We all know the fable of the ant and the cricket. Translated into the language of scientific economics: the ant was a Keynesian, not an Austerian. She did not save money and buy bonds or other second-hand financial stuff but she invested, in new inventories. And indeed: the worst thing which we can do for our children is to postpone ‘real investments’ (as opposed to financial investments, it’s really bad for the science of economics that the english language doesn’t make a distinction, like Dutch does, between ‘beleggen’ (financial investments, ‘belaying‘ or safeguarding your money, and ‘investeren’, real investments, new goods and knowledge and relations and whatever).
But alas. Postponing real investments and ‘belaying’ our money is what we do, at the moment, in the Eurozone (see the graphs, all data Eurostat). We are putting the future at stake. Just think of the consequences of rapidly increasing long-term unemployment. It’s not just that investments are low. Investments are the most volatile expenditure category and can decline at a double-digit rate during a slump. But after a slump they can also recover at the same speed. And often they do. But sometimes, once in every three generations or so, they don’t recover… and this is such a time (graphs).
A. Land related investment (dwellings and the like) are more than half of total investments. As the life span of buildings is quite a bit longer than the life span of other fixed assets this means that the stock of capital consists for an even larger part of buildings and roads (in the Netherlands: over 70%). This is one of the facts which made me appreciate Georgist economics.
Carola Binder is somewhat puzzled that so many Europeans see rising prices as one of their two personal top problems (data from May 2012):
” I was stunned that three times as many people consider inflation a top issue as consider health and social security a top issue.”
I understand. But we should not confuse macro with micro. And powerful institutions in the Eurozone want people to suffer from higher prices. Many economists (including me) do not see inflation as a pressing macroeconomic problem at the moment or in the foreseeable future. This however does not mean that it’s not an important microeconomic problem. This difference between micro and macro is also indicated by one of the commenters on the blogpost of Binder:
“Perhaps you should also mention the response to the previous question, “What do you think are the two most important issues facing our country,” to which the most common answer by far is “unemployment,” followed by “economic situation,” with “rising prices/inflation” a rather distant third“.
For many people, rising prices are a personal problem. And when we look at the data per country, shown in the Blinder blogpost, we see that countries were people see rising prices as an especially large problem are often characterized by low wages and pressures to decrease these already low wages (Estonia, Lithuania, Czech Republic etcetera). And in all European countries automatic COLA (Cost of Living Adjustment) of wages has been abolished or there are powerful forces who want to abolish it (against the pressing advise of Milton Friedman, by the way). Hard won institutional arrangements to protect people from the consequences inflation are going down the drains, a policy which is of course backed by the usual suspects like the ECB, the European Commission and the IMF (read the Cyprus Memorandum of Understanding).
And there is another reason why people see rising prices as a large problem. The data Blinder uses are from May 2012. Remember that around that time gasoline prices had increased quite a bit. And gasoline is one of the ‘Frequent out of pocket purchases’ items measured by Eurostat.
According to this institution,
“The FROOPP indicator is important for understanding people’s perceptions of inflation. Individuals often feel that inflation rate is higher than that announced by official statistics. Sometimes this is true, if their purchasing behaviour is not average, but often it is a perception they form. This is because their own judgement of inflation is governed more by everyday purchases (found in the FROOPP) than by less frequent purchases, such as electricity bills paid every three months, annual car insurance or television sets or cars bought infrequently.”
Between 2005 and 2013, this indicator increased quite a bit more than either the HICP consumer prices index and the index of core prices, which excludes volatile prices of energy and seasonal food.
The weird thing is not that people are bothered by higher prices. The really weird thing is that an institution which should know about such problems, the ECB, still mistakenly tracks a metric which is essentially a micro-metric (the HICP price index) instead of a macro-metric like the GDP deflator. And tries to make people suffer more from higher prices by explicitly pressing for a new ‘social contract’, without COLA and comparable arrangements. And don’t underestimate the resolve of the ECB – they are getting more and more explicit about their ardent wish to alter the ‘political economy’ of the Eurozone. As Yves Mersch recently stated, the ECB is quite happy to cross the boundaries of its mandate:
Allow me to point out that over the last few years the ECB has not only been a guardian of stability and among the most interested observers of the various deficit and imbalances procedures, but we have also raised awareness of the need for profound transformations in our political economy and in our societies. We have been advocates of change. In my view, this is our most important unconventional measure…
What a hubris.
