large current account deficits are Turkey and South Africa. Brazil and India, for example, have deficits that are not that large. Argentina, not shown in the picture, and with more problems than most in it, has a practically balanced current account. Of course the FT, like Roubini, suggests that contractionary policies are what the Dr. recommends. Oh well.

Dr. Volcker, I presume?

Great line today, even if unintentionally funny, in David Pilling's column (subscription required) in the Financial Times. He notes that many are comparing Raghuram Rajan, the new head of the Reserve Bank of India (RBI), with Paul Volcker, inflation hawk, and one time chairperson of the Fed. Rajan has denied the similarities, but as noted by Pilling: "if Mr. Rajan does not want to be seen as Paul Volcker, he has done a pretty good impersonation so far." Not sure that's what India needs with the economy decelerating, but I'll not delve into that right now.

Austerity Sucks: Another Drag on the Post-Recession Economy Is Public-Sector Wages

By Monique Morrissey
The aftermath of the Great Recession has led to outright wage declines for the vast majority of American workers in recent years, resulting in a full decade of essentially stagnant wages. Though you might expect public-sector wages to have weathered the recession and its aftermath better than private-sector wages, the opposite appears true: While the decline in real public-sector wages started later, it was steeper and ultimately more damaging. According to the Bureau of Labor Statistics’ Employment Cost Index, public-sector wages have fallen by about 1.3 percent in inflation-adjusted terms since 2007, where private-sector wages have been essentially flat (an increase of 0.3 percent). Unlike in previous recoveries, state and local government austerity has been a major drag on job growth and the broader economy. The number of public-sector jobs fell by almost 3 percent in the three years following the recession, while the number of private-sector jobs grew (albeit anemically). The fact that public-sector wages have lagged behind those in the private-sector exacerbates government’s drag on the economy.
Read rest here.

Wednesday, February 5, 2014

Are emerging markets going to collapse? Why is Dr. Doom wrong

The series of devaluations in the currencies of a few developing countries (I prefer the term to the one in the title, which became popular in the 1990s, when Neoliberal policies required selling bonds in international financial markets, and, hence, emerging markets sounded more marketable than underdeveloped country) has led to a lot of speculation about the collapse of the boom in the periphery. The graph below shows that depreciation has been between moderate to severe, depending on the country (source by The Economist).

The Argentine peso and the Turkish Lira lead the pack, by far. Nouriel Roubini, the so-called Dr. Doom, has suggested that the problems have a common cause, based political problems, and loose fiscal policy leading to external deficits. According to Roubini (here):
"Many emerging markets are in real trouble. The list includes India, Indonesia, Brazil, Turkey, and South Africa – dubbed the “Fragile Five,” because all have twin fiscal and current-account deficits, falling growth rates, above-target inflation, and political uncertainty from upcoming legislative and/or presidential elections this year. But five other significant countries – Argentina, Venezuela, Ukraine, Hungary, and Thailand – are also vulnerable. Political and/or electoral risk can be found in all of them, loose fiscal policy in many of them, and rising external imbalances and sovereign risk in some of them."
In all fairness the fragility of some of the countries is exaggerated, and the reasons are simply wrong. Yes it is true that current account deficits are in normal circumstances a very dangerous stance for developing countries that must borrow in foreign currency; however, the low rates of interest in the center, associated to a slow recovery from the crisis in the US and a terrible collapse in Europe, together with increasing international liquidity, implies that many countries have been able to finance their external imbalances.

The fiscal situation is also not pressing, and at any rate is only relevant to the extent that it affects the level of activity and imports. And as noted by Roubini, these countries are either not growing fast (like Brazil, which has primary surpluses) or decelerating (like India, where nominal deficits as a share of GDP have also decreased). Also, inflation is certainly NOT high in the majority of these countries (again Brazil and India do have single digit inflation levels,* even if the inflation rate is above the target, and that prompted central banks in both countries to hike interest rates).+

The expectations of tightening of US monetary policy, and the possible effects that this might have on developing countries has also been exaggerated. Again, according to Roubini:
"the Fed’s tapering of its long-term asset purchases has begun in earnest, with interest rates set to rise. As a result, the capital that flowed to emerging markets in the years of high liquidity and low yields in advanced economies is now fleeing many countries where easy money caused fiscal, monetary, and credit policies to become too lax."
the Fed’s tapering of its long-term asset purchases has begun in earnest, with interest rates set to rise. As a result, the capital that flowed to emerging markets in the years of high liquidity and low yields in advanced economies is now fleeing many countries where easy money caused fiscal, monetary, and credit policies to become too lax.
"the Fed’s tapering of its long-term asset purchases has begun in earnest, with interest rates set to rise. As a result, the capital that flowed to emerging markets in the years of high liquidity and low yields in advanced economies is now fleeing many countries where easy money caused fiscal, monetary, and credit policies to become too lax."

"the Fed’s tapering of its long-term asset purchases has begun in earnest, with interest rates set to rise. As a result, the capital that flowed to emerging markets in the years of high liquidity and low yields in advanced economies is now fleeing many countries where easy money caused fiscal, monetary, and credit policies to become too lax."
If you agree with Roubini, the solution would be contraction in all these peripheral countries. Devaluation and fiscal adjustment to ease the current account and fiscal imbalances, as the old (and I would argue the new) IMF used to demand.

However, it is hard to foresee a strong recovery in the US, and a steep, or even a mild, increase in interest rates by the Fed, now under Janet Yellen's command. That obviously does not mean that capital flight might not take place in some countries, and that a few of them would actually face external crises. Yet, it seems unlikely that the situation in the center would completely reverse and lead to a generalized collapse of the peripheral countries. In fact, I would argue that a bigger risk would be a severe collapse in Europe, leading to a flight to safety (i.e. US dollar denominated bonds), even with very low rates in the US, and then a new round of external crises. That's why regulation of capital flows is needed, as demanded by Kevin Gallagher (see here) and not austerity for the periphery, as Roubini wants.

* Also, there is no evidence that inflation around 6 or 7% is any worse than inflation at 4 or 5% in terms of growth or unemployment.

+ There are countries in which the story is more problematic. Argentina, discussed here and here, is certainly one, but interestingly enough it would be a case where the external accounts are actually not that bad.

Podcast with about the never ending crisis in Argentina

Podcast with about the never ending crisis in Argentina with Fabián Amico, and myself and interview by Carlos Pinkusfeld Bastos and Caio Be...