Hype and facts on free trade

from C. P. Chandrasekhar

Voices questioning the claim that nations and the majority of their people stand to gain from global trade are growing louder. The one difference now is that the leading protagonist of protectionism is not a developing country, but global hegemon United States under Donald Trump. Free trade benefits big corporations with production facilities abroad, Trump argues, while harming those looking for a decent livelihood working in America. With time Trump has made clear that his words are not mere rhetoric, matching them with tariffs that have frightened European and North American allies and US corporations, besides troubling the likes of China and Japan. A nation that pushed for freer trade is now building economic walls along its borders. This turn in policy at the metropolitan core not only undermines the case for free trade among other nations, but revives arguments usually advanced by developing countries. The benefits of trade under capitalism, they hold, tend to be distributed unequally among nations. They sometimes fail to mention that at the national level as well the gains are asymmetrically distributed, favouring the more powerful.  

The 2008 Economic Crisis Ten Years On

a WEA online conference
15th October to 30th November, 2018

Discussion Forum Sessions
Visit the Discussion Forum

 

I. The Financialisation of the Economy

1. Carmelo Ferlito, “The Malaysian Property Boom and Bust Cycle: History Repeating?”
2. Jake Jennings, “The Crisis and the Asset Driven Household”
3. Pushpangadan Mangari, “Impact of Financialization: View from India”
4. Teodoro Dario Togati, “Financialization and the ‘New Normal’. At the Root of the Aggregate Demand Problem Undermining New Capitalism”
5. Gianni Vaggi, “Financial Mercantilism and Developing Countries”

II. Investment, Employment and Working Conditions

1. Maria Alejandra Madi, “Pension Funds: Key Issues after the Global Crisis”
2. Zeeshan, Geetilaxmi Mohapatra, and A K Giri, “Rural Nonfarm Enterprises Diversification, Farm Income and Consumption Expenditure in Different Agroecological Zones of India: Evidence from Longitudinal Farm Households”
3. Edoardo Pizzoli, “The Green Economy: a Technological Option against
   Economic Crisis?”
4. Azzurra Rinaldi, ”Female Entrepreneurs, the Crisis and Access to Credit: the Italian Case”
5. Cameron M. Weber, “Some Observations on the Structure of the Labor
   Market after the Great Recession”

III. Social, Economic and Political Imbalances

1. Guglielmo Forges Davanzati, “The Monetary Theory of Production and the Modern Money Theory: A Critical Assessment” 
   Guglielmo Forges Davanzati, “Income Inequalities, Public Debt and Social Cohesion: A Postkeynesian-Institutional Approach”
2. Arturo Hermann, “The Economic Imbalances of our Time and the
   Perspective of Circular Economy”
3. Davide Gualerzi, “Stagnation in A Historical Perspective”
4. Laurence A. Krause, “Marx on Credit, Agency Problems, and Crises”
5. Rodrigo Pérez Artica, “The impact of excess capacity over the investment falloff”

IV. Institutional Challenges and Alternatives

1. Jesper Jespersen, “The European Monetary Union Failed because of
   Misunderstood Macroeconomics”
2. Laszlo Kulin, “Alternative institutional frameworks at national and
   supranational level”
3. Mogens Ove Madsen, “Institutional Challenges and Alternatives: Revision of Fiscal Rules in the EU”
4. Constantine E. Passaris, “The Transformational Role of The Great
   Recession for Economic Governance”

Visit the Discussion Forum

Conference leaders: Arturo Hermann & Maria Alejandra Madi

new issue of WEA Commentaries

WEA Commentaries Volume 8, Issue No. 4  Download the issue as a PDF In this issue Studies on Financialization in Latin America, Esteban Pérez Socialism, Economics and the Left, David Ruccio Economics for an Information Age, Patrick Spread Complexity in Economics, Maria Alejandra Madi On global capitalism and the survival of democracy, Maria Alejandra Madi                Please support the WEA by paying a membership fee                                    or making a small donation.

Brazil

Mark Weisbrot –   Presidential election is about a fight for democracy in Brazil

Thomas Palley – Brazil is falling under an evil political spell

The necessity and difficulty of shifting our economic paradigms

from Asad Zaman and the current issue of the RWER

In the wake of the Global Financial Crisis, the failure of economic theories, and of economists, to provide any warnings, analysis, or remedies, became glaringly obvious to all. The Queen of England went to the London School of Economics to ask “Why did no one see it coming?”. The US Congress constituted a committee to investigate why “economics, a field that aspires to be a science … (but) … generally accepted economic models inclined the Nation’s policy makers to dismiss the notion that a crisis was possible.” General discontent with economics has been captured in books too numerous to list; as a small sample chosen at random, consider Steve Keen’s Debunking Economics: The Naked Emperor of the Social Sciences, Joe Earle, Cahal Moran and Zach Ward-Perkins: The Econocracy: The Perils of Leaving Economics to the Experts, and Phillip Pilkington: The Reformation in Economics: A Deconstruction and Reconstruction of Economic Theory.

