Showing posts from March, 2013

The Bad Deal

By James K. Galbraith

Political news travels slowly, and in my casual observation progressive Europeans have held on to the myth of Barack Obama as a good man much longer than most progressive Americans did. How could a young black American from Chicago and Harvard be otherwise?

Over here reality has been evident for a while, thanks to the President's pattern of giving way to banks, lobbies, Republicans and right-wing extremists. Whether your prime interest is housing, health care, peace, justice, jobs or climate change, if you are an activist in America you have known for a long time that this President is not your friend.

Still, even on these shores disillusion often took a mildly forgiving form. The President was a “disappointment.” He was weak. He had “bad negotiating skills.” He had a tendency to “deal with hostage-takers,” to “surrender.” All of this fed the image of a man with a noble spirit, a good heart, the best intentions, but trapped by limited ability and the relentl…

Brazilian Keynesian Association Conference


Call for Papers

The Brazilian Keynesian Association (AKB) is organizing its 6th International Conference which will be held in the 14-16 August 2013, in Vitoria, Brazil, at the Federal University of Espirito Santo. The Conference will have two special sessions: ‘The future of the Keynesianism: in honour of Prof Mario Possas’ and ‘Inflation targeting and the criticism on the New Macroeconomic Consensus’, with participation of Philip Arestis, Gilberto Tadeu Lima, among other ones, as special guests. There will be a mini-course on ‘Keynes, Kalecki and Schumpeter: a necessary bridge?”, with Mario Possas. We would like to invite you to submit papers to our Conference. The submissions shall be broadly related to the following topics:
International Economics and Finance.
Financial System and Financing of the Economy.
Macroeconomics and Economic Policies.
Macroeconomic Regime Alternatives.
Economic Growth and Income …

The costs of man made catastrophes

Graph below shows some evidence on the increasing costs of man made catastrophes. Note that some of the weather ones are also associated to global warming and, thus, are man made too (h/t The Economist).
Although the data is for a relatively short period, the increase is clear and significant. This is another reason why State spending to prevent these kind of disasters is called for.

Michael Pettis on the Chinese Growth Model

I have been slow to respond some of the comments in previous posts, and have not been able to post on some topics I wanted. One topic that I left out, but is worth mentioning, is about an interesting post on the Chinese Growth Model that Michael Pettis had a while ago. He compares the Chinese model to the Hamiltonean American System. He suggests that the three keys to the 'model' are: protection, domestic investment (public?) and national finance.

Note that this suggests an active role for the State, which is often not recognized in conventional accounts of US development. Nate Cline has dealt with some of those issues in his PhD dissertation (first and second essays in particular). He says: "that the developmental orientation of the state emerges as fundamental in U.S. history. Most importantly, the federal government’s role in shaping and establishing financial markets and a common money of account allowed the U.S. to escape external constraints on growth related to the…

IS-LM is bad economics no matter what Krugman says

"There is nothing in the post-General Theory writings of Keynes that suggests him considering Hicks’s IS-LM anywhere near a faithful rendering of his thought. In Keynes’s canonical statement of the essence of his theory in the 1937 QJE-article there is nothing to even suggest that Keynes would have thought the existence of a Keynes-Hicks-IS-LM-theory anything but pure nonsense. So of course there can’t be any “vindication for the whole enterprise of Keynes/Hicks macroeconomic theory” – simply because “Keynes/Hicks” never existed..." (see rest here)

Investment in infrastructure is a no brainer

NYTimes comic strip that gets economics right, which is more than you can say about most pundits and a good chunk of the profession.

Dude seriously, it's the accelerator

Once again I get to discuss on whether investment depends on 'animal spirits', Schumpeterian entrepreneurialism or other confidence fairies. The evidence, as I noted here before, is quite overwhelming in favor of a simple and logical empirical regularity, namely: the accelerator. Below the last results from the Fair Model.
KK is the capital stock, RBA is the bond rate, and Y is income. Note that the coefficient on bond interests is insignificant, both statistically and in economic terms. What drives the change in the capital stock are the contemporaneous and lagged changes in the levels of income (demand). This is not only in the data, but is also quite logical. It says that firms increase their capital stock when demand increases (note that firms have always some spare capacity, so they are looking for permanent increases in demand). If there is no increasing demand there is no need to invest.

