Does public debt restrict growth?

12 Mar, 2015 at 12:10 | Posted in Economics | 1 Comment

 

Bob Pollin was — together with people like Fred Lee and Axel Leijonhufvud — one of those who made a visit to University of California such a great experience back in the beginning of the 1980s for a young Swedish research stipendiate in economics. Yours truly had the great pleasure and privelege of having Bob as teacher. He was a great inspiration at the time — and he still is.

Brad DeLong on ‘silly’ Robert Lucas

11 Mar, 2015 at 10:14 | Posted in Economics | 2 Comments

S1365100513000345a_abstractRobert 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.

I do not think Lucas understands that when he builds his models he is aggregating up the behavior of 310 million American individuals, having made certain assumptions about what things cancel out when that aggregation is made.

Lucas does say that economists definitely should not:
•Model humans as they actually behave.
•Model their economic interactions as they actually happen.
•Aggregate up.
•And look for emergent patterns to fit to the data.

Instead Lucas says economists should:
•Do what macroeconomists currently do.
•This is, assume one infinitely-lived hyper-rational representative price-taking agent.
•Assume that all equilibrium-selection and coordination problems are automagically solved.

The second, Lucas says, is “science”! The first, Lucas says, is not–even though the first is a strict superset of the second.

And if econometric tools reject Lucas’s approach? Then, Lucas says, so much the worse for econometric tools. And if the data reject that approach? Then, Prescott says, so much the worse for the data: “economic theory ahead of economic measurement”–our theories would not be falsified if we had the real data to work on …

Brad DeLong

Yours truly totally agrees — there exist overwhelmingly strong reasons for being critical and doubtful re microfoundations of macroeconomics.

Microfoundations today means more than anything else that you try to build macroeconomic models assuming “rational expectations” and hyperrational “representative actors” optimizing over time. Both are highly questionable assumptions.

Macroeconomic models building on rational expectations microfoundations impute beliefs to the agents that is not based on any real informational considerations, but simply stipulated to make the models mathematically-statistically tractable. Of course you can make assumptions based on tractability, but then you do also have to take into account the necessary trade-off in terms of the ability to make relevant and valid statements on the intended target system. Mathematical tractability cannot be the ultimate arbiter in science when it comes to modeling real world target systems. One could perhaps accept macroeconomic models building on rational expectations-microfoundations if they had produced lots of verified predictions and good explanations. But they have done nothing of the kind. Therefore the burden of proof is on those macroeconomists who still want to use models built on these particular unreal assumptions.

Macroeconomic models building on rational expectations microfoundations emanates from the belief that to be scientific, economics has to be able to model individuals and markets in a stochastic-deterministic way. It’s like treating individuals and markets as the celestial bodies studied by astronomers with the help of gravitational laws. Unfortunately, individuals, markets and entire economies are not planets moving in predetermined orbits in the sky.

Microfoundations -– and a fortiori rational expectations and representative agents -– serves a particular theoretical purpose. And as the history of macroeconomics during the last thirty years has shown, this Lakatosian microfoundation programme for macroeconomics is only methodologically consistent within the framework of a (deterministic or stochastic) general equilibrium analysis. In no other context has it been possible to incorporate these kind of microfoundations, with its “forward-looking optimizing individuals,” into macroeconomic models.

This is of course not by accident. General equilibrium theory is basically nothing else than an endeavour to consistently generalize the microeconomics of individuals and firms on to the macroeconomic level of aggregates.

But it obviously doesn’t work. The analogy between microeconomic behaviour and macroeconomic behaviour is misplaced. Empirically, science-theoretically and methodologically, neoclassical microfoundations for macroeconomics are defective. Tenable foundations for macroeconomics really have to be sought for elsewhere.

 

Reinhart & Rogoff finally get it right!

11 Mar, 2015 at 08:39 | Posted in Economics | 5 Comments

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).a62edf0f39de560a219b7262163b0d45 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.

Carmen Reinhart & Kenneth Rogoff

This time it seems as though it is — really — different. At last the light at the end of the austerity tunnel seeps through.

What is science?

