Inflation: should we take away the soup bowl? — Real-World Economics Review Blog

The graph below has been constructed by economists of the European Central Bank. It’s based on national accounts data. It shows that present day inflation is profit driven, not wage driven. Money flows to profits, not wages. What does this mean for monetary, fiscal and income policy, taking some other aspects of inflation into consideration? […]

Inflation: should we take away the soup bowl? — Real-World Economics Review Blog

The UK is the new ‘sick man of Europe’: an interview with Duncan Weldon

For those of you interested in the current performance and prospects of the UK economy, here is an interesting and wide-ranging interview with Duncan Weldon, a former economist at the Trades Union Congress, and a former economics editor for the BBC’s flagship programme Newsnight. He now writes the Value Added newsletter. During the interview he discusses the UK’s poor performance in recent years, and how this has been impacted by government policies, as well as the international environment, including our evolving relationship with the European Union. He ends on a (sort of) optimistic note, in that the fact that UK productivity is some 20 percent behind that of countries such as France and the US means there is plenty of room for living standards to ‘catch up’ with those of more successful economies.

The unifying impact of external threats

EUUrsulavdLThe Ukraine-Russia conflict and the evolving response to it from much of the ‘west’ has reminded me of a key aspect of the political economy of development: external threats to sovereign states and their neighbours, including wars hot, cold and everything in between, have the potential to unite otherwise divided populations around a common cause and transform politics and policymaking.

Events have been moving quickly in recent days, in all sorts of ways. Protests against Russia’s war in Ukraine have mobilised across Europe. The leaders of EU member states, as well as the bureaucratic machinery of the EU itself, have rallied to condemn and respond to the invasion. NATO members have cohered into an unusually united front. Germany has promised to rapidly increase defence spending and modernise its armed forces. A number of countries are providing Ukraine with supplies of weapons. The escalation of financial sanctions promises to do serious damage to the Russian economy. The tragic return of war to Europe in this form is rapidly shaking up politics and policymaking. Continue reading

A disintegrating Europe? Why the region needs a more ambitious industrial policy

threads_eu_600x423The pandemic crisis has spurred EU institutions into proposing a sizeable economic response. In May the European Commission “unveiled the Next Generation EU recovery plan that aims to address the damage caused by the pandemic and invest in a green, digital, social and more resilient EU”. It is a shame that it took this historical turn to galvanise such ambition. Despite all this, EU member states are some way from agreement over the size and distribution of the Covid-19 recovery package. But ambition is needed, now more than ever, to respond in a way that promotes a renewed, sustainable and socially cohesive prosperity across the continent. Continue reading

Globalisation, Brexit and Rodrik’s political trilemma

From Brexit to trade wars, the advance of globalisation has not had a great few years. Hoping for a bit of enlightenment to counter the political rhetoric we are so often exposed to, I thought I would turn to Dani Rodrik’s 2011 book The Globalisation Paradox: why global markets, states and democracy can’t coexist.

At the core of Rodrik’s theoretical contribution in the book is what he calls his ‘political trilemma’ in relation to globalisation and politics: the impossibility of combining hyperglobalisation, democratic politics and the nation state or national sovereignty. In this reading, one country can combine any two of the three, but not all three at once.

Thus, under the postwar Bretton Woods compromise, countries were able to combine democracy and national sovereignty with moderate globalisation. Trade in goods between the richer capitalist nations became gradually more free during the 1950s and 60s, while there were restrictions on global capital flows and fixed but adjustable exchange rates, freeing up monetary policy to target growth in aggregate demand to support full employment. Continue reading

A Sputtering Car Goes into Reverse: The German Recession and its Consequences — flassbeck economics international

Heiner Flassbeck and Patrick Kaczmarczyk write that amidst global political and economic fragility, the downturn in the Germany economy adds to the uncertainty in a world that, as Paul Krugman put it, has a “Germany problem”. It not only raises questions and doubts over the future of the largest European economy but, …More …

via A Sputtering Car Goes into Reverse: The German Recession and its Consequences — flassbeck economics international

Who are “the people?” Language games in Brexit and beyond

brexit-e1547639192542Many of us in the UK are sick of Brexit, and it hasn’t even happened yet. We have been living through the Brexit referendum and its aftermath, Brexit as process, for more than three years. Keen political observers and pundits may be among those who are fed up, though they keep a closer eye on matters, and some of them have reporter’s duties to uphold.

One of the aspects of this whole business which is not often examined, with regards to Brexit and politics more generally, is the use and abuse of political rhetoric. I have chosen a few terms that are over-used by our politicians and try to unpick them below. Since they generally pass without question, and are key to how we are persuaded, or otherwise, I thought it would be a helpful exercise. This is part politics and economics, part semantics.

