Rethinking (Macro)Economics

Bashing economists has become a fashionable sport today. Healthily, self-criticism and rethinking also come from inside the profession. RGE has recently posted three authoritative reflections, by Olivier Blanchard, Joe Stiglitz and Michael Spence, about the state of the discipline taking stock of the hard lesson imparted by the crisis in the face of the policy challenges ahead. This welcomed attitude should not remain a moment’s penance in the wait for the next upswing in the business cycle that will push the sorrow days of the crisis far back in the memory. A wide-ranging and long-lasting correction is needed of major faults in the way in which economics has been thought, taught and practiced for some decades.

Time for a Financial Transaction Tax

James Tobin proposed to introduce a tax on international currency transactions in 1972[1]. Since then proposals for taxing financial transactions in general have been recurrent under the catch-all name of Tobin Tax. As a matter fact, 23 countries around the world have adopted a financial transaction tax (FTT), mostly as a means to cover the operating costs of domestic stock markets. Typically, tax rates are very thin (from 1 to 5 per 10,000) but revenues are substantial, ranging from 0.4% of GDP in the UK in 2009 up to 2.4% in Hong Kong in 2008. Empirical analyses do not show dramatic distortionary effects (see e.g. Thornton Matheson). Nonetheless, the Tobin Tax can hardly be recorded as a hit both academically and politically. Vocal supporters of the Tobin Tax have always presented it as a weapon “to fight financial speculation” and as a means to collect resources for ethical uses at one and the same time. These arguments have never overcome the compound obstructions erected by sceptical economists and worried financial lobbyists. This time it seems that the mood is changing.

The Treasury View Failed in the 1930s. Why Should It Work Now?

The Toronto G8+12 summit, under the pressure of financial markets and of the LCFE[1] lobby, declared the end of the World Keynesian Games. For the United States, it was an easier task to put together the “army of the willing” to go to the Iraq war than to obtain a coordinated set of policies to support the world recovery, correct the global imbalances, regulate LCFE and reform the financial system. The meagre joint declaration that the governments are “committed to halving fiscal deficits by 2012 while sustaining recovery” means that everyone will look after its own domestic businesses. For Deutscheuroland the priority will be fiscal consolidation, possibly with some kind contribution of LCFE. Mr. Trichet says that this is the right choice because it will re-create confidence and sustain recovery (La Repubblica, June 16; Engl. here). On the other hand, critics argue that this policy will make of Deutscheuroland a world deflationary area seeking for net export outlets in a highly congested traffic area engulfed by China, Brazil, India and other emergent countries. The only country willing to sustain domestic aggregate demand is the US, but its twin fiscal-external deficits are hardly sustainable in the medium-long run. Tenuous hopes lie in China’s proverbial secular wisdom, where the government seems willing to let wages grow, work conditions improve, and the renmimbi appreciate.

Greece Like Lehman?

The Greek debt crisis with its dramatic spillovers are clearly a sequel of the catastrophic financial earthquake of 2008, and, at the same time, an early warning of the kind of situations that the world financial system will have to manage in the years to come. Whatever the specific responsibilities and contingencies may be, Greece is not, and will not remain, an exceptional and isolated case. Alas, the Greek crisis in Europe is being dealt with an astonishing mix of backward-looking conceptual mistakes and political myopia. Those who are eager to give a hard lesson to Greece are the same who hailed the Lehman’s bankruptcy as a new dawn of Capitalism. If not materially the same persons (in some cases yes), the ones share with the others the same faulty, as much as obdurate, view of how modern financial systems work. A view that, apparently, has not been shaken by the crisis of 2008 and the subsequent flood of analyses and official documents explaining where the faults lie and how to fix them.

Conceptual mistakes

Is There a Future for the Bank?

In the good old days of plain vanilla finance, intermediaries were distinguished, and clearly distinguishable, between bank and non-bank intermediaries. The former, it was explained, were “special” in that they collected funds (mostly) in the form of short-term, sight money deposits, and lent them out (mostly) in the form of long-term, personal, non-marketable loans. The […]

“Fiscal stimuli”- Where do we stand?

Fiscal plans aimed at rescuing banking systems and sustaining depressed economies are under way in all major world countries. The fiscal lever has been vigorously activated since last autumn, when it became clear that monetary policy alone was insufficient, and the Japanese disease appeared as a dreadful menace. Apart from few, though authoritative, contrary voices […]

Some unpleasant arithmetic of the Geithner Plan

RGE Monitor has recently provided timely explanation of the essentials of the Geithner Plan aimed to clear “toxic assets” from banks’ balance sheets by way of public-private partnerships (RGE Monitor Newsletter, March 25). The overall assessment was mixed: some weaknessess were pointed out, “but taking care of legacy loans and securities is a welcome step […]

The pigs, the Titanic, and Noah’s Ark

P.I.G.S. is the notorious acronym that was coined, in some Anglo-Saxon circles, at the time of the launch of the euro to denote the countries with worse public finances which would deserve to be shut out of the door (i.e Portugal, Italy, Greece, Spain). In these days, the zoological characterization of  EMU members has been […]

Fiscal policy in Europe: An unloaded weapon?

At the end, under the pressure of stock markets “thirsty of good news” (Solow), leading world governments have resorted to big fiscal plans to take their countries and the world economy out of the muddle. There is in fact large agreement among operators and economists that the persistent pessimism of stock markets is now mainly dictated by awful perspectives of the real economy. And there are very good reasons indeed for pessimism; for there is no bail-out programme of any sort that can create prospects of prosperity for banks or businesses as long as their final clients have no such prospects.