Showing posts from February, 2016

On Eccles and QE in the 1930s

So last weekend I was at the Eastern Economic Association meetings, and I presented with Steve Bannister (on and off contributor to NK) a paper on Quantitative Easing in the 1930s. It's been a while since we looked at this work, which started long ago (4 years at least). One point worth noticing is that while most accounts of Eccles performance at the Fed suggest that he didn't do much (see Meltzer in his A History of the Federal Reserve), we suggest that he was crucial in pushing qualitative easing (the term first used by Buiter here), that is a shift in the composition of the Fed's balance sheet.
The figure shows that when Eccles assumed at the Fed, in 1934, QE, the increase of the balance sheet had already started, but the shift from short term government bills (blue ones) to long term bonds (green) had not. The dark line shows Eccles' policy, which had the objective of keeping long term interest rates at 2.5 percent, in order to allow for fiscal stimulus and susta…

On the blogs

Graph For the Day: Is QE4 Far Away? -- Roger Farmer on why the Fed might be forced to intervene. This one is a bit old, but worth reading, even if you don't agree with Roger on the effect of the stock market on the unemployment rate

Lessons from the Crisis: Ending Too Big to Fail -- New head of the Minneapolis Fed, Neel Kashkari says that financial reform did not go far enough and some banks are still too big to fail

New Keynesian Orthodoxy and Hysteresis -- Robert Waldmann, at Angry Bear, on the Jerry Friedman versus establishment economists debate, and on the fact that with the Kaldor-Verdoorn law (he doesn't cite it, but that's the source of hysteresis), short run effects of macro stimulus have a more significant impact on growth

On Austerity and the Economic Outlook at the Rick Smith Show

Undocumented Immigrants pay a lot of taxes

I have discussed this before. I explicitly argued that this was one the GOP myths about taxes, and I lumped it together with the notion that poor people don't pay taxes (Myth #3: 50% don't pay taxes, including immigrants).  Now a report from the Institute on Taxation and Economic Policy (ITEP) seems to confirm this view.

The report claims that undocumented immigrants living in the United States collectively pay an estimated $11.6 billion dollars each year in state and local taxes. And if their situation was regularized, they would pay even more. Add that to the fact that it does not seem that immigrants reduce wages, and the whole anti-immigration position seems more like what it really is. Xenophobia exploited by a demagogues preying on people that have had a hard time and are willing to find someone to blame. A dangerous mix.

Brexit and Euroskepticism

British exit from the European Union (EU) is more radical than Grexit, which basically was exit from the eurozone (EZ), the currency area, but not the union. Wynne Godley, for example, was against the euro (see this), but he was not against the EU. Quite the opposite, he was pro-Europe, as were many progressive economists, several connected to Labor (Lord Eatwell being an example). The whole isue now became relevant, since David Cameron, the prime minister, set the date for a referendum on Brexit for June 23rd. Map below shows the degrees of euroskepticism (as in EU membership, not EZ) around Europe.

Note that in the UK there is a significant amount of euroskeptics, more than in the parts of Europe that have suffered from the problems with the monetary union (source here). The UK and the countries with more developed welfare systems in Northern Europe (Denmark, Sweden, Finland) tend to have a less favorable view of the European Union.

I'll discuss the pros and cons, from an econ…

Size of government

Source: WEO, IMF
Nothing earth shattering. Just the size of the average government spending as a share of GDP between 2001 and 2015 in a few developed countries, all of which, but one, have comprehensive health coverage. So it's reasonable to assume that if the US wanted that (healthcare for all), it would have to increase spending to something closer to 40% of GDP, for all levels of government, rather than the current 35% or so. Nothing implausible about that (wink, wink, nudge, nudge, say no more).

