Yes, and more. There was an article in the EU Observer this week (April 3, 2012) – EU ‘surprised’ by Portugal’s unemployment rate – which I had to re-read a few times to check that I was actually reading the words correctly. The dialogue presented was so shocking that it raises fundamental questions about how one is interact with the economics debate. Then I read some more articles this week which investigated why mainstream economics retains its dominance in the face of its catastrophic failure to explain anything of importance to humanity. Closed minds are very resistant to change especially when socio-pathological dimensions are present. Which led me to investigate Mayan cosmology after being accused of being a practitioner of the art! Overall, another week in the life of a Modern Monetary Theorist (MMTist) – par for the course really.
The latest Eurostat Labour Force estimates (for February 2012) – Euro area unemployment rate at 10.8%. which came out earlier this week and which I reported on in this blog – Policy failure in Europe scales new heights – were very scary.
The data shows that overall unemployment and youth unemployment (under 25’s), in particularly, has risen dramatically over the last 12 months in many EMU countries.
For example, in Spain youth unemployment has risen from 44.4 per cent to 50.5 per cent. In Greece, from 39.5 per cent in February 2011 to 50.4 per cent in December 2011 and who would care to guess what it is now. In Portugal, the focus of the EU Observer article it has risen from 26.9 per cent to 35.4 per cent, with no end in sight to the deteriorating conditions facing the youth labour market.
In terms of overall unemployment, Portugal has moved from 12.3 per cent in February 2011 to 15 per cent and rising 12 months later. Over the same time period Spain has seen its unemployment rate rise from 20.6 per cent to 23.6 per cent, and Greece from 14.9 per cent to 21 per cent (in December 2011) and rising.
Unemployment rates at this level invoke memories of the Great Depression and are clearly unsustainable from the perspective of social cohesion and social stability.
The next day I read the EU Observer article cited above.
The EU Observer quoted Mr Peter Weiss who is the Deputy head of the European Commission mission to Portugal and clearly very employed and well-paid. He said:
We have seen the figures and were a bit surprised by the rapid rise in the last quarter. We still have a bit of difficulty in interpreting the figures, it may be that seasonal factors were not taken into account properly …
I am sick and tired of reading about how surprised some “official” is, or how the “markets” are, or how “economists” are, when the statistician releases the latest National Accounts or Labour Force data, which shows the economy and/or labour market has deteriorated some more in the face of harsh austerity programs.
What do these characters think is going to happen when governments savagely cut into aggregate demand. Spending equals income which drives employment – a basic macroeconomic rule which is continually being forgotten in the current period.
The EU Deputy Head (Weiss) was then quoted as saying that in terms of the austerity measures implemented by Portugal’s government:
The budgetary adjustment is currently on track and it is likely for the Eurogroup to say yes to the fourth disbursement (of bail-out money) … Overall compliance with the programme is very good.
He said that the austerity cuts to the government budget were the equivalent of “7.5 percent of the gross domestic product in only two years” which was an “enormous and very ambitious” program but was essential “to regain market confidence”.
It was noted that because of the trade links with Spain, Portugal would continue to deteriorate given the austerity is wreaking havoc in Spain.
The EU Observer article quoted Mr Weiss as saying that:
The centre-right government led by Pedro Coelho has to stick to the benefits-cutting measures agreed last month and go further still by “cutting unemployment benefits for some groups with preferential treatment ….
I looked up the International Classification of Diseases (ICD) to check out what constitutes sociopathological behaviour. Terms like “Callous unconcern for the feelings of others” and “Gross and persistent attitude of irresponsibility and disregard for social norms, rules, and obligations” are used.
You can also consult the American Psychiatric Association’s Diagnostic and Statistical Manual of Mental Disorders, under the T 04 Antisocial Personality Disorder (Dyssocial Personality Disorder) – “a pervasive pattern of disregard for and violation of the rights of others”.
