from David Ruccio
Regular readers know I take statistics quite seriously. So, as it turns out, did Stephen Jay Gould who, in the most poignant story about statistics of which I am aware, explained how important it is to go beyond the abstractions of central tendencies and understand the distribution of variation within the numbers.
And right now, when the numbers are under attack—when, for example, the new Trump administration is threatening to purge the inconvenient numbers about climate change—it is even more important to understand the role statistics play in economic and social life.*
William Davies [ht: ja] offers one story about statistics, starting with the recent populist attacks on public statistics and the questioning of the experts that produce and interpret them. His view is that, for all their faults, the numbers collected and disseminated by technical experts within national statistical offices need to be defended—as the representation of “common ideas of society and collective progress”—against the rise of private “data.”
A post-statistical society is a potentially frightening proposition, not because it would lack any forms of truth or expertise altogether, but because it would drastically privatise them. Statistics are one of many pillars of liberalism, indeed of Enlightenment. The experts who produce and use them have become painted as arrogant and oblivious to the emotional and local dimensions of politics. No doubt there are ways in which data collection could be adapted to reflect lived experiences better. But the battle that will need to be waged in the long term is not between an elite-led politics of facts versus a populist politics of feeling. It is between those still committed to public knowledge and public argument and those who profit from the ongoing disintegration of those things.
from Lars Syll
Eminent statistician David Salsburg is rightfully very critical of the way social scientists — including economists and econometricians — uncritically and without arguments have come to simply assume that one can apply probability distributions from statistical theory on their own area of research:
We assume there is an abstract space of elementary things called ‘events’ … If a measure on the abstract space of events fulfills certain axioms, then it is a probability. To use probability in real life, we have to identify this space of events and do so with sufficient specificity to allow us to actually calculate probability measurements on that space … Unless we can identify [this] abstract space, the probability statements that emerge from statistical analyses will have many different and sometimes contrary meanings …
Kolmogorov established the mathematical meaning of probability: Probability is a measure of sets in an abstract space of events. All the mathematical properties of probability can be derived from this definition. When we wish to apply probability to real life, we need to identify that abstract space of events for the particular problem at hand … It is not well established when statistical methods are used for observational studies … If we cannot identify the space of events that generate the probabilities being calculated, then one model is no more valid than another … As statistical models are used more and more for observational studies to assist in social decisions by government and advocacy groups, this fundamental failure to be able to derive probabilities without ambiguity will cast doubt on the usefulness of these methods.
Wise words well worth pondering on.
As long as economists and statisticians cannot really identify their statistical theories with real-world phenomena there is no real warrant for taking their statistical inferences seriously. Read more…
from Peter Radford
One of the greatest shifts in our economy over the past few decades has been the steady rise of what we call contingent workers. These are people who make their livings on a part-time or contractual basis and have no full-time job. In the US the increase in contingent workers accounted for all the increase in jobs between 2005 and 2015. Whilst there was an increase in full-time jobs during that period that increase was more than offset by a simultaneous elimination of other full-time jobs. There are many different measures of this part-time or contingent workforce because the government has not collected reliable data for over a decade, but all those private and academic efforts at measurement concur: contingent workers are now a very large and rapidly growing part of the national workforce.
Before we all lament this trend let us remind ourselves of some history. Prior to industrialization most people worked as a contingent worker. They supplemented their incomes from a variety of work, they were partly self-sufficient, they were largely based in agricultural activities, and they survived generally minimally above the barest subsistence levels. Those were the days of Malthusian economics: short burst of higher wages led to population growth, which stressed the food supply and thus brought on starvation which then reduced the population and restored the possibility of higher wages. Most economies existed in this kind of slow meandering and scarcely improving condition for centuries. Life was, to borrow Hobbes’s infamous phrase “nasty, brutish, and short”
We then broke free from this.
Why? Read more…
Update: after writing this post I discovered that today Matthew Klein wrote a much longer and much more in depth article about the same subject here. Same conclusion.
Should we start a trade war? Let’s, before doing this, take a closer look at current accounts: higher current account surpluses or smaller deficits are not necessarily associated with higher employment. To the contrary. Two examples: Read more…
from Dean Baker
With the official death of the Trans-Pacific Partnership (TPP) and the likely renegotiation of the North American Free Trade Agreement (NAFTA), the proponents of these deals are doubling down in their defense of the current course of US trade policy. While there are serious arguments that can be made in defense of these policies, advocates are instead seeking to deny basic reality.
