Thursday, December 8, 2016

Neoliberalism in the Pampas

Soybean Republic

As promised, here are some brief reflections on the situation in Argentina, which I think is not as bad as in Brazil economically or politically, surprisingly, since Argentina had a balance of payments problem that is completely absent in the increasingly chaotic neighbor, and the left actually lost the election, which was not the case of Dilma (a coup was required to defenestrate her). As I suggested in my talk a year ago (for non Spanish speakers go to this text), the economy would experience a recession and higher inflation as a result of the likely (and effectively adopted) economic package of devaluation and fiscal adjustment.
Figure above shows that inflation accelerated from about 25% to about 40%, later figure from IMF estimates, and GDP moved from moderate growth (2.5%) to slightly less than 2% fall (again IMF estimates). It is worth noticing that many, including some that claim to be somewhat heterodox (in particular when they're not in Argentina), suggested that devaluation was not inflationary, and that it would produce significant growth of exports and lead to GDP growth.

Long term growth of exports depends essentially on the income of the trading partners, and the slowdown in China, the terrible collapse of the Brazilian economy, and overall gloomy perspectives of the global economy suggest that to expect growth from the external economy is wishful thinking. By the way, the notion that the problem is that the nominal devaluation (of about 100%) was not large enough and the real exchange rate is still appreciated (see here, in Spanish, Frenkel suggests that "we reedited the exchange rate lag") is outright delusional. The idea that if you devalue enough a country like Argentina would be competitive not just in the production of commodities, i.e. soybeans, but also in some marginal manufacturing sector, is based on a misreading of the East Asian experience, and the exaggeration of the idea that manufacturing exports respond simply to price signals (the right exchange rate) rather than industrial policy.

Also, there is no reason to expect a recovery next year on the basis of consumption, since real wages are falling, and the unemployment level went up from 7.2 to 9.2% according to IMF estimates. That also implies that private investment is not going to increase (yes, that's called the accelerator, and yes the IMF expects a fall of about 0.5% of GDP in investment).

However, contrary to what you might think all of this was expected. This is less of a surprise for the government that most analysts understand. As I said in the talk linked above, the objective was to get a recession and increase unemployment, reduce the bargaining power of the labor force, and reduce the real wage. That will be the basis of the future stabilization of the economy. Stagnating wages, and a relatively stable exchange rate. For that reason, and to avoid the continuous capital flight, the government did increase the interest rate. And also, since the Obama administration supported this neoliberal government (they are not populists after all) and the Macri administration was willing to do anything the Vultures wanted, Argentina finally returned to the international financial markets, and the external constraint was lifted. International reserves are up, from the low 20s to the 30 something billion.

That implies that even with a current account deficit, which is at a bit more than 2% of GDP (slightly lower than before as a result of the recession), fiscal stimulus would allow for a recovery. Note that this could be done without increasing significantly the governments degree of indebtedness in dollars. There is no reason to borrow abroad to finance domestic spending. But in essence that's what this administration is doing, since they self imposed limits on the ability of the central bank to finance the treasury, which they misguidedly saw as the source of inflationary pressures. The more pressing short run question is whether they will accelerate public investment to promote growth and perhaps have a recovery in time for next year's election (something I suggested they might do in my talk last year). It seems that the degree of fiscal conservatism of this administration (there is no way you can call Prat-Gay Keynesian, even if the term has suffered with semantical saturation; or call the neoliberal Macri government heterodox, for that matter) is so extreme that they would prefer to continue with the recession. And yes, without external expansion, private demand, or government expansion there cannot be any recovery.

There are other more concerning issues with this administration, and I'm not even talking the corruption that concerned so much the critics of the previous government (Macri's name is in the Panama papers, for one, or the fact that his energy minister worked for Shell, and the many other conflicts of interest between the government and private corporations) that are now silent, or the fact that the statistical office (Indec) has also left a gap in the data and has actually increased the uncertainty about the macroeconomic numbers, including inflation (something that critics of the previous government also, correctly, complained about, but interestingly enough they are silent now). I mean the cuts in spending on research and development, and the reversion of the very few initiatives that promoted national technology, like the cancellation of the manufacture of communications satellites, after the launch of two (ARSAT 1 and 2) in the last couple of years. Those were the kind of policies that would have the possibility of leading to some degree of manufacturing export dynamism. But for this government the plan is the return of the old 19th century commodity export model, and if they could reverse the external policy to colonial times (with the US instead of Spain as the metropolis) they probably would.

