Update: Summary: in times of balance sheet recessions and secular stagnation Keynesian policies should not just aim at the level of aggregate demand and income but also at the composition of aggregate demand and income.
In a very readable and insightful review of the new Martin Wolf book (which I haven’t read yet) Kenneth Rogoff plays the revolutionary card:’Let’s get rid of these debts, we’ve got nothing to lose than a deflationary chain of events’. This puts him, in a Eurozone perspective, in the radical left corner of politics (and it’s kind of ironic that he accuses text-book economists like Krugman of being ´hard-left´…). Quote:
Without question the best and most effective approach to the problem would have been to bail out the subprime homeowners directly, forcing banks to take losses but keeping them manageable. For an investment of perhaps a few hundred billion dollars, the US Treasury could have saved itself from a financial crisis whose cumulative cost, counting lost output, already runs into many, many trillions of dollars. Instead of “saving Wall Street,” a subprime bailout would have been targeted, almost by definition, at lower income households. But unfortunately, this approach too would have been politically impossible prior to the crisis.
I agree with almost the whole piece. I can however add some specifics which al point to towards the same conclusion: European austerity is not just about curtailing governments but very much also about disempowering households. For instance the UK recovery can largely be explained because this disempowerment happened to a much lesser extent in the UK, at least when we look at disposable income.
(A) Rogoff states that the German economy is arguably somewhat overheated. It arguably isn’t. Read more…
On his Marginal Revolution blog Tyler Cowen has an interesting post about Germany: historically, German inflation has often been much, much higher than today without anything like the present turmoil about ‘stable money’. Tyler rightly states:
Today, Eurostat published the new, revised and updated GDP data wich are based upon the new, revised and updated national accounts. What does this teach us?
The aggregate European Union data do not show any kind of dramatic difference with the old data. It is however worhtwhile to look at some individual countries:
Germany had, according to the new revised data, an official double dip (two subsequent quarters of declining GDP)
The 2011-2012 recession in Spain was more severe than originally estimated (2011: GDP decline -0,6% instead of +0,1%; 2012 -2,1% instead of -1,6%)
According to the
English British ONS growth in the UK was slightly higher and the growth of employment slightly lower than earlier estimated which means that the unprecedented decline of productivity is still unprecedented – but less large than earlier estimated. Read more…
Links. Inflation and ergodicity, Greece, Greece, flaring solar, tobacco as subordinating money, ordoneoliberalenergyprices: guess who pays the bill
1) Thomas Sargent and Timothy Cogely investigate the long run development of USA wholesale prices and discover the obvious (emphasis added):
Major outbreaks of price level instability and unpredictability are associated with the Civil War, the two World Wars and Great Depression, and the Great Inflation and Great Recession. In each instance, a crisis disrupted pre-existing monetary arrangements and created considerable uncertainty about the future. In each case, policy makers eventually found a path back to price stability, but that took a long time: the average time from peak to trough was 30 years.
This makes even Thomas doubt the models of Robert Lucas (see the concluding remarks). The really interesting thing is however that, despite the enormous increase and change of the 19th century monetary USA economy (PT in the PT=MV formula) average inflation was about zero. Coincidence? Endogenous gold standard money? Sargent and Cogely still do not explicitly reject ergodocity (or: ‘economic predestination’ – rational expectation economics have a Calvinist streak). But given some time they probably will follow the path of so many former neoclassicals who started to do economic history. Caveat: I do know that this thirty year period fits into Sargent’s ideas about deep social parameters etcetera. It is, however, at odds with Real Business Cycle ideas as these stress very rapid adaptation of economies to ‘shocks’.
2) This makes me desperate: ‘financial markets’ fret about Greece. Again. Help. What were the whizzpersons behind their screens thinking Read more…
In the comments to the 69th, Piketty, issue of the RWER, Newtownian states:
Try as I might in 182 PDF pages I could not find a single reference to the natural environment or climate change, peak oil, degrowth, exponential economic growth impacts, some small discussion oil and only a single footnote with the word ‘ecosystem’.
