Two days ago I posted ‘The macro economic graph of the decade‘. The comments were highly interesting and may be summarized as: “what does ‘headline’ unemployment measure anyway”. About this:
Headline of ‘U-3’ unemployment only captures a part of labor slack and is designed to capture only part of total slack. It can however be supplemented with other unemployment measurements which are designed to measure additional slack, like underemployed workers or discouraged workers.
But there are reasons to assume that it systematically underestimates what it tries to measure.
Ad 1) USA ‘broad’ unemployment is, measured in persons, at this moment about twice as high as headline unemployment (graph, I use USA data as these are very easily available). Also, the difference between broad and

Source: eurostat.
What did the last decade teach us about (macro-)economics? The graph above is clear:
* ‘Drunk driving’ financial crises do happen and cast a long shadow.
* Even then, the response to these crises does matter. Eurozone sobriety led to a double dip (in case of unemployment: a double increase). After a crisis, sobriety is not the answer. Remember: the famous ant of the fable of the ant and the grasshopper was not an austerian as he invested in real assets all the time! That’s what we should have done, too. The New Green Deal could have been largely completed by now.
* Absent such activities, recovery takes a lot of time
* Ideas about ‘natural’ or ‘equilibrium’ unemployment of 5 or 6% turned out to be nonsense. Unemployment can, without problems, go as low as 3 or even

Merry christmas and a happy new year! And a picture of an off the shelf heart shaped 2018 Christmas adornment which managed to twinkle 365/24/7 (even when not very bright) on one off the shelf battery, showing the power and the glory of modern contemporary off the shelf led and battery technology. Let’s embrace and welcome the next 365. And dump the last remaining 19th century technology totally outdated short lived energy wasting heat squandering incandescent light bulbs before the next year starts, making 2020 a happy place in advance.
And my favorite willow:

According to some economists, ‘Divisia money’ is, as a monetary aggregate, a superior and neoclassical alternative to the more often used M2 or M3 ‘single sum’ aggregates. But looking at such money aggregates in isolation prevents economists from analyzing monetary developments using the integrated and statistically coherent Flow of Funds framework which ties the growth of money to the growth of credit. Divisia money is not a sound alternative. The Flow of Funds are.

The graph shows that aggregate lending data are much more indicative of the growth of financial vulnerabilities and booms and busts than data on money.
What is Divisia money?
Divisia money is a neoclassical alternative to the classical ‘single sum’ money aggregates, like M3,  pioneered by Keynes in ‘A treatise on Money

From Merijn Knibbe
The EU has announced a ‘Green Deal‘.  Good. But at this moment, this only a plan for a plan. But there’s no time to waste. So, what to do while we wait? Let’s unleash the economists’ neurotic obsession with efficiency! Identify ‘fallen fruit’, energy gobbling activities which shouldn’t have been there in the first place. And get rid of it. Three examples, non of which requries massive investment or path breaking research:
Media boxes. Problem: extreme stand by use. Solution: waiting for Netflix (for a few seconds). Almost every household has a media box, nowadays. And we literally can’t wait to see Netflix. Which means that these boxes are on ‘stand by’ which uses lots of energy.
In the case of Ziggo media boxes: 56 Watt. Suppose that 100.000.000 households in the EU

Recent research has emphasized the negative effects of finance on macroeconomic performance and even cautioned of a “finance curse.” As one of the main drivers of financial sector growth, mortgages have traditionally been hailed as increasing the number of homeowners in a country. This article uses long-run panel data for seventeen countries between 1920 (1950) and 2013 to show that the effect of the “great mortgaging” on homeownership rates is not universally positive. Increasing mortgage debt appears to be neither necessary nor sufficient for higher homeownership levels. There were periods of rising homeownership levels without much increase in mortgages before 1980, thanks to government programs, purchasing power increases, and less inflated house prices. There have also been

The next post is interesting on different levels. First, interest rates are low and it shows that medium run changes in these rates can to quite some extent be ‘explained’ by a cocktail of:  economic variables, price setting by central banks and expectation variables (mind that the model is straightforward but the variables aren’t!). This, however, does not explain why USA rates are quite a bit higher than (in this case) German rates, even when inflation, growth and unemployment in the USA and Germany is not too different. Second, it’s an example of investigating Keynes’ ‘beauty contest‘ (what do others expect expectations to be) and Soros’ ‘reflexivity‘ (expectations may be dead wrong but do influence markets so people follow them as they are paid to make short term gains) as well as

