Archive for June, 2013

Doctor X, “pure shit” and the Royal Society’s motto

from Edward Fullbrook

Recently at a large party I found myself sitting next to a very likable young middle-aged academic tenured at an elite British university, whom henceforth I will refer to as Doctor X and whose field is closely associated with this blog.

Doctor X was unfamiliar with both the Real-World Economics Review and the World Economics Association.  But when I described the purposes of the latter, in particular the fostering of a professional ethos that prioritized the advancement of knowledge rather than the preservation of orthodoxies and the promotion of vested interests, there was an instantaneous recognition of a central relevance to his/her intellectual and career situation.

“Every year I publish papers in the top journals and they’re pure shit.”  Doctor X, who by now had had a glass or two, felt bad about this, not least because “students these days are so idealistic and eager to learn; they’re really wonderful.”  Furthermore Doctor X could and would like “to write serious papers but what would be the point?”

I then listened to an explanation of Doctor X’s predicament that went roughly like this. Read more…

English unemployment: decreasingly defying gravity ?

June 29, 2013 5 comments

I was wrong about English unemployment. Considering demographics, the lousy performance of the English economy and our 200 years of experience with ‘modern economic growth’ I expected English unemployment to be 11 or 12% at the moment. But it is not even 8%. How can that be?

1. I can be excused for being wrong. The behavior of english productivity was, considering the history of the British economy, very a-typical (graph). We could have expected productivity to be 3% higher at the moment than it was back in 2007. But it is about 5% lower. For math wonks: the trend line is based on a polynomial of degree six, which however shows only one serious inflection point. Even the ‘winter of discontent’ caused, compared with the shift in 2008, only a barely perceptible productivity blip. This shift is beyond reasonable 2007 expectations.


2. However, I can’t be excused when I do not take this change serious. Read more…

James Galbraith: “Europe’s house is on fire. No time for complacency”

June 28, 2013 2 comments

from the blog of Yanis Varoufakis: the keynote speech of James Galbraith at the European parliament. He draws attention to increasing hunger in Europe and draws parallels with (former) Yugoslavia and the (former) Soviet Union, including the oligarchisation of the economy following the fire sales of state companies.

On June 27, James Galbraith keynoted a conference at the European Parliament entitled “Achieving Europe,” sponsored by the parliamentary socialists and social democrats. Listen here. Brief closing statement here.

Niall Ferguson: More mistaken musings from the land of the Excel spreadsheet error

June 28, 2013 7 comments

from Dean Baker

Harvard’s standing in economic policy debates took a big hit when the famous Reinhart-Rogoff 90 percent debt-to-GDP growth cliff was shown to be the result of a simple spreadsheet error. Niall Ferguson’s strange rant in the Wall Street Journal about the United States becoming the land of government regulation continues the downhill slide.

The gist of the piece is that the country is going down the road to economic stagnation and suffocating bureaucracy because of excessive regulation. The Affordable Care Act (ACA) is the main villain in this story.

It’s fair to say that just about everything in the piece is wrong. Starting with the meat, rather than being some horrible burden for small businesses, the main effect of the ACA on the vast majority of small businesses will be to provide them with a subsidy if they offer their workers insurance. The mandate only applies to firms that employ more than 50 workers, most of whom already provide insurance that would meet the mandate anyhow. So these engines of innovation will grind to a halt if the government offers them subsidies for insurance? Interesting theory.

Ferguson then cites a number of hack studies that find enormous costs to regulation. The main trick in this sort of study is to add up every possible cost associated with restrictions without taking account of the benefits of these regulations. Read more…

Outright money destruction (OMD) in Cyprus?

June 27, 2013 17 comments

Update: the ECB has just suspended ‘the eligibility of marketable debt instruments issued or fully guaranteed by the Republic of Cyprus for use as collateral in Eurosystem monetary policy operations‘. I.e.: the Cypriot financial/monetary system is bust. Which might have been avoided if the ECB had issued ‘debt free money’ (in the shape of Euro bills) to compensate the deposit losses of the depositors of the banks of Cyprus (people and companies could have exchanged their ‘hair cut’ at face value of Euro bills. This would have prevented the demise of the Cypriot private sector: bail out households and companies, not banks.

A deposit is a loan to a bank. Financial repression forces us to make such a loans every time we receive our salary. Which means that banks (at least the money creating MFI-banks, which have a licence to print) do not only have a monopoly to create money. But they are also large and by assured that people will deposit this money at the same banks which created it, at a 0% interest rate. In Cyprus this went wrong. To a large extent because of the Greek debt default Cypriot banks could not honor their debts to households and non-financial companies anymore. And a haircut was imposed on these debt. Data of the Central Bank of Cyprus enable us to get a first glance of subsequent events.


