Friday, May 27, 2016

Revised GDP and the slow recovery

BEA released the second estimate of the first quarter GDP, and it's up from 0.5 to 0.8%. Not bad, not great. Note that federal government spending is a drag on the recovery (although local and state governments are positive force, and part of that is actually funded by the federal government anyway; so the actual negative impact of contractionary fiscal policy is smaller than what the numbers suggest). At any rate, this will be used to demand higher rates in the next meeting of the FOMC. You can bet about it. Listen to Dean Baker at the Rick Smith Show here, suggesting why this is a terrible idea.

Thursday, May 26, 2016

A brief note on Venezuela and the turn to the right in Latin America

So besides the coup in Brazil (which was all but confirmed by the last revelations, if you had any doubts), and the electoral victory of Macri in Argentina, the crisis in Venezuela is reaching a critical level, and it would not be surprising if the Maduro administration is recalled, even though right now the referendum is not scheduled yet.

The economy in Venezuela has collapsed (GDP has fallen by about 14% or so in the last two years), inflation has accelerated (to three digit levels; 450% or so according to the IMF), there are shortages of essential goods, recurrent energy blackouts, and all of these aggravated by persistent violence. Contrary to what the press suggests, these events are not new or specific to left of center governments. Similar events occurred in the late 1980s, in the infamous Caracazo, when the fall in oil prices caused an external crisis, inflation, and food shortages, which eventually, after the announcement of a neoliberal economic package that included the increase in the cost of transportation, led to public protests and government repression.

These are the problems of an economy that is excessively dependent on oil exports, and that has been unable to diversify its economic activity. Sometimes this is seen as the result of a Dutch Disease (or the Resource Curse), the deindustrialization associated to the changes in relative prices related to favorable terms of trade, which lead to an inflow of imports of manufactured goods and deindustrialization. I would be reluctant, however, to suggest that this is the case in Venezuela, since Import Substitution Industrialization (ISI) was weak there when compared to say Argentina, Brazil or Mexico, and the industrialization process was never strong in Venezuela.
In both cases, back during the Caracazo and now, the current account deficit has been at the center of all problems (see figure above). And while one can blame the left of center governments of Chávez and Maduro for not being able to break the structural dependence on oil, it is hardly the case that this is a problem just of the left of center governments. In fact, even with this terrible collapse of the economy, for the period as a whole starting in 1999 (or 2003, after the Chávez administration survived the US sponsored coup, and took over the oil company), the economy grew considerably (see figure below).
So growth has been tied to terms of trade and the price of oil. Also, not only the economy collapses when the price of oil collapses, but exchange rate depreciation, in the black market now, leads to high inflation, which goes often with shortages. Anybody that has lived through high inflation in Latin America in the 1980s knows this. It has nothing to do with fiscal policy, or with the central bank printing money. The fiscal situation worsened as a result of lack of growth and the external problems (see figure below).
This is a tragedy, and there are no good solutions. Mark Weisbrot suggests depreciating the exchange rate. But normally this operates by making imported goods more expensive, and leading a recession and lower imports. As he notes, the recession has already done a good chunk of that job, and imports have already collapsed. And Venezuela cannot expect much external help, certainly not from the IMF and the US, not while Maduro is in power. My guess is that there is a good chance that the government of Maduro will not resist and that a right wing government will come to power and adopt a neoliberal program. This would bring almost no relief in the short run, even though access to IMF funds might mitigate the balance of payments for a while, and allow to reduce the worst elements of the crisis, like the food shortages.

I should note also, that while it is not surprising that Maduro's government is unpopular in the middle of this crisis (like Dilma was in Brazil), it would be a stretch to suggest that most people want a return of neoliberal policies (in fact, in Brazil the country remains divided, as much as in Argentina, were the neoliberal Macri only won a narrow victory by deceiving the electorate). The problems of the long cycle of the left in the region, tied to the high prices of commodities, and the reduced popularity of left of center politicians, does not translate into an acceptance of neoliberal policies, and more popular resistance can be expected now, as compared to the 1990s, when the Washington Consensus policies were adopted.

