Thursday, May 5, 2016

Robert Paul Wolff on Marx

Robert Paul Wolff always worth. Should read his Understanding Marx. He surprisingly says that Analytical Marxism has taken over Marxism. To get to Marxism he had to learn economics, the classical political economy of the Ricardian kind, and learn linear algebra. Hegelianism was not really central to the message (in my view, but he does say he hates Hegel). Labor Theory of Value explained, but he does not discuss Piero Sraffa's contributions directly here. There is no way to understand Marx without Sraffa. As he said in a paper in Social Research (subscription required) Sraffa "rescued [Smith, Ricardo, and Marx] from the trash heap of antique, outmoded ideas... [and provided] a serious alternative to marginalist theories."

An alternative for Greece

Nikolaos Bourtzis (Guest blogger)

There we have it again. Another one of those clashes between Greece’s creditors and the Greek government. For the millionth time, the Troika, I’m sorry I mean the institutions, are demanding that Greece comes up with policy suggestions that could bring in 3.6 billion approximately in fiscal savings.

This time, though, is different because these are going to be a “just in case” package, a buffer in case the government misses its fiscal targets. The government wants to finish the negotiations as soon as possible in order to remove the uncertainty that has grinded the Greek economy to a halt but it does not want to pass any preliminary measures. The negotiation on other issues is coming closely to an end, or so it is being reported, but this issue persists and the final decision is to come from the urgent Eurogroup meeting on Greece that will take place on the 9th of May.

Why all this fuss? Well, Greece urgently needs a disbursement of some of its 80 billion euros bailout money in order to cover its debt payments that are coming up in the summer. In addition, if the measures that are agreed upon during the negotiations are passed, the “forbidden” book of debt relief might be opened. The IMF insists that Greece’s public debt is unsustainable and some sort of debt forgiveness is necessary or else it won’t be able to take part in the bailout. And it might just be the case that the IMF is capable of doing anything in order to impose its ideology (Hint: The recent leaked discussion).

How is it that more austerity will make the public debt more sustainable, though? A form of debt relief was granted to Greece in 2012 with the so-called PSI. Interest rates on its official loans are at rock bottom; not having to pay 5 % or 10 % interest payments could be seen as a form of debt relief. How come that is not enough? This back and forth between the Greek governments that have passed by the last 6-7 years and the official creditors has always ended up with more austerity, more deregulation and well, more of the same; more of the same failed policies that are not even addressing the root of the problem; the depressed Greek economy. If the Greek economy were growing, nobody would be worrying about Greece’s debt. Public debt should never be a problem and it doesn’t have to be. The real issue that both the creditors and the Greek government are not paying attention to is how to get the economy back on its feet and put an end to the humanitarian crisis that is plaguing the nation.

There is only one way to put an end to this. Grexit; yes Grexit. It’s going to be difficult in the beginning but it might be the only sustainable long-term solution. The Bank of Greece would have to secure enough reserves, through some sort of external loans, to support the exchange rate and to pay for imports. Printing new bills would take some time so the euro and the drachma would probably have to coexist for some months. The banks would have to be nationalized since a bank run is very probable and no external funding would be available for them. But the point here is that Greece’s economy did not tank because public debt is high nor did it tank because it has severe structural issues, which it partly has. The Depression was a result of a severe fall in aggregate demand. The financial crisis took a toll on Greece’s banks, which then had to be nationalized. Lending contracted along with consumer and business spending. That’s where the government has to step in with aggressive fiscal expansion that will invigorate “animal spirits”. The structural reforms, that the creditors want Greece to pass, are not going to do anything to support demand, and austerity has depressed aggregate demand even more. That is the main culprit of this disaster. Government spending does not have to be constrained by borrowing. If Greece had its own currency, it could fund income support and employment programs with central bank credit; yes, by printing money. Mainstream economists will scream “hyperinflation” if anybody proposes such kind of policy. With the economy operating well below capacity, inflation is not going to be a problem and it’s actually needed. The economy is experiencing debt deflation right now. Unserviceable debts need to be dealt with immediately if consumer spending is to pick up for good and the only way to do it is if the government provides assistance to troubled borrowers.

That should have been the official “Plan B” of the Greek government; Grexit. The debt cannot be serviced and it needs to written off. The Greek economy and the Greek people have been sacrificed on the altar of debt servicing and it has to stop. There is a way to recovery that does not involve any more of the so-called “internal devaluation”, which is obviously not working. Wages have collapsed by almost 20 % and unemployment is still stuck at 25 %. Greece can rebuild its economy but only outside the Euro. A well-designed industrial policy could bring manufacturing back to life, employment and training programs can bring down the prohibitively high unemployment and the reversal of social spending cuts can help alleviate poverty. Comprehensive regulation of the financial system could prevent a repeat of a financial crisis and direct lending to the real economy. Finally, the labor laws that were repealed need to be brought back and labor unions need to be strengthened if wages are to go up. Labor unions and collective bargaining were one of the reasons for the thriving middle class all over the world until the era of neoliberalism in the 1980s.

