Thursday, June 27, 2024

Trumponomics vs. Bidenomics: The good, the bad and the stupid

It's a battle of wits between Trump and Biden, in Rick McKee's latest  cartoon

The debate between Biden and Trump is on everybody's mind. And for good reason, the future of the global economy, and the well being of the planet are always at stake in American elections. I, of course, will restrict my brief comments here to the economy, and what the alternatives might entail. But the analysis of the impacts of both programs, if one can talk of programs per se, is very poor, to say the least.

Broadly speaking there has been increasing agreement on a tougher policy with respect to China, what Jake Sullivan referred to as a New Washington Consensus. Many see this as a revival of industrial policy. This is of course suggests some continuity with the Trump policies, even though I would suggest that only with Biden there was a clear plan to re-shore manufacturing jobs, particularly with chips and electric vehicles. Trump basically just hiked tariffs. Both protectionism and the continuity make some liberals (I would say neoliberal progressives, to use Nancy Fraser's term, nervous. For example, Edward Luce's anxiety is that Biden agrees too much with Trump. He says: "both Biden and Trump are vowing to travel in the same direction. But Trump would do so in leaps and bounds."

Note that in all fairness, the US never really stopped doing industrial policy. As noted by Fred Block, even with the problems of the Military-Industrial-Sillicon-Valley Complex, a hidden developmental state. The main new element in the "New" Washington Consensus is really that the US will be less willing to promote economic development by invitation in the case of China. As the IMF policies seem to indicate, for the rest of the world, the old consensus is in place. In that respect, the anxieties of liberals on this are exaggerated.

But that's not all. According to Luce, based on a report* from Moody's, "Trump’s policies would trigger a recession by mid-2025. Unemployment and inflation would jump. The bottom half of US income distribution would suffer the most." He concludes that: "The economic consequences of Trump would be a disaster." This was reinforced letter by 16 Nobel economists warns that: "Many Americans are concerned about inflation, which has come down remarkably fast. There is rightly a worry that Donald Trump will reignite this inflation, with his fiscally irresponsible budgets." This is flatly incorrect. Tax cuts (or their extension) and tariffs wouldn't cause inflation and a recession. Worst case scenario there would be a one time increase in prices, but again the bargaining power of the working class is at low point. So no danger of inflation there. And neither would affect the ability the government to spend. On that Republicans are normally less fiscally conservative when in power than Dems (see old roundtable on that here). And it actually it is a critique that misses the point of why Bidenomics is much better than Trumponomics.

Inflation was not caused by Biden's fiscal packages, as I have insisted several times here (see this paper). And Trump's tax cuts would also not be a problem from that perspective. The point is that Trump would be, in his domestic agenda, more of the trickle down agenda or Republicans going back to Ronald Reagan. Cutting taxes for the wealthy and making it harder for minorities and the poor (often minorities) to access welfare programs. It would be distributively problematic. Inflation is not the risk. The problem with Trump's policies is that they hurt the very working class (many in unions, and certainly white folk) that might vote for him. It would be stupid for unions and other progressives to support Trump.

The good thing about Biden is that he, in part because he had more union connections, and in part because he has moved towards the left (certainly Bernie played a role here), was bold in his fiscal policy, and that might have been instrumental in avoiding a recession (that the Fed was almost engineering). Contrary to Obama, with his mild post-bubble program, and Hillary, Biden has moved to a more traditional Dem (New Deal would be a stretch perhaps) logic of tax and spend.

Eight years ago Hillary had a completely different economic agenda, and that actually explained, to some extent, why Trump ended up winning. I noted that it was likely in this post from before that election, right after a debate, in which I said: "This [election] is going to be way closer than it should be." I also noted that the problem with Hillary was that: "The fact that she has not fully renounced Clintonomics, i.e. financial deregulation, austerity (End of Welfare as we know it) and free trade, is a problem for the progressive base of the party. She walked back some of these, mostly after pressure from the Bernie campaign, but is unclear that these changes would stick."

That these divisions are still relevant within the Democratic Party is clear in the primary in New York that pitied Bowman and Latimer, the former with support from Bernie and the latter from Hillary. Bernie said that "the race 'one of the most important in the modern history of America' and a contest between 'the billionaire class' and ordinary citizens," according to the Financial Times. So if one wants to criticize Trumponomics, the issue is that his agenda is the pro-billionaire one (Wall Street and Silicon Valley agree and have closed the funding gap). Biden is the leftest president since Lyndon Johnson (he is clearly to his right, and LBJ was no commie). He also is not the best possible candidate. He has one unbeatable quality though: he is NOT Trump.

