Archive for October, 2012

Obama is scared

October 31, 2012 9 comments

from Peter Radford

Dean Baker goes overboard. Well he suggests that Obama is failing to defend Social Security because of his fear of retribution from the policy elite.

Baker is right.

This is an issue that extends beyond Social Security. Many of us have been saying for a while that Obama is too beholden to an elite whose view of the world is vastly different from that of the average voter. As a result he fails to provide a narrative for the majority. Instead he constantly trims to avoid conflict with the elite.   Read more…

Public Debt or Private Debt? – Part 2

October 31, 2012 4 comments

In 24 hours a number of people have contributed data and graphs related to the request in Part 1.  These are pasted below, including the two remarkable graphs sent by Beaker in Australia and which he made  from data obtained by clicking through on the link sent by kkalev.

But I am still drawn to the simplicity of the two kinds of debt graph that Steve Keen is using in various public forums to illustrate the situation in his country.  It would be useful if such a single-country graph existed for many countries for anyone to use in public discussions.

First, here are two graphs from Beaker.  Click on them to enlarge.  Read more…

Inequality and the Second Gilded Age

October 30, 2012 10 comments

from David Ruccio

Grotesque inequalities in the distribution of income characterize our time, the Second Gilded Age. The question is, what is causing those inequalities?

The only way you can answer that question is based on a theory of value—a theory of how commodity values are determined and how the resulting flows of value are distributed to different participants in the economy.

For mainstream economists, both commodity values and distributions of income are determined by the forces of supply and demand in markets. Therefore, the kinds of inequalities we have witnessed in recent decades in the United States can be explained, first, by the functioning of those markets and, then, by the “corrections” made by taxation and other government programs.

And that’s where a debate has emerged among mainstream economists. On one side, Read more…

Public Debt or Private Debt?

October 30, 2012 9 comments

Steve Keen has an article in the Australian Business Spectator that features the following graph in which the red line is the ratio of government debt to GDP (debt to the banking sector only) in Australia and the blue is the ratio of private debt to GDP in Australia.

Given the present situation, it would be useful to have similar graphs available for a whole range of countries.  Can anyone help?

A wonkish note on ‘NGDP-targeting’

October 29, 2012 Leave a comment

from Merijn Knibbe

At this moment, NGDP-targeting is all the rage. According to this idea, central banks have to target the level of Nominal Gross Domestic Product instead of the interest rate or inflation, with as one of the implications that monetary policy is perceived to be ‘tight’ when interest rates are low – but NGDP is declining. This has interesting implications and I’m not sure wheter the proponents of NGDP targeting are aware of these:

Read more…

Is President Obama opting to lose the election?

October 29, 2012 1 comment

from Dean Baker

There are few issues that matter more to the public than Social Security. It is a hugely popular and hugely successful program.

Social Security was set up to provide retirees and disabled workers with a core income either in retirement or in the event a disability made them unable to work. This is exactly what the program does. In its seven decades of existence it has lifted tens of millions of retirees out of poverty and allowed millions of disabled workers to maintain a modest standard of living.

It accomplishes these goals with a minimal amount of fraud and in a highly efficient manner. Its administrative costs are less one-tenth as a high as those of private sector insurers.

This is the reason that the program enjoys enormous popularity across the political and ideological spectrum. Not only Democrats, but the overwhelming majority of independent and Republicans consistently tell pollsters that they support Social Security and do not want to see benefits cut. Conservatives and even self-identified supporters of the Tea Party also oppose cuts to the program.

This is why it is striking that Governor Romney has explicitly called for large cuts to the program. It is perhaps even more striking that President Obama indicated in his first debate that he agrees with these cuts.  Read more…

The Monticello machine

October 29, 2012 1 comment

from David Ruccio

With ongoing discussions of Henry Wiencek’s new book [ht: sm], Master of the Mountain, we learn more and more about Thomas Jefferson, the economy of Monticello, and the profits and punishments of the slave south.

