Showing posts from May, 2012

Obama is not Carter

Interesting post by Nate Silver at Five Thirty Eight on Obama and Carter comparisons. The important point Carter went up for re-election in the middle of a worsening economy, and Obama is up in the middle of a very poor recovery. I add my 2 cents with the graph below.

The graph shows private employment growth in the four years of the Carter administration, and for Obama the three first years and the average of the first four months of 2012. Note that by 1980 private employment fell 0.2%, and is invisible in the graph. In the case of Obama the trend is up, but slowing down. Obama could increase public employment to help the lackluster private demand, but that is another story.

Parasites, vultures and other economic agents

The decision by Facebook cofounder, Eduardo Saverin, to relinquish his US citizenship led to a huge outcry, and to new bi-partiscan (a very rare event indeed) to tax him in advance and prohibit him from re-entering the country (the Ex-Patriot Act).  This is not a new phenomenon by the way. Kenneth Dart, inheritor to a styrofoam cup company and a few millions (billions?), renounced his US citizenship and became a citizen of Belize, a flight capital haven, in the 1990s for the same reason.

William McNeill differentiates between the micro-parasites and the macro-parasites, and Saverin and Dart are clearly in latter category. Macro-parasites also benefit from the host, and harm it in the process. And they evolve too. Dart is the owner of a Vulture Fund that made millions (700 or so) out of the Argentinean default back in the early 2000s.

Now, even though it has not received much attention, his Vulture fund has cashed US$ 400 millions out of the Greek payments after the last debt restruc…

How big was the stimulus?

The figure shows the rates of growth of total federal government spending in three periods 1930-36, 1941-45 and during the last recession and after, that is 2008-11.
The longest series is 7 years, and you see that spending growth peaked in the third year, but is visible even in the last year. World War II saw a massive increase in government spending. By the standards of those previous stimuli the last one has been moderate in size, and even worse, not sustained in time. In the third year the rate of growth of government spending was negative. That is, after the 2009 stimulus government spending fell in comparison to the previous year.

And yes the comparison with the Great Depression and the War is okay, since the size of the shock was by almost any measure as big as the one  back then.

De Grauwe moment: an impressively prescient prediction of the Eurozone balance of payments crisis

Sergio Cesaratto (Guest blogger)

In an article in the Financial Times written one year before the onset of the European currency union, Paul De Grauwe presented a farsighted conjecture of what could follow, something most economists have only recently realised.[i] Indeed, with the benefit of hindsight, the European crisis appears now as the nth ‘this time is different’ episode of the financial liberalisation sequence cum fixed exchange rates, capital flows from the centre to the periphery, housing bubble, current account (CA) deficit and indebtedness, default. Although I find Reinhart and Rogoff (2009) to be a poorly organised account of the history and nature of defaults, their title really conveys the sense of a recurring pattern of unfortunate events. The title of a seminal paper ‘Good-bye financial repression, hello financial crash?’ (Diaz-Alejandro, C. 1985) also sums up the essence of those events. In order to better appreciate prof. De Grauwe’s insight I introduce his article w…

A leader for the ILO

Vijay Prashad writes on the very important election for the head of the International Labour Organization, and the need to support Jomo K.S. a progressive economist, in particular in the middle of the current global crisis. He says:

On May 28, a select group of delegates will enter a room in the International Labour Organization (ILO) in Geneva to elect the body's next Director-General. Nine candidates are in line for the post. The ILO's byzantine process revolves around a tripartite structure, with the employers (the International Organisation of Employers), the workers (largely the International Trade Union Confederation, ITUC) and the governments sharing the task of selecting the next Director. Read the rest here.

Newspeak, Europe and economics

The German representative on the board of the European Central Bank (ECB), Jörg Asmussen, says that the debate on growth versus austerity is the "wrong debate" since "we [who?] need both." Of course what he means by growth measures is labor market reforms, meaning more flexibility to fire workers (yes with more than 20% of unemployment in Greece and Spain, and double digits for the eurozone it seems that firing workers is really hard in the old continent). That would supposedly reduce the cost of workers, i.e. lower wages, and, as a result firms will hire more workers, even if nobody is buying their goods. And you wonder why things are the way they are in Europe?

PS: For a debunking of the idea that labor market flexibility is necessary for full employment, or that labor market protections cause unemployment, read this paper.

