Tag: economics

But that doesn’t mean we can’t occasionally give his corpse another whack with the shovel:

In the midst of the European debt crisis, economists at the European Central Bank just produced a paper that looks at how growth in the size of government affects economic performance. The authors, António Afonso and João Tovar Jalles, provide “evidence on the issue of whether ‘too much’ government is good or bad for economic progress and macroeconomic performance, particularly when associated with differentiated levels of (underlying) institutional quality and alternative political regimes.”

Here are some key findings.

We analyse a wide set of 108 countries composed of both developed and emerging and developing countries, using a long time span running from 1970-2008, and employing different proxies for government size […] Our results show a significant negative effect of the size of government on growth. […] Interestingly, government consumption is consistently detrimental to output growth irrespective of the country sample considered (OECD, emerging and developing countries).

Basically, an increase in government spending (whether financed by taxes or by borrowing) reduces economic growth.

This is contra everything that is ever taught about GDP in mainstream economics. TheoreticallyPractically, it should not be possible that an increase in G could ever lead to a decrease in C+I+G+(X-M). The situation isn’t that supply-side economics is voodoo economics, it is that all mainstream economics is voodoo… except that it doesn’t work even when the target genuinely believes in it.

And for those who want to speak good economica, it can be phrased thusly: The multiplier is less than one.

There it is. And right in the most mainstream of the mainstream newspapers:

It’s time to start calling the current situation what it is: a depression. True, it’s not a full replay of the Great Depression, but that’s cold comfort. Unemployment in both America and Europe remains disastrously high. Leaders and institutions are increasingly discredited. And democratic values are under siege.

Krugman is just wrong about one thing here. It’s not a full replay of the Great Depression, it’s a bigger, wider, and deeper one. Which, of course, is why I described it as the Great Depression 2.0 two years ago in The Return of the Great Depression.

Economic statisticians can utilize the climate scientists’ trick too:

The jobless rate declined to 8.6 percent, the lowest since March 2009, from 9 percent, Labor Department figures showed today in Washington. Payrolls climbed 120,000, with more than half the hiring coming from retailers and temporary help agencies, after a revised 100,000 rise in October. The median estimate in a Bloomberg News survey called for a 125,000 gain…..

The decrease in the jobless rate reflected a 278,000 gain in employment at the same time 315,000 Americans left the labor force. The labor participation rate declined to 64 percent from 64.2 percent.

This appears to be nothing more than the usual statistical shenanigans. By claiming that the labor force is shrinking, those who have left it are not counted as jobless, therefore unemployment is considered to have fallen, therefore more people are employed even though a smaller percentage of the growing population has jobs than before.

However, the more important number, the EPR, did continue to tick upwards to an unadjusted 58.7 percent, the same as last month. This means that the jobs situation is marginally better than one year ago, when it was 58.4 percent.

I’ve been reading the second edition of Debunking Economics by Steve Keen and I’ve been reading it very slowly and carefully because it appears to be one of two things. If his criticisms are generally correct but his proposed alternatives are generally incorrect, (which is what I would presently conclude on the basis of a still-incomplete reading, but I am reserving judgment for now) this is the most important book on economics since Paul Samuelson’s 1948 textbook.

If, on the other hand, he is generally correct across the board, it is the most important book on economics since Adam Smith wrote The Wealth of Nations. Either way, it does to neoclassical economics what Mises and Hayek together did to socialist economics. It’s not a critique, and to call it a deconstruction would completely fail to do it justice. It’s a one-man gang bang. In prison.

On the casual level, my first impression was “Damn, I was right! I knew I was smarter than all those clueless PhDs babbling nonsensically about equilibrium and rational consumers with perfect information.” And my second impression was “Damn, I didn’t know the half of it. Keen is a freaking genius!” Needless to say, I will be writing a very detailed review/critique of it in a month or two. In the meantime, it’s highly recommended for those who grokked RGD and want to go deeper. There is a surprising amount of synchronicity between Debunking Economics and The Return of the Great Depression even though he is a professional academic coming from a left-wing perspective and I am an amateur

And just for the record… I should mention that Dirk Bezemer told me he probably would have included me with Keen, Baker, Shiller and the others on the famous list of the Bezemer 12 who saw the 2008 crisis coming had he known about my predictions prior to assembling it. But I’m hardly the only one; Investor Home has expanded the list to 45, including Ron Paul, Nassim Talib, and rather less credibly, Paul Krugman. I can’t say I’m terribly surprised to learn Dutch academics aren’t regular readers of the WND commentary page, but it is really a pathetic commentary on the state of economics to note that less than 50 people, out of all the various academics, analysts, and financial media talkers, managed to notice the global debt tsunami.

What is fantastic about Keen’s book is he explains, in great detail, exactly why nearly all academic and professional economists didn’t see it coming in 2008 and still don’t see it coming now. They literally cannot see anything of the sort due to their theoretical blinders.

Some of my 2011 economic predictions are bang on the trend, but may not happen as described by the end of the year. Specifically 8 and 9.

8. There will be a serious Euro crisis, most likely brought about by a sovereign default or a nation announcing it will be leaving the Euro. Italy is the most likely candidate.

Political and economic crisis in Italy spurred fears of a split in the euro zone with borrowing costs for Europe’s third biggest economy near unsustainable levels and the bloc unable to afford a bailout.

