Per S&P & Bloomberg, Argentina Defaults... So What Now?

From a matter of fact point of view, even though Argentina has made the payments to bondholders, Judge Griesa's decision precludes them (the bondholders) from receiving payment, and so Argentina is technically in default (Argentine Finance Minister, Kicillof called it: "default Griesa. Griefault." This is NOT like in 2002 the result of lack of funds, but direct consequence from a judicial decision backed by the US Supreme Court. From Bloomberg:

Standard & Poor’s declared Argentina in default after the government missed a deadline for paying interest on $13 billion of restructured bonds. The South American country failed to get the $539 million payment to bondholders after a U.S. judge ruled that the money couldn’t be distributed unless a group of hedge funds holding defaulted debt also got paid. Argentina, in default for the second time in 13 years, has about $200 billion in foreign-currency debt, including $30 billion of restructured bonds, according to S&P. Argentina and the hedge funds, led by billionaire Paul Singer’s Elliott Management Corp., failed to reach agreement in talks today in New York, according to the court-appointed mediator in the case, Daniel Pollack. In a press conference after the talks ended, Argentine Economy Minister Axel Kicillof described the group of creditors as “vulture funds” and said the country wouldn’t sign an accord under “extortion.”

Read rest here.

And for recent NK posts on the situation, see here, here, here, here, here, and here.

Neoliberal Authoritarian Greece: A Nation for Sale & Death of Democracy

According to Henry A. Giroux (2005/6), 'neoliberal authoritarianism' is the process by which upper capitalist class interests reinvent the past, present, & future in the image of a crude exercise of power that unleashes unimaginable human suffering, in order to maximize wealth and influence in social, political & economic affairs at whatever social costs. From Truthout:

When the European Union (EU) and the International Monetary Fund (IMF) came to Greece's rescue in May 2010 with a 110 billion euro bailout loan in order to avoid the default of a euro-zone member state (a second bailout loan worth 130 billion euros was activated in March 2012), the intentions of the rescue plan were mult-ifold. First, the EU-IMF duo (with the IMF in the role of junior partner) wanted to protect the interests of the foreign banks and the financial institutions that had loaned Greece billions of euros. Greece's gross foreign debt amounted to over 410 billion euros by the end of 2009, so a default would have led to substantial losses for foreign banks and bondholders, but also to the collapse of the Greek banking system itself as the European Central Bank (ECB) would be obliged in such an event to refuse to fund Greek banks.

Read rest here.

Giroux, Henry A. 2005. “The Terror of Neoliberalism: Rethinking the Significance of Cultural Politics.” College Literature 32(1):1-19.

Giroux, Henry A., and Susan Searls Giroux. 2006. “Challenging Neoliberalism’s New World Order: The Promise of Critical Pedagogy.” Cultural Studies ↔ Critical Methodologies 6(1):21–32.

Jerry Epstein on the financial crisis after six years

By Gerald Epstein

It has now been almost six years since Lehman Brother’s collapsed and, as Warren Buffett famously put it, all the world could see who had been “swimming naked”. Alan Greenspan, Ben Bernanke, and many economists claimed that “no one could see it coming”, but many economists working without the ideological blinders of mainstream economic theory did, in fact, see “it” coming.

Prominent among these economists is Jane D’Arista, whose prescient and insightful work on financial and monetary issues serves as a guide and inspiration for those who want to clear away the cobwebs of distorting economic ideology and, in the tradition of Keynes, Minsky and Kindleberger, sink their intellectual teeth into the real economic institutions and dynamics that drive our macroeconomy. If we do that, and ask how the dynamics and institutions of monetary policy, banking and financial regulation have evolved since Lehman Brothers, the panorama is astonishing.

Read rest here.

Notes on the Policy Implications of the New Macroeconomic Consensus

The New Macroeconomic Consensus (NMC) model is based on three simple equations. An IS equation that, contrary to what most discussions within the heterodoxy suggest, is based on a Ramsey model intertemporal approach to savings and investment, a Phillips curve (PC) equation, normally with rational expectations, and a monetary policy (MP) rule, typically Taylor’s rule. From the IS and the MP an aggregate demand (AD) curve is derived, while the PC provides an aggregate supply (AS) curve, similar to Lucas’ supply curve. Business cycles are seen as being determined by shocks, either monetary, that affect the AD curve, or real, which impact the AS curve.

A few things are important to note with respect to the NMC model. First, the IS curve now is not based on the traditional Keynesian multiplier process, by which savings adjust to investment (or in more sophisticated models with endogenous investment, to autonomous demand) as a result of variations to the income level. Agents make intertemporal decisions on consumption and savings, and investment adjusts, in the absence of imperfections, to full employment savings as in the pre-Keynesian models. That is the reason why in order to stimulate the economy it is often suggested that what is needed is higher inflationary expectations (which in this framework could be caused by the central bank announcing a higher inflation target), which would in turn lead to an increase in current consumption (since inflation would reduce future consumption possibilities; see my critique of this view, which I refer to as the inflation expectations fairy, here).

