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Economists On US Manufacturing And Trade

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Recently, Paul Krugman wrote two articles in The New York Times on recent surge in US manufacturing: Making Manufacturing Great Again (June 6, 2023) and Making Manufacturing Greater Again (April 20, 2023).

Post-Keynesians stress the importance of manufacturing and exports/international trade. Before the economic and financial crisis which started in 2007, Wynne Godley was worried about all this and proposed to improve exports and take measures such as imposing non-selective protectionism, as he thought—rightly—that a crisis would happen and fiscal policy should be used and would be used but that alone will not be sufficient. In other words, the market mechanism won’t do the trick.

The reason manufacturing is important is because of the potential for expansion of exports.

Economists however have been denying all this. Especially with the rise of Donald Trump when attempts to improve the US balance of payments/international investment position were looked upon as clownish. But now the establishment has accepted that it needs to be addressed. But they don’t want to accept that they were behind. At the same time, Joe Biden has gone beyond measures that Trump has taken.

However, there are many economists who still live with old dogmas. For example, see Adam Posen’s article America’s Zero-Sum Economics Doesn’t Add Up for Foreign Policy.

So we have two types of mainstream economists: a) those who grudgingly accept that they were wrong and b) who are still wedded to dogmas.

There’s of course a limit to this, so the solution to the problems lie in disbanding the system of free trade and move toward a system of balance-of-payments targets.

Marc Lavoie On The Shortcomings Of The Profit Inflation Theory

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Marc Lavoie has an article, Some Controversies In The Causes Of The Post-Pandemic Inflation at the  blog, Monetary Policy Institute Blog.

From the article:

In the post-Keynesian tradition, firms usually operate in an area where marginal costs, or unit direct costs, are constant. Taking into account overhead labour costs and other fixed costs, unit costs are thus decreasing up to full capacity. This means that with a given markup rate over unit direct costs (or with a given markup rate over normal unit costs), profits will be rising for two reasons … First, as firms produce and sell more units, their unit cost drops, and hence their realized profit per unit gets bigger, and secondly since they sell more units, they will make more profits.

A lot of heterodox authors have endorsed the profit inflation theory and there are even research reports from the Wall Street claiming the same! But according to Marc Lavoie’s argument they just explain it in only some industries like the oil industry.

Nicholas Kaldor On Monetary Policy And Stability Of Financial Instituitions

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Via Eric Tymoigne’s blog post, I came across this quote from Nicholas Kaldor in 1982 (page 13) on stability/solvency of financial institutions, especially relevant in recent times:

Given the fact that most, if not all, types of financial institutions have short-term liabilities, the interest payment on which varies in strict relation to the Bank Rate, whilst their assets consist in a large part of bonds or mortgages, the income from which is (or may be) fixed, there must clearly be limits to the freedom of the central bank to use the interest weapon if the solvency and viability of financial institutions is to be preserved. This is only one aspect of a wider problem of the Bank of England in its policies of debt-management (regarded by the Committee as the ‘fundamental domestic task of the central bank’), which must be so conducted as to provide various types of debt in the amounts and proportions in which the public desires to hold them subject to the Bank’s powers to influence the public’s preferences by altering the relative yield on various types of debt.

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That’s from his book The Scourge Of Monetarism.

It’s a fantastic book and clearly shows how Kaldor is a monetary economist of rank 1.

A favourite quote from the book is (next page) and which I quote often in this blog:

… As it is, a highly developed banking system already provides such facilities on an ample scale, since it is prepared to accommodate the public’s changing demand between different types or financial assets by altering the composition of the banks’ assets or liabilities in a reverse direction. If the non-banking public wishes to switch its holding of gilts for interest-bearing bank deposits, the banks are ready to supply such deposits at the minimum of inconvenience, and at the same time to place their surplus funds into the gilts which were previously held by the public. Similarly the banks provide easy facilities to their customers for switching balances on current accounts into interest-bearing deposit accounts, or vice versa. Hence, while the annual increment in the total holding of financial assets of the private sector (considered as a whole) is nothing more than the mirror-image of the borrowing requirement of the public sector (in a closed economy at any rate), neither the Government nor the banks can determine how much of this increment will be held in the form of cash (meaning notes and current deposits) and how much in the near-equivalents to cash (such as interest-bearing demand deposits) or in various forms of public sector debt. Thus neither the Government nor the central bank can control how much or the total financial assets the public prefers to hold in the form of ‘money’ on one particular definition or another.

Marc Lavoie On Recent Controversies On Inflation

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There’s a new talk (from 22nd February) by Marc Lavoie (available on YouTube) on the recent controversies on relatively high inflation in recent times in North America.

Marc had already talked on this before.

Profits vs profits margins vs costing margins.

The above screenshot summarises Marc Lavoie’s points. The discussion appears around 16:00 in the video.

Lots of left-leaning economists have claimed the idea of profits being the source of high inflation. An example is a recent paper by Isabella Weber (and Evan Wasner) who claim that under conditions of supply constraints, firms can hike prices.

