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Showing posts from June, 2016

Why Negative Interest Rate Policy (NIRP) is Ineffective and Dangerous

By Thomas Palley

NIRP is quickly becoming a consensus policy within the economics establishment. This paper argues that consensus is dangerously wrong, resting on flawed theory and flawed policy assessment. Regarding theory, NIRP draws on fallacious pre-Keynesian economic logic that asserts interest rate adjustment can ensure full employment. That fallacious logic has been augmented by ZLB economics which claims times of severe demand shortage may require negative interest rates, which policy must deliver since the market cannot. Regarding policy assessment, NIRP turns a blind eye to the possibility that negative interest rates may reduce AD, cause financial fragility, create a macroeconomics of whiplash owing to contradictions between policy today and tomorrow, promote currency wars that undermine the international economy, and foster a political economy that spawns toxic politics. Worst of all, NIRP maintains and encourages the flawed model of growth, based on debt and asset price …

Exchange rate depreciation and exports: the evidence

In this blog we discussed several times the reasons why exchange rate depreciation is not necessarily a panacea for current account problems (see for example here and here on Argentina depreciation before the last one with the Macri administration, here on the Europe, here in general about the idea of a Sustainable and Stable Competitive Real Exchange Rate or SSCRER, and here on the role of the exit from the Gold Standard during the Depression). Exchange rate skepticism suggested that depreciation often works because it is contractionary, and it worked by causing a recession and reduced imports. The optimists, like the so-called New Developmentalists pointed out to the positive impact on exports.
Now a new paper by Filippo di Mauro and others (h/t Pablro Bortz) at shows that the exchange rate has a reduced role in the explanation of exports shares for European and Asian countries. As the authors suggest:
"An obvious reason for the low explanatory power of price competitiv…

Trading Up: A Critical Perspective on Jobs, Governance and Security in US Trade Policy

This Tuesday June 28, 2016, the AFL-CIO is holding a conference titled “Trading Up: A Critical Perspective on Jobs, Governance & Security in U.S. Trade Policy,” from 9:00 am to 5:00 pm in Washington, DC. The full program is here. Participants include Joseph Stiglitz, Dean Baker, Tom Palley, Rob Scott, Jeff Faux, among others.

You can join online for what should be an lively and insightful debate—especially given recent developments around the Brexit and the Trans-Pacific Partnership (TPP).

You can watch the conference here and join in the discussion online using #BetterTrade. Please tweet any questions for panelists to conference organizer Celeste Drake (@cdrakefairtrade).

Dvoskin and Petri on the relevance of the capital debates

Ariel Dvoskin and Fabio Petri just got their paper published in Metroeconomica. From the abstract:
Among the recent interventions in the capital controversy, the debate between Paola Potestio and Kurz & Salvadori has raised important issues. We agree with Potestio's rejection of the legitimacy of a value endowment of capital but we disagree with her dismissal of the relevance of reswitching and reverse capital deepening: these phenomena are very important because they undermine the demand-side role of the conception of capital as a single factor. For the marginal approach to be plausible, this demand-side role had to imply the stability of the savings-investment market even in shorter time frames than those required by a complete adaptation of the ‘form’ of capital; this was taken by Marshall to authorize doing without a given endowment of value capital, which opened the door to the shift to the modern neo-Walrasian versions of the marginal approach. With proof from Hayek, Hi…

On the blogs -- Brexit edition

A few brief comments on Brexit and the postmortem of the European Union

Another end of the world is possible
There will be a lot of postmortems for the European Union (EU) after Brexit. Many will suggest that this was a victory against the neoliberal policies of the European Union. See, for example, the first three paragraphs of Paul Mason's column here. And it is true, large contingents of working class people, that have suffered with 'free-market' economics, voted for leaving the union. The union, rightly or wrongly, has been seen as undemocratic and responsible for the economics woes of Europe.

The problem is that while it is true that the EU leaders have been part of the problem and have pursued the neoliberal policies within the framework of the union, sometimes with treaties like the Fiscal Compact, it is far from clear that Brexit and the possible demise of the union, if the fever spreads to France, Germany and other countries with their populations demanding their own referenda, will lead to the abandonment of neoliberal policies. Aust…

Prebisch on Economic Dynamics

Here is the link to the power point presentation on the unpublished Buenos Aires lectures given by Raúl Prebsich on economic dynamics at the University of Buenos Aires in 1948, right before he entered ECLAC, that we presented (actually Esteban did it, I only participated in the Q&A) at the History of Economics Society Meetings. Next year the conference is in Toronto.

Ending austerity policies to open a new time in Europe

Stop praying and change your vote!
The management of the economic crisis has had devastating consequences for our country, as well as for the eurozone as a whole. The fiscal austerity and wage reduction policies imposed over the last few years have unnecessarily prolonged the recession across the continent and generated deep social fractures by increasing economic and social inequalities.

Fiscal austerity and wage reduction policies have led us to a lost decade. Across the Eurozone, we haven’t yet regained pre-crisis level of per capita income, and in Spain this indicator is still 5% below its 2007 level. In our country, only one in three jobs lost during the crisis has been recovered, job precariousness has aggravated, and 29% of the population lives at risk of poverty or social exclusion.

Read full manifesto against austerity here. I'm number 50 of more than 177 signatories.

A very brief comment on Brexit

I've been posting less frequently with the end of the school year. Will be going to the History of Economic Society Meeting this weekend. Posting will be even more limited. At any rate, hope to be able to say something more substantial on Brexit before the referendum. Let me say that I'm against Brexit, which is I suspect the view that Wynne Godley would take on the issue. He was firmly for Europe, but against the euro as it was shaped, but not in all circumstances. He correctly pointed out that a common currency requires a fiscal union.

