Author Archive

‘Adults in the Room’ by Varoufakis. Good, necessary and very frightening.

August 16, 2017 35 comments

Yanis Varoufakis has written a book which shows that the European Union is, at present, disfunctional and does not live up to the treaties.

The EU treaties are clear:

“The Union shall establish an internal market. It shall work for the sustainable development of Europe based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment. It shall promote scientific and technological advance. It shall combat social exclusion and discrimination, and shall promote social justice and protection, equality between women and men, solidarity between generations and protection of the rights of the child. It shall promote economic, social and territorial cohesion, and solidarity among Member States. It shall respect its rich cultural and linguistic diversity, and shall ensure that Europe’s cultural heritage is safeguarded and enhanced”.

But the Union doesn’t even try. As is shown by  ‘Adults in the Room’ by Yanis Varoufakis, the minister of finance of Greece who, for five months, defied the ‘Troika’ (the combination of the ECB, the IMF and the European Commission who, with the Eurogroup, the regular meeting of the ministers of finance of the Eurozone, in the background).   Read more…

We need doughnut economics. But we also need GDP growth. Lots of it.

August 3, 2017 21 comments

Recently, some ‘alternative economics’ have been published: we are moving from criticism to alternatives. Which is a good thing: Kate Raworth broke ground with Doughnut economics. Jamie Morgan et all recently published ‘Quest for a new paradigm in economics. A synthesis of views of the New Economics working group’. We can also mention the people publishing in the Journal of Industrial Ecology, who do not look at the circular monetary economy but at the circularity (or not) of flows of materials and energy. And we can look at the seventeen sustainable development goals of the UN.

Will it make a difference? I do not know. Things like this have been around for at least forty years, though especially measurements have become much better. And I do think that the reaction against monetary measures of the economy is somewhat myopic. We do not have to move beyond the monetary economy. Neoclassical economics tried that and utterly failed. Hey, the very definition of poverty is: ‘not having enough money’. And we really have to look into that. But we have to look at other economies and circularities, too.  What we need for a new economy is a number of statistics is:

  • Monetary measures like the Flow of funds which track flows and stocks of debts and credits and changes in the amount of income and the like. Money is important.
  • This includes ‘real’ estimates of flows of production and spending, like  real GDP. Mind that ‘real’ GDP is not measured but estimated. Nominal GDP is measured, statisticians use scores of methods to take prices out of the nominal measures and to recalculate these nominal measures into ‘real’ estimates, like the purchasing power of wages or the volume of retail spending. Aside from problems like changes in quality (surely not always improvements in quality – take anti-biotics!) this is problematic as relative prices change. We should, however, not only see this as problems but also as exciting events which require economic explanation.
  • And we need a set of statistics which maps labor, paid as well as unpaid and idle as well as occupied
  • And  set of statistics which map flows of materials and energy (inputs as well as outputs like CO2)
  • And statistics about (risk of ) poverty, health and well-being
  • And environmental statistics

Read more…

(Modified) Irish national income Q1, 2017.

Update 18-7-2017: see also, much more extensive and in depth but along the same lines, the Financial Times.

To circumvent the internationally approved rules of national accounting, irish economists developed new national income indicators: Modified Gross National Income and Modified Total Domestic Demand. They were right to do this. And these are not minor changes. Modified Income is almost a third (a third!) lower than ‘normal’ income. AlsoIn today’s quarterly results, the modified Total Domestic Demand indicator decreased by 2.7% in Quarter 1 2017, while the traditional indicator decreased by 17.3%’. Wow.

What are the differences between the indicators and why did the Irish statisticians do this? First, a quote from the press release of Irish National Income in Q1, 2017:

Modified GNI (or GNI*) is defined as GNI less the effects of the profits of re-domiciled companies and the depreciation of intellectual property products and aircraft leasing companies.  This new indicator of the level of the Irish economy will be a useful additional input to debt ratio analysis.

