The Great Financial Crisis taught most of us that private credit matters. Nowadays, for instance Tyler Cowen uses Steve Keen kind of explanations in stead of general equilibrium ideas: there is no great Pareto optimal intertemporal general equilibrium. The crisis also taught most of us a (to quote Paul Krugman) ‘dirty little secret‘: monetary policy works via the housing market (hmmm… where do these bubbles come from?). Which makes sense: houses are our most important asset. And mortgages are our most important kind of credit.
Anthony B. Sanders has a nice graph which binds private credit and the housing market in the US of A together, using so called ‘deep’ parameters like the employment to population rate, home ownership rates, the rapidly rising share of 20-34 year olds living with their parents (not in this graph but already at 25% in the US of A) and comparable variables. Note that he does not need house prices or volumes of credit to show the housing bubble, which has origins dating back to 1995-1999. Fred Foldvary, who used to be a regular commentor on this blog and who repeatedly emphasized the ‘Georgist’ 18 year USA credit/housing cycle, would not be surprised. In a very real sense, QE served to mitigate the consequences of the debt build up followed by house price decreases caused by the housing cycle. Instead of QE the US of A government could, as Rogoff argues, have written down more debt but Larry Summers does not agree (about debt in the Euro Area later today some links).
Aside: note the tight ‘Phillips curve’ co-movement between wage increases and the employment rate which seems to be stronger as well as more stable than the ‘unemployment-wage increase’ Phillips curces.
from David Ruccio
In the United States, we’ve witnessed a return of the Roaring Twenties—for the past three and a half decades.
As Emmanuel Saez and Gabriel Zucman show, the share of wealth (defined as total assets, including real estate and funded pension wealth, net of all debts) held by the top 0.1 percent of families is now almost as high as it was in the late 1920s. Read more…
from Peter Radford
I will keep this short: I have been taken aback by all the talk about the apparent onset of something called secular stagnation. Today’s Financial Times gives us another dose of it in an article by Gavin Davies. The basic argument seems to be that since both population growth and worker productivity are declining somewhat in the biggest economies we ought expect those economies to grow more slowly than in the past. This shift downwards is a sharp break with what orthodox economists had assumed the norm to be: that economies would chug along nicely because productivity is driven by technology change, and because populations have been relatively stable.
The downscaling is said to fit with the empirical evidence, and in particular with the trends that seem to have set in since around 1980.
In other words, a sputtering economic performance over the past few decades is seen as proof that we now live in more constrained times, where limited growth puts a cap on our latitude in dealing with economic issues. People drawing this conclusion almost inevitably then jump into discussions of how this reduced latitude implies a more austere role for government, and – naturally – that everyday folks just will have to manage on less.
I have a slightly different perspective. Read more…
1) Carmen Reinhart and Christoph Trebesch argue that, looking at the record (which they established), redeeming government debt overhangs generally (no: often) increases prosperity. Learn their Box 1 by heart! It’s another addition to our rapidly increasing knowledge about the history of ‘really existing capitalism’ (for the young ones: the phrase ‘really existing socialism‘ was used to describe communist systems and served to drive down the difference between rosy communist ideals and the often bland and harsh reality – the rosy ideal in this case being ‘general equilibrium’).
2) On Voxeu, S. M. Ali Abbas, Laura Blattner, Mark De Broeck, Asmaa El-Ganainy andMalin Hu show a decomposition of 100 years of government debt in 13 advanced economies. Who owned the debt, what kinds of debts were issued? Less and less of the debt is held by commercial banks and more and more by institutional investors (pension funds and the like) which leads to internationalization of the debt (though governments owe less debt denominated in foreign currencies – which in the Eurozone however does not matter as the Euro can, in a sense, be considered to be a foreign currency). The amount of debt on the balance sheets of central banks is nowaday way lower (as a % of total debt) than in the 1950-1980 period. Part of these debts were (and are) currency, the authors do not show the amount of this kind of ‘debt’. Read more…
The Levy institute is a Post-Keynesian think tank. What did these economists, before 2007, write about financial stability and the role of the central bank? Should we have listened to the economist their warnings?
