I’m not one to generally tout the wisdom of the economics discipline, but it actually does offer some useful insights into the likely motive for the murder of Brian Thompson, the CEO of United Healthcare (UHC). According to media accounts, the suspect, Luigi Mangione, was angered by his own and others’ experiences being turned down when submitting claims for healthcare service. United and other insurers make a profit by restricting the claims they pay, so their profit motive goes directly against people’s need to get healthcare.
Mainstream distribution myths
December 19, 2024
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from Lars Syll
Pretending that the distribution of income and wealth that results from a long set of policy decisions is somehow the natural workings of the market is not a serious position …
Pretending that distributional outcomes are just the workings of the market is convenient for any beneficiaries of this inequality, even those who consider themselves liberal …
But we should not structure our understanding of the economy around political convenience. There is no way of escaping the fact that levels of output and employment are determined by policy, that the length and strength of patent and copyright monopolies are determined by policy, and that the rules of corporate governance are determined by policy. The people who would treat these and other policy decisions determining the distribution of income as somehow given are not being honest.
Health insurance killing: Economics does have something to say
December 17, 2024
2 comments
from Dean Baker
That simple story is undeniably true, but the picture is more complicated. Many of the claims being submitted are outlandishly high, due to high prices for drugs and medical equipment, as well high fees for medical specialists and hospital administrators. In recent years, private equity firms have also seen the healthcare industry as a promising source of profits.
Our doctors on average get paid more than twice as much as their counterparts in other wealthy countries. Our pay structure for CEOs and other top corporate executives is out of whack and badly needs reforming. Private equity is largely a predatory industry that often profits by conducting itself in ways that would be too embarrassing for a publicly traded company.
These are all important sources of bloat in the healthcare sector, as is the insurance industry itself, but I want to focus on the relatively simple story of prices for drugs and medical equipment. This is where one of the most basic principles of economics, marginal cost pricing, has much to tell us.
Debunking mathematical economics
December 15, 2024
3 comments
from Lars Syll
It is a great fault of symbolic pseudo-mathematical methods of formalising a system of economic analysis … that they expressly assume strict independence between the factors involved and lose all their cogency and authority if this hypothesis is disallowed; whereas, in ordinary discourse, where we are not blindly manipulating but know all the time what we are doing and what the words mean, we can keep “at the back of our heads” the necessary reserves and qualifications and the adjustments which we shall have to make later on, in a way in which we cannot keep complicated partial differentials “at the back” of several pages of algebra which assume that they all vanish. Too large a proportion of recent “mathematical” economics are mere concoctions, as imprecise as the initial assumptions they rest on, which allow the author to lose sight of the complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols.
In mathematics, the deductive-axiomatic method has worked just fine.
But science is not mathematics.
Conflating those two knowledge domains has been one of the most fundamental mistakes in modern economics. Read more…
´Extra Unordinarily Persistent Large Otput Gaps´ (EU-PLOGs)
December 11, 2024
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A PLOG is a ´Persistent Large Output Gap´. Read: a long period of high unemployment. Literature about PLOGs tries to mitigate one of the ideas of economic orthodoxy, especially the unsubstantiated idea that lowering high post-economic crisis unemployment will fuel inflation. According to this literature, which is quite empirical, it doesn´t. However, this somewhat older literature does not yet consider the post-2009 Euro Area experience. Here, I will propose an updated definition of PLOGs, to enable economists to consider the post-2009 EU experience in a sound framework:
EU-PLOGs (Extra Unordinarly Persistent Large Output Gaps),
The reason to do this is the duration of PLOGs in Europe (Figure 1 and 2). In Spain, unemployment is still 11%. In Greece, employment is still not back to its pre-2009 level (Greek employment was based on demand fuelled by unsustainable private and public borrowing, showing up as a massive current account deficit, yes, but that does not mean employment was unsustainable high).
Figure 1. Extra-Unordinarily Persistent High Unemployment in Spain.
The Geology of Economics?