Vital economic debate is alive and well in Chicago.
Post-Kenyesian economist Paul Davidson recently was invited to the University of Chicago to give a lecture on Keynes’s solutions to current economics crises – solutions that are very much at odds with the traditional approaches associated with Chicago School economics.
In his talk titled “The Keynes Solution: The Path to Global Economic Prosperity via a Serious Monetary Theory,” Davidson discusses the failures of orthodox economics and explores how Keynes would have addressed them. You can watch the lecture and download the video or audio here.
Davidson points to Keynes’s theory of liquidity to explain why laissez-faire financial markets cannot be efficient and do not solve the problem they claim to solve: optimally allocating capital. He also notes that traditional explanations of financial markets fail to explain unemployment or bubbles – phenomena that Keynes studied throughout his body of work. In particular, Davidson cites the failure of risk-management approaches that rely on a stable and knowable future, which is impossible according to Keynes’s idea of radical uncertainty.
Davidson also explains how orthodox theories guide economic policy such as Quantitative Easing (QE). Quoting Keynes on why QE doesn’t stimulate the economy, Davidson says, “If you want to get fat, buy a bigger belt,” before adding that “QE doesn’t help you get fat, but it may help drop your pants.”
In all, Davidson’s presence at Chicago shows that the school that shook up economics in the mid 20th century by thinking outside the box is still pushing the boundaries of economic thinking. Chicago remains a vital center for economic debate. INET applauds both the University of Chicago and Davidson for promoting the kind of healthy economic discussion that is necessary for the economics profession – and the economy – to get back on course. Hopefully more economics departments will follow its lead.
On Twitter, @cigolo published an
interesting frightening graph on Spanish and Italian bad bank loans. The Great European debt crisis is still intensifying. After some tinkering it turns out that unemployment is a rather robust ‘leading indicator‘ for these bad loans.
The economics are of course common sense: unemployment leads to lower incomes which leads to bad loans, the lag can be explained by households receiving benefits for some time as well as draining down savings. Unemployment and lower income clearly is not just and ‘incentive’ for the unemployed, it also cripples the economy.
Differences between Italy and Spain are large. For Spain I used an (unemployment -8)/1,5 metric; for Italy I used an (unemployment – 3) metric and while the relationship is remarkably stable in Spain it shifts somewhat in Italy. The difference might be caused by relatively high ‘additional’ unemployment in Italy. Never mind – unemployment showed large increased during the past two years… (datasource: Eurostat).
I remember the first time when I saw two men kissing in public. I must have been fifteen or sixteen at the time. I did not shock me, even at that tender age – as I literally did not believe my eyes: “did I really see that?”. And after some seconds looked again (and, to be honest, was shocked after all).
Psychologists call this behaviour: ‘cognitive dissonance’. New information which is at odds with previous experience or knowledge and is either ignored, disbelieved, or rationalized. It happens all the time – also in science. A recent ECB ‘Monthly Bulletin’ article, ‘Country adjustment in the Euro area – where do we stand’ is an example.
The beginning of the article is in fact quite good. Read more…
from Dean Baker
By now almost everyone knows of the famous Excel spreadsheet error by Harvard professors Carmen Reinhart and Ken Rogoff. It turns out that the main conclusions from their paper warning of the risks of high public sector debt were driven by miscalculations.
When the data are entered correctly, this hugely influential paper can no longer be used to argue that the United States or other wealthy countries need fear a large growth penalty by running deficits now. There is no obvious reason that governments can’t increase spending on infrastructure, research, education and other services that will both directly improve people’s lives and foster future growth.
