Showing posts from October, 2012

What's the deal with MERCOSUR/SUL?

First there is the issue of whether it should be called MERCOSUL in Portuguese or MERCOSUR in Spanish. More people speak Portuguese, but more member countries speak Spanish. But that is not a real problem. The problem that almost nobody understands is that it is a Free Trade Agreement (FTA). While MERCOSUR/SUL is an alternative to the Free Trade Area of the Americas (FTAA) in the sense that it excludes larger integration with other regions, and the US in particular, it is a Free Trade Agreement (FTA), and was part of the neoliberal logic of integration that came to dominate in both Argentina and Brazil in the 1990s when the main agreements were signed. Per se the treaty is not better than the North American Free Trade Area (NAFTA), and the main advantage is that, given that the initial asymmetries between Argentina and Brazil were smaller than between Mexico and the US, the negative effects were also less significant.

There is little connection with the logic of integration that was d…

Teaching macro after the crisis

Wendy Carlin and David Soskice have an interesting post at on "How should macroeconomics be taught to undergraduates in the post-crisis era." They explicitly follow, as in their manual, a New Keynesian framework. Which is an ISMP model with price rigidities, which are incorporated in a slow adjusting Phillips curve with imperfections (they refer to it as the ISPCMR model). Also, they add the financial system. I should make clear that in many respects it is an improvement on some of the newer manuals around, which since the 1990s have given less attention to the possibilities of crises, and have emphasized long term growth (presenting the Solow model in the initial chapters).

From a methodological point of view I would also agree with the notion that "undergraduates need a unified integrated model through which they can understand the major business cycle events of the past century and see how economic theories and policy regimes have evolved in response to the…

Scenes from the Class Struggle

Dean Baker recent critique of Krugman is right on the mark (see the K-man reply here; yes he agrees with Dean, so nothing to see here really). What Dean suggests is that this (the 2007-9) recession was not a typical financial crisis and the financial sector is not precluding the recovery. And consumption is not being held by debt deleverage, being at below peak, but still quite high levels. Dean suggests that only government spending and exports would allow the economy to get out of the hole now.

As much as I agree with Dean that we need more government spending (I'm more skeptical about exports and the need for a devalued dollar, but that's a different story), I think that there is something to be said about consumption. Dean is looking at consumption as a share of disposable income, and measured that way consumption seems fine. However, when you look at the data on consumption expansion (at the BEA here) you see a few things. First, consumption is not consistently growing ab…

Graph of the Day: Frequency of Banking Crises

The graph below, from Alan Taylor's recent paper shows the frequency of banking crises around the world.

As you can see in between the Great Depression in the 1930s and the 1980s, with the beggining of financial deregulation there are NO banking crisis. As Taylor (p. 2) notes: "none [banking crises] at all occurred from World War 2 until the 1970s."That's how effective the regulation of the 1930s and the capital controls of the Bretton Woods era were.

PS: Any similarity with the graph on income inequality, that decreases after the Great Depression and grows after Reagan too, is NOT a coincidence.

The standard commodity and the labor theory of value

In a previous post I promised to deal with Sraffa's standard commodity (chapter IV of his Production of Commodities by Means of Commodities, PCMC). So here is a brief and simple explanation of this somewhat arcane topic. The standard commodity is basically a more developed version of Ricardo's corn model.

Ricardo, remember, wanted to explain the rate of profit, to show that tariffs on corn (not corn, grain imports really) would reduce the rate of profit, and as a result would be detrimental for capital accumulation (which was based on profits for him). To determine the rate of profit he needed to obtain the prices at which commodities were bought and sold. Yet, to get the prices he needed the uniform rate of profit earned on the production of those commodities.

