Economists who passed away in 2016

These (below) are the ones I remember, but there are certainly more. Here, with links to obituaries: Karl Case, Aldo Ferrer, Lloyd Shapley, Thomas Schelling, Charles L. Schultz, Lester Thurrow, Robert Tollison. The only one I met was Ferrer, in a few conferences in Argentina and Brazil. Two "Nobel" (Central Bank of Sweden) Prize winners among the departed. Interesting that Shapley said about his prize that: "I consider myself a mathematician and the award is for economics. I never, never in my life took a course in economics." So I'm not sure he should be on this list (or there should be a prize like that one). Of the non-economists discussed in this blog, the most prominent loss in 2016 was the historian William McNeill. He is one of the authors from other social sciences that I suggest, like say Jared Diamond or David Graeber, that use the surplus approach analytical framework, more akin to old classical political economy than modern marginalist (neoclassical) economics. And Keynes is still dead, 70 years ago this year, but there is always hope for an intellectual revival.

PS: Sad addendum, Tony Atkinson passed away.

Special issue of Nova Economia on Austerity and (Lack of) Growth

Editorial Introduction - Fiscal Austerity and Economic Growth
Laura Barbosa de Carvalho
PDF (English)

Neoliberalism, trade imbalances, and economic policy in the Eurozone crisis
Engelbert Stockhammer, Collin Constantine, Severin Reissl
PDF (English)

The Greek public debt problem
Michalis Nikiforos, Dimitri B. Papadimitriou, Gennaro Zezza
PDF (English)

Aggregate demand and the slowdown of Brazilian economic growth in 2011-2014
Franklin Serrano, Ricardo Summa
PDF (English)

Fiscal consolidation in developed and emerging economies
Paulo André Camuri, Frederico G. Jayme Jr., Ana Maria Hermeto
PDF (English)

Macroeconomic regime and labor market: the Argentine experience of the past two decades
Luis Beccaria, Roxana Maurizio
PDF (English)

Currency crisis and external fragility: a Minskyan interpretation applied to the Brazilian economy between 1999 and 2013
Victor Hugo Rocha Sarto, Luciana Togeiro de Almeid
 PDF (English)

History of Central Banks Tutorial - Before Central Banks II

As promised, one more installment on the history of central banks, and why the early Italian (and Spanish and Dutch) public banks were not seen as central banks. We must start with Italian banking. Even though the Medici Bank is probably the most well-known of the Italian banks of the Renaissance period the two key cities to understand the development of modern banking, and the precursors of central banks, are Genoa and Venice. And as noted before, central to the story is the emergence of public debt, one of the few innovations that was not known in antiquity.

The records for the floating of public debt go back to 1149 in Genoa and to 1164 for Venice. Local governments essentially sold the rights to collect taxes for a determinate period in exchange for a fixed amount of money. Public debt was originally compulsory,  since the city-states were always hard-pressed for funds, and constantly fighting for their very survival in economic and political terms, in the complicated and unstable political disputes between the Papacy and the Holy Roman Empire. Public debt was also relatively illiquid, since it was difficult to transfer the tax farming rights.

Over time public debt become voluntary, rather than compulsory, perpetuities were issued, and secondary markets for government bonds developed.  In other words, public debt was an early and persistent feature of the Italian financial markets. The importance of public debt was that it provided a relatively secure asset for the functioning of the financial system, even when in reality there were periods of crises and situations in which interest payments were interrupted and consolidations of older debt took place frequently. Unlike private debt in which there is little recourse in case of default, the latter was considerably less likely in the case of public debt. Historically disputes between creditors and debtors are at the center of class conflict. Debt peonage, were the creditor coerces the debtor to repay with work, or debtor’s prisons, for those unable to repay, were common solutions for the problem of private default until the 19th century (see David Graeber's Debt).

Public debt was denominated in local currency, and a formal commitment from the local government to match taxes to the required needs to service debt was relatively easy to obtain, in particular since the merchant class and bankers, the creditors of the state, had a hand in the administration of the city-state.  Except perhaps in the case of the complete collapse of the economy, associated to military defeat, the possibility of default was limited. Public debt could be sold and bought in secondary markets and it could be used as collateral by the banking system.

Banks, then, reemerged in Europe after the crusades in the context of the commercial revolution, which connected long distant trade between the Levant and the fairs in Champagne and other northern European markets through the Italian city-states.  In the context of pre-modern Europe, with political and economic fragmentation, and with a significant large number of currencies, one of the central activities of early bankers was to provide foreign exchange.  Traders required not only exchange services, but also the ability to transfer funds from one place to the other, and the international settlement of accounts was useful not just for traders with business in many cities, but also for the church.

