Ken Rogoff on Milei and the IMF

 

Another Excel... ent work*

This is from a few weeks ago, but only now I had some time to post about it. Ken Rogoff has been doing the rounds of podcasts, after the publication of his most recent book, Our Dollar, Your Problem. He was on Ezra Klein, where he claimed basically that Bernie is as bad as Trump on trade (essentially saying that Biden, that had moved in the direction of Bernie is as bad too; good for Klein that he pushed back on that point). More on that in another post.

He was also on Tyler Cowen's podcast were he discussed, very briefly, the Argentina case. Here a short clip.

Here is the transcript of that bit of the conversation.

COWEN: Is Milei going to make it succeed in Argentina? What does it depend upon?

ROGOFF: I hope so. I think he’s the best chance that Argentina’s had in a long time, which is, fair to say, a very low bar. The thing that he’s done that I have not seen before is balancing the budget. If you’re a big borrower and you keep defaulting, a starting point is figuring out how not to have to borrow money, and he’s managed to do that. I don’t know that all his libertarian visions necessarily will come to pass, but he’s provided some stability, bringing inflation down.

It’s so sad. Argentina, as you know, was one of the richest countries in the world by any measure at the turn of the 20th century in 1900. Now they’re a lower middle-income country. Their per capita income is below Brazil, which is hard to get your head wrapped around. I think there are many reasons, but certainly Peronism, socialism has not done well by Argentina.

COWEN: But has he balanced the budget? I know he announced a balanced budget, but this is April 2025, and they just borrowed $20 million from the IMF. It doesn’t sound like a very balanced budget.

ROGOFF: It’s counting the interest payments on the IMF, and yes, he inherited this big debt. They’re paying the interest. It’s very low interest on the big debt, and I don’t know how that’s ultimately going to get resolved. They have a lot of problems ahead, but there’s a lot of strength in Argentina if they can grow again. I don’t want to sound Panglossian about Argentina, but goodness, they had inflation of 200 percent when he took over. The economy was in free fall. Look, there’s no magic wand you can wave over the last 80, 90 years of Argentina and make everything right.

A few things, that I think are important to contextualize, in particular given the relevance of Rogoff, who was the chief economist at the IMF, and whose textbook, co-authored with Maurice Obstefeld, another ex-chief economist at the IMF, is one of the main graduate texts for international macroeconomics.

First, the notion here is that the problem was fiscal in nature, and the debt in domestic currency is what matters. Of course that is NOT a problem. Inflation was not caused by monetary emissions, and neither was Milei's stabilization. In fact, the IMF first, by forcing a devaluation while Massa was still the minister, and candidate, and then Milei in December of 2023 accelerated inflation. He only managed to stabilize prices so far, because he has held the exchange rate under control, and that has led to many complaints that the real exchange rate is overvalued (that's a topic for another discussion). The fiscal adjustment caused the recession in 2024. That is on Milei, as well as the initial collapse of real wages.

Second, Argentina was never a developed country. It did have a high level of income per capita, but that is true of Saudi Arabia now. Petro-States and Beef-States are not necessarily developed, even if some people might be very wealthy. Peronism (which cannot really be considered socialism) did not cause a decline, not only because there was no glorious past in which the country was developed, but also because it was not in power all the time. There were periods of industrialization with conservative-authoritarian regimes, like Ongania in the 1960s, that did not align with the liberalism that Rogoff seems to prefer.

In fact, Prebisch, the father of the intellectual defense of state-led, import substitution industrialization, was a well-known anti-Peronist, and supported the 1955 coup.

Finally, it is true that Milei inherited a large external debt in dollars, and no significant reserves in the central bank. But that debt was accumulated during the Macri administration, an ally of sorts of Milei, under the same economic team (both Caputo and Sturzenegger were in both governments). This was not caused by the excesses of Peronism (read the Kirchners), but by the excesses of neoliberalism.

I have my issues with the implied notion that laissez faire, both in the US, and even more so in the periphery, is a rational strategy for development. On this Rogoff seems out of sink with the times, that have rediscovered industrial policy, and state-led growth. And I also think that Milei can, in particular with the help of the IMF, hold exchange rates for a while (even longer if external markets help him) and ride a reelection as Menem did in the 1990s. But then things will eventually crash.

