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…
The Greek ‘accomodation and food service’ sector last tuesday intentionally insulted the Troika by showing the highest rate of job growth of this sector of the entire Eurozone. Flabbergasted economists in Brussels and Frankfurt were heared shouting “:we’ve never experienced anything like this” and “this ruins our reputation as serious economists”! According to anonimous sources they even stated: “this has to stop, these cheaters do not play according to our rules and are giving us the finger!” as well as “don’t you understand it, a demand led recovery in Greece flies in the face of our models, that just can’t be”.
Is the Greek economy inflexible and unable to create jobs? Not really. The rebound (and more) of tourism led, in 2014, to one of the highest job growth rates of Europe, demand led of course. Despite this, unemployment did not really come down… talk about flexibility of labour supply! A case can even be made that the Greek labour market, with its unusual high percentage of self-employed (look here, El is Greece), is one of the most ‘flexible’ of Europe. Unemployment benefits are for instance also quite low, not available for the self-employed and for a short time only, a libertarian dream. One of the reasons for the sheer depth of the Greek crisis may exactly be this flexibility and the lack of automatic stabilizers: the paradox of flexibility. Income of employees declined with about 32% during the crisis (graph 1), much more than in other program countries (and mind that disposable income declined even more!). But, even more unusual and contrary to the situation in other program countries, ‘operating surplus (gross profits of companies) and mixed income (of the self-employed)’ declined about as much (28%) as total income of employees, while aside from a temporary dip in Ireland it stayed about level in other program countries (graph 2). Read more…
In the four quarters 2013-IV to 2014-III (more recent data are not yet available on Eurostat) the Greek government deficit was smaller than the Dutch and Finnish deficit and about half as large the Irish and Portuguese size. Mind that the Dutch and the Finnish governments love to lecture the Greek. As, in 2014, the Greek real economy grew with about 0.5% but the country also experienced, in line with the austerity plan, 2.6% deflation, nominal GDP contracted with 2%. Which means that the country needed a government surplus of about 4% just to keep the debt to GDP ratio stable… Despite this, it still is the case that Greece decreased its government deficit (excluding transfer incomes to banks) more and faster than Spain, Portugal and Ireland. It seems that, to obtain Troika funding, it does not matter what you do. Just tell them they are right.
Although Mr Van Overtveldt says he agrees with Mr Varoufakis that the Greek programme has been a “failure”, he believes authorities in Athens are to blame — not creditor countries.
“It works in Spain, it works in Portugal, it worked in Ireland,” said Mr Van Overtveldt. “But then it does not work in Greece, because the Greek authorities have not done what they needed to do, not across the board.”
“Don’t blame it on ‘the institutions’,” he added. “It is not the programme, it is the execution.”
But he is wrong. Austerity consists of a supposedly magic tonic of wage cuts and less government expenditure plus less rights for labor which has to lead to a lower price level which will somehow solve the unemployment problem. Greece implemented such policies much more successfully than other countries: after 2008 the cost price of government consumption (education, the police and comparable services) went down more than in other program countries (graph 1). But it did not work…
Mintzberg, a writer of management books, is one of the most influential post war economists. His work easily passes the heterodoxy test – as he looks at the real world. An example:
What could possibly be wrong with “efficiency”? Plenty.
10 October 2014
Efficiency is like motherhood. It gets us the greatest bang for the buck, to use an old military expression. Herbert Simon, winner of one of those non-Nobel prizes in economics (more on that in a later TWOG), called efficiency a value-free, completely neutral concept. You decide what benefits you want; efficiency gets you them at the least possible cost. Who could possibly argue with that?
Me, for one.
I list below a couple of things that are efficient. Ask yourself what am I referring to—the first words that pop into your head.
A restaurant is efficient.
Did you think about speed of service? Most people do. Few think about the quality of the food. Is that the way you chose your restaurants?
My house is efficient.
Energy consumption always comes out way ahead. Tell me: who ever bought a house for its energy consumption, compared with, say, its design, or its location?
What’s going on here? It’s quite obvious as soon as we realize it. When we hear the word efficiency we zero in―subconsciously―on the most measurable criteria, like speed of service or consumption of energy. Efficiency means measurable efficiency. That’s not neutral at all, since it favors what can best be measured. And herein lies the problem, in three respects:
- Because costs are usually easier to measure than benefits, efficiency often reduces to economy: cutting measurable costs at the expense of less measurable benefits. Think of all those governments that have cut the costs of health care or education while the quality of those services have deteriorated. (I defy anyone to come up with an adequate measure of what a child really learns in a classroom.) How about those CEOs who cut budgets for research so that they can earn bigger bonuses right away, or the student in last week’s TWOG who found all sorts of ways to make an orchestra more efficient. This week, on the news in Canada, we are hearing about railroads that are determined to be more efficient, while overworked engineers are reporting that they have been falling asleep at the switch. Very efficient this.
