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The Draghi speech on structural reforms: mistakes, misunderstandings and defunct models

May 23, 2015 1 comment

“As of 2005 Spain had the second highest immigration rates within the EU, just after Cyprus, and the second highest absolute net migration in the World (after the USA). …  In fact, booming Spain was Europe’s largest absorber of migrants from 2002 to 2007, with its immigrant population more than doubling as 2.5 million people arrived.”

Contrary to what Mario Draghi tells us in his recent speech ‘structural reforms, inflation and monetary policy’, more ‘flexibility’ is not the answer to the Eurozone woes. Maybe even to the contrary. Flexible labour markets and deregulated financial markets did not just enable the buildup of housing bubbles and an oversized financial sector and unsustainable private debt levels in countries like Spain, Ireland and the Netherlands but also caused them. Fast ‘reallocation of resources between sectors’, lauded by Draghi, like mass immigration of construction workers in Spain and Ireland, mitigated wage increases. Which led to an even larger bubbles Read more…

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Links. The standard of living and how to measure it.

May 21, 2015 3 comments

How to measure the standard of living? Is it about market production? Or about happiness? Or about market production plus home production (the washing machine!) plus government production? Or about utility? Or even about ‘the biological standard of living’? Or where we live? Or all of these? Below, three excerpts from recent articles about this, from John Komlos, Diane Coyle and Eurostat.

My take:(1) we should be wary of national averages while (2) national accounts are highly useful and even indispensable to calculate (using input-output models) the change in CO2 production caused by a change in final demand, technology or gasoline taxes. These accounts are not just about GDP, though GDP is, in an accounting sense, the emergent statistical keystone of a national money based economy. And (3), as Komlos shows social differences permeate our entire life. Read more…

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DSGE macro models criticism, a round up. Part 5, the intertemporal government budget constraint

May 20, 2015 9 comments

Guest post by Brian Romanchuk (see also his blog Bond Economics)

Earlier posts in this series, which consists of concise posts looking at DSGE models using the lens of statistical concepts, were about money, market fundamentalism, unemployment and capital.

Problems With Fiscal Policy In DSGE Models

Dynamic Stochastic General Equilibrium (DSGE) models suffer from a great many defects, but the specification of fiscal policy in standard models stands out. Given the ongoing wave of publications of these models, it is hard to generalise about them. My statements here are based on how fiscal policy is represented within the models presented in the Chapter 12 of the text Advanced Macroeconomics by Paul Romer (fourth edition). The models in Romer are fairly indicative of much of the literature, but my criticisms here will not apply to all of them.

Behavioural Assumptions

One of the key results used within DSGE models is that the timing of taxes has no effect on household behaviour.  This assumption is known as “Ricardian Equivalence”. There is an academic literature which questions this behavioural assumption. Although this is an interesting debate, my view is that the specification of fiscal policy within DSGE is internally inconsistent, and so the quality of the behavioural assumptions around Ricardian Equivalence appears to be a secondary issue. Read more…

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Greece, cognitive dissonance edition

Did I ever tell you that the extremely hostile reaction of the Troika towards the Syriza government made it miss a unique chance? Well, it did. As I see it, the window of opportunity has closed. For the first time in decades Greece had (and still has) a responsible government. But all available Troika-energy was directed at derailing the Greek economy, corrupting information, saving the Troika ego’s and toppling Syriza. I’m afraid the derailment program succeeded, despite the green shoots mentioned below.

From Bruegel.org:

The State budget balance records a deficit of EUR 508 mn over January- April 2015, against the target of deficit of EUR 2.9 bn set in the 2015 budget, and significantly lower than for the same period of 2014 (when the deficit was EUR 1.15 bn). The State budget primary balance records instead a surplus of EUR 2.16 bn over the first four months of the year, against the target primary deficit of EUR 287 mn. This implies that in cumulative terms the State primary balance has over-performed the target by as much as EUR 2.45 bn

Read more…

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Deflation in Greece: a hideous loose-loose situation

May 18, 2015 1 comment

Deflation in Greece is serious. In the fourth quarter of 2014 the price level was 8% lower than in the third quarter of 2009 (seasonally adjusted data) – which means that total income (wages, profits, mixed income of the self-employed) is 8% lower than it would have been if the price level had not changed. As this, predictably, leads to a decline of tax income of the government of about the same size this makes it quite difficult for the government to balance the budget. One of the goals of austerity is a decline of the relative price level of countries. Greece did accomplish this. Compared with the Eurozone average the price level of Greece has deteriorated with about 12% (2010-I – 2014-IV). The decline of the Greek price level is, in the medium run, much larger than the decline of the Spanish and Portuguese price level, which makes one wonder why other, less ‘succesful’ austerity countries like Spain and Portugal are so critical of Greece. As austerity was imposed upon Greece by the creditors it seems less than fair that these same creditors do not take responsibility for their actions and write down the debts. It was not Greece which shot the creditors in the foot. Source: Eurostat.

