March 4th, 2009
Libertarian-minded conservatives would do well to remember that the revered Milton Friedman didn’t sympathize with the Austrian view, which holds that financial crises are to a large extent the result of government policy, and that the Great Depression would have been mitigated if the government had done less rather than more.
Friedman via DeLong:
[Abba] Lerner was trained at the London School of Economics [in the 1930s], where the dominant view was that the depression was an inevitable result of the prior [speculative] boom, that it was deepened by the attempts to prevent prices and wages from falling and firms from going bankrupt, that the monetary authorities had brought on the depression by inflationary policies before the crash and had prolonged it by “easy money” policies thereafter; that the only sound policy was to let the depression run its course, bring down money costs, and eliminate weak and unsound firms…. It was [this] London School (really Austrian) view that I referred to in my “Restatement” when I spoke of “the atrophied and rigid caricature [of the quantity theory] that is so frequently described by the proponents of the new income-expenditure approach and with some justice, to judge by much of the literature on policy that was spawned by the quantity theorists” (Friedman 1969, p. 51).
Note that Friedman wasn’t a Keynesian: he preferred monetary measures to fiscal stimulus, which he thought was too short-lived and impermanent to make a difference. But he certainly was a proponent of vigorous government action in the face of these crises: monetary action which amounts to “Helicopter” Ben Bernanke’s “print money and dump it on the population using helicopters if necessary.” And yes, this both devalues the dollar and causes inflation.
Thing is, monetary expansion has been going full-bore for a while now with little to no effect—we’re still facing deflation, not inflation. So conservatives are faced with either supporting more fiscal stimulus (though more heavily favoring tax cuts than government spending for [debatable] reasons of efficiency), or coming up with new and heretofore untried monetary measures. According to Milton Friedman, anyway, doing anything less—i.e. arguing that letting the market sort this out on its own is the best way forward—is unserious.
January 27th, 2009
Megan McArdle has a deft post up critiquing the Democratic rush to fiscal stimulus which is well worth your time. In a nutshell, there’s precious little evidence to suggest that any kind of politically feasible government spending can get us out of something as grave as the Great Depression.
What we’ve got, since Japan really never did emerge from its lost decade, is basically one fact: America entered World War II in a depression, and emerged from World War II without one. Hopefully, the relevant variable was the massive, massive amount of spending, rather than any of the other explanations one can plausibly build about the effect of Total War on depressions—like the slaughter of some of your excess labor force, or the substitution of more immediate fears of being killed for panic about the financial future.
But I’ve got a broader question I’m hoping someone with a better econ background than mine (like Megan) can answer for me: Isn’t part of what caused the current mess that American consumers were overspending and undersaving? That the global financial system has set itself up on the back of American consumption? And that this was an unsustainable arrangement? If any of those premises are true, isn’t resuscitating American consumption/demand a pretty foolish thing to do?
I’ve got Ben Bernanke’s much-derided-at-the-time “Global Savings Glut” analysis in mind.
Here’s an oversimplified, almost caricatured summary for those unwilling to plough through Bernanke’s rather lucid (but lengthy) exposition: Asian economies, burned by the financial crises of the late 90s, instead of encouraging net inflows of capital as they had before, decided to channel their domestic savings into international capital markets. These funds found a productive home in the advanced American economy, where they heated up the housing and equity markets and generally allowed Americans to live way beyond their means. Americans spent what they experienced as their newfound wealth in part on the exports of these developing economies, which ploughed even more of their money back into our system, further perpetuating and exacerbating the situation.
Bernanke didn’t predict that things would unravel the way they did. Like most economists at the time, he worried about Asian central bankers turning off the spigot of capital flows as they began to wonder about America’s ability to repay its mounting debts. This would lead to interest rates going up in the United States, which would lead to the much-feared “hard landing” for the economy. He didn’t count on the bottom falling out of American consumer demand like it has.
But what’s changed since it’s happened? The Chinese haven’t changed their spending habits, and there’s little to suggest that they will. By insisting we repair American consumer demand by fiscal stimulus, aren’t we trying to turn the clock back to something like 2003—a situation that even then was clearly unsustainable in the long run?
October 15th, 2008
Dow’s down a whole lot today. Is the end in sight? Probably not.
Financial sector troubles have started to affect consumption decisions on the part of individuals, with consumer purchases down 1.2% in September. Credit getting tight? No flat screen TV this year.
Why are chances good that the end is nowhere near in sight? Have a look at this awesome graph I found on the internets:
You see where that line starts going crazy? That’s around 1996, when Greenspan made his famous “irrational exuberance” remark. (h/t Yves Smith).
In closing, let me introduce you to another awesome economics term: overshooting.
Fasten your seatbelts, my friends. It’s gonna be a bumpy ride.
September 17th, 2008
Does Matt Yglesias really want this? Is he serious?
