Archive

Archive for the ‘Uncategorized’ Category

The next recession: what it could look like

January 19, 2019 6 comments

from Dean Baker

With the New Year and the US recovery soon to be record-breaking in duration, many are asking when the next recession is likely to come and what will cause it. While none of us has a crystal ball that gives a clear view of the future, there are a few things we can say.

First, and most importantly, the next recession will not look like the last recession. The last recession was caused by the collapse of a massive housing bubble that had been the driving force in the previous recovery. While economists like to pretend this was an unforeseeable event, that is not true.

There was an unprecedented run-up in nationwide house prices. It was clear that this was not being driven by the fundamentals of the housing market, as there was no remotely corresponding increase in rents, and vacancy rates were hitting record levels.

Furthermore, it was easy to see the housing bubble was driving the economy. Residential construction was hitting record shares of GDP, more than two full percentage points above its long-term average of 4.0 percent of GDP.

The wealth created by the bubble was also leading to a consumption boom, as people spent based on the new equity created by the run-up in the price of their home. This was also easy to see in the data, as the ratio of consumption-to-income hit record levels.  Read more…

Fisher’s debt deflation theory of financial crises

January 18, 2019 Leave a comment

from Asad Zaman

This post is the third part of lecture 8 of Advanced Macro L08C: Fisher’s Debt-Deflation Theory of the Great Depression. In previous segments of this lecture L08A: Micro-Foundations for Keynesian Economics, and L08B: Keynesian Explanation for Great Depression: Seriously Incomplete, we examined the Keynesian explanation for the Great Depression, and found serious deficiencies in it. L08A explains that many different kinds of outcomes, with and without unemployment, are possible depending on how we specify details of the micro-structure that Keynes failed to specify. L08B explains that a simple deficiency in aggregate demand created by savings does not suffice to create unemployment because savings of current period is income/wealth of the next. It is necessary to look at abnormal savings, together with fixed prices, to create surplus production which signals shortfall in aggregate demand to the producers. Thus, many elements – micro-structure, role of debt, and different sectors of the economy – must be added to the Keynesian model to achieve the outcome of unemployment due to shortfall in aggregate demand that is at the center of Keynesian analysis.  read more

Paul Krugman — a methodological critique

January 18, 2019 4 comments

from Lars Syll

Alex Rosenberg — chair of the philosophy department at Duke University and renowned economic methodologist — has an interesting article on What’s Wrong with Paul Krugman’s Philosophy of Economics in 3:AM Magazine. Writes Rosenberg:

theoryKrugman writes: “So how do you do useful economics? In general, what we really do is combine maximization-and-equilibrium as a first cut with a variety of ad hoc modifications reflecting what seem to be empirical regularities about how both individual behavior and markets depart from this idealized case.”

But if you ask the New Classical economists, they’ll say, this is exactly what we do—combine maximizing-and-equilibrium with empirical regularities …

Read more…

62

January 17, 2019 13 comments

Nine years with euro crisis – time to think anew

January 16, 2019 2 comments

from Trond Andresen, Steve Keen and Marco Cattaneo and the current issue of WEA Commentaries

A new means of payment can be part of the solution for the eurozone’s unemployed.

We have now seen nine years of social crisis and huge unemployment in many euro countries. An entire youth generation has barely experienced anything but being out of work. Still no solution has been found or implemented. The time is overdue to think outside the box. We propose a solution that has circulated internationally for several years: some of us have argued for this since 2011. Both households and businesses should be provided with an additional national means of payment, “Electronic Parallel Money” (“EPM”).

Our proposal works like this: EPM transactions take place via mobile phone, PC and card. The transactions are logged on a server in the country’s central bank. There are no EPM coins and notes in circulation. The government (and local authorities) have EPM accounts in the central bank. These are debited when the public pays wages and pensions, or purchases goods and services. All citizens and enterprises also receive a user account there.

EPM will greatly reduce unemployment and enable people and businesses to exchange goods and services. It will alleviate the social crisis and reduce pessimism in economics and society. Such a solution is now being discussed in Italy, triggered by the acute budgetary conflict with the EU.  read more

Bayesianism — a patently​ absurd approach to science

January 16, 2019 7 comments

from Lars Syll

Back in 1991, when yours truly earned his first PhD with a dissertation on decision making and rationality in social choice theory and game theory, I concluded that “repeatedly it seems as though mathematical tractability and elegance — rather than realism and relevance — have been the most applied guidelines for the behavioural assumptions being made. On a political and social level, it is doubtful if the methodological individualism, ahistoricity and formalism they are advocating are especially valid.”