One of the incontestable strengths of Wiencek’s book is the way it transports readers deep into the hierarchical world of Jefferson’s Monticello — an earthly paradise of rationality, built and maintained on foundations of barbarism. Jefferson has been characterized as a progressive master, but “the Monticello machine,” Wiencek says, “operated on calibrated violence.” Among many other sources, he points to a formerly deleted passage in Jefferson’s Farm Book, a daily compendium of working life at Monticello. That report describes how the output of the nail forge was improving because “the small ones” who worked there were being whipped. Those “small ones” were slave boys of between 10 and 12 years old.   Read more…

When the economy is like a pack of wild horses

October 28, 2012 6 comments

from Lars Syll

Andrew Haldane is England’s Executive Director for Financial Stability. Olaf Storbeck recently inteviewed him about the crisis of contemporary economics and the way forward.

I am just trying to make sense of the real world. The workhorse model we used in economics is no longer working properly. Hence we are compelled to think innovatively, to seek insights from disciplines beyond our own. We are looking for systems behaviour that matches what we can see happening in the real world. In some ways we are just borrowing ideas from other disciplines.

What are the issues of contemporary macroeconomics?  Read more…

In the USA “the real earnings of the median male have actually declined by 19 percent since 1970.”

October 26, 2012 7 comments

from David Ruccio

I often tell people, in class and in talks I give, that workers’ wages have been stagnant for decades in the United States.

But, according to Michael Greenstone and Adam Looney, I’m wrong. Things are much worse.  Read more…

In Greece, deflation and not inflation is the problem.

October 26, 2012 1 comment

Government debt in Greece is 150% of GDP. Will they be able to pay these debts back? Of course not. On top of a severe economic crisis – prices are deflating too. GDP-deflation is, at the moment of writing, -0,7%. This alone will cause the debtlevel to increase with 1% of GDP…

And things won’t get better. The relation between money and inflation is complicated and holds – as we all should know – only in the medium run and especialy when the rate of money growth is relatively high, i.e. over 20%, while causality sometimes runs from prices to money growth. As is clearly shown during the housing bubble: higher house prices en expectations of even higher prices enabled and enticed people to borrow more  and, therewith, led to an increase in the amount of money. Sometimes, however, the causality may be the other way around, for instance in a situation of capital flight from a country. In Greece, this contributed to a severe contraction of activity and unacceptable unemployment: no ‘neutrality’ of money in Greece. It leads, at this moment, also to deflation (consumer prices are still rising slightly, but the broader GDP-deflator declines). Which makes things worse.

Anyway – despite low interest rates in Frankfurt money in Greece is extremely ‘tight’.

Review of new book on Thorstein Veblen

October 25, 2012 13 comments

from Michael Hudson
(Cross posted from

David Reisman, The Social Economics of Thorstein Veblen. Cheltenham, UK: Edward Elgar, 2012. vii + 338 pp. $150 (hardcover), ISBN: 978-0-85793-218-1.

Reviewed for EH.Net by Michael Hudson, Department of Economics, University of Missouri – Kansas City.

Those who wish to understand the many and deep contributions of Thorstein Veblen to economics will find that this offering falls short of the mark. The title promises to treat the social policy content of Veblen’s economic thought. Describing the ways in which markets were being distorted by predatory finance and other special interests, Veblen was read by every socialist leader and most progressives in early and mid-twentieth century America. Written in a popular sarcastic style, his books showed how the behavior of wealth and high finance was having perverse effects after World War I. Instead of funding economic growth, Wall Street was becoming the protector of privilege and engaging in artful deception, distorting economies away from passing on the fruits of technology to populations in the form of rising living standards and falling costs of living. Mainstream economics was ripe with hypocrisy in saying (and even trying to demonstrate mathematically) that all this was for the best and depicting all wealth and income as being fairly earned.  Read more…

Political Economics

October 24, 2012 5 comments

from Peter Radford

Like everything in America the economics profession is deeply politicized. The chasm that divides the two sides of the cultural war is mirrored exactly by two sides equally entrenched in economics. This means that nothing an economist says can be taken at face value. The entire profession is now bogged down, failing to move forward, and has lost all pretense of being scientific.

