Americans, as we know, are forced to have the freedom to labor more hours than do workers in other advanced countries.
Via de website of Brad deLong I encountered this wise article about DSGE models from macro-advisors. It’s sometimes rather technical (an AR(1) process is a kind of complicated moving average – or in fact, some weighted moving averages are a simple AR(1) process). It’s important enough to republish it. It starts quiet – but does not end that way.
Much has been made of the failure of modern macroeconomics to predict or understand the Great Recession of 2007–2009. In this MACRO FOCUS, our resident time-series econometrician, James Morley*, explains what is currently meant by “modern” macroeconomics, what is behind its failure, and what can be done to rehabilitate its reputation.
In a recent essay, Narayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis, acknowledged that modern macroeconomics failed during the recent financial crisis. However, his essay misses the point of why it failed. Read more…
2) Time series economics and econometrics is the science of complicated moving averages. It matters a lot which weights are used. Don’t use present day (relative) prices to estimate past economic performance. Or the other way around, as Leandro Prados de las Escosura shows. But where does the past stop and the present begin?
3) It’s starting to dawn upon the Irish what really happened – they did not bail our their banks but foreign creditors.
Links: tourism is a growth sector, four years of Greek wage decreases, Spanish economy did worse in 2011, 2012
Tourism is, at this moment, a growth sector in countries like Portugal, Greece, Spain, Ireland, the Baltic states and the UK. In the UK growth started (predictably) after the large depreciation of the pound in 2008/2009. Despite impressive increase, there are however no signs of ‘supply side constraints': the number of people working in tourism wanting to work more hours actually increased after 2009, according to the ONS:
- Employment in UK tourism industries increased at nearly double the rate of the rest of the UK labour market between 2009 and 2013 (5.4% increase, rising 143,000 from 2.66 million to 2.81 million)
- Most of the growth in tourism employment was part-time work between 2009 and 2013 increasing 6.8% or 72,000 from 1.06 million to 1.13 million.
- The number of workers who would like to work more hours within the food and beverage serving industry group has increased at over double the rate of the rest of the UK labour market between 2009 and 2013 (49.0% increase, rising 100,000 from 1.14 million to 1.24 million)
- Self-employment has increased at double the rate of the rest of the UK labour market within the UK cultural, sports, recreation and conference activities industry group between 2009 and 2013 (21.9% increase, rising 41,000 from 188,000 to 229,000)
- Temporary employment within main jobs in the UK tourism industry has grown cumulatively by 16.6% between 2009 and 2013, in comparison to 12.5% within UK non-tourism industries (rising 29,000 from 231,000 to 260,000)
Greek wages are flexible. But (just as in the Netherlands in the nineteen thirties) this does not solve demand side problems. In Greece, wages have been declining for four years in a stretch, sometimes at a double digit rate. Despite of this – to a large extent: because of this – the country is to the ropes. Lowering wages clearly is not the solutions to demand side problems. I guess that this will become a text book classic.
Revisions to the Spanish national accounts show larger decreases in 2011 and 2012 (look at cuadro 3). Which is in line with expectations based upon the fast increase of unemployment in those years. Eurozone austerity was even more detrimental than we already thought.
1) In the Financial Times Robin Hardin has a good article about the land tax. He suggests (based upon micro-economic work of Morris Davis, Rutger Stephen Oliner and Edward Pinto which I did not read) that a ‘land underlying houses’ value index might be a good indicator of housing bubbles. Macro data show this, too. The ‘Piketty style’ national accounts balance sheet data contain information on the value of land underlying houses. For the Netherlands I’ve extrapolated these data (roughly: market value of houses minus building costs of houses) backwards to 1965 and they clearly show the two post WW II Dutch housing bubbles. Technical detail: due to the introduction of new national accounts concepts there is a break in the series between 2008 and 2009; the data on NIP are consistent with the old concepts, not with the new concepts). See Jesse Frederik (in Dutch) on the first bubble.
2) Unemployment in Estonia keeps getting down – but employment is not getting up. The working age population is shrinking.
