Is the Greek economy inflexible and unable to create jobs? Not really. The rebound (and more) of tourism led, in 2014, to one of the highest job growth rates of Europe, demand led of course. Despite this, unemployment did not really come down… talk about flexibility of labour supply! A case can even be made that the Greek labour market, with its unusual high percentage of self-employed (look here, El is Greece), is one of the most ‘flexible’ of Europe. Unemployment benefits are for instance also quite low, not available for the self-employed and for a short time only, a libertarian dream. One of the reasons for the sheer depth of the Greek crisis may exactly be this flexibility and the lack of automatic stabilizers: the paradox of flexibility. Income of employees declined with about 32% during the crisis (graph 1), much more than in other program countries (and mind that disposable income declined even more!). But, even more unusual and contrary to the situation in other program countries, ‘operating surplus (gross profits of companies) and mixed income (of the self-employed)’ declined about as much (28%) as total income of employees, while aside from a temporary dip in Ireland it stayed about level in other program countries (graph 2). Read more…
from David Hollanders
Many ponder the desirability of a Grexit. There is a heterogeneous group, including the right-wing German party Alternative for Deutschland and the left-wing of Syriza, who agree that a Grexit is optimal. On the other hand, Greek finance minister Varoufakis and the European Commission – for all their other differences – agree that a Grexit is to be avoided. The optimality-question of a Grexit can be broken down into three questions. Should Greece have entered the EMU? Now that it has, is an ordered exit optimal? If so, can the same be said of an unordered exit? Even if one disagrees about the answer to the third question, the first two questions should be answered affirmative. All parties involved – Greece, banks, the EC, ECB and the E(M)U – should thus agree on it. That is, if they are willing to lose face, for they have always pleaded against what is now optimal. Read more…
from Lars Syll
To many conservative and neoliberal politicians and economists there seems to be a spectre haunting the United States and Europe today — Keynesian ideas on governments pursuing policies raising effective demand and supporting employment. And some of the favourite arguments used among these Keynesophobics to fight it are the confidence argument and the doctrine of ‘sound finance.’
Is this witless crusade against economic reason new? Not at all. In 1943 a famous Polish economist wrote the following in a classic essay on ‘sound finance': Read more…
In the four quarters 2013-IV to 2014-III (more recent data are not yet available on Eurostat) the Greek government deficit was smaller than the Dutch and Finnish deficit and about half as large the Irish and Portuguese size. Mind that the Dutch and the Finnish governments love to lecture the Greek. As, in 2014, the Greek real economy grew with about 0.5% but the country also experienced, in line with the austerity plan, 2.6% deflation, nominal GDP contracted with 2%. Which means that the country needed a government surplus of about 4% just to keep the debt to GDP ratio stable… Despite this, it still is the case that Greece decreased its government deficit (excluding transfer incomes to banks) more and faster than Spain, Portugal and Ireland. It seems that, to obtain Troika funding, it does not matter what you do. Just tell them they are right.
from Peter Radford
Much of what we are told as being advances in economics are diversions or delusions that serve only to trap us in a cul-de-sac. Sometimes that becomes a very long road to nowhere. Sometimes, it seems, economics will never return to being about actual economies, but will always be doomed to stay the plaything of a select group of very clever savants separated from the world by their contempt for its complex messiness.
I am not one of those to indulge in endless territorial fights over purity of thought. What matters to me is practical application. I measure the usefulness of an economic idea by the illumination it throws on a real world problem and on its ability to assist us better our collective lots in life. I frankly don’t care if it is the precise meaning that some long ago dead theorist gave to an idea. Our current divination of that meaning may have strayed from purity, but it might also work. Battles over intellectual turf are meaningless except for a very few whose reputations are involved. Other than that, who cares? Read more…
from Dean Baker
One of the greatest scenes in movie history occurs at the end of Casablanca. Humphrey Bogart is standing over the gestapo major’s body with a smoking gun. When the police drive up, the French colonel announces that the major has been shot and orders his men to “round up the usual suspects.”
Nearly all Democrats, and even many Republicans, now agree that inequality is a serious problem. They are desperately struggling to find ways to address the problem. Meanwhile, they will likely stand by and watch as the Fed raises interest rates. They will mostly like jump on board of the Trans-Pacific Partnership (TPP) and other trade deals that may come before Congress. While these policies go into effect, which are designed to redistribute income upward, we can count on our political leaders rounding up the usual suspects: looking for reasons why most workers are not sharing in the gains from economic growth.
Starting with the Fed, the purpose of raising interest rates is to slow economic growth and to keep workers from getting jobs. The ostensible rationale is that if the unemployment rate gets too low, then wages will start rising more rapidly and then we could have a problem with inflation. In order to ensure that inflation doesn’t become a problem, the Fed raises rates and keeps the unemployment rate from falling further. Read more…
Although Mr Van Overtveldt says he agrees with Mr Varoufakis that the Greek programme has been a “failure”, he believes authorities in Athens are to blame — not creditor countries.
