Remarks given at the Harvard Club UK Southwark Cathedral dinner, London.
I’ve tried to extend the analysis of unemployment policies by Joan Muysken en Wiliam Mitchell, Full employment abandoned. Shifting sands and policy failures, by adding a few years and a number of countries to their sample and by incorporating new concepts and estimates on the flow of labour and broad unemployment. Here, the full paper. Below, the abstract.
In 2008 William Mitchell and Joan Muysken argued that after about 1978 there had been a shift from public policies aimed at full employment at the macro level to full employability at the micro level, accompanied by a larger emphasis on the budget balance of the government and low inflation. At the same time, unemployment rose to levels unheard of in decades. After 2008, however, unemployment increased to even higher levels, while extending the analysis to countries from the ‘fringe’ of Europe and to data on ‘broad’ unemployment reveals that extreme levels of unemployment in these regions were a rule instead of an exception. Flow data on the labour market show that during crises there is a temporary and relatively small increase of inflows into unemployment and a decrease of outflows out of unemployment, which, however, combine into a fast increase in the stock of unemployment – which is not countered by higher rates of outflow and inflow after the crisis. This evidence shows that major crises tend to shift countries to a semi-permanent situation of higher unemployment. Read more…
Does the Euro need a transnational government to become a succes? According tot Tara Koning and Tom Vleeschhouwer: yes. Do we want such a government? Ehm… Here, their paper for the WEA internet conference on the European crisis, below the abstract.
This paper studies three important problems that have led to or have aggravated the euro crisis: moral hazard in accumulating debt by sovereigns, lack of macroeconomic policy coordination and stabilization, and macroeconomic imbalances. We use both theoretical and empirical evidence to argue that these problems were largely caused by coordination problems. We will then investigate whether a supranational government, a layer of government above all euro member countries, can alleviate these problems. We will find that macroeconomic stabilization and macroeconomic imbalances can be improved by such a government, though moral hazard cannot be solved. The only, but certainly not insignificant, obstacle seems to be that politicians and voters may not be willing to transfer their authority to this government.
from: Erwan Mahé (guest post)
“Do not speak, unless it improves on silence.” (Buddhist Sayings)
This Buddhist aphorism pretty much sums up the reason for the lack of a new Thaler’s Corner in more than thirty days, which, excluding the holiday periods, amounts to a first for me (the last being “Sad September”, on 3 September). At the time, I emphasised the danger of market indices falling back to the “Black Market” levels of last August 24th, like they did in the wake of the flash crash of May 2010. The idiosyncratic shocks triggered by the Volkswagen and then the Glencore scandals, the prolonged weakness of emerging markets and the Fed’s relentless caution initially seemed to suggest I was right, as the Euro Stoxx 50 dipped below 3,000 points at the end of September, i.e. nearly 10% below the level at the time of my last Thaler’s Corner.
But I am obliged to return to the drawing board, given the market’s behaviour since the release last Friday of the disappointing jobs figures in the United States, with about a 3% rebound in intraday indices Friday and the new surge of the Euro Stoxx 20 to 3,170, as I write these lines. As usual, in times of confusion, Read more…
The WEA has organized an internet conference about ‘The European crisis‘.
Nicola Acocella has a paper about ‘signaling imbalances in the EMU’. Below, the abstract. Here, the full paper.
Markets show well known difficulties in delivering the right signals of looming imbalances, may underreact or overreact to them and cannot properly correct them. Pure monetary union add no significant system of signaling and re-adjustment and can even cause further imbalances. The more so if the asymmetries producing such imbalances have a structural nature, as in this case some markets, such as labour markets, may not work in an appropriate way. In this situation moral hazard and adverse selection are easy to arise, making correction of imbalances more difficult. The system should then be helped to deliver proper signals and to correct them. The OCA theory [Optimum Currency Area, M.K.] must be made to work and appropriate non-market institutions, mainly at the union level, should be created. In particular, a common financial regulation, fiscal, industrial and labour policies should be introduced, while devising consistent institutions at the country level.
- In agriculture cloning animals has become routine. Cloning your favorite but old pet is getting fashionable. What’s next? A younger version of your husband or wife? To me, it’s somewhat unsettling.
- The Lidl budget supermarket is shifting to 100% animal welfare friendly meat. A problem: slower growing chickens use more feed, which is less sustainable.
- After London and New York (and some other places) the spectacular exhibition Animals Inside Out Read more…
- On Voxeu Jon Danielsson, Marcela Valenzuela, Ilknur Zer argue that Minsky was (and is) right. “This column presents the first empirical results that find a strong validation of Minsky’s hypothesis – obtained from 200 years of historical cross-sectional data – that low volatility increases the likelihood of a future financial crisis by increasing risk-taking”.
