Showing posts from September, 2012

Eugene Genovese and modes of production

Eugene Genovese has passed away. He was a historian of American slavery, and his views were not particularly popular or discussed in economics courses, as far as I know. Mainstream, quantitative historians suggested that his view that slavery in the South was not profitable was incorrect (in particular Engerman and Fogel, the latter a Bank of Sweden prize, also known as the Nobel, winner). The other reason, I imagine, that made his work particularly difficult for mainstream authors was his use of Marxist categories, including one that I still find essential for historical analysis, namely: the notion of mode of production.

Genevose (I read only his The Political Economy of Slavery and not the classic Roll, Jordan, Roll, often praised as his best work) argued that slavery was an economic drag to the Master class, and that the system remained a pre-capitalist formation, with the profit motive having a secondary role in the process of social reproduction. The idea was that, even if the …

Unemployment during the Great Depression

Unemployment remained above normal for a long period after the recovery from the Depression started in 1933. So much so that Galbraith père dictum became famous:  “Hitler, having ended unemployment in Germany, had gone to end it for its enemies.” That is, even if the New Deal was successful it was unable to completely eliminate unemployment, something that only World War II did. The graph below shows two different series for unemployment, one that follows closely the official BLS level by Lebergott, and one by Darby.
The main difference is that Darby includes the workers in the emergency government labor force as employed – the most important being the Civil Works Administration (CWA) and the Works Progress Administration, later renamed Work Projects Administration (WPA). Once the workfare programs are accounted for, the level of unemployment fell from 22.9% in 1932 to 9.1% in 1937, a reduction of 13.8%, which can hardly be seen as a failure, even if the 1937 level is certainly not fu…

Rochon and Docherty on the future of PK economics

The financial crises led many to believe that neoclassical economics might pay a price for the inability to foresee the unsustainable problems that were at the heart of the crisis. This paper deals with the problems of the mainstream and the possible strategies that heterodox groups, in particular post-Keynesians, might use to gain influence. From the abstract: This paper examines the reasons for the difficulties Post Keynesian economics has had in supplanting mainstream neoclassical theory and for its resulting marginalization. Three explanations are given: intellectual, sociological and political, where the latter two are largely responsible for the current relationship of Post Keynesian economics to the mainstream. The paper also reviews various strategies for improving the future of Post Keynesian economics, including a focus on methodological issues by maintaining an ‘open systems’ approach; a strategy of ‘embattled survival’; the development of a positive alternative to mainstr…

Let’s not get ‘carried away’ by Bernanke’s latest twist

By Kevin P. Gallagher

Ben Bernanke, chairman of the US Federal Reserve, should be applauded for boldly putting employment over price stability in his latest move to keep interest rates low and to purchase mortgage-backed securities. Bernanke’s critics (and Bernanke himself) have rightly said that monetary policy is not enough, however. To truly generate employment-led growth in the US, those critics say more fiscal policy is needed.

There is also a need for stronger financial regulation in order to ensure that financial institutions do not steer newfound liquidity into currency and commodity speculation in emerging markets and developing countries—speculation that can wreak havoc on developing countries’ financial systems and growth prospects. Such was the case during previous rounds of interest rate declines and quantitative easing in the US, and could occur again.

Investors may choose not to go down Bernanke’s path but rather to use the carry trade to speculate on foreign currencies…

Sraffa and the Confidence Fairy

Sraffa's views on macroeconomic issues are difficult to gather since he didn't directly write on the issue. However, there is some evidence that he believed in the accelerator, that is, the idea that investment is induced demand, depending on variations of the level of income. Franklin Serrano points out the following passage in a paper by Terenzio Cozzi (my translation, so remember that in this case it is true that il traduttore è un traditore):
“In the spring of 1963 or in the fall of 1964, I asked Sraffa why he had chosen to take as a given, not the real wage, but the rate of profit, and had suggested that the level of the latter could be influenced in particular by the monetary rate of interest. He replied that in the past entrepreneurs, in deciding how much to invest, were strongly influenced by the general state of economy and how the level of activity evolved in recent periods. At the first sign of a decline in production levels, they decided to stop investing. Now, how…

Employment-Population ratio, how useful is it?

