Yearly Archives: 2017

Kalecki. Geniusz Zapomniany

h/t Matias Vernengo, I came across this nice short documentary Kalecki. Geniusz Zapomniany (Kalecki: Forgotten Genius) on the life of the Polish 🇵🇱 economist Michal Kalecki.

Michal Kalecki with India’s first Prime Minister Jawaharlal Nehru. Click the picture to see the documentary in a new tab. 

I also came across this nice article by Marc Lavoie, Kalecki And Post-Keynesian Economics, in the book, Michał Kalecki In the 21st Century, edited by Jan Toporowski and Łukasz Mamica and published in 2015. Toporowski also appears in the documentary above.

In that article Marc Lavoie says that although the work of Kalecki is “extensive and paramount”, some Post-Keynesian authors have been reluctant to accept it. Marc Lavoie argues that it ought to not be that way and that “some post-Keynesians believe that Kalecki, rather than Keynes, provides the best foundations for post-Keynesian theory”.

The importance of national accounts and flow of funds is underemphasized by economists. It’s as crucial as calculus and real analysis is to physics. Economists confound income flows with financial flows, but matters of national accounts were kindergarten stuff for Kalecki. With such advantage, Kalecki made a huge amount of progress in his work on economic dynamics.

Noah Smith On Free Trade

In an article The Man Who Made Us See That Trade Isn’t Always Free for Bloomberg View, Noah Smith says this about David Autor:

So, I asked, how should trade policy be changed? Autor’s answers again surprised me. He suggested that the process of admitting China to the World Trade Organization back in 2000 should have been slowed down significantly. That would have given American workers and industries time to prepare for, and adjust to, China’s competitive onslaught.

He told me that the U.S. government should focus attention on manufacturing industries, and even use industrial policy to bolster the sector.

Traditionally, economists have looked down their noses at “manufacturing fetishism,” but Autor says he thinks the sector is underrated.

Of course, heterodox economists have known this for long. As Nicholas Kaldor said in his 1980 articleFoundations And Implications Of Free Trade Theory, written in Unemployment In Western Countries (probably my most favourite quote in this blog):

Owing to increasing returns in processing activities (in manufactures) success breeds further success and failure begets more failure. Another Swedish economist, Gunnar Myrdal called this’the principle of circular and cumulative causation’.

It is as a result of this that free trade in the field of manfactured goods led to the concentration of manufacturing production in certain areas – to a ‘polarization process’ which inhibits the growth of such activities in some areas and concentrates them on others.

Of course Smith saying all this isn’t exactly heresy as economists are known to make mea culpa all the time and then backtrack. Nonetheless, this article is still revealing. Smith also talks of the importance of empirical work. In heterodox literature, there is of course the work of Anthony Thirlwall, John McCombie and others. See Models Of Balance of Payments Constrained Growth: History, Theory And Empirical EvidenceSoukiazis, E., Cerqueira, P. (Eds.).

There’s also evidence from Ricardo Hausmann and César A. Hidalgo of Harvard University. See this Nature article.

John McCombie in the above quoted book, Models of Balance Of Payments Constrained Growth, in his chapter, Criticisms and Defences Of The Balance Of Payments Constrained Growth Model: Some Old, Some New, recognizes the work of Hausmann, Hidalogo, et al. :

Hausmann et al., (2007) have also stressed the importance of the sophistication of a country’s exports for its rate of output growth. They measure the sophistication of a particular export in terms of an index of the weighted per capita income of the countries that export that good, where the weights correspond to the revealed comparative advantage of the countries producing that good (PRODY). Then the average productivity of a country’s export basket is measured using this productivity index together with the relative shares of exports of the country concerned (EXPY). They found that EXPY was a statistically significant explanatory variable of per capita GDP growth in a regression which also included control variables.

These theoretical and empirical works go so much against the economist case for free trade, the most sacred tenet in economics.