“It works in Spain, it works in Portugal, it worked in Ireland,” said Mr Van Overtveldt. “But then it does not work in Greece, because the Greek authorities have not done what they needed to do, not across the board.”
“Don’t blame it on ‘the institutions’,” he added. “It is not the programme, it is the execution.”
But he is wrong. Austerity consists of a supposedly magic tonic of wage cuts and less government expenditure plus less rights for labor which has to lead to a lower price level which will somehow solve the unemployment problem. Greece implemented such policies much more successfully than other countries: after 2008 the cost price of government consumption (education, the police and comparable services) went down more than in other program countries (graph 1). But it did not work…
from Lars Syll
In responding to these warranted wonderings, some economists – like theoretical economist David K. Levine in the article Why Economists Are Right: Rational Expectations and the Uncertainty Principle in Economics in the Huffington Post – have maintained that
it is a fundamental principle that there can be no reliable way of predicting a crisis.
To me this is a totally inadequate answer. And even trying to make an honour out of the inability of one’s own science to give answers to just questions, is indeed proof of a rather arrogant and insulting attitude.
Fortunately yours truly is not the only one racting to this guy’s arrogance: Read more…
Mintzberg, a writer of management books, is one of the most influential post war economists. His work easily passes the heterodoxy test – as he looks at the real world. An example:
What could possibly be wrong with “efficiency”? Plenty.
10 October 2014
Efficiency is like motherhood. It gets us the greatest bang for the buck, to use an old military expression. Herbert Simon, winner of one of those non-Nobel prizes in economics (more on that in a later TWOG), called efficiency a value-free, completely neutral concept. You decide what benefits you want; efficiency gets you them at the least possible cost. Who could possibly argue with that?
Me, for one.
I list below a couple of things that are efficient. Ask yourself what am I referring to—the first words that pop into your head.
A restaurant is efficient.
Did you think about speed of service? Most people do. Few think about the quality of the food. Is that the way you chose your restaurants?
My house is efficient.
Energy consumption always comes out way ahead. Tell me: who ever bought a house for its energy consumption, compared with, say, its design, or its location?
What’s going on here? It’s quite obvious as soon as we realize it. When we hear the word efficiency we zero in―subconsciously―on the most measurable criteria, like speed of service or consumption of energy. Efficiency means measurable efficiency. That’s not neutral at all, since it favors what can best be measured. And herein lies the problem, in three respects:
- Because costs are usually easier to measure than benefits, efficiency often reduces to economy: cutting measurable costs at the expense of less measurable benefits. Think of all those governments that have cut the costs of health care or education while the quality of those services have deteriorated. (I defy anyone to come up with an adequate measure of what a child really learns in a classroom.) How about those CEOs who cut budgets for research so that they can earn bigger bonuses right away, or the student in last week’s TWOG who found all sorts of ways to make an orchestra more efficient. This week, on the news in Canada, we are hearing about railroads that are determined to be more efficient, while overworked engineers are reporting that they have been falling asleep at the switch. Very efficient this.
- Because economic costs are typically easier to measure than social costs, efficiency can actually result in an escalation of social costs. Making a factory or a school more efficient is easy, so long as you don’t care about the air polluted or the minds turned off learning. I’ll bet the factory that collapsed in Bangladesh was very efficient.
- Because economic benefits are typically easier to measure than social benefits, efficiency drives us toward an economic mindset that can result in social degradation. In a nutshell, we are efficient when we eat fast food instead of good food.
So beware of efficiency, and of efficiency experts, as well as efficient education, heath care, and music, even efficient factories. Be careful too of balanced scorecards, because while including all kinds of criteria may be well intentioned, the dice are loaded in favor of those that can most easily be measured.
By the way, twitter is efficient. Only 140 characters!
Herbert A. Simon Administrative Behavior: Second Edition (Macmillan, 1957, page 14).
This TWOG derives from my article “A Note on the Dirty Word Efficiency”, Interfaces (October, 1982: 101-105)
In Europe, we are wasting time. Varoufakis tries to break the deadlock: the continent is awash with money but, despite record low-interest rates investment rates are low. In a very well written speech he proposes a solution, based on the ‘Modest proposal’ by Holland, Galbraith and Varoufakis. The sting in the tail: there will be another undemocratic ‘federal’ institution, an investmentbank, backed by the ECB. Maybe this institution might, to an extent, make up for the lack of fiscal policy on the Eurozone level, at least by restoring part of the monetary transmission channel, i.e. provide a level playing field when it comes to financing projects in the different countries in the Eurozone. While it might also make up for the present lack of government investment in at least some countries. And it might make the present, asset price increasing, kind of QE superfluous. My idea: the European Parliament will have to get large supervisory powers over this bank. An excerpt: Read more…
Eric Zuesse has written a provocative and challenging volume, though in my opinion he sometimes goes too far in his criticisms and claims. This book proposes two new postulates to replace existing ones that are at the foundation of microeconomic theory. It cites the existing body of empirical findings in economics as being the reasons for them, and it presents a strong empirical case for each of its two new postulates as being true and the one that it is replacing as being false. I regard his book as the work of a serious, committed scholar whose views deserve to be taken seriously.
