Mainstream models assume that households smooth consumption. Rational people are supposed borrow when they are young and to pay back their loans and to save when they are old, which is supposed to lead to a stable level of consumption. This means that there is no reason for contra-cyclical policies to counter sudden increases or decreases in consumption as, whenever a shock causes an upswing or downswing in incomes, consumer themselves will, given a little time, act in a contra-cyclical way by increasing or decreasing net borrowing. But do they?
Do people actually buy more cars when their income goes down but when the ‘potential’ of the economy keeps increasing? Read more…
When you’re unemployed in France your chances of finding a job within a year are larger than in Germany, despite lower unemployment in Germany, according to the improved ILO database on employment and unemployment published today. From the press release:
GENEVA (ILO News) – Unemployment spells for workers are becoming longer in some countries compared to the pre-crisis situation in 2008, according to the new edition of the ILO Key Indicators of the Labour Market (KILM).
“Headlines on a recent decline in unemployment rates hide the bitter reality that many jobless workers are finding it increasingly difficult to get into a new job within a reasonable period of time of 6 months or less,” says Ekkehard Ernst, chief of the ILO Employment Trends Unit.
Where do job seekers have more chances to find a job within a year
For example, in Spain, the United Kingdom, the United States, Serbia and Bulgaria, long-term unemployment has increased by 40 per cent or more in comparison to 2008.
The latest edition of KILM – an online reference tool offering data and analysis on the world’s labour market – includes information about the dynamics of job losses and job creation in 70 developed and emerging economies.
The new figures show that in countries with similar unemployment rates, there can be substantial differences in labour market trends.
While both the United States and Germany had unemployment rates of around 6.3 per cent between 1970 and 2013, unemployment spells were on average shorter in the US labour market. In France, where unemployment rates have been about 30 per cent higher than in Germany since 1991, it takes on average less time for an unemployed worker to find a job than it does in Germany.
In developing countries, the story is different. Workers move faster between spells of unemployment and employment than in advanced economies, but that’s because they transit frequently into informal employment.
In Mexico, for instance, the number of people entering and leaving the labour market between 2001 and 2012 were 3.7 per cent and 69 per cent higher, respectively, than in the United States – one of the advanced economies with the highest labour market turnover.
Where are workers more likely to become unemployed within a year
“Unemployment rates only give a rough picture of the functioning of a country’s labour market. Our data will help countries adapt their policies to those categories of workers who are most affected by the dynamics of the labour market,” explains Ernst.
The data on unemployment flows in the KILM cover, depending on the country, up to 30 years (1980-2012). It is the first time that such statistics have been collected to obtain a single, consistent picture of labour market dynamics in both developed and developing countries.
Whoever reads modern neoclassical models will notice that “It is one of the commonplaces of the received economic theory that work is irksome.” As Thorstein Veblen wrote 115 years ago. This idea is even one of the cornerstones of DSGE-models. But is work really always irksome? Below, the rest of the Veblen article which boils down to the idea that disliking all work is in fact, in modern terminology, characteristic of a state of clinical psychological depression: “Man’s life is activity”. And as man is a social animal, at least part of that activity had to be oriented at longer term goals in the interest of the group and man has evolved to like such activities: work. But if that’s part of our true nature, why does our society give so many people the idea that work is irksome?
The Instinct of Workmanship and the Irksomeness of Labor
American Journal of Sociology, volume 4 (1898-99)
It is one of the commonplaces of the received economic theory that work is irksome. Many a discussion proceeds on this axiom that, so far as regards economic matters, men desire above all things to get the goods produced by labor and to avoid the labor by which the goods are produced. In a general way the common-sense opinion is well in accord with current theory on this head. According to the common-sense-ideal, the economic beatitude lies in an unrestrained consumption of goods, without work; whereas the perfect economic affliction is unremunerated labor. Man instinctively revolts at effort that goes to supply the means of life.
No one will accept the proposition when stated in this bald fashion, but even as it stands it is scarcely an overstatement of what is implied in the writings of eminent economists. Read more…
According to the Eurogroup (emphasis added):
We endorsed today the twelfth and final review of the Irish adjustment programme based on the Commission services’ draft compliance report. We congratulated once again the Irish authorities for the steadfast implementation of the programme that is allowing Ireland to return to a path of balanced growth and job creation and to stand on its own feet again. The imminent completion of the Irish programme is a proof that our strategy is now delivering results. Tribute was paid to the hard work of the Irish people and to the determination with which reforms have been pursued.
