Author Archive

Over the hill. The secular decline of the rate of ‘fixed’ investment in rich countries

August 18, 2014 Leave a comment

On Voxeu a book about secular stagnation has been published. Can I add something to this? Yes: information on the secular development of the rate of fixed investment (5 graphs).

The book contains a lot of interesting and important ideas about labour (ageing, declining male participation rates), technological possibilities (opinions differ about the magnitude of these possibilities but everybody sees possible improvements in life styles and health) and disequilibrium economics: tenacious interruptions of the flows of money which can not be cured or are even caused by changing relative prices (i.e. lowering then interest rate) are preponderant in the book. And only Smets (from the ECB…), Jimeno and Yiangou still believe in the confidence fairy. But even they advocate a smaller financial sector. ‘Fixed capital’ does however not get enough attention. According to me, progress will be increasingly dependent on household purchases of specialized consumer durables (in combination with cultural changes in life styles) instead of upon government and company ‘fixed investments’ which means that households will have to get the means (i.e. higher incomes) to finance these ‘household investments’. This will not only enable these purchases but it will also be necessary to fill the expenditure gap left by the decrease of government and business fixed investment. Read more…

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How the Goldman Sachs guys (in cooperation with mrs. Merkel) wrecked Europe

August 15, 2014 8 comments

Yesterday, Eurostat published predictably dismal economic data about Europe: the six-year slump continues. Important: this is very much an European slump, as Ambrose Evans-Pritchard showed:


And it’s an engineered slump. A striking fact of the graph above is the sudden stalling of the European recovery around 2011, Q1. This stalling was deliberately caused by Eurozone monetary policies. One can of course point to the ECB interest rate increases of April as well as July 2011. But these increases were, in the end, limited to ‘only’ 0,5%. Much more important, however, is what happened to ‘real economy interest rates’, like those paid by governments and, as governments nowadays are the financer of last resort for banks, therewith to rates paid by households and non-financial companies (graph 2).

Graph 2. Difference between interest rates paid by Italian, Spanish and French governments and the German government   Read more…

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The (estimation of the) flourishing UK labour market

August 14, 2014 1 comment

The UK labour market does well. The number of jobs increased with 2,7%, year on year. The total number of hours worked increased with 3,4% which means, as earnings per hour show (low) growth of about +0,6% and consumer price inflation is about 2%, an increase of 2% in total spending power. As a lot of the increase in jobs as well the increase in wages is in low wage occupations (the high wage financial sector is still under siege), where people have a high marginal propensity to spend additional income, the fast increase of the number of jobs together with rather low pay increases boosts consumer spending. Also, according to Eurostat, UK GDP increased with 3,1% which indicates that average (!) productivity is still declining, albeit slightly. Caveat: all these data are based upon three month averages, the not-official single month data for June show somewhat less positive developments.

The ONS (the UK statistical Office) does not only measure the level of unemployment but also flows of people in and out of employment, unemployment and inactivity. According to these data, during Read more…

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Graph of the day: fixed assets in Germany (or: the importance of land)

August 13, 2014 Leave a comment

According to official data, by far the larger part of fixed assets in Germany consist of land and land related investments like houses and buildings. This pattern is typical for rich countries. Note that Germany was one of the few countries to escape the international house price boom of the 1990-2008 period. Note that the data do not even include agricultural land.’Machinery and equipment’, i.e. trucks, cars, planes and machinery and the like, are of relatively minor importance, to an extent because they depriciate faster than buildings.


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Links, books 12-8-2014

August 12, 2014 Leave a comment

Printing income. When I borrow money to buy an existing house this is not counted as ‘production’ in the national accounts (though it does increase the amount of money). When I borrow money to buy a house and to pay the fee of the real estate agent the fee is counted as an increase in income and production. Large scale constructions like this one (IPO’s…) drove profit growth in the banking sector, since 1990.

Leaving the train station. In 2013, use of public means of transport in Spain declined with about 6% – for the fifth year in a row.

Isaac Asimov and the representative consumer. <strong>Foundation and earth is an interesting science fiction novel by Asimov about the representative consumer (the hive-mind of the Gaia planet), agent based modelling (‘psycho history’), a world inhabited by 1200 homo economicus individuals (who, interestingly, changed themselves into ultra-intelligent hermaphrodites who never meet in the flesh and only trade with each other via video) Read more…

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Bundesbank calls for higher wages across Eurozone

August 3, 2014 16 comments

Not much blogging from my side as Edward tricked me into constructing ‘Piketty series’ for the Netherlands – but this is a game changer (via left foot forward): the Bundesbank finally understands. Economic policies aimed at financial deregulation, low wages and asset price increases instead of low unemployment, high employment and high income have failed.

