Argentina and the latest failure of heterodox economics

[Cheezy the Wiz]

Two Words: Eva Peron.

Three Words: state-run populism.

This isn't the vacuous opinion it seems to be at first glance (because of layout, not because of content ).

Argentina is in a pretty unique situation because of Peronism, which gives its government a host of interests to satisfy which is different from almost any other Latin American state. "Populism" is a good word to use here, because that's the strongest legacy of the Perons. The state-run unions are a force unto themselves, but have no direction; robbed of their radical origins decades ago, they've effectively become political pawns of various elites. They don't have a strong political bent anymore, and with upwards of 40% of the Argentinian workforce unionized during Juan's tenure, they have a huge hammer and don't know how to swing it, so they become the pawns of whomever has a loud enough voice to direct that hammer elsewhere: in this case, most often the state. The government knows it relies on the power of the unions to maintain its own power, which is largely what fuels the populism. Fascism has always hinged upon populism and bribing the public, so this legacy shouldn't surprise anyone.

Not that I lament the power of unions, mind you. But without direction, they become pawns of maleficent forces and resistant to any sort of change whatsoever, and that is a dangerous force. Middle-class resistance to change is what fuels fascism.

 

[Hygro]

As is known, a lot of people have been arguing since the 2008 crisis for an adoption of "heterodox" economic policies to fight unemployment and deflation. The high-priest of this crowd, among the mainstream economists anyway (this thread is about discussions in the mainstream, lunatic views will not be entertained) is Paul Krugman. He textually argued, on several occasions, that the Fed should pledge to be irresponsible, that not only it shouldn't be vigilant on inflation, it should promise and deliver higher inflation. The "orthodox" view of course is that the credibility of the Central Bank is hard to earn and easy to lose, and that once lost any attempt at disinflation will have a tremendous cost in terms of decrease in output and employment, and so pretty much nothing is worth losing it. And Krugman & co. didn't stop their prescriptions at monetary policy, they have been constantly whining about the need at greater and greater deficit spending, that under certain circumstances (which apparently last forever) austerity actually increases relative debt and deficit spending decreases it.

And what is their model? Which country pursued policies to their agreement? Well, as late as mid 2012, and probably later, Krugman et al. had nothing but praise for the economic policies of Argentina, which was a "model" that should be followed by the likes of Greece, Portugal and Ireland. Here's Krugman, quoting Matt Yglesias in May 2012, another acolyte of heterodox economics:



Now Brazil, which also adopted heterodox policies but not to the same extent as Argentina, also looks pretty bleak. Inflation is high, growth is pathetic (expected to be 1.1% this year).

But what about Argentina, Krugman's and Yglesias' model country, the place that followed the heterodox recipe to the letter (devaluation, "irresponsible" Central Bank pledging future inflation to stimulate private spending, deficit spending to boost economic performance, etc)? Well, sure enough, they had high economic growth for some years. Large part of it was due to the commodity boom of the 00's that dramatically increased growth in all countries with similar exporting profiles, and part of it was indeed due to heterodox policies. No "orthodox" economist denies that in the first years heterodox policies will indeed lead to higher growth. What they say is that this growth is not sustainable, that once in a path of "irresponsibility" it's very hard and costly to go back to normalcy, that higher inflation tends to fuel itself and spiral out of control, that deficit spending is easy to start and very hard to stop, and so on and so forth. So on the not-so-long run countries that adopt heterodox policies will actually fare worse than those who adopt orthodox ones.

Anyway, what happened to Argentina (why have I started this thread)? Just this week they are yet again threatening with default. Inflation is totally out of control, probably running close to 25% a year for several years now (the government blatantly manipulates inflation data, which is trusted by nobody internally or externally). 12 years after the end of the crisis which in theory justified deficit spending, Argentina's public sector deficit is still 2.5% of GDP (but remember, Krugman, Yglesias and co. were praising Argentina as late as 2012!!!). The country is totally dry of hard currency and imposes draconian restrictions on its citizens who travel abroad or import anything (they can only buy a ridiculous amount of dollars, which is totally below the minimum needed to travel anywhere, and have to pay a huge tax even on that pathetic amount). And the economy has stalled; GDP is expected to either growth nothing or decrease in 2014, and the years ahead look increasingly dark. Strikes, riots, absence of public utilities and basic public services have all become the "new normal" of Argentinian life.

Present Argentina is, in sum, the logic conclusion of the heterodox recipe. It is what Krugman et al. would have the Eurozone (and the US!!) turn into.

Paul Krugman is a 100% mainstream economist representing the most orthodox macroeconomic thought. Heterodox economists are not part of Krugman's Neo-Keynesian Neoclassical Synthesis.

In the long run, cutting aggregate demand destroys future potential of aggregate supply. Industries that never get funded in the first place can't beget future industries. Austerity to grow an economy is like using birth control to have more babies.



Oh look, there's Switzerland in the lower left corner quietly instituting a paycheck for all of their adult citizens.


Here's a history of mainstream macroeconomics http://sites.uclouvain.be/econ/DP/IRES/2011028.pdf

 

[Tahuti]

Which isn't very Keynesian in the first place, it deserves to be mentioned.

At any rate, Keynesian economics has been mainstream for the last 60 years, so considering it to be "heterodox" is some pretty creative naming.

