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Demise of the Dollar?

December 11, 2018 Leave a comment

from Asad Zaman

SADLY, it is true that ‘money makes the world go round’. But, it is also true that very few people understand how. This article is an attempt at explaining the basics of our global trading system.

A good starting point is the Bretton-Woods conference which took place in 1944, while the Second World War was still raging. The two World Wars had drained the treasuries of the European states, making the gold standard impossible to maintain. An entirely new system had to be created to enable global trade for the post-War era. At the Bretton-Woods conference, the most sensible proposal for the global trading system was created and advocated by John Maynard Keynes. Unfortunately, the political power of the United States enabled it to quash this proposal. Instead, gold was replaced by the dollar standard, with the proviso that dollars could be exchanged for gold.

When the Vietnam War forced the US to print an excessive amount of dollars, president Richard Nixon declared in 1971 that dollars would no longer be backed by gold, creating a brave new world of currencies without any backing. Just like a fixed exchange rate is the natural consequence of pegging currencies to dollar or gold, so too a floating exchange rate system emerges naturally when there are no pegs for any currency

Today, the dollar is at the centre of the global trading system, and is as good as gold once was. Everyone needs dollars as reserves to back up their currencies. To acquire dollars, all countries other than the US, must strive to increase exports — this is how one earns dollars. The US can increase imports just by printing dollars, while the rest of world exports goods and services to earn dollars. Because dollars are the gold of the modern financial system, the US can print money without adverse consequences. For instance, the US printed trillions of dollars to finance the Iraq war, and other trillions to bail out the financial sector from the global financial crisis that was created by it. read more

‘Controlling for’ — a methodological urban legend

December 10, 2018 2 comments

from Lars Syll

Trying to reduce the risk of having established only ‘spurious relations’ when dealing with observational data, statisticians and econometricians standardly add control variables. The hope is that one thereby will be able to make more reliable causal inferences. But — as Keynes showed already back in the 1930s when criticizing statistical-econometric applications of regression analysis — if you do not manage to get hold of all potential confounding factors, the model risks producing estimates of the variable of interest that are even worse than models without any control variables at all. Conclusion: think twice before you simply include ‘control variables’ in your models!

The gender pay gap is a fact that, sad to say, to a non-negligible extent is the result of discrimination. And even though many women are not deliberately discriminated against, but rather self-select into lower-wage jobs, this in no way magically explains away the discrimination gap. As decades of socialization research has shown, women may be ‘structural’ victims of impersonal social mechanisms that in different ways aggrieve them. Wage discrimination is unacceptable. Wage discrimination is a shame.   Read more…

Will degrowthing save the planet?

December 9, 2018 8 comments

from Dean Baker

[This is the third piece in an exchange with Jason Hickel on growth. Hickel’s response will be the last piece in the series.]

Jason Hickel responded to my earlier piece on degrowth arguing that in fact economic growth is inconsistent with a sustainable environment and that we have to get people to reject growth as an economic goal if we are going to limit the damage from climate change and excessive resource use more generally.

First, let me point out where we do agree. It is necessary to take drastic measures to reduce greenhouse gas emissions quickly. The world is falling far behind a path of emissions reductions (they are still rising) that will prevent excessive damage to the planet. Going beyond the issue of greenhouse gas emissions, we also have to take steps to reduce resource use more generally. The planet is rapidly losing habitat and species in ways that are irreversible.

I’m sure Hickel knows the data in these areas better than me, but I would not argue on the basic point. The question is whether degrowth needs to somehow fit into the picture. I will raise two points, one a question of logic and one a practical political issue.

On the logical point, I am at loss to understand why we would have a war on growth. Granted, we need to massively reduce our consumption of fossil fuels and over time other material inputs, but I am afraid I don’t see how that this precludes growth.  Read more…

DSGE — models built on shaky ground

December 8, 2018 5 comments

from Lars Syll

In most aspects of their lives humans must plan forwards. They take decisions today that affect their future in complex interactions with the decisions of others. When taking such decisions, the available information is only ever a subset of the universe of past and present information, as no individual or group of individuals can be aware of all the relevant information. Hence, views or expectations about the future, relevant for their decisions, use a partial information set, formally expressed as a conditional expectation given the available information.

vraylar-shaky-ground-large-4Moreover, all such views are predicated on there being no un-anticipated future changes in the environment pertinent to the decision. This is formally captured in the concept of ‘stationarity’. Without stationarity, good outcomes based on conditional expectations could not be achieved consistently. Fortunately, there are periods of stability when insights into the way that past events unfolded can assist in planning for the future.

