Archive for September, 2011

It’s been a depressing week

September 17, 2011 18 comments

from Peter Radford

I tried my hardest to hide from the flow of depressing news this week, but here I am on Friday feeling battered by it all. This was a week in which we had our worst suspicions confirmed.

Yes, the American economy is now deeply divided into haves and have nots.

Yes, the so-called recovery is evaporating as we meander about in the no man’s land of stagnation.

Yes, our elite is fumbling at every opportunity to do something about the malaise.

Yes, the threat from European ineptitude is almost as strong as that fro our own incompetence.

And, yes, the Republican hard core supporters are as extreme as we all feared.

Combine this lot and you end up with a toxic, corrosive, and potentially devastating brew. No wonder I wanted to hide from it all. Read more…

Question of the day: how about Stark? Should he have left the European Central Bank earlier?

September 16, 2011 6 comments

from Merijn Knibbe

Jurgen Stark has left the European Central Bank. The immediate consequences could not have been more beneficial: the Euro plunged to a six month low. Serious: that’s so good for Dutch horticulturalists who had difficulties selling flowers to the UK, Greek hotels who have to compete with Turkey, German car makers who face increasing competition from China (in China, that is) or Baltic dairy farmers who have to sell their milk in a global market… thank you, mr. Stark!

But what I do not understand: why is everybody upset about him leaving the building? Read more…

The cost of higher education in the USA

September 15, 2011 4 comments

from David Ruccio

Now and in the coming weeks, many U.S. college students will be preparing for the resumption of classes. Some of them will be worrying about the escalating tuition and fees and wondering if they’ll be able to pay them. Many others, for whom college might have been considered as a possibility, will be locked out by rising college costs or will have to consider going deeper into debt.

That’s because, as Allison Linn [ht: ja] explains,

the cost of tuition and fees has more than doubled since 2000. That’s a bigger percentage increase than, well, pretty much anything else. Read more…

The European Central Bank is repeating an old mistake….

September 12, 2011 Leave a comment

from Merijn Knibbe

On Voxeu, Douglas Irwin argues that the 1937 depression (an 11% contraction of GDP…) was caused by monetary tightening in a still depressed economy:

“If we are to avoid the mistakes of the past, it is important to have an accurate assessment of what those past mistakes were. The severity of the Recession of 1937-38 was not due to contractionary fiscal policy or higher reserve requirements. By contrast, the policy tightening associated with gold sterilisation was not modest – it did not simply reduce the growth of the monetary base by a few percentage points, it stopped its growth altogether. While the Federal Reserve is often blamed for its poor policy choices during the Great Depression, the Treasury Department was responsible for this particular policy error.

The recession of 1937-38 occurred long ago, but it does have policy lessons for today. It suggests that, in a weak recovery, a pre-emptive monetary strike against inflation (which was very low at the time, as it is today) is capable of producing a devastating recession.

Alas, the ECB is repeating this exact mistake… (see graph below). Read more…

Changing the narrative. Inequality as a cause for the Euro conundrum.

September 9, 2011 9 comments

from Merijn Knibbe

If this post is right there is a relation between inequality and the Euro problems. According to the post, high inequality leads to deficits on the current account (an idea vindicated by the ‘plutonomy reports’, see the posts obout these on this blog!) while, especially in former authoritarian countries, tax systems are designed to minimize the tax burden of the rich – which makes it hard for governments to change this ‘structural-deficit-situation’. Is there something to this line of reasoning? Is it a viable alternative to the mistaken view that government deficits (which did not exist, prior to 2008, in Ireland and Spain…) caused the crisis? According to the graph below there is. Read more…

The false promise of Obama’s trade deals

September 9, 2011 3 comments

Kevin P. Gallagher and Timothy A. Wise

It is bad enough that President Obama is reversing his campaign pledge and supporting Bush-era trade deals with Korea, Colombia and Panama. Starting this week in Chicago, the US will be hosting the first major trade negotiations since the “Battle in Seattle” World Trade Organisation talks came here in 1999. This occasion is for the Trans-Pacific Partnership (TPP) with a wide range of industrialised and developing Pacific Rim countries.

