When economists are unsure what exactly is going on, what does that mean? There's the quote by Buffet, "Be fearful when others are greedy and greedy when others are fearful".
What should one do when others have no idea what's going on?
I think we are witnessing a massive de-centralization of economics. We seem to live in multi-tiered cellular societies that seem decoupled from one another. People living in the same city are experience vastly different trends with some are struggling, some are prospering.
Like how small startups are able to create value that usually needed large corporate structures, small trends are becoming powerful and independent. People are getting news from a large variety of sources and living in their own bubbles.
The new normal is that there is no normal. Those who are fearful and greedy are both right, but they no longer reside in the same world.
Extrapolating from Buffet's advice, the thing to do when others are uncertain and don't know what's going would be to be extremely certain and know precisely what's going on!
Accomplishing this is left as an exercise for the reader.
"Standard new Keynesian macroeconomics essentially abstracts away from most of what is important in macroeconomics."
Yes, that has been the criticism for decades. There is nothing new here.
The only time Keynesian economics has "fixed" an economy was WW2 when we (the US, specifically) had full employment because of the draft and all of our competition had been literally flattened and/or killed.
For another look at it, check out the Keynes vs Hayek rap battle:
Don't watch that rap battle, hayek's insights are surely worse than Keynes. At least we can attribute one repaired economy to Keynes, we can attribute zero to Hayek. In addition, while Keynes may not help us resume prior output, he at least gives us some way to recover from recessions. Hayek's given us nothing, unless you're one of those people who thinks "The Road to Serfdom" is a good book.
We could have been following any economic ideology and recovered strongly post-war, for the reason caseysoftware gave. We can attribute zero to Hayek because the Keynesians have been running the economy for decades.
> We can attribute zero to Hayek because the Keynesians have been running the economy for decades.
No we can attribute zero to Hayek because he had no notable macroeconomic insights. Most of his work was related to the business cycle, investment and choice (ie. microeconomics).
First: watch the rap battle. Avoiding (or urging the avoiding) of contrarian ideas is how you perpetuate ignorance. If Keynes is worth is weight in stimulus, he'll be able to withstand the counter argument and win the day: if not, then there's even greater reason to see other perspectives.
Sorry, but not buying your argument. If anything we can attribute a greater length of the Great Depression to the Keynesian inspired policies, not a repair (assuming that is the "fixed" economy attributed to Keynes). For some reference on this consider: http://newsroom.ucla.edu/releases/FDR-s-Policies-Prolonged-D...
WW II ended the Depression insofar as its impact on employment, but it also destroyed (literally) massive amounts of accumulated capital. Global quality of life was greatly reduced: a failure by any rational standard. I suspect the necessary economic restructuring for war, and the later return to a peacetime economy, has much more to do with the repair of the economy that anything Keynes ever conjured.
Later we have substantial numbers of completely unimpressive Keynesianesque experiments, including our own current "recovery". For Hayek (or similar) you are correct: there are really no instances of his policies repairing an economy... but could you tell me how many times approaches like his have been tried? There's some argument for the Depression of 1920, but on the whole reduction in Government intervention during an economic downturn is just not how bureaucrats roll. So I count no attempts. To suggest there are no Hayekian successes because Hayek fails is simply deeply flawed thinking; there are no successes simply because those approaches have never been tried. I think the closest you can see are in certain emerging economies where, at first, no one cares to regulate because there is nothing of worth there from a political power point of view (e.g. early Hong Kong, much of the early U.S. even).
And yes, I do consider the "Road to Serfdom" a good book :-)
I didn't know until I clicked it whether this was going to be a pro-Europe or a pro-America link. Austerity hasn't ended Europe's part of the Great Recession; but the US's "recovery" has only extended to a few privileged economic areas. In the South, the Midwest, and the interior of the coastal states, the Great Recession never ended.
What about the Midwest? The Northern and West Coast interior? Are they somehow suffering from the Civil War as opposed to the never-ended-in-real-terms 2008 recession?
"Global quality of life was greatly reduced" -> and that's for the people who survived.
I think we have a handful of examples of Hayek's principles working out. JFK, Reagan, and even Bush 43 demonstrated that reducing taxes increases consumer spending across the entire system and improving the economy - less in the short term, more in the long term - and increasing government revenue at the same time al a the Laffer Curve.
Bush 43, was that the one that presided over the inflating housing bubble that burst in 2007, as well as a ballooning federal debt? A Democrat had to clean up the mess, so I guess you could call it a long-term success.
Notably the only US president since 1980 that achieved a balanced budget was Bill Clinton - unsurprisingly, he did so by raising taxes.
Of course, the important question on which opinions differ is where is the peak of the curve.
Given the data the US has collected over the last decade (see link above) it is immediately evident that current levels of taxation are to the left of the peak.
Summers is criticizing "New Keynesian" models from the 1980s that are based on mathematically sophisticated DSGE models, in contrast with original "Keynesian" models from the 1930s that were rather more ad-hoc, such as Hicks' IS/LM.
Wouldn't a simpler hypothesis be that output trends before a recession are artificially high? We know fairly well that economic trends tend to feed back on themselves; the idea that growth leads to an acceleration of growth which overreaches and ends in a crash isn't particularly far-fetched.
The problem is its very hard to tell a plausible sounding about what over artificially high production looks like. If you lived in an island economy and went from producing 100 widgets to producing 95. What exactly is artificial about the extra 5 widgets you supplied? You could argue that people were incentivized to work harder than they actually wanted to work but then you find a wage increase as we entered the recession. You could argue that technology got worse. But that's really strange because it doesn't seem like in 2008 we forgot how to efficiently make things. So that leaves the story Larry Summers is talking about.
I'm talking about what you might call "artificial demand," not capability.
Example: our corporate customers decided to buy 5 more widgets in 2007 than in 2008 because they saw the economy improving, mostly due to the growth of household on-paper wealth and the associated increase in consumer spending, and were forecasting a growth in their own business. When the housing market collapsed and consumer spending fell off a cliff, those customers no longer had any reason to buy the extra widgets.
In that way, you can say output is artificial. A large mass of people spending above their means because of a perceived increase in wealth, along with other psychological factors, leads to an economy with rising demand. When it turns out that wealth increase was a phantom and those psychological factors disappear, there is less demand for widgets and thus output decreases.
Output isn't "how much we can make," it's "how much we DO make." The amount we produce is proportional to the demand for that product.
>>>... Additionally, the pain of correction can lead to a dampening in overall demand compared to what it was before.
I went through a scenario much like this. Company had a single customer that is dominant, and that customer was over optimistic about the level of demand it was seeing from it's marketplace. Orders grew to large levels, company expands, etc...
Then reality hits. That customer has a ton of inventory and wants relief!
Worse, they could just order nothing and do a sell off for a time to recover, but that may destroy a valued partner, who didn't really do anything wrong, other than supply what they could have seen as too much. Long term, that is expensive for them as they would lose a valuable part of their product line.
The solution ended up being sharing the problem with both parties running very lean while inventory levels drop.
Now, coming out the other side, both parties are far more conservative. Risks are seen as bigger than they really are, and overall run rate business just isn't what it should be based on the data from before. Inventory, sales, and some other data is more closely tracked to answer the questions of "what DO we make?", and "Will it sell?" by both parties, who share the impacts of those answers.
Hysteresis, in the sense being talked about here, could arise from artifacts of an event like this. When things were running high, expansion came either at the expense of capital held by the company, or debt, and both of those have impacts on the risk appetite of the business. It's all moderated now.
That moderation is both real, in terms of hard data, cash, etc... and human, in that raw fear of another instability causing everyone to lose gains had since that last one...
It's been an interesting journey. The reality is a took a very considerable time to reach a point where meaningful risks make sense again. About two years. This, despite the problem itself resolved within 6 - 8 months.
Turns out, the motivation to take some new risks and make reasonable investments is being driven by a slight downward trend in sales. It's not much, but it's not growth. The additional "hysteresis" impact appears to be felt through the marketplace. That big event seemed to dampen way more than one would expect at first glance.
I believe that slight trend is the change in risk / value perception as well as the market seeing the brand fluctuate and that resulting in a loss of confidence, or a crack where competing brands gained some ground. This is hard to resolve though. There isn't enough data. I've made some changes in marketing in an attempt to get it, and or just correct for the trend in an obvious, measured way. Jury is still out on that.
Having production satisfy demand is very important in the vast majority of cases. Overproduction either tends to create instability, or a reduction in value as too much is out there, or high inventory costs that tend to marginalize the value of an overproduction event. Exceptions can be, say an overproduction to insure supply during a planned downtime, or expansion, but that can be expensive money and resource availability...
So it seems to me that we both agree that changes in perceived wealth can alter demand. We both agree this change in demand leads us to produce less than we are capable of producing. Why shouldn't we increase demand to so that we produce as many goods as we are capable of producing and exit the recession?
We do, that's what monetary policy is for (and fiscal stimulus, when warranted). The purpose is to target aggregate demand in an attempt to shift GDP towards its estimated potential. But that doesn't mean that the pre-recession level of output is sustainable, and that it corresponds to the demand level we should be targeting.
As an example, with housing prices so high there was a surge in homebuilding. No one really needed or wanted all those homes, so the demand for ex. shingles was artificially high. It would make no sense to introduce some kind of stimulus program to prop up the shingle market to its housing bubble peak. Nobody needs or wants that many shingles at that price.
The issue I take with the article is that their study compares growth levels during recovery to growth levels right before a market crash. It's not sensible; of course the latter will be higher, that's how market psychology works. It doesn't make sense to think of "potential growth" as "the highest growth we've seen."
It blows my mind that Keynesians can't identify busts that were caused by bubbles.
When the US real estate market started tanking, how was the boom supposed to continue? More construction in an over-supplied housing market? Re-train workers overnight and give them jobs in other industries? Transmute wood, concrete, shingles, tractors, bulldozers, and excavators into other materials and tools for other industries?
Keynesians believe that there is malinvestment. They just believe that malinvestment has a direct impact on per capita efficiency but doesn't have an impact on labor utilization except through aggregate demand.
Basically there is a difference between
1. 10 people growing bananas when the economy would be better off with 7 people growing bananas and 3 people growing apples.
2. 9 people growing bananas and 1 person sitting on his butt doing nothing because he can't find a banana growing job. Even though the economy would be better off with 10 banana growers then none.
The problem with recessions is that per person productivity usually goes up but less people are employed. This phenomenon is hard to explain without referencing aggregate demand.
If you read Keynes, you'll see that capital ROI is the inverse (1/x) of the share of their income that the population invests.
Yep, that simple. That's called investment multiplier, and economists were discussing at the late 00's how it could vary from one company to the other given the Keynes' identities.
Keynesians seem to think it is, given the way they think that government funded make-work construction projects will have positive effect on an economy.
> More construction in an over-supplied housing market?
You do realize that Keynes' departure from 'classical' economics was a model that depended more on aggregate demand than supply, right?
Classical economics (ie. pre-Keynesian economics) would say "just build more". Keynesian economics states that you should stimulate demand (lower interest rates, increase government spending, increase money supply, etc...). Which is exactly what got us out of the recession.
> It blows my mind that Keynesians can't identify busts that were caused by bubbles.
It's not about whether they can or can't. Some obviously did see the bubble coming (some Goldman Sachs traders famously bet against the housing market). The problem is that too many people profit from the 'bubble', and momentum takes people over the edge (because, like it or not, consumers are NOT rational).
Yeah because there's negative interest rates in Europe and the USD has already appreciated considerably.
Anyhow, low-ish interest rates were the norm for most of the US' history, rates will go up, but get used to low rates. Keeping the banks in line (not taking too much leverage) is the key to preventing another bust, not raising interest rates.
Regardless, low interest rates don't mean the US is still in a recession. There's 5% unemployment and the economy is growing. Heck, 2 of Europe's stronger economies (Switzerland and Sweden) have negative rates.
If you're theory is that when individuals move from one industry to another it causes unemployment as they retrain? If that's true then we should have seen unemployment as people shifted from other industries into construction.
Larry may be right on some points, but given his past support for and architecting of deregulation of the U.S financial system (including the repeal of the Glass-Steagall Act) while he was in the Clinton admin., along with support for the disastrous privatization of the economies of the Post-Soviet states that's lead to massive human suffering and political failure, as well as gambling with Harvard's endowment and losing the school $1.8 billion, triggering layoffs and budget slashing, I think we'd do well to find advice from those with a less predictable and disastrous track record.
"support for the disastrous privatization of the economies of the Post-Soviet states that's lead to massive human suffering"
Lack of privatization in Post-Soviet states lead to massive human suffering. In Poland the government constantly subsidies all companies that weren't privitzed in 90s. What's worse quality of products and services in these industries is terrible. That's why for instance electricity in Poland is one of the most expensive in Europe. And it is impossible to change anything because all these companies are highly unionized and have huge political influences during elections.
Little state ownership may work fine in countries that has different culture in rest of the economy has been capitalistic for last 200 years. In Post-Soviet world it is disastrous. Look at Russia for intance - Gazprom and other state companies were overtaken by the Putin's mafia.
Sort of. The Russian government still owns a majority stake in Gazprom and Putin's conquests have been under the banner of moving corrupt private oil companies back into the public hands of Gazprom. So it's really a landgrab by the state, which happens to own a private company. But it was the US's policy of rapid "shock" privatisation which resulted in the unmanaged sell-off of the original state assets in the 1990s and the creation of those oligarchs. It's like selling USPS for $1m - that's not privatisation, it's madness.
