from Lars Syll
Oxford macroeconomist Simon Wren-Lewis has a post up on his blog on the use of labels in macroeconomics:
Labels are fun, and get attention. They can be a useful shorthand to capture an idea, or related set of ideas … Here are a couple of bold assertions, which I think I believe, and which I will try to justify. First, in academic research terms there is only one meaningful division, between mainstream and heterodox … Second, in macroeconomic policy terms I think there is only one meaningful significant division, between mainstream and anti-Keynesians …
So what do I mean by a meaningful division in academic research terms? I mean speaking a different language. Thanks to the microfoundations revolution in macro, mainstream macroeconomists speak the same language. I can go to a seminar that involves an RBC model with flexible prices and no involuntary unemployment and still contribute and possibly learn something.
Wren-Lewis seems to be überjoyed by the fact that using the same language as real business cycles macroeconomists he can “possibly learn something” from them.
Wonder what …
I’m not sure Wren-Lewis uses the same “language” as James Tobin, but he’s definitely worth listening to: Read more…
The Great Financial Crisis taught most of us that private credit matters. Nowadays, for instance Tyler Cowen uses Steve Keen kind of explanations in stead of general equilibrium ideas: there is no great Pareto optimal intertemporal general equilibrium. The crisis also taught most of us a (to quote Paul Krugman) ‘dirty little secret‘: monetary policy works via the housing market (hmmm… where do these bubbles come from?). Which makes sense: houses are our most important asset. And mortgages are our most important kind of credit.
Anthony B. Sanders has a nice graph which binds private credit and the housing market in the US of A together, using so called ‘deep’ parameters like the employment to population rate, home ownership rates, the rapidly rising share of 20-34 year olds living with their parents (not in this graph but already at 25% in the US of A) and comparable variables. Note that he does not need house prices or volumes of credit to show the housing bubble, which has origins dating back to 1995-1999. Fred Foldvary, who used to be a regular commentor on this blog and who repeatedly emphasized the ‘Georgist’ 18 year USA credit/housing cycle, would not be surprised. In a very real sense, QE served to mitigate the consequences of the debt build up followed by house price decreases caused by the housing cycle. Instead of QE the US of A government could, as Rogoff argues, have written down more debt but Larry Summers does not agree (about debt in the Euro Area later today some links).
Aside: note the tight ‘Phillips curve’ co-movement between wage increases and the employment rate which seems to be stronger as well as more stable than the ‘unemployment-wage increase’ Phillips curces.
from David Ruccio
In the United States, we’ve witnessed a return of the Roaring Twenties—for the past three and a half decades.
As Emmanuel Saez and Gabriel Zucman show, the share of wealth (defined as total assets, including real estate and funded pension wealth, net of all debts) held by the top 0.1 percent of families is now almost as high as it was in the late 1920s. Read more…
As a follow-up to Rethinking Economics rejects INET’s “Core Curriculum” here is an excerpt from a Rethinking Economics blog post back in August by David Wells.
. . . just before the final keynote address, a short video was played in which Robert Johnson, the President of INET, sent his best wishes to the conference and congratulated the organisers – but also suggested at one point that the students should be ‘guided’ by INET.
This is strange. Why should the students be ‘guided’ by INET? Why not the other way around? After all, it is the students who are the instigators of this revolution and who are at the front line, manning the barricades. INET are very active in their own way – the CORE curriculum project is especially interesting – and they supply invaluable funding, including for this conference*, but they are essentially secondary actors on the stage. The protagonists are the students, not just in the UK but all over the world: the ISIPE now has (at least) 65 member associations in 30 countries.
from Peter Radford
I will keep this short: I have been taken aback by all the talk about the apparent onset of something called secular stagnation. Today’s Financial Times gives us another dose of it in an article by Gavin Davies. The basic argument seems to be that since both population growth and worker productivity are declining somewhat in the biggest economies we ought expect those economies to grow more slowly than in the past. This shift downwards is a sharp break with what orthodox economists had assumed the norm to be: that economies would chug along nicely because productivity is driven by technology change, and because populations have been relatively stable.
The downscaling is said to fit with the empirical evidence, and in particular with the trends that seem to have set in since around 1980.
In other words, a sputtering economic performance over the past few decades is seen as proof that we now live in more constrained times, where limited growth puts a cap on our latitude in dealing with economic issues. People drawing this conclusion almost inevitably then jump into discussions of how this reduced latitude implies a more austere role for government, and – naturally – that everyday folks just will have to manage on less.
