Posts

Showing posts from July, 2014

Per S&P & Bloomberg, Argentina Defaults... So What Now?

Image
From a matter of fact point of view, even though Argentina has made the payments to bondholders, Judge Griesa's decision precludes them (the bondholders) from receiving payment, and so Argentina is technically in default (Argentine Finance Minister, Kicillof called it: "default Griesa. Griefault." This is NOT like in 2002 the result of lack of funds, but direct consequence from a judicial decision backed by the US Supreme Court. From Bloomberg: Standard & Poor’s declared Argentina in default after the government missed a deadline for paying interest on $13 billion of restructured bonds. The South American country failed to get the $539 million payment to bondholders after a U.S. judge ruled that the money couldn’t be distributed unless a group of hedge funds holding defaulted debt also got paid. Argentina, in default for the second time in 13 years, has about $200 billion in foreign-currency debt, including $30 billion of restructured bonds, according to S&…

Neoliberal Authoritarian Greece: A Nation for Sale & Death of Democracy

Image
According to Henry A. Giroux (2005/6), 'neoliberal authoritarianism' is the process by which upper capitalist class interests reinvent the past, present, & future in the image of a crude exercise of power that unleashes unimaginable human suffering, in order to maximize wealth and influence in social, political & economic affairs at whatever social costs. From Truthout:
When the European Union (EU) and the International Monetary Fund (IMF) came to Greece's rescue in May 2010 with a 110 billion euro bailout loan in order to avoid the default of a euro-zone member state (a second bailout loan worth 130 billion euros was activated in March 2012), the intentions of the rescue plan were mult-ifold. First, the EU-IMF duo (with the IMF in the role of junior partner) wanted to protect the interests of the foreign banks and the financial institutions that had loaned Greece billions of euros. Greece's gross foreign debt amounted to over 410 billion euros by th…

Jerry Epstein on the financial crisis after six years

By Gerald Epstein

It has now been almost six years since Lehman Brother’s collapsed and, as Warren Buffett famously put it, all the world could see who had been “swimming naked”. Alan Greenspan, Ben Bernanke, and many economists claimed that “no one could see it coming”, but many economists working without the ideological blinders of mainstream economic theory did, in fact, see “it” coming.

Prominent among these economists is Jane D’Arista, whose prescient and insightful work on financial and monetary issues serves as a guide and inspiration for those who want to clear away the cobwebs of distorting economic ideology and, in the tradition of Keynes, Minsky and Kindleberger, sink their intellectual teeth into the real economic institutions and dynamics that drive our macroeconomy. If we do that, and ask how the dynamics and institutions of monetary policy, banking and financial regulation have evolved since Lehman Brothers, the panorama is astonishing.
Read rest here.

Notes on the Policy Implications of the New Macroeconomic Consensus

Image
The New Macroeconomic Consensus (NMC) model is based on three simple equations. An IS equation that, contrary to what most discussions within the heterodoxy suggest, is based on a Ramsey model intertemporal approach to savings and investment, a Phillips curve (PC) equation, normally with rational expectations, and a monetary policy (MP) rule, typically Taylor’s rule. From the IS and the MP an aggregate demand (AD) curve is derived, while the PC provides an aggregate supply (AS) curve, similar to Lucas’ supply curve. Business cycles are seen as being determined by shocks, either monetary, that affect the AD curve, or real, which impact the AS curve.

A few things are important to note with respect to the NMC model. First, the IS curve now is not based on the traditional Keynesian multiplier process, by which savings adjust to investment (or in more sophisticated models with endogenous investment, to autonomous demand) as a result of variations to the income level. Agents make intertemp…

Dean Baker on The Promotion of Waste & Inequality By US Finance

Image
By Dean Baker
In the crazy years of the housing boom the financial sector was a gigantic cesspool of excess and corruption. There was big money in pushing and packaging fraudulent mortgages. The country paid a huge price for the financial sector's sleaze. Unfortunately, because of the Obama administration's soft on crime approach to the bankers who became rich in the process; the industry is still a cesspool of excess and greed. Just to be clear, knowingly issuing and packaging a fraudulent mortgage is a crime, the sort of thing for which people go to jail. But thanks to the political power of the Wall Street, none of them went to jail, and in fact they got to keep the money. Read rest here.

