Wednesday, August 24, 2016

US Net International Investment Position

Nothing much changed since I posted on this a couple of years ago. The U.S. net international investment position at the end of the first quarter of 2016 was −$7.5 trillion, which corresponds to about 40% of GDP, higher than two years ago. But no real problem in my view
Note that this is the sort of number that economists show when they want to suggest a possible run on the dollar, and the demise of its role as a reserve currency. The last report by the Bureau of Economic Analysis (BEA) is available here.

Tuesday, August 23, 2016

Class activity

Teaching Latin American Economic Development. Asked students to match the list of countries below with the graph representing GDP per capita in 2016 (source here). List of countries: Argentina, Brazil, Chile, China, Congo, India, Mexico, Norway, Saudi Arabia, and the US.
The point I always try to make is that Latin American economies are (most of them) middle income countries, all the ones in the sample with higher GDP per capita than China. That's often a surprise for many students, which think that China is an advanced economy (yep, grows fast, less now, but it's still a middle income economy, and will probably remain so in the foreseeable future). Also, Saudi Arabia has a very high level of GDP per capita, but it's not really a developed economy. An advanced economy produces more than commodities (oil in this case). So what the economy produces and exports matters.

PS: Solution in the comments section.

Sunday, August 21, 2016

On the blogs

Sraffa’s archival material is a gift to the science of economics -- Scott Carter, that started a new blog dedicated to Sraffa, on the still unpublished archival material. Great initiative. I'll have more on this later

De Vroey’s Chicago style History of Macroeconomics -- Lars Syll on Michael De Vroey recent book on the history of macroeconomics. I had briefly noted De Vroey's book here 

Can Latin America Learn from Europe’s Mistakes? Divergence in Regional Economic Integration -- Collin Constantine in the also new blog Developing Economics

Friday, August 19, 2016

Noah Smith on heterodox models

As it is often the case when you've been blogging for a while, there is always a precedent, and one might have written about a particular topic. Noah Smith, which I think has been blogging for a shorter period of time than I've been, now comes up with another take down of heterodox economics (having difficulties of understanding the meaning of the mainstream, it's no wonder he gets heterodoxy wrong; on the definition of the latter go here).

He argues that "much of heterodox theory is non-quantitative." True, but so is the case with the mainstream. Not everything can be formalized. And there is qualitative knowledge. But, having said that, the point is that difference between the mainstream (marginalism, neoclassical economics) and heterodox approaches has nothing to do with the lack of formalization of the latter. His examples of heterodoxy are not the best, I would argue. He first deals with Hyman Minsky, which in my view accepted a good chunk of mainstream ideas in his interpretation of Keynes. And yes, he did not formalize his theory, but there are plenty of models (Lance Taylor, Alessandro Vercelli and Steve Keen have done it, to name a few).

The main critique of mainstream economics, or at least of its core theory of value and distribution, is presented in a very short, and formalized, little book called The Production of Commodities by Means of Commodities. The notion that supply and demand determine prices (long term equilibrium prices) and that the principle of substitution works is sketched there. And later Paul Samuelson (subscription required) admitted that neoclassical parables made little sense. I've dealt with this issues several times notably here. And the heterodoxy has formalized models of the determination of output, employment, inflation (see mine here), growth (in many varieties, but mainly demand-led) currency crises (see mine here), etc. So Noah is wrong when he suggests that "heterodox theory is non-quantitative."

Noah discusses essentially the so-called stock-flow models deriving from Wynne Godley's (my old mentor) work as examples of heterodox models that are formalized. His main critique is that there are problems with estimation of parameters. This is essentially one of the critiques raised against the Cowles Commission types of model that dominated the mainstream until the 1970s (before Lucas' critique). They are still raise about Ray Fair's model at Cowles. Fair provides a response and comparison with modern methodology here, which is worth reading.  But the defense that Wynne would provide would be different in my view.

As I noted before, Wynne "was more concerned with what he referred to as 'model architecture' than with parameter estimation. The architecture, which was careful about stock-flow consistency, showing that everything came from somewhere and went somewhere so to speak, also imposed a clear causality structure, which determined most of the results. In fact, Wynne believed that significant variations of the parameters might not greatly influence the end result of the model, which was used for simulations and scenarios that helped to understand how the economy functioned, rather than for strictly forecasting purposes."

