from David Ruccio
The core of my argument is that many sequences of events that are presented as mechanisms (i.e., as sequences of events organized in a stable way and leading to results known beforehand) in theoretical models are actually socially constructed by the presence (often tacit) of regulations and institutions that eliminate otherwise alternative options. My argument is against the alleged naturalness of social sequences modeled within theoretical models. These sequences do not reflect social laws (like physical laws), or mechanisms in the usual sense of the term (used in current mechanismic literature). When they are represented within theoretical models, they are not much more than modeled representations of truncated processes, which are open-ended in reality. Theoretical mechanisms are obtained assuming as “natural” and given (i.e., unchangeable as a matter of principle) institutional features that are actually historically determined and perfectly modifiable.
The value of capitals. Does Airbnb drive house price increases in London, Berlin, Dublin and Amsterdam?
Since 2008, economic statistics have twisted my mind, again and again. One of the weird patterns shown by the data are comparatively very large and fast house price increases in capitals.
Look here for London.
Look here for Berlin
Look here for Dublin
Look here for Amsterdam
Look here for Paris
Is this caused by a large and fast increase in gross rental yields of houses enabled by the site Airbnb, which makes it a lot easier for international tourists to rent houses from individual owners, which leads to a rapid increase of potential gross rental yields of existing houses? According to a recent article in De Volkskrant, a Dutch newspaper, this is at least one of the reasons why house prices are increasing in Amsterdam, not just because individuals are enabled to let their houses but also because new companies are very rapidly using Airbnb to enter this market (especially in the center of cities) which leads to house price increases – increases which are consistent with the fact that tourism is one of the few growth sectors in Europe, at the moment. Look also here, for Venice (Italy).
If this hypothesis is right, these price increases are no sign of a property bubble.
from Lars Syll
I’ve never yet been able to understand why the economics profession was/is so impressed by the Arrow-Debreu results. They establish that in an extremely abstract model of an economy, there exists a unique equilibrium with certain properties. The assumptions required to obtain the result make this economy utterly unlike anything in the real world. In effect, it tells us nothing at all. So why pay any attention to it? The attention, I suspect, must come from some prior fascination with the idea of competitive equilibrium, and a desire to see the world through that lens, a desire that is more powerful than the desire to understand the real world itself. This fascination really does hold a kind of deranging power over economic theorists, so powerful that they lose the ability to think in even minimally logical terms; they fail to distinguish necessary from sufficient conditions, and manage to overlook the issue of the stability of equilibria.
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. Read more…
After re-unification, the German unemployment rate has been way too high for way too long. Look here for excellent data from ‘der Spiegel’, a German weekly. Comparing the 1991-2013 unemployment data with the 1950-1960 period of the ‘Wirtschaftswunder’, when the initially very high unemployment rate declined rapidly for 10 years in a stretch, the post re-unification era was a time of massive policy failings. Unemployment rates either increased or were stagnant for 14 years in a stretch. Neither the monetary union between West- and East-Germany nor the subsequent ‘internal devaluation’ policies (needed because the implied exchange rate of the East-German ‘mark was way too high to begin with while subsequent developments led to an inflation shock in 1992-1994 which, alas, was not offset by external devaluation) led to any kind of rapid decline of unemployment. To the contrary. More succesful economic policies would have led to lower unemployment and higher investment rates – is it too much to expect at least a temporary increase in the German investment rate after re-unification? It did not happen.
Smith’s commitment to “equity” for the working class was behind the vehemence of his opposition to mercantilist (“business economics”) arguments for policies that would protect or promote the profits of producers and intermediaries. Smith saw such pro-business arguments—which arguably persist as the core of neoliberalism (Harvey 2007)—whether for direct subsidies or competition-restricting regulations, as an intellectually bankrupt and often morally corrupt rhetorical veil for what were actually “taxes” upon the poor (what we now call “rents”). Such taxes are unjust and outrageous because they violate fair play both in the deceptive rhetoric by which they are advanced and by harming the interests of one group in society (generally, the poor and voiceless) to further the interests of another (unsurprisingly, the rich and politically connected). Smith explicitly moralised the point,
To hurt in any degree the interest of any one order of citizens, for no other purpose but to promote that of some other, is evidently contrary to that justice and equality of treatment which the sovereign owes to all the different orders of his subjects (WN IV.viii.30).
from Peter Radford
“Yes, much of micro can be derived rigorously from individual maximization plus equilibrium; but why, exactly, does that make it right?”
