Archive for March, 2013

The three mandates of the European Central Bank: the price level, employment and stability

March 31, 2013 2 comments

Summary. According to the European treaties the ECB does have an employment mandate next to its inflation mandate. Looking at more prices than just consumer prices as well as at a historical output gap shows that there is ample scope and necessity for more aggressive monetary policies by the ECB.

I received some comments on my post about Jeroen Dijsselbloem, also by email, to which I will answer in a couple of blogposts. The first of these will be about the mandates (plural) of the European Central Bank, the other(s) will be about recent developments.

The ‘single’ price stability mandate is, at the moment, invoked again and again as an excuse for bad monetary policies. This is remarkable, as according to the treaties the ECB does not have a single mandate at all. It has, de jure, a clear double mandate. De facto it even has a triple mandate. Let’s first look at what ‘The consolidated version of the Treaty on the functioning of the European Union‘  has to say (article 127, part 1 and 2, emphasis added)):  Read more…

Foundations of Paul Samuelson’s Revealed Preference Theory (super wonkish)

March 30, 2013 3 comments

from Lars Syll

In 1938 Paul Samuelson offered a replacement for the then accepted theory of utility. The cardinal utility theory was discarded with the following words: “The discrediting of utility as a psychological concept robbed it of its possible virtue as an explanation of human behaviour in other than a circular sense, revealing its emptiness as even a construction” (1938, 61). According to Samuelson, the ordinalist revision of utility theory was, however, not drastic enough. The introduction of the concept of a marginal rate of substitution was considered “an artificial convention in the explanation of price behaviour” (1938, 62). One ought to analyze the consumer’s behaviour without having recourse to the concept of utility at all, since this did not correspond to directly observable phenomena. The old theory was criticized mainly from a methodological point of view, in that it used non-observable concepts and propositions.  Read more…

Jeroen Dijsselbloem did the right thing

March 30, 2013 7 comments

Cyprus is a disaster. As I see it, many mistakes were made, for instance during the boom years 2004-2007, when the ECB stubbornly refused to look at developments in individual countries and for reasons connected to ‘rational expectation economics’ (you can read more about that here) equated financial stability with low and stable inflation. And it was not the case that nobody warned. In 2002, Cladio Borio and Philip Lowe from the Bank of International Settlements warned, In 1992 Wayne Godley warned.  Minsky even had a whole subset of economic crises named after him. After the boom, the ECB failed to engineer really low interest rates for households and companies in southern Europe – they should have bought much more government bonds (no, in a situation where M-3 money in Greece has declined with about 40% that’s not inflationary).

Well, no crying about spoiled trillions. But did Jeroen Dijsselbloem make a mistake when he stated that depositors with more than 100.000,– should take a hit? Of course not. So, why did Dijsselbloem get all this flack in the international press? In Ireland, poor people are at this moment paying higher taxes because large depositors and senior bondholders were bailed out. In Cyprus, these large depositors and bondholders are getting ‘Diogenes shares. So, I’ll ask the question again: ‘Why did Dijsselbloem get all this flack’?

Fact checking Athanasios Orphanides, former head of the Central Bank of Cyprus (3 graphs)

March 29, 2013 3 comments

According to an interview with The Economist an interview with The Economist, Athanasios Orphanides, former head of the central bank of Cyprus, thinks the problems of Cyprus are caused by:

bad luck outright stupidity, bordering on the hilarious if it hadn’t caused the death of twelve people (the explosion of an electricity plant because the ammo stored right next to it exploded)

– a bad president, Dimitri Christofias

– bad Germans

– and not by bad (central) banks.

The main mistakes of the former president, Dimitri Christofias, were according to Orphanides increases of entitlements (mainly pensions) as well as not enough front loaded austerity. And to his surprise the Germans cared more about the upcoming German elections than about the fact that the new president was an austeristian too. Is Orphanides right? Read more…

Revised data on the Greek trade balance – still a large improvement but not spectacular anymore (graph)

March 28, 2013 Leave a comment

About a year and a half ago I pointed out a spectacular improvement of the Greek trade balance (part of the current account), to a large extent caused by a swift increase in exports. I was however told that there were some problems with these data, especially regarding oil. Also, J.W. Mason pointed out, on the slack wire blog, that Greece had a deficit on the trade balance long before the Euro, which was first financed by EU transfers of money (i.e. gifts) which were gradually replaced by capital flows (i.e. private loans) from the North (which increased the deficit, by the way) and nowadays to an extent by Target2 imbalances (i.e. loans by the European System of Central Banks).

