Tag Archives: interest rates

Salah el Serafy (1927-2016) stated the following about GDP and NDP (Gross and Net Domestic Product):

  • “Selling natural assets and including the proceeds in the gross domestic product, GDP, is wrong on both economic and accounting grounds.”
  • Even though NDP is rarely estimated, depreciation of produced assets is fairly small and predictable. Declines in natural assets, on the other hand, may be large and volatile, and are not reflected at all in the estimates of GDP commonly used for macroeconomic analysis.”
  • “For economic purposes, a better approach would be to calculate the user cost component of resource declines, and either subtract this from GDP as capital consumption or (much better) exclude it from the gross product altogether.”

The term “user cost” merely indicates the investments that are required to maintain the resource level and quality.

Two flows

In the RES Newsletter El Serafy (2014) recalled:

“Exploiting finite natural resources without replenishment is akin to mining and Marshall had taken pains to explain that the surplus realized in mining, often miscalled rent, should be split into proper ‘rent’ which is income and ‘royalty’ which is capital.”

George Santopietro (1998) summarized El Serafy’s position as:

“El-Serafy (1989) argued that the surplus for a depletable resource represents two values: (1) a true income component which can be consumed; and (2) a separate depletion cost. The depletion cost is the amount that needs to be reinvested in order to sustain the economy’s ability to provide future generations with the ability to enjoy a non-declining level of consumption. In this line of thinking, the net price method overstates the true depletion cost. Von Amsberg took El-Serafy’s method and applied the strong sustainability criterion to it by calling for a depletion cost sufficiently large that when invested in the production of a substitute, future generations will be able to enjoy a non-declining flow of similar services.”

It was actually John Hicks who distinguished fundist and materialist capital in accounting. In both cases there is Hicks’s accounting principle of keeping capital intact for income estimation purposes. El Serafy puts emphasis on fundist capital, thus with monetary value. A depletion of a natural asset can be compensated by a gain in other capital. The alternative is to look at the physical stock of goods. El Serafy: “damaged or depleted natural capital cannot easily be replaced with manufactured capital.”

A small model

Wondering what to make of this, I came upon the following small model. When you sell your house then the proceeds are not your income, so much is obvious. You might rent out a room to pay for the maintenance costs. Farmers sell the proceeds from their crop but keep some seeds for next year.

Since Keynes, macro-economics has tended to link consumption to income but let us now relate it to the capital stock that might be depleted.

Assume that the price of a depletable resource is p = 1, and that the resource stock K is capital too: K ~ p K. The first is in physical units and the second would be in money, but let us take the resource as the numeraire, so that K = p K.

  • For investment: Let physical investment J = b K. Let g be the physical return factor on physical investment. Then economic (gross) investment I = r K = (dK with d depreciation and i a rate of interest. We also have I = g J = g b K so that r = g b.
  • For consumption: Let w L be services without use of capital. For consumption of the depletable resource we distinguish a fraction s that is sustainable and a fraction u that is unsustainable. Total consumption is C = (s + u) K + w L, and we have sustainability when u = 0. Below relations allow us to deduce that s = (g – 1) b, so that sustainable consumption is determined by the physical return factor of physical investments.
  • From these two: u K are the user costs or investment that are required to keep the resource intact. When consumption is sustainable = 0 then such costs are not incurred.

In accounting of expenditure flows, it may happen that u currently is not even included in D, so that also NDP is off-track.

If u is in D then we find: NDP gives substainable consumption s K + w L, while the figure of GDP will be polluted by unsustainable depletion u.

Physical, sustainable if u = 0 Nominal, with p = 1
C = (s + u) K + w L C = (s + u) K + w L
J = b K I = r K = (i + d) K       (gross investment)
K[t+1] = (1 – sub) K + g J K[t+1] = (1 + r) KD
K[t+1] = (1 – u) K D = d K = (s + u + b) K = (r + u) K
s = (g – 1) b r = s + b = g b,     1 – u = 1 + i
d = s + u + b GDP = Y = C + S = C + I = (s + u + r) K + w L
0 ≤ s + u + b ≤ 1 NDP = YD = s K + w L = (g – 1) b K + w L

El Serafy rather wants to see that also GDP is income, which can be achieved by a separate deduction from the stock:

Physical, sustainable if u = 0 Nominal, with p = 1
C = (s + u) K + w L C = (s + u) K + w L
J = b K I = r K                                  (gross investment)
K[t+1] = (1 – sub) K + g J K[t+1] = (1 + r) KD* – Δ   with Δ = u K  as user cost
K[t+1] = (1 – u) K D* = d* K = (sb) K = r K     (without user cost)
s = (g – 1) b r = s + b = g b,   and r = i* + d* means i* = 0
d = s + u + b GDP* = Y* = C + S = C + I – Δ = (s + r) K + w L
0 ≤ s + u + b ≤ 1 NDP = Y*D* = s K + w L = (g – 1) b K + w L

An example is selling the natural resource, putting the proceeds into a bank, and live from the perpetuity. With i the money rate of interest, then sustainable income is s K = i K, so that s = i. Then b = 1 because all money is in the bank, and g = 1 + i = r. It follows that GDP = (1 + 2 iK + w L and NDP = i K + w L. Normally we do not regard the whole capital as the investment but for money it makes sense. In practice money in the bank is only a financial arrangement and the true return must still come from productive investments.

Environmental sustainability

Above model can be extended with environmental sustainability by replacing s + u with es + eu, with es ≤ s and eu ≥ u. For example, the home owner must put aside additional investments for an extension to the house to make room for solar panels or heat pumps, or to relocate it because of flooding. Sustainability and environmental sustainability have the same model here, and only different data. However, practical modeling can be different. Mere sustainability might rely on actually observed values of the going rate of depleting, while environmental sustainability with es and eu would require more involved modeling to come to grips with the current (conservative) expectations on future development.

Intermediate conclusion based upon this small model

I tended to favour GDP as based upon expenditure flows, since depreciation of produced capital tends to use accounting schemes that seem rather arbitrary. Now, however, it is clearer to me that depletion of natural resources may pollute these GDP data. Now I am starting to think that NDP would tend to be a better yardstick, provided that statisticians find adequate estimates of depletion of course. If those estimates are deficient then the use of NDP provides only the illusion of improvement though.

PM. This simple model seems quite tricky. A one time deviation from sustainability causes a one time GDP growth, but also forces to continue to deviate from sustainability for ever more, with K[t] = (1 – u)^t K[0] merely to maintain the income level without any growth. It is only a simple model to clarify a basic idea. Salah el Serafy has more sophistication with the user cost.