With the advocates of austerity on the run this is a great time to pursue the attack. The public should understand that the often expressed concerns about long-term growth, the future, and the well-being of our children are simple fig-leafs for inhumane policies that deny people (a.k.a. the parents of our children) work and redistribute income upward. Read more…
Raphael Auer is, on Voxeu, surprised about the rapid decline of the current account deficits of the periphery countries of the Eurozone (see also here and here). But he is wrong about the reasons for this decline. The ‘rebalancing’ is mainly caused by a very deep economic slump – and not so much by an increase of productivity. Since 2007 the volume of Spanish exports of goods and services (i.e. the current account without the income balance) increased with about 26 billion euro (2005 prices) and at about the same rate as before 2008. No change there. But the 64 billion euro decline of imports was much more important for the change in de current account. Before 2008 imports increased faster than exports – after 2008 imports actually went down.And this decline was caused by a steep decline in final demand of about 110 billion Euro (see graph, data from Eurostat).
This means that Auer’s suggestion that the Southern European experience shows that internal devaluation can lead to a rapid rebalancing of the current account through the competitivity channel is dead wrong. He states:
Because current-account imbalances are indicative of underlying differences in macroeconomic fundamentals across the currency union, restoring uniform competitiveness across the Eurozone has become a policy objective for many European policymakers. For example, Draghi (2012) states that “Europe’s future prosperity requires member countries to be competitive individually in order to be competitive jointly and thrive in an open, global economy”. However, the heterogeneous developments in wage setting and public and private spending patterns that caused the current-account imbalances had taken a decade to develop, thus giving rise to concerns that closing current-account imbalances also might take a prolonged period. Indeed, given the lack of the possibility of exchange-rate depreciation, external adjustment within currency unions is generally thought to be a slow and costly process. Against the backdrop of these considerations, it is worthwhile to point out that rapid current-account rebalancing is actually well underway at the current juncture.
“The size, the speed, and the uniformity of the current-account improvement in these four nations could indicate an improvement of macroeconomic fundamentals or of the deep recession in these nations”.
In my world 27% ‘normal’ U-3 unemployment, almost 40% of broad unemployment and rapidly rising long-term unemployment is not really ‘an improvement of fundamentals’. And neither is a level of spending which is clearly below capacity. But an extreme crisis of course leads to less imports. Auers should not have been surprised at all. When domestic final demand declines at an unprecedented rate the current account will (completely consistent with economics 101, by the way) also ‘rebalance’ at an unprecedented rate, surely when a rather limited increase in government expenditure is offset by high interest rates, like in Spain. Even when productivity decreases, like in Greece.
The idea that, to quote a recent Cyprus speech of Jörg Asmussen, member of the board of the ECB, periphery countries were characterized by “significant external and internal imbalances had… – notably persistent current account deficits, significant losses in competitiveness, rising fiscal deficits and public debt” while it’s the task of the ECB to lecture them about this clearly still goes around (here by the way some information about Asmussen’s role in deregulating the German financial sector).
(A). The current account deficits. Dean Baker is too kind when he states about how the ECB ignored these deficits before 2008:
How did the ECB think these imbalances made sense? Read more…
Eurostat published new data on the production of electricity in the EU. Total supply (production + net imports/exports) is declining. The share of renewables is rising rapidly, the share of ‘conventional thermal’, though still the most important kind of production, is declining. Update: in an economic history perspective the replacement of ‘conventional thermal’ by renewables could not have gone much faster than in 2011 and 2012.
Graph 2. Production of electricity by source
After 2008 the Turkish central bank could slash (high) interest rates. It seems to have worked: unemployment declined, despite rapid population growth and an increasing participation rate; in only four years time the number of jobs increased with about 25 – 30%, which compares quite well with even Germany and especially other mediterranean countries. The number of jobs in England was quite stable, despite the crisis, which is partly due to an increase in (involuntary) part-time working but also because of a whopping decline of productivity, which is estimated to be a whopping -2,6%, YoY, in the fourth quarter of 2012. Also considering the rapid increase of the english current account deficit I however suspect that production estimates are too low and will be revised upward. The Turkish current account deficit also increased in 2010 and 2011, while inflation has increased to about 7%. In 2012 the deficit on the current account however decreased again. The central bank recently decreased the interest rate, to prevent a rise of the Turkish lira and a renewed increase of the current account deficit. The number of jobs in Germany is increasing – but not at the 2 to 3% a year rate which the Eurozone needs.