How do they even dear to state this, when unemployment is still 12,5% of the labour force while droves of people are leaving the country because – they want to work hard.
The very problem is that the policies of the Eurogroup, i.e. increasing government debts to unsustainable levels by transferring de facto worthless private debts to the government, prevented the Irish from working harder as this disabled anti cyclical government policies! Oh, and this path of balanced growth and job creation? In October, consumer spending was down, again. And industrial production fell of a cliff. While, according to The Economist, foreign banks are leaving the country and the Irish banks have been nationalized. So much for neoliberal policies: in the real world they lead to higher government debts and nationalized
There seem to be some green shoots ireland, especially in the ITC business. But the monthly services index for October is down, too. I agree, that’s only one month. The latest data are dismal (except for milk production…). The Eurogroup would do well to consult the statistics before making statements and insult the Irish (and Spanish and Greek and Portuguese) unemployed. And wait till the banks get in trouble again…
1)News of the week:
The Celtic Tiger Ireland is off financial life support, among other things because it nationalized almost the entire banking sector (including the debts of the banks), a move which led to an almost 100% increase of the National Debt (or does it just disappear into thin air…). No link, message from The Economist. And no, that’s not a left-wing rag but a respected weekly which for quite some time cheered the Celtic growth miracle (they did start to measure and to warn about house prices in a very early stage). There Was An Alternative to the path chosen by the Irish people European Central Bank, though.
2) Geoff Davies is right: GDP does not measure welfare. The national accounts measure financial flows and stocks (including loans and debts). Which is a important in its own right. And Robert Locke (comment to the post) is right to – we should stop criticising and try to measure welfare and sustainability, too. Economic statisticians, as always in the scientific vanguard when compared with mainstream macro, do exactly this. Right from the Eurostat site:
A. Just published: the resource efficiency scoreboard:
“Resource productivity is defined as the ratio of GDP to domestic material consumption. Read more…
Rohihlahla ‘Nelson’ Mandela died. Born in the backwater of Mvezo he not only became, as an orphan and the first of his family to attend formal education, a lawyer but also the most admired politician of his generation. In jail, he learned the language of his oppressors (‘Afrikaans’) not to obey them – but to understand and, ultimately, to lead them, towards a free and democratic South-Africa where everybody was equal before the law (and look here for the decreasing share of the population living below the national poverty line). Don’t underestimate the scope and overriding importance of this endeavour as South-Africa is a very complex society which could easily have been torn to shreds by tribal warfare (including the white tribe) and civil strife. From Johan Fourie’s blog (03/12/2013):
South Africa: a country of migrants
Continuous waves of people have flocked to this land. Read more…
Does British austerity lead to prosperity? Economic growth in the UK in the third quarter of 2013 was (in a European perspective…) quite high, albeit still moderate in a historical perspective (i.e. the period 1995-2007). This article of the ONS shows which production sectors grew (overwhelmingly: services, albeit with some uptick in construction). But where did demand come from? I might have missed an ONS press release, but I couldn’t find this easily on the ONS site. The Eurostat site however tells us the next things (Year on year % change, seasonally adjusted and adjusted data by working days):
What do these data tell us?
1) Consumer demand is doing quite well, which continues to surprise me (employment is up but real wages have taken a very large hit during the last years). Note that total consumption is much larger than total investments, which means that consumption was the main engine of growth (looking at the demand side)
2) Government consumption (volume) did not go down, its price level however decreased (i.e.: wage cuts, as government consumption consists mainly of wages of teachers and the like)
3) Investments did quite well. Good, considering the low-level of investments all over Europe!
4). Exports declined
The main take away: the British recovery is (looking at the demand side) caused by a considerable increasing domestic demand which was mitigated by decreasing exports of goods and services. The volume of government consumption is (slightly) increasing but as a percentage of total demand it declined slightly as other sectors grow faster (nominal!). Also, international trade is became less important for the British economy.
Can you call this austerity?
Whoever is interested in life in the nineteenth century European city does well to read the first part of Crime and Punishment (1866, fiction, situated in St Petersburg) by Fyodor Dostoyevsky or the entirety of The Condition of the Working Class in England by Friedrich Engels (1845, investigative journalism, cities like Liverpool and Birmingham). Planet Money has a very good video-epic, Planet Money makes a T-shirt (2013, mainly Bangladesh, Colombia and the USA) about comparable situations in the twenty-first century. It follows the production process of a T-shirt and shows how the economies of scale of global production chains, technology and the modern city intertwine with human endeavour, ambition and hope. The most surprising aspects:
(A) the amount of historical continuity between the situation Engels described and the present situation. Read more…
Tyler Cowen is rather upbeat about the British economy. I’m not.