Simpler models, which do not provide the full accounting, as I suggested here, but that separate income and price determination, where output is demand determined, are in that sense also useful. Or just stated simply, of course there is a formal alternative to the mainstream. It's one that does not emphasize microfoundations and individual behavior as Noah would like, but that's another story.

Tuesday, August 16, 2016

Crowdfunding campaign to publish Keynes' remaining writings



OVERALL AIM: To complete the publication of ALL of Keynes’s remaining unpublished writings of academic significance.

Only about ONE THIRD were published in the Royal Economic Society edition. A huge quantity of VALUABLE unpublished material remains, scattered across 60 archives in 6 countries.

AIM OF THIS CAMPAIGN: Preparation of the Eton and early Cambridge volumes.

CAMPAIGN START: 11 October 2016.

TO LOCATE PROJECT: Google ‘JMK Writings Project Indiegogo’.

It is also planned, with publisher cooperation, for the campaign to assist selected universities in developing countries.

HOW YOU CAN HELP

1. Spread the word prior to the campaign launch – to academic colleagues (in economics or elsewhere), students in classes, conference participants, policy-makers, parliamentarians, philanthropists etc.

2. Make, and encourage, donations, of ANY size, according to your situation. Especially on the first or second day of the campaign. Experience shows that strong starts are correlated with strong finishes.

Editor: Professor Rod O’Donnell, University of Technology Sydney, Australia.

Contact: jmkwritingsproject@gmail.com

See also: https://www.uts.edu.au/staff/rod.odonnell

Thursday, August 11, 2016

Cassidy on the productivity puzzle

John Cassidy is one of the best economic journalists around (together with Jeff Madrick probably). And not only because he has written about one of my mentors, Wynne Godley. In his last column he tackles the issue of productivity. And again I should say he is on the right track. He first gives a simple example of technological change from the donkey to the truck delivery system. Almost imperceptibly he tells you that you would change from one to another technology if: "you can find enough customers." Exactly, why would you invest in the new technology, the truck, if nobody is demanding more deliveries which would make the truck cost effective.

At any rate, he suggests three explanations for the current productivity slowdown (or the new concerns about it, since the Great Recession; this had temporarily vanished in the late 1990s when productivity picked up as a result of the so-called New Economy, i.e. information technology). The first, is that it's all a measurement problem, which in all fairness is not very credible. Then there is the Robert Gordon story that the third Industrial Revolution is less technologically dynamic. A supply-side story. And lastly, he hits the nail with the Kaldor-Verdoorn story. It is the slowdown in growth, mostly resulting from austerity. As the figure below shows productivity and GDP growth are highly correlated, and the question is whether you believe Gordon (with causality from productivity to GDP) or vice-versa, like Kaldor (Godley's intellectual hero, btw).


On Marx and other 19th century critical economists he might be wrong. But that is a topic for another post. On the calculations for Kaldor-Verdoorn go here (my method avoids the need to calculate potential GDP; on potential GDP see this interesting posts here, here and here by JW Mason).

Wednesday, August 10, 2016

Joan Robinson's Accumulation of Capital after 60 years

My favorite is still Essays in the Theory of Economic Growth

Back from a summer road trip. Should start to blog more consistently soon. Here a new paper from John King in the last issue of ROKE. From the abstract:
Joan Robinson's magnum opus, The Accumulation of Capital, was published 60 years ago, in 1956. I begin this diamond jubilee assessment by explaining the intellectual background to the book, placing Robinson's attempt to ‘generalise the General Theory’ in the context of the contemporary work of Harrod, Kaldor and Kalecki. I then provide a brief summary of the eight parts of the book before focusing on the analytical core, the analysis of ‘accumulation in the long run’ that is provided in Book II. Next I outline the critical reception of the book in the late 1950s and Robinson's reaction to it, both then and later in her career. I conclude by documenting the rather limited influence of The Accumulation of Capital in the longer term, even among heterodox economists, and conclude that the book was a noble failure.
Read full paper here.

Friday, July 22, 2016

Trump, Hillary and Free Trade

So, besides the nativist, xenophobic, and racist appeals to the darker side of American society, Trump speech was all about trade, and its effects on the working class. That is clearly the strategy for November, and Hillary is, for obvious reasons, weak on that subject. I don't think Trump even thinks Bernie supporters would vote for him, but his appeal to them last night was for them not to vote for Hillary.