Links: real estate problems, the importance of being employed, economic weight watching, banking in the USA
Fergal McCann and Tara McIndoe-Calder show, on Voxeu, with micro data on small and medium enterprises, that Richard Koo is right: real estate cycles lead to debt overhangs which lead to balance sheet recessions.
Shortly after World War II, i.e. about seventy years ago, the ‘money purification’ in the Netherlands led to a situation in which in fact all households were ‘banked’, i.e. had access to bank accounts. Claire Célérier and Adrian Matray show, on Voxeu, that, in 2014, the US of A are still lagging Read more…
Update Data on job growth in Ireland can be found here. Employment increased with 1,7%, Year on Year. Together with a 7,7% increase of the volume of production this implies a whopping 6% increase of productivity. Which fits in the picture of catch up growth in a country with an absolutely massive output gap.
After years and years of grave, creditor centered deflationaqry liquiditionist policy mistakes Ireland recently finally got a chance to grow again – and it did. GDP in the second quarter of 2014 was 7,7% larger than one year earlier. The triumph of austerity policies!? Not really. The volume of government expenditure increased with 7,9%, even more than production. Government expenditure in current prices however only increased with 1,6% which meant that prices paid by the government (mainly wages) were a whopping 6% lower… Growth was not export led either: imports grew about as fast as exports (which, as Ireland has an export surplus, of course meant that the surplus increased a little). The most surprising thing: a 18,5% increase of the volume of investments! I can’t at the moment explain this (construction? equipment?). But it shows the power of domestic demand. I could not find second quarter employment data – but it seems that productivity growth went through the roof.
from Gustavo Marqués
According to the dominant view of financial markets, access to easy credit driven by central banks in both the U.S. and the developed countries of the European Union, should have led to economic growth. The transmission mechanism is the following: availability of easy credit (at rates of zero or near zero interest) will raise the price of stocks (including real estate within this category), generating a wealth effect that will in turn increase consumption and the GDP. See some testimonies.
“Before the current turmoil began, Federal Reserve Chairman Ben Bernanke’s hope was that rising asset prices would lead to a ‘wealth effect’ that would encourage the American consumer to start spending again, and thus help the American economy finally leave the ‘Great Recession’ behind” (Keen, 2013, p. 3).
Alan Greenspan has been even more explicit. Read more…
According to INSEE, the French statistical institute, the French labour market became much more flexible. But it also became less flexible, according to the same study…
How to explain ‘Ces constats apparemment contradictoires?’
Apparently, more flexibility led to ever shorter contracts at the bottom of the labour market and therewith to segmentation and less dynamism, many people are increasingly trapped:
tout ceci suggère que le fonctionnement du marché du travail se rapproche d’un modèle segmenté, où les emplois stables et les emplois instables forment deux mondes séparés, les emplois instables constituant une « trappe » pour ceux qui les occupent
Grumpy update: yes, I can and do read french, albeit somewhat slowly, and more people talking about France should be able to do that.
Should this problem be solved by a more flexible upper half of the labour market? Hmmm… that’s the USA solution, a country characterized by extreme income inequality and loads of ‘working poor’. And when we look at the 1995-2014 period less than impressive job growth and a declining participation rate. I do not say that French labour market rules, habits and culture are perfect. But economists should stop analysing the labour market assuming a situation of full employment. But we we’ll first have to solve the macro-economic problems: mind that european countries with medium or, regionally, even low unemployment like Switzerland, Germany and the Netherlands have been able to fill the macro economic ‘spending gap’ with current account surpluses of 7 to (over) 10% and even this did not prevent a double dip in Germany and outright stagnation the Netherlands… Also and obviously not every country can have such surpluses at the same time. A ‘flexible’ labour market in a situation of high output gaps (look at the high rates of unemployment) is a totally different ball game than in a situation of full employment and will trap people into poverty.
The labour market in the UK is doing well. Unemployment is going down, employment is going up, contrary to the situation in the USA participation rates are slightly increasing and total wage income is increasing too, especially in the lower brackets. And the number of real jobs relative to
day labourers self employment might increase a little (look here at EMPo1, quarterly data to correct for the privatization of the Royal Post). Time to tighten? Hmmm… unemployment is still high (i.e. above 6%) and wage increases are at a historical low. There are, at this moment, NO signs of wage inflation. There are ever clearer signs of a housing bubble and house price inflation – but that kind of inflation does not require higher interest rates but a land tax and, as far as I know the British situation, more construction, especially in and around London. If Scotland becomes independent they can only hope to leave before this bubble bursts and they really have introduce a Scottish currency asap and to curb any Scottish housing bubble right away. That might save them quite a bit of economic fall out.
