Yearly Archives: 2017

New Book: Advances In Endogenous Money Analysis

There’s a nice new book titled, Advances In Endogenous Money Analysis, edited by Louis-Philippe Rochon and Sergio Rossi.

There’s a great chapter on Nicholas Kaldor’s views on money over the years by John E. King and another by Marc Lavoie titled, Assessing Some Structuralist Claims Through A Coherent
Stock–Flow Framework. John E. King also discusses the importance of fiscal policy in Kaldor’s work:

Kaldor continued to insist on the importance of fiscal policy. The first point in his ‘constructive programme of recovery’ from the world stagflationary crisis of the early 1980s was international agreement on ‘coordinated fiscal action including a set of consistent balance of payments targets and “full employment” budgets’ (Kaldor, 1996, pp. 86, 87). Existing budget deficits, he maintained, were

largely the consequence of the low level of activity. On a ‘full employment’ basis they would show a highly restrictive picture – they would show surpluses and not deficits. Contrary to appearances, the requirement of stability is for expansionary budgets – with lower taxes and higher expenditure, and not further fiscal restriction (as is advocated, for example, by M. de Larosiere of the International Monetary Fund). (Ibid., p. 87)

International coordination was critical to the success of this strategy. Trade liberalization was not consistent with full employment: ‘under conditions of unrestricted free trade the actual volume of production and trade may in fact be considerably less than under some system of regulated trade’ (ibid., italics in the original).

Link

Thomas Palley — The General Theory At 80

Thomas Palley’s new paper titled, The General Theory At 80: Reflections On The History And Enduring Relevance Of Keynes’ Economics:

This paper reflects on the history and enduring relevance of Keynes’ economics. Keynes unleashed a devastating critique of classical macroeconomics and introduced a new replacement schema that defines macroeconomics. The success of the Keynesian revolution triggered a counter-revolution that restored the classical tradition and now enforces a renewed classical monopoly. That monopoly has provided the intellectual foundations for neoliberalism which has produced economic and political conditions echoing the 1930s. Openness to Keynesian ideas seems to fluctuate with conditions, and current conditions are conducive to revival of the Keynesian revolution. However, a revival will have to overcome the renewed classical monopoly.

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Do Bank Recapitalisation By The Government Lead To Higher Fiscal Deficits?

Yesterday, the Indian government announced a $32 billion plan to recapitalise some banks. These banks have large government ownership. Such issues remain controversial because the government is seen as allowing a lot of bank debtors get away with defaulting on their loans. At any rate, the topic for this post is whether the government plan leads to a rise in deficit or not.

The Chief Economic Advisor clarified on Twitter than according to international standards, it doesn’t lead to a rise in fiscal deficits over the periods during which recapitalisation happens. But people don’t seem to be convinced. So here’s an attempt.

In short, a recapitalisation of banks by the government by an amount of say $100 doesn’t lead to an increase of $100 in deficit. There are some complications, as highlighted below.

It shouldn’t matter but those arguing whether it leads to a rise in deficits are motivated to do so since acceptance by the government will lead to a fall in government expenditures since they are—incorrectly—committed to “fiscal responsibility”.

In the system of national accounts—the latest update of which is the 2008 SNA—there are three main types accounts in the transactions flow account:

  1. Current accounts
  2. Capital account
  3. Financial account

The current accounts record things such as production, generation and distribution of income and so on.

The capital account records transactions in non-financial assets. Para 10.1 of the 2008 SNA describes it:

The capital account is the first of four accounts dealing with changes in the values of assets held by institutional units. It records transactions in non-financial assets. The financial account records transactions in financial assets and liabilities. The other changes in the volume of assets account records changes in the value of both non-financial and financial assets that result from neither transactions nor price changes. The effects of price changes are recorded in the revaluation account. These four accounts enable the change in the net worth of an institutional unit or sector between the beginning and end of the accounting period to be decomposed into its constituent elements by recording all changes in the prices and volumes of assets, whether resulting from transactions or not. The impact of all four accounts is brought together in the balance sheets. The immediately following chapters describe the other accounts just mentioned.

