Let’s take (un)employment statistics more serious

November 29, 2016 3 comments

1bOn his insightful ‘conversable economist’ blog the excellent Timothy Taylor has a good piece about European unemployment which as follows:

American readers: can you imagine the social turmoil in the US if the unemployment rate has been above 10% for the last seven years, instead of peaking at 10% back in October 2009 and falling down to about 5% by a year ago in fall 2015? Can you imagine if half of these unemployed had been looking for work for more than a year? Consider the difference, and you’ll have a better sense of why the EU is struggling to have much appeal to the European public.

And this is without regard for Balkan countries like Albania which are not (yet) a member of the EU and which have rates which sometimes are as high as 30%. Taylor is totally right Read more…

Class before Trumponomics, part 2 (10 graphics)

November 29, 2016 4 comments

from David Ruccio

In the first installment of this series on “class before Trumponomics,” I argued that the recovery from the crash of 2007-08 created conditions that were favorable to capital at the expense of labor—and that trend represented a continuation of the class dynamic that had characterized the U.S. economy for decades, going back at least to the early 1980s.

There are, of course, many details that were left out of that story, and I want to present a more fine-grained class analysis of the U.S. economy prior to Donald Trump’s election in this post.

Let me start with labor. In the first post, my analysis actually understated the capital share and overstated the labor share. That’s because a large share of the surplus was actually included in wages, and thus attributed to labor, when in fact it properly belongs in the share captured by capital. The idea is that high-level executives and others (e.g., CEOs and those working in finance), while much of their income is reported as “wages,” are actually receiving a cut of the surplus from their employers. Therefore, their wages are actually part of the capital share, while the incomes of the rest of workers form the basis of the labor share properly understood.

This is clear in the chart below (modified, from a paper by Michael W. L. Elsby, Bart Hobijin, and Aysegül Sahin [pdf]), where the labor share is split up by income fractiles. Based on a rough class analysis of the U.S. labor force, the labor share actually includes the first two components (making up the bottom 95 percent of the labor force), while the other fractiles (those making up the top 5 percent) represent a distribution of the surplus from capital. As is evident from a quick glance at the chart, the share of total wages going to the working-class has been declining since the early 1970s, while the share representing distributions of the surplus has grown.  Read more…

P4: The Entanglement of the Objective & The Subjective

November 29, 2016 Leave a comment

from Asad Zaman

PRELIMINARY REMARKS: Philosopher Hilary Putnam writes in “The Collapse of the Fact/Value Distinction” that there are cases where we can easily and clearly distinguish between facts and values — the objective and the subjective. However, it is wrong to think that we can ALWAYS do so. There are many sentences, especially in economic theories, where the two are “inextricably entangled” .

This is the fourth post in a sequence about Re-Reading Keynes. This post is focused on a single point which has been mentioned,  but perhaps not sufficiently emphasized earlier: the entanglement of the economic system with the economic theories about the system. Our purpose in reading Keynes is not directly to understand Keynesian theory — that is, to assess it as an economic theory in isolation, and whether or not it is valid and useful for contemporary affairs. Rather, we want to co-understand Keynesian theory and the historical context in which it was born. This is an exercise in the application of Polanyi’s methodology, which I described in excruciating detail in my paper published in WEA journal Economic Thought recently:

Asad Zaman (2016) ‘The Methodology of Polanyi’s Great Transformation.’ Economic Thought, 5.1, pp. 44-63.

