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Showing posts from March, 2016

CEO compensation

According to Shue and Townsend most of the growth in CEO compensation has been based on options. Looking at the figure below I would say stocks have also played a role.

This is all in a period in which the CEO to worker compensation ratio was already at very high levels by historical standards. And by the way, it is also very high by international standards.

And you think a $15/hour wage is too high!

Domestic reasons for Yellen to remain dovish

The last estimate of real GDP growth in the fourth quarter of 2015 indicates that the economy expanded at 1.4%. Not very fast. Also, this week the Bureau of Economic Analysis (BEA) announced that personal consumption expenditures (PCE) increased 0.1%, and revised down the January number to 0.1%. In other words, consumption is slowing down, or so it seems. More importantly, the report says: "The February PCE price index increased 1.0 percent from February a year ago. The February PCE price index, excluding food and energy, increased 1.7 percent from February a year ago." In other words, core inflation remains below the 2% target, and it has decelerated a bit, since in the previous report it was indicated that core inflation increased 1.3% on a yearly basis.

So there are good reasons for Janet Yellen to remain dovish, and suggest that interest rates will not increase significantly. Actually, there are good domestic reasons for that, even if she seems to emphasize the uncerta…

Default resolution in historical perspective

If Argentina finalizes an agreement with the holdouts, the so-called Vultures, it will close a long process that started with default in 2002, and was followed by renegotiations with about 93% of bondholders in 2005 and 2010. How fast has this process been when compared to other debt rescheduling processes? Figure below by Christian Suter (subscription required) looks at the average duration of defaults on foreign bonds in three different periods. Even though it misses the debt crisis of the 1980s, since that one was related to bank loans rather than bonds, the numbers might be pretty good for the whole period.
The average for the whole period is about 9 years, which makes the Argentine situation rather long, and comparable to the 1821 to 1870 period. The table also shows what he refers to as the durability of debt settlements, or time period between the conclusion of the debt settlement and the outbreak of the next debt default or rescheduling. Let's hope Argentina does better o…

Financial sector hypertrophy and financial transaction tax

The volume of financial transactions has stabilized since the Global Financial Crisis of 2008, but remans at very high levels, as shown in the figure below. With GDP at about 18 trillions the volume of financial transactions is about 25 times the size of GDP. The potential problems associated to a hypertrophied financial sector.

The source is this paper that discusses the possibilities of a financial transactions tax (FTT), something that has been proposed by Bernie Sanders. And as the authors note: "The revenue potential of a FTT stems from the enormous volume of nancial transactions, which have a value many times GDP."

On the blogs

Two reasons DSGE models are such spectacular failures -- Lars Syll on the limits of DSGE models, including New Keynesian ones. He notes correctly that even the New Keynesian ones have an intertemporal consumption model, and have abandoned the old multiplier story
Helicopter drops might not be far away -- A bit old, but Martin Wolf suggests that if fiscal policy is off the table, then central banks could "send money, ideally in electronic form, to every adult citizen"

Why the Fed Should Raise Rates and Purchase More Assets -- Old, but not as much. Where Roger Farmer argues that "the Phillips Curve is like the Planet Vulcan. Although observed by eminent astronomers in the early twentieth century: it was never actually there." Which is probably correct, but he then concludes that the Fed should hike rates, which is probably not

Obama's Latin American Legacy

In 2009 I wrote that: "a progressive U.S. policy agenda toward Latin America should express support of and solidarity with the region’s left-of-center governments themselves." And central to that agenda was the need for: "would be reversing the corporate bias of the free trade agreements (FTAs) that have been signed over the past decade and a half." How well has Obama done in his almost 8 years by that yardstick, you ask. Not very well.

Obama never cozied up to the left of center governments in the region, even though they promoted an improvement in income inequality, which has no other parallel in the world in the 2000s, when inequality increased in almost every region. Worse it is very clear that his administration was close to several groups that tried undermine the left of center governments. His role in the 2009 coup in Honduras against democratically elected President Manuel Zelaya, for example, is now plaguing his ex-Secretary of State Hillary Clinton. As n…

Bernie Slanders: How the Democratic Party Establishment Suffocates Progressive Change

By Thomas I. Palley (guest blogger)

The Democratic Party establishment has recently found itself discomforted by Senator Bernie Sanders’ campaign to return the party to its modern roots of New Deal social democracy. The establishment’s response has included a complex coupling of elite media and elite economics opinion aimed at promoting an image of Sanders as an unelectable extremist with unrealistic economic policies.

The response provides a case study showing how the Party suffocates progressive change. Every progressive knows about the opposition and tactics of the Republican Party. Less understood are the opposition and tactics of the Democratic Party establishment. Speaking metaphorically, that establishment is a far lesser evil, but it may also be a far greater obstacle to progressive change.

Read rest here.

Latin America's turn to the right and American policy

Tom Jobim said that Brazil was not for beginners, and he was right. The Brazilian economy is in free fall. As I noted before the causes are strictly internal, and not related to any fiscal problem. Inflation was low, even if closer to the top margin of the inflation target. Devaluation of the currency has led to higher inflation, on the low two digit level, just slightly above 10%. At the same time, fiscal contraction has led to a collapse of about 3.5% of GDP last year. There is little need for discussing that again. Nothing much has changed.

