Sunday, February 19, 2017

On the blogs

Why You Should Never Use a Supply and Demand Diagram for Labor Markets -- by Peter Dorman at Econospeak. And you shouldn't, but the reasons given here are not the best (more on this on later post)

Declining US Investment, Gross and Net -- Tim Taylor just show the data really (nope, no accelerator story, or any for that matter). Particularly worrisome is the decline in infrastructure investment, even after a recession

What’s behind the decline in U.S. interest rates? -- Nick Bunker at the Center for Equitable Growth, a liberal (progressive?) think tank. Hey, if they endorse the nonsense about the natural rate of interest, there is little hope, I would argue (more on this later too)

Saturday, February 18, 2017

Lara-Resende, Cochrane and the Brazilian Recession

GDP has collapsed by a bit more than 7% in real terms over the last two years in Brazil (graph below show more recent data). This constitutes the worst crisis in recorded macroeconomic history, worse than the debt crisis of the early 1980s, and even the Great Depression.
The reasons for this crisis are entirely self-inflicted. I discussed those issues before here (and here). The problem is not fiscal, which resulted from the crisis, nor external, since there was no real issue in financing the current account deficits. The fiscal adjustment was the main cause of the recession. And certainly monetary tightening didn't help, actually it made the fiscal situation worse by increasing debt servicing costs. At any rate, recently a short newspaper piece (in Portuguese, and registration might be required) by André Lara-Resende, one of the authors behind the idea of inertial inflation, and a student of Lance Taylor at MIT in the 1970s, has received significant praise from a wide and diverse audience. So I finally decided to read it.

Lara-Resende notes, correctly, that the empirical evidence for the simple Quantity Theory of Money is not particularly good, and that there is little connection between money supply and prices. He also notes that modern macro has had a Wicksellian turn, something that is not that new. He is retooling and trying to learn modern macro at Columbia, and discovered the Fiscal Theory of the Price Level (FTPL).

In the traditional QTM story, if the economy is at full employment, and if we assume that the optimal output level is rigid and does not react to demand expansion, and the central bank increases money supply, then inflation would follow. Inflation may actually follow in this scenario even if the central bank decides to tighten monetary policy and not finance the deficits, according to New Classical authors. Sargent and Wallace argue that economic agents know that lower money supply growth today would lead to faster money growth in the future. In other words, if the central bank does not monetize debt in the present, it will be forced to do so in the future, since public debt is a promise to pay in cash in the future, and tighter money now means more inflation later. This would be a situation in which fiscal policy dominates monetary policy.

Fiscal dominance is a situation where the central bank gives up its control over the quantity of money and over inflation to prevent the government from defaulting on its public debt. In addition, with rational expectations, economic agents would anticipate this higher growth rate in the future, and inflation would accelerate in the present without monetization. Sargent and Wallace suggest that inflation becomes always and everywhere a fiscal phenomenon. This is the basis of the FTPL, and the work of Cochrane, which Lara-Resende sees as unorthodox and an alternative to conservatism.

Note that he sees this ideas as unorthodox, in particular because they can account for the possibility of a positive relation between the nominal rate of interest and the price level, something that used to be called the Gibson Paradox.* But, like Cochrane and his fellow New Classical authors, the idea is that to control inflation you need a good old-fashioned fiscal adjustment (btw, that was true too for the old Monetarists, that thought that monetary expansion was caused by fiscal deficits).

The notion that monetization of debt, or fiscal dominance, would lead to inflation, however, is predicated on the supposition that the system has a tendency to move to full employment, and to do it relatively fast. The central question regarding monetization, then, is what determines this supply constraint that imposes an inflation barrier to demand expansion, what Friedman referred to as the natural rate of unemployment – note that natural was meant to suggest that policy cannot affect it. If the economy is below the supply constraint or the supply constraint is variable, then monetization is not inflationary.

