- More and more economists are writing about ‘secular stagnation’: a ‘lack of demand’ induced situation of lacklustre growth. think of high private debts, high inequality, high unemployment and an overgrown financial sector and a house price bust.
- In the meanwhile, a hospital in Rotterdam introduces a robot-bed-washer. And surgeons are experimenting with using 3-D printing during in-womb surgery on unborn children. Which is good: when robots wash bed, nurses have more time to wash patients (unless we embrace neoliberal ideology and only look at caring for people from a cost perspective).
- Despite such technological progress, economic growth in the Eurozone is, despite low interest rates, low oil prices and an increase in total wages, measly.
- The interesting Eurozone countries are, when it comes to the latest data on economic growth, Spain (robust growth), Greece (-1,8% decrease of nominal GDP – which is much better than expected) and Ireland (data on job growth and economic growth do not seem to match). And Germany, which still increasingly relies on foreign demand, Which is dangerous, as the growth impetus of the increase of foreign demand (measured as an increase in net exports not caused by declining imports) will eventually come to a halt – which however won’t stop the growing imbalances caused by an extreme surplus on the current account. Growth of total nominal wages in Germany must be close t 4% which, once upon a time, will lead to an expenditure boom. I will return to Ireland, but the Irish data are quite puzzling: no credit growth (to the contrary) – but a 100% increase of investment in some sectors (Q2). It seems as if some large companies are transferring intellectual ownership to Ireland.
- I was clearly wrong about Greece. Closing the banks did not tank the economy: money kept flowing. However, at this moment renewed austerity (higher VAT rates, lower pensions and the like) is starting to bite. And this is tanking the economy: net number of jobs in october -56.000. Which is extreme. I should have known about these banks, by the way, as there was no outright money destruction and bail in of depositors.
from Lars Syll
A common idea among mainstream — neoclassical — economists is the idea of science advancing through the use of ‘as if’ modeling assumptions and ‘successive approximations’. But is this really a feasible methodology? I think not.
Most models in science are representations of something else. Models “stand for” or “depict” specific parts of a “target system” (usually the real world). All theories and models have to use sign vehicles to convey some kind of content that may be used for saying something of the target system. But purpose-built assumptions — like “rational expectations” or “representative actors” — made solely to secure a way of reaching deductively validated results in mathematical models, are of little value if they cannot be validated outside of the model.
All empirical sciences use simplifying or unrealistic assumptions in their modeling activities. That is not the issue – as long as the assumptions made are not unrealistic in the wrong way or for the wrong reasons.
from Dean Baker
What if we could boost the economy with longer vacations? Or with paid family leave? With shorter workweeks?
It may sound too good to be true, but hear me out.
Economists have long dismissed the idea that an economy could suffer from a persistent shortfall in demand. While most acknowledged that in periods of recession, growth and jobs could be limited by inadequate demand, this was viewed as a temporary story. In the decades since World War II, the economy generally bounced back quickly from recessions. Once the economy recovered from recession, the basic constraint was supply. We would only have more growth and jobs if we could make the economy more productive and/or persuade more people to work. In this context, additional demand, such as a burst of consumption or increase in government spending, would only create inflationary pressures and undermine the effort to boost growth.
This view has been badly shaken by the Great Recession. Many prominent economists, including Paul Krugman and Larry Summers, now warn quite explicitly about the country facing a prolonged period of what’s known as secular stagnation. Secular stagnation means the main constraint on the economy is inadequate demand, not a lack of supply. If we are facing secular stagnation, policies that boost demand will lead to more growth and jobs.
Ansgar Rannenberg, Christian Schoder and Jan Strasky do a good job dissecting some DSGE models (The ECB NAWM model and the EU Quest model). They want to show that, if you tweak these models enough, they can account for the decline of output in the euro zone following (real) interest rate increases and fiscal consolidation in 2011/2012. What they do show, however, is that even despite such tweaking one of the central assumptions of these models, the unavoidable return to full production equilibrium and the primacy of supply, causes a large divergence between the world of the models and the real world (graph 1, RoT and FA are specific assumptions, see below).
How do they tweak the models? Read more…
from Dean Baker
The concept of the children’s table has moved from Thanksgiving dinner to presidential politics with the networks having a separate debate for the low-polling candidates for the Republican nomination. But the concept of the children’s table is also useful for understanding trade policy and the Trans-Pacific Partnership (TPP).
