from David Ruccio
The American Dream has all but collapsed under the weight of growing inequality. It’s becoming increasingly difficult for the American working-class to sustain a decent standard of living, and their children are increasingly unlikely to be better off than they are.
But those who hang on to the American Dream—or at least the selling of that dream to others—believe that sending young people to the nation’s colleges and universities is the solution. Read more…
A negative interest rate policy (NIRP) appears revolutionary, but its justification rests on failed, pre-Keynesian “classical” economics. This claims that lower interest rates can always solve aggregate demand shortages and lead to full employment. Keynes discredited classical economics by showing that saving and investment might not respond, as assumed, to lower interest rates. Once all profitable investment opportunities have been undertaken, negative interest rates may encourage firms to buy back shares or raise credit for takeover activity. This creates financial fragility via debt-laden balance sheets, and reduces firms’ financial capacity for future investment. Negative interest rates may also in fact increase savings if households try to compensate for lost interest income. NIRP may generate financial disruption, too, which can reduce the supply of bank credit and increase its cost. Somebody must bear the cost of negative rates. If banks absorb it, that will reduce their profitability and they may reduce lending via raised credit standards. Alternatively, if banks decide they do not want to lose deposits — a valuable source of cheap, stable long-term finance — by introducing negative interest rates, they may instead pass the cost on to borrowers. NIRP also undermines insurance companies and pension funds, which may then engage in risky yield-chasing. This makes them financially fragile and leads to asset bubbles. Internationally, NIRP encourages competitive devaluation “currency wars” that cause disruption to manufacturing. And it creates exchange rate uncertainty, which can lower global investment. Lastly, there is the danger of a major contradiction. NIRP aims to increase house prices and equity prices, and so generate wealth effects that stimulate the economy. But if the policy is successful, future interest rates will rise. And this risks triggering a financial crisis as bubbles burst, house prices fall, and we see debt defaults. In normal times, lower interest rates stimulate the economy, but one can have too much of a good thing. NIRP is pushing monetary policy into an area where it is likely to start doing harm. Read more…
from Norbert Häring
The European Ombudswoman has announced that she will investigate the membership of the President of the European Central Bank (ECB), Mario Draghi, in the Group of Thirty. this is a shadowy forum of the most senior executives from large commercial banks and the most important central banks.The Group of Thirty meets behind closed doors without the press and without minutes taken. Some of the institutions are being supervised by the ECB. This group could come to an end, in its current form, if the EU-Ombudswoman finds fault with Draghi’s membership.
Some Background on the Group of Thirty: It was founded in 1978 upon an Initiative of the Rockefeller-Foundation. It has a little more than 30 (usually all-male) members, mostly active or former top manages of large international financial institutions and active or former central bankers. Often they are both at the same time. Almost a third of members are representing US-institutions. Its main purpose is the mingling of commercial bankers and central bankers. The central bankers have their groups in Basel, there they regularly meet. The big international banks have groups like the Institute of International Finance there they discuss current topics and issue reports. The Group of Thirty is the only mixed group and the central bankers that go there, do not apply any of the usual transparency and anti-corruption rules that otherwise govern their relationships with commercial bankers. Read more…
from Lars Syll
1 Just eight men own the same wealth as the 3.6 billion people who make up the poorest half of humanity. Although some of them have earned their fortune through talent or hard work, over half the world’s billionaires either inherited their wealth or accumulated it through industries prone to corruption and cronyism.
2 Seven out of 10 people live in a country that has seen a rise in inequality in the last 30 years.
3 The richest are accumulating wealth at such an astonishing rate that the world could see its first trillionaire in just 25 years. So, you would need to spend $1 million every day for 2738 years to spend $1 trillion.
4 Extreme inequality across the globe is having a tremendous impact on women’s lives. Employed women, who face high levels of discrimination in the work place, and take on a disproportionate amount of unpaid care work often find themselves at the bottom of the pile. On current trends, it will take 170 years for women to be paid the same as men.
5 Corporate tax dodging costs poor countries at least $100 billion every year. This is enough money to provide an education for the 124 million children who aren’t in school and prevent the deaths of at least six million children thanks to health care services.
from Maria Alejandra Madi
Much of the comments on the global financial and economic crisis have focused on the proximate causes and governance issues related to risk management, monetary policy and weak regulation. New political alignments allowed a process of global financial deregulations in the early 1970s. The political ascendancy of financial capital and extensive capital market liberalization, employment goals were abandoned in the economic policy agenda. Indeed, price stabilization and “fiscal prudence” turned out to be the primary objectives of the economic policy. As a result, prior to the 2008 global crisis, inflation was low and close to official inflation target rates in the advanced economies. However, credit bubbles threaten the macroeconomic stability.
