What the euro is all about

6 Sep, 2020 at 14:11 | Posted in Economics | 2 Comments

There are still some economists and politicians out there who think that the euro is the only future for Europe. However, there seem to be some rather basic facts about optimal currency areas that it would perhaps be wise to consider …

The idea that the euro has “failed” is dangerously naive. The euro is doing exactly what its progenitor – and the wealthy 1%-ers who adopted it – predicted and planned for it to do.

reaganomicsThat progenitor is former University of Chicago economist Robert Mundell. The architect of “supply-side economics” is now a professor at Columbia University, but I knew him through his connection to my Chicago professor, Milton Friedman …

The euro would really do its work when crises hit, Mundell explained. Removing a government’s control over currency would prevent nasty little elected officials from using Keynesian monetary and fiscal juice to pull a nation out of recession.

“It puts monetary policy out of the reach of politicians,” he said. “[And] without fiscal policy, the only way nations can keep jobs is by the competitive reduction of rules on business” …

For Mundell, the euro wasn’t about turning Europe into a powerful, unified economic unit. It was about Reagan and Thatcher …

Mundell explained to me that, in fact, the euro is of a piece with Reaganomics:

“Monetary discipline forces fiscal discipline on the politicians as well.”

And when crises arise, economically disarmed nations have little to do but wipe away government regulations wholesale, privatize state industries en masse, slash taxes and send the European welfare state down the drain.

Greg Palast/The Guardian

What the euro is all about

30 Jun, 2018 at 09:58 | Posted in Economics | 3 Comments

There are still economists and politicians out there who think that the euro is the only future for Europe. However, there seem to be some rather basic facts about optimal currency areas that it would perhaps be wise to consider …

The idea that the euro has “failed” is dangerously naive. The euro is doing exactly what its progenitor – and the wealthy 1%-ers who adopted it – predicted and planned for it to do.

suThat progenitor is former University of Chicago economist Robert Mundell. The architect of “supply-side economics” is now a professor at Columbia University, but I knew him through his connection to my Chicago professor, Milton Friedman …

The euro would really do its work when crises hit, Mundell explained. Removing a government’s control over currency would prevent nasty little elected officials from using Keynesian monetary and fiscal juice to pull a nation out of recession.

“It puts monetary policy out of the reach of politicians,” he said. “[And] without fiscal policy, the only way nations can keep jobs is by the competitive reduction of rules on business” …

As another Nobelist, Paul Krugman, notes, the creation of the eurozone violated the basic economic rule known as “optimum currency area”. This was a rule devised by Bob Mundell.

reaganomicsThat doesn’t bother Mundell. For him, the euro wasn’t about turning Europe into a powerful, unified economic unit. It was about Reagan and Thatcher …

Mundell explained to me that, in fact, the euro is of a piece with Reaganomics:

“Monetary discipline forces fiscal discipline on the politicians as well.”

And when crises arise, economically disarmed nations have little to do but wipe away government regulations wholesale, privatize state industries en masse, slash taxes and send the European welfare state down the drain.

Greg Palast/The Guardian

Krugman’s models — squeezing out central ideas from Keynes

1 Sep, 2016 at 16:58 | Posted in Economics | Comments Off on Krugman’s models — squeezing out central ideas from Keynes

The gist is that despite Krugman’s claims to the contrary, the analysis is not really Keynesian, at least in comparison to The General Theory, or GT. It does hark back to the world of the turn of the 20th century Swedish economist Knut Wicksell and contemporaries and followers such as Irving Fisher, James Tobin, and Robert Mundell …

Krugman argues that the central bank should somehow intervene to increase expected inflation, reduce the real interest rate, and drive up capital formation. Here he is following contemporary ideas about “inflation targeting,” whereby the central bank is supposed to set an inflation target and then manipulate the interest rate to try to hit it. At a zero interest rate floor, this sort of maneuver is impossible, so the bank is supposed to talk up expectations about rising prices. The observed inflation will then presumably speed up. Whether such incantations will prove effective is by no means clear. Absent a miraculous shift in model closure … supply-side interventions such as raising nominal wages, devaluation, or even FDR’s 1933 pig slaughter program would be more effective.

taylor_press_lowresA round of price increases might well do the US economy some good, especially if it is driven by money wage increases at the bottom of the income distribution. Still, there is no reason to believe that the inflationist confidence fairy’s powers to cure recession will be stronger than those of her austerian colleague. Expansionary fiscal policy and progressive income redistribution would do a lot more good.

