Monthly Archives: August 2017

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Alex Izurieta On The UN Global Policy Model

Alex Izurieta compares and contrasts the UN Global Policy Model with models of other international organizations such as the IMF, the OECD and the EU:

A central proposition in this essay is that global models cannot be taken to represent objective and scientific tools for policy analysis. Clearly, all models have to make simplifications and in doing so they will fail to capture some dimensions of economic reality. … Unfortunately, the dominant models proposed by the mentioned IOs ignore essential features of the socio-economic system and therefore deliver a seriously distorted view of policy impacts. Most salient are their assumptions about economic growth, distribution, fiscal and monetary policy, and their failure to address problems of global aggregation—that is, of adding up variables for each world region to account for all relevant macroeconomic factors.

Also an important point on “structural reforms”,

In a different model, such as the UN GPM, structural reforms that depress wages and increase inequality in one country have negative repercussions in other countries that tend to reduce aggregate demand in the world as a whole

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Jayati Ghosh — After Neoliberalism, What Next?

Jayati Ghosh in Red Pepper: 

The question ‘what is your alternative?’ is a familiar one for most progressives, and too often we are overly defensive or self-critical about our supposed lack of alternatives. In truth, there are many economically-viable, socially-desirable alternative proposals in different contexts. The problem is not their lack of existence but their lack of political feasibility, and perhaps their lack of wider dissemination. …

While rejecting the totalising theory, it is possible to think of a broad framework around which there could be much agreement, even among people who do not necessarily identify themselves as of the ‘left’, but are nevertheless dissatisfied with current economic arrangements at both national and international levels.

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The obsessively export-oriented model that has dominated the growth strategy for the past few decades must be reconsidered. This is not a just a desirable shift – it has become a necessity given the obvious fact that the US and the EU are no longer engines of world growth through increasing import demand in the near future. This means that both developed and developing countries must seek to redirect their exports to other countries and most of all to redirect their economies towards more domestic demand. This requires a shift towards wage-led and domestic demand-led growth, particularly in the countries with economies large enough to sustain this shift.

Hangovers And Economic Ideology

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Post-Keynesians frequently highlight the Kaldor-Verdoorn Law which states that aggregate demand affects the supply side. This was even used by economists who prepared the economic plan for Bernie Sanders’ presidential campaign in the United States, as explained well by John Cassidy for The New Yorker. Although, the law is not generally known, economists roughly understand it as a theory of “hangovers”.

The Kaldor-Verdoorn Law is:

rate of growth of productivity = constant1 +  constant2  × rate of growth of production

where constant1 is the exogenous rate of growth of productivity.

These constants will be different for every nation and are to be found empirically.

Of course, productivity is not the only measure of the supply side, but that gives an idea about the general notion of super-hysteresis. 

So Post-Keynesians would argue that slowdown, crises and recessions will affect the supply side but fiscal and monetary policy can be used to quickly recover and that delays will affect the supply side.

It’s interesting to note how others see it.

Carmen Reinhart and Kenneth Rogoff do an empirical analysis and claim that the hangover effect is permanent.

John Cogan, Glenn Hubbard, John Taylor and Kevin Warsh claim this all wrong and that policy can be used to recover.

The two ideas contain a mix of ideology and scientific validity. As Joan Robinson says, “I believe that economic analysis, though it cannot help containing an element of propaganda, yet can be scientific as well.”

While Reinhart and Rogoff’s analysis about hangovers is half right, what they wish to say is that nothing can be achieved via policy to change it. Taylor and Co.’s analysis is correct that policy can be used to resolve the slowdown. They however reject the hangover effect or that there is a damage to the supply side because of a slowdown of aggregate demand. They are rejecting super-hysteresis. Also, by policy, what they mean is deregulation.