It is not clear to me to which extent the dramatic decline in household and non-financial company deposits is caused by the haircut or by a bank run. It is however clear to me that the net indebtedness of non-financial companies increased with about 6 billion, while households received a comparable hit (though they still have net claims on the banks). To the extent that this was due to the haircut (10 billions?) one can genuinely ask the question: ‘how will households and companies ever be able to pay back their debts to the bank when so much money has disappeared into thin air’? Or does that sound too much like Paul Grignon? By the way – notice the bubble between May 2007 and May 2008. In one year, loans to non-financial companies almost doubled.

Technical addendum: the total decline of deposits between December and April was 12,8 billion Euro of which 5,5 billion consisted of Euro’s and 5,4 billion of US $ and the rest of other currencies.

Students rethinking economics

Students at the London School of Economics have organized for this coming a weekend a rather large 3-day conference on Rethinking Economics.   I am posting below the conference agenda, not with the illusion that this event is within easy geographical reach of most of this blog’s readership, but rather as an example of the sort of initiative that economics students around the world can take and increasingly are taking.

Rethinking Economics: London
Fri 28th June – Sun 30th June, London School of Economics
a conference to demystify, diversify and reinvigorate economics for imaginative citizens, students, academics, and professionals, including those with no previous training in economics to launch a collaborative network of economic rethinkers

Book workshops now to avoid disappointment:!tickets/c1tbo

To be opened by Read more…

Income inequalities in 2007 compared to latest available year in 26 countries

June 27, 2013 2 comments

from David Ruccio



Note that the U.S. Gini coefficients—starting at 46.3 in 2007 and then rising to 47 in 2010 and 47.7 in 2011—literally don’t fit on the chart.

The Ben Bernanke pre-mature taper blues

June 26, 2013 1 comment

from Dean Baker

In his news conference after the Fed’s meeting last week, Chairman Ben Bernanke announced plans to end quantitative easing as soon as the unemployment rate falls below 7.0 percent. He also said that he now views full employment as being in the range of 5.5-6.0 percent. Both positions could be very bad news for the country’s workers.

The first view means that just a small decline in the unemployment rate from the economy’s current 7.6 percent will be sufficient to get the Fed to pull back its support. This is troubling because the economy will likely still have a long way to go to make up the jobs lost since the beginning of the downturn.

There has been substantial improvement in the unemployment rate since it peaked at 10.0 percent in the fall of 2009. However the story is quite different if we turn to the employment-to-population ratio (EPOP), the percentage of people who have jobs. This fell from 63.0 in 2007 to a low of 58.2 percent reached briefly in 2010 and again in 2011. We have made little progress in getting back to the pre-recession EPOP, with the EPOP standing at just 58.6 percent in May, almost 4.5 percentage points below its pre-recession level.  Read more…

All the economics news that’s not fit to print

June 25, 2013 3 comments

from David Ruccio

labor share-recent

David Cay Johnston notes that all the major networks and newspapers, including the New York Times, failed to report the fact that, according to the Bureau of Labor Statistics, wages fell at the fastest rate ever recorded during the first quarter of this year. Read more…

Human capital – The knowledge dimension

June 24, 2013 7 comments

from Peter Radford

The very words have a bureaucratic ring to them. At least to me. Nancy Folbre has written an interesting article about the ending of the Golden Age of Human Capital, her main point being that there has been a major change in the landscape for higher education. The value of a college degree is not what it used to be, and the cost of getting one is becoming prohibitive.

The second part of that statement – about the cost of education – is testimony to the shockingly irresponsible shambles that academia has become. The cost of providing an education is way out of line, affordability is declining rapidly, student debt shackles the young and reduces their ability to attain the creature comforts of the old middle class, and the future value of college is increasingly murky. Academics decry the cost of getting an education, but offer little by way of a remedy. The productivity within academia is a challenge to say the least, and odd ball solutions like opening up campuses of our universities in China solve nothing. Indeed they make matters worse by building the supply of graduates and thus eroding the return available for all graduates.

Folbre hints that there may have been a shift in the demand for educated workers, at least here in the west, with employers now focusing on more specific skills rather than the old fashioned generalists pumped out en masse by liberal arts colleges.

