Well not really. My co-edited book The Means to Prosperity: Fiscal Policy Reconsidered is now in paperback, for a third of the price. So buy three copies please.
Friday, December 14, 2012
Thursday, December 13, 2012
The natural rate is 6.5%
At least according to the Fed's new press release. The release says:
Note that the inflation target continues to be 2%, so even Blanchard's mild-mannered rethinking of macroeconomics (that Krugman and others having been pushing) for a higher inflation target has not been accepted by Bernanke. Obama should get rid of Bernanke next time he has the chance.
PS: In contrasting news the Reserve Bank of India seems to be suggesting, at least according to The Economist, that it would raise its inflation target above 5%. Good for them.
"the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal."So if unemployment falls below 6.5% expect higher rates of interest, associated to what would be in Bernanke's view the risk of excess demand.
Note that the inflation target continues to be 2%, so even Blanchard's mild-mannered rethinking of macroeconomics (that Krugman and others having been pushing) for a higher inflation target has not been accepted by Bernanke. Obama should get rid of Bernanke next time he has the chance.
PS: In contrasting news the Reserve Bank of India seems to be suggesting, at least according to The Economist, that it would raise its inflation target above 5%. Good for them.
Goldman and Chinn discover the accelerator
Steve Bannister (where have you gone Joe Di Maggio?) pointed out this nice post by Menzie Chinn on the "puzzle" (sic) of the slow investment recovery during the crisis. Note that it is actually not a puzzle at all. Chinn cites a study by the Vampire-Squid (Goldman Sachs), that concludes that (wait for the surprise) "the accelerator model generally fits well." Chinn also finds that lending conditions and "slow GDP growth (attributable to fiscal drag) are important determinants of low nonresidential fixed investment." Is rain wet?
PS: Lending conditions (which is actually a measure of liquidity) might actually be caused by the level of activity and investment rather than the other way round.
PS: Lending conditions (which is actually a measure of liquidity) might actually be caused by the level of activity and investment rather than the other way round.
Wednesday, December 12, 2012
Krugman notes that marginalism doesn't work
This is great, like in his book (homonymous to his blog) Krugman has noted that the idea that technology (the marginal productivity of labor) determines distribution (real wages) is bogus. He says so clearly:
PS1: Note that in the post I criticized here from this week (two days ago) he said that productivity was determined by technology (skills), that is the inclination of the marginal productivity curve, depending on the production function. Today he says: stop talking about skills!
PS2: My review of his book is here, by the way.
"if you want to understand what’s happening to income distribution in the 21st century economy, you need to stop talking so much about skills, and start talking much more about profits and who owns the capital. Mea culpa: I myself didn’t grasp this until recently. But it’s really crucial."Kudos for the mea culpa. Now notice that he says that who owns capital is important. In other words, power and conflict are central for the determination of income distribution. This dude is becoming a surplus approach author (next thing he will be reading Sraffa!). Okay, so can you now drop the production function, the assumption of full employment and the natural rate hypothesis. I mean, it would only make the whole thing coherent.
PS1: Note that in the post I criticized here from this week (two days ago) he said that productivity was determined by technology (skills), that is the inclination of the marginal productivity curve, depending on the production function. Today he says: stop talking about skills!
PS2: My review of his book is here, by the way.
More on Hirschman
Several obituaries of Hirschman have already popped up (see here, here, and here for example). Note that both Alex Tabarrok at Marginal Revolution and Rajiv Sethi (who was my econometrics teacher I should note), the economic blogs, emphasize among the many contributions of Hirschman his book Exit, Voice and Loyalty (EVL), his work as a historian of economics (Tabarrok, in particular, praising The Passions and the Interests, PI), and his interdisciplinary work (Sethi, noting his crossing of boundaries of disciplines).
I tend to find exactly that those are the less appealing and more problematic characteristics of Hirschman as a scholar. His analysis of the history of ideas is based on the policy objectives rather than on the theoretical foundations of theories. Hence, classical political economy ideas are treated in terms of their laissez faire component, which would actually make them similar to a lot of the marginalist ideas of a century later.* Note that laissez faire in the period of the rising bourgeoisie is not akin to the same policy once that class is dominant.