* Spending in the Eurozone is too low, unemployment is disastrously high, people are getting evicted from their houses while the number of empty houses increases and in quite some countries poverty is rising.
* For obvious reasons, not every country can export itself out of unemployment at the same time (a classic example of a ‘zero sum game’).
* Present policies to engineer current account surpluses are anyway not based upon any kind of serious export strategy but upon restricting domestic demand, which leads to a ‘race to the bottom’
* Households and companies are heavily indebted while low spending and high unemployment causes increasing problems with non-performing loans
* Companies are not going to invest when demand stays low, even when interest rates are low
* Quite some people do not want the government to act as a ‘spender of last resort’

Which leaves wage increases as the only way to restore demand, increase prosperity and lower unemployment (getting unemployment down to 4% in five years, with 1% productivity growth and 1% inflation and a share of wages (including mixed income) of 70% means that wages can increase with 4 to 5% a year, a little bit less when investments increase). Economies are of course quite unpredictable, but we can start with ‘forward guided’ 4% wage increases for two or three years.

Germany’s Bundesbank, Europe’s largest central bank, has backed a call for higher wages to boost the flat-lining Eurozone economy.

Jens Ulbrich, the bank’s chief economist, has joined a growing list of key players calling for widespread pay rises to fend off the crippling effects of failed austerity and low inflation and to crawl back the falling wage share in national wealth. Read more…

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Estimating capital. Robert Gallman edition.

July 26, 2014 1 comment

In economics, there is an unfortunate rift between academics and the economists who actually measure the economy. Which means that academic economists give little attention to the extremely important question how economic concepts relate to actual measurements – one reason why so much of their work is naïve (the ‘Ricardian’ household, which cuts consumption when government spending increases and the like). Fortunately, economic historians, who often have to do the measurements themselves, often bridge part of the gap. Robert Gallman has some highly relevant remarks about different ways to measure (nineteenth century USA) capital – and how these relate to the future, the past, uncertainty, savings, consumption foregone and replacement costs. This still  leaves out important parts of the concept of capital like liquidity, ownership and the ‘overlapping generations’ problem – which however does not make these remarks less valuable. Read more…

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Mainly German links

July 20, 2014 2 comments

The Bundesbank wants higher wages in Germany (really!).

The ‘Statistisches Bundesamt’ has a kind of app which helps companies to use data on historical inflation to insert ‘real price’ clauses in contracts – which can lead to a ‘price-price’ spiral. Interesting, as many economic models suppose that historical inflation is caused by expectations about future inflation (really!).

The German Handelsblatt has a very interesting article (sorry, no link) about business credit in the north (+1,4%) and the south (-5,9%) of the Euro Area. Which shows the difficulties of monetary policy in the Euro Area: one size fits none.

Eurostat published, coincidentally on July 17, data on EU energy imports from Russia. 39% of EU imports of natural gas and 34% of oil imports come from Russia. Also (including re-exports):

For seven Member States (Bulgaria, Czech Republic, Finland, Hungary, Lithuania, Poland, Slovakia) more than 75 % of their petroleum oils imports came from Russia. Twelve countries (Austria, Bulgaria, Czech Republic, Estonia, Finland, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia), imported more than 75 % of total national imports of natural gas from Russia.

Price increases caused a surge in imports from Russia from 80 million euro in 2005 to 140 billion in 2013.

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Bubble days are here again – time for a land tax

July 15, 2014 3 comments

Recently, Eurostat published data on European house prices. Prices are, on average, falling with 0,3%, Year on year. Which is a good thing, especially for the young ones. More good news: deflated Euro area and European Union house prices indexes are however about 12% lower than at the height of the bubble, in 2007. I’m of the opinion that young people establishing a family should not be burdened with paying high tributes to the middle aged and elderly or to banks reaping unearned rent incomes! Houses have to be and can be affordable (and available) and lower prices in combination with lower interest and, in a number of countries, a limited increase in nominal wage rates did lead to increased affordability (the idea that low interest rates necessarily have to lead to high house prices is bad economics!). Good.

