What do economists know?

Three articles casting doubt on the validity of economic knowledge.

Dirk Bezemer describes the shifting opinions of Dutch economists. Since the coronavirus pandemic, the majority thinks government debt can rise to 90% of GDP without causing problems. Few believe the 60% debt-to-GDP ratio of the Maastricht Treaty is a sensible ceiling. Compare that to December 2019, when planners at the CPB wrote that ‘sustainable’ government finances would stabilize debt at 25% of GDP. Thinking has also shifted about topics like the flexibility of the labor market, taxation and the climate responsibilities of the ECB. All of this raises questions about what economists really “know”. Is all of it politics dressed up as “neutral science”? Bezemer exposes the secret:

“The consensus among policy economists, including those at universities and research institutions, appears to correspond surprisingly well with current policy. That what becomes politically opportune, or simply happens, is suddenly embraced by many economists as being sensible and responsible.” (own translation)

JW Mason is pessimistic about macroeconomic theory:

“What is taught in today’s graduate programs as macroeconomics is entirely useless for the kinds of questions we are interested in. (…) [Macroeconomics education] provides no preparation whatsoever for thinking about the substantive questions we are interested in. It’s not that this or that assumption is unrealistic. It is that there is no point of contact between the world of these models and the real economies that we live in.”

This explains Bezemer’s secret: when the models don’t put constraints on what we expect to happen in the real world1, it’s convenient to follow popular opinion of the people in charge.2 Instead of rigorous science, policymaking relies on “a kind of folk wisdom — low unemployment leads to inflation, public deficits lead to higher interest rates, etc.”. Like Bezemer, Mason concludes that

Keynes got a lot of things right, but one thing I think he got wrong was that “practical men are slaves to some defunct economist.” The relationship is more often the other way round. When practical people come to think about economy in new ways, economic theory eventually follows.

Bezemer and Mason are not two disgruntled outliers. A survey of almost 10,000 economic researchers found that most are dissatisfied with the status quo, in terms of research topics and objectives.

Interesting podcast episodes

Latest update: July 26, 2021

Random reads winter 2020

Banking update August-September 2020

  • ABN AMRO exits all its non-European corporate banking activities
  • CaixaBank and Bankia are planning a merger
  • HSBC wants to sell its French retail network
  • Rumors of a merger between Credit Suisse and UBS

The strategy of European banks ever since the Global Financial Crisis has been to focus on profitability1. How do you achieve a higher return on equity? There are two commonly followed options. Either you cut costs, e.g. by merging banks in the same geography and closing down the redundant branches. Or you sell the business, especially when you’re an also-ran outside of your home market.

An EU super rebate would solve a lot of problems

European Union leaders agreed on a package of measures to support the economy after the damage done by Covid-19.

The summit took four days, because of tensions between member states that will be net payers and those that will be net receivers of EU funds.

However, I had a more elegant alternative, as I explained on Twitter (thread):

The EU missed an opportunity to provide macroeconomic support that matches the size of the corona shock, to increase safe assets and to avoid transfers between member states.

Government debt and inflation

Do deficits automatically lead to default or high inflation? No.

Here are some good reads:

Will deficit spending lead to inflation? There is a difference between developed and developing countries.

Who pays for this? How the United States dealt with its national debt after the Second World War.

Historical lessons from large increases in government debt. The debt was set aside in a sinking fund for repayment at a later date.

Aircraft leasing confirms all economic clichés

Cliché ideas of how the international economy works (see the work of Brad Setser and many others):

  • Companies use “financial centers” aka tax havens to minimize their tax bills.
  • Financial institutions in surplus countries invest the money abroad, but are not good at it.

Let’s have a look at how the aircraft leasing business works in reality.

Financial center? Check:
“Ireland is one of the biggest centres for airline leasing in the world. Many of the world’s biggest and best airline leasing companies are based in the Republic”, which explains why Ireland has 17,000 aircraft orders. [To be fair, financial centers also benefit from the concentration of specialized workers and firms.]

Financiers from Germany, Japan and China investing in low-margin, high risk businesses? Check:
Between 2010 and 2014, [Dublin-based aircraft leasing company] Avolon also raised US$6.1 billion in debt from the capital markets and a range of commercial and specialist aviation banks including Wells Fargo Securities, Citi, Deutsche Bank, BNP Paribas, Credit Agricole, UBS, DVB, Nord LB and KfW IPEX-Bank. In 2017, Avolon entered the public debt markets and raised a total over US$9 billion in debt finance. In November 2018, Avolon announced that Japanese financial institution, ORIX Corporation had acquired a 30% stake in the business from its shareholder Bohai Capital, part of China’s HNA Group. (source: Wikipedia)

Links: Yemeni money, IT migration screw-up, ECB response to Covid-19 and more

Some interesting articles I came across recently:

Yemen has two governments (civil war), one currency, and two monetary systems.

IT project management horror story at German Apobank (in German).

Overview of the Eurosystem response to the pandemic.

What central banks have done to help the economy survive Covid-19

Central bank responses to the pandemic. Source: Banque de France

Historical lessons from large increases in government debt

Euro area economic expansions are like Tolkien’s Elves: they don’t die of old age. The most recent one was murdered by corona.

(On a sidenote: I’ve been critical about the lack of blogging at the ECB. But it turns out that the Banque de France’s Eco Notepad is an excellent blog, as the four articles above show!)

All of the World’s Money and Markets in One Visualization

How may clicks to open a bank account? (Built for Mars on the user experience of retail banking)

The Economic Foundations of Industrial Policy: an amazing longread (very long!) on productivity, explaining why rich nations are rich

Ancient history: “In 2003, refinancing via LTROs amounts to 45 bln Euro which is about 20% of overall liquidity provided by the ECB.” (On June 18, 2020, banks borrowed 1.31 trillion euro from the ECB via TLTRO!)

Inflation is #VALUE!

What is the inflation rate during and after lockdowns?

Inflation is already hard to measure in normal times, as I discussed in Bankers are people, too (page 126-129).

But the corona crisis adds further complications. Some services are unavailable due to the corona lockdown, for example restaurant visits and air travel. To discourage hoarding, supermarkets stopped offering discounts.

The abrupt shock causes headaches for statisticians.

For more, you should read Claire Jones’ Alphaville post on the fuzzy inflation figures.

Is the Corona Crisis the beginning of the Dumb Depression?

Will millions of businesses fail due to the corona crisis? Are we doomed to years of high unemployment?

Maybe.

But let’s be very clear. A depression is a political choice.

Governments can solve the crisis in the blink of an eye. Transfer money to households and businesses that suddenly lost their income.

Problem solved.