Immigration And Wages

In recent times, there has been a large rise in refugees. This has fueled the debate on migration—both about economic migration and on people seeking refuge in the West because of political turmoil in their home countries.

As is true with most issues, there’s a conflation. Of course, the latter is non-negotiable. Article 33. – Prohibition of expulsion or return (“refoulement”) of the United Nations’ Human Rights’ Convention relating to the Status of Refugees is clear about this:

  1. No Contracting State shall expel or return (” refouler “) a refugee in any manner whatsoever to the frontiers of territories where his life or freedom would be threatened on account of his race, religion, nationality, membership of a particular social group or political opinion.

So refusing refugees is both immoral and illegal.

But that still leaves a debate about economic migration. But in public debates, either people argue for “open borders” or we have xenophobic, far-right kind of arguments.

Heterodox economists such as Ha-Joon Chang argue for migration controls, who sees it as a policy for cheap labour and keeping wages low.

Now Simon Wren-Lewis thinks that it’s incorrect. On his blog he says:

[the liberal left] gets to love immigration controls and can begin again to represent the part of working class that dislikes immigration.

The reasoning is attractive. Starve firms of cheap labour, and they are forced to innovate and invest in labour saving machinery and/or in training their workers, which drives up productivity and real wages. In a world where capital is not mobile, that mechanism could work over a very long time period. But when capital is mobile, the firm has an obvious alternative: produce somewhere else where labour is cheaper. Keynes taught us not to make the mistake of assuming output was fixed, and the same is true here. Labour shortages could equally lead to less production, more imports, and a depreciation that makes everyone poorer.

The mechanism on how immigration controls work is simpler than that. There’s no need for labour-saving machinery. Instead because immigration controls put workers in a better bargaining position, it raises wages (as the Phillips curve tells us). Higher wages means higher domestic demand and hence higher output. It’s possible that some firms may shift production abroad but an economic policy which favours immigration controls also likely favours “reshoring”, i.e., bringing jobs back. In many cases—such as restaurant staff—it is not even true that jobs can be offshored. Plus why assume that non-immigrants are less productive?

It’s true—as Simon Wren-Lewis says—that output shouldn’t be assumed to be fixed, as Keynes taught us, but he also seems to miss the Kaleckian dynamics that wage rises will lead to higher output.

Of course, migration can be beneficial. But there’s conflation here too. It’s myth making to say that “immigrants aren’t taking jobs Americans don’t want to do”. But high-skill migration can be highly beneficial. This is because fortunes of nations depend critically on the competitiveness of their producers and firms are finally people. So attracting high-skill talent is beneficial for any nation. So debates and policies on immigration needs to be more nuanced.

There has been a rise in the rejection of the “center-left” globally coincident with the rise in right-wing populism. The center-left has shifted to neoliberalism instead of caring for the working class. Right-wing parties sensed an opportunity. As the blurb of a recent articleThe Ruthlessly Effective Rebranding Of Europe’s New Far Right by Sasha Polakow-Suransky for The Guardian, says:

Across the continent, rightwing populist parties have seized control of the political conversation. How have they done it? By stealing the language, causes and voters of the traditional left

Macroeconomics and political economy are now more important that ever. To get back the control of the populist parties, economic myth-making needs to go.

Francis Cripps And Marc Lavoie’s Short Biography Of Wynne Godley

There’s a new bookThe Palgrave Companion To Cambridge Economics which features among other things biographies of Wynne Godley, Joan Robinson and Nicholas Kaldor and other notable Cambridge economists. Wynne Godley’s biography—Wynne Godley (1926-2010)—is by his closest collaborators – Francis Cripps and Marc Lavoie (pp. 929-953)

You can access the book on Springer, if you have subscription or preview it on Google Books.

