Relentlessly Progressive Political Economy

At some point we are going to have to throw in the towel and conclude that there is a concerted effort to promulgate the noble lie.  It was one thing when the business press argued that the BOC faced technical limits to their capacity to retrench the value of the Canadian dollar, and yet another thing when almost every commercial bank economists pushed the same fallacy.  But now no less than the BOC and the Department of Finance, respectively incarnate in Carney and Flaherty, are pushing the same argument.  The FP reports:

Bank of Canada Governor Mark Carney said on Tuesday that foreign exchange intervention did not usually work without complementary policy moves.

“I agree with what the governor of the bank said yesterday …. that it is a limited tool,” Mr. Flaherty told reporters.

At least Carney was smart enough to add the vague qualification “complimentary policy moves.”  Flaherty of course stripped it down to the most elegant version of the Nobel Lie.  For those looking for further detail about why it is simply not true that the BOC is constrained in its capacity to devalue the dollar go over to worthwhile Canadian and read the series of posts on this subject.

So I am curious why would the BOC who most definitely knows what Worthwhile Canadian knows be misleading the public?  The only thing I can come up with (because I do not assume people are dumb) is that the neither the BOC nor the Canadian government has any interest in a policy that would be largely regarded as one of competitive devaluation.  So instead of fight the policy issue out in public on its merits they are attempting to smother it under a “technically not feasible” argument.  That is, they are doing what the BOC always does.  Depoliticize and dispense .

The most noble lie

You would be really mad if you took my analysis and went long on the Canadian dollar especially if you found out I had taken a short position.  None of what you hear, half of what you see.  But seriously can we credit Carney with the non-trivial ( near 5 cent) decline in the Canadian dollar.  Maybe, but only if you can give him credit for talking down the TSX as well.

Source: Globe Investor

Listening to Mark Carney talk tough is like watching Stephane Dion pound his fists on the table.  Well ok a little more credible than that.  Being a former GS man you know he knows people who know people.  Some of which I should think are quite unpleasant characters.  Problem is there is not really a robust connection between the value of the Canadian dollar and inflation or deflation.  Currency traders probably know this…at least more than they have some version of the standard (and empirically dubious) model in their head.  So when Carney says “we take our inflation target seriously.”   Currency traders likely shrug and say: “we are banking on it.”

Mr. Carney said he has a range of tools and he can use to dampen the blow of the currency’s rise, and signaled that any investor who thinks he’s shy to use them is making a mistake.

“Markets should take seriously our determination to set policy to achieve the inflation target,” Mr. Carney said. “Markets sometimes lose their focus. We don’t lose our focus.”

Carney’s problem (well actually the manufacturing sector’s problem) is that the BOC does not care about the level of activity in exports. It only cares about their target.  Full stop.  So unless deflation increases in some way that can be definitively linked to the appreciation of the CAD–which is doubtful–the BOC is not going to do anything.

The short answer is no despite what has been argued here and here.  Bank economists may be a comfortable and no doubt arrogant bunch (imagine combining the natural arrogance of economists with the comfy smugness of Canadian bankers… thankfully a cocktail party I will never be invited to).  But do we really believe they do not understand the difference between raising and lowering the value of a currency and the different mechanisms required for each?  I think they probably do.

So does Erin Weir over at the Progressive Economics Forum.  He makes a cogent case why bank economists may be arguing (erroneously) that the BOC does not have the resources to intervene in fx markets to depreciate the CDN dollar.  In a nut-shell Erin argues that the CDN banks are looking to do a little foreign financial asset shopping and that a high CDN dollar makes that prospect even more lucrative.  I like this explanation because it does not rely on bank economists being stupid, but, rather, hard-working employees serving their employers to the best of their abilities.  And I if that requires misdirection so be it.  Let me put it this way: I think they are bank employees before they are economists.

When it comes to economists and bankers I always prefer rational actor models.  But hey ad hoc explanations are always amusing. And insinuating that people are stupid does allow one to feel superior I suppose.

Next comes currency traders.  Are they as dumb as a sack of hammers?  Again I think not.  Aggressive if jittery risk takers…you bet…stupid nope.  They have played this game before and it is called chicken.  I bet they do not think the BOC has the nerve to go into the fx markets in big way, that the BOC does not want the precedent; that it does not want to fuel the notion that the value of the CDN should be set be fiat etc., etc.

Sure, yesterday the loonie lost two cents on Marky Marc’s: “I really mean it this time, I just might do something.”