These trade policy proponents are trying to deny that these policies have hurt large segments of the workforce and are claiming that the people, who believe that they were hurt by trade, are simply misinformed. The proponent’s story is that the real cause of job loss was the impersonal force of technology, not a trade policy that deliberately placed US manufacturing workers in direct competition with low paid workers in the developing world.
Fortunately this is a case where the facts are clear. The people who think they were hurt by trade are right. It is the people who blame technology who are misinformed or worse.
The obvious error in the technology or automation story is that automation is not anything new. We have been seeing increases in productivity in manufacturing forever; it is not something that just happened in the last two decades. In fact, the most rapid period of technological change was in the quarter century from 1947 to 1973, not the last two decades. Read more…
from David Ruccio
The share of American workers in unions fell to 10.7 percent in 2016 (down from 11.1 percent in 2015), the lowest level on record, according to the Bureau of Labor Statistics (pdf).
What we’re seeing is a return to the downward trend for organized labor after membership figures had stabilized in recent years—and this is before the new Republican administration even took office. Read more…
from Maria Alejandra Madi
Throughout 2016, many countries around the world keep on competing for market share in high-wage, innovation-based industries. Indeed, these countries have turned to “innovation mercantilism” by imposing protectionist policies to expand domestic production and exports of high-tech goods and services.
In this setting, innovation mercantilist policies are being oriented to high-value tech sectors such as life sciences, renewable energy, computers and electronics, and Internet services. There are new “beggar-thy-neighbor” strategies adopted by nation-states, such as forcing companies to transfer the rights to their technology or forcing them to relocate their production, research and development (R&D), or data-storage activities. These strategies aim at both replacing imports with domestic production or promoting exports.
At this respect, the 2016 Information Technology and Innovation Foundation annual report shows that:
- China introduced a new cybersecurity law so as to impose local data-storage requirements, and forced intellectual property and source code disclosures. This country also introduced new cloud-computing restrictions so as to exclude and prevent foreign firms from operating in the Chinese market.
- Germany introduced forced local data-storage requirements as part of a new telecommunications data law.
- Indonesia introduced forced local data-storage requirements for Internet-based content providers. The country also introduced a patent law amendment in order to force local production and technology transfers.
- Russia introduced forced local data-storage requirements and encryption-key disclosure as part of a new telecommunications data law. The country also introduced new government procurement rules in order to ban the purchase of foreign software.
- Turkey introduced a new data-protection law that, as a matter of fact, forced local data storage.
- Vietnam introduced forced local data-storage requirements for Internet-based content providers. The country also introduced a new network-security law that forces disclose encryption keys and source codes a condition of market access. read more
from Lars Syll
Many mainstream economists seem to think the idea behind Modern Monetary Theory is new and originates from economic cranks.
New? Cranks? How about reading one of the great founders of neoclassical economics – Knut Wicksell. This is what Wicksell wrote in 1898 on ‘pure credit systems’ in Interest and Prices (Geldzins und Güterpreise), 1936 (1898), p. 68f:
It is possible to go even further. There is no real need for any money at all if a payment between two customers can be accomplished by simply transferring the appropriate sum of money in the books of the bank …
A pure credit system has not yet … been completely developed in this form. But here and there it is to be found in the somewhat different guise of the banknote system …
We intend therefor, as a basis for the following discussion, to imagine a state of affairs in which money does not actually circulate at all, neither in the form of coin … nor in the form of notes, but where all domestic payments are effected by means of the Giro system and bookkeeping transfers. A thorough analysis of this purely imaginary case seems to me to be worth while, for it provides a precise antithesis to the equally imaginay case of a pure cash system, in which credit plays no part whatever [the exact equivalent of the often used neoclassical model assumption of “cash in advance” – LPS] …
For the sake of simplicity, let us then assume that the whole monetary system of a country is in the hands of a single credit institution, provided with an adequate number of branches, at which each independent economic individual keeps an account on which he can draw cheques.
What Modern Monetary Theory (MMT) basically does is exactly what Wicksell tried to do more than a hundred years ago. The difference is that today the ‘pure credit economy’ is a reality and not just a theoretical curiosity – MMT describes a fiat currency system that almost every country in the world is operating under.