Paul Krugman is a 100% mainstream economist representing the most orthodox macroeconomic thought. Heterodox economists are not part of Krugman's Neo-Keynesian Neoclassical Synthesis.

Since the 1970s oil shock, we are operating on a synthesis of Keynesianism and Monetarism. Argentina is arguably closer to classical Keynesianism than most Western countries.

In the long run, cutting aggregate demand destroys future potential of aggregate supply. Industries that never get funded in the first place can't beget future industries. Austerity to grow an economy is like using birth control to have more babies.

The goal of austerity is not to directly provide growth, rather, to make sure growth is more sustainable and indirectly provide for growth by freeing up capital for the private sector. However, without policies to reduce consumer debt, it is slightly flying besides its purpose. Government austerity will not really help unless there is an all-out assault against debt (save for such used for starting businesses and college education), both public and private.

 

[Hygro]

Here's some heterodox economists talking about Paul Krugman's article against heterodox economists. BTW these heterodox economists are the bees knees (podcast/mp3) http://hwcdn.libsyn.com/p/e/b/4/eb4...03813633&hwt=36d4bd9d886fdb71fbdf06c42707043f

Here's Dutch economist Dirk Bezemer examining various heterodox theories that predicted the crash. Note that nowhere is Krugman's mainstream methods http://mpra.ub.uni-muenchen.de/15892

The best method above is Godley/Lavoie's stock-flow consistent macroeconomic accounting, which was incorporated into the works of the people in the podcast above.

Since the 1970s oil shock, we are operating on a synthesis of Keynesianism and Monetarism. Argentina is arguably closer to classical Keynesianism than most Western countries.

Almost. One offshoot of Keynesianism got supplanted by neoclassicalists for a few years, and the synthesis came a bit later. The synthesis was a bit of a capitulation to neoclassical economics, which informed the economic policies that provided the ground for the stagnant wages and bubble-crashes.

 

[luiz]

Paul Krugman is a 100% mainstream economist representing the most orthodox macroeconomic thought. Heterodox economists are not part of Krugman's Neo-Keynesian Neoclassical Synthesis.

You´re laughing at the wrong guy. I said in this very thread I regard him as mainstream. But he advocated several heterodox policies, as he says himself.

In the long run, cutting aggregate demand destroys future potential of aggregate supply. Industries that never get funded in the first place can't beget future industries. Austerity to grow an economy is like using birth control to have more babies.

Nobody uses austerity to grow an economy. They use austerity to prevent an economy from going the Argentinian way. Argentina used all heterodox medicine, look where that took them.

Oh look, there's Switzerland in the lower left corner quietly instituting a paycheck for all of their adult citizens.

Reverse-casuality much? Countries that were not as affected by the crisis (Switzerland, Germany, the Nordics) have had greater economic growth and didn't need to change their balances as much, because they never had as big deficits...

 

[Hygro]

You´re laughing at the wrong guy. I said in this very thread I regard him as mainstream. But he advocated several heterodox policies, as he says himself.

Krugman's a hipster who tries to position himself as cutting edge, so I'm not surprised he'll say that, but referring to my previous post, Krugman's pretty down on the heterodox.

Reverse-casuality much? Countries that were not as affected by the crisis (Switzerland, Germany, the Nordics) have had greater economic growth and didn't need to change their balances as much, because they never had as big deficits...

And yet Spain had a budget surplus for the crash. Budget deficits were never the problem.

 

[luiz]

Krugman's a hipster who tries to position himself as cutting edge, so I'm not surprised he'll say that, but referring to my previous post, Krugman's pretty down on the heterodox.

Well he did offer praise for Argentina's heterodox economic policies following their collapse, and there's no way to describe them other than heterodox. They consist of:

-Default;
-Huge devaluation;
-Printing huge amounts of money to stimulate the economy;
-Tolerating high inflation to stimulate private spending;
-Running consistent deficits;
-Capital controls to prevent outflows;
-Nationalization of the oil industry.

If that's not enough to qualify as heterodox, I wonder what short of a full Bolshevik takeover is!

And the point here is that these heterodox policies, which we all heard again and again being recommended to the Eurozone, failed miserably. And those policies were not adopted in an ad-hoc, non-systematic manner by Argentina. They were the brainchild of several heterodox economists.

And yet Spain had a budget surplus for the crash. Budget deficits were never the problem.

They were for Greece. Also, it's only natural that Spain who was imploded by the housing bubble bust would grow less than Switzerland.

 

[Cheezy the Wiz]

-Printing huge amounts of money to stimulate the economy;

This phrasing bothers me because of its misuse in the American context. In the US, the government didn't print money to stimulate the economy, the stimulus was primarily a tax credit. Later, the money supply expanded because the banks lent it out and the government backed them up on it. Is this what happened in Argentina, or did the government literally print money and hand it away to people on the street while refusing to destroy existing money in any way?

 

[luiz]

This phrasing bothers me because of its misuse in the American context. In the US, the government didn't print money to stimulate the economy, the stimulus was primarily a tax credit. Later, the money supply expanded because the banks lent it out and the government backed them up on it. Is this what happened in Argentina, or did the government literally print money and hand it away to people on the street while refusing to destroy existing money in any way?

They literally printed money, but used it to pay their own obligations (both old and new).

