Demystifying Trickle Down
28 December, 2017 at 20:01 | Posted in Economics | Leave a comment
The causes of secular stagnation and the loanable funds theory
28 December, 2017 at 09:34 | Posted in Economics | 4 CommentsWhat are the causes of secular stagnation? What are the solutions to revive growth and get the U.S. economy out of the doldrums? …
One headline conclusion stands out: the secular stagnation is caused by a heavy overdose of savings … All these savings end up as deposits, or ‘loanable funds’ (LF), in commercial banks … The glut in savings supply is so large that banks cannot get rid of all the loanable funds even when they offer firms free loans—that is, even after they reduce the interest rate to zero, firms are not willing to borrow more in order to invest. The result is inadequate investment and a shortage of aggregate demand in the short run, which lead to long-term stagnation as long as the savings-investment imbalance persists …
This is clearly a depressing conclusion, but it is also wrong …
Ever since Knut Wicksell’s (1898) restatement of the doctrine, the loanable funds approach has exerted a surprisingly strong influence upon some of the best minds in the profession …
Due to our inability to free ourselves from the discredited loanable funds doctrine, we have lost the forest for the trees. We cannot see that the solution to the real problem underlying secular stagnation (a structural shortage of aggregate demand) is by no means difficult: use fiscal policy—a package of spending on infrastructure, green energy systems, public transportation and public services, and progressive income taxation—and raise (median) wages. The stagnation will soon be over, relegating all the scholastic talk about the ZLB to the dustbin of a Christmas past.
It is difficult not to agree with Servaas here. The loanable funds theory is in many regards nothing but an approach where the ruling rate of interest in society is — pure and simple — conceived as nothing else than the price of loans or credits set by banks and determined by supply and demand — as Bertil Ohlin put it — “in the same way as the price of eggs and strawberries on a village market.”
It’s a beautiful fairy tale, but the problem is that banks are not barter institutions that transfer pre-existing loanable funds from depositors to borrowers. Why? Because, in the real world, there simply are no pre-existing loanable funds. Banks create new funds — credit — only if someone has previously got into debt! Banks are monetary institutions, not barter vehicles.
Continue Reading The causes of secular stagnation and the loanable funds theory…
A Happy New Year to all my blog readers
27 December, 2017 at 23:31 | Posted in Varia | 2 CommentsTired of the idea of an infallible mainstream neoclassical economics and its perpetuation of spoon-fed orthodoxy, yours truly launched this blog six years ago. The number of visitors has increased steadily, and with now having had my posts viewed more than 3 million times, I have to admit of still being — given the rather wonkish character of the blog, with posts mostly on economic theory, statistics, econometrics, theory of science and methodology — utterly astonished that so many are interested and take their time to read the often rather geeky stuff posted here.
In the 21st century, the blogosphere has without any doubts become one of the greatest channels for dispersing new knowledge and information. As a blogger, I can specialize in those particular topics an economist and professor of social science happens to have both deep knowledge of and interest in. That, of course, also means — in the modern long tail world — being able to target a segment of readers with much narrower and specialized interests than newspapers and magazines, as a rule, could aim for — and still attract quite a lot of readers.
Farewell to neoliberalism
27 December, 2017 at 09:58 | Posted in Politics & Society | 1 CommentKR: The death of the centre-left has also led to the rise of the Right. You note … that working class white women overwhelmingly voted for Trump, while Clinton lost votes among African Americans and Latinos compared to Obama’s election in 2008. How have so many social groups associated with the Left – the working class, minorities, women – turned away?
Wolfgang Streeck:
That’s a difficult question as the “racial” complexities of American politics in particular are endless. Basically I believe that at some point material deprivation trumps (if the word is allowed) cultural identification, especially if the alternative – in this case, Clinton – is so unattractive and indeed untrustworthy. Clinton’s hobnobbing with the Californian movie stars and other celebrities, let alone her material greed and the incredible sums she collected for her Wall Street appearances, must at some point have destroyed her claim to defend “hard-working Americans and their families”. What was left then was Trump. I think we have reasons to believe that had Bernie Sanders been allowed by the Democratic party machine to will the nomination, he could have defeated Trump handily, certainly in places like Iowa, Wisconsin and Ohio.
Facebook destroys democracy
26 December, 2017 at 12:13 | Posted in Politics & Society | 2 CommentsZEIT: Die Monopolstellung ist also mehr als ein marktwirtschaftliches Problem?
