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Weekend reflections

October 10th, 2009

It’s time again for weekend reflections, which makes space for longer than usual comments on any topic. As always, civilised discussion and no coarse language. I’ve cut off a thread-derailing discussion of the Pinochet dictatorship on another post, but those so inclined can go at it here, bearing in mind the comments policy and the requirement for civility.

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  1. sdfc
    October 17th, 2009 at 18:45 | #1

    Seb let’s approach this discussion from another angle. Just what to you think the policy prescription should have been in the early 1930′s as the US economy began to head into the abyss? Bearing in mind that the Dr Do-little approach proved to be such a spectacular failure.

    Just to give you a hint, deflation is not much of a remedy in an economy with high levels of private debt and complex financial markets. Also talk of avoiding the credit boom in the first place is of little use unless of course your policy prescription involves time travel of some sort.

  2. SeanG
    October 17th, 2009 at 19:27 | #2

    If history is on the side of Alice then why did Keynesian economics completely fail? Why did formerly command-economies turn to the market system?

    Ah… the left hates to think about their own failures on such a grand scale and dreams of the era when the government commanded the lot. Very authoritarian when you think about it.

  3. Michael of Summer Hill
    October 17th, 2009 at 20:06 | #3

    Sea-bass & SeanG, in 2002 long before the global financial credit crisis this is what William J. McDonough, chairman of the New York Federal Reserve Bank, said, “I am old enough to have known both the CEOs of 20 years ago and those of today. I can assure you that CEOs of today are not 10 times better than those of 20 years ago”. McDonough was commenting on the salaries of corporate executives which have grown by a factor of more than 10 over the past 20 years. In 2000 CEO’s were receiving 500 times the compensation of the average employee.

  4. jquiggin
    October 17th, 2009 at 20:36 | #4

    @SeanG

    “why did Keynesian economics completely fail?”

    You appear to have missed the news during your recent visit to Mars. Wikipedia is, as usual a good place to start. Seriously, Sean you’re on the losing side now, and you need to present serious arguments, not appeals to a historical inevitability that is no longer evident, and certainly not the silly snark of comments like this one.

  5. Alice
    October 17th, 2009 at 21:04 | #5

    @Sea-bass
    Sea bass – what can I say but you are a silly fool if you beleive that a couple of rants by a labor pollie justifies the existance of a calculated politically biased rag like the CIS.

    This is not academia Sea Bass. This is MONEY. People sell out for MONEY.

    Does it make them great economists? No. You silly boy (ill forgive you because you are so young and at least you are interested enough…). Read and read deeper is all I have to say to you Sea Bass. You are young and want to beleive that the remedies are simple and class based and if only one class would listen to their natural leaders all would be OK??

    No??….No.

    Sea Bass – either you want to be a mouthpiece or you want to think for yourself in life.

    The freedom Sea Bass. You have no idea because you havent even put a toe in the water yet. You dont need other people to tell you what and when and how to think. Alll you need to do is read and read widely.

    The solution to a healthy econjomy where opportunity is maximised for the longest time possible for the most, is never as simple as it is promoted for the few. Do you want to work for the few or for all Sea Bass? If you cant listen to a man like Soros who worked the financial markets for half a century (your real markets Sea Bass) and who was likely erroneously rejected by mainstream economists, caught up as they were in mainstream academic promotion of pretty nmodels (that didnt work)…

    Who are you Sean Bass but just a novice (….but an interested novice and thats a bonus)? Polish yourself son and learn to argue for and against your own side (only then will you be an elegant commentator – throw the sledgehammer and all precconceived biases away first).

  6. Alice
    October 17th, 2009 at 21:07 | #6

    I admit I am a shocking speller but I have no patience for the checker.

  7. Sea-bass
    October 17th, 2009 at 21:41 | #7

    @Alice
    I’ve already tried to be a good social democrat, driving my poor mother batty by preaching about the benefits of “free” healthcare for all – that was before I studied economics. I’m not going back to that now, having seen the error of that particular doctrine – people respond to incentives, and it is naive to hope that everybody will share and cooperate and hold hands, singing kumbayah. Since you’re so old, you should understand that by now. Of course, who would I be to suggest that you had any biases, hmmmm?

