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Showing posts from October, 2011

The political economy of flat taxes

The GOP has revived this season the ghost of the flat tax. Cain is for the 999 plan (whatever that is) and Perry for a 20% flat income tax (see here, for example). I haven't seen any particular analysis of the Perry plan so far, but it won't be much different from the Cain breakup. For example, the Tax Policy Center (here) shows that Cain's plan would increase the federal taxes of the lowest quintile by 18.3% while reducing that of the top 0.1% by 17.9%.  And that's not class warfare! You don't need to be a rocket scientist to know that when you hear flat tax it's all about reducing the taxes of the rich.

Taxation was, by the way, always a key concern of classical political economy (it's there in the title of Mr. Ricardo's Principles). One of the most famous tax proposals of the 19th century, Henry George's single land tax, was in fact based on the 'Ricardian' theory of the rent. That is, the idea that landowners derive their income (rent) …

Utah is number 1

A graduate student brought to my attention the study here that classifies universities according to economic freedom (liberty). The Econ Dept at the University of Utah is number one (if you exclude Canadian universities) in the liberty-reducing (see graph below; click to enhance) index. We hate freedom here!
If you read the paper you'll find out that the liberty-enhancing and liberty-reduction indexes depend on what types of petitions the faculty signs. So if you sign a petition for free trade and against protectionism (a Club for Growth thing), to oppose tax hikes (the so-called Death Tax; yes they do use that term in the paper), to warn against the risks to Social Security (i.e. want to cut benefits) then you're for liberty. But if you sign a petition against the Bush tax cuts, to increase the minimum wage, or to show concern about global warming (they call it climate change; I know) then you're against liberty.
I'm proud to be against liberty then. By the way, we b…

Historians and the surplus approach

An interesting feature of the literature in history, particularly when related to ancient history, is that ideas that are clearly in the tradition of classical political economy, that is the developments from William Petty to Marx including mainly, but not uniquely Quesnay, Smith and Ricardo, are often used in contrast with the dominant supply and demand approach of the literature in economics. The typical discussion of development presumes that it was the surplus obtained with the domestication of plants and animals, and the transition from hunter/gatherer to agricultural societies, that allowed specialization (the division of labor) and the development of social classes.

The figure below comes from William McNeill's classic The Rise of the West, and the essential concept of surplus is at the center of the stage.

In that sense, historians, contrary to economists (even economic historians) do not tend to fall into the trap of describing markets as autonomous institutions that are …

Commercial Policy in Latin America

Last week I taught my Raúl Prebisch class, in my Latin American Economic History and Development course, dealing with Import Substitution Industrialization (an annual thing now). The classic paper in English was published in the American Economic Review of 1959. The masters' students have to read the original paper. This follows my two previous posts (here and here) on trade. A few things that are important to notice.

Prebisch clearly says that industrialization (and hence the expansion of domestic production) is an inevitable part of the process of development, something that has been often forgotten as if strategies based on services or intensive agriculture are alternatives to industrialization. We still live in industrial societies (not post-industrial ones), and industry remains the main source for productivity growth (something that was referred to as Kaldor's Second Law of development).

Second, even if there is strong growth of productivity in the primary sector, these…

More on "free" trade

In a recent post I promised to develop the critique of the dominant trade model, the so-called Heckscher-Ohlin-Samuelson (HOS) theory. While the Ricardian concept of comparative advantage is based on the labor theory of value (and is compatible with modern versions of that theory, as developed by Sraffa), and its results hold if the assumptions are realistic (limited capital mobility, and a fixed level of employment, the latter could result from domestic demand policies), the HOS is an application of the marginalist theory of value and distribution and it suffers from that theory's inconsistencies.

The HOS theory says that a country exports the goods that are intensive in the use of the factor of production that is abundant in the country. A country with lots of workers, and according to theory cheap labor, would produce goods that are labor intensive and export them, while importing capital intensive goods. The graph below illustrates the argument.
If there are two goods (a and …

Jamie Galbraith on the European crisis

Here is the link to Jamie's take on the European crisis. Mike Mandel and Dan McCrum two journalists, are also part of the talk. I'm increasingly surprised that there is a concern that the European Financial Stability Facility (EFSF), the bailout fund, is NOT large enough. As I said before, the Greek debt is not that large, and the European Central Bank (ECB) can buy just a fraction of Greek debt and solve all problems (by the way Jamie makes that point very clearly: that the ECB can print as many euros as they wish to). It's difficult to get this whole thing, as Jamie says Greece is being destroyed, and for what exactly? To make an example.