Frank Knight on unemployment equilibrium

Luca Fiorito, my sometimes co-author, and Carlo Cristiano have published (subscription required) class notes from Frank H. Knight's business cycle course in the fall of 1936, that used Keynes' General Theory (GT) as one of his references. Two quotes from the notes by Perham Nahal are reproduced below.
The main postulate of Keynes: the supply curve for labor should be drawn in terms of money, with no reference to the value of money (real vs. money wages). There is no tendency for the price of labor to adjust itself so as to clear the market. It is not intelligent to take antithetical assumptions, as Keynes has done. There must be an enormous amount of inertia in an economic system to keep it from flying to pieces. Frictionless conditions are a fallacy. Because the classical assumptions did not work, they were not necessarily wrong. It is entirely possible that ‘frictions’ or undiscussed tendencies are responsible for deviations of actual conditions from what the classical econ…

Lord Eatwell in the Financial Times

A short Letter to the Editor, but worth reading. He clearly explains the policy failure since the global crisis and the reasons for the current problems in financial markets in developed and developing countries. He says:
The adage that, in the absence of the prospect of growing demand, cheap money amounts to “pushing on a string” has been once again confirmed in advanced economies by the slowest recovery from any modern recession. Instead of funding real investment, monetary expansion has resulted in a boom in asset prices — not just in real estate and equity markets, but in the flow of funds into emerging market corporate bonds in the search for higher return. All these asset markets are extremely unstable, as is now all too evident. And, as has been once again demonstrated in the last 7 years, financial instability leads to substantial real economic loss.

Yet in the face of evident policy failure, and of severe asset market distortions that can only lead to further financial insta…

On the blogs

The Pious Attacks on Bernie Sanders’s “Fuzzy” Economics -- David Dayen at the New Republic on the Bernienomics debate

The TPP: Investor-State Dispute Procedures are a Threat to Democracy -- Mehrene Larudee at Triplecrisis on dispute settlement provision of the TPP agreement

Are US taxes progressive all the way to the top 1%? -- Branko Milanovic is not sure, in this slightly older, but relevant post

NYT Zombie Sighting -- James Livingston, who was last week at Bucknell, on an even older post, discusses the strange persistence of Monetarism (I discussed this before here and here)

Crazy as Adam Smith: the Media Discovers the Kaldor-Verdoorn Effect

So Kevin Drum at Mother Jones discovers the Kaldor-Verdoorn effect, and the fact that growing demand might be the main cause of rising productivity, and idea as old as Adam Smith in his vent for surplus model (chapter 3 of the Wealth of Nations says that the division of labor, that is, productivity, which is the basis for development, is limited by the extent of the market, that is, by demand). I posted extensively on that here (all post by date here), and produced, as far as I know, the only methodology to separate the Verdoorn effect (long term trend effect) from the Okun effect (cyclical effect) with one of my graduate students long ago (see here). And yes this is in part why a Bernie type policy would actually lead to significant changes in employment and productivity.

Getting history right: Krugman continues his disinformation campaign

So Krugman continues to argue that Friedman's calculations are implausible. Well sure. But that's the point to some extent as Galbraith discussed here. The Plan involves huge (read yuge; wink, wink, nudge, nudge) spending, and it should have almost by definition implausible results looking from the perspective of recent history. Imagine the implausible effect that Social Security had on old age poverty. Or the incredible reduction in inequality that the New Deal policies had.

If you were in the 1930s, the historical record would suggest that an improvement in income distribution based on higher taxes on the wealthy and cheap college access to the masses would be implausible, and yet by the 1950s things had changed (see graph below). The historical record would say this was not possible.

The guy that used the graph above said: "The middle-class society I grew up in didn’t evolve gradually or automatically. It was created, in a remarkably short period of time, by FDR and …

On Bernie Sanders and the Democratic Establishment Economists at the Rick Smith Show

Jamie Galbraith's response to the critics of Gerald Friedman's paper on the impact of Bernie Sanders policies

There has been a debate following the NYTimes piece on left of center economists against Bernie Sanders. Doug Henwood replied here and Dean Baker here. Henwood does not discuss the Gerald Friedman paper that led to the whole discussion. Now Jamie Galbraith provided a nice reply to the left of center economists that suggested that Bernie's plans are not realistic. He says:
"What the Friedman paper shows, is that under conventional assumptions, the projected impact of Senator Sanders' proposals stems from their scale and ambition. When you dare to do big things, big results should be expected. The Sanders program is big, and when you run it through a standard model, you get a big result.

That, by the way, is the lesson of the Reagan era – like it or not. It is a lesson that, among today's political leaders, only Senator Sanders has learned." Read full letter here.