I have a slightly different perspective. Read more…
1) Carmen Reinhart and Christoph Trebesch argue that, looking at the record (which they established), redeeming government debt overhangs generally (no: often) increases prosperity. Learn their Box 1 by heart! It’s another addition to our rapidly increasing knowledge about the history of ‘really existing capitalism’ (for the young ones: the phrase ‘really existing socialism‘ was used to describe communist systems and served to drive down the difference between rosy communist ideals and the often bland and harsh reality – the rosy ideal in this case being ‘general equilibrium’).
2) On Voxeu, S. M. Ali Abbas, Laura Blattner, Mark De Broeck, Asmaa El-Ganainy andMalin Hu show a decomposition of 100 years of government debt in 13 advanced economies. Who owned the debt, what kinds of debts were issued? Less and less of the debt is held by commercial banks and more and more by institutional investors (pension funds and the like) which leads to internationalization of the debt (though governments owe less debt denominated in foreign currencies – which in the Eurozone however does not matter as the Euro can, in a sense, be considered to be a foreign currency). The amount of debt on the balance sheets of central banks is nowaday way lower (as a % of total debt) than in the 1950-1980 period. Part of these debts were (and are) currency, the authors do not show the amount of this kind of ‘debt’. Read more…
Rethinking Economics Position on CORE Curriculum
London, UK- 16 October 2014 – The CORE Curriculum is not an answer to our demands for reform. CORE is more engaging in its teaching style, but falls short of creating broader content.
RE does not currently endorse any curriculum; instead, we have written our vision of a pluralistic curriculum (http://www.rethinkeconomics.org/#!our-vision/colf) and we support the ISIPE open letter, which we contributed to along with 65 student groups (www.isipe.net). We encourage educators and curriculum writers to sign up to publically support these visions.
What we are looking for is curricula that embody the three pluralisms: pluralism in methodology, pluralism in schools of thought, and pluralism in disciplines. This means at least a key role for the history of economic thought in a way that encourages debate over different schools of thought.
The Levy institute is a Post-Keynesian think tank. What did these economists, before 2007, write about financial stability and the role of the central bank? Should we have listened to the economist their warnings?
1) In 2006, Dimitri Papadimitriou, Edward Chilcote and Genarro Zezza warned about the detrimental macro-economic consequences effects of the unavoidable end of the (credit driven) US of A housing bubble. In hindsight: things turned out better than they expected because in the autumn of 2008 the current account deficit of the US of A declined, almost overnight, from -6% of GDP to -2% of GDP (a combination of lower oil prices and lower imports).
2) Also in 2006, Eric Tymoigne argued that central banks should watch asset prices more closely and should concentrate on their core business, i.e. financial stability, instead of focusing solely on low and stable consumer price inflation. In hindsight: this is exactly what the ECB is increasingly doing.
3) In 2003 L. Randall Wray and Dimitri Papadimitriou argued that deflation is not just about consumer prices or even the GDP price level (which also includes investments in new fixed assets, government consumption like expenditures on primary education and export prices) but also and especially about prices of existing assets. We should however understand deflation as a (toxic) symptom – if we want to remedy the consequences of deflation we should look at its origins, i.e. severe and chronic lack of demand which can’t be easily cured by just flooding the economy with money. Profound social, political and economic changes may be necessary (like the post 1937 variant of the New Deal). In hindsight: read the whole thing. Read more…
from Lars Syll
Last night (Oct. 23) at 11:20 PM, CDT, prominent heterodox economist, Fred Lee of the University of Missouri-Kansas City, died of cancer. He had stopped teaching during the last spring semester and was honored at the 12th International Post Keynesian Conference held at UMKC a month ago …
Whatever one thinks of heterodox economics in general, or of the views of Fred Lee in particular, he should be respected as the person more than any other who was behind the founding of the International Conference of Associations for Pluralism in Economics (ICAPE), and also the Heterodox Economics Newsletter. While many talked about the need for there to be an organized group pushing heterodox economics in all its varieties, Fred did more than talk and went and organized the group and its main communications outlet. He also regularly and strongly spoke in favor of heterodox economics, the unity of which he may have exaggerated. But his voice in advocating the superiority of heterodox economics over mainstream neoclassical economics was as strong as that of anybody that I have known. I also note that he was the incoming President for the Association for Evolutionary Economics (AFEE), and they will now have to find a replacement. He had earlier stepped down from his positions with ICAPE and the Heterodox Economics Newsletter. Read more…
from David Ruccio
I just received word that Frederic S. Lee, who taught Post Keynesian economics at the University of Missouri-Kansas City for the past fourteen years, died last night. I first met Fred when he was at Roosevelt University, and we had been in touch (at conferences and presentations as well as through his articles and books on heterodox economics) many times since.
The following paper appeared in 2005 in what is now the Real-World Economics Review http://www.paecon.net/PAEReview/issue31/Lee31.htm It is worth reading today no less than it was then.