Today, Elstat has published revised data on Greek imports and exports, backdated to 2004, to tackle the oil problem. These, too, show that the decline of the deficit on the trade balance is not just caused by a decline of imports but also by a sizeable, double-digit increase of exports (graph) Read more…

USA Inequality Update

March 28, 2013 13 comments

from Peter Radford

In case you missed it: the US is a wildly unequal society, and it’s getting worse by the hour.

No surprise at all, but nonetheless some of the data can be quite eye-opening. Allow me to point you to David Cay Johnston and some of his analysis.

  • Incomes have grown between 2009 and 2011. Great. But 149% of that growth has gone to the top ten percent of all income earners. Yes. More than all the increase has gone to a small minority. You knew that right?
  • How? Because income for the rest actually went down.
  • According to the Internal Revenue Service data you needed an income of above $110,651 to achieve top ten percent status. $366,623 gets you into the top one percent.
  • And it’s worth getting into that top one percent: 81% of all the extra income earned since 2009 has gone to that lucky group.
  • Even better if you can squeeze into the top of the top. The top ten percent of the top ten percent – bear with me here – managed to make off with 39% of all the income gains nationwide. That’s 15,837 households if you’re counting. Out of 158,400,000 households.

Now Johnston gets cruel:  Read more…

USA 1966 to 2011: One inch (for the bottom 90 percent) versus 4.9 miles (for the top .01 percent).

March 28, 2013 1 comment

from David Ruccio

In the United States as David Cay Johnston explains,

In 2011 the average AGI [adjusted gross income] of the vast majority fell to $30,437 per taxpayer, its lowest level since 1966 when measured in 2011 dollars. The vast majority averaged a mere $59 more in 2011 than in 1966. For the top 10 percent, by the same measures, average income rose by $116,071 to $254,864, an increase of 84 percent over 1966.

Plot those numbers on a chart, with one inch for $59, and the top 10 percent’s line would extend more than 163 feet.  Read more…

Remarks on and excerpts from a detailed Troika dictat for Cyprus

March 28, 2013 Leave a comment

A lot of people talk about austerity policies. But do we know the details of such policies? This ‘Troika’ (ECB, IMF, EC) document (October 2012, i.e. not the most recent) about Cyprus gives interesting information about details as well as about the style of thinking.


Some of the measures are smart and long overdue:

“set-up a system of family doctors acting as gate-keepers for access to further levels of care, including effective financial disincentives for bypassing family doctors and for using emergency care services in non-urgent situations”

Some of the measures however smack of outright panic Read more…

Domestic demand in selected euro and non-Euro countries, time series.

March 27, 2013 4 comments

Dear Ezra, thank you for pointing out, in the comments to this blogpost, what the acronym ‘POS’ means, in the USA. Didn’t knew that. Does it mean the same in Great-Britain? And Australia? Anyway – there is a clear solution to your problem. The anomaly you perceive is increasing domestic demand (investments, private consumption, government consumption) in Bulgaria amid signs of impoverishment and crisis. The answer to the anomaly is that the upswing in Bulgaria takes place from a very low level (see the graph). There is an increase – but the level is still low. And to underscore my point of the previous blog (see link): Euro-austerity countries are doing much worse than non-Euro countries with problems.

Domestic demand

Source: Eurostat, national accounts statistics, volume series

Let’s say ‘thank you’ to the brave Cypriot parliament

March 25, 2013 18 comments

The hero of the Cypriot saga has of course been the Cypriot parliament, which defied the combined power of the IMF, the ECB and the European Commission. This brave stance led to a much better deal and an important precedent which should serve as an example for Ireland and Spain. Considering the present situation, dominated by a central bank which does not seem to understand that its mandate explicitly includes the obligation to foster prosperity, and because of economic, monetary but above all democratic reasons we have to be thankful to the Cypriotic parliament. Banks are not sacrosanct anymore, in Europe. Not even German ones.

