Update: in this post I mention the Phillips-curve, the (supposed) relation between inflation and unemployment, and how the ECB uses this concept to rationalize its out-of-mandate labour market policies (via ‘conditionality’). This model supposes a more or less unified labour market. According to me, the differences in unemployment between Germany and Spain (see graph) show that there is no such thing in the Eurozone.
Well, unemployment increased again and continues to reach new heights. According to this recent ECB article, this is to a large extent due to ‘structural unemployment’, i.e. if people only retrained, accepted lower wages and more powerful managers everything would be all right. It’s nor really the mandate of a central bank to force ‘reforms’ of labour markets – but the ECB does try. To prove their point, they use the Phillips curve, which shows the relation between unemployment and inflation. However, inflation in the Eurozone has been flat. Which means that, according to this idea, all increases in unemployment are by definition by definition structural unemployment (chart 8 of the link). How credible is that, when you look at a country like Portugal (which did not know a spanish style housing bubble!), where unemployment only started to rise after they were included in the Eurozone (yes, in the eighties it was even higher, but even then it was quite a bit lower than today). Might the Euro itself be the main culprit and the main cause of unsustainable national credit bubbles (I write this from a nice pub in Frankfurt, where several people told me today that the ECB, at least during the Trichet years, indeed was really not interested in differences between countries at the senior level).
Britain’s Chancellor of the Exchequer made the surprising announcement this week that the next Governor of the Bank of England (replacing the retiring Mervyn King) will be Mark Carney, currently serving as head of the Bank of Canada.
The fact that Canada’s banking system survived the global meltdown in relatively better shape than many other industrialized countries was certainly a factor in Mr. Carney’s selection. However, as I argue below, if the goal is Canadian-style financial stability, then Britons (and others) need to learn closely from Canadian financial regulations, not just recruit a talented Canadian financial regulator. A version of this commentary appeared in the Financial Times. Read more…
In 2008 Spain had 20 million jobs. This number declined to 17 million – a decline which was almost completely due to the bust of the building boom. As construction has a relatively lower productivity average productivity increased because of the decline of building, just like in Ireland. Which means that variables like average productivity and average Unit Labour Cost may not be the best metrics to gauge the competitiveness of a country. And which means that export demand is not the only or even the most important kind of demand to solve the real Spanish problem (which is not debt but the loss of 3 million jobs). Investments in new sectors are needed. Like medical care for old, rich Germans.
In 2007 the European Central Bank (ECB) published a new series on long-term debt of, among other sectors, households in the Eurozone (source, especially pages 17-19 and 67-84). When it turned out that the run up in debt of households in the Eurozone as a whole could not be explained by a combination of rising incomes and lower interest rates the ECB stated:
“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”
from Geoff Davies
The challenge, and reactions to it
Many economists, and more non-economists, agree that economics needs new ideas, given the comprehensive failure of the mainstream to foresee the Global Financial Crisis and its continuing failure to lift the US and Europe out of deep recession or depression.
Few in the mainstream seem to have any idea where to start. Many non-mainstream economists offer ideas, and many of those ideas are important, but not the whole story. Many of the non-mainstream proposals reach back to older ideas (Keynes, the Austrians, etc., often with valuable but incomplete insight) rather than reaching forward to new and more comprehensive approaches. There seems to be little agreement on which things to change, nor on how much the subject needs to change. Read more…
from David Ruccio
Both Michael Sandel and Deirdre McCloskey treat market morality as a very trivial thing, and easily understood.
For Sandel, market morality is based on the idea that “some of the good things in life are degraded if turned into commodities.” Therefore, “the market” should be circumscribed and delimited according to community norms and values. McCloskey’s view, per contra, is that “the market” is responsible for tremendous economic growth, and especially for the decline in world poverty. Her version of market morality is to encourage the flourishing of markets, anywhere and everywhere.
The problem is, both market moralists—Sandel and McCloskey—treat markets in an abstract fashion, as “the market.” Neither wants to discuss different kinds of markets: slave markets, capitalist markets, communist markets, and so on. And therefore neither wants to recognize the fact that the different consequences of markets depend, at least in part, on how market commodities are produced. Read more…
from Dean Baker
At this point almost everyone has heard of Nate Silver, the New York Times polling analyst who had all the pundits looking stupid on election night. Silver managed to call every state exactly right. He ignored the gibberish about momentum or voters’ moods and simply focused on the data given by the various polls taken in the final weeks of the campaign.
While Silver’s work has likely permanently transformed election coverage, it is interesting to think about a similar analysis being applied elsewhere, for example the debate over the budget. Suppose that we had someone focused on actual data involved in the budget debate instead of the silly rhetoric coming from the Republicans and Democrats.
The first thing that a Nate Silver would likely point out in discussing the budget is that the large deficits of the last few years cannot be attributed either to either extravagant social spending or the Bush tax cuts. The reality that neither Republicans nor Democrats like to acknowledge is that deficits were relatively modest until the economy collapsed in 2008. Read more…
from Lars Syll
Simon Wren-Lewis has a piece on his blog on how teaching macroeconomics after the crisis looks:
I was asked the other day how macroeconomics teaching at Oxford had changed as a result of the Great Recession of 2008-9 … [A]lthough the crisis has added material, nothing has really been thrown away as a consequence of what has happened. We have not, either individually or collectively, decided that the Great Recession implies that some chunk of what we used to teach is clearly wrong and should be jettisoned as a result … As Paul Krugman has pointed out many times, recent developments have in many ways been a vindication of the basic Keynesian model that lies at the heart of any undergraduate macro course … The mess we are currently in is due in part to policy makers ignoring this basic macroeconomic analysis.