A time to reap

Conceição Tavares worked hard and now is time to reap the benefits. From Marx21 (hat tip Tomas Rotta). Renowned professor and economist Maria da Conceição Tavares received yesterday, May 17th 2012, the highest scientific prize granted by the Brazilian government. The national foundation for scientific research (CNPq) awarded Conceição Tavares for her lifetime theoretical and practical achievements. Tavares has influenced generations of students, scholars, and state officials. The significance of the award is that it goes to a female Marxist economist. Dilma Rousseff, Brazil’s first female president and herself a former student of Conceição Tavares, personally handed the prize. During the official ceremony Dilma made clear in her brief speech that “Conceição Tavares treated economics as it should be treated, as political economy.” Read the rest here.
PS: By the way, while it's true that Conceição was certainly influenced by Marx, it's far from clear that one could call her Ma…

Central Bank Independence not so well intentioned failure

Chris Giles, the economics editor of the Financial Times, thinks, rather surprisingly, that central bank independence (CBI) has been a failure, in England at least. In his own words: "with the benefit of hindsight, the first 15 years of BoE [Bank of England] independence should be seen as a well-intentioned failure."

His views hinge on the question of public control of central bank behavior. For Giles a well informed public could have pushed the BoE to act more boldly after the 2007 financial crisis, and to be more prepared for the global crisis that started with the Lehman collapse in 2008.

While I agree that CBI has been a failure -- and not just in England (yep ECB is what I'm thinking) -- and also agree that there is no reason why fiscal policy is more directly scrutinized, than monetary policy, by the people's representatives in parliaments in most countries, I would disagree that the mistakes have all been well intentioned [that might also explain why the BoE i…

Letter of support for the new central bank law in Argentina

The prevailing ideology over the last thirty years has been that the only legitimate task of central banks everywhere is control of inflation. This has frequently been through the application of an "inflation target", a maximum rate of increase of some measure of aggregate price changes. The practical consequence of setting the "fight against inflation" as the primary objective has been to reduce substantially the policy options of central banks. Even more, this narrow approach prevents the coordination of monetary policy and fiscal policy, essential to successful countercyclical interventions.

In Argentina in the 1990s economic policy operated under the burden of an extreme form of this narrow approach, a "currency board" regime, involving a fixed exchange rate to the dollar and a monetary base strictly linked to foreign exchange reserves. During 1997-2002 the weaknesses inherent in this monetary policy created disaster, economic collapse and high infla…

Greeks pay their fair share

Krugman suggests that we might be close to the end, if Greece is unable to form a government and ends up out of the euro, which seems increasingly likely. One thing that everybody seems to agree is that in the Greek case fiscal issues did play a role. So here is some food for thought, are Greeks taxed at lower rates than citizens of other OECD countries?
The overall tax revenue as a share of GDP is actually a bit lower than the German, but not much, and is higher than the US, according to OECD data. There are differences on what kinds of taxes Greeks and Germans pay, with the Greek paying more on goods and services and less on income (i.e. a more regressive tax structure). But, for what is worth, tax revenues are not way off with respect to other countries.

Central Bank (what is it good for?)

If you ask Ron Paul, yep ... absolutely nothing! Jamie Galbraith has a different view, and he told it to Paul, the chairman of the House Sub-Committee On Domestic Monetary Policy. He said:
"We cannot escape the need for a central bank. The United States before the Federal Reserve Act suffered from chronic deflation and financial panics; for this reason the period from 1873 to 1896 was known as the Great Depression, until the 1930s got that title. In the past century only the communist countries dispensed with central banks and private banking firms, and this arrangement did not serve them well. For this reason, I cannot join in supporting bills that would repeal the Federal Reserve Act or bar lending by commercial banks." He also argued in favor of the Humphrey-Hawkins Act (note that he was a member of the team that drafted the legislation). The Fed mandate is important for him, and this is how he justifies it why he and his monetarists colleagues alike worked to draft:

Free Trade and Inclusive Development

By Suranjana Nabar-Bhaduri

One of the central elements in the development of any country is the creation of economic activities that transform the production structure by significantly increasing labor productivity, or the amount of production per worker. By helping to absorb more people into quality employment, the creation of such activities helps to generate a more inclusive and sustainable path of long-run economic growth. While economists and policy-makers accept the necessity of this transformation, there are differing views on the policies that developing countries should follow to achieve this transformation.

Many Western countries and institutions, such as the International Monetary Fund (IMF) and the World Bank, argue that minimizing the role of the State in economic activity, and opening up the economy to external markets is vital to achieving this transformation. But other economists (e.g., Prebisch 1959, Cimoli and Correa 2002, and Ocampo 2005) stress that active industri…

Why economists fail

The new book (and the accompanying blog) by Daron Acemoglu and James Robinson Why Nations Fails is a popular version of their academic papers (several with Simon Johnson, the ex IMF chief economist) on the topic [brief summary here]. The main idea is that institutions and not geography or culture are the key to economic development. That is for the most part true.

