Risk vs. arrogance

from David Ruccio

Most of us are pretty cautious when it comes to spending our money. The amount of money we have is pretty small—and the global economic, financial, and political landscape is pretty shaky right now.

And even if we’re not cautious, if we’re not prudent savers, then no harm done. Spending everything we have may be a personal risk but it doesn’t do any social harm.

It’s different, however, for the global rich. The individual decisions they make do, in fact, have social ramifications. That’s why, back in 2011, I suggested we switch our focus from the “culture of poverty” to the pathologies of the rich.

Consider, for example, the BBC [ht: ja] report on the findings of UBS Wealth Management’s survey of more than 2,800 millionaires in seven countries.

Some 82 percent of those surveyed said this is the most unpredictable period in history. More than a quarter are reviewing their investments and almost half said they intend to but haven’t yet done so.

But more than three quarters (77 pct) believe they can “accurately assess financial risk arising from uncertain events”, while 51 percent expect their finances to improve over the coming year compared with 13 percent who expect them to deteriorate.

More than half (57 pct) are optimistic about achieving their long-term goals, compared with 11 percent who are pessimistic. And an overwhelming 86 percent trust their own instincts when making important decisions.

“Most millionaires seem to be confident they can steer their way through the turbulence without so much as a dent in their finances,” UBS WM said.

Most of us can’t afford that kind of arrogance in the face of risk. But the world’s millionaires can. Just as they did during the lead-up to the crashes of 1929 and of 2008.

They trusted their instincts—and everyone else paid the consequences.

A tax on Wall Street trading is the best solution to income inequality

May 19, 2017 9 comments

from Dean Baker

In the years since the 2008 economic crisis, financial transactions taxes (FTTs) have gone from a fringe idea to a policy that is in mainstream policy debates. They are seen as a way to both raise large amounts of money and to slow the pace of churning in financial markets. For this reason, most progressive Democrats have come out in support, and even the Clinton campaign provided a hat-tip to some form of taxation on high frequency trading.

This is a welcome change from where things stood before the crisis, when the only people supporting FTTs were the far left of the party. As a long-time proponent of an FTT, I welcome this change, but even many of the proponents of FTTs don’t realize the full benefits of such a tax.

To get some bearing, it is first worth recognizing how much money is potentially at stake. The Joint Tax Committee projected that a modest tax of 0.03 percent on all trades of stocks, bonds, and derivative instruments, along the lines of a proposal by Representative Peter DeFazio, would raise more than $400 billion over the course of a decade. This is roughly equal to 0.2 percent of gross domestic product (GDP. This would be enough money to cover 60 percent of the cost of the food stamp program.There have been proposals for larger FTTs. The Tax Policy Center of the Urban Institute and the Brookings Institution analyzed an FTT with a varying rate structure on stocks, bonds, and derivative instruments. They calculated that the maximum revenue would be achieved with a rate on stocks of 0.34 percent, with lower tax rates on other financial instruments. This tax would raise more than  $800 billion, or 0.4 percent of GDP, over the course of a decade.   Read more…

Equilibrium: a weed to pull

May 19, 2017 20 comments

from Peter Radford

Just how pejorative must we be in order to get attention? There are silly things in economics that need to be weeded out, so that something better can emerge. Sometimes I just say the whole thing is a waste of time, after all economics is not simply a body of thought, but it is also a social phenomenon, it has its own language, its own self-referential estimate of quality, its own hierarchy, and its own history that locks it tightly along a specific path.

And, frankly, that path has led it astray.

Take this piece of silliness from one of its greats:

” Just as we measure gravity by its effects in the motion of a pendulum, so we may estimate the equality or inequality of feelings by the decisions of the human mind. The will is our pendulum, and its oscillations are minutely registered in the price lists of the markets. I know not when we shall have a perfect system of statistics, but the want of it is the only insuperable obstacle in the way of making Economics an exact science.” ~ William Stanley Jevons

Well, we do know about Jevon’s ‘perfect system of statistics’. We will never have it. An economy is too complex to fit neatly into any statistics Jevons could imagine. Maybe he was hinting at that when he called the lack of it an ‘insuperable obstacle’.

