Kevin P. Gallagher and Sarah Anderson, guest blogger
Since the onset of the global financial crisis, Triple Crisis bloggers have been commenting on the need for policy space for capital controls in developing countries and the need to reform US trade agreements, which generally prohibit their use. To further that end, Triple Crisis co-chair Kevin Gallagher and Sarah Anderson of the Washington-based Institute for Policy Studies initiated an economist sign-on letter to urge negotiators of the Trans-Pacific Partnership Treaty. The letter attracted 100 signatories from TPP countries and was released today.
Click here for the full statement and list of endorsers.
In advance of Trans-Pacific trade talks, over 100 economists are sending a letter today urging negotiators to promote global financial stability by allowing the use of capital controls.
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The Triple Crisis blog is pleased to welcome Cornel Ban as a regular contributor. Ban is a Postdoctoral Scholar of International Studies and Deputy Director of the Development Studies Program at the Watson Institute for International Studies at Brown University. His research in international political economy focuses on the transnational spread of economic ideas and varieties of capitalist development.
You know that a ship is about to sink when the most loyal sailors head for the life raft. Until January 2012 the continuous expansion of the realm of the market and the shrinking of the state’s responsibility for delivering public goods was de rigueur in Romania. Indeed, this East European country that joined the EU in 2007 appeared as a poster child for austerity and market reforms. The country’s 2010 fiscal adjustment included the usual mass layoffs and wage cuts in the public sector but the government surprised even the visiting IMF chief with its utter lack of concern for distribution costs: drastic cuts in the social security benefits of the most vulnerable, a “flat” cut of 25 percent applied to all wages in the country’s very unequal public sector, and an undifferentiated hike of the VAT to one of Europe’s highest levels.
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Alejandro Nadal
Marx is the ultimate critic of capitalism, so what does a Marxian analysis offer when applied to the present global economic and financial crisis?
Two preliminaries are important. First, for Marx crises are not pathologies of capitalism. They are the necessary outcome of the contradictions that define the essence of this mode of production. The backdrop of Marx’s analysis of crises is always class struggle. Second, capital has its own views of crisis and cycles: they are designed to facilitate policy and intervention. These views vary in their degree of accuracy, but in general they do not question capitalism. Marx’s perspective has a different objective: to reveal to the working class the forces that can overthrow capital.
Marx’s theory of crises is disseminated in several key writings. We concentrate our attention on the following: Grundrisse, Contribution to the Critique of Political Economy, Capital, Theories of Surplus Value. It must be remembered that Engels first advanced his theory of overproduction in his Outline of a Critique of Political Economy (1843).
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C.P. Chandrasekhar
It is now more than four years since the onset of the real economy recession in the United States. It is also close to five years since the disclosure by the investment-banking firm Bear Stearns that two of its subprime mortgage-linked funds were worthless, which signalled the onset of the financial crisis. Yet the global economy has not emerged out of both crises.
In the January 2012 update of its World Economic Outlook, the International Monetary Fund (IMF) has revised downwards by three-fourths of a percentage point (to 1.2 per cent) its global growth forecast for 2012. It also fears that things could be even worse. “The world recovery, which was weak in the first place, is in danger of stalling. The epicentre of the danger is Europe, but the rest of the world is increasingly affected,” said Olivier Blanchard, the IMF’s Economic Counsellor. The IMF has also noted, in a parallel January update to its Global Financial Stability Report: “Since the last Global Financial Stability Report (GFSR), risks to stability have increased, despite various policy steps to contain the euro area debt crisis and banking problems.”
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Gerald Epstein
In “Up to Speed, but Still Lagging Behind” Matias Vernengo presents an important critique of Gary Gorton’s and Andrew Metrick’s (GM) “speed read” survey, “Getting up to Speed on the Financial Crisis” which is to be published in the Journal of Economic Literature, the predominant U.S. general literature survey journal in the economics profession. As Vernengo shows in his Triple Crisis blog piece, the Gorton and Metrick piece demonstrates just how far behind mainstream economics is in its understanding of the causes, dynamics and impacts of the financial crisis, both in an absolute sense, and also – and this was Vernengo’s main point – compared with the rich heterodox literature that both predicted the crisis and has been analyzing it dynamics since it has broken out.
In fact, the Gorton and Metrick piece presents an even more devastating picture of the ability of mainstream economics to “get up to speed” than Vernengo suggests. For it essentially admits that mainstream economics, which, for the last several decades, has cost society millions and millions of dollars on highly paid economists’ salaries at elite universities and prominent public institutions such as the IMF, the Federal Reserve and all the Federal Reserve Banks which have armies of economists– to say nothing of the high priced economists working in financial institutions themselves – completely missed the financial crisis and, according to Gorton and Metrick, are just now getting up to speed.
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Edward B. Barbier
(also available in Portuguese at INESC)
The survey by Gary Gorton and Andrew Metrick on what happened during the 2008-9 financial crisis, “Getting Up To Speed on the Financial Crisis,” to be published by the Journal of Economic Literature, focuses on an important cause of this crisis: global imbalances in the world economy. As Gorton and Metrick suggest, such imbalances include the “institutional cash pools” caused by sovereign wealth funds and the “global savings glut”.
