The Economist On Germany’s Balance Of Payments

The Economist‘s latest cover is about the German balance of payments. The subheading of its editorial says, that it “[t]he country saves too much and spends too little”.

That’s welcome, although the article claims that the German government’s policy is not mercantilist, while at the same time saying that wages have been held down to achieve more competitiveness in exports.


Anyway, it’s good that it has recognized that this is a problem for the world economy. Funnily, the editorial is still defending free trade, without realizing that the ideology is based on the assumption that market forces will resolve imbalances. If the magic of the price mechanism works, why do you need active policy?

It’s important to remember that John Maynard Keynes recognized that active policy measures are needed to resolve global imbalances. He proposed to impose a penalty on creditor nations in his plan for Bretton-Woods and also require them to take measures such as:

(a) Measures for the expansion of domestic credit and domestic demand.
(b) The appreciation of its local currency in terms of bancor, or, alternatively, the
encouragement of an increase in money rates of earnings;
(c) The reduction of tariffs and other discouragements against imports.
(d) International development loans

– page 24 of The Keynes Plan

A lot of times, people argue that the moral stand that Germany reduce its surpluses is vacuous. Germany is independent and responsible for its own decision. Who are others asking German politicians to raise domestic demand?

The answer to that is Germany makes huge gains out of its success in international trade. What if deficit nations form a union and impose high tariffs and quotas on their imports? International trade runs under a set of rules (the “rules of the game”) and other nations have a right to demand this from Germany and ask for fairer rules.

Anyway, The Economist has finally accepted what Keynes was saying 80 years ago!


Thomas Palley — A Theory of Economic Policy Lock-in And Lock-out Via Hysteresis: Rethinking Economists’ Approach To Economic Policy

Thomas Palley:

This paper uses hysteresis to develop the concept of policy lock-in and lock-out. Policy changes may near-irrevocably change the economy’s structure, thereby changing the distribution of wealth, income and power. That may lock-in policy by changing the political equilibrium. Exit costs that block policy reversals also cause lock-in. Conventional thinking treats policy as a dial which is adjusted according to the economy’s state. Policy lock-in questions the dial formulation and raises new issues for optimal policy design. It also offers insights into economic and political crisis theory. Policy lock-in is illustrated with examples that include tax policy, government spending, the euro, globalization, and the neoliberal policy experiment.

[the title is the link]

Public Debt And Current Account Deficits

Yesterday, there was an article at Vox which takes issue with a statement from Donald Trump which connects the US public debt with current account deficits.

Trump ran his campaign on dividing people, is out to destroy health care and wants a regressive system of taxation and so should be resisted. At the same time, a blanket opposition is counterproductive, especially when it is an important matter.

Vox quotes Trump:

For many, many years the United States has suffered through massive trade deficits; that’s why we have $20 trillion in debt.

In response, Vox claims:

The US trade deficit refers to the fact that the US imports more from the world than it exports. The national debt is the result of the fact that the US government spends more revenue than it collects. There’s no direct relationship between the two.

The whole article is written to claim that there is no connection. But anyone who knows the sectoral balances identity will recognize that there is a connection.

So the sectoral balances identity is:


where, NL is the private sector net lending, DEF is the government’s deficit and CAB is the current account balance of payments (and is to a zeroth order approximation, exports less imports).

Of course, this is an identity and shouldn’t be confused for any behavioural hypothesis but it’s still useful in creating a narrative around a model (such as an SFC model) with behaviour for households, firms, the financial system, the government and the rest of the world.

On an average the private sector net lending is a small positive number relative to GDP (such as 2%), although it can fluctuate a lot. So for the U.S. economy, we saw that it was negative a lot in the 2000s and then reverted to a large positive just before and during the crisis.

One should of course keep in mind the correct causality connecting the three terms. What connects them is demand and output at home and abroad.

So the government’s deficit is affected by exports and imports. If there’s a large current account deficit, there’s a fall in demand and hence output and hence income and hence taxes leading to a higher government deficit than otherwise. Deficits in turn affects the public debt.

In other words, the U.S. public debt would have been lower, ceteris paribus, had the problem of the U.S. trade imbalance would have been addressed. This would have happened because of higher national income and higher taxes.

People don’t see the connection because they are comparing different nations. So for example, Japan has been successful in international trade and yet has a high public debt. In the other extreme, Australia has had large current account deficits over the years and public debt much lower than Japan (relative to GDP). But one should do a ceteris paribus comparison.

