More on the mainstream (not wonkish)

May 1st, 2014

Paul Krugman wrote a reply to my two postings (Part 1 and Part 2) on the flimflam of mainstream economics. Below is my response to Paul that was posted as a comment on his Conscience of a Liberal website. I am posting it because I think it sheds more light on the failings of so-called New Keynesianism.

Dear Paul,

I enjoy what you write and have great admiration for your work, but this piece is unfair.

(1) Here is an article of mine on what you term the paradox of flexibility, published in 2008 and extending James Tobin’s seminal paper on “Keynesian Models of Recession and Depression”.

“Keynesian Models of Deflation and Depression Revisited,” Journal of Economic Behavior and Organization, 68 (October 2008), 167 - 77.

(2) I do not think I am misportraying you. Your own macroeconomic framework seems unconvincing to me as a description of a capitalist economy, being Keynesian at the zero lower bound and classical the rest of the time. I think of Keynesianism as being a macroeconomic theory that applies at all times. But these are issues that require more space for discussion.



Looking for flimflam: some hints on where to find it

May 1st, 2014

Simon Wren-Lewis has graciously replied to my post on mainstream economics’ flimflam and says he cannot find it (the flimflam). Here are some hints on where to look.

(1) A first con is the labeling adopted by New Keynesians. As I showed in my post, New Keynesianism has near-nothing to do with Keynes’s theoretical thinking as expressed in The General Theory. I too am not interested in an exegesis of what Keynes meant, but I am interested in honesty in labeling to help avoid damaging confusions. Read the rest of this entry »

The flimflam defense of mainstream economics

April 29th, 2014

The teaching of economics has recently been in the news. One reason is the activities of Manchester University undergraduates who have formed the Post-Crash Economics Society to protest the monopoly of mainstream neoclassical economics in university lecture halls. A second reason is criticism of the neoclassical reasoning in Thomas Piketty’s runaway best seller Capital in the Twenty-First Century.

This criticism and calls for including heterodox economic theory in the curriculum have prompted a defense of mainstream economics from Princeton University’s Paul Krugman and Oxford University’s Simon Wren-Lewis. Both hail from the mainstream’s liberal wing, which muddies the issue because it is easy to conflate the liberal wing with the critics. In fact, the two are significantly different and their defense of mainstream economics is pure flimflam. Read the rest of this entry »

The accidental controversialist: deeper reflections on Thomas Piketty’s “Capital”

April 23rd, 2014

Thomas Piketty’s Capital in the Twenty-First Century is a six hundred and eighty-five page tome that definitively characterizes the empirical pattern of income and wealth inequality in capitalist economies over the past two hundred and fifty years, and especially over the last one hundred. It also documents the grotesque rise of inequality over the past forty years and ends with a call for restoration of high marginal income tax rates and a global wealth tax.

His book has tapped a nerve and become a phenomenon. In laying a solid blow against inequality, Piketty has also become an accidental controversialist. That is because his book has potential to unintentionally trigger debate over so-called “free market” capitalism. The big question is will that happen? Read the rest of this entry »

Monetary policy after quantitative easing: The case for asset based reserve requirements (ABRR)

April 9th, 2014

This paper critiques the Federal Reserve’s quantitative easing (QE) exit strategy which aims to deactivate excess liquidity via higher interest rates on reserves. That is equivalent to giving banks a tax cut at the public’s expense. It also risks domestic and international financial market turmoil. The paper proposes an alternative exit strategy based on ABRR which avoids the adverse fiscal and financial market impacts of higher interest rates. ABRR also increase the number of monetary policy instruments which can permanently improve policy. This is especially beneficial for euro zone countries. Furthermore, ABRR yield fiscal benefits via increased seignorage and can shrink a financial sector that is too large.

Keywords: Quantitative easing, asset based reserve requirements, exit strategy.

