Some links, 28/2/2014. Inequality, trust and money (and bad Troika policies)

There are some interesting new reports, all of them implicitly debunking the atomistic worldview of neoclassical economics.

From the IMF: an economy is like a neural network and more inequal nodes hamper its working:

In sum, then, inequality remains harmful for growth, even when controlling for redistribution. And we find no evidence that redistribution is harmful. The data tend to reject the Okun assumption that there is in general a trade-off between redistribution and growth. On the contrary, on average—because with these regressions we are looking only at what happens on  average in the sample—redistribution is overall pro-growth, taking into account its effects on  inequality. And these results do not seem to depend on the levels of inequality or redistribution. Moreover, they hold even in the restrictive sample, which makes relatively conservative assumptions about which data to include in the regression, as well as in the full sample, which makes use of all available data.

From the European Parliament: an economy is like a circular system and the people propelling the flow of money in this system show, when they react to the acts and the consequences thereof of others, pro-cyclical behaviour instead of contra-cyclical behaviour. Troika policies were a disaster as they were influenced by the ‘confidence fairy’ ideas implicit in DSGE economics that cutting wages and government expenditure will lead to higher private investment and consumption. The opposite happened. Multipliers turned out to exist (duhhh… we’re living in a monetary world) and to be (much) larger than 1, which means that initial cuts were amplified by private behaviour and lower trust and confidence. Unemployment as well as public debt soared and only when ‘success’ is defined as  ‘a lower government deficit (excluding bank aid)’ some successes can be spotted. Addendum: contrary to recent statements of Mario Draghi exports in countries like Greece and Ireland are not doing well, ‘despite’ dramatic declines of Unit Labour Costs (a flawed metric, by the way). Export success depends on decades of private and public investments in technology, sales, global value chains and networks – not on cutting wages of teachers (as usual, the economic statisticians and not the super-modellers are doing the path breaking work when it comes to conceptualizing this).

To conclude, with the improvement of the economic climate in the euro area and Ireland’s successful programme exit, both market and political sentiment has become more optimistic about the possibility that the other programme countries, and certainly Portugal and Cyprus, will be able to exit assistance when their turn comes. The current mood, which tends to focus on exit as a measure of success, is understandable, but should be partly resisted. It is understandable because politicians in programme countries, in euro-area partners and in European institutions, are naturally rejoicing about the good news
which comes after much bad news and before the European and also some national elections. But it should be resisted because many problems remain, even if countries succeed in exiting their programmes. In particular, unemployment rates and (private and public) debt levels are still very high. Growth prospects are still unsatisfactory and far too weak to address the unemployment challenge. Greece is in the worst situation with unemployment at more than 25 percent and public debt at 175 percent of GDP, but the other three countries, with unemployment at about 15 percent and public debt at about 120 percent of GDP, are also not faring well.

High (private and public) debt levels and generally weak growth determinants in programme countries, a
fragile global economy, disinflationary tendencies in the EU and the remaining banking problems, suggest that caution should be exercised when considering future exits. Certainly weak structural conditions in Portugal are concerning and indicate that the country should not opt in favour of a clean exit from its programme in May. At the very least it should request a precautionary credit line as a way of insuring against future risks. In the case of Greece, it is hard to see how the country could exit from its programme at the end of this year without some form of further debt relief and an accompanying framework to improve the structural drivers of growth.

From the NBER An economy is like a game with ever-changing rules and players and confidence increases when people learn and discover that they can trust these rules (which itself changes the rules and the players). In the eighteenth century New Jersey, a British colony, was desperately short of cash. Increasing the amount of paper money (a kind of small denomination interest free government ‘Mossler’ bonds) increased the value of this money in New Jersey between 1709-1775, as people learned to use and trust it.