Wednesday, May 31, 2023

Servaas Storm on Lance Taylor

Lance Taylor in Beijing (with me, center), 2001

Full paper for download here. From Duncan Foley's recollection cited in the paper.

Lance had what one might call a casual approach to every-day dress, though he appeared for public talks well turned out even with rather jaunty accessories. It was not unusual, however,for him to appear in his office in the working clothes of a Maine farmer. On some of these occasions, particularly when travel delays or cancellations disrupted work plans, I would try to persuade Lance that graduate students were at least as interesting as goats in the hopes of getting him to spend more time in New York, but I made no headway on this issue.

I don't know if I was as interesting as a goat, but I do recall a dinner after some late talk at CEPA, in which Duncan and Lance discussed about goats and whether they did have souls. Worth reading if you are interested in alternative macro views, and the legacy of someone diametrically opposed to Robert Lucas Jr, who also passed away recently (on my views on Lucas go here).

Friday, May 19, 2023

Soft landing or recession

This is a very short note, prompted by the increasing fears of the default and its consequences, which I think it's greatly exaggerated, and the relatively optimistic views about the effects of monetary tightening. Sure enough, as I noted recently, an adjustment, and lower spending, associated either with an agreement with Congress Republicans (very unlikely) or as contingency plans (14th Amendment of other solutions) are implemented, could certainly through the economy into a recession. But I'm somewhat skeptical about that scenario.

On the other hand, I'm less sanguine than Krugman on the possibility of a soft landing. Note that I don't think our situation is as good as the unemployment numbers show, and that the recovery, while fast, brought is back to a position with underutilized capacity, and more slack in the labor market than what the official numbers suggest. But that's another story (discussed before several times). At any rate, the number I would look is the one below: New Privately-Owned Housing Units Started. Basically, construction.

As it can be seen, new constructions fall before every recession since 1960, with the exception of the 2001, recession. Also, it fell in 1966, without causing a recession. It is not a necessary or a sufficient condition for a recession. In 1966, the military spending with the Vietnam war, and the expansion of social programs more than compensated the negative effects of the monetary tightening that was taking place at that time. In 2001, the collapse of the dot-com bubble is what explains the recession.

However, the current and fast increase in interest rates by the Fed, with direct impact on mortgage rates, not only affects the construction of houses (less people willing to buy, less construction), but also affects the patterns of consumption of a large share of the population. And construction is already declining. Sure enough the Fed might stop the interest rate increases, and Biden might continue spending, even expanding his social agenda (that's were this gets iffy), and this might look like 1966. But I wouldn't expect a lot from fiscal policy at this point, and the Fed is not helping. My two cents.

Thursday, May 18, 2023

How Industrialization Become the Core of Raúl Prebisch's Thought

New paper by Adriana Calcagno. From the abstract:

This paper focuses on the intellectual path through which Raúl Prebisch placed industrialization at the center of his economic thought and policy recommendations. It shows how the changing international  context  of  the  1930s  and  1940s  made  him  depart  from  laissez-faire  and  adopt counter-cyclical policies, gradually abandoning the agrarian export-led growth model and finally embracing industrialization as the new growth strategy for Argentina and Latin America.

Published here, and working paper open for download here.

Monday, May 15, 2023

The Forgotten Case Against Milton Friedman: Jacobin's Interview with Tom Palley


In 1967, Milton Friedman launched a counterrevolution in economics that overturned the Keynesian theory of inflation. Three years later, economist James Tobin issued a powerful theoretical rebuttal — but in the economics mainstream, it’s been all but forgotten.

Read full interview here.

Monday, May 8, 2023

The debt ceiling and the American economy: not Armageddon

There is a lot of discussion about the debt ceiling, most of it somewhat exaggerated and panicky. In a recent WAPO op-ed it was called Financial Armageddon. From a run on the dollar to the complete collapse of the economy, one can find almost anything in the news. And sure enough there are reasons to be more concerned this time than in previous disputes between a Republican House and a Democratic White House, which is always the pattern when it comes to the debt ceiling, an institutional feature that very few countries have, btw (old post here, and piece in Dollars & Sense).*

First, let me say a few things about the consequences. If the debt limit is breached, and a default occurs, the first and most direct consequence is that a series of government functions that require government spending cannot go on, and these activities will stop. That is essentially like a shutdown. Government shutdowns have occurred several times, but not as a result of a default, and this will have further implications. Last time we were close to breaching the debt ceiling, the credit rating agencies (Standards & Poor's, to be specific; old post on that here), that determine whether public and private agents are creditworthy, downgraded the US debt for the first time. It was unnecessary at that time, because there was no doubt that the government could pay its bills in its own currency. But that is likely to happen again, more so if there is a default. This would reflect not only the budgetary inability to spend, like in a shutdown, but also the fact that the Treasury will, most likely, stop paying interest on its debt.