Not a surprising result, unless you for some other reason need the Superman theory…

Natural Resource Nationalism and Fiscal Revenues

One of the relevant points made by Amico and Fiorito for the case of Argentina, that apply to many countries in the region, is the increase in fiscal revenue that was associated to the higher national participation in the gains from exports of primary goods. This has been, in part, associated to the left of center governments and the so-called Natural Resource Nationalism. The table below shows the evidence.

It can be seen that, with the exception of Mexico and Venezuela, where State revenue from oil was already high, in all other countries there was a significant increase in State revenues. Governments have appropriated primary export earnings and turned them into fiscal resources by taking a share of operating earnings, either through public enterprises (which included nationalization in some cases) or through equity holdings, more stringent requirements on the payments of royalties, and by levying taxes on export earnings.

Read more on the fiscal situation in Latin America in ECLA…

The mysterious case of the optimism about the relation between depreciation and growth

By Fabián Amico and Alejandro Fiorito* (Guest Bloggers)

The current debate about economic growth in Argentina, has accepted as dogma that the fast rate of economic growth between 2003 and 2011 had as its primary cause the devaluation in 2002, and the maintenance of a Sustainable and Stable Competitive Real Exchange Rate (SSCRER). Several economists attribute the current deceleration of economic activity to the real exchange rate appreciation.

The most analyzed economic variable is the real wage in dollars: between 2009 and 2011 the official exchange rate was devalued in 12.6%, while nominal wages in the private sector increased by 68%. In other words, the dollar value of wages increased almost 50%. In 2012 this was partially reversed.

How would a more competitive (devalued) real exchange rate stimulate growth? First and foremost it would lead to higher exports and lower imports, and then it would stimulate investment, and would generate more output and employment. The implicit assump…

Galbraith on the Great Depression and the 'Great Recession'

A new interview with Jamie Galbraith (and also Leo Panitch), on the possibilities of a New 'New Deal' (part II here). Not much of chance, by the way. Part of the story is that the New Deal was fundamental in institution building, and these very institutions saved us from a crisis similar to the Depression, creating less of a perceived need for continuous reform.

In Jamie's words:
"So an entire system was built that had never previously existed and gave us an economy with a very strong presence of the federal government. And ultimately, as the New Deal progressed, that was extended to very large social insurance programs, which also had never previously existed, Social Security on a continental scale being the lead thing in the 1930s. And then added to that in the 1960s we had the work of the New Frontier, and especially of the Great Society, which extended this especially into health care, where we got Medicare, we got Medicaid, we got a major public presence in what…

A Shackled Revolution? The Bubble Act and Financial Regulation in 18th Century England

New Working Paper by Bill McColloch, which refutes anti-Keynesian (crowding out) views on the Industrial Revolution (IR). From the abstract:
"Revisionist estimates of growth rates during the British industrial revolution, though largely successful in presenting a more modest picture of Britain’s ‘take-off’ prior to the 1830s, have also posed fresh analytical difficulties for champions of the new economic history. If 18th-century Britain was witness to a diffuse explosion of ‘useful knowledge,’ why did aggregate growth rates or industrial output growth rates not more closely shadow the pace of technological change? In effort to explain this paradox, Peter Temin and Hans-Joachim Voth have claimed that a few key institutional restrictions on financial markets – namely the Bubble Act, and tightening of usury laws in 1714 – served to amplify the "crowding out" impact of government borrowing. Against this vision, the present paper contends that the adverse impact of financi…

Thomas Tooke and the Gibson Paradox

The Gibson Paradox is the name that Keynes suggested for a particular empirical regularity, namely: the positive correlation between the rate of interest and the price level. He had read about in a series of articles in the Banker's Magazine by A. H. Gibson, hence the name. Keynes suggested in his Treatise on Money that the Gibson Paradox was "one of the most completely established empirical facts in the whole field of quantitative economics." The graph below is from Gibson's 1926 piece.
However, the correlation was first noted by Thomas Tooke (for more see Pivetti's entry in the New Palgrave; subscription required), the leader of the Banking School, in the 19th century, and author of the massive and underappreciated History of Prices ( Vols. 1, 2, 3, 4, 5 and 6 available on-line).