The latest examples of this are the various attempts by right wing economists to provide support for the Romney/Ryan tax plan, and their attack on Obama’s handling of the economy since 2009.

As you know Romney has made a big deal out of his tax plan. It will, he says, solve all our economic woes. It will unleash capitalists from the fetters of overburdening taxes, eliminate the federal deficit, spur growth, create 12 million jobs, and generally leap tall buildings with amazing agility and grace. It is, in short, magical.  Read more…

The economics of social security in the presidential race

October 24, 2012 2 comments

from Dean Baker

It is remarkable that Social Security hasn’t been a more prominent issue in the presidential race. After all, Governor Romney has proposed a plan that would imply cuts of more than 40 percent for middle-class workers just entering the labor force. Since Social Security is hugely popular across the political spectrum, it would seem that President Obama could gain an enormous advantage by clearly proclaiming his support for the program.

But President Obama has consistently refused to rise to the defense of Social Security. In fact, in the first debate he explicitly took the issue off the table telling the American people that there is not much difference between his stand on Social Security and Romney’s.  Read more…

Don’t panic, mister Sinn, as panic is the problem! (2 graphs)

October 24, 2012 1 comment

from Merijn Knibbe

Hans Werner Sinn is a leading German economists. He has rightly opened our eyes to the importance of the Target2 balances which at this moment provide the liquidity which keeps the Eurozone afloat. But according to Sinn, in a recent article in which he laments the past and regrets the future, interest rates in the Eurozone periphery countries should have been higher, private investments should have been lower and government expenditure should have been slashed even more. This would have caused a faster improvement of the large current account deficits of these countries and possibly smaller Target2 imbalances today. Nothing about more spending in Germany…

On a psychological level, he sounds like somebody who to his abhorrence has discovered that, well, the world did not work the way he supposed it to work, feels betrayed, loathes his own stupidity and now, panicking, tries to cover his losses not by doing the right thing (spend the money!) but by doing the wrong thing (restrickting spending and a flight into safety, i.e. changing Target2 debts into something more tangible ‘non-fiat money’). But is Sinn right on an economic level? First things first: even the economic costs alone of years and possibly decades of 25 to 35% unemployment in the periphery countries are a multiple of the costs Sinn is afraid of. Also, Sinn is by now clearly aware that German banks are of the hook. The ‘Target2’ claims effectively bailed out these, i.e. the current account debts were transferred from private southern and northern European companies and banks to the central banks. And when you read Sinn carefully he also seems to understand that transferring debt is not net-money creation on the Eurozone scale, despite his use of the term ‘printing press’ when it comes to the financing of still existing current account deficits. But he’s still panicking: “what if the Eurozone breaks up?”. Well, unemployment might go down surprisingly fast, in Spain and Portugal and Greece. But that’s not the question here. The question is if Sinn is right about the fact that ‘frontloading’ austerity like the Baltic countries did would have caused current account deficits to decrease faster, which would have caused Target2 imbalances to be slightly smaller today.

Let’s take a look at these deficits (graph 1).

Read more…

The Invisible Side of Latvia’s ‘Success’ Story: Life with ‘God’s Mercy and the Goodness of Others’

October 23, 2012 10 comments

On this blog, Henry Law repeatedly (and rightly) stated that news about the Baltic states should not just be based upon statistics but also on ‘field work’. Read this long article, the best piece of investigative journalism I’ve read for quite some time. An excerpt (ht: “Jan”):

from Re:Baltica

Latvia’s painful austerity program and recent economic growth is presented to the world as a success story and a model for other struggling countries resisting cuts. Re:Baltica’s investigation finds that Latvia has some of the highest poverty, unemployment and income inequality rates in the EU. What can other countries learn from Latvia to avoid the high human costs of its political choices?