Greek deflation

Read more…

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Fact checking Jens Wedmann – deflation and ELA edition

May 17, 2015 2 comments

Update: the GDP price level of Greece deteriorated, according to the most recent estimates, with 8% (quarterly data), not 10%. Post adapted.

As the head of the Bundesbank Jens Weidmann has a large responsibility. His acts and remarks influence the lifes of millioins. But he’s not up to this task. He at least does not seem to know what he is talking about. In a recent interview in the German Handelsblatt he makes, as far as I’m concerned, two major mistakes.

1) He states that the weekly increases in ECB ‘ELA-money’ (Emergency Liquidity Assitance’), which keep the Greek banks afloat, are not to be accepted as the freshly printed money is used to ramp up lending to the Greek government, which means that these increases violate the ban on monetary financing of the government by the ECB. Probably, somebody told Weidmann that the net position of the Greek government vis-a-vis the Greek banks is deteriorating. Which is right. But balance sheets have two sides. And looking at both of these shows that this deterioration is not caused by an increase of bank lending to the government (to the contrary – bank loans to the government have diminished a little between December 2014 and March 2015). Read more…

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Piketty and the non-applicability of neoclassical economics

May 17, 2015 5 comments

from Lars Syll

economic-mythIn yours truly’s On the use and misuse of theories and models in economics the author of Capital in the Twenty-First Century is criticized for not being prepared to fully take the consequences of marginal productivity theory — and the alleged close connection between productivity and remuneration postulated in mainstream income distribution theory — over and over again being disconfirmed both by history and, as shown already by Sraffa in the 1920s and in the Cambridge capital controversy in the 1960s, also from a theoretical point of view: Read more…

We rely on economics too much

May 14, 2015 7 comments

from Peter Radford

I think I am with Tony Judt on this one. I am reading the new collection of his essays written between 1995 and his death in 2010, and have had my memory jolted: he gave us many very considered critiques of modern economics, although they were usually dressed within the context of a book review. The point I am agreeing with is this statement he gives us in his 2009 speech called “What Is Living and What Is Dead in Social Democracy?”:

“But how did we, in our own time, come to think in exclusively economic terms? The fascination with an etiolated economic vocabulary did not come out of nowhere.”

Etiolated? Lovely, but I disagree. Our economic vocabulary is both robust and way too vigorous to be etiolated. On the contrary, economics has become a weed infesting society in every corner, and our use of it is far too frequent to consider it etiolated at all. Indeed our reliance on economic vocabulary belies the gaping holes in the theories that those words depend upon for their relevance.

But the larger point: that we overuse economics, that we see our world in economic terms rather than in other, perhaps more relevant, terms, and that we have come to depend too much on economic analysis to justify our actions is one I wholeheartedly endorse.  Read more…

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U.S. lags badly in employment of prime-age workers

May 13, 2015 3 comments

from Dean Baker

In 2006, before the recession hit, there was not much difference in the employment rate for prime-age (ages 25–54) workers in the United States and other wealthy countries. The employment to population ratio (EPOP) for prime age workers in the United States was 79.8 percent. That was slightly below the 81.2 percent rate in France and the United Kingdom, but slightly above the 78.8 percent rate in Germany.

However, the recession has seriously altered the patterns of employment of prime age workers. According to the latest OECD quarterly data, Germany and Japan both now have EPOPs for prime age workers that are well above their pre-recession levels, at 83.4 percent and 82.6 percent, respectively. The EPOP for prime age workers in the U.K. has risen slightly to 82.3 percent, while it has fallen slightly to 80.4 percent in France.

Read more…

Categories: The Economy

The new BIS ‘Handbook on security statistics’. A reason to celebrate.

May 12, 2015 1 comment

The BIS (Bank for International Settlements) has, together with the IMF and the ECB, published a new handbook on how to estimate debt. A reason to celebrate. Mainly, of course, as the handbook enables more consistent and better measurement of debt-securities (mortgages, bonds and the like). But also as this handbook shows how much economic statistics are consistent with the ideas and concepts of institutional and Post-Keynesian statistics. And how inconsistent with mainstream economics. About the first fact we can cite the website blurb (which does not mention the phrase ‘The Great North Atlantic post 2008 debt crisis’ but we all know what this is about):

The importance of securities markets in intermediating financial flows, both domestically and internationally, underscores the need for relevant, coherent and internationally comparable statistics. This need was recognised by the G20 Data Gaps Initiative Read more…

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The shifting battleground

May 11, 2015 5 comments

from Asad Zaman

The bull charges the red flag being waved by the matador, and is killed because he makes a mistake in recognising the enemy. Samuel Huntington argued that the era of the clash of nations is over. However, he created a red flag when he painted the civilisation of Islam as the new enemy. Trillions of dollars have been spent in fighting this enemy, created to distract attention from the real enemy.

