Interview on CBC Central Morning

CBC Radio Central Newfoundland Morning aired an interview they did with me about inequality and the future of development in Newfoundland and Labrador.  The pod cast can be found here.  It is the last of the three interviews on the podcast (16min 38sec mark).  The first interview is about the salmon festival and KISS.  I always thought I should do a project with Gene Simmons.

Reswitching, relative prices and linearity

Ok so only 1000 people in the world understand this and only 10 care about it: economics for the most part has long since given up its empirical pretensions when it comes to its ontological assumptions.  Still I suspect the heterodox world will be interested in this forthcoming publication by Anwar Shaikh antiseptically titled, The Empirical Linearity of Sraffa’s Critical Output‐Capital Ratios.  Here is the conclusion:

Even though Marx initially develops his analysis in Volumes I‐II under the assumption that prices are proportional to labor values, he is adamant that the two must be systematically different. In his famous (and incomplete) transformation procedure in Volume III, he derives prices of production as linear functions whose deviations from values increased with the rate of profit. The first two components of the Sraffian decomposition can be therefore viewed as the vertically integrated equivalent of Marx’s procedure. The data clearly support Marx’s general hypothesis that prices of production deviate smoothly and near‐linearly from values.

Sraffa’s elegant and elliptical text suggests that prices of production are likely to exhibit more complex patterns. He specifically cites the potentially complex behavior of individual sectoral output/capital ratios as being the source of complicated price movements. But at an empirical level, individual output capital ratios turn out to be virtually linear functions of the rate of profit, so that individual prices of production and the aggregate wage‐profit curve are near‐linear.

Such findings clearly support the structural price theories of Ricardo and Marx. While they do not completely exclude reswitching, they certainly relegate it to a secondary role. This does not mean that they rehabilitate neoclassical economics. First of all, the structural determination of relative prices in equation (1.4) is a far cry from the neoclassical theory of marginal cost pricing. Secondly, the difference between classical and neoclassical theories of profit is most evident precisely when prices are equal to labor values. This is the condition under which profit is exactly equal to the surplus value created in production. Even if we further posit an infinite number of co‐existing techniques, timeless technical change, and a host of other non‐classical assumptions, then equality of standard prices and values is also the condition under which an aggregate pseudo (surrogate) production function obtains, in the sense that frontier techniques corresponding to lower rates of profit will have higher (constant) capital‐labor ratios5. But correlation is not causation: both profit‐as‐surplus value and the profit‐rate‐as scarcity‐price coexist in this abstract space because their real theoretical differences lie elsewhere (6).

Goldman Sachs, Market Makers and standard economic theory

I wish I had the time to work through this more systematically but I do not. But can anyone watching the US senate grilling of G&S execs believe in the micro-foundations of orthodox economics (scientific liberalism)? What I liked was Sen. Levin’s interpretation of a Market Maker (MM) and G&S’s interpretation of MM. The G&S position is thus: we can sell anything to anybody without divulging what we think it is worth; in fact our obligation is to sell shit, if it is shit, it is just that shit, and we have no obligation to divulge our position about its quality.

This is simply buyer beware all trussed up. I am kind of sympathetic to this position as far as it applies to capitalism. The job of a capitalist enterprise is to make a profit: Some profit by selling quality and some profit by selling fake versions of Viagra. To paraphrase Marx: “capitalists seek profits; that in the process real or imagined needs get satisfied, satisfied well, or not is of secondary importance to the capitalist.” People sell lemons all the time in the attempt to lay-off their risk. In for the penny into the pound.

The community sets the standards on what is fraud and what is not. Now of course it is clear that firms like G&S bought the regulator (or in more polite form captured the regulator). So all of this is a bit of a smoke screen: political theatre. The real question is about how the state came to give these firms such latitude to determine what is fraud and what is not: or what is a lemon what is not?

Standard micro economic theory has a highly transparent view of information. Between the rational expectations and the implied substance of the efficient market hypothesis G&S should never have been able to push junk onto a market and find buyers in a sustained fashion over a prolonged period of time. But the G&S defence wants it both ways: we can sell shit because buyers should know they are buying shit. And they want to say we can sell shit because nothing obliges us to divulge the fact we are selling and saying shit.

