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Laughter is the best medicine

October 23, 2017 4 comments

from David Ruccio

Sometimes we just have to sit back and laugh. Or, we would, if the consequences were not so serious.

I’ve been reading and watching the presentations (and ensuing discussions) at the Rethinking Macroeconomic Policy conference recently organized by the Peterson Institute for International Economics.

Quite a spectacle it appears to have been, with an opening paper by famous mainstream macroeconomists Olivier Blanchard and Larry Summers and a closing session—a “fireside chat” without the fire—with the very same doyens of the field.

The basic question of the conference was: does contemporary macroeconomics, in the wake of the Second Great Depression, require a few reforms or does it need a wholesale revolution? Blanchard lined up in the reform camp, with Summers calling for a revolution—with the added spice of Adam Posen referring to himself as Trotsky to Summers’s Lenin.

Most people would think it’s about time. They know that mainstream macroeconomics failed spectacularly in recent years: It wasn’t able to predict the onset of the crash of 2007-08. It didn’t even include the possibility of such a crash occurring. And it certainly hasn’t been a reliable guide to getting out of the crisis, the worst since the Great Depression of the 1930s.   Read more…

Joan Robinson and the inadequacies of revealed preference theory

October 22, 2017 5 comments

from Lars Syll

We are told nowadays that since utility cannot be measured it is not an operational concept, and that ‘revealed preference’ should be put in its place. Observable market behaviour will show what an individual chooses …

joanIt is just not true that market behaviour can reveal preferences. It is not only that the experiment of offering an individual alternative bundles of goods, or changing his income just to see what he will buy, could never be carried out in practice. The objection is logical, not only practical …

We can observe the reaction of an individual to two different sets of prices only at two different times. How can we tell what part of the difference in his purchases is due to the difference in prices and what part to the change in his preferences that has taken place meanwhile? There is certainly no presumption that his character has not changed, for soap and whisky are not the only goods whose use affects tastes. Practically everything develops either an inertia of habit or a desire for change.

We have got one equation for two unknowns. Unless we can get some independent evidence about preferences the experiment is no good. But it was the experiment that we were supposed to rely on to observe the preferences.

As so often, Robinson hits the nail on the head.   Read more…

Whatever happened to ₹-money (and credit) in India?

October 22, 2017 2 comments

Aside: I didn’t know, but the ₹-sign is the official sign for the rupee

Why did the Indian economy not succumb under the weight of the sudden demonetization of 8 November 2016? The answer: to an extent because the government and the commercial sector kept borrowing from banks and spent this money.

India8

There is overwhelming evidence that at the grassroots level the dearth of cash caused by the financial folly disproportionately hurt the poor and unbanked as rebuilding took time and converting old notes to new ones did led to a short but crippling decline in the amount of available cash. This despite the fact that a much larger proportion of outstanding ‘old’ cash was converted to new money than expected. In spite of this, the official economy grew. How come? Credit growth rapidly rebounded… (see below). Read more…

Pie in the sky

October 21, 2017 2 comments

from David Ruccio

Kevin Hassett and the other members of the president’s Council of Economic Advisers are just like the long-haired preachers Joe Hill sang about more than a century ago. They come out every night to tell us what’s wrong and what’s right. But when asked about something to eat, they answer in voices so sweet:

You will eat, bye and bye
In that glorious land above the sky
Work and pray, live on hay
You’ll get pie in the sky when you die.
That’s a lie

With one notable exception: according to the Council (pdf), that “glorious land above the sky” lies just on the other side of the Trump administration’s proposed tax reform. And workers, whose real wages have stagnated for decades now, won’t have to die to receive their pie in the sky.

Reducing the statutory federal corporate tax rate from 35 to 20 percent would. . .increase average household income in the United States by, very conservatively, $4,000 annually. The increases recur each year, and the estimated total value of corporate tax reform for the average U.S. household is therefore substantially higher than $4,000. Moreover, the broad range of results in the literature suggest that over a decade, this effect could be much larger.

