Real-World Economics Review Blog

from David Ruccio

New technologies—automation, robotics, artificial intelligence—have created a specter of mass unemployment. But, as critical as I am of existing economic institutions, I don’t see that as the issue, at least at the macro level. The real problem is the distribution of the value that is produced with the assistance of the new technologies—in short, the specter of growing inequality.

David Autor and Anna Salomons (pdf) are the latest to attempt to answer the question about technology and employment in their contribution to the recent ECB Forum on Central Banking. Their empirical work leads to the conclusion that while “industry-level employment robustly falls as industry productivity rises. . .country-level employment generally grows as aggregate productivity rises.”

To me, their results make sense. But for a different reason.

It is clear that, in many sectors—perhaps especially in manufacturing—the growth in output (the red line in the chart above) is due to the growth in labor productivity (the blue line) occasioned by the use of new technologies, which in turn has led to a decline in manufacturing employment (the green line).   Read more…

Is there a decoupling of economic growth and use of materials? On the national scale: sometimes. On the global scale: absolutely not. From The Journal of Industrial Ecology:

The international industrial ecology (IE) research community and United Nations (UN) Environment have, for the first time, agreed on an authoritative and comprehensive data set for global material extraction and trade covering 40 years of global economic activity and natural resource use. This new data set is becoming the standard information source for decision making at the UN in the context of the post-2015 development agenda, which acknowledges the strong links between sustainable natural resource management, economic prosperity, and human well-being. Only if economic growth and human development can become substantially decoupled from accelerating material use, waste, and emissions can the tensions inherent in the Sustainable Development Goals be resolved and inclusive human development be achieved. In this paper, we summarize the key findings of the assessment study to make the IE research community aware of this new global research resource. The global results show a massive increase in materials extraction from 22 billion tonnes (Bt) in 1970 to 70 Bt in 2010, and an acceleration in material extraction since 2000. This acceleration has occurred at a time when global population growth has slowed and global economic growth has stalled. The global surge in material extraction has been driven by growing wealth and consumption and accelerating trade. A material footprint perspective shows that demand for materials has grown even in the wealthiest parts of the world. Low-income countries have benefited least from growing global resource availability and have continued to deliver primary materials to high-income countries while experiencing few improvements in their domestic material living standards. Material efficiency, the amount of primary materials required per unit of economic activity, has declined since around 2000 because of a shift of global production from very material-efficient economies to less-efficient ones. This global trend of recoupling economic activity with material use, driven by industrialization and urbanization in the global South, most notably Asia, has negative impacts on a suite of environmental and social issues, including natural resource depletion, climate change, loss of biodiversity, and uneven economic development.

from Lars Syll

Defenders of microfoundations and its rational expectations equipped representative agent’s intertemporal optimization often argue as if sticking with simple representative agent macroeconomic models doesn’t impart a bias to the analysis. I unequivocally reject that unsubstantiated view, and have given the reasons why here.

These defenders often also maintain that there are no methodologically coherent alternatives to microfoundations modeling. That allegation is of course difficult to evaluate, substantially hinging on how coherence is defined. But one thing I do know, is that the kind of microfoundationalist macroeconomics that New Classical economists and “New Keynesian” economists are pursuing, are not methodologically coherent according to the standard coherence definition (see e. g. here). And that ought to be rather embarrassing for those ilks of macroeconomists to whom axiomatics and deductivity is the hallmark of science tout court.

The fact that Lucas introduced rational expectations as a consistency axiom is not really an argument to why we should accept it as an acceptable assumption in a theory or model purporting to explain real macroeconomic processes (see e. g. here). And although virtually any macroeconomic empirical claim is contestable, so is any claim in micro (see e. g. here).

On this issue I think Paul Krugman comes closer to truth than his “New Keynesian” buddies with his remark that  Read more…

from Dean Baker

In the last couple years, the financial transactions tax (FTT) has moved from a fringe idea to a policy proposal treated seriously by even the mainstream of the Democratic Party. The decision by Senator Bernie Sanders to make it a central part of his presidential campaign certainly helped, but a number of members of Congress, including Keith Ellison and Peter DeFazio, have also pushed FTT proposals for many years.

