Yesterday, as part of an attempt to raise the level of discussion about the Eurozone problems, I spent the better part of ten minutes to download a 98 page Excel-file from Eurostat containing data about the last sixteen years of European Union macro economic history. It turns out that Greece has a surplus of almost 10% of GDP on its ‘international trade in services’ account (among other things: shipping, tourism). That’s a lot by whatever standard and surely when compared with 2% of GDP German deficit. In the EU it is only topped by tiny Malta, Cyprus and Luxembourg. It is caused by the fact that Greece is not only home to one world-class economic sector (tourism) but even to two (the other being shipping), which is a lot for a country the size of Greece.
The changes to economic theory beyond the micro level involve a complete recanting of the neoclassical vision. The vital first step here is to abandon the obsession with equilibrium.
The fallacy that dynamic processes must be modelled as if the system is in continuous equilibrium through time is probably the most important reason for the intellectual failure of neoclassical economics. Mathematics, sciences and engineering long ago developed tools to model out of equilibrium processes, and this dynamic approach to thinking about the economy should become second nature to economists. Read more…
C. T. Kurien
WEALTH and ILLFARE is intended for readers who do not have much knowledge in economics, but are eager to know how economic systems function.
In particular, it deals with the phenomenon that many find disturbing, the soaring affluence of the few and the continuing misery of the many that is increasingly becoming evident globally and in our country.
Ownership and control over resources, different forms of mediation and asymmetry of information are identified as clues for any interested reader to develop skills to study real life economic problems.
It is a unique and timely contribution by a reputed practitioner who, over the past half a century, has influenced generations of students and through his earlier writings the general public as well.
from Lars Syll
DATE: December 12, 1991
FR: Lawrence H. Summers
1) The measurements of the costs of health impairing pollution depends on the foregone earnings from increased morbidity and mortality. From this point of view a given amount of health impairing pollution should be done in the country with the lowest cost, which will be the country with the lowest wages. I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that. Read more…
from Norbert Häring
In June 2011, Spiegel Online conducted and published a remarkable interview with Albrecht Ritschl. Ritschl is one of Germany’s most renowned economic historians, teaching at the London School of Economics. Already for years ago, he warned that Germany, being the worst debt offender in history, would ultimately regret it, if it insisted on behaving like the tough taskmaster of Athens and the rest of Europe. What Ritschl predicted is happening now. Greece is presenting us with huge unpaid bills from our dark past. Others might follow, if we are required to pay our long/evaded dues. Some highlights of what Ritschl said in the interview that was conducted by Yasmin El-Sharif:
from Lars Syll
“Robert Lucas: Economics tries to… make predictions about the way… say, 280 million people are going to respond if you change something in the tax structure, something in the inflation rate, or whatever…. Kahnemann and Tversky haven’t even gotten to two people; they can’t even tell us anything interesting about how a couple that’s been married for ten years splits or makes decisions about what city to live in–let alone 250 million. This is like saying that we ought to build it up from knowledge of molecules or–no, that won’t do either, because there are a lot of subatomic particles…. We’re not going to build up useful economics in the sense of things that help us think about the policy issues that we should be thinking about starting from individuals and, somehow, building it up from there. Behavioral economics should be on the reading list…. But to think of it as an alternative to what macroeconomics or public finance people are doing or trying to do… not in my lifetime…“
I do not think Lucas understands how silly he sounds.
In quite some Eurozone countries staggering amounts of money have been paid to save bankrupt banks (table, via @cigolo). In Ireland, this amounted to about € 40.000,– per Household, in Greece to 17.000,– and in Spain to 3.000,– . Which includes unbanked households, households where every adult is unemployed and, in Spain, the 70.000 households which faced a ‘certification of a foreclosure begun’ . And there are quite some households where every adult is unemployed, in countries like Spain and Greece which face unemployment rates of 23 and 26%. Paying back this money of course depresses the economy as it’s not recirculated. At the same time, in Cyprus the Troika pushes for mass evictions based upon a creditor centered valuation system which will not only cause social harm but which also lower asset prices. That’s what debt deflation looks like. Read more…
from Lars Syll
Even after one of the most severe multi-year crises on record in the advanced economies, the received wisdom in policy circles clings to the notion that high-income countries are completely different from their emerging-market counterparts. The current phase of the official policy approach is predicated on the assumption that growth, financial stability, and debt sustainability can be achieved through a mix of austerity and forbearance (and some reform). The claim is that advanced countries do not need to resort to the more eclectic policies of emerging markets, including debt restructurings and conversions, higher inflation, capital controls, and other forms of financial repression. Now entering the sixth or seventh year (depending on the country) of crisis, output remains well below its pre-crisis peak in ten of the twelve crisis countries. The gap with potential output is even greater. Delays in accepting that desperate times call for desperate measures keeps raising the odds that, as documented here, this crisis may in the end surpass in severity the depression of the 1930s in a large number of countries.
