Schauble, the German finance minister, did it again. In the New York Times: distorting the facts using a mixture of ignorance and misunderstanding to push an ideological agenda. The finance minister of Germany is clearly is not only the man who kicks the can down the Autobahn by postponing badly needed government investments. To be more precise: who kicks this can towards the banks by (1) postponing investments (2) demonizing any kind of government deficit and (3) at a time when the German state has to pay 0% interest rate, tries to outsource financing of the badly needed maintenance investments to a private/public corporation which has to pay much higher interest rates than the state, did not know his facts. Pub quiz question: which party (the government or the banks) will, according to the present plans, bear the risk of these investments…
Schauble also is – and will be remembered as – the man who wrote inconsistent and wrong, not fact checked nonsense in the New York Times. This newspaper is famous for its fact checking but this opinion piece by a foreign finance minister seems to have slipped through.
* Inconsistent as he states that he despises debt financed spending. But at the same time he accepts that German banks and companies lend tens and even hundreds of billions of euro to counterparts in other countries – to quite an extent to finance spending. The housing bubbles in Spain and Ireland really were related to the German (and Dutch) current account surplus, the Euro and financial integration and all that!
Source: Eurostat, national account series.
* Wrong, Read more…
Look here for part 1 of this series, about money. Today: market fundamentalism. The posts are supposed to be succinct, to look at the issues from the angle of the economic statistician.
Today: market fundamentalism.
There are, in my view, three main strands of market fundamentalism in DSGE-macro models:
1) The idea that market prices are ‘optimal’, especially when we’re in equilibrium (whatever that is)
2) The idea that non market production, especially government production like lots of education or health care, is essentially worthless
3) The idea that markets are not just very dynamic and creative (which surprisingly does not seem to be very interesting to the DSGE economists) but that a market system leads to some kind of optimal general equilibrium or (taking the models at face value) is at least not totally inconsistent with such a situation. Read more…
Labros Skartsis has written a labour of love: “Greek vehicle & machine manufacturers 1800 to present. A Pictorial history“. One would maybe expect a rather thin book – but it isn’t. Skartsis wrote voluminous “tribute to a large number of engineers, designers and entrepreneurs whose efforts could soon be completely forgotten”. The tone of the volume is, understandably, somewhat desperate. Since 1981, when Greece entered the European Union, the history of Greek manufacturing is mainly a history of decline. Despite this, the book shows that Greece does have an engineering and designing tradition, even though the Greek themselves seem to be pretty indifferent about this. And even when manufacturing in Greece is finally, after almost seven years of fast decline, rebounding at least a little (graph).
Skartsis poses the question why Greece isn’t more of a manufacturing powerhouse, despite the significant tradition. According to him this is not caused by a high wage level but by lack of a manufacturing culture and manufacturing oriented policies. His introduction: Read more…
On this site, we’ve occasionally criticized neoclassical ‘DSGE’ (Dynamic Stochastic General Equilibrium) macro models. Time for a round-up (comments welcome). This succinct round-up will not be an extensive discussion but will only provide some resources and, important, pay explicit attention to economic statistics which, as a rule, are conceptually much more consistent with Post-Keynesian and sometimes classical and Austrian economics than with neoclassical ‘macro’. I’ll use the next taxonomy to do this:
* Land, Labour, Capital
* Interest and portfolio’s
* Market fundamentalism
Update: because of comments the next items are added:
* The intertemporral government budget constraint
Money. The way Eurozone statisticians estimate ‘money’ can be found in this older 1999 ECB manual, which is consistent with the way Japanese, British or USA statisticians estimate ‘money’ as well as with newer manuals, which however do take recent institutional changes into account (shadow banking). Read more…
And another German economist did not bother to check the data. According to Ekhatimerini,
Additional Eurozone assistance to indebted Greece is dependent on Athens improving the state of its finances, German central bank executive Andreas Dombret said in Johannesburg on Friday. “Further assistance can only be granted to Greece if it applies sound public finances.
