Thomas Palley On Nord Stream Pipeline Attack Whodunnit

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As John Mearsheimer says—and which I believe is right—the United States bears the primary responsibility for the crisis in Ukraine.

Thomas Palley has written some good articles on this and in his latest, he address the issue of whodunnit on the attack on the Nord Stream pipeline. The article is titled Sabotaging Germany, Blaming Russia: Another View Of The Nord Stream Pipeline Attack.

Unfortunately discussion of US imperialism is now forbidden and even Post-Keynesians smear Palley. An example in this discussion.

Here’s Tony Blinken, US Secretary of State saying how this is a good opportunity!

Here’s Jeffrey Sachs saying he thinks that it’s the United States which did it and talks about how saying this is now taboo.

This crisis has shown how anti-imperialism is a rare thing in the West. It’s sad but perhaps scholars need to update their theories and reevaluate the role of the left in the West as providers of a left cover for imperialism.

RIP, Lance Taylor

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Lance Taylor has passed away.

Among other things, he promoted stock-flow consistent modeling. He had a book Reconstructing Macroeconomics.

I hold dear the review of Lance Taylor of Wynne Godley’s work, titled: A Foxy Hedgehog: Wynne Godley And Macroeconomic Modelling.

The article starts:

The fox knows many things, but the hedgehog knows one big thing (Archilochus, seventh century BCE).

Lance Taylor clearly understood the importance of accounting. In the paper A Simple Model Of Three Economies With Two Currencies, Wynne Godley and Marc Lavoie quote him:

As pointed out by Taylor (2004, p. 206), ‘the best way to attack a problem in economics is to make sure the accounting is right’.

…

Bibliography

…

Taylor, L. 2004. Exchange rate interderminacy in portfolio balance, Mundell–Fleming and
uncovered interest rate parity models, Cambridge Journal of Economics, vol. 28, no. 2, 205–27

…

Here’s the link to that Lance Taylor paper.

Thomas Palley On The Intellectual No-Fly Zone

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Thomas Palley has a new blog post Flirting With Armageddon: The US And Ukraine discussing how the US government is escalating the situation in Ukraine and that warns that it may end badly. An important part of his post is ponting out the existence of an edict of silence.

First, the liberal blob has promulgated an edict of silence against those who challenge its explanation of the war and the case for US participation. The edict applies to conservatives who argue “it’s not our war”, and to independent critics who argue the war has been “made in the USA” via a thirty-year slow-motion attack on Russia conducted through eastward expansion of NATO and regime change subversion in the republics of the former Soviet Union.

Matt Taibbi has used the phrase intellectual no-fly zone to describe this.

Anyone who criticises will be brought down. Supposed left-wing politicians such as Bernie Sanders and the “Squad” vote for more funds for the military industrial complex. The left in the West has always been soft on imperialism and with this the process seems complete. Even supposedly left-wing governments of Sweden and Norway have joined NATO.

There’s a serious problem with the left in the West.

Matt Taibbi quotes Noam Chomsky:

… I reached out to Chomsky this weekend and asked him what in particular it is about the Ukraine conflict that’s brought out such an aggressive response.

“Putting aside the dangers, which are all too real,” he says, the unusually intense response is “part of something much worse: the general atmosphere of irrationality engendered by the whole Ukraine affair. It ranges from the nutcases like Fukuyama assuring us that there’s no threat of nuclear war if we escalate (and the official policy that is not much different), to the ‘left’ shouting slogans about how we have to defend Ukraine and punish Russia no matter what, and any voice that breaks unanimity has to be stilled, maybe crushed.”

A Rare Admission Of How Monetary Policy Works

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A recent FT Alphaville post by Ajay Rajadhyaksha, global chair of research at Barclays has this admission on how monetary policy works:

Central bankers don’t like admitting it, but a primary goal of rate hikes is to cause enough job losses to ensure that wage growth slows down.

Several Post-Keynesians have of course said this but here I quote Nicholas Kaldor who wrote in 1980 in the article Monetarism And UK Monetary Policy:

… This does not mean that a ‘monetarist’ economic policy such as that of the present government is futile. But its real effect depends on the shrinkage of effective demand brought about through high interest rates, an overvalued exchange rate and deflationary fiscal measures (mainly expenditure cuts), and the consequent diminution in the bargaining strength of labour due to unemployment. Control over the ‘money supply’, which has in any case been ineffective on the government’s own criteria, is no more than a convenient smoke-screen providing an ideological justification for such antisocial measures.

