from Lars Syll
It is now claimed by this group of American monetarists that the … proper cognition of the economy enables rational expectations to be formed which will prevent all but ‘surprise’ departures from an equilibrium path and will, therefore, render nugatory any attempt to reduce unemployment below its ‘natural’ level even in the short run. The centrepiece of this argument is that both workers and employers realise that the quantity theory of money is correct and that wages and prices must rise in the same proportion as the money supply. As a result, it is argued that increased expenditure will cause increases in wages and prices directly without affecting real variables such as output, employment or the real wage rate. They contend that they will base their expectations not on a projection of past trends in the price level or one of its time derivatives (such a procedure would usually be ‘irrational’) but on the ‘correct’ understanding of the economy which takes changing trends into account …
from Peter Radford
“… the act of judgement that leads scientists to reject a previously accepted theory is always based upon more than a comparison of that theory with the world. The decision to reject one paradigm is always the decision to accept another, and the judgement leading to that decision involves the comparison of both paradigms with nature and with each other.” – Thomas Kuhn, The Structure of Scientific Revolutions
I will break my recent silence – I am still burrowing down into the issue of inequality – to make a comment on the skepticism I see concerning the Institute for New Economic Thinking.
It is justified.
Let’s think about this a moment.
If we are to set up an institute to support change, provoke discussion, and otherwise meddle about with the established way of thinking, and thus to earn the moniker of “newness”, we ought not to pack our agendas with a steady stream of establishment figures. That is not the way to revolution. It might, however, be the way to raise esteem and thus get the institution media attention. Read more…
John Cochrane, a well-known Chicago economist, seems to think that a ‘sudden stop’, a sudden slowdown of private capital inflows into a country, leads to inflation. A ‘sudden stop’ is one manifestation of what is also known as a ‘credit crunch’. Cochrane states about these crunches:
“If we just had a credit crunch, we would expect to see stagflation–lower quantities sold, but upward pressure on prices. A credit crunch, like a broken refinery is a “supply shock.”
Sigh. Less credit does not directly lead to less supply. It leads to less demand and therewith to a pressure on prices and only subsequently, as companies can’t sell their stuff, to less supply. Read more…
“Paul Davidson has converted to Monetarism”
“Paul Krugman admits that he has never read Keynes’ ‘General Theory’, but promises to give it a go this summer”
“Chicago University’s Economics Department has offered Steve Keen a chair”
“The NCTers and MMTers kiss and makeup”
“Alan Greenspan and Robert Lucas ask to be forgiven for facilitating the GFC”
“James Galbraith announces that his real father was Milton Friedman”
“George Soros’ INET announces that henceforth it will support grassroots reform of the economics profession”
“Joan Robinson has been reincarnated as an app promoting Prince William”
“Edward Fullbrook was seen at a conference”
Complexity in real world practices: reshaping the relationships
ECCS 2014, 22-26 September, Lucca, Italy. Satellite Meeting to the main Conference.
Since the ECCS foundation in 2004, a number of meetings have been organized at the ECCS conferences dealing with how Complexity Science might inform about and provide leverage within socioeconomic contexts and policy oriented practices. This meeting is meant to keep alive that discussion and help bring together an inter-disciplinary community who, since the first event, has progressively attracted people from different domains. Thus this workshop provides a direct “interface” to the policy world for the more academic research elsewhere at ECCS, facilitating a dialogue between the policy world and the ECCS community.
In addition, over the last few years several initiatives in universities and EU projects have explored these issues with the spread of the complexity oriented literature into many disciplinary fields.
While the merits of complexity studies are praised on a methodological grounds, their impact on real-world organizations is still limited. The reasons are manifold and may be attributed to the difficulties that private and public organizations have in understanding the impact of this paradigm which, besides dismantling the old one, encroaches on the possibility created by the dramatic progress in ICT and in computational power.
The questions raised in today’s application of complexity approaches tend to polarize around two main themes:
- A conceptual one: designing lines of enquire to address substantial issues for the future of organizations, such as those concerning goals definition, cooperative behaviour and agents engagement on a collective basis (e.g. learning to learn in order to cooperate and build more resilient organizations);
- An operational one: developing new techniques for data gathering, information processing and visualization, to manage the increasingly large data source made available by ICT devices.