- Peter Praet, chief economist of the ECB, argues that the Euro was a disaster (he doesn’t state this, but his slides do). A significant detail: Praet uses not just the normal but also the broad concept of unemployment (which I stressed again and again on this blog and which still does not get enough attention in Europe), very encouraging. Kudo’s to the economic statisticians, which,led by the ILO, developed and measured this variable.
- Claudio Borio (chief economist of the BIS), Leonardo Gambacorta and Boris Hofmann argue that low interest rates are, net, bad for bank profits, which adds more than a little credibility to Paul Krugman‘s recent statements that the ‘raise USA rates now’ squad is led by financial interests.
- Paul Krugman also links to a speech by Jason Furman, chairman of the council of economic advisors, which shows that it has become possible to mention the ‘accelerator’ (the idea that rising government or consumer expenditure during a crisis might induce an increase in investments) again.
- Aside: Ekhatimerini has an article which shows that the ECB can (A) effectively rule Greek banks, which means that these should in essence be understood as owned by the Troika, and (B) even seems to be able to prevent these banks from paying their creditors. I’m not sure if this includes depositors.
The Irish economy is booming. GDP increased with 6,7% year on year while, due to a net outflow of ‘factor incomes’ (read: profits) GNP (the income of the Irish) increased with 5,3%. The boom is not fired by exports: over the same period net exports declined with 177 million. It is a domestic, investment led boom: investments increased with a whopping 34,2%. Employment is up with 3%. And retail sales, especially of cars but also of other items, are booming, too.
The boom is puzzling, as the exemplary Financial Statistics Summary Chart Pack of the Irish Central Bank shows that households and non-financial companies are still deleveraging: total debt of these sectors declined with an (again) whopping 11%. So, where did the money come from to increase investments with that much (as well as to finance a double digit increase in house prices and to finance a boom in car sales)?
Part of the answer is: from the UK. A lot of english as well as chinese seem to buy Irish property. The capital balance indeed shows an extreme inflow of foreign direct investment into Ireland, especially in the first but also in the second quarter of 2015 – though this flow is somehow mirrored by an outflow of ‘portfolio investment’ (shares and the like) which is almost as large. It is almost as if foreign investors traded Irish shares for Irish houses (which, though about 1/3 cheaper than during the boom, are still not a bargain, according to me). Does anybody have opinions about this?
- In 2014 Morgan Knibbe (nephew in the nth degree) made the documentary ‘shipwreck Lampedusa‘, about the aftermath of the capsizing of a ship with migrants in the Mediterranean. The documentary is as brutal as ever. The text accompanying it is however hopelessly outdated: íf the problem was still only that small!
‘Over the weekend of April 18th and 19th, an estimated number of between eight hundred and nine hundred people, migrants and asylum seekers that had set off from Lybia, drowned in the Mediterranean. The were packed onto a single boat that capsized. Each year, roughly twenty thousand people set out to cross the Mediterranean Read more…
Summary. One of the most influential critics of the ideas of Piketty is Matthew Rognlie – who, to be able to write down his criticisms and following the national accounts, reintroduced the idea of ‘land’, or unproduced inputs like land and natural resources including land underlying buildings, in a neoclassical world. Herewith he undid the work of John Bates Clark, who purged ‘land’ from the concept of capital of classical economics, therewith enabling the rise of neoclassical economics. But this is not the only example of the return of land into economic discourse – land has made quite a return. Some examples:
Classical economists made a distinction between the factors of production ‘land, labour and capital’ while neoclassical economists only distinguish ‘capital and labour’ – which, as this disables any analysis of incomes related to the ownership of ‘land’ (not just land but also other unproduced inputs like oil or clean air), enabled neoclassical economists to restrict their attention to the asset side of the national balance sheet and to describe the distribution of income as a process unrelated to ‘property’ and ‘ownership’. According to economists like Mason Gaffney and Fred Harrison, purging the concept of ‘land’ from neoclassical economic discourse was a deliberate act, sponsored by people owning ‘land’, to enable exactly such a class free, a-historical, harmonious description of modern economies.. ‘Land’ has, however, made a glorious comeback. Below, Read more…
Reinhart and Trebesch: “The pitfalls of external dependence. Greece 1829-2015”. How to loot and weaken a state.