See Part 2 here: Public Debt And Current Account Deficits, Part 2

Jayati Ghosh On Imperialism

Excellent Jayati Ghosh interview with The Real News Network, from earlier this week, titled Jayati Ghosh On Imperialism In The 21st Century. 

click to watch on YouTube. 


… [I]mperialism is fundamentally about the struggle over economic territory. It’s not just about state control or colonial control or any specific kind of control. It’s really the struggle of large capital over different kinds of economic territory. And these could be territories defined in terms of markets, in terms of workers and labor, in terms of natural resources, in terms of new kinds of markets that are developed.

… [I]mperialism has gone through many different forms in the course of its evolution. There was the time when it was explicit colonial control, when it was the control by the state over other physical territories which they could then change to their own desires.

… [I]mperialism has had to move towards new ways of control. They are not purely military. They are not purely political. They are much more, I would call them, legal and institutional forms of control … So, the WTO, of course, several of the rules of the IMF, but much more significantly, the new trade and investment treaties that are being signed, plurilateral, bilateral, all of these mega regionals. All of these are really oriented towards limiting the power of nation states to control capital, which in turn means that imperialism is able to take new forms.

Also a good explanation of what neoliberalism is:

Neoliberalism is fundamentally the view that the role of the state is not necessarily to reduce its power but to exercise its power directly in favor of capital … People talk about it as a retreat of the state. It’s not a retreat of the state. It’s a shift of the state away from protecting the interests of society at large and particularly, therefore, the working class towards protecting the interests of capital. Because we will see that states are no less powerful. In fact, some of the most neoliberal states are often the most authoritarian. And they’re becoming more and more authoritarian.

Transcript here


Noam Chomsky And Ha-Joon Chang In Conversation On Globalization

There’s a nice interview of Noam Chomsky and Ha-Joon Chang by C.J. Polychroniou of Truthout on the myths of globalization. Of course, as Chomsky and Ha-Joon Chang point out, the debate is not against globalization per se, but globalization under the current rules of the game.

Ha-Joon Chang is direct about his views:

The assumption that globalization benefits everyone is based on mainstream economic theories that assume that workers can be costlessly re-deployed, if international trade or cross-border investments make certain industries unviable.

In this view, if the US signs NAFTA with Mexico, some auto workers in the US may lose their jobs, but they will not lose out, as they can retrain themselves and get jobs in industries that are expanding, thanks to NAFTA, such as software or investment banking.

You will immediately see the absurdity of the argument — how many US auto workers do you know who have retrained themselves as software engineers or investment bankers in the last couple of decades? Typically, ex-auto-workers fired from their jobs have ended up working as night-shift janitors in a warehouse or stacking shelves in supermarkets, drawing much lower wages than before.

He also talks of winners and losers and compensation. Of course, I wish he went further and argued that globalization—under the current rules of the game—-produces not just individual winners and losers and also leads to polarization between nations.

[the title of this post is the link]

The Los Angeles Review Of Books On Liberalism

Emmett Rensin has a fantastic essay The Blathering Superego At The End of History on liberalism for the Los Angeles Review Of Books. Rensin says:

The most significant development in the past 30 years of liberal self-conception was the replacement of politics understood as an ideological conflict with politics understood as a struggle against idiots unwilling to recognize liberalism’s monopoly on empirical reason. The trouble with liberalism’s enemies was no longer that they were evil, although they might be that too. The problem, reinforced by Daily Kos essays in your Facebook feed and retweeted Daily Show clips, was that liberalism’s enemies were factually wrong about the world. Just take a look at this chart …

And Vox and The New Yorker and so on.  A good example of this is Paul Krugman’s Ricardo’s Difficult Idea. We are told how silly it is to reject free trade. Heterodox economists can see all this because we know the real history: Keynesian economics overthrown by Friedmanism and neoliberalism.

I also loved the line:

The Clinton campaign believed that it would win because it predicted that it would win, and because the capacity to predict and manage was precisely the competence Clinton’s team was selling. But then Clinton lost. The car crashed in the desert instead.

The article is written keeping in mind the UK referendum on the EU membership (“Brexit”), Clinton’s loss/Trump’s win and Jeremy Corbyn’s rise and liberals’ reaction to it and how what Rensin calls the “intellectual authority” is suddenly ripping away.