Tuesday, May 24, 2016

Who is afraid of Neoliberalism? A comment on Mirowski

Way less scary than Neoliberalism

Debate with Mirowski, as promised. From the INET website:
While the Neoliberal movement’s concerns extend into a broad political reorganization of society, it remains intimately connected with neoclassical economic thought.
The idea of a Neoliberal Thought Collective (NTC) being a “completely different school of thought” from neoclassical economics is not quite correct. It is true that Neoliberalism transcends the more limited scope of neoclassical economics with a much broader preoccupation with the political reorganization of society. On the other hand, it is hard to think of any Neoliberal author cited by Mirowski that does not fall within the neoclassical school.
Read my full reply to his paper here.

PS: There is also a response to Mirowski by Kari Polanyi Levitt and Mario Seccareccia here, and one by Alessandro Vercelli here.

Monday, May 23, 2016

Latin American Corner: Thoughts on inflation targeting

By Naked Keynes (Guest Blogger)

Several Latin American economies (Brazil, Chile, Colombia, Mexico, Peru) adopted full-fledged inflation targeting regimes at the end of the 1990s and beginning of the 2000s. Others are following suit including the Costa Rica, Dominican Republic, Guatemala, Paraguay and more recently Argentina.

Inflation targeting is defined by its proponents as a monetary policy framework, rather than iron clad rule as monetary targeting, consisting in the public announcement of numerical targets (a point inflation rate, a range or a point with a tolerance range) acknowledging that price stability is the fundamental and hierarchical goal of monetary policy and a commitment to transparency and accountability. Transparency means that the monetary authorities must communicate their targets, forecasts of inflation, decisions on monetary policy and the motivation for their decisions. Accountability means that the monetary authorities are responsible for attaining the announced objectives and subject to “public scrutiny for changes in their policy or deviations from their targets.” Full fledge inflation targeters practice ‘flexible’ inflation targeting entails pursuing a ‘gradualist’ approach to the achievement of monetary policy objectives.

The Latin American experience underscores some major limitations of inflation targeting. First, inflation targeting is not intended to reduce inflation and countries adopt inflation targeting regimes at very low inflation rates. The available empirical evidence shows that Latin American countries adopted full- fledged inflation targeting regimes at one-digit inflation rates. Latin America´s high inflation periods occurred in the 1970s and the 1980s. Inflation began to decline in the mid-1990s for the great majority of Latin American irrespective of their monetary and associated exchange rate regimes (Table 1).

Table 1:  Latin America: annual inflation rates (averages; 1960-2015) 
Country Name
1960-1971
1972-1983
1984-1995
1996-2007
2008-2015
Argentina
21
171
592
9
19
Bolivia
3
55
1,178
6
7
Brazil
44
62
928
9
8
Chile
31
170
18
6
4
Colombia
12
23
27
11
4
Costa Rica
2
27
18
11
7
Dominican Republic
2
8
29
12
5
Ecuador
10
11
0
4
5
El Salvador
1
9
5
3
2
Guatemala
1
10
18
6
5
Honduras
3
8
13
12
5
Mexico
4
30
51
11
4
Nicaragua
2
15
2,422
9
9
Panama
1
9
1
3
4
Paraguay
3
13
24
10
5
Peru
9
45
865
4
3
Uruguay
44
62
68
11
8
Venezuela, RB
3
14
34
33
27
Median
3
19
28
9
5
Standard Deviation
14
51
643
7
6
Source: On the basis of Word Bank development Indicators (2016)

Implementing inflation targeting regimes at a one-digit inflation rate level has an obvious theoretical justification: the condition for stability in an inflation targeting model is that the policy rate of interest in real terms must be positive (the nominal rate of interest has to exceed the future expected inflation rate). A two-digit inflation rate means that the Central Bank must adopt a two-digit monetary policy rate which in turn implies that the structure of interest rates must also conform to those levels.
There is here an important policy lesson for Argentina. The current authorities of the central bank of Argentina are committed to the adoption of inflation targeting. Since the rate of inflation is above 40% (the highest in more than a decade and half) this would also mean that the monetary policy rate must be set above the inflation level. With a structure of the terms of interest hovering above 40% do the Argentine authorities believe they can foster growth or are they trying to provoke a giant recession?

