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The DSGE emperor has no clothes. But he does have a hat. And a rabbit.

September 29, 2014 5 comments

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.

“Modern” Macroeconomics
In a recent essay, Narayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis, acknowledged that modern macroeconomics failed during the recent financial crisis.[1] However, his essay misses the point of why it failed.  Read more…

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Links. Meat, weights, Ireland, Spain. And a man needs a hobby.

September 29, 2014 Leave a comment

1) Peak meat?

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.

4) This made the ECB very happy   Read more…

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Links: tourism is a growth sector, four years of Greek wage decreases, Spanish economy did worse in 2011, 2012

September 26, 2014 Leave a comment

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.

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Links. Land, Estonia, Economic myopia, Putin’s popularity, British teachers, Clean technology

September 25, 2014 1 comment

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.

Bubble

2) Unemployment in Estonia keeps getting down – but employment is not getting up. The working age population is shrinking.

3) Robin Fransman on myopia at the ECB Read more…

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Links: real estate problems, the importance of being employed, economic weight watching, banking in the USA

September 24, 2014 Leave a comment

Joanne Lindley and Steven McIntosh show, on Voxeu, that Michael Hudson is right: finance is a rent extracting sector.

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…

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Government and investment led growth in Ireland

September 22, 2014 3 comments

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.

Ireland

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The French labour market: more flexibility led to petrification and a poverty trap

September 20, 2014 Leave a comment

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.

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Wages increases in the UK: at a historical low

September 18, 2014 Leave a comment

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.

england

 

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Steve Hanke (Cato institute) acts like the Orwellian ‘minister of truth’

September 17, 2014 1 comment

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.

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Oh sure, France and Italy and Spain really should embrace the USA model…

September 14, 2014 2 comments

Life expectancy: green is good, red is bad. Via @conradhackett

life

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The potential rate of growth: two definitions.

September 12, 2014 1 comment

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.

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Already!

September 9, 2014 2 comments

BxGojFkCYAAb0RP.jpg large

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Germany: a triple dip?

September 5, 2014 1 comment

The German ‘Statistisches Bundesamt’ has published new, revised data on German economic growth. These data clearly show a slightly less rosy picture (in fact: a more gloomy picture) than previous data. Germany unequivocally  experienced the feared  ‘double dip’ in 2012/2013 – and we can’t even exclude a triple dip (a dip being defined as two subsequent quarters showing a decline of production). This despite record low interest rates! Which of course means that  Schauble and Merkel are wrong: contractionary policies are not expansionary, they are, as they are intended to be, contractionary (why is this for many people so difficult to understand…). Even when domestic interest rates are low.

Germany

I do not really expect a double dip: extra-Eurozone orders for manufacturing showed an extra-ordinary increase of +10% (mainly investment goods which, considering the size of the German economy, is HUGE). This increase even compensated the recent dismal development of domestic orders. But a little historical perspective is in order: total orders are still way lower than in 2007… Fortunately, the labour market is still doing reasonably well, the number of jobs increases with about 0,8% a year (which is to an extent caused by people working ever fewer hours, on average – if that’s voluntary that’s a good thing). We can’t however be sure that foreign, extra EU orders will keep compensating rapidly declining German retail sales. German domestic demand still seems to be sub par. Domestic demand has to revive and the number of jobs will have to grow with at least 2% a year. Raise those wages (with an additional 1% for a number of years), cut those taxes.

By the way. Last year, German government wealth declined more than a little – because, well, mainly something with banks.

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The value of capitals. Does Airbnb drive house price increases in London, Berlin, Dublin and Amsterdam?

August 31, 2014 3 comments

Since 2008, economic statistics have twisted my mind, again and again. One of the weird patterns shown by the data are comparatively very large and fast house price increases in capitals.

Look here for London.

Look here for Berlin

Look here for Dublin

Look here for Amsterdam

Look here for Paris

Is this caused by a large and fast increase in gross rental yields of houses enabled by the site Airbnb, which makes it a lot easier for international tourists to rent houses from individual owners, which leads to a rapid increase of potential gross rental yields of existing houses? According to a recent article in De Volkskrant, a Dutch newspaper, this is at least one of the reasons why house prices are increasing in Amsterdam, not just because individuals are enabled to let their houses but also because new companies are very rapidly using Airbnb to enter this market (especially in the center of cities) which leads to house price increases – increases which are consistent with the fact that tourism is one of the few growth sectors in Europe, at the moment. Look also here, for Venice (Italy).

If this hypothesis is right, these price increases are no sign of a property bubble.

 

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The secular decline of the German rate of fixed investment – do we need a new ‘social contract’?

August 30, 2014 1 comment

After re-unification, the German unemployment rate has been way too high for way too long. Look here for excellent data from ‘der Spiegel’, a German weekly. Comparing the 1991-2013 unemployment data with the 1950-1960 period of the ‘Wirtschaftswunder’, when the initially very high unemployment rate declined rapidly for 10 years in a stretch, the post re-unification era was a time of massive policy failings. Unemployment rates either increased or were stagnant for 14 years in a stretch. Neither the monetary union between West- and East-Germany nor the subsequent ‘internal devaluation’ policies (needed because the implied exchange rate of the East-German ‘mark was way too high to begin with while subsequent developments led to an inflation shock in 1992-1994 which, alas, was not offset by external devaluation) led to any kind of rapid decline of unemployment. To the contrary. More succesful economic policies would have led to lower unemployment and higher investment rates – is it too much to expect at least a temporary increase in the German investment rate after re-unification? It did not happen.