In that book, and contrary to Ricardo and the Bullionist authors (the precursors of the Currency School), he argued that inflation during the Napoleonic Wars (1793-1814) was not cause…

IMF's New View on Capital Controls

By Kevin P. Gallagher and Jose Antonio Ocampo
"Weeks before the spring meetings of the International Monetary Fund (IMF) in Washington next month, GDAE Senior Researcher Kevin P. Gallagher and Colombia University economist Jose Antonio Ocampo offer a critical analysis of the IMF's new view on capital account liberalization and the management of capital flows. The article, “The IMF’s New View on Capital Controls,” appears in India's Economic and Political Weekly (see here).

In the 1970s the International Monetary Fund became an advocate of capital account liberalization, and in 1997 it tried to change its Articles of Agreement to include capital account convertibility among its mandates. In contrast, the IMF embraced in December 2012 a new "institutional view" on this issue. While it remains wedded to eventual financial liberalization, it now acknowledges that free movement of capital rests on a weak intellectual foundation. Gallagher and Ocampo claim that this …

South-South Trade

The Human Development Report (see here p. 46), which was the topic of a recent post, has a great graph on the huge expansion of South-South trade, when compared to North-South and North-North trade, in the last decade.
As one can see, the share of North-South trade in total world trade has expanded at a relatively slow pace, while the share of South-South trade has exploded. The obvious counterpart is the collapse of North-North trade.

I had a teacher that used to say that if someone asked you a question about globalization, and you didn't know the answer, just say China, and you'll be right a third of the times. So let's say China explains what is going on in South-South trade. [China entered the World Trade Organization (WTO) in 2001].

Troika Kleptocracy

From the Guardian (see here):

"The imposition of a levy on savers in Cypriot banks marks a new turn in the European crisis. Savings of over €100,000 will be subject to a 10% tax, and those under €100,000 one of 6.7%, although it's reported these levels may change. The raid has been instructed by the "Troika" – the European commission, the IMF and the European Central Bank – as part of a characteristic "take it or leave it" ultimatum to the Cypriot government. The parliament in Nicosia is being pressed to ratify the deal with the threat that without it there will be no bailout funds and the ECB will withdraw all liquidity support to the stricken banks.

The Troika and its supporters have justified the levy by arguing that the state could not support the debt burden of a bank bailout. But this simply means the debt burden has been transferred from the banks, where it properly belongs, to households, who had no part in their lending decisions.

But it is …

Human Development Index: now and then

The new Human Development Report is out. It compares the 2012 Human Development Index (HDI) with the initial one, from 1990. Norway at the top, and Congo at the bottom of the list. As it turns out, only two countries, Zimbabwe and Lesotho, have seen their index scores fall. The chart below shows several countries (h/t The Economist).
The additional red dot, is the Inequality adjusted HDI (IHDI). Note also that in the case of Western European countries (Norway, Germany, Sweden, France, Italy, Britain) the IHDI is in between the 1990 and the 2012 HDI. So adjusted to inequality the HDI now is better than in 1990. That is not the case for the US. For the methodology for including inequality in the HDI go here.

The largest improvements in the index are Afghnistan (ravaged by a 10 year war with Russia when it started to be measured; and with significant transfers from the US now), China, Iran, India, and Egypt. Left of center countries in Latin America did reasonably well in the last 10 ye…

Growing Indebtedness

I have posted here on growing indebtedness and financialization. The table below comes from Duménil and Lévy's recent book The Crisis of Neoliberalism. As they note (p. 104) in regard to the table, one can see: "the rise of the debts of all US sectors as a percentage of GDP. This growth remained moderate after World War II, from 126 percent in 1952 to 155 percent in 1980, and exploded during the neoliberal decades, up to 353 percent in 2008." Yet, between 1952 and 1980 public sector debt fell from 68 to 37, and the moderate increase was all in private debt. Further, note the explosion of the financial sector debt increasing six-fold in the three decades after 1980. Over the whole period, the financial sector debt as a share of GDP grew by almost 40 times. In their words again: "the indebtedness of the financial sector is a new and spectacular phenomenon, typical of the neoliberal decades."

