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“Fred Lee’s departing words of wisdom”

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Saturday morning musing: market prices, sticky by nature?

October 25, 2014 Leave a comment

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.

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World’s richest man tries to defend wealth inequality

October 24, 2014 2 comments

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.

Read more…

Banks first. And second. And third. Three little ECB economists about the function of Eurozone households.

October 23, 2014 4 comments

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.

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Statistical links. UK R@D, German sustainability, French innovation, Italian austerity, tourism, spanish jobs.

October 23, 2014 Leave a comment

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.

4) Italy: the trade balance is improving, but industrial turnover and orders are down  as domestic sales are dwindling.

5) Irish and Greek tourism do well

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.

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Graph of the day: Exports ‘de la haute technologie’

October 23, 2014 Leave a comment

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…

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What Yellen didn’t say

October 21, 2014 1 comment

from David Ruccio

MJ-inequality

 

source

The other day, I reported that Fed chair Janet Yellen said a great deal about existing levels of economic inequality at the Conference on Economic Opportunity and Inequality in Boston. Read more…

Why did Britain’s political class buy into the Tories’ economic fairytale?

October 20, 2014 6 comments

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…

Rogoff on Wolf. Some comments or: empowering households made all the difference

October 19, 2014 8 comments

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…

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Tyler Cowen on German inflation – graph added.

October 18, 2014 2 comments

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:

Rightly or wrongly, today’s Germans associate high rates of inflation with wealth transfers away from Germany and toward other nations.
Tyler Cowen’s post could however do with a little more quantitative rigor and after a little searching I found the data on the site of the Statistisches Bundesamt (see the graph). And Tyler is quite right about Germany: historically, inflation has quite often been above the present ECB target – and with more than a small margin! There was however some collateral information in the Bundesamt files: it turns out that there might have been a recent German inflation trauma after all. In former East Germany prices increased steeply just when unemployment exploded and as far as I know wage increases were limited… I agree with the sentence of Tyler Cowen above: aging people who don’t want to see the European equivalent of the post 1991 ‘Elephanten-transfers‘ to East Germany. But the East-German experience may count for something.

Read more…

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Political economy of Ebola

October 17, 2014 1 comment

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…

The new European Union GDP and national accounts data (1). More crisis, less debt

October 17, 2014 Leave a comment

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…

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Links. Inflation and ergodicity, Greece, Greece, flaring solar, tobacco as subordinating money, ordoneoliberalenergyprices: guess who pays the bill

October 16, 2014 1 comment

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…

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Defending Germany from Paul Krugman

October 15, 2014 4 comments

from Dean Baker

I would not typically defend Germany’s economic policies against Paul Krugman, but I will say a word in its favor this morning. Krugman trashes Germany for running large trade surpluses, telling us that Germany actually has a weak domestic economy. He concludes a short post by saying that Germany can’t be any sort of model, since we can’t all run large trade surpluses.

While there is much truth to Krugman’s comments, it is worth stepping back for a moment. First, the claim that Germany’s domestic economy is weak means that Germans don’t want to buy lots of stuff. While Germany does certainly have problems of poverty and inequality, they are nothing like what we see in the United States. It would be great for Germany to spend more to address these problems, both because of the direct benefit and also because of the demand it would provide to the world economy, but it is not necessarily a bad thing that a country doesn’t want to buy more stuff.

A really good way to deal with a problem of insufficient demand is to design policies that encourage less supply. Germany has done this to some extent with work sharing, long vacations, paid parental leave, and other policies that have the effect of dividing the available work more evenly among the population. The average work year in Germany is 20 percent shorter than in the United States. Germany can certainly do more to spread the work more evenly and hopefully the income goes with it, but weak domestic demand need not be a problem. Read more…

Categories: The Economy

Seven things that economists could usefully do or call for over the next several years

October 14, 2014 20 comments

from Richard Parker

Without solving . . . Pikettyan meta-issues, the question arises: Are there other things we as economists can do if, like Piketty, we’re concerned (alarmed? appalled?) about current levels and trends of inequality? How – absent meta-solutions – should we or could we move an inequality-reduction agenda forward? What issues or strategies or agendas might help advance absorption of Piketty’s focus on distribution and reframe a mainstream professional and public discourse still fixed almost monocularly on aggregated, rather than a distributionally-differentiated, GDP?

As I contemplated that question in Athens this summer, several possible projects occurred to me as worth at least consideration and debate. Some readers will no doubt find these suggestions too small, too pallid, too technical, or too bureaucratic, but I’m motivated to raise them – rather than more sweeping or heroic responses to Capital – in part by my reading of the ways The General Theory’s lessons were absorbed, initially by academics, then policymakers, and then by elements of the press and wider public, during the first 25 years or so after its publication (about which more shortly).

