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Showing posts from February, 2013


Stiglitz notion that foreign advisors feel superior to the locals, is by no means new. This account of a perceptive Italian Merchant in 16th century India suggests that European did something similar back then.
"The Florentine Piero Strozzi, was willing in 1510 to write of the Muslim merchants of Goa, 'We believe ourselves to be the most astute men that one can encounter, and the people here surpass us in everything. And there are Moorish merchants worth 400,000 to 500,000 ducats. And they can do better calculations by memory than we can do with the pen. And they mock us, and it seems to me they are superior to us in countless things, save with sword in hand, which they cannot resist'."
Sanjay Subrahmanyam, "'Um bom homen de tratar': Piero Strozzi, a Florentine in Portuguese Asia, 1510-1522," Journal of European Economic History, XVI(3).

The IMF and the white man's burden

A quote from Stiglitz, that suddenly felt very apropos:
"It's not fair to say that IMF economists don't care about the citizens of developing nations. But the older men who staff the fund--and they are overwhelmingly older men--act as if they are shouldering Rudyard Kipling's white man's burden. IMF experts believe they are brighter, more educated, and less politically motivated than the economists in the countries they visit. In fact, the economic leaders from those countries are pretty good--in many cases brighter or better-educated than the IMF staff, which frequently consists of third-rank students from first-rate universities. (Trust me: I've taught at Oxford University, MIT, Stanford University, Yale University, and Princeton University, and the IMF almost never succeeded in recruiting any of the best students.)" Joseph Stiglitz

Effects of the possible sequester

We are again close to a fiscal cut deadline, the by now infamous sequestration. This one of around US$ 85 billions in the first year (around 40 billions or so in defense spending), mostly in discretionary spending (10 billion or so in Medicare), accumulating to a total of US$ 1.2 trillions until 2021, which is obviously not what the doctor recommended. Some have suggested that the size of the initial cut is small, around 0.5% of US GDP, and should have limited impact.

Some simple back of the envelope calculations suggest that the effects might be worse than they think. So let's say that the multiplier is between 1 and 1.5, which wouldn't be completely out of line with some measures in the literature. This suggests a fall in output between 85 and 127.5 billions, or between 0.5% and 0.75% of GDP. Assuming an Okun effect of 2, that is that a decrease in output of 2% increases unemployment in 1%, then an increase in the unemployment rate between 0.25% and 0.375% should be expecte…

"From Financial Crisis to Stagnation" Now in Paperback

Tom Palley's book From Financial Crisis to Stagnation is now available in paperback for only US$18.47.

This is what some people have said about the book: "Thomas Palley has provided a penetrating analysis of the Great Recession, the weakness of the policy response, and the role of economic ideas in both. If we are to avoid the Great Stagnation - and build a more equitable and sustainable economic future - economists and policy makers must fundamentally change the way they think about economics and politics. Mr Palley points the way." Ron Blackwell, Chief Economist, AFL-CIO
"Thomas Palley's carefully argued study combines an acute critique of conventional economic thinking with thoughtful and stimulating proposals to fix America's broken economic policies." Thomas Ferguson, University of Massachusetts, Boston, and Senior Fellow, Roosevelt Institute
"In the depths of the Great Depression, John Maynard Keynes wrote that 'nothing is required, and …

Unemployment and growth in the euro periphery

Martin Wolf had a few graphs in one of his recent columns that are worth reproducing. The first below shows the growth collapse.
Note that the recovery was very short lived and all rapidly fell into a double-dip recession. And as per Okun's Law, if output falls you should expect unemployment to go up. And indeed up it went.

Greece and Spain breaking the Great Depression like barrier of 25% of the labor force. So that's what austerity does. Back in the 1930s a similar situation is what made anyone that was reasonable Keynesian.

It's NOT just the external conditions

Frankly, it's a bit boring. But every time you show the actual data on Argentina's growth someone says it's just good luck. The terms of trade boom. Data below compares terms of trade in Argentina and Brazil in the same period, 2003-12 (Kirchner-Kirchner and Lula-Dilma).
Not very different, and if something terms of trade improved a little bit more in Brazil (33% against 22% approximately, for the whole period). Note that metallic commodities (Brazil is a big exporter of iron ore) increased more than agricultural goods (both Brazil and Argentina are big exporters of soybean and derived products, for example). So did Brazil grew more than Argentina, which is what you would expect if external conditions determined growth? See graph below.
As it turns out Argentina grew 5.8% against 3.6% in Brazil. Further Brazil has a larger current account deficit. Fiscal and monetary policy were more expansionary in Argentina, and the nominal and real exchange rates more devalued. Let alo…