In 1833 the young Greek state was bailed out for the first time. Greece could not pay the loans taken on even before Greece was an independent state anymore. Remarkably, the state-to-be had received not even half of this money as, aside from high fees, there was a 40% haircut on the money Greece received. See p. 13 of a new paper by Reinhart and Trebesch, The pitfalls of external dependence, Greece 1929-2015, on the history of the four to six bail outs of Greece. The total sum of the 1833 bail out loan (financed by governments and which in fact bailed out private creditors, not Greece) was 45,5 million gold Drachme. Five million went to the Rothschild bank, as a fee. Another 7,6 million did not go to the Greek government but to the lenders as an interest advance for 1833 and 1834. Greece had to pay interest on a loan used to pay interest in advance. And the rest of the money? According to Reinhart and Trebesch, this is what happened: Read more…
Looking at neoclassical macro-models through the lens of economic statistics. Today part 8: financial markets. On 21 september Mark Carney (governor of the Bank of England), held a speech for Harvardians in London, about financial markets. It totally fits in this series even though it´s not too explicit about statistics. These are, however, used in a welcome, inductive way. When they do not fit the models the statistical data are not ignored but the models are questioned. See at the end for part 1-7.
Three Truths for Finance – speech by Mark Carney21 September 2015“All England is an American shrine, full of rich records of the makers of their nation.” 1None more so than glorious St Saviour’s – Southwark Cathedral – a few minutes south of the river from here.
from: Frances Coppola (guest post)
Editor´s introduction: a pivotal discussion. The banking sector has been at the center of macro-economic problems. Not once, but again and again. And again. What to do? Some people argue that we should restrict bank lending to ´primary´ markets which produce new ´GDP´ goods and services, to prevent credit fuelled bubbles on ´secondary´ markets, like the market for existing dwellings or the art and stock market. Frances Coppola warns for a simplified view of the primary and secondary market: there are many and complicated micro-economic linkages which should not be ignored. I hope to publish some other guest posts about this very important problem in the near future. M.K.
GDP transactions in secondary markets
There is a widespread view that much bank lending is unproductive, i.e. does not raise GDP – or if it does, it does so in an unsustainable way by inflating asset prices or increasing inflation, rather than by increasing production. Many proposals for bank reform therefore envisage restricting banks to “productive” lending, by which usually seems to be meant business finance and short-term consumer credit. Financial transactions on secondary markets, and the purchase of second-hand property, are regarded as unproductive.
This appears attractive. Banks do indeed lend far more for property purchase than they do for business finance, and most of the properties purchased are second-hand. So, the thinking goes, if we could eliminate unproductive housing finance, banks would lend more to businesses, and that would mean higher GDP in the longer term.
But I’m afraid there is a serious fallacy here Read more…
There has been quite a spat about the Fed not raising the interest rate, which inspired me to look at Eurozone price data: are there any developments which indicate that higher inflation may be just around the corner and a Eurozone rate hike is imminent?
Links. ´Huh?´!, the loneliness of mainstream economics, the draft, madmen in Brussels and job growth and transfers to Euro banks
- Dingemanse, M., Torreira, F., & Enfield, N. J. say they will hold the shortest speech ever when they receive their Ignoble price for the article ´Is “Huh?” a universal word? Conversational infrastructure and the convergent evolution of linguistic items. PLOS ONE, 2013, 8(11): e78273. (pdf)
- According to ´thank you´s´ in books titled ´Heterodox macroeconomics´ and this website Arjun Jayadev and Josh Mason can be called ´heterodox economists´. But are they? Or, to rephrase this question in an awkward way, are ´heterodox´ economists really the heterodox ones? Their article `Fisher Dynamics” in US Household Debt, 1929-2011.” American Economic Journal: Macroeconomics, 6(3): 214-34.is about the influence of debt service on net macro indebtedness of households. Interestingly, the Bank of International Settlements publishes comparable research, look here and here., using comparable data and methods to answer somewhat comparable questions. It increasingly looks as if ´mainstream´ economics with its blind eye for debt )which is opening a little, but only a little) is becoming more and more isolated and ´heterodox´.
- There is a backlash against neoliberal policies. One of the signs of this is the reintroduction of the draft in LIthuania. Yes, the abolishment of the draft in many countries in the eighties was a victory for neoliberal policies. Extend the labour market to the army! Look here for an article of J.D. Singleton about the pivotal role of (of course) MIlton Friedman in the debate about abolishing the draft Read more…
Austerity-demographics. The unmatched decline of the population from 15 to 64 in the Baltic countries
The elephant in the room: austerity-demographics (sizeable out migration in combination with as yet gentle but increasing rate of natural decline in countries with extremely high levels of post 2008 unemployment) exist. And are another reason why harsh austerity is self-defeating.
