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The End of the Euro

The Dean of the British economic journalists, Samuel Brittan, wrote an interesting column (subscription required) on the state of the euro.  The arguments follow closely the book by Christian Saint-Etienne, La Fin de l'Euro.  As I said in my radio interview recently, he thinks that the euro area will continue to muddle through for a long while, making the Greek people pay a terrible price, and that there are significant probabilities that the euro will not survive in the end.

Lorie Tarshis on National Debt

Tarshis was a student of Keynes, and the author of an early textbook (published in 1947, a year before Samuelson's more well known manual), which included the main elements of Keynesian economics (Colander and Landreth discuss the reception of the book here).  One of the last chapters of the manual deals with national (meaning public) debt.  Note that this was written when the debt-to-GDP ratio in the United States was around 120 percent. First, contrary to many economists today, he clearly distinguishes public and private debt, and notices that:
"Since it [the Federal Government] may either impose taxes, or borrow through its control of the banking system, there can be no question of the federal government going bankrupt." Interestingly, at that time, even at the beginning of the McCarthyte Red Scare, he would not imagine the possibility of the debt-ceiling not being raised.  So default in domestic currency is impossible. Further, he argues that:
"Even though a hi…

Who holds the American public debt?

Just a clarification following up my comments on Nick Rowe's post.  Several people are under the impression that the Fed can still monetize debt if the debt-ceiling is not raised beyond the US$ 14.3 trillion limit.  Not the case. Otherwise there would be no default by definition.  There might have been some problems associated with monetization, but not default (see more about monetization here).

Of the US$ 14 trillion of debt outstanding by December 2010, around US$ 5.6 were held by the Fed and other intra-government agencies (Fed holds around US$ 1.6; see Dean Baker's proposal and discussion here).  So if the Fed buys debt, to monetize it, it just reduces the privately held part of the debt and increases the publicly held, but it cannot increase the total amount.  The graph below shows the public, private, and the foreign (within the private) held shares of US public debt.


As you can see, since the Great Recession, the private share increased from around 50% to close to 60%,…

What ended the Great Depression?

Conventional wisdom contends that fiscal policy was of secondary importance to the economic recovery in the 1930s. The recovery is then connected to monetary policy that allowed non-sterilized gold inflows to increase the money supply. Often, this is shown by measuring the fiscal multipliers, and demonstrating that they were relatively small. This working paper shows that problems with the conventional measures of fiscal multipliers in the 1930s may have created an incorrect consensus on the irrelevance of fiscal policy. The rehabilitation of fiscal policy is seen as a necessary step in the reinterpretation of the positive role of New Deal policies for the recovery.

Debt-ceiling limit and double entry bookkeeping

Double entry bookkeeping has been known since the 15th century at least, going back to Luca Paccioli. However, most discussions of public debt in the US assume that there are only liabilities, but no assets. In that respect the quote from Evsey Domar below is instructive:
"President Eisenhower, who disliked deficits and debts, is reported to have said, shortly before he left the White House, that every American baby born at the time carried on its neck a tag indicating its share of the Federal debt. Perhaps it did; but it must have also borne a second tag showing its share of the value of the Federal bonds." The debt clock in Manhattan should be changed accordingly. It’s also a credit clock. By the way it’s interesting to note that Alexander Hamilton would talk not of public debt, but of public credit.  It also should lead to a change in the discussion about the arbitrary limit to debt.  If there are people unemployed and the government can borrow at low rates (and could us…

More on the debt-ceiling limit by Jamie Galbraith

A longish, but incredibly good, interview by Doug Henwood of the Left Business Observer with Jamie Galbraith.  Not only a very clear discussion on the debt-ceiling, including why part of the  Democrats have accepted the grand bargain on raising the debt-ceiling by cutting spending in entitlement programs, but also an illuminating discussion about the problems with the profession.  Jamie notes that his father believed that economists had to engage with the broader public, something that has not happened in the last decades. Bob Heilbronner referred to that as the end of the worldly philosophy.

