from Peter Radford
This is meant as a friendly gentle nudge:
As we all know markets are heavenly creations of exquisite perfection. Free and impersonal markets that is. We just know this. It just is. Free impersonal markets are what have delivered us all from the abominations of servitude and the darkest poverty. They have enlightened us. The have illuminated us. They are what have enabled us to discover what we now know. Our literature, our arts, our politics, our cultures, our very beings are due entirely to the ability of free impersonal markets to grab hold of the tyrannical state and demolish its suffocating grip.
Markets said free, and they were free.
That in a democracy we the people are the state and so apparently have our own hands on our own throats is of no consequence. That ‘we the people’ stuff is just a veil behind which lurks the monster of the state waiting to bash us with another calamitous and inevitably doomed policy. Even if that policy was conceived with the best intentions. Read more…
from Steve Keen
In this post I consider the economy in general: I’ll cover asset markets in particular in the next column, but you’ll need to understand today’s post to comprehend the stock and property market dynamics at play. Having said that, the Shanghai Index fell another 7.5% on Tuesday, after losing 8.5% on Monday, and is now down over 45% from its peak—so I’ll try to write the stock-market-specific post by tomorrow. In this post I’ll show, very simply, why a slowdown in the rate of growth of private debt will cause a crisis, if both the level and the rate of change of debt are high at the time of the slowdown. Read more…
from David Ruccio
All the advice today—as the the Dow Jones Industrial Average fell by 1,089 points in the morning and, at this writing, remains almost 450 points below the opening—has been the same: keep calm and carry on investing.
from Dean Baker
Andrew Ross Sorkin seems prepared to pronounce Ken Rogoff to be prescient once again with his prediction that China would run into a debt crisis. Rogoff’s past claims to prescience might be viewed as somewhat questionable. He, along with co-author Carmen Reinhardt, famously argued that countries face a severe slowdown in growth when their debt to GDP ratios exceed 90 percent. It turned out that this claim was driven by an error in an Excel spreadsheet, nonetheless it was used to justify austerity in the euro zone, the United States and elsewhere. This austerity did help to worsen the downturns caused by the collapse of asset bubbles, in effect contributing to the crisis that Sorkin credits Rogoff with predicting. Read more…
from Dean Baker
We are seeing the usual hysteria over the sharp drop in the markets in Asia, Europe, and perhaps the U.S. (Wall Street seems to be rallying as I write.) There are a few items worth noting as we enjoy the panic.
First and most importantly, the stock market is not the economy. The stock market has fluctuations all the time that have nothing to do with the real economy. The most famous was the 1987 crash which did not correspond to any real world bad event that anyone could identify.
Even over longer periods there is no direct correlation between the stock market and GDP. In the decade of the 1970s the stock market lost more than 40 percent of its value in real terms, in the decade of the 1980s it more than doubled. GDP growth averaged 3.3 percent from 1980 to 1990 compared to 3.2 percent from 1970 to 1980.
Apart from its erratic movements, the stock market is not even in principle supposed to be a measure of economic activity. It is supposed to represent the present value of future profits. This means that if people are expecting the economy to slowdown, but also expect a big shift in income from wages to profits, then we should expect to see the market rise. So there is no sense in treating the stock market as a gauge of economic activity, it isn’t.
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For over a year now Spain shows high year on year employment growth. Excellent news and a clear sign of a serious recovery! But does this also mean that structural reforms are paying off? Four remarks:
A) The graph shows that. before 2008 (i.e.: before the reforms of the labour market), the Spanish labour market was extremely dynamic already, showing the highest rates of job growth of the entire North Atlantic economy. Which means that the 3% growth we witness at this moment is not any kind of proof of the success of structural reforms.
from Peter Radford
How do you calculate the marginal productivity of an economics professor? Especially a tenured professor. Especially a tenured professor who advocates economics theories based upon ‘marginalist’ thought.
And do they apply those theories to their own lives?
Do they believe that the theories they advocate and promulgate are representations of reality?
If so they must surely live by those theories. Their lives must reflect those ideas. Their day to day existence must mimic the ideas they fill student’s heads with.
