A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Thursday, February 21, 2013

Transcript: Lucas v. Correa, Japan's negative inflation, Nouriel Roubini

Today: Who is the better economist? The man who turns depression ito vitality or the one who does the reverse. Plus Japan's big reflation plans start with a hole in the ground. Then, We haven't heard from Nouriel Roubini in awhile, even though he has a chapter in the book, Demand Side Economics, find it at demandsidebooks.com Roubini was number two to Steve Keen in the Revere Award balloting.
Listen to this episode
Let's start with Ecuador’s president Rafael Correa. Correa has been elected to a third term as leader of Ecuador. Here he is, quote

We are improving real wages—we have been able to close the gap between family incomes and a basic basket of consumption goods. Around 60–65 per cent of families could afford the basic basket at the start of our mandate, now we’ve reached 93 per cent, the highest in the country’s history. We’ve disproved orthodox economic theory, the idea that to generate employment one needs to lower real wages: here the real wage has risen substantially, and we have one of the lowest unemployment rates in the region—just under 5 per cent. We’ve also paid attention to the quality of employment, making sure businesses comply with labor laws. While raising wages for labor, we’ve reduced the remuneration for capital. In this country, if one proposed raising the minimum wage by a few dollars one was called a demagogue, a populist, but no one was surprised by interest rates of 24–45 per cent. We drastically lowered interest rates, to 8–9 per cent, for the corporate sector."

The US-educated Correa defied international financiers by defaulting on $3.9bn in foreign debt obligations and rewriting contracts with oil multinationals to secure a higher share of oil revenues for Ecuador.

Not that he's all that popular with free press advocates, or with the Washington Post.

But in this corner.

via Lars Syll and Real World Economic Review, we get Robert Lucas on the slump.
In a recent lecture on the US recession – Robert Lucas gave an outline of what the New Classical school of macroeconomics today thinks on the latest downturn in the US economy and its future prospects.

Lucas starts by showing that real US GDP has grown at an average yearly rate of 3 per cent since 1870, with one big dip during the Depression of the 1930s and a big – but smaller – dip in the recent recession.

After stating his view that the US recession that started in 2008 was basically caused by a run for liquidity, Lucas then goes on to discuss the prospect of recovery, maintaining that past experience would suggest an “automatic” recovery, if the free market system is left to repair itself to equilibrium unimpeded by social welfare activities of the government.

As could be expected there is no room for any Keynesian type considerations on eventual shortages of aggregate demand discouraging the recovery of the economy. No, as usual in the New Classical macroeconomic school’s explanations and prescriptions, the blame game points to the government and its lack of supply side policies.

Lucas is convinced that what might arrest the recovery are higher taxes on the rich, greater government involvement in the medical sector and tougher regulations of the financial sector. But – if left to run its course unimpeded by European type welfare state activities -the free market will fix it all.

In a rather cavalier manner – without a hint of argument or presentation of empirical facts – Lucas dismisses even the possibility of a shortfall of demand. For someone who already 30 years ago proclaimed Keynesianism dead – “people don’t take Keynesian theorizing seriously anymore; the audience starts to whisper and giggle to one another” – this is of course only what could be expected. Demand considerations are simply ruled out on whimsical theoretical-ideological grounds, much like we have seen other neo-liberal economists do over and over again in their attempts to explain away the fact that the latest economic crises shows how the markets have failed to deliver. If there is a problem with the economy, the true cause has to be government.
Lucas won the Nobel Prize in Economics, but you choose. Which is the better economist.

Reflation in Japan? The new government in Japan announced a 2% inflation target. The latest reading is minus 4%. Japan is deflating at 4%. Peter Radford at RWER opines:
"We should not read too much in one data-point. But we also should take it serious: there might well be some kind of deflation shock in Japan. Which adds some background to the aggressive reflation policies proposed by Shinzo Abe. A 4% deflation rate is a massive failure of central bank policies and preliminary data must have been buzzing around for quite some time."