When Zane Valdmane opens the door to her apartment, holding her two-year-old daughter Made in her arms, the chronic lack of money in this household is invisible at first glance. 36-year-old Zane’s athletic body and striking face, with tiny wrinkles around the corners of her lips, radiate health and joyfulness. The family’s small apartment in the city of Saldus, where Zane lives with her daughter and 13-year-old son Arturs, is orderly, calm, and filled with the light scent of a burning candle.

But as we talk at the small kitchen table set in a narrow kitchen, this idyllic family picture slowly dissipates. Two toothbrushes sit in a cup near the kitchen sink. There is no shower in this apartment. Made and Zane wash themselves in a small bucket in the kitchen. Arturs uses showers at his soccer gym. There is no refrigerator. Zane can’t afford to buy one or pay for electricity to run it. The kitchen walls are covered with wallpaper from three different rolls that Zane bought thanks to a church donation.

As a single mother, Zane is a part of the largest group at risk for poverty in Latvia. Overall, 425,000 people – or one out of every five people in Latvia – are poor. The monthly income of each household in this group is about 215 euros or less.

To see municipal social benefits paid
in 2011 in Latvia, click on the map.
Map: eazyBI

These families often don’t have enough money to cover rent, heat, or buy food. Sometimes, these homes don’t have running water, a phone or a TV. Last year, 100,000 Latvians lived on less than 65 euros a month.

The biggest joy and pride of Zane’s life —her children—turned out to be her biggest trial. Poor, single mothers like Zane have a harder time raising children in Latvia than in any other country in the European Union (EU). This is largely because Latvia spends less on social benefits that target the poor than almost any other EU country. The World Bank’s experts note that the Latvian government supports children from middle- and high-income families more generously than most European countries, but it invests the least amount of resources in children like Made and Arturs, who live in poor, single-parent homes.

Even after a significant expansion of the social safety net in the aftermath of the recession, Latvia’s spending on social protection programs for the poor was still among the lowest in the EU. For example, when the country faced the world’s deepest recession in 2009, only Bulgaria and Romania spent less on social protection programs. Estonia spent 40 percent more per capita than Latvia, Lithuania spent 33 percent more.

Re:Baltica called two companies that had the most openings to see what kind of jobs are available for people like Zane.

The first company, IMS, located about an hour and a half away from Saldus, is a fish processing plant. They are looking for people to pack cartons and seal containers. The pay depends on how many cartons are processed and the size of the box being packed. If the worker can do 1.5 shifts, it is possible to make more than 287 euros per month. Since Zane lives over 100 km away, the manager promised a bus ride. There are hostels at the processing plant too, but workers will have to pay to stay in them. Another company, Bears Ltd. is looking for cookie bakers, but openings are only in the night shifts. Each shift is 12 hours, and pay is about 2 euros an hour.

There are also some openings in grocery stores, but Zane already tried this route when she worked for a local butcher, and there was little gain. Work hours were from 9 am to 9 pm. The employer refused to sign a contract, offer sick leave, or vacation. Salary: 215 euros under the table. After Zane paid a babysitter, she ended up with less money than even the meager state benefits she currently receives.

Food, Fuel, Forests and Climate

October 22, 2012 1 comment

from Greenpeace

Fossil fuels are killing our climate and we need to find alternatives.

It’s a simple message that most people get, but what happens when one of the supposed alternatives also becomes not just a climate killer, but a driver of hunger? Then surely it’s time to stop and rethink?

Yesterday, the European Union (EU) took a tentative step towards solving this problem by changing its previous policy of increasing biofuel use for cars and trucks by proposing to cap it at 5%.

So why the change of heart?

Because the EU has been forced to recognise that growing crops for biofuels mean less crops available for food and likely price hikes as demand increases. The US, EU, China, India and Brazil all have set targets for a sharp increase in the use of biofuels. This resulted in huge additional demand for cereals, grains, sugar and oilseeds, further exacerbating recent increases in food prices compounded also by the impacts of the drought in the US last summer. Currently about 40% of US corn production is devoted to biofuel.

