Remarks given at the Harvard Club UK Southwark Cathedral dinner, London.
from Peter Radford
I am not sure I understand the point of Alexander Kaufman’s column in the Huffington Post. In it he takes Paul Krugman to task for being repetitive and talking about just there things: austerity is bad, inflation fears are overblown, and Keynes was right.
Whether or not we have disagreements with Krugman – and I know many of you do – those disagreements pale in comparison with those we all have with the arguments of the people Krugman is targeting in his columns. Yes Krugman can be annoying with his emphasis on his version of the Hicks version of Keynes. But if it serves to get a vital message across to a public largely unaware of the internecine struggles within economics, so what? I don’t care. Nor should you.
And if he sounds repetitive, then we should ponder the reason: far too many policy makers are still stubbornly clinging to disproven theories. Yes, disproven. So are far too many academics. Read more…
For years, trade and justice activists from across North America have proposed renegotiating the North American Free Trade Agreement to address some of the deal’s most damaging features. Top priorities would include removing the anti-democratic investor-state dispute settlement (ISDS) provisions of Chapter 11, linking trade benefits to genuine protections for human and labour rights (crucial given the deteriorating democratic situation in Mexico, with mass disappearances and regular suppression of journalists and organizers), and establishing a continent-wide strategy to fairly allocate investment and production in key industries like auto manufacturing (thus curtailing the race-to-the-bottom the that currently shapes those patterns).
We were always told that renegotiating NAFTA was a pipe dream: it would not be possible to open the text and get all three countries on board with reforms, no matter how legitimate the concerns. So imagine our collective surprise to see that the entire NAFTA is suddenly now being renegotiated on a wholesale basis – but through a back-door method. The Trans-Pacific Partnership talks, as usual behind closed doors, have jumped right into the deep end, opening up the entire text of NAFTA to wholesale reform and renegotiation. Read more…
Looking at neoclassical macro-models through the lens of economic statistics. Today part 8: financial markets. On 21 september Mark Carney (governor of the Bank of England), held a speech for Harvardians in London, about financial markets. It totally fits in this series even though it´s not too explicit about statistics. These are, however, used in a welcome, inductive way. When they do not fit the models the statistical data are not ignored but the models are questioned. See at the end for part 1-7.
Three Truths for Finance – speech by Mark Carney21 September 2015“All England is an American shrine, full of rich records of the makers of their nation.” 1None more so than glorious St Saviour’s – Southwark Cathedral – a few minutes south of the river from here.
from David Wessel in the Wall Street Journal
The typical man with a full-time job–the one at the statistical middle of the middle–earned $50,383 last year, the Census Bureau reported this week.
The typical man with a full-time job in 1973 earned $53,294, measured in 2014 dollars to adjust for inflation.
You read that right: The median male worker who was employed year-round and full time earned less in 2014 than a similarly situated worker earned four decades ago. And those are the ones who had jobs.
This one fact, tucked in Table A-4 of the Census Bureau’s annual report on income, is both a symptom of an economy that isn’t delivering for many ordinary Americans and at least one reason for the dissatisfaction, anger, and distrust that voters are displaying in the 2016 presidential campaign. read more
from Lars Syll
Internal coherence is one way of adjudicating among theories, but so is correspondence to everyday life. Too much realism may kill analysis, but too little realism is unscientific. If theoretical coherence alone were all that mattered, then the only constraint on theoretical exercises would be the human imagination. Interesting
puzzles would replace pragmatic solutions to problems encountered in the world — arguably, an accurate characterization of most contemporary economic theory. Economists must steer a course between (allegedly) pure description and the mere recording of events, on the one side, and self-indulgent mental gymnastics on the other …
Parsimony won out over thoroughness … By myopically pursuing only the formal aspects of the discipline, economics was reduced to its present state, in which we continually know more and more about less and less.