10 Mar, 2015 at 21:07 | Posted in Theory of Science & Methodology | 4 Comments

The primary aim of this study is the development of a systematic realist account of science. In this way I hope to provide a comprehensive alternative to the positivism that has usurped the title of science. I think that only the position developed here can do full justice to the rationality of scientific practice or sustain the intelligibility of such scientific activities as theoryconstruction and experimentation. And that while recent developments in the philosophy of science mark a great advance on positivism they must eventually prove vulnerable to positivist counter-attack, unless carried to the limit worked out here.

My subsidiary aim is thus to show once-and-for-all why no return to positivism is possible. This of course depends upon my primary aim.9781844672042-frontcoverFor any adequate answer to the critical metaquestion ‘what are the conditions of the plausibility of an account of science ?’ presupposes an account which is capable of thinking of those conditions as special cases. That is to say, to adapt an image of Wittgenstein’s, one can only see the fly in the fly-bottle if one’s perspective is different from that of the fly. And the sting is only removed from a system of thought when the particular conditions under which it makes sense are described. In practice this task is simplified for us by the fact that the conditions under which positivism is plausible as an account of science are largely co-extensive with the conditions under which experience is significant in science. This is of course an important and substantive question which we could say, echoing Kant, no account of science can decline, but positivism cannot ask, because (it will be seen) the idea of insignificant experiences transcends the very bounds of its thought.

This book is written in the context of vigorous critical activity in the philosophy of science. In the course of this the twin templates of the positivist view of science, viz. the ideas that science has a certain base and a deductive structure, have been subjected to damaging attack. With a degree of arbitrariness one can separate this critical activity into two strands. The first, represented by writers such as Kuhn, Popper, Lakatos, Feyerabend, Toulmin, Polanyi and Ravetz, emphasises the social character of science and focusses particularly on the phenomena of scientific change and development. It is generally critical of any monistic interpretation of scientific development, of the kind characteristic of empiricist historiography and implicit in any doctrine of the foundations of knowledge. The second strand, represented by the work of Scriven, Hanson, Hesse and Harré among others, calls attention to the stratification of science. It stresses the difference between explanation and prediction and emphasises the role played by models in scientific thought. It is highly critical of the deductivist view of the structure of scientific theories, and more generally of any exclusively formal account of science. This study attempts to synthesise these two critical strands; and to show in particular why and how the realism presupposed by the first strand must be extended to cover the objects of scientific thought postulated by the second strand. In this way I will be describing the nature and the development of what has been hailed as the ‘Copernican Revolution’ in the philosophy of science.

To see science as a social activity, and as structured and discriminating in its thought, constitutes a significant step in our understanding of science. But, I shall argue, without the support of a revised ontology, and in particular a conception of the world as stratified and differentiated too, it is impossible to steer clear of the Scylla of holding the structure dispensable in the long run (back to empiricism) without being pulled into the Charybdis of justifying it exlusively in terms of the fixed or changing needs of the scientific community (a form of neoKantian pragmatism exemplified by e.g. Toulmin and Kuhn). In this study I attempt to show how such a revised ontology is in fact presupposed by the social activity of science. The basic principle of realist philosophy of science, viz. that perception gives us access to things and experimental activity access to structures that exist independently of us, is very simple. Yet the full working out of this principle implies a radical account of the nature of causal laws, viz. as expressing tendencies of things, not conjunctions of events. And it implies that a constant conjunction of events is no more a necessary than a sufficient condition for a causal law.

Male circumcision — a case of selection bias

10 Mar, 2015 at 17:01 | Posted in Statistics & Econometrics | 1 Comment

Take a look at a map of Africa showing male circumcision rates, and impose on that data on HIV/AIDS prevalence. There is a very close correspondence between the two, with the exceptions being cities with large numbers of recent uncircumcised male migrants. One might therefore conclude that male circumcision reduces the chances of contracting HIV/AIDS, and indeed there are medical reasons to believe this may be so. But maybe some third, underlying variable, explains both circumcision and HIV/AIDS prevalence. meme2That is, those who select to get circumcised have special characteristics which make them less likely to contract HIV/AIDS, so a comparison of HIV/AIDS rates between circumcised and uncircumcised men will give a biased estimate of the impact of circumcision on HIV/AIDS prevalence. There is such a factor, it is being Muslim. Muslim men are circumcised and less likely to engage in risky sexual behaviour exposing themselves to HIV/AIDS, partly as they do not drink alcohol. Again we are not comparing like with like: circumcised men have different characteristics compared to uncircumcised men, and these characteristics affect the outcome of interest.