Which I suggest indicates the real natural world is still not seen as relevant to economic thought and critique even for ‘real world’ economists.
This comes concurrently with the release of Naomi Klein’s new book “This changes everything” http://www.theguardian.com/books/2014/sep/19/this-changes-everything-capitalism-vs-climate-naomi-klein-review !!??? which makes this omission even more bizarre.
From a mainstream economics group I would have expected this. But RWER I thought was progressive. This omission is so depressing – for me personally in part after having spent two days last week at a degrowth conference which itemized how bad, bad economics policy is regarding sustainability and future generations and now desperately new economics ideas are needed.
I agree. But the concept of capital used by Piketty is not as bad in this respect as the ‘mainstream’ text book growth concept (which, as shown below, is hugely influential in policy circles). Read more…
1) Wage rates in Germany: +3%. Which, as the number of jobs is increasing at a 1% rate, means that total wages are up 4%. The only thing they have to do to avoid recession is to lower VAT on labour intensive services, to give an additional boost to purchasing power.
2) An interesting ECB labour market study: employment losses (EU level) had a very strong gender bias (almost 100% of net jobs lost were occupied by males) and a very strong education bias (employment of higher educated people actually increased but employment of lower educated people plummeted). Interestingly, the ECB does not push for ‘structural’ changes anymore. But it’s still trying to turn the Euro Area into a Mundellian optimal currency area: barriers to international mobility have to go down (I agree but not because of the Euro) (p. 67):
“While the impact of reforms that have already been undertaken may take some time to produce their full effects, more may be required to achieve the degree of labour market flexibility compatible with membership of a monetary union Read more…
Official unemployment in Cyprus is ‘only’ 15,4% – and falling! It’s high but nothing like the Spanish and Greek rates which almost touched 30%. A success for austerity? Not really, as Cyprus witnessed (according to the new Eurostat data) the fastest growth of ‘non-official’ unemployment of all EU countries (graph). This is defined as: underemployed part-time workers, jobless persons seeking a job but not immediately available for work and jobless persons available for work but not seeking it.
Mind that the six countries with the highest increases are all Euro-countries. Mind that many of the countries with the lowest increases are non-Euro countries. Don’t misunderstand the graph: non-official unemployment in Latvia has witnessed a (very welcome) decline last year but is still higher than in 2008. Differences in levels between countries are quite large, especially Italy has a very large amount of people who are available for work but not seeking (12,6% of the working force). Anyway – especially in the crisis countries the increase of broad unemployment (i.e. official and non-official unemployment) was (and is) quite a bit higher than the increase of official unemployment. Germany might be the only country where labour slack is starting to diminish, though Eastern and Northern Germany still know large areas with high unemployment. No data for France.
mis•un•der•stand (ˌmɪs ʌn dərˈstænd)
v.t. -stood, -stand•ing.
From: Erwan Mahé (guest post). Emphasis added
Speaking of the ECB’s targets, just a quick aside. Would it be possible to name governors to the ECB who are aware of the central bank’s fundamental and institutional founding goals?
Check out this zinger by Mr Bostjan Jazbeck, the president of the Slovenian central bank since July 2013 and former IMF “expert:
“what the ECB is doing is trying to keep its head above water because of the lack of thorough policies needed to support it.”
“the ECB does not have a mandate to support growth.”
As much as his first statement makes sense, and is consistent with those made by the other ECB governors, the second one leaves me stunned.
On the bright side, this gives me the opportunity to re-quote the relevant ECB statutes, as set forth in the Maastricht Treaty and the Treaty on the European Union:
“Without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community as laid down in Article 2.” (Treaty article 105.1).
“The objectives of the Union (Article 2 of the Treaty on European Union) are a high level of employment and sustainable and non-inflationary growth.”
