Unemployment in Europe: the totally stunning regional differences

April 15, 2014 Leave a comment

‘Totally stunning’: two hyperboles. But I had to use them. Could anybody only six years ago have imagined a Eurozone core with 4% unemployment or less (here the new regional unemployment data) and a southern periphery with large areas with unemployment of over 30%. Broad unemployment in these regions must be somewhere between 35 and 40%. Hey, Andalucia has 36% normal unemployment… Mind that inflation is going down in the core, too. Unemployment percentages of 3 to 4% are i.e. totally feasable.

Unemployment2

Mind also that borders between countries do explain part of the differences. But only a part. Mind also that unemployment in Eastern Germany is finally becoming less high – but it took, despite lavish transfers, almost 25 years and mass migration before this happened. The ‘Wirtschaftswunder’, based upon debt redemption and equality, worked better than neoliberal internal devaluation (in the fifties unemployment went down from about 12% to about 2% in 9 years).

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“Meritocratic Extremism”

April 14, 2014 2 comments

from Edward Fullbrook

Merijn is ahead of me as I have only just ordered Thomas Piketty’s Capital in the Twenty-First Century. The book is receiving masses of favorable media attention in the West, including from The New Yorker, the Financial Times, the Economist and The Observer where yesterday Piketty and his book occupied the cover of the newspaper’s review section. This attention is surprising given the book’s central message (one often expressed on this blog), that capitalism has now failed the world and that inequality is now accelerating at a very dangerous pace and that the rule of the ultra-rich over the everyone else is a form of gangsterism. The Observer’s feature writer went to the École d’économie de Paris to interview Piketty, and here are a couple of quotes.

Read more…

Piketty’s dataset: part of a trend which is changing economics.

April 14, 2014 Leave a comment

Update: via Business Insider: this 2012 Cato Institute report by Steve Hanke and Nicholas Krus which, starting in France in 1796, carefully lists all 56 known episodes of hyperinflation (21 of which were connected with demise of Soviet Union and Yugoslavia).

I’m reading Thomas Piketty’s book about wealth, capital and inequality. At this moment one remark:

His book is based upon a very extensive ‘open source’ dataset which spans the centuries and the globe (wealth, return on capital, labour share, share of capital etc.). This seems to be part of a trend as Piketty is not the only economist who does this. Other examples are:

Carmen Reinhart and Kenneth Rogoff with their ‘This time it’s different. Eight centuries of financially folly‘ dataset, which spans the centuries and the globe (debt).

The late Angus Maddison data on GDP  (dataset continued by ‘a group of close colleagues’) which span the millenia and the globe

The Bank for International Settlements with their recent dataset on house prices which span decades (for Norway: centuries) and the globe.

The (real) wages datasets of the International Institute of Social History (moderator: Jan Luiten van Zanden) which span the centuries and the globe.

These datasets are changing or did already change the science of economics. A common theme: there is no such thing as a stable monetary capitalist economy.

I do think that, as long as we have the Sveriges Riksbank prize in economics science in memory of Alfred Nobel, the founding and maintenance of such datahubs should be one of the arguments to award the prize.

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The ECB is failing its own, flawed, goals

April 13, 2014 Leave a comment

One of the functions of the 2% Eurozone inflation target of the ECB is to make processes of internal devaluation easier. This should, according to the ECB, be possible without outright deflation of the price level.  According to the 2011 ECB manual ‘The monetary policy of the ECB‘ (161 pages):

Taking the existence of unavoidable inflation differences into account, it has been argued that the ECB’s monetary policy should aim to achieve – over the medium term – an inflation rate for the area as a whole that is high enough to prevent regions with structurally lower inflation rates from having to meet the costs of possible downward nominal rigidities or entering periods of protracted deflation. According to all available studies, a rate of inflation below, but close to, 2% for the euro area provides a sufficient margin also in this respect.

In other words: 4% inflation in the Netherlands and Germany is necessary to enable Spain and Portugal and Greece and Italy to lower their price level relative to the Dutch and German level without having to lower nominal wages. That’s what this is all about. One can wonder if such a policy is effective anyway. As a recent ECB working paper states: Read more…

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A Pedagogical Paradox

April 12, 2014 15 comments

from Asad Zaman and the WEA Pedagogy Blog

What is really strange is the contrast between the strength of the arguments against conventional economics, and difficulties involved in teaching common sense. It is like someone who has been convinced that day is night, and great effort is involved in pointing out the sun to him. I sometimes give the following example.