Today it was back up a cent by noon trading.

The game of chicken is on.

If what we are worried about is an overvalued CDN dollar which is caused by speculative flows then why the focus on the Bank of Canada?  Exchange rates are not really in the BOC’s mandate.  Sure in the case where an appreciating CDN dollar is causing further deflationary pressures it could be argued that exchange rates are within the purview of the Bank’s mandate.

But the BOC is a conservative (in both the ideological and cultural sense) institution.  Canada does not face the same structural dynamics (problems) as the UK and the US.  And thus I doubt arguments for non-conventional monetary policy responses are going to get very far with the Bank.  Moreover there are downside risks to pursuing unconventional monetary policy.  We might get a lower exchange rate at the expense of perverse side-effects.  So forget the BOC; leave them out altogether.

Thankfully, however, when it comes to exchange rates there are policies available to the government. On such policy could be called an  Investment Inflow Tax Equilibration  program (INVITE).  It would work like this.  A simple 2% tax on all inward portfolio investment (as Brazil just announced) would help stop appreciation in its trax.  Second if we really think much of the dollar’s appreciation is being driven by gas and oil then an additional 2% tax on all oil and gas investment inflows regardless of the type (portfolio or direct) would help further dampen the speculative plays in that sector.  The terminator seed on the INVITE program would be when Canada’s manufacturing sector returned to some degree of health.

Ok today two good videos.  The first does a dry wit explanation of neoliberalism and the financial crisis.

more about “Neoliberalism Explained“, posted with vodpod

The second is satire on bankers, bonuses and the lessons they learned.  Here is the link.

Enjoy

The gold bugs are of course freaking out because the present spot price of gold would seem to vindicate their position.  I will grant that the price of gold reflects a fundamental uncertainty about the future.  But does anybody seriously believe the future is paved with gold.  In a truly apocalyptic future people will be trading goods and services directly.  The second the world is stable enough to trust that your hoard will be safe from the barbarian hoards is the second that fiat money and all its conveniences will be on offer.  Security requires a state and states (and capitalist ones at that) have very little interest in a specie based regime.

Thinking out-loud

The answer to this question is almost a unanimously agreed upon yes across paradigms even within formalized Marxian models.  In the classic Marx-Goodwin formulation successful collective action by workers only serves to increase the long-run rate of unemployment: some workers maybe able to raise their wages but this will be balanced out in the aggregate by increased unemployment.  However, if as Shaikh (2003) points out the strength of labour endogenously influences the rate of technical change then workers can increase their wages in the aggregate (wage share) without causing an increase in long term rate of unemployment.

Shaikh sums up the case thus:

6. Summary and Conclusions

This paper has attempted to analyze the manner in which alternative macroeconomic frameworks portray the dynamics of the labor market. Two types of dynamics have been of interest, both of which depend upon the mutual interactions between the wage share and the employment rate. In disequilibrium dynamics, the issue is the manner in which these variables respond to imbalances in the labor market, while in growth dynamics the issue is their response to technical change and growth in labor supply growth. We examined the basic neoclassical, Keynesian, Harrodian and Marx-Goodwin models, since each embodies a particular approach to macroeconomics

Dynamics require explicit analysis of stability of various equilibria. But even the existence of a particular stable equilibrium need not imply that the economy will be at or even near that point. The analysis of the neoclassical model in Section 2 demonstrates that if real wages respond to the current excess demand for labor, then the labor market converges to a particular wage at full employment (Figure 1). But if real wages respond to the cumulative excess demand for labor, then the labor market would exhibit endless and possibly large fluctuations in real wages and excess labor demand, around but not at, the equilibrium real wage and full employment (Figure 2). This second type of response is reminiscent of Goodwin’s elegant representation of Marx’s argument about the reserve army of labor, except that in his model the center of gravity is a persistent level of unemployment, not full employment (Section 5). In any case, this type of disequilibrium dynamic remind us that we should be careful to distinguish between equilibrating paths and equilibrium points. At an empirical level, this cautions us not to confuse observed variables with their putative equilibrium levels.

