Economic theory is prone to hysteresis. Once an idea is adopted it is difficult to change. In the 1970s, the economics profession abandoned the Keynesian Phillips curve and adopted Milton Friedman’s natural rate of unemployment (NRU) hypothesis. The shift was facilitated by a series of lucky breaks. Despite much evidence against the NRU, and much evidence and theoretical argument supportive of the Keynesian Phillips curve, the NRU hypothesis remains ascendant. The hypothesis has had an enormous impact on macroeconomic theory and policy. 2018 is the fiftieth anniversary of Friedman’s introduction of the NRU hypothesis. The anniversary offers an opportunity to challenge, rather than celebrate it. [READ MORE]
Archive for 2018
Recovering Keynesian Phillips curve theory: hysteresis of ideas and the natural rate of unemployment
Monday, October 29th, 2018Brazil is Falling Under an Evil Political Spell
Friday, October 12th, 2018Brazil is falling under an evil political spell. The leading candidate in the presidential election is Jair Bolsonaro, an extreme right-wing politician. It is as if voters are sleepwalking their way to destruction of Brazilian democracy. Under the spell’s influence, they have become blind to the truth about Brazilian politics and blind to their better nature. (more…)
Job Guarantee Programs: Careful What You Wish For
Friday, September 14th, 2018Some progressive economists are now arguing for the idea of a Job Guarantee Program (JGP), and their advocacy has begun to gain political traction. For instance, in the US, Bernie Sanders and some other leading Democrats have recently signaled a willingness to embrace the idea.
In a recent research paper I have examined the macroeconomics of such a program. Whereas a JGP would deliver real macroeconomic benefits, it also raises some significant troubling economic and political economy concerns. Those concerns should be fully digested before a JGP is politically embraced.
Government Spending in the Income-Expenditure Model: Spending Composition, the Multiplier, and Job Guarantee Programs
Friday, September 14th, 2018This paper reconstructs the income – expenditure (IE) model to include a distinction between government purchases of output versus government production. The distinction has important consequences for output and employment multipliers. The paper also extends the IE model to incorporate a government job guarantee program (JGP), and the extended model illuminates the automatic stabilizer properties of a JGP. The model is then extended to include Kaleckian income distribution effects. That generates a novel Kaleckian balanced budget multiplier driven by changed composition of government spending. The paper concludes with some economic and political economy concerns about a JGP that are flagged by the model.
Three Globalizations, Not Two: Rethinking the History and Economics of Trade and Globalization
Tuesday, July 24th, 2018The conventional wisdom is there have been two globalizations in the modern era. The first began around 1870 and ended in 1914. The second began in 1945 and is still underway. This paper challenges that view and argues there have been three globalizations, not two. The first half of the paper provides empirical evidence for the three globalizations hypothesis. The second half discusses its analytical implications. The Victorian first globalization and Keynesian era second globalization were driven by gains from trade, and those gains increased industrialized country real wages. The neoliberal third globalization has been driven by industrial reorganization motivated by distributional conflict. Trade theory does not explain the third globalization; capital’s share has increased at the expense of labor’s; and there can be no presumption of mutually beneficial country gains from the third globalization.
Globalization Checkmated? Political and Geopolitical Contradictions Coming Home to Roost
Tuesday, July 24th, 2018The deepening of economic globalization appears to have ground to a halt and the process may even unravel a little. The sudden stop has surprised economists, whose belief in globalization has strong parallels with Fukuyama’s (1989) flawed end of history hypothesis. The paper presents a simple analytic model that shows how economic globalization has triggered political and geopolitical contradictions. For the system to work, politics within countries and geopolitics across blocs must be supportive of the system. That is missing. The model is applied to a global economic core consisting of the US, China, and the European Union. It is revealing of multiple tensions, fracture lines, and contradictions. Within the US, globalization has delivered economic outcomes that have estranged the electoral bases of both major political parties. It has also delivered outcomes that are inconsistent with the US neocon geopolitical inclination. President Trump is a product of those forces, and he will likely prove to be a historically significant figure. That is because he has surfaced geopolitical contradictions that cannot be swept back under the rug. Ironically, his biggest impact may be on the European Union, particularly Germany, which is being compelled to recognize the neocon nature of the US and the vulnerabilities of dependence on US exports and technology. China was already aware of its vulnerabilities in those regards.
Negative interest rate policy (NIRP) and the fallacy of the natural rate of interest: Why NIRP may worsen Keynesian unemployment
Wednesday, May 16th, 2018NIRP has quickly become a consensus policy within the economics establishment. This paper argues that consensus is dangerously wrong, resting on flawed theory and flawed policy assessment. Regarding theory, NIRP draws on fallacious pre-Keynesian classical economic logic that asserts there is a natural rate of interest which can ensure full employment. That pre-Keynesian logic has been augmented by ZLB economics which claims the natural rate may be negative in times of severe demand shortage, so that policy must deliver it since the market cannot. In contrast, Keynes argued investment could become saturated so lower interest rates cannot increase aggregate demand (AD) and no natural interest rate exists. Regarding policy assessment, NIRP turns a blind eye to the possibility that negative interest rates may reduce AD, cause financial fragility, create a macroeconomics of whiplash owing to contradictions between policy today and tomorrow, promote currency wars that undermine the international economy, and foster a political economy that spawns toxic politics. Worst of all, NIRP maintains and encourages the flawed model of growth, based on debt and asset price inflation, which has already done such harm.
Modern Money Theory (MMT) vs. Structural Keynesianism
Friday, April 6th, 2018A journalist sent me some questions about MMT. My answers are below.
1. What are the major flaws you see within Modern Monetary Theory?
(A) I like to say that MMT is a mix of “old” and “new” ideas. The old ideas are well known among Keynesian economists and are correct, but the new ideas are either misleading or wrong.
The essential old idea, which everybody knows, is government has the power to issue money. We used to talk of “printing” money. In today’s electronic world we talk about “keystroke” money created by electronic credit entries.
Everyone knows that because government has the capacity to create money, it can always pay its bills and debts by printing money. But having the capacity is not the same thing as saying it should, which is the beginning of where MMT goes astray. (more…)
Is the US hypocritical to Criticize Russian Election Meddling?
Monday, March 26th, 2018Thomas Carothers has recently written an article in Foreign Affairs, the prestigious elite journal published by the US based Council on Foreign Relations. The article asks is the US hypocritical for criticizing Russian election meddling?
Given the place of publication, the unsurprising conclusion is it is not. The problem is the US is a champion meddler. Consequently, the argument crumbles every time Mr. Carothers reaches for substance. READ MORE
Re-theorizing the Welfare State and the Political Economy of Neoliberalism’s War Against It
Monday, February 26th, 2018This paper seeks to frame neoliberalism’s relation to the welfare state. At issue are competing views regarding the size and organization of the welfare state. The paper presents a new theoretical framework that distinguishes between modes of production and financing of the welfare estate. The framework helps understand both comparative country welfare states and the goals of the neoliberal attempt to refashion the welfare state. The paper then explores the political economy strategy behind the neoliberal campaign. It argues neoliberalism seeks to politically discredit the traditional welfare state and change the economic structure so that the latter becomes unviable. READ MORE