Monday, May 25, 2015

Winter School: Advanced Topics in Heterodox Economics


For more information go here. And yes, it's in Spanish.

Sunday, May 24, 2015

On the blogs

Paul Romer Confused on Capital Theory -- Robert Vienneau on the mathiness affair.

Mathiness -- and Mike Isaacson too.

Central bank lending and the Great Fire of London -- A bit old, but relevant. Frances Coppola on the distinction between lender of last resort and bailouts. I have the impression that the same confusion occurs with Quantitative Easing.

Josef Steindl on why austerity fails: A Keynesian-Kaleckian view of stagnation policy and the endogenous budget deficit -- Even older post by Circuit, but on the recent debates on the revived secular stagnation issue.

Saturday, May 23, 2015

US Senate approves fast track authority, and Krugman doesn't


The Senate approved fast track for the Trans-Pacific Partnership (TPP), giving Obama authority to negotiate. It has to be approved by Congress still. On this topic, it is interesting that it is the first time Krugman came out (or here), as a closet 'protectionist', and was against a Free Trade Agreement (FTA). Note that the reason for his Sveriges Riksbank Prize (aka Nobel) was: "his analysis of trade patterns and location of economic activity."

His contribution to the analysis of trade patterns was essentially to introduce imperfect competition in the mainstream trade model. And actually what introducing imperfect competition in the mainstream Heckscher–Ohlin-Samuelson (HOS) model (the limitations of that model were discussed here before) did was to suggest that under certain circumstances trade management might be a good idea. He edited later a book, Strategic Trade Policy and the New International Economics, in which some more vocal defenders of trade intervention were present (I'm thinking of Laura d'Andrea Tyson, and John Zysman, at least at that time, in the early 1990s).

But he remained committed to free trade (he wanted the 'Nobel' badly, is my guess). The logic, presented in his paper "Is Free Trade Passé?" (subscription required) was that free trade was a simple rule, while trade management was too complicated, so even though policy might be required, Occam's Razor suggested that free trade was a better choice. So Free Trade was not passé after all. Note that this is a bogus argument, since trade, even with FTAs is always managed to some degree. Sanitary rules, defense preoccupations, and so on, imply that barriers to trade are usually imposed. The problem is not the complication of managing trade, is who benefits from the rules imposed (cui bono). FTAs favor corporations, mostly in advanced economies.

Now Krugman finally gets that. He suggests that:
"the Pacific trade deal isn’t really about trade. Some already low tariffs would come down, but the main thrust of the proposed deal involves strengthening intellectual property rights — things like drug patents and movie copyrights — and changing the way companies and countries settle disputes. And it’s by no means clear that either of those changes is good for America."
That is not new for those that understood the limitations of the theory behind free trade. A few years back I said on the FTA with Colombia:
"Rather than a 'free trade' agreement, the plan that will be sent to Congress should be understood as a corporate and financial liberalization agreement. Workers, in Colombia and the United States, have little to gain from it." (See also my response to Mankiw on TPP more recently here)
FTAs allow greater mobility to capital, provide all sorts of protection to corporations in terms of ownership and access to courts, at the same time that it limits the abilities of national governments to intervene. However, one of the central things that government should be able to affect is exactly was is locally produced, and what types of jobs are generated as a result of these interventions. Industrial policy is intrinsically tied to commercial policy.

On this Krugman remains as conventional as he can be. He avoids telling you that trade has negative distributive effects, and that it might negatively affect industrial employment, and potential growth. For him, the only reason that TPP might be bad is that it may reduce access to cheap medicines in developing countries and make financial reform more difficult in the US (both true, by the way). Why you ask free trade would not be bad otherwise? In his words: "because, whatever you may say about the benefits of free trade, most of those benefits have already been realized." So there you have, Free Trade already worked, and one would assume it has not been part of the forces that weakened labor bargaining power in the US, according to his views. Or if it was, it was fine, since overall free trade was beneficial. To whom is not a question.

And ask the people in Mexico, left with a pattern of specialization that only allows for the exports of people, directly through immigration or indirectly through maquilas, how much NAFTA has benefited them. The notion that free trade, free markets in general, produce somehow optimal outcomes is a crucial fetish of mainstream economics. And Krugman is very concerned with being taking seriously, and not violating the accepted totem of the profession. As he says it is possible for: "reasonable, well-intentioned people [to] have serious questions about what's going on [the TPP negotiations]." Yes, he still believes in free trade (is not passé and the benefits have been realized), he is 'reasonable, and well-intentioned,' and has 'serious questions.' Not like those dirty hippies that think free trade has no rigorous intellectual foundation.

