Is the United States again driving the world economy?

February 23, 2015 5 comments

from Dean Baker

In the late 1990s, and again in the business cycle in the last decade, the United States to a large extent was the main engine of world growth. In both cases, growth in the United States, coupled with a rising dollar, led to a growing trade deficit, which provided a boost to demand elsewhere in the world.

There are many who see this pattern repeating based on a pickup of GDP growth in 2014, coupled with considerably faster job growth. This has coincided with a sharp rise in the dollar against other major currencies. However, beyond these outward similarities, there is little basis for the view that the U.S. economy will again be the engine for world growth.

The first and most important reason why this is unlikely is the pickup in growth in the United States is largely an illusion. The economy did grow at a fairly rapid 4.1 percent annual rate in the last three quarters of 2014, but this has to be understood in the context of a first quarter when it shrank at a 2.1 percent annual rate. Read more…

Categories: The Economy

The human capital controversy

February 22, 2015 8 comments

from David Ruccio

Like the capital controversy of the 1960s, the current controversy over human capital pits neoclassical economics against its critics.

The capital controversy (also known as the Cambridge controversy, because it was staged between neoclassical economists at MIT, and thus of Cambridge, Massachusetts, and non-neoclassical economists at Cambridge University, and thus of Cambridge, England), which actually took place between the mid-1950s and mid-1970s, was narrowly about the internal consistency of neoclassical economics and more generally about the role of capital in economic theory. The basic idea is that, in a world of heterogeneous capital goods (e.g., a shovel and an automobile assembly-line), you need to know the price of capital (the interest rate or rate of return on capital) in order to determine the quantity of capital (i.e., in order to add up all those different kinds of physical capital). But, in neoclassical economics, you need to use the quantity of capital in order to determine the price of capital (via supply and demand in the “capital market”), which creates a fundamental problem for the neoclassical theory of capital. Read more…

Categories: rethinking economics

Minutes of a meeting of civil servants employed by the ECB Eurosystem: some snippets.

February 20, 2015 Leave a comment

Employees

There is a meme-war going on. One of the meme’s is that the new Greek president hired 850.000 new civil servants when he was minister of the interior in a former Greek government. And though the man clearly isn’t a new broom it is sobering to look at the graph. The total amount of employees in the Eurostat ‘Mainly government’ sector at its peak hardly surpassed 900.000. Which may have been too high but to anybody stating  this: please, show me that Greek health workers and teachers are worthless leeches instead of trusted, dedicated public workers. Which is indeed something the ECB should do more carefully, as its minutes show that fuzzy memes as the statement above (not even a half-truth) do influence the discussion. Yes, the ECB is, finally, publishing its minutes. Read more…

Categories: Uncategorized

Greek retreat from game theory

February 19, 2015 3 comments

from Lars Syll

ATHENS — I am writing this piece on the margins of a crucial negotiation with my country’s creditors — a negotiation the result of which may mark a generation, and even prove a turning point for Europe’s unfolding experiment with monetary union.

Game-Theory-Paper-Matrix-Final1Game theorists analyze negotiations as if they were split-a-pie games involving selfish players. Because I spent many years during my previous life as an academic researching game theory, some commentators rushed to presume that as Greece’s new finance minister I was busily devising bluffs, stratagems and outside options, struggling to improve upon a weak hand.

Nothing could be further from the truth.

If anything, my game-theory background convinced me that it would be pure folly to think of the current deliberations between Greece and our partners as a bargaining game to be won or lost via bluffs and tactical subterfuge.

Read more…

Categories: Uncategorized

Issue no. 70 of the real-world economics review

February 19, 2015 Comments off

An open letter to economics student groups

February 18, 2015 1 comment

from Stuart Birks

Well done, your concerns about the economics curriculum are getting attention. There are also many practicing economists who have concerns about the current emphasis and direction of economics as a discipline.

As in any such situation, the process of change can be crucial in determining the outcome. Often many different initiatives are called for. There is one initiative which may be effective in the short term and also instrumental in shaping developments in the long term. I am referring to the World Economics Association’s Textbook Commentaries Project.