Scientific economics needs more memes: short statements which capture the imagination and stick to the mind of lay people as well as economists. One of the well known memes of classical and neoclassical economics is the definition of money:
Money is:
* A means of exchange
* A store of value
* A unit of account
As such, it’s not bad. But it’s incomplete. The unit of account and the means of exchange do not have to be the same thing. In the olden days, in the Dutch Republic (as well as elswhere), the universal unit of account was the Stuiver and multiples thereof, like the Carolus Guilder of twenty Stuiver. While the means of exchange existed of a bewildering array of Pieces of eight, Guilders, Nobels, Thalers and whatever and sometimes, especially before 1650, even of products like rye

On June 17 Olivier Blanchard, an influential economist, held a dinner speech at the ECB Sintra Forum. Weird. Nothing changed. No Hyman Minsky. No Claudio Borio. No Ulrich Bindseil and intertemporal instability of the asset side of bank balance sheets. No Flow of Funds. Nothing of the kind. His solution for the problems of the Eurozone: get relative prices right and, trust me, general neoclassical equilibrium will return. Just plain old 2007 macro-economics. The whole reason we’re stuck in the mud is according to him that the – unobservable – ‘natural rate of interest’ has declined and has to increase again. Just get prices right (read: lower wages and the interest rate), which is more difficult when the natural rate of interest and inflation is low, and wait. In the meantime, as

Let’s not forget that she once played a union worker, in ‘The pajama game’. With the song ‘racing with the clock‘. Also, here a blogpost of mine about how in ‘The Age of Doris Day’ apt new institutions enabled everybody to work less and have better lives, in stead of a part of the population being entirely unemployed and miserable.

The Federal Reserve (Fed) publishes the Flow of Funds. It has recently made an important addition to these invaluable financial data: quarterly distributional financial accounts. They are more frequent, more detailed and much faster than existing accounts. Why did they do this? For one thing: distributional accounts are not a new idea. As stated in their first footnote (but note the gap between the fifties and 2014):
For example, Carroll (2014) cites the need for distributional national statistics, while the Inter-Agency Group on Economic and Financial Statistics has called on G-20 nations to develop such statistics that are internationally comparable. Other efforts to construct distributional national measures in the United States include early work by King (1915), King (1927), King

Is it possible to model unemployment in neoclassical ‘DSGE’ macro-economic models ? I’m occupied with a project which compares neoclassical macro concepts with statistical macro concepts. One of the glaring differences between the statistics and the models: we measure unemployment as a matter of routine but DSGE-models do not conceptualize or define, let alone operationalize it. When you model our society as a one person ‘Robinson Crusoë’ ‘society’ you will have somebody who works a little less or more but who will never be entirely unemployed. Models with heterogeneous agents have problems with this, too. On twitter, Lukas Freund however pointed me however to the 2018 article ‘Unemployment (fears) and deflationary spiral’ by Wouter J. den Haan, Pontus Rendahl and Markus Riegler, which

What’s an economic model? A little semantic intro (don’t worry, we will get to Keynes in a moment)
I work together with biologists, agronomists and even test animal specialists on a regular basis. These people use words like ‘conceptual models’ or ‘even ‘animal model’ all the time. Check this:  ‘Mouse Models of Diabetic Nephropathy‘. Yes, a live animal is considered to be a scientific model. I had to get used to this as this use of the word ‘model’ transcended the boundaries used in the world I came from. But mastering these concepts prooved enightening. Conceptual models are described by Andrew Powell-Morse in the following way:
A conceptual model is a representation of a system that uses concepts and ideas to form said representation… a model is intrinsically a thing unto itself, but

One of the tenets of Modern Monetary Theory (MMT) is that taxes are, ceteris paribus, deflationary. When prices of gasoline increase because of green taxes, people have less money left and know that their purchasing power declines. This is not consistent with neoclassical macro, at least not in its influential ‘Ricardian equivalence’ version, but that’s not interesting. The interesting thing is that MMT states that if inflation rises, taxes should increase to cool the economy. Which means that they will have to target some kind of inflation rate. Which rate? I’m not aware of any MMT-ers writing about this (but I might have missed a paragraph here or there from Bill Mitchell). But they should. The price level doesn’t only change because of an overheated economy but also because sales

