Links. Economic models and economic statistics edition (featuring H-W Sinn!)

1) Hans-Werner Sinn, on Project Syndicate, shows that he still does not understand the basic accounting behind Target2. He still seems to think that the Greek Target2 deficit is increasing because Greek citizens are borrowing and bringing this borrowed money abroad. Sigh. Even when a country has a current account surplus (which Greece has) and private credit is shrinking (which, according to the Greek national bank is happening) the Target2 deficit increases when foreign Eurozone banks do not want to roll over legacy private debts anymore and the European Central Bank automatically finances this by letting the Target2 deficit increase. Private debts are offloaded to the central banking system. It’s a shame that Project Syndicate publishes this nonsense.

2) On the website of Elstat, the Greek statistical organization, an alarming document has been published in which the members of the European statistical system committee:  “confirm our concern with regard to the situation in Greece, where the statistical institute, ELSTAT, as well as some of its staff members, including the current President of ELSTAT, continue to be questioned in their professional capacity. There are ongoing political debates and investigatory and judicial proceedings related to actions taken by ELSTAT and to statistics which have repeatedly passed the quality checks applied by Eurostat“. Mind the ‘continue’ and ‘ongoing’ – this is the way statisticians say that this predates the present government (which should take a clear stance, however). Dian Coyle eloquently states why this is indeed alarming and why (economic) statistics – with their flaws and mistakes – are important for an open society (and why economists do have to know the structure, limits but also the strengths of these statistics).

3) I totally agree with Coyle. Imnsho, however, mainstream economists commit a comparable crime by using models which use variables that are on the conceptual at odds with the statistical data or even leaving entire sectors of the economy, like the government, out of supposedly ‘macro’ models is at least as bad: unscientific, politically biased and outright wrong.

4). A practical example why (economic) statistics (should) matter: one of the things the Greek economic statistics show is Greece deflation. In real terms, the Greek economy was, in the first quarter of 2015, almost precisely as large as two years ago. In nominal terms it was was 4.4% smaller (table 2). Remarkably, this decrease of the price level (an intended consequence of the ‘structural reforms’!) does not seem to play a role in the present negotiations about the Greek debts.

5) The good news: Zoltan Jakab and Michael Kumhof have a new Bank of England working paper which states that Loanable funds theory is nonsense and economists should use models which are more consistent with the glorious system of economic statistics, in this case the Central Bank statistics on money creation:

“In the intermediation of loanable funds model of banking, banks accept deposits of pre-existing real resources from savers and then lend them to borrowers. In the real world, banks provide financing through money creation. That is they create deposits of new money through lending, and in doing so are mainly constrained by profitability and solvency considerations. This paper contrasts simple intermediation and financing models of banking. Compared to otherwise identical intermediation models, and following identical shocks, financing models predict changes in bank lending that are far larger, happen much faster, and have much greater effects on the real economy“.