Second inflation targeting requires stable and certain economic conditions that can guarantee policy continuity but which are not present in the real world. According to its proponents, inflation targeting is about managing inflation expectations through public credible announcements in order to avoid abrupt changes in interest rates, output and employment. This is the main reason for ´flexible inflation targeting´ which implies continuous gradual changes in the monetary policy rate over time allowing agents to adapt their behavior to the existing monetary conditions. Thus, if the inflation rate is above target a tighter policy stance should translate into a continuous path of gradual interest rates increases over time until the rate of inflation converges to the target. Yet in many instances, the required conditions for policy continuity are simply not present because central banks can easily misread current conditions. As a result the aim for policy continuity turns in practice into a stop-and-go policy. This is what has happened in the last couple of years in Latin American inflation targeteres including Chile, Mexico and Peru.

Third the presumption that interest rates can manage both inflation and economic activity is wrong and in reality we often find is a disconnect, between interest rates, inflation and economic activity. Chile provides an interesting case of the disconnect between interest rates, inflation and economic activity: (i) inflation is currently at 5% annually above the target (3%) and the upper bound of the inflation target (4%); (ii) the monetary policy interest rate was negative in real terms during most of 2015 and after a 25% basis point increases the monetary policy rate is roughly zero in real terms; and (ii) the rate of growth has slowed down in the past two years to 2% from 5.5% and 4.% in 2012 and 2013.

Fourth so what is inflation targeting all about? Well, in some cases it is simply a policy to maintain the profitability of the financial system. Inflation targeting is portrayed as a very harmless policy: it is gradualist, it avoids giant costs in terms of employment, it promotes credibility and accountability, and it allows the full use of resources once the inflation target is met (this is known as the Divine Coincidence). Yet there is an aspect of inflation targeting which is harmful that is seldom mentioned and which has to with the relationship between the central bank and the financial system and which can be illustrated with the case of Latin America and more particularly with Chile. The Chilean Central Bank as a policy rate that is zero in real terms (and that was negative for almost a year). Commercial borrow from the Central Bank but commercial banks charge positive real rates of interest on their loans to consumers and businesses and pay nothing in real terms for their loans from the Central Bank.

Central Bank policy can easily become captive to the interests of the financial sector…So much for Central Bank independence.

Friday, May 20, 2016

DisORIENT: Money, Technological Development and the Rise of the West

A very short paper on a very broad subject, co-written with David Fields, which was presented at the last ASSA Meetings in San Francisco. It is forthcoming in the Review of Radical Political Economics (RRPE). The title is derived from Gunder Frank's ReORIENT, that David and I always thought was thought provoking, but surprisingly Monetarist in its assumptions about money. The paper also adds a discussion of Pomeranz famous views on the Great Divergence, particularly the views regarding technological change, which are marginalist at its core, as well as those of Gunder Frank and some of his critics, like Arrighi.

From the abstract:
This paper analyzes the revisionist literature on the Rise of the West. Revisionist authors suggest that the so-called Great Divergence is relatively recent, and that good luck – in the form of silver from the Americas, and abundance of coal, rather than European exceptionalism – was central for the higher rates of growth of GDP in the West. This paper argues that while the revisionist literature provides relevant critiques of conventional accounts of the Rise of the West, it remains rooted in marginalist or neoclassical views of both the role of money and technological progress, and that abandoning these theoretical foundations would strengthen some of its arguments.
As far as I can tell, there aren't many papers in economic history that properly acknowledge the contributions of the revisionist literature, but also of the Military Revolution (Parker), the Consumer Revolution (McKendrick), and the Fiscal-Military State (Brewer). In fact, these historical schools are more compatible with non-marginalist views of the functioning of the economy that emphasize the role of demand and endogenous money in the explanation of the Rise of the West.

