Archive for January, 2012

Meanwhile in Europe… Unemployment, december 2011 (graphs)

January 31, 2012 1 comment

from Merijn Knibbe

Update: the January data for German unemployment is already available: the downward trend continues (seasonally adjusted data). Can’t resist to mention that German Thyssen/Krupp yesterday sold its ‘Edelstahl’ (Stainless Steel) division to Finish Outokumpu Oyj, the world’s second largest stainless steel producer, as it was deep in the red.

Total unemployment in Europe hit a new record in december. Differences still increase as unemployment in Germany (and Slovakia and Romania) is still declining while in all other countries unemployment is either stable (often at a high level) or increases (no data on the Baltic countries, though, for the last quarter of 2011). I will continue to publish graph 1 on this blog every month, adding another graph showing other aspects of unemployment. Graph 2 shows long-term unemployment (> 12 months) in some countries. That was not what was supposed to happen, when the Euro was introduced – and up to 2008 everything indeed seemed just fine. Note that Germany did not do too well, up to 2006…

Read more…

War is a racket

January 30, 2012 3 comments

from David Ruccio

Here’s the link to the text of the booklet published with the same title (and a link to images of the original publication).

WAR is a racket. It always has been.

It is possibly the oldest, easily the most profitable, surely the most vicious. It is the only one international in scope. It is the only one in which the profits are reckoned in dollars and the losses in lives.

A racket is best described, I believe, as something that is not what it seems to the majority of the people. Only a small “inside” group knows what it is about. It is conducted for the benefit of the very few, at the expense of the very many. Out of war a few people make huge fortunes.

In the World War [I] a mere handful garnered the profits of the conflict. At least 21,000 new millionaires and billionaires were made in the United States during the World War. That many admitted their huge blood gains in their income tax returns. How many other war millionaires falsified their tax returns no one knows.

By the same token, isn’t the current economic crisis also a racket? If so, who is the Major General Smedley Butler of our time?

Sending money home – remittances from ‘foreign’ labour in the EU

January 30, 2012 2 comments

from Merijn Knibbe

The European Union is changing into one labour market (again…). International mobility is higher than you might think: Germany has more than 7 million foreign citizens, Spain almost 6 million, many of them from South America. Aside from these citizens there are millions of seasonal and temporary workers – and these people are sending billions of Euros home (7 billion from foreign citizens in Spain alone, and that’s surely a minimum taking the black market and cash transfers into consideration!). Some data, from a recent Eurostat publication

EU27 top remitting countries: Spain, Italy, Germany, France and the Netherlands. As in previous years, the outflow of workers’ remittances in 2010 was highest in Spain at 7.2 bn euro or 23% of total EU27 remittances, Italy (6.6 bn or 21%), Germany (3.0 bn or 10%), France (2.9 bn or 9%), and the Netherlands (1.5 bn or 5%). These five Member States accounted for nearly 21.2 billion euro, or 68% of total EU remittances (Table 2). This might not be surprising given that 66% of all the 32.5 million foreigners in the EU resided in these five Member States in 2010 (Table 1). Read more…

Ulrich Bindseil, former head of the ECB liquidity management department, debunks ECB monetary policy

January 29, 2012 11 comments

from Merijn Knibbe

Wow. The most scathing criticism of the European Central Bank (ECB) money growth target and monetary policy I’ve read thus far is written by Ulrich Bindseil, ECB Deputy Director General of Market Operations and former head of liquidity management, and is published by… the ECB, in 2004. (Hat tip: Jesse Frederik)!

The idea: Central Banks can’t control the supply of money. They can either control interest rates (the price of money) or try to control the quantity of money – which they can’t. And surely not both. See this post for some additional literature. The European Central Bank however still has an official money growth target based upon the idea that the ECB can control the quantity of money, which they explain as follows (a quote from the 2011 “The monetary policy of the ECB” document which is linked on the Home Page of the ECB (p. 55).

“The way in which monetary policy exerts its influence on the economy can be explained as follows. The central bank is the sole issuer of banknotes and bank reserves, i.e. it is the monopoly supplier of the monetary base. By virtue of this monopoly, the central bank is able to influence money market conditions and steer short-term interest rates.”

