Showing posts from March, 2015

Petri on Say's Law

Profs. Serrano and Petri
I somehow missed this paper so far. It explain the several additional problems with Say's Law even if one does not rely on the capital debates to show the limitations of the downward-sloping investment curve.

From the abstract: Neoclassical capital-labour substitution correctly understood is unable to prove a tendency toward the full employment of resources because it leaves investment indeterminate if the full employment of labour is not assumed to start with; then Say's Law loses plausibility because of the inevitable presence of accelerator-type influences on investment, even neglecting the inconsistencies of neoclassical capital theory; and wage decreases cause a decrease of investment, undermining the 'neoclassical synthesis' criticism of Keynes. The way a negatively interest-elastic investment function is obtained by Romer without assuming the full employment of labour, that is through adjustment costs, relies on several grave mistakes. T…

Minimum wage and inequality

Carlos Medeiros reminded me the other day that the minimum wage had played an important part in the reduction of inequality in developed economies, something often not discussed in detail or given proper emphasis in mainstream stories, that in the US tend to emphasize the role of education (for example, in Claudia Goldin and Lawrence Katz's work). By the way, Medeiros comment was prompted by the fact that Piketty in his Capital in the Twenty-First Century does note the role of the minimum wage in the reduction of inequality during the Golden Age.

The graph below shows the real minimum wage since its creation until 2013, and the income of the top 1%, from the Piketty and Saez data.
This exhibits a similar pattern as the one shown by the relation of inequality and the top marginal tax rate. The fall and then stagnation of real minimum wage over the last thirty years is certainly part of the story of increasing inequality, and to reverse it would require strengthening the labor forc…

On the blogs

Why We Cannot Afford The Republican Budget -- John Harvey provides a functional finance critique of the Republican budget.

'No Homo' Economicus -- first post in Mike Isaacson's blog Vulgar Economics on "religious freedom" laws and their role in discrimination, increasingly regarding the queer community.

Premature deindustrialization in the developing world -- a bit old, but still relevant post by Dani Rodrik on deindustrialization.

Don't be less evil -- Max Sawicky on the Democratic party shift to the right and its consequences.

On Mainstream Economists' Ignorance of Real Analysis -- Robert Vienneau on formalism and how the mainstream economists "treat their training in mathematics as a hazing ceremony for induction into the brotherhood of economists."

On being a 'real Keynesian'

1965: when we were all Keynesians (wink, wink, nudge, nudge, say no more)
Recently the Boston Globe had a piece on the Leontief Prize shared by Duncan and Lance, but emphasizing to some extent that while the winners are true heterodox economists (for a personal definition of heterodox go here) and 'real Keynesians' one would think, some well known progressive economists, like Krugman, are not 'real Keynesians.' In many ways, the issue has been discussed here before (or here).

Keynesian is one of those labels that is imbued with several meanings, and there are, not surprisingly, many prefixes to denote the particular Keynesian tribe, e.g. neo-Keynesian, post-Keynesian, New Keynesian, Old (Neoclassical Synthesis) Keynesian, sometimes referred in less polite fashion as Bastard Keynesian, classical-Keynesian (Sraffian-Keynesian?), etc. And those are just the ones related to theory, since policies have been referred to as Military Keynesianism or more recently weaponized Ke…

A Woman on a 20 Dollar Bill

A woman instead of a flawed president
I'm not a huge fan of the sociological discussions about the symbolic role of money. As readers of the blog would know I tend to follow a cartalist or chartalist view of money -- most discussion in the blog have been also associated with the cartalist conception of the role of dollar hegemony (here) -- which basically means that the origin of money is power. Keynes said in his Treatise on Money that: “money of account comes into existence along with debts, which are contracts for deferred payment, and price lists, which are offers of contracts for sale or purchase.... [and] can only be expressed in terms of a money of account” (p. 3). It's a unit of account, and someone has the power to decide what money is.

Having said that, it is true that money, as any other symbol of power, has implications for the functioning of society that go beyond the merely material ones related to the reproduction of society. Now there is a campaign to put a wom…

Krugman is not a real Keynesian

From The Boston Globe:
Keynes’s insights have enormous practical importance, according to Lance Taylor and Duncan Foley of the New School. Temperamentally opposite — Foley a brilliant theorist, Taylor a pragmatist influential in developing nations — they jointly received the Leontief Prize for Advancing the Frontiers of Economic Thought at Tufts University’s Global Development and Environment Institute on Monday. But isn’t Keynes now mainstream? No, say Foley and Taylor. The mainstream still sees economies as inherently moving to an optimal equilibrium, as Wicksell did. It still says demand causes short-run fluctuations, but only supply factors, such as the capital stock and technology, can affect long-run growth. Read rest here. Not a surprise for the readers of this blog.

