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

Carlo Cottarelli

Carlo Cottarelli was asked to try to form an Italian government by President Sergio Mattarella. There is no chance that Cottarelli will obtain the confidence of Parliament (parties including a majority of deputies have brought up the possibility of impeaching Mattarella for nominating Cottarelli).

Mattarella is using his extraordinary powers to fight populist nationalists who disrespected the Euro. Cottarelli is an odd choice for an anti-anti-globalist — he is currently a top official at the IMF. Nominating him is a declaration of absolute opposition to the current majority in Parliament.

My view is that the rise of populist nationalists in Europe is a terrible thing (not quite as bad yet as their taking power in the USA but getting there). I also think the blame mainly belongs to DG-EcFin and the Eurocrats who do not pretend to respect Democracy, who don’t see 11 % unemployment as relevant to macroeconomic policy making, and who are technically incompented technicians.

Being vain, I googled [waldmann stability and growth pact] to find out to what extent I could tell them I told them so. I found this worthwhile still relevant blog post by Roberto Tamborini. It denounces the application of the stability and growth pact and is well worth reading. But I was most struck by the references (which include the name Waldmann because Waldmann googled himself)


Cottarelli C. (2015), “Potential Growth Rates and the Working of SGP Fiscal
Rules”, Vox-EU, 2 March.

Fioramanti M., Waldamnn R. (2016), “The Stability and Growth Pact:
Econometrics and Its Consequences for Human Beings”, Vox-EU, 19 November.

It turns out that I agree entirely, completely, 100% with Carlo Cottarelli. He has been arguing against Brussels’s approach to austerity. He is much more able than I am to write for non-economists. He makes a very simple practical proposal which I entirely embrace — he says that structural unemployment not NAWRU should be used to calculate output gaps. This is actually very important. I am quite confident there is no counterargument based on econometrics or economic theory. It would have prevented the imposition of pro-cyclical fiscal policy. If they had listened to him, he might have been saved from the very unpleasant next few months.

But voters don’t know this, won’t learn, and wouldn’t care. The stability and growth pact NAWRU nuts have discredited Europe, the Euro, international organizations, economics, and time series econometrics. Italians won’t settle for demanding that output gaps be calculated with structural unemployment, after someone promised to demand that the European Central Bank fork over 250,000,000,000 Euros.

Good thing that insane devotion to austerity and a strong currency has never provoked really dangerous extremism in Europe.

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The Italian Crisis: La resa di Conte

(literally the surrender of Conte but a reference to The Big Gundown).

updated to comply with the Italian criminal code (which forbids vilifying the President of the Republic)

I have to write about Italian politics, because everyone is (and I live in Rome) but you don’t have to read it.

I will try one paragraph of background. In the last election angry Italians gave a very thin majority to two extremist parties the movimento 5 stell and La Lega Nord is a fairly far right party focused on expelling immigrants (I have a permesso di soggiorno so I’m not worried). It started as Northern separatist movement denouncing the central government. It has become nationalist, because racists will racist. The movimento 5 stelle is more exotic. They are very very angry about something but it isn’t clear what. The party was founded by a stand up comic and basically started as a blog (really). The two parties are very different in many ways, but both hate Eurocrats and reject austerity. They presented a program based on a flat tax and universal basic income (give all the money to the rich and the poor). They proposed that the European Central Bank pay for all this by giving Italy 250 billion Euros (this is not a joke, also don’t try this at home kids).

But the key stumbling block preventing implementation of this coherent reasonable program was that the Lega insisted on breaking with the past by nominating Paolo Savona, an 81 year old economist Minister of the Treasury. He has written that Europe should have a plan B which allows countries to stop using the Euro. This heresy was unacceptable Sergio Mattarella the President of the Republic who must nominate that cabinet (which must obtain the confidence of both houses of parliament). It is clear that Mattarella has the constitutional authority to refuse to nominate a minister. This veto power is rarely used and, in previous cases (eg Berlusconi trying to name his amazingly corrupt lawyer minister of justice) a compromise was reached. But the Lega & the 5 Selle are not the compromising types. Importantly, Mattarella does *not* have the authority to call early elections if there is a majority in parliament (which there is). Equally importantly, that just means he has to say he can’t find a majority and there will be early elections.