These questions are also crucial to those involved in policy activities, as they underpin the emerging requirements for open government. However, the opportunity to better articulate the relationships between the above themes is however crucial and the meeting will provide ground for their discussion.
The webpage for this workshop will be linked to: http://www.eccs14.eu/
from Dean Baker
Brad DeLong and Paul Krugman are having some back and forth on the problem of secular stagnation and what it would have taken to avoid a prolonged period of high unemployment. I thought I would weigh in quickly since I have a better track record on this stuff than either of them.
The basic story going into the crash was that we had an economy that was being driven by the housing bubble. This was both directly through residential construction and indirectly through the consumption that followed from $8 trillion of bubble generated housing equity. Residential construction expanded to a record high of more than 6 percent of GDP at a time when demographics would have implied its share would be shrinking. This led to enormous overbuilding, which is why construction hit record lows following the crash. (There was a smaller bubble in non-residential real estate that also burst in the crash.)
Consumption also predictably plummeted. This is known as the housing wealth effect. (I learned about this in grad school, didn’t anyone else?) Anyhow, when people saw their homes soar in value many spent in part based on this wealth. This might have meant doing cash out refinancing, a story that obsessed Alan Greenspan during the bubble years. It might mean a home equity loan, or it might just mean not putting money into a retirement account because your house is saving for you.
from Lars Syll
So far, the history and the actions of the Institute for New Economic Thinking, founded by George Soros and other members of the financial establishment, are compatible with the hypothesis that it might be a Trojan horse of the financial oligarchy, meant to control the movement for reform of economics. However, despite some limited evidence to the contrary, it is also still compatible with the counter-hypothesis that it is a bona fide effort to push such reform to the benefit of society at large. A restrictive policy of supporting independent initiatives with the same stated goals, and a recent tendency toward the promotion of the less radical reformist ideas make it opportune to monitor the activities of INET with an open but skeptical mind.
Yours truly can’t but concur. And obviously there are others also having doubts about INET:
from David Ruccio
As Ed Dolan explains,
The chart [above] assigns a value of 100 to each component’s share in 2007, the year before the recession began. This chart shows that corporate profits were hit hard in the first months of the recession, but began to recover already by the end of 2008, when GDP was still falling. By the time the economy had officially entered the recovery phase in mid-2009, corporate profits were surging to new highs.
Compensation of employees and proprietors’ income behaved differently. During the downslope of the recession, the shares of those two components held fairly steady, that is, they decreased but only at about the same rate as GDI [Gross Domestic Income] as a whole. After mid-2009, when the economy began to recover, the two diverged. Proprietors’ income grew faster than GDI as a whole, so that its share increased. Compensation of employees grew less rapidly than GDI, so its share began to fall, and is still falling.
These trends in the shares of GDI components provide another view of the substantial changes in the distribution of income and wealth that are underway in the twenty-first century United States. The data shown in our charts are only indirectly related to the more widely publicized increase in the share of total income accruing to top earners, but they explain part of what is going on. It is true that some high earners receive the major part of their income in the form of salaries and bonuses, and that many middle-class families receive some corporate profit income through mutual funds and retirement savings accounts. Still, corporate profits are more unequally distributed and compensation of employees less unequally distributed than income as a whole. That means the rising share in GDI of the former and the falling share of the latter are two of the factors behind the rising fortunes of the super-rich and the relative economic stagnation of the middle class.
In their book Animal Spirits George Akerlof and Robert Shiller state that wages are not set equal to the marginal productivity of labour but according to social norms – i.e. equal to (a part of) other wages. A wage is not just the atomistic market remuneration for your labour. It’s also a powerful social token of the respect you earn and a neon sign of your position in society. You’re paid for a position – not for your work. As far as I’m concerned this characteristic of wage setting is more important than the famous ‘stickiness’ of wages. The ONS recently published some information which corroborates this view of wage setting (graph): the only constant pattern in the graph below is the stunning conformity of wage developments in the UK services sector and the UK manufacturing sector – also during the disastrous decline of UK manufacturing before the 2008 devaluation. Even Schumpeterian dynamics were less strong than social norms. Mind that the UK labour market is supposed to be one of the most ‘flexible’ of the European Union.