* On the Reinhart and Rogoff affair read the piece by Cassidy in the New Yorker.

A Taxonomy of Piketty's reviews

Brad DeLong wrote a lengthy review of Piketty's Capital, paraphrasing in the title the famous ISLM (ISLL in Hick's original terminology) paper by John Hicks, which deserves a review by itself. In particular the discussion of Piketty's analytical model, which is, as noted before, incredibly problematic. It is worth noticing that Brad argues somehow that there two kind of reviews, namely: those that are useful and worth reading, in which he includes Tyler Cowen's review (which I've only indirectly alluded to here and here), and the ones that are wrong and are 'distracted by irrelevances,' which include Galbraith and Palley's reviews.*

Brad's idea is not bad, I mean of a taxonomy of the reviews of Piketty, but his take is neither useful to understand the differences, nor constructive for dialogue. So here is my very brief taxonomy.

There are only a few that I included, not because these are the more important necessarily, but because they seem to be representative. I made two analytical distinctions. Mainstream and Heterodox, which is based on the theoretical background, and whether the authors accept the Neoclassical paradigm or not (Murphy and Austrians do, in a confused way). Also, reviews are classified as favorable or critical of the policy prescriptions in Piketty's book. Basically, one distinction is theoretical and the other is policy oriented.

Note that the interesting thing that emerges is that there are NO, at least to my knowledge, Critical Heterodox views, that is, heterodox authors that are against higher taxes and wealth taxes.

The basis for the mainstream critiques (Cowen and Murphy) is that taxes create distortions and lead to lower growth making things worse. After all greed is good, or something like that. This comes from the more radical fringe of the pro-markets are efficient wing of the profession. The conventional defense of Piketty is basically based on New Keynesian (or old in the case of Solow) views, and it suggests that market imperfections are sufficiently large that there is space for redistribution, and tax policy is the main way to go to redress the increase in inequality of the last 30 years.

Finally the Heterodox views (Galbraith, Palley and Lance Taylor), and here I included a non-economist, David Harvey that follows a distinctly Marxist view,** which all suggest that Piketty raises and important point, which has been discussed by heterodox economists forever, that the empirical analysis is also an addition to our understanding of inequality, but that there are theoretical flaws, which both mainstream groups (Piketty would be closer to a New Keynesian, and he is a Socialist, or at least supported Holland in the last election) share, and that this limits, but does NOT disqualify the argument for redistribution.

This illustrates also a point made in this blog for a while. On the one hand, heterodox groups are politically closer to some New Keynesian authors, which, however, remain firmly based on the orthodox notion that markets unimpeded by imperfections produce optimal outcomes. Once, the New Keynesians get rid of some of the limitations of their theoretical framework, the essential being the natural rate (of interest or unemployment), their political argument would be more coherent and stronger.

* The ones that are wrong or distract point to the logical flaws in Piketty's theoretical model, by the way.

** I didn't include Cassidy's good review, simply because as a journalist the mainstream/heterodox distinction doesn't quite apply, but his views are fundamentally favorable. By the way, the Financial Times, also would not fit that dichotomy, but it certainly fits more clearly the political one, and has come clearly against Piketty for his empirical mistakes (here). For a response see Branko Milanovic here (h/t Daniele Tavani).

Was Marx right? Nice of you to ask, but...

The New York Times asked five economists whether Marx's economics was right, even if his politics was all wrong. By the way, the latter would be unquestionably true as a result of the collapse of the Soviet bloc. I am no Marx scholar, but I'll try to give my two cents on this debate. At any rate, it seems I read more of Marx's works than most of the commentators in the Times.

It is a bit disingenuous to suggest that Marxist economics, or classical political economy for that matter, since Marx was building on the work of the surplus approach authors, stands or falls with the Soviet Union [for a discussion of the causes of the Soviet collapse go here]. In fact, Marx has very little to say about communism, and many of the 10 policy proposals in the Communist Manifesto are now well-established consensual views in civilized societies, like the idea of a "heavy progressive or graduated income tax" ... or the provision of "free education for all children in public schools" and the "abolition of children’s factory labor."

