CORE and Periphery in the Reform of Econ 101 — Peter Dorman

Peter Dorman critiques the CORE revision of Econ 101 and finds that it relies too much on rote and not enough on active learning. Rote may be more suitable for those going on in the study of economics, but most students taking Econ 101 don't. The introductory course should be designed to serve the needs of the many rather than the few.

Econospeak
CORE and Periphery in the Reform of Econ 101
Peter Dorman | Professor of Political Economy, The Evergreen State College

John Cassidy — A New Way to Learn Economics

A group of economists from both sides of the Atlantic, part of a project called core Econ, has put together a new introductory economics curriculum, one that is modern, comprehensive, and freely available online.

In this country, many colleges encourage Econ 101 students to buy (or rent) expensive textbooks, which can cost up to three hundred dollars, or even morefor some hardcover editions. The core curriculum includes a lengthy e-book titled “The Economy,” lecture slides, and quizzes to test understanding. Some of the material has already been used successfully at colleges like University College London and Sciences Po, in Paris.…

The core approach isn’t particularly radical. (Students looking for expositions of Marxian economics or Modern Monetary Theory will have to look elsewhere.)...

OK. But thanks for the shout out anyway.

The New Yorker
A New Way to Learn Economics
John Cassidy

Michael Pettis — When do we decide that Europe must restructure much of its debt?

It is hard to watch the Greek drama unfold without a sense of foreboding. If it is possible for the Greek economy partially to revive in spite of its tremendous debt burden, with a lot of hard work and even more good luck we can posit scenarios that don’t involve a painful social and political breakdown, but I am pretty convinced that the Greek balance sheet itself makes growth all but impossible for many more years. 

The history is, to me pretty convincing. Countries with this level of debt and this level of uncertainty associated with the resolution of the debt are never able too grow out of their debt burdens, no matter how determined and how forcefully they implement the “correct” set of orthodox reforms, until the debt is resolved and the costs assigned. Greece and Europe, in other words, have a choice. They can choose to restructure Greek debt explicitly, with substantial real debt forgiveness and with the costs optimally allocated in a way that maximizes value for all stakeholders, or Greece can continue to struggle for many more years as the debt is resolved implicitly, with the costs allocated as the outcome of an uncertain political struggle. 

Until one or the other outcome, the country is not a viable creditor and it will not grow. There is no way to get the numbers to work. If Europe policymakers who oppose a rapid resolution of its debt crisis continue to prove as intransigent over the next few months as they have been in the past week, I suspect that they will only be able to pull off one of their goals, which is to embarrass Syriza and get it thrown out of office. 

But I suspect that many European policymakers incorrectly think Syriza is as radical as it gets, and once Syriza is discredited, almost any alternative leadership would be better. I disagree. If Syriza is discredited, and the Greek economy continues to stagnate as I expect, the alternative could very easily be Golden Dawn or some other group of radical nationalists determined to blame foreigners for their problems, and Germany will have set itself up for much of the blame. It is ironic, because in my opinion Angela Merkel is not and has never been the bully that she is made out to be, and the main reason Germany seems to be running the show is that no one else has ever dared to disagree with her or to take any position of real leadership. For that reason she and Germany are being seen as far worse than they actually are. 

And this is clearly not just about Greece. Everyone understands that Greece has already restructured its debt once before and received partial forgiveness — in fact once coupon reductions are correctly accounted for Greece’s debt ratio is probably much lower than the roughly 180% of GDP the official numbers suggest. Most people also understand that the Greek debate is not just about Greece but also about whether or not several other countries — Spain, Portugal and Italy among them, and perhaps even France — will also have to restructure their debts with partial debt forgiveness.…

What follows is a long and detailed analysis based on balance sheets.

1. Why must Europe restructure much of its debt? The purpose of a debt restructuring is to make all parties better off by increasing the value of the associated instruments and improving future growth prospects for all the relevant stakeholders. Once the existing debt structure adversely affects future growth prospects and reduces the current wealth of the relevant stakeholders, it makes sense to consider ways in which the debt can be restructured so as to improve both current value and future growth prospects.
2. For most economists, debt is the way operations are funded, and the best debt is the cheapest. I am not suggesting that economists are unaware that certain debt structures are riskier than others, but for the most part they ignore the structure of the balance sheet and focus primarily on the way assets are managed. The moment debt levels become high, however, or create institutional distortions, they begin to affect, and usually constrain, value creation. Debt has four very separate and very important functions, and it is important to understand what they are before deciding what an optimal balance sheet looks like.
3. Once we understand the role and impact of the structure of the balance sheets, it becomes possible to describe what an optimal debt restructuring should accomplish.