I must confess that I am not very happy with the paper; I was struggling to formulate the ideas, and could not achieve the clarity that I always try for. It is a difficult read, though it expresses very important ideas — laying out the foundations for a radical new methodology which incorporates political, social and historical elements that have been discard in conventional methodology for economics. One of the key elements of Polanyi’s methodology is the interaction between theories and history — our history generates our experiences of the world, and this experience in understood in the light of theories we generate to try to understand this experience. This obvious fact was ignored & lost due to the positivist fallacy that facts can be understood directly by themselves. The truth is that they can only be understood within the context of a (theoretical) framework. Once we use theories to understand experience, then these theories are used to shape our responses to this experience, and so these theories directly impact on history — history is shaped by theories, and theories are shaped by history. The two are “inextricably entangled.”  read more

‘Post-real’ macroeconomics — three decades of intellectual regress

November 28, 2016 6 comments

from Lars Syll

Macroeconomists got comfortable with the idea that fluctuations in macroeconomic aggregates are caused by imaginary shocks, instead of actions that people take, after Kydland and Prescott (1982) launched the real business cycle (RBC) model …

67477738In response to the observation that the shocks are imaginary, a standard defence invokes Milton Friedman’s (1953) methodological assertion from unnamed authority that “the more significant the theory, the more unrealistic the assumptions.” More recently, “all models are false” seems to have become the universal hand-wave for dismissing any fact that does not conform to the model that is the current favourite.

The noncommittal relationship with the truth revealed by these methodological evasions and the “less than totally convinced …” dismissal of fact goes so far beyond post-modern irony that it deserves its own label. I suggest “post-real.”

Paul Romer

There are many kinds of useless economics held in high regard within the mainstream economics establishment today. Few  are less deserved than the post-real macroeconomic theory — mostly connected with Finn Kydland, Robert Lucas,  Edward Prescott and Thomas Sargent — called RBC.   Read more…

Postmodern mumbo jumbo soup

November 28, 2016 3 comments

from Lars Syll

MUMBO-JUMBO1The move from a structuralist account in which capital is understood to structure social relations in relatively homologous ways to a view of hegemony in which power relations are subject to repetition, convergence, and rearticulation brought the question of temporality into the thinking of structure, and marked a shift from a form of Althusserian theory that takes structural totalities as theoretical objects to one in which the insights into the contingent possibility of structure inaugurate a renewed conception of hegemony as bound up with the contingent sites and strategies of the rearticulation of power.

Judith Butler

P3: Impact of Keynes

November 27, 2016 2 comments

from Asad Zaman

This 1000 word article is the third in a series of posts on Re-Reading Keynes. It traces the impact of Keynesian theories on the 20th century, as necessary background knowledge for a contextual and historically situated study of Keynes. It was published in Express Tribune on 4 Nov 2016.

The Global Financial Crisis (GFC) has created awareness of the great gap between academic models and reality. IMF Chief Economist Olivier Blanchard said that modern DSGE macroeconomic models currently used for policy decisions are based on assumptions which are profoundly at odds with what we know about consumers and firms. More than seven different schools of macroeconomic thought contend with each other, without coming to agreement on any fundamental issue. This bears a striking resemblance to the post-Depression era when Keynes set out to resolve the “deep divergences of opinion between fellow economists which have for the time being almost destroyed the practical influence of economic theory.”

Likewise, today, the inability of mainstream economists to predict, understand, explain, or find remedies for the Global Financial Crisis, has deeply damaged the reputation of economists and economic theories. Recently, World Bank Chief Economist Paul Romer stated that for more than three decades, macroeconomics has gone backwards. Since modern macroeconomics bears a strong resemblance to pre-Keynesian theories, Keynesian theories have fresh relevance, as described below.

In the aftermath of the Great Depression, economic misery was a major factor which led to the Russian Revolution and the rise of Hitler in Germany. Conventional economic theory held that market forces would automatically and quickly correct the temporary disequilibrium of high unemployment and low production in Europe and USA. Keynes argued that high unemployment could persist, and government interventions in the form of active monetary and fiscal policy were required to correct the economic problems. Many have suggested that Keynes rescued Capitalism by providing governments with rationale to intervene on behalf of the workers, thereby preventing socialist or communist revolutions. There is no doubt that strong and powerful labor movements in Europe and USA derived strength from the economic misery of the masses, and also took inspiration from the pro-labor and anti-capitalist theories of Marx. While it is hard to be sure whether Keynes saved capitalism, we can be very sure that Keynes and Keynesian theories were extremely influential in shaping the economic landscapes of the 20th Century.     read more

Public debt should not be zero. Ever!