A view of the world which, according to Bindseil, is nonsensical. Read more…

“Gross operating surplus” in the Eurozone: do high profits make an economy more resilient? (graph)

January 28, 2012 21 comments

Update: coincidentally, Eurostat published its “gross operating surplus” time series today (Jan 30). They call it the ‘rate of profit’, but it includes rent and mixed income as well as is shown by the tables.


Gross operating surplus is equal to profits, interest and rents before tax plus income of the self employed. Ireland had the highest rate of the EU, in 2007 (graph). Germany had one of the lowest.  This metric is of course influenced by the structure of an economy. Even then: it is remarkable that the German economy was so much more resilient than the Irish one, after 2007. I’m rather sceptical of most kinds of industrial policies. But making your country a tax haven, like the Irish did, may actually be one of the worst.

But didn’t Ireland, which at the time still had a large deficit on the current account as well as a rapidly increasing government deficit and no car industry to speak of, introduce a ‘cash for clunkers’ policy to boost demand, back in 2009? Germany said: thanks! So much for Irish economic policy.

The official definition of the metric: “The turnover is used to remunerate the production factors: capital in the form of the gross operating surplus, and labour in the form of the personnel costs. The share of the gross operating surplus in the turnover varies from sector to sector: The more capital-intensive the sector, the higher the share of gross operating surplus in turnover” and:

“Operating surplus is the surplus (or deficit) on production activities before account has been taken of the interest, rents or charges paid or received for the use of assets. Mixed income is the remuneration for the work carried out by the owner (or by members of his family) of an unincorporated enterprise. This is referred to as ‘mixed income’ since it cannot be distinguished from the entrepreneurial profit of the owner.”

The ‘State of the World 2011’ report of the World Watch Institute: innovations that nourish the planet

January 27, 2012 13 comments

from Merijn Knibbe

Two weeks ago the World Watch Institute published its ‘State of the World’ report (links can be found here). It’s about agriculture and food on a planet which sees its number of human inhabitants increase. A very important figure is 1.1 in: (click here, p. 6): bucking a 140 year old long run trend, food prices are moving upwards, since 2000.

An excerpt (emphasis added): Read more…

Policy as [Bad] Drama

January 27, 2012 1 comment
By Peter Radford

Is is just me or are we firmly stuck in one of those endless dramas designed to drive us all batty?

David Cameron just gave a speech in which he called for ‘urgent action’ to resolve the Euro Zone crisis. This must be the millionth time a serious person has called for urgency. Just for fun someone should give a speech calling for extended dithering and obfuscation. At least they could later claim to have influenced the outcome. Read more…

Central Bankers: ‘We’re all Post-Keynesians now’

January 26, 2012 10 comments

from Jesse Frederik (guest post)

Does the ‘money multiplier’, this core concept of monetary theory, exist? Do banks need reserves before they create money? Not according to central bankers. Banks can create money at will, even without reserves, though they will have to find or borrow these reserves afterwards. But as the central bank has to provide these, this is not any kind of  constraint, even when the central bank increases the rate of interest. Some quotes which imply that central banks can not control the amount of money by influencing reserves:

Alan R. Holmes, Federal Reserve Bank of New York (1969):

‘In the real world, banks extend credit, creating deposits in the process , and look for the reserves later.’ Read more…

Core inflation in the Eurozone

January 26, 2012 Leave a comment

from Merijn Knibbe

One week before the crucial monthly monetary policy meeting of the board of the ECB and two weeks before the ‘real’ data is published, Eurostat publishes a ‘flash’ estimate of inflation in the Eurozone. This estimate tries to predict headline inflation and plays a key role in the decisions of the board of the ECB. To quote Draghi, from his ‘introductory statements’ to the press conference:

“With regard to price developments, euro area annual HICP inflation was 2.8% in December 2011, according to Eurostat’s flash estimate, after 3.0% in the preceding three months.”

It might become time to add a prediction of core inflation to the ‘flash’ estimate, as core inflation, excluding volatile energy prices, turned out to be a better lode star than headline inflation, after 2008 (graph).