In a recent report, Oxfam concluded that the demand for biofuels has pushed millions of people to poverty through rising food prices. In 2008, when biofuels accounted for 3.5% of transport fuel in the EU, a study commissioned by the EC estimated that 70,000 km² of land was needed to grow biofuel crops and close to half of that area was estimated to be located outside of Europe. If this amount of land had been used to produce wheat and maize instead, it could have fed 127 million people for an entire year.

Increasing the price of food as well as reducing its availability should be enough reasons to suspend biofuel mandates. However, expanding biofuel production also has severe negative climate impacts as it often displaces crop production farther into threatened forests, savannahs and peatland or increase the use of oil-based fertilizers and pesticides. The destruction of ecosystems for biofuel crop production leads to massive greenhouse gas emissions as intact ecosystems are natural carbon sink.

Nevertheless the EU proposal failed to go far enough. It failed to take into account the greenhouse gas emissions from producing biodiesel from vegetable oils. EU countries can still continue to use biofuels that have higher emissions than crude oil. A major re-think of the entire biofuel policy is required if we are to avoid compounding rather than fixing the problem.

Used wisely biofuels can be part of the solutions needed for a fossil-fuel free future. But when the current biofuels policy increases food prices, while making climate change worse through additional deforestation and unsustainable farming practices then the system isn’t working and has to change.

A golden age of microeconomics? Really?

October 22, 2012 5 comments

from David Ruccio

A Nobel prize and a few well-paid neoclassical microeconomists and the Economist declares a golden age of micro.


It’s become a common refrain in recent years: mainstream economics finds itself in shambles (true that) but microeconomics, well, it’s doing just fine.

Except that it isn’t. Not when neoclassical economics, for all the attention to market (and, in my view, nonmarket) design, is still based on a theory of markets in which money plays no significant role (and therefore Say’s Law still holds). And in which income inequality is just a reflection of given technology, human capital, and globalized markets (such that nothing can be done about it). And in which the problems of economic development are reduced to microfinance and providing incentives for individuals to make the “right” individual decisions (and thus land reform plays no significant role).

Accept the pronouncements of the Economist (and the imprimatur of the Nobel committee and of major corporations like Google, Microsoft, Amazon, and eBay), and you might imagine that we’re in a golden age of microeconomics. However, as it turns out, this is really a golden age of the critics of neoclassical microeconomics.

World grain production, 2011 and employment in the Asia/pacific region

October 22, 2012 Leave a comment

from the Worldwatch Institute:

Global Grain Production at Record High Despite Extreme Climatic Events
Global grain production is expected to reach a record high of 2.4 billion tons in 2012, an increase of 1 percent from 2011 levels, according to new research conducted by the Nourishing the Planet project for our Vital Signs Online service. According to the United Nations Food and Agriculture Organization (FAO), the production of grain for animal feed is growing the fastest—a 2.1 percent increase from 2011. Grain for direct human consumption grew 1.1 percent from 2011.

In 2011, the amount of grain used for food totaled 571 million tons, with India consuming 89 million tons, China 87 million tons, and the United States 28 million tons, according to the International Grains Council. The world relies heavily on wheat, maize (corn), and rice for daily sustenance: of the 50,000 edible plants in the world, these three grains account for two-thirds of global food energy intake. Grains provide the majority of calories in diets worldwide, ranging from a 23 percent share in the United States to 60 percent in Asia and 62 percent in North Africa.

from the International Labour Organization

News | 22 October 2012
HANOI (ILO News) – Economic growth has slowed down in many Asia-Pacific countries, affecting labour markets both in terms of the quantity and the quality of jobs available, according to an ILO report.

The October 2012 Asia-Pacific Labour Market Update, says jobs growth in the region has slowed down compared to 2011, although the situation varies greatly among countries.

For example, while Indonesia, the Philippines, Australia, New Zealand and Taiwan (China) experienced a significant slow-down in employment growth, the Republic of Korea and, to a lesser extent, Singapore and Thailand, saw a rise in job creation. Poor quality of employment – which often means low wages and limited access to rights and benefits – is another huge challenge for the region, especially in developing countries.

