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Showing posts from May, 2011

Too many contradictions, not enough cumulation

In 1996, if I'm not wrong, there was a conference at the New School in honor of David Gordon, who had just passed away.  The late Andrew Glynn, gave a very nice talk, but he said something that left me uneasy.  For him, the NAIRU (Non Accelerating Inflation Rate of Unemployment) was our concept, meaning by our radical economics' idea, not mainstream's idea.  The point was that the NAIRU, in contradistinction to Milton Friedman's natural rate, does not imply full employment.
The NAIRU does suggest that output is supply determined, and that expanding demand beyond that level is inflationary, but the fundamental reason is that after that the bargaining power of workers increases and leads to wage-price spirals.  This could happen way before the economy is fully utilizing its productive capacity, and would depend on social factors like the relative strength of the trade unions, for example.

While that is correct, I noted, after the conference, that this still meant that d…

More on public debt and the rate of interest

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An important point in the conservative (sound finance) argument against the increase in public debt, and the need for fiscal adjustment is that higher debt-to-GDP ratios would eventually lead to higher real interest rates.  In other words, the increase in debt would imply that economic agents would demand remuneration for holding government bonds.  The figure below shows the correlation between the change in public debt and the real rate of interest on bonds, between 1981 and 2009.


The result shows that an increase in the debt-to-GDP ratio of 1% leads to an increase of the real rate of interest on bonds os 0.07%.  In other words, the effect is in economic terms insignificant.  Much ado about nothing.
PS: As Nate Cline and Franklin Serrano kindly noticed, causality most likely runs from the rate of interest to debt.  Sure thing; the point here is just to note that even if the conservative point was correct, the actual effect would be insignificant.

Debt dynamics for dummies

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Krugman again does a great job showing that the risks of explosive debt are way overblown.  As he says:
"So even with substantial deficits, the pace of long-term budget worsening is very slow." It is not difficult to understand debt dynamics.  The ratio of debt to income (GDP) is a measure of the capacity to repay debt.  If the economy grows faster than debt, the debt-to-GDP ratio falls.  GDP grows with demand expansion, and debt grows at the pace of the interest on the debt.  In other words, if the economy grows faster than the rate of interest, then the debt-to-GDP ratio will fall even if the government runs deficits.

The graph below shows the growth rate and the real rate of interest on government bonds for the US since 1990.  As it can be seen, since 2003, with the exception of the Great Recession, the rate of interest has been below the rate of growth.



The debt-to-GDP ratio has only increased (see graph below), because the crisis has caused significant deficits to accum…

Are the Latin American Economies Overheating?

The International Monetary Fund (IMF) in spite of all the talk about reform is pushing for fiscal adjustment around the world.   The IMF argues overheating in the developing world, particularly in China and Latin America, and excessive debt accumulation in the developed world requires fiscal adjustment to reduce the risks of inflation and debt default.

The IMF has suggested in their last Regional Economic Outlook Report that the Latin American economies that have recovered swiftly from the global financial crisis may be at risk of overheating. Read the rest here.

It's the model stupid!

Brad DeLong, that together with Krugman has been a force for sanity within the mainstream, arguing for more fiscal expansion, shows why we need heterodox economists.  He says in a recent post:

This is a bad time to be an economist. If you were fresh from the womb and had no past opinions to defend, if you had never said anything notable before, it might be a fine time to be an economist. If you are one of those soap-opera characters who has complete amnesia and no memory of anything that they ever said or did or any intellectual position they took before January 1, 2010, it might be a fine time to be an economist. But for the rest of us--we who are now looking back at our opinions and analytic judgments and statements and pronouncements of the past 15 years and thinking: "how could I ever have been so stupid; how could I have missed so much?"--it is a bad time to be economist? Four years ago we economists were writing learned papers about the "Great Moderation": ab…

Who will succeed DSK?

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There is a lot of fuss about who should be the next managing director of the IMF. The French have held the position for more than 30 years, and a European has always been at the helm of the IMF. Thus, the voices of protest for a broader representation, more transparency and a democratic process have been raised. Raghuram Rajan, former chief economist at the IMF, has suggested (subscription required) that we need a technical/market economist rather than a politician running the Fund.

