This paper explores the economics and political economy of financialization using Matt Taibbi’s vampire squid metaphor to characterize it. The paper makes five innovations. First, it focuses on the mechanics of the “vampire squid” process whereby financialization rotates through the economy loading sector balance sheets with debt. Second, it identifies the critical role of government budget deficits for the financialization process. Third, it identifies the critical role of central banks, which are the lynchpin of the system and now serve as de facto guarantors of the value and liquidity of private sector liabilities. Fourth, the paper argues financialization imposes a form of policy lock-in. Fifth, it argues financialization transforms popular attitudes and understandings, thereby generating political support despite poor economic outcomes. In effect, there is a politics of financialization that goes hand-in-hand with the economics. The paper concludes with some observations on why mainstream macroeconomics has no equivalent construct to financialization and discusses the disquieting unexplored terrain that the economy is now in.
Financialization revisited: the economics and political economy of the vampire squid economy
September 1st, 2021Preparations for the “Next Afghanistan” have already begun
August 19th, 2021Now that the twenty year-long US military expedition to Afghanistan has ended in catastrophe, the US Neocon establishment has already begun preparations for the “Next Afghanistan”. That process begins with blaming Joe Biden and rewriting history.
Thus, Richard Haas (President of the Council on Foreign Relations) writes in Project Syndicate: “Biden was recently asked if he harbored any regrets about his decision to withdraw all US troops from Afghanistan. He replied he did not. He should.” As part of his argument, Mr. Haas scare mongers the prospect of a “Taliban domino effect” whereby the Taliban takeover Pakistan.
The New York Times has also been busy playing the blame game and rewriting history. Two days after Kabul fell, its page one story blamed President Biden and suggested something very different was possible: “But in his speech, Mr. Biden spent more time defending his decision to depart Afghanistan than the chaotic way it was carried out.”
In similar vein, another Times story claimed: “In several cities, Afghan security forces put up a strong fight to stop the Taliban advance, with videos showing exchanges of gunfire. But much more prevalent during the Taliban’s offensive were scenes of apparent retreat by government forces left ill-equipped to secure the country after the American withdrawal.”
The reality is President Biden has nothing to apologize for and deserves our collective thanks for a decision that always stood to benefit the United States but never politically benefit him.
Read the rest of this entry »The economics of New Developmentalism: a critical assessment
July 1st, 2021This paper critically assesses the economics of New Developmentalism (ND). It begins by identifying and formalizing the principal components of ND which are identified as neutralizing Dutch disease, ending growth with foreign saving, development driven by a technologically advanced and internationally competitive manufacturing private sector, and getting macroeconomic prices right. It then examines four strands of critique consisting of internal economic logic critiques, Classical Developmentalism (CD) critiques, Keynesian and Neo-Kaleckian critiques, and the fighting the last war critique. To this author, ND is best understood as a Third Way styled analysis that blends CD heterodoxy and Neoliberalism. However, ND’s substantive policy recommendations lean in the Neoliberal direction, particularly as regards budget deficits and state intervention in the development process. From a Classical Development perspective, the problematic of development cannot be solved as easily as suggested by ND.
The Macroeconomics of Government Spending: Distinguishing Between Government Purchases, Government Production, and Job Guarantee Programs
June 14th, 2021This paper reconstructs the Keynesian income – expenditure (IE) model to include distinctions between government purchases of private sector output, government production, and government job guarantee program (JGP) employment. Analytically, including those distinctions transforms the model from a single sector model into a multi-sector model. It also surfaces the logic behind the automatic stabilizer property of JGP employment. The model is then extended to include Kaleckian income distribution effects which contribute to explaining why expenditure multipliers vary by type of fiscal expenditure. The Kaleckian version generates a new balanced budget multiplier driven by changed composition of government spending. It also illuminates some macroeconomic implications of privatization of government produced services.
Proto-fascism unleashed: how the Republican Party sold its soul and now threatens democracy
June 4th, 2021This essay argues that some forty years ago the Republican Party struck a Faustian bargain whereby it traded political integrity and decency for tax cuts and a corporate dominated economy. Now, the Republican party is reaping the consequences of that bargain in the form of its capture by Donald Trump and his followers. However, it also means we are all threatened as the party has unleashed and legitimized proto-fascist tendencies that risk destroying tolerance and democracy, and replacing them with intolerance and authoritarianism. The U.S. is now fighting a war for its soul. At issue are two core questions. One, will the U.S. remain committed to true democracy? Two, will the U.S. aspire to having a decent society with shared prosperity? The one upside of Trump and his purging of the old guard Republican Party is that he compels welcome clarification of those questions, which can no longer be evaded by the Democratic Party and the chattering class.