 

[Hygro]

Well he did offer praise for Argentina's heterodox economic policies following their collapse, and there's no way to describe them other than heterodox. They consist of:

-Default;
-Huge devaluation;
-Printing huge amounts of money to stimulate the economy;
-Tolerating high inflation to stimulate private spending;
-Running consistent deficits;
-Capital controls to prevent outflows;
-Nationalization of the oil industry.

If that's not enough to qualify as heterodox, I wonder what short of a full Bolshevik takeover is!

And the point here is that these heterodox policies, which we all heard again and again being recommended to the Eurozone, failed miserably. And those policies were not adopted in an ad-hoc, non-systematic manner by Argentina. They were the brainchild of several heterodox economists.


They were for Greece. Also, it's only natural that Spain who was imploded by the housing bubble bust would grow less than Switzerland.

Unfortunately Argentina seems to not be well reported on economically in the last couple of years, but here's after the crash against Ireland.



Which economists lead Argentina's strategy? How much of that strategy is actually being followed today rather than a few years back?

 

[El_Machinae]

Surely, there's a balance between austerity and 25% inflation?

 

[luiz]

Unfortunately Argentina seems to not be well reported on economically in the last couple of years, but here's after the crash against Ireland.



Which economists lead Argentina's strategy? How much of that strategy is actually being followed today rather than a few years back?

That's a very unfair graphic because Argentina's collapse was in 2001, while Ireland's was in 2008. So you're comparing the effects of Ireland's collapse with the last years of Argentina's commodity-boom.

Several economists lead Argentina's policies. Nowadays the commander of economic policy is Axel Kicillof, who was one of Argentina's most prominent heterodox economists (google him). Some of the worst recent measurs of Cristina K. were his ideas, such as the nationalization of YPF.

 

[Hygro]

Cool, thanks for the tip on Kicillof. I'm reading some of his work now. I don't know anything about Argentina specifically, but I'm curious what changed in the last couple of years and why.

Persistent deficits, for example, are normal for economies, and moderate inflation is both sustainable and not so bad (Not so sure Argentina's is "moderate"). Nationalizing energy industries is rarely the deathknell of an economy, and just as often beneficial. Capital controls are a well documented tool for development, to maintain stability. Devaluation only matters in the short run. Basically these are pretty reasonable, non-radical measures.

Basically, something else is going on, too, for Argentina to be motivated to fudge their inflation numbers and create the microeconomic distortions I talked about in the Argentina thread.

Ireland is still looking pretty bad, btw.

 

[luiz]

Cool, thanks for the tip on Kicillof. I'm reading some of his work now. I don't know anything about Argentina specifically, but I'm curious what changed in the last couple of years and why.

Persistent deficits, for example, are normal for economies, and moderate inflation is both sustainable and not so bad (Not so sure Argentina's is "moderate"). Nationalizing energy industries is rarely the deathknell of an economy, and just as often beneficial. Capital controls are a well documented tool for development, to maintain stability. Devaluation only matters in the short run. Basically these are pretty reasonable, non-radical measures.

Basically, something else is going on, too, for Argentina to be motivated to fudge their inflation numbers and create the microeconomic distortions I talked about in the Argentina thread.

All those measures seem radical to me, specially taken together and kept for a decade. Persistent deficits are "normal" and can be go indefinitely provided the size of debt relative to the economy remains more or less stable, which isn't the case in Argentina.

With the rest of your points I disagree radically. Nationalizing the energy industry has rarely, if ever, proved beneficial. In Latin America it has always been a catastrophe that resulted in less investment, less oil production, and ultimately less jobs and economic growth. Repsol had its assets on YPF seized under Argentina's terms - terms they did not accept. Do you think any energy company will make a massive long-term investment in Argentina now? Argentina lost foreign expertise and capital that it badly needed, and the (entirely predictable) result was a further steep decrease in oil production. The situation is so bad that Argentina is considering paying Repsol all that they originally demanded as compensation in a desperate attempt to attract foreign oil companies once again.

High inflation is always a disaster for the economy in the medium run. It leads to a severe misallocation of resources, it disrupts economic activity, it makes normal economic life impossible. In Argentina inflation is running close to 30% a year (28% in 2013). The reason the government has tried to mask this by falsifying official reports is because such inflation rate is known to be a catastrophe.

Capital controls are not in themselves so harmful, if properly done, but they're still bad, and right now Argentina is proof. Free flow of capital encourages foreign direct investment which they badly need right now to avoid a second default. And it also makes it easier for states to raise funds quickly in external makets to mitigate recessions (they will need this soon).

Devaluation only matters in the short run, OK, but it has the effect of kick-starting inflation and may disrupt whole segments of the economy which are dependent on foreign suppliers. And this has long lasting effects, as the once proud and now collapsing Argentine auto industry is proof.

Heterodox economics produce a roller coast ride. The economy will grow 8% one year, 2% the other and then shrink 6% on the following. This of course is far from ideal for the people experiencing it. And here's the worst part: under heterodox economic policies, life is bad even when the economy is on the "boom" years. Why? Because it's not stable and sustainable growth, where supply and demand rise relatively together. So you have shortages, blackouts, rationing. Inflation is high, so the workers need to protect their wages by demanding gigantic pay raises every year (they have to make up for past inflation and protect themselves against future inflation, in case the economy goes under and they can't secure another raise). So you have massive strikes on a daily basis, including of people such as policemen, garbage men and firefighters, leading to a climate of chaos and perpetual confrontation. All of this happened in Argentina even while they were growing 7% a year, and is much worse now that they're stagnating.