December 10, 2024
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from Peter Radford
This is something I need to get off my desktop. It’s just for fun …
Asymmetry is the very beginning and end of an economy. It’s the bumps that matter. Explain them and you explain the economy. After all the very notion of exchange presumes differences between those involved, and difference is just another way off saying asymmetry. Sweep the bumps away with a broad brush of supposedly superb logic and you eliminate the very object of your study. That is if your intent is to study economies rather than economics.
Meanwhile ….
I love geology. I am the first to admit that I am merely an enthusiastic amateur, but I love geology. It explains what I see round me here in the mountains of southern Vermont. I recently discovered, for instance, that a continental collision and the movement of vast slabs of the earth’s crust are the probable cause — albeit at a very long distance — of the series of fissures in the local rock from which water flows in the form of natural springs. Some of that water ends up in my basement. Continental collisions can have very unfortunate long term consequences.
Economists don’t think like geologists. They are far more abstract. They love building models and simplifying everything. For instance, economists would not think in terms of plate tectonics, they would start with a hypothetical earth bereft of all variation. A smooth earth. They would give this earth all sorts of attributes. They would model it in fine detail. They would produce endless studies of its smoothness. They would prove its smoothness. They would delve ever deeper into the bountiful nature of smoothness. They would assure us all that the earth is, indeed, smooth.
Despite what we see. Read more…
Money for beginners
December 8, 2024
2 comments
from Lars Syll
Economists have sometimes misled us with their belief that it is their job to tell “white lies” to scare the population into “behaving themselves.”
We think that is the wrong approach. This book trusts you, the reader, with that truth. We trust you to do what you can to spread the truth and to hold policymakers accountable.
The truth is that government faces political constraints. It faces resource constraints. It faces technological constraints.
But it does not, cannot, face financial constraints. Whatever is doable is financially affordable.
Take that idea and run with it.
new issue of RWER
December 4, 2024
1 comment
real-world economics review
issue no. 109
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Culture – the elephant in the room
Hardy Hanappi 22
The capitalization of everything
Shimshon Bichler and Jonathan Nitzan 18
From the Bretton Woods system to global stagnation
Leon Podkaminer 29
The role of internetization in creating sustainable development for the Global South
Constantine E. Passaris 35
The works of Ha-Joon Chang
Junaid B. Jahangir 56
A critique of Saito’s Slow Down; How degrowth communism can save the Earth
Ted Trainer 84
Causality in economics and Keynes’ General Theory
George H. Blackford 84
End Matter 108
Please click here to support this open-access journal and the WEA
Capitalism and Democracy: The market is far more flexible than Christopher Caldwell imagines
December 1, 2024
2 comments
from Dean Baker
New York Times columnist Christopher Caldwell devoted his Thanksgiving piece to describing the German sociologist Wolfgang Streeck’s views on capitalism and democracy. I have not read much of Streeck’s work, but as recounted by Caldwell, he gets many of the basic facts about the U.S. economy badly wrong.
According to Caldwell’s account, capitalists were willing to sacrifice profits in the decades after World War II for stability. This meant less dynamism but allowed for broadly shared prosperity and thriving democratic institutions.
“Between the end of World War II and the 1970s, he reminds us, working classes in Western countries won robust incomes and extensive protections. Profit margins suffered, of course, but that was in the nature of what Mr. Streeck calls the ‘postwar settlement.’ What economies lost in dynamism, they gained in social stability.”
The problem with this account is that, at least in the United States there is no evidence that capitalists were sacrificing profit. Here’s after-tax corporate profits as a share of GDP since World War II.
As can be seen, Read more…
More ´Natural rate of unemployment´ busting, bad measurement edition.
