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Weekend reflections

February 16th, 2013

It’s time for another weekend reflections, which makes space for longer than usual comments on any topic. Side discussions to sandpits, please.

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  1. Chris Warren
    February 16th, 2013 at 11:44 | #1

    In latest Journal of Political Economy (Mike Beggs, “Zombie Marx and Modern Economics, or How I Learned to Stop Worrying and Forget the Transformation problem”, 70:11-24) there is an excellent 12 or so page article on Marx and Modern Economics. Its starting point is a criticism of Brad DeLong’s ridiculing of David Harvey. In this Delong only replicates his contemptuous approach to Marx displayed at.

    Beggs writes; “DeLong’s attack was unfair and indeed arrogant, and deserved a forthright response” so it is obviously worthwhile having a look at the DeLong fellow.

    This is DeLong’s contribution(!?) at http://tinyurl.com/yankee-spew ;

    Note well the level of discourse:

    … intellectual masturbation … any damned foolish thing he pleases.

    and etc.

    DeLong aficionados claim that:

    Any level of deficit can be financed if the interest rate is such that the deficit plus the private investment spending equals the savings that come out of the incomes generated by the corresponding level of output.

    So instead of Keynes’

    S(aving) = I(nvestment),

    we now have a crypto-Keynesian

    I(nvestment) + D(ebt) = S(aving).

    Where saving is relatively diminished by paying-off last year’s interest bill?

    Now this should be dead easy to model. However when this is done in an Excel spreadsheet – sure enough it collapses as the rate of profit inexorably declines.

    Keynesian debt is meant to produce more growth than it costs through a multiplier. But the task to pay interest lasts forever and compounds if the root cause of debt is not relieved. If you then decide to reduce the outstanding debt balance, then (at least how I have modelled it) the economic crisis erupts just as certainly.

    If we assume a competitive economy, then to start with there is no economic profit – the market is cleared at the price where average total costs meet demand.

    Capitalists the demand stimulus for their economic profit-habit.

    So we get stimulus, for arguments sake @ 10%

    Now assume costs of production – £1000, and funds in circular flow for consumption are £1000 (zero economic profits)

    We now have unhappy capitalists who will destroy social, environmental, financial, labour and/or political standards to extract profit, or plead for stimulus. To see how this works, just assume the stimulus is 10%.

    Now:

    Costs of production – £1000 (as before);
    + £100 injections,
    Profit – 10%

    And all enterprises have revenues of £1100 and jubilant managers and investors.

    However this will not work if capitalists demand the same rate of profit next year given they now have accumulated £1100. Profit falls to 8.6%

    And you need a spreadsheet to work this out.

    Costs of expanded production – £1100, Funds in circular flow £1100 + £100 injections – £5 interest, Profit [£95/1100], Profit 8.6%

    Next cycle, Profit 7.5%

    So stimulus to build the Harbour Bridge or to build a needed port makes perfect sense, stimulus to maintain capitalist profit rates, or to counter ineffective demand caused by capitalist profit rates, is fool hardy in the extreme, as they are learning slowly in Japan.

    In Japan after passing a series of stimulus packages in the early 1990s, the economy showed signs of improving and by 1995, GDP was growing at roughly an annual rate of 2.5%. DeLongian success?

    Shortly after Japan needs even greater stimulus. This is the rule not the exception.

    In any case Harvey’s reply is here:

    http://davidharvey.org/2009/02/exhibit-a-the-arrogance-of-the-neoclassical-economists/

  2. kevin1
    February 16th, 2013 at 12:49 | #2

    Had a chuckle when the new CEO of Rio Tinto said in relation to their loss that he wanted employees to “treat the company’s money like its own and to run the business like they own it, not just manage it.” That may get the desired effect!
    Reminded me of a previous Minister for Industry, Commerce and Tourism (P Lynch) who was concerned about too much competition between states for the international tourist dollar. After banging state bureaucrat heads together, he announced that “In future, the Australian Tourist Commission would be promoting Australia as a whole to overseas tourists.” (you have to say it for the effect.