And here’s another well-known economist with early ideas of the MMT variety: Read more…
from Peter Radford
We are, no doubt, about to be barraged by a torrent of alternative facts concerning the economy and economic growth under our new leader. So let’s get a few facts on the table in order to set a base level for future reference. Let’s start with growth during the past six presidencies:
So, no, Obama was not the disaster Trump and the Republicans are trying to paint him as. The economy during Obama’s term outperformed that of his predecessor. This includes the enormous difficulty of digging out of the Great Recession without much help from Congress. Average growth through all that last six presidencies is around 2.8% a year, so boosting it to, and then maintaining it at, the 4.0% promised by Trump will take some extraordinary efforts, not to mention a defiance of history and is thus unlikely to occur. Read more…
from David Ruccio
Now that President Trump has begun carrying out his campaign pledges to undo America’s trade ties, formally withdrawing the United States from the Trans-Pacific Partnership and announcing he will start to renegotiate the North American Free Trade Agreement, it’s time to analyze what this means.
As it turns out, I’d already started to do this before the election, with a series of posts (e.g., here, here, here, and here) on Trump and the mounting criticism of the trade agreements the United States had signed (such as NAFTA) or was in the process of negotiating (the TPP).
It’s clear Trump’s decisions—which he claims are a “Great thing for the American worker”—challenge the view of economic and political elites, as well as those of mainstream economists (such as Brad DeLong), in the United States and around the world that everyone benefits from free trade.*
But, we now know, there has also been a growing counter-narrative, that not everyone has gained from growing international trade and trade agreements, which have generated unequal benefits and costs. What’s interesting about this alternative story, at least when it comes to NAFTA, is that critics on each side argue the other side is the one that has benefited: U.S. critics that Mexico has gained, and just the opposite in Mexico, that the United States has captured the lion’s share of the benefits from NAFTA.
Here’s the problem: workers on both sides of the border have lost out, and their losses are mostly not due to NAFTA. Read more…
from Dean Baker
As we start the Trump presidency, events just keep getting more bizarre. At his first and last press conference as president-elect, Donald Trump boasted about his divestment plan in which he was “sort of, kind of” turning over the management of his business enterprises to his two adult sons. He displayed a table full of documents that were supposed to indicate the extent of his divestment, but the documents were not made available for the press to examine.
Furthermore, in spite of claiming that he was stepping away from his business enterprises, Trump was still boasting being offered a $2 billion deal from a Dubai businessman. While Trump assured us that he turned the deal down, the obvious question is why he was discussing it in the first place.
Insofar as Trump is actually stepping away from his business, this is very far from the sort of blind trust arrangements made by presidents of both parties for the last half century. The public can never be sure that his actions as president are not motivated by a desire to fatten the profits of Trump enterprises. Nor can we be assured that actions by foreign governments won’t be affected by their country’s dealings with the president’s business empire.
The ethical lapses from the top carry through to his cabinet appointments, which seem destined to replace Ringling Bros. Circus as the strangest show on Earth. Andy Puzder, Trump’s pick for secretary of labor, runs two chains of fast-food restaurants that have repeatedly violated wage and hour laws and has been legally forced to make payments to workers. These are the laws that Mr. Puzder will be responsible for enforcing if he gets approved for the job.
Yes, he said it. One of the gems found by Erwan Mahé in the minutes of the FOMC meetings. Ben Bernanke: “Here we potentially have a comparison to Keynes’ The Economic Consequences of the Peace and the Versailles treaty, where he pointed out that forcing Germany into extreme austerity, although it might satisfy certain moral, ethical, or political urges, had macroeconomic consequences that might force Germany eventually to rebel. By the same token, if there’s not growth for the South, eventually they’re going to decide that default and leaving the euro are better options than what they have.”
From: Erwan Mahé 27 January 2017
Good morning! I would like to take this opportunity to wish everyone best wishes for 2017. Let us hope it will be less complicated than the one that just ended.
Unfortunately, I fear that we will remain at the mercy of political events for some time to come. I have come to fear like the plague alternative facts analysis of politics relating to financial markets, with the real economy seemingly more and more directive than before, at least for the time being. But I also use this time of the year to plunge into the reading of the full, declassified minutes of FOMC meetings of the last five years, this time, from 2011. Read more…
from Lars Syll
In an often cynical world, standard ﬁnancial and macroeconomic quantitative models give people the beneﬁ t of the doubt. Fundamental economic theory assumes the best of us, supposing that human beings are perfectly rational, know all the facts of a given situation, understand the risks, and optimize our behavior and portfolios accordingly. Reality, of course, is quite different. While a signiﬁcant portion of individual and market behavior can be modeled reasonably well, the human emotions that drive cycles of fear and greed are not predictable and can often defy historical precedent. As a result, quantitative models sometimes fail to anticipate major macroeconomic turning points. The ongoing debt crisis in Europe is the most recent example of an extreme event shattering historical norms.