Howard White

Austerity — a class-specific put-option

10 Mar, 2015 at 10:09 | Posted in Economics, Politics & Society | 1 Comment

article4bWhen you bail out a bank or a banking system, you are not just bailing the bankers. You are bailing the savers, the pensions, the mortgages, the derivatives written on these loans and annuities, and all the rest that constitute the bank’s assets, which are your liabilities and vice versa. So when governments bail banks they are simultaneously bailing the assets and incomes of the top 30 percent of the income distribution …

The cost of exercising the put-option is paid for by people who don’t have many such assets and rely on government spending and public goods, but that’s what gets cut. The poorest segment of society is forced to pay out on an insurance policy that they never agreed to guarantee, and for which they never received a single insurance premium from the holders of the bailed (i.e. insured) assets. This is why austerity is best thought of as a class-specific put-option. It’s free asset insurance for the top end of the income distribution, those who also just happen to be the people that vote most and fund elections.

Mark Blyth

So much for ‘expansionary austerity’ solutions

10 Mar, 2015 at 09:18 | Posted in Economics, Politics & Society | 5 Comments

Unemployment rates in Europe, Japan and US
Unemployment_rates_EU-28_EA-18_US_and_Japan_seasonally_adjusted_January_2000_January_2015

Source: Eurostat

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 …

When should we — really — care about public debt?

9 Mar, 2015 at 19:28 | Posted in Economics | 2 Comments

Nick Rowe has a silly question for those who oppose austerity … would you still advocate fiscal stimulus in a liquidity trap (with interest rates stuck at some lower bound – the ZLB) if government debt was ten times annual GDP? …

There are four main potential costs associated with high government debt. The first is that, by generating high real interest rates, it crowds out private capital. However at the ZLB long term real interest rates are likely to be low, not high. Second, paying the interest on that debt requires higher distortionary taxes … However if there is an output gap the possibility that people are not supplying labour because income taxes are too high is not a current problem either.

55446682A third issue with debt is the ‘burden on future generations’. How real that is or not, dealing with excessive debt is going to screw the current generation (who have to suffer the higher taxes or lower spending to get debt down), so asking them to also suffer continuing unemployment is hardly fair.

The final problem is that the markets might suddenly take fright that the tax burden implied by the debt is too large in political terms, and as a result the government may default …

Suppose … the funding does dry up. You have your own independent central bank, so you print the money to cover the stimulus and any debt rollover required. That might require a lot of money creation – perhaps as much as central banks have actually undertaken as a result of Quantitative Easing (QE)! Just as with QE, the world does not fall in. Will that not lead to massive inflation? No, for exactly the same reason QE does not. The moment the output gap has been eliminated, and interest rates are off the ZLB, you can start the austerity programme that begins to roll back money creation. That stops the output gap becoming positive and therefore stops inflation …

So I think the answer to Nick’s question is not the answer he thinks. The logic is that every time and whatever the numbers you first eliminate the output gap and get off the ZLB. Only when that is done do you start taking action to reduce deficits.

Simon Wren-Lewis

I notice again and again that on many macroeconomic policy issues I find myself in agreement with people like Wren-Lewis and Krugman. To me that just shows that they are right in spite of and not thanks to the kind of neoclassical models they ultimately refer to. When discussing austerity measures, Ricardian equivalence, euro problems, or public debt, they actually, as far as I can see, are not using those models, but rather (even) simpler and more adequate and relevant thought-constructions much more in the vein of Keynes.

So — has Wren-Lewis turned into MMT-Functional Finance? Probably not, but it sure sounds a lot like Abba Lerner …

national debt5One 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. It is owed by one person to others. That is what makes it burdensome. Because it is interpersonal the proper analogy is not to national debt but to international debt…. But this does not hold for national debt which is owed by the nation to citizens of the same nation. There is no external creditor. We owe it to ourselves.

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)

‘Sizeless science’ and the cult of significance testing

9 Mar, 2015 at 15:06 | Posted in Statistics & Econometrics | Comments Off on ‘Sizeless science’ and the cult of significance testing

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.