Second, both the New Keynesian Phillips Curve and the Taylor rule presuppose the existence of a natural rate of unemployment, in line with Milton Friedman. Further, stabilizing the rate of inflation around its target is tantamount to stabilizing output around its full employment level, a result sometimes referred to as the ‘Divine Coincidence.’ Thus, inflation is always the result of a level of unemployment that is below its natural level, or in other words caused by demand-pull. Supply-side shocks may eventually cause inflation too, but those are seen, at least by most New Keynesians as being of secondary importance. Even Lucas, who has accepted for the most part the Real Business Cycle story, admits that one cannot explain the Great Depression and other such crises with real shocks.

Third, the MP rule implies that money is endogenous, and that central banks control the rate of interest and NOT the quantity of money. In other words, the old Monetarist rules about the rate of growth of money supply are out, since actual central banks very rarely have behaved in that way. This ‘innovation’ (not much of an invention since Wicksell used more than a century ago) within the mainstream took place without ever acknowledging the contributions of Kaldor (accomodationist tradition to endogenous money), Minsky (financial innovation tradition to endogenous money), Moore and other post-Keynesian authors.

Finally, it is rather clear that the NMC is essentially a neo-Wicksellian model (for a simple description go here), rather than Keynesian (New or otherwise). Not only the multiplier model was abandoned (and with it even the basis for fiscal policy activism, since the logic of Barro’s Ricardian Equivalence has been incorporated; see Wren-Lewis here), but also the concept of the natural rate that Keynes at least tried to get rid of has become central for policy analysis. And here is the Achilles’ heel of the NMC model.

Note that if the natural rate is not fixed, and in particular if it presents hysteresis or path dependence, and moves with the actual level of unemployment, then the basis of the NMC model falls apart. In other words, expanding demand might reduce the natural rate of unemployment and would not trigger inflation, and as a result would not require the central bank to hike the rate of interest to lean against the wind. That was, in a sense, the rationale for not hiking the rate of interest when unemployment fell below 6%, which many identified as the natural rate, during the Clinton boom. Greenspan suggested that productivity was going up (note that he didn’t necessarily say that productivity went up, and the natural rate down, as a result of the expansion of demand).

There are good logical reasons for not believing the natural rate story, as we know, associated to the limitations of the marginalist theory (see here). However, there are also reasonably well-established empirical problems with the natural rate hypothesis. The Real Business Cycles authors, in particular Nelson and Plosser in their classic paper (here), have long ago shown that output follows a random walk. In other words, changes in output are permanent, and there is no tendency for output to revert to its former trend following a shock, contradicting the natural rate hypothesis, or suggesting if one prefers that the natural rate moves with supply-side shocks and that the business cycle is the result of agents adjusting their behavior to the change in the natural rate.

As I noted before (here), the actual measure of productivity (Total Factor Productivity, TFP) used by RBC authors does NOT measure productivity, and most of their conclusions are irrelevant really. Also, as suggested above, it would be impossible to pin down the real shock that caused the Great Depression or the Great Recession, that have structural causes that are profound (in the patterns of consumption, private indebtedness and inequality) and that were triggered by financial shocks. However, the notion that the natural rate is not fixed, and that it changes significantly is actually quite important, since as we indicated, it suggests that policies that try to lean against the wind hiking the rate of interest when the economy is below the natural rate of unemployment are without foundation.

Heterodox authors would add to the RBC empirical observation about the fact that output is not mean reverting, that the supply or capacity limit of the economy is endogenously determined by autonomous spending (the supermultiplier that extends Keynes’ effective demand to explain potential output; for more go here). This does NOT mean that one can expand the economy without limits, since if the expansion of demand is faster than the movement of the capacity limit, eventually full employment would be reached and inflation (demand-pull inflation) might follow. Note, however, than since the 1930s in the US unemployment was below 4% (to say a relatively low number) only for four short periods, during the mid-40s, early 50s, late 60s and late 90s, with inflation occurring in the first three periods. Also, it suggests that the main barrier to the use of demand policies to achieve full employment, at least in developed countries with no balance of payments problems, is political. As Kalecki noted long ago, sound finance would be the political instrument to keep workers’ demands for higher wages in line. The NMC model is the modern incarnation of what Kalecki’s referred to as sound finance. So who is really surprised with the dominance of austerity policies?