Mainstream economic theory today is in the story-telling business whereby economic theorists create make-believe analogue models of the target system – usually conceived as the real economic system. Read more…
from: Frances Coppola (guest post)
Editor´s introduction: a pivotal discussion. The banking sector has been at the center of macro-economic problems. Not once, but again and again. And again. What to do? Some people argue that we should restrict bank lending to ´primary´ markets which produce new ´GDP´ goods and services, to prevent credit fuelled bubbles on ´secondary´ markets, like the market for existing dwellings or the art and stock market. Frances Coppola warns for a simplified view of the primary and secondary market: there are many and complicated micro-economic linkages which should not be ignored. I hope to publish some other guest posts about this very important problem in the near future. M.K.
GDP transactions in secondary markets
There is a widespread view that much bank lending is unproductive, i.e. does not raise GDP – or if it does, it does so in an unsustainable way by inflating asset prices or increasing inflation, rather than by increasing production. Many proposals for bank reform therefore envisage restricting banks to “productive” lending, by which usually seems to be meant business finance and short-term consumer credit. Financial transactions on secondary markets, and the purchase of second-hand property, are regarded as unproductive.
This appears attractive. Banks do indeed lend far more for property purchase than they do for business finance, and most of the properties purchased are second-hand. So, the thinking goes, if we could eliminate unproductive housing finance, banks would lend more to businesses, and that would mean higher GDP in the longer term.
But I’m afraid there is a serious fallacy here Read more…
from Dean Baker
Paul Krugman rightly criticizes the proponents of austerity for claiming Spain as a success story. As Krugman points out, its economy is growing, but it has a long way to go to make up the ground lost in its downturn.
He makes this point in a graph showing log GDP, but this picture is actually too generous. We should care about GDP per capita, and here the story is even worse.
from David Ruccio
Ray Fisman and Daniel Markovits suggest that we’re seeing right now, with the insurgent campaigns of Donald Trump and Bernie Sanders and elite hopes that they will just fade away, are “early skirmishes in a coming class war.”
Why? Because their research (along with coauthors Pamela Jakiela and Shachar Kariv, just published in Science) revealed stark differences between attitudes toward economic justice between ordinary Americans and those at the top. Basically, the elites (both intermediate and extreme) are much more likely to be selfish as their compatriots in general. What’s more, elite Americans show a far greater commitment to efficiency over equality than ordinary Americans. Read more…
from Lars Syll
Whereas increasing the difference between a model and its target system may have the advantage that the model becomes easier to study, studying a model is ultimately aimed at learning something about the target system. Therefore, additional approximations come with the cost of making the correspondence between model and target system less straight- forward. Ultimately, this makes the interpretation of results on the model in terms of the target system more problematic. We should keep in mind the advice of Whitehead: “Seek simplicity and distrust it.”
A ‘good model’ is to be understood as a model that achieves an equilibrium between being useful and not being too wrong. The usefulness of a model is clearly context-dependent; it may involve a combination of desired features such as being understandable (for students, researchers, or others), achieving computational tractability, and other criteria. ‘Not being too wrong’ is to be understood as ‘not being too different from reality’.
An interesting article underlining the fact that all empirical sciences use simplifying or unrealistic assumptions in their modeling activities, and that that is not the issue – as long as the assumptions made are not unrealistic in the wrong way or for the wrong reasons. Read more…
There has been quite a spat about the Fed not raising the interest rate, which inspired me to look at Eurozone price data: are there any developments which indicate that higher inflation may be just around the corner and a Eurozone rate hike is imminent?
