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Economic models: worse than Whelan thinks.

December 20, 2014 2 comments

Karl Whelan has an interesting longread on the state of (the teaching of) economics. I agree with many points. But not with everything. It’s worse than he thinks: (1) A large part of economics gives us, intentionally, less insights into the economy, for instance because it ‘abandons’ the idea that people use money (and no, that’s not just a convenient assumption to keep models simple for undergraduates – it is a core aspect of reputed policy models, see below). (2) Much of economics is ideologically framed. A shortread on (1) and (2) below. But first a Whelan quote:

I reckon nobody’s reading at this point, so I’ll just say what I think to keep myself happy.

The world economy is more complicated than any of us can understand and getting more so by the day. There are no magic formulae for understanding it and it takes many years of learning about it to even understand which kinds of approaches to thinking about the economy are useful versus which kinds are not. Undergraduate students are really not the best people to be designing a syllabus for a subject that is so bloody complicated.

But the truth is that many students are dissatisfied and a significant amount of their complaints are well-founded. With all the attractions of the information age available to them, students are more demanding than ever and can be turned off a subject more quickly in the past. We need to work harder to show students how economics connects with the real world and we need to explain to them how we think and why we think that way.

The point: economics, as taught to students and as used by economists and politicians, does not always connect with the real world.

An example:

Read more…

Categories: Uncategorized

Maintaining the supremacy of the financial oligarchy

December 20, 2014 1 comment

Let’s assume that there is a financial oligarchy which exerts strong political influence due to the vast amounts of money it controls. Let’s further assume that this financial oligarchy has succeeded in having financial markets deregulated and that this has enabled the financial industry to expand their business massively. Then, in some near or far future, their artfully constructed financial edifice breaks down, because it cannot be hidden any more that the accumulated claims cannot be serviced by the real economy That might be due, for example, to millions of people having bought overly expensive houses on credit without having the income necessary to service this debt. This is the kind of situation we are interested in.

If such a situation occurs, the leading figures of that financial oligarchy might recall that there has been a financial crisis in the 1930s of similar origin, and that during and after this crisis, laws were passed which broke the power of the financial oligarchy and taxed their profits steeply. They might remember that it took their forbearers decades to reestablish the favorable state of the late 1920s, with deregulated finance and very low taxes on incomes and estates, even huge ones.

Read more…

The ECB is going to publish the ‘accounts’ of its meetings 1556 weeks faster

December 18, 2014 1 comment

The ECB is going to publish its minutes 1556 weeks faster!

On September 19, 2012, I wrote on this blog:

“* The Bank of Japan does it after three weeks

* The Fed does it after three weeks

* The Bank of England does it after two weeks

* And the ECB does it after 1560 weeks…

At this moment there is, suddenly, a discussion going on about the question if the ECB should publish the minutes of the meetings of the Governing Council a little bit faster. Should we even talk about this?”

The good news, straight from the ECB website: “ECB to publish regular accounts of monetary policy discussions from January 2015 … The accounts will be released four weeks after each meeting.”

Long story short: democracy is under siege, at the moment, but this is a big boost to transparant, accountable government in the European Union.

Categories: Uncategorized

On the limits of cross-country regressions

December 18, 2014 1 comment

from Lars Syll

Endogeneity problems are of course nothing new in growth regressions. But what is special here is that policy endogeneity is not just an econometric nuisance, but typically an integral part of the null hypothesis that is being tested. The supposition that governments are trying to achieve some economic or political objective is at the core of the theoretical framework that is subjected to empirical tests. In such a setting, treating policy as if it were exogenous or random is problematic not just from an econometric standpoint, but also conceptually …

escherThe cross-national variation we observe in government ownership is unlikely to be random by the very logic of the theories that are tested. Under the developmental perspective, this variation will be driven by the magnitude of the financial market failures that need to be addressed and the governments’ capacity to do so effectively. Under the political motive, the variation will be generated by the degree of “honesty” or “corruption” of political leaders. I show in this paper that the cross-national association between performance and policy will have a very different interpretation depending on which of these fundamental drivers dominate. Unfortunately, none of these drivers is likely to be observable to the analyst. In such a setting the estimated coefficient on state ownership is not informative about either the positive or the normative questions at stake. It cannot help us distinguish between the develop-mental and political views, because the estimated coefficient on government ownership will be negative in both cases.