For more on the long-run macroeconomic causes, implications, and effects of US financialization, see recent articles here, here (subscription required) , here, here,here (subscription required), and here (subscription required); for a pertinent sociological analysis, see here

Lars Syll On Methodological Critique of Austrian Economics

Image
By Lars Syll [h/t] Jan Milch

This is a fair presentation and critique of Austrian methodology. But beware! In theoretical and methodological questions it’s not always either-or. We have to be open-minded and pluralistic enough not to throw out the baby with the bath water — and fail to secure insights like this:

What is the problem we wish to solve when we try to construct a rational economic order?… If we possess all the relevant information, if we can start out from a given system of preferences, and if we command complete knowledge of available means, the problem which remains is purely one of logic…

This, however, is emphatically not the economic problem which society faces…The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which al…

Structural Transformation in China 1952-2013

Image
Just checking the Chinese economic data (subscription required), and decided to look at the structural changes more or less since the Communist takeover, as shown below.
The interesting thing is that while the size of agriculture diminished significantly throughout the whole period, industry more or less reached its current level at the beginning of the opening period. Most of the growth in the post-liberalization period has been in services, which has gone hand in hand with the urbanization process.

Of course the results are a little bit deceiving. The primary sector is basically agriculture and the secondary contains the bulk of manufacturing, but the tertiary includes some industries too. For the definitions go here. Still interesting result. By the way, by 2013 the tertiary sector is finally bigger than the secondary.

Per Fed, American Median Wealth Plunged By 40 percent From 2007 to 2010

Image
The Federal Reserve has confirmed that the median net worth of families plunged by 40 percent in just three years, from $126,400 in 2007 to $77,300 in 2010. That is, the average American family wealth is roughly on par with what it was in 1992. According to the Washington Post:
"The recent recession wiped out nearly two decades of Americans’ wealth, according to government data released Monday, with ­middle-class families bearing the brunt of the decline. The data represent one of the most detailed looks at how the economic downturn altered the landscape of family finance. Over a span of three years, Americans watched progress that took almost a generation to accumulate evaporate. The promise of retirement built on the inevitable rise of the stock market proved illusory for most. Homeownership, once heralded as a pathway to wealth, became an albatross. The findings underscore the depth of the wounds of the financial crisis and how far many families remain from healing. I…

More on Argentina and the Vulture Funds

Image
This week will be key for the Argentine debt renegotiation drama. If no agreement is reached then default might take place. Here is a short note in Spanish for the Argentine newspaper Página/12, in which I suggest that in spite of the costs of an agreement, and the fact that on a simple technical basis Argentina should not pay them (after all they would still profit if they accepted the terms that 93% of bondholders agreed to), it might be the only solution that would allow economic growth to continue.

Tom Palley on New Keynesianism as a Club

Image
Tom Palley discusses the fact that New Keynesian have 'rediscovered' several of the ideas that other Keynesians, in particular the more heterodox sort (but not only, he includes James Tobin too), without properly acknowledging them. In his words:
"For almost thirty years, New Keynesians have dismissed other Keynesians and not bothered to stay acquainted with their research. But now that the economic crisis has forced awareness, the right thing is to acknowledge and incorporate that research." Read rest here. By the way, Tobin, in his little book Asset Accumulation and Economic Activity, discusses why even with price flexibility the system does not have a tendency to full employment, being the closest to the alternative Keynesian ideas, or arguably to Keynes' own views. For Minsky's review of that book, in which he also criticizes Tobin for dismissing the research of post-Keynesians, go here.

CEPR on "Minimum Wage Workers Pay Cut Clock"

Image
The last time the federal minimum wage was raised was July 24, 2009, to $7.25 per hour. Workers making the minimum wage have been facing a continual pay cut since then, as inflation has eroded the purchasing power of the minimum wage.

