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May 2, 2014

Latest Posts from Economist's View

Latest Posts from Economist's View

Paul Krugman: Why Economics Failed

Posted: 02 May 2014 12:24 AM PDT

Why didn't fiscal policy makers listen to economists?:

Why Economics Failed, by Paul Krugman, Commentary, NY Times: On Wednesday, I wrapped up the class I've been teaching..: "The Great Recession: Causes and Consequences." ...I found myself turning at the end to an agonizing question: Why, at the moment it was most needed and could have done the most good, did economics fail?
I don't mean that economics was useless to policy makers. ... While ... few economists saw the crisis coming..., since the fall of Lehman Brothers, basic textbook macroeconomics has performed very well. ...
In what sense did economics work well? Economists who took their own textbooks seriously quickly diagnosed the nature of our economic malaise: We were suffering from inadequate demand ... and a depressed economy. ...
And the diagnosis ... had clear policy implications: ...this was no time to worry about budget deficits and cut spending... We needed more government spending, not less, to fill the hole left by inadequate private demand. But... Since 2010, we've seen a sharp decline in discretionary spending and an unprecedented decline in budget deficits, and the result has been anemic growth and long-term unemployment on a scale not seen since the 1930s.
So why didn't we use the economic knowledge we had?
One answer is that most people find the logic of policy in a depressed economy counterintuitive. ... And even supposedly well-informed people balk at the notion that simple lack of demand can wreak so much havoc. Surely, they insist, we must have deep structural problems, like a work force that lacks the right skills; that sounds serious and wise, even though all the evidence says that it's completely untrue.
Meanwhile, powerful political factions ... whose real goal is dismantling the social safety net have found promoting deficit panic an effective way to push their agenda. And such people have been aided and abetted by what I've come to think of as the trahison des nerds — the willingness of some economists to come up with analyses that tell powerful people what they want to hear, whether it's that slashing government spending is actually expansionary, because of confidence, or that government debt somehow has dire effects on economic growth even if interest rates stay low.
Whatever the reasons basic economics got tossed aside, the result has been tragic. ... We have, all along, had the knowledge and the tools to restore full employment. But policy makers just keep finding reasons not to do the right thing.

Links for 5-02-14

Posted: 02 May 2014 12:03 AM PDT

'Another Perspective on U.S. Economic Mobility'

Posted: 01 May 2014 01:30 PM PDT

Busy day ... quick one from Tim Noah:

Another Perspective on U.S. Economic Mobility , by Timothy Noah, Washington Wire: My fellow Think Tank-er Benjamin Domenech, in formulating a conservative response to Thomas Piketty, wrote that "Several recent studies have shown that U.S. economic mobility is very good."
But these studies aren't terribly useful. They define "mobility" as what happens to an individual over many years..., a predictable earnings lifecycle. Most everybody enters the workforce making nothing or next to nothing; acquires experience and makes more; tops out at some point; then retires and makes less. ...
A much more useful measure of mobility is intergenerational... How "heritable" is relative income? In the U.S., it's about 40 percent.... That isn't very good by international standards. It's been in that range since ... the 1970s. I write about all this at greater length here.

Reasons for the Slow Recovery

Posted: 01 May 2014 09:37 AM PDT

Why has the recovery from the Great Recession been so excruciatingly slow?:

A Chart that Demands Attention, by Atif Mian and Amir Sufi: Neil Irwin at the New York Times ... writes that "no one cares about economic data anymore" which he says is "good news." He points to some indisputable facts, such as the steady growth in both employment and GDP over the past few years. His focus is mostly on short-run monthly or quarterly movements in economic data–movements that perhaps we can safely ignore in the near future. ...
But over a longer horizon, there is something deeply puzzling about the GDP numbers, and economists everywhere should be staring at them and scratching their heads. ... It is true that the recovery in GDP has been steady over the past couple of years – but it's been steadily disappointing. The recovery out of the Great Recession looks dismal compared to earlier recoveries. The short-run gyrations are gone, but the longer run issue of dismal growth is as important as ever.
Why has the recovery been so dismal? This has to be one of the central research questions for macroeconomics going forward. We have several candidates: (1) secular stagnation, (2) structural changes in the economy such as demographics (3) a Gordonesque pessimism on productivity growth (4) weak government spending, (5) heightened policy uncertainty, and (6) excessively tight monetary policy. These aren't mutually exclusive.
But whatever your views, this ... demands attention – and further research.

I tend to favor the explanation that recessions are a time when firms layoff workers they'd normally retain, and then replace them with machines, robots, computer programs, etc. as things improve. But, as noted, lost more research is needed to nail down the correct explanation.

[They have a follow-up post as well: More on the GDP Mystery.]

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