57626084A 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)).

This is not to blame on students’ ignorance, but rather on significance testing not being particularly transparent (conditional probability inference is difficult even to those of us who teach and practice it). A lot of researchers fall prey to the same mistakes. So — given that it anyway is very unlikely than any population parameter is exactly zero, and that contrary to assumption most samples in social science and economics are not random or having the right distributional shape — why continue to press students and researchers to do null hypothesis significance testing, testing that relies on weird backward logic that students and researchers usually don’t understand?

Reviewing Deirdre’s and Stephen Ziliak’s The Cult of Statistical Significance (University of Michigan Press 2008), mathematical statistician Olle Häggström succinctly summarizes what the debate is all about:

Stephen Ziliak and Deirdre McCloskey, claim in their recent book The Cult of Statistical Significance [ZM] that the reliance on statistical methods has gone too far and turned into a ritual and an obstacle to scientific progress.

A typical situation is the following. A scientist formulates a null hypothesis. By means of a significance test, she tries to falsify it. The analysis leads to a p-value, which indicates how likely it would have been, if the null hypothesis were true, to obtain data at least as extreme as those she actually got. If the p-value is below a certain prespecified threshold (typically 0.01 or 0.05), the result is deemed statistically significant, which, although far from constituting a definite disproof of the null hypothesis, counts as evidence against it.

Imagine now that a new drug for reducing blood pressure is being tested and that the fact of the matter is that the drug does have a positive effect (as compared with a placebo) but that the effect is so small that it is of no practical relevance to the patient’s health or well-being. If the study involves sufficiently many patients, the effect will nevertheless with high probability be detected, and the study will yield statistical significance. The lesson to learn from this is that in a medical study, statistical significance is not enough—the detected effect also needs to be large enough to be medically significant. Likewise, empirical studies in economics (or psychology, geology, etc.) need to consider not only statistical significance but also economic (psychological, geological, etc.) significance.

A major point in The Cult of Statistical Significance is the observation that many researchers are so obsessed with statistical significance that they neglect to ask themselves whether the detected discrepancies are large enough to be of any subject-matter significance. Ziliak and McCloskey call this neglect sizeless science …

The Cult of Statistical Significance is written in an entertaining and polemical style. Sometimes the authors push their position a bit far, such as when they ask themselves: “If nullhypothesis significance testing is as idiotic as we and its other critics have so long believed, how on earth has it survived?” (p. 240). Granted, the single-minded focus on statistical significance that they label sizeless science is bad practice. Still, to throw out the use of significance tests would be a mistake, considering how often it is a crucial tool for concluding with confidence that what we see really is a pattern, as opposed to just noise. For a data set to provide reasonable evidence of an important deviation from the null hypothesis, we typically need both statistical and subject-matter significance.

Statistical significance doesn’t say that something is important or true. Although Häggström has a point in his last remark, I still think – since there already are far better and more relevant testing that can be done (see e. g. my posts here and here) – it is high time to consider what should be the proper function of what has now really become a statistical fetish.

The Latvian experience shows why austerity sucks

8 Mar, 2015 at 17:16 | Posted in Economics | Comments Off on The Latvian experience shows why austerity sucks

 

‘Expansionary austerity’ — a tale of scientific fraud

7 Mar, 2015 at 18:22 | Posted in Economics | Comments Off on ‘Expansionary austerity’ — a tale of scientific fraud

fraud-kit-2

I’ve just read ‘Tales of Fiscal Adjustment’ by Alesina and Ardagna, which appears to be the founding text for the idea of expansionary austerity. The level of scholarship, at least as it applies to Australia (which is their first illustration) is exceptionally poor … I’m going to quote excerpts from their text and intersperse them with my comments.

In 1985, a single-party left-wing government took office and launched a stabilization plan to correct the internal and external imbalances (the current account deficit was 4.13% of GDP and the total deficit/GDP ratio was above 3% in 1984).

