Unemployment in Lithuania, a study about debt and the economics curriculum
Updata: paragraph 1 states that ‘remittances were… a whopping 25% of total national income’. The source cited explicitly states this – but the source is wrong. Clicking on the full data set button of the source yields that remittances were 4,3% of GDP and 23,7% of ‘net wage fund ratio’, a phrase unknown to me but, if the gross/net difference is about 20%, the wages-share of income is about 0,5 and take home pay is about 50% of wages, might be something like net wages of laborers.
1. Unemployment in Lithuania. As a kind of follow-up of this post, a graph on unemployment in Lithuania. Unemployment is down with about 60.000 people which, for this country of 3 million people, is a lot (a very favourable development yes, but it’s still way to high). In the same period there was however a net emigration of about 100.000 people… An additional argument against austerity seems to be that it wrecks the ‘human capital’ of a nation as it makes people emigrate. Remittances of these people were, however, a whopping 25% of total national income – which also points to a solution for the Portuguese and Greek: get rich in Germany. At this moment, unemployment in Lithuania seems to be on the rise again, while GDP declined in the fourth quarter.
Source: Statistics Lithuania
2. An interesting study about debt from J.W. Mason and Arun Jayadev
I’m not always impressed by ‘the economist as an intellectual’. An interesting new study about ‘debt’, which basically states that the increase of household debt in the USA was not caused by net lending but by refinancing interest charges, does not mention people like David Graeber, Michael Hudson, Steve Keen or the quite comparable (but less historical) work of Paul Grignon. However – it gave me a ‘join the club’ feeling:
“From a policy standpoint, the most important conclusion is that in an environment where leverage is already high and real interest rates signifi cantly exceed real growth rates, deleveraging is almost impossible simply via reduced expenditure relative to income. The “headwind” from unfavorable debt dynamics is too large to be overcome by any realistic curtailment of expenditure.”
We really have to learn again that lending is risky business and that banks, when they write down debts, also should forgive them (which they don’t!). And we surely should not use the literally medieval method of expecting larger political entities like (in the middle ages) cities or (nowadays) states to pay private debts (Iceland! Ireland!). Hey, they invented bankruptcy for a reason.
3. Beware: they want to enhance the scientific content of the economics curriculum! Diane Coyle writes:
The global crisis has plunged the economic profession into a state of anxiety, at least in some quarters. One question, among many, is whether the way economics is taught at universities needs to be rethought. This column summarises the range of views raised at a recent conference on this issue organised by the British government, the Bank of England, and the Royal Economic Society.
And what do we have to do, according to people who employ economists?
“A surprising number of the employers present suggested the need for teaching more economic history; and also a focus on the international context rather than just national economic data; and a better practical grasp of quantitative methods including collecting and understanding data (as opposed to more sophisticated econometric techniques)”
Hmmm… yes, that’s me. See also this article
Anyway, events as well as dissident voices from non-dissident people seem to indicate that something is crumbling, when it comes to economics.
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Gerson Lima / Maria Alejandra Madi
Edward Fullbrook and Jamie Morgan
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Real-World Economics Review Blog 
Economics as taught in academia is little more than charlatanry overlaid with statistics and some plausible mathematics which conceals the underlying weakness. The economist, Professor Wynne Godley, once wrote that “economics is in a state of great confusion… with no agreed definitions and no accepted and settle body of theory”. If I recall, the article was in the Financial Times in the early 1980s.
The fatal error is the conflation of land and capital, which conceals the part that location and natural resources have in the economic process. But there are all sorts of other confusions such as the lack of agreement on the meaning of foundational terms like wages, capital, rent and credit. It has created a situation in which it is impossible to conduct a meaningful discourse.
This prevailing confusion seems to have arisen following the publication, in 1879, of “Progress and Poverty” by Henry George, which highlighted the key role of the rental values of location and natural resources. George is pretty much in line with the tradition established by the French Physiocrats, Adam Smith, David Ricardo and J S Mill.