Debt can be thought of as a moral obligation when a loan is extended from one individual to another, especially if there is no interest on the loan. But loans to businesses or to sovereign entities are business transactions, and they should be managed as such. The only moral obligation in restructuring sovereign debt, it seems to me, is for policymakers to fulfill their political responsibilities to do what is in the best interests of their citizens and to participate in a responsible way in the global community. The debt restructuring process is, in other words, morally neutral.…

"Excessive debt" begets uncertainty, which increases debt. When is debt "excessive"? When it begins to increase uncertainty to the level that the process is affected. Value begins to be lost, growth contracts, and existing debt multiplies.

To summarize:

1. Under “normal” conditions, the obligations associated with debt are explicit and there is very little uncertainty about how the debt will be resolved. The revenues sources needed to service the debt are clearly identified.
2. When debt levels become “excessive”, that is when the existing revenues sources are no longer sufficient easily to service the debt, uncertainty arises about how the debt will be resolved and even about the amount of the debt to be resolved. This is exacerbated by the highly reflexive relationship between rising uncertainty and rising debt, so that rising uncertainty associated with the resolution of the debt forces adverse stakeholder behavior, which causes the uncertainty associated with the resolution of the debt to rise further.
3. How do we know when debt levels have become “excessive”? Debt levels are excessive when the uncertainty associated with the resolution of the debt is high enough to change the behavior of stakeholders. To put it in terms guaranteed to infuriate policymakers, a country has too much debt whenever the market believes it has too much debt. Anyone who does not understand why it is as simple as this does not understand the economic impact of debt.
4. The purpose of a debt restructuring, then, is to reduce or eliminate the uncertainty associated with the resolution of the debt because this uncertainty automatically reduces value and future growth. If done correctly, a debt restructuring increases the wealth of stakeholders and improves future growth prospects.…

China Financial Markets
When do we decide that Europe must restructure much of its debt?
Michael Pettis | Professor of Finance at Peking University’s Guanghua School of Management

Catarina Principe — A New European Narrative

On Thursday, Germany refused any negotiations with Greece, and the European Central Bank (ECB) refused to accept Greek bonds as collateral (since there are no guarantees that the Greek government will carry out the “adjustment” plan). Although this does not amount to an immediate push to kick Greece out of the eurozone, it is certainly a threat in that direction. 

In order to understand the motivations behind this recalcitrance, and the competing interests at work, Germany’s special relationship with the euro must be understood. The eurozone’s stated goal was to create a currency strong enough to build a unified European financial bloc that could compete with the US and China. 

However, this was never the full truth. This “unified” bloc has always been composed of competing nation states, and the big, industrialized countries at the center have been keen on making the peripheral economies dependent on the core. 

With the introduction of the single currency, there was a devaluation of Germany’s deutsche mark in comparison to the other national currencies. This meant not only that labor value was diminished, but also that the country’s manufactured products became cheaper and more competitive in the world market. 

The resulting overvaluation of the southern countries’ national currencies solidified them as peripheral economies and established export markets for German products. Their productive sectors destroyed, the peripheral economies became dependent on imports, especially from Germany. 

Germany, then, clearly benefits from Greece’s presence in the eurozone; a Grexit is not in its economic interest. Nonetheless, German Chancellor Angela Merkel is sending a veiled threat that this is what might happen. Why?….

Analysis from the left.

Jacobin
A New European Narrative

Catarina Principe

Chris Parr — ‘New’ approach to economics courses criticized

The course, entitled “The Economy”, has been produced by the CORE Project (Curriculum Open access Resources in Economics), a group of more than 20 leading economists.…

However, Ben Glover, campaigns coordinator and chair of the Post-Crash Economics Society at the University of Manchester, which has conducted a high-profile campaign to change the economics curriculum at the institution, said that the new course “isn’t really much of a change”. 

“The issues CORE sets out to address aren’t the real gaps in economics,” he said. “We see the real hole in economic thinking being the neglect of alternative economic perspectives. This is why we continually call for pluralism in schools of thought. 

Nowhere does CORE make this clear to its students and why in its current conception it fails.”

My conclusion, too, after looking at the CORE "reform." Mostly rearranging deck chairs on the Titanic.

Times Higher Education UK
‘New’ approach to economics courses criticized
Chris Parr

(h/t Jan Milch)

Frances Coppola — The zero-sum trade in people

This is an important issue in that under neoliberalism free markets, free trade and free flow of capital are promoted but not free flow of labor. This is viewed as disadvantageous to labor.

However, within the US, there are free markets, free trade, free capital flow and free flow of labor among the sovereign states of the federation. This experiment has functioned reasonably well.

Now a similar experiment is underway in the EZ, with the flow of labor being prompted by economic necessity due to the crisis. Will the outcome be comparable to the US experience, since even though the case is similar, it is very different, too. The answer has consequences for globalization under a neoliberal model.

Coppola Comment

The zero-sum trade in people

Frances Coppola