As part of his plan to revive the US economy and create jobs, Obama claims he will be unveiling “a trade agreement for the 21st century”. Ironically, though, he will be pushing the same “Nafta-style” trade pacts he campaigned against, and to howls of protest from his own electoral base. Let us not forget what he said:  Read more…

USA: The Great Prosperity / The Great Regression : 5 charts

September 7, 2011 13 comments

from David Ruccio

The USA Charts
The Great Prosperity 1947– 79 / The Great Regression 1980 to now
Income gains by fifths 1947– 979
Income gains by fifths 1980 – now
Wealth redistribution
Household spending 1975 to now  Read more…

RWER issue 57: Michael Hudson

September 6, 2011 91 comments

How economic theory came to ignore the role of debt

Michael Hudson   

            Starting from David Ricardo in 1817, the historian of economic thought searches in vain through the theorizing of financial-sector spokesmen for an acknowledgement of how debt charges (1) add a non-production cost to prices, (2) deflate markets of purchasing power that otherwise would be spent on goods and services, (3) discourage capital investment and employment to supply these markets, and hence (4) put downward pressure on wages.  Read more…

RWER issue 57: Steve Keen

September 6, 2011 3 comments

Economic growth, asset markets and the credit accelerator

Steve Keen  

According to the U.S. National Bureau of Economic Research, the “Great Recession” is now two years behind us, but the recovery that normally follows a recession has not occurred. While growth did rise for a while, it has been anaemic compared to the norm after a recession, and it is already trending down. Growth needs to exceed 3 per cent per annum to reduce unemployment—the rule of thumb known as Okun’s Law and it needs to be substantially higher than this to make serious inroads into it. Instead, growth barely peeped its head above Okun’s level. It is now below it again, and trending down. Unemployment is therefore rising once more, and with it, Obama’s chances of re-election are rapidly fading.

You may download the whole paper at:


RWER issue 57: Peetz and Genreith

September 6, 2011 Leave a comment

The financial sector and the real economy

Dietmar Peetz and Heribert Genreith  


The uncertainty precipitated by the lingering fallout from the financial, economic, and debt crises increases daily.  Meanwhile, leading mainstream economists are being criticized for their divided positions on the correct diagnosis of and viable solutions for these crises. Classical economic growth theories were unable to predict these dilemmas, as they did not adequately take into account factors such as the macroeconomic impact of outsized financial sector developments. Classical economic models are still considered by many economists to be the correct tools for dealing with the consequences of the 2008-2011 credit crisis (“crisis”). Meanwhile, others view crisis as stemming from the global imbalances precipitated by the application of these classic macro models.  This contradiction seems irreconcilable. A new approach is therefore necessary. In this review, we present an alternative growth model. Specifically, one which helps to analyze the interdependence between the financial and the real economy and which also yields analytical statements about the causes of crises.  Read more…

RWER issue 57: Steve Keen2

September 6, 2011 Leave a comment

The Return of the Bear

Steve Keen  

Far be it from me to underestimate the stock market’s capacity to pluck the embers of delusion from the fire of reality. However, the crash in prices and explosion in volatility that began in late July 2011 may be evidence that sanity is finally making a comeback. What many hoped was a new Bull Market from the depths of the 52% crash from October 2007 till March 2009 was instead a classic Bear Market rally, fuelled by the market’s capacity for self-delusion, accelerating private debt, and—thanks to QE2—an ample supply of government-created liquidity. The 85% rise from March 2009 till April 2011 was enough to restore Wall Street’s euphoria, but still fell short of the 110% rally needed to restore the 2007 peak.

You may download the whole paper at: Read more…

RWER issue 57: Richard Murphy

September 6, 2011 Leave a comment

Tax havens, secrecy jurisdictions and the breakdown of corporation tax

Richard Murphy

United Kingdom: a case history

             In March 2011, the Chancellor of the Exchequer, the British cabinet minister who is responsible for all economic and financial matters, announced in his budget statement three major changes to UK corporation tax.

             The first was that the rate for large companies in the UK was set to fall to 23%. The second was that the UK would move to a corporate tax system where only the profits of companies arising in the UK would be subject to UK corporation tax; this representing a compete reversal of the situation that existed prior to 2009 when UK companies were (albeit convolutedly) taxable on their worldwide income. And thirdly he announced that if in the future a UK company runs its internal banking arrangements through a tax haven subsidiary then that company will benefit from a special UK tax rate of just 5.75 per cent of the resulting profits. Read more…

RWER issue 57: Mazhar Siraj

September 6, 2011 Leave a comment

China and India: A comparative analysis of their integration into the global economy

Mazhar Siraj   


Global integration ofChinaandIndiahas had quite different effects on the structural pattern of their economic growth. Manufacturing became the engine of economic growth in the former whereas the latter thrived due to the rapid growth of services sector. The implications of their present patterns of growth seem to be very favourable for long-term development. However, employment effects of their integration into the global economy are quite similar, and are evident in fast growth of labour, migration of skilled labour force to developed countries, decline of employment in formal sector and slow growth of regular wage employment. In this context, sustainability of the fast economic growth ofChinaandIndiadepends largely on the extent to which they are able to generate a process for steady expansion of regular wage employment and productivity of low skilled labour force.  Read more…