Dani Rodrik

Categories: methodology, Uncategorized

2 paperbacks from the WEA

December 17, 2014 Leave a comment

Amazon US $18.00 – Amazon UK £12.50                     Amazon US $17.10 – Amazon UK £ 12.00

                      Read more…

Categories: Uncategorized

Marking Mark to market – was he right about a 2014 Greek recovery?

December 17, 2014 Leave a comment

On January 23, 2014, on this blog a Mark Weisbrot post was published titled: “Greece will likely begin recovery this year: Is austerity working?“. He was right and not just about the recovery, but also about its cause, increased aggregate demand:

Now the IMF is projecting economic growth for 2014. But this time they are probably, finally, going to be right. It is vitally important that we understand why. Last month the Greek parliament approved a stimulus program involving highway construction that is quite large. According to the Ministry of Infrastructure, Transport, and Networks, total spending on this project will be 7.5 billion euros over the next year and a half.

What does Elstat teach us about the results of this stimulus:

The Production Index in Construction (IPC) for the 3rd quarter 2014 compared with the 3rd
quarter 2013 recorded an increase of 61.3%. A year ago, the year-on-year growth rate of
the index was –4.7% (Table 1). The aforementioned increase is due exclusively to the
execution of civil engineering works.

Will this last? Read more…

Categories: Uncategorized

Proper use of math in economics

December 17, 2014 16 comments

from Lars Syll

13.1a Alfred Marshall27. ii. 06
My dear Bowley,

I have not been able to lay my hands on any notes as to Mathematico-economics that would be of any use to you: and I have very indistinct memories of what I used to think on the subject. I never read mathematics now: in fact I have forgotten even how to integrate a good many things.

But I know I had a growing feeling in the later years of my work at the subject that a good mathematical theorem dealing with economic hypotheses was very unlikely to be good economics: and I went more and more on the rules — (1) Use mathematics as a short-hand language, rather than as an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics. (6) If you can’t succeed in 4, burn 3. This last I did often.  Read more…

Categories: methodology, Uncategorized

Links. Price levels (plural)

December 16, 2014 Leave a comment

A) A gentleman called Hume argued, back in 1752, that it’s not just about household consumption prices – differences in government consumption price levels are important, too.

B) Hume’s take on prices was actually more balanced than present day central bank ideas about ‘inflation targeting‘ which invariably but for no good reason target consumer prices only.

C) An no, the DSGE-modelling strategy which assumes that there is only a single final good and one ‘representative’ household in the entire economy is not a very good reason to do this (albeit consistent with new-classical thinking)

D) Recent data from the British ONS for instance show that in the UK inflation for poor households was 1% a year higher for eleven years in a stretch than for rich households (as they buy other goods and services, especially ‘housing’ is important). The ‘repreentative consumer’might not be that representative. By the way – consumer price inflation in the UK saw a sizeable 0,3%-point decline in October – the lowest rate of inflation in 12 years. Producer output prices even declined with 0,1% – but that’s not a problem as input prices (excluding wages) declined with a massive 8,8%. An oh, the country is still infected with wealth illusion: house prices increased with more than 10% (+17% in London: sell and emigrate!).

E) Which underscores the point that central bank strategy of average  ‘consumer price inflation only’ targeting is, well, daft.

F) German inflation differences between income groups were somewhat smaller than in the UK, albeit still sizeable

G) Tyler Cowen argues, rightly, that inflation is about the purchasing power of income (i.e.: not about the purchasing power of money) and even when estimated inflation is equal for all income classes higher incomes do have the advantage.

Categories: Uncategorized

Household wealth trends in the United States, 1962-2013

December 16, 2014 Leave a comment

from David Ruccio

mean-median-net worth

The chart comes from Ed Wolff’s latest, “Household Wealth Trends in the United States, 1962-2013: What Happened over the Great Recession?”—another in a growing list of investigations into the declining fortunes of the American middle-class. Read more…

The incompetence of economic policy makers: why U.S. women are leaving the labor force

December 15, 2014 Leave a comment

from Dean Baker

The NYT seems intent on hiding the elephant in the living room. Yesterday it gave us a piece on why men are leaving the labor force, today it gives us a piece on why women are leaving the labor force.

Both articles raise some interesting and important issues. The article on women and work in particular gives an excellent discussion of how most other wealthy countries are far ahead of the United States in providing support for working mothers in the form of paid family leave, paid sick days, and affordable child care. (These are all areas in which CEPR has done considerable research.) 