The world, however, is far from completely stationary. Unanticipated events occur, and they cannot be dealt with using standard data-transformation techniques such as differencing, or by taking linear combinations, or ratios. In particular, ‘extrinsic unpredictability’ – unpredicted shifts of the distributions of economic variables at unanticipated times – is common. As we shall illustrate, extrinsic unpredictability has dramatic consequences for the standard macroeconomic forecasting models used by governments around the world – models known as ‘dynamic stochastic general equilibrium’ models – or DSGE models …  Read more…

Stability without growth: Keynes in an age of climate breakdown

December 7, 2018 7 comments

from Dean Baker

[This post is by Jason Hickel. He is responding to a post I did on the possibility of having growth in a sustainable economy. I will post a rejoinder later in the week. Jason will then get the last word in this exchange.]

What do Keynesian Democrats think about the movement for post-growth and de-growth economics? Dean Baker, a senior economist at the Center for Economic Policy Research in Washington, DC, has given us some insight into this question. In a recent blog post, republished by Counterpunch, he takes aim at two articles that I wrote for Foreign Policy in which I argue that it is not feasible to reduce our emissions and resource use in line with planetary boundaries while at the same time pursuing exponential GDP growth.

Baker agrees — thankfully — that we need to dramatically reduce emissions and resource use to prevent ecological collapse. But he thinks that this is entirely compatible with continued GDP growth.

Let’s imagine, he says, that a new government imposes massive taxes on greenhouse gas emissions and resource extraction while at the same time increasing spending on clean technologies, with subsidies for electric vehicles and mass transit systems. Baker believes that this will shift patterns of consumption toward goods that are less emissions and resource intensive. People will spend their money on movies and plays, for example, or on gyms and nice restaurants and new computer software. So GDP will continue growing forever while emissions and resource use declines.  Read more…

A little knowledge

December 7, 2018 4 comments

from Peter Radford

A little knowledge goes a long way.  That’s the saying, correct?  Well you’d never know it by looking at economics.  It’s hard to find knowledge anywhere.

Now I’m not being facetious about the gaps in economic theory.  Let’s all give the discipline its due and say that it has done a masterful job of getting as far as it has based on the limitations it bounds itself with.

It’s just that sometimes those limitations are glaring and can stop someone in their tracks if they’re not steeped in the dark arts themselves.

The results of those limitations are often a stunning avoidance of topics that are crucial to understanding a real economy.  Or at least they’re crucial to someone less determined to be so willingly limited.

I know, this is all vague.  Let me explain.

I have been re-reading an excellent book by Cesar Hidalgo.  It’s called “Why Information Grows”.  It was first published in 2015, and is well worth the time it takes to read through it.  Hidalgo is another of those apparently endless line of MIT types who wander all over topics in an unconstrained manner.  In his case he sets out a wonderfully clear account of what information is — as opposed to the usual rather cramped version built solely on Shannon’s communication theory.

I read the book back when it first came out.  My eye had been caught by it’s subtitle: “The Evolution of Order, from Atoms to Economies”.  How could I possibly pass that up?  Obviously I was not alone it being captivated by that innocent line because Paul Romer, someone far more august than me, also read it upon its publication.  I know this because he blogged about it in 2015.  Read more…

