Relevant and even prescient commentary on news, politics and the economy.


According to exit polls the leftist party Syriza clearly won the Greek elections

Two exit polls show Syriza with a 12.5 percentage point lead over nearest party, New Demoracy.

update a bit more:

One poll suggested Syriza took 35.5% of the votes, and the other suggested it took 39.5%, well ahead of the ruling New Democracy party on 23%-27%

update: Some official results. I think (hope) this page updates. H/T Matt O’Brien ‏@ObsoleteDogma .

Exit polls are not actual vote counts. In particular it is not possible to know if Syriza will win an absolute majority or have to form a coaltion with some centrist party.

The exit polls are more dramatic than pre-election polls were.

This is important news for all Europeans especially Southern Europeans. The election is a repudiation of austerity. Commands from the European Commission (and the IMF and the European Central Bank) have been met with grumbling but obeyed.

Beyond that, the European left has been apologetic for decades. The position seems to me to be that, yes we need to cut social welfare spending and deregulate the labor market. But the right of center parties want to do a bit too much. In fact, labor market deregulation (mostly making it less extremely difficult to fire people) has mostly been enacted by center left governments.
An outspoken unapologetic left with massive support seems very new, although it was typical of ,at least, the first four post war decades.

I don’t want to try to guess what will happen next. A new Syriza lead government will try to renegotiate Greek debt payments with official lenders, who have mostly taken the risk from foolish banks already. They will resist very strongly. Partly this is a matter of ordo-principle. Partly, they know Spain will be next (and what about Italy?). I am sure there are many people whose assent is needed who wouldn’t mind making an example of Greece.

It is also too bad that there will have to be focus on debt renegotiation when, for the rest of the Eurobloc, the issue is stimulus and price level misalignment. The rest of the rest of Europe has to ask Germans to make the sacrifice of paying lower taxes, and, if they are very generous, accepting higher wages. High profile high tension negotiations with a Syriza government will make it even harder to communicate this to ordinary Germans (and it is currently impossible).

Still, I think it is better to struggle than to surrender to horrible poverty in the name of austerity. I congratulate the Greeks on what I perceive to be their good judgment.

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2013 and all that II

A fairly large number of economists have argued that Keynesians predicted that the fiscal cliff January 2013 and sequestration March 2013 would cause a recession. A fairly large number of Keynesian economists have denied personally making that prediction (including the oversigned). Only following a complaint in comments will I look up all the links at which I just hinted.

I think it is fairly easy to decide if the orthodox Keynesian view was that 2013 fiscal contraction would cause a recession. The reason is that official forecasts are Keynesian. The forecasting models range from new Keynesian with added epicycles for the Bank of England to paleo Keynesian for the Fed.

So I decided to look up forecasts for 2013. The advantage is that official forecasts include a precise guess of the expected value of future variables so they give a hostage to fortune.

OK First the CBO “The Budget and Economic Outlook: Fiscal Years 2013 to 2023″

Strikingly the CBO seems to have qualitatively nailed it. The report starts

Economic growth will remain slow this year, CBO anticipates, as gradual improvement in many of the forces that drive the economy is offset by the effects of budgetary changes that are scheduled to occur under current law. After this year, economic growth will speed up, CBO projects, causing the unemployment rate to decline and inflation and interest rates to eventually rise from their current low levels.

They didn’t predict the polar vortex, but seem to have done OK. They are undeniably Keynesian. This is well known but also shown by “effects of budgetary changes”.

The CBO didn’t forecast a recession. They did underestimate real GDP growwth forecasting 1.3% explicitly because of the fiscal cliff and sequestration. Actual year on year growth was 2.2%. Similarly the CBO over forecast unemployment expecting it to stay above 7.5% through 2014.

So there is an anomaly, but not an incorrect forecast of a recession.

update: Pulled back from comments

January 25, 2015 1:10 pm
In November 2012, the CBO specifically addressed the “fiscal cliff” here: and predicted a very mild recession IF Congress did absolutely nothing to moderate or prevent the tax hikes and budget cuts scheduled for January 2013. Of course, we didn’t go off the cliff. Instead, we went on a moderated glide path over a few months.