This, of course, was like swearing in church. My mainstream colleagues were — to say the least — not exactly überjoyed.

The decision theoretical approach I was most critical of, was the one building on the then reawakened Bayesian subjectivist (personalistic) interpretation of probability.

One of my inspirations when working on the dissertation was Henry E. Kyburg, and I still think his critique is the ultimate take-down of Bayesian hubris:  Read more…

The public economy in crisis

January 15, 2019 9 comments

from W. Milberg and the current issue of the RWER

With the Trump tax cuts of 2017, the disconnect in popular discourse between government spending and taxing became more or less complete. Rate (and revenue) cuts were considered politically appealing, independent of any imagined social goal that might require public financing. It constituted an end to the debate over the government spending required to attain social goals and the analysis of the tax rates and regulations needed to finance this spending. Whether or not the 2017 tax cuts were merited from a macroeconomic stimulus perspective (they were not), it is important to note that not once in the recent debate over tax cuts did the issue of social protection and public spending become part of the discussion. In the US at the moment, there is little possibility for meaningful discussion of the public good, and specifically of infrastructure needs, educational improvements, broadening access to health insurance, expanding retirement pensions, reducing poverty or even assisting those injured by the introduction of new technologies or foreign competition.

How could such an economically-advanced and financially-sophisticated culture be so completely clueless when it comes to knowing even how to talk about the role of government and the benefit of government programs?

A very compelling answer to this question – and an urgent appeal for change – comes from June Sekera, in her book The Public Economy in Crisis: A Call for a New Public Economics, which arrives at a crucial and opportune moment. Sekera argues that the reason the public does not connect taxes to expenditure and does not even know how to discuss the benefits of government spending, is that the economists themselves do not have the conceptual framework to deal with the issue.  read more 

US median household income in the 21st century

January 14, 2019 7 comments

A comment on corporations

January 14, 2019 5 comments

from Peter Radford and the current issue of RWER

There is a continuum between the abstraction of economics theory and the practice of business. The two, after all, coexist in the same domain. The one seeks to explain phenomena which are consequences of the other. In the past few decades the highly stylized version of the firm that exists in economic theory has deeply influenced the way in which business is practiced. This is despite the detail excluded in theory, and the evident mischaracterization of the main vehicle of business – the corporation. Economics cannot theorize correctly about the firm until it absorbs the reality of the corporate form that dominates business.

Mainstream economics is very good at explaining what might happen with respect to economic transactions in an idealized world. That idealized world is created by expunging all manner of irritants that might make it difficult to model or teach. The entire resultant edifice is the tour de force of abstraction that has dominated economic theorizing for many decades. Unfortunately, it is the irritants, the very things removed in the process of abstraction, that are of most importance and interest to those of us trying to explain the real world. And amongst those the modern corporation stands out as a prime example.  read more

Is ‘modern’ macroeconomics for real?

January 13, 2019 11 comments

from Lars Syll

861cf344575acd50ed67b35d88615f2318610d8148e8c471ad10ca0132cda91eEmpirically, far from isolating a microeconomic core, real-business-cycle models, as with other representative-agent models, use macroeconomic aggregates for their testing and estimation. Thus, to the degree that such models are successful in explaining empirical phenomena, they point to the ontological centrality of macroeconomic and not to microeconomic entities … At the empirical level, even the new classical representative-agent models are fundamentally macroeconomic in content …

The nature of microeconomics and macroeconomics — as they are currently practised​ — undermines the prospects for a reduction of macroeconomics to microeconomics. Both microeconomics and macroeconomics must refer to irreducible macroeconomic entities.

Kevin Hoover

Kevin Hoover has been writing on microfoundations for more than 25 years, and is beyond any doubts the one economist/econometrician/methodologist who has thought most on the issue. It’s always interesting to compare his qualified and methodologically founded assessment on the representative-agent-rational-expectations microfoundationalist program with the more or less apologetic views of freshwater economists like Robert Lucas:  Read more…

Resolutions to improve debates on economic policy in 2019

January 12, 2019 9 comments

from Dean Baker and WEA Commentaries

Okay, it’s that time of year when we are all supposed to commit ourselves to performing nearly impossible tasks over the next twelve months. I will play the game. Here is the list of areas where I will try to bring economics into economic policy debates in 2019.

