Friday, September 4, 2015

More on the Greek Crisis at the Rick Smith Show

Thursday, September 3, 2015

Teaching Marx in Lewisburg

I've been teaching an Intermediate Political Economy course, substituting Berhanu Nega, who regularly teaches this course. The text used, and it was already in the bookstore, is Bowles, Edwards and Roosevelt's Understanding Capitalism, which puts an emphasis on individual behavior as the main difference with the marginalist view, and is not the best choice, in my view. At any rate here are a few old posts on Marx, which is central to the first part of the course (towards the end Veblen becomes more important; I guess at Bucknell this is the way we introduce Marxism and Institutionalism; glad I'm teaching it and having a better perspective on our curriculum).

What makes capitalism capitalism? (on the definitions of capitalism as a mode of production)

Sraffa and Marxism or the Labor Theory of Value, what is it good for? (on the labor theory of value)

Was Marx right? Nice of you to ask, but... (on common misconceptions about Marx)

And why not this one, on why Marx and Keynes are essential for a coherent heterodox alternative to the mainstream:

The meaning of heterodox economics, and why it matters

PS: The course has other books and texts, which complement the main text. I highly recommend the one by my colleagues Sackrey, Schneider and Knoedler Introduction to Political Economy.

Wednesday, September 2, 2015

Will the Fed hike the interest rate?


It seems increasingly probable. Stanley Fischer suggested that is possible in his speech last weekend at Jackson Hole. My bet is that unless labor markets numbers are terrible Friday, there is a good chance there will be a minor rate increase in the next meeting. That is a bit of a surprise. It's also not a very good idea, as I noted before, and Mark Weisbrot suggests here.

Friday, August 28, 2015

Thirlwall à la Godley

Short note on Thirlwall's Law by Lance Taylor available here. As he notes on Thirlwall's Law:  "Insofar as they [the conditions to generate it] are 'extreme,' the plausibility of (3) [Thirlwall's Law] is open to doubt," which is one of the points I raised in my recent debate with Jaime Ros. Causality here remains from exports to growth, which was reversed in Clavijo and Ros, but there is a healthy skepticism about the generality of the law.

Arguably Godley had a version of Thirlwall's Law in his model too. As noted by Zezza: "the ideas underlying the ‘New Cambridge Hypothesis,’ which assumed... that the private sector would adjust rather quickly to a shock, to restore its desired income/assets ratio." In this sense, in the long run in a steady state Godley assumed that the net acquisition of financial assets would be zero. This would be a stock version of the flow equilibrium between investment and savings, the private balance.

Thursday, August 27, 2015

Martin Feldstein on Wall Street Instability and Interest Rate Policy

Martin Feldstein, chairman of the Council of Economic Advisers (CEA) during the Reagan administration, and one of the most influential economists in policy circles says that: "Market participants know that the economy is now essentially at full employment, that the consumer-price index is close to 2% and that there is little risk of deflation."

Few things. This:
Broader measure of unemployment is at 10.4%. Then this:

That is, the increase in employment, for the growing population, since the crisis has been almost nil. And finally this:
http://data.bls.gov/pdq/SurveyOutputServlet?request_action=wh&graph_name=EC_ectbrief

That is, wages have not increased much in real terms (click on figure for a better image).

Also, the deflation that matters (again) is asset deflation, not CPI, or some broad price index, deflation. Funny thing is that Feldstein thinks it's possible that asset deflation would have real effects. He says: "Much of this mispricing will likely unwind in the months ahead. What isn’t clear is whether the fall of equity prices and other corrections will have adverse systemic effects as they did in 2007-08, bringing down consumer spending and business investment and thereby reversing the recent labor-market improvement. Only time will tell."

I'm more skeptical that the effect would be big. For most consumers the effects of the Wall Street crash are irrelevant. But clearly there is no risk of inflation. In sum, not at full employment, and inflation is not really a problem, since wages are subdued. So his call for higher interest rates is hard to defend. Unless there is something else going on.