1) In 2006, Dimitri Papadimitriou, Edward Chilcote and Genarro Zezza warned about the detrimental macro-economic consequences effects of the unavoidable end of the (credit driven) US of A housing bubble. In hindsight: things turned out better than they expected because in the autumn of 2008 the current account deficit of the US of A declined, almost overnight, from -6% of GDP to -2% of GDP (a combination of lower oil prices and lower imports).
2) Also in 2006, Eric Tymoigne argued that central banks should watch asset prices more closely and should concentrate on their core business, i.e. financial stability, instead of focusing solely on low and stable consumer price inflation. In hindsight: this is exactly what the ECB is increasingly doing.
3) In 2003 L. Randall Wray and Dimitri Papadimitriou argued that deflation is not just about consumer prices or even the GDP price level (which also includes investments in new fixed assets, government consumption like expenditures on primary education and export prices) but also and especially about prices of existing assets. We should however understand deflation as a (toxic) symptom – if we want to remedy the consequences of deflation we should look at its origins, i.e. severe and chronic lack of demand which can’t be easily cured by just flooding the economy with money. Profound social, political and economic changes may be necessary (like the post 1937 variant of the New Deal). In hindsight: read the whole thing. Read more…
from Lars Syll
Last night (Oct. 23) at 11:20 PM, CDT, prominent heterodox economist, Fred Lee of the University of Missouri-Kansas City, died of cancer. He had stopped teaching during the last spring semester and was honored at the 12th International Post Keynesian Conference held at UMKC a month ago …
Whatever one thinks of heterodox economics in general, or of the views of Fred Lee in particular, he should be respected as the person more than any other who was behind the founding of the International Conference of Associations for Pluralism in Economics (ICAPE), and also the Heterodox Economics Newsletter. While many talked about the need for there to be an organized group pushing heterodox economics in all its varieties, Fred did more than talk and went and organized the group and its main communications outlet. He also regularly and strongly spoke in favor of heterodox economics, the unity of which he may have exaggerated. But his voice in advocating the superiority of heterodox economics over mainstream neoclassical economics was as strong as that of anybody that I have known. I also note that he was the incoming President for the Association for Evolutionary Economics (AFEE), and they will now have to find a replacement. He had earlier stepped down from his positions with ICAPE and the Heterodox Economics Newsletter. Read more…
from David Ruccio
I just received word that Frederic S. Lee, who taught Post Keynesian economics at the University of Missouri-Kansas City for the past fourteen years, died last night. I first met Fred when he was at Roosevelt University, and we had been in touch (at conferences and presentations as well as through his articles and books on heterodox economics) many times since.
In 1998 Fieke van der Lecq published her dissertation ‘Money, coordination and prices‘. In a hazelnutshell: ‘money does not enable (market) transactions because it lowers transaction costs but because it enables sticky prices’. The study sets out to investigate the consequences of ‘radical uncertainty’ and ‘historical time’ for the nature of prices as defined in general equilibrium theory. As I understood it: human society uses many kinds of coordination systems. When it comes to the division of labour families are one kind. Markets are another. A special thing about markets: participants agree on, among other things, monetary prices before a transaction is ‘completed’. The special thing about market prices is that these are not ex post ‘shadow prices’ but real prices, which are known ex ante. People do this to solve (or try to solve) some of the problems connected with radical uncertainty and historical time. In a family situation, the ‘in good times and bad times’ wedding vow is also used to handle this situation but in a totally different way: a promise to, ex post, accept whatever happens. Market contracts work the other way around. And to be able to do this, they use monetary prices. The essence of money is, in this view, not its function as a means of exchange but its ‘accounting’ function to reduce uncertainty by enabling sticky prices, sometimes in the short run (super markets) and sometimes in the long run (twenty year fixed mortgages). There is a reason why general equilibrium models, which use the concept of ergodicity (i.e. there is, at the most, only stochastic uncertainty and this uncertainty is predictable) and which do not use the concept of historical time, have no place for money: the essential functions of money are not needed. There is of course a difference between stickiness of individual prices and the stickiness of average market prices. And in the case of wages there is overwhelming evidence that social conventions and interpersonal relations play an important role, too (see among many others Akerlof and Shiller). But even then, monetary prices are needed as a focal point for these conventions – while, the other side of the coin, these conventions and the ex ante specifications do define the value of money. In this sense, prices – and therewith money – exist because they are sticky.