The Colombia FTA: Only Corporations Win

Trade has been a contentious issue in U.S. politics for a very long while. In recent times, free trade agreements have been promoted as essential by the cheerleaders of globalization, and as a threat to good jobs with decent wages and benefits by those who are skeptical about the advantages of the global economy. President Obama, a man of broad views, seems to represent both opinions. On February 12, 2008, candidate Obama made the following argument on this issue: “It’s a game where trade deals like NAFTA ship jobs overseas and force parents to compete with their teenagers to work for minimum wage at Wal-Mart. That’s what happens when the American worker doesn’t have a voice at the negotiating table, when leaders change their positions on trade with the politics of the moment, and that’s why we need a President who will listen to Main Street—not just Wall Street; a President who will stand with workers not just when it’s easy, but when it’s hard.” The previous year, Senator Obama …

Milton Friedman was wrong on Bush's tax cuts

Zain Siddiqui sent a link to a radio debate between Paul Samuelson and Daniel McFadden (against) versus Milton Friedman (for) on Bush's tax cuts back in 2003. In the minute 24:20 of the interview, the host asks Friedman:
"Milton Friedman, let me turn to you, are you suggesting, on the contrary, that these tax cuts will lead to capital formation, investment, and therefore, economic growth?" His response, after noting that he is a libertarian, was:
"Yes I am, indeed and well." This was eight years ago. Time to take stock and see what happened.  Average rate of real GDP growth from 2001 to 2010 was 1.68 percent.  Below the historical average, even if you eliminated the crisis, in which case it would be 2.08 percent.  And let's not forget that the tax cuts are to a great extent, besides the crisis and the two wars, the cause of higher deficits and debt. Was he wrong? Yes, indeed and well.

Financial Times thinks rating agencies did a good job

A bizarre article in the Financial Times, by Jude Webber, that claims that Argentina's recovery "is not quite as attractive or clean-cut as some of its proponents suggest." There are lots of factual mistakes and half-truths. Just an example.  They say Argentina's investment at 19.4% of GDP  last year was too low.  Compared to what? The US that was at 15.9%, or Argentina in 2002 when it was around 10%?  So the problem with Argentina is that is not China?

Also, they say that Argentina's "economy [is] just a sixth of the size of Brazil’s and a third of Mexico’s," and is going to be overtaken by Colombia.  The only thing they forgot to tell you is that the population of Argentina is just a one fourth of the Brazilian and around 40% of the Mexican, and that if you measure GDP in dollars, since the Brazilian and Mexican currencies are appreciated, it would overestimate the GDP of those countries and underestimate the Argentine.  Data from the World Bank puts…

Background Briefing on the Greek debt crisis

I was on Background Briefing with Ian Masters's programyesterday tonight.  The link for the audio here.  By the way, I am actually working with UNCTAD not UNDP this summer.

Foreign and external debt: not the same

In this whole discussion of the debt-ceiling limit the distinction between foreign debt (that is denominated in foreign currency) and external debt (owned by foreigners) has been often lost.  In the case of the US around 30% of Treasury securities are held by foreigners or around half if you discount the ones held by US governmental institutions (see data here). A country can default on its foreign debt, but not on the external debt denominated in domestic currency.

There is a fear (to some extent manufactured) about the Chinese taking over the country, and not just by pundits and late night comedians, as if the US would be unable to repay debt denominated in a currency that the US can produce.  Even Krugman has been excessively guarded on the issue. While noting correctly that the US is not Greece he said:
"So the US has much less debt than Greece. Also worth noting is the pattern over time. Greece ran up debt relative to GDP at a fairly good clip even during good times, while …

Tom Palley on a global wage policy

Tom Palley suggests that wages should be higher in surplus (current account) countries, to help re-balance the global economy.  In the case of Europe, it seems really unlikely that Germany will expand the economy, and promote nominal wage increases to help the European periphery.  With respect to the rest of the world it seems that Tom still believes that export-led growth is the engine of growth.  In China it seems clear that domestic demand has taken over and that real wages (including minimum wages) have been increasing at a fast pace (see ILO's Global Wage Report).  The world economy needs more growth in the US and Germany, China and other developing countries are actually doing their job to help in a global recovery.  Tom believes that competition from low wage countries has had a negative impact in labor conditions in the North.  I tend to believe that the problems have more to do with political economy problems in the North, in particular the ascendancy of conservatism sin…

The debt-ceiling limit: a guide for the bewildered

It is very difficult to explain American politics to those that are not Americans and/or have not lived here long enough. Add to that the confusion over basic economic principles, and it becomes almost impossible to explain the debt-ceiling debate to rational people.