Look at that old lady purchasing tomatoes. You know what she is doing? She is differentiating a multivariate utility function and setting up a simultaneous equations system of first order conditions. Now she is solving the nonlinear system. Fantastic, she just solved it to find the utility maximizing purchase under budget constraints is exactly 12.8 oz of tomatoes. Alas, she cannot slice them with such precision, and does not know the integer programming techniques required to solve the more complex optimization problems. OOPS, she miscounted the money she paid, and did not notice the change in the budget constraint when the greengrocer shortchanged her.

While this is usually good for a few laughs, especially from deeply indoctrinated students, because we are poking fun at the sacred principle of utility maximization, there is a serious point involved. Our personal experience, observations of others behavior, and general knowledge of how markets and shopping works, provide overwhelming evidence against microeconomic theory of consumer behavior. Yet we set it all aside when we read Samuelson. If a Nobel prize winner said so, it must be right. My survey which provides a summary of this evidence is linked below:
The Empirical Evidence Against Neoclassical Utility Theory: A Review of the Literature” [with Mehmet Karacuka] International Journal for Pluralism and Economics Education Vol. 3 (4) 2012, p 366-414

As a group, why are we such complete failures at persuading the public of something which is plain as the sun? I have the following hypotheses:  read more here

 

The unpleasant political arithmetic of Greek bonds (2 graphs)

April 11, 2014 Leave a comment

Greek bonds fly of the shelves‘. Yesterday, Greece successfully issued 3 billion 4,95% bonds – and I’m still not seeing that one coming. Greece does not need new debt to be able to pay its interest bill. It needs frontloaded debt reduction to get debts down to a sustainable level, i.e. 60% of 2015 GDP (conservatively estimated, i.e. taking 0% growth and 3% deflation into account).Credible measures and structural reforms to make the remainder of the debt more flexible (i.e. ‘deflation protected’ bonds) have to be put in place. Tax measures – like a land tax – which increase the velocity of the stock of wealth and induce market oriented and demand boosting use of this wealth have to be introduced. Read more…

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A simple proposal to kill high frequency trading in the stock market

April 11, 2014 5 comments

from Trond Andresen

Due to technological possiblities, success in stock market trading has increasingly become dependent on being at the front of a rat race in software, computing capacity and fast optical cable connections. While the firms whose stock is traded obviously do not change their prospects over time horizons shorter than days or even months, to win in the stock selling and buying game, today you have to act and react on a time scale of fractions of milliseconds. Automated high frequency trading (HFT) enables this. This race has now become so absurd that even the business press and financial regulators and pundits have become critical to it. One technical measure against HFT that has been implemented by a new stock exchange, IEX, is that all traffic go through a roll of cable (!) that delays the signals so much that HFT trading cannot profit parasitically from orders given to that exchange.

Here follows a simple proposal which does not depend on any changes to physical infrastructure, can be mandated by regulators and implemented easily at any exchange, and which enables not only the blocking of trading on millisecond scales, but can remove trading on any time scale that is considered too short. Being implemented as software, it also has the advantage that its parameters can be easily adjusted based on how the system performs. This solution does not presuppose any transaction fee, and it impacts small and big trade(r)s in the same way. Read more…

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Economics textbooks on ‘capital’ — how to get away with scientific fraud

April 11, 2014 Leave a comment

from Lars Syll

It is important, for the record, to recognize that key participants in the debate openly admitted their mistakes. Samuelson’s seventh edition of Economics was purged of errors. Levhari and Samuelson published a paper which began, ‘We wish to make it clear for the record that the nonreswitching theorem associated with us is definitely false’ … Leland Yeager and I jointly published a note acknowledging his earlier error and attempting to resolve the conflict between our theoretical perspectives … However, the damage had been done, and  Cambridge, UK, ‘declared victory’: Levhari was wrong, Samuelson was wrong, Solow was wrong, MIT was wrong and therefore neoclassical economics was wrong. As a result there are some groups of economists who have abandoned neoclassical economics for their own refinements of classical economics. In the United States, on the other hand, mainstream economics goes on as if the controversy had never occurred. Macroeconomics textbooks discuss ‘capital’ as if it were a well-defined concept — which it is not, except in a very special one-capital-good world (or under other unrealistically restrictive conditions). The problems of heterogeneous capital goods have also been ignored in the ‘rational expectations revolution’ and in virtually all metric work.
Edwin Burmeister

burmeister

 

