Letter of support for the new central bank law in Argentina

The prevailing ideology over the last thirty years has been that the only legitimate task of central banks everywhere is control of inflation. This has frequently been through the application of an "inflation target", a maximum rate of increase of some measure of aggregate price changes. The practical consequence of setting the "fight against inflation" as the primary objective has been to reduce substantially the policy options of central banks. Even more, this narrow approach prevents the coordination of monetary policy and fiscal policy, essential to successful countercyclical interventions.

In Argentina in the 1990s economic policy operated under the burden of an extreme form of this narrow approach, a "currency board" regime, involving a fixed exchange rate to the dollar and a monetary base strictly linked to foreign exchange reserves. During 1997-2002 the weaknesses inherent in this monetary policy created disaster, economic collapse and high inflation.

In March of this year, the Argentine government proposed a new central bank mandate, that would repeal the currency board rules and broaden the institution's mandate to multiple objectives including growth, more equitable distribution, sectoral credit allocation, and price stability. The Congress passed and President Cristina Fernandez signed it into law the new mandate.

We, economists working in the United Kingdom, applaud the Argentine government and the Congress for this farsighted approach to monetary policy. The new mandate allows the current and future governments to choose between wise and foolish economic policies, while the previous law institutionalized the latter.

George Irvin
Costas Lapavitsas
Terry McKinley
Jan Toporowski
John Weeks
(SOAS, University of London)

Ann Pettifor
(Prime Economics)

G. C. Harcourt
Ha-Joon Chang
Gabriel Palma
(Cambridge University)

Malcolm Sawyer
Gary Dymski
Annina Kaltenbrunner
(University of Leeds)

Guy Standing
(University of Bath)

Engelbert Stockhammer
(University of Kingston)

Ozlem Onaran
(University of Westminster)

John Grahl
(University of Middlesex)

Sarah Bracking
(University of Manchester)

Kalim Siddiqui
(University of Huddersfield)

Hulya Dagdeviren
(University of Hertfordshire)

Michael Burke
(Socialist Economic Bulletin)

Published in Spanish in Página/12 (thanks to John Weeks for providing the original English version)

Greeks pay their fair share

Krugman suggests that we might be close to the end, if Greece is unable to form a government and ends up out of the euro, which seems increasingly likely. One thing that everybody seems to agree is that in the Greek case fiscal issues did play a role. So here is some food for thought, are Greeks taxed at lower rates than citizens of other OECD countries?

The overall tax revenue as a share of GDP is actually a bit lower than the German, but not much, and is higher than the US, according to OECD data. There are differences on what kinds of taxes Greeks and Germans pay, with the Greek paying more on goods and services and less on income (i.e. a more regressive tax structure). But, for what is worth, tax revenues are not way off with respect to other countries.

Central Bank (what is it good for?)

If you ask Ron Paul, yep ... absolutely nothing! Jamie Galbraith has a different view, and he told it to Paul, the chairman of the House Sub-Committee On Domestic Monetary Policy. He said:

"We cannot escape the need for a central bank. The United States before the Federal Reserve Act suffered from chronic deflation and financial panics; for this reason the period from 1873 to 1896 was known as the Great Depression, until the 1930s got that title. In the past century only the communist countries dispensed with central banks and private banking firms, and this arrangement did not serve them well. For this reason, I cannot join in supporting bills that would repeal the Federal Reserve Act or bar lending by commercial banks."

He also argued in favor of the Humphrey-Hawkins Act (note that he was a member of the team that drafted the legislation). The Fed mandate is important for him, and this is how he justifies it why he and his monetarists colleagues alike worked to draft:

"The “dual mandate,” which was expressed as “to promote full employment, production, and real income, balanced growth, adequate productivity growth, proper attention to national priorities, and reasonable price stability” in the preamble of the Humphrey-Hawkins Act and as “maximum employment, stable prices and moderate long-term interest rates” in the Federal Reserve Act.

My staff colleagues were committed monetarists. They believed that the Federal Reserve should pursue a policy of monetary control, to contain inflation. But they did not try to dictate that to the Federal Reserve. Nor would I have tried to dictate the pursuit of full employment over all other policy goals. Writing economic theory into law is dangerous and we steered clear of it as best we could."

Read the rest here.

Free Trade and Inclusive Development

By Suranjana Nabar-Bhaduri

One of the central elements in the development of any country is the creation of economic activities that transform the production structure by significantly increasing labor productivity, or the amount of production per worker. By helping to absorb more people into quality employment, the creation of such activities helps to generate a more inclusive and sustainable path of long-run economic growth. While economists and policy-makers accept the necessity of this transformation, there are differing views on the policies that developing countries should follow to achieve this transformation.