Thursday, May 21, 2015

More on Secular Stagnation

Mauro Boianovsky and Roger Backhouse have written a brief post on the topic, based on a longer paper. As I understand the modern version, due essentially to Larry Summers, it basically suggests that there are insufficient investment opportunities, or a savings glut to use Bernanke's hypothesis, discussed here before. I explained why it doesn't seem particularly compelling story in that previous post. If public spending picked up in the US, so would private investment, and the savings glut would vanish. Yes global imbalances would increase. That would be good. Global imbalances would solve the 'secular stagnation' problem.

Note that the Summers' view is different than the Robert Gordon's view, but not incompatible with it, according to which the innovations of the third industrial revolution are less transformative than those of previous waves of technological change. As noted before also, since I believe the evidence for demand driven technological innovation is strong (something called Kaldor-Verdoorn's Law) I don't think there is much to this argument either. The Gordon hypothesis assumes that innovations are supply side determined, like most neoclassical economists, including Schumpeter.

Boianovsky and Backhouse point out something that I didn't know, since I didn't read Hansen's original paper on this, I might add, that the Turner's hypothesis about the closing of the Western frontier played a role in Hansen's stagnationist hypothesis. Not sure what's the mechanism, so I'll check and report back on that. Also they seem to suggest that Domar's debt sustainability condition depends on the Harrod-Domar model. That result, as far as I understand it, is completely independent of the growth model.

I should also note that the only forgotten author in this revival of the stagnationist thesis, is the most interesting of them all, namely: Josef Steindl, author of the 1952 classic Maturity and Stagnation in American Capitalism. Stagnation resulted from the oligopolistic structure of mature capitalism, in his view. Steindl was famously wrong, in the sense that the 1950s and 1960s were not a period of stagnation.* But at least his explanation pointed out in the direction of social conflicts imposed by the productive structure of advanced economies. As I said on my previous post on the topic, there is no secular stagnation problem, associated to lack of investment opportunities, in my view. There is a political problem that precludes more fiscal expansion, or in Steindl's terms, it's stagnation policy.

* An issue he discusses in his 1979 Cambridge Journal of Economics paper (subscription required).

Wednesday, May 20, 2015

Fraternity of Failure: The Alternative Version

By Thomas I. Palley

Hillary Clinton does not want to talk about past economic controversies. And it is easy to understand why. There is much that is troubling. But let’s not go along with her wishes. You can learn a lot by studying recent history and even more by watching how politicians react to that history.

The big “let’s move on” story of the Clinton campaign is the refusal to answer journalists. According to the Washington Post in the first 29 days after she announced her campaign she took just eight questions. The campaign’s response to all this? Blah. Reporters whining as usual.

Now, I’m not going to be impolite and focus on questions about the Iraq War which have been getting Jeb Bush in deep trouble with some liberals. Instead, I’m going to focus on economic policy which is my area of expertise. It also seems to be the focus of Mrs. Clinton’s campaign.

Read rest here.

Tuesday, May 19, 2015

Some Brief Thoughts on Paul Romer and Mathiness

Catching up with work after grading. Posting will continue slow for a few weeks. Just a brief note on the brouhaha that the Romer (Paul) paper has led to. I mostly read it in Lars blog. Lars quotes Romer as saying:
"About math: I have an undergraduate degree in physics.* I’ve seen clear evidence that math can facilitate scientific progress toward the truth. If you think that math is worthless or dangerous, I’m sure that there are people who will be happy to discuss this with you. I’m not interested. I’m busy. 
About truth and science: My fundamental premise is that there is an objective notion of truth and that science can help us make progress toward truth. If you do not accept this premise, I’m sure that there are people who would be happy to debate it with you. I’m not interested. I’m busy."
I should say that I only looked cursorily at the paper, which seems poor at best. The notion that: "Joan Robinson (1956) was engaged in academic politics when she waged her campaign against capital and the aggregate production function," misses the quite important logical point of the capital debates, which were acknowledged by none other than Paul Samuelson in his 1966 "Summing Up" (subscription required).

It seems clear that the very concept of mathiness is murky at best.** Some mathematical concepts are fine, some aren't. The criteria seems to be Romer's personal preferences. Mind you, the quote above is one of the few things in that post that is clear and on the mark. Math is just an instrument. If Romer spent the time to read Sraffa's short monograph, he would have to conclude (mathematical logic requires it) that mainstream notions about relative prices associated to relative scarcity are not logically tenable. Progress would imply discarding illogical models. He is busy, though.

I should add that, in general, I'm in agreement with Lars critique of Romer. However, the problem to me seems to be less concerned with the use of mathematical models because "the real world is fuzzy, vague and indeterminate," which it clearly is, but with the logical inconsistencies of the neoclassical model per se. It is the kind of models that Romer uses (and the authors he criticizes too) that are problematic, not the fact that he formalizes his ideas in mathematical models. That's why it's a bit funny that he thinks that some RBC or New Classical authors are the problem, because presumably they fool you with math or, as one of the definitions of mathiness suggests, the words that these authors use to describe their mathematical results do not accurately convey what the math shows.