Modified Total Domestic Demand is defined as Total Domestic Demand less the effects of the trade in aircraft by aircraft leasing companies and the imports of intellectual property.  This modified indicator gives insight into the activity within the domestic economy and is designed to be more closely related to employment growth as it is focuses on the physical capital used to produce domestic output

Read more…

‘Money as electricity’ – redux

July 17, 2017 4 comments

Morris_A__CopelandThe heterodox heritage of economic statistics is underestimated. Too often I encounter the idea that heterodox economics does not provide an alternative to mainstream economics, let alone economic measurement. Ahem. Instead of ignoring (data on) unemployment (Robert Lucas!) or ignoring (data on) money and the monetary system (more on this below), it were heterodox economists who set out to measure it. To quite an extent, economic statistics are the heterodox alternative people want to see, surely when it comes to macro-economics . If alone because unlike mainstream macro it does carefully define variables – modern science! The mainstream equivalent of the tedious statistical manuals which economic statistics use to do this is entirely absent! One example of such data are the Flow of Funds. Read more…

The deadweight economy

July 16, 2017 4 comments

Is there a decoupling of economic growth and use of materials? On the national scale: sometimes. On the global scale: absolutely not. From The Journal of Industrial Ecology:

The international industrial ecology (IE) research community and United Nations (UN) Environment have, for the first time, agreed on an authoritative and comprehensive data set for global material extraction and trade covering 40 years of global economic activity and natural resource use. This new data set is becoming the standard information source for decision making at the UN in the context of the post-2015 development agenda, which acknowledges the strong links between sustainable natural resource management, economic prosperity, and human well-being. Only if economic growth and human development can become substantially decoupled from accelerating material use, waste, and emissions can the tensions inherent in the Sustainable Development Goals be resolved and inclusive human development be achieved. In this paper, we summarize the key findings of the assessment study to make the IE research community aware of this new global research resource. The global results show a massive increase in materials extraction from 22 billion tonnes (Bt) in 1970 to 70 Bt in 2010, and an acceleration in material extraction since 2000. This acceleration has occurred at a time when global population growth has slowed and global economic growth has stalled. The global surge in material extraction has been driven by growing wealth and consumption and accelerating trade. A material footprint perspective shows that demand for materials has grown even in the wealthiest parts of the world. Low-income countries have benefited least from growing global resource availability and have continued to deliver primary materials to high-income countries while experiencing few improvements in their domestic material living standards. Material efficiency, the amount of primary materials required per unit of economic activity, has declined since around 2000 because of a shift of global production from very material-efficient economies to less-efficient ones. This global trend of recoupling economic activity with material use, driven by industrialization and urbanization in the global South, most notably Asia, has negative impacts on a suite of environmental and social issues, including natural resource depletion, climate change, loss of biodiversity, and uneven economic development.

Is there a housing bubble in the EU? Not everywhere.

July 13, 2017 1 comment


House price developments in the EU show large differences in development – which makes the task for monetary and fiscal policy even more difficult.

One of the beneficial consequences of the Great Financial Crisis is that economic statisticians at for instance Eurostat or the Bank for International Settlements spend more effort on assembling house prices , though The Economist deserves praise as it led the way about 15 years ago. What do these data tell us? Low interest rates are criticized by some economists as these should encourage asset price bubbles. Houses are our most important asset. Are house prices in the EU at this moment increasing too fast?

Not yet in Southern Europe. Spanish prices show a considerable increase but the level in Spain is still low. And prices in France and Italy do not show any meaningful increase, while Italian levels are low.

However… Swedish prices are of the chart. Dutch prices are rapidly increasing (and continued to do so during the first six months of 2017). German prices have, by now, increased with a third (house ownership in Germany is less common than in many other countries but the increase means that there will, quite soon, be a push to sell houses to renters – who of course have to borrow from the big banks). yes, there is a northern European bubble. And it is rapidly inflating: during the last six months (not in the graph) prices have continued to increase.

The house price bubble has not exactly the same characteristics as the previous one. The previous bubble was financed by credit and money creation. The money created was to a considerable extent stacked away by the sellers (who often inherited these houses) in long-term deposits and is now used again to finance new house purchases. In selected cities, like Amsterdam, house prices are exploding (+21% in one year, I read somewhere) which is to an extent influenced by Airbnb. Nevertheless – house prices show continued increases which are way higher than the increases of nominal income of households, even including Airbnb income. Actions have to be taken: a gradual increase (with clear forward guidance) of land value taxes (the money raised has to be used to lower VAT on labor), a gradual decrease of Loan to Value ratio’s (with clear forward guidance) and a gradual banishment of tax deductions of interest paid (with clear forward guidance).

