Crimes against humanity

from David Ruccio

As regular readers of this blog know, I am no fan of the way healthcare is currently organized in the United States.

The U.S. healthcare system, as it is currently configured, only really works for those who make a profit—selling health insurance, pharmaceuticals, and in-patient and acute-care services in hospitals—and those who have the wherewithal to finance their own healthcare.

But Republican plans to repeal the Affordable Care Act, aka Obamacare, and replace it with the American Health Care Act will move us even further from the goal of providing universal, affordable, high-quality healthcare for the American people.

The new act, aka Trumpcare, hasn’t yet been been scored by the Congressional Budget Office. And it will likely change as Senate Republicans get their hands on it.

AHCA

source [ht: ja]   Read more…

Is there a mismatch between theory and measurement in economics?

May 13, 2017 5 comments

Nobel22

The ‘The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel’ has much more often than the prizes for physics, Chemistry and physiology and medicine been awarded for: theory. It was on a regular basis awarded for analysis of data or the discovery of new events but in these cases ‘discovery’ was contrary to the other sciences much less important than analysis. It was only rarely awarded for the development of measurement techniques.   Read more…

What happens when a small and dangerous sect captures the teaching of economics

May 12, 2017 4 comments

from Lars Syll

The fallacy of composition basically consists of the false belief that the whole is nothing but the sum of its parts.  In the society and in the economy this is arguably not the case. An adequate analysis of society and economy a fortiori can’t proceed by just adding up the acts and decisions of individuals. The whole is more than a sum of parts.

This fact shows up when orthodox/mainstream/neoclassical economics tries to argue for the existence of The Law of Demand – when the price of a commodity falls, the demand for it will increase – on the aggregate. Although it may be said that one succeeds in establishing The Law for single individuals it soon turned out – in the Sonnenschein-Mantel-Debreu theorem firmly established already in 1976 – that it wasn’t possible to extend The Law of Demand to apply on the market level, unless one made ridiculously unrealistic assumptions such as individuals all having homothetic preferences – which actually implies that all individuals have identical preferences.

This could only be conceivable if all agents are identical (i. e. there is in essence only one actor) — the (in)famous representative actor. So, yes, it was possible to generalize The Law of Demand – as long as we assumed that on the aggregate level there was only one commodity and one actor. What generalization! Does this sound reasonable? Of course not. This is pure nonsense!   Read more…

Bundesbank corrects textbook mistakes on money creation, rejects 100%-money

May 11, 2017 19 comments

from Norbert Häring

In the April-edition of their monthly report, the Bundesbank has belatedly joined the Bank of England in explicitly stating that the treatment of banks and money creation in most textbooks is wrong: banks are not intermediaries; they create money ex-nihilo. This helps the Bundesbank to reject criticism that central banks are currently “printing” too much money. At the same time, the Bundesbank rejects the proposal of 100%-money, i.e. bank deposits fully backed by central bank money.

So far, the Bundesbank has only published an English summary of the article “How money is created”, originally written in German (and a French summary). Once the article is available in full translation, I will write a bit more about the (mostly faulty) arguments of the Bundesbank against 100%-money.

The most important sentences regarding money creation are already there in the summary, though:

The majority of the money supply is made up of book money, which is created through transactions between banks and domestic customers. Sight deposits are an example of book money: sight deposits are created when a bank grants a credit or purchases an asset and credits the corresponding amount to the customer’s bank account in return. This means that banks can create book money just by making an accounting entry. This refutes a popular misconception that banks act simply as intermediaries at the time of lending – ie that banks can only grant credit using funds placed with them previously as deposits by other customers.

Limits

May 11, 2017 19 comments

from Peter Radford

I don’t understand why people get upset when I say that economics is a waste of time. I suppose it’s because I don’t make a clear enough difference between economics as a general topic and economics as a formal, mainstream, body of knowledge. It’s the latter that is a waste of time. The former is wonderfully interesting.

At its heart economics is a study of human behavior, where that behavior is specific to certain activities. It is thus deeply rooted in psychology, so it is more closely associated with biology than physics. This is not a new idea: some of the greatest economists of the past have argued as much. Trying to transfer in ideas from physics, even metaphorically, therefore tends to lead to dead ends.

