Yearly Archives: 2021

Joan Robinson On The Importance Of International Trade For Economic Dynamics

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A few important things to understand macroeconomics/political economy are: national accounts/flow of funds, fiscal policy, endogeneity of money—the financial system in general, the role of demand (or the reverse Say’s Law), behaviour of firms such as pricing, decisions to produce, decisions to hire labour, and international trade and globalisation.

After the economic and financial crisis which started in 2007, economists have conceded to some extent that they have been wrong and accepted some heterodox positions except the most important one: international trade.

Joan Robinson was in my opinion the first economist to truly understand all the issues need to make someone an economist of rank one.

Here’s the opening of a 1973 article:

Joan Robinson on international trade

In this article she tells the reader about how this problem leads to polarisation in the fortunes of nations:

We are now in the era of modern capitalism when every industrial country has a national economic policy of near-full employment and growth of GNP. Every industrial country wants a surplus on income account. ‘Export lead growth’ is the most convenient way of running modem capitalism. Who succeeds at any moment is accidental, largely depending upon historical circumstances and political and psychological influences. Success leads to success and failure engenders failure.

The most important point is that market mechanisms fail to resolve imbalances and this leads to divergence instead of convergence and causes a deflationary bias to the whole world. So in the absence of a market mechanism, an official mechanism is needed.

Link

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.

How Come The New York Times Is Endorsing Joan Robinson?

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A Democratic Party operative Zachary Carter has an opinion piece The Woman Who Shattered the Myth Of The Free Market for The New York Times.

At first it might be surprising but as Glenn Greenwald says, the left loyalty to the Democratic Party has been the highest ever. The party’s most powerful people also pretend that they have moved radically left. Like a video on equity by Kamala Harris.

So NYT is promoting that the idea that the party has become radical and Joan Robison would approve Biden. If they’ve named Joan Robinson and you criticise their policies (for not doing enough) maybe the problem is with you? Are you rejecting Joan Robison? Propaganda like that.

Adam Tooze says that “Biden’s stimulus is the dawn of a new era” and JW Mason says that “It is the definitive break with neoliberalism”. So plenty of deceit happening there, with people in the left providing cover for it.

Hell, it’s even true that Biden’s policy is a change but a change to keep things constant.

And then Donald Trump was himself promoting large stimulus. He tweeted this:

STIMULUS! Go big or go home!!!

And in a video posted on Twitter, he proposed paying people $2,000 instead of $600, something the Democrats never proposed but pretended to after Trump said it.

But these Democratic Party loyalists won’t call Trump a radical. Rightly but the same standard isn’t extended to Joe Biden. So you see the deceit happening here.

Link

The Gatekeeper: Adam Tooze On Paul Krugman’s Evolution

Snip from a Paul Krugman article from the 90s.

Adam Tooze has a nice essay on evolution on Paul Krugman’s views. It’s decent although I would critique much more if I were to write it.

There was one part which was quite amusing to me:

The hour and a half Krugman spent laying out his new trade theory at the National Bureau of Economic Research in July 1979 was, he later wrote, ‘the best ninety minutes of my life. There’s a corny scene in the movie Coal Miner’s Daughter in which the young Loretta Lynn performs for the first time in a noisy bar, and little by little everyone gets quiet and starts to listen to her singing. Well, that’s what it felt like: I had, all at once, made it.’

Imagine being so wrong but feeling this way.

Paul Krugman has shifted his views but it’s not as if he has changed for the better to benefit mankind. He is still doing whatever as an establishment hack, trying to preserve power for top corporations.

Glenn Greenwald On Corporations’ Use Of Wokeism To Prettify Imperialism

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Glenn Greenwald has a new article at Substack explaining how corporations wear costumes of social justice to prettify imperialism.

The sarcasm in the article is wonderful:

Who could possibly be opposed to an institution that offers such noble gestures and works behind such a pretty facade? How bad could the GCHQ really be if they are so deeply committed to the rights of gay men, lesbians, bisexuals and trans people? Sure, maybe they go a little overboard with the spying sometimes, and maybe some of their surveillance and disinformation programs are a bit questionable, and they do not necessarily have the highest regard for law, privacy and truth. But we know that, deep down, these are fundamentally good people working within a fundamentally benign institution. Just look at their flamboyant support for this virtuous cause of social justice.

…

Large corporations have obviously witnessed the success of this tactic — to prettify the face of militarism and imperialism with the costumes of social justice — and are now weaponizing it for themselves …

You have to appreciate the genius of the propaganda. It helps people pretend that they stand for right causes.