His solution in the Corn Essay of 1815 was brilliantly simple. Assume that the economy produces corn by means of corn seeds and labor. So the total output consisted of corn, the wages paid to workers were also in corn,…

First issue of ROKE will be published soon

The inaugural issue of the Review of Keynesian Economics will be published by the end of the week and will be available here. Here is the 'Manifesto' (Economics and the economic crisis: the case for change) of the editors (Thomas Palley, Louis-Philippe Rochon and yours truly). The papers in the first issue are by Sebastian Dullien, Alfredo Calcagno, Gennaro Zezza, Robert Pollin, Laurence Seidman, Philip Arestis, Hassan Bougrine, Aldo Barba and Massimo Pivetti.

Where is Waldo?

Several people asked me where the New School History of Economic Thought Website, developed by Gonçalo Fonseca with the help of Leanne Ussher, is now. As it turns it is still around here (h/t Humberto Barreto, from the also essential History of Economics Society). Enjoy!

PS: I should say it's a great resource, not just for teachers/students, and it should be preserved. The New School Economics Department, HES or the European Society for the History of Economic Thought (ESHET) should try to get Gonçalo on board and help him keep it alive.

What's the deal with PPP?

In a previous post I suggested that there might some problems with using Purchasing Power Parity (PPP) measures of income per capita, the traditional measure of well-being used by the World Bank, for example. And although some might think that the main problems are basically empirical, my fundamental preoccupation is theoretical (see this paper, which in fact comes from my thesis).

PPP was developed by Gustav Cassel as an extension of the Quantity Theory of Money (QTM) to international matters. The quantity of money determined domestically the internal price level, and the exchange rate was determined as the ratio of domestic and foreign prices (or vice versa depending on how you define the exchange ratio), or in dynamic versions, the change in the exchange rate was defined as the difference of the inflation rates.

Wicksell was very critical of Cassel's theory, as I note in my paper [there were significant personal differences between the two main authors of the Swedish school, be…

Is China Buying the World?

That's the name of the excellent book by Peter Nolan. Part of what he suggests is behind the Chinese success is that the "government has refused to privatize the commanding heights of its economy" (p. 13). In fact, the large role played by the State, in particular State-Owned Enterprises, is clear in the data. According to this report on Chinascope:
"Of the top 500 companies in China, 316 are State-Owned Enterprises (SOEs). They account for 82.82 percent of the total revenue, 90.40% of the total assets, and 81.88% of the total profit of these 500 companies. The top 10 most profitable companies are all SOEs, including three oil companies and five banks." Mind you, Nolan's point is that in crucial industries, for example aircraft (see also James Fallows' China Airborne), US based firms that control sensitive technology (in aircraft there is a symbiotic relation between military spending and civilian innovation) are deeply interconnected with the catch up …

Not so fast, the premature recovery problem

There is a certain brouhaha about the speed of the recovery. John Taylor says financial crises do not lead to slow recoveries (also Michael Bordo here). On the other hand, Krugman (and also Reinhart and Rogoff here) say that slow recoveries from financial crises are the norm. At stake, obviously, whether Romney is right and Obama is at fault for the slow recovery. Don't get me wrong, I would tend to agree that recoveries are relatively slow after a financial crisis, since deleveraging is a slow process.

Yet, that is not the main issue about this debate. The point is that ALL involved agree that the system has a natural (automatic) tendency to move back to the trend. Bordo refers nicely to Friedman's 'plucking' model. He reminds us, how it works:
"Friedman imagined the U.S. economy as a string attached to an upward sloping board, with the board representing the underlying long-run growth rate. A recession, in this view, was a downward pluck on the string; the reco…

Explaining the Sveriges Riksbank Prize and the Post-Modern Mainstream

The so-called Nobels (not original Nobels, and the Nobel family is against them; I tend to dislike the criteria for the winners, which leaves out Harrod, Kahn, Kaldor, Kalecki, Prebisch, Robinson and Sraffa, to mention a few, but not the prize per se, after all Myrdal and Leontief did get it) are out (here for a journalistic account), and it went to Lloyd Shapley and Alan Roth. I won't explain anything about the Gale-Shapley algorithm, which is not my area of research, even though I sat back in the early 1990s in course taught by Marilda Sotomayor who co-authored some papers with both Gale and Roth. My concern is what it means a prize for a matching algorithm and its applications and the current state of economics science.

