The Mediatic-Parliamentary Coup in Brazil

President Dilma Rousseff was finally toppled down today. Yes, it's a coup, different in nature to the previous ones (last in Brazil was in 1964), but with the same consequences. I have discussed the nature of the process here, here, here, and here (this last more on the economy, from last year) before. It is a coup that has received discrete support from the US government, by the way, as much as the elected neoliberal government of Macri in Argentina (Obama visited the latter, a government that basically tries to vindicate the last and genocidal dictatorship in Argentina).

A good summary of the mess is available here. Important things to remember: she is NOT implicated in corruption (contrary to Fernando Collor that was impeached in 1992, so that was NOT a coup), and even if one has qualms about the fiscal transfers ("pedaladas") that are the formal cause for the impeachment (and one shouldn't really, since these are not crimes of responsibility, or crimes at all), it's not even clear that she violated the rules by which she was overthrown. Note that the worse that can actually be said, and it was repeated ad nauseam by the opposition, is that she lied during the campaign. And she did. She promised a government against bankers and for the people, with expansion of social expenditures, and did a u-turn, and delivered the neoliberal policies that the opposition was requesting.

What comes next is more of the same neoliberal policies that are spreading throughout the continent, support for free trade, privatization, including cuts to social security, lower real wages, fiscal adjustment, and more unemployment. The economic collapse of the last year and half is far from over.

The Impossible Trinity Revisited

The Economist's brief is available here (subscription required). I have discussed the limitations of the Mundell-Fleming model in some posts (here and here, for example). But I have not discussed the limits to the trilemma fully. In this paper, I argue that under certain circumstances, associated to what Ben Cohen calls the geography of money, the trilemma might not hold. The countries at the top of the pyramid with convertible currencies do not face the harsh trade offs of the countries at the base.

As I said back then:

"The United States during the current crises is an example of the reduced impact of the trinitarian trade-offs for countries with convertible currencies. In fact, even though the economy was in a deep recession by the last quarter of 2008, the dollar, which had depreciated considerably over the previous years, started to appreciate as investors increasingly fled to Treasury bonds for safety. In other words, even though rates of interest were reduced to deal with the recession and the financial crisis, and capital mobility was preserved, a certain degree of exchange rate stability was maintained."

If you're not at the top, I would recommend to give up the complete free mobility of capital, which should be no surprise.

Top marginal income tax rate in developed countries

From the new book Taxing the Rich: A History of Fiscal Fairness in the United States and Europe by Kenneth Scheve and David Stasavage. Switzerland always at the bottom. More interesting is that Norway and Sweden are not at the top of the list.

Robert Blecker on Thirlwall's Balance of Payments Constrained Growth

New paper available here. From the abstract:

Several recent critiques have questioned the theoretical logic of standard models of balance-of-payments-constrained growth (BPCG) and the empirical support for ‘Thirlwall’s Law’. On the empirical side, critics charge that most econometric estimates of this model have effectively only tested whether exports and imports grow at similar rates in the long-run. On the theoretical side, the criticisms have focused on the role of foreign income growth, capital accumulation, relative prices and country size in BPCG models. This article reviews the current state of the debate over these critiques and also offers a brief discussion and evaluation of three alternative models. The alternative models all highlight a significant role for the level of relative prices (or the real exchange rate) in determining long-run growth, which is consistent with recent empirical studies.

My paper cited there can be downloaded here (in Spanish). Thirlwall's reflections on his classic paper can be found here.

US Net International Investment Position

Nothing much changed since I posted on this a couple of years ago. The U.S. net international investment position at the end of the first quarter of 2016 was −$7.5 trillion, which corresponds to about 40% of GDP, higher than two years ago. But no real problem in my view

Note that this is the sort of number that economists show when they want to suggest a possible run on the dollar, and the demise of its role as a reserve currency. The last report by the Bureau of Economic Analysis (BEA) is available here.

Class activity

Teaching Latin American Economic Development. Asked students to match the list of countries below with the graph representing GDP per capita in 2016 (source here). List of countries: Argentina, Brazil, Chile, China, Congo, India, Mexico, Norway, Saudi Arabia, and the US.