Update: below, pension funds are mentioned as new macro economic players. Just read in the newspaper (29/3/2014) that the European commission wants these funds to make/finance more real investments instead of just buying Bunds or stocks. The consequence will of course be that they, once, will own a very large chunk of our economy and infra structure.
Update: as far as I’m concerned the practical points mentioned below are totally consistent with the theoretical points raised by Lars Syll
In fact, I kind of like the IS-LM model and the idea of a liquidity trap. But the model has its problems. It did not tell us how we arrived at the present situation. Or how we can escape from it. Like any model you can only use it when you add institutional detail. Which too often does not happen. Paul Krugman gives the perfect example of the institutional context of the model when he stated:
“as I wrote long ago, in a piece from the 1990s, IS-LM is basic economics applied to a world in which in addition to production of goods there is both money and a bond market”.
And this world is, surprise!, the USA. To be more precise: the USA of the 1990s. Nowadays and outside the USA, things are different. Some examples:
A) Not all bond markets are equal. Read more…
from Dean Baker
In the wake of the Russian takeover of Crimea, there havebeen a number of calls for weaning Europe from dependence on Russian natural gas. Some have suggested that Europe would abandon environmental restrictions on drilling for oil and gas to increase domestic production. To help, the U.S. would continue to massively increase production of oil and gas as well as its capacity to liquefy natural gas and transport it to Europe.
The weaners seem to have the impression that this is yet another case in which the United States has to come to the rescue of those weak Europeans. After all, while we were drilling everywhere, the Europeans were fiddling around with wind and solar energy, all the while making themselves vulnerable to Russian President Vladimir Putin’s machinations.
Reality-based fans of arithmetic see matters differently. The reality is that Europe, especially Germany, has done a huge amount over the last two decades to reduce its consumption of fossil fuels, including natural gas, from Russia. The reduction in fossil fuel use swamps the impact of the drill-everywhere strategy in the United States.
If Europe had not been aggressively pushing to reduce its energy use, there is no way that gas from Russia could be replaced by domestically fracked gas or imports from elsewhere. In addition, Europe’s efforts to reduce fuel consumption have the advantage of slowing global warming.
from Lars Syll
As we all know, Paul Krugman and some other more or less unorthodox mainstream economists keeps on arguing that IS-LM is a valid model for analyzing modern economies.
Yours truly disagrees. In this article I want to focus on why IS-LM doesn’t adequately reflect the width and depth of Keynes’s insights on the workings of modern market economies and why we have so much more to learn from Hyman Minsky than a “brilliantly silly” gadget like the IS-LM model.
• Almost nothing in the post-General Theory writings of Keynes suggests him considering Hicks’s IS-LM anywhere near a faithful rendering of his thought. In Keynes’s canonical statement of the essence of his theory — in the famous 1937 Quarterly Journal of Economics article — there is nothing to even suggest that Keynes would have thought the existence of a Keynes-Hicks-IS-LM-theory anything but pure nonsense. John Hicks, the man who invented IS-LM in his 1937 Econometrica review of Keynes’ General Theory — “Mr. Keynes and the ‘Classics’. A Suggested Interpretation” — returned to it in an article in 1980 — “IS-LM: an explanation” — in Journal of Post Keynesian Economics. Self-critically he wrote that ”the only way in which IS-LM analysis usefully survives — as anything more than a classroom gadget, to be superseded, later on, by something better — is in application to a particular kind of causal analysis, where the use of equilibrium methods, even a drastic use of equilibrium methods, is not inappropriate.” What Hicks acknowledges in 1980 is basically that his original IS-LM model ignored significant parts of Keynes’ theory. IS-LM is inherently a temporary general equilibrium model. However — much of the discussions we have in macroeconomics is about timing and the speed of relative adjustments of quantities, commodity prices and wages — on which IS-LM doesn’t have much to say.
from Norbert Haering
Let’s assume that there is a financial oligarchy which exerts strong political influence due to the vast amounts of money it controls. Let’s further assume that this financial oligarchy has succeeded in having financial markets deregulated and that this has enabled the financial industry to expand their business massively. Then, in some near or far future, their artfully constructed financial edifice breaks down, because it cannot be hidden any more that the accumulated claims cannot be serviced by the real economy That might be due, for example, to millions of people having bought overly expensive houses on credit without having the income necessary to service this debt. This is the kind of situation we are interested in.