I do not know if Cyprus itself will be better off because of this deal.

issue no. 63 of real-world economics review

March 25, 2013 2 comments

Issue no. 63,  25  March  2012

You can download the whole issue as a pdf document by clicking  here  

In this issue:

The veil of deception over money           2
Norbert Häring           download pdf

Ultra easy monetary policy and the law of unintended consequences           19
William White            download pdf

Civilizing capitalism           57
Erik Reinert           download pdf

Looking at the right metrics in the right way – Two kinds of models           73
Merijn Knibbe           download pdf

Crisis and methodology: Some heterodox misunderstandings          98
Egmont Kakarot-Handtke          download pdf

Inapplicable operations on ordinal, cardinal, and expected utility          118
Jonathan Barzilai          download pdf

Reduced work hours as a means of slowing climate change         124
David Rosnick          download pdf

Electronic money and Modern Monetary Theory          135
Trond Andresen          download pdf

Productivity, unemployment and the Rule of Eight          142
Alan Taylor Harvey          download pdf

What I would like economic majors to know          147
David Hemenway          download pdf

Past, contributors, submissions and etc.          155

“Inapplicable operations on ordinal, cardinal, and expected utility”

March 25, 2013 7 comments

from Issue no. 63 of the real-world economics review

Inapplicable operations on ordinal, cardinal, and expected utility
Jonathan Barzilai   [Dalhousie University, Canada]      download pdf

Editor’s note:

This short paper was originally submitted to World Economics Review, where under its online open review it was for a year subjected to voluminous high calibre critique and author response (available here). As the first reviewer noted: “If the author is right, a substantial part of orthodox economics has to be rejected on purely formal grounds”. The paper’s arguments turn on the application of abstract algebra, a branch of mathematics in which we economists are rarely fluent. The paper asserts:

  1. Hick’s and Samuelson’s applications (and those based thereon) of differentiation to ordinal utility are founded on mathematical errors.
  2. Expected utility’s scale construction rule is self-contradictory.

By publishing Jonathan Barzilai’s paper in the RWER, it is hoped that one or more mathematicians will bring their expertise to bear on its argument and that the high calibre consideration of the paper by economists will continue in public view. To this end, this post has been placed so that people may comment on the paper. Only comments of an academic nature and directed primarily to the paper will be posted. 

Deutsche bank: fifteen shades of fraud

March 23, 2013 16 comments

I was a little fed up with the stories about banksters from Cyprus. How about Deutsche Bank, the largest bank of Europe, darling of the German government and, Lehman style, “Chief Executive Officer Josef Ackermann, who has called proposals to limit bank size “misguided,” will leave behind a balance sheet about 40 percent larger than in 2006, and more than 80 percent as big as Germany’s economy, when he steps down in May. The firm is the second-most leveraged and third-least capitalized of Europe’s 10 largest banks”. A quick google search on ‘Deutsche Bank’ and ‘Fraud’ yielded the next fifteen links:

1. The biggest criminal tax-fraud persecution in history

Read more…

The ECB: still behind the curve when it comes to (estimating) inflation. Graph

March 21, 2013 Leave a comment

Up to about 2011 the ECB largely disregarded the systemic risks inherent in the private ‘printing’ of trillions upon trillions of Euro’s and the connected exponential rise of private debt. These increases were caused by ever more generous lending for house purchase, a process spelled out clearly and on a monthly basis by the ECB’s own monetary statistics. These statistics were extended backwards in the important article “LONG-TERM DEVELOPMENTS IN MFI LOANS TO HOUSEHOLDS IN THE EURO AREA: MAIN PATTERNS AND DETERMINANTS” in the Monthly Bulletin of October 2007, which showed that the rise already dated from the eighties. But instead of leading to a heightened sense of alarm this information only led the ECB to state:

assessing the historical pattern of household loan developments purely on the basis of the macroeconomic determinants of loan demand remains to some extent inconclusive, given that loan developments over the past two decades are also likely to reflect a number of structural influences, such as financial innovation and changes in mortgage market regulation, as well as the shift to a low-inflation and credible monetary policy environment in the euro area in the context of EMU”