1) Patent and copyright monopolies are government policies:

This one is pretty simple, but that doesn’t mean it is easy. It should be pretty obvious that these and other forms of intellectual property are government policies explicitly designed to promote innovation and creative work. We can (and have) make them stronger and longer, or alternatively make them shorter and weaker, or not have them at all. We can also substitute other mechanisms for financing innovation and creative work, including expanding those already exist. (Anyone hear of the National Institutes of Health?)

Incredibly, most policy debates, especially those on inequality, treat these monopolies as though they were just given to us by the gods. It is endlessly repeated that technology has allowed people like Bill Gates to get incredibly rich, while leaving less-educated workers behind. But that’s not true. It is our rules on patents and copyrights that have allowed people to get enormously wealthy from technological developments. With a different set of rules, Bill Gates would still be working for a living.

There are a few pieces on the topic herehere, and here (chapter 5).

2) Patent and copyright rents are equivalent to interest payments on government debt: read more

Pension funds and the search for alternative assets

January 11, 2019 6 comments

from Maria Alejandra Madi

A decade after the 2008 global crisis, some key trends can be highlighted: a) There has been a shift to defined contribution (DC) pension plans, b) The increasing role of alternative assets, such as private equity, among pension assets.

Many governments in OCDE countries have been committed to structural reforms in labour markets and pension plans. As a result, the current era of austerity has deep impacts on the diversification of types of pension plans. According to a 2018 OCDE  report, in a mandatory pension plan, a) employers setup a plan for their employees, b) employees contribute to a state funded pension scheme or c) employees contribute a private pension fund of their choice.  In a quasi-mandatory, employers need to setup a pension plan as a result of labour agreements. In some OCDE countries, there are automatic enrolment programs at the national level where employees have the option to opt out of the plan under certain conditions.

In this setting, a recent PwC report warned that government-incentivized or government-mandated retirement plans turns out to privilege the use of defined contribution (DC) pension plans -such as the United States.  read more

“The economics profession is facing a mounting crisis of sexual harassment, discrimination and bullying”

January 11, 2019 4 comments

from yesterday’s New York Times

The economics profession is facing a mounting crisis of sexual harassment, discrimination and bullying that women in the field say has pushed many of them to the sidelines — or out of the field entirely.

Those issues took center stage at the American Economic Association’s annual meeting, the largest gathering of the profession, last weekend in Atlanta. Spurred by substantiated allegations of harassment against one of the most prominent young economists in the country, top women in the field shared stories of their own struggles with discrimination. Graduate students and junior professors demanded immediate steps by the A.E.A. to help victims of harassment and discipline economists who violate the group’s newly adopted code of conduct.

Read more…

Insignificant ‘statistical significance’

January 11, 2019 3 comments

from Lars Syll

ad11

Read more…

The US is not that important to China

January 10, 2019 4 comments

from Dean Baker

It is common to see stories that have China’s economy reeling as a result of the Trump tariffs. While it does seem that China’s economy is experiencing difficulties, it is hard to tell a story where Trump’s tariffs are a major factor.

First, as I pointed out in the past, China’s trade surplus has actually risen in 2018 compared to 2017. In the first 10 months of 2018, (Census is not releasing new data because of the shutdown), China’s surplus on goods trade was up 11.5 percent from 2017. Perhaps the surplus would have risen even more without the tariffs, but it is a bit hard to believe that China’s economy is suffering too much because its surplus with the US only increased by 11.5 percent.

But the other point is that China’s exports to the US are just not that large a share of its economy. If we assume that exports for November and December would be roughly comparable to the prior two months, then the total for 2018 would be $550 billion, which comes to 4.2 percent of its $13 trillion economy.