However – signs of exuberance are returning. These increases are, as such, maybe not yet alarming. But whenever they are associated with rising private debt – we’re in trouble.

house prices

And part of these increases are alarming. Prices in London (which is about ten times as large as Estonia) ewcwntly increased with 20% YoY, a record. In Dublin (where prices declined during the crisis, but not to anything like a low level), prices are increasing at a double-digit rate, too. The 2013 the German rate of change seems to be about 10% (Eurostat does not have recent German data), though the most recent data seem to indicate that this rise has abated. Read more…

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In neoclassical DSGE models, coastal defences are ‘wasteful’. A reply to June Sekera

July 11, 2014 21 comments

Dear mrs. Sekera,

thank you for your very clear and insightful blogpost on this blog about economists and their distorted concept of public goods. But I’m afraid you’re way to positive about at least mainstream macro models and ‘public goods’. Very often – these models do not have a concept of public goods.

Too often, neoclassical ‘macro’ models do not have any logical space for public goods or ‘government consumption’ (i.e. consumption by households produced or financed by the government, like education) at all. Which is daft. My country – the Netherlands - would not even exist without coastal defences. And believe me – we learned about the necessity of well maintained large-scale public coastal defences the New Orleans hard way (Knibbe, forthcoming). But in the default DSGE (Dynamic Stochastic General Equilibrium) models, public expenditure on coastal defences is, by definition, ‘wasteful’ – as it’s government expenditure. You are attacking Samuelson – but Samuelson in fact crafted his ideas – which as you state do have basic flaws – to combat exactly this kind of thinking! But he failed. This kind of thinking is alive and kicking. And kicking hard – as the over five million unemployed in Spain can testify. Even incorporating the ideas of Samuelson into these models would be a huge step forward – these at least consider the existence of public goods and services.

The Oosterscheldekering coastal defence. Wasteful?


There are endeavours to change this. But the very fact that these articles have to state, in an explicit way, their difference with ‘standard’ neoclassical ‘macro’ by introducing the notion that public expenditure can serve a purpose shows the ‘state of the mainstream art': Read more…

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The UK productivity decline is over

July 6, 2014 1 comment

The ONS has published new data on British productivity. These show that the unprecedented 5% productivity decline has to quite an extent a lasting nature as it was mainly located in finance and the oil industry, which means that potential GDP also declined with the same amount. According to the ONS,

New analysis of industry contributions to productivity movements since the economic downturn shows large negative contributions from production industries other than manufacturers and from the financial services industry.

See also my take on this from a year ago (including productivity graph). Look also here. Productivity has however started to increase again, which means that potential GDP, though lower than before 2008, is increasing again (Okun’s law) while the surprising increase of British employment is not due to special productivity lowering British labour market mechanics (the British labour market is not special, despite flexibility) but to buoyant demand in non-financial, non-oil sectors (possibly to an extent caused by lower income inequality):

UK labour productivity was little changed in the first quarter of 2014, as growth of labour inputs broadly matched the expansion of economic output. Output per hour grew by 0.2% in the first quarter in service industries, and by 0.5% in production industries

The rise in productivity was to be expected.

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Internal *revaluation* in the Baltics

For quite some time Latvia was an austerity and internal devaluation poster child. Lately, however, the voices lauding ultra-unemployment and the crushing of already very low wages have silenced – as wages are rising rapidly. For a time I suspected, cynically, that this wage shock might be a cunning plan of these sly Baltics – once they joined the Euro they increased their wage level (Latvia business economy wages increased at a healthy 7% rate, 2014 Q1 (Eurostat), directly after Latvia joined the Euro), to obtain a free Bratwurst.


But this was probably not the case. According to a new NBER working paper by Cavallo, Neiman and Rigobon, market forces might be at work. Joining the Euro seems to lead to a fast convergence of price levels:

Does membership in a currency union matter for prices and for a country’s real exchange rate? The answer to this question is critical for thinking about the implications of joining (or exiting) a common currency area. This paper is the first to use high-frequency good-level data to demonstrate that the answer is yes, at least for an important subset of consumption goods. We consider the case of Latvia, which recently dropped its pegged exchange rate and joined the euro zone. We analyze the prices of thousands of differentiated goods sold by Zara, the world’s largest clothing retailer. Price dispersion between Latvia and euro zone countries collapsed swiftly following entry to the euro. The percentage of goods with nearly identical prices in Latvia and Germany increased from 6 percent to 89 percent. The median size of price differentials declined from 7 percent to zero.