    Believe me, my university is a hotbed of left-wing moonbatery. If I wasn’t thinking for myself, I’d be skipping classes to put up posters for the Socialist Alternative. Everyone sits in tutorials coo-ing and ah-ing about the state and how we need more government programmes to make everything perfect. Believe me, I would like to go back to spouting left-wing nonsense and being perceived as a good person just because I think spending other peoples’ money is a great idea. Being a fanboy of the free-market definitely hasn’t made me any more popular, so I could hardly say that I’m taking the path of least resistance.

    @sdfc
    “Just what to you think the policy prescription should have been in the early 1930’s as the US economy began to head into the abyss? Bearing in mind that the Dr Do-little approach proved to be such a spectacular failure.”

    I think the onus should be on you to prove that a Dr Do-Little approach was taken at all. It simply wasn’t. You need to find evidence to suggest that Herbert Hoover was some do-nothing laissez-faire ideologue, which might be hard since he too engaged in deficit spending, raised taxes and started make-work programs/infrastructure projects. Wikipedia, as always, is a good place to start:

    “Franklin D. Roosevelt blasted the Republican incumbent for spending and taxing too much, increasing national debt, raising tariffs and blocking trade, as well as placing millions on the dole of the government. Roosevelt attacked Hoover for “reckless and extravagant” spending, of thinking “that we ought to center control of everything in Washington as rapidly as possible,” and of leading “the greatest spending administration in peacetime in all of history.”

    By contrast, a truly “do-nothing” president, Warren G Harding (frequently and unfairly judged the worst president in US history) cut taxes and spending in response to the recession of 1920-21, which was an extremely sharp downturn. But I think the Keynesians like to paper over this one.

  8. SeanG
    October 17th, 2009 at 23:25 | #8

    @jquiggin

    Sorry Professor. You are completely correct. Keynesian economics did not fail, the entire 1970s never happened, when James Callaghan said: “We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.” He obviously was not referring to Keynesian economic policies.

    This is the problem with Keynesian economists. They believe that you can continue to tax and spend your way to a utopia that does not exist, never will exist and will bankrupt you before too long.

    That is why I am on the winning side of history. ProfQ, let us think about this away from the dreamy spires of academia to the harsh reality of the bond market. Keynesian economics is reliant on government spending to prop up demand. You and Alice et al will all carp on about that. Yet for a government to spend their way out of recession and into the promised land there must be someone willing to lend to them. Correct?

    Okay, what happens when people are no longer interested in lending?

    ProfQ I think we should look to the UK as an example of excessive government spending. Foreign investors are leaving that country in droves. So what does the government do to get people to continue to lend them money? They regulate that pension funds and banks must increase their holdings of UK Government gilts. That was not enough. Quantitative easing has now meant that you can lend to the government, turn around and get refunded by the Bank of England. In the only auction where the Government Gilts were not to be repurchased by the BoE, the auction was undersubscribed.

    You do not understand the simple fact that for a government to spend big there must be someone willing to lend. Have you ever spoken to bond traders and strategists and heard their opinions on government spending?

  9. Kevin Cox
    October 18th, 2009 at 04:54 | #9

    @SeanG

    You are confusing lending with spending. The government can (and does) lend when there is no one else willing to lend. The issue is how the money lent is spent. Governments are lending like it was going out of style. Unfortunately most of the lending is going to spending on consumption whereas if it was spent on building new productive assets we would be OK.

  10. jquiggin
    October 18th, 2009 at 07:21 | #10

    @SeanG
    SeanG, of course it’s important to consider the evidence of the 1970s. But in the light of the recent spectacular failure of market liberal economic management, you’re not going to win any arguments by slamming it down as a trump card.

    As for your attempted theoretical refutation, it’s a version of “crowding out” (investors will certainly lend to a solvent government at some rate of interest, so the standard version is that government borrowing will drive up interest rates so much as to reduce private investment by an amount equal to the stimulus). Very few economists (and even fewer now than before) believe that 100 per cent crowding out operates in recession conditions. But it’s certainly necessary to take account of possible crowding out, or, in the extreme case, of investor unwillingness to buy bonds. Pretty clearly, neither condition was applicable in Australia when the stimulus package was brought in. The bank economists I talk to confirm this, as do the actions of bond traders (whatever they may say to you down at the pub).

    In any case, this is the kind of argument you need to engage in now, and this will require actually learning some macoreconomics rather than relying on libertarian logic-chopping. Claims that “Keynesian completely failed” are not going to do it for you any longer.

  11. Michael of Summer Hill
    October 18th, 2009 at 07:33 | #11

    SeanG, the truth is there are positive signs of an export led growth recovery and you can thank governments around the world implementing Keynesian economic policies for making this possible. Furthermore, when the global economic financial crisis was at its height, nearly every economist agreed with stabilising the markets and I cannot recall one economist saying the monetarist are doing a first rate job.

