Archive for the ‘The Economy’ Category

From trade war to class war: screw Pfizer’s drug patents

June 18, 2018 3 comments

from Dean Baker

Wars always have unpredictable outcomes. It is unlikely that George W. Bush anticipated that the Iraq war would destabilize the Middle East for two decades, and possibly quite a bit longer. World War I resulted in the collapse of four European empires and emergence of the Soviet Union as a world power.

In this vein, we can hope that something positive may emerge from Donald Trump’s ill-conceived trade war. Specifically, it may lead the United States and the world to re-examine the system of patent and copyright monopolies that we have been expanding and extending for the last four decades.

While the Trump administration’s tactics and goals seem to be constantly shifting, the one thing that has won applause from the Washington elite is cracking down on China’s “theft” of our intellectual property. As Washington Post columnist Catherine Rampell aptly framed the issue, when she told readers that stopping China from using intellectual property claimed by US corporations is “our” real concern in dealing with China.

Specifically, China requires foreign companies to transfer technology as a condition of investing in China. There are also complaints that Chinese producers of drugs, software, videos, and recorded music don’t properly compensate US patent and copyright holders.  Read more…

The Permanent Income Hypothesis

June 17, 2018 6 comments

from Lars Syll

150514006_4Milton Friedman’s Permanent Income Hypothesis (PIH) says that people’s consumption is not affected by short-term fluctuations in incomes since people only spend more money when they think that their lifetime incomes change. Believing Friedman is right, mainstream economists have for decades argued that Keynesian fiscal policies, therefore, are ineffectual.

As shown over and over again for the last three decades, empirical facts totally disconfirm Friedman’s hypothesis. The final nail in the coffin is recent research from Harvard:

We compare the path of spending during unemployment in the data to three benchmark models and find that the buffer stock model fits better than a permanent income model or a hand-to-mouth model …

Using rich category-level expenditure data, we find that work-related expenses explain only a modest portion of the spending drop during unemployment. The overall path of spending for a seven-month unemployment spell is consistent with a buffer stock model where agents hold assets equal to less than one month of income at the onset of unemployment. Because unemployment is such a large shock to income, our finding that spending is highly sensitive to income overcomes the near-rationality critique applied to prior work. Finally, we document a puzzling drop in spending of 11% in the month UI benefits exhaust, suggesting that families do not prepare for benefit exhaustion.

Peter Ganong & Pascal Noel

So — now we know that consumer behaviour is influenced by short-term fluctuations in incomes and that this is true even if consumers know that their situation may well change in the future.  Read more…

Class struggle according to liberals

June 17, 2018 2 comments

from David Ruccio


Liberals like to talk about all kinds of social ills and identity-laden tensions—but not class struggle. That’s their persistent and enduring blindspot.

Except, it seems, when it comes to Donald Trump.  Read more…

Economics for the 21st century

June 13, 2018 18 comments

from Lars Syll

1. Change the goal: from GDP growth to the Doughnut.

For over half a century, economists have fixated on GDP as the first measure of economic progress, but GDP is a false goal waiting to be ousted. The 21st century calls for a far more ambitious and global economic goal: meeting the needs of all within the means of the planet. Draw that goal on the page and – odd though it sounds – it comes out looking like a doughnut …

raworth2. See the big picture: from self-contained market to embedded economy.

Exactly 70 years ago in April 1947, an ambitious band of economists crafted a neoliberal story of the economy and, since Thatcher and Reagan came to power in the 1980s, it has dominated the international stage. Its narrative about the efficiency of the market, the incompetence of the state, the domesticity of the household and the tragedy of the commons, has helped to push many societies towards social and ecological collapse. It’s time to write a new economic story fit for this century – one that sees the economy’s dependence upon society and the living world …

3. Nurture human nature: from rational economic man to social adaptable humans.

The character at the heart of 20th century economics—‘rational economic man’—presents a pitiful portrait of humanity: he stands alone, with money in his hand, a calculator in his head, ego in his heart, and nature at his feet. Worse, when we are told that he is like us, we actually start to become more like him, to the detriment of our communities and the planet. But human nature is far richer than this, as emerging sketches of our new self-portrait reveal: we are reciprocating, interdependent, approximating people deeply embedded within the living world …  Read more…

Utopia and technology

from David Ruccio

Forget Bitcoin. It’s the underlying technology, blockchain, that is generating the most excitement. Even utopia!