Unless a government that is bold enough to stand up to the neoliberals of the EU and the IMF takes power, the theatrical negotiations will keep going, the government will keep caving in and more of the same failed policies will be implemented.

Wednesday, May 4, 2016

How bad is the Greek crisis in one graph

Real GDP starting in 1929 for the US and 2007 for Greece. Back then, with the New Deal, the US economy had essentially recovered after less than a decade. But there is no solution in sight for Greece now. This summer with more payments due, and the Brexit discussion on top, should bring new developments.

More on the slow recovery

The private sector added 156,000 jobs in April, according to the Automatic Data Processing (ADP) report, ahead of the Bureau of Labor Statistics (BLS) more comprehensive release this Friday. As the graph shows there is a slowdown form last month.
This adds to weak manufacturing growth,and a smaller trade deficit, resulting from lower imports, that is, a slower economy. I still think a recession might not be in the immediate horizon. However, the data seem to indicate, as I said before, that there are good domestic reasons for Yellen not to hike the rate of interest.

By the way, not surprisingly labor productivity has been weak, and according to the BLS it "decreased at a 1.0 percent annual rate during the first quarter of 2016... From the first quarter of 2015 to the first quarter of 2016, productivity increased 0.6 percent." This is sometimes reported still by suggesting that "low productivity [is] a puzzle to economists." It shouldn't be a puzzle, of course. Low productivity is the result of low growth. And that is the result of a contractionary fiscal stance, in an economy with too much inequality, and slow growing wages.

Tuesday, May 3, 2016

John Cochrane on economic growth

There are three kinds of lies, "lies, damned lies, and statistics," supposedly said Benjamin Disraeli. This applies to John Cochrane piece in the Wall Street Journal today. Cochrane says that:
"Sclerotic growth is America’s overriding economic problem. From 1950 to 2000, the U.S. economy grew at an average rate of 3.5% annually. Since 2000, it has grown at half that rate—1.76%. Even in the years since the bottom of the great recession in 2009, which should have been a time of fast catch-up growth, the economy has only grown at 2%. Last week’s 0.5% GDP report is merely the latest Groundhog Day repetition of dashed hopes."
That is all true, and I myself complained about slow growth last week. However, this gives a false impression that the slowdown is a very recent thing, of the 2000s. In all fairness there has been a slowdown in growth going back to the 1970s or at least the 1980s. Growth since 1973 has been around 2.8%, and 2.6% since 1980, the years of the first oil shock and the productivity slowdown, and the beginning of the Reagan revolution respectively.

Yes, it is true that growth has further slowed down since the last recession (1.8% since 2000, and 1.2% since 2008), but growth has not only been slower over the last three decades (which, by the way go hand in hand with worsening income distribution), but also it has been more dependent on financial bubbles. And the last three recessions have been associated to the burst of a bubble. And given the structural conditions of the US economy, it seems that only with a bubble we will have healthier growth again.

The point is that an economy that depends on excessive accumulation of private debt, and debt-driven consumption bubbles is more volatile and prone to crisis. And that is associated both to financial deregulation and worsening income distribution. Certainly not to what Cochrane sees as the main American problem: "that the U.S. economy is simply overrun by an out-of-control and increasingly politicized regulatory state. If it takes years to get the permits to start projects and mountains of paper to hire people, if every step risks a new criminal investigation, people don’t invest, hire or innovate."By the way, investment is a result of growth (accelerator) as well as innovation (Kaldor-Verdoorn).

The problem is not enough spending on a sustainable basis, because party politics impedes public investment, and income inequality makes private spending more unstable. Austerity and inequality, not excessive regulation. yeah, because deregulating the financial sector has worked so well. At least he is right that growth did not slowdown because of lack of innovativeness or a savings glut.

Monday, May 2, 2016

The Central Bank as sugar daddy

Complex technical stuff indeed

Pascal Blanqué and Amin Rajan complain about unconventional monetary policy, low or negative rates and Quantitative Easing, which they mostly blame on Greenspan and the excessive reliance on the lender of last resort (LOLR) function of the central banks (even though this precedes Greenspan). They say:
The US example shows all too clearly that the longer such unconventional policy remains in place, the harder it is to exit. Most likely, ultra-low rates will remain a fact of life for the foreseeable future, with no return to a scenario in which asset prices mostly reflect their intrinsic worth... Negative interest rates are a dangerous comfort blanket. They show that the proverbial punch bowl will continue to be replenished while the party is on. Investing is now mostly about second guessing the central banks’ next move, which even central banks themselves are not sure about.
I have a more benign view of unconventional monetary policy. It is there to support expansionary fiscal policy. But that has been like waiting for Godot. What the US example really shows is that, in the absence of significant fiscal expansion, monetary policy is not sufficient to get the economy out of the hole. You need to use the low rates, which allow government to borrow on the cheap, and boost public investment. Infrastructure spending used to be a no brainer.