The Gold Standard and the Depression

I have been teaching on this topic this week. One of the accepted views on the Depression is that countries that depreciated earlier recovered faster from the crisis. The classic paper by Eichengreen and Sachs sort of established the result.* The notion is the traditional one. Depreciation leads to lower prices in foreign currency, increased competitiveness and higher exports. Graph below shows the correlation between depreciation (since the exchange rate is measured as the foreign price of domestic currency, lower rate means depreciation). The indexes show the difference between the exchange rate and export volumes in 1929 (100) and 1935. So in 1935 France had not left the Gold Standard and the exchange rate remained at 100, while the exports were close to 50% of their 1929 level. There seems to be a clear negative relation between the exchange rate depreciation and export performance. However, note that in the United Kingdom a depreciation of about 40% implied exports at around 75%…

Minsky's puppet explains the crisis

Monty Python's Terry Jones' documentary Boom Bust Boom with a Hyman Minsky puppet. What's not to like?

PS: The puppet at the end represents Hyman Minsky.

Taylor and Foley recipients of Leontief Prize live

2015 Leontief Prize went to Duncan Foley and Lance Taylor for their work on "Macroeconomics in the Age of Climate Change." Watch their talk live starting at 5:30 Eastern Time today here.

PS: If you missed it, they will post later video footage. Meanwhile here are the interviews with last years winners Angus Deaton and James K. Galbraith.

New Book: The Encyclopedia of Central Banking

New book on central banking, edited by L-P Rochon & Sergio Rossi, has recently been published. I have two chapters: 1. on Classical Dichotomy, & 2. on Dollar Hegemony.

See here.
PS: Posted here with an entry on Bretton Woods by Omar Hamouda.

On the blogs

Architects of Miscalculation: Behind the White House’s Sanctions Against Venezuela -- Mark Weisbrot on why "Washington is still some ways away from the hemispheric equivalent of Nixon’s trip to China in 1972."

Greek Debt: Do the Right Thing -- Dmitri Papadimitriou on the ongoing Greek crisis.

How to Raise Wages -- Lawrence Mishel and Ross Eisenbrey, from EPI, on policies that strengthen workers' power to bargain for higher wages.

Suzanne de Brunhoff (1929-2015) -- Well-known Marxist scholar has passed away recently, but I haven't seen any obituary so far.

Robin Hahnel on the Fed & the pressure to raise interest rates

From The Real News Network
Translating from Fed speak, Janet Yellen is doing everything within her power to slow down the pressure that she's under to start raising interest rates here in the United States. We actually have a news network that today sort of asked the question, is Janet Yellen too socialist? And I think that's actually a good way for people to sort of understand what's going on. As much as any chairperson of the Federal Reserve Bank of the United States can be, she is actually trying the best she can to act in the interests of the general public, which is quite unusual. And so she is trying to delay as long as possible raising interest rates in the United States, mostly because she doesn't want to derail the sort of slow and tepid recovery that's going on and she understands that raising interest rates prematurely and too rapidly would have the significant danger that it would slow our recovery. And she's pointing out that there is …

The Economic Education of JFK: Arthur Okun's recollections

JFK with Dillon (first to JFK's right) and Heller (standing behind Dillon)
Nate has posted on JFK State of the Union address in 1963, when the tax cut was proposed to deal with the high level of unemployment of about 5.7 percent. Transcripts from an interview with Arthur Okun (of Okun's Law fame) conducted by David McComb and deposited at the LBJ Library tell the story of how that came to be.

Walter Heller was the chairman of the Council of Economic Advisers (CEA) at this time. Here is Okun on the CEA's views of the economic problem early in the JFK administration:
"The economist's diagnosis of the ills of the economy right at the start in 1961 was that it had been over-sedated with an excessively restrictive budget, which had so sapped its strength that you weren't getting the revenues from that budget; and therefore the budget looked as though it wasn't restrictive. Still you had a deficit, but the deficit was associated with trying to get too big a surp…