Moneychangers and bankers operated in a world with an extensive number of currencies, and coins that were often debased, with an actual metallic content below its face value.  As noted by Peter Suppford in Money and Its Use in Medieval Europe, not only there were a myriad of coins, but also, and more importantly, there were as many units of account. In fact, many coins that actually disappeared continued to be used as units of account, what Spufford refers to as ‘imaginary money.’

The necessity of a unit of account to make economic calculation possible was certainly one of the reasons for the development of public banks, after all money is as noted by John Maynard Keynes essentially money of account. In this sense, money developed not as a device to facilitate transactions, i.e. the means of exchange, but as a result of the power of city-states, and merchant bankers to determine the unit of account (for the chartal origins of modern money see Rochon and Vernengo, 2003). The introduction of a unit of account, and a relatively safe asset were central not so much because they were needed to provide a payments system, as noted by some mainstream authors, although that was a positive externality, but because the determination a unit of account provided the ability to create a relatively safe asset, reduce the risk of default and support the expansion of the of the mercantile activities that were seen as required for the survival of the city state.

Public banks were the culmination of a process by which the state tried to both fund its activities at a relatively low cost, creating in the process a secure asset to anchor financial markets, and that a unit of account was established by the Prince. The question then is why the public banks that preceded the Bank of England (BoE) are not often seen as central banks in the proper acceptation of the word.

One reason for the neglect of the previous public banks derives from a certain view of what central banks do, which, in turn, results from a particular perspective about the functioning of macroeconomic variables. In the conventional view, central banks must provide banknotes, a means of payments, to facilitate exchange but cannot provide too much of them, otherwise inflation would follow. But given the risks of bank runs they must be willing to provide liquidity in moments of crisis (lender of last resort function, LOLR). That is why banknotes and the LOLR function are often seen as the hallmarks of central banking.

Presumably the reason why the initial public banks are not considered central banks is that they were not emission banks. Early public banks provided a centralized clearing system that was guaranteed by the state. In the case of the Banco Giro, the successor to the Rialto in Venice, and the Bank of Amsterdam they had a monopoly over the clearing mechanism. However, there was an active exchange of the lire de paghe, the money of account, of the Banco di San Giorgio as bank money, and, hence, at least some precedent to the emission banks. Besides a giro system, in which credit and debit accounts are centrally cleared might be as powerful to provide liquidity as a system of banknotes.

In that sense, it is a bit arbitrary to consider the BoE, or the Bank of Sweden for that matter, as the first central banks. The most likely reason why that has become common sense is that all the other public banks vanished in the post-Napoleonic Wars period. The reasons for their disappearance, is certainly tied to the disappearance of autonomous municipalities, but the causes are more profound. Note that the rise of public banks follows more or less the evolution of control of trade with Asia, first the Mediterranean control of trade with the Levant, and subsequently the transfer of the dynamic center to the Atlantic, once the Portuguese had opened the trade routes around Africa. In other words, what city-states did not have was an edge in the process that was central for economic development, the control of the trade routes with the East. Also, there were technical problems associated with the printing of paper currency (Eric Helleiner in his The Making of National Money, shows that only in the late 19th century, with the technical advances in counterfeiting is that the State could impose territorial currencies)

In addition, neither the Mediterranean city-states, which were politically fragile, nor the Dutch Republic, which was under constant threat of the Spanish and French crowns, controlled a large domestic economy that could rival with the emergent nation states in terms of political and military power. England, on the other hand, was the first nation state with a public bank large enough to benefit from the positive effects of the expansion of international trade with the Orient, and that could challenge the military hegemony of other European powers.

More importantly, with the advantage of hindsight, it is clear that the financial revolution in England in the 18th century, even if it was in part an evolution of a long process of development of financial practices and institutions in Western Europe, was indeed groundbreaking, and occurred right before the Industrial Revolution. It is the eventual victory in the Napoleonic Wars, and the rise to global hegemonic power that made the Bank of England, retrospectively, the first central bank. By then the rules of what a central bank should actually do where changing according to the interests of the British industrialists and merchants, and that view, the Victorian view of central banks became dominant. And history, including the history of central banks, is written by the victors.

PS: To read the first two posts in the Tutorial series just click on the label below History of central banks.

On the blogs: End of Year, Before Doom, Edition

How the Obama Coalition Crumbled, Leaving an Opening for Trump -- Nate Cohn, and sorry, but it wasn't Putin or Comey, it was white working class people in the Rust Belt. In one word, Neoliberalism. And yes Cohn uses the term working class. And it wasn't turnout. Cohn says: "Mr. Trump made gains in white working-class areas, whether turnout surged or dropped." Facts should matter.