Note also that a bourgeois economist like Ricardo could openly suggest that capital and labor had conflictive interests, in a way that only a few years later would be considered unacceptable. Marx, a radical critic of classical political economy, could maintain the core principles of Ricardian economics exactly because of that.
Also, EVL, which shows the breadth of Hirschman's intellectual interests, is a book that emphasizes interdisciplinarity in a way that the material economic preoccupations of agents and social groups are of secondary importance. Classical political economy was in many respects interdisciplinary, in particular because it shed light on the social conflicts inherent in the determination of income distribution.
In my view the more interesting contributions are associated to his early works, in particular his book National Power and the Structure of Foreign Trade (NPSFT), which showed that relationships of dependence and the counterpart, hegemonic power, can arise out of trade relations. For those that follow the aggressive trade policies pursued by developed countries pushing Free Trade Agreements (FTAs) and Bilateral Investement Treaties (BITs) this should not be a surprise. In this context, his analysis of power in NPSFT seems more akin to the preoccupation of the old classical political economists with economic power and social conflict that his analysis in EVL.
Hirschman also wrote one of the first papers, if not the first, showing the contractionary effects of depreciations, and was as a practitioner of development policies for a big push of public investment to kick start the process of industrialization. That agenda for industrialization of the periphery is still open, and his contributions (e.g. linkages) are still relevant. Those are the good things to be remembered for, in my view.
* Coherent with his perspective mainstream Tabarrok suggest reading McCloskey's Bourgeois Virtues together with PI. The idea is that capitalism is a cultural phenomenum, that is based on bourgeois values, in Weberian fashion. I have criticized this view in another post (see also Cesaratto's post).
I tend to find exactly that those are the less appealing and more problematic characteristics of Hirschman as a scholar. His analysis of the history of ideas is based on the policy objectives rather than on the theoretical foundations of theories. Hence, classical political economy ideas are treated in terms of their laissez faire component, which would actually make them similar to a lot of the marginalist ideas of a century later.* Note that laissez faire in the period of the rising bourgeoisie is not akin to the same policy once that class is dominant.
Note also that a bourgeois economist like Ricardo could openly suggest that capital and labor had conflictive interests, in a way that only a few years later would be considered unacceptable. Marx, a radical critic of classical political economy, could maintain the core principles of Ricardian economics exactly because of that.
Also, EVL, which shows the breadth of Hirschman's intellectual interests, is a book that emphasizes interdisciplinarity in a way that the material economic preoccupations of agents and social groups are of secondary importance. Classical political economy was in many respects interdisciplinary, in particular because it shed light on the social conflicts inherent in the determination of income distribution.
In my view the more interesting contributions are associated to his early works, in particular his book National Power and the Structure of Foreign Trade (NPSFT), which showed that relationships of dependence and the counterpart, hegemonic power, can arise out of trade relations. For those that follow the aggressive trade policies pursued by developed countries pushing Free Trade Agreements (FTAs) and Bilateral Investement Treaties (BITs) this should not be a surprise. In this context, his analysis of power in NPSFT seems more akin to the preoccupation of the old classical political economists with economic power and social conflict that his analysis in EVL.
Hirschman also wrote one of the first papers, if not the first, showing the contractionary effects of depreciations, and was as a practitioner of development policies for a big push of public investment to kick start the process of industrialization. That agenda for industrialization of the periphery is still open, and his contributions (e.g. linkages) are still relevant. Those are the good things to be remembered for, in my view.
* Coherent with his perspective mainstream Tabarrok suggest reading McCloskey's Bourgeois Virtues together with PI. The idea is that capitalism is a cultural phenomenum, that is based on bourgeois values, in Weberian fashion. I have criticized this view in another post (see also Cesaratto's post).
