Real ‘micro foundations’ of macro ideas are possible. Asger Lau Andersen, Charlotte Duus and Thais Lærkholm Jensen use data from 800.000 individual Danish households to show the micro-economic underpinnings of ‘balance sheet recessions’. When house prices decline, severely indebted households spend relatively less than less indebted households – even when debt service does not change and the incomes of the indebted households increases more than the income of less indebted households. Remarkably, they do not cite the author intellectualis of the idea of balance recessions, Richard Koo.
Elstat, the Greek statistical office, is still prosecuted for producing reliable statistics
British inflation is still at a historical low.
The increase in employment in the UK is mainly caused by an increase in self-employment. This increase in self-employmnent is mainly caused by fewer people leaving ‘self-employment’.
Despite declines of employment in Estonia and Latvia in the first quarter of 2014, unemployment in the Baltic states is declining (second quarter 2014). Second quarter employment data are not yet available.
In Italy, the business ‘birth rate’ increased in 2013. Turnover has however decreased for the fifth year in a row.
from Dean Baker
Last week Martin Feldstein and Robert Rubin made their case for the gold medal in the economic policy category of the “show no shame” contest. Their entry took the form of a joint op-ed in the Wall Street Journal warning that the Fed needs to take seriously the risk of asset bubbles growing in financial markets.
Those familiar with Feldstein and Rubin will instantly appreciate the bold audacity of this entry. They are, respectively, the leading intellectual lights of the Republican and Democratic Party economic policy establishments.
Feldstein was the chair of the Council of Economic Advisors under President Reagan. He also was president of the National Bureau of Economic Research for thirty years and a professor and chair of economics department at Harvard. Almost all of the country’s top conservative economists have either directly studied with Feldstein or one of his protégées.
Robert Rubin was instrumental in creating a solid Democratic base among the Wall Street set. He was rewarded for his efforts with top positions in the Clinton administration, including a stint as Treasury Secretary from 1995 to 1998. Larry Summers and Timothy Geithner both advanced under his tutelage and he continues to be a source of economic wisdom for President Obama and other top figures in the party.
Given their enormous stature, Feldstein and Rubin undoubtedly expected their joint bubble warning to have considerable weight in economic policy circles. Of course this raises the obvious question, why couldn’t Feldstein and Rubin have joined hands to issue this sort of bubble warning ten years ago in 2004 about the housing bubble? If they used their influence to get a column about the dangers of the housing bubble in the Wall Street Journal in the summer of 2004 it might have saved the country and the world an enormous amount of pain. Read more…
from David Ruccio
The Washington Post tries to put a positive spin on the recent pattern of job growth. However, the underlying study (from the National Employment Law Project [pdf]) offers quite a different view: even though jobs gains have recently accelerated in higher-wage industries, the imbalance of especially pronounced gains at the bottom and slow growth in mid-wage industries persists. Read more…
On Voxeu a book about secular stagnation has been published. Can I add something to this? Yes: information on the secular development of the rate of fixed investment (5 graphs).
The book contains a lot of interesting and important ideas about labour (ageing, declining male participation rates), technological possibilities (opinions differ about the magnitude of these possibilities but everybody sees possible improvements in life styles and health) and disequilibrium economics: tenacious interruptions of the flows of money which can not be cured or are even caused by changing relative prices (i.e. lowering then interest rate) are preponderant in the book. And only Smets (from the ECB…), Jimeno and Yiangou still believe in the confidence fairy. But even they advocate a smaller financial sector. ‘Fixed capital’ does however not get enough attention. According to me, progress will be increasingly dependent on household purchases of specialized consumer durables (in combination with cultural changes in life styles) instead of upon government and company ‘fixed investments’ which means that households will have to get the means (i.e. higher incomes) to finance these ‘household investments’. This will not only enable these purchases but it will also be necessary to fill the expenditure gap left by the decrease of government and business fixed investment. Read more…
from Lars Syll
In Andrew Gelman’s and Jennifer Hill’s Data Analysis Using Regression and Multilevel/Hierarchical Models, the authors list the assumptions of the linear regression model. On top of the list is validity and additivity/linearity, followed by different assumptions pertaining to error charateristics.
Yours truly can’t but concur, especially on the “decreasing order of importance” of the assumptions. But then, of course, one really has to wonder why econometrics textbooks — almost invariably — turn this order of importance upside-down and don’t have more thorough discussions on the overriding importance of Gelman/Hill’s two first points …
Since econometrics doesn’t content itself with only making “optimal predictions,” but also aspires to explain things in terms of causes and effects, econometricians need loads of assumptions — and most important of these are validity and additivity.
