Hong Kong leader tries to reassure investors rattled by China law

AFP / ANTHONY WALLACEThousands of protesters took to the streets of Hong Kong on Sunday after the security law announcement and were dispersed by tear gas and water cannon

China's plans to impose a new security law on Hong Kong will not erode freedoms, the city's leader said Tuesday, as she tried to reassure international businesses and foreign governments alarmed by the proposal.

Chief Executive Carrie Lam said the controversial law would "only target a handful of lawbreakers" but she would not be drawn on what actions and opinions would be deemed illegal once the legislation is passed.

Her comments came as the commander of China's military garrison in Hong Kong warned the law would "punish any acts of separatism".

"Garrison officers have the determination, faith and capacity to defend national sovereignty," Chen Daoxiang told state-run CCTV.

Beijing wants to enact legislation banning secession, subversion, terrorism and foreign interference in the international finance hub after months of massive, often-violent pro-democracy protests last year.


Many Hong Kongers, business groups and Western nations fear the proposal could be a death blow to the city's treasured liberties and usher in an end to the semi-autonomous city passing its own laws.

The announcement of plans for the new law -- which will be written by Beijing and bypass Hong Kong's legislature -- sparked the biggest drop on the city's stock exchange in five years on Friday.

But Lam said fears the city's business-friendly freedoms were at risk were "totally groundless".

"Hong Kong's freedoms will be preserved and Hong Kong's vibrancy and the core values in terms of the rule of law, the independence of the judiciary, the various rights and freedoms enjoyed by people, will continue to be there," Lam told reporters.

The proposed law, she added, "only targets a handful of law-breakers... it protects the vast majority of law-abiding, peace-loving residents."

- Mainland agents? -

Hong Kong was upended last year by seven months of huge and often violent pro-democracy protests, fuelled by years of rising fears that Beijing is chipping away at the city's freedoms.

Millions took to the streets for rallies that routinely ended with clashes between riot police and smaller groups of militant protesters wielding petrol bombs.

AFP / ANTHONY WALLACE

Beijing portrays the Hong Kong protests as a foreign-backed plot to destabilise the motherland

Beijing portrays the protests as a foreign-backed plot to destabilise the motherland. Protesters say their rallies are the only way to voice opposition in a city with no universal suffrage.

Thousands protested on Sunday after the security law announcement and were dispersed by tear gas and water cannon in the worst clashes in months.

The precise wording of the security law has yet to be revealed but China's rubber-stamp parliament previewed initial details last week.

It is expected to approve a draft of the law on Thursday and analysts say it could be implemented in the summer.

One concern is a provision allowing Chinese security agents to operate in Hong Kong, with fears it could spark a crackdown on those voicing dissent against Beijing.

Subversion laws are routinely wielded against critics on the mainland.

- Anthem law -

Asked by a reporter whether mainland officials could arrest protesters in Hong Kong, Lam dismissed the question as "your imagination".

She said anti-government protests would continue to be allowed "if it is done in a legal way", but she did not elaborate on what views would be considered illegal under the new law.

A common chant at protests over the last year has been "Free Hong Kong, revolution of our times", a cry that encapsulates frustration with Beijing's rule since the city's 1997 handover by Britain.

Activists fear such calls might be considered illegal given the broad definition of subversion.

In an interview with AFP on Tuesday, Elsie Leung, a former secretary for justice, said activities seeking to undermine the local government might be covered by the law.

"I don't think chanting of the slogan itself is so important, but when chanting of slogans (is) coupled with other behaviour, that might well amount to subversion of Hong Kong's government," she said.

Further protests are expected despite anti-coronavirus measures banning large public gatherings.

On Wednesday Hong Kong's legislature will debate a bill banning insults to China's national anthem.

Police have ringed the building -- which was ransacked by protesters last year -- with water-filled barriers ahead of the debate.

GLOBAL BELLWETHER

Singapore warns of worst economic contraction since independence

AFP / ROSLAN RAHMANEmpty streets in Singapore as people stay at home to curb the spread of the coronavirus

Singapore's virus-hit economy could shrink by as much as seven percent this year -- the worst reading since independence -- the government said Tuesday, as it unveiled a fresh multi-billion dollar stimulus package.

The city-state is seen as a bellwether of the global economy, and the forecast historic contraction highlights the extreme pain being wrought on countries by the killer disease.

The warning came as Singapore's deputy prime minister unveiled a fresh support package worth Sg$33 billion ($23.2 billion) for the troubled city, which has been crippled by months of lockdowns around the world.

The trade ministry's forecast -- which was a downgrade from the maximum four percent contraction predicted in March -- came as official data showed the economy shrank 0.7 percent on-year in the first three months of the year, while it reduced 4.7 percent from the previous quarter.

The financial hub is one of the world's most open economies, and is usually hit hardest and earliest during any global shock.

The ministry said the new estimate was made "in view of the deterioration in the external demand outlook" and the partial lockdown imposed domestically. A contraction of seven percent would be the worst since the city's independence in 1965.

Shutdowns in major markets such as the United States, Europe and China have crippled demand for exports, and a halt in international air travel has hammered Singapore's key tourism sector.

Singapore has ordered the closure of most businesses, advised people to stay at home, and banned large gatherings. While officials say they may start relaxing the rules from early June, many restrictions will remain in place.

Deputy Prime Minister Heng Swee Keat, who is also the finance minister, announced in parliament the new package largely aimed at helping companies save jobs.

The government has so far earmarked more than Sg$90 billion, or 20 percent of GDP, to cushion the economic fallout from the virus, which has infected over 32,000 people in the city-state, the highest in Southeast Asia.

"It has been an unprecedented crisis that is still changing rapidly," Heng said, adding Singapore has the "fiscal resources to mount this response".

Song Seng Wun, an economist with CIMB Private Banking, said he expects the second quarter to bear the full brunt of the fallout, with GDP expected to contract 15-20 percent.

"Singapore is a small and open economy whose trade is three times the size of GDP. The sharp contractions are a reflection of its external vulnerability," he told AFP.

The trade ministry also said "significant uncertainties" remain despite the opening up of some economies as they slowly emerge from lockdowns.

