The Spanish economy is suffering from contagion

Until about a year ago, almost all the job losses in Spain were concentrated in construction and related industries. Austerity policies have however lead to contagion of the other sectors of the economy: all sectors are shedding jobs, at the moment. Ironically, the source still mentions ‘job growth’. Remarkably, construction is still shedding jobs, after about five years of decline.

A letter from the president of Cyprus, about the bail-in of his country

The president of Cyprus has written a letter reconsidering the clumsy and deeply deflationary bail-in of Cyprus. You can read the whole letter here. Two paragraphs are reproduced below (emphasis added)

2. Application of bail-in was implemented without careful preparation

It is my humble submission that the bail-in was implemented without careful preparation. Its form was changed drastically within a week. Originally designed as a general bail-in across the banking system, it eventually became focused on the two distressed banks, the Laiki Bank and the Bank of Cyprus (BOC). There was no clear understanding of how a bail-in was to be implemented, legal issues are being raised and major delays in completing the process are being observed. Moreover, no distinction was made between long-term deposits earning high returns and money flowing through current accounts, such as firms’ working capital. This amounted to a significant loss of working capital for businesses. An alternative, Ionger-term, downsizing of the banking system away from publicity and without bank-runs was a credible alternative that would not have produced such a deep recession and loss of confidence in the banking system.

3. Cyprus was forced to pay the cost to ring-fence Greece but no reciprocity has been granted

Another feature of the current solution was that deposits at the branches of Laiki and Bank of Cyprus in Greece were spared from a haircut to prevent contagion. These deposits amounted to €15 billion. The wish to avoid contagion to Greece was also evident in the Eurogroup’s insistence that Cypriot banks sell their Greek branches. In addition and as a result of the sale, the Cypriot banks have lost their Greek deferred tax assets. As understandable as ring-fencing may be, this was absent at the time of deciding the Greek PSI in relation to the Greek Government Bonds which cost Cyprus 25% of its GDP (€4.5 billion). The heavy burden placed on Cyprus by the restructuring of Greek debt was not taken into consideration when it was Cyprus’ turn to seek help.

Did high unemployment enable the Nazi’s to increase their share of the votes? Yes. Unequivocally: yes.

The Nazi’s pose two disturbing and, alas, highly relevant problems to (Eurozone) economists. The first is if high Great Depression unemployment enabled them to rise to power. The second is how they, starting from a macro-economic situation which closely resembles the Spanish situation of today, could engineer such a spectacular economic recovery. They did deliver. The answer to the second question will have to wait (you might however google ‘MEFO-bills’). The answer to the first question is, according to Christian Stögbauer, an absolutely unequivocally ‘Yes’ (h/t Jesse Frederik), an imnportant answer as not everybody is convinced of this. People did not vote against the Weimar Republic but against the parties in power and voted for the party which took the concerns of the middle class to heart.

The summary of his article:

A special pooled longitudinal/cross sectional, fixed-effects approach with spatial autocorrelation (EGLS) is used in order to simultaneously estimate the popularity determinants for the entire system of political parties for each of the 830 localities in our data set. By analysing the determinants for the vote shares of all major parties/party blocks we demonstrate unequivocally that the economic crisis was the crucial prerequisite for the political collapse of the Weimar Republic. In contrast to other empirical studies in this field, we use an essentially longitudinal approach by which we can completely avoid the problems associated with ecological inference and show that unemployment had a strong positive effect in favor of the National Socialists.

About the economic situation and the differences between the NSDAP and another radical party, the DKP (the communists):

The Real Dow

from Edward Fullbrook

You will find more real stuff here:
http://www.showrealhist.com/RD_RJShomes_PSav.html

Meme-evaporating of the day: the Nazis could rise to power because of high unemployment, not because of high inflation

There we go again. Two journalists of Reuters, Annika Breidthardt and Ilona Wissenbach, state (emphasis added) that:

“Weidmann (president of the Bundesbank, M.K.) fears that the bond-buying programme removes part of the incentive for euro zone states to reform their economies and could undermine the credibility of the ECB.