The FTT is also gaining momentum overseas. There’s a push to enact an FTT in the eurozone. And in England, an expanded FTT — the London stock exchange has long levied a 0.5 percent tax on stock trades — was included in the Labour Party’s platform in the recent election.

But while the idea of taxing financial transactions is growing more popular, even many of its proponents don’t realize its full benefits. An FTT is usually seen as a way to raise large amounts of revenue (in the US, it could possibly generate as much as $190 billion a year, or 1 percent of GDP). Or it is viewed as a means to limit speculative trading in the financial sector, potentially making markets less volatile.

The best argument for an FTT, however, is that it can sharply reduce some of the highest incomes in the economy by curtailing the trading that makes those incomes possible. As a result, it can play a large role in reversing the upward redistribution of income that we’ve seen over the last four decades.

Investors …   Read more…

from David Ruccio

Sometimes you just have to sit back and admire capitalism’s ingenuity.

It’s able to make profits twice over. First, capitalists know that, when they keep workers’ wages down—even when there’s “full employment”—they can make spectacular profits. And, second, they can make additional profits by loaning money to those same workers, who are desperate to purchase goods and services and send their children to college, thereby financing the demand for the goods and services industrial capitalists need to sell to realize their profits.

Thus, as we can see in the chart at the top of the post, the amount of consumer credit is once again soaring to record highs. In relation to personal income, consumer credit fell after the Great Recession (to just under 20 percent in December 2012)—as households “deleveraged”—and then it began to rise once again, reaching 23.3 percent four years later.  Read more…

from Lars Syll

Some time ago yours truly ventured to question Paul Krugman for his unadulterated devotion to the IS-LM model. For years self-proclaimed “proud neoclassicist” Paul Krugman had in endless harpings on the same IS-LM string told us about the splendour of the Hicksian invention.

Krugman’s response contained nothing new. In an earlier post on his blog, Krugman had argued that ‘Keynesian’ macroeconomics more than anything else “made economics the model-oriented field it has become.” In Krugman’s eyes, Keynes was a “pretty klutzy modeler,” and it was only thanks to Samuelson’s famous 45-degree diagram and Hicks’s IS-LM that things got into place. Although admitting that economists have a tendency to use ”excessive math” and “equate hard math with quality” he still vehemently defends — and always have — the mathematization of economics:

I’ve seen quite a lot of what economics without math and models looks like — and it’s not good.

Sure, ‘New Keynesian’ economists like Mankiw and Krugman — and their forerunners, ‘Keynesian’ economists like Paul Samuelson and (young) John Hicks — certainly have contributed to making economics more mathematical and “model-oriented.”   Read more…

House price developments in the EU show large differences in development – which makes the task for monetary and fiscal policy even more difficult.

One of the beneficial consequences of the Great Financial Crisis is that economic statisticians at for instance Eurostat or the Bank for International Settlements spend more effort on assembling house prices , though The Economist deserves praise as it led the way about 15 years ago. What do these data tell us? Low interest rates are criticized by some economists as these should encourage asset price bubbles. Houses are our most important asset. Are house prices in the EU at this moment increasing too fast?

Not yet in Southern Europe. Spanish prices show a considerable increase but the level in Spain is still low. And prices in France and Italy do not show any meaningful increase, while Italian levels are low.

However… Swedish prices are of the chart. Dutch prices are rapidly increasing (and continued to do so during the first six months of 2017). German prices have, by now, increased with a third (house ownership in Germany is less common than in many other countries but the increase means that there will, quite soon, be a push to sell houses to renters – who of course have to borrow from the big banks). yes, there is a northern European bubble. And it is rapidly inflating: during the last six months (not in the graph) prices have continued to increase.