While the United States has been amassing large current account deficits, China, Japan, other Asian emerging market economies and some oil exporters have been generating trade surpluses. Similar structural imbalances were occurring within major regional economies, such as the European Union, where the large current account surpluses of France and Germany were offset by deficits in Ireland, Greece, Portugal, Spain and the United Kingdom. The result was that economies with chronic trade deficits were receiving large and sustained capital inflows from surplus economies seeking new asset investments. These massive credit flows precipitated the bubble and subsequent bust in financial markets, and the persistence of such global imbalances continues to add to the uncertainty and instability of the world economy.
Understanding how the global imbalances caused the financial crisis and subsequent recession is important. But addressing these imbalances in the world economy will need a much more profound change in global economic development.
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Matías Vernengo
Gary Gorton and Andrew Metrick have just produced a survey on the vast literature on what happened during the last financial crisis (and to a lesser extent why it did) titled “Getting Up To Speed on the Financial Crisis,” to be published by the Journal of Economic Literature. They used only 16 documents, between papers from ‘top journals,’ reports and speeches and congressional testimonies. It must be noted that the objective of the review is to provide “a one-weekend-reader’s guide” to the crisis.
The biggest problem with their paper is not the limited number of documents reviewed, which seem to be fairly representative of conventional views on the financial crisis, but the limitations of what the mainstream of the profession knows about the crisis, and worse, what the profession clearly does not know it does not know, the unknown unknowns, so to speak. And that is why ignoring heterodox and progressive contributions has been very harmful for the profession. I will use three of their cited documents as an example of what I mean.
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Arjun Jayadev
American households have been profligate spenders over the last 30 years and have lived beyond their means for too long. Or so it is proclaimed repeatedly in the media and among policy makers. What else could explain the fact that household debt to income ratios have increased while the personal savings rate has fallen?
As it turns out, there are other ways in which debt-income ratios can increase other than actually borrowing more. Specifically, income can grow slower than the real interest burden. The latter in turn depends on both nominal interest rates and inflation. In the case of public debt, there is a long and distinguished literature trying to separate the relevant importance of these effects in periods of leveraging and deleveraging. Interestingly enough, although household debt exceeds public debt substantially (look here at Table L1), there has been virtually no research trying to assess the importance of each channel.
Josh Mason and I have attempted to address this in a new working paper. The basic idea of our paper is to apply the standard equation used to analyze government debt trajectories to the debt of the household sector. We decompose changes in the sector’s debt-income ratio into a primary deficit (i.e. net new borrowing), nominal interest rates, real income growth and inflation. Using this approach, we find some interesting and underappreciated patterns.
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Jayati Ghosh
For a while, in the immediate aftermath of the Global Financial Crisis of late 2008, the G20 came into its own. This group of (self-styled) leaders of the global economy, representing governments in nations contributing more than half of global GDP, came together in April 2009 to pledge a co-ordinated response to unprecedented global economic threats. This not only had a role in staving off immediate disaster through the implementation of broadly Keynesian responses, but also promise more for the future. This was not just vainglorious self-importance on the part of these governments. There was a genuine absence of global institutions that were sufficiently small as to be coherent (something that was not as possible in the United Nations, given its size and structure) or even seen as generally reliable, flexible and aware (given how the IMF has discredited itself by awarding good marks to so many economies just before they imploded financially).
But since then, the drama in the world economy could even have been Hamlet without the Prince of Denmark, as Act 2 of the global financial crisis unfolds. In its subsequent meetings, the G20 has been much more about style than substance – and sometimes the style has also been lacking. At least, in its Seoul meeting in 2010, the G20 committed themselves to promoting inclusive and sustainable economic growth. They argued that ‘for prosperity to be sustained it must be shared’ and also endorsed ‘green growth’, which promised to decouple economic expansion from environmental degradation.
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Jeff Madrick
The audacity Germany has shown in floating a demand to manage Greece’s finances is a window on the leaders of that country and how much perspective they’ve lost. Let’s be clear; not all in Germany agree with this narrow, insensitive stance and the uninformed and uneducated demands for austerity economics in debt-ridden and recessionary nations. For example, there are political parties in Germany that want their country to take the lead on a Marshall Plan for the periphery of the eurozone. But they are not the ones setting policy.
I am tempted to say that antediluvian economics is ruling in Germany, but it may not really be about economic theory, but rather superior pride, irrational fear of inflation, and perhaps vindictiveness. It’s as if a German version of our own Tea Party is now running economic policy in Europe. Germany reduced its unit labor costs beginning in the late 1990s, which were higher than much of the rest of the EU, but with the euro fixed, they benefited as their export prices remained low. Could they have done well without their eurozone trading partners buying more from them than they were selling? And they lent them the money to do so. Do they have no moral obligation here? Without the fixed euro, the DM would have soared.
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