Lapavitsas on Greexit

Costas Lapavitsas, who is now a member of parliament for Syriza, on Greexit, which he sees as the best option. "There are three stages. First, as I said, is the negotiated, consensual, orderly exit.  Second stage is recovery and that would depend very much on recovery of domestic demand which is very heavily repressed in this country. There are vast resources lying unused. Small and medium enterprises would be reactivated, that’s what would really restart the Greek economy. Not exports - this worship of exports is nonsense.  But obviously that is not really a path for sustainable growth. What Greece would need after that would be an industrial policy to restructure its productive base, to integrate itself in the world economy on a different basis. That would take a few years.  But Greece would be still part of a common market, as a member of the EU. So it is not so easy to go back to domestic demand and to the SMEs, because it would have to kick out the big companies that could …

Ernesto Screpanti on Marx's Labor Theory of Value and The 'New Interpretation'

New Working Paper by Ernesto Screpanti. From the abstract:
Marx’s theory of labour value is flawed. This note summarizes the main reasons why this is so. At the same time, it claims that the theory of exploitation does not depend on a labour embodied valuation and can be expounded by resorting to the theory of production prices. Almost all Marxists have now accepted this truth. Most of them have been convinced by a ‘new interpretation’ which has been able to translate the price of net output into an amount of ‘living labour’ and the rate of exploitation into a ratio between unpaid and paid labour. What produced such a surprising result is the use of labour productivity as a numeraire. Read rest here.

For more on Marx and LVT, see here.

Janet Yellen and the weak labor market

Janet Yellen, basically in the same vein of what I suggested here, used the broader unemployment measure, called the U-6 by the Labor Department, which was 11% in February to argue that the labor market is not that well in the US.
Note that U-6 is total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force. And the number is very similar to my calculation of what unemployment would be if the participation rate had remained constant. One more reason not to hike the rate of interest any time soon.

Austerity Sucks: Mark Blyth on the follies of US budget policy

The following is from a presentation before the US Senate by Mark Blyth, author of “Austerity: The History of a Dangerous Idea” It is a scholarly rebuke of mainstream notions about public debt and investment in social welfare that are driving domestic economic policy.
My name is Mark Blyth and I am the Eastman Professor of Political Economy at the Watson Institute for International Studies and Brown University in Providence RI. I am also the author of a book entitled Austerity: The History of a Dangerous Idea (Oxford University Press 2013) a book, which oddly just received a national award in Germany, the country most associated with budgetary austerity. Given that irony is not a German national trait, it might be the case that even the Germans are re-thinking their stance on balanced budgets. As I shall show you today, it’s really not working out so well in Europe and it would be a disaster if it were tried here too.

And yet balancing the budget as a matter of principle …

L-P Rochon on Making sense of U.S. and Canadian labour market data

By Louis-Philippe Rochon
If you’re watching labour market statistics on both sides of the U.S. and Canadian border, you might think our economies are heading in very different directions. But a closer look shows that there are striking — and troubling — similarities. The U.S. economy seems to be outperforming expectations, according to labour market data released last week. In February alone, the it added more than 295,000 jobs; the 12th time in a row monthly job creation was at least 200,000. Job creation is widespread across all sectors and demographics, suggesting a firmly-rooted recovery. Unemployment has shrunk to 5.5 per cent, which is where it stood in May 2008. Finally, as the Secretary of Labour, Thomas E. Perez, boasted last week, February marks the first time in more than three decades that unemployment fell in all 50 states. What more could you say? Apparently, the U.S. is on course for a strong growth spurt, fuelling fear of inflation, which may convince the Federal Res…

On the blogs

Fun With Brad DeLong on TPP -- Dean Baker discusses Brad deLong timid defense of the Trans Pacific Partnership. Mind you I am less keen on the notion that a depreciated dollar would lead to more manufacturing jobs in the US, but at any rate we agree that Free trade Agreements hurt workers (here and in developing countries). FTAs are pro-corporation treaties

Yes David: Unemployment is Sometimes Involuntary -- Roger Farmer explaining the obvious to his friend David, and in the process criticizing Lucas. Always good in my book
Power from the People -- Florence Jaumotte and Carolina Buitron in the IMF's Finance & Development magazine note that the decline in unionization in recent decades has fed the rise in incomes at the top
A Tale of Two Economies? -- L-P. Rochon on the Canadian and US labor market weakness. And Canada is also far from full employment

Academic Freedom Watch: University of Manitoba

Based on an investigation conducted by the Canadian Association of University Teachers (CAUT), mainstream economists in the department of economics at the University of Manitoba, including the dean of faculty, have systematically marginalized heterodox professors. Robert Chernomas, a heterodox economics professor at the U of M, filed a grievance with university administration in 2009 claiming that the process for selecting a chair was “contrary to the collective agreement, unfair, unreasonable, and biased in relation to Dr. Chernomas.” Professor Chernomas had applied for the job but was not shortlisted by the committee. The committee eventually selected Pinaki Bose, an economics professor from the University of Memphis, in 2010. Since this appointment, according to Chernomos, heterodox professors have been "suppressed and isolated" to such an extent that they no longer hold any positions of authority or influence in the department.