I think we might send some medical staff to Brussels to do some analysis.
It is almost unbelievable – hence my re-reading of the article – that people could maintain their professional demeanour when advocating even harsher cuts in income support to the unemployed when the policies they are advocating are creating that very unemployment. Some simple empathy would suggest that this is not the right way out of this problem.
Further, I have searched many times for a coherent cost-benefit analysis of the relative merits of creating this scale of economic and social disaster versus the net benefits of “market confidence” (however that is defined). This is especially the case when the ECB has all the capacity necessary to render the confidence of the private bond markets irrelevant for ever and a day.
Who has actually compared the costs of the massive unemployment both daily and across the generations that will be affected to the alternative? Answer: none of these “officials”. They have adopted a dogmatic view that the bond markets have to be appeased.
The only reason they have to be appeased is because the Eurozone elites created a monetary system that ensured every one of the member governments became immediately exposed to insolvency risk. They also refused to create a federal fiscal authority which could have smoothed the aggregate demand fluctuations and prevented the member states’ budgets from being exposed to the massive downturn in tax revenue.
It was obvious from the inception of the EMU that a serious negative aggregate demand shock would push the insolvency buttons and the bond markets would take fright.
And, even with those weaknesses, the ECB could stop the whole meltdown and support growth and curtail the massive daily losses from unemployment occurring. Instead, it does just enough to keep the system from collapsing altogether but supports the fiscal austerity which ensures the bleeding is slower but not quelled.
It reads as if the whole region is on another planet and acting out some black script.
Anyway, apparently I practice Mayan cosmology.
There was an article (March 21, 2012) – Mainstream economists on the defensive – which was the final installment in a “six-part series on the consequences of how economics is and is not taught to undergraduates in the United States”. US weekly ads.
The article began by saying that:
Despite the economic meltdown of 2008, the pre-existing, one-sided model of economics education has remained almost entirely intact.
The article conducted “interviews with prominent mainstream economists, many of whom chair top-ranking departments” and wanted to know why “students would not benefit from a more open, pluralistic education in economics and, to the extent they believed students would benefit, why so little has changed”.
I have to admit that in the early days of the crisis (late 2007 and early 2008) I thought that the mainstream in my profession would be hard pressed to maintain its their arrogant disregard for facts.
I have studied the philosophy of science and so appreciate the writings of Thomas Kuhn and Imre Lakatos, not to forget the work of Paul Feyeraband, who wrote the brilliant work – Against Method (published 1975).
I fully understood Kuhn’s concept of “normal science” where practitioners of a particular discipline will persist with their theories even though they become, increasingly, empirically bereft.
Lakatos’ concept of the Research Programme clearly outlined how a particular paradigm protected its main (core) propositions from empirical scrutiny via a protective belt. In other words, some of the main theoretical propositions could never be reasonably examined and were thus of the status of assertion – read, blind faith.
Joan Robinson, the Cambridge economist and follower of Keynes described economics as a branch of theology – saying that it was all a matter of faith.
Lakatos also outlined the concept of a progressive research program (one that was growing through the discovery of new and stunning facts, new techniques, and “more precise predictions”.
He juxtaposed this state with a degenerating research program which was characterised by a lack of vitality and a failure of the protective belt to generate new ways of understanding the world or deal with the empirical evidence confronting it.
Mainstream macroeconomics is clearly a degenerating research program, but as Kuhn argued, practitioners within such a program hang on grimly to their theoretical core, until such time that a “scientific revolution” occurs.
A degenerative research programme maintains its hegemony in a number of ways, including control of teaching programmes in universities; control of the hiring process within the Academy; control of key publication outlets; control of major research funding bodies; and a dominance in the linkages between the Academy, business and government.
So to make it as a heterodox economist within the Academy and to get some non-mainstream ideas out into the wider debate is very difficult.
In some sense, the developments in the Internet, including self-publishing platforms such as blogs have allowed non-orthodox views to gain a wider exposure than would otherwise be the case.