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Just published: the scientific answer of the ECB to the crisis

The ECB published a report on the results of the Macro Prudential Research Network. It’s the scientific answer of the ECB to the crisis: what has to change in our view of the economy? Considering the subject the paper, basically a dense abstract of post 2008 ECB research on this subject, is well written, though it’s clearly not intended for people who haven’t finished economics 101 (or 202).

I have read only a few of the many reports cited in this paper. Based upon the little I’ve read and the paper itself the next things can be stated about this potential pathbreaking (it’s intended to be pathbreaking!) piece of economics:

It’s a step away from rational expectations and general equilibrium: good.  It tries to model the financial sector using insights of people like Minsky and Kindleberger: good. It does not just pay attention to the flow economy but also to the stock economy (debts, assets like houses): good. It tries to model a financial sector: good. Despite the fact that the monthly monetary statistics of the ECB are totally endogenous by nature and based upon the idea that credit and money are two sides of the same coin (of course they are, as they try to measure the real world), endogenous money still seems to be a bridge too far: bad (but I, or the person who wrote the abstract, might have missed something). Not enough attention is given to the ECB reports on international trade, which again and again show that lowering wages is not the way towards buoyant exports. Lower wages do decrease imports, as domestic expenditure goes down (duh….). But they do not lead to any noticeable break in the long run pattern of export growth (Spain!). The reader should be aware that a ‘VAR’ is a multidimensional moving average. Caveat (again): I did read only a few of the research papers behind this impressing document.

The policy take away: money (and monetary credit) matters. It’s not just a ‘veil’ over the real economy. To be precise: it’s not a ‘classical’ veil. Read Minsky (1992) about this (who bases his view on Schumpeter (1933), Fischer (1934), Keynes (1936), Kindleberger (1978). The insights above are, when push comes to play not exactly fresh and pathbreaking – but a rediscovery of received wisdom. Not too little – but too late. As millions of needless unemployed in the Euro Area can testify.

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Low interest rates? What low interest rates (3 graphs)! The BIS is very wrong about the Euro Area.

Is the BIS right to warn about the long run dangers of long-term ultra accommodative monetary policies? Yes. But the BIS is wrong about the Eurozone. Interest rates policies in the Eurozone are not ultra-accommodative. They are only starting to become normally ‘accommodative’ – and not even for everyone. Also, not that long ago (the summer of 2012), ultra tight monetary policy almost led to the disorderly break up of the Euro Area. Eurozone monetary policy has not (repeat: not) led to ‘ultra accommodative’ interest rates and we’re only starting to recover from grave policy mistakes which induced tightening in the midst of the most severe post WW II recession to date.

* though banks have been paying low rates for quite some time now (and even these were increased, back in 2011…)
* it is has only been since some months that the same holds for the governments of, for instance, Spain, Italy and Greece. Rates paid by these countries were, totally unnecessary, immorally and destructively high and a main cause of the present Euro Area mess (graph 1 – as can be seen government rates were 7%-points higher in Italy than in Germany – while at that time inflation and government debt in both countries was about equal

Graph 1. Spread between italian and Spanish government rates and German rates. Courtesy: Erwan Mahé.


). Read more…

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Borio and Disyatat: beware, money matters (and not just because of debts)

June 28, 2014 1 comment

Claudio Borio and Piti Disyatat are concerned about low interest rates. Hmmm… At this moment, the Euro Area is deleveraging – despite ultra low interest rates, the German economy is doing only moderately well, at best, despite ultra low-interest rates, while the level of unemployment in countries like Greece and Spain is almost 20%-point above the level where any meaningful ‘Phillips curve’ (i.e. a relation between unemployment and nominal wages) still exists – despite ultra low interest rates (well, not for Greek and Spanish companies, of course). And at the moment house prices are, on average, slowly declining, while before 2009 dislocating house price inflation was arguable not so much caused by lower interest rates but by lending deregulation.

Still, their warnings should be taken serious – as there is no such thing as a natural rate of interest. As an example of ‘malinvestments’ during the boom phase associated with a subsequently unsustainable debt overhang as well as idle capital, a graph of house completions in Ireland (how could Irish economist ever miss that bubble, why do mainstream economists sometimes still argue that bubbles do not exist – read Borio and Disyatat) is added (house completions in the entire UK reached a peak level of 219.000 in 2006/2007). See also the latest J.W. Mason blogpost about interest rates, which more or less states that people are not searching for yield – but use their trust in money, the monetary system, the guarantee of the cyclical dynamics of money as well as prevailing monetary yields as a foundation to act upon (possibly guided, to an extent, by ‘animal spirits’, M.K.?) – which fits into the Borio/Disyatat story (or the other way around).  Read more…

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Anti-austerity links, ‘economists hate to say ‘I should have told you so” edition

June 27, 2014 3 comments

A) Greece: past Dickens. Supposed to happen when the monetary system fails you. See below.