After the Global Crisis, academic economists and policy makers have actively participated in the debate on monetary policy in the United States and European Union. In the face of the outcomes of the crisis, central banks have dealt with a triple challenge
- how to contain the crisis
- how to prevent a recessionary downturn
- how to avoid enhancing financial instability in the form of inflationary pressures or asset and credit bubbles.
The Federal Reserve (Fed) and the European Central Bank (ECB) have faced major global financial challenges together. However, within their respective zones, they coped with their institutional set-up and governance guidelines.
After the bail-outs, their main concern is whether nominal interest rates really have a lower bound around zero per cent. After the crisis, central banks responded to the large fall in aggregate demand and the under- utilized productive resources by adjusting the policy interest rates to, or very close to, zero. Indeed, these central banks have focused on lender-of-last-resort program extensions. The main question is: to what extent central banks can deal with huge levels of leverage, structural flaws of financial innovations (securitization, structured finance, and derivatives above all) and lack of transparency in terms of risk management?. read more
from Peter Söderbaum
Book review of Offer, Avner and Gabriel Söderberg, The Nobel Factor: The Prize in Economics, Social Democracy and the Market Turn, Princeton University Press, Princeton 2016.
Since 1969 there has been a so called Nobel Economics Prize. It is not a normal Nobel Prize established by Alfred Nobel but rather a prize reminding us of the 300 year existence of the Central Bank in Sweden. The correct name is “The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”. The history of this prize, how it came about and its development over the years with Laureates and their achievements is now presented by two scholars in Economic History, Avner Offer and Gabriel Söderberg.
Offer and Söderberg appear to be well acquainted with developments in mainstream economics and the different achievements by the winners of the prize. However, their study is of interest mainly because they depart from neoclassical economists in their approach. Mainstream economists believe in value-neutrality (or at least behave as if they believed in value-neutrality). For Offer and Söderberg, value issues are instead at the heart of analysis. They are interested in the ideological and political role of “the Nobel Factor” over the years.
Beliefs in value-neutrality suggest that the values or ideological orientations of economists are of little interest. The scholar is just looking for the truth about economic agents (households and firms), the functioning of markets and the economy as a whole. In fact this value-neutrality idea functions as a “limited responsibility” doctrine for the neoclassical economist as scholar. read more
from Peter Radford
Here we are one day before the ascension of Trump to the White House and already the policy chaos has begun. To be fair to Trump this particular chaos is not necessarily of his own doing entirely. The Republicans in Congress are also responsible. So hell bent are they in expunging all things Obama from the record that they have charged into the valley of death known as health care reform. Or, in this case, un-reform.
Having spent vast amounts of hours and taxpayer money in pointless votes to eliminate the Affordable Health Care act, and its eradication having become a totem of party loyalty, the Republicans jumped for joy when they finally gained enough control of Congress to make this wish come true. This is the moment their extremists have been waiting for.
And it’s terrifying the entire party except for those so clueless that they imagine getting rid of Obamacare is easy.
The source of this terror is the realization that they are now responsible for the consequences of their quixotic crusade. They will be accountable. It was all well and good to tilt at windmills when everyone knew that their efforts would be foiled, but now the public is looking at them as the legislative power. What happens over the next few years in our health care marketplace is entirely the doing of the Republican party. Read more…
from Lars Syll
A rigorous application of econometric methods in economics presupposes that the phenomena of our real world economies are ruled by stable causal relations between variables. Parameter-values estimated in specific spatio-temporal contexts are presupposed to be exportable to totally different contexts. To warrant this assumption one, however, has to convincingly establish that the targeted acting causes are stable and invariant so that they maintain their parametric status after the bridging. The endemic lack of predictive success of the econometric project indicates that this hope of finding fixed parameters is a hope for which there really is no other ground than hope itself.
Invariance assumptions need to be made in order to draw causal conclusions from non-experimental data: parameters are invariant to interventions, and so are errors or their distributions. Exogeneity is another concern. In a real example, as opposed to a hypothetical, real questions would have to be asked about these assumptions. Why are the equations ‘structural,’ in the sense that the required invariance assumptions hold true? Applied papers seldom address such assumptions, or the narrower statistical assumptions: for instance, why are errors IID?
