Friday, July 1, 2016

The Puerto Rican crisis in one graph

I published a while ago a link to a piece by Argeo Quiñones and Ian Seda on the situation in Puerto Rico. Below a graph of GDP (in constant prices).

Clearly the economy started to collapsed in 2007, more or less with the US recession. The difference is that there has been no recovery in Puerto Rico. Not surprisingly there is talk about Prexit (an exit from the US; even though the entry was incomplete and subordinate).

Thursday, June 30, 2016

Why Negative Interest Rate Policy (NIRP) is Ineffective and Dangerous

By Thomas Palley

NIRP is quickly becoming a consensus policy within the economics establishment. This paper argues that consensus is dangerously wrong, resting on flawed theory and flawed policy assessment. Regarding theory, NIRP draws on fallacious pre-Keynesian economic logic that asserts interest rate adjustment can ensure full employment. That fallacious logic has been augmented by ZLB economics which claims times of severe demand shortage may require negative interest rates, which policy must deliver since the market cannot. Regarding policy assessment, NIRP turns a blind eye to the possibility that negative interest rates may reduce AD, cause financial fragility, create a macroeconomics of whiplash owing to contradictions between policy today and tomorrow, promote currency wars that undermine the international economy, and foster a political economy that spawns toxic politics. Worst of all, NIRP maintains and encourages the flawed model of growth, based on debt and asset price inflation, which has already done such harm.

Read more here.

Wednesday, June 29, 2016

Exchange rate depreciation and exports: the evidence

In this blog we discussed several times the reasons why exchange rate depreciation is not necessarily a panacea for current account problems (see for example here and here on Argentina depreciation before the last one with the Macri administration, here on the Europe, here in general about the idea of a Sustainable and Stable Competitive Real Exchange Rate or SSCRER, and here on the role of the exit from the Gold Standard during the Depression). Exchange rate skepticism suggested that depreciation often works because it is contractionary, and it worked by causing a recession and reduced imports. The optimists, like the so-called New Developmentalists pointed out to the positive impact on exports.

Now a new paper by Filippo di Mauro and others (h/t Pablro Bortz) at Vox.eu shows that the exchange rate has a reduced role in the explanation of exports shares for European and Asian countries. As the authors suggest:
"An obvious reason for the low explanatory power of price competitiveness is that a large part of trade involves intermediates products – i.e. inputs used within rather well established global value chains (GVCs) – and is thus far less influenced by pure exchange rate considerations."
That is the steady increase in Chinese global export shares have less to do with their currency manipulation (something briefly discussed here) and more to do with the strategic decisions of firms on where to locate their supply chains. The authors conclude:
"By disentangling the impact of exchange rate changes on trade results, we have shown that the underlying assumption of the ‘currency wars’ discussion – that devaluations bring about substantial export gains – may be severely flawed."
The evidence seems to suggest that depreciation does not stimulate the type of substitution that would lead to external equilibrium, neither on the import or export side, and that a devalued currency is no substitute for industrial policy. Of course evidence, once John Eatwell noticed, has not solved any economic debate so far.

Tuesday, June 28, 2016

Trading Up: A Critical Perspective on Jobs, Governance and Security in US Trade Policy


This Tuesday June 28, 2016, the AFL-CIO is holding a conference titled “Trading Up: A Critical Perspective on Jobs, Governance & Security in U.S. Trade Policy,” from 9:00 am to 5:00 pm in Washington, DC. The full program is here. Participants include Joseph Stiglitz, Dean Baker, Tom Palley, Rob Scott, Jeff Faux, among others.

You can join online for what should be an lively and insightful debate—especially given recent developments around the Brexit and the Trans-Pacific Partnership (TPP).

You can watch the conference here and join in the discussion online using #BetterTrade. Please tweet any questions for panelists to conference organizer Celeste Drake (@cdrakefairtrade).