In any case, the entire search for equilibrium has bedeviled economics long enough. Those mechanical references to nicely oscillating systems slowly swinging away under the influence of gravity are totally inappropriate for something like an economy. Equilibrium is  a nasty weed. It clutters up our garden. It distracts us from reality. Rip it out!   Read more…

Comparing income inequality in the United States and France

May 18, 2017 2 comments

The bottom 50 percent of income earners makes more in France than in the United States even though average income per adult is still 35 percent lower in France than in the United States (partly due to differences in standard working hours in the two countries).9 Since the welfare state is more generous in France, the gap between the bottom 50 percent of income earners in France and the United States would be even greater after taxes and transfers.

Read more…

Formal mathematical modeling in economics — a dead-end

May 17, 2017 3 comments

from Lars Syll

Using formal mathematical modeling, mainstream economists sure can guarantee that the conclusions hold given the assumptions. However, the validity we get in abstract model worlds does not warrantly transfer to real world economies. Validity may be good, but it isn’t enough. From a realist perspective both relevance and soundness are sine qua non.

broken-linkIn their search for validity, rigour and precision, mainstream macro modellers of various ilks construct microfounded DSGE models that standardly assume rational expectations, Walrasian market clearing, unique equilibria, time invariance, linear separability and homogeneity of both inputs/outputs and technology, infinitely lived intertemporally optimizing representative household/ consumer/producer agents with homothetic and identical preferences, etc., etc. At the same time the models standardly ignore complexity, diversity, uncertainty, coordination problems, non-market clearing prices, real aggregation problems, emergence, expectations formation, etc., etc.

Behavioural and experimental economics — not to speak of psychology — show beyond any doubts that “deep parameters” — peoples’ preferences, choices and forecasts — are regularly influenced by those of other participants in the economy. And how about the homogeneity assumption? And if all actors are the same – why and with whom do they transact? And why does economics have to be exclusively teleological (concerned with intentional states of individuals)? Where are the arguments for that ontological reductionism? And what about collective intentionality and constitutive background rules?   Read more…

Late capitalism?

from David Ruccio

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Apparently, “late capitalism” is the term that is being widely used to capture and make sense of the irrational and increasingly grotesque features of contemporary economy and society. There’s even a recent novel, A Young Man’s Guide to Late Capitalism, by Peter Mountford.

A reader [ht: ra] wrote in wanting to know what I thought about the label, which is admirably surveyed and discussed in a recent Atlantic article by Anne LowreyRead more…

Bundesbank rejects 100%-money based on sophistry and false claims

May 16, 2017 5 comments

from Norbert Häring

In its April monthly report, Deutsche Bundesbank explains that banks create money ex-nihilo and rejects the proposal of 100%-money. The full English version is now online. The arguments employed to discredit 100%-money are a mix of sophistry and misleading or false statements.

With some delay, Bundesbank has joined the Bank of England in explicitly stating that the treatment of banks and money creation in most textbooks is wrong and that banks are not intermediaries, transferring money from savers to investors, but rather creators of money.

A key statement is this:

Sight deposits are created when a bank grants a credit or purchases an asset and credits the corresponding amount to the customer’s bank account in return. This means that banks can create book money just by making an accounting entry. This refutes a popular misconception that banks act simply as intermediaries at the time of lending – ie that banks can only grant credit using funds placed with them previously as deposits by other customers.

All the explanations are impeccable, albeit framed in a way that is very friendly toward the interests of commercial banks. The Bundesbank is stressing the “services” that banks provide. It does not even mention the benefits, which banks derive from their extraordinary privilege of having their short-term debt instruments treated as money.

Still, overall the article is a welcome attempt to bring knowledge and sanity back into the treatment of money.

