Today: 2 graphs. And do I really have to write this blog? Yes, I have. At this moment the USA government seems to target bilateral trade balances: these should be more or less balanced. To quote a Trumptweet (January 27, 2017): “The U.S. has a 60 billion dollar trade deficit with Mexico. It has been a one-sided deal from the beginning of NAFTA with massive numbers…”. But it does not work that way. Bilateral trade deficits are not the right measure to estimate if trade is one-sided deal. Switzerland is an example.
The coming days I will post some graphs. The first I made to answer the question if East German unemployment was finally coming down. East Germany has experienced sky-high unemployment for decades despite massive transfers and despite a wage level which is supposed to be 25% lower than in West Germany. But at this moment, East German über-unemployment has more or less disappeared, at least compared with the German version of the rust belt (Stainless steel belt? Nutzeisen belt?). Two remarks:
- German unemployment is developing favorably. But comparison with Bavaria shows that there still is ample labour market slack.
- If neoliberal wage restraint policies plus massive transfers led to two decades of almost 20% unemployment in East Germany, how long will it take for Greek unemployment to come down? Four decades?
from David Ruccio
It is likely, if some version of Trump/Ryancare is approved in the United States, millions more people will not be able to purchase the insurance necessary to receive adequate healthcare. Read more…
from Peter Radford
We all ought calm down about the Trump budget. Presidential budgets never, ever, get put into practice. They are simply exercises in politics. They simply give us insight into presidential goals.
In Trump’s case there is nothing that we didn’t already know. He wants to slash domestic programs, especially those niggling ones that offend his far right fans, and pile on the offensive weaponry for the Pentagon.
As I said: no big surprise.
Here’s a very short synopsis of the bigger items:
- The Environmental Protection Agency takes a really big hit — a 31% cut in spending. Many of its key programs would simply be axed. They range from any and all research into climate change to the very popular Energy Star program that rates energy using products and so gives consumers insight into their probable energy bills. Ironically one program that might survive is the greenhouse emissions monitoring program which is a mandate by Congress so getting rid of it would imply legislation unlikely to pass. So the EPA might still monitor greenhouse gases. It just would n’t be able to do anything about them.
- The Energy Department gets hammered too with an almost 18% cut. The biggest target at DOE is its research programs designed to help accelerate the country’s move from a carbon based energy supply to alternative sources. Right wingers have constantly complained about the DOE dabbling in applied rather than pure early stage research. Evidently Trump agrees.
- The State Department also gets a beating, especially anything to do with climate change. The cuts don’t indicate that the US is quitting the Paris climate agreement of 2015, but it sure looks as if that is in the cards. The cuts also include anything to do with UN based climate initiatives. Indeed the UN is a heavy target with the US contribution to peace keeping in the cross hairs. State is having its “soft power” capacity severely trimmed. These are the kinds of programs both the hard right and Russia particularly dislike. They are programs that allow the US to project a softer, gentler image to the world and are meant to take the edge off the militaristic image all those wars project. Apparently Trump doesn’t care about the US image. His generals do: they love soft power because it makes their lives easier out in the war zones.
- NASA gets its climate watching programs axed or drastically cut.
- The National Oceanic and Atmospheric Administration is likewise gutted.
from Lars Syll
Currently the dominant formalism for treating the [general gamble] problem is utility theory. Utility theory was born out of the failure of the following behavioral null model: individuals were assumed to optimize changes in the expectation values of their wealth. We argue that this null model is a priori a bad starting point because the expectation value of wealth does not generally reflect what happens over time. We propose a different null model of human behavior that eliminates, in many cases, the need for utility theory: an individual optimizes what happens to his wealth as time passes …
Our method starts by recognizing the inevitable non- ergodicity of stochastic growth processes, e.g. noisy multiplicative growth. The specific stochastic process implies a set of meaningful observables with ergodic properties, e.g. the exponential growth rate. These observables make use of a mapping that in the tradition of economics is viewed as a psychological utility function, e.g. the logarithm …
The dynamic approach to the gamble problem makes sense of risk aversion as optimal behavior for a given dynamic and level of wealth, implying a different concept of rationality. Maximizing expectation values of observables that do not have the ergodic property … cannot be considered rational for an individual. Instead, it is more useful to consider rational the optimization of time-average performance, or of expectation values of appropriate ergodic observables. We note that where optimization is used in science, the deep insight is finding the right object to optimize … The same is true in the present case — deep insight is gained by finding the right object to optimize — we suggest time-average growth.