The algorithm is actually less about matching preferences, even though that is the most common description, than you might think. For example, one of the practical uses is related to matching kidney donors and recipients, andrather than subjective preferences t…

Free Lunch with Paul Davidson at the University of Chicago

If you are near by, do not miss Paul Davidson's talk in Friedman's backyard. The talk is October 17, from 12:00pm to 1:00pm at the Rosenwald Hall, Room 015, University of Chicago (1101 E. 58th Street).

And yes they will provide a FREE LUNCH, brought to you buy the Association of Sarcastic Economists (no, just INET).

Fiscal consolidation, what does it mean really?

There are a few ways you can look at the term fiscal consolidation. Fiscal consolidation is often (in IMF-speak) equated with lower spending and higher revenues, which are policy instruments not outcomes. A more rational way of looking at consolidation is that it is about lower deficits and debt, which are outcomes. The point is that in general it is expansionary fiscal policy (higher spending and lower taxes) that lead to fiscal consolidation (lower deficits and debt), since expansionary policies increase income and revenue.

Hence, lower spending and higher taxes should be properly called fiscal austerity. And austerity, even if you do not follow functional finance, is contractionary. Mind you, it is not just the IMF that confuses consolidation with austerity.

Larry Summers in his recent op-ed on British economic policy says that:
"Britain must change the pace of fiscal consolidation to stand a chance of avoiding a lost decade. Rather than starving public investment, now is the …

Bob Pollin's new blog

Yeah, a new blog! No really, since there are lots of blogs, but few that are this promising. From Bob's first post:
Yes, another blog is now being launched into the world as I type these words. Does the world really need yet another blog? Obviously, there are lots and lots of them already out there—many, many bad ones, but some good ones as well. There are even lots of good ones out there already dealing with economics and economic policy, which is the focus on this blog as well. So why take up more cyperspace with this blog, on top of all the other ones already going strong?

The aim of this blog will be to develop, extend, and debate the themes that I present in my new little book, Back to Full Employment. In my view, creating a full employment economy is absolutely crucial to creating a decent society—that is, a society in which everyone has the right to earn a reasonable living through their own efforts or the efforts of family members and friends. It’s that simple a point. But …

The last Marxist? Or shortchanging Hobsbawm

According to The Economist, Eric Hobsbawm, who has just died on October 1st, was the last of the Mohicans, I mean Marxists. Its news to me. In my view, the surplus approach which was brought back by Sraffa and builds on Marx is the ONLY coherent economic theory left standing. Marginalism (i.e. neoclassical economics) is nothing but a profession of faith, after the capital debates.

Among other things, because there is a role for historical and institutional analysis in the surplus approach, related to both the theories of distribution and accumulation, the work of Hobsbawm and other surplus approach historians is essential. The obituary was very thin on his contributions to our understanding about key issues in capitalist development.

The review of his contributions in The Economist's obituary was typical of what was written in the press (see also here; the exception here). A lot about his life, and range (yes I know he liked jazz, who doesn't?!), but his research …

Heterodox Central Bankers on Debt Deleveraging

Arturo O'Connell is an advisor to the president of the Central Bank of Argentina. He has not given a talk at the last conference, but here is his recent talk "The Challenge of Deleveraging and Overhangs of Debt" at the Institute of New Economic Thinking (INET).

Heteredox Central Bankers and Systemic Crisis

Anwar Shaikh's talk at the Central Bank of Argentina is now available at Revista Circus (h/t Alejandro Fiorito). Anwar's talk, as suggested before, looks at the current crisis from a long term perspective suggesting that this is the first of the 'depressions' of this century, a phenomenon that is recurrent in capitalist societies.