Salah el Serafy again

El Serafy (2014) however advises that resource depletion is removed from income altogether (with my comments):

“Any presumption that removing ‘royalty’ (the capital element) from GDP entries relating to natural resources might be taken care of at the level of estimating NDP cannot be accepted for more than one reason.
First, NDP is not often reckoned at all, and if reckoned there is no unanimity over the amount to be used for the capital consumption involved. (TC: But would there be unanimity for correction at the level of GDP ?)
Second, natural resource deterioration due to commercial exploitation is not ‘depreciation’ in the accepted sense; it does not conform to standard wear-and-tear allowances applied at year-end to asset categories, and may in fact amount to as much as 100 per cent of the asset. In the latter case proceeds of the asset sale will all be a User Cost and must be exiled altogether from GDP. (TC: This is a matter of definitions. If Gross is taken as expenditure flows, then Net can be taken as depletion and standard depreciation. However, expenditure flows are not income indeed.)
Third, if stock erosion is viewed correctly as Marshall advised as emanating from ‘Nature’s store’, accounting conventions dictate that using-up stocks must be dealt with at the gross income estimation stage. Clearly natural resources are not ‘fixed capital’ but inventories, and the User Cost implicit in using them up should be recognized for correct accounting. (TC: But the situation becomes blurred, when the stocks can be used for investments to maintain the stocks, see above small model. In that case it makes some sense to define Gross as the expenditure flows, and deduct depletion with depreciation. However, expenditure flows are not income indeed.)
Such economic reasoning appears to escape the concerns of the estimators who have taken charge of the accounts resisting the economic logic behind the ‘greening’ quest.”


El Serafy did his doctorate in economics at Oxford in 1957, supervised by John Hicks, one of the giants in economics, and also famous for his insistence on proper accounting. El Serafy laments that this heritage has gotten lost:

“However, as the economists’ interest in studying social accounting faded the accountants and statisticians have taken over, often disregarding the concerns of economics, and disclaiming any hint that the national accounts should be estimating income.”

“Their message in brief is that no adjustment for environmental losses can be expected within the mainframe of the national accounts. This in effect is a death sentence on ‘green accounting’.”

Salah el Serafy has a point. The point has also been made by Tinbergen & Hueting.

The Dutch government in 1972 instituted a Scientific Council for Government Policy -in Dutch: “WRR”. The rationale is: while there are Ministries for actual policy and while there are Planning Bureaus for separate fields, the WRR is supposed to look over a longer horizon and across fields. Their YouTube channel may contain interesting material also for foreigners.

Here is the lecture by Joseph Stiglitz (1943): The future of globalization, given on Thursday November 6 2014.

Stiglitz pointed to world problems and the interconnectedness of nations, the rise of world governance, but the lack of instances of world government. The economic integration proceeds faster than the political integration. In the piecemeal system that arises it are special interests who take the lead. Bankers want to control financial markets. Producers want to control sales and thus dominate trade talks. National political systems become corrupt because of campaign financing.

Globalisation has been a huge and unpredicted success in other realms. With China and India 2.5 billion people have seen their prospects improve. China has taken care in the sequence and pacing of joining the world system. In September 2014 China became the biggest economy in the world, putting the USA in second place. Compared to 1815 China en India only take their historical position, and their position in the last two centuries was “only temporarily” affected due to Western colonisation. The new balance of economic power also requires a political balance, and the multipolar world requires new institutions.

Joseph Stiglitz on the Future of Globalisation, WRR November 6 2014 (Source: own picture)

Joseph Stiglitz on the Future of Globalisation, WRR November 6 2014 (Source: own picture)

What about my suggestion of Economic Supreme Courts ?

My suggestion, and not Stiglitz’s suggestion, is: Each nation could adopt an Economic Supreme Court (ESC), see my memo in the RES Newsletter this Fall, and also see the About page above. When these national ESCs communicate, then there will be some form of co-ordination based upon economic science. Governments will be better informed about the world situation, and the bargaining issues will be clearer.

I wondered what Stiglitz would think about this suggestion, since he had been chairman of the Council of Economic Advisers in 1995-1997 under Clinton. Asked after the lecture, his first reaction was that such a court might make such horrible mistakes as the US Supreme Court has made in the past. My  reply was: (a) It would be economists and not lawyers, and the court would be based in economic science, (b) Duration of terms would not be for life but for seven years, on a revolving basis with one new appointment per year, (c) Court decisions would be open to society so that the discussion before and after would remain open to science too. Stiglitz was willing to consider these aspects, and seemed to agree that the dynamics in policy making would change. Due to his initial negative reaction and my need to defend it, I didn’t get to ask Stiglitz about his reaction to the possible contribution to world governance via that mutual contact.

World governance is an old idea. It was supported by Jan Tinbergen who pointed to the obvious externalities and the need to incorporate them in the economic process (rather then leave them be with Coase’s Theorem). The idea also finds support in my book DRGTPE, see the About page.


One of Stiglitz’s messages was that the Transatlantic Trade and Investment Partnership (TTIP) proposed trade agreement is “framed”. It uses terms of “trade” and “freedom” and “harmonisation”, but is actually a different kind of beast. The old trade agreements that dealt with comparative advantage have run much of their course. Tariffs are already quite low. What is at stake now are the so-called “non-tariff barriers” – but those are in place precisely because of national regulations that have their own reasons. Thus the real issue is deregulation again, but now under the guise of international trade agreements. An example is health regulation that might be abolished under international pressure. What is severely lacking in these negotiations is transparancy. Again it are the producers who want to have control over their sales, but one should wish that the consumers are also at the table.

In the EU TTIP  is politically sold with the argument that it would generate jobs. But trade agreements should create a balance between imports and exports, and thus the effect on jobs should rather be balanced too. The classic argument for trade and comparative advantage is income and not jobs. The EU should look for jobs elsewhere.

My own experience at the CPB in 1982-1991 with the Single European Act a.k.a. “Europe 1992” proposed by Delors was that the European Commission claimed efficiency gains from trade, but did not account for job losses that explained those gains. They overlooked the investments that would be needed to create new employment. See CPB (1989), “Europe 1992″, working paper 28, that might be only mildly critical.

Low wage unemployment

There is an economic theory that trade would enhance prosperity, but (with reminiscences of the Ricardo – Malthus debate on the Corn Law of 1815+) free trade now seems to have adverse effects for many. The factor price equalisation theorem causes lower wages for the lowly productive. Competition between governments causes cutbacks on public services and less progressive taxation. Globalisation exacerbates the national problems. The low income groups are worse off on all accounts. The median income of the full time male worker is as low as four decades ago. The minimum wage has the real level of five decades ago. Stiglitz claimed that trade had been a critical factor in the last 15 years to explain these developments in inequality. He referred to James Galbraith. An article that I could find is “A perfect crime: inequality in the age of globalization“. Galbraith also has this new book: The End of Normal (2014).

Another point that I could ask Stiglitz after the lecture was whether he was aware of the notion of a tax void. It is relatively hard to explain such a notion in a noisy reception hall, but professor Stiglitz has a Nobel Prize and seemed to get a major part of it. See my paper with the graphical display also for the USA. See my discussion of Larry Summers’s Tinbergen Lecture on Secular Stagnation, last Friday. After some confusion we established, for the US, that families with children might have such a tax credit that there might be no tax void, but that singles still would have a problem. I must be careful here since my last calculation for the US was from 2009 and that is five years ago. Overall there might be scope for an analysis to counter above negative effect of globalisation on the internal market, see this other paper on exposed and sheltered sectors. Professor Stiglitz seemed to think that the German introduction of a minimum wage shouldn’t be a problem, but I haven’t looked into that yet and am less optimistic.

