Banks first. And second. And third. Three little ECB economists about the function of Eurozone households.

October 23, 2014 4 comments

Three ECB economists, Miguel Ampudia, Has van Vlokhoven and Dawid Żochowski, presenting their personal opinions, have written a paper titled: Financial fragility of Euro Area households. It should however have been titled: Lend till they bend. They establish a metric to gauge the financial vulnerability of Euro Area households – but not to help these households in any way. No. And their mothers are not proud of them. They learned nothing, nothing at all from the housing bubble and the Great financial Crisis. Quotes (and note the casual, unsuspecting, naieve way in which they use the phrases ‘efficient’ and ‘good credit’ in a totally bank centered way):

In the case of the house price shock, countries with high loan ‐ to ‐ value (LTV) ratios are affected the most. Nevertheless, one caveat requires due consideration: low LGDs as calculated using our metric heavily depend on the value of the collateral (i.e. the house, M.K.). Hence, any factors hindering the seizure of the collateral or lowering its value, such as an inefficient legal system, moratoria on foreclosures, deadlocks in the courts, may significantly increase losses to the banking sector … We also demonstrate how the framework could potentially be used for macroprudential purposes, in particular the calibration of optimal LTV ratio caps. We show that the reduction of losses for the banking sector from the imposition of LTV ratio caps can be substantial and exhibits a non‐linear pattern. For instance, setting LTV ratio caps at a too‐low level may fully outweigh the benefits of higher cushion against possible defaults by reducing banking sector revenues, due to trimming good credit, by more than the amount of losses that the banks could suffer without the restriction on the LTV ratio cap.

Categories: Uncategorized

Statistical links. UK R@D, German sustainability, French innovation, Italian austerity, tourism, spanish jobs.

October 23, 2014 Leave a comment

1) In the UK, manufacturing counts for 8% of jobs – but 72% of research and development spending.

2) Germany published, as part of its national accounts, sustainability accounts (Umweltökonomische Gesamtrechnungen ). These show that the amount of (real) GDP per unit of energy and per unit of ‘Rohstoff’ (a-biotic  commodities) is increasing rapidly. The study contains a lot of information about health, education and the like. Financial sustainability is calculated by using the structural government deficit while the report does mention how (very large) financial transfers to the banks increased German government debt. No information about private debts however.

3) France: ‘Les sociétés exportatrices sont plus innovantes que les autres’ : exporting companies are more innovative.

4) Italy: the trade balance is improving, but industrial turnover and orders are down  as domestic sales are dwindling.

5) Irish and Greek tourism do well

6) Spanish employment is increasing (+ 274.000 in one year, mainly males, almost only Spanish nationals, all private employment, more flexwork, less self-employed (YoY)). Just like in other countries (UK, Ireland, the Netherlands), there seems to be a very large ‘capital city bias’. As, despite the increase in the number of jobs, many people are leaving the labour force (net -241.700 in one year, mainly migrant workers returning to Romania, Morocco and South America), unemployment is going down quite fast. The flow estimates show that already before the labour market reforms the Spanish labour market was highly dynamic. Part-time jobs are decreasing.

Categories: Uncategorized

Graph of the day: Exports ‘de la haute technologie’

October 23, 2014 Leave a comment

When it comes to high-tech exports France does best. Source.

The French share of high-tech exports, expressed as a percentage of total exports, is higher than the German and the UK share and increases faster and in a more dynamic, contra-cyclical way. There are very marked differences between the south and the north of europe, France clearly belongs to the ‘north’, Germany is somewhere in between.

Greek exports deteriorate, possibly because plunging domestic sales disabled exporting companies to innovate or even to continue ‘business as usual’. Spanish high-tech exports are increasing, Irish high-tech largely consists of pharmaceutical products. Mind that total German exports are larger than total French exports. Mind that producing and exporting low tech products like food in a high-tech way does not count (and a case can be made that no biological product is ‘low tech’!).

Hightech

Categories: Uncategorized

Why no labor controversy?

October 22, 2014 5 comments

from Peter Radford

The familiar so-called “capital controversies” a few decades ago were never fully resolved. This is mainly because the losers of that battle eventually won the war and so were able to overlook their loss. They carried on with a muddled view of what capital actually is and ignored the impact of that muddle as if it were unimportant.

Whichever side you are on in that debate – which still emerges from the shadows now and again – I have a question: why no labor controversy?

