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Econometric forecasting — an assessment

July 29, 2016 3 comments

from Lars Syll

411e9aO5PCL._SY344_BO1,204,203,200_There have been over four decades of econometric research on business cycles … The formalization has undeniably improved the scientific strength of business cycle measures …

But the significance of the formalization becomes more difficult to identify when it is assessed from the applied perspective, especially when the success rate in ex-ante forecasts of recessions is used as a key criterion. The fact that the onset of the 2008 financial-crisis-triggered recession was predicted by only a few ‘Wise Owls’ … while missed by regular forecasters armed with various models serves us as the latest warning that the efficiency of the formalization might be far from optimal. Remarkably, not only has the performance of time-series data-driven econometric models been off the track this time, so has that of the whole bunch of theory-rich macro dynamic models developed in the wake of the rational expectations movement, which derived its fame mainly from exploiting the forecast failures of the macro-econometric models of the mid-1970s recession.

The limits of econometric forecasting has, as noted by Qin, been critically pointed out many times before.

Trygve Haavelmo — with the completion (in 1958) of the twenty-fifth volume of Econometrica — assessed the the role of econometrics in the advancement of economics, and although mainly positive of the “repair work” and “clearing-up work” done, Haavelmo also found some grounds for despair:
Read more…

Class struggles in America (6 graphs)

July 28, 2016 3 comments

from David Ruccio

Almost five years ago, I suggested we start calling things by their correct names.

Take the working-class—people who are forced to have the freedom to sell their labor power for a wage. We refer to them as members of the middle-class (which needs to be “rebuilt“) and working families (who need to be helped) or, now as workers’ wages stagnate and the real value of the minimum wage declines, as the “feral underclass” (especially in theUK, in the aftermath of the riots) or the working-age poor (as in the recent AP report on the demographic composition of those living in poverty [ht: ja]).*

What’s the problem with calling it as it is? What are we afraid of? It’s the working-class, and its member are becoming increasingly impoverished. People who work for a living, or want a full-time job but can’t find one (whether or not they’re actively looking for one, since it’s getting increasingly difficult to find a decent job), represent nearly 3 out of 5 poor people. . .

So, from now on, in political and economic discourse, let’s call things by their correct names. The vast majority of people in the United States are members of the working-class. And they’re getting shafted.

Well, it seems, Americans are still struggling with the notion of the working-class (and of class more generally).

The best Donald Trump was able to come up with were “the great miners and steel workers of our country.” (Really? Trump wants to send American workers back into the mines and steel mills? Those jobs are mostly gone, and that’s a good thing.) Even Elizabeth Warren and Bernie Sanders weren’t able to refer to the working-class, preferring instead to use terms like “working people,” “hard-working families,” “workers,” and “working families”—although, in their case, when counterposed to corporate profits and CEOs, it was pretty clear they were referring to the growing class divide in the United States.

As Tamara Draut [ht: ja] explains, the American working-class is in fact changing.

Read more…

Job growth in Ireland. Meuhhh…

July 27, 2016 2 comments

Irishjobs

According to the Irish Statistical Office, economic growth in 2015 was an unbelievable 26%. At the same time, employment increased with 2,4% or 151.000 jobs. A brisk but not exceptional pace and totally at odds with the 26% economic growth estimate. Subsectoral data underscore this anomaly: job growth was located in agriculture, tourism (food and beverage service activities) and construction. And to a much smaller extent in the computer, pharmaceutical and leasing sectors which showed, according to the institute, such an amazing growth.

Capital links. Nature, France and a Marxist DSGE model

July 27, 2016 1 comment

1) What is capital? The national accounts define capital as a monetary variable. Many people however also talk about ‘natural capital’, ‘The stock of living and non-living components of the earth that provide a flow of valuable ecosystem goods or services‘. That’s from the Australian Bureau of Meteorology, which has issued a very good report ‘The environmental accounts landscape‘. They may underestimate the extent to which laws and regulations shape ‘capital’. But here’s an interesting graph from the report:

capital2

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Austerity policies — nothing but kindergarten economics

July 27, 2016 2 comments

from Lars Syll

 

I definitely recommend everyone to watch this well-argued interview with Steve Keen.

