Times are crucial for Europe. It will either disintegrate or find a new political constitution. Below, something about the efforts of the ECB to prevent disintegration of at least the price level (and probably much more…)
From: Erwan Mahé
I am still working on my paper on QE, following the wonderful reading of 3000 pages of the FED 2010 meetings transcripts, so a very short piece today, because Draghi’s speech this morning looks like it had a ‘secret’ message in it. In fact, just a copy and paste of what I just sent to my customers by …, but this seems important to me.
After careful reading, I wonder if he is not preparing to modify the country allocation key of the APP…
Full Excerpt for the context (my emphasis):
Expanding the stance
The second, specific challenge we have faced in the euro area has come when we needed to expand our monetary stance – specifically, when we shifted from interest rates as the main instrument of monetary policy to asset purchases via the APP [asset purchases program, M.K.].
In part, large-scale asset purchases aim at reducing the risk-free rate by taking out duration from the market for sovereign bonds. In the euro area, however, we do not have a single risk-free rate since we do not have a single fiscal issuer that acts as a benchmark. And there is no national market which could act as a substitute, not only due to volume constraints, but also because no government security in the euro area is truly risk-free. The prohibition on monetary financing means that every sovereign bond carries a degree of credit risk. Read more…
David Sloan Wilson has an interesting blogpost about modern evolutionary theory and economics in which he compares the ideas in a highly intelligent 1996 speech about this by Paul Krugman with subsequent developments in evolutionary theory. It reminds me a little of the early twentieth century ideas of Kropotkin (see this post on this blog): “Kropotkin … noticed that groupings of species thrived through cooperation. Researching human settlements in Siberia, Kropotkin likewise noted cooperation and mutual aid as the foundation for dealing with the larger struggle for survival against natural challenges.”
Let’s revisit Krugman’s four components of economics in the light of these developments in evolutionary theory.
1) It’s about what individuals do. “Methodological individualism is of the essence”. Not any more. Read more…
Graph 1. Unemployment in France (Eurostat)
Is the unusual combination of low oil prices, a relatively low exchange rate, less austerity and low interest rates finally paying off? The European labour market shows some green shoots. European unemployment is going down, which is to a relatively large extent due to rapidly decreasing French unemployment (graph 1). French youth unemployment is not (yet?) going down and women younger than 25 as well as those between 25 and 74 do quite a bit better than men of the same age but on average after July French unemployment has suddenly plunged. Read more…
Should Europe accept more asylum seekers? Let’s restrict the analysis to Germany – as the German situation seems out of political control.
In 2015, not the often stated one million but about 477.000 people applied for asylum in Germany (Bundesamt für Migration und Flüchtlinge, The Economist is one of the rare periodicals/journals who gets this easily checked fact right). Of these, 163.000 came from Syria and about 145.000 came from the failed states of the Western Balkan (Albania, Kosovo, Serbia, Macedonia, Monte Negro). Read more…
From: Norbert Häring
Presentation by Norbert Häring at the symposium “The ECB – Europe’s unelected government” on 14 Jnauary 2016 at the European Parliament in Brussels.
Ladies and Gentlemen,
What I would like you to do with me today, is to try out a different angle for looking at the ECB and at central banks in general. I will not promise you that you will get the complete picture from this angle, but you might see stuff you have not seen from the usual angles.
From the most common point of view, the ECB looks like a special government entity which wants to promote the interest of the population at large, and does so more or less imperfectly, depending on your attitude. Perspectives differ a bit of course between conservatives and the left. The left would usually accept more inflation to get higher wages and more employment, the right would tend to argue that the general good is served best if inflation is kept low. While disagreement can be fierce, the general angle from which both sides look at the ECB is more or less the same and the ECB’s motivation and nature is not questioned.
This is a major mistake.
Yes, after 2008 we did entered an era of secular stagnation – i.e. depressed demand. Why do I think this? Macro demand consists of household consumption, government consumption, investments and exports. About this:
A) During the last decades, the labor share has declined (graph 1). Source. This leads to lower household consumption. Here more about this. Lowering the share of labor has been official government policy, by the way.
Graph 1. the secular decline of the wage share.
In 2011 there were thousands. In 2012 there were tens of thousands. In 2013 hundreds of thousands. In 2014 millions, mainly in refugee camps in Turkey (2,2 million), Lebanon (1,2 million) and Jordan (1,4 million). Source: Wikipedia. In 2015 these refugees started to wash up on the shores of Europe. Surprise! By the millions. That’s not anything new. The Syrian crisis dislocated 12 million people and is the largest refugee crisis since WW II (look here for a very good WAPO infographic). But it is far from the only one. We’ve seen this before.