Morris Copeland’s Monetary Economics

Morris Copeland was the discoverer (or inventor?) of the flow of funds approach. The U.S. Federal Reserve publishes the statistics every quarter but is largely ignored. Copeland was of the view that it is essential to get rid of myths in economics. He said:

The subject of money, credit and moneyflows is a highly technical one, but it is also one that has a wide popular appeal. For centuries it has attracted quacks as well as serious students, and there has too often been difficulty in distinguishing a widely held popular belief from a completely formulated and tested scientific hypothesis.  I have said that the subject of money and moneyflows lends itself to a social accounting approach. Let me go one step farther. I am convinced that only with such an approach will economists be able to rid this subject of the quackery and misconceptions that have hitherto been prevalent in it.

– in Social Accounting For Moneyflows, in Flow-of-Funds Analysis: A Handbook for Practitioners (1996) [article originally published in 1949]

In an article titled, Some Illustrative Analytical Uses Of Flow-of-Funds Data, in the book, The Flow-of Funds Approach To Social Accounting, published in 1962, he has several interesting things to say about the myths prevalent even among most economists.

Page 196:

The FOF accounts help to dispel various misconceptions in regard to the role of money and of other forms of credit in the income and money circuit. Among these misconceptions are such ideas as that: (1) it is safe to assume that private nonbank cash balances are mostly consumer cash balances; (2) the banking sector is more than a mere financial intermediary, that by itself it can “create” a substantial amount of “money” that can be used to finance a substantial increase in aggregate demand; (3) a government deficit in a particular year or other period can be considered inflationary without stopping to consider whether it represents a fiscal change from the preceding period that tends to increase aggregate demand or whether it occurs at a time when the economy is operating at or near or far below full capacity; and (4) when the government seeks to raise a large amount of money through financial channels to finance a war, one can ignore the fact that an excess of nonfinancial uses over nonfinancial sources of funds for the government means an equal excess of nonfinancial sources over nonfinancial uses of funds for the rest of the economy and a consequent equal amount of money that the rest of the economy will necessarily advance to the government through financial channels.

Note: in (2) above, Copeland is talking of finance of government deficit via sale to banks as compared to sale to the general public and these two have different effects on the money stock. Same below.

Page 197:

It is not easy for us today to imagine what it must have been like to try to understand the workings of our economy in the absence of social accounting information. The workings of those aspects that involve financial transactions seem to have been particularly difficult to understand. Indeed, I think we can say that in the absence of financial transaction social accounting information various misunderstandings were permitted to develop. Let me mention three:

  1. One of these relates to the role of trade credit in the business cycle. This is a subject that probably received somewhat less attention than it deserved fifty-odd years ago, but it seems to have greatly intrigued H. J. Davenport, and he came up with this curious conclusion about the contraction of credit during a commercial crisis— “Side by side with the diminution of bank credit there is taking place an enforced and inevitable expansion of credit relations between producers and consumers, producers and middle-men, and between middle-men and consumers.”
  2. During World War I Secretary of the Treasury W. G. McAdoo, among others, was greatly concerned about the possibility that the huge wartime increase in the demand for funds would drive interest rates sharply up. As a matter of fact, interest rates did rise but by no means as sharply as McAdoo had anticipated. Railroad bond yields rose from 4.12 per cent in April 1917 to 4.42 per cent in November 1918. During World War II the yields on long-term United States bonds actually declined.
  3. There is a view still entertained by quite a number of economists that an increment in the currency and deposit liabilities of the banking and monetary system creates a net addition to the total sources of funds available to finance purchases of GNP and so, a net addition to aggregate demand.

Page 207:

There is still another type of misconception that I hesitated to mention in my opening remarks because it is of a rather subtle nature. I would like to comment on it briefly at this point. Let me indicate its nature by quoting from George Leland Bach’s Economics. An Introduction to Analysis and Policy:

When private spending on consumption and investment falls short of high production and employment levels, the government can increase total expenditures by spending more than it currently collects in taxes. At the extreme, it can finance this net addition by creating new money so as to assure a net addition to private spending. Or it can borrow existing funds from the public, hoping to draw on funds that would not otherwise be spent …

Conversely, when total private spending is too high, with resulting inflation, the government can withdraw funds from the income stream by taxing away more than it spends. At the extreme, it may simply hold or destroy this net surplus. Or it may use the surplus to pay off government debt, hoping that the bondholders will not rush out and spend the funds they receive.