And this is not much different from standard economic theory. Standard economic theory is want to say that shit can be sold because the market will almost instantly recognize that it is shit and that is the natural limit thus we do not need regulation to define shit. But G&S’s actions prove that market makers have an informational advantage that will not necessarily disappear by the discovery processes of market agents; at least not any meaningful sense of what is meant by this. The EMH boyz now want to redefine colossal market failure (the failure for good information to drive out bad) as the financial crisis. The crisis, the market pancaking thus becomes the rectifying process, the proof of real information discovery. That is like saying nautical engineers are successful because when ships sink they really sink.

What the sad story of G&S actually indicates is that market makers really make markets and that information is, by design, and in the absence of regulation, asymmetrical and consciously so. In a more revolutionary direction G&S, along with the entire private financial sector, indicates that private entities, if they have the financial wherewithal, will thwart, to the best of their abilities, the capacity for public oversight and regulation. This being the case it would seem to suggest that some activities ought to be brought under the public domain.

Stiglitz: Capitalism is Characterized by Big Bubbles and more

Stiglitz is one of the few (liberal) economists who is not suffering from a massive bought of cognitive dissonance owing to the GFC. This hour long interview with Joseph Stiglitz is well worth watching. Don’t have an hour? Then watch the first fifteen minutes.

Krugman should talk to the CD Howe about Canadian Banking policy

Canadians’ need to be mentioned south of the border will probably find some glee in Krugman’s musings on the Canadian policy conversation. But as edifying as it is to be talked about in such a positive light by such a luminary as Paul Krugman and under the New York Times flagstaff no less; is Krugman right to characterize the policy conversation as “defying conventional wisdom” especially when it comes to the conversation about financial regulation in Canada?

Unfortunately the answer is no. Since the latter half of the 1990s, the Major Canadian banks (MCBs) have been pushing for deregulation that would allow them to, besides become bigger, go global and get into global financial markets. Indeed in the run-up to the Great Financial Crisis (GFC) there was mounting pressure to allow just the kinds of mortgages that were being offered to the south, and for awhile at least, a zero down, teaser rate, 30 year mortgage was allowed. That the product came late market in Canada and was cut short by the GFC is sure luck (or perhaps laggard nature of Canadian financial deregulation).

But if Mr. Krugman would like an indication of not only the intense lobbying that was going on in Canada to allow the MCBs to be more like his banks he need only peruse the CD Howe web site. In 2007 it released a Commentary titled: Branching Out: The Urgent Need to Transform Canada’s Financial Landscape and How to Do It. Inter alia it was argued that mergers should be allowed to go forward and not just among the big five themselves but that the MCBs should be allowed to merge with big insurance companies as well. Allowing banks to become this big would enable them to become significant international players that would be able to behave and mitigate risk like the other big international banks:

Size is also important for a bank in dealing efficiently with financial risk. Larger banks have more ready access to modern risk management techniques that allow them to achieve better diversification and, hence, lower risk. Modern ways of managing bank risk rely increasingly on direct access to international capital markets. Credit risk derivatives, loan syndication and especially securitizing asset positions have become the prevalent tools to reduce the risk that banks take on . However, in order to effectively securitize assets, banks have to offer pools of assets that are well diversified and of sufficient size in order to ensure enough liquidity in the market.

Hmm pretty standard pre GFC thinking here. All that liquidity. Remind me again Paul what is the US in right now (and Canada also looked to be in)? A liquidity trap…how can that be? What with all the risk reduction which comes from diversification into credit derivatives, magic turtles and the goose that lays golden eggs. What indeed could possibly go wrong?

Banks clearly benefit from operating broadly across different segments in their core business of taking deposits and granting loans. But banks can also benefit from diversifying geographically and across different financial products. Historical evidence shows that when banks were able to operate across various regions (such as in Canada and Europe) failure rates were lower than when banks faced geographical branching restrictions (such as until recently in the US). Similarly, as fee revenue has been steadily increasing for banks over the last 15 years relative to interest revenue, the product mix a bank can offer has become an important instrument to hedge general business risk and ensure stable profitability.

Yah those fees… think of all those fees! Originate to distribute; that is Mosses and the prophets. What a model. Especially if it comes with a tax payer funded rescue when it all goes pop.

Maybe Paul is right, size does not matter all that much, what matters is what banks intend and are allowed to do with their size. But whatever the case may be, as the commentary by the CD Howe makes clear, circa 2007 the policy conversation was very much one of follow the leader. As the economists advising for the CD Howe and thus must be considered some of the sharpest tools in the economics shed illustrate, this had nothing to do with the enlightened nature of the policy conversation going on in Canada prior to the GFC.