During the last six years unemployment in the Baltic countries (Latvia, Lithuania, Estonia) shows a consistent decline and, though still very high in Latvia and Lithuania, it is approaching the 5% level in Estonia (graph 1). Good! The pace of the decline is also much faster than for instance in Bulgaria and even Poland, which famously escaped the Great Financial Crisis by (1) unlike the Baltics not having a property bubble financed by a reckless inflow of foreign capital before 2008, (2) unlike the Baltics devaluating its currency in 2008 and (3) unlike the Baltics (which initially raised their interest rates…) aggressively lowering the policy rate of the central bank.
Is there a Baltic secret? Yes. Graph 2 shows that the Baltics knew an unmatched decline of the 15-64 population after 2008. Read more…
Links. Jeroen ‘1984’ Dijsselbloem, Frances Coppola on monetary sovereignty, Richard Werner on the government and bankss
1) Jeroen ‘1984’ Dijsselbloem is head of the Eurogroup. @erikwesselius, on Twitter: “Social Democrat”@JDijsselbloem on Dutch tv: >>It’s up to Greece whether it wants to become North or south Korea<unaccountable and not bound to democratic oversight or rules which is, of course, consistent with the Varoufakis Eurogroup critique.
2) Frances Coppola has a well written piece on
government debt monetary sovereignty: Read more…
Eurostat provides us (kudo’s) with data on total unemployment but also on unemployment of people from the EU living in another EU country (an Irishmen living in Italy) and on people from outside the EU living in a EU country (Moroccans or Japanese living in Spain, this excludes people from, say, Turkey who have received citizenship of one of the EU countries).
Let’s start with the silver lining: differences between total unemployment and unemployment of people from another EU country are (to me) surprisingly small (graph 1). Differences with people from outside the EU are however enormous.. Differences between countries are exceedingly large, too (graph 2). Read more…
The elephant in the room: in a historical perspective, unemployment in the Eurozone is still very elevated, not only in Spain and Greece, but also in France and even Germany. I’ve updated and completed my long-term unemployment series with 2013 and 2014 data (Eurostat) as well as 1948-1983 data for France and the UK (UK: Bank of England, I increased the BoE data a little as the BoE data are systematically lower than the Eurostat data. Read more…
According to Eurostat, “The employment rate of older people has increased in both in the long term since 2002 and in the short term since 2009. The positive trend has been consistent for both men and women over the entire time period. Because the employment rate for older women has grown faster than for older men, the gap between men and women has narrowed slightly“. Which means that at least part of the dreaded ‘dependency’ crisis has been solved: less 55 to 64 year olds are dependent, more have a job (which means that the denominator of the dependency ratio also increased). Developments in countries like Germany and Italy are in fact: spectacular. Even in Spain – which saw a mind numbing increase of unemployment after 2008 – the percentage of 55 to 64 years old with paid work increased. The crisis struck countries Portugal, Cyprus and Greece were however the only countries were the employment rate for older people decreased, due to the increase in unemployment. Aside for the consequences for the dependency ratio, a high employment rate for 55 to 64 year olds is of course a positive development anyway – at least as long as it’s not caused by an increase of crappy jobs. Work has to be dignified, in some way or another. And surely so for seniors.
People are streaming into Europe. The real question is: why did this take such a long time! American and Dutch and IS and Syrian and (since today) French bombs are part of the answer. And it might well be the case that IS is not only actively dislocating people but is also a supplier of trafficking services… Create your own market! But hey, between 1945 and 1948 12 million displaced Germans flocked to West-Germany and Austria but within ten years these countries knew labour shortages and West-Germany started to sign treaties with countries like Italy which enabled an inflow of immigrants from these countries. And the real problem may not be the inflow of people…
The real problem may be this:
The number of Germans between 0 and 5 years old is less than half the number of 50 – 55 years old…
In 1965 the German fertility rate plummeted and has never really recovered. At the moment (2013) it is 1,4, slightly higher than in the preceding years but still way below the 2,1 children per women which are needed for a stable population. At the same time, average life expectation in the entire EU is still rising with almost 3 months a year – Germany is rapidly becoming a granny state. And Germany is not the only European state heading that way (personally I welcome dwindling populations. But a fertility rate of 1,2, like in Portugal, is not consistent with ‘dwindling’ but with ‘plummeting’ – within a few decades the number of 0-5 year olds in Portugal will be much less than hafl the number of 50-55 year olds). Read more…