However, as we are endlessly reminded by supporters of recent trade deals, much of the value in these exports is generated elsewhere. Read more…

A specific plan to change economics textbooks

January 10, 2019 5 comments

from Tim Thornton and WEA Commentaries

  1. The importance of economics textbooks

Economics textbooks are central to how the discipline of economics reproduces itself and how it convinces society of the legitimacy of its conclusions. Whilst writing a textbook does not have the glamour or esteem of producing highly cited research, it is perhaps at least as important. As Paul Samuelson, the father of the modern economics textbook remarked,“I don’t care who writes a nation’s laws – or crafts its advanced treatises – as long as I can write its textbooks” (Samuelson cited in Skousen 1997, p. 150). Relatedly, Lamm (1993) points out that the yearly sales of the leading economics textbooks dwarf the lifetime sales of many of the ground breaking books in economics such as Keynes’ General Theory. Furthermore, King (1995) argues that the inability of the first generation of Post Keynesians to produce a satisfactory textbook was a critical factor in allowing neoclassical-synthesis Keynesianism to become dominant.

Clearly, textbooks matter. Indeed, it is quite hard to imagine how there will be major change in economics until there are major changes in economics textbooks. However, we can frame this same point in more positive terms by saying it is quite easy to imagine how changing the textbooks used in economics could precipitate major change in economics. What then are the prospects of change?

  1. The difficulties of changing textbooks

Usurping the currently dominant economics texts has proven to be difficult thus far and it appears unlikely that the problem will resolve itself. Why is this?   read more

Cutting wages — the wrong medicine

January 9, 2019 30 comments

from Lars Syll

'Sure, your salaries are low but think of all the apples you're getting.'A couple of years ago yours truly had a discussion with the chairman of the Swedish Royal Academy of Sciences (yes, the one that yearly presents the winners of ‘The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel’). What started the discussion was the allegation that the level of employment in the long run is a result of people’s own rational intertemporal choices and that how much people work basically is a question of incentives.

Somehow the argument sounded familiar.

When being awarded the ‘Nobel prize’ in 2011, Thomas Sargent declared that workers ought to be prepared for having low unemployment compensations in order to get the right incentives to search for jobs. The Swedish right-wing finance minister at the time appreciated Sargent’s statement and declared it to be a “healthy warning” for those who wanted to increase compensation levels.

The view is symptomatic. As in the 1930s, more and more right-wing politicians — and economists — now suggest that lowering wages is the right medicine to strengthen the competitiveness of their faltering economies, get the economy going, increase employment and create growth that will get rid of towering debts and create balance in the state budgets.  Read more…

Resolution: mind the gap

January 9, 2019 3 comments

from David Ruccio

We’re all done singing to “days gone by” (even though no one really knows the lyrics). But, unless we change our tune and resolve to fundamentally alter the way the economy is organized, we’re going to have to face up to the problem that’s been haunting the United States for decades now: growing inequality.

And it’s only getting worse.

Part of the problem stems from the increase in market concentration in the United States. According to a recent research paper by Joshua Gans et al., the rise in mark-ups by large U.S. corporations is a two-edged sword: it increases the prices consumers pay but, at the same time, rewards shareholders. The problem is, the ownership of corporate stocks is more unequal than consumption—and it’s been getting more unequal in recent decades. Thus, the majority of Americans are forced to pay higher prices for the goods they consume but they don’t own much in the way of corporate equity—and the distribution of income, which was already obscenely unequal, is made even worse.  Read more…

Why Bayesianism has not resolved a single fundamental​ scientific​ dispute

January 8, 2019 2 comments

from Lars Syll

419fn8sv1fl-_sx332_bo1204203200_Bayesian reasoning works, undeniably, where we know (or are ready to assume) that the process studied fits certain special though abstract causal structures, often called ‘statistical models’ … However, when we choose among hypotheses in important scientific controversies, we usually lack such prior knowledge​ of causal structures, or it is irrelevant to the choice. As a consequence, such Bayesian inference to the preferred alternative has not resolved, even temporarily, a single fundamental scientific dispute.

Mainstream economics nowadays usually assumes that agents that have to make choices under conditions of uncertainty behave according to Bayesian rules (preferably the ones axiomatized by Ramsey (1931), de Finetti (1937) or Savage (1954)) — that is, they maximize expected utility with respect to some subjective probability measure that is continually updated according to Bayes theorem. If not, they are supposed to be irrational, and ultimately — via some “Dutch book” or “money pump” argument — susceptible to being ruined by some clever “bookie”.  Read more…

new issue of WEA Commentaries

January 7, 2019 Leave a comment

WEA Commentaries

Volume 8, Issue No. 5 
Download the issue as a PDF

In this issue

Please support the WEA by paying a membership fee or making a small donation.