The project involves the development of an online platform containing brief commentaries which can be used right now in existing and new economics courses. This growing collection is designed to increase critical understanding of economics approaches and awareness of alternative perspectives. The commentaries are each short and stand-alone, so can be easily be incorporated into existing courses without greatly increasing the workload. They do generate an awareness of the concerns about various approaches and the diversity of thought that exists, even if no longer included in the standard curriculum. Many commentaries draw directly on alternative literature by recognised experts in the field. It is important that students be made aware of these sources, if only to put their own knowledge in a wider context. Additional pages also highlight other accessible material (books and online teaching resources).

How can you participate?

Read more…

Link of the day. The ‘mark-to-market’, household and business centered plan of the Greek government

February 18, 2015 2 comments

You can trust a con man to double down on his lying and cheating whenever something – or someone – is exposing his lies. Which is exactly what Schauble, minister of finance of Germany does. And I don’t mind. He is a politician – it is what he is supposed to do. But that’s the point. Much of the press believes him, for instance when he – or somebody from his coterie around him, like mr. D. – is talking about Greece. And he will only be as honest as the press forces – forces! – him to be. At one point, even the existence of Greek ideas and plans was put into question. Well, here they are, via a part of the Greek press which, by the way, is owned by the oligarchy. The failure of the press clearly is not caused by any kind of class struggle. It’s just bad reporting. An excerpt (mind the realist ‘mark-to-market’, non-dogmatic and even bourgeois nature of the piece): Read more…

Categories: Uncategorized

Germany 1919 — Greece 2015

February 18, 2015 25 comments

from Lars Syll

The Greeks tried to talk with the other finance ministers of EU. The negotiations broke down.

140906085As soon as it was admitted that it was in fact impossible to make Germany pay the expenses of both sides, and that the unloading of their liabilities upon the enemy was not practicable, the position of the Ministers of Finance of France and Italy became untenable. Thus a scientific consideration of Germany’s capacity to pay was from the outset out of court. The expectations which the exigencies of politics had made it necessary to raise were so very remote from the truth that a slight distortion of figures was no use, and it was necessary to ignore the facts entirely. The resulting unveracity was fundamental. On a basis of so much falsehood it became impossible to erect any constructive financial policy which was workable. For this reason amongst others, a magnanimous financial policy was essential.

 

Read more…

Categories: Greece

Reforms in Greece. An exemplary record. But the wrong track. 3 graphs.

February 17, 2015 3 comments

Greece is champion reformer. According to austerity mythology, we did not have a financial but a ‘rigidity’ crisis, aggravated by uncompetitive price levels. Which had to be solved with structural reforms and by bringing the price level (read: wages) down. Which is what Greece did, much more than any other country. But, as we do not have a rigidity crisis but a monetary crisis this did not work, of course. Some data: via Frances Coppola we learn that Greece has been the most ardent reformer of the entire Eurozone (graph 1, OECD data). Via Paul Krugman we learn that no country cut government expenditure as much as Greece (by a long shot: graph 2, Eurostat data). And Eurostat also teaches us that no country has been as succesful as Greece in lowering relative and even absolute prices (graph 3, Eurostat data). Coppola and Krugman are, understandable, aghast about the hypocrisy of the prime ministers of Ireland and Finland, who are lecturing Greece about something which it did much more succesfully than they did. And then there is the argument: “the Irish suffered for nothing, so the Greek have to suffer too“. Sigh.

Remark: the Krugman graph jpg has a lot of white below the actual graph.

Graph 1. OECD shows that Greece did reform

Coppola

Read more…

Categories: Uncategorized

Game theory—in practice

February 17, 2015 4 comments

from David Ruccio

 

Greece-Greek-Games-4

source*

Back when I taught Principles of Microeconomics, I offered a lecture or two on game theory. Given how terrible most textbook presentations are, I used to borrowed heavily from the work of Judith Mehta and Shaun Hargreaves-Heap and Yanis Varoufakis to explain the key assumptions behind and the tensions generated within game theory.

Now, Varoufakis is back—in a very different capacity, of course—to explain the lesson he learned from his studies of game theory: Read more…

Categories: Greece, methodology

Greece does battle with creationist economics: can Germany be brought into the 21st Century?