As noted by James Galbraith, this is not a fiscal crisis, which should be obvious, since it was a Wall Street driven bubble.  Also, contrary to what you think the Republicans are the big government party. The graph below shows total federal government spending as a share of GDP (in black), and some spending categories as a share of government spending (in colors). As it can be seen total spending goes up in 1981, 1989, 2001, when Republicans assumed the administration, and down in 1993, when Clinton did.  Also, note that even if spending went up in 2009, as a result of the crisis, it did come down in 2010 (which is not a good thing, by the way) with Obama.

Read the rest here.

15 minutes of fame

Andreu Mas-Colell, author of the famous micro text used in most graduate programs, and specialist in General Equilibrium, suggested a solution for Spanish unemployment.  After wage reductions, his advise is to go for "marginal adjustments" like increasing the working day of public workers by 15 minutes. Working more for less money, would help balance the budget and maintain credibility. The hilarious proposal is described here (in Spanish). Nough said.

Sensible theory and economic predictions

Yes, that's Wynne's bust.
 Economists are well known for having predicted nine of the last five recessions.  Or so goes the joke.  The fact that economists cannot predict and that forecasters are always wrong is not new, and I would suggest less important than often understood.  The problem is not so much that economists cannot predict particular events, but that the dominant theory is an ineffective tool for understanding real economies. And that is true for both the New Classical/Real business Cycle types that believe that markets are efficient immediately, or the imperfectionist New Keynesian, that think that they are too, but only in the long run (this view should lead you to believe that the main solution is to reduce imperfections). As a result, the mainstream always provides unreasonable predictions.

But let me give an example of what I mean. Rudiger Dornbusch was a well respected mainstream economist.  He said back in 1999 that the euro would:
"reinforce financial…

Global Monetarism Strikes Back

 Olivier Blanchard, the chief economist at the International Monetary Fund (IMF) announced in a triumphalist tone that “earlier fears of a double-dip recession—which we did not share—have not materialized” and defended the need for “fiscal consolidation that is neither too fast, which could kill growth, nor too slow, which would kill credibility.” For Blanchard fiscal expansion has done its job, since “private demand has, for the most part, taken the baton.” The risks are associated to the higher prices of commodities and inflation. The Bank of International Settlements (BIS) has added to the IMF’s view that inflation is the main risk on an otherwise recovering world economy. In their recent Annual Report they argue that: “spread of inflation dangers from major emerging market economies to the advanced economies bolsters the conclusion that policy rates should rise globally.” That is, add monetary contraction to the policy mix.

Read the rest of the entry here.

Wouldn't it be nice if ...

 Nope, not the Beach Boys song.  Ronald Dworkin reminder that Obama is not FDR (here).  From FDR's Madison Square Garden's speech:
"For nearly four years you have had an Administration which instead of twirling its thumbs has rolled up its sleeves. We will keep our sleeves rolled up. We had to struggle with the old enemies of peace—business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering. They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob. Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me—and I welcome their hatred. I should like to have it said of my first Administration that in it the forces of selfishness and of lust for power met their match. I should like to have …

Devastating Labor Market Backslide

According to Heidi Shierholz, from the Economic Policy Institute (EPI) regarding the last Employment Situation report by the Bureau of Labor Statistics:
"Virtually every single measure was devastatingly weak: only 18,000 payroll jobs were added, average hours declined, nominal wages fell, unemployment was up in almost all age groups, more than 250,000 workers dropped out of the labor force altogether, and the public sector continued to bleed jobs. Furthermore, a downward revision to last month’s data means that this is the second month in a row with job growth at 25,000 or less. This is a remarkable, across-the-board backslide. The President and Congressional leaders need to stop talking about deficit reduction and start talking about job creation." Meaning, they need to talk about more fiscal stimulus. The whole thing here.

The debt ceiling limit: Dean Baker vs. Matt Rognlie

So I have been having a back and forward with Matt Rognlie on his blog about Dean Baker’s proposal to destroy the 1.6 trillion dollars in the Fed balances as a way of avoiding the debt ceiling limit.  Note that, as Dean says, this debt is owed by one branch of government to the other (although the Fed is a hybrid part public, part private), and is basically owed to itself.  The point is that nobody loses if the Fed just shreds the bonds.  Dean then discusses the risks of doing it, which are fundamentally associated with the loss of the bonds (which the Fed could sell to the public to reduce liquidity) and the effects that it might had in future monetary policy.  The fear was (although I doubt that was Dean’s concern) the Fed would have its ability to curtail liquidity limited and that inflation pressures might not be contained.  Dean simply noted that reserve requirements could be used in that case.
Not a difficult point to make.  Rognlie suggests somehow that this is both confusing …

The end of the New Deal as we know it?