Link

FT Letter To The Editor On Current Account Imbalances And War

FT has published a letter to the editor from some post-Keynesian economists arguing for regulating imbalances in the current account balance of payments, and that such imbalances make wars more likely.

One of the signatory of the letter is Dimitri Papadimitriou, who along with Wynne Godley had been warning about imbalances since the turn of the millennium.

From the letter:

…

A new international economic policy initiative is therefore required to head off the threat of further wars.

A plan is needed to regulate current account imbalances, which draws on John Maynard Keynes’s project for an international clearing union.

…

The current system of free trade has created a deflationary bias in the world economy. A further bias is introduced because the United States is now a large debtor of the world and till the crisis which started in 2007 it was acting as the driver of the world, a role which it still plays but is not as big as before. With such a deflationary bias, countries try to use beggar-thy-neighbour policies, as world output is limited. That creates tensions between countries and the desperation to raise output exacerbates the tensions. So a new international order: a system of regulated/planned trade.

Link

Ashwani Saith Discusses His Book Cambridge Economics In The Post-Keynesian Era: The Eclipse Of Heterodox Traditions

There’s a webinar for the Review Of Political Economy where Ashwani Saith discusses his new book on Cambridge economics, hosted by Louis-Philippe Rochon and with discussion from Francis Cripps, Marc Lavoie and Maria Cristina Marcuzzo.

The event was held on Feb 2, 2023.

[The title is the link to the video on YouTube]

Ashwani Saith’s New Book — Cambridge Economics In The Post-Keynesian Era: The Eclipse Of Heterodox Traditions

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Ashwani Saith’s new book is out. It’s the history of how Post-Keynesianism was dethroned at Cambridge through power and influence of neoliberalism.

Wynne Godley is on the cover!

From the book’s description of the cover:

COVER

St Michael’s victory over the devil.
Jacob Epstein, Coventry Cathedral

On 14–15 November 1940, “a bright moonlit cloudless night made navigation simple” for the Luftwaffe operation—fatefully code-named Moonlight Sonata—of the blanket bombing of Coventry in which “almost a third of the city was fattened” with its medieval cathedral reduced to rubble. (GCHQ 2021). Wynne Godley was married to Kitty Garman, daughter of Kathleen Garman and the famous sculptor Jacob Epstein, one of whose creations lives on the wall of the cathedral in Coventry evoking the unbroken spirit of the city, with Benjamin Britten composing his War Requiem for the consecration of the reconstructed cathedral in 1962. It depicts St Michael—representing the good—slaying the devil. Epstein used a model of his “impossibly handsome” son-in-law, Wynne, to sculpt the head of St Michael. Though Wynne and his research team, along with other celebrated heterodox lineages, lost out proverbially to “the devil” in the Cambridge war of economics, there has subsequently been a defiant phoenix-like revival of the reputation and work of the famous Godley-Cripps Cambridge Economic Policy Group of the 1970s, as well as of other renowned radical traditions nurtured since the 1920s in Cambridge, the crucible of heterodox economics. The allegorical symbolism of Sir Jacob Epstein’s sculpture resonates with the leitmotif of the book.

Here’s Marc Lavoie’s review:

Ashwani Saith’s book is monumental, enthralling, beautifully written with its occasional satirical tone, but as we are being warned, depressing. It explains how the Faculty of Economics of the University of Cambridge—the world centre of post-Keynesian economics—was gradually and entirely taken over by neoclassical economics and why the Department of Applied Economics, also at the heart of heterodox economics, eventually came to be dismantled. This was so far an untold story, except for a chapter on ‘Faculty wars’ in Saith’s previous book, the intellectual biography of Ajit Singh. The current book provides 14 chapters of a meticulous detective story, relying mostly on Cambridge archives, but also on testimonies, interviews, emails, and previous articles of participants to these events. The book makes clear that, besides possible strategical mistakes by the incumbent heterodox economists, there were inexorable and ineluctable outside forces that led to this dismal state of affairs, through the Americanization of the economics profession and through the changing political winds that blew out heterodox and left-wing economics nearly everywhere in the world. The last chapter shows that all is not lost, both in Cambridge and elsewhere in the world.

…

REFERENCES

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GCHQ. (2021, April 19). The bombing of Coventry in WWII. Retrieved December 19, 2021, from https://www.gchq.gov.uk/information/the-bombing-of-coventry-in-wwii

…

The book is 1217 pages long.

Word count of “Kaldor” and “Godley”: 428 and 512 respectively.

Mainstream Economics On A Better Globalisation

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The United States policies and maintains the “liberal international order”, a totally unfair game built on laissez-faire/anti-Keynesian ideas. That was advantageous for the United States because its corporations are highly competitive because of historical reasons and who don’t need protection at home. Of course the US has still been using protectionist measures, so there’s hypocrisy there too. But the general system is the removal of protection from countries whose producers need it. Free trade in general. Low tariffs, no import quotas and industrial policy is shooed away.

There’s a good Noam Chomsky video on What Is The WTO? (with transcripts on that page).

