European Appeal – companies and employees – blazing a new European trail

May 2, 2018 4 comments

from Olivier Favereau 

Something has gone wrong in the European Union. Four examples bear witness to this dysfunction. How can it be justified that hundreds of thousands of letter-box companies have been allowed to develop, when the aim of these ghost companies is to evade taxes, labour laws and regulations? How can it be explained that European Court of Justice decisions authorized the restriction of employees’ fundamental rights in order to support business schemes whose very objective was to circumvent the protection of employees? How could recurring revelations such as those made by the Panama Papers and the Paradise Papers fail to have consequences, showing the EU’s inability to prevent tax circumvention by wealthy individuals and large companies? Finally, how could we accept that, despite scandals such as the Rana Plaza factory collapse in Bangladesh, many companies have continued to turn a blind eye to suppliers that ignore the most basic social, environmental and human rights?

The “shareholder primacy” theory has been promoted by the European Commission while the real economy and employees have been forgotten in the process. As a result, profits have grown at the expense of wages since the 1990s. This does not make sense. Employees are a core constituency of companies: while shareholders contribute capital, employees contribute their time, skills and life. That is why it is time to revisit the situation of the more than 140 million EU employees working in companies. The elections for the European Parliament are in one year’s time, and we wish to set the upcoming debate on the right footing.

We deeply believe that it is vital that the following five reforms be undertaken.  Read more…

Inequality and fairness

from David Ruccio

CEO

While Amazon let it slip last week that its Prime program—the annual membership that offers discount pricing and free 2-day shipping—now tops 100 million members, there’s another number people might be curious about: the company’s average annual wage, which Amazon revealed in compliance with a new regulation that asks companies to show a comparison between an average worker’s wage and the salary of their CEO.

Read more…

The future of work is now

May 1, 2018 8 comments

from Peter Radford

The future of work has become one of the most hotly debated and analyzed topics of the past couple of years. No one with a pretension of a serious nature or a desire to be seen opining on the “big” issues can afford not to have a point of view on it. Thus we are bombarded by an endless torrent of articles, books, academic papers, and speeches on the way in which the workplace will be changed by the emergence of  various technologies. The usual umbrella under which these technologies lurk is the one we call artificial intelligence.

There is no doubt that AI will have an enormous impact. There are countless breathless accounts of the number of jobs that will simply disappear as AI sweeps through the economy. These accounts usually appear from those involved in the invention and application of AI. They all end up expressing some form of fatalistic vision where the workplace will inevitably collapse under the impress of technology, wages will similarly collapse for those poor souls unable to keep up with the onslaught of robotics, with the resultant picture being grim for just about everyone except for the few who remain in the so-called “knowledge economy”.

The almost total agreement between all these accounts with respect to the dystopia they articulate is matched only by the paucity of mitigating prescriptions. Just about all of them agree that education is the only escape hatch available to the ordinary worker. Consequently there are as many equally breathless accounts about the need for everyone to engage in constant learning of one form or another as there are accounts of the impending wage disaster if we don’t all suddenly become perpetual students.  Read more…

The Lucas critique comes back with a vengeance in DSGE models

May 1, 2018 3 comments

from Lars Syll

Both approaches to DSGE macroeconometrics (VAR and Bayesian) have evident vulnerabilities, which substantially derive from how parameters are handled in the technique. In brief, parameters from formally elegant models are calibrated in order to obtain simulated values that reproduce some stylized fact and/or some empirical data distribution, thus relating the underlying theoretical model and the observational data. But there are at least three main respects in which this practice fails.

lucasFirst of all, DSGE models have substantial difficulties in taking account of many important mechanisms that actually govern real economies, for example, institutional constraints like the tax system, thereby reducing DSGE power in policy analysis … In the attempt to deal with this serious problem, various parameter constraints on the model policy block are provided. They derive from institutional analysis and reflect policymakers’ operational procedures. However such model extensions, which are intended to reshape its predictions to reality and to deal with the underlying optimization problem, prove to be highly unflexible, turning DSGE into a “straitjacket tool” … In particular, the structure imposed on DSGE parameters entails various identification problems, such as observational equivalence, underidentification, and partial and weak identification.  Read more…

Progress, farmers and the government – no easy solutions.