Let me take the opportunity to cite one of my favourite introductory statistics textbooks on one further reason these assumptions are made — and why they ought to be much more argued for on both epistemological and ontological grounds when used (emphasis added): Read more…
from David Ruccio
from Peter Radford
In a recent speech I gave on inequality, I described the relevance of economics in a series of quotes thusly:
“Political economy you think is an enquiry into the nature and causes of wealth – I think it should rather be called an enquiry into the laws which determine the division of the produce of industry amongst the classes who concur in its formation” ~ Ricardo to Malthus correspondence, quoted in Sraffa, 1951
“The real scientific study of the distribution of wealth has, we must confess, scarcely yet begun. The conventional academic study of the so-called theory of distribution into rent, interest, wages, and profit is only remotely related to the subject. This subject, the causes and cures for the actual distribution of capital and income among real persons, is one of the many now in need of our best efforts as scientific students of society” ~ Irving Fisher, 1919
“Does Inequality in the distribution of income increase or decrease in the course of a country’s economic growth? What factors determine the secular level and trends of income inequalities? … These are broad questions in a field of study that has been plagued by looseness in definitions, unusual scarcity of data, and pressures of strongly held opinions.” ~ Kuznets, 1955
“I am wandering away from my usual concerns briefly to discuss an even more nagging and pervasive tradeoff, that between inequality and efficiency. It is in my view, our biggest socioeconomic tradeoff, and it plagues us in dozens of dimensions of social policy.” ~ Okun, 1975
“Of the tendencies that are harmful to sound economics, the most seductive, and my opinion the most poisonous, is to focus on questions of distribution … The potential for improving the lives of poor people by finding different ways of distributing current production is nothing [italics in original] compared to the apparent limitless potential of increasing production.” ~ Lucas, 2004
“Equality lacks relevance if the poor are growing richer.” McCloskey, 2014
The journey from being actively concerned, through a somewhat guilty admission of a lack of progress, to a stab at a general idea, thence to the notion of inequality as a cost of seeking growth, only to arrive, finally, at a patronizing dismissal of the entire topic is an arc of embarrassing failure.
And it’s an engineered slump. A striking fact of the graph above is the sudden stalling of the European recovery around 2011, Q1. This stalling was deliberately caused by Eurozone monetary policies. One can of course point to the ECB interest rate increases of April as well as July 2011. But these increases were, in the end, limited to ‘only’ 0,5%. Much more important, however, is what happened to ‘real economy interest rates’, like those paid by governments and, as governments nowadays are the financer of last resort for banks, therewith to rates paid by households and non-financial companies (graph 2).
Graph 2. Difference between interest rates paid by Italian, Spanish and French governments and the German government Read more…
The UK labour market does well. The number of jobs increased with 2,7%, year on year. The total number of hours worked increased with 3,4% which means, as earnings per hour show (low) growth of about +0,6% and consumer price inflation is about 2%, an increase of 2% in total spending power. As a lot of the increase in jobs as well the increase in wages is in low wage occupations (the high wage financial sector is still under siege), where people have a high marginal propensity to spend additional income, the fast increase of the number of jobs together with rather low pay increases boosts consumer spending. Also, according to Eurostat, UK GDP increased with 3,1% which indicates that average (!) productivity is still declining, albeit slightly. Caveat: all these data are based upon three month averages, the not-official single month data for June show somewhat less positive developments.
The ONS (the UK statistical Office) does not only measure the level of unemployment but also flows of people in and out of employment, unemployment and inactivity. According to these data, during Read more…
According to official data, by far the larger part of fixed assets in Germany consist of land and land related investments like houses and buildings. This pattern is typical for rich countries. Note that Germany was one of the few countries to escape the international house price boom of the 1990-2008 period. Note that the data do not even include agricultural land.’Machinery and equipment’, i.e. trucks, cars, planes and machinery and the like, are of relatively minor importance, to an extent because they depriciate faster than buildings.
Printing income. When I borrow money to buy an existing house this is not counted as ‘production’ in the national accounts (though it does increase the amount of money). When I borrow money to buy a house and to pay the fee of the real estate agent the fee is counted as an increase in income and production. Large scale constructions like this one (IPO’s…) drove profit growth in the banking sector, since 1990.
Leaving the train station. In 2013, use of public means of transport in Spain declined with about 6% – for the fifth year in a row.