g economists have expressed serious dis-satisfaction with the profession as a whole.  John Cassidy’s article “After the Blowup …” in The New Yorker describes his interviews with apostates from the Chicago creed. Krugman wrote that the “Profession as a whole went astray because they mistook the beauty of mathematics for truth.” David Romer wrote that economists’ “dismissal of fact goes …(so)… far beyond post-modern irony” that it should be called “post-real”. He wrote that the profession has been moving backwards, losing precious insights gained. Olivier Blanchard, Chief Economist at IMF writes that DSGE models make “assumptions profoundly at odds with what we know about consumers and firms”. This is just a small sampler; we can easily find many other similar statements from leading economists, and practitioners intimately involved with finance and central banks on a global level[1]. 

Short-termism: culture or power?

from Shimshon Bichler and Jonathan Nitzan and current issue of the RWER

At stake here is the connection between the two key quantities of the capitalist nomos – the price of capital and its underlying earnings – so the question is obviously important.  Yet, to the best of our knowledge, that question has never been asked, let alone answered. Indeed, as far as we know, the V­­‑shape pattern of the short-term price-EPS correlation shown in Figures 3 and 4 is a new finding.

It is common to argue that, since the 1980s, U.S. capitalism has been marked by a growing emphasis on ‘shareholder value’, heightened ‘short-termism’ and a nearly universal obsession with quarterly increases in profits. This popular view is certainly consistent with the post-1980s surge of the price-EPS correlation shown in Figure 4 – and this consistency should hardly surprise us. With capitalists paying more and more attention to the latest bottom line and analysts glued to the latest bit of news, it is no wonder that equity markets have become increasingly sensitive to the most recent variations in earnings.

But what is the cause of these changes? Why has the capitalist time horizon shrunk? Why have investors – who, for a whole century up until that point, cared less and less about current earnings and often seemed perfectly happy to buy and hold stocks for the long haul – suddenly started to insist on quarterly increases in profits? Is the V­‑shape reversal of the early 1990s merely the consequence of a changing ‘investment culture’? Is it simply a new fad imprinted by the theoretical winds of just-in-time neoliberalism and emboldened by the ideological flare of Margaret Thatcher, Ronald Reagan and Alan Greenspan – or are these developments themselves the result of a deeper change?  

Krugman vs. Keen

from John Balder and the current issue of the RWER

To explore the origins of the global financial crisis, the first step is to specify the relationship between banking, money and credit. According to the mainstream view, a bank serves as an intermediary between a borrower and a lender. As a pure intermediary, a bank has no impact on real economic activity. This view – taught in most Economics 101 textbooks – implicitly assumes that money is available in finite quantities that are regulated by the central bank.

Several years ago, Paul Krugman and Steve Keen engaged in an enlightening back-and-forth about banking, money and credit. The discussion examined whether banks lend existing money (implying money is neutral) or newly create the money they lend (money is not neutral).

Economist	Category	Result
Krugman (2012)	Money is neutral	Banks lend already existing money
Keen (2011, 2017)	Money is not neutral	Banks newly create the money they lend

In support of neutral money (mainstream view), Krugman (2012) casually asserts:

“Think of it this way: when debt is rising, it’s not the economy, as a whole borrowing more money. It is rather, a case of less patient people – people who, for whatever reason want to spend sooner rather than later – borrowing from more patient people.”  

Capital and class

from David Ruccio and Jamie Morgan and the current issue of the RWER

The premise and promise of capitalism, going back to Adam Smith, have been that global wealth would increase and serve as a benefit to all of humanity.[1] However, the experience of recent decades has challenged those claims: while global wealth has indeed grown, most of the increase has been captured by a small group at the top. This has continued into the “recovery” in the United States and globally. The result is that an obscenely unequal distribution of the world’s wealth has become even more unequal. Those in the small group at the top have long been able to put distance between themselves and everyone else precisely because they’ve been able to capture the surplus and then convert their share of the surplus into ownership of wealth. And the returns on their wealth allow them to capture even more of the surplus produced within global capitalism. This is accompanied by growing income inequality.

However, although people are aware of inequality, they are typically unaware of its real extent, and mainstream economics and the popular press contribute to this situation, which in turn leads to the reproduction of the system that produces ever-more-grotesque levels of inequality.

