‘Totally stunning’: two hyperboles. But I had to use them. Could anybody only six years ago have imagined a Eurozone core with 4% unemployment or less (here the new regional unemployment data) and a southern periphery with large areas with unemployment of over 30%. Broad unemployment in these regions must be somewhere between 35 and 40%. Hey, Andalucia has 36% normal unemployment… Mind that inflation is going down in the core, too. Unemployment percentages of 3 to 4% are i.e. totally feasable.
Mind also that borders between countries do explain part of the differences. But only a part. Mind also that unemployment in Eastern Germany is finally becoming less high – but it took, despite lavish transfers, almost 25 years and mass migration before this happened. The ‘Wirtschaftswunder’, based upon debt redemption and equality, worked better than neoliberal internal devaluation (in the fifties unemployment went down from about 12% to about 2% in 9 years).
Update: via Business Insider: this 2012 Cato Institute report by Steve Hanke and Nicholas Krus which, starting in France in 1796, carefully lists all 56 known episodes of hyperinflation (21 of which were connected with demise of Soviet Union and Yugoslavia).
I’m reading Thomas Piketty’s book about wealth, capital and inequality. At this moment one remark:
His book is based upon a very extensive ‘open source’ dataset which spans the centuries and the globe (wealth, return on capital, labour share, share of capital etc.). This seems to be part of a trend as Piketty is not the only economist who does this. Other examples are:
Carmen Reinhart and Kenneth Rogoff with their ‘This time it’s different. Eight centuries of financially folly‘ dataset, which spans the centuries and the globe (debt).
The late Angus Maddison data on GDP (dataset continued by ‘a group of close colleagues’) which span the millenia and the globe
The Bank for International Settlements with their recent dataset on house prices which span decades (for Norway: centuries) and the globe.
The (real) wages datasets of the International Institute of Social History (moderator: Jan Luiten van Zanden) which span the centuries and the globe.
These datasets are changing or did already change the science of economics. A common theme: there is no such thing as a stable monetary capitalist economy.
I do think that, as long as we have the Sveriges Riksbank prize in economics science in memory of Alfred Nobel, the founding and maintenance of such datahubs should be one of the arguments to award the prize.
One of the functions of the 2% Eurozone inflation target of the ECB is to make processes of internal devaluation easier. This should, according to the ECB, be possible without outright deflation of the price level. According to the 2011 ECB manual ‘The monetary policy of the ECB‘ (161 pages):
Taking the existence of unavoidable inflation differences into account, it has been argued that the ECB’s monetary policy should aim to achieve – over the medium term – an inflation rate for the area as a whole that is high enough to prevent regions with structurally lower inflation rates from having to meet the costs of possible downward nominal rigidities or entering periods of protracted deflation. According to all available studies, a rate of inflation below, but close to, 2% for the euro area provides a sufficient margin also in this respect.
In other words: 4% inflation in the Netherlands and Germany is necessary to enable Spain and Portugal and Greece and Italy to lower their price level relative to the Dutch and German level without having to lower nominal wages. That’s what this is all about. One can wonder if such a policy is effective anyway. As a recent ECB working paper states:
The main finding is that changes in the current account balance precedes changes in relative unit labour costs, while there is no discernable effect in the opposite direction. The divergence in unit labour costs between the countries in Northern Europe and the countries in Southern and Eastern Europe may thus partly be the result of capital flows from the core of Europe to the periphery prior to the global financial crisis. The results also suggest that the measures in the Euro Plus Pact to restrain the growth of unit labour costs may not affect the current account balance in the short term.
But even then, the ECB is failing its own goals (graph). Average Eurozone inflation is way below the ECB target and falling while Greece has entered a period of protracted and, as it looks at the moment, even accelerating deflation (5 quarters in a stretch, by now). At the cost of 27% unemployment, tens of thousands of bankruptcies, higher real debt levels and a disintegrating state (health care, education, pensions). The tragedy – it indeed does not work. Exports are getting down. The story of Kronos comes to mind.
