Email to Krugman and Van der Ploeg

Subject: Your visit to Holland on June 19 & the crisis & the tax credit fraud in Holland

Dear professor Krugman and professor Van der Ploeg,

I sent prof. Krugman an earlier email for his visit to Holland on June 19, that is available here:
http://boycottholland.wordpress.com/2013/05/06/email-to-paul-krugman/

It so happens that last week had a discussion in Dutch Parliament on frauds with tax credits. As economists we are all aware that the tax credit is an important instrument for employment. We also see that Holland and Germany have a related low wage policy with structural surplusses on the external account that aggravate the problems in the Eurozone.

This present situation caused me to write this paper: Economics as victim between lawyers and mathematics: An explanation for the tax credit, Bulgarian potential fraud, European unemployment and the economic crisis. It is available here: http://mpra.ub.uni-muenchen.de/47071/

I write to prof. Rick van der Ploeg now at Oxford since he was assistant minister of culture and member of the Dutch kabinet in 1998 when the tax credit was introduced in Holland. In a discussion on the tax credit he stated that I was right theoretically but not practically. Van der Ploeg did not want to clarify this back then. Now that we see mass unemployment not only in Holland but also with the economic crisis all over the world, and now that we see this massive tax credit fraud in Holland, perhaps I can ask again what he means by that phrase.

I copy to some other people since the issue is quite important. A key question is whether Jeroen Dijsselbloem understands the issue. It is his Treasury that deliberately lied in 1998 and that would have to make amends now in 2013. It is the common problem in the OECD with the tax void masked by the tax credit that is key to understanding the Great Stagflation since 1970 and to start solving the present economic crisis.

Since prof. Krugman stated (a while ago) that he wasn’t quite at home in tax theory, I have written above paper such that it should be understandable for a wider audience.

For the context for Dutch readers, I copy below an earlier email in Dutch to prof. Van der Ploeg, parliamentarian Helma Nepperus and the editors of the national television NOS. I might copy another earlier email to Ruud de Mooij, tax specialist now at IMF, but I suppose I already sent enough to read.

Sincerely yours,

Thomas Cool / Thomas Colignatus
Econometrician (Groningen 1982) and teacher of mathematics (Leiden 2008)
Scheveningen Holland

Date: Sun, 19 May 2013
Cc: whitebirdbv, Olivier Blanchard, Martin Wolf, Peter Bofinger, James Galbraith, Robert Skidelsky, Mark Thoma, Sandra Phlippen, Charles Groenhuisen, Sweder van Wijnbergen, Bas Jacobs, Alfred Kleinknecht, Ruud de Mooij, Helma Nepperus, NOS, and some others

The end of laissez-parler

These three weblogs in a row have titles “The end of …” and were inspired by Steven de Jong at NRC Handelsblad who was inspired by Carlos Lozada at the Washington Post who discussed The end of everything, and who was inspired naturally by Francis Fukuyama‘s The end of history 1989.

Steven suggests that ”The end of …” is a catchy title to provoke debate. He prefers debate to the reasoned exposition that says it all and that kills debate. There is a distinction between publicists who have to gain attention since they live from the proceeds, and scientists who would put the truth in first place. It is a good bet that the form versus content distinction follows the motives. The distinction is tricky though since some scientific results apparently came with a lot of debate.

It so happens that I wrote about The end of laissez-parler in 1990, inspired by John Maynard Keynes’s The end of laissez-faire in 1926. This 1990 text provides the Core Argument of this weblog. I wrote it as an economic scientist but apparently followed Keynes in the choice of literary expression.

The phrase and its explanation can be found in the concluding paragraph of the 1990 paper After 20 years of mass unemployment: Why we might wish for a parliamentary inquiry, CPB internal note 90-III-38. It is this paper that got blocked from internal discussion and from the process towards publication, which constitutes the very censorship that requires the boycott of Holland to resolve it. The directorate then blocked all my papers anyway, and nowadays they are not interested whether the crisis confirms my analysis since I have been erased from relevance.

