Our Continuing Slump
[UPDATE below.]
What?! In this article I actually claim that the Austrians have held their own against the Keynesians when it comes to steering through the choppy waters of the housing boom and now bust. I imagine Daniel Kuehn and some of the other frequent commenters here will not agree.
One thing that I didn’t realize until recently involves this:
Now, it is true that Krugman (and Mark Thoma) were warning by this point that such an amount wouldn’t be big enough. But go look at Krugman’s analysis at the time. His point was not so much that the Romer team’s numbers were wrong (though he did think their projections of what would happen without the stimulus were very optimistic). Rather, he was saying that on their own projections, they weren’t anywhere near to closing the “output gap.”
For the full details, go check out my article. But what I’m saying is that I’ve been conceding too much to Krugman for lo these many months. He actually wasn’t saying, “We need to spend more, because the economy is worse than Romer et al. realize.” Rather, he was saying, “Even on their own numbers, they aren’t getting the job done, so I don’t understand why Romer et al. aren’t proposing a bigger stimulus package.”
To be fair, Krugman does say that he thinks the economy is worse than they do. But it doesn’t look like he’s anywhere close to predicting what actually happened, after the stimulus kicked in. So I have no problem saying that Krugman was caught flat-footed by how bad things got, after the stimulus kicked in, just as Romer & Co. were. But hey I’m open to debate on this point…
UPDATE: Wow I see Daniel Kuehn has already thrown up his hands in frustration. This is a crucial point so let me quote him and explain my position:
[W]hat exactly is Bob under the impression the “output gap” is? That is a proclamation that the estimates are too rosy, is it not? And what’s this talk about Republicans? Nothing Bob links to seems to mention Republicans at all. Certainly Krugman and others were worried that Republicans would scuttle the stimulus, but from the beginning the complaint was that this wasn’t enough – that it would help but we would still have high unemployment. How Murphy gets this: “Therefore, when it comes to the effects of the “stimulus” package, the free-market economists (including the Austrians) were right, and the Keynesians were wrong” is beyond me…
OK here’s the deal: Romer’s team said, “If we spend $787 billion [or however they scored it, that’s one estimate that was prevalent at the time], then unemployment will peak somewhere around 8 percent and then come down gradually over the the next few years. If we do nothing, unemployment might get as high as 9 percent.”
Of course, in reality what happened is they passed they stimulus and we got unemployment higher than 10 percent–worse than Romer et al.’s “do-nothing” scary scenario. So as other Austrians and I were pointing out as this occurred, “What more could possibly happen to discredit Keynesianism?”
Now the standard response from the Keynesian camp is to say, “We were wrong in the baseline forecast of how bad things would get. The stimulus still helped, but it kept unemployment at 10 percent instead of hitting 12 or 13 percent. And anyway, Krugman was saying from the get-go that unemployment was going to be too high, even with the stimulus. So he nailed it, it’s just some other Keynesians like Romer were off on their baseline.”
This is the point I’m criticizing. Go look at Krugman’s analysis at the time. When he was urging them to spend more, his main argument was that Romer’s own numbers showed unemployment well above the “natural” rate for at least three years, i.e. actual GDP would be well below potential GDP for at least three years. So Krugman was asking, “Why are we settling for an incomplete package? Why not propose spending that will actually close the output gap in a reasonable amount of time, before the Republicans can discredit the stimulus?”
So yes, to answer Daniel’s question, I do know what he means by an “output gap.” And Krugman was telling everybody that Romer’s own projections showed there would still be a sizable gap 3 years out.
If you want to make the point that Krugman knew the economy itself was worse than Romer et al. did (as of January 2009), then all you’ve got are two sentences from the one blog post where he says he thinks Romer et al. are being very optimistic on their ex-stimulus projections. Yet even there, look at the numbers he throws around. It doesn’t look to me like he had any idea unemployment would break 10 percent even with the stimulus. But I’m open to debate on that.
What is clear, however, is that Krugman’s main argument for spending more, was that Romer’s own projections showed unacceptably high unemployment for years. He wasn’t saying their baseline was wrong, and gosh they’d better spend more because of that mistake.
I posted briefly on that this morning – I have extended thoughts I hope to share tomorrow.
Oh – a question that I had, and would inform my further thoughts on this whole issue of scoring how people did.
Do you know of any Austrians that produced any forecasts like the Romer-Bernstein one? I’m not aware of any. But it seems crucial – if we’re evaluating questions like this – to have a sense of counterfactuals. We know estimates of counter-factuals are very hard, so I have absolutely no idea why people obsess over Romer-Bernstein. But if you obsess over Romer-Bernstein and don’t produce any of your own, that’s especially bad.
But if you obsess over Romer-Bernstein and don’t produce any of your own, that’s especially bad.
Maybe its just silly to pretend people can possibly predict how the economy will react to massive intervention and “stimulus” in a detailed way. Nobody can really know with great degree what a bunch of elites do when you write them huge checks for nothing. Even the supposed brightest minds our overlords shove down our throats could not have been more wrong. You’ve got Romer and the WH saying the boogie man will drive unemployment as high as 9% without their stimulus……..only to find it higher than that WITH the “stimulus”.
Nobody can really know with great degree what a bunch of elites do when you write them huge checks for nothing.
Are you referring to bankers’bonuses and CEO’s golden parachutes?
More like the primary dealers after receiving hundreds of billions of dollars in checks from the Fed in exchange for the Treasuries they bought, and many Wall Street investment banks after receiving trillions of dollars in checks from the Fed in exchange for worthless securities, and the receivers of the Treasury’s $700 billion bailout package.