So it seems that Obama is willing to play ball with Republicans on the debt-ceiling issue. Meaning cut Medicare and Social Security in exchange of an increase in the debt limit, increasing planned cuts for the next ten years from somewhere around two to closer to four trillion dollars. This was reported by the Washington Post, and seems to be in accordance with, not just Obama’s politics, but of the mainstream democrats since Carter and including Clinton, who notoriously ended welfare as we knew it.
It’s incredible that Obama would cave without putting a fight (he says that the WaPo story is overhyped apparently, but suggests that Social Security should be a means tested program!). This basically implies that the long fight that started with Reagan’s presidency to dismantle the basic achievements of the New Deal will finally succeed under a democratic presidency. But, on the other hand, it is part of the democratic move to the right, at least on economic issues, since Carter.

The graph …

Well trained but poorly educated

David Ruccio's post on Brad DeLong confessions about his past favoring financial deregulation is not far from what I wanted to say.  I am, however, more impressed by the a-critical acceptance in the mainstream of whatever their teachers tell them. I agree with Minsky, who said that:
"If I had my way the standard American course in economics would be eliminated and economics would be introduced in the context of social sciences and history. The current American way of teaching economics leads to American economists who are well trained but poorly educated" (Minsky,6 2009, p. 194) The only question is well trained in what?!!!

The wageless recovery and the two-speed recovery

Is this a wageless recovery? No doubt in the United States, and also in a good part of the rest of the developed world (e.g. Europe and Japan).  In the case of the US real wages have stagnated since the 1970s.  The recovery may very well be wageless, but in all fairness that has been a perennial characteristic of the American economy.  In Europe there were marked differences between Greece and Iceland, where real wages were growing until the crisis, and Germany, where they have basically stagnated.  So the wageless recovery is basically an American, German and Japanese story.

In developing countries, however, the story is quite different.  The graph below shows real wages in advanced, Latin American and Asian economies (there are also significant variations between and within the two sub-regional groups).  The graphs come from the International Labour Office's Global Wage Report 2010/11 (available here).


Note that both in Asia and Latin America real wages did not fall in 2008, an…

Profit-led stagnation?

So a new paper published by the Center for Labor Market Studies shows that the recovery in the US has been wageless and jobless. The graphs below which show the variation of the Dow Jones Index, Corporate Profits, and Average Hourly Earnings in the Private Sector (from figure 14 in the paper), and Real GDP , Investment and Payroll Employment (using BEA data) illustrate the point.
It is clear that conservative calls for tax cuts for the wealthy do NOT work. Profits go up, but jobs do not increase.  Wealthy corporations are not ncessarily job creators. Also, any heterodox story about profit-led growth seems also incorrect.  Again, why would firms invest if there is no demand?  The increase in demand is not robust enough to lead to investment or employment creation.  In fact, while corporate profits increased 39.6 per cent between the second quarter of 2009 and the first of 2011, investment only increased 7.6 percent.  This recovery is just for the rich.

Eclecticism, Complexity and Hypocrisy in Economics

 In some of my posts there is an open critique of what I referred to the best in the mainstream, people like Krugman and Brad DeLong (and even Larry Summers), that have been in favor of fiscal stimulus, QE, and against tax cuts for the rich.  The critique is not about the soundness of their policy advice or even about their political views, which are liberal in the American sense of the word.  My trouble is the same that Joan Robinson had with the neoclassical synthesis, that is, that their policy propositions do not follow (logically) from their economic models.

Some people may think that this is just splitting hairs, an irrelevant exercise in taxonomy, to determine who is or is not heterodox. And that would certainly be a complete waste of time and energy. But the problem is that this inconsistency between reasonable policy advice and coherent economic theory is at the heart of the problems with the mainstream, and not just the crazy ones that believe in extreme versions of market …

Lindsay Lohan is a monetarist

 Via Jason Linkins; the joke of the day.  So Lohan twitted the following:
"Have you guys seen food and gas prices lately? U.S. $ will soon be worthless if the Fed keeps printing money!" Apparently she was paid by a group called the National Inflation Association (with that name I'm sure they are in favor of inflation).  Forget that the causes of inflation had nothing to do with the Fed printing money, what is really hilarious is that conservative/monetarists chose Lohan as the speaker of their cause.  It must be a question of credibility!