Two leading conservative German economists, Hans-Werner Sinn and Otmar Issing, once agreed with Mario Draghi: Eurozone inflation should not become too low. Do they still agree?
Today, the ECB published a Mario Draghi speech on is website. From the summary:
He added the ECB would continue to meet its responsibility: “We will do what we must to raise inflation and inflation expectations as fast as possible, as our price stability mandate requires of us. If on its current trajectory our policy is not effective enough to achieve this, or further risks to the inflation outlook materialise, we would step up the pressure and broaden even more the channels through which we intervene, by altering accordingly the size, pace and composition of our purchases,” Mr Draghi said.
This is totally in line with a 2003 Otmar Issing speech. In this speech this former ECB banker (1998-2006) states that Eurozone inflation should not become too low, among other reasons to prevent outright deflation in any of the member countries. And in 2000 another leading conservative German economist, Hans-Werner Sinn, stated (with Michael Reutter) in a 100% Krugman proof paper that inflation should not become too low to prevent interest policies from becoming ineffective as well as to enable individual countries to become more competitive (i.e. obtain a lower relative price level compared with other countries) without outright deflation. Again, prevention of deflation in individual member countries is stressed. In those days, Germany was on the brink of deflation and Sinn argued for higher inflation (4%?) in the periphery. Today, Spain and Italy and Greece are beyond the brink of inflation but I do not hear Sinn or Issing arguing for 4% inflation in Germany (they do want some countries to leave the Eurozone). Read more…
from Steve Keen
Taken at face value, David Cameron’s warning this week about risks in the global economy sounds like it might be wonderfully prescient. Here’s the country’s economic chauffeur, carefully checking his instrument gauges, and sure enough, sees the same signs today that should have given us warning of the crisis of 2007-08. Time to apply the brakes.
There’s only one problem: the economic dashboard that Cameron relies upon did not warn of the crisis before it happened. Instead, that dashboard advised Cameron and other leaders around the world that everything was looking rosy, and that going full throttle was entirely safe.
The OECD’s Economic Outlook, published in May 2007, stated that its “central forecast remains indeed quite benign” as it predicted “a strong and sustained recovery in Europe”. Some dashboard that turned out to be.
Politicians are fond of car analogies when talking about the economy, because Read more…
The UK is supposed to have a flexible labour market. Flexible labour markets are supposed to end rigid ‘dual’ structures of labour markets by improving the position of marginal workers and the unemployed as workers with jobs can be fired more easily. Does this work? Hmmm… (source: the new ONS earnings report).
Figure 2: Annual percentage change in median full-time gross weekly earnings for all employees and those in continuous employment, UK, April 2005 to 2014
The unemployment rate in Germany is, though surley not low, one of the lowest of the European Union – and declining. Also, at this moment employment as well as hours worked per employed person are increasing. This combination is pretty special for Germany. Between 1991 and 2005 the total number of hours worked declined with almost 10% (graph 1) which did not lead to even higher unemployment because the number of hours worked per person declined with about the same amount (graph 2). After 2005 the number of hours first increased in the boom period 2006-2008 but stagnated afterwards which, as the number of hours per worker kept declining, led to an increase of unemployment. At this moment, however, employment as well as the number of hours is increasing, despite a stagnating economy. The continuous decline of the number of hours indicates that, if need be, at least part of the problems of the rapidly ageing German society can be solved by increasing the number of hours per person instead of only increasing the ‘Rentenalter’ (I’m not against such increases – but I’m getting a bit fed up with the ‘ageing society’ panic). And, as I already indicated, unemployment can still go down a few notches, too. Read more…
For my view on the British labour market look here (nice long-term productivity graph), here (where I predict that the decline of productivity will end quite soon, I totally stick to this prediction), here (some historical comparative data on unemployment which show how terrible the Eurozone is doing while the UK experience is much more in line with post WW II developments and the post WW II implicit social contract.Yes, that was betrayed in the UK, too, but that does not compare to what happened in the Eurozone with regard to Spain, Italy, Ireland, Portugal and Greece Update: Krugman hits the nail on the head today, deconstructing some remarks of the increasingly extreme Weidmann, boss of the BuBa, who wants to inflict even more pain on these countries. 45% unemployment?) and here (where I indicate that UK broad unemployment is not doing as well as normal unemployment, to say the least). Mind also that government expenditure increased quite a bit, in 2014. Despite all caveats, the British labour market keeps beating my expectations. The very good thing about this is that this gives people the chance to exit crappy jobs and ´self-underemployment´. One large risk: the continued Eurozone crisis might lead to lower British exports, causing a rapidly increasing current account deficit forcing the UK into austerity and the further betrayal of the post WW II social contract. Read more…
from David Ruccio
According to NBC news [ht: db], U.S. corporations are for the first time holding more than $2 trillion overseas, a sixfold increase over the past 12 years.