This proliferation of blogs etc also carries its own dangers but, by and large, it has been a progressive development and has allowed a wider audience to gain an appreciation of what goes on inside the academic economic’s departments around the world.
The article in question provides some insights into the closed world of mainstream economists. They quote one US academic as saying:
I don’t see that we’re lacking on the critical thinking end … Within neoclassical economics there’s plenty of debate and we’re always focused on trying to understand how different assumptions have different outcomes.
That may be true but the terrain defined by neoclassical economics – within which the assumptions are varied – is highly restrictive.
Moreover, they are of little relevance to the real world
In particular, the dominant professional macro models in recent years, which defined their New Keynesian approach, have tended not to include “money” or a “financial sector” at all and, if included, the perception of the role of government is deeply flawed.
The mainstream also actually believe they are generating theory that is relevant to the real world. The article provided this quote:
Most of the people teaching our courses think that … [neoclassical economists’] …unique way of thinking can most successfully describe how things works.
How can you describe how a monetary system works if there is no money in the model?
The article also quoted one Harald Uhlig, chair of the economics department at the University of Chicago. He claimed that:
As a teacher, you want to get your students to think critically, of course … You want to expose them to ideas but also question these ideas to some extent. But to do that you have to make a choice of bringing what you think are the most relevant criticisms into the classroom.
He said that “most relevant” criticisms came from within the neoclassical school itself.
I considered the work of Harald Uhlig in this blog – There is no unemployment in a non-monetary economy.
He was the character the proposed we seek to understand unemployment by studying a world with no money, no spending (that is, no aggregate demand), and whose command of the National Accounts framework was demonstrably flawed.
In fact, there was not even a market in his “explanatory” framework.
The purpose of this paper was to demonstrate that fiscal austerity was equivalent to making the government disappear from the lives of private citizens, a process when they “are no worse off” than before the government entered their lives.
Remember, there was no money in this economy and any insights that may have been provided from this model (and there were none) were irrelevant to a modern economy which uses state money, which individuals can choose not to spend when they are uncertain about the future.
The Remapping article said that several mainstream economists said that:
… heterodox perspectives were akin to unscientific theories, like astrology, or to outdated theories in the natural sciences.
Harald Uhlig was quoted as saying;
If my son were taking a course on astrophysics, I would expect him to learn the modern astrophysicist’s perspective, not be taken through six centuries of theological doctrine … The Mayans have thought about the origins of the universe, but I don’t think he needs to learn what they thought.
Another mainstream economists from a top US department said:
I wouldn’t think that science departments ought to give equal weight to flat-earth theories or creationist approaches …
Please read my blog – Flat earth theorists – dumb but sneaky – for more discussion on this point.
Some readers may have followed a recent debate about banks and money which has been played out via a few blogs lately. It demonstrated that even the more progressive end of mainstream economics has a deeply flawed grasp on the way the monetary system operates. I chose not to participate because I have written about these issues many times in the past and that work is on the public record.
But as a note to Harald Uhlig and others who think that anything other than mainstream economics is cosmology I did read an interesting article from the Washington branch of the US Federal Reserve by Seth B. Carpenter and Selva Demiralp (from 2010) – Money, Reserves, and the Transmission of Monetary Policy: Does the Money Multiplier Exist?.
I have written about how the mainstream macroeconomics teaching program seriously fails to teach them anything about how the economy works. Their “unique way of thinking” totally misses major points about the operation of the monetary system and as a consequence their analysis fails badly and their policy suggestions are spurious.
For example, most recently – Monetary movements in the US – and the deficit but also in these blogs – Money multiplier and other myths – for more discussion on this point – Building bank reserves will not expand credit and Building bank reserves is not inflationary – to list just a few.