The point I always try to make is that Latin American economies are (most of them) middle income countries, all the ones in the sample with higher GDP per capita than China. That's often a surprise for many students, which think that China is an advanced economy (yep, grows fast, less now, but it's still a middle income economy, and will probably remain so in the foreseeable future). Also, Saudi Arabia has a very high level of GDP per capita, but it's not really a developed economy. An advanced economy produces more than commodities (oil in this case). So what the economy produces and exports matters.

PS: Solution in the comments section.

On the blogs

Sraffa’s archival material is a gift to the science of economics -- Scott Carter, that started a new blog dedicated to Sraffa, on the still unpublished archival material. Great initiative. I'll have more on this later

De Vroey’s Chicago style History of Macroeconomics -- Lars Syll on Michael De Vroey recent book on the history of macroeconomics. I had briefly noted De Vroey's book here 

Can Latin America Learn from Europe’s Mistakes? Divergence in Regional Economic Integration -- Collin Constantine in the also new blog Developing Economics

On Privatization Myths at the Rick Smith Show

Noah Smith on heterodox models

As it is often the case when you've been blogging for a while, there is always a precedent, and one might have written about a particular topic. Noah Smith, which I think has been blogging for a shorter period of time than I've been, now comes up with another take down of heterodox economics (having difficulties of understanding the meaning of the mainstream, it's no wonder he gets heterodoxy wrong; on the definition of the latter go here).

He argues that "much of heterodox theory is non-quantitative." True, but so is the case with the mainstream. Not everything can be formalized. And there is qualitative knowledge. But, having said that, the point is that difference between the mainstream (marginalism, neoclassical economics) and heterodox approaches has nothing to do with the lack of formalization of the latter. His examples of heterodoxy are not the best, I would argue. He first deals with Hyman Minsky, which in my view accepted a good chunk of mainstream ideas in his interpretation of Keynes. And yes, he did not formalize his theory, but there are plenty of models (Lance Taylor, Alessandro Vercelli and Steve Keen have done it, to name a few).

The main critique of mainstream economics, or at least of its core theory of value and distribution, is presented in a very short, and formalized, little book called The Production of Commodities by Means of Commodities. The notion that supply and demand determine prices (long term equilibrium prices) and that the principle of substitution works is sketched there. And later Paul Samuelson (subscription required) admitted that neoclassical parables made little sense. I've dealt with this issues several times notably here. And the heterodoxy has formalized models of the determination of output, employment, inflation (see mine here), growth (in many varieties, but mainly demand-led) currency crises (see mine here), etc. So Noah is wrong when he suggests that "heterodox theory is non-quantitative."

Noah discusses essentially the so-called stock-flow models deriving from Wynne Godley's (my old mentor) work as examples of heterodox models that are formalized. His main critique is that there are problems with estimation of parameters. This is essentially one of the critiques raised against the Cowles Commission types of model that dominated the mainstream until the 1970s (before Lucas' critique). They are still around like Ray Fair's model at Cowles. Fair provides a response and comparison with modern methodology here, which is worth reading.  But the defense that Wynne would provide would be different in my view.

As I noted before, Wynne "was more concerned with what he referred to as 'model architecture' than with parameter estimation. The architecture, which was careful about stock-flow consistency, showing that everything came from somewhere and went somewhere so to speak, also imposed a clear causality structure, which determined most of the results. In fact, Wynne believed that significant variations of the parameters might not greatly influence the end result of the model, which was used for simulations and scenarios that helped to understand how the economy functioned, rather than for strictly forecasting purposes."

Simpler models, which do not provide the full accounting, as I suggested here, but that separate income and price determination, where output is demand determined, are in that sense also useful. Or just stated simply, of course there is a formal alternative to the mainstream. It's one that does not emphasize microfoundations and individual behavior as Noah would like, but that's another story.