I agree that Russia is a very extreme case, but it would be difficult to find any place in the world where privatization was not done in the benefit of a few friends of the people in power.
Mexico and Carlos Slim comes to mind for instance.
Many European countries have very large (dominant even) state owned power companies that work pretty well.
But really the argument about Russian privatization is that it ought to have been executed less poorly, for example not donating most state property to a few corrupt oligarchs.
I would not use words "poor execution" to describe a process that achieved its exact intended effect. Nor does it have anything whatsoever to do with any American economic advisors.
It only looks like a failure if we assume that the Soviet (and post-Soviet Russian) state considered its subjects as stakeholders, which has never been the case.
>Lack of privatization in Post-Soviet states lead to massive human suffering.
No, lack of rule-of-law and stochasticity (allowance of firms to succeed or fail on their own merits) lead to massive human suffering. If you "privatize" everything without solid rule-of-law and with bank bailouts, you get massive human suffering and no growth. If you "nationalize" things without solid rule-of-law and without allowing experiments in new ways of doing things, you get massive human suffering and no growth.
Repealing Glass-Steagall was not a bad thing. In the recent financial meltdown, diversified financial institutions like JP Morgan survived, and less diversified institutions like AIG, WaMu, Bear Sterns and Lehman did not. Even the i-banks that survived, like Goldmann and Merrill, did so by diversifying. Goldmann became a bank holding company and Merrill merged with B of A.
I don't have the background to address the other points, but the focus on Glass-Steagall annoys me because the counterproof is so obvious.
Goldman became a bank holding company so that they could access a fed emergency lending facility. Without that lending facility, they probably would have collapsed. They didn't hesitate to organize their new bank in a way that was profitable, but they didn't diversify to survive, they begged for a different legal classification so that they could get a big loan.
AIG collapsed because instead of a boring insurance company, it was a boring insurance company with a bunch of people trading crazy financial derivatives. Under Glass-Steagall, the insurance business wouldn't have been exposed to those derivatives.
> Under Glass-Steagall, the insurance business wouldn't have been exposed to those derivatives.
Glass-Steagall was a law that regulated banks, i.e. financial institutions that accepted deposits. AIG would never have been covered by Glass-Steagall.
This is one reason I find the topic annoying: people ascribe all sorts of effects to Glass-Steagall that it did not actually do.
Under federal law a bank is a financial institution that accepts deposits from consumers and businesses. If a financial institution is not accepting and holding deposits, it's not a bank. (This is greatly simplified but it's a key differentiator.)
Laws are targeted toward different types of financial institutions. Glass-Steagall was a law that applied to banks, and prevented them from selling securities.
But if a financial institution wasn't a bank, then Glass-Steagall did not apply to them. AIG did not hold deposits so it wasn't a bank. So no G-S.
Edit: to help connect the dots--what I'm referring to above are technically called "commercial banks."
From the G-S page: "The term Glass–Steagall Act usually refers to four provisions of the U.S. Banking Act of 1933 that limited commercial bank securities activities and affiliations within commercial banks and securities firms."
In general, different kinds of financial institutions are regulated by different regulatory agencies. This is as good a place to start as any:
Back then, you could shop for your regulator. Often companies shopped for the most lax regulator. AIG purchased a tiny credit union and then got themselves to be regulated by the "Office of Thrift Supervision": https://en.wikipedia.org/wiki/Office_of_Thrift_Supervision
The wikipedia article has details on the other organizations who did this.
Should AIG have been regulated by a tiny 30-person regulator? You judge, here is AIG's credit presentation: http://www.aig.com/Chartis/internet/US/en/FinalConf_revised_...
AIG had a 1/2 Trillion USD one-way unhedged credit default swap exposure, amongst other exposures.
>In the recent financial meltdown, diversified financial institutions like JP Morgan survived, and less diversified institutions like AIG, WaMu, Bear Sterns and Lehman did not.
Why is this argument still around? Yes, "diversified financial institutions" (i.e., too-big-to-fail banks) survived, because they had tremendous political power as a result of their consolidation. The idea that there were too-big-to-fail institutions is not a victory, it's a defeat. These are the institutions that caused the problem in the first place! The fact that they live on is a travesty.
Because it's true. The topic has been so politicized now that it's almost impossible to have an even discussion about it, which is part of what I find annoying.
Too big to fail is not about diversification, it is about the scope of capital assets and counterparty risk. USAA, for example, is a diversified institution that would have been illegal under Glass-Steagall but navigated the meltdown well on their own. Meanwhile every institution I list above was too big to fail but would never have been covered by Glass-Steagall--not to mention Fannie and Freddie.
Edit to add: IMO "Glass-Steagall" has become political shorthand, a sort of litmus test to see if people are for or against big banks that socialize risk and privatize profits. But G-S was a real law that was rather limited in scope. If we fail to understand the detailed realities of the financial meltdown, we will fail to prevent the next one.
This is the "regulation is ineffective, let's get rid of it" argument. Yes, by the time of its repeal banks had found ways around Glass-Steagall, both legal and illegal. The conclusion should not be that we should get rid of GS, we should extend it to cover those holes. Banks finding new ways to extend their size and reach is a metastatic event.
I think the argument persists because it accelerated the shift towards a new banking paradigm, where regional banking was swallowed up by massive financial institutions.
There are plenty of examples where the ability to diversify has strengthened many institutions. But there has also been some very negative affects. If you are too small to be big and too big to get government loan guarantees, or outside of a major metro, bank financing isn't really an option anymore.
We had a few smaller manufacturing businesses in my area that folded up not due to foreign competition, but from being starved of capital. The banks they depended on got swallowed up, and the folks in the banks that understood their business were laid off. The dude in NYC or Boston who made loan decisions had no clue.
"disastrous privatization of the economies of the Post-Soviet states that's lead to massive human suffering and political failure"
Communists around the world killed between 60 million and 100 million people (there is debate among scholars as to the exact number).[0] Stalin killed the "wealthy" peasants, enslaved Eastern Europe, and carted millions off to work camps in Siberia (where they would eventually die or become broken people). Pol Pot killed 2 million of his own people as a "social engineering" experiment (after studying Rousseau). Mao killed 45 million in 4 years. Can anyone say "massive human suffering and political failure"?
It's true that the Post-Soviet states have had mixed results, based upon which have privatized industry and enacted pro-freedom policies, and also based upon which people retained trace Enlightenment notions of the government's relationship to its citizenry. Estonia, for example, has flourished: "The foundation was laid in 1992 when Mart Laar, Estonia’s prime minister at the time, defibrillated the flat-lining economy. In less than two years his young government (average age: 35) gave Estonia a flat income-tax, free trade, sound money and privatisation. New businesses could be registered smoothly and without delays, an important spur for geeks lying in wait."[1] In Russia, a heavy-industrial and resource-based country (partly thanks to Stalin's 5-year-plans and massive capital theft from the Eastern Bloc countries), former Communist officials assumed ownership of state assets during the transition, and it predictably has not done as well.
Again, we can argue that liberalization has not occurred to a great extent in countries such as Russia, where a strongman still rules. (It's probably the case that places with massive natural resources have had greater struggles, as there was probably better opportunity for collusion by the political oligopoly. Less resource-rich countries have on-average fared better.) We can have an intelligent discussion comparing each of those countries based on the different policies they have enacted. However, to drop historical context of life (and death) during the Soviet era is completely ludicrous.
I'm not saying they shouldn't have privatized at all, I'm saying the way they privatized was disastrous. Summers was deeply involved in supporting terrible policy and putting corrupt US economic advisors in Russia to advise Yelstin. Those US economic advisors then worked to profit off the policies they were pushing.
Perhaps instead of giving cheap money to the banks so they can make a profit at our expense, we could give the money to the people so they can use it the 'best' way for them (save, spend, pay off debt etc)
"None of the above" means no money at all. Money is issued by the central bank with the authority granted by the government which is in turn granted by the people.
So long as there is money, there will be a monetary policy. The government doing "nothing" is not an option.
I think nothing (or as fche said "none of the above) was an option. The economy is sick because we insisted the sickest companies in the economy were "too big to fail". We're keeping them on life support when they're sucking the life out of the economy.
People --> government --> central bank --> money --> people...
This is 2015, why do we need so many middle men and such an inefficient closed source volatile paper based system? How about letting the people issue their own money based on open source computer algorithms and p2p networks instead of oligarchy voodoo?
These are quite bold, and arguably heretical statements to modern neoclassical economics:
New Keynesian models imply that stabilization policies cannot affect the average level of output over time and that the only effect policy can have is on the amplitude of economic fluctuations, not on the level of output
But Summers tries to refute that, just by saying it's absurd and giving the costanzian platitude "well I gotta do something!"
I think he makes his best point by saying:
Beginning the study of stabilization with this assumption takes away much of the motivation for doing macroeconomics.
Surprise surprise, world's central banks are engaged on the largest bout of central planning the world has even seen and... guess what, it doesn't work!
Perhaps if we expand the meaning of Keyensian "Government investment in infrastructure" to include human infrastructure and provide stimulus, or at least a stable platform, for the actual nodes of demand (the people) we can get back to optimal growth faster.
The idea that we can have a quarter of the people or more (the poor and working poor) in a state of playing zero sum or negative sum games -- exploitative economic relationships -- non-convex factors in what should, ideally, be a convex efficiency curve, and still reach market efficiency is silly. We just reach the state where the convex portions of our economy cannot compensate for those massive destructions or stagnations of value during times of contraction so it is easier to shake those results out of the aggregate. But that destruction of value happens even in times of relative prosperity and overall growth and it would be wise to whittle down the problem while is relatively painless.
Take pain and death out of the equation for the people through direct stimulus. Create a market where everyone must be enticed with value-add to trade. Watch demand bubble up and create the strongest growth possible.
Guaranteed minimum income, reverse taxation, or merely a solid welfare program that provides solid housing, food, and medical care -- basically anything that someone would die or be in pain without...these are all possible solutions.
I'd advocate for an experimental approach with smaller populations with different possible solutions, ratcheting them up as they are shown to be successful and sustainable.
>> Guaranteed minimum income, reverse taxation, or merely a solid welfare program that provides solid housing, food, and medical care
The only problem with this is how this is impossible to scale to proper levels in the US.
This works great in smaller economies (like you're advocating) like Scandinavian countries where you have a much smaller population and it's easy to support a few million people. You also have to take into account the Scandinavian cultural norms as well.
When you have over 300 million? As we've seen in recent years, when you institute measures like this it actually creates more dependency and self reliance on the government - not something I would think you'd want to advocate on such a large scale.
We are all dependent on government in at least some ways. Unless you don't drive on public roads, don't send your kids to public schools, and don't use US Mail.
Here's a great opportunity for a little informal HN poll. When was the last time you used the postal service to send a letter? Sure, I've got a box that gets junk mail every day, but the only time I send anything are one-off bills where they don't have an option for on-line payments.
So, if you're looking at .gov as a service provider, why give it a monopoly on providing those services if that makes its users dependent on it? Roads may be a little tricky, of course, but some services like US Mail could surely do with a few competitors to bring prices down and service up.
UPS and FedEx. They don't do individual letters, of course, but they compete with the US Mail on packages, and compete by offering better service, not on price.
I tend to agree with you when it comes to Guaranteed Minimum Income. Reverse taxation is a bit more murky. And I absolutely think a solid welfare program is possible -- we are within a stone's throw of that as things stand now we'd just need to streamline things a bit.
Also, your concern is why I'd advocate for a small pop to large pop experimental approach.
I don't think government dependence is a prima facie bad thing. If we assume that people are mostly rational and can make decisions that are best for themselves the government dependence problem would work itself out. We have a problem with it, now, because it is in a persons best interest to step out of the zero sum and negative sum games that the poor are forced into for, sometimes, decades or lifetimes. But if we ensure people have just enough guaranteed assistance to not starve, go homeless, or die from lack of medical care we can ensure that the vast majority of transactions -- including trading one's time to create value for an employer -- are positive sum transactions. People will tend to make the most of that if we assume a basic level of self interest and rationality. Government assistance would be a steady state of mere survival while the market would offer positive growth and an improvement of one's condition.
The idea of basic income is that it provides the basic human rights in a more libertarian manner (instead of the government providing services, the government gives you money). So, if someone doesn't have enough money to buy food, they won't starve to death and the facilitation of this human right is done via the market in basic income. I don't think a basic income set to provide basic human rights is going to create any sort of drug-user like dependency on the government.
Regarding population, when you have more people you get more money.
> You also have to take into account the Scandinavian cultural norms as well.
In the US, the banking and military sectors - and a large chunk of tech - are at least as dependent on government handouts.
So the problem isn't one of scale, which is already huge. It's one of distribution.
Money on its own is not the solution. You can only grow an economy when people are building useful things of all kinds, doing useful things for each other, and creating new businesses.
The big problem in the US isn't capitalism as such, it's the fact that there's a layer of old and new money privilege accreted around Wall St and Washington. It's such a resource sink it has literally locked out most of the rest of the population.
It's a networking and patronage problem. The money is just a symptom.
If you're on the right side of the social firewall you can be a complete failure and still get jobs at C-suite and board level. (See recent examples from any number of tech companies - which are the obvious symptoms of a much bigger issue.)
Prosperity only happens when an economy rewards ability much more than it rewards the benefits of in-caste relationships.