Davidson on Temin and Vines

The Big Short and post-film debate with Geoff Schneider and @NakedKeynes

Showing at The Campus Theatre this Saturday, Feb 20th, 4:00pm – THE BIG SHORT – This funny, fact-based film explores the very serious recent collapse of Wall Street and the insiders who saw it coming. Mondragon Bookstore and Susquehanna Valley Progressives are pleased to sponsor this film and a discussion panel of economic and business experts, immediately following the film. Panelists include Dr. Geoffrey Schneider, Professor of Economics, Bucknell University and Dr. Matías Vernengo, Professor Of Economics, Bucknell University. The panel will be moderated by Charles Sackrey, former Bucknell Professor of Economics and owner of Mondragon Bookstore. The panel is free and open to the public and will take place across the street at the Barnes & Noble bookstore's meeting room. Complimentary coffee and refreshments will be offered.

More info here.

PS: In short what I said on the debate, is that, while the film is good in portraying that the crisis was manufactured, and it was a swind…

Scalia, Partisanship bias, and Long Term Stagnation

So a student asked me if the nomination for the Scalia vacancy at the Supreme Court would have any macroeconomic impact. Can't imagine what kind of effect he was thinking about, but there is a relevant question on what are the effects of the inability of the legislative to get things done. The most obvious is the inability to pass a budget that deals with the slow recovery.

It used to be the case that both parties had a a very different fiscal agenda, with Democrats being for tax and spend, in particular spend on social welfare, while the GOP was for, at least nominally, for small government. And up to the Vietnam War, hawks tended to be Democrats (certainly before World War-II, most isolationists were Republicans). But as I noted before, there has been a switch in both parties, with the GOP being since Gerald Ford the party of Big Government.

In part, the switch is explained by the fact that the GOP has become the party of the neocons, and of the shadow government that requires …

5 years of Naked Keynesianism

Barking Keynesianism
The first post was this day in 2011. The name was based on Fox News criticism of Jamie Galbraith's corruption of youth at the University of Texas, Austin. He was teaching "Naked Keynesianism." And the rest is history.

On the blogs

How to Make a Mess of a Monetary Union, and of Analyzing it Too -- Jörg Bibow on the never ending European crisis

The Challenge before the Latin American Left -- Prabhat Patnaik on the Latin American Left. Not sure I agree Argentina was less on the left than some of the other cited. And the problem is not just the people blame the governments for the economic situation. In all fairness, in many cases the problems are caused by government policies. Worth reading

Fabio Petri: Walras on capital: interpretative insights from a review by Bortkiewicz -- Alejandro Fiorito at Revista Circus links to a paper by Petri. Always worth reading

A Clarification of the clarification of supermultipliers

After my post I got an email and post below by Franklin. Mind you, I still would refer to supermultiplier models as Kaldorian, and the models with autonomous investment as neo-Kaleckian. As Franklin notes Bortis, a Kaldorian and Sraffian, makes the transition to exogenous distribution, even if Kaldor himself didn't. Below the email and the post.

Dear Matias:

Great Post.Your use of the phrase “no independent investment function” to refer to induced investment models is unfortunately quite confusing.

This phrase since the classic survey of Hahn in Matthews has been used to refer to models in which full employment (or full capacity in Lewisian and neo-Marxian models) saving determines investment.

I am sure that what you mean is that in supermultiplier models there is no autonomous component in the (capacity creating) investment function. It would be much better to all of us if you changed that at no cost for you. If you do this , please omit this part from my uninvited guest pos…

Kaldorian and Sraffian supermultipliers: a clarification

This is a post for those interested in demand-led theories of growth. Not long ago I wrote a post on misconceptions about Sraffian economics. Marc Lavoie sent me a nice email about it, and a recent paper he published in Metroeconomica (subscription required), which comments on a paper I wrote with Esteban Pérez (working paper available here). In his discussion of supermultiplier models, which put the multiplier and the accelerator together to explain -- not fluctuations of the level of output around its normal position -- but the determination of trend or normal output. Lavoie says:
"Other post-Keynesians, also assume that non-capacity creating autonomous expenditures are the driving force, rather than investment. Serrano himself refers to Kaldor (1983, p. 9) to provide support for this reversal of causality. Fazzari et al. (2013) assume that there is some unidentified demand component that grows autonomously, in order to tame Harrodian instability; Godley and Lavoie (2007, ch. …

Global depreciation since the collapse of oil prices

One figure is worth a thousand words (negative number imply depreciation).
So, if you think China devalued a lot...