Aside: the Chicago-endeavour to call every situation where ex post shadow prices can be calculated a ‘market’ shows imo a blatant disregard for the true nature of markets. And human society.
from Dean Baker
A review of French economist Thomas Piketty’s best-selling book “Capital in the 21st Century” by the world’s richest man is too delicious to ignore. The main takeaway from Piketty’s book, of course, is that we need to worry about the growing concentration of capital, in which people like Microsoft co-founder turned megaphilanthropist Bill Gates and his children will control the bulk of society’s wealth. Gates, however, doesn’t quite see it this way.
From his evidence, he actually has a good case. If the issue is the superrich passing their wealth to their children, who will become the next generation’s superrich, he is right to point out that the biographies of the Fortune 400 — the richest 400 Americans — don’t seem to support this concern. We find many people like Gates, who started life as the merely wealthy (his father was a prosperous corporate lawyer), who parlayed their advantages in life into enormous fortunes. The ones who inherited their vast wealth are the exception, not the rule.
Gates tells readers of his plans to give away the bulk of his fortune. His children will have to get by with the advantages that accrue to the children of the ultrarich, along with whatever fraction of his estate he opts to give them. That will undoubtedly ensure that Gates’ kids enjoy a far more comfortable life than the bottom 99 percent can expect, but it likely will not guarantee a place among the Fortune 400.
Banks first. And second. And third. Three little ECB economists about the function of Eurozone households.
Three ECB economists, Miguel Ampudia, Has van Vlokhoven and Dawid Żochowski, presenting their personal opinions, have written a paper titled: Financial fragility of Euro Area households. It should however have been titled: Lend till they bend. They establish a metric to gauge the financial vulnerability of Euro Area households – but not to help these households in any way. No. And their mothers are not proud of them. They learned nothing, nothing at all from the housing bubble and the Great financial Crisis. Quotes (and note the casual, unsuspecting, naieve way in which they use the phrases ‘efficient’ and ‘good credit’ in a totally bank centered way):
In the case of the house price shock, countries with high loan ‐ to ‐ value (LTV) ratios are affected the most. Nevertheless, one caveat requires due consideration: low LGDs as calculated using our metric heavily depend on the value of the collateral (i.e. the house, M.K.). Hence, any factors hindering the seizure of the collateral or lowering its value, such as an inefficient legal system, moratoria on foreclosures, deadlocks in the courts, may significantly increase losses to the banking sector … We also demonstrate how the framework could potentially be used for macroprudential purposes, in particular the calibration of optimal LTV ratio caps. We show that the reduction of losses for the banking sector from the imposition of LTV ratio caps can be substantial and exhibits a non‐linear pattern. For instance, setting LTV ratio caps at a too‐low level may fully outweigh the benefits of higher cushion against possible defaults by reducing banking sector revenues, due to trimming good credit, by more than the amount of losses that the banks could suffer without the restriction on the LTV ratio cap.
Statistical links. UK R@D, German sustainability, French innovation, Italian austerity, tourism, spanish jobs.
1) In the UK, manufacturing counts for 8% of jobs – but 72% of research and development spending.