This isn't even considered an issue in most descriptions of economics, but it's a huge influence at every level of business. And with the partial exception of the startup/accelerator/incubator scene, the current situation in the US has been a tragic brake on real growth.
The best you'll get from throwing money at people is temporarily less crime, starvation, and homelessness. Those are big wins on their own, but they're a bandaid and the improvement isn't really sustainable. For a growth-oriented economy, more is needed.
Exactly right. The US Military (and Israel, for that matter) get a guaranteed minimum income from the US government. Why not the average person on the street?
> In the US, the banking and military sectors - and a large chunk of tech - are at least as dependent on government handouts.
> So the problem isn't one of scale, which is already huge. It's one of distribution.
Ah, but those industries are concentrated interests. The individual value proposition is sufficient for people in these industries to lobby the government, because there's an enormous amount of wealth available to be transferred to a relatively small number of individuals.
On the other hand, the scenario you're proposing is that same enormous amount of wealth available to be transferred to an enormous number of individuals. The upside per individual is relatively small, and most individuals are better off spending their time and resources on things that can more directly improve their life (like going to work, getting an education, exercising, enjoying entertainment, etc.). Note that this isn't individuals making a mistake or being irrational. They're acting in their self-interest.
It's easy to say that "we" should just redistribute the subsidies on big industry to the entire population. But it is, as far as I can tell, not a remotely feasible goal.
> "The big problem in the US isn't capitalism as such, it's the fact that there's a layer of old and new money privilege accreted around Wall St and Washington. It's such a resource sink it has literally locked out most of the rest of the population."
Just thinking out loud about this, but could part of the fix for this be using a debt jubilee to reset debt after a set number of years?
When the government decides that it's willing to do something as interventionist as bailing out literally everyone, that places a lot of political risk over the financial industry as a whole. One can't be sure that intervention will always be for the best, after all.
Safety will be more valuable than ever, so those with huge lump sums of existing Capital will have even more power. We could replace modern corporate finance with good old-fashioned robber-baron family-finance operations like Carnegie, Rockefeller, and Gould.
Okay, how about this: Ownership of any property or asset can only last a maximum of 50 years. After this point ownership will either revert back to the commons or can be repurchased at current market rates.
> "So in essence the government seizes all property and rents it back to us? Geez, man. Even medieval serfs could own property on better terms than that."
The ownership wouldn't transmit back to the government, it'd be converted into public property but with the option to renew ownership. Public property is not the same as government owned.
The idea is to get rid of accumulation of wealth beyond a single generation, i.e. in general you only own what you earned in your own lifetime (plus some extra from the generation that preceded you).
Could you be specific about which programs you're referring to? I'd also appreciate specific figures about expenditures, and what percentage of people are dependent on public welfare programs.
The figures I've seen suggest that in the US, 50% of welfare beneficiaries are long-term dependents, but they have bouts of it, going in and out of welfare over the course of (on average) 12 years.
If you dig into specific programs, I think generally you find that programs fail because they aren't giving people enough resources to become self-sufficient, and are expecting results on too short a time frame.
> The only problem with this is how this is impossible to scale to proper levels in the US.
I've yet to see a coherent argument for this claim.
> This works great in smaller economies (like you're advocating) like Scandinavian countries where you have a much smaller population and it's easy to support a few million people.
Why would this work better in a smaller economy? Why would it be easier for an economy of 30 million people to support N needy people than for an economy of 300 million people to support 10N?
> When you have over 300 million? As we've seen in recent years, when you institute measures like this it actually creates more dependency and self reliance on the government
How have we seen this? I don't see any evidence that "measures like this" have actually been instituted, much less that they have been instituted and observed to produce the results you suggest.
It's the favourite argument against anything and everything the US isn't doing. It has the benefit that it pretty much only falls flat when China or India is doing something successfully.
Of course, the problem is that almost everything it gets applied to can be decomposed neatly into, independently operated geographic regions - whether states, or counties or groups of such - if the scale becomes a challenge.
Arguably scale rather creates great opportunities. Subdivision coupled with looser coordination and knowledge exchange means systemic failure at the top of each system can be contained by leaning on the others. E.g. the UK National Health Service is split into many "trusts" and failing trusts are often either put under the control - temporarily or long term - of successful ones, or given more focused support from surrounding trusts to get back on track. Any number of trusts can be badly mismanaged without creating existential threats to the health service as a whole.
The larger the overall system, the more such trusts can be run at whatever the ideal scale is for optimizing system cost rather than having to scale them down to spread the risk; and the more such trusts, the easier it becomes to absorb individual failures without too big effects on surrounding ones.
The "the US is too big" argument gets dragged out for all kinds of things, and it is total nonsense. You have more people to pay, but you have equivalently more jobs. And conveniently, you have administrative subdivisions: States. And not that many of them have more people than the Scandinavian countries.
Furthermore, none of them have more people than Germany (~80 million), the country where the modern welfare state was born (Bismark put in place the first welfare reforms as a means to try to stop the growth of the socialist groups that were becoming a threat to the political stability of Prussia; though while he gave with one hand, he outlawed dozens of them with the other).
Of course, even the Scandinavian countries subdivides provisioning of these services further, down to the county level for many types of services.
In other words: This is a problem that decomposes very nicely, and that scales up accordingly. Just threat it as a suitable number of independent systems. They still have the economies of scale to make it reasonably efficient. You have some added complications, but also the benefit of being able to study differences in the various implementations and copy the most effective practices. Scale is opportunity here, first and foremost, not a problem.
> You also have to take into account the Scandinavian cultural norms as well.
As a Scandinavian, I'm very curious about what Scandinavian cultural norms you believe makes this easier that isn't present elsewhere. Besides, it's not just Scandinavia that has a comprehensive welfare system. Most Western-European countries do.
> As we've seen in recent years, when you institute measures like this it actually creates more dependency and self reliance on the government
This is only a "problem" when you don't consider that the alternative is that these people starve, live in substandard housing or go without important medical care. Nobody wants people to be dependent on welfare, but I prefer "welfare dependence" to having people grow up destitute.
If/when there are jobs that pay enough, fine, put strict conditions in place to push people to take them or lose benefits. But when there aren't enough jobs, or the ones that are available doesn't cover housing or food nothing good is achieved by not providing support for the basics.
> Germany (~80 million), the country where the modern welfare state was born
When discussing social services, it's also important to discuss borders, because of the real-or-imagined threat of people doing all their tax-paying years in one jurisdiction and all their benefit-drawing years in another.
The various US states have been dealing with tenuous internal boundaries for 200 years, and it has affected the evolution of their various tax/benefit systems.
In contrast, Germany--as part of the EU--has done the same for only about 20 years, and is even now poised to break/bend the agreement to deter an influx of migrants.
TLDR: It much easier to maintain a high-welfare state when you have strong border-controls or are geographically remote from waves of immigration.
>In contrast, Germany--as part of the EU--has done the same for only about 20 years, and is even now poised to break/bend the agreement to deter an influx of migrants.
Wait a minute.
1) It's not just Germany. The Schengen area inside and partly outside the EU is playing catch-up with the consequences of increased work migration. We can even say the whole EU has tried to come up with solutions since the Eastern European states joined.
2) Currently Germany is one of the few countries /not/ trying to deter migrants. That does not only apply to refugees but also migrants from South and East Europe. It's a couple of other countries bending rules here.
3) Stop conflating intra-EU migration with the refugees.
Yes, it would be terrible if people started depending on government for the safety of the air traffic system, the maintenance of clean air and water, or the existence of a stable and universally accepted currency.
I mean, can you imagine? Just...total horror. If only there was a word to describe this nightmarish dependence on government.
Wait, what's that? There is a word? Oh, right, civilization.
Unfortunately, your partisan blinders made you read an innocent comment about how to provide a safety net without fostering dependency as an anti-government screed that you had to blast a bunch of liberal talking points to counter.
What you could have done was instead read it for what it is.
Sorry, what? Acknowledgemetns of basic reality are now "liberal talking points"?
Um, ok.
More the point, negative forms of dependency are fostered by reducing people's options, not increasing them. If you're really worried about dependency (and not, say, maintaining a status quo that features a cheap, easily exploited, and largely disposable labor pool) worry less about making life's basic necessities a reward and more about the kind of society that can develop when basic security is a baseline.
>The only problem with this is how this is impossible to scale to proper levels in the US.
This is obviously false when you consider the simple fact that there already exists a renewable surplus of food water and shelter in the US. There are more than 5 empty houses for every homeless person in the US. This is a distribution problem, not a production problem.
The way I think about this, is that currency is a form of information. If we want an optimal economy, we want everyone to have table stakes at least, so we can get more information. I don't see how to get universal participation in the information flows without something like basic income.
I like your concave / convex image, thanks for that.
Another way to think if it is that money is a measure of the ability to overcome barriers to cooperation. (That is, you don't need money at all if everyone were already cooperating with each other.)
This would imply that our economic measurements are inaccurate if they don't account for the situations where people cooperate without exchanging money (for instance, raising a child.) Thus maximizing money flows in the current economy only maximizes cooperation where otherwise it would not happen, not cooperation in general, and you run the risk of optimizing for behaviors that people are actively against (and don't want to cooperate), while penalizing behaviors that people like (where they would cooperate for very little.)
You can end up paying people to fight each other, while failing to pay them to help each other.
I don't know if there is a good way to deal with this directly, but there are a couple ways to deal with it indirectly. Basic income is one such method, though you could also pay people for performing civic responsibilities or charitable work. (Some of this already exists, of course.)
Great way to sum up the problem with market-for-everything ideology. The valuable things that people do often aren't transactionalized but sometimes they are commemorated.
I'm slowly working on an idea for an alternate cryptocurrency based on commemorating ordinary human moments (instead of CPU time as the source of scarcity).
What I mean is that you can't be paid to raise a child, but you can be paid to manipulate them through marketing. You won't get paid to pick of trash off the street, but you can get paid to produce things that produce street-prone trash.
"And if you could pay someone to do something they normally wouldn't wouldn't they be merely passively not for it and not actively against that thing?"
It doesn't matter. They might be actively against it, but if you pay them enough, they'll still do it. We -- as a society -- pay people to do things that nobody really wants to have happen except those who happen get paid to do it (like market cigarettes.) And there are things that everybody wants to have happen that almost nobody gets paid to do (like care for your family.)
We're potentially using our economy to create problems rather than solve them.
> Thus maximizing money flows in the current economy only maximizes cooperation where otherwise it would not happen, not cooperation in general, and you run the risk of optimizing for behaviors that people are actively against (and don't want to cooperate), while penalizing behaviors that people like (where they would cooperate for very little.)
I need to think about this VERY HARD. I've never seen it put that way before.
Alan Watts did a great bit back in the day about money as an information network and how basic income is necessary for automation:
>And one of the reasons that our technology is impeded and prevented from feeding the world properly is the failure of one of our networks. It's an information network and it's called money, about which we have the most unbelievable superstitions and psychological blocks...
>Now what happens then when you introduce technology into production? You produce enormous quantities of goods by technological methods but at the same time you put people out of work. You can say, "Oh but it always creates more jobs. There will always be more jobs." Yes, but lots of them will be futile jobs. They will be jobs making every kind of frippery and unnecessary contraption, and one will also at the same time have to beguile the public into feeling that they need and want these completely unnecessary things that aren't even beautiful. And therefore an enormous amount of nonsense employment and busy work, bureaucratic and otherwise, has to be created in order to keep people working, because we believe as good Protestants that the devil finds work for idle hands to do. But the basic principle of the whole thing has been completely overlooked, that the purpose of the machine is to make drudgery unnecessary. And if we don't allow it to achieve its purpose we live in a constant state of self-frustration.
>So then if a given manufacturer automates his plant and dismisses his labor force and they have to operate on a very much diminished income, (say some sort of dole), the manufacturer suddenly finds that the public does not have the wherewithal to buy his products. And therefore he has invested in this expensive automative machinery to no purpose. And therefore obviously the public has to be provided with the means of purchasing what the machines produce.
>People say, "That's not fair. Where's the money going to come from? Who's gonna pay for it?" The answer is the machine. The machine pays for it, because the machine works for the manufacturer and for the community. This is not saying you see that a...this is not the statist or communist idea that you expropriate the manufacture and say you can't own and run this factory anymore, it is owned by the government. It is only saying that the government or the people have to be responsible for issuing to themselves sufficient credit to circulate the goods they are producing and have to balance the measuring standard of money with the gross national product. That means that taxation is obsolete - completely obsolete. It ought to go the other way.
>Theobald points out that every individual should be assured of a minimum income. Now you see that absolutely horrifies most people. “Say all these wastrels, these people who are out of a job because they're really lazy see... ah giving them money?” Yeah, because otherwise the machines can't work. They come to a blockage.
>This was the situation of the Great Depression when here we were still, in a material sense, a very rich country, with plenty of fields and farms and mines and factories...everything going. But suddenly because of a psychological hang-up, because of a mysterious mumbo-jumbo about the economy, about the banking, we were all miserable and poor - starving in the midst of plenty. Just because of a psychological hang-up. And that hang-up is that money is real, and that people ought to suffer in order to get it. But the whole point of the machine is to relieve you of that suffering. It is ingenuity. You see we are psychologically back in the 17th century and technically in the 20th. And here comes the problem.
>So what we have to find out how to do is to change the psychological attitude to money and to wealth and further more to pleasure and further more to the nature of work.