The tension here is worth considering. We want to use regression to draw causal inferences from non-experimental data. To do that, we need to know that certain parameters and certain distributions would remain invariant if we were to intervene. Invariance can seldom be demonstrated experimentally. If it could, we probably wouldn’t be discussing invariance assumptions. What then is the source of the knowledge?
‘Economic theory’ seems like a natural answer, but an incomplete one. Theory has to be anchored in reality. Sooner or later, invariance needs empirical demonstration, which is easier said than done.
David Freedman: Statistical Models – Theory and Practice (CUP 2009:187)
Since econometrics aspires to explain things in terms of causes and effects it needs loads of assumptions. Invariance is not the only limiting assumption that has to be made. Equally important are the ‘atomistic’ assumptions of additivity and linearity. read more
from Asad Zaman
This is the 9th Post in a sequence about Re-Reading Keynes. In chapter 2 of General Theory, Keynes wishes to develop a theory of employment. He claims that classical economics does not have a theory of employment, because it assumes that all resources will be fully employed. But the theory that unemployment will always be 0% – except for frictional – is not a theory which can explain observations of high and persistent unemployment. Taking this post-Depression observation for granted, the question arises how we can create a theory in which the labor resources can be utilized at different levels. In order show that classical theory cannot explain the observed fluctuations in the level of employment, Keynes lists the four possibilities under classical theory which could create a change in the quantity of labor being employed:
- A more efficiently organized labor market, which find faster matches between the unemployed and job opportunities, would lower frictional unemployment and increase employment.
- A decrease in the disutility of labor would mean that laborers would be willing to accept lower wage offers, which would lead to expansion of the employment.
- An increase in the productivity of labor would bring greater rewards to the employers and induce them to hire more labor at a given wage.
- An exogenous decline in price of consumer goods purchased by laborers would increase the real wage and thereby employment. Exogenous means that demand for these goods by non-laborers decreases, causing the price decline. read more
from David Ruccio
Oxfam’s headline-grabbing numbers are bad enough: “Eight men are as rich as half the world.” But the international organization has presented an even more serious and severe indictment of current economic arrangements—which can’t be glossed over by merely encouraging those at the top to pay more taxes.
In the background paper, “An Economy for the 99 Percent” (a follow-up to last year’s “An Economy for the 1%“), Oxfam researchers both document the existence of grotesque levels of economic inequality in the world today and analyze the main causes of that inequality.
Regular readers of this blog will recognize the numbers indicating the obscene levels of contemporary inequality: Read more…
from Norbert Haering
In a news piece on rediff, one of India’s most popular news-sites, Badal Malick, CEO of the US-Indian organization Catalyst, explains via a friendly journalist, what Catalyst is doing and that my writing on Catalyst and on Washington’s meddling in the fight against cash in India was bogus. He did not convince me. Maybe he will convince you.
To very briefly summarize my piece “‘A Well-Kept Open Secret: Washington Is Behind India’s Brutal Demonetisation Project‘”( augmented here or both in a consolidated version on zero hedge), I had written that the longstanding US influence, notably the influence of the Better Than Cash Alliance, in the fight against cash in India has been conspicuously absent in the discussion about the sudden demonetization that Premier Modi decreed on 8 November 2016. I have then provided the evidence of this US involvement, including the launch of Catalyst less than four weeks before the demonetization. The rediff-article even mentions that Catalyst was launched at a conference in Delhi hosted by the … drumrolls … Better Than Cash Alliance.
This is the part of the rediff-article that deals with my writing: Read more…
from Lars Syll
Renowned ‘error-statistician’ Aris Spanos maintains — in a comment on this blog a couple of weeks ago — that Keynes’ critique of econometrics and the reliability of inferences made when it is applied, “have been addressed or answered.”
One could, of course, say that, but the valuation of the statement hinges completely on what we mean by a question or critique being ‘addressed’ or ‘answered’. As I will argue below, Keynes’ critique is still valid and unanswered in the sense that the problems he pointed at are still with us today and ‘unsolved.’ Ignoring them — the most common practice among applied econometricians — is not to solve them.
To apply statistical and mathematical methods to the real-world economy, the econometrician have to make some quite strong assumption. In a review of Tinbergen’s econometric work — published in The Economic Journal in 1939 — Keynes gave a comprehensive critique of Tinbergen’s work, focussing on the limiting and unreal character of the assumptions that econometric analyses build on:
Completeness: Where Tinbergen attempts to specify and quantify which different factors influence the business cycle, Keynes maintains there has to be a complete list of all the relevant factors to avoid misspecification and spurious causal claims. Usually this problem is ‘solved’ by econometricians assuming that they somehow have a ‘correct’ model specification. Keynes is, to put it mildly, unconvinced:
from Peter Radford
I don’t want to spend much time on Trump and his version of economics primarily because I am not sure what it is. Nor, I think, does he.