Growth in Argentina, again

So again, because some didn't get the memo. How 'bad' has been Argentina's performance since the crisis in 2002? Well if you use the numbers put out by Orlando Ferreres, not the government official data, with inflation at around 25% or so, what you get is the graph below.
Note that the average rate of growth in 2003-2012 is about 5.8% better than at any time in the post-war period (in fact, in recorded history). In the neoliberal era the rate of growth was 0.2% between 1976 and 1989, and 1.9 between 1990 and 2002, while in the State-led growth period it was a healthy 3.8%. 'Nough said. These are not opinions. Simply the facts. And no there is NO problem with these measures. These are the data use by the critics of the government.

This is not say that everything is fine in Argentina. But certainly the country does not need a return to the failed policies of the Washington Consensus.

Social history and economic development

Carlo Cipolla noted in his Before the Industrial Revolution that social history is an essential component for our understanding of economic progress. He notes that:
"The history of the professions is an essential part of the story of 'intangible' values. Scholarly prestige, restrictive practices through the enforcement of licensing, relatively high personal income—all these factors individually reinforced each other and in combination made possible the social ascent of the professionals." He suggests that the financial independence of certain professional categories in Europe (lawyers and doctors, for example), when compared with Asia, might explain some of the divergnet paths between the regions. Before, we go down the road of eurocentrism, I want to note the following table from the book.
Cipolla notes that prostitution went hand in hand with the process of economic development. According to him: "in the sixteenth and seventeenth centuries, the two major cent…

Reversal of fortune and settlement colonies

Acemoglu and others have discussed the concept of reversal of fortune, the idea that the areas with high income per capita around the 1500s (basically the areas colonized by Europeans in the Americas and Asia) became relatively poor, and vice versa. The idea is that there is a negative relationship between economic prosperity in 1500 and income per capita today. They suggest that the type of settlement and the institutions built by colonizers explain the apparent paradox.

The idea is that in settlement colonies, were more equalitarian societies were built, institutions protected property rights and led to higher investment and growth (à la North). They use the mortality rates associated to a particular region as an instrument for the type of settlement and institutions built by European colonizers. High mortality rates imply low European population density, more indigenous or African slaves, and more unequal institutions, with less protection of property rights.

It is a clever argumen…

HESA guest speakers

The Heterodox Economics Student Association (HESA) will be hosting three events. If you are in Salt Lake don't miss them.

Friday, March 1, 12pm-3pm
Amitava Dutt, Professor, University of Notre Dame
Peter Skott, Professor, UMASS Amherst
Topic to be announced

Friday, March 22, 11pm-1pm
Anwar Shaikh, Professor, New School for Social Research
Topic TBA

Tuesday, March 26, 3:30 PM-5pm
Prof. Dr. Klaus-Jürgen Grün, Department of Philosophy, Goethe-Universität, Frankfurt
From Hegel’s Idea of Alienation to Karl Marx's "Humanitäre Praxis"

More deflation in Bitcoinland

A while back I wrote about bitcoins, the decentralized digital currency, that has a rule based supply creation process, supposedly to avoid inflation. As I noted, in Bitcoinland, a fictional country that uses bitcoins, everything is imported, and, as a result, prices of goods and services in bitcoins are heavily dependent, if you live in the US, on the exchange rate between bitcoins and dollars.

The graph below shows the evolution of the BTC/US$  US$/BTC exchange rate.

As you can see, beyond the hike in the exchange rate back in mid-2011, now again there is a significant depreciation approciation of the value of bitcoins. Since the beginning of the year the BTC/US$ exchange rate has gone from around 13 dollars per bitcoins to slightly more than 26. That is, prices in bitcoins have increased decerased by a hundred percent in less than two months, without a significant change in the supply of bitcoins.

Meanwhile, in spite of all the increase in money supply (dollars that is), prices ha…

Weak expansions: A distinctive feature of the business cycle in Latin America and the Caribbean

By Esteban Pérez Caldentey (guest blogger)*

Over the past three decades Latin America and the Caribbean have experienced lower long-run growth in relation to other regions. The available evidence indicates that Latin America and the Caribbean had the highest levels of GDP per capita growth in the 1970’s decade in relation to other regions, with the exception of East Asia and the Pacific. Thereafter, the region has registered one of the lowest rates of growth of GDP per capita in relation to other developing regions for most of the periods under consideration (1981-1990; 1991-2000; 2001-2009, 2001-2011). Moreover the growth differential between Latin America and the Caribbean and other regions such as the case of East Asia and the Pacific has widened over time.