"First, there is a risk that subsequent waves of infections in major economies such as the US and eurozone may further disrupt economic activity," it said.

"Second, a growing perception of diminished fiscal and monetary policy space in many major economies could damage confidence in authorities’ ability to respond to shocks."

The trade ministry warned that "notwithstanding the downgrade, there continues to be a significant degree of uncertainty over the length and severity of the COVID-19 outbreak, as well as the trajectory of the economic recovery".

Singapore's central bank in March eased monetary policy to support the virus-hit economy.

Dino-dooming asteroid hit Earth at 'deadliest possible' angle

AFP/File / STEPHANE DE SAKUTIN66 million years ago an asteroid roughly twice the diameter of Paris crashed into Earth, wiping out all land-dwelling dinosaurs and 75 percent of life on the planet

This much we knew: some 66 million years ago an asteroid roughly twice the diameter of Paris crashed into Earth, wiping out all land-dwelling dinosaurs and 75 percent of life on the planet.

What remained a mystery was whether it was a direct hit or more of a glancing blow, and which would be more destructive.

As it turns out, according to a study published Tuesday in Nature Communications, the giant space rock struck at the "deadliest possible" angle -- 60 degrees.

The cataclysmic impact kicked up enough debris and gases into the upper atmosphere to radically change the climate, dooming T-Rex and everything it ever hunted to extinction.

Analysing the structure of the 200-kilometre-wide crater in southern Mexico where the asteroid hit, scientists ran a series of simulations.

Lead author Gareth Collins of Imperial College London and colleagues at the University of Freiburg and the University of Texas at Austin looked at four possible impact angles -- 90, 60, 45 and 30 degrees -- and two impact speeds, 12 and 20 kilometres per second.

The best fit with the data from the crater was a 60 degree strike.

"Sixty degrees is a more lethal impact angle because it ejects a larger amount of material fast enough to engulf the planet," Collins told AFP.

"The Chicxulub impact triggered a mass extinction because it ejected huge quantities of dust and gas out of the crater fast enough to disperse around the globe."

Had the asteroid hit head on or at a more oblique angle, not as much debris would have been thrown up into the atmosphere, he added.

Large amounts of sulphur in the form of tiny particles that remained suspended in the air blocked the Sun, cooling the climate by several degrees Celsius.

- Rocks 'rebound' -

Smoke, ash and debris engulfed the atmosphere, eventually destroying most plants and wiping out 75 percent of species on Earth.

AFP/File / Jonathan WALTERThe Chicxulub asteroid strike is thought to have triggered an earthquake

Chicxulub is also thought to have triggered an earthquake whose seismic waves reached Tanis -– the fossil site 3,000 km away in North Dakota where definitive evidence of the asteroid's devastating impact was uncovered -– in just 13 minutes.

The seismic shock triggered a torrent of water and debris from an arm of an inland sea known as the Western Interior Seaway.

Thus far, scientists have only been able to study the early stages of the impact.

The researchers combed through geological data gathered during a recent dig to better understand how the cataclysm unfolded.

They soon realised that the asteroid did not, as long assumed, approach Earth from the southeast.

"Our work overturns this hypothesis," Collins explained. "The crater's central uplift is leaning slightly to the southwest, and numerical simulations of the impact reproduce this."

The findings could lead to a greater understanding about how craters are formed in general.

The 3-D simulations, for example, suggest that rocks "rebound" to fill in some of the impact layer during the final stage of crater formation, a process that takes only minutes, the researchers conjectured.

Scientists are still trying to figure out exactly how the asteroid triggered a mass extinction event and why some species survived while others didn't.

"The Chicxulub impact was a very bad day for the dinosaurs," Collins said, adding that the new research showed it was "even worse" than had been previously thought.

"It makes it even more remarkable that life survived and recovered as rapidly as it did."

‘This is pretty nuts’: Reporter grills Kayleigh McEnany over Trump’s Joe Scarborough murder smear

May 26, 2020 By David Edwards


White House Press Secretary Kayleigh McEnany defiantly pushed back on criticism of President Donald Trump for suggesting that MSNBC host Joe Scarborough is guilty of murdering intern Lori Klausutis.

“The opening of a Cold Case against Psycho Joe Scarborough was not a Donald Trump original thought, this has been going on for years, long before I joined the chorus,” Trump wrote in a tweet, “about whether or not Joe could have done such a horrible thing? Maybe or maybe not, but I find Joe to be a total Nut Job, and I knew him well, far better than most. So many unanswered & obvious questions, but I won’t bring them up now! Law enforcement eventually will?

On Tuesday, McEnany was asked if Trump would honor a request from Klausutis’ family to take down the tweet.

“I do know that our hearts are with Lori’s family at this time,” McEnany said without answering the question.

“Why is the president making these unfounded allegations?” ABC correspondent Jonathan Karl asked. “This is pretty nuts, isn’t it? The president is accusing somebody of possible murder. The family is pleading with the president to please stop unfounded conspiracy theories. Why is he doing this?”

After glancing at her prepared remarks, McEnany accused Scarborough of “joking about killing an intern” years after Klausutis died.

“I’m sure that was hurtful to Lori’s family,” she added.

“He’s the president of the United States,” Karl pointed out, “and he’s accusing somebody of possibly murder. This is different. He’s not a private citizen. He’s the president.”

“Yeah,” McEnany said, returning to her notes. “Joe Scarborough, if we want to start talking about false accusations, we have quite a few we can go through.”

“I’m asking about the president’s allegations,” Karl pressed.

“And I’m replying to you,” McEnany quipped. “Mika [Brzezinski] accused the president of 100,000 deaths and that’s incredibly irresponsible. They’ve dragged his family through the mud. They’ve made false accusations that I won’t go through.”

“They should be held to account for their falsehoods!” she complained. “Joe Scarborough should be held to account for saying people will die by taking hydroxychloroquine.”

“Does that justify the president spreading a false conspiracy theory?” Karl wondered.

“I will point you back to Joe Scarborough who laughed and joked about this item,” McEnany shot back. “It’s Joe Scarborough that has to answer these questions.”

Watch the video below from Fox News.