Interestingly enough, Lara-Resende does not discuss whether Brazil is at the natural rate at all, and what would be the effect of a massive fiscal adjustment. The idea here is that low rates of interest would signal, lower inflation expectations, and that the fiscal adjustment would reduce the real rate of interest determined by non-monetary factors (the natural rate of interest). There are too many problems with the notion of a natural rate of interest (yes, as I always insist, go learn about the capital debates). But there is hardly anything unorthodox about it. And besides, austerity, which seems to be the default position now in Brazil, would lead to a worsening of the crisis, and contrary to what Lara-Resende thinks, monetary tightening, through its effect on the exchange rate and the cost of imported goods (and its impact on real wages; on top of the effects of the recession on workers' bargaining power, and the government's policy for minimum wages), would maintain inflation low. Low rates of interest (even if welcome) are not the solution; at this stage only expansionary fiscal policy would work.

* It's not really a paradox in a classical (as in classical political economy) context, in which the interest rate is a cost of production.

Thursday, February 16, 2017

Trilemma or dillema: Rodrik and Palley on Globalization

As a followed up on my recent discussion on Dani Rodrik's paper, below Tom Palley's critique of Rodrik's trilemma between globalization, national sovereignty, and democratic politics. Tom argues that there is no trilemma, only a dilemma, and that democracy is not on the same plane.

From his paper "A Theory of Economic Policy Lock-in and Lock-out via Hysteresis: Rethinking Economists’ Approach to Economic Policy."

Rodrik (2011) has argued that globalization poses a trilemma between globalization, national sovereignty, and democratic politics. He argues that you can have any two, but not all three. The framework in Figure 3 qualifies that interpretation. From the perspective of the nation state there is no trilemma, only a dilemma.
National sovereignty can be identified with national policy space. Globalization creates a trade-off between national policy space and the degree of globalization, with national policy space declining as globalization deepens. Democracy is not at issue. Countries can be outside of globalization and democratic, or they can be engaged in globalization and democratic. Democratic politics is always viable. The problem is globalization diminishes the “content” of democratic politics, as measured by the achievable range of the policy target.

It is these type of concerns that motivate criticism of trade agreements like the Trans-Pacific Partnership. Whereas trade agreements fifty years ago were about reducing tariffs and quotas, today they are “global governance agreements (Palley, 2016)” that are writing the rules of a new world order. These global governance agreements fundamentally impact national policy space. A clear example of this is the new system governing disputes between governments and foreign-based corporate investors, which involves an extra-legal investor – state dispute settlement (ISDS) process that is outside of nations’ own legal systems. As Renato Ruggerio (1996), the first General Secretary of the World Trade Organization observed at its onset: “We are no longer writing the rules of interaction among separate national economies. We are writing the constitution of a single global economy.”
In fact, the problem is likely more complex than illustrated in Figure 3 because a country that seeks to avoid globalization may still find its policy space impacted by globalization. This is illustrated in Figure 4. As globalization increases in the rest of the world (G*0 < G*1), policy space decreases in country i despite unchanged local engagement with globalization (Pi,0(Gi,0, G*0) > Pi,0(Gi,0, G*1)), which reduces the achievable range of the policy target (Xi,0+( Gi,0, G*0) > Xi,0+( Gi,0, G*1)). That is because globalization is relational. When other countries deepen their globalization, that imposes additional constraints on countries that do not follow suit because it negatively impacts the latter’s network of relations. The exact nature of this shift will depend on the type of globalization adopted by the rest of the world.

Read full paper here.

Wednesday, February 15, 2017

Microfinance, Financial Inclusion,and the Rhetoric of Reaction

This paper was published by Latin American Policy last year, co-authored by my ex-student Carlos Schönerwald Silva. From the abstract:
Several political and academic circles have considered microfinance to be an important tool to promote economic development and the reduction of poverty. It became a worldwide phenomenon, and the practice disseminated in many developing countries such as Brazil. Even as many authors sing the praises of microfinance—in particular the success in developing countries—the actual experience has fallen short. The goal in this article is to provide a critical analysis of the recent practices of microfinance in Brazil. The article also presents the general characteristics of microcredit in Brazil within the context of the broader development strategy pursued, in particular since stabilization and the inception of neoliberal policies in the mid-1990s. It is argued that microfinance plays an insidious role, making market-friendly solutions for social problems more acceptable.
Read full paper here.

