from Dean Baker
Carmen Reinhart and Ken Rogoff, used their second NYT column in a week, to complain about how they are being treated. Their complaint deserves tears from crocodiles everywhere. They try to present themselves as ivory tower economists who cannot possibly be blamed for the ways in which their work has been used to justify public policy, specifically as a rationale to cut government programs and raise taxes, measures that lead to unemployment in a downturn.
This portrayal is disingenuous in the extreme. Reinhart and Rogoff surely are aware of how their work has been used. They have also encouraged this use in public writings and talks. While it is unfortunate that they have “received hate-filled, even threatening, e-mail messages,” as one who works in the lower-paid corners of policy debates, let me say, welcome to the club.
This column is careful to halfway walk back the main claim of their famous paper, telling us: Read more…
Eurostat has new data on European unemployment:
The euro area (EA17) seasonally-adjusted unemployment rate was 12.1% in March 2013, up from 12.0% in February. The EU271 unemployment rate was 10.9%, stable compared with February. In both zones, rates have risen markedly compared with March 2012, when they were 11.0% and 10.3% respectively. These figures are published by Eurostat, the statistical office of the European Union. Eurostat estimates that 26.521 million men and women in the EU27, of whom 19.211 million were in the euro area, were unemployed in March 2013.
Notice, however, that:
(1) Graph 1. Broad unemployment rates are quite a bit higher and are in some cases threatening to breach the 40% level (2012-IV data!). See also this blogpost, look at how low unemployment in Iceland is (considering the size and nature of the country not a ‘sterling’ example, but nevertheless).
From: Henk de Vos (guest post)
Unemployment in Europe is at record levels and rising. Five European leaders (Dijsselbloem, Rehn, Asmussen, Regling and Hoyer) declared in The New York Times (April 17) that their current policies of austerity bring:
serious social challenges, notably in the form of unacceptably high unemployment. These challenges have to be addressed with determination.
But there is awfully little to find in their policies that is reassuring to those who suffer being unemployed, often for years in a row, or to the increasing number of employed who face the prospect of job loss. And the policies that the leaders bring forward as their response to the crisis, do not indicate a deep awareness of the disastrous psychological, social and economic consequences of unemployment. It seems that full employment, that used to be one of the main macro-economic policy goals, has completely disappeared behind the priorities of low inflation and balanced budgets. The latter are considered to be essential because of confidence effects. But what are the confidence effects of mass unemployment? Questions about psychological well-being are often included in general purpose household surveys, in particular the question “How satisfied are you at present with your life as a whole?” Winkelmann and Winkelmann (1998) used evidence from panel data to show that unemployment has a large detrimental effect on satisfaction after individual specific effects are controlled for. The effect of unemployment is large: almost three times larger than the effect of bad health. And it is unrelated to unemployment duration Read more…
from Robert Locke
Post WWII business schools deans, philanthropic foundation bureaucrats (Ford and Carnegie), and businessmen carried through radical reform of US business school curricula in the 1960s to get rid of “unimaginative, non-theoretical, second rate …students,” working in, to use Herbert Simon’s phrase, “a wasteland of vocationalism,” (Khurana, 236). Their goal was to replace the existing curriculum with a scientific education in which neoclassical economics played a “dominant role within the emerging tinplate for disciplines-oriented business studies.” (Khurana, p. 265, Locke, 1989, Management and Higher Education Since 1940) Rakesh Khurana tells this story in detail in his 2007 book, From Higher Aims to Hired Hands (Princeton UP), without much comment, however, about whether the reform, which was thorough, actually succeeded in improving economic performance. I suggest it did not.
Why the Postwar Business School reform
Most histories of this transformation of business studies stress a two step process. First, neo-classical economics imbibed the scientific toolkit that operational research developed during WWII and the Cold War in government agencies and think tanks like the Rand Corporation, therewith claiming to have turned itself into a “prescriptive” science. Then, in a second step, reformers made this new neo-classical economics the dominant force in the subsequent transformation of business school curricula and research.
