López Obrador’s speech at Mexico’s chamber of deputies

The audio of López Obrador’s speech at Mexico’s lower parliamentary chamber (in Spanish).

Venezuela and Ecuador take joint economic steps

Venezuela and Ecuador take some steps in the formation of the Bank of the South and the introduction of a common regional currency. Here’s the press conference that presidents Hugo Chávez and Rafael Correa held yesterday (in Spanish).

The causes of the crisis

crisis = danger + opportunity

Today, at work, I talked to a room packed with students and faculty, about the causes of the ongoing crisis. The slides are here:

JH Causes of the Crisis – Upload a Document to Scribd

Report on my trip to Caracas (1)

A week ago, I was in Caracas, at an economic conference organized by the Centro Internacional Miranda on the responses from the South to the ongoing crisis.  There, I had a chance to meet president Hugo Chávez personally.    Briefly, of course.

At the opening of the conference, Chávez gave a two-hour speech.  Extremely interesting.  The highlight of his speech (if you ask me) was a vivid description of the way in which his government managed to get Venezuela’s central bank to disgorge a portion of the country’s international reserves for economic and social development.  Quite a story!  Just imagine that, back in 2001, Venezuela had its international reserves parked at, inter alia, Lehman Bros. — like, I imagine, Mexico did until the financial giant collapsed.

From a purely logical and factual point of view, this is such a slam dunk that merely stating it is an overkill.  But here I go:

The point of any economy is the well-being of people — the more people, the better.  Thus, if people have money (e.g. as a result of the extraction and sale of natural resources from the commons), an asset with zero nominal return, or liquid fixed-income financial assets, with tiny nominal returns, then they should spend it (or invest it) in whichever gets them the highest return measured in well-being, compared to the alternatives.  (And, for the purists, well-being is measurable.  Not perfectly measurable, but roughly measurable.  No measure is perfect.)

In a Latin American country (as in an Asian or African country), with their high levels of poverty and low indicators of social development, it is self evident that the highest return on that money or liquid wealth is — of course — on the people themselves.  Or, as economists call it, on their human capital: health and education.  And social equity.  Social equity also, because existing inequities make their political and social life extremely unstable and wasteful of human welfare.  So, revolutions a la Chávez’s (or Correa’s) are the most sensible economic policies any unbiased economist could think of!

But, isn’t it true that using fiscal policy to transfer resources to the poor is inefficient in principle?  Why?  Compared to what?  “Free” markets?  How is it inefficient in principle?  That money belongs to the nation of Venezuela to begin with.  If, trough legitimate political processes, participatory democracy, those countries give themselves a government (like Chávez’s or Correa’s) that takes funds from the commons parked in financial assets and put them to higher return uses for the benefit of the commons, how is that inefficient in principle?

I’d argue that, even if a government like Chávez’s and Correa’s taxed the rich progressively (as opposed to using resources that are already public) and used revenues thus obtained to fund programs of social development, those policies would be entirely justified on the grounds of efficiency, let alone equity.

But, isn’t this type of fiscal policy inefficient in practice, as it fosters corruption and waste?   Compared to what?  “Free” markets?  Isn’t there waste of human welfare in every market failure, a vicious case of which we’ve been witnessing as of late?  So, why don’t they argue in favor of reducing the waste in the transference mechanisms or such?  No, their argument is against using public money to help the public.  That’s what underlies stories like a recent one published in the New York Times magazine about how PdVSA is being gutted out by Chávez.  (I won’t link it, but you can google it if you want to get angry.)  Therefore, they are in favor of using public money to help small groups of people who are already immensely rich.

I rest my case.

But, of course, economic debates are not only — or mainly — about logic or facts.  They are also (mainly?) about special, vested interests trying to appropriate privately the resources of the commons and using discourse, economic or political, to pull a fast one on the public.  That is why we need to belabor the point.  For regular people not willing to allow the special interests to manipulate them ideologically, logic and facts should have primacy.

Anyway, I’m not saying that was the only interesting thing about Chávez’s speech, but it was the most interesting to me.  There were two other, very interesting speakers at this event, prior to Chávez, one of them Claudio Katz, an economist from Argentina whose work we should be googling and Pedro Páez Pérez (PPP, for those who can get the economic pun), the minister of the economy of Ecuador.  (You can spot me on the first row, on a green shirt, between David Barkin, UAM-Mexico, and Venezuela’s former  minister of basic industries, Víctor Álvarez.)

Chávez’s full speech can be watched here (in Spanish). (I tried to embed the video clip, but I couldn’t do it right.)

And the Nobel goes to… Paul Krugman!

Our just appointed economic ambassador to Sweden

Congratulations, Paul Krugman!

He just won the 2008 Nobel in Economics or — to be more precise — the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2008.

On life and financial markets

When I taught at Ramapo, on the first day of class, I would ask my international finance students to help me build the balance sheet for the whole global economy as if it were co-owned by the entire human race — no estimated values of course, just the items listed in the statement. The typical makeup of class would be seniors or, at least, juniors who had already taken two heavy courses in financial accounting, one or two micro courses, one or two macro courses, two courses in corporate finance, perhaps one money and banking, and at least one econometrics. Some of them worked for banks or financial firms in northern NJ or Manhattan.