Tuesday, February 14, 2017

Has this happened before?

So I have discussed this before. The idea that the Great Depression bears a resemblance to the Great Recession, in that in both cases income inequality increased in the previous period, and went hand in hand with debt accumulation. I cited the Barba and Pivetti paper for the more recent event, and the work by my student Ahmad Borazan on the previous case (see also this post). Now I've been reading Matthew Drennan's book on Income Inequality, and he shows the following figure.
In the same vein, he suggests that income inequality was at the heart of the increasing private indebtedness, and at the heart of the Great Depression. Nothing particularly new. An interesting book, worth reading.

Monday, February 13, 2017

Heterodox, Trespasser, Malthusian and other economist labels

I discussed long ago what it means to be heterodox in economics. Bob Kuttner, who I once saw giving a talk at the New School (in the 1990s), a very sharp journalist that knows quite a bit about economics, sings the praises of Dani Rodrik as an heterodox economist. I discussed Rodrik before, in particular his notion that there is only one economics (neoclassical, of course as in the title of his book One Economics, Many Recipes). And he is not subtle about it either. As I noted back then, in his Has Globalization Gone Too Far, that in spite of Kuttner's review is not particularly critical and is indeed mildly for globalization, Rodrik says that: “when I mention ‘economists’ here, I am, of course, referring to mainstream economics, as represented by neoclassical economists (of which I count myself as one).”

Rodrik is, or was a few years ago at least, in what Colander, Holt and Rosser refer to as the cutting edge of the profession (my views on that here), which is to say he is heterodox in the same way that Joe Stiglitz or Paul Krugman are heterodox. They are willing to suggest that some imperfections make the laissez-faire dream of the most fundamentalist neoclassical authors somewhat overstated. But as much as Krugman and Stiglitz accept the conventional macro model, with the natural rate hypothesis, the same is true for Rodrik, which essentially accepts the basic Heckscher-Ohlin-Samuelson trade model (for a critique go here). He is a moderate neoclassical economist; a potty trained one if you will, but certainly not heterodox.

Don't get me wrong, in many policy issues Rodrik, like Krugman and Stiglitz, is on the right side, even if he gets there in ways that I would suggest are contradictory, and can be seen as an ally of heterodox economists on these policy issues. But I think it is a bit much to call him a critic of globalization, in particular because it underplays the role of true critics, that often paid a steep professional price, in terms of prestige and money, to defend their views. For example, his critique of the Washington Consensus was that the policies (essentially austerity cum deregulation, trade liberalization and privatization, or what you would call neoliberal policies) were incomplete and more institutional reforms were needed to make them work. So Rodrik was basically playing the Douglas North New Institutional imperfection card (now used very effectively by Acemoglu, Robinson and co-authors). Summarizing his work I said back then:
"Rodrik (1999b) suggested that five types of institutions, defined as behavioral rules that govern the interaction between economic agents, are relevant to explain successful development experiences: property rights, regulatory institutions, institutions for macroeconomic stabilization, institutions for social insurance, and institutions for conflict management."
The problem, as I noticed back then, was that the institutions he was pushing for (note that property rights are in the original Williamson consensus decalogue) were more harmful than good. They reduced the ability to promote state intervention in the economy and the scope for industrial policy, they were geared for macro stability narrowly focused on price stability (he probably wouldn't disagree with the idea of the natural rate in macro), and even when he was for social insurance policies, didn't seem to notice that his macro policies would make more social spending almost by definition impossible.

I should say that I find it very apropos that Kuttner compares him with Albert Hirschman, and calls the latter one of Rodrik's heroes, even if I think Rodrik is a different kind of trespasser, not interested in interdisciplinarity per se, but in using economics concepts for insights into other social sciences. More like a social science imperialist (for my take on Hirschman's interdisciplinarity go here). Hirschman was a development economists that was against planning, and that thought that there was something relevant about Hayek's Road to Serfdom (a book that says that any intervention by the state ends up in a slippery slope towards fascism*; the same argument Reagan made about Medicare in the 1960s). Hirschman had a serious debate with Currie on the issue of planning, regarding the latter's World Bank mission to Colombia, and was generally seen as friendly critic of the mainstream (see Roger Sandilands views, which are, correctly I would add, very critical of Hirschman). Like Rodrik, Hirschman got hired by Harvard, which is hardly known for hiring controversial lefties that go against the grain, which he only left to the Institute of Advanced Studies because he was a terrible teacher. Also, like with Hirschman's contributions, many heterodox and progressive intellectuals tend to overplay the critical aspects of Rodrik's work.

