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Showing posts from April, 2012

From Financial Crisis to Stagnation

By Thomas Palley

Marshall McLuhan, the famed philosopher of media, wrote: “we shape our tools and they in turn shape us”. His insight also applies to the economy which is shaped by economic policy derived from economic ideas, and it is the theme of my recent book which argues the global economic crisis is the product of flawed policies derived from flawed ideas.

Broadly speaking, there exist three different perspectives on the crisis. Perspective 1 is the hard-core neoliberal position, which can be labelled the “government failure hypothesis”. In the U.S. it is identified with the Republican Party and the Chicago school of economics. Perspective 2 is the soft-core neoliberal position, which can be labelled the “market failure hypothesis”. It is identified with the Obama administration, half of the Democratic Party, and the MIT economics departments. In Europe it is identified with Third Way politics. Perspective 3 is the progressive position which can be labelled the “destruction of s…

The inflation expectations fairy

There are confidence fairies and there is the inflation expectations fairy. It's a 4% fairy apparently. I'll explain. So Krugman correctly points out always that the more fundamentalist neoclassical economists (the Talibans that love price flexibility and instantaneous adjustment to full employment, not the moderates that also believe in a natural rate, but think it takes a while to get to it like Krugman himself) believe that the economy would recover if only a proper environment for investment was created. Hence, if confidence returned we would have a recovery.

They obviously invert causality between confidence and recovery. As noted by Marriner Eccles long ago: "confidence itself is not a cause. It is the effect of things already in motion. (...) What passed as a 'lack of confidence' crisis was really nothing more than an investor's recognition of the fact that new plant facilities were not needed at the time." Investment is the result of a growing ec…

Shift happens indeed

 The Chronichle of Higher Education has a very good piece on the 50 year anniversary of Thomas Kuhn's classic The Structure of Scientific Revolutions (SSR). It is worth remembering that the official methodology in economics remains Popperian.

The conventional history of ideas in economics, as represented by Schumpeter’s monumental History of Economic Analysis or by Mark Blaug’s work is one that emphasis the continuity and growth of knowledge. Hence, the frontier contains the set of accepted truths and the past is a history of how true knowledge was achieved. Knowledge progresses in a twofold process, first conjectures are made. Conjectures are not the ultimate truth, but are accepted while not proven incorrect. Then, tests are designed to falsify the conjectures. Hence, in Popperian terms theories can never be proven true or verified, but they can be accepted while they are not refuted. In other words, there is rational progress in science, including economics. Falsification is,…

Argentina is right

By Luiz Carlos Bresser-Pereira

There is no sense in leaving to a foreign company the control of a sector that is strategic for a country's

Argentina once again became the target of the North, of the “common sense” that comes from Washington and New York, and decided to retake State control of the YPF, the country's major oil company, formerly under control of a Spanish company. The Spanish government is indignant, the company protests, both swear to take all legal measures to protect their interests. The Wall Street Journal states that “the decision will damage Argentina's reputation even further with international investors”. But I ask: does the development of Argentina depend on international capital, or is it the owners of that capital who cannot agree when a country decides to protect its interests? And, as for oil industry, is it reasonable for the State to be in control of its most important company, or should it leave everything under the control of multinational corp…

The reform of the central bank charter was necessary for growth and stability

By Sergio Cesaratto, Marc Lavoie and John Weeks
“Give me a one-handed economist! All my economists say: on the one hand… on the other…” once famously said the U.S. President Truman. In his interview to La Nación professor Lance Taylor provides the perfect example of a two-handed economist: he supports growth, but he warns of the dangers of inflation; he approves of a central bank that cooperates with fiscal authorities, but he warns of excessive public spending; he gives his support to import controls, but he warns of their possible “micro-inefficiencies”. Professor Taylor thus plays the two-handed game of criticizing whatever the Argentineans could possibly do, even if we are not completely convinced that he actually said in the interview that he is in favor of an Independent Central Bank, as the headline would make you believe.
Of course we share, and we are sure that the Argentinean government shares, some of these preoccupations – although we are less concerned with the idea that…

The IMF with a thorn on its side

By Martin Khor

A serious impasse emerged in the preparatory committee of UNCTAD XIII, which is tasked with preparing the draft outcome document that Ministers are scheduled to adopt at the end of UNCTAD XIII in Doha on 21-26 April.