Read rest here.

Seymour Harris on Post War Public Debt

Seymour E. Harris, 1897-1975
Seymour Edwin Harris was one of the pioneers of Keynesian economics in the US. He worked in the Office of Price Administration during the War, which was headed at some point by John Kenneth Galbraith, and was the chair of Harvard's Economics department. Galbraith suggests that: "President John F. Kennedy, shortly before he was killed, told of his intention of making Harris his next appointment to the Board of Governors of the Federal Reserve System." That was not meant to be.

His views on public debt show how widespread the ideas that would be labeled Functional Finance by Abba Lerner were among Keynesians in the 1940s. Most of the quotes below come from a paper on "Postwar Public Debt." The paper is in the book Postwar Economic Problems that he edited and is available here.

Note that there was no doubt that more debt was necessary to fund public investment in the post-war period. He says:
"We must not, therefore, be deterred fr…

US Interstate Transfers and the Euro Crisis

by Nathaniel Cline and David Fields

It is recognized among heterodox economists that the fiscal crisis some Eurozone countries faced (and are facing) is the result not of internal fiscal excess but of fundamental imbalances made worse by the adoption of a common currency. Indeed, as Wynne Godley pointed out (in several pieces) long ago, European structural payment imbalances will not be automatically corrected by market forces. In this case a common currency without centralized fiscal powers will potentially exacerbate the balance of payments problems of member countries. Some countries will be permanently outsold, and under the current arrangements, are forced to make large income adjustments to resolve their balance of payments.

As a result, many (even in the mainstream) have suggested that a common fiscal union would resolve the problems these countries face. Comparisons have been made to the US whose member states enjoy a common currency with a substantial federal fiscal system t…

How bad is unemployment?

So the unemployment rate is 5.5%, which some suggest is the upper limit of the calculations for the natural rate (some estimates suggest between 5.2 and 5.5%). And yes those measures are plagued by logical problems, let alone the empirical problem that the natural rate seems to be tied to the actual rate. At any rate, given the relevance of actual unemployment for the Fed policy it would be nice to know what the actual rate of unemployment means.

It is worth remembering that the rate of unemployment depends on the participation rate that, as can be seen below, has been falling since the late 1990s. The question is how would the unemployment rate look like if the participation rate remained at the same level it reached at the end of the Clinton boom.
This calculation was done before (here and here), and the new graph is below showing that unemployment would be at a much higher rate.
In fact, the rate of unemployment (u*) would be a bit more than double the current rate of unemployment…

More Jobs, Still Weak Wage Growth: The Federal Reserve Must Wait

By Thomas Palley

February’s employment report showed a gain of 295,000 jobs and a decline in the unemployment rate to 5.5%. The report is another in a string of strong employment reports, but it also contains depressingly familiar news about weak wage growth and millions of workers still short of work.

Job gains were spread widely across all sectors, with particularly strong gains in the service sector. Construction added another 29,000 jobs despite bad weather, and manufacturing added 8,000 jobs. The only significant weaknesses were in mining (down 8,000) and petroleum and coal products (down 6,000), reflecting lower energy commodity prices.

On the other side of the ledger, there continues to be abundant labor supply. Though the unemployment rate ticked down to 5.5%, there are still 8.7 million unemployed workers, another 6.6 million workers who are working part-time but want full-time work, and a further 6.5 million workers who would enter the labor force if a job were available. That…

Is Venezuela a threat to the US?

I published not long ago on the sanctions imposed on Venezuela, in the middle of the easing of relations with Cuba. Now the US has imposed additional sanctions on Venezuela, and declared that the country is "an extraordinary threat to the national security of the United States." That this statement is, at face value, ridiculous is fairly evident. The sanctions are imposed allegedly on the basis of violations of human rights, which is also not credible, since the US (not just in the past, but right now) supports governments with a very poor record on human rights. In Latin America the US gives full support to the government of Colombia were human rights violations are the norm.

