Archive for the ‘Economics’ Category
Economist Paul Krugman is one of those who have been 100% correct in explaining our current economic malaise and, as a result of that understanding, has been 100% accurate in predicting how the economy will perform in the future depending upon government policy. Unlike any other economist, Krugman also is the voice of the New York Times in things economic, and therefore he has a huge platform upon which to be seen and heard across the globe. His face is on transit buses and trains in Europe because of his criticism of the austerity policies applied in the European Union.
Krugman is first a teacher, a professor of economics at Princeton University. He brings that approach to his writings in the NYT and the impact of these writings increases because he is teaching the public as he writes. As a journalist explains a news event, Krugman explains why the economy is behaving as it does, in real time. Because he understands his subject so well, because he can teach it so well, and because of his NYT platform, Krugman is arguably the most influential economist on the planet.
All that said, here’s a recent Krugman post with all his skills displayed in force. It’s a brief rundown of the economy, how he understands it, and what it all means in terms of policy.
Those of us who have spent years arguing against premature fiscal austerity have just had a good two weeks. Academic studies that supposedly justified austerity have lost credibility; hard-liners in the European Commission and elsewhere have softened their rhetoric. The tone of the conversation has definitely changed.
My sense, however, is that many people still don’t understand what this is all about. So this seems like a good time to offer a sort of refresher on the nature of our economic woes, and why this remains a very bad time for spending cuts.
Let’s start with what may be the most crucial thing to understand: the economy is not like an individual family.
Families earn what they can, and spend as much as they think prudent; spending and earning opportunities are two different things. In the economy as a whole, however, income and spending are interdependent: my spending is your income, and your spending is my income. If both of us slash spending at the same time, both of our incomes will fall too.
And that’s what happened after the financial crisis of 2008. Many people suddenly cut spending, either because they chose to or because their creditors forced them to; meanwhile, not many people were able or willing to spend more. The result was a plunge in incomes that also caused a plunge in employment, creating the depression that persists to this day.
Why did spending plunge? Mainly because of a burst housing bubble and an overhang of private-sector debt — but if you ask me, people talk too much about what went wrong during the boom years and not enough about what we should be doing now. For no matter how lurid the excesses of the past, there’s no good reason that we should pay for them with year after year of mass unemployment.
So what could we do to reduce unemployment? The answer is, this is a time for above-normal government spending, to sustain the economy until the private sector is willing to spend again. The crucial point is that under current conditions, the government is not, repeat not, in competition with the private sector. Government spending doesn’t divert resources away from private uses; it puts unemployed resources to work. Government borrowing doesn’t crowd out private investment; it mobilizes funds that would otherwise go unused.
Now, just to be clear, this is not a case for more government spending and larger budget deficits under all circumstances — and the claim that people like me always want bigger deficits is just false. For the economy isn’t always like this — in fact, situations like the one we’re in are fairly rare. By all means let’s try to reduce deficits and bring down government indebtedness once normal conditions return and the economy is no longer depressed. But right now we’re still dealing with the aftermath of a once-in-three-generations financial crisis. This is no time for austerity.
O.K., I’ve just given you a story, but why should you believe it? There are, after all, people who insist that the real problem is on the economy’s supply side: that workers lack the skills they need, or that unemployment insurance has destroyed the incentive to work, or that the looming menace of universal health care is preventing hiring, or whatever. How do we know that they’re wrong?
Well, I could go on at length on this topic, but just look at the predictions the two sides in this debate have made. People like me predicted right from the start that large budget deficits would have little effect on interest rates, that large-scale “money printing” by the Fed (not a good description of actual Fed policy, but never mind) wouldn’t be inflationary, that austerity policies would lead to terrible economic downturns. The other side jeered, insisting that interest rates would skyrocket and that austerity would actually lead to economic expansion. Ask bond traders, or the suffering populations of Spain, Portugal and so on, how it actually turned out.
Is the story really that simple, and would it really be that easy to end the scourge of unemployment? Yes — but powerful people don’t want to believe it. Some of them have a visceral sense that suffering is good, that we must pay a price for past sins (even if the sinners then and the sufferers now are very different groups of people). Some of them see the crisis as an opportunity to dismantle the social safety net. And just about everyone in the policy elite takes cues from a wealthy minority that isn’t actually feeling much pain.