If such a situation occurs, the leading figures of that financial oligarchy might recall that there has been a financial crisis in the 1930s of similar origin, and that during and after this crisis, laws were passed which broke the power of the financial oligarchy and taxed their profits steeply. They might remember that it took their forbearers decades to reestablish the favorable state of the late 1920s, with deregulated finance and very low taxes on incomes and estates, even huge ones.
The financial oligarchy might also recollect that economics is their most important ally in shaping public opinion and policies in their favor. To prevent a loss of power as it happened hence, they might want to make sure first that economics will not challenge the notion of leaving financial markets mostly to themselves and will continue to downplay the role of money and the power of the financial oligarchy, and of power in general.
from Norbert Haering
A working paper published by the European Central Bank (ECB) shows that strong wage increases have not been the cause for the troubles of the euro zone’s crisis countries. Rather, capital flows have caused bloated house and asset prices and exaggerated construction activity and unsustainable economic activity in general, which in turn has pushed up wages. This diagnosis flies in the face of the of the story often retold by the ECB and other European policy makers that peripheral countries lost their competitiveness, because they did allow exaggerated wage increases for many years, and that declining wages are the appropriate cure for a crisis caused in this way.
Even countries not in crisis are expected to increase their competitiveness, according to the Euro Plus Pact, signed in March 2011 by 23 countries.
It is all the more embarrassing, that two members of the Competitiveness Research Network of the ECB and other central banks and international organizations have published a paper called “The Euro Plus Pact: Competitiveness and External Capital Flows in the EU Countries” in the ECB’s working paper series, which shows that the focus on labor cost is mistaken, because the diagnosis behind it has it the wrong way round. Hubert Gabrisch of the German research institute IWH and Karsten Staehr of Estonia’s central bank find in their empirical analysis for the years 1995 to 2012 that increases in the current account deficit exerted a clear positive influence on subsequent wage increases, but not the other way round.
from Dean Baker
Apparently it was in large part, according to this WSJ article. The piece tells readers that Ireland’s economy shrank by 2.3 percent from the third to the fourth quarter, meaning that it dropped at a 9.2 percent annual rate, to use the normal terminology of people in the United States when talking about growth data. However the article later tells us that the story is not as bad as it first appears, since much of this decline is due to a major drug going off patent, which has reduced the income flows recorded in Ireland.
Due to its low corporate tax rate, many multinational companies book income in Ireland even though it was actually generated elsewhere. These phantom income flows have little to do with the state of the Irish economy. To avoid this problem it is more useful to look at gross national income. If we look at the OECD data on Irish national income we find that the number for 2012 (the most recent year available) was still 8.6 percent below the 2008 level. In fact, it was 2.3 percent below the 2005 level. Obviously Ireland is yet another one of those great success stories from the economic whizzes at the European Commission.
from Norbert Haering
Outstanding credit to the private sector in the euro area has been shrinking for a while now. It is shrinking fast in several peripheral countries and the European Central Bank (ECB) seems unable or unwilling to do anything about it. Given that the economy of the euro area is barely crawling out of recession and that inflation is predicted to be significantly below the central banks’ target rate for the next two years at least, this seems troublesome. Two economists of the Bank for International Settlements (BIS) help out with a study called “Credit and Growth After Financial Crises”: The authors claim: „We find that declining bank credit to the private sector will not necessarily constrain the economic recovery after output has bottomed out following a financial crisis.” So if there should be a problem, it is not because of a credit crunch or anything like that, we learn. To obtain their result, BIS-economists Előd Takáts and Christian Upper examine data from 39 financial crises, which were preceded by credit booms. “In these crises the change in bank credit, either in real terms or relative to GDP, consistently did not correlate with growth during the first two years of the recovery”, they write.
