Does, contrary to the assumptions of many economic models, ‘involuntary unemployment’ exist? Of course. We measure it (for the definition see below). And in the USA it is going down. About two months ago I posted this graph, which showed that what I call involuntary unemployment in the USA tended upwards. Two months of additional data show that this was, fortunately, just a hiccup – though the decline is not as fast as it used to be. Some musings about models and measurement, starting with a somewhat exasperated Josh Mason: “Economics the discipline is to the economy the sphere of social reality as chess theory is to medieval history: The statement, say, that “queens are most effective when supported by strong bishops” might be reasonable in both domains, but studying its application in the one case will not help at all in applying it in the other.” . And I agree with the next remark: ” One consequence of this is, as I say, that radical criticism of the realism or logical consistency of orthodox economics do nothing to get us closer to a positive understanding of the economy.”. Pointing out that the ‘periodic system’ of economic theory is packed with inconsistencies and unobservables is not enough. We need a fundamentally better system. One way to do this is to look outside the circle of academic economists to the people who measure (macro-)economic variables, the economic statisticians. As it happens, the journal of the USA Bureau of Labour Statistics, the Monthly Labour Review, was established one hundred years ago (it is no coincidence that the battle of the Somme was one hundred years ago, too). Aside: the Review is online and, as the BLS is a government agency, not gated – a fine example of path dependent productivity and mood boosting technology). Read more…
- The UK environmental accounts.
“Energy consumption from renewable and waste sources has been increasing since 1990; reaching a record high of 14.4 million tonnes of oil equivalent in 2014. These sources contributed 7.1% of total energy consumption.Emissions of greenhouse gases have decreased since 1990; peaking in 1991 at 845.2 million tonnes of carbon dioxide equivalent and falling to 608.6 million tonnes of carbon dioxide equivalent in 2014. This is the lowest level since 1990. The amount of material resources consumed (per person) has decreased by 30.4% between 2000 and 2014, falling from 12.5 tonnes per person to 8.7 tonnes per person.The trend of road transport fuel switching from petrol to diesel continued. Between 2013 and 2014, diesel use increased by 3.3%, whereas petrol use decreased by 2.0%. Since 1997, UK government spend on environmental protection expenditure (EPE) has increased from £4.1 billion to £15.4 billion in 2014, and currently accounts for 1.9% of total government spending. Read more…
Should European countries accept free in-migration of people? Hmmm… many countries should focus on the problem of how to totally discourage out-migration.
In many countries the young and well-educated have left in droves because of boom-bust crises followed by austerity, this despite unfavorable demographics. Latvia, Estonia, Bulgaria, Lithuania are examples – but even in Germany the ‘Harz-reform’ of around 2000 was followed by high net out-migration of Germans. States should be applying all macro- and micro-economic tricks to keep the millennial at home (including providing cheap houses)! If there is any countries which should welcome Brexit it are Poland and Lithuania! Read more…
From: Erwan Mahé
” This is why one of the only ways to get out of the current mess is to bring together all the major decision-making states in Europe, including Germany, to decide on a clear-cut stimulus programme, minus the sterile Maastricht criteria.”
Brexit shock. And now what?
All the investment scenarios have been shaken in the wake of the surprise victory of the Leave forces in the Brexit referendum last Thursday. The many discussions I have held with clients since the referendum have focused on the “exogenous” character of the shock, which brought back a whole slew of major risks to the financial landscape. So let’s go over these risks, one by one. Read more…
Brad deLong is right. Economists lack the necessary frenzy about Europe (also starring: le Petit Prince)
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. Read more…
Source: ONS. According to the same ONS: Looking at the estimates by country of birth, between January to March 2015 and January to March 2016:UK born people working in the UK increased by 94,000 to 26.25 million. Non-UK born people working in the UK increased by 330,000 to 5.24 million
Some months ago I was in London. The subway was populated by a mix of Asian looking super models and Polish construction workers. And by the occasional tourist, heading, with his son, 14, to a football game (Westham United – Aston Villa, 2-0). Close to the football stadion (the now deserted Boleyn Park) was an amazing ‘minorities’ market which, according to Wikipedia, was founded more than a century ago by Jewish pedlers and where I saw not one but three kinds of tropical fruit I’d never seen before! Around 23:30, after the game, 5.000 or so lily white supporters of Westham United and Aston Villa walked a mile or so and side by side to the next subway station, as the Upton Park station could not handle the amount of people. The atmosphere was very friendly. Read more…
On the CFR blog Brad Setser has an interesting post about Spain, based upon the Spanish national accounts.. Summary: it is going better but (the volumes of) domestic demand and jobs are still 10% below the 2007 level. And despite a relatively favorable development of (net) exports domestic demand seems to explain about everything, when it comes to employment. Read more…
I was pleasantly surprised by this informed and moderate speech by Mario Draghi (though I do not agree with his suggestion that structural employment is 9,7%…). But then I read Billy Blog about the latest ridiculous nonsense by the European Commission (sanctioned by the ECB) and I was reminded that economic economic insanity lurks, well, not around the corner but has centre stage: “When policy becomes so distorted that nations with rampant deflation and elevated levels of unemployment (particularly youth) are held out as the “best-performing Member States” you know that reality has fallen off the cliff and neoliberal Groupthink is dominant.”