> I'd advocate for an experimental approach with smaller populations with different possible solutions, ratcheting them up as they are shown to be successful and sustainable.
That sounds like exactly the kind of situation where different states try different things, then the Federal government does something after it sees which ones worked. This approach has been something of a pattern for trying new things in the US.
Yes, and one of the secret ingredients to the success of the US.
But as decades pass, people seem to want to skip those first steps and jump right to the Federal level and refuse to budge if they cannot get the entire nation to make some leap or another with them.
That evolving 'Everybody or Nobody' attitude is killing one of the strengths of the US system.
The problem with a job guarantee is that you're forcing people to sell their time in order to live. This is nearly the definition of an exploitative economic relationship and borders on state run slavery.
Just wanted to point that the idea is to offer an alternative job, not to force nobody to do anything. Currently, in a lot of countries, unemployment payment just run for a while and only if you worked before. Then, if you can't find a job you have a serious problem.
Job guarantee also "force" a minimum wage in the economy without need of big controls. It can be though as another automatic stabilizer.
Anyway, maybe you are right. I haven't made up my mind about it yet.
The problem I've always had when "job guarantees" come up is what about those that can't work? Be it from disability, age, or something else. Would we also need a separate welfare system in place for these people? If so why not just have one system like basic income that provides for everyone.
The other problem I have is that these are most likely to be busy work jobs. With something like basic income you could spend your time doing whatever you want. Anything from nothing, to art, to working for a company.
I don't know if basic income has any major downsides (I'm not an economist by any means), but to me guaranteed jobs seem like a worse alternative.
I think you're (not deliberately) beating around the bush. The problem is not that we're only now becoming clever or wise enough to implement demand-driving economic policies in a time of secular demand shortages, but that, for decades now, the very zero-sum and negative-sum games we so deplore (exploitation of the weak, exploitation of the public purse, freeriding on the public purse, rentiering of all kinds) have been treated as the intended goal of economic policy.
Starting in the 1970s, Western societies' economic planners set out to hold inflation down, at all costs, including high unemployment. They did this because they were confronted with stagflation, oil crises, labor militancy, and a crisis of corporate profitability, and they naively believed that deflationary depressions were a solved problem.
They succeeded, and today's economy is their program of governance gone horribly right.
The explicit goals of our sociopolitical economy as stated in the 1913 Federal Reserve Act are (paraphrased) as follows:
1. Maximum employment
2. Stable prices
3. Moderate interest rates
I'd say all of these should be reevaluated, most importantly #'s 1 and 2.
Instead of "putting country X back to work" we should consider the current state of automative abundance and the basic economic principle of "too many cooks in the kitchen". So instead of maximum employment, maybe we should think about minimum employment?
#2 should also be reconsidered in light of exponential growth of our technology and the resulting ephemeralization. We are producing goods and services better, faster, and cheaper at exponential rates. So prices should tend to reflect this reality, and diminish, not stay the same.
"How can we provide the maximum quality of life to everyone with the minimum amount of jobs? And what level of resources can we commit to automating away the rest of jobs in this century?"
There are two very important things that would need to be factored in before we start to better understand what is going on.
1) We need to understand that we live in a global economy not a national one. One of the key elements to understanding this global economy would probably be to look at something like Supply Chain Management. I.e. the productivity of china should be closely tied with an understand of US economy. They aren't separate anymore than two computers connected via a network is.
2) We need to find a way to factor in technology, digitalization and automatization instead of treating it as the externality it is today, by almost all economic thinkers.
Especially those who advice countries and central banks. It is one of the key components in understanding what is going on. And before we find a way to factor that in, we will keep fighting in the blind.
Until then we will have this fruitless idealistic fight between Keynes and Austerity and not get to the heart of the discussion.
Your ideas strongly relate to the message of the late Buckminster Fuller, former president of the Mensa Society and winner of the Presidential Medal of Freedom. Here are just a couple quotes that your post made me think of:
>Humanity is now experiencing history's most difficult evolutionary transformation. We are moving away from a rooted life-style with a 95-percent rate of illiteracy. We are almost unconsciously drifting away from selfidentity with our ages-long, physically-remote-from-one-another existence as 150 separate, sovereign nations. Now the uprooted humans of all nations are spontaneously deploying into their physically integrated highways and airways and satellite-relayed telephone speakways, into a big-city way-stationed, world-around living system. We may soon be atom-bombed into extinction by the preemptive folly of the political puppet administrators fronting for the exclusively-for-money-making, supranational corporations' weaponry industry of the now hopelessly bankrupt greatest-weapons-manufacturing nation (the U.S.A.). If not bomb-terminated, we are on our ever swifter way to becoming an omni-integrated, majorly literate, unified Spaceship Earth society. The new human networks' emergence represents the natural evolutionary expansion into the just completed, thirty-years-in - its-buildings world-embracing, physical communications network. The new reorienting of human networking constitutes the heart-and-mind-pumped flow of life and intellect into the world arteries.
-Grunch of Giants (1982)
>I'm going to give you an important kind of a picture. I hear a lot of people say "I don't like machinery and technology it's making a lot of trouble", so were going to take all the machinery away from all the countries of the world, all machinery, all the tracks and the wires, and the works and were going to dump it all in the ocean. And you discover that within 6 months, 2 billion people will die of starvation having gone through great pain. So we say "that's not a very good idea lets put all the machinery back where it was." Then, were going to take all the politicians from all the countries around the world and we're going to send them on a trip around the sun, and you'll find we keep right on eating. And the political barriers now... scientists say very clear you could make the world work and take care of 100% of the people at a higher standard of living that anyone has ever known despite the increasing population, but you cant do it with the barriers, any more than you can try run a human organism with a wall between the ear the eye and the stomach. It is an organic whole, it is total industrialization.
Thats interesting and yes I guess they do correlate.
It's not the global economy it's the networked economy. And so in order to understand economy we need to look at it non-nationalistically. Thats the only perspective where we will see whats going on IMO.
Bill Gross is a rather polarizing figure, but compared to Summers, I'd say he's a lot more "hands on" and experienced in the way that financial systems work - or don't. Here's his latest Janus newsletter / update:
Bill Gross makes money from high interest rates, he's been wrong for about 7 years now with regards to every one of his predictions (QE will cause high inflation, stopping QE will cause inflation, stopping QE will increase bond yields), I wouldn't take his advice too seriously.
Savers are getting killed by no interest rates available in the market. He is no less wrong than the Federal Reserve saying that zero interest rate policy is good for growth, or that their policies aren't responsible for bubbles, etc, etc, etc.
The Federal Reserve having an opinion about the economy that is different from yours has nothing to do with Bill Gross being factually incorrect in every prediction he has made about the economy since the recession, and performing badly.
You don't get to distribute wrongness equally between supply-side and demand-side people; that's not how reason works.
What you call opinion I call active decision making, and while Gross hasn't "predicted" well, neither has the Federal Reserve, thus they are equivalent, practically speaking, in their efficacy. They balance each other out. But sure, grind that axe against his perspectives all you want, I've got my own CFA Level 3 Asset Manager guy that I follow closely.
You might want to read up on this. It was US economic advice which led to the rapid sell-off of public assets which resulted in the creation of the oligarchs in the first place.
Seriously, I do not need to read up on this, I was there. But one does not really need to have first-hand experience to see the deliberate deception in klein's "shock doctrine" and the like: for example, different countries in the region had markedly different timings, different implementation of reforms, different rhetoric, and different resources; but the outcomes pretty much fall into two groups: places where people demanded and expected accountability on part of government (ie. baltic states, and a few former warsaw pact countries) did relatively fine, and others devolved into oligarchies (ie. the rest of the former soviet union).
Sachs resigned when the Harvard Institute for International Development he was running was roiled in the scandal of his direct reports buying Russian stocks and working to get the first mutual fund license in Russia while they were dictating economic policy. They were recommending policies that they were directly profiting from. They lost their funding, were in a massive scandal, then Sachs resigned. His article is a sad heap of dishonest excuses and fails to take responsibility for his own involvement in the corruption he happily blames others for.
The corruption in HIIS was also a factor in the dismissal of Summers, since he set up the project.
Keynesian economics creates market failures. Government "stimulus" does not create natural demand and any "stimulus" has front-loaded costs that are paid for by future generations.
Central "Planners" should be fired and our economic systems need to move to a more decentralized economic model,
à la Austrian Economic Theory[1] if we ever want to see natural growth again.
The solution isn't decentralized economics, it's debt-free money. Get rid of the need for money to create a return for its creators and you eliminate many of the issues with money in our society, including future generations having to pay for the spending of currently active governments.
I actually think there are a fair number of prominent figures that have a good grasp of what's actually going on with the economy, but they would rather make money off of it than fix it. You have to divine their theories from their actions and a few oblique public posts.
The academic economics community just seems terribly out-of-touch these days, using models made a generation ago to try and explain an economy that has changed dramatically since then.
I wasn't sure if I wanted to embarrass the people involved, but they're public figures anyway.
For people: Marc Andreesen, Peter Thiel, Ray Dalio, Warren Buffett. Interestingly, neo-Schumpeterianism (as championed by Perez/Andreesen) seems to be making a comeback.
For important phenomena that mainstream academic macro-economics has no explanation for:
- How do you measure the "substitution effect" of greater quality at lower prices? Most standard economics metrics assume that value = price; GDP is the total value of all goods manufactured within a company. That means that when the price of a computer falls from $2000 to $200, GDP falls. When Google gives away web search, it counts for nothing; when they reduce the number of organic results to show more ads, it increases GDP. When open-source Linux replaces proprietary Windows, GDP falls.
- Inflation is not uniform. Inflation in classical macroeconomics is treated as the measured price of a basket of goods, and caused by an increase in the money supply. But when the money supply increases, that increase does not filter down to all goods equally. It tends to collect at goods with high bargaining power and few substitutes (Warren Buffett was the first person I know of to note this effect). So we have seen massive inflation in the valuation of unicorns, and in the price of San Francisco real estate. We've seen high inflation in health care and the price of a college degree. We've seen steady inflation in home prices elsewhere. We've seen severe deflation in competitive consumer goods markets, and in non-unionized wages. The basket of goods used to calculate CPI is largely commodities, and so by definition tends to understate inflation. That's why the Fed is continuing to step on the gas even though the price of education, or health care, or homeownership is rapidly moving beyond the reach of average Americans.
- Competition and capitalism are to some degree antonyms (this is the Peter Thiel thesis). The first goal of most companies is to build a monopoly and keep competitors out. This is covered in depth in microeconomics, but is largely ignored in macroeconomics. But monopolies behave very differently from competitive businesses when it comes to the macroeconomics fundamentals of employment, output, and wages. Monopolies tend to employ people because they have money and want to eliminate competition, not because they need output; this explains a lot of crazy economics results like why people can work 2 hours/day for six-figure salaries while others work 16 hours/day for minimum wage, or why companies buy startups and then immediately kill their products, or why companies would rather sit on cash than hire more people.
All of these are mentioned as footnotes in economics textbooks, but they're mentioned to say "Yes, we know this is a problem with the model, but nobody has yet found a better way to account for these phenomena." Policy response is still very much dependent upon mainstream macroeconomics models, even though the observed effect of that policy response isn't working.
Spot on. Unfortunately, academic economists are incentivized to produce models that justify existing power structures which leads many to go off the deep end reality-wise.
That's how stupid assumptions like "natural rate of unemployment" or "perfect competition" in particular get baked in.
Those assumptions are concealing sources of profit. Which is a feature, not a bug.
> Competition and capitalism are to some degree antonyms (this is the Peter Thiel thesis). The first goal of most companies is to build a monopoly and keep competitors out. This is covered in depth in microeconomics, but is largely ignored in macroeconomics.
I sometimes wonder how much people delude themselves. For instance this observation about capitalism, competition and monopoly is something that should be obvious to anyone who thinks about the issue for more than 30 seconds. It's the fundamental mechanic. And yet people don't notice. I've noticed, observing various people I know who are very vocal about politics and economy, that educated people are at bigger risk - many end up papering their concerns over with sophisticated explanations of their favourite ideology.
And yet 80-year-old academic theory holds up very well. Seems many neglected to study the basics, in favour of parroting whatever the ruling class wanted for self-interested reasons.
The article says the U.S. is about 10% below a trend estimated through 2007. 2007 was the peek of the bubble. Why are they using 2007 as a target? The credit market was different back than. How much of that 10% output was fueled by easy credit? It might be better to use a few years before 2007 as a target. I would like to know where we are if you look at it before the Mania Phase of the bubble.
There's something wrong with the cost structure in "Advanced Economies". It's just too cheap to make things in China. There are some products where the cost of the raw materials would be more expensive in the U.S than having the finished product shipped from China. There are sky high costs, and nobody can figure out where they are coming from and everyone just shrugs their shoulders. This kind of thing happens in healthcare and education too.
Has anyone in manufacturing looked at the financials of a Chinese manufacturer with low unit cost? Where does the money go or not go that makes things so cheap?
> There's something wrong with the cost structure in "Advanced Economies".
Yes, and that something wrong is taxation and regulation (which is a hidden form of tax). Those things are both absolutely necessary, but they greatly inflate the cost of goods and services. What's more, they tend to be well-hidden in order to prevent people from generally revolting.