What is happening in Argentina is not an accident. God does not hate Argentina, life is not a tango song. It's the logical conclusion of Kicillof & co. policies. The bill for a decade of gross heterodoxy and mismanagement is here.

Ireland is still looking pretty bad, btw.

I'd still take Ireland 100 times over Argentina. At least the cops are not striking.
The orthodox pill is harder to swallow, but Ireland is on a sure path to recovery, even if slower and with fewer jobs than we'd like. Argentina is on a sure path to chaos and national disaster.

 

[Masada]

He textually argued, on several occasions, that the Fed should pledge to be irresponsible, that not only it shouldn't be vigilant on inflation, it should promise and deliver higher inflation. The "orthodox" view of course is that the credibility of the Central Bank is hard to earn and easy to lose, and that once lost any attempt at disinflation will have a tremendous cost in terms of decrease in output and employment, and so pretty much nothing is worth losing it.

Having the Federal Reserve target a higher inflation band is a quite a mainstream position now. I'd suggest there's ample reason for doing so now that we know that US growth can be slack when rates are at near 0% in a bad slump. I also think it's incorrect to suppose that increasing the band would have a major impact. New Zealand (1-3%) and Australia (2-3%) both maintain higher bands and haven't had issues. Chile also targets a higher band (2-4%) than the US but Chile seems to be doing quite well. The controversial part of his suggestion isn't that we should increase inflation but the means by which we determine how much to increase it by. Personally, I don't like nominal GDP targeting because it'd be technically very hard to implement But I don't think its a bad idea nor do I think it's a heterodox one either. In actual fact, there seems to be a lot of appetite for a whole range of innovative approaches to monetary policy.

Large part of it was due to the commodity boom of the 00's that dramatically increased growth in all countries with similar exporting profiles, and part of it was indeed due to heterodox policies. No "orthodox" economist denies that in the first years heterodox policies will indeed lead to higher growth. What they say is that this growth is not sustainable, that once in a path of "irresponsibility" it's very hard and costly to go back to normalcy, that higher inflation tends to fuel itself and spiral out of control, that deficit spending is easy to start and very hard to stop, and so on and so forth. So on the not-so-long run countries that adopt heterodox policies will actually fare worse than those who adopt orthodox ones.

I'm not sure if that's what orthodox economists think. It's sort of a complicated question. But the general consensus seems to be that there was no guarantee that growth would be lower as a result of stimulus spending in the US. I'd suggest that the same would be true for most sovereign issuers. I'd also go further and suggest that inflation can most economists think inflation can be managed quite well with our existing tools should there be a break-out. Economists are more concerned about the risk of higher government debt levels raising the cost of borrowing. That's unsurprising given that inflation in a slump is often somewhat difficult to conjure up.

Now, I don't know much about Argentina's current issues although I do know a bit about their past issues. Anyways, I think Argentina's model of high inflation is the least likely of the two possible "this could blow up in your face" arguments. The other being a rise in debt levels raising the cost of borrowing. Something we've seen in spades and something that economists were concerned about. I'm not convinced that the fate of states within the EU, especially given the EU's absolutely awful response to the crisis, is representative of the what might happen to states generally. But I think it's a possibility that could cause problems for growth, if not, you know, a full-scale default. Opinions are, kinda, sorta, are split on this one.

All those measures seem radical to me, specially taken together and kept for a decade. Persistent deficits are "normal" and can be go indefinitely provided the size of debt relative to the economy remains more or less stable, which isn't the case in Argentina.

Your last sentence should have read like this: Persistent deficits are "normal" and can be go indefinitely provided the size of debt relative to the economy remains below the level at which creditors care. Australia, for example, has been running a deficit for a while while increasing the size of our debt relative to our economy and hasn't been punished at all. In actual fact, our borrowing costs have fallen while our inflation rate is on the low side. I'm also not sure if it can be called radical to run a deficit or increasing one's debt to GDP ratio if the IMF and World Bank say its fine.

High inflation is always a disaster for the economy in the medium run. It leads to a severe misallocation of resources, it disrupts economic activity, it makes normal economic life impossible. In Argentina inflation is running close to 30% a year (28% in 2013). The reason the government has tried to mask this by falsifying official reports is because such inflation rate is known to be a catastrophe.

Sorta, kinda. As long as the rate is calculable and steady the actual rate of inflation as long as its above 0% doesn't matter that much. This isn't a comment on Argentina and is more a theoretical consideration.

Devaluation only matters in the short run, OK, but it has the effect of kick-starting inflation and may disrupt whole segments of the economy which are dependent on foreign suppliers. And this has long lasting effects, as the once proud and now collapsing Argentine auto industry is proof.

Devaluation is the orthodox prescription to a slump. With the PIIGS in particular, the talk was all about internal devaluation, i.e. reducing wages, because normal devaluation was impossible. Latvia which went through a sharp internal devaluation is still the poster-child for how you should respond to these sorts of things for at least some economists. I'm just not sure if they're the mainstream anymore. Maybe pre-Crisis but post-Crisis I don't think so.

