Friday, February 27, 2015

Eastern Economic Association Meeting in New York

Will be at the Eastern Economic Association Meetings, that will take place from today, Friday to Sunday at the Sheraton New York Times Square Hotel, New York, NY. Program here. Back to blogging on Monday.

Thursday, February 26, 2015

The Economist is concerned with debt-deflation

Or so it seems (see here; subscription required). They say: "If falling prices endure, then debts, fixed in nominal terms, are harder to pay." Indeed. As Keynes had said back in 1936: “if the fall of wages and prices goes far, the embarrassment of those entrepreneurs who are heavily indebted may soon reach the point of insolvency, — with severely adverse effects on investment.”

In other words, if prices fall, indebted agents owe in real terms more than before. This could affect both firms and consumers. If the price of houses fall, but the mortgage debt remains the same, consumers own more debt in real terms and consumption might fall. In the same vein, if prices are falling and the firm nominal debt is fixed, the real debt increased and investment might decline. Keynes emphasized the role of investment. The sequence of events is given by:

P↓⇒(Debt/P)↑⇒I↓⇒Y↓

The Economist basically argues for Central Banks to change the inflation target. The Blanchard and Krugman idea, even though The Economist does not propose 4% as the new one. I would still argue for fiscal policy. The whole inflation target idea is a confidence fairy too (as noted before).

Wednesday, February 25, 2015

The U.S. Federal Reserve and Shared Prosperity

By Thomas Palley

The Federal Reserve is a hugely powerful institution whose policies have an enormous effect throughout the economy. For that reason, it is doubtful the United States can achieve shared prosperity without the policy cooperation of the Fed.

Now, with the economy stronger, there is debate over whether the Federal Reserve should raise interest rates. That conversation is important, but it is also too narrow.

It keeps policy locked into a failed status quo which has seen the Fed consistently take care of Wall Street first, while placing the concerns of Main Street a distant second. Though the Great Recession has triggered some policy shift toward helping ordinary Americans, much more is needed.

Read rest here.

Yellen says that interest rates will remain low for a while


Patience is the new buzzword. Yellen correctly noted that even though the economy is recovering: "too many Americans remain unemployed or underemployed, wage growth is still sluggish and inflation remains well below our longer-run objective."

Tuesday, February 24, 2015

Jean Tirole is afraid of heterodox economics

Jean Tirole says heterodox economics encourages "relativism of knowledge" and is "the antechamber of obscurantism." The response from the Association Française D'Économie Politique (AFEP) is here. The context is the creation of a new section of the National Council of Universities (CNU), which would incorporate heterodox approaches to economics, which was discussed here and here before.

Tirole suggests that unless you publish in mainstream journals, and get the approval of people in authority, that won the "Nobel" (Bank of Sweden), Clark or the Yjro Johannson award, you should not count. Heterodox economists are basically: "a disparate group, in trouble with the assessment standards that are internationally acknowledged."

He uses his authority as a "Nobel" winner, to reduce the space for alternative views on the functioning of the economy. Note that in his pursuit of closing spaces for heterodox economists, which would not per se diminish the space for mainstream views, he uses the book by Piketty to show how concerned the mainstream is with important issues in the real world. And Piketty's book is certainly very problematic as a discussion of inequality.

With the criteria of normal science Galileo was an obscurantist. We all know that the established journals publish the conventional wisdom, and that these are closed to heterodox authors for reasons that have little to do with quality. Scientists too follow customs and conventions, and even fashions, which often are disconnected from logic and evidence, as any reader of Thomas Kuhn would know. Tirole does not address any substantive issue. The idea that the mainstream neoclassical theory suggests that markets produce optimal outcomes, and economies move to the natural rate, even in the face of the current crisis, is basically okay with him, and he does not feel he needs to explain why [this is not just Tirole, Krugman keeps repeating that conventional analysis did well during the crisis too, but at least he deals explicitly with the issue; see this, and for a discussion of how little the mainstream has learned from the crisis go here].

Krugman himself recognized he published things that were not correct, and that was part of a strategy to get published. In his words:
“By the early 1980s it was already common knowledge among people I hung out with that the only way to get non-crazy macroeconomics published was to wrap sensible assumptions about output and employment in something else, something that involved rational expectations and intertemporal stuff and made the paper respectable. And yes, that was conscious knowledge, which shaped the kinds of papers we wrote." [Italics added]
Respectability is what gets you published in mainstream journals. Willingness to wrap your ideas in crazy models. So that is the problem with the French heterodox authors. They are not sufficiently hypocritical.

The question is why a powerful economist like Tirole is so afraid about heterodox economists. For one, students, and regular people, know when they are been taught crazy models. And if you have something sensible to compare it to, you might be in trouble. Not only you must wrap sensible ideas in crazy models, you must suppress sensible ideas. If nothing else is in indictment of the Nobel in economics, Tirole attitude is. He might be considered 'respectable', since he has the right credentials, but his behavior is disreputable.

