Argentina and the latest failure of heterodox economics

[Ajidica]

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

It wouldn't be that hard to test. Assuming inflation=f(strikes, GDP growth %)* it wouldn't be that hard to create a cross-section spreadsheet and then do a regression on it. The trickiest part would be choosing the right functional form.
Number of strikes should probably be averaged per capita also.

*I couldn't quite tell if luiz was saying that strikes cause higher inflation or if inflation causes more strikes.

 

[Masada]

Sure, I guess, except we're not talking about testing, so much as how economic models handle high inflation. More generally, that sort of approach is sort of useless since all it would tell me is whether or not there there's a correlation between the two variable and how strong that is. It doesn't tell me about direction, whether or not there's a causal link and how strong that it is nor does it account for the influence of other variables.

 

[Masada]

This is quite relevant:

I’ve posted it before, but in honor of yesterday’s announcement of monetary easing by the Federal Reserve, I think it’s worth repeating Milton Friedman’s analysis of the Japanese recession of the 1990s:

In 1989, the Bank of Japan stepped on the brakes very hard and brought money supply down to negative rates for a while. The stock market broke. The economy went into a recession, and it’s been in a state of quasi recession ever since. Monetary growth has been too low. Now, the Bank of Japan’s argument is, “Oh well, we’ve got the interest rate down to zero; what more can we do?”

It’s very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary policy.

The Japanese bank has supposedly had, until very recently, a zero interest rate policy. Yet that zero interest rate policy was evidence of an extremely tight monetary policy.

This quote almost perfectly mirrors the situation the United States has found itself in since 2008. Zero interest rates have fooled a lot of people, such as the Wall Street Journal editors, into thinking monetary policy is loose. But in reality, it’s been tight, as indicated by the below-target inflation rate.

Note also Friedman’s advice that Japan adopt quantitative easing “until the high powered money starts getting the economy in an expansion.” That’s the key difference between past rounds of quantitative easing—which involved fixed dollar amounts for limited periods of time—and yesterday’s open-ended commitment to buy assets until the economy recovers.

I'm so right-wing Milton Friedman agrees with me.

 

[luiz]

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.


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.


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



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.



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.



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



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:



"INFLATION IS THE REAL ISSUE"



"INFLATION IS THE REAL ISSUE!"


"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...



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

Masada, you're arguing from a wrong perspective. Yes, the Fed adopted an expansionary policy (QE), but here's my point: the Fed did not do what the heterodox economists wanted it to do!. That's why they criticized Bernanke so much. Compared to what they wanted, the Fed has been very orthodox, which is why they have been whining for 5 years now that the response to the crisis has been inadequate.

And they have also complained, probably even more, about the fiscal response. So you can't point to the present absence of high inflation and say "see, they were right, nothing happened", because their prescription was not followed. I'm pointing out here to a country that followed their more radical prescriptions and is facing a collapse as a result.

 

[Masada]

You're whole view, advanced so far, is incompatible with the view that QE is normal. You outright said that this was a bad thing:

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.

When as I've noted, more inflation is an IMF approved policy now and the Fed has committed to prioritizing jobs over inflation all of which suggest that the IMF and Fed are "heterodox" and thus bad. That you've subsequently changed your position from "QE IS BAD" to "QE IS NOT BAD BUT HETERODOX QE IS BAD" because that view doesn't work in 2014 isn't my problem. You should also note that the IMF and WB were pushing for the advanced economies to continue stimulus spending because monetary policy was not capable of doing the heavy lifting itself. So you're also wrong about the view that the fiscal response was inadequate is a "heterodox" thing.

 

[luiz]

You're whole view, advanced so far, is incompatible with the view that QE is normal. You outright said that this was a bad thing:


When as I've noted, more inflation is an IMF approved policy now and the Fed has committed to prioritizing jobs over inflation all of which suggest that the IMF and Fed are "heterodox" and thus bad. That you've subsequently changed your position from "QE IS BAD" to "QE IS NOT BAD BUT HETERODOX QE IS BAD" because that view doesn't work in 2014 isn't my problem. You should also note that the IMF and WB were pushing for the advanced economies to continue stimulus spending because monetary policy was not capable of doing the heavy lifting itself. So you're also wrong about the view that the fiscal response was inadequate is a "heterodox" thing.

But QE is not about a pledge for higher inflation. The Fed has never claimed it wanted higher inflation (above the implicit 2% target). At most they wanted to return inflation to "target", and even that was always very cautiously worded. I don't see how QE can be equated with dropping vigilance on inflation, I certainly never made that case.

Also, note that the IMF and WB can temporarily make "heterodox" recommendations, without instantly turning those recommendations into orthodox. But they are already backtracking from some of them, such as from their criticism of British austerity, which they now recognize worked:

The International Monetary Fund underestimated the strength of the U.K. economy when warning against the government’s austerity program, Managing Director Christine Lagarde said.