The Revival of the Working-Class Concept: Trump, the Class Struggle and the (Somewhat Overstated) Specter of Fascism -- Gary Leupp on the only positive thing of this campaign season, the return of class analysis. The US is not classless, and the working class is not happy with Neoliberalism.

A BRIEF TIMELINE OF VERY BAD YEARS, FROM 2016 TO 65,000,000 B.C -- Ryan Bort and 65 million bad years. I'm sure 2017 will suck too!

History of Central Banks Tutorial - Before Central Banks

Central banks can be seen as the culmination of the long process of financial development in Western Europe. Starting with the Italian City States, in particular in Genoa, Venice, and Florence, followed by the Dutch Republic and finally reaching its apex with the Financial Revolution in England, to use Dickson famous expression.  Many of the financial innovations pioneered in the early stages were central for the latter development of modern central banks. But, the relatively small scale of the pioneering economies limited the effects their inventions on the global economy.

Most accounts of the emergence of banking suggest that merchants dealing in foreign exchange and metallic currencies started to discount bills of exchange, accept deposits and make loans as a side development of their commercial activities. In this view, it was the advantages of reducing transaction costs that the practice of safekeeping metallic currency as deposits that allowed goldsmiths to lend money beyond their reserves.  This in fact would suggest that the emergence of banking is very similar to the development of money, which is often also seen as a means of reducing the transactions costs associated to barter.

However, what is often neglected about the rise of modern banking is the role played by public debt. Lending to the state was initially compulsory, in the Italian City States, and the elites were compelled to lend to the state in lieu of taxes, which were essentially a burden on the poor (Vernengo, 2004). Public debt was secured by setting aside the revenues of specific taxes, in general excise or trade taxes, for that purpose. Banks were often a source of short-term finance for the state, necessary in order to deal with the uncertainties of the tax system.

Further, a symbiotic relation between the banking and merchant elites and the state emerged, since bankers and merchants and other wealthy individuals that participated actively in the administration of their cities were holders of public debt. Active trading in public debt and the shares of banks and other corporations developed. Even though there were recurrent interruptions in debt service, and consolidations of public debt, in general public debt provided the most secure financial asset. It was the security provided by public debt that allowed the expansion of banking and other financial transactions.

But the iconic banking institutions of the mercantile period, the Bank of San George in Genoa, the Bank of Rialto in Venice, and the Bank of Amsterdam fell short of becoming what we would call central banks by most accounts. These were all public institutions, that provided, centralized clearing accounts (giro accounts), banknotes and, even more importantly, legal tender in exchange for lending money to the state. Before discussing the precursors of central banks, it would make sense to take a critical look at the conventional definition of central banks.

Capie, Goodhart and Schnadt (1994), in their review of the development of central banking, fix the beginning of central banking in various countries by two indicators: the legal monopoly of note issue, and the de facto assumption of the responsibilities of the lender of last resort. In other words, central banks control the money supply, and they guarantee the stability of the banking and financial sector.

Interestingly enough this definition of central banking presupposes both the existence of money and of an organized banking and financial system. Central banks then become the external instrument that evolves organically from the functioning of the market or is imposed from above to organize and provide stability to the market. This account, also, assumes that the monetary and financial markets arose more or less spontaneously from the rational behavior of economic agents.

In other words, banks results from the perception of goldsmiths that they could lend beyond the amounts of metallic deposits that they held, since it was unlikely that all depositors would withdraw their deposits simultaneously, while the public benefited from the security provided by the deposit institutions, and the reduction of transaction costs associated with the use of banknotes instead of metallic coin. In doing so banks intermediate between savers that deposit in the bank, and investors, that take loans, functioning as intermediaries.

However, since banks provide a bridge between short-term deposits, that can be withdrawn at any time, and long-term loans, that cannot be called in immediately, bank runs are a likely possibility. Further, bank runs might lead to what is often referred to as systemic risk, if the depository institution under attack is interconnected with several others in the banking system, that is, if other banks have deposits in the problematic institution. Central banks develop as the natural outcome of the need to provide banknotes and guarantee the stability of the system, eliminating systemic risk, in a world with asymmetric information between depositors and banks (Goodhart, 1988, p. 85).

So it is the possibility of bank runs, and systemic risk that requires the need for supervision. Goodhart notes that there is no need for a public bank, and that a club of banks could play that role. Evidently the notion is that the central bank could evolve from a private bank, that given its preeminence in the market, its primus inter pares position, allows it to act as the independent arbiter of such a club of banks, and that the evolution of Bank of England represents a reasonable illustration of such a process.