While the previous two or three conferences were rather tame affairs, it looks like UNCTAD XIII (whose general theme is development-centred globalization) will be more difficult, with the organisation’s future scope of work and influence at stake.

UNCTAD was set up in 1964 to support developing countries to strengthen their weak position in international economic structures, and to design national development strategies.

It became a kind of secretariat on behalf of developing countries, providing a small pro-development balance to the huge organisations dominated by the developed countries, such as the OECD, the IMF and World Bank.

Read the rest here.

Also read this piece by Martin Khor too.

Galbraith on inequality

Here an interview with Jamie Galbraith on his new book. An important point about inequality is that it peaked around 2000 and in the first decade of this century it has improved. That is often missed by economists. According to Galbraith:

"Worldwide, inequality rose sharply from 1980 to 2000. This is a pattern you find in my data, which measure pay inequalities within countries, and also in measures of inequality between countries and in measures of the profit share in the rich countries. It's well-confirmed at this point. The pattern closely tracks the evolution of the global debt crisis: first in Latin America and Africa, then in Central and Eastern Europe, finally in Asia. Worldwide, as in the U.S., the peak appears to have come in 2000. Since then, with lower interest rates and rising commodity prices, conditions have improved, especially in South America where inequality has declined quite a bit. Even in China we observe a peaking of inter-regional inequality in the mid-…

Just prices, elephants and kings

Well I'm not going to get medieval on your rear ends. Yep just price is the old scholastic idea that there is a fair or ethical price that can be charged for a commodity, and beyond that the producer is obtaining unfair earnings. It was the basis for the attacks on usury. David Friedman (1987), in the old New Palgrave (the one edited by Eatwell, Milgate and Newman) argued that the dominant view suggested that the just price was "the price which allowed the producer to maintain his proper place in society."

I wouldn't expect The Economist to come on the side of ethics in market relations, but that's what they have done. The Economist already has a fair price for YPF (see here), the oil company that was partially nationalized by the government of Argentina.
"Argentina could presumably mollify Spain by paying a fair price for YPF—which would most likely be half of the $15 billion or so the company was worth before the Argentine government began harassing it.&q…

Recovery with a human face

There have been many fora for discussions about the crisis, and its consequences on the more vulnerable around the globe. The electronic debate moderated by United Nations was among the more interesting. Topics ranged from the impacts of the crisis to policy responses and alternative options for socio-economic recovery. Now a summary of the debates is avaliable here:

A Recovery with a Human Face? Summary of a UN e-discussion

A more thorough analysis of the issues debated can be found in the recent publication A Recovery for All: Rethinking Socio-Economic Policies for Children and Poor Households, which can be downloaded for free here.

Thanks go to Isabel Ortiz for sharing the information, and for her commitment to the whole project.

Palley on the crisis and more

Philip Pilkington interviews Tom Palley on his new book at Naked Capitalism.

In the news

Two big news today.

The US, as expected, managed to keep the presidency of the World Bank. Kim was chosen over more qualified and progressive alternatives (José Antonio Ocampo, in particular). See more here.

And Argentina has nationalized the oil company (YPF) that had been privatized during the neoliberal period. By the way, notice that neither Brazil nor Mexico, the other two large countries in Latin America, had privatized their oil companies. See more here.

Useless European austerity

By Sergio Cesaratto*

The European financial crisis is not over, it has just begun. In the long run, the Greek tragedy will appear just as one minor episode. It is not difficult for the Argentineans to understand the origin of this crisis, as I shall shortly explain, although they will still be surprised as to why one of the richest regions in the world and a world reference for growth with social fairness is committing suicide by adopting austerity measures that aggravate, rather than solve, the crisis.