Crowdfunding campaign to publish Keynes' remaining writings

OVERALL AIM: To complete the publication of ALL of Keynes’s remaining unpublished writings of academic significance.

Only about ONE THIRD were published in the Royal Economic Society edition. A huge quantity of VALUABLE unpublished material remains, scattered across 60 archives in 6 countries.

AIM OF THIS CAMPAIGN: Preparation of the Eton and early Cambridge volumes.

CAMPAIGN START: 11 October 2016.

TO LOCATE PROJECT: Google ‘JMK Writings Project Indiegogo’.

It is also planned, with publisher cooperation, for the campaign to assist selected universities in developing countries.

HOW YOU CAN HELP

1. Spread the word prior to the campaign launch – to academic colleagues (in economics or elsewhere), students in classes, conference participants, policy-makers, parliamentarians, philanthropists etc.

2. Make, and encourage, donations, of ANY size, according to your situation. Especially on the first or second day of the campaign. Experience shows that strong starts are correlated with strong finishes.

Editor: Professor Rod O’Donnell, University of Technology Sydney, Australia.

Contact: jmkwritingsproject@gmail.com

See also: https://www.uts.edu.au/staff/rod.odonnell

On the blogs

Worst recovery in postwar era largely explained by cuts in government spending -- Rob Scott at the EPI blog. A bit old, but worth reading

Does Fiscal Stimulus Work when Recessions Are Caused by Too Much Private Debt? -- It does according to Yulia Demyanyk at Cleveland Fed

Female Economists and the Blogosphere – Do We Dare Mention Sexism? -- Ingrid Harold Kvangraven now blogging at Developing Economics blog

On Zombie Economics at the Rick Smith Show

Cassidy on the productivity puzzle

John Cassidy is one of the best economic journalists around (together with Jeff Madrick probably). And not only because he has written about one of my mentors, Wynne Godley. In his last column he tackles the issue of productivity. And again I should say he is on the right track. He first gives a simple example of technological change from the donkey to the truck delivery system. Almost imperceptibly he tells you that you would change from one to another technology if: "you can find enough customers." Exactly, why would you invest in the new technology, the truck, if nobody is demanding more deliveries which would make the truck cost effective.

At any rate, he suggests three explanations for the current productivity slowdown (or the new concerns about it, since the Great Recession; this had temporarily vanished in the late 1990s when productivity picked up as a result of the so-called New Economy, i.e. information technology). The first, is that it's all a measurement problem, which in all fairness is not very credible. Then there is the Robert Gordon story that the third Industrial Revolution is less technologically dynamic. A supply-side story. And lastly, he hits the nail with the Kaldor-Verdoorn story. It is the slowdown in growth, mostly resulting from austerity. As the figure below shows productivity and GDP growth are highly correlated, and the question is whether you believe Gordon (with causality from productivity to GDP) or vice-versa, like Kaldor (Godley's intellectual hero, btw).

On Marx and other 19th century critical economists he might be wrong. But that is a topic for another post. On the calculations for Kaldor-Verdoorn go here (my method avoids the need to calculate potential GDP; on potential GDP see this interesting posts here, here and here by JW Mason).

Joan Robinson's Accumulation of Capital after 60 years

My favorite is still Essays in the Theory of Economic Growth

Back from a summer road trip. Should start to blog more consistently soon. Here a new paper from John King in the last issue of ROKE. From the abstract:

Joan Robinson's magnum opus, The Accumulation of Capital, was published 60 years ago, in 1956. I begin this diamond jubilee assessment by explaining the intellectual background to the book, placing Robinson's attempt to ‘generalise the General Theory’ in the context of the contemporary work of Harrod, Kaldor and Kalecki. I then provide a brief summary of the eight parts of the book before focusing on the analytical core, the analysis of ‘accumulation in the long run’ that is provided in Book II. Next I outline the critical reception of the book in the late 1950s and Robinson's reaction to it, both then and later in her career. I conclude by documenting the rather limited influence of The Accumulation of Capital in the longer term, even among heterodox economists, and conclude that the book was a noble failure.

Read full paper here.