Seriously, Mr Jazbeck, given your recent rise to the pinnacles of monetary policy making, your lack of knowledge of the mission that was confided to the institution of which you are now a leading official is inexcusable. Unless this types of statement is, in reality the reflection of an ideological posture (structural reforms! Structural reforms!) combined with bath faith?
The European Central Bank is going to buy Asset Backed Securities. The press release contains a remarkable sentence:
To ensure that the programmes can include the whole euro area, ABSs and covered bonds from Greece and Cyprus that are currently not eligible as collateral for monetary policy operations will be subject to specific rules with risk-mitigating measures.
Translation: the ECB will buy junk bonds, too.
Which is the best part of the news (sorry, but the need to drive down broad unemployment rates of 35% in Southern Europe trumps all those ideas about moral hazard and the like. And we’re out of time). But predictably, the Bavarian minister of finance, Markus Söder, has already protested and tried to influence ECB policies as he fears that the ECB runs the risk of becoming a bad bank. He’s wrong. There are valid arguments against thje ECB decision. But his ‘bad bank’ argument is bonkers. Central banks do not get ‘bad’, as shown by the chart below, from Muhammad Bin Ibrahim (see p. 44). HEY, they print the money…
Source. Graph slightly updated. Red: source of vulnerability; yellow: constraint on recovery.
Via de website of Brad deLong I encountered this wise article about DSGE models from macro-advisors. It’s sometimes rather technical (an AR(1) process is a kind of complicated moving average – or in fact, some weighted moving averages are a simple AR(1) process). It’s important enough to republish it. It starts quiet – but does not end that way.
Much has been made of the failure of modern macroeconomics to predict or understand the Great Recession of 2007–2009. In this MACRO FOCUS, our resident time-series econometrician, James Morley*, explains what is currently meant by “modern” macroeconomics, what is behind its failure, and what can be done to rehabilitate its reputation.
In a recent essay, Narayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis, acknowledged that modern macroeconomics failed during the recent financial crisis. However, his essay misses the point of why it failed. Read more…
2) Time series economics and econometrics is the science of complicated moving averages. It matters a lot which weights are used. Don’t use present day (relative) prices to estimate past economic performance. Or the other way around, as Leandro Prados de las Escosura shows. But where does the past stop and the present begin?
3) It’s starting to dawn upon the Irish what really happened – they did not bail our their banks but foreign creditors.
Links: tourism is a growth sector, four years of Greek wage decreases, Spanish economy did worse in 2011, 2012
Tourism is, at this moment, a growth sector in countries like Portugal, Greece, Spain, Ireland, the Baltic states and the UK. In the UK growth started (predictably) after the large depreciation of the pound in 2008/2009. Despite impressive increase, there are however no signs of ‘supply side constraints': the number of people working in tourism wanting to work more hours actually increased after 2009, according to the ONS:
- Employment in UK tourism industries increased at nearly double the rate of the rest of the UK labour market between 2009 and 2013 (5.4% increase, rising 143,000 from 2.66 million to 2.81 million)
- Most of the growth in tourism employment was part-time work between 2009 and 2013 increasing 6.8% or 72,000 from 1.06 million to 1.13 million.
- The number of workers who would like to work more hours within the food and beverage serving industry group has increased at over double the rate of the rest of the UK labour market between 2009 and 2013 (49.0% increase, rising 100,000 from 1.14 million to 1.24 million)
- Self-employment has increased at double the rate of the rest of the UK labour market within the UK cultural, sports, recreation and conference activities industry group between 2009 and 2013 (21.9% increase, rising 41,000 from 188,000 to 229,000)
- Temporary employment within main jobs in the UK tourism industry has grown cumulatively by 16.6% between 2009 and 2013, in comparison to 12.5% within UK non-tourism industries (rising 29,000 from 231,000 to 260,000)
Greek wages are flexible. But (just as in the Netherlands in the nineteen thirties) this does not solve demand side problems. In Greece, wages have been declining for four years in a stretch, sometimes at a double digit rate. Despite of this – to a large extent: because of this – the country is to the ropes. Lowering wages clearly is not the solutions to demand side problems. I guess that this will become a text book classic.
