Posts

Showing posts from July, 2013

US economy continues to slowdown

The BEA announced that economic growth in the second quarter was 1.7% and only 1.1% in the first (revised down from 1.8%). Note the significant contraction of the government numbers, according to the Report:
Real federal government consumption expenditures and gross investment decreased 1.5 percent in the second quarter, compared with a decrease of 8.4 percent in the first. National defense decreased 0.5 percent, compared with a decrease of 11.2 percent. Nondefense decreased 3.2 percent, compared with a decrease of 3.6 percent. Real state and local government consumption expenditures and gross investment increased 0.3 percent, in contrast to a decrease of 1.3 percent. Yes austerity does work, and it produces slower growth, and it will by Okun's Law produce higher unemployment rates. This are well established empirical regularities.

Jamie Galbraith on Europe and the United States

Yannis Varoufakis posted a translation of an interview given by Jamie Galbraith here. Among other things Jamie suggests that:
"the dominant European narrative of the United States now as then is utterly misleading. It’s the notion that we have somehow in the thirty years since Ronald Reagan transformed ourselves into a free-market, deregulated, privatized, flexible labor market, weak-welfare-state country, which, if you just cast your memory back to the 60′s and 70′s, a totally unrecognizable view of the country, a country that was built by Roosevelt and Kennedy and Johnson, especially Roosevelt and Johnson, and which had extended even into the Nixon administration, which had and has a very substantial social insurance, public investment and regulatory framework. Many things about this have been under assault, some of them have failed entirely, including the regulation of finance, but this is not a Hayekian vision that has triumphed, but rather the one I described in my book,

Palley on the next Fed chairperson

Tom Palley weighs in on Summers as a potential chairman of the Fed. He says:
"Summers’ policy inclinations remain questionable. Along with much of the economics profession, he now acknowledges the need for greater financial regulation, (although there also remains an underlying intellectual bias among economists against regulation). As for fiscal policy, he has shifted from austerity now to austerity later when economic recovery is more entrenched. Beyond that, little else has changed. In economics, it is difficult for an old dog to learn new tricks." Read the whole piece here.

Keynes has always been more popular than Hayek

Image
Or at least is what the Ngram Viewer suggests. Below starting in 1919, after the publication of Keynes' The Economic Consequences of the Peace.
Note that after the spikes with his books on the business cycles in the 1930s, and the slightly larger spike after the Road to Serfdom in 1944, Hayek drops to re-emerge only after the Sveriges Riksbank Prize (aka Nobel). Keynes on the other hand has a surge after the General Theory in 1936, and remains with the same level of popularity, with no decrease even in the 1970s, the period of the so-called crisis of Keynesian economics. Both seem to decrease in popularity right before the last crisis.

Kevin Gallagher on China and financial deregulation

Kevin Gallagher explains why financial deregulation in China would be a huge mistake. In his words:
"Rumor has it that China is set to accelerate the de-regulation of its financial system. For years, China has restricted the ability of its residents and foreign investors to pull and push their money in and out of the country. While that may be illiberal, there was a sound reason for this restriction: Every emerging market that has scrapped these regulations has had a major financial crisis and subsequent trouble with growth." Read the rest here.


More on Summers, Yellen and the next Fed chairperson

The NYTimes has a debate on who should be the next Fed chairperson. Predictably Brad DeLong prefers Summers over Yellen, which is almost unique given the backlash that the floating of Summers name caused (see Krugman on that here). Brad's preference is based on the fact that:
"Larry Summers has an edge as the most creative thinker likely to successfully think outside the box should outside-the-box thinking be called for, and least likely to bind himself to an institutional consensus past its sell-by date. If times are placid, the stakes are small. If times are turbulent, outside-the-box thinking has its place. Therefore I have a slight preference for Summers." While it is arguable if Summers is more creative than Yellen and other possible candidates, I wouldn't disagree that thinking outside the box is an advantage. That's why an heterodox economist would be even better, without false preoccupations about inflation. But in all fairness the best alternative, and …

I do not post on Econ Job Rumors

By the way, it was brought to my attention that someone using my name has posted on this website called Econ Job Rumors, were anonymity leads insecure and, I assume, mostly young economists to write vicious things about each other. Just to make it clear, I have not and have no intention of posting anything there.