Monday, June 27, 2016

Dvoskin and Petri on the relevance of the capital debates

Ariel Dvoskin and Fabio Petri just got their paper published in Metroeconomica. From the abstract:
Among the recent interventions in the capital controversy, the debate between Paola Potestio and Kurz & Salvadori has raised important issues. We agree with Potestio's rejection of the legitimacy of a value endowment of capital but we disagree with her dismissal of the relevance of reswitching and reverse capital deepening: these phenomena are very important because they undermine the demand-side role of the conception of capital as a single factor. For the marginal approach to be plausible, this demand-side role had to imply the stability of the savings-investment market even in shorter time frames than those required by a complete adaptation of the ‘form’ of capital; this was taken by Marshall to authorize doing without a given endowment of value capital, which opened the door to the shift to the modern neo-Walrasian versions of the marginal approach. With proof from Hayek, Hicks, Malinvaud, and Lucas we argue that a continuing belief in traditional time-consuming marginalist disequilibrium adjustments based on capital-labour substitution is the hidden reason why the claim often made by contemporary marginalist economists, that the economy can be assumed to be all the time on the equilibrium-growth path, is not found patently unacceptable. The true microfoundation of DSGE macromodels is not intertemporal equilibrium theory, but the time-consuming adjustment mechanisms on whose basis the marginal approach was born and accepted, and on whose basis monetarism was then able to re-assert a pre-Keynesian view of the working of the economy.
You can read the preliminary version at the Siena working paper series here. The idea that the capital debates is a central issue in macroeconomics has been discussed recurrently in this blog.

Friday, June 24, 2016

A few brief comments on Brexit and the postmortem of the European Union

Another end of the world is possible

There will be a lot of postmortems for the European Union (EU) after Brexit. Many will suggest that this was a victory against the neoliberal policies of the European Union. See, for example, the first three paragraphs of Paul Mason's column here. And it is true, large contingents of working class people, that have suffered with 'free-market' economics, voted for leaving the union. The union, rightly or wrongly, has been seen as undemocratic and responsible for the economics woes of Europe.

The problem is that while it is true that the EU leaders have been part of the problem and have pursued the neoliberal policies within the framework of the union, sometimes with treaties like the Fiscal Compact, it is far from clear that Brexit and the possible demise of the union, if the fever spreads to France, Germany and other countries with their populations demanding their own referenda, will lead to the abandonment of neoliberal policies. Austerity will most likely continue. On this matter, note that the United Kingdom did not ratify the Fiscal Compact, and austerity is a completely home made policy, consolidated by the current Conservative government, but also by the previous Blairite New Labor. And Socialist governments in France (you can say the same of Syriza in Greece) have also accepted austerity as the only alternative.

Most of the austerity policies imposed on the peripheral countries are actually the result of the euro, and are to a great extent independent of the existence of a broader political union. Of course the mechanisms for imposing austerity pass through the institutions of the union, but it is clear that progressive policies can be pursued within the union.

In order to understand the limitations of the European project it is important to remember that the original project, associated to the Treaty of Rome built on the European Coal and Steel community, was a policy that aimed at resolving the perennial Franco-German conflict, with the cooperation of the US, in the context of the Cold War. The project went hand in hand with Keynesian policies at home, and the development of the modern Welfare State, possible in part as a result of the Marshall Plan. On the other hand, the modern union is often confused and seen as being inextricably associated with the euro, which was designed after the Conservative resurgence in the 1980s, and consolidated in the 1990s after the collapse of the Soviet block. That is, the euro was created in the neoliberal Thatcherite world in which supposedly 'there is no alternative.' The context has not changed much, even if there is a revolt against neoliberal policies.

And that is why separating the euro project (the case of Grexit would be based on that) from Brexit is important. This is hardly the demise of neoliberal policies. Even the end of the European Union would not guarantee that pro-worker coalitions would win elections, or that if elected they would purse Keynesian expansionary policies (btw, it is also unclear that Grexit would solve all the problems in Greece, and that a default would be successful, although I do think the case is stronger there).

Globally, in fact, there is no evidence that neoliberalism is retreating. In Latin America, the opposite seems to be the case. In the US the same working class anger with neoliberal policies, austerity and stagnation has led to both Bernie Sanders and Donald Trump's insurgent campaigns, but we may end up with the same old neoliberal policies as always (yeah, I mean Hillary Clinton; and no Bernie and Donald are not the same, but that's another issue, and I would vote for Hillary). Even worse, some elements of the revolt of the masses in the US have led to a wave of anti-immigrant sentiment and outright xenophobia, not unlike the UK. And that is something that Nigel Farage and Boris Johnson have exploited in the UK. And remember that Jeremy Corbyn was for Remain, and that he may also suffer with Brexit, and with that the insurgence against neoliberal Blairism within Labor.