Let me add my voice to this discussion. Read more…

Maxwell, Michelson-Morley, Einstein – and the tenacity of Ether mechanics

June 23, 2013 4 comments

This comment by Edward Ponderer on the ‘Project Syndicate’ blog might interest some regular commenters of this blog (it can be read without reading the ‘Europe’s Economic Groupthink‘ column it relates to):

I fear that the economic groupthink is much more global than Europe.

I recall a certain sense of sadness many years ago in the technical library of my first employer. There was a book, reproduced from 1900 — a first year graduate textbook on Ether Mechanics. It was 38 years since James Clerk Maxwell published his paper, “A Dynamic Theory of the Electromagnetic Field,” whose crowning success was that it predicted a wave that moved precisely at light speed — showing that light was electromagnetic, and required no ether to propagate in free space. It was also 13 years after the Michelson–Morley experiment demonstrated that light-speed was independent of direction, literally flying right in the face of the idea of an “ether wind.” If trail questions on these results existed that justified not totally abandoning the theory, at least it was understood that it would require radical changes.

But the entering class of physicists of 1900 would again be treated to the the same, worn out theory — break their heads on its fundamentally flawed theory, and their teeth in sleepless hours making tedious calculation of its nonexistent statics and dynamics. But they would have company, some two decades or so as even Einstein Special Relativity Theory of 1905 and General Relativity of 1915, couldn’t completely kill ether in professional circles. Finally under the weight of countless experimental demonstration, ether was finally universally accepted as being, well, as ethereal as Casper the friendly ghost.

We understand system science, we understand the process of globalization, we understand the dynamics of chaos, and the loss of predictive reductionist control at single points in the development of natural homeostasis. Yet we continue on this perpetual old-school economic groupthink. But what’s at stake here is a lot more than just a delay in the development of innovations like radio and atom smashers.

We must put our focus into behavioral economics — develop societal relationships of mutual responsibility. We must stop beating the exhausted horse to drive it the extra mile, and instead focus on repairing its flesh so that it may rejuvenate on its own.

Because ice cream cones melt slower in Northern Europe than the South is no reason to belief that anyone’s ice cream cone is going to last and stay creamy without the homeostasis of the right refrigerator environment and thermostat.



The (low) real level of inflation in the Eurozone and the UK

June 23, 2013 1 comment

An organisation like the ECB targets the ‘HICP’ consumer price index. However – prices of investments are prices too, just like wages of teachers, paid by the government. The Eurostat data enable us to investigate not only consumer price inflation but also the change of the price level of ‘domestic demand’, i.e. consumption plus investments plus government expenditure. It turns out that, especially after 2008, differences between the inflation rates of these different kinds of inflation have become sizeable. Also, domestic demand inflation, based upon a much broader set of prices and kinds of expenditure, is much lower than consumer price inflation in the Eurozone as well as in the UK. This means that the real interest rate, i.e. the nominal interest rate minus the rate of inflation, is about one percent higher than indicated by consumer price inflation. Real interest rates in Greece have become crushing. Inflation in the Eurozone is still low and even declining.



Suggestion for Mankiw’s reading list: the entrepreneurial state

June 23, 2013 3 comments

via Lars Syll

The myth is of a dynamic, creative, colourful, entrepreneurial private sector, that at most needs ‘unleashing’ from its constraints from the public sector. The latter is instead depicted as necessary for fixing ‘market failures’ (investing in ‘public goods’ like infrastructure or basic research) but inherently bureaucratic, slow, grey, and often too ‘meddling’. It is told to stick to the ‘basics’ but to avoid getting too directly involved in the economy …

mazzucatoAll this fear about the government trying and failing to pick winners is exaggerated. Both Apple and the technologies behind the iPhone were picked! But picking winners is more probable when the state is described as though it is relevant rather than irrelevant …

Today, we see countries that are growing thanks to a courageous public sector and through mission oriented policies. For example, China is spending $1.7 trillion on five key new broadly defined sectors, including ‘environmentally friendly’ technologies. Brazil’s active state investment bank is spending more than $60 billion just this year on green technology. The economics profession doesn’t adequately account for this kind of state-led activity, but only warns of governments ‘crowding out’ private business or failing at picking winners …

The problem is that by not admitting this entrepreneurial risk-taking role that the state provides, we have not confronted a key relationship in finance: the relationship between risk and return. Innovation is deeply uncertain, with most attempts failing. For every Internet there are many Concordes or Solyndras. Yet this is also true for private venture capital (VC). But while private VC is then able to use the profits from the 1 out of 10 successes to fund the 9 losses, the state has not been allowed to reap a return. Economists think this will happen via tax (from the jobs created, and from the profits of the companies), yet so many of the companies that receive such benefits from state funding, bring their jobs elsewhere, and of course we know they also pay very little tax. Thus the return generating mechanisms must be rethought. It could be done through retaining equity, a ‘golden share’ of the intellectual property rights, or through income contingent loans …