Excerpt:

One interpretation of Godley’s theoretical work is that it is a quest for the Holy Grail of Keynesianism. Keynesians of all stripes had for a long time mentioned the need to integrate the real and the monetary sides of economics. Integration was all the talk, but for a long time, little seemed to be achieved … The main purpose of the Godley and Cripps’s 1983 book is to amalgamate the real and the financial sides, providing a theory of real output in a monetary economy …

Godley believed that Keynesian orthodoxy ‘did not properly incorporate money and other financial variables’ (ibid.: 15). Godley and Cripps and their colleagues ‘found quite early on that there was indeed something deficient in most macroeconomic models of the time’, including their own, ‘in that they tended to ignore constraints which adjustments of money and other financial assets impose on the economic system as a whole’ (ibid.: 16). Interestingly, Godley was aware of the work being carried out at about the same time by Tobin and his Yale colleagues, as well as by others such as Buiter, Christ, Ott and Ott, Turnovsky, and Blinder and Solow, who emphasized, as Godley and Cripps (ibid.: 18) did, that ‘money stocks and flows must satisfy accounting identities in individual budgets and in an economy as a whole’. Still, Godley thought that the analysis of the authors in this tradition was overly complicated, in particular because they assumed some given stock or growth rate of money, ‘leaving an endogenous rate of interest to reconcile’ this stock of money with the fiscal stance (Godley 1983: 137). Godley and Cripps (ibid.: 15) were also annoyed by several of the behavioural hypotheses found in the work of these more orthodox Keynesians, as they ‘could only give vague and complicated answers to simple questions like how money is created and what functions it fulfils’. The Cambridge authors thus wanted to start from scratch, with their own way of integrating the real and the financial sides, thus avoiding these ‘tormented replies’ (ibid.) …

Ultimately, Godley’s desire to present a definitive treatise based on consistent macroeconomic accounting gave rise, nearly 25 years later, to the Monetary Economics book (Godley and Lavoie 2007a) …

Link

The FRED Blog On Unemployment

Federal Reserve Bank of St. Louis has a good explainer on the different unemployment rates. (Click the header for the link).

These nuances have become more important than before as Donald Trump has frequently suggested that the unemployment rate is fake. While Trump overstates his case, it’s also true that the headline unemployment rate is misleading.

In addition, during and after the crisis, the civilian participation rate dropped. 

In the above chart, which is the inverse of the labour participation rate, the fraction of the population not in the workforce is shown. As the blog explains, it comprises of:

Principally, these are retirees, students, people with various handicaps, people who dropped out of the labor force, and people who do not want to work

Of course, there’s a thin line between people who are discouraged to work and people included above. As you can see from the chart above, the fall in the participation rate has been coincident with the crisis and raises the question if the unemployment rates sufficiently capture true unemployment. It is difficult to believe that this is entirely due to demographics.

So it’s important to keep these things in mind when discussing politics. Neither believe a nationalist, nor a neoliberal.

Link

FRED Graph: US 🇺🇸 Sectoral Balances

Tracking the sectoral balances of a nation’s economy is a great way to build a narrative about its economic dynamics. It’s true, that an accounting identity doesn’t say much about causation. But they hint it and if we have a behavioural model around it, then we learn a lot more. It was used by Wynne Godley to highlight the predicament on the horizon in the 2000s.

The Federal Reserve Bank of St. Louis has a nice website FRED where you can create charts and even observe them when new data gets updated. Below is the U.S. sectoral balances chart. This is a static image file. For the dynamic chart, track the link above (the header of this page).

The blue line is the private sector net lending—its income less expenditure— which was in deficit and led to the crisis. The red line is the government’s deficit and the green line is the current account balance of international payments.

 

Glenn Greenwald On The New Yorker‘s Admission

Since the U.S. elections results, the media has been hysterically claiming that Hillary Clinton lost the election because of “Russian hacking”. This is mainly to suffocate the debate on why Clinton really lost. A lot of journalists leaning Hillary Clinton before the election do this Russian hacking thing regularly either on TV, or on Twitter or in their articles. Even Paul Krugman has been mentioning Vladimir Putin’s name in almost every article since Nov 9.

