Everything has a cost, or so the story goes, especially time. In the Greek case we now know an additional item on the mounting bill: the country is back in recession. The issue is who – apart of course from the long-suffering Greeks themselves – will pay the extra costs of the latest imbroglio.
In our model, people advance along at least locally optimal career paths in expansions, and then have to find a new one in recessions. So you’d expect job tenure, marked in green, to reflect the business cycle – people accumulate it during expansions and lose it in recessions – and that’s precisely what we see. In 1996-2000, when unemployment dropped sharply, it was a strongly negative contributor to wage growth. After that, it began to be a positive contribution as the new hires progressively accumulated tenure and advanced along their career paths. We also see a bit of this after the .com crash. However, it didn’t become a big negative item after the great financial crisis, perhaps because unemployment didn’t rise as much as expected.
The effect of change in qualifications has been quite surprising; it was negative for most of the boom, and then very positive immediately post-crisis.
From 1999 to 2007, workers changing between occupations seems to have been a significant contributor to wage growth (about +0.2% a year). Between 1996 and 2002, workers changing between industries was a positive contribution, but it then swung negative between 2002 and 2006, before becoming positive again in 2007.
During the great financial crisis, it was significantly negative, and it then became positive in the recovery. Since then, it’s disappeared as a factor. Change between occupations, however, was strongly positive in the crisis, erratic and noisy in the recovery, and since Q1 2013, has become very strongly negative. So has the effect of job tenure. At the moment, the combination of tenure and occupational change accounts for -0.75 percentage points of wage growth. The strong negative tenure effect is comparable to that in the late 90s expansion, implying significant net hiring. The occupational change effect is, however, unprecedentedly awful, and it is increasing.
This is consistent with the perverse selection I proposed in the original post. The big difference between now and the 90s experience, though, is that the occupational shift effect is much bigger.
Which is also consistent with making Jobseekers’ Allowance claimants stand around Finsbury Park station wearing a hi-viz vest to no particular purpose.
He must be chosen from among you as a scapegoat. Hipponax
One of the more intriguing aspects of the whole modern Greek drama is the tragicomic way the country seems to be constantly condemned to live out well known themes which come from its own mythology. The latest example is the way what was once the cradle of European civilization has allowed itself to be converted into the role model for everything its fellow Europeans are not. Or at least, this is the story we are supposed to believe. Continue reading
The Swiss Franc unpegging from the euro 15 January this year brought the risk of foreign currency borrowing for unhedged borrowers yet again to the fore. In Central, Eastern and South-Eastern Europe lending in Swiss Franc and other foreign currency, most notably in euros, has been common since the early 2000s, often amounting to more than half of loans issued to households. The 2008 crisis put some damper on this lending, did not stop it though and in addition legacy issues remain. Now, actions by foreign currency borrowers in various countries are also unveiling a less glorious aspect: mis-selling and breach of European Directives on consumer protection. Senior bankers involved in foreign currency lending invariably claim that banks could not possibly foresee FX fluctuation. Yet, all of this has happened earlier in different parts of the world, most notably in Australia in the 1980s.
“The 2008-09 financial crisis has highlighted the problems associated with currency mismatches in the balance sheets of emerging market borrowers, particularly in Emerging Europe,” economists at the European Bank of Reconstruction and Development, EBRD, Jeromin Zettelmeyer, Piroska Nagy and Stephen Jeffrey wrote in the summer of 2009.*
In the grand scheme of Western and Northern European countries this mismatch was a little-noticed side-effect of the 2008 crisis. But at the EBRD, focused on Central, Eastern, South East European, CESEE, countries, its chief economist Erik Berglöf and his colleagues worried since foreign currency, FX, lending was common in this part of Europe. FX lending per se was not the problem but the fact that these loans were to a great extent issued to unhedged borrowers, i.e. borrowers who have neither assets nor income in FX. This lending was also partly the focus of the Vienna Initiative, launched in January 2009 by the EBRD, European and international organisations and banks to help resolve problems arising from CESEE countries mainly being served by foreign banks.