I am not so much interested in the fun discussions of cutting edge ideas that occupy their time in graduate seminars, professional meetings, conferences and the like, but, rather, in what they teach everyday students. What do they teach students who are taking only one of two economics classes and whose knowledge of the economy will rest entirely on that exposure? Read more…
Econ 101 textbooks are misleading more than a million students a year in the U.S. alone because they leave the lasting impression that markets could solve all our economic problems if only they were left to themselves. Not even the horrendous sub-prime mortgage-crisis bailout in 2008 and 2009, amounting to trillions of dollars, shook the professions’ faith that the markets know best. They continue to invoke the “invisible hand” metaphor coined by Adam Smith in 1776, without conceding that the global economy has undergone several revolutions and changed profoundly during the intervening centuries. Outdated metaphors will not help but only hinder any effort to understand where we have gone wrong, and why, and what to do about it.
Happily, some students are beginning to see the disconnect between the idealized, theoretical version of economics thought on blackboards and its real-world variant. That is exactly why students walked out of Gregory Mankiw’s Principles of Economics (Econ 10) class at Harvard in 2011,1 and provided him a written explanation for this symbolic gesture: Read more…
Governments have, just like banks, quite some ‘off balance sheet’ debt, which is considered not to to be part of the ‘official’ debt of the government as it is not primarily owed by the government but by a government controlled ‘entity’. The government is, however, often responsible when things go wrong. Especially Germany has a lot of this kind of debt. Greece has remarkably few of such contingent debts. What kind of organizations make up these ‘entities’? A full 121%-point of the 126% of GDP contingent debt of Germany is caused by ‘units involved in financial activities’ (Sparkassen and the like, 40% of all banking assets in Germany are owned by public banks). Mind that these banks have assets too, of course. But ‘contingent government liabilities’ for banks not controlled by the government, the kind of liabilities which cause Brussels to wreck the European welfare states (cut pensions to save the bankers), are not included in these data. Fun fact: the third bailout memorandum for Greece states in a rather shrill, almost hysterical way that CEO’s of banks have to be independent of the government. The German Sparkassen of course aren’t. Germany was one of the very few countries which did not have a house ownership and price bubble.
from Mark Weisbrot
As the ever-lengthening U.S. election season begins to heat up, it is interesting to compare the U.S. and Europe regarding the evolution of their politics since the world financial crisis and recession (2008-09). In Europe, there has been quite a bit of political upheaval, with center-left parties often losing a large part of their voters. In Greece, to take the most dramatic example, the Panhellenic Socialist Movement (PASOK) is now polling just 3 percent of the electorate, after decades of wining around 40 percent or more of the vote. There have been significant losses of popularity for similar center-left parties in Spain, Italy, France and other countries — although some have yet to materialize in elections. In Greece, the leftist Syriza party has gotten most of the disaffected voters and took power this year; in Spain, the newly created leftist Podemos party shot up to the top quickly, although it has fallen some in polls recently. In France it has been the extreme right National Front that gained most, and in Italy, the new populist Five Star Movement. Read more…
from Lars Syll
The U.S. economy has, on the whole, done pretty well these past 180 years, suggesting that having the government owe the private sector money might not be all that bad a thing. The British government, by the way, has been in debt for more than three centuries, an era spanning the Industrial Revolution, victory over Napoleon, and more.
But is the point simply that public debt isn’t as bad as legend has it? Or can government debt actually be a good thing?
Believe it or not, many economists argue that the economy needs a sufficient amount of public debt out there to function well. And how much is sufficient? Maybe more than we currently have. That is, there’s a reasonable argument to be made that part of what ails the world economy right now is that governments aren’t deep enough in debt.
Krugman is absolutely right.
