We usually think of charities as being a story where money flows down from those on top to those who are most in need. But in our vibrant 21st century economy, charity often flows in the opposite direction, with rest of us subsidizing the incomes of very rich. That is the implication of several recent news stories.
For example, we have John Sexton the president of New York University. The university was recently in the news because of a story reporting that workers building its Abu Dhabi campus are often beaten and have their wages stolen. This campus is part of an ambitious expansion plan designed by Sexton, who reportedly makes $1.5 million a year and stands to pocket a “longevity bonus” of $2.5 million if he stays into 2015.
The University of Chicago is another school where the president, Robert Zimmer, appears to be doing rather well financially. Mr. Zimmer’s compensation for 2013 was reportedly $1.9 million after having spiked to $3.4 million the prior year. This compensation comes in spite of the fact that the school has an operating deficit and may be at risk of a credit downgrade.
A study by the Institute for Policy Studies found that student debt and low-paid faculty increased more rapidly at the universities with the 25 highest paid presidents than the national average. At the very least this suggests high presidential pay is not associated with scoring well in terms of either holding down student debt or minimizing the share of adjunct faculty. Read more…
Household debt in Greece is pretty low (70% of GDP, 2013), at least compared with countries like the Netherlands (139%, 2012), Denmark (149%, 2012) or Ireland (112%, 2012). Also, after 2010 Greek households paid down 24 billion of debt (part of this decline might be due to debts being written off by banks), despite of this debt as a % of GDP debt increased since 2010 as nominal GDP (a measure of total income) went down. While nominal debt is about as high as in 2007/2008, the index of debt as a % of GDP is about 40%-points higher (as a % of GDP it increased from about 55% to 70%).
Mathematical statistician David A. Freedman‘s Statistical Models and Causal Inference (Cambridge University Press, 2010)is a marvellous book. It ought to be mandatory reading for every serious social scientist – including economists and econometricians – who doesn’t want to succumb to ad hoc assumptions and unsupported statistical conclusions! Read more…
In Bubble Economics, Paul Egan and Philip Soos explore a depressed Australia in the 1840s, 1890s and 1930s. They detail recurrent patterns of boom-bust credit and asset cycles which heralded financial instability, particularly following speculation in commercial and residential land markets.A financial stability model is put forward to predict economic downturns which is based on Georgist, post-Keynesian and behavioural finance schools of economic thought, informed by data from 1830 to 2013. The trends in Australia’s current trade settings, residential property market and banking sector are ominously similar to the key precursors to Australia’s ‘Great Depression’ of the 1890s – a recession or depression may now be imminent. Egan and Soos expose ‘rentier economics’ in the land down under and discard the dominant neoclassical paradigm, bringing a fresh perspective to the intense debate about Australia’s economic future.
I’ve spent the past two weeks in Europe, with speaking engagements in Italy, Greece and Austria. This was my first visit to Greece, and my first chance to get an admittedly superficial tourist’s view of what a country with Great Depression levels of unemployment looks like.
It didn’t look like anything in particular until the drive from Athens, Greece’s capital and largest city, to Thessaloniki, its second largest. Then it struck me: the roads were near empty — as the toll booth shown in Figure 1 illustrates. My host Nikos reckons he has done a million kilometers over the years on this 500km drive, and he confirmed that roads which were now virtually empty were once full of cars, and especially trucks — that mobile sign of a thriving economy.
Figure 1: A toll booth on Greece’s main highway at about 5pm: no vehicles in either direction
This is a very different manifestation of economic stagnation than the mental picture I had of it from the historical record of the Great Depression, when the overwhelming impression was of crowds: crowds lined up at soup kitchens, crowds outside dole offices. Today, the 28 per cent of Greek’s workforce that is unemployed is mainly at home (if they have homes), and surviving on electronically transmitted dole payments. The social organisation of the unemployed that marked the Great Depression is not apparent today — though the political shifts are beginning. Read more…
I have been reading Gregory Clark’s brief history of the world economy “A Farewell to Alms” as part of my continuing reading on inequality. Somehow I think I need to know more about the entire arc of growth in our modern era and inevitably that means reading more about the great mystery of the surge in living standards since about 1750. Clark gives me a fairly standard view. He divides history into two distinct positions. An older “Malthusian” era, where growth was negligible, and a modern era dominated by “innovation”.
On page 197 he tells us:
“For, although modern economies are deeply complex machines, they have at heart a surprisingly simple structure. We can construct a simple model of this complex economy and in that model catch all the features that are relevant to understanding growth.”
That ought to encourage us all.
A simple model – how economists love those – but all inclusive.
With 217,000 new jobs created in May, the U.S. economy is finally—finally, after 50 months!—back to the pre-recession employment level.