Sunday, December 4, 2016

On the blogs

Was the 20th century long or short? -- Branko Milanovic on the political (Hobsbawm) versus economic (De Long) dating of the 20th century. I prefer the economic, but not Brad's timing, mine would go from the Great Depression to the oil shock (1929-1973), which roughly corresponds to the Keynesian era

Dealing with the Trade Deficit -- Josh Mason on the lack of need for the US of a favorable trade balance and the role of the dollar, something often discussed in this blog

Trump’s Carrier deal could permanently damage American capitalism -- Larry Summers, and I guess the neoliberal wing of the Dems, agree with Sarah Palin that the Carrier deal is crony capitalism

Friday, December 2, 2016

The Strange Death of Progressive Brazil

Strange indeed

I've been off for a few days for Thanksgiving, as you might have noticed. I visited Argentina, and will have something to say about the situation there in a few days. Here is something I was thinking about what is going on in Brazil, that seems to be in a never ending economic and political crisis. I find the situation particularly concerning for the future of the left in the region.

There is a very nice little book about The Strange Death of Liberal England, (oddly enough, it's also the name of a band) written in the 1930s, when Labour took over as the main opponent of the Tories in parliament, and the Liberal Party of Gladstone, Asquith, Lloyd George and Maynard Keynes became irrelevant and vanished. The book, if memory doesn't fail me (I read it many years ago, when I found a used copy in bookstore in New York; I remember Godley telling me he read it around the time it was published), shows how the divisions on the Irish question and the Gold Standard, together with the rise of a more militant labor force, and new social movements overwhelmed the liberal establishment.

Something similar is happening in Brazil, but in this case, I suspect, the vindictiveness of the right is particularly important to understand the demise of the Workers' Party, that had significant losses in the last municipal elections, including, perhaps more importantly, in São Paulo and in the periphery of that city, where the party was born. One way of looking at the demise of the Workers' Party is to emphasize that it was associated to the corruption scandals of the last few years, in particular those connected to the Operation Car-Wash (Lava Jato in Portuguese) and related to the state controlled oil company Petrobras, as for example the WSJ suggests in the link above.

However, as I noted before, there is little evidence that corruption increased during the Workers' Party 13 years in power. Corruption, as I said then, has a long standing tradition, and is structural, associated to the way the country is managed. By the way, the specific problems with construction contractors, and the state oil company, exactly because they go back all the way to the the 1950s, and in particular, the military dictatorship, indicate that corruption is probably orthogonal to the process of economic development, since up to the early 1980s, Brazil was among the fastest growing countries in the world, up there with Japan and South Korea (nope China and India were laggards back then).

The more recent literature on corruption coming from the Word Bank, tends to suggest that corruption is inimical to growth. However, an older literature tended to suggest, in contrast, that corruption greased the wheels of business and helped promote growth. Samuel Huntington famously argued that: "In terms of economic growth, the only thing worse than a society with a rigid, over-centralized, dishonest bureaucracy is one with a rigid, over-centralized and honest bureaucracy." And no, I'm not in favor of corruption. My point is that you probably don't have a simple linear relationship between corruption and growth.

Besides, as I've also noted before, most measures of corruption are not objective, that is they do not measure the quantitative effects of corruption (money embezzled, etc.), but simply the perceptions. Perceptions of corruption, maybe or not correlated to actual corruption, of course. And one should note that there is always the nagging question of causality. That is, corruption might be the result of lack of development, rather than its cause.

The corruption argument, in spite of its prevalence in the international media, does not explain the collapse of the Workers' Party.* On the other hand, it seems far more reasonable to believe that a combination of right wing resentment, prevalent in the middle class, related to the expansion of social programs, with the acceptance within the party of several elements of the neoliberal discourse, which undermined its support within its base, are at the core of its current problems.

Protests in 2013 started on the basis of legitimate problems related to the cost of public transportation, led by the Free Fare Movement (Movimento Passe Livre in Portuguese). But the protests rapidly broadened the scope of complaints and right wing groups that were against the Workers' Party became more prominent. Note, however, that in spite of the massive protests and the complaints about economic problems, and about corruption, Dilma Rousseff won the elections in 2014, promising to expand the social welfare programs of the Workers' Party. The real problem for the Workers' Party was the post-election volta face, when Dilma appointed Joaquim Levy, a neoliberal economist from Bradesco, one of the largest banks, to the finance ministry, with a plan to promote fiscal adjustment.