Micro-Meso-Macro: Redressing Micro-Macro Syntheses

December 7, 2018 Leave a comment

from Stuart Holland and Andrew Black and the current issue of Economic Thought

When Janet Yellen questioned in her address to the Boston Fed in 2016 why there had been a lack of rethinking in economic theory since the financial crisis, she cited a host of
macroeconomic analyses yet did not even refer to ‘too big to fail’. Whereas one of the
reasons for seeking to redress the missing middle in mainstream economics relates to the
increased concentration of banks in the US since the repeal of the Glass-Steagall Act in 1999 that not only aided the 2007-08 financial crisis, but has increased since it occurred (Grullon, Larkin and Michaely, 2017). Which also has been paralleled by ongoing concentration in global industry, with 100 corporations now representing half of world manufacturing output (UNCTAD, 2016) while 100 of them source over 70%, and 25 over 50% of global carbon emissions (CDP, 2017).  Read more…

Economic crises and uncertainty

December 6, 2018 7 comments

from Lars Syll

The financial crisis of 2007-08 hit most laymen and economists with surprise. What was it that went wrong with our macroeconomic models, since they obviously did not foresee the collapse or even make it conceivable?

There are many who have ventured to answer this question. And they have come up with a variety of answers, ranging from the exaggerated mathematization of economics to irrational and corrupt politicians.

0But the root of our problem goes much deeper. It ultimately goes back to how we look upon the data we are handling. In ‘modern’ macroeconomics — Dynamic Stochastic General Equilibrium, New Synthesis, New Classical and New ‘Keynesian’ — variables are treated as if drawn from a known ‘data-generating process’ that unfolds over time and on which we, therefore, have access to heaps of historical time-series. If we do not assume that we know the ‘data-generating process’ – if we do not have the ‘true’ model – the whole edifice collapses. And of course, it has to. I mean, who really honestly believes that we should have access to this mythical Holy Grail, the data-generating process?

‘Modern’ macroeconomics obviously did not anticipate the enormity of the problems that unregulated ‘efficient’ financial markets created. Why? Because it builds on the myth of us knowing the ‘data-generating process’ and that we can describe the variables of our evolving economies as drawn from an urn containing stochastic probability functions with known means and variances.  Read more…

Is shadow banking a serious threat in emerging markets?

December 5, 2018 Leave a comment

from C. P. Chandrasekhar and Jayati Ghosh

Everyone seems to have woken up to the fact that global debt levels are too high and portent difficulties ahead. As Figure 1 indicates, the levels of credit to GDP, which were so high as to be unsustainable and resulted in the big crisis of 2008, have increased even more since then. There was a phase of deleveraging in the advanced economies until around 2014, and in developing countries and emerging markets until 2011, but since then, credit/debt has been expanding again. So much so that the credit GDP levels in 2017 were 15 per cent higher than in 2008 in the advanced economies, and more than 80 per cent higher for emerging markets (Figure 1).

Figure 1: Since the GFC, credit to GDP ratios have increased significantly in both advanced economies and emerging markets                                     Source for all figures and tables: BIS online database

Read more…

Climate change: threats and challenges

from Maria Alejandra Madi

Global warming and global CO2 emissions are interconnected. In 2018, heatwaves were observed in Europe, Asia, North America and northern Africa, while the extent of Arctic sea ice has been continuously dropping. According to the World Meteorological Organization (WMO), the last four years (2015-2018) have been the warmest years on record. In particular, between January and October 2018, global average temperature increased 0.98 degrees Celsius above the levels of 1850-1900. If this trend continues, temperatures may rise by 3-5 degrees Celsius by 2100.

Global CO2 emissions have also been increasing in the last years. China and the US together account for more than 40% of the global total CO2 emissions, according to 2017 data from the European Commission’s Joint Research Centre and the PBL Netherlands Environmental Assessment Agency. After the withdrawal from the Paris climate change agreement, the US’s environmental policy shifted to a pro-fossil fuels agenda on behalf of the need to overcome the disadvantage of American businesses and workers. Trump called climate change a “very, very expensive form of tax”. Fossil fuel lobbies in Saudi Arabia, Russia and Canada are powerful forces against government climate policies.  read more

Tale of two depressions

December 4, 2018 4 comments

from David Ruccio

T2D

Mainstream economists continue to discuss the two great crises of capitalism during the past century like the pillars of society in the brothel—a “house of infinite mirrors and theaters”—in Jean Genet’s The Balcony.* The order they represent is indeed threatened by an uprising in the streets, and the only question is: can they reestablish the illusion of control?