He has denounced it as tantamount to printing money – a taboo in Germany, where inflation fears still run deep nearly a century after runaway prices under the Weimar Republic devastated the economy, which helped the Nazis rise to power“.

What a nonsense. The exact opposite is closer to the truth. The Nazis rose to power during the first years of the thirties, when the economy was actually experiencing deflation (graph, source ).

But the real reason why the Nazis could rise to power, considering the unique situation in Germany, was not inflation or deflation – it was high unemployment. To quote the blog linked above:

Just consider the sequence of events: The Nazis were receiving between 2% and 3% of the vote from 1924 to 1928. Then the government sent the economy into a veritable deflationist depression in 1930-1933, as unemployment peaked to 30% in 1932. The Nazis then skyrocketed to 37.3% of the vote in the elections of July 1932, 33.1% in November of the same year and finally 43.9% in March 1933.

The names of the journalists suggest they are German – if so, this means that they really, really should know better.

Look here for a little more background on countries histories and right wing extremism in this period (Eichengreen, O’Rourke and Bromhead; look here (p. 6) for an international comparison of unemployment in this period (Eichengreen and Hatton, slightly different figures than mentioned in the text). German unemployment during the hyperinflation year of 1923 was by the way only about a third of the level of 1932.

Robert Fogel died

Robert Fogel is dead. He became famous because of Stanley Engerman’s and his highly neo-classical influenced work on the economics of slavery. Later in live he however became one of a whole bunch of quantitative neo-classical economic historians who increasingly discovered that looking at the entire society as a system of markets and explaining everything by (shadow) prices is not always the most fruitful way to explain the past, as argued at length (and highly readable) by Jan Willem Drukker.

Fogel even went as far as constructing and developing non-market and even non-monetary estimates of prosperity, therewith contributing to the discussion about the ‘biological standard of living’: despite a century of preceding ‘modern economic growth’ it was, according to Fogel, only after about 1890 that the ‘real’ standard of living (housing, nutrition, health, stamina, child mortality, life expectancy and the like) surpassed the maximum levels of the pre-industrial era for large parts of the population (a statement which I could not refute for the Netherlands). To an extent, our own body becomes the measure of prosperity, as shown in his recent work with Harris, Floud and Chung Hol: The Changing Body: Health, Nutrition, and Human Development in the Western World since 1700 (New Approaches to Economic and Social History)

This work clearly shows that the health, stamina and even the size of our bodies is crucially influenced by the health and stamina of the previous, caring generation as well as by the circumstances during the crucial first years of life and even during pregnancy. Poverty, filth and less breast-feeding makes people, on average, smaller and less healthy for the rest of their life. The political implications are clear: giving people equal chances has to start before birth – maybe even before conception. Fogel never lost his quantitative inclination (to the contrary) – but unlike many other economists did allow his ideas to be changed by empirical discipline.

The Neoclassical conspiracy against Post Keynesian Economics (1)

from Steve Keen

Paul Krugman recently posted on predictions of the crisis before it happened, in a piece entitled “Non-prophet Economics”. It had a set of propositions about how one should evaluate such claims with which I completely and utterly agree. I’ll quote it in its entirety, because it’s an eminently suitable starting point for evaluating whether a prediction was in fact made:

So as I see it, we should first of all be evaluating models, not individuals; obviously we need people to interpret those entrails models, but we’re looking for the right economic framework, not the dismal Nostradamus.

Second, we should be evaluating models and the individuals who claim to have these models based on broad performance, not single events; if your approach (say) predicted the housing crash but then also predicted runaway inflation from Fed expansion — I assume everyone knows who we’re talking about [for those that don’t, Krugman is referring to Peter Schiff] — it’s not a good approach.

Finally, I think we’re looking for conditional predictions — what happens given events that are themselves not part of the model — not absolute predictions. It was, for example, very hard in the fall of 2011 to know how the ECB would respond to the escalating financial crisis in Europe; failing to predict that Mario Draghi would find a way to funnel vast sums to debtor nations through discounting would have lost you a lot of money, but wasn’t really a failure of the economic model.