So, yes, the subject needs to be put on a sound footing. But since the turkeys are not going to go for Christmas, they need to be shown up as a flock of silly birds.
I’m not always impressed by ‘the economist as an intellectual’. An interesting new study about ‘debt’, which basically states that the increase of household debt in the USA was not caused by net lending but by refinancing interest charges, does not mention people like Peter Graeber, Michael Hudson, Steve Keen or the quite comparable (but less historical) work of Paul Grignon.
Ouch, that hurts!
I assure you, we have read Graeber and Keen, and they were in our minds as we wrote the piece. (I don’t know Grignon.) Not to mention Minsky. In fact we sent Keen an early draft, which unfortunately he didn’t have time to look at. Arjun and I both went to UMass, after all! But you are right: It was bugging me already that almost all the cites are to mainstream papers — it’s a real problem that those of us on the left of the economics profession are so much more oriented toward the center than to each other, as I have complained on my own blog. We will correct this in the next version.
On reflection, I conceded too much. Hudson and Keen are doing good work, but neither of them have done what we did, at all — to attempt to quantitatively break down the relative contributions of borrowing behavior, growth, inflation and interest rates in changes in debt ratios. This is new. So a patronizing “join the club” isn’t called for.
Also it’s Jadadev with a ‘v’. And for that matter, it’s David, not Peter, Graber. While we’re being intellectuals.
Excuses, I’ve been too fast.
However. The reason why I mentioned the article is of course that it’s important (very imporant, even).
As I have a rather indirect, implicit and sometimes somewhat twisted way of writing there seems to be a kind of misunderstanding between us . What I wanted to state was:
1. Hey, this is an important study about debt! It shows that debt dynamics can wreck a monetary market economy
2. This really is the stuff we need to change, for instance, ECB behavior!
3. But, alas, the authors understate their case and have to hit the throttle
To state this differently: the article is the stake and you’re the hammer – but the stake is not yet pointed precisely at the heart of the beast. A little more of the next might improve the already very important article, but I can of course be wrong (sorry, being explicit and clear sometimes requires a lot of space).
“In October 2007 the European Central Bank (ECB) published, in its Monthly Bulletin, new time series of total private debt in the Eurozone (ECB, 2007). And while authors like Keen as well as Reinhardt and Rogoff, who at the same time were looking at very comparable variables, became absolutely alarmed about what they saw (an exponential increase of private debt with the potential to wreck the economy) the ECB didn’t (Keen’s ‘debtwatch’ website; Reinhardt and Rogoff, 2008). The ECB didn’t, even though it did admit that this increase was clearly inconsistent with the development of variables like household income and the interest rate (albeit in a somewhat indirect and twisted way):
“assessing the historical pattern of household loan developments purely on the basis of the macroeconomic determinants of loan demand remains to some extent inconclusive, given that loan developments over the past two decades are also likely to reflect a number of structural influences, such as financial innovation and changes in mortgage market regulation, as well as the shift to a low-inflation and credible monetary policy environment in the euro area in the context of EMU”
In other words: household borrowing is out of control – but it isn’t as we have the banks and the ECB. This ECB view is of course consistent with the Rational Expectations General Equilibrium thinking which, considering the importance of this kind of thinking in the ECB’s New Area Wide Model (NAWM, see below) which is the center of its analysis and which spells out the ECB view of the world: market economies tend towards equilibrium and stability. It can however be argued that the General Equilibrium view rests on shaky foundations, for one thing because they systematically leave out economic variables, like debt, which might disturb equilibrium – and that might not be a coincidence. During the last two hundred years, economists have managed to purge, consciously,
• debt
• ‘land’ (i.e. unproduced factors of production)
• and unemployment
from economic theory and models (Hudson, 2008; Gaffney and Harrison, 2007; Klamer, 1984; Gali, Smets and Wouters, 2011). This indeed means that important economic models like the ‘General Equilibrium’ NAWM of the European Central Bank contains neither of these variables. Which, in its turn, means that potentially disturbing events like:
* debt dynamics
* the influence of rent incomes on profits and wages (and therewith unemployment and debt)
* or unemployment dynamics like the negative correlation between long term unemployment and employability
fall outside the scope of these models and the economists who rely on them. [1]
[Footnote 1. According to the ECB: “The New-Area-Wide Model (NAWM) is a micro-founded open-economy model of the euro area, which is designed for use in the (Broad) Macroeconomic Projection Exercises regularly undertaken by ECB/Eurosystem staff and for policy analysis.