The increasing share of developing countries in world GDP

Image
In a previous post I noted the rise in the share of South-South trade. Below is the expansion of developing countries' share in total world GDP (source here).
The expansion reflects to a great extent the rising share of China. At PPP the share of developing countries is now at around 50%.

Say's Law Keynesians

Image
In the 1990s Fernando Henrique Cardoso, the one time sociologist and dependency theory author, turned politician and president of Brazil said that people should forget about what he had written in the past (on dependency theory). Something similar could be said about the economists at Catholic University in Rio de Janeiro, who were the main economic advisors to Cardoso during his presidency.* They seem to have forgotten what they wrote in the past.

An interesting case of the switcheroo from heterodox to mainstream is Edward Amadeo (Labor Minister during the Cardoso administration, even though he had connections to the Worker's Party up to the early 1990s), author of a very good book on Keynes (Keynes' Principle of Effective Demand), based on his dissertation at Harvard supervised by Murray Milgate and co-supervised by Lance Taylor (who was at MIT at that time), with a preface by Vicky Chick. The book is still the best interpretation of Keynes' General Theory, and its rela…

When did the term macroeconomics become dominant?

Image
I discussed before the origin of the term macroeconomics (here). The term was introduced most likely by Ragnar Frisch, and become associated with the Keynesian Revolution. Before the rise of the macro/micro divide economics was divided between monetary theory (which roughly corresponded to the macro part) and theory of value and distribution (the micro one). Using my new toy in Google Books we can see when the new terms became dominant.
Note the term macroeconomics takes a very long time to become part of the vocabulary of economists. If Ngram Viewer is to be trusted, only in the 1970s the term macroeconomics became more relevant than monetary theory (which now would be more a sub-field of macro).

Economics vs Political Economy

Image
Google Books has an interesting feature that allows to search words or combinations of them in its huge database. Below the use of Political Economy and Economics from 1776 to 2008 (last possible year in the database).
Note that there is no surprise. Political Economy dominated up to the Marginalist Revolution, with a lag for Economics to take over. Note the spike in Economics around 1890, which probably reflects references to Marshall's Principles of Economics, which marks the begging of the transition. Since the 2000s, there has been a decline in Economics, and mild increase in Political Economy. But I wouldn't be very optimistic about it. Political Economy now comes in a marginalist flavor too.

The meaning of short and long-term and the natural rate

Image
From a history of economic thought point of view the turning point in the demise of the Keynesian Consensus based on the Neoclassical Synthesis was Friedman's rediscovery of Wicksell's natural rate. It was peculiar, in a sense, that it happened in the 1960s when the capital debates demonstrated (and was accepted by Samuelson, the High Priest of the Neoclassical Synthesis) that the natural rate made no theoretical sense. That led to a more significant and insidious change in economics. The abandonment of the notion of long-term equilibrium method, as noted by Garegnani.

Briefly stated, what the process entailed is that confronted with the fact that there is no possible way to relate some measure of capital with its remuneration (the idea that abundant capital would lead to a low level of remuneration, i.e. a low rate of interest, and the analogous one that full employment of capital could be obtained with a sufficiently low rate of interest) the mainstream reverted to the Arro…

Why the crisis didn't discredit mainstream (neoclassical) economics?

There are probably many answers to the question. I suggested before that the best way to look at it is from a sociological standpoint. The same people hold the same positions at the key 'respectable' universities, go to the same 'relevant' meetings, and award the same 'important' prizes. And research does build on previous research. Let alone that the economics profession, like the others, is there to protect and reproduce the status quo.
At any rate, in his new book Philip Mirowski, from Notre Dame, and a member of Institute for New Economic Thinking (INET; which has funded I should say several heterodox authors) dedicates, in part, his first chapter to the topic. He says about the INET meetings, which were supposed to display some of the changes in the profession after the crisis: "[...] the first INET meeting at Cambridge University in 2010 bore some small promise—for instance, when protestors disrupted the IMF platitudes of Dominique Strauss-Kahn in K…