Ferguson: Sie ist ein riesiges Problem. In der gesamten Menschheitsgeschichte galt der öffentliche Raum als nicht kommerziell. Heute haben wir daraus einen gigantischen Anzeigenmarkt gemacht. Die Suche nach Informationen ist wie der Gang in eine Bibliothek.
Durch Google ist das jetzt ein weltweiter Verkaufsraum. Dasselbe sehen Sie in der Veränderung unserer sozialen Netzwerke. Früher hatten wir Clubs und Gesellschaften, den Marktplatz oder die Kneipe, um miteinander abzuhängen und uns auszutauschen. Dieser Raum gehört jetzt Facebook, und Facebook bombardiert uns mit Werbung. Kurz gefasst haben wir also zwei Firmen, Google und Facebook, die den globalen Werbemarkt bestimmen und zugleich auch die Macht haben, den öffentlichen Raum zu dominieren. Das ist ein Zustand, der langfristig nicht aufrechterhalten werden kann. Es kann nicht sein, dass ein Privatunternehmen ein Monopol über unsere persönlichen Daten besitzt und sie einfach weiterverkaufen kann. Das ist schlicht und einfach verrückt. Genauso wie die Tatsache, dass Facebook durch seinen Newsfeed der mit Abstand größte Herausgeber von Nachrichten in der Geschichte der USA ist. Das ist desaströs für den Fortbestand der westlichen Demokratie.
Never thought I would quote Niall Ferguson, but here — for once — he has something both intelligent and thoughtful to say.
Is it time to ditch the natural rate hypothesis?
25 December, 2017 at 12:00 | Posted in Economics | 1 CommentFifty years ago Milton Friedman wrote an (in)famous article arguing that (1) the natural rate of unemployment was independent of monetary policy, and (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 ideas that unemployment really is independent of monetary policy and that there is no long-run trade-off between inflation and unemployment.
Although Olivier Blanchard also has his doubts — after having played around with a ‘toy model’ and looked at the data — he lands on the following advice:
Failure of either of the hypothesis leads to a more attractive trade-off between output and inflation, and, in the presence of shocks, suggests a stronger role for stabilization policy. If the independence hypothesis fails, adverse shocks are more costly, and stabilization policy more powerful. If the accelerationist hypothesis fails, there is more room for stabilization policy to be used at little inflation cost.
Where does this leave us? It would be good to have a sense of … the specific channels at work. The empirical part of this paper has shown that we are still far from it. Thus, the general advice must be that central banks should keep the natural rate hypothesis (extended to mean positive but low values of b and a) as their baseline, but keep an open mind and put some weight on the alternatives. For example, given the evidence on labor force participation and on the stickiness of inflation expectations presented earlier, I believe that there is a strong case, although not an overwhelming case, to allow U.S. output to exceed potential for some time, so as to reintegrate some of the workers who left the labor force during the last ten years.
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.
The real damage done is that policymakers that take decisions based on NRH models systematically implement austerity measures and kill off economic expansion. The unnecessary and costly unemployment that this self-inflicted and flawed illusion eventuates, is something its New Classical and ‘New Keynesian’ advocates should always be kept accountable for.
According to the [NRH], unemployment differs from its natural rate only if expected inflation differs from actual inflation. If expectations are rational, we should see as many quarters when inflation is above expected inflation as quarters when it is below expected inflation. That suggests the following test of the [NRH]:
Because a decade contains 40 quarters, the probability that average expected inflation over a decade will be different from average actual inflation should be small. If the [NRH] and rational expectations are both true simultaneously, a plot of decade averages of inflation against unemployment should reveal a vertical line at the natural rate of unemployment … This prediction fails dramatically.
There is no tendency for the points to lie around a vertical line and, if anything, the long-run Phillips is upward sloping, and closer to being horizontal than vertical. Since it is unlikely that expectations are systematically biased over decades, I conclude that the [NRH] is false.
Defenders of the [NRH] might choose to respond to these empirical findings by arguing that the natural rate of unemployment is time-varying. But I am unaware of any theory which provides us, in advance, with an explanation of how the natural rate of unemployment varies over time. In the absence of such a theor, the [NRH] has no predictive content. A theory like this, which cannot be falsified by any set of observations, is closer to religion than science.
So, yes, it is definitely time to ditch the natural rate hypothesis!
Trumpian trickle down
25 December, 2017 at 11:08 | Posted in Economics | 1 CommentTrump and the GOP delivering a huge gift to US corporations and shareholders. The only trickle down to workers going on is probably best described in analogy to the above picture …
O holy night
24 December, 2017 at 18:23 | Posted in Varia | Leave a comment
Absolutely outstanding. Divine.
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