But yeah, let’s focus on CEO pay. That’s where it all begins.
But if you obsess over Romer-Bernstein and don’t produce any of your own, that’s especially bad.
Maybe its just silly to think anyone can predict what the effects of huge jolts of intervention and “stimulus” will be with great detail. Nobody can know to a great degree what financial elites will do when we hand over huge checks for screwing up the economy. Even the supposed greatest minds our overlords shove down our throats completely blew it. Romer specifically said the boogie man would drive unemployment to as high as 9% if we didn’t pass their “stimulus”…..only to find it higher WITH the stimulus.
Do you know that Austrian economics does not presume to predict what learning entities like people will do in the future, only to know the logical categories of what will happen if certain actions transpire?
When Murphy is criticizing Romer’s prediction of “9% unemployment without the stimulus, 8% with the stimulus” he is arguing from the logical categories of Austrian economics, namely, “If the government blows up an economic bubble, and after the collapse it decides to spend money in an attempt to reverse the required recession, then they will not solve the employment problem, and at best, only delay the necessary correction, kick the can down the road, and generate an even larger bust later on.”
You have no idea why perhaps the foremost intellectual defense of the stimulus package, the paper touted by mainstream Keynesians, policymakers, and the media alike, would possibly be focused on after the fact by many people, including those who know the Keynesian prescription to be wrong at the outset? Geez, it was only shoved down our throats!
re: “Do you know that Austrian economics does not presume to predict what learning entities like people will do in the future, only to know the logical categories of what will happen if certain actions transpire?”
Well, yes and no.
I know this is the story – but every time you talk with some counter-factual in mind you do just that.
This sort of thing is inevitable – we have to think in terms of some counter-factual. I am up front and admit that it is dicey business. Everyone ought to admit that.
My concern is this – Bob is measuring things against a counter-factual I don’t put a great deal of faith in, and he’s doing this without other alternatives.
I see what you’re saying, and I think you’re right.
But strictly speaking, there is nuance in the Austrian approach that many Austrians indeed violate. The Austrian approach does not claim to derive us with knowledge of what the exact market rate of interest would have been had the Fed not targeted, say, a 5% interest rate on overnight funds, such that we can say aha, the Fed is targeting too low a rate. Yes, many Austrians do speak in these terms, but strictly speaking, it’s not correct.
All that the Austrian approach can tell us is that IF the Fed holds a rate below the market rate, THEN….etc. Logical categories, not necessarily prediction of what actually will transpire.
My concern is this – Bob is measuring things against a counter-factual I don’t put a great deal of faith in
OK, granted, but you can’t expect others to put as little a weight on the Romer-Bernstein prediction as you say you do. And it’s easy to say now that you don’t put a lot of faith in it.
Just imagine if the Romer et al prediction ended up being consistent with historical data. Could you say that you would have put as little weight on it as you do now? Again, we’re back in counter-factual land, so I will definitely not hold this against you because it’s not really fair, but I think you can understand the frustration that Austrians have when their very lives are used like lab rats, to test predictions of Keynesian economists who provide intellectual support to the government in spending $700 billion of taxpayer money.
Well, there’s always some empiricist minded economist who happens along a correct prediction, but that can only be known ex post.
re: “Geez, it was only shoved down our throats!”
It was our best guess at what was going to happen. I’m not saying don’t do forecasts I’m just saying “weren’t we all aware of how dicey forecasts are”???
Maybe we weren’t all aware. I thought we were.
Wouldn’t the best guess be the one that turned out right? Economists that argued that deficit spending will not improve the economy had the superior judgment.
Tell that to the economists who were willing to sell their children, and our children, into a world where they owe more taxes before they are even old enough to vote, or who will be exploited through the inflation tax by the Fed if the government can’t raise enough through direct taxation.
Tell that to the economists who predicted the world would end if the government didn’t spend more and print more.
Tell that to all the economists who ridiculed the Austrian approach and believed that positivist predictions should be used to backstop multi-trillion dollar programs and other forms of social control.
Is it especially bad? I think it is especially bad to have the hubris to think that putting point estimates on macro aggregate models is anything but a laughable excercise.
Austrians are fine describing directional outcomes from strong theoretical arguments.
re: “Austrians are fine describing directional outcomes from strong theoretical arguments”
Then why do so many Austrians seem to accept Romer-Bernstein as an ace-in-the-hole against Krugman?
I prefer describing directional outcomes from strong theoretical arguments too. I wouldn’t go as far as to say forecasting is a “laughable exercise”, but I do think it’s dicey.
Why is Bob latching on to it so strongly? Does anyone – anyone at all – think it is a viable counter-factual? No. No one does. So why evaluate people as if it were?
Which Austrians?
You said that you believe Romer-Bernstein was the Keynesian camp’s “best guess,” and now you’re surprised that Murphy is critiquing the Keynesian camp’s best guess? What is so wrong with this?
The question is if Krugman consistently argued that the effects of stimulus would peter out and the economy would return to pre-stimulus conditions.
I’m not going to concede that there is such a thing as “the output gap” or that economies have or lack “traction”. One needs a theory that can be applied to facts, stubborn or not, to make sense of those facts. There is no theoretical reason to think that any part of the Keynesian or Krugmanite theory makes any sense whatsoever and it’s clearly inapplicable to the stubborn facts of the real world. Keynesianism makes no sense moving from theory to fact nor from fact back to theory. And I’m still holding my breath waiting for the first Keynesian to demonstrate an understanding that the basis of Austrian theory is the pricing process and economic calculation. 38 years and 5 months now I’ve been waiting.
re: “There is no theoretical reason to think that any part of the Keynesian or Krugmanite theory makes any sense whatsoever and it’s clearly inapplicable to the stubborn facts of the real world.”
