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John Maynard Keynes

"The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist." 

The General theory of employment, interest and money (1935)

Other Economics Blogs

The Democrats lost all 4 special elections, will probably take the House in 2018

6/22/2017

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That's my prediction at least. There are a lot of people who suggest now that the Democrats are in big trouble because they lost all 4 special elections that took place in recent month. Trump and the Republicans were certainly able to hold on to their base. It must be said though that all 4 elections took place in Congressional districts that were more Repiblican-leaning than the average Republican district. And remember that Trump only got 46% of the popualr vote, holding to the base will not be enough. Furthermore, the data shows that Democrats highly outperformed compared to recent elections. Suddenly Democrats were competitive in races that shouldn't have been up for grabs at all. According to Silver, Democrats outperformed by more than 10 percentage points. If this lead will be maintained, Democrats will be able to take back the House in 2018.
I am not expert enough to be able to foresee whether the Republicans really will repeal the Affordable Care Act. The consequences would be very dire for many Americans indeed. There is not enough known yet about the Republican health care plan,but as far as I know it would leave milllions of Americans without insurance and raise premiums while giving millionaires and billionaires a hefty tax cut. This is class warfare on the poor, plain and simple.
Many Americans in the red states will  realize that they got screwed by the Republican party. We should thus expect a pushback in the midterm elections. Voters will want to rein in the Republican's power who curerently hold the presidency and both houses.
It is always important to mark your belief to market. So here some forecasts about things to come:

The current political climate is quite favorable to Democracts. This trend will increase if the Republicans manage to pass their truly horrible healthcare bill. I thus expect that Demcorats will manage to get a majority in Congress after the midterm elections in 2018.
 
And now to some economic forecasts:
 
I turned out to be spot on with my early April point forecast of 1.25 real GDP growth for the U.S. for Q1 2017. The real figure came in at 1.2% a little later. I got lucky. Quarterly GDP growth rates are highly volatile. The trick is to take into consideration the range of forecasts provided by the Blue Chip consensus as well as the different GDP Nowcasts, like the one provided by the Atlanta Fed and the New York Fed. It is also important to track how the Nowcasts evolve over time as the quarter goes by. For the second quarter of this year, for example, we can see that the GDP Nowcasts have continuously gone down over the last few months. Incoming data thus suggests that Q2 will not be as good as initially believed in April.
The New York Fed's Nowcast, for example, declined from 3% in March to currently 1.9% while the Atlanta Fed's Nowcast declined from 4% in April to less than 3% right  now.
The recent Fed hike was definitely a mistake and will put downward pressure on an economy that is advancing at a very modest pace. So here a probabilistic forecast for real GDP growth Q2:
 
 
Below 1.5%                            10%
1.5% - 2.0%                           20%
2.0% - 2.5%                           40%
2.5% - 3.0%                           20%
Above 3.0%                           10%
 
My point forecast for Q2 thus would be 2.25%, which is more pessimistic than the Blue Chip consensus, but somehwat more opitmistic than the current Nowcast of the New York Fed. I just found out though that my estimate is exactly in line with the current Nowcast provided by the St. Louis Fed (2.3%).
 
Concerning U.S. annual GDP for 2017, I think it is fair to say that there is a high probablity (about 70%) that it will be in the range of 1.5% to 2%. Back in April I provided a point forecast of 1.8%. Given the meagre performance of Q1 combined with the fact that Q2 will probably be significantly higher than 2%, I think annual GDP might rather end up being closer to 1.5% than 2%.
Low real GDP figures are the new normal in the 21st century, at least for the foreseeable future. Note that there is a good chance that the Eurozone's real GDP growth rate this year might outperform American real GDP growth, just like in 2016 (note though that the Eurozone underperformed for several years in the beginning of the decade as a result of the Eurozone crisis).

When it comes to interest rate increases, the recent rate hike by the Fed now increasingly looks like a mistake. Incoming economic data is relatively weak. While some Fed officials wanted another two rate hikes this year, this is now completely out of the question. Some of the Fed doves made it abundantly clear that further hikes are only warranted if inflation will finally go back to target. I don't see this happening anytime soon. Inflation data will continue to disappoint (the Phillips curve is dead, more on that in a later blog post). Markets expect only one rate hike by the end of this year with a probability of about 50%. Since I trust market forecasts over Fed forecasts, this is basically where I stand as well. 
 
Finally, a note on oil prices. Thanks to the fracking revolution, the U.S. has become one of the largest oil producers in the world in recent years. Furthermore, the oil cartel OPEC has broken down as it has lost in market share.  Peak oil was predicted decades ago, but so far all pessimistic forecasts have proved to be unwarranted. The price of Brent just declined below 45$ a barrel (see below), so financial markets do not think that we will run out of oil anytime soon. There is a good chance that we will reach peak oil within the next two decades or so, but it might just as well be related to lower demand than a lack of supply as renewable energies are becoming increasingly competitive. The price of solar panels has plunged in recent years. In the meantime, I expect that fracking will put a ceiling on the price of oil in the range of 50 to 60$ a barrel for the foreseeable future, meaning the next 2-3 years or so. As for what comes after, it's anybody's guess.
    