Personally, I cannot see that the disintegration of Europe would lead to a positive outcome. Sure the EU has a significant democratic deficit, and a bureaucracy that is seen as wasteful and inefficient (that is always, btw, part of the right wing propaganda for smaller government; you know, because private corporations are always so efficient and democratic, aren't they?). The same is true of American democracy. Ask the Bernie supporters re-counting votes in California (or Al Gore for that matter). So maybe secession should be the solution (yeah, in the US it's the right wing crazy lunatic fringe in Texas that thinks that this is a good idea). And yes, the right wingers in Europe are rejoicing (Trump too).

At a minimum the European Union provided an environment in which people could move freely, in which petty nationalism gave way to acceptance of foreigners and immigrants, something particularly relevant with the refugee crisis in the neighboring region. Some may suggest that this was very little to show for. And the alternative, does it have something to show for? If the European Union really collapses, there will be very little for progressives to be happy about.

Tuesday, June 21, 2016

Prebisch on Economic Dynamics


Here is the link to the power point presentation on the unpublished Buenos Aires lectures given by Raúl Prebsich on economic dynamics at the University of Buenos Aires in 1948, right before he entered ECLAC, that we presented (actually Esteban did it, I only participated in the Q&A) at the History of Economics Society Meetings. Next year the conference is in Toronto.

Monday, June 20, 2016

Ending austerity policies to open a new time in Europe

Stop praying and change your vote!

The management of the economic crisis has had devastating consequences for our country, as well as for the eurozone as a whole. The fiscal austerity and wage reduction policies imposed over the last few years have unnecessarily prolonged the recession across the continent and generated deep social fractures by increasing economic and social inequalities.

Fiscal austerity and wage reduction policies have led us to a lost decade. Across the Eurozone, we haven’t yet regained pre-crisis level of per capita income, and in Spain this indicator is still 5% below its 2007 level. In our country, only one in three jobs lost during the crisis has been recovered, job precariousness has aggravated, and 29% of the population lives at risk of poverty or social exclusion.

Read full manifesto against austerity here. I'm number 50 of more than 177 signatories.

Friday, June 17, 2016

A very brief comment on Brexit

I've been posting less frequently with the end of the school year. Will be going to the History of Economic Society Meeting this weekend. Posting will be even more limited. At any rate, hope to be able to say something more substantial on Brexit before the referendum. Let me say that I'm against Brexit, which is I suspect the view that Wynne Godley would take on the issue. He was firmly for Europe, but against the euro as it was shaped, but not in all circumstances. He correctly pointed out that a common currency requires a fiscal union.

It seems that more than a few heterodox Keynesians (post-Keynesians for the most part) have come in favor of Brexit. I think it is important to emphasize the difference between the common currency (the euro) and leaving it, for example, Grexit, and the European Union. Brexit, of course, refers to the last, since the UK has its own currency, the pound.

Mind you, I don't think that the problems with leaving the EU are essentially economic, and I think to emphasize these costs is a mistake. The real problem with Brexit is the political costs, associated to a more closed view of what Europe means. It would lend support to radical right wing views that reject a more culturally and ethnically diverse Europe, and it might, as Yanis Varoufakis suggested lead to the slow disintegration of the European project.

I have posted a few videos of 'Yes, Minister' before. The one below (h/t Ramanan) is apropos. Enjoy!


Monday, June 13, 2016

Boom Bust Boom and the South Sea Bubble

Terry Jones documentary Boom Bust Boom has been out for a while. Worth watching too. The Economist gave it a reasonable review. And there are Minsky and Galbraith puppets.

Above a brief, and simple discussion of the South Sea Bubble. I think role of trade with Spanish America is exaggerated. The most relevant part of the scheme was the public debt swap. Dale's The First Crash provides an interesting account of it.

Sunday, June 12, 2016

Brothers on the line


Documentary on the Reuther brothers and the role of unions in the prosperity of the Golden Age of Capitalism. Worth watching.

Wednesday, June 8, 2016

Vultures, bottom feeders and the debt collection business

John Oliver's story on debt collection is very instructive. It looks only at the domestic practices, but these are essentially the same as the ones used by Vulture Funds in international financial markets.
So respectable businessmen like Paul Singer, a top GPO contributor that owns the Elliot Vulture Fund that buys debt of developing countries and sues them in New York courts, or the international organizations like the IMF that impose conditionality on poor indebted countries are not much different from the bottom feeders described by Oliver.