from David Ruccio
Schauble, the German finance minister, did it again. In the New York Times: distorting the facts using a mixture of ignorance and misunderstanding to push an ideological agenda. The finance minister of Germany is clearly is not only the man who kicks the can down the Autobahn by postponing badly needed government investments. To be more precise: who kicks this can towards the banks by (1) postponing investments (2) demonizing any kind of government deficit and (3) at a time when the German state has to pay 0% interest rate, tries to outsource financing of the badly needed maintenance investments to a private/public corporation which has to pay much higher interest rates than the state, did not know his facts. Pub quiz question: which party (the government or the banks) will, according to the present plans, bear the risk of these investments…
Schauble also is – and will be remembered as – the man who wrote inconsistent and wrong, not fact checked nonsense in the New York Times. This newspaper is famous for its fact checking but this opinion piece by a foreign finance minister seems to have slipped through.
* Inconsistent as he states that he despises debt financed spending. But at the same time he accepts that German banks and companies lend tens and even hundreds of billions of euro to counterparts in other countries – to quite an extent to finance spending. The housing bubbles in Spain and Ireland really were related to the German (and Dutch) current account surplus, the Euro and financial integration and all that!
Source: Eurostat, national account series.
* Wrong, Read more…
from David Ruccio
The Wall Street Journal notes that workers wages in the United States are lower today than they were back in 1972.
In particular, both average real weekly earnings and real hourly earnings of production and nonsupervisory workers peaked in October 1972 (“when Richard Nixon won re-election, Eugene Cernan became the last man to walk on the moon and the Dow Jones Industrial Average closed above 1,000 for the first time”) and they still haven’t reached that level more than four decades later. Read more…
Look here for part 1 of this series, about money. Today: market fundamentalism. The posts are supposed to be succinct, to look at the issues from the angle of the economic statistician.
Today: market fundamentalism.
There are, in my view, three main strands of market fundamentalism in DSGE-macro models:
1) The idea that market prices are ‘optimal’, especially when we’re in equilibrium (whatever that is)
2) The idea that non market production, especially government production like lots of education or health care, is essentially worthless
3) The idea that markets are not just very dynamic and creative (which surprisingly does not seem to be very interesting to the DSGE economists) but that a market system leads to some kind of optimal general equilibrium or (taking the models at face value) is at least not totally inconsistent with such a situation. Read more…
from Dean Baker
The Labor Department reported the U.S. economy created 126,000 jobs in March. This was a sharp slowdown from the 290,000 average over the prior three months. This relatively weak jobs report led many economic analysts to comment that the economy may not be as strong as they had believed.
This reassessment is welcome, but it really raises the question of why so many professional economists and economic reporters could be so badly mistaken about the strength of the economy. There never was much basis for claiming a boom in the U.S. economy and the people claiming otherwise were relying on a very selective reading of the data.
Just starting with the most basic measure, real GDP in the United States grew at just a 2.2 percent annual rate in the fourth quarter of 2014. This is a pace roughly in line with most estimates of the economy’s potential rate of growth. This means that the economy was just keeping up with the growth in its potential, filling none of the large gap between potential GDP and actual GDP that still persists from the 2008–2009 recession. Read more…
Labros Skartsis has written a labour of love: “Greek vehicle & machine manufacturers 1800 to present. A Pictorial history“. One would maybe expect a rather thin book – but it isn’t. Skartsis wrote voluminous “tribute to a large number of engineers, designers and entrepreneurs whose efforts could soon be completely forgotten”. The tone of the volume is, understandably, somewhat desperate. Since 1981, when Greece entered the European Union, the history of Greek manufacturing is mainly a history of decline. Despite this, the book shows that Greece does have an engineering and designing tradition, even though the Greek themselves seem to be pretty indifferent about this. And even when manufacturing in Greece is finally, after almost seven years of fast decline, rebounding at least a little (graph).
Skartsis poses the question why Greece isn’t more of a manufacturing powerhouse, despite the significant tradition. According to him this is not caused by a high wage level but by lack of a manufacturing culture and manufacturing oriented policies. His introduction: Read more…
from David Ruccio
Harvard economics professor Sendhil Mullainathan is worried that too many of his students are taking jobs in finance. He should be worried for other reasons, too.
Mullainathan’s concern stems from the idea that much of the activity in the financial sector involves “rent-seeking”:
Instead of creating wealth, rent seekers simply transfer it — from others to themselves. . .