Surely labor is as muddled a concept as capital.

If our problem with capital is supposed to be its multitudinous expression in concrete terms – is it a machine? is it money? is it simply a bookkeeping entry on a balance sheet? is it a factory? and so on – then labor too is a similar multitude.

Is labor simply an energy source?

After all people do “work” in the old fashioned sense of that word. They lift, bend, move, and otherwise translate energy into work as they go about business. Labor is thus an energy input.

Is labor a source of skill? Read more…

Categories: New vs. Old Paradigm

Microfounded DSGE models — a total waste of time!

October 21, 2014 2 comments

from Lars Syll

In conclusion, one can say that the sympathy that some of the traditional and Post-Keynesian authors show towards DSGE models is rather hard to understand. Even before the recent financial and economic crisis put some weaknesses of the model – such as the impossibility of generating asset price bubbles or the lack of inclusion of financial sector issues – into the spotlight and brought them even to the attention of mainstream media, the models’ inner working were highly questionable from the very beginning. While one can understand that some of the elements in DSGE models seem to appeal to Keynesians at first sight, after closer examination, these models are in fundamental contradiction to Post-Keynesian and even traditional Keynesian thinking. The DSGE model is a model in which output is determined in the labour market as in New Classical models and in which aggregate demand plays only a very secondary role, even in the short run.

In addition, given the fundamental philosophical problems presented for the use of DSGE models for policy simulation, namely the fact that a number of parameters used have completely implausible magnitudes and that the degree of freedom for different parameters is so large that DSGE models with fundamentally different parametrization (and therefore different policy conclusions) equally well produce time series which fit the real-world data, it is also very hard to understand why DSGE models have reached such a prominence in economic science in general.

Sebastian Dullien

Read more…

Categories: New vs. Old Paradigm

What Yellen didn’t say

October 21, 2014 1 comment

from David Ruccio

MJ-inequality

 

source

The other day, I reported that Fed chair Janet Yellen said a great deal about existing levels of economic inequality at the Conference on Economic Opportunity and Inequality in Boston. Read more…

Why did Britain’s political class buy into the Tories’ economic fairytale?

October 20, 2014 6 comments

from Ha-Joon Chang

The UK economy has been in difficulty since the 2008 financial crisis. Tough spending decisions have been needed to put it on the path to recovery because of the huge budget deficit left behind by the last irresponsible Labour government, showering its supporters with social benefit spending. Thanks to the coalition holding its nerve amid the clamour against cuts, the economy has finally recovered. True, wages have yet to make up the lost ground, but it is at least a “job-rich” recovery, allowing people to stand on their own feet rather than relying on state handouts.

That is the Conservative party’s narrative on the UK economy, and a large proportion of the British voting public has bought into it. They say they trust the Conservatives more than Labour by a big margin when it comes to economic management. And it’s not just the voting public. Even the Labour party has come to subscribe to this narrative and tried to match, if not outdo, the Conservatives in pledging continued austerity. The trouble is that when you hold it up to the light this narrative is so full of holes it looks like a piece of Swiss cheese. Read more…

Rogoff on Wolf. Some comments or: empowering households made all the difference

October 19, 2014 8 comments

Update: Summary: in times of balance sheet recessions and secular stagnation Keynesian policies should not just aim at the level of aggregate demand and income but also at the composition of aggregate demand and income.

In a very readable and insightful review of the new Martin Wolf book (which I haven’t read yet) Kenneth Rogoff plays the revolutionary card:’Let’s get rid of these debts, we’ve got nothing to lose than a deflationary chain of events’. This puts him, in a Eurozone perspective, in the radical left corner of politics (and it’s kind of ironic that he accuses text-book economists like Krugman of being ´hard-left´…). Quote:

Without question the best and most effective approach to the problem would have been to bail out the subprime homeowners directly, forcing banks to take losses but keeping them manageable. For an investment of perhaps a few hundred billion dollars, the US Treasury could have saved itself from a financial crisis whose cumulative cost, counting lost output, already runs into many, many trillions of dollars. Instead of “saving Wall Street,” a subprime bailout would have been targeted, almost by definition, at lower income households. But unfortunately, this approach too would have been politically impossible prior to the crisis.

I agree with almost the whole piece. I can however add some specifics which al point to towards the same conclusion: European austerity is not just about curtailing governments but very much also about disempowering households. For instance the UK recovery can largely be explained because this disempowerment happened to a much lesser extent in the UK, at least when we look at disposable income.