The tax increases were much smaller than those originally scheduled with Bush tax cuts extended for individuals with income up to $400,000 and families up to $450,000. However, they, including the 2% payroll tax increase, were sudden. As I have typed from time to time, the spending cuts were indeed gradual, and actually look just like the preceding glide path due to state and local spending cuts.

end update.

I talk about the Federal Reserve after the jump

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Trichet V Democracy

A month late, I learn from brilliant economist Simon Wren-Lewis about the 3.5 year late revelation of the utter contempt that then European Central Bank President Jean-Claude Trichet had for Democracy.

I hand the microphone over to brilliant economist Paul DeGrauwe

The ECB’s letter to the Spanish government is not the only one the ECB sent to Member States’ governments. A similar letter was sent to the Italian Government. The letter is of great significance because it reflects the ambition of the central bank to determine macroeconomic policies in the Eurozone. This ambition should be checked, for two reasons.

First, the letter illustrates the intensity of the micro-economic management the ECB intends to apply in crisis countries. The letter contains a detailed list of what according to the ECB needs to be done in the labor market. Thus, collective agreements should be abolished and should be organized at the level of the individual firms. In addition, these agreements should not contain indexation clauses, even when these are entered into freely.

I am shocked and shocked that I am shocked. I should have known that Democracy is optional. Needless to say, third world countries are used to having policy dictated by lenders, in their cases usually the IMF. Also needless to say, I have often wondered if I live in one (I live in Rome). Well now I know.

I am a bit amazed by DeGrauwe’s ability to be diplomatic. He warned the ECB to cease and desist noting the risk that their independence might be endangered by their contempt for Democracy.

I’d be more inclined to call for a Democratic revolution starting tomorrow in Greece.

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Is GDP Wildly Underestimating GDP?

The markets have been showing a rather particular schizophrenia over the last dozen or so years — but not, perhaps, the one you may be thinking of. This schizo-disconnect is between the goods markets and the asset markets, and their valuations of U.S. production.

In short, the existing-asset markets think we’re producing and saving far more than we see being sold and accumulated in the newly-produced-goods markets. Take a look:

Screen shot 2015-01-23 at 6.17.38 AM

(See here for some ways to think about these measures. The spreadsheet cumulating saving is here. You can find all the data series on Fred here.)

A huge gap has emerged between what we’ve saved and what we’re worth.

Household Net Worth is the asset markets’ best estimate of what all our privately-held real assets are worth. It’s our best or perhaps only proxy for that value. (Household net worth includes all firms’ net worth, since households are firms’ ultimate shareholders. Firms, by contrast, don’t own households. Yet.) This is not just about assets like drill presses and buildings, but also skills, techniques, knowledge, organizational systems, etc. — all the tangible and intangible stuff that allows us to produce more stuff in the future. Household Net Worth at least provides us with an index of the change in that total value, as estimated by the asset markets.

As we increase our stock of real assets (“save,” by producing more than we consume), household net worth (wealth, or claims on those real assets) increases. The valuation jumps up and down as asset markets re-evaluate what all those real assets are worth — how much output and income they’ll produce in the future — but the two measures generally (should) move together.

Except: Since about ’98, and especially since ’02, that hasn’t been true. And no: zooming in on earlier periods doesn’t reveal the kind of anomaly we’ve seen since 2002.

There are two oddities here:

First, the flattening of cumulative savings: this measure was increasing exponentially for decades. Then it slowed significantly starting in the late 90s, and has gone flat to negative since The Great Whatever.

Second, the continued exponential growth of household net worth, and the resulting divergence of the two measures.

But bottom line: Net Worth and the cumulative stock of savings used to move pretty much together. They don’t anymore. What in the heck is going on?

There are three possibilities:

The asset markets are wrong. They’re wildly overestimating the value of our existing stock of real assets, and the output/income they’ll deliver in the future. See: “Irrational exuberance.”