'Green snow' to become a more regular occurrence in Antarctica

Algae blooms turn the snow bright green in warmer areas of Antarctica during the summer, and scientists found it will likely spread due to rising temperatures.
By Brooks Hays, UPI,
Updated May. 25, 2020 

May 20 (UPI) -- Green snow algae is likely to become more abundant across Antarctica's coast as global temperatures continue to rise, according to research by a team of scientists from the University of Cambridge and the British Antarctic Survey.

To better understand the effects of climate conditions on algae growth patterns, researchers constructed a large-scale map of green snow blooms.

Each individual algae is microscopic, but when they grow en mass, they stain the snow green. The blooms can be mapped using aerial surveys and satellite images.


Ocean scientist Norman Kuring of NASA’s Goddard Space Flight Center photographed green algae covering snow and ice in Antarctica in February 2013. (NASA Earth Observatory / Norman Kuring)

By tracking links between local weather conditions and green snow growth patterns, scientists say they can predict how climate change will influence future blooms.

"This is a significant advance in our understanding of land-based life on Antarctica, and how it might change in the coming years as the climate warms," lead researcher Matt Davey, a plant physiologist and chemical ecologist at Cambridge, said in a news release. "Snow algae are a key component of the continent's ability to capture carbon dioxide from the atmosphere through photosynthesis."

The latest mapping effort, detailed Wednesday in the journal Nature Communications, confirmed green snow algae blooms are most frequently found when temperatures hover above zero degrees Celsius.

Researchers created their map using images captured between 2017 and 2019 by the European Space Agency's Sentinel 2 satellite. Scientists supplemented the satellite data with on-the-ground field observations. Some of the largest splotches of green were found on islands along the west coast of the Antarctica Peninsula, where warming has been most pronounced over the last several decades.

In addition to the correlation between green snow blooms and warmer temperatures, researchers also found a link between coastal algae blooms and the presence of marine birds and mammals -- bird excrement is rich in nutrients that fuel algae growth.

More than 60 percent of the green snow blooms analyzed by scientists were found within a few miles of penguin colonies, and many other large blooms were identified near the nesting sites of other bird species.

While warming temperatures are likely to encourage larger green snow algae blooms across most of the Antarctic, climate change is likely to leave at least some low-lying islands without summertime snow cover, robbing the islands of their green snow blooms.

"As Antarctica warms, we predict the overall mass of snow algae will increase, as the spread to higher ground will significantly outweigh the loss of small island patches of algae," said Cambridge researcher Andrew Gray, lead author of the new paper.

Larger green snow algae blooms could help pull carbon dioxide from the air. Like plants, microscopic algae capture CO2 and emit oxygen as part of the photosynthesis process.

Keynes and the European economy

Peter Temin and David Vines

Keywords: Keynes; international; The Economic Consequences of the Peace; Macmillan Committee; Bretton Woods

Published in print:Jan 2016

https://www.elgaronline.com/view/journals/roke/4-1/roke.2016.01.04.xml?rskey=eAzHXr&result=2

Category:Research Article

DOI:https://doi.org/10.4337/roke.2016.01.04

Pages:36–49

Download PDF (100 KB)


We argue in this paper that Keynes was interested primarily in the world economy. We do not seek to diminish the innovative advances Keynes made in The General Theory; we instead want to expand the perceived scope of Keynesian economics. We make this argument by analysing Keynes's contributions at three points during his career: writing The Economic Consequences of the Peace just after the First World War, testifying before the Macmillan Committee at the outset of the Great Depression, and negotiating at Bretton Woods during and after the Second World War. We then show how international Keynesian analysis clarifies the economic problems of Europe today.

Full Text

1 INTRODUCTION

We argue in this paper that Keynes was interested primarily in the world economy. He wrote The General Theory (1936) as a necessary part of this grand design, and then he died prematurely just after the Second World War. The success of The General Theory overshadowed Keynes's research design, and he is best known today as an analyst of a closed economy. To expand Keynesian analysis to the world economy, we survey Keynes's thought process through his active career and use his framework to analyse current European conditions.

How Keynes came to Britain

Robert Skidelsky

Keywords: Keynes; Keynesian economics; the Great Depression; economic thought; history of economic thought; macroeconomics; monetary policy; fiscal policy; economic history; the Keynesian revolution

Published in print:Jan 2016

https://www.elgaronline.com/view/journals/roke/4-1/roke.2016.01.02.xml

Category:Research Article

DOI:https://doi.org/10.4337/roke.2016.01.02

Pages:4–19

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I explore how Keynesian ideas made their way into British public policy. I argue that the breakdown of pre-First World War macroeconomic conditions led to a ‘blocked’ system, where the adjustment mechanisms presupposed by classical economics were jammed, and that Keynesian economics offered an escape from this system. I explain the Keynesian response to the new problems in monetary and fiscal policy: the gold standard impeding credit control, and the tenacity of the balanced budget rule, respectively. Finally, I outline how Keynes's ideas took hold after the Great Depression via the events at the Macmillan Committee, and their policy implications.

Full Text

‘[I]t would promote confidence and furnish an objective standard of value, if … the authorities would employ all their resources to prevent a movement of [the price level] by more than a certain percentage in either direction away from the normal.’John Maynard Keynes (1923 [1978], p. 148)


‘Very little additional employment and no permanent employment can in fact and as a general rule be created by State borrowing and State expenditure.’Winston Churchill (HC Deb 15 April 1929, vol. 227, col. 54)


‘When every country turned to protect its national private interest, the world public interest went down the drain.’Charles P. Kindleberger (1973, pp. 290–291)

1 THE BLOCKED SOCIETY

After the First World War, the macroeconomic policy rules of the previous half-century broke down. This was because the conditions making it possible to keep them disappeared. The old macro-economy (in the days before macroeconomic policy) was framed by three connected rules: adherence to the gold standard, balanced budgets, free trade. All three were unhinged by the war. Quite simply, the gold standard became the transmitter, rather than the dampener, of external shocks, while domestic adjustment to them became more costly.