PS: Feldstein was on the board of AIG for many years, and he received a lot of money (millions?) from the company, which was at the center of the financial meltdown in 2008. He never defended regulation of financial markets. It might be a coincidence of course that his personal interests and his views are well aligned. But it would be good to know who are his clients now. I mean, just to make sure that his advise on interest rates is not biased ("Nudge, nudge. Wink, wink. Say no more").

Wednesday, August 26, 2015

Thirlwall's Law debate in Investigación Económica

The other side

Jaime Ros, with Pedro Hugo Clavijo, wrote a critique of Thirlwall's Law (in Spanish). Replies by Carlos Ibarra here, Esteban Pérez here and myself here. Their rejoinder here. All in Spanish. Haven't read the whole rejoinder yet (just got it), but for some reason they insist that the supermultiplier implies that exports are always the main source of autonomous demand.* Hm, that's weird. Just puzzled by that one. They should read Bortis and Serrano (this one with Fabio Freitas). Oh well.

* In their words: "El problema con esta propuesta [el supermultiplicador], ... implícitamente está suponiendo que las exportaciones son el componente principal, aunque no único, de la demanda autónoma..." Translation: "The problem with this proposal [the supermultiplier],... is that implicitly presumes that exports are the main component, even if not the only one, of autonomous demand..."

Gets better. They agree with me on this. In their words:  "estamos de acuerdo con Vernengo cuando dice: '(…) el modelo de Thirlwall no es capaz de captar la complejidad del proceso de desarrollo asiático, el papel del Estado, de la inversión pública, del financiamiento de los bancos públicos, del papel jugado por factores geopolíticos asociados a la amenaza comunista, entre otras cosas'." Translation: "we agree with Vernengo when he says: '... Thirlwall's model is not capable of explaining the complexity of the Asian development process, the role of the State, of public investment, of public banks' financing, of the role played by geopolitical factors associated with the communist threat, among other things'." The rest of the paragraph they forgot to quote: "Several of these factors were operative through autonomous government spending. One cannot think about the Chinese case without public investment." That would be as in government spending is the main, even if not the only, source of autonomous demand.

PS: The whole issue of Investigación Económica is available here.

Did anyone notice the global financial crisis of 2007–2008?

By Paul Davidson

On November 4, 2008, at the dedication of a new building, Queen Elizabeth of Great Britain visited the London School of Economics (LSE). While there she was given a briefing by academics at the LSE on the origins and effects of the global financial crisis and its resulting turmoil in international financial markets. The Queen is reported to have asked, “Why did nobody notice it developing?” The director of research at LSE told her, “At every stage someone was relying on somebody else and everyone thought they were doing the right thing.”

How is it possible that the many intelligent investors, bankers, brokers, fund managers and other financial market participants thought they were doing the right thing, when it is clear in hindsight that market activity was creating a situation that ultim- ately caused global financial markets to collapse?

The answer lies in the fact that, for at least four decades, the economic theory that has dominated academic teaching has not been applicable to our economic system.
...

Download the rest of the chapter here. It's the first chapter in his new book Post Keynesian Theory and Policy: A Realistic Analysis of the Market Oriented Capitalist Economy.

Tuesday, August 25, 2015

Obituaries: Nathan Rosenberg (1927-2015)

E-mail was sent to the Society for the History of Economics (SHOE) informing that Nathan Rosenberg has passed away. Have not seen an obituary, but will link later. He was the author How the West Grew Rich, that suggested that freedom was central for creating the supply-side conditions for economic growth in Western Europe. Several heterodox neo-Schumpeterians used his work, in particular Inside the Black Box. Personally I prefer demand-driven stories, including for technology. At any rate, another blow for economic history, that has less space in economics departments, and that needs clear, erudite thinkers like him.

China and secular stagnation

So in the last couple of weeks the Chinese problems have been in the news. And many suggest that the troubles in the US are not unrelated. For example, the New York Times tells us that according to Larry Summers: “The risks of a deflationary, secular stagnation in the US would be increased by a large devaluation of the renminbi.” And Krugman resuscitates Bernanke's global savings glut as the explanation for everything, from China's slowdown, depreciation and stock troubles to the recent turbulence in Wall Street.