And everybody knows the solution: lasting peace in the Middle East. Nobody even talks about it. They will keep coming.
The EU can, theoretically and historically, easily absorb millions of immigrants a year (more about the culture thing below). After WW II, 12 million people or so immigrated to the new, much smaller Germany which enabled the Wirtschaftswunder (though it would take until the end of the fifties before unemployment was really low, this contrary to the situation in some neighbouring countries). But those were not normal times or, more important, this was at that time not a normal country. And today some EU countries are clearly stressed to the breaking point – during the last months of 2015 the number of asylum seekers in Sweden was about 0,4% of the population. Per month. Read more…
At this moment there is quite some talk of ‘secular stagnation’, i.e. the possibility that demand is, considering potential supply, continually depressed. Reasons cited for such a situation are demographics (a large amount of middle-aged people who save too much), balance sheet recessions (private debts are too high and people and companies try to pay them off ), overly high exchange rates, a banking sector in distress or combinations of such factors. In the EU, the ‘Troika’ might be added.
But: does secular stagnation exist? Yes. Read more…
One of the sessions at the conference is titled: ‘Why Labor Is Not Like Broccoli: Session in Honor of Robert E. Prasch III‘ . Robert Prasch, who died in 2015, is famous for publishing an article which analyses the differences between the market for broccoli (or sacks of concrete or whatever) with the most important market of them all (when we look at the number of people engaged and the money involved): the labor market. Differences are, according to him, caused by fundamental points: “1) Labor cannot be separated from its providers. (2) Labor cannot be stored. (3) Labor embodies the quality of self-consciousness. (4) Labor is the one “factor of production” that most of us wish, in the end, to see well compensated”. To understand the significance of this it might be added that even (self-conscious) monkeys go on strike when one ‘earns’ a grape and the other ‘only’ a piece of cucumber. Really. Wages are set according to such standards of fairness too, according to the Akerlof and Shiller ‘Animal spirits’ book.
One of the contributions to the session is by Daphne T. Greenwood, who elaborates such ideas in her paper: “Institutionalist Theories of the Wage Bargain: Beyond Demand and Supply“. Her conclusion:
“In sum, a host of contemporary issues such as the right level for minimum wages as well as growing wage inequality within occupations and educational levels or the ability to raise minimum wages without causing unemployment are better explained by the extended family of institutionalist models. Identifying core principles and propositions is an attempt to make the richer and more complex analysis of wage determination in institutionalist models more accessible to those accustomed to one general model.” Read more…
Two of the papers presented at the ‘Inside Institutions: Feminist Perspectives‘ at the 2016 ASSA conference leave me puzzled. Both have highly interesting topics: the influence of globalisation on the gender gap and even fertility. But both are disappointing. Look here for Alicia Girón and Eugenia Correa (Gender Gaps Post-Crisis: Women Workers, Employment and Precarity), look here for Mizuki Komura and Hikaru Ogawa (Globalization, Gender Empowerment and Fertility).
Let me explain: Read more…
The excerpt below is from ‘The theory of economic progress (1944)‘ by Clarence Ayres. He argues that economists essentially understand capital as a kind of moral or even spiritual concept while they use prices to measure this moral value. He chides them for not paying attention to the difference between the asset and the liability side of the balance sheet and obfuscating the two. Today, his criticism is still valid. The modern scholar might state that his idea that, when it comes to labour, ‘skill’ is neglected is somewhat outdated as economists nowadays use the concept of ‘human capital’.
But it does seem that the ‘dignity of work’, mentioned by Ayres as a core moral concept of economists, gets less attention from economists than in 1944?
