Category Archives: The dismal science

Stephanie Kelton: What Happens When the Government Tightens its Belt?

Yves here. This post is certain to annoy some readers. Note that Kelton does not address under what circumstances it is desirable to have the government run a surplus versus a deficit, merely what the implications are. Bill MItchell is rather forceful on this matter:

The US press was awash with claims over the weekend that the US was “living beyond” its “means” and that “will not be viable for a whole lot longer”. One senior US central banker claimed that the way to resolve the sluggish growth was to increase interest rates to ensure people would save. Funny, the same person also wants fiscal policy to contract. Another fiscal contraction expansion zealot. Pity it only kills growth. Another commentator – chose, lazily – to be the mouthpiece for the conservative lobby and wrote a book review that focused on the scary and exploding public debt levels. Apparently, this public debt tells us that the US is living beyond its means. Well, when I look at the data I see around 16 per cent of available labour idle in the US and capacity utilisation rates that are still very low. That tells me that there is a lot of “means” available to be called into production to generate incomes and prosperity. A national government doesn’t really have any “means”. It needs to spend to get hold off the means (production resources). Given the idle labour and low capacity utilisation rates the government in the US is clearly not spending enough. The US is currently living well below its means. But the US government can always buy any “means” that are available for sale in US dollars and if there is insufficient demand for these resources emanating from the non-government sector then the US government can bring those idle “means” into productive use any time it chooses.

Wikileaks: Saudis Warned About Oil Speculators in 2007 and 2008

Kevin Hall of McClatchy wrote about Wikileaks releases showing that the Saudis were concerned about oil market speculation leading to unduly high prices in 2007 and 2008. In 2008, we wrote that the Saudis said they did not see tightness in the market, and they also warned that prices were excessive. The Wikileaks thus confirm that these statements were not just PR, to shift blame from them as the historical swing producer, but were consistent with their private communications.

Paul Jay of the Real News Network interviewed Kevin Hall (hat tip reader Philip Pilkington):

Philip Pilkington: Beyond growth – are we entering a new phase of economic maturity?

By Philip Pilkington, a journalist and anti-economist writing from amidst the devastated ruins of Dublin, Ireland

All successful revolutions are the kicking in of a rotten door – JK Galbraith

What’s the easiest way to embarrass an economist? Okay, that’s a bit of a trick question. After all, economics is a pretty embarrassing profession and there are a million questions you could put to an economist that would likely turn his or her cheeks red. You could, for example, approach your typical ‘academic of ill-repute’ and ask them if they saw the bursting of the US housing bubble coming or the unsustainable debt-overload that accompanied it – yep, that would probably do the trick.

One topic that does cause your average economist a lot of brain-bother, though, is the environment. After all, everyone and their cat cares about the environment these days, but such concern seems irreconcilable with the ‘infinite growth’ assumptions of most economists. It has long been pointed out by environmentalists, concerned citizens and the sane how, if we are to prevent global warming from melting the planet, we have to put some sort of a ceiling on economic growth and industrial development. This is a truly pressing concern – yet it appears that economists and policymakers simply cannot integrate it into their worldview.

But here’s an uplifting thought: what if History is doing our work for us? What if we are already entering a sort of ‘post-growth’ world?

On Short-Termism and the Institutionalization of Rentier Capitalism

Andrew Haldane and Richard Davies of the Bank of England have released a very useful new paper on short-termism in the investment arena. They contend that this problem real and getting worse. This may at first blush seem to be mere official confirmation of most people’s gut instinct. However, the authors take the critical step of developing some estimates of the severity of the phenomenon, since past efforts to do so are surprisingly scarce.

A short-term perspective is tantamount to applying an overly high discount rate to an investment project or similarly, requiring an excessively rapid payback. In corporate capital budgeting settings, the distortions are pronounced:

Doug Smith: Shock Therapy For Economics, Part 1

By Douglas K. Smith, author of On Value and Values: Thinking Differently About We In An Age Of Me

In “Economics In Crisis”, professor Brad DeLong notes:

The most interesting moment at a recent conference held in Bretton Woods … came when Financial Times columnist Martin Wolf (asked) Larry Summers, “[Doesn’t] what has happened in the past few years simply suggest that [academic] economists did not understand what was going on?”