Read more…

Polanyi and Keynes on the idea of ‘self-adjusting’ markets

December 2, 2018 4 comments

from Lars Syll

Paul Krugman has repeatedly over the years argued that we should continue to use maistream economics hobby horses like IS-LM and AS-AD models. Here’s one example:

So why do AS-AD? … We do want, somewhere along the way, to get across the notion of the self-correcting economy, the notion that in the long run, we may all be dead, but that we also have a tendency to return to full employment via price flexibility. Or to put it differently, you do want somehow to make clear the notion (which even fairly Keynesian guys like me share) that money is neutral in the long run.

I seriously doubt that Keynes would have been impressed by having his theory being characterized by​ catchwords like “tendency to return to full employment” and “money is neutral in the long run.”

quote-our-thesis-is-that-the-idea-of-a-self-adjusting-market-implied-a-stark-utopia-such-an-karl-polanyi-120-53-85

One of Keynes’s central tenets is that there is no strong automatic tendency for economies to move towards full employment levels.  Read more…

Restore higher tax rates for corporations that can’t contain CEO pay

December 1, 2018 3 comments

from Dean Baker

There is an argument that carries considerable currency on the right about the need to force the poor to do things that are actually good for them. This comes up frequently in the context of work requirements for people receiving benefits like Medicaid or food stamps (the Supplemental Nutrition Assistance Program).

The claim is that people will be made better off by working, since that will give them a foot into the labor market. They can eventually move up and earn enough so they no longer need these benefits. A major flaw in this argument is that the vast majority of non-disabled people who receive these benefits are already working.

While the idea of forcing people to help themselves doesn’t make much sense for these anti-poverty programs, they could make considerable sense for the governance of major US corporations. The problem is that shareholders seem to be unable to avoid paying out tens of millions of dollars to CEOs, even when these CEOs are not especially competent.

The problem is the structure of corporate governance. The people who most immediately determine the CEO’s pay are the corporation’s board of directors. These directors have incredibly cushy jobs. They typically get paid several hundred thousand dollars a year for perhaps 150 hours of workRead more…

new issue of Economic Thought

November 30, 2018 Leave a comment

Economic Thought

History, Philosophy and Methodology
Vol. 7, No. 2 

download issue in full

 

A Common Misunderstanding about Capitalism and Communism Through the Eyes of Innovation
Dirk-Hinnerk Fischer, Hovhannes Yeritsyan

Cherchez la Firme: Redressing the Missing – Meso – Middle in Mainstream Economics
Stuart Holland, Andrew Black

The Lucas Critique: A Lucas Critique
Christian Müller-Kademann

Quantum Economics
David Orrell

Computational Agents, Design and Innovative Behaviour: Hetero Economicus
Timon Scheuer

By paying a WEA membership fee here, or by giving a contribution here,
you will be making the WEA possible.

Demystifying economics

November 29, 2018 3 comments

from Lars Syll

The first thing to understand about macroeconomic theory is that it is weirder than you think. The heart of it is the idea that the economy can be thought of as a single infinite-lived individual trading off leisure and consumption over all future time …

reality-header2This approach is formalized in something called the Euler equation … Some version of this equation is the basis of most articles on macroeconomic theory published in a mainstream journal in the past 30 years …

The models may abstract away from features of the world that non-economists might think are rather fundamental to “the economy” — like the existence of businesses, money, and government … But in today’s profession, if you don’t at least start from there, you’re not doing economics.

J W Mason

Yes indeed, mainstream macroeconomics sure is weird. Very weird. And among the weirdest things are those Euler equations Mason mentions in his article.   Read more…

Left behind

November 29, 2018 4 comments

from David Ruccio

The historically low black unemployment rate is one of Donald Trump’s favorite applause lines. Even Reuters [ht: ja] declares that Trump is right.