In Iceland FX lending took off from 2003 following the privatisation of the banks: with the banks growing far beyond the funding capacity of Icelandic depositors, foreign funding poured in to finance the banks’ expansion abroad. Icelandic interest rates were high and the rates of euro, Swiss Franc, CHF and yen attractive. Less so in October 2008 when the banks had collapsed: at the end of October 2007 1 euro stood at ISK85, a year later at ISK150 and by October 2009 at ISK185.
After Icelandic borrowers sued one of the banks, the Supreme Court ruled in a 2010 judgement that FX loans were indeed legal but not FX indexed loans, which most of household loans were. It took further time and several judgements to determine the course of action: household loans were recalculated in ISK at the very favourable foreign interest rates. Court cases are still on-going, now to test FX lending against European directives on consumer-protection.
In all these stories of FX loans turning into a millstone around the neck of borrowers in various European countries senior bankers invariably say the same thing: “we couldn’t possibly foresee the currency fluctuations!” In a narrow sense this is true: it is not easy to foresee when exactly a currency fluctuation will happen. Yet, these fluctuation are frequent; consequently, if a loan has a maturity of more than just a few years it is as sure as the earth revolving around the sun that a fluctuation of ca. 20%, often considerably more, will happen.
Interestingly, many of the banks issuing FX loans in emerging Europe did indeed make provisions for the risk, only not on behalf of their clients. According to economist at the Swiss National Bank, SNB, Pinar Yesin “banks in Europe have continuously held more foreign-currency-denominated assets than liabilities, indicating their awareness of the exchange-rate-induced credit risk they face.”
Indeed, many of the banks lending to unhedged borrowers took measures to hedge themselves. Understandably so since it has all happened before. Recent stories of FX lending misery in various European countries are nothing but a rerun of what happened in many countries all over the world in earlier decades: i.a., events in Australia in the 1980s are like a blueprint of the European events. In Australia leaked documents unveiled that senior bankers knew full well of the risk to unhedged borrowers but they kept it to themselves.
It can also be argued that given certain conditions FX lending led to systematic lending to CESEE clients borrowing more than they would have coped with in domestic currency making FX lending a type of sub-prime lending. What now seems clear is that cases of mis-selling, unclear fees and insufficient documentation now seem to be emerging, albeit slowly, in European FX lending to unhedged borrowers.
FX lending in CESEE: to what extent and why
A striking snapshot of lending in Emerging Europe is that “local currency finance comes second,” with the exception of the Czech Republic and Poland, as Piroska Nagy pointed out in October 2010, referring to EBRD research. With under-developed financial markets in these countries banking systems there are largely dominated by foreign banks or subsidiaries of foreign banks.
This also means, as Nagy underlined, that there is an urgent need to reduce “systemic risks associated with FX lending to unhedged borrowers” as this would remove key vulnerabilities and “enhance monetary policy effectiveness.”
Although action has been taken in some of the European countries hit by FX lending, “legacy” issues remain, i.e. problems stemming from prolific FX lending in the years up to 2008 and even later. In short, FX lending is still a problem to many households and a threat to European banks, in addition to non-performing loans, i.e. loans in arrears, arising from unhedged FX lending.
The most striking mismatch in terms of banks’ behaviour is evident in the operations of the Austrian banks that have been lending in FX at home in Austria the euro country, but also abroad in the neighbouring CESEE countries. In Austria, FX loans were available to wealthy individuals who mostly hedged their FX balloon loans (i.e. a type of “interest only” loans) with insurance of some sort. Abroad however, “these loans in most cases had not been granted mostly to relatively high income households,” as somewhat euphemistically stated in the Financial Stability report by the Austrian Central Bank, OeNB in 2009.
There is plenty of anecdotal evidence to conclude that during the boom years banks were pushing FX loans to borrowers, rather than the other way around. Thus, it can be concluded that the FX lending in CESEE countries was a form of sub-prime lending, that is people who did not meet the requirements for borrowing in the domestic currency could borrow, or borrow more, in FX. This would then also explain why FX loans to unhedged borrowers did become such a major problem in these countries.