Because of increased union control over wages, increased working-class influence on politics, and the shutting-off of emigration outlets, domestic economies had become more rigid. Long before ‘stickiness’ of wages and prices found their way into formal economic models, it was becoming evident that industrial economies had lost their previous ‘elasticity’. The liquid markets praised by economists had morphed into a congealed corporatist mass. Germany was the main example of this (Maier 1975). Fiscal rules based on balanced budgets and free trade became increasingly difficult to maintain.

The nineteenth century gold standard had worked after a fashion owing to special conditions. After the war it became completely dysfunctional. Barry Eichengreen (1985, p. 22) paints a compelling picture of ‘an international monetary system disturbed by misaligned exchange rates, insufficient and unhelpfully distributed reserves … and at the same time incapable of responding to disturbances due to rigidities in wage structure, rising tariffs, and the failure of cooperation’. London was fatally weakened as a ‘conductor of the international orchestra’. The problem of ‘global imbalances’ reared its head for the first time, but by no means the last time, with the USA's permanent export surplus exerting deflationary pressure on much of the rest of the world.

In short, the adjustment mechanisms assumed by classical economics were blocked or jammed. Unemployment became the chief expression of market sclerosis, and the main challenge to economic policy. Unemployment in Germany and Britain averaged about 10 per cent in the 1920s, double what it had been before the First World War. Persisting mass unemployment was also a challenge to theory. There was no theory of output and employment as such, since classical theory assumed – perhaps presupposed would be better – a state of full employment. Experience validated this to some extent. Economies might be knocked over for a short time, but they got up again without government help. Say's law was not mortally challenged. This changed with the Great Depression, which started in 1929 and from which the world did not fully recover until the Second World War.

Theory and policy alike were slow to recognize that conditions had changed. Under the slogan ‘Back to normalcy’, determined attempts were made in the 1920s to restore the prewar system. At their heart was the restoration of the international gold standard. Orthodoxy saw this as the indispensable framework for domestic monetary discipline. A gold anchor was politician-proof. To restore the gold standard, suspended in the war, it was, according to the Financial Resolution of the Genoa Conference of 1922, essential for governments ‘to balance national budgets by contraction of expenses rather than by increase in taxation, to stop inflation by ceasing to cover budget deficits by recourse to paper money, and to cease borrowing for unproductive purposes’ (Brown 1940, p. 343) – in short, to liquidate war finance. The old post-Napoleonic Ricardian programme became the consensual position of all governments.

The Great Depression of 1929–1932 started a period of experiments in macroeconomic policy and theory from which the Keynesian Revolution eventually emerged triumphant.

This essay will consider the way in which macro policy adapted, or failed to adapt, to the new conditions, with the Great Depression as the traumatic break in trend.

Unravelling the New Classical Counter Revolution

Simon Wren-Lewis

Keywords: New Classical Counter Revolution; microfoundations

Published in print:Jan 2016 

https://www.elgaronline.com/view/journals/roke/4-1/roke.2016.01.03.xml

Category:Research Article

DOI:https://doi.org/10.4337/roke.2016.01.03

Pages:20–35

Download PDF (124.6 KB)

To understand the position of Keynes's The General Theory today, and why so many policy-makers felt they had to go back to it to understand the Great Recession, we need to understand the New Classical Counter Revolution (NCCR), and why it was so successful. This revolution can be seen as having two strands. The first, which attempted to replace Keynesian policy, failed. The second, which was to change the way academic macroeconomics was done, was successful. Before the NCCR, macroeconomics was an intensely empirical discipline: something made possible by the developments in statistics and econometrics inspired by The General Theory. After the NCCR and its emphasis on microfoundations, it became much more deductive.

As a result, most academic macroeconomists today would see the foundation of their discipline as not coming from The General Theory, but as coming from basic microeconomic theory – arguably the ‘classical theory’ that Keynes was so keen to cast aside. Students are also taught that pre-NCCR methods of analysing the economy are fatally flawed, and that simulating DSGE models is the only proper way of doing policy analysis. This is simply wrong. The problem with the NCCR was not the emergence of microfoundations modelling, which is a progressive research programme, but that it discouraged the methods of analysis that had flourished after The General Theory. I argue that, had there been more academic interest in these alternative forms of analysis, the discipline would have been better prepared ahead of the financial crisis.



Full Text

1 INTRODUCTION

The General Theory of Employment, Interest and Money (Keynes 1936) is sometimes credited with creating modern macroeconomics. Today that observation appears highly questionable for two reasons. The first relates to policy. We have once again found ourselves in a global liquidity trap of just the kind that The General Theory was designed to explain and avoid. Yet policy-makers have prolonged that liquidity trap by doing precisely the opposite of what The General Theory recommended. Can anyone doubt that Keynes would be turning in his grave seeing the current obsession with fiscal austerity?

There is of course nothing that compels policy-makers to base their decisions on macroeconomic theory, and a large part of what is currently going on may just be politicians using populist analogies between state and household budgets to achieve goals to do with the size of the state. Yet we have to ask whether they would be able to get away with that if macroeconomists were united in their opposition to fiscal austerity. Instead, the economics profession appears much more divided. This in turn reflects the second reason why the importance of The General Theory to modern macroeconomics might be questioned. The reality is that most academic macroeconomists no longer regard The General Theory as the defining text of their discipline. If they had to name one, they might be more likely to choose one of the seminal texts of the New Classical revolution: Lucas and Sargent (1979), which is aptly titled ‘After Keynesian Macroeconomics’.

Much discussion of current divisions within macroeconomics focuses on the ‘saltwater/freshwater’ divide. This understates the importance of the New Classical Counter Revolution (hereafter NCCR). It may be more helpful to think about the NCCR as involving two strands. The one most commonly talked about involves Keynesian monetary and fiscal policy. That is of course very important, and plays a role in the policy reaction to the recent Great Recession. However I want to suggest that in some ways the second strand, which was methodological, is more important. The NCCR helped completely change the way academic macroeconomics is done.

Before the NCCR, macroeconomics was an intensely empirical discipline: something made possible by the developments in statistics and econometrics inspired by The General Theory. After the NCCR and its emphasis on microfoundations, it became much more deductive. As Hoover (2001, p. 72) writes, ‘[t]he conviction that macroeconomics must possess microfoundations has changed the face of the discipline in the last quarter century’. In terms of this second strand, the NCCR was triumphant and remains largely unchallenged within mainstream academic macroeconomics.