Key points to be aware of are:

1. My appointment at the Central Planning Bureau was that of a scientific co-worker with a task to provide scientific advice on economic developments.
2. I observed that Parliament got lost in mere talking while neglecting scientific advice. Twenty years of mass unemployment in 1972-1992 were caused not by lack of scienfic knowledge and proper advice, but by Parliamentary failure to respect science.
3. This failure by Parliament also amounted to a form of abuse of power. On the one hand one asks for scientific advice, on the other hand one neglects it, and one creates a state of chaos so that voters are disinformed about the true state of affairs.
4. Hence, I draw a line in the sand. As a scientist I cannot accept this maltreatment of science. The Trias Politica structure is finished, and we enter the new configuration where Parliament must come to respect that what it has said to do but doesn’t.
5. The only thing that a scientist can do is write a paper and describe the situation. This became that 1990 paper.
6. The paper explains that Parliament should start studying the advices given, the concepts involved, and investigate the processes how such advices got neglected. By this study, Parliament could confirm that it was creating unemployment itself, and by the method of neglecting scientific advice.
7. Unfortunately, CPB director Gerrit Zalm blocked the paper, which is censorship of science. He dismissed me with untruths, which is an abuse of power too.
8. The Trias Politica system might have had some self-correction, if my paper had been published and had caused a debate in Parliament. Now Parliament may investigate not only how it neglects scientific advice, but it may also investigate how that element of self-correction got sabotaged. We now rely on the external process of what we call free society. Apparently it takes a huge economic crisis to get some attention to the censorship, and apparently it requires an advice of a boycott.

In my analysis, there is no return to the Trias Politica model. In my analysis, we should only accept a Tessera Politica model with an Economic Supreme Court, with a firm foundation in the Constitution. Scientific integrity is to be respected, in the form of a veto power for the case that the national budget would contain wrong information that is misleading to voters.

Of course we are speaking only about conceptual models here. The reality still is the chaos at the national Parliaments where scientific integrity is treated as a floor mat.  But in the Core Argument, Parliament has lost the power to chatter an economy into chaos.

The education of Jeroen Dijsselbloem

The Dutch minister of finance and eurogroup president Jeroen Dijsselbloem became (in-) famous in Europe overnight, with the handling of the crisis in Cyprus. He is decent, he is smart, and he belongs to the younger generation that is set to take over from Angela Merkel and François Hollande over the next decade. Indeed, it is better to call him Jeroen rather than Mr. Dijsselbloem and keep him as a household name, as common as that of a soccer player, not only since he will stay on the stage for a longer time but also because it is easier to communicate up close rather than over a long distance. If one thing has become clear from the Cyprus event is that Europe has to communicate a lot.

The Cyprus government had four years since 2008 to resolve its banking problem and had refused to do so. In September 2012 the EU presented plans for a European Banking Union. These plans distinguish between system banks that have to be saved at all costs and normal banks that may collapse. The Cyprus government could have read those plans, especially since Cyprus even was the EU-President in the second half of 2012. The Cyprus government still refused to resolve its problems and apparently hoped that the EU would provide ample funds. Alternatively said, the Cyprus banking elite didn’t mind to use its own population as hostages, hoping that the bluff poker would work. The key message from the EU to Cyprus is that the EU did actually help, for otherwise the chaos would be much bigger. It is up to Cyprus now to get rid of its brutal elite, and find similar decent and smart people like Jeroen to clean up the mess.

It is good to know that Jeroen made an entrance on the political stage in Holland in about the same manner as now in Europe. He made his mark as the chairperson of a parliamentary enquiry into education. It is hard to believe, but the system of education in Holland had been spiralling downwards, and Jeroen suddenly was on national television, explaining what had gone wrong and what should be done to repair it. Overnight he was a national hero. A key thing to see is that this fame endured, and didn’t disappear as sudden as it had come, as we see with so many hypes nowadays. Jeroen is there to stay.

Europe has had strange political leaders, like Helmut Kohl from Germany who got lost in an illegal party financing deal and Jacques Chirac from France who got convicted to two years of prison for diverting public funds. With leaders like that, you may question what they say or do. Think of Cyprus again, or of Berlusconi. The Greek who hate Angela Merkel should rather protest against Berlusconi and his lame promises. In any case, with Jeroen, we do not need to fear for this. Jeroen isn’t perfect and may make errors, but given that he is decent and smart, an error still means that no mischief is intended, so that he can learn from mistakes, and he tends to be open to new information that can help to correct such errors.

