Monthly Archives: June 2021

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The Levy Institute’s Macro-Modeling Team — The Pandemic, The Stimulus, And The Future Prospects For The US Economy

Dimitri B. Papadimitriou, Michalis Nikiforos and Gennaro Zezza have a new report on prospects for the US economy.

They argue that while the US economy would enjoy a boom in the near term because of the large fiscal stimulus, the danger is that because of the large trade imbalance because of the different growth rates of the US and its trading partners implies that the continuation would require a large fiscal deficit or the private sector becoming a net borrower.

In my opinion, soon enough when the US economy starts approaching full employment, there will be shouts to cut the fiscal stance because as Michal Kalecki argued captains of industry don’t like full employment. And/or: continuous growth would require high fiscal deficits but as the public debt will continue to rise relative to gdp, politicians will get nervous.

The US government could try to improve net exports by increasing competitiveness of US firms but such things take time. A combination of trying to improve net exports by industrial policy, tariffs and eventually removing the system of free trade is the way forward. It won’t be easy as economists are attached to dogmas.

Paul Krugman On “Economic Nationalism”

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Paul Krugman has a new article titled Wonking Out: Economic Nationalism, Biden-Style, in which he defends Biden’s economic policy which is a deviation from laissez-faire, in particular free trade.

The article has reference to a 250-page report by the White House titled Building Resilient Supply Chains, Revitalizing American Manufacturing, And Fostering Broad-Based Growth,

The United States’ balance of payment and international investment position is unsustainable and it needs to do something to reverse it. Weakness in international trade and offshoring have led to a lot of economic destruction which was exploited by Donald J. Trump. But the Democratic Party—led by Paul Krugman on economics—attacked Trump for deviating from free trade. But now that they are in power, they have learned a bit from their mistakes and economic realism has also taken over. Even during the Democratic Party primary election, the candidates all agreed that something has to be done on international trade and proposed policies to address it.

Elizabeth Warren, for example had a post on Medium titled A Plan For Economic Patriotism.

It’s a shame that the Democratic Party which has voters consisting of more educated people had to copy or at least follow Donald Trump.

Why is manufacturing important? Because (a) manufacturing is important to exports (b) rise in production leads to faster rise in productivity compared to other things. (c) a process of success leads to higher competitiveness of firms—not just price competitiveness but also non-price competitiveness.

The Biden administration has also not rolled back the tariffs imposed on China by Trump.

Instead, Paul Krugman has this spin:

In any case, however, we seem to be entering a new era of worries about the role of the United States in the world economy, this time driven by fears of China. And we’re hearing new calls for industrial policy. I have to admit that I’m not entirely persuaded by these calls. But the rationales for government action are a lot smarter this time around than they were in the 1980s — and, of course, immensely smarter than the economic nationalism of the Trump era, which they superficially resemble.

and:

As you might guess, then, a lot of the Biden-Harris report focuses on national security concerns. National security has always been recognized as a legitimate reason to deviate from free trade. It’s even enshrined in international agreements. Donald Trump gave the national security argument a bad name by abusing it. (Seriously, is America threatened by Canadian aluminum?) But you don’t have to be a Trumpist to worry about our dependence on Chinese rare earths.

Donald Trump is a shady person and so it’s ironic that the Democratic Party was behind. Paul Krugman in fact even spent the last 5 years or so denying that US trade is a problem. Now he is making it look like Biden and Co. are doing something original.

Many people present the recent changes as some kind of break from neoliberalism. In a sense it is but that way of presenting is misleading: finally the US policy makers are furthering US interests, which could be at the expense of the rest of the world. The United States needs policies to promote net exports—to make its international investment position sustainable—but there are various ways of doing it, such as moving to a system away from free trade or even expanding domestic demand to the point of full employment which won’t restrict total imports, and hence isn’t beggar-thy-neighbour and which is good for the whole world.

But it’s a bit like recent changes in fiscal policy: once the US is out of the woods, leaders and the academia will again go back to same old policies. So Krugman’s piece has a lot of praise for free trade which allows him to argue in the future that free trade is good. Another reason is while US deviates from free trade, politicians and pundits can continue to impose free trade on other countries. Finally the aim is to promote policies which are beneficial to oligarchies and oligarchs. Whatever works! Just like “liquidity trap” is used to argue that fiscal expansion can be done now but that neoclassical economics works otherwise, “national security” concern is used now in case of trade.

In summary, the United States needs policies to make net exports rise faster over imports, which Post-Keynesians have argued earlier than anyone, but the Democratic Party has only learned it by losing. They will try to spin this, impose more free trade on the world, while taking protectionist measures and running industrial policy themselves and create a narrative which makes it easier for them to go back to their old ideology.

Neochartalists Arguing For Tax Cuts Again

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There’s a recent article by Randall Wray and Edward Lane for Levy Institute titled Why President Biden Should Eliminate Corporate Taxes To Build Back Better. I mean it’s ridiculous!

Neochartalism (“MMT”) is a trojan horse for reducing tax rates on the super-rich. They tend to argue erroneously  that since output can be expanded by a rise in government expenditure without raising tax rates, it implies that tax rates ought not be raised. Warren Mosler has a proposal to remove most taxes.

To be sure, Wray proposes an alternative without realising that both taxes on profits and alternatives can be done.

Neochartalism is a mix of old and new, with the new part significantly wrong. So it becomes Post-Keynesians in a difficult position as agreeing with many criticisms may sound like helping neoliberals. But with such extreme proposals, Post-Keynesians ought to criticise “MMT” more, simply to distinguish themselves.

Industrial Policy And Global Tax Coordination: Some Changes In How The World Is Run

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Senate Poised To Pass Huge Industrial Policy Bill To Counter China is the headline of a recent news item from The New York Times.

US politicians have come to realise—especially after the rise of Trump—that free trade and globalisation is a major cause of damage to the US economy. The purpose of industrial policy is to make US producers more competitive. This results in increase of exports and fall in imports, relative to gdp.

Wynne Godley had been warning for quite some time on how the US government should address the trade imbalance instead of leaving it to market forces. In March 2003, in an article The U.S. Economy: A Changing Strategic Predicament he said:

The default conclusion is that the U.S. economy will not recover properly in the medium term, but rather will enter a prolonged period of “growth recession.” The only lasting solution will be to get U.S. exports to rise much faster than imports over a prolonged period.

And also suggested non-selected protectionism for the short term.

Another recent news article from NYT is about a global tax coordination. Globalisation has led to a race to the bottom. To raise price competitiveness, countries have been wrongly incentivised to reduce tax rates on firms and this led to some competition between countries to keep reducing tax rates on corporations. And this has led to lot of economic damage.

The Democratic Party of the US has learned from mistakes in the past and is trying to correct them but the Dems are total corporatists and these measures are just for elite preservation. For example, they were talking of reversing Trump’s tax cuts for corporations but the party is a champion in performative politics: it seems they’re not reversing it now.

As Joseph Stiglitz points out, the problem with this 15% tax rate is that it become the de facto the maximum tax rate.

In his last paper, Wynne Godley said on rebalancing:

It is inconceivable that such a large rebalancing could occur without a drastic change in the institutions responsible for running the world economy—a change that would involve placing far less than total reliance on market forces.

Although the steps taken by the US government looks in the right direction, there’s still a large way to go, especially considering how the Democrats pretend to do all sorts of good things. Still far from a Keynes like plan to fine surplus countries and to remove imbalances in balance of payments and international investment position.