Growth in college food banks

April 10, 2014 Leave a comment

From: David Ruccio

296Hunger0405

As the Washington Post explains, Read more…

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Some links, 10/4/2014. Cooperations, energy (graph), Peter Praet (ECB) on the impossibilities of monetary policy in the EZ

April 10, 2014 Leave a comment

The ILO is officially charged with promoting and estimating cooperatives:

Here a little about the new statistics on cooperations. Here a report about cooperations (mind that Goldman Sachs was a partnership until 1999):

As business organization, cooperatives contribute to economic development, generating more than 100 million jobs and securing the livelihoods of nearly a quarter the world’s population. Cooperatives provide an important channel for bridging market values and human values … The financial and ensuing economic crisis has had negative impacts on the majority of enterprises; however, cooperative enterprises around the world are showing resilience to the crisis. Financial cooperatives remain financially sound; consumer cooperatives are reporting increased turnover; worker cooperatives are seeing growth as people choose the cooperative form of enterprise to respond to new economic realities. This report provides historical evidence and current empirical evidence that proves that the cooperative model of enterprise survives crisis, but more importantly that it is a sustainable form of enterprise able to withstand crisis, maintaining the livelihoods of the communities in which they operate

From the Worldwatch institute: energy priorities: Read more…

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Are New-Keynesians accidentally discovering Keynes?

April 9, 2014 5 comments

Are ‘New-Keynesians’ discovering Keynes? Paul Krugman links on his blog to an Eggertsson/Merohtra paper which allows the ‘natural rate of interest’ to fluctuate. Which actually sounds somewhat Keynesian. In new/neo/old classical thinking the natural rate of interest equilibrates, in the unspecified run, supply and demand in all markets, including the labour market. An idea which, according to Keynes, was not so much wrong but useless. David Glasner, on his ‘Uneasy Money’ blog, states about Keynes this (emphasis added):

Keynes did not conclude, as had Sraffa, that there is no natural rate of interest. Rather, he made a very different argument: that the natural rate of interest is a useless concept, because there are many natural rates each corresponding to a different the level of income and employment, a consideration that Hayek, and presumably Fisher, had avoided by assuming full intertemporal equilibrium.

This last assumption is, according to Eggersson and Merohtra, still crucial for ‘microfounded’ models (which are not founded upon micro-relations at all, but that’s another discussion, see the end). But adding even a little realism to the model leads the model away from equilibrium, even in the long run…

In Summers’ words, we may have found ourselves in a situation in which the natural rate of interest – the short-term real interest rate consistent with full employment – is permanently negative … It may seem somewhat surprising that the idea of secular stagnation has not already been studied in detail in the recent literature on the liquidity trap, which does indeed already invite the possibility that the zero bound on the nominal interest rate is binding for some period of time due to a drop in the natural rate of interest. The reason for this, we suspect, is that secular stagnation does not emerge naturally from the current vintage of models in use Read more…

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The capital controversy — when ignorance is bliss

April 8, 2014 1 comment

from Lars Syll

The production function has been a powerful instrument of miseducation.   The student of economic theory is taught to write Q = f(L, K) where L is a quantity of labor, K a quantity of capital and Q a rate of output of commodities. He is instructed to assume all workers alike, and to measure L in man-hours of labor; he is told something about the index-number problem in choosing a unit of output; and then he is hurried on to the next question,  in the hope that he will forget to ask in what units K is measured. Before he ever does ask, he has become a professor, and so sloppy habits of thought are handed on from one generation to the next.
Joan Robinson The Production Function and the Theory of Capital (1953)

joan

 

 

The english recovery (?)

The ONS has published a new report on the recovery (?) of the UK economy. Some snippets:

While aggregate output has grown strongly in recent quarters, Figure 2 suggests that GDP per capita – a measure of output per person in the economy – has only recently started to recover. This difference is particularly pronounced in Panel B of Figure 2. While GDP has closed on the predownturn peak, GDP per capita remains some 6.1% below the level in Q1 2008, and is little higher than the level first achieved in early 2005.

Also, 72% of the increase of the number of self-employed was caused by an increase in the number of self-employed of 50 years and over of age, about half of these were over 65.

Also, the old and feeble also increasingly work for the young and healthy:  Read more…

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Unemployment: is there always a market clearing price? (Netherlands very long run edition).

April 7, 2014 4 comments

Frances Coppola has an interesting post on ‘why labour markets don’t clear‘. She points to the fact that during downturns,

the market-clearing price of labour can fall to below the minimum needed to sustain life.