The economists Eric Budish at the Booth School of Business and Peter Cramton at the University of Maryland, and John J. Shim, a Ph.D. candidate at Booth, have shown in a study how extreme this financial gold rush has become in at least one corner of the financial world. From 2005 to 2011, they found that the duration of arbitrage opportunities in the Chicago Mercantile Exchange and the New York Stock Exchange declined from a median of 97 milliseconds to seven milliseconds. No doubt that’s an achievement, but correcting mispricing at this speed is unlikely to have any real social benefit: What serious investment is being guided by prices at the millisecond level? Short-term arbitrage, while lucrative, seems to be mainly rent-seeking.
This kind of rent-seeking behavior is widespread in other parts of finance. Banks sometimes make money by using hidden fees rather than adding true value. Debt collection agencies may use unscrupulous practices. Lenders to poor people buying used cars can make profits with business models that encourage high rates of default — making money by taking advantage of people’s overconfidence about what cars they can afford and by repossessing vehicles. These kinds of practices may be both lucrative — and socially pernicious.
On this site, we’ve occasionally criticized neoclassical ‘DSGE’ (Dynamic Stochastic General Equilibrium) macro models. Time for a round-up (comments welcome). This succinct round-up will not be an extensive discussion but will only provide some resources and, important, pay explicit attention to economic statistics which, as a rule, are conceptually much more consistent with Post-Keynesian and sometimes classical and Austrian economics than with neoclassical ‘macro’. I’ll use the next taxonomy to do this:
* Land, Labour, Capital
* Interest and portfolio’s
* Market fundamentalism
Update: because of comments the next items are added:
* The intertemporral government budget constraint
Money. The way Eurozone statisticians estimate ‘money’ can be found in this older 1999 ECB manual, which is consistent with the way Japanese, British or USA statisticians estimate ‘money’ as well as with newer manuals, which however do take recent institutional changes into account (shadow banking). Read more…
And another German economist did not bother to check the data. According to Ekhatimerini,
Additional Eurozone assistance to indebted Greece is dependent on Athens improving the state of its finances, German central bank executive Andreas Dombret said in Johannesburg on Friday. “Further assistance can only be granted to Greece if it applies sound public finances.
According to the facts (Eurostat, four quarter rolling average), the Greek government deficit is not only much smaller than the Spanish deficit but also smaller than the Dutch deficit. And the decline of the Greek deficit was 1,5 times as large as the Spanish and the Dutch decline combined…
Spanish job growth in 2014 was high in a comparative as well as in a historical perspective (graph 1) and, after the ‘Great Depression’ sized decline in employment caused by the financial crisis and the housing bust, of course very welcome (source: Eurostat). Job growth seems to be fairly balanced. Manufacturing (including utilities) and the ‘broad’ government sector (including health and education, which, though partly private, are always and everywhere heavily influenced by public arrangements and finance) added about 100.000 jobs (graph 2). The big winner was the leisure sector (tourism, hospitality, recreation, arts etcetera). Agriculture did bad. Will Brussels agree with an increasing number of ‘broad government’ jobs? According to neoclassical macro models popular in Brussels and Frankfurt, government health and education jobs add nothing of value… Read more…
The post 2008 decline of Macro Nominal Unit Labour Costs (NULC) in Ireland was not caused by austerity of wage restraint. It was caused by the housing bust (source: Eurostat, CBS). Which can’t be explained by neoclassical macro models. But which can be explained by simple arithmetic.
The bust led to the almost complete (from the top of my head: -93% at one point!) demise of ‘high NULC’ housing construction, which caused a decline of average macro NULC in Ireland – even when average wages did not change…. But this is not the only problem Read more…
from Lars Syll
As we all know Paul Krugman is very fond of referring to and defending the old and dear IS-LM model.
John Hicks, the man who invented it in his 1937 Econometrica review of Keynes’ General Theory – Mr. Keynes and the ‘Classics’. A Suggested Interpretation – returned to it in an article in 1980 – IS-LM: an explanation – in Journal of Post Keynesian Economics. Self-critically he wrote: Read more…
One of the marked characteristics of modern times is the decline in average hours worked (graph, via Henk de Vos). But: beware! There is more to averages than meets the eye which, for students of economics, is more important than the latest fad about regressions and statistical significance – this is about contentional significance.