I like regulation. I see these articles about people in China suffering from severe asthma and entire major cities where you can't go outside due to the haze of pollution and I thank my lucky stars our forerunners had the decency and common sense to think of the future and not just short-term bottom-lines.
I visit China every couple of years and I completely agree. The terrible air quality is the worst thing about Beijing.
But it does explain a decent chunk of the cost disparity. The Chinese (or at least the government) are willing to pollute the crap out of their air in order to better compete, while we are not. That doesn't mean we should join them, but it does explain their lower costs.
Hence my comment that it's, 'absolutely necessary.' But it has costs, and not every instance of regulation is absolutely necessary.
> I thank my lucky stars our forerunners had the decency and common sense to think of the future and not just short-term bottom-lines.
Look at photos from the 1970s. The reason we're as well-off now as we are is precisely that our forerunners weren't focusing on long-term cleanliness and instead focused on short-term profits at the expense of the environment. Then we got rich enough as a society to afford to clean it up.
Note, too, that not all regulations are environmental. Look at how difficult it can be to hire a contractor in some states, or the amount of money a small business must expend to be in regulatory compliance.
Yes, you need new euphemisms and new twisted definitions to profit from naive people, to convince them that they should buy your bullshit because they "need" it, and to tell them that govt. subsidies/legal pardons given to corporations are just fine, while giving "your" tax money poor people is a bad, terrible idea.
People don't believe your BS anymore. And you know it.
Classical macroeconomics has some real problems. These include:
- Most models of capitalism are based on trading in goods. This was a reasonable model a century ago, but today, services are much larger in the developed world. This has tax policy implications - sales and import taxes apply only to goods, not services.
- Classical models assume that demand is infinite but capital is limited. For most of history, the problem was making enough stuff. In today's economies in the developed world, demand is a scarce resource but capital is not. The US population is essentially maxed out on buying power, with a low savings rate. Manufacturers could easily up production of just about anything if they could sell it. There's lots of capital around looking for something which will provide even a few percent reliable return, but few investment opportunities. This is why tweaking the capital supply, which is all the Fed can do, doesn't seem to affect much any more.
- Technology has brought an asymmetry to recessions. In a recession, as demand declines, the least efficient producers drop out first and there are layoffs. Productivity increases. Now, when the recession is over, the most efficient producers scale up, maintaining the productivity level they had, increasing their market share. This may be the real cause of the "hysteresis" of which Summers writes. It's also a way in which industries become more concentrated.
- Classical economics overestimates the effect of capital and underestimates the effect of technology. Recent work indicates that most economic growth is driven by technology, not capital, and has been since the Industrial Revolution two centuries ago. (Economic growth rate pre-industrial revolution: about 1%-2% per century.)
- Classical models of the "free market" assume a large number of players. That's rarely the case today. One big effect of computerization is that it's now possible to run very large organizations, like Amazon, quite well. Business used to have scaling problems - beyond some size, businesses became harder to run, and couldn't get out of their own way. For most consumer-facing industries, that's no longer a problem. There's now a tendency to consolidate as far as antitrust enforcement will allow, which in the US, seems to be down to a duopoly. When the number of competitors is very small, they tend not to compete too hard.
- Classical economics assumes labor is mostly direct labor, and that output requires labor inputs. Today, direct labor is way down, and most labor is indirect labor, leading to change, not direct output. Online businesses are an extreme case - doing what the business did yesterday requires almost no labor. Economics doesn't really have a handle on this yet.
Like maybe don't put a Soviet-style central committee in charge of the money supply?
It's depressing to me that modern economies like the US and Europe can be so shot through with central planning, and then when they produce bad results everyone pretends it's the fault of some freewheeling laizzes-faire policy that never existed.
Actually, central banks in both the US and Europe have very little control over the money supply.
The money created by central banks only accounts for about 3% of the monetary base, the remaining 97% of money that circulates in the economy is created by private banks, lending money out of thin air. Therefore money supply is actually dictated by how confident private banks are to lend to the public. A central bank can try to incentivize lending by lowering interest rates, but in the end it's private banks who choose whether to lend or not (in Europe it didn't work so well..).
It's still a pretty fucked up system either way. I think more people should work on the issue of money supply, it's probably the single most important problem in any economy.
Do you have a link that explains this lending mechanism? I saw it referred to in a previous HN discussion a while back, and would like to know more about it, since it sounds ludicrous.
There is a group called Positive Money that has a youtube channel with some videos about it. I don't remember which ones are the best, but this is a playlist from them which gave an high level overview in simple terms: https://www.youtube.com/playlist?list=PLyl80QTKi0gPBcb32paMv...
They have more in-depth talks on their channel, if I find some better links I'll give them to you.
I can't say this theory is 100% correct, though it does explain things like the housing bubble, the failure of the ECB policy, and eurozone deflation despite the ultra low interest rates.
So far, out of everything I've read and watched, I think their model is the one that better explains the current system of money creation, but if you have any alternative links with I'm always open to reading different things on this topic.
Banks (in the US) can't just lend out however much "fake" money they chose depending on how confident they are.
There is a reserve ratio that must be met. That is the percent of deposits that must be kept on hand and can't be lent out. This rate is dictated by the Federal Reserve (the central bank) in the US. Adjusting this rate allows more or less lending and thus influences inflation. So in short... central banks have a lot more control over the money supply than they themselves simply creating money out thin air.
>Like maybe don't put a Soviet-style central committee in charge of the money supply?
The US didn't have this at the end of the 19th century and they suffered through multiple bouts of mass unemployment and deflation as a result. That's why the Federal Reserve was created.
Central planning can be done well or badly. It can't not be done at all.
The latter half of the 19th century up to WW1 was the USA's longest sustained period of high growth and high economic mobility. No central bank. Moderate deflation was the norm. According to the likes of Paul Krugman Americans should have been eating dirt and living in caves by 1913, but the exact opposite happened. Growth that the Keynesian technocrats have yet to match.
Except even then, government intervention in money fixed a certain price ratio of gold and silver. When that ratio no longer reflected the real market prices, chaos predictably appeared in the banking system. Go back over the history of the late 19th century panics and you'll notice one metal was fleeing the country and causing a lot of controversy. That's a government price control at work, not unfettered capitalism. The Federal Reserve Act was the wrong solution.
And yet even with the Fed, there's the stubborn little fact of the crash of 1920 -- bigger than that of 1929 -- and the rapid recovery that followed. The Fed, Congress and the Presidency did basically nothing and it was over in 18 months. So judging from the objective facts laying before us, it looks like the central planners perform best when they avoid central planning.
> According to the likes of Paul Krugman Americans should have been eating dirt and living in caves by 1913, but the exact opposite happened. Growth that the Keynesian technocrats have yet to match.
And my grandfather walked picket lines and got shot at. Robber barons were at the peak of their power. Children were exploited as laborers.
Let's also quote Anthony Trollope, a Victorian Londoner who was no stranger to pollution:
“Pittsburgh without exception is the blackest place which I ever saw, the site is picturesque, even the filth and wondrous blackness are picturesque.... I was never more in love with smoke and dirt than when I stood and watched the darkness of night close in upon the floating soot which hovered over the city.”
And that was in the 1860's! It only got worse from there until the 1940's.
Your rosy assessment of the country prior to the 1920's has no basis in historical fact.
>And my grandfather walked picket lines and got shot at. Robber barons were at the peak of their power. Children were exploited as laborers.
Which has been true since the beginning of time. Children worked hard labor on farms instead of factories, and there was more rural poverty instead of city poverty. On average things were improving.
But that's not even the point. Parent comment is talking about the health of the economy and the federal reserve. You are talking about the distribution of wealth. We could implement something like a basic income to redistribute wealth, without getting rid of free markets and capitalism.
The goal of economic policy should be to generate the most total wealth. Then we can decide what to do with that wealth.
>The latter half of the 19th century up to WW1 was the USA's longest sustained period of high growth and high economic mobility.
That would be the post WW2 years, not the latter half of the 19th century.
As bsder stated, you seem to be painting a rosy picture of a period of American history where exploitation (including child labor) was both rampant and vicious and robber baron power was approaching its peak.
>According to the likes of Paul Krugman Americans should have been eating dirt and living in caves by 1913
According to Ron Paul we have been perpetually just about to experience hyperinflation since circa 1985.
Paul Krugman's record is hardly spotless, but he is at least not making intentionally wrong predictions in order to service the needs of the ultrawealthy.
>Except even then, government intervention in money fixed a certain price ratio of gold and silver. When that ratio no longer reflected the real market prices, chaos predictably appeared in the banking system
This is backwards. The chaos was caused by that gold standard. Financial panics were inordinately common and severe during the latter half of the 19th century. Much more so than they were after 1977.
We've had multiple bouts of mass unemployment with the federal reserve. And they are much more severe and much longer than recessions were before the federal reserve. Or at least that's the argument I hear from people against the federal reserve.
The existence of central planning anywhere in Western financial systems is even more insulting. After watching the examples of our good neighbors to the East you'd think we would have learned our lesson by now.
193 comments
[ 2.7 ms ] story [ 257 ms ] threadWhen economists are unsure what exactly is going on, what does that mean? There's the quote by Buffet, "Be fearful when others are greedy and greedy when others are fearful".
What should one do when others have no idea what's going on?
Like how small startups are able to create value that usually needed large corporate structures, small trends are becoming powerful and independent. People are getting news from a large variety of sources and living in their own bubbles.
The new normal is that there is no normal. Those who are fearful and greedy are both right, but they no longer reside in the same world.
Accomplishing this is left as an exercise for the reader.
Yes, that has been the criticism for decades. There is nothing new here.
The only time Keynesian economics has "fixed" an economy was WW2 when we (the US, specifically) had full employment because of the draft and all of our competition had been literally flattened and/or killed.
For another look at it, check out the Keynes vs Hayek rap battle:
https://www.youtube.com/watch?v=GTQnarzmTOc
No we can attribute zero to Hayek because he had no notable macroeconomic insights. Most of his work was related to the business cycle, investment and choice (ie. microeconomics).
Sorry, but not buying your argument. If anything we can attribute a greater length of the Great Depression to the Keynesian inspired policies, not a repair (assuming that is the "fixed" economy attributed to Keynes). For some reference on this consider: http://newsroom.ucla.edu/releases/FDR-s-Policies-Prolonged-D...
WW II ended the Depression insofar as its impact on employment, but it also destroyed (literally) massive amounts of accumulated capital. Global quality of life was greatly reduced: a failure by any rational standard. I suspect the necessary economic restructuring for war, and the later return to a peacetime economy, has much more to do with the repair of the economy that anything Keynes ever conjured.
Later we have substantial numbers of completely unimpressive Keynesianesque experiments, including our own current "recovery". For Hayek (or similar) you are correct: there are really no instances of his policies repairing an economy... but could you tell me how many times approaches like his have been tried? There's some argument for the Depression of 1920, but on the whole reduction in Government intervention during an economic downturn is just not how bureaucrats roll. So I count no attempts. To suggest there are no Hayekian successes because Hayek fails is simply deeply flawed thinking; there are no successes simply because those approaches have never been tried. I think the closest you can see are in certain emerging economies where, at first, no one cares to regulate because there is nothing of worth there from a political power point of view (e.g. early Hong Kong, much of the early U.S. even).
And yes, I do consider the "Road to Serfdom" a good book :-)
We had this exact experiment after 2008. Austerity in Europe, stimulus in the US. The results are pretty clear.
I think we have a handful of examples of Hayek's principles working out. JFK, Reagan, and even Bush 43 demonstrated that reducing taxes increases consumer spending across the entire system and improving the economy - less in the short term, more in the long term - and increasing government revenue at the same time al a the Laffer Curve.
Notably the only US president since 1980 that achieved a balanced budget was Bill Clinton - unsurprisingly, he did so by raising taxes.
https://research.stlouisfed.org/fred2/series/FYFSGDA188S
By the way, did you know that Keynes wrote of the Laffer curve already in 1933?
http://www.liberal-vision.org/2010/12/17/keynes-and-the-laff...
Of course, the important question on which opinions differ is where is the peak of the curve.
Given the data the US has collected over the last decade (see link above) it is immediately evident that current levels of taxation are to the left of the peak.
Summers is criticizing "New Keynesian" models from the 1980s that are based on mathematically sophisticated DSGE models, in contrast with original "Keynesian" models from the 1930s that were rather more ad-hoc, such as Hicks' IS/LM.
https://en.wikipedia.org/wiki/New_Keynesian
Example: our corporate customers decided to buy 5 more widgets in 2007 than in 2008 because they saw the economy improving, mostly due to the growth of household on-paper wealth and the associated increase in consumer spending, and were forecasting a growth in their own business. When the housing market collapsed and consumer spending fell off a cliff, those customers no longer had any reason to buy the extra widgets.
In that way, you can say output is artificial. A large mass of people spending above their means because of a perceived increase in wealth, along with other psychological factors, leads to an economy with rising demand. When it turns out that wealth increase was a phantom and those psychological factors disappear, there is less demand for widgets and thus output decreases.
Output isn't "how much we can make," it's "how much we DO make." The amount we produce is proportional to the demand for that product.
I went through a scenario much like this. Company had a single customer that is dominant, and that customer was over optimistic about the level of demand it was seeing from it's marketplace. Orders grew to large levels, company expands, etc...
Then reality hits. That customer has a ton of inventory and wants relief!
Worse, they could just order nothing and do a sell off for a time to recover, but that may destroy a valued partner, who didn't really do anything wrong, other than supply what they could have seen as too much. Long term, that is expensive for them as they would lose a valuable part of their product line.