This policy statement seems to imply three propositions that a good many economists have accepted, propositions the validity of which I want to question. The three propositions are:

  1. A federal government nonfinancial deficit makes for an increase (or surplus makes for a decrease) in aggregate demand.
  2. A federal government nonfinancial deficit financed by an increase (or a federal nonfinancial surplus resulting in a decrease) in currency outside banks plus demand deposits adjusted makes for a larger increase (or for a larger decrease) in aggregate demand than a deficit financed by the sale to the public of (or a surplus that is used to retire publicly held) interest-bearing federal obligations.
  3. In considering the effect of a federal deficit (or surplus) on aggregate demand we can afford to neglect the difference between a deficit brought about by an increase in government expenditures and one brought about by a decrease in government receipts (or between a surplus brought about by a decrease in government expenditures and one brought about by an increase in government receipts).

So you see Morris Copeland was the clearest monetary economist at his time.

Noam Chomsky On Neoliberalism: It’s Market For You But State Power For Me

Radio Open Source has a nice intervew of Noam Chomsky by Christopher Lydon where they discuss neoliberalism among other things.  Audio, transcript.

What is neoliberalism?

This question is asked frequently, especially by those who deny that such a thing exists (not the interviewer of course!). In my experience, those who deny it the most are the most neoliberal. At any rate—although I’ll try to describe what it is—it’s not important to get the definition right. Isn’t the creation of the Euro Area without a central government neoliberalism?

In the above interview, Chomksy is faced with this question:

CL: You famously said about neoliberalism that it’s not new, and it’s not liberal. Do you want to define it for people who just landed from Mars?

NC: Well, it’s a kind of a mixture. The rhetoric is free market, individual choice and so on. That’s the rhetoric. The reality is rather different. It’s individualism and market for you but state power for me. So take a look, say, at the actual institutions like the World Trade Organization or NAFTA, what are called the “free trade agreements.” The media calls them “free trade agreements.” They’re not free trade agreements. They’re investor rights agreements. They’re highly protectionist. They provide unprecedented protection backed by state power for major conglomerates like the pharmaceutical industry, media conglomerates, others.

That’s quite accurate, although Chomsky didn’t take the effort to define it but just described it as it is.

A lot of people try to distinguish neoliberalism and the New Consensus of economics. It’s certainly true that you can find examples of economists who believe in neoclassical economics or the new consensus or whatever you call it but don’t exactly advocate policies of neoliberalism. But, I’ll just categorize them as being deceived by economists. Orthodox economics is neoliberalism, except for minor differences. The former is an academic subject built to defend the latter, which is a political ideology. New Consesus Economics exists in academia because neoliberals and conservatives in political positions award them. Neoliberals then quote their research to defend policies.

Neoliberalism is based on three extremely damaging ideas of neoclassical economics: free trade, tight fiscal policy and the production function.

After the economic and financial crisis, it’s true that economists have conceded that fiscal policy has strong positive effects. Yet, it’s situational in most occasions. When a neoliberal party is in power, they might advocate fiscal expansion, at least make it look like they’re doing it. Also, although they sound as if they are unorthodox about it, they’ll rarely concede that they had a different position before the crisis. They’ll make it look like they have always believed their current positions since their undergraduate days. They’ll also pander to people who might want to hear otherwise. So they have different public and private positions. In other words, doublespeak about fiscal policy is the hallmark of a neoliberal.

But although economists have shifted their positions on fiscal policy—at least when it suits them—their voice about free trade has grown stronger. It is here that Chomsky’s point about “market for you but state power for me” appears the most illuminating. Rich nations are rich due to their success in international trade and they try to impose it on poor nations by hook or crook. This requires the cooperation of governments because agreements are negotiated by governments. Poor nations generally are sceptical about economists’ narratives but are arm-twisted by governments of rich nations and there is an establishment around the government which pushes such things both directly and indirectly by controlling the narrative (or control of opinion and manufacturing consent, as Chomsky might say).

Another aspect about neoliberalism is the politics around wages. As Thomas Palley says,

With regard to income distribution, neoliberalism asserts that factors of production—labor and capital—get paid what they are worth. This is accomplished through the supply and demand process, whereby payment depends on a factor’s relative scarcity (supply) and its productivity (which affects demand).

The theoretical basis for this is the narrative build in neoclassical economics using the notion of a production function and marginalism. Reality check: In the late 70s and early 80s, orthodox economists promoted government policies of high interest rates and this created unemployment and led to drastic weakening of labour unions. They were also weakened by laws. Again, markets for you but state power for me.

