Thursday, April 24, 2014

The accidental controversialist: Palley on Piketty’s “Capital"

By Thomas Palley

Thomas Piketty’s Capital in the Twenty-First Century is a six hundred and eighty-five page tome that definitively characterizes the empirical pattern of income and wealth inequality in capitalist economies over the past two hundred and fifty years, and especially over the last one hundred. It also documents the grotesque rise of inequality over the past forty years and ends with a call for restoration of high marginal income tax rates and a global wealth tax.

His book has tapped a nerve and become a phenomenon. In laying a solid blow against inequality, Piketty has also become an accidental controversialist. That is because his book has potential to unintentionally trigger debate over so-called “free market” capitalism. The big question is will that happen?

 Read more here.

Wednesday, April 23, 2014

Classical Theory and Policy Analysis

A new research area [R] ‘Classical Theory and Policy Analysis’ (coordinators: Enrico Sergio Levrero and Franklin Serrano) is now part of the European Association for Evolutionary Political Economy (EAEPE, see here). In collaboration with the “Centro di Ricerche e Documentazione Piero Sraffa” it will promote activities to reconstruct economic theory and policy analysis along the lines of the classical or surplus approach. In particular, it will promote research on the determinants of distribution and capital accumulation, economic policy proposals alternative to those advanced on the basis of the dominant neoclassical theories, and studies on the method of analysis adopted within the classical theory and its relation with Institutionalism. It will also participate to the organisation of the Eaepe Summer School held at Roma Tre University and to the Summer School of Heterodox Economics held at Poznan University of Economics (partners: Review of Keynesian Economics and Forum for Social Economics).

On the occasion of the 26th EAEPE Conference to be held in Nicosia (Cyprus), 6-8 november 2014 on the theme “Unemployment and Austerity in Mediterranean European Countries” the research area [R] will organise a special session on ‘Demand led growth and fiscal policies’. For papers on this theme or subjects relating to the research area [R], the submission deadline is 30 May 2014. For any further information, please contact the coordinators or see the conference website.

The American Middle Class Is No Longer the World’s 'Richest'

While the American rentier class is outpacing global peers, a New York Times analysis shows that across the lower- and middle-income tiers, citizens of other advanced countries have received considerably larger income raises over the last three decades. Mind you, while the report suggests that the majority of Americans made more than their European counterparts thirty years ago, it must be noted noted that their ancestral cousins have long enjoyed the extensive benefits & security of a much stronger well-established welfare-state (though significantly diminished from recent neoliberalization, before & after the crisis of the Euro).
The numbers, based on surveys conducted over the past 35 years, offer some of the most detailed publicly available comparisons for different income groups in different countries over time. They suggest that most American families are paying a steep price for high and rising income inequality. Although economic growth in the United States continues to be as strong as in many other countries, or stronger, a small percentage of American households is fully benefiting from it. Median income in Canada pulled into a tie with median United States income in 2010 and has most likely surpassed it since then. Median incomes in Western European countries still trail those in the United States, but the gap in several — including Britain, the Netherlands and Sweden — is much smaller than it was a decade ago. 
Read rest here

Iren Levina: A Puzzling Rise in Financial Profits and the Role of Capital Gain-Like Revenues

New PERI working paper by my friend & colleague Iren Levina - From the abstract:
The paper provides an explanation for the puzzling decoupling between the rate of growth of financial profits and GDP in the 2000s. Drawing on the insights from Keynes, Minsky, and Hilferding, the paper identifies a peculiar type of profit – capital gain-like revenues that take the form of profits from underwriting, mergers and acquisitions, securitization, and trade in financial assets. These capital gain-like revenues come from the redistribution of monetary assets and lack a counterpart in current GDP. They can be thought of as wealth transfers. Based on an empirical analysis of revenues of U.S. bank holding companies, these capital gain-like revenues are shown to have contributed significantly to the decoupling between the rate of growth of financial profits and GDP. The paper identifies characteristics of these revenues that explain the puzzles around this decoupling – its very possibility, sustainability over long time, and lack of losses sufficient to offset the pre-crisis financial gains. These characteristics of capital gain-like revenues also allow one to reconcile two seemingly incompatible approaches to a rise in financial profits – as transfers (rent) and as an illusion (mirage). 
Read rest here

Tuesday, April 22, 2014

On the Argentine crisis again

This week the Supreme Court heard the case of the Vulture Funds against Argentina. I wrote a while ago about that here. The paper on the more recent crisis and devaluation is available here.

