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Unsustainable Processes Of The EU

Stephen Kinsella on his new web app:

Wynne Godley’s Seven Unsustainable Processes (1999) examined the medium-term prospects for the US economy. It shows that in the United States, growth in that period was associated with seven unsustainable processes related to fiscal policy, foreign trade and payments, and private saving, spending, and borrowing. Given unchanged US fiscal policy and growth in the rest of the world, in order to maintain growth, the excessive indebtedness implied by these processes would be so large as to create major problems for the US economy and the world economy in the future. Godley was right. This web application aims to replicate Godley’s analysis for all of the countries in the EU, to see whether or not these unsustainable processes can be seen. It goes beyond Godley in forecasting each important ratio. The accompanying paper gives full details of the ratios and their construction.

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Dirk Bezemer On How Wynne Godley And Some Other Economists Saw The Crisis Coming

Dirk Bezemer had investigated who saw the crisis coming and why. Now he has written a short piece for the Financial Times‘s readers.

It’s not an easy task. Many may have said that “there is going to be a crisis”. Some may even say the same thing their whole life. Even a broken clock is right twice a day!

So one has to choose some criteria to separate good analysis from fluke.

Also, What Bezemer observes is that the common theme of economists who saw it coming is the use of flow of funds accounting.

One small quibble in the latest article: Bezemer claims that lending to the financial sector “crowds out” production. I am not sure that’s the case. But it’s not important here.

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Alex Izurieta On The UN Global Policy Model

Alex Izurieta compares and contrasts the UN Global Policy Model with models of other international organizations such as the IMF, the OECD and the EU:

A central proposition in this essay is that global models cannot be taken to represent objective and scientific tools for policy analysis. Clearly, all models have to make simplifications and in doing so they will fail to capture some dimensions of economic reality. … Unfortunately, the dominant models proposed by the mentioned IOs ignore essential features of the socio-economic system and therefore deliver a seriously distorted view of policy impacts. Most salient are their assumptions about economic growth, distribution, fiscal and monetary policy, and their failure to address problems of global aggregation—that is, of adding up variables for each world region to account for all relevant macroeconomic factors.

Also an important point on “structural reforms”,

In a different model, such as the UN GPM, structural reforms that depress wages and increase inequality in one country have negative repercussions in other countries that tend to reduce aggregate demand in the world as a whole

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Jayati Ghosh — After Neoliberalism, What Next?

Jayati Ghosh in Red Pepper: 

The question ‘what is your alternative?’ is a familiar one for most progressives, and too often we are overly defensive or self-critical about our supposed lack of alternatives. In truth, there are many economically-viable, socially-desirable alternative proposals in different contexts. The problem is not their lack of existence but their lack of political feasibility, and perhaps their lack of wider dissemination. …

While rejecting the totalising theory, it is possible to think of a broad framework around which there could be much agreement, even among people who do not necessarily identify themselves as of the ‘left’, but are nevertheless dissatisfied with current economic arrangements at both national and international levels.

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The obsessively export-oriented model that has dominated the growth strategy for the past few decades must be reconsidered. This is not a just a desirable shift – it has become a necessity given the obvious fact that the US and the EU are no longer engines of world growth through increasing import demand in the near future. This means that both developed and developing countries must seek to redirect their exports to other countries and most of all to redirect their economies towards more domestic demand. This requires a shift towards wage-led and domestic demand-led growth, particularly in the countries with economies large enough to sustain this shift.

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Noam Chomsky And Ha-Joon Chang In Conversation On Globalization

There’s a nice interview of Noam Chomsky and Ha-Joon Chang by C.J. Polychroniou of Truthout on the myths of globalization. Of course, as Chomsky and Ha-Joon Chang point out, the debate is not against globalization per se, but globalization under the current rules of the game.

Ha-Joon Chang is direct about his views:

The assumption that globalization benefits everyone is based on mainstream economic theories that assume that workers can be costlessly re-deployed, if international trade or cross-border investments make certain industries unviable.

In this view, if the US signs NAFTA with Mexico, some auto workers in the US may lose their jobs, but they will not lose out, as they can retrain themselves and get jobs in industries that are expanding, thanks to NAFTA, such as software or investment banking.

You will immediately see the absurdity of the argument — how many US auto workers do you know who have retrained themselves as software engineers or investment bankers in the last couple of decades? Typically, ex-auto-workers fired from their jobs have ended up working as night-shift janitors in a warehouse or stacking shelves in supermarkets, drawing much lower wages than before.