Why? Read more…
I love (most) companies. I love (most) markets. And like Ricardo Hausmann I totally think that investments and increases in scale led to unimaginable increases in productivity, though we have to remember that the largest absolute increase in productivity in spinning took place when the distaff was replaced by the spinningwheel – according to a woman I once talked with at a local fair, who had mastered the distaff as well as the spinning wheel, the wheel is two to three times as productive. I.e. – it cut the time needed to spin a certain amount in half. Such improvements in productivity also enabled increases in prosperity – including shorter working weeks, though we should not forger that people spinning in putting out systems using the spinning wheel or the many single women in pre industrial revolution urban centers were, ahem, not always the most prosperous members of society – though they took part in a well defined market system. Unlike Hausmann, however, I do think that government production (most roads, most education, large parts of healthcare and insurance) is an important part of our present prosperity, too. Hausmann does not even mention this – just like the neoclassical macro models, which almost always assume that government production has zero value by nature. Hausmann also forgets about rent extraction, for instance by multinationals who want to drill for oil and natural gas in Peru and are not taxed enough. And Hausmann is wrong about Peru, too. That’s not a dirt poor country and poverty is (according to world bank data) falling fast, while economic growth is, compared with the South American average, high and stable. Again: why doesn’t Project Syndicate (the site which published the Hausmann blog) have a better fact checker! Read more…
From the comfortable obscurity of academia to become one of the most recognised politicians on the planet
from The Observer
The island of Aegina is just 17 miles from Athens, a mere 40 minutes’ dash on a hydrofoil. Owing to its proximity to the Greek capital, it’s less a tourist island than a second-home sanctuary for wealthy Athenians, but it boasts several impressive classical sites and a distinguished history. Not only was it briefly the capital of a newly liberated Greece in the 19th century but back in the 7th century BC it was the first Greek state to mint its own coins.
Given Greece’s current predicament, trapped in the euro and an ever-expanding debt crisis, that last fact is a monetary irony not lost on one particular wealthy Athenian on Aegina. Sitting on top of a hill a few minutes’ drive from the port is the holiday home of Yanis Varoufakis. He is the former finance minister of Greece, although that’s hardly a description that befits the man’s legend. Gikas Hardouvelis is also a former finance minister of Greece, but no one has heard of him.
It would be more accurate to say that Varoufakis is the former finance minister of Greece who took on the global banking system, the European political elite and, in the minds of many, the great god of capitalism itself. His is a story so full of drama and symbolism that it contains more than a hint of Greek myth.
An economics professor by occupation, he went in a few months from the comfortable obscurity of academia to become one of the most recognised politicians on the planet. read much more
from Maria Alejandra Madi and the WEA Pedagogical Blog
The expansion of neoliberalism in the last four decades has increasingly expressed the tensions between the expansion of the market economy and the consolidation of a new way of life. Indeed, the neoliberal way of life can be apprehended if considering Karl Polanyi´s concern about the way in which the economy relates to social organization and culture and the impacts of social and political institutions in relation to human livelihood. In his opinion, since the proper self-regulation of the market entails that nothing must be allowed to inhibit the formation of markets, the institutional patterns and principles of behavior turn out to adjust perfectly.
Taking into account the current effects of the neoliberal modernization process on the way of life, Karl Polanyi´s critique of the liberal myth and of the disruptive forces inherent to the self-regulated markets it is inspiring to think about the deep impacts of neoliberal policies and institutions on livelihoods. In accordance to Polanyi, the centrality of the market entails that “Nothing must be allowed to inhibit the formation of markets, nor must incomes be permitted to be formed otherwise than through sales” (Polanyi 1944: 69). In other words, labor, land and money turn out to be seen as commodities and are produced for sale. As the commodity fiction proves to be the vital organizing process, the self-regulated markets demand the institutional separation of society into an economic and a political sphere. In other words, the commodity fiction implies that the market economy demands the institutional separation of society into an economic and political sphere, that is, in the market society the social relations are embedded in the economy rather than the economy embedded in social relations. read more
Yesterday alone the italian coastguard saved 4.400 refugees. Germany expects 800.000 asylum seekers in 2015.Are such numbers manageable?
In a purely quantitative way: easily. Let’s take Germany: in 2014 the number of births increased with 5% to 715.000, leaving Germany with a natural decrease of minus 153.000. Subtracting this from the 800.000 refugees and adding about 400.000 people coming in from other EU countries leaves population growth of about a million or 1,3%. many countries have successfully coped with such growth rates, there is no reason why Germany couldn’t (and mind: the natural decrease is set to increase).
The problem is of course that the babies born in Germany will get at least 10 years of education, will speak German and understand German culture. Many of the asylum seekers will have had quite some education – but a not inconsiderable part of them will be illiterate even in their own language. Few of them will speak German. Not all of them will adapt to core western values, for instance in the case of gender relations.
It won’t solve all of these problems. But it seems that investing in these refugees – i.e:for many of them (young, old, men women) years of education in german (or french or Dutch or whatever) and vocational training – is a necessary part of the solution.
And the Italian coast guard is of course doing a good job.