What has happened now, however, is that the drive for austerity has lost its intellectual fig leaf, and stands exposed as the expression of prejudice, opportunism and class interest it always was. And maybe, just maybe, that sudden exposure will give us a chance to start doing something about the depression we’re in.
Berkeley economist Bradford DeLong writes an article reminding us that we’re still basically a species whose DNA was hammered out on the plains of East Africa. And at the same time he catches your attention to that piece of our history, as explained by Hungarian economic historian Karl Polanyi, DeLong seamlessly switches into hard core economics. Economics made interesting. DeLong is no doubt an excellent teacher.
As John Maynard Keynes shrilly stated back in 1926:
Let us clear… the ground…. It is not true that individuals possess a prescriptive ‘natural liberty’ in their economic activities. There is no ‘compact’ conferring perpetual rights on those who Have or on those who Acquire. The world is not so governed from above that private and social interest always coincide. It is not so managed here below that in practice they coincide. It is not a correct deduction from the principles of economics that enlightened self-interest always operates in the public interest. Nor is it true that self-interest generally is enlightened… individuals… promot[ing] their own ends are too ignorant or too weak to attain even these. Experience does not show that… social unit[s] are always less clear-sighted than [individuals] act[ing] separately. We [must] therefore settle… on its merits… “determin[ing] what the State ought to take upon itself to direct by the public wisdom, and what it ought to leave, with as little interference as possible, to individual exertion”.
The management of economies by governments in the twentieth century was at best inept. And, as we have seen since 2007, little if anything has been durably learned about how to regulate the un-self-regulating market in order to maintain prosperity, or ensure opportunity, or produce substantial equality.
Before the start of the nineteenth century, there were markets but there was not really a market economy—and the peculiar dysfunctions that we have seen the market economy generate through its macroeconomic functioning were, if not absent, at least rare and in the background of attention. Wars, famines, government defaults were threats to life and livelihood. The idea that Alice might be poor and hungry because Bob would not buy stuff from her because Bob was unemployed because Carl wanted to deleverage because Dana was no longer a good credit risk because Alice had stopped paying rent to Dana–that and similar macroeconomic processes are a post-1800 phenomenon.
The problems of economic policy in the modern age are, speaking very broadly, threefold: first, the problem of attempts to replace the market with central planning–which is, for reasons well-outlined by the brilliant Friedrich von Hayek, a subclass of the problem of twentieth-century totalitarian tyranny–second, the problem of managing what Karl Polanyi called “fictitious commodities”; and, third, the problem of managing aggregate demand.
Leave the first problem to the side: we are already depressed enough by the little time we spent on it above. Turn to the second problem, to Karl Polanyi’s “fictitious commodities”. We–we East African Plains Apes–are gift-exchange animals. We seek reciprocity: neither to give so much that we feel exploited by those who give too little back in return, nor to give so little as to unbalance the scales and leave us doomed to submission, but rather to fairly balance the scales. On top of this propensity in human nature to truck, barter, and exchange we have built our market economy. This means that market exchanges have to fulfill five distinct social roles: (1) The prices at which commodities are exchanged survey as signals and incentives to direct and coordinate the human division of labor. (2) The fact of trade and exchange cements social bonds–Albert Hirshman’s “doux commerce” idea. (3) Present generosity–giving more than you receive right now, whether explicitly a loan or not–creates a status hierarchy that distributes social decision-making power. (4) The unlucky benefit from a modicum of social insurance by implicitly trading away some decision-making autonomy for current resources. And (5) the prices the market attaches to the resources at one’s hand make some rich and others poor: “We know these matters:/How the poor debtors/Still sell their daughters./How in the drought/Men still grow fat…”
But the logic of the competitive market economy focuses on fulfilling (1) and only (1) of these distinct roles, leaving the other four hanging–and that will not be good. A self-regulating competitive market economy will not seek to cement social bonds, or to establish a functional and effective status hierarchy for collective decision making, or provide a modicum of social insurance, or produce a sane balance between rich and poor. It will only produce prices that serve as guides to direct and coordinate the human division of labor. And, in the presence of significant externalities or significant market power, it will not even do that.
