Welcome to 2025
January 13, 2025
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from Peter Radford
Take Janan Ganesh in Thursday’s Financial Times. He has written one of his usual deliberately provocative articles with the portentous title “Things have to get worse to get better”. Really? Oddly, he uses the arrival of Reagan in power as the most recent example of a corrective beneficial turn in history. According to Ganesh things improved after Reagan’s election.
Which is strange because things didn’t get better. The American fiscal position began its long descent — even the short term revival under Clinton couldn’t reverse the decline. The American trade position suddenly fell into free fall. The phrase “rust belt” emerged as a legitimate description of swathes of the American heartland. Loss of manufacturing became a major topic of conversation. Interest rates soared to crush inflation. Unemployment responded by rising to much higher levels than the public was used to in those “glorious” but all too ephemeral postwar years — unemployment was still very high in Reagan’s re-election year. And wage stagnation had set in for a large chunk of the workforce. Reagan’s economic legacy is not very good at all.
His socio-political legacy is even worse.
The Moon is a Perfect Square (and other Economic truths)
January 12, 2025
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from Rajani Kanth and WEA Pedagogy Blog
I asked an Economist to explain the moon to me.
Just to see what happens.
He laughed.
Easy, he said.
Go on, I urged.
Well, we have to first build a model, he said.
Naturally, I said, Go ahead.
And a model needs assumptions.
Why not?, I laughed.
Ok, then. he said. here they are:
Read more…
Stock market and budget projections: Do the Numbers Add Up?
January 10, 2025
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from Dean Baker
It’s been a while since we’ve had Mr. Arithmetic here, but with Donald Trump coming back to the White House, we may need him around. The immediate reason for consulting his expertise is the projections for big stock market gains in 2025.
It seems the median forecast is for the S&P 500 to rise by roughly 10 percent over the course of 2025 from its year-end 2024 level. Many are forecasting considerably larger gains. Basically, the story is that all the good news for corporate profits in recent years will continue and the stock market will keep going higher at close to the pace it has been rising.
There is a problem in this story that seems to be getting little attention. The price-to-earnings (PE) ratio for the S&P 500 is already near the peaks that it hit in the 1990s bubble. Robert Shiller’s cyclically adjusted level stands at more than 38 to 1. (The cyclical adjustment compares current prices to inflation-adjusted profits over the last decade.) This is more than twice the long-period average and only slightly below the peaks hit in the late 1990s bubble.
The question I asked Mr. Arithmetic is Read more…
The ECB and the disastrous decline of the purchasing power of EU wages
January 5, 2025
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The European Central Bank (ECB) published, on December 18, 2024, a new ´wage tracker´ that tracks ´negotiated wages´. The index enables the ECB to understand the ´pressure´ of wages on the price level and to identify turning points. Methodologically, it is challenging to design such an index, and it is quite an accomplishment for the ECB to do this. The ECB, however, still uses this index in the context of wage inflation, a concept of the eighties of the twentieth century. The otherwise excellent methodological report states: ´Given the role of wages as a fundamental determinant of inflation, one of the key elements in the pursuit of the ultimate monetary policy goal of price stability is a sound and comprehensive analysis of wage pressures´. More on this below.
However, dividing this index by the consumer price index enables us to calculate the purchasing power of negotiated wages (graph 1). A disaster, FYI: I double-checked the data and also investigated other sources; the report mentioned above compares the index with the Indeed index of posted wages, which, on the Euro Area level, shows surprisingly comparable developments). Despite a temporary uptick in the increase of nominal wages (graph 2), the recent bout of inflation led to a massive decrease in purchasing power – a decline of around 10 points from over 106 (2013 = 100) to 96. Unprecedented. Uncharted. Let me be honest: the ECB should have pointed this out. It failed.
Graph 1. The purchasing power of negotiated wages in the Euro area (source).
Debunking the balanced budget superstition
January 5, 2025
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from Lars Syll
The balanced budget paradox is probably one of the most devastating phenomena haunting our economies. The harder politicians — usually on the advice of establishment economists — try to achieve balanced budgets for the public sector, the less likely they are to succeed in their endeavour. And the more the citizens have to pay for the concomitant austerity policies these wrong-headed politicians and economists recommend as “the sole solution.”
One of the most effective ways of clearing up this most serious of all semantic confusions is to point out that private debt differs from national debt in being external … A variant of the false analogy is the declaration that national debt puts an unfair burden on our children, who are thereby made to pay for our extravagances. Very few economists need to be reminded that if our children or grandchildren repay some of the national debt these payments will be made to our children or grandchildren and to nobody else. Taking them altogether they will no more be impoverished by making the repayments than they will be enriched by receiving them.
Abba Lerner The Burden of the National Debt (1948)
Few issues in politics and economics are nowadays more discussed — and less understood — than public debt. Many raise their voices to urge for reducing the debt, but few explain why and in what way reducing the debt would be conducive to a better economy or a fairer society. And there are no limits to all the — especially macroeconomic — calamities and evils a large public debt is supposed to result in — unemployment, inflation, higher interest rates, lower productivity growth, increased burdens for subsequent generations, etc., etc. Read more…
Understanding society via self-discovery
January 3, 2025
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from Asad Zaman
If “to know yourself is the beginning of wisdom,” then modern economics might well be the pinnacle of folly. Its foundational assumption—that human beings behave like homo economicus, selfishly pursuing wealth and pleasure—has been repeatedly disproven by empirical evidence. Worse, it would be unwise for real people to act in this way. The self-centered pursuit of material goods inevitably erodes social relationships, which are consistently shown to be the greatest source of lifelong happiness and fulfillment.