Long term persistence of fiscal conservatism was a hall mark of the Workers' Party ideology, briefly lifted during the 2009 crisis with the Plan for Growth Acceleration (PAC in Portuguese). But these views were entrenched, and the experts with anti-austerity, Keynesian (Lernerian to be more precise) views were often marginal. Don't get me wrong, after the initial austerity and the pledge to follow responsible policies (the infamous letter to the Brazilian people), they expanded social spending, and that certainly played a role in economic growth and the increase in tax revenue (hence, the fiscal balances didn't deteriorate), and more so after PAC with increasing public investment. But the ideological notion that fiscal deficits are problematic remained central within the party, and not surprisingly Dilma's economic team accepted the verdict that adjustment was necessary.

The huge recession caused by the austerity policies led to collapse of the economy, which could be and was used to claim incompetence and invent reasons for the impeachment (essentially the criminalization of relatively innocuous and routine policies, the delay in payments to public banks, the so-called 'pedaladas').** Worse, some of the ideas that were discussed during the fiscal adjustment in 2015, like a limit to government spending, are now being implemented. The Constitutional Amendment Project 241/55 (PEC in Portuguese) imposes a limit, for 20 years, on real spending, that is, corrected by inflation. The rule solves a problem that does not exist, that is, it presupposes that the 1988 constitution gave too much in terms of social benefits, that this led to a runaway increase in government spending, that caused both the recent inflation and the lack of growth.*** At any rate, these rules are created essentially to stop progressive policies in the future.

So a combination of the mistakes of the Workers' Party**** and the revanchist rancor of right wing opposition, with significant support in the middle class, explains the incredible collapse of the Workers' Party. Their (they who, you ask; the opposition consolidated in power through the mediatic-juridical coup) work is not over yet, and the question is whether the judges and prosecutors associated with the Car Wash Operation will decide to jail Lula -- on the basis of information obtained from plea bargains with self-confessed criminals, but without any material proof of guilt, at least so far -- in order to preclude his possible return as a candidate. The abuses of the judiciary system are by now well documented, not just regarding the jailing of accused people with no formal ruling (it seems that you are guilty until proved innocent now) and the use of the media to humiliate them, but also the fact that they explicitly target the Workers' Party with no investigation of Social Democrats (yep in Brazil the right wingers call themselves social democrats), which have been caught also in the same types of accusations.

There are many implications of the current events in Brazil. The corruption scandal has not only precluded any kind of serious discussion about public investment, since the modus operandi of government procurement rules in Brazil required several of these practices that are under scrutiny, but it led to a consolidation of a consensus view that fiscal deficits are by definition the instruments of corruption. Further, the crisis has almost certainly destroyed the possibility of using Petrobras as an instrument of industrial policy, to buy specialized equipment and so on (my guess is that right wing groups will at least try to privatize it). Note that in the United States corruption is as endemic as in Brazil, even if in many cases it is sanctioned by law (that is, it is not illegal, even if it is morally unacceptable). And also the US keeps its ability to do industrial policy through the defense budget.

The electoral chances of the left in Brazil are incredibly diminished. I'm skeptical both about the possibilities of Lula, if he escapes the inquisitorial witch hunt, and more so about the possibilities of the splinter from the Workers' Party, the Party of Socialism and Liberty (PSOL in Portuguese), which looks very much like PT 30 years ago. With no channel for the use of the public machine to promote demand growth or to promote technological upgrading through some sort of industrial policy, even in the hands of a right wing conservative government, the future prospects for the country are grim. Without a left of center party capable of winning the elections and using the state apparatus to promote a modicum of welfare redistribution, by increasing social spending and the minimum wage as the Workers' Party did, Brazil seems condemned to maintain its long history of social inequality. And this does not bode well for the rest of the left in Latin America.

* Note also that while there is no evidence of direct involvement of Dilma Rousseff in any of the corrupt deals in Petrobras, congress or any other place, that is not true about her vice-president now in power.

** Something similar is taking place in Argentina, the criminalization of the decision about the exchange rate by the central bank. More on that when I post about Argentina.

** Of course recent inflation has no relation to excessive fiscal expansion. In the last couple of years it went hand in hand with a recession and fiscal contraction. The behavior of wages and the exchange rate is considerably more important. And if the recession caused by fiscal contraction has not convinced you about the fallacy of "expansionary contractions" (I assume you don't cade for evidence) nothing will.

**** On this one should also add that the Workers' Party members always complained about corruption, as a moral issue, and suggested that their government was going to be different. A huge mistake, since the problems with corruption, that should be combated don't get me wrong, are structural. That is, they are intrinsic to the way the country is governed, and it was obvious that a Workers' Party administration would not be immune to it, and would need to have mechanisms to deal with it and try to reduce it.