The TPP has two classes of issues. On the one hand, there are the issues that really matter to the drafters of the deal. These are issues like protection of patents and copyrights and other forms of investment. Disputes that arise over investment can be taken directly by foreign investors to the investor-state dispute settlement tribunals set up by the TPP.
The investor bringing the complaint gets to appoint one of the three judges hearing the complaint. A second judge is appointed by the country against whom a complaint is being brought. The third judge is jointly appointed by the investor and the government. This panel is then empowered to impose fines of whatever size it considers appropriate. This is entirely an extra-judicial process. The verdict is not appealable to any domestic court.
from Maria Alejandra Madi and WEA Pedagogy Blog
The WEA On-line Conferences format, designed by Edward Fullbrook and Grazia Ietto-Gillies, makes full use of the digital technologies in the pursuit of the commitments included in the World Economics Association Manifesto: plurality, competence, reality and relevance, diversity, openness, outreach, ethical conduct, and global democracy. The WEA On-line Conferences seek to also engage graduate and undergraduate students considering: (a) the variety of theoretical perspectives; (b) the range of human activities and issues which fall within the broad domain of economics; and (c) the study of the world’s diverse economies.
The current conference is The European crisis. It is being led by distinguished professors Victor Becker, Beniamino Moro and James Galbraith. The purpose of the online Conference is to analyze the current crisis in the countries of the Eurozone. After the 2008 financial meltdown, the American crisis soon infected the European financial system, becoming both a sovereign debt crisis and a banking debacle in many peripheral Euro area countries. The European crisis has shown that crisis can spread quickly among closely integrated economies. The implementation of austerity policies, prompted by the Troika (European Commission, European Central Bank and the IMF) have reinforced a spiral of economic contractions, and provoked a rising political rebellion against austerity, inspired in part (and especially in Spain, but also to a degree in Greece) by the successful exit from crisis of the South American countries in the past decade. The conference would like especially to address the questions of social stabilization, strategies for structural reform and economic growth, and monetary, financial and debt management that may be used to frame a new economic model for Europe.
The Discussion Forum is now open. The interactive format of Conferences provides an on-line forum for visitors and commentators. All participants will be able to send comments on specific papers, or to contribute to a general discussion on the conference theme.The Leaders of the conference moderate these comments prior to posting to ensure no libellous or hateful language.
Within the Discussion Forum, students share thoughts, review ideas of others and explore new perspectives. The Wea leaders encourage students to submit comments to the following papers http://europeancrisis2015.weaconferences.net/papers/. read more
from Peter Radford
I was going to write about last night’s Republican presidential debate. After all it was ostensibly about the economy.
But I can’t. I won’t.
There is nothing to say other than these two observations:
First: the questions themselves were designed to allow the candidates to spout standard Republican ideology unfettered by reality. For instance, early on one question began with a meandering statement about how the national debt is unsustainable, and how the social security system is headed for bankruptcy. Neither is true. Neither is true at all. However, in the tightly controlled and hermetically sealed world of the GOP party base, both those statements are regarded as rock solid facts.
Thus the candidates were able to answer with the necessary Republican critique that we must balance the budget, slash social spending, and cut ties on the wealthy.
In other words the answers were given to questions that did not reference the real economy, but only the make-believe economy that Republicans now inhabit.
from Lars Syll
Macroeconomic forecasts produced with macroeconomic models tend to be little better than intelligent guesswork. That is not an opinion – it is a fact. It is a fact because for decades many reputable and long standing model based forecasters have looked at their past errors, and that is what they find. It is also a fact because we can use models to generate standard errors for forecasts, as well as the most likely outcome that gets all the attention. Doing so indicates errors of a similar magnitude as those observed from past forecasts. In other words, model based forecasts are predictably bad …
I think it is safe to say that this inability to accurately forecast is unlikely to change anytime soon. Which raises an obvious question: why do people still use often elaborate models to forecast? …
It makes sense for both monetary and fiscal authorities to forecast. So why use the combination of a macroeconomic model and judgement to do so, rather than intelligent guesswork? (Intelligent guesswork here means some atheoretical time series forecasting technique.) The first point is that it is not obviously harmful to do so …
from David Ruccio
Income inequality in the United States increases as people get older.