“The fund is designed to push tough policies to straighten out countries that have mismanaged finances, not win a popularity contest. When it colludes with politicians to propose politically palatable programs, the IMF fails in its proper role of reforming a country.”
Interestingly enough the idea is that good policies are painful ones. The sadomasochistic vein in mainstream economics runs deep. Rajan means that the IMF is needed to impose fiscal contraction, and it should be independent from politicians,…

Krugman on manufacturing deficits

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 Krugman correctly points out that depreciation has had a role in the reduction of the manufacturing trade deficit in the US (above).  However, he forgets to say that the recession was also instrumental in reducing the deficit.  While he is correct that those that are afraid that depreciation would lead to the collapse of the dollar (a hysterical exaggeration), and do not see the positive role of a depreciation, it is also true that the reduction of the deficit is not all good news. A reduction that results from a recession is hardly good news.

Note also that it is important to explain why the manufacturing sector is key for the economy. Nicholas Kaldor used to argue that it is manufacturing growth that drives productivity change (and that productivity in agriculture and services is derived). In that sense, as I noted before, even though employment in the sector have shrunk and the trade balance in the sector has been perennially negative, the US is still the leading innovator in the…

The meaning of heterodox economics, and why it matters

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Heterodox economics is often defined as potpourri of of schools, too many to mention. Further, most of these heterodox schools are defined against marginalism (or neoclassical economics, which is also a fragmented school of economic thought).  In this sense, the heterodox camp is defined in a negative (against orthodox) and fragmented (depending on what aspect of orthodoxy is contested) way.  I think that is a counter productive approach, and that heterodoxy should be seen as a set of principles.  A positive (in its own terms) and unified (in the sense of the minimum set of propositions that are universally accepted) definition of heterodoxy is necessary.

Two things are central from my point of view.  First, heterodox economists are concerned with the amplified reproduction of society, and this implies that the production and distribution of the social surplus is central for their theories.  This is part of a tradition that harks back to classical political economy.  The determinanti…

Deindustrialization and American Hegemony

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Manufacturing jobs have declined precipitously in the United States since the late 1960s. As the graph below shows they fell from 28% of total employment to 10% last year. The decline is continuous, and, one should add, precedes NAFTA and other Free Trade Agreements, (FTAs) which are often associated with the process of deindustrialization in the US. That the topic is old should be highlighted by the fact that the classic on the subject is Barry Bluestone and Bennett Harrison’s book published in 1982.
However, if one looks at the absolute number of manufacturing jobs, rather than their share in total employment, a slightly different picture emerges. First, manufacturing employment grows up to 1979 (peaking at around 19 million jobs). In other words, the fall in the manufacturing employment share from the 1960s to 1979 is fundamentally the result of a rate of employment growth in the manufacturing sector lower than in the economy as a whole. From 1980 manufacturing employment basicall…

Goldman and the satanic derivative mills

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Great piece by Matt Taibbi, which shows two important things. First, despite all the talk about the sophistication of the mathematical models behind the creation of derivatives, the whole thing was pretty trivial.  According to Taibbi the infamous Timberwolf deal (the sh**ty one): (...) was built on a satanic derivative structure called the CDO-squared. A normal CDO is a giant pool of loans that are chopped up and layered into different "tranches": the prime or AAA level, the BBB or "mezzanine" level, and finally the equity or "toxic waste" level. Banks had no trouble finding investors for the AAA pieces, which involve betting on the safest borrowers in the pool. And there were usually investors willing to make higher-odds bets on the crack addicts and no-documentation immigrants at the potentially lucrative bottom of the pool. But the unsexy BBB parts of the pool were hard to sell, and the banks didn't want to be stuck holding all of these risky pie…

Honest economists and other unicorns

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So Dean Baker just nailed Greg Mankiw.  Bush's Council of Economic Advisors's chairman (yep he was part of that economic team) asks three questions in his NYTimes column.  Namely:
1) How long will inflation expectations remain anchored? 2) How long will the bond market trust the United States?  3) How long will it take for the economy’s wounds to heal?  The reply to the first (I changed the order) is pretty good, in part because it dismisses the whole exaggeration about the role of expectations (what people think you think they might think will actually happen).  Also, and more importantly Dean emphasizes that wages have been subdued (to say the least; and one might add with unemployment at this level and years of weakened unions no chance of recovery anytime soon), and the only source of inflationary pressures are higher commodity prices.  He elegantly puts aside Mankiw's nonsense about the credibility of the Fed.