‘Greek bonds fly of the shelves‘. Yesterday, Greece successfully issued 3 billion 4,95% bonds – and I’m still not seeing that one coming. Greece does not need new debt to be able to pay its interest bill. It needs frontloaded debt reduction to get debts down to a sustainable level, i.e. 60% of 2015 GDP (conservatively estimated, i.e. taking 0% growth and 3% deflation into account).Credible measures and structural reforms to make the remainder of the debt more flexible (i.e. ‘deflation protected’ bonds) have to be put in place. Tax measures – like a land tax – which increase the velocity of the stock of wealth and induce market oriented and demand boosting use of this wealth have to be introduced. Read more…
Some links, 10/4/2014. Cooperations, energy (graph), Peter Praet (ECB) on the impossibilities of monetary policy in the EZ
The ILO is officially charged with promoting and estimating cooperatives:
As business organization, cooperatives contribute to economic development, generating more than 100 million jobs and securing the livelihoods of nearly a quarter the world’s population. Cooperatives provide an important channel for bridging market values and human values … The financial and ensuing economic crisis has had negative impacts on the majority of enterprises; however, cooperative enterprises around the world are showing resilience to the crisis. Financial cooperatives remain financially sound; consumer cooperatives are reporting increased turnover; worker cooperatives are seeing growth as people choose the cooperative form of enterprise to respond to new economic realities. This report provides historical evidence and current empirical evidence that proves that the cooperative model of enterprise survives crisis, but more importantly that it is a sustainable form of enterprise able to withstand crisis, maintaining the livelihoods of the communities in which they operate
Are ‘New-Keynesians’ discovering Keynes? Paul Krugman links on his blog to an Eggertsson/Merohtra paper which allows the ‘natural rate of interest’ to fluctuate. Which actually sounds somewhat Keynesian. In new/neo/old classical thinking the natural rate of interest equilibrates, in the unspecified run, supply and demand in all markets, including the labour market. An idea which, according to Keynes, was not so much wrong but useless. David Glasner, on his ‘Uneasy Money’ blog, states about Keynes this (emphasis added):
Keynes did not conclude, as had Sraffa, that there is no natural rate of interest. Rather, he made a very different argument: that the natural rate of interest is a useless concept, because there are many natural rates each corresponding to a different the level of income and employment, a consideration that Hayek, and presumably Fisher, had avoided by assuming full intertemporal equilibrium.
This last assumption is, according to Eggersson and Merohtra, still crucial for ‘microfounded’ models (which are not founded upon micro-relations at all, but that’s another discussion, see the end). But adding even a little realism to the model leads the model away from equilibrium, even in the long run…
In Summers’ words, we may have found ourselves in a situation in which the natural rate of interest – the short-term real interest rate consistent with full employment – is permanently negative … It may seem somewhat surprising that the idea of secular stagnation has not already been studied in detail in the recent literature on the liquidity trap, which does indeed already invite the possibility that the zero bound on the nominal interest rate is binding for some period of time due to a drop in the natural rate of interest. The reason for this, we suspect, is that secular stagnation does not emerge naturally from the current vintage of models in use Read more…
The ONS has published a new report on the recovery (?) of the UK economy. Some snippets:
While aggregate output has grown strongly in recent quarters, Figure 2 suggests that GDP per capita – a measure of output per person in the economy – has only recently started to recover. This difference is particularly pronounced in Panel B of Figure 2. While GDP has closed on the predownturn peak, GDP per capita remains some 6.1% below the level in Q1 2008, and is little higher than the level first achieved in early 2005.
Also, 72% of the increase of the number of self-employed was caused by an increase in the number of self-employed of 50 years and over of age, about half of these were over 65.
Also, the old and feeble also increasingly work for the young and healthy: Read more…
Frances Coppola has an interesting post on ‘why labour markets don’t clear‘. She points to the fact that during downturns,
the market-clearing price of labour can fall to below the minimum needed to sustain life.
When wages are at starvation level, hours worked, labour force participation rate and workforce size all decline as people become weak, ill and eventually die – or, if they can, leave for somewhere more prosperous. Reducing the size of the workforce means that the market will eventually clear and wages start to rise again – for those who have survived.
This is the fundamental flaw in the “sticky wages” argument. In an economic downturn, the labour market cannot clear without incurring unacceptable social costs. Malnutrition, starvation, disease and death are the consequences of freely falling wages in an economic downturn. The reason why labour markets don’t clear is because we don’t want them to.
I do not entirely agree. Let’s take a look at the Netherlands.
Source: Centraal Bureau voor de Statistiek. Data for the first decades are probably pretty shaky, the 1813 level must for instance have been higher. The rise around 1850 is however real, though the magnitude might have been different. Read more…
Lower relative and even absolute wages did not lead to lower price levels in the Eurozone, up to 2012
Do lower relative or even absolute wages lead to a lower absolute or price level, as implied by the at least some of the versions of the ‘New Keynesian pricing Equation‘, other things, like total employment, equal? No, they don’t. At least not in the short or even the medium run. 2012 wages in Portugal and the UK (Euro price level) were about as high as in 2004. Greek wages were even lower (and continued to decline in 2013…). But the price level in these countries increased about as much as the price level in other EU countries. This is an important fact. It means that slashing wages leads to a massive erosion of purchasing power, with, of course, dire consequences for expenditure, employment and all that. Employment won’t be equal and its decline will aggravate the slump. It’s a very Old Keynesian situation.