Several authors, in particular Brad DeLong have correctly pointed out (here, for example) that the employment-population ratio provides a good picture of the problems in the labor market. Krugman and I (see here) also used the same measure to show why the improvements in the employment situation in the current recovery have been small so far. But recently I've been poking the data, and found that there is more to it than meets the eye. Below a longer series than often presented.
Note that there is an increasing trend from the 1970s to the 1980s, which seems to revert in the last decade. The ratio was about 56% before the mid-1970s, and about 61% ever since. Why is that so, you ask? The graph below shows the evolution of male and female employment to population ratios.
By disaggregating by gender, we find out that the constant trend from the 1950s to the 1970s was associated to a decline in male employment to population ratio from about 80% to around 70%, compensated by an increase…

Quantitative easing isn't magic

"... a candid review of what central banks cannot do. Yes, they can usually forestall panic. Yes, for better or worse they can keep zombie banks alive. No, they cannot bring on economic recovery or solve any of our deeper economic problems, from unemployment and foreclosures in America to unemployment and economic collapse in Greece and elsewhere."
By James K. Galbraith
What should we make of the latest moves to kickstart the US economy, and to save the euro? As the late, great Harvard chaplain Peter Gomes said to my graduating class many years ago, about our degrees: "There is less there than meets the eye."

Quantitative easing, the third tranche of which was announced in the US last week (QE3), is just a fancy phrase for buying bonds, notably mortgage-backed-securities, in which operation the Federal Reserve takes assets from the banks and gives them cash. This raises the bond price and lowers the yield. It also tends to boost stock prices – very nice for people …

Heterodox Central Bankers: Robert Triffin

Robert Triffin (c. 1940)
Robert Triffin (of Triffin Dilemma fame) worked for the Federal Reserve in the 1940s, after his PhD at Harvard and before joining the IMF. He became the most prominent 'American' (he was Belgian born, in fact) money doctor of the 1940s, participating in missions to the Dominican Republic, Guatemala and Paraguay [other US money doctors in this period were Arthur Bloomfield, Bray Hammond, Henry Wallich, and John Williams; a list of missions available here at the end of the file]. Contrary to the Kemmerer missions of the 1920s and 1930s, or the British missions by Sir Otto Niemeyer of the same period, which advised on the creation of independent central banks strictly adhereing to the Gold Standard rules, the new Fed missions were quite heterodox.

In his National Central Banking and the International Economy, Triffin suggests that peripheral countries (agricultural in his terminology) were victims of the fluctuation of their terms of trade. He says:

Nick Rowe's misconceptions about Sraffians II

As promised here are my additional responses to Nick Rowe’s assumptions (here) on the Sraffian or Cambridge UK side of the capital debates. I had agreed to comment also on assumptions 3 and 4, which stated that:

3. But they still couldn't explain the rate of interest. Because it's hard to explain the rate of interest if you don't want to talk about time preferences. And all the other prices depend on the rate of interest, as well as on technology. So they assumed the rate of interest was exogenous;

4. Some economists in Cambridge US made a very special assumption that let them explain the rate of interest without talking about time preferences. They assumed that there was only one good, and it could be converted back and forth between the consumption good and the capital good by waving a wand.Before we get to why Sraffa argued that the rate of interest is exogenously determined by the monetary authority, let me discuss the neoclassical assumptions behind Nick’s proposition. …

Nick Rowe's misconceptions about Sraffians I

Nick Rowe continues his very welcome discussion of the issues related to the capital debates in a recent post (see also the reply by Unlearning Economics). However, there are several misconceptions in his post that are worth clarifying. I'm going to deal with his first four assumptions (1 and 2 in this post, and 3 and 4 in a subsequent one), which are the more substantial from a theoretical point of view, namely:
1. Some economists in Cambridge UK wanted to explain prices without talking about preferences. I don't know why they didn't want to talk about preferences;

2. They made some special assumptions that helped them explain prices from technology alone, without talking about preferences. Like: all labour is identical; all technology is linear; prices never change over time;

3. But they still couldn't explain the rate of interest. Because it's hard to explain the rate of interest if you don't want to talk about time preferences. And all the other prices depe…

Path Dependency and Hysteresis

I promised to discuss the difference between these two concepts a while ago. The idea of path dependency is related to Joan Robinson’s famous objection according to which equilibrium is not an actual outcome of real economic processes, and it is for that reason an inadequate tool for analyzing accumulation.Her view would suggest that path dependency should be seen as a property of models that break with conventional methodological stances, and, in particular, with the dominant neoclassical school.

