It’s somewhat ironic that, amid all the anxiety over the future of the euro, economists are asked for their views.After all, why rely on a profession that is structured like a primitive tribe, with hierarchical kinship structures, a slew of rituals, and no room for a free market in liturgy as publications are dominated by a Brahmanical priesthood?
That, at least is how they appear to Marion Fourcade, a professor of sociology at Berkeley and associate fellow at the Max Planck Sciences Po Center in Paris, who conducted a kind of ethnography on the rival discipline.
Infinite jests aside, there is trouble afoot. Things that could never happen did, and the finance gurus now don’t blush when they refer every few months to events which, measured by standard deviations, should occur once every million years or so.
This post will take a look at three economic facts that may spur some new ways of thinking or simply don’t square with much of what is assumed to be true.
Haja Sundu Marrah is the head of a women vegetable farmers’cooperative in Sierra Leone’s northern Koinadugu district. Her group took out a loan to expand planting of cabbages, tomatoes, lettuces, onions and carrots for sale in Freetown. Recently the Ebola outbreak led to a crackdown on movements in the country, forcing the perishable produce to be sold locally – for prices 70 percent lower than in the urban capital. Marrah’s lament: The price of vegetables is now determined by customers because of the lack of access to markets.
That phrase warrants being digested slowly and not dismissed as confused. She is suggesting that the price signal itself is different when set by markets or by customers, thus drawing a strong distinction between the two. There are central bankers today who wish they had realized that during real estate booms driven by debt markets whose resuscitation now has investors on edge.
Middle-class Roman slaves
One amazing discovery that emerged during the global financial crisis is that the real hourly male wage in the United States hasn’t risen in 40 years. That economists did not notice this long-term fact makes one nervous about their ability to provide policy advice on how to boost labor income – needed to service debts that obscured the fact – today.
Over the centuries, labor’s wages have waxed and waned. Rises tend to follow large-scale calamities such as the Black Plague, which killed a third of Europe’s population.
Jerry Toner, director of classical studies at Churchill College in Cambridge, England, provides a hint in his new book on Roman slave management, offers precious insight into how things were back in the day.
The purchase price of a Roman slave was typically around the amount of money it would take to feed a family of four for two years. Naturally there were operating costs, as slaves were provided with food, clothing and lodging. Tipping was a standard form of incentive bonus. Above all, it was common to free well-performing slaves after a decade of service.
In Italy today, official figures show that the average household of 2.4 people spends EUR2,000 a month not including housing costs. Adjusting for a larger family and incorporating median housing costs would bring the figure to around EUR4,000, which squares with the aggregate national consumption share of GDP.
Applying Rome slave accounting to today’s personal finance suggests we should be “worth” EUR96,000 every decade – after expenses and not including compound interest gains. After 40 years of work, a person would have EUR392,000. Average net household wealth in Italy today is EUR357,000, according to the Bank of Italy.
So there it is: the labor value of the average citizen of democratic Italy is 10 percent less than the average Roman slave 2,000 years ago.
One of the canonical precepts of modern central banking is that deflation is bad because consumers defer their purchases in hopes of lower prices tomorrow, thereby exacerbating economic downturns. While some people worry that monetary authorities may not have the power to counter globalization and demography, the script is rarely questioned. Indeed, the popular press tenaciously quotes officials saying that new policies such as quantitative easing – google Diocletius for a Roman variant – should gun up some inflation and ignite a recovery.
Meanwhile, new research suggests that assumption is unexamined hogwash, and that inflation may not be some magical form of fiscal stimulus after all.
In a paper just published in the American Economic Review, Rudiger Bachmann, Tim Berg and Eric Sims peruse reams of data from the University of Michigan’s benchmark survey of spending plans and inflation expectations. It turns out there is no correlation at all.
Actually that’s not quite true. What they found was that “a one percentage increase in expected inflation during the recent lower-bound period reduces households’ probability of having a positive attitude towards spending by about 0.5 percentage points.”
If rising inflation expectations squelch consumption, logic would suggest that deflation might even given it a boost!
The beat goes on
All three of the above vignettes are meant to remind us that we know less than we imagined.
Oh, but one footnote, strictly for the record: The paper on inflation expectations was written by Germans.