Economic Theory

Error message

Deprecated function: The each() function is deprecated. This message will be suppressed on further calls in _menu_load_objects() (line 579 of /var/www/drupal-7.x/includes/menu.inc).

Challenging Economic “Common Sense” … From Toronto to Sydney!

Published by Anonymous (not verified) on Mon, 23/05/2016 - 9:00am in

I am thrilled to accept the University of Sydney’s recent invitation to serve as an Honorary Professor in the Department of Political Economy.  I have a long and collegial association with the Department – including delivering the second Ted Wheelwright lecture in 2009 (on the Global Financial Crisis), participating in seminars and conferences, and most recently squatting in Frank Stilwell’s office for six months in 2014 while on research leave here with my family.

The Department is a unique and irreplaceable asset in the global political economy community.  It is a multidisciplinary meeting place for both scholars and activists.  Its research and teaching stretches the frontiers of our understanding of world economy and society.  And it attracts ambitious, committed students from around the world.  I can also attest to the remarkable collegiality within the Department: its culture and practice marks the best traditions of mutual respect and diversity of analysis, yet combined with a willingness to challenge each other in the interests of formulating stronger, more convincing analyses.  It will be both a great honour, and a great opportunity to further my own thinking, to be welcomed into such a fine scholarly community.

I have just settled in Sydney, having left in January my long-time position as Economist with Unifor, Canada’s largest private-sector trade union.  (Unifor was formed in 2013 through a merger between the Canadian Auto Workers, where I worked since 1994, and the Communications, Energy and Paperworkers unions.)  The leaders and members of Unifor supported me very generously while I was there: not only providing concrete economic analysis and advice to the union, but also allowing me to play a broader role in economic policy debates in Canada and internationally.  It was a difficult decision for me to leave that job (after 22 years), and I carry with me a tremendous “scrapbook” of memories of our union struggles, victories, and lessons.  But the desire to do something different (not to mention the appointment of my spouse, Professor Donna Baines, to a senior position in the Department of Social Work here at the University of Sydney!) spurred the big move.

StanfordI have great hopes for transferring my work as an “activist-economist” from Toronto to Sydney.  And it is already clear there will be no shortage of urgent opportunities for me to do so.  A core theme in my work has been a desire to democratise economics, by expanding popular understanding (including among union members and other working people) about the ideological roots and hegemonic functions of conventional economic discourse.  We need to understand that what is widely accepted as economic “common sense” (rooted in ideas about the virtue and productivity of private property, the universality of greed, and the efficiency of markets) is not scientifically based (and hence “sensible”) at all.  Rather, it reflects a conscious and political effort to justify the status quo – rather than truly explaining it.  I have placed great emphasis on communicating critical approaches to economics in ways that are accessible, without being simplistic or populist.  The best example is through my book Economics for Everyone (now in its second printing with Pluto Books) and its associated web-based curriculum materials (all available for free at www.economicsforeveryone.com).

The economic and political similarities between Australia and Canada will make my transition easier, I suspect – as will Sydney’s much more appealing climate!  While I am cautious about drawing too many parallels between the economic experience of the two countries, they are too obvious to overlook: both suffer from a renewed recent reliance on resource extraction as the main engine of accumulation, the associated problems of deindustrialization and environmental degradation, the distorting influence of credit-fueled speculation (in both financial assets and property), and the increasingly aggressive exercise of political influence by the concentrated interests which benefited from those regressive trends.  Canada held a federal election in October 2015 (just before I left the country), in which voters threw out an unapologetic right-wing pro-extraction government, replacing it with a more moderate and balanced (but still pro-business) party.  That election hasn’t remotely solved all Canada’s problems, but it was undeniably a move in the right direction – and a testament to the ability of progressive resistance campaigns to influence the course of events.  With a federal election now underway in Australia, will there soon be another parallel we can draw between these two countries?  I hope so.

My paying job here in Australia will be with the Australia Institute, the leading progressive research institute in the country.  I will work with them as an economist, and director of a new project called the Centre for Future Work.  This Centre aims to strengthen the Australia Institute’s presence and engagement in issues related to employment, labour markets, incomes, industry, and globalization.  We will be publishing research reports (some quick-and-fast, some longer-term and more comprehensive), building links with trade unions and other progressive constituencies, and trying to influence the battle of economic ideas related to these topics.  I am interested in partnering with political economists and other academics interested in these issues, and would welcome any inquiries in my new role (you can reach me at jim[AT]tai.org.au).  The Australia Institute will be a great home for me, and I look forward to working closely with their team of progressive, entrepreneurial researchers (including a prominent alumnus of the Department of Political Economy, Dr. Richard Denniss).

I am already participating in some of the research going on in the Department of Political Economy: including Lynne Chester’s project on industry policy, and Frank Stilwell’s tireless efforts around inequality, tax policy, and related topics.  And I look forward to doing much more – including guest lectures, supervision of graduate students, and other contributions.