Isaac Asimov and the representative consumer. <strong>Foundation and earth is an interesting science fiction novel by Asimov about the representative consumer (the hive-mind of the Gaia planet), agent based modelling (‘psycho history’), a world inhabited by 1200 homo economicus individuals (who, interestingly, changed themselves into ultra-intelligent hermaphrodites who never meet in the flesh and only trade with each other via video) Read more…
from Lars Syll
Almost a century and a half after Léon Walras founded neoclassical general equilibrium theory, economists still have not been able to show that markets move economies to equilibria.
We do know that — under very restrictive assumptions — equilibria do exist, are unique and are Pareto-efficient. After reading Franklin M. Fisher‘s masterly paper The stability of general equilibrium: results and problems one however has to ask oneself — what good does that do? Read more…
from Dean Baker and Jared Bernstein
As predictable as August vacations, numerous economists and Federal Reserve watchers are arguing that the nation’s central bank must raise interest rates or risk an outbreak of spiraling inflation. Their campaign has heated up a bit in recent months, as one can cherry pick an indicator or two showing slightly faster growth in prices or wages.
But an objective analysis of the recent data, along with longer-term wage trends, reveals that the stakes of premature tightening are unacceptably high. The vast majority of the population depends on their paychecks, not their stock portfolios. If the Fed were to slam on the breaks by raising interest rates as soon as workers started to see some long-awaited real wage gains, it would be acting to prevent most of the country from seeing improvements in living standards.
To understand why continued support from the Fed is unlikely to be inflationary, consider three factors: the current state of key variables, the mechanics of inflationary pressures and the sharp rise in profits as a share of national income in recent years, along with its corollary, the fall in the compensation share. (See figure.)
from Lars Syll
In a recent judgement the English Court of Appeal has denied that probability can be used as an expression of uncertainty for events that have either happened or not.
The case was a civil dispute about the cause of a fire, and concerned an appeal against a decision in the High Court by Judge Edwards-Stuart. Edwards-Stuart had essentially concluded that the fire had been started by a discarded cigarette, even though this seemed an unlikely event in itself, because the other two explanations were even more implausible. The Court of Appeal rejected this approach although still supported the overall judgement and disallowed the appeal …
But it’s the quotations from the judgement that are so interesting:
“Sometimes the ‘balance of probability’ standard is expressed mathematically as ’50 + % probability’, but this can carry with it a danger of pseudo-mathematics, as the argument in this case demonstrated. When judging whether a case for believing that an event was caused in a particular way is stronger that the case for not so believing, the process is not scientific (although it may obviously include evaluation of scientific evidence) and to express the probability of some event having happened in percentage terms is illusory.“
The idea that you can assign probabilities to events that have already occurred, but where we are ignorant of the result, forms the basis for the Bayesian view of probability. Put very broadly, the ‘classical’ view of probability is in terms of genuine unpredictability about future events, popularly known as ‘chance’ or ‘aleatory uncertainty’. The Bayesian interpretation allows probability also to be used to express our uncertainty due to our ignorance, known as ‘epistemic uncertainty’ …
The judges went on to say:
“The chances of something happening in the future may be expressed in terms of percentage. Epidemiological evidence may enable doctors to say that on average smokers increase their risk of lung cancer by X%. But you cannot properly say that there is a 25 per cent chance that something has happened … Either it has or it has not“ …
Anyway, I teach the Bayesian approach to post-graduate students attending my ‘Applied Bayesian Statistics’ course at Cambridge, and so I must now tell them that the entire philosophy behind their course has been declared illegal in the Court of Appeal. I hope they don’t mind.
from Dean Baker
Discussions of inflation and Federal Reserve Board policy take place primarily in the business media. That’s unfortunate, because these discussions can have more impact on the jobs and wages of most workers than almost any other policy imaginable.
The context of these discussions is that many economists, including some in policy making positions at the Fed, claim that the labor market is getting too tight. They argue this is leading to more rapid wage growth, which will cause more inflation and that this would be really bad news for the economy. Therefore they want the Fed to raise interest rates.
The part of this story that few people seem to grasp is that point of raising interest is to kill jobs. If that sounds like a bizarre accusation to make against responsible people in public life then you need to pick up an introductory economics text.
