Krugman’s modelling flimflam

June 6, 2018 12 comments

from Lars Syll

Paul Krugman has a piece up on his blog arguing that the ‘discipline of modeling’ is a sine qua non for tackling politically and emotionally charged economic issues:

You might say that the way to go about research is to approach issues with a pure heart and mind: seek the truth, and derive any policy conclusions afterwards. But that, I suspect, is rarely how things work. After all, the reason you study an issue at all is usually that you care about it, that there’s something you want to achieve or see happen. Motivation is always there; the trick is to do all you can to avoid motivated reasoning that validates what you want to hear.

economist-nakedIn my experience, modeling is a helpful tool (among others) in avoiding that trap, in being self-aware when you’re starting to let your desired conclusions dictate your analysis. Why? Because when you try to write down a model, it often seems to lead some place you weren’t expecting or wanting to go. And if you catch yourself fiddling with the model to get something else out of it, that should set off a little alarm in your brain.

Hmm …  Read more…

Long-term trends in U.S. income distribution – 2 graphs

June 5, 2018 1 comment

No bubbles on the horizon

June 5, 2018 33 comments

from Dean Baker

Ever since the collapse of the housing bubble in 2007–2008 that gave us the Great Recession, there has been a large doom and gloom crowd anxious to tell us another crash is on the way. Most insist this one will be even worse than the last one. They are wrong.

Both the housing bubble in the last decade and the stock bubble in the 1990s were easy to see. It was also easy to see that their collapse would throw the economy into a recession since both bubbles were driving the economy. We are in a very different place today.

The stock market is high. By any measure, price-to-earnings ratios are far above historic averages, but they are nowhere near as out of line as they were in the 1990s bubble.

The current value of the market is roughly 24 times after-tax corporate profits, based on the first quarter’s data. This compares to the historic average ratio of 15-to-1. But at the peak of the bubble in 2000, the ratio was over 30-to-1.

Furthermore, the higher than normal price-to-earnings ratio can very well be justified by unusually low real interest rates. The interest rate on the 10-year Treasury bond is flirting with 3.0 percent. With a 2.0 percent inflation rate, that translates into a real interest rate of just 1.0 percent.  Read more…

From Wicksell to Le Bourva and MMT

June 4, 2018 7 comments

from Lars Syll

MMTComparing the limited work of Wicksell, Le Bourva, and MMT, we find that they share many similarities. Obviously, the institutions and issues being discussed have changed during the decades these scholars were writing, yet all three views agree on some fundamental issues. The methodology is quite similar, with a strong focus on balance sheets opposed to theoretical models based on assumptions that are necessary for the mathematics to work. There is also a strong consensus that monetary theory is positive, not normative. Further relevant areas of agreement are found with respect to: the idea of Chartalism when it comes to the origin and value of money; the endogeneity of money regarding bank creation of deposits; the role of the money market in the economy and the missing link to inflation; the monetary circuit and the link from debt to income; and the effects of deficit spending.

Some minor differences occur when it comes to the question of why banks do not expand unlimited credit if they can. While Wicksell believes that the interbank-market debt of banks expanding their loan books relatively faster than other banks should stop further bank loan creation, Le Bourva agrees with Kalecki and sees rising risk as the major factor. In Wray (2012), it is creditworthiness and access to reserves at low costs that limit the extension of loans.

Dirk Ehnts & Nicolas Barberoux

Most mainstream economists seem to think the idea behind Modern Monetary Theory is something new that some wild heterodox economic cranks have come up with.

New? Cranks? Reading one of the founders of neoclassical economics, Knut Wicksell, and what he writes in 1898 on ‘pure credit systems’ in Interest and Prices (Geldzins und Güterpreise) soon makes the delusion go away:   Read more…

Unequal wealth of nations

from David Ruccio

global wealth

The premise and promise of capitalism, going back to Adam Smith, have been that global wealth would increase and serve as a benefit to all of humanity.* But the experience of recent decades has challenged those claims: while global wealth has indeed grown, most of the increase has been captured by a small group at the top. The result is that an obscenely unequal distribution of the world’s wealth has become even more unequal—and, if business as usual continues, it will turn out to be even more grotesquely unequal in the decades ahead.  Read more…

“Health expenditure”

June 3, 2018 12 comments

Image result for health spending by country


Read more…


June 3, 2018 1 comment

from Lars Syll

Olivier Blanchard’s intellectual path, exploring different avenues – sometimes non-linear, sometimes even contradictory – can be considered as the personification of the controversial​ evolution of mainstream macroeconomic research during the last three decades …