But the penetration of business schools by neoclassical economics Read more…
from David Ruccio
Dystopia. The increase of normal, ‘U-3′ unemployment as well as of ‘additional’ unemployment in the EU after 2008
Eurostat does not only publish ‘U-3′ unemployment data but also additional data (graph 0, check the link for all kind of meta). The Eurostat graph shows that most of the action on the aggregate level has been in the U-3 realm. Is the same true for individual countries? No, as is shown by graph 1 and 2 which compare the change of lev els of unemployment between the fourth quarter of 2012 and the fourth quarter of 2012 (in Spain and Ireland, unemployment already had started to rise at that moment)
Graph 0. Unemployment rate and new supplementary indicators, EU-27, age15-74
A comparison of the increase of U-3 unemployment with the increase of additional unemployment clearly shows that some countries which seemed to do relatively well (Belgium, Finland, the UK) are doing about as bad as neighbouring countries (some of these are not included due to lack of data for 2008). Read more…
I’ve added the 2012 data to my interest data base (sources here, albeit in Dutch).
Graph 1. 2012 is indeed special: interest rates on government bonds are, with quite a margin, the lowest ever (graph 1). The very low Dutch rate is of course connected to crushing rates in southern Europe and a lack of borrowing by/lending to households and companies. In a sense the pre-Euro rates should be compared with the average Euro bond rate and not with the Dutch rate. Household rates in the Netherlands are however still pretty high, surely when we take ever lower GDP inflation into consideration.
Graph 2. Overnight rates are pretty low, too. Notice that these can be low for decades.
from Dean Baker
“Among economists, there is no consensus on policies. Is “austerity” (government spending cuts and tax increases) self-defeating or the unavoidable response to high budget deficits and debt? Can central banks such as the Federal Reserve or the European Central Bank engineer recovery by holding short-term interest rates near zero and by buying massive amounts of bonds (so-called “quantitative easing”)? Or will these policies foster financial speculation, instability and inflation? The public is confused, because economists are divided.”
See, we don’t know what to do, so we just can’t do anything. All those suckers who are unemployed or seeing stagnant wages, well we just don’t know. And the fact that those on the top are getting rich with 60-year high shares of national income, well what can we do about that? It’s just too confusing. Read more…
Inflation in the Eurozone is lower than the ECB states it is. Which means that monetary policy is tighter than the ECB assumes. We just have to look at the right prices to see this. Wages are a price, too. When we look at the economy using the lens of the national accounts (income approach) they even are the most important income related price. When we look at the economy from the expenditure side of the national accounts, consumer prices are of course important. But so are prices of government consumption. And prices of exports and investments. Sales of existing houses are not covered by the national accounts (except for fees of real estate brokers and the like) but house prices also are one of the most important price of the entire economy, and (looking at the long run) increasingly so as in many countries home ownership has increased quite a bit, after about 1930. Only a limited amount of these prices are covered by the ECB’s inflation metric of choice, the HICP index of consumer prices. Which would not be to bad when these prices all showed the same development. But they don’t.
The focus of the ECB on just this inflation metric has cost us dearly. In the period up to 2008 the clearly neurotic attention to the HICP and a neglect of other prices led the ECB to miss out on the house price bubbles in the Netherlands, Spain, Ireland, Slovenia and a bunch of other countries. At this moment we are paying the price for this mayor policy mistake.
Alas, the ECB has not learned from its mistakes. They are still paying neurotic attention to HICP inflation, while missing out on other important inflation metrics which makes them misunderstand the situation. In the annual report the ECB states:
“Annual inflation remained at elevated levels in 2012 despite the unfavourable macroeconomic environment,
although it declined in the course of the year.”
