Guest post by Erwan Mahé
Free summary (by M.K.): Erwan Mahé has a very important question.
Central Banks are, de facto, a branch of government (forget about the legal details). The employees, including the head of the bank, are civil servants. Like other branches of government the central bank has to deliver: among other things monetary (prices) and financial (debts) stability. The European Central Bank (ECB) defines monetary stability as consumer price inflation of nearly 2% (moins de 2% mais proche de 2%). But what if the ECB does not deliver? Do these civil servants still have the moral and legal right (if it ever had it, anyway) to prescribe economic policy to Euro member countries,? Are these member countries able to stick to the Maastricht debt and deficit agreements anyway, in the present lowflation surrounding? Are they even bound to try this, when deflation looms (deflation in this case not defined as a decline of the consumer price level but as a decline of the GDP price level. Don’t want deflation? Increase GDP spending, use the money).
No, don’t worry, I am not going to talk today about whether or not the ECB will launch a QE in January. Although all the “experts” agree that Mr Coeuré’s comments a couple days ago, in the WSJ interview, go in that direction. All the information available to us since the last ECB press conference on December 4th point to such a move as early as January 22nd, like the mediocre demand for the second TLTRO of December 11th and the collapse of inflation expectations (negative on two years and 0.50% on five years!), made worse by the steep plunge in oil prices. I am interested in a precise comment by Mr Coeuré, that reveals quite a bit about the monetarist bias of certain ECB members which could, ironically, present a perfect way for the eurozone to pull out of the economic morass in which it has been trapped since 2008. Here is the excerpt Read more…
Let’s assume that there is a financial oligarchy which exerts strong political influence due to the vast amounts of money it controls. Let’s further assume that this financial oligarchy has succeeded in having financial markets deregulated and that this has enabled the financial industry to expand their business massively. Then, in some near or far future, their artfully constructed financial edifice breaks down, because it cannot be hidden any more that the accumulated claims cannot be serviced by the real economy That might be due, for example, to millions of people having bought overly expensive houses on credit without having the income necessary to service this debt. This is the kind of situation we are interested in.
If such a situation occurs, the leading figures of that financial oligarchy might recall that there has been a financial crisis in the 1930s of similar origin, and that during and after this crisis, laws were passed which broke the power of the financial oligarchy and taxed their profits steeply. They might remember that it took their forbearers decades to reestablish the favorable state of the late 1920s, with deregulated finance and very low taxes on incomes and estates, even huge ones.
How does it happen that we have given our quiet assent to a situation where the richest 85 individuals have more money than the bottom 3.5 billion? Where vultures wait for starving children to die, while others eat luxurious meals on private resort islands? Where horrendous military and commercial crimes leading to deaths, misery, and deprivations of millions are routinely committed by highly educated men with multimillion dollar salaries in luxury corporate and government suites?
A core component of the answer to these critical questions is that we have been educated to believe that this is a normal state of affairs, which comes about through the operation of iron laws of economics. Economic theories currently being taught in universities all over the world are an essential pillar which sustains the economic system currently in operation. These theories state that we (human beings) are cold, callous, and calculating. Microeconomic theory says rational individuals are concerned only with their own consumption. They are callous; completely indifferent to the needs of others. They maximize, calculating personal benefits to the last penny. They are cold – their decisions are not swayed by emotions of any kind. All this theorizing is not without power – it creates the world we live in, and the rules we live by.
This January, the rebel economists at Adbusters will head to the American Economic Association conference in Boston to throw off some much-needed sparks. As the largest annual gathering of economists in the U.S., and a magnet for media attention, the AEA conference is the perfect location to light brush fires in people’s minds, stoke debate, and inspire new flare ups of campus activism. From the workshops to the hallways, we’ll shake things up and challenge the dead-end status-quo with the subversive memes and mind-bombs of a new pluralist economics for the 21st century. We’re looking for a few good rebel economists – from students, to educators and beyond – to join in the fun!
Here are the details:
The ECB is going to publish its minutes 1556 weeks faster!
On September 19, 2012, I wrote on this blog:
* The Bank of England does it after two weeks
* And the ECB does it after 1560 weeks…
At this moment there is, suddenly, a discussion going on about the question if the ECB should publish the minutes of the meetings of the Governing Council a little bit faster. Should we even talk about this?”
The good news, straight from the ECB website: “ECB to publish regular accounts of monetary policy discussions from January 2015 … The accounts will be released four weeks after each meeting.”