According to the facts (Eurostat, four quarter rolling average), the Greek government deficit is not only much smaller than the Spanish deficit but also smaller than the Dutch deficit. And the decline of the Greek deficit was 1,5 times as large as the Spanish and the Dutch decline combined…
Spanish job growth in 2014 was high in a comparative as well as in a historical perspective (graph 1) and, after the ‘Great Depression’ sized decline in employment caused by the financial crisis and the housing bust, of course very welcome (source: Eurostat). Job growth seems to be fairly balanced. Manufacturing (including utilities) and the ‘broad’ government sector (including health and education, which, though partly private, are always and everywhere heavily influenced by public arrangements and finance) added about 100.000 jobs (graph 2). The big winner was the leisure sector (tourism, hospitality, recreation, arts etcetera). Agriculture did bad. Will Brussels agree with an increasing number of ‘broad government’ jobs? According to neoclassical macro models popular in Brussels and Frankfurt, government health and education jobs add nothing of value… Read more…
The post 2008 decline of Macro Nominal Unit Labour Costs (NULC) in Ireland was not caused by austerity of wage restraint. It was caused by the housing bust (source: Eurostat, CBS). Which can’t be explained by neoclassical macro models. But which can be explained by simple arithmetic.
The bust led to the almost complete (from the top of my head: -93% at one point!) demise of ‘high NULC’ housing construction, which caused a decline of average macro NULC in Ireland – even when average wages did not change…. But this is not the only problem Read more…
One of the marked characteristics of modern times is the decline in average hours worked (graph, via Henk de Vos). But: beware! There is more to averages than meets the eye which, for students of economics, is more important than the latest fad about regressions and statistical significance – this is about contentional significance.
When real male wages started to increase after about 1880 (very large international differences, but the decline of grain prices after about 1880 boosted the process) female labour market participation first decreased, Read more…
In this post Robert Parenteau and Trond Andresen propose a parallel currency for Greece. Here some snippets from the thread. Introductory remarks:
1) An effective tax system is crucial to the new system. Making the tax system more effective (and just) is top priority of the Tsipras government, as is clear from ‘the list‘. This is at the moment obstructed by the Troika.
2) The government of Iceland has published this immensely readable tract on monetary reform (great teaching resource!) which is, from Soddy and Keynes to Werner and Huber a good overview of how scientific economists think about money. And an analysis of the immense failure of ‘private’ banking in Iceland and the changing nature of the money-inflation nexus.
The snippets: Read more…
I’ve read the list with the Greek reforms.
1) It’s so much better than the Cyprus ‘save the creditors and abolish the siësta‘ Memorandum of Understanding
2) one recurrent theme: we’ll stop the looting of the state (tax evasion, a more efficient government, no fire sales of government property etcetera, implementing already introduced (tax-)laws, finishing the cadastral survey, more efficient and honest banks, a more targeted system of welfare).
3) Doing business will become a little easier
4) The weak and vulnerable will be protected a little better – in the end at the detriment of the creditors. THIS IS ABOUT MALNUTRITION AND EVEN HUNGER, AND HEALTH CARE FOR POOR CHILDREN. Time has already run out on this one.
Point 4 will of course make the list hard to swallow for Brussels.
1) On the Slack wire blog Josh Mason states, in a post about how restraining domestic demand led to current account surpluses in Europe (emphasis added): “Personally, I don’t think that the masters of the euro care too much about the outcome of the struggle for competitiveness; it’s the struggle itself — and the constraints it imposes on public and private choices — that matters. But insofar as the test of the success of austerity is the trade balance, I suspect austerity can succeed indefinitely“.
2) About these constraints: Schauble, the German minister of finance, blocks endeavours of the European Investment Fund to issue bonds and raise money to lend to small and medium enterprises in southern Europe, companies still have to pay interest rates which are way higher Read more…
1) Amazing companies, sustainable ice cream edition.