April 30, 2018 3 comments

Fat4

I’ve always been wondering why small farmers enjoying ‘Fair Trade’ privileges are not modernizing faster in the sense that they invest and modernize, capture the market and do not need ‘us’ anymore. Yes, I know that many international trade rules are not exactly fair. And the words ‘Banana republic’ and ‘Banana wars‘ come from somewhere – the official phrase for such ‘politically enforced’ global value systems is ‘empire‘ (TTIP anyone?). But even then – why do many small farmers and even slaves (cocoa production!) in more or less stable countries still need western NGO’s and benevolent consumers and companies like Chocolonely? There are reasons for this – as it surely is possible that, when circumstances are ‘right’, development can be very fast. My ideas about this were influenced by my Ph. D. about Dutch agriculture. Between about 1890 and 1910 Dutch farmers managed to change input, output and credit markets in a fundamental way by establishing literally thousands of local cooperative purchasing, selling, production and saving and credit cooperatives while they also invested in new production systems; the government did its part by establishing an (grass roots) education and (grass roots) research system. Also, the Netherlands were in those days basically a low corruption, high trust society while the government (but also local dairy factories and railway entrepreneurs) enhanced basic education and roads and railways. On top of this, local teachers and other well-educated elite often did a very good job as voluntary secretaries or accountants of the boards of the cooperatives. Everything was ‘right’. And change did happen.  Read more…

The irresponsibility of fiscal responsibility

April 30, 2018 11 comments

from Dean Baker

It’s official: New York Times columnist David Leonhardt pronounced the Democrats as the party of fiscal responsibility. In contrast to three of the last four Republican presidents who raised deficits with big tax cuts for the rich and increases in military spending, the last Democratic presidents sharply reduced the budget deficit during their term in office.

Leonhardt obviously intends the designation to be praise for the party, but it really shows his confusion about budget deficits and their impact on the economy. Unfortunately, this confusion is widely shared.

Contrary to what Leonhardt seems to think, the economy doesn’t get a gold star for a balanced budget or lower deficit. In fact, lower deficits can inflict devastating damage on the economy by reducing demand, leading to millions of workers needlessly unemployed.

This has a permanent cost as many of the long-term unemployed may lose their attachment to the labor market and never work again. Their children will also pay a big price as children of unemployed parent(s) tend to fare worse in life by a wide variety of measures, especially when unemployment is associated with family breakup, frequent moves, and possible evictions. Also, lower levels of output will mean less investment, making the economy less productive in the future.  Read more…

The Big Five: Australia, USA, Canada, Luxembourg and Saudi Arabia

April 29, 2018 9 comments

CO2 Emissions-PerCapita

source: http://www.oecd.org/sti/ind/carbondioxideemissionsembodiedininternationaltrade.htm

Utopia and macroeconomics

April 29, 2018 8 comments

from David Ruccio

AScontroversy2

From the beginning, mainstream macroeconomics has been a battleground between the visible and the invisible hand.

Keynesian macroeconomics, represented on the left-hand side of the chart above, has an aggregate supply curve with a long horizontal section at levels of output (Y or real GDP) below full employment (Yfe). What this means is that the aggregate demand determines the actual level of output, which can be and often is at less than full employment (e.g., when AD falls from AD1 to AD2, output to Y1, and prices to P2), with no necessary tendency to return to full employment and price stability. Therefore, according to Keynesian economists, the visible hand of government needs to step in and, through a combination of fiscal and monetary policy, move the economy toward full employment (at Yfe) and stable prices (at P1).

Read more…

Oxfam report on the rich-poor divide

April 28, 2018 3 comments

The illusion of scarcity

April 28, 2018 Leave a comment

from Asad Zaman

(continuation of previous post on ET1%: Blindfolds Created by Economic Theory)

Economists have performed an amazing piece of magic, successfully creating a mass deception which has taken in the vast majority of the population of the world. Seeing through this complex and sophisticated trick requires separating, studying and understanding many different elements which all combine to create this illusion. One of the elements is a binary theory of knowledge, according to which theories are either true or false, and this is the only characteristic of theories that we should study. This prevents us from looking at the historical context in which the theories originate, and the functions that these theories serve, in terms of advancing the interests of powerful groups in the social struggles then going on. Social theories cannot be understood without this context, and hiding this context, and the relationships between knowledge and power, is an essential component of the WMD — weapon of mass deception — deployed by the economists to create a mass hallucination. In this post we analyze briefly the concept of Scarcity, which is at the heart of modern Economic Theory.