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Germany sinks to a new low, foreign policy edition

6/16/2017

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German foreign policy has been nothing but complete bullshit in recent years. Let's start with Southern Europe. The IMF has argued for years now that the Greek government needs some kind of debt relief and that austerity has been counterproductive. Germany won't allow it though. The German government under Merkel and Schäuble has been pushing for years for austerity measures in Southern Europe because the tough stance on Greece sells well with German voters at home. Never mind, of course, that Germany has been historically one of the biggest beneficiaries of the exact kind of policies the German government has been arguing against. Germany got substantial debt relief after World War II because the Allies didn't want to repeat the mistakes from World War I. Germany also benefitted from an economic stimulus program, called the Marshall plan, but this part of Economic History seems to have been forgotten. The Greeks are the bad guys because they spent more than they could afford before the crisis and now they have to repent for their sins.
Let's now turn to Turkey. It's very clear that the country has been moving towards a more authoritarian regime under Erdogan over the last years, especially after the failed military putsch last year. Criticizing Turkey, however, is completely out of fashion because there are some 3 million Syrian refugees inside the country. The biggest fear of Germany and other EU countries is that some of those people might actually make it to Europe in the hope to have a better life here. But god forbid any of those people might actually arrive in Europe because 1/100.000 Syrians could be a potential terrorist. Much better to let them rot in a low-income country like Turkey. Also letting in more refugees would probably shift a few votes to right-wing parties, so better to play it safe. I do not deny that mass immigration poses a lot of challenges, but it also provides a lot of opportunities. Sweden accepted some 150.000 migrants within two years, which represents a influx of about 1.5% of the Swedish population. Sweden was one of the fastest growing advanced economies in 2015 and 2016 with an annual growth rate of 4.1 and 3.3%, respectively. I suspect that part of the growth was a result of higher government spending. Immigration done right is a positive supply shock, thus raising the country's potential output. Furthermore, new research suggest that the effect on natives' wages is actually quite muted.
Meanwhile, Germany actually pursues the policy to send back Afghan refugees because "parts of the country are safe". Well, they don't send back women or children, apparently just single, young men. That's nice! As a young and single men myself I guess I can count myself lucky that I'm not Afghan refugee. Being born in rich Western economy means that I automatically belong to the top 10% globally.
Recent attacks in Afghanistan have been far more deadly than the attacks in London, yet were mostly ignored by the media. After all, the country has been in a war-like state for decades, so it's really old news. Attacks in London, Paris, and Berlin deserve much more attention. Hey, the West rules, for now (and the foreseeable future). So who gives a shit about Kabul? (I actually had to look up to spell Kabul, so proving my own point).
And I'm sure that parts of the country are relatively safe. The country is landlocked. In the North we find mountains that exceed 7000m in altitude and in the South there are deserts. Just lovely. But sure, I guess those places might be relatively safe because nobody wants to fucking live there. It is deemed overly generous that we spend half a percent of our GDP annually on foreign aid. The one policy, however, that would make a real difference to people's lives is not pursued. Those poor souls can earn about 10-20 times as much as in their home country if we manage to integrate them in the labor market. A higher rate of relocation of labor from poor to rich countries is the one policy that could make a real difference to many people's lives while also providing a significant boost to global GDP. And it's not like it never happened before. For several centuries, especially during the 19th century, millions and millions of Europeans migrated from poorer European countries to the New World, the US, Canada, Australia, etc (millions of indigenous people were killed in the process, but that's a story for another blogpost). My point is that the first wave of globalization before World War I was somewhat more liberal when it comes to the movement of labor. We desperately need to go back to a more liberal regime.
And now finally to Russia. U.S. congress has decided to impose harsher sanctions on Russia. There is substantial evidence that Russian hackers have meddled with two key elections in the West. They might have decided the fate of the U.S. presidential election. Furthermore, they also tried to meddle with the French presidential election. However, the German government under Merkel and foreign minister Gabriel don't seem to be overly concerned. In fact, they heavily criticize the U.S. government on the grounds that this will interfere with the energy market in Europe. So here we have it. Cheap gas is apparently more important than democracy.
Those Western values of enlightenment, insofar as they were ever more enlightened than the rest of the world, are very selectively applied. That's all for now.

PS: The number of refugees that arrived in Europe as a result of the Yoguslav Wars in the 1990s was about the same as the number of refugees that came into Europe recently because of the civil war in Syria.

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Roger Farmer briefly comments on my macro critique

6/14/2017

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I recently wrote this essay for a Theory of Science course in which briefly I trace out the evolution of macroeconomic theory. I allowed myself to be quite critical of modern macroeconomic theory, not for the first time. The essay is a pretty neat piece, if I may say so, and I highly encourage everybody to read it.
I got the idea for the essay after reading Roger Farmer's excellent book "Prosperity for all". Farmer is equally critical of some parts of modern macroeconomic theory. Most importantly, he wants to discard the assumption of the natural rate of unemployment, which has dominated modern macroeconomics for the better part of half a century now. Instead, Farmer advocates a story of multiple equilibira. While multiple equilibria models have been more prominent in international macroeconomics, see models on currency crises, they have not made a real breakthrough in domestic macroeconomics yet.
In my piece I also briefly discuss chaos theory, but ultimately come to the conclusion that, at least for now, chaotic models will not do a better job in explaining the macroeconomy than the usual log-linearized models that are currently used by Central Banks and such. I might get back to this topic on this blog at some later point in time.
I recently met Roger Farmer at a Post-Keynesian conference at Greenwich University. I wrote him an email and he read my piece and briefly commented on it. He also allowed me to make his comment public. So here is what he had to say:

"Thank you for sending me this Julius. It is a very nice piece. Regarding your description of Chaos theory; there is a second  problem, in addition to lack of data. We are also missing a convincing theory that leads to chaos."      
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    Author

    My name is Julius Probst.
    I started a Phd in Economic History at Lund University, Sweden, in September 2015.
    I received a Master in Economics from Lund and a Bachelor in Economics from Maastricht University (Netherlands).
    During my Bachelor I also spent an exchange semester at the Australian National University.

    I am mainly interested in macroeconomics, both long-run economic growth and business cycle analysis.
    This blog is all about discussing the heated debates that have characterized the field of macroeconomics over the last couple of years.

    You can find out more about my research here.  

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