The goods markets are wrong. The market for newly-produced goods and services is setting the prices for newly produced goods below the production’s actual value.

GDP is wrong. We’re producing something that’s not being measured by the BEA methods (tallying up what people spend on produced goods). There’s production the GDP methods can’t see in sales, so it doesn’t show up in saving (production minus consumption). But the asset markets can see it (or…sense it), and they deliver it to households in later periods, through the mechanism of market asset revaluation/capital gains.

Techno-optimists will like this last one. You’ve heard it before: The BEA has no sales-based method for estimating the produced value of free digital goods like Wikipedia, or the utility people derive from using them. They’re not purchased, so the BEA can’t “see” them. They could look at ad dollars spent on Facebook as a proxy for the value of browsing Facebook, but…that’s a pretty shaky estimation method, especially when many of those ad dollars would have been spent anyway, in other media. GDP simply doesn’t, can’t, measure that value, because nobody purchases it.

The timing sure supports this invisible-digital-goods story. The divergence takes off four to eight years after the release of the first mainstream web browser, and the global mainstreaming of the internet in general.

But it’s worth pausing before swallowing that explanation wholesale. You have to ask, for instance:

How does the internet/digital-goods story explain the flatlining of cumulative savings? Shouldn’t that continue to rise, though perhaps not as fast as net worth? Has the internet killed off sales (and accumulation) of traditionally measurable, purchased, goods to the extraordinary extent we see over the last dozen-plus years?

Are the asset markets seeing something else that GDP can’t see? Improved supply-chain management? More-efficient corporate extraction of profits from other other (less-developed?) countries? More-effective suppression of low-end wages? The rising costs of education and health care? (Which the BEA counts as consumption, extracted from saving, even though they’re arguably investment at least in part; they produce very real though intangible and difficult-to-measure long-term value/assets.) Or — here’s a flier — does it have something to do with the Commodities Futures Modernization Act and other financial “liberalizations” passed in the waning days of the Clinton administration? Something else entirely? In particular: would any of these explain the striking trend change in the cumulative savings measure?

Whatever the causes, the divergence of these two measures suggests a rather profound and singular economic shift of late — a shift that is not being widely discussed, even amidst the recent spate of commentary on Piketty’s Capital. (Piketty, by the way, defines wealth and capital synonymously — though his usages are not always consistent.) Prominent exceptions include the economists Joseph Stiglitz and Branko Milanovic, who are actively interrogating the troublesome theoretical intersection of wealth and real capital. The recent divergence of these two national accounting measures suggests that they’re tilling fertile ground for our understanding of how monetary economies work, and how we measure those workings.

Note: Technically one might add (negative) government net worth to the household measure to arrive at national net worth. But: 1. government net-worth estimates are inevitably dicey to meaningless. Government assets (and services) aren’t generally sold in the marketplace, so we have no observable sales information to base our estimates on. Liabilities are also very tricky: estimates vary massively based on your chosen time horizon and (necessarily) arbitrarily chosen discount and economic-growth rates. And 2. It barely changes the picture drawn above. Feel free to add government to the spreadsheet if you want; you’ll find estimates of net worth for the federal, and state/local, government sectors here. Net worth is — as it should be — the bottom line for each sector.

Cross-posted at Asymptosis.

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European Quantitative Easing

Mario Draghi announced European Central Bank Quantitative Easing yesterday. The plan is to buy long term public bonds for 60 billion euros a month from March at least through September 2016. Draghi said the program could be extended if inflation of slightly below 2% isn’t achieved.

60 billion a month is slightly above analysts’ average guess (warning in Italian). The hint that the purchases might be extended should, in theory, be important. All in all the announced program is more than forecast.

Paul Krugman is, of course, totally on the story.

He looked at German inflation protected securities vs regular Bunds and calculates an 0.2% increase in expected annual inflation over then next 5 years. This confirms the impression that the program is bigger than expected. 0.2% more inflation (and so 0.2% lower safe short term real interest rates) will not have a large effect on investment. This is just the expected extra effect from the program being more aggressive than was guessed before it was announced.