To understand the position of The General Theory today, and why so many policy-makers felt they had to go back to it to understand the Great Recession, we need to understand the NCCR, and why it was so successful.

One explanation, which I consider in Section 2, could be summed up in Harold Macmillan‘s phrase ‘events, dear boy, events’. Just as the inability of economists to understand the Great Depression gave rise to The General Theory and the Keynesian consensus that followed, the Great Inflation of the 1960s and 1970s undermined that Keynesian consensus. The suggestion is that the NCCR was a response to the empirical failure of the Keynesian consensus. I will argue instead that the NCCR was primarily driven by ideas rather than events.

Section 3 considers the methodological revolution brought about by the NCCR and the microfoundations research strategy that it championed. Section 4 argues that this research methodology weakened the ability of macroeconomics to respond to the financial crisis and the Great Recession that followed. Although microfounded macroeconomic models are quite capable of examining financial and real economy interactions, and there is a huge amount of recent work, it is important to ask why so little was done before the crisis. I will suggest that a focus on explaining only partial properties of the data and an obsession with internal consistency are partly to blame, and this focus comes straight from the methodology.

Many economists involved with policy have commented that they found texts written prior to the NCCR, like The General Theory, or texts written by those outside the post-NCCR mainstream, more helpful during the crisis than mainstream macroeconomics based on microfounded models. Does that mean that macroeconomics needs to discard the innovations brought about by the NCCR, just as that revolution wanted to discard so much of Keynesian economics? In Section 5 I argue that that would make exactly the same mistake as the NCCR made. We do not need a discipline punctuated by periodic revolutions. The mistake that the discipline made in the 1980s and 1990s was to cast aside, rather than supplement, older ways of doing things. As experience in the UK shows, it is quite possible for microfounded modelling to coexist with other ways of modelling and estimation, and furthermore that different approaches can learn from each other.

2 IDEAS, NOT EVENTS

Growth and distribution after the 2007–2008 US financial crisis: who shouldered the burden of the crisis?

Mathieu Dufour and Özgür Orhangazi

Keywords: financial crisis; Great Recession; 2008 crisis

Published in print:Apr 2016

https://www.elgaronline.com/view/journals/roke/4-2/roke.2016.02.02.xml

Category:Research Article

DOI:https://doi.org/10.4337/roke.2016.02.02

Pages:151–174

Download PDF (785.7 KB)

The post-1980 era witnessed an increase in the frequency and severity of financial crises around the globe, the majority of which took place in low- and middle-income countries. Studies of the impacts of these crises have identified three broad sets of consequences. First, the burden of crises falls disproportionately on labor in general and low-income segments of society in particular. In the years following financial crises, wages and labor share of income fall, the rate of unemployment increases, the power of labor and labor unions is eroded, and income inequality and rates of poverty increase. Capital as a whole, on the other hand, usually recovers quickly and most of the time gains more ground. Second, the consequences of crises are visible not only through asset and income distribution, but also in government policies. Government policies in most cases favor capital, especially financial capital, at the expense of large masses. In addition, many crises have presented opportunities for further deregulation and liberalization, not only in financial markets but in the rest of the economy as well. Third, in the aftermath of financial crises in low- and middle-income economies, capital inflows may increase as international capital seeks to take advantage of the crisis and acquire domestic financial and non-financial assets. The 2007–2008 financial crisis in the US provides an opportunity to extend this analysis to a leading high-income country and see if the patterns visible in other crises are also visible in this case. Using the questions and issues typically raised in examinations of low- and middle- income countries, we study the consequences of the 2007–2008 US financial crisis and complement the budding literature on the ‘Great Recession.’ In particular, we examine the impacts of the crisis on labor and capital, with a focus on distributional effects of the crisis such as changes in income shares of labor and capital, and the evolution of inequality and poverty. We also analyse the role of government policies through a study of government taxation and spending policies, and examine capital flow patterns.



Full Text

1 INTRODUCTION

The post-1980 era witnessed an increase in the frequency and severity of financial crises around the globe (Eichengreen 2001; Reinhart and Rogoff 2011). Apart from the large amount of literature that examines the causes of these crises, another line of research has concerned itself with the consequences of financial crises. Three broad findings emerge from the latter, which focuses on low- and middle-income country experiences, as this is where most of the major financial crises have taken place in the last couple of decades. First, the burden of crises falls disproportionately on labor in general and low-income segments of society in particular. In the years following financial crises, wages and labor share of income fall, the rate of unemployment increases, the power of labor and labor unions is eroded, and income inequality and rates of poverty increase (Diwan 2000; 2001; Jayadev 2005; Onaran 2007). Capital as a whole, on the other hand, usually recovers quickly and most of the time gains more ground. Second, the consequences of crises are visible not only through asset and income distribution, but also in government policies. Government policies in most cases favor capital, especially financial capital, at the expense of the rest of society. In addition, many crises have presented opportunities for further deregulation and liberalization, not only in financial markets but in the rest of the economy as well (Crotty and Lee 2001; Harvey 2003; Duménil and Lévy 2006; Dufour and Orhangazi 2007; 2009). Third, in the aftermath of financial crises in low- and middle-income economies, capital inflows often increase as international capital seeks to take advantage of the crisis and acquire domestic financial and non-financial assets (Wade and Veneroso 1998; Dufour and Orhangazi 2007; 2009).

The 2007–2008 financial crisis in the US provides an opportunity to extend this analysis to a leading high-income country and see if the patterns visible in other crises are also visible in this case. Using the questions and issues typically raised in examinations of low- and middle-income countries as an entry point to look at the experience of the US economy in the aftermath of the 2007–2008 financial crisis provides a fresh perspective on that crisis and allows for an original contribution to the gradually emerging literature on the consequences of the US financial crisis and the ‘Great Recession’ (for example, Oleinik 2013; Wolff 2013). In this paper, we empirically investigate the outcome using broad indicators such as changes in inequality and poverty, and then compare the fortunes of labor and capital after the crisis. We find that unemployment has substantially increased and labor incomes have fallen, but the income share of capital and profitability continued to increase after the crisis. While the US did not need an external bailout, such as those the IMF provided during earlier financial crises in less-developed countries, the US government and the Federal Reserve (FED) provided unprecedented amounts of support to the economy. Since they were not constrained by an external structural adjustment program and since the FED has the power to issue an international reserve currency, the outcomes of the crisis in this regard differed from other experiences. However, capital inflows peaked during the crisis, suggesting that it opened business opportunities for international capital in similar ways as previous crises did.

