Erinc Yeldan, Guest Blogger
The IMF released the April edition of its World Economic Outlook (WEO). One of the key analytical chapters (Chapter 3) of the Report is titled “The Dog that Didn’t Bark: Has Inflation Been Muzzled, or Was It Just Sleeping?” Its main argument (or rather sort of a mystery that needs to be resolved, in the words of its authors) is that over the course of the previous crisis episodes we used to witness severe increases in unemployment along with a simultaneous fall in inflation. Yet, during the current great recession there has been very little movement in inflation, while unemployment rates soared almost everywhere; —hence the metaphor: inflation (the dog…) does not respond (… bark). And the alleged mystery is but why?
The WEO suggests two candidates for explaining the mystery: the first one is based on the “structural unemployment has shifted” hypothesis, arguing that “the failure of inflation to fall is evidence that output gaps are small and that the large increases in unemployment are mostly structural.” The logical policy implication of this argument is that “… the monetary stimulus already in the pipeline may reduce unemployment, but only at the cost of overheating and a strong increase in inflation—just as during the 1970s”. Yet, by itself this argument does not provide much of an explanation, as the underlying causes of this structural shift still remains unanswered.
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Martin Khor
Many articles and books have been published on the contrast and competition between the present Western and the Asian-style economic models.
Western countries are said to have the free-market model based on competition among private firms, with the government taking a hands-off approach.
East Asian countries are branded as practising “state capitalism” in which the government plays a major role in helping the local private sector and the state also fully or partially owns many enterprises.
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Daniela Schwarzer
The current crisis in the euro area, the reforms governments have to implement, and the high unemployment levels in many member states are weakening the legitimacy of European integration. In my last post, I described how this output legitimacy crisis unfolds.
The debate about legitimacy and democratization in the EU traditionally focuses on the input side. As crises have surfaced, the flaws in the governance structures have also fuelled this old debate. In fact, it can hardly be argued that citizens have the chance to effectively influence the developments that deeply affect them, given the national fragmentation of decision-making and the resulting hazardous nature of macro-economic developments.
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Alejandro Nadal
The global financial crisis is breathing and evolving. In Europe it is treated as a sovereign debt crisis. But given the fact that the crisis exploded in the midst of the private financial sector, how did we get here?
Four decades ago, more precisely on January 3 1973, a new law on central banking was approved in France. The new statute for the Banque de France contained critical provisions for the independence of the monetary institute. Article 25 turns out to be particularly relevant for today’s debate on Europe’s crisis. It stated that the Treasury would not be able to resort to the Banque de France to borrow money.
This represented a historical transformation in public finance and left the State at the mercy of the private commercial banking system. Instead of using the money emission capacity of the central bank, the French government had now embarked on a new course, one that turned out to be a milestone in financial liberalization. Many other countries followed this example. Incidentally, when the law was passed Georges Pompidou was the President of France. He had been director of the Banque Rothschild between 1956-1962, a fact that generated suspicion as to the motivations of the Loi 73-7 of 1973.
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Erinc Yeldan, Guest Blogger
Two Latin American style economies, Argentina and Turkey, shared a common history until very recently. This “commonness” included a prolonged history of import substitution industrialization (ISI) with inward-looking, state-led development paths. Both economies had relatively high rates of growth during their respective stages of ISI and yet, found out that these paths reached their limits by late 1970s (Argentina perhaps half a decade earlier than Turkey).
Both countries had also witnessed a lost decade, respectively; Argentina the 1980s, Turkey 1990s. For both countries the period after was one of active reform. Both countries suffered from an almost identical type of financial crisis in 2001, while both of them were following an IMF-led disinflation programme that rested on exchange rate-based stabilization adventures. The contraction of the GDP and the burden of adjustment through rapid currency depreciation, banking collapses, and a severe rise of unemployment were also at comparable scale across the two countries. However, the two had divergent paths of adjustment subsequently. Turkey followed a strict orthodox adjustment programme under the auspices of the IMF, while Argentine chose to set its own course with debt default and an adherence to what is commonly referred to as a heterodox adjustment programme, while maintaining a strong anti-poverty and pro-employment stance.
Almost a decade into this divergence, Argentina was in the international news once again, now with a ruling by the district court of New York that the Argentinian government ought to pay $1.3 billion to a “vulture fund”: Elliott Capital Management. The ruling further contained a statement that prohibited third parties to aid Argentina in its efforts of debt re-structuring.
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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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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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Carlo Panico and Francesco Purificato, Guest Bloggers
The media and some professional blogs are spreading the view that the European debt crisis is caused by the decision of the political authorities of the countries under attack to let their citizens live beyond the material possibilities of the economy. They advertise the unfounded fears that the taxpayer of the other euro-countries is becoming the victim of a money machine that rewards the profligacy of Southern European countries. As shown in our PERI paper The debt crisis and the ECB’s role of lender of last resort, these fears have become powerful political forces inhibiting rational solutions.
When the crisis began in April-May 2010, the Greek sovereign debt was around 300 billion euros and it was sufficient to buy a portion of it to persuade the markets that the authorities were determined to stabilise the interest rates. Yet, in spite of its independence, the ECB waited the end of the regional elections of May 9 in Renania-Westfalia (Germany) to respond to the speculative attacks, which had gambled on the view that the European authorities would not react until the election had ended.
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Gerald Epstein
Prognostication is a fool’s errand…maybe that’s why we economists like to do so much of it, especially this time of year.
John Maynard Keynes was no fool, but even he couldn’t help making forecasts. Keynes famously predicted, for example, that over time there would be such abundance of capital that investments would yield close to 0%, bringing about the “euthanasia of the rentier.” Though interest rates are now quite low, the rentiers are still, unfortunately, going strong.
Keynes’ willingness to engage in such forecasts is all the more interesting because, better than most economists – then and now — Keynes understood the pitfalls of economic prediction. As emphasized by my colleague James Crotty, among others, central to Keynes’ economic thought is the notion of “fundamental uncertainty.” That is, the economy is constantly in a state of flux, especially in times of profound structural change, so about the future “we simply do not know.”
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Gerald Epstein
On the last day of 2012, we note the passing of two brilliant economists who have done much to contribute a broad and deep understanding of economic history and institutions. Triple Crisis has written of the passing, life, and work of Alice Amsden, the brilliant development economist from MIT, who contributed enormously to our understanding of technology and industrial policy to the dramatic rise of Asian economies, among others.
We also recognize here Albert Hirschman, the brilliant political economist, who crossed disciplinary boundaries and had a deep commitment to learning from economic history and political institutions. Hirschman died on December 11, 2012 at the age of 97.
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