That total is now greater than the amount held within the United States, which totals just under $1.9 trillion.
1) In India, the government and, well, another part of the government (the central bank) are bickering about who is allowed to set an inflation target (should a rather narrow variable like consumer price inflation be targeted anyway? In India, this will mainly be about very volatile food prices!):
Finance Minister Arun Jaitley has given the go-ahead for a major overhaul of the current monetary policy framework wherein the Centre will specify ‘inflation targets’ for the Reserve Bank of India (RBI) to achieve. Under the proposed new regime, the RBI will set inflation as its top priority in its policy statements. The decision departs from the recommendation of an expert committee of the RBI, appointed to examine monetary policy. Headed by Reserve Bank Deputy Governor Urjit R. Patel, the committee had recommended that the monetary policy decision-making should be vested with a monetary policy committee, chaired by the RBI Governor. Other recommendations were that the apex bank adopt the new Consumer Price Index (CPI) as the measure of the nominal anchor for monetary policy. And that the RBI set the target CPI inflation level at 4 per cent (+/- 2 per cent) to be achieved through its monetary policy tools. A senior Ministry official told The Hindu that the Modi government decided that the RBI “cannot set for itself an inflation target level of 4 per cent for all times to come…the Centre will set this target.” Another Ministry source said: “It is best that inflation targets are set by the governments elected by the people and not a bunch of bureaucrats and economists sitting in the Reserve Bank.”
from J.C. Bloem (Dutch poet, 1887-1966). Translation: John Irons
It’s raining and it is November:
Autumn lays siege now to the heart
That sadly, though more wont than ever,
Endures its secret pains apart.
And in the room, where resignation
Sees daily life pass as it may,
From streets that speak of desolation
A bleak light falls at close of day.
The years pass by but never alter,
The difference will soon be gone
Between dim memories that falter
And what is lived and is to come.
Lost are the ways I knew of gaining
Release from time in earlier days;
Always November, always raining,
Always this empty heart, always. Read more…
from Dean Baker
According to the plan designed for Italy by the European Commission, Italy must regain competitiveness with Germany by forcing down wages. A prolonged period of high unemployment is an essential part of this process.
There can be little doubt that the main problem with Italy’s economy is a lack of demand. When the housing bubbles that were driving the euro zone economies burst in 2008, there was nothing to replace this source of demand. Italy joined other countries in the euro zone and around the world in using fiscal stimulus to boost demand, but then was forced to revert to austerity in 2010.
Its economy has been shrinking ever since, as would be predicted by textbook Keynesian economics. GDP in 2014 is projected to be almost 9.0 percent less than the 2007 peak. According to the I.M.F.’s projections, which have consistently been overly optimistic, Italy’s GDP will still be 3.5 percent below the 2007 level in 2019. This would imply twelve years with cumulative negative growth, a performance far worse than any major country saw in the Great Depression.
The shrinkage of the economy has been disastrous for Italy’s workers. The employment rate for prime age workers is down by almost six full percentage points. The employment rate for young people is down by ten percentage points, translating into youth unemployment rates of close to 40 percent.
Of course the pain for workers is the strategy. The plan designed for Italy by the European Commission is have Italy regain competitiveness with Germany by forcing down wages. A prolonged period of high unemployment is an essential part of this process. Read more…
from David Ruccio
It is a glaring omission in his otherwise remarkable discussion of the relationship between Karl Marx and Abraham Lincoln, An Unfinished Revolution, that Robin Blackburn neither discusses nor does he include the text of Lincoln’s First Annual Message to Congress(the equivalent of what we refer to today as the president’s State of the Union) , of 3 December 1861.