It is important to note that mainstream defenders of the idea that ‘history matters’, like Paul David (of QWERTY fame), tend to disagree with the view that path dependency implies a rupture with neoclassical economics. David (2001, p. 22) says, in this regard: “imagine … my utter surprise to find this approach being attacked as a rival paradigm of economic analysis, whose only relevance consisted in the degree to which it could be held to represent a direct rejection of the normative, laissez…

EPI's The State of Working America 2012

The last edition of the Economic Policy Institute State of Working America is out. A lot of data and more importantly serious and rigorous analysis. Here just want graph, which shows the relation between unemployment and changes in median wages from 1991 to 2011.

As you can see real wages are pro-cyclical, going up in a boom when unemployment falls, and down in a recession. We know that since at least Tarshis and Dunlop critique of Keynes in the 1930s. One more reason why full employment is an important policy goal.

Trade and Development Report 2012

The United Nations Conference on Trade and Development has just published the TDR 2012, on growth and inequality. Not surprisingly the TDR says that "rising inequality is [not] a necessary condition for sound economic growth." The table below shows the regional evolution of inequality since the 1980s.
As the report shows: "Empirical evidence shows that increasing income inequality has been a feature in the world economy since the early 1980s. However, in the 2000s in Latin America and in parts of Africa and South East-Asia income inequality fell in a context of improved external conditions. The evidence suggests that the relationship between growth and inequality is complex and can be altered by proactive economic and social policies."

A good book on the Cambridge Capital Controversy

I have received a few questions about what one can read on the topic. I suggest the recent book by Andrés Lazzarini, which is based on his PhD in Rome under Ciccone and Garegnani. From the preface:
This book is the result of my research on the post-war Cambridge capital theory controversies conducted at the Department of Economics, Roma Tre University, to obtain my Ph.D. in Economics (Dottorato di Ricerca in Economia Politica), which I eventually achieved in April 2008. Since then I have presented and discussed several works drawn from my original dissertation which immensely helped to improve the present version for publication at the Pavia University Press.

The so-called Cambridge controversy in the theory of capital took place between the beginning of the 1950s and the mid-1970s, though arguably it got its heyday after the publication of Sraffa’s 1960 book. That there existed a controversy between Cambridge (UK) and Cambridge, Massachusetts (US), could hardly be ignored by any prac…

India’s Growth Model: A Need for Change

By Suranjana Nabar-Bhaduri (Guest Blogger)

India has been cited as an example of an alternative development strategy under which economic growth in the early stages of development is service sector-led rather than manufacturing-led. The international press has heralded its exemplary growth performance, projecting it as one of the emerging market economies that will take over the world economy. As expected in the process of development, the share of the agricultural sector in GDP has decreased over time. However, the share of the manufacturing sector has not shown any significant increase. Rather, the services sector has emerged as the main contributor to India’s economic growth, especially since the 1990s. Evidence suggests that between 1993 to 2007, more than 60 per cent of the increase in India’s GDP was driven by an increase in services GDP. This growing importance of the service sector is partly the result of a meteoric rise in services exports, mainly software and information tec…

2013 Leontief Prize

Wassily Leontief (1905-99)  Tufts University’s Global Development And Environment Institute announced today that it will award its 2013 Leontief Prize for Advancing the Frontiers of Economic Thought to Albert O. Hirschman and Frances Stewart. This year's award, titled "Development in Hard Times," recognizes the critical role played by these researchers in crossing disciplines to forge new theories and policies to promote international development. The ceremony and lectures will take place on March 7, 2013 at Tufts University’s Medford campus.