The financial deregulation initiated in the Reagan-Thatcher era in the 1980s was supposed to create prosperity. In fact, it has resulted in a sky-rocketing rise in inequality. The gap between the richest and the poorest has become larger than ever witnessed in history. Countless academic articles and books have been written to document, explain and attempt to provide solutions to the dramatic increase in inequality. The American public does not need these sophisticated data and theories; it experiences the fact, documented in The Wall Street Journal, that the quality of jobs and wage earnings are lower today than they were in the 1970s. Growing public awareness is reflected in several movies about inequality. For instance, Elysium depicts a world where the super-rich have abandoned the ruined surface of the planet Earth to the proles, and live in luxury on a satellite.  Read more…

Production of greenhouse gas and global warming: the sectoral cumulative carbon emission budget view

Recently a new report on global warming has been published: how much do sectors like agriculture, construction and households have to increase the ‘Carbon-efficiency’ of their ‘production process’ to limit global warming to 2%? Oops – the report states (using a refined version of a methodology which has been pioneered by Ben and Jerry’s) freight transport has (as I understand it, the report is not explicit about this) increase its efficiency seven fold.

Some graphs and an excerpt.

Graph 1. Historical production of greenhouse gas, mind the increasing rate of increase.

CO2

Agriculture is a very, very important source of greenhouse gases. Read more…

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DSGE macro models criticism 4. Capital.

Earlier posts in this series, which takes short looks at DSGE models using the lens of statistical concepts, were about money, market fundamentalism and unemployment.

There are at least three fundamental differences between ‘capital as statisticians measure it’ and ‘capital as a concept in neoclassical macro models’. Next to this, statisticians as well as neoclassical economists shy away from a crucial aspect of the ownership of capital: it’s forged in the fire of revolutions. Examples are the Protestant revolution (Cromwell, the Dutch Revolt, the  Glorious Revolution, expropriation of the massive wealth (land!) of many cloisters), the Enlightenment revolutions (the French revolution, the abolishment of slavery and the Civil War) or the decolonization revolutions. This last point won’t be elaborated but it is good to remember it when rating the statistics and the models – just read ‘Capital in the twenty first century’ to get an idea about the importance of slaves as a main asset on USA balance sheets before the civil war.

The three differences (to be elaborated below): Read more…

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Equality and efficiency in retrospect (3 graphs)

from David Ruccio

I remember my dismay, when I first began teaching economics, how enthralled my colleagues (at least the liberal ones) were with Arthur Okun’s notion of the fundamental tradeoff between equality and efficiency (which they supplemented with John Rawls’s theory of justice). No critique of capitalism, no critique of political economy. They believed the democratic process would find the appropriate balance between market efficiencies and nonmarket interventions to create greater equality.

I was never happy with the idea of such a tradeoff (or, for that matter, with the veil of ignorance), because it was based on denying the fundamental injustice embedded in a capitalist economy—the appropriation and distribution of a surplus produced by the majority for the benefit of a tiny minority at the top. And no amount of celebrating the supposed efficiencies of capitalist markets (which, for the most part, were simply assumed) or tinkering with the distribution of income (with tax-based redistribution) was going to fix that. Read more…

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Why the ergodic theorem is not applicable in economics

May 8, 2015 40 comments

from Lars Syll

At a realistic level of analysis, Keynes’ claim that some events could have no probability ratios assigned to them can be represented as rejecting the belief that some observed economic phenomena are the outcomes of any stochastic process: probability structures do not even fleetingly exist for many economic events.

7107nQVwWOLIn order to apply probability theory, one must assume replicability of the experiment under the same conditions so that, in principle, the moments of the random functions can be calculated over a large number of realizations …

For macroeconomic functions it can be claimed that only a single realization exists since there is only one actual economy; hence there are no cross-sectional data which are relevant. If we do not possess, never have possessed, and conceptually never will possess an ensemble of macroeconomic worlds, then the entire concept of the definition of relevant distribution functions is questionable. It can be logically argued that the distribution function cannot be defined if all the macroinformation which can exist is only a finite part (the past and the present) of a single realization. Since a universe of such realizations must at least conceptually exist for this theory to be germane, the application of the mathematical theory of stochastic processes to macroeconomic phenomena is therefore questionable, if not in principle invalid.