Care to get specific?
I’ve heard you peddle vague statements like this for days now and I still have no idea what you mean specifically.
I’ve mentioned four things to look at: unemployment rate levels, unemployment rate rates of change, interest rates, and inflation. The first is impossibly slippery because we don’t have counterfactuals or crystal balls (either would do, I imagine). The last three we can look at and the last three give reason to take Keynesianism very seriously.
Where is your specificity?
What are you looking at or thinking of exactly?
Or, like Bob, are you just amused by the fact that Keynesians didn’t know what never could be known (ie – the future or what could have happened in an alternate reality)?
re: “And I’m still holding my breath waiting for the first Keynesian to demonstrate an understanding that the basis of Austrian theory is the pricing process and economic calculation. 38 years and 5 months now I’ve been waiting”
You should read my blog.
He means that Keynesians and Krugmanites have been eviscerated, routed, trashed, shredded and torn into little pieces even before their theories were formulated.
Aren’t you impressed?
I am! Who couldn’t be impressed?
Compare that to MMT, that only achieved to claim that notebanks are shred when you use them to pay your taxes. And that’s after payment, not even before…
I am just slightly disappointed that they have not been ripped apart (yet).
I’m not going to concede that there is such a thing as “the output gap” or that economies have or lack “traction”.
Are you saying that the 9% of the workforce that is unemployed is simply incapable of producing anything of value?
No I think he’s saying that we shouldn’t be taking 2007 GDP, plus a gradual increase since then due to productivity, as what the economy “should” be producing right now, and thus that number minus the current output = “output gap.” That very notion assumes away the entire Austrian position about capital consumption during the boom.
What would be more valuable than sitting idly a few decades waiting for the economy to recover?
What the government is doing now, which is preventing the economy from recovering?
Under current conditions, yes they are incapable of producing anything of value. In order to make them deliver value, some aspect of the current conditions must change.
Remember that employment is a two-way street: in order to deliver value when person A sells their labour to person B, it requires that person A finds the payment they get more valuable than the labour they offer, and also requires that person B finds the additional labour more useful than the payment.
The question at hand is a matter of what exactly must change, but since none of us know the answer; the question becomes by what process do we discover the changes that will make these people productive again?
The Keynesian approach is to force person B to pay for something they never wanted, in order to keep person A working. Then the Keynesians tally up all the forced payments and insist they have just created value. No one can figure out whether the Keynesians are correct because no one can remember what the word “value” means anymore. The overall efficiency of the system drops down until you do have full employment, because everyone is working as hard as they can just to go nowhere… Keynesian nirvana.
BINGO!
Seconded on the BINGO! Thanks for Tel-ing it like it is!
I had a peek at your bitcoin stuff, very interesting. I’m not quite ready to rush out and make Nvidia happy tooling up for a mining enterprise, but the concept is intriguing.
Maybe we can get Murphy to write up an economic take on the bitcoin idea. Obviously the mathematics and cryptography is unsuitable for this blog, let’s just presume that part works as advertised. What about the economic questions though?
Will bitcoin be subject to inflation?
If multiple competing bitcoin systems are operational, can you transfer wealth from one to the other?
What about the principle of a monetary system that requires constant “mining” to build new coins, in the form of distributed computing effort? Seems to be inefficient… maybe better to put those computers to work solving medical problems or something.
I I think the money quote from Krugman in that 11/08 op-ed is on “conventional notions of prudence”:
All indications are that the new administration will offer a major stimulus package. My own back-of-the-envelope calculations say that the package should be huge, on the order of $600 billion.
So the question becomes, will the Obama people dare to propose something on that scale?
Let’s hope that the answer to that question is yes, that the new administration will indeed be that daring. For we’re now in a situation where it would be very dangerous to give in to conventional notions of prudence.
Average people do not realize that our national economic policy has been captured by people who spout this “alternative moral and logical universe of macro” nonsense. If we open their eyes to the fact that their “leaders” actually believe this stuff and act upon it to everyone’s detriment, maybe there could be hope for the future.
http://krugman.blogs.nytimes.com/2010/09/07/600-billion/
OK DJ thanks, I didn’t realize that when I wrote this most recent article. I won’t use the $600 billion quote again. (I’ll check out Krugman’s link to make sure I agree that that’s what he was saying, but I’ll take him at his word.)
Krugman had a few other articles and blogs from about the same time that the stimulus magnitude was being debated (end of ’08?) that support his claim that he meant $1.2T.
Austrians have a theory as to why there was a bust in 2008 (ABCT).
Austrians have also proposed various theories about why there has been no recovery (minimum wage increase, unemployment benefits, ObamaCare, fear of regulation, etc.)
The theory about why there was a bust focuses mainly on the actions of the Fed, whereas the theories about why there has been no recovery focus mainly on actions by the political branches of government.
These theories are independent of each other, in that the truth of one does not require the truth of the other or visa versa. There’s nothing wrong with that, but it’s important not to conflate the two theories. Someone could accept all the arguments about how recovery is being prevented by government interventions without accepting ABCT, and nothing in ABCT implies that any of the supply side stories about why there’s been no recovery are true.
