Tuesday, January 29, 2019

On the unfolding coup in Venezuela

I recommend this video with an interview with Lucas Koerner that is in Caracas about the situation there on the Real News Network.

Saturday, January 26, 2019

Still time to save the euro

Still time to save the euro
New book edited by Herr, Priewe and Watt. Free download at the website (both pdf and for e-reader). I've only seen it now, and have been reading the great chapter by Cesaratto and Zezza. But look forward to others by Uxó, Álvarez and Febrero, Priewe, Bibow, Dullien, Simonazzi, Celi and Guarascio,  and Bofinger to mention a few.

Read full book here.

Friday, January 25, 2019

On the crisis in Venezuela

I wrote a few entries over the last few years that might be useful to understand what is going on in Venezuela. This one from 2016, tries to explain how the crisis is related to an old problem, the dependence on oil exports and the balance of payments constraint. Venezuela can't manage to get beyond the oil dependence in the boom, since a sort of Dutch Disease sets in. One can certainly blame the Chavista governments for not breaking with that dependence, but in all fairness conservative governments also were unable to do it. In the period of a fall in international oil prices a crisis normally occurs (this one is probably already worse than the Caracazo).

Here for context the data on exports (note that about 90 percent of exports are basically oil, and those go mostly to the US that has refineries that specialize in the Venezuelan oil).
The numbers are from the World Bank Development Indicators up to 2016, and then I use the IMF estimates of growth (actually decline) from the World Economic Outlook database. So this is a brutal collapse, something the US government is doing, even at the price of some costs to local refineries, in order to promote regime change in Venezuela. Whatever your views on Maduro and the Chávez period, note that the US is fine with Saudi Arabia. Trump and Dems before too. And remember that Obama tightened the embargo as one of his last measures. Double standards are incredible, and difficult to defend.

Mind you with the collapse of exports and the fiscal capacity of the state, the economy collapsed too, and so did imports. The embargo makes imports of almost everything impossible and heightens the humanitarian crisis, and the refugee problem. It is somewhat hypocritical, to say the least, to complain about the humanitarian crisis and not acknowledging the US role and the embargo in causing it.

Note also, that in the absence of dollars, not only imports collapse, but payments on foreign denominated debt too. Hence, the close possibility of a complete financial meltdown. Not only default will take place, but scarcity of almost anything imported (including food essentials) and the rapid depreciation of the currency would lead to hyperinflation. If you want to understand external crisis in general read this entry, and for hyperinflation go to this one.

On the complex issues of democracy in Venezuela read this entry from 2017, and this one from 2018. For those that think that the current coup, or any coup including a military one would reduce violence (the opposite is more likely to happen) read this.

Tuesday, January 22, 2019

The Unreal Basis of Neoclassical Economics

The Market Myth | Cadmus Journal

By Al Campbell, Ann Davis, David Fields, Paddy Quick, Jared Ragusett and Geoffrey Schneider

originally posted here

Ten years after the financial crisis, we still find mainstream economists engaging in overly simplistic analysis that does not accurately capture the dynamics of the real world. People studying economics need to know that the principles of mainstream economics are hopelessly unrealistic. In this short article, we demonstrate that the ten principles of economics in Gregory Mankiw’s best-selling textbook are divorced from reality and reflect an extreme and unwarranted bias towards unregulated markets.[ii] Mankiw’s “Ten Principles of Economics” should more accurately be titled “Ten Principles of Unrealistic Neoclassical Theory.”

Mankiw’s Principle #1:  People Face Tradeoffs/There is no such thing as a free lunch.
Mankiw ignores the historical determination of the distribution of resources and the crucial distinction between those whose income comes almost entirely from the performance of labor and those whose income comes from their ownership of capital. As a result he is unable to recognize the political power that results from the concentration of wealth in the capitalist class, and to analyze the distributional impact of decisions in which those who gain are often significantly different from those who lose. In addition, history is full of accounts of forcible appropriation of resources that appeared to be “free” to those who acquired them.

Mankiw’s Principle #2:  The Cost of Something Is What You Give Up to Get It/Opportunity Cost
Insofar as individuals are able to make decisions, their choices can be described as “giving up” one opportunity in order to take up another. This tells us nothing about the determination of the choices that are available to them. The “choice” of a worker as to whether to take on a dangerous job or face eviction from a home requires a very different analysis than one suitable for a discussion of the choice between apples and oranges. On a different level, an analysis of the “trade-off” between income now and increased income in the future requires an understanding of ecological limits to the growth of material production.