February 17, 2015 6 comments

from Dean Baker

Europeans have been amused in recent weeks by the difficulty that Republican presidential candidates have with the theory of evolution. But these cognitive problems will only matter if one of these people gets into the White House and still finds himself unable to distinguish myth from reality. By contrast, Europe is already suffering enormous pain because the people setting economic policy prefer morality tales to economic reality.

This is the story of the confrontation between Greece and the leadership of the European Union. The northern European countries, most importantly Germany, insist on punishing Greece as a profligate spender. They insist on massive debt payments from Greece to the European Union and other official creditors to make up for excessive borrowing in prior years.

The current program requires that Greece’s tax revenues exceed non-interest government spending by 4.0 percent of GDP, the equivalent of $720 billion a year in the United States. This money is pulled out of Greece’s economy and sent to its creditors. Making matters worse, because Greece is locked into the euro at present, it is not able to regain competitiveness by lowering the value of its currency relative to the richer countries in Europe.

The result of the German program for Greece has been an economic downturn that makes the Great Depression in the United States look like a bad day. Seven years after the start of the downturn Greece’s economy is more than 23 percent smaller than its peak in 2007. Read more…

Categories: Greece

Chronicle of a Grexit foretold

February 16, 2015 8 comments

Update (CET 21:00). The ‘negotiations’ have broken down. Let’s quote Varoufakis (considering the way the ‘negotiations’ broke down some people are genuinely afraid of something, maybe it is this, emphasis added):

I am often asked: What if the only way you can secure funding is to cross your red lines and accept measures that you consider to be part of the problem, rather than of its solution? Faithful to the principle that I have no right to bluff, my answer is: The lines that we have presented as red will not be crossed. Otherwise, they would not be truly red, but merely a bluff.

But what if this brings your people much pain? I am asked. Surely you must be bluffing.

The problem with this line of argument is that it presumes, along with game theory, that we live in a tyranny of consequences. That there are no circumstances when we must do what is right not as a strategy but simply because it is … right.

Against such cynicism the new Greek government will innovate. We shall desist, whatever the consequences, from deals that are wrong for Greece and wrong for Europe. The “extend and pretend” game that began after Greece’s public debt became unserviceable in 2010 will end. No more loans — not until we have a credible plan for growing the economy in order to repay those loans, help the middle class get back on its feet and address the hideous humanitarian crisis. No more “reform” programs that target poor pensioners and family-owned pharmacies while leaving large-scale corruption untouched.

Our government is not asking our partners for a way out of repaying our debts. We are asking for a few months of financial stability that will allow us to embark upon the task of reforms that the broad Greek population can own and support, so we can bring back growth and end our inability to pay our dues.”

In ‘Chronicle of a death foretold‘ Gabriel Garcia Marquez tells the story of twins who, as they have to save their face, have to kill another man. Or at least have to show in a credible way that they intend to do so. So they set up an ambush. And tell everybody that they will kill this other man, hoping – trusting, as they live in a small village – that somebody will tell this other man to change his normal ways and to avoid the place of the ambush. An unbelievable but true string of coincidences however prevents this from happening. And the other man walks, like every other day, towards the place of the ambush. Which makes the twins run out of options and they have to kill him…

The Eruozone saga increasingly reminds me of this story.  Read more…

Categories: Uncategorized

Links. Drowning job seekers, fuzzy asset prices, the trouble with real estate banking.

February 15, 2015 3 comments

1) More than 300 people searching for work and a better life drown in the Mediterranean.

“The UN’s refugee agency, UNHCR, says more migrants are dying because search and rescue efforts have been reduced. Italy’s major patrol and rescue operation ended last year. A smaller scale EU operation, Triton, took over. The UNHCR says about 3,500 migrants died trying to cross the Mediterranean Sea to Europe in 2014.”

2) The problem with NIIP (Net International Investment Position). Does running a current account surplus for decades make a country richer? Not necessarily so. For one thing, it is quite difficult to estimate the value of ‘NIIP’. For another, the net position is the result of large gross positions, which means that a limited decline of the value assets may turn a positive net position into a negative position despite positive current account flows, which is what happened in the Dutch case. For quite some time, the decline of the value of international financial assets was larger than the (whopping) current account surpluses of the Netherlands.

3) Real-estate banking crowds out productive investment: “We also find some evidence of a financial Dutch disease – the faster the growth of financial services and the larger the lending-deposit interest spread, the slower the growth of the manufacturing sector”.