On the upside: Ben and Jerry’s is an ice cream company owned by Unilever. They use milk produced by CONO, a farmers cooperative in the Netherlands. CONO is owned by about 600 farmers and has developed, together with Ben and Jerry’s, the ‘caring dairy‘ concept, a sustainable production concept based upon scoring multiple dimensions of eleven sustainability indicators (soil, erosion, fertilizer, water, profit, family, the local economy, energy, animal welfare, biodiversity, sustainable crops). CONO members who take part in the program get more for their milk and take part in a program which continuously searches for ‘best practices’ and helps farmers to introduce these best practices. This works.
On the downside: not all CONO members like the lack of independence inherent to the program (CONO is sensitive to these critiques, by the way). It can be understood as a case of ’empire’ as described by Wageningen University professor Jan Douwe van der Ploeg, the new way to control labour as well as capital which takes part in global value chains: Read more…
The graph below shows that Italy might have serious labour supply rigidities, in this case defined, operationalized and measured as discouraged ‘unemployed’. But Greece? Forget it.
Considering the level of ‘normal’ unemployment in Greece – an unprecedented 25+% – one of the indicators of broad unemployment (people available to work but not seeking, not counted as ‘normal’ unemployed) is surprisingly low. Normally, one would, considering the level and tenacity of Greek unemployment, expect that many unemployed would just quit searching for a job – but not in Greece! Italy, however, Read more…
The latest ECB Economic Bulletin states: “In Portugal, the 2009-13 reforms have already raised the levels of productivity and potential GDP. According to OECD estimates the reforms will have resulted in a 3.5% increase in these variables by 2020″. This quote, from an article titled “Progress with structural reforms across the euro area and their possible impacts”, reminds one of the 1947 Isaac Asimov story about the endochronic nature of thiotimoline, the compound which “will dissolve before the water is added“. I mean – is it 2020 already?
The article is profoundly researched when it comes to neoclassical models – but lacks a proper diagnosis of the present situation and totally ignores even ECB papers which, when looking at the present day situation in the Eurozone in a serious way, produce results which makes the neoclassical view of events crumble. Read more…
1) Do we know how rich we are? One of the problems with the (invaluable) work of Piketty is how to value assets. GDP accounts basically use transaction prices – but many assets are not traded and we have to use other values or prices like book value, assessed market prices, rebuilding value or something like that. Think of the valuation of natural reserves of oil or dikes (the discounted value of assessed future streams of income is not used by statisticians, as this measure is too fickle – if measurable at all, as in the case of dikes). This means that assessed asset values can be quite volatile – as shown by the estimated value of Dutch net international assets (graph) – using another assessment method of the stock value leads to a 100 billion difference – even though estimated current account surpluses (a flow) stayed basically stable. Not that despite decades of current account surpluses in 2008 the Netherlands had a negative international investment position (the ‘Dutch black hole’, caused by bad investments…). The large change in the net position is also caused by the fact that it is… a net position. A relatively small change in total assets or liabilities can show up as a relatively large change in the net position. Even then, 100 billion is a lot…
Troika economists have a problem. It’s huge: cutting wages clearly did not work as intended, which goes against their deepest convictions. In such a situation people tend to rationalize. To quote Goethe: “intelligent people are sharpest when they are… wrong“. Some recent publications enable us to investigate the rationalization process of among others ECB economists. One of these is a Voxeu piece by Eric Bartelsman (head of the department of economics of the Vrije Universiteit van Amsterdam), Filippo di Mauro (senior advisor in the research department, ECB) and Ettorre Durucci (head of the convergence and competitiveness division, ECB) which clearly shows that cutting wages did not work as intended (see their figure 1). How did they cope with this?
Figure 1. Relative prices and activity in selected Eurozone countries (change between the year of the ULCT-deflated REER peak and 2014 projected)
Figure 1 shows that
* As a consequence of austerity the ‘Real Effective Exchange Rate (REER)’ of countries like Spain, Ireland, Greece, Latvia and the like declined a lot (i.e.: exports became much cheaper). This was totally intended.