Links. ´Huh?´!, the loneliness of mainstream economics, the draft, madmen in Brussels and job growth and transfers to Euro banks
- Dingemanse, M., Torreira, F., & Enfield, N. J. say they will hold the shortest speech ever when they receive their Ignoble price for the article ´Is “Huh?” a universal word? Conversational infrastructure and the convergent evolution of linguistic items. PLOS ONE, 2013, 8(11): e78273. (pdf)
- According to ´thank you´s´ in books titled ´Heterodox macroeconomics´ and this website Arjun Jayadev and Josh Mason can be called ´heterodox economists´. But are they? Or, to rephrase this question in an awkward way, are ´heterodox´ economists really the heterodox ones? Their article `Fisher Dynamics” in US Household Debt, 1929-2011.” American Economic Journal: Macroeconomics, 6(3): 214-34.is about the influence of debt service on net macro indebtedness of households. Interestingly, the Bank of International Settlements publishes comparable research, look here and here., using comparable data and methods to answer somewhat comparable questions. It increasingly looks as if ´mainstream´ economics with its blind eye for debt )which is opening a little, but only a little) is becoming more and more isolated and ´heterodox´.
- There is a backlash against neoliberal policies. One of the signs of this is the reintroduction of the draft in LIthuania. Yes, the abolishment of the draft in many countries in the eighties was a victory for neoliberal policies. Extend the labour market to the army! Look here for an article of J.D. Singleton about the pivotal role of (of course) MIlton Friedman in the debate about abolishing the draft Read more…
from David Ruccio
The United States is more than six years into the officially designated and much-vaunted economic recovery from the Great Recession. But most Americans wouldn’t know it. Read more…
from Dean Baker
Seven years ago this week, the world’s financial system was teetering on the brink of collapse. The bankruptcy of Lehman Brothers had completely shaken confidence in the banking industry. First, no one could trust the banks books; no one knew how much bad debt banks were concealing. Second, the too big to fail insurance seemed not to exist. After all, if Lehman was not too big to fail, who was?
At that point, policy could have gone two directions. One direction would have been to take advantage of this moment and let the market work its magic. The bloated financial structure that had developed over the last three decades was collapsing from its own excesses. The industry would have paid the price for the issuing and packaging of hundreds of billions of dollars of fraudulent loans, as they finally ran out of suckers to buy the junk. Read more…
from Lars Syll
In most aspects of their lives humans must plan forwards. They take decisions today that affect their future in complex interactions with the decisions of others. When taking such decisions, the available information is only ever a subset of the universe of past and present information, as no individual or group of individuals can be aware of all the relevant information. Hence, views or expectations about the future, relevant for their decisions, use a partial information set, formally expressed as a conditional expectation given the available information.
Moreover, all such views are predicated on there being no un-anticipated future changes in the environment pertinent to the decision. This is formally captured in the concept of ‘stationarity’. Without stationarity, good outcomes based on conditional expectations could not be achieved consistently. Fortunately, there are periods of stability when insights into the way that past events unfolded can assist in planning for the future.
from David Ruccio
We know that economic inequalities have been increasing in the United States for decades now. And there’s been no let-up since the economic recovery was officially declared in 2009.
And many of us believe the grotesque inequalities we’re seeing these days have a corrosive effect on U.S. society. Not only are the majority being left behind; everything from the public infrastructure to political discourse appears to be deteriorating because of the growing gap between a small group at the top and everyone else. Read more…
Austerity-demographics. The unmatched decline of the population from 15 to 64 in the Baltic countries
The elephant in the room: austerity-demographics (sizeable out migration in combination with as yet gentle but increasing rate of natural decline in countries with extremely high levels of post 2008 unemployment) exist. And are another reason why harsh austerity is self-defeating.
During the last six years unemployment in the Baltic countries (Latvia, Lithuania, Estonia) shows a consistent decline and, though still very high in Latvia and Lithuania, it is approaching the 5% level in Estonia (graph 1). Good! The pace of the decline is also much faster than for instance in Bulgaria and even Poland, which famously escaped the Great Financial Crisis by (1) unlike the Baltics not having a property bubble financed by a reckless inflow of foreign capital before 2008, (2) unlike the Baltics devaluating its currency in 2008 and (3) unlike the Baltics (which initially raised their interest rates…) aggressively lowering the policy rate of the central bank.