Like the notion of efficiency. That’s something of great interest to engineers, but has little to do with economics. You can have an efficient physical system. You cannot have an efficient social system. There’s just too much we don’t know and can never know. Still economists all over the world are obsessed with efficiency. So what do they do? They start to abstract and simplify. They model and fine tune. They test and re-test. And still their ideas run afoul of reality: human beings are not efficiency seeking machines, and so any system filled with humans is likely to be darned near impossible to steer towards efficient outcomes. Nothing daunted economists press on. If humans are unlikely to be efficient the logical next step is to construct a theory to exclude actual humans. That’s what’s happened in economics: the faulty decision to root economics in a physics-like setting rather than in a biology like-setting forced subsequent generations of economists to “refine” their thinking and, eventually, to force real people out of their theoretical world. Voila! Modern economics ends up as a wonderful edifice with extravagant claims as to its ability to understand human behavior precisely by eliminating all contact with humanity. Weird.   Read more…

End of Second Great Depression

from David Ruccio

I am quite willing to admit that, based on last Friday’s job report, the Second Great Depression is now over.

As regular readers know, I have been using the analogy to the Great Depression of the 1930s to characterize the situation in the United States since late 2007. Then as now, it was not a recession but, instead, a depression.

As I explain to my students in A Tale of Two Depressions, the National Bureau of Economic Research doesn’t have any official criteria for distinguishing an economic depression from a recession. What I offer them as an alternative are two criteria: (a) being down (as against going down) and (b) the normal rules are suspended (as, e.g., in the case of the “zero lower bound” and the election of Donald Trump).

By those criteria, the United States experienced a second Great Depression starting in December 2007 and continuing through April 2017. That’s almost a decade of being down and suspending the normal rules!

Now, with the official unemployment rate having fallen to 4.4 percent, equal to the low it had reached in May 2007, we can safely say the Second Great Depression has come to an end.

However, that doesn’t mean we’re out of the woods, or that we can forget about the effects of the most recent depression on American workers.*  Read more…

The tragedy of pseudoscientific and self-defeatingly arrogant economics

May 10, 2017 2 comments

from Lars Syll

The problem of any branch of knowledge is to systematize a set of particular observations in a more coherent form, called hypothesis or ‘theory.’ Two problems must be resolved by those attempting to develop theory: (1) finding agreement on what has been observed; (2) finding agreement on how to systematize those observations.

comic1In economics, there would be more agreement on the second point than on the first. Many would agree that using the short-hand rules of mathematics is a convenient way of systematizing and communicating knowledge — provided we have agreement on the first problem, namely what observations are being systematized. Social sciences face this problem in the absence of controlled experiments in a changing, non-repetitive world. This problem may be more acute for economics than for other branches of social science, because economists like to believe that they are dealing with quantitative facts, and can use standard statistical methods. However, what are quantitative facts in a changing world? If one is dealing with questions of general interest that arise in macroeconomics, one has to first agree on ‘robust’ so-called ‘stylized’ facts based on observation: for example, we can agree that business cycles occur; that total output grows as a long term trend; that unemployment and financial crisis are recurring problems, and so on.

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Global warming must be addressed now

May 9, 2017 7 comments

from Dean Baker

There are two enormous myths about global warming. One is that dealing with it is optional. The other is that the measures needed to slow the process will devastate the economy. Neither is true.

On the first point, we are already seeing major changes in weather that are almost certainly related to global warming, both in the United States and around the world. In the United States, we are seeing rising water levels eroding beachfront property all along our coast lines.

We are also seeing extraordinary conditions like the multi-year drought that until recently had much of California rationing water.

In addition, we have seen extreme weather events like Superstorm Sandy, which destroyed hundreds of homes in New Jersey and New York and made many areas uninhabitable.

The story is much worse elsewhere in the world. The Sahara Desert is rapidly moving southward in Africa, depriving millions of people of the means to support themselves.

Hundreds of millions of people in low lying areas of Bangladesh and elsewhere in East Asia face far greater risk from storms and flooding due to rising oceans.  Global warming is a reality; we can’t solve the problem by looking away any more than we can deal with a weight problem by throwing out our scale and continuing to eat unhealthy foods.   Read more…

The spectacular failure of DSGE models

May 8, 2017 38 comments

from Lars Syll

In most aspects of their lives humans must plan forwards. They take decisions today that affect their future in complex interactions with the decisions of others. When taking such decisions, the available information is only ever a subset of the universe of past and present information, as no individual or group of individuals can be aware of all the relevant information. Hence, views or expectations about the future, relevant for their decisions, use a partial information set, formally expressed as a conditional expectation given the available information.

macroeconomics-14-638Moreover, all such views are predicated on there being no un-anticipated future changes in the environment pertinent to the decision. This is formally captured in the concept of ‘stationarity’. Without stationarity, good outcomes based on conditional expectations could not be achieved consistently. Fortunately, there are periods of stability when insights into the way that past events unfolded can assist in planning for the future.