(A) Rogoff states that the German economy is arguably somewhat overheated. It arguably isn’t. Read more…

Categories: Uncategorized

Tyler Cowen on German inflation – graph added.

October 18, 2014 2 comments

On his Marginal Revolution blog Tyler Cowen has an interesting post about Germany: historically, German inflation has often been much, much higher than today without anything like the present turmoil about ‘stable money’. Tyler rightly states:

Rightly or wrongly, today’s Germans associate high rates of inflation with wealth transfers away from Germany and toward other nations.
Tyler Cowen’s post could however do with a little more quantitative rigor and after a little searching I found the data on the site of the Statistisches Bundesamt (see the graph). And Tyler is quite right about Germany: historically, inflation has quite often been above the present ECB target – and with more than a small margin! There was however some collateral information in the Bundesamt files: it turns out that there might have been a recent German inflation trauma after all. In former East Germany prices increased steeply just when unemployment exploded and as far as I know wage increases were limited… I agree with the sentence of Tyler Cowen above: aging people who don’t want to see the European equivalent of the post 1991 ‘Elephanten-transfers‘ to East Germany. But the East-German experience may count for something.

Read more…

Categories: Uncategorized

The role of influence

October 18, 2014 Leave a comment

from Neva Goodwin

Herbert Simon received the Nobel Prize in 1978. This fact had little or no influence on subsequent economics textbooks, which sometimes mentioned bounded rationality, but did not reduce their dependence on the old rationality postulate as the foundation for deducing all human behaviour.

Simon was not the first critic to be so dismissed. Decades before behavioral economics came into fashion “alternative” economists were complaining about the unrealism of the neoclassical view of humanity. They especially focused on the fact that, as Smith had so well recognized, people are social animals. Relatively few of our actions are taken completely without regard for what we have seen other people do, or what we expect that other people will think. Even popular books on finance refer to the “herd instinct” in reference to the way investors follow fads and fashions of thought. There appears to be an inborn tendency for people to act as part of some kind of human collective, rather than in isolation. Yet this had no place in the neoclassical understanding of human behaviour.

Read more…

Lies that economics is built on

October 18, 2014 1 comment

from Lars Syll

Peter Dorman is one of those rare economists that it is always a pleasure to read. Here his critical eye is focussed on economists’ infatuation with homogeneity and averages: Read more…

Political economy of Ebola

October 17, 2014 1 comment

from David Ruccio

Back in August, James Surowiecki observed that the lack of an Ebola treatment was disturbing but predictable.

When pharmaceutical companies are deciding where to direct their R. & D. money, they naturally assess the potential market for a drug candidate. That means that they have an incentive to target diseases that affect wealthier people (above all, people in the developed world), who can afford to pay a lot. They have an incentive to make drugs that many people will take. And they have an incentive to make drugs that people will take regularly for a long time—drugs like statins.

This system does a reasonable job of getting Westerners the drugs they want (albeit often at high prices). But it also leads to enormous underinvestment in certain kinds of diseases and certain categories of drugs. Diseases that mostly affect poor people in poor countries aren’t a research priority, because it’s unlikely that those markets will ever provide a decent return. So diseases like malaria and tuberculosis, which together kill two million people a year, have received less attention from pharmaceutical companies than high cholesterol. Then, there’s what the World Health Organization calls “neglected tropical diseases,” such as Chagas disease and dengue; they affect more than a billion people and kill as many as half a million a year. One study found that of the more than fifteen hundred drugs that came to market between 1975 and 2004 just ten were targeted at these maladies. And when a disease’s victims are both poor and not very numerous that’s a double whammy.

Unfortunately, the best solution Surowiecki could offer was to reward companies for creating substantial public-health benefits by offering prizes for new drugs. Read more…

The new European Union GDP and national accounts data (1). More crisis, less debt

October 17, 2014 Leave a comment

Today, Eurostat published the new, revised and updated GDP data wich are based upon the new, revised and updated national accounts. What does this teach us?