Dean Baker on The Promotion of Waste & Inequality By US Finance

By Dean Baker

In the crazy years of the housing boom the financial sector was a gigantic cesspool of excess and corruption. There was big money in pushing and packaging fraudulent mortgages. The country paid a huge price for the financial sector's sleaze. Unfortunately, because of the Obama administration's soft on crime approach to the bankers who became rich in the process; the industry is still a cesspool of excess and greed. Just to be clear, knowingly issuing and packaging a fraudulent mortgage is a crime, the sort of thing for which people go to jail. But thanks to the political power of the Wall Street, none of them went to jail, and in fact they got to keep the money.

Read rest here.

For more on the long-run macroeconomic causes, implications, and effects of US financialization, see recent articles here, here (subscription required) , here, here, here (subscription required), and here (subscription required); for a pertinent sociological analysis, see here

Lars Syll On Methodological Critique of Austrian Economics

By Lars Syll [h/t] Jan Milch

This is a fair presentation and critique of Austrian methodology. But beware! In theoretical and methodological questions it’s not always either-or. We have to be open-minded and pluralistic enough not to throw out the baby with the bath water — and fail to secure insights like this:

What is the problem we wish to solve when we try to construct a rational economic order?… If we possess all the relevant information, if we can start out from a given system of preferences, and if we command complete knowledge of available means, the problem which remains is purely one of logic…

This, however, is emphatically not the economic problem which society faces…The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is…a problem of the utilization of knowledge which is not given to anyone in its totality.

This character of the fundamental problem has, I am afraid, been obscured rather than illuminated by many of the recent refinements of economic theory…Many of the current disputes with regard to both economic theory and economic policy have their common origin in a misconception about the nature of the economic problem of society. This misconception in turn is due to an erroneous transfer to social phenomena of the habits of thought we have developed in dealing with the phenomena of nature…

Read rest here (and be sure to check out the comments made by Paul Davidson!).

Structural Transformation in China 1952-2013

Just checking the Chinese economic data (subscription required), and decided to look at the structural changes more or less since the Communist takeover, as shown below.

The interesting thing is that while the size of agriculture diminished significantly throughout the whole period, industry more or less reached its current level at the beginning of the opening period. Most of the growth in the post-liberalization period has been in services, which has gone hand in hand with the urbanization process.

Of course the results are a little bit deceiving. The primary sector is basically agriculture and the secondary contains the bulk of manufacturing, but the tertiary includes some industries too. For the definitions go here. Still interesting result. By the way, by 2013 the tertiary sector is finally bigger than the secondary.

Per Fed, American Median Wealth Plunged By 40 percent From 2007 to 2010

 

The Federal Reserve has confirmed that the median net worth of families plunged by 40 percent in just three years, from $126,400 in 2007 to $77,300 in 2010. That is, the average American family wealth is roughly on par with what it was in 1992. According to the Washington Post:

"The recent recession wiped out nearly two decades of Americans’ wealth, according to government data released Monday, with ­middle-class families bearing the brunt of the decline. The data represent one of the most detailed looks at how the economic downturn altered the landscape of family finance. Over a span of three years, Americans watched progress that took almost a generation to accumulate evaporate. The promise of retirement built on the inevitable rise of the stock market proved illusory for most. Homeownership, once heralded as a pathway to wealth, became an albatross. The findings underscore the depth of the wounds of the financial crisis and how far many families remain from healing. If the recession set Americans back 20 years, economists say, the road forward is sure to be a long one. And so far, the country has seen only a halting recovery."

 Read rest here.

More on Argentina and the Vulture Funds

This week will be key for the Argentine debt renegotiation drama. If no agreement is reached then default might take place. Here is a short note in Spanish for the Argentine newspaper Página/12, in which I suggest that in spite of the costs of an agreement, and the fact that on a simple technical basis Argentina should not pay them (after all they would still profit if they accepted the terms that 93% of bondholders agreed to), it might be the only solution that would allow economic growth to continue.

Tom Palley on New Keynesianism as a Club

Tom Palley discusses the fact that New Keynesian have 'rediscovered' several of the ideas that other Keynesians, in particular the more heterodox sort (but not only, he includes James Tobin too), without properly acknowledging them. In his words:

"For almost thirty years, New Keynesians have dismissed other Keynesians and not bothered to stay acquainted with their research. But now that the economic crisis has forced awareness, the right thing is to acknowledge and incorporate that research."

Read rest here. By the way, Tobin, in his little book Asset Accumulation and Economic Activity, discusses why even with price flexibility the system does not have a tendency to full employment, being the closest to the alternative Keynesian ideas, or arguably to Keynes' own views. For Minsky's review of that book, in which he also criticizes Tobin for dismissing the research of post-Keynesians, go here.

CEPR on "Minimum Wage Workers Pay Cut Clock"

The last time the federal minimum wage was raised was July 24, 2009, to $7.25 per hour. Workers making the minimum wage have been facing a continual pay cut since then, as inflation has eroded the purchasing power of the minimum wage.