- The explosive influence of mister Luther. The European 16th century reformation is resurfacing as a political and economic watershed. Jeremiah (of all names…) Ditmar and Skipper Seabold show how fast (we knew that already) and, especially how much (that’s new: epic) Luther’s 95 theses, hammered to the door of an obscure church in an obscure place, influenced the content of printing and how fast this led to new rules and laws.
- Ravi Kanbur and Joseph Stiglitz discover than, when we talk about wealth, balance sheets have two sides, one side (liabilities) which basically is about ownership rights and power and another which is the value of real and financial assets. Quote: “what Piketty and others measure as wealth ‘W’ is a measure of control over resources, not a measure of capital K, in the sense that that is used in the context of a production function.“. To estimate this ‘production function capital’ the value of financial capital has of course to be subtracted from total wealth, while inflationary increases of house prices wreak havoc with the idea of ‘one kind of production function capital’. The good thing: the acknowledge the importance of (control over) ‘land’ and other unproduced capital. Aside – if I remember well, debts (liabilities) are used to pressure Greece to sell harbours and railways and the airports and the like (real, land related assets).
- The Bank of Italy discovers that: “the weakness of aggregate demand was contributing significantly to the decline in inflation“, while this weakness also influences inflation expectations’. The point: this means that, contrary to Lucas and Sargent inspired ideas in the Trichet era, the central bank is not the sole and only institution which governs inflation expectations while governing expectations is not enough to control inflation. Draghi is ++smarter than that, but it is good to see that the fight against the Lucas/Sargent paradigm is joined by the Italian central bank. Lucas/Sargent kind of ideas are by the way tempting to the ego of central bankers and therewith dangerous by nature.
- Eurozone small and medium sized enterprises as well as small and medium sized banks still have a hard time when it comes to financing. Small and medium sized enterprises in the Netherlands (which has no small banks left) do especially bad.
- About how bullying Iceland and Greece led to suboptimal negotiations.
from Jamie Morgan’s “Piketty’s Calibration Economics: Inequality and the Dissolution of Solutions?” – an open access paper in current issue of Globalizations
In the neoliberal age, we have naturalised the rich. However, the success of Thomas Piketty’s Capital in the Twenty-First Century has done a great deal to legitimate a rather differently inflected concern. It is now permissible to ask: can we, should we, afford the rich? Growing income and wealth inequality have gradually become areas of public concern, but this concern has become more acute, and more politically febrile, in the wake of the global financial crisis. The election victory by Syriza in Greece, and the Occupy Movement speak directly to this. Austerity responses to the crisis have distributed the fallout costs to the many from the few who benefitted most from the preceding decades. Meanwhile, central bank policy responses have created new opportunities for the global rich to become even richer.1 To a large degree, the idea that the rest of us are dragged along in the wake of the wealthy has been exposed as a myth. Read more…
from David Ruccio
from Asad Zaman and the WEA Pedagogical Blog
A recent and amazing article by John H Richardson, titled “When the end of human civilisation is your day-job”, describes how many climate scientists suffer from psychological trauma because their studies lead to the inescapable conclusion that human beings are destroying the planet, and climate change will create conditions making it impossible for the human civilisation to survive. There are two strategies currently being pursued with regard to climate change. One is the ostrich strategy of denial, which claims that there is no such thing, or if there is, it is part of natural geological processes rather than being created by human beings. The second is the band-aid strategy which seeks to make small efforts at relief of major visible problems being caused by climate change. Neither strategy has any hope of success at saving the human civilisation in its current form.
The roots of the problem run deep, and the changes we need to make are very radical. One of the most fundamental teachings of all traditional societies is the subordination of personal interests to the social or collective good. During the “Great Transformation” that led to the creation of modern society, this teaching was turned on its head. Individuals were encouraged to pursue personal interests even at the expense of society. As this philosophy gradually gained strength, many institutions which depended on social commitments were destroyed. Key examples are families and communities, previously built on lifetime commitments, which have been replaced by temporary social relationships based on expediency in advanced societies. The idea that excessive and wasteful consumption was immoral, especially when others were in need has been replaced by the idea of sacredness of property. That is those who have are perfectly justified in flaunting their luxurious lifestyles, while the rest of us struggle to imitate them. The breakdown of barriers to greed led to a mad race to consume more and more without any concern as to the effects on others or on the planet. As a result, income inequalities have become greater than ever seen in human history, and the lifestyles of the super-rich are unimaginably wasteful of planetary resources. read more
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