It doesn’t seem to matter that most of the decline in the unemployment rate for African American workers (from a high of 16.5 percent in the beginning of 2010 to a low of 6.3 percent today) occurred before Trump was ever elected.

fredgraph (2)

What does matter is that, even as the rate has dropped (the purple line in the chart above), black workers’ pay (the green line) has barely changed. After falling precipitously (by 10 percent, from the end of 2009 to the middle of 2015), it has only increased slightly (by 3.8 percent). Overall, the real wages of black workers have actually declined (by 6.5 percent, between the end of 2009 to today).  Read more…

DSGE — a scientific illusion

November 28, 2018 5 comments

from Lars Syll

Dynamic stochastic general equilibrium (DSGE) models remain the work-horse models employed by many academics and research departments at central banks … Prior to the Global Financial Crisis the financial sector played no role in these DSGE models. That limitation is now widely acknowledged and numerous aspects of the financial sector have been incorporated into second and later generation DSGE models … Unfortunately, these efforts are misguided because they do not address the fundamental flaw in the microeconomic foundations of these models and this mistake is widely repeated in all later generations of DSGE models.

macroeconomics-14-638Many theorists today simply fail to recognize the limitations inherent in starting with the wrong microeconomic foundations; frictionless or perfect barter microeconomic foundations. Consequently, those theorists are now intent on introducing ‘monetary’, ‘financial’ and other ‘frictions’ without acknowledging that those ‘frictions’ are inconsistent with the perfect barter or frictionless microeconomic foundations of their models as well as long established principles of monetary theory …   Read more…

We all use glasses to see the world.

November 27, 2018 1 comment

from Asad Zaman and the current issue of RWER

The outcome of all this discussion can be summarized metaphorically by saying that we all use glasses to see the world. The direct world out there is a jumble of sensations – a matrix of points – which makes no sense by itself, and must be interpreted using our own frameworks, represented by the glasses. This means that ALL observations are tinged with subjectivity, and interpreted within the frameworks created by our past experiences, successes and failures, in viewing the world.

A paradigm shift occurs if we remove the glasses we use to view the world, and instead put on a different pair of glasses. A famous experiment  conducted by Professor Theodor Erismann, of the University of Innsbruck put reversing glasses on his student and assistant Ivo Kohler. It caused extreme disorientation and discomfort at first, but after about a week of stumbling around, he adapted to this new way of seeing the world. His subjective interpretative equipment learned to interpret the reversed image by performing an additional reversal within the brain to arrive at a correct image of the world. Now, when the glasses were removed, the world appeared to be upside down to Ivo.  On a much larger scale, this is what happened in Europe due to the Great Transformation[1] which transformed traditional society to a market society, where everything is viewed a commodity for sale.  Later, these ways of thinking were spread throughout the world by colonization and Western education. We learned to value everything according to its market price, and forgot that the most precious things cannot be purchased. Then it became easy to kill a million children, and destroy entire nations, for corporate profits.  Read more…

Productive versus financial uses of credit

November 26, 2018 9 comments

from John Balder and the current issue of RWER

In addition to the explosive growth in credit, the manner in which credit was deployed also shifted toward financing transaction in housing and other assets (e.g., equities, bonds, et al). As noted above, up until the early 1980s, credit was used mostly to finance production of goods and services. Growth in credit from 1945 to 1980 was closely linked with growth in incomes. The incomes that were generated were then used to amortize and eventually extinguish the debt. This represented a healthy use of debt; it increased incomes and introduced negligible financial fragility.

However, as constraints were lifted, credit creation shifted toward asset-based transactions (e.g., real estate, equities bonds, etc.). This transition was also fueled by the record-high (double-digit) interest rates in the early 1980s and the relatively low risk-adjusted returns on productive capital. The expansion of credit lifted asset prices, fueling creation of more credit. Over time, financial innovations, including securitization and derivative instruments, also contributed to the explosive growth in trading activities that accompanied asset price appreciation.

Unlike credit allocated to the production of goods and services, a decision to allocate credit to finance transactions in already existing assets (e.g., home mortgages) does not increase value-added or GDP (wealth-effects aside). As the International Currency Review stated in December 1987:  Read more…

P-values are no substitute for thinking

November 25, 2018 2 comments

from Lars Syll

A non-trivial part of statistics education is made up of teaching students to perform significance testing. A problem I have noticed repeatedly over the years, however, is that no matter how careful you try to be in explicating what the probabilities generated by these statistical tests really are, still most students misinterpret them.  Read more…