In this view, it is only with the Bank Act of 1844, with the separation of issue and the banking departments of the bank and with the monopoly of issuing that the Bank of England (BoE) could be considered a modern central bank. Further, it is the effective development of the Lender of Last Resort (LOLR) function in the second half of the 19th century that consolidates the modern central bank as an institution necessary for the management of an advanced market economy. More importantly, it seems that the separation between the issuing and loan departments of the BoE and the indication that the central bank is independent from the treasury is what really makes it a modern central bank, according to the conventional economic analysis.

Essential in the evolution of central banks, not only the BoE but also some of its predecessors, was the role of fiscal agent of the state. Public banks, of which the Casa di San Giorgio founded in Genoa in 1407 is a chief example, that managed the public debt of the state, were an essential feature of the development of central banks. There are many issues with the conventional view of the origins and functions of central banks, including the ideas regarding the origins of money and banks. In the next installment I will deal with them, and provide an alternative interpretation of why the BoE is often seen as the first central bank, and why that definition is a bit arbitrary.

10 papers from ROKE

As Review of Keynesian Economics comes to the end of its 4th year, I thought of reminding you that there are 34 free-access articles we have published so far. Below a list of 10 articles that I think are worth reading with no particular criteria (but a representative sample), in alphabetical order by author.

Wage-led versus profit-led demand regimes: the long and the short of it
Robert A. Blecker

The neoclassical sink and the heterodox spiral: political divides and lines of communication in economics
Gary A. Dymski

Developmental central banking: winning the future by updating a page from the past
Gerald Epstein

Endogenous money and effective demand
Steve Keen

Cambridge and neo-Kaleckian growth and distribution theory: comparison with an application to fiscal policy
Thomas I. Palley

What caused the great inflation moderation in the US? A post-Keynesian view
Nathan Perry and Nathaniel Cline

Keynes, family allowances, and Keynesian economic policy
Steven Pressman

How Keynes came to Britain
Robert Skidelsky

Keynes and the European economy
Peter Temin and David Vines

Unravelling the New Classical Counter Revolution
Simon Wren-Lewis

Will Trumponomics be expansionary?

Deficit vultures

A few days ago, Trump announced South Carolina Rep. Mick Mulvaney to be the director of the Office of Management and Budget. He is a Tea Party nut (he was for Rand Paul, and might have libertarian tendencies), and more importantly a fiscal hawk, and for a balanced budget amendment. Mulvaney is really for cutting spending, including, somewhat surprisingly, military spending, even if he thinks that defense is the first priority of the federal government.

So this has created a certain uncertainty about what direction fiscal policy will take in the next administration. Tyler Durden at Zero Hedge has said that: "it is difficult to reconcile this appointment, with the market's increasingly conventional view of Trump as an "out of control" spender." I may be wrong, but I think Mulvaney would be as adept to balanced budget, and strict debt-ceiling limits as a budget director, as an old fashioned tax and spend Democrat. But without the taxes, of course. So I still believe that there will be an increase in deficits, and it's likely that defense and infrastructure spending increase, while taxes, for corporations and the wealthy go down.

Trumponomics is Reaganomics. And as much as fiscal hawks preach the advantages of low deficits, and reduced spending (on entitlements), they do increase both once in power. By the way, I do expect an assault on entitlements. I don't believe that the deep convictions about debt management are in general. It's basically strict fiscal rules for Dems, and loose rules and pork barrel spending for the right wingers. It's predatory capitalism, as Jamie Galbraith would call it. Another interesting nugget in the Durden post, is that Mulvaney is in favor of full privatization of Freddy and Fannie, something that I'm sure would be okay with real state broker in chief.

On the blogs

Keynes Betrayed -- Roger Farmer's, from his new book, critique of the Neoclassical Synthesis

The Case Against the Universal Liberalisation Model for Economic Growth -- Jenny Tue Anh Nguyen at Developing Economics

Where does all the surplus go? -- David Ruccio on income inequality

The Federal Reserve Must Rethink How it Tightens Monetary Policy

Thomas I. Palley

After more than 7 years of economic recovery, the Federal Reserve is positioning itself to tighten monetary policy by raising interest rates. In light of the wobbly reaction in financial markets, an important question that must be asked is whether raising interest rates is the right tool.

It could well be that the world’s leading central bank is going about the process of tightening in the wrong way. Owing to the dollar’s preeminent standing, that could have severe global repercussions.

Just as the Fed has had to rethink how it combats recessions, so too it must rethink how it transitions from an easy monetary policy stance to a tighter stance.

Read rest here.

Slow posting -- Grading

Interest rates are up, and what is the real problem with that

Not by much. To 0.75%, and yes it wasn't necessary because we're not at full employment yet (Krugman thinks we're; his point is that wages are increasing again, but not that much and participation rates remain low). Two things worth mentioning. One is that Yellen agrees with Krugman, and that signals that the Fed doesn't get what's the current state of the economy. She said:

"I believe my predecessor and I called for fiscal stimulus when the unemployment rate was substantially higher than it is now. With a 4.6% unemployment and a solid labor market, there may be some additional slack in labor markets but I would judge that the degree of slack has diminished. I would say at this point that fiscal policy is not obviously needed to provide stimulus to get back to full employment."