That’s the stark conclusion of a new study by Fatih Karaham for the Federal Reserve Bank of New York.* In the chart above, men are grouped into percentiles of total lifetime income (income earned between ages twenty-five and sixty). Read more…
from Lars Syll
Walked-out Harvard economist Greg Mankiw has more than once tried to defend the 1 % by invoking Adam Smith’s invisible hand:
[B]y delivering extraordinary performances in hit films, top stars may do more than entertain millions of moviegoers and make themselves rich in the process. They may also contribute many millions in federal taxes, and other millions in state taxes. And those millions help fund schools, police departments and national defense for the rest of us …
[T]he richest 1 percent aren’t motivated by an altruistic desire to advance the public good. But, in most cases, that is precisely their effect.
When reading Mankiw’s articles on the “just desert” of the 1 % one gets a strong feeling that Mankiw is really trying to argue that a market economy is some kind of moral free zone where, if left undisturbed, people get what they “deserve.” Read more…
At this moment, the ECB is increasingly chided for keeping interest rates low. Hmmm… ECB interest rates are indeed at a historical low. And so are interest rates paid by most Euro Area states. But it is only since 2012 (four years after the crisis!) that average Euro Area interest rates for non financial companies and households (new loans) are cheaper than before the financial bubble. But even then, the present average 3% on outstanding loans is, when we take the decline of core inflation of around 1 to 1,5% into account, not extremely low. Considering higher interest rates and a larger decline of inflation and, at present, even deflation in Spain and Portugal this holds of course a forteriori for these countries.
from Dean Baker
Insanely high drug prices have been in the news lately. We are regularly hearing about new miracle drugs like the Hepatitis C drug Sovaldi. Sovaldi comes with an $84,000 price tag for a 3-month course of treatment. Many of the new cancer drugs cost well over $100,000 for a year’s dosage. And of course we had the case of Turing Pharmaceuticals, which raised the price of a Daraprim, an old but important anti-infection drug, by 5000 percent.
These stories of extraordinarily high drug prices are especially painful because they are unnecessary. In almost all cases drugs are cheap to produce. The reason they are expensive is because the government grants them a patent monopoly. (In the case of Daraprim, at the moment Turing is the only licensed manufacturer, even though the drug is off-patent.) Generic Sovaldi is available for just $300 a treatment in Egypt, less than one percent of the U.S. price. Most of the cutting edge cancer drugs would also be available for less than one percent of the U.S. price if they could be sold as generics in a free market. Read more…
from Maria Alejandra Madi and the WEA Pedagogy Blog
More recently, the internet has enabled the transformation of traditional work under Fordism, to knowledge work, characteristic of post-Fordism. In knowledge work, multi-tasking workers are integrated into flat hierarchical structures, compared to the centralized large corporation, e.g., General Motors. As a result, communication channels have been re-defined with greater involvement of lower-level employees in decision-making. Knowledge work includes new employment practices, such as time flexibility, teleworking; alternative payment schemes; along with employee empowerment and autonomy; task rotation and multi-skilling, team work and team autonomy. Potential consequences include fragmentation of work, crowdsourcing and virtualization of work.
Indeed, technological change has significantly transformed the labour market as the result of the diffusion of innovative practices at the micro-level. Crowdsourcing, for example, is the outsourcing of tasks to a large, undefined group of people in an open call. Considering this background, current challenges in working conditions are also related to the emergence of a crowd of freelancers available and able to quickly do the necessary tasks. The cloud based work environment is characterized by five essential characteristics: on-demand service; broad access; resource pooling; rapid elasticity; and measured service (Ipeirotis, 2012). read more
from David Ruccio
We all know that the distribution of income has been increasingly unequal in recent decades—in the years leading up to the crash of 2007-08 and, now, during the current economic recovery.*
But, as I explained to my students in class this week, there are two different ways of conceiving of and measuring inequality within capitalism. One is the size or interpersonal distribution of income—the distribution of income to individuals or individual households. Thus, for example, the Gini coefficient, the share of income going to the top 1 percent, and the 90-10 ratio are all ways of measuring the size distribution of income. The other way is the functional distribution of income—the distribution of income to groups that are functionally related to the production of total income. Thus, we often refer to and measure the income shares going to capitalists and workers (and, less often these days, to landlords).
