Saturday, April 18, 2015

Sanford Schram on how the welfare system is designed to keep the poor poorer

Sanford Schram, professor of political science at Hunter College, argues that the welfare system in the United States, as it is currently institutionalized, marks the poor as deviant, and, thus, manufactures their otherness in order to reinforce, or buttress, anti-welfare antipathy.

Friday, April 17, 2015

Off the air

On my way to give the keynote speech at the Omicron Delta Epsilon International Economics Honor Society induction ceremony at San Francis College. If it's filmed, which is unlikely, I'll post it. Back tomorrow.

Thursday, April 16, 2015

Yellen and Taylor on the Taylor Rule

 In her last speech, Janet Yellen argued that:
"For example, the Taylor rule is Rt = RR* + πt + 0.5(πt -2) + 0.5Yt, where R denotes the federal funds rate, RR* is the estimated value of the equilibrium real rate, π is the current inflation rate (usually measured using a core consumer price index), and Y is the output gap. The latter can be approximated using Okun’s law, Yt = -2 (Ut – U*), where U is the unemployment rate and U* is the natural rate of unemployment. If RR* is assumed to equal 2 percent (roughly the average historical value of the real federal funds rate) and U* is assumed to equal 5-1/2 percent, then the Taylor rule would call for the nominal funds rate to be set a bit below 3 percent currently, given that core PCE inflation is now running close to 1-1/4 percent and the unemployment rate is 5.5 percent. But if RR* is instead assumed to equal 0 percent currently (as some statistical models suggest) and U* is assumed to equal 5 percent (an estimate in line with many FOMC participants’ SEP projections), then the rule’s current prescription is less than 1/2 percent."
The point is clear, given the uncertainty about what the natural rate of unemployment and the equilibrium or natural rate of interest actually are, then there is some space for keeping the Fed Funds rate close to zero, where it is.

John B. Taylor cited the passage above to criticize Yellen's view. He said:
"So the main argument is that if one replaces the equilibrium federal funds rate of 2% in the Taylor rule with 0%, then the recommended setting for the funds rate declines by two percentage points. The additional slack due to a lower natural rate of unemployment is much less important. But little or no rationale is given for slashing the equilibrium interest rate from 2% percent to 0%. She simply says 'some statistical models suggest' it. In my view, there is little evidence supporting it, but this is a huge controversial issue, deserving a lot of explanation and research which I hope the Fed is doing or planning to do."
Taylor is okay with not having a clue about the natural rate of unemployment (tells you something about a theory that depends on a variable they never know where it is), but seems to think that the natural rate of interest is really 2%. I haven't seen the empirical analysis that shows that the natural rate of interest is 2%.

Frankly, if the methodology is the same as used for the natural rate of unemployment, meaning some average of the actual rates, I'd be somewhat underwhelmed. And I'm not even going to discuss the logical problems of the natural rate of unemployment (yes, there is no such thing). But if Taylor were right, we should have inflation around the corner. He has been complaining about the Fed policy for a while, and inflation hawks have suggested that hyperinflation would follow Fed expansionary policy for six years now. The question is when would Taylor and the inflation hawks be satisfied that inflation is not accelerating? The answer is probably never. The new Taylor rule should be hike the rate of interest in every circumstance then.

Wednesday, April 15, 2015

IMF wants austerity and social security reform in the US

Blanchard presenting the WEO Report at the Spring Meetings

The new edition of the bi-annual World Economic Outlook is out (there is one in April and one in October). Olivier Blanchard, from MIT, and the IMF's Economic Counsellor since 2008, is the intellectual force behind the report. In the IMF's view, in the case of the United States:
"The next prominent policy challenge will be a smooth normalization of monetary policy. Building political consensus around a medium term fiscal consolidation plan and supply-side reforms to boost medium-term growth—including simplifying the tax system, investing in infrastructure and human capital, and immigration reform—will continue to be a challenge." [Italics added]
Fiscal consolidation is IMF speak for austerity. Austerity is really about less spending, and higher taxes, but fiscal consolidation should be about the results, meaning lower deficits and debt. Note that austerity is NOT the best way to get fiscal consolidation. Also, normalization of monetary policy can only mean higher interest rates. So for the IMF we are at the natural rate, or so it seems.

In the case of the US labor markets are seen as flexible enough, so immigration is seen as central for keeping real wages low, rather than further deregulation. Yes, supply side reforms are often about lowering real wages. They do not provide much in terms of what austerity would mean. Again from the report:
"Addressing the issue of potential growth will require implementation of an ambitious agenda of supply-side policies in a fractious political environment. Forging agreement on a credible medium-term fiscal consolidation plan is a high priority... [This] will require efforts to lower the growth of health care costs, reform social security, and increase tax revenues." [Italics added]
Reform social security is IMF speak for cutting and delaying benefits, and increasing payroll taxes. Not necessarily privatize it, although some might be in favor of that at the IMF. So supposedly in the US the priority is to promote austerity by reforming social security. The New IMF is great.