Revisions to the Spanish national accounts show larger decreases in 2011 and 2012 (look at cuadro 3). Which is in line with expectations based upon the fast increase of unemployment in those years. Eurozone austerity was even more detrimental than we already thought.
1) In the Financial Times Robin Hardin has a good article about the land tax. He suggests (based upon micro-economic work of Morris Davis, Rutger Stephen Oliner and Edward Pinto which I did not read) that a ‘land underlying houses’ value index might be a good indicator of housing bubbles. Macro data show this, too. The ‘Piketty style’ national accounts balance sheet data contain information on the value of land underlying houses. For the Netherlands I’ve extrapolated these data (roughly: market value of houses minus building costs of houses) backwards to 1965 and they clearly show the two post WW II Dutch housing bubbles. Technical detail: due to the introduction of new national accounts concepts there is a break in the series between 2008 and 2009; the data on NIP are consistent with the old concepts, not with the new concepts). See Jesse Frederik (in Dutch) on the first bubble.
2) Unemployment in Estonia keeps getting down – but employment is not getting up. The working age population is shrinking.
Links: real estate problems, the importance of being employed, economic weight watching, banking in the USA
Fergal McCann and Tara McIndoe-Calder show, on Voxeu, with micro data on small and medium enterprises, that Richard Koo is right: real estate cycles lead to debt overhangs which lead to balance sheet recessions.
Shortly after World War II, i.e. about seventy years ago, the ‘money purification’ in the Netherlands led to a situation in which in fact all households were ‘banked’, i.e. had access to bank accounts. Claire Célérier and Adrian Matray show, on Voxeu, that, in 2014, the US of A are still lagging Read more…
Update Data on job growth in Ireland can be found here. Employment increased with 1,7%, Year on Year. Together with a 7,7% increase of the volume of production this implies a whopping 6% increase of productivity. Which fits in the picture of catch up growth in a country with an absolutely massive output gap.
After years and years of grave, creditor centered deflationaqry liquiditionist policy mistakes Ireland recently finally got a chance to grow again – and it did. GDP in the second quarter of 2014 was 7,7% larger than one year earlier. The triumph of austerity policies!? Not really. The volume of government expenditure increased with 7,9%, even more than production. Government expenditure in current prices however only increased with 1,6% which meant that prices paid by the government (mainly wages) were a whopping 6% lower… Growth was not export led either: imports grew about as fast as exports (which, as Ireland has an export surplus, of course meant that the surplus increased a little). The most surprising thing: a 18,5% increase of the volume of investments! I can’t at the moment explain this (construction? equipment?). But it shows the power of domestic demand. I could not find second quarter employment data – but it seems that productivity growth went through the roof.
According to INSEE, the French statistical institute, the French labour market became much more flexible. But it also became less flexible, according to the same study…
How to explain ‘Ces constats apparemment contradictoires?’
Apparently, more flexibility led to ever shorter contracts at the bottom of the labour market and therewith to segmentation and less dynamism, many people are increasingly trapped:
tout ceci suggère que le fonctionnement du marché du travail se rapproche d’un modèle segmenté, où les emplois stables et les emplois instables forment deux mondes séparés, les emplois instables constituant une « trappe » pour ceux qui les occupent
Grumpy update: yes, I can and do read french, albeit somewhat slowly, and more people talking about France should be able to do that.
Should this problem be solved by a more flexible upper half of the labour market? Hmmm… that’s the USA solution, a country characterized by extreme income inequality and loads of ‘working poor’. And when we look at the 1995-2014 period less than impressive job growth and a declining participation rate. I do not say that French labour market rules, habits and culture are perfect. But economists should stop analysing the labour market assuming a situation of full employment. But we we’ll first have to solve the macro-economic problems: mind that european countries with medium or, regionally, even low unemployment like Switzerland, Germany and the Netherlands have been able to fill the macro economic ‘spending gap’ with current account surpluses of 7 to (over) 10% and even this did not prevent a double dip in Germany and outright stagnation the Netherlands… Also and obviously not every country can have such surpluses at the same time. A ‘flexible’ labour market in a situation of high output gaps (look at the high rates of unemployment) is a totally different ball game than in a situation of full employment and will trap people into poverty.