Tuesday, December 11, 2012
Albert Hirschman (1915-2012)
So? None of your conclusions follow from your arguments
Krugman has a post on the effects of technological change on employment. Here is a very illustrative case of the limitations of mainstream marginalist (neoclassical) economics, which leads a reasonable and intelligent economist to all sorts of mistakes. He says:
His first point, which is based on the marginalist theory of distribution**, is that:
Of course this is nonsense. A reduction in real wages, and I'm not even talking about the effects of deflation on demand which were discussed by Keynes in the chapter 19 of the General Theory, may not lead to an increase in the demand for labor. First, it must be noted that if wages go down, since wages are part of the cost of production of produced means of production (i.e. capital), the price of the latter also goes down. There is a priori no reason to say that firms will substitute labor for capital (on capital debates go here; really Krugman should read this stuff).
Second, once the idea that the intensity of the use of a 'factor of production' is inversely related with its remuneration is abandoned (by the way there is no evidence for the notion that real wages are inversely related to employment utilization, in fact, if anything, the evidence points in the other direction, with real wages being slightly pro-cyclical), there is no reason to believe that real wages are connected to productivity (and again there is no evidence for that relation either, which means that when Krugman asks "what is that real wage?" and replies that it is "the marginal product of labor at that point," he is also incorrect). Yes real wages have stagnated, since the bargaining power of the working class has deteriorated, with productivity still growing since the 1970s.
So, what is the problem Mr. Krugman? That your conclusion, that the effects of technical change on employment are ambiguous, does not follow logically from your arguments. Ricardo's discussion of the effects of technical change on employment, in his famous chapter on machinery, is far more interesting and coherent than Krugman's (see the paper here). Not just the idea of a natural rate has to be abandoned, but the essential principle of substitution, which allows for the natural rate, must be dropped too. Logical coherence and evidence require it.
* For a serious discussion of the limitations of the aggregate production function go this paper by Jesus Felipe and Franklin Fisher here.
** The quote of Hicks classic presentation of the marginalist theory of wages leaves little doubt of where Krugman stands, if you had any.
"start with the notion of an aggregate production function, which relates economy-wide output to economy-wide inputs of capital and labor. Yes, that sort of aggregation does violence to the complexity of reality. So?"Implicit here is the incorrect notion that the problem with the aggregate production function is over-simplification. Nope, that is a feature of all theories of course. The problem is far worse; it is that it leads to logical mistakes.* So, as we will see, none of Krugman's conclusions follow from his analysis, and that is kind of a problem. Lack of logical coherence and empirical evidence are after all the two main criteria of demarcation between scientific knowledge and the half-baked notions of ideologues.
His first point, which is based on the marginalist theory of distribution**, is that:
"in competitive economy ..., we would expect the labor force to achieve full employment by accepting whatever real wage is consistent with said full employment."In other words, wage flexibility guarantees the full utilization of labor. A reduction in the real wage in the case of unemployment would lead to full employment (yes, he actually does not defend this in policy discussions, because he thinks that nominal wage rigidities preclude adjustment; mind you his real preocupation is that the rate of interest of equilibrium is negative, precluding adjustment in capital markets).
Of course this is nonsense. A reduction in real wages, and I'm not even talking about the effects of deflation on demand which were discussed by Keynes in the chapter 19 of the General Theory, may not lead to an increase in the demand for labor. First, it must be noted that if wages go down, since wages are part of the cost of production of produced means of production (i.e. capital), the price of the latter also goes down. There is a priori no reason to say that firms will substitute labor for capital (on capital debates go here; really Krugman should read this stuff).
Second, once the idea that the intensity of the use of a 'factor of production' is inversely related with its remuneration is abandoned (by the way there is no evidence for the notion that real wages are inversely related to employment utilization, in fact, if anything, the evidence points in the other direction, with real wages being slightly pro-cyclical), there is no reason to believe that real wages are connected to productivity (and again there is no evidence for that relation either, which means that when Krugman asks "what is that real wage?" and replies that it is "the marginal product of labor at that point," he is also incorrect). Yes real wages have stagnated, since the bargaining power of the working class has deteriorated, with productivity still growing since the 1970s.
So, what is the problem Mr. Krugman? That your conclusion, that the effects of technical change on employment are ambiguous, does not follow logically from your arguments. Ricardo's discussion of the effects of technical change on employment, in his famous chapter on machinery, is far more interesting and coherent than Krugman's (see the paper here). Not just the idea of a natural rate has to be abandoned, but the essential principle of substitution, which allows for the natural rate, must be dropped too. Logical coherence and evidence require it.
