Rats! History does repeat itself

February 10, 2015 3 comments

from Peter Radford

And clearly economists don’t learn from it.

Ponder this:

“It was all very well for the rich, who could raise all the credit they needed, to clamp rigid deflation and monetary orthodoxy on the economy … it was the little man who suffered, and demanded easy credit and financial unorthodoxy.”

That’s the voice of E. J. Hobsbawm in his book, “The Age of Revolution 1789 – 1848″, and he is talking about post Napoleonic Europe.

But how contemporary is that sentiment?

We are stuck in a similar situation. Our elite, both here and in Europe, is managing the economy  for its own ends. The disconnect with everyday folk is astonishing. The hubris and plain meanness of it all is equally astonishing.

Look at Greece: the attempt to impose a teutonic fiscal ‘discipline’ via stringent austerity has simply led to the debt that was the target of the policy becoming an even larger problem. It is an example of epic policy failure. The Greeks, for all their previous laxity and fiscal ineptitude, are to be applauded for calling for an end to the stupidity. Read more…

The current conflict is not between nations, but between classes (2 graphs)

February 9, 2015 7 comments

from David Ruccio

Most of the commentary on the ongoing euro crisis, especially the current Greek debt negotiations, has been couched in terms of a conflict between nations. This is particularly true of mainstream economists, whose nation-state-based models downplay or ignore class, even as the policies they advocate have tremendous class implications.

So, it’s fallen to—however ironically—financial strategist and professor of finance Michael Pettis to remind us the current conflict is not between nations, but between classes.

The whole piece, beginning with the French indemnity of 1871-73, is worth a careful read. But I want to focus here on what Pettis writes about the class conditions that led to and follow on from the current crisis.

First, Pettis makes the important point that the capital flows from north to south within the euro zone were based on important class changes within Germany (he uses his native Spain throughout as his example in the south but most of his analysis follows for Greece and other countries): Read more…

Debt Deflation in Greece: a textbook example.

February 8, 2015 3 comments


Diogenes, always ready to mock ‘social contrivances’ (to quote a famous Paul Samuelson definition of money), was kicked out of Sinope because he debased the currency. In Greece, at this moment, the opposite is happening: the price level is declining.   Read more…

Categories: Uncategorized

Links. The emerging markets merits of statehood, manufacturing, UK trade, Germany 1871-1873 vs. present day New York

February 8, 2015 Leave a comment

A) My latest from ‘De Vrije Fries’ (in Dutch). The state, the church and the price of land. Rents of clerical land in Frriesland, 1511-1543. Or: ‘pay for the dikes or for the ferryman’. After the Habsburgers bought (!) Friesland they started establishing a state. As a consequence, the area was pacified and coastal levees were improved while, even more important, the financing of these levees was, finally, improved and communalized. As a results, there was an end to the washing away of Friesland and land rents increased quite a bit, much more than can be explained by the sixteenth century price revolution. A tantalizing question:did the growth of a state (including an early transition to Roman law) enable/force people to transform into ‘burghers’ which, according to their increasingly detailed probate inventories, possessed quite a number of note books which enabled them to keep track of all kinds of ‘petty debts’, (Knibbe, 2007)? Did this give preponderance to the ‘economic motive’, as opposed to the ‘honour’ motive of the medieval Friesian clan society (in the fifteenth century, the only brick buildings in Friesland were churches and small castles. After about 1530, many of these small castles were broken down and a rapidly increasing number of farms were at least partly made of bricks)?  Read more…

Categories: Uncategorized

Finding equilibrium

February 8, 2015 8 comments

from Lars Syll

book-equilibrum-till-duppeFinding Equilibrium explores the post–World War II transformation of economics by constructing a history of the proof of its central dogma—that a competitive market economy may possess a set of equilibrium prices. The model economy for which the theorem could be proved was mapped out in 1954 by Kenneth Arrow and Gerard Debreu collaboratively, and by Lionel McKenzie separately, and would become widely known as the “Arrow-Debreu Model.” While Arrow and Debreu would later go on to win separate Nobel prizes in economics, McKenzie would never receive it. Till Düppe and E. Roy Weintraub explore the lives and work of these economists and the issues of scientific credit against the extraordinary backdrop of overlapping research communities and an economics discipline that was shifting dramatically to mathematical modes of expression.