This time it seems as though it is — really — different. At last the light at the end of the austerity tunnel seeps through.
“Statistical Foundations for Econometric Techniques” features previously unavailable material in a textbook format for econometrics students, researchers and practitioners. Taking strong positions for and against standard econometric techniques, the book endorses a single best technique whenever possible. In many cases, the recommended optimal technique differs substantially from current practice. Detailed discussions present many new estimation strategies superior to conventional OLS, and ways to use them. It evaluates econometric techniques and the procedures commonly used to analyse those techniques. It challenges established concepts and introduces many techniques that are not available in other texts. It recommends against using the Durbin-Watson and Lagrange Multiplier tests in favour of tests with superior power. This title forms a judicious mixture of various methodological approaches, and it illustrates Empirical Bayes estimators and robust regression techniques possessing a 50 per cent breakdown value.
from Lars Syll
If this is recovery for Europe, well, I’ll be dipped! Some years ago unemployment rates at these levels were considered totally unacceptable. And then came the Reagan-Thatcher turnover and price stability was everything and being unemployed was something people freely chose to be …
from David Ruccio
Andrew Bacevich begins his review of Christian Appy’s new book, American Reckoning: The Vietnam War and Our National Identity, with the following:
Policy intellectuals — eggheads presuming to instruct the mere mortals who actually run for office — are a blight on the republic. Like some invasive species, they infest present-day Washington, where their presence strangles common sense and has brought to the verge of extinction the simple ability to perceive reality. A benign appearance — well-dressed types testifying before Congress, pontificating in print and on TV, or even filling key positions in the executive branch — belies a malign impact. They are like Asian carp let loose in the Great Lakes.
Appy’s examples include, in the area of national security, Cold Warriors McGeorge Bundy, Walt Whitman Rostow, and Samuel P. Huntington. Bacevich then extends the analysis to the new foreign policy intellectual establishment associated with Ashton Carter in his return to the Pentagon as President Obama’s fourth secretary of defense.
I wonder if we might use the same kind of analysis to examine Obama’s economic team, especially the first group of economic advisers. They included Treasury Secretary Timothy Geithner (whose “counselors” included Lewis Alexander, Gene Sperling, and Lael Brainard), National Economic Council Director Lawrence Summers, Deputy Director of the National Economic Council (and now Chairperson of the Council of Economic Advisers) Jason Furman, and others. In Obama’s case, the members of the economics “Brains Trust” weren’t from Yale but had close associations with Robert Rubin, the former co-chairman of Goldman Sachs who served as Treasury secretary under Bill Clinton.
from Lars Syll
A couple of years ago yours truly had an interesting luncheon discussion with Deirdre McCloskey on her controversy with Kevin Hoover on significance testing. It got me thinking about where the fetish status of significance testing comes from and why we are still teaching and practising it without serious qualifications despite its obvious inadequacies.
A non-trivial part of teaching statistics is made up of learning students to perform significance testing. A problem I have noticed repeatedly over the years, however, is that no matter how careful you try to be in explicating what the proba-bilities generated by these statistical tests – p-values – really are, still most students misinterpret them.
Giving a statistics course for the Swedish National Research School in History, I asked the students at the exam to explain how one should correctly interpret p-values. Although the correct definition is p(data|null hypothesis), a majority of the students either misinterpreted the meaning of the p-value as being the likelihood of a sampling error (which of course is wrong, since the very computation of the p value is based on the assumption that sampling errors are what causes the sample statistics not coinciding with the null hypothesis), or that the meaning of the p-value is the probability of the null hypothesis being true, given the data (which is a case of the fallacy of transposing the conditional, and of course also being wrong, since that is p(null hypothesis|data) rather than the correct p(data|null hypothesis)). Read more…
from Mark Weisbrot
The electoral victory of Syriza in Greece on January 25 marked the first government that was elected with a strong mandate to finally say no to European officials who have been trying to remake Europe since at least 2010. While many thought it was impossible for a small country with just 2 percent of the economic output of the 19-nation eurozone to change the course of Europe’s history, it is already happening. On Friday, February 20, European officials backed off from their threats and assaults on the Greek financial system, which had already caused more than $13 billion dollars of deposits to flee the country in January. They agreed, for the first time (and for the first country) since Europe’s post-crisis austerity began, that the terms of Greece’s financing could be renegotiated. On Monday, March 9, officials are expected to present their proposals to eurozone finance ministers. If these are eventually rejected, Greece is considering calling new elections or a referendum over its deal with lenders.