The first minimum wage pay cut clock shows how many dollars America's minimum wage workers have lost since July 2009. Every second it shows how much more money they're losing, as long as the federal minimum wage remains stuck at $7.25. Mind you, even if the federal minimum wage were to catch up to its July 2009 level, it would still be far below its historical level. The peak year for the U.S. minimum wage was 1968.

The second clock shows how many dollars America's minimum wage workers have lost since July 24, 2009 if the minimum wage had instead been raised to its 1968 level and then kept pace with inflation since then. Every second it shows how much more money they're losing, as long as the federal minimum wage remains below its historical peak.

See here.

A debate on Endogenous Money and Effective Demand: Keen, Fiebiger, Lavoie and Palley

The last issue of the Review of Keynesian Economics (ROKE) has a debate between Steve Keen with Brett Fiebiger, Marc Lavoie and Tom Palley. Two papers are available for download (Keen and Lavoie's). Tom's paper is available as a working paper here.

The basis for Steve's defense of endogenous money is based on the works of Schumpeter, as developed by the latter's student Hyman Minsky. In his words:

"The proposition that effective demand exceeds income is not a new one: it can be found in both Schumpeter and Minsky (and arguably in Keynes's writings after The General Theory, though not in as definitive a form – see Keynes 1937*, p. 247). A difference between income and expenditure, with the gap filled by the endogenous creation of money, was a foundation of Schumpeter's vision of the entrepreneurial role in capitalism. Minsky's attempt to reconcile endogenous money and sectoral balances is the closest antecedent to the argument I make, but I will start in chronological order with Schumpeter's analysis."

I have noted before that the idea of endogenous money is NOT central for heterodox approaches, since Wicksell and the whole modern New Keynesian consensus adopts it. And perfectly conventional authors like Irving Fisher had introduced debt in their models too. I also noted that Schumpeter is essentially a Real Business Cycle (innovations are nothing but exogenous productivity shocks) author, which thought that both short-run output and employment and long-run growth were determined by supply-side factors. So in general I'm not a great fan of having Schumpeter as a staring point, or the notion that to introduce debt and endogenous money is per se a critique of the mainstream.

In that respect, I tend to agree with Tom's point that it is the way in which endogenous money and debt are introduced in the model that matters. Keen's use of a variation of Fisher's equation of exchange, as pointed out by Tom, is troublesome. In Tom's words:

"The Fisher equation constitutes the monetarist framework for macroeconomics. Income-expenditure accounting constitutes the Keynesian framework and it offers an alternative approach to understanding the AD, credit, endogenous money nexus."

In fact, in the equation of exchange framework the presumption is that demand would adjust (in Steve's approach with endogenous money) up to the point that it meets supply at the optimal level (also something that would be perfectly in line with  Schumpeter). The whole point of the income-expenditure framework is that it puts demand in charge of the level of activity.

At any rate, a good debate that it's worth checking out. Enjoy!

* J.M. Keynes (1937), "Alternative Theories of the Rate of Interest," 47, Economic Journal, pp. 241-252. Available here (subscription required).

Comparative Asian and Latin American Development

New book on the comparative development experiences of Latin American (Argentina, Brazil, Chile, Colombia, Mexico, and Venezuela), and Asian (China, India, Indonesia, Philippines, and South Korea) economies, plus Russia, edited by Ricardo Bielschowsky, has been published and is available for free here (in Portuguese, I'm afraid). A general intro to all country experiences and the chapter on Argentina by yours truly (an updated version of the paper on Argentina is posted here).

CEPR | Stimulus and Fiscal Consolidation: The Evidence and Implications

In a previous post, see here, Matias provided a graph that displayed the fiscal results for the US as a share of GDP from 1993-2014, along with a discussion of the misconception that democrats are nothing but tax/spend liberals. I thought it would be pertinent to post this paper by Dean Baker and David Rosnick providing conclusive evidence on the effects of stimulus packages and fiscal consolidation during the recent economic crisis.

From the abstract:

The first part deals with the most important literature on the subject, the consensus in the research of the past decade attests a clear counter-cyclical effect of stimulus packages during a prolonged recession. The second part deals with the impact of changes in government consumption and investment to growth. For this data for developed countries in 1980 are analyzed. Consistent with much of the previous literature have increased government spending during a crisis has a positive effect on economic growth. In addition, the period is simulated after the crisis, the multiplier effect is around 1.5. The third part focuses on the production potential, which has declined sharply due to the economic crisis. This would have to include a comprehensive model that analyzes the effects of an economic stimulus package with, since the effect could turn out relative to the size of the stimulus package as significant.

Read rest here.