The gloomy European project

I don't know for how long, but if you go here now you can get for free the papers of the symposium at Contributions to Political Economy, by Pivetti, Sawyer, Palley, Varoufakis, Barba and De Vivo, Boyer, Bibow, and Singh and his co-authors. Pivetti notes in his introduction that:
"The austerity policies of the last five years can hardly be regarded as a true policy shift. They should rather be seen as a continuum with respect to the entire European Monetary Union (EMU) experience, to whose overall policy stance they just contribute a toughening up. Ever since the Treaty of Maastricht in 1992, and even more from the birth in 1999 of the European Central Bank (ECB) as a monet- ary authority, the average rate of growth of real income in the Euro area has been very low by historical standards, contributing to the persistence of the area high levels of unemployment, largely as a result of the inflation rate having been the ECB’s overriding policy objective." Note that the au…

Krugman is right: "Macroeconomics is all wrong"

Image
Krugman seems to be surprised to find out that there is no direct relation between fiscal deficits and higher interest rates, and that for the most part the relation seems to be upside down. He gets everything right, including the bold claim that mainstream macro [the only one he acknowledges, even though he knows better] is all wrong. And seriously why is he surprised that crowding out does not hold water?!

It's not new that the evidence for crowding out is weak, at best. For the most part the evidence on the positive effects of fiscal policy on the level of activity has been well established (see here Eisner, and here a review by Arestis and Sawyer). Note that essentially the surprise comes from the fact that Krugman does accept the natural rate (for more on this go here).

In that case, conventional wisdom says that it must be true that if the level of output is above its natural level (or the actual unemployment rate is below the natural, or, finally, the rate of interest is be…

Detroit, Greece and debt crises

Image
The big news this week is that Detroit filed, or tried to, for bankruptcy. Some have compared the Motor City crisis to the European, and in particular Greek, crisis. And in the essential that is fine. Detroit is, like Greece has become, a sub-unit of a larger entity and does not control monetary policy. But the analogy does not help much in understanding the difficulties in Detroit.

There is an important difference that has always been part of the discussion of the European crisis, and that is that if you are unemployed in Michigan you get Federal unemployment insurance, and a series of other federal funds support the less privileged. Fiscal transfers are relatively large, and certainly larger than intra-European transfers. According to the Tax Foundation in 2011, federal aid corresponded to 36.4% of the Michigan revenues [not the highest, by the way, which was Mississippi with 49%].

So, if it is far from clear that the European crisis [and in my view that includes the Greek crisis] …

Galbraith on the myth of consumer sovereignty and Big Corporations

Image
From the old, but still essential, The Age of Uncertainty by John Kenneth Galbraith. The myth of consumer sovereignty, created by Paul Samuelson, unmasked and the fact that mainstream economics (as all economic education) is there to protect Big Corporations made clear by Galbraith.

Financial sector growth before the Global Crisis

Image
The graph below shows the the share of the Finance and Insurance industry in the GDP of the United States, estimated from 1850 to 2007 (source here; h/t to Eric Mielants for bringing the paper to my attention).
Note that basically there are three periods of increase in the financial sector's participation in GDP, the late 19th century, the 1920s, and if one discounts the partial recovery from the collapse during the Great Depression and WW-II period, the 1980s onwards. Deregulation has obviously something to do with this increase.

Larry Summers should not be appointed to the Fed

There are increasing rumors that Larry Summers rather than Janet Yellen might be chosen to substitute Ben Bernanke as the head of the Fed. Dean Baker has summarized all the correct reasons for not doing so. As he says:
"Summers was a key actor in the Clinton economic team that pushed for bigger and less regulated banks. He was there for the repeal of Glass-Steagall. He was also among those hectoring Brooksley Born, when the then head of the Commodity Futures Trading Commission argued that it would be a good idea to regulate derivatives. And he famously ridiculed as Luddites those warning of the risks of financial deregulation at the Fed's Greenspanfest in 2005." I'm less keen than Dean on the issue of US trade deficits, since in my view global imbalances are actually too small (the US would need to stimulate global demand and actually run higher deficits, which given the role of the dollar would have no significant impact on the American economy).

