Author Archive

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…

Thomas Mayer on the ideal European Central Bank

December 9, 2017 13 comments

We’re publishing some expert ideas about the future of the ECB (and hence Euro money). Two days ago some ideas of Willem Buiter were published, yesterday we published some ideas from Richard Werner. Today some ideas by Thomas Mayer. Beware the last sentence.

EMU is incomplete and dysfunctional The European Monetary Union (EMU) is incomplete and dysfunctional. First, it is incomplete, because the quality of book money created by banks through credit extension differs from country to country (depending on the quality of the banks’ credit portfolios and the financial capacity of the governments to support weak banks in their jurisdiction). We have a paper currency union (as euro notes are the same in all member countries), but no monetary union (as deposits differ). Second, EMU is dysfunctional, because the monetary policy of inflation targeting pursued by the ECB has broken down. Since the Phillips curve no longer works, the central banks has lost control over inflation. The ECB-“Insiders” (policy makers and their loyal “watchers”) of course deny that the emperor has no clothes and hope that the Philipps curve would come back at some point. This amounts to a denial of reality. Against this background, I propose first to complete EMU by introducing a safe bank deposit, i.e., a deposit fully backed by reserve money deposits at the central bank. The safe deposit would turn deposits (like bank notes) into complete substitutes across countries (anyone wanting to read more on this can find it here. Second, I propose that the ECB abandon the policy of inflation targeting and adopt a rule for the expansion of reserve money (which would of course translate into the expansion of the safe deposit). The rate of expansion should reflect the expected nominal growth rate of the economy. This rate could only be altered with a two thirds majority in the Governing Council on the basis of an assessment of any structural changes that are expected to change the long-term growth rate of the economy. I am aware that there would be no room for pro-active monetary policy in this regime. In my view, this is its biggest advantage.

Mit freundlichen Grüßen Dr. Thomas Mayer.

Richard Werner on the Ideal ‘European’ Central Bank

December 8, 2017 4 comments

As I stated yesterday we will publish some ideas about the future of the ECB. Yesterday some ideas of Willem Buiter were published. He wanted to abolish national central banks, to change the mandate, more transparency and an end to the prohibition of monetary financing. Today: Richard Werner. He warns us that it’s not just about the central bank but also about the ‘normal’ banks. More localism is needed. And the ‘tool’ credit guidance plus more localized banking may be more important than a mandate: let decentralized decisions rule money creation (as long as it is not for purchasing existing assets)!

The ideal central bank does not have the legal status of ECB or Reichsbank [the pre-1946 central bank of Germany, M.K.], but that of the Bundesbank

In my analysis of the ECB, published first in 2003 in my bestseller ‘Princes of the Yen: Japan’s Central Bankers and the Transformation of the Economy’ as chapter 19, and published in 2006 here, I pointed out that the ECB had not, in fact, been modelled on the Bundesbank, as had been variously claimed. Read more…

Willem Buiter on the ideal European Central Bank

December 7, 2017 4 comments

The future of Europe is at stake. Yesterday, the European commission published a Roadmap for deepening Europe’s Economic and Monetary Union. coincidentally, the German Handelsblatt ‘EZB Schattenrat’ (‘ECB shadow council’, of which I’m a member) today discussed the ideal European Central Bank. The coming days I will post some (written) remarks made by members of the shadow council as well as some stuff relating to the Roadmap. No mention will be made of individual verbal remarks. Recurring themes were however the tension between centralization and decentralization, the inadequacy of pure inflation targeting (but what has to come next?), the importance of financial stability, the wish that some kind of ECB prosperity mandate has to become more explicit and the need for accountability. Today: written remarks by Willem Buiter:

The ideal central bank of the future

1. The ECB should have financial stability as its overriding target. Subject to that it should target price stability and full employment. Read more…

The Euro Area double dip was caused by austerity (and yes: there was a double dip)

November 25, 2017 Leave a comment

MerijnKnibbe2What was the cause of the infamous Euro Area 2011-2013 double dip? Answer: a grave policy mistake. Already high ECB interest rates were increased (13 April 2011 13 July 2011) at the same time when fiscal policy was tightened (‘austerity’), unemployment was at record levels (graph 1) and use of capacity was still lowish (less important, core inflation was low, too). As a consequence, Euro Area unemployment started to increase at a time when Japanese and USA unemployment continued to decrease while UK unemployment started to decrease, despite the Eurozone dip. Brad Seltser has written a very good post about the demand side of this (second graph).


Read more…

Keynes was right about Quantitative Easing (QE)

November 13, 2017 7 comments


Did the growth of money caused by QE in the Eurozone (graph) stimulate economic activity? Not enough. According to John Maynard Keynes, in The general theory(1936),

The relation of changes in M (money) to Y (income) and r (the interest rate) depends, in the first instance, on the way in which changes in M come about.”