Where these loans have become a political issue FX borrowers have often been met with allegations of greed; that they were trying to gain by gambling on the FX market. In 2010 Martin Brown, economist at the SNB and two other economists published a study on “Foreign Currency Loans – Demand or Supply Driven?” They attempted to answer the question by studying loans to Bulgarian companies 2003-2007. What they discovered was i.a. that for 32% of the FX business loans issued in their sample the companies had indeed asked for local currency loan.
“Our analysis suggests that the bank lends in foreign currency, not only to less risky firms, but also when the firm requests a long-term loan and when the bank itself has more funding in euro. These results imply that foreign currency borrowing in Eastern Europe is not only driven by borrowers who try to benefit from lower interest rates but also by banks hesitant to lend long-term in local currency and eager to match the currency structure of their assets and liabilities.”
In other words, the banks had more funding in euro than in the local currency and consequently, by lending in FX (here, euro), the banks were hedging themselves in addition to distancing themselves from instable domestic conditions. A further support for this theory is FX lending in Iceland, which took off when the banks started to seek funding on international markets. (The effect on banks’ FX funding is not uncontested: further on reasons for FX lending in Europe see EBRD’s “Transition Report” 2010, Ch. 3, esp. Box 3.2.)
The Australian lesson: with clear information “…nobody in their right mind… would have gone ahead with it”
Financial deregulation began in Australia in the early 1970s. Against that background, the Australian dollar was floated in December 1983. In the years up to 1985 banks in Australia had been lending in FX, often to farmers who previously had little recourse to bank credit. However, the Australian dollar started falling in early 1985; from end of 1984 to the lowest point in July 1986 the trade-weighted index depreciated by more then a third. Consequently, the FX loans became too heavy a burden for many of the burrowers, with the usual ensuing misery: bankruptcy, loss of homes, breaking up of marriages and, in the most tragic cases, suicide.
The Australian bankers shrugged their shoulders; it had all been unforeseeable. FX borrowers who tried suing the banks lost miserably in court, unable to prove that bankers had told them the currency fluctuations would never be that severe and if it did the bank would intervene. As one judge put it: “A foreign borrowing is not itself dangerous merely because opportunities for profit, or loss, may exist.” The prevailing understanding in the justice system was that those borrowing in FX had willingly taken on a gamble where some lose, some win.
But gambling turned out to be a mistaken parallel: a gambler knows he is gambling; the FX borrowers did not know they were involved in FX gambling. The borrowers got organised, by 1989 they had formed the Foreign Currency Borrowers Association and assisted in suing the banks. The tide finally turned in favour of the borrowers and against the banks; the courts realised that unlike gamblers the borrowers had been wholly unaware of the risk because the banks had not done their duty in properly informing the FX borrowers of the risk. But by this time FX borrowers had already been suffering pain and misery for four to five years.
What changed the situation were internal documents, two letters, tabled on the first day of a case against one of the banks, Westpac. The letters, provided by a Westpac whistle-blower, John McLennan, showed that when the loan in question was issued in March 1985 the Westpac management was already well aware of the risk but said nothing to clients. Staff dealing with clients was often ignorant of the risks and did not fully understand the products they were welling. When it transpired who had provided the documents Westpac sued McLennan – a classic example of harassment whistle-blowers almost invariably suffer – but later settled with McLennan.
As a former senior manager summed it up in 1991: “Let us face it – nobody in their right mind, if they had done a proper analysis of what could happen, would have gone ahead with it.” (See here for an overview of some Australian court cases regarding FX loans).
FX borrowers of all lands, unify!
“Probably like a lot of other people (.) I felt that the banks knew what they were doing, and you know, that they could be trusted in giving you the right advice,” is how one Westpac borrower summed it up in a 1989 documentary on the Australian FX lending saga.
This misplaced trust in banks delayed action against the banks in Australia in the 1980s and in all similar sagas. However, at some point bank clients realise the banks take their care of duty towards clients lightly but are better at safeguarding own interests. As in Australia, the most effective way is setting up an association to fight the banks in a more targeted cost-efficient way.