Long story short: democracy is under siege, at the moment, but this is a big boost to transparant, accountable government in the European Union.
from Lars Syll
Endogeneity problems are of course nothing new in growth regressions. But what is special here is that policy endogeneity is not just an econometric nuisance, but typically an integral part of the null hypothesis that is being tested. The supposition that governments are trying to achieve some economic or political objective is at the core of the theoretical framework that is subjected to empirical tests. In such a setting, treating policy as if it were exogenous or random is problematic not just from an econometric standpoint, but also conceptually …
The cross-national variation we observe in government ownership is unlikely to be random by the very logic of the theories that are tested. Under the developmental perspective, this variation will be driven by the magnitude of the financial market failures that need to be addressed and the governments’ capacity to do so effectively. Under the political motive, the variation will be generated by the degree of “honesty” or “corruption” of political leaders. I show in this paper that the cross-national association between performance and policy will have a very different interpretation depending on which of these fundamental drivers dominate. Unfortunately, none of these drivers is likely to be observable to the analyst. In such a setting the estimated coefficient on state ownership is not informative about either the positive or the normative questions at stake. It cannot help us distinguish between the develop-mental and political views, because the estimated coefficient on government ownership will be negative in both cases.
On January 23, 2014, on this blog a Mark Weisbrot post was published titled: “Greece will likely begin recovery this year: Is austerity working?“. He was right and not just about the recovery, but also about its cause, increased aggregate demand:
Now the IMF is projecting economic growth for 2014. But this time they are probably, finally, going to be right. It is vitally important that we understand why. Last month the Greek parliament approved a stimulus program involving highway construction that is quite large. According to the Ministry of Infrastructure, Transport, and Networks, total spending on this project will be 7.5 billion euros over the next year and a half.
What does Elstat teach us about the results of this stimulus:
The Production Index in Construction (IPC) for the 3rd quarter 2014 compared with the 3rd
quarter 2013 recorded an increase of 61.3%. A year ago, the year-on-year growth rate of
the index was –4.7% (Table 1). The aforementioned increase is due exclusively to the
execution of civil engineering works.
Will this last? Read more…
from Lars Syll
I have not been able to lay my hands on any notes as to Mathematico-economics that would be of any use to you: and I have very indistinct memories of what I used to think on the subject. I never read mathematics now: in fact I have forgotten even how to integrate a good many things.
But I know I had a growing feeling in the later years of my work at the subject that a good mathematical theorem dealing with economic hypotheses was very unlikely to be good economics: and I went more and more on the rules — (1) Use mathematics as a short-hand language, rather than as an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics. (6) If you can’t succeed in 4, burn 3. This last I did often. Read more…
A) A gentleman called Hume argued, back in 1752, that it’s not just about household consumption prices – differences in government consumption price levels are important, too.
B) Hume’s take on prices was actually more balanced than present day central bank ideas about ‘inflation targeting‘ which invariably but for no good reason target consumer prices only.
C) An no, the DSGE-modelling strategy which assumes that there is only a single final good and one ‘representative’ household in the entire economy is not a very good reason to do this (albeit consistent with new-classical thinking)
D) Recent data from the British ONS for instance show that in the UK inflation for poor households was 1% a year higher for eleven years in a stretch than for rich households (as they buy other goods and services, especially ‘housing’ is important). The ‘repreentative consumer’might not be that representative. By the way – consumer price inflation in the UK saw a sizeable 0,3%-point decline in October – the lowest rate of inflation in 12 years. Producer output prices even declined with 0,1% – but that’s not a problem as input prices (excluding wages) declined with a massive 8,8%. An oh, the country is still infected with wealth illusion: house prices increased with more than 10% (+17% in London: sell and emigrate!).
E) Which underscores the point that central bank strategy of average ‘consumer price inflation only’ targeting is, well, daft.
F) German inflation differences between income groups were somewhat smaller than in the UK, albeit still sizeable
G) Tyler Cowen argues, rightly, that inflation is about the purchasing power of income (i.e.: not about the purchasing power of money) and even when estimated inflation is equal for all income classes higher incomes do have the advantage.
from David Ruccio
The chart comes from Ed Wolff’s latest, “Household Wealth Trends in the United States, 1962-2013: What Happened over the Great Recession?”—another in a growing list of investigations into the declining fortunes of the American middle-class. Read more…
. . . the totality of all goods cannot be traded by the totality of all agents at every single trading moment. Momentary analysis thus facilitates the recognition of an important real-world attribute: continual trade in different goods among different traders.