Yesterday, as part of an attempt to raise the level of discussion about the Eurozone problems, I spent the better part of ten minutes to download a 98 page Excel-file from Eurostat containing data about the last sixteen years of European Union macro economic history. It turns out that Greece has a surplus of almost 10% of GDP on its ‘international trade in services’ account (among other things: shipping, tourism). That’s a lot by whatever standard and surely when compared with 2% of GDP German deficit. In the EU it is only topped by tiny Malta, Cyprus and Luxembourg. It is caused by the fact that Greece is not only home to one world-class economic sector (tourism) but even to two (the other being shipping), which is a lot for a country the size of Greece.
The changes to economic theory beyond the micro level involve a complete recanting of the neoclassical vision. The vital first step here is to abandon the obsession with equilibrium.
The fallacy that dynamic processes must be modelled as if the system is in continuous equilibrium through time is probably the most important reason for the intellectual failure of neoclassical economics. Mathematics, sciences and engineering long ago developed tools to model out of equilibrium processes, and this dynamic approach to thinking about the economy should become second nature to economists. Read more…
C. T. Kurien
WEALTH and ILLFARE is intended for readers who do not have much knowledge in economics, but are eager to know how economic systems function.
In particular, it deals with the phenomenon that many find disturbing, the soaring affluence of the few and the continuing misery of the many that is increasingly becoming evident globally and in our country.
Ownership and control over resources, different forms of mediation and asymmetry of information are identified as clues for any interested reader to develop skills to study real life economic problems.
It is a unique and timely contribution by a reputed practitioner who, over the past half a century, has influenced generations of students and through his earlier writings the general public as well.
from Lars Syll
DATE: December 12, 1991
FR: Lawrence H. Summers
1) The measurements of the costs of health impairing pollution depends on the foregone earnings from increased morbidity and mortality. From this point of view a given amount of health impairing pollution should be done in the country with the lowest cost, which will be the country with the lowest wages. I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that. Read more…
from Norbert Häring
In June 2011, Spiegel Online conducted and published a remarkable interview with Albrecht Ritschl. Ritschl is one of Germany’s most renowned economic historians, teaching at the London School of Economics. Already for years ago, he warned that Germany, being the worst debt offender in history, would ultimately regret it, if it insisted on behaving like the tough taskmaster of Athens and the rest of Europe. What Ritschl predicted is happening now. Greece is presenting us with huge unpaid bills from our dark past. Others might follow, if we are required to pay our long/evaded dues. Some highlights of what Ritschl said in the interview that was conducted by Yasmin El-Sharif:
from Lars Syll
“Robert Lucas: Economics tries to… make predictions about the way… say, 280 million people are going to respond if you change something in the tax structure, something in the inflation rate, or whatever…. Kahnemann and Tversky haven’t even gotten to two people; they can’t even tell us anything interesting about how a couple that’s been married for ten years splits or makes decisions about what city to live in–let alone 250 million. This is like saying that we ought to build it up from knowledge of molecules or–no, that won’t do either, because there are a lot of subatomic particles…. We’re not going to build up useful economics in the sense of things that help us think about the policy issues that we should be thinking about starting from individuals and, somehow, building it up from there. Behavioral economics should be on the reading list…. But to think of it as an alternative to what macroeconomics or public finance people are doing or trying to do… not in my lifetime…“
I do not think Lucas understands how silly he sounds.
In quite some Eurozone countries staggering amounts of money have been paid to save bankrupt banks (table, via @cigolo). In Ireland, this amounted to about € 40.000,– per Household, in Greece to 17.000,– and in Spain to 3.000,– . Which includes unbanked households, households where every adult is unemployed and, in Spain, the 70.000 households which faced a ‘certification of a foreclosure begun’ . And there are quite some households where every adult is unemployed, in countries like Spain and Greece which face unemployment rates of 23 and 26%. Paying back this money of course depresses the economy as it’s not recirculated. At the same time, in Cyprus the Troika pushes for mass evictions based upon a creditor centered valuation system which will not only cause social harm but which also lower asset prices. That’s what debt deflation looks like. Read more…
from Lars Syll
Even after one of the most severe multi-year crises on record in the advanced economies, the received wisdom in policy circles clings to the notion that high-income countries are completely different from their emerging-market counterparts. The current phase of the official policy approach is predicated on the assumption that growth, financial stability, and debt sustainability can be achieved through a mix of austerity and forbearance (and some reform). The claim is that advanced countries do not need to resort to the more eclectic policies of emerging markets, including debt restructurings and conversions, higher inflation, capital controls, and other forms of financial repression. Now entering the sixth or seventh year (depending on the country) of crisis, output remains well below its pre-crisis peak in ten of the twelve crisis countries. The gap with potential output is even greater. Delays in accepting that desperate times call for desperate measures keeps raising the odds that, as documented here, this crisis may in the end surpass in severity the depression of the 1930s in a large number of countries.
This time it seems as though it is — really — different. At last the light at the end of the austerity tunnel seeps through.