This is an excellent set of criteria—all I would add is one more in a similar spirit,

Will USA living standards ever again be as high as they were in the last century?

from Edward Fullbrook

Median household income in the USA is now 8.4 per cent less than it was at the close of the 20th century.

Source: Sentier Research analysis of Labor Department data.
More info and graphs are available in a  report from Sentier Research.

The Eurozone is not ready for Latvia (graph)

The Latvian government seems bent on introducing the Euro. A bad idea: Estonia, which has introduced the Euro, suffered since from high inflation while, at this moment, GDP is going down (2012-I, -1,0% compared with the previous quarter). Latvia, too, is not exactly experiencing a ‘V’ shaped recovery (industrial production is still not above the January 2007 level, and started to decline again) – but at least there is some growth instead of the Estonian double dip.

Is Latvia ready for the Euro? That’s not the right question. The question is if the Eurozone is ready for Latvia. And the answer is: it isn’t. To join the club the Eurozone states that a country needs to have low inflation and government debt and the like: financial criteria. And these criteria did not change, post 2007, while they turned out to be inadequate. The whole credit crisis did not teach the ECB and EC pundits anything. This alone is a reason to reject any new member – the people in charge in the eurozone don’t learn from their mistakes – even when they are as grave as in the Greek case.

Do central banks need the backing of the treasury?

Can anybody remember when the central bank of Zimbabwe went broke? Of course not, as it didn’t. Established in 1956, it’s still alive. For obvious reasons, central banks generally do not have the habit of going broke. They can literally print the money. I was therefore a little surprised to read a Krugman blog which links to a Voxeu article of Corsetti and Dedola, who state that central banks need the backing of the treasury. Well, they don’t. Balance sheets of central banks are never a constraint, during financial crises, as shown by Muhammed Bin-Ibrahim (see the graph). As a matter of empirical fact, central banks do not need the backing of the treasury or the tax payer, to keep alive. Note that the Bin-Ibrahim graph was published in an ECB manual!

The point is of course that the authors implicitly assume that keeping inflation at a level of “moins de 2%, proche de 2%” (to quote Trichet) is more important than preventing a default of the government – and such a choice might indeed constrain a central bank. This will make the central bank dependent on the treasury. But why should such a choice be made? Around 1980, inflation was 6 to 8%. And I did not care. Not at all. Nobody really did. It was not a real problem. But it would have been a very big problem for very many people when the government had defaulted on its debt…

The graph is a copy of the graph in the article, I did not manage to make it larger, below it is a list of the crises.

The crises: Finland 1991, Sweden 1991, Mexico 1994, Argentina 1995, Japan 1995, Thailand 1997, Korea 1997, Indonesia 1997, Malaysia 1997, Russia, 1998, Brazil 1999, Turkey 2000, Argentina 2001, Uruguay 2002, USA 2007, Ireland 2008, Ireland 2009, Greece 2011

Krugman – more Wicksell than Keynes

from Lars Syll

In a recent blogpost Paul Krugman comes back to his idea that it would be great if the Fed stimulated inflationary expectations so that investments would increase. I don’t have any problem with this idea per se, but I don’t think it’s of the stature that Krugman seems to think. But although I have written extensively on Knut Wicksell and consider him the greatest Swedish economist ever, I definitely - since Krugman portrays himself as “sorta-kinda Keynesian” - have to question his invocation of Knut Wicksell for his ideas on the “natural” rate of interest. Krugman writes (emphasis added):

Meme-bashing of the day: Spanish exports are not increasing

There is a meme going around, shared for instance by somebody like Mario Draghi, that Spanish exports are doing really well: “the impressive improvement in export performance in Ireland, Spain and Portugal“. But according to the Spanish national accounts, they don’t. During the last quarter of 2012 and the first quarter of 2013, ”Exportaciones de bienes y servicios” went down with -0,9% respectively -1,3% compared with the preceding quarter.

Quotes of the day: the IMF on Greek debt payment negotiations (2013), Keynes on German debt payment negotiations (1919)

These are the days: I stopped reading ‘The economic consequences of the peace’ to read the IMF report on Greece. Did anything change (emphasis added)?

