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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) 3rd edition, Thomas Cool Consultancy & Econometrics, http://thomascool.eu.

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

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While this weblog invites the world to boycott Holland, it must be observed that the borders become blurred and that the clarity of the proposal is affected since the world also becomes contaminated from Holland.

Some good Dutch people who have already reduced their intake of Heineken and Gouda cheese discover that they might not be able to switch to Belgian beer because professor Paul de Grauwe from Belgium is failing, and that they cannot quite switch to French cheese because Christine Lagarde runs the IMF that hasn’t responded to this email to its Independent Evaluation Office. Due to that contamination, the world apparently must start boycotting parts of itself too, with needlepoint precision, like a complex embroidery.

The contamination spreads and spreads, like bird flu or a fashionable dance. Holland is oriented to the world. It is internationally minded. Foreign economists are invited for talks and temporary appointments, such as at the luxurious Netherlands Institute for Advanced Study in the Humanities and Social Sciences (NIAS). Another example is the Union of Greek students in Holland: just read how happy they are here in Holland, in the country that helps to destroy their homeland. And so on.

The key contamination is via the international audit committees that come to Holland to investigate the scientific conduct of the Dutch Central Planning Bureau (CPB). This weblog calls for a boycott of Holland because of the censorship of science by the directorate of that CPB. One would hope that such scientific audit committees would investigate that censorship. However, they don’t. Because of this failure to stop the censorship, these audit committees and their members become accomplices and develop a vested interest to deny and cover up the censorship.

In the first audit by Anton Barten cs. in 1997, I happened to meet professor Barten on a reunion of CPB employees, and by chance he mentioned that upcoming audit. I was actually invited to come and explain the main issue. The committee decided that the censorship was ‘old’, and hence they neglected the issue. However, the censorship started in 1990 and continues to this day. The reasoning by Barten cs. is hopelessly deficient and is a complete failure of an audit. See my report on the events.

The committee consisted of prof. dr. Anton Barten (emiritus Katholieke Universiteit Leuven), dr. Richard Blundell (The Institute of Fiscal Studies, London), prof. dr. Frank den Butter (Vrije Universiteit, Amsterdam), dr. John Martin (OECD, Paris), prof.dr. Frederic Scherer (Harvard University, Cambridge, Massachusetts, USA), prof. dr. Hans K. Schneider (emiritus University Köln / Cologne, and former chair of the Sachverstandigenrat).

Clearly all these economists are failing miserably on the integrity of economic science. Incidently, professor Blundell was in 2011 member of the Mirrlees committee on UK taxation, see my comments in the former weblog entry. The UK pays a high price for Blundell’s negligence.

The second audit in 2003 was by Klaus F. Zimmermann (president DIW Berlin and IZA Bonn), Daniel Gros (CEPS Brussels), Robert Haveman (University of Wisconsin), David Newbery (Cambridge UK), Rick van der Ploeg (Universiteit van Amsterdam and EUI Florence), Piet Rietveld (Vrije Universiteit Amsterdam), secretary Bart van Riel (SER, The Hague).

In this case I wasn’t invited and there wasn’t an affirmative response to my email (see here).

The third audit in 2010 was by Martin Hellwig (Max Planck Institute). In this case I only learned about the existence of the audit after the report had been finished. I did send an email to professor Hellwig, but did not get a reply. In terms of integrity of science, one might conjecture that professor Hellwig would have informed his audit committee about that (late) email. These members are: Torben M. Andersen (Aarhus University), Robin W. Boadway (Queen’s University Kingston, Ontario), Jørgen Elmeskov (OECD, Paris), Rachel Griffith (University College London, Institute of Fiscal Studies, CEPR), Sweder van Wijnbergen (University of Amsterdam), Secretary: Alexandra van Selm, assisted by Jante Parlevliet (both SER, The Hague).

If these members haven’t been informed by professor Hellwig, then they may still ask him. Or, they may also ask CPB or the former audit committees why they have been neglecting and destroying the integrity of economic science while the very object of the exercise was to enhance it. This third committee actually has a stronger challenge. The economic crisis since August 2007 confirms my analysis, and the CPB-directorate neglects to check into that confirmation.

The proper response for scientists would of course be to withdraw these reports.