Thank you very much to the University and the whole Department for this opportunity, and for your warm welcome to Sydney!

The post Challenging Economic “Common Sense” … From Toronto to Sydney! appeared first on Progress in Political Economy (PPE).

Which unconventional monetary policies hold most promise?

Published by Anonymous (not verified) on Sun, 20/10/2013 - 7:16am in

Kudos to Biagio Bossone, Chairman of the Group of Lecce and former central banker (and circuit theorist par excellence), for his first-rate analysis (see here: part 1 and part 2) of the different types of unconventional monetary policy measures that have been implemented and proposed in the last few years!

Bossone's piece does a fantastic job of presenting the different policy proposals into six distinct categories based on their implied transmission channel and the degree of cooperation between the fiscal and monetary authorities that is required in order to implement the proposed measures.

The main take-away from the analysis is that Bossone finds the proposals that aim to boost aggregate demand via fiscal actions are the most promising. According to Bossone, the benefits of fiscal measures (with or without actions by the monetary authority) are that their effect is more direct than policy measures such as quantitative easing (which works indirectly via its impact on interest rates) or forward guidance (which works indirectly via its effect on the public's expectations on future interest rates).

In the concluding paragraph, Bossone writes,

...this result vindicates the proposed measures to expand the money supply via overt monetary financing or neo-chartalism, which aims to inject new money independently of central banks' interest-rate policies, especially if these are limited by the zero lower bound.

Reference

Bossone, B., Unconventional monetary policies revisited, Part 1 and Part 2, Vox, October 2013

Does the concentration of finance matter?

Published by Anonymous (not verified) on Wed, 10/07/2013 - 1:19am in

It may sound like a strange question in light of all the talk about "too big to fail" during the last few years. But, believe or not, the idea that bank concentration has an impact on real economic activity isn't the standard view. Here's from a recent blog post by NY Fed economists Mary Amiti and David Weinstein:

The notion that financial institutions are large relative to the size of economies is not something that plays a prominent role in traditional economic theory. Macroeconomic textbooks tend to treat economies as composed of representative firms that are infinitesimal in size compared to any given market. As a result, positive and negative idiosyncratic shocks [movement in bank loan supply net of borrower characteristics and general credit conditions] to financial institutions cancel out due to the law of large numbers. 

However, this representation stands in stark contrast with the reality of concentration in financial markets. A striking regularity is that a few banks account for a substantial share of an economy’s loans.

Starting from this basis, Amiti and Weinstein have examined Japanese aggregate bank lending data and other aggregates and were able to demonstrate the following: banks matter, bank concentration matters, bank lending matters. No small feat.

On the issue of bank concentration and aggregate lending, they found that

...if markets are dominated by a few financial institutions, cuts in lending due to some change in financial conditions in just a small number of banks have the potential to substantially affect aggregate lending. Moreover, if firms find it hard to find good substitutes for loans like issuing equity or debt, then it is possible for their investment rates to fall as well. 

As for their take on banks' impact on the real economy, the conclusion to their paper (on which their blog post in based) gives a good summary:

Our paper contributes to this literature by providing the first evidence that shocks to the supply of credit affect firm investment rates. We find that even after controlling for firm credit shocks, loan supply shocks are a significant determinant of firm-level investment of loan-dependent firms. This result is particularly surprising because our sample is comprised of listed companies that have, by definition, access to equity markets. Moreover, the fact that so much lending is intermediated through a few financial institutions means that idiosyncratic shocks hitting large financial institutions can move aggregate lending and investment. We show that about 40 percent of the movement in these variables can be attributed to these granular bank shocks. This means that the idiosyncratic fates of large financial institutions are an important determinant of investment and real economic activity.

And the implication for policy, according to Amiti and Weinstein, is significant. Here is the relevant excerpt of their blog post on this point:

...[P]olicymakers without detailed information on the major financial institutions are likely to have a difficult time understanding the causes of lending and investment fluctuations. A large portion of Japan’s aggregate economic fluctuations can be traced to the country’s banking problems. 

While many researchers have focused on the implications of banks being “too big to fail,” we show that even if large banks do not fail, granular bank shocks can have substantial impacts on aggregate investment. 

For example, reductions in bank capital at large financial institutions can cause investment declines by firms that would like to borrow, while recapitalization of the right institutions can stimulate investment. In sum, this study shows that what happens to large financial institutions is important for understanding aggregate investment behavior. 

While their paper looks specifically at Japanese data, the authors suggest that the overall conclusions are relevant to the situation in the US given that it too has a very concentrated banking sector.

Amiti, Mary and David Weinstein, How much do banks shocks affect investment: Evidence from matched bank-firm loan data, NY Fed staff paper 604, March 2013