It won’t happen.

The nature of growth: three visions

July 12, 2017 6 comments

Do we need growth? Do we need technology? Is technology ‘neutral’ in the sense that its appearance and use can be understood without historical context? The Journal of Industrial Ecology has a special issue about such ideas. I love the kind of calculations they do about flows of stuff. But Vincent Moreau, Marlyne Sahakian, Pascal van Griethuysen and Francois Vuille have an apt observation.

In light of the environmental consequences of linear production and consumption processes, the circular economy (CE) is gaining momentum … promoting closed material cycles by focusing on multiple strategies from material recycling to product reuse, as well as rethinking production and consumption chains toward increased resource efficiency. Yet, by considering mainly cost-effective opportunities within the realm of economic competitiveness, it stops short of grappling with the institutional and social predispositions necessary for societal transitions to a CE. The distinction of noncompetitive and not-for-profit activities remains to be addressed, along with other societal questions relating to labor conditions, wealth distribution, and governance systems. … We examine the CE from a biophysical and social perspective to show that the concept lacks the social and institutional dimensions to address the current material and energy throughput in the economy. We show that reconsidering labor is essential .

See also Branko Milanovic about the”Need and inevitability of growth”: Read more…

What Macron should know about the win-win-win-win-win consequences of the new German minimum wage

July 12, 2017 3 comments

Recently, Germany introduced an economy wide minimum wage. This led to better jobs, better incomes, an increase in productivity, no upsurge in inflation and no decline of employment growth:

“Higher wages, shorter hours The comparison of both worker groups shows that the minimum wage has worked. As intended, the hourly wage of the interviewed minimum wage workers rose from €6.70 to €8.20, an impressive 22 percent. This is a multiple of the wage increase in the control group, which amounted to 4 percent. However, this also shows that the average hourly wage had not yet reached the minimum wage of €8.50, which is not due to exemptions from the minimum wage (we excluded these from the data). At the same time, weekly working hours of minimum wage workers fell by 90 minutes, whereas working time in the control group increased somewhat. In particular, the share of employees with very long working hours of more than 45 fell markedly. This also runs counter to the trend of the control group. Finally, despite lower average working hours, the monthly gross wage climbed from roughly €840 to €990. This is important, since it is the gross wage more than the hourly wage that matters for being able to meet living expenses.

Happier despite higher workload

These results paint the minimum wage in glowing colours for affected workers. However, how did companies react? Manager interviews conducted in another IAB survey showed that firms focused more on raising worker productivity than on layoffs. Our results confirm this from a worker perspective.”

Involuntary unemployment in the Eurozone, the rest of the EU and the USA: elevated and high

July 11, 2017 4 comments

SaveIn the USA and the EU, employment is up and unemployment is down. But unemployment is not yet low. Unemployment rates have to decline more (a bit in the USA, a lot in the EU) and participation rates have to recover (a lot in the USA, a bit in the EU). In the EU, there are large differences between countries (compare Spain with Germany). But on the macro level, there is still a large reservoir of involuntary unemployment and, looking at the participation rates, people who have given up altogether.

For practical reasons (it always takes time and effort to find a job), unemployment will never be zero. But we can account for this and look at “involuntary unemployment” only. In a statistical sense, we might define involuntary unemployment as the number of unemployed which, after a reasonable time, still have not yet found a new job. Available data led me to set this ‘reasonable time’ to one quarter for the EU and to 15 weeks for the USA, the data are shown in graph 1 (German data not available!). In the USA, there are still over 2 million people who were unemployed for 15 weeks or more. Which is way lower than in 2009 – but still 2 million. The comparable figure for the Euro zone is, ahem, 9,7 million and for the non-Euro zone EU about 1,7 million. And though the employment to population ratio in the USA is finally rising in a serious way, it is still way below the per 2008 level (let alone the much higher level of the end of the twentieth century). Aside – the nefarious consequences of the combination of monetary tightening and government austerity in the Euro zone after 2010 clearly show.