Why the recession has lasted as long as it had shouldn’t be solely a question of theory, but also a study of history. There simply hasn’t been enough empirical work — and whatever work there is it’s not “deep” enough — by Austrians on what has slowed the recovery. Theory is relevant when interpreting the data, but we need the data before we can interpret it!
That’s fine, BA, I agree with your basic point. Also, on the other thread, you asked me how interventions could both be helping and hurting. That’s related to your post here. I think lowering interest rates and pumping in extra money gives a short-term illusion of recovery, while actually grinding away the real capital and making the ultimate bottoming out that much worse. In contrast, doing stuff like deficit spending and especially raising taxes/regulating will make things worse right away. (The deficit spending might make some sectors appear better–where they’re spending the money–but it hurts others.)
Bob,
Okay, so suppose that the Fed hadn’t responded to the crash by lowering rates and pumping in extra money, but all the other stuff (nationalizations, increased unemployment, ObamaCare, etc.) still happened. If both theories are right, then wouldn’t we expect 1) a worse crash, and 2) still no recovery?
If it weren’t for the Fed they wouldn’t have been able to do what they’ve done as far as spending goes. Interest rates would have risen and put a brake on their spending.
Dan,
It’s not clear to me how deficit spending (bad as it may be) is responsible for high levels of unemployment. There’s an argument about unemployment benefits, but this represents such a small portion of the overall budget that I don’t see it being affected by higher interest rates. (Also, if you look at a country like Ireland, where the government was forced to cut spending because of this issue, the spending cuts/lack of fiscal stimulus failed to produce recovery and in fact things got worse).
Most of the arguments about how government intervention is preventing recovery involve not spending but regulation, and thus aren’t dependent on Fed pump priming.
That’s just changes the subject. You said “all the other stuff”. I’m saying the bailout and stimulus and everything else wouldn’t not have been possible without the fed. If you want to ask about each individual thing on it’s own that’s a different thing entirely. The State might get away with raising a tax to pay for unemployment “insurance” but you won’t to be able to raise income tax to 60% on everbody to pay for all the things they’ve done.
As for Ireland, if you think Ireland has followed some Austrian prescription to their problems you are sadly mistaken. I doubt you believe that Ireland has gone Rothbardian all the sudden so I’m not sure how ireland can go against us.
Dan,
You raised an objection to what I was saying, so I modified my statement to take account of it. Even assuming that rising interest rates would have prevented a stimulus from being passed, this would not have prevented the various regulatory interventions that are blamed for stopping the recovery.
Ireland is not an example of Rothbardianism is action. However, on the specific issue in question (stimulus vs. austerity) they did do was Austrians have called for. If someone wants to argue that we would have had recovery if only we had cut spending, it’s appropriate to bring up Ireland as a counter-example.
Actually if any country followed Rothbard’s advice (early Rothbard, when he suggested interest rates be raised to get out of a depression) it has been Australia. Basically Rudd’s Labor government thought “we need a stimulus package” as all governments do and was going to mail $900 to everyone (literally) but really almost absolutely nothing ever came of that (in fact I think a lot of money just went to the US government), and the RBA decided to raise interest rates for whatever reason, so the net effect was the government did very little, and interest rates were eased higher and higher over a few years.
So at least superficially it would seem that the one country that took the Austrian perscription came out fine. It is also no surprise that in Australia there is no deposit insurance, the banks have hefty capital adequecy requirements (the best you can do when you have a central bank imo, of course it would be better to have no central bank at all) and the economic freedom score (a good measure of microeconomic effeciency see here: http://www.heritage.org/index/) is through the roof!
Meanwhile in communist USA and European Union incompetent socialists are talking about why they can’t get things right.
“The government must buy more things!”
“No that is only half the problem, people are not working and are idle resources!”
“Fools, there are “gaps” in our economy we must fill them!”
“Why isn’t the economy getting better? We hired a million people to help fill out forms and paper work in our government agencies already!”
“Of course its not working we must hire a million more people to fill out forms and papers, we have not done enough there are still idle resources!”
P.S Australia is no Rothbard-land or anything, but it is no USSA either.
Avram,
There wasn’t a recession in Australia in 2008, so Austrian arguments about how government interventions prevent recovery don’t really come into play there.
Actually, there hasn’t been a recession in Australia since 1991. I wonder how Austrians would explain that?
No no, it’s AUSTRIAN economics.
Black Adder, Three things:
1) I don’t know how Austrians would explain the lack of recessions in Australia in the period between 1990 – 2010. Casual observation seems to suggest that the quite conservative interest rate targets of the RBA during this period (at a glance they average over 5% and never going below 4% except for the sharp drop at the onset of the 2008 fiasco which brought them down to ~3%) did not create any large malinvestments, and that the generally unhampered market most businesses enjoy ironed out any bumps.
2) I live in Australia, and have for the past 11 years, and while what happened in 2008 might not be classified as a recession (I am just taking your word for it) there was definitely some readjustment happening. For example a few major mortgage lending houses (RAMS and BankWest come to mind) went out of business or were bought out. No doubt countless other smaller institutions that did not make the headlines were also affected.
However unlike in the U.S, Australia simply let failing businesses fail, so a lot of the bad stuff was purged immediately, which might be an explanation as to why there was no recorded recession.
3) The government here naturally claims itself and the extraordinary power grabs it made during this time as the reason Australia got out of things fairly quickly. For example Australian banks *now* do have federal government backed deposit insurance, even though the fact that they didn’t contributed much to Australian financial intitutions prudence prior to the crisis (the irony is strong here). As I explained earlier much was made about the stimulus package here, and the government would have you believe it is the only reason any of us are alive today, but in actual fact much of it never materialized, and compared to other nations stimulus packages it was more than miniscule. The RBA too did originally lower interest rates by a large measure (although nothing compared to elsewhere), and as mentioned before they almost immediatley changed their mind and started raising them. So actually observing the facts shows that the government didn’t do much, and imo precisely this is why things got better really fast.