“We got it wrong,” Lagarde told the “Andrew Marr Show” on BBC Television yesterday. “We acknowledged it. Clearly the confidence building that has resulted from the economic policies adopted by the government has surprised many of us.”

A year after the IMF’s chief economist, Oliver Blanchard, said U.K. budget cutting risked “playing with fire,” the Washington-based lender said in April the U.K. economy will grow 2.9 percent this year, the fastest pace among the Group of Seven nations.

Pressed by Marr on whether she had apologized to Chancellor of the Exchequer George Osborne, Lagarde stopped short of saying so and said “Do I have to go on my knees?”

“We said very clearly that we had underestimated growth for the U.K. and that our forecasts had been proven wrong by the reality of economic developments,” she said.

http://www.bloomberg.com/news/2014-06-08/lagarde-says-imf-got-it-wrong-on-rallying-u-k-economy.html

So the IMF's position is that the "confidence fairy" so ridiculed by heterodox economists actually exists. Back to orthodoxy!

 

[Masada]

But QE is not about a pledge for higher inflation. The Fed has never claimed it wanted higher inflation (above the implicit 2% target). At most they wanted to return inflation to "target", and even that was always very cautiously worded. I don't see how QE can be equated with dropping vigilance on inflation, I certainly never made that case.

Huh? I'm a little confused. You earlier in the thread said that "printing money = bad" and that heterodox economic policies include "Printing huge amounts of money to stimulate the economy". So how is it that QE which involves "[p]rinting huge amounts of money to stimulate the economy" isn't bad or heterodox? As I've noted, your stated positions earlier in the thread and your current positions don't reconcile at all. (Arguably even your later ones don't work all that well either).

Also, note that the IMF and WB can temporarily make "heterodox" recommendations, without instantly turning those recommendations into orthodox.

Nobody thinks that QE and stimulus spending should be permanent policies. So of course they're temporary.

So the IMF's position is that the "confidence fairy" so ridiculed by heterodox economists actually exists. Back to orthodoxy!

An orthodoxy in which the IMF supports QE? What a strange form of orthodoxy.

 

[luiz]

Huh? I'm a little confused. You earlier in the thread said that "printing money = bad" and that heterodox economic policies include "Printing huge amounts of money to stimulate the economy". So how is it that QE which involves "[p]rinting huge amounts of money to stimulate the economy" isn't bad or heterodox? As I've noted, your stated positions earlier in the thread and your current positions don't reconcile at all. (Arguably even your later ones don't work all that well either).

Well, I think you might misunderstand how QE works. QE is not printing money, as Bernanke has explained many times. While it is "creating" money, the actuall effetcs are substantially different from those of printing money Argentina-style. Technically, QE, which is done mostly with non-banks, does indeed increase the outstanding supply of deposits. But that’s just an extra step in the accounting and doesn’t really change the story all that much. More importantly, QE creates reserves/deposits and could technically be described as “money printing”, but also involves the “unprinting” of a T-bond or MBS thereby leaving the private sector with the same quantity of financial assets, but an altered composition. Calling this overall process “money printing” is highly misleading. The term “asset swap” is much more appropriate.
When the Fed creates $85 billion, it uses this money to buy bonds - typically split 50/50 between US Treasuries and Mortgage Backed Securities (MBS). Here is what's important: When the Fed creates and gives $85 billion in reserves to its member banks, it removes $85 billion worth of assets (bonds) from the balance sheets of those same member banks. The result is that no new net financial assets enter the economy. This bears repeating. Every time the Fed injects $85 billion in reserves (assets) into the economy, it removes $85 billion worth of assets from the economy. This process is not a one way flow of money into the economy, as interpreted by some.

If the Fed was simply injecting money into the economy, then we would see more inflation, and also more temporary GDP growth.

Nobody thinks that QE and stimulus spending should be permanent policies. So of course they're temporary.

My point was that not all policies embraced by the IMF should be called "orthodox". The IMF could have a heterodox managing-director. Granted, if those policies persist for decades and end up adopted by everybody they will constitute the new orthodoxy, but that's not the case since 2008.

An orthodoxy in which the IMF supports QE? What a strange form of orthodoxy.

There's nothing particularly unorthodox about QE.

 

[Hygro]

QE is mostly contractionary, rather than expansionary. You're taking high quality collateral out of the market for lower quality collateral (bonds and MBS for cash), and you're taking higher interest financial assets out of the market for lower interest assets (bonds and MBS for cash) all in hopes that increasing reserves increases loans, when loans are demand driven, i.e. wtf does QE even do other than give banks a nice haircut?