Bretton Woods Conference transcripts now available

The transcripts of 1944 Bretton Woods Conference were recently found at the Treasury, and have been published (a sample is available here). More info here. As noted by the NYTimes do NOT expect any major surprises though.

Overall federal fiscal results for the US, 1993-2014

Prompted by my post on Brazil yesterday. Graph below shows fiscal results for the US as a share of GDP.

For more go to the original post here.

PS: On the switch between Democrats and Republicans regarding deficits and the 'size' of government see this debate.

Fiscal balances in Brazil, 2002-2012

This is from an unpublised paper by Fernando Maccari Lara, Roberto de Souza Rodrigues, and Carlos Pinkusfeld Bastos.* Figure below shows the nominal and primary balances as a share of GDP, and the financial expenditures, which make the difference between the two balances (i.e. a primary surplus becomes a nominal deficit after the interest payments on outstanding debt). All figures as a share of GDP.

Note that during the whole Lula, and the first two years of Dilma, the Brazilian government kept primary surpluses, as it has done essentially for a few decades now, with few exceptions. There is a tendency for the expenses with interest rates to go down, they remain at 3.5% of GDP (in 2012), which means that it remains the largest 'social' program in Brazil, larger than the Bolsa Familia.

From the asbtract: 

Brazilian economy adopts a set of economic policies after the crisis in the end of the 1990s decade. Setting a target for the primary fiscal surplus was the main objective of the fiscal policy, and it has been in used since then. In fact, the Workers Party (PT), which was initially critical to this policy, maintained it after assumed the government in 2003. Therefore, this article analyzes the fiscal policies during this party government period from 2003 to 2012. To achieve this objective it will be used both government's official raw data and a calculation of fiscal impact of outlays and taxation. We conclude that there is no clear rationale behind the determination of primary fiscal surpluses which became more of a political dogma than a useful policy instrument. In terms of economic growth one cannot say that the fiscal policy has been effectively contractionist but in some years it most certainly did not contribute to a more robust rate o economic growth and did not respond to stabilization policy needs.

* To be published in the Annals of the Brazilian Keynesian Association Meetings.

Cheap Talk at the Fed

By Dean Baker

Federal Reserve Board Chair Janet Yellen made waves in her Congressional testimony last week when she argued that social media and biotech stocks were over-valued. She also said that the price of junk bonds was out of line with historic experience. By making these assertions in a highly visible public forum, Yellen was using the power of the Fed’s megaphone to stem the growth of incipient bubbles. This is an approach that some of us have advocated for close to twenty years. Before examining the merits of this approach, it is worth noting the remarkable transformation in the Fed’s view on its role in containing bubbles. Just a decade ago, then Fed Chair Alan Greenspan told an adoring audience at the American Economic Association that the best thing the Fed could do with bubbles was to let them run their course and then pick up the pieces after they burst. He argued that the Fed’s approach to the stock bubble vindicated this route. Apparently it did not bother him, or most of the people in the audience, that the economy was at the time experiencing its longest period without net job growth since the Great Depression.

Read rest here.

Some thoughts on the Bank of the BRICS

The BRICS announced in their last summit a new development bank, with US$ 100 billions in capital, of which US$ 41 billions are from China. There is a certain excitement about the possibilities for South-South cooperation and alternatives to development that this new institution will bring about. First, let me explicitly say that I think in general development banks are a relevant tool for development, that the new bank is a welcome addition that increases South-South cooperation and that reduces the need for developed country dominated institutions.

And yes a lot of the investment that will come will likely (and I would say hopefully) be on infrastructure (I say this since in one of the meetings of the Bank of the South, in Quito years ago, an activist told me I was a neoliberal for supporting infrastructure rather than community based projects; by the way, not against those, but as I said back then, if you want schools or sanitation for local communities, you'll need roads, electricity, sewer facilities and so on, which is what I mean by infrastructure). Stephany Griffith-Jones provides here the sort of defense of development banks I would agree with.

The new arrangements include a Contingent Reserve Arrangement which is more interesting than the bank itself, since it purports to provide “a self-managed contingent reserve arrangement to forestall short-term balance of payments pressures, provide mutual support and further strengthen financial stability.” In other words, not simply provide funding for development projects, but more widely to provide finance for balance of payments problems, which are at the center of developing countries problems. So, all in all, this seems to be something to be celebrated.

My two concerns are not directly connected to the new institutions. The first issue would be implementation. The Bank of the South has been in the works for almost a decade, and has been established since 2009. As I had noted here, barriers to implementation have basically meant that it is an irrelevant institution, at least so far (what I said back in 2009 was that lack of implementation might come from political differences, in the case of the Bank of the South, given its role vis-à-vis the Brazilian National Development Bank, BNDES). Note that in the case of the Bank of South it duplicated to some extent the work done by the Corporación Andina de Fomento (CAF), another regional development bank, also headquartered in Caracas. Not only it has so far failed, but in addition it has precluded the further development of existing institutions.