Effective demand, endogenous money, and debt: a Keynesian critique of Keen and an alternative theoretical framework

March 30th, 2014

This paper presents a Keynesian critique of Steve Keen’s treatment of the endogenous money – credit – aggregate demand (AD) nexus. It argues his analytic intuition is correct but is developed in the wrong direction. Keen’s fundamental relation describing determination of AD in an endogenous credit money economy suffers from two flaws. First, it neglects the core Keynesian problematic of leakages from and injections into the circular flow of income. Second, it falls into the theoretical morass regarding the black box of velocity of money via its adoption of a form of Fisher equation to determine AD. The paper contrasts Keen’s treatment with a Keynesian structural framework. [READ MORE HERE]

Explaining Stagnation: Why it Matters

February 24th, 2014

Larry Summers (HERE) and Paul Krugman (HERE) have recently identified the phenomenon of stagnation. Given that they are giants in today’s economic policy conversation, their views have naturally received enormous attention. That attention is very welcome because the issue is so important. However, there is also a danger that their dominance risks crowding out other explanations of stagnation, thereby short-circuiting debate.

Krugman has long emphasized the liquidity trap – zero lower bound to interest rates which supposedly prevents spending from reaching a level sufficient for full employment. Summers has added to this story by saying we have been in the throes of stagnation for a long while, but that has been obscured by years of serial asset price bubbles. Read the rest of this entry »

Modern money theory (MMT): the emperor still has no clothes

February 17th, 2014

Eric Tymoigne and Randall Wray’s (T&W, 2013) defense of MMT leaves the MMT emperor even more naked than before (excuse the Yogi Berra-ism). The criticism of MMT is not that it has produced nothing new. The criticism is that MMT is a mix of old and new, the old is correct and well understood, while the new is substantially wrong. Among many failings, T&W fail to provide an explanation of how MMT generates full employment with price stability; lack a credible theory of inflation; and fail to justify the claim that the natural rate of interest is zero. MMT currently has appeal because it is a policy polemic for depressed times. That makes for good politics but, unfortunately, MMT’s policy claims are based on unsubstantiated economics (The full paper is HERE).

The middle class in macroeconomics and growth theory

February 12th, 2014

This paper presents a three class growth model with labor market conflict. The classes are workers, a middle management middle class, and a “top” management capitalist class. The model introduces personal income distribution that supplements conventional concerns with functional income distribution. Endogenously generated changes in personal income distribution can generate endogenous shifts from profit-led to wage-led regimes and vice-versa. A three class economy generates richer patterns of class conflict because the middle class has shared interests and conflicts with both capitalists and workers. Changes that benefit the middle class do not necessarily increase growth or employment or benefit workers (The full paper is available HERE).

New Book: Restoring Shared Prosperity: a Policy Agenda from Leading Keynesian Economists

December 20th, 2013

Edited by Thomas I. Palley and Gustav A. Horn. The economic recovery in the US since the Great Recession has remained sub-par and beset by persistent fear it might weaken again. Even if that is avoided, the most likely outcome is continued weak growth, accompanied by high unemployment and historically high levels of income inequality. In Europe, the recovery from the Great Recession has been even worse, with the euro zone beset by an unresolved euro crisis that has already contributed to a double-dip recession in the region. This book offers an alternative agenda for shared prosperity to that on offer from mainstream economists. The thinking is rooted in the Keynesian analytic tradition, which has been substantially vindicated by events. However, pure Keynesian macroeconomic analysis is supplemented by a focus on the institutions and policy interventions needed for an economy to generate productive full employment with contained income inequality. Such a perspective can be termed “structural Keynesianism”. These are critical times and the public deserves an open debate that does not arbitrarily or ideologically lock out alternative perspectives and policy ideas. The book contains a collection of essays that offer a credible policy program for shared prosperity, rooted in a clear narrative that cuts through the economic confusions that currently bedevil debate.

Contributions by Richard L Trumka, Thomas I Palley, Gustav A. Horn, Andreas Botsch, Josh Bivens, Achim Truger, Jared Bernstein, Robert Pollin, Dean Baker, Gerald Epstein, Damon Silvers, Jennifer Taub, Silke Tober, Jan Priewe, John Schmidt, Heidi Shierholz, William E Spriggs, Eckhard Hein, Heiner Flassbeck, Gerhard Bosch, Michael Dauderstädt

The book is available for $7.52 at AMAZON.COM

A free PDF is available HERE.