Now, don’t you think its kind of odd that while the rest of the world is lowering interest rates to 0 levels and complaining how they can’t lower them anymore, bailing out this and bailing out that, stimuluating here and stimulating there, the other parts of the world that had comparatively limited government responses, restrained cash rate policy, let businesses fail and so on seemed to get out of things the fastest?
Now before you go and show me that Australia did not take anything close to what Austrians actually perscribed and that our government did try to intervene and that the RBA did initially drop the cash rate and so on, I’m gonna tell you I know this. It is obvious that the Austrlaian government was actually following Keynesian perscriptions (all governments want more power). But that is not the key. The key is that *compared to everywhere else*, the Australian response was as restrained, weak, and as half assed as they get on the Keynesian measures.
I think I can say with quite a lot of certainty that if the United States had just let their lending instutitions fail, halved the funds rate for only a few months and then eased them higher and higher, and delivered a less than 0.005% GDP stimulus package their recession would have lasted just as long as Australia’s apparently not even big enough to record one..
I am no super intelligent dude though so I know the arguments I present are anything but sophisticated, but seriously just looking at what has happened here and what has happend there, it is hard to come to any conclusion but that the less governments do and the less central banks do to “fix” things, the faster they actually get fixed.
First time I read that.
It’s funny how Australia is also given as example of how fiscal stimulus work to avoid a recession by Kenesians.
It’s funny how the baltic states are considered the example of what to do by austerians, and the example not to follow by Kenesians.
It’s funny how Iceland is considered the example of what to do by Keynesians, and the example not to follow by austerians.
So the only thing we can conclude is that economics is so funny!
“1) I don’t know how Austrians would explain the lack of recessions in Australia in the period between 1990 – 2010. Casual observation seems to suggest that the quite conservative interest rate targets of the RBA during this period (at a glance they average over 5% and never going below 4% except for the sharp drop at the onset of the 2008 fiasco which brought them down to ~
The reason why interest rates are higher in Australia than in the US is that Australia has higher inflation than the US. Their GDP deflator has been 4% and nominal GDP growth has been 7% in the past 10 years compared to the US’ gdp deflator of 2% and nominal GDP growth of 5%. Technically, Australia’s central bank has been printing more money than the Fed! According to the Andy Harless/Scott Sumner theory, the reason why Australia avoided a recession was the lack of an anti-inflation fetish the US has which gave the central bank more room to bring down interest rates without hitting the zero bound/liquidity trap.
“The Fed dropped its federal funds rate target by 5 percentage points in the year and a half following the onset of the financial crisis, and that was as far as conventional monetary policy could go. If the inflation target had started out at 4% instead of 2%, and the federal funds rate had started out at 7.25% instead of 5.25%, the Fed would have had a lot more ammunition. Moreover, the market would have known that the Fed had more ammunition, and investors would have been more confident in the Fed’s ability to minimize the economic impact of the financial crisis, and this would have made financial instruments less risky and thereby ameliorated the financial crisis itself.”
http://blog.andyharless.com/2010/01/inflation-targets-and-financial-crises.html
@Desolation Jones
The United States Fed Funds Rate at the beginning of the crisis dropped sharply from 6% to below 0%. In Australia it dropped from 5% to 3%. From my uneducated observation, it would seem to me that the U.S Federal reserve was more aggressive and capable in entering the cash market.
So if when Scott Sumner says “Australia had more room to move” he means “Australia had more room to move and then moved less then the USA” I guess he is correct.
Australia actually moved their cash rate (Federal funds rate equivalent) from 7.25% to 3% compared compared to the US’s 5.25 to 0. It wasn’t so much the specific amount that was lowered that mattered as much as the headroom left over (do to high inflation target) that gave markets comfort in knowing that the central bank had plenty ammunition left if needed. Because of the headroom, inflation and nominal gdp expectations didn’t fall as much as it did in the US so the Australia didn’t suffer such a severe downtown. I would actually say Australia was more aggresive than the US because they were able to return nominal GDP back to trend.
http://research.stlouisfed.org/fred2/graph/?id=AUSGDPNQDSMEI#
Also, I always wondered was Austrians though of Australia’s housing market. They have had a similar run up in house prices, but have yet to see a housing downturn.
http://aussienomics.com/uploads/Australian_vs_US_Inflation_Adjusted_House_prices.png
Is it in a bubble?
Ok you read the charts better than me and the data actually scores more to your favor than I originally presented, but my point still stood even with that data, which you acknowledged and then provided a good counter theory for (expectations resulting from greater room to move) and I buy your argument. It is very much a possibility. (although one would think, if expectations play such a large part why didn’t the Federal reserve lower interest rates by 4.25 percent (as Australia did) still giving them a 1% “room to move” to intimidate the markets with, why did they have to be more agressive to less effect?) However I think the fact that Australia let some financial institutions fail played a large part in averting any crises as well.
I will give some anecdotes about the housing market as it is now: House prices are really high at the moment and have been inclining for the past 10 years. However 2010 saw the first drop in housing prices in Sydney (something around ~2%) and that seems to be continuing this year.