This has now happened in many European countries hit by FX loans and devaluation. At a conference in Cyprus in early December, organised by a Cypriot solicitor Katherine Alexander-Theodotou, representatives from fifteen countries gathered to share experience and inform of state of affairs and actions taken in their countries regarding FX loans. This group is now working as an umbrella organization at a European level, has a website and aims i.a. at influencing consumer protection at European level.
Spain is part of the euro zone and yet banks in Spain have been selling FX loans. Patricia Suárez Ramírez is the president of Asuapedefin, a Spanish association of FX borrowers set up in 2009. She says that since the Swiss unpegging in January the number of Asuapedefin members has doubled. “There is an information mismatch between the banks and their clients. Given the full information, nobody in their right mind would invest all their assets in foreign currency and guarantee with their home. Banks have access to forecasts like Bloomberg and knew from early 2007 that the euro would devalue against the Swiss Franc and Japanese Yen.”
As in Australia, the first cases in most of the European countries have in general and for various reasons not been successful: judges have often not been experienced enough in financial matters; as in Australia clients lack evidence; there tends to be a bias favouring the banks and so far, only few cases have reached higher instances of the courts. However, in Europe the tide might be turning in favour of FX borrowers, thanks to an fervent Hungarian FX borrower.
The case of Árpád Kásler and the European Court of Justice
In April 2014 the European Court of Justice, ECJ, ruled on a Hungarian case, referred to it by a Hungarian Court: Árpád Kásler and his wife v OTP Jelzálogbank, ECJ C?26/13. The Káslers had contested the bank’s charging structure, which they claimed unduly favoured the bank and also claimed the loan contract had not been clear: the contract authorised the bank to calculate the monthly instalment on the basis of the selling rate of the CHF, on which the loan was based, whereas the amount of the loan advanced was determined by the bank on the basis of the buying rate of the CHF.
After winning their case the bank appealed the judgement after which the Hungarian Court requested a preliminary ruling from the ECJ, concerning “the interpretation of Articles 4(2) and 6(1) of Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts (OJ 1993 L 95, p. 29, ‘the Directive’ or ‘Directive 93/13’).”
In its judgment the ECJ partly sided with the Káslers. It ruled that the fee structure was unjust: the bank did not, as it claimed, incur any service costs as the loan was indeed only indexed to CHF; the bank did not actually go into the market to buy CHF. The Court also ruled that it was not enough that the contract was “grammatically intelligible to the consumer” but should also be set out in such a way “that consumer is in a position to evaluate… the economic consequences” of the contract for him. Regarding the third question – what should substitute the contract if it was deemed unfair – the ECJ left it to the national court to decide on the substitute.
Following the ECJ judgement in April 2014, the Hungarian Supreme Court ruled in favour of the Káslers: the fee structure had indeed favoured the bank and was not fair, the contract was not clear enough and the loan should be linked to interest rates set by the Hungarian Central Bank. – As in the Australian cases Kásler’s fight had taken years and come at immense personal pain and pecuniary cost.
Hungarian law are not precedent-based, which meant that the effect on other similar loan contracts was not evident. In July 2014 the Hungarian Parliament decided that banks lending in FX should return the fee that the Kásler judgement had deemed unfair.
The European Banking Authority, EBS is the new European regulator. The ECJ ruling in many ways reflects what the EBA has been pointing from the time it was set up in 2011. In its advice in 2013 on good practice for responsible mortgage lending it emphasises “a comprehensive disclosure approach in foreign currency lending, for example using scenarios to illustrate the effect of interest and exchange rate movements.”
Calculated gamble v being blind-folded at the gambling table
“Since the ECJ judgment in the Kásler case, judges in Spain have started to agree with consumers from banks,” says Patricia Suárez Ramírez. So far, anecdotal evidence supports her view that the ECJ judgment in the Kásler case is, albeit slowly, determining the course of other similar cases in other EU countries.
The FX loans were clearly a risk to unhedged borrowers in the countries where these loans were prevalent. If judgements to come will be in favour of borrowers, as in ECJ C?26/13, the banks clearly face losses: in some cases even considerable losses if the FX loans will have to be recalculated on an extensive scale, as did indeed happen in Iceland.