The solution ended up being sharing the problem with both parties running very lean while inventory levels drop.
Now, coming out the other side, both parties are far more conservative. Risks are seen as bigger than they really are, and overall run rate business just isn't what it should be based on the data from before. Inventory, sales, and some other data is more closely tracked to answer the questions of "what DO we make?", and "Will it sell?" by both parties, who share the impacts of those answers.
Hysteresis, in the sense being talked about here, could arise from artifacts of an event like this. When things were running high, expansion came either at the expense of capital held by the company, or debt, and both of those have impacts on the risk appetite of the business. It's all moderated now.
That moderation is both real, in terms of hard data, cash, etc... and human, in that raw fear of another instability causing everyone to lose gains had since that last one...
It's been an interesting journey. The reality is a took a very considerable time to reach a point where meaningful risks make sense again. About two years. This, despite the problem itself resolved within 6 - 8 months.
Turns out, the motivation to take some new risks and make reasonable investments is being driven by a slight downward trend in sales. It's not much, but it's not growth. The additional "hysteresis" impact appears to be felt through the marketplace. That big event seemed to dampen way more than one would expect at first glance.
I believe that slight trend is the change in risk / value perception as well as the market seeing the brand fluctuate and that resulting in a loss of confidence, or a crack where competing brands gained some ground. This is hard to resolve though. There isn't enough data. I've made some changes in marketing in an attempt to get it, and or just correct for the trend in an obvious, measured way. Jury is still out on that.
Having production satisfy demand is very important in the vast majority of cases. Overproduction either tends to create instability, or a reduction in value as too much is out there, or high inventory costs that tend to marginalize the value of an overproduction event. Exceptions can be, say an overproduction to insure supply during a planned downtime, or expansion, but that can be expensive money and resource availability...
As an example, with housing prices so high there was a surge in homebuilding. No one really needed or wanted all those homes, so the demand for ex. shingles was artificially high. It would make no sense to introduce some kind of stimulus program to prop up the shingle market to its housing bubble peak. Nobody needs or wants that many shingles at that price.
The issue I take with the article is that their study compares growth levels during recovery to growth levels right before a market crash. It's not sensible; of course the latter will be higher, that's how market psychology works. It doesn't make sense to think of "potential growth" as "the highest growth we've seen."
When the US real estate market started tanking, how was the boom supposed to continue? More construction in an over-supplied housing market? Re-train workers overnight and give them jobs in other industries? Transmute wood, concrete, shingles, tractors, bulldozers, and excavators into other materials and tools for other industries?
Basically there is a difference between
1. 10 people growing bananas when the economy would be better off with 7 people growing bananas and 3 people growing apples. 2. 9 people growing bananas and 1 person sitting on his butt doing nothing because he can't find a banana growing job. Even though the economy would be better off with 10 banana growers then none.
The problem with recessions is that per person productivity usually goes up but less people are employed. This phenomenon is hard to explain without referencing aggregate demand.
Yep, that simple. That's called investment multiplier, and economists were discussing at the late 00's how it could vary from one company to the other given the Keynes' identities.
You do realize that Keynes' departure from 'classical' economics was a model that depended more on aggregate demand than supply, right?
Classical economics (ie. pre-Keynesian economics) would say "just build more". Keynesian economics states that you should stimulate demand (lower interest rates, increase government spending, increase money supply, etc...). Which is exactly what got us out of the recession.
> It blows my mind that Keynesians can't identify busts that were caused by bubbles.
It's not about whether they can or can't. Some obviously did see the bubble coming (some Goldman Sachs traders famously bet against the housing market). The problem is that too many people profit from the 'bubble', and momentum takes people over the edge (because, like it or not, consumers are NOT rational).
It's what caused it in the first place. i.e. 2% interest ninja loans, CRA, "home ownership society", gov't-sponsored entities, etc...
Low interest rates by themselves wouldn't have caused the recession, although rates probably should have been higher during that time period anyway.
Also keep in mind it's only recently that Keynesian and left-wing economics has become fashionable once again...
wat.
We're not out of it, people are just adapting to it.
Think about it.
Anyhow, low-ish interest rates were the norm for most of the US' history, rates will go up, but get used to low rates. Keeping the banks in line (not taking too much leverage) is the key to preventing another bust, not raising interest rates.
Regardless, low interest rates don't mean the US is still in a recession. There's 5% unemployment and the economy is growing. Heck, 2 of Europe's stronger economies (Switzerland and Sweden) have negative rates.
Lack of privatization in Post-Soviet states lead to massive human suffering. In Poland the government constantly subsidies all companies that weren't privitzed in 90s. What's worse quality of products and services in these industries is terrible. That's why for instance electricity in Poland is one of the most expensive in Europe. And it is impossible to change anything because all these companies are highly unionized and have huge political influences during elections.
Little state ownership may work fine in countries that has different culture in rest of the economy has been capitalistic for last 200 years. In Post-Soviet world it is disastrous. Look at Russia for intance - Gazprom and other state companies were overtaken by the Putin's mafia.
That is called "privatization".
Mexico and Carlos Slim comes to mind for instance.
But really the argument about Russian privatization is that it ought to have been executed less poorly, for example not donating most state property to a few corrupt oligarchs.
It only looks like a failure if we assume that the Soviet (and post-Soviet Russian) state considered its subjects as stakeholders, which has never been the case.
You must have missed the Boris Yeltsin era...
No, lack of rule-of-law and stochasticity (allowance of firms to succeed or fail on their own merits) lead to massive human suffering. If you "privatize" everything without solid rule-of-law and with bank bailouts, you get massive human suffering and no growth. If you "nationalize" things without solid rule-of-law and without allowing experiments in new ways of doing things, you get massive human suffering and no growth.
I don't have the background to address the other points, but the focus on Glass-Steagall annoys me because the counterproof is so obvious.
AIG collapsed because instead of a boring insurance company, it was a boring insurance company with a bunch of people trading crazy financial derivatives. Under Glass-Steagall, the insurance business wouldn't have been exposed to those derivatives.
Glass-Steagall was a law that regulated banks, i.e. financial institutions that accepted deposits. AIG would never have been covered by Glass-Steagall.
This is one reason I find the topic annoying: people ascribe all sorts of effects to Glass-Steagall that it did not actually do.
I thought AIG provided securities. I'm sure I'm missing something obvious as it's not something I know anything about
Laws are targeted toward different types of financial institutions. Glass-Steagall was a law that applied to banks, and prevented them from selling securities.
But if a financial institution wasn't a bank, then Glass-Steagall did not apply to them. AIG did not hold deposits so it wasn't a bank. So no G-S.
Edit: to help connect the dots--what I'm referring to above are technically called "commercial banks."
https://en.wikipedia.org/wiki/Commercial_bank
From the G-S page: "The term Glass–Steagall Act usually refers to four provisions of the U.S. Banking Act of 1933 that limited commercial bank securities activities and affiliations within commercial banks and securities firms."
In general, different kinds of financial institutions are regulated by different regulatory agencies. This is as good a place to start as any:
https://en.wikipedia.org/wiki/Financial_regulation
This sources seems to indicate that goldman's use of the discount window was absolutely minimal:
http://www.bloomberg.com/news/articles/2011-03-31/goldman-bo...
re: AIG, insurance companies were never regulated by Glass-Steagall
Should AIG have been regulated by a tiny 30-person regulator? You judge, here is AIG's credit presentation: http://www.aig.com/Chartis/internet/US/en/FinalConf_revised_... AIG had a 1/2 Trillion USD one-way unhedged credit default swap exposure, amongst other exposures.
https://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program#...
I'm think I'm wrong about AIG and don't feel like chasing it.
TARP eligibility had nothing to do with being a bank holding company.
Why is this argument still around? Yes, "diversified financial institutions" (i.e., too-big-to-fail banks) survived, because they had tremendous political power as a result of their consolidation. The idea that there were too-big-to-fail institutions is not a victory, it's a defeat. These are the institutions that caused the problem in the first place! The fact that they live on is a travesty.
Too big to fail is not about diversification, it is about the scope of capital assets and counterparty risk. USAA, for example, is a diversified institution that would have been illegal under Glass-Steagall but navigated the meltdown well on their own. Meanwhile every institution I list above was too big to fail but would never have been covered by Glass-Steagall--not to mention Fannie and Freddie.
Edit to add: IMO "Glass-Steagall" has become political shorthand, a sort of litmus test to see if people are for or against big banks that socialize risk and privatize profits. But G-S was a real law that was rather limited in scope. If we fail to understand the detailed realities of the financial meltdown, we will fail to prevent the next one.
There are plenty of examples where the ability to diversify has strengthened many institutions. But there has also been some very negative affects. If you are too small to be big and too big to get government loan guarantees, or outside of a major metro, bank financing isn't really an option anymore.
We had a few smaller manufacturing businesses in my area that folded up not due to foreign competition, but from being starved of capital. The banks they depended on got swallowed up, and the folks in the banks that understood their business were laid off. The dude in NYC or Boston who made loan decisions had no clue.
Communists around the world killed between 60 million and 100 million people (there is debate among scholars as to the exact number).[0] Stalin killed the "wealthy" peasants, enslaved Eastern Europe, and carted millions off to work camps in Siberia (where they would eventually die or become broken people). Pol Pot killed 2 million of his own people as a "social engineering" experiment (after studying Rousseau). Mao killed 45 million in 4 years. Can anyone say "massive human suffering and political failure"?
It's true that the Post-Soviet states have had mixed results, based upon which have privatized industry and enacted pro-freedom policies, and also based upon which people retained trace Enlightenment notions of the government's relationship to its citizenry. Estonia, for example, has flourished: "The foundation was laid in 1992 when Mart Laar, Estonia’s prime minister at the time, defibrillated the flat-lining economy. In less than two years his young government (average age: 35) gave Estonia a flat income-tax, free trade, sound money and privatisation. New businesses could be registered smoothly and without delays, an important spur for geeks lying in wait."[1] In Russia, a heavy-industrial and resource-based country (partly thanks to Stalin's 5-year-plans and massive capital theft from the Eastern Bloc countries), former Communist officials assumed ownership of state assets during the transition, and it predictably has not done as well.
Again, we can argue that liberalization has not occurred to a great extent in countries such as Russia, where a strongman still rules. (It's probably the case that places with massive natural resources have had greater struggles, as there was probably better opportunity for collusion by the political oligopoly. Less resource-rich countries have on-average fared better.) We can have an intelligent discussion comparing each of those countries based on the different policies they have enacted. However, to drop historical context of life (and death) during the Soviet era is completely ludicrous.
[0] https://en.wikipedia.org/wiki/Mass_killings_under_Communist_...
[1] http://www.economist.com/blogs/economist-explains/2013/07/ec...
So long as there is money, there will be a monetary policy. The government doing "nothing" is not an option.
This is 2015, why do we need so many middle men and such an inefficient closed source volatile paper based system? How about letting the people issue their own money based on open source computer algorithms and p2p networks instead of oligarchy voodoo?
New Keynesian models imply that stabilization policies cannot affect the average level of output over time and that the only effect policy can have is on the amplitude of economic fluctuations, not on the level of output
But Summers tries to refute that, just by saying it's absurd and giving the costanzian platitude "well I gotta do something!"
I think he makes his best point by saying:
Beginning the study of stabilization with this assumption takes away much of the motivation for doing macroeconomics.
Indeed it does Larry.
The idea that we can have a quarter of the people or more (the poor and working poor) in a state of playing zero sum or negative sum games -- exploitative economic relationships -- non-convex factors in what should, ideally, be a convex efficiency curve, and still reach market efficiency is silly. We just reach the state where the convex portions of our economy cannot compensate for those massive destructions or stagnations of value during times of contraction so it is easier to shake those results out of the aggregate. But that destruction of value happens even in times of relative prosperity and overall growth and it would be wise to whittle down the problem while is relatively painless.
Take pain and death out of the equation for the people through direct stimulus. Create a market where everyone must be enticed with value-add to trade. Watch demand bubble up and create the strongest growth possible.
I'd advocate for an experimental approach with smaller populations with different possible solutions, ratcheting them up as they are shown to be successful and sustainable.
The only problem with this is how this is impossible to scale to proper levels in the US.
This works great in smaller economies (like you're advocating) like Scandinavian countries where you have a much smaller population and it's easy to support a few million people. You also have to take into account the Scandinavian cultural norms as well.
When you have over 300 million? As we've seen in recent years, when you institute measures like this it actually creates more dependency and self reliance on the government - not something I would think you'd want to advocate on such a large scale.
Also, your concern is why I'd advocate for a small pop to large pop experimental approach.
I don't think government dependence is a prima facie bad thing. If we assume that people are mostly rational and can make decisions that are best for themselves the government dependence problem would work itself out. We have a problem with it, now, because it is in a persons best interest to step out of the zero sum and negative sum games that the poor are forced into for, sometimes, decades or lifetimes. But if we ensure people have just enough guaranteed assistance to not starve, go homeless, or die from lack of medical care we can ensure that the vast majority of transactions -- including trading one's time to create value for an employer -- are positive sum transactions. People will tend to make the most of that if we assume a basic level of self interest and rationality. Government assistance would be a steady state of mere survival while the market would offer positive growth and an improvement of one's condition.
Regarding population, when you have more people you get more money.