The Annex titled “Remarks on a 100% reserve requirement for sight deposits”, however, is quite disappointing.   Read more…

Trump family and friends: in your pockets

May 16, 2017 6 comments

from Dean Baker

Donald Trump has openly said that he doesn’t care at all about the rules that prohibit the president and those around him from profiting from their government positions. In breaking with longstanding precedent, he is holding on to his business empire and having his children run it as he carries on with the business of being president.

With the government forced to pay the bills for the Secret Service to stay at his golf resorts and hotels, Trump obviously feels no compunction about gouging taxpayers to put more money in his pockets. But this open graft is almost certainly the least important way in which Donald Trump’s family and friends will profit at the expense of the rest of us.

We still don’t know most of the details of Trump’s tax plan, but the main parts of the plan we do know look like it was written to benefit him personally as much as possible. First, it gets rid of the Alternative Minimum Tax (AMT). This tax was put into law in 1986 to ensure that wealthy people, who can use deductions to drastically reduce their taxes, will still have to pay some amount of tax.

In his leaked 2005 tax return we know that Trump paid 25 percent AMT rather than the much lower rate that his aggressive use of tax loopholes would have allowed. It’s not a big surprise then, that Trump’s tax plan gets rid of the AMT.  Read more…

Structural econometrics

May 16, 2017 2 comments

from Lars Syll

In a blog post the other day, Noah Smith returned again to the discussion about the ’empirical revolution’ in economics and how to — if it really does exist — evaluate it. Counter those who think quasi-experiments and RCTs are the true solutions to finding causal parameters, Noah argues that without structural models

empirical results are only locally valid. And you don’t really know how local “local” is. If you find that raising the minimum wage from $10 to $12 doesn’t reduce employment much in Seattle, what does that really tell you about what would happen if you raised it from $10 to $15 in Baltimore?

That’s a good reason to want a good structural model. With a good structural model, you can predict the effects of policies far away from the current state of the world.

If only that were true! But it’s not.

Structural econometrics — essentially going back to the Cowles programme — more or less takes for granted the possibility of a priori postulating relations that describe economic behaviours as invariant within a Walrasian general equilibrium system. In practice that means the structural model is based on a straightjacket delivered by economic theory. Causal inferences in those models are — by assumption — made possible since the econometrician is supposed to know the true structure of the economy. And, of course, those exact assumptions are the crux of the matter. If the assumptions don’t hold, there is no reason whatsoever  to have any faith in the conclusions drawn, since they do not follow from the statistical machinery used!   Read more…

Models and measurement in economics: Wesley Mitchell in 1946

May 15, 2017 2 comments

Noah Smith is not the first one to be puzzled by the rift between theory and measurement in economics. He states:

econ seems too focused on “theory vs. evidence” instead of using the two in conjunction. And when they do get used in conjunction, it’s often in a tacked-on, pro-forma sort of way, without a real meaningful interplay between the two. Of course, this is just my own limited experience, and there are whole fields – industrial organization, environmental economics, trade – that I have relatively limited contact with. So I could be over-generalizing. Nevertheless, I see very few economists explicitly calling for the kind of “combined approach” to modeling that exists in other sciences – i.e., using evidence to continuously restrict the set of usable models”..

But in 1946, in the wake of the war and the Keynesian revolution, Wesley C. Mitchell, long time head of the NBER (National bureau of Economic Research), one of the foremost economists of his time and one of the best students as well as a friend of Thorstein Veblen, held a “read the whole thing” speech (like much of this old stuff made available by the NBER) about “Empirical research and the future of economic science”. Eloquent (though not succinct) it bears in a somewhat depressing way on the ideas stated by Smith  (though Mitchell restricts himself much less to the Ivory Tower than Smith does):