November 28, 2024
3 comments
The ´natural rate of unemployment´, also called ´Non-Accelerating Inflation Rate of Unemployment´ (NAIRU) or ´Non-Accelerating Wage Rate of Unemployment´ (NAWRU), is as, on this blog, Lars Syll states (here and here), a dangerous tool. According to NAIRU/NAWRU theory,
a) When unemployment falls below a certain threshold, an inexorable increase in inflation will start. This is simply not true, considering the facts.
b) As NAIRU/NAWRU theory is untrue, it can´t be measured by estimating a relation between inflation and unemployment. It is hence measured by what boils down to a short-term (3 year) running average of headline unemployment. Actual measurements are more or less equal to the recent rate of unemployment
c) This means that when unemployment suddenly explodes to double-digit rates, as is the case during financial crises, economists using this tool will (despite the theory being untrue) state that no policies aimed at lowering double-digit unemployment should be pursued. Look at the case of Finland in the nineties when estimated NAIRU almost quadrupled (Table 1) or Spain around 2009. In both cases, demand-boosting policies (not just government demand but also investments and consumption) were needed. The opposite happened.
Table 1. NAIRU estimates for European countries based on an European Commission report, which, for Finland, show an increase from 4,7 to 17%. Source.
Busting the ‘natural rate of unemployment’ myth
November 27, 2024
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from Lars Syll
Sixty years ago Milton Friedman wrote an (in)famous article arguing that (1) the natural rate of unemployment was independent of monetary policy and that (2) trying to keep the unemployment rate below the natural rate would only give rise to higher and higher inflation.
The hypothesis has always been controversial, and much theoretical and empirical work has questioned the real-world relevance of the idea that unemployment really is independent of monetary policy and that there is no long-run trade-off between inflation and unemployment.
My own view on the subject is that the natural rate hypothesis does not hold water simply because the relations it describes have never actually existed.
The only thing that amazes yours truly is that although this is pretty common knowledge, so-called ‘New Keynesian’ macroeconomists still today use it — and its cousin the Phillips curve — as a fundamental building block in their models. Why? Because without it ‘New Keynesians’ have to give up their (again and again empirically falsified) neoclassical view of the long-run neutrality of money and the simplistic idea of inflation as an excess-demand phenomenon.
The natural rate hypothesis approach (NRH) is not only of theoretical interest. Far from it. Read more…
The political economy of estimating productivity.
November 25, 2024
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Who decides what statistical offices measure and how they measure it? And what are the implicit values embedded in these decisions? Recently, the ILO issued a new manual on measuring productivity. Below, I´ll discuss the questions posed. But for starters, it is essential to realize that economists measure monetary productivity, not physical productivity, which leads to problems with ever-changing prices. This will be part of the discussion.
- The ILO (International Labour Organization) is the only tripartite international organization (governments, labour, and employers). One of its tasks is to assemble statistics on labour and organize the global discussion about the concepts of ´unemployment´ and ´labour´. To give an idea, they assemble statistics on paid labour, forced labour, migratory labour, household labour and much more. Their basic framework for doing this is the same framework used for the national accounts (Diagram 1). The upside of this is that it means we have a set of consistent production and labour statistics. The downside: activities outside the national accounts production boundary (light blue in the diagram) are less well measured. This boundary is also used to measure productivity, or ´unit of output per unit of input´. Washing machines increased physical production and productivity in households (but also in the national accounts sector). This increase is not included in productivity statistics. Addendum: part of household production, especially in agriculture, is included in the national accounts production boundary. The most essential household ´activity´ included is the ´production´ of imputed rents of owner-occupied dwellings. Do not underestimate this.
Diagram 1. The production boundary used to measure production and the use of labour (including unemployment) and productivity.
- It seems logical that the ILO is included in the processes that lead to conceptualising and defining variables like unemployment. But why is it bothered by productivity? Labour input (hours, jobs, persons,…) is an important element of productivity estimates. In their words, in the recent manual:
Peak babies has been. Young men are not expendable, anymore.
November 24, 2024
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Peak Babies was in 2012. At this moment, we´re back to the level of forty years ago (and the most recent data may well be an overestimate). For the first time in centuries, cohorts entering the global labour market will soon be smaller than the cohorts preceding them.