The rest of the paper is organized as follows. In Section 2 we look at the emergence of the 2007–2008 US financial crisis and the path of some important macroeconomic indicators before and after the crisis. In Section 3 we turn our attention to the distributional effects of the US financial crisis and then compare this with the impacts of the crisis on capital. We compare the changes in income shares of labor and capital before shifting our attention to changes in inequality and poverty. Section 4 focuses on the role of government policies through an analysis of government taxation and spending policies. After discussing the change in capital flows in Section 5, we conclude in Section 6 with a discussion of our overall findings and further research areas.

Macroeconomic effects of household debt: an empirical analysis

Yun K. Kim

Keywords: household debt; business cycles; financial instability hypothesis; cointegration; VAR; VECM

Published in print:Apr 2016

https://www.elgaronline.com/view/journals/roke/4-2/roke.2016.02.01.xml

Category:Research Article

DOI:https://doi.org/10.4337/roke.2016.02.01

Pages:127–150

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Multi-equation econometric frameworks are used to investigate the impact of household debt on GDP in the US. In the vector autoregression analysis capturing the transitory feedback effects, we observe a bidirectional positive feedback process between aggregate income and debt. According to the estimation of vector error correction models, there are negative long-run relationships between household debt and output. These empirical results provide a support for the view of the debt-driven business cycles.



Full Text

1 INTRODUCTION

Prior to the financial crisis of 2007, the US experienced a significant increase in household debt relative to income. Figure 1 depicts the ratios of consumer, mortgage, and household debt (sum of mortgage and consumer debt) relative to gross domestic product (GDP). Household debt outstanding as a share of GDP, for example, increased from about 45 percent in 1975 to nearly 100 percent in 2009. Although there is more fluctuation in the consumer debt–GDP ratio, a clear upward trend is observed, especially since 1985. Mortgage debt seems to be a dominating component of household debt, and the household and mortgage debt–GDP ratios seem to show close comovements.
Figure 1Debt outstanding as a share of GDP (1951Q4–2009Q1)

Citation: 4, 2;10.4337/roke.2016.02.01

Figure 2 depicts the evolution of debt–net worth ratios. This provides additional evidence of the substantial increase in debt. Similar to the debt–GDP ratios, both household and mortgage debt–net worth ratios exhibit a clear upward trend over the whole sample period. Consumer debt–net worth ratio shows an upward trend until the middle of 1970, but, after that, it shows considerable fluctuations. In general, the liability side has grown more rapidly than the asset side over the sample period. Similar to the debt–GDP ratios, household and mortgage debt–net worth ratios seem to show close comovements.
Figure 2Debt outstanding as a share of household net worth (1951Q4–2009Q1)

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Figure 3 depicts two measures of the debt service burden: household financial obligations as a percentage of disposable personal income (FODSP) and household debt service payments as a percentage of disposable personal income (TDSP). These two series have been used by the Federal Reserve as primary measures of the household debt burden (Greenspan 2004), and are available starting in 1980. 1 Both measures also show upward trends, indicating that households’ financial positions have been continuously worsening. These levels of debt accumulation eventually proved untenable – as has been broadly implied in the Great Recession.
Figure 3Debt service and financial obligation as a share of disposable income (1980Q1–2009Q1)

Citation: 4, 2;10.4337/roke.2016.02.01

A number of post-Keynesian scholars have addressed the macroeconomic implications of household debt using formal models. For example, Palley (1994) incorporates consumer debt into a linear multiplier-accelerator model and analyses the cyclical aspects of consumer borrowing over the business cycle. In his model, a rise in consumer debt initially increases consumption and hence promotes growth, but eventually the accumulation of debt becomes excessive. This implies that there is a transfer of income from low saving agents (debtors) to high saving agents (rentiers) at an increasing rate due to the debt service payments. The debt service burden then reduces consumption and output level. This provides a mechanism of credit-driven cyclical process of output. Dutt (2006) investigates the role of consumer debt within a neo-Kaleckian growth and distribution framework. In Dutt's model, an increase in household consumption debt raises the growth rate in the short run. In the long run, however, the effect is ambiguous because the accumulation of consumer debt results in a shift in income distribution toward rentiers, who have a higher propensity to save. This latter result has a depressing effect on the long-run growth rate in a demand-driven model. Nishi (2012) incorporates an endogenous interest rate into a neo-Kaleckian growth model, where the change in interest rate responds to workers’ indebtedness, and investigates the dynamic stability of the system. He also demonstrates that the introduction of household borrowing can change the characteristics of a demand-generating process (that is, wage-led and profit-led). 2

Post-Keynesian thoughts on the effect of debt on the macroeconomy are also strongly influenced by Hyman Minsky's financial instability hypothesis. Minsky's theory clarifies the two-sided aspects of debt-financed spending. During the boom phase of the business cycle, debt-financed household spending (and investment as traditionally emphasized) provides a source of additional economic stimulus. 3 However, as the economy experiences a prolonged phase of prosperity, more debt-financed spending occurs and the debt-to-income ratio eventually rises. The balance sheets of businesses and households deteriorate and the system becomes financially fragile. The system becomes highly vulnerable to negative shocks, potentially resulting in a severe economic downturn.

Minsky's financial instability hypothesis has been applied to household debt by Cynamon and Fazzari (2008), who provide a very informative discussion of household debt from a Minskyan perspective. They observe that, from the 1980s to the early 2000s, the US experienced consumption expansion accompanied by significant household debt accumulation. Cynamon and Fazzari (2008) argue that, although this provided a substantial macroeconomic stimulus, this unprecedented rise in household debt could have planted the seeds for financial instability and a non-trivial economic downturn.