What this means is that we have socialized the risk of innovation but privatised the rewards. This dynamic is one of the key drivers of increasing inequality. Because innovation today builds on innovation tomorrow, the ‘capture’ can be very large. This would not be the case if innovation were just a random walk. Policy makers must think very hard how to make value creation activities (done by all the collective actors in the innovation game) rewarded above value extraction activities (in this sense capital gains taxes are way too low). And since the booty from the latter can be very large, redirecting incentives and rewards towards the value creators is essential. The problem is that some of the ‘extractors’ like to sell themselves as the creators.

Mariana Mazzucato interviewed on INET

Links and fests

June 21, 2013 9 comments

(1) According to some news the arctic sea is covered with ice, once again. Fortunately, this is the internet age – and you can check it. Aside – the fact that we have such real-time data is of course a-ma-zing.

(2) An underrated statistic from the European Central Bank: monthly data on the Eurozone balance of payments. The twelve month cumulated total of the current account data show (almost in real-time) that the surplus increased from 0,4% of Eurozone GDP in April 2012 to 1,8% of GDP in April 2013, quite a boost for such a large area. The more stunning statistic: despite this boost the volume of GDP declined with 1,1% in (almost) the same period (nominal GDP was flat). Which means that domestic demand plummeted. If the Eurozone had been less lucky, for instance because of a dip in China and the USA, GDP might have declined with 2 to 3% or even more. Those are the risks which the Troika is taking.

(3) Paul Krugman is tinkering with a model which explains monopoly rents on products with ‘zero’ or at least very low production costs (pharmaceutical products, computer programs like Excel). But he does not yet mention that (A) electronic fiat money is the ultimate zero production costs product while (B) the seigniorage interest profits made by the banks which produce it are to quite some extent based upon ‘land’related loans. Think of a loan for house purchase, financed by freshly produced money and a 4% interest rate. This income often is, to the extent that it’s used to buy already existing land with a high location value or leads to an inflationary increase of house prices, an often overlooked rent income. Read more…

The bigger problem with Mankiw’s plan to give everything to the one percent

June 21, 2013 5 comments

from Dean Baker

Chrystia Freeland notes the rapid growth in the wealth of the extremely rich. Then she follows Greg Mankiw in arguing that this growth is largely positive insofar as it resulted from people like Steve Jobs and J.K. Rowling producing great innovations or creative material enjoyed by hundreds of millions of people.

While Freeland notes problems from the resulting inequality, she does commit the same error as Mankiw in implying both that the enormous wealth of these people is a natural outgrowth of the market and that these creative people would not have been as productive absent these enormous rewards. Neither claim is remotely plausible. Read more…

“The intrinsic limits of modern economic theory”

June 20, 2013 10 comments

from Lars Syll

Almost a century and a half after Léon Walras founded neoclassical general equilibrium theory, economists still have not been able to show that markets move economies to equilibria.

We do know that – under very restrictive assumptions – equilibria do exist, are unique and are Pareto-efficient. After reading Franklin M. Fisher‘s masterly article The stability of general equilibrium – what do we know and why is it important? one, however, has to ask oneself – what good does that do?

As long as we cannot show, except under exceedingly special assumptions, that there are convincing reasons to suppose there are forces which lead economies to equilibria – the value of general equilibrium theory is nil. As long as we cannot really demonstrate that there are forces operating – under reasonable, relevant and at least mildly realistic conditions – at moving markets to equilibria, there cannot really be any sustainable reason for anyone to pay any interest or attention to this theory.

A stability that can only be proved by assuming “Santa Claus” conditions is of no avail. Most people do not believe in Santa Claus anymore. And for good reasons. Santa Claus is for kids, and general equilibrium economists ought to grow up, leaving their Santa Claus economics in the dustbin of history.

Continuing to model a world full of agents behaving as economists – “often wrong, but never uncertain” – and still not being able to show that the system under reasonable assumptions converges to equilibrium (or simply assume the problem away), is a gross misallocation of intellectual resources and time. Read more…

Who framed inequality?

June 20, 2013 14 comments

from David Ruccio


Once again, we’re faced with a false choice about the causes of inequality. A few days ago, it was redistribution versus predistribution. And I came down on the side of a third alternative: distribution.