DeLong agreed with Summers’ response: “the problem is that there is so much that is “distracting, confusing, and problem-denying in…the first year course in most PhD programs.” As a result, even though “economics knows a fair amount,” it “has forgotten a fair amount that is relevant, and it has been distracted by an enormous amount.” DeLong then goes on to call for serious change in what economics departments do and teach.

In Part 2 of this post, I’m going to address the realities of ‘serious change’; and, in that context, what is troubling for INET about Summers’ presence at the recent Bretton Woods gathering. I’ll do this from my experience in leading and guiding real change as well as by contrasting INET with another, smaller, and more nascent effort called Econ4.

For now, though, let’s put aside the serious lack of self-respect in paying any attention at all to a world historical failure like Summers (Why is this arrogant sophist even on anyone’s C list, let alone A list? Why isn’t Summers wearing sack cloth and rolling in ashes?). Instead, let’s respond to DeLong’s ‘fessing up to the crisis in economics:

Jeffrey Frankel: The ECB’s three mistakes in the Greek crisis and how to get sovereign debt right in the future

Yves here. While Frankel’s take on the ECB’s errors has some merit, his recommendation, of imposing much harder limits on eurozone members who run deficits in excess of permitted levels, is more debatable.

Any country running a large intra-eurozone trade deficit is going to show rising debt levels. If the increase in debt funds investments that increase economic productivity, that might work out fine in the long run, but that seldom proves to be the case. We’ve seen that big debtors either rack up rising government debt levels directly (Greece) or have rising private sector debts that eventually result in outsized financial sectors that produce financial crises that lead to collapses in tax revenues that then lead to rising government debt levels (or directly via bailouts, see Ireland). Note in most countries the explosion in debt to GDP is primarily the result of the impact of the global financial crisis on tax revenues). So fiscal deficits cannot be addressed independent of trade and cross border capital flows.

By Jeffrey Frankel, Professor of Economics at the Kennedy School of Government, Harvard. Cross posted from VoxEU

It is a year since Greece was bailed out by EU and IMF and there are many who label it a failure. This column says that while there is plenty of blame to go around, there were three big mistakes made by the European Central Bank. Number one: Letting Greece join the euro in the first place

Raghuram Rajan on Delineating the Role of Government

In this interview, Rajan, who famously told Greenspan at his last Jackson Hole conference that recent changes in financial services industry policy had increased risk, takes on the question of the role of government. He contends that economists have neglected this issue due to overspecialization.

Marshall Auerback: Get Ready for a Global Growth Slowdown

By Marshall Auerback, a portfolio strategist and hedge fund manager. Cross posted from New Deal 2.0.

Governments across the globe are headed for a disaster entirely of their own making.

Though capital markets remain strong, the global economic backdrop continues to deteriorate as fiscal retrenchment takes hold. Commodity markets have rallied in tandem with the fall in the dollar even though there are signs that growth in the emerging world is slowing. Japan’s economy is in the soup, the U.S. economy has failed to pick up as many thought (with a mere 2% growth rate expected to be released for Q1 shortly), and the European economy is overdue for its own slowdown. The U.S. stock market has also rallied despite the threat of a very high gasoline price, disappointing economic growth data, and a fairly mixed earnings picture.

Guest Post: Beware of runaway headline inflation

Yves here. As much as this post makes an interesting observation, note the emphasis on reducing labor bargaining power as the solution to booms and busts, when the era of weak labor bargaining power (which started taking hold in a serious way in the Reagan/Thatcher eras) showed far more financial instability that the preceding period where productivity gains were shared with workers. As a result, consumers didn’t need to resort to debt to compensate for stagnant worker wages. As long as we keep resorting to failed remedies, there isn’t much reason to hope for better outcomes.

By Heleen Mees, Researcher, Erasmus School of Economics and Assistant Professor, University of Tilburg. Cross posted from VoxEU

The latest figures from the US show that the consumer price index rose 0.5% in March, whilst the core personal consumption expenditure price index rose only 0.1%. This column explains the roles of these competing measures and argues that US monetary policymakers should pay close attention to headline inflation. It warns that neglecting headline inflation risks feverish boom-and-bust cycles with prolonged periods of high unemployment.

Michael Pettis: Is it time for the US to disengage the world from the dollar?