In November, there’s going to be an election. And in January, there’ll be a new President. And in the interim, progressive groups will probably come up with a lot of “ten ways to make everything awesome” proposals. And it’ll take 41 conservative senators to filibuster them all, and so they’ll all be filibustered. But if the government directly controls major financial institutions, that would give the new administration extraordinary leverage over the national economy. Suppose the new CEO of AIG decided he didn’t want to insure assets of companies whose executives make unseemly multiples of the national median income? There are all kinds of crazy things you could do. And of course not all of them would be good ideas. But some of them would! And the smart folks on our side need to be figuring out which ones they are. It seems doubtful to me that a progressive administration would ever be able to get away with this much nationalizing of everything, but what’s done is done and I think it creates a real opportunity for “socially conscious insurance underwriting” or whatever you care to call it.
I’m absolutely dumbfounded.
Having read David Leonhardt’s extensive piece on Obamanomics, I’m inclined to think that Obama would avoid such foolish market interventionism. Indeed, he explicitly says he’s opposed to it in the above-cited article:
“If you talk to Warren [Buffett], he’ll tell you his preference is not to meddle in the economy at all — let the market work, however way it’s going to work, and then just tax the heck out of people at the end and just redistribute it,” Obama said. “That way you’re not impeding efficiency, and you’re achieving equity on the back end.”
I always knew that people of terribly unsound economic judgment were bound to be part of the Obama bandwagon. I guess I never assumed Matt Yglesias was among them.
UPDATE: I should clarify, perhaps, that I’m not terribly thrilled with Obama’s gambit. It’s completely acceptable in contrast to Matt’s formulation, however.
May 28th, 2008
Daniel Yergin, chairman of Cambridge Energy Research Associates and author of the seminal history of oil, writes a thought-provoking piece in yesterday’s FT. It’s not that prices are soaring due to an increase in the demand, he argues, as much as that the oil companies are facing steeply increasing costs for bringing oil to market. He reasons, therefore, that
the impact of rising oilfield costs and the importance of encouraging investment need to be taken into account when considering a “windfall profits” tax or other new taxes. However attractive politically, the effect would be to constrain investment and to lead to lower production levels than would otherwise be the case.
Crude and blunt measures to help out the little guy at the expense of the big guy often bring more pain on for everybody. It’s an important lesson that never gets learned thoroughly enough.
April 1st, 2008
I had no idea Gawker bloggers made this kind of money:
It turns out that Golson got 557,469 pageviews in March, which equates to a total paycheck of $5,435. That’s well over double his base pay. His colleague Nicholas Carlson earned $9,025 for the month, in which Valleywag as a whole got just over 5 million pageviews.
Online advertising has clearly arrived in the past few years, and nimble, lean operations like Gawker are making very good money. Heck, even well-positioned, interesting individuals like John Gruber seem to be doing quite well working for themselves. Sure sounds like the life to me…
March 31st, 2008
Via Naked Capitalism, we get this mind-boggling article from the Telegraph:
A senior official at one of the Scandinavian central banks told The Daily Telegraph that Fed strategists had stepped up contacts to learn how Norway, Sweden and Finland managed their traumatic crisis from 1991 to 1993, which brought the region’s economy to its knees.
It is understood that Fed vice-chairman Don Kohn remains very concerned by the depth of the US crisis and is eyeing the Nordic approach for contingency options.
Norway ensured that shareholders of insolvent lenders received nothing and the senior management was entirely purged. Two of the country’s top four banks - Christiania Bank and Fokus - were seized by force majeure.
“We were determined not to get caught in the game we’ve seen with Bear Stearns where shareholders make money out of the rescue,” said one Norwegian adviser.
“The law was amended so that we could take 100% control of any bank where its equity had fallen below zero. Shareholders were left with nothing. It was very controversial,” he said.
Yes, that’s right, the n-word: the Fed is thinking about nationalizing certain failing banks. If Martin Wolf didn’t shake you awake, this news ought to. We’re talking about America here, where nationalized anything is anathema. If the Fed has contingency plans for doing just that, we know we’re in deep shit. Like in way past our waists.
March 31st, 2008
What’s that? You’re not worried about what’s been going on with the economy? Surely you religiously read Martin Wolf? You know, the guy at the Financial Times, probably one of the best economic analysts writing for any publication today. Perhaps you’ve read his most recent, widely circulated column on the possible death of Anglo-Saxon-style finance?
Well if you haven’t, and you don’t really feel like working through a well structured argument, surf on over to Radio Free Europe and check out this wide-ranging interview with the man. It’s hard to excerpt any one part to give you a proper sense of scale to the problems facing us today. It’s staggering.
And as you read it, remember, Martin Wolf is hardly one of those bearish chicken little types. If he’s rattled to this severe an extent, we should all be very concerned.
March 21st, 2008
I’m so sick of people like Steve Forbes and Larry Kudlow talking nonsense. Megan McArdle to the rescue:
The good news is, the weak dollar isn’t the catastrophe that some people seem to think it is. While it is falling, it will trigger capital outflow, but when it bottoms, US capital markets will become attractive to foreigners.
It’s the most right-on thing I’ve read all day.
March 17th, 2008
Maybe it’s because economics requires the development of math skills to the exclusion of writing skills that much economics writing is riddled with ill-conceived metaphors. Paul Krugman sounds the alarm:
Uh oh. we’ve got a downturn that can feed itself and, at the same time, dig trenches. The fascist octopus will sing its swan song any day now.
Sounds like a fun sport, spotting travesties like these. They should be in abundance as reporters struggle to keep pace with events and consequently drop their standards.