the key features of the model are:
– Its scale – compared with a typical DSGE model – is relatively large.
– Employing Bayesian methods, it estimates 18 key macroeconomic variables, including real GDP, private consumption, total investment, government consumption, exports and imports, a number of deflators, employment and wages, and the short-term nominal interest rate.”
Source: http://www.ecb.int/home/html/researcher.en.html ]
With the aforementioned variables disequilibrium is purged, in this case from a model used by the economists which are at the helm of what is arguably the most powerful economic institution of the Eurozone, the ECB. Even the very economists who developed these models agree that including, for instance, unemployment in the models fundamentally change the results (austerity does not work anymore, see Gali, Smets and Wouters, 2011).
And it are not only ECB economists who attest to the importance of the variables left out of the General Equilibrium models. The economists of the European Commission (talk about ‘the vestiges of power!) recently designed the ‘Macro-Economic Imbalances Scorecard’ (“MIPS”). [2]
[Footnote 2. See for instance https://rwer.wordpress.com/2012/02/18/some-thoughts-about-the-new-macro-economic-imbalances-procedure-of-the-european-commission-graph/%5D
The MIPS explicitly aims at monitoring variables whose development might not lead to ‘General Equilibrium’, but, to the contrary, to disequilibrium and crises. And not coincidentally this scorecard almost exclusively consists of the very kind of variables omitted from ‘modern’ economic theory and a model like the NAWM: different kinds of borrowing and debt, a land price related variable like house prices – and unemployment. And it was the wholesale inclusion of such variables in the models and strain of thinking of authors like Keen as well as Reinhart and Rogoff which led to their alarmism. [3]
[Footnote 4: To avoid misunderstandings: Reinhart and Rogoff is not just about government debt. To quote Reinhart: “You can’t just focus on a single indicator, you have to look in conjunction. Our book is not about a bubble in housing or a bubble in the equity market. You look at pricing in these markets in conjunction with what is happening with capital inflows and the current account deficit. What is happening in conjunction with indebtedness. When several of these indicators start running off the charts simultaneously, you have a vulnerable situation.” http://blogs.wsj.com/economics/2009/10/12/qa-reinhart-and-rogoff-on-the-crisis-the-mother-of-all-moral-hazard/, accessed 18-12-2001]
The implicit message of this is of course loud and clear: economics has, considering the 2008 meltdown and the present Euro muddle, been on a very wrong track, by purging debt, land and unemployment from main stream thinking and models. It led to a ‘false negative’: not including these variables in the models enabled economists to construct General Equilibrium models – but this disabled them to even conceptualize disequilibrium processes. Inclusion of these variables into economic thinking however does enable us to see crises (see also Bezemer, 2009).
Focusing on debt it, fortunately, turns out that not every economist had forgotten about it. Most notably the economic statisticians of the very institute which so explicitly denied the importance of the run up in private debt in 2007, the ECB, were the very people who mapped it. And we have to be gratefull for this. The stock and flow debt data included in the MIPS are largely obtained from the ECB. People like Keen and Reinhart and Rogoff also rely on exactly this kind of data. And these statisticians of course had a very good reason not to forget about, as they have to estimate the amount of money, too. And the so called ‘counterparts’ of the stock of money (obtained from the activa side of the balance sheets of the money creating banks) are of course these very debts. Estimating money is estimating debt… .
