Krugman decided to try his hand at history of macroeconomic thought in one of his last posts. That’s great, since history of thought is essential to understand how we got here. It’s also bad, since Krugman is still very much a mainstream author, and misses the point of Keynes’ contributions, and the limitations of neoclassical (or more properly, marginalist) approach. He suggests correctly that the New Classical (NC)/Real Business Cycle (RBC) project was a failure, but both the reasons for that and his interpretation of the Keynesian project are misguided.
The first proposition in Krugman’s reassessment of the recent history of macroeconomics, is that Keynesian models were ad hoc, and assumed wage and price rigidity. The whole of chapter 19 of the General Theory (GT) is about the effects of price and wage flexibility, and how it does not produce full employment. It was with Franco Modigliani’s PhD dissertation, done at the New School for Social Research under Jacob Marschak, that the sticky wage version of Keynesian theory that would dominate the neoclassical synthesis was concocted. Read the rest of this entry »
The US is by no means the world’s most competitive or strongest economy, though the dollar remains its reserve currency. This intuitively contradictory feature in contemporary capitalism was seen as likely to sap the dollar’s strength, even if there was no clear alternative to it as a reserve currency. The threat to the dollar intensified with the onset of the 2008 crisis and the Federal Reserve’s response to that crisis in the form of an injection of huge volumes of cheap liquidity into the system. With the system awash with dollars, the currency was expected to slide. The evidence too pointed to a medium-term decline of the relative value of the dollar. Countries like China with substantial exposure to dollar-denominated assets were wary of suffering large losses because of the depreciation of the dollar.
What has come as a surprise, however, is the recent sudden rise of the dollar with a parallel fall in the value of a whole host of assets varying from equity to metals and gold which had emerged as the preferred safe havens for investors.
In the debate on the euro area’s future, the ”big options“ have now been tabled: fiscal union, euro bonds, a European economic government – or even all three together based on a sound democratic legitimization. It is absolutely right that the European Monetary Union will only be able to survive if it moves closer to a political union. But this fundamental debate does not help to solve the current crisis in the euro area. And time is running short.
Triple Crisis blogger Gerald Epstein was recently interviewed by the Institute for New Economic Thinking (INET) on the role of the financial sector in the real economy and how to assess whether the sector is currently too big or engaged in socially inefficient activities.
There has been a certain view, that was already quite popular around the time Strauss-Kahn still managed the IMF, that with Christine Lagarde the Fund has become less orthodox, not just regarding capital controls, but now also supposedly on fiscal issues. See for example the article in the NYTimes by Liz Alderman.
In the last World Economic Outlook, the Fund argues (WEO, p. 110) that Argentina’s inflation results from excessively expansionary policies (no analysis backs this claim and the effects of a more devalued currency and commodity prices are not discussed) and suggests (p. 42) that monetary tightening is necessary. Also, the report continues the tone of the previous WEO, suggesting that in developed countries fiscal adjustment should continue to reduce the debt burden, and in developing ones, like Argentina, to avoid overheating.
The young are sinking into poverty faster than the elderly because the social safety net is working and the economy isn’t.
The poverty data released by the Census Bureau last week may well be the straw that broke the camel’s back — the camel being those deliberately blind people who can’t seem to acknowledge that most Americans are doing poorly. Average Americans should not be the ones who have to shoulder the burden of balancing the budget, even if it needed balancing soon.
The poverty rate is now as high as it was during the war on poverty of the 1960s — about 15 percent. The Census also revealed that median household income went nowhere under George W. Bush and is now down to its lowest level since 1997, essentially before the Clinton boom.
G-20 development ministers meet on Friday in Washington, D.C. One of the items on their agenda is a proposal developed in June for the G-20 agriculture ministers to allow the World Food Program to develop a pilot proposal for an emergency food reserve. The decision was possibly the most important outcome in an otherwise thin summit communiqué: however circumscribed, we know that food price volatility correlates with low stocks, and that providing stocks is a proven way to curb excessive volatility. We also know that in emergencies, in most of the poorest countries, it takes an average of 90 days to bring food into food-deficit areas. 90 days is too long. The costs of working in emergency conditions are also too high, in both resources and human life. There are cheaper, better ways to ensure food is available when it’s needed: a reserve in the food-vulnerable regions is one of them.
As an environmentalist who looks for answers, I am clear that there is a huge amount of buzz about low carbon economy and there is an equal amount of confusion about what this means. Nobody wants to accept that in the current economic model, the technology pathway is constrained. There is just so much any country can do to reduce its emissions, without changing the way it does business or the business of business itself. This is the crisis and challenge of climate change. This is why the world is struggling to find an agreement on an issue, which is both obvious and serious.
India is no different from the rest of the world. In fact it is at the bottom of the development trajectory – it has a long way to go to meet its growth needs and the way ahead will only add to pollution. This is inevitable. It will need the ecological space to increase its emissions.