Life among the Econ: fifty years on
April 20th, 2021Almost fifty years ago, the Swedish econographer Axel Leijonhufvud (1973) wrote a seminal study on the Econ tribe titled “Life among the Econ”. This study revisits the Econ and reports on their current state. Life has gotten more complicated since those bygone days. The cult of math modl-ing has spread far and wide, so that even lay Econs practice it. Fifty years ago the Econ used to say “Modl-ing is everything”. Now they say “Modl-ing is the only thing”. The math priesthood has been joined by a priesthood of economagicians. The fundamental social divide between Micro and Macro sub-tribes persists, but it has been diluted by a new doctrine of micro foundations. The Econ remain a fractious and argumentative tribe.
Keywords: Micro, macro, economagicians, Keynesians, New Classicals, New Keynesians.
JEL ref.: A10, B00, B2, Z0, Z1.
Read the report
2021 Godley-Tobin Lecture: Marc Lavoie, “Godley versus Tobin on Monetary Matters”
February 12th, 2021
Rethinking capacity utilization choice: the role of surrogate inventory and entry deterrence
January 30th, 2021This paper presents a macroeconomics-friendly Post Keynesian model of the firm describing both an inventory theoretic approach and an entry deterrence approach to choice of excess capacity. The model explains why firms may rationally choose to have excess capacity. It also shows the two approaches are complementary and reinforcing of each other. Analytically, the paper makes three principal contributions. First, it provides a simple framework for understanding the microeconomics of capacity utilization choice. Second, it reframes the Post Keynesian discussion of capacity utilization by making excess capacity choice the key to understanding normal capacity utilization. Third, it implicitly challenges Neo-Kaleckian wage-led growth theory as the model shows choice of the optimal excess capacity rate is independent of the level of demand.
Sliding Doors: The Day US Democracy Almost Died
January 10th, 2021Sunday January 10, 2021. It is now four days since the January 6 mob attack on the US Congress which President Donald Trump incited. In a manner akin to a combat situation, the numbness induced by the overwhelming nature of the event is giving way to shock and anger. What is also becoming clear is just how close US democracy came to dying.
Sliding Doors
The film Sliding Doors begins with two different scenarios in which the course of the main protagonist’s life depends on whether or not she catches the subway by seconds. The events of January 6 have a Sliding Doors quality to them.
It now seems the attack has backfired for Trump and turned into a political fiasco. That fiasco resonates with Adolf Hitler’s failed 1923 Munich Beer Hall putsch (German for coup) – though lest we get carried away, let us not forget Hitler returned and took power ten years later, and we all know what followed.
Hitler’s failed Munich putsch is one scenario. The other scenario is the Bolshevik Party’s sudden seizure of power in St. Petersburg, Russia in October 1917. That coup succeeded and launched a totalitarian dictatorship that was to last almost seventy-five years.
It is easy to imagine a scenario in which Trump’s mob had been better organized and more ruthless, and in which they had seized Congress and summarily executed Democratic Senators and House members – along with Senator Mitt Romney, who has been heroic in his opposition to Trump. That would have left a rump majority of willing accomplice Republicans, plus a smaller group of Vichyssoise Republicans who meekly towed the line.
Read the rest of this entry »National Policy Space: Reframing the Political Economy of Globalization and its Implications for National Sovereignty and Democracy
January 8th, 2021This paper critiques the trilemma framing of the political economy of globalization, and offers a new framing based on the construct of national policy space. The paper makes three main contributions. First, building on Stein (2016), it deconstructs the categories used by Rodrik (2011) and introduces distinctions between the “degree”, “type”, and “dimensions” of globalization; “effective” versus “formal” national sovereignty; “content” versus “process” of democracy; and “national” versus “global” democracy. The deconstruction shows countries face choices involving a series of margins, not a trilemma. Second, that suggests reframing the problematic in terms of national policy space, which is the “funnel” through which globalization impacts democracy and national sovereignty. Third, the paper shows a country can be impacted by globalization even if it does nothing because other countries’ actions change its possibility set. The reframing shows globalization is an intrinsically political project. To the extent it is now driving a nationalistic anti-democratic turn in politics, responsibility lies with political elites.
READ MORE: Brazilian Journal of Political Economy, July 2021.