Composed at least in part as an answer to Jefferson Davis’s President’s Message of 18 November, in which Davis decries the actions of a president turned despot and celebrates the slave South’s “unconquerable will to be free,” Lincoln responds as follows: Read more…
from David Ruccio
This chart is another illustration of the report I discussed a couple of weeks ago, according to which the share of total wealth owned by the top 0.1 percent—roughly 160,000 families with total net assets of more than $20 million in 2012—has risen to the point (22 percent of total U.S. wealth) where it is almost the same as the share owned by the bottom 90 percent (23 percent of the total).
from Dean Baker
Eduardo Porter has an interesting discussion of inequality, based in large part on the views of M.I.T. Professor Robert Solow. Solow views it as unlikely that it will be possible politically any time soon to have tax and transfer policies that do much to lesson inequality. However he does hold out the hope that changes in corporate practices could lessen before tax inequality.
This is an extremely important point. There is considerable research showing that CEOs and other top management essentially ripoff shareholders, taking advantage of their insider power to give themselves pay that has little to do with their productivity, measured as the return they give to shareholders. (Lucian Bebchuk has a good summary of the issues.) If shareholders can better gain control of their companies, they might cut pay by 50 percent or more, bringing CEO pay in the United States in line with pay in other wealthy countries. Read more…
from Dean Baker
Tyler Cowen is worried that rich countries won’t have enough people to do the work. This concern seems more than a bit off the mark given that almost every rich country continues to have large numbers of unemployed and underemployed workers, but I suppose pondering this question can at least create some jobs for economists. Anyhow, two of the countries Cowen highlights are Japan, which he tells us has seen a declining working age population since 1997 and China, where he warns about the difficulties that working couples will face supporting four parents as well as their own children.
Taking these in turn, a key part of the story that Cowen leaves out is hours worked. These vary hugely across countries and across time within countries. For example, the OECD reports the average work year in Germany at 1388 hours in 2013. By comparison South Korea, which has a comparable per capita income, had an average work year of 2163 hours in 2012.
This means that in terms of hours worked, each worker in Korea puts in 55 percent more hours than a worker in Germany. If Germany felt it was short of workers, obviously they could try to encourage their workforce to put in more hours. If they just made up half the difference with Korea it would be equivalent to a 28 percent increase in their workforce. That is equivalent to an awful lot of additional kids.
This is directly relevant to the Japan story, since the OECD reports that the average work year in Japan has declined by 7.0 percent since 1997, the year its working age population began to decline. This doesn’t suggest that a shortage of workers has been a major problem for Japan. Read more…
Update: @Twundit, who was there in 1989, is a kind of ‘life-twittering’ the pictures he made in Berlin.
Twenty five years ago the Berlin Wall came down. Which was and is a good thing: East Germany was a stagnating bureaucratic dictatorship. After ‘Die Wende’, West-Germany kind of adopted East-Germany and the West-Germans paid trainloads of money to enable a ‘one system’ reunification. I read somewhere that the costs must have been around 2 trillion or between 30.000 and 40.000 Euro per West-German. That’s a lot. In an economic sense, however, reunification was less than a total success. Unemployment (unknown in East-Germany, at least in its open variant, hidden unemployment may have been considerable) not only became sky-high (15% in 1994, i.e. four years after reunification) but even increased to an unheard of maximum of 18,7% in 2005 (graph 1). Read more…
Via Detroit news (ht: @AMvanRijsbergen) And yes – I do know that this might, indirectly, via a global banking/hedge fund/investment/securitization channel, affect my Dutch pension rights in a negative way. In the short run. So?
In a bankruptcy case about numbers — $18 billion in debt, 32,000 pensioners, 35,000 broken streetlights — a judge needed 75 seconds Friday to approve a plan to undo decades of financial decline.
U.S. Bankruptcy Judge Steven Rhodes went on to deliver a nearly two-hour speech sprinkled with sympathy for residents of the insolvent city and praise for a plan to shed $7 billion in debt, shield the city’s art collection and minimize cuts to retiree pensions.