The second concern is regarding the type of integration between Brazil (member of the BRICS) and other Latin American countries (the same is true with some caveats for India, specialized in services, and Russia and South Africa) with China. If the new development bank is one more instrument to pursue a strategy of development in which Latin American economies specialize in commodity exports, to an increasingly manufacturing based China, then rather than solve our long-term balance of payments problems we will end building a new dependent relation, now with the Asian periphery (for more here). Hope springs eternal.

EPI | Why It’s Time to Give Tipped Workers A Living Wage

By Sylvia A. Allegretto and David Cooper

Raising the wage floor for tipped workers is crucial for a number of reasons. Rising income inequality and the accompanying slowdown in improving American living standards over the past four decades has been driven by weak hourly wage growth, a problem that has been particularly acute for low-wage workers (Bivens et al. 2014). Tipped workers—whose wages typically fall in the bottom quartile of all U.S. wage earners, even after accounting for tips—are a growing portion of the U.S. workforce. Employment in the full-service restaurant industry has grown over 85 percent since 1990, while overall private-sector employment grew by only 24 percent.4 In fact, today more than one in 10 U.S. workers is employed in the leisure and hospitality sector, making labor policies for these industries all the more central to defining typical American work life. Ensuring fair pay for tipped workers is also a women’s issue. Women comprise two out of every three tipped workers; of the food servers and bartenders who make up over half of the tipped workforce, roughly 70 percent are women. Allegretto and Filion give an historical account of the tipped-minimum-wage policy and bring much-needed attention to how the two-tiered wage system results in significantly different living standards for tipped versus non-tipped workers. For instance, tipped workers experience a poverty rate nearly twice that of other workers. This contradicts the notion that these workers’ tips provide adequate levels of income and reasonable economic security.

Read rest here.

Bivens, Josh, Elise Gould, Lawrence Mishel, and Heidi Shierholz. 2014. "Raising America’s Pay: Why It’s Our Central Economic Policy Challenge." Economic Policy Institute, Briefing Paper #378. http://www.epi.org/publication/raising-americas-pay/

NPR Planet Money on Bretton Woods and the Role of the Dollar

Listen here (if the one on top doesn't work). Not bad, I should add, but it relies too much on Benn Steil's terrible book. In particular the evidence on Harry Dexter White being a Soviet spy is exaggerated. The best evidence is inconclusive. And as the program says White was responsible, or mainly so, for the use of the dollar as the key currency, which gave the US a great economic advantage. If he was pro-Soviet he was awful, wasn't him?

New Book: Private Equity at Work, When Wall Street Manages Main Street

By Eileen Appelbaum and Rosemary Batt

Prior research on private equity has focused almost exclusively on the financial performance of private equity funds and the returns to their investors. Private Equity at Work provides a new roadmap to the largely hidden internal operations of these firms, showing how their business strategies disproportionately benefit the partners in private equity firms at the expense of other stakeholders and taxpayers. In the 1980s, leveraged buyouts by private equity firms saw high returns and were widely considered the solution to corporate wastefulness and mismanagement. And since 2000, nearly 11,500 companies—representing almost 8 million employees—have been purchased by private equity firms. As their role in the economy has increased, they have come under fire from labor unions and community advocates who argue that the proliferation of leveraged buyouts destroys jobs, causes wages to stagnate, saddles otherwise healthy companies with debt, and leads to subsidies from taxpayers. Appelbaum and Batt show that private equity firms’ financial strategies are designed to extract maximum value from the companies they buy and sell, often to the detriment of those companies and their employees and suppliers. Their risky decisions include buying companies and extracting dividends by loading them with high levels of debt and selling assets. These actions often lead to financial distress and a disproportionate focus on cost-cutting, outsourcing, and wage and benefit losses for workers, especially if they are unionized.

See here.

Tom Palley on the Phillips Curve

Tom has written a short note titled “The Phillips Curve: Missing the Obvious and Looking in All the Wrong Places.” From the intro:

There is an old story about a policeman who sees a drunk looking for something under a streetlight and asks what he is looking for. The drunk replies he has lost his car keys and the policeman joins in the search. A few minutes later the policeman asks if he is sure he lost them here and the drunk replies “No, I lost them in the park.” The policeman then asks “So why are you looking here?” to which the drunk replies “Because this is where the light is.”That story has much relevance for the economics profession’s approach to the Phillips curve.

Read more here.