Paul Davidson

Read more…

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Pain versus gain: Argentina, Greece, and Paul Volcker

May 7, 2015 1 comment

from Dean Baker

The NYT has a column by Uki Goni, warning of the bad things that will face Greece if it defaults. The default by Argentina in December of 2001 provides the basis for his warnings.

“Economic activity was paralyzed, supermarket prices soared and pharmaceutical companies withdrew their products as the peso lost three-quarters of its value against the dollar. With private medical insurance firms virtually bankrupt and the public health system on the brink of collapse, badly needed drugs for cancer, H.I.V. and heart conditions soon became scarce. Insulin for the country’s estimated 300,000 diabetics disappeared from drugstore shelves.

“With the economy in free fall, about half the country’s population was below the poverty line.”

There is no doubt that the people of Argentina suffered serious hardship due to the default. However it is important to recognize that they were suffering severe hardship even before the default. The economy contracted by 8.4 percent since its peak in 1998, and contracted by 4.4 percent in 2001 alone. The unemployment rate had risen to more than 19.0 percent. Even worse, there was no end in sight.  Read more…

Categories: The Economy

Income inequality begins at birth and these are the stats that prove it.

May 6, 2015 4 comments

from John Komlos

Even conservative Republican Alan Greenspan, an ardent advocate of free markets, is beginning to see inequality as a fundamental threat to the system and admits that,

“You cannot have the benefits of capitalist market growth without the support of a significant proportion, and indeed, virtually all of the people; and if you have an increasing sense that the rewards of capitalism are being distributed unjustly the system will not stand.”

Well, the system was not standing very sturdily during the days of rage in Baltimore or in Ferguson. So we need to look beyond the ugly surface manifestations of young black men being shot in the back or suffocated and consider the deeper socioeconomic plight of this demographic in this country in 2015. The truth of the matter is that people of color are disadvantaged by the current socio-economic system from the very beginning of their lives.

Problem no. 1: babies born in low-income neighborhoods will go to bad schools.  Read more…

Categories: The Economy

Links. Banks, Money, Solar energy unbound, Great Depression and money, competitivety and productivity.

May 6, 2015 4 comments

1) Tim Worstall has a nice piece on the shortage of (hotel quality) toilet paper in Venezuela, which shows that he mastered institutional ideas about how markets work (there is more between heaven and earth than USA chartered listed companies).

2) Nice piece about the plunging costs of storing energy. Yes, ‘Tesla batteries’ but also something as simple as compressed air. We will see hundreds of billions of investments in decentralized, sustainable energy production and storage in the coming decades (around the North Sea this even cheap storage of wind and solar will however not solve the problem of foggy december days). Read more…

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Bob Solow, Matt Rognlie, Paul Romer, Mason Gaffney, the economic statisticians and rent incomes.

May 4, 2015 4 comments

Are we witnessing one of these rare moments when rock solid intellectual positions suddenly become fluid and start flowing? One of the problems of neoclassical economics is the replacement of the classical ‘land, labour, capital’ trichotomy with the ‘labour, capital’ dichotomy. But suddenly it seems to leap back into the mind of economists. This might seem like an arcane detail of the history of economic though – but it isn’t. Removing ‘land’ (i.e. unproduced but valuable inputs like land, aquifers, stocks of oil, clean water and the like) from the income equations rules out rent incomes. According to Mason Gaffney (here) removing ‘land’ from economic theory was a conscious act, subsidized by land owners, to disable for instance the systematic taxation of land rent incomes. And with, according to Gaffney, dire consequences. Writing about Henry George he states  Read more…

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Job growth in europe since 1995. Not what we are told to expect.

Do low wages lead to high job growth? Or are UK-style ‘flexible’ job markets in combination with house price subsidies the answer to the European jobs problem? In the long run – not really. Low wage Poland did not do too well, since 1996. And in a longer term perspective UK job growth – at present about the highest of the EU – is not really special. Job growth does not seem to be about flexibility and low wages but about ‘dynamism’, the growth and decline of entire sectors of the economy in combination with the changes in productivity, events which are to an extent itself enabled by flows of labour towards new sectors.

MerijnKnibbe1

In the UK this meant, after 2008, an outflow from high productivity oil and finance and an inflow into low productivity ‘hospitality’. In Spain, health care did well, after 1995. In the somewhat longer run, the growth of sectors seems influenced by supply side reactions like the monetization of modern life itself – i.e. the fast post 1995 rise of the (female) participation rate in a country like Spain. We have to face the fact that the bubbles (not so much the price bubbles but the income generating building bubbles) might have enabled the growth of new sectors like health care which, after the bust, can hold their own… Read more…

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