Which shows – as every economist know, or at least was taught – that ‘debt’ is inherent to monetary economy – you can’t leave it aside and look at is as an exogenous variable. It’s the Siamese twin of money. These twins are of course separated at birth and develop in separate ways but they stay twins, and once they will be united again – which means that macro statements just about money (and consumer prices), like the money growth statements and consumer prices inflation in the speeches of the presidents of the ECB are fundamentally wrong. [5]
[Footnote 5. Consider also this Robert E. Lucas jr. quote: ‘There’s going to be a neutrality theme in any well-formulated model of money. There’s always a ‘units don’t matter’ feature somewhere in the model. A pretty severe criticism of old-fashioned Keynesian models is that they simply neglected that” (Klamer, 1984). The point is that in the case of (money and debt), units do matter, the obvious cases being either ‘debt deflation’ or paying off debts with ‘inflated’ money.]
We have to look at debt too, therefore, and as a lot of debt is mortgage-debt at asset prices too. Which brings us to a growing number of recent studies which investigate (private) debt and look at exactly these kinds of connections. And though they are very different in scope, nature and method, there is one common thread which binds them all (including the economic statisticians): money is the Siamese twin of ‘debt’ (Keen, 2007; 2009; Graeber, 2011, Hudson, 2002; 2011; Reinhardt and Rogoff). And they show that a sustained increase in debts can, through all kind of forward and backward linkages, lead to crisis or, indeed, wreck and bring down entire societies: monetary market economies as inherent unstable events – for one thing because money creation and therewith debt creation changes the obligatory payments structure of our society.
One blank spot of these studies is however why private debts increased in the first place – why did households (on average) increase their leverage so much? Did people borrow recklessly? Or were other factors at stake? Well, here your study takes off.
Original sources:
• The ‘Debtwatch’ website: http://www.google.nl/search?q=debtwatch&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:nl:official&client=firefox-a
Literature
ECB: ‘Box 1. New Euro area series on MFI loans to households and non-financial corporations’ in: ECB monthly bulletin October 2007 pp. 17-19; ECB, ‘Long-term developments of MFI loans to households in the Euro area: main patterns and determinants’ in: ECB monthly bulletin October 2007 pp. 67-84.
Bezemer, D., ‘No One Saw This Coming”: Understanding Financial Crisis Through Accounting Models’, MPRA Paper No. 15892, 2009, found at http://mpra.ub.uni,muenchen.de/15892/1/MPRA_paper_15892.pdf
Gaffney, M. and F. Harrison, The corruption of economics. Shepheard-Walwyn Publishers, 2007.
Galí, J., F. Smets and R. Wouters, ‘Unemployment in an Estimated New Keynesian Model.
May 16, 2011. Paper Prepared for the NBER Macroeconomics Annual 2011 Conference, held in Cambridge, MA on April 8-9, 2011, found on: http://www.econ.cam.ac.uk/keynes-conf-2011/papers/Unemployment-in-an-Estimated-New-Keynesian-Model.pdf
Graeber, D., Debt. The first 5.000 years. Melville house publishing, New York 2011.
Hudson, M., ‘How economic theory came to ignore the role of debt’, Real-world economics review, issue no. 57, 6 September 2011, pp. 2-24.
Keen, S., “The roving cavaliers of credit”, 2009, on: http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/
Keen, S. ‘Addicted to debt. Australia’s addiction to borrowed money’ in: occasional papers, Sidney center for policy development’, 2007.
Klamer, A., ‘Robert E. Lucas jr.’ in Klamer, A., The new classical macroeconomics. Conversations with new classical economists and their opponents. pp. 29-57. Wheatsheaf books LTD, Brighton, 1984.
Reinhart, C. M. and K.S. Rogoff, ‘This Time is Different: A Panoramic View of Eight Centuries of
Financial Crises’, found at http://www.economics.harvard.edu/files/faculty/51_This_Time_Is_Different.pdf”
Well, that’s what I wanted to state, I hope it’s clearer now..