Both class and ideology underpin this worsening situation. The tiny group at the top, both nationally and globally, have both an interest and the means to maintain the economic and social rules and institutions that allow them to capture the surplus, and thus create more distance between themselves and everyone else. Meantime, mainstream economic and political discourses, inside and outside the academy, tend to ignore the class conditions and consequences of inequality – and to undermine the possibility of a real debate about the kinds of changes that are necessary to give the majority of people a say in how the surplus is utilized.

Global wealth inequality  

Globalization checkmated?

from Thomas Palley and current issue of the RWER

1. Economic failings and the rise of politics

It has been ten years since the financial crisis. Since then, the global economy has recovered and attention has increasingly shifted to political risks as the trigger for the next economic crisis. That shift of attention has been driven by political events like the UK’s Brexit referendum, the election of President Trump, and the rise of anti-euro populist political parties in Italy. Such events have the potential to cause financial disruptions that trigger broader economic dislocation, which in turn could further aggravate political conditions. In effect, we have moved to a world in which politics has become an important potential economic detonator.

The rise of politics is no accident. Instead, it reflects the popularly perceived failings of the neoliberal economic paradigm which has dominated economic policymaking for the past forty years. Since globalization is the most prominent feature of the neoliberal program and has also had some of the most visible negative effects, it has been placed in the forefront of the backlash. That backlash suggests globalization is unlikely to deepen further, and may even unravel a bit.

2. Globalization as economists’ version of the “end of history” fallacy

The challenge to globalization has taken economists by surprise. In many ways, there are parallels between economists’ faith in globalization and Francis Fukuyama’s (1989) “end of history” hypothesis. After the demise of the Soviet Union, Fukuyama prophesied that free market liberal democracy had become the “final form of human government, to which all countries would now converge (Fukuyama, 1989, 3)”.

The real problem with free trade

from Jayati Ghosh

Even if free trade is ultimately broadly beneficial, the fact remains that as trade has become freer, inequality has worsened. One major reason for this is that current global trade rules have enabled a few large firms to capture an ever-larger share of value-added, at a massive cost to economies, workers, and the environment.

For most critics of globalization, trade is the villain, responsible for deepening inequality and rising economic insecurity among workers. This is the logic driving support for US President Donald Trump’s escalating tariffs. Why, then, does the message resonate far beyond the United States, and even the advanced economies, to include workers in many of the developing countries that are typically portrayed as globalization’s main beneficiaries?

Free trade is hardly the only – or even primary – source of inequality and insecurity worldwide. Surprisingly, one enduring problem that provokes far less popular backlash is that finance continues to dominate the world economy, generating substantial instability and mounting risks like those that led to the 2008 global financial crisis.

Moreover, some countries continue to pursue fiscal austerity, instead of consolidating their budgets by, say, addressing large-scale tax avoidance and evasion by major companies and wealthy individuals. And labor-saving innovations continue to be developed and deployed, producing “technological unemployment” among some groups.

Some argue that free trade is being demonized simply because people do not understand what is in their own best interest. But that is both patronizing and simplistic. Even if free trade is ultimately broadly beneficial, the fact remains that as trade has become freer, inequality has worsened. 

real-world economics review – issue no. 85

real-world economics review
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back issues
18 September 2018
issue no. 85
download whole issue

Globalization checkmated?
Thomas Palley          download pdf

Post-crisis, next crisis

Capital and class: Inequality after the crash
David Ruccio and Jamie Morgan          download pdf

Post-crisis perspective: sorting out money and credit and why they matter!
John M. Balder           download pdf 

With their back to the future, will past earnings trigger the next crisis?
Shimshon Bichler and Jonathan Nitzan           download pdf              

Changing economics

Radical paradigm shifts
Asad Zaman           download pdf   

How to transform economics and systems of power?
Deniz Kellecioglu            download pdf      

Economics and normativity in four sections
Jamie Morgan           download pdf       

From Pareto economics, to Pareto politics, to fascism
Jorge Buzaglo             download pdf                  

Trump politics towards Mexico:
Alicia Puyana           download pdf                       

Note: The structure of “crowding out” is reappearing
Leon Podkaminer          download pdf

Board of Editors, past contributors, submissions, etc.       

Job Guarantee Programs: careful what you wish for

from Thomas Palley

Some 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.

The real benefits of a JGP

The starting point for discussion should be recognition that a JGP delivers multiple benefits. First, it ensures full employment by making available a job to all who want one on the terms specified by the program. Second, it substitutes wages for welfare benefits to workers who accept such jobs and would otherwise be on welfare. Third, it may deliver supply-side benefits to the extent that it helps unemployed workers retain job skills and avoid becoming detached from the labor force during periods of unemployment. Fourth, society benefits from the services produced by workers holding guaranteed employment jobs. Fifth, it has significant desirable counter-cyclical stabilization properties.