The ONS title of the next graph: Business investment increased by 1.4% between Q2 2013 and Q3 2013. Right.
Investments are of course a lagging variable. And British employment is doing surprisingly well, which leads me to suspect that the British production estimates are on the low side. The expenditure data above are however independent from the production estimates and consistent with a rather dull economic situation. A complicating factor: ONS data on British goods exports are out of tune with the much more positive Eurostat data, which means that the estimates of one of the main components of aggregate demand are quite shaky which of course influences the reliability of judgements of the macro situation. It seems anyway that net non-oil exports did quite well, after the British devaluation in 2008 which up to know however did not result in a meaningfull recovery of measured manufacturing output – I still do not exclude a large upswing of production of arms, which might be left out of at least part of the ONS statistics (or it might be included in the post ‘erratics’ of the UK trade balance, which is left out of the official data).
Look here for some thoughts about the British (and the Spanish) productivity conundrum.
We are living in a dark age of macro-economics indeed.
The empirical record of the last 300 years: (ultra-)unemployment in combination with wage cuts will lead to (much) lower incomes of households which leads to (much) lower expenditure of households. Recently, this has been happening for three or four or five years in a stretch, in countries like the Baltics and Ireland and Greece and Italy and Portugal and Spain and which is happening increasingly in the Netherlands and which will happen soon in Finland, too. Higher unemployemt in combination with lower incomes causes people to tighten their belts, which leads to a further decline of expenditure and a positive multiplier.
But on Voxeu, Petra Gerlach-Kirsten, Rosanna Merola and Connor O’Toole discover that lower household income leads to lower household expenditures. Which is puzzling to them as non-monetary rational consumer general equilibrium models had led them to believe that lower incomes do not lead to lower expenditure. Because rational households in an ergodic world know their future incomes and smooth consumption, taking their future incomes, future interest rates and future ideas and preferences into account when spending today, while they are also not cash constrained:
“We find that consumption growth is lower during financial crises, particularly during banking crises, and that a drop in income reduces consumption in the short run.”
Arghhh… we are not talking about lower growth here, we are talking about unimaginable drops of 30 to 40% in some countries. A single look at the national accounts will show their second point and would have shown that five, ten, fifteen and twenty years ago. And they do not even mention unemployment.
This line of reasoning is of course influenced by the ideas of people like Milton Friedman who mixed up non-monetary consumption (i.e. the use of consumer goods) and ‘utility’ with monetary consumption (i.e. the purchase of consumer goods) and production, to argue that consumption was non-cyclical, signifying that all kinds of counter-cyclical government policies were not necessary. But monetary consumption is cyclical and contrary to the statements of Gerlach-Kirsten, Merola and O’Toole it has been quite cyclical all along, especially expenditure on consumer durables. In the real world, the smoothing of the use of these durables leads to more cyclical purchases!
Dear friends, if post war consumption did not show the large cyclical developments of the past this was because incomes were smoothed by automatic stabilizers, minimum, wages, whatever, and not because households smoothed expenditures. However – governments have given up on this, at least in the EU, and ultra-unemployment (oops, ultra-unemployment is not even mentioned in their article…) and volatile expenditure are back, together with highly volatile consumer expenditures.
I agree, however, with their point that household heterogeneity should be taken into account – there is a difference between wealthy and poor households.
Austeristians love to point out that their expenditure and wage cutting policies promote long term development and prosperity. But the opposite is happening in Spain. Instead of boosting private investment, the cuts dampen private investment and especially future oriented investments like R@D which have declined with 8 to 9% a year for three years in a stretch
Which means that the accelerator effect, which ties investments to a high level of capacity utilization in combination with a high level of expected demand, is alive and kicking. And which means that the modernization of the Spanish economy is lagging, instead of speeding up, because of austerity policies. Not just because these cuts to business expenditure decrease aggregate demand even more. But also and especially because they signify a lower rate of technological progress.
Today, the Bank for International Settlements (BIS) published a new and improved edition of their international house and land prices database. That’s a great thing and shows the progress of the science of economics! We need those prices to describe as well as to analyse our economies:
1) By far the larger part of household debt consists of mortgage debt, which means that house prices are indispensable for the analysis of as well net wealth of households as well as household behaviour. And, as mortgage debt is the single most important kind of ‘real economy’ asset on the balance sheets of banks the same holds for banks.