Post-Keynesians have argued how the system of free trade has a deflationary bias and causes polarisation in the fortunes of nations.

The solution is, as proposed by Nicholas Kaldor in his book Causes Of Growth And Stagnation In The World Economy, page 87:

… coordinated fiscal action including a set of consistent balance of payments targets and “full employment” budgets.

Anyway, China has gamed this too well to cause troubles to the United States. The US balance of payments and international investment position is on an unsustainable path now because of this. Slower growth for the US also implies slower growth for the world as a whole because the United States is a spender of the last resort (or more like the first resort). High imbalance also means that many countries can’t expand fiscal policy.

So there is a need to change the rules of globalisation, which is more than about free trade but free trade is an important part of it.

Dani Rodrik has two interesting recent articles on this. He is different from the establishment but unfortunately falls short. In his article US-China Rivalry: Geopolitics Is Ruining The Chance To Shape A Better Globalisation, he talks of how the US has taken measures which are more than just tariffs raised by Trump:

US President Joe Biden has added to these challenges by launching what Edward Luce of the Financial Times has called “a full-blown economic war on China”. Just before the party congress, the United States announced a vast array of new restrictions on the sale of advanced technologies to Chinese firms.

As Luce notes, Biden has gone much further than his predecessor Donald Trump, who targeted individual companies such as Huawei. The new measures are astounding in their ambition, aiming at nothing less than preventing China’s rise as a hi-tech power.

In Trump’s four years, economists led by Paul Krugman dismissed Trump’s actions on China but the current Biden administration for which Krugman—acts as a lackey—have gone way beyond.

It’s such a blot on the economics profession that almost nobody saw all this coming. The exception of course was Wynne Godley who was recommending import controls and policies to expand exports in the 2000s. The bigger solution of course is one in which trade is overall balanced. Wynne Godley mentions in his article The United States And Her Creditors — Can The Symbiosis Last? written in 2005:

A resolution of the strategic problems now facing the U.S. and world economies can probably be achieved only via an international agreement that would change the international pattern of aggregate demand, combined with a change in relative prices. Together, these measures would ensure that trade is generally balanced at full employment.

The other Dani Rodrik article How To Build A Better Order although interesting doesn’t go much far than proposing some changes. And Rodrik is a kind of dissenter from mainstream economics from within the establishment, so the profession doesn’t have a clue!

Mainstream Economics Vs. PKE On Manufacturing

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Post-Keynesian growth theory (based on the work of Nicholas Kaldor) highlights the importance of manufacturing.

Mainstream theory denies it.

That’s because once you start talking along those lines, the idea of free trade appears even more dubious than at first sight. Mainstream economists don’t want that to happen as they represent the interests of Western corporations which have an interest in finding more markets for their products and services, at the expense of local producers abroad.

A recent denial of the importance of manufacturing came from Adam Posen who uses what’s called woke language. It also highlights how the woke ideology/identity politics is simply class politics disguised as concerns for identity.

Here’s what Adam Posen said in a talk at the CATO Institute:

I’m sure I’m gonna piss off both left and right, so I apologize. The fetish for manufacturing is part of the general fetish for keeping white males with low education outside the cities in the powerful positions they are in in the U.S., and that is really what’s going on here, because when you look at the costs of manufacturing and Susan Houseman and her co-authors have done a lot not of manufacturing but of trade and job displacement and community. Susan Houseman and her co-authors have done a lot of work on this and I’m sure she’ll have a different view than I do but when I look at the so-called cost of the China shock or the cost of the decline of manufacturing, I always think ‘compared to what’?

This is ridiculous as it sort of implies that people of other races somehow don’t want a position in manufacturing, are okay with offshoring work abroad or are okay with closing down of factories due to competition from abroad.

In reality this kind of analysis is just cover for class politics favouring the upper class and the super-rich.

Compare Post-Keynesians:

Here’s a quote from Wynne Godley from 1995 from the article, A Critical Imbalance In U.S. Trade, The U.S. Balance Of Payments, International Indebtedness, And Economic Policy:

It is sometimes said that manufacturing has lost its importance and that countries in balance of payments difficulties should look to trade in services to put things right. However, while it is still true that manufacturing output has declined substantially as a share of GDP, the figures quoted above show that the share of manufacturing imports has risen substantially. The importance of manufacturing does not reside in the quantity of domestic output and employment it generates, still less in any intrinsic superiority that production of goods has over provision of services; it resides, rather, in the potential that manufactures have for expansion in international trade.

Link

Marc Lavoie And Matias Vernengo — Thinking About Inflation

There were two talks on inflation in recent times by Marc Lavoie and Matias Vernengo on September 16th at the Fields Institute For Research In Mathematical Sciences in Canada.

Both authors highlight the shortcomings of orthodox explanations of the recent spike in inflation: the monetarist argument about expansion of the balance sheet of central banks, wage-price spiral, rise in demand etc. They also critique the argument about firms raising their markups and becoming more greedy, which many on the left seem to be putting forward. In their opinion—which I also agree with—it is mainly because of supply chains.

[The title is the link to the video]