In fact it makes it wrong.
Individual maximization is a pipe dream that only exists in the heads of utopian economists. And equilibrium. Have you ever seen one? Seriously? Neither have I.
Add the two together and you have a wonderfully coherent, internally consistent, beautiful system that portrays nothing. It looks good. It is vacuous nonetheless.
To think that good macro has to be built on this vaporware is just awesomely foolish.
Yet, apparently, according to luminaries like Robert Lucas, “good” economics is built precisely on such vapor.
No wonder “real economics” is of little to no value.
Maybe we should try real world economics.
From: Erwan Mahé (guest post)
29 August 2014
Mr Draghi’s speech at the Jackson Hole symposium was definitely the highlight of late last week. A lot of ink has already been spent about it, and I preferred to wait a bit before expressing myself on the matter. I was especially waiting for the inevitable response of our German friends, who did not disappoint us, with German finance minister Schauble’s declaration this morning that the “ECB’s Draghi has been “over-interpreted.”
While I do not want to “over-interpret” anything our central bank chief says during his pilgrimages to the Grand Teton National Park, where the Siberian scenes of Rocky 4 were filmed, I think it important to understand it in full. After all, his comments appear just as significant as those made during his whatever it takes speech in the summer of 2012. The parallel appears all the more worthwhile, since I remember, the day before Mr Draghi pronounced his famous words, my own intervention at the same meeting to explain the ECB’s ability to reverse the situation before a gathering of American investors, terrorized as the European experiment appeared on the verge of collapse. My argument that no ECB chief would allow the eurozone to implode under his leadership was met a mix of scepticism and irony. Some Texas hedge fund managers bet on the zone’s implosion and claimed that the ECB’s efforts to oppose “free market forces” would meet the same fate as the BoE’s unsuccessful attempt to defend the pound sterling in 1992. Super Mario’s dramatic statement provided sweet revenge and some new diligent readers. Read more…
from David Ruccio
In Europe, there is no need for lower pensions. Maybe for shorter pensions – not for lower pensions. But before starting to think about shorter pensions we first have to get unemployment down and activity rates up. The present combination of high (youth) unemployment and ever lower pensions is a fricking disaster for young and old alike – which is aggravated by cutting entitlements.
The population of the European Union is ageing. This is a problem: we will have to take care of a steeply increasing number of people with Alzheimer and comparable debilitating, care-intensive diseases. But there is, at least during the next decades, no entitlement problem. Pensions can be paid – there is no lack of labour in the European Union, it’s not a supply side problem. At this moment, unemployment is 11,5%. This can and should go down to 3 or 4%. All kind of models used to calculate the burden of pension entitlements assume, in an implicit or explicit way, ‘full employment’. These models can and should be discarded as Mario Draghi is right: we’re far away from full employment – further than pre-2008 type of models. On top of this, productivity in low or medium productivity countries like Spain, Greece, the UK and even more so in Poland and Romania can increase with 2 to 3% a year for an extended period. On top of that, broad ‘U6′ unemployment’ is much higher than official ‘U3′ unemployment. Also, ‘activity ratio’s’ can increase (even when accounting for ‘broad unemployed’). Hey, these are already increasing in a spectacular fashion (graph), all kinds of ideas about structural rigidities preventing this are bogus (employment ratios can however often still easily double). It’s not a supply side problem.
from Peter Radford
This is a bit of a rant. Please bear with me.
I rarely do this, but here’s a link to one of my favorite economics blogs:
The problem with all this self-criticism is that many of the people doing the dissing are responsible for the disarray they are criticizing. A different view is that none of them saw fit to make enough noise to change things.
This may unfair of me.
Notice also that much of this criticism is dated. The wheels have been coming off economics for a long time, yet inertia is sufficient to prevent change.
