New IMF research validates critics’ concerns

Ilene Grabel

I’m imagining that things have gotten a little chilly for some in the IMF’s cafeteria.  Why? Two important studies coming from different quarters of the Fund validate important and long-standing criticisms of the institution.

The first is a recent report by the IMF’s Independent Evaluation Office (the IEO), an internal body that conducts notably refreshing and often critical audits of various aspects of IMF performance.  In an especially hard hitting (and on target) report, the IEO takes on the IMF’s work on exchange rate issues and specifically on “excess” foreign reserve accumulation in some countries during the period 2000-2011. After 2009, we should recall, IMF economists began to argue that excess reserve accumulation contributed to global financial instability. The report provides support for what many Fund watchers have long argued—namely, that the Fund has used the charge of excess reserve accumulation as a Trojan horse to advance the interest of its most powerful members in pushing countries like China to move toward more flexible exchange rates.

The same IEO report finds that the Fund’s analysis of excess reserve accumulation was analytically deficient on several grounds.   First, the report’s authors argue that there is scant academic evidence for setting upper or lower limits to countries’ reserve levels (though the IMF has attempted to do so via a reserve adequacy metric since 2011). Second, the obsessive focus on reserves meant that Fund staff overlooked the precautionary motives that caused some countries (in East Asia and elsewhere) to amass massive reserves.

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Econ 4 The Bottom Line: Regulation

We are economists who think that the economy should serve people, the planet and the future.

Rules are as important in an economy as they are in sports. When gamblers rig the game, players flout the rules, or competent referees are not on the field, the result is a charade and not a fair contest.

Yet some claim that regulations are always bad for the economy. They believe that “freeing” business from rules that protect public health, maintain competitive markets, and ensure financial solvency is the route to prosperity. This ideological opposition to regulation, epitomized by the repeal of the Glass-Steagall Act, dismantled the firewall between commercial banking and investment banking, and opened the door to the greed and reckless behavior that culminated in our current economic crisis.

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Democratizing Finance

Sasha Breger Bush, Guest Blogger

Back in 2003, Yale economist Robert Shiller noted in his book The New Financial Order, “We need to democratize finance and bring the advantages enjoyed by the clients of Wall Street to the customers of Wal-Mart” (1).  More recently, Shiller’s 2012 article in The New York Times connects suggestions to “democratize finance” to the Occupy Wall Street Movement: “Finance is substantially about controlling risk. If risk management is suitably democratized, and if its sophisticated tools are better dispersed throughout society, it could help reduce social inequality.” Among Shiller’s proposals, in the older book and more the recent article, are for income insurance based on occupational derivatives and financial innovations to manage old age risks, thereby reducing pressures on welfare based entitlements like Social Security. Efforts to democratize finance in the advanced industrial economies are mirrored in development policy circles, where officials from the World Bank and UNCTAD, among other agencies,  have been recommending for many years now that certain kinds of derivatives markets (largely for commodities and the weather) be re-tooled to better meet the needs of the agrarian poor.

On the surface, such efforts appear to be rather successful. As I detail in my recent book, derivative exchanges have proliferated across the developing world over the past several decades, with 23 of the top 50 derivatives exchanges (by volume) located in the global South in 2010.  This same year, the most rapidly growing derivatives exchanges in the world were located in Asia and Latin America.  Between 2003-06, commodity derivative contract volume outside of the OECD well surpassed that within. And, in 2009, China’s Securities Regulatory Commission announced that China had become the largest commodity derivatives market in the world, contributing over 40% of global volume. On the micro level, commodity and weather derivative contracts are being transformed into retail products, designed for use by smaller and poorer actors who have traditionally been excluded from global derivatives trading—e.g. retail crop insurance based in weather derivatives markets (“weather-index insurance”), agricultural producer bonds with built-in price insurance (like Brazil’s rural product bonds), and other mechanisms for passing on the risk management services of derivatives to those unable to participate directly in the markets.  What could be more democratic?