Quantitative Easing

Stiglitz was quite critical of the Quantitative Easing (QE) that has pursued since November 2008. The funds didn’t go to the common people (e.g. by reducing the mortgage burden), but to the banks, who invested the sums in the emerging markets, aggravating their problems by exchange rates and inflation. Who is to blame the banks for selecting options with potentially higher returns ? According to Stiglitz the difference between the US and the EU is that the US didn’t have much austerity while the EU did – see indeed the Depression in Southern Europe. The difference has not been caused by the US with QE and the EU without QE. The policy by the ECB to embark upon QE, by buying up problematic assets, would be dubious.

I hadn’t seen that US link to the emerging markets yet. My paper Money as gold versus money as water (2013) however uses new money only for a targetted use, and thus doesn’t make that mistake with QE in the US and the new policy by the ECB.

Stiglitz was also critical that standard monetary policy neglects the impact on inequality. He claimed that 95% of QE since 2008 benefitted the top 1%. A low rate of interest hurts pensioners who save in bonds and benefits the rich who are active on Wall Street. Janet Yellen would have more awareness of the issue.

Other issues

One cannot discuss globalisation without a whole range of topics: bankruptcy law (also for sovereign debt, cf. Greece), (de-) regulation, capital controls, failure of co-ordination, the Bush-selected G20 of 2008 rather than the legitimate UN, tax havens, … Stiglitz pointed to several mechanisms how there can be regulatory capture and (deliberate) catch-22’s. A system with private prisons might welcome new prisoners. Take the farmaceutical case of a known drug, a placebo, and a new drug. A new competitor might not be able to do a test with the placebo, since it would be unethical not to use the known accepted drug. The competitor cannot create a good test with that known drug since it has no access to the required performance data.

A short response on this: A special feature of the US system is litigation, in which companies can even sue regulators. Others have already observed that China is ruled by engineers and the US by lawyers: a major element in tackling world problems is tackling litigation.

Of course, minister Lilianne Ploumen spoke as well. It came down to explaining the VVD-PvdA coalition government agreement since Fall 2012 for another time, now to the distinguished guest.


For me the discussion did not add novelty. The moderator was professor Arnoud Boot from Amsterdam, who is member of the WRR, and who also chaired the KVS meeting last Friday with Larry Summers – see this discussion. There are some constants in the Dutch discussion on economics. Professor Boot is quite capable in many respects but observe his Catch 22:

  • If there is censorship of economic science by the directorate of the CPB then Dutch Parliament should investigate it.
  • Only such an investigation can establish that there is such censorship.
  • When Parliament does no investigation then we will never know and there is no need to discuss it.
  • Hence the issue does not exist.
Joseph Stiglitz and Arnoud Boot, WRR November 6 2014 (Source: own picture)

Joseph Stiglitz and Arnoud Boot, WRR November 6 2014 (Source: own picture)

A mere two weeks ago I stated:

“Overall, I seem to be one of the few economists who hasn’t read Piketty’s book yet. I intend to keep it so, not for lack of interest but because of lack of logical necessity. Piketty’s summary does not indicate that it is essential reading unless you are involved in economic statistics.” (this weblog, October 24 2014, and see there for some links to James Galbraith and David Colander)

It is difficult to fully neglect the hype, however. Thomas Piketty visited The Hague, spoke in Dutch Parliament, and I have to be up to date with views of those who run the country.

Thomas Piketty visits Dutch Parliament, November 5 2014 (Source: NOS screenshot)

Thomas Piketty visits Dutch Parliament, November 5 2014 (Source: NOS screenshot)

A relevant quote by Piketty at minute 1.37 of that NOS broadcast:

“The main message of my book is that these issues of income and wealth are too important to be left to economists and statisticians. I am very happy to talk to politicians but, to be honest, I care more about the normal people, and I want to contribute to the democratisation of economic knowledge.”

 There was a book signing session too.

Thomas Piketty signing his book in The Hague, November 5 2011 (Source: NOS screenshot)

Thomas Piketty signing his book in The Hague, November 5 2011 (Source: NOS screenshot)

It felt impolite not take the ten minutes tram ride, buy a copy of the English book, meet Piketty and invite him to sign that copy, from Thomas to Thomas. So my plan is to skip the deep historical statistics and look at his policy proposals at a later moment. He has the same problem as I have, of writing a proper “a” after the “m”, but perhaps his cause is that he had been doing it too much this day. Incidently, I alerted him to my memo An Economic Supreme Court in the RES Newsletter this fall. The book signing session was after he met Dutch Parliament, so they may need to invite him to return to inform them about his thoughts on reforming the Trias Politica system of democracy.

Book signature of Thomas Piketty for Thomas Cool / Thomas Colignatus, November 5 2014

Book signature by Thomas Piketty for Thomas Cool / Thomas Colignatus, November 5 2014

Addendum on the interview in Paradiso, Amsterdam

After his interview in Paradiso, Amsterdam, by Joris Luyendijk, Thomas Piketty signed perhaps another hundred copies. The interview indeed helps to understand some of his views.

Economic advice if economics were no science

The main point is this: My advice is that each nation adopts an Economic Supreme Court, that is based in economic science and is open to the academia and the public, so that Parliament and citizens get better information to base their decisions upon. How does this relate to Piketty’s view ?

Remarkably, Piketty calls economics a “discipline” and not a “science”:

“Economists have a strong responsibility when they pretend that they have a science. Which they of course don’t have. This is a huge joke. Non-economists are also responsible for letting them do that.” (minute 37:40)

Piketty states that these issues (notably on inequality) are too important to be left to others (i.e. economists, and perhaps lawyers). He wants a “democratisation of economic knowledge” that “will allow individuals to make better choices” (minute 39:07). However, who is to determine what “economic knowledge” is ? Later interviewer Joris Luyendijk asks whether Piketty thinks about a market of ideas such that “over time the market takes care of the best idea and that is what we shall do”. Here Piketty protests:

“You don’t want to let others tell you that for technical reasons that there is only one policy that is possible. There is never only one policy that is possible. There are always alternatives.” (minute 39:40)

But how do you know about those alternatives ? Some issues can be very simple but soon you either study economics or find a network of advice that you have to trust. Piketty apparently relies upon the academia and upon the books used in school. But government policy making tends to be quite involved and more complex than a single professor (even Paul Krugman) might be able to handle.

Thus we should hope that Piketty, after thinking it through, would agree with the idea of an Economic Supreme Court:, since it would be open to society and have the same objective of providing quality tested information.