Normally, countries that default pay a significant price. Argentina, for example, has defaulted, and that has led to a run on the currency, as agents seek to sell government bonds and try to buy foreign denominated bonds, mostly in dollars. That is inflationary, as the currency depreciates and the price of imported goods go up, and contractionary, since the inflation reduces the ability of consumers to spend. Depreciation, inflation and recession, are the likely outcomes of a sovereign default. Note that Argentina normally defaults on its foreign obligations in dollars, not the domestic ones in pesos (there would be no reason for that, even though Macri did it once), as the United States might do soon.

In the case of the United States, that holds the global reserve currency the consequences would be considerably milder. Everybody knows that the Treasury, besides the political bickering, can always pay its bills in dollars. This crisis does not represent a fundamental inability of the government to pay its bills, but simply the decision to not pay them for calculated political gains by Republicans. The likely effect might be a mild recession associated to the inability of the government to spend, that would add to the already contractionary monetary policy. I should note that a negotiation between McCarthy and Biden to reduce spending, which will be contractionary for sure, is in my view worse than breaching the debt ceiling, since Biden can always find some solution and continue to spend. A recession would be politically disastrous for Biden.

Besides a possible recession, some depreciation of the dollar might or might not occur. Sure enough it is possible that some agents would go to Euro denominated assets, or some other alternative currency, but since the interest rate is relatively high in the US, and it was raised last week again as a result of the preoccupation with inflation, that might attract economic agents into holding dollar denominated assets. The results are ambiguous. Certainly there is no danger of the dollar losing its international position, as Larry Summers correctly pointed out. And of course, even if there is some mild depreciation, its inflationary impact in the US is negligible as compared to developing countries like Argentina. In a developing country, if the currency depreciates 30 percent with respect to the dollar, the price of oil (priced in dollars in international markets) in domestic currency goes up tantamount, but that is not the case in the US.

I am skeptical that a default, if it happens, would be a prolonged problem, since it most likely will backfire politically for Republicans, as shutdowns normally do. So Biden should ignore this, and go on paying, as I suggested a while ago.

* Proof of that is that both Paul Krugman and Laurence Tribe have written in favor of alternative ways of dealing with the issue. I, for what's worth, always thought the one trillion dollar coin exceedingly idiotic, and would prefer the 14th Amendment solution. I think if it went to the SCOTUS, even this group of corrupt, pro-business, conservative justices would muster a narrow majority (Roberts and Kavannaugh perhaps) for the unconstitutionality of the debt ceiling.

Thursday, May 4, 2023

The problem with Keynes' General Theory: by Tom Palley

New working paper by Tom Palley. From the abstract:

Keynes' General Theory was a massive step forward relative to classical economics, but it was also a step backward in its denial of the conflictual nature of capitalism. There is need to understand Keynes' technical contributions regarding the workings of monetary economies, but also need to understand the flaws within his thinking and the consequences thereof. Keynes made a fundamental contribution elucidating the mechanism of effective demand, and he also has claim to be the preeminent monetary theorist. However, owing to his denial of conflict, he had a flawed view of capitalism which is why establishment Keynesianism struggles to explain contemporary stagnation. That flawed view also undermines the case for Social Democracy. Contrary to conventional wisdom, his view of capitalism is supportive of Neoliberalism and Keynes can be viewed as a compassionate (Third Way) Neoliberal.

In some ways this is the argument in Geoff Mann's In the Long Run We Are All Dead. I think one way of thinking about it is that Keynes' effective demand as a critique of marginalist (neoclassical) economics needs to be completed by old classical (political economy) ideas, which put the class conflict at the center of analysis. That of course is necessary for a policy break with neoliberalism.

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...