Once an extreme event occurs, standard models offer limited insight as to how the ensuing crisis could play out and how it should be managed, which is why policy responses can seem disjointed. The latest policy responses to the European crisis have been no exception. To understand and respond to a crisis like the one in Europe, perhaps we need to consider some new models that include the “human factor.” Economic historian Charles Kindleberger can offer some insight. In his book Manias, Panics, and Crashes, Kindleberger explores the anatomy of a typical ﬁnancial crisis and provides a framework that considers the impact of the powerful human dynamics of fear and greed. Kindleberger’s descriptive process of the boom and bust liquidity cycle can help shed light on the current European sovereign debt saga, and perhaps illuminate whether we have in fact turned the corner on this ﬁnancial crisis.
from Norbert Häring
Boston Consulting Group (BCG), the omnipresent US-consulting company, and Google, the global data miner, issued a joint report in July 2016 on the “$500 bn Pot of Gold”, which is the Indian digital payment market. Even though the authors deny it, the report gives much reason to suspect that the authors knew that something radical was imminent from the Indian government. The report is remarkably honest about the aims of the whole exercise.
There is no statement in the BCG-Google-report “Digital Payments 2020” to the effect that it is related to the joint initiative of USAID and the Indian ministry of finance, formally established in 2015, to push back the use of cash and promote digital payments. Rather it is presented as a freestanding initiative of BCG and Google. I reached out to one of the authors, BCG’s senior partner Alpesh Shah, to ask about this and he insisted: “This was a joint BCG-Google report, with no connection / relation to USAID/Indian Ministry of Finance.” However, there is much to suggest that there was a connection. First of all, the subject so perfectly fits with the program of that partnership. The subtitle of the report is “The Making of a $500 bn ecosystem in India”. The steering committee for the report included a representative of Visa, member of the Better Than Cash Alliance together with USAID and affiliate of the partnership of USAID and Indian finance ministry to advance digital payments. It also included PayTM and Vodafone, which are also part of the CATALYST coalition, a project, which according to USAID, is a “next step” in said partnership of USAID and the Indian finance ministry.
The report is a call to arms for all payment service providers. They are alerted that things are going to be shaken up in India. On page three it says: Read more…
from David Ruccio
In discussing the textbook treatment of the minimum wage, James Kwak provides a perfect example of how contemporary mainstream economics “can be more misleading than it is helpful.”
Kwak refers to the problem as “economism.”* For me, borrowing from a different tradition, it is a case of “vulgar economics.” Read more…
from Peter Radford
Already the Trump regime is taking shape. Or, rather, I ought say the agenda is taking shape since the cabinet that is supposed to be overseeing things is well behind schedule in arriving on station.
First things first.
Trump raised to cost of applying for a mortgage for low income people. He undid a recent reduction in the fees charged by the FHA. That reduction had been put in place because the FHA has a large surplus and wanted to pass along that prosperity to homeowners. Apparently Trump thinks that FHA mortgages should be more expensive. This is an attack on low income voters that is pure Republican thinking and not at all populist. Republicans hate the FHA. They always have. They don’t believe in any help for low income people other than charity.
Next: Trump signed an order calling for the abolition of Obamacare. This is meaningless since undoing Obamacare will take a long time. What the order could do, however, is to throw the insurance market into a bit of a mess and thus drive up premiums for everyone as insurance companies scramble to figure out how to ditch 20 million customers.
Third: Trump begins his attack on free trade by getting the US out of the Trans Pacific Partnership [TPP] and calling for the renegotiation of NAFTA. He also has made dark comments about imposing tariffs on imports. None of this will have a great deal of impact because the exchange rate ought offset most of it. TPP was a rotten deal because it was mainly, from the US point of view, a pro-big business boondoggle. It was first proposed during the Bush administration, and was opposed by many leaders on the left. Good riddance. Re-negotiating NAFTA will be much more tricky and probably will have little effect. Most of the shifts in employment, which seems to be Trump’s motivation, will not change because automation is making them anachronisms. Read more…
As far as I’m concerned, the ECB does not yet have to increase interest rates – as households still have to be able to refinance many billions high rate loans. As mister Draghi has shown, using sectoral balances, households have, unlike companies and governments not yet profited from low rates and QE! Individual EU countries have to reign in the housing market, though. Below, I’ll share some thoughts about this (as I’m a member of the ECB shadow council who gives advice on this, and I am reconsidering my point of view).