The most recent period of expansion (2003-2007) does not constitute an exception to this observed trend. During this time Latin America and the Caribbean experienced the highest average rate of growth in over three decades. Th…

Minimum Wage and Unemployment: The Brazilian Experience

The State of the Union address last week raised the possibility of increasing the minimum wage, and a debate on the effects of this ensued. Krugman, among others, has quite correctly pointed out that there is no evidence for positive effects of a higher minimum wage on the rate of unemployment. In other words, a higher minimum wage should not lead to a higher level of unemployment. The classic paper on the subject was written long ago by Card and Krueger.

Below I show the recent evidence (2003-2012) on the relation between minimum wage and unemployment rate in Brazil. As it can be seen, minimum wages almost doubled in real terms (left axis; black line), while unemployment (right axis; grey line), in this case for the Metropolitan area of São Paulo, dropped dramatically (source IPEA Data).
In the Brazilian case, in which median income has not grown too much, the increase in the minimum wage, together with the expansion of the Bolsa Familia, has been one of the reasons behind the impro…

How unwieldy is your bureaucracy?

The economic reporting on the New York Times is not always very sharp, to say the least. If you read Dean Baker's Beat the Press you should know. Their reporting on Latin America is not much better, I should add. So it's no surprise that their reporting on the economies of the region is weak and a bit biased. Simon Romero tells us recently that in Brazil's "once-booming economy stalls, ... [and] 'super salaries, as they have become known here, are feeding newfound resentment over inequality in the nation’s unwieldy bureaucracies." The piece is on the high wages of some public sector workers in Brazil.
Note that Brazil's economy has not boomed since the early 1980s. Yes it grew fast right after the 2009 recession (7.5% in 2010) because of expansionary fiscal policy, but the reversal of the fiscal stimulus has led to less than 1% growth last year. Between 2003 and 2011 average growth rate was 3.9% (3.6% between 2003 and 2012), good but not a booming econom…

A Global New Deal: Three lessons from Argentina

As noted by Richard Kozul-Wright and Jayati Ghosh finance-led globalization has failed. In Argentina we discovered that early on, having applied all the reforms of the Washington Consensus by the early 1990s, only to fail spectacularly in 2001-2. Our crisis was worse than the one during the Great Depression, and preceded the Great Recession by 6 years, which put us on the path of reforming the reforms relatively early. In fact, I suggest that certain lessons from the recent Argentine experience would be valuable for the construction of "a global new deal allowing different economic strategies providing benefits for all."

The first fundamental lesson from the Argentine experience is that foreign debt should be maintained to a minimum, and that negotiations with creditors have to be on the basis of ability to pay, putting the well being of the population ahead of interest payments. It is important to note that the default and restructuring of debt obligations is a normal proc…

Yellen to Washington, D.C.: Fiscal Austerity Slows Recovery

By Thomas I. Palley

Last Monday, Federal Reserve Vice-Chair Janet Yellen gave the keynote speech at an AFL-CIO economic policy conference on restoring shared prosperity.

Dr. Yellen began by noting that the Federal Reserve “is the only agency assigned the job of pursuing maximum employment.” She then went on to acknowledge “the gulf between maximum employment and the very difficult conditions workers face today.” That gulf is the reason behind the Federal Reserve’s on-going actions to strengthen the recovery and why there is continued need for “forceful action to increase the pace of economic growth and job creation.”
Read the rest here.

Fiscal expansion, what fiscal expansion?

The data on Federal spending since 2000 can be a little surprising. The graph below shows real federal government spending since 2000 (blue line). Note that the expansion from 2000 to 2008, from the last year of Clinton to the last of Bush, was of around 35%. The increase from the last year in the Bush administration up to last year, the last in Obama's first mandate, of slightly less than 20%, most of it in 2009.
The problem is that State and Local spending has decreased (red and green), so overall the increase since the recession (2007-8) has not been particularly large. The type of spending is also relevant to understand the effects on the economy as a whole. In the Bush years the biggest expansion was on defense, while in the Obama administration welfare spending has increased the most as a result of the crisis. Mind you, spending on welfare has decreased since the beginning of the recovery, while military spending slowed down, but has still continued to increase.