Except it isn’t. Not by a long shot. Not when we consider the “jobs gap”—which we can calculate in one of two ways: by the amount of time it will take at this rate to get back to pre-recession employment levels while also absorbing the people who enter the labor force each month (4 years) or by the difference between payroll employment and the number of jobs needed to keep up with the growth in the potential labor force (6.9 million jobs). Read more…
The task of this book is to explain wage rigidities … It seems reasonable to hope that a successful explanation of wage rigidity would contribute to understanding the extent of the welfare loss associated with unemployment and what can be done to reduce it … Many theories of wage rigidity and unemployment include partial answers to these questions as part of their assumptions, so that the phenomena of real interest … are described in the theories’ assumptions. For instance, Lucas concludes that increased unemployment during recessions implies little welfare loss … Lucas’s policy conclusions are not strongly supported … Good support can come only from information that distinguishes his microeconomic assumptions from others yielding different policy recommendations.
A fanciful example may illustrate the danger of taking too narrow a view of instrumentalism. You are an explorer seeking contact with the Dafs, an isolated tribe about which almost nothing is known. You observe one of their villages through binoculars from far away … You observe that every morning on sunny days, men wearing bright yellow hats stand in the backyards and make sweeping gestures toward the sky … When you finally arrange a meeting with some Dafs, you meet a few men with yellow hats and a few other plainer people. Believing the first to be leaders, you offer them presents, at which point all the Dafs are outraged and assault you. What you have not observed is that yellow hats mark slaves, who throw grain to the household chickens in the yard on sunny days and inside on rainy ones … Read more…
Do DSGE economists really exclude ‘government consumption’ from their concept of household prosperity? Yes, they do.
Scientific economists explain ‘government consumption’ as follows:
Government acquisition of goods and services for current use to directly satisfy individual or collective needs of the members of the community is called government final consumption expenditure (GFCE.) It is a purchase from the national accounts “use of income account” for goods and services directly satisfying of individual needs (individual consumption) or collective needs of members of the community (collective consumption). GFCE consists of the value of the goods and services produced by the government itself other than own-account capital formation and sales and of purchases by the government of goods and services produced by market producers that are supplied to households – without any transformation – as “social transfers” in kind.
Source: Wikipedia, which shows that this isn’t any kind of secret – it’s has been ‘received wisdom’ since the fifties of the twentieth century.
Also, total, i.e. individual (education) plus collective (property rights) government, consumption is a well-defined and fully measured part of the National Accounts. It’s not like a fuzzy, unmeasurable, pre-scientific concept like neoclassical ‘utility’. Look here for the most recent Eurostat estimates of what’s called ‘Actual Individual Consumption’: Read more…
A central argument of Piketty is the idea that if ‘r’, the realized return on all kind of capital (houses, bonds, stock, land,…) turns out to be larger than the rate of growth, capital, estimated as a % of total GDP, will tend to increase as the extra money can be reinvested in new capital (or (via securitized mortgages?) increase prices of existing capital: the famous ‘search for yield’).
Sources: Bank of England, Sveriges Riksbank, Centraal Bureau voor de Statistiek, Eurostat.
The rate of growth is, however, a variable. Read more…
I just received an email from the London School of Economics asking me to donate, as a loyal alumni, so that they can devote funds to “innovation”. The university of the future seems to be the objective of this innovation.
What on earth is this?
What about higher education needs innovating?
Why the imperative?
I understand that higher education productivity measured in business terms is, to be blunt, weak. And I understand that more modern techniques as enabled by digital technologies will, no doubt, disintermediate education and make the classic class/lecture room setting look antiquated. But what are the consequences?
The British economy has not yet recovered in any meaningful sense of the word. Production per capita is not back to historical levels, private debts are still sky-high, the number of crappy jobs is increasing and productivity is about 7 to 8% below ‘trend’ (a downward adjusted trend, that is), which is of course consistent with the increase of crappy jobs. Also, according to the PSE
The percentage of households who fall below society’s minimum standard of living has increased from 14 per cent to 33 per cent over the last 30 years, despite the size of the economy doubling. This is one of the stark findings from the largest study of poverty and deprivation ever conducted in the UK. Other key figures reveal that almost 18 million people cannot afford adequate housing conditions; 12 million people are too poor to engage in common social activities; one in three people cannot afford to heat their homes adequately in the winter and four million children and adults aren’t properly fed by today’s standards … full-time work is not always sufficient to escape from poverty.
1) Tyler Cowen is slightly bullish about the UK economy and calls it a ‘classical’ recovery, i.e. caused by market induced changes in relative prices. Cowen mentions the labour market but forgets about the decline of the price of the British pound (and about the recent house price bubble, too – though house prices estimated in Euro of course declined more/increased less, post 2008).
Graph 1: pound/dollar exchange rate.
Source: trading economics.
