A) The 1992 Bundesbank ‘Geschäftsbericht 1992′ shows that the Bundesbank did not use to have any problem with buying government bonds. It even provided credit to non-general government companies.
B) In this 1981 piece (Stopping moderate inflations) Thomas Sargent is unusually clear about his opinion of central banking and Margaret Thatcher. He was wrong that disinflation could be easy.
C) Tourism in the EU is far above pre-crisis levels.
D) Robert Vienneau has an interesting input-output study about income distribution and price levels (which I still have to digest a little): ” an empirical exploration, with data from countries worldwide, of Sraffian, Marxian, and classical political economy… Labor values predict market prices better than prices of production do. Labor values also predict market prices better than they predict prices of production. In short, a simple labor theory of value is a surprisingly accurate price theory for economies around the world”. Which is, by the way, in line with Eurozone ‘Troika’ policies. Mind, however, that contrary to another assumption of these policies low wages do not exclude large current account deficits or slow export growth.
E) Non-EU citizens twice as likely to be at risk of poverty or social exclusion as nationals in 2013. Differences are increasing. And there are large differences between countries which implies that this difference is (also) policy sensitive.
Deirdre McCloskey has written a lengthy Piketty criticism – and she totally agrees with Piketty. It’s Friedmanian in spirit: a self-concious, eloquent (even more eloquent than Friedman!) defense of the market based upon clever arguments and our experience with markets, though also more literate and less US centered than the typical Friedman piece. But it’s a somewhat weird piece. She states that she totally disagrees with Piketty. But she doesn’t. In fact she totally shares his vision: it’s all about g. She defines ‘g’ as ‘The great enrichment’. And states, just like Piketty, that g, or the high growth rate of our economy, saved us from becoming a rentier economy. And just like Piketty she does not seem to understand balance sheets. More on that below.
I agree with many points and surely with the first three of its main arguments: Read more…
from Lars Syll
One may wonder how much calibration adds to the knowledge of economic structures and the deep parameters involved … Micro estimates are imputed in general equilibrium models which are confronted with new data, not used for the construction of the imputed parameters … However this procedure to impute parameter values into calibrated models has serious weaknesses …
Second, even where estimates are available from micro-econometric investigations, they cannot be automatically importyed into aggregated general equlibrium models …
Third, calibration hardly contributes to growth of knowledge about ‘deep parameters’. These deep parameters are confronted with a novel context (aggregate time-series), but this is not used for inference on their behalf. Rather, the new context is used to fit the model to presumed ‘laws of motion’ of the economy … Read more…
from David Ruccio
“We allow our fellow Americans to be exploited for the benefit of corporate greed and unnecessary wars. This nation has become an embarrassment.” That’s how tintin from the Midwest responded to the news that many factory jobs today pay far less than what workers in almost identical positions earned in the past.
Perhaps even more significant, while the typical production job in the manufacturing sector paid more than the private sector average in the 1980s, 1990s and early 2000s, that relationship flipped in 2007, and line work in factories now pays less than the typical private sector job. That gap has been widening — in 2013, production jobs paid an average of $19.29 an hour, compared with $20.13 for all private sector positions.
from Lars Syll
Tinbergen’s results cannot be judged by ordinary tests of statistical significance. The reason is that the variables with which he winds up, the particular series measuring these variables, the leads and lags, and various other aspects of the equations besides the particular values of the parameters (which alone can be tested by the usual statistical technique) have been selected after an extensive process of trial and error because they yield high coefficients of correlation. Tinbergen is seldom satisfied with a correlation coefficient less than 0.98. But these attractive correlation coefficients create no presumption that the relationships they describe will hold in the future. The multiple regression equations which yield them are simply tautological reformulations of selected economic data. Taken at face value, Tinbergen’s work “explains” the errors in his data no less than their real movements; for although many of the series employed in the study would be accorded, even by their compilers, a margin of error in excess of 5 per cent, Tinbergen’s equations “explain” well over 95 per cent of the Read more…
Two leading conservative German economists, Hans-Werner Sinn and Otmar Issing, once agreed with Mario Draghi: Eurozone inflation should not become too low. Do they still agree?
Today, the ECB published a Mario Draghi speech on is website. From the summary:
He added the ECB would continue to meet its responsibility: “We will do what we must to raise inflation and inflation expectations as fast as possible, as our price stability mandate requires of us. If on its current trajectory our policy is not effective enough to achieve this, or further risks to the inflation outlook materialise, we would step up the pressure and broaden even more the channels through which we intervene, by altering accordingly the size, pace and composition of our purchases,” Mr Draghi said.