  3. Tony Lynch
    February 16th, 2013 at 16:31 | #3

    Paul Krugman has had a lot of fun with “the Confidence Fairy”. But what he didn’t know is that the Confidence Fairy ONLY emerges in Australia, and ONLY – though instantaneously and on steroids – when the Coalition wins the next election under Mr. Abbott.

  4. kevin1
    February 16th, 2013 at 17:28 | #4

    @kevin1
    And then there was the sporting commentator who said on TV that Essendon put on an “enhanced performance” to beat Collingwood at the MCG last night. Ouch!

  5. hris Grealy
    February 17th, 2013 at 05:47 | #5

    Best laugh to end the week, noted islamophobe Senator Xenophobe tries to sneak into Malaysia, and doesn’t get past immigration. Carr called it surprising and disappointing, but really it’s neither. Now if they would just keep him there indefinitely……..

  6. Salient Green
    February 17th, 2013 at 07:46 | #6

    hris Grealy @ #5, Evidence please that Senator Nick Xenophon is a “noted islamophobe “?

  7. Chris Warren
    February 17th, 2013 at 07:58 | #7

    @hris Grealy

    How do you sneak into Malaysia if you arrive at an airport and show your passport at the border?

  8. Jim Rose
    February 17th, 2013 at 08:05 | #8

    Scientology is Senator Nick Xenophon’s bug-bear. He is suing the New Straits Times for editing a parliamentary speech he made against Scientology and inserting muslim instead.

    Xenophon is a supporter of Anwar Ibrahim and an observer at the malaysian elections.

    Xenophon strikes me as a left-leaning populist who is fiscally conservative and socially liberal.

  9. kevin1
    February 17th, 2013 at 08:15 | #9

    @hris Grealy
    This needs to be substantiated or withdrawn. Xenophon is an opponent of Scientology, and says a newspaper there has been “misattributing a speech I gave on Scientology, replacing the word ‘Scientology’ with the word ‘Islam,’ which was pretty rough stuff.” His Wikipedia entry gives more detail.

  10. Katz
    February 17th, 2013 at 08:59 | #10

    Jim Rose :
    Scientology is Senator Nick Xenophon’s bug-bear. He is suing the New Straits Times for editing falsifying a parliamentary speech he made against Scientology and inserting muslim instead.

    Fixed!

  11. hris Grealy
    February 17th, 2013 at 12:39 | #11

    Ok, my mistake, sorry.

  12. kevin1
    February 17th, 2013 at 15:05 | #12

    @hris Grealy
    Thanks for being big enough to say it. Not many people can!

  13. Ikonoclast
    February 17th, 2013 at 17:02 | #13

    The problem most orthodox status quo economists have is exactly that. They want to be part of the orthodox status quo. That way lies positions and sincures with the corporations, right-wing think tanks and conservative governments (all major western parties). To them, being part of a socio-ideological consensus is more important than empirical truth. A few academic economists dare to be different. But the corporate managerialists are shutting those pesky independent thinking economic departments down.

    Once they have created an intellectual monoculture with none of the right answers for anything they will have created their masterpiece; the totally maladaptive and doomed society.

  14. Jordan
    February 17th, 2013 at 22:23 | #14

    DeLong got a beating from his own commentators. I found only one comment supporting DeLong’s view.

    S(avings) = I(nvestment) + D(ebt additional)

    So, to have a rate of profit constant you have to have additional debt growth at constant rate, not constant ammount. That says, growth at constant rate is exponential just as debt grows exponentially untill it hits the ceiling due to the lag in income growth.

    That is growth of private sector debt, then we have some leeway to replace it with public sector debt growth while private debt rate is recovering with defaults and income growth.

    Public debt growth has to replace private sector debt and also agregat demand with it.
    All that benefits creditors of public debt and even incentivises them to park it there instead of into productive capacity.
    Only real cure for that is, while waiting for defaults and income growth to reduce private debt and restart its growth, is to raise income trough minimum wage and print money for employment purpose not to incentivise savings into government financial assets.

  15. TerjeP
    February 18th, 2013 at 07:12 | #15

    The latest polls suggest that federal Labor will get whipped next election. No doubt the polls will tighten as the day approaches (7 months to go) but the coalition could hardly wish for a better starting point. On preferred PM Abbott is now ahead.

    http://www.smh.com.au/opinion/political-news/pms-poll-pain-abbott-and-rudd-more-popular-20130217-2elb7.html

    Gillard should announce some tax cuts. They are always popular.