2) As (a) house prices have (at least up to 2008) increased in many countries while (b)at least up to 2008 house ownership also increased in many countries, the importance of the value of houses has increased. Read more…
What should central banks do? Do they have to control inflation by targeting the amount of money? Should they ‘lean against the wind’ when it comes to bubbles? Or is ‘inflation targeting’ the silver bullet of central bank policies? A case can be made that central banks should ‘lean against the wind’ when it comes to credit: they should discourage ‘unproductive’ lending (i.e. lending to buy assets, including existing houses), though ‘macro prudential’ tax policies might be a better tool to do this and. And, surely in case of a severe crisis, they should encourage productive lending by banks to households, companies and yes, also the government. Any way, ‘credit to the private sector’ seems to be a much better indicator of the state of the business cycle than the supply of money or inflation. The dot.com bubble and the housing bubble were not characterized by high consumer price inflatin (the target variable of the ECB) or, in the case of the dot com bubble, by high money growth. They were both characterized by high credit growth (the difference between M-3 money and credit to the private sector is, at the moment, especially caused by lending to non-Eurozone companies). Oh, and this is the time to be resolute and credible, when it comes to this, as Kocherlakota understands. Via @cigolo.
In an interesting and important recent Voxeu article Pınar Yeşin states, about lending in a foreign currency (emphasis added),
While foreign currency loans offer some advantages to borrowers – such as lower interest rates and longer maturities compared to domestic currency loans – they also carry a significant exchange rate risk. A sharp depreciation of the domestic currency can prevent unhedged borrowers from being able to service their foreign currency loans. As a result, these loans could create a substantial systemic risk to the European banking sector. Banks could fail jointly as a result of their exposure to unhedged households and non-financial firms which default on their loans when the domestic currency depreciates sharply.
Policymakers and international institutions have recognised the systemic risk that foreign currency loans pose to the European banking sector. For example, the European Systemic Risk Board (ESRB), an independent institution monitoring financial stability within the EU, made an official recommendation on lending in foreign currency on November 22, 2011. In particular, the ESRB stated that “Excessive foreign currency lending may produce significant systemic risks for those member states and may create conditions for negative cross-border spillover effects.”
But the real problem is not lending in a foreign currency. The real problem is borrowing a foreign currency.
One of the problems with economics (as well as economists) is an undue focus on the financial sector (including pension funds) and financial assets. And the larger problem of a monetary crisis is not the systemic risk to the banking sectors and an increase in non-performing assets (which are problems in their own right, to be sure) but households and non-financial companies which have to default. It´s not about banks. It´s about families and households. As Stiglitz, Sen and Fitoussi argue, economic statistics have to become more household oriented to enable a shift of economic thinking towards the important questions. Which, according to Mahé, Schrijvers and me, is entirely possible when it comes to monetary statistics. Even when it is, as in this case, about the original sin in economics – borrowing in a currency which your country does not control. Which in this case also means that it´s not about protecting the value of the assets of the financial sector (i.e. protecting wealth and creditors) but about guaranteeing the circular flow of money and income (i.e. protecting the income of households and companies which, by the way, is better for the banks too).
1) According to Keynes,
“If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.”
Book 3, Chapter 10, Section 6 pg.129 “The General Theory..”
2) According to the Guardian,
Missing: hard drive containing Bitcoins worth £4m in Newport landfill siteA digital ‘wallet’ containing 7,500 Bitcoins that James Howells generated on his laptop is buried under four feet of rubbish
Buried somewhere under four feet of mud and rubbish, in the Docksway landfill site near Newport, Wales, in a space about the size of a football pitch is a computer hard drive worth more than £4m.
It belonged to James Howells, who threw it out when he was clearing up his desk in mid-summer and discovered the part, rescued from a defunct Dell laptop. He found it in a drawer and put it in a bin.
And then last Friday he realised that it held a digital wallet with 7,500 Bitcoins created for almost nothing in 2009 – and then worth about the same.
Today, the Irish statistical institute published data on employment growth in Ireland: a solid +3%, year on year. This news is about as good as it can be.
It is puzzling. Very puzzling. Such rates of employment growth are normally consistent with economic growth of 4 to 5% and, during a recovery, even with rates of 5 to 6% as companies at first can use existing ´slack´ to cater to additional demand.