Meta: John Maynard Keynes once invented, or at least popularized, the word: “involuntary unemployment”. This means something as: “even when the unemployed are willing to accept a wage cut to find work – they won’t find it”. To restate this in the language of modern data on labor market flows: “even when, during a slump, the wage rate is cut this won’t increase the net outflow (gross outflow minus gross inflow) from the reservoir of unemployed”. One of the reasons for this is the non-existence of individual wages. A wage cut is not a wage cut for an individual worker – but a cut to the ‘market rate’, a ‘wages cut’. That’s the way labor markets work. And worked: historical data on wages very clearly show the existence of very stable market wide wage rates for carpenters, agricultural labor, masons and whatever even in a time when government interference with wage rates was much less than today.

Update: more meta. The way the unemployment data used above are measured ensures that it shows that on the individual level ‘measured unemployment’ is involuntary too, as the unemployed are asked if they are actively trying to change their situation. This is related to but not the same kind as the ‘involuntary unemployment’ referred to above which is probably best explained by the fact that the people in the unemployment reservoir might, in one year, be very different people than in the preceding or the next year. A not entirely satisfying aspect of the definition of involuntary unemployment used above is that even when people get new jobs quite fast they still might encounter many short spells of unemployment, leading to high average unemployment.

Links. High powered money in Greece, ECB transparancy reveales raw power, 50 years ago the Bundesbank combatted trade surpluses

June 19, 2017 1 comment

High powered money in Greece. The EU is re-financing 8,5 billion of Greek debt. About 7 billion of this is just trading in one kind of government bonds for another kind of government bonds. Much ado about less than nothing. There is some welcome softening of the terms – but not enough. However: About 1,6 billion has to be used to pay overdue bills which have to be paid by the government. This exchanging private debt for government bonds and will lead to an injection of highly powered money into the Greek economy which will prevent bankruptcies, which will enable these suppliers to pay their bills to their suppliers. Spain has however already threatened to block the agreement as it wants to protect a corrupt Spanish citizen in charge of privatization in Greece.

The ECB doubles down on monetary financing of the government. The European Central Bank published a report detailing why banks do or do not get ELA (Emergency Liquidity Assistance). Read more…

The productivity stagnation – not a global phenomenon.

June 12, 2017 11 comments

Productivity 1

Long story short: labor productivity, as economists define it, is best understood as the amount of ‘stuff’ the income (wages, profits, rents, interest) related to one hour of work can buy (this is a somewhat idiosyncratic take on productivity. Look however here). Productivity is, as economists define it, not any kind of physical entity. It is supposed to be ‘value added’, or total income cq. the nominal value of net production, per hour of work. For about two centuries, give or take some decades, productivity has increased. Not anymore. At least: in a whole bunch of seemingly quite distinct countries (graph 1). This is, in a historical sense, really surprising. And economists spend a lot of ink about it: why did this happen? Which disease, nay, evil!, did beset the western economies! And it does require explanation. For any kind of explanation, however, we still need a more general picture of productivity developments in rich countries (I first wanted to include Japan in graph 1, too, but it turned out that Japanese productivity growth, though low, is clearly superior to these countries). Graph 2 shows developments in most of Europe.

Read more…

The monetary and fiscal design of the Eurozone. New ideas and old mistakes from the EC.

June 3, 2017 2 comments

Recently the European Commission (EC) has published a “A possible roadmap towards the completion of the Economic and Monetary Union by 2025”. It is an important report. According to the report once Britain will have left the EU 85% of EU inhabitants will use the Euro. The future of these people is at stake. The report proposes:


  • to introduce at least a bit of Eurozone level fiscal policy
  • to introduce a kind of Eurobonds
  • to introduce a system of unemployment insurance which, during national downturns, will lead to more transfer incomes and ‘automatic’ stabilization
  • to introduce a banking union (which means that bankrupt banks won’t have to be re-financed by their host country anymore)
  • and it wants a more transparent political process (not the same thing as a more democratic political process) and even admits (without mentioning him) that Varoufakis was totally right about the lack of formal status of and the opaque political process within the Eurogroup.

Read more…

Econometrics? Keep it very simple.