  12. SeanG
    October 18th, 2009 at 09:07 | #12

    Prof Q, Australia is different from other countries and in a good way. However, how can you apply demand management to a country like the UK who has a very large government deficit whilst their currency is not a reserve currency like the USD or the Euro? The UK is a great example of the problems that excessive government spending will cause to an economy. Bank strategists are now factoring higher inflation as a fat tail probability and many are considering a Japanese lost decade as a real possibility.

    Now, I never mentioned a 100% crowding out but you automatically assume that. That is something even I disagree with. There will not be 100% crowding out but there is such a thing as crowding out!

    Fiscal conservatism, based on the Keynesian notion of surpluses during good years and deficits via automatic stabilisers is something I buy into but it is not the policy-making of politicians and many economists who label themselves Keynesians. You know that as much as I do.

    You label me as a libertarian. I am not but the fact that you are ready to label me that shows me that you are less willing to engage in this debate than I thought.

    If you were a financial market strategist in a global portfolio, what would your recommendations be to the trading floor and your clients? If you think in that way, then you have to take into consideration the risk of 0% interest rates of the medium term, FX risk in the portfolio etc etc. Once you think in these terms do you realise that things are a little dicier than the Keynesian economists simplistic notion of financial regulation and government demand-side activity.

  13. SeanG
    October 18th, 2009 at 09:12 | #13

    @Michael of Summer Hill

    There is so little in this statement that is true that it hurts.

    Michael, look at trade volumes, supply-chain management AND inventory stocks BEFORE you make a broad-based decision of a recovery via export demand. Many companies whittled down their inventory stock then asked to be resupplied which lead to some tenative signs of recovery but the devil is still in a flight to Singapore when you pass hundreds of floating ships that are not being used.

    I have a fascinating graph which I will see if I can get published here in this blog if both ProfQ and the authors allow it. It literally breaks down the different segments of the economy and shows the signs and indicators of where they are heading and presents a brilliant snap-shot of an economy in crisis. This will show that shipping which is a key determinant of any export-lead recovery is in no way making a strong comeback.

    And as to whatever economists you know, they want governments to try to stabilise markets and I agree that when things go crazy you need governments BUT there are always downside risks to every piece of government action in an economy. Once you and ProfQ acknowledge downside risks then these debates will be far more intellectually substantial than they currently are.

  14. SeanG
    October 18th, 2009 at 09:14 | #14

    @Kevin Cox

    When a government goes into deficit there needs to be lenders. Now in Australia you will see a healthy bond market because a lot of analysts look at the Aussie economy and are pretty impressed. When you have an imbalanced economy, with high structural fiscal deficits and no indicators of where future growth is coming from, then you have problems getting the government to borrow money at relatively cheap rates.

    Ask yourself this critical question – where will the yields be today if there were no quantitative easing programme?

  15. SeanG
    October 18th, 2009 at 09:34 | #15

    The problem with this debate is that we must split between theoretical Keynesian economics as embodied in the General Theory, and the policy-making based on Keynesian economics which is subject to economists and politicians bias.

    David Blanchflower was a member of the MPC in the UK and was calling for a relaxed monetary policy before the Lehman Bros. collapse when the financial system was suffering from acute lack of liquidity. He is being lauded as a visionary. He wants the taps turned on – QE and fiscal stimuli.

    However, he has said that this needs to be quickly reversed once the economy gets going again. It is easier said than done. A politician effectively controls policy along with his or her analysts and they will say a cut will produce X number of job losses. Now, many keynesian economists view demand management by government spending as vital and many politicians would view thousands of job losses as political unpalatable. So will they make those cuts? Of course not.

    I will go back to the UK because it has had a social democratic government since 1997. At this moment the deficit is approximate 12% of GDP. Out of every £4 the government spends, £1 has to be borrowed via the sale of gilts. Of the forecast deficit of £175bn, £90bn is structural whilst the rest is cyclical. Now, how are you going to cut £90bn to get the budget healthy again knowing the massive loss of jobs and a sudden retreat of aggregate demand (I am not stupid enough to think that cutting spending by £90bn is not going to have a negative effect on an economy)? The answer is that they will not.