Krugman’s model is ingenious, but is neither beast nor fish nor fowl. Natural rate theory and current ideas about inflation targeting and formation of rational expectations of price increases squeeze out central ideas from Keynes about how the macroeconomy functions under fundamental uncertainty. A pity.

Lance Taylor

The euro — a Reaganomics wet dream

8 May, 2016 at 12:41 | Posted in Economics | 2 Comments

There are obviously still a lot of economists out there who do not accept the conventional wisdom that the euro is a bad idea.

However, there seems to be some rather basic facts about optimal currency areas that all economists would perhaps be wise to consider …

The idea that the euro has “failed” is dangerously naive. The euro is doing exactly what its progenitor – and the wealthy 1%-ers who adopted it – predicted and planned for it to do.

That progenitor is former University of Chicago economist Robert Mundell. The architect of “supply-side economics” is now a professor at Columbia University, but I knew him through his connection to my Chicago professor, Milton Friedman, back before Mundell’s research on currencies and exchange rates had produced the blueprint for European monetary union and a common European currency.

Mundell, then, was more concerned with his bathroom arrangements. Professor Mundell, who has both a Nobel Prize and an ancient villa in Tuscany, told me, incensed:

“They won’t even let me have a toilet. They’ve got rules that tell me I can’t have a toilet in this room! Can you imagine?”

As it happens, I can’t. But I don’t have an Italian villa, so I can’t imagine the frustrations of bylaws governing commode placement.

But Mundell, a can-do Canadian-American, intended to do something about it: come up with a weapon that would blow away government rules and labor regulations. (He really hated the union plumbers who charged a bundle to move his throne.)

“It’s very hard to fire workers in Europe,” he complained. His answer: the euro.

The euro would really do its work when crises hit, Mundell explained. Removing a government’s control over currency would prevent nasty little elected officials from using Keynesian monetary and fiscal juice to pull a nation out of recession.

“It puts monetary policy out of the reach of politicians,” he said. “[And] without fiscal policy, the only way nations can keep jobs is by the competitive reduction of rules on business.”

He cited labor laws, environmental regulations and, of course, taxes. All would be flushed away by the euro. Democracy would not be allowed to interfere with the marketplace – or the plumbing.

As another Nobelist, Paul Krugman, notes, the creation of the eurozone violated the basic economic rule known as “optimum currency area”. This was a rule devised by Bob Mundell.

reaganomicsThat doesn’t bother Mundell. For him, the euro wasn’t about turning Europe into a powerful, unified economic unit. It was about Reagan and Thatcher.

“Ronald Reagan would not have been elected president without Mundell’s influence,” once wrote Jude Wanniski in the Wall Street Journal. The supply-side economics pioneered by Mundell became the theoretical template for Reaganomics – or as George Bush the Elder called it, “voodoo economics”: the magical belief in free-market nostrums that also inspired the policies of Mrs Thatcher.

Mundell explained to me that, in fact, the euro is of a piece with Reaganomics:

“Monetary discipline forces fiscal discipline on the politicians as well.”

And when crises arise, economically disarmed nations have little to do but wipe away government regulations wholesale, privatize state industries en masse, slash taxes and send the European welfare state down the drain.

Greg Palast/The Guardian

Non-conventional non-wisdom on the euro

30 Jul, 2015 at 18:29 | Posted in Economics | 3 Comments

John Cochrane is obviously a big euro fan who doesn’t accept the conventional wisdom that the euro is a bad idea.

However, there seems to be some rather basic facts about optimal currency areas that all economists would perhaps be wise to consider …

The idea that the euro has “failed” is dangerously naive. The euro is doing exactly what its progenitor – and the wealthy 1%-ers who adopted it – predicted and planned for it to do.