The Labor government was elected in 1983, not 1985, in the early stages of recovery from a deep recession. Their stabilization plan, introduced in 1984, and called the Trilogy, pledged to hold tax/GDP and expenditure/GDP ratios at or below their current levels while reducing the budget deficit. The current account deficit, a subject of continuous concern, remained high throughout the period in question

The government wage bill and transfer programmes accounted for the biggest share of the adjustment … The cuts in transfer programmes were mainly concentrated on unemployment insurance.

There were no cuts in unemployment benefits. Expenditure fell because unemployment was falling. Haven’t Alesina and Ardagna heard of automatic stabilizers? …

From 1983 to 1986, wages were bargained at a centralized level. The system was based on full indexation with twice-yearly adjustment, but there was a departure from full indexation in 1984 and 1986. In the negotiation process, government used tax reductions previously described to induce the union movement to accept reductions and delays in wages increments.

Absolutely opposite to the story told here, the trade-off in 1984 was in return for the (re)introduction of a single-payer health insurance scheme, a major expansion in the role of government and one that has endured to this day. In subsequent rounds, tax cuts were sometimes part of the deal, but the big trade-off was the introduction of compulsory employer contributions to retirement income funds. These aren’t counted in measures of tax revenue and expenditure, but in functional terms they are the equivalent of a social security scheme (though a regressive and badly designed one, with lots of historical inequities and complexities locked in) …

Australia is a clear case of an‘expansionary fiscal contraction’. GDP grew faster during and in the aftermath of the adjustment, both in absolute terms and relative to the G7 countries. A private investment boom was associated with profits and easier access to credit following the financial deregulation process that took place in 1985–6.

This is like the story of the guy who jumps off a tall building and says, as he passes the 25th floor “All good so far”. Writing in 1998, Alesina and Ardagna must surely have been aware that, almost immediately after their story ends, Australia entered the worst recession in its postwar history. The recession was triggered by contractionary monetary policy, but its severity was largely due to the collapse of speculative investment projects undertaken by so-called ‘entrepreneurs’ who took advantage of easy access to credit to build conglomerate empires that failed in the crisis, almost taking down the banking system with them. Unemployment reached double digits in the early 1990s, and didn’t fall below the pre-adjustment level of 8 per cent (itself disastrous) for nearly a decade …

Overall, the description of Australian macroeconomic experience given here is unrecognisable to someone who lived through the period. The government did lots of things that gained the approval of neoliberals (global sense) but these were almost entirely microeconomic in nature.

Although this piece is full of silly errors and spurious claims, the central problem (which starts with the dating error) is that the direction of causality is reversed. The strong expansion that began in 1983 drove much of the fiscal consolidation directly, and created the political-economic environment in which tight fiscal discipline was feasible without economic contraction, and politically salable. The severe recession that began just after the triumphant return to budget surplus … wiped out all of the fiscal consolidation of the previous decade. Balance wasn’t restored until years into the expansion with a consolidation that produced an increase (admittedly temporary) in unemployment, as Keynesian theory would predict.

John Quiggin

Public debt — a case of atomistic fallacy

7 Mar, 2015 at 10:41 | Posted in Economics | 2 Comments

Fear of debt is rooted in human nature; so the extinction of it as a policy aim seems right to the average citizen. Everyone knows what financial debt means: money owed, often borrowed. To be in debt can produce anxiety if one is uncertain whether, when the time comes, one will be able to repay what one owes.

This anxiety is readily transferred to national debt – the debt owed by a government to its creditors. How, people ask, will governments repay all of the hundreds of billions of dollars that they owe?

SkidelskyThe next step readily follows: in order to repay, or at least reduce, the national debt, the government must eliminate its budget deficit, because the excess of spending over revenue continually adds to the national debt. Indeed, if the government fails to act, the national debt will become, in today’s jargon, “unsustainable.”

Again, an analogy with household debt readily suggests itself. My death does not extinguish my debt, reasons the sensible citizen. My creditors will have the first claim on my estate – everything that I wanted to leave to my children. Similarly, a debt left unpaid too long by a government is a burden on future generations: I may enjoy the benefits of government extravagance, but my children will have to foot the bill.

That is why deficit reduction is at the center of most governments’ fiscal policy today. A government with a “credible” plan for “fiscal consolidation” supposedly is less likely to default on its debt, or leave it for the future to pay. This will, it is thought, enable the government to borrow money more cheaply than it would otherwise be able to do, in turn lowering interest rates for private borrowers, which should boost economic activity. So fiscal consolidation is the royal road to economic recovery.