Later on (at 1:05:00) he protests against the use of complex mathematics, and asks for more empirical work. He repeats that later, using the word “discipline” (at 1:12:00). But this abuse of complex math detached from empirical reality precisely happens at the academia, while it would be the Economic Supreme Court that would have the incentive for empirical research to warrant the quality of the information used for policy making.

Environment biggest problem of 21st century

Though Piketty wrote a book about capital in the 19th and 20th century with some “historical perspective” for the 21st century, he still holds that the environment is the major problem for the 21st century:

“I think in many ways the biggest challenge is probably the threat to our natural capital and to the environment. (…) What I talk about in my book in a way is a lot simpler to do than solving this more difficult problem with the environment and our natural capital. So I think that if we are not able to solve this financial problem and these problems that have to do with inequality, how are we going to solve the more difficult environmental problems that are in front of us ?” (minute 1:00:40)

He might appreciate the website by Roefie Hueting and my draft book on the Tinbergen & Hueting approach to Ecological Survival. The environment clearly is an example of where an Economic Supreme Court would eliminate the confusion by politics and special interests. Hueting holds that the discipline of economic statistics might also do the job, but I have my doubts, since policy making differs from the use of statistics. See my weblog text on Hueting, the piano and eSNI.

European political union

Not in his book but in another manifesto, Piketty advises faster integration in Europe, with a Political and Fiscal Union for the Eurozone with a separate own Parliament (minute 47:40). When asked whether “people should take action” – and the person who asked this seems to have thought about pitchfork marches – Piketty points out that the most effective action is to unite Europe (minute 1:14:00). He gives the example that Germany and France may think that they are big but compared to the world players they are quite small.

However, there are strong national tendencies in Europe. Piketty shows him aware of that. In the final minutes, he mentions that there can be nationalistic resistance against globalisation, and he mentions France as an example. In that case the option of European political union evaporates, while the latter is the only good road, in his view, to do something about inequality.

However, when each nation adopts its own Economic Supreme Court (ESC), then such political union might not be needed, and countries can tackle inequality via the co-ordination of the various ESC’s. Thus there is an alternative to the two opposites.

Also, Piketty uses “the new round of trade liberalisation” of TTIP as leverage to arrive at international standards for minimal capital taxation. People would not be inclined to accept new liberalisation if there would be no curbing of inequality. However, he then seems to fall for the rhetoric and framing of TTIP that it would concern “liberalisation”, while Joseph Stiglitz (see later) criticizes TTIP for not creating more competition but reducing it.

Global dictatorship

Fortunately, the audience in Amsterdam was also aware of the risk of global dictatorship. With capital flowing into the hands of a small elite that cannot be touched by taxation, and with the Western democracies reduced by campaign fund corruption and propaganda – see the Iraq War, as if Saddam Hussein was the same person as Osama bin Laden – it is just a matter of time. Perhaps Joris Luyendijk is a member of the Bilderberg group since he asked more than once whether democracies are not already lost and already subjected to subtle psychological manipulation by the powers that be. As you know, according to proper conspiracy theory, merely asking a question like this is actually a subtle manipulation to bring an audience into submission and have them forget about really critical questions.

Perhaps mindful of the sales of his book, Piketty replied that the possibility of global dictatorship cannot be excluded (minute 1:28:00). If his book sells so well that he could become our world dictator then he likely would try to be a benevolent one.

Thomas Piketty receives flowers in Paradiso Amsterdam, November 5 2014 (Source: video screenshot)

Thomas Piketty receives flowers in Paradiso Amsterdam, November 5 2014 (Source: video screenshot)

Friday October 31 Larry Summers gave the 27th Tinbergen Lecture, organised by KVS, the Royal Dutch Association for Political Economy. The title of the lecture is Perspectives on Secular Stagnation. The main thesis: if the world doesn’t choose for a large fiscal expansion then it runs the risk of a long period of stagnation. The advantage of the lecture is that Summers runs through the various aspects, and presents the clear policy choices: (1) Structural reform (likely with austerity), (2) Raise spending (fiscal expenditure, government investments), (3) Reduce real rates (even more monetary expansion with likely more inflation). His joke: when presenting a case to the President, give three options, with your advice in the middle.

Larry Summers giving the 27th Tinbergen Lecture, October 31 2014 (Source: KVS-web)

Larry Summers gives the 27th Tinbergen Lecture, October 31 2014 (Source: KVS website)

I am “glad” that Summers confirms this part of my own analysis, though the prospect of stagnation isn’t something to be glad about. Summers’s advice actually may be some kind of turn-about, since in the past he was in the financial-monetary track.

My memo of April 2009 Gliding into the Bush-Obama Depression has the same theme. At that time Summers was director of the US National Economic Council, and pursued a policy of restoring banks and confidence in Wall Street. The US Fed had started quantitative easing in November 2008. We now know that much if not most new money didn’t land in the US but was exported to more promising investment opportunities in the emerging economies, raising their currencies and inflation (a critique by Joseph Stiglitz). During the Clinton Presidency 1993-2001 Summers was influential in the financial deregulation and the abolition of the Glass-Steagall Act and thus the onset of the crisis. Let me quote my 2009 memo:

“Does Obama have an alternative ? He must choose from US economists. Leonhardt (2008) refers to the “Battle of the Bobs” between Robert Rubin and Robert Reich during the Clinton Administration, that apparently Rubin won. Reich now has won the argument that deregulation has turned out to be disastrous. But that does not imply that he was right on intervention in the market to directly do something about unemployment. Conditional on the state of economic theory in the US, the “Battle of the Bobs” still is undecided. Robert Reich still hasn’t won the argument that the government should step in with an interventionist agenda, since his argumentation is unconvincing. But that does not mean that Robert Rubin has won the argument that it shouldn’t. When unemployment rises to 10% society better steps in, and for sure if it stays this high during a number of years. The real US problem is their state of economic theory. It is OK that the two Bobs discuss with each other but it is not OK that they are not open to a discussion with others.”

The New Yorker April 21, 2014, about Elizabeth Warren’s book, mentions another advice for Presidential circles:

“In the spring of 2009, after the panel issued its third report, critical of the bailout, Larry Summers took Warren out to dinner in Washington and, she recalls, told her that she had a choice to make. She could be an insider or an outsider, but if she was going to be an insider she needed to understand one unbreakable rule about insiders: “They don’t criticize other insiders.””

Overall, I would advise more openness in Presidential circles. It should be possible to present a critical argument and increase the quality of discussion both inside and outside.

