Posted by: Dirk | April 28, 2016

1,610,900 Spaniards live in households with no jobs

According to Spanish media, the number of Spaniards living in households where none of the members has any job stands at 1,610,900 (source: El Mundo, original data at INE). This is a very sad story. As Reuters reports, unemployment in Spain has ticked up in the first quarter. Even though this is typical for winter, the unemployment rate still stands at 21%, which is a dangerous level. Given all the talk about Brexit one wonders what Spanish voters would do if they were confronted with the question of Spexit. If a country cannot guarantee jobs for its population, how is political stability achieved? The answer is difficult to find, but probably the country’s institutions needs to be rearranged so that mass unemployment can be addressed.

Spain, which is facing new elections soon if nothing surprising happens, will have to find political solutions for political problems. One indication of what might work is the recent increase in economic growth that came with a higher government deficit, as reported by Reuters. Perhaps more government spending could help any economy where the private sector does not and cannot spend enough to achieve full employment?

On a personal note, I find it odd that the social problems resulting from austerity policies get almost no media coverage unless there are elections, the government breaks the deficit rules or the government is threatened with bankruptcy. In the US, “the” dictum for presidential elections is “It’s the economy, stupid”. Why do European politicians, why does European media think that we’re different?

At the end of February, I had a discussion on the political consequences of austerity politics. I couldn’t get myself to come up with even one single head of state who did austerity policy and got reelected inside the usual rhythm of elections. Tsipras of Syriza in Greece was re-elected, but that was hardly a year after he came to power. German chancellor Merkel got reelected, but she didn’t do austerity policies at home: the black zero (a balanced government budget) has been achieved by higher tax income, not lower spending. Ireland and Spain both had governments that did not win reelection lately, and I can’t think of a country in the euro zone where the government cut spending and got reelected in the period of 2008/09 till today.

Since new political parties can be created from nothing, we’ll see more new parties entering the European policy space. Whether they have any good strategies remains to be seen.

Posted by: Dirk | April 22, 2016

US Industrial Production Index – Not so good news

I was just looking at US data and found the FRED2 stats for the US Industrial Production Index not so good news:

IPIThe index had surpassed the pre-crisis peak from late 2007 in late 2014, but now it is back under its pre-crisis peak. This seems to say that the US has a problem. A fall in the index used to be a sure indicator for an upcoming recession. Let’s see if this time it’s different.

Wolfgang Streeck has given an interview to the Spanish magazine CTXT. He says:

Creo que hay que acabar con el euro, es un desastre. En tanto en cuanto exista el euro en su forma actual, la situación de los países mediterráneos continuará empeorando y la de los alemanes, mejorando. No hay posibilidad de crear mecanismos igualitarios en Europa. Hay gente de los países del sur que tiene la esperanza de que en algún momento, alguien convencerá a los gobiernos del norte de que les interesa rebajar la competitividad de la economía alemana para incrementar la de la italiana. Esto es una completa ilusión.

A translation into English would roughly look like this (I am neither native in English nor in Spanish, so I kept as close to the Spanish as I could):

I think we have to abandon the euro, which is a disaster.  que hay que acabar con el euro, es un desastre. Insofar as the euro exists in its actual form, the situation of the Mediterranean countries will continue to worsen and that of the Germans will continue to improve. There is no possibility of creating egalitarian mechanisms in Europe. There are people in the countries of the South that have the hope that at some moment, somebody will convince the governments of the South that it would be of interest to put down the competitiveness of the German economy to help increase that of the Italian. This is a complete illusion.

So, Streeck ignores the taboo that exists in the group of academic economists, which is that the euro cannot be put into question. However, I do not agree with Streeck’s economics. The German government is not supposed to decrease the competitiveness of its economy, but is supposed to create more demand so that the current account moves towards balance. This, I believe, is still in the cards. However, I do not think that it will happen with the government that Germany now has, nor with the next one. The taboo regarding the euro has worked quite well, and it will take some years to break down the ideas of competitiveness and bad debt/Swabian housewife so that we can move forward again. Perhaps European integration will break down before that happens, but then this is the result of an intellectual failure of European elites. It would not be the first time.

Posted by: Dirk | April 19, 2016

John Smithin on money (INET video)

It is always interesting to see other economists talk about the very same things that oneself is teaching. I prefer to show much more balance sheets, John Smithin uses puzzles and controversies to structure his lecture. This is a widespread way of “doing economics”, but I have my doubts about it. While history of economic thought is a very interesting subject, students should first be taught what we think today and then go back. Otherwise their head gets stuck in old bottles with old ideas, and they are biased towards the older stuff. This is a psychological problem that Kahneman and others have pointed out many times. What you first hear/see/think you will take as true unless some heavy intellectual lifting makes you understand that it’s not. This is why I find it wiser to start with a description of the actual monetary and financial system and only then return to the neoclassical school, Keynes, Wicksell, Knapp, etc. Having said that, I nevertheless recommend the video to students.

The title of this article is a quote from a recent research paper by the European Central Bank (ECB). The sentence is hidden in footnote 7 on page 14:

ecbequityThis is very interesting because the president of the German central bank, Jens Weidmann, had this to say in an 2014 interview published on the website of Bundesbank:

But the USA, England, Japan – they have all been buying up an abundance of government bonds since the financial crisis. Why are we in Europe, in particular, so cautious?