Monday, April 21, 2014

McKinnon and Wolf on global imbalances and Chinese liberalization

This is a bit old. It was published earlier this month in the Financial Times, as a response to Wolf's column. McKinnon is a well-known exchange rate specialist, and one of the few that has, correctly in my judgment, not been overly concerned with the international role of the dollar for the last three decades. His concern with Chinese liberalization of financial markets is that it would lead to inflows, since interest rates in the developed world are too low, and instead of balancing the trade surpluses, it would lead to more accumulation of reserves. The implicit notion is that if rates of interest were higher abroad, and Chinese funds flowed abroad it would be okay to liberalize, one supposes.

Note that this is also what Martin Wolf suggested in the original column (subscription required). In his words: "In the long run China’s capital account will presumably become largely open and in time, no doubt, China’s savers will own large parts of the world." In other words, the idea is that Chinese funds would finance the over spending in the rest of the world, and help in dealing with global imbalances, and Chinese savers would invest in real assets abroad. In contrast, if inflows were added to the trade surpluses, the Chinese would add to the 'problem' of the global imbalances.

Note that this view goes hand in hand with the notion that the accumulation of reserves is intrinsically bad. Wolf says:
"The principal form of capital outflow has been the accumulation of foreign currency reserves by the government. At $3.8tn last December (almost $3,000 for each Chinese person), these are gigantic and extremely unrewarding. It would be far better if some of this were converted into real assets."
Don't get me wrong, China holds more reserves than it needs for avoiding a currency crisis, or any sort of balance of payments problem that might arise (in a very distant future). Yet, the notion that China could open the capital account and not get into the kinds of problems that all the countries that liberalized financial markets did seems excessively optimistic.

There is essentially no problem if China maintains a trade surplus and attracts capital flows, increasing their reserves. And that has no relation to the financing of their investment, or the transition to a more consumer oriented economy. As I said a while ago global rebalancing is one of the myths of the current crisis. If the US grows faster, say as the result of an improbable fiscal expansion, the imbalances would grow larger, and that would be good.

I hope that China doesn't open the capital account, but that has nothing to do with the global imbalances, and all to do with the problems of financial liberalization.
In the long run China’s capital account will presumably become largely open and in time, no doubt, China’s savers will own large parts of the world. - See more at:

Thursday, April 17, 2014

Kirsten Ford, a young Old Institutionalist

Kirsten Ford (1976-2014)

I first met Kirsten in the mathematics leveling class for the incoming PhD students. I think it was in 2007, but it might have been the year before. She felt she needed to take more math courses, and did so at Westminster College, where she had obtained her Bachelor's degree. She had come to economics out of a concern with social justice, and her early views were shaped in Dick Chapman's classes on Keynes' General Theory and Chace Stiehl's discussion of classical political economy authors, both PhDs from Utah's graduate program, which influenced her choice for her graduate studies.

At that time I taught two regular courses in the graduate program, the second required macro class, which basically reviewed heterodox approaches and growth theory (both conventional and heterodox views), and the second history of economic thought course, which went from the Marginalist Revolution to the post-capital debates developments (the change in the notion of equilibrium, and what I referred to as the return of vulgar economics; the first part of the course on classical political economy and Marx was taught by E.K. Hunt). She and her classmates, which were among the best cohorts of students in the PhD program I can remember, took also two other elective courses with me. A seminar on Sraffian topics, and a course in international economic history.

That course was not chronologically organized. The topics covered emphasized unresolved controversial issues in international economic history, e.g. whether there was an Industrial Revolution, the critique of Eurocentric interpretations of History, and the revival of cultural and geographical explanations for relative backwarderness. One of the most fun courses I ever taught, not just because I basically taught what I wanted, but more importantly because I never learnt as much from my students as I did in that opportunity.