Ezra Klein, too, suggests a third way, beyond what he considers to be the two main schools of thought on income inequality—in this case, redistribution and fatalism:

The fatalists, who contend that rising inequality is the ineluctable result of a changing economy, and the redistributionists, who blame a skewed tax system and lethargic government. Perhaps it’s time to consider a third. . .

Yet the fatalist and redistributionist camps also give the government too little credit — and too little blame — for inequality. Both cleanly divide the issue in half: On one side is the way the economy distributes income, on the other the way the government redistributes it. But this misses the space between: the way the government itself changes the economy.

I couldn’t agree more: the government does play a key role in forming and changing the economy. But, in order to understand that role, we need a theory of the state. The government does not act autonomously, as an independent force setting “the rules for the economy and for those who benefit most from it.” It is also a product of those economic rules, especially as it reflects the influence of those who benefit most from the way the economy is currently organized.

Such a theory of the state would go beyond the liberal framing of the issue of inequality and answer the Millenials’ quandary: why, if the economic system favors the wealthy, does the government not do more to reduce the gap between the rich and the poor?

The Spanish economy is suffering from contagion

June 19, 2013 1 comment

Until about a year ago, almost all the job losses in Spain were concentrated in construction and related industries. Austerity policies have however lead to contagion of the other sectors of the economy: all sectors are shedding jobs, at the moment. Ironically, the source still mentions ‘job growth’. Remarkably, construction is still shedding jobs, after about five years of decline.


A letter from the president of Cyprus, about the bail-in of his country

June 19, 2013 5 comments

The president of Cyprus has written a letter reconsidering the clumsy and deeply deflationary bail-in of Cyprus. You can read the whole letter here. Two paragraphs are reproduced below (emphasis added)

2. Application of bail-in was implemented without careful preparation

It is my humble submission that the bail-in was implemented without careful preparation. Its form was changed drastically within a week. Originally designed as a general bail-in across the banking system, it eventually became focused on the two distressed banks, the Laiki Bank and the Bank of Cyprus (BOC). There was no clear understanding of how a bail-in was to be implemented, legal issues are being raised and major delays in completing the process are being observed. Moreover, no distinction was made between long-term deposits earning high returns and money flowing through current accounts, such as firms’ working capital. This amounted to a significant loss of working capital for businesses. An alternative, Ionger-term, downsizing of the banking system away from publicity and without bank-runs was a credible alternative that would not have produced such a deep recession and loss of confidence in the banking system.

3. Cyprus was forced to pay the cost to ring-fence Greece but no reciprocity has been granted

Another feature of the current solution was that deposits at the branches of Laiki and Bank of Cyprus in Greece were spared from a haircut to prevent contagion. These deposits amounted to €15 billion. The wish to avoid contagion to Greece was also evident in the Eurogroup’s insistence that Cypriot banks sell their Greek branches. In addition and as a result of the sale, the Cypriot banks have lost their Greek deferred tax assets. As understandable as ring-fencing may be, this was absent at the time of deciding the Greek PSI in relation to the Greek Government Bonds which cost Cyprus 25% of its GDP (€4.5 billion). The heavy burden placed on Cyprus by the restructuring of Greek debt was not taken into consideration when it was Cyprus’ turn to seek help.

Did high unemployment enable the Nazi’s to increase their share of the votes? Yes. Unequivocally: yes.

June 18, 2013 5 comments

The Nazi’s pose two disturbing and, alas, highly relevant problems to (Eurozone) economists. The first is if high Great Depression unemployment enabled them to rise to power. The second is how they, starting from a macro-economic situation which closely resembles the Spanish situation of today, could engineer such a spectacular economic recovery. They did deliver. The answer to the second question will have to wait (you might however google ‘MEFO-bills’). The answer to the first question is, according to Christian Stögbauer, an absolutely unequivocally ‘Yes’ (h/t Jesse Frederik), an imnportant answer as not everybody is convinced of this. People did not vote against the Weimar Republic but against the parties in power and voted for the party which took the concerns of the middle class to heart.

The summary of his article:

A special pooled longitudinal/cross sectional, fixed-effects approach with spatial autocorrelation (EGLS) is used in order to simultaneously estimate the popularity determinants for the entire system of political parties for each of the 830 localities in our data set. By analysing the determinants for the vote shares of all major parties/party blocks we demonstrate unequivocally that the economic crisis was the crucial prerequisite for the political collapse of the Weimar Republic. In contrast to other empirical studies in this field, we use an essentially longitudinal approach by which we can completely avoid the problems associated with ecological inference and show that unemployment had a strong positive effect in favor of the National Socialists.

About the economic situation and the differences between the NSDAP and another radical party, the DKP (the communists): Read more…