Put differently: credit and not money makes the world go round. Money creating lending to enable household purchases of existing homes has a quite different effect on the economy than money creating lending to exiting new companies which hire lots of labor to produce live saving medical equipment (or the latest craze, L.O.L. balls, works too). Quantitative easing by central banks is a nice albeit dismal empirical example which shows that the amount of money did grow thanks to QE – but that the wrong sectors obtained the money. Read more…

Demonetisation in India: the marketing view

November 7, 2017 Leave a comment

One of the advantages of marketeers, compared with neoclassical economists, is that they do not assume things about consumers but observe them or ask them questions. So did Nielsen India, a large marketing company, less then a month after the infamous Indian demonetisation. The report is ungated and, for one thing, contains valuable information about the female experience. An excerpt

PART B: DECODING CONSUMER SENTIMENT (Source: Nielsen India)To pick up the consumer sentiment at this point in time, where they would have startedadjusting to this new reality, we ran a consumer measurement of sentiment and reaction. We reached out to nearly 800 people* in an online survey carried out between 25th November and 1st December 2016. Findings were quite revealing (Cities covered: Mumbai, Delhi, Kolkata, Bangalore, Chennai, Ludhiana, Ahmedabad, Vijayawada; Male – 52%, Female – 48%; Age 18 – 45 years; Occupation working professional, housewife, students)

Decline in overall spending: About half the consumers have cut down their household spends significantly.

One out of five housewives has reduced spending by 50% or more. : Read more…

On Spain, Catalunya and former Yugoslavia

October 28, 2017 10 comments

Update 29-10-2017: in 2014 this important Voxeu post from Andrés Rodríguez-Pose and Marko Stermšek about the countries formerly called Yugoslavia was published. The data fully endorse the view I express: secession is economic folly but trajectories matter a lot. Their conclusions are, considering the data, imo too positive. In 2011 only one country, Slovenia, had significantly surpassed the 1985 level of production. But even Slovenia, which had a relatively very peaceful transition, experienced a 25% drop of GDP during the years of secession (others had drops of about 50% or even more). Many others in 2011 still had levels of production way below what was reached in 1985: 25 years of stagnation (and remember: economic growth is also better healthcare, better housing and more years of education).

  1. What I did not expect: In my lifetime I’ve seem countries in and around Europe disintegrate. The Soviet Union. Yugoslavia. Czechoslovakia. Iraq. Syria. And, work in progress, the UK. Spain seems to be next in line. In many fo these countries this process was accompanied by war.
  2. Vaclav Havel was the last president of Czechoslovakia and strongly opposed splitting up. Being a wise man, he resigned instead of using violence when he saw that it had become inevitable. Thanks to him we know that splitting up a country can be a relatively orderly and, especially, peaceful process.
  3. Spain and Catalunya are heading the other way.
  4. At this moment, provoking the opponent is a winning strategy for radicals at both sides which means that the radicals have all reasons to ‘cooperate’ with the other side when it comes to this.
  5. Many Catalunyan companies have already moved their headquarters out of Catalunya
  6. Soon, the despised tourists will tay away. Yes, the number of overnight stays of tourists in hotels in Barcelona quadrupled in a few decades and such increases do change cities into theme parks. Not funny. But what if they stay away? Even despite Multi year double-digit growth of tourism, unemployment in Catalunya is still high.
  7. Foreign companies will move away, too.
  8. Don’t forget that in an economic sense, Catalunya is a city-state, centered on Barcelona! Romantic ideas about small scale organic family farms and grocery shops which will save the day are wacky – these won’t buy you modern healthcare, let alone a Volkswagen and can’t sustain a city economy.
  9. Spain, backed by the EU and the USA, has every incentive to increase such economic havoc, for instance by reducing flows of government money. Catalunya may be a net contributor to the Spanish government but that does not mean that there are no gross flows which can be halted. Brussels will follow suite.
  10. Mind that as Catalunya won’t be a member of the EU its citizens will not have free rights of entree into the EU labor market.
  11. Even if Catalunya is a net contributor, it still profits from the 4,5% budget deficit of Madrid.
  12. Mind that after Yugoslavia split up its constituent parts experienced rates of inflation of 30, 40 and even almost 50% (Kosovo). Brussels did not come to the rescue (and citizens of these states are basically not allowed to work inside the EU). If companies move away, tourists stay away and money from Brussels and Madrid is halted such rates of unemployment are not inconceivable. Brussels won’t come to the rescue.
  13. Catalunya will, for a time, probably still use the Euro. But its banks will be cut short from the Target2 system which enables international payments. International payments will be, ahem, difficult. It does not have to be this way, but Rajoy does hold all the cards. All of them. Catalunya is at his mercy.

I can go on. Nothing good will come of this. Rajoy will have to ponder about the wisdom of Vaclav Havel. Catalunyans will however have to ponder about the possibilitiy of 40% unemployment. And the relative merit of being a paid guardian of a themepark instead of an unemployed citizen of Catalunya.