I will not discuss again the problems with that view. In Krugman's favor he suggests that the "ideology of austerity, which has led to unprecedented weakness in government spending, has added to the problem." It is not that it added to it, it is the problem. But in all fairness, set aside the drama in the financial press, the Chinese stock market should not be a problem for China's long term growth, since losses in domestic currency can always be compensated by their central bank. And China increasingly grows as a result of domestic markets, which are expanding, with real wages still going up, and migration to the cities also helping.

The devaluation of the yuan certainly has consequences, but the problem isn't the effects on US exports, and weaker markets here. That the US could grow with an export-led strategy doesn't pass the laugh test. The US will continue the very slow recovery, and the recent Wall Street problems will have a negligible effect on consumer spending. Yes financial markets are still unregulated and that is dangerous.

But the real problem now, as discussed (whole book is worthwhile) a while ago when commodity prices had not yet fallen significantly by Franklin Serrano, is that a devaluation of all peripheral currencies, as it has been going on in recent times, would have a negative impact on commodity prices. That would be the supply side mechanism, rather than the demand (Chinese, in particular) one. And that might have negative consequences for commodity exporters.

On the positive side, this turbulence suggests that the Fed is very unlikely to hike the rate of interest in the next meeting. That's not enough to produce a stronger recovery in the US, but it might be sufficient to preclude a global debt crisis in the periphery.

Saturday, August 22, 2015

Keynes beauty contest in the NYTimes

Still very slow posting. Will pick up in September, I hope. Here a link to a game that is representative of what Keynes referred to as the beauty contest, which described the behavior of financial markets. Keynes original quote from chapter 12 of the General Theory says that:
"professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be."
So the game is not necessarily to pick up the number (in the NYTimes) that would follow from rational behavior. It's the number that the average person thinks the average person would choose.

Sunday, August 9, 2015

Palley on economic stagnation


Tom's new paper titled "The US Economy: Explaining Stagnation and Why It Will Persist." It's a policy problem, not a structural phenomenon. The abstract:

This paper examines the major competing interpretations of the economic crisis in the US and explains the rebound of neoliberal orthodoxy. It shows how US policymakers acted to stabilize and save the economy, but failed to change the underlying neoliberal economic policy model. That failure explains the emergence of stagnation, which is likely to endure. Current economic conditions in the US smack of the mid-1990s. The 1990s expansion proved unsustainable and so will the current modest expansion. However, this time it is unlikely to be followed by financial crisis because of the balance sheet cleaning that took place during the last crisis.

Read full paper here.

Friday, August 7, 2015

Unemployment is unchanged and so is the Republican Party

So nothing new in the last report. 215k jobs created and unemployment rate at 5.3%. Below the employment to population ratio.
https://research.stlouisfed.org/fredgraph.jpg?hires=1&type=image/jpeg&chart_type=line&recession_bars=on&log_scales=&bgcolor=%23e1e9f0&graph_bgcolor=%23ffffff&fo=verdana&ts=12&tts=12&txtcolor=%23444444&show_legend=yes&show_axis_titles=yes&drp=0&cosd=1990-06-30&coed=2015-07-01&height=445&stacking=&range=Custom&mode=fred&id=EMRATIO&transformation=lin&nd=&ost=-99999&oet=99999&lsv=&lev=&scale=left&line_color=%234572a7&line_style=solid&lw=2&mark_type=none&mw=2&mma=0&fml=a&fgst=lin&fgsnd=2007-12-01&fq=Monthly&fam=avg&vintage_date=&revision_date=&width=670
It has started to go up. But there is a long way to go. By the way, in the Republican debate I didn't hear anything different as a solution for the economic problems. Tax cuts, presumably for the wealthy (job creators is not used anymore), a flat tax and even tything instead of income taxes. Deregulation always. They are for military expansion too. And yes military Keynesianism might help the economy, but... Apparently no lesson from the 2008 Global Crisis has been incorporated into the GOP's economic discourse.