Kirsten's interests were broad, but she had a particular concern with the institutional aspects of economic development, approached from a historical perspective, and that would include the history of ideas. That was very much in line with the institutional/Marxist traditions that already existed in Utah's economics department, and fit with my own work in what might be called the Classical-Keynesian tradition (classical meaning the old classical political economists, including Marx, as interpreted by Sraffa, while Keynesian puts an emphasis on the radical followers of Keynes and Kalecki).

She published early on a paper (in a Brazilian journal called Versus, which I suggested as a venue; accessible version here) that was based on a previous one done in a development course with Nilüfer Çağatay. It was a critique of the New Institutionalism of Douglas North, and a discussion of the Veblenian, or Old Institutionalist roots in the radical development economics of Ha-Joon Chang. She also published, with Bill McColloch, one of her colleagues in the graduate program, a paper on the Journal of Economic Issues on the methodological compatibility between Marx and Veblen (working paper version available here), influenced by Hunt's views on the topic, to some extent.

Kirsten also collaborated with me, and Nathaniel Cline, another graduate student at the U, on a paper on the persistence of mainstream policy advice, even after the crisis of the marginalist paradigm in the 1970s, in which we hinted that a real world economic crisis, like the Global Recession of 2008, was an unlikely cause for significant changes in the direction of research, which was published in the Journal of Philosophical Economics (see here). Kirsten was particularly interested in the role of the IMF as a the institutional instrument by which conservative policies were maintained in developing countries. Further research on the lack of change in the IMF policy positions that she conducted will be published later this year in Development and Change.

She was also interested in the role of institutionalist authors during the New Deal, and helped me to do research on Marriner Eccles papers at Marriott Library. We had a project of publishing some of Eccles speeches as the chairperson of the Fed.

Kirsten was extremely generous in her intellectual exchanges, unwilling to take her contributions as exclusively her own, and sharing them as part of the knowledge of the group. Surprisingly that's not common among the heterodox tribe, in which pride and the desire for prominence often lead to fratricidal disputes. She was also generous with her time, dedicating immense amounts of it to organize the Heterodox Economics Student Association (HESA), and making the economics department better for other graduate students, and to her classes and her students. Economics as a profession is a little bit better because of her work.

Wednesday, April 16, 2014

Big government, functional finance and debt sustainability

Teaching the fiscal policy classes of my intermediate macro course. One of the few things that is still not well understood and discussed in manuals is functional finance. Froyen's manual, which is otherwise an old textbook similar to Dornbusch and Fischer or Gordon or any 1970s manual (meaning with short run ISLM and Phillips curve first, and then growth), includes in the policy discussion Partisan Theory and Public Choice, but not Functional Finance or any heterodox approach.

Partisan Theory, developed by Douglas Hibbs, builds on an old idea by Kalecki that political and ideological elements would affect the business cycle. Left of center governments would lead to higher government spending and lower unemployment, and conservative governments would be concerned with inflation, and tend to promote fiscal adjustment. Public choice, more dramatically, suggested that politicians would be guided by selfish desire for re-election, which would lead to a permanent bias for deficits, and accumulation of debt. Big government, and Keynesian ideas, that had unleashed the monster, or so thought James Buchanan, one of the leaders of the Public Choice School, had to be constrained by balanced budget amendments.

When one looks at the data for the United States it is fairly clear that over the last forty something years it has been Republicans that have expanded deficits.

Deficit (% GDP)
In the graph you can see that with Carter (1977-1980), Clinton (1993-2000) and Obama (2009 to 2012 in the graph) the deficit as a share of GDP has fallen, while it did increase with all Republicans [note that with Reagan they increase, and then fall after taxes were raised]. Also, if you have any doubts, Republicans are the party of big government when it comes to spending.