November 26, 2016 17 comments

from Lars Syll

Nation states borrow to provide public capital: For example, rail networks, road systems, airports and bridges. These are examples of large expenditure items that are more efficiently provided by government than by private companies.

darling-let-s-get-deeply-into-debtThe benefits of public capital expenditures are enjoyed not only by the current generation of people, who must sacrifice consumption to pay for them, but also by future generations who will travel on the rail networks, drive on the roads, fly to and from the airports and drive over the bridges that were built by previous generations. Interest on the government debt is a payment from current taxpayers, who enjoy the fruits of public capital, to past generations, who sacrificed consumption to provide that capital.

To maintain the roads, railways, airports and bridges, the government must continue to invest in public infrastructure. And public investment should be financed by borrowing, not from current tax revenues.

Investment in public infrastructure was, on average, equal to 4.3% of GDP in the period from 1948 through 1983. It has since fallen to 1.6% of GDP. There is a strong case to be made for increasing investment in public infrastructure. First, the public capital that was constructed in the post WWII period must be maintained in order to allow the private sector to function effectively. Second, there is a strong case for the construction of new public infrastructure to promote and facilitate future private sector growth.

The debt raised by a private sector company should be strictly less than the value of assets, broadly defined. That principle does not apply to a nation state. Even if government provided no capital services, the value of its assets or liabilities should not be zero except by chance.

National treasuries have the power to transfer resources from one generation to another. By buying and selling assets in the private markets, government creates opportunities for those of us alive today to transfer resources to or from those who are yet to be born. If government issues less debt than the value of public capital, there will be an implicit transfer from current to future generations. If it owns more debt, the implicit transfer is in the other direction.

The optimal value of debt, relative to public capital, is a political decision … Whatever principle the government does choose to fund its expenditure, the optimal value of public sector borrowing will not be zero, except by chance.

Roger Farmer

Today there seems to be a rather widespread consensus of public debt being acceptable as long as it doesn’t increase too much and too fast. If the public debt-GDP ratio becomes higher than X % the likelihood of debt crisis and/or lower growth increases.  Read more…

The disconnect in the US between productivity and wages

November 25, 2016 3 comments

P3: Impact of Keynes

November 25, 2016 2 comments

from Asad Zaman

This 1000 word article is the third in a series of posts on Re-Reading Keynes. It traces the impact of Keynesian theories on the 20th century, as necessary background knowledge for a contextual and historically situated study of Keynes. It was published in Express Tribune on 4 Nov 2016.

The Global Financial Crisis (GFC) has created awareness of the great gap between academic models and reality. IMF Chief Economist Olivier Blanchard said that modern DSGE macroeconomic models currently used for policy decisions are based on assumptions which are profoundly at odds with what we know about consumers and firms. More than seven different schools of macroeconomic thought contend with each other, without coming to agreement on any fundamental issue. This bears a striking resemblance to the post-Depression era when Keynes set out to resolve the “deep divergences of opinion between fellow economists which have for the time being almost destroyed the practical influence of economic theory.”

Likewise, today, the inability of mainstream economists to predict, understand, explain, or find remedies for the Global Financial Crisis, has deeply damaged the reputation of economists and economic theories. Recently, World Bank Chief Economist Paul Romer stated that for more than three decades, macroeconomics has gone backwards. Since modern macroeconomics bears a strong resemblance to pre-Keynesian theories, Keynesian theories have fresh relevance, as described below.   read more

Econometrics — science built on beliefs and untestable assumptions

November 24, 2016 4 comments

from Lars Syll

What is distinctive about structural models, in contrast to forecasting models, is that they are supposed to be – when successfully supported by observation – informative about the impact of interventions in the economy. As such, they carry causal content about the structure of the economy. Therefore, structural models do not model mere functional relations supported by correlations, their functional relations have causal content which support counterfactuals about what would happen under certain changes or interventions.