Austerity ideology states Read more…
Mario Draghi will have to push for wage increases as disinflation continues, in the Eurozone and as quite some countries are already experiencing deflation. Deflation is vicious – especially when, like in the euro zone, debt levels are high while nominal debts are highly rigid and sticky. On the Eurozone level, there has been quite some disinflation and during the last 9 months inflation was in fact close to zero. And while I do not expect a prolonged period of average deflation as long as average nominal wages keep increasing with about 1%, even ‘lowflation’ will be devastating for the possibilities of quite some countries to pay back their debts. Especially as zero average inflation will, arithmetically, mean that quite a number of countries are actually having deflation. The only way out is not monetary policy (which takes to long to work, if it works at all) but higher wage increases, especially in the Eurozone ‘core’.
Below, data on seasonally adjusted domestic demand inflation in the Eurozone and in individual Eurozone countries. Domestic demand inflation is a broader concept than consumer prices and also includes prices of real investments and government purchases. What do these graphs show?
A) There has been (as we all know) quite a bit of disinflation in the Euro area (graph 1). Read more…
Whenever a DSGE economist uses phrases like ‘fundamental’, ‘deep’, ‘sound’, ‘data-rich’, ‘non-trivial’ or ‘micro-founded’ – beware. The opposite will likely be the case.
Robert King and Mark Watson point out another sorry example of this. They, literally, deconstruct the inflation variable used in a Smets-Wouters model (Smets being the head economist of the ECB) and a Gali-Gartner model, a variable mistakenly named ‘fundamental inflation’. And this ‘fundamental inflation’ metric turns to be totally unrelated inflation as you and I know it. Some quotes:
We study two decompositions of inflation, motivated by a New Keynesian Pricing Equation. The first uses four components: lagged inflation, expected future inflation, real unit labor cost and a residual. The second uses two components: fundamental inflation (discounted expected future real unit labour cost) and a residual …
From 1999-2011 fundamental inflation fell by more than 15 percentage points, while actual inflation changed little. We discuss this discrepancy in terms of the data (a large drop in labor’s share of income) and through the lens of a canonical structural model (Smets-Wouters (2007)) … While actual inflation is essentially unchanged over the post-1999 period, the measure of fundamental inflation constructed along Gali-Gertler lines fell by nearly 15 percent and that implied by the Smets-Wouters DSGE model fell by nearly 20 percent. That is, both measures of fundamental inflation predicted large deflation over the last decade.
What happened? Labor’s share in income showed a dramatic decline – as is also shown by the familiar graphs comparing real wages per hour (stable) with production per hour (up). This is however not visible in the Smets-Wouters formula, as they mix up micro relations with macro relations – there literally is no changing ‘labor share’ possible in their world. Which rules out inflation caused by increases in profits, taxes, ‘mixed income’ of the self-employed (wich is not included in real unit labour costs), changes in the sector structure of the economy and comparable factors. As they do not take these factors into account they are in fact kind of estimating the declining labour share of income. And call this: ‘fundamental inflation’ (taking their model serious they should of course have pushed for massive increases of wages – but I’m afraid that did not happen…).
By the way – King and Watson define real unit labor costs as nominal labour costs divided by nominal income. Which is wrong. Real unit labour costs are a derived indicator calculated by taking a series of nominal labour costs in different years and dividing this series by a series of real production in these years.
I’m preparing an article titled: ‘Metrics-meta about a meta-metric – a critical history of the concept of the price level’. However – either my table or my head may give way before it’s finished.
Some links, 4/4/2014. Worried banks, What is capital, World Bank made killing mistake, Slave labour, L’amour (not?)
Straight from the financial world (and they do not even mention Greece…):
2015 will not be the year when Spain, Italy and Portugal return to normal. When we look at the dynamics of unemployment, public and private debt, household and corporate solvency, and industrial production capacity, we see that it will take from 5 to more than 20 years to really return to normal. During this very long period, their economies will remain fragile; the Southern euro-zone countries will remain under the threat of a return of investor pessimism.