The world, however, is far from completely stationary. Unanticipated events occur, and they cannot be dealt with using standard data-transformation techniques such as differencing, or by taking linear combinations, or ratios. In particular, ‘extrinsic unpredictability’ – unpredicted shifts of the distributions of economic variables at unanticipated times – is common. As we shall illustrate, extrinsic unpredictability has dramatic consequences for the standard macroeconomic forecasting models used by governments around the world – models known as ‘dynamic stochastic general equilibrium’ models – or DSGE models …

Many of the theoretical equations in DSGE models take a form in which a variable today, say incomes (denoted as yt) depends inter alia on its ‘expected future value’… For example, yt may be the log-difference between a de-trended level and its steady-state value. Implicitly, such a formulation assumes some form of stationarity is achieved by de-trending.

Unfortunately, in most economies, the underlying distributions can shift unexpectedly. This vitiates any assumption of stationarity. The consequences for DSGEs are profound. As we explain below, the mathematical basis of a DSGE model fails when distributions shift … This would be like a fire station automatically burning down at every outbreak of a fire. Economic agents are affected by, and notice such shifts. They consequently change their plans, and perhaps the way they form their expectations. When they do so, they violate the key assumptions on which DSGEs are built.

David Hendry & Grayham Mizon

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A non-white recovery in the USA

May 7, 2017 1 comment

anic rate employmentrate

First: the elephant in the room: the post 2008 development of the USA white employment rate relative to the black and hispanic rate is, in a historical perspective but also when compared with post 2008 developments in Europe, spectacular. though something seems to have been the matter since 1995. No explanation here but the correlation between the white and the other rates slowly fades away (a hypothesis might be that ‘Blacks’ and ‘Hispanics’ are groups which are characterized by a relatively large subgroup of people belonging to the ‘precariat’, workers depending on low paid unstable jobs, who do relatively better in an increasingly precarious economy).

Second: it’s not inconceivable that the black rate will, within years, also be at par with or higher than the white rate. Note that the decline of white employment in the 2008 crisis was much larger than during other downturns. This pattern is less outspoken for the hispanic and black employment rates. Next to the employment rate we can also look at the participation rate (unemployment plus employment).    Read more…

Mainstream textbooks — full of utter nonsense!

May 7, 2017 4 comments

from Lars Syll

The other day yours truly was sent a copy of the new edition of Chad Jones intermediate textbook Macroeconomics (4th ed, W W Norton, 2018). There’s much in the book I like, e. g. Jones’  combining of more traditional short-run macroeconomic analysis with an accessible coverage of the Romer model — the foundation of modern growth theory — and DSGE business cycle models.

Unfortunately it also contains some utter nonsense!

In chapter 7 — on “The Labor Market, Wages, and Unemployment” — Jones writes (p. 184):

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The point of this experiment is to show that wage rigidities can lead to large movements in employment. Indeed, they are the reason John Maynard Keynes gave, in The General Theory of Employment, Interest, and Money (1936), for the high unemployment of the Great Depression.

 

But this is pure nonsense. A serious editor — who really checked the facts — would immediately find that although Keynes in General Theory devoted substantial attention to the subject of wage rigidities, he certainly did not hold the view that wage rigidities were “the reason … for the high unemployment of the Great Depression.”

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Meta-theory and pluralism in the methodology of Polanyi

May 6, 2017 9 comments

from Asad Zaman

Currently, I am teaching a course in Advanced Microeconomics where I have started with the premise that conventional economic theory, both Micro and Macro are fundamentally wrong. The number of ways in which they are wrong cannot even be counted. Instead of enumerating errors, the course is devoted to providing a constructive alternative. A lot of the early lectures deal with the basic concepts of optimization and equilibrium, the fundamental building blocks of conventional courses, and explain how these are wrong. I also explain how economists are using a wrong methodology, and how they misunderstand the concept of a theoretical model, and the relations between models and reality. The video-taped lectures, PPT slides, and some supporting materials, are available from my website: https://sites.google.com/site/az4math/