This is really gobsmacking.
First of all because I find this rather self-congratulatory and complacent attitude unwarranted. Read more…
from Lars Syll
Some of my readers have asked me if there really is any difference between solving the liquidity trap by lowering real wages via inflation or by lowering nominal wages. Are they not equivalent measures?
No, they are not!
As John Maynard Keynes wrote in General Theory (1936): Read more…
from Deniz Kellecioglu
About a year ago, while having coffee with friends in Addis Ababa, I postulated that the Eurozone would break up, probably by May, but certainly by September. Of course, I was not the only one offering such projections. But why did we miss the mark (so far)?
Economically, it does not make much sense to go on with the Euro, especially if we have the general populace at heart. Last Thursday, statistics from Eurostat confirmed that the Eurozone remains in recession. The day before that, millions of people across Europe, but predominantly in the most affected countries Portugal, Spain, Italy and Greece, took to the streets against austerity. As you already know, the unemployment figures are at record heights. Read more…
Daft. The definition of money by the influential neo-classical economist Robert E. Lucas, jr. finally starts to make sense to me. Really. What he in fact does in his models is creating a, literally, childish monetary world:
* First, he supposes that real markets do not use money but are organized by an all-knowing, all-mighty auctioneer - he assumes ‘money as you and I know it’ away. And therewith skips our entire, deeply financial, market economy…
from Shimshon Bichler and Jonathan Nitzan
Edited transcript of a presentation by Jonathan Nitzan
The 3rd Annual Conference of the Forum on Capital as Power
Capitalizing Power: The Qualities and Quantities of Accumulation
September, 28-30, 2012, York University, Toronto
Conference Page: http://bnarchives.yorku.ca/341/
In May 2011, the U.S. Supreme Court ordered the State of California to release 30,000 to 40,000 of its 140,000 inmates. California’s prisons have become so overcrowded that the Supreme Court declared the situation unconstitutional. The decision was imminent. For nearly two decades, California, along with many other states, was busy getting ‘tough on crime’. In the early 1990s, the state enacted the ‘Three-Strikes Law’, which mandates life sentences for third-time serious crime offenders, and it pursued the country’s ‘war on drugs’ and other law-enforcement campaigns with increasing zeal. Soon enough, its prisons were overflowing at nearly twice their capacity. Read more…
from Lars Syll
Interviewed in a Swedish Television documentary on the the economic crisis (aired yesterday on SvT), Nobel laureate Robert Lucas answered a question (wind to 19:40 in the programme here) if the level of debt was a problem, by telling us that the high level of debt is not an interesting problem, since, for a country as a whole, debt and credit always “cancel out.” Unbelievable stupidity even to come from a Chicago economist. Fortunately Dirk Bezemer and Steve Keen were also interviewed and could sort things out and give a more sensible view on the increasing indebtedness of modern economies.
from David Ruccio
from Lars Syll
There are unfortunately a lot of neoclassical economists out there who still think that price and wage rigidities are the prime movers behind unemployment. What is even worse – I’m totally gobsmacked every time I come across this utterly ridiculous misapprehension -is that some of them even think that these rigidities are the reason John Maynard Keynes gave for the high unemployment of the Great Depression. This is of course pure nonsense. For although Keynes in General Theory devoted substantial attention to the subject of wage and price rigidities, he certainly did not hold this view. Read more…
Papers submitted to the World Economic Review (WER) that meet minimum standards of professional quality are posted on the journal’s Discussion Forum in order to solicit comments and discussions. The Forum’s home page says:
You are invited to comment on these papers.
Comments can range from short remarks to full reviews. We encourage you to be frank, but polite. As a rule, commentators should give their name. If they fear hurting their relationship with authors, they can use an alias, which has to be clearly recognizable as such. Editors will vet comments before publication to make sure appropriate and comprehensible language is used and that they are substantive comments relating to the content of the paper at hand. Standards of fairness will be particularly high if an alias is used.
Preciously there was a navigation problem (now corrected) from the WEA homepage that may have prevented you from taking part. Below is a linked list of some papers recently posted for open review that you might wish to consider. Read more…
from Mark Weisbrot
As the much-hyped “fiscal cliff” looms at the end of the year, there is talk about “comprehensive tax reform” as part of a deal to achieve deficit reduction. For Republicans and their allies who want to minimize the taxes paid by rich people, this is one strategy: keep tax rates on rich people at historic lows (or even lower them) while supposedly closing some loopholes. These loopholes may or may not be closed, or the changes may collect more revenue from people who are not in the top 1 or 2 percent, whom they want to protect.
But the whole debate misses the boat in so many ways that it is hard to list them all in this space. Read more…
from David Ruccio
Just the other day, I explained to students that, until quite recently, mainstream economists mostly ignored the grotesque levels of economic inequality that have emerged in the United States. Now, the problem of inequality is so glaring, it’s even gotten recognition at Harvard!*
According to Jonathan Schlefer [ht: sb], while mainstream economists are finally paying attention to the trend of increasing inequality that has characterized the United States for the past three decades, they still don’t understand it. They continue to teach and write on the assumption that “markets determine wages, and any social or political tampering just creates inefficiency.” His own alternative view is that Read more…