Government Spending (% GDP)
The graph above shows that also spending actually falls with the three Democrats, and increases with the four Republicans (Ford, Reagan, Bush I, and Bush II). This switch on Democratic and Republican views on fiscal issues was discussed here. Obviously there are important differences between the old Democrats, from the New Deal and Kennedy/Johnson era, that wanted big government for social purposes, and the kind of big government promoted by the GOP.

Also, the political economy of why the GOP is for big government, has less to do with Partisan Theory or Public Choice, and more with the starve-the-beast theory, according to which if you cut taxes, then government will eventually be forced to cut spending.

Functional finance, an idea introduced by Abba Lerner, that could be seen as the extension of Keynesian ideas to fiscal policy (Keynes actually had little to say in the General Theory, were he refers vaguely to the socialization of investment rather than fiscal deficits), suggests that deficits should be judged on the basis of their function in the economy. Deficits that promote growth, and take place in an environment of low rates of interest, not only would be sustainable, but would be necessary to promote full employment.

By the way, by historical standards the US net debt (held by the public, i.e. not in the hands of the Fed or the Social Security Trust Fund) is not high at around 70% of GDP, below the peak at the end of the Great Depression and World-War II.

Net Public Debt (% GDP)
The debt-to-GDP ratio did increase after the 1980s, basically as a result of higher deficits on average (both the starve the beast, and more recently the massive recession), but also because until the collapse of the housing bubble rates of interest were on average higher than rates of growth of the economy. The debt-to-GDP ratio did fall in the late 1990s, as a result of the Clinton surpluses.

Mind you, two important points must be noted. First, historically the period in which rates of interest were consistently below growth rates was during the so-called Golden Age of Capitalism, roughly the post-war period up to the 1970s. In other words, in normal times the economy is in the wrong side of Domar's sustainability condition [that the rate of growth of the ability to repay, economic growth, should be higher than the growth of debt, that is, the rate of interest]. That didn't preclude governments to run deficits and accumulate debt. Note that governments have one advantage over private agents, when it comes to spending, namely: government spending is sufficiently large that by increasing general income it leads to higher tax revenue and an increase of its own income.

The second point, for those concerned with the size of the debt, is that the recession, and the collapse of the bubble have created the political conditions for a low rate of interest, which would be very hard to reverse in the medium term. That is, the Fed is unlikely to hike rates while unemployment remains high. Which basically provides space for fiscal deficits and debt on a relatively cheap basis. Of course chances of that happening are a completely different question.

Tuesday, April 15, 2014

Galbraith and Deaton Leontief Prize lecture

Jamie Galbraith and Angus Deaton Leontief Prize lectures at the Global Development And Environment Institute (GDAE) last week. Deaton starts at minute 49 or so, and Jamie at around 1:27.

Monday, April 14, 2014

Is Venezuala's SICAD II Resolving Exchange Rate Problems?

 By Mark Weisbrot
All economies have major structural and policy problems, but some problems are more important and urgent than others at particular times. In Venezuela, the most important economic problem is in the exchange rate system. A fixed exchange rate system with periodic devaluations tends to be more crisis-prone than other exchange rate regimes, especially in a country like Venezuela where inflation has historically been higher than that of its trading partners. This is particularly important right now because opposition leaders who have called for the overthrow of the government have pointed to 57 percent inflation and widespread shortages of consumer goods as justification for (often violent) street protests over the past two months. Although the protests have failed to attract the working and poorer people who are most hurt by the shortages, they are still a major complaint – as is inflation – for most Venezuelans.
Read rest here

Sunday, April 13, 2014

The Association for Heterodox Economics thinks INET is marginalizing heterodox economics

"Our main concern is that the positive potential of INET is steadily being closed down. What began as recognition of fundamental problems that require fundamental change is becoming a more modest set of alterations. A sense of failure is, for all intents and purposes, being translated into a context of relative success requiring more limited changes – though these are still being seen as significant. Part of the reason that they are seen as significant is that changes from within mainstream economics do not have to be major in order to appear radical. It is our contention that heterodox economics is being marginalised in this process of ‘change’ and that this is to the detriment of the positive potential for transforming the discipline."
 Worth reading. But can say I'm too surprised though. See my previous post on INET's project of rethinking economics.