The failure of the United States to meet the needs of working parents largely explains why so many countries have passed the United States in the percentage of prime age (ages 25-54) women who are employed. This figure now stands at 69.9 percent in the United States. By comparison, it is 78.4 percent in Denmark, 76.1 percent in France, and 72.0 percent in Japan. Read more…

Categories: Uncategorized

Quantitative Easing (QE) for the Eurozone people: perfectly possible.

December 14, 2014 2 comments

QE for the Eurozone people instead of the Eurozone banks is perfectly possible (as well as necessary) – just give people some money. Preferably tradeable vouchers which can be used to pay back mortgage debt. It’s that simple.

Central bankers in the Eurozone are contemplating quantitative easing (QE) for the Eurozone. Basically QE consists of a central bank which creates money, or bank reserves (a kind of alt-money for transactions between banks) which it uses to buy bonds (especially government bonds). In the USA, normal money was created to buy bonds from pension funds and comparable institutions (the Wikipedia entry does not mention that buying bonds from pension funds will not increase bank reserves but will increase the amount of plain, normal, every day dollars), while reserves were created to buy bonds from banks. The idea is that this will decrease the long-term interest rate, which might lead to additional lending and borrowing in the real economy.

But do we really need to buy bonds, Read more…

Categories: Uncategorized

In the USA the already huge wealth gap between whites and non-whites is growing. (2 graphs)

December 13, 2014 Leave a comment

from David Ruccio

FT_14.12.11_wealthGap2

Read more…

A capital question: why are houses in Bulgaria so cheap, unlike machines. Wonkish

December 12, 2014 2 comments

International price differences of ‘machinery and equipment’ are remarkably small within the EU. International price differences of another kind of fixed assets, residential building and civil engineering works, are remarkably large (see graphs).

Investments in ‘machinery and equipment’ as well as new ‘residential buildings and civil engineering works’ (i.e. construction) are both future oriented. The flow of expenditure on both kinds of investments can be compared, using the GDP-grid. Both kinds of investment boost our stock of ‘fixed assets’ and both are in a sense a ‘sunk cost’ transfer of the present generation to future generations. But can we arithmetically compare the stock of total ‘machinery’-capital with the stock of total ‘construction’-capital? In an economic sense, the stock of ‘machinery and equipment’ is a quite different item than ‘Residential buildings en engineering works': Read more…

Categories: Uncategorized

Energy conflicts and differential profits: an update

December 11, 2014 3 comments

from Shimshon Bichler and Jonathan Nitzan

During the late 1980s and early 1990s, we identified a new phenomenon that we called ‘energy conflicts’ and showed that these conflicts were intimately linked to the differential profitability of the leading oil companies. Figure 1 below, which was first published in 1995, adds new data to bring this connection up to­ date.[2] 

BichlerNitzan1 Read more…

Categories: Uncategorized

A dangerous non-sense definition of financial stability from the ECB

December 10, 2014 4 comments

The very first sentences of the Financial Stability Review of the ECB (December 2012) define financial stability as:

Financial stability can be defined as a condition in which the financial system – which comprises financial intermediaries, markets and market infrastructures – is capable of withstanding shocks and the unravelling of financial imbalances. This mitigates the likelihood of disruptions in the financial intermediation process that are severe enough to significantly impair the allocation of savings to profitable investment opportunities.
Sigh.
1) Pension funds sometimes lend monetary savings to the non-financial economy. Banks don’t (at least: the state-backed MFI-banks don’t). MFI-lending is financed by creating money (i.e: using the printing press). Really. Banks are not intermediairies. They are money creators. Just read this Bank of England paper about it. Or check the monetary statistics of the ECB. Or the same statistics of the Fed. Or the Bank of Japan. To me, it is incomprehensible that people working for such banks, like the writers of the introduction of the Review, clearly do not know these statistics (which are used to make the graph below) and seemingly have a totally distorted view of our financial system.

Read more…

Categories: Uncategorized

Fed shouldn’t be raising interest rates any time soon

December 10, 2014 1 comment

from Mark Weisbrot

A lot has changed in the last 20 years since then-Federal Reserve Vice-Chairman Alan Blinder had the audacity to suggest, in a speech, that the Fed could use interest-rate policy to help reduce unemployment in the short term. It was real blasphemy back then, and despite the fact that the Fed had by law a dual mandate to maintain both “price stability” and full employment, his remarks ignited a firestorm of controversy.