This is totally in line with a 2003 Otmar Issing speech. In this speech this former ECB banker (1998-2006) states that Eurozone inflation should not become too low, among other reasons to prevent outright deflation in any of the member countries. And in 2000 another leading conservative German economist, Hans-Werner Sinn, stated (with Michael Reutter) in a 100% Krugman proof paper that inflation should not become too low to prevent interest policies from becoming ineffective as well as to enable individual countries to become more competitive (i.e. obtain a lower relative price level compared with other countries) without outright deflation. Again, prevention of deflation in individual member countries is stressed. In those days, Germany was on the brink of deflation and Sinn argued for higher inflation (4%?) in the periphery. Today, Spain and Italy and Greece are beyond the brink of inflation but I do not hear Sinn or Issing arguing for 4% inflation in Germany (they do want some countries to leave the Eurozone). Read more…
from Steve Keen
Taken at face value, David Cameron’s warning this week about risks in the global economy sounds like it might be wonderfully prescient. Here’s the country’s economic chauffeur, carefully checking his instrument gauges, and sure enough, sees the same signs today that should have given us warning of the crisis of 2007-08. Time to apply the brakes.
There’s only one problem: the economic dashboard that Cameron relies upon did not warn of the crisis before it happened. Instead, that dashboard advised Cameron and other leaders around the world that everything was looking rosy, and that going full throttle was entirely safe.
The OECD’s Economic Outlook, published in May 2007, stated that its “central forecast remains indeed quite benign” as it predicted “a strong and sustained recovery in Europe”. Some dashboard that turned out to be.
Politicians are fond of car analogies when talking about the economy, because Read more…
The UK is supposed to have a flexible labour market. Flexible labour markets are supposed to end rigid ‘dual’ structures of labour markets by improving the position of marginal workers and the unemployed as workers with jobs can be fired more easily. Does this work? Hmmm… (source: the new ONS earnings report).
Figure 2: Annual percentage change in median full-time gross weekly earnings for all employees and those in continuous employment, UK, April 2005 to 2014
The unemployment rate in Germany is, though surley not low, one of the lowest of the European Union – and declining. Also, at this moment employment as well as hours worked per employed person are increasing. This combination is pretty special for Germany. Between 1991 and 2005 the total number of hours worked declined with almost 10% (graph 1) which did not lead to even higher unemployment because the number of hours worked per person declined with about the same amount (graph 2). After 2005 the number of hours first increased in the boom period 2006-2008 but stagnated afterwards which, as the number of hours per worker kept declining, led to an increase of unemployment. At this moment, however, employment as well as the number of hours is increasing, despite a stagnating economy. The continuous decline of the number of hours indicates that, if need be, at least part of the problems of the rapidly ageing German society can be solved by increasing the number of hours per person instead of only increasing the ‘Rentenalter’ (I’m not against such increases – but I’m getting a bit fed up with the ‘ageing society’ panic). And, as I already indicated, unemployment can still go down a few notches, too. Read more…
For my view on the British labour market look here (nice long-term productivity graph), here (where I predict that the decline of productivity will end quite soon, I totally stick to this prediction), here (some historical comparative data on unemployment which show how terrible the Eurozone is doing while the UK experience is much more in line with post WW II developments and the post WW II implicit social contract.Yes, that was betrayed in the UK, too, but that does not compare to what happened in the Eurozone with regard to Spain, Italy, Ireland, Portugal and Greece Update: Krugman hits the nail on the head today, deconstructing some remarks of the increasingly extreme Weidmann, boss of the BuBa, who wants to inflict even more pain on these countries. 45% unemployment?) and here (where I indicate that UK broad unemployment is not doing as well as normal unemployment, to say the least). Mind also that government expenditure increased quite a bit, in 2014. Despite all caveats, the British labour market keeps beating my expectations. The very good thing about this is that this gives people the chance to exit crappy jobs and ´self-underemployment´. One large risk: the continued Eurozone crisis might lead to lower British exports, causing a rapidly increasing current account deficit forcing the UK into austerity and the further betrayal of the post WW II social contract. Read more…
Financial Times, November 17.
University departments must share the blame
Sir, The FT is far from alone in, once again and for the umpteenth time, decrying the “scandal” that a section of the financial sector – this time the foreign exchange market – has “remained immersed in a culture that subordinates everything to making money” (editorial, November 13). University economics departments cannot escape their share of the blame for this, so crucial have they been in recent years in providing academic justification for this “culture”.