Also, the Money Il…

Peter Temin on the strange death of economic history

Peter Temin recounts in this paper the vanishing (apparently complete by 2010) of economic history from the MIT curriculum. History of thought has probably vanished even before, if it was taught at all. He says that:
"Economic history at MIT reached its peak in the 1970s with three teachers* of the subject to graduates and undergraduates alike. It declined until economic history vanished both from the faculty and the graduate program around 2010." He notes that the most famous economic historian graduated from MIT was Christina Romer, which, it must be emphasized, in her famous paper on the Great Depression claims that fiscal policy (and to a great extent the New Deal) was not responsible for the recovery. For her it was the non-sterilized inflows of gold that increased the money supply [yep, the most important historian graduated at MIT is more of a Monetarist than a Keynesian; New Keynesians are peculiar that way; for more go here].

Ideologically this is the result of the…

Hamilton's Reports and the American Economic System

Image
Alexander Hamilton's reports to Congress go against the grain of much of the core principles of mainstream economics. Hamilton had read the main economic authors of his time, including David Hume and Adam Smith, both of which had a much more critical view of public debt than Hamilton did. He was also influenced by policy makers like Jacques Necker (see here; subscription required), a Genevan banker and finance minister of France just before the Revolution, and Robert Morris, who is often referred as the Financier of the Revolution (see Ron Chernow's biography of Hamilton).

The Hamiltonian plan, which was to a great extent based on the British economic model, was based on the need to consolidate all debts incurred by the states under the Federal government, and to provide the latter with revenues from foreign trade, implying tariffs, and excise taxes (e.g on whisky) to allow to pay the interest on the new national debt. Hamilton argued famously in his Report on Public Credit t…

José Antonio Ocampo on Argentina's debt holdouts

José Antonio Ocampo, now from Columbia University, Aldo Caliari, from the Rethinking Bretton Woods Project, argue that a global framework for dealing with debt restructuring is needed in light of the risks posed by the vulture funds in the Argentine case.

From their FT article:
"A framework for sovereign debt restructuring is required. Late last month the Argentine government filed a writ at the US Supreme Court to have claims in its continuing legal battle with Elliott Management, a hedge fund, and other creditors heard by that higher tribunal.
...
Every day the lack of a predictable set of rules for timely, orderly, fair and economically efficient resolutions of sovereign debt problems becomes harder to hide. Think of it as the absence of the bankruptcy procedures that exist at national level. Without them there is no speedy restitution to disputes, funding dries up and crisis costs rise.
...
The holdouts have demanded their claims be paid in full, plus interest. But the one …

Government employment

Image
If you had any doubts, with the exception of the Census in 2010, government employment has gone down significantly since the 2007-8 recession, as shown below.
The most obvious solution is to revive employment programs, like those of the New Deal, the Works Progress Administration (WPA) headed by Harry Hopkins, and the Public Works Administration (PWA) led by Harold Ickes. But in all fairness chances of that happening are slim to none.

Jeff Frankel also thinks government is dragging down the economy

He is very clear in this interview that sequestration is one of the causes of the slowdown to 1.8% in the first quarter. Menzie Chinn also looks at the forecasts, which indicate 0.6% growth in the second quarter, and argues that this is: "no time for either contractionary fiscal or monetary policy."

A new edition of the Modest Proposal for Resolving the Eurozone Crisis

Image
Galbraith and Holland at the Central Bank of Argentina
A new edition of Yanis Varoufakis and Stuart Holland's Modest Proposal is out, now co-authored by Jamie Galbraith (for more here).

Crowding out and the Industrial Revolution

Image
A while ago I posted on Bill McColloch's paper on the role of financial regulation during the 18th century. One of the arguments that Bill's paper tries to refute is the idea that the revisionist views that suggest slower growth in England during the Industrial Revolution (Crafts and Harley here; subscription required) was caused by crowding out (see, for example, Jeffrey Williamson here). Bill correctly points out that interest rates remained low in England.
The graph below, from Dickson's classic book on the Financial Revolution shows that throughout the 18th century interest rates actually fell. More importantly, British rates remained well below the levels of the French ones, and gave a significant advantage in their quest for global hegemony, as the graph below shows (source here). Note that even if one accepts the lower rates of growth suggested by Crafts and Harley, the explanation for the lower rates of investment should not be that surprising. Yes, the accelerato…

Government is responsible for weak recovery

Image
Argument in one graph. The figure below shows that private consumption (red line) fell, and then started growing, while government spending (blue line) was important for the early part of the recovery and then has become a drag on the economy.
Hard to see how we are going to get out of the hole with public policy being so incredibly misguided.

