When will people read Keynes correctly?

Robert Skidelsky writes a very interesting article about the cycle of ideological debates and what Keynes actually meant (I wonder why people are still not (trying) understanding the simple, common sense concept put forth by Keynes in the 1930s). The beauty of classical economics and its different variations is that their models can be proved mathematically in a very slick and convincing fashion (ceteris paribus). This does not mean that they represent reality cent percent. Economics is a social science and not all things can be simplified without missing some stuff. What matters is good judgment arising from some sort of economic model (may or may not be comprehensive). This is what Keynesians do!

And remember, when resources are idle, economy is not in full employment, and market forces hesitate to function as they should (due to, say, crisis of confidence arising from self-fulfilling and reinforcing prophesy of some speculators/investors), government can turn the tide around by managing demand/using fiscal policies to put idle resources to work. Things could go awfully wrong even in a stable market economy, when then needs an escort to safety. Isn’t this a common sense?

For 30 years or so Keynesianism ruled the roost of economics – and economic policy. Harvard was queen, Chicago was nowhere. But Chicago was merely licking its wounds. In the 1960s it counter-attacked. The new assault was led by Milton Friedman and followed up by a galaxy of clever young disciples. What they did was to reinstate classical theory. Their “proofs” that markets are instantaneously, or nearly instantaneously, self-adjusting to full employment were all the more impressive because now expressed in mathematics. Adaptive Expectations, Rational Expectations, Real Business Cycle Theory, Efficient Financial Market Theory – they all poured off the Chicago assembly line, their inventors awarded Nobel Prizes.

No policymaker understood the maths, but they got the message: markets were good, governments bad. The Keynesians were in retreat. Following Ronald Reagan and Margaret Thatcher, Keynesian full employment policies were abandoned and markets deregulated. Then along came the almost Great Depression of today and the battle is once more joined.

Keynes had proved that such crowding-out could occur only at full employment: if there were unemployed resources, fiscal deficits would not drive up interest rates without also expanding the economy. Prof Ferguson’s ignorant remarks only confirmed that “we’re living in a Dark Age of macroeconomics, in which hard-won know-ledge has simply been forgotten”.

This is to take economics to be like a natural science, which Keynes never believed it was, because he thought its subject matter was much too variable over time.

Markets could behave in ways described by the classical and New Classical theories, but they need not. So it was important to take precautions against bad behaviour. Ultimately, the Keynesian revolution was a triumph not of good science over bad science, but of good judgment over bad judgment.

Can additional funding to the developing countries through the IMF be helpful?

Economists at the CEPR say, No unless…! The $108 billion in new funds for the IMF approved by the US Senate is not going to counter the world recession, they say. Why? Because without reforms in the IMF itself, additional funding injections would not be helpful. (The G20 pledged $500 billion for the IMF to lend to struggling economies)

Contrary to remarks by IMF Managing Director Dominique Strauss-Kahn that rich country contributions to the IMF make "this…the most coordinated stimulus ever," the IMF has been mandating economic conditions for countries receiving new loans, including deficit reduction, monetary tightening, and inflation-targeting measures that run counter to the worldwide need for an increased economic stimulus.

"Throwing $108 billion at the IMF without any reforms is a mistake, and one that Americans will later regret."

"There's little evidence that the IMF has actually helped boost GDP growth in developing countries over the past 30 years, and a lot of evidence to the contrary," Weisbrot said. "Giving the IMF this money without reform conditions is a mistake, and one that will come back to haunt us in the future."

Also, see this one:

Almost all of the agreements that the IMF has concluded since the global economic crisis began have included the opposite of stimulus programs: for example spending cuts or interest rate increases. The amount of money that will help poor countries is tiny. And it is difficult to see why the IMF would need hundreds of billions of dollars to help governments with balance of payments support: for sixteen Standby Arrangements negotiated since the crisis intensified last year, the total has been less than $46 billion.