The first minimum wage pay cut clock shows how many dollars America's minimum wage workers have lost since July 2009. Every second it shows how much more money they're losing, as long as the federal minimum wage remains stuck at $7.25. Mind you, even if the federal minimum wage were to catch up to its July 2009 level, it would still be far below its historical level. The peak year for the U.S. minimum wage was 1968.

The second clock shows how many dollars America's minimum wage workers have lost since July 24, 2009 if the minimum wage had instead been raised to its 1968 level and then kept pace with inflation since then. Every second it shows how much more money they're losing, as long as the federal minimum wage remains be…

A debate on Endogenous Money and Effective Demand: Keen, Fiebiger, Lavoie and Palley

Image
The last issue of the Review of Keynesian Economics (ROKE) has a debate between Steve Keen with Brett Fiebiger, Marc Lavoie and Tom Palley. Two papers are available for download (Keen and Lavoie's). Tom's paper is available as a working paper here.

The basis for Steve's defense of endogenous money is based on the works of Schumpeter, as developed by the latter's student Hyman Minsky. In his words: "The proposition that effective demand exceeds income is not a new one: it can be found in both Schumpeter and Minsky (and arguably in Keynes's writings after The General Theory, though not in as definitive a form – see Keynes 1937*, p. 247). A difference between income and expenditure, with the gap filled by the endogenous creation of money, was a foundation of Schumpeter's vision of the entrepreneurial role in capitalism. Minsky's attempt to reconcile endogenous money and sectoral balances is the closest antecedent to the argument I make, but I will start …

Comparative Asian and Latin American Development

Image
New book on the comparative development experiences of Latin American (Argentina, Brazil, Chile, Colombia, Mexico, and Venezuela), and Asian (China, India, Indonesia, Philippines, and South Korea) economies, plus Russia, edited by Ricardo Bielschowsky, has been published and is available for free here (in Portuguese, I'm afraid). A general intro to all country experiences and the chapter on Argentina by yours truly (an updated version of the paper on Argentina is posted here).

CEPR | Stimulus and Fiscal Consolidation: The Evidence and Implications

Image
In a previous post, see here, Matias provided a graph that displayed the fiscal results for the US as a share of GDP from 1993-2014, along with a discussion of the misconception that democrats are nothing but tax/spend liberals. I thought it would be pertinent to post this paper by Dean Baker and David Rosnick providing conclusive evidence on the effects of stimulus packages and fiscal consolidation during the recent economic crisis.

From the abstract:
The first part deals with the most important literature on the subject, the consensus in the research of the past decade attests a clear counter-cyclical effect of stimulus packages during a prolonged recession. The second part deals with the impact of changes in government consumption and investment to growth. For this data for developed countries in 1980 are analyzed. Consistent with much of the previous literature have increased government spending during a crisis has a positive effect on economic growth. In addition, the period is …

Bretton Woods Conference transcripts now available

The transcripts of 1944 Bretton Woods Conference were recently found at the Treasury, and have been published (a sample is available here). More info here. As noted by the NYTimes do NOT expect any major surprises though.

Overall federal fiscal results for the US, 1993-2014

Image
Prompted by my post on Brazil yesterday. Graph below shows fiscal results for the US as a share of GDP.
For more go to the original post here.

PS: On the switch between Democrats and Republicans regarding deficits and the 'size' of government see this debate.

Fiscal balances in Brazil, 2002-2012

Image
This is from an unpublised paper by Fernando Maccari Lara, Roberto de Souza Rodrigues, and Carlos Pinkusfeld Bastos.* Figure below shows the nominal and primary balances as a share of GDP, and the financial expenditures, which make the difference between the two balances (i.e. a primary surplus becomes a nominal deficit after the interest payments on outstanding debt). All figures as a share of GDP.
Note that during the whole Lula, and the first two years of Dilma, the Brazilian government kept primary surpluses, as it has done essentially for a few decades now, with few exceptions. There is a tendency for the expenses with interest rates to go down, they remain at 3.5% of GDP (in 2012), which means that it remains the largest 'social' program in Brazil, larger than the Bolsa Familia.