That progenitor is former University of Chicago economist Robert Mundell. The architect of “supply-side economics” is now a professor at Columbia University, but I knew him through his connection to my Chicago professor, Milton Friedman, back before Mundell’s research on currencies and exchange rates had produced the blueprint for European monetary union and a common European currency.

Mundell, then, was more concerned with his bathroom arrangements. Professor Mundell, who has both a Nobel Prize and an ancient villa in Tuscany, told me, incensed:

“They won’t even let me have a toilet. They’ve got rules that tell me I can’t have a toilet in this room! Can you imagine?”

As it happens, I can’t. But I don’t have an Italian villa, so I can’t imagine the frustrations of bylaws governing commode placement.

But Mundell, a can-do Canadian-American, intended to do something about it: come up with a weapon that would blow away government rules and labor regulations. (He really hated the union plumbers who charged a bundle to move his throne.)

“It’s very hard to fire workers in Europe,” he complained. His answer: the euro.

The euro would really do its work when crises hit, Mundell explained. Removing a government’s control over currency would prevent nasty little elected officials from using Keynesian monetary and fiscal juice to pull a nation out of recession.

“It puts monetary policy out of the reach of politicians,” he said. “[And] without fiscal policy, the only way nations can keep jobs is by the competitive reduction of rules on business.”

He cited labor laws, environmental regulations and, of course, taxes. All would be flushed away by the euro. Democracy would not be allowed to interfere with the marketplace – or the plumbing.

As another Nobelist, Paul Krugman, notes, the creation of the eurozone violated the basic economic rule known as “optimum currency area”. This was a rule devised by Bob Mundell.

That doesn’t bother Mundell. For him, the euro wasn’t about turning Europe into a powerful, unified economic unit. It was about Reagan and Thatcher.

“Ronald Reagan would not have been elected president without Mundell’s influence,” once wrote Jude Wanniski in the Wall Street Journal. The supply-side economics pioneered by Mundell became the theoretical template for Reaganomics – or as George Bush the Elder called it, “voodoo economics”: the magical belief in free-market nostrums that also inspired the policies of Mrs Thatcher.

Mundell explained to me that, in fact, the euro is of a piece with Reaganomics:

“Monetary discipline forces fiscal discipline on the politicians as well.”

And when crises arise, economically disarmed nations have little to do but wipe away government regulations wholesale, privatize state industries en masse, slash taxes and send the European welfare state down the drain.

Greg Palast/The Guardian

Greece and the true purpose of the euro

28 Jun, 2015 at 15:56 | Posted in Economics | 2 Comments

The idea that the euro has “failed” is dangerously naive. The euro is doing exactly what its progenitor – and the wealthy 1%-ers who adopted it – predicted and planned for it to do.

That progenitor is former University of Chicago economist Robert Mundell. The architect of “supply-side economics” is now a professor at Columbia University, but I knew him through his connection to my Chicago professor, Milton Friedman, back before Mundell’s research on currencies and exchange rates had produced the blueprint for European monetary union and a common European currency.

Mundell, then, was more concerned with his bathroom arrangements. Professor Mundell, who has both a Nobel Prize and an ancient villa in Tuscany, told me, incensed:

“They won’t even let me have a toilet. They’ve got rules that tell me I can’t have a toilet in this room! Can you imagine?”

As it happens, I can’t. But I don’t have an Italian villa, so I can’t imagine the frustrations of bylaws governing commode placement.

But Mundell, a can-do Canadian-American, intended to do something about it: come up with a weapon that would blow away government rules and labor regulations. (He really hated the union plumbers who charged a bundle to move his throne.)

“It’s very hard to fire workers in Europe,” he complained. His answer: the euro.

The euro would really do its work when crises hit, Mundell explained. Removing a government’s control over currency would prevent nasty little elected officials from using Keynesian monetary and fiscal juice to pull a nation out of recession.

“It puts monetary policy out of the reach of politicians,” he said. “[And] without fiscal policy, the only way nations can keep jobs is by the competitive reduction of rules on business.”

He cited labor laws, environmental regulations and, of course, taxes. All would be flushed away by the euro. Democracy would not be allowed to interfere with the marketplace – or the plumbing.