Chart online

We haven't heard from Nouriel Roubini in awhile. His latest Project Syndicate piece runs

"The global economy this year will exhibit some similarities with the conditions that prevailed in 2012. No surprise there: We face another year in which global growth will average about 3 percent, but with a multi-speed recovery—a subpar, below-trend annual rate of 1 percent in the advanced economies, and close-to-trend rates of 5 percent in emerging markets. But there will be some important differences as well.

Painful deleveraging—less spending and more saving to reduce debt and leverage— continues in most advanced economies, which implies slow economic growth. But fiscal austerity will envelop MOST advanced economies this year, rather than just the Eurozone periphery and the United Kingdom. Indeed, austerity is spreading to the core of the Eurozone, the United States, and other advanced economies (with the exception of Japan). Given synchronized fiscal retrenchment,another year of mediocre growth could give way to outright contraction in some countries.

With growth anemic, the rally in risky assets that began in the second half of 2012 has not been driven by improved fundamentals, but rather by fresh rounds of unconventional monetary policy. Central banks—the European Central Bank, the US Federal Reserve, the Bank of England, and the Swiss National Bank — have all engaged in some form of quantitative easing, and they are now likely to be joined by the Bank of Japan.

Moreover, several risks lie ahead. First, America’s mini-deal on taxes has not steered it fully away from the fiscal cliff. Sooner or later, another ugly fight will take place on the debt ceiling, the delayed sequester of spending, and a congressional “continuing spending resolution” (an agreement to allow the government to continue functioning in the absence of an appropriations law). Markets may become spooked by another fiscal cliffhanger. And even the current mini-deal implies a significant amount of drag—about 1.4 percent of GDP—on an economy that has grown at barely 2 percent over the last few quarters.

Second, while the ECB’s actions have reduced tail risks in the Eurozone—a Greek exit and/or loss of market access for Italy and Spain—the monetary union’s fundamental problems have not been resolved. Together with political uncertainty, they will re-emerge with full force in the second half of the year.

After all, stagnation and outright recession—exacerbated by fiscal austerity, a strong euro, and an ongoing credit crunch—remain Europe’s norm. Large stocks of private and public debt remain. Given aging populations and low productivity growth, potential output is likely to be eroded in the absence of more aggressive structural reforms to boost competitiveness, leaving the private sector no reason to finance chronic current-account deficits.

Third, China has had to rely on another round of monetary, fiscal, and credit stimulus to prop up an unbalanced and unsustainable growth model based on excessive exports and fixed investment, high saving, and low consumption. By the second half of the year, the investment bust in real estate, infrastructure, and industrial capacity will accelerate. And, because the country’s new leadership—which is conservative, gradualist, and consensus-driven—is unlikely to speed up implementation of reforms needed to increase household income and reduce precautionary saving, consumption as a share of GDP will not rise fast enough to compensate. So the risk of a hard landing will rise by the end of this year.

Fourth, many emerging markets—including the BRICs (Brazil, Russia, India, and China), but also many others—are now experiencing decelerating growth. Their “state capitalism” is the heart of the problem. A large role for state-owned companies; an even larger role for state-owned banks; resource nationalism; import-substitution industrialization; and financial protectionism and controls on foreign direct investment. Whether they will embrace reforms aimed at boosting the private sector’s role in economic growth remains to be seen.

Finally, serious geopolitical risks loom large. The entire greater Middle East—from the Maghreb to Afghanistan and Pakistan—is socially, economically, and politically unstable. Indeed, the Arab Spring is turning into an Arab Winter. An outright military conflict between Israel and the U.S. on one side and Iran on the other side remains unlikely, but it is clear that negotiations and sanctions will not induce Iran’s leaders to abandon efforts to develop nuclear weapons. With Israel refusing to accept a nuclear-armed Iran, the drums of actual war will beat harder. The fear premium in oil markets may significantly rise and increase oil prices by 20 percent, leading to negative growth effects in the U.S., Europe, Japan, China, India and all other advanced economies and emerging markets that are net oil importers.