Based on recently opened archives, Finding Equilibrium shows the complex interplay between each man’s personal life and work, and examines compelling ideas about scientific credit, publication, regard for different research institutions, and the awarding of Nobel prizes. Instead of asking whether recognition was rightly or wrongly given, and who were the heroes or villains, the book considers attitudes toward intellectual credit and strategies to gain it vis-à-vis the communities that grant it.

Telling the story behind the proof of the central theorem in economics, Finding Equilibrium sheds light on the changing nature of the scientific community and the critical connections between the personal and public rewards of scientific work.

Although I find Düppe’s and Weintraub’s book a well-researched and interesting reading , I still can’t get rid of the feeling that all these efforts at modeling a world full of agents behaving as economists — “often wrong, but never uncertain” — and still not being able to show that the system under reasonable assumptions converges to equilibrium (or simply assume the problem away), is a gross misallocation of intellectual resources and time.  Read more…

Categories: New vs. Old Paradigm

Should senior economic advisors feel they can loose their job to make them do their homework?

February 7, 2015 3 comments

I’m afraid I’ve got to react to Antonio Fatas, who shows that (A) Spanish productivity increased relatively fast after 2008 while (B) German and UK and Dutch productivity actually declined. This explains a lot of the differences in unemployment in these countries: when GDP declines with about 6% and GDP per worker increases with 10% employment (measured in workers) will decline by 16% (as happened in Spain). When (as happened in the UK) GDP declines with 2% but GDP per worker declines with 5% – employment will actually increase. The regular reader of this blog is aware of this. It’s good that Fatas points this out.

But that’s not why I react. In a twitter reaction, @miotei, “Senior Analyst, International Political Economy, Elcano Royal Institute. Author of ‘The Euro, the Dollar and the Global Financial Crisis‘”, states: ‘Yes, sadly Spanish workers seem to work a lot harder when they feel they will lose their job“.

Sadly, @miotei, who has a job as an economic advisor with serious responsibilities and can make people lose their job when he gives the wrong advise, clearly did not do his homework and should have worked a lot harder. The large arithmetical increase of Spanish productivity is NOT caused by ‘reforms’ but by the epic decline of low productivity construction, which arithmetically led to a rise of average productivity of the entire economy. Look here. A more generalized critique of using macro productivity data as indicators of competitivety can be found here. Macro-economics is to an extent the science of weighted averages of weighted averages which is pretty compicated complicated as the weights shift all the time. @miotei should have known this. He didn’t. Should he loose his job? Or might it be better when he feels that he, a spanish economist, has a mission: working to restore Spanish prosperity and employment by giving sound advises aimed at employing people and the journey to an economy were Spanish people are treated with dignity by at least senior economic analysts?

Categories: Uncategorized

Greece: ECB kicks Syriza in the face; Syriza turns the other cheek

February 7, 2015 7 comments

from Mark Weisbrot

On Wednesday the European Central Bank (ECB) announced that it would no longer accept Greek government bonds and government-guaranteed debt as collateral. Although Greece would still be eligible for other, emergency lending from the Central Bank, the immediate effect of the announcement was to raise Greek borrowing costs and squeeze its banks, and to increase financial market instability within Greece.

We should be clear about what this means.  The ECB’s move was completely unnecessary, and it was done some weeks before any decision had to be made.  It looks very much like a deliberate attempt to undermine the new government.  They are trying to force the government to abandon its promises to the Greek electorate, and to follow the IMF program that its predecessors signed on to. Read more…

Categories: Greece

Syriza’s win is the beginning of the end for the Eurozone’s long nightmare

February 6, 2015 13 comments

from Mark Weisbrot

Everyone seems to agree that Syriza’s big victory in Greece is a milestone for Europe, which has been plagued by mass unemployment and a failure to really recover from the financial crisis and world recession of 2008-09.  But what kind of a milestone will it be? We can get some ideas from focusing on a few key issues, especially economic policy, which remain surrounded by much confusion in the public debate.