Originally, I had not planned to teach Karl Polanyi because his theories are significantly more complex than those of Karl Marx and Adam Smith. However, because the class has been very receptive, and has understood the what I have been teaching, I have decided to explain his ideas. We have already started discussing his ideas starting from Lecture 13, and have finished Part I of the Great Transformation in Lecture 16. In order to prepare for the complexities of Part II, I have distributed the following handout to the class, to explain the complex general methodological framework which underlies Polanyi’s analysis.  Read More

The dangers of neglecting methodology

May 6, 2017 11 comments

from Lars Syll

rosenbergAlex Rosenberg — chair of the philosophy department at Duke University, renowned economic methodologist and author of Economics — Mathematical Politics or Science of Diminshing Returns? — had an interesting article up on What’s Wrong with Paul Krugman’s Philosophy of Economics some time ago. Writes Rosenberg:

Krugman 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’ …

When he accepts maximizing and equilibrium as the (only?) way useful economics is done Krugman makes a concession so great it threatens to undercut the rest of his arguments against New Classical economics …

One thing that’s missing from Krugman’s treatment of economics is the explicit recognition of what Keynes and before him Frank Knight, emphasized: the persistent presence of enormous uncertainty in the economy … Why is uncertainty so important? Because the more of it there is in the economy the less scope for successful maximizing and the more unstable are the equilibria the economy exhibits, if it exhibits any at all …

There is a second feature of the economy that Krugman’s useful economics needs to reckon with, one that Keynes and after him George Soros, emphasized. Along with uncertainty, the economy exhibits pervasive reflexivity: expectations about the economic future tend to actually shift that future …

I think Rosenberg is on to something important here regarding Krugman’s — and other mainstream economists’ — neglect of methodological reflection.  Read more…

How the Eurozone damaged French politics — and this year’s presidential election

from Mark Weisbrot

As France heads into the second and final round of its presidential election on Sunday, a number of observers have compared the choice between the far-right candidate Marine Le Pen and centrist neoliberal Emmanuel Macron with the Trump-Clinton contest of 2016. There are similarities: Le Pen, who is politely called xenophobic, like Trump represents an anti-immigrant, right-wing nationalism combined with some populist appeals. Macron is a former investment banker and economy minister under the current Socialist government who, like Hillary, is widely seen as too close to powerful financial interests.

But one significant difference is that if Hillary had won the US presidency in 2016, she would most likely have tried to win some net improvements in the living standards and economic security of the majority of the electorate — including working class and poor people — who voted for her. The same cannot be said for Macron in France. His public platform has been vague, but insofar as it has a discernible trend, it is in the same direction that the country has moved over most of the past decade. That has included large public pension cuts, labor law reform that has weakened the bargaining power of unions and made it easier for employers to dismiss workers (including the Macron Law, as it is called, of 2015), and spending cuts.

Read more…

Class, in a nutshell

from David Ruccio

920x920

What happens when you combine conspicuous consumption and consumption productivity?

You get Barracuda Straight Leg Jeans—complete with “crackled, caked-on muddy coating”—on sale for $425 at Nordstrom.

When Thorstein Veblen Read more…

Channelling Galbraith

May 4, 2017 1 comment

from Peter Radford

Jamie Galbraith’s conclusion in his essay at Dissent magazine:

“The progressive alternative to an economic program of reckless stimulus and real-estate capital gains is a program of full employment, fair wages, and broad investment in social, cultural, and environmental needs, backed by taxes that fall directly on rents, monopoly profits, and on inheritances, thus directly dismantling the dynastic oligarchy that has been running the United States, through both parties, since 1981. How precisely progressive action along these lines can be made to work is a matter for study and argument. But this needs to begin now. Intellectually and politically, the Democratic Party is in ruins. It cannot be rebuilt solely from a defense of past achievements, nor by reacting to disasters that lie just ahead, nor from simple economic models or fragments of a half-baked agenda. It is time, in short, for a left program at least as radical as that about to be enacted by the right.”

Exactly.

