Matias Vernengo
Economics is an essential part of foreign policy. One cannot think of the Cold War without the Marshall Plan that allowed reconstruction in Western Europe and containment of the Soviet Union in Western Europe. In Latin America one cannot dissociate the Cuban Revolution and the subsequent Alliance for Progress, which basically provided credit for allies in the region, pushed by Kennedy to contain Communism in the region. Geopolitics is, however, often ignored by economists, and political scientists tend to use only mainstream economics when discussing political economy issues.
In the case of US-Latin American affairs, the inability to understand the political elements of the economic process, and the incapacity to comprehend the deep causes of underdevelopment in the region explain, in part, the problematic relationship of the Obama administration with the left of center governments in the region. The Obama administration has compounded old mistakes and aggravated the mistrust from progressives in Latin America (for an early discussion of the topic go here; subscription required). John Kerry, the Secretary of the State, has referred recently to Latin America as the American “backyard,” and the Obama administration has not recognized the democratically elected government of Nicolás Maduro in Venezuela.
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Robert H. Wade
It is by now generally accepted that the sharp rise in income and wealth inequality in the US and much of Western Europe over the 1990s and 2000s was one of the bulldozer forces behind the rise in financial fragility. And it has long been accepted that the Gini coefficient is the workhorse measure of inequality. But it is not generally recognized that the coefficient is normally defined in a way which biases the measure in a downward direction, making inequality seem less large than another version of the coefficient would suggest. By this alternative measure inequality is much higher than is generally thought. The standard measure is misleading us into thinking that economic growth is more “inclusive’ than it is.
Recall that the Gini coefficient is a number between zero and one that measures the degree of inequality in the distribution of income in a given society (named after an Italian statistician, Corrado Gini). The coefficient is zero for a society in which each member receives exactly the same income; it reaches its maximum value (bounded from above by 1.0) for a society in which one member receives all the income and the rest nothing.
As normally defined the Gini says that inequality remains constant—growth remains ‘inclusive’—if all individuals (or countries by average income) experience the same rate of growth, and rises only when upper incomes grow faster than lower incomes. So inequality remains constant if a two person (or two country) distribution x = (10, 40) becomes y = (20, 80). Yet the income gap has grown from 10 to 40.
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Alejandro Nadal
There is (almost) no quarrel about the fact that inequality has increased during the past three or four decades. One of the consequences of this is the growth of unsustainable indebtedness of households in order to maintain aggregate demand, a problem intimately related to the global financial crisis and the so-called Great Recession. James Galbraith’s book Inequality and Instability highlights this aspect of the crisis and the process of inequality.
So it is critically important to understand the causes of this rising inequality. One of the most popular lines of analysis finds in technical change the source of growing inequality. This explanation says that skill-biased technological change has replaced workers at the lower levels of pay with machinery. This has the double effect of reducing the value of their contribution to production and of increasing the reward for highly skilled workers that have the capacity to repair and manipulate more sophisticated machinery. Thus technological change is seen as the force behind changes in wage structure and therefore inequality during the last three decades.
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Jayati Ghosh
The UNDP’s latest Human Development Report 2013 (entitled “The rise of the South”) has one particularly striking chart that it uses to make the point about the recent growing economic significance of some “emerging” nations. In Chapter 1, Chart 3 suggests that just three countries (Brazil, China and India) together account for around 30 per cent of global GDP already, around the same as the total share of large Northern countries (Canada, France, Germany, Italy, the UK and the US).
If this were an accurate representation of reality it would mark a truly astounding change over the past three decades. but since the output of different countries is measured in terms of 1990 PPP dollars, rather than nominal exchange rates, this greatly exaggerates the extent of change. With nominal exchange rates, the rising trend share of these countries is still evident but not so marked: the GDP of these three countries in 2011 accounted for just above 16 per cent of world GDP according to IMF, (around half of the ratio estimated by the HDR) and their share of total merchandise exports is just above 13 per cent according to the WTO.