Alexis Tsipras himself, the charismatic 40-year old leader of Syriza who has become the country’s youngest prime minister in 150 years, declared on Sunday that “Democracy will return to Greece.” This was mostly overlooked as mere political rhetoric, but it was actually a concise political statement that goes to the core of not only Greece’s but the eurozone’s main problem. All we need to do is compare the recovery of the United States – which was the epicenter of the earthquake that shook the world economy in 2008 and 2009 – and that of Europe, to see what a difference democracy makes. Read more…

Categories: Uncategorized

Money in Greece. Five graphs and some problems.

February 6, 2015 Leave a comment

Straight from the Bank of Greece: some data on Greek money. Can there be a bank run? How much money do the banks owe the public? How about securitization? Some highlights:

1) The Greek were, before 2008, quite thrifty.

2) By far the larger amount of money is owned by households, largely in the shape of time deposits. Which means that these households have a problem when the unaccountable civil servants of the ECB halt ELA (Emergency Liquidity Assistance). The households will often have to pay a haircut when they withdraw their money.

3) The government has, at this moment, a sizeable amount of money in the banks. It is remarkable that so much government money is in private banks. It means that the government, pressed by the Troika, did not only fund these banks with billions upon billions of direct aid but also funded them with deposits. Will the government have to pay a haircut, too, when the ECB halts ELA?

4. Recognition by the bankers and the accountants that money owned by (probably) shadow banks is money, too, led to a 30 billion increase in the measured amount of money. Mind that these are debts owed by the normal banks to the shadow banks. In a sense the 25 billion or so of government aid to the bank served to enables the banks to honour the deposit debts they owed to the shadow banks.

. Read more…

Categories: Uncategorized

Greece needs an exit option

February 5, 2015 9 comments

from Dean Baker

Every fan of the market knows the importance of exit. If your breakfast cereal is too bland, you can buy a different brand of cereal. If your barber charges too much, you can look for a new barber who will charge less. The option to leave is crucial since it forces the cereal producer and the barber to try to please their customers in order to keep them.

The same logic applies to Greece’s position in the euro. The country’s newly elected Syriza-led government intends to press the European Union (EU) for concessions that will allow it to restart its economy. The policies that have been imposed by the EU on Greece since the crisis could win a Nobel Prize for economic mismanagement.

Since the pre-recession peak in 2007, the Greek economy has contracted by more than 23 percent. By comparison, in the Great Depression the U.S. economy bottomed out in 1933 at 26 percent below the 1929 GDP level. However the next year the economy grew by 10 percent and by 1936 it had already made back all the ground it lost. If Greece sustains its 2014 growth rate it will return to its 2007 level of output just before 2050. If the U.S. economy had taken the same hit as Greece, GDP would be lower by more than $4 trillion, implying a loss of annual output of more than $13,000 per person. Read more…

Categories: Uncategorized

Dear Greek, take the Euronotes and run

February 5, 2015 3 comments

Update (20:56 CET): Rumor has it that the ECB has 59,5 billion in Emergency Liquidity Assitance available. But, to be credible, it should be willing to provide backing for every single Greek deposit Euro.

The ECB is preparing a ‘Cyprus’ for Greece. So, dear Greek, exchange your deposit money for cash.

1) According to the ECB the European system of central banks still guarantees the 1:1 exchange rate of Greek bank deposit money and Cash. But the Eurosystem is preparing for a ‘Cyprus scenario’, i.e. it wants to have the possibility to renege on its promise of a guaranteed 1:1 exchange rate between Euro notes and Greek deposit money: the first line of funding of Greek banks has been cut loose  (emphasis added)

4 February 2015 – Eligibility of Greek bonds used as collateral in Eurosystem monetary policy operations

  • ECB’s Governing Council lifts current waiver of minimum credit rating requirements for marketable instruments issued or guaranteed by the Hellenic Republic
  • Suspension is in line with existing Eurosystem rules, since it is currently not possible to assume a successful conclusion of the programme review
  • Suspension has no impact on counterparty status of Greek financial institutions
  • Liquidity needs of affected Eurosystem counterparties can be satisfied by the relevant national central bank, in line with Eurosystem rules” 

Read more…

Categories: Uncategorized

Decomposing the top decile US income share into 3 groups, 1913-2013

February 4, 2015 Leave a comment

from David Ruccio

top shares

The share of total income captured by the top 1 percent actually shrunk in 2013, falling from 21.22 percent to 18.98.