According to this concept, which was made central to Economics by Lionel Robbins in 1929, there are not enough resources to satisfy the unlimited needs and wants of all people. Accordingly, solutions require increasing resources, or economic growth.  On the surface, this seems like a straightforward statement of the factual position: we need more resources in order to take care of the needs of the poor. Hidden beneath this simplicity is a strategy which is massively favorable to the interests of the top 1%. We bring out some of these hidden implications below.

1.     Failure to Distinguish Needs and Wants  –  read more

The loanable funds fallacy

April 27, 2018 12 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 credits set by banks and 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.”

loanIt is a beautiful fairy tale, but the problem is that banks are notbarter institutions that transfer pre-existing loanable funds from depositors to borrowers. Why? Because, in the real world, there simply are no pre-existing loanable funds. Banks create new funds — credit — only if someone has previously got into debt! Banks are monetary institutions, not barter vehicles.

In the traditional loanable funds theory — as presented in mainstream macroeconomics textbooks — 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 via a lower interest.   Read more…

Trends of bottom 50% income share: USA and China versus France

April 26, 2018 1 comment

new issue of Economic Thought

April 26, 2018 Leave a comment

Introducing a New Economics

from Maria Alejandra Madi

Alfred Marshall wrote in his Principles of Economics that “economic conditions are constantly changing, and each generation looks at its own problems in its own way” (1920, p. v.). Our generation is confronted with many problems including climate change, environmental damage, disruptive innovations, inequality, indebtedness, youth unemployment, besides a health care crisis. At the center of these problems, however, is the discipline of economics itself and economics education.

The mathematization of economics was done in the name of science, but in doing so, the mainstream of the academic community has renounced its claim to studying the actual economy. In this respect, it is worth remembering  Keynes’ critique of  the behaviour of pofessional economists at his time since his words are more valuable  than ever,

For professional economists…were apparently unmoved by the lack of correspondence between the results of their theory and the facts of observation;– a discrepancy which the ordinary man has not failed to observe, with the result of his growing unwillingness to accord to economists that measure of respect which he gives to other…scientists whose theoretical results are confirmed by observation when they are applied to the facts (Keynes, 1936, The General Theory of Employment)

read more

Top marginal U.S. income tax rate 1913 to 2013

April 25, 2018 5 comments

marginal tax rates

source: https://www.huffingtonpost.co.uk/entry/economists-tax-rich_n_6024430

The case for a new economics

April 24, 2018 31 comments

from Lars Syll

When the great crash hit a decade ago, the public realised that the economics profession was clueless …

After 10 years in the shadow of the crisis, the profession’s more open minds have recognised there is serious re-thinking to be done …

But the truth is that most of the “reforms” have been about adding modules to the basic template, leaving the core of the old discipline essentially intact. My view is that this is insufficient, and treats the symptoms rather than the underlying malaise …

RE-LogoIf we accept that we need fundamental reform, what should the new economics—“de-conomics” as I’m calling it—look like?

First, we need to accept that there is no such thing as “value-free” analysis of the economy. As I’ve explained, neoclassical economics pretends to be ethically neutral while smuggling in an individualistic, anti-social ethos …

Second, the analysis needs to be based around how human beings actually operate—rather than how neoclassicism asserts that “rational economic person (or firm)” should operate …

Third, we need to put the good life centre stage, rather than prioritising the areas that are most amenable to analysis via late-19th century linear mathematics. Technological progress and power relationships between firms, workers and governments need to be at the heart of economic discourse and research …

Finally, economics needs to be pluralistic. For the last half-century neoclassical economics has been gradually colonising other social science disciplines such as sociology and political science. It is high time this process reversed itself so that there was two-way traffic and a mutually beneficial learning exchange between disciplines. It is possible—and probably desirable—that the “deconomics” of the future looks more like psychology, sociology or anthropology than it does today’s arid economics …

The change I am seeking is no more fundamental than the transition from classical to neoclassical economics, and that was accomplished without the discipline imploding. And this time around we’ve got then-unimaginable data and other resources. So there can be no excuse for delay. Let economists free themselves of a misleading map, and then—with clear eyes—look at the world anew.