Now, thanks to the Great Recession, and Ben Bernanke’s willingness to use zero interest rates and venture into uncharted territory with quantitative easing, the “dual mandate” is widely accepted.  Both Bernanke and current Fed Chair Janet Yellen also spoke out in favor using fiscal policy (i.e. deficit spending) to increase employment, something that U.S. Fed chairs didn’t say in the past.  In a recent speech, Yellen noted that “the lack of fiscal support for demand in recent years also helps account for the weakness of this recovery compared with past recoveries.”

These are important institutional advances, even if other branches of government – most importantly the Congress – are not smart enough to take advantage of free money to create some of the millions of jobs that are so desperately needed. But today’s Fed could still be a threat to full employment if it proceeds too early with the “normalization” of interest rates that even Ms. Yellen is talking about.  And everyone is talking about some time next year, and that is too early. Read more…

Categories: Uncategorized

Don’t bother about Polish deflation – as long as nominal wages keep increasing

December 9, 2014 Leave a comment

The Polish central bank is concerned about deflation. It should not be. Prices of goods and services are going down. But employment is increasing at a rate of 1,5% a year, unemployment is going down (from 10 to 8,3% in one year) and productivity increases. At the same time,  wages are increasing at a rate of about 4% a year. This 4% may, due to rapidly increasing productivity, be not enough to enable positive domestic demand inflation. But that’s not a problem. Rising nominal and real income means that there is no sign of any kind of debt deflation, i.e. people and companies who, due to declining nominal incomes, are not able to pay their bills and other debts.

Poland

Read more…

Categories: Uncategorized

Deception and democracy: convincing the masses to help the rich

December 8, 2014 2 comments

from Asad Zaman and the WEA Pedagogy Blog

There is widespread agreement on the proposition that people act according to their self-interest. Marx went further to suggest that people subscribe to ideologies conforming to their class interests. For example, agricultural laborers would believe in land reforms, while big landlords would believe that small farms are inefficient. Gradually the weight of strong empirical evidence has led me to understanding that this proposition is false. Large segments of the population can be brought to believe in, and act according to, ideologies extremely harmful to their self interest. As Dani Rodrik has written in “How the Rich Rule”, political scientists Gilens & Page found that on issues where there was a conflict between the interest of the elite and that of the public, Congress voted in favor of the elite and against the public interest. In the past, the elites have enforced their interests by the use of power. In a democratic age, the same effect is achieved by the use of propaganda. This is striking because the propaganda must convince the public to act against their own self-interest, in favor of the ruling elites. It would seem that you can fool most of the people most of the time. Here is some empirical evidence for my thesis:  read more

Categories: Political Economy

Links. Tourism and some background links on price indices.

December 8, 2014 Leave a comment

On this blog I’ve repeatedly argued that tourism is one of the main forces driving recoveries (Ireland, UK, Baltics). Here, some data about the magnitude of this effect in the UK. Mind that one pound spend in the tourism business leads to about two times as much work as one buck spend in the financial sector.

Classical and neoclassical economists liked and like to talk about the ‘purchasing power of money’. Which is as apt as talking about the power of a wrench. A wrench has a (sometimes adjustable) size – but no power. The man or woman who uses it has the power. Purchasing power is not about money, it is about income (as every manual on how to calculate price indices shows). We use money to spend our income.

A nice example of the dramatic differences of the amount of nominal capital, expressed as a a % of nominal GDP, and the amount of real capital, expressed as a % of real GDP (relative prices change all the time…). This is related to the Cambridge controversies.

Economic historian Claudio Borio about ‘inflation targeting’ (and the Gold Standard and Bretton Woods and all that): “no policy regime in history has simultaneously achieved sustained monetary and financial stability”

Categories: Uncategorized

Beware! Competition for research funds can kill you

December 5, 2014 2 comments

from Grazia Ietto-Gillies

What I am about to report is not specifically about the economics profession. However, it is an economics issue in that it is linked to: competition for research funds and the management of academic researchers in the current culture where the public sector, including universities, is led by: targets; markets for academics – not that dissimilar from markets for footballers -; and competition.

A distinguished Professor in the Department of Medicine of Imperial College London – Professor Stefan Grimm – was found dead in his London home in September following a review of his performance in getting research grants. A few weeks after his death, Professor Grimm’s colleagues received a delayed email, sent from his account, in which he told of his tragic story and which he wanted circulated. It speaks for itself as does the letter from his manager which Professor Grimm made public. Both can be found at: Read more…

Categories: Uncategorized
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