Summary of the blogpost: inflation in EU countries should be close to inflation in what the European Commission and the ECB consider to be the ‘best performing members’, even if this inflation is actually -1,6% (Spain) or even -2,5% deflation (Bulgaria). Billy Blog of course points out that this race to the bottom is incompatible with the official inflation ‘close to 2%’ goal of the ECB, which was recently forcefully restated by Mario Draghi in this speech.
From William Mitchell on Billy Blog:
The EC and ECB 2016 Reports are available as at June 7, 2016:
The ECB (and EC) methodology is as follows:
1. Calculate the annual percentage changes in the HICP for each monthly observation.
2. Average these monthly observations (annual inflation rate) over the period May 2015 to April 2016 which forms the reference period.
3. Select the three nations with the lowest ‘inflation’ rate, which might lead you to think that rate would have to be positive. You would be wrong. The lowest ‘inflation’ rate includes deflation. So in this era of deflation, The ECB and the EC were looking for the nations with the highest rate of deflation as their “best-performing Member States” according to Article 140.
4. Average the deflation rates of these three ‘superlative’ nations.
5. Add 1.5 percentage points to that result to come up with the benchmark for assessing the nations convergence performance to join the euro based on the ‘price stability’ criterion.
But hidden, pretty close to the surface of this arithmetical exercise is the ideology of the political elites that are destroying the prosperity of citizens within the European Union and the Eurozone, in particular.
In an interesting and highly readable recent Bloomberg blogpost Noah Smith distinguishes 4 kinds of macro: coffee-house macro, financial macro, academic macro and Fed macro. I like to add ’empirical macro’, i.e. the National Accounts, but that’s for another occasion as I just ran into a blogpost by Olivier Blanchard and a speech by Mario Draghi which nicely illustrate the differences between two of Noah’s macro’s, i.e. academic macro and what I want to rename ‘central bank’ macro (sorry, Noah!).
Academic macro is defined by Noah as:
“This traditionally involves professors making toy models of the economy — since the early ’80s, these have almost exclusively been DSGE models (if you must ask, DSGE stands for dynamic stochastic general equilibrium). Though academics soberly insist that the models describe the deep structure of the economy, based on the behavior of individual consumers and businesses, most people outside the discipline who take one look at these models immediately think they’re kind of a joke. They contain so many unrealistic assumptions that they probably have little chance of capturing reality. Their forecasting performance is abysmal. Some of their core elements are clearly broken. Any rigorous statistical tests tend to reject these models instantly, because they always include a hefty dose of fantasy.”