2) Germany published, as part of its national accounts, sustainability accounts (Umweltökonomische Gesamtrechnungen ). These show that the amount of (real) GDP per unit of energy and per unit of ‘Rohstoff’ (a-biotic commodities) is increasing rapidly. The study contains a lot of information about health, education and the like. Financial sustainability is calculated by using the structural government deficit while the report does mention how (very large) financial transfers to the banks increased German government debt. No information about private debts however.
3) France: ‘Les sociétés exportatrices sont plus innovantes que les autres’ : exporting companies are more innovative.
6) Spanish employment is increasing (+ 274.000 in one year, mainly males, almost only Spanish nationals, all private employment, more flexwork, less self-employed (YoY)). Just like in other countries (UK, Ireland, the Netherlands), there seems to be a very large ‘capital city bias’. As, despite the increase in the number of jobs, many people are leaving the labour force (net -241.700 in one year, mainly migrant workers returning to Romania, Morocco and South America), unemployment is going down quite fast. The flow estimates show that already before the labour market reforms the Spanish labour market was highly dynamic. Part-time jobs are decreasing.
When it comes to high-tech exports France does best. Source.
The French share of high-tech exports, expressed as a percentage of total exports, is higher than the German and the UK share and increases faster and in a more dynamic, contra-cyclical way. There are very marked differences between the south and the north of europe, France clearly belongs to the ‘north’, Germany is somewhere in between.
Greek exports deteriorate, possibly because plunging domestic sales disabled exporting companies to innovate or even to continue ‘business as usual’. Spanish high-tech exports are increasing, Irish high-tech largely consists of pharmaceutical products. Mind that total German exports are larger than total French exports. Mind that producing and exporting low tech products like food in a high-tech way does not count (and a case can be made that no biological product is ‘low tech’!). Read more…
from David Ruccio
from Ha-Joon Chang
The UK economy has been in difficulty since the 2008 financial crisis. Tough spending decisions have been needed to put it on the path to recovery because of the huge budget deficit left behind by the last irresponsible Labour government, showering its supporters with social benefit spending. Thanks to the coalition holding its nerve amid the clamour against cuts, the economy has finally recovered. True, wages have yet to make up the lost ground, but it is at least a “job-rich” recovery, allowing people to stand on their own feet rather than relying on state handouts.
That is the Conservative party’s narrative on the UK economy, and a large proportion of the British voting public has bought into it. They say they trust the Conservatives more than Labour by a big margin when it comes to economic management. And it’s not just the voting public. Even the Labour party has come to subscribe to this narrative and tried to match, if not outdo, the Conservatives in pledging continued austerity. The trouble is that when you hold it up to the light this narrative is so full of holes it looks like a piece of Swiss cheese. Read more…
Update: Summary: in times of balance sheet recessions and secular stagnation Keynesian policies should not just aim at the level of aggregate demand and income but also at the composition of aggregate demand and income.
In a very readable and insightful review of the new Martin Wolf book (which I haven’t read yet) Kenneth Rogoff plays the revolutionary card:’Let’s get rid of these debts, we’ve got nothing to lose than a deflationary chain of events’. This puts him, in a Eurozone perspective, in the radical left corner of politics (and it’s kind of ironic that he accuses text-book economists like Krugman of being ´hard-left´…). Quote:
Without question the best and most effective approach to the problem would have been to bail out the subprime homeowners directly, forcing banks to take losses but keeping them manageable. For an investment of perhaps a few hundred billion dollars, the US Treasury could have saved itself from a financial crisis whose cumulative cost, counting lost output, already runs into many, many trillions of dollars. Instead of “saving Wall Street,” a subprime bailout would have been targeted, almost by definition, at lower income households. But unfortunately, this approach too would have been politically impossible prior to the crisis.
I agree with almost the whole piece. I can however add some specifics which al point to towards the same conclusion: European austerity is not just about curtailing governments but very much also about disempowering households. For instance the UK recovery can largely be explained because this disempowerment happened to a much lesser extent in the UK, at least when we look at disposable income.