- Because economic costs are typically easier to measure than social costs, efficiency can actually result in an escalation of social costs. Making a factory or a school more efficient is easy, so long as you don’t care about the air polluted or the minds turned off learning. I’ll bet the factory that collapsed in Bangladesh was very efficient.
- Because economic benefits are typically easier to measure than social benefits, efficiency drives us toward an economic mindset that can result in social degradation. In a nutshell, we are efficient when we eat fast food instead of good food.
So beware of efficiency, and of efficiency experts, as well as efficient education, heath care, and music, even efficient factories. Be careful too of balanced scorecards, because while including all kinds of criteria may be well intentioned, the dice are loaded in favor of those that can most easily be measured.
By the way, twitter is efficient. Only 140 characters!
Herbert A. Simon Administrative Behavior: Second Edition (Macmillan, 1957, page 14).
This TWOG derives from my article “A Note on the Dirty Word Efficiency”, Interfaces (October, 1982: 101-105)
In Europe, we are wasting time. Varoufakis tries to break the deadlock: the continent is awash with money but, despite record low-interest rates investment rates are low. In a very well written speech he proposes a solution, based on the ‘Modest proposal’ by Holland, Galbraith and Varoufakis. The sting in the tail: there will be another undemocratic ‘federal’ institution, an investmentbank, backed by the ECB. Maybe this institution might, to an extent, make up for the lack of fiscal policy on the Eurozone level, at least by restoring part of the monetary transmission channel, i.e. provide a level playing field when it comes to financing projects in the different countries in the Eurozone. While it might also make up for the present lack of government investment in at least some countries. And it might make the present, asset price increasing, kind of QE superfluous. My idea: the European Parliament will have to get large supervisory powers over this bank. An excerpt: Read more…
Yesterday, as part of an attempt to raise the level of discussion about the Eurozone problems, I spent the better part of ten minutes to download a 98 page Excel-file from Eurostat containing data about the last sixteen years of European Union macro economic history. It turns out that Greece has a surplus of almost 10% of GDP on its ‘international trade in services’ account (among other things: shipping, tourism). That’s a lot by whatever standard and surely when compared with 2% of GDP German deficit. In the EU it is only topped by tiny Malta, Cyprus and Luxembourg. It is caused by the fact that Greece is not only home to one world-class economic sector (tourism) but even to two (the other being shipping), which is a lot for a country the size of Greece.
In quite some Eurozone countries staggering amounts of money have been paid to save bankrupt banks (table, via @cigolo). In Ireland, this amounted to about € 40.000,– per Household, in Greece to 17.000,– and in Spain to 3.000,– . Which includes unbanked households, households where every adult is unemployed and, in Spain, the 70.000 households which faced a ‘certification of a foreclosure begun’ . And there are quite some households where every adult is unemployed, in countries like Spain and Greece which face unemployment rates of 23 and 26%. Paying back this money of course depresses the economy as it’s not recirculated. At the same time, in Cyprus the Troika pushes for mass evictions based upon a creditor centered valuation system which will not only cause social harm but which also lower asset prices. That’s what debt deflation looks like. Read more…
1) The latest from Josh Mason: Disgorge the cash. He states that, according to mainstream theory, wealth owners don’t care about the liquidity of their wealth. Money or equity in their own company, it’s all the same. In reality, however, they do. He shows that rentiers love money. And they want it now. As a consequence,
The Federal Reserve has certainly succeeded at making it cheaper for corporations to borrow, and in the postwar decades, when today’s policy consensus took shape, abundant credit would have offered strong encouragement for higher investment. In that context, it made sense to think of credit as the “gas pedal” or “thermostat” of the economy, which the central bank could raise or lower at will. But in the financialized economy, the link between credit availability and real production and job growth is much less reliable. Today, rentier-dominated firms use cheaper credit primarily to boost dividends and stock buybacks. This means there is no longer a strong link between real spending and corporate borrowing. This is a serious problem for monetary policy, since it is this real spending that boosts GDP and employment. Without a strong link between financing and investment, it is more difficult to use lower interest rates to raise employment and wages. To the extent the policy is effective, it must rely more on the few sectors of the economy where real activity remains interestsensitive — most recently, the housing sector. And the costs of responding to all demand shocks by inducing offsetting swings in housing-related borrowing are now all too apparent.
1) Alex Tabarrok discovers the limits of profit seeking behaviour and the marketization of the government. Join the club.