From the asbtract:
Brazilian economy adopts a set of economic policies after the crisis in the end of the 1990s decade. Setting a target for the primary fiscal surplus was the main objective of …

Cheap Talk at the Fed

Image
By Dean Baker
Federal Reserve Board Chair Janet Yellen made waves in her Congressional testimony last week when she argued that social media and biotech stocks were over-valued. She also said that the price of junk bonds was out of line with historic experience. By making these assertions in a highly visible public forum, Yellen was using the power of the Fed’s megaphone to stem the growth of incipient bubbles. This is an approach that some of us have advocated for close to twenty years. Before examining the merits of this approach, it is worth noting the remarkable transformation in the Fed’s view on its role in containing bubbles. Just a decade ago, then Fed Chair Alan Greenspan told an adoring audience at the American Economic Association that the best thing the Fed could do with bubbles was to let them run their course and then pick up the pieces after they burst. He argued that the Fed’s approach to the stock bubble vindicated this route. Apparently it did not bother him, or mos…

Some thoughts on the Bank of the BRICS

Image
The BRICS announced in their last summit a new development bank, with US$ 100 billions in capital, of which US$ 41 billions are from China. There is a certain excitement about the possibilities for South-South cooperation and alternatives to development that this new institution will bring about. First, let me explicitly say that I think in general development banks are a relevant tool for development, that the new bank is a welcome addition that increases South-South cooperation and that reduces the need for developed country dominated institutions.

And yes a lot of the investment that will come will likely (and I would say hopefully) be on infrastructure (I say this since in one of the meetings of the Bank of the South, in Quito years ago, an activist told me I was a neoliberal for supporting infrastructure rather than community based projects; by the way, not against those, but as I said back then, if you want schools or sanitation for local communities, you'll need roads, ele…

EPI | Why It’s Time to Give Tipped Workers A Living Wage

Image
By Sylvia A. Allegretto and David Cooper
Raising the wage floor for tipped workers is crucial for a number of reasons. Rising income inequality and the accompanying slowdown in improving American living standards over the past four decades has been driven by weak hourly wage growth, a problem that has been particularly acute for low-wage workers (Bivens et al. 2014). Tipped workers—whose wages typically fall in the bottom quartile of all U.S. wage earners, even after accounting for tips—are a growing portion of the U.S. workforce. Employment in the full-service restaurant industry has grown over 85 percent since 1990, while overall private-sector employment grew by only 24 percent.4 In fact, today more than one in 10 U.S. workers is employed in the leisure and hospitality sector, making labor policies for these industries all the more central to defining typical American work life. Ensuring fair pay for tipped workers is also a women’s issue. Women comprise two out of every three tip…

NPR Planet Money on Bretton Woods and the Role of the Dollar

Image
Listen here (if the one on top doesn't work). Not bad, I should add, but it relies too much on Benn Steil's terrible book. In particular the evidence on Harry Dexter White being a Soviet spy is exaggerated. The best evidence is inconclusive. And as the program says White was responsible, or mainly so, for the use of the dollar as the key currency, which gave the US a great economic advantage. If he was pro-Soviet he was awful, wasn't him?

New Book: Private Equity at Work, When Wall Street Manages Main Street

Image
By Eileen Appelbaum and Rosemary Batt

Prior research on private equity has focused almost exclusively on the financial performance of private equity funds and the returns to their investors. Private Equity at Work provides a new roadmap to the largely hidden internal operations of these firms, showing how their business strategies disproportionately benefit the partners in private equity firms at the expense of other stakeholders and taxpayers. In the 1980s, leveraged buyouts by private equity firms saw high returns and were widely considered the solution to corporate wastefulness and mismanagement. And since 2000, nearly 11,500 companies—representing almost 8 million employees—have been purchased by private equity firms. As their role in the economy has increased, they have come under fire from labor unions and community advocates who argue that the proliferation of leveraged buyouts destroys jobs, causes wages to stagnate, saddles otherwise healthy companies with debt, and leads to…

