Posts Tagged ‘crisis’


Special mention

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Special mention

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Chart of the day

Posted: 9 October 2014 in Uncategorized
Tags: , , ,

de neve fig3 7 oct

Jan-Emmanuel De Neve and Michael I. Norton have found there’s a signficiant asymmetry in the way individuals experience positive and negative macroeconomic fluctuations:

We find evidence that the life satisfaction of individuals is between two and eight times more sensitive to negative growth as compared to positive economic growth. People do not psychologically benefit from expansions nearly as much as they suffer from recessions.

These results suggest that policymakers seeking to raise wellbeing should focus more on preventing busts than inculcating booms. Our results also offer an explanation for why increases in GDP do not always pay off in increases in happiness – the modest happiness gains accrued over years of growth can be wiped out by just a single year of contraction.

In the case of Greece, for example, the crisis that started in 2008 led to a decrease in average wellbeing that erased all prior gains. Average wellbeing in Greece now stands at a level below historical records, despite real income remaining at a level well above historical figures.

What that asymmetry suggests—for Greece and elsewhere—is that even a significant economic recovery on current terms will not and cannot generate an improvement in wellbeing anytime in the foreseeable future that can compensate for the losses generated since the crisis began.

To put it in other terms, it’s much easier and quicker to destroy what exists—such as people’s lives and livelihoods during the Second Great Depression or, as in the case of the University of Southern Maine, educational institutions—than to rebuild it.



That’s right: during the first three years of the current “recovery,” the top 10 percent captured 116 percent of all income gains. That’s because incomes actually fell for the bottom 90 percent, even as they rose nicely for those at the top.

1 percent gains

Even more striking is the fact that 95 percent of the income gains during the same period went to the top 1 percent, with only 5 percent left for everyone else.

In other words, the fruits of the current expansion have been captured almost exclusively by those at the very top—in contrast to every other period of economic recovery in the postwar period.

We have to face the fact that capitalism’s crises have become increasingly severe, and the solutions to those crises have increasingly involved redirecting the income gains to a tiny minority at the top. Everyone else is being left behind. Is it any wonder that the current economic system is facing a legitimation crisis?


Poverty2013 RealHousehold2013

The current “recovery” rolls on but nothing is really changing—at least for the vast majority of people.

According to the U.S. Census Bureau, the 45.3 million people living at or below the poverty line in 2013, for the third consecutive year, did not represent a statistically significant change from the previous year’s estimate. And median household income in the United States in 2013 was $51,939, not statistically significant from what it was in 2012 ($51,759). This is the second consecutive year that the annual change was not statistically significant.

However, both numbers are significantly different from what they were before the onset of the current crises. Real median household income in 2013 was 8.0 percent lower than in 2007, while the number of people living in poverty has risen 21.5 percent since 2007.

What’s that they say about insanity? Doing the same thing over and over again and expecting different results. . .



You know the story: Xi and his San tribe are “living well off the land.” They are happy because of their belief that the gods have provided plenty of everything, and no one among them has any wants. One day, a Coca-Cola bottle is thrown out of an airplane and falls to Earth unbroken. But the bottle eventually causes unhappiness within the tribe, leading the elders to believe it’s an “evil thing” which the gods were “absent-minded” to send them. Xi then travels to  the edge of the world and throws the bottle off the cliff. He then returns to his tribe and receives a warm welcome from his family.

I wonder if Paul Krugman expects to receive a warm welcome from the economics family after throwing the prediction bottle over the cliff.

Hardly anyone predicted the 2008 crisis, but that in itself is arguably excusable in a complicated world. More damning was the widespread conviction among economists that such a crisis couldn’t happen. Underlying this complacency was the dominance of an idealized vision of capitalism, in which individuals are always rational and markets always function perfectly.

I actually agree with Krugman on this point. Economic prediction is, in fact, impossible and the really crazy feature of mainstream economic models is the fact that endogenous crises simply can’t occur. Exogenous factors, sure, but nothing internal to the models can lead to a crash. Their idealized vision of capitalism, absent an external event (such as a credit crunch or an increase in the price of oil), simply leads to a full-employment, price-stable equilibrium.

But, wait, doesn’t the entire edifice fall when—on its own terms—the ability to correct predict is dispensed with? The whole rationale of giving up realistic assumptions about the economic system has been the ability to accurately and correctly predict the movements of the economy. That’s the mantle of predictive science that has been used, since at least the mid-1950s, to expunge all other economic theories and approaches from the discipline.

Mainstream economists can’t have it both ways: to celebrate their models for their predictive ability and then to dispense with prediction when, as in 2007-08 (just as in 1929), their models clearly failed. We need something better.

As for their track record since the crisis broke out, well, they haven’t fared much better—at least to judge by where we stand right now. Krugman, for his part, wants to stick with the hydraulic mechanisms of the textbook economic models, which “did a pretty good job of predicting how things would play out in the aftermath,” and declare that “too many influential” economists must be crazy.


The Rethinking Economics conference starts this morning in New York City.

Here’s a link [pdf] to the schedule. The live-stream can be found here.