Sunday, November 20, 2016

On the blogs

Roundup: Trump’s Harmful Proposals for Replacing Health Reform -- Center on Budget and Policy Priorities on what to expect about health care reform

Three ways to make sense of the dollar in uncertain times -- Barry Eichengreen predicts the dollar will fluctuate (btw, everybody seems pretty certain the Fed will hike interest rates quite a bit, and that fiscal expansion will cause inflation; I'm skeptical about both)

Keeping America’s Promises: The Green-State Climate Agreement -- Frank Ackerman on the Climate Denier in Chief and what can be done about it (State rights?)

Thursday, November 17, 2016

CROWDFUNDING CAMPAIGN FOR THE JMK WRITINGS PROJECT

From Rod O'Donnell

DECEMBER 8, 2016.

THE CLOSING DATE FOR THE CROWDFUNDING CAMPAIGN FOR THE JMK WRITINGS PROJECT.

I thank, from the bottom of my heart, all those who have backed the campaign, with donations ranging from USD5 to USD1,000. Almost everyone has said complimentary things about the proposed edition (‘great idea’, ‘wonderful project’, ‘best of luck’ etc), but far fewer have followed up with contributions.

The bottom line is this. Funds are essential if the edition is to be realized. The people undertaking the large and necessary tasks of word-processing documents and background research need to be paid. All the money raised by crowdfunding will be devoted to document preparation, not to travel for document collection.

It is now time for the many supporters of the project to get serious about whether they want also to be backers and so help make the edition a reality. Time is running out − only about 3 weeks remain before the crowdfunding campaign ends. Recent events have made understanding Keynes’s economics, politics and philosophy even more important.

If you would like to provide material support, please go, before December 8, to

https://www.indiegogo.com/projects/jmk-writings-project-stage-1

This link also gives more information about the project, the campaign and the editor.

Remember the overall aim: to benefit the world by completing the publication of all of Keynes’s writings of academic significance, only about one third of which are presently available.

THANK YOU IN ADVANCE FOR YOUR BACKING OF THE JMK WRITINGS PROJECT.

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

Contact: jmkwritingsproject@gmail.com

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

Tuesday, November 15, 2016

To President Obama and Secretary Clinton: In the name of god, go

Dear Secretary Clinton and President Obama:

On April 20, 1653, Oliver Cromwell spoke these words to the Long Parliament:

“You have sat here too long for any good you have been doing…. Depart, I say, and let us have done with you. In the name of god, go.”

Secretary Clinton, you are rightly being blamed for the electoral tragedy that has befallen our country. The country wanted change and you offered continuity. You prided yourself on the neoliberal economic policies of your husband, President Bill Clinton, which have driven our country into stagnation and despair. Your rejection in Wisconsin, Ohio, Michigan, and Pennsylvania speaks to a greater rejection of the economic policies you, your husband, and your Third Way associates imposed on the party of Franklin Roosevelt.

President Obama, you too deserve enormous blame. You wasted the historic opportunity at the beginning of your presidency to break with neoliberal economics. Instead, you pushed Obamacare with its expensive sub-standard insurance that is punitively imposed on the self-employed. Donald Trump benefited enormously from the premium increase notices that were received up and down the country in the week before the election. And at the end, you pushed the Trans-Pacific Partnership, another neoliberal globalization agreement, which ceded the economic argument to Mr. Trump. Your charm and intelligence are no substitute for the economic change we need, you promised, and then reneged on.

Cromwell’s words apply to both of you. Heed them and be gone.

Sincerely,

Tom Palley

Monday, November 14, 2016

Global Security: Russia, China, Europe and Latin America

Economists for Peace and Security will conduct its 9th annual policy symposium at the Hyatt Regency Capitol Hill in Washington DC today to discuss the economic dimensions of the most pressing global security issues and those facing the domestic economy. Following one of the most unusual presidential and congressional elections in US history, panelists will present ideas for improving prospects for peace, and growth with fairness for all Americans.

Program starts at 9am. Watch the livestream here.

Sunday, November 13, 2016

On the blogs -- Election edition

The Rust Party Belt


The High Price of the Trans-Pacific Partnership -- Dean Baker on the role of free trade deals in the election

Is globalization to blame? -- Chris Dillow on, well, whether it was globalization

The long haul -- Paul Krugman, right that is going to be a disaster, but not very perceptive on how (it's not about the bad things that will happen and Drumpf will be unprepared to deal with; it's all about the predatory behavior of the GOP and the president elect cronies, that will feed on the government machine to further enrich the already wealthy)

On Winsconsin! -- Barkley Rosser on how Bernie would have fared

Map of the Day -- David Ruccio shows how to cross the all red country

Friday, November 11, 2016

The working class joins the cocktail party

The working class elephant in the room

Upton Sinclair famously said that "it is difficult to get a man to understand something, when his salary depends on his not understanding it." Not understanding the results of this election is what the Democratic establishment is trying very hard to do. Many will continues to say that at the heart of the loss are the misogyny, racism and xenophobia of Trump and his supporters, which is real and problematic, but deny the truth that it was the neoliberal free trade policies pushed by the Clintons and Obama that kept people from going to the pools, in particular in the Rust Belt (see here, but also here, which says essentially the same).