What explains the stubborn persistence of this flawed worldview? The problem lies in methodology. In its quest for scientific legitimacy, modern economics focuses exclusively on external, measurable behavior, dismissing the insights of lived experience. Self-knowledge is our best tool for understanding both human behavior and the societies we inhabit. This radically different approach forms the foundation of the first chapter of my new textbook. Read more…
A quick note on trade and inequality
December 30, 2024
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from Dean Baker
Oren Cass, the head economist of Compass, had a column in the New York Times today touting Donald Trump’s proposed tariffs. The gist of the piece is that “free trade” has not worked out as economists’ textbooks promised and we should look to take a different path.
As someone who was very critical of the major trade deals of the last three decades, I would say that they did work out very much as the economists’ textbooks promised. But they were also not “free trade” and imposing high tariffs will not help us going forward.
First, the economists’ textbooks did not promise that everyone would benefit from opening trade. They show that there would be a redistribution from some types of workers to other types of workers and/or capital. There is a famous article, co-authored by the first American Nobel Prize winner Paul Samuelson, that laid out this theoretical argument more than 80 years ago.
Economists pushing NAFTA, China’s entry into in the WTO, and other recent trade deals always waved off the logic of the Stolper-Samuelson model, or alternatively promised government policies to offset the distributional impact of trade openings. As a practical matter, the policies (mostly trade-adjustment assistance) were one or two orders of magnitude too small for the job.
We saw millions of workers displaced in manufacturing, as our trade deficit ballooned from 1997 to 2007. Communities across the industrial heartland were devastated as the factories that supported them downsized or shut altogether. We can have lengthy debates about the motives of working-class people who switched from Democrats to Trump voters, but the fact that Democratic presidents pushed trade policies that destroyed millions of good paying jobs for non-college educated workers is not really in dispute.
While it is important to recognize the damage caused by trade deals of the last three decades, it is also essential to recognize that these were not “free trade” deals even though this is what their proponents like to claim. Read more…
How inequality causes financial crises
December 23, 2024
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from Lars Syll
One way that inequality precipitates debt bubbles begins with “relative deprivation.” This concept concerns the discontent people feel when they compare their socio-economic status, measured by income, wealth, consumption, or other indicators of perceived economic welfare, with that of their richer counterparts. Economists have suggested several ways that this discontent may translate into indebtedness. One theory holds that people of a given income level may try to increase spending to match the higher consumption of those just above them. This in turn leads others just below the group in question to spend more, and so on, in what has been termed an “expenditure cascade.” Another theory focuses on the increased supply of high-status goods and services that flow into the economy as the rich grow richer. Such increases might induce everyday people to demand and consume more of these status items. If the non-rich wish to maintain their usual consumption of other, non-status items, they might then end up spending more out of current income …
Compared with low-income households, high-income households spend a lower share of their income, and save a higher share. They also allocate a higher fraction of their savings toward riskier assets. This may be another way that higher inequality drives inflated valuations of risky assets like stocks.
Moreover, the manner in which the rich save can serve to finance the debt bubbles of the poor and middle class. Since the 1980’s in the U.S., the rise in savings by the top 1% of the income or wealth distribution has been substantial, and has been associated with dissaving, in other words borrowing, by the rest of the household sector as well as the government … The combination of demand for debt by the non-rich, and the excess of funds supplied by the rich, caused the ratio of household debt to disposable income to rise from 77 percent in 1983 to 177 percent in 2007 for the bottom 95% income group of U.S. households. In contrast, the top 5% group maintained a trendless ratio in the range of 50-100% during the entire period.
Christmas thoughts about counting the dead in zones of armed conflict.
December 21, 2024
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In those days Caesar Augustus issued a decree that a census should be taken of the entire Roman world. (This was the first census that took place while Quirinius was governor of Syria.) And everyone went to their own town to register.
Luke 1:3 (as will turn out below, this quote is not frivolous)
Summary.
The Gaza Ministery of Health, Airways and the World Health Organization have published robust data sets on victims of war-related violence in Gaza. Médecins Sans Frontières provided the world with a robust qualitative overview of the state of the health system. At the same time, The World Peace Foundation reported on the methodological difficulties of estimating the indirect victims of the war in Gaza. Together, these organisations mention the methodologies that can successfully estimate violent deaths in conflict zones. Information on indirect casualties is still lacking, even when all organizations state that the circumstances, including a planned destruction of the health and social system, are the worst they have seen. This means that ´guesstimates´using indirect methods must be based on a worst-case scenario. Information about worst-case scenarios has to be developed. A total of 350.000 deaths can not be ruled out. Survey methods based on ´their own town or neighbourhood´ instead of households have to be developed to be able to make better assessments of indirect victims of war-related violence.
Mainstream distribution myths
December 19, 2024
3 comments
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
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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
4 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
3 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
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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
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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:
—– look inside —– $5.94 / $20.00
—– look inside —– $4.90 / $8.00
—– look inside —– $15.99
—– look inside —– $5.99 / 12.99
—– look inside —– $5.93 / $12.99
—– look inside —– $4.97 / $9.90
—— Ugarteche, Puyana and Madi ——
Gerson Lima / Maria Alejandra Madi
Edward Fullbrook and Jamie Morgan
————— Michael Hudson ————–
Maria Alejandra Madi / Jack Reardon
————- Edward Fullbrook ————-
—————— Steve Keen —————–
————— Richard Smith —————
————– Gustavo Marques————
– Victor Beker and Beniamino Moro –
————– Lars Pålsson Syll ————-
—————– Stuart Birks —————-
Edward Fullbrook and Jamie Morgan
———— Armando Ochangco ———-
Shimshon Bichler / Jonathan Nitzan
————— Mauro Gallegati ————–
————— Herman Daly —————-
————— Asad Zaman —————
—————– C. T. Kurien —————
————— Robert Locke —————-
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