Ole Peters & Murray Gell-Mann
Although the expected utility theory is obviously both theoretically and descriptively inadequate, colleagues in economics, game theory and decision theory, gladly continue to use it, as though its deficiencies were unknown or unheard of. Read more…
from Dean Baker
Over the past two decades, the economics profession has compiled an impressive track record of getting almost all the big calls wrong. In the mid-1990s, all the great minds in the field agreed that the unemployment rate could not fall much below 6 percent without triggering spiraling inflation. It turns out that the unemployment rate could fall to 4 percent as a year-round average in 2000, with no visible uptick in the inflation rate. As the stock bubble that drove the late 1990s boom was already collapsing, leading lights in Washington were debating whether we risked paying off the national debt too quickly. The recession following the collapse of the stock bubble took care of this problem, as the gigantic projected surpluses quickly turned to deficits. The labor market pain from the collapse of this bubble was both unpredicted and largely overlooked, even in retrospect. While the recession officially ended in November 2001, we didn’t start creating jobs again until the fall of 2003. And we didn’t get back the jobs we lost in the downturn until January 2005. At the time, it was the longest period without net job creation since the Great Depression.
When the labor market did finally begin to recover, it was on the back of the housing bubble. Even though the evidence of a bubble in the housing sector was plainly visible, as were the junk loans that fueled it, folks like me who warned of an impending housing collapse were laughed at for not appreciating the wonders of modern finance. After the bubble burst and the financial crisis shook the banking system to its foundations, the great minds of the profession were near unanimous in predicting a robust recovery. Stimulus was at best an accelerant for the impatient, most mainstream economists agreed — not an essential ingredient of a lasting recovery. Read more…
from Erik Reinert, Jayati Ghosh and Rainer Kattel and WEA Commentaries
We have recently co-edited a book (The Handbook of Alternative Theories of Economic Development, Edward Elgar 2016, also available as an e-book on http://www.ebooks.com/95628740/handbook-of-alternative-theories-of-economic-development/reinert-erik-s-ghosh-jayati-kattel-rainer/) that seeks to bring back the richness of development economics through many different theories that have contributed over the ages to an understanding of material progress. The underlying approach is based on this quotation from nearly four centuries ago: “There is a startling difference between the life of men in the most civilised province of Europe, and in the wildest and most barbarous districts of New India. This difference comes not from the soil, not from climate, not from race, but from the arts.” (Francis Bacon, Novum Organum, 1620)
For centuries, economics was at its very core an art, a practice and a science devoted to ‘economic development’, albeit under a variety of labels: from an idealistic promotion of ‘public happiness’ to the nationalistic creation of wealth and greatness of nations and rulers, and the winning of wars. In some sense, until about 100 years ago, most economists were ‘development economists’. But during the process of formalization of economics into neoclassical economics in the post-World War II period, development economics slowly disappeared from the economic mainstream. ‘Where are their models?’ was one famous battle cry. For example, Jacob Viner made a key contribution to the demise of development economics by removing a fundamental force of uneven development – increasing returns – from international trade theory, on the account that it was not compatible with equilibrium. What would have been more logical would have been to remove equilibrium from economic theory because it is not compatible with an analysis of the real world. Economists’ choice of tools came to trump their interest in reality. Equilibrium became virtually the only game in town. read more
from David Ruccio
One of the courses I’m offering this semester is A Tale of Two Depressions, cotaught with one of my colleagues, Ben Giamo, from American Studies. It’s a comparison of the conditions and consequences of the two major crises of capitalism during the past hundred years, the 1930s and the period after the crash of 2007-08.*
It just so happens the Guardian is also right now revisiting the 1930s. Readers will find lots of interesting material, from some evocative street photography from the period (including bread lines, hunger marches, and various protests) to classics of political theater (from Bertolt Brecht and Federico García Lorca to John Dos Passos and Clifford Odets).
I’ve been writing about the Second Great Depression, in mostly economic terms, since 2010. For the Guardian, the idea is that the situation then, in the 1930s, offers lessons for us today—partly for economic reasons but, increasingly, given the victory of Donald Trump and the growth of other right-wing populist-nationalist movements in Europe, in political terms. Read more…
from Lars Syll
As I see it, a rational predictor should use a combination of theory and empirics. But theory should also be informed by data – there are lots of theories, and in general they can’t all apply to the same situation, so you need evidence to tell you which one(s) to use. So a rational predictor’s predictions should always be tied as closely as possible to empirical evidence. Discounting empirical evidence … seems inevitably to lead to the use of casual intuition (or to even worse things, like pure ideology).
Anyway, just in case you were curious, Seattle went ahead and hiked the minimum wage, and whether you measure by stylized facts or carefully controlled empirical studies, any negative effect on employment was small or zero. Of course, if you want, you can say that the empirical studies weren’t controlled well enough, and the stylized facts are illusions, and the minimum wage hike must have hurt employment because government intervention always hurts employment la la la I can’t hear you, but if you say that, who’s going to respect you intellectually?
Yes, indeed, who would respect such a person ‘intellectually’? Read more…
from Peter Radford
The Congressional Budget Office is the latest victim of the intensity of Washington politics. The CBO is the organization we rely on to “score” legislation so that Congress and the White House know roughly what impact their policies will have on the country. As you can imagine being the CBO during times such as these when alternative facts have become the primary way of explaining things is perilous. Worse: being the CBO when one party wants to cram through some legislation that is already known to be a doozy is more than perilous.