On the ‘Cato at liberty‘ blog Steve Hanke states:
In 1981, Margaret Thatcher was prime minister and my friend and collaborator, the late Sir Alan Walters, was her economic guru. Britain’s fiscal deficit was relatively large, 5.6% of its gross domestic product, and the economy was in the middle of a nasty slump. To restart the economy, Thatcher instituted a fierce fiscal squeeze, coupled with an expansionary monetary policy. This was immediately condemned by 364 dyed-in-the-wool Keynesian economists – virtually all of the British establishment. In a letter to the Times, they wrote, “Present policies will deepen the depression, erode the industrial base of our economy and threaten its social and political stability.”
Thatcher and Walters were vindicated quickly. No sooner had the 364 affixed their signatures than the economy turned around and boomed for the next five years. That result provoked disbelief among the Keynesians. After all, according to their dogma, the relationship between the direction of a fiscal impulse and economic activity is supposed to be positive, not negative.
The 364’s dogma was proven wrong. Thatcher and Walters were right.
NO, they weren’t. After 1981 the British economy tanked and British unemployment rapidly increased to a post war high of 12% in…1984. Hanke, possibly inspired by the year ‘1984’, rewrites history.
from David Ruccio
The technological development process that allows electronic transaction instead of exchanges using physical currency, has the same merciless and irreversible character as the advent of the electronic calculator in the 70s and digital photography in the 90s: it meant the unavoidable death of the slide rule (then) and photographic film (more recently). Based on the nature of technological innovations and the market economy’s exploitation of such, we may predict the death of physical currency; bills and coins. It is probably a question of when, not if, this will take place. This paper will discuss some positive possibilities for reform of the financial and monetary system that emerge as a side effect of the unstoppable advances of technology in this field.
A modern financial system consists of a Central Bank (CB) and an extensive network of private financial units. The role of a CB has up to this day been as an interest-rate setter behind the scenes and – in crisis – “lender of last resort” for the network of private licensed (“commercial”) banks and non-bank financial institutions (NBFIs).
The commercial bank network has historically been quite dense, with branches of competing banks within a reasonable distance from customers. The reasons for this geographical diversity has been twofold:
from David Ruccio
According to Gallup’s latest annual Work and Education Survey [ht: db],
Adults employed full time in the U.S. report working an average of 47 hours per week, almost a full workday longer than what a standard five-day, 9-to-5 schedule entails. In fact, half of all full-time workers indicate they typically work more than 40 hours, and nearly four in 10 say they work at least 50 hours.
The Economist (a British weekly) in its September 6 issue, p. 67, dances to the tune of the neoliberal piper as it, when defining potential growth’ implicitly uses neoclassical models which by assumption exclude the possibility of involuntary unemployment. Potential growth is supposed to be: ‘the speed at which the economy can expand while keeping inflation in check’. Wrong.
Following the lead of Harrod, 1939 and Domar, 1946 and defying Solow (who, to get rid of the expenditure flow consistentcy of the Harrod and Domar models, ruled out unemployment in his famous 1956 article about growth, in retrospect a textbook case of scientific retrogression!) we have to define ‘potential growth’ as ‘the speed at which the economy can and has to expand while keeping unemployment low’. See about this also this recent article by Fazarri et al and this Slack wire blogpost about the article. Empirically, the German, Spanish, Irish and Greek experiences seem to be described much better by the Harrod/Domar ideas than by the Solow model, Germany since 1991 being affected by Domar style endemic deflationary forces.
In a practical sense the definition of The Economist, which does not take structural unemployment into account, would restrict potential Spanish and Greek growth to 3% a year, the Harrod and Domar insights however show that both countries can grow much, much faster for quite some time as unemployment is sky-high.