A central tenet of the mainstream macroeconomics story that students learn from textbooks is that the role of the central bank is to control the money supply. This misconception is the first of many failings that the mainstream profession make when trying to pass on even a basic understanding of how monetary policy is implemented in a modern monetary economy to their students.
The reality is that monetary policy is focused on determining the value of a short-term interest rate. Central banks cannot control the money supply.
To some extent these ideas were a residual of the commodity money systems where the central bank could clearly control the stock of gold, for example. But in a credit money system, this ability to control the stock of “money” is undermined by the demand for credit.
The movements in the broad monetary aggregates is adequately explained by the theory of endogenous money. which is central to the horizontal analysis in Modern Monetary Theory (MMT). When we talk about endogenous money we are referring to the outcomes that are arrived at after market participants respond to their own market prospects and central bank policy settings and make decisions about the liquid assets they will hold (deposits) and new liquid assets they will seek (loans).
For a discussion of the difference between vertical and horizontal transactions in a modern monetary economy please see Deficit spending 101 – Part 1 – Deficit spending 101 – Part 2 and Deficit spending 101 – Part 3.
To repeat, the “money supply” (the broad monetary aggregate however measured) is demand-determined – as the demand for credit expands so does the money supply.
As credit is repaid the money supply shrinks. These flows are going on all the time and the stock measure we choose to call the money supply, say M3 (Currency plus bank current deposits of the private non-bank sector plus all other bank deposits from the private non-bank sector) is just an arbitrary reflection of the credit circuit.
So the supply of money is determined endogenously by the level of GDP, which means it is a dynamic (rather than a static) concept. Central banks clearly do not determine the volume of deposits held each day. These arise from decisions by commercial banks to make loans. The central bank can determine the price of “money” by setting the interest rate on bank reserves.
In 2006, Bernanke gave a speech (November 10, 2006) in Germany – Monetary Aggregates and Monetary Policy at the Federal Reserve: A Historical Perspective – where he discussed some of the evolution of monetary thinking among central bankers. At one point he posed the question:
Why have monetary aggregates not been more influential in U.S. monetary policymaking, despite the strong theoretical presumption that money growth should be linked to growth in nominal aggregates and to inflation? In practice, the difficulty has been that, in the United States, deregulation, financial innovation, and other factors have led to recurrent instability in the relationships between various monetary aggregates and other nominal variables.
There has been a long history of economists being “surprised” when their estimates of M1 or M2 don’t pan out in the real world. The development of broad monetary aggregates like M2 and beyond were an ad hoc response to repeated failures to accurately forecast the movements in M1.
But as Bernanke noted “over the years the stability of the economic relationships based on the M2 monetary aggregate has also come into question”.
The upshot is that these aggregates have very little relevance for policy making and only serve to excite Austrian-school devotees and remnant-Monetarists who don’t know any better.
So the divergence in monetary growth rates in the US from the UK and ECB reflects the difference in current performance of their economies. The reality is that the US government hasn’t yet imposed austerity even though public spending growth is starting to flag. There has been sufficient deficit stimulus for long enough to kick-start the economy (although it hasn’t been a very strong boot at work).
Please read my blog – The US is not an example of a fiscal contraction expansion – for more discussion on this point.
The point that arises in these contexts is the mainstream concept of the monetary multiplier. I also discussed this issue in this recent blog – Bank of England money supply data paints a grim picture.
As I have indicated several times the depiction of the fractional reserve-money multiplier process in textbooks like Mankiw exemplifies the mainstream misunderstanding of banking operations. Please read my blog – Money multiplier and other myths – for more discussion on this point.
The idea that the monetary base (the sum of bank reserves and currency) leads to a change in the money supply via some multiple is not a valid representation of the way the monetary system operates.
In the world we live in, bank loans create deposits and are made without reference to the reserve positions of the banks. The bank then ensures its reserve positions are legally compliant as a separate process knowing that it can always get the reserves from the central bank.