    Now we have a problem here. Keynesian economists (left-wing, social democratic types) do not want to make cuts but they are reliant on the markets to bail them out via borrowing billions in the Gilt markets. Now, investors on the buy-side are looking at this and are thinking in far longer terms than the investment bankers are. They are seeing problems develop and no one taking responsibility for doing anything about it. It will be very damaging to the credibility of the economy.

    It is easy for David Blanchflower to say that we can suddenly cut government spending. The reality is somewhat different. Keynesian economists morally agree with the idea of big government spending and dislike cutting it. This is the problem with Keynes current acolytes – they love turning on the tap but when the reality smacks them in the face then they are lost at sea.

    Tell me: what would you do? Cut government spending, or keep the taps open?

  16. Michael of Summer Hill
    October 18th, 2009 at 10:28 | #16

    SeanG, the truth is in August, 2009 the UK’s surplus on trade in services widened by £0.1 billion to £3.9 billion, compared with the surplus of £3.8 billion in July.
    Total exports rose by £0.1 billion (0.8 per cent) to £13.3 billion, and total imports rose by less than £0.1 billion (0.2 per cent) to remain at £9.4 billion but is more or less inline with global trend whereby the value of trade for both imports and exports have been falling in recent months. But Lloyd’s Register have a more positive outlook whereby they predict the dry bulker fleet is expected to grow by an average of 9.5% per annum through to the end of 2013, whilst general cargo ships will growth a meagre 2.5% annually through to 2013.

  17. sdfc
    October 18th, 2009 at 22:15 | #17

    Seb – they were obsessed with balancing the budget. Are you really suggesting that Hoover ran an expansionary fiscal policy? If so a little history is in order. The only year in which there was structural deficit and that was in 1932 and ran at something like 0.5% of GDP.

    The recession of 1920-21 was engineered by the Fed as a deliberate policy to fight inflation. In case you are not aware, a major global conflict had just ended. The recession wasn’t characterised by financial collapse as was the case in the early 30′s, nor was private sector debt at the extraordinary levels of later in the decade. If you want to draw parallels between episodes a little more in depth analysis is needed.

    Sean, Keynesian economics doesn’t involve pump priming a full employment economy as you seem to think it is. Budgets are to be balanced over the economic cycle.

  18. SeanG
    October 19th, 2009 at 07:46 | #18

    @Michael of Summer Hill

    And the truth is you read the first paragraph of the August national statistics webpage and did not read the second paragraph showing a deficit in the trade of goods.

  19. SeanG
    October 19th, 2009 at 07:48 | #19

    Michael,

    Just for laughs I have put the few paragraphs you forgot about.

    “The UK’s deficit on trade in goods and services was £2.3 billion in August, compared with a revised deficit of £2.6 billion in July (originally published as a deficit of £2.4 billion).

    The surplus on trade in services was £3.9 billion in August, compared with the surplus of £3.8 billion in July.

    The deficit on trade in goods was £6.2 billion in August, compared with a revised deficit of £6.4 billion in July (originally published as a deficit of £6.5 billion). Exports fell by £0.1 billion and imports fell by £0.3 billion.”

    If exports rose by 0.1% and the currency has devalued against a basket of currencies by between 20-25%… what does that say?

  20. Alice
    October 19th, 2009 at 08:24 | #20

    @sdfc
    Sdfc is also of the brigade that like to suggest “keynesian policy” failed us all in the 1970s. Now unless someone can give me a good reason for calling a massive fiscal expansion into the Vietnam War, when the economy in the US was already AT or CLOSE to full employment sound fiscal policy – Ill eat my hat.

    That wasnt sound fiscal policy. I have no idea what policy that was but fear of reds under the bed and some insane response from McCarthyism and twisted cold war madness (for the cold war was mad – and so was Vietnam – so who made money out of it??).

    They havent a clue sdfc. They (the sea urchins) really dont know their history well at all and it would appear the only place they get their history is from the denialist liberal fact twisting stink tank rags like CIS and IPA. Ill bet thats the reason for their ignorance sdfc.

  21. Alice
    October 19th, 2009 at 08:25 | #21

    sdfc – I meant to say “sean is also of the brigade…. etc

  22. Michael of Summer Hill
    October 19th, 2009 at 09:22 | #22

    SeanG, just pointing out the slight improvement in seasonally adjusted figures and what lies ahead. All indications are the recession is over but the pain has not eased.

  23. SeanG
    October 20th, 2009 at 19:41 | #23

    Michael,

    Very true – unemployment will still go up, families will still be under pressure and sustainable growth is not on the horizon.

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