2). At Voxeu, David Hendry and Grayham Mizon explain how in the real world unpredictable shifts make a mess of modern economic models which assume ‘ergodicity’, i.e. a kind of predictable predestination of our economies:
Figure 1 Location shifts over 1860–2011 in UK unemployment, with major historical events
According to Brad deLong, ‘the extremely wise Robert Skidelsky has an excellent rant against Anglo-Saxon economics departments‘, on Project Syndicate. First a Skidelsky excerpt, below this some Brad.
The deeper message is that mainstream economics is in fact an ideology – the ideology of the free market. Its tools and assumptions define its topics. If we assume perfect rationality and complete markets, we are debarred from exploring the causes of large-scale economic failures. Unfortunately, such assumptions have a profound influence on policy.
The efficient-market hypothesis – the belief that financial markets price risks correctly on average – provided the intellectual argument for extensive deregulation of banking in the 1980s and 1990s. Similarly, the austerity policies that Europe used to fight the recession from 2010 on were based on the belief that there was no recession to fight.
These ideas were tailored to the views of the financial oligarchy. But the tools of economics, as currently taught, provide little scope for investigating the links between economists’ ideas and the structures of power.
Today’s “post-crash” students are right.: Read more…
Yesterday, Eurostat published (new!) Beveridge curves for the European Union. The data suggest to me that the curve is essentially horizontal when unemployment is higher than 10%, regardless of the institutional structure of a country. Which means that trying to make labour markets more efficient will not lead to a lower job vacancy rate and, i.e., not to a (short-term) employment gain. An ‘efficient’ labour market is not necessarily the same thing as a ‘flexible’ labour market, see the Eurostat remarks below the graph. Efficiency gains might be possible in the UK, Belgium and Germany, see however the Eurostat remarks below the graph .
Economists of all shades have generally misunderstood the theoretical structure of Keynes’s The General Theory. Quite often this is a result of misunderstanding the concept of ‘effective demand’ — one of the key theoretical innovations of The General Theory (chapter 6, M.K.)
Jesper Jespersen untangles the concept and shows how Keynes, by taking uncertainty seriously, contributed to forming an analytical alternative to the prevailing neoclassical general equilibrium framework:
Effective demand is one of the distinctive analytical concepts that Keynes developed in The General Theory. Demand and demand management have thereby come to represent one of the distinct trademarks of Keynesian macroeconomic theory and policy. It is not without reason that the central position of this concept has left the impression that Keynes’s macroeconomic model predominantly consists of theories for determining demand, while the supply side is neglected. From here it is a short step within a superficial interpretation to conclude that Keynes (and post-Keynesians) had ended up in a theoretical dead end, where macroeconomic development is exclusively determined by demand factors …
It is the behaviour of profit-seeking firms acting under the ontological condition of uncertainty that is at the centre of post-Keynesian concept of effective demand. Read more…
Market monetarists like Scott Sumner totally focus on nominal GDP. And employment. Keynes, of course, totally did the same thing. Remember, by the way, that the accounting identities of the national accounts which are so crucial to the Keynesian system are only true when it comes to values in current prices! There are some differences, too, between market monetarists and Keynes, especial when it comes to expectations: are these fallible but influential or rational and inconsequential? Anyway, much of what Scott Sumner wrote sounds a lot like chapter 4 of the General Theory (sometimes even the style):
The three perplexities which most impeded my progress in writing this book, so that I could not express myself conveniently until I had found some solution for them, are: firstly, the choice of the units of quantity appropriate to the problems of the economic system as a whole; secondly, the part played by expectation in economic analysis; and, thirdly, the definition of income.
That the units, in terms of which economists commonly work, are unsatisfactory can be illustrated by the concepts of the National Dividend, the stock of real capital and the general price-level:—
(i) The National Dividend, as defined by Marshall and Professor Pigou, measures the volume of current output or real income and not the value of output or money-income. Read more…
In the European Union, production of renewable energy is increasing (graph 1, 2) and consumption of lignite and coal (CO2 wise the dirtiest of all fossil fuels because of a very high Carbon/Hydrogen content) is going down (graph 3,4), though especially in recent years not as fast as needed. Mind that actual use of solar energy is much higher than indicated by these graphs as ‘passive’ solar energy is not included. When the sun shines into our chambers in wintertime, we need less fossil fuels for heating. Despite this direct trade-off, this use of solar is not included in the data. Production of ‘renewable’ energy (see, for details, the Eurostat links) seems to be on an exponential growth path. Total use of energy however still has to decrease, in the near future, to enable long-term prosperity.
1. Production of renewable energy as a percentage of total energy production
Ryan Avent on how the lure of the modern city in combination with zoning and the difficulty of increasing the number of homes in cities anyway increases the price of land and houses as well as wealth inequality
The ILO has started a campaign against child labour (and does not forget the statistics): “There are over 168 million children in child labour worldwide. More than half of them are doing work that puts their health and safety at risk. This is unacceptable. Be part of the global movement, hold the red card against child labour, and help give children around the world a brand new start“
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