Again, fiscal policy was needed to get a healthy recovery according to Clinton's plans, and it is also true under Trump. I know Trump won't expand the welfare net, quite the opposite, and some of his spending will help his businesses and his cronies. But some infrastructure spending will do some good. And it's needed.

The other important misconception is that Trump's possible fiscal stimulus won't work. Krugman says:

"Meanwhile, Trump deficits won’t actually do much to boost growth, because rates will rise and there will be lots of crowding out. Also a strong dollar and bigger trade deficit, like Reagan’s morning after Morning in America."

First, that's not crowding out per se. In other words, it's not that the use of funds by the government crowds out private investors. It's more like monetary policy will be used to counter the fiscal expansion. But the previous experience with contractionary monetary and expansionary fiscal (militaristic and welfare cutting and full of cronyism too), yeah the Reagan era, led to significant growth, with increasing income inequality.

I'm skeptical that interest rates will go up by a lot. But let's say I'm wrong and Yellen decides to do that, and Trump does expand military and infrastructure spending. That danger is not an overheating economy and too much inflation. It's increasing income inequality. Higher rates will make the life of workers and debtors (consumers, kids in college, etc.) considerably harder. The stimulus will create jobs, but not good manufacturing jobs with high pay. More McJobs. And yes, economic growth, which might help in a reelection campaign in 2020.

Trumponomics might just be Reaganomics on steroids, but Krugman misreads the main danger. The trade deficits didn't stop growth (and won't this time either). Besides the manufacturing jobs wouldn't come back even with a very large depreciation (we're not about to pay Chinese salaries in the US). It's inequality stupid!

On the blogs

South Africa’s Junk Credit Rating was Avoided, But at the Cost of Junk Analysis -- Patrick Bond on the failures of Neoliberalism in South Africa

Employment Going South. Literally -- By Dietrich Vollrath. A bit old, but worth reading, on how jobs moved from the Upper Midwest and Northeast to the Sunbelt

Dismal Jobs Report -- Paul Craig Roberts with a darker view of the employment situation

The end of jobs

I posted about the driverless trucks a while ago. Now Amazon unveiled the no-checkout store, which would threaten the jobs of 3.5 million cashiers according to the Financial Times (subscription required). I was surprised by the figure below.

It shows that one of the growing demands in the future will be statisticians. Statisticians? Oh well. Among the losers not just clerks, but also lawyers that specialize in shoplifting (and DUI in the case of the driverless vehicles, besides the obvious, truck drivers).

Can Trumponomics work?

Work for whom?

That's what Martin Sandbu (subscription required) asks in the Financial Times. In his view, it might. He cites Ken Rogoff -- of spreadsheet fame -- who also has said that it's a possibility. Sandbu cites Summers doubts on Trumponomics, which are all based on supply side factors, but has very little to say about that.* Like Rogoff, Sandbu thinks that what matters is private investment that matters, meaning demand, and, as it must be in these cases, the confidence fairy makes an appearance. In his words:

"What matters, of course, is whether business investment will increase under a Trump economic policy. If it does, it could be because regulations are made business-friendly, because fiscal stimulus boosts aggregate demand and expectations of future demand growth, simply because there is something about Trump that changes the "animal spirits" of investors and business decision makers."

Keynes' animal spirits, also valued by New Keynesians, become relevant. However, the really relevant stuff in there is the fiscal stimulus and how much in terms of actual spending rather than tax cuts for the wealthy, and on what he will spend (e.g. infrastructure). On that, by the way, Trumponomics remains a mystery. But he is right that if: "if a greater fiscal deficit would have boosted growth under a president Hillary Clinton, it should also boost growth under a president Trump."
But the important point Sandbu makes is that:

"Whether greater spending leads to greater (sustained) growth depends on, as Rogoff rightly points out, whether there is much spare capacity in the economy today, or more intriguingly, whether supply capacity itself responds with faster productivity increases in a 'high-pressure economy' of strong demand."

Note that Rogoff only makes the point about spare capacity, and the intriguing idea that the supply constraint responds to demand is Sandbu's own. In other words, he argues that some sort of Kaldor-Verdoorn Law might be at work in the economy. And yes, that's absolutely right.