ASSOCIATED STUDENTS OF
MICHIGAN STATE UNIVERSITY
INTRODUCED BY: Nikolovksi SECONDED BY: Goheen
A BILL TO:
ADVOCATE FOR THE DIVERSIFICATION OF THE CURRICULUM WITHIN THE DEPARTMENT OF ECONOMICS
THE ASSOCIATED STUDENTS OF MICHIGAN STATE UNIVERSITY ENACT:
WHEREAS, Since the recent global financial crisis, there has been a heightened debate within academic circles about the varying methods of analyzing economic phenomena. The department of Economics at MSU teaches from a single theoretical framework, widely known as the neoclassical school. This framework is only one perspective among several others which are not taught, and only gives one way of trying to understand our economy; and,
WHEREAS, Economists espousing other theoretical frameworks have given insights into important economic phenomena which have drastic implications for economic policy. Some important analyses include alternative empirical work that consistently explains the process of economic growth and—what is connected—warnings of the global financial crisis prior to its precipitation. These frameworks of thought use completely different methods and assumptions then those that are taught here at MSU; and,
WHEREAS, Students taking Economics within MSU are unlikely to be aware of the debates that go on, because the vast majority of what they do as “economics” is in the form of math problems which takes the assumptions and method of the neoclassical framework as given. Also, because students are often not explicitly made aware of the method and assumptions that underlie the mathematical formalism that they use, there is an appearance of diversity in the topics within the curriculum (e.g. international economics, microeconomics, and macroeconomics). Students should be made aware that there is a basic unity in the methods of neoclassical economics in analyzing these different topics; therefore be it,
RESOLVED, That MSU’s Economics department diversify its curriculum to allow students to engage not only with neoclassical work, but also competing frameworks so that they may be aware of the debates that are going on.
A first recommendation includes giving more explicit recognition of thev underlying method and assumptions of the frameworks that are taught, as well as engaging with the original works of the foundations of the
different schools of economics (e.g. Adam Smith, David Ricardo, Alfred Marshall, Karl Marx, John Maynard Keynes, and Milton Friedman.)
Secondly, working away from using mathematical formalism as an end in itself but recognizing it as a secondary tool, and also allowing for critical and reflective thought through paper writing and in-class debate is also highly recommended.
from Peter Radford
You probably have missed it, but there is a major furor within the economics profession concerning the findings of an academic paper written by Carmen Reinhart and Kenneth Rogoff in 2010. The profession issues a torrent of papers annually, most of which remain scarcely read and massively under-appreciated. Probably deservedly so since the sole objective of most is to meet the check-box requirement of publication that dominates academia. This desperation to publish to build reputation and to demonstrate mastery of the subject to a determinedly self-referential peer group is one of the causes of the rapid decline within economics: it encourages ever more fragmentation of the subject into ever less relevant sub-disciplines, and has resulted in a near total elimination of a common understanding – or common memory – of its development.
It has also produced sloppiness.
The R-R paper has now become a cause-celebre of such sloppiness.
This would not normally be worthy of passing along to a broader audience – who cares what academic economists write after all? – were it not for the particular topic that R-R covered. Read more…
Should we, as present day money creation is largely asset based (mortgages <- ->houses!), move from a consumer price target to a
house asset price target for central banks? Anthony Hotson gives some historical reasons why this might be a good idea:
For centuries, monetary systems have been stabilised by anchoring the price of some of the asset counterparts of money and allowing other (consumer) prices to vary. In recent decades, we have turned this approach on its head, targeting the consumer price index and allowing asset-counterpart prices – mainly property prices – to let rip. Our focus is on requiring banks to adjust their capital to reflect the risk of asset-price impairments (and other exposures), rather than to stabilise the prices of their assets. The two approaches are not mutually exclusive, but it is curious that so little attention is paid to the other approach with its long historical pedigree.
Aside: he also gives a very practical reason why coins were debased about once every generation in those days (was is that simple…?):
Roughly once a generation, the Mint would exchange worn coins for new ones. The terms of exchange during re-coinages could vary, but a commonly adopted practice was to reduce (devalue) the weight of newly minted coins by an amount commensurate with the deterioration (reduced weight) of the old ones. This would mean that newly minted coins would weigh the same as averagely worn old ones, and the aggregate face value of the coin stock would remain the same.
Current account surpluses require “autonomy in work, high levels of learning, problem-solving, and task complexity”
The Eurozone problems are often explained by bad policy choices of individual countries. The Troika remedy is to cut wages and to make it easier to dismiss people. Is this the way ahead? Do we really have to dumb down labor? Is it all about managerial independence? Not really.