RWER issue 57: Ted Trainer

September 6, 2011 15 comments

The radical implications of a zero growth economy

Ted Trainer  

For 50 years literature has been accumulating pointing out the contradiction between the pursuit of economic growth and ecological sustainability, although this has had negligible impact on economic theory or practice.   A few, notably Herman Daly (2008), have continued to attempt to get the notion of a steady-state economy onto the agenda but it has only been in the last few years that discussion has begun to gain momentum. Jackson’s Prosperity Without Growth(200) has been widely recognised, there is now a substantial European ”De-growth” movement (Latouche, 2007), and CASSE (2010) has emerged. Read more…

RWER issue 57: Hazel Henderson

September 6, 2011 Leave a comment

From rigged carbon markets to investing in green growth

Hazel Henderson  


Reviews failure of global carbon trading underKyotoand reasons why alternatives emerged.  Assesses prospects for climate policies beyondKyotoand covers shifts toward green growth in governments and private sector investments.

            The Kyoto Protocol and its global carbon emission-trading scheme expire in 2012.  The World Bank in State and Trends of the Carbon Market found that the market declined in 2010 and is at a crossroads, due to loss of political momentum.  Read more…

RWER issue 57: Nicolas Bouleau

September 6, 2011 3 comments

Mathematics and real-world knowledge

Nicolas Bouleau  

Several articles on the misuse of mathematics in economics have already appeared in this journal. They all denounce this excess and list numerous weaknesses of liberal economics and theoretical economics that are due to, or at least related to, too much math.

             This subject is worthy of further comment because it seems to me that these articles have mostly described symptoms, albeit a great many symptoms, but have barely begun to diagnose the causes and have given no hint of the kind of knowledge that would enable us to escape this no-man’s-land of using a little math but not too much. Read more…

RWER issue 57: Geoff Davies

September 6, 2011 3 comments

The Value of Simple Models

Geoff Davies  

Neoclassical economic theory predicts equilibrium, yet the prediction is based on a string of patently absurd assumptions.  Furthermore, evidence for instability is pervasive in the behaviour of real economies, implying that real economies are far from equilibrium and their behaviour potentially complex or chaotic. Therefore the neoclassical approach to understanding the behaviour of economies is futile and misleading [1], as many heterodox economists understand. Read more…

RWER issue 57: Hollanders

September 6, 2011 1 comment

Five methodological fallacies in applied econometrics

D.A. Hollanders   


This paper discusses five methodological problems in applied econometrics. These are the problem of measurement, data mining, publication bias, the Duhem-Quine critique, and the non-repeatable nature of historical events. These problems form a third source of error next to two other more common sources of error in econometrics, sampling error and specification error. The paper argues that these problems aggravate the already difficult task of testing, but can often be dealt with. In some circumstances however testing itself is inappropriate, and econometrics is better understood as a means for description than for testing.  Read more…

Are we there yet?

September 6, 2011 4 comments

from Peter Radford


At the point where we dip into a second recession.


This is despite last Friday’s abysmal US employment number. For those of you distracted by storms and earthquakes: the US economy added no jobs – as in zero – last month. That is appalling. Terrible. Corrosive of our national wealth. It is outrageous. It is a scandal. And it is an affront to all of us concerned about our common wellbeing.

And it will not be solved by our worthy leadership elite any time soon. They are all too deeply involved in their childish and destructive political posturing, and in their self imposed austerity driven charge towards a replica of 1937. Read more…

Meanwhile, in Europe…18. Jobs, jobs, jobs?

September 5, 2011 Leave a comment

from Merijn Knibbe

Recently, Eurostat published new data on unemployment – which is stuck at an unacceptable 10%. Large differences hide behind this average. Unemployment in Austria is 3,7% (and falling). Unemployment in Spain is 21,2% (and rising). One of the remarkable aspects of EU unemployment is a fast decline of (still double-digit) unemployment in the Baltics (Estonia, Latvia, Lithuania). Between the second quarter of 2011 and the second quarter of 2010, Estonian unemployment fell with 5,1% – which is, in a historical as well as in a comparative perspective, staggering. Do neo-liberal policies work after all? Remember, the Baltics are neo-liberal prodigies who pursued ruthless austerity policies. Do neo-liberal economists finally know how to shape societies and did they earn their badge as ‘social engineers’? Are crises good, after all, and do we only have to endure some short years of pain to live happily ever after (or at least to pay our creditors forever after)? Read more…