Heterodox economics produce a roller coast ride. The economy will grow 8% one year, 2% the other and then shrink 6% on the following. This of course is far from ideal for the people experiencing it. And here's the worst part: under heterodox economic policies, life is bad even when the economy is on the "boom" years. Why? Because it's not stable and sustainable growth, where supply and demand rise relatively together. So you have shortages, blackouts, rationing. Inflation is high, so the workers need to protect their wages by demanding gigantic pay raises every year (they have to make up for past inflation and protect themselves against future inflation, in case the economy goes under and they can't secure another raise). So you have massive strikes on a daily basis, including of people such as policemen, garbage men and firefighters, leading to a climate of chaos and perpetual confrontation. All of this happened in Argentina even while they were growing 7% a year, and is much worse now that they're stagnating.

Why isn't that happening in the US then? The US has pursued a super unorthodox route and is still having trouble hitting its inflation targets. Wages, are, also I might add all but flat. I think the simple argument is that it's due to some feature of Argentina (do they still do inflation indexed contracts perchance?) and not a feature of supposed heterodox economics.

 

[luiz]

Having the Federal Reserve target a higher inflation band is a quite a mainstream position now. I'd suggest there's ample reason for doing so now that we know that US growth can be slack when rates are at near 0% in a bad slump. I also think it's incorrect to suppose that increasing the band would have a major impact. New Zealand (1-3%) and Australia (2-3%) both maintain higher bands and haven't had issues. Chile also targets a higher band (2-4%) than the US but Chile seems to be doing quite well. The controversial part of his suggestion isn't that we should increase inflation but the means by which we determine how much to increase it by. Personally, I don't like nominal GDP targeting because it'd be technically very hard to implement But I don't think its a bad idea nor do I think it's a heterodox one either. In actual fact, there seems to be a lot of appetite for a whole range of innovative approaches to monetary policy.

The problem is not the targeting of a higher band (provided that band is still low). The Fed does not target inflation, but it is widely assumed it informally targets a band centered on 2%. The problem is the suggestion that the Fed losing it's credibility would be a good thing, the notion that the Fed should not be vigilant with inflation and the approval of Argentina's inflationary policy.

Argentina is not targeting a high band of inflation, it is simply unconcerned with inflation and considers high inflation an acceptable price to pay for higher growth (which of course does not last forever, au contraire). That's heterodox, not a slightly higher band.

I'm not sure if that's what orthodox economists think. It's sort of a complicated question. But the general consensus seems to be that there was no guarantee that growth would be lower as a result of stimulus spending in the US. I'd suggest that the same would be true for most sovereign issuers. I'd also go further and suggest that inflation can most economists think inflation can be managed quite well with our existing tools should there be a break-out. Economists are more concerned about the risk of higher government debt levels raising the cost of borrowing. That's unsurprising given that inflation in a slump is often somewhat difficult to conjure up.

Now, I don't know much about Argentina's current issues although I do know a bit about their past issues. Anyways, I think Argentina's model of high inflation is the least likely of the two possible "this could blow up in your face" arguments. The other being a rise in debt levels raising the cost of borrowing. Something we've seen in spades and something that economists were concerned about. I'm not convinced that the fate of states within the EU, especially given the EU's absolutely awful response to the crisis, is representative of the what might happen to states generally. But I think it's a possibility that could cause problems for growth, if not, you know, a full-scale default. Opinions are, kinda, sorta, are split on this one.

Inflation can only be dealt with adequately and in a relatively "painless" manner if the CB has an extremely solid credibility. Otherwise it's a big problem. Even the US, last time they had to undertake a big disinflation, were plunged in recession.

In Latin America it's a much bigger issue because of all the "inflationary memory". People and firms will move back to price indexing at the first sign inflation is increasing above "normal", and from that point on any inflation triggers additional inflation.

There's also the problem that Argentina is forced to print money because the government can't meet it's obligations using normal instruments.

Your last sentence should have read like this: Persistent deficits are "normal" and can be go indefinitely provided the size of debt relative to the economy remains below the level at which creditors care. Australia, for example, has been running a deficit for a while while increasing the size of our debt relative to our economy and hasn't been punished at all. In actual fact, our borrowing costs have fallen while our inflation rate is on the low side. I'm also not sure if it can be called radical to run a deficit or increasing one's debt to GDP ratio if the IMF and World Bank say its fine.

That's true, to a point. But even Australia can't do it indefinitely. The size which the creditors care varies form country to country, and also from time to time. You really don't want to keep the debt relative to the economy growing indefinitely for a long time.

Sorta, kinda. As long as the rate is calculable and steady the actual rate of inflation as long as its above 0% doesn't matter that much. This isn't a comment on Argentina and is more a theoretical consideration.

It does matter, that's my point. On some models it doesn't, which is why some economists, the heterodox ones, have said Argentina was right to tolerate high inflation in order to not sacrifice growth. But an inflation as high as 30% has all sorts of deleterious effects which are hard to model, as the constant strikes I mentioned, in addition to the misallocation of resources.

Devaluation is the orthodox prescription to a slump. With the PIIGS in particular, the talk was all about internal devaluation, i.e. reducing wages, because normal devaluation was impossible. Latvia which went through a sharp internal devaluation is still the poster-child for how you should respond to these sorts of things for at least some economists. I'm just not sure if they're the mainstream anymore. Maybe pre-Crisis but post-Crisis I don't think so.