To quote Chomsky again from the interview,

[neoliberalism’s] crucial principle is undermining mechanisms of social solidarity and mutual support and popular engagement in determining policy.

What Is Equilibrium?

The new paper by Gennaro Zezza and Michalis Nikiforos for the Levy Institute, surveying the literature on stock-flow consistent models has a discussion on the concept of equilibrium:

In the short run, “equilibrium” is reached through price adjustments in financial markets, while output adjustments guarantee that overall saving is equal to investment. However, such “equilibrium” is not a state of rest, since the expectations that drive expenditure and portfolio decisions may not be fulfilled, and/or the end-of-period level for at least one stock in the economy is not at its target level, so that such discrepancies influence decisions in the next period.

In theoretical SFC models, the long-run equilibrium is defined as the state where the stock-flow ratios are stable. In other words, the stocks and the flows grow at the same rate. The system converges towards that equilibrium with a sequence of short-run equilibria, and thus follows the Kaleckian dictum that “the long-run trend is but a slowly changing component of a chain of short-run situations; it has no independent entity” (Kalecki 1971: 165). The adjustment takes place because stocks and stock-flow ratios are relevant for the decisions of the agents of the economy. If stocks did not feed back into flows, the model may generate ever-increasing (or decreasing) stock-flow ratios: a result that might be stock-flow consistent, but at the same time unendurable. The convergence towards the long-run equilibrium also depends on more conventional hypotheses regarding the parameters of the model.

So equilibrium is a state where stock-flow ratios are stable.

Of course equilibrium just means that and doesn’t automatically translate to full employment, for example. One can imagine stock-flow ratios such as public debt/gdp, private debt/gdp may converge to some level such as 80%, 50% respectively but with unemployment at, say, 5%.

Also, it’s worth mentioning—especially in open economies—there is in general no automatic/market mechanism which guarantees that stock-flow norms are converging to some stable ratios.

Let me offer an alternative viewpoint for the short run.

In the short run, there’s really no concept of equilibrium because there is no heavenly Walrasian auctioneer in most markets. As pointed out by Nicholas Kaldor, there are dealers who are both buyers and sellers simultaneously. Dealers quote bid/ask prices and the quantities they are willing to buy or sell. Since there is a mismatch in demand and supply of “outside buyers” and “outside sellers”, dealers accumulate inventories or stocks. Dealers make a business out of the bid-ask spread. In non-financial markets, the terminology is slightly different. You won’t find a board with bid/ask prices at a car dealer, but the concept is similar. Here even the producer has inventories in the goods market. In the services market, whatever is demanded is supplied (or put in queue or refused if capacity is reached).

So there’s no equilibrium to be reached in the short-run. It’s always in disequilibrium. Sometimes neoclassical authors make it look like accounting identities are violated in disequilibrium and satisfied in equilibrium arranged by the Walrasian auctioneer. But in SFC models, it’s illogical to have such a thing. Accounting identities must always be respected. At all times, between all time periods, even infinitesimally small.

In real life, especially because of complications of the open economy, there is no such thing as an equilibrium or a tendency to move toward any equilibrium via market forces.

Still, the concept of equilibrium is useful even in SFC models. One can start with a state with a stable stock-flow ratios and then study what happens if some parameter or some exogenous variable is changed or a set of them are changed simultaneously. The dynamics may or may not reach equilibrium in the long run but we can study what happens in the traverse.


Thomas Palley — Trump And The Neocons: Doing The Unilateralist Waltz

Thomas Palley:

The neocon factor dramatically changes the interpretation of the Trump administration’s unilateralist international economic policy chatter.

Donald Trump’s first one hundred days have revealed his inclination for unilateralism in international relations. That inclination reflects his opportunistic and bullying disposition, and it also fits well with his anti-globalization pose.

Trump’s unilateralism has also spawned a dangerous waltz with Washington’s neocon establishment. The opportunistic Trump looks to gain establishment support, while the neocon establishment looks to the opportunist-in-chief to implement its own unilateralist view of the world.

The waltz is clearly visible in recent military actions, but it also extends to international economic policy which is an area of budding neocon concern. A further twist is that neocon unilateralism can be exercised against both rivals and allies. Power is at the core of the neocon project, and power can be used to block rivals or bend allies.

[The title is the link]