(A) Rogoff states that the German economy is arguably somewhat overheated. It arguably isn’t. Read more…
On his Marginal Revolution blog Tyler Cowen has an interesting post about Germany: historically, German inflation has often been much, much higher than today without anything like the present turmoil about ‘stable money’. Tyler rightly states:
from David Ruccio
Back in August, James Surowiecki observed that the lack of an Ebola treatment was disturbing but predictable.
When pharmaceutical companies are deciding where to direct their R. & D. money, they naturally assess the potential market for a drug candidate. That means that they have an incentive to target diseases that affect wealthier people (above all, people in the developed world), who can afford to pay a lot. They have an incentive to make drugs that many people will take. And they have an incentive to make drugs that people will take regularly for a long time—drugs like statins.
This system does a reasonable job of getting Westerners the drugs they want (albeit often at high prices). But it also leads to enormous underinvestment in certain kinds of diseases and certain categories of drugs. Diseases that mostly affect poor people in poor countries aren’t a research priority, because it’s unlikely that those markets will ever provide a decent return. So diseases like malaria and tuberculosis, which together kill two million people a year, have received less attention from pharmaceutical companies than high cholesterol. Then, there’s what the World Health Organization calls “neglected tropical diseases,” such as Chagas disease and dengue; they affect more than a billion people and kill as many as half a million a year. One study found that of the more than fifteen hundred drugs that came to market between 1975 and 2004 just ten were targeted at these maladies. And when a disease’s victims are both poor and not very numerous that’s a double whammy.
Unfortunately, the best solution Surowiecki could offer was to reward companies for creating substantial public-health benefits by offering prizes for new drugs. Read more…
Today, Eurostat published the new, revised and updated GDP data wich are based upon the new, revised and updated national accounts. What does this teach us?
The aggregate European Union data do not show any kind of dramatic difference with the old data. It is however worhtwhile to look at some individual countries:
Germany had, according to the new revised data, an official double dip (two subsequent quarters of declining GDP)
The 2011-2012 recession in Spain was more severe than originally estimated (2011: GDP decline -0,6% instead of +0,1%; 2012 -2,1% instead of -1,6%)
According to the
English British ONS growth in the UK was slightly higher and the growth of employment slightly lower than earlier estimated which means that the unprecedented decline of productivity is still unprecedented – but less large than earlier estimated. Read more…
Links. Inflation and ergodicity, Greece, Greece, flaring solar, tobacco as subordinating money, ordoneoliberalenergyprices: guess who pays the bill
1) Thomas Sargent and Timothy Cogely investigate the long run development of USA wholesale prices and discover the obvious (emphasis added):
Major outbreaks of price level instability and unpredictability are associated with the Civil War, the two World Wars and Great Depression, and the Great Inflation and Great Recession. In each instance, a crisis disrupted pre-existing monetary arrangements and created considerable uncertainty about the future. In each case, policy makers eventually found a path back to price stability, but that took a long time: the average time from peak to trough was 30 years.
This makes even Thomas doubt the models of Robert Lucas (see the concluding remarks). The really interesting thing is however that, despite the enormous increase and change of the 19th century monetary USA economy (PT in the PT=MV formula) average inflation was about zero. Coincidence? Endogenous gold standard money? Sargent and Cogely still do not explicitly reject ergodocity (or: ‘economic predestination’ – rational expectation economics have a Calvinist streak). But given some time they probably will follow the path of so many former neoclassicals who started to do economic history. Caveat: I do know that this thirty year period fits into Sargent’s ideas about deep social parameters etcetera. It is, however, at odds with Real Business Cycle ideas as these stress very rapid adaptation of economies to ‘shocks’.
2) This makes me desperate: ‘financial markets’ fret about Greece. Again. Help. What were the whizzpersons behind their screens thinking Read more…