Thursday, October 7, 2021

Financialization revisited: the economics and political economy of the vampire squid economy

New paper by Thomas Palley. From the abstract:

This paper explores the economics and political economy of financialization using Matt Taibbi’s vampire squid metaphor to characterize it. The paper makes five innovations. First, it focuses on the mechanics of the “vampire squid” process whereby financialization rotates through the economy loading sector balance sheets with debt. Second, it identifies the critical role of government budget deficits for the financialization process. Third, it identifies the critical role of central banks, which are the lynchpin of the system and now serve as de facto guarantors of the value and liquidity of private sector liabilities. Fourth, the paper argues financialization imposes a form of policy lock-in. Fifth, it argues financialization transforms popular attitudes and understandings, thereby generating political support despite poor economic outcomes. In effect, there is a politics of financialization that goes hand-in-hand with the economics. The paper concludes with some observations on why mainstream macroeconomics has no equivalent construct to financialization and discusses the disquieting unexplored terrain that the economy is now in. 

Read rest here.

Wednesday, October 6, 2021

The Biden administration should ignore the debt ceiling

The administration run excessive budget deficits, and accumulated too much debt in the face of successive economic crises. As a result, it was forced to compromise politically in order to avoid a catastrophic default, and the subsequent political crisis brought about chaos, and the collapse of the established institutions. Of course, this is not a cautionary tale about the United States. It is a description of the economic crisis that led to the French Revolution.

But in spite of the apocalyptical rhetoric in Washington nothing like this is even faintly possible in the case of the United States. Public debt in the US is in domestic currency, the safest financial asset, and not owed to foreign bankers or in foreign currency, which is not controlled by the administration. It is also not debt in an asset the administration does not control like gold, as it was the case in Ancien Régime France, or the US itself before the end of Bretton Woods. More importantly, political representation, and democratic control over the public purse provided the conditions to sustain expanding budgets and public debt in the American case. The debt reflects, for good or for bad, the democratic decisions of the people. The only reason public debt has become an issue is the existence, for arcane political reasons, of a debt ceiling.

Even though there is a debate about whether the economy needs an additional fiscal boost or not, nobody thinks seriously that the disruption caused by a default and interruption of government functions, with a shutdown, would be a good idea, particularly not during a pandemic. The economy is certainly not a full employment, and about five million workers that had jobs before the pandemic are unemployed. Inflation, although a concern, does not result from an economy close to full employment, but from the disruptions associated with the supply chain during the pandemic. Interest rates on public debt remain low, and there is no reason for austerity measures in the midst of a still uncertain recovery. In fact, most economists, and a good part of the public opinion, think that the visible decline in American economy results from lack of investment, not just on basic infrastructure, but also on the wellbeing of population. 

If there is a perception of a national crisis, it is not about a fiscal one, but one about declining hegemonic power, and about the rise of China (with the Sinophobic undertones noted by Tom Palley). The solution requires investment in the future, in the kinds of things that are both popular and part of the broader Biden agenda, boosting the safety net programs, and investing in green technologies, promoting cleaner economic growth. That these investments are necessary is not particularly controversial, given the size of the social crisis at home, and the global environmental crisis, let alone in the context of a pandemic crisis that seems will become endemic.*

The debt ceiling debate is purely a political instrument used by Republicans to preclude Democrats from implementing their budgetary priorities. This is not an economic crisis, it is a political crisis and requires a political solution. The most cited solution for the current crisis would be to mint a one trillion-dollar platinum coin, that would allow the Treasury to continue spending (e.g. Paul Krugman here). As Zachary Carter said in the Washington Post, only an absurd solution could save the US from an absurd problem. However, trust in the existent political institutions might be the best solution for the impasse. The Biden administration should simply declare that the debt ceiling is unconstitutional, move forward, and continue to make payments even if the debt ceiling is breached. Congress cannot enforce the debt ceiling, and the Treasury can continue to pay until the courts decide on the merits of the case. The issue should be decided by the courts.

There are two possible objections to this strategy. The first one is that an impasse may imply that the US would be technically in default, and that chaos would ensue. However, if the Treasury continues to pay, the worst consequences could be averted. As noted, everybody knows this is a political problem and there is no real question that the US cannot pay. The other concern is that the Supreme Court could presumably determine that the debt ceiling is constitutional after all. That is, to be clear, a possibility. However, it should also be clear that the Roberts court is strongly probusiness and that financial and corporate interests in general are against a default that would hurt the economy. But in the case the court decides to commit economic suicide for no good technical reason, this might still be the right move. Perhaps then there would be enough support to eliminate the debt ceiling through the legislative process, eliminating the filibuster.

* There is, of course, some debate within the Democratic Party, with Senators Manchin and Sinema probably precluding a larger fiscal package.

Tuesday, October 5, 2021

On the irrelevance of inflation expectations: the return of the working class

There are many myths about the Phillips Curve and the so-called Monetarist Counter-Revolution of the 1960s and 1970s. Forder's book is a good read on some of these issues. Jeremy Rudd's recent paper is also a must read, and has now been accepted for publication in the Review of Keynesian Economics (ROKE).

It debunks the myth about the importance of inflationary expectations for explaining the Great Inflation of the 1970s, and casts doubts about the Monetarist Counter Revolution, the Rational Expectations one, and that would include the more recent New Keynesian developments that include a lot from both. Rudd's paper suggests that there is a simpler explanation for the acceleration of inflation back then, and the Great Moderation since the 1990s. In his words:

"Another way of stating this point is that an important feature of inflation dynamics after the mid- 1990s appears to be the lack of a strong wage–price spiral (or of any significant year-to-year feedback between wage growth and inflation)... An observation about the actual nature of the 'wage bargaining process' is helpful at this point."

Old Keynesian stories about cost-push versus demand-pull inflation come back to mind. He suggests essentially that worker's wage bargaining power has been weakened, and that reflects in less impact of labor costs on actual inflation. Again, in his words:

"We can make a reasonable case that reactions of labor costs to actual inflation were an important feature of the inflation process in the 1970s. In particular, without this channel’s being present, it is nearly impossible to explain why movements in food prices left a durable imprint on core inflation—unlike energy, which can plausibly be viewed as a broader input to industry, changes in agricultural prices shouldn’t act like a cost shock to firms outside the food sector."

This suggests a preoccupation of the profession with more concrete, objective causes of inflation dynamics, and that bargaining power of the labor class matters. Martin Sandbu has suggested a few months ago in his Financial Times column that:

"To be precise, we may be witnessing the manifestation of two outmoded ideas: that the relative power of economic classes alters macroeconomic outcomes; and that macroeconomic policy tilts that relative power."

Sandbu also noted that in this recession it is Michal Kalecki, not Keynes, the old and forgotten master that we should bring back from the dead. While I do think that Kalecki should always be remembered and was and continues to be relevant, it is less clear that the wage bargaining position of the working class will recover anytime soon. Sure, if Dems manage to pass the more robust social spending bill, with the extra US$ 3.5 trillion, things would look a bite better. Hope springs eternal.

On Garegnani's contributions to economics

My initial comments at the seminar on the legacy of Pierangelo Garegnani's contributions to economics organized by the Italian Post Keyn...