On the plus side, the IMF has rediscovered the accelerator (I checked a few older versions and have seen no trace of the accelerator in the last couple of reports) and the report shows:
"estimates of how much investment weakness can be explained by output dynamics based on investment models estimated at the individual-country level. The analysis is based on the conventional accelerator model of investment... A key assumption is that firms adjust their capital stock gradually toward a level that is proportional to output. In addition, firms are assumed to invest to replace capital that depreciates over time... The empirical literature has found strong support for this model, as in Oliner, Rudebusch, and Sichel 1995 and Lee and Rabanal 2010 for the United States, and, more recently, in IMF 2014a and Barkbu and others 2015 for European economies."
Funny, so supply responds to demand, that is, firms adjust their supply capacity to expected demand, but all reforms for growth are based on supply side factors. Yeah, way to use the right theory, but keep the wrong policy advice.

Monday, April 13, 2015

Eduardo Galeano (1940-2015)

Open Veins

Galeano, famous for The Open Veins of Latin America, among several other books, has passed away. He was a leading voice of the Latin American left, as The Guardian elegantly put it, which is a more accurate description than the 'anti-capitalist' epithet used by Reuters.

I inherited the copy of the book pictured above from my mom, who loved Galeano's books, in the 1980s, I guess, when I decided to study economics. I can't say that I was influenced by his book, even though Galeano thanks one of my teachers, Carlos Lessa.* He wasn't an economist, and I normally wouldn't post about it. But I decided to post something since, not long ago, a friend told me he had disavowed the book.

If one reads the accounts of his rejection of the book, it seems that it was the language, the vocabulary of the left in the early 1970s, which Galeano seemed to suggest that was heavy and dated, what led to his criticism of his work. Also, as he got older, and found mistakes in the book (sadly he doesn't specify which ones), his older self tended to be less satisfied with the result. Note, however, that in this discussion about what message he would like Obama to get from the book, after Chávez gave the US president a copy, he summarizes the basic point, which he seems to still uphold. In his words, he wanted Obama to get:"a certain idea about the fact that no richness is innocent. Richness in the world is a result of other people's poverty. We should begin to shorten the abyss between haves and have-nots."

A cursory look at the book might give you the not altogether incorrect sense that Open Veins provides a simplified version of Dependency Theory. Galeano was a popularizer of the kind of political economy that can be broadly defined as Structuralist. One not all together different from the one used for consumption in American universities, which simplifies and blames underdevelopment on developed countries, and that sees limited space for development in the periphery.** And, in that sense, it is a good thing that Galeano could say: "Reality has changed a lot, and I have changed a lot." But it is unclear that he threw the baby out with the bath water.

* If I had to say a book that influenced my choice to study economics, that I read in high school, it was Osvaldo Sunkel's El marco histórico del proceso de desarrollo y de subdesarrollo, which has a message that is not altogether different from Open Veins, namely that underdevelopment is part of the same process that caused development. Think of the Industrial Revolution in England, that goes hand in hand with deindustrialization in India. Industry and empire, as another historian would put it, are tied together.

** For alternative and more sophisticated versions see here.

Sunday, April 12, 2015

On the blogs

DRAFT For “Rethinking Macroeconomics” Conference Fiscal Policy Panel -- Brad DeLong says that government debts should be bigger, since the old Domar functional finance g>r rule indicates that governments in developed countries tended to be on the sustainable side of debt accumulation.

Macro teaching and the financial crisis -- Simon Wren-Lewis praises the Carlin and Soskice textbook. The new edition adds the stuff from their three equation model, and is probably the most up-to-date mainstream New Keynesian textbook around. I got my copy last month, and have many problems with the book, in particular the resistance of getting rid of the natural rate concept.

A Quick Point on Models  -- JW Mason on models. A bit older (I missed it), but worth reading. Yes models are about regularities, and you can measure capital for sure. BTW, what you cannot do, and Piketty does in his model, is to assume that there is a negative relation between capital intensity and its remuneration.

Notes on Frantz Fanon -- Branko Milanovic on why Fanon was all wrong, but you should still read it. I have my copy somewhere, that my mom gave me back in the 1980s. Not sure I would re-read as Branko did.