* Mark Zandi is the main author of the report, and he can be seen as another neoliberal progressive, aligned with the pro-business part of the Dems.

Wednesday, June 26, 2024

Brief note on public debt and interest rates in Brazil

Robin Brooks, previously the chief economist at from the Institute of International Finance (IFF), and now at Brookings, suggests Brazil needs austerity, and, here is the punch line, that would promote growth (laugh track here).

The notion that it is the fiscal balances that determine the interest rate on public debt, and that fiscal deficits and high debt must imply high interest rates has no correlation with reality. Imagine the rate of interest that Japan would have if that was correct. In the case of Brazil the higher interest rates are entirely associated to Central Bank decisions.

In fact, if one looks at the correlation between interest rate and the size of public debt as a share of GDP, the correlation is weak, statistically insignificant, and negative. That is, higher debt is associated with lower interest rates by the central bank.

Let alone that the idea of expansionary fiscal contraction has been completely debunked with the austerity policies that followed the European crisis more than a decade ago. Ask Tories in the UK how well that worked!

Tuesday, June 25, 2024

New Clarivate Rankings


ROKE continues to improve it's ranking (based on the Clarivate Impact Factor measure) among heterodox journals. An old discussion about that here. You can see how much we went up since the last time I posted about this here and here.

Monday, June 24, 2024

Paul Davidson (1930-2024)


Paul (I'm next to him) and the Brazilians at the UMKC, PK Conference in 2002

Paul has passed away a few days ago. He wasn't in good shape for a while, and this was expected. He lived a long and productive life. I wasn't personally close to him, even though I met him several times from the mid-1990s onward. He went to two conferences I co-organized at the Federal University in Rio, always with Louise, which was a central figure of Post Keynesian (PK) life, and basically run the Journal of Post Keynesian Economics (JPKE) for him.

He was more effective as an institutional organizer, and as an observer of economic reality (and his main book was called Money and the Real World) than in his theoretical endeavors. His views on Keynes stayed close to the flawed discussion of the Principle of Effective Demand in chapter 3 of the General Theory, and an insistence on the importance of uncertainty and non-ergodicity in Keynes' work, that proved to be somewhat of a dead alley for PKs. He also emphasized the ideas of Tony Thirlwall, and his export-led model of growth, as a central PK contribution to economic theory. Finally, he tended to accept the views of Robert Skidelsky on Keynes' intellectual development, who, as I noted here, accepted a conventional on interpretation of Keynes' ideas, relying on imperfections to explain unemployment, even if he provided a much needed accurate biography of Keynes (in contrast to Harrod).

JPKE, that he created with Sidney Weintraub, and help from John Kenneth Galbraith among others, was central for a generation of PKs. He was part of the Trieste Summer Conferences that, in the early 1980s, that included many heterodox groups, and was the closest to Marc Lavoie's broad tent in real life, but failed to provide a unified view, and an alternative to mainstream marginalist theory. Many thought that the PK project was sectarian, and could not incorporate other views. I tend to think that the failure resulted from the fragmentation of the mainstream, that was reflected in the fragmentation of the heterodoxy, and were part of the era. Certainly not Paul's fault, who, at least in my experience, was very open and willing to debate, even if he did stick to his views. At least, not his personal fault.

When LP (Rochon) invited me to start a new journal, more or less at the time Paul was substituted as the editor of the JPKE by Jan Kregel and Randy Wray, on PK monetary economics, I suggested we needed a journal that would bring other Keynesians into the conversation. Hence, the Review of Keynesian Economics (ROKE).* Paul wrote to me once he knew about the new name of the journal. I knew from him that they had thought of naming their journal the Journal of Keynesian Economics, but the acronym would have been JOKE, so they opted for Post Keynesian, and the name stuck to the school of thought. He wasn't happy. But he understood that our project was very different.

Ours was not a journal to propagate the ideas of the heterodox followers of Keynes, and to emphasize the notion that effective demand mattered, at times that Keynesians were under attack with the neoliberal turn, and the rise of Monetarism and New Classical economics (Paul was in the book of debaters with Milton Friedman, that included also Jim Tobin, and a few other more conventional Keynesians). Ours was an attempt to recreate a Keynesian big tent (not an heterodox one) to reinforce the commonalities with all Keynesians (in spite of the many differences).

Paul was combative, forceful in his discussions, particularly about Keynes' legacy, and a key figure in the preservation of Keynesian ideas, when those were considerably less popular, and the profession moved incorrectly away from the Keynesian Consensus. Later many would gladly talk about the return of the master. Paul never abandoned him, and he was right. A great loss for the profession.

* On that see Tom Palley here and my discussion of Bob Solow's role here.

