Tuesday, October 29, 2019

The IMF's Second Chance in Argentina

Kevin Gallagher and Matías Vernengo

Alberto Fernández and his running mate, former president Cristina Fernández de Kirchner, have won the election in Argentina amid a real danger that the country’s economy will collapse. Outgoing president Mauricio Macri and the transitioning Mr Fernández should work closely with the IMF to put the fragile economy back on a path to stability and sustainable growth.

Read rest here.

Friday, October 25, 2019

Challenges for Economic Development in Latin America at the Universidad del Litoral

I'll be in Santa Fé (Argentina, not New Mexico) next week, talking about the challenges ahead, in a particularly important time for the country.

For those around that want to register go here.

Thursday, October 24, 2019

Who really wants the (Brazilian) economy to grow?

Franklin Serrano and Vivian Garrido (Guest bloggers)

When the Brazilian economy was growing with low unemployment rates and reducing income inequality, it was said that “businessmen have never made so much money” and, at the same time, the business community’s discontent with the government was increasing. On the other hand, in the current situation of semi-stagnation that followed from a deep recession, the entrepreneurs of both real and financial sectors declare their unrestricted support to the current government, despite the daily mess and shame of various government members and the bad economic conditions. We believe that, in order to understand both this apparent paradox and the very tendency of the Brazilian economy to stagnate, it is useful to clarify some basic theoretical relationships between investment, growth of demand and profitability.[1]

What matters to entrepreneurs?Entrepreneurs want "profitability". Profitability is not simply about selling more (total profit volume), but about the amount of profit compared to the size of the invested capital. Of course, as the economy grows, the volume or mass of profits invariably increases in absolute terms. But, as Garegnani said, companies do not care about the mass of absolute profits, but about the rate of profit, that is, the amount of profit relative to the capital invested; this variable may simply be called “profitability”. However, in the short run, the capital stock already installed is given; it’s a result of past investments. Then, in this short run, the rate of profit on this capital stock will depend only on the amount of profit and this, by its turn, depends on two factors: how much is produced and sold (the level of output) and the share of the product (and income) that goes to profits. Let us clarify in more detail these two factors.

In order to do so, let's imagine a scenario (let's call it “scenario 1”) in which real wages rise more than the trend of growth of labor productivity. This tends to reduce the rate of profits as the share of profits on sales (the second factor above) falls. It is true that, since in aggregate level these increases in wage share tend to increase the demand for consumption (because the share of wage income spent on consumption is naturally higher than that of profit income), aggregate consumption and production increase, which means that, in the short run, the degree of utilization of already installed capital increases and firms as a whole, partially offset lower margins with higher sales (i.e., the first factor above). Lower margins tend to decrease the rate of profit, but higher sales, on the other hand, tend to increase the rate of profit on this already installed capital stock. But one thing does not fully offset the other. This offset, however, besides being of a short term nature, is also only partial, as any increase in the payroll increases company costs and only part of this increase comes back as additional demand and revenue for them. This is because part of the amount of these additional wages will be spent directly on imported consumer goods (and indirectly on imported inputs of consumer goods produced in the country). Another part of the payroll increase goes either to pay direct taxes or is captured by indirect taxes paid by consumers and embedded in the price of retail goods. And also because part of the payroll is saved or used to pay workers's debts with the financial sector (whose owners tend not to spend these revenues).

So, is this profit rate that matters to entrepreneurs?Not really; or rather, although this is the actual rate of profits realized on the existing capital stock, it is not the rate of profit that determines the expected profitability of entrepreneurs in their new investments. In the latter case, companies are going to invest an adequate amount for the production capacity to adjust to the new expected total demand (which, in the present case, has grown) at a planned or normal degree of utilization, that, in its turn, is calculated to meet the expected fluctuations in demand, which implies that now (beyond the short term), the volume of capital invested will increase. Therefore, because of the rise on real wages, the expected rate of profit on new investments will fall as much as the share of profits will fall, without any partial compensation (as in the previous case), and gradually the profit rate related to the capital that is being installed goes falling as much as the expected rate of profit. And this rate of profit, that is, the rate of profit on the productive capacity planned to be used at the normal level, is the one that matters, because it determines the expected profitability. This longer run profit rate is called the “normal” or “expected” rate of profit.