The second question is also dealt with the same clear und…

Monetization of debt: what does it do? Krugman and Rognlie on MMT

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Again in a previous post I suggested I would deal with the issue, which seems to be apropos, since there has been a certain discussion in the blogosphere about the so-called Modern Monetary Theory (MMT) approach (see here, here and here). First, I should clarify that the discussion to which I refer tends to conflate two different issues. One is the question that I will deal here, what are the constraints faced by the government in managing its budget, and the approach associated with MMT in this case is basically what used to be called functional finance, a tradition that harks back to Abba Lerner and Evsey Domar, and to which Keynes eventually agreed.

The other issue is related to the causality between money and economic activity, and is part of what in more modern times has been called endogenous money. The debates on this issue are older than the Bullionist/Anti-bullionist and Currency/Banking schools, and in modern times the endogenous money (anti-bullionist-banking) view was de…

There is no public debt problem in the United States

Jamie Galbraith's clearly shows that fears of an American default are exaggerated.  He says:

Let's suppose that the Treasury actually says to the People's Bank of China, sorry, we can't write a check to you right now. Well, in the case of the People's Bank of China, the bond that they hold would become a defaulted bond, but it would still be there. And the Treasury would still recognize its obligation on that bond and would presumably be willing to pay accrued interest on it. The Treasury would probably say, it's going to be a few days while we resolve this, and the People's Bank of China would, in my view, probably do nothing. If I were sitting in the position of a foreign holder of U.S. Treasury securities in that situation, the last thing I would want would be a panic. I would want this problem to go away. And by the way, Standard & Poor's doesn't matter also.

The collapse of the dollar

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Krugman wrote a very sensible post on why the dollar is not a problem (unemployment is). He says:
"Dollar declines haven’t brought woe in their wake in the past: neither the huge decline after 1985 nor the sustained decline during the Bush years — both of them dwarfing anything we’ve seen recently — brought catastrophe; in fact, both were associated with OK economic growth and mild inflation. In some cases, currency declines have caused major balance sheet problems — but that’s because highly leverage players have large debts in foreign currency. US households are plenty indebted — but those debts are in dollars." Worth reading too on the same topic this (full disclosure: I'm favorably biased by what this guy says).

More on income distribution and growth (wonskish)

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Kaldor and Kalecki
A few years back Sam Bowles presented a paper (Kudunomics: Property rights for the information-based economy) at the University of Utah. At dinner he reaffirmed his conviction that Arrow-Debreu General Equilibrium (GE) is compatible with different kinds of behavior and can be a force for progressive economics. Conventional marginalist theory suggests that income distribution is the result of relative scarcities, and, as a result, real wages should equal the marginal product of labor, i.e. labor productivity. When asked how he squares the belief in GE with the fact that wages in the US do NOT follow productivity since the 1970s, Bowles seemed puzzled. And the relation of income distribution and growth remains puzzling for the mainstream and its sycophants.

In the heterodox camp, the discussion has been centered, for the most part, between the so-called Kaleckian and Kaldorian models. First, I should note that from a history of ideas point, the Kaleckian name is a mi…

Is the American economy profit-led?

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In a recent post I showed the evolution of real wages and long-term real rates of interest in the United States from 1950 until now. The figure below shows the real rate of output (GDP) growth for the same period. Between 1950 and 1973 the average (red line) rate of growth was 4.2% and in the subsequent period it was 2.7%. In other words, the change in income distribution dynamics, with a significant slower rate of growth of wages, was accompanied by a significant reduction in the pace of economic growth (we also saw in the previous post that it also went hand in hand with higher real rates of interest).



Many authors (e.g. the late David Gordon), in particular when looking at the evidence post-1970s, argued that the American economy is profit-led. In other words, as profits (some emphasized profit shares while others prioritized profit rates; the profit rate time the level of capacity utilization gives the profit share) expanded, it stimulated investment, and this, in turn, led to o…

What would Galbraith ask Bernanke?

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Jamie Galbraith endorses the demand for transparency in the management of the Fed, which is central to Senator Bernie Sanders's audit bill.  Here is a critical view of the Fed, that does not ask for its elimination, like representative Ron Paul, but public control and accountability of the Fed actions.  He would also try to democratize the Federal Open Market Committee (FOMC) meetings.