[emphasis: mine]

The financial account is described in para 11.1:

The financial account is the final account in the full sequence of accounts that records transactions between institutional units. Net saving is the balancing item of the use of income accounts, and net saving plus net capital transfers receivable or payable can be used to accumulate non-financial assets. If they are not exhausted in this way, the resulting surplus is called net lending. Alternatively, if net saving and capital transfers are not sufficient to cover the net accumulation of non-financial assets, the resulting deficit is called net borrowing. This surplus or deficit, net lending or net borrowing, is the balancing item that is carried forward from the capital account into the financial account. The financial account does not have a balancing item that is carried forward to another account, as has been the case with all the accounts discussed in previous chapters. It simply explains how net lending or net borrowing is effected by means of changes in holdings of financial assets and liabilities. The sum of these changes is conceptually equal in magnitude, but on the opposite side of the account, to the balancing item of the capital account.

[emphasis: mine]

A recapitalisation of banks is an exchange for equities issued by the bank for funds. The government might raise funds via auctions. The Indian government is even planning to issue something called “recapitalisation bonds” which will be a direct exchange of those bonds with banks for equity. At any rate, these transactions for the government are likely to change the financial account and won’t enter the current accounts and the capital account. So these don’t change the deficit, with the exception below.

It could be the case that the purchase of equity by the government could be not at the market value. So there’s something called capital transfers.

There was a good publication by the BEA which appeared in the Survey of Current Business, February 2009. 

click for the pdf file

So the note says:

… consistent with the recommendations in the newly updated international guidelines, System of National Accounts 2008 (SNA), in the fourth quarter of 2008, BEA recorded a portion of the purchase of preferred stock through the TARP as capital transfers; this portion was calculated as the difference between the actual prices paid for the financial assets and an estimate of their market value. These capital transfers recognize that the federal government paid over market value for these financial assets. Net government saving was not affected by the capital transfers, but net government lending or borrowing was reduced as shown in NIPA tables 3.1 and 3.2.

So the full amount of the recapitalisation doesn’t affect the deficit.

In other words, government recapitalisation of banks for an amount $100 doesn’t increase the deficit by $100, but only by the amount mentioned above.

There’s a technicality. If a bank is fully government owned, then it’s the case that the full amount of recapitalisation is the capital transfer. Else it is not.

Also, once a bank is recapitalised, the government pays interest on the bonds and also receives dividends from the ownership. These affect the deficit, and the numbers are also different to the case when a bank isn’t recapitalised or recapitalised by the markets. But for the current purpose, it’s not that important.

It should be simple to understand. If you borrow to buy financial securities for $100, it doesn’t change your deficit or net borrowing (except for brokerage fees and transaction taxes). Your net lending is the difference between your disposable income and expenditure on goods and services. You have borrowed to buy some financial securities but you are also a lender.

Anyway, this simple point was missed even by the US Treasury!

An Important Note By The United Nations On The IMF And The World Order

I recently came across a phrase, social silence, which Gillian Tett of FT describes:

As Pierre Bourdieu, the French anthropologist and intellectual, observed in his seminal work Outline of a theory of practice, the way that an elite typically stays in power in almost any society is not simply by controlling the means of production (i.e. wealth), but by shaping the discourse (or the cognitive map that a society uses to describe the world around it.) And what matters most in relation to that map is not just what is discussed in public, but what is not discussed because those topics are considered boring, irrelevant, taboo or just unthinkable. Or as Bourdieu wrote: “The most successful ideological effects are those which have no need of words, but ask no more than a complicitous silence.”

Very few talk of the world order and how it operates. The current world order can be described as a neoliberal. It is a system of free trade (or more generally globalization), tight fiscal policy, deregulation and privatization.

The IMF is one institutional which has been responsible for maintaining this world order. Since governments need exceptional financing, they are arm-twisted by the IMF.

A recent United Nations General Assemby notePromotion Of A Democratic And Equitable International Order, has recognized this and criticizes the IMF strongly. Many economists and pundits deny there’s something called neoliberalism but the note is open about the ideology and the word.

In fact, IMF advocacy of structural adjustment has privileged powerful corporate interests and created a vicious cycle of dependence for borrower countries. As noted by Peter Dolack:

Ideology plays a critical role here. International lending organizations … consistently impose austerity. The IMF’s loans, earmarked … to pay debts or stabilize currencies, always come with the same requirements to privatize public assets (which can be sold far below market value to multi-national corporations waiting to pounce); cut social safety nets; drastically reduce the scope of government services; eliminate regulations; and open economies wide to multi-national capital, even if that means the destruction of local industry and agriculture. This results in more debt, which then gives multi-national corporations and the IMF, which enforces those corporate interests, still more leverage to impose more control, including heightened ability to weaken environmental and labour laws.

and also:

IMF still appears more committed to the obsolete neoliberal economic
model.