Saturday, April 12, 2014

You get what you pay for; but not when it comes to business degrees

Veblen famously doubted whether Law Schools had a place in Universities, and as I noted not too long ago he was not altogether happy with what we would now call Business or Management Schools. He said in The Higher Learning in America:
"A college of commerce is designed to serve an emulative purpose only -- individual gain regardless of, or at the cost of, the community at large -- and it is, therefore, peculiarly incompatible with the collective cultural purpose of the university. It belongs in the corporation of learning no more than a department of athletics. Both alike give training that is of no use to the community,except, perhaps, as a sentimental excitement. Neither business proficiency nor proficiency in athletic contests need be decried, of course. They have their value, to the businessmen and to the athletes, respectively, chiefly as a means of livelihood at the cost of the rest of the community, and it is to be presumed that they are worth while to those who go in for that sort of thing. Both alike are related to the legitimate ends of the university as a drain on its resources and an impairment of its scholarly animus. As related to the ostensible purposes of a university, therefore, the support and conduct of such schools at the expense of the universities is to be construed as a breach of trust."
You would imagine then that at least for those that paid for a business degree it would have a compensation in the form of higher pay after graduation. It is not the case, as the PayScale last college salary report shows. Economics majors make considerably more than accounting, finance and business majors. Funny that enticement of pay opportunities is one of the ways in which business and management schools attract students and try to encroach economic departments in many universities.

Friday, April 11, 2014

On the blogs

Noah Smith on a unified theory of behavioral economics

Gems in The General Theory;  Unlearning Economics

Claude Fischer on what average Americans think about inequality

Krugman, Greider, and the Continuing Saga of Sustained Secular Stagnation; Dean Baker

BBC News article on Minsky

Palley and the case for asset based reserve requirements

Revised paper by Tom Palley available here. From the abstract:

This paper critiques the Federal Reserve’s quantitative easing (QE) exit strategy which aims to deactivate excess liquidity via higher interest rates on reserves. That is equivalent to giving banks a tax cut at the public’s expense. It also risks domestic and international financial market turmoil. The paper proposes an alternative exit strategy based on ABRR which avoids the adverse fiscal and financial market impacts of higher interest rates. ABRR also increase the number of monetary policy instruments which can permanently improve policy. This is especially beneficial for euro zone countries. Furthermore, ABRR yield fiscal benefits via increased seignorage and can shrink a financial sector that is too large.

Read more here. Jane D'Arista has also made the case of ABRR, for example here.

Thursday, April 10, 2014

US Economy Adds 192,000 Jobs in March; Long-Term Unemployment Rate Unchanged

In two recent posts (here and here), it was noted that educational credentials have had next to zero significant causal influence on structural unemployment, and that stagnation is primarily due to lack of adequate effective demand and appropriate fiscal policy. According to CEPR,
[with] population growth implying labor force growth in the neighborhood of 90,000, the economy is cutting into the backlog of unemployed workers at the rate of 90,000 a month. With the economy still down close to 7 million jobs from trend levels, this would imply that we would reach full employment some time in 2020. 
Read rest here

Wednesday, April 9, 2014

Long-Term Unemployment High, Regardless of Education

By Heidi Shierholz
Job opportunities have been so weak for so long that jobless workers continue to get stuck in unemployment for unprecedented lengths of time. Currently 3.7 million unemployed workers have been searching for a job for more than six months, more than three times the number of long-term unemployed there were in 2007, before the recession began. We often hear the claim that long-term unemployment in this recovery is due to unemployed workers not having the education or skills for the jobs that are available. A look at the data, however, shows that this is not what’s driving today’s long-term unemployment crisis. 
Read rest here
And for another post on the issue, see here 

Monday, April 7, 2014

The Wall-Street/Silicon-Valley/Beltway complex

Eisenhower once warned us of the dangers of the Military-Industrial Complex. A bit more sardonically, globalization champion, and Columbia Professor, Jagdish Bhagwati coined the Wall Street-Treasury Complex, often referred to with the addition of the IMF (International Monetary Fund) at the end. When it comes to inequality in the US maybe we should talk about a Wall-Street/Silicon-Valley/Beltway complex or at least that is what the data presented by Galbraith and Hale here suggests.