There’s no other way to put it. That’s a lie.   Read more…

Microeconomic aggregation problems

October 21, 2017 3 comments

from Lars Syll

If a demand function for the economy as a whole is to be estimated, just drawing upon the economy’s overall income and the price system, is it legitimate to use the demand system derived for an individual? In other words, can we estimate demand functions independently of the distribution of income and preferences across consumers?

fineNot surprisingly, the answer is no in general, and the conditions for it to be yes are extremely stringent, indeed unrealistically so. Essentially, the economy as a whole needs to consume as it were a single individual with a given income. But if we take income from one consumer and give it to another, the pattern of demand will be different unless those two consumers have the same preferences. So we have to assume that each and every consumer has the same preferences. However, even this assumption is not enough​. Suppose it is true, and take income from a rich person and give it to a poor person. Their patterns of consumption around their initial levels of income are liable to be very different, luxuries as opposed to necessities. So, redistributing the income from rich to poor will not leave demand unchanged but shift it from luxuries to necessities. To have an aggregate demand function as if the economy were a single individual it is necessary both that every individual has the same preferences and that those preferences remain in the same proportions at every level of income (or, to put it another way, once you know one indifference curve for our representative individual, you know them all, not only for that consumer, but for all others as well — all consumers must have the same, so-called homothetic indifference curves). To be sure that the aggregation problem to be negotiated, it is necessary that the economy’s demand be reduced to a singleindifference curve … Significantly, the insurmountable nature of the aggregation problem is well established within the orthodoxy, as a result of what is known as the​ Sonnenschein-Mantel-Debreu theorem …

Obviously, this is entirely unacceptable …

Read more…

More about the de-digitisation of money in India

October 20, 2017 1 comment

India4 On this blog Jayati Gosh published an excellent post about the monetary folly in India where without any notice overnight large denominations of cash were abolished to force people to use digital bank money. I totally agree with this analysis but I am able to add a little. The author takes cash withdrawals from ATM machines as an indicator of the re-monetization of the economy. The Bank of India however publishes data on the composition of the stock of money in India. See also here. This information enabled me to make the graph above which shows that, as early as January 2017, the failure of this policy was clear. The Bank of India clearly facilitated a rapid re-monetization (defined as an increase of M3 money, i.e. cash plus deposit money). Economic growth has according to official estimates taken less of a hit than expected but especially the (misnamed) ‘informal’ sector seems to have had dire times. Looking at the graph, it seems that the very rapid re-monetization which started after december 2016 might explain this conundrum to an extent (there also was a considerable downward change in the growth rate of the GDP deflator though it kept increasing).

For an analysis of USA involvement in this folly this post by Norbert Häring.

 

The de-digitisation of India

October 20, 2017 Leave a comment

from Jayati Ghosh

So it’s official: cash use is back in almost full force in the Indian economy. Cash withdrawals from ATM machines – a reasonable if incomplete proxy for the use of cash in the economy – are nearly back to the level of just before the demonetisation shock of 8 November 2016. RBI data on use of debit and credit cards to withdraw money from ATMs show that such withdrawals, which had collapsed to only Rs 850 billion in December 2016 largely because of the sheer unavailability of cash with such machines, amounted to Rs 2.27 trillion in July 2017, only slightly below the Rs 2.55 trillion withdrawals recorded for October 2016.

It is worth noting that this reliance on cash is back despite the fact that the RBI is yet to remonetise the economy fully: currency with the public on 15 September 2017 was still 11 per cent below its level of a year earlier. It cannot simply be assumed (as was done in the Economic Survey 2016-17 Volume II) that this reflects lower demand from currency by the public, since there is no evidence that it is not supply-constrained. Rather, the aggressive return of cash use suggests that it has only been the lack of supply of cash that has constrained people from using it in payments and exchange settlement.

Indeed, it is likely that if the RBI does fully remonetise, then cash use will increase further, since the economy is still growing and therefore the volume and value of total transactions must increase. What is more surprising is that total digital payments have not increased more along with economic growth. In fact such payments, which peaked dramatically in December 2016, are also back to the levels broadly seen in September-October 2016, despite the many incentives provided for such payments through official policy.   Read more…

Intellectual property for the twenty-first-century economy

October 20, 2017 1 comment

from Joseph E. Stiglitz, Dean Baker and Arjun Jayadev

When the South African government attempted to amend its laws in 1997 to avail itself of affordable generic medicines for the treatment of HIV/AIDS, the full legal might of the global pharmaceutical industry bore down on the country, delaying implementation and extracting a high human cost. South Africa eventually won its case, but the government learned its lesson: it did not try again to put its citizens’ health and wellbeing into its own hands by challenging the conventional global intellectual property (IP) regime.