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Is Income Distribution Holding Up the Recovery? Stiglitz Versus Krugman

Matias Vernengo

A friendly debate between Stiglitz and Krugman (and also further comments here) on the role of income distribution in the recovery has been getting some attention in the blogosphere. Note that I don’t think neither Krugman nor Stiglitz would deny that worsening income distribution was not relevant for the crisis, even if they were slower than some heterodox economists like Jamie Galbraith or Bob Pollin, to name two, in emphasizing the role of inequality. The question is whether inequality has been central for the slow recovery in the last few years.

Stiglitz’s main reason for suggesting that the recovery has been stifled by inequality is that “middle class is too weak to support the consumer spending that has historically driven our economic growth.” Krugman, for some reason, thinks that this argument is a long run one, and suggests that while: “it’s true that at any given point in time the rich have much higher savings rates than the poor. Since Milton Friedman, however, we’ve known that this fact is to an important degree a sort of statistical illusion. Consumer spending tends to reflect expected income over an extended period.” However, he thinks that “you can have full employment based on purchases of yachts, luxury cars, and the services of personal trainers and celebrity chefs.” In other words, worsening of income distribution might actually help the recovery.

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Economics, the Environment, and Our Common Wealth

In his new collection of essays, James K. Boyce explores the idea that the environment belongs in equal measure to us all; a clean and safe environment is not a commodity to be allocated on the basis of wealth, nor a privilege to be allocated through political power, but rather a basic human right. Building upon this premise, Boyce explores the many ways in which economics can be refashioned into an instrument for advancing human well-being and environmental health. Topics covered include environmental justice, disaster response, globalization and the environment, industrial toxins and other pollutants, cap-and-dividend climate policies, and agricultural biodiversity.

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Restoring Fiscal Policy in the Monetary Union

Panico and Purificato, Guest Bloggers

What is to be done to solve the European debt problem? In our view, fiscal policy enhancing growth and central bank interventions to reduce the interest rates on sovereign securities are necessary. To enact them, a satisfactory answer must be given to the moral hazard problem regarding the behaviour of national authorities: if the Euro governments help out national governments that are in budget difficulties, what is to prevent these nations from engaging in irresponsible budget policies in the future? The literature indicates viable solutions (Panico and Purificato). It suggests reforming the organization of the coordination process between monetary and fiscal policies in such a way as to minimize the moral hazard problem regarding the behaviour of the national Governments. A European fiscal agency can serve this purpose. It can fix, year after year, the ratio deficit-GDP for each country, taking into account the cyclical conditions and the needs of the economies, while realizing the objective of financial sustainability.

The organisation of monetary policy in the euro area is based on effective forms of coordination that minimise the uncertainty on how the national central banks implement the decisions taken at the European level. In fiscal policy, instead, national governments can agree on decisions at super-national level, but behave differently at home without suffering negative consequences. Opportunistic behaviour is then possible and this leads the monetary authorities and national Governments to defend themselves from the unreliable behaviour of the others. Under these conditions, the search for a sensible policy for the whole area is an empty aspiration.

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Climate Economics: The State of the Art

Frank Ackerman

Climate science paints an ever-more-detailed picture: irreversible, catastrophic events are becoming increasingly likely as greenhouse gas emissions continue to rise. Climate economics, particularly in its policy applications, lags behind: leading models and analyses frequently ignore the extreme risks and the intergenerational aspect of the problem – and rely on simplistic and dated interpretations of the underlying science. Yet the state of the art has progressed rapidly, in the research literature on climate economics as well as science.

To address this problem, Liz Stanton and I wrote Climate Economics: The State of the Art, which has just been published by Routledge. Our book grew out of a request from the World Wildlife Fund for an update on climate economics since the Stern Review. In that 2006 review, commissioned by the British government, Nicholas Stern argued persuasively for a new approach to the economics of climate change, emphasizing arguments for a very low discount rate and a focus on catastrophic risks.