There is of course little truth to all this. The main reason this story has attention is that Julian Assange’s WikiLeaks leaked emails of John Podesta, a former White House chief of staff. It’s true that Russia tries to hack the U.S. government servers regularly and hence it’s become easier for people promoting the Russian hacking story to claim that WikiLeaks’ source is the Russian government. But nobody has given any proof of this, yet.

But instead of stopping, the hysteria keeps continuing. Recently The New Yorker published a 13,000-word cover story (Mar 6, 2017) on Trump and Russia/Putin. 

The online version has this header image:

But toward the end of the long essay, The New Yorker makes this admission:

No reasonable analyst believes that Russia’s active measures in the United States and Europe have been the dominant force behind the ascent of Trump and nationalist politicians in Europe. Resentment of the effects of globalization and deindustrialization are far more important factors.

So despite so much hysteria, the magazine is conceding to the effect of globalization and de-industrialization on workers.

Glenn Greenwald of The Intercept has a nice critique of The New Yorker‘s cover story. He says:

As long as the Russia story enables pervasive avoidance of self-critique – one of the things humans least like to do – it will continue to resonate no matter its actual substance and value.

And quoting the cover story’s reference to globalization and deindustrialization, he says:

As Even The New Yorker Admits™, the primary reason for Trump, for Brexit, and for growing right-wing über-nationalism throughout Europe is that prevailing neoliberal policies have destroyed the economic security and future of hundreds of millions of people, rendering them highly susceptible to scapegoating and desperate, in a nothing-to-lose sort of way, for any type of radical change, no matter how risky or harmful that change might be. But all of that gets to be ignored, all of the self-reckoning is avoided, as long we get ourselves to believe that some omnipotent foreign power is behind it all.

Donald Trump has to be resisted but a strong alternative would not be neoliberalism.

The Kaldor-Verdoorn Law In Action

The Kaldor-Verdoorn Law conjectures that the causality is mainly from GDP to productivity. It’s not obvious to most economists. They do observe that GDP rises fast when productivity is rising fast but don’t see the direction of causality and assume it’s from the latter to the former. Some do see some connection, such as Lawrence Summers who talks of the damage to the supply side because of the economic crisis. However they are thinking of it as an exception than a general rule.

I came across this chart from the U.S. Bureau of Labour Statistics showing how productivity growth has suffered.

A recent example of someone failing to see the casuality is Jon Cunliffe, the Deputy Governor for Financial Stability, Bank of England. In a recent speech he said:

Productivity has been disappointing since the financial crisis. … Weak productivity growth has almost certainly been one of the main reasons for the weak growth in pay we have seen in the UK since the crisis. Over the last decade real earnings have grown at the slowest rate since the mid-19th century

Cunliffe fails to recognize that the slow growth is mainly due to the tight fiscal stance of the U.K. government. Had it relaxed fiscal policy, growth in GDP would have been higher, and productivity would have also risen and so would have pay, since productivity rise can be said to be one of the causes for wage rises. In other words, he is thinking of productivity rise as exogenous when pinpointing the blame of weak pay rise.

Still, productivity rise is important. Although production rise is demand-led, if productivity doesn’t rise or doesn’t rise fast enough, output is more constrained. Large rises in productivity would imply that output has more scope to be expanded. So we have path dependency and super-hysteresis.

The Non-existence Of NAIRU In SFC Models

Simon Wren-Lewis has a post on his blog, The NAIRU: A Response To Critics. In that he refers to a blog post from me where I refer to the book Monetary Economics by Wynne Godley and Marc Lavoie. He perhaps doesn’t like me just citing the textbook and needs an explanation. How is that for an argument! Suppose I write a paper on gravitation. Do I always have to derive Einstein’s equations? Can’t I just refer it to the reader?

In other words, how is telling somone that, “SFC models have no NAIRU” not a good argument? Easy to check.