In the case of growth dynamics, a second type of finding emerges. It turns out that in each of the four macroeconomic approaches, the paradigmatic case is one in which the organizational or institutional strength of labor has no influence whatsoever on the path of real wages and on the level of the wage share. In all of the approaches, it is technical factors and labor supply growth which determine the standard of living of workers. The degree of labor strength in the struggle over wages has no effect at all. In the neoclassical case, this is instanced by the ubiquitous Cobb-Douglas production function, in which the labor elasticity parameter directly determines the wage share. Hence the profit-wage ratio is entirely determined by production conditions. In the standard Keynesian case, the corresponding outcome arises from mark-up pricing, in which changes in money wages are said to cause equiproportional price changes. This not only leaves the real wage unchanged, but also implies that it is unchangeable. In the Harrodian framework, unemployment affects the wage share, which in turn affects the warranted rate of growth via the dependence of the savings rate on the wage share, a la Kaldor and Pasinetti. This feedback loop leads the system to stabilize around full employment in the long term. But it also implies that the wage share is completely determined by the rates of technical change and population growth, completely independently of labor strength. Finally, even in Goodwin’s classic formalization of Marx’s theory of the reserve army of labor, “class struggle” over wages has no effect whatsoever on the rate of surplus value. Indeed, greater labor strength would only serve to increase the long-run equilibrium rate of unemployment. This is a particularly unkind cut for a Marxian model.

Two critical questions are raised by the general theoretical finding that wage shares are independent of labor strength. First of all, it is at all empirically plausible? The stability of wage shares is a well-known “stylized fact.” But then so too are differences between wage shares across nations and across levels of development. Are these differences reducible to those arising solely from technical factors and conditions of labor supply?

Alternately, if social forces do indeed influence the wage share, how might such a mechanism operate? The key expression to consider is equation 15, in which the rate of change of the employment ratio depends solely on two critical variables: the rate of accumulation g_K = s(u)R and the rate of mechanization g_k, assuming that the rate of growth of the labor supply g_n is exogenous.

v‘/v = g_K – (g_k + g_n) = s(u)R – (g_k + g_n)                                            (15)

We saw that if the output-capital ratio R and the mechanization rate g_k are exogenously given, then there is only one wage share u = u* consistent with a stable employment rate (i.e. with v‘/v = 0). But this conclusion would not be altered if R and g_k, and indeed even g_n , were to also depend on the wage share.²¹ What is needed, therefore, is some other mode of feedback between the employment rate and one of these variables. A particularly simple one is to suppose that the rate of mechanization depends not only on the wage share (i.e. indirectly on the employment rate through its effect on the relative cost of labor) but also directly on the employment rate (i.e. directly on the relative availability of labor). Rowthorn (1984, pp. 203-205) notes that this is precisely the argument in Marx.²² Then g_k = f(u,v), and

v‘/v = g_K – (g_k + g_n) = s(u)R – [g_k(u,v)+ g_n]                                      (15a)

The results of this apparently minor extension are dramatic. Suppose we consider the extreme case in which the wage share is now entirely determined by “class struggle,” so that u = u₀. Then if v‘/v > 0 initially, the employment rate v will rise, which will raise the mechanization rate g_k(u₀, v), thereby bringing the employment rate back into balance. It follows that the same result would also obtain if we assume that the wage share depends on both “class struggle” and the employment rate. Thus the preceding simple modification completely reverses the general theoretical conclusion that the wage share is independent of labor strength, for now there is plenty of room for the influence of the relative strength of labor.

However, if the mechanism is technical change–the swapping of machinery for living labour–it strikes me that over the short run the Marxist model would have to say that unemployment must initially increase unemployment.  This is consistent with Marx’s observation that capital can always adjust to existing supply shortages through technological / organizational innovation. Surely this process takes time.  As Marx was well aware.   I think Marx’s position was that even in cases where capitalism managed to produce full employment that such a condition would not prevail for long do to the tendency to substitute away from labour.

Moreover, what about the case of successful collective action by workers in the face of not labour market shortages but rather excess supply aka unemployment?  It seems the inescapable answer is that such action would serve to increase the short term rate of unemployment even if over the medium to long term there were not any adverse effects.

This result undoubtedly sharpens the political question for unions during recessions.

You  would think that that the PM would have been a little more helpful to this guy given his high profile Gala confession.

Just sayin.

What I cannot figure out is why the provinces have not been more vocal on expanding both eligibility and the duration of benefits for EI given the EI program is a federal program and welfare is provincial. From a provincial point of view the more restrictive the EI program the greater the provincial welfare bills.  So why are the provinces not calling on the Feds to at least temporarily expand the program in  a meaningful way?  I doubt the provinces are worried about moral hazard.  So what has been going on?