Is there a Baltic secret? Yes. Graph 2 shows that the Baltics knew an unmatched decline of the 15-64 population after 2008. Read more…
from Asad Zaman and the WEA Pedagogy Blog
Ever since its origins in industrialising England, the capitalist economic system has always been subject to crises. There are countless theories as to the causes, consequences, and possible remedies for these. Karl Marx was among the earliest and most famous critics of capitalism. He argued that the source of the wealth produced by capitalism was the labour of the workers. The capitalists use their power to make profits by exploiting workers, depriving them of their due shares of profits. Capitalismrequires growth to prosper, and this could only come by increasing exploitation. Crises would occur when workers would be oppressed beyond their limits. Eventually, these crises would destroy capitalism as the workers revolted against this unfair system.
Of course, these ideas are anathema to capitalists. During my own studies of economics in universities, a shallow caricature of Marxist economics was presented, only to be ridiculed and dismissed. Much later, I learned to my great surprise, that Marxist ideas are strongly supported by empirical evidence as well as standard capitalist economic theories. Capitalist theory argues that in free markets with perfect competition, both capital and labour earn according to their productivity, so that there is no exploitation. Textbooks pass silently over the fact that huge and increasing concentration of capital in a small number of hands makes free markets and perfect competition impossible. Textbooks also close their eyes to the reality of unemployment rates (currently at an amazingly high 23 per cent in the USA, if we include discouraged workers). Instead, neoclassical theories tell us that all workers will automatically find work in a dynamic free market economy, and blame unemployment on clumsy government interventions. read more
from Dean Baker
This week marks the 7th anniversary of the collapse of Lehman Brothers, the huge investment bank. This collapse set off the worldwide financial panic that brought Wall Street to its knees. The anniversary of this collapse, September 15th, is the day set aside to ridicule the people who warned of a second Great Depression (SGD) if the Treasury Department and the Federal Reserve Board didn’t rescue the Wall Street banks.
Just to recount the basic story, there is no doubt that without a government bailout most of the big Wall Street banks would have gone under. Citigroup and Bank of America were both effectively bankrupt and remained on life support with hundreds of billions of dollars of government subsidized loans well into 2010. The remaining investment banks, Merrill Lynch, Morgan Stanley, and Goldman Sachs were all facing bank runs. These would have been unstoppable without the helping hand of big government. Many other financial institutions also would have been brought down in the maelstrom, but these giants were for sure dead ducks at the time of the bailouts. Read more…
from Thomas Palley
August’s Employment Report showed the unemployment rate fell to 5.1 percent and creation of 173,000 new jobs. Predictably, the decline in the unemployment rate has triggered calls for higher interest rates from Wall Street Hawks on grounds that higher core inflation is just around the corner. That is the same call we heard when the unemployment rate was much higher, and it is the same call we heard in the past two business cycles.
Federal Reserve policymakers should ignore the Hawks and stop being afraid of tight labor markets. In a market economy, that is the way workers get a raise. There is no reason for the Fed to rock the boat and risk confiscating the raise working families have waited for so long. That is the message this Labor Day weekend.
Though the unemployment rate fell, headline job creation was actually below expectations. Moreover, private sector job creation was only 140,000, which is much weaker than recent months. Read more…
from Steve Keen Why China had to crash: Part 1
One thing my 28 years as a card-carrying economist have taught me is that conventional economic theory is the best guide to what is likely to happen in the economy.
Read whatever it advises or predicts, and then advise or expect the opposite. You (almost) can’t go wrong.
Nowhere is this more obvious than in its strident assurances that the value of shares is unaffected by the level of debt taken on, either by the firms themselves or by the speculators who have purchased them. This theory, known as the “Modigliani-Miller theorem”, asserted that since a debt-free company could be purchased by a highly levered speculator, or a debt-laden company could be purchased by a debt-free speculator, therefore (under the usual host of Neoclassical “simplifying assumptions”, which are better described as fantasies) the level of leverage of neither firm nor speculator had any impact on a firm’s value—and hence its share price. The sole determinant of the share price, it argued, was the rationally discounted value of the firm’s expected future cash flows. Read more…