Author Archive

Regraphing USA unemployment history. An addendum to the USA data

February 25, 2018 3 comments


Source: Bureau of Labor Statistics

Broad unemployment today is, compared with the period before 1994, worse than you think. A new way of estimating ‘part time workers for economic reasons’ shifted this series downward with almost 1% of the labor force. To gain a proper understanding of historical developments present day data have to be increased or historical data have to be decreased a little.  Read more…

Modern macro-economists: money is not ‘neutral’. Bordo, Meissner, Sufi and Mian do a good job.

February 16, 2018 1 comment

Hardcore neoclassical economist John Taylor has edited a new handbook of macro-economics. The good news: the sands are shifting. After 2008, more attention has been paid to the obvious fact that we’re living in a monetary world. Guess what: it  turns out that money is non-neutral after all. Two examples (summaries below):

(A) Bordo and Meissner claim that whenever a country has a large banking sector it has a choice, during a financial crisis. It can bail out the banks or it can try to mitigate the crisis and prevent unemployment to increase to extreme levels.

And (B): Mian and Sufi’s work implicates that the ‘representative consumer’ is bogus: differences between renters and house owners in combination with data on indebtedness and house price booms and busts explain a lot of the severity of the 2008 crisis.

Bordo and Meissner:

(A) Interconnections between banking crises and fiscal crises have a long history. We document the long-run evolution from classic banking panics toward modern banking crises where financial guarantees are associated with crisis resolution. Recent crises feature a feedback loop between bank guarantees and bank holdings of local sovereign debt thereby linking financial to fiscal crises. Earlier examples include the crises in Chile (early 1980s), Japan (1990), Sweden and Finland (1991), and the Asian crisis (1997). Read more…

A pan-European living wage as a condition for authentic Freedom of Movement

February 4, 2018 4 comments

From Yanis Varoufakis

At the source a link to the UK House of Commons discussion where this idea was put forward can be found.

Britain used to have wage councils that set the minimum wage per sector. Mrs Thatcher saw to it that they were abolished, together (effectively) with trades unions and council houses – thus yielding the present Precariat-Proletariat whose palpable anger and frustration is evident across the land. There is no doubt that we need to bring back a modernised for of wage councils. Not just in the UK but across Europe! It is the only way we can safeguard genuine freedom of movement. Here is why:

The oligarchs in Eastern Europe, and elsewhere, want the freedom of moving their money around and the freedom to export surplus labour from their country – people who would rather stay at home if a living wage were available locally. These oligarchs must be told in no uncertain terms: Your freedom of movement (and that of your money) is conditional on legislating a living wage in your own country for your citizens. This is a condition for being part of a European free movement area. And this condition must be imposed by the EU! Why does Brussels think it has a right to come to, say, Greece, to impose cuts to the lowest of the low pensions? How about imposing, instead, across Europe a minimum living wage and pension which terminates instantly involuntary migration, and thus safeguards genuine freedom of movement?

Low unemployment rates are here again (at least in parts of Europe). Surprise (not): productivity increases, too.

February 4, 2018 1 comment

3.8It seems that at this moment in time lower unemployment does not lead to higher inflation but to increasing wages, lower profits and increasing productivity. Read more…

The text in which Thorstein Veblen introduced the phrase ‘neo-classical’

February 1, 2018 10 comments

On this blog neoclassical economics are discussed on a regular basis. Thorstein Veblen is credited by Tony Aspromorgous with introducing, around 1900, the phrase ‘neo-classical’ (see the excerpt below from  ‘The preconceptions of economic science, part III, the Quarterly Journal of Economics 14 (1900), available  on the AFEE website. A lot of his criticisms of neo-classical authors still apply today: they assume what they should explain. The Keynes in the text is the father of John Maynard Keynes. Veblen was a very talented writer – which shows when you read the excerpt (and the entire text) twice.