Even if some of Marx's propositions are less well viewed in today's political climate, like the "abolition of private property," or the expansion of the "factories and instruments of production owned by the State," or the "centralization of credit in the hands of the state, by means of a national bank," these were instruments used to some degree by almost all successful experiences of industrialization in the world. One might as well suggest that the accomplishments of the Welfare State, in Western Europe and in the US (yes, even here), and some of the successful experiences in the developing world, are associated to Marx ideas. In fact, without the unity that he recommended to the working men of all countries, none of the advantages of the Welfare State would have taken place. The success of Sweden, so to speak, is as much a measure of the success of Marx's political ideas as the failures of the Soviet Union would be of his intellectual failure.

But, be that as it may, it is the actual economic thinking of Marx, about the functioning of capitalism, a mode of production, that he was the first to define and to try to explain its origins from a previous mode of production (feudalism), that matters in order to understand whether his contributions are relevant or not. The comments by the two academic economists in the New York Times, Brad DeLong and Tyler Cowen, are poor at best. Their views reveal, no surprise here, that their contact with Marx's works is minimal, if any, and that what they do know is some form of pop Marxism, filled with naïve simplifications of what Marx actually said.

Brad suggests that Marx was a second rate theorist. Why? In his words: "Marx's fixation on the labor theory of value made his technical economic analyses of little worth." I've already dealt significantly with the question of the labor theory of value (LTV) here, but it's worth remembering that while Sraffa provided a coherent solution for the labor theory of value's problems, in which long term normal prices can be determined as proportional to the labor commanded by the standard commodity (for the latter go here), the neoclassical problems to show that prices in the long term are determined by supply and demand, forced them to abandon the traditional method of economics, and embrace the intertemporal General Equilibrium model, in which all prices are short run ones, and there is no tendency to a uniform rate of profit. In other words, the LTV (or at least a version of it) theoretically stands on firmer ground than the neoclassical supply and demand theory. That is one of the results of the capital debates.

Also, note just for the sake of the argument, that while Brad dismisses Marx as a second rate theorist, he embraces Adam Smith (e.g. he says: "Adam Smith is the founder of economics because he has a great and extraordinary insight: that the competitive market system is a remarkably powerful social calculating and organizing mechanism"). And yet Adam Smith did use the labor theory of value, which should make his analysis of little worth, one would imagine. Mind you, for Smith, as much as for Marx, the competitive market system led prices to their long run equilibrium determined by the labor theory of value (labor commanded in Smith, incorporated in Marx). One is forced to assume that the reasons for dismissing Marx are not related to the LTV, and are political, or are based in a misunderstanding of the LTV, which would include the work of Smith (my history of thought students in Utah had a t-shirt that read: "I've read Smith and understood it.")

Brad then moves on to discuss Marx's predictions, which he suggest are somehow connected to Marx's confusion between real and nominal values. It is clear that Marx's immiseration hypothesis, the notion that the conditions of workers worsen as capital accumulation proceeds, is not based on some simplistic confusion between real measures of well being and nominal remuneration. For Marx the determination of the real wage, as it was for all the classical authors (Smith and Ricardo included) was exogenous, and at the subsistence level, but that did not mean that wages were determined physiologically, but by historical and institutional standards instead. In other words, the subsistence level would change in time and space. Why did Marx believe that the labor class would be worse off with the development of capitalism? Basically because he thought that the reserve army of unemployed would increase reducing the bargaining power of workers.

In his words:

"The greater the social wealth, the functioning capital, the extent and energy of its growth, and, therefore, also the absolute mass of the proletariat and the productiveness of its labour, the greater is the industrial reserve army. The same causes which develop the expansive power of capital, develop also the labour power at its disposal. The relative mass of the industrial reserve army increases therefore with the potential energy of wealth. But the greater this reserve army in proportion to the active labour army, the greater is the mass of a consolidated surplus population, whose misery is in inverse ratio to its torment of labour. The more extensive, finally, the lazarus layers of the working class, and the industrial reserve army, the greater is official pauperism. This is the absolute general law of capitalist accumulation. Like all other laws it is modified in its working by many circumstances, the analysis of which does not concern us here."

