What’s driving inflation? Bucknell prof says maybe not what you think

My interview with Scott LaMar from WTFI, on inflation and the problems with demand-pull and oligopolistic inflation, for those interested in another iteration of the same. It's a bit longer than previous ones, and we go on some additional detail.

Review of Keynesian Economics New Impact Factor

I am pleased to let you know that the 2023 Impact Factor for ROKE has gone up to 1.6 from 1.219. This puts us as one of the top heterodox journals. There are a few above, in my understanding, like the Cambridge Journal (2), and some incredibly good ones that were not ranked until recently, like the Review of Political Economy (now 1.5). One, of course, should take those ranks with some degree of caution. And old post on that here.

New directions in the Sraffian approach

 Call for Papers (ROPE)

65 years after Production of Commodities by Means of Commodities: new directions in the Sraffian approach

Guest Editor: Santiago José Gahn

Internal Editor: Sylvio Kappes

The year 2025 marks the 65th anniversary of the publication of the book Production of Commodities by Means of Commodities by Piero Sraffa (1960). Not all economists are capable of transforming their name into a legacy, into a school. Piero Sraffa belongs to this select group. Exiled from fascism, he built his entire academic career at Cambridge University, where, from a profound analysis of the classical authors, he constructed a powerful critique of the dominant marginalist theory. But Sraffa's legacy has evolved into something much more powerful over the years, where some of his disciples have extended his criticism of marginalist theory, applied his ideas to international trade, and constructed alternative theories of economic growth.

65 years after Sraffa's publication, we believe it is necessary to launch a special issue that calls for reflection on his life, his political thoughts, his friendships, his lessons at Cambridge and his archive; his intellectual legacy, and that of his followers, and the impact on economic theory today; as well as possible guidelines for extending Sraffa's thought to other fields in the future. In recent years, Sraffa's legacy has had a boom that was born mainly in the periphery or the "global south", in particular in Argentina, Brazil and India. Recently, many authors have taken Sraffa's basic outlines and combined them with Latin American structuralist thinking in an attempt to explain the limits to growth and income distribution; they have developed and extended mathematical models of economic growth such as the Sraffian supermultiplier; they have presented the main limitations to Real Exchange Rate-led strategies, among other topics. Sraffa's legacy is alive and growing.

As a way of paying tribute to Production of Commodities by Means of Commodities (Sraffa, 1960) Review of Political Economy (ROPE) is preparing a special issue. This special issue intends to collect scientific articles that present or reinforce new lines of research within a Sraffian (or classical-Keynesian) perspective.

This special issue welcomes articles on a number of topics, including:

a. Sraffa's personal history, his relationship with Gramsci and his political thought.

b. Issues related to Sraffa's intellectual development, such as: extensions of PCMC, critique of mainstream theory, analysis of Sraffa’s archive.

c. Sraffa’s intellectual legacy: the direct impact on their followers such as Garegnani and Pasinetti, among others.

d. New directions in the Sraffian approach: extensions of the Sraffian supermultiplier model, endogenous money, international trade, imperialism and unequal exchange, the method in economics, impact of economic policies on gender, race or climate change. Articles that can extend Sraffian school to Anthropology and Sociology are also welcome.

Of course, all these topics can never cover the vast universe of the impact of Sraffa's intellectual legacy, but all articles that relate to Sraffa's thought are welcome, including critical ones as well. Finally, this special issue will attempt to have a gender balance.

If interested in submitting a paper, please send a short abstract by September 15th, 2023 to both Santiago J. Gahn (santiago.gahn@uniba.it) and Sylvio Kappes (sylviokappes@gmail.com). Decisions will be made by September 25th, 2023. If selected, the complete paper must be sent by May 1st, 2024.

Deadline for submitting abstracts: 15th September 2023

Deadline for submitting papers: 1st May 2024

References
Sraffa, P. (1960). Production of Commodities: Prelude to a Critique of Economic Theory. Cambridge University Press.

Unmasking Inflation: Why the Conventional Wisdom is Failing Us

Interview I gave for INET in January. From their website:

Matías Vernengo navigates the complex topic of inflation, discussing its implications on workers, and the economic policies that can potentially mitigate these effects. He explains the inflation of the 1970s and compares it to the more recent inflationary scenario provoked by global events. Vernengo evaluates the mainstream explanations - demand-pull and cost-push theories - and presents an alternative, heterodox explanation that views inflation as a result of distributive conflict and corporate power. While he acknowledges the role of corporations, he emphasizes that it’s the effects of inflation, primarily on workers’ real wages, that require addressing. He argues that the best policy would be to compensate workers for these effects. Vernengo’s analysis covers not just the American context, but also examines inflation in peripheral economies like Argentina and Turkey, identifying a link to exchange rates. He also critiques the “one-size-fits-all” theory approach to understanding inflation, underscoring the need for a heterodox economics perspective that could offer more nuanced insights and potential solutions.

Special Issue of the Review of Keynesian Economics

New issue of ROKE on: Center-periphery analysis reconsidered, Essays in memory of Luigi Pasinetti. Possible topics of contribution to our special issue could address:

• The relevance of the center-periphery analysis and/or its limitations;
• Income and/or wealth distribution: the distributive and redistributive effects (in central and peripheral countries) of the neoliberal globalization;Debt tolerance/financial crises: the destabilizing role of central monetary policies on the peripheral economies;
• International political economy: the ongoing reconfiguration of center-periphery relations;
• Decoupling of a global West from an emerging Asia; future and crisis of globalization;
• The inherent fragility of global supply chains;
• Any other topic related to the center-periphery analysis in a classical-Keynesian perspective.