Wednesday, May 18, 2016

CEO-to-worker pay ratios

New data by the AFL-CIO Executive Paywatch, available here. Note that union members do much better than nonunion members, and certainly than minimum wage workers.
For more context read this EPI report. You must admit that the use of flawed neoclassical thinking is sometimes amusing. In this Bloomberg post, an 'expert' (aka hired gun) from a free market think tank (pro-corporations propaganda machine) says that the "AFL-CIO study [is] 'useless' because it compares two different labor markets that should be evaluated separately. While most workers could easily be replaced, he said, CEOs are 'much harder to substitute.'" Yes, they are receiving according to their productivity, and is so hard to find these geniuses.

Tuesday, May 17, 2016

Philip Mirowski on Neoliberalism


Neoliberalism is resurgent in Latin America, and quite never left in the US anyway. And everything indicates that, either with Trump (yes, he does have a right-wing populist discourse, but I wouldn't take it too seriously; see his tax plan) or Clinton, it will continue to do well here, even if there is clearly a desire for change. This paper by Mirowski discusses the main points of Neoliberalism. A short reply by yours truly will be published soon in the INET website.

Monday, May 16, 2016

Boycott the Rio Olympics to Defend Brazilian Democracy

By Thomas Palley

Terrible anti-democratic events are now unfolding in Brazil with the constitutional coup against President Dilma Rousseff, organized through a cooked-up impeachment trial.

The impeachment coup represents a naked attempt by corrupt neoliberal elements to seize power in Brazil. Make no mistake: it is a threat to democracy and social progress in Brazil, Latin America, and even the global community at large.

If Brazilian voices concur, the world should respond by boycotting the Rio Olympics scheduled for this August.

Read full text here.

Thursday, May 12, 2016

Brazilian coup and US misinformation

Brazil has an enormous past ahead

As I suggested last month the coup had succeeded. Today Dilma Rousseff was effectively removed from the presidency. No real news here. I just want to correct, to some extent, the huge misinformation campaign in course in the US.  Monica de Bolle was saying many incorrect things on NPR this week (for example, that "the origins of the program called Bolsa Familia came from actually Cardoso's government, so the previous government, the PSDB government that came before the Worker's Party government," when it actually came ideas from Betinho and Cristovam Buarque from the Workers' Party's, PT in Portuguese, government in Brasilia; note that the lie is that she seems to indicate they like spending on the poor, but will have to cut social programs because the new government must be fiscally responsible), which is not a surprise.*

Today the New York Times pitched in also spreading incorrect news. The Times suggests that Rousseff "is charged with violating budgetary laws in order to conceal a deficit before what she anticipated would be a tough 2014 re-election campaign, borrowing money from banks that the executive branch controls to fund domestic programs, and making changes to the federal budget without congressional approval." Actually, the impeachment is based on delays on payments to public banks in 2015, not 2014, and, hence, not related to the re-election campaign. And the primary balance was changed and approved by congress. But the mistakes are all over the place (listen to this on Bloomberg radio; yeah things are going to be wonderful because markets are confident).

The worst part of all of these, and there are many things, not the least the collapse of the economy and the brutal increase in unemployment, is the criminalization of fiscal policy. Note that the Workers' Party maintained primary surpluses for almost all of its period in power. For the most part because a growing economy implies higher revenue. It should be noted that people on the left, like yours truly, always complained of the difference between the primary surplus (red line) and the nominal deficit (blue line), averaging 6% of GDP. The gap corresponds to interest payments that go mainly to the wealthy (see the book on the side for more on that).