Karl Polanyi summarized all this by stating that the self-regulating market economy turns the stuff of people’s lives–where they live, what they work on, and what promises and obligations they have for the future–into the fictitious commodities of land, labor, and capital and then deals with them as it deals with other commodities. And that, Polanyi correctly said, is not good. The problem is that governments, even democratic governments, do less to properly regulate the market in the interest of achieving these other four social roles besides that of setting prices to serve as incentives and signals.
Turn now to the third of the problems of economic policy, the problem of managing aggregate demand to avoid either mass unemployment or excessive and destructive inflation. These evils are avoided by having the government adjust its spending programs and modify the supply of the money and debt it issues in order to make Say’s Law–the principle that everybody’s production becomes their income which is somebody else’s spending demand, and all three of these quantities match–true in practice even though it is not true in theory. Phrased this way, the conceptual problem is easy: match aggregate demand to full-employment aggregate supply or productive potential.
The global Lesser Depression starting in 2007 is proof that even after two centuries of dealing with disturbances to aggregate demand that the world’s governments cannot manage these grand mal seizures of the market economy. Little, it turns out, was known in 2007 about how to manage a market economy under circumstances of large shocks to demand. Lessons learned from experience were often forgotten quickly. There was an extraordinary disjunction between the power of twentieth-century economies as social-calculating and behavior-conditioning mechanisms and the ineptness with which these economies were managed.
Some of it is because twentieth century economists did not know what to prescribe: the history of economic policy reads like alchemy, not chemistry. Often proposed remedies made economic problems worse. Many times one current generation’s proposed solutions to the problems of how to manage domestic and international macroeconomic policy turn out to lay the groundwork for the next generation’s problems of macroeconomic management. And it is not always the case that larger problems are replaced by smaller ones over time. As the salience of different problems—inflation, unemployment, unstable capital flows, unstable exchange rates, the sacrifice of domestic to international interests, the focus on domestic interests which means that the international system is left ungoverned and unmanaged—has changed over time, the movement of economic policy has looked less progressive and more circular. Theoretical doctrines like the Keynesian “liquidity trap” that were last applied to the U.S. in the 1930s, and thereafter dismissed as theoretical curios of no practical importance, are dusted-off and revived for the analysis of Japanese stagnation in the 1990s. When Argentinian technocrat Domingo Cavallo reassumes the post of Minister of Finance in early 2001, some of the policy proposals that he advances to deal with Argentina’s then-macroeconomic problems appeared remarkably similar to policy proposals that John Maynard Keynes had advanced at the end of the 1920s to deal with Great Britain’s similar macroeconomic problems.
Some of it is that politicians did not like to follow their economists’ advice, or at least sought for a more complaisant set of economists who would give advice that would be more politically pleasing and palatable to follow. And some of it is simply that while it may be true that those who do not remember the past are condemned to repeat it, this aphorism does not stress the fact that that means that the rest of us are condemned to repeat it with them.
The twentieth century economy has been a tremendously powerful, efficient, and productive social mechanism—the market system. Yet few, or few of those in power, have known how to operate or fix it. Moreover, learning does not appear to take place—or if it does take place, it does not take place at more than a glacial pace. The inescapable image is of an ocean liner crewed and steered by chimpanzees. The failures and half-successes of economic policy together make up another key facet of twentieth century economic history: how governments have managed or mismanaged their economies, and how knowledge of how the economic system works has been painfully gained and then painfully lost.
Beezer here. Nice piece of teaching, in my opinion. And it makes me want to read Polanyi.
From an article in Fortune written by journalist Tim Lee that points out Friedman’s economics is not in line with today’s Republican Party, even though the party still considers Friedman their economics prophet. As evidence Lee quotes Friedman in his book Two Lucky People:
“The intellectual climate at Chicago had been wholly different. My teachers regarded the depression as largely the product of misguided policy—or at least as greatly intensified by such policies. They blamed the monetary and fiscal authorities for permitting banks to fail and the quantity of deposits to decline. Far from preaching the need to let deflation and bankruptcy run their course, they issued repeated pronunciamentos calling for governmental action to stem the deflation—as J. Rennie Davis put it, “Frank H. Knight, Henry Simons, Jacob Viner, and their Chicago colleagues argued throughout the early 1930′s for the use of large and continuous deficit budgets to combat the mass unemployment and deflation of the times.”
