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Showing posts from December, 2012

Household's financial burden

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Matt Franko, via Mike Norman, shows that household financial obligations as a share of disposable personal income is at almost the level of the early 1980s. Deleveraging has been accomplished to a great extent. In part, this results from the Fed's low interest rate policy. However, if wages do not go up, or government does not step up spending, then only another bubble will get the economy going. Hope it doesn't come to that.

I'm out of here (for a few days at any rate). Happy New Year to all!

To Failure

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The ministry of silly budgets
Philip Larkin was wrong; failure actually does come dramatically indeed. Or so it seems if you look at the failure of the fiscal policies of the Tory cabinet. John Lanchester has a great piece in the new issue of the London Review of Books showing the perverse effects of austerity. Yes the multiplier works, and it is rather large he contends.

As much as the story of the Cameron/Osborne failure [they've promised to reduce the deficit from 4.8% of GDP to 1.9% and delivered after two years a mild hike to 4.9%], or the problems with the 'independent' Office of Budget Responsibility [you have to love the name, it's like they work for the Ministry of Silly Walks] and the additional nuggets on IMF revisionism, there is an interesting take on the history of economic ideas.

Lanchester correctly points out that:
"About thirty years ago, when Keynes was in the depths of economic unfashionability, going up to a group of macroeconomists and trying…

Thelma and Boehner or going off the fiscal cliff

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Brad DeLong thinks we're going off the fiscal cliff. Brace yourselves then. What to expect, according to him:
"Running up to the explosion time of the austerity bomb has already reduced likely year-2013 real GDP growth from 3.0% to 2.5%. If no deal is reached until June 30 then our likely year-2013 real GDP growth rate will be -0.5%." Unless I'm confused those look like the estimates of the Congretional Budget Office (CBO), run by Douglas Elmendorf. According to the CBO:
"if all of that fiscal tightening occurs, real (inflation-adjusted) gross domestic product (GDP) will drop by 0.5 percent in 2013 (as measured by the change from the fourth quarter of 2012 to the fourth quarter of 2013)—reflecting a decline in the first half of the year and renewed growth at a modest pace later in the year. That contraction of the economy will cause employment to decline and the unemployment rate to rise to 9.1 percent in the fourth quarter of 2013." So the fiscal cliff,…

Joan Robinson on neoclassical economics

Given Krugman's involuntary reopening of the discussion on the capital debates and the limits of neoclassical/marginalist economics, it would be good to hear this audio (here and here; not very good quality) of a lecture given by Joan Robinson (with a brief intro by Don Harris). H/t F*#k Yeah Piero Sraffa.

Technological Progress and the Capital Labor Ratio

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So Krugman is again trying to make sense of his marginalist theory of distribution and the choice of technique. He suggests the following graph, which I slightly modified, to express the possibilities available to the firm.
The profit maximizing firm will choose the 'labor-intensive' technique to the left of the intersection level between the two techniques. For example, at L/Y=0.4, where there is a vertical dotted line, now the firm needs less capital per unit of output (around half, approximately 0.3, rather than 0.6) to produce one unit of output. To the right of the intersection the opposite applies.
Note correctly that, as is well known by Krugman, the neoclassical theory of distribution applies here. The slope of the techniques is given by the negative of the capital to labor ratio, and relative remuneration of capital and labor are associated to the intensity of the use of the factors of production. In his words: "and if you’re worried, yes, workers and machines a…

How do you measure economic success II

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Follow up on my previous post on Argentina. One of the typical critiques is that the current government has run very large fiscal deficits, spending well beyond its means. Figure below (Ferreres numbers again) shows the primary (without financial payments) and nominal fiscal balances.
Yep, no primary deficits at all until 2009. In fact, no primary fiscal deficit since 1990. And the largest nominal deficit just before the crisis in 2001 was at around 2% of GDP. That is an incredible amount of fiscal restraint. Yes fiscal spending increased, which explains a good part of the boom, but higher income led to higher revenues, with the consequence that the fiscal results have not been unbalanced.