That said, a JGP generates some policy conflicts and it also has some drawbacks. Those conflicts and drawbacks concern macroeconomics, microeconomics, and political economy.

Macroeconomic concerns

A first macroeconomic concern is the putative cost of a JGP. This is a complex multifaceted concern. The immediate cost of a JGP will depend on the state of the economy and the state of the aggregate demand (AD) generation process. An economy with a deteriorated AD generation process, marked by a reduced wage share and increased inequality, will be prone to higher unemployment that raises the program’s cost. That speaks to the need to pair a JGP with other conventional structural Keynesian policies that remedy the causes of AD weakness. 

Progressive International Movement

from Yanis Varoufakis

Our new international movement will fight rising fascism and globalists

Our era will be remembered for the triumphant march of a globally unifying rightwing – a Nationalist International – that sprang out of the cesspool of financialised capitalism. Whether it will also be remembered for a successful humanist challenge to this menace depends on the willingness of progressives in the United States, the European Union, the United Kingdom as well as countries like Mexico, India and South Africa, to forge a coherent Progressive International.

Our task is not unprecedented. Fascists did not come to power in the mid-war period by promising violence, war or concentration camps. They came to power by addressing good people who, following a severe capitalist crisis, had been treated for too long like livestock that had lost its market value. Instead of treating them like “deplorables”, fascists looked at them in the eye and promised to restore their pride, offered their friendship, gave them a sense that they belonged to a larger ideal, allowed them to think of themselves as something more than sovereign consumers.

That injection of self-esteem was accompanied by warnings against the lurking “alien” who threatened their revived hope. The politics of “us versus them” took over, bleached of social class characteristics and defined solely in terms of identities. The fear of losing status turned into tolerance of human rights abuses first against the suspect “others” and then against any and all dissent. Soon, as the establishment’s control over politics waned under the weight of the economic crisis it had caused, the progressives ended up marginalised or in prison. By then it was all over.  read more in The Guardian

Women’s work in India

from Jayati Ghosh

One of the difficulties with discussions on employment in India is the tendency to conflate employment and work. But employment is only that part of work that is remunerated, and in India a vast amount of work is actually unpaid and often not even socially recognised. Once we recognise that, a lot of what appears to be inexplicable about Indian employment trends becomes easier to understand.

This is especially true of women’s work. There has been much discussion on the evidence from recent NSS large sample surveys on employment, of the significant decline in women’s workforce participation rates. The work participation rate of rural women aged 15+ years declined from 35 per cent in 1999-2000 to 24 per cent in 2011-12, while the rate for urban women did not change from the really low rate of 16.6 per cent. Various explanations have been offered for this, from more young women being engaged in education (which is still not enough to explain the decline) to rising real wages that have allowed women in poor households to avoid or reduce involvement in very physically arduous and demanding work with relatively low wages. Implicit in this discussion is a notion of a household-level backward bending supply curve, which allows women especially in poorer families not to “work” when their economic conditions allow it. 

The rise and fall of US middle-class wealth

Student debt in the US and the UK

United States

USA official unemployment rate: the missing 15.9 million

Source: https://www.marketslant.com/article/next-crisis-not-our-lifetimes-yellen-62717

Mainstream economics and the state

from June Sekera

In standard economics scripting, government is most often cast in the role of bumbler or villain. Whether as market fixer, intervenor, enforcer or redistributor, its actions are portrayed as resulting in “distortion,” “inefficiency,” “deadweight loss,” and worse.

Three quarters of a century ago, Paul Studenski rejected such casting. He found government to be a vital figure whose role was not simply to intervene or redistribute. Government was a producer. A professor of economics at New York University (1927-55), an authority on public finance, and a widely-respected historian of national income accounting,^[1] Studenski argued that “government is a productive, wealth-creating organization. It supplies direct utilities as well as aids to private production” (1939, p. 34). He elaborated:

“Under all forms of organized society, economic activity has required some collective effort in addition to the individual one, and this is still true of the modern society. The notion that production for exchange is alone ‘productive’ is preposterous.

Production consists in the creation of utilities. Government furnishes services and goods which satisfy the two tests of economic value-namely, utility and scarcity. They satisfy human needs and must be economically used. Government is, therefore, engaged in production just as much as is private enterprise. Government employees are just as much producers as are private employees and entrepreneurs. To deny this fact is to demonstrate one’s faulty economic education or the fact that one’s idolatry for business has thwarted one’s vision” (emphasis added). 

Income redistribution in the United States

Share of wealth in the United States

Source: http://politicsthatwork.com/graphs/share-of-wealth