There are good reasons for this. First and foremost, we have a currency union and not a federal state. We have agreed to share a single currency but that each nation would be individually liable for its sovereign debt – because each country also individually decides on its fiscal and budget policy. However, once euro-area central banks begin to buy sovereign bonds of all countries, they then instantly assume joint liability. They together, and thus ultimately the taxpayer, would be on the hook for losses on these purchases.

Wrong. The taxpayer is not ultimately on the hook for losses at the central bank stemming from purchases of any financial assets, including government bonds. What is wrong today must have been wrong on 2014.


I’ll give a course titled Modern Monetary Theory and European Macroeconomics at the summer school of the University of Maastricht from July 18-22. The course provides a new methodological approach to money and macroeconomics. Realizing that abstract equilibrium models lack descriptions of fundamental issues of a modern monetary economy, the focus of this course lies on the (stylized) balance sheets of the main actors. Money, after all, is born on the balance sheets of the central bank or commercial bank. The course aims to explain how the two monetary circuits – central bank deposits and bank deposits – are intertwined. It is also shown how government spending injects money into the economy. We discuss real world problems with a focus on the economic crisis in the eurozone. Specific issues discussed are quantitative easing, the TARGET2 system and the way the European Central Bank works. The course is at bachelor level; no prior knowledge of economics or monetary theory necessary. It is based on a forthcoming book of the same title.

More information can be found on the website of the summer school (scroll down to find information on my course).

Fischer and Dornbusch was my textbook in macroeconomics at the University of Göttingen. Now Stanley Fischer looks back at lessons “of the last 55 years” – and he says 55 years, because in 1961 he read Keynes’s General Theory for the first time. His speech is very interesting (link, hat tip to Irwin Collier). He writes on productivity, secular stagnation, the zero lower bound, fiscal policy, TIPS, etc. Here is an excerpt:

The monetary-fiscal policy mix: There was once a great deal of work on the optimal monetary-fiscal policy mix. The topic was interesting and the analysis persuasive. Nonetheless the subject seems to be disappearing from the public dialogue; perhaps in ascendance is the notion that–except in extremis, as in 2009–activist fiscal policy should not be used at all. Certainly, it is easier for a central bank to change its policies than for a Treasury or Finance Ministry to do so, but it remains a pity that the fiscal lever seems to have been disabled.

We all know that the science of economics is undergoing a paradigm change these years (link1, link2, link3, link4, link5, …), and this is one of the most pressing issues. If we do not allow fiscal policy to get back in the ring, the depression/deflation tag team will beat up the monetary policy guy pretty badly…

Posted by: Dirk | March 11, 2016

Flassbeck Economics (in English)

I have written two articles on European banks with Heiner Flassbeck at his website. I have also started writing for the German version. I was quoted in an article on the ECB by Deutsche Welle online here. Publishing at this blog will be limited in the near future because of other commitments.

Posted by: Dirk | February 18, 2016

Why is the General Theory “general”? Take two

I have recently commented on why the General Theory by Keynes (1936) is a general theory. Reading chapter 3, I might change my mind:

The classical doctrine, on the other hand, which used to be expressed categorically in the statement that “Supply creates its own Demand” and continues to underlie all orthodox economic theory, involves a special assumption as to the relationship between these two functions. For “Supply creates its own Demand” must mean that f(N) and φ(N) are equal for all values of N, i.e. for all levels of output and employment; and that when there is an increase in Z( = f(N)) corresponding to an increase in N, D( =f(N)) necessarily increases by the same amount as Z. The classical theory assumes, in other words, that the aggregate demand price (or proceeds) always accommodates itself to the aggregate supply price; so that, whatever the value of N may be, the proceeds D assume a value equal to the aggregate supply price Z which corresponds to N. That is to say, effective demand, instead of having a unique equilibrium value, is an infinite range of values all equally admissible; and the amount of employment is indeterminate except in so far as the marginal disutility of labour sets an upper limit.

If this were true, competition between entrepreneurs would always lead to an expansion of employment up to the point at which the supply of output as a whole ceases to be elastic, i.e. where a further increase in the value of the effective demand will no longer be accompanied by any increase in output. Evidently this amounts to the same thing as full employment. In the previous chapter we have given a definition of full employment in terms of the behaviour of labour. An alternative, though equivalent, criterion is that at which we have now arrived, namely a situation, in which aggregate employment is inelastic in response to an increase in the effective demand for its output. Thus Say’s law, that the aggregate demand price of output as a whole is equal to its aggregate supply price for all volumes of output, is equivalent to the proposition that there is no obstacle to full employment. If, however, this is not the true law relating the aggregate demand and supply functions, there is a vitally important chapter of economic theory which remains to be written and without which all discussions concerning the volume of aggregate employment are futile.

This seems to imply that Say’s Law is the special case, whereas the General Theory allows for supply/demand imbalances, mostly supply being limited by demand. Rereading chapter 1 …

I shall argue that the postulates of the classical theory are applicable to a special case only and not to the general case, the situation which it assumes being a limiting point of the possible positions of equilibrium. Moreover, the characteristics of the special case assumed by the classical theory happen not to be those of the economic society in which we actually live, with the result that its teaching is misleading and disastrous if we attempt to apply it to the facts of experience.

… I now conclude that the postulates of classical theory are more or less “similar” to Say’s Law of supply being always equal to demand. At least Say’s Law is made plausible by the discussion of these assumptions, so the two are intertwined.

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