I was talking about external devaluation, which is of course a tool against a slump, but not a magic bullet nor is it free of cost. Krugman et. al. insisted that internal devaluation was a brutal policy that lead to unnecessary suffering, while an external one was relatively painless. My point is that while on the short run an external devaluation does cause less pain, it also has all sorts negative and sometimes hard to predict negative consequences. I think a combination of both is needed depending on the case.

Why isn't that happening in the US then? The US has pursued a super unorthodox route and is still having trouble hitting its inflation targets. Wages, are, also I might add all but flat. I think the simple argument is that it's due to some feature of Argentina (do they still do inflation indexed contracts perchance?) and not a feature of supposed heterodox economics.

Because compared to Argentina the US has been super-orthodox. That's why heterodox economists have chastised the US, who remained committed to low inflation and some degree of fiscal discipline even in a slump (and even moreso the Eurozone).

Had the US simply printed money like crazy (Argentina is printing so much money they have to import bills as their mints are overburdened) and spent recklessly, all the while pursuing all sorts of other populist / heterodox measures (nationalization of the energy sector, massive expansion of transfers, etc), we would be seeing similar problems.

Argentina is simply much further down the heterodox road (and Venezuela even more).

 

[Masada]

The problem is the suggestion that the Fed losing it's credibility would be a good thing, the notion that the Fed should not be vigilant with inflation and the approval of Argentina's inflationary policy.

Ah, right. I don't think textually he's saying what you think he's saying. I'll start with the inflation issue: for one, the Fed doesn't need to be hawkish on inflation because inflation is still low and is unlikely to break out given how weak employment is at the moment. It could be an issue in the future but the Fed has all the tools needed to keep inflation down. What the Fed lacks are the tools to improve economic growth. Krugman's arguing that one tool it could use is a promise not to raise interest rates until the economy has recovered. That's what his "irresponsible" quip is about which is something Yellen and Bernanke have embraced in the intervening two years.

Argentina is not targeting a high band of inflation, it is simply unconcerned with inflation and considers high inflation an acceptable price to pay for higher growth (which of course does not last forever, au contraire). That's heterodox, not a slightly higher band.

I'm not sure how that has to do with Krugman given the evidence presented thus far?

Inflation can only be dealt with adequately and in a relatively "painless" manner if the CB has an extremely solid credibility. Otherwise it's a big problem. Even the US, last time they had to undertake a big disinflation, were plunged in recession.

Well, I guess? But inflation isn't all that likely an outcome in the current environment. So it's not a huge issue. And it isn't like the Fed doesn't have solid credibility even if it overshot its inflation band, something it does with a fair degree of regularity in normal times anyway.

That's true, to a point. But even Australia can't do it indefinitely. The size which the creditors care varies form country to country, and also from time to time. You really don't want to keep the debt relative to the economy growing indefinitely for a long time.

Does Krugman think we should be infinitely running up our GDP to debt ratio? Because I doubt he does.

It does matter, that's my point. On some models it doesn't, which is why some economists, the heterodox ones, have said Argentina was right to tolerate high inflation in order to not sacrifice growth. But an inflation as high as 30% has all sorts of deleterious effects which are hard to model, as the constant strikes I mentioned, in addition to the misallocation of resources.

What models are we talking about? Because I'm confused.

I was talking about external devaluation, which is of course a tool against a slump, but not a magic bullet nor is it free of cost. Krugman et. al. insisted that internal devaluation was a brutal policy that lead to unnecessary suffering, while an external one was relatively painless. My point is that while on the short run an external devaluation does cause less pain, it also has all sorts negative and sometimes hard to predict negative consequences. I think a combination of both is needed depending on the case.

I'm not sure how he's wrong? Because the IMF and WB both advised states to pursue external devaluation where possible, in preference to internal devaluation. You've, more or less, agreed with him anyways. So I'm a bit confused as to what the purpose of this paragraph is.

Because compared to Argentina the US has been super-orthodox. That's why heterodox economists have chastised the US, who remained committed to low inflation and some degree of fiscal discipline even in a slump (and even moreso the Eurozone).

Had the US simply printed money like crazy (Argentina is printing so much money they have to import bills as their mints are overburdened) and spent recklessly, all the while pursuing all sorts of other populist / heterodox measures (nationalization of the energy sector, massive expansion of transfers, etc), we would be seeing similar problems.

Are you even living in the same world as I am? Because this is hysterical.

 

[luiz]

Ah, right. I don't think textually he's saying what you think he's saying. I'll start with the inflation issue: for one, the Fed doesn't need to be hawkish on inflation because inflation is still low and is unlikely to break out given how weak employment is at the moment. It could be an issue in the future but the Fed has all the tools needed to keep inflation down. What the Fed lacks are the tools to improve economic growth. Krugman's arguing that one tool it could use is a promise not to raise interest rates until the economy has recovered. That's what his "irresponsible" quip is about which is something Yellen and Bernanke have embraced in the intervening two years.