It seems that more than a few heterodox Keynesians (post-Keynesians for the most part) have come in favor of Brexit. I think it is important to emphasize the difference between the common currency (the euro) and leaving it, for example, Grexit, and the European Union. Brexit, of course, refers to the last, since the UK has its own currency, the pound.

Mind you, I don't think that the problems with leaving the EU are essentially economic, …

Boom Bust Boom and the South Sea Bubble

Terry Jones documentary Boom Bust Boom has been out for a while. Worth watching too. The Economist gave it a reasonable review. And there are Minsky and Galbraith puppets.
Above a brief, and simple discussion of the South Sea Bubble. I think role of trade with Spanish America is exaggerated. The most relevant part of the scheme was the public debt swap. Dale's The First Crash provides an interesting account of it.

Brothers on the line

Documentary on the Reuther brothers and the role of unions in the prosperity of the Golden Age of Capitalism. Worth watching.

Vultures, bottom feeders and the debt collection business

John Oliver's story on debt collection is very instructive. It looks only at the domestic practices, but these are essentially the same as the ones used by Vulture Funds in international financial markets.
So respectable businessmen like Paul Singer, a top GPO contributor that owns the Elliot Vulture Fund that buys debt of developing countries and sues them in New York courts, or the international organizations like the IMF that impose conditionality on poor indebted countries are not much different from the bottom feeders described by Oliver.

A novel capital control proposal

New book
By Pablo Bortz (Guest blogger)*

After the breakdown of the Bretton Woods regime and the subsequent deregulation in capital flows around the globe, the movement of financial assets and liabilities has increased several times faster than trade and GDP growth. While still mainly concentrated between advanced countries, financial flows to emerging and developing economies (EDEs) have been rising at an exponential rate, particularly in the last two decades. However, public external debt (as per cent of GDP) has been on a downward trend in the 2000s (though the trend has been slightly reversed since the 2008 crisis), with a larger proportion being denominated in domestic currency, but attracting more non-resident private investors (Arslanalp and Tsuda 2014). The other big story of the last fifteen years, notwithstanding, is quite different: private external debt has been on a marked rise. As Akyüz (2014) reviews, the share of private debt denominated in a foreign currency has incre…

Winter (Southern Hemisphere) School

Announcement for those interested in a Summer (Winter down there) school in Spanish.

Topics (in Spanish)

Ariel Dvoskin: Teoría de la distribución y controversias del capital

Juan Matías de Lucchi: Del monetarismo fugaz a un sistema de metas de inflación

Nicolás Grinberg: América Latina y Asia del Este: Desarrollo económico comparado

Germán Feldman: Tipo de cambio real y restricción externa

Pablo Lavarello: Empresas Multinacionales en la actual fase de internacionalización:
implicancias para los sistemas nacionales de innovación

Natalia Reynoso: Los aportes de Michal Kalecki a la teoría del desarrollo económico

Verónica Robert: Enfoque evolucionista del cambio tecnológico y el
desarrollo económico. Debates sobre política industrial y tecnológica

Corina Rodríguez Enríquez: Economía y Género. Implicancias para la agenda de desarrollo

Fernando Toledo: Estabilización, políticas de ingreso y conflicto distributivo en economías

Matías Vernengo: Revisión crítica del Nuevo Consen…

Argeo Quiñones and Ian Seda on the crisis in Puerto Rico

Argeo Quiñones-Pérez and Ian Seda-Irizarry discuss the crisis in this piece. They correctly point out the neocolonialist solution being imposed by the US administration. I find the imposition of a Fiscal Control Board (FCB) particularly problematic. Back when Argentina defaulted in 2002, Rudi Dornbusch had suggested something similar. At that time I sent the letter below to the Financial Times that had published his proposal.
Mystery of about-turn on Argentina  Financial Times, Mar 12, 2002
From Matias Vernengo.  Sir, Back in February 1997, Professor Rudiger Dornbusch said: "Argentina is on the go - (it) is the only country in the world today that enjoys both price stability and vigorous growth." The reasons were associated, according to Prof Dornbusch, with hard money and pro-market reforms. Argentina's policies then were an example to Brazil, Mexico and other developing countries. Now, Prof Dornbusch together with Prof Ricardo Caballero tells us…

Weak jobs report should kill interest rate hike

Or so it seems. The BLS last employment situation summary says that only 38000 jobs were created last month. Unemployment fell to 4.7%, but that is mostly the result of the fall in the participation rate, that is, less people in the labor force (see below).
In other words, unemployment rate is lower not because unemployment decreased (at least not much), but because workers stopped looking for jobs. Since the crisis there has been no recovery in the labor force participation rate, as shown in the figure above. This report is consistent with the slow rate of GDP growth announced last week. The economy is slowing to a halt. The Fed should not hike the rate later this summer, but that's not enough. The US needs less austerity. Urgently.

Overdose of heterodoxy, failed Keynesian policies or same old balance of payments constraint?

The hunger games
Ricardo Hausmann blames the situation in Venezuela to excessive heterodox policies. The piece is not particularly well written, but if you look for the deep cause of the crisis, according to Hausmann, then you must conclude that it is a fiscal one. The government spent too much, and got into too much debt. In his words:
Governments often struggle to balance their books, leading to over-indebtedness and financial trouble. Yet fiscal prudence is one of the most frequently attacked principles of economic orthodoxy. But Venezuela shows what happens when prudence is frowned upon and fiscal information is treated as a state secret... Venezuela used the 2004-2013 oil boom to quintuple its external public debt, instead of saving up for a rainy day. By 2013, Venezuela’s extravagant borrowing led international capital markets to shut it out, leading the authorities to print money. So fiscal problems, too much spending and borrowing, too much money printing, which caused inflat…