In my view, the problem with the friendly critic, that accepts all of the main tenets of mainstream marginalism, without taking seriously the heterodox critiques of the internal logic of neoclassical economics, is that they end up validating some of this illogical ideas, and the foundation for the neoliberal policies people like Rodrik supposedly abhor.

On a slightly different note, and I guess once we are in the topic of who should be considered heterodox and who is a follower of Hirschman, here is another question of labels. Dietrich Vollrath comes out of the closet as a MalthusianThat's a bit funny. I know neoclassical economists, in particular, after Clark's A Farewell to Alms, have come to embrace the epithet, but in all fairness, for a reasonably educated person Malthusian is sort of an insult (btw, on my views on some of the mistakes with the ideas of demographic transitions and Malthusian traps see this).

* On this, Jeremy Adelman tells us in his biography of Hirschman that: "when he found a copy of Friedrich von Hayek’s recently published (in London, in March 1944) The Road to Serfdom in a Rome bookstore, a nerve was struck. 'Reading this book is very useful for someone like me who grew up in a ‘collectivist’ climate—it makes you rethink many things and has shown me in how many important points I have moved away from the beliefs I had when I was 18 years old.'" Those would be his more progressive, Marxist, convictions. Hirschman had lived in Germany, not the Soviet Union, by the way.

Thursday, February 9, 2017

On the AS/AD model and the micro/macro relation

I promised to discuss Nick Rowe's claim that one must start with Aggregate Demand and Supply (AS/AD) to explain macroeconomics. Nick's argument is that the AS/AD model is useful to analyze monetary economies, and he quite correctly points out that money must be part of the discussion from the start. In his words:
And if you don't start with money, monetary exchange, and AD and AS, you are doing macro wrong. Because the only thing that makes macro different from micro general equilibrium theory is the fact that macro incorporates the fact of monetary exchange, which microeconomists ignore.
While I tend to agree that macro should deal directly with monetary economies, it's far from clear that the only difference between macro and General Equilibrium (GE) micro is the existence of money. But before I get to that a few things about the AS/AD model in general and Nick's suggestions.

Sure money matters, but it's worth remembering that the basic macro principle, the idea of effective demand and the multiplier can be described without directly discussing money. Sure, Keynes noted that effective demand works in a monetary economy of production, and suggested that it was similar to Marx's capitalism (M-C-M') in the drafts of the General Theory (GT). But that was just to note that that the process of production is not about consumption, but about accumulation, something relevant for debunking Say's Law.

But the idea that investment (in this case as a proxy for autonomous spending) determines savings, and the adjustment process results from increases in income, does not require a previous discussion of money. So much so that Keynes himself suggests that he only came up with the theory of liquidity preference, and the monetary rate of interest, after the development of the multiplier (and his version the psychological law, and the propensity to consume below one; Kalecki does it by the share of income going to wages below one, and with workers consuming all their income).

So why is AS/AD important in my view, you may ask. I actually start with the Quantity Theory of Money to provide an AD curve (as suggested by Nick; but he prefers to make M endogenous as in a Wicksellian model), and a simple production function and labor market story for a vertical AS at the natural level of output to describe the neoclassical model. Exactly to show that in this case output is supply constrained and money does not matter. And that would contrast with the Keynesian view of a demand determined level of income and employment, and a world in which money matters.*

The worst part of using the AS/AD framework is that most students will mechanically believe in something along those lines, and in particular the notion that the two curves are independent. And even though by the end of the course I try to emphasize that the AS (potential output) can be moved by changes in the AD, along the lines of the Kaldor-Verdoorn, it is harder once they have been using both curves independently.