The key message of this article is that there is new information. Up to now, economic science has been explaining that a common currency like the euro also requires a political union. This is called the theory of the optimal currency area. In the Treaty of Maastricht of 1992, the political leaders created the euro but rejected the political union. The euro indeed was badly managed. Europe now goes from crisis to crisis, potentially making the minds of the population ripe to accept a United States of Europe, and give up national sovereignty, but also with the risk of rising nationalism and the break-up of what already exists.

Now, however, there is a new economic theory, that would allow to maintain both the euro and national sovereignty, provided that each nation adopts its own national Economic Supreme Court (ESC), that supervises national economic policy. The national ESC would be staffed by national economic scientists, who know their nation better than distant Brussels, and who operate under the rules of science, rather than the hidden rules of a distant bureaucracy. The international co-ordination that is required for a common currency comes about by the international scientific co-operation of the various ESCs, that is transparent and open to science and the public. This new economic theory plus a scheme how to handle the euro is discussed in the paper “Money as gold versus money as water” available at the Munich archive for economic papers.

Since I am Dutch and present this analysis from Holland, and since Jeroen is Dutch and is the minister of finance of Holland, readers may think that Jeroen and I have discussed this new theory, and that he is well-informed on this. Unfortunately, it doesn’t work like that. A huge unemployment and political chaos across Europe and complex communications and diplomacies over a few thousand kilometers apparently are required, to cross the few kilometers from my desk to his desk. There is also censorship of science in Holland since 1990. The Dutch Central Planning Bureau (CPB) is not an Economic Supreme Court and does not apply the proper rules of science. Next to “Greek statistics” there is “Dutch economic science”. Thus Jeroen entertains a misperception about the quality of his economic advisors and he lacks information about the new economic theory. Thus Europe needs some education on Jeroen, and Jeroen needs some education on Europe. The best thing that Europe can do is help Jeroen gain more information indeed where this is lacking now.

Thomas Colignatus is an econometrician and teacher of mathematics in Scheveningen, Holland. The article “Money as gold versus money as water” is available at http://mpra.ub.uni-muenchen.de/45759/

Cause and cure of the crisis

The current crisis is a phase in the Great Stagflation since 1970. Let us first understand this cause before we consider the cure.

The term stagflation was coined by MP Iain Macleod in a speech in the UK parliament in 1965. The inability of economists and governments to solve the problem right then and there allows us to choose the rounder year of 1970 as the moment when a simple affliction turned into what we now can call the Great Stagflation.

In the period 1965-1980 the world tried a vulgar Keynesian stimulus of the ‘demand side’. Accelerating inflation caused a switch to monetarism and the ‘supply side’. Since the presidency of Reagan in 1981 governments tend to follow a policy that also is called ‘neoliberal’ because of deregulation and the encouragement of the free market. The deregulation also implied a massive demand stimulus, because the deregulation of financial markets released vast sums to search for investment opportunities. Eventually that deregulation caused massive leveraging, so that finally there came the ‘Minsky moment’ with the collapse of Bear Stearns in August 2007. That moment is taken by many as the official beginning of the current crisis, though it is only a new phase in the longer problem history.

Now that we are reregulating again, stagflation rears its ugly head again in high unemployment and stagnating investments for growth, while there is also the threat that inflation is going to be used again to reduce government debt.

The events since 2007 cause economists and governments to focus on the financial sector, monetary policy and national debt. This is reasonable to a large extent since the mess must be cleaned up and the sector needs regulation again. There are limits to what can be achieved here however. It is also necessary to look at fiscal policy, investments and labour. In these areas the tendency exists to look back only a couple of decades, say to the period of president Clinton 1993-2001 when the world economy seemed to do well. We must look deeper into the past however, because the periode 1950-1970 contributed to the Great Staflation that we are in.

One might hold that the current problems are aggravated by the imbalances in Europe because of the euro, and the imbalance between the US and China on trade and debt. In an alternate history a managed float in Europe (instead of the common euro) might have caused havoc as well. The relationship between the US and China is quite special anyway. Thus these issues deserve attention but are not the main ones. The key aspects of the Great Stagflation are internal to each nation in the OECD and cannot be resolved by exchange rates.

What, then, are those key aspects, and what is the cure of the Great Stagflation ?