When others are trying to persuade us using rhetoric, one must keep in mind that words are not the same thing as that to which they refer. Words are not reality. Words are symbols used in communication to convey meaning. While it is both inconvenient and practically impossible to contest every word as it is uttered, it should be remembered that ideas and concepts, however we name or describe them, miss out much of the related information that we can potentially perceive with our senses, as well as much that we cannot.

Our sensory experiences are mediated by our nervous system and the ways in which it is structured and has learned to process information. We tend to believe that what we perceive is equal to reality, whereas whatever reality might be, it has been filtered by our often biased and very human brain. Snakes can perceive heat waves, allowing them to “see” in the dark. Humans perceive things differently. This does not make either perception the “correct” reality, rather each one is partial.

Following this digression, I discuss some of the language games of Brexit below. Calling them games may rather trivialise the serious issues involved, so please forgive me for that. Continue reading

Heiner Flassbeck on the global economy: the problem of Europe

In the video below from the Real News Network, former economist at UNCTAD, Heiner Flassbeck, discusses some of the problems besetting today’s global economy and claims that they have deep historical roots. Germany may be heading for a recession due to shrinking exports linked to the ongoing US-China trade war and weak demand in Europe.

Flassbeck argues that the cause of sluggish global demand lies in the weakness of corporate investment compared to corporate saving alongside stagnant wages and the insufficient response of governments in Europe to counter this with more expansionary fiscal policy.

This has been brewing since the 1970s. The US under Reagan, Bush junior and most recently Trump has on a number of occasions responded to sluggish growth with higher fiscal deficits. The exception came under Clinton, when a booming economy and fiscal tightening produced several years of budget surpluses, which ultimately proved unsustainable.

In contrast, many European economies have remained wedded to tighter fiscal policies and austerity in the run-up to the creation of the euro. Since 2000 Germany has relied on foreign demand to drive growth, and now runs, in absolute terms, the largest current account surplus in the world.

Corporate surpluses are also excessively large in Japan, but the government continues to run a moderately large budget deficit which absorbs some of these savings and sustains aggregate demand to a degree. The German government is now running a budget surplus, which withdraws demand from the economy, leaving net exports as the driver of growth.

Ideally, corporations would use more of their retained earnings for investment, rather than running up surpluses as they are doing at the moment, particularly in Germany. This would increase spending on the demand side, and the capital stock on the supply side, boosting growth in output and some combination of employment and productivity.

In the absence of strong corporate investment growth, sufficient demand to support economic growth has to come from household consumption, net exports, or from the government. With insufficient household income growth, Germany has relied excessively on growth in exports enabled by sluggish wage increases for twenty years. In a weakening global economy, it is now suffering again and could be on the brink of recession.

A more sustainable return to healthy economic growth and fuller employment with rising living standards would see household incomes rising for the majority through significant wage increases, stimulating consumption and providing greater incentives for companies to increase investment in new capacity and employment. Also needed is some degree of fiscal expansion which includes public investment in necessary infrastructure and support for those on the lowest incomes.

The corporate sector surplus (the excess of savings over investment) in a number of large economies needs to shrink as wages and household incomes rise alongside corporate investment. This would lessen the need to rely on large and persistent fiscal deficits, which have supported demand in Japan on and off for well over two decades but have not by themselves created the conditions for a return to more balanced economic growth over the longer term. It would also lessen the need for consumption to be excessively dependent on rising debt, as in the UK and US.

More balanced global growth and reduced inequality within countries which have seen the latter soar since the end of the 1970s can be achieved together.

Flassbeck does not really discuss the reasons behind excessive corporate savings relative to investment, aside from a brief reference to neoliberalism, and he ignores the problem of private debt in China, but the interview is interesting and worth a watch.

‘The left must fight for a real Brexit’ – an interview with Costas Lapavitsas

lapavitsasCostas Lapavitsas is a Professor of Economics at SOAS in London and a long-standing critic of the EU. His recent book, The Left Case Against the EU, is an interesting and provocative read, whatever your political orientation.

In this short interview, he argues for a No Deal Brexit from a left perspective, as well as political and economic transformation in countries across Europe that benefits ordinary working people via public ownership of the banks and utilities, industrial policy and redistribution, alongside increased popular and national sovereignty and democratic accountability. Continue reading

Europe’s Growth Champion: institutions, economics and politics

Poland’s success in becoming a high-income country with dramatically improved living standards since its transition from communism in 1989 may be one of the lesser-known stories in recent world economic history.

This transition is in stark contrast to Poland’s historical record over several hundred years in which its economic fortunes fluctuated relative to Western Europe, but never got as close in terms of income per head and overall prosperity as it is today.

Marcin Piatkowski has written an interesting book on this subject, Europe’s Growth Champion, which draws on and extends some of the insights of the New Institutional Economics (NIE), particularly the work of Daron Acemoglu, Simon Johnson and James Robinson (AJR). Continue reading