Wednesday, June 19, 2024

Lula's fiscal problems

Almost everything that’s wrong with conventional views on fiscal policy is on display in this column (well written and clear) by one of the key journalists from Folha de São Paulo, Vinicius Torres Freire. He suggests that the current fiscal adjustment is not credible. For him, this is a confidence crisis, caused by Lula’s insistence on attacking the central bank policy and his lukewarm support for the adjustment. Why the adjustment is necessary, he never asks. It’s evident, for any educated or serious person, one must conclude. Debt is too high, spending cannot go on forever. These are truisms, and if repeated long enough they do seem right.

The problem of course is that the Brazilian fiscal problems (note that it is unclear why deficits that are not particularly large by historical or comparative standards and debt that grew as a proportion of GDP, but is in domestic currency and can be rolled over without any trouble routinely, are a problem) started when the economy stopped growing in 2015. And that’s when PT tried to promote an adjustment to appease the radical right. It was only then that public debt started growing as a share of GDP (see graph). We know how well that strategy worked out for Dilma.

In my Catalyst piece from last summer, I suggested that the problems Lula would face would be within his own coalition. The fiscal conservatives inside his coalition, and, in particular, those on the left and within PT, which include his own Finance Minister, Fernando Haddad. Haddad truly and earnestly believes, as much as Torres Freire, that the path to growth is through fiscal consolidation, lower deficits and debt, obtained in his view mostly by increasing revenue (his critics and the 'markets', read the traders on Faria Lima, would prefer cuts on social spending), and obtaining investment grade, which would lead to an investment boom.

Note that many political scientists, for example Marcos Nobre here, suggest that somehow the problem is that Lula needs to negotiate with the so-called Centrão, the clientelist groups in congress that control voting and have a grip on governability. In that view, he is between the rock of lack of governability, and the hard place of macroeconomic instability. In other words, he either continues with the clientelist policies that allowed all governments to deal with congress since the return of democracy, but pays the price of not being able to deliver the fiscal results necessary,  or he confronts them and does the adjustment, and keeps stability (and growth), but might have his agenda blocked. In this view,  price stability and growth go hand in hand, since fiscal restraint also allows for lower interest rates, which would be instrumental for growth. If Lula negotiates with the Centrão he would also spend on unnecessary things rather than the crucial things that are needed for growth, including in the green transition, in this view. The notion is that whatever he does, the likelihood is that the extreme right (the right without fear) might return (even without Bolsonaro).

Of course, that's a false dilemma. Brazil has no fiscal problem. The best way to consolidate, reducing debt, if that is deemed essential, would be promoting growth, and investing (public investment), including on a green transition, and that would allow the ratio of debt to GDP to fall, even if debt per se went up. The main problem for Lula is that many in his own party, and his key ministers are promoting an adjustment that might force him to miss the mandatory minimum expenditures on education and health, that would preclude providing the increases in wages of public sector workers, and the minimum wage, that would help promote a recovery. So Lula's fiscal problems are not what you might think, an economic constraint on his ability to spend. Brazil has no fiscal problems, which are always political problems, and has not have any serious external issues either, a recurrent theme gong back for more than two decades and discussed here, more recently (and here and here, the last one with links to 7 additional posts, to give a few examples over the years). Lula's problem is fiscal conservatism.

Tuesday, June 11, 2024

Bidenomics and other ugly ducklings

The media and a good chunk of the policy wonks are surprised that Biden does not get the deserved recognition for the relatively good state of the US economy, and that as a result he is suffering in the polls. There are two separate, but interrelated, causes for that. The most obvious can be defined in one word, inflation. The second, is related to the fact that, even though the recovery from the pandemic was fast, the economic situation for most working class people has not been great for a long while. In other words, the recovery from the pandemic brought back a situation with which most of the people at the bottom of the income distribution were struggling. I'll deal with inflation, which is the one that everybody is discussing in the news.

Regarding inflation, two things have been negative for Biden. A lot of the mainstream (liberal) and conservative media blames Biden's fiscal package in early 2021 and, perhaps to a lesser extent, the 2022 Inflation reduction Act, for the acceleration of inflation. As do many economists connected to the Dems, more prominently Larry Summers. That view also underpins the Fed's interest rate hikes.

The interest rate hikes could have caused a recession, but now that seems to have been clearly avoided. Traditionally the mechanism is through the impact of the interest rate on residential investment, which is critical for consumption patterns. The graph below show residential investment, that fell before every recession. There were two previous false alarms, in 1951 and 1967, where the Korean and Vietnam wars, and the spending associated to those, came to the rescue. Here, it seems the extra fiscal spending which was highly criticized came to the rescue. Also, the government shutdown, which was always a possibility, and would have reduced spending (and was my biggest fear in terms of a possible recession), never materialized.