Translated: deregulated capital markets do lead to rogue lending, but that’s because of us, so, no problem. Again: October 2007. Read more…

Graph of the day. Low and lower GDP inflation in the Eurozone, selected countries

March 21, 2013 2 comments

Wages of teachers are a price, too. These are not included in the favorite metric of the ECB, the Harmonized Index of Consumer Prices (HICP). But they are included in the GDP-deflator (to be more precise: as part of ‘government consumption’, i.e. that part of household consumption that is paid for by taxes). Wages of teachers and other government employees have, as a rule, risen much less than wages in the business economy, in the Eurozone. Which means that GDP inflation is quite a bit lower than HICP inflation, also as investing in new buildings has become cheaper after the housing bubble (lower land prices…). Even in Germany, where economic development was less dismal than in many other Eurozone countries in 2012 (the German economy surely did not do well!), inflation still is way below the ECB 1,8% target. No time to panic about ‘hyperinflation’. Time to panic about hyperunemployment.


IS-LM is bad economics no matter what Krugman says

March 20, 2013 26 comments

from Lars Syll

Paul Krugman has a post up on his blog once again defending “the whole enterprise of Keynes/Hicks macroeconomic theory” and especially his own somewhat idiosyncratic version of IS-LM.

The main problem is simpliciter that there is no such thing as a Keynes-Hicks macroeconomic theory!

So, let us get some things straight.

There is nothing in the post-General Theory writings of Keynes that 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 1937 QJE-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. So of course there can’t be any “vindication for the whole enterprise of Keynes/Hicks macroeconomic theory” – simply because “Keynes/Hicks” never existed.

And it gets even worse!  Read more…

Worms, pond scum and economists

March 20, 2013 11 comments

from Dean Baker

The effort to blame the awful plight of the young on Social Security and Medicare is picking up steam.

In the last week, there were several pieces in The Washington Post and The New York Times that either implicitly or explicitly blamed older workers and retirees for the bad economic plight facing young people today. There is now a full-court press to cut Social Security and Medicare benefits, ostensibly out of a desire to help young workers today and in the future.   Read more…

Graph of the day. Domestic demand in the EU

March 20, 2013 1 comment

‘Domestic demand’ is consumption plus investments by residents and the government of a country. It either leads to sales by domestic companies or to imports of goods and services. Austerity and financial insecurity led to a large decline of domestic demand in the Eurozone, compared with non-Euro EU countries as well as compared with Japan, the UK or the USA. A decline in domestic demand by definition leads to lower sales and (almost by definition) lower employment, unless it is compensated by higher exports. When domestic demand in neighbouring countries is falling too, however, it becomes harder to increase exports.


Cyprus, how could it happen? Why did the ECB accept this?

March 18, 2013 5 comments

I’ve read x blogs and comments on Cyprus. Which gave me the impression that the main organisation responsible for financial stability in the Eurozone, the ECB, does not seem have a real vision of Deposit Guarantee Systems (DGS) – or at least not of its own role and responsibility in safeguarding these systems. To check this, I started to browse their website. It indeed turns out that the ECB sees DGS as a responsibility of the governments and defines these systems as part of the government. Which means that their main preoccupation is not to safeguard these systems but to take care that they are in case of emergency not temporarily financed by overdraft facilities of the DSG at the national central banks, as this is ‘monetary financing of the government’. The new Dutch system is ex ante financed, but it can of course run out of money. The ECB states about this situation:

However, at the same time it is important for the national provisions on funding of the deposit guarantee schemes to comply with the monetary financing prohibition under Article 123 of the Treaty. This provision prohibits central banks from providing overdraft facilities or any other type of credit facility to the public sector, including financing of the public sector’s obligations vis-à-vis third parties. Hence, ECB Opinion CON/2011/60 advised the Dutch authorities that advance payments by DNB (the Dutch central bank, M.K.) in the context of the operation of the Dutch DGS are incompatible with the monetary financing prohibition and that consequently relevant Dutch legislation needs to be amended.

When push comes to play the ECB still defines its own role as safeguarding monetary financing of the government prohibition (never mind the billions of monetary financing of the housing market) and not as safeguarding financial stability.

Inequality and well-being

March 18, 2013 11 comments

from Lars Syll