May 23, 2017 4 comments

Readers of this blog might have noticed that I prefer to detrend time series using a moving average – and not the advanced and routinely and widely used Hodrick-Prescott filter. Part of this was lazyness. But I also do not like the HP filter: what is it? Why does it wag its tails so much? What is the ‘right’ smoothing parameter? James D. Hamilton has answered my questions (while implicating that a load of research is at least suspect if not worthless):

Why You should never use the Hodrick-Prescott filter: “Here’s why. (1) The HP filter produces series with spurious dynamic relations that have no basis in the underlying data-generating process. (2) Filtered values at the end of the sample are very different from those in the middle, and are also characterized by spurious dynamics. (3) A statistical formalization of the problem typically produces values for the smoothing parameter vastly at odds with common practice, e.g., a value for λ far below 1600 for quarterly data. (4) There’s a better alternative. A regression of the variable at date t+h on the four most recent values as of date t offers a robust approach to detrending that achieves all the objectives sought by users of the HP filter with none of its drawbacks.”,

Models and measurement in economics: Wesley Mitchell in 1946

May 15, 2017 2 comments

Noah Smith is not the first one to be puzzled by the rift between theory and measurement in economics. He states:

econ seems too focused on “theory vs. evidence” instead of using the two in conjunction. And when they do get used in conjunction, it’s often in a tacked-on, pro-forma sort of way, without a real meaningful interplay between the two. Of course, this is just my own limited experience, and there are whole fields – industrial organization, environmental economics, trade – that I have relatively limited contact with. So I could be over-generalizing. Nevertheless, I see very few economists explicitly calling for the kind of “combined approach” to modeling that exists in other sciences – i.e., using evidence to continuously restrict the set of usable models”..

But in 1946, in the wake of the war and the Keynesian revolution, Wesley C. Mitchell, long time head of the NBER (National bureau of Economic Research), one of the foremost economists of his time and one of the best students as well as a friend of Thorstein Veblen, held a “read the whole thing” speech (like much of this old stuff made available by the NBER) about “Empirical research and the future of economic science”. Eloquent (though not succinct) it bears in a somewhat depressing way on the ideas stated by Smith  (though Mitchell restricts himself much less to the Ivory Tower than Smith does):

There is better prospect than before that men who think of themselves as theorists will absorb into their work the methods and findings of realistically minded investigators, while the latter will make such free use of the concepts and procedures of theorists that no one will know on which side of the old line of demarcation he stands. In fine, the years near at hand may see the beginnings of an economics worthy to be called a science. Rapid progress toward that goal is not to be expected. The great drawbacks of empirical research in comparison with speculative reasoning are that it is much more laborious, Slower, and more dependent on financial support. The speculative reasoner must think hard; his is no easy task. But if gifted with logical acumen, he can select a set of assumptions interesting to him, and think Empirical Research and the Development of Economic Science out their implications by himself. If he has a funded income, or earns a living salary by work that does not exhaust his energy, he can get on without financial grants. In a relatively short time he can cover much ground, and, barring logical errors, arrive at conclusions incontestably true in the sense that they are necessary consequences of his assumptions. The empirical investigator, on the contrary, requires mass observations and considerable intimacy with actual practices; to extract the meaning from his data he needs assistants whose salaries few scholars can pay out of their own pockets”.

See p. 16 for his institutional stance. I’m afraid the ideas of Noah Smith indicate there still is a problem. Much has been accomplished, be sure of that. But a rift still exits. Here are my takes on models and measurement in economics: the concepts, social worlds and even the language of economic statistics and economic theory are not always congruent. Plus ça change, plus c’est la même chose. Why?

Is there a mismatch between theory and measurement in economics?

May 13, 2017 5 comments


The ‘The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel’ has much more often than the prizes for physics, Chemistry and physiology and medicine been awarded for: theory. It was on a regular basis awarded for analysis of data or the discovery of new events but in these cases ‘discovery’ was contrary to the other sciences much less important than analysis. It was only rarely awarded for the development of measurement techniques.   Read more…

A non-white recovery in the USA

May 7, 2017 1 comment

anic rate employmentrate

First: the elephant in the room: the post 2008 development of the USA white employment rate relative to the black and hispanic rate is, in a historical perspective but also when compared with post 2008 developments in Europe, spectacular. though something seems to have been the matter since 1995. No explanation here but the correlation between the white and the other rates slowly fades away (a hypothesis might be that ‘Blacks’ and ‘Hispanics’ are groups which are characterized by a relatively large subgroup of people belonging to the ‘precariat’, workers depending on low paid unstable jobs, who do relatively better in an increasingly precarious economy).