That leaves the issue of the micro/macro relations and Nick's notion that money, which he sees as a medium of exchange in typical neoclassical fashion rather than as a unit of account that represents the power of the State, is the main difference with micro. In my course, the first thing I discuss is the different views of what macroeconomics is, simply the aggregation of individual rational behavior, or as in Keynes' notion of the fallacy of composition something beyond simple aggregation. One example I use is Keynes' notion of financial markets as a beauty contest, that is, the idea that agents in financial markets are concerned with the average view of where the markets should be. So the behavior of one agent affects the behavior of others.

But the main problem with the notion of conventional neoclassical micro is more complicated than the lack of interdependence of preferences, or the lack of money for that matter, but the very core notion of the principle of substitution. I only discuss this in my course, briefly when I have to deal with investment behavior and Keynes' acceptance of the marginal efficiency of capital. And yes, that requires some understanding of the capital debates.

* I should add that I make the distinction that you could have short run effects of money in the simple neoclassical story, but not in the long run, in which cycles are dominated by technological shocks (phlogiston as Romer would aptly call them). In my view, in the long run the main effect of money would be on the level of the normal rate of interest, and it's impact on income distribution and the dynamics of debt. But those are discussed only cursorily in the undergraduate course.

Sunday, February 5, 2017

On the blogs

Why Did Latin American Import Substitution Industrialisation Run into Serious Problems by 1970s/1980s? -- Lord Keynes provides a summary of Erik Reinert views. If he is accurate, I have a lot of problems with Reinert's views, btw (perhaps more on that in a post)

Scarce workers? -- In which David Ruccio says workers are abundant and that's why wages have been growing slowly. I think pay goes beyond scarcity/abundance, but he is not wrong on the state of the labor market

Post Keynesian Dynamic Stochastic General Equilibrium Theory -- In which Roger Farmer tells us that he hopes "the shock of the Great Recession will catalyze interbreeding between new-Keynesian and heterodox economists. If I am right, more of my neo-classical contemporaries will need to listen to the drum beat that post-Keynesians have been sounding for sixty years." Not sure if DSGE is the way to go though

Wednesday, February 1, 2017

Higher education and social mobility

The New York Times had a while ago a whole piece on Chetty, Saez and co-authors about the lack of capital mobility in the US. No surprises really. Turns out that universities can increase social mobility. The problem is that universities don't do enough. Bucknell actually has considerably more students from the 1% than from the bottom fifth. One way to increase social mobility would be to expand the scholarships for low income students. Somehow I doubt that the guy from Trump University would do much on that front.

Tuesday, January 31, 2017

Beware of Trump's appointees

No, not to the SCOTUS position. I'll leave that for more qualified analysts. I'm just saying that it seems that Trump will appoint more hawkish appointees for the two vacancies on the Fed’s Board of Governors, which are part of the FOMC, that decided monetary policy (the other 5 are the Governor of the NY Fed, and governors of the rotating member banks). It seems that Trump wants higher interest rates, even if that contradicts his rhetoric about the dollar being appreciated and hurting manufacturing at home. If monetary policy turns significantly more contractionary, unless he really goes for fiscal expansion, he might after all throw the economy into a recession. So far just more uncertainty.

Sunday, January 29, 2017

On the blogs

The Macroeconomics of Reality-TV Populism -- Krugman mildly critical of Dornbusch's idea of macroeconomic populism, which is good. The problem with redistribution and high wages is not that it produces a crash, at least not because of unsustainable public debt. In the case of Latin America it was always the external accounts. And he is right, it is far from clear that Trump will be a populist in that sense

Keynesian Economics without the Consumption Function -- Roger Farmer wants to get rid of the multiplier, that is, of effective demand. He says that wealth effects matter, not income effects. Beyond the question of whether it's empirically correct, I would say that Keynesian economics without effective demand (the multiplier) is not Keynesian

Festschrifts for Sraffians -- Robert Vienneau lists several books in honor of Sraffian scholars (not sure all in the list are Sraffians though; list is worth looking anyway). He suggests we are in the third generation of Sraffa scholars. Not sure how you count the descent. Mine would be via John Eatwell at the New School, I guess, and he was a student of Joan Robinson, who was a student of Sraffa