Even when there are significant differences in levels between countries, the years around 1970 were a turning point everywhere. In 1965, the relentless movement towards below-replacement human reproduction started. Aside: that won´t be a blessing for the environment. The 10% wealthiest people cause about 50% of all unsustainability or something like that, meaning that a much smaller global population can still wreck the planet.
Do not underestimate the magnitude of the decline. In Seoul, the fertility rate has plummeted to 0,55, meaning grandchildren are around 1/14th of the grandparents’ generation. Other cities will follow. It puts the MAGA wish to deport tens of millions of people into a ´the department of stupid´ perspective. Instead of doing this, countries should provide a safety net, free education, accessible healthcare, and many more excellent houses and high-quality jobs for their citizens. Having stated this, Russia is already trading oil for military-commodified North Koreans. My prediction: We haven´t seen the latest of such deals. All this will, however, not increase fertility rates.
NAIRU — a harmful fairy tale
November 20, 2024
3 comments
from Lars Syll
The NAIRU story has always had a very clear policy implication — attempts to promote full employment are doomed to fail since governments and central banks can’t push unemployment below the critical NAIRU threshold without causing harmful runaway inflation.
Although a lot of mainstream economists and politicians have a touching faith in the NAIRU fairy tale, it doesn’t hold water when scrutinized.
One of the main problems with NAIRU is that it is essentially a timeless long-run equilibrium attractor to which actual unemployment (allegedly) has to adjust. If that equilibrium is itself changing — and in ways that depend on the process of getting to the equilibrium — well, then we can’t really be sure what that equilibrium will be without contextualizing unemployment in real historical time. And when we do, we will see how seriously wrong we go if we omit demand from the analysis. Demand policy has long-run effects and matters also for structural unemployment — and governments and central banks can’t just look the other way and legitimize their passivity re unemployment by referring to NAIRU. Read more…
Monetary developments in the Euro Area, september 2024. Quiet.
November 20, 2024
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Like John Stuart Mill, I´m more interested in credit than in money. Developments in the amount of credit provided are much more instructive to the economist than data on money. Look at the graph below (no. 2 in the ECB press release) , a highly Post-Keynesian graph that originated from the pre-Euro Bundesbank and is now published by the European Central Bank. It shows that money growth in the EU is relatively moderate and, more interesting, caused by a combination of
1) lather large inflows of money from outside of the Euro area (I do not know from which country) in combination with
2) a sizeable negative effect from ´longer term liabilities´. People move money from overnight accounts, which are included in the ´M3´ definition of money, to longer term accounts which are not included in this definition. The long-term accounts, with a maturity of over 2 years, have higher interest rates than overnight accounts but you can´t touch your money for at least two years) which pay higher interest rates.
In both these cases, Euro´s are shifted around, no new Euro´s comes into existence. Net credit, however, does lead to new Euro´s and the ECB also provides data on this (table 1)
Superinflation in Milei´s Argentina
November 18, 2024
2 comments
Hyperinflation is defined as over 50% inflation per month. Let´s define ´normal´ inflation as anything between 0 and 1% per month and anything between 1 and 50% per month as superinflation (1% a month is still a lot, yearly!). Before President Milei, Argentina already knew superinflation. After Milei, inflation accelerated, and the country almost entered a period of hyperinflation. It´s still nearly 200% a year. The maximum monthly increase of the consumer price index was over 24%. These increasing price increases were not caused but enabled by a sudden spurt in the amount of money and, to an extent, caused by a massive devaluation (which increased prices of imported goods and which, looking at the current account, was totally unnecessary).
Graph 1. Year-on-year inflation in Milei´s Argentina. Up and still sky-high.
Election: Take Four
November 17, 2024
4 comments
from Peter Radford
Take four.
I continue to listen in on the conversation.
The election reverberates loudly around leftish circles. Recriminations mount. Criticisms fly. Finger pointing and over-analysis have become all too common. And this is after just a week. Imagine what a month can produce.