The dollar has NOT depreciated since the 1970s?

Mike Norman had an intriguing graph a while ago (see here) showing that if one uses the broad, rather than the major currencies, index for the US trade weighted exchange rate, then the dollar did not depreciate (which I prefer to go down, since if you define the exchange rate as the domestic price of foreign currency, as most countries do, up is actually a depreciation). I decided to explore the issue. I reproduce the graph below, putting both indexes together.
Note that these are nominal exchange rates. The broad index, as noted by Mike, actually only depreciates in the 2000s, and overall has not depreciated.

The difference between the two rates are the countries that are included in the respective indexes. In the broad index there are 26 countries (one is not a country really, the Euro-area), while the major currencies index includes only 7 currencies, which are traded widely outside of their home country, namely: the euro, Canadian dollar, Japanese yen, British pound, Swiss franc,…

Conflict, Inflation and Income Distribution

Fears of inflation have been misplaced, since there is little evidence that without wage resistance, which depends on the bargaining position of workers, there could be systematic inflation pressures. Last time that workers tried to push back and increase wages was in the 1970s, in which labor’s stronger position, and employers’ resistance to workers’ demands, resulted in high levels of industrial conflict.

The graph below shows the number of strikes, using LABORSTA data, and inflation, from the FRED database, and shows that the decrease in inflation has been correlated with lower levels of work stoppages.
That’s is why higher commodity prices in the 1970s, including the oil shocks, led to high inflation back then, but has had a marginal impact this time around. This also suggests that the low inflationary pressures in recent times – Bernanke’s Great Moderation – have less to do with Central Bank ‘credible’ policies than with the attack on unions and workers’ rights. It also suggests…

Sraffa and the Marshallian system

(Sraffa circa 1976)
G. L. S. Shackle argues in The Years of High Theory that ‘there began in the mid-1920s an immense creative spasm, lasting for fourteen years until the Second World War, and yielding six or seven major innovations of theory, which together have completely altered the orientation and character of economics’ (Shackle, 1967, p. 5). However, by 1967, the two most important developments of this period—Keynes’s principle of effective demand and Sraffa’s criticism of the marginalist theory of value—were rapidly fading from the main corpus of mainstream theory.

The relative ease with which neoclassical economics reasserted its main conclusions is, in fact, explained by Shackle’s account of those years. First, Sraffa’s critique of the Marshallian theory of value is seen only as a step in the development of the theories of imperfect competition by Joan Robinson and Edward Chamberlin. Second, Keynes’s General Theory is seen as stating that unemployment results from the existe…

Human Drivers of Environmental Change

Within the social sciences there is a growing consensus that human social processes, in a dialectical complex interrelationship with the environment, are the primary drivers of destructive ecological change. A broadly shared framework of idiosyncratic ideas and understandings has been formulated to assess the degree to which the genus, and the species, of spatial practices in, the capitalist world-system has ensued prodigious modifications of the global ecosystem. Palpable cognitive perceptions, along with a priori assumptions, of the causes and outcomes concerning the bio-synthetical facets of social organization have been articulated—amplifying intelligible explanations and empirical testing of what perceived biophysical characteristics contribute to environmental transformations.

Competing paradigms regarding human-environment interactions have been constructed. Despite their intellectual fragmentation, these perspectives are materialist in essence, since they elucidate the degree …

ECB anti-inflation policy effective in Germany?

Roberto Frenkel published an op-ed in an Argentine newspaper (here in Spanish) in which he says that while anti-inflation policy by the ECB in Spain was ineffective, but "the same anti inflation policy of the European Central Bank was effective in Germany. There it had an important component of cooperation. The Bundesbank participates in the negotiation of wage increases with the unions." The idea that the ECB has been effective in Germany is peculiar, to say the least.