Many Western countries and institutions, such as the International Monetary Fund (IMF) and the World Bank, argue that minimizing the role of the State in economic activity, and opening up the economy to external markets is vital to achieving this transformation. But other economists (e.g., Prebisch 1959, Cimoli and Correa 2002, and Ocampo 2005) stress that active industrial and employment generation policies are also essential ingredients for this transformation, and that it is necessary to complement liberalization with such policies.

Read the rest here.

Why economists fail

The new book (and the accompanying blog) by Daron Acemoglu and James Robinson Why Nations Fails is a popular version of their academic papers (several with Simon Johnson, the ex IMF chief economist) on the topic [brief summary here]. The main idea is that institutions and not geography or culture are the key to economic development. That is for the most part true.

They use South and North Korea (and Nogales, México and Arizona) as an example of countries that share the same culture and geography, but have very different institutions, and, as a result, a huge disparity in income per capita. Jared Diamond is correct to point out that, in part, technology is geographically determined. No plants and animals to domesticate, and provide for a large surplus (Diamond uses the old classical notion of surplus), and higher population density (with the diseases and immunities associated to those Germs) and no advantages associated to a more developed division of labor (Diamond is also Smithian in that sense), with the consequent development of technology (Guns and Steel). But the problem is that this won’t help you understand why England and not China industrialized (the opposite extremes of the Eurasian continent).

Read the rest here.

Three part interview with Jamie Galbraith

At the German website NachDenkSeiten (here, here and here for the English transcripts). In the last one, important to note his views on why the Obama fiscal package and the momentary Keynesian period was insufficient for recovery. He says:

"The crisis imposed a momentary intellectual discipline and a resurgence, a reassertion of Keynesian principles. But that discipline did not extend into decision-making circles, at least not deeply enough, and it was overridden by, let's say, existing protocols, existing habits of thought and action that had developed in policymaking circles. And those protocols and habits precluded taking adequate action. What I mean by that specifically is that you had ways of making forecasts which were intrinsically too optimistic, intrinsically assumed that you were going to return to a baseline over a five-year time frame. And that meant that you were not going to get even presented to the president the possibility that the crisis was on the scale of the 1930's."

This has important implications for Europe, which since yesterday, will have a Socialist in charge in France. Also, on what has happened with left of center parties around the globe.

"What were historically left parties both in the United States and Europe, equally true of the Democrats and the SPD and the PS in France have adopted what would have been in earlier times considered to be right-wing orthodoxies, particularly with respect to budget deficits, public debt. So they can pretend to be in favor of solidaristic social policies, but unfortunately unable to do anything in the face of the realities they allegedly face" [italics added].

As far as I can tell only in Latin America, some left of center parties, that had moved to the right in the 1990s, returned to the fold in this century. As he notes, in the case of the US and Europe the collapse of the Soviet Union played an important role in the political changes of the 1980s and 1990s. In Latin America the return of left was associated to a more significant collapse of the neoliberal model. One can hope that the obvious collapse of the austerity programs in the developed world would lead to a revival of the left. Hope springs eternal.

No gentlemen are bankers

Pure logic, according to Ernest Nagel (and James Newman) at least. In the classic book on Gödel's theorem the following example appears:

Where g stands for gentlemen, p for polite, and b for bankers, with the bar on top meaning not. So gentlemen are contained in polite, bankers are contained in not-polite, so it follows that gentlemen are contained in not-bankers. Of course you can substitute polite with other epithets. But they got it right. As I said, it's pure logic.

Krugman is right on Argentina

Fair is fair; I often point out when he is wrong, so I must admit he is 100% correct this time around (see my most recent comment on the topic here). By whatever measure you want Argentina has grown more than Brazil in the last decade. And yes (for the nuts in Krugman's comment section), Argentina has more inflation as a result of more nominal depreciation and more wage resistance. He did not say everything is perfect in Argentina, just better (much better, as a matter of fact) than with the neoliberal model. And that was the point of Matt Yglesias too.

Happy ending at UNCTAD XIII

Or at least for now, is what Deborah James says. Note that the contentious paragraph on UNCTAD's mandate that the US State Department didn't like reads tha UNCTAD would:

"continue, as a contribution to the work of the UN, research and analysis on the prospects of, and impact on, developing countries in matters of trade and development, in light of the global economic and financial crisis."

Yep, that is unacceptable indeed. After all you ask, what crisis?

Fed up with the full empoyment target?