So the problem is not the central bank as a sugar daddy, but the stagnation policy which results from a consensus that budgets have to be balanced, and spending reduced. The legacy of almost four decades of conservative economics, which, by the way, has been accepted by too many left of center parties.

Sunday, May 1, 2016

On the blogs

Millionaires Would Gain Trillions Under Trump and Cruz Tax Plans -- Isaac Shapiro at the Center on Budget and Policy Priorities shows the effects of GOP candidates' tax policies. Hillary would have pro-business economic policies (yes I prefer Bernie), but nothing like this

What is to be done? -- Robert Paul Wolff on the Trump vs. Clinton choice. Yes, Hillary, if you had any doubts

Why Is Productivity So Weak? Three Theories -- Neil Irwin at NYTimes/Upshot gives 3 scenarios really, and they're all supply side stories. Oh well

Saturday, April 30, 2016

Chomsky on public education

Defunding a program is the best way to promote privatization. He discusses here public education, but you can go down the line. The idea of voucherizing Medicare is basically a way of defunding it, worsening its quality and eventually move to private health (you get it if you pay for it). And on education note that while Chomsky is right that it worked well and is being defunded and privatized (think charter schools), it is also true that the system was always unequal and favored the middle class, since the value of housing determined the quality of the public schools.

Short excerpt from Requiem for the American Dream, which I highly recommend.

Friday, April 29, 2016

Ilene Grabel on capital controls

New paper on the resurgence of capital controls. From the Abstract:
The startling resuscitation of capital controls during the global crisis has substantially widened policy space in the global north and south. The paper highlights five factors that contribute to the evolving rebranding of capital controls. These include: (1) the rise of increasingly autonomous developing states, largely as a consequence of their successful response to the Asian crisis; (2) the increasing confidence and assertiveness of their policymakers in part as a consequence of their relative success in responding to the global crisis at a time when many advanced economies have and still are stumbling; (3) a pragmatic adjustment by the IMF to an altered global economy in which the geography of its influence has been severely restricted; (4) the intensification of the need for capital controls during the crisis not just by countries facing fragility or implosion, but also by those that fared “too well”; and (5) the evolution in the ideas of academic economists and IMF staff. The paper explores tensions around the rebranding of capital controls. These are exemplified by efforts to develop a hierarchy in which controls on inflows that are a last resort and are targeted, temporary, and non-discriminatory are more acceptable than those that are blunt, enduring, discriminatory, and that target outflows. In addition, tensions have increasingly focused on whether controls should be used by capital-source rather than just capital-recipient countries.
Read full paper here.

Slow recovery continues

In the first quarter the economy slowed down grinding nearly to a halt. Real Gross Domestic Product (GDP) slowed to a 0.5% annual growth rate in the first three months of 2016, according to the Bureau of Economic Analysis (BEA). By the way, federal government spending has been a drag on growth. And here in lies the problem. Don't expect any stimulus this year, and very unlikely that this would change significantly any time soon. The problem isn't secular stagnation, it is rather short-term inaction.

Bankers and economic theory

From the BBC Yes, Prime Minister comic series. True, most bankers never quite learned Keynes, and then had to learn the stuff from some other Milton.

Wednesday, April 27, 2016

Fabio Petri on non-substitution theorems

Sometimes there is simple and right

New paper by Professor Petri, which is always worth reading, titled "Nonsubstitution Theorem, Leontief Model, Netputs: Some Clarifications." From the abstract:
The nonsubstitution theorem concerns long-period technical choice and relative prices, and was so understood in its first (1951) formulations, but the modern advanced micro textbooks that present it do not make this clear, rendering the theorem impossible to understand for students. These modern presentations derive from a reinterpretation of the Leontief model as a ‘timeless’ economy in Walrasian equilibrium, capable of positive production in spite of zero initial endowments of all inputs except labour: an unacceptable interpretation, made possible by a use of netputs, to describe the economy’s production possibilities, that is illegitimate in this case even from a strictly neoclassical perspective. The notion of a ‘timeless’ economy disappears from the textbook presentations of the Leontief model and of the nonsubstitution theorem, but the result is that the nature of the model and of the prices to which the theorem refers is not clarified, inevitably leaving students utterly confused. This note remembers the true nonsubstitution theorem, points out that it had been correctly enunciated by Samuelson (1961), and suggests that the current inability to present it in a correct way is due to the absence of the notion of long-period prices from the theoretical horizon of contemporary neoclassical value theory. The paper opens with clarifications on the meaning of the Leontief model which prepare the ground for the discussion of the problem with netputs.
 Read full paper here.