That said, QE was considered to be an unorthodox tool of MP. All of the RBS microfoundational neoclassical types were screaming inflation the entire time. The neo-Keynesians, the other half of orthodoxy, thought it was okay but only because of the zero-lower bound--both groups thought we printing money in the way that, luiz, you correctly identify that we are not. It was the heterodox economists and some of the more educated finance guys who were like "yo, this isn't expansionary".

QE was slightly expansionary in driving down the cost of mortgages though, and if it turns out that outweighed the loss of collateral needed for business expansion loans and the loss of interest income, then maybe it was slightly good overall.


When I think of heterodox economics, though, I think of this: http://www.voxeu.org/article/no-one-saw-coming-or-did-they something like post-Keynesian stock-flow consistent macroeconomics. You know, the kind that makes sure each sector is accounted for, oh so radical. The kind that predicted the crash and the dot-com burst. Mainstream economics did neither.

 

[Masada]

Well, I think you might misunderstand how QE works. QE is not printing money, as Bernanke has explained many times. While it is "creating" money, the actuall effetcs are substantially different from those of printing money Argentina-style. Technically, QE, which is done mostly with non-banks, does indeed increase the outstanding supply of deposits. But that’s just an extra step in the accounting and doesn’t really change the story all that much. More importantly, QE creates reserves/deposits and could technically be described as “money printing”, but also involves the “unprinting” of a T-bond or MBS thereby leaving the private sector with the same quantity of financial assets, but an altered composition. Calling this overall process “money printing” is highly misleading. The term “asset swap” is much more appropriate.

I understand perfectly well how QE works. I also know that's not how the Orthodox were interpreting it in 2008.

My point was that not all policies embraced by the IMF should be called "orthodox". The IMF could have a heterodox managing-director. Granted, if those policies persist for decades and end up adopted by everybody they will constitute the new orthodoxy, but that's not the case since 2008.

Well then, who sets what is and isn't Orthodox? If it isn't the IMF and the WB the world's leading macroeconomic institutions who the hell is it? Is it just people who agree with you? Or people who agree with each other that printing money = bad? It's a freaking mystery to me.

There's nothing particularly unorthodox about QE.

You must have missed the whole 2007-08 debates and never have cracked open a pre-crisis neo-classical textbook. I have a bunch, QE is not mentioned.

EDIT: That's not true. It is mention in relation to Japan and is cited as evidence for how it's inflationary and how it isn't a responsible policy and/or doesn't work.

EDIT EDIT: You don't think its strange that here are so many articles about how the idea that QE = printing money = inflation is wrong is tells us that people still believe that. And I'm going to outright say it, the further you go back in time the more people are going to be making that argument. That you're now in 2014 making the argument that it won't cause inflation, because it hasn't and nobody sane thinks it will anymore, doesn't alter the fact that most of the Orthodox in 2007-08 thought it would.

 

[Masada]

I've been thinking about this debate and the issue with it is that Luiz hasn't actually told us the names of any of the Orthodox Economists he likes so much. So this argument has basically involved Luiz changing his position whenever he gets caught flat-footed. I mean, at this stage I don't have a firm picture of what positions these Orthodox Economists are supposed to hold. When I entered the debate, I noted that he backdated it to 2008 and discussed it in the context of these things:

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.

As I've shown, none of this is heterodox. So his Orthodox Economists have moved from being massive inflation hawks who hate stimulus spending in 2008 to supporters of QE, something inflation hawks hated in 2008, and stimulus spending but not increased stimulus in 2014. It's a strange set of positions and I suspect not a lot of people have held them. Even Greg Mawkim whose like Krugman's favourite whipping boy and a conservative economic darling wouldn't fall into this camp because he said this:

Having the central bank embrace inflation would shock economists and Fed watchers who view price stability as the foremost goal of monetary policy. But there are worse things than inflation. And guess what? We have them today. A little more inflation might be preferable to rising unemployment or a series of fiscal measures that pile on debt bequeathed to future generations.

So really, who the hell am I debating? Am I debating an actual group of economists? Or am I debating Luiz? I suspect the latter because I've racked my brains and can't come up with any group of economists who hold these sorts of views. Really, I can't even come up with a single good fit. Hydro can you help me out here?

 

[brennan]

http://www.bloomberg.com/news/2014-06-08/lagarde-says-imf-got-it-wrong-on-rallying-u-k-economy.html

So the IMF's position is that the "confidence fairy" so ridiculed by heterodox economists actually exists. Back to orthodoxy!

Surely a pretty uncontroversial view would be that the UK economy is growing 'strongly' because it shrunk more than most and therefore has more ground to make up. No reference to fairies necessary. No need to pat any half-baked economic policies on the back either.

 

[Masada]

Amusingly, Krugman made the same point.

 

[Pangur Bán]

Since Luiz used (quite rightly) a religious analogy at the beginning, I thought I was observe that this thread reminds me of the debate people in the Middle Ages had about plague. Did plague x (say the Black Death) come because we didn't practice our beliefs and rituals well, or because those beliefs and rituals were wrong? People on the Neoliberal side are the bishops saying that you just need to give more money to the Church, and all will be well; the 'Keynesian' side saying the Plague came because of the bishops and the corruption of the Church.