9781292160504Assessing this complex intellectual path, nevertheless, also helps to understand why Blanchard’s analyses are ultimately limited by the mainstream framework, and by the role he decided to play in its defense. The primary limitation of the mainstream analysis, in our view, concerns the neoclassical reliance on price movements as leading the economy towards an optimal use of the available amount of labor and other productive resources. This reliance is also apparent in the old IS–LM diagram, advocated by Krugman and other members of the mainstream and that Blanchard readmits at least in the educational field …

This is a typical feature of almost all of the latest evolutions in Blanchard’s thought and more generally in current mainstream analysis: they fall within the branch of neoclassical doctrine that several years ago was sharply defined, and cricitized, as imperfectionist (Eatwell and Milgate 1982). According to this line of research, while in the best of all possible​ worlds the spontaneous movement of market prices would bring the economy towards a neoclassical competitive general equilibrium, actual markets are inhibited from fulfilling this task by the presence of ‘frictions’, ‘rigidities’, ‘asymmetric information’ or ‘incorrect expectations’ concerning future movements of prices. In fact, the critique of the neoclassical theory of capital has shown that even if all ‘market imperfections’ were removed, there would be no guarantee of achieving a full employment equilibrium simply through spontaneous price movements. In the case of the IS–LM model, for example, the problem concerns not only adjustments in price expectations but also the impossibility of proving the existence of an inverse relationship between the interest rate and investment. The non-existence of this relation, among other things, also causes a sense of perplexity concerning the confidence that Blanchard and other mainstream scholars continue to place in the ability of monetary policy to ensure convergence towards full employment.

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‘Free EU movement of workers’: new rules. But we need better economic policies.

June 2, 2018 9 comments

Fig 1

Inter-EU flows of ‘labour’ have dramatically increased (figure 1, figure 2), which leads to problems in sending as well as receiving countries. New EU legislation tries to restrict the extent to which entrants can be used to circumvent existing labour laws to unfairly undercutting labour in the receiving countries (and ‘fairness’ is as fundamental an incentive to people working as their wage). This legislation is welcome. But it is too late. Or is it ‘too little’? Can sending countries afford to lose up to 15% of their active labour force in a few years? Can receiving countries deal with the influx? Aside – this is not just about the EU. Albania has a population of about 2,9 million people. About 500.000 of these seem to be residing in Italy alone… Read more…

International Financial Architecture: Part II

from Asad Zaman

This is the second lecture on Understanding the Rise and Fall of the Gold Standard — shortlink: — we start with a  Summary of First Lecture 

The first lecture discusses the Keynesian theory that the exact level of money in an economy is critically important – too little leads to recessions, while too much leads to inflations. Furthermore, domestic business cycles, and international financial crises are caused by pro-cyclical behavior of current artificial systems of money creation and international trade. Standard macro theories make it impossible to understand the economy because they assert that money is neutral, and does not affect the real economy – exactly the opposite of the Keynesian idea that the quantity of money is all important. Standard macro model currently in use throughout the world have no explicit role of money, banks, and credit, even though these factors are of central importance in understanding the world. Once we understand the vital role and function of money within an economy, it becomes possible to understand historical events of the twentieth century – whereas this is impossible using conventional macro theories. The first lecture summarizes how the colonial system came into being, and the monetary arrangement for a hard currency at the core and soft currencies in the periphery. This system of fiat currencies works fine within one system of colonies, where the value of money is decreed by sovereign fiat. For trading between different countries, the gold backed currencies were used. As European countries prospered by exploiting resources throughout the globe within their colonies, inter-European trade increased. The optimal quantity of money required for the domestic economy is not the same as that required for stable international exchange rates. The pro-cyclical money creation which is characteristic of the system creates cycles, and large cycles lead to crises on a routine basis. World War I was partly caused by the breakdown of the colonial trading system due to the end of expansion possibilities after the completion of the conquest of the globe. Efforts to restore the gold standard after World War I failed. The second part of the lecture discusses the post World War I history, with reference to the international financial architecture that emerged in the post-Gold era after World War I.  read more

For-profit schools corrupt educational systems — lessons from Sweden

June 1, 2018 10 comments

from Lars Syll

Neoliberals and libertarians have always provided a lot of ideologically founded ideas and ‘theories’ to underpin their Panglossian view on markets. But when they are tested against the ​reality they usually turn out to be wrong. The promised results are simply not to be found. And that goes for for-profit schools too.  Read more…