* But this did not lead to the expected increase in net (!) exports Read more…
1) Simon Wren-Lewis looks at the facts and finds that The UK prime minister lies about Greece. The truth:
“The real travesty however is in the implication that somehow Greece failed to take the ‘difficult decisions’ that the UK took. ‘Difficult decisions’ is code for austerity. A good measure of austerity is the underlying primary balance. According to the OECD, the UK underlying primary balance was -7% in 2009, and it fell to -3.5% in 2014: a fiscal contraction worth 3.5% of GDP. In Greece it was -12.1% in 2009, and was turned into a surplus of 7.6% by 2014: a fiscal contraction worth 19.7% of GDP! So Greece had far more austerity, which is of course why Greek GDP has fallen by 25% over the same period“.
2) Norbert Häring looks at the facts and finds that the ARD (German television) lies about Greece (In German, a whole list of inaccuracies, outright mistakes, wrong data and dishonest reporting)
3) Bill Mitchell goes the additional theoretical and empirical miles to take down a crucial austerity document from Brussels. The truth: lowering wages did not work anymore once everybody started to do this (and not just Germany).
Soon, I’ll write a little about ‘inside the neoliberal mind’. To be able to do this I have to establish my credentials: no, I’m not just an armchair economists but also do know a little about lots of real life companies (largely thanks to the internships of my students) and I will blog about these so now and then. Lots of these companies are truly amazing and worth telling about. Not all companies are amazing – but I tell my students that even crappy ones are survivors which in a competitive economy is quite an accomplishment.
A) Meet Avonturia. Even a pet shop can be an experience. A constructionworker became disabled which made him turn his hobby -birds- into a living. His sons wanted to join this trade – which meant that they had to expand. The options: three large ‘normal’ pet shops at an A location – or ‘Large and Loony’, i.e. Avonturia Their secret: push it to the limit: inside the shop they have a ‘brasserie‘. Which has the best tea bar I’ve seen in my life. In a pet shop… Also: Schulp fruit juices, again the best. Like the whole shop, including this. Read more…
The most famous Keynes quote is no doubt:
“But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again.”.
But ECB economists clearly do not grasp the wisdom of these words. I was reading the recent ECB document: “Progress with structural reforms across the Euro Area and their possible impacts“. I’ll write more about this. For now: after seven years of continuous decline and/or deflation of the Greek economy and an about 25% contraction the ECB economists dare to state (based upon a 2013 IMF report):
“A number of structural reforms were implemented in Greece. The IMF estimates that policies which close roughly half the gap in product and labour markets with the rest of the euro area – which seems to be what Greece achieved … according to changes in the OECD’s product market regulation (PMR) and employment protection legislation (EPL) indicators – could raise real GDP by about 4% after five years and by 10% in the long run.”
About these reforms: the article shows that of all Eurozone countries Finland scores about the highest when we look at ‘product market regulation’ and ’employment protection legislation’ (‘high’ meaning: approved by neoclassical economists). That’s the template for Greece! But it seems that for Finland, too, the tempestuous season still hasn’t ended…. (graph).
I do think – but in this case my opinion is humble, as I did not talk with Greek business owners – that Greece should make doing business and more reforms and changes are welcome, like finally completing the cadastral survey. But this alone won’t solve the problems. Not anytime soon. And not in the long run, either.
A long post from Erwan Mahé – but immensely readable. It shows how ideas from academic scribblers (especially about the nature of money and (un)employment) directly guided central bank discussions and policies in a crucial period (some articles are even explicitly mentioned by Yellen!). Don’t forget, however, the anonimous data produced by economic statisticians, which with their strengths, weaknesses and unavoidable biases guide policy too. In the end it’s about wich theory is, at a central bank, used to understand this data. MK. Read more…