Mankiw’s Principle #3:  Rational People Think at the Margin.
Neither consumers nor producers, nor humans in many other social roles, generally act on the margin. The assertion of marginal analysis that decisions must be such as to equate marginal benefit with marginal cost is simply a restatement of the first derivative condition resulting from maximization subject to a constraint, rather than a reflection of real human choice. Mainstream theory then defines behavior according to this mathematical construction even though it does not govern actual choice in the real world. But more important is the presumption that all decision-making is guided by the well-being of isolated individuals, and thus that “rationality” consists of behavior that maximizes the benefit of the individual decision–maker. This dismisses the fact that people are social animals whose decision-making recognizes the interaction between individuals, and it ignores how in the real world people make decisions considering their whole situation under possible alternatives, material restraints, imperfect information, their cognitive abilities, the existing power structures, and culture.

Mankiw’s Principle #4:  People Respond to Incentives.
This is tautological. Furthermore, models based on monetary incentives by selfish, isolated individuals and firms in perfectly competitive markets are unrealistic and ignore crucial real world issues. Monetary incentives are not all that matters. In the real world people make many decisions on the basis of their evaluation of the resulting well-being of many people beyond themselves, or on social and cultural norms.

Mankiw’s Principle #5:  Trade Can Make Everyone Better Off.
Trade can increase total production, but trade has distributional impacts, with winners and losers. Trade in modern capitalism tends to foster inequality while undermining wages and working conditions for many laborers. This principle promotes unregulated trade, but unregulated trade has not proven to be the best route to economic development, nor is it good for all people. In the real world, infant industries, immiserating growth, terms of trade shocks, and increasing inequality render this principle useless as a policy guide.

Mankiw’s Principle #6:  Markets Are Usually a Good Way to Organize Economic Activity.
As there are no measurable units by which one can classify all specific economic activities in the real world as “good” or not, principle #6 is nothing more than a neoclassical ideological declaration of faith. Markets are human creations that operate differently in various economic systems, and the various existing and potential economic systems themselves are human creations. The first real question then is if under an existing system private capitalist markets driven by the profit motive do better than possible alternative human creations for providing the good or service, potentially driven directly by the desire to meet specific human needs. Important examples providing evidence of the inferior performance (efficiency and effectivity) of private capitalist market-driven systems are well run social security systems and single-payer health care systems. Avoiding the error of accepting the system as given, a deeper question would be if under some different economic system, which was not built to favor capitalist accumulation, alternatives could outperform profit-driven markets operating in capitalist systems.

Mankiw’s Principle #7:  Governments Can Sometimes Improve Market Outcomes.
Behind this assertion is the idea that markets are natural and could run without any government intervention, and that such natural markets tend to be efficient but sometimes are not quite optimal. In those cases the efficiency of markets could be improved by government tweaks. To the contrary, in the real world all markets are created by governments, which both establish the rules of the game and enforce them, and thereby determine market outcomes. If the government passes laws requiring that food be safe, that changes the market for food, and yields different market outcomes than if those laws did not exist. With this understanding, principle #7 is reduced to the not very profound statement that because governments create markets, they have the ability to create them with better or worse outcomes. Further, the issue always ignored by neoclassical economics of social divisions is particularly important for considering “better market outcomes”: better for whom? Market rules are shaped by power structures to benefit some classes and other social groups more favorably than others (for example capitalists at the expense of workers, First World countries at the expense of Third World countries, etc.).

Mankiw’s Principle #8:  A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services.
Higher GDP per capita does not necessarily result in a higher material standard of living for all people within, as well as between, countries. Furthermore, neoclassical economics operates with a definition of “standard of living” as the amount of goods and services consumed, so this principle reduces to the not quite tautological, but not very insightful, claim that the amount of goods and services consumed in a country depends on its ability to produce them. In the real world what people are concerned with is their quality of life, which includes social respect, power to act on one’s desires, conditions of work (and not just pay), social relations, and much more. Neoclassical economics does not address the extension of principle #8 to what people in the real world are actually concerned with, their quality of life, for which the goods and services produced are just one among many determinants.

Mankiw’s Principle #9:  Prices Rise When the Government Prints Too Much Money.
Since the neoclassical definition of “too much money” is the amount that makes prices rise, this is a tautology. In the real world the relationship between prices and the money supply is complex: expanding money might cause a jump in prices or it might cause no price increases at all, depending on many other things in the economy.  The applied policy transformation of this into the incorrect claim that “prices rise when the government prints more money” is an ideological artifice, used today to justify austerity policies and keeping wages low.