What I said about corruption in that not so old post from last December still stands. In short:
(1.) there is no evidence that corruption increased;*
(2.) corruption is not limited to the government or the parties in its coalition;
(3.) the central issues related to corruption are the structural ones, the ones that make it a necessary feature to manage the country (and those have been there for a long time). Things have, however, got out of con…

Fed holds on the interest rate hike, for now

From the Federal Reserve Board press release:
"The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen. However, global economic and financial developments continue to pose risks. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further." For that reason:
"The Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation." There was one dissenting vote, Esther George the president of the Federal Reserve Bank of Kansas City, …

Free trade and Portuguese decline

Last weekend, as a result of Brad DeLong's post on free trade, we had a brief Twitter exchange. He had suggested that the Heckscher-Ohlin (HO) model* implies gains from trade associated to comparative advantage. He went further and suggested, after I implied that the Methuen Treaty between England and Portugal had not been favorable to the latter, that Portugal had indeed benefited greatly from free trade.

It is important to note, before we get to Portugal, that the HO model, which is a direct application of marginalist theory of value to international trade, arguing that specialization depends on relative scarcity, with countries exporting the goods that use intensively the factor of production that is abundant, is open to the capital debates critique, as shown by Ian Steedman long ago. So the HO model results lack generality, and it is NOT possible to guarantee gains of trade, as suggested by Brad. Actually, there should be no surprise that one finds paradoxes and problems, lik…

Argentina and global integration

Decent Vultures
A short note in Spanish for Página/12 on the new direction of the Macri's government, with the emphasis on free trade and financial deregulation. Will try to post something longer in English later this week.

On the blogs

The Benefits of Free Trade: Time to Fly My Neoliberal Freak Flag High! -- Brad DeLong sides with Krugman on the benefits from trade. He cites the Heckscher-Ohlin model basically, and I explain here the limitations of that model based on the capital debates (the Ricardian model is at least logically consistent, but also ultimately does not explain trade patterns)
The Mundell-Fleming Model and Republican Economics -- Pro-Growth Liberal (PGL) at Econospeak, in an older post, notes that GOP candidates are more likely to be 'protectionist' than Democrats (yes, I know, it's about managed trade, not protectionism). At any rate, true about Trump, not the others necessarily. And incorrect on Bernie. PGL thinks that fiscal and monetary expansion would work with a devalued dollar and stronger exports (he should abandon the Mundell-Fleming model)
Senator Sanders and Financial Regulation -- Menzie Chinn on the positions of several politicians on financial regulation. Not sure Hillary wou…

Budget’s exercise to achieve financial stability at cost of real economy in India

By Sunanda Sen* (Guest Blogger)

Success achieved by the Indian economy , as highlighted in the recent budget of the central government rests on four pillars which include current GDP growth rate at 7.6%, drop in inflation ( as measured by the CPI index) around 6%, a record stock of official reserve at $350bn and most importantly, a reduced fiscal deficit at 3.5% of current GDP.

Looking beyond the official figures to convey the positive note, one comes across reservations; first that the GDP growth, calculated by the earlier method so long followed, would have generates a rate around 5% and no more. Second that the stock of official reserves have much to do with inflows of short term and volatile capital flows which may evaporate without much warnings. Third the comfortable inflation at present may also not last very long if the current lows in oil and commodity prices reverse. Finally, to come to the much proclaimed claim of achieving growth via financial stability with reducti…

Tom Palley on Paul Krugman and Free Trade

Tom's new post titled 'Self-Protectionist Moment: Paul Krugman Protects Himself and the Establishment' criticizes Krugman's role as an establishment economist and defender of free trade. He says: Paul Krugman has a new op-ed ('A Protectionist Moment?') in which he tries to walk away from his own contribution as an elite trade economist to the damage done by globalization, while also lending his political support to Hillary Clinton and the neoliberal globalization wing of the Democratic Party.  His article inadvertently spotlights all that is wrong with the economics profession through the lens of the trade debate.  On one hand, Krugman writes 'So the elite case for ever-freer trade is largely a scam, which voters probably sense even if they don’t know exactly what form it’s taking. On the other hand, he writes 'In this, as in many other things, Sanders currently benefits from the luxury of irresponsibility: he’s never been anywhere close to the levers …

Free trade loses political support

Wall Street Journal notes the obvious, given the US presidential campaign. Here some old entries that explain the theoretical problems with "free trade." Some are more theoretical (first three) and others more in tune with the issues related to Free Trade Agreements (FTAs) and Bilateral Investment Agreements (BITs).