This real-world attribute straightforwardly invalidates Walras’s Law, understood as the necessary equality of the total value of goods brought to market and the total value of goods taken away from the market at its close. Walras’s Law does not describe an intrinsic quality of market exchange, but results from the stylisation of a single trading round per period during which a given set of agents seeks to trade a given and uniformly priced set of goods among each other. Hence when the identities of goods and traders are in continual flux, as they are in the real world, Walras’s Law fails (Tsiang, 1966). The scrapping of one arbitrarily chosen market facilitated by Walras’s Law has, unsurprisingly, no imaginable counterpart in economic reality. It is an absurdity. Yet it continues to be invoked (e.g. by Brunnermeier and Sannikov, 2011) while textbook LM theory also still employs it to rid itself of the bond market.
from Dean Baker
The NYT seems intent on hiding the elephant in the living room. Yesterday it gave us a piece on why men are leaving the labor force, today it gives us a piece on why women are leaving the labor force.
Both articles raise some interesting and important issues. The article on women and work in particular gives an excellent discussion of how most other wealthy countries are far ahead of the United States in providing support for working mothers in the form of paid family leave, paid sick days, and affordable child care. (These are all areas in which CEPR has done considerable research.)
The failure of the United States to meet the needs of working parents largely explains why so many countries have passed the United States in the percentage of prime age (ages 25-54) women who are employed. This figure now stands at 69.9 percent in the United States. By comparison, it is 78.4 percent in Denmark, 76.1 percent in France, and 72.0 percent in Japan. Read more…
World War Two was followed by a period of economic growth. Yet in 1968 many young people in developed Western nations were questioning the lifestyles provided by their societies. They wanted a more meaningful lifestyle, and recognised that it had become physically possible to provide universal social services and good living conditions, including well-paid employment for all with liberal conditions and ample leisure time within a workweek of 30-35 hours. The leisure society beckoned.
At the same time, through the late 1960s and the decade of the 1970s, a considerable body of information described looming global problems. Since evidently all was not well, many decided to search deeper, to ask the major questions of the time and find the answers. Modern society, with its rapacious desire for never-ending growth, was foolishly pushing against limits on a finite planet while increasing inequality and joblessness within a consumer society tightly controlled by ubiquitous advertising. Read more…
QE for the Eurozone people instead of the Eurozone banks is perfectly possible (as well as necessary) – just give people some money. Preferably tradeable vouchers which can be used to pay back mortgage debt. It’s that simple.
Central bankers in the Eurozone are contemplating quantitative easing (QE) for the Eurozone. Basically QE consists of a central bank which creates money, or bank reserves (a kind of alt-money for transactions between banks) which it uses to buy bonds (especially government bonds). In the USA, normal money was created to buy bonds from pension funds and comparable institutions (the Wikipedia entry does not mention that buying bonds from pension funds will not increase bank reserves but will increase the amount of plain, normal, every day dollars), while reserves were created to buy bonds from banks. The idea is that this will decrease the long-term interest rate, which might lead to additional lending and borrowing in the real economy.
But do we really need to buy bonds, Read more…
Note that the supply and demand model is, like much of economics, based on static analysis. Consequently the focus will be on the market equilibrium. It is based on the idea that you have a scenario within which you can have as much costless adjustment as required to achieve some final end state which will be the equilibrium (issues of existence and uniqueness aside). This does not reflect the real world. In reality, there is a starting point, A. This is more than just an initial resource endowment. It also specifies an application of those resources, for example producing and consuming goods and services at some rate of output (as we are actually moving through time). There is also a path to be taken to the endpoint. Read more…
from David Ruccio
International price differences of ‘machinery and equipment’ are remarkably small within the EU. International price differences of another kind of fixed assets, residential building and civil engineering works, are remarkably large (see graphs).
Investments in ‘machinery and equipment’ as well as new ‘residential buildings and civil engineering works’ (i.e. construction) are both future oriented. The flow of expenditure on both kinds of investments can be compared, using the GDP-grid. Both kinds of investment boost our stock of ‘fixed assets’ and both are in a sense a ‘sunk cost’ transfer of the present generation to future generations. But can we arithmetically compare the stock of total ‘machinery’-capital with the stock of total ‘construction’-capital? In an economic sense, the stock of ‘machinery and equipment’ is a quite different item than ‘Residential buildings en engineering works': Read more…