It is time for the entire neoliberal era to be drawn to a close. Or torn down, whichever is easier. Average people everywhere are being oppressed by the combination of plutocratic corporatism and liberal intellectual indifference. Four decades of this is enough. Surely Trump’s election ought to be sufficient warning that something has to give.  Read more…

Positional analysis: what it is and why economists need it

May 4, 2017 Leave a comment

from Peter Söderbaum, Judy Brown and Małgorzata Dereniowska and WEA Commentaries

What would an alternative economics and economy look like for a sustainable future? As with any normative vision, such as that of a sustainable economy and society, a variety of responses and perspectives can be legitimately sought. Out of those, for many economists, only the perspectives that result in outcomes that are (potentially) Pareto improvements are economically meaningful. But sustainability and democratic legitimization of sustainability values in some respects displays some inefficiency in terms of utility (e.g., loss of time needed to implement democratic procedures or to collectively develop a shared normative vision of sustainability), or can be judged differently depending on the process employed in arriving at a sustainable outcome. Indeed, the inherent ethical dilemma of sustainable development between economic efficiency, social equity, and environmental conservation are not practically separable. What if we turned around the question to think about an alternative vision of economics, economic analysis, and decision making approaches that makes room for plural normative criteria without predefining their ranking within decision processes, and illuminates social conflicts, instead of obscuring them with value-neutral ‘representational’ claims? This alternative idea underlies positional analysis (PA) that addresses both the outcome and the process, with explicit attention paid to their ethical and political content, at the level of analysis, planning, and decision making.   Read more…

The Ricardian Vice (II)

May 3, 2017 1 comment

from Lars Syll

The completeness of the Ricardian victory is something of a curiosity and a mystery. It must have been due to a complex of suitabilities in the doctrine to the environment into which it was projected. That it reached conclusions quite different from what the ordinary uninstructed person would expect, added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and consistent logical superstructure, gave it beauty.9780333009420-us-300That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority.

But although the doctrine itself has remained unquestioned by orthodox economists up to a late date, its signal failure for purposes of scientific prediction has greatly impaired, in the course of time, the prestige of its practitioners. For professional economists … were apparently unmoved by the lack of correspondence between the results of their theory and the facts of observation;— a discrepancy which the ordinary man has not failed to observe, with the result of his growing unwillingness to accord to economists that measure of respect which he gives to other groups of scientists whose theoretical results are confirmed by observation when they are applied to the facts.

People in France and Germany work much less than in the U.S

May 3, 2017 5 comments

from Dean Baker

The NYT had an article reporting on how the Pew Research Center had discovered work done by the Economic Policy Institute for a quarter century (the middle class is hurting). At one point the piece compares the United States with France and Germany:

“The United States, including the middle class, has a higher median income than nearly all of Europe, even if the Continent is catching up. The median household income in the United States was $52,941 after taxes in 2010, compared with $41,047 in Germany and $41,076 in France.”

When making such comparisons it is important to note that people in Europe work many few hours than people in the United States. Five or six weeks a year of vacation are standard. In addition, these countries all mandate paid sick days and paid family leave.

According to the OECD, the length of the average work year in the United States in 2015 was 1790 hours. It was 1482 hours in France (17 percent fewer hours) and just 1371 hours (23 percent fewer hours) in Germany. While these comparisons are not perfect (there are measurement issues) it is clear that people in these countries and the rest of Europe are working considerably fewer hours than people in the United States in large part as a conscious choice. This should be noted in any effort to compare them.

Monopoly Power: Is it time to bring back anti-trust?

May 2, 2017 5 comments

from Dean Baker

There has been growing attention in recent years to the near monopolization of many sectors of the U.S. economy. For example, Google completely dominates the search engine market, while Facebook has an overwhelming presence in social media. Amazon controls close to 70 percent of book sales in the United States and an ever growing share of retail more generally. Microsoft remains by far the dominant force in computer operating system software.

Recent research has found an increasing concentration of corporate profits in recent decades in such large firms. In addition, the workers at these dominant firms tend to be paid much more than at their less successful competitors. For these reasons, increasing concentration could be one of the main factors behind the rise of income inequality.

While it is good to see many mainstream political figures raising concerns over excessive market power, there are a couple of important caveats that need to be included in this story. First, it is important to note that this is not a simple story of corporate profits rising at the expense of wages.

Corporate profits rose sharply following the collapse of employment in the Great Recession. Profits peaked as a share of corporate income at 26.8 percent in 2014. This was a full 5.0 percentage points above the peak in the nineties of 21.8 percent. However, most of the upward redistribution of income had occurred before 2005, when the profit share first began to rise notably. And the pre-recession increase is inflated by the profits booked on housing bubble related loans, which subsequently went bad.    Read more…