Submissions should be made using the usual channels of the journal, and they will be managed jointly by editors and guest editors. All accepted articles will be published in the special issue.
Deadline for submissions: November 30, 2023. For further information, please contact the Guest Editors: Matias Vernengo (Bucknell University, U.S.A.; mv012@bucknell.edu) and Roberto Lampa (University of Macerata, Italy; r.lampa@unimc.it)

A New Turn to the Left in Latin America?

 

Special issue of Cuadernos de Economía, to be co-edited by Esteban Pérez and myself. Deadline is December 15.

How tight is the labor market?

Inflation is coming down, as the last BLS report shows. I'm not going to get into that into this (very short) post. The disinflation has taken place while the official unemployment remains very low. However, we all know that unemployment measures very poorly the situation in the labor market. My alternative measure, which I make students calculate in macro classes, is what would be the unemployment rate be if the participation rate, which has been declining since the early 2000s (when China entered the WTO; see on that and deindustrialization this very old post), was the same of the last peak (back at the end of the Clinton era) when it was at about 67 percent (see below).

Note that the unemployment rate has a negative relationship with the participation rate, everything else constant. The result below.

 

The answer is, not 3.7 percent, but around 10 percent. In other words, there's a lot of what Joan Robinson used to call disguised unemployment. Discouraged workers that are not searching for a job, because they can't find anything worthwhile, and, hence, do not count as unemployed. This can be seen as the extra unemployment that we have because of the neoliberal policies of the last four decades, but in particular after the more radical opening to China starting in the 1990s.

More on oligopolistic inflation (Greedflation)

Marc Lavoie has written this post on the current inflation debates, which received some attention. We had a conversation (I don't say debate because we mostly agreed, and the video is here, last September). I also recommend Julia Braga and Franklin Serrano's paper on Marc's chapter on inflation, which is relevant for the current debates. The debate rages, within heterodoxy, as if a lot of the ideas are new, but quite frankly they are a recap of discussions of the past, particularly for those that dealt with the extensive debates about inflation and hyperinflation in Latin America in the 1980s and 1990s.

That demand-pull inflation was not the cause of inflation, I think is accepted among heterodox authors, and increasingly so within the mainstream or at least the media, that mostly covers the mainstream. After an initial idyll with Larry Summers and the notion that excessively large fiscal packages during the pandemic had caused inflation, now his view that a prolonged period of relatively high (or at least higher) unemployment was necessary for stabilization has fallen out of favor. Disinflation has taken place with relatively low levels of unemployment (which, it's worth remembering measure very poorly the conditions in the labor market in our neoliberal era, and where there is more slack than noted due to significant numbers of discouraged workers). The coverage has changed from thinking Summers was right to dismissing his views. He was wrong both times.

I'm more concerned with the dominant view among progressives that inflation was caused by higher profit margins, associated to the excessive power of corporations. Something that has been called greedflation, by many commentators (see Robert Reich's recent column here), and that back when, in a distant past in another galaxy, we called oligopolistic inflation. So this is mostly a debate between neoliberal and progressive Dems (Republicans have been less relevant; for their view go to this conference/book including John B. Taylor, John Cochrane and others at the Hoover Institution; not very different than Summers, who was at the conference, at least conceptually, even if more hawkish, if that is possible).*

In particular, I think the main remaining issue is the question of the role of mark ups, or profit margins in the inflationary process. As I noted before, the idea of oligopolistic inflation is in some sense a reaction to the notion that wage resistance and wage-price spirals would imply that workers are responsible for inflation (in this reading as much as demand-pull inflation would require unemployment for stabilization, conflict inflation would imply the need for wage stagnation). Some heterodox economists have even suggested that wage-price spirals are sort of a myth.

Note that when workers manage to increase wages, then price making firms will try to recompose their margins and increase prices. And if workers are not satisfied, as prices go up again and real wages fall, then you get a spiral. Hence, the wage-price spiral is a reflection of distributive conflict, and that workers and capitalists are not satisfied with their relative shares. In that sense, inflation is neither wage-led nor profit-led, like accumulation can be. It is the result of incompatible income claims by both classes.

There is a simple model in this old paper for the Handbook edited by Phil Arestis and Malcolm Sawyer, in which I discussed the three causes of inflation for heterodox authors, supply shocks, inertia and conflict.

* The inflation paranoia is somewhat surprising, with Taylor saying that: "The answer to the key question, 'Are We Entering a New Era of High Inflation?' is clearly 'yes,' unless monetary policy makers change policy." Note that this is not new. The late Allan Meltzer warned against the dangers of excessive monetary expansion after the 2008-9 crisis, saying back then: "the enormous increase in bank reserves —caused by the Fed’s purchases of bonds and mortgages — will surely bring on severe inflation if allowed to remain." So, you would have to really believe in the lags in monetary policy (more than a decade) for his prediction to make any sense.

Servaas Storm on Lance Taylor

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

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

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

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

Soft landing or recession

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

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

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

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

How Industrialization Become the Core of Raúl Prebisch's Thought

New paper by Adriana Calcagno. From the abstract:

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

Published here, and working paper open for download here.

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

 

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

Read full interview here.

The debt ceiling and the American economy: not Armageddon

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

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

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

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

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

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

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