EU: Support for financial institutions increases government deficits in 2012, especially in Spain and Greece
Why do we need all this austerity? To enable governments to support the banks? At least to an extent.
Upward impact of 0.4pp GDP in the EU and 0.6pp in the euro area
In 2012 public interventions to support financial institutions, notably in the form of bank recapitalisations, increased government deficits in a majority of Member States that reported such interventions. The increase was particularly large in Greece (4.0 percentage points of GDP) and Spain (3.6pp GDP).
Read the whole thing, it also contains data on othe years.
Unfortunately there was a period in the economics profession, from late 1980s to early 2000s, where many noted academics tried to re-write the history by arguing that it was monetary and not fiscal policy that allowed the US economy to recover from the Great Depression. They made this argument based on the fact that the US money supply increased significantly from 1933 to 1936. However, none of these academics bothered to look at what was on the asset side of banks’ balance sheets.
Richard C. Koo
Do you want to know what ‘Modern Keynesianism’ is all about? Read Richard Koo.
First, an excerpt (for the ‘exhibits’: see the link). Below that some meta which you might want to skip. Important: Keynesian economics is very much about all kinds of interconnected monetary flows and stocks, powered and owned by individual households, companies and the government who are however restrained by the interconnectedness. Think: wages, profits, consumption, real investments, financial investments, lending, borrowing, taxes, debt, assets, whatever. It’s only indirectly about a just economy, ‘real’ prosperity or a green economy. But we are living in a monetary world – most of us do work for profit or wages. And most of us do depend on this. Low unemployment is a prerequisite for prosperity – and an important element of a just society.
A flavour of the text: Read more…
May 1 used to be labor day. The income share of labor is falling all over the world, according to the ILO. Its Global Wage Report 2012/21013 states (emphasis added),
This shift in income distribution has taken somewhat different forms in different countries. In the Anglo-Saxon countries a sharp polarisation of personal income distribution has occurred, combined with a modest decline in the wage share. In particular top incomes have increased dramatically …. In the USA for example, the top 1per cent of the income distribution increased their share of national income by more than 10 percentage points. In continental European countries functional rather than personal income distribution has shifted dramatically. In the Euro area, wage shares have decreased by around 10 percentage points of GDP (Stockhammer 2009), but personal distribution has remained comparably stable and often has not changed in the same way as in the USA (OECD 2008, 2011). For example, in Germany personal income distribution was stable until the mid-1990s and thereafter the bottom of the distribution lost ground; in France personal income distribution among wage earners has become more equal. While these developments appear rather different at first sight, they share the common trend that the share of non-managerial wage earners in national income has decreased sharply. The increase in inequality in the USA is, to a significant extent, driven by changes in the remuneration of top managers, whose salaries and bonuses are counted as labour compensation, i.e. wages, in the National Accounts. If they were counted, in the spirit of 19th century Political Economy, as part of profits, trends in the USA and in continental Europe would look rather similar.
Is this mainly caused by technological change? Or by cheap chinese labor? Less protection of workers because of neo-liberal policies? The ILO estimates the world-wide fall of the labor share (graph 1 and 2) and tries to explain this using four variables (and a whole bunch of specifications of these variables): globalisation (cheap chinese), technological development (better education and health, more productive methods, machines and materials, advanced on the job learning, new products, a shift towards technologically advanced sectors), the shrinking of the welfare state and: financialisation, defined as:
An increased role of financial activity and rising prominence of financial institutions is a hallmark of the transformations of economy and society since the mid-1970s. These changes are often referred to as financialisation and include rising indebtedness of households, more volatile exchange rates and asset prices, short-termism of financial institutions, and shareholder value orientation of non-financial businesses (Erturk et al 2008, Stockhammer 2010). Financialisation has had two important effects on the bargaining position of labour. First, firms have gained more options for investing: they can invest in financial assets as well as in real assets and they can invest at home as well as abroad. They have gained mobility in terms of the geographical location as well as in terms of the content of investment. Second, it has empowered shareholders relative to workers by putting additional constraints on firms and the development of a market for corporate control has aligned management’s interest to that of shareholders (Lazonick and O’Sullivan 2000, Stockhammer 2004). Rossmann (2009) illustrates this with reference to private equity funds, which buy firms by way of debt that is transferred to the firm. The surplus is siphoned to the private equity fund through dividend payments or fees. The restructured firms then are heavily burdened with servicing their debt and have little alternative to pursuing an aggressive cost-cutting strategy.
