Thirlwall à la Godley

Short note on Thirlwall's Law by Lance Taylor available here. As he notes on Thirlwall's Law:  "Insofar as they [the conditions to generate it] are 'extreme,' the plausibility of (3) [Thirlwall's Law] is open to doubt," which is one of the points I raised in my recent debate with Jaime Ros. Causality here remains from exports to growth, which was reversed in Clavijo and Ros, but there is a healthy skepticism about the generality of the law.

Arguably Godley had a version of Thirlwall's Law in his model too. As noted by Zezza: "the ideas underlying the ‘New Cambridge Hypothesis,’ which assumed... that the private sector would adjust rather quickly to a shock, to restore its desired income/assets ratio." In this sense, in the long run in a steady state Godley assumed that the net acquisition of financial assets would be zero. This would be a stock version of the flow equilibrium between investment and savings, the private balance.

Martin Feldstein on Wall Street Instability and Interest Rate Policy

Martin Feldstein, chairman of the Council of Economic Advisers (CEA) during the Reagan administration, and one of the most influential economists in policy circles says that: "Market participants know that the economy is now essentially at full employment, that the consumer-price index is close to 2% and that there is little risk of deflation."

Few things. This:

Broader measure of unemployment is at 10.4%. Then this:

That is, the increase in employment, for the growing population, since the crisis has been almost nil. And finally this:

That is, wages have not increased much in real terms (click on figure for a better image).

Also, the deflation that matters (again) is asset deflation, not CPI, or some broad price index, deflation. Funny thing is that Feldstein thinks it's possible that asset deflation would have real effects. He says: "Much of this mispricing will likely unwind in the months ahead. What isn’t clear is whether the fall of equity prices and other corrections will have adverse systemic effects as they did in 2007-08, bringing down consumer spending and business investment and thereby reversing the recent labor-market improvement. Only time will tell."

I'm more skeptical that the effect would be big. For most consumers the effects of the Wall Street crash are irrelevant. But clearly there is no risk of inflation. In sum, not at full employment, and inflation is not really a problem, since wages are subdued. So his call for higher interest rates is hard to defend. Unless there is something else going on.

PS: Feldstein was on the board of AIG for many years, and he received a lot of money (millions?) from the company, which was at the center of the financial meltdown in 2008. He never defended regulation of financial markets. It might be a coincidence of course that his personal interests and his views are well aligned. But it would be good to know who are his clients now. I mean, just to make sure that his advise on interest rates is not biased ("Nudge, nudge. Wink, wink. Say no more").

Thirlwall's Law debate in Investigación Económica

 

The other side

Jaime Ros, with Pedro Hugo Clavijo, wrote a critique of Thirlwall's Law (in Spanish). Replies by Carlos Ibarra here, Esteban Pérez here and myself here. Their rejoinder here. All in Spanish. Haven't read the whole rejoinder yet (just got it), but for some reason they insist that the supermultiplier implies that exports are always the main source of autonomous demand.* Hm, that's weird. Just puzzled by that one. They should read Bortis and Serrano (this one with Fabio Freitas). Oh well.

* In their words: "El problema con esta propuesta [el supermultiplicador], ... implícitamente está suponiendo que las exportaciones son el componente principal, aunque no único, de la demanda autónoma..." Translation: "The problem with this proposal [the supermultiplier],... is that implicitly presumes that exports are the main component, even if not the only one, of autonomous demand..."

Gets better. They agree with me on this. In their words:  "estamos de acuerdo con Vernengo cuando dice: '(…) el modelo de Thirlwall no es capaz de captar la complejidad del proceso de desarrollo asiático, el papel del Estado, de la inversión pública, del financiamiento de los bancos públicos, del papel jugado por factores geopolíticos asociados a la amenaza comunista, entre otras cosas'." Translation: "we agree with Vernengo when he says: '... Thirlwall's model is not capable of explaining the complexity of the Asian development process, the role of the State, of public investment, of public banks' financing, of the role played by geopolitical factors associated with the communist threat, among other things'." The rest of the paragraph they forgot to quote: "Several of these factors were operative through autonomous government spending. One cannot think about the Chinese case without public investment." That would be as in government spending is the main, even if not the only, source of autonomous demand.

PS: The whole issue of Investigación Económica is available here.