The starting point was the balance sheet of a typical firm.  (We’d treat governments, nonprofits, households, individuals as “firms.”)  On the balance side, it’d have assets: cash and liquid securities, receivables and other short-term financial assets, longer-term financial assets, inventories, equipment, vehicles, buildings, and real estate. I asked them to, first, consolidate the balance sheets of all U.S. firms and then add them to the consolidated balance sheet of the rest of the world.

At this point, they would start to see how all the financial claims issued by U.S. firms and held by other U.S. firms would be on both sides of the sheet and thus dropped out. At the end, they’d have on the top of the U.S. asset side only domestically-held foreign financial assets and the different forms of U.S. productive wealth. All U.S. cash held by Americans would cancel out, because it was a liability of the U.S. government offset by the cash holdings on the asset side of Americans.

On the right hand side, they’d have the U.S.-issued financial assets held by the rest of the world, including the portion of U.S. currency not held domestically. In the rest-of-the-world balance sheet, they’d report those same U.S.-issued financial assets plus the productive wealth held by the rest of the world. On the liability side, the same things that appeared on the left hand side of the U.S. balance sheet.

At this point, the students would start to come up with the punchlines.

The next exercise was, “on the basis of what you just figured out about the global balance sheet, help me draw a diagram of the human economy overall.” First off, “What is the point of the whole human economy? What is it for?” After a bit of discussion, we’d conclude that it had to be some form of well-being or welfare. Or that’s what the economists would have us believe. (Please, economists, don’t take this as economics baiting.)

“How do people obtain well-being?” Through consumption of wealth (goods). Okay. We drew a box and labeled it “Consumption.” But wealth has to be produced before (or at the same time as) it is consumed? A box on the left hand side labeled “Production” with an arrow connecting it to the consumption box. Not all wealth produced is consumables. We labeled the arrow “Consumption Goods.” “What are the inputs to production?” If a distracted student said money, the rest of the class would correct him. “No, all money drops out when you look at the global economy.” Exactly! The items that remain in the global balance sheet! Natural resources and “capital goods.” Natural resources: an arrow labeled T (for terrum, the Latin word for land) from nowhere into the production box. “Capital goods”: an arrow coming out of production and looping back into production. The classical economists and Marx, I’d say, called them “means of production.”

“What else is required?” Something that our accountant’s global balance sheet didn’t show, because slavery is illegal. Indeed, [hu]manpower. “What else is produced when people produce wealth?” Somebody would say “garbage.” Right! Garbage, pollution, waste, noise, etc. We produce goods and bads. Goods enhance welfare. Bads reduce it. An arrow out of production into nowhere would indicate those bads. “Aside from well-being, what else is produced when people consume?” “Garbage as well.” Another arrow out of the consumption box. And labor. People replenish themselves and produce themselves as producers when they consume. An arrow from consumption looping back into the production box.

Do production generate well-being directly? Do we get some of our well-being from the things we do at work? How about the negative of well-being, misery? We produce goods and garbage, and also social garbage: “We get out of work [out of the production box] exhausted and grumpy, and then go and become aggressive drivers, bad neighbors, bad citizens.” — a female student once said. And from the consumption box? “As well, sometimes we consume and feel empty inside.” She made my point much better than I could have. The arrows pointing out of production and consumption labeled “Well-being” now had the inscription “>=< 0.”

A last push: “Do garbage get into our consumption and production boxes? Is the bad side of nature feeding back into those boxes?” Yes, the answers would pour. We live in noisy cities, breath polluted air, our products have toxic chemicals, trash entertainment, hurricanes, etc.

When we had a more or less populated diagram, I’d pause and say, “This is perhaps the broadest picture we can draw of our global economy. This is the ultimate foundation of the international monetary and financial systems. Those systems, very bulky and complex, are built on top of our production/consumption metabolism. We often lose sight of what lies underneath. So, what conclusions can you draw from these exercises?”

A shower of punchlines:

Wealth (and well-being) can only be produced the hard way, with productive wealth: labor, capital goods, natural resources. Central banks and regular banks can create money. And almost anybody can create financial assets. But that is not the same as creating actual wealth. Finance doesn’t produce wealth. It consumes wealth. Therefore it doesn’t produce well-being. “Not directly” — a student would reply — “but if financial markets transfer wealth to its best uses, then financial markets help preserve well-being.” The markets-are-efficient argument. The efficiency of financial markets can’t just be assumed. It has to be shown that they are indeed doing that job. But, in a reference to their micro courses, I’d ask: “Do markets (e.g. financial markets) always lead to an efficient allocation of resources, goods, and bads?” “No, there are market failures: monopoly, externalities, public goods, information imperfections.” Financial markets are plagued by them.

At some point, I’d show them a chart with the estimated size of the different financial markets. By comparison, the figures dwarf global GDP. Are financial markets efficient? Why are they so bloated? Remember, they use wealth, but they don’t produce it directly. Are they really giving the human race the bang for the buck? Forex markets were the biggest: spot, forwards, futures, options, swaps, not only on currencies but also on deposits (interest rates), volatility, etc. — and lots of exotics. I’d ask, “Look at what happened in Europe. What do you think would happen to the forex markets if there were a single global currency?” No need for them. They’d disappear. And no need for a course in international finance. We could be in the Bahamas instead!

Stiglitz steals my plan

Joseph Stiglitz drew his main ideas from my plan, improved upon them a little, and just published them as his own in Vanity Fair.  You’re welcome, Joe!