As another Nobelist, Paul Krugman, notes, the creation of the eurozone violated the basic economic rule known as “optimum currency area”. This was a rule devised by Bob Mundell.

That doesn’t bother Mundell. For him, the euro wasn’t about turning Europe into a powerful, unified economic unit. It was about Reagan and Thatcher.

“Ronald Reagan would not have been elected president without Mundell’s influence,” once wrote Jude Wanniski in the Wall Street Journal. The supply-side economics pioneered by Mundell became the theoretical template for Reaganomics – or as George Bush the Elder called it, “voodoo economics”: the magical belief in free-market nostrums that also inspired the policies of Mrs Thatcher.

Mundell explained to me that, in fact, the euro is of a piece with Reaganomics:

“Monetary discipline forces fiscal discipline on the politicians as well.”

And when crises arise, economically disarmed nations have little to do but wipe away government regulations wholesale, privatize state industries en masse, slash taxes and send the European welfare state down the drain.

Greg Palast/The Guardian

The true purpose of the euro

12 Sep, 2012 at 20:43 | Posted in Economics, Politics & Society | 1 Comment

The idea that the euro has “failed” is dangerously naive. The euro is doing exactly what its progenitor – and the wealthy 1%-ers who adopted it – predicted and planned for it to do.

That progenitor is former University of Chicago economist Robert Mundell. The architect of “supply-side economics” is now a professor at Columbia University, but I knew him through his connection to my Chicago professor, Milton Friedman, back before Mundell’s research on currencies and exchange rates had produced the blueprint for European monetary union and a common European currency.

Mundell, then, was more concerned with his bathroom arrangements. Professor Mundell, who has both a Nobel Prize and an ancient villa in Tuscany, told me, incensed:

“They won’t even let me have a toilet. They’ve got rules that tell me I can’t have a toilet in this room! Can you imagine?”

As it happens, I can’t. But I don’t have an Italian villa, so I can’t imagine the frustrations of bylaws governing commode placement.

But Mundell, a can-do Canadian-American, intended to do something about it: come up with a weapon that would blow away government rules and labor regulations. (He really hated the union plumbers who charged a bundle to move his throne.)

“It’s very hard to fire workers in Europe,” he complained. His answer: the euro.

The euro would really do its work when crises hit, Mundell explained. Removing a government’s control over currency would prevent nasty little elected officials from using Keynesian monetary and fiscal juice to pull a nation out of recession.

“It puts monetary policy out of the reach of politicians,” he said. “[And] without fiscal policy, the only way nations can keep jobs is by the competitive reduction of rules on business.”

He cited labor laws, environmental regulations and, of course, taxes. All would be flushed away by the euro. Democracy would not be allowed to interfere with the marketplace – or the plumbing.

As another Nobelist, Paul Krugman, notes, the creation of the eurozone violated the basic economic rule known as “optimum currency area”. This was a rule devised by Bob Mundell.

That doesn’t bother Mundell. For him, the euro wasn’t about turning Europe into a powerful, unified economic unit. It was about Reagan and Thatcher.

“Ronald Reagan would not have been elected president without Mundell’s influence,” once wrote Jude Wanniski in the Wall Street Journal. The supply-side economics pioneered by Mundell became the theoretical template for Reaganomics – or as George Bush the Elder called it, “voodoo economics”: the magical belief in free-market nostrums that also inspired the policies of Mrs Thatcher.

Mundell explained to me that, in fact, the euro is of a piece with Reaganomics:

“Monetary discipline forces fiscal discipline on the politicians as well.”

And when crises arise, economically disarmed nations have little to do but wipe away government regulations wholesale, privatize state industries en masse, slash taxes and send the European welfare state down the drain.

Greg Palast The Guardian

Why the euro is doomed

21 Jun, 2012 at 00:53 | Posted in Economics | Comments Off on Why the euro is doomed

Tim Worstall  knows why:
 

 

The euro is doomed to fall apart: no, not because I’m some nasty man in UKIP but because the basic idea was such a terrible one. Our chart above shows just how terrible it was. It would, in economic terms, have been better to have a new currency for all countries beginning with the letter M than for the eurozone. Or for all countries that have the 5th parallel North passing through them.