Bitcoin is a digital currency that was invented in 2009 by a person (or group) who called himself Satoshi Nakamoto. His stated goal was to create “a new electronic cash system” that was “completely decentralized with no server or central authority.” After cultivating the concept and technology, in 2011, Nakamoto turned over the source code and domains to others in the bitcoin community, and subsequently vanished.


Read more…

Italian situation is highly worrisome!

June 9, 2018 10 comments

Considering the present architecture of the Eurozone – there is according to Erwan Mahé no obvious way to solve the Italian Euro crisis…

From: Erwan Mahé

I sent this little collage on 25 May, via IB Bloomberg chat, as the BTP began to decline, since it seemed to sum up the best attitude to take towards the near hysteria afflicting the Italian debt market at the time.


From a high of 132.88 on Monday 25 May, it plunged to as low as 120.10 the next day, reflecting a full one per cent rate shift on the eurozone on the 10-year maturity! Read more…

Swiss sovereign money referendum

June 7, 2018 35 comments

from Lars Syll

The people behind the proposal​ in Switzerland​ are effectively trying to get gold back into the monetary system.

This is an extremely​ bad idea.

Eighty-seven years ago Keynes could congratulate Great Britain on finally having got rid of the biggest ”barbarous relic” of his time – the gold standard. He lamented that  Read more…

The big bad pension scare.

June 6, 2018 14 comments

On Voxeu, Hervé Boulhol and Christian Geppert  published an article a about population ageing and pensions which tries to scare us: “on average in the OECD, stabilising the old-age dependency ratio between 2015 and 2050 requires an increase in retirement age of a stunning 8.4 years. This number far exceeds the projected increase in longevity and increases in retirement age driven by pension reforms alone.”. The pension age has to go up. But not for the reasons and by the amount they state. What’s wrong with their article?

  1. Their base line is wrong. They calculate a post 1980 dependency ratio (the number of young and old people per person in the working age) by using a 20 year and a 65 year threshold. During the 1980-2015 period, many people retired before 65 which means that the dependency ratio was higher than calculated in the article. Which in it turn mean that the rise of the dependency will be lower which means that less of an increase in the pension age is needed to stabilize it.
  2. As they admit in a footnote, they do not take changes in employment rates into account. Employment rates of people and especially women above 50 are rising spectacularly, which means that the dependency ratio per working person rises less than they calculate.
  3. Their assumptions about the rise of the pension age between today and 2050 is wrong. They assume an increase to 66,5 years of age. At present the pension age in many countries (Italy, Greece) is already while the pension age in the Netherlands and in 2050 even the German retirement age will be higher. This will lower future dependency ratio’s.
  4. In their world, unemployment does not exist. In countries like Spain, Italy and Greece total unemployment (including unemployment) is however around 25% while in a country like France it is close to 20%. Putting a large part of these people to work will solve a large part of the problem.
  5. They assume that pensions have to be paid using a ‘paygo’ system, i.e. by taxes. Surprisingly, they assume that only wage incomes will be taxed. One could however also tax capital income (or raise the labour share).
  6. If need be, people can start to work longer. A 4 hour increase of working weeks which are on average 32 hours leads to a 12,5% in total hours worked per person, which can also solve a part of the problem.
  7. Productivity can increase. A modest 0,5% increase of productivity per year between now and 2050 translates in a total rise of productivity of 17%. Together with an increase of hours of 12% this translates in a growth of production of 30% per working person.