The house price bubble has not exactly the same characteristics as the previous one. The previous bubble was financed by credit and money creation. The money created was to a considerable extent stacked away by the sellers (who often inherited these houses) in long-term deposits and is now used again to finance new house purchases. In selected cities, like Amsterdam, house prices are exploding (+21% in one year, I read somewhere) which is to an extent influenced by Airbnb. Nevertheless – house prices show continued increases which are way higher than the increases of nominal income of households, even including Airbnb income. Actions have to be taken: a gradual increase (with clear forward guidance) of land value taxes (the money raised has to be used to lower VAT on labor), a gradual decrease of Loan to Value ratio’s (with clear forward guidance) and a gradual banishment of tax deductions of interest paid (with clear forward guidance).

It won’t happen.

Do we need growth? Do we need technology? Is technology ‘neutral’ in the sense that its appearance and use can be understood without historical context? The Journal of Industrial Ecology has a special issue about such ideas. I love the kind of calculations they do about flows of stuff. But Vincent Moreau, Marlyne Sahakian, Pascal van Griethuysen and Francois Vuille have an apt observation.

In light of the environmental consequences of linear production and consumption processes, the circular economy (CE) is gaining momentum … promoting closed material cycles by focusing on multiple strategies from material recycling to product reuse, as well as rethinking production and consumption chains toward increased resource efficiency. Yet, by considering mainly cost-effective opportunities within the realm of economic competitiveness, it stops short of grappling with the institutional and social predispositions necessary for societal transitions to a CE. The distinction of noncompetitive and not-for-profit activities remains to be addressed, along with other societal questions relating to labor conditions, wealth distribution, and governance systems. … We examine the CE from a biophysical and social perspective to show that the concept lacks the social and institutional dimensions to address the current material and energy throughput in the economy. We show that reconsidering labor is essential .

See also Branko Milanovic about the”Need and inevitability of growth”: Read more…

Recently, Germany introduced an economy wide minimum wage. This led to better jobs, better incomes, an increase in productivity, no upsurge in inflation and no decline of employment growth:

“Higher wages, shorter hours The comparison of both worker groups shows that the minimum wage has worked. As intended, the hourly wage of the interviewed minimum wage workers rose from €6.70 to €8.20, an impressive 22 percent. This is a multiple of the wage increase in the control group, which amounted to 4 percent. However, this also shows that the average hourly wage had not yet reached the minimum wage of €8.50, which is not due to exemptions from the minimum wage (we excluded these from the data). At the same time, weekly working hours of minimum wage workers fell by 90 minutes, whereas working time in the control group increased somewhat. In particular, the share of employees with very long working hours of more than 45 fell markedly. This also runs counter to the trend of the control group. Finally, despite lower average working hours, the monthly gross wage climbed from roughly €840 to €990. This is important, since it is the gross wage more than the hourly wage that matters for being able to meet living expenses.

Happier despite higher workload

These results paint the minimum wage in glowing colours for affected workers. However, how did companies react? Manager interviews conducted in another IAB survey showed that firms focused more on raising worker productivity than on layoffs. Our results confirm this from a worker perspective.”

In the USA and the EU, employment is up and unemployment is down. But unemployment is not yet low. Unemployment rates have to decline more (a bit in the USA, a lot in the EU) and participation rates have to recover (a lot in the USA, a bit in the EU). In the EU, there are large differences between countries (compare Spain with Germany). But on the macro level, there is still a large reservoir of involuntary unemployment and, looking at the participation rates, people who have given up altogether.

For practical reasons (it always takes time and effort to find a job), unemployment will never be zero. But we can account for this and look at “involuntary unemployment” only. In a statistical sense, we might define involuntary unemployment as the number of unemployed which, after a reasonable time, still have not yet found a new job. Available data led me to set this ‘reasonable time’ to one quarter for the EU and to 15 weeks for the USA, the data are shown in graph 1 (German data not available!). In the USA, there are still over 2 million people who were unemployed for 15 weeks or more. Which is way lower than in 2009 – but still 2 million. The comparable figure for the Euro zone is, ahem, 9,7 million and for the non-Euro zone EU about 1,7 million. And though the employment to population ratio in the USA is finally rising in a serious way, it is still way below the per 2008 level (let alone the much higher level of the end of the twentieth century). Aside – the nefarious consequences of the combination of monetary tightening and government austerity in the Euro zone after 2010 clearly show.