  16. Fran Barlow
    February 18th, 2013 at 09:38 | #16

    @TerjeP

    I disagree. So far Abbott has skated through — holding his fragile voter base together on little more than unfocused hatred of the regime. The Gillard regime needs to hold the LNP to account — compelling them to specify their policies. If they approached this in a structured way — setting out their own policies and their wider implications and filling in the blancks as best they could on behalf of the LNP — assuming they don’t show, this will make life much harder for the LNP trolls.

    I do believe though that in some areas — and the mining tax would be one — they can go a lot harder on differentiation — tidying up the loopholes and setting the benchmarks where anomalous profits really will be captured. They should have a progressive scale so that the more anomlaous the profits, the higher the rate.

  17. February 18th, 2013 at 09:52 | #17

    I could be wrong, but I seem to have mainly noticed Rudd referring to Julia Gillard as “the Prime Minister” still; like referring to her as “Julia” is still something he simply can’t bring himself to do.

    I can’t see the public believing his renewed media profile isn’t connected with his interest in at least being available for a challenge until there is some public smoking of the peace pipe between them. And not one like that awful meeting during the election campaign, where (as Barrie Cassidy noted at the time) it was clear that there was only person in the room even interested in trying.

  18. February 18th, 2013 at 09:53 | #18

    “…only one person in the room…”

  19. Ikonoclast
    February 18th, 2013 at 10:05 | #19

    @TerjeP

    Along with the populist tax cuts, Abbott could announce all the government services he intends to cut. Cuts in government “waste” are always popular until people realise it’s their assistance and benefits that are considered wasted spending.

    But it’s funny how the capitalists never consider industry assistance, business subsidies, borrowing subsidies (negative gearing), fossil fuel subsidies and other corporate welfare to be waste. Oh no, then it’s a “business friendly” environment.

  20. TerjeP
    February 18th, 2013 at 14:21 | #20

    Ikonoclast – don’t expect policy ideals to interfere with politics. Lest you get disappointed.

  21. Brad DeLong
    February 18th, 2013 at 23:16 | #21

    Puh-leeze. People who want to make arguments give the context. David Harvey’s argument–to the extent that it is an argument–is the Say’s Law circular-flow argument that Marx never bought, that John Stuart Mill never bought, and that Jean-Baptiste Say had repudiated by 1829:

    DeLong on Harvey:

    >After ten extremely dense paragraphs of–what can I call it? I can’t call what David Harvey does pointless intellectual masturbation because what David Harvey does does not feel good at all–we finally come to the suggestion of a shadow of an argument:

    >>The problem for the United States… is… chronic indebtedness to the rest of the world… [which] poses an economic limitation upon the size of the extra deficit…. [T]he funding of any extra deficit is contingent upon the willingness of other powers… to lend. On both counts, the economic stimulus available to the United States will almost certainly be neither large enough nor sustained enough to be up to the task of reflating the economy…

    >And we can see that here we have an internationalized version of Fama’s Fallacy. If we forced Harvey to actually construct on argument here, he might be able to: he might say that deficit financing means that the U.S. government borrow from somewhere, that Americans don’t have the savings to finance deficit spending, and that foreigners’ willingness to buy U.S. Treasury bonds is tapped out because of massive borrowing earlier in this decade. And it is at this point that we draw on neoclassical economics to save us–specifically, John Hicks (1937), “Mr. Keynes and the Classics,” the fons et origo of the neoclassical synthesis. Hicks’s IS curve gives us a menu of combinations of levels of production and interest rates at which private investment spending and public deficit spending are financed out of the flow of savings. When the level of production is higher, private savings are higher–and thus the combination of private investent and deficit that can be financed is bigger. When the level of production is lower, private savings are lower–and thus the combination of private investment and deficit that can be financed is lower. Any level of deficit can be financed if the interest rate is such that the deficit plus the private investment spending equals the savings that come out of the incomes generated by the corresponding level of output.