First of all, taxes and social security premiums neglect the need for an adequate exemption for subsistence. The policy that is co-ordinated in the OECD is to adjust for inflation but it should be for the rise in the general welfare, i.e. both inflation and real growth. The levies at the minimum wage raise those labour costs, with subsequent unemployment. When labour demand shifts to higher productive workers, these workers can demand a higher wage, which contributes to inflation. The higher unemployment and inflation are depicted in an unfavourable shift of the Phillipscurve.

A second point is that economists who study taxation and the labour market concentrate on partial derivatives and neglect the total differential. In lay terms this is the difference between static and dynamic marginal tax rates. The static rate can be found in the tax statute. The dynamic rate arises over time when rates are adjusted. Official policy has been to reduce exemption and static rates, and to switch from income tax to VAT (that has no exemption at all). This contrasts with the optimal policy, which is to maintain high exemption, while VAT could be one percent.

The third point is the failure of economic co-ordination. One cannot look back at the period since 1950 with the various crises without concluding that there is something seriously amiss in the co-ordination of economic policy. The advice is to extend the checks and balances of the Trias Politica into a Tessera Politica with the addition of an Economic Supreme Court (ESC). A draft constitutional amendment can be found in my book DRGTPE.

The economy has had crises but there have been similar crises in economic theory itself. In that respect it might be silly to have an Economic Supreme Court (ESC), with its members in similar disarray as politicians or the stock markets. However, consider what we see now. A problem caused by failure in taxation has been approached subsequently by vulgar keynesians then monetarists then neoliberals and now reregulators, each trying to solve the errors of the predecessor. The current system allows each solver to take a rather narrow view. The ESC will be grounded both in science and society so that such a narrow view is much less likely. For comparison, we have an independent Judiciary that will surely not be perfect, but it is better to discuss its faults under the regime of such an independent court rather than under a regime like we now have in economics.

It may be observed that I have been explaining the core of this analysis since 1990 and that it met with censorship by the directorate of the Dutch Central Planning Bureau (CPB) over the whole period since then. This proves that the information has been available and could have been used if there had been a scientifically based ESC. The current arrangements in Europe apparently allow such censorship of science, which surely seems suboptimal. In this difficult situation, my best advice is to boycott Holland till the issue is resolved.

Thomas Colignatus is an econometrician and teacher of mathematics in Scheveningen, Holland. He worked at the Dutch Central Planning Bureau in 1982-1991. See http://thomascool.eu.

References

Colignatus (2011), Definition & Reality in the General Theory of Political Economy, (DRGTPE) 3^rd edition, Thomas Cool Consultancy & Econometrics, http://thomascool.eu.

Colignatus (2012), Common Sense: Boycott Holland, MijnBestseller.nl

Wikipedia acrobatics

A core argument of this weblog is that the checks and balances of the democratic model of Trias Politica fail and that we need an extension with an Economic Supreme Court (ESC) into a Tessera Politica. A government budget tends to be based on forecasts and it is better that those are scientific and hence independent. Economic scientists will forecast what the politicians will do in the future. All kinds of political promises are made, but will they be kept ? What value is a budget, voters will wonder, when it is based upon rosy promises and without scientific scrutiny ? Independence is not enough, the ESC requires the scientific ethic, and be open to society and fellow economic scientists.

This argument causes that this weblog is interested in democracy and in what the public understands about democracy. A friend asked me what I thought about Wikipedia entries on democracy, since that is a source that people tend to refer to with increasing frequency. We actually see some acrobatics here. The subject curves in on itself, like a snake dancer who is able to hold her head by her feet, forming a full circle.

Wikipedia is made by volunteers who apply some notions of democracy themselves to settle differences in approaches. Does the quality of Wikipedia improve with internal democracy ? Have its editors a sound understanding of democracy that is also reflected in what the encyclopedia states about the subject ? Or, do the editors follow what has been written – what they have written themselves ? Might it happen that Wikipedia publishes a wrong analysis on democracy, and that its editors behave in dictatorial fashion ?

Unfortunately, the latter is true: Wikipedia publishes a wrong analysis on democracy, and its editors behave in dictatorial fashion. Wikipedia has been misleading its readers since 2006 because of scientifically unacceptable conduct of its members, and internal rules that allow this. Wikipedia doesn’t show sufficient respect for science, which would be a key requirement for democracy (unless you follow the Trias Politica model where politicians can manipulate science).