Of the foundations of later theory, in so far as the postulates of later economists differ characteristically from those of Mill and Cairnes, little can be said in this place. Nothing but the very general features of the later development can be taken up; and even these general features of the existing theoretic situation can not be handled with the same confidence as the corresponding features of a past phase of speculation. With respect to writers of the present or the more recent past the work of natural selection, as between variants of scientific aim and animus and between more or less divergent points of view, has not yet taken effect; and it would be over-hazardous to attempt an anticipation of the results of the selection that lies in great part yet in the future. As regards the directions of theoretical work suggested by the names of Professor Marshall, Mr. Cannan, Professor Clark, Mr. Pierson, Austrian Professor Loria, Professor Schmoller, the group, — no off-hand decision is admissible as between these candidates for the honor, or, better, for the work, of continuing the main current of economic speculation and inquiry. No attempt will here be made even to pass a verdict on the relative claims of the recognised two or three main “schools” of theory, beyond the somewhat obvious finding that, for the purpose in hand, the so-called Austrian school is scarcely distinguishable from the neo-classical, unless it be in the different distribution of emphasis. Read more…

What Mark does. Lack of institutional precision in neoclassical macro leads to an incoherent monetary model

January 26, 2018 2 comments

SMore garbled

Source (p. 32)

Oops. Mark Gertler (with Kiyotaki and Prestipino) does it again: “There has been considerable progress in developing macroeconomic models of banking crises. However, most of this literature focuses on the retail sector where banks obtain deposits from households.” After ‘obtaining’ deposits, these banks are supposed to lend the ‘money’  to households and companies. Source: the 2000+ pages Handbook of [neoclassical, M.K.] Macroeconomics edited by John Taylor. As we know, this is not true. Read more…

Edward Prescott and the illicit use of garbled language

January 23, 2018 5 comments

Update 24/1/2018 Today Simon Wren-Lewis published a blogpost about model consistent preferences of the government. According to him, model consistent preferences of the government show that inflation is a worse curse and unemployment is less worse curse than was expected by economists. Of course it is. When economists model unemployment as ‘leisure’ this is bound to happen. Garbage in, garbage out.

John Taylor edited the new 2000+ pages plus ‘Handbook of macro-economics’, effectively a ‘Handbook of neoclassical macroeconomics’. Neoclassical economics is known for its illicit use of garbled language which hides and convolutes instead of explains. As the title of the book exemplifies. An interesting example is the chapter by Edward Prescott, titled ‘RBC Methodology and the Development of Aggregate Economic Theory’ ). Let’s first give the floor to him (emphasis added), mind that ‘leisure’ means ‘measured unemployment’.:

“What turned out to be the big breakthrough was the use of growth theory to study business cycle fluctuations … based on micro theory reasoning, dynamic economic theory was viewed as being useless in understanding business cycle fluctuations. This view arose because, cyclically, leisure and consumption moved in opposite directions. Being that these goods are both normal goods and there is little cyclical movement in their relative price, micro reasoning leads to the conclusion that leisure should move procyclically when in fact it moves strongly countercyclically. Another fact is that labor productivity is a procyclical variable; this runs counter to the prediction of micro theory that it should be countercyclical, given the aggregate labor input to production. Micro reasoning leads to the incorrect conclusion that these aggregate observations violated the law of diminishing returns. In order to use growth theory to study business cycle fluctuations, the investment-consumption decision and the labor-leisure decision must be endogenized. Kydland and Prescott (1982) introduced an aggregate household to accomplish this. We restricted attention to the household utility function for which the model economies had a balanced growth path, and this balanced growth path displayed the growth facts. With this extension, growth theory and business cycle theory were integrated. It turned out that the predictions of dynamic aggregate theory were consistent with the business cycle facts that ran counter to the conclusion of those using microeconomic reasoning”

Translation: “Depressions are caused because people want to work less. Read more…

Broad unemployment in Europe: the last two years. Two graphs.

January 19, 2018 3 comments

broad 3Eurostat made new data on broad unemployment available. For some countries (Ireland, Greece, Switzerland), these show a less rosy picture than the ‘normal’ unemployment data. Only the Czech Republic has low normal as well as low broad unemployment though Poland, Hungary, Bulgaria (!) and Germany seem to be heading that way. Altogether, labor slack is still immense. At this moment, wage increases are still low in non-Eastern European countries. Considering the slack this might stay so for a while, though there are more opportunities to obtain a better paying job. Read more…

What Martin Sandbu gets wrong about neoclassical macro-economics

January 17, 2018 1 comment

Martin Sandbu is, in the Financial Times, wrong about neoclassical macroeconomic models. Let me explain by responding to his text, paragraph by paragraph. No links, I might add these later.