In the area I live (a more or less affluent part of Sydney) there have been many new high density residential constructions of lower quality (that have pissed off countless already existing residents btw, in fact a politician from this area was elected as NSW state premier and promised to bring residential planning laws back to council not state levels), and I think the developers of those properties will see less of a return than they initially expected, as they are just hitting the market now when prices have started falling.
I do not think there will be any foreclosures and a sudden spike in bad debts as in the United States. But there definitely has been some “malinvestment” if you will.
See below.
Blackadder,
Didn’t Ireland implement a humongous taxpayer bailout of banks that made bad loans? In fact, wasn’t it the primary example when Krugman was gloating that the “orthodox” people said banks needed to be bailed out, and Krugman was claiming victory for his “unorthodox” recommendations to do what Iceland did?
(This was from Bizarro Land of course, because Krugman was for the bailouts [with caveats] in the US while Austrians were totally opposed.)
So no, saddling Irish taxpayers with a bank bailout of 40% of GDP (according to this) is not “the Austrian solution.” Yes, the press uses the same word “austerity” but the two are a bit different.
Yes, the crucial point about Ireland is that its political leaders sold out the taxpayers to the big banks. Taxpayer bailouts of private industry are laughable as a supposed Austrian prescription.
Shouldn’t the Fed raise rates instead of lowering them in order to accelerate liquidation of malinvestment and increase savings? I mean, what is the point of having an unaccountable overseer of the economy if they cannot speed up the process of reorganization by making it more painful.
In a 1975 speech, Hayek explained the shortcomings of applying math to economics:
“The primary cause of the appearance of extensive unemployment, however, is a deviation of the actual structure of prices and wages from its equilibrium structure. Remember, please: that is the crucial concept. The point I want to make is that this equilibrium structure of prices is something which we cannot know beforehand because the only way to discover it is to give the market free play; by definition, therefore, the divergence of actual prices from the equilibrium structure is something that can never be statistically measured.
However, this paragraph is profound for other reasons. Due to our Fed-inflicted super-low interest rates, we will never attain the necessary equilibrium interest rate. That by itself suggests a decade-long stagnation. We do not and cannot know what the interest rate should be “beforehand because the only way to discover it is to give the market free play”. Throw in regime uncertainty in the form of unpayable debt and the impending total removal of the medicine field from the pricing process of the market via Obamacare, and you have a long term disaster on your hands.
The above Hayek paragraph is also profound because it suggests that there is no “trend line” and that there cannot be a “trend line”. The transactions that created the exchanges for the “trend line” stopped trending because people became aware that various lines of production were unsustainable. We do not and cannot know what lines of production are sustainable “beforehand because the only way to discover it is to give the market free play”. No “trend line”, no gap.
The concept of “aggregate demand” is nonsense. Each exchange is an EXCHANGE, even if money is used. Each side “demands” something and “supplies” something. If “aggregate demand” is down, it is because people are poorer than they and everyone else thought they were. Those people need to revisit and relearn “convention notions of prudence” and save more. The idea that creating and diluting the funny money supply to get poor people to spend more of what they don’t really have is preposterous.
@ Bob Roddis,
Do you have the full text of this speach or know where it is published?
I would like to read it.
Thanks
oops. meant “speech” 😉
It’s taken from his infamous speech On the evisceration of any past, present and future economic theory I disagree with.
Yes, it’s in text form, right next to his Nobel Prize (not that it is worth as much as perhaps once was, considering how they’re giving Nobel Prizes to NYT pundits who don’t understand economics, and Nobel Peace Prizes to war mongering Presidents).
It’s in a 20 page pamphlet that originally cost $1.50. I bought it last year on Amazon for $20. Someone is now charging $29, “A Discussion With Friedrich A. Von Hayek: Held at the American Enterprise Institute on April 9, 1975” (Domestic Affairs Studies)
http://tinyurl.com/3srhh99
In a few days, I’ll scan a few pages and post them on my photo page. It will be a companion piece to Abba Lerner’s “The Economics of Control”.
Blackadder wants to know how government spending is the cause of unemployment.
I would say that the key Austrian concept is the pricing process/economic calculation. Because this is the essential basic concept of the Austrian School, it is ignored by Keynesians and other etatist groups. Jonathan Finegold Catalan explains how government spending impairs economic calculation here:
http://mises.org/daily/5123/Government-Spending-Is-Bad-Economics
We know that austrian economics is based on the unproven assumption that the return on coordination of individual investment is optimal.
J.F Catalan’s article is just a long tautology which can be summarized by
[…] we know that the only method of economic calculation is by individuals through the pricing process. Therefore, government investment is inherently inferior to free-market investment.
Duh!
@ MaMoTh
Does this mean that you assume that an “optimal” investment is one not coordinated by individuals? Perhaps a committee would do better where one individual may not? But then aren’t committees comprised of individuals or does something magical happen to individuals when they make a formal group that would allow them to think with each other’s brains?
I assume nothing at all. You seem to assume that a group of people is just several individuals that do not communicate with each other.
Maybe you should rebrand your theory Autism Economics.
@MaMoTh
This:
“We know that austrian economics is based on the unproven assumption ”
Contradicts,
this:
“I assume nothing at all. ”
If you “know” what is not proved, then that “presumes” you know what is, or are you just spouting random nonsense for people to respond to?
Both. Either that or you didn’t understand what I said.
How exactly do you come to the conclusion that trade between individuals is “Autism Economics” ?
Surely, in order to trade with another human I must first be able to achieve some level of communication. Otherwise how can I explain what I have to offer for trade, or what I would desire in exchange?