They use South and North Korea (and Nogales, México and Arizona) as an example of countries that share the same culture and geography, but have very different institutions, and, as a result, a huge disparity in income per capita. Jared Diamond is correct to point out that, in part, technology is geographically determined. No plants and animals to domesticate, and provide for a large surplus (Diamond uses the old classical notion of surplus), and higher population density (with the diseases and immunities associated to those Germs) and no advantages associated to a more developed division of labor (Diamond is also Smithian in…

Three part interview with Jamie Galbraith

At the German website NachDenkSeiten (here, here and here for the English transcripts). In the last one, important to note his views on why the Obama fiscal package and the momentary Keynesian period was insufficient for recovery. He says:
"The crisis imposed a momentary intellectual discipline and a resurgence, a reassertion of Keynesian principles. But that discipline did not extend into decision-making circles, at least not deeply enough, and it was overridden by, let's say, existing protocols, existing habits of thought and action that had developed in policymaking circles. And those protocols and habits precluded taking adequate action. What I mean by that specifically is that you had ways of making forecasts which were intrinsically too optimistic, intrinsically assumed that you were going to return to a baseline over a five-year time frame. And that meant that you were not going to get even presented to the president the possibility that the crisis was on the scale of …

No gentlemen are bankers

Pure logic, according to Ernest Nagel (and James Newman) at least. In the classic book on Gödel's theorem the following example appears:
Where g stands for gentlemen, p for polite, and b for bankers, with the bar on top meaning not. So gentlemen are contained in polite, bankers are contained in not-polite, so it follows that gentlemen are contained in not-bankers. Of course you can substitute polite with other epithets. But they got it right. As I said, it's pure logic.

Krugman is right on Argentina

Fair is fair; I often point out when he is wrong, so I must admit he is 100% correct this time around (see my most recent comment on the topic here). By whatever measure you want Argentina has grown more than Brazil in the last decade. And yes (for the nuts in Krugman's comment section), Argentina has more inflation as a result of more nominal depreciation and more wage resistance. He did not say everything is perfect in Argentina, just better (much better, as a matter of fact) than with the neoliberal model. And that was the point of Matt Yglesias too.

Happy ending at UNCTAD XIII

Or at least for now, is what Deborah James says. Note that the contentious paragraph on UNCTAD's mandate that the US State Department didn't like reads tha UNCTAD would:
"continue, as a contribution to the work of the UN, research and analysis on the prospects of, and impact on, developing countries in matters of trade and development, in light of the global economic and financial crisis." Yep, that is unacceptable indeed. After all you ask, what crisis?

Fed up with the full empoyment target?

The debate on Bernanke's views on inflation targeting -- whether it should be 2 or 4% -- as I noted in a previous post is peculiar, to say the least. After all the Fed has a dual mandate, and inflation preoccupations have to be tempered by the pressing question of unemployment. The preoccupation in some quarters is that the Fed has already accepted as a matter of fact that it has single mandate (see here and here). It seems to me that critics (e.g. Krugman, DeLong and others) are correct for the wrong reasons.

The graph below shows the effective Fed Funds rate in the last three recessions (represented by the shaded areas). The rate of interest falls in all three during or just before the recession.
Further, after the trough of the recession the Greenspan Fed took 46 and 35 months to start raising the rate in the previous two recessions. So far, 35 months after the last trough, the Bernanke Fed has not increased the rate. This time around it has done Quantitative Easing allowing fo…

Galbraith on Summers and deficit spending

Letter to the Financial Times published today as 'Dr Summers performs a medical miracle.'
From Prof James K. Galbraith

Sir, Whence comes Lawrence Summers’ medical knowledge? He writes of palliatives, of misdiagnosis, and states that “treating symptoms rather than causes is usually a good way to make a patient worse” (“Growth not austerity is the best remedy for Europe”, April 30).

As to cures, Prof Summers writes of “a need to raise retirement ages, reform sclerosis-inducing regulations and restructure benefit programmes”. Yet he presents no evidence that these matters caused our troubles, and of course they didn’t – unsupervised bankers and ambitious economists did. Blaming the elderly and poor is just a prejudice, common to people who have easy jobs and private means. Bleeding them (gradually, of course) is a medieval practice.

And yet, on the main point, Prof Summers gets it right. He does this by mistaking a symptom (recession) for a cause, and then prescribing a palliative (…

Not entirely debauched by economics

The quote of the week (I should instate it as a policy) comes from a letter from Piero Sraffa to Joan Robinson:
"If one measures labour and land by heads or acres the result has a definite meaning, subject to a margin of error: the margin is wide, but it is a question of degree. On the other hand if you measure capital in tons the result is purely and simply nonsense. How many tons is, e.g., a railway tunnel? If you are not convinced, try it on someone who has not been entirely debauched by economics. Tell your gardener that a farmer has 200 acres or employs 10 men – will he not have a pretty accurate idea of the quantities of land & labour? Now tell him that he employs 500 tons of capital, & he will think you are dotty – (not more so, however, than Sidgwick or Marshall)." That was in 1936. The reference comes from this paper by Velupillai on Krishna Bharadwaj’s contributions to economics.

In solidarity