    >The question is thus not can government deficit spending be financed–for it can–the question is at what interest rate will financial markets finance that deficit spending. That then tells us what level of economic activity it will support. Harvey cannot say that the debt overhang means that the U.S. government cannot borrow. He must be saying that the debt overhang means that the U.S. government can only borrow at a very high interest rate that will crowd out private investment and household wealth-supported consumption spending and leave the level of production unaffected or little affected.

    >It could happen. Crowding-out is real. Is it likely to happen? Well, if it were going to happen we would have seen the interest rates on U.S. long-term government bonds spiking upwards to scarily-high levels as the stimulus bill moves through the congress and its chances of final passage grow. Did we? No. High long-term interest rates on U.S. Treasury bonds are simply not a concern right now.

    >The point is general. People who say that the stimulus won’t work are relying–whether they know it or not–on one of two channels. Either they believe that resources are in short enough supply that increased nominal spending will not increase real spending because it will be eaten up by inflation, or they believe that financial markets are such that the increased supply of bonds produced by deficit spending will push bond prices down and interest rates up enough to crowd out exports and investment spending roughly dollar-for-dollar. Both of these claims are empirical claims. And both of them are completely without support in the present conjuncture.

    >If we forced Harvey to turn his… um… into an argument we would see that the argument he would be making does not hold together. But, of course, we cannot say that Harvey’s argument does not hold together because he does not make one. He doesn’t understand Keynes, probably never read Hicks, does not understand Friedman, and I’m sure has never heard of Patinkin or Tobin or Modigliani. Yet somehow he thinks he has standing to make judgments as to the likely success of Keynesian policy moves.

    >It is a great mystery.

  22. Chris Warren
    February 19th, 2013 at 15:32 | #22

    @Brad DeLong

    I think the context was pretty well spelt out.

    Mike Begg’s comment:

    “DeLong’s attack was unfair and indeed arrogant, and deserved a forthright response”

    Plus some evidence:

    … intellectual masturbation … any damned foolish thing he pleases.

    Plus real questions whether:

    Any level of deficit can be financed if the interest rate is such that the deficit plus the private investment spending equals the savings that come out of the incomes generated by the corresponding level of output.

    makes much sense.

    First impression is that if you try and put numbers to this scenario, – it does not work.

    The incorrect context is to put words into Harvey’s mouth and to then criticise the supposed words.

    The core issue underpinning Harvey is

    economic stimulus within capitalism will almost certainly be neither large enough nor sustained enough to avoid long-run crisis.

    Stimulus may work for specific projects, but not on a capitalist-economy wide basis.

    Stimulus may work under market socialism where there is under utilised capacities.

    If stimulus works on an economy wide basis, under capitalism then there should be a very simple way to model this in an Excel spread sheet.

    Then there is another problem. If stimulus is applied how does it negate the cause that occasioned stimulus?

    It it doesn’t negate the root cause, then logically stimulus needs to be repeated, and at a higher scale.

    Has anyone noticed the general tendency for macro-instability to increase in OECD economies since the 1950′s?

  23. Brad DeLong
    February 19th, 2013 at 20:44 | #23

    You really don’t get it, do you?

    Mike Beggs says that I am unfair, and arrogant–and yet correct:

    >[O]n the point at issue, [DeLong] was right – it is a question of interest rates, not of the number of bonds that can be sold. When Harvey went on to clarify his argument, it was only with some casual empiricism of his own. He noted that he was hardly the only one to be making the argument that East Asian central banks could stop collecting US Treasuries, so that “the track of long-term treasury interest rates may go the way of the housing market data in just a couple of years (if not months).” This was an argument you could read in mainstream business pages; there was nothing particularly Marxist about it. Now that we are more than a couple of years down the track, DeLong still looks right: the yields on long-term Treasury bonds are, as I write in July 2011, about the same as they were in February 2009, when the exchange took place. The limits to stimulus have been political, not financial.

    Harvey claimed that fiscal stimulus would not work because the U.S. government would have had to borrow from the Chinese and the Chinese would not lend. The consequence of attempts at fiscal stimulus would be skyrocketing interest rates.

    It’s now 4.5 years later than it was when these arguments were first made. No skyrocketing interest rates.