Hillary had slightly more votes than Trump (and yes the electoral college doesn't help, but that's not the problem now), but she had less votes than Romney and about 8 million less votes than Obama in 2008 (when some people thought he was a progressive; btw, there was back then a thing called Economists for Edwards, since many progressives thought, correctly, that Obama was a centrist like the Clintons. He ended up receiving a lot of support because he was the anti-Clinton candidate).

As I noted the other day, the neoliberal wing of the Democratic Party is not dead. Now they are trying to get Howard Dean to substitute Donna Brazile (that passed debate questions during the primaries to Hillary), the interim head of the Democratic National Committee (DNC) (a position she holds because Debbie Wasserman Schultz was forced to resign after being caught blatantly helping Hillary's campaign during the primaries). Bernie wants Keith Ellison instead, since he correctly noted that: “the Democratic Party has to be focused on grass-roots America and not wealthy people attending cocktail parties.”

Of course you will hear a lot about how we need serious people to take over the party in these difficult times, and how we need to collaborate with President Trump, and not be obstructionist, and the idea of electability (how did that work with Hillary?) will be brought back in four years. The emblem of that were the comments from Daron Acemoglu that I quoted the other day: "as long as the Democratic Party shakes off its hard-core anti-market, pro-union stance, there is a huge constituency of well-educated, socially conscious Americans that will join in." That position cost Dems the election, but you should not be surprised that this is taken seriously. This is what the party's establishment is trying to do, since their jobs depend on them not understanding that the Dems need the working class, and they do prefer the nice and educated people in their cocktail parties anyway, rather than the uncouth, and in their view, racist, misogynistic, and xenophobic,* blue collar workers.

* Before some idiot suggest that I'm saying no Trump supporter is racist, misogynistic, and xenophobic, yes there are too many indeed, and his presidency will make things worse. But that's not the reason the election was lost, and many of his voters are NOT those things and DO have legitimate economic grievances. And yes, the majority of the working poor actually voted for her (not enough in the Rust Belt), as I noted in my previous post on the election.

Thursday, November 10, 2016

CALL FOR PAPERS: Special issue of ROKE on 'Monetary policy and negative nominal interest rates'


In light of increased unemployment, the absence of strong economic growth and the threat of deflation in many countries, the recent financial crisis led many to expect a shift in monetary policy. Central banks were at the forefront of these changes, by shunning ‘conventional’ policies in favor of so-called unconventional ones. After experimenting with Quantitative Easing, a number of countries have recently officially adopted negative interest rates in the hope of reviving their moribund economies. Today, the Swiss National Bank, the Bank of Japan, the Bank of Sweden and others, have all gone negative.

However, nearly two years after Switzerland adopted the policy in January 2015, there are questions regarding its success, and overall consequences on economic activity. At the empirical level, negative rates did not increase bank lending and has even generated unexpected and perverse effects. At the theoretical level, questions remain regarding the neoclassical/money multiplier model upon which such policies are based.

Finally, on the epistemological level, many questions arise: what monetary policy? What should be its objectives, means, and instruments? What are the challenges that monetary policy must now face? At the heart of this policy debate is the insistence of using monetary policy to stimulate growth, as opposed to the use of fiscal policy. It begs the question of whether monetary policy is still the most relevant policy to use in periods of slow economic growth, or secular stagnation-type conditions.

This special issue aims to make a major scientific contribution to the conduct of monetary policies of negative interest rates. Proposals can be very diverse in nature (empirical, theoretical, and epistemological) and from various theoretical backgrounds. The purpose is to encourage discussion on a very important policy question.

The issue will be co-edited by Louis-Philippe Rochon and Guillaume Vallet. Please note the following deadlines: deadline for submitting an abstract: February 1, 2017; deadline for submitting the final paper is September 1, 2017.

All papers will be subject to a double-blind peer-review.  Please send us a prior email to let us know your intent on submitting a paper. All correspondence should be addressed to guillaume.vallet@univ-grenoble-alpes.fr