The debate on Bernanke's views on inflation targeting -- whether it should be 2 or 4% -- as I noted in a previous post is peculiar, to say the least. After all the Fed has a dual mandate, and inflation preoccupations have to be tempered by the pressing question of unemployment. The preoccupation in some quarters is that the Fed has already accepted as a matter of fact that it has single mandate (see here and here). It seems to me that critics (e.g. Krugman, DeLong and others) are correct for the wrong reasons.

The graph below shows the effective Fed Funds rate in the last three recessions (represented by the shaded areas). The rate of interest falls in all three during or just before the recession.

Further, after the trough of the recession the Greenspan Fed took 46 and 35 months to start raising the rate in the previous two recessions. So far, 35 months after the last trough, the Bernanke Fed has not increased the rate. This time around it has done Quantitative Easing allowing for lower long term rates too, which was not done during the Greenspan era. If anything the Fed has done more now than under Greenspan, and unless you believe in the inflation expectations fairy, the old Eccles maxim is still true, monetary policy now is like pushing on a string.

So how is that critics of the Fed are correct and I believe that the dual mandate (full employment and inflation) is gone. Well look at the graph below. It shows the Fed Funds, again, with the 10 year Treasury bonds rate.

Notice that the Fed eventually raises the Fed Funds sufficiently to surpass the bond rate, and invert the yield curve. The point is to slowdown the economy, and avoid full employment. Even in the 1990s, when Greenspan allowed the bubble to continue and unemployment to fall below the then official limit of 6%, he eventually took action, when wages started to increase. Full employment has not been a target, but keeping workers demands for higher wages checked has been very much part of the reaction function. Jamie Galbraith has written about it (go here for a technical paper). So the Fed has a single target mandate, but is not an inflation target, it is a "fear of full employment target."

The Fed can do practical things like helping distressed borrowers (with defaulted or underwater mortgages), but it cannot directly increase spending, and in the absence of private spenders (domestic or foreign), or local governments, it must be the federal government. Bernanke is not the problem right now. Geithner is (and so is Congress).

PS: The New Keynesian view that if you increase expected inflation spending goes up is now defended by Brad DeLong. He says: "an extra $100 billion of quantitative easing boosts the expected price level ten years hence by 1%--and boosts expected inflation after the next decade by an average of 0.1%/year. That is enough to spur higher spending and a more rapid and satisfactory recovery." I'm not against QE per se, the idea of maintaining long term rates low. But the notion that it would lead to inflation (printing money generates inflation) and that expected inflation generates a boost in productive spending is clearly another confidence fairy story.

Galbraith on Summers and deficit spending

Letter to the Financial Times published today as 'Dr Summers performs a medical miracle.'

From Prof James K. Galbraith

Sir, Whence comes Lawrence Summers’ medical knowledge? He writes of palliatives, of misdiagnosis, and states that “treating symptoms rather than causes is usually a good way to make a patient worse” (“Growth not austerity is the best remedy for Europe”, April 30).

As to cures, Prof Summers writes of “a need to raise retirement ages, reform sclerosis-inducing regulations and restructure benefit programmes”. Yet he presents no evidence that these matters caused our troubles, and of course they didn’t – unsupervised bankers and ambitious economists did. Blaming the elderly and poor is just a prejudice, common to people who have easy jobs and private means. Bleeding them (gradually, of course) is a medieval practice.

And yet, on the main point, Prof Summers gets it right. He does this by mistaking a symptom (recession) for a cause, and then prescribing a palliative (deficit spending). A minor medical miracle, perhaps!

The irony is that a real doctor would likely approve. After all, fever-reducers and pain relievers, from aspirin to morphine, are in widespread medical use and have been for many years.

So “Dr” Summers is on the right track for now, but as his methods show, he is still very dangerous to the sick.

Originally published here.

Not entirely debauched by economics

The quote of the week (I should instate it as a policy) comes from a letter from Piero Sraffa to Joan Robinson:

"If one measures labour and land by heads or acres the result has a definite meaning, subject to a margin of error: the margin is wide, but it is a question of degree. On the other hand if you measure capital in tons the result is purely and simply nonsense. How many tons is, e.g., a railway tunnel? If you are not convinced, try it on someone who has not been entirely debauched by economics. Tell your gardener that a farmer has 200 acres or employs 10 men – will he not have a pretty accurate idea of the quantities of land & labour? Now tell him that he employs 500 tons of capital, & he will think you are dotty – (not more so, however, than Sidgwick or Marshall)."

That was in 1936. The reference comes from this paper by Velupillai on Krishna Bharadwaj’s contributions to economics.

In solidarity