There is better prospect than before that men who think of themselves as theorists will absorb into their work the methods and findings of realistically minded investigators, while the latter will make such free use of the concepts and procedures of theorists that no one will know on which side of the old line of demarcation he stands. In fine, the years near at hand may see the beginnings of an economics worthy to be called a science. Rapid progress toward that goal is not to be expected. The great drawbacks of empirical research in comparison with speculative reasoning are that it is much more laborious, Slower, and more dependent on financial support. The speculative reasoner must think hard; his is no easy task. But if gifted with logical acumen, he can select a set of assumptions interesting to him, and think Empirical Research and the Development of Economic Science out their implications by himself. If he has a funded income, or earns a living salary by work that does not exhaust his energy, he can get on without financial grants. In a relatively short time he can cover much ground, and, barring logical errors, arrive at conclusions incontestably true in the sense that they are necessary consequences of his assumptions. The empirical investigator, on the contrary, requires mass observations and considerable intimacy with actual practices; to extract the meaning from his data he needs assistants whose salaries few scholars can pay out of their own pockets”.

See p. 16 for his institutional stance. I’m afraid the ideas of Noah Smith indicate there still is a problem. Much has been accomplished, be sure of that. But a rift still exits. Here are my takes on models and measurement in economics: the concepts, social worlds and even the language of economic statistics and economic theory are not always congruent. Plus ça change, plus c’est la même chose. Why?

Where’s the productivity growth? The Bureau of Labor Statistics can’t find the robots!

May 15, 2017 3 comments

from Dean Baker

Manu prod

Source: Bureau of Labor Statistics.

We hear endless stories in the media about how the robots are taking all the jobs. There was a new rush of such stories after the release of a study by Daron Acemoglu and Pascual Restrepo, which found that robots were responsible for a substantial share of the job loss in manufacturing in the last decade. (For example, this Bloomberg piece by Mira Rojanasakul and Peter Coy.)

However, there remains a very basic problem in the robot story, it is not showing up in the productivity data. To step back a minute, robots are supposed to replace human labor. This means that for the same number of hours of human work, we should see much higher output of goods and services, since the robots are now adding to total output. This is what productivity growth means.

So if robots are having a large impact on jobs, then we should see productivity growth going through the roof. Instead, it is falling through the floor. It has averaged less than 1.0 percent annually in the last decade. This compares to an average growth rate of 3.0 percent in the decade from 1995 to 2005 and also in the long Golden Age from 1947 to 1973.

Strikingly, productivity growth has been especially bad in manufacturing, the place where we see the greatest use of robots. Here’s the picture since 1988, the period for which the Bureau of Labor Statistics (BLS) has a consistent series.
Read more…

Curb your enthusiasm: Macron is just the beginning of a new fight for France and Europe

May 14, 2017 12 comments

from Mark Weisbrot

The media response to the French election reads like some people had too much cannabis. From the first paragraph of a front page news analysis of the New York Times: “It was globalization against nationalism. It was the future versus the past. Open versus closed.”

Let’s not get carried away. It’s great that Marine Le Pen, whose National Front party with deep racist roots that go back to French collaborators during the Nazi occupation, as well as French colonialism, was defeated by a large margin of the votes cast. There were no signs that she had any realistic chance of winning, but people were understandably nervous after the Brexit and Trump votes. On the other hand, her 34 percent of the vote was about twice that of her father in 2002, who ran against the conservative Jacques Chirac. And abstentions this time were higher than in any French election since 1969; together with blank or spoiled ballots, 34 percent of the electorate chose none of the above.

Most importantly, if the “global open future” of France and Europe is going to be like the recent past, then the National Front and similar movements are still going to have some growth potential. Because it is primarily the economic policies of Europe, including France, over most of the past decade, that have allowed the National Front to progress from a marginalized boil on the body politic to what is now treated as a legitimate, serious opposition party.  Read more…

Crimes against humanity

from David Ruccio

As regular readers of this blog know, I am no fan of the way healthcare is currently organized in the United States.

The U.S. healthcare system, as it is currently configured, only really works for those who make a profit—selling health insurance, pharmaceuticals, and in-patient and acute-care services in hospitals—and those who have the wherewithal to finance their own healthcare.

But Republican plans to repeal the Affordable Care Act, aka Obamacare, and replace it with the American Health Care Act will move us even further from the goal of providing universal, affordable, high-quality healthcare for the American people.