Wynne Godley’s Views About How The Economy Works

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You may have noticed the expression (G + X)∕(θ + μ), where G is government expenditure, X is exports, θ is the tax rate, and μ is the propensity to import in stock-flow consistent (SFC) models.

In the book A Biographical Dictionary of Dissenting Economists, Wynne Godley (pages 232-240) says:

… As a result of this apprenticeship at the ‘sharp end’ of economic policymaking, I had formed by the late 1960s a system of views about how the economy works which corresponded roughly to what people now call ‘crude’ Keynesianism. That is, I thought real output and employment were determined by the exogenous variables of the model – government expenditure and exports – interacting sequentially through the combined effects of the multiplier and accelerator, while inflation was a largely contingent process (which, as stated by the OED, ‘may or may not happen’) only weakly related to the pressure of demand (1974a). But I recognized early on that performance in foreign trade was an abiding constraint on growth. In no sense did this set of views make me into a ‘dissenting’ economist. The same opinions were held by virtually all my colleagues in the Civil Service and, so far as I could discern, in comparable institutions in foreign countries. I had, for instance, no sense of any difference in Weltanschauung when discussing any aspect of economics with Arthur Okun.

(The entry seems to have been first published in the year 2000).

I thought if you’re writing on economics, you should say that frequently and especially when you’re introducing the subject to someone.

That the worldview was widely held seems surprising to me though.

Edward Nell On Managed Trade

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Edward Nell in Free Market Conservatism: A Theory Of Critique And Practice, 1984:

… The second set of controls needed would prevent the flight of capital overseas. Some capital mobility would be permitted; the point would be to regulate it in the national interest, rather than permitting capital flows to follow anticipated profits (profits that may never be realized, as in the loans to some ‘developing’ countries, which went into the pockets, and Swiss bank accounts, of corrupt officials). Along with these controls, a policy of managed trade will be needed; countries must not be required to generate recessions in order to bring imports down to the level of their exports. Selective import controls must be permitted and balance of payments deficits must be financed without requiring ‘austerity’. Again, it is not technically impossible to see how to do this; instead of penalizing the weak—those who run deficits—penalties could be assessed against the strong—the surplus countries—who would be required to promote the loans to finance the deficits. Instead of cutting back imports through austerity, deficit-running countries could be encouraged to modernize their export industries

Marc Lavoie On The Euro Area And Neochartalism

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Marc Lavoie has a new paper MMT, Sovereign Currencies And The Eurozone. It’s based on a lecture he was asked to give in 2021 STOREP conference. In this he analyses what neochartalism (“MMT”) is and what is says about the Euro Area.

Marc Lavoie also discusses Sergio Cesaratto’s work. Sergio had an excellent book Heterodox Challenges In Economics: Theoretical Issues And The Crisis Of The Eurozone and I somehow missed Marc’s review of it earlier.

My view on these issues—with good grasp of the institutional details—is that countries face a balance-of-payments constraint and the way the Euro Area is set up makes the balance-of-payments constraint stronger. Euro Area countries can no longer devalue their currencies (or hope their currencies depreciate by market forces) and the government can’t make overdrafts on their central banks.

It’s true that the European Central Bank (ECB) can buy government bonds but that it can doesn’t mean it actually will do to the extent needed. Indeed, the ECB has also pushed for tightening of fiscal policy using its powers. Countries face a BOP problem because like in other institutional setups, they’re at the mercy of foreigners. In fact more it’s more than otherwise in case of the Euro Area. And international indebtedness ultimately falls on the shoulders of the governments and hence we saw crisis in the government bond markets.

Countries with a strong international investment position such as Germany do not face this problem.

Ultimately, the problem is that the Euro Area doesn’t have a central government which would be involved in large fiscal transfers and keeping imbalances between countries in check. But as Sergio Cesaratto argues, it was never meant to be that way as the founders of the Euro Area designed it in a way to take away powers from national governments.

I should add one question which arises: the question about the political role of the ECB, which is similar to the role of governments in other places such as the US. There seems to be an inconsistency in the position of people such as Sergio (and I) that we treat the ECB and the US government differently. We say that the US government should be involved in more fiscal stimulus but don’t exactly say that the problems of the Euro Area can be resolved by proposing that the ECB promises to purchase government bonds without limits.

The answer to that is: even outside the Euro Area, rich countries’ central banks can bail out poor countries facing balance-of-payments financing problems. Does that mean that countries outside the Euro Area don’t face a bop-constraint??

It’s a rhetorical question posed as an answer.

Ultimately the balance-of-payments problems in the Euro Area is more severe than otherwise.