By Michael Pettis, a Senior Associate at the Carnegie Endowment for International Peace and a finance professor at Peking University’s Guanghua School of Management. Cross posted from China Financial Markets

The week before last on Thursday the Financial Times published an OpEd piece I wrote arguing that Washington should take the lead in getting the world to abandon the dollar as the dominant reserve currency. My basic argument is that every twenty to thirty years – whenever, it seems, that American current account deficits surge – we hear dire warnings in the US and abroad about the end of the dollar’s dominance as the world’s reserve currency. Needless to say in the last few years these warnings have intensified to an almost feverish pitch. In fact I discuss one such warning, by Barry Eichengreen, in an entry two months ago.

But these predictions are likely to be as wrong now as they have been in the past. Reserve currency status is a global public good that comes with a cost, and people often forget that cost.

Earth to Libertarians: Private Parties Have Coercive Power Too

I’m sick of the free pass given the libertarian blather, “The state is the only source of coercive power.” I doubt that many non-libertarians buy that assetion, but they too often remain silent because most libertarians are rabid on that issue and arguing with them is like talking to a wall. But since that bogus assertion has been showing up increasingly in comments here as right-wing plants are becoming more common, I might as well do a quick shred, since it does not take much effort to show this claim is nonsense.

Let’s look at some simple empirical examples of why this pet argument just ain’t so.

Guest Post: China is Different

Cross posted from MacroBusiness

We need a new framework for understanding and interpreting what is happening in China. As a friend recently commented to me, there should be three categories of economies: developed, developing and China. China may struggle, but it will struggle in a uniquely Chinese way, and inevitably pose deep questions about the future of capitalism. Pundits, especially of the bearish persuasion, are fond of deriding the comment that “this time it is different”. But are things always the same? Analytics should match the subject matter (methodology should match ontology), and what has happened in China already is very different to anything yet seen. It has been the most sustained wealth creation in history, largely unpredicted. Two recent comments reported on MacroBusiness, one by Michael Pettis and the other by Nouriel Roubini reveal the problem.

Both pundits focus on China’s extremely high levels of investment, which is about half GDP, instead of about a tenth in most developed economies. Viewing China through the lens of a developed economy, they argue there is trouble ahead. But Pettis also sees the frameworks used for developed economies start to fail:

Thomas Palley on How to Fix the Fed

The Roosevelt Institute hosted a conference yesterday on the future of the Federal Reserve, with the speakers including Joe Stiglitz, Jeff Madrick, Matt Yglesias, Joe Gagnon, Dennis Kelleher, Mike Konczal and Matt Stoller. Yours truly broke her Linda Evangelista rule to attend.

The discussion included the contradictions in the central bank’s various roles, its neglect of its duty to promote full employment, and its overly accommodative stance as a regulator, which has been enlarged thanks to Dodd Frank.

You can visit the Roosevelt site to view each of the three panels in full (they include the Q&A, which were very useful), the introductory remarks by Joe Stiglitz, or the presentations by each speaker separately. I encourage you to watch some of the panels, and to entice you, I’ve included videos from two talks I particularly liked below.

Bill Black: My Class, right or wrong – the Powell Memorandum’s 40th Anniversary

Yves here. Black’s post discusses a turning point that is not as well known as it ought to be. Thanks to reader John M for bring this post to my attention.

By Bill Black, an Associate Professor of Economics and Law at the University of Missouri-Kansas City. He is a white-collar criminologist, a former senior financial regulator, and the author of The Best Way to Rob a Bank is to Own One. Cross posted from New Economic Perspectives

August 23, 2011 will bring the 40th anniversary of one of the most successful efforts to transform America. Forty years ago the most influential representatives of our largest corporations despaired. They saw themselves on the losing side of history. They did not, however, give in to that despair, but rather sought advice from the man they viewed as their best and brightest about how to reverse their losses. That man advanced a comprehensive, sophisticated strategy, but it was also a strategy that embraced a consistent tactic – attack the critics and valorize corporations!

He issued a clarion call for corporations to mobilize their economic power to further their economic interests by ensuring that corporations dominated every influential and powerful American institution. Lewis Powell’s call was answered by the CEOs who funded the creation of Cato, Heritage, and hundreds of other movement centers.

Mirabile Dictu! Economists Agree All the Fed Has Done is Goose Financial Markets!

You heard it first in the blogopshere. From the New York Times:

The Federal Reserve’s experimental effort to spur a recovery by purchasing vast quantities of federal debt has pumped up the stock market, reduced the cost of American exports and allowed companies to borrow money at lower interest rates.

But most Americans are not feeling the difference, in part because those benefits have been surprisingly small….