1) Hans-Werner Sinn, on Project Syndicate, shows that he still does not understand the basic accounting behind Target2. He still seems to think that the Greek Target2 deficit is increasing because Greek citizens are borrowing and bringing this borrowed money abroad. Sigh. Even when a country has a current account surplus (which Greece has) and private credit is shrinking (which, according to the Greek national bank is happening) the Target2 deficit increases when foreign Eurozone banks do not want to roll over legacy private debts anymore and the European Central Bank automatically finances this by letting the Target2 deficit increase. Private debts are offloaded to the central banking system. It’s a shame that Project Syndicate publishes this nonsense.
2) On the website of Elstat, the Greek statistical organization, an alarming document has been published in which the members of the European statistical system committee: “confirm our concern with regard to the situation in Greece, where the statistical institute, ELSTAT, as well as some of its staff members, including the current President of ELSTAT, continue to be questioned in their professional capacity. There are ongoing political debates and investigatory and judicial proceedings related to actions taken by ELSTAT and to statistics which have repeatedly passed the quality checks applied by Eurostat“. Mind the ‘continue’ and ‘ongoing’ – this is the way statisticians say that this predates the present government (which should take a clear stance, however). Dian Coyle eloquently states why this is indeed alarming and why (economic) statistics – with their flaws and mistakes – are important for an open society (and why economists do have to know the structure, limits but also the strengths of these statistics).
3) I totally agree with Coyle. Imnsho, however, mainstream economists commit a comparable crime by using models which use variables that are on the conceptual at odds with the statistical data or even leaving entire sectors of the economy, like the government, out of supposedly ‘macro’ models is at least as bad: unscientific, politically biased and outright wrong.
4). A practical example why (economic) statistics (should) matter: one of the things the Greek economic statistics show is Greece deflation. In real terms, the Greek economy was, in the first quarter of 2015, almost precisely as large as two years ago. In nominal terms it was was 4.4% smaller (table 2). Remarkably, this decrease of the price level (an intended consequence of the ‘structural reforms’!) does not seem to play a role in the present negotiations about the Greek debts.
5) The good news: Zoltan Jakab and Michael Kumhof have a new Bank of England working paper which states that Loanable funds theory is nonsense and economists should use models which are more consistent with the glorious system of economic statistics, in this case the Central Bank statistics on money creation:
“In the intermediation of loanable funds model of banking, banks accept deposits of pre-existing real resources from savers and then lend them to borrowers. In the real world, banks provide financing through money creation. That is they create deposits of new money through lending, and in doing so are mainly constrained by profitability and solvency considerations. This paper contrasts simple intermediation and financing models of banking. Compared to otherwise identical intermediation models, and following identical shocks, financing models predict changes in bank lending that are far larger, happen much faster, and have much greater effects on the real economy“.
June Sekera has published a new working paper which sets out to “outline the elements of a theory of the public non-market, and suggest a model to explain its forces, flows and dynamics“. She wants to do this because: “More than a century ago, the effective operation of the public economy was a significant, active concern of economics. But, with the rise of market-centrism and rational choice economics, government was devalued and allowed a role only in cases of “market failure.” The very idea of a valid, valuable public non-market almost disappeared from sight. So today we lack a coherent, comprehensive theory of the public economy“.
Sadly, Read more…
According to Mario Draghi, structural reforms should make the Eurozone economies more flexible, to enable them to recover faster from a crisis. A faster decline of wages should have lead to faster economic recovery. Hmmmm…
1) Without directly attacking this point of view Frances Coppola argues (using Latvia as an example) that high inequality increases the volatility of an economy (via a leverage channel) – implying that structural reforms aimed at lower inequality will reduce the need to recover from crises as they might well be less deep. Look here and here .
2) The same idea is stressed by IMF economists Kumhof and Ranciere
“As of 2005 Spain had the second highest immigration rates within the EU, just after Cyprus, and the second highest absolute net migration in the World (after the USA). … In fact, booming Spain was Europe’s largest absorber of migrants from 2002 to 2007, with its immigrant population more than doubling as 2.5 million people arrived.”