What do macroeconomists actually do? Without an answer to that question, it is difficult to articulate what they might be doing wrong. The rebuilding macroeconomic theory project is useful also to non-economists — perhaps especially to them — because it takes the time to dwell on how macroeconomists do what they do, in order to argue what they must do better.

Two points.

  • Sandbu answers this question by discussing what some macroeconomists do. To be precise: what neoclassical macroeconomists do. Stock and flow consistent modelling is left out of the discussion. NBER business cycle analysis is left out of the discussion. The kind of models which people like Steve Keen develop are left out of the discussion. Flow of Funds analysis as performed at national banks is left out of the discussion. Reduced form models and, in fact, ‘VAR’ models are left out of his discussion, too. It is about a very limited part of what macro-economics is all about  

Read more…

Some 1921 remarks about National Income

January 9, 2018 6 comments

In 1921 King, Macaulay and Mitchell published their milestone Income in the United States: Its Amount and Distribution, 1909-1919’ which estimated time series of nominal and real income in the USA. Why did they measure this? The last sentence of their introduction reads: “Last but most interesting of all, we shall consider the way in which the National Income is distributed among individuals”. Distribution was paramount. The authors were also well aware of the limited nature of their estimates of monetary income: it was not a measure of welfare or prosperity. To quote them again: “Following common practice once more, we do not count as part of the National Income anything for which a price is commonly not paid. On this score we omit several of the most important factors in social well-being, above all the services of housewives to their families” (they go on to present a very rough monetary estimate of the value of these services). Even the depletion of national resources is already discussed: “No systematic deduction from the National Income is made in our estimates to cover depletion of natural resources. Doubtless this item is of considerable size as well as of peculiar interest.”. Still, if we want to measure the distribution of income or sectoral differences the monetary estimates are the way to go. Nowadays, GDP contains many non-monetary imputations. interestingly, the UK Office for National Statistics is publishing estimates of nominal income without these imputations. Look here for a very recent ONS study. The reason: ‘the national accounts measure of RHDI can differ from the perceived experience of households’. These monetary accounts are among other things a better gauge of the distribution of monetary income (wages, profits) than the normal national accounts: back to 1921. It makes one wonder why, later, these imputations were introduced and our focus changed from distribution to growth.

Is economics becoming an evolutionary science? Veblen at the 2018 ASSA conference

January 8, 2018 7 comments

In 1898 Thorstein Veblen asked ‘Why isn’t economics an evolutionary science?’. At the ASSA 2018 conference Avsar, Duroy and Scorsone mused about this. Below, the abstracts of their papers. Here, Mark Thomas about this.

Avsar’s article is, with its link to neurology, truly Veblenian in spirit. An interesting question is: it seems that the behavior of hunter-gatherers, who have little property as they can’t carry it with them, have behavior that is more economic rational than the behavior of people with a lot of property. Does the institution of property itself destroy economic rationality? And if so, how does this relate to market behavior?

Duroy’s article is about the question if selfish behavior, which sometimes is good for individuals, destroys groups on which these people depend for survival. We might call this the Trump-effect.

Scorsone might give more attention to the work of Norbert Elias, who states that changing interdependencies does not only change institutions but also people themselves.

Rojhat B. Avsar: Read more…

The ASSA conference: some institutional papers

January 7, 2018 Leave a comment

Some (institutional) stuff from the ASSA conference, the first one with nice definitions of trust and control (but there might be more empirical stuff). The second one on the role of the ideology of judges in economic cases when there are no clear legal rules. More tomorrow.

Claudius Gräbner, Johannes Kepler University-Linz Wolfram Elsner. To trust or to control: Informal value transfer systems and computational analysis in institutional economics

Here, the PPT

This paper illustrates the usefulness of computational methods for the investigation of institutions. As an example, we use a computational agent-based model to study the role of general trust and social control in informal value transfer systems (ITVS). We find that, how and in which timeline general trust and social control interact in order to make ITVS work, become stable and highly effective. The case shows how computational models may help (1) to operationalize institutional theory and to clarify the functioning of institutions, (2) to test the logical consistency of alternative hypotheses about institutions, and (3) to relate institutionalist theory with other paradigms and to practice an interested pluralism

Read more…

In praise of the Institutional Nature of the National Accounts

January 6, 2018 3 comments

A variable like GDP (Gross domestic Product) receives a lot of flack from economists. Much of this is misguided. The economists should not look at GDP but at the national accounts (of which GDP is one, but only one, variable). And they should not criticize the accounts but praise them. A 2016 ECB working paper about the flagship ECB ‘EAGLE-FLI’ neoclassical macro-model (Bokan e.a. (2016)) shows why: neoclassical have no idea about how and what to measure. National account statisticians do.