2) His findings are related to this Voxeu post by Victor Kümmritz about Global Value Chains (i.e. the international division of labour and production processes). It’s not just about ‘equal trade’ between companies, but about a brutal power struggle between countries, too. In the gentler wording of Kümmritz:
These new findings lead to two conclusions for policymakers.
- Firstly, integrating into GVCs is a sound strategy. Interacting with global production networks can improve productivity and lead to spillovers for the domestic economy, as successfully shown by a large set of middle-income countries (e.g. Czech Republic, South Korea).
- Secondly, the materialisation of these gains is not guaranteed [e.g. the Baltic states, Greece M.K.]. New entrants need to ensure that they have a good institutional environment that incentivises foreign firms to source inputs locally and to outsource a growing share of their production.
Did poverty rapidly increase in countries like Greece? Yes, according to Eurostat data. The poverty level in Greece is after steep increases at the moment the highest of any non-Eastern European EU country. Indices of ‘material deprivation'(see below) also show steep increases in Hungary as well as (albeit at a lower level) in Italy, the UK and Spain. In the Baltic countries comparable increases could be witnessed, though levels are going down at the moment. Poland, close to the Baltic countries and having a somewhat comparable economic history, did however not witness any kind of ‘Baltic’ increase. Remarkably, the level in Iceland, which also experienced a financial crisis but which pursued a less creditor friendly policy, did not increase.
A Cyprus style money destruction ‘solution’ for Greece is still in the cards – and I’m afraid that the continued monetary inaction of the ECB brings it closer. One might cry ‘moral hazard’ about guaranteed ‘Emergency Liduidity Assitance’ (ELA, or QE which actually works) from the ‘Eurosystem’ to the Greek banks but on this blog we did warn about the dire consequences of ECB inaction in 2011 and 2012. And we were right: these consequences – increasing deflation and crisis, higher debts compared with income – materialized and the ECB has to face its responsibilities for its inaction. Mind that, at this moment, Greece has a surplus on the current account and a primary government while it leads the other austerity countries by a lap when it comes to cutting wages, employment and entitlements and reforming the labour market. It did do its austerity homework (which is of course why its economy is in tatters). Be that as it may: until the ECB comes to its economic senses the already gasping Greek economy is increasingly smothered. And Greece will have to do a ‘Münchhausen’ to pull itself out of the monetary mire. Which is not entirely impossible, though the banks won’t like it. See graph 1.
A relatively quick short- as well as long-term fix is to increase the ‘moneyness’ and liquidity of ‘receivables’. Irish companies managed, compared with Spanish companies, to mitigate the Irish liquidity crunch by increasing the amount of receivables on their balance sheets (remember, interest rates are very low, which helps). In the end these debts have to be paid but a monetary easing of 70% of GDP, as in the Irish case, would not be bad, in Greece. The Greek government can increase the moneyness of ‘receivables’ by moving them up in the bankruptcy pecking order (they will have to get preferential treatment compared with bank debts), by enabling companies to use them (with a ‘haircut’) to pay tax arrears, by using smart technology and algorithms to enable ‘clearing’ (a matching problem). This increase of moneyness will also increase the asset value of receivables, which will make Greek companies more willing to keep them on their balance sheets.In the end, Euro’s will still be needed, but that’s why ELA was invented.
Since 2007, the increase of the wealth of Dutch pension funds has been much larger than the value of the entire government debt. The Dutch are however still cutting pensions as the ‘risk free rate’ used to discount future obligations is decreasing. Between 1992 and 2014, average return on investment was a whopping 7,9%. In the future, this will be quite a bit lower (Back of the envelope: lower inflation:-2%. Lower increase of population: -0,5% Lower economic growth: -0,5%). The ‘risk free rate’ (which is hardly risk free, as it changes all the time) is however supposed to be 1,9% – while the real rate of return in 2014 was 14,5%….The point is that many households or building corporations (who, in the Netherlands, own a lot of houses), are eager to re-finance their mortgage and loans with a 3% new loan (which is about 50% higher than the 1,9% rate). No, that’s not risk free either. But helping households to refinance might be a less risk strategy, in a macro-economic sense, than cutting pensions. Read more…
Minimum wages in European austerity countries: Greece is different (but not as you are made to expect)
In Januari 2015, Germany introduced a new economy wide minimum wage of Euro 1473,–, about the same level of the Irish minimum wage and slightly higher than the French level. The mimimum wage in Greece is 684,–, considerable higher than the 390,– Estonian level but clearly below the 757,– Spanish level. See these Eurostat data. The Eurostat statisticians point out that Greece was the only country to decrease its minimum wage between 2008 and 2015 (-19%). It is interesting to compare Greece with other austerity countries, which are supposed to be a shining example for Greece. Lowering the minimum wage is clearly not a silver bullet when it comes to job growth. Read more…