To many conservative and neoliberal politicians and economists there seems to be a spectre haunting the United States and Europe today — Keynesian ideas on governments pursuing policies raising effective demand and supporting employment. And some of the favourite arguments used among these Keynesophobics to fight it are the confidence argument and the doctrine of ‘sound finance.’

Read more…

Children’s economics

July 27, 2016 3 comments

from David Ruccio

As I have argued many times on this blog, representations of the economy are produced and disseminated in many different spaces (in addition to academic economics departments) and through many different media (in addition to the usual, mostly mainstream economics textbooks).

One example of this proliferation of economic representations is children’s literature. Children are the targets of educators and writers, most of whom (at least these days) are determined to make sure children get the “correct” understanding of key concepts and institutions. And, for the most part, they mirror the kinds of knowledges produced by mainstream economists, albeit with language and illustrations appropriate for children.

Scholastic offers such a list (which features Homer Price by Robert McClosky, through which students learn the “law of demand”). So does Choice Literacy (which includes Tomie dePaola’s Charlie Needs a Cloak, “good for discussing the four factors of production”). And then there’s the Rutgers University Project on Economics and Children, which groups books by concept (such as Markets and Competition, Opportunity Cost, and so on).

Motoko Rich’s view is that “By and large, the economic lessons in children’s books lean left of center” (and that may be true of books that teach the importance of sharing and gift-giving) but, at least for the books on the lists provided by economics educators these days, the tendency is much more mainstream, if not purely neoclassical.  Read more…

Is the Trans-Pacific Partnership President Obama’s Vietnam?

July 26, 2016 3 comments

from Dean Baker

The prospects for the Trans-Pacific Partnership (TPP) are not looking very good right now. Both parties’ presidential candidates have come out against the deal. Donald Trump has placed it at the top of his list of bad trade deals that he wants to stop or reverse. Hillary Clinton had been a supporter as secretary of state, but has since joined the opposition in response to overwhelming pressure from the Democratic base.

As a concession to President Obama, the Democratic platform does not explicitly oppose the TPP. However it does include unambiguous language opposing investor-state dispute settlement mechanisms — the extra-judicial tribunals that are an integral part of the TPP.

If the political prospects look bleak there also is not much that can be said for the economic merits of the pact. The classic story of gaining from free trade by removing trade barriers doesn’t really apply to the TPP primarily because we have already removed most of the barriers between the countries in the pact.

The United States has trade deals in place with six of the 11 countries in the TPP, so tariffs with these countries are already at or very near zero. Even with the other five countries, in most cases the formal trade barriers are already low, so pushing them to zero will not have much economic impact.   Read more…

Escape from Freedom

July 25, 2016 7 comments

from Robert Locke

Erich Fromm’s 1941 book, with this title, came to mind while watching Donald Trump and his followers in the Cleveland arena. In his book

“Fromm distinguishes between ‘freedom from’ (negative freedom) and ‘freedom to’ (positive freedom). The former refers to emancipation from restrictions such as social conventions placed on individuals by other people or institutions. This is the kind of freedom typified by the Existentialism of Sartre, and has often been fought for historically, but according to Fromm, on its own it can be a destructive force…Fromm analyzes the character of Nazi ideology and suggests that the psychological conditions of Germany after the first world war fed into a desire for some form of new order to restore the nation’s pride. This came in the form of National Socialism and Fromm’s interpretation of Mein Kampf suggests that Hitler had an authoritarian personality structure that not only made him want to rule over Germany in the name of a higher authority … but also made him an appealing prospect for an insecure middle class that needed some sense of pride and certainty.” Widepedia.