And Central Bank macro as: Read more…
Big, listed banks, darlings of the neoliberal establishment, brought Ireland to its knees. Small Irish community banks (credit unions, a volunteer led movement with over 3 million members), while severely affected by the financial crisis, did not only not contribute to the financial crisis but also weathered it, retaining the trust of their members. Mind: ‘members’, not ‘clients’. Via the website of the Irish Central Bank some excerpts of a speech by Registrar Anne Marie McKiernan to Irish League of Credit Unions AGM (and mind that members kept trust BECAUSE they got less dividends during the crisis): Read more…
Is total German consumption really growing that slowly? In a tweet, Erwan Mahé (@ThalersCorner) expressed his surprise and confusion about the slow increase of private consumer expenditure in Germany, despite robust job growth and relatively low unemployment (and sizeable increases of real wages!). I do share his surprise and confusion, but the world starts to make more sense when we do not just look at household expenditure but at ‘Actual Individual Consumption’ (AIC). This broader indicator of consumption increased in fact quite much in Germany, thanks to robust increases in especially services provided by the government (health)! AIC is defined by Eurostat (who also estimates and calculates it) as: Read more…
Is money ‘neutral’? Is it just a veil over ‘real’ transactions? Or does it affect the level and composition of ‘real’ expenditure? Stephen Cecchetti and Enisse Kharroubi recently published an article which in a very net way shows that money (and credit) is non-neutral. It’s not a veil. It’s part of the essence of our economy. The abstract:
“We examine the negative relationship between the rate of growth of the financial sector and the rate of productivity growth. Using a panel of 20 countries over 30 years, we establish that there is a robust correlation: the faster the financial sector expands, the slower the real economy grows. We then proceed to build a model in which this relationship arises from the fact that investment projects that are easier to pledge as loan collateral have lower productivity. As the financiers improve their ability to recover collateral in default, entrepreneurs expect credit to grow more quickly. As a consequence, they choose to invest in more pledgeable/less productive projects, reducing productivity growth. We take this theoretical prediction to the data and find that financial growth disproportionately harms industries the less tangible their assets or the more R&D intensive they are. “
Branko Milanovic gets philosophical about productive and unproductive labour. Is a dentist productive? A soldier? A lobbyist? Seen from the angle of national accounting such questions, important as they are, are beside the point as these accounts aim to gauge total income and all labour which yields an income (wages, profits, whatever) is considered to be productive. As it enables people to gain an income… People work for the money, even when they are protecting the environment. Which does not mean that the composition of production is not important. Of course it is. And according to Eurostat more and more people work to prevent even more environmental degradation (graph). Think: solar cells, wasste water treatment and comparable activities. This adds to GDP and income. And to a better (or at least: less bad) environment. The point: we are measuring this, using the national accounts (among other statistics). Which is a good thing. Aside: Eurostat defines these activities as: Read more…
Donald Trump is right and wrong about unemployment. He’s right that 20% unemployment is a f*cking shame and calls for action. A fact not acknowledged by (neoclassical) economists, who for Europe calculate ‘equilibrium’ unemployment (NAIRU, see this post by Lars Syll) in countries like Spain to be higher than 20%.These official (!) estimates are beyond ridiculous! Small wonder that people flock to politicians like Trump.
Trump is however wrong to state that USA unemployment is 20%. Read more…
Slave labour is still part of some global value chains. Chocolate is an example. It can be shown and measured that in such a case but also in other cases increases in trade can actually lower production and income for countries lower in the chain. Take cocoa farmers who are forced to use extensive imported inputs. But can trade however also be beneficial for suppliers? Alternatives are possible. Chocolonely – an extremist, perfectionist, consumer and producer oriented as well highly succesful producer of slave free chocolate – tries to show this is possible. Using the latest production technology and marketing gimmicks. From the annual report (which contains much, much more information which, by the way, makes you doubt the wisdom of TTIP treaties):
Principle: Follow the cocoa bean
Traceability is an essential step in order to generate real and lasting impact. Almost no chocolate brand in the supermarket knows exactly where, how and by whom their cocoa is produced. And that’s crazy, because it holds true for the vast majority of certified and sustainable cocoa. Read more…
Via June Sekera and the Public Goods Post website (see also below). This post is of course USA centered, but I’ll be glad to put up comparable posts for other countries. Ideas anybody?
“The 2016 Samuel J. Heyman Service to America Medal finalists were announced this month. As described recently in The Washington Post, these medals honor civil servants who have performed breakthrough work in the public sector, resolving formidable challenges to public well-being. You are likely familiar with these challenges. Especially as they impact public health and the environment, they have made national headlines. But you probably have not heard about how a problem was solved or a public need met, because solutions are not considered newsworthy. For many of the public workers on this list, their contributions are being recognized for the first time. ….”
SELECTED 2016 FINALISTS
Dr. Burke Healey Department of Agriculture
“Halted the spread of the largest animal disease outbreak in U.S. history, an avian influenza virus that threatened human health, the poultry industry and the jobs of 1.8 million people.”
Background Avian Flu Outbreak Takes Poultry Producers Into Uncharted Territory | NPR
Thomas A. Mariani, Jr., Steven O’Rourke, Sarah Himmelhoch Department of Justice
“Secured a record $20.8 billion legal settlement against BP Read more…
Timo Boppart and Per Krusell have written an interesting but flawed article about the long run decline in the average hours worked. As they do not account for changes in involuntary unemployment and do not even seem to know the concept they are led to an understanding of their (interesting!) data which is at odds with reality Read more…
The problem of the 720.000 Palestinians who fled their homes in 1947 has not yet been solved (understatement). Should the way these refugees were and are treated however become the template for how we treat the Syrian refugees? The Economist gives an answer. No.