The following quotes are from Wikipedia Februari 17 2013 on the entry of Arrow’s impossibility theorem. First note that the article presents a complex mathematical proof. This is needlessly complex. The issue is essentially simpler. Kenneth Arrow gives a general statement, that would apply for all kinds of preferences and situations. Hence it suffices to give a single counterexample to decide to an impossibility. See e.g. the counterexample by Donald Saari, that I copied in DRGTPE at Project Gutenberg.

Thus we arrive at an analysis that most citizens of a democracy could understand: (1) Arrow presents five conditions that would apply to collective decision making in a democracy, (2) There is a contradiction. (3) Thus those five conditions cannot hold all at the same time.

The above can be called “Arrow’s theorem” and it stands (though see below). The confusion starts from that Arrow suggested that the conditions would be “reasonable” and “morally desirable”. This inserts notions of rationality and morality that give a high weight to the discussion. Arrow argues: we must become irrational or immoral if we want to achieve collective decision making, and this will not be “perfect” democracy.

My book “Voting Theory for Democracy” (VTFD) explains that Arrow makes some crucial mistakes here. VTFD is the only book in the world that explains the situation properly. The book turns those “non-mathematical” qualifications “reasonable” and “moral desirable” into mathematics too, such that it casts doubt on the mathematical result.

(a) Reasonable means at least consistent, but his axioms are not consistent. Hence the axioms cannot be called reasonable.

(b) Morality holds that you cannot be obliged to do the impossible. Hence his axioms cannot be morally desirable.

(c) Arrow’s Theorem by their generality would also concern preferences on constitutions. This is a form of self-reference, that his axioms also apply to themselves. Can people have preferences on constitutions ? Yes. The analysis is complete if it covers this intended interpretation. Arrow assumes rational agents but no rational agent would accept his inconsistent axioms. Apparently Arrow’s analysis is incomplete or inconsistent.

Now, where does Wikipedia become misleading ?

(1) Wikipedia-quote: “Although Arrow’s theorem is a mathematical result, it is often expressed in a non-mathematical way with a statement such as “No voting method is fair,” “Every ranked voting method is flawed,” or “The only voting method that isn’t flawed is a dictatorship”. These statements are simplifications of Arrow’s result which are not universally considered to be true. What Arrow’s theorem does state is that a deterministic preferential voting mechanism – that is, one where a preference order is the only information in a vote, and any possible set of votes gives a unique result – cannot comply with all of the conditions given above simultaneously.”

In itself a rather nice synopsis of the situation, except for the points (a) to (c) above. If you assume that Arrow’s axioms would need to be complete with respect to the intended interpretation (are self-referential with respect to constitutions too), then they appear incomplete or inconsistent. 

(2) Wikipedia-quote: “the Gibbard–Satterthwaite theorem still does: no system is fully strategy-free, so the informal dictum that “no voting system is perfect” still has a mathematical basis.”

Here is the same sillyness about “perfection” without a definition about what that would be. Would Arrow’s axioms be the criterion of “perfection”, while we know that they are inconsistent ? If there is no “perfection”, are we to allow people to argue for dictatorship or ”let’s accept corruption, since democracy isn’t perfect anyway” ?

Conclusions: (1) Arrow does not study democracy but only a mathematical model, (2) Arrow uses characterisations about that model that cannot be maintained, (3) Arrow breeds cynicism about democracy, (4) many other mathematicians are parrotting this, spreading cynicism about democracy, like speaking about imperfection or even calling for dictatorial mechanisms, (5) Wikipedia neglects the better analysis is VTFD.

The other dismal point is that Wikipedia can show little respect for science and can use dictatorial methods. In 2006 I noticed that an editor had inserted a Wikipedia entry on my suggestion for a Borda Fixed Point voting mechanism. The entry was erroneous at some points, so I took the liberty to correct the Wikipedia entry. In the process I also improved some points on the page on Arrow’s theorem that applies to it. A student in computer science at MIT thought that he had a better understanding of the situation, but was unwilling to show this with logical argument and decent behaviour. See here what followed in terms of gang-rape and witch-hunting. The editors at Wikipedia did not appreciate that I regarded the professors of the student as more relevant for student education than the editors themselves. See here what another student wrote, misleadingly, about the affair. This second student, Joseph Lorenzo Hall now in 2013 has completed his Ph.D. thesis and has become a staff member at the Center for Democracy & Technology. We may wonder what he tells his colleagues about what democracy actually is and how this can be programmed so that we can all benefit from it.