Tom Palley on the Phillips Curve

Image
Tom has written a short note titled “The Phillips Curve: Missing the Obvious and Looking in All the Wrong Places.” From the intro:
There is an old story about a policeman who sees a drunk looking for something under a streetlight and asks what he is looking for. The drunk replies he has lost his car keys and the policeman joins in the search. A few minutes later the policeman asks if he is sure he lost them here and the drunk replies “No, I lost them in the park.” The policeman then asks “So why are you looking here?” to which the drunk replies “Because this is where the light is.”That story has much relevance for the economics profession’s approach to the Phillips curve. Read more here.

Kevin P. Gallagher on BRICS Consensus

Image
By Kevin P. Gallagher

Conveniently scheduled at the end of the World Cup, leaders of the BRICS countries travel to Brazil in mid-July for a meeting that presents them with a truly historic opportunity. While in Brazil, the BRICS hope to establish a new development bank and reserve currency pool arrangement. This action could strike a true trifecta — recharge global economic governance and the prospects for development as well as pressure the World Bank and the International Monetary Fund (IMF) — to get back on the right track. The two Bretton Woods institutions, both headquartered in Washington, with good reason originally put financial stability, employment and development as their core missions. That focus, however, became derailed in the last quarter of the 20th century. During the 1980s and 1990s, the World Bank and the IMF pushed the “Washington Consensus,” which offered countries financing but conditioned it on a doctrine of deregulation.

Read rest here.

Mark Weisbrot on BRICS reserve fund & development bank

Image

Fed doesn't think that the natural rate of unemployment is 6.5%

Image
Previously there was some talk about the Fed keeping the fed funds rate low as long as unemployment was higher than 6.5% and inflation was close to the 2% unofficial target. Since last month the unemployment rate crossed that barrier, and is now at 6.1%, there might have been doubts about what would Janet Yellen do or simply What Would Janet Do (WWJD).
The good news is that, quite correctly, Yellen seems to believe that the recovery is still weak, the labor market is slacking and there is no sign of impending inflation acceleration. So the natural rate (which does not exist) is NOT 6.5% for the Fed.

On the blogs

Banking, Monetary Policy And The Political Economy Of Financial Regulation

Image
To be published soon. A Festschrift for Jane D'Arsita. From the dust-jacket:

"Jane D’Arista is one of those towering figures who thinks way ahead of the conventional understandings. A generation ago she recognized the distorted architecture of finance and banking and described in lucid detail the reform agenda for restoring a stable and equitable system. Written in the tradition of D’Arista, the essays in this important collection point the way toward overcoming the recurrent financial disorders of our gilded age. Like Jane D’Arista’s work, this timely volume demands the attention of both policy experts and the politicians who must do the reconstruction."
William Greider, author of Secrets of the Temple: How the Federal Reserve Runs the Country
For more info go here.

Who should negotiate with the Vulture Funds

A bit of World Cup humor.
Si mandamos a @Mascherano a negociar con los fondos buitres trae vuelto !!!!!
— Toro Palladino (@Toropalladino) July 10, 2014Translation: If we send Mascherano to negotiate with the Vulture Funds, he will bring back some change!!!!!

If you read in Portuguese, here is an interview with yours truly on the Vulture Funds.

NBER: Mutual Assistance between Federal Reserve Banks, 1913-1960

Image
By Barry Eichengreen, Arnaud J. Mehl, Livia Chițu, & Gary Richardson
This paper reconstructs the forgotten history of mutual assistance among Reserve Banks in the early years of the Federal Reserve System. We use data on accommodation operations by the 12 Reserve Banks between 1913 and 1960 which enabled them to mutualise their gold reserves in emergency situations. Gold reserve sharing was especially important in response to liquidity crises and bank runs. Cooperation among reserve banks was essential for the cohesion and stability of the US monetary union. But fortunes could change quickly, with emergency recipients of gold turning into providers. Because regional imbalances did not grow endlessly, instead narrowing when region-specific liquidity shocks subsided, mutual assistance created only limited tensions. These findings speak to the current debate over TARGET2 balances in Europe.
Read rest here (subscription required).