Graph 3 below shows the contributions of these factors, technological development actually has a positive effect. And guess what the main culprit is.
Figure 1. Adjusted wage shares in advanced countries, Germany, the USA and Japan, 1970-2010, % of total income (see the report for more details)
Figure 2. Adjusted wage shares in developing countries, 1970-2010, % of total income
Note: DVP3: unweighted average of Mexico, South Korea, and Turkey; DVP5: unweighted average of China, Kenya, Mexico, South Korea, and Turkey; DVP16: unweighted average of Argentina, Brazil, Chile, China, Costa Rica, Kenya, Mexico, Namibia, Oman, Panama, Peru, Russia, South Africa, South Korea, Thailand, and Turkey
It turns out that (emphasis added):
We have found that globalisation, i.e. increased international trade, has negative effects on the wage share in advanced as well as in developing economies, which is in contradiction to the Stolper-Samuelson Theorem. Overall, the results are similar for advanced and developing economies, with the possible exception of low-income countries. Financialisation has had the largest negative effect on wage shares. Technological progress (including structural change) has had substantial effects on the wage share, but these have been positive since 1980 and can therefore not explain the decline in the wage share. Globalisation and welfare state retrenchment have had moderate negative effects on the wage share.
Figure 3. Contributions to the change in the wage share for all countries, 1990/94-2000/04, by estimation
method (for the methods: see the report)
Eurostat has new data on European unemployment:
The euro area (EA17) seasonally-adjusted unemployment rate was 12.1% in March 2013, up from 12.0% in February. The EU271 unemployment rate was 10.9%, stable compared with February. In both zones, rates have risen markedly compared with March 2012, when they were 11.0% and 10.3% respectively. These figures are published by Eurostat, the statistical office of the European Union. Eurostat estimates that 26.521 million men and women in the EU27, of whom 19.211 million were in the euro area, were unemployed in March 2013.
Notice, however, that:
(1) Graph 1. Broad unemployment rates are quite a bit higher and are in some cases threatening to breach the 40% level (2012-IV data!). See also this blogpost, look at how low unemployment in Iceland is (considering the size and nature of the country not a ‘sterling’ example, but nevertheless).
From: Henk de Vos (guest post)
Unemployment in Europe is at record levels and rising. Five European leaders (Dijsselbloem, Rehn, Asmussen, Regling and Hoyer) declared in The New York Times (April 17) that their current policies of austerity bring:
serious social challenges, notably in the form of unacceptably high unemployment. These challenges have to be addressed with determination.