It is only with the crisis itself that the fiscal accounts worsened, and that went hand in hand with austerity policies. Actually more primary spending, and less financial spending, would have accelerated growth and revenue without creating any fiscal problem. And yes net debt went up, but remains below the initial level (see below). And more importantly the debt is in domestic currency. Foreign debt and the current account are not really problems, since Brazil has a pile of international reserves and has access to international capital markets that maintain (and will continue to do so) low interest rates.
There is no fiscal problem. There is, however, a backlash among the middle and upper classes against social programs, and the greater visibility of the poor in places that were reserved to the elites (airports, malls, universities, etc.) and a discomfort with the stronger rights for workers (for example maids; if you didn't see the movie The Second Mother you should, it would give you an idea of the social tensions in the country). This is a testament of how much the social hierarchy has been challenged, even by a relatively moderate left of center government. Don't be fooled, it is a coup, and as coups usually do it will turn on its enemies. They will try to jail Lula, not just to wreck his legacy, but more importantly because he seems still to be among the few viable politicians in the country.

*  PSDB stands for Brazilian Social Democracy Party in Portuguese (which in Brazilian politics is really conservative, not social democratic at all).

Wednesday, May 11, 2016

The great economic equations

A few days ago, Unlearning Economics twitted a link to an article on "The 17 equations that changed the world." Only one was an economic equation, The Black-Scholes one, and in all fairness it did not change the world, and is not even a central one in economics. First of all, Nassim Taleb has argued convincingly (for example, here) that Black, Scholes and Merton did not invent the formula, and what they really did was to provide a theoretical justification that was compatible with Arrow-Debreu general equilibrium (GE) views. Haug and Taleb say it clearly:
Indeed what Black, Scholes and Merton did was “marketing”, finding a way to make a well-known formula palatable to the economics establishment of the time, little else, and in fact distorting its essence.
So market participants already had formulas to price options, and the idea that their version of the formula "helped create the now multi-trillion dollar derivatives market," as suggested by Andy Kiersz, is clearly incorrect. Unregulated financial markets didn't need the Black-Scholes formula, economists did. And we know how well that ended. Deregulation and the nature of competition in financial markets would have led to the expansion of derivative markets anyway. But GE would not look like it could provide practical answers to real economic problems. Which turns out it couldn't. Besides, as discussed here before, the Arrow-Debreu general equilibrium model is not devoid of problems.

So what are, if any, the great economic equations, you ask. If I had to say one it would be either Keynes' multiplier formula, Y = I/(1 – c), or Sraffa's demonstration of the inverse relation between wages and profits, r = R(1  – w).* The first clearly shows that spending determines the level of activity and provides formal justification for counter-cyclical policies, which have indeed reduced the effects of recessions on the economy, even if, as Kalecki had noted it would happen, austerity is often imposed for political reasons. The second resolved an issue first clearly posed by Ricardo, is part of the clear understanding of what determines long-term prices, and shows the conflictive nature of the capitalist system. Both are central to understanding the way capitalist economies work.

* Where all variables have the standard meaning, Y is output, I investment, c the propensity to consume, r is the rate of profit, R is the maximum rate of profit, and w the wage share.

Monday, May 9, 2016

Latin American Corner: Quantitative easing, commodities, corporate debt and the paradox of debt

By Naked Keynes (Guest Blogger)

The policy of quantitative easing (QE) pursued by the Federal Reserve following the fall of Lehman Brothers in September 2008 meant to lower long-term interest rates in the United States and boost expenditure had major effects on developing economies including in those of Latin America. As it is well know QE did not increase liquidity. The liquidity with which the Federal Reserve bought financial assets ended as excess reserves at the Federal Reserve balance sheet and the money multiplier became, actually a divisor (the money multiplier dropped below 1 after the start of QE).

However, quantitative easing had an important portfolio rebalancing effect, which altered the relative profitabilities of different assets and made commodities an attractive investment and speculative alternative. Investing in commodities as a way to hedge risk was also championed by mainstream economists. Gorton and Rouwenhorst (2004) (here) argued that commodities and stocks yield similar returns over time so that they are adequate investment substitutes. Moreover they claimed that commodities and stocks are, in terms of levels and volatilities, either not correlated or negatively correlated over time so that investing a part of the portfolio in commodities lowers its total risk. The effect of the boom in commodities during the 2000s in Latin America is reflected in the difference between GDP and gross domestic income (GDI) (the latter is equal to GDP plus the effects of the term-of-trade which were clearly favorable in many Latin American economies. See figure 1 below for a comparison of GDP and GDI for major Latin American commodity exporters.