The acceleration of inflation, as I discussed several times here (see this paper and this one too, or this INET video),  was caused by supply side constraints during the pandemic, and the shocks to key prices, particularly energy and food commodities after the war in Ukraine. Since there is no significant wage resistance, it was expected that inflation would recede and fall once the shocks passed. No surprises there. And wages are winning against inflation, ad can be seen below. The wages of non-supervisory workers were growing below CPI in the early phase of the inflation acceleration, and are recovering now.

So one may very well ask why are people so angry about inflation. If one looks at the BLS resports it is clear that energy prices, early in the war, and then rents, after the Fed hiked interest rates, had higher increases than the general CPI. The graph below shows that.

This is relevant, since, for lower income people, the impact of higher energy and rental prices impact more than proportionally their ability to spend. In other words, people have less money after paying for gas and housing (and gas impacts transportation and some food items). So most people have felt the inflationary acceleration and they had to tighten the belt somewhat to maintain the same life style.

PS: The yield curve is inverted, and has been for a while and that makes some people nervous. I discussed back in 2019 why an inverted yield curve might not necessarily imply an impending disaster.

Sunday, June 9, 2024

Maria da Conceição Tavares (1930-2024)


Maria da Conceição Tavares passed away last Sunday. She was among the key thinkers of the Latin American Structuralist School, often associated with the Economic Commission for Latin America (ECLA). In her case, Anibal Pinto, who was her teacher in a ECLA course in the early 1960s, and Celso Furtado, who was never formally her teacher, were her major influences. She was instrumental in introducing Kalecki in Brazilian academic circles, and in her debate with Furtado on the possibilities of growth in the late 1960s (Furtado defended a stagnationist thesis) she started to move in the direction of demand-led growth theories. She also noted in the mid-1980s that the diplomacy of the dollar (and the end of Bretton Woods) essentially implied that American Hegemony was stronger than ever. She was associated to the failed stabilization plans of the 1980s (in particular the Cruzado Plan), and was critical of the neoliberal policies of her friend Fernando Henrique Cardoso, and her co-author José Serra. She was a member of congress (I should say I did work for her campaign back in 1994), and she was close to the Workers' Party administrations. Her contributions both to academia and to Brazilian politics were without comparison, and she will be missed.

For those that read in Spanish, here a paper I wrote a few years ago on her contributions to heterodox economics. It was published in this book edited by Juan Odisio and Marcelo Rougier on several key Latin American thinkers.

An obit written with Esteban Pérez is available here.

Saturday, June 1, 2024

My short piece on Solow and his relation to the Review of Keynesian Economics


Robert Solow, who was a member of the editorial board of the Review of Keynesian Economics (ROKE), died in December 2023. Solow holds a special place in the history of macroeconomics, and he was a strong supporter of the ROKE project. In this brief note I want to honor Solow’s contribution to economics and to place on record his contribution to ROKE.

Histories of macroeconomics tend to emphasize the disputes between Keynesians and Monetarists, at least up to the 1970s. Those disputes very often pitted Milton Friedman against either Paul Samuelson, with whom he alternated in a famous Newsweek column, or James Tobin who was, perhaps, the most prominent of Friedman’s opponents when the Journal of Political Economy edited a debate with Friedman’s critics. In the broader cultural wars, Friedman was often pitted against John Kenneth Galbraith, and his Free to Choose series was seen as a response to the latter’s BBC series The Age of Uncertainty. Solow appears, if at all, as Samuelson’s co-author of a paper on anti-inflation policy (Samuelson and Solow 1960), which is widely viewed as introducing the Phillips curve to the American economics profession.

Yet Solow is, in many ways, the central figure of ‘American’ Keynesianism, and he was awarded the 1987 Nobel Prize in Economics. His work was central to the building of what Samuelson referred to as the Neoclassical Synthesis, which was dominant during the post-war era up to the 1970s. This synthesis combined microeconomic competitive general equilibrium theory, Keynesian macroeconomics, and Solow’s (1956) Neoclassical growth theory. It gave short-run space for Keynesian policy effectiveness but asserted a long-run belief in market forces and Say’s Law, which Solow defended in his growth model and in the Cambridge debates with more heterodox Keynesians. Additionally, Solow contributed decisively to the development of what eventually would be called New Keynesian Economics, with the development of the efficiency wage model in the late 1970s. He lived long enough to see fiscal policy rehabilitated after the Great Recession of 2007–2009, and to see what many view as the return of Keynesian Economics.

Read rest here.

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