Contrary to what Mario Draghi tells us in his recent speech ‘structural reforms, inflation and monetary policy’, more ‘flexibility’ is not the answer to the Eurozone woes. Maybe even to the contrary. Flexible labour markets and deregulated financial markets did not just enable the buildup of housing bubbles and an oversized financial sector and unsustainable private debt levels in countries like Spain, Ireland and the Netherlands but also caused them. Fast ‘reallocation of resources between sectors’, lauded by Draghi, like mass immigration of construction workers in Spain and Ireland, mitigated wage increases. Which led to an even larger bubbles Read more…
How to measure the standard of living? Is it about market production? Or about happiness? Or about market production plus home production (the washing machine!) plus government production? Or about utility? Or even about ‘the biological standard of living’? Or where we live? Or all of these? Below, three excerpts from recent articles about this, from John Komlos, Diane Coyle and Eurostat.
My take:(1) we should be wary of national averages while (2) national accounts are highly useful and even indispensable to calculate (using input-output models) the change in CO2 production caused by a change in final demand, technology or gasoline taxes. These accounts are not just about GDP, though GDP is, in an accounting sense, the emergent statistical keystone of a national money based economy. And (3), as Komlos shows social differences permeate our entire life. Read more…
Guest post by Brian Romanchuk (see also his blog Bond Economics)
Problems With Fiscal Policy In DSGE Models
Dynamic Stochastic General Equilibrium (DSGE) models suffer from a great many defects, but the specification of fiscal policy in standard models stands out. Given the ongoing wave of publications of these models, it is hard to generalise about them. My statements here are based on how fiscal policy is represented within the models presented in the Chapter 12 of the text Advanced Macroeconomics by Paul Romer (fourth edition). The models in Romer are fairly indicative of much of the literature, but my criticisms here will not apply to all of them.
One of the key results used within DSGE models is that the timing of taxes has no effect on household behaviour. This assumption is known as “Ricardian Equivalence”. There is an academic literature which questions this behavioural assumption. Although this is an interesting debate, my view is that the specification of fiscal policy within DSGE is internally inconsistent, and so the quality of the behavioural assumptions around Ricardian Equivalence appears to be a secondary issue. Read more…
Did I ever tell you that the extremely hostile reaction of the Troika towards the Syriza government made it miss a unique chance? Well, it did. As I see it, the window of opportunity has closed. For the first time in decades Greece had (and still has) a responsible government. But all available Troika-energy was directed at derailing the Greek economy, corrupting information, saving the Troika ego’s and toppling Syriza. I’m afraid the derailment program succeeded, despite the green shoots mentioned below.
The State budget balance records a deficit of EUR 508 mn over January- April 2015, against the target of deficit of EUR 2.9 bn set in the 2015 budget, and significantly lower than for the same period of 2014 (when the deficit was EUR 1.15 bn). The State budget primary balance records instead a surplus of EUR 2.16 bn over the first four months of the year, against the target primary deficit of EUR 287 mn. This implies that in cumulative terms the State primary balance has over-performed the target by as much as EUR 2.45 bn
Deflation in Greece is serious. In the fourth quarter of 2014 the price level was 8% lower than in the third quarter of 2009 (seasonally adjusted data) – which means that total income (wages, profits, mixed income of the self-employed) is 8% lower than it would have been if the price level had not changed. As this, predictably, leads to a decline of tax income of the government of about the same size this makes it quite difficult for the government to balance the budget. One of the goals of austerity is a decline of the relative price level of countries. Greece did accomplish this. Compared with the Eurozone average the price level of Greece has deteriorated with about 12% (2010-I – 2014-IV). The decline of the Greek price level is, in the medium run, much larger than the decline of the Spanish and Portuguese price level, which makes one wonder why other, less ‘succesful’ austerity countries like Spain and Portugal are so critical of Greece. As austerity was imposed upon Greece by the creditors it seems less than fair that these same creditors do not take responsibility for their actions and write down the debts. It was not Greece which shot the creditors in the foot. Source: Eurostat.
Update: the GDP price level of Greece deteriorated, according to the most recent estimates, with 8% (quarterly data), not 10%. Post adapted.
As the head of the Bundesbank Jens Weidmann has a large responsibility. His acts and remarks influence the lifes of millioins. But he’s not up to this task. He at least does not seem to know what he is talking about. In a recent interview in the German Handelsblatt he makes, as far as I’m concerned, two major mistakes.
