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June 17, 2010

Latest Posts from Economist's View

Latest Posts from Economist's View

"Paradox of Thrift" versus "Confidence in the Markets"

Posted: 17 Jun 2010 04:23 AM PDT

Who is correct, Keynes who argued that budget cuts in a recession make things worse -- his "paradox of thrift" -- or the austerians who say that budget cuts restore "confidence in the markets" and make things better? Hopefully, by now, you know how I see it:

Once again we must ask: 'Who governs?', by Robert Skidelsky, Commentary, Financial Times: In 1974, Edward Heath asked: "Who governs – government or trade unions?" Five years later British voters delivered a final verdict by electing Margaret Thatcher. The equivalent today would be: "Who governs – government or financial markets?" No clear answer has yet been given, but the question may well define the political battleground for the next five years. ...
The implicit premise of the coming retrenchment is that market economies are always at, or rapidly return to, full employment. It follows that a stimulus, whether fiscal or monetary, cannot improve on the existing situation. All that increased government spending does is to withdraw money from the private sector; all that printing money does is to cause inflation.
These propositions are a re-run of the famous "Treasury view" of 1929. By contrast, Keynes argued that demand can fall short of supply, and that when this happened, government vice turned into virtue. In a slump, governments should increase, not reduce, their deficits to make up for the deficit in private spending. Any attempt by government to increase its saving (in other words, to balance its budget) would only worsen the slump. This was his "paradox of thrift". ...
Politicians clamouring for cuts in public spending ... talk about the need to restore "confidence in the markets". The argument here is that deficits do positive harm by destroying business confidence. This collapse of confidence may come in several forms – fear of higher taxes, fear of default, fear of inflation. Deficits thus delay the natural (and rapid) recovery of the economy. If markets have come to the view that deficits are harmful, they must be appeased, even if they are wrong. ...
We are about to embark on a momentous experiment to discover which of the two stories about the economy is true. If, in fact, fiscal consolidation proves to be the royal road to recovery and fast growth then we might as well bury Keynes once and for all. If however, the financial markets and their political fuglemen turn out to be as "super-asinine" as Keynes thought they were, then the challenge that financial power poses to good government has to be squarely faced.

"Reducing the Influence Banks Have over Monetary Policy"

Posted: 17 Jun 2010 03:21 AM PDT

Here are some comments on the latest proposal to restructure the Fed:

Reducing the Influence Banks Have over Monetary Policy

At the end of the post, I suggest an alternative policy.

links for 2010-06-16

Posted: 16 Jun 2010 11:05 PM PDT

"President’s Obama’s War on Error"

Posted: 16 Jun 2010 03:24 PM PDT

Alex Tabarrok at the NY Time Room for Debate:

Carbon Taxes, by Alex Tabarrok: President Obama lost his cool last week when — sounding like the old president — he said he was looking for some "ass to kick." He didn't regain any lost cool in Tuesday's oil speech, which also made him sound like his predecessor: "Make no mistake: we will fight this spill with everything we've got for as long it takes," he said, emphasizing "We will make BP pay…." Call it President's Obama's war on error.

Turning to energy, the president called for innovation and hard choices but offered little new or courageous thinking of his own. ... Most important, nowhere did the president mention two hard ideas that the public must accept if we are to move to a cleaner energy future: nuclear power and carbon taxes. Nuclear power is among the cleanest sources of energy, power plants can be built when and where needed and the combination of nuclear-generated electricity and hydrogen can serve virtually all of our energy needs. Is nuclear power safe? Oil spills and coal-mine disasters should remind us that safety is always relative.

The oil spill isn't really a new event. It's simply another reminder that not all of the costs of oil are reflected in the price; whether it's climate change, environmental disaster or the financing of anti-American governments, cheap oil is a lot more expensive than it appears at the pump. A tax on oil — and carbon more generally — would make the price of oil better reflect its true costs thus making our choices more realistic and rational. Moreover, a carbon tax would do more than any other policy to spur energy conservation and innovation.

No one likes taxes but Al Gore was right when he said we should tax burning not earning. A tax shift — not a tax increase — away from labor and toward carbon would increase the incentive to create jobs and to use less carbon. Both changes would be welcome at the present time.

We needed bold but unfortunately the president mostly gave us old.

I was on the fence before and not really sure whether to go with the seemingly emerging consensus that nuclear power is the answer to our energy needs, there were always nagging doubts, but the problems in the gulf make me hesitant to embrace nuclear power despite assurances that the risks are minuscule. Should nuclear power play a large role in the solution to our energy problems?

The Macroeconomic Foundations of Microeconomics

Posted: 16 Jun 2010 01:17 PM PDT

At MoneyWatch:

The Macroeconomic Foundations of Microeconomics

This is something I've been thinking about, but I'm not sure I have it completely worked out (and there may be more work on this topic than I am aware of). In any case, hopefully it's a start, and comments are certainly welcome.

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