This gave a false sense of prosperity that even endured after GDP growth in most economies of the region began to decline in 2011: domestic income follows GDP but with a lag).

Moreover, the increase in commodities and terms-of-trade was accompanied by nominal and real exchange rate appreciation in the great majority of Latin American countries. The appreciation in the exchange rate was detrimental to export diversification but, nonetheless, welcome by policy makers as it permitted to control inflation.

Low external interest rates, high commodity prices and income, and exchange rate appreciation set the stage for the large rise observed in the corporate debt following the Global Financial Crisis (2008-2009) in the larger economies of the region. The issuance of corporate debt involved some of the major firms in the region and major commodity producing firms as well the financial sector.

According to recent estimates (here) corporate bond issuance in foreign currency increased from US$ 170 to 383 billion dollars between 2010 and 2015 (compare with FDI figures which are of the order of US$ 150-160 billion per year). But these corporate debt estimates are flows. The corporate debt stocks are much higher. Available non-official figures for Brazil point to a corporate debt stock of US$ 300 billion dollars. The corporate debt issue not only affects Latin America but in general the developing world. According to a research note published by the Institute of International Finance (IIF, June 1 2015), the stock of corporate debt outstanding was above US$ 6.8 trillion in 2014.

The decline in commodity prices which began in 2011 and turned into an outright crash in 2015 was accompanied by exchange rate depreciation and lower growth. The decline in commodity prices reduced the income flows of tradable sector firms giving rise to a wedge between income flows and debt flows. In the case of the non-tradable sectors, the decline commodity prices plus exchange rate depreciation had both income flows and balance sheet effects. Firms have reacted by reducing the debt issuance and slash capital expenditure which affects negatively investment and growth.

As argued by Fitch “the refinancing risk is high and default risk in climbing” (Fitch Latin American Corporate Bond maturities, February 8, 2016). Moreover, as firms have tried to cut investment, this has affected profits so that the corporate sector has increased its debt instead of deleveraging. This paradox of debt, prevalent in part of the Post Keynesian literature (See, M. Lavoie, New Foundations of Post Keynesian Economics, 2014) can be illustrated in figure 2 above with the case of Chile and may be a major stumbling block to overcome the current slowdown of some of the major Latin American economies.

Sunday, May 8, 2016

On the blogs

This Is Extraordinarily Unprofessional!! -- Brad DeLong on the same WSJ piece by Cochrane I discussed this week

Prosperity for All: Coming Soon to a Bookstore Near You -- Roger Famer on his new book, the critique of the ISLM Neoclassical Synthesis and his own Neo-Paleo-Keynesianism

Inflation Targeting and Neoliberalism -- Jerry Epstein interviewed at Triplecrisis

Friday, May 6, 2016

Jobs numbers and slow recovery

Jobs report (BLS, Employment Situation Summary) confirms a relatively weak month in April with total nonfarm payroll employment increasing by 160,000. Also, the labor force participation rate decreased and the employment-population ratio both decreased a bit. Mining employment continued to decline, something that Trump promised to reverse and Clinton noted there might not be much we can do about (the implications might not be minor, see here). Also, while unemployment remains at 5% a broader measures of unemployment remain high. For example, 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 is at 9.7%.

Thursday, May 5, 2016

Robert Paul Wolff on Marx


Robert Paul Wolff always worth. Should read his Understanding Marx. He surprisingly says that Analytical Marxism has taken over Marxism. To get to Marxism he had to learn economics, the classical political economy of the Ricardian kind, and learn linear algebra. Hegelianism was not really central to the message (in my view, but he does say he hates Hegel). Labor Theory of Value explained, but he does not discuss Piero Sraffa's contributions directly here. There is no way to understand Marx without Sraffa. As he said in a paper in Social Research (subscription required) Sraffa "rescued [Smith, Ricardo, and Marx] from the trash heap of antique, outmoded ideas... [and provided] a serious alternative to marginalist theories."