Only he could save America Trump proclaimed to the cheering Trumpites, sprewing out a hate of Hillary Clinton that resembled the mindless chants of Hitler’s followers against the November criminals who made peace and “betrayed” Germany in 1918. In a Germany beset with massive unemployment and saddled with the war guilt clause by the victorious allies in the Versailles treaty, Hitler fanatics were willing to escape from the freedom of the Weimar Republic into a National Socialists dictatorship. History never repeats itself, but the hatred of Clinton and willingness to submit to Donald Trump I saw in the arena was a frightening reminder of events in the 1930s when Germany went berserk.

Don’t believe Wall Street’s scare stories about a financial transactions tax

July 25, 2016 2 comments

from Dean Baker

Thanks in large part to Sen. Bernie Sanders, the Democratic Party recently added a financial transactions tax to its platform. In his run for the presidential nomination, Sanders had promoted the idea of an FTT — a small sales tax on the purchase of stocks, bonds or other financial assets — as a way to finance free college for everyone, with money left over for infrastructure and other important needs. The idea has currency beyond the platform, too: Rep. Peter A. DeFazio (D-Ore.) recently reintroduced an earlier proposal for a tax of 3 cents on every 100 dollars on most financial transactions.

Talk of FTTs scares the financial industry: They would significantly reduce the industry’s revenue and profits. As soon as anyone starts taking FTTs seriously, the industry immediately begins issuing dire warnings — which, unsurprisingly, almost always amount to nonsense.

Of late, the industry has taken to pretending that the real victims of an FTT won’t be the high rollers on Wall Street, but rather middle-class families. If families have 401(k)s, industry complainers say, they will have to pay more for the trades done by the people who manage their funds. Likewise, if they have a traditional pension, each trade made by the pension will cost more.

There’s a basic problem with the industry’s logic. A great deal of research shows that trading of stock and other financial assets is hugely responsive to the cost of trading. In fact, most research shows that if the cost of trading goes up by a certain amount — say 20% — the number of trades will fall by an even larger amount, say 25%.   Read more…

Spot the Crisis

July 24, 2016 7 comments

from Peter Radford

We hear it all the time. It is a relentless drum beat on the left. Capitalism, we are told, is in crisis. This crisis is manifested in all sorts of ways. We – meaning those of us on the left – need to prepare. We need to counter attack. We need to seize this moment and retrieve from the mess whatever we can. Democracy, in various forms depending on who is writing, is our way forward. Only through democracy can we save society from the crisis in capitalism.

Really?

Where, exactly is this crisis?

This occurs to me because at the same time leftist writers are proclaiming the existence of crisis they are often, simultaneously, proclaiming the ever increasing divide in social inequality as defined by income or wealth. Capitalists are doing quite nicely I would imagine if these concerns over inequality are correct. Which they are.

So, where, exactly, is this crisis?

If capitalists are taking and ever increasing share of the national income, if they are accumulating an ever increasing proportion of the national wealth, and if they have managed to wrestle effective control of the ship of state from the majority of ordinary folks, how can they be in crisis? I would argue that things look pretty dandy if you’re one of them.

There is no crisis in capitalism if you are a capitalist. You’re on a winning roll. You are loving life.

It’s the rest of us that have a problem. We are the ones mired in crisis. We don’t have a crisis of capitalism. We have a crisis because of capitalism. That’s a big difference.  Read more…