Trade matters, even if Trump has no clue why. As, I have explained several times (go here, here or here for the basics of the theory, here  for a brief discussion of the loss of political support for Free Trade Agreements, FTAs) free trade is a bit of a misnomer. Nobody is for purely free trade or complete protectionism. The real discussion is about managed trade, and for what purposes one should manage it. While most economists agree that trade should be managed for phytosanitary rules and defenses purposes, there is unwillingness to accept that the quality of employment and real wages matter too.

Trade matters, because what one country produces matters. Complex products with higher value added are more likely to lead to the incremental innovations that are behind the wealth of nations. Trade agreements that ossify the production structure in sectors with low levels of technological dynamism lead to lower growth, and employment. In the US, certainly, since the entry of China in the WTO there has been a significant collapse of manufacturing jobs (see discussion here), which has not implied lack of technological dynamism per se, but has had a significant impact on the old manufacturing belt, which happens to affect many swing states in this election.

That is why it would be a huge (yuge, really) mistake if Hillary chooses Tim Kaine over Sherrod Brown as a running mate. Both are senators from swing states, but only Brown would be credible as a critic of FTAs. Don't get me wrong. I don't think that if she chooses Sherrod Brown her positions on trade could be trusted blindly (see here, for example; Obama too was critical of FTAs before he was elected). But it would send a signal that the constituency (mostly related to labor) within the party that would want a less pro-business approach to trade would have a voice in the White House (btw, I wouldn't trust Trump's views on trade; given his proposals on taxes, his administration would be the most pro-business since Calvin Coolidge).

Thursday, July 21, 2016

The Gospel of Co-operative Capitalism: Acolytes and Apostates

Bill McColloch published a new PERI Working Paper, which deals with the same issues, in a very different way, raised in the last chapter of his dissertation. From the abstract:
The present paper seeks to locate the Bhaduri-Marglin (B-M) model as an historical outcome of the Left's internal disputes over the prospects for social democracy. In better  contextualizing the B-M model as a historical response to the perceived political economic failings of the social compromises upon which the growth of post-War advanced capitalist economies had rested, both the model’s popularity and its potential limitations can more easily be understood. Though the B-M framework has frequently come to be referred to as the neo- or post-Kaleckian growth model, such labels perhaps obscure the model's diverse ancestry. The model constituted an attempt to reconcile seemingly incompatible theoretical perspectives, and to highlight those special conditions that made possible a ‘Golden Age’ of social democracy. Moreover, they sought to show that the conclusions of Keynesian social democrats and of radical Marxists could be viewed as two possible outcomes of the same broadly Keynesian theoretical framework in which investment played a leading role. While this synthesis has fostered a vast literature and useful dialogue, it is argued that it should, nevertheless, be seen as the outcome of a generation Left social scientists that had become deeply skeptical of the possibility of egalitarian redistribution under capitalism, and of the political ambitions of Keynesian and social democratic parties.
The paper explains to some extent the political economy of the rise of the profit-led models within radical economics.

Wednesday, July 20, 2016

Minsky's financial instability hypothesis


From Boom, Bust, Boom. Not the best explanation, but accessible. In this version is all about confidence, which is not particularly heterodox. Btw, slow posting will continue until mid-August.

Thursday, July 14, 2016

On the possibility of a recession, again

So the yield curve is really flat, not inverted, but really flat, and that has many  (or here) afraid of an impending recession. The fear is basically associated to the inverted yield curve (see below: when the blue line is above the red and green lines, there is an inverted yield curve, with a high short rate and lower longer rates, signaling a recession) which is really flat, and the danger that the Fed will rise the rate in the next meeting in a few weeks.
Yield Curve (click to enlarge)
Blanchard, cited in one of the WSJ pieces above, thinks that the Fed might be forced to hike interest rates, since the economy, presumably is close to the natural rate, that is, to full employment and inflation is a danger. Note that Blanchard is suggesting that the 2% target should be upheld, even though he was against this when he was at the IMF.

I think this is misguided on many levels. On the theoretical front the reliance on the natural rate is problematic, of course. The notion that we are close to full employment is doubtful to say the least, given that participation rate has not recovered much at all since the last recession. Real wages have not grown that much either, and with lower commodity prices the risk of higher inflation (if one is concerned not just with core inflation) is not particularly high. The FOMC should leave the short run rate unchanged. But that is not enough. The Eccles mantra should be repeated more often. Monetary policy is like pushing on a string, in a situation like this one. We need fiscal stimulus.