Yes, of course, we all know, the euro is the bright new dawn, the vital step in stopping Germany from invading France. Again. No one seems to have noticed it that they managed it last time and having experienced the place seem to have no desire at all to go back. So this might not be a problem that needs a solution.

However, let’s look behind the political posturing and ask ourselves whether, in economic terms, the euro was a sensible idea. The structure we need to help us decide is Robert Mundell’s concept of an Optimum Currency Area. We should look at things like language barriers, labour mobility, capital, the similarity between economies, their reaction to external shocks – essentially what has been worked out for us in that chart.

And, as you can see, it’s a blitheringly stupid idea to try and push countries into the same currency just because they happen to be next door to each other. People would have been better off if we’d insisted that the c. 1800 Ottoman Empire had the same currency again: Tunisia, Turkey, Israel and Greece. Which is a real indication of how dumb it was to try and get Greece and Germany into the same currency.

So a very silly thing done by those Very Serious People who have decided they’d like to rule us.
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Still stunned and disappointed at the 2011 Nobel Prize in Economics

11 Oct, 2011 at 20:51 | Posted in Economics | Comments Off on Still stunned and disappointed at the 2011 Nobel Prize in Economics

Olaf Storbeck has an interesting and thought-provoking piece on the fact that The Royal Swedish Academy of Sciences decided to award The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2011 to Thomas J. Sargent and Christopher A. Sims. He writes:

I think this decision is detrimental to the reputation of the Nobel prize in Economics as well as bad for the discipline in a broader sense. As an influential economist told me confidentially last night at a drinks reception here in London: “This is completely ridiculous.”

In fact Stockholm once again honours the Ancien Régime in macroeconomics.

The prize goes to theories that are rightly blamed for paving the way to the biggest financial and economic crisis since the Great Depression. It is a price for a school of economics that assumes unfettered markets always perform smoothly and the financial system is so efficient that macro economists don’t have to bother looking at it.

Hence, there are no banks (and by definition: no banking crises) whatsoever in the mainstream macro models. There usually is one stable equilibrium, and every economic agent behaves perfectly rational and selfishly. Consumers as well as firms are building “rational expectations” about the future and rightly assume any future consequence of a government intervention. Additionally, mainstream macro economists quite often assume that all consumers and all companies are identical. All those assumptions make it much easier to solve the models. And all those assumptions are at odds with the world we live in.

Those models usually lead to the conclusion that fiscal and monetary policy can’t achieve a lot and that government interventions are doing more harm than good. The experience of the last for years teaches us otherwise. Without the ultra-aggressive monetary policy and the large fiscal stimulus the world economy would have fallen into a second Great Depression.

Mainstream macro economists like Thomas Sargent and Christopher Sims devised elegant mathematical models and methods that are widely used in the profession. In a telephone interview, Tom Sargent said yesterday:

 “We try to experiment in our models before we wreck the world”.

This is precisely the problem. They use models that were based on wrong assumptions and delivered wrong conclusion. Macroeconomists like Sargent and Sims lead their discipline into an illusionary world and dangerous policy advice.

The helpless answers Sargent and Sims gave on questions regarding the financial crisis were the latest evidence supporting this view. “There is no easy solution, we have to look at data”, Sims told the world. Sargent said in a telephone interview: “We are just bookish types that look at data and try to figure out what’s going on.”

We are in the fourth year of the most severe financial crisis since the Great Depression and this is all that two of the allegedly leading macroeconomists have to offer? My goddess, maybe I really should start to buy gold after all.

Unfortunately, this years noble price committee decision is no outlier. When it comes to economics, Stockholm for decades has been cherished a weird preference in favour of a specific school of orthodox economics. Time and again, the award was given to very conservative economists who were arguing against government interventions.

This started with Milton Friedman and George Stigler and includes Gary Becker, Robert Lucas, Ed Prescott, Finn Kydland and Robert Mundell. The prize to Robert Merton and Myron Scholes can also be seen in this tradition.

This years decision to give the prize to Sargent and Sims is particularly bizarre. It is like honouring the engineer who designed the Titanic after the ship sunk.

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