Did anyone notice the global financial crisis of 2007–2008?

By Paul Davidson

On November 4, 2008, at the dedication of a new building, Queen Elizabeth of Great Britain visited the London School of Economics (LSE). While there she was given a briefing by academics at the LSE on the origins and effects of the global financial crisis and its resulting turmoil in international financial markets. The Queen is reported to have asked, “Why did nobody notice it developing?” The director of research at LSE told her, “At every stage someone was relying on somebody else and everyone thought they were doing the right thing.”

How is it possible that the many intelligent investors, bankers, brokers, fund managers and other financial market participants thought they were doing the right thing, when it is clear in hindsight that market activity was creating a situation that ultim- ately caused global financial markets to collapse?

The answer lies in the fact that, for at least four decades, the economic theory that has dominated academic teaching has not been applicable to our economic system.
...

Download the rest of the chapter here. It's the first chapter in his new book Post Keynesian Theory and Policy: A Realistic Analysis of the Market Oriented Capitalist Economy.

Obituaries: Nathan Rosenberg (1927-2015)

E-mail was sent to the Society for the History of Economics (SHOE) informing that Nathan Rosenberg has passed away. Have not seen an obituary, but will link later. He was the author How the West Grew Rich, that suggested that freedom was central for creating the supply-side conditions for economic growth in Western Europe. Several heterodox neo-Schumpeterians used his work, in particular Inside the Black Box. Personally I prefer demand-driven stories, including for technology. At any rate, another blow for economic history, that has less space in economics departments, and that needs clear, erudite thinkers like him.

China and secular stagnation

So in the last couple of weeks the Chinese problems have been in the news. And many suggest that the troubles in the US are not unrelated. For example, the New York Times tells us that according to Larry Summers: “The risks of a deflationary, secular stagnation in the US would be increased by a large devaluation of the renminbi.” And Krugman resuscitates Bernanke's global savings glut as the explanation for everything, from China's slowdown, depreciation and stock troubles to the recent turbulence in Wall Street.

I will not discuss again the problems with that view. In Krugman's favor he suggests that the "ideology of austerity, which has led to unprecedented weakness in government spending, has added to the problem." It is not that it added to it, it is the problem. But in all fairness, set aside the drama in the financial press, the Chinese stock market should not be a problem for China's long term growth, since losses in domestic currency can always be compensated by their central bank. And China increasingly grows as a result of domestic markets, which are expanding, with real wages still going up, and migration to the cities also helping.

The devaluation of the yuan certainly has consequences, but the problem isn't the effects on US exports, and weaker markets here. That the US could grow with an export-led strategy doesn't pass the laugh test. The US will continue the very slow recovery, and the recent Wall Street problems will have a negligible effect on consumer spending. Yes financial markets are still unregulated and that is dangerous.

But the real problem now, as discussed (whole book is worthwhile) a while ago when commodity prices had not yet fallen significantly by Franklin Serrano, is that a devaluation of all peripheral currencies, as it has been going on in recent times, would have a negative impact on commodity prices. That would be the supply side mechanism, rather than the demand (Chinese, in particular) one. And that might have negative consequences for commodity exporters.

On the positive side, this turbulence suggests that the Fed is very unlikely to hike the rate of interest in the next meeting. That's not enough to produce a stronger recovery in the US, but it might be sufficient to preclude a global debt crisis in the periphery.

Keynes beauty contest in the NYTimes

Still very slow posting. Will pick up in September, I hope. Here a link to a game that is representative of what Keynes referred to as the beauty contest, which described the behavior of financial markets. Keynes original quote from chapter 12 of the General Theory says that:

"professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be."

So the game is not necessarily to pick up the number (in the NYTimes) that would follow from rational behavior. It's the number that the average person thinks the average person would choose.

Palley on economic stagnation

Tom's new paper titled "The US Economy: Explaining Stagnation and Why It Will Persist." It's a policy problem, not a structural phenomenon. The abstract:

This paper examines the major competing interpretations of the economic crisis in the US and explains the rebound of neoliberal orthodoxy. It shows how US policymakers acted to stabilize and save the economy, but failed to change the underlying neoliberal economic policy model. That failure explains the emergence of stagnation, which is likely to endure. Current economic conditions in the US smack of the mid-1990s. The 1990s expansion proved unsustainable and so will the current modest expansion. However, this time it is unlikely to be followed by financial crisis because of the balance sheet cleaning that took place during the last crisis.