 

[Cutlass]

I haven't had the time to get into this thread. The past couple weeks have been extremely busy for me. But I can't help but be aware of the fact that luiz is complaining that certain economic policies are not working in Argentina without pausing to consider just how unorthodox the entirety of the Argentinian economy is. Applying orthodox economics to Argentina would require a nearly bottom up reboot of the entire nation's economy. As it stands, it's more of a mixture of cronyism and corruption in an underdeveloped extractive economy than it is anything which resembles an actual market economy, much less a 'free market' economy. And as such the rest of the debate doesn't really matter at all, because the conditions for them to matter don't really exist at all.

 

[El_Machinae]

I think luiz has a good point. IF Krugman praised Argentina's responses compared to other place's responses, and IF Argentina under-performed relatively, then it's a valid criticism of Krugman's theory. We all know Argentina is complicated, it's the suggestion that they were following appropriate policy where the criticism can lie.

 

[brennan]

Amusingly, Krugman made the same point.

The idea that this is a 'strong' recovery should be openly mocked in every media on the planet.

 

[Hygro]

Hydro can you help me out here?

You summed up all the economics the thread needed when you translated three lines into " 'INFLATION IS THE REAL ISSUE' ". That's all it is. It's just psychology. Some of us have to believe that un-Keynesian neoclassical economics is real to absolve ourselves of our privilege. Others take prozac, smoke weed, work out, therapy, volunteer, chase girls, chase fame, play video games.... Some of it is healthy, some isn't. Whatever someone needs to get themself through the day I guess– gotta protect that identity lest depression takes its hold, right? It's just that at some point the teenage girl relieving her existential angst by cutting herself has the moral high ground over a voter keeping the poor down for his or her own mental health. I don't mean this as a pot shot to luiz, I got my own, too, it's just sometimes you gotta call a spade a spade.

luiz was actually influential in getting me into economics back in the day.

 

[luiz]

I understand perfectly well how QE works. I also know that's not how the Orthodox were interpreting it in 2008.

Well you did equate it with printing money, which it simply isn't. Also, note that "GOP talking heads" is not the same as "orthodox economists". Some orthodox economists were opposed to QE, others favored QE but were opposed to QE2, and some supported both. But I don't think any of them would equate QE with printing money.

Well then, who sets what is and isn't Orthodox? If it isn't the IMF and the WB the world's leading macroeconomic institutions who the hell is it? Is it just people who agree with you? Or people who agree with each other that printing money = bad? It's a freaking mystery to me.

Well there's no precise definition. Yes, the IMF and WB are generally considered bastions of orthodox policies, but that doesn't mean they can't have an unorthodox recommendation. The Fed, the ECB, and some other CBs are also known for adhering to orthodoxy. So what is "more orthodox", a Fed policy or an IMF recommendation?

You must have missed the whole 2007-08 debates and never have cracked open a pre-crisis neo-classical textbook. I have a bunch, QE is not mentioned.

EDIT: That's not true. It is mention in relation to Japan and is cited as evidence for how it's inflationary and how it isn't a responsible policy and/or doesn't work.

It was indeed mentioned on several pre-crisis textbooks in relation to Japan. I can see why they would claim it would not work (it didn't work in Japan), but why would they claim it's inflationary if we didn't see inflation as a result of QE in Japan? Would they really claim something so demonstrably false?

EDIT EDIT: You don't think its strange that here are so many articles about how the idea that QE = printing money = inflation is wrong is tells us that people still believe that. And I'm going to outright say it, the further you go back in time the more people are going to be making that argument. That you're now in 2014 making the argument that it won't cause inflation, because it hasn't and nobody sane thinks it will anymore, doesn't alter the fact that most of the Orthodox in 2007-08 thought it would.

Again, "GOP talking heads" are not the same as economic orthodoxy.

 

[luiz]

luiz was actually influential in getting me into economics back in the day.

I'm flattered, I didn't think it was possible to influence anyone in anyway on CFC
That's the highest compliment I was ever given here (not that I get complimented all that often, but still), even if I influenced you to go on the opposite direction of what I believe.

And I don't mind the "pot shot", I can see why some would feel that way. But note that it can just as easily be argued that "progressive politics", "unorthodox economics" (of the left-wing variety), and etc are also just a way to absolve ourselves from a life of privilege. Talking a big talk about the need for massive redistribution, the evils of the corporate world, all the while enjoying a first world lifestyle only made possible by such corporate world, and not giving up even a fraction of the luxuries it affords. There's a saying in Latin America about populist politicians, it goes more or less like this: "socialism for the masses, capitalism for us".