The endogenous definition of money (business accounting view)

October 21, 2012 59 comments

What’s money? According to Hyman Minsky (emphasis added):

‘Modern capitalist economies are intensely financial. Money in these economies is endogenously determined as activity and asset holdings are financed and commitments of prior contracts are fulfilled. In truth, every economic unit can create money – this property is not restricted to banks. The main problem a ‘money creator’ faces is getting his money accepted’

Does everybody agree? No. According to a very recent ECB study about international liquidity (emphasis added):

The concept of monetary liquidity attempts to capture the ability of economic agents to settle their transactions using money, an asset the agents cannot create themselves. Money is typically seen as the asset which, first, can be transformed into consumption without incurring transaction costs, and second, has an exchange value that is not subject to uncertainty in nominal terms, rendering it the most liquid asset in the economy. Strictly speaking, these characteristics apply only to currency. The question of which other assets can be defined as money depends on the degree of substitutability between currency and these other assets. In practice, the definition of money in an economy generally includes those other assets which can be easily converted into currency: short-term bank deposits are an obvious example.

Who’s right? According to business accounting: Minsky.

Main stream economists define money as a combination of a

* unit of account (which by the way existed long before currency)
* means of payment
* store of value

Which means that the ‘receivables’ on the balance sheets of companies are money, too.

An example: company A buys stuff from company B and promises to pay within six weeks (which happens all the time and provides the liquidity which make markets work). According to the law, according to business accounting and, last but not least, according to the the tax man this is a legal and binding transaction – even if the debt is not settled you will have to pay taxes and you have to add it to your turnover data. The unit of the ‘receivable’ (might be Euro 15,79 but that’s a unit, too) enters the balance sheet and the profit and loss account (as it’s a store of value) and was used as a means of exchange. It’s money. Temporary money, yes, but that’s money too. So, Minsky is right, according to business economics – and the fact that transactions create payables (the debt which serves as the collateral of the receivable) means that transactions lead to money creation. Minsky is right and the ECB isn’t, which makes these ECB economists misunderstand the deeply financial nature of our economy. Money is an social act, not a good.

And this is not a measly amount of money. I’ve checked the balance sheets and profit and loss accounts of five large Dutch companies, ‘receivables’ alone are 90 billions of Euro’s and sometimes over 20% of total sales.

P.S. – the idea that using money does not involve transaction costs is bonkers. Last time I checked interest on my mortgage was still 4,6%, money which I have to pay as I once needed money to use money to buy a house. And see also this recent ECB study, which estimates that making retail transactions alone cost us about 1% of GDP, not counting transport costs to and from the shops (those are market and not paying transactions costs).

What caused the Greek export surge?

October 20, 2012 10 comments

The regular reader of this blog has for quite some time been aware of the spectacular surge in Greek export. At this moment, people start to pose the question ‘what caused this surge?’. Low wages? Of all (average) EU wages Greek wages declined the most by a long shot (also on this blog). Or was it caused in a ‘modern’ way (well, modern – let’s say the post 1830 way), by investments in technology and production and organization and markets and people – a strategy favoured on this blog by commentors as well as bloggers? The verdict is out and could not be clearer – at least if the data are dependable. Ronald Janssen investigated the composition of Greek exports. And the surge is led by ‘Mineral fuels, lubricants and related materials’, about the most capital intensive sector you can think of. What we need, in the Eurozone, is not savings and cuts – but investment. Savers are afraid of the future. Investors create it.

Caveats: Ronald Janssen mentions the possibility that the data are not dependable, due to revisions. Total Greek goods exports are still very low, comparatively. They have to quintuple or something like that to pull Greece out of the crisis. That’s not impossible – but will require one or two decades. And the recent (August) surge in Irish exports is also enabled by capital and technology intensive production processes, not by low wages. Despite the surge and a large decrease in imports, Greece still has a sizeable deficit on the trade balance, though the services balance (tourism!) compensates for this, to an extent.