From The economist
Unaccompanied children are the neediest kind of refugee
In 1939, at great personal risk, an English stockbroker rescued 669 Jewish children from Nazi-occupied Czechoslovakia. Nicholas Winton travelled to Prague, helped the children onto trains and battled with his own country’s bureaucrats to have them admitted to Britain. Among those he saved from the gas chambers was Alf Dubs, now a Labour peer, who is pressing Britain’s government to grant asylum to refugee children in Europe without their parents.
He has met stout resistance. On April 25th the House of Commons, including nearly all MPs from the ruling Conservative Party, voted against Lord Dubs’s proposal to admit 3,000 of these children. Read more…
One of the problems with the present Irish upswing is the curious case of the missing money. Economic growth (estimated at 7%) may be somewhat cosmetic (look here) but employment and consumption have been increasing at a brisk rate, too. Which is, also considering the upswing in house prices, remarkable as Irish households are deleveraging and rapidly so, while companies are not really borrowing, according to the Bank of Ireland. Total loans owed by non financial companies behave slightly erratic but are still lower than in 2012.This runs counter to ideas about balance sheet recessions: deleveraging should lead to less consumption and investment. So, where does all the money come from? Trade credits. See graph 1 (the flow of funds data from the Irish central bank show that this increase went on at least until the third quarter of 2016 and possibly even at a faster rate). Irish companies are accepting ‘promises to pay’ from their customers as a (legally binding) means of payment, therewith pulling themselves and the Irish economy out of the morass.
- A very dense and very long 2013 speech by Joseph Stiglitz: A Revolution in Monetary Policy: Lessons in the Wake of the Global Financial Crisis. Quote: “Thus, I take strong issue with Bernanke who has tried to suggest that there was nothing wrong with standard macroeconomic and monetary theory; there were only some minor flaws in its implementation.”
- Josh Mason, ‘Only the debt is national‘. The economics and accounting of how the Mobutus of the world and banks like Anglo-Irish succeeded in borrowing abroad, siphoning off the money for private gain and socializing the debt. Quote: “Financial commitments create obligations; when circumstances change, sometimes they can’t be met. Someone isn’t going to get what they were promised. In modern economies, the state (often in the guise of the central bank) steps in to assume or redominate claims, to impose an ex post consistency on the inconsistent contracts signed by private agents. But with foreign-currency commitments to foreigners the authorities’ usual tools aren’t available. And just as important, there are other authorities — the ECB in the case of Greece, the US federal court system in the case of Argentina — that are ready to use their privileged position in the larger payments system to enforce the claims of creditors. In effect, while domestic contracts are always subject to political renegotiation, foreign contracts are — or can be made to seem — objective fact.”
- Conference paper by N. Bokan, A. Gerali, S. Gomes, P. Jacquinot and M. Pisani about the ECB flagship ‘Eagle model'(a so-called neoclassical DSGE model). They added a banking sector to the model of the ECB (and call it ‘Eagle Fli’…). Yes, right, it was only in 2015 a banking sector was added to the flagship model of the European Central Bank… As in this model the government still creates all the money, while in reality the banks create most of the money (and the ECB is even phasing out the 500,– bill) these central bank economists still have some way to go. But at least they gave it a try; the original ECB New Area Wide Model (precursor of the Eagle model) model of the ECB did not even have money in the model…
- The chapter about DSGE models in the 7th edition of Mankiw economics textbook starts with the next William Bragg quote: “The important thing in science is not so much to obtain new facts as to discover new ways of thinking about them“. Wrong. The PhD thesis of Benjamin Hav Mitra Kahn, ‘Redefining the Economy’, clearly shows that students of famous economists which taught us to think in another way about the economy, like Alfred Marshall, went on to redefine economic statistics to find new facts. Keynes was an exception: he himself guided this process. Mitra Kahn does not mention Veblen, his student Wesley Mitchell became head of the NBER, his student Morris Copeland conceived the flow of funds statistics and his student and friend Isador Lublin became head of the Bureau of Labour Statistics. It’s clearly one of the mayor failings of neoclassical macro-economists that they have not been able to spawn a system of statistics consistent with their models.