> You also have to take into account the Scandinavian cultural norms as well.
What are these Scandinavian cultural norms?
So the problem isn't one of scale, which is already huge. It's one of distribution.
Money on its own is not the solution. You can only grow an economy when people are building useful things of all kinds, doing useful things for each other, and creating new businesses.
The big problem in the US isn't capitalism as such, it's the fact that there's a layer of old and new money privilege accreted around Wall St and Washington. It's such a resource sink it has literally locked out most of the rest of the population.
It's a networking and patronage problem. The money is just a symptom.
If you're on the right side of the social firewall you can be a complete failure and still get jobs at C-suite and board level. (See recent examples from any number of tech companies - which are the obvious symptoms of a much bigger issue.)
Prosperity only happens when an economy rewards ability much more than it rewards the benefits of in-caste relationships.
This isn't even considered an issue in most descriptions of economics, but it's a huge influence at every level of business. And with the partial exception of the startup/accelerator/incubator scene, the current situation in the US has been a tragic brake on real growth.
The best you'll get from throwing money at people is temporarily less crime, starvation, and homelessness. Those are big wins on their own, but they're a bandaid and the improvement isn't really sustainable. For a growth-oriented economy, more is needed.
> So the problem isn't one of scale, which is already huge. It's one of distribution.
Ah, but those industries are concentrated interests. The individual value proposition is sufficient for people in these industries to lobby the government, because there's an enormous amount of wealth available to be transferred to a relatively small number of individuals.
On the other hand, the scenario you're proposing is that same enormous amount of wealth available to be transferred to an enormous number of individuals. The upside per individual is relatively small, and most individuals are better off spending their time and resources on things that can more directly improve their life (like going to work, getting an education, exercising, enjoying entertainment, etc.). Note that this isn't individuals making a mistake or being irrational. They're acting in their self-interest.
It's easy to say that "we" should just redistribute the subsidies on big industry to the entire population. But it is, as far as I can tell, not a remotely feasible goal.
Just thinking out loud about this, but could part of the fix for this be using a debt jubilee to reset debt after a set number of years?
EDIT: For anyone unfamiliar with debt jubilees:
http://theconversation.com/the-debt-jubilee-an-old-testament...
Safety will be more valuable than ever, so those with huge lump sums of existing Capital will have even more power. We could replace modern corporate finance with good old-fashioned robber-baron family-finance operations like Carnegie, Rockefeller, and Gould.
The ownership wouldn't transmit back to the government, it'd be converted into public property but with the option to renew ownership. Public property is not the same as government owned.
The idea is to get rid of accumulation of wealth beyond a single generation, i.e. in general you only own what you earned in your own lifetime (plus some extra from the generation that preceded you).
"The white man knows how to make everything, but he does not know how to distribute it." -Sitting Bull
The figures I've seen suggest that in the US, 50% of welfare beneficiaries are long-term dependents, but they have bouts of it, going in and out of welfare over the course of (on average) 12 years.
If you dig into specific programs, I think generally you find that programs fail because they aren't giving people enough resources to become self-sufficient, and are expecting results on too short a time frame.
I've yet to see a coherent argument for this claim.
> This works great in smaller economies (like you're advocating) like Scandinavian countries where you have a much smaller population and it's easy to support a few million people.
Why would this work better in a smaller economy? Why would it be easier for an economy of 30 million people to support N needy people than for an economy of 300 million people to support 10N?
> When you have over 300 million? As we've seen in recent years, when you institute measures like this it actually creates more dependency and self reliance on the government
How have we seen this? I don't see any evidence that "measures like this" have actually been instituted, much less that they have been instituted and observed to produce the results you suggest.
Of course, the problem is that almost everything it gets applied to can be decomposed neatly into, independently operated geographic regions - whether states, or counties or groups of such - if the scale becomes a challenge.
Arguably scale rather creates great opportunities. Subdivision coupled with looser coordination and knowledge exchange means systemic failure at the top of each system can be contained by leaning on the others. E.g. the UK National Health Service is split into many "trusts" and failing trusts are often either put under the control - temporarily or long term - of successful ones, or given more focused support from surrounding trusts to get back on track. Any number of trusts can be badly mismanaged without creating existential threats to the health service as a whole.
The larger the overall system, the more such trusts can be run at whatever the ideal scale is for optimizing system cost rather than having to scale them down to spread the risk; and the more such trusts, the easier it becomes to absorb individual failures without too big effects on surrounding ones.
Furthermore, none of them have more people than Germany (~80 million), the country where the modern welfare state was born (Bismark put in place the first welfare reforms as a means to try to stop the growth of the socialist groups that were becoming a threat to the political stability of Prussia; though while he gave with one hand, he outlawed dozens of them with the other).
Of course, even the Scandinavian countries subdivides provisioning of these services further, down to the county level for many types of services.
In other words: This is a problem that decomposes very nicely, and that scales up accordingly. Just threat it as a suitable number of independent systems. They still have the economies of scale to make it reasonably efficient. You have some added complications, but also the benefit of being able to study differences in the various implementations and copy the most effective practices. Scale is opportunity here, first and foremost, not a problem.
> You also have to take into account the Scandinavian cultural norms as well.
As a Scandinavian, I'm very curious about what Scandinavian cultural norms you believe makes this easier that isn't present elsewhere. Besides, it's not just Scandinavia that has a comprehensive welfare system. Most Western-European countries do.
> As we've seen in recent years, when you institute measures like this it actually creates more dependency and self reliance on the government
This is only a "problem" when you don't consider that the alternative is that these people starve, live in substandard housing or go without important medical care. Nobody wants people to be dependent on welfare, but I prefer "welfare dependence" to having people grow up destitute.
If/when there are jobs that pay enough, fine, put strict conditions in place to push people to take them or lose benefits. But when there aren't enough jobs, or the ones that are available doesn't cover housing or food nothing good is achieved by not providing support for the basics.
When discussing social services, it's also important to discuss borders, because of the real-or-imagined threat of people doing all their tax-paying years in one jurisdiction and all their benefit-drawing years in another.
The various US states have been dealing with tenuous internal boundaries for 200 years, and it has affected the evolution of their various tax/benefit systems.
In contrast, Germany--as part of the EU--has done the same for only about 20 years, and is even now poised to break/bend the agreement to deter an influx of migrants.
TLDR: It much easier to maintain a high-welfare state when you have strong border-controls or are geographically remote from waves of immigration.
Wait a minute.
1) It's not just Germany. The Schengen area inside and partly outside the EU is playing catch-up with the consequences of increased work migration. We can even say the whole EU has tried to come up with solutions since the Eastern European states joined.
2) Currently Germany is one of the few countries /not/ trying to deter migrants. That does not only apply to refugees but also migrants from South and East Europe. It's a couple of other countries bending rules here.
3) Stop conflating intra-EU migration with the refugees.
But yes, we have to be careful not to foster dependency.
I mean, can you imagine? Just...total horror. If only there was a word to describe this nightmarish dependence on government.
Wait, what's that? There is a word? Oh, right, civilization.
What you could have done was instead read it for what it is.
Um, ok.
More the point, negative forms of dependency are fostered by reducing people's options, not increasing them. If you're really worried about dependency (and not, say, maintaining a status quo that features a cheap, easily exploited, and largely disposable labor pool) worry less about making life's basic necessities a reward and more about the kind of society that can develop when basic security is a baseline.
This is obviously false when you consider the simple fact that there already exists a renewable surplus of food water and shelter in the US. There are more than 5 empty houses for every homeless person in the US. This is a distribution problem, not a production problem.
I like your concave / convex image, thanks for that.
This would imply that our economic measurements are inaccurate if they don't account for the situations where people cooperate without exchanging money (for instance, raising a child.) Thus maximizing money flows in the current economy only maximizes cooperation where otherwise it would not happen, not cooperation in general, and you run the risk of optimizing for behaviors that people are actively against (and don't want to cooperate), while penalizing behaviors that people like (where they would cooperate for very little.)
You can end up paying people to fight each other, while failing to pay them to help each other.
I'm slowly working on an idea for an alternate cryptocurrency based on commemorating ordinary human moments (instead of CPU time as the source of scarcity).
A couple of articles on the project: http://www.wired.com/2014/07/document-coin/ http://thenewstack.io/why-art-could-become-currency-in-a-cry...
I can't think of many instances where someone would be paid enough to not raise their child, for example.
And if you could pay someone to do something they normally wouldn't wouldn't they be merely passively not for it and not actively against that thing?
"And if you could pay someone to do something they normally wouldn't wouldn't they be merely passively not for it and not actively against that thing?"
It doesn't matter. They might be actively against it, but if you pay them enough, they'll still do it. We -- as a society -- pay people to do things that nobody really wants to have happen except those who happen get paid to do it (like market cigarettes.) And there are things that everybody wants to have happen that almost nobody gets paid to do (like care for your family.)
We're potentially using our economy to create problems rather than solve them.
I need to think about this VERY HARD. I've never seen it put that way before.
He did a lot of work about what it means for a market to be efficient.
People forget the axioms that lead to market efficiency -- convexity being one of them.
>And one of the reasons that our technology is impeded and prevented from feeding the world properly is the failure of one of our networks. It's an information network and it's called money, about which we have the most unbelievable superstitions and psychological blocks...
>Now what happens then when you introduce technology into production? You produce enormous quantities of goods by technological methods but at the same time you put people out of work. You can say, "Oh but it always creates more jobs. There will always be more jobs." Yes, but lots of them will be futile jobs. They will be jobs making every kind of frippery and unnecessary contraption, and one will also at the same time have to beguile the public into feeling that they need and want these completely unnecessary things that aren't even beautiful. And therefore an enormous amount of nonsense employment and busy work, bureaucratic and otherwise, has to be created in order to keep people working, because we believe as good Protestants that the devil finds work for idle hands to do. But the basic principle of the whole thing has been completely overlooked, that the purpose of the machine is to make drudgery unnecessary. And if we don't allow it to achieve its purpose we live in a constant state of self-frustration.
>So then if a given manufacturer automates his plant and dismisses his labor force and they have to operate on a very much diminished income, (say some sort of dole), the manufacturer suddenly finds that the public does not have the wherewithal to buy his products. And therefore he has invested in this expensive automative machinery to no purpose. And therefore obviously the public has to be provided with the means of purchasing what the machines produce.
>People say, "That's not fair. Where's the money going to come from? Who's gonna pay for it?" The answer is the machine. The machine pays for it, because the machine works for the manufacturer and for the community. This is not saying you see that a...this is not the statist or communist idea that you expropriate the manufacture and say you can't own and run this factory anymore, it is owned by the government. It is only saying that the government or the people have to be responsible for issuing to themselves sufficient credit to circulate the goods they are producing and have to balance the measuring standard of money with the gross national product. That means that taxation is obsolete - completely obsolete. It ought to go the other way.
>Theobald points out that every individual should be assured of a minimum income. Now you see that absolutely horrifies most people. “Say all these wastrels, these people who are out of a job because they're really lazy see... ah giving them money?” Yeah, because otherwise the machines can't work. They come to a blockage.
>This was the situation of the Great Depression when here we were still, in a material sense, a very rich country, with plenty of fields and farms and mines and factories...everything going. But suddenly because of a psychological hang-up, because of a mysterious mumbo-jumbo about the economy, about the banking, we were all miserable and poor - starving in the midst of plenty. Just because of a psychological hang-up. And that hang-up is that money is real, and that people ought to suffer in order to get it. But the whole point of the machine is to relieve you of that suffering. It is ingenuity. You see we are psychologically back in the 17th century and technically in the 20th. And here comes the problem.
>So what we have to find out how to do is to change the psychological attitude to money and to wealth and further more to pleasure and further more to the nature of work.
-Alan Watts, Money Guilt and the Machine
That sounds like exactly the kind of situation where different states try different things, then the Federal government does something after it sees which ones worked. This approach has been something of a pattern for trying new things in the US.
But as decades pass, people seem to want to skip those first steps and jump right to the Federal level and refuse to budge if they cannot get the entire nation to make some leap or another with them.
That evolving 'Everybody or Nobody' attitude is killing one of the strengths of the US system.
http://e1.newcastle.edu.au/coffee/job_guarantee/JobGuarantee...
Job guarantee also "force" a minimum wage in the economy without need of big controls. It can be though as another automatic stabilizer.
Anyway, maybe you are right. I haven't made up my mind about it yet.
The other problem I have is that these are most likely to be busy work jobs. With something like basic income you could spend your time doing whatever you want. Anything from nothing, to art, to working for a company.
I don't know if basic income has any major downsides (I'm not an economist by any means), but to me guaranteed jobs seem like a worse alternative.
Starting in the 1970s, Western societies' economic planners set out to hold inflation down, at all costs, including high unemployment. They did this because they were confronted with stagflation, oil crises, labor militancy, and a crisis of corporate profitability, and they naively believed that deflationary depressions were a solved problem.
They succeeded, and today's economy is their program of governance gone horribly right.
1. Maximum employment 2. Stable prices 3. Moderate interest rates
I'd say all of these should be reevaluated, most importantly #'s 1 and 2.
Instead of "putting country X back to work" we should consider the current state of automative abundance and the basic economic principle of "too many cooks in the kitchen". So instead of maximum employment, maybe we should think about minimum employment?
#2 should also be reconsidered in light of exponential growth of our technology and the resulting ephemeralization. We are producing goods and services better, faster, and cheaper at exponential rates. So prices should tend to reflect this reality, and diminish, not stay the same.