Read more…

Krugman’s modelling flimflam

June 6, 2018 12 comments

from Lars Syll

Paul Krugman has a piece up on his blog arguing that the ‘discipline of modeling’ is a sine qua non for tackling politically and emotionally charged economic issues:

You might say that the way to go about research is to approach issues with a pure heart and mind: seek the truth, and derive any policy conclusions afterwards. But that, I suspect, is rarely how things work. After all, the reason you study an issue at all is usually that you care about it, that there’s something you want to achieve or see happen. Motivation is always there; the trick is to do all you can to avoid motivated reasoning that validates what you want to hear.

economist-nakedIn my experience, modeling is a helpful tool (among others) in avoiding that trap, in being self-aware when you’re starting to let your desired conclusions dictate your analysis. Why? Because when you try to write down a model, it often seems to lead some place you weren’t expecting or wanting to go. And if you catch yourself fiddling with the model to get something else out of it, that should set off a little alarm in your brain.

Hmm …  Read more…

Long-term trends in U.S. income distribution – 2 graphs

June 5, 2018 1 comment

No bubbles on the horizon

June 5, 2018 33 comments

from Dean Baker

Ever since the collapse of the housing bubble in 2007–2008 that gave us the Great Recession, there has been a large doom and gloom crowd anxious to tell us another crash is on the way. Most insist this one will be even worse than the last one. They are wrong.

Both the housing bubble in the last decade and the stock bubble in the 1990s were easy to see. It was also easy to see that their collapse would throw the economy into a recession since both bubbles were driving the economy. We are in a very different place today.

The stock market is high. By any measure, price-to-earnings ratios are far above historic averages, but they are nowhere near as out of line as they were in the 1990s bubble.

The current value of the market is roughly 24 times after-tax corporate profits, based on the first quarter’s data. This compares to the historic average ratio of 15-to-1. But at the peak of the bubble in 2000, the ratio was over 30-to-1.

Furthermore, the higher than normal price-to-earnings ratio can very well be justified by unusually low real interest rates. The interest rate on the 10-year Treasury bond is flirting with 3.0 percent. With a 2.0 percent inflation rate, that translates into a real interest rate of just 1.0 percent.  Read more…

From Wicksell to Le Bourva and MMT

June 4, 2018 7 comments

from Lars Syll

MMTComparing the limited work of Wicksell, Le Bourva, and MMT, we find that they share many similarities. Obviously, the institutions and issues being discussed have changed during the decades these scholars were writing, yet all three views agree on some fundamental issues. The methodology is quite similar, with a strong focus on balance sheets opposed to theoretical models based on assumptions that are necessary for the mathematics to work. There is also a strong consensus that monetary theory is positive, not normative. Further relevant areas of agreement are found with respect to: the idea of Chartalism when it comes to the origin and value of money; the endogeneity of money regarding bank creation of deposits; the role of the money market in the economy and the missing link to inflation; the monetary circuit and the link from debt to income; and the effects of deficit spending.

Some minor differences occur when it comes to the question of why banks do not expand unlimited credit if they can. While Wicksell believes that the interbank-market debt of banks expanding their loan books relatively faster than other banks should stop further bank loan creation, Le Bourva agrees with Kalecki and sees rising risk as the major factor. In Wray (2012), it is creditworthiness and access to reserves at low costs that limit the extension of loans.

Dirk Ehnts & Nicolas Barberoux

Most mainstream economists seem to think the idea behind Modern Monetary Theory is something new that some wild heterodox economic cranks have come up with.