Rhodes read from a 50-page script that laid out the legal reasons why Detroit’s bankruptcy plan was feasible, fair and in the best interest of creditors, and spoke directly to residents angry about losing money and elected representation. Read more…
The Great Depression of 1929, and now the Great Recession following the Global Financial Crisis, poses several puzzles for economists. One is them is the sudden and severe drop in aggregate demand. This leads firms to curtail production, and therefore reduces demand for factors of production, most importantly labor. Why does aggregate demand fall, and why do not the price adjustment mechanisms restore equilibrium? The outstanding contribution of Atif Mian and Amir Sufi in House of Debt (see my Review & Summary) is to explain both why aggregate demand fell and also why the standard price adjustment mechanisms fail to restore equilibrium. The correct explanations have eluded famous economists like Keynes, Friedman, Lucas and many others. Only after understanding the reason for the shortfall in aggregate demand does it become possible to prescribe a remedy.
Keynes noted that Aggregate Demand fell in wake of the financial crisis and suggested that fiscal and monetary policy might restore it. It is the shortfall of aggregate demand which leads to unemployment. Standard macroeconomics then and now does not allow for a long run and persistent shortfall in aggregate demand. Theoretically, prices should fall in response, which would stimulate the demand. Increased demand would lead to increased production and ultimately restore full employment equilibrium. The Great Depression made it clear to all that this mechanism did not work as expected. The Great Recession following the Global Financial Crisis has reinforced this lesson. Unemployment persists at high levels, even though there had been no change in the productive capacity of the economy. Why did not the self regulating market restore equilibrium? A similar and related puzzle was the failure of demand and supply in the labor market. High unemployment should have led to falling wages, which should have eliminated unemployment. Again this was not observed to happen. Why? read more
1) Kudo’s for the ECB: the bank published the infamous letter which supposedly bullied Ireland into submission to the Troika. And bullying it was. My takes:
(A) an unelected official like Trichet should never use this kind of bullying tone (see especially the letter of October 15) whenever he or she writes to the head of a democratic state. This alone should have been enough to return the letters – whatever the consequences. Trichet was acting far outside his mandate.
(B) the bullying, triumphant tone should have warned the Irish of a hidden agenda and a certain amount of bluff
(C) the ‘Troika’ (cc’s of the Trichet letters were sent to Olli Rehn, EU commissioner for economic and monetary affairs and Joaquin Almunia, EU commissioner for competition…) was, in hindsight, more than a little wrong about the economics. And at the time they could and should have known better
2) Via Marginal Revolution: one more reason why neoliberal policies, based upon hyperindividualism, are a total disaster for family life. Read more…
from David Ruccio
Many of my well-intentioned students are in awe of Bill Gates. He’s a rich guy, a successful businessman, who is giving away a large portion of his income to help solve the world’s economic and social problems through the Bill and Melinda Gates Foundation. What could be more admirable? Read more…
In the first quarter of 2014 the UK government deficit was 0,5% of GDP larger than in the fist quarter of 2013. Somewhat trivial, but it’s hard to call this ‘austerity’. In the second quarter, however, the deficit was a non-trivial 1,5% of GDP larger than one year earlier, despite a 4 to 5% growth rate of nominal GDP: austerity (not!). This sure does explain part of the economic upswing of the UK. This was, I guess, connected to the ardent wish to keep Scotland in the UK – can you imagine any British government which would not have pushed the expansionary pedal to the metal to keep the country together?
from Dean Baker
Federal Reserve Chairman Janet Yellen gave a speech a few weeks ago that was doubly unusual.
First, she provided a welcome and trenchant analysis of inequality, focusing on the stagnant income and wealth of middle- and low-income families relative to the top few percent. For the nation’s chief economist to elevate this issue is an important contribution in its own right.
Second, she declined to mention the critical role of slack labor markets in these outcomes. In what is a rare case for her, the word “unemployment” was not even mentioned in the speech. The omission was especially noticeable as Yellen, to her credit, has so consistently pointed out the extent of remaining slack in the U.S. job market.
Unemployment is down and gross domestic product is up, yet there isn’t much progress in real wages and incomes of most working families. While many reasons have been set forth to explain this unfortunate disconnect, including globalization and technological change as well as unmet skill demands and the Federal Reserve’s asset-buying program, our research suggests that the main factor behind both stagnant real wages and rising inequality is the absence of full employment. Truly tight labor markets — an unemployment rate closer to 4 percent than 6 percent — would not only boost real wages, but would give a larger lift to the lowest-paid workers and those with the least bargaining clout, pushing back on stagnation and inequality. Read more…