Home > Uncategorized > Brad deLong is right. Economists lack the necessary frenzy about Europe (also starring: le Petit Prince)

Brad deLong is right. Economists lack the necessary frenzy about Europe (also starring: le Petit Prince)

Graph 1. Wage levels and vote shares, Brexit.
Begin

Brad deLong is very annoyed about this Voxeu piece by a whole slew of famous economists, which advises that we, as a consequence of Brexit, have to double down on the Euro. Full disclosure: the piece is also signed by Brad’s academic Bossom Buddy Barry Eichengreen. I agree with the gist and arguments of the piece of deLong: “From my perspective, this piece at Vox.eu makes many too many bows to conventional-wisdom idols with not just feet but bodies and heads of clay” (for younger readers: consult for ‘feet of clay’ the bible book Daniel 2:31-45). Do I also have something to add? Yes. (A) The economists in question do not seem to be particularly well-informed about (changes in) relative price levels in the EU. (B) Their macro-economics is outdated. And (C) they do not grasp the problem: structural EU change is, at least for large parts of the population, the problem and not the solution. Let me explain (to underscore that macro is about people and families I’ll start with a personal observation).

Yesterday evening I found myself at a parking place along the A7 highway, half way between Groningen and Drachten. Rain.  There were four trucks: one from Lithuania, one from Romania, one from Poland and one from Bulgaria. Two of these trucks were ostensibly driving for ‘western’ companies, one from Denmark and one from the Netherlands. ‘Fast backward’ to 1985. A friend and I hitchhiked to Barcelona with two of such trucks, which were transporting pigs to Spanish slaughterhouses. In those days the Spanish market had just been opened up for Dutch farmers and there was a kind of pig-export bonanza. According to the truckers international transport was one of the very few legal ways for people like them, with little formal education, to earn a lot of money. One of them however bitterly complained about the (EU) regulations imposed by Neelie Smit-Kroes, a former Dutch transport minister, which had forced ‘self employed’ truck drivers out of business and which had forced him to become a wage earner. The work involved long hours and being separated  from your family (their main concern) – but earned big bucks.

That was then. Nowadays, drivers living in countries with much lower average macro-economic price levels (source: Eurostat) compete with Dutch (and Belgian and British and…) drivers. A situation designed and enforced by bureaucrats from Brussels. And as the price level in the home countries of these drivers, were their families live and spend, is so much lower than the Dutch (and Belgian and…) price level (graph 2) there is just no way Dutch drivers can compete (specialized trucking services as well as deliveries from Dutch to Dutch companies are still handled by Dutch drivers, this is about international transport). Which means that employment of Dutch international truck drivers has declined, as have their incomes (aside – even in 1985 becoming an international truck driver did involve considerable practical as well as theoretical education).

Graph 2. Comparable price levels of Actual Individual Consumption (includes individual government services like education). Source: Eurostat.
Price level

As such, this is just the usual story about competition and dynamic change of the economy which leads to lower costs and lower prices for consumers which, as neoclassical macro assumes that we’re having full employment at (almost) all times, means that we’re happier ever after. But is this story right? Between 2006 and 2015 there has been no convergence of price levels (graph 2). The ‘usual’ story also implies that competition will also lead to a convergence of price levels. But that’s not what happened and happens.  This conclusion does not only hold for the countries of graph 2, but also for the entire EU and even the Eurozone. Especially after 2008 differences between countries increased. And differences in the entire Eurozone even increased dramatically, because of the inclusion of new members. These are, admittedly, pretty small countries like Lithuania and Estonia. But even then there is no convergence – people like our truck Dutch truck-drivers are getting blow after blow after blow – even when countries like Estonia have, recently, witnessed dramatic increases of minimum and other wages. To me, it seems that populists like Farage, Le Pen and Wilders do have a point. Not everybody is living happier after enlargements of the EU and the Eurozone. And, more important – there are no signs of improvement. I do not expect that people voting for Brexit were aware of these price level data (the Voxeu economists do not seem to be aware of them…). But they are somehow very aware of the role of of bureaucrats from Brussels. And the consequences of their designs for changes in the differences between Eurozone price levels. Maybe even more so than the important economists.

Graph 3. Differences in price levels, Eurozone 12 and Eurozone 19, final household consumption (excludes individual government services). Source: Eurostat.
levels

Another addition to te piece of Brad deLong: he does mention the velocity of money. But it would have been clearer to invoke the new macro, which acknowledges that the housing market is (by far) the most important asset market of them all, as well as (by far) the most important collateral and debt generator of the economy. The original Voxeu piece does talk about banks but leaves, when it comes to debts and credits, households and companies entirely off the table and the same for the housing market. Additions to macro-economics like balance sheet recessions, the importance of mortgages on the balance sheets of banks and, hence, for money creation and the volatile nature of the housing (and hence the credit) markets deserve more attentioin than just a remark about the velocity of money. But Brad at least mentions that. The Voxeu piece totally ignores it. Just like the understandable grievances of the ‘losers’ from free capital and labour markets. To these, the piece will sound as more of the same problem, instead of as a solution. Brad deLong argues for more utopian frenzy. Bu that should not just be about Euro-institutions, important as they are. We also need that ‘Europe-feeling’. So, from ‘Le Petit Prince‘ and about the Voxeu post (lisez toute la piece!):

“J’ai de sérieuses raisons de croire que la planète d’où venait le petit prince est l’astéroïde B 612. Cet astéroïde n’a été aperçu qu’une fois au télescope, en 1909, par un astronome turc. Il avait fait alors une grande démonstration de sa découverte à un Congrès International d’Astronomie. Mais personne ne l’avait cru à cause de son costume.