Overall, my points w.r.t. Summers’s lecture are:

  • Summers said that It may matter who brings the message. He hoped that his argument would be heard by economists in Germany and Holland, since those have a better position to argue for investments than economists from Southern Europe who might be regarded as self-serving. However, to convince the Dutch, Summers must take into account that Holland has an export surplus since 1981 – thus some 33 years. See the lecture by H.J. Witteveen. There are vested interests her. The Dutch “mantra” of wage moderation makes for easy economic analysis and policy advice. Apparently it blocks thinking about alternatives.
  • Instead of general wage moderation, an alternative policy for Holland (and now Germany) would be a differential wage policy, notably: higher wages for productive workers (commonly in the exposed sectors), and lower wage costs (supported by proper taxation to support net income) for the lower productive workers (commonly in the sheltered sectors). See my 1996 paper on this, building on the analysis by Van Schaaijk and Bakhoven, and the original 1990 paper when I worked at the Dutch Central Planning Bureau (CPB) in 1982-1991.
  • My advice is that each nation adopts a constitutional Economic Supreme Court (ESC), based in economic science rather than bureaucracy, that checks the quality of information for decision making, and that has the power to veto the budget if the information in the budget would be misleading according to that court. This is my memo in the Royal Economic Society Newsletter of October 2014:
  • When the Dutch Central Planning Bureau (CPB, founded by Tinbergen) would be changed into an ESC then it would mean a promotion. Current forecasts are conditional on the assumption that the government speaks truth and that policy will be successful, but an ESC would be able to make unconditional forecasts. The Executive Branch would still be free to decide what to do but would lose some degrees of freedom for disinforming Parliament and the public.
  • Olivier Blanchard, now at the IMF, in his 1999 Tinbergen Lecture, in reviewing macro-economic theory at that time, thanked me for my comment on the historical origin of the word “macro-economics”  – in 1999 I followed the Dutch convention that it was due to former CPB-director Pieter de Wolff in 1939 but it now appears that it is due to Ragnar Frisch in 1933, see Kevin D. Hoover 2012 and some fine sheets 2014 – but apparently Blanchard in 1999 wasn’t convinced yet about the advice for both an Economic Supreme Court and the advice on taxation and the minimum wage. He ought to be able to quickly relate to the issue once he realizes the link to the current threat of stagnation.

Present at the event were Sweder van Wijnbergen (1951) and Coen Teulings (1958). These professors have been participant in the discussion but also the creation of Dutch economic policy for a fairly long time after 1990. Van Wijnbergen was for a short time the top civil servant at the Ministery of Economic Affairs, and supervised the CPB. Teulings was head of an incomes policy unit at the Ministry of Social Affairs and was director of the CPB  in 2006-2013. Teulings did not accept that the economic crisis since 2007 was another confirmation of my analysis. They may not be aware of what I describe as “vested interests”. They may also not have been aware of the quality of the analysis. It may indeed matter who brings the message. Having heard Summers’s perspective on Secular Stagnation, they might perhaps help out that my analysis on unemployment is no longer blocked from discussion at the Dutch CPB, that I can run the Athena model there (that I helped build there, and adapt it where errors can be proven), and that my paper can be published so that the scientific community can discuss it. But everyone may doubt whether the world works like that. The chairman of the KVS and host to the Tinbergen Lecture, is Arnoud Boot (1960), professor in Amsterdam and member of the WRR Scientific Council for Government Policy. He has a general awareness of some of these issues but obviously isn’t convinced yet, either of Secular Stagnation or the relation of my analysis and the blockage at CPB to Secular Stagnation.

Arnoud Boot, Larry Summers, Sweder van Wijnbergen, Coen Teulings, at Tinbergen Lecture October 31, 2014 (Source: KVS website)

Arnoud Boot, Larry Summers, Sweder van Wijnbergen, Coen Teulings, at Tinbergen Lecture October 31, 2014 (Source: KVS website)

It appears that Summers was born in 1954 too, like Angela Merkel and François Hollande, and me. When I told Jan Tinbergen of the problem at CPB, he recognised that such problems might arise in the current institutional framework, but he also said that he was too old for that and that the younger generation ought to solve it. An understandable position. I hope that it still occurs in my generation.

PS 1. As I am reading Harlan McCracken (1961), Keynesian Economics in the Stream of Economic Thought, Louisiana State University Press, because of my earlier discussion of Malthus in Maastricht, it is amazingly logical to see McCracken discuss … secular stagnation. Well, McCracken 1961 refers to Alvin Hansen as Summers 2014 does, so there is no surprise there. McCracken tends to reject the danger of secular stagnation with the optimism of 1960, though he admits the impact of WW 2. Our “advantage” is the crisis of 2007+, though for me the situation after the Fall of the Berlin Wall 25 years ago sufficed to develop that alternative analysis on unemployment and the Economic Supreme Court, see here.

PS. 2. Since this weblog has a vested interest in the education of mathematics, we must report the following google results on Iris Mack and her Phat Math project on math education. Apparently the link doesn’t work and last month saw a failed attempt at fundraising. Her Wilmott weblog recently consists of links to events or reports by others. Apparently Mack worked at the Harvard Management Company (HMC) during Summers’s Harvard Presidency, warned about risks and had to depart around 2002, and later around 2007 she and Robert Rubin met in a Miami beach area; well, this is her story in the Huffington Post 2010. Playwright Nancy McCleman has tried to evaluate Mack’s website and ends up in disappointment. That seems to be a good description of my own sentiment too, that this weblog evaluation of the 27th Tinbergen Lecture must have this PS 2.

Tomáš Sedláček (1977) (henceforth without accents) will be giving the 32nd Van der Leeuw lecture in Groningen, November 7 2014. The title of the lecture isEconomics as an Unorchestrated Orchestrator“. This reminds of Adam Smith’s Invisible Hand or modern-day recourse to The Great Divinator of “the financial markets”. Since the lecture is held in the Groninger Martini church the religious notion that God himself creates order comes to mind as well. In this RSA video Sedlacek refers to economics as the modern religion indeed. However, his lecture in Groningen will be refereed only by professor Barbara Baarsma (1969), CEO of SEO in Amsterdam.

Actually, the Foundation that organizes the lecture has as its main purpose to use that church for other cultural or social events rather than the dwindling religious services. Especially when the heating costs in November must be bridged before the uptake around Christmas, it is useful to organise some event to get people into the building. Since the building concerns a church, they found a theologian to name the lecture series after, even though Gerardus van der Leeuw (1890-1950) isn’t so remarkable compared to other Groningers Daniel Bernoulli (mathematician), Johan Huizinga (historian), Heike Kamerlingh Onnes (discoverer of superconductivity) or Hendrik Willem Mesdag (painter). Every human being is important and should be remembered however, so we can only hope that more cities take the opportunity to dedicate their lectures to those who are in danger of being forgotten especially when the weather turns cold.

Announcement 32nd Van der Leeuw Lezing (Source: screenshot website)

Announcement 32nd Van der Leeuw Lezing (Source: screenshot website)

That Sedlacek gives the lecture fits the confusion of location and purpose. Sedlacek does history and philosophy but uses the label of economics. Listeners in a church and partaking in a non-religious event should not mind another and lesser distortion. Unless we have returned to the historical situation that everything is religion anyway.