Teaching Heterodox Microeconomics
Frederic S. Lee (University of Missouri-Kansas City, USA)
Microeconomics is an important, though not a very popular, field of research in heterodox economics. This is due, in part, to the underlaboring role of micro-entities, such as the business enterprises, costs, pricing, profit mark ups, wage rates, markets, and investment, in most of the research conducted by heterodox economists in macroeconomic theory, monetary theory, and economic policy. Given its theoretical importance, it is surprising that the number monographs devoted largely to delineating a heterodox microeconomic theory are so few.1 One reason for this is that some heterodox economists believe that it is necessary for all economic students to learn neoclassical microeconomic theory; and the learning of heterodox microeconomics is of second-order importance. The unintended consequence of this attitude is that there is little interest among heterodox economists to delineate a comprehensive microeconomic theory. A second reason has to do with the role of microeconomic theory in heterodox economics. In particular, microeconomic theory is correctly viewed by most heterodox economists as providing a non-reductionist foundation to macroeconomic and monetary theory. And it is these theoretic areas that contribute most to macroeconomic policy issues in which they are interested. Given this macro-policy concern, there is little interest among heterodox economists to engage in the near thankless and largely obscure task of foundation building.
In 1998 Fieke van der Lecq published her dissertation ‘Money, coordination and prices‘. In a hazelnutshell: ‘money does not enable (market) transactions because it lowers transaction costs but because it enables sticky prices’. The study sets out to investigate the consequences of ‘radical uncertainty’ and ‘historical time’ for the nature of prices as defined in general equilibrium theory. As I understood it: human society uses many kinds of coordination systems. When it comes to the division of labour families are one kind. Markets are another. A special thing about markets: participants agree on, among other things, monetary prices before a transaction is ‘completed’. The special thing about market prices is that these are not ex post ‘shadow prices’ but real prices, which are known ex ante. People do this to solve (or try to solve) some of the problems connected with radical uncertainty and historical time. In a family situation, the ‘in good times and bad times’ wedding vow is also used to handle this situation but in a totally different way: a promise to, ex post, accept whatever happens. Market contracts work the other way around. And to be able to do this, they use monetary prices. The essence of money is, in this view, not its function as a means of exchange but its ‘accounting’ function to reduce uncertainty by enabling sticky prices, sometimes in the short run (super markets) and sometimes in the long run (twenty year fixed mortgages). There is a reason why general equilibrium models, which use the concept of ergodicity (i.e. there is, at the most, only stochastic uncertainty and this uncertainty is predictable) and which do not use the concept of historical time, have no place for money: the essential functions of money are not needed. There is of course a difference between stickiness of individual prices and the stickiness of average market prices. And in the case of wages there is overwhelming evidence that social conventions and interpersonal relations play an important role, too (see among many others Akerlof and Shiller). But even then, monetary prices are needed as a focal point for these conventions – while, the other side of the coin, these conventions and the ex ante specifications do define the value of money. In this sense, prices – and therewith money – exist because they are sticky.
Aside: the Chicago-endeavour to call every situation where ex post shadow prices can be calculated a ‘market’ shows imo a blatant disregard for the true nature of markets. And human society.
from Dean Baker
A review of French economist Thomas Piketty’s best-selling book “Capital in the 21st Century” by the world’s richest man is too delicious to ignore. The main takeaway from Piketty’s book, of course, is that we need to worry about the growing concentration of capital, in which people like Microsoft co-founder turned megaphilanthropist Bill Gates and his children will control the bulk of society’s wealth. Gates, however, doesn’t quite see it this way.
From his evidence, he actually has a good case. If the issue is the superrich passing their wealth to their children, who will become the next generation’s superrich, he is right to point out that the biographies of the Fortune 400 — the richest 400 Americans — don’t seem to support this concern. We find many people like Gates, who started life as the merely wealthy (his father was a prosperous corporate lawyer), who parlayed their advantages in life into enormous fortunes. The ones who inherited their vast wealth are the exception, not the rule.
Gates tells readers of his plans to give away the bulk of his fortune. His children will have to get by with the advantages that accrue to the children of the ultrarich, along with whatever fraction of his estate he opts to give them. That will undoubtedly ensure that Gates’ kids enjoy a far more comfortable life than the bottom 99 percent can expect, but it likely will not guarantee a place among the Fortune 400.
Banks first. And second. And third. Three little ECB economists about the function of Eurozone households.
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.
Statistical links. UK R@D, German sustainability, French innovation, Italian austerity, tourism, spanish jobs.
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.
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.
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’!). Read more…
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…
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.
from David Ruccio