Prince

Les grandes personnes sont comme ça. Heureusement pour la réputation de l’astéroïde B 612 un dictateur turc imposa à son peuple, sous peine de mort, de s’habiller à l’Européenne. L’astronome refit sa démonstration en 1920, dans un habit très élégant. Et cette fois ci tout le monde fut de son avis.Si je vous ai raconté ces détails sur l’astéroïde B 612 et si je vous ai confié son numéro, c’est à cause des grandes personnes. Les grandes personnes aiment les chiffres. Quand vous leur parlez d’un nouvel ami, elles ne vous questionnent jamais sur l’essentiel. Elles ne vous disent jamais: «Quel est le son de sa voix? Quels sont les jeux qu’il préfère? Est-ce qu’il collectionne les papillons?» Elles vous demandent: «Quel âge a-t-il? Combien a-t-il de frères? Combien pèse-t-il? Combien gagne son père?». Alors seulement elles croient le connaître. Si vousdites aux grandes personnes: «J’ai vu une belle maison en briques roses, avec des géraniums aux fenêtres et des colombes sur le toit…» elles ne parviennent pas à s’imaginer cette maison. Ilfaut leur dire: «J’ai vu une maison de cent mille francs.» Alors elles s’écrient: «Comme c’est joli!»”

  1. louisperetzperetz
    June 26, 2016 at 3:00 pm

    Le titre de mon ouvrage aurait pu être « le cycliste économiste ». En effet, tout ce qui caractérise le vélocipédiste, qui avance en faisant tourner les roues, la monnaie, en circulant sur les marchés, fait avancer la production et permet d’augmenter les possibilités de satisfaire les besoins essentiels humains. Cette invention née il y a environ 2800 ans a permis de rechercher et transporter et utiliser l’énergie nécessaire à la survie de l’homme en société, le soleil, qui indirectement, lui offre généreusement sa puissance. On apprend rarement dans les cours d’Economie, quel qu’en soit le niveau, que le monétarisme est la base de l’activité économique, c’est-à-dire L’Economie réelle. L’objectif de ce livre est de montrer comment la dynamique de la monnaie, a fait progresser la société humaine par un effet circulaire comme le cycliste progresse grâce à la roue qui, elle, a été inventée bien avant, mais qui déjà a permis de développer la production agricole, et de la transporter localement. Le retour aux sources de ces phénomènes physiques bien connus, permettra de comprendre la macroéconomie, celle de tout pays moderne, sans avoir besoin de statistiques ni de formules mathématiques abstraites. Comment l’homo erectus, devenu sapiens-sapiens et sédentaire, après l’extraordinaire invention de la charrue, qui utilisait donc déjà la roue, a, en très peu de temps, relativement à la durée de sa présence sur terre, réussi à croître, jusqu’à compter de nos jours, 7 milliards d’individus malgré tous les obstacles rencontrés sur son chemin ? On parvient même, de nos jours, à s’affranchir du travail, qui est l’énergie nécessaire pour « faire tourner la machine », quand, ce système dévie et échappe en partie aux objectifs pour lesquels il a été créé. Cet ouvrage aura donc pour ambition de montrer ce processus qui a multiplié les moyens d’existence de l’homme en gagnant sur les déplacements et les échanges de biens, ceci des millions de fois plus vite que le faisait la charrue. En effet, l’effort du travail, qui reste nécessaire à toute production, a « gagné du temps » en faisant circuler les biens et valeurs sur les marchés, de plus en plus rapidement, grâce, également, à d’autres inventions tels que le moteur. Mais, comment alors continuer à donner des moyens d’existence pour tous, si l’outil-monnaie devenu presqu’autonome diminue toujours plus les efforts nécessaires à la production ? L’analyse de la circulation des flux monétaires, apportera des réponses. Les mesures préconisées seront susceptibles d’agir directement sur le marché productif, et, par contrecoup sur la croissance et le plein-emploi.

  2. June 26, 2016 at 3:24 pm

    `I vividly remember the lies with which Frits Bolkestein, then EU Commissioner, justified the introduction of this structural imbalance: “J’ai une maison en France et la-bas je ne peux pas trouver un plombier ou un electricien”. The mayor of his little town sent him scores of addresses from ‘les pages jaunes’ and the untraceable French craftspeople cut his wires and his pipes.

  3. June 27, 2016 at 12:49 am

    Voxeu piece short version: The economics of failure has failed. We must make it work again!

  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s