According to the abstract of the ECB paper new features of the EAGLE-FLI model were the inclusion of ‘deposits’ and banks. Bokan e.a. go on to state: ‘banks collect deposits from domestic households’.


Banks don’t collect  deposits. As they can’t collect what they already have.  Read more…

Thoughts about the sharing economy

December 31, 2017 2 comments

AirBnBRecently, Eurostat published data on the sharing economy. Its huge (graph, source: Eurostat). And this digital enhanced sharing economy should be (and is) included in GDP. But the private, non-monetary use of digital GPS apps which enhance your life as they enable you to find your way when, after attending a wedding, you get lost in rural Kent, 2:00 AM (happens…): not. There is a discussion going on if GDP tracks the changes in our life caused by the use of all kind of digital gadgets. It doesn’t. And it shouldn’t. Read more…

Christmas eve, 1717

December 23, 2017 4 comments



On 24 December 1717, three hundred years ago today, a northwesterly storm hit the coasts of North Europe. About 14.000 died, over 2.000 of these in the Dutch province of Groningen but only 150 in neighboring Friesland. Why this difference? We do know the answer: Friesland had better coastal defences. Frisian ‘dijken’ were better designed, higher and, especially, better maintained than in Groningen. As Frisian public governance of these public goods was better. In 1716, the Groningen government had been warned, see the extensive report by Thomas van Seeratt, the newly appointed ‘master of coastal defences’, available and transcribed here. After 1717, money became available and the very able and dynamic van Seeratt did a good job to improve the Groningen ‘dijken’. The history of coastal defences is long, simple and somewhat repetitive: ‘After the storm, we improve our public coastal defences’ (why do you think these Frisian ‘dijken’ were better): again and again taxes are increased and monetized, governance is centralized, and designs and maintenance are improved, leading to lasting improvements. I love taxes (plus good government).

Happy Christmas.

The European Commission on how (not) to change the Eurozone

December 23, 2017 2 comments

Previous posts in this series on central banking: ideas of Willem Buiter, Richard Werner, Thomas Mayer, excerpts from a recent paper by Mike Konczal and Josh Mason, Edward Harris and ideas from the German Handelsblatt shadow council. Today: the European Commission.

Why? A lot of people want to change (European) monetary policy and central banking. This includes the members of the European Commission. They want 2 things:

  • A larger Eurozone
  • Some kind of ‘transfer’ union which somehow transfers either investments or income or financial funds to members in need (but also restricts discretionary powers of members to increase or decrease government spending).

The first point is delusional. The idea behind the second point: the Eurozone is a ‘free flow of funds’ zone. As freely flowing funds can, thanks to ‘markets’, stop suddenly or reverse course, a ‘free flow of funds’ zone is prone to financial havoc which brings entire economies to the ground. Remember above 25% unemployment in Spain and Greece, not even counting ‘broad’ unemployment. According to the EC we need better institutions to counter this. Bill Mitchell about this (excerpt):

This is the second part of my two-part series analysing the latest offering from the European Commission on Eurozone ‘reform’. Today, I consider the two ‘concrete’ proposals to emerge from last week’s – Completing Europe’s Economic and Monetary Union – policy package. The two ‘concrete’ proposals are: Creation of a European Monetary Fund to absorb the intergovernmental European Stability Fund and the integration of the Fiscal Compact into the Treaty on the Functioning of the European Union. Neither are reforms worth considering. Read more…

William White: wrong about the future of central banking

December 18, 2017 8 comments

“We too must bring into our science a strict order and discipline, which we are still far from having…by a disorderly and ambiguous terminology we are led into the most palpable mistakes and misunderstandings – all these failings are of so frequent occurrence in our science that they almost seem to be characteristic of its style.”