Voices from the financial sector are already pointing out the unfairness of demands that the banks recalculate FX loans or compensate unhedged FX borrowers. However, it seems clear that banks took a calculated gamble on FX lending to unhedged borrowers. In the best spirit of capitalism, you win some you lose some. The unfairness here does not apply to the banks but to their unhedged clients, who believed in the banks’ duty of care and who, instead of being sold a sound product, were led blind-folded to the gambling table.
*The first draft was written in July 2009; published 2010 as EBRD Working Paper.
This is the first article in a series on FX lending in Europe: the unobserved threat to FX unhedged borrowers – and European banks.The next article will be on Austrian banks, prolific FX lenders both at home and abroad, though with an intriguing difference. The series is cross-posted on Icelog.
The WSJ’s Simon Nixon spelled it out for us in his “QE is Working Better than the ECB Dared Hope” article: “one month into the ECB’s €1 trillion ($1.06 trillion) quantitative-easing program, and ECB President Mario Draghi was only too happy to take credit for a remarkable turnaround in the economy’s fortunes at Wednesday’s news conference.” And he goes on to give examples:
“Growth forecasts have been continually revised up since January when the program was announced: the International Monetary Fund said this week it now expects the eurozone to grow by 1.5% in 2015. Business and consumer confidence are the highest since 2007. Bank lending is finally picking up.”
“The strongest growth is coming from former crisis countries: Spain is forecast to grow by up to 3% and Ireland up to 4% this year. Meanwhile German policy makers fret that with growth likely to hit 2.5%, the economy may overheat.”
Naturally, as he also says, “not all of this can be traced to quantitative easing.” But then, here comes the point: “Indeed, if the ECB had delayed its decision on quantitative easing until March, as the Bundesbank had urged, it may have concluded it didn’t need to buy any bonds at all.” Continue reading
They say the first rule of editing is “kill your darlings”. The first rule of science, however, is “sacrifice your darlings humanely in accordance with the research ethics committee guidelines, but keep their brains for further investigation”. So it is with this post. Per Mason, apparently the GFC looks a lot different to past recessions and it’s important to include the full span of the ECEC data back to 1986. So here goes.
The ECEC civilian workers series doesn’t go back to 1986, and neither does all workers, so I picked on the series for “private industry” – after all you’d expect public sector employment to be less responsive to the business cycle by definition – which does. The orange dots on the chart mark ECEC data points, while the blue ones mark the composition-weighted ECI series for private industry. ECEC after 2002 is quarterly, and is averaged to give an annual figure.
The big orange outlier is 2002. ECEC was issued as a slightly different series in 2002-2003, so perhaps we should exclude that one. I’ve plotted regression lines for the two series, orange and blue respectively, and for ECEC excluding 2002, black.
As you can see, ECI is still more cyclical than ECEC (R^2=0.33 vs 0.03 – ten times as much). Excluding 2002 helps a bit, but not enough (R^2=0.33 vs 0.11, three times as much). The correlation between the change in ECEC for the private sector and the output gap is 0.19, and that between private sector ECI and the output gap is 0.58. The blue outlier is 1985-1986.
Purely visually, it looks like the difference between the two series is in fact greatest in the 1980s, but any effect is accounted for by three data points (’86, ’87, ’88) and in any case, it seems to have disappeared 30 years ago. Alternatively, the BLS has changed the method it uses to collect ECEC several times in that period and this might be an artefact.
Mariano Rajoy is a man who is not shy when it comes to being controversial, as the storm surrounding his stance over the recent Greek bailout negotiations clearly illustrates (and here). So it is perhaps not surprising that he did not notably blush when he informed a Madrid audience recently that “In many ways, the crisis is history.” Such was the storm that followed that he was forced to at least partially retract the offending phrase after a meeting with union officials some four days later. “In many ways the crisis is history, but its consequences are not,” he clarified.