* For a serious discussion of the limitations of the aggregate production function go this paper by Jesus Felipe and Franklin Fisher here.
** The quote of Hicks classic presentation of the marginalist theory of wages leaves little doubt of where Krugman stands, if you had any.
What is new about the IMF's views on capital controls?
I wanted to write about this topic for a while, but didn't have enough time. The IMF has adopted a new institutional view on capital controls, which will inform their policy advice and surveillance of member countries, which they suggest reflects "a very broad consensus" [I'm always a little bit wary of broad consensuses]. Note that the Fund is still in favor of capital account liberalization, as noted in the second key feature of their institutional view, which says that "capital flow liberalization is generally more beneficial and less risky if countries have reached certain levels or 'thresholds' of financial and institutional development."
The question is how to get beyond the threshold, but there is no doubt that liberalization should be ultimately pursued, at least to some degree. They do add a cautionary note that full liberalization might be an impossible goal for many countries. In their words: "countries with extensive and long-standing measures to limit capital flows are likely to benefit from further liberalization in an orderly manner. There is, however, no presumption that full liberalization is an appropriate goal for all countries at all times."
The new institutional view is based on the notion that capital flows will continue to move away from the center, and that developing countries will be faced with a persistent pressure for the appreciation of their currencies. Blanchard says in his post that "looking at the relevant set of investors suggests higher flows to emerging markets are here to stay." He also suggests that the biggest threat from those inflows, the so-called Dutch Disease that New Developmentalist authors like Bresser-Pereira (here, for example) have emphasized, is not that dangerous and the empirical evidence about it is not well established [by the way, I tend to agree with Blanchard on this one, and believe that fears of a Dutch Disease are exaggerated].
My concerns with the new institutional view are twofold. On the one hand, I would rather not accept a general rule in which the IMF has a say on when and why a member country should use capital controls. Right now countries have a right to do it. So this new institutional view actually reduces policy space for developing countries. Note that the IMF, in spite of all the talk about the new macroeconomics is enforcing austerity in the European periphery. So the orderly manner that would lead to benefits from capital account liberalization are basically fiscal asuterity and inflation targets (slightly higher, 4% and not 2%).
Second, the view of the relevance of capital controls is limited to its effects on exchange rates, its volatility, the risk of appreciation, and last the possibilities of depreciations with disruptive outflows (or sudden stops). I tend to see capital controls as an essential tool not just for exchange rate management, but also for industrial policy, since the availability of dollars is often essential for determining which sectors can be promoted by allowing imports of essential goods (e.g. capital and intermediary goods), and which ones would be forced to rely on domestic substitutes. Import substitution and alternative development policies, of course, remain an anathema at the IMF.
Further, exchange rates are connected and do affect income distribution. It is far from clear that the only thing a country wants to do is avoid 'excessive' appreciation and loss of external competitiveness. Higher wages, associated with appreciated exchange rates, might be relevant for demand expansion too. At any rate, the point is that a great deal of discretionary power by domestic authorities should be the norm when it comes to capital controls. The less power the IMF has in this respect, the better.
The question is how to get beyond the threshold, but there is no doubt that liberalization should be ultimately pursued, at least to some degree. They do add a cautionary note that full liberalization might be an impossible goal for many countries. In their words: "countries with extensive and long-standing measures to limit capital flows are likely to benefit from further liberalization in an orderly manner. There is, however, no presumption that full liberalization is an appropriate goal for all countries at all times."
The new institutional view is based on the notion that capital flows will continue to move away from the center, and that developing countries will be faced with a persistent pressure for the appreciation of their currencies. Blanchard says in his post that "looking at the relevant set of investors suggests higher flows to emerging markets are here to stay." He also suggests that the biggest threat from those inflows, the so-called Dutch Disease that New Developmentalist authors like Bresser-Pereira (here, for example) have emphasized, is not that dangerous and the empirical evidence about it is not well established [by the way, I tend to agree with Blanchard on this one, and believe that fears of a Dutch Disease are exaggerated].