My problem was when he textually argued (by approvingly quoting another economist and then saying that he was right and agreed with his diagnosis), that the Fed should lose credibility to help speed up recovery. And I quote:

The Federal Reserve has too much credibility. Each time it increases the money supply it buys some asset (say a government bond or even a foreign security) and issues cash. And people hold the cash because it is a reasonable store of value. And it is a reasonable store of value because they trust – at the end of this cycle – that the Federal Reserve will eventually take its vault full of assets, sell the assets for hard cash (which it will destroy) and will thus suck the excess liquidity out of the system.

If people really believed the cash was trash they would all try to get rid of it (ie buy something) but collectively they could not get rid of it (every time they buy something it would have a new owner) and the result would be inflation. Inflation would then reduce the real value of the money stock to a level where people were comfortable holding it.

To get inflation you need to damage the Federal Reserve’s credibility. You need the Federal Reserve to make a credible promise to be reckless.

http://krugman.blogs.nytimes.com/20...d-hawaiian-shirts/?_php=true&_type=blogs&_r=0

I was arguing that damaging the Fed's credibility would be a disaster, as several historical events show.

I'm not sure how that has to do with Krugman given the evidence presented thus far?

Well he has offered praise for the policies Argentina adopted after their 2001 collapse, and there's no way to deny inflation was a big part of the mix. Additionally, he has been arguing for inflation in the US relentlessly.

Well, I guess? But inflation isn't all that likely an outcome in the current environment. So it's not a huge issue. And it isn't like the Fed doesn't have solid credibility even if it overshot its inflation band, something it does with a fair degree of regularity in normal times anyway.

Indeed, but again, it's a good thing that inflation is not problem right now.

Does Krugman think we should be infinitely running up our GDP to debt ratio? Because I doubt he does.

Well of course he doesn't think that in theory. But in practice he only ever argues for debt reduction when a Republican is in the White House; at all other years there's an excuse for debt to be increased relative to the economy. And he continued to praise heterodox Argentina all the way to late 2012, when the theoretical justifications for running up debt were gone for years. And that's the problem with deficit spending, it's very easy to start but very hard to stop.

What models are we talking about? Because I'm confused.

I don't know of a single model that would incorporate strikes as a negative consequence of high inflation, and yet they undeniably are.

I'm not sure how he's wrong? Because the IMF and WB both advised states to pursue external devaluation where possible, in preference to internal devaluation. You've, more or less, agreed with him anyways. So I'm a bit confused as to what the purpose of this paragraph is.

External devaluation is not a magic bullet, it has several negative consequences, only they take more time to show than internal devaluation. Additionally, if you try to solve everything by external devaluation without making the structural reforms which are actually needed to regain competitiveness, you'll have to make an internal devaluation at some point in the future anyway. Case in point: Argentina. So Krugman's praise of Argentina was entirely misguided.

Are you even living in the same world as I am? Because this is hysterical.

Yes, I wonder where you live, though?

Here on Earth heterodox economists have been very critical of the US's "too conservative" response to the crisis. They have lamented the fiscal stimulus as way too small to matter, and the monetary response as inadequate. They wanted massive federal spending, because on a liquidity trap it would pay for itself. They wanted inflation, they wanted the government to print money (because under a liquidity trap it will not lead to inflation) and they totally disagreed with the phasing out of QE which is under way. In short, they wanted Argentina. And we should be happy they didn't get it.

 

[Masada]

My problem was when he textually argued (by approvingly quoting another economist and then saying that he was right and agreed with his diagnosis), that the Fed should lose credibility to help speed up recovery.... I was arguing that damaging the Fed's credibility would be a disaster, as several historical events show.

You missed the point. In late-2011 that was a radical step. In mid-2014 this is what the Fed is doing and has been doing for some time. The horses have bolted. The Fed is still standing and with no disaster to show for it.

Well he has offered praise for the policies Argentina adopted after their 2001 collapse, and there's no way to deny inflation was a big part of the mix. Additionally, he has been arguing for inflation in the US relentlessly.

First, that's rather different from what you've said he supported. Second, that's all quite mainstream now in 2014. The IMF's Christine Lagarde got up five months ago to warn about the risk of deflation in advanced economies generally and the risks to the US economy of "the premature withdrawal of monetary support" by the Fed. Just last month, Olivier Blanchard, the Chief Economist of the IMF, got up and said "we think that there is a 25 percent probability that we see deflation in the euro zone by the end of 2015". In other words: more inflation is a good thing in the present circumstances.

Well of course he doesn't think that in theory. But in practice he only ever argues for debt reduction when a Republican is in the White House; at all other years there's an excuse for debt to be increased relative to the economy. And he continued to praise heterodox Argentina all the way to late 2012, when the theoretical justifications for running up debt were gone for years. And that's the problem with deficit spending, it's very easy to start but very hard to stop.

Can you please provide a citation for the first claim. I'd also be interested to know what he has said about Argentina since 2001.

I don't know of a single model that would incorporate strikes as a negative consequence of high inflation, and yet they undeniably are.

I hope Hydro has more experience with modelling than I do because I'm not sure what to make of this.

External devaluation is not a magic bullet, it has several negative consequences, only they take more time to show than internal devaluation.

I don't think anyone has said that it is. It's just the least worst option and one that wasn't available to the peripheral states of the European Union.

Additionally, if you try to solve everything by external devaluation without making the structural reforms which are actually needed to regain competitiveness, you'll have to make an internal devaluation at some point in the future anyway.