The new act, aka Trumpcare, hasn’t yet been been scored by the Congressional Budget Office. And it will likely change as Senate Republicans get their hands on it.

AHCA

source [ht: ja]   Read more…

Is there a mismatch between theory and measurement in economics?

May 13, 2017 5 comments

Nobel22

The ‘The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel’ has much more often than the prizes for physics, Chemistry and physiology and medicine been awarded for: theory. It was on a regular basis awarded for analysis of data or the discovery of new events but in these cases ‘discovery’ was contrary to the other sciences much less important than analysis. It was only rarely awarded for the development of measurement techniques.   Read more…

What happens when a small and dangerous sect captures the teaching of economics

May 12, 2017 4 comments

from Lars Syll

The fallacy of composition basically consists of the false belief that the whole is nothing but the sum of its parts.  In the society and in the economy this is arguably not the case. An adequate analysis of society and economy a fortiori can’t proceed by just adding up the acts and decisions of individuals. The whole is more than a sum of parts.

This fact shows up when orthodox/mainstream/neoclassical economics tries to argue for the existence of The Law of Demand – when the price of a commodity falls, the demand for it will increase – on the aggregate. Although it may be said that one succeeds in establishing The Law for single individuals it soon turned out – in the Sonnenschein-Mantel-Debreu theorem firmly established already in 1976 – that it wasn’t possible to extend The Law of Demand to apply on the market level, unless one made ridiculously unrealistic assumptions such as individuals all having homothetic preferences – which actually implies that all individuals have identical preferences.

This could only be conceivable if all agents are identical (i. e. there is in essence only one actor) — the (in)famous representative actor. So, yes, it was possible to generalize The Law of Demand – as long as we assumed that on the aggregate level there was only one commodity and one actor. What generalization! Does this sound reasonable? Of course not. This is pure nonsense!   Read more…

Bundesbank corrects textbook mistakes on money creation, rejects 100%-money

May 11, 2017 19 comments

from Norbert Häring

In the April-edition of their monthly report, the Bundesbank has belatedly joined the Bank of England in explicitly stating that the treatment of banks and money creation in most textbooks is wrong: banks are not intermediaries; they create money ex-nihilo. This helps the Bundesbank to reject criticism that central banks are currently “printing” too much money. At the same time, the Bundesbank rejects the proposal of 100%-money, i.e. bank deposits fully backed by central bank money.

So far, the Bundesbank has only published an English summary of the article “How money is created”, originally written in German (and a French summary). Once the article is available in full translation, I will write a bit more about the (mostly faulty) arguments of the Bundesbank against 100%-money.

The most important sentences regarding money creation are already there in the summary, though:

The majority of the money supply is made up of book money, which is created through transactions between banks and domestic customers. Sight deposits are an example of book money: sight deposits are created when a bank grants a credit or purchases an asset and credits the corresponding amount to the customer’s bank account in return. This means that banks can create book money just by making an accounting entry. This refutes a popular misconception that banks act simply as intermediaries at the time of lending – ie that banks can only grant credit using funds placed with them previously as deposits by other customers.

Limits

May 11, 2017 19 comments

from Peter Radford

I don’t understand why people get upset when I say that economics is a waste of time. I suppose it’s because I don’t make a clear enough difference between economics as a general topic and economics as a formal, mainstream, body of knowledge. It’s the latter that is a waste of time. The former is wonderfully interesting.

At its heart economics is a study of human behavior, where that behavior is specific to certain activities. It is thus deeply rooted in psychology, so it is more closely associated with biology than physics. This is not a new idea: some of the greatest economists of the past have argued as much. Trying to transfer in ideas from physics, even metaphorically, therefore tends to lead to dead ends.