Of course, potential growth is not necessarily the same thing as sustainable growth. Which makes things complicated. But inflation is no serious restriction, at least not for Greece and Spain. One overlooked aspect of the Spanish bubble before 2008 is by the way that wage increases were relatively restricted (really, check the data, and unit labour cost increases in manufacturing were restricted, too) as these were mitigated by large increases in immigration as well as a fast increase in the participation rate of women.
from today’s Guardian
Surging carbon dioxide levels have pushed greenhouse gases to record highs in the atmosphere, the World Meteorological Organisation (WMO) has said.
Concentrations of carbon dioxide, the major cause of global warming, increased at their fastest rate for 30 years in 2013, despite warnings from the world’s scientists of the need to cut emissions to halt temperature rises.
Experts warned that the world was “running out of time” to reverse rising levels of carbon dioxide (CO2) to tackle climate change.
Data show levels of the gas increased more between 2012 and 2013 than during any other year since 1984, possibly due to less uptake of carbon dioxide by ecosystems such as forests, as well as rising CO2 emissions.
The annual greenhouse gas bulletin from the WMO showed that in 2013 concentrations of CO2 in the atmosphere were 142% of what they were before the Industrial Revolution.
Other potent greenhouse gases have also risen significantly, with concentrations of methane now 253% and nitrous oxide 121% of pre-industrial levels.
Between 1990 and 2013 the warming effect on the planet known as “radiative forcing” due to greenhouse gases such as CO2 rose by more than a third (34%).
from David Ruccio
Inflation appears at first sight an extremely obvious, trivial thing. But its analysis brings out that it is a very strange thing…
One one level, inflation is extremely obvious: it’s an increase in the prices of the commodities people buy. Bread, gasoline, housing, and so on. When their prices go up, we are witnessing (and, for many, suffering) inflation. (The opposite, when prices fall, is deflation.)
Why is inflation important? Well, for most of us, our money (or nominal) incomes are eaten away by increases in prices. Therefore, over time, our real incomes are less than our nominal incomes, thus permitting us to purchase less.
Here’s an USA illustration of the difference: Read more…
from Lars Syll
Modern probabilistic econometrics relies on the notion of probability. To at all be amenable to econometric analysis, economic observations allegedly have to be conceived as random events.
But is it really necessary to model the economic system as a system where randomness can only be analyzed and understood when based on an a priori notion of probability?
In probabilistic econometrics, events and observations are as a rule interpreted as random variables as if generated by an underlying probability density function, and a fortiori – since probability density functions are only definable in a probability context – consistent with a probability. As Haavelmo (1944:iii) has it:
For no tool developed in the theory of statistics has any meaning – except , perhaps for descriptive purposes – without being referred to some stochastic scheme.
When attempting to convince us of the necessity of founding empirical economic analysis on probability models, Haavelmo – building largely on the earlier Fisherian paradigm – actually forces econometrics to (implicitly) interpret events as random variables generated by an underlying probability density function.
This is at odds with reality. Randomness obviously is a fact of the real world. Probability, on the other hand, attaches to the world via intellectually constructed models, and a fortiori is only a fact of a probability generating machine or a well constructed experimental arrangement or “chance set-up”. Read more…
Virtually all economies are currently growing both physically and financially, within a global envelope that is finite, non-growing and materially closed. A prevailing view, such as within the OECD and UNEP, is that the physical growth of throughput can be decoupled from the non-physical (financial) growth of GDP through innovation, which is commonly branded as “green growth” or “sustainable growth”. This view is also reflected, for example, in policy proposals for the next United Nations Climate Change Conference that emphasize decoupling emissions from growth (European Commission 2014). Two forms of decoupling are discussed in the literature: With relative decoupling, the growth of environmental impacts slows down relative to GDP due to efficiency improvements. With absolute decoupling, the environmental impact decreases as GDP grows.
To perpetuate a growing GDP under conditions of absolute biophysical limits will require—it is argued—compensation in terms of absolute decoupling of both the inflows from and the outflows into the environment. Relative decoupling will not suffice; it will merely delay the point in time when one or more limits are reached. Moreover, absolute decoupling will have to be achieved on a global scale, because improvements in one part of the world might be achieved when production and associated ecological impacts are moved offshore.