Sedlacek is known internationally for his 2011 book Economics of Good and Evil: The Quest for Economic Meaning from Gilgamesh to Wall Street, see this review by Samuel Brittan in the FT. The book is his thesis that was rejected by the Charles University, and his website mentions that he is still registered there as a Ph.D. student. I haven’t read that book but have read some reviews and watched also this video recorded in Amsterdam June 11 2013.

I know about Evil, since I wrote about the pure evil of the basic income. I know about Good since I wrote The simple mathematics of Jesus (2012). I know about Economics, see the About page. I still don’t know whether Sedlacek’s book is good or evil but it doesn’t look like economics to me, whatever Deirdre McCloskey says about it. A term used is “meta-economics” but that might be comparable to sociology perhaps. I settle for “history and philosophy while trying to focus on economic thought”.

The publisher “describes” the book as:

“Tomas Sedlacek has shaken the study of economics as few ever have. Named one of the “Young Guns” and one of the “five hot minds in economics” by the Yale Economic Review, he serves on the National Economic Council in Prague, where his provocative writing has achieved bestseller status. How has he done it? By arguing a simple, almost heretical proposition: economics is ultimately about good and evil.

[Comment by TC: Surely, since economics is not about good and evil, it is ground-shaking to turn economics into theology indeed. Doing so is not heretical but quite fitting in church. It is quite a miracle: to be at an economics department, stop doing economics, but convince other people that you are still doing economics. As people can believe that Jesus walked on water, they can also believe that you are doing economics. The same miracle was performed by mathematicians who said that they were doing economics but in fact continued doing mathematics.]

In The Economics of Good and Evil, Sedlacek radically rethinks his field, challenging our assumptions about the world. Economics is touted as a science, a value-free mathematical inquiry, he writes, but it’s actually a cultural phenomenon, a product of our civilization. It began within philosophy–Adam Smith himself not only wrote The Wealth of Nations, but also The Theory of Moral Sentiments–and economics, as Sedlacek shows, is woven out of history, myth, religion, and ethics.

[Comment by TC: Economics as a science ought to be value-free, but its application is in society and thus its application is immersed in values. Yes, there have been and still are many influences on the development on economic thought, but that does not take away that former distinction.]

“Even the most sophisticated mathematical model,” Sedlacek writes, “is, de facto, a story, a parable, our effort to (rationally) grasp the world around us.”

[Comment by TC: There is nothing new in this, that a mathematical model can be seen as a story or parable – except that it would tend to be consistent and more precise. So what is the point ? Can philosophy be set equal to mathematics, since both are “just stories” ?]

Economics not only describes the world, but establishes normative standards, identifying ideal conditions. Science, he claims, is a system of beliefs to which we are committed. To grasp the beliefs underlying economics, he breaks out of the field’s confines with a tour de force exploration of economic thinking, broadly defined, over the millennia. He ranges from the epic of Gilgamesh and the Old Testament to the emergence of Christianity, from Descartes and Adam Smith to the consumerism in Fight Club. Throughout, he asks searching meta-economic questions: What is the meaning and the point of economics? Can we do ethically all that we can do technically? Does it pay to be good?

[Comment by TC: (1) Economics does not establish normative standards. Economics enlightens such choices. Check e.g. Pareto Optimality: Economic models don’t impose this but elucidate the notion. (2) The latter quoted questions are useful for the talk between an economic scientist and a policy maker. (3) The inner value of economics lies in increased knowledge, as for any science. Like pure number theory in mathematics. (4) The outer value of economics lies in its application. Like using number theory for cryptography for secure bank accounts.]

Placing the wisdom of philosophers and poets over strict mathematical models of human behavior, Sedlacek’s groundbreaking work promises to change the way we calculate economic value.”

[Comment by TC: If philosophers and poets can do without bread and butter, they can be excluded from the economic calculation, and we indeed have something novel. Overall though, economics was developed to get away from those unscientific story-tellers.]

Sedlacek in Dutch VPRO "Tegenlicht" program, June 11 2013 (Source: screenshot)

Sedlacek in Dutch VPRO “Tegenlicht” program, June 11 2013 (Source: screenshot)

Let us conclude with the following points:

  1. Dutch VPRO and professor Baarsma do not report about the censorship of economic science by the directorate of the Dutch Central Planning Bureau since 1990.
  2. Dutch VPRO and professor Baarsma do pay attention to Tomas Sedlacek’s story that isn’t economics and that is at points unscientific.
  3. We can enjoy various points in Sedlacek’s tale. The history of economic thought and its precursors is interesting and it would require a worse author to destroy this. For example the analogy between Christianity and the calculation of sin and redemption is nice. Hopefully he included the invention of Purgatory for the collectors of interest too. But the book should be rewritten before it can be advised.
  4. Check my books DRGTPE and SMOJ referred to above, for the full story on getting an Economic Supreme Court, for a better orchestra.

PM. Since Sedlacek is from the Czech Republic and advised Vaclav Havel, he might take an interest in the point that my analysis in 1990 originated from the Fall of the Berlin Wall in 1989, and was targetted at handling the economic fall out, see this text. The history of Eastern Europe and Russia would have looked quite different when the directorate of the Dutch CPB had respected science – or others in the surrounding had made a correction.

H.J. (Johannes) Witteveen (1921) is best known as managing director of the IMF in 1973-1978.

Please note that the Bretton Woods Institutions IMF and Worldbank have wrong names. J.M. Keynes already complained to the Americans: “The Fund is a bank and the Bank is a fund !” (no exact quote). It would be better that the IMF is renamed to World Central Bank and the Worldbank into World Investment Bank, since this would strengthen their role and position also in public perception and discussion.

Following the First Oil Crisis 1973-74 Witteveen created the Supplementary Financing Facility, unofficially known as the Witteveen facility, to channel revenues from oil producers back to the consuming countries, to prevent a liquidity crisis amongst those consumers. The IMF book by James Boughton The silent revolutionassigns a later major role to Witteveen’s successors Jacques de Larosiere and Michel Camessus, but underestimates how Witteveen paved the way.

In the current crisis of 2007+, Witteveen pointed to requirements for a New Bretton Woods (Nov 20 2008, Financial Times). For Europe he advised a similar “facility” again by the IMF rather than the ECB (Aug 22 2011, Financial times, Business Insider).

Recently, Witteveen looked at the Dutch export surplus and the need for an investment strategy in The Netherlands itself.

We can observe that the Dutch surplus exists since 1981. When Germany started copying that, Southern Europe got into problems. I tend to agree with Witteveen on IS-LM but advise at the level of each nation: (a) an Economic Supreme Court, (b) National Investment Banks (NIBs), (c) the overall approach to reduce unemployment as discussed in my book DRGTPE.

My pre-crisis book is Definition & Reality in the General Theory of Political Economy (DRGTPE). My 2007+ papers on the crisis are collected in Common Sense: Boycott Holland (CSBH). A boycott of Holland is warranted because of the censorship of economic science by the Dutch government. That censorship pertains to the issue discussed below, and professor Witteveen’s discussion suffers seriously from not having the material under censorship.