When real male wages started to increase after about 1880 (very large international differences, but the decline of grain prices after about 1880 boosted the process) female labour market participation first decreased, Read more…
In this post Robert Parenteau and Trond Andresen propose a parallel currency for Greece. Here some snippets from the thread. Introductory remarks:
1) An effective tax system is crucial to the new system. Making the tax system more effective (and just) is top priority of the Tsipras government, as is clear from ‘the list‘. This is at the moment obstructed by the Troika.
2) The government of Iceland has published this immensely readable tract on monetary reform (great teaching resource!) which is, from Soddy and Keynes to Werner and Huber a good overview of how scientific economists think about money. And an analysis of the immense failure of ‘private’ banking in Iceland and the changing nature of the money-inflation nexus.
The snippets: Read more…
from C.P. Chandrasekhar and Jayati Ghosh
Indian media – as well as several official representatives of the government – are full of excitement at the possibility that in the coming year India’s rate of growth of economic activity might actually be higher than that of China. It is not just that the extremely rapid growth of the giant Asian neighbour is slowing down substantially, but also that India’s GDP growth is projected to be higher than before, and the CSO’s latest revisions to the GDP estimates suggest that the recent deceleration was less sharp than generally perceived.
Chart 1: China overtook India in terms of share of world GDP only from 1979 onwards
I’ve read the list with the Greek reforms.
1) It’s so much better than the Cyprus ‘save the creditors and abolish the siësta‘ Memorandum of Understanding
2) one recurrent theme: we’ll stop the looting of the state (tax evasion, a more efficient government, no fire sales of government property etcetera, implementing already introduced (tax-)laws, finishing the cadastral survey, more efficient and honest banks, a more targeted system of welfare).
3) Doing business will become a little easier
4) The weak and vulnerable will be protected a little better – in the end at the detriment of the creditors. THIS IS ABOUT MALNUTRITION AND EVEN HUNGER, AND HEALTH CARE FOR POOR CHILDREN. Time has already run out on this one.
Point 4 will of course make the list hard to swallow for Brussels.
1) On the Slack wire blog Josh Mason states, in a post about how restraining domestic demand led to current account surpluses in Europe (emphasis added): “Personally, I don’t think that the masters of the euro care too much about the outcome of the struggle for competitiveness; it’s the struggle itself — and the constraints it imposes on public and private choices — that matters. But insofar as the test of the success of austerity is the trade balance, I suspect austerity can succeed indefinitely“.
2) About these constraints: Schauble, the German minister of finance, blocks endeavours of the European Investment Fund to issue bonds and raise money to lend to small and medium enterprises in southern Europe, companies still have to pay interest rates which are way higher Read more…
from Dean Baker
So-called “sharing economy” companies such as Uber, Airbnb and Task Rabbit are posing policy headaches for governments around the world. Their argument that they should be exempt from existing regulations because their services are ordered over the web does not make much sense, but it provides an adequate fig leaf for politicians seeking campaign contributions from these highly capitalized newcomers.
For those who have missed the hype, “sharing economy” refers to a wide variety of companies that use the web to connect consumers and providers. While there is not reliable data on its size, in part because it is not well-defined, Airbnb now boasts far more room listings than Hilton or Marriott, and Uber has quickly grown to be the largest taxi service in the world.
Part of the response to the innovations associated with these sharing economy companies should be to modernize regulations. It is reasonable to regulate taxi services in ways that ensure that cars are safe and drivers are competent and responsible. It is also reasonable to regulate rented rooms to ensure they are not fire traps. Similarly, both should be regulated in ways that ensure access to the handicapped and prevents discrimination. In addition, employees in these companies should be covered by workers compensation and protected by minimum wage and overtime rules. Read more…
Bubble Economics: Australian Land Speculation 1830 – 2013
Paul D. Egan and Philip Soos
Australia has experienced rapid housing price inflation since the mid-1990s, leading to claims that a bubble has formed in the residential property market. Between the low in 1996 and apparent peak in 2010, real housing prices soared by 123 per cent. Rampant overvaluation has become the norm across the capital cities and housing prices have become detached from economic fundamentals. Total land values relative to GDP doubled between 1996 and 2010, driven by rising residential land values. Gross and net rental yields have compressed to a historical low. In 2013, the gross and estimated net yields of houses were a miniscule 3.9 and 1.9 per cent nationwide. Conversely, the net price to earnings ratio is 53, indicating investors are paying massive premiums far in excess of rental income. Investment property rental income has not covered expenses, principal and interest since 2001. In combination, these factors suggest investment strategies are fixated on capital gain…
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