That's a fair point to make to an extent. But, and I stress but, structural reforms are not always needed. Sometimes, in economics, bad things happen to not all that bad countries. Contagion is a thing and it doesn't always go for the obvious targets.

Case in point: Argentina. So Krugman's praise of Argentina was entirely misguided.

This seems like an argument without a lot of evidence. To be honest, you haven't provided much evidence whatsoever so far.

Here on Earth heterodox economists have been very critical of the US's "too conservative" response to the crisis.

You don't get it. The positions you've been advocating in this thread are the same positions as those people who denounce more or less everything the Fed has done since things fell apart. I'm just going to quote some of them and put short comments below them to tell you how they read to me:

The "orthodox" view of course is that the credibility of the Central Bank is hard to earn and easy to lose, and that once lost any attempt at disinflation will have a tremendous cost in terms of decrease in output and employment, and so pretty much nothing is worth losing it.

"INFLATION IS THE REAL ISSUE"

What they say is that this growth is not sustainable, that once in a path of "irresponsibility" it's very hard and costly to go back to normalcy, that higher inflation tends to fuel itself and spiral out of control, that deficit spending is easy to start and very hard to stop, and so on and so forth.

"INFLATION IS THE REAL ISSUE!"

Persistent deficits are "normal" and can be go indefinitely provided the size of debt relative to the economy remains more or less stable, which isn't the case in Argentina.

"INFLATION IS THE REAL ISSUE"

And so on. Yet as I've noted, the IMF thinks deflation is the big issue for advanced economies and outright advised the US to be careful with "the premature withdrawal of monetary support". The IGM Forum Polls make it even more clear than on a whole range of issues you were arguing minority points of view. In short, the view you've adopted and are advancing in this thread are heterodox. The below literally encapsulates everything I've just said...

They have lamented the fiscal stimulus as way too small to matter, and the monetary response as inadequate. They wanted massive federal spending, because on a liquidity trap it would pay for itself. They wanted inflation, they wanted the government to print money (because under a liquidity trap it will not lead to inflation) and they totally disagreed with the phasing out of QE which is under way. In short, they wanted Argentina. And we should be happy they didn't get it.

...because all of those views are mainstream as I've shown.

 

[kochman]

But what about Argentina, Krugman's and Yglesias' model country, the place that followed the heterodox recipe to the letter (devaluation, "irresponsible" Central Bank pledging future inflation to stimulate private spending, deficit spending to boost economic performance, etc)? Well, sure enough, they had high economic growth for some years. Large part of it was due to the commodity boom of the 00's that dramatically increased growth in all countries with similar exporting profiles, and part of it was indeed due to heterodox policies. No "orthodox" economist denies that in the first years heterodox policies will indeed lead to higher growth. What they say is that this growth is not sustainable, that once in a path of "irresponsibility" it's very hard and costly to go back to normalcy, that higher inflation tends to fuel itself and spiral out of control, that deficit spending is easy to start and very hard to stop, and so on and so forth. So on the not-so-long run countries that adopt heterodox policies will actually fare worse than those who adopt orthodox ones.

Anyway, what happened to Argentina (why have I started this thread)? Just this week they are yet again threatening with default. Inflation is totally out of control, probably running close to 25% a year for several years now (the government blatantly manipulates inflation data, which is trusted by nobody internally or externally). 12 years after the end of the crisis which in theory justified deficit spending, Argentina's public sector deficit is still 2.5% of GDP (but remember, Krugman, Yglesias and co. were praising Argentina as late as 2012!!!). The country is totally dry of hard currency and imposes draconian restrictions on its citizens who travel abroad or import anything (they can only buy a ridiculous amount of dollars, which is totally below the minimum needed to travel anywhere, and have to pay a huge tax even on that pathetic amount). And the economy has stalled; GDP is expected to either growth nothing or decrease in 2014, and the years ahead look increasingly dark. Strikes, riots, absence of public utilities and basic public services have all become the "new normal" of Argentinian life.

Present Argentina is, in sum, the logic conclusion of the heterodox recipe. It is what Krugman et al. would have the Eurozone (and the US!!) turn into.

I was just in Argentina, a lovely country.
However, as you mention, the economy is in total shambles. I cannot be sure why, as I haven't looked into it specifically, though I intend to do so as I may move there one day.
I will report only on what I saw/experienced/heard from the people.
Argentines tend to be passionate, whichever way they lean. Some support what is going on, but most I talked to were vehemently against it.
The money has two exchange rates, after the government artificially fixed the exchange rate. When I was there, the official rate was something like 8 pesos/dollar. However, you could easily find, through legitimate brokers including online agencies such as xoom.com, exchange rates at at least 10:1. Recently I have see it nearing 12:1, as the true value of the peso spirals out of control.
What does this mean? Official transactions are at an artificial rate... in other words, much international business. This rate tends to HURT the foreigner entity in the dealings, which of course would seem likely to deter such trade. That would in turn be bad for the general economy... the peso spins further out of control.
A vicious circle.
Unemployment and thievery are high... people don't have money.
That's about as far as I want to go right now, since I really haven't delved into this topic in depth.
Needless to say, this one issue I have covered, it's pretty huge economically. I think the bottom line in limousine socialist Kircher needs to go... They need more of a VW guy like the Uruguayans have.