The aggregate European Union data do not show any kind of dramatic difference with the old data. It is however worhtwhile to look at some individual countries:

Germany had, according to the new revised data, an official double dip (two subsequent quarters of declining GDP)

The 2011-2012 recession in Spain was more severe than originally estimated (2011: GDP decline -0,6% instead of +0,1%; 2012 -2,1% instead of -1,6%)

According to the English British ONS growth in the UK was slightly higher and the growth of employment slightly lower than earlier estimated which means that the unprecedented decline of productivity is still unprecedented – but less large than earlier estimated. Read more…

Categories: Uncategorized

Links. Inflation and ergodicity, Greece, Greece, flaring solar, tobacco as subordinating money, ordoneoliberalenergyprices: guess who pays the bill

October 16, 2014 1 comment

1) Thomas Sargent and Timothy Cogely investigate the long run development of USA wholesale prices and discover the obvious (emphasis added):

Major outbreaks of price level instability and unpredictability are associated with the Civil War, the two World Wars and Great Depression, and the Great Inflation and Great Recession. In each instance, a crisis disrupted pre-existing monetary arrangements and created considerable uncertainty about the future. In each case, policy makers eventually found a path back to price stability, but that took a long time: the average time from peak to trough was 30 years.

This makes even Thomas doubt the models of Robert Lucas (see the concluding remarks). The really interesting thing is however that, despite the enormous increase and change of the 19th century monetary USA economy (PT in the PT=MV formula) average inflation was about zero. Coincidence? Endogenous gold standard money? Sargent and Cogely still do not explicitly reject ergodocity (or: ‘economic predestination’ – rational expectation economics have a Calvinist streak). But given some time they probably will follow the path of so many former neoclassicals who started to do economic history. Caveat: I do know that this thirty year period fits into Sargent’s ideas about deep social parameters etcetera. It is, however, at odds with Real Business Cycle ideas as these stress very rapid adaptation of economies to ‘shocks’.

2) This makes me desperate: ‘financial markets’ fret about Greece. Again. Help. What were the whizzpersons behind their screens thinking Read more…

Categories: Uncategorized

Defending Germany from Paul Krugman

October 15, 2014 4 comments

from Dean Baker

I would not typically defend Germany’s economic policies against Paul Krugman, but I will say a word in its favor this morning. Krugman trashes Germany for running large trade surpluses, telling us that Germany actually has a weak domestic economy. He concludes a short post by saying that Germany can’t be any sort of model, since we can’t all run large trade surpluses.

While there is much truth to Krugman’s comments, it is worth stepping back for a moment. First, the claim that Germany’s domestic economy is weak means that Germans don’t want to buy lots of stuff. While Germany does certainly have problems of poverty and inequality, they are nothing like what we see in the United States. It would be great for Germany to spend more to address these problems, both because of the direct benefit and also because of the demand it would provide to the world economy, but it is not necessarily a bad thing that a country doesn’t want to buy more stuff.

A really good way to deal with a problem of insufficient demand is to design policies that encourage less supply. Germany has done this to some extent with work sharing, long vacations, paid parental leave, and other policies that have the effect of dividing the available work more evenly among the population. The average work year in Germany is 20 percent shorter than in the United States. Germany can certainly do more to spread the work more evenly and hopefully the income goes with it, but weak domestic demand need not be a problem. Read more…

Categories: The Economy

Modern macroeconomics and the perils of using ‘Mickey Mouse’ models

October 15, 2014 12 comments

from Lars Syll

The techniques we use affect our thinking in deep and not always conscious ways. This was very much the case in macroeconomics in the decades preceding the crisis. The techniques were best suited to a worldview in which economic fluctuations occurred but were regular, and essentially self correcting. The problem is that we came to believe that this was indeed the way the world worked.

To understand how that view emerged, one has to go back to the so-called rational expectations revolution of the 1970s … These techniques however made sense only under a vision in which economic fluctuations were regular enough so that, by looking at the past, people and firms (and the econometricians who apply statistics to economics) could understand their nature and form expectations of the future, and simple enough so that small shocks had small effects and a shock twice as big as another had twice the effect on economic activity. The reason for this assumption, called linearity, was technical: models with nonlinearities—those in which a small shock, such as a decrease in housing prices, can sometimes have large effects, or in which the effect of a shock depends on the rest of the economic environment—were difficult, if not impossible, to solve under rational expectations.

Thinking about macroeconomics was largely shaped by those assumptions. We in the field did think of the economy as roughly linear, constantly subject to different shocks, constantly fluctuating, but naturally returning to its steady state over time …

From the early 1980s on, most advanced economies experienced what has been dubbed the “Great Moderation,” a steady decrease in the variability of output and its major components—such as consumption and investment … Whatever caused the Great Moderation, for a quarter Century the benign, linear view of fluctuations looked fine.