New? Cranks? Reading one of the founders of neoclassical economics, Knut Wicksell, and what he writes in 1898 on ‘pure credit systems’ in Interest and Prices (Geldzins und Güterpreise) soon makes the delusion go away:   Read more…

Unequal wealth of nations

from David Ruccio

global wealth

The premise and promise of capitalism, going back to Adam Smith, have been that global wealth would increase and serve as a benefit to all of humanity.* But the experience of recent decades has challenged those claims: while global wealth has indeed grown, most of the increase has been captured by a small group at the top. The result is that an obscenely unequal distribution of the world’s wealth has become even more unequal—and, if business as usual continues, it will turn out to be even more grotesquely unequal in the decades ahead.  Read more…

“Health expenditure”

June 3, 2018 7 comments

Image result for health spending by country


Read more…


June 3, 2018 1 comment

from Lars Syll

Olivier Blanchard’s intellectual path, exploring different avenues – sometimes non-linear, sometimes even contradictory – can be considered as the personification of the controversial​ evolution of mainstream macroeconomic research during the last three decades …

9781292160504Assessing this complex intellectual path, nevertheless, also helps to understand why Blanchard’s analyses are ultimately limited by the mainstream framework, and by the role he decided to play in its defense. The primary limitation of the mainstream analysis, in our view, concerns the neoclassical reliance on price movements as leading the economy towards an optimal use of the available amount of labor and other productive resources. This reliance is also apparent in the old IS–LM diagram, advocated by Krugman and other members of the mainstream and that Blanchard readmits at least in the educational field …

This is a typical feature of almost all of the latest evolutions in Blanchard’s thought and more generally in current mainstream analysis: they fall within the branch of neoclassical doctrine that several years ago was sharply defined, and cricitized, as imperfectionist (Eatwell and Milgate 1982). According to this line of research, while in the best of all possible​ worlds the spontaneous movement of market prices would bring the economy towards a neoclassical competitive general equilibrium, actual markets are inhibited from fulfilling this task by the presence of ‘frictions’, ‘rigidities’, ‘asymmetric information’ or ‘incorrect expectations’ concerning future movements of prices. In fact, the critique of the neoclassical theory of capital has shown that even if all ‘market imperfections’ were removed, there would be no guarantee of achieving a full employment equilibrium simply through spontaneous price movements. In the case of the IS–LM model, for example, the problem concerns not only adjustments in price expectations but also the impossibility of proving the existence of an inverse relationship between the interest rate and investment. The non-existence of this relation, among other things, also causes a sense of perplexity concerning the confidence that Blanchard and other mainstream scholars continue to place in the ability of monetary policy to ensure convergence towards full employment.

Read more…

‘Free EU movement of workers’: new rules. But we need better economic policies.

June 2, 2018 5 comments

Fig 1

Inter-EU flows of ‘labour’ have dramatically increased (figure 1, figure 2), which leads to problems in sending as well as receiving countries. New EU legislation tries to restrict the extent to which entrants can be used to circumvent existing labour laws to unfairly undercutting labour in the receiving countries (and ‘fairness’ is as fundamental an incentive to people working as their wage). This legislation is welcome. But it is too late. Or is it ‘too little’? Can sending countries afford to lose up to 15% of their active labour force in a few years? Can receiving countries deal with the influx? Aside – this is not just about the EU. Albania has a population of about 2,9 million people. About 500.000 of these seem to be residing in Italy alone… Read more…

International Financial Architecture: Part II

from Asad Zaman

This is the second lecture on Understanding the Rise and Fall of the Gold Standard — shortlink: — we start with a  Summary of First Lecture 