But, as Emmanuel Saez [pdf] explains, that decline is probably a statistical anomaly: Read more…

Categories: income inequality

Greg Mankiw on loanable funds — so wrong, so wrong

February 3, 2015 2 comments

from Lars Syll

The loanable funds theory is in many regards nothing but an approach where the ruling rate of interest in society is — pure and simple — conceived as nothing else than the price of loans or credit, determined by supply and demand — as Bertil Ohlin put it — “in the same way as the price of eggs and strawberries on a village market.”

loanIn the traditional loanable funds theory — as presented in mainstream macroeconomics textbooks like Greg Mankiw’s — the amount of loans and credit available for financing investment is constrained by how much saving is available. Saving is the supply of loanable funds, investment is the demand for loanable funds and assumed to be negatively related to the interest rate. Lowering households’ consumption means increasing savings that via a lower interest.

From a more Post-Keynesian-Minskyite point of view the problems with the standard presentation and formalization of the loanable funds theory by Greg Mankiw and other “New Keynesian” macroeconomists  are quite obvious:

1 As already noticed by James Meade decades ago, the causal story told to explicate the accounting identities used gives the picture of “a dog called saving wagged its tail labelled investment.” In Keynes’s view — and later over and over again confirmed by empirical research — it’s not so much the interest rate at which firms can borrow that causally determines the amount of investment undertaken, but rather their internal funds, profit expectations and capacity utilization. Read more…

Categories: New vs. Old Paradigm

Links. Ireland, Unemployment does exist, Greek taxes, Uber stinks, the IMF gets data driven

February 2, 2015 3 comments

1) Frances Coppola: “The IMF has just produced a review of the Irish financial crisis and subsequent IMF/EU programme which concludes that the Irish financial crisis was badly handled by all parties, and especially by the institutions involved – the so-called Troika, made up of the European Commission, the ECB, and the IMF itself….We often hear it said that Greece should never have joined the Euro. But no-one to my knowledge has ever said that Ireland’s joining was a mistake. Yet it was. For Ireland, Euro membership was an unmitigated disaster, right from the start. “

2) Roger Farmer (slightly scrambled):

The twin hallmarks of the DSGE agenda are the assumptions of continuous labour market clearing and rational expectations. These assumptions were made in the first RBC models and were incorporated into almost every DSGE model since. That includes almost all of the work on New Keynesian economics that predates the 2008 crisis. … households are still assumed to be able to find as much employment as they would like at existing wages and prices. In New Keynesian DSGE models, just as in RBC models, there is no involuntary unemployment … In both classical and New Keynesian theories, employment variation over the business cycle occurs through intertemporal substitution, by rational forward-looking households, of leisure today for leisure tomorrow. In both theories, households can work as many hours as they choose and the demand and supply of labour are continuously equated by adjustments of the money wage. The facts contradict this assumption. Read more…

Categories: Uncategorized

Will the ECB push Europe over the deflation cliff?

February 2, 2015 5 comments


Technical detail: ’72 per. Zw. Gem’ is ’72 month running average’

Inflation in the Euro Area is getting lower and lower – the Euro Area is only one shock away from ‘ugly’ deflation, a persistent and self reinforcing decline of incomes and expenditure which, for one thing, disables debtors to pay back their debt. Greece is already experiencing considerable income deflation – thanks of course to persistent deflationary policies aimed at cutting wages, pensions and employment. And we’re all aware of the consequences… I’m not a believer in the omnipotence of monetary policy. But a Grexit might pull the Eurozone over the deflation edge into unpredictable financial turmoil – and the ECB is totally able to prevent a Grexit. Read more…

Categories: Uncategorized

Scholars’ Appeal for Greece – please sign

February 2, 2015 132 comments

from Edward Fullbrook

I have been asked to circulate this appeal.  You may sign it by leaving your name and if appropriate your affiliation as a comment to this post.  Please do not comment further on this post as it will make the collection of the signatures more difficult.