Graph 1: Net interest ‘income’ of banks, the government, non-financial companies and households.
from Lars Syll
Nation states borrow to provide public capital: For example, rail networks, road systems, airports and bridges. These are examples of large expenditure items that are more efficiently provided by government than by private companies.
The benefits of public capital expenditures are enjoyed not only by the current generation of people, who must sacrifice consumption to pay for them, but also by future generations who will travel on the rail networks, drive on the roads, fly to and from the airports and drive over the bridges that were built by previous generations. Interest on the government debt is a payment from current taxpayers, who enjoy the fruits of public capital, to past generations, who sacrificed consumption to provide that capital.
To maintain the roads, railways, airports and bridges, the government must continue to invest in public infrastructure. And public investment should be financed by borrowing, not from current tax revenues …
The debt raised by a private sector company should be strictly less than the value of assets, broadly defined. That principle does not apply to a nation state. Even if government provided no capital services, the value of its assets or liabilities should not be zero except by chance.
National treasuries have the power to transfer resources from one generation to another. By buying and selling assets in the private markets, government creates opportunities for those of us alive today to transfer resources to or from those who are yet to be born. If government issues less debt than the value of public capital, there will be an implicit transfer from current to future generations. If it owns more debt, the implicit transfer is in the other direction.
The optimal value of debt, relative to public capital, is a political decision. Public economics suggests that the welfare of the average citizen will be greatest when the growth rate is equal to the interest rate. Economists call that principle the golden rule. Democratic societies may, or may not, choose to follow the golden rule. Whatever principle the government does choose to fund its expenditure, the optimal value of public sector borrowing will not be zero, except by chance.
Today there seems to be a rather widespread consensus of public debt being acceptable as long as it doesn’t increase too much and too fast. If the public debt-GDP ratio becomes higher than X % the likelihood of debt crisis and/or lower growth increases.
from David Ruccio
The American Dream has all but collapsed under the weight of growing inequality. It’s becoming increasingly difficult for the American working-class to sustain a decent standard of living, and their children are increasingly unlikely to be better off than they are.
But those who hang on to the American Dream—or at least the selling of that dream to others—believe that sending young people to the nation’s colleges and universities is the solution. Read more…
A negative interest rate policy (NIRP) appears revolutionary, but its justification rests on failed, pre-Keynesian “classical” economics. This claims that lower interest rates can always solve aggregate demand shortages and lead to full employment. Keynes discredited classical economics by showing that saving and investment might not respond, as assumed, to lower interest rates. Once all profitable investment opportunities have been undertaken, negative interest rates may encourage firms to buy back shares or raise credit for takeover activity. This creates financial fragility via debt-laden balance sheets, and reduces firms’ financial capacity for future investment. Negative interest rates may also in fact increase savings if households try to compensate for lost interest income. NIRP may generate financial disruption, too, which can reduce the supply of bank credit and increase its cost. Somebody must bear the cost of negative rates. If banks absorb it, that will reduce their profitability and they may reduce lending via raised credit standards. Alternatively, if banks decide they do not want to lose deposits — a valuable source of cheap, stable long-term finance — by introducing negative interest rates, they may instead pass the cost on to borrowers. NIRP also undermines insurance companies and pension funds, which may then engage in risky yield-chasing. This makes them financially fragile and leads to asset bubbles. Internationally, NIRP encourages competitive devaluation “currency wars” that cause disruption to manufacturing. And it creates exchange rate uncertainty, which can lower global investment. Lastly, there is the danger of a major contradiction. NIRP aims to increase house prices and equity prices, and so generate wealth effects that stimulate the economy. But if the policy is successful, future interest rates will rise. And this risks triggering a financial crisis as bubbles burst, house prices fall, and we see debt defaults. In normal times, lower interest rates stimulate the economy, but one can have too much of a good thing. NIRP is pushing monetary policy into an area where it is likely to start doing harm. Read more…