The labour market in the UK is doing well. Unemployment is going down, employment is going up, contrary to the situation in the USA participation rates are slightly increasing and total wage income is increasing too, especially in the lower brackets. And the number of real jobs relative to
day labourers self employment might increase a little (look here at EMPo1, quarterly data to correct for the privatization of the Royal Post). Time to tighten? Hmmm… unemployment is still high (i.e. above 6%) and wage increases are at a historical low. There are, at this moment, NO signs of wage inflation. There are ever clearer signs of a housing bubble and house price inflation – but that kind of inflation does not require higher interest rates but a land tax and, as far as I know the British situation, more construction, especially in and around London. If Scotland becomes independent they can only hope to leave before this bubble bursts and they really have introduce a Scottish currency asap and to curb any Scottish housing bubble right away. That might save them quite a bit of economic fall out.
On the ‘Cato at liberty‘ blog Steve Hanke states:
In 1981, Margaret Thatcher was prime minister and my friend and collaborator, the late Sir Alan Walters, was her economic guru. Britain’s fiscal deficit was relatively large, 5.6% of its gross domestic product, and the economy was in the middle of a nasty slump. To restart the economy, Thatcher instituted a fierce fiscal squeeze, coupled with an expansionary monetary policy. This was immediately condemned by 364 dyed-in-the-wool Keynesian economists – virtually all of the British establishment. In a letter to the Times, they wrote, “Present policies will deepen the depression, erode the industrial base of our economy and threaten its social and political stability.”
Thatcher and Walters were vindicated quickly. No sooner had the 364 affixed their signatures than the economy turned around and boomed for the next five years. That result provoked disbelief among the Keynesians. After all, according to their dogma, the relationship between the direction of a fiscal impulse and economic activity is supposed to be positive, not negative.
The 364’s dogma was proven wrong. Thatcher and Walters were right.
NO, they weren’t. After 1981 the British economy tanked and British unemployment rapidly increased to a post war high of 12% in…1984. Hanke, possibly inspired by the year ‘1984’, rewrites history.
The Economist (a British weekly) in its September 6 issue, p. 67, dances to the tune of the neoliberal piper as it, when defining potential growth’ implicitly uses neoclassical models which by assumption exclude the possibility of involuntary unemployment. Potential growth is supposed to be: ‘the speed at which the economy can expand while keeping inflation in check’. Wrong.
Following the lead of Harrod, 1939 and Domar, 1946 and defying Solow (who, to get rid of the expenditure flow consistentcy of the Harrod and Domar models, ruled out unemployment in his famous 1956 article about growth, in retrospect a textbook case of scientific retrogression!) we have to define ‘potential growth’ as ‘the speed at which the economy can and has to expand while keeping unemployment low’. See about this also this recent article by Fazarri et al and this Slack wire blogpost about the article. Empirically, the German, Spanish, Irish and Greek experiences seem to be described much better by the Harrod/Domar ideas than by the Solow model, Germany since 1991 being affected by Domar style endemic deflationary forces.
In a practical sense the definition of The Economist, which does not take structural unemployment into account, would restrict potential Spanish and Greek growth to 3% a year, the Harrod and Domar insights however show that both countries can grow much, much faster for quite some time as unemployment is sky-high.
Of course, potential growth is not necessarily the same thing as sustainable growth. Which makes things complicated. But inflation is no serious restriction, at least not for Greece and Spain. One overlooked aspect of the Spanish bubble before 2008 is by the way that wage increases were relatively restricted (really, check the data, and unit labour cost increases in manufacturing were restricted, too) as these were mitigated by large increases in immigration as well as a fast increase in the participation rate of women.