This may also be unfair of me.
But, ask yourself: where else in our economy could so much analytical ineptitude be tolerated for so long? Where else could repeated failure be fobbed off so easily? Where else could so much fraction, discord, and general incoherence be treated as a “profession”?
If some of the so-called heterodox alternatives to the dominant theories were so compelling surely they would have been more widely accepted. It is not enough to carp about other people’s evident failings – and believe me, as a relative outsider those failings are glaringly evident – because I believe those who complain have a responsibility to build the better alternative. Read more…
France is doing relatively well (graph 1). It clearly escaped the historical unique decline of productivity which took place in the UK (more on this below). And though it did not increase its productivity lead over Germany – it did keep its lead (graph 2).
Despite this clear success of French economic policies and its high rate of productivity, a sign of an effective economic system, France gets a bad press. ‘The Economist’ starts an article about French education with the sentence ‘Wary of competition when it comes to global markets..’. And Tyler Cowen sees France as one of the countries with enhanced risk of secular stagnation, soon to be left behind by history. What a nonsense. Dacia, a Romanian brand of cars owned by Renault, has by far the best quality/safety/size/price combination of all cars on sale in my country. And at least according to this test, the Dacia Sandero is the most dependable European car Read more…
from Peter Radford
Yes it is.
The explanation is found in the genesis of classical economics and then in its idealization of the marketplace.
At its onset the modern neo-liberal project was a search for a way of organizing civil society without that organization being imposed in what had hitherto been an overt political, that is power relationship, sense. Thus the literature in the late 1700′s is brimming with applause for what we would now call the market as a method of coordination. In contemporary thinking we seem to forget that the market back then was seen as a supreme organizing principle for all social activity since the then burgeoning economy was the major issue calling for analysis. The market was posited as an alternative to the prior traditional political problem solution to allocation because it allowed the emerging commercial class to locate itself within a social structure facing great stress. The older regime had no space for commerce as it was being redefined – starting with a redefinition of the word itself. Older societies were based on long established, hierarchical, and unvarying governance of all aspects of life, including what we now describe as economic activity. That governance was centered in traditional sources of power. It was thus deeply political, although people at that time would not have referred to it in that way. Read more…
Jan Mankes was born in 1889 in Meppel, the Netherlands, and died in 1920 from tuberculosis. At the age of twelve he became the apprentice of a glass painter. At eighteen, he was established as an independent artist. Influenced by Tolstoï, ideas about vegetarianism and communal ownership of land, he became the most ‘silent’ painter of the Netherlands. I’m always very impressed by his birds. Read more…
from Lars Syll
There have been over four decades of econometric research on business cycles … The formalization has undeniably improved the scientific strength of business cycle measures …
But the significance of the formalization becomes more difficult to identify when it is assessed from the applied perspective, especially when the success rate in ex-ante forecasts of recessions is used as a key criterion. The fact that the onset of the 2008 financial-crisis-triggered recession was predicted by only a few ‘Wise Owls’ … while missed by regular forecasters armed with various models serves us as the latest warning that the efficiency of the formalization might be far from optimal. Remarkably, not only has the performance of time-series data-driven econometric models been off the track this time, so has that of the whole bunch of theory-rich macro dynamic models developed in the wake of the rational expectations movement, which derived its fame mainly from exploiting the forecast failures of the macro-econometric models of the mid-1970s recession.
The limits of econometric forecasting has, as noted by Qin, been critically pointed out many times before.
Trygve Haavelmo — with the completion (in 1958) of the twenty-fifth volume of Econometrica – assessed the the role of econometrics in the advancement of economics, and although mainly positive of the “repair work” and “clearing-up work” done, Haavelmo also found some grounds for despair: Read more…
Recently, Eurostat published data on labour participation rates in North Africa and the eastern mediterranean. In many of these countries, female labour participation rates (paid labour, that is) are low (graph 1). And they are lower than they used to be (graph 2).
Graph 1. Labour market participation rates, Israel (IL), Morocco (MA), Egypt (EG), Lebanon (LB), Tunisia (TN), Palestine (PL) and Algeria (DZ).
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…