Like the notion of efficiency. That’s something of great interest to engineers, but has little to do with economics. You can have an efficient physical system. You cannot have an efficient social system. There’s just too much we don’t know and can never know. Still economists all over the world are obsessed with efficiency. So what do they do? They start to abstract and simplify. They model and fine tune. They test and re-test. And still their ideas run afoul of reality: human beings are not efficiency seeking machines, and so any system filled with humans is likely to be darned near impossible to steer towards efficient outcomes. Nothing daunted economists press on. If humans are unlikely to be efficient the logical next step is to construct a theory to exclude actual humans. That’s what’s happened in economics: the faulty decision to root economics in a physics-like setting rather than in a biology like-setting forced subsequent generations of economists to “refine” their thinking and, eventually, to force real people out of their theoretical world. Voila! Modern economics ends up as a wonderful edifice with extravagant claims as to its ability to understand human behavior precisely by eliminating all contact with humanity. Weird.   Read more…

End of Second Great Depression

from David Ruccio

I am quite willing to admit that, based on last Friday’s job report, the Second Great Depression is now over.

As regular readers know, I have been using the analogy to the Great Depression of the 1930s to characterize the situation in the United States since late 2007. Then as now, it was not a recession but, instead, a depression.

As I explain to my students in A Tale of Two Depressions, the National Bureau of Economic Research doesn’t have any official criteria for distinguishing an economic depression from a recession. What I offer them as an alternative are two criteria: (a) being down (as against going down) and (b) the normal rules are suspended (as, e.g., in the case of the “zero lower bound” and the election of Donald Trump).

By those criteria, the United States experienced a second Great Depression starting in December 2007 and continuing through April 2017. That’s almost a decade of being down and suspending the normal rules!

Now, with the official unemployment rate having fallen to 4.4 percent, equal to the low it had reached in May 2007, we can safely say the Second Great Depression has come to an end.

However, that doesn’t mean we’re out of the woods, or that we can forget about the effects of the most recent depression on American workers.*  Read more…

The tragedy of pseudoscientific and self-defeatingly arrogant economics

May 10, 2017 2 comments

from Lars Syll

The problem of any branch of knowledge is to systematize a set of particular observations in a more coherent form, called hypothesis or ‘theory.’ Two problems must be resolved by those attempting to develop theory: (1) finding agreement on what has been observed; (2) finding agreement on how to systematize those observations.

comic1In economics, there would be more agreement on the second point than on the first. Many would agree that using the short-hand rules of mathematics is a convenient way of systematizing and communicating knowledge — provided we have agreement on the first problem, namely what observations are being systematized. Social sciences face this problem in the absence of controlled experiments in a changing, non-repetitive world. This problem may be more acute for economics than for other branches of social science, because economists like to believe that they are dealing with quantitative facts, and can use standard statistical methods. However, what are quantitative facts in a changing world? If one is dealing with questions of general interest that arise in macroeconomics, one has to first agree on ‘robust’ so-called ‘stylized’ facts based on observation: for example, we can agree that business cycles occur; that total output grows as a long term trend; that unemployment and financial crisis are recurring problems, and so on.

Read more…

Global warming must be addressed now

May 9, 2017 7 comments

from Dean Baker

There are two enormous myths about global warming. One is that dealing with it is optional. The other is that the measures needed to slow the process will devastate the economy. Neither is true.

On the first point, we are already seeing major changes in weather that are almost certainly related to global warming, both in the United States and around the world. In the United States, we are seeing rising water levels eroding beachfront property all along our coast lines.

We are also seeing extraordinary conditions like the multi-year drought that until recently had much of California rationing water.

In addition, we have seen extreme weather events like Superstorm Sandy, which destroyed hundreds of homes in New Jersey and New York and made many areas uninhabitable.

The story is much worse elsewhere in the world. The Sahara Desert is rapidly moving southward in Africa, depriving millions of people of the means to support themselves.

Hundreds of millions of people in low lying areas of Bangladesh and elsewhere in East Asia face far greater risk from storms and flooding due to rising oceans.  Global warming is a reality; we can’t solve the problem by looking away any more than we can deal with a weight problem by throwing out our scale and continuing to eat unhealthy foods.   Read more…