When wages are at starvation level, hours worked, labour force participation rate and workforce size all decline as people become weak, ill and eventually die – or, if they can, leave for somewhere more prosperous.  Reducing the size of the workforce means that the market will eventually clear and wages start to rise again – for those who have survived.

This is the fundamental flaw in the “sticky wages” argument. In an economic downturn, the labour market cannot clear without incurring unacceptable social costs. Malnutrition, starvation, disease and death are the  consequences of freely falling wages in an economic downturn. The reason why labour markets don’t clear is because we don’t want them to.

I do not entirely agree. Let’s take a look at the Netherlands.

Unemployment

Source: Centraal Bureau voor de Statistiek. Data for the first decades are probably pretty shaky, the 1813 level must for instance have been higher. The rise around 1850 is however real, though the magnitude might have been different. Read more…

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How not to win an economic argument

April 7, 2014 9 comments

from Steve Keen

A critique of a yet-to-be-published paper of mine (“Loanable Funds, Endogenous Money and Aggregate Demand”, forthcoming in the Review of Keynesian Economics later this year; the link is to a partial blog post of that paper) by non-mainstream economist Tom Palley reminds me of one of my favourite ripostes by a politician, back in the days before spin doctors stopped them saying anything offensive — or indeed anything interesting.

As Sir Robert Menzies, former Australian prime minister and leader of the conservative Liberal Party, was giving a campaign speech in 1954, a heckler called out “Mr Menzies, I wouldn’t vote for you if you were the Archangel Gabriel”. Menzies shot back: “Madam, if I were the Archangel Gabriel, you would not be in my constituency.”

So it is with Tom’s critique. He criticises me for a whole range of things that I didn’t discuss, that he thinks I should have discussed, and for techniques I used that he thinks I shouldn’t have used. But Tom wasn’t in my intended audience for this paper — and not because he “wouldn’t be in my constituency”, but because he is. We have our differences, but we’re generally on the same side on the topic of this paper — and I didn’t write it for people who agree with me, but for those who don’t on two key issues: the role of banks, debt and money in the economy, and the role of the change in debt in aggregate demand. Read more…

Lower relative and even absolute wages did not lead to lower price levels in the Eurozone, up to 2012

Do lower relative or even absolute wages lead to a lower absolute or price level, as implied by the at least some of the versions of the ‘New Keynesian pricing Equation‘, other things, like total employment, equal? No, they don’t. At least not in the short or even the medium run. 2012 wages in Portugal and the UK (Euro price level) were about as high as in 2004. Greek wages were even lower (and continued to decline in 2013…). But the price level in these countries increased about as much as the price level in other EU countries.  This is an important fact. It means that slashing wages leads to a massive erosion of purchasing power, with, of course, dire consequences for expenditure, employment and all that. Employment won’t be equal and its decline will aggravate the slump. It’s a very Old Keynesian situation.

Priceswages

Austerity ideology states Read more…

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Is economics ripe for disruption?

April 6, 2014 11 comments

from Lars Syll

It was, of all people, Elizabeth Windsor who laid the charge most forcefully. Opening a new building at the LSE, weeks after Lehman Brothers imploded, she asked one of the dons why no one had seen the meltdown coming. In the years since, it has often seemed as if students are more serious than their lecturers about pursuing the monarch’s concern.

disrupt

Undergraduates at Sheffield and Cambridge have set out to rattle the foundation stones of their discipline. In Manchester, they went further, organising the Post-Crash Economics Society and securing more eclectic instruction, through a new Bubbles, Panics and Crashes module. Covering the former Fed boss, Ben Bernanke, as well as the interwar Marxist, Kalecki, the course was not reducible to right or left. It offered something closer to economics as understood in Keynes’s Cambridge. Manchester, however, has now declined to accredit the course, and instead opted to pull the plug …

The failure to spot the crisis raised wider questions about the discipline’s usefulness. It can shelter behind unavoidable ambiguities regarding the price of both labour and capital. Will workers respond to income tax cuts by striving for the extra earnings they can now keep or by skiving, on the basis that they can now afford to take more time off? Do high interest rates induce savers to scrimp or encourage them to go out and blow their extra return? No one can say without interrogating the data – which good economists do try to do. But hopes of clear answers are retarded by departments that treat the subject as a branch of applied mathematics, and by practitioners less concerned with the insight than the arithmetical tractability of their models.