Read more…

The global jobs crisis

January 25, 2012 6 comments

from Merijn Knibbe (editor a.i. as Edward Fullbrook is in India)

The International Labor Organization has published its Global employment trends 2012: preventing a deeper jobs crisis. It’s grim. An excerpt from the executive summary:

The world faces a challenge of creating 600 million jobs over the next decade. … After three years of continuous crisis conditions in global labour markets and against the prospect of a further deterioration of economic activity, there is a backlog of global unemployment of 200 million – an increase of 27 million since the start of the crisis. In addition, more than 400 million new jobs will be needed over the next decade to avoid a further increase in unemployment. Hence, to generate sustainable growth while maintaining social cohesion, the world must rise to the urgent challenge of creating 600 million productive jobs over the next decade, which would still leave 900 million workers living with their families below the US$2 a day poverty line, largely in developing countries. Global labour markets show little improvement Read more…

House prices, Unit Labor Costs and current account deficits (graphs)

January 25, 2012 Leave a comment

from  Merijn Knibbe

In my previous blog I argued that Unit Labor Cost (ULC) are not a good metric to estimate competitiveness. This is also shown by graph one, directly from the European Central Bank. It shows the % change of real ULC in the Eurozone. Do you see the spike in 2009? That’s not an increase in wages – it’s a decrease in profits. As ULC are the labor share in GDP a decline in profits can lead to increases in GDP! And though lower profits might influence investments they’re not supposed to influence competitiveness.

Graph 1. Percentage change of ULC in the Eurozone (source: ECB).

This means that rising ULC may not have been the main reason why current account deficits for many EU countries became so large so fast, especially after 2005 – 8 EU countries had deficits larger than 15% of GDP at that time. Read more…

Capital Controls are Not Beggar thy Neighbor (2)

January 23, 2012 6 comments

from Kevin P. Gallagher

Emerging markets have fallen victim to unstable capital flows in the wake of the financial crisis. In an attempt to mitigate the accompanying asset bubbles and exchange rate pressures that come with such volatility, a number of emerging markets resorted to capital controls. Although these actions have largely been supported by the International Monetary Fund, some policy-makers and economists have decried capital controls as protectionist measures that can cause spillovers that unduly harm other nations.

Recently-published research shows that these claims are unfounded. According to the new welfare economics of capital controls, unstable capital flows to emerging markets can be viewed as negative externalities on recipient countries. Therefore regulations on cross-border capital flows are tools to correct for market failures that can make markets work better and enhance growth, not worsen it. Read more…

Europe: constraining wages or constraining flows of capital? (graphs)

January 23, 2012 6 comments

from Merijn Knibbe

Summary. Mickey Levy, chief economist of ‘Monetary Financial Institution (MFI) ‘Bank of America’, recently stated that European nations have to constrain wages to get rid of current account deficits. A more thorough look at the statistics shows that Levy uses flawed reasoning. Also, as wage growth in most (not all) countries was moderate post 1999 (Spanish manufacturing wages did for instance not increase faster than German manufacturing wages) while there is ample evidence that ‘easy credit’ led to extra ordinary booms and busts, it might very well be that it are “MFI’s gone wild” which have to be constrained instead of wages.

This and/or next week I will publish a number of posts which take issue with Mickey Levy. He recently published an article on VOXEU, ‘Diverging competitiveness in the EU: constraining wages is the key”. Levy looks at Unit Labor Costs (ULC) in the EU Germany, Spain, Italy, Greece, Portugal and France, sees that ULC have not increased in Germany but did increase in the other countries and: presto! Higher ULC means lower competitiveness so ULC has to fall which means ‘wage constraint’ in the entire EU! But he should have taken a better look at the information. And he should not have used ULC. And he should have looked at more countries. Using the wrong information and concepts leads him to misunderstand the problem. He’s paid high wages to understand such problems – but he doesn’t. Read more…

Capital Controls Not Beggar thy Neighbor

January 22, 2012 1 comment

from Kevin Gallagher


Kevin Gallagher, Ph.D., associate professor of international relations at Boston University, discusses the new economics of capital controls and how they are helping to correct international markets.

click here

Dickens meets Huxley: labor in China

January 21, 2012 6 comments

from Merijn Knibbe

The most unhealthy industrial job in nineteenth century Europe was probably making cutlery, as whetting, grinding and polishing metal filled the air with little metal particles which quickly ruined your lungs. The situation in China today seems to be little better, looking at the ‘sweat shops’ in Shenzen, a 30 year old city with 14 million inhabitants. Shenzen, you know, the city where the iPod is assembled. And all this other stuff. This American Life has an in-depth investigative journalism article about it. It makes you think twice, about your iPod.