Enfin. It is not just so that the UK pays a high price for professor Blundell’s negligence. The whole world suffers a huge economic crisis, that is crucially related to this censorship since 1990. Like things are developing now, the solution of the crisis first requires solution of that censorship.

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 ?

After thinking about nudes and pyramids, our thoughts naturally converge on the dead. It is amazing how much time we spend with them. Aristotle, Spinoza, John Maynard Keynes, Shakespeare, … they stare at us from the bookshelves, as perfect advisors who only speak when asked. And the children, who don’t sit on the bookshelves, fortunately, and who speak even when asked not to, don’t get that same attention as these dead (so that we should be grateful that they call for it).

The Royal Economic Society Newsletter, no 160, January 2013, has two obituaries that we must discuss. For the living, there is also an article by Tony Atkinson on the Mirrlees Review of taxation in the UK, and a Letter from France from Alan Kirman with also some attention to high marginal tax rates and the tax flight of Gerard Depardieu to Russia.

The Economist called France the ‘time bomb at the centre of Europe’. Apparantly the François Hollande government is in statis, trying to maintain some social peace but unable to generate investments and environmentally sustainable growth and jobs. I also indicated his in an earlier weblog entry on France, and apparently there hasn’t been progress.

Professor Atkinson’s text on taxation in the UK cannot make anyone happy either. We may be satisfied that the Mirrlees Review gives the state of the art in a particular section of the profession. However, the key notions of the tax void and the dynamic marginal tax rate, see my book DRGTPE, are still missing. Isn’t anyone on the British Isles able to see little Holland across the Channel, and this little figure waving this colourful flag ? A problem is, though, that professor Richard Blundell who took part in the Mirrlees Review also was part of the 1997 CPB Audit Committee chaired by Anton Barten, who neglected to look into the censorship of science at the CPB since 1990, with the argument that it was ‘old history’, even though that censorship continues to this very day, and which censorship also concerns those notions of the tax void and dynamic marginal tax rate. The Mirrlees Review is half-baked and only partly useful, but essentially misleading since it suggests to offer more than it does. Most notably, on the optimal tax and VAT and the top income tax rate, the Mirrlees Review leaves much to be desired.

When Atkinson considers the impact on taxes and tax-earnings, he refers to the research by Robin Marris on imperfect competition and principal-agents. The issue of the RES Newsletter also contains an obituary of Robin Marris, by Adrian Wood (see also the Guardian). Marris has done much, but I would like to mention that his book Reconstructing Keynesian Economics with Imperfect Competition (1991) deserves consideration. In this context I want to mention also Connell Fanning & David O Mahony, The General Theory and the Entrepreneur Economy, 2nd edition, MacMillan 2000, The economic profession on the British Isles can somehow still capture the mood of Keynesian thought and bring fresh insights.

The problematic point now is the obituary of Jules Theeuwes (1944-2012), by Joop Hartog, both from the University of Amsterdam, and both among the founding editors of Labour Economics, the official journal of the European Association of Labour Economists (EALE).

Are we allowed a word of criticism on the dead ? If we may criticise Aristotle, are we allowed to do so with Jules Theeuwes ? My point is that labour economists can be expected to be interested in an analysis on unemployment, and in particular how taxation affects it. This paper Tax structure, inflation and unemployment benefitted from comments by Jules, was published by Guido den Broeder of Magnana Mu 1994, ISBN 90-5518-208-7, and included in the archive EconWPA at St. Louis ewp-mac/9508002. It explains the notions of the tax void and the dynamic marginal tax rate, though I introduced the particular term ‘tax void’ a bit later to better transfer what is explained there. Unfortunately, Theeuwes apparently did not understand the analysis, broke off further discussion, and didn’t want to consider the censorship at the CPB. In 1990 the directorate had accused me of some points, that Theeuwes helped neutralise, see this exchange of letters (in Dutch), which is how he and I met in the first place. So I have been grateful to him for that neutralisation and the comments on my analysis, and everyone will agree that he has been a fine man overall indeed. Yet, it is unclear to me why he could not understand that analysis, and why he did not protest against the censorship of science at CPB. These points of course hang together. The same holds for Joop Hartog. Hartog doesn’t indicate that the labour market is as badly managed as the financial market. Dutch professors of economics have failed on the integrity of science since 1990, and perhaps also on competence. Sorry for these words. Writing about the dead is easier when there isn’t this sad emphasis that their life story has ended.