Until now. The South African cabinet is preparing to finalize an IP policy that promises to expand access to medicines substantially. South Africa will now undoubtedly face all manner of bilateral and multilateral pressure from wealthy countries. But the government is right, and other developing and emerging economies should follow in its footsteps.

Over the last two decades, there has been serious pushback from the developing world against the current IP regime. In large part, this is because wealthy countries have sought to impose a one-size-fits-all model on the world, by influencing the rulemaking process at the World Trade Organization (WTO) and forcing their will via trade agreements.  Read more…

Putting theories to the test

October 19, 2017 2 comments

from Lars Syll

Mainstream neoclassical economists often maintain — usually referring to the methodological individualism of Milton Friedman — that it doesn’t matter if the assumptions of the theories and models they use are realistic or not. What matters is if the predictions are right or not. But, if so, then the only conclusion we can make is — throw away the garbage! Because, oh dear, oh dear, how wrong they have been!

The empirical and theoretical evidence is clear. Predictions and forecasts are inherently difficult to make in a socio-economic domain where genuine uncertainty and unknown unknowns often rule the roost. The real processes that underly the time series that economists use to make their predictions and forecasts do not conform with the assumptions made in the applied statistical and econometric models. Much less is a fortiori predictable than standardly — and uncritically — assumed. The forecasting models fail to a large extent because the kind of uncertainty that faces humans and societies actually makes the models strictly seen inapplicable. The future is inherently unknowable — and using statistics, econometrics, decision theory or game theory, does not in the least overcome this ontological fact. The economic future is not something that we normally can predict in advance. Better then to accept that as a rule “we simply do not know.”

papIt is of paramount importance that economists be frank with themselves and their audience. The limitations of current practice … must be recognized openly. If we are engaged in ex post facto explanation, we should be quite ready to say so, rather than pretend that our ‘theories’ can pass the same tests that theories of well-developed sciences can pass … Recognition of the character of current methodological practice will go a long way toward substituting fact for myth and thus open the way to new horizons of research.

Pie in the sky

October 19, 2017 4 comments

from David Ruccio

Kevin Hassett and the other members of the president’s Council of Economic Advisers are just like the long-haired preachers Joe Hill sang about more than a century ago. They come out every night to tell us what’s wrong and what’s right. But when asked about something to eat, they answer in voices so sweet:

You will eat, bye and bye
In that glorious land above the sky
Work and pray, live on hay
You’ll get pie in the sky when you die.
That’s a lie

With one notable exception: according to the Council (pdf), that “glorious land above the sky” lies just on the other side of the Trump administration’s proposed tax reform. And workers, whose real wages have stagnated for decades now, won’t have to die to receive their pie in the sky.

Reducing the statutory federal corporate tax rate from 35 to 20 percent would. . .increase average household income in the United States by, very conservatively, $4,000 annually. The increases recur each year, and the estimated total value of corporate tax reform for the average U.S. household is therefore substantially higher than $4,000. Moreover, the broad range of results in the literature suggest that over a decade, this effect could be much larger.

There’s no other way to put it. That’s a lie.   Read more…

Axioms — things to be suspicious of

October 18, 2017 10 comments

from Lars Syll

miracle_cartoonTo me, the crucial difference between modelling in physics and in economics lies in how the fields treat the relative role of concepts, equations and empirical data …

An economist once told me, to my bewilderment: “These concepts are so strong that they supersede any empirical observation” …

Physicists, on the other hand, have learned to be suspicious of axioms. If empirical observation is incompatible with a model, the model must be trashed or amended, even if it is conceptually beautiful or mathematically convenient.

Jean-Philippe Bouchaud

The Republican tax plan to slow growth

October 17, 2017 2 comments

from Dean Baker

In the speech where President Reagan launched his push for the last major tax reform in 1986, he criticized a tax code that “treats people’s earnings, similar incomes, much differently regarding the tax that they pay; and… causes some to invest their money, not to make a better mousetrap but simply to avoid a tax trap.” He was right to make these criticisms.

Unfortunately the current Republican plan goes in the opposite direction in two important areas: the treatment of the income from “pass-through” businesses and the taxation of the foreign earnings of U.S. corporations. By creating more opportunities for tax avoidance, the Republicans will be doing exactly what Reagan condemned, creating opportunities to make money through tax avoidance schemes rather than work and productive investment. For this reason, it could actually impede growth rather than being the promised boost to a slow growing economy.