Olivier Blanchard

Read more…

Jean Tirole

October 14, 2014 8 comments

from David Ruccio

One story that can be told about today’s announcement is the Royal Swedish Academy of Sciences’ own explanation: that French economist Jean Tirole has been awarded the The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2014 because he “has clarified how to understand and regulate industries with a few powerful firms.”

The other story is: Tirole has shown how much the real world of capitalism—industries that are dominated by a few firms that have extensive market power, which can charge prices much higher than costs and block the entry of other firms—differs from the fantasy taught in countless introductory courses in economics: a world of perfectly competitive firms, which have no negative effects on society and which therefore don’t need to be regulated.

In addition, Tirole (in “Intrinsic and Extrinsic Motivation,” an article with Roland Bénabou, published in the Review of Economic Studies) has challenged a central tenet of neoclassical economics, that individuals always respond positively to managerial supervision and incentives. He has demonstrated, instead, that both close supervision and monetary rewards can often times backfire, especially in the long run: they can undermine intrinsic motivations, thus explaining why workers find behavioral punishments and rewards both alienating and dehumanizing.

Last year, the Academy tried to have it both ways, offering the Prize to both Eugene Fama and Robert Schiller. This year, the message is both clearer and yet unspoken: the neoclassical model of perfect competition and individual incentives bears no relation to the kinds of capitalism that exist anywhere in the world.

And the policy implication: we’ll all be better off if we take over the large firms and let workers run them for society’s benefit.

Categories: New vs. Old Paradigm

Seven things that economists could usefully do or call for over the next several years

October 14, 2014 19 comments

from Richard Parker

Without solving . . . Pikettyan meta-issues, the question arises: Are there other things we as economists can do if, like Piketty, we’re concerned (alarmed? appalled?) about current levels and trends of inequality? How – absent meta-solutions – should we or could we move an inequality-reduction agenda forward? What issues or strategies or agendas might help advance absorption of Piketty’s focus on distribution and reframe a mainstream professional and public discourse still fixed almost monocularly on aggregated, rather than a distributionally-differentiated, GDP?

As I contemplated that question in Athens this summer, several possible projects occurred to me as worth at least consideration and debate. Some readers will no doubt find these suggestions too small, too pallid, too technical, or too bureaucratic, but I’m motivated to raise them – rather than more sweeping or heroic responses to Capital – in part by my reading of the ways The General Theory’s lessons were absorbed, initially by academics, then policymakers, and then by elements of the press and wider public, during the first 25 years or so after its publication (about which more shortly).

What academic, government, and policy NGO economists could, in my opinion, usefully do or call for over the next several years includes, at very least, the following:

Read more…

Categories: Uncategorized

Real median income of working-age American families 1975-2013 (chart)

October 13, 2014 Leave a comment

from David Ruccio

70467-swa-income-figure-2b-real-median-income-2-epi

There are two periods to focus on in this recently updated chart of the real median income of working-age American families: Read more…

Piketty’s blindside: any accounting format reflects the economic theory that defines its categories

October 13, 2014 2 comments

from Michael Hudson

Piketty sought to explain the ebb and flow of polarization by suggesting a basic mathematical law: when wealth is unequally distributed and returns to capital (interest, dividends and capital gains) exceed the rise in overall income (as measured by GDP), economies polarize in favor of capital owners. Unlike the classical economists, he does not focus on rentier gains by real estate owners, their bankers, corporate raiders and financiers, privatizers and other rent seekers.

Piketty is limited by the available statistical sources, because any accounting format reflects the economic theory that defines its categories. Neither the National Income and Product Accounts (NIPA) nor the Internal Revenue Service’s Statistics on Income in the United States define the specific form that the wealth buildup takes. Most textbook models focus on tangible investment in means of production (plant and equipment, research and development). But industrial profits on such investment have fallen relative to more passive gains from asset-price inflation (rising debt-fueled prices for real estate, stocks and bonds), financial speculation (arbitrage, derivatives trading and credit default insurance), and land rent, natural resource rent (oil and gas, minerals), monopoly rent (including patent rights), and legal privileges topped by the ability of banks to create interest-bearing credit.

Read more…

Categories: Piketty's Capital
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