The first lecture discusses the Keynesian theory that the exact level of money in an economy is critically important – too little leads to recessions, while too much leads to inflations. Furthermore, domestic business cycles, and international financial crises are caused by pro-cyclical behavior of current artificial systems of money creation and international trade. Standard macro theories make it impossible to understand the economy because they assert that money is neutral, and does not affect the real economy – exactly the opposite of the Keynesian idea that the quantity of money is all important. Standard macro model currently in use throughout the world have no explicit role of money, banks, and credit, even though these factors are of central importance in understanding the world. Once we understand the vital role and function of money within an economy, it becomes possible to understand historical events of the twentieth century – whereas this is impossible using conventional macro theories. The first lecture summarizes how the colonial system came into being, and the monetary arrangement for a hard currency at the core and soft currencies in the periphery. This system of fiat currencies works fine within one system of colonies, where the value of money is decreed by sovereign fiat. For trading between different countries, the gold backed currencies were used. As European countries prospered by exploiting resources throughout the globe within their colonies, inter-European trade increased. The optimal quantity of money required for the domestic economy is not the same as that required for stable international exchange rates. The pro-cyclical money creation which is characteristic of the system creates cycles, and large cycles lead to crises on a routine basis. World War I was partly caused by the breakdown of the colonial trading system due to the end of expansion possibilities after the completion of the conquest of the globe. Efforts to restore the gold standard after World War I failed. The second part of the lecture discusses the post World War I history, with reference to the international financial architecture that emerged in the post-Gold era after World War I.  read more

For-profit schools corrupt educational systems — lessons from Sweden

June 1, 2018 10 comments

from Lars Syll

Neoliberals and libertarians have always provided a lot of ideologically founded ideas and ‘theories’ to underpin their Panglossian view on markets. But when they are tested against the ​reality they usually turn out to be wrong. The promised results are simply not to be found. And that goes for for-profit schools too.  Read more…

Walmart’s gamble and what it means for India

June 1, 2018 1 comment

from C. P. Chandrasekhar

Much of the writing on Walmart’s purchase of a dominant 77 per cent stake in Flipkart, touted for long as India’s answer to Amazon, is focused on its size. At $16 billion, of which $14 billion goes to buy up the stakes of investors such as SoftBank from Japan and Naspers from South Africa, it is reportedly the biggest acquisition in the global e-commerce area, and way larger than $3.3 billion that Walmart paid for US web retailer in a deal considered the largest purchase of a US e-commerce startup. With some existing shareholders exiting, Walmart now shares ownership with co-founder Binny Bansal, Tencent, Tiger Global and Microsoft. The size of the acquisition, and Walmart’s keenness to acquire Flipkart it reflected, is seen as indicative of India’s importance to the world economy, and not just to international capital. What is missed in this perspective is the impact that this kind of transition has for Indian-owned business, which is the instrument through which India can be seen as participating meaningfully in the global capitalist economy.

The reason why Walmart is interested in the acquisition of Flipkart, at a price which most observers feel implies an unwarranted premium and valuation, is clear. The company that had dominated the brick-and-mortar retailing business in the United States for long has, as in the case of many other players from the ‘old economy’, not been able to keep pace with the disruption that technology has caused. As the share of aggregate sales through online retail creeps up in the US, the company has lost market share to Amazon since its foray into the e-commerce realm has not been too successful.  Read more…

Italy — shows why the euro has to be abandoned if Europe is to be saved

May 31, 2018 12 comments

from Lars Syll

ita ger 10y spreadInvestors had until recently been widely expected the European Central Bank to signal at its next meeting in two weeks’ time that it would wind down QE later in the year. Now, questions are growing about how feasible it will be to withdraw the ECB’s buying power at a time when investors are already driving Italian debt costs higher. Nearly half a decade ago, the Greek debt crisis turned into a crunch point for the bloc as a whole. The sheer scale of both the Italian economy and its bond market make it much more of a systemic challenge to the bloc than Greece was. Some commentators have dubbed Italy “too big to fail and too big to bail”. “On a number of levels — by challenging political cohesion, by raising public and private borrowing costs, and ultimately, through growing eurosystem imbalances — events in Italy could destabilise the euro area,” said Marchel Alexandrovich, senior European financial economist at Jefferies.

Financial Times

The euro has taken away the possibility for national governments to manage their economies in a meaningful way — and in Italy, just as in Greece a couple of years ago, the people have​ had to pay the true costs of its concomitant misguided austerity policies.  Read more…