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The Persistent Power of Finance

C.P. Chandrasekhar

In a move that went contrary to what is expected of regulators, the Securities and Exchange Commission of the US approved in mid-December a controversial JP Morgan-created exchange-traded fund (ETF) backed by physical supplies of copper. The fund will use investor money to buy and hold copper, presumably to earn a profit when prices rise. According to a NASDAQ analysis the investment vehicle will register 6.18 million shares backed by 61,800 metric tonnes of copper in physical form stored in warehouses approved by the London Metal Exchange or located in the Netherlands, Singapore, South Korea, China and the US, and not approved by the LME. With this decision of the SEC, copper joins metals such as gold, silver, platinum, and palladium that are already traded through ETFs. If the JP Morgan proposal goes through so would another ETF proposed by Blackrock titled iShares Copper Trust, which awaits SEC approval.

Copper is a metal much in demand for electricity wiring and various industrial uses that are growth areas in many emerging markets. The result is that copper has been trading in rather tight markets. According to the International Copper Study Group, apparent global usage of copper rose by grew by 5.2 per cent during the the first nine months of 2012 as compared with the corresponding period of 2011, driven largely by a 19 per cent increase in China’s apparent usage. China accounted for 43 per cent of world usage over this period. As a result the refined copper balance for the first nine months of 2012 points to a deficit of 594,000 tonnes, which was more than a third of refined copper production with capacity utilised to the extent of 80 per cent. While slowing growth in China may have led to accumulation of inventories, the market is indeed tight. According to the Economist Intelligence Unit, copper will be the strongest performer among metals in 2013, with prices rising by 12 per cent thanks to the supply-demand balance.

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The Review of Keynesian Economics: Launch of New Journal

Thomas I. Palley, Louis-Phillipe Rochon and Matías Vernengo

It is widely recognized that economic crises can trigger enormous change, with regard to both economic theory and the politics of governance. Today, the global economy is struggling with the fall-out from the financial crash of 2008 and the Great Recession of 2007–2009. The economic crisis that these events have generated, combined with the failure of the mainstream economics profession, has again put the question of change on the table. Reasonable people do not expect economists to predict the daily movements of the stock market, but they do expect them to anticipate and explain major imminent economic developments. On that score, the profession failed catastrophically, revealing fundamental theoretical inadequacies.

This intellectual failure has prompted us to launch the Review of Keynesian Economics (ROKE), the first issue of which is fully available here. At a time of journal proliferation, some may wonder about the need for another journal. We would respond there is a proliferation of journals, but that proliferation is essentially within one intellectual paradigm. As such, it obscures the fact that the range of theoretical inquiry is actually very narrow. A journal devoted to Keynesian economics is therefore needed, both to correct this narrowness and because events have once again confirmed the profound relevance of Keynesian theory. As noted by Robert Solow, a member of the board of ROKE, our project is “counter-cultural, and god knows the current culture needs to be countered.”

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Responding to Financial Crisis: Are Austerity and Suffering Inevitable?

Jayati Ghosh

All too often people in countries experiencing financial crisis are told that the road to recovery necessarily involves pain, that fiscal austerity and cuts in spending that adversely affect the lives of ordinary citizens are necessary costs of correction of macroeconomic imbalances and the consequent adjustment that is considered essential for recovery. This is repeated so often that it is now taken as received wisdom by policy makers and civil society alike – yet in fact it is not true at all. It can actually be plausibly argued that in several situations the reverse is correct, that attempts to reverse economic downswings through cuts in public spending are counterproductive and makes matters much worse. This is clearly evident for all to see in the case of crisis-ridden countries in the eurozone, for example.

And there are also positive counter-examples, that show how taking into account the concerns and requirements of ordinary citizens (and paid and unpaid workers in particular) can work as a positive macroeconomic strategy that actually provides a route out of crisis. Sweden provides an example of a country that responded to the financial crisis by explicitly recognizing and attempting to reduce the pressures on workers, and particularly women workers whose needs are often the last to be considered in such periods of crisis. Sweden incorporated measures to maintain or ensure favourable conditions of women’s work and life into its broader economic recovery strategy.

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