Mankiw’s Principle #10:  Society Faces a Short-Run Tradeoff between Inflation & Unemployment.
The relationship between inflation and unemployment is complex and does not follow a systematic pattern. By the 1970s data from the real world had caused textbooks to go from Phillips Curves to Shifting Phillips Curves to abandoning them entirely. In view of that experience, principle #10 of a short-term trade-off between inflation and unemployment has become a neoclassical ideological justification for challenging those who advocate policies that would reduce the rate of unemployment, by fostering fears of inflation that may never materialize.
In conclusion, Mankiw’s so-called “Ten Principles of Economics” ignore crucial realities of the economic world. In particular, Mankiw excludes power imbalances, inequality, social forces, development experiences, the realities of market behaviors, laws and outcomes, realistic measures of quality of life, and recent macroeconomic data from his principles. It is hard to imagine a less useful set of ideas to guide modern societies in designing a good economic system. Unfortunately, almost all other mainstream principles of economics textbooks parrot these same principles. Students of economics will have to look elsewhere for useful analysis of the economy and how to build a democratic economy and society that works for all.

Mankiw, Gregory. Principles of Economics, 7th Edition. Stamford, Connecticut: Cengage. 2015.

[i] In a subsequent article, we will offer a set of principles of radical political economy to provide a more realistic, alternative approach.
[ii] The authors are members of the steering committee of the Union for Radical Political Economics (URPE). The ideas presented in this article are those of the authors and not of URPE. The purpose of this article is to make readers aware that there are alternatives to the principles of economics put forth by mainstream economists. We synthesize the critiques of mainstream economics by radical political economists in order to give students and teachers ammunition to confront the unrealistic paradigm of neoclassical economics that currently dominates the profession.

Monday, January 21, 2019

Functional Finance, MMT and Blanchard's Presidential Address

So Olivier Blanchard gave the AEA presidential address at the Atlanta meetings earlier this year. If you missed it you can watch it here. The paper is also here. In all fairness, there is nothing new there. He notes the famous rule by Evsey Domar about sustainability of public debt, meaning that if the rate of interest on debt is lower than the rate of growth, debt-to-GDP ratios tend to be stable and you are in no danger in pursuing active fiscal policies.

Note that functional finance is in many ways compatible with Old Neoclassical Synthesis Keynesianism, and it should not be a surprise that New Keynesians accept some of the same arguments. Certainly Domar was an Old Keynesian in that mold, and although he was more difficult to classify, Abba Lerner the founder of functional finance accepted many marginalist arguments.

Blanchard actually is quite conventional and argues that public debt has negative welfare effects and reduces growth (forget this, that the Industrial Revolution was done on a pile, a huge pile, of public debt). He is very clear that he's not in general in favor of more debt, but only under the current circumstances, in which the rate of growth would be above the risk free interest rate of government bonds (that he calls the safe rate) and the marginal efficiency of capital (which really means he thinks in terms of a natural rate, in Wicksellian fashion).

Yet, of course, pundits went crazy. A typical reaction is from Desmond Lachman, and ex-IMF economist (i.e. worked for Blanchard), and fellow at the American Enterprise Institute in the Wall-Street Journal. Two things, one he suggests that Blanchard is a defender of MMT, which is a stretch. MMT involves more than functional finance, like a notion of endogenous and chartal money, and a policy preoccupation with full employment, often embodied in an Employer of Last Resort (ELR) proposal (that's a non exhaustive list). The second issue is that his whole argument is that the rate of interest will go up soon (as a result, presumably of foreign bond holders; in his words: "It’s more likely that investors, particularly from overseas, will demand higher government bond yields to compensate for the elevated inflation or default risk they see from an ever-increasing public debt ratio"). In other words, the foreign crowding-out of the old Mundell-Fleming model.

Of course, the are many problems with this arguments. The Fed has considerably more room than other central banks, and US bonds play a special role in the global economy. The dollar has been relatively appreciated, even with very low rates of interest, and the notion that something has to be done, even with some depreciation, is bogus. Depreciation is neither inflationary, nor contractionary in the US, in contrast to developing countries. The chances of higher inflation, are also subdued, even with the current long, but slow, recovery with low official unemployment. But it says something that there is all this crazy reaction about a very modest defense of fiscal expansion (note also that after Bernie, and AOC, MMT has become synonymous with fiscal expansionism, in ways that Keynesianism was before; naked Keynesianism, you might argue).

PS: If you are interested on the effects of monetization of public debt read this old post that replied to Krugman (who has warmed up to some functional finance/MMT ideas).