causationThis suggests an important question: just what is the causal content attributed to structural models in econometrics? And, from the more restricted perspective of this paper, what does this imply with respect to the interpretation of the error term? What does the error term represent causally in structural equation models in econometrics? And finally, what constraints are imposed on the error term for successful causal inference? …

I now consider briefly a key constraint that may be necessary for the error term to meet for using the model for causal inference. To keep the discussion simple, I look only at the simplest model

y= αx+u

Read more…

Class before Trumponomics, part 1

November 24, 2016 9 comments

from David Ruccio

Right now, after Donald’s Trump surprising victory and in the midst of the messy transition, everyone is curious about how the U.S. economy will change if and when the president-elect’s economic policies are enacted.*

But first things first. We need to have a clear understanding of what the U.S. economy looks like now, during the uneven recovery from the Second Great Depression. In particular, it’s important to analyze the class dimensions of that recovery, even before the new administration takes action.inequality

Read more…

How Trump theft hurts you: thoughts to chew on over Thanksgiving dinner

November 24, 2016 10 comments

from Dean Baker

Donald Trump has basically come right out said that he intends to use the presidency to further enrich himself and his family. After refusing to follow long-established precedent and put his assets in a blind trust, he proclaimed, “the president can’t have a conflict of interest.”

Of course the president absolutely can have a conflict of interest as speakers of the English language use the expression. If a president owns a large business empire, as does Mr. Trump, there are all sorts of situations where his personal business interests could be in conflict with the country’s interests.

For example, he may want favorable treatment from a form government for one of his hotels. This may lead him to make concessions to the government in other areas which he would not otherwise do. The same applies to domestic tax policy where he may decide to push tax changes that will help his business interests. There are literally an infinite number of situations where the president can and does have a conflict of interest when he owns a business empire like Mr. Trump.

It is also worth noting that it does not seem as though corruption will be exlcusively a family affair with Mr. Trump. David Dayen has an interesting piece in the Intercept about how Trump may hand billions to his friend and campaign contributor, John Paulson, by reprivatizing Fannie Mae and Freddie Mac. Of course this is just the tip of the iceberg. Trump seems intent on raising political corruption to a new level in his administration. As he is prone to say, it will be yuuge!   Read more…

Follies and fallacies of Chicago economics

November 23, 2016 3 comments

from Lars Syll

Savings-and-InvestmentsEvery dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both. This form of “crowding out” is just accounting, and doesn’t rest on any perceptions or behavioral assumptions.

John Cochrane

And the tiny little problem? It’s utterly and completely wrong!

What Cochrane is reiterating here is nothing but Say’s law, basically saying that savings are equal to investments, and that if the state increases investments, then private investments have to come down (‘crowding out’). As an accounting identity there is of course nothing to say about the law, but as such it is also totally uninteresting from an economic point of view. As some of my Swedish forerunners — Gunnar Myrdal and Erik Lindahl — stressed more than 80 years ago, it’s really a question of ex ante and ex post adjustments. And as further stressed by a famous English economist about the same time, what happens when ex ante savings and investments differ, is that we basically get output adjustments. GDP changes and so makes saving and investments equal ex ost. And this, nota bene, says nothing at all about the success or failure of fiscal policies!

Read more…

Richard Rorty, postmodernism, and Trump

November 22, 2016 11 comments

from David Ruccio

Yes, the late Richard Rorty got it spot on:

Members of labor unions, and unorganized unskilled workers, will sooner or later realize that their government is not even trying to prevent wages from sinking or to prevent jobs from being exported. Around the same time, they will realize that suburban white-collar workers—themselves desperately afraid of being downsized—are not going to let themselves be taxed to provide social benefits for anyone else.

At that point, something will crack. The nonsuburban electorate will decide that the system has failed and start looking around for a strongman to vote for—someone willing to assure them that, once he is elected, the smug bureaucrats, tricky lawyers, overpaid bond salesmen, and postmodernist professors will no longer be calling the shots. . .