John King on Pluralism in Economics

Image
John King shows that other social disciplines do NOT have a unique unified mainstream, and presents a case for pluralism in economics.

Building a New Economy

A few heterodox economists posted this video. For more go here.

Did Inflation Bring Down the Allende Government?

Image
Allende's glasses
Roberto Frenkel, the well-known Argentine economist, gave an interesting radio interview (transcribed, in Spanish, here) in which, as always, there is a lot to learn. In that interview he tells a touching story about his experience during the Allende government. Apparently he was told by the Finance Minister Carlos Matus to make a presentation on inflation, and warned of the dire consequences of not pursuing contractionary demand policies. After that he says (I keep his Spanish version and translate below):
"Yo había explicado cómo la inflación se iba a acelerar, la situación iba a empeorar rápidamente... y entonces se me acerca Allende con quien yo había tenido la oportunidad de estar en pocas oportunidades, y me dice '¿Por qué no me lo dijeron antes?' Y es una cosa que me pesó en el corazón... al poco tiempo el hombre se suicidó en La Moneda. Y eso se lo conté a algunos que estuvieron con el gobierno de Kirchner hasta hace poco y ahora salen preoc…

42 years of the nationalization of copper in Chile

Image
Yesterday, July 12, was the anniversary of the nationalization of copper in Chile. Allende referred to the nationalization as the most important act in Chile's history since independence (you can see parts of his speech in this documentary from Telesur here; in Spanish). Even though the government of the military coup (1973-89) weakened the nationalization, it was ultimately unable to revert the process and privatize it. This is the most direct cause of the coup against Allende, and the support from the US intelligence services. In the last decade natural resource nationalism (as noted before here) allowed for better income distribution.

Mankiw and the myth of one economics

I avoid commenting on Mankiw's blog, since it is, in my view, the worst of the mainstream. I'm okay with Krugman, who at least uses neoclassical economics to try to understand the world (although his economics makes it difficult for him). But Mankiw is a different animal, and seems to be more about justifying the worst of conservative policies. Also, he is the sort of the leader of New Keynesians (or was at some point), which is a terrible misnomer used by fundamentally anti-Keynesian authors [Mankiw is only Keynesian when it is convenient for the 1%; he is against higher taxes, since that would make productive people like him work less; yes a good reason to for higher taxes on the wealthy indeed!].

At any rate, I'll make an exception this time, since I think the topic is relevant. In a recent column on the NYTimes, on the new head of the CEA, an ex-student of his, he said:
"The field of economics offers a lens through which to view the world. For those who buy into …

Houthakker-Magee effect and the US external position

The Houthakker-Magee (HM) effect is one of those empirical regularities, like Okun's Law, that suggests that Kaldor was correct when he talked about stylized facts, and that indicates that economics might actually aspire to be a more serious scientific endeavor (in spite of economists, of course). The HM effect says that the income elasticity of imports in the US tends to be about double the size of the income elasticity of exports, and as a result the US has a tendency to run trade deficits if it grows at the same pace than the rest of the world.

Several more recent estimates of the HM (the original Houthakker and Magee paper is from 1969*; subscription required) confirm the persistence of the phenomenon. Peter Hooper and Jaime Marquez are responsible for more than one of those more recent estimates (see, for example, here with Karen Johnson), which also suggest that income elasticities are considerably larger than price elasticities. In particular they note that, at least for G…

Coordinate Currencies or Stagnate

By Thomas I. Palley

The global economy needs exchange rate coordination now. Absent that, the world is likely to be increasingly afflicted by exchange rate fluctuations and policy acrimony. These are bound to undermine the economic recovery and increase the likelihood of stagnation.

Read the rest here.

Bernanke on fiscal policy: Keynesian ma non troppo

I noted before that Christina Romer, who was the chairwoman of the CEA and responsible for the fiscal package in 2009, held views on the recovery from the Great Depression that were ironical given her position. She argued in her classic paper that fiscal policy was irrelevant. Another New Keynesian that held similar views was Ben Bernanke. He says, in a famous paper published in his Essays on the Great Depression trying to explain industrial output, that:
"In an attempt to control for fiscal policy, we also included measures of central government expenditure in our first estimated equations. Since the estimated coefficients were always negative (the wrong sign), small, and statistically insignificant, the government expenditure variable is excluded from the results reported here." So in his view (and his co-author, Harold James) fiscal policy was not relevant for industrial recovery. This view was challenged here (a significantly modified paper was accepted for publication)…

Thatcher, Cameron and Real Wages

Image
Real wages are pro-cyclical, a well established regularity that led Keynes to accept (after evidence presented by Tarshis and Dunlop) that his marginal decreasing productivity demand for labor might be wrong, and that Kalecki seemed to be right (see his article here; subscription required).