An excerpt:

“I’m at a restaurant in the factory zone, seated at a table with Kathy. And this aphorism is running through my head over and over again– I can’t remember who said it originally– that paranoia is not paranoia when they’re actually out to get you.

And I go through my checklist again. I’ve gone through my pockets and found every slip of paper with an email address or a phone number, and I’ve destroyed all of these. I’ve hidden my paper notes off of my person, and I’ve erased everything on my laptop. And anything I can’t erase is on an encrypted partition that I hope is encrypted enough. I’ve done all of these things because I am in this restaurant to meet with a union.

Because there are unions in China. There are the ones that are fronts for the Communist Party, and then there are actual unions interested in labor reform. They’re called secret unions, because in China, if you’re caught being a member of or affiliating with a union like that, you go to prison. You go to prison for many years. And that’s why I’ve had to take these precautions… Read more…

European Central Bank: “our money growth target is obsolete”

January 20, 2012 8 comments

The ECB has published an important study about ‘money’. It investigates how recent and not so recent institutional changes have changed the ‘nature’ of the M-3 definition of money which the ECB uses to set its rigid 4,5% money growth target. Warning: it’s  a boring read. But the conclusion is straightforward and exciting: financial innovation has made this core money growth target of ECB policy, enshrined in official documents and many, many speeches and press releases, obsolete as money isn’t anymore what it used to be:

>”A lengthening of the financial intermediation chain typically implies more non-monetary financial intermediaries in the economy and therefore that more money is held by these intermediaries. This tends to result in a decrease in the overall share of money growth that is motivated by consumption or real investment transactions.”

And: Read more…

Economists: A Profession at Sea

January 19, 2012 7 comments

from Edward Fullbrook

This week’s Time magazine, of all places, has a splendid hard-hitting longish article by Robert Johnson (Institute for New Economic Thinking).  It includes an acknowledgement that a prestigious segment of the profession has been financially corrupted.  Here is some of the article followed by a link to the remainder.

Economists: A Profession at Sea

How to keep economists from missing the next financial crisis.

By Robert Johnson

After the financial crisis of 2008, the Queen of England asked economists, “Why did no one see the credit crunch coming?” Three years later, a group of Harvard under­graduate students walked out of introductory economics and wrote, “Today, we are walking out of your class, ­Economics 101, in order to express our discontent with the bias inherent in this introductory economics course. We are deeply concerned about the way that this bias affects students, the University, and our greater society.”

What has happened? Rebellion from both above and below suggests that economists, who were recently at the core of power and social leadership in our society, are no longer trusted. Not long ago, the principal theories of economics appeared to be the secular religion of society. Today, economics is a discipline in disrepute. Read more…

Captain America?

January 18, 2012 6 comments

from Peter Radford

The Economist’s astonishingly tone deaf editorial on Mitt Romney – “America’s next CEO?” – is partisan, wong-headed, and naive. The very title gives away the fundamental error: America does not need a CEO. The popular notion that business experience somehow makes for a more productive president is horribly misguided and displays a misunderstanding of politics that, frankly, the Economist ought to know how to avoid. Read more…

World Economics Association – Two announcements

The WEA’s forum for the open review of proposed articles for the World Economics Journal and for Economic Thought is now open. It is located at 19 submissions have been posted so far. You are encouraged to read and comment on papers that interest you.

The WEA’s first online conference – “ Economics in Society: The Ethical Dimension ” – is now set to begin on March 1st. The cut-off date for submissions (a wide diversity of papers has already been received) is February 19th. For details, go to Leave your email address and you will be kept informed.

Real-World Economics Movement has been getting lots of media coverage in Germany

January 16, 2012 10 comments

Thomas Duermeier reports that in Germany the Real-World Economics movement has been getting lots of media coverage.

Crisis pushes German PAEcon movement into mainstream news.

The German Press is increasingly supporting the German movement for real world economics. Numerous journalists from newspapers, radio and television have reported about the make-believe nature of neoclassical modeling and the failures of the economics mainstream.  Their baseline is that economists have learned nearly nothing from the financial crisis. Read more…