One thing worth mentioning is that there is an unprecedented disconnect between the economics profession and the incoming President. Just about every economist I know says that Trump will be bad for the economy, and that the best we can hope for is that his notoriously poor attention span will prevent him from doing much.
For a much more detailed discussion of this disconnect go and read Justin Wolfers article in the New York Times.
What intrigues me is that this near complete separation between the economics profession, of all political persuasions, and the incoming administration is in stark contrast to that between Trump and both Wall Street and small business owners.
Is this because Wall Street and small business has a better handle on the economy? Or is it because they are deluded and are thus in for an ugly surprise?
There’s a part of me that would argue that Wall Street and small business are better informed than economists are about the economy. This opinion is based on my continued amazement at the extraordinarily strange convolutions that economics puts itself through in order to “prove” its various propositions. They are, frankly, absurd. So much so that any conclusions economists draw from their mathematics ought be taken with bucket loads of salt. Economists are steadfastly incapable and unwilling to amend their ideas and are still stuck in major reconsideration mode after the real world repudiation of their confidence and theories that the Great Recession represented. Suffice to say that were I a politician trying to steer the ship of state through these turbulent times, the last place I would look for economic advice is to a profession that still — despite the evidence — builds its theories on the quicksands of rationality, perfect information and so on. Read more…
from Lars Syll
Maintaining that economics is a science in the ‘true knowledge’ business, I remain a skeptic of the pretences and aspirations of ‘New Keynesian’ macroeconomics. So far, I cannot really see that it has yielded very much in terms of realist and relevant economic knowledge. And there’s nothing new or Keynesian about it.
‘New Keynesianism’ doesn’t have its roots in Keynes. It has its intellectual roots in Paul Samuelson’s ill-founded ‘neoclassical synthesis’ project, whereby he thought he could save the ‘classical’ view of the market economy as a (long run) self-regulating market clearing equilibrium mechanism, by adding some (short run) frictions and rigidities in the form of sticky wages and prices.
But — putting a sticky-price lipstick on the ‘classical’ pig sure won’t do. The ‘New Keynesian’ pig is still neither Keynesian nor new.
The rather one-sided emphasis of usefulness and its concomitant instrumentalist justification cannot hide that ‘New Keynesians’ cannot give supportive evidence for their considering it fruitful to analyze macroeconomic structures and events as the aggregated result of optimizing representative actors. After having analyzed some of its ontological and epistemological foundations, yours truly cannot but conclude that ‘New Keynesian’ macroeconomics on the whole has not delivered anything else than ‘as if’ unreal and irrelevant models. Read more…
from Asad Zaman
Even though very few people have more than a vague idea about them, macroeconomic theories deeply affect the lives of everybody on the planet. Writings of Piketty, Stiglitz and many others, as well as personal experience of the 1% — 99% divide, have created increasing awareness of the deep and increasing inequalities which characterize modern capitalist economies. However, the link between inequality and macroeconomic theory has not been pointed out clearly. The fact that since the 1970’s top corporate salaries have increased by 1000% while the average worker only earns 11% more is closely linked to the revolution in economic theory that occurred over the 70’s and 80’s. We will try to sketch some parts of the complex and coordinated efforts which led to the emergence of theories which provide the invisible foundations and the enabling environment for this inequality.
The oil crisis of the early 70’s destroyed the consensus on Keynesian macroeconomics, and created the opportunities for ideologies disguised as economic theories to emerge. Chicago school economist Robert Lucas attacked the dominant Keynesian theories which argued that governments must play an important role in eliminating unemployment. Guided by free market ideology, Lucas created macroeconomic theories which suggested that government interventions are always harmful. Some elements of the Lucasian methodology provided genuinely superior alternatives to defects in existing Keynesian models. However, other elements were bizarre. Even though unemployment is a painful reality to vast numbers of people, defender-of-free-markets Lucas argued that this was a free choice. According to Lucas, the Great Depression was really the Great Vacation, where vast numbers of people suddenly decided to stop working in order to enjoy leisure. This, and many other strange assumptions of the Lucasian alternative led famous economists like Robert Solow to say that to engage in a serious discussion with the Chicago school would be analogous to discussing technicalities of the Battle of Austerlitz with a madman who claimed to be Napoleon Bonaparte. For example, Solow wrote that “Bob Lucas and Tom Sargent like nothing better than to get drawn into technical discussions, because then attention is attracted away from the basic weakness of the whole story. Since I find that fundamental framework ludicrous, I respond by treating it as ludicrous – that is, by laughing at it – so as not to fall into the trap of taking it seriously and passing on to matters of technique.” read more
from David Ruccio
Like many liberal economic nationalists, who are concerned about both inequality and economic growth, Michael Lind attempts to make a distinction between “takers” and “makers.”