My concerns with the new institutional view are twofold. On the one hand, I would rather not accept a general rule in which the IMF has a say on when and why a member country should use capital controls. Right now countries have a right to do it. So this new institutional view actually reduces policy space for developing countries. Note that the IMF, in spite of all the talk about the new macroeconomics is enforcing austerity in the European periphery. So the orderly manner that would lead to benefits from capital account liberalization are basically fiscal asuterity and inflation targets (slightly higher, 4% and not 2%).
Second, the view of the relevance of capital controls is limited to its effects on exchange rates, its volatility, the risk of appreciation, and last the possibilities of depreciations with disruptive outflows (or sudden stops). I tend to see capital controls as an essential tool not just for exchange rate management, but also for industrial policy, since the availability of dollars is often essential for determining which sectors can be promoted by allowing imports of essential goods (e.g. capital and intermediary goods), and which ones would be forced to rely on domestic substitutes. Import substitution and alternative development policies, of course, remain an anathema at the IMF.
Further, exchange rates are connected and do affect income distribution. It is far from clear that the only thing a country wants to do is avoid 'excessive' appreciation and loss of external competitiveness. Higher wages, associated with appreciated exchange rates, might be relevant for demand expansion too. At any rate, the point is that a great deal of discretionary power by domestic authorities should be the norm when it comes to capital controls. The less power the IMF has in this respect, the better.
Thursday, December 6, 2012
New and Heterdox Master's Program
In response to an increasing demand for a more open, pluralist approach both in teaching and academic research in Economics a group of heterodox scholars have gathered together to launch a new Master’s Program in Economic Development in Buenos Aires, Argentina. The Program seeks to provide economics students with an alternative curriculum while covering—and seeking for students to master—standard mainstream literature and themes, including advanced quantitative skills, as middle step in the development of an academic career or public service.
Latin American students for the most part lack this type of approach and opportunity. Policy discussion has to some extent shifted in recent times in Latin America due to the progressive turn part of the region has taken at the political level. But despite this shift in debate, policy making remains to a large extent permeated by the orthodox vision and so too, with a few notable exceptions, curriculum design and teaching in the field Economics.
While providing wide-ranging courses on development, macroeconomics, microeconomics, econometrics and history of economic ideas, the program will offer students the possibility of picking between two alternative concentrations —the first, on “Macroeconomics and finance for development”, to be coordinated by Matías Vernengo (Ph.D., New School University); the second, on “Industrial organization and technical change”, to be coordinated by Pablo Lavarello (Ph.D., University of Paris XIII). Martín Abeles (Ph.D., New School University) will be the Program Director, backed by a host of prominent academics.
The Program will be hosted by the National University of San Martín (UNSAM), a prestigious Argentine public university, with great achievements not only in social sciences, but also—and very outstandingly indeed—in natural sciences, and classes taught in downtown Buenos Aires. The Program will begin in 2013 and the deadline for applications is December 27, 2012. For more information go here (in Spanish).
Latin American students for the most part lack this type of approach and opportunity. Policy discussion has to some extent shifted in recent times in Latin America due to the progressive turn part of the region has taken at the political level. But despite this shift in debate, policy making remains to a large extent permeated by the orthodox vision and so too, with a few notable exceptions, curriculum design and teaching in the field Economics.
While providing wide-ranging courses on development, macroeconomics, microeconomics, econometrics and history of economic ideas, the program will offer students the possibility of picking between two alternative concentrations —the first, on “Macroeconomics and finance for development”, to be coordinated by Matías Vernengo (Ph.D., New School University); the second, on “Industrial organization and technical change”, to be coordinated by Pablo Lavarello (Ph.D., University of Paris XIII). Martín Abeles (Ph.D., New School University) will be the Program Director, backed by a host of prominent academics.
The Program will be hosted by the National University of San Martín (UNSAM), a prestigious Argentine public university, with great achievements not only in social sciences, but also—and very outstandingly indeed—in natural sciences, and classes taught in downtown Buenos Aires. The Program will begin in 2013 and the deadline for applications is December 27, 2012. For more information go here (in Spanish).
Wednesday, December 5, 2012
Forget Deficits and the Fiscal Cliff Scam
By James K. Galbraith
What do rich people do with money? They make the best use of it they can, and in times of high growth and strong confidence they take risks and – if they are good and lucky – reap the rewards.