One of the most criticized elements of German policy, at least by heterodox authors like Jörg Bibow for example, is the wage restraint and fiscal austerity. As he says (p. 20):
"With domestic demand persistently 'sick,' thanks to unconditional austerity and wage restraint, exports were Germany’s lifeline and sole—albeit cyclical—engine of growth. Protracted stagnation in Germany meant a correspondingly easier 'one-size-fits-all' ECB stance for Euroland, far too easy for the periphery, wh…

James K. Galbraith on "Inequality and Instability: What's Ahead for the World Economy"


Gotta love empirical evidence supporting

The proposition that data has a liberal bias [ht/, of course to Matias for the notion, and to Chris Hayes (Up with Chris Hayes) for the image. Link to research paper here]. In this graph, the blue line is conservatism as measured by the AEI House of Representatives Conservative Rating, and, drum roll please, the red line is actual, self-described, conservative level of, gasp, conservative voters. Clearly way more liberal, and increasingly so, than the Cipolla-idiots they elect.

How a Post-Keynesian Economist Became a Poster Boy for Controversy


Reasonable liberals and conservatives, unreasonable economics

The ambiguously liberal/conservative duo, Joe Scarborough and Jeff Sachs, self-denominated reasonable (what Krugman refers to as 'serious' people), suggest that we need austerity in their WAPO op-ed. Forget for a second the inconsistencies of Scarborough, the conservative in the duo. What I find incredible is that Sachs continues to push the fiction that he is a liberal in the American sense of the word, meaning progressive or lefty, rather than a right wing neoliberal.

Let's not forget that Jeff Sachs is Dr. Shock Therapy,* a doctrine that suggested that budget deficits should be cut to control inflation, and that deregulated markets would promote growth and development, and that he applied in Bolivia, Poland and Russia, among other countries. The collapse and failure in these countries foreshadowed the failures of the so-called Washington Consensus. Forget also the institutional problems Sachs had regarding his advice in Russia [note that he did not have the same legal …

Esping-Anderson's Welfare-State Typology, Social Stratification, and Unintended Consequences

Debates on the welfare state have centered on the degrees to which certain policy measures ensue reductions in poverty and inequality. Contrary to popular belief, however, welfare state institutions have empirically shown to be less than ideal. Using Esping-Anderson’s Welfare-Type Typology, we examine the degree to which welfare states have shaped social stratification, with special attention to the role of gender as a social location affecting social welfare outcomes. We also assess what other social forces are crucial, particularly regarding the nature of gender relations.

The ‘liberal’ welfare-state is constituted by a high degree of ‘commodification,' in which basic access to material necessities are determined by the extent to which an individual participates in the labor market and is rewarded by labor-market outcomes.  The ideology is that a high degree of state interference in the market economy, such that various human needs, like access to health care, are socialized, n…

Neoliberal Theory of Society

Neoliberalism has been one of the most discussed topics of the 21st century. In many respects, the concept has been used as a ubiquitous catchphrase conveying a sense fundamental transformation of various dimensions of social life. It is espoused that given the intensification of integration, through the proliferation of capital mobility and the aggrandizement of transnational corporations (TNC’s), countries are forced into ‘prisoner’s dilemma’ type situations in which the capacity for progressive reform along Keynesian lines is limited, if nonexistent. The assumption is that the capacity is strained to  sustain welfare-state institutions. This culturally hegemonic social construction is nothing but an ideological mask; the foregone conclusion is a self-fulfilling mythology. An excellent paper that expounds this is Simon Clarke's 'The Neoliberal Theory of Society" (see here).

In general, neoliberals contend that financial liberalization and privatization guarantee the most…

Property rights and the Industrial Revolution

I have discussed here a few times (herehere and here, for example; last one by Cesaratto) the role of institutions in the process of economic development. Within the mainstream the dominant view is that property rights are the essential institution for promoting growth. I only now came across the excellent paper by Julian Hoppit.* He says:
"Such views of the interrelated importance of property and the rule of law have led to major interpretations of the interplay of Britain’s economic, social and political histories, including that secure property rights were a vital foundation for the first industrial revolution. Yet property was often heavily taxed, frequently expropriated and, exceptionally, eradicated through redefinition. Such vulnerabilities did not diminish after the Glorious Revolution, they increased—mainly because parliament now met annually, had greater sovereign power than earlier monarchs and legislated prolifically regarding property. After 1688, Britain’s econom…