As against conservative economic nationalists, who blame immigrants and the welfare-dependent poor, Lind focuses his attention on the “rent-extracting, unproductive rich” for undermining the dynamism and fairness of contemporary capitalism.
The term “rent” in this context refers to more than payments to your landlords. . . “Profits” from the sale of goods or services in a free market are different from “rents” extracted from the public by monopolists in various kinds. Unlike profits, rents tend to be based on recurrent fees rather than sales to ever-changing consumers. While productive capitalists — “industrialists,” to use the old-fashioned term — need to be active and entrepreneurial in order to keep ahead of the competition, “rentiers” (the term for people whose income comes from rents, rather than profits) can enjoy a perpetual stream of income even if they are completely passive.
This is a familiar trope within economic discourse. As I’ve explained before (e.g., here and here), it relies on a distinction between productive and unproductive economic activities, which is then overlain with other dichotomies: active vs. passive, doing vs. owning, and so on. The idea is that one group—the passive, owning, recipients of rent—increasingly serve as a drag on the other group—the active, doing, recipients of profits. Read more…
from Dean Baker
It really is shameful how so many people, who certainly should know better, argue that automation is the factor depressing the wages of large segments of the workforce and that education (i.e. blame the ignorant workers) is the solution. President Obama takes center stage in this picture since he said almost exactly this in his farewell address earlier in the week. This misconception is repeated in a Claire Cain Miller’s NYT column today. Just about every part of the story is wrong.
Starting with the basic story of automation replacing workers, we have a simple way of measuring this process, it’s called “productivity growth.” And contrary to what the automation folks tell you, productivity growth has actually been very slow lately.
Source: Bureau of Labor Statistics.
The figure above shows average annual rates of productivity growth for five year periods, going back to 1952. As can be seen, the pace of automation (productivity growth) has actually been quite slow in recent years. It is also projected by the Congressional Budget Office and most other forecasters to remain slow for the foreseeable future, so the prospect of mass displacement of jobs by automation runs completely counter to what we have been seeing in the labor market.
from Peter Radford
Here’s a well known quote:
“For really I think that the poorest he that is in England hath a life to live, as the greatest he; and therefore truly, sir, I think it’s clear, that every man that is to live under a government ought first by his own consent to put himself under that government … and I do think that the poorest man in England is not bound in a strict sense to that government that he hath not had a voice to put himself under.”
Thus spoke Colonel Rainsborough at Putney in 1647.
This is an early instance of the rise of the modern liberal view of government. Rainsborough lost the argument with Cromwell and Ireton because the issue of property ownership intruded into the debate. That issue revolved around the question of the likelihood that those who owned no property would infringe on the rights of those who did, were the former allowed to participate in their own governance. So even at this formative moment in modern constitutional development the possibility that a liberal stance could evolve down two parallel tracks was clear.
Liberalism was subject to division at its inception.
One track, the one that dominated early on and which echoes strongly to this day, argues that for a person to have a voice in their own government they ought to have an overt stake in society. And the most obvious and material such stake is the ownership of property. Read more…
from Lars Syll
There is something about the way macroeconomists construct their models nowadays that obviously doesn’t sit right.
Empirical evidence still only plays a minor role in mainstream economic theory, where models largely function as a substitute for empirical evidence.
One might have hoped that humbled by the manifest failure of its theoretical pretences during the latest economic-financial crisis, the one-sided, almost religious, insistence on axiomatic-deductivist modeling as the only scientific activity worthy of pursuing in economics would give way to methodological pluralism based on ontological considerations rather than formalistic tractability. That has, so far, not happened.
If macroeconomic models – no matter of what ilk – build on microfoundational assumptions of representative actors, rational expectations, market clearing and equilibrium, and we know that real people and markets cannot be expected to obey these assumptions, the warrants for supposing that conclusions or hypotheses of causally relevant mechanisms or regularities can be bridged, are obviously non-justifiable. Incompatibility between actual behaviour and the behaviour in macroeconomic models building on representative actors and rational expectations microfoundations is not a symptom of ‘irrationality.’ It rather shows the futility of trying to represent real-world target systems with models flagrantly at odds with reality. Read more…