Meta: John Maynard Keynes once invented, or at least popularized, the word: “involuntary unemployment”. This means something as: “even when the unemployed are willing to accept a wage cut to find work – they won’t find it”. To restate this in the language of modern data on labor market flows: “even when, during a slump, the wage rate is cut this won’t increase the net outflow (gross outflow minus gross inflow) from the reservoir of unemployed”. One of the reasons for this is the non-existence of individual wages. A wage cut is not a wage cut for an individual worker – but a cut to the ‘market rate’, a ‘wages cut’. That’s the way labor markets work. And worked: historical data on wages very clearly show the existence of very stable market wide wage rates for carpenters, agricultural labor, masons and whatever even in a time when government interference with wage rates was much less than today.

Update: more meta. The way the unemployment data used above are measured ensures that it shows that on the individual level ‘measured unemployment’ is involuntary too, as the unemployed are asked if they are actively trying to change their situation. This is related to but not the same kind as the ‘involuntary unemployment’ referred to above which is probably best explained by the fact that the people in the unemployment reservoir might, in one year, be very different people than in the preceding or the next year. A not entirely satisfying aspect of the definition of involuntary unemployment used above is that even when people get new jobs quite fast they still might encounter many short spells of unemployment, leading to high average unemployment.

from Peter Radford

I have been less vexed about economics recently precisely because I have been focused on other, and more urgent, topics. The politics of our age are wondrously absorbing, if not a little disturbing. In any case I do try to keep an eye on what economists are up to. In that endeavor I came across a short article by Diane Coyle on the website “Project Syndicate”. If you want to know what is occupying the establishment it’s a good place to visit periodically.

And Professor Coyle is decidedly establishment.

Her article is couched as a book review/discussion of what ails economics. In it she attempts to refute the notion that economics is lost in a desert of its own making, as I and many others would suggest, but rather, she argues, it is vibrant and rapidly modernizing. She tries to persuade us that critics, like me, just don’t get what’s going own at the frontier of the discipline. There are, apparently, a load of breakthrough ideas some of which might make it into the textbooks sometime in the future.

Great.

But not great enough.

Two paragraphs towards the end of her article illustrate the issues:  Read more…

from David Ruccio

Obviously, recent events—such as Brexit, Donald Trump’s presidency, and the rise of Bernie Sanders and Jeremy Corbyn—have surprised many experts and shaken up the existing common sense. Some have therefore begun to make the case that an era has come to an end.

The problem, of course, is while the old may be dying, it’s not all clear the new can be born. And, as Antonio Gramsci warned during the previous world-shaking crisis, “in this interregnum morbid phenomena of the most varied kind come to pass.”

For Pankaj Mishra, it is the era of neoliberalism that has come to an end.

In this new reality, the rhetoric of the conservative right echoes that of the socialistic left as it tries to acknowledge the politically explosive problem of inequality. The leaders of Britain and the United States, two countries that practically invented global capitalism, flirt with rejecting the free-trade zones (the European Union, Nafta) they helped build.

Mishra is correct in tracing British neoliberalism—at least, I hasten to add, its most recent phase—through both the Conservative and Labour Parties, from Margaret Thatcher to Tony Blair and David Cameron.* All of them, albeit in different ways, celebrated and defended individual initiative, self-regulating markets, cheap credit, privatized social services, and greater international trade—bolstered by military adventurism abroad. Similarly, in the United States, Reaganism extended through both Bush administrations as well as the presidencies of Bill Clinton and Barak Obama—and would have been continued by Hillary Clinton—with analogous promises of prosperity based on unleashing competitive market forces, together with military interventions in other countries.  Read more…

real-world economics review
Issue no. 80 
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from Lars Syll

Read more…

from Jamie Morgan

Understanding Brexit requires us to consider the political economy of tax justice and the abuse of wealth protection.