The story line there is that we get inflation if too many people are employed. There are all sorts of ways of making the story more complicated, and many people get PhDs in economics doing just that, but the basic point is a simple one: at lower rates of unemployment workers have more bargaining power and are therefore able to push up their wages. Read more…
from Lars Syll
Now, I don’t care to discuss the alleged complaints American Indians have against this country. I believe, with good reason, the most unsympathetic Hollywood portrayal of Indians and what they did to the white man. They had no right to a country merely because they were born here and then acted like savages. The white man did not conquer this country …
Since the Indians did not have the concept of property or property rights—they didn’t have a settled society, they had predominantly nomadic tribal “cultures”—they didn’t have rights to the land, and there was no reason for anyone to grant them rights that they had not conceived of and were not using …
What were they fighting for, in opposing the white man on this continent? For their wish to continue a primitive existence; for their “right” to keep part of the earth untouched—to keep everybody out so they could live like animals or cavemen. Any European who brought with him an element of civilization had the right to take over this continent, and it’s great that some of them did. The racist Indians today—those who condemn America—do not respect individual rights.
Ayn Rand, Address To The Graduating Class Of The United States Military Academy at West Point, 1974
World student movement could become major player in the struggle to bring pluralism and freedom of inquiry to economics
from Edward Fullbrook
An emergent worldwide grassroots movement of economics students, the International Student Initiative, has the potential of becoming a major force that could work alongside the academics’ World Economics Association (now 13,000 strong) to break the neoclassical stranglehold on economics and to bring the real world back into the classroom. Launched in May, the ISI already boasts 65 associations of economics students from 30 countries, 5 continents and representing 13 languages groups. For the most part they are based in individual universities. Together they constitute a coordinated grassroots base that has the potential of serving as the launch pad for a massive worldwide student rebellion in the coming academic year, one that would see 100s more of these associations formed, each focused on reforming the economics curriculum of their university.
The formation of these student associations can be greatly facilitated by encouragement and moral support from faculty members. If you would like to help please go to http://www.isipe.net/supportus/
Below is the ISI‘s manifesto, a partial list of the student organizations, a partial linked list of their websites, and a linked list (67) of media coverage. Here to begin with is a world map showing ISI associations to date: Read more…
Not much blogging from my side as Edward tricked me into constructing ‘Piketty series’ for the Netherlands – but this is a game changer (via left foot forward): the Bundesbank finally understands. Economic policies aimed at financial deregulation, low wages and asset price increases instead of low unemployment, high employment and high income have failed.
* Spending in the Eurozone is too low, unemployment is disastrously high, people are getting evicted from their houses while the number of empty houses increases and in quite some countries poverty is rising.
* For obvious reasons, not every country can export itself out of unemployment at the same time (a classic example of a ‘zero sum game’).
* Present policies to engineer current account surpluses are anyway not based upon any kind of serious export strategy but upon restricting domestic demand, which leads to a ‘race to the bottom’
* Households and companies are heavily indebted while low spending and high unemployment causes increasing problems with non-performing loans
* Companies are not going to invest when demand stays low, even when interest rates are low
* Quite some people do not want the government to act as a ‘spender of last resort’
Which leaves wage increases as the only way to restore demand, increase prosperity and lower unemployment (getting unemployment down to 4% in five years, with 1% productivity growth and 1% inflation and a share of wages (including mixed income) of 70% means that wages can increase with 4 to 5% a year, a little bit less when investments increase). Economies are of course quite unpredictable, but we can start with ‘forward guided’ 4% wage increases for two or three years.
Germany’s Bundesbank, Europe’s largest central bank, has backed a call for higher wages to boost the flat-lining Eurozone economy.
Jens Ulbrich, the bank’s chief economist, has joined a growing list of key players calling for widespread pay rises to fend off the crippling effects of failed austerity and low inflation and to crawl back the falling wage share in national wealth. Read more…
from Dean Baker
In the crazy years of the housing boom the financial sector was a gigantic cesspool of excess and corruption. There was big money in pushing and packaging fraudulent mortgages. The country paid a huge price for the financial sector’s sleaze.
Unfortunately, because of the Obama administration’s soft on crime approach to the bankers who became rich in the process; the industry is still a cesspool of excess and greed. Just to be clear, knowingly issuing and packaging a fraudulent mortgage is a crime, the sort of thing for which people go to jail. But thanks to the political power of the Wall Street, none of them went to jail, and in fact they got to keep the money.
Since the penalties for ripping off people are trivial to non-existent, the financial sector finds this to be a much more profitable line of business than actually providing financial services. The New York Times recently reported on the boom in the subprime market for auto loans featuring many of the same abusive practices we saw in the subprime mortgage market during the bubble years. Lenders are slapping on extra fees, changing the terms after contracts are signed, and doing all the other fun things we have come to expect from leaders in finance. The used car industry was sufficiently powerful that it was able to gain an exemption from being covered by the Consumer Financial Protection Bureau. Read more…