I love good writing about the relation between the concept of an economic variable and its measurement. Jamie Galbraith does an outstanding job when he discusses the concept ‘capital’. A taste, from his review of Piketty, ‘Capital in the Twenty-First century‘:
What is “capital”? To Karl Marx, it was a social, political, and legal category—the means of control of the means of production by the dominant class. Capital could be money, it could be machines; it could be fixed and it could be variable. But the essence of capital was neither physical nor financial. It was the power that capital gave to capitalists, namely the authority to make decisions and to extract surplus from the worker.
Early in the last century, neoclassical economics dumped this social and political analysis for a mechanical one. Read more…
John Cochrane, a well-known Chicago economist, seems to think that a ‘sudden stop’, a sudden slowdown of private capital inflows into a country, leads to inflation. A ‘sudden stop’ is one manifestation of what is also known as a ‘credit crunch’. Cochrane states about these crunches:
“If we just had a credit crunch, we would expect to see stagflation–lower quantities sold, but upward pressure on prices. A credit crunch, like a broken refinery is a “supply shock.”
Sigh. Less credit does not directly lead to less supply. It leads to less demand and therewith to a pressure on prices and only subsequently, as companies can’t sell their stuff, to less supply. Read more…
In their book Animal Spirits George Akerlof and Robert Shiller state that wages are not set equal to the marginal productivity of labour but according to social norms – i.e. equal to (a part of) other wages. A wage is not just the atomistic market remuneration for your labour. It’s also a powerful social token of the respect you earn and a neon sign of your position in society. You’re paid for a position – not for your work. As far as I’m concerned this characteristic of wage setting is more important than the famous ‘stickiness’ of wages. The ONS recently published some information which corroborates this view of wage setting (graph): the only constant pattern in the graph below is the stunning conformity of wage developments in the UK services sector and the UK manufacturing sector – also during the disastrous decline of UK manufacturing before the 2008 devaluation. Even Schumpeterian dynamics were less strong than social norms. Mind that the UK labour market is supposed to be one of the most ‘flexible’ of the European Union.
Update: below, pension funds are mentioned as new macro economic players. Just read in the newspaper (29/3/2014) that the European commission wants these funds to make/finance more real investments instead of just buying Bunds or stocks. The consequence will of course be that they, once, will own a very large chunk of our economy and infra structure.
Update: as far as I’m concerned the practical points mentioned below are totally consistent with the theoretical points raised by Lars Syll
In fact, I kind of like the IS-LM model and the idea of a liquidity trap. But the model has its problems. It did not tell us how we arrived at the present situation. Or how we can escape from it. Like any model you can only use it when you add institutional detail. Which too often does not happen. Paul Krugman gives the perfect example of the institutional context of the model when he stated:
“as I wrote long ago, in a piece from the 1990s, IS-LM is basic economics applied to a world in which in addition to production of goods there is both money and a bond market”.
And this world is, surprise!, the USA. To be more precise: the USA of the 1990s. Nowadays and outside the USA, things are different. Some examples:
A) Not all bond markets are equal. Read more…
From: Erwan Mahé (guest post)
21 March 2014
Today I received interesting news via the Twitter page of Lorcan Roche Kelly, who is much more of a ECB watcher than even I, so I thought it judicious to share this information straightaway. The analyst was also kind enough to provide me the link to the ECB reference text which enabled me to dig a bit deeper into the matter by comparing it with the prior text.
In a nutshell, the ECB, without the slightest bit of hoopla, has just modified certain rules governing the Eurosystem’s collateral eligibility criteria. These moves constitute an easing on two scores:
· ABS containing credit card receivables will now be eligible;
· National central banks (NCBs) will no longer be able to reject bank bonds from Irish banks guaranteed by the country.
This latter measure stems from the fact that Ireland is no longer deemed to be a country “under programme”, thus bolstering the value of the Irish government’s guarantee.
Some links, 2 graphs. EZ wage ‘increases’, the rise of the self-employed in the UK and ‘Markets and Morality’ (in Spain)
A) Are wage increases in the Eurozone too low? Deflation is especially vicious when debts are high, and low wages contribute to deflation, as the Japanese example shows (check the footnotes and remember that Unit Labour Costs are not a competitivety metric but gauge the contribution of wages to in- or deflation). Wage increases in the Eurozone are still not low enough to be consistent with a situation of self-perpetuating deflation but the data suggest that the ECB will continue to undershoot its inflation target, people will continue to struggle with their debt load, banks will, as a result, continue to be feeble and unemployment will continue to be high.