But why do companies focus on the expected rather than on the actually realized profit rate?Well… due to competitive pressure, firms do not want either to overestimate the expansion of the market (in order to avoid loss), nor underestimate this expansion, otherwise they will lose market shares to rival companies and/or new entrants in their sectors. Hence, any individual entrepreneur who refuses to invest just because he is not content with a lower profitability (i.e., a lower normal rate of profit) while demand is expanding will simply be losing market share to another one. The idea of ​​planning the production capacity to be used at the so-called “normal” level contemplates the possibility of fully meeting the average demand over the life of the equipment while maintaining a slack to meet temporary or seasonal demand peaks, thus avoiding losing market share to competitors during these peaks. And because the productive capacity is planned to operate at the normal level based on the expected demand, then it is the expected not the realized rate of profits that becomes decisive.

Does this mean that, although “upset”, entrepreneurs still invest knowing that their expected profit rate will fall?


So, profitability matters to entrepreneurs but it doesn't matter to the investment decision? What do you mean?

This is where we would like to separate and clarify the confusion between the expected profit rate and the investment decision. The total amount of investment depends only on the expected demand and not on the expected profit rate! This leads us to two opposite but not antagonistic conclusions. First, that the business community generally does not like reductions in the share of profits in income through real wage increases above the rising trend in labor productivity. That is, as we said above, the business community struggle for their profitability, because this is what matters to them. But second, when this scenario of a rise in the wage share actually happens and markets expand, the combination between competition and the lack of a better alternative, cause entrepreneurs to expand their investments, even if expected and realized profit rates are falling, unless they fall below their opportunity cost, given by the interest rate, which is its lower bound. With profit rates still above this lower limit and if demand is expanding, investment continues to grow. A central implication of these propositions is that the reaction of the business community to a downward trend in profitability will not be, therefore, an implausible "investment strike." As Kalecki said: "capitalists do many things as a class, but they certainly do not invest as a class". If and when there is a capitalist reaction, it will consist of doing something like political pressure for the State to change the economic policy regime, in order to reverse the situation in the direction of their own interests.

To illustrate, let us now suppose a second scenario (let's call it “scenario 2”), where we observe such a class reaction that succeeds and, through austerity policies, the government manages to generate stagnation with mass unemployment and this then reverses the trend of rapid growth in real wages. In this second scenario, if demand is no longer expanding and even more if there is unwanted idle capacity in the already installed capital stock, companies have no incentive to invest, no matter how much real wages and other costs or taxes and corporate contributions fall, due to labor reforms or social security or due to tax exemptions to firms in general. As much as the business community can and will be satisfied with this high level of profitability, there is no incentive for additional investment, since it would only create unnecessary productive capacity. Probably some entrepreneurs will invest in innovations to steal market share from other companies. But if the innovators succeed, those other companies that have lost market tend to reduce their own investments in the same magnitude. Unfortunately, without growth of final demand, an aggregate expansion of investment will not be sustained for too long.

And what matters to workers?Naturally, workers generally are interested in more jobs, and in increase in real wages. Both factors are directly connected with higher economic growth because growth tends to generate more jobs. In fact, politically and historically, it is through decreasing unemployment and underemployment that the bargaining power of workers rises (and has risen) and facilitates the achievement of higher real wages and better working conditions. Increases in real wages above labour productivity growth is even better for workers, because, in this case, in addition to the initial increase in wage purchasing power, there is an increase in the economy’s aggregate marginal propensity to consume (share of total income that is spent on consumption) and thus, an additional increase in aggregate demand and employment as a result of this wage increase itself.