PS: That also explains the media's need to continue lying about Argentina's post-default performance. Not only Greece must be an example, Argentina cannot be a good example of a default country doing well. On that see Dean Baker's post.

Crossing lines

David Ruccio has a great post on why there are no clear lines between research and policy advice, between advocacy and activism. The post was prompted by Krugman's justifications for not appearing in the Occupy Wall Street protests. I agree with Ruccio that it is possible to provide serious analysis and participate in social movements, and there are lots of examples of public intellectuals that do both well (Noam Chomsky, the late Howard Zinn, and Cornell West, shown above, come to mind). For example, here is the take from Kevin Gallagher and Mark Blyth in Occupy Boston.

Garegnani and the revival of the surplus approach


Last weekend Pierangelo Garegnani passed away in Rome. He was the main disciple of Piero Sraffa, and one of the most important heterodox critics of the mainstream marginalist (neoclassical) approach. A full account of his contributions to economics is well beyond what I can offer in this space, but here are a few highlights.

As early as 1961, while spending an academic year at MIT, he suggested during a presentation by Paul Samuelson that his results depended on the assumption that all sectors use the same capital-labor ratio. The final results of his critique were presented in Garegnani's paper "Heterogeneous Capital, the Production Function and the Theory of Distribution." His paper shows conclusively that the marginalist theory of value and distribution based on an aggregate production function is untenable. This of course builds on Sraffa's work in the Production of Commodities (PC). By 1966, in the famous Quarterly Journal of Economics (QJE) Symposi…

Sims is not Sargent

Below Steve's comment on Sims. Worth a whole post.
Chris Sims' classic 1980 paper "Macroeconomics and Reality" still echoes, or should, among macro model builders and macro econometricians. He could not possibly be clearer about the "incredible" restrictions that models often impose, and proposed a way forward, the VAR in its many forms. That method has evolved to the point where, for example, good econometricians can recast a DSGE model in VAR form and see if it survives the data. Often they don't, a recent example being Peter Ireland's DSGE so soundly rejected by Katarina Juselius. The rub is in the qualifier good. This is not easy stuff to do correctly. But its power is worth the sweat. Sims has been homaged over his prize by Mark Thoma here, and by Jim Hamilton, the time series bible author here. A very favorite story is when Sims, Robert Litterman, and Thomas Doan, all either at the Minneapolis Fed or U of Minnesota in the 80's, "took…

Esther-Mirjam Sent on Sargent and more

As Kevin Gallagher noted, the contributions of Sargent and Sims are quite different and should be analyzed separately. Ester Mirjam-Sent is certainly the most qualified and discerning critic of Sargent's work, and anybody interested in understanding his (Sargent's) contributions to economics should read her extensive research on his ideas. A good start is her paper in the Cambridge Journal of 1997 (here).

Her concerns are more with the evolution of his thinking about rationality, from rational to bounded, which is a central pillar of neoclassical economics. She notes that Sargent's preoccupation with rationality (which should be contrasted with Simon's views) was to strengthen the theoretical foundations of neoclassical economics. I tend to be more concerned with the critique of those foundations, rather than with the question of how rational behavior leads (or not) to efficient market results.