On the state of macroeconomics: fashion versus logic and evidence

Yes there is something rotten in the kingdom of Denmark, and it is macroeconomics; pretty much as in every other country. There has been an ongoing debate on the blogosphere on the topic (see Krugman, Smith, Thoma, Williamson and Wren-Lewis, not in chronological order, by the way). The New Classical versus New Keynesian debate tends to be on two issues the relevance of microfoundations on the theoretical level, and the importance of price rigidities on the empirical side.

Scientists, as Mankiw put it, are the New Classicals that emphasize the microfundations. They have intertemporal maximization models based on rational representative agents. The New Keynesians are the engineers, again using Mankiw's dichotomy, that strive for economic realism. Or so is what you are expected to believe if you read their posts. Of course all of these presumptions are bogus.

Noah Smith correctly points out that they all use the same DSGE models. But Krugman notes that on policy debates the whole di…

Pimping out Glenn Hubbard

So how much does it take to get Glenn Hubbard's consulting expertise. Matt Taibbi has the scoop.
"So how much does it cost to get the Dean of Columbia Business School to say that Countrywide customers weren't injured by fraud? Well, MBIA's lawyer, David Freeburg, asked Hubbard that very question: Q. How are you being compensated?
A. I'm being compensated at an hourly rate for my work.
Q. Do you know your hourly rate?
A. Yes, it's $1200 an hour. For comparison's sake, $1200 an hour is about what Natalia, the woman New York Magazine called "America's #1 escort" in a famous profile many years ago, made early on in her career working for Jason Itzler, the self-described 'King of All Pimps.'" So the same that a high end, but not top of the line prostitute, according to Taibbi. Seems about right. A must read. The rest here.

Macroeconomics and the financial cycle

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Claudio Borio from the BIS has written a widely cited paper. The Economist has linked to it and suggested that so far his advice for including the financial cycle into macroeconomics has only been followed by a few. Besides Borio, Minsky, Godley and Lavoie and Keene are also cited by The Economist. The paper by Borio (he only cites Minsky), which has been a very influential voice suggesting that capital flows were pro-cyclical and more regulation was needed before the financial crisis, is somewhat underwhelming though.

For starters the definition of the financial cycle is based on individual perceptions. In his view, financial cycles result from "self-reinforcing interactions between perceptions of value and risk, attitudes towards risk and financing constraints, which translate into booms followed by busts." Then there is the question of the theoretical features for modeling the financial cycle according to Borio. There are three that are essential according to him. First,…

Where are we on the Fiscal Cliff?

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This graph from the Washington Post shows the several proposals so far. As you can see Obama has been moving on Social Security and Medicare/Medicaid cuts in the direction of Boehner.
Don't get me wrong, but even proposal #1 conceded too much.

PS: To be precise US$ 350 billion too much in the #1 offer (i.e. the entitlement cuts). You may give some discretionary cuts, and negotiate how much you increase the taxes on the rich, but you cannot after winning an election, that clearly meant that people want to preserve Social Security and Medicare/Medicaid, cut those very programs.

Krugman and the natural rate again

Krugman again (re-channeling Hicks) restates his argument that the problem with the US economy is that the natural rate of interest is negative. Note that he also admits, as did recently Goldman Sachs or anybody that looks at data, that the accelerator is what determines investment. Not only his stance has serious logical problems, but also it weakens his own arguments about confidence fairies and so on. And there is no empirical evidence favoring the view that in any period, not just now, non residential investment is significantly affected by variations of the rate of interest. But yes we do need more fiscal expansion, even if lack of full employment is not simply a market failure.

PS: Note that Krugman's second graph, showing the equilibrium of I and S with a negative natural rate, implies that either we had a negative shock to I or a positive shock to S. That is, either a negative productivity shock or a change in preferences about present and future consumption. Real shocks. …

Energy sources in Latin America and Asia

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The graphs below (World Bank data) show the sources of energy in a few selected countries in Latin America and Asia. The first thing to notice is that Asia burns way more coal than Latin America, which tends to depend more on hydroelectric and natural gas sources (the US is a natural gas and coal country, by the way).
One reason for the difference is that Latin America does not have a significant share of the global coal reserves. China and India have a reasonable share (the US has the largest reserves of coal, followed by Russia).
In terms of the environment hydro sources are considerably better for emissions (zero) than coal, but do have other impacts, associated with flooding, reduced streams and negative impact on fish migration patterns among the worse. Natural gas is also better than coal. So Latin America is slightly more environmentally friendly. Coal tends to be cheaper (although fracking may be changing that in the US), which gives a competitive edge to Asian countries.
Not…

New book on fiscal issues

Well not really. My co-edited bookThe Means to Prosperity: Fiscal Policy Reconsidered is now in paperback, for a third of the price. So buy three copies please.