So can it work? Sure, but for whom is the important question you should ask. And it will be for the few? A boost to infrastructure spending would certainly help, and even military spending (and I'm not discussing the foreign policy implications of a Trump presidency), which is the way the US promotes industrial policy, might stimulate growth. But I would expect after his choices for the economic positions in the cabinet, including his last very anti-union Labor Secretary (and his twitter rant against the Carrier union leader) that the benefits will not be very well distributed.

* Rogoff thinks the economy is not growing less because of secular stagnation, as Summers, meaning it's not a permanent supply-side problem (negative natural rate of interest, or whatever version of the argument you prefer), but the result of debt overhang (more on this for a later post).

Neoliberalism in the Pampas

Soybean Republic

As promised, here are some brief reflections on the situation in Argentina, which I think is not as bad as in Brazil economically or politically, surprisingly, since Argentina had a balance of payments problem that is completely absent in the increasingly chaotic neighbor, and the left actually lost the election, which was not the case of Dilma (a coup was required to defenestrate her). As I suggested in my talk a year ago (for non Spanish speakers go to this text), the economy would experience a recession and higher inflation as a result of the likely (and effectively adopted) economic package of devaluation and fiscal adjustment.

Figure above shows that inflation accelerated from about 25% to about 40%, later figure from IMF estimates, and GDP moved from moderate growth (2.5%) to slightly less than 2% fall (again IMF estimates). It is worth noticing that many, including some that claim to be somewhat heterodox (in particular when they're not in Argentina), suggested that devaluation was not inflationary, and that it would produce significant growth of exports and lead to GDP growth.

Long term growth of exports depends essentially on the income of the trading partners, and the slowdown in China, the terrible collapse of the Brazilian economy, and overall gloomy perspectives of the global economy suggest that to expect growth from the external economy is wishful thinking. By the way, the notion that the problem is that the nominal devaluation (of about 100%) was not large enough and the real exchange rate is still appreciated (see here, in Spanish, Frenkel suggests that "we reedited the exchange rate lag") is outright delusional. The idea that if you devalue enough a country like Argentina would be competitive not just in the production of commodities, i.e. soybeans, but also in some marginal manufacturing sector, is based on a misreading of the East Asian experience, and the exaggeration of the idea that manufacturing exports respond simply to price signals (the right exchange rate) rather than industrial policy.

Also, there is no reason to expect a recovery next year on the basis of consumption, since real wages are falling, and the unemployment level went up from 7.2 to 9.2% according to IMF estimates. That also implies that private investment is not going to increase (yes, that's called the accelerator, and yes the IMF expects a fall of about 0.5% of GDP in investment).

However, contrary to what you might think all of this was expected. This is less of a surprise for the government that most analysts understand. As I said in the talk linked above, the objective was to get a recession and increase unemployment, reduce the bargaining power of the labor force, and reduce the real wage. That will be the basis of the future stabilization of the economy. Stagnating wages, and a relatively stable exchange rate. For that reason, and to avoid the continuous capital flight, the government did increase the interest rate. And also, since the Obama administration supported this neoliberal government (they are not populists after all) and the Macri administration was willing to do anything the Vultures wanted, Argentina finally returned to the international financial markets, and the external constraint was lifted. International reserves are up, from the low 20s to 30 something billion.

That implies that even with a current account deficit, which is at a bit more than 2% of GDP (slightly lower than before as a result of the recession), fiscal stimulus would allow for a recovery. Note that this could be done without increasing significantly the governments degree of indebtedness in dollars. There is no reason to borrow abroad to finance domestic spending. But in essence that's what this administration is doing, since they self imposed limits on the ability of the central bank to finance the treasury, which they misguidedly saw as the source of inflationary pressures. The more pressing short run question is whether they will accelerate public investment to promote growth and perhaps have a recovery in time for next year's election (something I suggested they might do in my talk last year). It seems that the degree of fiscal conservatism of this administration (there is no way you can call Prat-Gay Keynesian, even if the term has suffered with semantical saturation; or call the neoliberal Macri government heterodox, for that matter) is so extreme that they would prefer to continue with the recession. And yes, without external expansion, private demand, or government expansion there cannot be any recovery.

There are other more preoccupying issues with this administration,* and I'm not even talking the corruption that concerned so much the critics of the previous government (Macri's name is in the Panama papers, for one, or the fact that his energy minister worked for Shell, and the many other conflicts of interest between the government and private corporations) that are now silent, or the fact that the statistical office (Indec) has also left a gap in the data and has actually increased the uncertainty about the macroeconomic numbers, including inflation (something that critics of the previous government also, correctly, complained about, but interestingly enough they are silent now). I mean the cuts in spending on research and development, and the reversion of the very few initiatives that promoted national technology, like the cancellation of the manufacture of communications satellites, after the launch of two (ARSAT 1 and 2) in the last couple of years. Those were the kind of policies that would have the possibility of leading to some degree of manufacturing export dynamism. But for this government the plan is the return of the old 19th century commodity export model, and if they could reverse the external policy to colonial times (with the US instead of Spain as the metropolis) they probably would.