Anyway, an explanation: In stock-flow coherent models, the wage dynamics is given by equations such as these (page 302) :

ωT= (W/p)T = Ω0 + Ω1·pr + Ω2·(N/Nfe)

W = W–1·(1 + Ω3·(ωT−1W-1/p-1))

Here,

is the price level, is the nominal wage rate, ωis the target real wage rate, pr is the labour productivity, is the level of employment, Nfe is the full employment level and the three Ωs are parameters.

Wages change only discretely. Workers have a target wage rate which depends on productivity and the employment level. The actual wage rate is the outcome of bargaining of employees of firms with management. So workers try to catch up to what they consider fair. And their target depends on the level of employment. If unemployment is high, negotiation is more difficult and if unemployment is low, it’s easier as jobs can be switched. So there’s a Phillips curve.

Another important point is that there is no inflation expectations here.

The parameters Ωs used by the authors Godley-Lavoie and Gennaro Zezza are: –0.4, 1, 1.2 and 0.3.

Simulations of such models do not produce a runaway inflation, only higher inflation at full employment.

It’s not difficult to see why. How does the wage dynamics equations imply a runaway inflation? Can you inspect them conclude in a straightforward manner that there’s NAIRU? Anyway, simulations confirm.

That doesn’t mean there can’t be a wage-price spiral. This might happen—as the authors Godley and Lavoie explain—if the parameters Ωs change fast with time or if wage settlement happen more frequently. But as I have mentioned, it’s not necessarily so.

More realistic models have a flatter segment like this (Figure 11.1, page 387 from Monetary Economics, Ed. 1):

snipping via amazon.com

In this model (the “growth model prototype”) with behavioural equations for the government, central bank, firms, banks and households, the wage dynamics are similar to the equations above except that they have a flat segment. Again no accelerating prices!

In the discussion above (with no flat segment), I mention that there’s no NAIRU, but just to confirm I asked Marc Lavoie if this is crucial and he said no. Quoting his email with his permission:

The (unique) NAIRU has to be associated with a relationship that says that any negative discrepancy between the actual rate of unemployment and the NAIRU will lead to an acceleration of the rate of inflation. In terms of the rate of employment, it implies that any positive discrepancy between the actual rate of employment and the NAIRU will lead to an acceleration of the rate of inflation. This means that we can draw an upward-sloping curve relating the rate of employment to the change in the rate of inflation, where the change is zero when the economy is at the NAIRU.

In the case of Godley and Lavoie (2007), whether it is chapter 9 or 11, the equations that define the real wage target are such that they do not lead to such a curve. What we get is an upward-sloping curve that relates the rate of employment to the rate of inflation, and not to its change. When we are in the flat area of Figure 11.1, this means that the rate of inflation remains constant even if the rate of employment is higher. Besides the flat area, we have a kind of old Phillips curve: to a higher rate of employment is associated a higher rate of inflation, but that is all. There is no acceleration. Another way to put it is to say that there is an infinite number of NAIRU or a multiplicity of NAIRU (of rates of employment with steady inflation).

So with explanations about wage dynamics which has a Phillips curve (with or without a flat segment), I show that SFC models have no NAIRU.

Link

The New York Times On Automation

The Editorial Board of The New York Times have written an editorial in “The Opinion Pages” stating that they don’t see automation as something taking away jobs. 

The article also rightly says:

Americans should blame policy makers, not robots.

While that’s great—good start—the article errs on trade:

Defenders of globalization are on solid ground when they criticize President Trump’s threats of punitive tariffs and border walls. The economy can’t flourish without trade and immigrants.

It’s a bit of a straw man argument to claim that anyone opposed to free trade is opposed to trade itself. The U.S. trade imbalance is a problem for employment. Globalization has also led to offshoring of jobs. Immigration control can be used for economic migration without discrimination to help workers both in employment and wage bargaining. The principle of non-refoulement should be respected and all refugees should be allowed.

[the header of this post is the link]