Saturday, April 11, 2015

Peter Temin explains the Great Recession and the slow recovery

A bit more on Peter Temin and David Vines book on Keynes. The explanation of the Great Recession is based on a traditional negative shock to the IS curve. Temin famously wrote the response Friedman and Schwartz Monetarist view of the Great Depression, his Did Monetary Forces Cause the Great Depression?, in which a contraction of consumption, and the IS, rather than the contraction of money supply and the LM was seen as the central story.*

 So the same is essentially at work now. They say:
“the IS curve in the US moved left a great distance after the Global Financial Crisis and the adjustments that followed. It moved so far that the new IS curve no longer crossed the LM curve at a positive interest rate.”
As can be seen below.
I can live with the representation of the Great Recession as a collapse of the IS (and yes the negative slope might be explained by other elements of demand, not investment, being inverse related to the rate of interest, like consumption or housing investment). I'm more troubled by the notion that the slow recovery is caused by the negative rate of interest, which in this case precludes the intersection of the IS and LM (note that, contrary to Krugman's negative rate, the equilibrium would not be the full employment one). But I do agree with the implied solution, not defended very forcefully, to my surprise, in the book, i.e. expansionary fiscal policy to bring the economy back to full employment.

In part, Temin and Vines do not defend fiscal policy strongly, because they bring the issues of an open economy to the forefront of the discussion, using James Meade's notion of internal and external balances. It's far from clear that they think this applies to the US, but in general their solution for a country with an external problem and unemployment, would be depreciation and austerity. In their words:
“The indebted country requires a combination of the two policies. Devaluation will increase exports and reduce imports. Austerity—just the right amount—will reduce home demand for goods and leave room for the production of extra exports and the home-produced goods that replace imports. The right combination of policies will move the economy to the intersection of the external balance line and the internal balance line, or even further down the internal balance line into the region of external surplus if the country is to begin repaying its debt.”
Note that without austerity the economy would overheat. That's a lot of confidence in the expansionary power of devaluation. As noted here several times, a devaluation can be contractionary, and it often 'solves' the balance of payments problem for that reason. Devaluation and austerity, by the way, were, and still are, the traditional policy measures imposed by the IMF on indebted countries. The implication seems to be that a combination of devaluation with austerity would produce, in the US too, a healthier recovery. The book is strangely positive on austerity, because of the external balance requirements, a position that, at least in this recession, other New Keynesians like Krugman and DeLong have temporarily abandoned.

And their analysis in the book about the post-war boom, the so-called Golden Age, is also not very good. Temin and Vines, even though they recognize the role of the Marshall Plan, emphasize the positive role of the IMF in promoting growth, and suggest that the IMF is an improved version of Keynes' proposal at Bretton Woods. In their words:
“The cooperation stimulated by American generosity in the Marshall Plan was a hallmark of postwar European progress... The IMF—an improved version of Keynes’ Clearing Union—eventually became a crucial policy-making institution... The IMF, which Keynes helped to design, was central to the restoration of growth.”
The Marshall Plan, which dependent not just on generosity, but on fear of the Soviets, was clearly central. The role of the IMF in a global recovery of the 50s and 60s is hard to defend though. And Keynes Plan did not involve punishing indebted countries, which is what depreciation and austerity do, quite the opposite. In fact, Keynes was relegated to the debates on what became the World Bank at Bretton Woods, while Harry Dexter White was the central figure in the creation of the IMF. And the World Bank was, until the 1980s, a more benign instrument of US external economic policy, one might add.

But Temin and Vines also botch that one, and say:
“The World Bank, which was less central than the IMF, facilitated long-run growth. The World Bank was designed to help re-create the international pattern of productive trade that Keynes had described in The Economic Consequences of the Peace.”
Yes, the World Bank was created to recreate the pre-war pattern of trade, with the periphery selling commodities, and the center manufactures, and the British as the hegemonic... Oh wait. Yeah that makes no sense either.

* In later research Temin came closer to Eichengreen in putting the Gold Standard at the center of the Great Depression. For example, in his Lessons from the Great Depression. The seeds of his positive view on the role of depreciation are associated to his view that the abandonment of the Gold Standard was at the heart of the recovery. For a critique of that go here.

Friday, April 10, 2015

The Economist on the end of economic history

The Economist has noticed Peter Temin's paper on the death of economic history (on which I had posted before) and suggests that "since the financial crisis there has been something of a minor revival." There isn't much of an explanation of why there is a revival, or much evidence for the revival, I might add. The reason alluded for the supposed revival is that "three big questions in economics over the past few years have become battles over economic history, rather than theory in its own right." These three questions would be the effect of public debt on growth, the causes of inequality, and the effects of inflation and deflation.