Second: it’s not inconceivable that the black rate will, within years, also be at par with or higher than the white rate. Note that the decline of white employment in the 2008 crisis was much larger than during other downturns. This pattern is less outspoken for the hispanic and black employment rates. Next to the employment rate we can also look at the participation rate (unemployment plus employment).    Read more…

Deep warming

From: Larry Hamilton and Merijn Knibbe

Following a twitter discussion between him and me about the question if the 2013-2015 warming of the first 700 meters of ocean was above trend or if 2016 was below trend, Larry Hamilton (@ichiloe) produced the next graph (which shows consistent and relentless warming not just of the surface of the earth but also of the first 700 meters of the oceans). These series are as far as I know measured in a totally independent way. ‘2017’ are partial data. We do not rest our case.


How’s the Eurozone doing?

April 28, 2017 2 comments

On 6 April, Mario Draghi made a speech titled ‘Monetary policy and the economic recovery in the Euro Area’. I would have emphasized the existing disequilibria a little more: unemployment in Germany is not far away from ‘low’ but this comes at the cost of an 8% of GDP surplus of the current account. German domestic demand (investments, public and private consumption) is i.e. about 10% too low to guarantee low unemployment. See also this recent Eurostat press release, which shows that, though some areas are by now characterized by low unemployment (<3,5%) others now levels of over 31% (not even counting ‘broad’ unemployment). But I agree: there is a recovery.


Read more…

Easter Monday links. (Mis?)measurement

April 17, 2017 1 comment

The ECB buys lots of bonds from large oil companies, not from small and medium enterprises.

Rapid money supply growth does not cause inflation (measurements!)

New UK guidelines on how to estimate natural capital. Surely worth the effort! But some things do not have a price for a good reason. And when you look really, really hard at statistics of the stock of capital it turns out that statisticians measure the value of rights to the monetary yield of ownership of certain items. And not any kind of intrinsic welfare or utility produced by machines or houses (or an Easter Monday trip to the woods). Do not commodify Nottingham Forest!

Economists like me measure productivity. Can we trust these statistics? Only if they are very carefully crafted. From a OECD manual standard methods used to calculate ‘real’ production can even result in estimates of negative production.

“Another issue is the occasional occurrence of negative value added figures when double deflation operates with Laspeyres quantity indices. Nothing ensures that the subtraction of constant-price intermediate inputs from constant-price gross output yields a positive number. The SNA 93 notes that negative real value added can occur when relative prices change: “a process of production which is efficient at one set of prices, may not be very efficient at another set of relative prices. If the other set of prices is very different, the inefficiency of the process may reveal itself in a very conspicuous form, namely negative value added”. … In these circumstances, a different accounting method should be used to estimate an aggregate like value added, such as the methods based on “superlative” index numbers

Read more…

A factual update on global warming

April 10, 2017 3 comments

Graph 2

What do you get when you apply a 13 year smoothing function to the yearly data on global temperature? The graph above. According to ‘climate optimists’ the graph above is misleading, as, for one thing, these surface data are supposed to show a different pattern of development than the ‘satellite data’. The point: they don’t. The graph above shows about 0,7 to 0,8 degrees warming after 1979 and a pattern of relentless increase. The ‘satellite  data’ (graph below) show 0,5 degrees warming after 1979 and a pattern of relentless increase (visualize a 12*13 = 156 months running average, couldn’t track the original data). Yes, that’s a difference. But even the 0,5 degrees is, considering the warming which took place  before 1979, quite a problem. And more so when we consider the 2,0 degrees of ‘acceptable’ warming. Even based upon this rather short period and these conservative data, while not taking 1880-1980 developments into account we’ve already spent *at least* 25% of our wiggle room. The graph below is used by climate optimists to defend their position… Delusional. It’s maybe less alarming than the graph above. But it is alarming, too.  Read more…