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Showing posts from June, 2012

More on the Indian Economy

By Suranjana Nabar-Bhaduri

Recent months have seen public concerns being voiced about the incipient slowdown in the Indian economy. Manufacturing output grew at only 0.1 per cent in April; the Indian rupee has been on a downward spiral since late 2011; exports have fallen; and capital inflows have been inadequate relative to India’s current account deficits. India’s GDP growth has declined to a nine-year low of 6.5 per cent in the financial year 2011-12.

The current situation draws attention to issues surrounding India’s services-led growth development strategy, and its persistent trade and current account deficits. It will hopefully provide a much-needed wake-up call to Indian policy-makers to undertake policies beyond “reforms”. A recent paper emphasizes that India’s services-led growth entails questions of long-run sustainability with respect to its balance of payments (BOP) and has a limited ability to raise the living standards of the population as a whole.

Read the rest here.

Has Econ 101 done just fine?

Krugman tells us that:
"huge government deficits could fail to raise interest rates in a depressed economy ... is what Econ 101 said – and it has been completely right. Basic IS-LM macro also said that under these conditions printing lots of money would not be inflationary, and that cutting government spending sharply would cause the economy to shrink. All of this has come true. So Econ 101 has done just fine ..." Note, however, that Krugman basically believes that this is the case because the economy is in a liquidity trap, and the natural rate of interest for him is negative. That is, the rate of interest that would stimulate enough investment to bring about full employment savings is below zero. As I have argued here there are several empirical and logical reasons why one should doubt that kind of imperfectionist argument.

So, yes the Old Keynesians policy prescriptions do work, and have done quite well, even if their theories do fail miserably, as much as any other neocl…

This time is different, after all

It is well known, and it has been discussed in this blog, that the crisis has been to a great extent associated to the fact that wage stagnation has led to the accumulation of increasingly more unsustainable levels of private debt (echoes of both Godley and Minsky, from the Levy Institute). The graph below shows the percentage change in federal government, household and financial sectors outstanding debt. In other words, expansions have been associated to ever growing private debt.

Note that, in the 1990s, the federal debt growth rate turned negative when the dot-com bubble allowed for revenue to go up sufficiently, together with the reduction of military spending after the end of real socialism, and the Clintonian "end of welfare as we know it," to lead to significant fiscal surpluses.

Also, in every recession (shaded areas) when private debt (the blue and red lines for household and financial sectors) went down (the blue line does not go down in the Bush II recession, sinc…

Jerry Epstein on the Argentinean Central Bank

Prevailing ideology has held that the only legitimate task for central banks is to control inflation, which often comes at the expense of broader goals such as employment creation, financial stability or economic growth. Now, in a bold and important move, the government of Argentina has fought against this neo-liberal “conventional wisdom” and broadened the mandate of the Argentine Central Bank to include economic growth and financial stability, and empowered it to use more tools to support credit allocation to promote productive investment and job creation (see Weeks).

Read the rest here (a slightly modified version published in Spanish by Página/12 here).

Two papers on the Indian economy

Two blog related papers on the Indian economy here and here suggest that there is less to the booming economy than you might think. Both suggest that the idea of the BRICS surpassing the US economy's global influence is an exaggeration, to say the least.

More on Heterodox Central Bankers

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 addition, in the periphery central banks changed to try to insulate the worst effects of balance of payments crises and the use of capital controls became more common. Marriner S. Eccles, in the United States, and Raúl Prebisch, in Argentina, are paradigmatic examples of those new tendencies of central banking in the 1930s.

Can we stop talking about inflation when we mean output growth?

Brad DeLong has a nice post on the euro crisis. Q&A session with himself (and yes he throws himself some soft balls, but hey those are relevant questions!). However, he says on the third question:
"(3) Q: How Should Greece Balance Its Spending on Imports and Its Exports Going Forward?
A: Borrowing to cover the gap between imports and exports that exists at current exchange rates and price and wage levels is not going to happen, so Greece has a choice between (a) deep prolonged depression to make Greeks too poor to afford imports, (b) Grexit, devaluation, and a subsequent export boom, and (c ) Germans opening up the monetary spigots to produce higher inflation in northern Europe and meanwhile giving Greece an additional fortune to keep the pain in Greece low enough for adjustment to take place within the Eurozone framework (emphasis added)." If Germany actually went for fiscal expansion (or even monetary) and more demand for goods and services, including a few Greek ones …

And here's to you, Mrs Robinson

Jesus loves you more than you will know (wo, wo, wo) ...I know, but I was going to talk about the other Mrs Robsinson, Joan Violet (née Maurice), the main disciple of Keynes,* as I had promised in a previous post. Joan Robinson's contributions to economics demand several posts. She has participated, as Maria Cristina Marcuzzo noted, in three Revolutions, namely: the imperfect competition, the Keynesian and the capital debates ones.

And to reduce her to those three one has to fit her contributions to growth theory into a subcategory of either the Keynesian Revolution (the extension of the Principle of Effective Demand to the long run) or the capital debates (the critique of mainstream growth theory), and omit her various other contributions to monetary theory (e.g. endogenous money and the circuit), methodology (e.g. history vs. equilibrium), Marxist economics and so on. She was prolific for sure.

