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August 7, 2012

Latest Posts from Economist's View


Latest Posts from Economist's View


Posted: 10 Jun 2012 12:24 AM PDT
Christina Romer via Brad DeLong:
It's the Fed's Time to Step Up: The argument for additional monetary action is straightforward. By law, the Fed is supposed to aim for maximum employment and stable prices. But the unemployment rate is 8.2 percent — a good two percentage points above what even the most pessimistic members say is its sustainable level. Moreover, the spate of disappointing data and the deepening crisis in Europe make continued weakness all too likely….
Some Fed members contend that monetary policy has already done its share…. Both the Fed's chairman and its vice chairwoman have talked about the need for additional near-term fiscal stimulus as part of a gradual deficit-reduction plan. And many Fed committee members have called for a more aggressive housing policy…. I agree that we need more effective fiscal and housing policies. But neither is likely to happen… the Fed is the only plausible source of immediate help for the American economy. It was set up as an independent body precisely so that somebody can do what's right when politicians can't or won't.
I find a related argument even more frustrating: that the Fed shouldn't act because Congress wouldn't like it and might retaliate…. But it also raises a key question: what are Fed policy makers saving their independence for? If rescuing millions of Americans from the torment of unemployment isn't a reason to risk their independence, what is?
In 1958, when the Fed was taking an unpopular stand to fight inflation, a very wise Fed chairman, William McChesney Martin, said this: "If the System should lose its independence in the process of fighting for sound money, that would indeed be a great feather in its cap and ultimately its success would be great." The current Fed chairman, Ben S. Bernanke, should add the phrase "and full employment"… and paste that line on his bathroom mirror….
Posted: 10 Jun 2012 12:06 AM PDT
Posted: 09 Jun 2012 01:35 PM PDT
Gavin Kennedy continues to fight against cartoonish mis-representations of what Adam Smith actually said and believed:
Adam Smith and the Myth of Laissez Faire, by Gavin Kennedy: ...Let us be clear: Adam Smith did not use the words "Laissez-faire" in anything that he wrote, published in his lifetime or posthumous, or in any student notes that have so far been found, or in any reports of his lectures by those who attended them (John Millar, James Woodrow, Lord Buchan, John Stuart, etc.,) or by those who knew him intimately (such as Dugald Stewart, whose father was a student at Glasgow with Smith). ...
We know that Smith knew of the use and meaning of laissez-faire from his close association with the Physiocratic circle around Quesnay during his visits to Paris (1764-67). The fact is that laissez-faire never entered his vocabulary. Nor did an English translation. This has not prevented many commentators from seeking to use Smith's use of Natural Liberty as a synonym for laissez-faire. It was not the same thing.
Natural Liberty was a philosophical concept based on Natural Law theories as expressed by Grotius and Pufendorf... The originator of laissez-faire was a 'plain spoken' French merchant, M. le Gendre, a deputy of commerce, who responded to the question put to them by Colbert, the French minister, what he could do for them at a meeting that Colbert convened: "lassez nous faire' le Gendre replied in 1690. Those who quote the phrase today often miss these details. Note that it was a merchant who favoured laissez faire. Consumers were not asked but are supposed to be the main beneficiaries of laissez-faire. Smith remained suspicious of merchants who from Elizabethan times had monopolised who could practise their trade and where, in the infamous Town Guilds. "People of the same trade seldom meet together, even for merriment and diversion, but the conversation sends in a conspiracy against the public, or in some contrivance to raise prices" (WN I.x.c.27: 145). Laissez-faire was of dubious benefit, given its claimants hence Smith never advocated it.
He believed that consumption was the sole end of production and competition was the antidote to open and secret monopolies. Far from leaving merchants alone, he wanted them under the pressure of free competition of consumer choice. Colbert typified state regulations of trade and France was a prime example where government regulations abounded, with numerous officious Inspectors of French street markets and fairs inspecting every detail, not to ensure open competition, but to ensure the State's passion for order. Absent these regulated orders, enforced by the Inspectors ,the merchants would have imposed their own orders, and their likely behaviours, if free to do so, would not have worked for the best interests of their captive customers. Trade guilds, legal or unofficial, under the cloak of laissez-faire worked for the interests of merchants, not consumers.
So where did cries by merchants and manufacturers for 'laissez faire come from throughout the 19th century? Two French economists, Say and Bastiat, were prominent in cries for laissez-faire, using Adam Smith's name as cover for its popularity among politicians and merchant campaigners against the 'Corn Laws' and the newly passed but limited Factory Acts. ...
This is a point I've made in another context. Free, unregulated markets -- those absent government oversight of any kind -- are not the same as the ideal competitive markets found in textbooks, those that produce optimal outcomes. In a free market, producers are free to organize, for example, "in some contrivance to raise prices," and this takes us away from the optimal outcome free market enthusiasts are trying to defend. Government oversight and regulation are needed to stop producers from engaging in behavior that is harmful to consumers, excessive market power and the associated political power that come with it are both problematic, a point Smith's so-called disciples ought to take to heart.
Posted: 09 Jun 2012 10:36 AM PDT
Michael Cohen, followed by a few comments of my own:
Did Republicans deliberately crash the US economy?, by Michael Cohen, CIF: So why does the US economy stink?
Why has job creation in America slowed to a crawl? Why, after several months of economic hope, are things suddenly turning sour? The culprits might seem obvious – uncertainty in Europe, an uneven economic recovery, fiscal and monetary policymakers immobilized and incapable of acting. But increasingly, Democrats are making the argument that the real culprit for the country's economic woes lies in a more discrete location: with the Republican Party.
In recent days, Democrats have started coming out and saying publicly what many have been mumbling privately for years – Republicans are so intent on defeating President Obama for re-election that they are purposely sabotaging the country's economic recovery ... in order to hurt Obama politically. Considering that presidents – and rarely opposition parties – are held electorally responsible for economic calamity, it's not a bad political strategy.