4) During the housing busts the number of houses sold often declined faster and more than prices. Why? Read more…

Categories: Uncategorized

Ruling Capital: Emerging Markets and the Reregulation of Cross-Border Finance

February 15, 2015 1 comment

Kevin Gallagher’s new book on emerging markets and the re-regulation of global finance

Categories: Uncategorized

Über-unemployment in the Eurozone: a question of design

February 13, 2015 6 comments

Unemployment

It’s always difficult to explain the glaring obvious.  Read more…

Categories: Uncategorized

Does Germany bail out Southern Europe? Or did Southern Europe bail out the Buba

February 11, 2015 2 comments

One of the imbalances of the Euro system are the Target2 claims. These claims are a kind national, non-government American Express credit card debts owed to foreigners which were paid down using the overdraft facility of the national private banks at the national central bank. To be able to do this, the national central bank borrows from a foreign national. These imbalances are large: many hundreds of billions of Euro. Interest rates on Target2 debts are low but as the total amount of money is huge total interest still is quite a bit of money. Germany is the main ‘foreign’ national bank. And the Bundesbank did earn a huge amount of interest:

* 3,3 billion Euro in 2011
* 6,0 billion Euro in 2012
* 4,5 billion Euro in 2013
Read more…

Categories: Uncategorized

The US labor market is failing on two fronts

February 11, 2015 Leave a comment

from John Schmitt

epop

In a new CEPR report out today, I argue that the US labor market is failing on two fronts. The first failure is the decades-long stagnation of real wages at the middle and the bottom of the wage scale –even as earnings at the top have grown rapidly. The second failure, only apparent since the early 2000s, is the sharp deterioration in job creation.  Read more…

Categories: The Economy

Model assumptions and reality

February 10, 2015 1 comment

from Lars Syll

In a previous article posted here — What are the key assumptions of linear regression models? — yours truly tried to argue that since econometrics doesn’t content itself with only making optimal predictions, but also aspires to explain things in terms of causes and effects, econometricians need loads of assumptions — and that most important of these are additivity and linearity.

Let me take the opportunity to cite one of my favourite introductory statistics textbooks on one further reason these assumptions are made — and why they ought to be much more argued for on both epistemological and ontological grounds when used (emphasis added): Read more…

Rats! History does repeat itself

February 10, 2015 3 comments

from Peter Radford

And clearly economists don’t learn from it.

Ponder this:

“It was all very well for the rich, who could raise all the credit they needed, to clamp rigid deflation and monetary orthodoxy on the economy … it was the little man who suffered, and demanded easy credit and financial unorthodoxy.”

That’s the voice of E. J. Hobsbawm in his book, “The Age of Revolution 1789 – 1848″, and he is talking about post Napoleonic Europe.

But how contemporary is that sentiment?

We are stuck in a similar situation. Our elite, both here and in Europe, is managing the economy  for its own ends. The disconnect with everyday folk is astonishing. The hubris and plain meanness of it all is equally astonishing.

Look at Greece: the attempt to impose a teutonic fiscal ‘discipline’ via stringent austerity has simply led to the debt that was the target of the policy becoming an even larger problem. It is an example of epic policy failure. The Greeks, for all their previous laxity and fiscal ineptitude, are to be applauded for calling for an end to the stupidity. Read more…

The current conflict is not between nations, but between classes (2 graphs)

February 9, 2015 7 comments

from David Ruccio

Most of the commentary on the ongoing euro crisis, especially the current Greek debt negotiations, has been couched in terms of a conflict between nations. This is particularly true of mainstream economists, whose nation-state-based models downplay or ignore class, even as the policies they advocate have tremendous class implications.

So, it’s fallen to—however ironically—financial strategist and professor of finance Michael Pettis to remind us the current conflict is not between nations, but between classes.

The whole piece, beginning with the French indemnity of 1871-73, is worth a careful read. But I want to focus here on what Pettis writes about the class conditions that led to and follow on from the current crisis.

First, Pettis makes the important point that the capital flows from north to south within the euro zone were based on important class changes within Germany (he uses his native Spain throughout as his example in the south but most of his analysis follows for Greece and other countries): Read more…

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