The natural rate is 6.5%

At least according to the Fed's new press release. The release says:
"the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal." So if unemployment falls below 6.5% expect higher rates of interest, associated to what would be in Bernanke's view the risk of excess demand.

Note that the inflation target continues to be 2%, so even Blanchard's mild-mannered rethinking of macroeconomics (that Krugman and others having been pushing) for a higher inflation target has not been accepted by Bernanke. Obama should get rid of Bernanke next time he has the chance.

PS: In contrasting news the Reserve Bank of India seems …

Goldman and Chinn discover the accelerator

Steve Bannister (where have you gone Joe Di Maggio?) pointed out this nice post by Menzie Chinn on the "puzzle" (sic) of the slow investment recovery during the crisis. Note that it is actually not a puzzle at all. Chinn cites a study by the Vampire-Squid (Goldman Sachs), that concludes that (wait for the surprise) "the accelerator model generally fits well." Chinn also finds that lending conditions and "slow GDP growth (attributable to fiscal drag) are important determinants of low nonresidential fixed investment." Is rain wet?

PS: Lending conditions (which is actually a measure of liquidity) might actually be caused by the level of activity and investment rather than the other way round.

Krugman notes that marginalism doesn't work

This is great, like in his book (homonymous to his blog) Krugman has noted that the idea that technology (the marginal productivity of labor) determines distribution (real wages) is bogus. He says so clearly:
"if you want to understand what’s happening to income distribution in the 21st century economy, you need to stop talking so much about skills, and start talking much more about profits and who owns the capital. Mea culpa: I myself didn’t grasp this until recently. But it’s really crucial." Kudos for the mea culpa. Now notice that he says that who owns capital is important. In other words, power and conflict are central for the determination of income distribution. This dude is becoming a surplus approach author (next thing he will be reading Sraffa!). Okay, so can you now drop the production function, the assumption of full employment and the natural rate hypothesis. I mean, it would only make the whole thing coherent.

PS1: Note that in the post I criticized here from …

More on Hirschman

Several obituaries of Hirschman have already popped up (see here, here, and here for example). Note that both Alex Tabarrok at Marginal Revolution and Rajiv Sethi (who was my econometrics teacher I should note), the economic blogs, emphasize among the many contributions of Hirschman his book Exit, Voice and Loyalty (EVL), his work as a historian of economics (Tabarrok, in particular, praising The Passions and the Interests, PI), and his interdisciplinary work (Sethi, noting his crossing of boundaries of disciplines).

I tend to find exactly that those are the less appealing and more problematic characteristics of Hirschman as a scholar. His analysis of the history of ideas is based on the policy objectives rather than on the theoretical foundations of theories. Hence, classical political economy ideas are treated in terms of their laissez faire component, which would actually make them similar to a lot of the marginalist ideas of a century later.* Note that laissez faire in the period…

Albert Hirschman (1915-2012)

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Albert Hirschman, one of the last pioneers of development, has passed away. News via Monkey Cage and Dani Rodrik.

So? None of your conclusions follow from your arguments

Krugman has a post on the effects of technological change on employment. Here is a very illustrative case of the limitations of mainstream marginalist (neoclassical) economics, which leads a reasonable and intelligent economist to all sorts of mistakes. He says:
"start with the notion of an aggregate production function, which relates economy-wide output to economy-wide inputs of capital and labor. Yes, that sort of aggregation does violence to the complexity of reality. So?" Implicit here is the incorrect notion that the problem with the aggregate production function is over-simplification. Nope, that is a feature of all theories of course. The problem is far worse; it is that it leads to logical mistakes.* So, as we will see, none of Krugman's conclusions follow from his analysis, and that is kind of a problem. Lack of logical coherence and empirical evidence are after all the two main criteria of demarcation between scientific knowledge and the half-baked notions of …

What is new about the IMF's views on capital controls?