Source: International Labour Organization
The most popular post on this blog is a summary of ‘The Great Transformation‘ by Polanyi. Which is remarkable as it is an old book about even older events: the transformation off traditional economies with a low rate of investment and little wage labor into modern economies with a high rate of investment and high levels of wage labor (Polanyi does not stress investments too much but see, in about the same period, Kuznets (1955) and Rostow (1959)). This economic process went together with a cultural revolution like the commodification of labor and time. Fortunately, people are not puppets and all kind of institutions mitigating the alienating aspects of the modern economy evolved, like the International Labour Organization, which turns one

There is a lot of ado about the French yellow vests who, somewhat violently and in a tenacious way protest the french government and battle the french police. The protests erupted when the Macron government increased gasoline and diesel prices.  Was this the proverbial drop which made the bucket overflow (”la goutte d’eau qui fait deborder la vase” or, to comply with Anglosaxon culture and to connect with the new nationalism in Anglosaxonia (not to be confused with Niedersachsen)): “the straw which broke the camels back”)? Yes, it was. The statisticians of Eurostat measure consumer price inflation for the Eurozone as a whole but also for the seperate countries. A distinct category is ‘administered prices inflation’. Administered prices are prices which are set (directly or indirectly)

@Brankomilan leads us to this (french) piece about Austria. It states that the Austrian government enacted a new law which authorizes working days of 12 hours and working weeks of 60 hours.
A). This is a clear case of retrogression. It’s good to read what, in 1921, the International Labor Office stated in its first annual report: 
““It would therefore be almost impossible to exaggerate the truly revolutionary character of the events which during the last years of the war or after the war took place in the sphere of the regulation of hours of work…. During the years 1918-19 the 8-hour day has, either by collective agreements or by law, become a reality in the majority of industrial countries … Before the war, whenever even a minimum or gradual reduction of the working day was proposed,

Graph 1. Unemployment in the USA, % of the labor force, monthly data.
One of the central and most pressing questions of macro-economics is how to estimate and explain unemployment. Thomas Sargent, card-carrying member of the neoclassical cabal and winner of the ‘Sveriges Riksbank Prize In Economic Sciences In Memory Of Alfred Nobel’ (SRPIESIMOAN)  just made a shot at it. A somewhat Marxist shot, as far as I’m concerned. Which, considering the hard core neoclassical nature of the rest of the work of Sargent, is quite surprising. What’s the case?
Unemployment as we measure it is a cyclical variable (graph 1). The increases of unemployment coincide perfectly with the downswings of the business cycle which are measured using methods pioneered by Wesley Mitchell (the grey bars in graph 1).

Is economics basically about measured monetary variables like GDP or wages (recount that ‘total wage income’ is part of GDP)? Or is it, as neoclassical economists assume, mainly about what Thorstein Veblen called ‘hedonistic’ variables like ‘utility’? This discussion is still waging. Look here. It’s an old discussion. According to a man who decisively contributed to the way we measure the ‘money economy’, Wesley ClaireMitchell, economics is about measuring the ‘money economy’ (Mitchell (1916))‘ – even when we want to know about the psychological variables. Not because money is all that matters. But as (on the practical side) monetary relations and transactions are inherently measurable. While (on the theoretical side) the development of monetary variables like wages, loans or profits,

One hundred years ago World War I ended. This war changed everything. It did not only  end the Austrian-Hungarian and the Ottoman empires and lead to the emergence of the USA as an international hegemon. It also transformed labor relations worldwide.  According to the first Report of the Director of the new International Labour Office (ILO): “It would therefore be almost impossible to exaggerate the truly revolutionary character of the events which during the last years of the war or after the war took place in the sphere of the regulation of hours of work…. During the years 1918-19 the 8-hour day has, either by collective agreements or by law, become a reality in the majority of industrial countries … Before the war, whenever even a minimum or gradual reduction of the working day was

In 1912 Wesley C. Mitchell, Veblen’s best student and one of the three or four most important economists of the first half of the twentieth century, published ‘The backward art of spending money’ (the link will directly download the article) in the American Economic Review. The article is about the (monetary) problems housewives encounter when they have to manage a household and a family and having scant time and money to do so. It is related to the present day Levy institute ‘time poverty’ project (very much so, even).  It’s a feminist text. Maybe not all young modern readers will agree. But remember that in 1912 the 48 hour workweek was not yet introduced (in most countries this happened between 1915 and 1921) while quite some people in western countries were still illiterate. If

How did this ever pass the peer-review procedure… In an article in the Journal of Political Economy Edward Prescott and Finn Kydland argue in favor of (undemocratic) rules instead of (democratic) economic policies. One of the methods they use to push their idea is the using examples. One particular famous one is the one about floodplains. But the example is wrong. Government policies are not as benevolent, rational and effective as Prescott and Kydland think they are. And people are not as rational. Here’s the example:

This is not what happens. What happens (and it happened after 1570 and 1717 and 1825 and 1916 and 1953 in the Netherlands and in Germany (around Hamburg) in 1962 and in the USA in New Orleans after 2005) is the next thing:
People build houses, farms, factories
The

Graph 1. Printing Francs to satisfy external demand for Francs led to a fast increase of the amount of money in Switzerland. Did this lead to inflation?