The issue with income from pass-through corporations is straightforward. Pass-through corporations pay zero tax; all their profits are passed through to their owners who currently pay tax on them at the ordinary income tax rate.

The Republicans are proposing to change this system by having a special 25 percent maximum tax rate on income from pass-through corporations. Under their plan, a high income person who got their money from their job would face a 35 percent marginal tax rate, whereas a person who got the same income from a pass-through corporation would only pay a 25 percent rate.

Read more…

Tackle this!

October 16, 2017 11 comments

from David Ruccio

Inequality

The latest IMF Fiscal Monitor, “Tackling Inequality,” is out and it represents a direct challenge to the United States.

Read more…

AM02: Supply & Demand

October 16, 2017 Leave a comment

from Asad Zaman

2nd Lecture (90min) on Advanced Microeconomics at PIDE, (14 Sep 2017). While planning to teach a heterodox micro course, I was faced with the dilemma of choosing a suitable textbook. Interestingly, there are many options available, but I was not happy with most of them. Some were too mathematical for my taste, some made too many concessions to conventional micro while being critical of it, and some were simply not suitable for use as texts. Eventually, I decided to use Rod Hill and Tony Myatt’s: The economics anti-textbook: a critical thinker’s guide to microeconomics. Zed Books Ltd., 2010. I am very pleased with this choice. It provides contact with conventional micro that we need, together with a critique that is easy to understand, and can be used as a basis for construction of good alternative approaches.

I started the course (first lecture was preliminary introduction to methodology and approach) by covering Chapter 3: How Markets Work (In an imaginary world) of the H&M anti-textbook. This chapter attacks the central Supply and Demand model which is at the heart of mainstream micro in a beautiful and elegant way. I am impressed! I have myself written what I thought (and still think) is a very good critique (see The Conflict between General Equilibrium and the Marshallian Cross). I have also seen other critiques (like Sraffa). But H&M pointed out an angle that I had not considered before. They survey conventional textbooks to pick out the main message being conveyed in the S&D model and its policy implications. Then they show that the S&D model is heavily dependent upon the assumptions of perfect competition, which require small price-taking firms, full information and zero transaction costs. All conclusions of S&D and policy implications fail when firms have market power, and the reverse policy ocnclusions can be easily derived.   read more

Thaler and behavioural economics — some critical perspectives

October 15, 2017 Leave a comment

from Lars Syll

Although discounting empirical evidence cannot be the right way to solve economic issues, there are still, in my opinion, a couple of weighty reasons why we perhaps shouldn’t be too excited about the so-called ’empirical revolution’ in economics.

behBehavioural experiments and laboratory research face the same basic problem as theoretical models — they are built on often rather artificial conditions and have difficulties with the ‘trade-off’ between internal and external validity. The more artificial conditions, the more internal validity, but also less external validity. The more we rig experiments to avoid the ‘confounding factors’, the less the conditions are reminiscent of the real ‘target system.’ The nodal issue is how economists using different isolation strategies in different ‘nomological machines’ attempt to learn about causal relationships. One may have justified doubts on the generalizability of this research strategy since the probability is high that causal mechanisms are different in different contexts and that lack of homogeneity and invariance doesn’t give us warranted export licenses to the ‘real’ societies or economies.   Read more…

The New Paradigm that emerged in economic s after WWII

October 14, 2017 21 comments

from Robert Locke

As an historian, I am somewhat appalled at the inability of economists, including those on this blog to get the history of their own discipline straight.  The obsession has been with neoclassical economic’s attempt to turn economics into a physico-mathematical discipline as Walras phrased it, and the economists usually discuss this attempt within the historical context of their discipline pre-1945, with references, to  Walras, Marshall, Keynes, and others.

It  became clear to me over thirty years ago, that the neoclassical  effort to turn economics into a prescriptive science had failed before WWII.  I based this on good authority, when I read the following in the foreword to John von Neumann and Oskar Morgenstern’s now classic book published at Princeton UP in 1944, Theory of Games and Economic Behavior:

“The concepts of economics are fuzzy but even in those parts of economics where the descriptive problems have been handled more satisfactorily, mathematical tools have seldom been used appropriately. Mathematical economics has not achieved very much.”