One thing that is very likely to happen is that the gains made in the past forty years by black and brown Americans, and by homosexuals, will be wiped out. Jocular contempt for women will come back into fashion. The words “nigger” and “kike” will once again be heard in the workplace.

That’s from Rorty’s Achieving Our Country: Leftist Thought in Twentieth-Century America, originally published in 1998. And Edward Helmore [ht: ja] is right to cite Rorty and to note that passages from the book have gone viral in the wake of the election.*   Read more…

P2: Methodology for (Re)-Reading Keynes

November 22, 2016 9 comments

from Asad Zaman

aaeaaqaaaaaaaahhaaaajdq5nmzhzwvllwmxn2utndg0yy05mtg2lwe5ymqxzjhhmji0nqThe first post on Reading Keynes provided an outline of the reasons why this is a good idea. It is clear that economics is broken. We need a new macroeconomics for the 21st century, one which can solve the massive problems which humanity as a whole is facing on political, social, economic, and environmental dimensions. Keynes faced similar problems, and found solutions which guided economic policy in the mid twentieth century. It is always useful to absorb the insights of our predecessors, before trying to build upon them. Such a methodology is essential for the advancement, progress and accumulation of knowledge. Our current stock of human knowledge is based on the collected insights and labors of hundreds of thousands of scholars, accumulated over the centuries. We would return to the stone ages if we were to reject it as being full of contradictions and errors (which it is). Instead, progress occurs by absorbing the past accumulated wisdom, and trying to remove the errors, or add missing insights, building on our heritage, rather than discarding it and starting over from scratch.

Several of the central Keynesian insights into the causes of the Great Depression never made it into the economics textbooks. However, our goal in studying Keynes goes far beyond just the re-discovery of these lost Keynesian insights.   A central goal is to apply and illustrate a radically different methodology for studying economics in particular, and social science in general. This is derived from a study of The Methodology of Polanyi’s Great Transformation. This is an extremely important point, which we proceed to amplify and explain further.  Read More

Stiglitz comes around

November 22, 2016 15 comments

A new paper by Joseph Stiglitz (it might be that he has been holding these ‘heterodox’ (better: common sense) views for some time already):

In the aftermath of the Great Recession, there is a growing consensus, even among central bank officials, concerning the limitations of monetary policy. This paper provides an explanation for the ineffectiveness of monetary policy, and in doing so provides a new framework for thinking about monetary policy and macro-economic activity. What matters is not so much the money supply or the T-bill interest rate, but the availability of credit, and the terms at which credit is made available. The latter variables may not move in tandem with the former. In particular, the spread between the T bill rate and the lending rate may increase, so even as the T bill rate decreases, the lending rate increases. An increase in credit availability may not lead to more spending on produced goods, but increased prices for land or other fixed assets; it can go to increased margins associated with increases in speculative activity; or it may go to spending abroad rather than at home. The paper explains the inadequacy of theories based on the zero low bound, and argues that the ineffectiveness of monetary policy is more related to the multiple alternative uses—beyond the purchase of domestically produced goods—of additional liquidity and to its adverse distributional consequences. The paper shows that while monetary policy is less effective than has been widely presumed, it is also more distortionary, identifying several distinct

P1: Reading Keynes

November 21, 2016 24 comments

from Asad Zaman

I am planning a sequence of posts on re-reading Keynes, where I will try to go through the General Theory. This first post explains my motivations for re-reading Keynes. As always, my primary motive is self-education; this will force me to go through the book again — I first read it in my first year graduate course on Macroeconomics at Stanford in 1975, when our teacher Duncan Foley was having doubts about modern macro theories, and decided to go back to the original sources. At the time, I could not understand it at all, and resorted to secondary sources, mainly Leijonhufvud, to make sense of it. Secondarily, i hope to be able to summarize Keynes’ insights to make them relevant and useful to a contemporary audience. Thirdly, there are many experts, especially Paul Davidson, on this blog, who will be able to prevent me from making serious mistakes in interpretation.