* And I mean just the economic stuff, leaving aside the record on human rights.

On the blogs

Was the 20th century long or short? -- Branko Milanovic on the political (Hobsbawm) versus economic (De Long) dating of the 20th century. I prefer the economic, but not Brad's timing, mine would go from the Great Depression to the oil shock (1929-1973), which roughly corresponds to the Keynesian era

Dealing with the Trade Deficit -- Josh Mason on the lack of need for the US of a favorable trade balance and the role of the dollar, something often discussed in this blog

Trump’s Carrier deal could permanently damage American capitalism -- Larry Summers, and I guess the neoliberal wing of the Dems, agree with Sarah Palin that the Carrier deal is crony capitalism

The Strange Death of Progressive Brazil

Strange indeed

I've been off for a few days for Thanksgiving, as you might have noticed. I visited Argentina, and will have something to say about the situation there in a few days. Here is something I was thinking about what is going on in Brazil, that seems to be in a never ending economic and political crisis. I find the situation particularly concerning for the future of the left in the region.

There is a very nice little book about The Strange Death of Liberal England, (oddly enough, it's also the name of a band) written in the 1930s, when Labour took over as the main opponent of the Tories in parliament, and the Liberal Party of Gladstone, Asquith, Lloyd George and Maynard Keynes became irrelevant and vanished. The book, if memory doesn't fail me (I read it many years ago, when I found a used copy in bookstore in New York; I remember Godley telling me he read it around the time it was published), shows how the divisions on the Irish question and the Gold Standard, together with the rise of a more militant labor force, and new social movements overwhelmed the liberal establishment.

Something similar is happening in Brazil, but in this case, I suspect, the vindictiveness of the right is particularly important to understand the demise of the Workers' Party, that had significant losses in the last municipal elections, including, perhaps more importantly, in São Paulo and in the periphery of that city, where the party was born. One way of looking at the demise of the Workers' Party is to emphasize that it was associated to the corruption scandals of the last few years, in particular those connected to the Operation Car-Wash (Lava Jato in Portuguese) and related to the state controlled oil company Petrobras, as for example the WSJ suggests in the link above.

However, as I noted before, there is little evidence that corruption increased during the Workers' Party 13 years in power. Corruption, as I said then, has a long standing tradition, and is structural, associated to the way the country is managed. By the way, the specific problems with construction contractors, and the state oil company, exactly because they go back all the way to the the 1950s, and in particular, the military dictatorship, indicate that corruption is probably orthogonal to the process of economic development, since up to the early 1980s, Brazil was among the fastest growing countries in the world, up there with Japan and South Korea (nope China and India were laggards back then).

The more recent literature on corruption coming from the Word Bank, tends to suggest that corruption is inimical to growth. However, an older literature tended to suggest, in contrast, that corruption greased the wheels of business and helped promote growth. Samuel Huntington famously argued that: "In terms of economic growth, the only thing worse than a society with a rigid, over-centralized, dishonest bureaucracy is one with a rigid, over-centralized and honest bureaucracy." And no, I'm not in favor of corruption. My point is that you probably don't have a simple linear relationship between corruption and growth.

Besides, as I've also noted before, most measures of corruption are not objective, that is they do not measure the quantitative effects of corruption (money embezzled, etc.), but simply the perceptions. Perceptions of corruption, maybe or not correlated to actual corruption, of course. And one should note that there is always the nagging question of causality. That is, corruption might be the result of lack of development, rather than its cause.

The corruption argument, in spite of its prevalence in the international media, does not explain the collapse of the Workers' Party.* On the other hand, it seems far more reasonable to believe that a combination of right wing resentment, prevalent in the middle class, related to the expansion of social programs, with the acceptance within the party of several elements of the neoliberal discourse, which undermined its support within its base, are at the core of its current problems.

Protests in 2013 started on the basis of legitimate problems related to the cost of public transportation, led by the Free Fare Movement (Movimento Passe Livre in Portuguese). But the protests rapidly broadened the scope of complaints and right wing groups that were against the Workers' Party became more prominent. Note, however, that in spite of the massive protests and the complaints about economic problems, and about corruption, Dilma Rousseff won the elections in 2014, promising to expand the social welfare programs of the Workers' Party. The real problem for the Workers' Party was the post-election volta face, when Dilma appointed Joaquim Levy, a neoliberal economist from Bradesco, one of the largest banks, to the finance ministry, with a plan to promote fiscal adjustment.

