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…

Categories: Uncategorized

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…

Categories: Uncategorized

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…

Categories: Uncategorized

Bounded rationality

October 11, 2014 Leave a comment

from Neva Goodwin

Rationality has become a loaded word in economics, bringing with it the baggage of earlier models that did not anticipate the findings of behavioral economics or take into account other every-day observations. The traditional rationality model includes the assumption that rational behavior is optimizing behavior (“rational economic man maximizes his utility”). In the 1970s an extreme version of this made the further assumption that rational economic actors have “perfect information.” A slightly more modest version says that people will collect information until the perceived costs of acquiring additional information exceed the perceived benefits.

One of the most effective challenges to the traditional assumption of rationality came from Herbert Simon, another non-economist winner of the Nobel Memorial Prize in economics (1978). Considering whether it is indeed possible for people to identify the optimal point at which one should cease gathering additional information, Simon showed that one first needs to have complete knowledge of all possible choices in order to identify that optimal point. Determining what additional information might be out there, and then gathering it, can be very costly in time, effort, and money – if it is even possible. Accordingly, Simon maintained, people rarely optimize. Instead they do what he called “satisficing;” they choose an outcome that would be satisfactory, and then seek an option that at least reaches that standard.

Read more…

Categories: New vs. Old Paradigm

Reading Piketty in Athens

October 10, 2014 4 comments

from Richard Parker

I have been reading Thomas Piketty this past week in Athens, where I came back to assess how Greece is faring half a decade after its economy imploded, initially as a consequence of its own ills and then – in an act of monumental malpractice by Germany, the ECB, and the IMF – the cure imposed.[1]

Signs of recovery are few.

It is hot here, as Mediterranean summers always are – but as thick as the heat is, an air of solemnity and defeat lies far more thickly over this concrete-gray capital and its now concrete-gray people, for whom what we know as the Great Recession has been their Great Depression, where the GDP has contracted 40% in five years and more than a quarter of its workforce can find no paid employment.

Four years ago, tens of thousands of Greeks would turn up regularly, week after week, at Syntagma Square in the heart of Athens to protest, again and again, the terms of the European-and-IMF-designed austerity regime that was the price Greece was being made to pay for loans meant to keep its government and economy afloat.

The streets lack protestors now, filled instead by tourists (more than 20 million visitors are expected this year, nearly two tourists for every Greek citizen) but also with drunks, junkies, and beggars out in alarming numbers of their own. Syntagma Square – jammed when I was here in 2011 with the tents and makeshift lean-tos of young protestors – has been scrubbed clean, the grass and flowers replanted, and new marble steps and benches replacing the stonework that had been chipped and broken to provide rocks to hurl at riot police.[2]

But cross the street from Syntagma Square and walk into the five-star Hotel Grande Bretagne and you suddenly encounter   Read more…

Broad unemployment indicators in Europe. HIGH.

October 10, 2014 Leave a comment

Official unemployment in Cyprus is ‘only’ 15,4% – and falling! It’s high but nothing like the Spanish and Greek rates which almost touched 30%. A success for austerity? Not really, as Cyprus witnessed (according to the new Eurostat data) the fastest growth of ‘non-official’ unemployment of all EU countries (graph). This is defined as: underemployed part-time workers, jobless persons seeking a job but not immediately available for work and jobless persons available for work but not seeking it.

TheplightofCyprus
Mind that the six countries with the highest increases are all Euro-countries. Mind that many of the countries with the lowest increases are non-Euro countries. Don’t misunderstand the graph: non-official unemployment in Latvia has witnessed a (very welcome) decline last year but is still higher than in 2008. Differences in levels between countries are quite large, especially Italy has a very large amount of people who are available for work but not seeking (12,6% of the working force). Anyway – especially in the crisis countries the increase of broad unemployment (i.e. official and non-official unemployment) was (and is) quite a bit higher than the increase of official unemployment. Germany might be the only country where labour slack is starting to diminish, though Eastern and Northern Germany still know large areas with high unemployment.  No data for France.

Categories: Uncategorized

The riddle of induction

October 9, 2014 24 comments

from Lars Syll

Recall [Russell's famous] turkey problem. You look at the past and derive some rule about the future. Well, the problems in projecting from the past can be even worse than what we have already learned, because the same past data can confirm a theory and also its exact opposite …

For the technical version of this idea, consider a series of dots on a page representing a number through time … Let’s say your high school teacher asks you to extend the series of dots. With a linear model, that is, using a ruler, you can run only a single straight line from the past to the future. The linear model is unique. There is one and only one straight line that can project a series of points …

grueThis is what philosopher Nelson Goodman called the riddle of induction: we project a straight line only because we have a linear model in our head — the fact that a number has risen for 1 000 days straight should make you more confident that it will rise in the future. But if you have a nonlinear model in your head, it might confirm that the number should decline on day 1 001 …

The severity of Goodman’s riddle of induction is as follows: if there is no longer even a single unique way to ‘generalize’ from what you see, to make an inference about the unknown, then how should you operate? The answer, clearly, will be that you should employ ‘common sense’.