Read full paper here.

Unemployment is unchanged and so is the Republican Party

So nothing new in the last report. 215k jobs created and unemployment rate at 5.3%. Below the employment to population ratio.

It has started to go up. But there is a long way to go. By the way, in the Republican debate I didn't hear anything different as a solution for the economic problems. Tax cuts, presumably for the wealthy (job creators is not used anymore), a flat tax and even tything instead of income taxes. Deregulation always. They are for military expansion too. And yes military Keynesianism might help the economy, but... Apparently no lesson from the 2008 Global Crisis has been incorporated into the GOP's economic discourse.

Are we on the verge of a new crisis in the periphery?

New paper co-authored with Nate Cline published by the Political Economy Research Institute (PERI). Abstract says:

In this paper we develop a simple model of currency crises, which emphasizes the role of currency mismatches and the balance of payments constraint. In our model, crises are driven by external shocks, particularly foreign interest rate and terms of trade shocks, which drive payments imbalances. In a reversal of conventional causality, we show how a currency crisis can then produce a domestic fiscal crisis. We then discuss the historical relevance of the model, tracing the major waves of currency and fiscal crises. The paper concludes with an assessment of the current situation of the peripheral countries in light of our model and argues that concerns of a renewed wave of currency crises may be overstated.

Full paper here or here. 

Brazil's Economic Slowdown Results from Policy Decisions

A new research paper from the Center for Economic and Policy Research examines the causes of Brazil’s recent economic slowdown and finds that policy choices rather than external factors have been the most important cause. The paper shows that the sharp slowdown that Brazil has experienced since 2011 is overwhelmingly the result of a significant decline in domestic demand that resulted from policy choices made by the government. It concludes that this decision to slow the economy was not necessary as there was no external constraint, such as a balance-of-payments problem, that warranted it.

“There have been enormous economic and social gains since the Workers' Party took office in 2003, in terms of reducing poverty (by 55 percent) and extreme poverty (by 65 percent), increasing employment, income growth, and some reduction in inequality,” CEPR Co-Director Mark Weisbrot said. “However, these gains are being eroded and are seriously threatened if the government continues on its current path.”

The paper, “Aggregate Demand and the Slowdown of Brazilian Economic Growth from 2011-2014,” by CEPR Senior Research Associate Franklin Serrano and economist Ricardo Summa, looks in detail at the sharp slowdown in the Brazilian economy for the years 2011-2014, in which economic growth averaged only 2.1 percent annually, as compared with 4.4 percent in the 2004-2010 period. The authors argue that the slowdown overwhelmingly results from a sharp decline in domestic demand led by government policy, rather than from a fall in exports or from any change in external financial conditions.

Read rest here.

Public debt crisis, austerity and deflation: the case of Greece

From the new issue of the Review of Keynesian Economics (ROKE). By Marica Frangakis from the Nicos Poulantzas Institute, Athens, Greece. From the abstract:

Greece is the country in which the eurozone's public debt crisis began in late 2009. The policy response of the EU elites was to provide financial assistance on condition that a strict austerity-cum-deregulation policy is applied under the watchful guidance of the European Commission, the European Central Bank and the IMF (the so-called Troika). Five years later, the country is in an economic, social and political limbo, as a debt-deflation process has set in. Greece, however, is not a special case. Rather, it illustrates the failures of the prevailing economic and political orthodoxy in the EU. At best, it can serve as an example of the cost of ignoring the lessons of the 1930s Great Depression.

Read full text here. 

Galbraith on the plan B for Greece

Slow (really slow) posting this summer. Here a few links to Jamie's role on the Greek Ministry of Finance Working Group convened by Varoufakis. Here he clearly says that: "At no time was the Working Group engaged in advocating exit or any policy choice. The job was strictly to study the operational issues that would arise if Greece were forced to issue scrip or if it were forced out of the euro." So it was a plan B in case of Grexpulsion, not a tactical negotiation tool or a threat of Grexit.

Below a podcast on the same topic (first half in which Jamie is interviewed).

Again it confirms it was a contingency plan, and no there was no plan to hack taxpayer accounts to prepare a return to the drachma.