Long term persistence of fiscal conservatism was a hall mark of the Workers' Party ideology, briefly lifted during the 2009 crisis with the Plan for Growth Acceleration (PAC in Portuguese). But these views were entrenched, and the experts with anti-austerity, Keynesian (Lernerian to be more precise) views were often marginal. Don't get me wrong, after the initial austerity and the pledge to follow responsible policies (the infamous letter to the Brazilian people), they expanded social spending, and that certainly played a role in economic growth and the increase in tax revenue (hence, the fiscal balances didn't deteriorate), and more so after PAC with increasing public investment. But the ideological notion that fiscal deficits are problematic remained central within the party, and not surprisingly Dilma's economic team accepted the verdict that adjustment was necessary.

The huge recession caused by the austerity policies led to collapse of the economy, which could be and was used to claim incompetence and invent reasons for the impeachment (essentially the criminalization of relatively innocuous and routine policies, the delay in payments to public banks, the so-called 'pedaladas').** Worse, some of the ideas that were discussed during the fiscal adjustment in 2015, like a limit to government spending, are now being implemented. The Constitutional Amendment Project 241/55 (PEC in Portuguese) imposes a limit, for 20 years, on real spending, that is, corrected by inflation. The rule solves a problem that does not exist, that is, it presupposes that the 1988 constitution gave too much in terms of social benefits, that this led to a runaway increase in government spending, that caused both the recent inflation and the lack of growth.*** At any rate, these rules are created essentially to stop progressive policies in the future.

So a combination of the mistakes of the Workers' Party**** and the revanchist rancor of right wing opposition, with significant support in the middle class, explains the incredible collapse of the Workers' Party. Their (they who, you ask; the opposition consolidated in power through the mediatic-juridical coup) work is not over yet, and the question is whether the judges and prosecutors associated with the Car Wash Operation will decide to jail Lula -- on the basis of information obtained from plea bargains with self-confessed criminals, but without any material proof of guilt, at least so far -- in order to preclude his possible return as a candidate. The abuses of the judiciary system are by now well documented, not just regarding the jailing of accused people with no formal ruling (it seems that you are guilty until proved innocent now) and the use of the media to humiliate them, but also the fact that they explicitly target the Workers' Party with no investigation of Social Democrats (yep in Brazil the right wingers call themselves social democrats), which have been caught also in the same types of accusations.

There are many implications of the current events in Brazil. The corruption scandal has not only precluded any kind of serious discussion about public investment, since the modus operandi of government procurement rules in Brazil required several of these practices that are under scrutiny, but it led to a consolidation of a consensus view that fiscal deficits are by definition the instruments of corruption. Further, the crisis has almost certainly destroyed the possibility of using Petrobras as an instrument of industrial policy, to buy specialized equipment and so on (my guess is that right wing groups will at least try to privatize it). Note that in the United States corruption is as endemic as in Brazil, even if in many cases it is sanctioned by law (that is, it is not illegal, even if it is morally unacceptable). And also the US keeps its ability to do industrial policy through the defense budget.

The electoral chances of the left in Brazil are incredibly diminished. I'm skeptical both about the possibilities of Lula, if he escapes the inquisitorial witch hunt, and more so about the possibilities of the splinter from the Workers' Party, the Party of Socialism and Liberty (PSOL in Portuguese), which looks very much like PT 30 years ago. With no channel for the use of the public machine to promote demand growth or to promote technological upgrading through some sort of industrial policy, even in the hands of a right wing conservative government, the future prospects for the country are grim. Without a left of center party capable of winning the elections and using the state apparatus to promote a modicum of welfare redistribution, by increasing social spending and the minimum wage as the Workers' Party did, Brazil seems condemned to maintain its long history of social inequality. And this does not bode well for the rest of the left in Latin America.

* Note also that while there is no evidence of direct involvement of Dilma Rousseff in any of the corrupt deals in Petrobras, congress or any other place, that is not true about her vice-president now in power.

** Something similar is taking place in Argentina, the criminalization of the decision about the exchange rate by the central bank. More on that when I post about Argentina.

** Of course recent inflation has no relation to excessive fiscal expansion. In the last couple of years it went hand in hand with a recession and fiscal contraction. The behavior of wages and the exchange rate is considerably more important. And if the recession caused by fiscal contraction has not convinced you about the fallacy of "expansionary contractions" (I assume you don't cade for evidence) nothing will.

**** On this one should also add that the Workers' Party members always complained about corruption, as a moral issue, and suggested that their government was going to be different. A huge mistake, since the problems with corruption, that should be combated don't get me wrong, are structural. That is, they are intrinsic to the way the country is governed, and it was obvious that a Workers' Party administration would not be immune to it, and would need to have mechanisms to deal with it and try to reduce it.