So it is with Trumpcare.
Up until today we were just guessing at how awful the Republican healthcare reform plan is. Now we know. The CBO issued its report today. There isn’t much to say other than this: Read more…
from Asad Zaman
In my paper entitled “Empirical Evidence Against Neoclassical Utility Theory: A Survey of the Literature,” I have argued that neoclassical utility theory acts as a blindfold, which prevents economists from understanding simple realities of human behavior. The paper provides many examples of this phenomenon, which I will illustrate briefly with one simple example in this post.
Consider the two player Ultimatum Game. The Proposer (P) has ten dollars in single dollar bills. He makes an offer of $m to the Responder (R), which allows him to keep $(10-m). The responder can either Accept or Reject. If Responder Accepts than P get $10-m, and R get $m as proposed; it is convenient to denote this outcome as (P:10-m,R:m). If Responder Rejects, then both get $0: (P:0,R:0)
Here are four predictions made by Game Theory, based on utility maximization behavior.
- Responder will be indifferent between the two choices Accept and Reject if he is offered $0.
- Responder will Accept an offer of $1, resulting in outcome (P:9, R:1). R prefers 1 to 0.
- Proposer believes that Responder is a Utility Maximizer; that is, he will behave in accordance with propositions 1 & 2 above.
- Proposer will therefore offer $1, as it maximizes his share at $9. If he offers $0, the outcome is uncertain because both responses A and R are possible maximizing responses, which is why an offer of $1 is the unique utility maximizing offer.
All four of these propositions are false. Furthermore, every layman will . . . read more
from Lars Syll
A democratic polity is supposed to be based on egalitarian distribution of political power. In a system where virtually all resources are available for a price, economic power can be translated into political power by channels too obvious for mention. In a capitalist society, economic power is very unequally distributed, and hence democratic government is inevitably something of a sham. In a sense, the maintained ideal of democracy makes matters worse, for it adds the tensions of hypocrisy to the inequality of power.
Kenneth Arrow, one of the greatest economists ever, died last month at age 95.
A great modeler, yes, but also an economist who never forgot on what assumptions the models were based …
from Dean Baker
Tony Blair, the former Prime Minister of the United Kingdom, who is best known for lying his country into participating in the Iraq War, lectured NYT readers on the evils of populism. Once again he gets many key points wrong.
He criticizes the left for abandoning centrist politicians:
“One element has aligned with the right in revolt against globalization, but with business taking the place of migrants as the chief evil. They agree with the right-wing populists about elites, though for the left the elites are the wealthy, while for the right they’re the liberals.”
Blair then tells us: Read more…
from David Ruccio
It’s true (as I have argued many times on this blog), the number of U.S. manufacturing jobs has been declining for decades now—and they’re not coming back. Instead, they’ve been replaced (as is clear in the chart above) by service-sector jobs. Read more…
What’s happening in India? The people are clearly rolling back the recent move of the Indian government to basically abolish the cash economy: the amount of cash is, at the moment of writing this, increasing at a hyperinflation rate of 8,5% per fortnight (according to the Reservebank of India data). But the amount of cash is still way below last years’level. Bank deposits are 12% higher than last year but have been flat since December. Read more…
from David Ruccio
Millions of workers have been displaced by robots. Or, if they have managed to keep their jobs, they’re being deskilled and transformed into appendages of automated machines. We also know that millions more workers and their jobs are threatened by much-anticipated future waves of robotics and other forms of automation.
But mainstream economists don’t want us to touch those robots. Just ask Larry Summers.
Summers is particularly incensed by Bill Gates’s suggestion that we begin taxing robots. So, he trots out all the usual arguments, hoping that at least one of them will stick. It’s hard to distinguish between robots and other forms of automation. Robots and other forms of automation produce better goods and services. And, of course, automation enhances productivity and leads to more wealth. So, we shouldn’t do anything to shrink the size of the economic pie. Read more…
from Lars Syll
There’s no question that mainstream academic macroeconomics failed pretty spectacularly in 2008 …
Many among the heterodox would have us believe that their paradigm worked perfectly well in 2008 and after … This is dramatically overselling the product. First, heterodox models didn’t “predict” the crisis in the sense of an actual quantitative forecast.
This is because much of heterodox theory is non-quantitative. Basically, people write down English words explaining their conceptual ideas about how the economy works. This describes the ideas of mid-20th-century economist Hyman Minsky, who wrote books and essays about the instability of the financial system. Minsky, though trained in math, chose not to use equations to model the economy — instead, he sketched broad ideas in plain English …
At the end of the day, policymakers and investors need to make quantitative decisions — how much to raise or lower interest rates, how big of a deficit to run, or how much wealth to allocate to Treasury bonds.
Noah Smith — like so many other mainstream economists — obviously has the unfounded and ridiculous idea that because heterodox people like yours truly often criticize the application of mathematics in mainstream economics, we are critical of math per se. Read more…