While the chance of a perfect storm is low, any one of them alone would be enough to stall the global economy and tip it into recession. And while they may not all emerge in the most extreme way, each is or will be appearing in some form. As 2013 begins, the downside risks to the global economy are gathering force.

says Nouriel Roubini, NOT a winner of the Nobel Prize in Market Fundamentalism

This week's folder at reMacroBaseline.com is labeled Human and Social Capital. We're going to get into some forecasting problems, and then to a specific scheme to solve a looming problem for many people, the boomers, in retirement financing, but first some notes.

It's funny how people get more respect when you consider them alongside machines or land or natural resources, and that is what happens when we put capital alongside "human" or "social." We begin to see that the society does better when people are better educated and in better health, irrespective of the increase in well-being to those people themselves.

There is an educational level -- skill level, if you must -- and a level of health that creates an intrinsic value that can be tapped. When we allow our educational systems to deteriorate -- often as a result of misguided schemes to hold teachers "accountable" -- or our health systems to run to high cost and low benefit -- often for the benefit of mega-corporations wearing free market costumes -- we are letting our infrastructure and capital decay just as surely as when we let the roadways turn to potholes or the sewer systems break.

Notice the difference between human capital and social capital. The educational and health care systems are parallel to physical capital, as well, and when we allow these, or police, or courts, or parks and libraries, or any of the rest of the utilities-type social services ... transportation ... to deteriorate, it is no different than a company allowing its production facilities to fall apart. Yet, corporations who would never let their machines rust or their roofs leak demand that the public sector do just that in the name of fiscal responsibility.

So when we consider the forecast for the medium and long-term futures, we need to take account of the crumbling human and social capital. But there are other issues.

One of them is the tendency to place more emphasis on the read-outs on the economic indicator dials -- GDP, investment, inflation, the rest -- than on the obvious condition of the infrastructure and what that portends for the future. Or for that matter, on the obvious condition of the population, its finances, health, security, and so on. One of the issues in this metrics vs. real condition that has gotten good attention recently is income disparity.

Which society is healthier, the one where the average income is $40,000 or the one where it is $50,000? Not enough information. In a society of 25 people, if 24 are getting $10,000 per year and one is getting a million, it is not clear that this is better than when all 25 are getting $40,000.

So, combine the two problems, the ignorance of social and human capital in the assessment of national well-being and the problem that the metrics often miss the mark, and you have a recipe for bad policy. Here we come again to health care, but also to retirement. One side says, cut the funding for social insurance, increase the contributions, raise the retirement age. But this doesn't fix the problems of growing older or being sick, it just shuffles the accounts and pushes people into private insurance. This is a more costly alternative, not as efficient, but it is good for GDP, or at least that part of GDP associated with the providers. In fact, as a public good, we need to universalize health care to drive the costs down. Doesn't do a thing for GDP. But we also need to make retirement efficient.

That brings us to today's special post, delivered partly for a want of time, since this is in the can from another project, but partly to offer a way out of the current and prospective dead-end for many baby boomers entering retirement. The investments many have made, the 401(k)s and individual retirement plans, have shrunk sadly under the Fed's easy money for the banks and corporations policy. A million dollars which returned $70,000 per year now returns half that. The house we were going to sell for a fat profit is now not worth enough for the down payment on the next one.

So, we've put up the Retirement Co-op Scheme. You can find the whole post below. But if you want to comment, please go to Retirement Co-op (http://retirementco-op.blogspot.com/) It is the first cut at this. Hopefully the concept comes through. There are a lot of details and aspects not directly addressed.

It offers retirees a way of securing their future in a very insurance-like way, entering a community before they need to join one physically, converting their energy, talent and property into the services they need while retaining equity and maximum estate value.

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