Walmart’s gamble and what it means for India

June 1, 2018 1 comment

from C. P. Chandrasekhar

Much of the writing on Walmart’s purchase of a dominant 77 per cent stake in Flipkart, touted for long as India’s answer to Amazon, is focused on its size. At $16 billion, of which $14 billion goes to buy up the stakes of investors such as SoftBank from Japan and Naspers from South Africa, it is reportedly the biggest acquisition in the global e-commerce area, and way larger than $3.3 billion that Walmart paid for US web retailer in a deal considered the largest purchase of a US e-commerce startup. With some existing shareholders exiting, Walmart now shares ownership with co-founder Binny Bansal, Tencent, Tiger Global and Microsoft. The size of the acquisition, and Walmart’s keenness to acquire Flipkart it reflected, is seen as indicative of India’s importance to the world economy, and not just to international capital. What is missed in this perspective is the impact that this kind of transition has for Indian-owned business, which is the instrument through which India can be seen as participating meaningfully in the global capitalist economy.

The reason why Walmart is interested in the acquisition of Flipkart, at a price which most observers feel implies an unwarranted premium and valuation, is clear. The company that had dominated the brick-and-mortar retailing business in the United States for long has, as in the case of many other players from the ‘old economy’, not been able to keep pace with the disruption that technology has caused. As the share of aggregate sales through online retail creeps up in the US, the company has lost market share to Amazon since its foray into the e-commerce realm has not been too successful.  Read more…

Italy — shows why the euro has to be abandoned if Europe is to be saved

May 31, 2018 12 comments

from Lars Syll

ita ger 10y spreadInvestors had until recently been widely expected the European Central Bank to signal at its next meeting in two weeks’ time that it would wind down QE later in the year. Now, questions are growing about how feasible it will be to withdraw the ECB’s buying power at a time when investors are already driving Italian debt costs higher. Nearly half a decade ago, the Greek debt crisis turned into a crunch point for the bloc as a whole. The sheer scale of both the Italian economy and its bond market make it much more of a systemic challenge to the bloc than Greece was. Some commentators have dubbed Italy “too big to fail and too big to bail”. “On a number of levels — by challenging political cohesion, by raising public and private borrowing costs, and ultimately, through growing eurosystem imbalances — events in Italy could destabilise the euro area,” said Marchel Alexandrovich, senior European financial economist at Jefferies.

Financial Times

The euro has taken away the possibility for national governments to manage their economies in a meaningful way — and in Italy, just as in Greece a couple of years ago, the people have​ had to pay the true costs of its concomitant misguided austerity policies.  Read more…

Why Innovate?

May 31, 2018 39 comments

from Peter Radford

Every so often one of the numerous news feeds that fill my inbox contains a story that stops me short. In this era of Trump dominated news I have become numb to the corruption that he has brought in his wake and to the absurdity of his autocratic style with its contempt for the rule of law. Instead I focus on why it was that so many Americans were willing to elect someone so ill fitted to the job. The insecurities of the contemporary workplace offer a partial answer. So when I read Steve LeVine’s “The Future of Work” feed from Axios recently, not only did it stop me short, it gave additional insight into that electoral conundrum.

Not that I was reading anything particularly new. Sadly the there was no news. What struck me, however, was the brazen attitude and expression of the CEO’s quoted. LeVine didn’t give us his source, I assume it was some conference or other, so I am simply quoting his article verbatim before I comment:  Read more…

Is CORE a pluralist economics curriculum?

May 31, 2018 4 comments

from Ioana Negru

Core (the acronym for Curriculum Open Access Resources in Economics) is a project led by professor Wendy Carlin from UCL, UK, that aims to improve the content and delivery of the economics curriculum around the world. Other remarkable economists have been and are part of this project such as Diane Coyle and Samuel Bowles.

According to the website of the project, CORE is:

“a) a global community of learners, teachers and researchers;

  1. b) a problem- motivated and interactive way to learn economics;
  2. c) bringing recent developments into the classroom;
  3. d) giving everyone the tools to understand the economics of the world around   them”.

As Mearman et al (2016: 5) explain: “CORE is a large undergraduate year one course called ‘The Economy’, which itself comprises nineteen modules on a range of topics. CORE is neither a Massive Online Course (MOOC) nor a course in the traditional sense, but an online resource, a frame to be elaborated”. According to the same authors, CORE represents both an ‘improvement’ and a ‘missed opportunity’. On the one hand, CORE employs historical and experimental data and draws on the history of economics or new branches of economics such as theory of games, covering thus a variety of topics. On the other hand, the course is rife with concepts and elements unsupported by evidence, such as utility maximization that constitute fundamental components of CORE (Mearman et al 2016).