Sunday, January 20, 2019

A global macroeconomics – yes, macroeconomics, dammit – of inequality and income distribution

Below the text of the first Godley-Tobin Lecture by James K. Galbraith.

According to an approximate count, there are 848 sub-categories in the classification codes of the Journal of Economic Literature. Of these, five relate to income inequality. Two are classed under Microeconomics: D31 ‘Personal Income, Wealth and Their Distribution’ and D33 ‘Factor Income Distribution.’ Two are classed under ‘Health, Education and Welfare’: I14 ‘Health and Inequality’ and I24 ‘Education and Inequality.’ One is classed under Labor: J31 ‘Wage Level and Structure/Wage Differentials.’

Under Macroeconomics there is nothing, unless you count E25 ‘Aggregate Factor Income Distribution,’ which surely means the analysis of factor shares – Wages, Profits, Rent – also known as the functional distribution. Under International Economics there is no reference to inequality at all. Nor under Development Economics. Simon Kuznets, whose immortal 1955 presidential lecture predates – I believe – the JEL classification scheme, is spinning in his grave.

So if your interest is in the global macroeconomics of inequality – in the personal or household distribution or pay structures considered over time and across continents and countries, you are what is known in the technical literature as shit-out-of-luck. From a formal standpoint. So far as the American Economic Association is concerned, affecting the structure of journals and the assignment of referees, you have nowhere to publish, no place to go. It is, therefore, nice to be here.

Read rest here.

Monday, January 14, 2019

Trade and Finance

Teaching a course on international economics (trade and finance) for international relations students. More on that later. Just wanted to post the exports to GDP ratio for the world.
This is to give students a sense of the increase in trade in the last few decades, and also the relative stagnation since the 2008 Global Financial Crisis. Note that while exports are about US$ 23 trillion in a year, the daily turnover in the foreign exchange market is about US$ 5 trillion, according to the last time I checked the BIS Report.

I put the US recessions bars too. Note that it seems that US recessions always have a significant impact on the expansion of world exports.

Friday, January 11, 2019

Heterodox Journals and Impact Factors

I blogged about journal rankings a while ago. As I said back then, journal rankings matter in decisions about grants and academic promotions, and there are biases against heterodox journals. So even if there are many problems with those measures (read previous post), they are still relevant. The Review of Keynesian Economics (ROKE), founded by Tom Palley, Louis-Philippe Rochon (now at ROPE) and myself, has now an impact factor of 0.738 in last year’s Clarivate Report (Thomson-Reuters citation index, previously known as the Science-Social Science Citation Index, SSCI), up from 0.515 in the 2015 report.

For comparison, well-established heterodox journals were somewhat below, with the Review of Radical Political Economics scoring 0.377 and 0.579 in the same reports, and the Journal of Economic Issues scoring 0.573 and 0.580. The Cambridge Economic Journal, and Metroeconomica also improved and went from 1.311 to 2.070, and from 0.984 to 1.379. Many good heterodox journals are not even indexed.

On the topic of the importance of rankings for tenure you might want to read Heckman and Moktan's paper "The Tyranny of the Top Five Journals."

Monday, January 7, 2019

Raúl Prebish’s Unpublished Manuscripts on the Buenos Aires Lectures on Economic Dynamics

By Esteban Pérez Caldentey

Raúl Prebish’s Unpublished Manuscripts on the Buenos Aires Lectures on Economic Dynamics edited by Esteban Pérez Caldentey (ECLAC) and Matías Vernengo (Bucknell University), have been published in the ECLAC Review, August 2018

Raúl Prebisch (1901–1986), the Second Executive Secretary of the Economic Commission for Latin America and the Caribbean (ECLAC) which he joined in 1949 is mostly known for his long-run analysis and diagnostic of the development problem of Latin America, which he fully stated in “The economic development of Latin America and some of its principal problems” (1950), also known as Prebisch’s “Manifesto”.

However, prior to joining ECLAC Prebisch also devoted a great part of his time and career the analysis of business cycles in theory and in practice (he was the first Director General of the central bank of Argentina created in 1935 and Prebisch himself drafted the project for the bank). On the basis of his cycle analysis he began to develop a theory of dynamics which sought to introduce two elements that, according to Prebisch, were missing from the Classical and Keynesian analyses, time and space.

Prebisch argued that capitalist economies evolved and developed in growth cycles. From 1920 to 1944 his analyses of capitalism centered on Argentina and on the characteristics of its business cycle. He attributed the phases of the Argentinean cycle to external causes determined to a large extent by the policy and economic performance in developed countries (Great Britain and the United States).