PM 1. The best defence of Wikipedia might be that they base their information on science but that there has been censorship in Holland. But in a case like this you can still think for yourself, and spend some time on the arguments that discussants have given. It helps when you have studied the subject so that you can understand arguments. The subject is democracy and not just a mathematical model.

PM 2. The directorate of the Dutch Central Planning Bureau (CPB) rejected my economic analysis on unemployment and the social welfare function also by referring to Arrow’s Theorem on the impossibility of fair social choice. In response I looked at Arrow’s analysis and wrote a paper that rejected it. However, the CPB directorate did not want to discuss and publish my analysis on Arrow’s theorem either. I have looked for support from outside mathematicians on the analysis in my paper. My position in this discussion has been rather weak since mathematicians refused to look into it or came up with silly remarks and did not respond adequately when I pointed out their own errors. (Dutch readers may look at a summary here.) Resolution of this issue could be very important for understanding my position, and the resolution of the issue of unemployment and social welfare. Yes, economists fail here too, also in the fact that they follow failing mathematicians. Overall, my best advice now is to boycott Holland till the country understands that it has to stop censoring science. Perhaps Wikipedia can write a nice article about that advice to boycott Holland ?

War in Europe

In July I promised to write on “the EU ‘superstate’ and its risks of war”. In the mean time the EU has received the Nobel Peace Prize, so apparently my thoughts are not completely out of sync. The problem however is war and not peace.

War is surely a high priority subject. However, I gave priority to completing the book Common Sense: Boycott Holland. When that was done another priority inserted itself, and that was the book The simple mathematics of Jesus, now completed as well. Perhaps you might agree that God deserves priority over war, especially since wars are frequently fought over God. Perhaps you might also agree that mathematics deserves priority over war, though it happens less frequently that wars are fought over mathematics.

I don’t claim any particular knowledge about war except for economic insight (see e.g. here). I suppose I know as much as anyone of the anonymous millions of potential victims about how horrible war can be. A not too distant relative is general Wouter Cool, minister of war in 1909-1911, which ministry now is called defence, presumably more fitting to its original task.

Now, following Caesar: The EU is divided in three parts: (1) North and South are divided by the Rhine between German and Roman cultures, (2) East and West are divided by the history of the Eastern and Western Roman empires, (3) There is a remainder that collects all other divisions, such as rich and poor, young and old, men and women, well-educated and less-educated, hard-working and happy-go-lucky, and so on.

Freddy Heineken, of the beer company (to be boycotted as well), developed a map of Europe, Eurotopia, where all regions with some historical and cultural unity are allowed more independence, and then integrated in the EU rather than in current nations. It is an enticing concept that clarifies that the current national structures are somewhat artificial compared to the much longer European history. A small point of critique is that an optimal allocation might cause even smaller units.

The point is that the EU puts pressure on this continent and its isles like an elephant in a China room. Its economic policy is misguided, and brings countries and regions to collapse. The euro is the new gold, the new mammon, and the EU sacrifices its youth in blind worship. If this policy continues, it is not inconceivable that violence will increase as well. The Banlieuex are not far from the center of Paris. Slogans about dominant Northerners and lazy Southerners might easily develop a dynamics of themselves.

Economics and politics mix. There is now talk about independence of Scotland and Catalunya. Perhaps London is willing to let Scotland go, but Spain might block Scottish membership of the EU for fear that this will set a precedent for Catalunya, and the Catalans might not accept this.

When the EU went to Oslo to collect the Nobel Prize, the current EU presidency by Cyprus was excluded from the three other presidents Van Rompuy, Barroso and Schulz, and one can understand that Christofias, the president of the Cyprus, decided to stay home.

And so on.

It is now inconceivable that there will be a full blown war again on the continent. Yet we already see violence in the streets in various parts. We are at risk of much more violence. Once the peaceful frame of mind switches to the regime of violence then the inconceivable will be discussed again. The crucial point is that the EU will be discredited. Once the EU is no longer the solution but people see it as part of the problem, we are back to square 1.

Northern Europeans tend to regard the Balkan as a rebellious region. They tend to forget that the whole of Europe is a Big Balkan. The war in Yugoslavia started when the IMF began to claim redemption of its loans. In the Cold War the country got easy credit to keep the Soviets out. When the Cold War ended, the IMF thought that it was time to pay back. Milosevic turned from communism to nationalism to keep in power. The IMF and EU are triggering similar processes right now.