What academic, government, and policy NGO economists could, in my opinion, usefully do or call for over the next several years includes, at very least, the following:

Read more…

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Real median income of working-age American families 1975-2013 (chart)

October 13, 2014 Leave a comment

from David Ruccio

70467-swa-income-figure-2b-real-median-income-2-epi

There are two periods to focus on in this recently updated chart of the real median income of working-age American families: Read more…

Piketty’s blindside: any accounting format reflects the economic theory that defines its categories

October 13, 2014 2 comments

from Michael Hudson

Piketty sought to explain the ebb and flow of polarization by suggesting a basic mathematical law: when wealth is unequally distributed and returns to capital (interest, dividends and capital gains) exceed the rise in overall income (as measured by GDP), economies polarize in favor of capital owners. Unlike the classical economists, he does not focus on rentier gains by real estate owners, their bankers, corporate raiders and financiers, privatizers and other rent seekers.

Piketty is limited by the available statistical sources, because any accounting format reflects the economic theory that defines its categories. Neither the National Income and Product Accounts (NIPA) nor the Internal Revenue Service’s Statistics on Income in the United States define the specific form that the wealth buildup takes. Most textbook models focus on tangible investment in means of production (plant and equipment, research and development). But industrial profits on such investment have fallen relative to more passive gains from asset-price inflation (rising debt-fueled prices for real estate, stocks and bonds), financial speculation (arbitrage, derivatives trading and credit default insurance), and land rent, natural resource rent (oil and gas, minerals), monopoly rent (including patent rights), and legal privileges topped by the ability of banks to create interest-bearing credit.

Read more…

Categories: Piketty's Capital

Large-scale wars, tax reforms and “inverted totalitarianism”

October 12, 2014 1 comment

from Heikki Patomäki 

The world wars of the 20th century constituted major economic and political shocks. Piketty goes so far as to argue that “we can now see those shocks as the only forces since the Industrial Revolution powerful enough to reduce inequality” (p. 8; italics HP). This is a point he repeats several times in the book; he also gives ample statistical evidence on the impact of the world wars on the level of taxation and inequalities (for instance pp. 18-20, p. 41, p. 141, p. 287, p. 471, pp. 498-500).

Piketty, however, is not fully consistent in formulating this point. Counterfactual developments are uncertain. Without the shock of World War I, “the move toward a more progressive tax system would at the very least have been much slower, and top rates might have never risen as high as they did” (p. 500). The war facilitated and speeded up change, but it was not a necessary condition for it. The weakest formulation is this: “[P]rogressive taxation was as much a product of two world wars as it was of democracy” (p. 498). Thus democratization too seems to have played a facilitating role. A problem is, however, that democracy cannot explain the decline of progressive taxation and the re-rise of widening inequalities since the 1970s.

Read more…

Categories: Piketty's Capital

From the comments to the Piketty issue of the RWER: Newtownian is right.

October 11, 2014 4 comments

In the comments to the 69th, Piketty, issue of the RWER, Newtownian states:

Try as I might in 182 PDF pages I could not find a single reference to the natural environment or climate change, peak oil, degrowth, exponential economic growth impacts, some small discussion oil and only a single footnote with the word ‘ecosystem’.

Which I suggest indicates the real natural world is still not seen as relevant to economic thought and critique even for ‘real world’ economists.

This comes concurrently with the release of Naomi Klein’s new book “This changes everything” http://www.theguardian.com/books/2014/sep/19/this-changes-everything-capitalism-vs-climate-naomi-klein-review !!??? which makes this omission even more bizarre.

From a mainstream economics group I would have expected this. But RWER I thought was progressive. This omission is so depressing – for me personally in part after having spent two days last week at a degrowth conference which itemized how bad, bad economics policy is regarding sustainability and future generations and now desperately new economics ideas are needed.

I agree. But the concept of capital used by Piketty is not as bad in this respect as the ‘mainstream’ text book growth concept (which, as shown below, is hugely influential in policy circles). Read more…

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Labour market links, 11/10/14. Germany, Greece, EU, UK, Simon Wren-Lewis

October 11, 2014 Leave a comment

1) Wage rates in Germany: +3%. Which, as the number of jobs is increasing at a 1% rate, means that total wages are up 4%. The only thing they have to do to avoid recession is to lower VAT on labour intensive services, to give an additional boost to purchasing power.

2) An interesting ECB labour market study: employment losses (EU level) had a very strong gender bias (almost 100% of net jobs lost were occupied by males) and a very strong education bias (employment of higher educated people actually increased but employment of lower educated people plummeted). Interestingly, the ECB does not push for ‘structural’ changes anymore. But it’s still trying to turn the Euro Area into a Mundellian optimal currency area: barriers to international mobility have to go down (I agree but not because of the Euro) (p. 67):

While the impact of reforms that have already been undertaken may take some time to produce their full effects, more may be required to achieve the degree of labour market flexibility compatible with membership of a monetary union Read more…

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