Mattarella decided to deal with the angry nationalists who must suspect him of undemocratic globalism by asking top IMF economist Carlo Cottarelli to form a caretaker government (you have got to be kidding me — next post (above) will be on Cottarelli, with whom I agree). Basically Italians will be asked to choose between austerity and obedience to unelected bureaucrats in Brussels, or semi-fascists, or the really crazy party. This is not an ideal situation.

The Quirinale (White House but much larger) explains Mattarella decision in a press release translated into English (although their English really reads as Eurenglish the English as a second language privileged by Eurocrats.

The key point is that the Euro is a core institution (like democracy, an independent judiciary and a free press ). Questioning the Euro is unacceptable to the President who is not supposed to meddle with policy, but to stick to protecting the fundamental institutions of the Republic (one of which turns out to be the Stability and Growth Pact).

IIRC the president of Portugal also refused to nominate a government with a majority because, he said, it was anti European Union. It’s almost enough to make me an anti-globalist.

There was, sadly, a long tradition of over-ruling parliamentary majorities which the alternative was to leave the gold standard. Somehow Europe has found its way back to the 20s and 30s. This time it probably won’t end so badly.

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Housing prices and recessions II

I wrote about how high house prices are correlaed with poor growth (partly because that which has gone up goes down). The data set was heroically collected by Jorda, Schularick, and Taylor who also used it for a paper which is actually very worth publishing (and published here).

They find that high housing prices and rapid growth of total credit are correlated with greater severity and duration of the next recession..

I wonder if the bubble and credit growth variables are useful in predicting the occurance of a recession (as well as the severity and duration once one comes).

I guessed that it is hard to predict turning points — in particular high asset prices & rapid expansion of credit may imply that there is trouble ahead, but not how far ahead. But I couldn’t resist a logit with dependent variable “recession” for your definition of recession — a decline in real GDP starting in year t. Also (guessing it would work better) I looked at recession3 which is a peak in the current year or one of the two following years and recession5 which is a peak in the current year or one of the four following years..

To my surprise, the variables work really quite well I think (not surprisingly better for recession3 and recession5).

for recession 3 (year to year decline starting in any of three years of real gdp

logit recession3 hpreal tloansgdp lrgdp year cn* if year>1945, cluster(ifs)

hpreal is the nominal price of housing /cpi, tloansgdp is total loans/gdp, lrgdp is ln(rgdp per capita), there are country dummies

or just for recession (real gdo decline current year to next)

. logit recession hpreal tloansgdp lrgdp year cn* if year>1945, cluster(ifs)

And with recession5

It works a little bit better if hpreal is filtered with a Hodrick Prescott filter (smoothing parameter from 100 to 4000 makes not so much difference) and the stationary part used in the regressions.

The index (x beta from the logit) makes it possible to classify years as preceeding recessions or not (again better for recession in next 3 years and better still recession in next 5 years).

The AUC (area under the curve) statistic gets as high as 0.8 for filtered hpreal (smoothing 1600) and recession5 — 0.5 is the expected value if the classification is random (if the index is worthless) and 1 means perfect classification.

This is the star peforming correct classification frontier from
logit recession5 hpreal_1 tloansgdp lrgdp year cn* if ok, cluster(ifs)

The area under the curve is the statistic called AUC and, in this case is equal to 0.8025378

Correct classification frontier was a new concept for me (it seems that doctors talk about it a lot). It is generated by starting with a very low cutoff A and saying a recession will come if xbeta>A then moving up the cutoff A. So for very low A all recessions are called so correctly classified, but all years not followed by a recession in 5 years are miss classifiied. As A slides up to infinity it goes to all non recessions are correctly classified and no recessions are correctly classified.

The curve shows that a value so that half of recessions are predicted, only 10% of years not followed (within 5 years) by a recession are false alarms.

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Memorial Day 2018

Memorial Day 2018

For all those, of whatever race, creed, color, or nationality, who gave their lives so that government of the People, by the People, and for the People shall not perish from the Earth:


Gettysburg National Cemetery

Antietam National Cemetery

Arlington National Cemetery

May they rest in peace.

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Regulation: A Gut Check

Regulation: A Gut Check



How do we get the word out that our underlying conception of how regulations should be designed and enforced needs to change?