The IMF on Greece, 2013

One way to make the debt outlook more sustainable would have been to attempt to restructure the debt from the beginning. However, PSI was not part of the original program. This was in contrast with the Fund program in Uruguay in 2002 and Jamaica in 2011 where PSI was announced upfront … Yet in Greece, on the eve of the program, the authorities dismissed debt restructuring as a “red herring” that was off the table for the Greek government and had not been proposed by the Fund … In fact, debt restructuring had been considered by the parties to the negotiations but had been ruled out by the euro area … Some Eurozone partners emphasized moral hazard arguments against restructuring. A rescue package for Greece that incorporated debt restructuring would likely have difficulty being approved, as would be necessary, by all the euro area parliaments. … Nonetheless, many commentators considered debt restructuring to be inevitable. With debt restructuring off the table, Greece faced two alternatives: default immediately, or move ahead as if debt restructuring could be avoided. The latter strategy was adopted, but in the event, this only served to delay debt restructuring and allowed many private creditors to escape. .

Keynes, ‘The economic consequences of the peace’, about the negotiations in 1919:

As soon as it was admitted that it was in fact impossible to make Germany pay the expenses of both sides, and that the unloading of their liabilities upon the enemy was not practicable, the position of the Ministers of Finance of France and Italy became untenable. Thus a scientific consideration of Germany’s capacity to pay was from the outset out of court. The expectations which the exigencies of politics had made it necessary to raise were so very remote from the truth that a slight distortion of figures was no use, and it was necessary to ignore the facts entirely. The resulting unveracity was fundamental. On a basis of so much falsehood it became impossible to erect any constructive financial policy which was workable. For this reason amongst others, a magnanimous financial policy was essential.

Time to retire Greenspan and Trichet’s pensions

from Dean Baker

The economies of the United States and Europe are seeing their worst downturn since the Great Depression. Tens of millions of people are unemployed or underemployed. This has led to millions losing their homes, their access to health care, and, in some cases, their lives.
Remarkably, the two individuals who bear the greatest responsibility for this disaster, former Federal Reserve Board chairman Alan Greenspan former president of the European Central Bank Jean-Claude Trichet, do not appear to be suffering at all for their failure. Both are living comfortably and continue to be sought out for their expertise on economic policy. This should infuriate reasonable people everywhere.

At this point everyone should understand that the economic wreckage destroying tens of millions of lives across the globe was an entirely preventable disaster. In the case of both the United States and Europe unsustainable asset bubbles were allowed to grow to ever more dangerous levels. It was inevitable that the bubbles would burst and when they did the outcome would be a severe downturn from which it would not easy to recover.

Bashing crises predictions

from Lars Syll

Noah Smith has a post up on his blog questioning that people like Dean Baker, Dirk Bezemer, Nouriel Roubini, Barkley Rosser and in particular Steve Keen really – in any essential meaning of the word – “predicted” the latest financial-economic crisis, the one that we are still living through (that mainstream economists didn’t, we know). It makes me come to think of (wonder why …) what James K. Galbraith wrote a couple of years ago in The NEA Higher Education Journal:

Leading active members of today’s economics profession… have formed themselves into a kind of Politburo for correct economic thinking.

The ECB sticks to the discredited 90%-debt-threshold-story with pathetic new evidence

from Norbert Häring

If you read the May Monthly Bulletin of the European Central Bank, you could be forgiven for thinking that the ECB has simply missed the widely publicized April debate around the mistakes Carmen Reinhart and Ken Rogoff made in the data analysis which formed the basis for the 90%-debt-level-threshold story. That story says that if the public debt to gdp ratio starts to exceed 90% growth goes down markedly. The ECB writes on page 95:

“Empirical literature has increasingly shown that high levels of debt (both public and private) are detrimental to growth. Some of these studies derive implicit thresholds for debt ratios and find that, beyond a certain level of debt which is maintained for a number of years, there is evidence that GDP growth remains subdued. While there is significant uncertainty surrounding such threshold estimates, there appears to be some empirical evidence that, on average, levels of public or private sector debt above 90% of GDP impair an economy’s growth.^11”

However,

Re-evaluating Value – non-market value models for changing times

A group of us are starting a discussion on how to model value, from more first principles.