Of course all of this is mainly political rhetoric at the start of what is set to be an election year, but still, it does raise interesting questions. Where exactly is Spain? What is the outlook for the future? Is the country still in crisis, or is it, as Rajoy 2.0 suggests simply suffering from the legacy of an earlier one? These questions are not as easy to answer as they seem at first sight, nonetheless in what follows I will take a shot at it. Continue reading
Just to follow up on this post, a simple test of the model would be to check if the ECEC (i.e. not normalised for compositional shifts) wages series is strongly correlated with the output gap. Output gap is easy enough – real potential GDP and real GDP are in FRED, and we convert this to a gap expressed in % of GDP:
Looks like a nice smooth correlation, and in fact the correlation coefficient is a very decent 0.51 for the annual data from 1991 to 2014. For the period 2003-2014 I’ve averaged the quarterly observations. But that’s just the classical effect, right? We need to compare the two indices. Here’s a plot with both series from 2002 to 2014 against the output gap.
It doesn’t look like I can replicate the result that the ECEC is more cyclical than the ECI, at least for the period 2002-2014. The correlation between the annual change in ECI and the output gap for that period is 0.83 and that for ECEC is 0.73. The covariance in ECEC is higher than ECI but both are really low (0.03 and 0.01).
JW Mason has an interesting discovery among the data. Specifically, it looks like the US data series for wages, normalised for shifts in the composition of jobs, is much less cyclical than the raw data. In other words, the business cycle seems to affect wages through composition shifts. In recessions, people lose jobs and eventually get hired back into ones with lower productivity and pay than they had before. People who manage to stick to their jobs through the crisis don’t see much difference. In booms, people who lose their jobs (or quit) tend to get hired into ones with higher productivity, and pay, than they had before.
This makes sense. Imagine that people try to pick a job that suits them – or in economicspeak, that maximises their labour productivity. Imagine also that firms try to hire people who suit their requirements. I doubt this will be very difficult. This is a pretty basic market setup, matching workers and vacancies. Now, consider that people tend to acquire skills and knowledge as they work. This might be something exciting, or it might be as dull as someone in sales building up a contacts book. As a result, people will tend to get onto some sort of career path, picking a speciality and getting better at it.
This might be horizontal – people with a highly transferable skill who move across industries – but I think it’s more likely to be vertical. As they gain in skill, knowledge, or just insidership, they are likely to get paid more. We should at least consider that this matches higher productivity. But then, there’s an explosion – suddenly a lot of firms fail, and their employees are on the dole. They now need to search their way back into work. It is likely, at least, that if they have to find it in another sector or even another firm they will lose some of the human capital they acquired in the past. The unemployed are suddenly driven off their optimal productivity path, and are usually under pressure to take any job that comes along, no matter how suboptimal. Until they get back to where they were before the crisis, on their new paths or on their old ones, the economy will forego the difference between their potential and actual production. You could call it an output gap, but that’s taken, so let’s call it the snakes-and-ladders model.
This, in itself, is enough to explain why unemployment is a thing – you can’t price yourself back into a job with a firm that has gone bust – and why productivity might be depressed for some time post-crisis. In the long term people will climb the ladder again, but this is deceptive. Society, and even firms, can think of a long term. Individuals cannot, as life is short. As the man said – in the long run, we are all dead. Hanging around at reduced productivity is a waste of your time. The recovery phase represents a substantial deadweight loss of production to everyone, concentrated on the unemployed. And there are dynamic effects. Contact books get stale, and technology changes, so the longer people stay either unemployed or underemployed, the bigger the gap. This little model also gives us hysteresis.
But we can go further with the snakes-and-ladders model. Markets, we are often told, are information-processing mechanisms. Let’s look at this from a Diego Gambetta-inspired signalling perspective. The only genuinely reliable way to know if someone is any good at a job is to let them try. I have, after all, every reason to pad my CV, overstate my achievements, and conceal my failures. The only genuinely reliable way to know if someone is an acceptable boss is to work for them. They have every reason to talk in circles about pay and repress their authoritarian streak.