And, here is Kevin Gallagher:

Kevin Gallagher argues that the IMF, in its emergency assistance plans for developing countries, is still imposing harsh conditionalities that limit rather than expand government spending. “If the IMF is to receive significantly higher lending authority, it should be forced to abandon its draconian austerity policies, which are more inappropriate than ever in the current crisis,” he argues.

Some Keynesian stuff

Keynesianism works in Australia

Australia went early and hard with a substantial cash handout to households in December 2008, followed by another round of cash stimulus delivered a month or two ago, and then a large-scale infrastructure program. The national accounts for the March quarter (which should include the effects of the first round of stimulus) have just come out, and show growth of 0.4 per cent, compared to a 0.6 per cent contraction in the December 2008 quarter

 

IMF loves to apply Keynesian principles in Africa

The main focus of fiscal stimulus should be on the expenditure side, particularly infrastructure and social spending given pressing needs, as reducing tax rates may be inequitable and the scope for doing so is limited given low revenue ratios. Other countries will have to adjust, in a way that will not affect critical spending. Additional donor support would reduce the need for adjustment. In all cases, countries should give priority to expanding social safety nets as needed to cushion the impact of the crisis on the poor.

And, this is very interesting-- The Phillips machine: Using water to predict the economy

Industrial policy in the US

Any doubts that the ongoing series of bail outs of financial institutions and key industries in the West is not an industrial policy. Well, it is definitely an industrial policy (under different trade regimes) of a different form that somewhat resembles the policies of South Korea, Japan, Taiwan and China, writes Gallagher. This is not necessarily protectionism. And yes, the government can fill up the gap where the private sector cannot. The best way to do it: go for PPP but with more accountability.

Many will cry that industrial policy – government fostering of specific sectors, industries or firms – is protectionism. It certainly can be. These policies are justifiable only to the extent they correct for market failures in the economy. Of course we all know that the free market is failing to supply credit to firms in the real economy. There is also an underproduction of green technologies, because firms are not compensated for the environmental benefits they bring. This is accentuated because dirty producers don't have to pay for their environmental sins.

If US policy rectifies market failures, these policies should be seen as correctionism rather than protectionism. Asian countries such as Japan, South Korea, Taiwan and China have all successfully experimented with industrial policy. Conventional economic theories would have told these nations to produce rice, fish and perhaps some clothing for the world economy. However, over time governments enabled firms like Toyota, Kia, Hyundai, Acer and Lenovo to become household names across the world.

When countries succeed at industrial policy they usually form public-private partnerships, put conditions on favoured recipients and have systems for government accountability. Public-private partnerships help alleviate the problem of governments picking winners by creating mechanisms whereby governments get important input from the private sector. Enforceable conditions are also important, such as performance requirements to export a certain percentage of output before receiving additional support. Government accountability needs to be ensured as well.

New op-ed about the Nepali economy under the Maoist-led government

This op-ed is the same as the blog post published earlier.

 

 

 

In the last day of his role as prime minister, the Maoist premier Pushpa Kamal Dahal claimed that his administration gave “utmost importance to economic transformation” and made “major contribution to economic revolution”. Unlike his boss, former Finance Minister Dr. Baburam Bhattarai was a bit modest in laying claims about economic progress achieved under his leadership. In assessing the economic policies and progress under the Maoist administration, it is unclear how the dismal performance, especially in encouraging private sector and utilizing development expenditures, amounts to or leads to “economic revolution”.

[…]

The economy is far from being transformed. There were some successes in revenue collection and welfare programs. However, there were even more problems-- industrial relations deteriorated, allocated development money remained unspent, investors and donors remained skeptical of Maoists policies, price level spiraled upwards, and there was a severe shortage of energy, which further crippled the industrial sector, among others.

Unfortunately and mistakenly, I emailed the same article to two (rival) dailies in Nepal. I have no desire to publish the same op-ed in two dailies (Republica and The Kathmandu Post) on the same day. I bear responsibility for the confusion (and tension) it created there! This should not have happened.