“Development economics is experiencing a deserved revival, as developing countries increasingly seek to define the appropriate role for the state in a global market economy that is suffering upheavals from politics, economics, and resource constraints,” says GDAE Co-director Neva Goodwin. “A serious return to development theory must start with the work of Albert Hirschman, one of the early leaders in the field. Frances Stewart’s p…

The Sinister Irreversibility of the Euro

Giancarlo Bergamini and Sergio Cesaratto (Guest Bloggers)

Draghi's decision to provide unlimited support to short term bonds of those countries who submit their public finances to European control has been greeted with widespread acclaim in Italy.

Albeit necessary to cut the spreads, which had attained unbearable levels, the European Central Bank (ECB) initiative is by no means decisive and under the current terms risks being counterproductive. For starters, it is politically indigestible for Spain and Italy, who hope in fact to scrape through without subscribing to any austere “precautionary program” imposed by Europe and policed by the IMF. In other words, they hope that the expectations triggered by the ECB's announcement can do the trick of lowering the spread on their sovereign bonds, even if nothing concrete follows without conditionality constraints. In reality, if nothing happens the spreads are likely to increase, possibly because the markets expect that the bailout w…

Why Tax the Rich?

A question that has been central in this electoral season is whether taxation of the wealthy matters. Republicans suggest that it reduces growth, since it creates negative incentives to 'job-creators', while Democrats argue that it is a question of fairness. The figure shows some data which sheds light on the second issue.
The graph shows the top marginal rate from 1913 to 2010 in the left-hand axis, with a low of 7% in 1913 and an all time high in 1953 at 92% of the marginal dollar being taxed, and the income of the top 1% (the non-99%) on the right-hand side. The lowest level of total income of the top 1% was 7.7% in 1973 and the highest levels were 19.6% in 1928 (right before the 1929 crash) and 18.3% in 2007 (before the 2008 Lehman collapse). There is a clear negative correlation. And, by the way, it is no coincidence that after the increase in inequality we had a financial crash both times.

Economists do it with models, again

Updating my blog on Nate Silver's model forecasts, I left the story in the aftermath of the RNC when it looked like any Romney bounce was below the expectations built into the model. Prior blog linked here.

The model is now responding to inputs from the DNC period, and is showing substantial gains in President Obama's probability of winning in the Electoral College. His probability as of today's (9/8/12) model update is 79.8%, up 2.5 percentage points since the end of the DNC, up 3.5 percentage points since the beginning of the DNC, up 8.2 percentage points since the end of the RNC, and up 10.5 percentage points since the beginning of the RNC. So the model has been consistently increasing the probability of an Obama win for the last 13 days. This is also a model high since it began in June. The early specific poll returns indicate that the Obama bounce is at or exceeding model expectations.

At an 80.0% probability of winning, Obama's win should be …

Europe’s Adjustment: How much has happened?

Austerity to reduce spending, and decrease the need for imports, and liberalization reforms to reduce real wages, and promote internal devaluation, have been going on for a while in the European periphery to promote rebalancing, that is, to reduce the current account deficits and allow for continuous service of the debt.

How much fiscal adjustment and wage reduction has already been pushed by the Troika (ECB, EU, IMF)? Quite a bit in fact. Figure 1 below shows the fiscal adjustment (all data from the European Commission’s Statistical Annex of the European Economy, Spring 2012). [Note that the crisis was not fiscal]
Read the rest here.

Employment numbers

Bureau of Labor Statistics (BLS) Employment Situation Summary posted. Total nonfarm payroll employment rose by 96,000 in August, and the unemployment rate edged down to 8.1%. This is weaker than last month, which suggests that the economy is slowing down.
Participation rate fell from 63.7 to 63.5%, meaning that the number of people not in the labor force edged up. The employment-population ratio fell from 58.4 to 58.3%, as shown below.
Note that while the employment-population ratio has been flat since the last recession, the previous boom (the Bush housing bubble) was so weak that the ratio never topped the previous peak (the Clinton bubble one).

Income Inequality in the US (1917-2010)

Atkinson, Piketty and Saez have a new website on income inequality that provides free access to a lot of data. Below a taste, showing the ratio of average income of the bottom 90% to the average income of the top 10% in the US from 1917 to 2010.
It is clear that the war, and the policies enacted during the 1930s, allowed a significant compression of the income of the top, which has been basically reverted in the last 3 decades, after Reagan and the rise of the Conservative movement. Nothing new, but good to see it this clearly.

