30 August 2011

Delong on pros and cons of US expansionary policy

The case seems pretty overwhelming:

"When the U.S. government can borrow at a real interest rate of -0.65%/year for five years, the case for larger deficits now--for pulling spending forward from the future into the present and pushing taxes back from the present into the future--is unanswerable: of course the government should borrow more on such terms: households value the taxes they will pay in the future if taxes are pushed back as much less painful than the taxes they would otherwise pay today, and a huge number of government spending programs offer at least a zero percent real rate of return via their effect on the productive capacity of the economy. Even if expansionary fiscal policy had no effect on capacity utilization and unemployment bigger deficits now while the government can borrow on such terms would be a no-brainer. And since expansionary fiscal policy does have such effects, it is something that you should advocate even if you have less than no brain at all--even if you have a negative brain."

Worth looking at Meltzer's arguments against more expansion and Delong's response

The economics of academic publishing

Interesting article by George Monbiot on academic publishing. His quote of Deutsche Bank analysis sums it up pretty well:

"But an analysis by Deutsche Bank reaches different conclusions. “We believe the publisher adds relatively little value to the publishing process … if the process really were as complex, costly and value-added as the publishers protest that it is, 40% margins wouldn’t be available.”(11) Far from assisting the dissemination of research, the big publishers impede it, as their long turnaround times can delay the release of findings by a year or more(12)."

The Socio economic determinants of labour market policies

For those interested in Active Labour Market Policies, check out the new paper by Barbara Vis "Under which conditions does spending on active labor market policies increase? An fsQCA analysis of 53 governments between 1985 and 2003".

This article examines the conditions under which governments increase spending on active labor market policies (ALMPs), as the European Union and the organization of economic co-operation and development recommend. Given that ALMPs are usually expensive and unlikely to win a government many votes, this study hypothesizes that an improving socio-economic situation is a necessary condition for increased spending. On the basis of the data of 53 governments from 18 established democracies between 1985 and 2003, the fuzzy-set qualitative comparative analysis shows that there are different combinations of conditions, or routes, toward activation and that an improving socio-economic situation is needed for each of them. Specifically, the analysis reveals that governments activate under decreasing unemployment combined with (1) trade openness, or (2) the absence of corporatism in the case of leftist governments, or (3) the presence of corporatism in the case of rightist governments. These findings advance our understanding of the politics of labor market reform.

Institute for New Economic Thinking

Interesting set of interviews about different ways to be an Economist. The broader project of the Institute for New Economic Thinking is also worth checking out given the dismal state of economic theory following the 2008 economic crisis.

The End of Loser Liberalism

New book by Dean Baker: The End of Loser Liberalism. The first paragraph of the first chapter is telling: 

"Money does not fall up. Yet the United States has experienced a massive upward redistribution of income over the last three decades, leaving the bulk of the workforce with little to show from the economic growth since 1980. This upward redistribution was not the result of the natural workings of the market. Rather, it was the result of deliberate policy, most of which had the support of the leadership of both the Republican and Democratic parties."

18 August 2011

17 August 2011

Double-dip recession on the horizon

Euro area and EU27 both experienced near zero growth for the second quarter (0.2%). This will put governments in a very difficult situation, stuck between between Scylla (debt crisis) and Charybdis (economic crisis). 

Given the repercussion of the latter on the former, it would ill advised to insist on expenditure control. With a falling GDP it is nearly impossible to reduce debt as % of GDP, both for 'mechanical' (Debt is weighted by GDP) and dynamic reasons (falling growth reduces revenues and increases expenditures)

5000 pageviews reached

14 August 2011

Summer pain in the financial markets

In the last two weeks, the DAX lost 23.41%, the CAC40 20.92%, and the S&P500 lost 16%... The markets picked up a bit on 11th/12th, let's see whether this proves shortlived tomorrow



Soros on Germany's responsibility

"Germany and the other eurozone members with AAA ratings will have to decide whether they are willing to risk their own credit to permit Spain and Italy to refinance their bonds at reasonable interest rates. Alternatively, Spain and Italy will be driven inexorably into bailout programs. In short, Germany and the other countries with AAA bond ratings must agree to a eurobond regime of one kind or another. Otherwise, the euro will break down."(The full article can be accessed here).