Beezer here. So Friedman here sounds a lot like Keynes, who also recommended increased government spending in the face of a recession. My problem with the quote is that Friedman also wrote here that, according to his interpretation, Keynes would not have recommended the same approach? Or at least the quote seems to suggest that.
‘We were affected very differently by the Keynesian revolution—Lerner becoming an enthusiastic convert and one of the most effective expositors and interpreters of Keynes, I remaining largely unaffected and if anything somewhat hostile…
Lerner was trained at the London School of Economics, where the dominant view was that the depression was an inevitable result of the prior boom, that it was deepened by the attempts to prevent prices and wages from falling and firms from going bankrupt, that the monetary authorities had brought on the depression by inflationary policies before the crash and had prolonged it by “easy money” policies thereafter; that the only sound policy was to let the depression run its course, bring down money costs, and eliminate weak and unsound firms.
By contrast with this dismal picture, the news seeping out of Cambridge (England) about Keynes’s interpretation of the depression and of the right policy to cure it must have come like a flash of light on a dark night… It is easy to see how a young, vigorous, and generous mind would have been attracted to it…”
Beezer again. So you can see my confusion. It may be that I’m not correctly interpreting the paragraphs above. And the final graph does say ‘the news seeping out of Cambridge’ which suggests Friedman may not have had the whole picture at that time, because it certainly was incorrect. When it comes to deficit government spending, what Friedman the monetarist recommended is exactly what Keynes did too. The main difference is that Keynes went further and recommended direct hiring if purely monetary policies didn’t work fast enough. Anyway, the point of the Fortune article is that today’s GOP would not approve of Friedman’s prescription. Hat tip to Economist’s View which highlighted a Paul Krugman New York Times post calling attention to the Fortune article, which was written a year ago. Krugman also thanks economist Brad DeLong for recalling Lee’s article.
One wonders what’s going on down in the District of Columbia. A Democrat President has put on the table what amounts to a reduction in Social Security benefits, although none are necessary. Purportedly the benefit reductions are needed as part of a ‘grand bargain’ the President seems determined to craft with Republicans, who want to eliminate SS but who are smart enough to never mention such a thing in public. No doubt in the mid-terms, Republicans will run advertisements about how the Democrats want to reduce SS benefits!!!
Anyway, for my readers edification, if not that of the President, here’s an article by an expert explaining why SS benefit reductions are completely irrelevant to the nation’s economic future.
The People’s Choice for the People’s PensionBy NANCY FOLBRE
Social Security, the most transparently self-financed program of the federal government, is not increasing our budget deficit. The most recent trustees’ report shows sufficient funds to pay full benefits until 2033.
Perspectives from expert contributors.
No one is making out like a bandit: Social Security beneficiaries who retired in 2010 are expected to get back approximately what they paid in.
If we wanted to adopt a cautious policy measure that would eliminate the shortfalls predicted 20 years down the road, we could eliminate the cap on earned income subject to Social Security taxes, currently set at $113,700. Such a measure would lead to increased payments by about the top 5.2 percent of wage earners.
Legislation designed to “scrap the cap” has been introduced in Congress. Senator Mark Begich, Democrat of Alaska, and Representative Ted Deutch, Democrat of Florida, have drafted a law that would require all workers to pay the same overall Social Security tax rate, and Senator Bernie Sanders of Vermont, an independent, and Representative Peter DeFazio, Democrat of Oregon, recently proposed application of the tax to earnings over $250,000 (as well as under $113,700) creating a “doughnut hole” exemption for earners in between in order to win more votes.
But as Thomas B. Edsall pointed out in a recent commentary, “scrap the cap” has apparently been taken off the table, despite evidence of considerable public support for it.
Readers doubtful of that public support should read the new National Academy of Social Insurance report, “Strengthening Social Security: What Do Americans Want?,” based on an online survey asking respondents whether they favored or opposed 14 specific changes to Social Security. The analysis also draws on findings from focus groups to add qualitative texture to the quantitative results.
That online survey, an opt-in model, is not based on a probability sample, but its findings echo other representative surveys, including this Quinnipiac University poll from 2011, which found that 56 percent of Americans favored raising the cap on taxable Social Security income.