I have to be honest - I don't like the idea of government playing the role of national HR department.
Please define.
1) We need to understand that we live in a global economy not a national one. One of the key elements to understanding this global economy would probably be to look at something like Supply Chain Management. I.e. the productivity of china should be closely tied with an understand of US economy. They aren't separate anymore than two computers connected via a network is.
2) We need to find a way to factor in technology, digitalization and automatization instead of treating it as the externality it is today, by almost all economic thinkers.
Especially those who advice countries and central banks. It is one of the key components in understanding what is going on. And before we find a way to factor that in, we will keep fighting in the blind.
Until then we will have this fruitless idealistic fight between Keynes and Austerity and not get to the heart of the discussion.
>Humanity is now experiencing history's most difficult evolutionary transformation. We are moving away from a rooted life-style with a 95-percent rate of illiteracy. We are almost unconsciously drifting away from selfidentity with our ages-long, physically-remote-from-one-another existence as 150 separate, sovereign nations. Now the uprooted humans of all nations are spontaneously deploying into their physically integrated highways and airways and satellite-relayed telephone speakways, into a big-city way-stationed, world-around living system. We may soon be atom-bombed into extinction by the preemptive folly of the political puppet administrators fronting for the exclusively-for-money-making, supranational corporations' weaponry industry of the now hopelessly bankrupt greatest-weapons-manufacturing nation (the U.S.A.). If not bomb-terminated, we are on our ever swifter way to becoming an omni-integrated, majorly literate, unified Spaceship Earth society. The new human networks' emergence represents the natural evolutionary expansion into the just completed, thirty-years-in - its-buildings world-embracing, physical communications network. The new reorienting of human networking constitutes the heart-and-mind-pumped flow of life and intellect into the world arteries.
-Grunch of Giants (1982)
>I'm going to give you an important kind of a picture. I hear a lot of people say "I don't like machinery and technology it's making a lot of trouble", so were going to take all the machinery away from all the countries of the world, all machinery, all the tracks and the wires, and the works and were going to dump it all in the ocean. And you discover that within 6 months, 2 billion people will die of starvation having gone through great pain. So we say "that's not a very good idea lets put all the machinery back where it was." Then, were going to take all the politicians from all the countries around the world and we're going to send them on a trip around the sun, and you'll find we keep right on eating. And the political barriers now... scientists say very clear you could make the world work and take care of 100% of the people at a higher standard of living that anyone has ever known despite the increasing population, but you cant do it with the barriers, any more than you can try run a human organism with a wall between the ear the eye and the stomach. It is an organic whole, it is total industrialization.
It's not the global economy it's the networked economy. And so in order to understand economy we need to look at it non-nationalistically. Thats the only perspective where we will see whats going on IMO.
https://www.janus.com/bill-gross-investment-outlook?utm_camp...
You don't get to distribute wrongness equally between supply-side and demand-side people; that's not how reason works.
You can see he did NOT advocate shock therapy and resigned when he realized he could do nothing about growing corruption.
The corruption in HIIS was also a factor in the dismissal of Summers, since he set up the project.
Central "Planners" should be fired and our economic systems need to move to a more decentralized economic model, à la Austrian Economic Theory[1] if we ever want to see natural growth again.
[1]https://en.wikipedia.org/wiki/Austrian_School
The academic economics community just seems terribly out-of-touch these days, using models made a generation ago to try and explain an economy that has changed dramatically since then.
For people: Marc Andreesen, Peter Thiel, Ray Dalio, Warren Buffett. Interestingly, neo-Schumpeterianism (as championed by Perez/Andreesen) seems to be making a comeback.
For important phenomena that mainstream academic macro-economics has no explanation for:
- How do you measure the "substitution effect" of greater quality at lower prices? Most standard economics metrics assume that value = price; GDP is the total value of all goods manufactured within a company. That means that when the price of a computer falls from $2000 to $200, GDP falls. When Google gives away web search, it counts for nothing; when they reduce the number of organic results to show more ads, it increases GDP. When open-source Linux replaces proprietary Windows, GDP falls.
- Inflation is not uniform. Inflation in classical macroeconomics is treated as the measured price of a basket of goods, and caused by an increase in the money supply. But when the money supply increases, that increase does not filter down to all goods equally. It tends to collect at goods with high bargaining power and few substitutes (Warren Buffett was the first person I know of to note this effect). So we have seen massive inflation in the valuation of unicorns, and in the price of San Francisco real estate. We've seen high inflation in health care and the price of a college degree. We've seen steady inflation in home prices elsewhere. We've seen severe deflation in competitive consumer goods markets, and in non-unionized wages. The basket of goods used to calculate CPI is largely commodities, and so by definition tends to understate inflation. That's why the Fed is continuing to step on the gas even though the price of education, or health care, or homeownership is rapidly moving beyond the reach of average Americans.
- Competition and capitalism are to some degree antonyms (this is the Peter Thiel thesis). The first goal of most companies is to build a monopoly and keep competitors out. This is covered in depth in microeconomics, but is largely ignored in macroeconomics. But monopolies behave very differently from competitive businesses when it comes to the macroeconomics fundamentals of employment, output, and wages. Monopolies tend to employ people because they have money and want to eliminate competition, not because they need output; this explains a lot of crazy economics results like why people can work 2 hours/day for six-figure salaries while others work 16 hours/day for minimum wage, or why companies buy startups and then immediately kill their products, or why companies would rather sit on cash than hire more people.
All of these are mentioned as footnotes in economics textbooks, but they're mentioned to say "Yes, we know this is a problem with the model, but nobody has yet found a better way to account for these phenomena." Policy response is still very much dependent upon mainstream macroeconomics models, even though the observed effect of that policy response isn't working.
That's how stupid assumptions like "natural rate of unemployment" or "perfect competition" in particular get baked in.
Those assumptions are concealing sources of profit. Which is a feature, not a bug.
I sometimes wonder how much people delude themselves. For instance this observation about capitalism, competition and monopoly is something that should be obvious to anyone who thinks about the issue for more than 30 seconds. It's the fundamental mechanic. And yet people don't notice. I've noticed, observing various people I know who are very vocal about politics and economy, that educated people are at bigger risk - many end up papering their concerns over with sophisticated explanations of their favourite ideology.
Has anyone in manufacturing looked at the financials of a Chinese manufacturer with low unit cost? Where does the money go or not go that makes things so cheap?
Yes, and that something wrong is taxation and regulation (which is a hidden form of tax). Those things are both absolutely necessary, but they greatly inflate the cost of goods and services. What's more, they tend to be well-hidden in order to prevent people from generally revolting.
But it does explain a decent chunk of the cost disparity. The Chinese (or at least the government) are willing to pollute the crap out of their air in order to better compete, while we are not. That doesn't mean we should join them, but it does explain their lower costs.
Hence my comment that it's, 'absolutely necessary.' But it has costs, and not every instance of regulation is absolutely necessary.
> I thank my lucky stars our forerunners had the decency and common sense to think of the future and not just short-term bottom-lines.
Look at photos from the 1970s. The reason we're as well-off now as we are is precisely that our forerunners weren't focusing on long-term cleanliness and instead focused on short-term profits at the expense of the environment. Then we got rich enough as a society to afford to clean it up.
Note, too, that not all regulations are environmental. Look at how difficult it can be to hire a contractor in some states, or the amount of money a small business must expend to be in regulatory compliance.
People don't believe your BS anymore. And you know it.
- Most models of capitalism are based on trading in goods. This was a reasonable model a century ago, but today, services are much larger in the developed world. This has tax policy implications - sales and import taxes apply only to goods, not services.
- Classical models assume that demand is infinite but capital is limited. For most of history, the problem was making enough stuff. In today's economies in the developed world, demand is a scarce resource but capital is not. The US population is essentially maxed out on buying power, with a low savings rate. Manufacturers could easily up production of just about anything if they could sell it. There's lots of capital around looking for something which will provide even a few percent reliable return, but few investment opportunities. This is why tweaking the capital supply, which is all the Fed can do, doesn't seem to affect much any more.
- Technology has brought an asymmetry to recessions. In a recession, as demand declines, the least efficient producers drop out first and there are layoffs. Productivity increases. Now, when the recession is over, the most efficient producers scale up, maintaining the productivity level they had, increasing their market share. This may be the real cause of the "hysteresis" of which Summers writes. It's also a way in which industries become more concentrated.
- Classical economics overestimates the effect of capital and underestimates the effect of technology. Recent work indicates that most economic growth is driven by technology, not capital, and has been since the Industrial Revolution two centuries ago. (Economic growth rate pre-industrial revolution: about 1%-2% per century.)
- Classical models of the "free market" assume a large number of players. That's rarely the case today. One big effect of computerization is that it's now possible to run very large organizations, like Amazon, quite well. Business used to have scaling problems - beyond some size, businesses became harder to run, and couldn't get out of their own way. For most consumer-facing industries, that's no longer a problem. There's now a tendency to consolidate as far as antitrust enforcement will allow, which in the US, seems to be down to a duopoly. When the number of competitors is very small, they tend not to compete too hard.
- Classical economics assumes labor is mostly direct labor, and that output requires labor inputs. Today, direct labor is way down, and most labor is indirect labor, leading to change, not direct output. Online businesses are an extreme case - doing what the business did yesterday requires almost no labor. Economics doesn't really have a handle on this yet.
It's depressing to me that modern economies like the US and Europe can be so shot through with central planning, and then when they produce bad results everyone pretends it's the fault of some freewheeling laizzes-faire policy that never existed.
The money created by central banks only accounts for about 3% of the monetary base, the remaining 97% of money that circulates in the economy is created by private banks, lending money out of thin air. Therefore money supply is actually dictated by how confident private banks are to lend to the public. A central bank can try to incentivize lending by lowering interest rates, but in the end it's private banks who choose whether to lend or not (in Europe it didn't work so well..).
It's still a pretty fucked up system either way. I think more people should work on the issue of money supply, it's probably the single most important problem in any economy.
They have more in-depth talks on their channel, if I find some better links I'll give them to you.
I can't say this theory is 100% correct, though it does explain things like the housing bubble, the failure of the ECB policy, and eurozone deflation despite the ultra low interest rates.
So far, out of everything I've read and watched, I think their model is the one that better explains the current system of money creation, but if you have any alternative links with I'm always open to reading different things on this topic.
There is a reserve ratio that must be met. That is the percent of deposits that must be kept on hand and can't be lent out. This rate is dictated by the Federal Reserve (the central bank) in the US. Adjusting this rate allows more or less lending and thus influences inflation. So in short... central banks have a lot more control over the money supply than they themselves simply creating money out thin air.
The US didn't have this at the end of the 19th century and they suffered through multiple bouts of mass unemployment and deflation as a result. That's why the Federal Reserve was created.
Central planning can be done well or badly. It can't not be done at all.
Except even then, government intervention in money fixed a certain price ratio of gold and silver. When that ratio no longer reflected the real market prices, chaos predictably appeared in the banking system. Go back over the history of the late 19th century panics and you'll notice one metal was fleeing the country and causing a lot of controversy. That's a government price control at work, not unfettered capitalism. The Federal Reserve Act was the wrong solution.
And yet even with the Fed, there's the stubborn little fact of the crash of 1920 -- bigger than that of 1929 -- and the rapid recovery that followed. The Fed, Congress and the Presidency did basically nothing and it was over in 18 months. So judging from the objective facts laying before us, it looks like the central planners perform best when they avoid central planning.
And my grandfather walked picket lines and got shot at. Robber barons were at the peak of their power. Children were exploited as laborers.
Let's also quote Anthony Trollope, a Victorian Londoner who was no stranger to pollution:
“Pittsburgh without exception is the blackest place which I ever saw, the site is picturesque, even the filth and wondrous blackness are picturesque.... I was never more in love with smoke and dirt than when I stood and watched the darkness of night close in upon the floating soot which hovered over the city.”
And that was in the 1860's! It only got worse from there until the 1940's.
Your rosy assessment of the country prior to the 1920's has no basis in historical fact.
Which has been true since the beginning of time. Children worked hard labor on farms instead of factories, and there was more rural poverty instead of city poverty. On average things were improving.
But that's not even the point. Parent comment is talking about the health of the economy and the federal reserve. You are talking about the distribution of wealth. We could implement something like a basic income to redistribute wealth, without getting rid of free markets and capitalism.
The goal of economic policy should be to generate the most total wealth. Then we can decide what to do with that wealth.
Somebody wants all the money to go to the 0.01%.
That would be the post WW2 years, not the latter half of the 19th century.
As bsder stated, you seem to be painting a rosy picture of a period of American history where exploitation (including child labor) was both rampant and vicious and robber baron power was approaching its peak.
>According to the likes of Paul Krugman Americans should have been eating dirt and living in caves by 1913
According to Ron Paul we have been perpetually just about to experience hyperinflation since circa 1985.
Paul Krugman's record is hardly spotless, but he is at least not making intentionally wrong predictions in order to service the needs of the ultrawealthy.
>Except even then, government intervention in money fixed a certain price ratio of gold and silver. When that ratio no longer reflected the real market prices, chaos predictably appeared in the banking system
This is backwards. The chaos was caused by that gold standard. Financial panics were inordinately common and severe during the latter half of the 19th century. Much more so than they were after 1977.
Sorry, as it's 2015, we were looking at the Nordic countries.
It's laissez-faire