Yeah, that doesn’t look too bad at the moment. Greek is already in technical default with the 2-year bond up to 108% and the one-year at 222%. Double your money! The big banks simply don’t want to call it that because doing so will trigger all the credit default swaps that are hanging over their heads. And Italy will pull out of the Euro sooner or later, but not necessarily by December 31st.

9. One U.S. state and at least three major cities (100k population plus) will attempt to file for bankruptcy or federal bailout. (It’s unclear if states can file for bankruptcy and public employee unions will oppose the city filings.)

Alabama’s Jefferson County filed for bankruptcy court protection on Wednesday in the biggest municipal bankruptcy in U.S. history. Commissioners for the county, which is home to Birmingham, the state’s biggest city and economic powerhouse, voted 4-1 to declare bankruptcy after meeting behind closed doors for two days in a last ditch-attempt to restructure its debt out of court.

Harrisburg also filed for bankruptcy this year and I thought it counted until I learned it’s only got a population of 50,000. You’d think I would have remembered that since I went to college about an hour away… of course, I never, ever went there, which probably should have been my first clue. I’d count Jefferson County and its 658,466 population but not Harrisburg. The big question, of course, is the state of Illinois. That’s the state I expect to declare bankruptcy first.

It does, however, look as if the blog will just barely make it to the predicted 2,750,000 for the year, up 16% from last year’s 2,370,028. On the other hand, the number of bank failures has decreased significantly in 2011, at this rate it may not even break 100.

I’ve been hearing from a few people here and there that they would be interested in seeing me write a basic economics textbook that could be used as a homeschooling resource. I have to admit that while the idea is of some interest to me, it isn’t something that I’ve ever contemplated too seriously in the past because most textbooks are written by academics with PhDs who sell them to captive college audiences. And, of course, there is no shortage of them, so why would the world need another one?

On the other hand, a look at Greg Mankiw’s textbook, which is used at Harvard where he teaches, offers a very strong counterpoint to that argument. Consider what he declares to be the Ten Principles of Economics in his textbook entitled Principles of Economics:

1. People Face Tradeoffs.
2. The Cost of Something Is What You Give Up to Get It
3. Rational People Think at the Margin
4. People Respond to Incentives
5. Trade Can Make Everyone Better Off
6. Markets Are Usually a Good Way to Organize Economic Activity
7. Governments Can Sometimes Improve Market Outcomes
8. A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services
9. Prices Rise When the Government Prints Too Much Money
10. Society Faces a Short-Run Trade-off between Inflation and Unemployment

Reading this, my first thought is that it is no wonder some of his students walked out of his class. My second one is that it is no mystery why Mankiw failed to see the 2008 crisis developing and still fails to recognize the current economic depression. My third thought is that perhaps a text on basic economic principles and history is in order after all.

When I look at Mankiw’s principles, I see two reasonably solid ones, (1,2), four that are obviously incorrect or incomplete to the point of being misleading, (3,5,7,10), and four that are merely irrelevant due to being incomplete. (4,6,8,9).

Anyhow, I have to finish the current novel first, which will be sometime next summer, but it’s not too early to start taking notes and looking at the deficiencies of current textbooks. So, the two things I’d be interested in knowing is how many people might be interested in an electronic econ textbook priced around $4.99 and what areas merit being covered. For example, Felsenburgh suggested that a proper economics education should begin with the School of Salamanca, but that is obviously insane to anyone who has actually read Rothbard’s History of Economic Thought. I don’t think even homeschooled students would be able to stay focused on an economics course that begins with a diverse group of people predominantly grouped together on the basis of their arguments for the legitimacy of usury.

This isn’t to say that the Salamancans aren’t important or denigrate their contributions to economic thought, only that they are not exactly the ideal point of entry to the field.

Harvard students walk out of Greg Mankiw’s basis economics class:

Today, we are walking out of your class, Economics 10, in order to express our discontent with the bias inherent in this introductory economics course. We are deeply concerned about the way that this bias affects students, the University, and our greater society.

As Harvard undergraduates, we enrolled in Economics 10 hoping to gain a broad and introductory foundation of economic theory that would assist us in our various intellectual pursuits and diverse disciplines, which range from Economics, to Government, to Environmental Sciences and Public Policy, and beyond. Instead, we found a course that espouses a specific—and limited—view of economics that we believe perpetuates problematic and inefficient systems of economic inequality in our society today.

A legitimate academic study of economics must include a critical discussion of both the benefits and flaws of different economic simplifying models. As your class does not include primary sources and rarely features articles from academic journals, we have very little access to alternative approaches to economics. There is no justification for presenting Adam Smith’s economic theories as more fundamental or basic than, for example, Keynesian theory.

On the one hand, this protest makes no sense. They’ll get no shortage of Keynesianism from Mankiw, even if most of the explicit Keynesianism won’t be provided until a subsequent macro class rather than in what is Harvard’s equivalent of Econ 101. But whether you prefer to describe Mankiw as a neoclassical or a monetarist, he’s still a Samuelsonian attempting to manage the economy in macroeconomics terms. He’s a Keynesian heretic, and would be better described as a quasi-Keynesian than an anti-Keynesian, Steve Keen’s opinion on the correct categorizations notwithstanding.

On the other, they’re absolutely right. Contra most academic programs, including the one in which I received my degree, Adam Smith is neither basic or fundamental. A proper education in economics should begin with Cantillon and Turgot.