The economic history content in the debates related to the three questions, in all fairness, is thin at best. And the problems with the debates actually do arise from a common acceptance of neoclassical economics, and are, thus, rooted in theory. Reinhart and Rogoff are not economic historians, and their discussion of debt, for example when compared to John Brewer's discussion of the role of debt in the rise of the British Military-Fiscal State, is poor at best. There is some discussion of the correlation with growth, inflation and currency movements, with limited understanding of causality. Which, as it turns, was botched by the misuse of data. The same can be said about Piketty (and now this Rognlie twist; he had vanished; my previous issue with him here), that uses mainstream theory that does not fit his data (which is better and shows the rise of inequality in the last three decades), but lacks any sense of history. There is no understanding of the social forces behind the rise of inequality in Piketty's work. And the idea that those that are afraid of inflation now have some basis on the history of "the risk hyperinflation has posed to democracy" is beyond preposterous. Not just because there is no risk of hyperinflation in any advanced economy at the moment (and that shows lack of theoretical understanding of what causes this phenomenon), but worse, it tends to obscure that the Great Depression, not the 1923 hyperinflation, brought down the Weimar Republic. Seriously, unemployment, the collapse of the economy creates the conditions for the rise of fascists (go check Greece now)

Note that marginalism always had a complicated relation with economic history. The German Historical School can be seen, or at least some authors within the school like Roscher and Schmoller, as noted by Bill McColloch (see second essay here), as part of the marginalist school. And Max Weber's views, which put Marx's relation between the economic base and the superstructure upside down, might be seen as the basis for a neoclassical theory of history. But the fact is that Weberian analysis was never embraced or even well understood in mainstream circles, even if it would be the kind of theory of history that would fit their analysis. The same applies to Douglas North's New Institutionalism.

My impression is that the decline of economic history, and history of economics I would add, within the mainstream of the profession, a subject that as noted by Temin had peaked in the 1970s, is essentially tied to the result of the capital debates, the rise of what I referred to as the return of vulgar economics, and the segregation of heterodox economists. It's a particular problem of the broader crisis of economics. And the revival is overstated. As much as the mainstream did not, and will not be abandoned in spite of its evident failures during the last (current) crisis, do not expect economic history courses (or history of thought ones) to be reinstated or created in the departments at the 'top' universities. The average mainstream economist will remain ignorant of history and the history of its own field. The Economist writers are a good example of the consequences of that.

Wednesday, April 8, 2015

Keynes and the abandonment of the Quantity Theory of Money

I've been reading Peter Temin and David Vines new book Keynes: Useful Economics for the World Economy (see also this). It is a very introductory and conventional reading of Keynes, with the distinctive characteristic that describes the development of Keynes' ideas in the proper historical context. This is good, since Temin is an illustrious economic historian. But he is not a history of economic thought scholar, and that has important implications in this case.

If there is any doubt about the conventional reading of Keynes, one is reminded by them that Keynes theoretical innovation is that: "he abandoned the assumption that prices are flexible which had been made by almost all previous economists—including by him in his Treatise on Money—for the more appropriate assumption for the 1930s: sticky prices.” No notice that the whole chapter 19 of the General Theory (GT) is about wage and price flexibility to show that it does not solve the unemployment problem, and it actually makes it worse.

But that is not the the main problem with the book. That is, in fact, the common reading among both Old and New Keynesians, with the latter providing microfoundations for rigidities. The authors claim that: “in order to free the analysis from the assumption of full employment, Keynes had to free himself from the Quantity Theory too.” Actually that is incorrect, since one can have endogenous money, and abandon the Quantity Theory of Money (QTM), without getting rid of Say's Law, or the neoclassical version of it which implies full employment, as indeed Keynes had done in the Treatise on Money (TM), his Wicksellian book.

The view of the Keynesian Revolution as a movement from price flexibility to price rigidity is well documented, and even if it has no basis in Keynes, it might acceptable to some authors. Krugman, who is not a historian of thought, explicitly says he does not care what Keynes actually said, for example. Note that saying that Keynesian policies are necessary as a result of price rigidities is not the same that saying that Keynes actually said that. And for historians of economic thought the difference is important.

More problematic is the idea of the Keynesian Revolution as a movement away from the QTM. There is a lot of scholarship in this direction, including some from Keynes' own disciples, like Richard Kahn in his The Making of the Keynesian Revolution. Actually in the GT Keynes goes back to an exogenous money approach, and in that sense is closer to the QTM than in the TM, which had endogenous money. The important thing in the GT is that Keynes noted that the natural rate of interest in his TM should be abandoned. That is, the idea that the interest rate brings investment into equilibrium with full employment savings had to be substituted by the notion of changes in income bringing savings into equilibrium with autonomous investment. The theory of interest or monetary theory comes later as a result of the abandonment of the Loanable Funds Theory. This is not to say that the abandonment of the Quantity Theory of Money is not important, but clearly it is not sufficient to lead to a theory of effective demand. 