I wanted to write about this topic for a while, but didn't have enough time. The IMF has adopted a new institutional view on capital controls, which will inform their policy advice and surveillance of member countries, which they suggest reflects "a very broad consensus" [I'm always a little bit wary of broad consensuses]. Note that the Fund is still in favor of capital account liberalization, as noted in the second key feature of their institutional view, which says that "capital flow liberalization is generally more beneficial and less risky if countries have reached certain levels or 'thresholds' of financial and institutional development."

The question is how to get beyond the threshold, but there is no doubt that liberalization should be ultimately pursued, at least to some degree. They do add a cautionary note that full liberalization might be an impossible goal for many countries. In their words: "countries with extensive and long-stand…

New and Heterdox Master's Program

In response to an increasing demand for a more open, pluralist approach both in teaching and academic research in Economics a group of heterodox scholars have gathered together to launch a new Master’s Program in Economic Development in Buenos Aires, Argentina. The Program seeks to provide economics students with an alternative curriculum while covering—and seeking for students to master—standard mainstream literature and themes, including advanced quantitative skills, as middle step in the development of an academic career or public service.

Latin American students for the most part lack this type of approach and opportunity. Policy discussion has to some extent shifted in recent times in Latin America due to the progressive turn part of the region has taken at the political level. But despite this shift in debate, policy making remains to a large extent permeated by the orthodox vision and so too, with a few notable exceptions, curriculum design and teaching in the field Economics.

Forget Deficits and the Fiscal Cliff Scam

By James K. Galbraith

What do rich people do with money? They make the best use of it they can, and in times of high growth and strong confidence they take risks and – if they are good and lucky – reap the rewards.

But the situation is different when the outlook is bleak and when real estate (especially) will be cheaper next year than today. Under these conditions, money is safe and gains value even at zero interest. So the idle balances pile up in banks and in low-risk assets like Treasury debt.

Read the rest here.

Also, check the four part interview by the Real News Network on why the fiscal cliff is a scam here.

How do you measure economic success?

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So the piece on Argentina at the Guardian got a lot of comments. One suggested that Argentina has not been very succesful. As I pointed out in terms of growth (if you use Levy-Yeyati's numbers, as shown in the figure below; his series is the red line) the average rate of growth has been at slightly more than 6% per year since the default, which constitutes the highest rate in the country's history.
Further, if one looks at the expansion of real wages in the industrial sector (using Ferreres numbers; there is a 2nd edition with more recent data) you have an impressive increase of 8.9% per year since the default (up to 2009; they also grew in 2010 and 2011, even though it is less clear they will in 2012).

Sure real wages are still below the peaks (mid-1950s, early 1970s and the very short lived increase after the Austral Plan in the mid-1980s), but the recovery is impressive nonetheless. So the country grows and workers are doing better. I don't know what you think, but it …

Don't comply for me Argentina

By Jayati Ghosh and Matías Vernengo

Argentina is in the news again. The country that successfully managed an external debt restructuring after a major financial crisis in 2001-02, and eschewed the standard austerity package to benefit from a remarkable economic recovery, is being attacked by a combination of court rulings and aggressive moves in financial markets.

Elliott Capital Management, a vulture fund based in the tax haven Cayman Islands owned by conservative financier Paul Singer (a big donor to the Romney campaign), refused to accept the terms of the debt restructuring that was accepted by more than 92% of bondholders in 2005 and 2010. It has demanded payment in full, and has actively pursued its case in different courts across the world. A few months ago, the Argentine frigate Libertad, which ironically means freedom in Spanish, was seized in Ghana after a local judge ruled in favour of Elliott Capital Management. Judge Thomas Griesa has recently ruled in a district court in N…

Income distribution in the BRICS

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If you have any doubts the graph above confirms the obvious. Income distribution is terrible in Africa and Latin America, and slightly better in ex-communist (China too is ex, isn't it?) and Asian countries. Mind you I expected China to be better than Russia.