The conclusion is: boycott Holland, remove the censorship of economic science, and let the peoples of Europe decide in freedom but also with sound information about their best economic policies. Put a stop to the illusions that now lead to violence and perhaps even war in a more distant future. Please be aware that I present a new economic analysis that allows monetary union without the fiscal union and transfer of sovereignty that now is on the table.

The book “Common Sense: Boycott Holland”

Now there is the book “Common Sense: Boycott Holland”.

Support for The Entrepreneurial State

The synthesis in economic theory presented in this weblog includes the crucial role for National Investment Banks (NIBs), see DRGTPE or the Economic plan for Europe entry.

The role of the NIBs is a matter of logic and experience. During an economic downturn companies cut back investments and then NIBs implement prospects that they might sell off in a later upswing. Experience has shown government involvement in major changes in society, such as railways, electricity and so on. Such an approach towards investments is also part of the Rehn Meidner model for the Scandinavian economy.

You may be interested in the report by professor Mazzucato “The Entrepreneurial State“, see the PDF there, or the video’s on her website. I strongly recommend and support this. (Dutch readers may be interested in the article in NRC Handelsblad March 14 that caught my attention.)

What Mazzucato adds to the analysis on investments is a deeper discussion of (1) the US experience with the Defense Advanced Research Projects Agency (DARPA) and the Small Business Innovation Research (SBIR), (2) the confusions and myths of investment policies in the EU.

Thus, DRGTPE restricts itself to the main argument and assumes that this is clear enough both for who has studied economic growth and read Keynes’s General Theory about the animal spirits, and for who knows what to avoid from the failures of industrial policy. Now however “The Entrepreneurial State” provides details that many people may require to become convinced.

The main current confusion and myth is that the state should step back and leave investments to the market. There however is the sound alternative of state involvement that combines freedom with efficiency. DRGTPE uses the banking label and Mazzucato uses the network label.

Mazzucato recalls the argument in The Economist of April 28 2011: “(…) grappling with entrenched joblessness deserves to be far higher on America’s policy agenda. Unfortunately, the few (leftish) politicians who acknowledge the problem tend to have misguided solutions, such as trade barriers or industrial policy to prop up yesterday’s jobs or to spot tomorrow’s. That won’t work: government has a terrible record at picking winners.”

Mazzucato refers to the record and finds: “A look at the massive impact that government’s targeted large investments in industries such as steel, railways, air travel, silicon microchip manufacturing, automotive manufacturing, computer, biotechnology and the internet, and nanotechnology shows this is just not true. Without the government pursuing a targeted investment strategy, none of these industries would have come into being. And being first matters because of the strong economies of scale.” (p91)

The distinction between the USA and the EU is not clearcut by the way. America seems to forget that it invented efficient network models. Mazzucato: “Many of the problems being faced today by the Obama administration are indeed due to the fact that US taxpayers are virtually unaware of how their taxes foster innovation and growth in the USA, and that corporations that have made money from innovation that has been supported by the government are neither returning a signifcant portion of the profts to the government nor investing in new innovation. They are sold the idea that this growth occurs as a result of individual ‘genius’, to Silicon Valley ‘entrepreneurs’, to venture capitalists, to what they think is a ‘weak’ state compared with the European system. These battles are also being played out in the UK where it is argued that the only way for the country to achieve growth is for it to be privately led and for the state to go back to its minimal role of ensuring the rule of law.” (p110)

State involvement in investments is tricky, if only because of the ambiguity in the word “state”. The USA has an overall state but one vested in freedom. The former USSR had a state but vested in dictatorship and bureaucracy. If it is necessary to have state involvement in investments (insight 1) the crucial question is: are there forms that combines freedom and efficiency ? The answer is: yes, there are such forms (insight 2).

PM. That article in The Economist has a curious statement on Dutch disability pensions: “And there, strange as it may seem, America could learn from Europe: the Netherlands, for instance, is a good model for how to overhaul disability insurance.” Well, the system around 1990 was abused by employer and employee unions to label unemployed as disabled. Individual employers enjoyed the ease of dismissal and turned the costs over to the community. It was a silly system and we can learn nothing from its abolition. The current system for the disabled still is not targetted at keeping them employed, so still leaves much to be desired.

