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July 8, 2015

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Links for 07-08-15

Posted: 08 Jul 2015 12:06 AM PDT

'Why Germany Wants Rid of Greece'

Posted: 07 Jul 2015 01:46 PM PDT

Simon Wren-Lewis:

Why Germany wants rid of Greece: When I recently visited Berlin, it quickly became clear the extent to which Germany had created a fantasy story about Greece. It was an image of Greeks as a privileged and lazy people, who kept on taking 'bailouts' while refusing to do anything to correct their situation. I heard this fantasy from talking to people who were otherwise well informed and knowledgeable about economics.
So powerful has this fantasy become, it is now driving German policy (and policy in a few other countries as well) in totally irrational ways. ... What is driving Germany's desperate need to rid itself of the Greek problem? ...
 Germany is a country where the ideas of Keynes, and therefore mainstream macroeconomics in the rest of the world, are considered profoundly wrong and are described as 'Anglo-Saxon economics'. Greece then becomes a kind of experiment to see which is right: the German view, or 'Anglo-Saxon economics'.
The results of the experiment are not to Germany's liking. ... Confronting this reality has been too much for Germany. So instead it has created its fantasy, a fantasy that allows it to cast its failed experiment to one side, blaming the character of the patient.
The only thing particularly German about this process is the minority status of Keynesian economics within German economic policy advice. In the past I have drawn parallels between what is going on here and the much more universal tendency for poverty to be explained in terms of the personal failings of the poor. These attempts to deflect criticism of economic systems are encouraged by political interests and a media that supports them, as we are currently seeing in the UK. So much easier to pretend that the problems of Greece lie with its people, or culture, or politicians, or its resistance to particular 'structural reforms', than to admit that Greece's real problem is of your making.

'Effects of Income Inequality on Economic Growth'

Posted: 07 Jul 2015 09:49 AM PDT

One more from Vox EU. This is by Markus Br├╝ckner and Daniel Lederman:

Effects of income inequality on economic growth: ... Conclusion Our empirical analysis is motivated by the theoretical work of Galor and Zeira (1993). who examined the relationship between inequality and aggregate output in the presence of credit market imperfections and indivisibilities in human capital investment. Galor and Zeira's model predicts heterogeneity in the effects of inequality on aggregate output across countries' initial income levels. Taking this prediction seriously, our econometric model included an interaction between measures of income inequality and countries' initial level of GDP per capita. Instrumental variables estimates showed that income inequality has a significant negative effect on aggregate output for the average country in the sample. However, for poor countries income inequality has a significant positive effect. We document that this heterogeneity is also present when considering investment – in particular, investment in human capital – as a channel through which inequality affects aggregate output. Overall, our empirical results provide support for the hypothesis that income inequality is beneficial to economic growth in poor countries, but that it is detrimental to economic growth in advanced economies.

'Growth in Finance is a Drag on the Real Economy'

Posted: 07 Jul 2015 09:49 AM PDT

Stephen Cecchetti and Enisse Kharroubi in Vox EU:

Why growth in finance is a drag on the real economy: A booming financial sector means economic growth. Or does it? This column presents new evidence showing that when the financial sector grows more quickly, productivity tends to grow disproportionately slower in industries with either lower asset tangibility or in industries with higher research and development intensity. It turns out that financial booms are not, in general, growth-enhancing.

'Boosting Growth Without Raising the Deficit'

Posted: 07 Jul 2015 09:48 AM PDT

I have been neglecting to post the things I write for MoneyWatch:

Boosting Growth Without Raising the Deficit: One of the lessons of the Great Recession is that monetary policy alone isn't enough to offset the effects of a massive economic downturn. Pushing the Federal Reserve's target interest rate as low as it can go, as monetary policy authorities did early in the recession, helped limit its severity.
But once interest rates are near zero, the Fed's power to stimulate the economy diminishes considerably. That means the Fed cannot, by itself, offset and overcome the forces pushing the economy into a severe recession. To accomplish that goal, fiscal policy also has to play a role.
Attempts to use fiscal policy, however, run into a big stumbling block: objections to the large increases in the deficit that come with tax cuts or additional government spending needed to stimulate the economy.
Even though the economics of large deficit increases to finance, say, infrastructure construction are supportive (worries that an increase in the national debt will cause interest rate spikes or other problems appear to be unfounded), the political will needed to pursue deficit spending on infrastructure or anything else simply isn't there.
But one message that did not come through very strongly in public discussions of economic policy during the Great Recession is that stimulative fiscal policy doesn't necessarily require an increase in the deficit. ...[more]...

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