Heterodox Central Bankers and Microcredit

Jayati Ghosh's presentation at the Central Bank of Argentina was a harsh critique of microcredit, which according to her has "gone from hero to zero" in less than a decade. Jayati relies on Bateman and Chang recent critique of microfinance, which suggests that microfinance is actually a barrier to economic growth and poverty reduction. A lot of the microcredit experience in India resembles a loan shark operation, with very high rates and heavy penalties, and is part of a broader drive to liberalize financial markets. It is important to note the perverse effects that fads in economic development might have on policy making.

China and Latin America

Back in the late 1960s and early 1970s the topic in economic development was the so-called Brazilian Miracle. Rates of growth were a staggering 7.5% on average, and in the last phase of the boom were in the two digit level. Forty years later the Brazilian economy is far from that kind of performance. Only the Chinese can boast such a miracle (at least so far). The graph below shows the relative performance of China with respect to both Argentina and Brazil from the 1950s until 2009.
The chart shows that until 1980 Brazil income per capita grew slightly faster than China, while Argentina did basically at the same rate, and both Latin American countries were considerably wealthier than China. By 2007 China's income per capita had surpassed that of Brazil and was approaching fast that of Argentina. Also, it is clear that in the 2000s the comparative performance of Argentina was better than that of Brazil.

These measures are with Geary-Khamis Purchasing Power Parity (PPP) 1990 dollars

South facing unfavourable global conditions

By Ylmaz Akyüz

The high-growth performance of many developing countries in 2003 to 2008 and then their quick recovery from the 2008-9 global financial crisis was largely due to favourable external conditions, including the policies in developed countries. (This was analysed in the previous issue of South Bulletin). However, these conditions do not exist today and in fact the global conditions have turned unfavourable. Hence developing countries are now facing serious vulnerabilities and risks to their economic situation, with each category of countries facing their own specific problems. Developing countries have to consider changing their growth and development strategies, in light of the changing global situation.

Read the rest here.

Employment improves, but not much

The BLS Employment Situation Summary shows that 114,000 jobs were created, not a particularly big number, and unemployment fell to 7.8%. It is sort of good news that the employment-population ratio increased by 0.4 percentage point to 58.7 percent, since it had decreased in the previous two months. Yet, the overall trend in the employment-population ratio for this year has been flat.

Heterodox Central Bankers: Kicking Away the Ladder Too

Let me briefly comment on two additional and interrelated presentations at the Central Bank of Argentina's annual conference. Two of the presentations were important in dispelling the myth that central banks were historically only concerned with inflation, and not particularly relevant for economic growth. Jane Knodell presented a paper on the evolution of the US banking sector from the late 18th century up to the Civil War, including the First and Second Banks of the United States, which were in many ways like the Bank of England a quasi-central bank.
Jane's presentation very clearly shows that the main role of the First Bank of the United States was as a fiscal agent of the federal government, its liabilities used to collect revenue and meet federal payment obligations, including debt service, a similar role to the Second Bank. More importantly, she concludes that the closing of the Second Bank by Andrew Jackson had a positive effect on growth, since the evidence suggests t…

Heterodox Central Bankers

The annual conference of the Central Bank of Argentina was held this week. The theme was the role of the Central Bank in the process of development. Jamie Galbraith, the actual author of the draft of the Full Employment and Balanced Growth Act, also known as the Humphrey-Hawkins Act, which gives the Fed its triple mandate of full employment, growth, and reasonably stable prices, opened the conference after the talk by the president of the bank (the video of Jamie's talk is available here; h/t Revista Circus), Mercedes Marcó del Pont. Jamie warned against falling into the trap of assuming that the crisis has only one cause, and was very pessimistic about the possibilities of a more rapid and vibrant recovery in the developed world. Phil Arestis (presentation here) closed the conference, with more emphasis on regulation issues, and his assessment was equally pessimistic. If the policies of central banks, in particular the ECB, and the austerity measures in the developed world are n…