But there is awfully little to find in their policies that is reassuring to those who suffer being unemployed, often for years in a row, or to the increasing number of employed who face the prospect of job loss. And the policies that the leaders bring forward as their response to the crisis, do not indicate a deep awareness of the disastrous psychological, social and economic consequences of unemployment. It seems that full employment, that used to be one of the main macro-economic policy goals, has completely disappeared behind the priorities of low inflation and balanced budgets. The latter are considered to be essential because of confidence effects. But what are the confidence effects of mass unemployment? Questions about psychological well-being are often included in general purpose household surveys, in particular the question “How satisfied are you at present with your life as a whole?” Winkelmann and Winkelmann (1998) used evidence from panel data to show that unemployment has a large detrimental effect on satisfaction after individual specific effects are controlled for. The effect of unemployment is large: almost three times larger than the effect of bad health. And it is unrelated to unemployment duration Read more…
Dystopia. The increase of normal, ‘U-3′ unemployment as well as of ‘additional’ unemployment in the EU after 2008
Eurostat does not only publish ‘U-3′ unemployment data but also additional data (graph 0, check the link for all kind of meta). The Eurostat graph shows that most of the action on the aggregate level has been in the U-3 realm. Is the same true for individual countries? No, as is shown by graph 1 and 2 which compare the change of lev els of unemployment between the fourth quarter of 2012 and the fourth quarter of 2012 (in Spain and Ireland, unemployment already had started to rise at that moment)
Graph 0. Unemployment rate and new supplementary indicators, EU-27, age15-74
A comparison of the increase of U-3 unemployment with the increase of additional unemployment clearly shows that some countries which seemed to do relatively well (Belgium, Finland, the UK) are doing about as bad as neighbouring countries (some of these are not included due to lack of data for 2008). Read more…
I’ve added the 2012 data to my interest data base (sources here, albeit in Dutch).
Graph 1. 2012 is indeed special: interest rates on government bonds are, with quite a margin, the lowest ever (graph 1). The very low Dutch rate is of course connected to crushing rates in southern Europe and a lack of borrowing by/lending to households and companies. In a sense the pre-Euro rates should be compared with the average Euro bond rate and not with the Dutch rate. Household rates in the Netherlands are however still pretty high, surely when we take ever lower GDP inflation into consideration.
Graph 2. Overnight rates are pretty low, too. Notice that these can be low for decades.
Inflation in the Eurozone is lower than the ECB states it is. Which means that monetary policy is tighter than the ECB assumes. We just have to look at the right prices to see this. Wages are a price, too. When we look at the economy using the lens of the national accounts (income approach) they even are the most important income related price. When we look at the economy from the expenditure side of the national accounts, consumer prices are of course important. But so are prices of government consumption. And prices of exports and investments. Sales of existing houses are not covered by the national accounts (except for fees of real estate brokers and the like) but house prices also are one of the most important price of the entire economy, and (looking at the long run) increasingly so as in many countries home ownership has increased quite a bit, after about 1930. Only a limited amount of these prices are covered by the ECB’s inflation metric of choice, the HICP index of consumer prices. Which would not be to bad when these prices all showed the same development. But they don’t.
The focus of the ECB on just this inflation metric has cost us dearly. In the period up to 2008 the clearly neurotic attention to the HICP and a neglect of other prices led the ECB to miss out on the house price bubbles in the Netherlands, Spain, Ireland, Slovenia and a bunch of other countries. At this moment we are paying the price for this mayor policy mistake.
Alas, the ECB has not learned from its mistakes. They are still paying neurotic attention to HICP inflation, while missing out on other important inflation metrics which makes them misunderstand the situation. In the annual report the ECB states:
“Annual inflation remained at elevated levels in 2012 despite the unfavourable macroeconomic environment,
although it declined in the course of the year.”
Should we, as present day money creation is largely asset based (mortgages <- ->houses!), move from a consumer price target to a
house asset price target for central banks? Anthony Hotson gives some historical reasons why this might be a good idea:
For centuries, monetary systems have been stabilised by anchoring the price of some of the asset counterparts of money and allowing other (consumer) prices to vary. In recent decades, we have turned this approach on its head, targeting the consumer price index and allowing asset-counterpart prices – mainly property prices – to let rip. Our focus is on requiring banks to adjust their capital to reflect the risk of asset-price impairments (and other exposures), rather than to stabilise the prices of their assets. The two approaches are not mutually exclusive, but it is curious that so little attention is paid to the other approach with its long historical pedigree.
Aside: he also gives a very practical reason why coins were debased about once every generation in those days (was is that simple…?):
Roughly once a generation, the Mint would exchange worn coins for new ones. The terms of exchange during re-coinages could vary, but a commonly adopted practice was to reduce (devalue) the weight of newly minted coins by an amount commensurate with the deterioration (reduced weight) of the old ones. This would mean that newly minted coins would weigh the same as averagely worn old ones, and the aggregate face value of the coin stock would remain the same.