Showing posts from April, 2015

The slow recovery has come to a halt

From the last press release of the Bureau of Economic Analysis (BEA):
"Real gross domestic product -- the value of the production of goods and services in the United States, adjusted for price changes -- increased at an annual rate of 0.2 percent in the first quarter of 2015, according to the 'advance' estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 2.2 percent." So basically zero growth. And some people want higher rates of interest to preclude the danger of inflation. Oh brother.

Interview on neo-structuralism

The World Economic Association conducted and interview with Esteban Pérez Caldentey, Miguel Torres and Romain Zivy, from Economic Commission for Latin America and the Caribbean (ECLAC), on a recently published book on neo-structuralism by Alicia Bárcena and Antonio Prado (eds.), Neo-structuralism and Heterodox Currents in Latin America and the Caribbean at the Beginning of the XXI Century. From the interview:
What is neo-structuralism?

Neo-structuralism is a modern version of the structuralist current of thought which flourished in Latin America and the Caribbean in the 1950s and 1960s based on the thinking of a group of economists mostly based in ECLAC. Famous structuralists include Celso Furtado (1920-2004); W. Arthur Lewis (1915-1991), Raúl Prebisch (1901-1986), Juan Noyola Vázquez (1922-1962); Aníbal Pinto Santa Cruz (1919-1996); Osvaldo Sunkel (1929-) and Ignácio Rangel (1914-1994). The development of structuralism also benefited substantially from the work of economists such a…

Free Trade Poll

Mankiw links to a poll in his defense of Free Trade in which a selected group of economists responded to two questions:
Question A: By lowering bargaining costs, fast-track negotiating authority for the president makes it more likely that the U.S. can conclude major trade deals Question B: Past major trade deals have benefited most Americans Not exactly whether they believe Free Trade based on comparative advantage holds as a theory. Note that one my think that trade is determined by absolute advantage, which would imply that some degree of trade management is required if a country is not to be out-competed by low cost countries, and still agree with both propositions.

So here a poll to see how many readers of this blog think the theoretical proposition is correct (and how many of these are economists).

Poll disabled; results above. So in contrast to Mankiw's results, most readers of this blog, including economists, think that comparative advantage does not always determine trad…

On free trade and economics consensus: a response to Mankiw

Mankiw tells us in his most recent NYTimes column that economists agree that Free Trade is good. He links to a poll in which, essentially, mainstream economists of different persuasions, some Keynesian and some not, and different political views, some liberal and some conservative, say that trade agreements are good. He backs his argument by suggesting that theoretically the argument is at the heart of the economics profession since the beginning; I guess an argument of authority.

And no better authority than Adam Smith. Mankiw says:
"The economic argument for free trade dates back to Adam Smith, the 18th-century author of 'The Wealth of Nations' and the grandfather of modern economics. Smith recognized that the case for trading with other nations was no different from the case for trading with other individuals within a society." And it is true, Adam Smith was for laissez-faire, in general, and thought that less intervention in trade would be good. But there is in M…

On the blogs

Roland Fryer wins the John Bates Clark medal -- Tyler Cowen shares the info, with a link to the AEA official announcement. The prize is a freakonomics prize. Fryer, for example, suggests that paying minority kids for grades might be a solution for inequality. He is also in favor of charter schools (my personal experience in SLC was terrible I should add). For a methodological critique of the freakonomics project see this book by Ben Fine.

Economists Actually Agree on This: The Wisdom of Free Trade -- Greg Mankiw repeats this inanity. Het tells you that: "Among economists, the issue is a no-brainer." No brain is right. Based on the Heckscher-Ohlin model. Turns out that the HO model falls with the capital debates. See here. And lots of reasonable economists going back to Hamilton and List, to Chang and Samuelson have noted that Free Trade does not always hold.

A New Deal for Greece -- Yannis Varoufakis, because not all economists sold out, or are just stupid.

New book on the Brazilian economy

If you read in Portuguese this book by Professor Carlos Medeiros is a must. If you don't, learn Portuguese, and read his book. Meanwhile read this paper, on a different topic.

Strange bedfellows on TPP

I had noted before that Obama was on the same side than some Republicans on the Trans Pacific Partnership (TPP), and on the role of Free Trade Agreements (FTAs) in general. Yesterday, Paul Ryan and Ted Cruz co-authored an op-ed in the Wall Street Journal in favor of fast track authority, which they avoid saying is giving power to Obama and strangely suggest it would empower Congress, and the TPP.

So not only is Obama for TPP, and he thinks that Elizabeth Warren is wrong in opposing it, but he agrees with Ryan and Cruz. By the way, Hillary is not much better on the free trade (and Bill signed NAFTA), even though it seems that she has not endorsed the TPP deal... yet. So mainstream Dems are on trade in bed with corporations, together with the GOP, which is pretty unified on this topic as far as I can tell. The recurrent problem is that there is no party for labor anymore. And not just in the US.

PS: For theoretical arguments against Free Trade go here and here.

Blanchard on rethinking macroeconomic policy

Here is Blanchard's summary of the last conference. Nothing much happening in all fairness, and certainly little impact on the policy advice that the IMF provides. On regulation, perhaps higher reserves is Blanchard's solution, and on monetary policy a higher target (which he does not discuss this time) and perhaps a defense of QE. But he only asks whether "the Fed [should] return to intervening only at the short end of the yield curve, or are there good reasons for continuing to intervene along the curve?" No mention that intervening at the long end provides space for expansionary fiscal policy by reducing interest rates (the real reason for QE).