Cherry picking economic models

July 23, 2016 3 comments

from Lars Syll

Chameleons arise and are often nurtured by the following dynamic. First a bookshelf model is constructed that involves terms and elements that seem to have some relation to the real world and assumptions that are not so unrealistic that they would be dismissed out of hand. The intention of the author, let’s call him or her “Q,” in developing the model may to say something about the real world or the goal may simply be to explore the implications of making a certain set of assumptions. Once Q’s model and results become known, references are made to it, with statements such as “Q shows that X.” This should be taken as short-hand way of saying “Q shows that under a certain set of assumptions it follows (deductively) that X,” but some people start taking X as a plausible statement about the real world. If someone skeptical about X challenges the assumptions made by Q, some will say that a model shouldn’t be judged by the realism of its assumptions, since all models have assumptions that are unrealistic. Another rejoinder made by those supporting X as something plausibly applying to the real world might be that the truth or falsity of X is an empirical matter and until the appropriate empirical tests or analyses have been conducted and have rejected X, X must be taken seriously. In other words, X is innocent until proven guilty. Now these statements may not be made in quite the stark manner that I have made them here, but the underlying notion still prevails that because there is a model for X, because questioning the assumptions behind X is not appropriate, and because the testable implications of the model supporting X have not been empirically rejected, we must take X seriously. Q’s model (with X as a result) becomes a chameleon that avoids the real world filters.   Read more…

The Irish and Eurostat national accounts statisticians do have something to explain…

I read the rule book – and am not that sure anymore if the Irish GDP figures were calculated ‘according to the rules’. Due to the relocation of headquarters of the headquarters of some large multinational corporations the Irish statisticians mapped an increase of, especially, profit income of the Irish economy of 60 billion euro in two years. Which is a lot, for a country of 4 million people. Eurostat agrees, as it was, according to Eurostat, calculated according to the Eurostat rules. But was it? I don’t think so. According to the ESA 201o (the rule book) just relocating a headquarter (or a ‘centre of predominant economic interest’, as it’s called in the rule book), is not enough. The same for ‘transfer pricing’. It is also about where production actually takes place. An excerpt (article 2.07) from the rulebook, emphasis added: Read more…

“How Individualist Economics Are Causing Planetary Eco-Collapse”

July 22, 2016 5 comments

A selection from the cover of Green Capitalism: The God That Failed. (Image: WEA Books)A selection from the cover of Green Capitalism: The God That Failed. (Image: WEA Books)

For some in the environmental movement, it has been tempting to believe that “innovation” and free market solutions could address the challenge of climate disruption. In his provocative and robustly argued book Green Capitalism: The God That Failed, Richard Smith shows why that idea is a myth. Click here to order this important book today with a donation to Truthout!

Click here for an abridged excerpt from the essay “How did the common good become a bad idea? The eco-suicidal economics of Adam Smith,” in Green Capitalism: The God That Failed.

 

Irish growth: what happened?

Profits

There has recently been a fuzz about the 26% Irish 2015 GDP growth rate. For more timely discussion of this phenomenon,look here and here on this blog (though I have to admit that I was flabbergasted too by the upward revision of Irish growth from about 9% to about 26%: beyond imagination). What to make of this? The Irish Central Statistical Office is not happy about it, too, and states: “the CSO intends to convene a high-level cross-sector consultative group” to address this situation. Two points for this discussion: Read more…

The top ten economics books of the last 100 years

July 22, 2016 Comments off

RWER Poll 2016

The top ten economics books of the last 100 years

Subscribers to this journal were asked:

“What are the top ten economics books of the past 100 years?

The poll was open for two weeks in May and over 3,000 economists voted.  They could vote for up to ten of the books on the short list of 50 which had been compiled from the nominations submitted by Real-World Economics Review readers.  People on average voted for five books.  Here are the results. Read more…

The other half of macroeconomics – Richard Koo

July 21, 2016 3 comments

Four possible states of borrowers and lenders

The discussion above suggests an economy is always in one of four possible states depending on the presence or absence of lenders (savers) and borrowers (investors). They are as follows: (1) both lenders and borrowers are present in sufficient numbers, (2) there are borrowers but not enough lenders even at high interest rates, (3) there are lenders but not enough borrowers even at low interest rates, and (4) both lenders and borrowers are absent. These four states are illustrated in Exhibit 2.

Of the four, only Cases 1 and 2 are discussed in traditional economics, which implicitly assumes there are always borrowers as long as real interest rates can be brought low enough. And of these two, only Case 1 requires a minimum of policy intervention – such as slight adjustments to interest rates – to keep the economy going.