In a tight labour market, people move along close-to-optimal career paths. In doing so, they gain both experience, and also reputation, its outward sign. Importantly, they also gain information about themselves – you don’t know, after all, if you can do the job until you try. The same process is happening with firms and with individual entrepreneurs or managers. Because the information is the product of actual experience, it is costly and therefore trustworthy.
Now let’s blow the system up. We introduce a shock that causes a large number of basically random firms to fail and sack everyone. Because the failure of these firms is not informative about the individuals in them, the effect is to destroy the accumulated information in the labour market. Whatever the workers knew about Bust plc is now irrelevant. In so far as they’re now looking for jobs outside the industry, what Bust plc knew about them is also irrelevant. In the absence of information, the market for labour is now in an inefficient out-of-equilibrium state, where it will stay until the information is re-created. Walrasian tatonnement, right?
This explains an important point in Mason’s data that we’ve not got to yet. Why should people thrown off their career paths take much lower productivity jobs? You don’t need much information to know if someone can mow the lawn. In the post-crisis, disequilibrium state, low productivity jobs are privileged over high productivity jobs.
It strikes me that this little model explains a number of major economic problems. The UK’s productivity paradox, for example, is nicely explained by a huge compositional shift, in part driven by labour market reforms designed to make the unemployed take the first job-ish that comes along. Students who graduate into a recession lose out by about $100,000 over their lives. Verdoorn’s law, the strong empirical correlation between productivity and employment, also seems pretty obvious. Axel Leijonhufvud’s idea of the corridor of stability also fits. In the corridor, the market is self-adjusting, but once it gets outside its control limits, anything can happen.
And, you know, despite all the heterodoxy, it’s microfounded. Workers and employers are entirely rational. Money is just money. It’s not quite simple enough to have a single representative agent, because it needs at least two employers and two workers with dissimilar endowments, but it doesn’t need any actors who aren’t empirically observable.
It also has clear policy implications. If the unemployed sit it out and look for something better, you would expect a jobless recovery and then a productivity boom – like the US in the 1990s. If the unemployed take the first job-like position that comes along, you would expect a jobs miracle with terrible productivity growth, flat to falling wages, and a long period of foregone GDP growth. Like the UK in the 2010s. And if your labour market institutions are designed to prevent the information destruction in the first place, with a fallback to Keynesian reflation if that doesn’t cut it? Well, that sounds like Germany in the 2010s.
Call it Hayekian Keynesianism. Macroeconomic stabilisation is vital to keep the information-processing function of the labour market from breaking down.
That said, I wouldn’t be me if I didn’t point out that there are a whole lot of structural forces here that discriminate against specific groups. The post-crisis skew to low productivity jobs wouldn’t work, after all, if workers weren’t forced sellers of labour to capitalists. And there is one very large group of people who tend to get kicked off their optimal career path with lasting consequences. They’re about 50% of the population.
“After the Great Depression, secular stagnation turned out to be a figment of economists’ imaginations……..it is still too soon to tell if this will also be the case after the Great Recession. However, the risks of secular stagnation are much greater in depressed Eurozone economies than in the US, due to less favourable demographics, lower productivity growth, the burden of fiscal consolidation, and the ECB’s strict focus on low inflation.”
Nick Crafts – Secular stagnation: US hypochondria, European disease? – In Secular Stagnation: Facts, Causes and Cures, Edited by Coen Teulings and Richard Baldwin
Finland’s economy has been attracting a lot of interest of late. And not for the right reasons, unfortunately. The economy in a country previously renowned for being highly placed in the World Bank’s “Ease of Doing Business Index” has just contracted for the third consecutive year. Once famous for being a symbol of “ultra competitiveness” (it came number 4 in the latest edition of the WEF Global Competitiveness Index) the country is now fast becoming the flagship example of another, less commendable, phenomenon: secular stagnation.The origins of the theory of secular stagnation go back to the US economist Alvin Hansen (see here) who first used the expression in the 1930s. The hallmark of secular stagnation, he said, was a series of sick “recoveries which die in their infancy and depressions which feed on themselves and leave a hard and seemingly immovable core of unemployment.” This seems to fit the Finish case to a T. Continue reading