The identity of these two processes of capital equipment with capital funds has never been established by any specific demonstration. It is rather implicit in the whole way of thinking which has been traditional in economics, and in this tradition it has been assumed rather than discovered or demonstrated. As Professor Fetter pointed out, it was assumed before the classical system of ideas was formulated and is one of the basic assumptions of that intellectual system. This is the assumption of the creative potency of funds. It finds expression in two forms: in what Veblen used to call “conjectural history,” and in the analysis of production. Nearly all economic writers have indulged at some time or other in chapters on “the progress of opulence” in which they have in imagination represented the accumulation of “wealth” as proceeding and conditioning industrial development, and professional historians have taken their cue and done their best to discover the sources of the (conjectural) funds which, supposedly, made later industrial development possible. These efforts have been notably unsuccessful, so that economic orthodoxy has never been able to cite history to its purpose at all extensively or with any great force of conviction. Nevertheless the historical assumption remains as a challenge to any other way of thinking to show how on any other basis Western society could be conceived to have developed as it has. Fortunately there is a profusion of evidence with which to meet this challenge. Read more…
According to Friedrich Hayek markets
are based upon rules and habits and a culture. And it is, considering ingrained habits and the established culture, quite difficult to establish which rules are best. Harry Trebing was good at this and one of the sessions at the 2016 ASSA conference is titled: “Institutions and the Public Interest: Session in Honor of Harry M. Trebing“. Read more…
At the 2016 ASSA conference David Gabel has a paper about competition between taxi’s. What I like very much about it is how he shows how seemingly trivial details have a decisive influence on market power (which on a ‘deeper’ level indicates that regulating markets is a very daunting task which not just requires textbook knowledge but also common sense, in depth knowledge of the sector and a little sense of history). Read more…
In The Economists of 10th December 2015 one can find a story about ‘The genius of Gujarati’s‘, Indian people who are highly succesful entrepreneurs in very many countries. Even in India. Their success is based on ambition, focus, hard work and the extended family (which finances new businesses) – all cultural factors which the Gujarati’s take with them when they move from one country to another. The Economist, alas, does not delve into the gender aspects of the Gujarati attitude.
According to Geoffrey Schneider and Berhanu Nega, in their paper for the 2016 ASSA conference, ‘The Limits of the New Institutional Economics Approach to African Development‘, such cultural factors are neglected by ‘The New Institutional Economics’ (NIE), which leads to sub-optimal development policies. People are not just producer/consumers but are, for one thing, also part of a family embedded in kinship structures (including, of course, gender roles). On the cynical side: assigning, in NIE style, ‘Roman Law’ land rights to some people might induce a ‘land grab’. What I missed was a discussion of the influence of population growth on technologies used and ‘induced institutional change’ – the paper might be improved by introducing some ‘Ester Boserup‘ kind of ideas (population growth requires a more intensive kind of agriculture including new institutions – but societies often manage to establish this). Some excerpts. Read more…
“Render unto Caesar the things that are Caesar’s”
Introduction. These posts loosely use the concept of the ‘life cycle analysis’ of a product and apply it to one of the stages of the product ‘silver or golden coins’, i.e. the mining of the silver/gold needed to produce these coins. And bitcoins. They depart from ‘normal’ life cycle analysis in the sense that they do not look at for instance the amount of energy used or carbon dioxide produced during this stage of production but at the labour market institutions which governed the division of labour in the silver mines was mined. This silver/gold which, turned into coins, was used to organize and expand empires was often mined by slaves, prisoners of war, convicts or ‘feudal labour’ (like the Inca mita system, which was used by the Habsburg empire to recruit labourers for its South American mines). Today: the Roman denarius. First, some iconic ‘Roman’ transactions will be discussed to give the reader an idea of the role of money in the Empire. After this, some remarks on the institutions governing the use of labour will be made. The posts are explicitly written with the aim to rebuke the ‘markets led to money’ myth which (often in the shape of ‘the classical dichotomy’) is still prevalent in many economic textbooks: looking at the entire life cycle of money depicts a harsher and much more state based reality. Earlier posts can be found here (the Athenian owl), here (the silver used to buy Josef) here (the piece of eight), here (South African gold) and here (Bitcoin). Aside: the investigation below is based upon ancient Roman and Jewish texts, Greenland ice cores, Iberian slag heaps and much more which provides us with remarkable precise information about silver (lead) production and Roman money – but gives only a vague idea about ‘the life of the miners’. I did not encounter one estimate of the number of silver miners, for instance – but that might of course be due to me being an ignoramus when it comes to ancient economic history.
In the Roman empire, different kinds of money were used
“On entering the house, they saw the child with Mary his mother; and they knelt down and paid him homage. Then, opening their treasure chests, they offered him gifts of gold, frankincense, and myrrh. And having been warned in a dream not to return to Herod, they left for their own country by another path.” Read more…
The 2016 ASSA conference (3-5 Jan.) is in San Fransisco. I’m not there but the internet allows me to highlight some interesting papers, mainly from the Association for Evolutionary Economics sessions. The paper by John Hall and Svetlana Kirdina about Pyotr Alexeyevich Kropotkin‘s ideas about evolution is an excellent paper to begin with (read that Wikipedia page: very interesting guy who, just like Darwin, was able to combine individual observations with global insights in a very clever way). The question is more or less: did people survive because they competed with each other – or because they cooperated?