These shortcomings go back to “the marginal revolution”, which jettisoned the dynamic, sweeping preoccupations of 19th century classical political economy in favour of a narrower but more precise concern with movements between market equilibrium. But the big questions that concerned Mill, Marx and Smith are now rearing their heads afresh …

Now Thomas Piketty – who spent long years, during which the mainstream neglected inequality, mapping the distribution of income – is making waves with Capital in the 21st Century. Nodding at Marx, that title helps explain the attention, but his decidedly classical emphasis on historical dynamics in determining who gets what resonates in a world where an increasing proportion of citizens are feeling fleeced by the elite. The tide of intellectual history is on the side of Manchester’s students.

The Guardian

Deflation has arrived in at least five Eurozone countries, including Finland and the Netherlands

April 5, 2014 1 comment

Mario Draghi will have to push for wage increases as disinflation continues, in the Eurozone and as quite some countries are already experiencing deflation. Deflation is vicious – especially when, like in the euro zone, debt levels are high while nominal debts are highly rigid and sticky.  On the Eurozone level, there has been quite some disinflation and during the last 9 months inflation was in fact close to zero. And while I do not expect a prolonged period of average deflation as long as average nominal wages keep increasing with about 1%, even ‘lowflation’ will be devastating for the possibilities of quite some countries to pay back their debts. Especially as zero average inflation will, arithmetically, mean that quite a number of countries are actually having deflation. The only way out is not monetary policy (which takes to long to work, if it works at all) but higher wage increases, especially in the Eurozone ‘core’.

Below, data on seasonally adjusted domestic demand inflation in the Eurozone and in individual Eurozone countries. Domestic demand inflation is a broader concept than consumer prices and also includes prices of real investments and government purchases. What do these graphs show?

Deflation2

A) There has been (as we all know) quite a bit of disinflation in the Euro area (graph 1). Read more…

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Top 0.1% wealth share in the U.S., 1913-2012

April 4, 2014 1 comment

from David Ruccio

Roaring 20s

This chart, from the work of Emmanuel Saez and Gabriel Zucman [pdf], illustrates the large increase in top 0.1% wealth share since the 1980s (top 0.1% = wealth above $20 million today. In other words, the inequality in the distribution of wealth in the United States is back to what it was just prior to the first Great Depression.

The weird world of DSGE inflation metrics

April 4, 2014 7 comments

Whenever a DSGE economist uses phrases like ‘fundamental’, ‘deep’, ‘sound’, ‘data-rich’, ‘non-trivial’ or ‘micro-founded’ – beware. The opposite will likely be the case.

Robert King and Mark Watson point out another sorry example of this. They, literally, deconstruct the inflation variable used in a Smets-Wouters model (Smets being the head economist of the ECB) and a Gali-Gartner model, a variable  mistakenly named ‘fundamental inflation’. And this ‘fundamental inflation’ metric turns to be totally unrelated inflation as you and I know it. Some quotes:

We study two decompositions of inflation, motivated by a New Keynesian Pricing Equation. The first uses four components: lagged inflation, expected future inflation, real unit labor cost and a residual. The second uses two components: fundamental inflation (discounted expected future real unit labour cost) and a residual …

From 1999-2011 fundamental inflation fell by more than 15 percentage points, while actual inflation changed little. We discuss this discrepancy in terms of the data (a large drop in labor’s share of income) and through the lens of a canonical structural model (Smets-Wouters (2007)) … While actual inflation is essentially unchanged over the post-1999 period, the measure of fundamental inflation constructed along Gali-Gertler lines fell by nearly 15 percent and that implied by the Smets-Wouters DSGE model fell by nearly 20 percent. That is, both measures of fundamental inflation predicted large deflation over the last decade.

What happened? Labor’s share in income showed a dramatic decline – as is also shown by the familiar graphs comparing real wages per hour (stable) with production per hour (up). This is however not visible in the Smets-Wouters formula, as they mix up micro relations with macro relations – there literally is no changing ‘labor share’ possible in their world. Which rules out inflation caused by increases in profits, taxes, ‘mixed income’ of the self-employed (wich is not included in real unit labour costs), changes in the sector structure of the economy and comparable factors. As they do not take these factors into account they are in fact kind of estimating the declining labour share of income. And call this: ‘fundamental inflation’ (taking their model serious they should of course have pushed for massive increases of wages – but I’m afraid that did not happen…).

By the way – King and Watson define real unit labor costs as nominal labour costs divided by nominal income. Which is wrong.  Real unit labour costs are a derived indicator calculated by taking a series of nominal labour costs in different years and dividing this series by a series of real production in these years.

I’m preparing an article titled: ‘Metrics-meta about a meta-metric – a critical history of the concept of the price level’. However – either my table or my head may give way before it’s finished.

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