B) What the **** happened with the self-employed in the UK?! Carefully reading the ONS spreadsheets it turns out that: Royal Mail plc is included in the private sector from December 2013 but in the public sector for earlier time periods. Need I say more…
C) Two very good short clips about Spain (Spanish, Dutch subtitles)
* In Spain, banks go to great lengths to impose their idea of creditor centered market morality upon the population while under water unemployed home owners which run the risk to be evicted (while there are 60.000 unoccupied dwellings in Barcelona alone, at the moment) advocate a right to sell and lease back.
* Almost all doors produced during the Spanish housing boom were made in the same city – a testimony of the efficiency, dynamism and effectivity of markets. This city has, of course, become a totally desolated place – an example of what’s called ‘backward linkages’ in input-ouptut models. The pension of granny has to sustain entire families.
Great background music.
Around 1900 John Bates Clark introduced the mythical ‘representative consumer’, the idea that you can model the sector households as if it is one person, as well as the idea that the ‘social utility’ (his phrase) experienced by this entity is the ultimate standard of social welfare (emphasis added):
>”If each man could measure the usefulness of an article by the effort that it costs him to get it, and if he could attain a fixed unit of effort, he could state the utility of a number of different articles in a sum total. Similarly, if all society acts in reality as one man, it makes such measurements of all commodities, and the trouble arising from the fact that there are many measurers disappear. A market secures this result, for society acts as a unit—like an individual buyer (chapter XXIV.14).
Interestingly, the economist Charles E. Persons, citing the last sentence of the quote above and explicitly attacking Clark, rebutted this view of the world already in 1913, among other things using data on inequality in the UK which in all probability are, recently, also used by Piketty (didn’t check this, though):
“The ultimate standard of value, then, for modern society, does not exist as a positive measure. That it does not is due to the presence of a large degree of inequality. In such a society, either the utility standard or the disutility standard must include incommensurable quantities, or (perhaps better stated) qualities. The problem is insoluble …. One cannot equate and unify either the pains or the pleasures of rich, well-to-do, and poor. We cannot find a positive measure of value in a society with such classes. The ultimate word declares only that with a given concentration of wealth, the society discounts the pains of the poor in a certain degree. Likewise in such a society there is a corresponding over-estimate of the sacrifices of the rich. Again, in such society the utilities enjoyed by the various classes are measured by various standards. Great pleasures for the poor count little; slight pleasures for the rich count much. We must add to the formula: “value depends on scarcity and utility,” the statement “each of these is conditioned by the existence of more or less of inequality.”
At first sight, this sounds depressing: a neoclassical economist invoking a mythical entity and a critic who points out the obvious flaws and inconsistencies – one hundred years ago. We seem to be running around in circles.
At second sight, however, we did move on. Clark as well as Persons was searching for an ultimate standard of value. Neoclassical economists did since not really progress beyond the ideas of Clark and still assume that the sector households acts as an individual buyer and still assume social welfare (the Euler equations and Samuelsonian shorthand they nowadays use do not make a fundamental difference, in my view). The critics, however, developed a whole array of methods to conceptualize and measure social welfare. Look here for 41 ‘headline well being’ metrics for the UK which, however, still exclude estimates of inequality (there is a poverty metric which might be used as a very crude inequality index). But look here for Eurostat data, published today, on ‘quality of life’ indicators which do contain data on inequality. In the end, ‘social welfare’ turns out to be a multi-dimensional thing which is not captured by relative market prices and which is difficult to optimize. Persons was right: Clark was wrong.
Thanks to Marko for providing links.
Macro-economics is a science of totals – not of averages. One of these ‘totals’ is the ‘price level’. Beate Reszat reminds us of the complicated nature of this aggregate: a fuzzy maze of a myriad of individual prices wich are interrelated via as well the demand as the supply side of the economy but which also change because of technological and product changes. Which leads among other things to the question if inflation, as we measure it, is the right metric to investigate if the total cloud of interconnected prices goes up or down.
I’m less concerned (not: ‘unconcerned’) than Beate is about the measurement of individual prices. Tough I do think that, for instance, the people of the Dutch Centraal Bureau voor de Statistiek should publish a kind of manual about this it does seem that they are doing a good job when it comes to dealing with, for instance, changes in the ‘quality’ of products. A whole array of formal and tacit methods are used to do this (phoned them about this some time ago). But Beate is totally right that we should not just look at the change of the ‘average’ (i.e. headline inflation, a ‘measure of centre’ in statistical phraseology) but also at individual prices, with some kind of ‘measure of spread’. Eurostat data enable us to do this in a crude way. See graph 1 and 2.