Green on Moyo and the effectiveness of aid

Duncan Green is not satisfied with Moyo’s analysis and the alternatives she proposes:

But it is Dead Aid’s purported alternatives to aid that seem particularly feeble: African governments should issue lots of bonds (not too many takers at the moment - bad luck on the timing there); trust in China (and thus get stuck in commodity dependence, let alone the human rights issues); rich countries should remove barriers to trade (fine, but it won’t make much difference except in a few particular products like cotton) and invest in infrastructure (does anyone disagree with that?) and access to microfinance needs to be increased (sure, but it’s not even close to a magic bullet).

What is most noticeable is what’s missing – the book claims to be about finding better ways to finance development, but she barely mentions taxation or redistribution. Maybe it’s that Goldman Sachs/Zambian elite thing coming through again.

Overall, I was intrigued by Moyo’s politics/ideology. She manages to combine an entirely understandable resentment to the patronizing ways of aid donors and their crass portrayal of her continent (in Tony Blair’s awful soundbite) as ‘a scar on the conscience of the world’, an uncritical celebration of the rise of Chinese and Indian influence in Africa, and a highly conventional international financier’s assumption that free capital markets will solve every problem. A kind of third worldist neoliberalism, or right wing version of the old ‘aid as imperialism’ line.

Earlier discussion on the same issue here

Ram Saran Mahat talks sense!

Former finance minster of Nepal Ram Saran Mahat zeros down on growth and Maoist led government’s progress (I largely agree with his assessment):

Their focus was on distribution, not on production. We believe in production. Without creating production and employment opportunities you cannot raise the economic status of the people. They believed that distributing government resources would take care of everything. […] They believe in government intervention even in production and trading. They believe in re-nationalisation.

[…] distribution of wealth takes time, it cannot happen overnight. We could have done better, but even with the type of development we saw in the private sector, the living conditions at the bottom have improved a lot. Look at the real wages in the rural areas. Now it is difficult to get labour for agriculture, the wage rate is very high. Real wages have gone up. If you look at the National Living Standard Survey (NLSS), it shows that the consumption level of people across regions, across ecological bases, of all income groups have increased significantly. Employment opportunities have increased, there is demand for more labour, more employment. So while it is true that market forces increase disparity, it increases the income level of the poor also. To raise the economic status of lower income groups, of course, you need a separate package of economic reforms. More consideration needs to be given to the social sector -- health, education, rural development, agriculture.

Even in the early days our development programme, our budget distribution and expenditure pattern, the focus was on creating infrastructure in rural areas. We strongly believed that without basic infrastructure in place -- like access roads, electricity, education, basic health services -- no matter how much you spend for the downtrodden, it will have no meaning. And infrastructure is not created overnight, it takes time. Now you have started seeing results. Karnali is accessible, you have road links to Kalikot, Jumla. Districts that were not touched by road networks 10-15 years ago now have road access not just in their headquarters but practically in all VDCs. Electricity has reached to far corners of the country. That has helped a lot in improving the status of the common man. Because of improved infrastructure in rural areas, people are now producing for the market. Even from the far corners of Nepal, you see agricultural production coming into the market. So our emphasis was different.

The Maoist-led government failed because they allocated budgeted programmes, ill-conceived, half-baked programmes, without much study. They didn't allocate funds in well-studied, well-prepared programmes. They allocated huge sums of money without any preparation. But how can you spend money? Of course, there are financial rules and regulations that need to be followed. This is why they couldn't deliver.

The Maoists also failed miserably on the price front. The irony is that at the international level prices have been declining. Prices decline during a recession. Indian inflation is almost at 0 now. Fuel prices have gone down. But Nepal's inflation rate is going up. This is because of government mismanagement. There is more purchasing power in the hands of the people without production. Production should go side by side with income. The emphasis on distributive policies leads to easy money in the hands of the people, which leads to inflation. Bandas, hartals, disruptions in the supply chain are also responsible for this.