Monday, April 25, 2016

Some brief thoughts on technical change

Engelbart's mouse

I have discussed some of these issues before (here, for example, or here). But it is the last week of my intermediate macro class, and I often end up with some discussion of growth. Mostly the Solow model, and some alternative demand-led growth model. I do only the simple models, Joan Robinson's banana model and Thirlwall's balance of payments constraint, to contrast with neoclassical supply constrained stories of growth.

But in the middle of that discussion, supply constraint versus demand led growth, a conversation about the nature of technological change is always inevitable. No, I'm not going to talk about Kaldor-Verdoorn now. There are two interesting aspects of technology that are often misrepresented in mainstream models.

First, in the Solow model technology is akin to a public good, meaning is non-excludable and non-rivalrous. So technology is relatively easy to acquire, difficult to preclude others from obtaining it, and the access to it by one group does not limit its availability to others. That, by the way, is the reason patents and copyright are supposedly needed, to preclude technology to spread too easily and to provide the incentive for innovators.

However, technology seems to be considerably more difficult to acquire than what the canonical neoclassical model presumes. I always tell students that technology acquisition resembles building IKEA chairs. You have the blueprint, but even then it is hard to interpret it, and the first one is always a bit wobbly, while the process of building new chairs implies that by the time you are done with the last (perhaps the third or fourth one) the process is completely mastered.

The second element of technology that is often misrepresented, and this also true of some neo-Schumpeterians, is the role of the entrepreneur, the innovator. There is overpraise of their role in the process of technological change. The flash of genius which allows the innovator to transform the whole world is glorified. In reality, technological change is a slow process, in which several flashes are necessary to eventually produce any significant change.

For example, I asked my students what made Bill Gates the wealthiest man on the planet. Only one, by the way, said Windows, the operating system that followed DOS, and that was in every PC, after his contract with IBM (yes that contract, and the fact that he could pile his other software with the operating system, is the real source of the wealth). The operating systems were bought from another company, and essentially copied from Apple. And yes, Steve Jobs got most of his ideas from a visit to Xerox Parc. So the names of the several people that were central for the development of the graphical interface with multiple windows on a screen are hardly household names.

Walter Isaacson's The Innovators, which does overall a good job of showing that technological progress is a team sport, even if he does also idealize the role of innovators (yeah, it's in the title) tells the story of one of the them, Douglas Engelbart. About him he says (and yes there is a bit of hero worship in this):
"Over the next six years, culminating in 1968, Engelbart went on to devise a full-fledged augmentation system that he called 'oNLine System,' or NLS. In addition to the mouse, it included many other advances that led to the personal computer revolution: on-screen graphics, multiple windows on a screen, digital publishing, blog-like journals, wiki-like collaborations, document sharing, email, instant messaging, hypertext linking, Skype-like videoconferencing, and the formatting of documents. One of his technocharged protégés, Alan Kay, who would later advance each of these ideas at Xerox PARC, said of Engelbart, 'I don’t know what Silicon Valley will do when it runs out of Doug’s ideas.'"
Most of the time the several innovators needed to produce significant change are forgotten, and do not reap the financial benefits of their own innovations. In particular, because many times is difficult to sort out who had the original idea, where one innovation finishes and when the other starts. Technology more often than not develops as a result of a series of small steps, rather than by big leaps. Histories of technology should emphasize the role of institutions, like Bell Labs, and in particular for modern capitalist societies the role of the state.

Sunday, April 24, 2016

On the blogs

Why not full employment? -- Chris Dillow on the abandonment of full employment as a policy goal. Personally, I'm not sure workers don't demand full employment now. I think they do, as they did back in the 1960s. But the conditions that allowed that to be an acceptable policy to the elites have changed significantly

Robert Lucas – Keynesian? -- ProGrowthLiberal at EconoSpeak. Yeah, sure it all depends on definitions, but it's a stretch

Enough central bank jazz hands… Why Labour should democratise the Bank of England -- Paul Mason's talk that has been all over the blogosphere. A quote if I may: "Under the Conservatives, monetary easing has been used simpy to offset the hit to the economy caused by fiscal tightening. Labour should, in future, use monetary policy to create fiscal space." Literately from Marriner Eccles book (see here)