Kevin P. Gallagher on BRICS Consensus

By Kevin P. Gallagher

Conveniently scheduled at the end of the World Cup, leaders of the BRICS countries travel to Brazil in mid-July for a meeting that presents them with a truly historic opportunity. While in Brazil, the BRICS hope to establish a new development bank and reserve currency pool arrangement. This action could strike a true trifecta — recharge global economic governance and the prospects for development as well as pressure the World Bank and the International Monetary Fund (IMF) — to get back on the right track. The two Bretton Woods institutions, both headquartered in Washington, with good reason originally put financial stability, employment and development as their core missions. That focus, however, became derailed in the last quarter of the 20th century. During the 1980s and 1990s, the World Bank and the IMF pushed the “Washington Consensus,” which offered countries financing but conditioned it on a doctrine of deregulation.

Read rest here.

Mark Weisbrot on BRICS reserve fund & development bank

Fed doesn't think that the natural rate of unemployment is 6.5%

Previously there was some talk about the Fed keeping the fed funds rate low as long as unemployment was higher than 6.5% and inflation was close to the 2% unofficial target. Since last month the unemployment rate crossed that barrier, and is now at 6.1%, there might have been doubts about what would Janet Yellen do or simply What Would Janet Do (WWJD).

The good news is that, quite correctly, Yellen seems to believe that the recovery is still weak, the labor market is slacking and there is no sign of impending inflation acceleration. So the natural rate (which does not exist) is NOT 6.5% for the Fed.

On the blogs

Why Macroeconomists, Not Bankers, Should Set Interest Rates - Mainly Macro

Economic Policies Pursuant to the Global Crisis: A Critique - Mainly Macro

Tom Engelhardt: An Exceptional Declince for the Exceptional County? The Empire as Basket Case - Naked Caplitalism

Nearly Half of New Small Businesses Established by Black And Hispanic Women Shut Down Within A Year - USAPP

Financial Interconnectedness and Systemic Risk: The Fed's FR Y-15 - TripleCrisis

Banking, Monetary Policy And The Political Economy Of Financial Regulation

To be published soon. A Festschrift for Jane D'Arsita. From the dust-jacket:

"Jane D’Arista is one of those towering figures who thinks way ahead of the conventional understandings. A generation ago she recognized the distorted architecture of finance and banking and described in lucid detail the reform agenda for restoring a stable and equitable system. Written in the tradition of D’Arista, the essays in this important collection point the way toward overcoming the recurrent financial disorders of our gilded age. Like Jane D’Arista’s work, this timely volume demands the attention of both policy experts and the politicians who must do the reconstruction."

William Greider, author of Secrets of the Temple: How the Federal Reserve Runs the Country

For more info go here.

Who should negotiate with the Vulture Funds

A bit of World Cup humor.

Si mandamos a @Mascherano a negociar con los fondos buitres trae vuelto !!!!!
— Toro Palladino (@Toropalladino) July 10, 2014

Translation: If we send Mascherano to negotiate with the Vulture Funds, he will bring back some change!!!!!

If you read in Portuguese, here is an interview with yours truly on the Vulture Funds.

NBER: Mutual Assistance between Federal Reserve Banks, 1913-1960

By Barry Eichengreen, Arnaud J. Mehl, Livia Chițu, & Gary Richardson

This paper reconstructs the forgotten history of mutual assistance among Reserve Banks in the early years of the Federal Reserve System. We use data on accommodation operations by the 12 Reserve Banks between 1913 and 1960 which enabled them to mutualise their gold reserves in emergency situations. Gold reserve sharing was especially important in response to liquidity crises and bank runs. Cooperation among reserve banks was essential for the cohesion and stability of the US monetary union. But fortunes could change quickly, with emergency recipients of gold turning into providers. Because regional imbalances did not grow endlessly, instead narrowing when region-specific liquidity shocks subsided, mutual assistance created only limited tensions. These findings speak to the current debate over TARGET2 balances in Europe.

Read rest here (subscription required).

CEPR: Latin American Growth in the 21st Century - The 'Commodities Boom' That Wasn't

By David Rosnick and Mark Weisbrot

This paper looks at whether the data support such a conclusion. It finds that there is no statistically significant relationship between the increase in the terms of trade (TOT) for Latin American countries and their GDP growth. There is, however, a positive relationship between the TOT increase and an improvement in the current account balance. It may be that this allowed countries to avoid balance of payments crises or constraints.

Read rest here.

Stop bashing GDP!

So everybody hates the Gross Domestic Product! The New York Times and the Financial Times have recently published articles criticizing the main measure of production in the economy. This is certainly not new, and criticism of the value of GDP for certain purposes, as a measure of well-being, for example, have led in the past to the creation of other variables like the United Nations Development Programme's Human Development Index, which includes GDP per capita (actually Gross National Income per capita), life expectancy at birth and average years of schooling for adults.

In fact, the NYTimes article basis for the supposedly dramatic "Rise and Fall of the GDP" is it's inability to measure well-being, and in it the author emphasizes its disadvantages when compared to the HDI. The NYTimes piece quotes Sen, the godfather of HDI, complaining about the "silliness about identifying growth with development." Of course, since GDP is only about the material growth of the economy, it would be an incomplete measure of development.