The causes of Case 2 (insufficient lenders) may be found in both financial and non-financial factors. Non-financial factors might include a culture that does not encourage saving or a country that is simply too poor and underdeveloped to save. A restrictive monetary policy may also qualify as a non-financial factor that weighs on savers’ ability to lend. (If the paradox of thrift leaves a country too poor to save, this would be classified as Case 3 or 4 because it is actually due to a lack of borrowers.)  Read more…

The World Bank on the way back to the Washington Consensus – with Chicago Boy Paul Romer

July 20, 2016 2 comments

from Norbert Häring

On Monday the World Bank made it official that Paul Romer will be the new chief economist. This nomination can be seen as a big step back toward the infamous Washington Consensus, which World Bank and IMF seemed to have left behind. This is true, even though Paul Romer has learned quite well to hide the market fundamentalist and anti-democratic nature of his pet idea – charter cities – behind a veil of compassionate wording.

Romer won significant academic merits with his theory of endogenous growth. He modelled the production of new knowledge within his model rather than letting it drip from sky in convenient increments, as growth theory had done before. At first sight, this sounds like a good qualification for the task at hand. However, Romer has admitted in an interview that it is of rather little use for development economics, because it fails to discriminate between the production of new knowledge at the knowledge frontier, i.e. in highly developed industrial countries, and the adaption of knowledge, which is of particular importance for catch-up processes in poor countries. Still is honors him, that he knows and talks about the limits of his theory.   Read more…

Why economists can’t reason

July 20, 2016 4 comments

from Lars Syll

reasoning-9780070558823

Reasoning is the process whereby we get from old truths to new truths, from the known to the unknown, from the accepted to the debatable … If the reasoning starts on firm ground, and if it is itself sound, then it will lead to a conclusion which we must accept, though previously, perhaps, we had not thought we should. And those are the conditions that a good argument must meet; true premises and a good inference. If either of those conditions is not met, you can’t say whether you’ve got a true conclusion or not.

Neoclassical economic theory today is in the story-telling business whereby economic theorists create make-believe analogue models of the target system – usually conceived as the real economic system. This modeling activity is considered useful and essential. Since fully-fledged experiments on a societal scale as a rule are prohibitively expensive, ethically indefensible or unmanageable, economic theorists have to substitute experimenting with something else. To understand and explain relations between different entities in the real economy the predominant strategy is to build models and make things happen in these “analogue-economy models” rather than engineering things happening in real economies.

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Making firm governance part of the economists’ dialogue

July 20, 2016 25 comments

from Robert Locke

In a recent article,”The Milton Friedman Doctrine is Wrong.  Here’s How to Rethink the Corporation,” Susan Holmberg and Mark Schmitt intoned: “We won’t fix the problem until we address the nature of the corporation.” at http://economics.com/milton-friedman-doctrine-wrong-heres-rethink-corporation/. Egmont Kakarot-Handtke asserts that sciences of society make no contribution to economics because they are scientifically invalid — to which I replied that his assertion is not true because the neoclassical economists who took over economics in the 20th century excluded history and social studies from the discipline’s purview. History and social studies could make no contribution since they have been ignored. The neoclassical economists’ failure to incorporate firm governance into the economists’ dialogue is a prime example of what I mean.    Read more…

Flat or falling (5 charts)

from David Ruccio

flat

A new report from McKinsey & Company, “Poorer than Their Parents? Flat or Falling Incomes in Advanced Countries” (pdf), confirms many people’s worst fears. As it turns out, the trend in stagnating or declining incomes for most workers (including the middle-class) is not confined to the United States, but is a global phenomenon.

Brexit and Trump are just the tip of the iceberg. Because of flat or falling incomes, many workers across the rich countries are angry and want change.

According to the authors of the report, as much as 70 percent of the households in 25 advanced economies saw their incomes drop in the past decade. That compares to just 2 percent of households that saw declining incomes in the previous 12 years.*

Read more…

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