B) The British consumption conundrum: not foretold but supposed to happen, considering the change in the income distribution. Conundrum solved. See below.

C) Voxeu: Eurozone austerity is self-defeating (A) - self-fulfilling crisis edition. It’s not different, this time.

D) Voxeu: Eurozone austerity is self-defeating (A) – debt deflation edition. Which we have known since the thirties (Irving Fisher actually already warns about ‘debt deflation’ in the beginning of the twenties (second edition of this)). The tens of billions which the Greek government was forced to borrow to recapitalize the banks, which was needed to plug their government debt restructuring induced capital shortage are not mentioned.

E) (No) investments in Greece, graph below. Investment in new dwellings declined to 10% of the peak level. Well, that was slightly unexpected – but in Ireland this happened, too.

Ad A) From Zero hedge and based upon a labour union investigation(h/t: David Taylor): this is what real, Great Depression like deflation looks like. The Greek are forced to use barter and to reinvent kinds of money and it’s not a pretty sight (for those who still believe the assumption of quite some neoclassical models that all companies use the same technology and only compete on (wage)costs: read recent ECB studies on competitivety, which are entirely consistent with the empirical findings from Salter in the sixties (in fact: fifties, it was published in 1960)):  Read more…

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Debt deflation in action: Greece

Household debt in Greece is  pretty low (70% of GDP, 2013), at least compared with countries like the Netherlands (139%, 2012), Denmark (149%, 2012) or Ireland (112%, 2012). Also, after 2010 Greek households paid down 24 billion of debt (part of this decline might be due to debts being written off by banks), despite of this debt as a % of GDP debt increased since 2010 as nominal GDP (a measure of total income) went down.  While nominal debt is about as high as in 2007/2008, the index of debt as a % of GDP is about 40%-points higher (as a % of GDP it increased from about 55% to 70%).


Greece debt



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Oh my. Do DSGE economists really misunderstand the concept of ‘government consumption’?

June 22, 2014 7 comments

Do DSGE economists really exclude ‘government consumption’ from their concept of household prosperity? Yes, they do.

Scientific economists explain ‘government consumption’ as follows:

Government acquisition of goods and services for current use to directly satisfy individual or collective needs of the members of the community is called government final consumption expenditure (GFCE.) It is a purchase from the national accounts “use of income account” for goods and services directly satisfying of individual needs (individual consumption) or collective needs of members of the community (collective consumption). GFCE consists of the value of the goods and services produced by the government itself other than own-account capital formation and sales and of purchases by the government of goods and services produced by market producers that are supplied to households – without any transformation – as “social transfers” in kind.

Source: Wikipedia, which shows that this isn’t any kind of secret – it’s  has been ‘received wisdom’ since the fifties of the twentieth century.

Also, total, i.e. individual (education) plus collective (property rights) government, consumption is a well-defined and fully measured part of the National Accounts. It’s not like a fuzzy, unmeasurable, pre-scientific concept like neoclassical ‘utility’. Look here for the most recent Eurostat estimates of  what’s called ‘Actual Individual Consumption': Read more…

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Piketty and the fixed-investment rate

A central argument of Piketty is the idea that if ‘r’, the realized return on all kind of capital (houses, bonds, stock, land,…) turns out to be larger than the rate of growth, capital, estimated as a % of total GDP, will tend to increase as the extra money can be reinvested in new capital (or (via securitized mortgages?) increase prices of existing capital: the famous ‘search for yield’).


Sources: Bank of England, Sveriges Riksbank, Centraal Bureau voor de Statistiek, Eurostat.

The rate of growth is, however, a variable. Read more…

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What does LSE mean?

June 20, 2014 2 comments

From: Peter Radford

I just received an email from the London School of Economics asking me to donate, as a loyal alumni, so that they can devote funds to “innovation”. The university of the future seems to be the objective of this innovation.

What on earth is this?

What about higher education needs innovating?

Why the imperative?

I understand that higher education productivity measured in business terms is, to be blunt, weak. And I understand that more modern techniques as enabled by digital technologies will, no doubt, disintermediate education and make the classic class/lecture room setting look antiquated. But what are the consequences?

For universities.

For students.

For teachers. Read more…

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