Thus, against the consensus, deleveraging need not hold back the upswing, is their contention. By extension, this means that even if all sectors of the economy are deleveraging, government may also reduce the deficit or pay down debt, without necessarily causing trouble.
The trouble is, the BIS-economists use an entirely inadequate method for coming to their conclusion, and they even seem to do so knowingly. Read more…
From: Erwan Mahé (guest post)
21 March 2014
Today I received interesting news via the Twitter page of Lorcan Roche Kelly, who is much more of a ECB watcher than even I, so I thought it judicious to share this information straightaway. The analyst was also kind enough to provide me the link to the ECB reference text which enabled me to dig a bit deeper into the matter by comparing it with the prior text.
In a nutshell, the ECB, without the slightest bit of hoopla, has just modified certain rules governing the Eurosystem’s collateral eligibility criteria. These moves constitute an easing on two scores:
· ABS containing credit card receivables will now be eligible;
· National central banks (NCBs) will no longer be able to reject bank bonds from Irish banks guaranteed by the country.
This latter measure stems from the fact that Ireland is no longer deemed to be a country “under programme”, thus bolstering the value of the Irish government’s guarantee.
Below is a letter to the editor of the New York Times that I wrote to try to explain why BITCOIN can NOT be a money or currency in our economic system. Apparently the Editor did no like the message for he did not publish the letter. Perhaps people on this blog would like to comment on Bitcoins!
March 1, 2014
To: Letters to the Editor Department
New York Times
TO THE EDITOR:
In his article “The Bitcoin Blasphemy” [N.Y. Times, Match 1, 2014], Joe Nocera implicitly raises the issue of why Bitcoin is thought of as a virtual currency when credit cards are recognized as merely a way of making payment in some form of government money.
What those who are promoting the notion that Bitcoin is some real, if virtual, money fail to comprehend is that all market transactions involving production and sales in any developed nation are organized through the use of that nation’s money denominated legal contracts.
Money (or currency), whether fiat or backed by gold or silver, is therefore defined as that thing that by delivery discharges all legal contractual obligations. Only the government, as the enforcer of contractual obligations, can determine that thing that is legally MONEY, i.e., what thing(s) will discharge contracts under that nation’s civil law of contracts. As Keynes once noted, in a money using, market economy, only the government can write the dictionary as to what is money. Government money has value as long as all residents are law abiding.
Credit cards can facilitate payments but are not money. They can be used for transactions where the buyer promises to pay in terms of government defined money to the credit card company while simultaneously the credit card company pays government defined money to the seller.
Unless the government asserts that the tending of Bitcoins will discharge all legal obligations, Bitcoins cannot be money. Bitcoins are merely something that someone created and has claimed to be “as good as cash” by implying that a well organized and orderly market exists where every Bitcoin can be sold for the currency of a nation in which the holder of the Bitcoin wants to buy something via a legal contract. We require dollars and not Bitcoins to settle legal contracts in the USA. Financial assets such as General Motors stocks are also valued in terms of dollars every day on the Stock Market – but GM stock cannot be directly used to settle a legal contract. Instead GM stock must be sold for dollars when the holder of the GM stock wants to legally pay for the purchase of a good or service. [Stamp collectors also deal in stamps that can be bought and sold on an organized market – but the stamps themselves are not money. These collector stamps have value only because community of users [collectors] have decided to give them value.]
People should have learned a lesson from the crash of the so called “derivatives” financial assets that were sold to the public by investment bankers as being as “good as cash” . These derivatives were never virtual money, though they were created by the investment bankers. When the market for selling these derivatives collapsed in 2007-8, these derivatives became worthless pieces of paper, as even financial writers of the media recognized. The result was a financial panic globally as holders of these virtually assets suddenly realized they were not as good as MONEY.
With the collapse of the Mt. Gox market for buying and selling Bitcoins, when will editorial page writers warn their readers that Bitcoins cannot be money?