And there isn´t even a recovery, in Ireland. Read more…
1) From Voxeu the real crowding out: ´When housing prices increase, banks on average reduce commercial lending and increase interest rates, leading related firms to cut back on investment`
2) From the Slack Wire more about secular stagnation. Are there hidden forces in our economies which tend to drive demand below output and production? Can these be counteracted by targeting an (unobservable) ´natural rate of interest´? Or do we need something else?
I think this conversation is a step forward for mainstream macroeconomic thought. There are further steps still to take. In this post I describe what, for me, are the positive elements of this new conversation. In subsequent posts, I will talk about the right way of analyzing these questions more systematically — in terms of a Harrod-type growth model — and about the wrong way — in terms of the natural rate of interest.
3) Hey, it is SME week (in case you didn´t know already!). To celebrate this, Eurostat published data on the amount of Micro (less than 10 persons), Small and Medium (10-250) and Large non-financial enterprises (>250) Non-financial enterprises. Just like in the days of Adam Smith, the large majority of enterprises are Micro (albeit less so in Germany). But unlike the situation in the eighteenth century there are quite some companies with more than 10 persons and even more than 250 persons, which already shows when we look at the number of people employed by these companies but even more so when we look at their share in total turnover (and some people state that this does not square with the neoclassical theory of the firm…).
4) And the ECB published a study on differences in export behaviour between small and large French companies. When you compare them with humans the export behaviour of these small companies resembles the dating behaviour of teenagers (a lot of ´churning´, as it is called in the study) while large companies tend to have much more steady relationships.
1) Hookers. Watch the whole thing, till the very end.
2) Once again: the Baltics. They still serve as an example, for some people, despite 20% declines in unemployment which, up till now, have been lasting. No Singapore style 4% increase of employment a year in sight. Economic growth is stalling. Why are they still popular, amongst some people? Look at these comparative EU data on government expenditure on various kinds of social protection (spoiler: they do not exactly have the highest expenditure (expressed as a % of GDP) of all EU countries)
3) A quite readable albeit slightly grumpy ´Told you so´ (in 1991, 1992, 1993, 1994, 1995, 1996…) bubble-ology piece by L. Randall Wray. But again, it´s good that economists are coming to their senses. Read more…
One of the problems of the economics curriculum is that very little attention is paid to measurement. And indeed, academic economists generally know little about this as most measurement is carried out by specialized statistical institutes. What about the history of this regrettable situation? The French economist Malinvaud (and long time head of the French statistical institute INSEE) has a nice metric on how USA economists increasingly dismissed empirical economics (let alone actual measurement) and turned to a-empirical ´high theory´ littered will ill-defined variables instead:
at the Cowles Commission: Rise and Maturity
Abstracted from the Cowles Fiftieth Anniversary Volume
Considering the contribution of the Cowles research institute to the development of econometrics, one has little choice but to focus on one major achievement, the building of the simultaneous-equation methodology. It is not necessary to demonstrate the indisputable fact that this methodology was conceived and elaborated at the Cowles Commission in the forties. Neither does one need to insist on the long-standing significance of this achievement nor on its central place in any education or reflection concerning statistical inference about economic phenomena. More interesting is the question of how research at Cowles during the first 15 years of its existence led to this result and how further econometric research here during the last 30 years relates to the simultaneous-equation achievement.
For 20 years, the motto of the Cowles Commission, printed on its monographs and reports, was Lord Kelvin’s sentence, “Science is measurement.” This might suggest that the main emphasis was then given to econometrics and that, from the beginning, research was devoted to the subject that matured in the forties.
The facts are not so simple. In the first place, during the first years a good deal of attention was devoted to direct measurement, as distinct from inference based on available statistical measures. Read more…
Larry Summers is puzzled by the fact that the increase in borrowing and lending during the aughts did not lead to higher inflation and lower unemployment. Hmmm. Did we all forget that the USA current account deficit increased to an almost Spanish 6% of GDP during these same aughts (to go down to 3%, within months, after Lehman)? And inflation did increase during the booms, at least when you look at metrics which also include prices of investments and especially of ´new residential investment´, like the gross domestic purchases index (ex. food and energy) of the Bureau of Economic Analysis (BEA). The metric of choice of the Fed, the PCE consumer prices index ex. food and energy, indeed does not show any kind of bubble related increases. But the domestic purchases index does. I discovered, by the way, that the BEA also calculates a GDP deflator excluding food and energy. Looking at these broader indexes also shows that disinflation has been considerable after Lehman or at least much larger than indicated by the PCE index.