It is interesting to note that in line with neo-functionalist theory, every new step in European integration generates the need for an additional step, and so on. Completing the Single Market required a Single currency, the Monetary Union requires a Fiscal Union; will this call for an enhanced Democracy at the EU level?

11 August 2011

Manufacturing and the welfare state

Rodrik on why deindustrialisation may be a problem...It is fair to say that the implications for the welfare state are not positive either. 

Politically, deindustrialisation removes one of the major constituency behind the expansion of the welfare state. It also makes it harder for trade unions to organise labour.

From an economic perspective, earlier literature had pointed out the role of industrialisation in the emergence of the welfare state. Limited unemployment makes it easier to introduce unemployment insurance. Productivity growth formed the basis for wage increases thereby expanding the revenues of governments.

EU Free movement of labour crumbles

The Commission accepts that Spain can temporarily restrict the free movement of Romanian workers, presumably because of "special circumstances" including the fall in GDP, high unemployment rates, etc.

06 August 2011

The US debt downgrade has started...

“The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics,” S&P said in a statement late yesterday after markets closed.

From Krugman:

"More than that, everything I’ve heard about S&P’s demands suggests that it’s talking nonsense about the US fiscal situation. The agency has suggested that the downgrade depended on the size of agreed deficit reduction over the next decade, with $4 trillion apparently the magic number. Yet US solvency depends hardly at all on what happens in the near or even medium term: an extra trillion in debt adds only a fraction of a percent of GDP to future interest costs, so a couple of trillion more or less barely signifies in the long term. What matters is the longer-term prospect, which in turn mainly depends on health care costs.

So what was S&P even talking about? Presumably they had some theory that restraint now is an indicator of the future — but there’s no good reason to believe that theory, and for sure S&P has no authority to make that kind of vague political judgment."

02 August 2011

To What Extent Did the Financial Crisis Intensify the Pressure to Reform the Welfare State?

New article by Barbara Vis,Kees van Kersbergen, Tom Hylands.
"If ever there was momentum to roll back the welfare state, it is the (aftermath) of the financial crisis of 2008–09. All theoretical perspectives within comparative welfare state research predict radical reform in this circumstance, but does it also happen? Our data indicate that – at least so far – it does not. Focusing on a selection of advanced welfare states (the UK, the USA, Germany, the Netherlands, Denmark and Sweden), we find that these countries face similar problems and that their initial response to these problems is also similar. The latter is surprising because, theoretically, we would expect varying responses across welfare state regime types. 

Rather than retrenchment, we observe a first phase of emergency capital injections in the banking sector and a second of Keynesian demand management and labour market protection, including the (temporary) expansion of social programmes. Continuing public support for the welfare state was a main precondition for this lack of immediate radical retrenchment. However, the contours of a third phase have become apparent now that budgetary constraints are forcing political actors to make tough choices and introduce austerity policies. As a result, the question of who pays what, when, and how will likely give rise to increasingly sharp distributional conflicts." 

The third phase involving retrenchment has clearly begun.

Welfare regimes and Youth Unemployment rates in the crisis

Whereas before the crisis most countries had youth unemployment rates between the 20ish % and the 5-10 % range, the vast majority of countries have seen this rate go above 15%. Coordinated Market  Economies have fared better: Netherlands, Austria, Germany, Denmark; but also Malta managed to stay under 15%.

Most countries have added 5 to 10 percentage points to youth unemployment rate following the crisis, some have seen this rate double! More than 30% of the youth is now unemployed in Greece, Estonia, Latvia, Slovakia and Lithuania, and more than 40% in Spain! 

Interestingly, most Bismarckian welfare regimes fare decently, the worst outcome among this cluster is France. In line with what Sapir had noted with respect to the equity and efficiency of the system, the Southern Welfare regimes fare worst with respect to unemployment rates.

High and persistent rates of youth unemployment will depreciate skills, generate social exclusion and ultimately reduce future fiscal revenues and growth prospects. How to adress this issue is likely to remain one of the biggest challenge of European welfare states in the near future.

Source: Report by European Foundation for the Improvement of Living and Working Conditions