The European Monetary Union (EMU) was born out of a French political design of linking for good the post-unification German destiny to Western Europe. The greater Germany would have otherwise looked East - as the facto it has anyway later done by becoming the manufacturing hub of Central and Eastern Europe where it has decentralized her low-value added productions. By participating in the EMU, Italy and the other Southern countries aimed to import the German fiscal, monetary and labor di…


Last week, guest blogger Robert Wade sounded the alarm about efforts on the part of some developed country governments to severely restrict the mandate of the UN Conference on Trade and Development (UNCTAD) at the organization’s April 21-26 ministerial conference in Doha, Qatar. We follow up on that post with a sign-on letter from former UNCTAD senior staff members urging that the institution’s broad mandate be maintained, as a critical source of heterodox economic thinking and policy analysis. We reprint their letter and signatories below.

Read the letter here.

Prices and quantities

Mainstream economics suggests that prices and quantities should be treated simultaneously, as it should be if market prices as determined by supply and demand are at the center of the analytical framework. With supply and demand, it must be the case that the quantity produced, and the equilibrium price, both are determined simultaneously. Further, it is the case that, with price flexibility, the quantity produced is optimal from the perspective of the utilization of resources and the preferences of the agents. And if that is true for bananas, or any other commodity for that matter, it must be true too for labor and ‘capital.’

As I discussed before, in particular with respect to capital, this approach (supply and demand or marginalist), which contrasts with the surplus approach, has serious problems. Even if we dismiss, for simplicity sake, the subjective part (about preferences) and concentrate just on supply conditions, the difficulties are insurmountable. Producers only supply more …

Buffett rules

Brief comment by Jamie on Buffett's rule, that is a minimum tax of 30% on millionaries (annual income above a million). His point is that it would be only symbolic, from the point of view of additional revenue, but it would be important for pushing the debate on income distribution. Hey, anytime we talk about millionaires rather than 'job creators' I'm happy!

PS: More here, where he also talks about his proposal to increase the minimum wage to US$ 12.

Inequality and economic instability

Jamie Galbraith's new book  is out. The main thesis in the book is that the inequality of the past three decades, driven fundamentally by financialization, led inexorably to boom and bust instability. A recent interview about his book and the current economic situation can be found here.

Is China the new #1?

The coming of the Chinese century and the final demise of American hegemony have been announced frequently as a sure thing. I have dealt with several of the issues associated with that, from the misconception of the fears about the dollar as the key currency (yep, will continue to be the unit of account in international affairs for a long time) to the question of the global imbalances (the problem is not that they are big, but the fact that they are not big enough; if the US grew decently and pushed the world economy its trade deficits would be larger).

Here I want just to point out a recent study that looks at corporations. The study shows that a small number of financial institutions basically controls the overwhelming majority of transnational corporations (TNCs). To be precise "only 737 top holders accumulate 80% of the control over the value of all TNCs." These, mostly financial, institutions "are at least in the position to exert considerable control, either form…

Not so Keen on Krugman

I have been critical of the theoretical positions held by Krugman for a while now, even if he and DeLong, and even Summers, have been useful for policy reasons. Now a lengthy debate between Krugman and Steve Keen, a very pragmatic and reasonable post-Keynesian (and I guess part of MMT tradition) that understands endogenous money has developed [a good summary with all the links here].

First, and foremost endogenous money implies that the rate of interest is exogenous and determined by monetary authorities. That per se is not necessarily in contradiction with a neoclassical/marginalist view according to which the rate of interest equilibrates investment to full employments savings, as Krugman clearly believes. Wicksell [see here] certainly did not think so either.

For Wicksell in a giro system, in which all transactions were recorded as debit/credit relations, credit could expand indefinitely, but in the real world, bank reserves would vanish and lending would eventually collapse if th…

The Economist and Argentina

Central Bank Independence is the rallying cry of the Economist againts Argentina's new law regulating the functioning central bank. Argentina will use the central bank as a piggy bank for the government, and that will lead to inflation. This is a bit ironic since it comes after the worse crisis in capitalism since the Great Depression and during the worst European Crisis after the launching of the euro, which threatens the very existence of the currency, and both should at least lead to some revision of central bank practices. Also, one should note the independence of the European Central Bank is part of the problem in the case of Europe, since if the ECB bought small amounts of Greek debt the draconian adjustment would be unnecessary.

The only thing worth about the piece is the brief objective description of what the central bank' new charter does, namely:
"It can now be required to transfer to the treasury cash equal to 20% of government revenues plus 12% of the money …