There are several great reviews of her contributions in all of them, which would mak…

The Overton Window for game changing exotic energy technologies

Political scientists invoke something called the Overton Window to describe the range of possible political conversations. Forget for the moment that the political right is trying to control this window.

I want to discuss a different 'Overton Window,' one which involves the possible conversations around truly radical, even exotic, energy sources. A small group of economists, including me, believe that much of what is to be understood in growth and development has a large energy component. So possibilities to radically change the supply and cost of energy causes great consternation. But moving the conversation window even a tiny bit will have great benefits.

Geographically for me, it is truly ironic that in 1989 Professors Pons and Fleischman were tarred and feathered and ridden out of town on a rail over their forced, though admittedly premature, assertion at a University of Utah press conference of low energy nuclear reactions, a.k.a. cold fusion, in their laboratory.

Well, …

A Latin American Perspective on the Greek Crisis

The election in Greece this weekend, and the possible victory of Syriza, the left of center party that is against the austerity measures that are attached to the bail-out program negotiated with the troika of the European Union (EU), the European Central Bank (ECB), and the International Monetary Fund (IMF), but wants to remain within the euro, has prompted fears of a final collapse of the euro. Let me say that irrespective of whether Greece will be forced out or not of the euro, policies to reverse the austerity imposed so far will be needed. Latin America has extensive experience with external crises, and with defaults and devaluation, the Argentinean crisis of 2001-2 being the most recent and dramatic example. Here are some lessons and a short proposal based on these experiences.

Read the rest here.

The nagging influence of energy prices

It's been a while since I have posted.  I have a few other things going on, mainly working on finishing my dissertation. I did successfully defend my topic on May 1 (!), and have an awesome committee that understands how to constrain the output in the right way. So, mea culpa, and here is the first in at least a couple of energy-related posts.

For the US economy, it is fairly widely recognized that each recession is preceded by a run up in energy prices. For the US consumer, the most relevant energy price is gasoline. The mechanism by which this price initiates the recession is the negative correlation with spending on consumer durables. Here is what has been happening in the last two years:

As gasoline prices spike, consumer durable spending decreases. And vice versa. The widely recognized soft spot in 2011Q1 is seen here as a run up in gas prices and a decrease in consumer durable spending. We seem to be seeing a similar pattern this year, though consumer durable spending appear…

Graph of the Week: Unions and Inequality

If you were concerned about the defeat of the recall of Governor Walker in Wisconsin, well here is one more reason for you to panic. The Economic Policy Institute (EPI) has just published its Economic Snapshot.

The authors, Ross Eisenbrey and Colin Gordon, say:
“To a remarkable extent, inequality, which fell during the New Deal but has risen dramatically since the late 1970s, corresponds to the rise and fall of unionization in the United States.” Nothing to add.

More austerity, more debt

How is that austerity working for you? According to a recent policy brief by UN-DESA, not so well. The authors (Oliver Paddison and Rob Vos) say that:
"Available evidence suggests that fi scal austerity is not helping restore economic growth or debt sustainability; countries that made the biggest spending cuts to reduce fiscal deficits have seen their debt-to-GDP ratios rise even further (see figure)."
The graph shows that higher primary surpluses (difference between revenue and spending, excluding financial payments) are correlated with higher level of public debt. The reason is that austerity reduces the level of activity and depresses revenues as you would expect according to Keynesian principles.
I think increasingly we have an analogy with evolution and creationism in the debate about the effects of austerity. Logic and evidence are clearly on one side, but belief, well that goes in any direction. The problem is that beliefs, ideology, and vested interests have an impa…

Reagan was a pro-corporations Keynesian

Krugman notes today that Reagan was a Keynesian. And in a sense he is correct. The fact is that Republicans, at least since Ford, have been the Keynesians, or the party of Big Government if you prefer, while Dems since Carter have been the small government party. The problem is that Republicans are Big Government for the wealthy and corporations, and nobody wants government for the unions and the poor. See this debate between Barbara Bergmann, Jeff Frankel, Bill Niskanen, and Larry Seidman from 2004 (with a longish intro by Berglund and Vernengo) where the issue is raised. So if Obama wins you get sort of almost anti-Keynesian policies, between the Democratic timidity (let's call it that), and the Republican obstructionism (yeah, that's also a nice euphemism). And if you get Romney, you'll get conservative Keynesianism, tax cuts for the wealthy and spending benefiting certain corporations.

A few Galbraith talks you might have missed

Also, two more recent ones on C-Span Book TV taped his talk at MIT on May 7, and his appearance on Bloomberg talking about why need more than stimulus.

How bad is the unemployment rate?

Labor market numbers reported today by the Bureau of Labor Statistics are pretty bad. Only 69,000 jobs created last month, when we would need something more like 400,000 to be in a healthy recovery. But they are actually worse than it looks like, if that is possible. The key to understand why numbers are too rosy is the so-called participation rate. The labor force participation rate is the percentage of working-age persons in an economy who are employed or are unemployed but looking for a job, shown in the graph below. At the peak, from 1997 to 2000 the participation rate was 67.1%, but fell to 63.8% now.
If the number of employed and unemployed people that are looking for a job drops the participation rate drops too. If a few of the employed workers become unemployed, but  are still looking for a job, the participation rate does not change. But if the unemployed stop searching for a job they drop out of the labor force and the participation rate falls. So you see what is going on. M…