Witteveen had been professor at Erasmus University since 1948. Apparently he never got time for an official farewell, and last week the old fox took the opportunity of a Valedictory Lecture to gather an audience and to present his analysis on that Dutch investment strategy (May 15 2014). The Lecture was published by the Dutch economics journal Economisch Statistische Berichten (ESB May 17 2014 p294-298). I thank the editors for permission to reproduce the lecture with my comments.

Cllick here to read the lecture and my comments on my website.

Witteveen also wrote books on universal sufism (not to be confused with islamic sufism), see his personal website. As a personal remark on my side: my father is also from 1921 but has stopped reading and writing. I am much impressed by Witteveen’s command of economics. Admittedly, Keynes solved these issues by IS-LM itself already in 1936 and by his proposal for an international trade currency (bancor). Our main problem since 1945 has been that politicians arrogantly proclaim to know it better.

Witteveen’s Valedictory Lecture is a major event in economics. It deserves to be treated with much respect and critical comment. It shows that the problem is not lack of knowledge from economic science but that the problem lies in the structure of decision making about economic policy.

The president of the Bundesbank Jens Weidmann came to Amsterdam on invitation by the president of the Dutch Central Bank Klaas Knot. The German Institute (DIA) of the University of Amsterdam organised a small conference where they presented their views and answered some questions from the audience. We can find Weidmann’s speech at the Bundesbank website.

Weidmann recalled that Amsterdam had been built on piles (poles) and then jumped to monetary stability: “But I am positive that if we learn from the sovereign debt crisis and do not falter in our efforts to push enough piles into the right parts of that tricky ground, the European monetary union can be preserved as a place of stability that is worth living in.”

A key point is that the ECB statute is targetted at controlling inflation. In the onslaught of the crisis since 2007 the ECB got an additional role in maintaining financial stability and preventing collapse, like with the supervision of the European Banking System (see the alphabet soup), but the Bundesbank considers it advisable that the ECB returns to its original role for stable money. A new Treaty is required, with a rejuvenated ECB and a new authority for monitoring the financial sector.

Thus, in a curious way, Weidmann suggested that he was irrelevant to talk to. Just let the ECB / Bundesbank manage inflation, forget about their existence, and talk to other people when you want to discuss financial stability. Having said this, didn’t stop Weidmann however in making his comments on monetary and financial stability.

A key point is that Basel III would need to be revised. Government debt is handled in the regulatory framework as risk free while the markets assign risks. See this report by Bloomberg 2011, when it was already an old issue. This weblog reported in 2012 about the visit of professor Bofinger to Amsterdam, who rejected that government debt could default since that would be some kind of bailout. Apparently there is little enthousiasm amongst regulators for amending Basel III, in particular amongst most countries other than Germany and Holland who would lose their risk free status. Weidmann turned on the screws however. He mentioned France as a “core country” that fails in its structural reforms and ought to suffer the consequences. In my impression Basel, Bofinger en Weidmann are stuck in a logical conundrum. I refer to my earlier paper for a solution approach Conditions for turning the ex ante risk premium into an ex post redemption for EU government debt.

Naturally the juridical status of the OMT came up, as it also was mentioned in an earlier weblog entry here. A professor from Leiden asked Weidmann whether he hadn’t put the authority of both the Bundesbank and the Bundesverfassungsgericht at stake, by voting against the OMT and publicly speaking out against it. “We are not lemmings,” Weidmann answered. In terms of their fear for inflation Germans actually are like lemmings, but obviously he has a good point that Germany shouldn’t be asked to pay for what other nations squander, and obviously OMT is a curious construct while there are much better approaches, see my Economic Plan for Europe and paper Money as gold versus money as water.

The joker of the afternoon came in the person of former EU commissioner Frits Bolkestein. He wondered whether Southern Europe should not take a vacation from the Euro, return to their original currencies, re-establish competitiveness, get some help in doing so, and then apply for the Euro again. He glossed over a question like how to handle the debt that is denominated in Euro’s. Weidmann and Knot remained polite and gave the obvious answers. A monetary union exists by stability and not a revolving door. Financial markets would sniff out potential departures and the speculations would force them. Bolkestein’s idyllic vacation is a recipe for economic chaos.

Bolkestein about a Southern European Vacation

Bolkestein (below right) asks about a Southern European Vacation from the Euro

PM. A Dutch report by DIA is here. The text by Klaas Knot is here.  Here is an interview with Weidmann on Dutch national television – in German with Dutch titles. The closing statement by Weidmann is that we can already see the light at the end of the tunnel. In my analysis he can only point to a small air vent that also leaks some light. We will not suffocate before we die from starvation.

The summary of this weblog has already been given in the About menu plus the earlier post Cause and Cure of the Crisis. Now there is a Video as well, see above menu.

The sound recording isn’t that good yet but I am learning how to use the software. My speech speed is rather slow, it doesn’t have the pitch as e.g. is common on TED or with some journalists. You can run the video at a higher speed up to getting me quacking like a duck and approximate that TED idea.

My thanks go to YouTube, Microsoft Expression Encoder and Afsbinwin of in particular for the present result. I also learned from the software of Diego Uscanga of aTube Catcher and the Audacity team for sound editting, and the Media Player Codec Pack, and WinFF (GUI) for converting MWV into MPEG4. It seems that MsEE allows edits and encodings to MWV that are okay for Ms Media Player but that can get stuck in YouTube Processing, so that you can wait for days for something to happen. FFmpeg / WinFF indeed render errors on timestamp ordering in such a MWV file. Repacking that MWV into ASF with Afsbinwin apparently removes such errors, and YouTube Processing accepts the file. The cost is, however, that the sound turns bad at particular places where there has been an edit (not all). This audio drop happens at the same spots both in Asfbinwin and in the conversion from MWV to MPEG4, so I presume that the main problem lies in MsEE indeed. Perhaps Bill Gates can look into this.

While I was waiting for YouTube Processing, I had the chance to look at some videos of “the competition”. YouTube noticed that I was interested in the crisis and thus it presented me with recordings of George Soros, Jim Rogers, Peter Schiff, Richard Duncan, and so on, with various doom scenarios of world economic collapse. Especially the ticking National Debt time bombs draw attention. Deacon Swayne of the British magazine MoneyWeek has a 47 minutes “documentary” on The debt time bomb that is Britain. Though much of that “documentary” is accurate, it turns out to be a long commercial advising you to rely on MoneyWeek. My suggestion is that you watch my Video and check how much is explained of the crisis.

It cannot be denied that Soros, Rogers, Schiff, Duncan, Swayne and others, with their state of knowledge, point to relevant angles in world developments. But they lack the synthesis in economic theory that is presented here. In the same manner, governments study the various scenarios of world development. Their vested interest is to enhance stability rather than scare mongering. You wouldn’t like it when Angela Merkel had a broadcast every week like Peter Schiff about her ideas about the impending world collapse and how everyone should work hard and save for the future. Nevertheless, these governments also lack the proper knowledge, due to the censorship of economic science by the Dutch government (that doesn’t know what it is censoring).