As the argument by Cynamon and Fazzari (2008) implies, Minsky's financial instability hypothesis can be read as highlighting distinctive debt effects depending on the time frame under consideration. Debt-financed household spending may provide a source of additional economic stimulus in the shorter time period, but eventually the accumulation of debt could become excessive, generating a negative impact on consumption and output level in the long run (for example through the higher debt service payments and frugal consumer behavior due to the excessive debt level). The system could become highly vulnerable to negative shocks, potentially resulting in a severe economic downturn. From this point of view, there are distinguishing effects of debt in the short and longer time period. 4

I approach my empirical investigation from the theoretical perspective of debt-driven business cycles. I will empirically distinguish the short-run and the long-run impact of household debt on real GDP. Multi-equation econometric frameworks are used to analyse the relationship between household debt and aggregate income. I study the unit roots and cointegrating relationships. Based on the findings, I implement vector autoregression (VAR) and vector error correction (VECM) models. In the VAR analysis, which captures the transitory (short-run) feedbacks among the growth rates of debt, GDP, and net worth, I observe a bidirectional positive feedback process between aggregate income and debt. According to the VECM estimation, which captures long-run relationships in a multi-equation framework, there is a negative long-run relationship between household debt and output. Our results provide evidence for household debt-driven busine

Wages, prices, and employment in a Keynesian long run

Stephen A. Marglin

Keywords: flexprice adjustment; fixprice adjustment; conventional wage; unlimited supplies of labor; capital widening; capital deepening; Phillips curve

Published in print:Jul 2017

https://www.elgaronline.com/view/journals/roke/5-3/roke.2017.03.04.xml

Category:Research Article

DOI:https://doi.org/10.4337/roke.2017.03.04

Pages:360–425

Download PDF (1.7 MB)

The central question this paper addresses is the same one I explored in my joint work with Amit Bhaduri 25 years ago: under what circumstances are high wages good for employment? I extend our 1990 argument in three directions. First, instead of mark-up pricing, I model labor and product markets separately. The labor supply to the capitalist sector of the economy is assumed à la Lewis to be unlimited. Consequently the wage cannot be determined endogenously but is fixed by an extended notion of subsistence based on Smith, Ricardo, and Marx. For tractability the product market is assumed to be perfectly competitive. The second innovation is to show how disequilibrium adjustment resolves the overdetermination inherent in the model. There are three equations – aggregate demand, goods supply, and labor supply – but two unknowns – the labor–capital ratio and the real price (the inverse of the real wage). Consequently equilibrium does not even exist until we define the adjustment process. The third innovation is to distinguish capital deepening from capital widening. This is important because, ceteris paribus, wage-led growth is more likely to stimulate the economy the greater the fraction of investment devoted to capital deepening. A final section of the paper shows that US data on employment and inflation since the 1950s are consistent with the theory developed in this paper.



Full Text

1 INTRODUCTION

Are high wages good for employment? Does higher employment lead to more inflation? When do higher prices mean stagflation? This essay lays out and tests a new framework for assessing the relationship between prices and wages on the one hand and output and employment on the other. I build on my work with Amit Bhaduri of a quarter of a century ago (Marglin and Bhaduri 1990; Bhaduri and Marglin 1990). The central innovation of this joint work was to question the conventional wisdom of left-leaning political economy that higher wages are always good for employment and output. Higher wages, Bhaduri and I argued, may decrease aggregate demand through a negative impact on investment demand. Here, I expand the argument by focusing on the differences in the relationship between wages and employment under different adjustment regimes. The expanded model allows me to examine supply and demand shocks under different dynamic assumptions, and to test the Keynesian idea that aggregate demand matters against data on employment and inflation. I also offer an argument about how different types of investment respond to profitability and capacity utilization, an argument intended to clarify the impact of wages on aggregate demand via the investment channel.

From a mainstream point of view, the entire tradition in which Bhaduri and I situated our work – the tradition in which aggregate demand matters in the long run as well as in the short run – was conceived in error. The process of consolidating the Keynesian revolution made a role for aggregate demand contingent on one form or another of market imperfection or friction, and the resulting sand in the wheels was supposed to operate only in the short term. By the late 1960s, when the neoclassical counter-revolution had begun in earnest, the Keynesians had already abandoned the long run to the neoclassicals. Robert Solow's 1956 essay was widely understood to have demonstrated the irrelevance of aggregate demand, even though the ‘demonstration,’ as Solow himself recognized (ibid., p. 91), is simply an assumption.

The counter-revolution, led by Milton Friedman (1968) and Edmund Phelps (1968), delivered the knock-out punch – or so it was believed. A positive relationship between employment and inflation, enshrined in the Phillips curve (Phillips 1958), was understood by Keynesians to reflect the operation of aggregate demand. The counter-revolutionaries dismissed the Phillips curve as the result of misperceptions that would necessarily disappear as agents developed more sophistication about the economy. The implication was that demand cannot matter in the long run. Indeed, Friedman and Phelps predicted that periods of high inflation would not be accompanied by higher economic activity. In the long run there is no Phillips curve, no trade-off between economic activity and price stability. In this perspective raising money wages is necessarily an exercise in futility: higher wages can mean only higher inflation, with no impact on employment and output. The classical dichotomy with a vengeance!

Some years later, Robert Lucas (1981, p. 560) claimed that experience had borne out the Friedman–Phelps predictions:


The central forecast to which their [Friedman and Phelps's] reasoning led was a conditional one, to the effect that a high-inflation decade should not have less unemployment on average than a low-inflation decade. We got the high inflation decade, and with it as clear-cut an experimental discrimination as macroeconomics is ever likely to see, and Friedman and Phelps were right. It really is as simple as that.We have a lot more data available today than Lucas had at his disposal in 1981. And the data do appear to bear out the prediction that there is no relationship between employment and inflation. Figure 1 plots the data over more than half a century. Analysing these data, economists have found, if anything, a negative relationship between real economic activity and inflation. Cross-sectional studies by Stanley Fischer (1993), Robert Barro (1996), and others have found a significant negative correlation between growth and inflation, but their results are dominated by high inflation rates, where negative supply-side effects plausibly dominate. More striking are the findings of Moshin Khan and Abdelhak Senhadji (2001), who separate poor and rich countries and find that for the rich countries the threshold above which inflation is associated with lower GDP growth is only 1–3 percent per year.