On 'free' and managed trade (Ricardian model)

More on "free" trade (HOS model)

Free trade again (on the role of absolute rather than comparative advantage)

On free trade and economics consensus: a response to Mankiw

The Colombia FTA: Only Corporations Win

Bilateral Investment Treaties and the Supreme Court or Do Cry for Argentina

Trans-Pacific Partnership creating strange bedfellows

More on Trans Pacific Partnership (TPP)

US Senate approves fast track authority, and Krugman doesn't

And a video from Ilan Ziv's Capitalism:

Capitalism and comparative advantage

Wealth of Nations at 240

Last month Keynes' General Theory was 80. Today Adam Smith's Wealth of Nations turns 240 (h/t Paulo Gala)! Below the often misunderstood quote on the notorious invisible hand. He says:
"As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the socie…

Desegregation and dissent at MIT's PhD program

I read recently this paper (subscription required) by Sandy Darity and Arden Kreeger in HOPE. In the paper they show how the 1970s efforts to attract more African-American PhD students were eventually abandoned, since faculty deemed the project a failure. They argue that the:
"factor that shaped the MIT faculty’s conclusion that the experiment had failed was their impression that black graduate students—particularly when they entered the program in sufficiently large numbers to form a Black Graduate Economic Students Association—were too concerned with social issues and the black community to participate in 'real' economics. MIT’s faculty, which did not include any black faculty members (and never has included any black faculty members on tenure track), seemed to want its black graduate students to replicate their own interests and style of doing economics. There was little enthusiasm for black economists bringing a set of intellectual questions and perspectives to the f…

Austerity and the weak recovery

From Papadimitriou, Nikiforos, and Zezza's new Levy Strategic Analysis:
"over the last 25 years policymakers in Washington have become increasingly fiscally conservative. The current recovery is the only one in the postwar period during which government expenditure has decreased in real terms. Fiscal austerity, together with weak foreign demand, has put the entire burden of supporting aggregate demand on the private sector spending in excess of its income and borrowing. This has led to a rapid increase in the private sector debt-to income ratio in the United States." Read full report here.

More on the Argentine adjustment

I'll post a longer discussion later, but I wanted to provide a short update on the situation in Argentina. Everything indicates, as I had noted before, that the government of Macri wanted to accelerate inflation, with depreciation and an increase in the electricity bill.Macri rehired the technician (Graciela Bevacqua) that had been fired by Cristina Kirchner, and that led to the (mostly true) critique that inflation was higher than the official measure indicated.  More importantly, for a government that constantly bashed the previous administration for lying about inflation, they fired the same technician as soon as it became obvious that inflation was accelerating (you can check the numbers in Cavallo's website; this is the son, not the infamous finance minister; as it can be seen inflation accelerates again in November 2015, right after the election, with the huge depreciation of the peso).

Also, it is clear that the economy is slowing down, with the index of production pro…

Aldo Ferrer (1927-2016)

Aldo Ferrer and Raúl Prebisch (h/t Marcelo Rougier)
I met him in a few conferences. His book on the economic history of Argentina stands with Celso Furtado's on Brazil and Anibal Pinto's on Chile as a mark of the structuralist, associated with Economic Commission for Latin America (ECLA), interpretation of economic development in the region.

From the Buenos Aires Herald: "Economist and former economy minister Aldo Ferrer has died today at the age of 88. Politically related to the Radical Party, Ferrer earned a vast public service career." Read the obituary here.

Health, Education and Bernie Sanders

There has been for quite a while now discussions on why younger voters prefer Bernie over Hillary in the Democratic contest (see this WAPO piece from last year, or this in the NYTimes, or this more recent by Nate Silver). Maybe someone already noted this before and I missed it, but it seems that the obvious answer is related to Bernie's proposals on health (Medicare for all) and education (tuition and debt free college). The other issues do not have an evident difference in their effects on young versus older voters. One would think that all democrats and left-leaning independents think that corporations have too much power and that inequality is beyond reasonable levels (the one issue in the campaign, arguably).

In the case of health, the US is unique among developed countries to have created a separate health insurance for the elderly. The reasons for that are complex and can only be understood in historical context. In the 1930s, unemployment was the priority and providing and…

On the blogs

Romer And Romer Stumble -- Robert Viennau's brief discussion on the last round of shots in the Bernienomics affair

Republicans and Trade Wars -- Paul Krugman on the GOP's views on trade, which he suggests is more protectionist than Dems

Business, governance, and the new corporate university -- David Ruccio on the debate opened by the Mount Saint Mary affair about the role of university presidents that come from outside academia

Tom Palley on Zero Lower Bound (ZLB) Economics

From the abstract:
This paper explores zero lower bound (ZLB) economics. The ZLB is widely invoked to explain stagnation and it fits with the long tradition that argues Keynesian economics is a special case based on nominal rigidities. The ZLB represents the newest rigidity. Contrary to ZLB economics, not only does a laissez-faire monetary economy lack a mechanism for delivering the natural rate of interest, it may also lack such an interest rate. Moreover, the ZLB can be a stabilizing rigidity that prevents negative nominal interest rates exacerbating excess supply conditions. Read full paper here.

Latin America's growth

From the presentation with Esteban Pérez. The graph shows that growth in the region is increasingly tied to terms of trade changes and financial flows.

This was something we discussed a few years ago here.