Sure enough, there are important elements in economic theory that cannot be easily formalized, and that does not mean that objective understanding is impossible. I haven't seen the formalization of the concept of mode of production, but that does not mean that the definition of capitalism is devoid of meaning. My two cents.

* This has been amended in the last version. Now reads: "I studied physics as an undergraduate." As it turns, some economists DO have physics envy. But you know what this means. He knows math people. He is an authority. Arguments of authority are so sciency, aren't they?

** At least two definitions are possible it seems. Logically incorrect mathematical arguments that are defended anyway (Romer would incur on this version of mathiness), or a discrepancy between the mathematical model and the underlying economic theory (the one Romer suggests some in the mainstream incur). They are not necessarily equivalent.

Sunday, May 17, 2015

On the blogs

How Should Economics be Taught? -- Vicenç Navarro on the need for more interdisciplinary and about Podemos in Spain (h/t Mike Norman). Don't get me wrong, interdisciplinary is certainly good, but the problems with economics are within the discipline. Doesn't help much to have historical and political perspective if the economic model suggests markets are self-regulated with a tendency to the natural rate of unemployment.

How to Justify Teaching the Worst of Economics to Non-Economists -- Ingrid Harvold Kvangraven also on teaching. Should have posted this one a while ago, but missed it.

Blaming Keynes -- Simon Wren-Lewis response to Niall Freguson's FT pirce. How well has the UK done under the Tories? His reply: "growth in GDP per head under Labour averaged 1.5% even though it included this recession, but average growth from 2010 to 2014 was only 1% when we should have been seeing a rapid recovery."

Paul Romer on math masquerading as science -- Many entries on Romer's paper. Lars Syll provides a good entry to this debate.

Friday, May 15, 2015

Central Bank of Ecuador Journal's Call for Papers

The journal, Cuestiones Económicas, is being re-launched. I had a paper published back in 2001, pictured above. And have been invited to be a member of the board now. Call for papers (in Spanish) here. Interestingly, the paper is not the one on Ecuador and dollarization (for that one go here).

Wednesday, May 13, 2015

Stiglitz (and others) on the Vulture Funds

From yesterday's panel on "Reforming the Future: Lessons from Sovereign Debt Restructuring" held at the Atlantic Council. Close to the 11 minute mark Stiglitz says that Griesa's decision on Argentina and the Vulture Funds was "very peculiar" and that it made restructuring almost impossible.

Tuesday, May 12, 2015

More Jobs, Flat Wages: Trade and the Trade Deficit Continue to Hurt Us

By Thomas Palley

April’s Employment Report showed a gain of 223,000 jobs and a further one-tenth percent decline in the unemployment rate to 5.4 percent. The good news is the report shows the economy continues to nudge forward and create jobs for newcomers into the labor force. The bad news is the economy is not growing fast enough to raise wages.

Average hourly earnings for production & non-supervisory workers, who are eighty percent of the workforce, are up just 1.85 percent over the past year. In April, the rate of wage increase actually declined.

The broad (U-6) measure of unemployment stands at 10.8 percent, which is far above the level of past economic cycles. Furthermore, unemployment is widespread across all business sectors. The labor force participation rate also remains at a historically low level, indicating that many workers stand ready to re-enter the work force when jobs become available. Together, these conditions show labor supply is plentiful and there is no threat of inflationary shortages.

Read rest here.

Monday, May 11, 2015

Comparative Austerity: Does Cameron re-election show that austerity works?

Here, as per the comments, an update picture of austerity in the UK in comparison to Greece and the US. I added Germany too this time. Data from the International Monetary Fund (IMF, WEO Database). Figures for 2014 and 2015 are estimates.

This graph shows total government expenditures rather than just consumption. Note that the UK has pursued austerity, but it has not been particularly more austere than the US. Germany has pursued moderate, very moderate, fiscal expansion. The decline in government spending in Greece has no parallel, as should be expected, since the country was forced to pursue austerity policies.

Again, this shows that David Brooks notion "that there were two countries that did what we call austerity," meaning Germany and the UK, and that is connected to the fact that "the two strongest political leaders right now in Europe are Angela Merkel and David Cameron," so that this is a vindication of austerity policies is, as I had noted before, preposterous.

Sunday, May 10, 2015

On the blogs

The Problem of Human Capital as a Factor of Production -- Mike Isaacson on the problems of human capital, beyond those raised by Branko Milanovic not long ago, which as Mike notes it's often used to endogenize the Solow residual.

Lost in Translation (Personal and Trivial) -- Paul Krugman on the dubious quality of translations. The old saying is correct, traduttore, traditore. Perhaps he is better in Italian or Japanese, who knows.

Graph/Table of the Week: Consumption Inequality -- URPE Blog on a new paper by Sanjay Reddy.