Showing posts from February, 2017

The “Natural” Interest Rate and Secular Stagnation: Loanable Funds Macro Models Don't Fit Today’s Institutions or Data

By Lance Taylor

Can America recover ideal rates of growth through interest-rate policies? This important analysis suggests that most economists misunderstand the issue. Updating Keynes, the analysis suggests that fiscal stimulus, labor union bargaining power, and more progressive income taxes are needed to support growth. (The article includes some algebra, which some readers may choose to skip.)

The main points of this paper are that loanable-funds macroeconomic models with their “natural” interest rate do not fit with modern institutions and data. Before getting into the numbers, it makes sense to describe the models and how to think about macroeconomics in the first place.

Today’s “New Keynesian” orthodoxy says that short- to medium-run performance is determined by interest-sensitive “loanable funds.” Unimpeded interest-rate adjustment should support robust macroeconomic equilibrium. Examples of this thinking include the (visibly nonexisting) “zero lower bound” on rates, which allege…

Crisis and Cycles in Economic Dictionaries and Encyclopaedias by Daniele Besomi

This is a review of this edited book that was just published in the Review of Political Economy.

This substantial volume provides an interesting and exhaustive discussion of the theories of business cycles as presented in the main economic dictionaries and encyclopedias over a period of almost two centuries. For the most part the content corresponds to the views of key authors who contributed to the development of the theories of fluctuations. Some major authors are nevertheless not directly covered, presumably because they did not write, or were not the subject of, encyclopedia entries. Joseph Schumpeter is one example of an important author who is not covered. Several chapters are devoted to schools of thought, e.g. Real Business Cycles, or to subfields like Political Business Cycles. The editor’s decision to focus on dictionary entries reflects his belief that these publications were authoritative and influential, and that the views expressed in them carried significant weight.


Roundtable on Neoliberalism

This Friday for those in New York, during the Meeting of the Eastern Economic Association.

<Friday, February 24, 1:00-2:20>
Roundtable on The Future of Neoliberalism (JEL Code B)
Session Chair:  Esteban Pérez-Caldentey, ECLAC Chile

Roundtable Panelists:
Robert Blecker, American University
Orsola Costantini, INET
Kim Phillips-Fein, New York University
Matías Vernengo, Bucknell University
Mark Weisbrot, CEPR

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)

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 divers…

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…

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 m…

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 onIncome 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.

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 heter…

On the blogs

Introduction to Economics and Global Capitalism Syllabus -- Mike Isaacson's syllabus, with no textbook. Good choice

The U.S. Tax Code Actually Doesn’t “Soak the Rich” -- Nick Buffi at the CEPR blog. I sort of discussed that here

Three reasons we’re not yet at full employment -- Jared Bernstein. He's right

Are we at full employment?

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 …

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

Unemployment, Trade and Trumponomics at the Rick Smith Show

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.