Germany3 Read more…

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Draghi Speaketh

August 29, 2014 Leave a comment

From: Erwan Mahé (guest post)

29 August 2014

Mr Draghi’s speech at the Jackson Hole symposium was definitely the highlight of late last week. A lot of ink has already been spent about it, and I preferred to wait a bit before expressing myself on the matter. I was especially waiting for the inevitable response of our German friends, who did not disappoint us, with German finance minister Schauble’s declaration this morning that the “ECB’s Draghi has been “over-interpreted.”

While I do not want to “over-interpret” anything our central bank chief says during his pilgrimages to the Grand Teton National Park, where the Siberian scenes of Rocky 4 were filmed, I think it important to understand it in full. After all, his comments appear just as significant as those made during his whatever it takes speech in the summer of 2012. The parallel appears all the more worthwhile, since I remember, the day before Mr Draghi pronounced his famous words, my own intervention at the same meeting to explain the ECB’s ability to reverse the situation before a gathering of American investors, terrorized as the European experiment appeared on the verge of collapse. My argument that no ECB chief would allow the eurozone to implode under his leadership was met a mix of scepticism and irony. Some Texas hedge fund managers bet on the zone’s implosion and claimed that the ECB’s efforts to oppose “free market forces” would meet the same fate as the BoE’s unsuccessful attempt to defend the pound sterling in 1992. Super Mario’s dramatic statement provided sweet revenge and some new diligent readers. Read more…

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Graph of the day: no pension problems in the EU (dynamic French grannies edition)

August 27, 2014 Leave a comment

In Europe, there is no need for lower pensions. Maybe for shorter pensions – not for lower pensions. But before starting to think about shorter pensions we first have to get unemployment down and activity rates up. The present combination of high (youth) unemployment and ever lower pensions is a fricking disaster for young and old alike – which is aggravated by cutting entitlements.

The population of the European Union is ageing. This is a problem: we will have to take care of a steeply increasing number of people with Alzheimer and comparable debilitating, care-intensive diseases. But there is, at least during the next decades, no entitlement problem. Pensions can be paid – there is no lack of labour in the European Union, it’s not a supply side problem. At this moment, unemployment is 11,5%. This can and should go down to 3 or 4%. All kind of models used to calculate the burden of pension entitlements assume, in an implicit or explicit way, ‘full employment’. These models can and should be discarded as Mario Draghi is right: we’re far away from full employment – further than pre-2008 type of models. On top of this, productivity in low or medium productivity countries like Spain, Greece, the UK and even more so in Poland and Romania can increase with 2 to 3% a year for an extended period. On top of that, broad ‘U6′ unemployment’ is much higher than official ‘U3′ unemployment. Also, ‘activity ratio’s’ can increase (even when accounting for ‘broad unemployed’). Hey, these are already increasing in a spectacular fashion (graph), all kinds of ideas about structural rigidities preventing this are bogus (employment ratios can however often still easily double). It’s not a supply side problem.

Pensions

Read more…

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The nonsense about France

August 24, 2014 Leave a comment

France is doing relatively well (graph 1). It clearly escaped the historical unique decline of productivity which took place in the UK (more on this below). And though it did not increase its productivity lead over Germany – it did keep its lead (graph 2).

France1

Despite this clear success of French economic policies and its high rate of productivity, a sign of an effective economic system, France gets a bad press. ‘The Economist’ starts an article about French education with the sentence ‘Wary of competition when it comes to global markets..’. And Tyler Cowen sees France as one of the countries with enhanced risk of secular stagnation, soon to be left behind by history. What a nonsense. Dacia, a Romanian brand of cars owned by Renault, has by far the best quality/safety/size/price combination of all cars on sale in my country. And at least according to this test, the Dacia Sandero is the most dependable European car Read more…

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Artist of the day: Jan Mankes.

August 23, 2014 2 comments

Jan Mankes was born in 1889 in Meppel, the Netherlands, and died in 1920 from tuberculosis. At the age of twelve he became the apprentice of a glass painter. At eighteen, he was established as an independent artist. Influenced by Tolstoï, ideas about vegetarianism and communal ownership of land, he became the most ‘silent’ painter of the Netherlands. I’m always very impressed by his birds. Read more…

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Mediterranean blues – participation and employment.

August 21, 2014 2 comments

Recently, Eurostat published data on labour participation rates in North Africa and the eastern mediterranean. In many of these countries, female labour participation rates (paid labour, that is) are low (graph 1). And they are lower than they used to be (graph 2).

Graph 1. Labour market participation rates, Israel (IL), Morocco (MA), Egypt (EG), Lebanon (LB), Tunisia (TN), Palestine (PL) and Algeria (DZ).

ENPS_Economic_activity_rate_by_gender_2011 Read more…

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