Source here.

PS: On Twitter some have argued that some depreciations are overestimated. My point remains. China did not depreciate much, comparatively. And besides as noted before there might be a connection between depreciation in the periphery and lower commodity prices.

On the blogs

Friedman responds to Thorpe on Single-Payer -- Gerald Friedman on the true costs of Medicare for all

Is the global economy headed for another crash? -- Ann Pettifor and others debate the issue. She thinks the crisis is "quite imminent." Mind you, I do agree that not enough was done to re-regualte Wall Street, not even close. But I don't see a global financial crisis as imminent

Hillary Is the Candidate of the War Machine -- Jeff Sachs on Hillary. And no, it's not about Wall Street

Jobs and Trade numbers at the Rick Smith Show

Unemployment is below 5%, and no inflation to be seen

Numbers are out,employment rose by 151,000 in last month, and December numbers were revised down too.Manufacturing added 29,000 jobs in January. The unemployment rate fell to 4.9 percent. Also, average hourly earnings increased by 12 cents last month, and at about 2.5 percent for the last year. So the unemployment rate has crossed the 5 percent barrier, but inflation does not seem to pick up. The natural rate keeps moving, and mainstream macro has very little to say about it.

Follow the Money

That's what Deep Throat said to Bob Woodward in All the President's Men. Good advice. I'm certainly not a specialist on campaign contributions, but Hillary Clinton said regarding Wall Street that "They’re not giving me very much money now, I can tell you that much" after the exchange with Anderson Cooper (video available here), and I decided to check it out. This website provides some comparative data on Hillary and Bernie's donors [I'm assuming the data is accurate and the info I provide is based on that assumption].

Hilary gets 80% of her funds from large donors, compared to 26% from Large Individual contributors for Bernie. At the top of her list the Soros Fund, with more than 7 million, while for Bernie it's Alphabet Inc., with less than 100,000. Not sure how she claimed to receive 90% from small donors.

If we take "Wall Street" to mean the sum of Securities & Investment, Real Estate and Misc. Finance, then she received about 21.5 m…

Lauchlin Currie's review of Keynes' General Theory

Curried Keynesianism in action The review with an intro can be read here (or here). Currie is often considered the first Keynesian in the Roosevelt administration (I suggested here that, while not a professional economist, that merit goes to Eccles), and was also the first to work in the White House, before the Employment Act and the creation of the Council of Economic Advisers (CEA). He was also later unjustly attacked as a Soviet spy, and Roger Sandilands has dealt with this here (subscription required). His biography of Currie is a must read.

Simon Wren-Lewis on New Classical Economics and the Financial Crisis

New paper by Wren-Lewis titled "Unravelling the New Classical Counter Revolution." It provides a strong New Keynesian critique of the New Classical/Real Business Cycle schools. He argues, correctly in my view, that the problem is the abandoning of the Keynesian method of analysis. I'm less keen on microfoundations. Or at least on marginalist microfoundations. But it is important to understand how much the fundamentalist views of Lucas and Prescott have affected the profession.

From the abstract:
To understand the position of Keynes's The General Theory today, and why so many policy-makers felt they had to go back to it to understand the Great Recession, we need to understand the New Classical Counter Revolution (NCCR), and why it was so successful. This revolution can be seen as having two strands. The first, which attempted to replace Keynesian policy, failed. The second, which was to change the way academic macroeconomics was done, was successful. Before the NCCR,…

The relevance of Keynes's General Theory after 80 years

By Thomas Palley, Louis-Philippe Rochon and Matías Vernengo*

This year marks two important anniversaries in macroeconomics: the 80th anniversary of the publication of Keynes's The General Theory of Employment, Interest and Money (1936), and the 70th anniversary of Keynes's premature death, at the age of 63. To mark these anniversaries, the first issue of the fourth year of the Review of Keynesian Economics is dedicated to Keynes.

The issue contains a symposium of papers titled ‘The Relevance of Keynes's General Theory after 80 Years’ and some previously unpublished archive material on Keynes. The unpublished material consists of notes from a 1936 University of California course taught by Frank Knight in which The General Theory was discussed, and a memorandum written by Lauchlin Currie, who is considered the first and most combative Keynesian in the Roosevelt administration during the early phases of the New Deal.

The 80th anniversary of The General Theory takes place at a…