He also talks of winners and losers and compensation. Of course, I wish he went further and argued that globalization—under the current rules of the game—-produces not just individual winners and losers and also leads to polarization between nations.

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Stock-Flow Consistent Models: A Survey

There’s a new paper by Gennaro Zezza and Michalis Nikiforos for the Levy Institute.

Abstract:

The stock-flow consistent (SFC) modeling approach, grounded in the pioneering work of Wynne Godley and James Tobin in the 1970s, has been adopted by a growing number of researchers in macroeconomics, especially after the publication of Godley and Lavoie (2007), which provided a general framework for the analysis of whole economic systems, and the recognition that macroeconomic models integrating real markets with flow-of-funds analysis had been particularly successful in predicting the Great Recession of 2007–9. We introduce the general features of the SFC approach for a closed economy, showing how the core model has been extended to address issues such as financialization and income distribution. We next discuss the implications of the approach for models of open economies and compare the methodologies adopted in developing SFC empirical models for whole countries. We review the contributions where the SFC approach is being adopted as the macroeconomic closure of microeconomic agent-based models, and how the SFC approach is at the core of new research in ecological macroeconomics. Finally, we discuss the appropriateness of the name “stock-flow consistent” for the class of models we survey.

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Levy Institute’s Strategic Analysis On The US Economy

Michalis Nikiforos and Gennaro Zezza of the Levy Economics Institute Of Bard College have published their strategic analysis report for the U.S. economy.

They discussion two scenarios — baseline scenario and scenario 1. Growth in either scenario is low. The authors argue that while equity markets have risen in recent times on expectations of a fiscal stimulus, it is unlikely. In scenario 1, it’s assumed that equity markets fall and this leads to a fall in private expenditure relative to income and this causes a fall in growth by 2020 and a rise in the budget deficit to 8.3% because of it.

It looks more likely that the Trump administration isn’t going to relax fiscal policy. Donald Trump had promised in his campaign to reduce taxes for even the middle class but is now saying that it’s dependent on numbers in the Republican healthcare plan.

At any rate, the report has a chart showing how tight fiscal policy has been since the recession. This is how real government expenditure changed after the crisis. The red line is the current recovery (2009Q2-) and other colours are for previous recoveries post recession trough.

Source: Levy Institute

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INET Interview With Anwar Shaikh On His Work

Recently, Institute For New Economic Thinking (INET), interviewed Anwar Shaikh in their New York office. It’s like a short autobiography of his work and his life and a background to his book, Capitalism: Competition, Conflict, Crises. Shaikh starts off describing his personal background and what led to him ask the questions he asks. He then talks about his work, from the humbug production function to the theory of international trade to the responsibilities of the heterodox.

An interesting story is about his association with Joan Robinson while writing the paper on the production function. Shaikh tells us that he was at Columbia University at the time and the professors there told him, “Joan Robinson is not an economist”!

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The FRED Blog On Unemployment

Federal Reserve Bank of St. Louis has a good explainer on the different unemployment rates. (Click the header for the link).

These nuances have become more important than before as Donald Trump has frequently suggested that the unemployment rate is fake. While Trump overstates his case, it’s also true that the headline unemployment rate is misleading.

In addition, during and after the crisis, the civilian participation rate dropped. 

In the above chart, which is the inverse of the labour participation rate, the fraction of the population not in the workforce is shown. As the blog explains, it comprises of:

Principally, these are retirees, students, people with various handicaps, people who dropped out of the labor force, and people who do not want to work

Of course, there’s a thin line between people who are discouraged to work and people included above. As you can see from the chart above, the fall in the participation rate has been coincident with the crisis and raises the question if the unemployment rates sufficiently capture true unemployment. It is difficult to believe that this is entirely due to demographics.

So it’s important to keep these things in mind when discussing politics. Neither believe a nationalist, nor a neoliberal.

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FRED Graph: US 🇺🇸 Sectoral Balances

Tracking the sectoral balances of a nation’s economy is a great way to build a narrative about its economic dynamics. It’s true, that an accounting identity doesn’t say much about causation. But they hint it and if we have a behavioural model around it, then we learn a lot more. It was used by Wynne Godley to highlight the predicament on the horizon in the 2000s.

The Federal Reserve Bank of St. Louis has a nice website FRED where you can create charts and even observe them when new data gets updated. Below is the U.S. sectoral balances chart. This is a static image file. For the dynamic chart, track the link above (the header of this page).

The blue line is the private sector net lending—its income less expenditure— which was in deficit and led to the crisis. The red line is the government’s deficit and the green line is the current account balance of international payments.