Euro QE should cause the the Euro to depreciate. I fair use this graph from the Wall Street Journal. It shows an announcement effect which is not large enough to make a big difference (again the announcement effect is just the effect of the program being more aggressive than expected).


This is not a huge shift. It is a large but not huge decline by the standards of the past month


More generally, the fairly dramatic discussion of Euro QE yes or no, and huge or gigantic didn’t cause extaordinary volatility.

My view so far, is my usual view of non Japanese QE. Effects are of the expected sign, but not very big. The assets being bought are fairly close substitutes for money. Fiscal stimulus is still needed.

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Tax Based Incomes Policy

Nick Rowe wonders why no one talks about price controls any more. I think this is related to his discussion of the gigantic influence of Milton Friedman on new Keynesian macroeconomics. See also this.

Due to the same exchange, I recall tax based incomes policy. IIRC Paul Samuelson and especially Robert Solow were quite enthusiastic about this. The idea is to penalize wage increases with a special extra payroll tax on employment times the change in wages. In simple models, this causes reduced inflation and no other changes.

After the Volcker deflation, I didn’t hear much about tax based incomes policies. I was a discussant of a paper on the Polish transition from communism to a market economy. The author noted that Poland had a problem with inflation and tried a tax based incomes policy. He said it worked very well.

The point (if any) of this post is that it should work equally well if one wishes to increase inflation. A subsidy for wage increases could be a way to prevent deflation. The idea would be something like replacing the payroll tax with a tax on what payroll would be if last year’s wages were paid to this year’s employees.

I’m not sure if this idea is totally insane or just impractical and irrelevant to the current debate. It seems backwards. Then again, lots of things seem backwards when one discusses policy for economies in a liquidity trap.

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What is Noah thinking?

Noah Smith put up a post Sunday purporting to show that things aren’t so bad for the middle class. Then he immediately shows us a chart of median household income. Stop right there. As I have argued before, this is always going to give you a rosier picture than reality. We need to look at individual data, aggregated weekly (because average hours per week have fallen for non-supervisory workers), to know what’s going on.

Because the individual real weekly wage is still below 1972 levels, households have had to compensate by having more incomes and going into debt. They have traded time and debt for current consumption. This is not an improvement in the middle class lifestyle. Commenter Richard Serlin points out that we also need to consider risk as well as average incomes, and he is right. The middle class is less secure than it was in 1972.

Noah has lots of interesting things to say, and you should check out his blog if you haven’t already. But this is an error on his part, and I don’t understand what he’s thinking.

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2013 and All That

There is continued discussion of how fiscal tightening in the first quarter of 2013 (the fiscal cliff in January and Sequestration in March) was followed by decent growth in the second half of 2014. I have already written much more than enough about this, but I have two more thoughts.

First 2013 was not just a year of Federal fiscal austerity, it was also the year of the taper tantrum when interest rates jumped up immediately following a press June 19 2013 conference where Ben Bernanke said that the Fed would taper it’s asset purchases. This means that there was a contractionary fiscal shock (really mainly the fiscal cliff tax increase January 1 2013 not sequestration) in the first quarter and a contractionary forward guidance of monetary policy shock in the second. No matter what one’s view of the relative effectiveness of fiscal policy and of non standard monetary policy at zero lower bound, one would expect disappointing growth. Also growth remained very disappointing compared to forecasts of rapid growth reducing the output gap as all past US output gaps have shrunk.

Second the lags people use are getting extremely long and variable. The debate was triggered by the surprisingly high growth in the third quarter of 2014 (the rapid growth from the first to the second quarter could be ascribed to the economy thawing after the polar vortex froze 2014q1). This is six quarters after the contractionary fiscal shift and five quarters after the contractionary non-standard monetary shift. This is very odd data analysis, especially since those who believe that fiscal policy works believe it works mostly without long and variable lags.

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