If the mathematics of preWWII neoclassical economics had not achieved very much as a prescriptive science, then why study their work?  That is what Neumann and Morgenstern were asking.  The mathematics in Game theory, e.g., matrix theory and probability theory were not part of the mathematical toolkit of neoclassical economists prior to WWII.  Read more…

The International Monetary Fund’s world economic outlook in theory and practice

October 13, 2017 3 comments

from Mark Weisbrot

The International Monetary Fund (IMF) released its biannual “World Economic Outlook” (WEO) today, presenting a 300-page overview of the world economy and where it might be going. The Fund is one of the most powerful and influential financial institutions in the world. Despite the fact that this flagship publication, and the Fund’s hundreds of PhD economists, missed the two biggest asset bubbles in US and world history (the stock market bubble in the late 1990s and the housing bubble that triggered the Great Recession), the WEO is taken very seriously and contains much valuable data and analysis.

The fall WEO is relatively upbeat for the world economy in the short run but is more worried about downside risks in the medium term. It lists a number of concerns that anyone who cares about social or economic justice, or progress, would be concerned with, such as:

the recent surprisingly slow growth of nominal wages, which reinforces a longer trend of stagnant median wages, rising income inequality, and job polarization such that middle-skill but well-paying jobs have become increasingly scarce.

And the Fund argues that “governments should also consider correcting distortions that may have reduced workers’ bargaining power excessively” and “promote an environment conducive to sustainable real wage growth” as well as  Read more…

Keynes — the first behavioural economist

October 13, 2017 Leave a comment

from Lars Syll

To-day, in many parts of the world, it is the serious embarrassment of the banks which is the cause of our gravest concern …

[The banks] stand between the real borrower and the real lender. They have given their guarantee to the real lender; and this guarantee is only good if the money value of the asset belonging to the real borrower is worth the money which has been advanced on it.

It is for this reason that a decline in money values so severe as that which we are now experiencing threatens the solidity of the whole financial structure. Banks and bankers are by nature blind. They have not seen what was coming. Some of them … employ so-called “economists” who tell us even to-day that our troubles are due to the fact that the prices of some commodities and some services have not yet fallen enough, regardless of what should be the obvious fact that their cure, if it could be realised, would be a menace to the solvency of their institution. A “sound” banker, alas! is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him.   Read more…

Kevin Warsh as Fed Chair: The art of marrying rich and falling upward

October 12, 2017 1 comment

from Dean Baker

Since the dawn of time men have married into prominent families as a way to improve their career prospects, but as Jared Kushner can attest, the returns to marrying well have never been greater. We may see further proof of this proposition if Donald Trump selects Kevin Warsh to replace Janet Yellen as chair of the Federal Reserve Board.

Like Kushner, Warsh’s secret to success seems to rest largely on the family he married into. Warsh’s father-in-law is the billionaire Ronald Lauder, the heir to the Estee Lauder cosmetics fortune and a major Republican Party donor. 

If Warsh were picked his background would provide a sharp contrast to that of Janet Yellen. Yellen developed a reputation as a highly respected academic economist, having taught at both Berkeley and Harvard, and published dozens of articles in top journals. She went to Washington to become a member of the Fed’s Board of Governors under President Clinton and then served as the chair of his Council of Economic Advisers. She then served as president of the San Francisco Fed district bank, before being appointed as vice-chair by President Obama. She was elevated to chair in 2013 after Ben Bernanke completed his second term.

She not only has held top positions, but she has had a good track record in her performance in these positions. Notably, she began to be concerned about the fallout from the collapse of the housing bubble in early 2007.  Read more…

Nobel economics: the behaviorism of economic decisions and its secret

October 12, 2017 13 comments

from David Ruccio

Lots of folks have been asking me about the significance of the so-called Nobel Prize in economics that was awarded yesterday to Richard Thaler.

They’re interested because they’ve read or heard about the large catalog of exceptions to the usual neoclassical rule of rational decision-making that has been compiled by Thaler and other behavioral economists.

One of my favorites is the “ultimatum game,” in which a player proposes an allocation of an endowment (say $5) and the second player can accept or reject the proposal. If the proposal is accepted, both players get paid according to the proposal; if the proposal is rejected, both players get nothing. What Thaler and his coauthors found is that most of the second players would reject proposals that would give them less than 25 percent of the endowment—even though, rationally, they’d be better off with even one penny in the initial offer. In other words, many individuals are willing to pay a cost (i.e., get nothing) in order to punish individuals who make an “unfair” proposal to them. Such a notion of fairness is anathema to the kind of self-interested, rational decision-making that is central to neoclassical economic theory.  Read more…