Scholars’ Appeal for Greece.

We the undersigned call on the governments of Europe, the European
Commission, the European Central Bank and the IMF to respect the decision
of the Greek people to choose a new course and to  engage the new
government of Greece in good faith negotiations to resolve the Greek debt.

The government of Greece is correct to insist on new policies because the
previous policies have failed.  They have not brought economic recovery.
They have not brought financial stability.  They have not brought jobs or
foreign investments. They have stressed and damaged Greek society and
weakened Greek institutions. There is therefore no value in that approach
and no progress to preserve. We urge Greece’s European partners to accept
this reality, without which the new government would never have been
elected.  Read more…

Categories: Uncategorized

A back of the envelope calculation of the Greek output gap: very large.

February 1, 2015 5 comments

Tourism in Greece is did very well, in 2014. I’ve seen growth estimates of between 13 and 22%, let’s stick to this 17%. As tourism is Greece most important economic sector, this is massive.To an extent, this double digit growth was a recovery from the deep slump in 2013, caused by the Troika induced panic about the Greek monetary system. But numbers of tourists have reached record levels – part of the increase is genuine growth. However – even double digit growth of the main sector of the economy did not get Greece out of the economic doldrums. Employment went up with 74.000 people (October 2013-October 2014) while unemployment declined with 104.000 people (also because of a considerable decline of the total labour force) but the unemployment rate is still 24% rate, which (as people flow in and out of unemployment) means that as much as 40% of the entire labour force might be unemployed during a sizeable part of the year. And broad unemployment is even about 30%… Also deflation is gathering steam, despite this double digit growth. Which is very bad news for the creditors of Greece. Read more…

Categories: Uncategorized

The Greek Experiment

January 31, 2015 7 comments

from Peter Radford

Let me congratulate the Greeks for taking the first, but only the first, step towards a more civilized economic policy. I am intrigued by the prospect of Yanis Varoufakis as economic minister deep in argument with any of the large number of radicals that infest European economic posts. And, yes, they are the radicals. The notion that aggressive austerity measures can engender growth and can be mostly benign with respect to employment, wages, and other immediate aspects of economic life is a radical, almost extreme, idea honed most recently to protect wealthy elites from having to engage with the rest of the societies inside which they exist. Against this form of radicalism people like Varoufakis, despite being smeared as radicals themselves, are more orthodox than not. At least they realize that economies are not mere models to manipulate, but are collections of people whose futures and dignity are surely worthy of consideration alongside such abstractions as markets or efficiency.  Read more…

Categories: Uncategorized

Graphs of the day – current accounts in Europe.

January 30, 2015 1 comment

Not all countries can have current account surpluses at the same time. The de facto Eurozone wage repression and austerity policies, including the recent moves to lower the exchange rate, seem however to aim at a situation in which all individual countries of the Eurozone have a surplus on their current account (graph 1). At this moment, only Finland, France, Latvia and Estonia have (limited) deficits on their current accounts. And Finland plans a new round of austerity while France is pressed to cut spending and wages. The very large deficits (sometimes even over 10, 15 or 10% of GDP) induced by Eurozone policies before 2008 were of course unsustainable, a ‘disaster waiting to happen’. But the same can be said of the surpluses (aside – the Germans lost many hundreds of billions as they had invested a lot of their ‘international savings’ in USA mortgages…). Remarkably, the Dutch-German surplus has even increased after 2008, making life for the periphery countries much more difficult. See also this post. And the remarks of Simon Wren-Lewis, who’s getting increasingly annoyed and alarmed about the level of macro economic discourse in Europe, where people actually wanted and still want to increase interest rates for indebted countries.  Read more…

Categories: Uncategorized

Decomposing the top decile US income share into 3 groups, 1913-2013

January 30, 2015 Leave a comment

from David Ruccio

top shares

Read more…


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