CEPR: Latin American Growth in the 21st Century - The 'Commodities Boom' That Wasn't

Image
By David Rosnick and Mark Weisbrot

This paper looks at whether the data support such a conclusion. It finds that there is no statistically significant relationship between the increase in the terms of trade (TOT) for Latin American countries and their GDP growth. There is, however, a positive relationship between the TOT increase and an improvement in the current account balance. It may be that this allowed countries to avoid balance of payments crises or constraints.

Read rest here.

Stop bashing GDP!

Image
So everybody hates the Gross Domestic Product! The New York Times and the Financial Times have recently published articles criticizing the main measure of production in the economy. This is certainly not new, and criticism of the value of GDP for certain purposes, as a measure of well-being, for example, have led in the past to the creation of other variables like the United Nations Development Programme's Human Development Index, which includes GDP per capita (actually Gross National Income per capita), life expectancy at birth and average years of schooling for adults.

In fact, the NYTimes article basis for the supposedly dramatic "Rise and Fall of the GDP" is it's inability to measure well-being, and in it the author emphasizes its disadvantages when compared to the HDI. The NYTimes piece quotes Sen, the godfather of HDI, complaining about the "silliness about identifying growth with development." Of course, since GDP is only about the material growth o…

Tom Palley on Milton Friedman’s economics and political economy

Image
By Thomas Palley

Milton Friedman’s influence on the economics profession has been enormous. In part, his success was due to political forces that have made neoliberalism the dominant global ideology, but Friedman also rode those forces and contributed to them. Friedman’s professional triumph is testament to the weak intellectual foundations of the economics profession which accepted ideas that are conceptually and empirically flawed. His success has taken economics back in a pre-Keynesian direction and squeezed Keynesianism out of the academy. Friedman’s thinking also frames so-called new Keynesian economics which is simply new classical macroeconomics with the addition of imperfect competition and nominal rigidities. By enabling the claim that macroeconomics is fully characterized by a divide between new Keynesian and new classical macroeconomics, new Keynesianism closes the pincer that excludes old Keynesianism. As long as that pincer holds, economics will remain under Friedman’s s…

On the blogs

John King and Marc Lavoie and alternatives to the mainstream

Image
An interview with John King (here), in the World Economic Association Newsletter. Also, chapter 1 of Marc Lavoie's new book on post-Keynesian economics available here.

PS: In Marc's book I'm included in a group of authors that can be classified in more than one category. In his words: "Many eclectic and productive economists go across all or at least two of the categories discussed above, and so could not fit neatly into one of the strands. This is the case of key senior authors such as Philip Arestis, Geoff Harcourt, John King , Barkley Rosser Jr and Edward Nell, or more junior ones like Steve Keen, Mathew Forstater, Mathias (sic) Vernengo and Louis-Philippe Rochon."

Dean Baker - Housing & The Downturn: It's Really Not That Complicated

Image
By Dean Baker
Neil Irwin has a piece noting housing's importance in the downturn, which gets things half right. First, housing is typically important in economic cycles, as he says, but the picture is quite different than Irwin implies. In a typical recession housing construction falls because it is very sensitive to interest rates. Most recessions are brought on by the Fed raising interest rates to slow the economy. In these cases the decline in housing is a deliberate outcome of Fed policy, not an accidental outcome to be avoided. In contrast, the most recent downturn was brought on by a collapse of a housing bubble. This made it qualitatively different from most prior downturns (the 2001 recession was also bubble induced) in several different ways. First, construction was proceeding at an extraordinary rate of more than 6.0 percent of GDP before the collapse, compared to an average rate of just over 4.0 percent of GDP. This meant that housing contracted far more …