This is a milestone on the way to renewed civilization for the rest of the eurozone. The country that has been the next hardest hit, with 23.7 percent unemployment, is Spain. And after years of mass unemployment and “reforms” that have hacked away at public services, pensions, labor and civil rights – a political rebellion has been born in Spain that promises to bring the next democratic alternative government to power. Read more…
1) The latest from Josh Mason: Disgorge the cash. He states that, according to mainstream theory, wealth owners don’t care about the liquidity of their wealth. Money or equity in their own company, it’s all the same. In reality, however, they do. He shows that rentiers love money. And they want it now. As a consequence,
The Federal Reserve has certainly succeeded at making it cheaper for corporations to borrow, and in the postwar decades, when today’s policy consensus took shape, abundant credit would have offered strong encouragement for higher investment. In that context, it made sense to think of credit as the “gas pedal” or “thermostat” of the economy, which the central bank could raise or lower at will. But in the financialized economy, the link between credit availability and real production and job growth is much less reliable. Today, rentier-dominated firms use cheaper credit primarily to boost dividends and stock buybacks. This means there is no longer a strong link between real spending and corporate borrowing. This is a serious problem for monetary policy, since it is this real spending that boosts GDP and employment. Without a strong link between financing and investment, it is more difficult to use lower interest rates to raise employment and wages. To the extent the policy is effective, it must rely more on the few sectors of the economy where real activity remains interestsensitive — most recently, the housing sector. And the costs of responding to all demand shocks by inducing offsetting swings in housing-related borrowing are now all too apparent.
I have already explained the difference between complex and uncertain worlds, and highlighted the importance of agents’ beliefs about how the world is and of the knowledge they can possibly have about it have for decision making. Now it is time to consider in more detail two different roles agents play in the economic process: decision-makers and lobbyists.
Individuals or firms may take economic decisions (behaving as decision-makers), or may influence economic performance in a broader sense with the purpose of enforcing the success of their decisions. In this second role they behave as lobbyists. The category of lobbyists includes the government, media of communication, corporations, unions, political parties and any individual or groups of individuals that are strong enough to influence the course of economic events. They may try to influence the expectations of other agents or the relevant economic context (promoting changes into the legislation, new regulations and institutions, etc).
The distinction between decision-makers and lobbyists refers exclusively to two different roles that the very same agents can play. One way to visualize this difference is to base it on two stages of economic processes: the time before and after decision-making. Read more…
In Appreciating Mental Capital: What and Who Economists Should Also Study, Robert Locke sets straight the most famous case of historical falsification in economics – The neoclassical economists removal of the subject of mental capital from the lexicon of economic studies over which they had gained control by mid-20th century. He accomplishes this feat by returning to the origins of economic thought in the age of classical economics to rediscover, by broadening the analysis historically and geographically, especially to German economists, a thriving school of mental capital advocates persistently challenging the classical/neoclassical view of physical capital as the chief driver of technological expansion.
The neoclassical school’s takeover of economics, Locke asserts in Chapter I, has led to an incomplete and distorted discussion within economics of the subject. Students of economics, therefore, cannot rely on economists to examine the subject of mental capital, but need to study the actual formation of mental capital in our times.
from David Ruccio
U.S. workers’ wages are going nowhere fast. Read more…
from Lars Syll
As is well-known, New Classical economists have never accepted Keynes’s distinction between voluntary and involuntary unemployment. According to New Classical übereconomist Robert Lucas, an unemployed worker can always instantaneously find some job. No matter how miserable the work options are, “one can always choose to accept them,” according to Lucas.
But sadly enough this extraterrestrial view of unemployment is actually shared by ‘New Keynesians,’ whose microfounded dynamic stochastic general equilibrium models cannot even incorporate such a basic fact of reality as involuntary unemployment!
Of course, working with microfunded representative agent models, this should come as no surprise. If one representative agent is employed, all representative agents are. The kind of unemployment that occurs is voluntary, since it is only adjustments of the hours of work that these optimizing agents make to maximize their utility. Read more…
from Lars Syll
Are macro-economists doomed to always “fight the last war”? Are they doomed to always be explaining the last problem we had, even as a completely different problem is building on the horizon?
Well, maybe. But I think the hope is that microfoundations might prevent this. If you can really figure out some timeless rules that describe the behavior of consumers, firms, financial markets, governments, etc., then you might be able to predict problems before they happen. So far, that dream has not been realized. But maybe the current round of “financial friction macro” will produce something more timeless. I hope so.
So there we have it! This is nothing but the age-old machine dream of neoclassical economics — an epistemologically founded cyborg dream that disregards the fundamental ontological fact that economies and societies are open — not closed — systems. Read more…
from John Komlos
Irving Berlin was dreaming of an old-fashioned Christmas. I’m dreaming of an old-fashioned economy in which everyone has a job. I know, it was ages ago, but what are dreams for anyway?
Isn’t it strange that full employment has to be a dream, even a quarter millennium after the beginning of our stupendous surge in wealth with the Industrial Revolution? But what is full employment? Well, it’s simple enough, isn’t it? An economy in which there are enough jobs to go around for everyone. But here is where the complications begin.
There are rationalizations galore why we have to accept unemployment as an integral part of our economic system. Read more…