So far the central narrative seems to be that the Democrats have become isolated from the most consequential issues that regular folk feel are important. The explanation being that the party is now dominated by a relatively well-off college educated elite that is absorbed in a sort of political navel gazing that prevents to from hearing, seeing, and reacting to much more immediate and thus relevant issues.
The Democrats have become a party obsessed with pronouns, politically correct conversation, identity, and the rendition of grievances . Paying the rent and buying food are seen as trivial by comparison.
This separation of the party’s establishment from everyday life — especially true in the case of its academic wing — has given it an air of aristocratic detachment that makes ridicule of any attempt it makes to attach itself to the working class. There is an arrogant haughtiness in its condemnation of vulgarity in language. It is as if we need to cleanse our gutters of all the stereotypical jokes and epithets accumulated through centuries of contact with each other. We now need to spend our time watching what we say for fear of stirring up some potential slight, but we need spend no time at all on worrying whether those we slight can pay their bills.
Priorities are askew. Read more…
Employment growth in Europe. Stark differences.
November 15, 2024
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Eurostat published new data on employment in Europe. Average employment growth is +0,9%. The average hides stark differences. A Germany-centered core consisting of Germany, Austria, Sweden, Estonia, Finland, and Hungary shows declines. Surprisingly, it excludes Denmark, Belgium and the Netherlands. The South does better. Countries like Portugal, France, Greece, and, especially, Spain post above-average increases. But unemployment in these countries is still high (over 5%), even when EU long-term unemployment hit a historical low (1,9%, Eurostat, series starts in 2005).
Table 1. Employment growth in Europe. Source.
In Greece, gross fixed investment still is at a pre-industrial level.
November 14, 2024
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Executive summary: if investments are needed, do not reform. Invest. Investments are the reform.
Angus Maddison (historical patterns of growth) and Jan Kregel (leading post-Keynesian economist) were the intellectually dominant forces during my economics study in Groningen around 1982. Let´s apply their frameworks to Greece.
- Growth, as we measure it, has many sources: increasing the productivity of existing activities (the mechanization of the potato harvest), shifting labour from low-productivity activities to high-productivity activities (supermarkets outcompeting small groceries), or using less stuff to produce more stuff (the increasing fuel efficiency of planes). One source of productivity increases is, or used to be, old people who retire and end low-productivity businesses like small-scale farming or a mom-and-pop store. More complicated: a shift of relative prices (lower prices of imported energy increases nominal domestic value-added, which we, to calculate growth, divide by the price level, which is actually going down because of lower energy prices). Productivity increases real production (the opposite happens in the exporting country). Behind this is the idea that everything happens: productivity increases, and we can make more with less. This applies to the non-money economy, too. Washing machines drove out paid maids. Domestic chores require less labour. But events in Greece are of a different order.
Argentina bucks the trend. Vitamin A deficiencies are increasing
November 13, 2024
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- Because of libertarian policies of the Milei government in Argentina, poverty and food deficiencies are increasing. People are getting less healthy and, hence, less able to care for themselves and their loved ones. One problem we thought we got rid of but resurfaces in Argentina: vitamin A deficiencies. Children are getting sick and starting to go blind.
- Vitamin A helps your body protect itself against many diseases. Thanks to concerted action and diffusion of knowledge and action, progress has been global. Argentina is, thanks to the Libertarian policies of the Milei government, regressing. It´s the New Old Africa. Look here for WHO data and here for Vitamin A policies in New Africa, where they want people to be healthy.
Making America Great Again, 2024
November 11, 2024
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from Shimshon Bichler & Jonathan Nitzan
In 2019, we published a RWER paper assessing Trump’s promise to ‘Make America Great Again’. https://bnarchives.net/id/eprint/630/
Here are updates of two key charts from this paper.
The first figure depicts the relative global decline of U.S. corporations. It shows that U.S. firms currently accounts for ~1/3rd of global corporate profit, down from 2/3rds half a century ago.
The second figure shows the growing dependence of U.S. firms on foreign operations. Read more…
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