The report is 18 pages long and critical of the IMF from the start to the end. Please read. You won’t find any discussion of the report in the mainstream media.

Link

Gennaro Zezza — Modeling The Macroeconomic Effects Of A Universal Basic Income

In August, Gennaro Zezza and his co-authors Michalis Nikiforos and Marshall Steinbaum had a paper for the Roosevelt Institute, studying the effects of a Universal Basic Income. The model uses the Levy Institute‘s model.

The idea is simple. If a basic income is provided for everyone, it raises domestic demand because of higher consumption and hence leads to higher output. This is easy to see if there’s no rise in tax rates. If tax rates are increased so that the income provided matches the taxes raised, it’s still a stimulus to the economy, since the propensity to consume for people with lower incomes (or no income otherwise) is higher.

From the introduction;

We examine three versions of unconditional cash transfers: $1,000 a month to all adults, $500 a month to all adults, and a $250 a month child allowance. For each of the three versions, we model the macroeconomic effects of these transfers using two different financing plans – increasing the federal debt, or fully funding the increased spending with increased taxes on households – and compare the effects to the Levy model’s baseline growth rate forecast. Our findings include the following:

  • For all three designs, enacting a UBI and paying for it by increasing the federal debt would grow the economy. Under the smallest spending scenario, $250 per month for each child, GDP is 0.79% larger than under the baseline forecast after eight years. According to the Levy Model, the largest cash program – $1,000 for all adults annually – expands the economy by 12.56% over the baseline after eight years. After eight years of enactment, the stimulative effects of the program dissipate and GDP growth returns to the baseline forecast, but the level of output remains permanently higher.
  • When paying for the policy by increasing taxes on households, the Levy model forecasts no effect on the economy. In effect, it gives to households with one hand what it is takes away with the other.
  • However, when the model is adapted to include distributional effects, the economy grows, even in the tax-financed scenarios. This occurs because the distributional model incorporates the idea that an extra dollar in the hands of lower income households leads to higher spending. In other words, the households that pay more in taxes than they receive in cash assistance have a low propensity to consume, and those that receive more in assistance than they pay in taxes have a high propensity to consume. Thus, even when the policy is tax- rather than debt-financed, there is an increase in output, employment, prices, and wages.

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Marc Lavoie On New Behavioural Economics

So,

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2017 was awarded to Richard H. Thaler “for his contributions to behavioural economics”.

as per the Nobel Prize’s website.

In his book, Post-Keynesian Economics: New Foundations, (2014), Marc Lavoie has a nice discussion/critique on what’s called “New Behavioural Economics”:

click to view on Google Books

Anthony Thirlwall On How He Became A Kaldorian

There was a conference last year in honour of Nicholas Kaldor organized by Corvinus University of Budapest.

The papers by the speakers has now been published by Acta Oeconomica in their September issue.

Anthony Thirlwall’s paper Nicholas Kaldor’s Life And Insights Into The Applied Economics Of Growth (Or Why I Became A Kaldorian) is notable. You can access it here if you can’t access the journal.

photo via Alberto Bagnai

Excerpt:

The second paper which struck an intellectual chord was Kaldor’s address to the Scottish Economic Society in 1970 entitled ‘The Case for Regional Policies’ (Kaldor, 1970). Here, at the regional level, he switches focus from the structure of production in a closed economy to the role of exports in an open regional context in which the growth of exports is considered the major component of autonomous demand (to which other components of demand adapt) which sets up a virtuous circle of growth working through the Verdoorn effect – similar in character to Gunnar Myrdal’s theory of circular and cumulative causation in which success breeds success and failure breeds failure (Myrdal, 1957). This is one of his challenges to equilibrium theory that free trade and the free mobility of factors of production will necessarily equalise economic performance across regions or countries.