Heterodox central bankers again

A new version of the paper Heterodox Central Bankers: Eccles, Prebisch and Financial Reform co-authored by Esteban Pérez Caldentey has been published in the Network Ideas Working Paper Series. Again from the abstract: The Great Depression led to a need to rethink the principles of central banking, as much as it had led to the rethinking of economics in general, with the Keynesian Revolution at the forefront of the theoretical changes. This paper suggests that the role of the monetary authority as a fiscal agent of government and the abandonment of the view of the economy as self-regulated were the central changes in central banking in the center. In the periphery, the change in central banking was related to insulating the worst effects of balance of payments crises, while the use of capital controls became more common. The experiences of Marriner S. Eccles in the United States following the Great Depression, and Raúl Prebisch in Argentina in the 1930s and in Latin America in the 194…

Is Growth Still Possible?

Paul Krugman has recently pointed out a very pessimistic, but very instigating paper by Robert Gordon, about the possibilities of long run growth. Gordon suggests, very boldly, that the: “rapid progress made over the past 250 years could well turn out to be a unique episode in human history.” In his view, long-term stagnation is a very possible outcome. The reasons are associated to the effects of technical progress on investment.

Gordon argues that, while the first (steam, cotton textiles, railroad) and particularly the second (automobile, chemicals, electricity, oil) Industrial Revolutions (IR) led to a significant increase in investment, the third IR (information technology) has been less prone to lead to significant increases in investment. Further, the advantages of the first and second IRs were incremented by demographic changes and the process of urbanization, which created the need for investment in infrastructure.

Read the rest here.

The IMF and stylized fiction

The IMF has posted their Top 20 list of most popular entries since the launch of the blog. At #3 they have the Ten Commandments of Fiscal Adjustement in Advanced Economies, which is from 2010, but still worth reading, since their views have hardly changed. I am not going to go through the whole list, even though it does merit careful analysis. I want just to point out a few problems with three of the commandments (do they really need the religious analogy?). This 10 Commandments are based on the IMF's views on the stylized facts of fiscal consolidations.

Note that the IMF wants a reduction in debt-to-GDP ratios in the long run (commandment #3), even if nobody knows exactly what is the difference of having a 40% ratio, which they recommend for 'emerging markets' (meaning developing economies), or a 250%, as the UK had during the Napoleonic Wars (here). My first concern is with the idea that consolidation (by which they mean austerity) should be done by cutting spending and …

Productivity slowdown and and the return of secular stagnation

Robert Gordon has recently argued that secular stagnation is a likely possibility. Alvin Hansen, one of the most influential of the neoclassical synthesis Keynesians, was the father of the idea. For Hansen the reasons were associated with declining population growth, the disappearance of labor-saving technology, and the closing of new frontiers.

His views were published in a famous book titled Full Recovery or Stagnation?, in which he argued that investment opportunities were lacking. Since Keynes theory was also dependent on the expansion of autonomous investment, and Hansen was a Keynesian, the stagnationist thesis was considered a Keynesian theory. All in all, Hansen's views are not very different from Gordon's position. However, it is important to note that Gordon presumes that productivity determines growth, which is not a very Keynesian proposition.

The table below shows the rate of labor productivity growth from 1948 to 2011, and the two sub-periods that start with the…

Election anti-bounce - economists do it with models

A very brief observation on economists, models, and the US presidential race.
Nate Silver, an economist (who successfully escaped the University of Chicago after completing his BA there), and a person who got hooked on econometrics, has the best electoral race forecasting model I am aware of.

During the 2008 race, he forecast the outcome within 0.1%.

His current model (as of 9/1/12) has President Obama's probability of winning at 72.0%. That is an increase of 2.7 percentage points during this last week of the Republican national convention. The Republican anti-bounce? Maybe they needed more of Dirty Harry, er, Clint Eastwood?

More importantly, this lead has been fairly consistent, perhaps slowly widening, since June. Those who call the race close are paying too much attention to the national horse-race polls. There, Obama's current projected lead is 1.8%, which is fairly close. But at this point has little bearing on the forecast outcome.

For the more wonkish of you out there…