One important area, in which I have done some research, is hyperinflation …

Re-writing history

By the way, in the middle of the several comments praising the winners of the Sveriges Riksbank Prize in Economics there will be a lot of misplaced acclaim. Here is one example from the Huffington Post:
"Sargent famously weighed in on the fight against inflation in the early 1980s. Many economists believed it would take years of high interest rates to bring inflation down. But Sargent believed that inflation could be tamed much faster if the Federal Reserve acted enough to break the public's expectations that prices would continue to rise rapidly. That is basically what happened: Then-Fed Chairman Paul Volcker raised interest rates so quickly and so much that inflation expectations were shattered." So now, if you believe this report, Sargent and Lucas were right about the costless disinflation of the 1980s. Forget that disinflation had to do with falling commodity prices, caused by the hike in interest rates, and with the weakening of the labor force, which faced what w…

A beautiful blind

Sylvia Nasar wrote a new book (the old and famous was the one on Nash's mind and life) on the history of economic ideas. Robert Solow is not too happy, since he thinks the book is superficial, and spends too much time on the economists lives and on what he thinks are second rate minds (e.g. Beatrice Webb, and I suspect for him Joan Robinson too). I did not finish reading the book, and hence will not review it here now, but I can comment on Solow's review, which is quite misguided.

In fact, the preoccupation with policy issues and the general context in which theories are developed is one of the good aspects of this book. In this sense, Nasar's book is in the direct line of descent of those, like Robert Heilbroner, that think that economics is (and should be) about the great questions (accumulation and the wealth of Nations, the quintessential themes of classical political economy) and that the economist's vision is as essential as, if not more so, than the analytical …

On 'free' and managed trade

In one my last posts I promised to talk about "free trade." As I said the name itself is a misnomer, much like "free market." Not just because it suggests that those that oppose it are somehow against freedom, but mostly because it vaguely indicates that trade and markets are like natural phenomena, which would spring out if only government restrictions were eliminated.

In fact, it is well known, at least since Polanyi's classic, that the key markets in capitalist economies (those for land, labor and money) were slowly created by the interplay of social conflicts articulated through the political process and that their very existence results, in part, from the power of the State. Thus, simplistic and manicheistic views on the relation between the State versus the 'free' market miss the point of how States and markets co-evolved historically.

For example, the Bank of England, created in 1694, obtained the monopoly of money creation only after the Bank C…

On China and Jobs

It is true that whenever the economy grows trade deficits tend to become larger, and the United States, which has had persistent deficits since the early 1980s, is particularly prone to those. Dean Baker has been the most vocal defender of a weak dollar (mostly as measure to boost local manufacturing jobs, since a depreciated currency protects local production; here for example a recent piece). Krugman too has recently argued for a more depreciated dollar and also for trade restrictions against China (see here for a recent one).

In all fairness, I have a few concerns with these line of thought, and not because I am (or ever was) a "free trader", like Krugman (by the way Free Trade is a terrible misnomer and there are serious problems with the conventional arguments for it; theme for another post, I guess).

First, in the case of China, the exchange rate has appreciated a lot since the crisis as can be seen in the graph below (Data from the Economist Intelligence Unit).

La vie en foreclose

That's right, not through pink glasses (i.e. rose). Randy Wray, Charles Whalen and Stephen Roach, all in the same page, asking for debt relief as essential for recovery, since most consumers are still de-leveraging from the housing bubble.

Both Keynes and Irving Fisher suggested that debt-deflation was at the heart of the Great Depression, and in that case debt relief for households should be at the center of the recovery. In the 1930s, the New Deal did provide a lot of debt relief for farmers, on top of trying to raise the prices of agricultural commodities (in order to help famers). Now more is needed in the housing front. The figure below shows how much the debt of the non-financial sector has fallen since the beginning of the crisis.
From the peak in 2008, it has fallen around US$ 700 billions. It's likely to continue. The problem is that consumer spending was tied to the ability to obtain credit, i.e. of getting indebted. And mortgages were central for consumers.

The euro is not money of account in Greece anymore

In Argentina, when the crisis got to the worst stage and reduced revenue and spending cuts were at the peak, local governments started using token currencies to pay state workers. The Buenos Aires province started paying its workers in patacónes, which became an alternative to the official currency, the peso, in 2001. In Greece we are already there. Local networks in which transactions take place using an alternative unit of account are taking place. These, if I understand correctly, are private and for the most part electronic networks, rather than public, as in the case of Argentina. No actual currency is being printed (as the 100 patacónes shown above).

At any rate, they go to the heart of the money question, i.e. they serve as alternative units of account.  Money is, after all, the unit of account that allows economic calculation to take place and facilitates the creation of credit and debit networks. Keynes said in his Treatise on Money that: “money of account comes into existen…