Value is a major aspect of any economic theory: what it is, how it is produced, measured, stored and transferred between agents. Indeed, historically, these aspects characterise different schools of political economy. Some approaches focus on an objective basis for value such as labour or physical resources. Others place emphasis on subjective judgments by individual agents and free exchange between them.

Recent, often ICT mediated, developments such as “commons based peer production”, “crowd funding”, “freecycling” and new virtual currencies do not fit easily into existing economic models of value. On the other hand “complexity science” tools and approaches allow for a widening of traditional models of value.

Traditional models have focused on agents using either object or subjective notions of value and equilibrium points. Agent-based modelling allows for experimentation with new and hybrid notions of value in non-equilibrium conditions. In these, value might be an emergent phenomena where agents construct notions of value through the interplay of subjective and objective factors supporting novel forms of exchange and cooperation.

There will be a workshop (see below),17th & 18th June in Marseilles sponsored by NESS (http://www.nessnet.eu/). For details see:

http://wp.me/P24zGe-bh

If you intended to participate you need send an email to Juliette Rouchier <juliette.rouchier@univ-amu.fr> before 9th June (sorry for late notice).

If you can not make it, you can discuss here of course!

LInks for today (AS-AD-Heterogenous aggregate demand and supply edition)

Toady, Paul Krugman has a blogpost about Aggregate Demand (AD, business investments, household consumption, government expenditure, net exports) and Aggregate Supply (AS, investments goods including new houses, household consumption goods and services, government consumption and investment goods and services, export goods and services). He states among other things:

Second — and this plays a surprisingly big role in my own pedagogical thinking — we do want, somewhere along the way, to get across the notion of the self-correcting economy, the notion that in the long run, we may all be dead, but that we also have a tendency to return to full employment via price flexibility. Or to put it differently, you do want somehow to make clear the notion (which even fairly Keynesian guys like me share) that money is neutral in the long run.

I.e: prices change in such a way (given an ultra smart central banker and apt central bank policies) that demand is just right to employ everybody. But are economies indeed like that? Do changing prices in combination with a central bank which controls the amount of money lead to an optimal equilibrium? 

My new book is out

from Lars Syll

Economics is a discipline with the avowed ambition to produce theory for the real world. But it fails in this ambition, Lars Pålsson Syll asserts in Chapter 12, at least as far as the dominant mainstream neoclassical economic theory is concerned. Overly confident in deductivistic Euclidian methodology, neoclassical economic theory lines up series of mathematical models that display elaborate internal consistency but lack clear counterparts in the real world. Such models are at best unhelpful, if not outright harmful, and it is time for economic theory to take a critical realist perspective and explain economic life in depth rather than merely modeling it axiomatically.

“Is economics a form of brain damage?”

Hazel Henderson argues that it is.

Outdated economic theories, assumptions and financial models justified the current cruel austerity being imposed on citizens in Europe and the U.S. – now clearly failing. Research in physics, thermodynamics, anthropology and, recently, brain science, endocrinology and the behavioral sciences has now invalidated most economic models. Financial reforms bailed out bankers and made things worse.  Scientific knowledge of our planet’s biosphere, its climate, geology and the behavior of our human species is finally trumping economics and 18^th century political ideologies.  Economics is not a science – as most economists will admit.  Its core tenets and “principles” are mere semantics: “capital” (too many definitions); “investment” (in what?); “wealth” (money, above other forms of wealth); “consumption” (education, social services, candy?) and so on.

Financial reformers challenged economic models: modern portfolio theory (MPT), efficient markets, rational human actors, etc. Pioneers of socially responsible, ethical, triple-bottom line, green investing re-defined finance.

The new scientific findings expose financiers’ mystifications. Financiers do not provide capital; but are intermediaries between savers in the real economy and borrowers they favor, while depositors’ money is sent overseas to speculate on credit default swaps.