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Malcolm Sawyer
In “Political Aspects of Full Employment,” a still widely cited article from 1943, Michal Kalecki raised many questions about the ability of a capitalist economy to maintain prolonged full employment — even though in light of the understanding of tools for stimulating aggregate demand and the use of fiscal policy brought about by the Keynesian ‘revolution.’ In a series of papers, Kalecki showed that the arguments against the use of budget deficits to secure full employment were invalid. Among these arguments, and their rebuttals, were that:
> deficits add to government debt, which is a burden on future generations
(rather, the government debt is bonds owned by individuals, pension funds etc.);
> deficits crowd out investment
(rather, they allow savings to take place and enable investment); and
> deficits cause higher interest rates
(the current situation makes the rebuttal to this clear).
Yet those arguments are still trotted out.
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James Crotty, Guest Blogger
Washington has been riveted by the sequester debacle. But rather than the terrible failure of government as portrayed in the media, in fact sequestration is a major victory for right wing forces in their long war to destroy the US version of social democracy. The New Deal was started in the 1930s and improved on through the mid-1970s, after which reactionary forces s began to have success in their efforts to initially weaken it and eventually destroy it. Their goal is nothing less than a return to the political and economic regime of the 1920s, when corporations and the rich paid little if any taxes, inequality was very high, Congress was bought and paid for by the rich, the trade union movement had been broken, and there was little if any regulation of business. Republican presidents since Reagan have been most energetic in pursuit of these objectives, but Democratic presidents since Jimmy have moved in the same direction though more slowly than the Republicans. President Obama is no exception to this trend.
Under the Budget Control Act passed last year with the President’s cooperation, discretionary non-defense government spending (on everything but Social security, Medicare and Medicaid) as a percentage of GDP was scheduled to hit its low point since the early 1950s in ten years. (Obama had also offered to make significant cuts to Social Security and Medicare last year, but the Republicans would not do it because his offer also raised taxes on the super-rich) To get some idea about how deeply the immediate and longer term cuts under Sequestration will be, see http://www.offthechartsblog.org/sequestrations-impact-its-real/.
This budget “emergency” or “disaster” is a major victory for the right wing because it will sustain their onslaught against domestic government spending. For them, this is not some big problem, but a dream come true. Moreover, most of the media coverage has been so lame in its explanation of the causes of this “crisis” that some polls show that an equal percentage of voters blame each party, so Republicans may not even be hurt politically by the outcomes.
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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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Nancy Folbre, Guest Blogger
Some of the most vivid political rhetoric of 2012 reflects a debate that has lasted centuries. Who are the makers and who are the takers? Much economic theory revolves around efforts to distinguish the two. The conceptual effort is motivated by noble intent: presumably, a good economic system encourages making (creating more to go around) and discourages taking (redistributing what others have made).
Yet it is surprisingly hard to create a consensus about these labels, and past disagreements, still unresolved, lurk in the background. History is shaped by contending claims over who is more productive than whom. Powerful groups like to describe themselves as makers rather than takers, partly to glorify themselves and partly to discourage take-backs.
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Martin Khor
So, the United States at the last minute averted a “fiscal cliff” crisis last week, and the world gave a sigh of relief, since the fate of the US economy has strong impact on other countries.
But that sigh was accompanied by a shake of the head at how this drama involving a contest of wills between the President and the Republicans in Congress has become an American way of life.
Has the economy of the US and the rest of the world economy become too dependent on how Washington’s budget politics plays out? It seems so, for some time to come.
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By Patrick Bond, Guest Blogger
Earlier this month, Time Magazine pronounced,
“Africa owes its takeoff to a variety of accelerators, nearly all of them external and occurring in the past 10 years:
• billions of dollars in aid, especially to fight HIV/AIDS and malaria;
• tens of billions of dollars in foreign-debt cancellations;
• a concurrent interest in Africa’s natural resources, led by China; and
• the rapid spread of mobile phones, from a few million in 2000 to more than 750 million today.”
The reality is very different, so let’s try this paragraph again. Actually, Africa owes its economic decline to a variety of accelerators, nearly all of them external and occurring in the past centuries during which slavery, colonialism and neo-colonialism locked in the continent’s underdevelopment, but several of which – along with climate change – were amplified in recent years:
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