The most common type of critique is that GDP does not count many things, like environmental degradation, or happiness (yep, I know; check Putnam's ideas in the NYTimes piece; talk about silliness), or almost all non-market transactions for that matter, or is slow to adjust to new products and services introduced in the market, and that it's not particularly good for understanding inequality (Robert Reich's complaint in FT's piece; check the full list of complaints in both articles linked above). The best defense is provided by William Nordhaus, who argues compellingly that: “if you want to know why GDP matters, you can just put yourself back in the 1930 period, where we had no idea what was happening to our economy.”

First, GDP is not a measure of everything, and it certainly has limitations. But it does measure relatively well the material production in a given year, and provides the basis for understanding the process of accumulation, which is central for understanding the dynamics of capitalism. And actually, if you look at functional distribution of income in the National Income and Product Accounts (NIPA), which are used to calculate GDP, you do have one of the best measures of income inequality! Yes growth of the flow of goods and services produced in a country in a year is not tantamount to development, but without growth developing countries cannot achieve the levels of well-being of advanced economies, so growth is kind of a pre-requiste (and yes, growth involves environmental degradation, and we should try to minimize it). Further, with GDP one can obtain a fairly good measure of productivity (labor productivity), which is the basis for the Wealth of Nations, if you believe that dude Adam Smith.

My beef with the profession is not the use of GDP growth as a measure of material progress, but the fact that a limited, supply-constrained, individual maximizing utility, market-friendly, neoclassical version of the process of growth and development is the dominant one. But GDP is fine. Like price indexes, which also are limited and sometimes inaccurate, is an essential tool for understanding the real world.

Tom Palley on Milton Friedman’s economics and political economy

By Thomas Palley

Milton Friedman’s influence on the economics profession has been enormous. In part, his success was due to political forces that have made neoliberalism the dominant global ideology, but Friedman also rode those forces and contributed to them. Friedman’s professional triumph is testament to the weak intellectual foundations of the economics profession which accepted ideas that are conceptually and empirically flawed. His success has taken economics back in a pre-Keynesian direction and squeezed Keynesianism out of the academy. Friedman’s thinking also frames so-called new Keynesian economics which is simply new classical macroeconomics with the addition of imperfect competition and nominal rigidities. By enabling the claim that macroeconomics is fully characterized by a divide between new Keynesian and new classical macroeconomics, new Keynesianism closes the pincer that excludes old Keynesianism. As long as that pincer holds, economics will remain under Friedman’s shadow.

Read paper here.

On the blogs

Pricing Power and Lower Potential GDP - Economist's view

The Great Recession's long-term damage - VOX

"Successful" Politics ... At Expense of General Welfare of the People? - Mike Norman Economics

Full Employment and the Path to Shared Prosperity (3 graphs) - Real World Economics Review

The Great Disinvestment - Paul Krugman

John King and Marc Lavoie and alternatives to the mainstream

An interview with John King (here), in the World Economic Association Newsletter. Also, chapter 1 of Marc Lavoie's new book on post-Keynesian economics available here.

PS: In Marc's book I'm included in a group of authors that can be classified in more than one category. In his words: "Many eclectic and productive economists go across all or at least two of the categories discussed above, and so could not fit neatly into one of the strands. This is the case of key senior authors such as Philip Arestis, Geoff Harcourt, John King , Barkley Rosser Jr and Edward Nell, or more junior ones like Steve Keen, Mathew Forstater, Mathias (sic) Vernengo and Louis-Philippe Rochon."

Dean Baker - Housing & The Downturn: It's Really Not That Complicated

By Dean Baker

Neil Irwin has a piece noting housing's importance in the downturn, which gets things half right. First, housing is typically important in economic cycles, as he says, but the picture is quite different than Irwin implies. In a typical recession housing construction falls because it is very sensitive to interest rates. Most recessions are brought on by the Fed raising interest rates to slow the economy. In these cases the decline in housing is a deliberate outcome of Fed policy, not an accidental outcome to be avoided. In contrast, the most recent downturn was brought on by a collapse of a housing bubble. This made it qualitatively different from most prior downturns (the 2001 recession was also bubble induced) in several different ways. First, construction was proceeding at an extraordinary rate of more than 6.0 percent of GDP before the collapse, compared to an average rate of just over 4.0 percent of GDP. This meant that housing contracted far more than it would in a typical downturn. Furthermore, because of the overbuilding of the bubble years, housing fell further than normal, hitting levels just above 2.0 percent of GDP. And, because the downturn was not brought on by a rise of interest rates it could not be reversed by a drop in interest rates.

Read rest here.