    A normal Harvey–a normal Warren–would right now be asking: “Where did we go wrong? Why were are confident predictions that rising debt would call the Bond Market Vigilantes to kill us all in error? How do we need to rethink what we said 4.5 years ago? And to whom–besides the people of the North Atlantic whom we served so badly–do we need to apologize?”

    No such luck…

  24. Chris Warren
    February 19th, 2013 at 21:29 | #24

    @Brad DeLong

    With all the interplay of various factors, I do not think one can jump to any conclusion within a few years, and interest rates have not soared, but I only expect that,over decades, general macroeconomic instability will increase, at least according to the evidence here:

    http://uploads.wikidot.com/instability

    Any single measure can move in opposite directions.

    I am sure that if stimulus solves a capitalist economic crisis, it would be easy to demonstrate using an Excel spreadsheet. So the offer is still there. I have tried it but the only way I could maintain capitalist profit was by increasing the population and not reducing debt.

    Would you expect interest rates to skyrocket if the globe feared deflation? At least this seems to be the case in Japan.

    Example: [www.guardian.co.uk/business/economics-blog/2013/jan/18/japan-economic-growth-strategy-wrong]

    So don’t speak too soon, for the wheel’s still in spin, and there’s no tellin’ who that it’s namin.

  25. Jim Rose
    February 19th, 2013 at 21:56 | #25

    As Jon Elster noted “Marxian economics is, with a few exceptions, intellectually dead” and Marx’s labor theory of value is “useless at best, harmful and misleading at its not infrequent worst.”

    Popper held that Marxism had been initially scientific: Marx’s theories made predictions.

    When these predictions were not in fact borne out, the theory was saved from falsification by adding ad hoc hypotheses to explain away inconvenient facts. By this, a theory which was genuinely scientific became pseudo-scientific dogma.

  26. Chris Warren
    February 19th, 2013 at 22:59 | #26

    @Jim Rose

    What else did you learn in school?

  27. Brad DeLong
    February 20th, 2013 at 01:37 | #27

    Ah. Now I see what is going on. Mike Beggs has deleted what I regard as the key paragraph from the version of his paper published in the JoAPE. The earlier version published in Jacobin has:

    >[O]n the point at issue, [whether boosting government spending would boost employment, DeLong] was right – it is a question of interest rates, not of the number of bonds that can be sold. When Harvey went on to clarify his argument, it was only with some casual empiricism of his own. He noted that he was hardly the only one to be making the argument that East Asian central banks could stop collecting US Treasuries, so that “the track of long-term treasury interest rates may go the way of the housing market data in just a couple of years (if not months).” This was an argument you could read in mainstream business pages; there was nothing particularly Marxist about it. Now that we are more than a couple of years down the track, DeLong still looks right: the yields on long-term Treasury bonds are, as I write in July 2011, about the same as they were in February 2009, when the exchange took place. The limits to stimulus have been political, not financial.

    With that paragraph missing, Beggs’s article for why people should abandon not just Frankenstein Marx but Harvey’s Zombie Marx has much less force–as seen by Warner’s taking Beggs to be not endorsing my critique of Harvey but “criticizing” it.

    If you are turned around by π radians, it is hard to march forward…

    Brad DeLong

  28. Chris Warren
    February 20th, 2013 at 13:34 | #28

    @Brad DeLong

    This does not explain anything.

    The very idea that there are no financial limits to stimulus (just political), whether Beggs or DeLong, needs basic substantiation. This may make a great epitaph on the tombstone of capitalist economics.

    Political limitations may be necessary so that financial limitations are never reached – a hopeless expectation I might add.

    So the invitation, as above earlier, remains.

  29. Jim Rose
    February 20th, 2013 at 16:17 | #29

    @Chris Warren Marx bet the whole box and dice on the downtrodden proletariat rising up in revolution. How is the immiserisation of the proletariat going these days?

    Joan Robinson’s in her Essay on Marxian Economics first published in 1942 noted that when the communist manifesto was published in 1848, its battle cry ‘Rise up ye workers for you have nothing to lose but your chains’ would have had some currency.