Nassim Taleb

And economists standardly — and without even the slightest justification — assume linearity in their models …

Categories: methodology

The Great Wage Slowdown in the USA

October 8, 2014 1 comment

from David Ruccio

weekly earnings

Read more…

Categories: income redistribution

Bostjan Jazbeck, Slovenian central bank president, misunderstands the ECB mission

October 7, 2014 Leave a comment

mis•un•der•stand (ˌmɪs ʌn dərˈstænd)

v.t. -stood, -stand•ing.

to understand or interpret incorrectly; attach a wrong meaning to.

 

From: Erwan Mahé (guest post). Emphasis added

Speaking of the ECB’s targets, just a quick aside. Would it be possible to name governors to the ECB who are aware of the central bank’s fundamental and institutional founding goals?

Check out this zinger by Mr Bostjan Jazbeck, the president of the Slovenian central bank since July 2013 and former IMF “expert:

“what the ECB is doing is trying to keep its head above water because of the lack of thorough policies needed to support it.”

“the ECB does not have a mandate to support growth.”

As much as his first statement makes sense, and is consistent with those made by the other ECB governors, the second one leaves me stunned.

On the bright side, this gives me the opportunity to re-quote the relevant ECB statutes, as set forth in the Maastricht Treaty and the Treaty on the European Union:

“Without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community as laid down in Article 2.” (Treaty article 105.1).

“The objectives of the Union (Article 2 of the Treaty on European Union) are a high level of employment and sustainable and non-inflationary growth.”

Seriously, Mr Jazbeck, given your recent rise to the pinnacles of monetary policy making, your lack of knowledge of the mission that was confided to the institution of which you are now a leading official is inexcusable. Unless this types of statement is, in reality the reflection of an ideological posture (structural reforms! Structural reforms!) combined with bath faith?

Categories: Uncategorized

The median net worth in the United States is, in real terms, lower today than it was in 1989.

October 7, 2014 1 comment

from David Ruccio

median net worth

The median net worth in the United States is, in real terms, lower today than it was in 1989.  Read more…

The Eurozone: good money should drive out bad debts

October 5, 2014 4 comments

The European Central Bank is going to buy Asset Backed Securities. The press release contains a remarkable sentence:

To ensure that the programmes can include the whole euro area, ABSs and covered bonds from Greece and Cyprus that are currently not eligible as collateral for monetary policy operations will be subject to specific rules with risk-mitigating measures.

Translation: the ECB will buy junk bonds, too.

Which is the best part of the news (sorry, but the need to drive down broad unemployment rates of 35% in Southern Europe trumps all those ideas about moral hazard and the like. And we’re out of time). But predictably, the Bavarian minister of finance, Markus Söder, has already protested and tried to influence ECB policies as he fears that the ECB runs the risk of becoming a bad bank. He’s wrong. There are valid arguments against thje ECB decision. But his ‘bad bank’ argument is bonkers.  Central banks do not get ‘bad’, as shown by the chart below, from Muhammad Bin Ibrahim (see p. 44). HEY, they print the money…

Bund

Source. Graph slightly updated. Red: source of vulnerability; yellow: constraint on recovery.

Categories: Uncategorized

Behind the unemployment headlines in the US (4 charts)

October 5, 2014 2 comments

David Ruccio

I often explain to students, when I’m teaching economic models, they have to look at what’s happening behind the blackboard—all the implicit mechanisms that allow the models to work as they do.

By the same token, we have to ask, what’s going on behind the unemployment headlines?

The headlines today all trumpet the number of new jobs added in September (248,000), such that the official unemployment rate fell for the first time since August 2008 to below 6 percent (5.9 percent, to be exact).

That’s good news. Employment is picking up. But, of course, that’s not the end of the story. And Tyler Durden helps us see why. Read more…

Categories: The Economy

Behavioral economics

October 4, 2014 3 comments

from Neva Goodwin

Neoclassical economics claims to be based entirely on a view of human nature which is not only morally repugnant, but which also both leaves out a great deal about how people actually do operate, while it brings in seriously contrary-to-fact assumptions about what people are capable of. The latter have included assumptions about consistency (including that preferences change slowly, if at all, and that if A is preferred to B and B is preferred to C, then C cannot be preferred to A); about information (people are able to act as if they have perfect information); about self-knowledge (people know what they want, and are best served by getting what they want); and about influence, or power. The last of these assumptions includes the idea that human wants and preferences are endogenous, generated entirely from within; it ignores the extent to which people’s choices and decisions may be manipulated by those who have an interest in persuading the public to buy certain things, or vote in certain ways. It ignores the reality that market economies are rife with powerful actors who do have such an interest, in both the economic and the political spheres.  Read more…

Study the shocks

October 3, 2014 12 comments

from Peter Radford

A system in motion stays in motion. A system at rest stays at rest.

Good so far.