Robert Skidelsky

However — this official doctrine contains heaps of fallacious thinking, the most fundamental being a kind of atomistic fallacy most eloquently examplified in Keynes’ “paradox of savings”:

An act of individual saving means — so to speak — a decision not to have dinner to-day. But it does not necessitate a decision to have dinner or to buy a pair of boots a week hence or a year hence or to consume any specified thing at any specified date. Thus it depresses the business of preparing to-day’s dinner without stimulating the business of making ready for some future act of consumption. It is not a substitution of future consumption-demand for present consumption-demand, — it is a net diminution of such demand …

If saving consisted not merely in abstaining from present consumption but in placing simultaneously a specific order for future consumption, the effect might indeed be different. For in that case the expectation of some future yield from investment would be improved, and the resources released from preparing for present consumption could be turned over to preparing for the future consumption … In any case, however, an individual decision to save does not, in actual fact, involve the placing of any specific forward order for consumption, but merely the cancellation of a present order. Thus, since the expectation of consumption is the only raison d’être of employment, there should be nothing paradoxical in the conclusion that a diminished propensity to consume has ceteris paribus a depressing effect on employment.

The trouble arises, therefore, because the act of saving implies, not a substitution for present consumption of some specific additional consumption which requires for its preparation just as much immediate economic activity as would have been required by present consumption equal in value to the sum saved, but a desire for “wealth” as such, that is for a potentiality of consuming an unspecified article at an unspecified time. The absurd, though almost universal, idea that an act of individual saving is just as good for effective demand as an act of individual consumption, has been fostered by the fallacy, much more specious than the conclusion derived from it, that an increased desire to hold wealth, being much the same thing as an increased desire to hold investments, must, by increasing the demand for investments, provide a stimulus to their production; so that current investment is promoted by individual saving to the same extent as present consumption is diminished.

Via, via, vieni via con me

6 Mar, 2015 at 16:59 | Posted in Varia | Comments Off on Via, via, vieni via con me

 

Come sempre, dedico questo video a te, Jeanette Meyer.

The ‘bad luck’ theory of unemployment

6 Mar, 2015 at 09:51 | Posted in Economics | Comments Off on The ‘bad luck’ theory of unemployment

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.

unemployedThis is, of course, only what you would expect of New Classical economists.

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.

In the basic DSGE models used by most ‘New Keynesians’, the labour market is always cleared – responding to a changing interest rate, expected life time incomes, or real wages, the representative agent maximizes the utility function by varying her labour supply, money holding and consumption over time. Most importantly – if the real wage somehow deviates from its “equilibrium value,” the representative agent adjust her labour supply, so that when the real wage is higher than its “equilibrium value,” labour supply is increased, and when the real wage is below its “equilibrium value,” labour supply is decreased.

In this model world, unemployment is always an optimal choice to changes in the labour market conditions. Hence, unemployment is totally voluntary. To be unemployed is something one optimally chooses to be.

If substantive questions about the real world are being posed, it is the formalistic-mathematical representations utilized to analyze them that have to match reality, not the other way around.

To Keynes this was self-evident. But obviously not so to New Classical and ‘New Keynesian’ economists.

Austerity-CoverThe notion that unemployment is voluntary is, in the context of the current self-inflicted wound in Europe, downright offensive. Real workers must pay bills and feed families from jobs that have fixed hours and fixed wage rates. The idea that workers ‘trade off’ labor against leisure by figuring out the real wage rate and then slacking off or going on an indefinite unpaid leave is the type of thinking that leads us to see the Great Depression as a giant, unexpected, and astonishingly long unpaid vacation for millions of people: original, yes; helpful, no.
 
 

Smärtsamt bra mästerverk

5 Mar, 2015 at 19:13 | Posted in Varia | Comments Off on Smärtsamt bra mästerverk

e-bok-9789100129392-juloratoriet

Bedövande vackert och nästintill outhärdligt smärtsamt berörande.

Stefan Nilsson har skrivit musiken till filmatiseringen av Göran Tunströms episka mästerverk Juloratoriet.

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