    Alas 90 years later, Robinson suggested that this battle cry would have to be ‘Rise up ye workers for you have nothing to lose but your suburban home and your motor car.’

    these days, the call to the barricades would be ‘Rise up ye workers, rise up, for you have nothing to lose but your suburban home, Ipad and air points.’

  30. Chris Warren
    February 20th, 2013 at 19:27 | #30

    @Jim Rose

    Yes, plenty of people in USA and throughout Europe are loosing:

    jobs,
    savings,
    houses,
    cars, and
    future.

    Marius Kloppers may not loose his though.

    Score 1 for Joan Robinson.

  31. Jim Rose
    February 21st, 2013 at 05:39 | #31

    @Chris Warren Why is it that the further to the Left people go, the more cheerful they get about the misery of others in recessions? They are miserable when times are good.

    Most of all, they supported the discretionary fiscal, monetary and other polices that caused the recession and then support crisis management polices that deepen the recession. They want to tax and regulate their way out of recessions!

    Crisis management policies distort the incentives to hire and invest and reduce competition and efficiency. The outcome is low employment and low income for years.

    Bad government policies are responsible for depressions. While different sorts of shocks lead to ordinary downturns, it is overreactions by governments to stem the crisis that prolong and deepen downturns, turning them into depressions.

    One in three EU unemployed are Spanish because of employment protection laws.

    Cahuc et al. 2012 estimated that Spanish unemployment would be 45% lower if Spain adopted the less strict French laws! Differences in their employment protection laws accounted for nearly half of the dramatic rise in Spanish unemployment since 2007.

  32. Chris Warren
    February 21st, 2013 at 06:09 | #32

    Why is it the further Right people go the more joy they gain from destroying the livelihoods of fellow citizens and other nations? They cheer when neighborhoods are laid to waste.

    Capitalist fiscal, monetary, and political policies cause recession and anti-social, rightwing subversion of public policies based on their previous expropriation (eg Berlusconi, Rinehardt), then deepens and spreads the recession, into a global financial crisis. These rightwingers then try to cut taxes and avoid laws and social morality.

    Capitalist policies corrupt the rights for workers to earn a livelihood, misdirect investment and eliminate competition and efficiency. The outcome is ratcheting, inflation, debt, unemployment, and trade imbalances.

    Capitalist government policies have always caused cycles independently of shocks and capitalist reactions mean that following cycles are worse than the previous and operate at higher levels and damage greater numbers and worsen inequality.

    There would be no unemployed in Spain if capitalists were allowed to conscript the jobless into factories and pay them by bags of rice and flour.

    Spanish involuntary unemployment would be abolished if the Spanish economy was based on not-for-capitalist profit enterprises. And we all know this by now.

    Except for rightwing slow learners.

  33. February 21st, 2013 at 08:12 | #33

    Discretionary monetary and/or fiscal policy did not cause the GFC.

    It was a reaction to it.

    You really weren’t thinking on that one!!

  34. Chris Warren
    February 21st, 2013 at 10:54 | #34

    @nottrampis

    If there was no money or debt there would be no GFC.

    It is obvious that contradictions here broke out in the form of a GFC but only because they built on previous problems with unemployment, inflation, stagflation, and rising debt.

    The intermediate stages include recessions aplenty, anti-social subversion by corporates, monopolisation and etc.

    Noone is saying the relationship monetary and fiscal policy is a direct cause. But this is how you have corrupted the position.

    And of course monetary and fiscal levers were jerked like crazy to attempt to mitigate the catastrophe as a reaction. But this does not exclude these as causes originally.

    If they were not associated as a cause – then playing with them now would have no impact and would be a waste of time.

  35. Will
    February 21st, 2013 at 11:30 | #35

    Jim Rose :
    @Chris Warren Why is it that the further to the Left people go, the more cheerful they get about the misery of others in recessions? They are miserable when times are good.
    Most of all, they supported the discretionary fiscal, monetary and other polices that caused the recession and then support crisis management polices that deepen the recession. They want to tax and regulate their way out of recessions!
    Crisis management policies distort the incentives to hire and invest and reduce competition and efficiency. The outcome is low employment and low income for years.
    Bad government policies are responsible for depressions. While different sorts of shocks lead to ordinary downturns, it is overreactions by governments to stem the crisis that prolong and deepen downturns, turning them into depressions.
    One in three EU unemployed are Spanish because of employment protection laws.
    Cahuc et al. 2012 estimated that Spanish unemployment would be 45% lower if Spain adopted the less strict French laws! Differences in their employment protection laws accounted for nearly half of the dramatic rise in Spanish unemployment since 2007.