PS. See also the entry on the Keynesian years 1981-2007 for how much stimulus has been required in the conventional approach to generate investments.

The Keynesian years 1981-2007

A modern fairy tale is that Ronald Reagan in 1981 started a supply side and neoliberal revolution, with lower taxes and deregulation of markets, such that the economic growth since then derived not from Keynes but from Hayek. Alan Greenspan believed that fairy tale and supported the Reagan revolution with his low interest policy. 

It is a fairy tale because hard economic analysis causes these qualifications: (1) lower taxes also provide a stimulus, (2) lower rates of interest provide a stimulus, (3) deregulation releases funds that then scramble for investment opportunities (and investment is demand too).

Thus we actually had Keynesian years. It is rather amazing how much the financial sector has been bloated to create that relatively meagre economic growth. Funds were sprayed around like water from a fire hose, in ict, dot.com, housing and the financial sector itself. Most investments failed but some were productive enough to count as economic growth.

The main thrust of the Reagan revolution lies not on the supply/demand distinction but on fundamental goals, such as on more income inequality and less parliamentary control of social-economic processes. To evaluate its success, it is necessary to correct for the “Keynesian” demand-side stimulus, otherwise we could exaggerate.

Of course there were supply side effects. Disentangling these effects is not easy. Policy measures have effects along different channels, and only partial effects might be classified as purely supply or demand. But these subtle issues get lost in the fairy tales that are being told.

This analysis is crucially important for understanding what we should do now in this phase of the economic crisis. The Reagan stimulus has fallen away and there is actually a contraction since we start re-regulate again. World investments have been paltry. Firms redirect funds towards consolidation rather than towards expansion and innovation. We now are in the anti-Keynesian years 2007-2012. Governments face a huge challenge to turn the scales and jump-start their economies again.

The best policy for governments is to set up National Investment Banks (NIBs) and redesign the tax mechanism, see DRGTPE. Value added tax (VAT) can be 1% and some countries may consider a 20% reduction in the working week, since such NIBs may take some time to get started.

PM. Piketty et al. (2011) consider the tax rate of the top 1% of the pre- and post-Reagan situations, and try to determine the impact. On income inequality they conclude: “the evolution of top tax rates is a good predictor of changes in pre-tax income concentration.” On wealth creation itself: “there is no correlation between cuts in top tax rates and average annual real GDP-per-capita growth since the 1970s.” I am a bit afraid that the discussion will be about their elasticities while the real clarification rather lies in the logic of the analysis. In my impression it is possible to already resolve current unemployment, see DRGTPE.

Econometrics is an empirical science

Cogito ergo sum. I exist. My protest against the censorship of science by the directorate of the Dutch Central Planning Bureau is a fact. The protest is a statistical datum. 

Econometrics, as founded by Jan Tinbergen and Ragnar Frisch, develops mathematical models of economic theories and confronts these with the statistical data. One economic model uses a social welfare function that depends upon the state of information, SWF[x, i] where x is the vector of standard economic variables and i is the indicator of information, i = 0 when the government does not know how to solve unemployment and i = 1 when the censorship is lifted and the government receives proper knowledge about how to tackle unemployment. See DRGTPE, Book IX on the reduced form, pag 198+.

Interestingly, many scientists who are aware that science is intended to explain empirical reality, manage to neglect some facts. To them, I don’t exist, the protest does not exist, the censorship does not exist. The “reality” they look at consists of rosy “facts” that fit their theories instead of the other way around.

One possibility is that I am mistaken and that there is no censorship of science by the directorate of the Dutch CPB. It shouldn’t be too difficult to determine this. The Dutch judiciary Court for Civil Servants decided that the CPB directorate had the power to decide what it wanted to publish or not. However, the publication series of “Research Memoranda under the name of the author” really states “under the name of the author” so that the directorate had decided earlier that it would not be involved. Hence there is an abuse of power and the Court is biased against the freedom of expression of science. How hard can it be to observe this as a fact ?

Apparently it can be awfully hard for Dutch people and even scientists to acknowledge that some unpleasant facts exist and that an otherwise highly esteemed directorate indeed censors science and abuses its power, and isn’t corrected by the Court.

Perhaps the world can help to flip the information indicator. And note that this problem would be much smaller in any democracy if each democracy adopted the constitutional amendment for an Economic Supreme Court.