1) He states that the weekly increases in ECB ‘ELA-money’ (Emergency Liquidity Assitance’), which keep the Greek banks afloat, are not to be accepted as the freshly printed money is used to ramp up lending to the Greek government, which means that these increases violate the ban on monetary financing of the government by the ECB. Probably, somebody told Weidmann that the net position of the Greek government vis-a-vis the Greek banks is deteriorating. Which is right. But balance sheets have two sides. And looking at both of these shows that this deterioration is not caused by an increase of bank lending to the government (to the contrary – bank loans to the government have diminished a little between December 2014 and March 2015). Read more…
from Peter Radford
I think I am with Tony Judt on this one. I am reading the new collection of his essays written between 1995 and his death in 2010, and have had my memory jolted: he gave us many very considered critiques of modern economics, although they were usually dressed within the context of a book review. The point I am agreeing with is this statement he gives us in his 2009 speech called “What Is Living and What Is Dead in Social Democracy?”:
“But how did we, in our own time, come to think in exclusively economic terms? The fascination with an etiolated economic vocabulary did not come out of nowhere.”
Etiolated? Lovely, but I disagree. Our economic vocabulary is both robust and way too vigorous to be etiolated. On the contrary, economics has become a weed infesting society in every corner, and our use of it is far too frequent to consider it etiolated at all. Indeed our reliance on economic vocabulary belies the gaping holes in the theories that those words depend upon for their relevance.
But the larger point: that we overuse economics, that we see our world in economic terms rather than in other, perhaps more relevant, terms, and that we have come to depend too much on economic analysis to justify our actions is one I wholeheartedly endorse. Read more…
The BIS (Bank for International Settlements) has, together with the IMF and the ECB, published a new handbook on how to estimate debt. A reason to celebrate. Mainly, of course, as the handbook enables more consistent and better measurement of debt-securities (mortgages, bonds and the like). But also as this handbook shows how much economic statistics are consistent with the ideas and concepts of institutional and Post-Keynesian statistics. And how inconsistent with mainstream economics. About the first fact we can cite the website blurb (which does not mention the phrase ‘The Great North Atlantic post 2008 debt crisis’ but we all know what this is about):
The importance of securities markets in intermediating financial flows, both domestically and internationally, underscores the need for relevant, coherent and internationally comparable statistics. This need was recognised by the G20 Data Gaps Initiative Read more…
Production of greenhouse gas and global warming: the sectoral cumulative carbon emission budget view
Recently a new report on global warming has been published: how much do sectors like agriculture, construction and households have to increase the ‘Carbon-efficiency’ of their ‘production process’ to limit global warming to 2%? Oops – the report states (using a refined version of a methodology which has been pioneered by Ben and Jerry’s) freight transport has (as I understand it, the report is not explicit about this) increase its efficiency seven fold.
Some graphs and an excerpt.
Graph 1. Historical production of greenhouse gas, mind the increasing rate of increase.
Agriculture is a very, very important source of greenhouse gases. Read more…
There are at least three fundamental differences between ‘capital as statisticians measure it’ and ‘capital as a concept in neoclassical macro models’. Next to this, statisticians as well as neoclassical economists shy away from a crucial aspect of the ownership of capital: it’s forged in the fire of revolutions. Examples are the Protestant revolution (Cromwell, the Dutch Revolt, the Glorious Revolution, expropriation of the massive wealth (land!) of many cloisters), the Enlightenment revolutions (the French revolution, the abolishment of slavery and the Civil War) or the decolonization revolutions. This last point won’t be elaborated but it is good to remember it when rating the statistics and the models – just read ‘Capital in the twenty first century’ to get an idea about the importance of slaves as a main asset on USA balance sheets before the civil war.
The three differences (to be elaborated below): Read more…
from David Ruccio
I remember my dismay, when I first began teaching economics, how enthralled my colleagues (at least the liberal ones) were with Arthur Okun’s notion of the fundamental tradeoff between equality and efficiency (which they supplemented with John Rawls’s theory of justice). No critique of capitalism, no critique of political economy. They believed the democratic process would find the appropriate balance between market efficiencies and nonmarket interventions to create greater equality.
I was never happy with the idea of such a tradeoff (or, for that matter, with the veil of ignorance), because it was based on denying the fundamental injustice embedded in a capitalist economy—the appropriation and distribution of a surplus produced by the majority for the benefit of a tiny minority at the top. And no amount of celebrating the supposed efficiencies of capitalist markets (which, for the most part, were simply assumed) or tinkering with the distribution of income (with tax-based redistribution) was going to fix that. Read more…
from Lars Syll
At a realistic level of analysis, Keynes’ claim that some events could have no probability ratios assigned to them can be represented as rejecting the belief that some observed economic phenomena are the outcomes of any stochastic process: probability structures do not even fleetingly exist for many economic events.