At a time when a general election has dominated the press for the last two months and Brexit has been a shadow of anxiety – a most remarkable event that the political parties have been steadfastly refusing to remark upon in any meaningful way – it is important to recall just how we got to the current state of affairs; a state that Craig Berry refers to as ‘undemocracy’.  A narrow majority decision based on (at best) limited information has become a fait accompli empowering government to pursue a position regarding which the populous are still in ignorance.  It is difficult to see what kind of mandate follows from this, but it is not difficult to see that the longstanding problem is one of increasing separation between citizenry and those who they elect to represent them.

Disintegration, distrust and any number of additional alliteratively phrasable and parsable terms and concepts have general and specific causes.  If we are to understand how we got here there is a political economy to be considered.  Financialisation has also meant the accumulation of financial assets creating wealth stocks and income flows for the few far more than for the many. Inequality is a process based on asymmetrical ownership of such assets.  This has been both a product of and a contribution to the difference between a 1% and the 99%.   Read more…

from David Ruccio

When I ask my students that question, they don’t really have an answer. That’s because, like much of the rest of the U.S. population, they don’t have much experience with unions, either directly or indirectly—not when the union membership rate has fallen to below 11 percent nationwide and is only 6.4 percent in the private sector.   Read more…

from Lars Syll

Source

As we’ve noticed, again and again, correlation is not the same as causation …

If you want to get the prize in economics — and want to be on the sure side — yours truly would suggest you complement  your intake of chocolate with a move to Chicago.

Out of the 78 laureates that have been awarded “The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel,” 28 have been affiliated to The University of Chicago — that is 36%. The world is really a small place when it comes to economics …

from David Ruccio

Mainstream economists and politicians have answers for everything.

Lose your job? Well, that’s just globalization and technology at work. Not much that can be done about that.

And if you still want a job? Then just move to where the jobs are—and make sure your children go to college in order to prepare themselves for the jobs that will be available in the future.

The fact is, they’re not particularly good answers. And people know it. That’s why working-class voters are questioning business as usual and registering their protest by supporting—in the case of Brexit, the 2016 U.S. presidential election, the 2017 snap election in Britain, and so on—alternative positions and politicians.   Read more…

High powered money in Greece. The EU is re-financing 8,5 billion of Greek debt. About 7 billion of this is just trading in one kind of government bonds for another kind of government bonds. Much ado about less than nothing. There is some welcome softening of the terms – but not enough. However: About 1,6 billion has to be used to pay overdue bills which have to be paid by the government. This exchanging private debt for government bonds and will lead to an injection of highly powered money into the Greek economy which will prevent bankruptcies, which will enable these suppliers to pay their bills to their suppliers. Spain has however already threatened to block the agreement as it wants to protect a corrupt Spanish citizen in charge of privatization in Greece.

The ECB doubles down on monetary financing of the government. The European Central Bank published a report detailing why banks do or do not get ELA (Emergency Liquidity Assistance). Read more…

from Dean Baker

In their desperation to provide $600 billion in tax cuts to their rich campaign contributors, the Republicans have decided to abandon all the standard rules by which Congress has governed itself. The actions might seem extraordinary, but we know how desperately the richest people in the country need tax cuts, so who can complain if the normal procedures are not being followed?

Unfortunately the debate over the “repeal and replacement” of Obamacare is being confused with a debate over health care. Paul Ryan, Mitch McConnell and the rest of the Republican caucuses in the House and Senate don’t give a damn about health care. This is about getting $600 billion in tax cuts for the people who pay for their campaigns and will offer them jobs as high paid lobbyists when they leave office. The fact that the tax cuts are associated with health care for tens of millions of people is just a coincidence.

If anyone thought the Republicans were interested in actually putting together a health care plan that was better than Obamacare, their actions show beyond any doubt this is not the case. After the Congressional Budget Office (CBO) projected that the first version of the American Health Care Act (AHCA) would increase the number of people without insurance by 24 million, the Republican leadership rushed a vote of the revised version before CBO had time to evaluate it.  Read more…