The graph below (source here) shows how much real wages have fallen in this and previous recessions in Britain.
Note that in the following one, real wages fell less (so far) than during Thatcher, but the decline has been way longer than with the Iron Lady.

Knut Krugman vs. Krugman von Hayek

Lance Taylor suggested that if you look closely into Paul Krugman's ideas you actually find the ghost of Knut Wicksell. Now Nathan Tankus argues in a post here that Krugman looks more like Friederich Hayek. The crucial thing is that:
"Both Krugman and Hayek have argued quite consistently that there was a 'natural rate of interest' which according to Krugman is “the rate of interest that would match desired savings with desired investment at full employment. “ Hayek makes the same argument in his writing. This interest rate is not the interest rate set by the central bank, indeed it is not an interest rate set on any market. It is a hypothetical interest rate which we will finally know if or when full employment returns." Note also that Hayek's model, like Keynes' in the Treatise on Money, was quite Wicksellian. So Nathan and Lance might be onto the same thing in fact.

Debt and the deep sources of inequality

In a previous post I noted that economists (particularly mainstream ones, like Brad DeLong) could actually learn quite a bit from anthropologists like David Graeber. One thing that they (anthropologists, not mainstream economists) seem to understand is that debt is a social relation that evolved with the creation of inequality. Debt servitude or slavery being quite old, as a result. As noted by Flannery and Marcus, in their The Creation of Inequality:
"The first step in such a process is to loan food and valuables to impoverished neighbors. The second step is to foreclose on the loan. Families who accept food and shelter from wealthy neighbors are in a poor position to deny the latter’s claims to luxury items and hereditary privileges." As much as historians (noted here and here before), anthropologists do work with the concept of surplus. For that reason they note that societies in which there is a significant surplus have more opportunities for inequality. The basis of Fl…

US and China's total GDP in PPP

Image
Branko Milanovic shows (using Maddison data) that:
According to Maddison's data, #US was the largest economy from 1870 to 2010. #China was the largest before and after. pic.twitter.com/hu3g2p7Wuy
— Branko Milanovic (@BrankoMilan) July 7, 2013 Graph below: Note that in terms of per capita GDP China is still a relatively poor country, given differences in population size. However, from a macro point of view, Chinese demand now plays an important role in the world economy.

Keynes and Prebisch paper now in English

The paper linked here before, has now been published as a working paper in English in the Network IDEAs website here.

From the abstract:
Keynes had a profound influence on Prebisch not only in terms of the diagnosis about the main failures of market economies but also on the need to pursue pro-active and anti-cyclical policies. Further, both economists dedicated their efforts to expand the policy autonomy of their respective countries and regions. However, Prebisch was critical of some aspects of Keynes’ main work, The General Theory of Employment, Interest and Money (1936). This can be explained by a difference between the two economists in their object and method of analysis. Prebisch’s interests focused on dynamics and the cycle, themes that were peripheral to the central message and analysis of the General Theory. Prebisch’s Keynesian influence and his rejection of Keynes’ magnum opus explain why Prebisch is often described as the Latin American Keynes, even as he is portrayed as…

Newton and the Gold Standard

Image
My limited knowledge of Newton's involvement with the Gold Standard, as the Master of the Mint, came from Barry Eichengreen's discussion in Globalizing Capital [a book that is very influential in spite of his claim that a variation of Hume's specie-flow is still the best view of balance of payments adjustment; for a critique go here or here; mind you the book is the best description of the mainstream views of balance of payments adjustment in historical perspective]. In that book he suggests that Newton got the price of silver incorrectly against gold, a too low gold price for silver, with the consequence that Britain moved effectively into a Gold Standard by accident. In this view, the new supply of Gold from Brazil, and the undervalued price of silver explain the slow move into a Gold Standard.