Where does neochartalism (“MMT” or “M.M.T.”) fit in my description? The idea that Euro Area governments cannot make overdrafts at their national central banks (NCBs) is something stressed by neochartalists is right but many authors who didn’t call themselves MMTers stressed this such as Wynne Godley in 1992. The idea that current account deficits don’t matter isn’t useful as you still have to explain why Germany didn’t go into a crisis like Greece.

Paul Krugman And Free Trade As Mercantilism

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In a recent article How The West Is Strangling Putin’s Economy for The New York Times, Paul Krugman makes this point about international trade:

One final point: The effect of sanctions on Russia offers a graphic, if grisly, demonstration of a point economists often try to make, but rarely manage to get across: Imports, not exports, are the point of international trade.

That is, the benefits of trade shouldn’t be measured by the jobs and incomes created in export industries; those workers could, after all, be doing something else. The gains from trade come, instead, from the useful goods and services other countries provide to your citizens. And running a trade surplus isn’t a “win”; if anything, it means that you’re giving the world more than you get, receiving nothing but i.o.u.s in return.

That’s quite a deceit!

Now, he has some caveats but tries to minimise them. But the main point about imports, not exports being the point of international trade is something top corporations claim since they want to open markets in poor countries. This reminds of Joan Robinson’s quote that free trade is a subtle form of mercantilism. A poor country needs protection from foreign competition. In Post-Keynesian theory, exports/success of corporations in international markets is quite important. As Anthony Thirlwall in the paper Kaldor’s 1970 Regional Growth Model Revisited says about Nicholas Kaldor’s model (which I believe):

The first proposition of the model is that regional growth is driven by export growth. Kaldor regarded exports as the only true autonomous component of aggregate demand, not just at the regional level but also at the national level because consumption and investment demand are largely induced by the growth of output itself …

So that’s quite the opposite view from mainstream economics.

Mats Lundahl — Twelve Figures In Swedish Economics

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Mats Lundahl has a new book Twelve Figures In Swedish Economics. The book has a chapter Gunnar Myrdal On Poverty And Circular, Cumulative Causation.

In my opinion, the principle of circular, cumulative causation is the most important principle of economics. The explicit way how it works via international trade is in the works of Nicholas Kaldor. As Anthony Thirlwall points out in his article Kaldor’s 1970 Regional Growth Model Revisited:

Kaldor was more than familiar with Myrdal’s ideas having worked with him in the Economic Commission for Europe (ECE) in Geneva from 1947 to 1949, and remained close friends.

In Lundahl’s words (page 105):

Myrdal wanted to explain the pattern that he observed and once more resorted to his idea of circular, cumulative causation. The traditional theory of international trade, in his view, could not explain the disparities. It was conceived in terms of stable equilibrium and pointed to equalization of incomes. Instead, Myrdal suggested, the analysis would have to concentrate on the quality of the factors of production and the effectiveness of their use in different uses. The notion of stable equilibrium was false. The economic system is ‘not steering towards such a position at all but, rather, is continuously en route away from it’ in the cumulative fashion sketched in An American Dilemma. His claims were extraordinarily strong: ‘I have suggested that the principle of interlocking, circular interdependence within a process of cumulative causation has validity over the entire field of social problems.’

A full book version of Mats Lundahl’s article is in his recent book from earlier this year: The Dynamics Of Poverty: Circular, Cumulative Causation, Value Judgments, Institutions And Social Engineering In The World Of Gunnar Myrdal.

Wynne Godley Vs. The Mundell-Fleming Model

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In mainstream economics, the Mundell-Fleming model is central. It’s however wrong to the core!

As early as 1978, Wynne Godley in a paper “New Cambridge” Macroeconomics And Global Monetarism: Some Issues In The Conduct Of U.K. Economic Policy (with Martin Fetherston) had a model with the compensation thesis which is contrary to the neoclassical model. As per Marc Lavoie’s paper Wynne Godley’s Monetary Circuit, where he also refers to the paper, according to the compensation thesis:

central banks set a target interest rate and supply bank reserves and cash on demand. Thus, if there is an increase in the amount of foreign reserves held by the central bank on the asset side of its balance sheet, so as to keep the overnight interbank rate on target this will be compensated on the asset side of the balance sheet of the central bank by either a decrease in the size of the advances provided to domestic banks or a decrease in the amount of government securities held by the central bank. As a third possible compensatory mechanism, the central bank may instead issue central bank bills on its liability side.

Marc Lavoie and Wynne Godley, Levy Institute, 2002. Picture via Marc Lavoie’s site.