Even if a group of individuals come to the conclusion that they are better off forming some sort of company, they would do so on the basis that all concerned have decided (individually) to make a trade of some of their time and/or resources to that company in exchange for some particular benefit that the company may offer.
The process of actual economic calculation is always performed by individuals in any case, regardless of whether those individuals choose to communicate with one another, share information, pool resources, or whatever. Indeed, on a government committee the economic calculation is still done by individuals. No individual knows for sure what is the fundamental basis of any other individual’s decision… are they advocating action based on personal benefit or what is good for the collective? There is no way to be sure.
Autists can communicate. Computers too. They have limited ways of communicating though, like just individually setting prices. Do you think Automata Economics will be a better name than Autism Economics?
Bob Roddis,
Whatever the merits of Catalan’s essay as an argument against government spending, it doesn’t explain why government spending would prevent the labor market from equilibrating.
If government taxes or borrows money and spends it wastefully, society as a whole will be poorer as a result. But I don’t see how that’s suppose to translate into high unemployment.
In a nutshell, it translates into more unemployment because the government money will tend to consume resources to produce things that are not desired by the market (i.e. the use the moeny would have gone to absent the government) and thereby making it harder and more expensive to produce the things that are desired, more demand against a limitted supply equals higher costs equals less production, ergo less employment. again, in a nutshell.
RS,
I’m with you until you say ergo less employment.
Fifty years ago production was lower than it is today, it was harder to produce things that people wanted than now, etc. In other words, society was poorer. But that didn’t mean that unemployment was high.
the efficiency of production methods 50 years ago vs today are vastly different so the measure of employment then vs now is likewise different. you cant compare the two, unemployment then must be measured in the context of the economy and its capacity to produce given the technology of the times.
also, I said “less” employment. government spending reduces employment, whether it is “high” or “low” is something I can defer to the professionals. I just deal in fundamentals 😉
RS,
Okay, then let’s talk fundamentals.
Wages, like other prices, are set by supply and demand. If demand falls while supply remains constant, the expected result in a corresponding fall in price.
So, if government taxes and borrowing reduce demand, we would expect this to result in lower wages, not in less employment.
If that doesn’t happen, then the explanation has to involve something more than the fact government spending has reduced private sector demand.
@BA
” if government taxes and borrowing reduce demand”
This is only half of the story.
Government taxes and spending do more than just reduce demand for labor it reduces the overall production of goods that people want in favor of goods that people do NOT want so in the short term wages go down in the private sectors but are offset by a rise in wages in public sectors (increase demand for govt workers) however, it is important to note that that “offset” that raises public wages comes from capital consumption NOT from capital investment and therefore it REDUCES the amount of capital employed in productive activities, which lowers the productivity of labor, lowers production overall and will eventually lead to more and more unemployment for both public and private as the capital stock seed is consumed and not replaced.
RS,
You understand that lower productivity and lower output do not imply more unemployment, right?
I think you guys are a bit too confident in these assertions. If your arguments were correct, then it’s odd why we have any unemployment, except for teenagers worth only $3/hour etc.
In other words, I think the search models (3 recent laureates) are OK as far as they go. And in that framework, if everybody’s productivity suddenly dropped 5 percent, then you’d expect the official unemployment rate to shoot up for a while.
BA,
“You understand that lower productivity and lower output do not imply more unemployment, right?”
No I dont and they do, given a fixed or growing population. Consider the huge population growth in pre-industrial vs post industrial time periods, where did all of those extra jobs come from to employ all of those extra people if not from the improved productivity of labor?
Bob,
Sure, if you have a crash then you would expect unemployment to shoot up for a while based on “recalculation” type reasons. And if there are labor market restrictions that might also prevent people from finding jobs. My point was that these effects would be roughly the same even if Ron Paul had become Fed chairman in the fall of 2008, so it doesn’t make sense to cite Fed interventions and deficit spending as the reasons why we still have high unemployment three years later.
If the economy is humming along nicely, there is no ABCT thing going on, and then the government out of clear blue sky announces that it will borrow $800 billion and spend it on planting coconut trees (a gift to Mammoth there), I could easily come up with a plausible story as to why there would soon be unemployment for a while.
I thought you guys were arguing in the context of my article, where I was claiming that humongous stimulus packages are contributing to the severity and length of the slump. Why isn’t my point relevant (if you buy it)?
Bob,
In a laissez-fair market I dont think it would be odd to have full employment. Everyone who wanted a job would be able to find one as there would be much more work from employers than people willing to work.
RS,
You can increase output without increasing the productivity of labor if you can increase the number of hours worked. More people means that you can increase the number of hours worked. So for example, a hundred people working ten hours a day can produce ten times as much as ten people working ten hours a day with the same level of productivity.
BA,
Ok, I dont disagree with your last post but here is the problem that you are overlooking.
That increased output (via more hours or more people) presuposes a prior increase in the productivity of labor (i.e. of purchasing power), if it did not then that increased output represents a waste of resources and a net loss of wealth.
Even if you were right, less production of the private sector would mean less employment in the private sector, but not necessarily less overall employment.
The government creates unemployment when it overtaxes the private sector.
It can also target full employment with a Job Guarantee that will set the price of its currency maintaining a buffer of employed low skill workers.
The former Soviet Union had a job guarantee program, with nearly full employment, yet they were totally improvised because government planners responsible for deciding who works where and what they are doing suffer from the knowledge problem, and are unable to engage in economic calculation.
This is because government planners, regardless of whether they know any MMT or not, are not subject to market forces, and ultimately have no ability to determine whether or not the jobs they dole out are productive or produce goods or services that are consistent with real consumer preferences.