Reasons for Studying Keynes

The heart has its reasons of which reason knows nothing.” Blaise Pascal

In line with the objectives of the WEA Pedagogy Blog, I am initiating a study group with the aim of [re-]reading Keynes’ classic The General Theory of Employment, Interest and Money. There are many reasons why I think this is a worthwhile enterprise. I hope to make weekly posts summarizing various aspects of the book, as we slog through the work, which can be difficult going in some parts. At the very least, this will force me to re-read Keynes, something I have been meaning to do for a long time. In this first post, I would like to explain my motivation in doing this exercise. Read More

Top 10 critiques of econometrics

November 20, 2016 7 comments

from Lars Syll

top-10-retail-news-thumb-610xauto-79997-600x240

•Achen, Christopher (1982). Interpreting and using regression. SAGE

•Berk, Richard (2004). Regression Analysis: A Constructive Critique. SAGE

•Freedman, David (1991). ‘Statistical Models and Shoe Leather’. Sociological Methodology

•Kennedy, Peter (2002).  ‘Sinning in the Basement: What are the Rules? The Ten Commandments of Applied Econometrics’. Journal of Economic Surveys

•Keynes, John Maynard (1939). ‘Professor Tinbergen’s method’. Economic Journal

•Klees, Steven (2016). ‘Inferences from regression analysis: are they valid?’ Real-World Economics Review

•Lawson, Tony (1989). ‘Realism and instrumentalism in the development of econometrics’. Oxford Economic Papers

•Leamer, Edward (1983). ‘Let’s take the con out of econometrics’. American Economic Review

•Lieberson, Stanley (1987). Making it count: the improvement of social research and theory. University of California Press

•Zaman, Asad (2012). ‘Methodological Mistakes and Econometric Consequences’. International Econometric Review

Macro and migration – EU edition.

November 20, 2016 1 comment

aaa

So, ‘What’s it going to be then, eh’? Will we let migration wreck the EU or will we opt for sound macro policies?

The non-far right should double down on the present freedom of movement of people inside the EU. But only when credible macro-economic demand and welfare policies are installed. Otherwise, the internal inconsistencies of the present macro-economic set up will fracture the EU. Which means that the freedom of capital flows, one of the other EU freedoms, might have to be curtailed. Caveat: this post is about migration between EU countries. It is not about refugees or about migration between the EU and the rest of the world. But especially the refugee and external immigration mess (about 5.000 refugees/immigrants have drowned in the Mediterranean in 2016 up till now and hundreds of thousands are ‘apprehended’) will not be sorted until we have post-Brexit clarity about internal migration. Latest news: far right group attacks ‘apprehended’ refugees in Greece.

Read more…

Making It Count

November 18, 2016 6 comments

from Lars Syll

Modern econometrics is fundamentally based on assuming — usually without any explicit justification — that we can gain causal knowledge by considering independent variables that may have an impact on the variation of a dependent variable. This is however, far from self-evident. Often the fundamental causes are constant forces that are not amenable to the kind of analysis econometrics supplies us with. As Stanley Lieberson has it in his modern classic Making It Count:

LiebersonOne can always say whether, in a given empirical context, a given variable or theory accounts for more variation than another. But it is almost certain that the variation observed is not universal over time and place. Hence the use of such a criterion first requires a conclusion about the variation over time and place in the dependent variable. If such an analysis is not forthcoming, the theoretical conclusion is undermined by the absence of information …

Moreover, it is questionable whether one can draw much of a conclusion about causal forces from simple analysis of the observed variation … To wit, it is vital that one have an understanding, or at least a working hypothesis, about what is causing the event per se; variation in the magnitude of the event will not provide the answer to that question.

Trygve Haavelmo was making a somewhat similar point back in 1941, when criticizing the treatmeant of the interest variable in Tinbergen’s regression analyses. The regression coefficient of the interest rate variable being zero was according to Haavelmo not sufficient for inferring that “variations in the rate of interest play only a minor role, or no role at all, in the changes in investment activity.” Interest rates may very well play a decisive indirect role by influencing other causally effective variables. And:

Read more…