Stephanie Kelton Trying To “Out-Right-Wing” Joe Biden ‼

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Joe Biden has been a neoliberal ghoul all his life and has helped oligarchs from a position of power. In recent times—perhaps due to pressure and threat from populists—he has adopted policies such as the recent large stimulus.

Biden is also talking of raising taxes on corporations and Janet Yellen, the US Treasury Secretary has proposed a minimum tax on corporations across countries, to prevent a race to the bottom policies.

Of course none of this means that they’re ditching neoliberalism. It is just a change to maintain the status quo. Elite preservation, basically.

There have been apologia from the left such as by J.W. Mason who has announced that there is a decisive break from neoliberalism! In general the left loyalty in the United States is the highest now, and that’s a sad thing. You won’t find for example, economists criticising Janet Yellen for conflicts of interests after taking $7.2 million in speaking fees from Wall Street, a kind of a bribe.

But there’s something even worse now. Stephanie Kelton one of the leading voices of neochartalism (or “MMT”), has a new opinion article Biden Can Go Bigger And Not ‘Pay for It’ The Old Way for The New York Times with the description:

By focusing on how much revenue they hope to raise from tax increases on the well-off, Democrats risk limiting the scope of their ambitions.

The article is deceitful too, claiming it’s not opposed to tax hikes but in the ending we see:

If Congress and the White House want to be responsible stewards of both society and the U.S. dollar’s value, then rather than focusing on taxation of the rich, they should prioritize and supply exactly what it would take, in terms of real resources, to electrify the nation’s power grid, repair every deficient bridge, give caretakers a living wage, upgrade our railways, and deliver clean drinking water and high-speed broadband to every home.

So you know, trying to out-right-wing Joe Biden, the neoliberal ghoul!

The trouble with neochartalists is that while it’s true that output can be expanded by increasing government expenditure and not increasing tax rates, that doesn’t mean that one can have like government expenditure equivalent to 50% of GDP, with taxes at some 25%. Taxes have to rise, and while more output bring in more taxes, it might not be sufficient enough and tax rates have to rise too.

Obviously, neochartalists’ political positions are a suspect. Obviously the Biden administration’s language is like from a book on neoclassical economics with arguments about “fiscal responsibility” etc, but one of the most reactionary politician has agreed to raise taxes and that is some bare minimum in the path to economic equality, so why try to puncture it?

Neochartalism And International Acceptance Of Currencies

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There was a recent critique of neochartalism by Costas Lapavitsas and Nicolás Aguila at the Developing Economics blog titled Monetary Policy Is Ultimately Based On A Theory Of Money: A Marxist Critique Of MMT.

Now, I don’t think that there is any Marxist theory of money, The true description of money and everything else can only be via using national accounts and the flow of funds, like Post-Keynesian stock-flow consistent models but the article has some interesting critique:

For Marxist political economy, monetary sovereignty depends on the relationship between capitalist accumulation in a nation-state and the ability to acquire world money, which in turn reflects a country’s place in the world market. The need for world money becomes clear once we consider capitalism as a global system, as it is needed for commodity transactions, the transfer of value, and the settlement of obligations among different parts of the world. The passage from the national to the international realm is a major problem for neo-Chartalist theory as there is no supranational state choosing units of account or having the power to tax at the international level.

The capacity to acquire world money necessary for participation in the world market differs dramatically among nation-states, and thus the global monetary system is hierarchically structured. In contemporary capitalism, one country, the U.S.A., issues quasi-world money, subject to competition by others. The lack of monetary sovereignty for other countries, far from being a policy choice, results from their subordinated position in the international hierarchy. This is particularly relevant for analysing economic policy in developing countries, where MMT prescriptions lose much of their appeal …

As long as countries are trading goods and assets with the external world, the acceptability of the currency is critical. Here taxing residents isn’t sufficient to make the currency acceptable to foreigners.

There’s an implicit wrong idea in neochartalism that the exchange rate adjusts smoothly to make things fine. A sort of an invisible hand sneaked in.

So unlike what neochartalists (the ones calling their theory “MMT”) say, floating the value of the currency won’t do the trick. It’s not like there’s always a price, sometimes there is no price to clear the foreign exchange market and the government might need to step in and meet the demands of investors.

Fiscal policy has a strong role to play, but ultimately exports have to rise in the long-run and fiscal policy becomes endogenous to it as Nicholas Kaldor had argued.

To make matters complicated, neochartalists also say similar things without saying that they realised these things only after they were challenged and forced to make changes. Big changes!

Thomas Palley likes to point out that neochartalism is a mix of old and new and the new is significantly wrong. The new relies heavily on claims about acceptance of currencies in the international markets. Such erroenous notions make them claim things like current account deficits are indefinitely sustainable. As long as acceptability of the domestic currency is not cast in stone, that’s of course not true.