Economics is, according to the orthodoxy now almost totally dominant in these departments, a discipline whose very identity is inseparable from the calculus of maximisation and minimisation. This standpoint is not limited to those of a neoliberal orientation; on the contrary, among its most dogmatic adherents is the outspokenly non-neoliberal Paul Krugman, who states quite simply that the economist is a “maximising-minimising kind of guy”.
Krugman is, however, exceptional in his radical views, and the inevitable bias that results from the exclusion from the economics curriculum of alternative approaches is towards turning out students who are ready-primed for incorporation into the “culture” that is revealed with such depressing regularity every time there is a thorough investigation of financial misdemeanours.
Fortunately, an increasing number of economics students are raising their voices against a curriculum which has become, in effect, little more than an indoctrination into that heinous “culture”.
It is about time the managements of economics departments stopped exploiting their freedom to appoint and promote their staff to perpetuate this situation. Let us hope that the demands of their students and of the wider public can begin to force them once more to open their doors to adherents of alternative approaches, and thus to reflect within themselves the debates on economic issues that rage in the world outside.
University College London and University of Westminster, UK
from David Ruccio
According to NBC news [ht: db], U.S. corporations are for the first time holding more than $2 trillion overseas, a sixfold increase over the past 12 years.
That total is now greater than the amount held within the United States, which totals just under $1.9 trillion.
1) In India, the government and, well, another part of the government (the central bank) are bickering about who is allowed to set an inflation target (should a rather narrow variable like consumer price inflation be targeted anyway? In India, this will mainly be about very volatile food prices!):
Finance Minister Arun Jaitley has given the go-ahead for a major overhaul of the current monetary policy framework wherein the Centre will specify ‘inflation targets’ for the Reserve Bank of India (RBI) to achieve. Under the proposed new regime, the RBI will set inflation as its top priority in its policy statements. The decision departs from the recommendation of an expert committee of the RBI, appointed to examine monetary policy. Headed by Reserve Bank Deputy Governor Urjit R. Patel, the committee had recommended that the monetary policy decision-making should be vested with a monetary policy committee, chaired by the RBI Governor. Other recommendations were that the apex bank adopt the new Consumer Price Index (CPI) as the measure of the nominal anchor for monetary policy. And that the RBI set the target CPI inflation level at 4 per cent (+/- 2 per cent) to be achieved through its monetary policy tools. A senior Ministry official told The Hindu that the Modi government decided that the RBI “cannot set for itself an inflation target level of 4 per cent for all times to come…the Centre will set this target.” Another Ministry source said: “It is best that inflation targets are set by the governments elected by the people and not a bunch of bureaucrats and economists sitting in the Reserve Bank.”
from Lars Syll
[Haavelmo's] effort to create foundations for the probability approach in econometrics finally results in an inconsistent set of claims in its defence. First, there are vast amounts of experience which warrant a frequency interpretation. This is supported by repetitive discussions of experimental design, but the inability to expeeriment inspires an epistemological interpretation. Then Haavelmo mentions the futility of bothering with these issues because the probability approach is most of all a useful tool. This would be an instrumentalistic justification for its use if Haavelmo gave supportive evidence for his claim. There is not one example which attempts to do so. [...]
The founders of exonometrics tried to adapt the sampling approach to a non-experimental small sample domain. They tried to justify this with a priori and analytcal arguments. However, the ultimate argument for a ‘probability approach in econometrics’ consists of a mixture of metaphors, metaphysics and a pinch of bluff.
Neoclassical economists often hold the view that criticisms of econometrics are the conclusions of sadly misinformed and misguided people who dislike and do not understand much of it. This is really a gross misapprehension. To be careful and cautious is not the same as to dislike. And as any perusal of the mathematical-statistical and philosophical works of people like for example David Freedman, Nancy Cartwright, Chris Chatfield, Hugo Keuzenkamp, Rudolf Kalman, John Maynard Keynes or Tony Lawson would show, the critique is put forward by respected authorities. I would argue, against “common knowledge”, that they do not misunderstand the crucial issues at stake in the development of econometrics. Quite the contrary. They know them all too well — and are not satisfied with the validity and philosophical underpinning of the assumptions made for applying its methods. Read more…
from J.C. Bloem (Dutch poet, 1887-1966). Translation: John Irons
It’s raining and it is November:
Autumn lays siege now to the heart
That sadly, though more wont than ever,
Endures its secret pains apart.