Some links, 2 graphs. EZ wage ‘increases’, the rise of the self-employed in the UK and ‘Markets and Morality’ (in Spain)
A) Are wage increases in the Eurozone too low? Deflation is especially vicious when debts are high, and low wages contribute to deflation, as the Japanese example shows (check the footnotes and remember that Unit Labour Costs are not a competitivety metric but gauge the contribution of wages to in- or deflation). Wage increases in the Eurozone are still not low enough to be consistent with a situation of self-perpetuating deflation but the data suggest that the ECB will continue to undershoot its inflation target, people will continue to struggle with their debt load, banks will, as a result, continue to be feeble and unemployment will continue to be high.
B) What the **** happened with the self-employed in the UK?! Carefully reading the ONS spreadsheets it turns out that: Royal Mail plc is included in the private sector from December 2013 but in the public sector for earlier time periods. Need I say more…
C) Two very good short clips about Spain (Spanish, Dutch subtitles)
* In Spain, banks go to great lengths to impose their idea of creditor centered market morality upon the population while under water unemployed home owners which run the risk to be evicted (while there are 60.000 unoccupied dwellings in Barcelona alone, at the moment) advocate a right to sell and lease back.
* Almost all doors produced during the Spanish housing boom were made in the same city – a testimony of the efficiency, dynamism and effectivity of markets. This city has, of course, become a totally desolated place – an example of what’s called ‘backward linkages’ in input-ouptut models. The pension of granny has to sustain entire families.
Great background music.
Around 1900 John Bates Clark introduced the mythical ‘representative consumer’, the idea that you can model the sector households as if it is one person, as well as the idea that the ‘social utility’ (his phrase) experienced by this entity is the ultimate standard of social welfare (emphasis added):
>”If each man could measure the usefulness of an article by the effort that it costs him to get it, and if he could attain a fixed unit of effort, he could state the utility of a number of different articles in a sum total. Similarly, if all society acts in reality as one man, it makes such measurements of all commodities, and the trouble arising from the fact that there are many measurers disappear. A market secures this result, for society acts as a unit—like an individual buyer (chapter XXIV.14).
Interestingly, the economist Charles E. Persons, citing the last sentence of the quote above and explicitly attacking Clark, rebutted this view of the world already in 1913, among other things using data on inequality in the UK which in all probability are, recently, also used by Piketty (didn’t check this, though):
“The ultimate standard of value, then, for modern society, does not exist as a positive measure. That it does not is due to the presence of a large degree of inequality. In such a society, either the utility standard or the disutility standard must include incommensurable quantities, or (perhaps better stated) qualities. The problem is insoluble …. One cannot equate and unify either the pains or the pleasures of rich, well-to-do, and poor. We cannot find a positive measure of value in a society with such classes. The ultimate word declares only that with a given concentration of wealth, the society discounts the pains of the poor in a certain degree. Likewise in such a society there is a corresponding over-estimate of the sacrifices of the rich. Again, in such society the utilities enjoyed by the various classes are measured by various standards. Great pleasures for the poor count little; slight pleasures for the rich count much. We must add to the formula: “value depends on scarcity and utility,” the statement “each of these is conditioned by the existence of more or less of inequality.”
At first sight, this sounds depressing: a neoclassical economist invoking a mythical entity and a critic who points out the obvious flaws and inconsistencies – one hundred years ago. We seem to be running around in circles.
At second sight, however, we did move on. Clark as well as Persons was searching for an ultimate standard of value. Neoclassical economists did since not really progress beyond the ideas of Clark and still assume that the sector households acts as an individual buyer and still assume social welfare (the Euler equations and Samuelsonian shorthand they nowadays use do not make a fundamental difference, in my view). The critics, however, developed a whole array of methods to conceptualize and measure social welfare. Look here for 41 ‘headline well being’ metrics for the UK which, however, still exclude estimates of inequality (there is a poverty metric which might be used as a very crude inequality index). But look here for Eurostat data, published today, on ‘quality of life’ indicators which do contain data on inequality. In the end, ‘social welfare’ turns out to be a multi-dimensional thing which is not captured by relative market prices and which is difficult to optimize. Persons was right: Clark was wrong.
Thanks to Marko for providing links.