– Eugen von Böhm-Bawerk (1891: 382-83)

What William White writes about inflation is wrong, sloppy and seems a conscious effort to derail the discussion. Today again a bit about central banking but this time more critical. On the prestigious Project Syndicate site, William White (former deputy governor of the Bank of Canada, and a former head of the Monetary and Economic Department of the Bank for International Settlements, Chairman of the Economic and Development Review Committee at the OECD) published a blogpost, ”The Dangerous Delusion of Price Stability”, Read more…

Central banking: Edward Harris on why raising interest rates in an overleveraged economy is very risky

December 17, 2017 4 comments

Even more about central banking. Why so much? Partly because people are writing very good stuff about it (like the AAA piece from Edward Harris below (excerpt)). Partly because we seem to see the end of the era of ‘pure’ inflation targeting. And (part of this last trend?) partly because soon Merkel and Macron will sit together to redesign the Eurosystem. Previous posts: ideas of Willem Buiter, Richard Werner, Thomas Mayer excerpts from a recent paper by Mike Konczal and Josh Mason and ideas from the German Handelsblatt shadow council.

As the Federal Reserve meets today [last week: M.K.] to decide how to communicate its messaging on future rate hikes and balance sheet reduction, financial stability will play a key role. Yesterday, I wrote about the Bank of International Settlements new warnings on financial stability. And just this morning, I read a piece from Goldman Sachs Asset Management EMEA division head Andrew Wilson, warning that the risk of overheating was real. So let’s put some framing around this issue and ask how the Fed reacts as the data come in down the line.

In the past decade on Credit Writedowns, I have had a lot of good commentary from different writers on financial stability. And most of it is based around Hyman Minsky’s Financial Instability Hypothesis. Read more…

The ECB shadow council on the ideal ECB. Inflation targeting: out. Financial cycle: in.

December 13, 2017 1 comment

Some years ago, Cladio Borio from the BIS introduced the ‘financial cycle’. Here, a Borio/Lowe paper from 2002. What’s the financial cycle? From the twenties of the twentieth century onwards Wesley Mitchell and the NBER (National Bureau of Economic Research) perfected the (monthly) measurement of the classical business cycle (a still ongoing project). The concept of this business cycle of the ‘flow’ economy was and is the cornerstone of much macro-economic theorizing. ‘Chicago style economists’ rationalized the idea that low and stable inflation (1) could be engineered by the central bank and (2) was enough to control this business cycle. The idea of Borio (and others) is that, next to this cycle, there also is a financial cycle related to credit and assets, mainly houses which can not be tamed by low and stable inflation. This idea, while not entirely new (Minsky!), seems to have gotten traction when we look at responses of members of the Handelsblatt ‘Shadowcouncil’ of the ECB. See about this also Willem Buiter, Richard WernerThomas Mayer  and Mike Konczal and Josh Mason

Shadow ECB Council Sees Changes to ECB Mandate Shadow ECB Council favors sweeping changes to the ECB’s mandate to account for some of the mistakes in the policies of the past. Some members favor a dual mandate that includes employment, but most pushed for upgrading the importance of financial stability Read more…

Mike Konczal and Josh Mason on the Ideal Central Bank

December 10, 2017 4 comments

We’re publishing some expert ideas about the future of the ECB and monetary policy. Three days ago some ideas of Willem Buiter were published, two days ago some ideas from Richard Werner and yesterday ideas from Thomas Mayer. Today some excerpts from a recent paper by Mike Konczal and Josh Mason. They are not part of the Handelsblatt Shadowcouncil but their ideas often tally with those already published:

  • Pure ‘inflation targeting’ is (mortally?) compromised
  • Hence, central banks are overburdened and need to share responsibility for stable economic and financial development with (other parts of) the government
  • But there are serious coordination issues (this looms larger in the Eurozone than in the USA) with regard to management of monetary/fiscal policy as well as with regard to macro and micro allocation of credit
  • ‘Credit guidance’ (which the government is already doing, think for instance about the deductability of mortgage interest in many countries) has to be rebooted and aimed at long-term productive investment. Opinions differ about the exact shape of this.
  • But it does mean that increased democratic and social accountability is important

There are substantial policy questions about the ways in which the Federal Reserve stimulates the economy by hitting the gas pedal or brake, by way of increasing or decreasing the single interest rate, is consistent with larger economic goals, including ensuring financial stability, fostering productive investment and good jobs, and directing society’s resources toward urgent social problems, such as climate change. In particular, we review recent proposals for modifying the inflation target of monetary policy and for allowing the overnight interest rate to move below zero. Read more…