It is worth noticing that Marx's Laws, for all the criticism about their determinism, allow for countervailing forces, and suggest tendencies, rather than mechanical relations. Marx suggested in the same chapter (linked above) that:

"within the capitalist system all methods for raising the social productiveness of labour are brought about at the cost of the individual labourer; all means for the development of production transform themselves into means of domination over, and exploitation of, the producers; they mutilate the labourer into a fragment of a man, degrade him to the level of an appendage of a machine, destroy every remnant of charm in his work and turn it into a hated toil; they estrange from him the intellectual potentialities of the labour process in the same proportion as science is incorporated in it as an independent power; they distort the conditions under which he works, subject him during the labour process to a despotism the more hateful for its meanness; they transform his life-time into working-time, and drag his wife and child beneath the wheels of the Juggernaut of capital. But all methods for the production of surplus value are at the same time methods of accumulation; and every extension of accumulation becomes again a means for the development of those methods. It follows therefore that in proportion as capital accumulates, the lot of the labourer, be his payment high or low, must grow worse."

It is not just the payment, which could be high or low, but the alienation, and exploitation that made the labor force worse off. It is also far from clear that Marx is suggesting absolute immiseration rather than relative in his writings. Brad, it seems, thinks that Marx somehow thought that workers would be in absolute terms worse off with the development of capitalism. He suggests that that extreme pessimism might not be guaranteed. Another reading would be that Marx thought that workers would be relatively worse off, and that the recurrent crisis of the system (realization crisis, financial crisis, of which Marx is among the first to discuss in a systematic way), would undermine the social basis of the system.

Tyler Cowen, the other academic economist in the NYTimes bunch, has no understanding of Marx and of the current problems of capitalism. For him the quesion is whether: "does Marx provide a very good guide to understanding all of those problems?" And his answer: "mostly not. Neoclassical microeconomics explains why some of our services are low quality and high cost, namely too much third party payment through insurance companies, too much regulation of the wrong kinds, and the difficulties consumers face in judging quality." In other words, for him our problems are caused by a collapse of supply, with high prices (and low quality) associated to too much regulation, or as he suggests, imperfect institutions. The notion that the instability of capitalism, or for that matter, the normal functioning of market economies is well explained by the neoclassical supply and demand story is hard to defend. There are too many problems with this kind of view. The lack of understanding of the limitations of the neoclassical paradigm by mainstream authors is probably one the worst problems of the profession at this point. And just to show the degree of confusion, he claims that Marx understood Public Choice theory (what passes for political economy at George Mason University)!

Michael Strain, who has been mostly an economist in government bureaucracies, including the Fed, suggests that: "Marx believed that the free enterprise system required the exploitation of workers," and for him "it is hard to see why anyone would believe that today." Sure poverty in the world has declined, depending on the measure you use (he uses the World Bank's one dollar a day). But the lack of understanding about the extension of capitalist exploitation associated with globalization, and the increase in inequality in many of the countries in which economic growth has accelerated in the last three decades seems misguided at best.

The last two commentators are more favorable to the Old Moor. Yves Smith, of the great blog Naked Capitalism, suggests an old theme among Marxists scholars. Even though Marx was aware of the destructive elements of financial crisis, he did not think that finance would be the main cause of the collapse of the system. Echoes of Rudolf Hilferding can be distinguished in her piece. Doug Henwood, a journalist with his Left Business Observer, is the only openly Marxist one to appear in the Times. He basically argues in favor of the old profit squeeze view of the demise of the Golden Age, and the beginning of the Conservative Era. And he does say, correctly, that we cannot understand our current problems without "some sort of Marx-inspired analysis."

Beyond the simplistic notions of whether Marx was a right about the Soviet Union [e.g. Strain tells us that Marx was: "devastatingly wrong ... about the most important questions he tried to tackle (see also: Union, Soviet)"; yep, Marx did not foresee the rise and fall of the Soviet Union, what a moron!], or about the collapse of capitalism, what is missed in this discussion is that Marx's method, which harks back to the old surplus approach, in which distribution is exogenous, and determined by social and institutional factors, and is open to Keynes effective demand to complement the theory of output and accumulation, and which can include all sorts of financial instability notions, provides a far more fertile ground to rebuild the edifice of economics than the illogical neoclassical paradigm. But even if some of the contributions were not great, we should still thank the New York Times for asking.