Readers mystified by the yawning gulf between public opinion and current political discussion might benefit from the background provided in Eric Laursen’s magisterial history, “The People’s Pension: The Struggle to Defend Social Security Since Reagan.” The book offers more than 800 pages of fascinating if gory details about the lobbying efforts and misinformation campaigns aimed at bringing the program down.
It also reports on a series of surveys going back to 1977 in which most respondents said they would be willing to pay higher payroll taxes if that would shore Social Security up for the future.
Mr. Laursen effectively decodes much of the economic jargon that has obscured public understanding of these issues, and continues to blog regularly on this topic.
Readers feeling demoralized by the history of class warfare over social insurance might be cheered by two of the short videos recently entered in an online contest sponsored by the Peter G. Peterson Foundation on the theme of “I’m Ready” to fix the national debt.
In one entry, “Being Honest, Tough Choices,” a serious young man uses his webcam to explain in simple, direct terms why he supports Social Security and deplores the rhetoric of “makers versus takers, young versus old.”
Another entry, originally titled “Scrap the Cap” but currently labeled “Movin’ In, Kids,” has outpaced all others to date in terms of both viewings and ratings. It features some lovable oldsters in a hilarious rap performance warning their son that if their Social Security benefits are cut he better pull out the sofa bed and put out some fresh towels because they will be living together from now on.
Their song and dance goes on to explain why scrapping the cap would be better for everyone concerned.
Beezer here. To be honest, we’ve often been a bit lost when it comes to understanding President Obama’s obsession over doing deals in Congress with Republicans. As a former US Senator, maybe that’s the only way the President believes progress is possible. Unfortunately, right now the Republican Party is so dysfunctional it has literally nothing positive to offer the nation, and doing deals with someone like that is a complete waste of effort. They are anti-female, anti-minority, anti-immigrant, anti-climate change, anti-clean energy, anti-environmental, anti-education, anti-science and anti-anything government except Defense. A party this far removed from the nation’s citizenry needs simply to be ignored until it can be reformed by new blood from within. Giving it any sustenance by way of compromise is simply prolonging the time needed for it to face the music.
The Problems With the European Union Are Well Known and Understood by Economists, But Not Politicians.Wednesday, March 20th, 2013
John Maynard Keynes, in his book ‘Essays in Persuasion, ‘ foresaw the importance of a united Europe and tried mightily to reduce the penalties that the post World War I negotiations placed on Germany. He was unsuccessful, in the end, so the penalties imposed were far too large for the defeated Germany, the result of which was to plunge the country into a Depression, ushering in the ultra nationalist movement and its leader Hitler.
J. Bradford DeLong, economics professor at UCal Berkeley, writes briefly about the current European Union banking woes and points out the current leadership is apparently ignorant of the lessons learned in the 1920s negotiations after WW I.
The 1919-1939 interwar period taught us four lessons:
- In order for the world economy to be prosperous, adjustment to macroeconomic disequilibrium needs to be undertaken by both “surplus” and “deficit” economies–not by “deficit” economies alone.
- If the world economy is to have any chance of avoiding or limiting crises, an integrated banking system requires an integrated bank regulator and supervisor.
- In order for crises to be successfully managed, the lender of last resort must truly be a lender of last resort: it must create whatever asset the market thinks is the safest in the economy, and must be able to do so in whatever quantity the market demands.
- In order for any monetary union or fixed exchange rate system larger than an optimum currency area to survive, it must be willing to undertake large-scale fiscal transfers to compensate for the exchange rate movements to rapidly shift inter-regional terms of trade that it prohibits.
I, at least, thought that everybody–or everybody who mattered in governing the world economy–had learned these four lessons that 1919-1939 had so cruelly taught us. Now it turns out that the dukes and duchesses of Eurovia had, in fact, learned none of them. History taught the lesson. But while history was teaching the lesson, the princes and princesses of Eurovia and their advisors were looking out the window and gossiping on Facebook….
Beezer here. So pundits and politicians over here refer to how the US is going to end up like Greece because they are, simply put, uneducated twits talking to each other in a bubble. A vast elaborate circle jerk of people who never learned the lessons of 1919-1939. And it’s quite apparent never will.