It is good thing Canada suffers from policy lag and a populist suspicion of the MCBs and bankers and had the good luck of successive minority parliaments in which giving the economists and the banks they were shilling for what they wanted would have been the death blow.

Are currency traders and Bank economists dumb as a sack of hammers?

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.

Cad_dollar

The game of chicken is on.

Unemployment and recovery: debating the future

A conversation over at PEF, instigated by Jim Stanford’s modeling exercise with respect to what the future holds for unemployment, prompted me to put down some of my thoughts about the future path of economic growth. On commentator suggested that the Jim’s numbers were too pessimistic based on the experience of the past two recessions. I argue the past recessions will not be a useful guide and here is why:

Three years forward and it is anyones guess what monetary policy is going to be and a strong case can be made that some form of restraint will be in the works whether in monetary or fiscal form. I don’t think the last recessions are going to be a very good guide to, or even educated guess about what, we can expect over the next three to five years. I would make the following seven conjectures.

1) There is not any  post-NAFTA bounce this time around, either in terms of the optimism it generated in investors’ expectations or in the “easy” forms of continental rationalization it made possible.

2) The US is going into major deficits these will have to be paid for through some form of restraint –higher interest rates plus higher taxes and or spending cuts. So hard to see a Clintonite gilded age of surpluses along side of tax cuts. Much the same this side of the border although more muted.

3) The bubble was a financial bubble not simply confined to housing or the US. It was that bubble that generated the fantastic growth numbers that brought structural unemployment down towards, but never reaching, post WWII golden age averages. That bubble also generated the terrific commodity price boom through several linkages.

4) The bursting of the bubble undermined the faith in high degrees of leverage. It was that leverage which enabled the neoliberal consumption miracle.

5) Mainstream economists may still have faith in the “efficiency” (not in the tautological sense of the EFMH) of financial markets. But it is going to be a long time before that degree of faith is restored in investors’ eyes and even then it is hard to imagine a repeat of the heady days of 2001-2006/7 in our life-time.

6) Insofar as this is shaping up to be a generalized (international) recession, the spatial and temporal dynamics are going to be very different. It is not going to be possible to play the game of export to the hot demand zone. We are going to be trying to export our way to growth. There is a compositional fallacy involved here.  This will either degenerate into a beggar-thy-neighbor game or its opposite which is not a positive sum game either. Rather, it is a cut throat competition game played-out in putatively “free” markets

7) Policy makers on both sides of the line are looking for one-off spending programs which deliver fiscal stimulus that has the following exotic properties: (a) to stimulate the economy over the short-term with no medium to long term liabilities in terms of taxes or debt i.e., which do not permanently alter the weight of the state in the economy; (b) which preserves jobs and (c) which lays the foundation for a future round of growth based on high productivity. I would like to be 7 feet tall and I wish them the best of luck in their endeavors.

Taking 1-7 together we get a recipe for the more somber form of neoliberal macroeconomic policy where the costs of adjustment are forced onto subordinate classes sans the prospect of an eventual orgy of consumption to wash the pain away.

Put less colorfully, the future looks more demand and supply constrained than the past and the current ideological policy fashion is still fascinated with last seasons dogma.

In a nut shell Jim’s numbers just might be too optimistic.

Comment on Corporate Profits in BC

Travis Fast

Yesterday I posted on the subject of corporate profits and their relationship to total labour income. Today I am simply throwing up this graph with the OHPs removed from the series in response to a little debate that seemed to be is unfolding over at the PEF blog.

BC along with Manitoba lead the non-oil having provinces (NOHPs) in the ratio of corporate profits to labour income (see graph below).

The Canadian average is higher than the other provinces owing to the massive ratios registered in the the OHPs. What is interesting, however, is that the ratios climb the steepest in Manitoba and BC. What needs to be kept in mind is that the trend in profits as a percent of labour income closely track profits as a percent of GDP. That is, the higher profits are as a percent of GDP; the higher profits tend to be as a percent of total labour income. However, the spread between the two metrics was at historical highs in 2006 both for the country as a whole and BC in particular. And if averages for the decades are taken one finds that the 2000s are without precedent in the previous five decades (see graph below). Although mention should be made that CIT as a percent of GDP seems to split the difference between 60-70 and 80-90 years in the 2000s. So it seems that the tax man is doing ok. That leaves labour income as the other major source of after tax profits.