Looking at inequality between economic sectors the paper suggests that between 1990 and 2012, three sectors are crucial, information technology, finance and the public sector. They argue that there are few main trends in the data:
One is the rise of professional, scientific and technical services in the information-technology boom through 2000. Another is the waning of the public sector, both federal and local, from 1990 to 2000 and then its recovery as a significant contributor to inequality in the early 2000s. It is notable that the Democratic years under Presidents Clinton and Obama were not banner ones for government; this sector fared better under the Republicans. A third trend is the rising importance of finance and insurance during the boom years from 1990 until 2001 but even more so during the run up to the financial crisis in 2007. Thereafter, the relative weight of the financial sector shrinks – and overall inequality also declined a bit. Taken as a whole, the period from 1990 to 2012 was one of rising earnings inequality, with a peak in 2000 and again in 2007. Inequality then subsides, but quickly recovers and by 2012 it was near or at its previous peak.
By the way, the importance of the public sector during the GOP governments goes hand in hand with the fact that Republicans are, for a long time, the party of big government (mostly for corporate welfare and tax cuts for the rich).

More interesting from the point of view of policy, Galbraith and Hale debunk the notion that education is the solution for inequality. They say:
When public discourse admits inequality to be a problem, education is often given as the cure... This is a view with powerful support among economists. But the simple inter-sector dynamics show clearly that, as a solution to inequality, education is a bust.

As we’ve shown, the last two decades have seen significantly slower job growth in the high- earnings-growth sectors than in the economy at large. So even if large numbers of young people do “acquire the skills needed to advance” there is no evidence that the economy will provide them with jobs to suit. Many will simply end up not using their skills.
Inequality is not just the result of lack of skills, since several skilled workers would end up with no jobs, or low paying jobs, and effective demand and government policy are necessary to reduce it.

Sunday, April 6, 2014

John Eatwell on the theoretical lessons from the crisis

It's from 2012, but still very much relevant. Short and to the point about the limitations of the mainstream to understand the crisis. I would put less emphasis on the Sonnenschein–Mantel–Debreu theorem, and more on the Sraffa-Garegnani critique of General Equilibrium, but that's a detail. He is correct in pointing out to Keynes' Principle of Effective Demand (PED), and to the insidious role of finance.

Saturday, April 5, 2014

Lars P. Syll: Piketty and the Cambridge capital controversy

By Lars P. Syll
Piketty wants to provide a theory relevant to growth, which requires physical capital as its input. And yet he deploys an empirical measure that is unrelated to productive physical capital and whose dollar value depends, in part, on the return on capital. Where does the rate of return come from? Piketty never says. He merely asserts that the return on capital has usually averaged a certain value, say 5 percent on land in the nineteenth century, and higher in the twentieth.  The basic neoclassical theory holds that the rate of return on capital depends on its (marginal) productivity. In that case, we must be thinking of physical capital—and this (again) appears to be Piketty’s view. But the effort to build a theory of physical capital with a technological rate-of-return collapsed long ago, under a withering challenge from critics based in Cambridge, England in the 1950s and 1960s, notably Joan Robinson, Piero Sraffa, and Luigi Pasinetti.
Read rest here.

Mark Weisbrot: Will Venezuela's New Floating Exchange Rate Curb Inflation?

Since Venezuela exports petroleum and petroleum byproducts and imports most of what it needs, the exchange rate is crucial for economic stability. Food scarcity and inflation has been cited among the reasons why there is ongoing protests in Venezuela. Hoping to quell some of this protest, last week the Bank of Venezuela introduced another exchange system, Sicad II, hoping to take control of inflation and scarcity of essential goods.To discuss all this and more is our guest, Mark Weisbrot, who recently returned from Venezuela. Mark Weisbrot is an economist and codirector of the Center for Economic and Policy Research in Washington, D.C.