And in the room, where resignation
Sees daily life pass as it may,
From streets that speak of desolation
A bleak light falls at close of day.
The years pass by but never alter,
The difference will soon be gone
Between dim memories that falter
And what is lived and is to come.
Lost are the ways I knew of gaining
Release from time in earlier days;
Always November, always raining,
Always this empty heart, always. Read more…
from Dean Baker
According to the plan designed for Italy by the European Commission, Italy must regain competitiveness with Germany by forcing down wages. A prolonged period of high unemployment is an essential part of this process.
There can be little doubt that the main problem with Italy’s economy is a lack of demand. When the housing bubbles that were driving the euro zone economies burst in 2008, there was nothing to replace this source of demand. Italy joined other countries in the euro zone and around the world in using fiscal stimulus to boost demand, but then was forced to revert to austerity in 2010.
Its economy has been shrinking ever since, as would be predicted by textbook Keynesian economics. GDP in 2014 is projected to be almost 9.0 percent less than the 2007 peak. According to the I.M.F.’s projections, which have consistently been overly optimistic, Italy’s GDP will still be 3.5 percent below the 2007 level in 2019. This would imply twelve years with cumulative negative growth, a performance far worse than any major country saw in the Great Depression.
The shrinkage of the economy has been disastrous for Italy’s workers. The employment rate for prime age workers is down by almost six full percentage points. The employment rate for young people is down by ten percentage points, translating into youth unemployment rates of close to 40 percent.
Of course the pain for workers is the strategy. The plan designed for Italy by the European Commission is have Italy regain competitiveness with Germany by forcing down wages. A prolonged period of high unemployment is an essential part of this process. Read more…
from David Ruccio
It is a glaring omission in his otherwise remarkable discussion of the relationship between Karl Marx and Abraham Lincoln, An Unfinished Revolution, that Robin Blackburn neither discusses nor does he include the text of Lincoln’s First Annual Message to Congress(the equivalent of what we refer to today as the president’s State of the Union) , of 3 December 1861.
Composed at least in part as an answer to Jefferson Davis’s President’s Message of 18 November, in which Davis decries the actions of a president turned despot and celebrates the slave South’s “unconquerable will to be free,” Lincoln responds as follows: Read more…
from Lars Syll
Following the greatest economic depression since the 1930s, Robert Solow in 2010 gave a prepared statement on “Building a Science of Economics for the Real World” for a hearing in the U. S. Congress. According to Solow modern macroeconomics has not only failed at solving present economic and financial problems, but is “bound” to fail. Building microfounded macromodels on “assuming the economy populated by a representative agent” — consisting of “one single combination worker-owner-consumer-everything-else who plans ahead carefully and lives forever” – do not pass the smell test: does this really make sense? Solow surmised that a thoughtful person “faced with the thought that economic policy was being pursued on this basis, might reasonably wonder what planet he or she is on.”
Conclusion: an economic theory or model that doesn’t pass the real world smell-test is just silly nonsense that doesn’t deserve our attention and therefore belongs in the dustbin.
Rational expectations immediately comes to mind.
Those who want to build macroeconomics on microfoundations usually maintain that the only robust policies and institutions are those based on rational expectations and representative actors. As yours truly tried to show in his Real-World Economics Review paper Rational expectations — a fallacious foundation for macroeconomics in a non-ergodic world — there is really no support for this conviction at all. On the contrary. Read more…
from David Ruccio
This chart is another illustration of the report I discussed a couple of weeks ago, according to which the share of total wealth owned by the top 0.1 percent—roughly 160,000 families with total net assets of more than $20 million in 2012—has risen to the point (22 percent of total U.S. wealth) where it is almost the same as the share owned by the bottom 90 percent (23 percent of the total).
from Dean Baker
Eduardo Porter has an interesting discussion of inequality, based in large part on the views of M.I.T. Professor Robert Solow. Solow views it as unlikely that it will be possible politically any time soon to have tax and transfer policies that do much to lesson inequality. However he does hold out the hope that changes in corporate practices could lessen before tax inequality.
This is an extremely important point. There is considerable research showing that CEOs and other top management essentially ripoff shareholders, taking advantage of their insider power to give themselves pay that has little to do with their productivity, measured as the return they give to shareholders. (Lucian Bebchuk has a good summary of the issues.) If shareholders can better gain control of their companies, they might cut pay by 50 percent or more, bringing CEO pay in the United States in line with pay in other wealthy countries. Read more…