Link

Unsustainable Processes Of The EU

Stephen Kinsella on his new web app:

Wynne Godley’s Seven Unsustainable Processes (1999) examined the medium-term prospects for the US economy. It shows that in the United States, growth in that period was associated with seven unsustainable processes related to fiscal policy, foreign trade and payments, and private saving, spending, and borrowing. Given unchanged US fiscal policy and growth in the rest of the world, in order to maintain growth, the excessive indebtedness implied by these processes would be so large as to create major problems for the US economy and the world economy in the future. Godley was right. This web application aims to replicate Godley’s analysis for all of the countries in the EU, to see whether or not these unsustainable processes can be seen. It goes beyond Godley in forecasting each important ratio. The accompanying paper gives full details of the ratios and their construction.

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UNCTAD On The Case For A Global New Deal

The United Nations 🇺🇳 Conference On Trade And Development (UNCTAD) publishes wonderful annual reports on trade and development. These are written by heterodox authors many times. Alex Izurieta, Francis Cripps, Jayati Ghosh are a few contributors. This year’s report is here. 200 pages!

The report has detailed discussion on robots and its impact. This is quite different from what one hears normally.

From the press release:

With the United States withdrawing from its role as global consumer of last resort, recycling surpluses is a key element in rebalancing the global economy.  The report turns the spotlight on the eurozone – especially Germany – which is now running a large surplus with the rest of the world. The recent Group of 20 proposal made by Germany – a Marshall Plan for Africa – is welcome, but so far lacks the requisite financial muscle. The trillion-dollar Belt and Road Initiative of China is much bolder, even as its surplus has dropped sharply over the last two years.

The report draws lessons from 1947, when the International Monetary Fund, the World Bank, the General Agreement on Tariffs and Trade and the United Nations joined forces to rebalance the post-war global economy, and the Marshall Plan was launched. Seven decades later, an equally ambitious effort is needed to tackle the inequities of hyperglobalization to build inclusive and sustainable economies.

In response to the political slogan of yesteryear – “there is no alternative” – the report outlines a global new deal to build more inclusive and caring economies.  This would combine economic recovery with regulatory reforms and redistribution policies, and do so with speed and at the requisite scale. The successes of the New Deal of the 1930s in the United States owed much to its emphasis on counterbalancing powers and giving a voice to weaker groups in society, including consumer groups, workers’ organizations, farmers and the dispossessed poor. This is no less true today.

In today’s integrated global economy, Governments will need to act together for any one country to achieve success. UNCTAD urges them to seize the opportunity offered by the Sustainable Development Goals and put in place a global new deal for the twenty-first century.

In addition, you can see the two short videos here.

A New Way To Learn Economics?

John Cassidy has a nice article titled A New Way To Learn Economics for The New Yorker on a new online introductory economics curriculum. produced by a lot of collaborators.

I went to the website which has the full book. Although there seems to be some progress, I have a strong reservation against it.

The chapter titled “Banks, money and the credit market” has a much better description on it than textbooks widely used, such as the ones by Paul Samuelson, Gregory Mankiw or Paul Krugman. On a cursory look, I didn’t find anything about the “money multiplier” model. Instead, the book says that central banks set short term interest rates and this has an effect on aggregate demand. If I missed something and if you find something orthodox, please let me know.

The chapter on fiscal policy looks like being written by fiscal hawks. There is a description of the government expenditure multiplier, which is not much different from other textbooks. There’s no mention of the more complicated nature of this process because of interactions between stocks and flows. For example, in stock-flow coherent (SFC) models, this one-step multiplier has a limited role.

Now, fiscal policy has strong effects and the book hardly does justice to any of this. It reads more like a defense of the establishment wisdom.

But it is in the area of international trade and globalization under the current rules of the game that the book is the most disappointing. The authors do tell students that it can produce “losers” but the problem of such an approach is that it doesn’t appreciate the fact that it leads to polarisation and divergences in fortunes of nations, instead of individuals. The assumption and conclusion (the same thing in most of economics!) is that if losers are compensated, fortunes of nations can converge.

This by Nicholas Kaldor, written in 1980, is change.

Not the new book, The Economy. 

As Morris Copeland emphasised, the root problem of economics is the total confusion of anyone and everyone on what money is. And his approach shows us that it’s not complicated. One just needs to study flow-of-funds or social accounting. There is hardly any emphasis of this in the book. Till then, students will remain confused and ignorant about the way the world works.