Call for Papers: URPE Reader

The Union for Radical Political Economics (URPE) has put a call for papers for the new reader. The last reader was titled Political Economy and Contemporary Capitalism and was published in 2000. I had a chapter on trade and finance (here). It provided an alternative to the mainstream in a variety of topics, including foreign financial crises, health care, social security, and welfare reform, while at the same time demonstrating the variety of heterodox (alternative) approaches available to economic inquiry. It was essentially an academic tool showcasing the latest work in heterodox research. This would be an excellent opportunity for young scholars, and very welcome for those teaching economics, in particular after the failure of the mainstream regarding the 2008 Global Crisis.

Monday, February 23, 2015

Honey, I shrunk the middle class

The definition of middle class jobs is arbitrary and not particularly good. From the NYTimes story, it seems it's basically wages between 35 and 100k per year. At any rate, less jobs in manufacturing and more in services, particularly in health jobs, like nurses. Also, a gender bias, with an increase in female participation in the middle income jobs. And yes, increasingly these jobs require a college education. So more nurses and less machine operators, or something like that. The problem is that with this the size of the middle class is effectively shrinking (see graph below).
This suggests that the majority in the US is not middle class anymore. The divided society between the haves and have nots is becoming the defining characteristic of the US.

It's all up to Merkel: Galbraith on the Greek Crisis

"Is Greece’s fate in the hands of Angela Merkel? One leading economist with close ties to Greek finance minister Yanis Varoufakis says that the primary obstacle to compromise is a dramatic division within the German government, with one faction demanding that Greece fully adhere to its previous commitments, and another powerful group advocating compromise."

Read rest here.

PS: Listen also to this interview here.

PS': And Jamie thinks that the agreement was good, as I did notice Saturday that it was Mario Nuti's and my own view.

Saturday, February 21, 2015

On the blogs

Kakistocracy -- Mario Nuti on the Greek negotiations, up to the agreement reached the other day. Note that he sees the extension as a good thing. So do I. I don't think Greece caved, as many on the left have been saying. This is an agreement were everybody can claim victory. Greeks got more time, which they need, Germans didn't make concessions, at least not very early in the process.

Warning: too much finance is bad for the economy -- The Economist, following research from Cecchetti at the BIS. And yes they are right, but for the wrong reasons. Finance hurts not because the genius that would have gone to physics ends up in the hedge fund. The reason is too much unregulated finance is prone to crisis.

Human Capital Controversy -- David Ruccio on the debate that followed Branko Milanovic's post on ditching human capital, with Nick Rowe among others.

Graph/Table of the Week: Wage Compression -- The URPE post, with a link to Ezra Klein's discussion of the Obama economy.

Friday, February 20, 2015

Economy-Sapping Patent Trolls or the other Vultures

The question of whether patents promote or hinder economic progress is unresolved and probably divides the profession. Not always according to orthodox/heterodox lines, I might add. I'm a patent agnostic, as you would know from a few posts (see here or here), in particular because I'm skeptical about the role of property rights in general in promoting innovation, and because I tend to believe in the role of expanding demand in technological innovation.

My reading of the evidence is that patents delayed the development of the steamboat, for example, often considered the first major American contribution to technological progress. The thing is that the notion that patents stimulate innovation is based on a sort of hero or great man theory of history, the god like figure that invents a solution out of nothing and transforms the world. This does not describe the messy, incremental process of technological development that seems to be behind every economically significant innovation.

At any rate, two CEOs wrote this piece for the Wall Street Journal (yes, my favorite kind of people, in my most cherished news source). They do note that their: "companies [Cisco and JC Penney] alone have spent well more than a third of a billion dollars in the last five years defending [them]selves against cases brought by patent-assertion entities." Patent-assertion entities are companies that file for patents, and do not produce anything. Like the Vulture Hedge Funds, they make their money in litigation. I love the nickname, Patent Trolls. And this would be additional evidence on the limitations of the patent system.

Thursday, February 19, 2015

More Galbraith on Greece

From a short piece in the Greek paper Ekatherimini:
"So far, the Greek achievement consists of stating raw truths in rooms full of self-serving illusions. This exposes contradictions, bringing on facile ripostes, easily rebutted. It also brings on threats and menacing gestures, intended to test resolve. The Greek government seems to have met that test. 
It can now proceed to the next step. 
The next step is to define carefully what may be accepted. As for reforms, as much as 70 percent of the previous memorandum is (and always has been) common ground. That which is not – fire-sale privatizations, destructive labor market liberalizations and the unreachable 4.5-percent target primary surplus – can be spelled out. Reasonable language to describe the process of discussion to follow may be found."
Read the full article here.

Galbraith on the Greek negotiations


A short interview given Tuesday morning from Brussels to Greek television. The questions are in Greek but the answers are in English and fairly direct. Not very good news, and not unexpected either. Basically the Germans are blocking a solution. What is needed to get a solution? "Calm and courage," says Jamie.