But: our question is a little more interesting. We want to know how the system began to move. We want to know about those moments of change. When you think about it, or when you’re not a mainstream economist, it is precisely those changes that attract your attention.

In this context it is always hilarious to be reminded of the way in which mainstream economics sees the world. It postulates an economy chugging along merrily following a path smoothly, fully determined by a combination of where it came from and a number of internal factors, and hermetically sealed off from the hurly burly around it.

To make sure that the path is smooth, mainstream theorists get rid of all the nasty stuff that could cause things to misbehave. Like people. Real people are an inconvenience, so they’re kicked out and replaced by a single representative chosen, presumably, for his or her astonishing likeness to economists. Business firms are tossed out as well. They too are represented by a single suitably cleansed and correct representative. The single firm and the single person then interact. Well, that is they interact within the confines of mainstream theory. This means they behave according to a few very simple and specially chosen rules that preclude any cheating, conniving, cooperation, or generally demeaning activity that  would discredit an economist. They are also endowed with astonishing powers of calculation. This is probably why they were chosen. I know its why I wasn’t chosen. I don’t know enough, and I am hopeless at all those lightning fast calculations. Were I the representative person inside the mainstream model I would probably send it hurtling off track so quickly it would explode before we all moved more than one time period forward. I am just clueless at knowing my preferences and trying to keep them consistent with what they were a few years ago, or with what they will be a few years hence. And I have a hard time keeping track of my taxes so I have no clue when I should stop buying food in order to save enough to pay them in the future. I think.  Read more…

Categories: New vs. Old Paradigm

‘Infinite populations’ and other econometric fictions masquerading as science

October 2, 2014 6 comments

from Lars Syll

pulling_a_rabbit_out_of_a_hat_by_candiphoenixes-d3ee5jaIn econometrics one often gets the feeling that many of its practitioners think of it as a kind of automatic inferential machine: input data and out comes casual knowledge. This is like pulling a rabbit from a hat. Great — but first you have to put the rabbit in the hat. And this is where assumptions come in to the picture.

The assumption of imaginary “superpopulations” is one of the many dubious assumptions used in modern econometrics, and as Clint Ballinger has highlighted, this is a particularly questionable rabbit pulling assumption:

Inferential statistics are based on taking a random sample from a larger population … and attempting to draw conclusions about a) the larger population from that data and b) the probability that the relations between measured variables are consistent or are artifacts of the sampling procedure.

However, in political science, economics, development studies and related fields the data often represents as complete an amount of data as can be measured from the real world (an ‘apparent population’). It is not the result of a random sampling from a larger population. Nevertheless, social scientists treat such data as the result of random sampling.   Read more…

Categories: New vs. Old Paradigm

Eric Holder: The reason Robert Rubin isn’t behind bars

October 2, 2014 1 comment

from Dean Baker

The big news item in Washington last week was Attorney General Eric Holder decision to resign. Undoubtedly there are positives to Holder’s tenure as attorney general, but one really big minus is his decision not to prosecute any of the Wall Street crew whose actions helped to prop up the housing bubble. As a result of this failure, the main culprits walked away incredibly wealthy even as most of the country has yet to recover from the damage they caused.

Just to be clear, it is not against the law to be foolish and undoubtedly many of the Wall Streeters were foolish. They likely believed that house prices would just keep rising forever. But the fact that they were foolish doesn’t mean that they didn’t also break the law. It’s likely that most of the Enron felons believed in Enron’s business model. After all, they held millions of dollars of Enron stock. But they still did break the law to make the company appear profitable when it wasn’t.

In the case of the banks, there are specific actions that were committed that violated the law. Mortgage issuers like Countrywide and Ameriquest knowingly issued mortgages based on false information. They then sold these mortgages to investment banks like Citigroup and Goldman Sachs who packaged them into mortgage backed securities. These banks knew that many of the mortgages being put into the pools for these securities did not meet their standards, but passed them along anyhow. And, the bond-rating agencies rated these securities as investment grade, giving many the highest possible ratings, even though they knew their quality did not warrant such ratings.  Read more…

Categories: corruption

new issue of Economic Thought

October 1, 2014 Leave a comment

Economic Thought - History, Philosophy, and Methodology
An open access, open peer review journal from the World Economics Association

Vol 3, No 2, 2014     Download issue 

J.M. Keynes, F.A. Hayek and the Common Reader
Constantinos Repapis          1          abstract

Reconciling Ricardo’s Comparative Advantage with Smith’s Productivity Theory
Jorge Morales Meoqui          21         abstract

The Theory of the Transnational Corporation at 50+
Grazia Ietto-Gillies          38          abstract

A commentary on Grazia Ietto-Gillies’ paper
John Cantwell           58          abstract

Reply to John Cantwell’s Commentary on Grazia Ietto-Gillies’ paper
Grazia Ietto-Gillies          67          abstract

If ‘Well-Being’ is the Key Concept in Political Economy...
Claudio Gnesutta          70          abstract

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