Lost in translation

Reading a paper by Luigi Pasinetti (2001, p. 153)* on the evolution of Sraffa's thought. There I found this gem from Sraffa's archived (and not published yet) papers:
"It is terrific to contemplate the abysmal gulf of incomprehension that has opened itself between us and the classical economists. Only one century separates us from them: [then the following sentence, here reproduced in italics, is added as a footnote] I say a century; but even ½ a century after, in 1870, they did not understand it. And during the preceding century an obscure process of ‘disunderstanding’ had been going on. How can we imagine to understand the Greeks and the Romans? [then the following sentence, again here reproduced in italics, is added as a footnote] Or rather, the extraordinary thing is that we do understand, since we find them perfect, Roman law and Greek philosophy. The classical economists said things which were perfectly true, even according to our standards of truth: they expressed…

And Now for Something Completely Different

Robert Paul Wolff, Emeritus Professor of Philosophy and African American Studies at UMass, has a great series of posts (still ongoing, first one here) on what he has being doing, which describes the evolution of his research on Marxist economics. In his last installment he says that:
"A good deal of Theology, Philosophy, History, Political Science, Sociology, Anthropology, and of course Economics is devoted to answering ... three questions.

The three questions are:

1. Who Gets the Surplus?
2. How do the Surplus Getters get the Surplus? and
3. What do the Surplus Getters do With the Surplus After They Get It?" This suggests that the surplus approach is actually the unifying theme of social sciences. Seems about right.

PS: Of course modern mainstream economics has abandoned the notion of the surplus, and has tried (still is trying with some degree of success, I might add) to colonize other social sciences.

A New Deal for Global Development

An e-discussion group on development strategies after the Millennium Development Goals (MDGs) co-organized by Richard Kozul-Wright and Jayati Ghosh is available here. They also published a manifesto for a New Deal for Global Development here. There lots of discussions and blog posts (e.g. Butch Montes, Dani Rodrik, and yours truly). Check it out.

Palley on Modern Money Tree (MMT) economics

Tom Palley published a new paper on MMT, available here. From the abstract:
Money, fiscal policy, and interest rates: A critique of Modern Monetary Theory  This paper excavates the set of ideas known as modern monetary theory (MMT). The principal conclusion is that the macroeconomics of MMT is a restatement of elementary well-understood Keynesian macroeconomics. There is nothing new in MMT’s construction of monetary macroeconomics that warrants the distinct nomenclature of MMT. Moreover, MMT over-simplifies the challenges of attaining non-inflationary full employment by ignoring the dilemmas posed by Phillips curve analysis; the dilemmas associated with maintaining real and financial sector stability; and the dilemmas confronting open economies. Its policy recommendations also rest on over-simplistic analysis that takes little account of political economy difficulties, and its interest rate policy recommendation would likely generate instability. At this time of high unemployment, whe…

Heterodox Central Bankers

"Virtually every monetary economist believes that the CB [Central Bank] can control the monetary base and…the broader monetary aggregates as well. Almost all of those who have worked in a CB believe that this view is totally mistaken…" Charles Goodhart (1994, p.1424).
Goodhart, C. A. E. (1994) "What should central banks do? What should be their macroeconomic objectives and operations," Economic Journal, 104, November, pp. 1424-36.

Price controls and horseshit

Argentina has announced that informal price controls will be in place for the next few months. A good thing if you ask me. Yet, you can expect a barrage of criticism about the inefficiency of price controls in the media, and by 'expert' economists to follow. Note, however, that from 1941 to 1946, during World War II, the United States applied a very successful program of price controls. A good description can be found in John Kenneth Galbraith's A Theory of Price Control, in which he describes his experience as Commissioner of Prices.

An interesting story Galbraith used to tell (see here) is that they would have a sign to tell when some industrialist that wanted to hike prices tried to suggest that he would go broke if that didn't happen. They would move their index and middle fingers like the antennas of ants. The story went that this little ant rolled a dung of horseshit up a mound, and when it lost control of it, and the dung rolled down in the direction of the ant…

Seneca, Selma, Stonewall and Haymarket too

In his second inaugural President Obama referred to iconic events in the history of gender, race and gay rights, putting the idea of equality at the center of his agenda. While several pundits were surprised or offended, depending on their political leanings, with the liberalism of Obama’s discourse, and a few noted the momentous effect of pairing gay rights with gender and race, nobody (at least to my knowledge) complained about the conspicuous absence of workers’ rights.
Okay so maybe citing the notorious Haymarket riot and the martyrs of the Knights of Labor was too much to expect from an American president. In fact, Samuel Gompers and the American Federation of Labor (AFL), as it is well known, never had a positive view of the anarchists associated to more combative labor tactics. In part, that’s why while the whole world, knowingly or not, commemorates the Haymarket affair every May Day, Labor Day in the US is relegated to the first Monday of September. But still a nod to labor wo…

How is that confidence thing working for you?

One comic strip is worth a thousand words. Nough said!