Figure 1Employment vs inflation, 1956–2011

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None of this should surprise us. Once it has been determined that demand does not matter in the long run, it makes sense to treat all observations symmetrically and look for supply-side effects.

Appearances notwithstanding, we can make sense of the data in terms of a Phillips curve along which movements reflect demand shocks but which is itself moved by supply shocks, as Robert Gordon (1984; 2013) and others have argued. Demand shocks result in the standard Phillips result, a positive relationship between employment and inflation. As we shall see, supply shocks are more complicated.

The key to finding order in the randomness of Figure 1 is to filter the data in two ways. Not only must we separate demand and supply shocks, we must also sort out wage shocks (which affect employment and wages through their effect on labor supply) from price shocks (which operate through goods supply on employment and output). This done, there were, I shall argue, two periods in which wage pressure exerted a strong influence on the positive Phillips-curve relationship: in the late 1960s and early 1970s upward pressure on wages displaced the relationship between employment and inflation upwards, and in the mid 1990s downward pressure on wages displaced the relationship downwards. This suggests that high(er) wages have historically exerted a negative influence on the economy, but, in line with the central hypothesis put forward by Bhaduri and me 25 years ago, this result is contextual. Both instances of wage pressure took place under conditions of high employment and, presumably, high investment demand – precisely the conditions under which Bhaduri and I argued that higher wages would not improve aggregate outcomes.

This leaves open the possibility that under conditions of slack, such as characterize global capitalism since the financial crisis that inaugurated the Great Recession, the impact of higher wages would be very different from 20 or 40 years ago. Higher wages would indeed stimulate the economy.

Wage increases, transfers, and the socially determined income distribution in the USA*

Lance Taylor, Armon Rezai, Rishabh Kumar, Nelson Barbosa and Laura Carvalho

Keywords: wealth distribution; income distribution; SAM

Published in print:Apr 2017

https://www.elgaronline.com/view/journals/roke/5-2/roke.2017.02.07.xml

Category:Research Article

DOI:https://doi.org/10.4337/roke.2017.02.07Pages:259–275

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This paper is based on a social accounting matrix (SAM) which incorporates the size distribution of income based on data from the BEA national accounts, the widely discussed 2012 CBO distribution study, and BLS consumer surveys. Sources and uses of incomes are disaggregated by household groups including the top 1 percent. Their importance (including saving rates) differs markedly across households. The SAM reveals two transfer flows exceeding 10 percent of GDP via fiscal (broadly progressive) and financial (regressive) channels. A third major flow over time has been a ten percentage point increase in the GDP share of the top 1 percent. A simulation model is used to illustrate how ‘feasible’ modifications to tax/transfer programs and increasing low wages cannot offset the historical redistribution toward the well-to-do.

1 INTRODUCTION

In the USA there is ongoing debate about how the positions of the ‘poor’ (say, households in the bottom one or two quintiles of the size distribution of income), the ‘rich’ (the top decile or top percentile), and the ‘middle class’ (households ‘between’ these two groups) will be affected by fiscal and other initiatives such as raising the minimum wage. Feedbacks of distributive changes into macroeconomic performance are equally of interest. This paper highlights the severe limitations to reducing income inequality in the USA. In model simulations, when they are applied at politically ‘feasible’ levels, standard policy tools such as increased taxes on high income households, higher transfers to people with low incomes, and raising wages at the bottom do not reduce rich-vs-poor inequality by very much.

The basic reason is that consistent macroeconomic accounting shows that there are three income redistribution flows on the order of 10 percent of GDP. The first two are fiscal tax/transfer payments (broadly progressive) and financial transactions (regressive). The last is an increase over 2 decades by 10 percent of GDP in the share of primary incomes appropriated (some might say expropriated) by the top 1 percent of income recipients. In a macroeconomically consistent framework incorporating the size distribution of income we show that policy interventions such as those mentioned above cannot reverse this historically large and unrequited income transfer.

For ease of presentation the household size distribution is rescaled to the national income and product accounts (NIPA). It is summarized by a metric (the ‘Palma ratio’) which, as opposed to the standard Gini coefficient, emphasizes the disparity in incomes between the ‘poor’ (say, households in the bottom one or two quintiles of the size distribution of income) and the ‘rich’ (the top decile or top percentile). The ratio has trended strongly upward over time.

To trace macroeconomic and distributive linkages through, we use a simple, static demand-driven macro model based on a social accounting matrix (SAM) which enfolds meso-level data on key distributive variables (types of income including transfers received, taxes paid, consumption, saving) for swaths of the size distribution into the NIPA system. Basically, we rescaled available data to fabricate a representation of the size distribution consistent with the NIPA from the US Bureau of Economic Analysis (the BEA accounts are themselves a fabrication). The numbers provide a broad-brush representation of the distributive situation for the period 1986–2009. For the model simulations we focused on 2008, a relatively ‘representative’ year for the economy. 1 While the distribution of income for the US economy is well known, there is less clarity on the size distribution of expenditure. As a first approximation we use less granular estimates on consumption and saving rates for most of the population. For the top decile and fractiles (top 10 percent and top 1 percent) we extend the relationship between income and saving using log-linear extrapolation. Our numbers are consistent with other estimations of the size distribution of income, such as the recent study by Alvaredo et al. (2013) and Saez and Zucman (2014). We use a Congressional Budget Office (CBO) study, itself based on administrative tax data, which captures a detailed breakdown of income across a more representative sample of households. Unlike the Survey of Consumer Finances (SCF), there is less concern in this data set regarding oversampling of wealthy households and exclusion of the Forbes 400.

We begin the presentation in Sections 2–4 with a review of the US size distribution in the context of the SAM, shedding light on how relatively large fiscal and financial transfer payments and unequal income flows fit into the macro system. In Section 5, we go on to simulation results, before concluding with a brief discussion in Section 6. Appendix 1 briefly discusses the Republican ‘Path to Prosperity’ budget proposal in the House of Representatives. Appendix 2 reports details on how we put the accounting together and sets out the specification of the model.