The question is, what is the relationship between the functional distribution of income and the size distribution of income?
from Lars Syll
Using formal mathematical modeling, mainstream economists sure can guarantee that the conclusion holds given the assumptions. However, the validity we get in abstract model worlds does not warrantly transfer to real world economies. Validity may be good, but it isn’t enough. From a realist perspective both relevance and soundness are sine qua non.
In their search for validity, rigour and precision, mainstream macro modellers of various ilks construct microfounded DSGE models that standardly assume rational expectations, Walrasian market clearing, unique equilibria, time invariance, linear separability and homogeneity of both inputs/outputs and technology, infinitely lived intertemporally optimizing representative household/ consumer/producer agents with homothetic and identical preferences, etc., etc. At the same time the models standardly ignore complexity, diversity, uncertainty, coordination problems, non-market clearing prices, real aggregation problems, emergence, expectations formation, etc., etc.
1) Why is German unemployment relatively low? Partly, because of a steady increase in jobs. But also because people left the labour force. According to a new Eurostat study about worker flows in 11 EU countries, it was also because of:
“the decrease of the flows from inactivity into unemployment in Germany, whose contributions to keeping unemployment low were relatively important. In contrast, in the rest of the countries, the contribution of (increased) flows from inactivity into unemployment and (decreased) flows from inactivity into employment was towards pushing the unemployment rate up, while the (decreased) flows from unemployment into inactivity contributed to increasing the unemployment rate (except in Portugal).”
Translated: in many country the response to rising unemployment was to increase the labour force, despite the decline in available jobs. In Germany, the opposite happened. And oh, are Austrians right and do crises lead to ‘cleansing’, i.e. a purge of unproductive, outdated companies? Nope: “we examine if the crisis has led to some employment reallocation across sectors, finding that, so far, there is no clear evidence in favor of cleansing effects“. The whole thing shows that high unemployment, contrary to classical ideas, does not spur economic development.
from Asad Zaman and the WEA Pedagogy Blog
The vision of a government of the people, by the people and for the people is enchanting, and powerfully attractive to the masses yearning to be free. However, the title of Nobel laureate Joseph Stiglitz’s article, Of the 1%, by the 1%, and for the 1% is a far more accurate description of the reality of US democracy. Prophetically, Eisenhower had warned against the threat to democracy posed by the powerful military-industrial complex. Today the power of a tiny minority to control the US, and thence the world, exceeds his worst nightmares. read more
from Peter Radford
A few things along the same lines:
Something that really bugs me at the moment here in the US is the absolutely stupid idea that freedom of speech and the possession of lots of money are somehow entangled. Put differently: how come the Supreme Court – Supreme at what I wonder? – allowed the flood gates of money to continue to pour into the American political process and not then wonder how much corruption and distortion that flood would create?
Isn’t it obvious?
I suppose not to someone cloistered for years in the American legal profession and positioning continually for promotion to the top.
It is absurd to think that wealthy people and big businesses spend all that money on elections and then don’t expect something in return. I mean really absurd. You have to go to great and other-worldly lengths to deny basic human instincts in order to convince yourself that a big political donor is giving away gobs of cash because they simply want us all to have great elections. Read more…
from David Ruccio
from Lars Syll
Standard new Keynesian macroeconomics essentially abstracts away from most of what is important in macroeconomics. To an even greater extent, this is true of the dynamic stochastic general equilibrium (DSGE) models that are the workhorse of central bank staffs and much practically oriented academic work.
Why? New Keynesian models imply that stabilization policies cannot affect the average level of output over time and that the only effect policy can have is on the amplitude of economic fluctuations, not on the level of output. This assumption is problematic at a number of levels …
The problem has always been that it is difficult to beat something with nothing. This may be changing as topics like hysteresis, secular stagnation, and multiple equilibrium are getting more and more attention …
As macroeconomics was transformed in response to the Depression of the 1930s and the inflation of the 1970s, another 40 years later it should again be transformed in response to stagnation in the industrial world.
Maybe we can call it the Keynesian New Economics.
Mainstream macroeconomics is stuck with crazy models — and ‘New Keynesian’ macroeconomics and DSGE models certainly, as Summers puts it, “essentially abstract away from most of what is important in macroeconomics. ”
Let me just give one example. Read more…