Howard Reed/Prospect Magazine

Read more…

World employers report

April 24, 2018 1 comment

from David Ruccio

The history of capitalism is actually a combination of two histories: it’s a history of employers attempting to hire workers and develop new technologies to make profits and expand the reach of capitalism; it’s also a history of workers banding together to improve wages and working conditions and imagine ways of moving beyond capitalism.

The World Bank’s World Development Report, currently in draft form, comes down firmly on the side of employers and their historical role.

The theme of the 2019 report is the “changing nature of work.” As envisioned by the reports authors,

Work is constantly being reshaped by economic progress. Society evolves as technology advances, new ways of production are adopted, markets integrate. While this process is continuous, certain technological changes have the potential for greater impact, and provoke more attention than others. The changes reshaping work today are fundamental and long-term, driven by technological progress, globalization, shifting demographics, urbanization and climate change.

Beneath the typically lofty but vague rhetoric, the two trends that haunt the report are the increasing gap between the top 1 percent and everyone else and the jobs that will be eliminated with the use of automation and other labor-saving technologies—leading to “rising concerns with unemployment, inequality and unfairness that are accompanying these changes.”  Read more…

Global income distribution 1800, 1975 and 2010

April 22, 2018 3 comments

The tractability hoax in modern economics

April 22, 2018 8 comments

from Lars Syll

While the paternity of the theoretical apparatus underlying the new neoclassical synthesis in macro is contested, there is wide agreement that the methodological framework was largely architected by Robert Lucas … Bringing a representative agent meant foregoing the possibility to tackle inequality, redistribution and justice concerns. Was it deliberate? How much does this choice owe to tractability? What macroeconomists were chasing, in these years, was a renewed explanation of the business cycle. They were trying to write microfounded and dynamic models …

tractable-2Rational expectations imposed cross-equation restrictions, yet estimating these new models substantially raised the computing burden. Assuming a representative agent mitigated computational demands, and allowed macroeconomists to get away with general equilibrium aggregate issues: it made new-classical models analytically and computationally tractable …

Was tractability the main reason why Lucas embraced the representative agent (and market clearing)? Or could he have improved tractability through alternative hypotheses, leading to opposed policy conclusions? … Some macroeconomists may have endorsed the new class of Lucas-critique-proof models because they liked its policy conclusions. Other may have retained some hypotheses, then some simplifications, “because it makes the model tractable.” And while the limits of simplifying assumptions are often emphasized by those who propose them, as they spread, caveats are forgotten. Tractability restricts the range of accepted models and prevent economists from discussing some social issues, and with time, from even “seeing” them. Tractability ‘filters’ economists’ reality … The aggregate effect of “looking for tractable models” is unknown, and yet it is crucial to understand the current state of economics.

Beatrice Cherrier

Read more…

Harvard teaches us that hedge fund managers get rich even when they mess up

April 21, 2018 3 comments

from Dean Baker

While we all know that it is important for people to get a good education if they want to do well in today’s economy, it remains the case that who you know matters much more than what you know. Harvard has taught us this lesson well with the management of its endowment in recent years.

Businessweek reported that the returns on Harvard’s endowment over the last decade averaged just 4.4 percent annually. This performance trailed both stock index returns and the returns received by other major university endowments. This means that Harvard would have had considerably more money to pay its faculty and staff if it simply bought a Vanguard index fund.

If this were just bad luck, one could be sympathetic, but according to Businessweek, the school paid $242 million to the people who managed its money over the period from 2010 to 2014, an average of $48.4 million annually. While Harvard’s endowment fared poorly, these money managers did very well, with the top-paid managers undoubtedly pocketing paychecks well in excess of $1 million a year (approximately 8,000 food stamp months). In other words, Harvard’s money managers were paid huge sums to lose the school money. Nice work if you can get it.

It is difficult to understand how Harvard, or any university, could pay so much money to lose the school money. Harvard’s money managers surely have good credentials, and probably even good track records with their past performance. How could the university write contracts that allow these people to get huge paychecks that end up costing Harvard money due to their poor investment decisions?  Read more…