On fiscal policy the same. There is an admission that, contrary to Reinhart and Rogoff, there is no threshold above which debt-to-GDP hurts economic growth. The discussion of the debt-to-GDP ratio has vanished from the last WEO (Apr. 2015). This is good, since in the previous one (Oct., 2014) the IMF still argued that: &qu…

Equality of opportunity vs. equality of outcomes

Campaign season started, and it is way too long if you think about it. At any rate, the discussion of how the GOP is for equality of opportunities, not outcomes, is already in the air. Sen. Marco Rubio has already suggested that.

If we assume that social mobility is a proxy for equality of opportunity and take some measure of inequality, say a Gini, as a proxy of equality of outcomes, one might get a sense of their relation. The figure below is from the book The Spirit Level and shows the data for a few countries.
Social mobility is measured as the correlation of income between different generations. As it turns, it seems that there might be a negative relation between inequality of outcomes, which is high in the US and the UK, with equality of opportunity (social mobility), which is low in those same countries.

Note that this is a limited set of countries, and that social mobility is not exactly equality of opportunity. But this is indicative that equality of opportunity might also …

On the blogs

Crowding In and the Paradox of Thrift -- Krugman praises Blanchard and the IMF research department. He too has rediscovered, but it was a few years back in his case, the accelerator. No word from him on why then all IMF policy advice is based on supply side reforms and why Blanchard thinks the priority in the US is fiscal consolidation. My take here. Note that here you have the typical organized hypocrisy story, the research department says reasonable things (accelerator), while the policy advice continues to be the same.

The economist's manifesto -- Tim Harford ask economists for policy advice. Often a terrible idea. Proposals are to abolish national insurance entirely (in my view the worst of all proposals) and replace it with higher rates of income tax, increase property taxes, to spend more on urban development, and R&D and infrastructure. Wren-Lewis proposes a rule for monetization of fiscal deficits when interests rates are at the zero bound. Not too bad.

What Causes Reces…

Claudio Sardoni on the possibility of a Marxist explanation of the current crisis

New ROKE paper by Claudio Sardoni. From the abstract:
The object of the paper is to explore whether, or to what extent, a Marxian explanation of the current capitalist crisis is possible. The answer is that, although Marx’s theory offers important insights to understanding the ultimate causes of capitalist crises, it is not able to provide a fully satisfactory explanation of typical crises of contemporary capitalism. In particular, Marx’s analysis cannot account for the long periods of stagnation following the eruption of financial and economic crises. In Marx’s analytical context, crises are followed by recovery and growth in a relatively short span of time. It is argued that the main reason for Marx’s inability to explain crises of contemporary capitalism is that he developed his analysis by considering free-competitive economies, whereas modern economies are characterized by monopolistic competition. A more satisfactory explanation of the current crisis requires going beyond Marx’…

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.

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.

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…

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…

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 i…

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…

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…

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 …

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 actuall…

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.

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.

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, v…

Bernanke and Summers on global savings glut and secular stagnation

So Ben Bernanke is blogging now. He has basically defended his old idea that interest rates are low as a result of a global savings glut. Yes, it is basically the loanable funds theory of interest—with no consideration of the limitations associated with the capital debates—and the notion that the supply of funds, mostly associated to surplus countries like China, Japan, Germany and oil exporters, has pushed interest rates down.
This is essentially the same argument on negative interest rates that Krugman has made awhile ago, and not surprisingly Krugman has been favorable to Bernanke's post.*
In Bernanke's view the solution for the savings glut is: "to try to reverse the various policies that generate the savings glut—for example, working to free up international capital flows and to reduce interventions in foreign exchange markets for the purpose of gaining trade advantage." This would, presumably, move the investment schedule and lead to a recovery.

Bernanke u…

Job market still terrible

BLS report shows that employers added only 126,000 workers in March, and the rate of unemployment remained at 5.5%. Labor force participation and employment population ratio basically unchanged. I want to see how inflation hawks are going to spin the need for raising the rate of interest now.

Competing Visions in Economics as a Social Science: A Primer

The following was posted here - I had originally written it for students in one of my intermediate courses:

Economics (indeed every discipline of the social sciences) has never been, and never will be, value-free. Social scientists have always relied, and will continue to rely, on sets of elaborate positions, perceptions, and views about the ultimate nature of reality; essentially, it is the reliance on preconceived notions of how the world works, and how it should work, when analyzing manifest phenomena. Aspects of conscientiousness precede investigation and thus one cannot separate the knowing mind from the object inquiry. What constitutes a fact perceives the observation and hence the conception of what is determined as socially significant; the mind is active in constructing and determining the lens through which observation deciphers what of social phenomena is worthy of factuality.

All theorizing is based on first order principles (Lawson, 1989). Thus, what underlie all theorie…

Martin Feldstein doesn't care about the inflation target

But he does want the Fed to raise rates soon and resolutely. Why? Because the labor market is too tight. Yes, I know (see here and here). One interesting thing is that a prominent Republican economist says that this is a "solid economic upturn." So there are some Republicans for Obama then.

More interestingly he suggests that the Fed's lack of preoccupation with inflation, since Janet Yellen does not seem to believe that 5.5% is the natural rate, is misplaced. But there is more. In his view, nobody should be concerned if inflation is below the target. In his words: "who cares if the inflation rate is a bit below an arbitrary 2% target?" Exactly, who cares about an arbitrary 2% target. Who? Feldstein of course, since he is really concerned that inflation would be above the arbitrary 2% target.

Besides, the notion that double digit inflation rates are around the corner is preposterous. And the problem of financial stability is not related low interest rates, but…