The paper states first that Darwin’s ideas about evolution may have had an individualist British flavour, for one thing as he stresses a very explicit Malthusian ‘struggle for survival’ Read more…
The remarkable thing about the Spanish labour market before 2008 is not that wages increased – but that they increased as little as they did. Total employment grew by leaps and bounds which suggests a tight labour market and high wage increases. But wage increases were quite moderate. Why? The answer to this question is that (A) in 1992 Spanish unemployment was very high while (B) the extra-ordinary increases in employment (graph 1) were matched by extra-ordinary increases in supply. The participation rate of women spurted ahead and many millions of workers from Romania, South-America and North-Africa migrated to Spain in search for work and income. The Spanish economy was a textbook example of investor friendly (sorry: bank friendly) flexibility and dynamism, exactly the kind of thing needed (according to the textbooks) to make the Euro work. Even though total employment in Spain in 1992 was only 8% of EU 15 employment (data for the present EU are not available for this year) employment gains and losses in Spain were, in an European perspective, often about 20 to even 80% of total EU 15 employment growth and decline (graph 2)! Read more…
I find myself immersed in all kinds of obscure (and not so obscure) texts and I thought that some of you might find it of interest to read what Diodorus of Sicily had to say (around 45 BC) about Egyptian debt law:
Their laws governing contracts they attribute to Bocchoris. These prescribe that men who had borrowed money without signing a bond, if they denied the indebtedness, might take an oath to that effect and be cleared of the obligation. The purpose, was, in the first place, that men might stand in awe of the gods by attributing great importance to oaths, for, since it is manifest that the man who has repeatedly taken such an oath will in the end lose the confidence which others had in him, everyone will consider it a matter of the utmost concern not to have recourse to the oath lest he forfeit his credit. In the second place, the lawgiver assumed that by basing confidence entirely upon a man’s sense of honour he would incite all men to be virtuous in character, in order that they might not be talked about as being unworthy of confidence; and, furthermore, he held it to be unjust that men who had been trusted with a loan without an oath should not be trusted when they gave their oath regarding the same transaction. And whoever lent money along with a written bond was forbidden to do more than double the principal from interest.
In the case of debtors the lawgiver ruled that the repayment of loans could be exacted only from a man’s estate, and under no condition did he allow the debtor’s person to be subject to seizure, holding that whereas property should belong to those who had amassed it or had received it from some earlier holder by way of a gift, the bodies of citizens should belong to the state, to the end that the state might avail itself of the services which its citizens owed it, in times of both war and peace. For it would be absurd, he felt, that a soldier, at the moment perhaps when he was setting forth to fight for his fatherland, should be haled to prison by his creditor for an unpaid loan, and that the greed of private citizens should in this way endanger the safety of all. And it appears that Solon took this law also to Athens, calling it a “disburdenment,” when he absolved all the citizens of the loans, secured by their persons, which they owed. But certain individuals find fault, and not without reason, with the majority of the Greek lawgivers, who forbade the taking of weapons and ploughs and other quite indispensable things as security for loans, but nevertheless allowed the men who would use these implements to be subject to imprisonments.
Why are so many right wing economists so afraid for an economists like Varoufakis, who wants less debt, and why do they continue to push for lower wages and more lending?
1) On Project Syndicate Yanis Varoufakis dissects the financial shenanigans surrounding Greek debts:
” In 2012, the insolvent Greek state borrowed €41 billion ($45 billion, or 22% of Greece’s shrinking national income) from European taxpayers to recapitalize the country’s insolvent commercial banks. For an economy in the clutches of unsustainable debt, and the associated debt-deflation spiral, the new loan and the stringent austerity on which it was conditioned were a ball and chain. At least, Greeks were promised, this bailout would secure the country’s banks once and for all.In 2013, once that tranche of funds had been transferred by the European Financial Stability Facility (EFSF), the eurozone’s bailout fund, to its Greek franchise, the Hellenic Financial Stability Facility, the HFSF pumped approximately €40 billion into the four “systemic” banks in exchange for non-voting shares. A few months later, in the autumn of 2013, a second recapitalization was orchestrated, with a new share issue. To make the new shares attractive to private investors, Greece’s “troika” of official creditors (the International Monetary Fund, European Central Bank, and the European Commission) approved offering them at a remarkable 80% discount on the prices that the HFSF, on behalf of European taxpayers, had paid a few months earlier. Crucially, the HFSF was prevented from participating, imposing upon taxpayers a massive dilution of their equity stake. Sensing potential gains at taxpayers’ expense, foreign hedge funds rushed in to take advantage. As if to prove that it understood the impropriety involved, the Troika compelled Greece’s government to immunize the HFSF board members from criminal prosecution for not participating in the new share offer and for the resulting disappearance of half of the taxpayers’ €41 billion capital injection” Read more…