Read rest here.

Link to CEPAL Review here.

Tuesday, January 1, 2019

The three caballeros: on populism and the economy

Cartoonish figures... and Disney toons too

With the incoming inauguration of Jair Bolsonaro in Brazil, the United States and the two largest countries in the Latin American region will have what the press has more or less universally and uncritically referred to as populist leaders in power. It has been very common in the press to compare Trump and Andrés Manuel López Obrador (AMLO) as right and left-wing populists. And although the term has not been applied as often to Bolsonaro, comparisons with Trump abound. Yet, while they do share certain characteristics, I would argue that populism is not one of them. The comparisons that make them all similar are at the end of the day caricatures.

Admittedly populism is a complicated and somewhat fuzzy term. It has a complicated history, and many in the developed world associate it with the old agrarian movements in Russia and the US, and can be seen as somewhat progressive. Alternatively, in Latin America it has been more often than not associated with the rise of Peronism in Argentina, and the affinities with Italian corporatist and fascist ideologies leads many to see it as somewhat reactionary movement.

The economic definition of populism, or what Dornbusch and Edwards called macroeconomic populism, is even more problematic. They basically suggested that running fiscal deficits would fit the bill. That makes the list of possible populist leaders almost all encompassing, and devoid of any relevance. I won't try to solve the question of what a good definition of populism is, but I'll try to explain why to emphasize the similarities between the three might not be completely accurate, and might distort understanding of what to expect ahead. Mind you, on some level, one expects that populism should deliver something for the people and should be the opposite of oligarchic regimes.

Trump and Bolsonaro are clearly associated with conservative ideas while AMLO might be seen as a lefty (note, however, that according to Cuauhtémoc Cárdenas, the son of General Cárdenas and an icon of the left in Mexico, that is not correct; see here, in Spanish). While Trump was brought to power by the votes in the Rust Belt (in Michigan, Pennsylvania and Wisconsin) dissatisfied with Free Trade policies that have affected the region, in Brazil and Mexico a fight against corruption (real or perceived) played a more important role (something stimulated by US interests in LA). In Brazil, during the Workers' Party (PT) administration income inequality decreased (and real wages went up). A mediatic-juridical coup brought down the government, and Bolsonaro represents the continuity with the coup. AMLO represents the dissatisfaction not just with the economic woes of Mexicans, but with the failures of democracy (including the return of PRI, Institutional Revolutionary Party, after two governments of PAN, National Action Party).

In the case of Brazil, the formerly nationalist Bolsonaro has actually appointed an openly neoliberal Chicago Boy to the newly enlarged economic ministry. While Trump and AMLO are less keen on Free Trade, it is unclear that this would be central to Bolsonaro and the opposite might be true (Paulo Guedes, his economic minister seems to dislike MERCOSUL, but not free trade). Also, while Trump trade disputes with China can be seen as part of a reaction to the latter's challenge to American Hegemony, and both that and the increase in military spending might extend for a bit the slow recovery and the bubbleized American economy, the tax cuts and the resistance to any kind of expansion of social spending will imply that very little of the growth trickles down to the less privileged in American society. In the two LA giants, austerity will, most likely if they follow through with their fiscal plans, lead to slow growth. Worse, they will be unable to use the US/China conflict to gain advantage for national strategies of development, but for very different reasons. In Brazil because Bolsonaro (and his fanatic foreign affairs minister) suggest direct alignment with American interests. In Mexico, because the new UMSCA ties the hands of the government in many ways (something that AMLO seemed to welcome, or at least did not think he should fight it).

While Trump has at least promised an expansion of infrastructure spending (and the infamous wall of shutdown fame too), making him somewhat populist in Dornbusch's definition, both Bolsonaro and AMLO promise austerity and balanced budgets. While AMLO wants to raise  raised (h/t Guillermo Matamoros) the minimum wage, there is no indication that Trump or Bolsonaro think a minimum wage should even exist.

Trump for all his anti-establishment rhetoric is no threat to the American oligarchy (Pence is in the pocket of the Koch brothers, if anything else needs to be said). I had suggested a while ago that with Bolsonaro Brazil could follow the path of Mexico or of 19th century Brazil, "an oligarchic state... in which the rents of a relatively stagnant... economy were distributed among a few powerful families, while the vast majority was left out." At least AMLO is trying to break with Mexican oligarchic traditions. It might not be enough. Happy old year!

Podcast with about the never ending crisis in Argentina

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