Then again, it's a hard accusation to prove: after all, one person's economic sabotage is another person's principled anti-government conservatism.
Beyond McConnell's words, though, there is circumstantial evidence to make the case. Republicans have opposed a lion's share of stimulus measures that once they supported, such as a payroll tax break, which they grudgingly embraced earlier this year. Even unemployment insurance, a relatively uncontroversial tool for helping those in an economic downturn, has been consistently held up by Republicans or used as a bargaining chip for more tax cuts. Ten years ago, prominent conservatives were loudly making the case for fiscal stimulus to get the economy going; today, they treat such ideas like they're the plague.
Traditionally, during economic recessions, Republicans have been supportive of loose monetary policy. Not this time. Rather, Republicans have upbraided Ben Bernanke, head of the Federal Reserve, for even considering policies that focus on growing the economy and creating jobs.
And then, there is the fact that since the original stimulus bill passed in February of 2009, Republicans have made practically no effort to draft comprehensive job creation legislation. Instead, they continue to pursue austerity policies, which reams of historical data suggest harms economic recovery and does little to create jobs. In fact, since taking control of the House of Representatives in 2011, Republicans have proposed hardly a single major jobs bill that didn't revolve, in some way, around their one-stop solution for all the nation's economic problems: more tax cuts.
Still, one can certainly argue – and Republicans do – that these steps are all reflective of conservative ideology. If you view government as a fundamentally bad actor, then stopping government expansion is, on some level, consistent. ...
Presidents get blamed for a bad economy... The obligation will be on Obama to make the case that it is the Republicans, not he, who is to blame – a difficult, but not impossible task.
In the end, that might be the worst part of all – one of two major political parties in America is engaging in scorched-earth economic policies that are undercutting the economic recovery, possibly on purpose, and is forcing job-killing austerity measures on the states. And they have paid absolutely no political price for doing so. If anything, it won them control of the House in 2010, and has kept win Obama's approval ratings in the political danger zone. It might even help them get control of the White House.
Sabotage or not, it's hard to argue with "success" – and it's hard to imagine we've seen the last of it, whoever wins in November.
Has the Republican Party's strategy been deliberate? Yes, of course, the things the Party proposes do not fall randomly from the sky, they are the result of GOP choices. So the question of whether they did this on purpose is easy to answer, it's yes.
Is it intended to undermine the president's agenda? Again, of course it is. The alternative would be to support Obama's policies, and they aren't about to do that. So Republicans have been deliberately obstructive, and it would be hard to argue otherwise.
Have they intentionally done harm? This is where flip-flops from what Republicans supported in the past matters. If they truly believed that all Keynesian type policies are harmful, then blocking them, and in the process blocking any policy at all -- which is essentially what they are doing since they surely know their pet policies have little chance of escaping a veto -- could not be considered an act of sabotage. The policies may be quite harmful in reality, but if they truly believe they are avoiding harm by blocking stimulus policies it would be hard to accuse them of sabotaging the economy in order to make political gains. But the fact that they have flip-flopped time and again on policies they supported when Republican presidents were in office and the economy needed help leads to the strong suspicion that blocking Obama's policy initiatives is a political strategy. The strategy is justified by a story about Keynesian economics being harmful that they clearly do not believe in their heart of hearts (witness, for example, Romney worrying about the consequences of the fiscal cliff, or their knee-jerk appeal to Keynesian principles when defense cuts are proposed). They have also concocted a story where a confidence fairy can make austerity work to support their ideological pursuit of smaller government. But this is quite a departure from the stimulative polices that Republicans presidents have pursued in recent years giving it every appearance of a belief of convenience rather than of true conviction. To me, the refusal to support policies they would have supported had the president been a Republican tells me everything I need to know about whether this is strategic or a true belief.
Posted: 09 Jun 2012 09:37 AM PDT
Larry Willmore:
Why do the wealthy save so much?, by Larry Willmore: ...The standard theory of saving behavior, known as the 'Life Cycle' hypothesis,... does the model explain why Bill Gates and Warren Buffet are giving away almost all their wealth before they die, just as steel tycoon Andrew Carnegie (1835-1919) did a century ago.
The Life Cycle model assumes that the only purpose of saving ... is to finance future consumption. Johns Hopkins economist Christopher D. Carroll in 1997 showed how and why "the model greatly underpredicts the amount of wealth held by the households at the top of the wealth distribution". His essay is as relevant today as it was 15 years ago.
Here is a key paragraph from the conclusion:
A variety of evidence, both qualitative and quantitative, strongly suggests that people at the top end of the wealth and income distributions behave in ways that are substantially different from the behavior of most of the rest of the population. In particular, it is difficult to explain the behavior of these consumers using the standard Life Cycle model of consumption. A leading alternative to (or perhaps just an extension of) the Life Cycle model is the Dynastic model in which the decision maker cares about the utility of his descendants. The Dynastic model, however, has problems of its own, starting with the testimony of many wealthy households who say that providing an inheritance is not a principal motivation for saving and ending with the fact that childless wealthy old people do not appear to dissave. I argue that the simplest model capable of fitting all the facts is a [`Capitalist Spirit'] model in which wealth either enters the utility function directly as a luxury good, or wealth yields a stream of services that enter the utility function in ways that would be formally virtually indistinguishable from a model in which wealth enters the utility function directly.
Christopher D. Carroll, "Why Do the Rich Save So Much?", The Johns Hopkins University, July 1997. ...

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