The New York Times has an ominous article about the overuse of antibiotics by the livestock industry and its risks for animal health and ours.  Flooding our digestive system with these drugs damages the gut microbiome we depend on for nutrition and waste processing, and it promotes the evolution of resistant strains of bacteria.  The upshot, according to this piece, is that 23,000 Americans die of antibiotic resistance each year, and it adds:

A growing body of scientific research also shows that the antibiotics we take as medicine can disrupt our so-called gut microbiome, the bacteria that live happily in our stomach and intestines and that are the key to our ability to properly digest food and process fats. This disruption has been linked to the rise of noncommunicable diseases such as obesity, juvenile diabetes, asthma and allergies. Some researchers also believe that alterations in the gut microbiome have led to an increase in the incidence of autism, Alzheimer’s and Parkinson’s disease.

Ranchers lace their feed with antibiotics to speed up animal growth because it’s profitable.  The risks are difficult for the public to appreciate, and the externality of reducing the effectiveness of legitimate antibiotic treatment is unpriced.  This is a serious problem.

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Healthcare’s Three Legged Stool

Charles Gaba at ACASignups talks about the three legs of healthcare supporting it, the composition of them, and why each of those legs are necessary for healthcare.

Charles reviews Enrollee Responsibility, Career Responsibility, and Government Responsibly (the three legs) necessary to support Healthcare in the US, explains how each Republican bill has or would have impacted the ACA, and what needs to be changed in the ACA to make it more effective for all people in the US.

It is an excellent summary of the ACA, Politics impacting the ACA, ACA Issues, and many of the things I have talked about since 2008 in one 17 minute clip.

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$3 a gallon gas has returned!

$3 a gallon gas has returned!

According to GasBuddy, as of this morning the average price of gas in the US is $3 a gallon:

This is the highest in 3 1/2 years.  YoY gas prices are up a little over 25%.

I suspect that this is a significant psychological threshold. While it’s not a “shock,” which historically has caused Americans to cut back their spending by double the increased amount that they spend on gas, causing a recession, it might very well cause a 1:1 retrenchment, which will be felt by discretionary spending like restaurants.  And, of course, it recirculates more of the currency outside of the USA into the treasuries of petroscheikhdoms.

An interesting byproduct is that the regional Fed districts which suffered the most from the downturn several years ago are turning in the best manufacturing and new orders growth in any of the districts now.

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Gorz: “The Right to an Income and the Right to Work,” part one

Gorz: “The Right to an Income and the Right to Work,” part one

From “Orientations and Proposals — The Reduction of Working Time: Issues and Policies” of Andre Gorz’s Critique of Economic Reason (1989) translated by Gillian Handyside and Chris Turner. I am posting the section on “The Right to an Income and the Right to Work” in two parts. This is part one:

The Right to an Income and The Right to Work 

When the production process demands less work and distributes less and less wages, it gradually becomes obvious that the right to an income can no longer be reserved for those who have a job; nor, most importantly, can the level of incomes be made to depend on the quantity of work furnished by each person. Hence the idea of guaranteeing an income to every citizen which is not linked to work, or the quantity of work done.

This idea haunts all the industrialized capitalist world of today. It has as many supporters on the Right as on the Left. To look only at recent history, it was (re)launched in the USA at the end of the 1950s by left Democrats and libertarians on the one hand and by neo-liberals (principally Milton Friedman) on the other. Since the end of the 1960s, several local experiments with a local basic income guarantee have been conducted in the USA. Richard Nixon tabled a bill to introduce a measure of this kind in 1972 and it was narrowly defeated. In the same year, George McGovern, the Democratic presidential candidate, included the guaranteed income in his programme. The object was to find a cure for poverty, which showed up more in the USA than elsewhere on account of the absence of a nationwide statutory social insurance system. The guaranteed income was meant as a substitute for such a scheme. European neo-liberals now dream of substituting such a basic income guarantee for the existing welfare-state institutions.

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Iran Responds to Plan B

Iran Responds to Plan B

Juan Cole reports that Iran’s supreme leader, Ayatollah Khameini has responded to Trump’s withdrawal from the JCPOA and Pompeo’s Plan B 12 demands with 6 demands for Europe: 1) condemn the US withdrawal, 2) stop pressing Iran on missile development, 3) criticize any further US boycotts, 4) undo damage to Iran economy of boycotts especially to buy any oil not able to be exported because of them, 5) support financing of Iran economy, and 6) respond rapidly to these demands.  According to Cole they are not optimistic the European nations will be able to withstand the US sanctions, with the impending withdrawal of France’s Total a harbinger.  Macron may be key.

If demands not met, Iran will return to enriching uranium to 19.75%, enough for medical use and to fuel a nuclear submarine (Iran has none), but not to make a weapon.  Oh such fun.

Barkley Rosser

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