But the situation is different when the outlook is bleak and when real estate (especially) will be cheaper next year than today. Under these conditions, money is safe and gains value even at zero interest. So the idle balances pile up in banks and in low-risk assets like Treasury debt.
Read the rest here.
Also, check the four part interview by the Real News Network on why the fiscal cliff is a scam here.
What do rich people do with money? They make the best use of it they can, and in times of high growth and strong confidence they take risks and – if they are good and lucky – reap the rewards.
But the situation is different when the outlook is bleak and when real estate (especially) will be cheaper next year than today. Under these conditions, money is safe and gains value even at zero interest. So the idle balances pile up in banks and in low-risk assets like Treasury debt.
Read the rest here.
Also, check the four part interview by the Real News Network on why the fiscal cliff is a scam here.
Tuesday, December 4, 2012
How do you measure economic success?
So the piece on Argentina at the Guardian got a lot of comments. One suggested that Argentina has not been very succesful. As I pointed out in terms of growth (if you use Levy-Yeyati's numbers, as shown in the figure below; his series is the red line) the average rate of growth has been at slightly more than 6% per year since the default, which constitutes the highest rate in the country's history.
Further, if one looks at the expansion of real wages in the industrial sector (using Ferreres numbers; there is a 2nd edition with more recent data) you have an impressive increase of 8.9% per year since the default (up to 2009; they also grew in 2010 and 2011, even though it is less clear they will in 2012).
Sure real wages are still below the peaks (mid-1950s, early 1970s and the very short lived increase after the Austral Plan in the mid-1980s), but the recovery is impressive nonetheless. So the country grows and workers are doing better. I don't know what you think, but it looks pretty good to me.
PS: Levy-Yeyati and Ferreres' numbers (not the official) are the ones used by the critics to say that the boom was not a success.
PS: Levy-Yeyati and Ferreres' numbers (not the official) are the ones used by the critics to say that the boom was not a success.
Monday, December 3, 2012
Don't comply for me Argentina
By Jayati Ghosh and Matías Vernengo
Argentina is in the news again. The country that successfully managed an external debt restructuring after a major financial crisis in 2001-02, and eschewed the standard austerity package to benefit from a remarkable economic recovery, is being attacked by a combination of court rulings and aggressive moves in financial markets.
Elliott Capital Management, a vulture fund based in the tax haven Cayman Islands owned by conservative financier Paul Singer (a big donor to the Romney campaign), refused to accept the terms of the debt restructuring that was accepted by more than 92% of bondholders in 2005 and 2010. It has demanded payment in full, and has actively pursued its case in different courts across the world. A few months ago, the Argentine frigate Libertad, which ironically means freedom in Spanish, was seized in Ghana after a local judge ruled in favour of Elliott Capital Management. Judge Thomas Griesa has recently ruled in a district court in New York that the Argentinian government must pay $1.3bn to the same vulture fund – the full face value of their holdings plus accumulated interest starting in late 2001 – on the basis of an unusual interpretation of the pari passu clause in debt contracts.
Read the rest here.
Argentina is in the news again. The country that successfully managed an external debt restructuring after a major financial crisis in 2001-02, and eschewed the standard austerity package to benefit from a remarkable economic recovery, is being attacked by a combination of court rulings and aggressive moves in financial markets.
Elliott Capital Management, a vulture fund based in the tax haven Cayman Islands owned by conservative financier Paul Singer (a big donor to the Romney campaign), refused to accept the terms of the debt restructuring that was accepted by more than 92% of bondholders in 2005 and 2010. It has demanded payment in full, and has actively pursued its case in different courts across the world. A few months ago, the Argentine frigate Libertad, which ironically means freedom in Spanish, was seized in Ghana after a local judge ruled in favour of Elliott Capital Management. Judge Thomas Griesa has recently ruled in a district court in New York that the Argentinian government must pay $1.3bn to the same vulture fund – the full face value of their holdings plus accumulated interest starting in late 2001 – on the basis of an unusual interpretation of the pari passu clause in debt contracts.
Read the rest here.
Sunday, December 2, 2012
Income distribution in the BRICS
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