The media coverage in the US about Venezuela is, as noted by Mark Weisbrot, worse than the coverage during the build up to the Iraq war. I normally don't discuss non-economic issues in the blog. But it is worth listening to Mark on the Diane Rehm show today. Note that as Mark says, it is the US th…

"The Question of Confidence" According to Marriner Eccles

From an address at a Conference on "Debt, Taxation, and Inflation" organized by the Wharton Institute of the University of Pennsylvania in May 8, 1936, and held at the Waldorf-Astoria in New York. In his words: "Leaving aside plans which involved fundamental and far-reaching changes in our whole economic organization, the solutions offered to the country in 1933 were of two main types. On the one hand there were those who contended that all that was needed was the restoration of confidence. They insisted that it was essential to balance the budget... On the other hand there were those who, like myself, felt that recovery in the present situation could only be achieved by bold and aggressive intervention by the government, largely through underpinning the entire private credit structure which had collapsed, and undertaking to restore purchasing power through relief, public expenditures and other measures.
What businessman would have added to his plant, when he alrea…

The vulture passes

Yep, not the condor. So it's my short note in Página/12 (in Spanish), the Argentine newspaper, on the future of the external debt negotiations. Note that the short summary on top suggests, since this is a debate, that the return of a neoliberal project would lead to increasing external debt. And that might be true, yet, as I note in my piece it is not true that external debt is always bad, since one can use it for diversifying exports (and reducing structural heterogeneity), reducing imports (the old import substituting industrialization strategy) and making the balance of payments more sustainable in the long run.

I might add then that the use of foreign debt, with caution, is not necessarily neoliberal. At any rate, neoliberal is a complicated term, often used to refer to things one does not like. Unlike neoclassical economics (or marginalism more properly) it does not have a precise meaning. I would imagine that in this context is used to refer to pro-business, pro-liberalizat…

On the blogs

Via Max Sawicky
Remembrance of NAIRUs past -- Krugman on the previous failed views that we were at the NAIRU. Note that he doesn't complain about the very notion of the natural rate, just that others don't get it right. Glad that he doesn't want to stop the economy, because unemployment is at 5.5%, but can he tell us what the natural rate is?

The Euro Greek Crisis again shows the poverty of austerity -- Arestis and Sawyer on European madness

Noah and Nick, too -- Max Sawicky on Noah Smith and Nick Rowe

Oscar Ugarteche on German Debt Reduction

"The largest debt problems in terms of GDP faced in financial history have belonged either to the United States or to European Governments. Large debt problems in developing and emerging nations have usually stemmed out of a drop in GDP size due to a fall in export earnings and a rise in interest rates. The reason is that creditors stop lending at a certain point and start restructuring existing debt which leads to debt growth but it is not really new lending. In major nations, lending goes on as the strategic reason for borrowing has normally been justified: a war. As a result, the leading debt reduction and innovative management schemes are related to these. Contrary to the impression generated by extensive works on the Latin American and African debt, it is the under researched European and US historical debt that must be looked into in order to understand some historical solution patterns to debt problems. Current European very high debt levels (over 90% of GDP) are due part…

Eatwell on the relevance of pure theory

Eatwell on the relevance of theory for policy debates, introduced by Arestis. John used to say in class that no debate was ever solved by empirical analysis.

Hat tip to Alejandro Fiorito and Franklin Serrano.

Is labor productivity still pro-cyclical? Okun's Law is still fine

So there has been some talk about productivity not being pro-cyclical anymore. This is based on the notion that labor productivity increased during the last few recessions. Robert Gordon is the main source of this view. That is, it would seem that labor productivity is now anti-cyclical. Note that pro-cyclical productivity is what is behind Okun's Law. So below the data, from Fred. Labor productivity, the difference between real GDP growth and civilian employment growth and real GDP growth itself.
It is hard to look at the graph and suggest that the two variables are not positively correlated, even for the post-1980s period. But it is true that if you look at the shaded areas, which represent recessions, it seems that productivity fell before, and was already recovering in that period, at least since the Bush senior recession. This is more about the timing of the recessions, and how these are measured by the NBER, than about the strength of the pro-cyclical relation between produ…

Internet access and development

Purple countries indicate less than 50% of the population has access to the internet. Basically Africa, Central America, México, the Caribbean, and the Andean region of South America (plus Paraguay and the Guyanas), Asia (including of course India and China, but not South Korea) and the Middle East (with a few exceptions, like Saudi Arabia). So there is a belt around the middle with countries further South (the Southern Cone of South America, including Brazil and Australia) and further North (North America and Europe, including the East and Russia) that are fine. Understanding internet access provides an alternative way to look at development.

PS: The Wall Street Journal is really about Facebook trying to expand in places with low internet access.