Erik Reinert and Rainer Kattel have a new paper about the historical dynamics of the extension of the European Union, symmetric and asymmetric integration and technology. One of the methods they use comparing the ‘learning capabilities’ of organizations with the developments of the current accounts of countries. Some excerpts:
Holm et al 2010 use European Working Conditions Survey for their taxonomy of organizations and their learning capabilities. We use here as learning organization those organizations in the Holm et al. taxonomy that are “distinctive for the way high levels of autonomy in work are combined with high levels of learning, problem-solving, and task complexity”
We can also trace these dynamics on the level of organizational capabilities, as a snapshot on Figure 8 does. Again, we do not see converging but rather diverging processes taking place in the core and in the periphery: in the core significantly more companies exhibit learning capabilities than in the periphery. Read more…
A factual rebuttal of remarks of ECB chief Jörg Asmussen, made at the Bank of America/Merill Lynch Investor conference
It’s sunday, an absolutely bright morning in spring – and I find myself taking down Jorg Amsussen, board member of the ECB, who held a speech titled:
Where did he go wrong?
Before going into details let me state that unemployment in the Eurozone periphery is not only higher than anything we’ve seen in the rich countries, post WW II, but very much higher, easily breaking the Finnish, East-German and Spanish records of the nineties. And its still increasing. This is atotal failure of economic policy (understatement). And not just economic policy of the periphery countries but also of EU and ECB economic policy, as is implicit in (A), below. It’s also a sign of the shift of old school future oriented policies aimed at increasing work, income and production to policies just aimed at the preservation of rent incomes (including the seigniorage interest incomes of banks make based on their deregulated monopoly of fiat money creation) and financial wealth. Alas, we can’t eat bonds.
A. First, the positive side. He states: “It is, at once, a crisis of public and private debt, a crisis of competitiveness and growth, and a crisis of trust; in institutions, in politics and in decision-making. Tackling the crisis successfully and comprehensively will require solutions for all of those.” Only a few years ago the ECB, inspired by rational expectations economics, explicitly stated that private debt and differences between countries (competitiveness, as Asmussen calls it) did not matter. And did act the wrong way, as it’s still doing (partly, because they do not seem to be aware of the facts, see below). But, important – by now the ECB admits the existence of criticism. Wow (thank you, Paul, as well as a 1.001.069 people (yes, some robots, too) with a Twitter account). This is an improvement.
B. The mistakes. Read more…
Crossposted from: the ILO
Unlike several other disciplines, economics is far from being an exact science. It is often hard to find clear answers about basic economic facts and trends.
Take wages, for instance. Half of all employed people rely on wages for a living. These wages tend to reflect the combined efficiency of capital, labour and technology in any given country. So it is important to know whether economies are leading to better wages for the large majority, especially in a highly interconnected global economy.
According to the ILO Global Wage Report 2012/2013, in the last decade, real wages – adjusted to reflect purchasing power – had doubled in Asia, almost tripled in Eastern Europe and Central Asia and increased by 15 per cent in Latin America. That compares with a rise of just five per cent in developed economies. These trends confirmed what we already know about the direction of the current changing regional dynamics, but do they tell us the extent to which wages around the world are converging?
Answering the question is not straightforward. The prices of goods and services in each country tend to differ as do wages. And comparing them raises a number of difficulties.
Several options are available:
One is to convert nominal wages into a single currency, usually the US dollar, using market exchange rates. This is the least preferable option as exchange rates are subject to many forces other than economic fundamentals. A better option for international comparisons is to work out what it would cost to buy a single basket of goods in each country – the purchasing power parity (PPP).
Comparing countries in this way, results in the following graph, which displays average wages for 2010 in 10 sample countries.
Table 1: Average nominal monthly wages,
in PPP international dollars, 2010
Source: ILO Global Wage Database and IMF
Here we can identify three groups of wage levels of around 700, 1500, and 3,000 international dollars respectively, corresponding to three levels of development or economic efficiency.
A disadvantage of this approach is the difficulty of composing one identical basket of goods that serves all countries.
A variation of this method is to compare wages (again using PPP), in a single occupation, for example unskilled work in construction. A broadly similar picture emerges, with wages of construction labourers in emerging countries 3 to 5 times lower than those in advanced countries. There are, however, interesting differences in the findings of the two graphs when comparing the United States with Germany and Turkey with Portugal.