I did enjoy the video by Bill Still on the Wizard of Oz. I knew from years back that the “Yellow Brick Road” was a reference to the gold standard, and so on, but Bill fills in historical details. It is also a serious issue whether money is in control by the state or by private banks, see my paper Money as gold versus money as water (2013). It is a no-brainer that money better be controlled by a democratic government.

It is a logical mismatch when the supply of money is associated with a rate of interest. If a private central bank with a monopoly on money creates a supply of 100 bn dollars in paper bills for use by the general public, and this supply is returned by the public to the bank at the end of the year, then it is physically impossible that the public can also pay an additional 5% rate of interest in terms of said paper bills, since all 100 bn dollars in paper bills have already been returned. It gives curious psychological power to such a bank to demand that the 5% interest is paid in terms of its own bills, though everyone should start laughing that the bank demands bills that it hasn’t issued itself. The current arrangements for the US Federal Reserve and the Bank of England suggest that there is private profit taking at the expense of those governments for no good reason (except lack of economic understanding in parliaments).

But it is incorrect when Bill Still suggests that issuance of money by the government means that there will be no National Debt. It is still possible that the government borrows from the public and builds up debt. It is advisable that the government does so, since e.g. pensioners would want a secure investment. That the current National Debts are excessive, is another story, see my Video.

On July 19 professor Peter Bofinger was in Amsterdam for a lecture organised by the German Embassy in The Hague and the Duitsland Instituut. Bofinger is member of the Sachverständigenrat – comparable to the Council of Economic Advisors in the USA. These German “Five Wise Men” (as they are called in Germany) have rather famously proposed that Europe puts all government debt above 60% in a Redemption Fund. People who understand Dutch or German may want to listen to this short interview on BNRadio. The discussion this evening was in English however.

Bofinger presented an analysis that also can be seen in the Tommaso Padoa-Schioppa Group June 2012 or his earlier lessons May 2011, where the latter is only 5 pages and may be more attractive for a quick read.

Bofinger presented the choice between either more EU integration or deliverance to the markets and the rating agencies. A Euro 2.0 would require a Banking Union and supervision by Brussels on budgets. Who would not stick to the rules could be evicted.

In his view, Greece, Spain, Portugal and Italy have really done much to redress their problems, and deserve to be aided. He also accepts that Germany causes part of the problem by its export surplus, partially caused by stagnant wages.

Professor Lex Hoogduin from Amsterdam was invited to comment on Bofinger’s analysis. His main point was that all depends upon the details, and that it is difficult to say something for or against something when the details aren’t clear yet. Well, great, this is like kicking in an open door.

Hoogduin had one good point: “Expelling a member turns a union into a fixed rate system, and we know that those are instable because of speculation.” The comment made Bofinger doubt. It is nice to see that a speaker shows himself so open on issues that he allows doubt to show. Indeed, in my own proposal to handle debts and rates, a member remains in the union but only loses support from the center.

Overall Hoogduin agreed that more integration was the best option, and that more supervision on maintaining the rules did not turn the EU into a ‘superstate’.

From the audience a student of history from Leiden remarked on the following, apparently not seen by Hoogduin. Bofinger had criticized the markets that rates of interest had converged before the crisis so that they did not include country risks. He also stated that it had been an error to partly default Greek debt. He advised that no eurozone debt should default in the future. This caused the student to point out the inconsistency. If no debt defaults then there should be only a small liquidity premium. To this, Bofinger didn’t have an answer. See again to my proposal for the proper perspective, where so-called interest differentials are translated into proper annuities that contain redemption.

The monitor of the discussion was Sandra Phlippen, chief editor of the Dutch economics magazine ESB. She observed that Greek national debt is insustainable and that part must be defaulted. There has been an article on Greek debt in ESB. A small difficulty here is that ESB puts its articles behind a pay barrier, and that its articles are in Dutch anyway, so that we find a small community of discussants here, and it seems of little use to provide links here. Anyway, Bofinger rejected such defaults and stated that all government debt should be secure and hence redeemed. Indeed, the proposal for the European Redemption Fund makes this feasible. His flat denial left Sandra bewildered.

My own suggestion in the Economic Plan for Europe (September 2011, written a short time before that proposal of a Redemption Fund) was that the ECB steps in. This is based upon the consideration that the inclusion of Italy and Greece in the eurozone was a political decision anyway, so that we merely need to be consistent in the special treatment that is required here.

To my suggestion that we need investment banks, Bofinger referred to the Schuldenbremse or the zero deficit rule that Germany adopted, see his lessons again, and that now is planned for the whole of the EU.

It would seem that if Bofinger studies my book DRGTPE and revises his position in the light of the new analysis there, that there is ample scope for agreement.

Now, given that it appears to be possible to have a good discussion in Amsterdam, at the international level too, is there still need for a boycott of Holland, till the censorship of science there is resolved ? I would say: Yes, of course, there is still censorship, and it wasn’t resolved by this neat discussion on July 19. I felt somewhat embarrassed by the weak performance by Hoogduin, who does nothing about that censorship and who is one of the professors of economics that need to be fired for lack of respect for the integrity of economic science. It was a good discussion but my contribution felt like being shackled in chains.

In the next blog, I will return to the EU ‘superstate’ and its risks of war.

This is a summary of an Economic plan for Europe (see the links for the supporting longer papers):

(1) In the short term, economies and policy makers are under too much stress, which is painful for the people who are suffering and unwise for policy makers who need a cool head. Thus my advice is to allow for eurozone bonds for some years at 3% of GDP max per annum. I advise against eurozone bonds as the long term solution but their use allows a short term moratorium.

(2) For the longer term: To resolve future government debt and the trajectory to stability around 60% GDP my suggestion is to create a regime ladder. Below 80% EU members are free to use bullet bonds but with some support from the ECB to maintain the range of the rate of discount, between 80-90% they have to use annuity bonds and still have support of the ECB to control the rate of discount, and above 90% they are free again but without any support. Investors thus have time to get out in time. This requires a change of the treaty on the ECB. See my note in the Royal Economic Society Newsletter or the longer paper.

(3) For the longer term as well: The suggestion is to focus on four points: (1) better governance, (2) investments for employment and growth, (3) fiscal policy based upon functional finance, and (4) monetary stability. Better governance is attained not by surrendering more power to Brussels but by having a constitutional Economic Supreme Court per member state. The debt overhang of Italy and Greece can be sterilized within the monetary system provided that they provide some collateral, such as establishing international investment zones. National Investment Banks are crucial for the functioning of an economy. See the longer paper or the interview by graduate student Protesilaos Stavrou, or the article in eKathimerini. (Actually, I fid the articles there by Nick Malkoutzis quite informative.)

These are the main points. This summary seems useful since it is easy to lose focus. More details are at my 2007+ crisis page. This economic plan is based upon the new synthesis in economic theory presented in DRGTPE.

PS. For the USA and the G20: check out this.