The more recent book by Thomas Levenson, not an economist (that's often good), Newton and the Counterfeiter, which is more of a police story, suggests that Newton was well aw…

The Portuguese inevitable collapse

Image
The Portuguese economy is not in the headlines as much as the other peripheral economies in crisis, but the troubles, and its political consequences are no less deep. Austerity has led to a collapse of output, that fell by around 4% in the first quarter of the year, the worst fall after Greece and Cyprus, respectively. Spreads with German bonds hiked, and two coalition ministers have resigned. However, this has been a long crisis in the making. Graph below shows industrial production (index equal to 100 in 2005) in Portugal and Germany, since the euro.
Note that the trend is there from the beginning. And it should have been expected too. No reasonable model predicts that with capital mobility and no barriers would lead to production to be spread rather than concentrated. Other than major fiscal transfers, the euro arrangement was unavoidably going to create increasing disparities. And by the way, the political crisis cannot end, if the economic collapse continues.

The fairy tale the super rich earn their money is exactly what it is, a fairy tale!

Image
From Jared Bernstein
Larry Mishel has a useful blog up responding to Greg Mankiw’s piece defending the top 1% (for much more discussion of Greg’s essay, start here and click through the many links).I’ll get to Larry’s point in a moment, but one thing re Greg’s paper. Much of the criticism, which I’ve (predictably) found resonant, is directed at a) his failure to comprehend that the opportunity set facing families and their kids on the have-not side of the inequality divide is diminished, and b) the role that inequality itself has played in that outcome (I’ll have a second post up soon on point b—it’s one I’ve consistently stressed in these parts). Read rest here.

Job market still indicates slow recovery

Bureau of Labor Statistics (BLS) released the data on the job market today. From the report: "Total nonfarm payroll employment increased by 195,000 in June, and the unemployment rate was unchanged at 7.6 percent. Employment rose in leisure and hospitality, professional and business services, retail trade, health care, and financial activities." At this pace, the recovery will take a whole 10 years to recover from the 2007-8 recession. Yes employment levels will surpass previous peak in 2017. We need around double that number (400,000 jobs per month), at least, for a healthy recovery.

ROPE at 25

The Review of Political Economy, one of the best and most influential heterodox journals, is 25 years old! They celebrated by linking to 25 of their best papers available here. From their page:
2013 marks the 25th volume of the Review of Political Economy and, to celebrate, the Editors have selected their top 25 articles from the past 25 years and made them free to view for the remainder of 2013. This collection includes a paper by the joint first Nobel Laureate in Economics and a wealth of other leading papers in the field of Political Economy from the last quarter of a century. Enjoy!

Minsky's crises

Last week I taught a couple of classes on financial crises, including Minsky's ideas. Lance Taylor's paper (with Stephen O'Connell; subscription required) is probably one of the few discussions of Minsky in a mainstream journal (in the Quarterly Journal of Economics, the working paper series of Harvard and MIT), and one of the last heterodox papers published on any topic, by the way. Lance's paper, as he admits leaves out a lot of the institutional richness of Minsky's ideas.

In Lance's model the crisis is fundamentally based on expectations about future profits, and the determination of economic growth is demand determined, but based on a Cambridge equation model in which profits determine investment. It's fundamentally a profit-led regime (for a critique of these kind of closures see here). In this view, the crisis is brought by a sudden decline in confidence (although a hike in the rate of interest would work too), which leads to a contraction of growth…

Price controls once again

I was off for a few days. In a previous post on price controls, in the comments, I suggested the book by Hugh Rockoff "Drastic measures A history of wage and price controls in the United States" and posted the following quote, which suggests under which conditions they were efficient in the 1940s (1984, p. 108):
"In a sense the democratic process wrote its own evaluation of controls: Selective controls were a failure; the hold-the-line policy was initially a success; but failed when, at the end of the war, the constraints on collective bargaining and rationing became too confining. The statistical record, on the whole, tends to confirm this judgment. Perhaps the simplest question is, Did controls "work" in the elementary sense that the rate of inflation was kept below some arbitrarily small figure, say 5 percent per year? The answer that emerges (Table 4.3) depends on the particular subperiod one examines. From April 1943, when President Roosevelt issued the …