The central bank has to guarantee reserves to the commercial banks on demand in order to guarantee financial stability. The viability of the payments system is an essential aspect of the maintenance of financial stability.
So the monetary base (currency plus reserves) always adjusts to the broad monetary aggregate not the other way around. Further, the base can move independently of the broader aggregate depending on what the central bank is doing with its balance sheet.
In other words, the central bank can expand the base at the same time as the broad aggregate is falling. That is the situation that most of the world was in a few years ago as central banks engaged in various balance sheet manouevers such as quantitative easing and other strategies via their standing facilities.
While this was going on, demand for credit from the private sector was drying up and so the broad monetary aggregates were in decline.
The is the situation still in the Eurozone and the UK. In the US, the base has expanded dramatically as a consequence of the US Federal Reserve’s asset purchase program, but more recently the broader aggregates have shown some improvement as business firms start investment (a bit).
Banks are not institutions that wait for deposits so as to build up reserves which would then allow them to on-lend at a margin in order to profit. The conceptualisation suggests that if it doesn’t have adequate reserves then it cannot lend. So the presupposition is that by adding to bank reserves, quantitative easing will help lending.
To repeat, bank lending is not “reserve constrained”. Banks lend to any credit worthy customer they can find and then worry about their reserve positions afterwards. If they are short of reserves (their reserve accounts have to be in positive balance each day and in some countries central banks require certain ratios to be maintained) then they borrow from each other in the interbank market or, ultimately, they will borrow from the central bank.
Apparently, that thinking is the equivalent of Mayan cosmology.
However, the Washington Federal Reserve paper says this:
Casual empirical evidence points away from a standard money multiplier and away from a story in which monetary policy has a direct effect on broader monetary aggregates … First, there is no direct link between reserves and money … Second, there is no direct link between money—defined as M2—and bank lending … the assumed link in the textbook version of the money multiplier between the creation of loans and the creation of demand deposits is dubious. According to the standard multiplier theory, an increase in bank lending is associated with an increase in demand deposits. The data as discussed below do not reflect any such link.
That is clear enough – no cosmology there and direct from the keyboards of central bank economists.
They also say that:
Simple textbook treatments of the money multiplier give the quantity of bank reserves a causal role in determining the quantity of money and bank lending and thus the transmission mechanism of monetary policy … Using data from recent decades, we have demonstrated that this simple textbook link is implausible ….
While the institutional facts alone provide compelling support for our view, we also demonstrate empirically that the relationships implied by the money multiplier do not exist in the data for the most liquid and well-capitalized banks. Changes in reserves are unrelated to changes in lending, and open market operations do not have a direct impact on lending. We conclude that the textbook treatment of money in the transmission mechanism can be rejected. Specifically, our results indicate that bank loan supply does not respond to changes in monetary policy through a bank lending channel, no matter how we group the banks …
Since 2008, the Federal Reserve has supplied an enormous quantity of reserve balances relative to historical levels as a result of a set of nontraditional policy actions. These actions were taken to stabilize short-term funding markets and to provide additional monetary policy stimulus at a time when the federal funds rate was at its effective lower bound. The question arises whether or not this unprecedented rise in reserve balances ought to lead to a sharp rise in money and lending. The results in this paper suggest that the quantity of reserve balances itself is not likely to trigger a rapid increase in lending. To be sure, the low level of interest rates could stimulate demand for loans and lead to increased lending, but the narrow, textbook money multiplier does not appear to be a useful means of assessing the implications of monetary policy for future money growth or bank lending.
Maybe Professor Krugman should have read this paper before he launched into a debate about banks, money and the rest of it.
Maybe the mainstream macroeconomics textbook writers will bring up their Chapters on money and Select All/Delete and start again. Perhaps they might consult some Mayan cosmology before they start.
Apparently, on December 21, 2012 the Mayan Calendar predicts that there will be a a global “consciousness shift”, which will mark “the beginning of a new age”, If only that was true.
That is enough for today!