The book also tries to show that there is a continuity in thinking between The Economic Consequences of the Peace and the discussions about the reorganization of the world economy at Bretton Woods. This is hard to defend, in particular since the book itself shows that Keynes' theoretical views changed as a result of the economic policy events, like the return to the Gold Standard at the pre-war parity, and the Great Depression. One of the important things about Keynes is exactly that, as stated in the phrase often attributed to him, when he was proven wrong, he changed his mind.

Tuesday, April 7, 2015

Jamie Galbraith on the Greek Crisis

From his latest piece:
I have just come from Athens where I have, for the last several days, had the high privilege of working with the government of Greece, and especially with the Finance Minister, my very good friend, Yanis Varoufakis. I’ve actually had two occasions, so far, to observe the drama that’s unfolding in Europe from a close vantage point.
The first one was during the week of the negotiations that led to the landmark agreement on 20 February. And then, in these last few weeks in Athens, which had their own drama as they led up to a series of payments, including a very substantial one that was due to the International Monetary Fund. All of which were, let’s say, events followed with distinct interest around the world and especially in financial circles.
Read full article here. He remains cautiously optimistic, or so it seems.

Monday, April 6, 2015

On being a 'real Keynesian': Paul Sweezy's take

More on the issue of 'real Keynesians,' which I discussed here before. Paul Sweezy, a Marxist economist that was, however, very positive on Keynesian ideas, said this on Keynesianism:
This is from Colander and Landreth interviews in The Coming of Keynesianism to America. He was, a close friend and student of Schumpeter, and before writing his classic The Theory of Capitalist Development, still one the best introductions to Marx's economic thinking, he penned with several other Keynesian economists, including Lorie Tarshies, a little pamphlet called An Economic Program for American Democracy, in which several Harvard economists promoted Keynesian ideas.

PS: The point of my previous post was that under certain circumstances, and referring to policy issues, the left-wing Keynesian and the business-minded Keynesian are allies, by the way.

Sunday, April 5, 2015

On the blogs

How To And How Not To Attack Marx's Economics -- Robert Vienneau thoughtful account of various topics on Marxist scholarship. There is also this post by Lord Keynes on the LTV, which he has been discussing more lately. My views are closer to Robert's point of view.

Germany's trade surplus is a problem -- New blogger Ben Bernanke continues with the savings glut theme, and in this case he is right. Germany surpluses hurt the rest of Europe. Germany should spend more and allow the rest of Europe to enjoy less austerity.

The Inbred Bernanke-Summers Debate On Secular Stagnation -- Steve Keen's take on the debate (mine here), which is not on the substance of the debate though (he will post more later). The problem for Steve is that they all are New Keynesians, I think. Not sure if that is a problem. Don't get me wrong pluralism is important, but not sure how an Austrian perspective, for  example, would help clarify matters.

Big data is watching you -- by Lambert Strether, via Yves Smith's Naked Capitalism. I was teaching on efficiency wages last week and told students about how much firms spend on monitoring. I remembered David Gordon's Fat and Mean, that had something to say about that.

Sir John and Maynard Would Have Rejected the IS-LM Framework for Conducting Macroeconomic Analysis -- Mario Seccareccia on the ISLM. Note that Hicks recantation is not particularly good. And regarding Mario's point about investment not being sensitive to the rate of interest (a point made here several times; it's the accelerator!) that does not mean that the IS is vertical. Other spending components might be affected by the rate of interest (e.g. consumption). I would say the problem with modern mainstream macro is that it abandoned (other than for teaching undergrads) the old ISLM. And also, everybody forgets that they not only abandoned the LM for the MP (which Mario notes, and that's just a flat LM), but that they abandoned the multiplier and the IS is based on an intertemporal Ramsey model (that's the problem; the return of Say's Law). On my views on the ISLM go here.

A Stagnating Minimum Wage has Left Low-Wage Workers Facing a Longer Climb to Reach The Middle Class -- EPI's snapshot by David Cooper. Title is self-explanatory. Topic discussed here recently.

PS: I noted that Bernanke, a Republican, is at the Brookings Institution and not at the American Enterprise Institute. I was under the impression, maybe incorrect, that Democrats went to the Brookings, a center-left think tank, and Republicans to the AEI, a center right one. Something has changed if a moderate Republican can make it into the AEI.