In order to apply probability theory, one must assume replicability of the experiment under the same conditions so that, in principle, the moments of the random functions can be calculated over a large number of realizations …
For macroeconomic functions it can be claimed that only a single realization exists since there is only one actual economy; hence there are no cross-sectional data which are relevant. If we do not possess, never have possessed, and conceptually never will possess an ensemble of macroeconomic worlds, then the entire concept of the definition of relevant distribution functions is questionable. It can be logically argued that the distribution function cannot be defined if all the macroinformation which can exist is only a finite part (the past and the present) of a single realization. Since a universe of such realizations must at least conceptually exist for this theory to be germane, the application of the mathematical theory of stochastic processes to macroeconomic phenomena is therefore questionable, if not in principle invalid.
Links. Banks, Money, Solar energy unbound, Great Depression and money, competitivety and productivity.
1) Tim Worstall has a nice piece on the shortage of (hotel quality) toilet paper in Venezuela, which shows that he mastered institutional ideas about how markets work (there is more between heaven and earth than USA chartered listed companies).
2) Nice piece about the plunging costs of storing energy. Yes, ‘Tesla batteries’ but also something as simple as compressed air. We will see hundreds of billions of investments in decentralized, sustainable energy production and storage in the coming decades (around the North Sea this even cheap storage of wind and solar will however not solve the problem of foggy december days). Read more…
Are we witnessing one of these rare moments when rock solid intellectual positions suddenly become fluid and start flowing? One of the problems of neoclassical economics is the replacement of the classical ‘land, labour, capital’ trichotomy with the ‘labour, capital’ dichotomy. But suddenly it seems to leap back into the mind of economists. This might seem like an arcane detail of the history of economic though – but it isn’t. Removing ‘land’ (i.e. unproduced but valuable inputs like land, aquifers, stocks of oil, clean water and the like) from the income equations rules out rent incomes. According to Mason Gaffney (here) removing ‘land’ from economic theory was a conscious act, subsidized by land owners, to disable for instance the systematic taxation of land rent incomes. And with, according to Gaffney, dire consequences. Writing about Henry George he states Read more…
Do low wages lead to high job growth? Or are UK-style ‘flexible’ job markets in combination with house price subsidies the answer to the European jobs problem? In the long run – not really. Low wage Poland did not do too well, since 1996. And in a longer term perspective UK job growth – at present about the highest of the EU – is not really special. Job growth does not seem to be about flexibility and low wages but about ‘dynamism’, the growth and decline of entire sectors of the economy in combination with the changes in productivity, events which are to an extent itself enabled by flows of labour towards new sectors.
In the UK this meant, after 2008, an outflow from high productivity oil and finance and an inflow into low productivity ‘hospitality’. In Spain, health care did well, after 1995. In the somewhat longer run, the growth of sectors seems influenced by supply side reactions like the monetization of modern life itself – i.e. the fast post 1995 rise of the (female) participation rate in a country like Spain. We have to face the fact that the bubbles (not so much the price bubbles but the income generating building bubbles) might have enabled the growth of new sectors like health care which, after the bust, can hold their own… Read more…
from Dean Baker
The stock market has recovered sharply from the lows hit in the financial crisis. All the major indices are at or near record highs. This has led many analysts to worry about a new bubble in the stock market. These concerns are misplaced.
Before going through the data, I should point out that I am not afraid to warn of bubbles. In the late 1990s, I clearly and repeatedlywarned of the stock bubble. I argued that its collapse was likely to lead to a recession, the end of the Clinton-era budget surpluses, and pose serious problems for pensions. In the last decade I was yelling about the dangers from the housing bubble as early as 2002.
I recognize the dangers of bubbles and have been at the forefront of those calling attention to them. However, it is necessary to view the picture with clear eyes, and not scream “fire” every time someone lights a cigarette. Read more…
This series tries to give a concise oversight of criticisms of neoclassical macro models looking through the lense of statistics. Today: unemployment. Part 1 (money) here. Part 2 (market fundamentalism) here.
On the micro level, the difference between the statistical definition of unemployment and the neoclassical ‘micro-founded’ concept of ‘unemployment’ can not be starker.
1) Economic statisticians count somebody as ‘unemployed’ when he or she actively tries to escape this situation. If you’re not seeking a job and try to change your situation, you’re not counted as ‘unemployed’. But according to Lawrence Christiano, neoclassical macro models (if these include unemployment at all!) assume that “Unemployed workers enjoy higher utility than the employed because they receive the same level of consumption, but without having to work“. Christiano goes on by stating tha this is daft, citing scores of articles which show that, in the real world, unemployed are poorer and not happy – and really, really try to change their situation (see also Lars Syll and Simon Wren-Lewis about this). Read more…