After 2008 rich people from all over the globe started to  buy Swiss Francs. This, of course led to appreciation of the Swiss Franc. The Swiss national bank didn’t like this: bad for exports. And, related to this but much worse, structural lower demand for export products of a small country like Switzerland will erode the manufacturing base of this country. Highly productive fixed capital, specialized knowledge hubs, production ecosystems – these all will flounder. Not good. What to do?
Switzerland is a monetary sovereign country. In 2011 the national bank decided to print money and sell it at a fixed Euro-price to foreign rich

From Jan Kregel  source

The 10th anniversary of the September collapse of the US financial system has led to a number of commentaries on the causes of the Lehman bankruptcy and cures for its aftermath. Most tend to focus on identifying the proximate causes of the crisis in an attempt to assess the adequacy of the regulations put in place after the crisis to prevent a repetition. It is interesting that while Hyman Minsky’s work became a touchstone of attempts to analyze the crisis as it was occurring last September, his work is notably absent in the current discussions.
While it is impossible to discern how Minsky might have answered these questions, his work does provide an indication of his likely response. Those familiar with Minsky’s work would recall his emphasis on the

According to D. Trump “The GDP rate (4,2%) is higher than the unemployment rate (3,9%) for the first time in over 100 years!”. This tweet.  Comparing the rate of GDP growth with the unemployment rate surely is interesting. And situations where the unemployment rate is lower than the rate of growth (U

There we go again. According to mister Mersch, a central banker, the ECB only has to care about consumer price inflation and not about financial stability. Mister Mersch knows this isn’t right. Legally, the ECB do has to care about financial stability. It’s part of the mandate of the bank. In a practical sense, caring about financial stability is what central banks do. While they do not excel at influencing the rate of consumer price inflation (which is influenced by wages, profit margins, productivity changes, prices of intermediate products like oil and also, but only to a limited extent, by interest costs). Mister Mersch knows all this. He is an old man. he must have studied ancient textbooks. What did the textbooks of yonder state about central banks (and I have little to add)?

In October 2015 I wrote a post in which I compared Bitcoin with Yap island stone money. Farfetched? No. Today, Sciencenews published an article by Bruce Bower. He states that archeologists nowadays argue the same thing. An excerpt:
Archaeologist Scott Fitzpatrick and finance professor Stephen McKeon, both of the University of Oregon in Eugene, see parallels between the public, decentralized way in which rai limestone money on the island of Yap was valued and distributed and the modern-day blockchain technology used for Bitcoin and other digital currency transactions.
Mining
Rai: Yap residents traveled to nearby islands where limestone was mined and carved into circular rai. At home, the miners described each item’s manufacturing history to the community so that everyone knew a rai’s

A well-known criticism of national income is thre ‘Ïf you marry your maid you will diminish national income‘ mrmr. Sigh. We should forget about this silly male fantasy and give women their due by replacing it by what really happened. Domestic workers did not marry their single masters. They left them, as they had better paying things to do. Or the income of their family rose, which enabled them to get an education or to care for their own kids. Unprotected labor by Vanessa May is a good book about the work and life of domestic servants in new York, 1870-1940. The influence of this on how we have to understand GDP is important. So, what happened?
Once upon a time, every middle class family and many other families had a maid living in. As Allyson Grossman shows, around 1870, more than

From Merijn Knibbe
I’m trying to write a book about the relation (not) of neoclassical macro-economic concepts to the concepts of macro-economic statistics. Which leads one to interesting places one can’t explore. If there is anybody out there in search for an interesting idea for a master thesis or something light that, these might do:
A qualitative and quantitative exploration of ‘hoboism’ in the 1930’s looking at it using the lens of ‘involuntary part time unemployment’
An international and historical extension of existing estimates of domestic servants and how this relates to our estimates of GDP.

Ad 1. If you do this well you can make it to the American Economic Review. It’s also great fun. In the thirties, there were hundreds of thousands of ‘hobo’s’ in the USA, mainly young men