In our view, due to a number of structural characteristics of the economy, Brazil was, until 2010, close to the previous situation described above, which is equivalent to our scenario 1. These characteristics had included elements such as: the demographic transition _ reducing the growth of labor supply _ and the low labour productivity growth _ due to a more than proportional expansion of the services sector, what generated more employment than the expansion led by other sectors. In addition, several aspects of the growth pattern adopted, based on a strong rise in the minimum wage, an elevation of job formalization, and an expansion of the welfare state (giving the poor the opportunity to survive or study without working in precarious conditions) contributed to increase the bargaining power of workers, especially the low-skilled ones, which has grown substantially and unexpectedly during the boom of the Brazilian economy since 2004. Nevertheless, since 2011 the government, pressured by the discontentment of the capitalist class with this trend, has taken a number of palliative measures to restore the corporate profitability (especially tax exemptions) and seemed to have been surprised with the lack of positive impact of such measures on private investment, in a context where government had helped to decrease markedly the growth of demand. Then, in 2015, the government decided to assume the austerity policies and the gradual weakening of the welfare state with the reduction of social rights. The capitalist class and its external allies, counting also on the support of the workers with higher salaries (the latter particularly outraged by basic wages increase and progressive measures such as the 2013’s housekeepers PEC[2]) and seeing that they had nothing to fear from a government without any firmness, set out to attack. And, through a succession of coups, the transition to something close to our scenario 2, against the workers' interests,was completed, and here we are now. Profitability conditions improve by each measure taken by the government, helped by the low bargaining power of the workers in this stagnant and mass unemployment economic situation.

In short ...

… With this note, we came up with a scenario that now, we hope, seems less paradoxical, and it is: a) interesting for entrepreneurs; b) uninteresting for workers; c) with an upward trend in the profit rate and d) with low investment growth.

Due to the weak growth of demand that largely resulted from austerity policies, investment and the economy are barely growing and there is a huge and successful effort to focus the political debate on anything but the state of the economy and social rights, in order to prevent the loss of legitimacy and maybe electoral failure of forces supporting the government. Promoting economic growth is not and has never been a priority for big businessmen and, as has been clearly acknowledge, neither growth is a government priority. But who really needs growth are not the entrepreneurs in general _ apart from some small entrepreneurs, for whom and whose family the company generates jobs _ but the workers.


SERRANO, F. & SUMMA, R. F. (2018) Conflito distributivo e o fim da “breve era de ouro” da economia brasileira. Novos Estudos CEBRAP, v. 37, p. 175.


[1] For more details see Serrano and Summa (2018)

[2] PEC is a brazilian instrument created to facilitate changes in small parts of the Federal Constitution. In the case refered in the text, it was a particular formalization of housekeeper’s jobs.

Argentina and the IMF: What to Expect with the Likely Return of Kirchnerism

Simple Math, Macri + IMF = Poverty

The Argentine economy is on the verge of another default less than two decades after the last one, in 2002. The forthcoming elections, in October 27, will most likely bring back the Kirchnerist opposition back to power, and they will have to negotiate with the International Monetary Fund (IMF), that has the power to prevent a crisis.

Argentina has a long and turbulent history with the IMF that dates back to the country’s entry in the organization in 1956 and to the first loan that was received the following year, after the military coup that brought down the Peronist government in 1955. Since then, the country has been an adept user of IMF resources, ranking among the countries that signed the most agreements. The loan of approximately $57 billion, reached in 2018, is the largest in the IMF’s history, and is a Stand-By arrangement, since it comes with the imposition of economic policies designed by the IMF. This contrasts with the period in which Néstor Kirchner and his wife Cristina Fernández de Kirchner were in power.

Read rest here.

Monday, October 21, 2019

Thirlwall at 40

Thirlwall and McCombie

The new issue of ROKE is out. Three papers are freely downloadable (linked below). Check it out!

Thirlwall's law at 40 by Esteban Pérez Caldentey and Matías Vernengo

Why Thirlwall's law is not a tautology: more on the debate over the law by J.S.L. McCombie

Thoughts on the balance-of-payments-constrained growth after 40 years by A.P. Thirlwall

Thursday, October 10, 2019

MMT in Developing Countries at the Real News Network

Full transcript of the short interview here. Paper was linked before. Note that we say that Functional Finance does apply to developing countries, but that the insistence of the advantages of flexible exchange rates, as opposed to managed regimes with capital controls, are not correct.

Saturday, October 5, 2019

Real World Economics Review

So the RWER has a whole issue on Modern Money Theory (MMT). I haven't read the whole thing yet (barely started). At nay rate on that later. Whole issue can be downloaded here. Enjoy!

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...