If the trends in real wages mentioned earlier were to be sustained into the future – a questionable assumption – the wages of construction labourers in Asia and in developed economies would equalize by 2038.
Table 2: Average monthly wage of labourers in construction,
in PPP international dollars, 2010
Source: ILOSTAT database and IMF
(Data for China and Germany are average wages in construction)
Another method is possible, based on the price of a staple food good that is prevalent in each region (rice, pasta, wheat or maize meal), which every household is likely to consume. This overcomes the difficulty of trying to compose one identical basket of goods across several countries.
Table 3 shows the cost of 5 kg of the prevalent staple as a percentage of the average wage. This is the most direct possible formula, as it avoids any exchange rate conversion.
Here the graph shows a different picture: In seven countries, the cost of 5kg of a staple food lies between 0.4 and 0.7 per cent of the average wage. Two countries stand out, Indonesia and South Africa with rather different ratios, suggesting some skewing of the relation between wage levels and average income.
Table 3: Cost of 5 kg of staple food
in per cent of monthly average wage
Source: ILO Global Wage database; FAO GIEWS database; Eurostat;
US Bureau of Labour Statistics; and South Africa Quarterly Food Monitor
More data needed
There has been much public debate about the role of domestic versus international factors in shaping relative wage levels. Some argue globalization is pressuring wages downward, whilst others argue that domestic institutions retain the upper hand in wage setting.
In order to move closer to a possible answer, we need more frequent international comparisons of wages covering more countries and occupations.
From: Lars Syll
Mainstream neoclassical economists seem to think that there really isn’t any difference between solving a liquidity trap by lowering real wages via inflation or by lowering nominal wages.
But that is of course pure nonsense. Lowering real wages via inflation and lowering nominal wages aren’t equivalent measures.
As John Maynard Keynes wrote in General Theory (1936):
The method of increasing the quantity of money in terms of wage-units by decreasing the wage-unit increases proportionately the burden of debt; whereas the method of producing the same result by increasing the quantity of money whilst leaving the wage-unit unchanged has the opposite effect. Having regard to the excessive burden of many types of debt, it can only be an inexperienced person who would prefer the former … If a sagging rate of interest has to be brought about by a sagging wage-level … there is … a double reason for putting off investment and thus postponing recovery.
Or as Irving Fisher – the originator of the debt-deflation theory – wrote in Debt-Deflation Theory of Great Depressions (Econometrica, 1933): Read more…
The large current account deficits of the southern European countries are gone (graph 1).
* This is not mainly caused by increases in productivity and a surge in exports. Average productivity in Spain is increasing but that’s caused by the decline of construction, which has lower productivity than the average of the rest of the economy. Wages in Greece have declined with about 20% vis-a-vis competitors – but as Greece first has to establish an export industries this has not yet led to any kind of clear competitive advantage. Greek exports of goods and services (including tourism) actually declined, in 2012-IV!
* It is, mainly, caused by the Great southern European Depression. High interest rates, dramatic declines of domestic demand and unprecedented unemployment as well as some decline of oil prices caused imports to decline.On a more detailed level the real changes are mainly in the goods- and income accounts, not in the services accounts.
New Eurostat data (trade, house prices,unemployment, CtC): we need ‘investments, investments, investments’.
Update: here a little bit about ‘Cyprus waste industries’ (see Ad d.)
New data from Eurostat: (a) current accounts, (b) house prices, (c) broad U-6 unemployment and (d) also some real stuff: packaging waste treatment
Ad a: the most interesting cherry: the current account deficit of Spain, 2012, fourth quarter, improved from -8,6 tot plus 4,4 billion (Euro). That’s a definitive: ‘wow‘. It’s is of course no sign of increasing competitiveness, as estadistica españa tells us that, in February, “Todos los sectores industriales registran tasa anuales negativas en febrero“- it’s a sign of an extremely deep economic crisis. For the same reason the current accounts of Greece, Italy and Portugal showed large improvements too. Looking at the last half-year of 2012 all of these current accounts even showed surpluses. Read more…