The reactions to CORE, both from the media and the academic world, have been mixed.  Read more

Modern division of labour …

May 30, 2018 5 comments

from Lars Syll


Marx ratio

from David Ruccio

First there was the Great Gatsby curve. Then there was the Proust index. Now, thanks to Neil Irwin, we have the Marx ratio.

Each, in their different way, attempts to capture the ravages of contemporary capitalism. But the Marx ratio is a bit different. It was published in the New York Times. Its aim is to capture one of the underlying determinants of the obscene levels of inequality in the United States today—not class mobility or the number of years of national income growth lost to the global financial crash. And, of course, it takes its name from that ruthless nineteenth-century critic of mainstream economics and capitalism itself.


Now, to be clear, there are lots of ratios than can be found in Marx’s critique of political economy—for example, the rate of exploitation, the intensity of labor, the technical productivity of labor, the exchange-value per unit use-value, and the value rate of profit (as illustrated above in a fragment from one of my class handouts)—and the ratio Irwin presents is not one of them.

But that doesn’t make Irwin’s ratio wrong, or uninteresting. On the contrary.  Read more…

US student loan debt explosion

May 29, 2018 16 comments

Behavioural economics — still too devoted to ideas it is supposedly attacking

May 29, 2018 50 comments

from Lars Syll

Behavioral economics is still ‘in a relationship’ with orthodox economics and, in a relationship, one makes compromises …

maxresdefaultWe all know how stubborn the other side in this relationship is: standard economics will always ‘rationalize’ behavior wherever it can and will only recognize ‘irrationality’ when there is clear and convincing evidence of it. Understandably, behavioral economics devoted itself to finding this evidence – the “anomalies”, in the words of Thaler (1988), which are “difficult to “rationalize”. And surely, it has done an impressive job in finding them.

However, accepting this burden of proof remains problematic, for several reasons. Firstly, it will lead to false positives; ‘rationalizing’ behavior where rationality might, in reality, be absent. What’s more, in doing this, the field will repeatedly lend credence to the flawed concept of the homo economicus. Secondly, it will lead to false negatives; failing to observe ‘irrationality’ (like altruism) when clear and convincing evidence of it is lacking, or perhaps even impossible to produce, thereby ignoring the complexity of human motives …

All of the above is not meant to downplay the achievements of behavioral economics … It is to argue that behavioral economics should not let its “symbiotic relationship” with standard economics limit its own ambitions. This relationship “works well as long as small changes to standard assumptions are made”. We should not fear bigger changes.

Alexander Beunder

Although discounting empirical evidence cannot be the right way to solve economic issues, there are still, in my opinion, a couple of weighty reasons why we perhaps shouldn’t be too excited about the so-called ’empirical revolution’ that behavioural economics has brought about in mainstream economics.  Read more…

President Mattarella of Italy: from moral drift to tactical blunder

May 28, 2018 2 comments

By Yanis Varoufakis.  Source

I concede that there are issues over which I would welcome the Italian President’s use of constitutional powers that (in my humble opinion) he should not have.(*)  One such issue is the outrageous policy of the Lega and the promise of its leader, Mr Salvini, to expel five hundred thousand migrants from Italy. Had President Mattarella refused Mr Salvini the post of Interior Minister, on the basis that he rejects such a monstrous project, I would be compelled to support him. But, no, Mr Mattarella had no such qualms. Not even for a moment did he consider vetoing the formation of a 5S-Lega government on the basis that there is no place in a European country for scenes involving security forces rounding up hundreds of thousands of people, caging them, and forcing them into trains, buses and ferries before expelling them goodness knows where. Read more…

Doubting the benefits of trade: a somewhat fuzzy discussion.

May 28, 2018 23 comments

There is a somewhat fuzzy discussion going on about exports, imports and the economy: are (net) exports (imports) good for Australia a country, or not. Look here. And here. It is a complicated question, which made Steve Keen state: “I don’t want to see, and obviously won’t tolerate, further arguments about exports as costs and imports as benefits. I want to see a detailed double-entry bookkeeping exploration of the monetary (and capacity-utilization/real GDP/physical) implications of trade surpluses and deficits“. The good news: such systems are available. No need to invent them. ‘Supply and use’ tables which also keep track of physical flows are alive and kicking, see graph, source here. Same for input-output models, here a bit on the influence of exports on German employment.


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