    Have you been living in a cave for the past decade? You apparently missed the hateful, spite-filled streak to which a large proportion of the right-wingers subscribe. I have witnessed far too many of them take joy in the suffering of their neighbours and countrymen. In the US, the Republican opposition only care about opposing Obama and have directly caused a US debt downgrade, a prolonging of their GFC and a slew of terrifying regressive economic policy, you know, how those too poor to pay income tax are “lucky duckies”, and 47% are the “takers”, and prolonged unemployment is a “nice vacation” and “clearing out the dead wood”. A good chunk also want the global economy to collapse so they can live out their nutbar violent survivalist fantasies; the welfare of everyone else in the rest of the world be damned. There is simply NO PARALLEL in this kind of thinking on the “left”.

    I used to think that John was too harsh on you for limiting you to one comment per thread per day, but given your mind-boggling propensity to spew such partisan nonsense, I have changed my original position and now regretfully concede that the need for information quality trumps your privilege to post unhindered.

  36. Jim Rose
    February 23rd, 2013 at 10:34 | #36

    @Will the great recession is the product of Obama’s policies: combination of negative productivity shocks.

    The majority of macroeconomists are New Keynesians. Not surprisingly, they have trouble understanding economic crises because they attribute it to demand issues. New Keynesians have a great deal of trouble understanding the prolongation of recessions because all that have to hang their hat on is sticky wages and prices.

    In Great Depressions of the Twentieth Century, Kehoe and Prescott (2007) in a team of 24 economists concluded that bad government policies are responsible for causing depressions. While different sorts of shocks can lead to ordinary downturns, overreaction by governments can prolong and deepen the downturn, turning it into a depression.

    Good long-run pro-growth polices quicken recoveries from recessions. crisis management policies prolong the depressing effects of these crises by impeding the normal forces of supply, demand, and competition that create jobs, investment and innovation.

    Two polar models of bank crises and what government lender-of-last-resort and deposit insurance do to arrest them or promote them were used to understand the GFC.

    They are polar models because:
    • in the Diamond-Dybvig and Bryant model, deposit insurance and other bailouts are purely a good thing stopping panic induced bank runs; and
    • In the Kareken and Wallace model, deposit insurance and lender-of-last-resorts are purely bad because moral hazard encourages risk taking unless there is regulation or there is proper surveillance and pricing of the insurance.

    Tom Sargent considers the Bryant-Diamond-Dybvig model had been very influential generally, and in 2008 among policymakers. Governments saw Bryant-Diamond-Dybvig bank runs everywhere.

    In the Diamond-Dybvig and Bryant model, if you put in government-supplied deposit insurance, people do not initiate bank runs because they trust their deposits to be safe.

    The logic of the Bryant-Diamond-Dybvig panic model of bank runs persuaded many governments that if they could arrest the actual or potential runs by convincing creditors that their loans were insured, that could be done at little or no eventual cost to the taxpayers.

    As for central banking, as Greg Mankiw noted:
    • Autobiographies and other hands-on sources show that recent developments in business cycle theory by new classical and new Keynesians have had close to zero impact on practical monetary policymaking.
    • Central banker’s analysis of economic fluctuations and monetary policy are intelligent and nuanced, but show no traces of modern macroeconomic theory, and would seem almost completely familiar to someone who was schooled in the neoclassical-Keynesian synthesis that prevailed in around 1970 and has ignored the scholarly literature ever since.

    When a list was drawn up of the ten economic papers that incoming Reagan administration should read, Kareken and Wallace’s 1978 paper on banking crises was at the top. The idea that deposit insurance leads to more crisis even troubled FDR before he signed the 1934 U.S. bill.

  37. February 23rd, 2013 at 11:31 | #37

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