Only way to determine whether or not they are consistent with real consumer demand is to use the pricing process and the profit and loss system, incentives which government is not and cannot be subject too.
Job guarantee program to promote “full employment”=statist nonsense.
Blah, blah, blah, please spare me the standard austrian tantrum as if I didn’t know it.
Blackadder’s question was about government spending causing unemployment. It’s not about regulations, and it’s not about wealth creation, as he made it clear.
It’s funny how no one is answering that simple question.
Regardless, I’m just pointing out how the job guarantee program is complete nonsense. It’s funny how no MMT’er bothers to respond basic Austrian objections to their Keynesian demand management style policies.
As Bob Roddis puts it, and I happen agree with him, I have yet to see an MMT’er on this blog demonstrate any familiarity with basic Austrian concepts. Much less apply them to the discussion.
@MaMoTh
“but not necessarily less overall employment”
This drops the context of why people choose to be employed. They do not work for the sake of working, people work to create wealth and to improve their condition in life, whethe that means eating from one day to the next or upgrading their car from a Ford to a Lexus.
We could certainly have full employment overnight by mandating that everyone dig diches all day or move rocks from one pile to the next and within your myopic view of employment you could claim that everyone was 100% employed and then you would be baffled as to why millions of people begin to starve to death not long after.
The Soviet Union suffered such a fate and it was because they kept trying to “employ” more and more people at tasks that did not produce anything anyone really needed because their economic overlords did not let them.
OK, so you are now saying government spending does not create unemployment, which was Blackadder’s initial simple question.
I really don’t want to think how long it will take to get an answer to a complex question.
do I have to clarify for the weak minded the difference between “gainful” employment for actual people vs. simple make work schemes for mindless automitons?
Government spending does not create unemployment per se, but creates employment in areas that may or may not produce goods and services that are consistent with real consumer preferences, which ultimately may cause underemployment in other sectors that are actually profitable.
Overall, I would government spending is not in any way a tool that can be used to promote employment in any meaningful or sustainable way.
How about addressing the comments that RS and myself posed to you about your job guarantee program to support “full employment?”
My point, government spending does not create unemployment.
Not really interested in discussing the Job Guarantee with people who bring up the example of the Soviet Union which has nothing to do with the Job Guarantee.
Dont bother Zack, MamMoTh is not concerned with concepts like sustainable or unsustainable in regards to ecnoomics. All he wants to hear are floating abstractions like “employment” and “money” that have no relation to people or goods or choices. All he cares about is how the rules are written so that reality will re-write itself so that this idea called “economics” will work itself out on paper, even if no one is able to produce the paper necessary to write on.
Yes it does its aiming at achieving the same nonsensical goal of “full employment” by using the government to put people to work.
The former Soviet Union employed people simply for the sake of employing them, under the guise of “full employment.” The Soviet Union used its power in the same way MMT’ers suggest the U.S Gov’t should use its power to put people to work for the sake of promoting full employment.
The Soviet Union had a very low unemployment rate, yet they were improvised despite the fact that government was guaranteeing jobs to promote employment.
The Austrian critiques of this foolish policy still hold. RS and I have presented them to you clearly. You have yet to conjure up a legitimate rebuttal.
The Job Guarantee has nothing to do with the Soviet Union.
It’s just hiring from the bottom anyone willing to work in order to achieve price stability with a buffer of minimum wage workers instead of a buffer of unemployed people.
So, instead of staying home (if they still have one!) watching Fox, people could for example learn to change diapers for the elderly and be able to provide that service to Roddis soon.
The job guarantee program is aiming at achieving the same goal as the Soviet Union was, which ultimately is to promote full employment. This of course, as we have established, is nonsense. Regardless, whatever goal this foolish program has, it’s still a bad policy.
I
f government employs these people doing things that MMT’ers deem appropriate, that means it will be increasingly difficult for the private sector to employ these workers in areas that are actually in conjunction with real consumer preferences.
Jobs for the sake of jobs makes no economic sense whatsoever. It’s not better than having them do nothing because government employing them prevents them from potentially shifting into sectors where they are needed.
Of course, only in the private sector, can individuals make those determinations because they are subject to market forces and can actually engage in meaningful economic calculation.
The government on the other hand, is not, so any job they give someone is necessarily unproductive because the government has no ability to determine if whatever service or good they are producing is profitable and productive.
Price stability is nonsense. No one knows, nor has the necessary information to determine what “the price level” is, or should be in that case. So trying to achieve price stability is foolish on its face. The market determines prices.
MMT central planners are in no position to deem prices to high or too low, much less advocate a policy to remedy such an abstract concept in which they have no ability to determine in the first place.
MMT central planning is foolishness. The Austrian critiques of the job guarantee program with regards to economic calculation, the knowledge problem, and the pricing process still hold.
You love picking on Roddis. It seems like he really gets under your skin. Out of all the commentators on this blog, it seems like Roddis gets under the skin of these MMT/Keyensians demand management statists the most.
Catalan’s article doesn’t explain why government spending would prevent the labor market from equilibrating.
If the government takes money from the private sector via taxes or borrowing and then wastes it, society will be poorer as a result. But how is that supposed to translate into extended periods of high unemployment (as opposed to full employment at a lower wage level)?
You’re right.
Government spending can emploly everyone with some sort of aggregate measure of production falling as a result. In the end it just amounts to wealth redistribution with those people producing very little in some cases getting a larger share than those producing a lot.
The problem with this is the whole malinvest spiel Austrian’s talk about, although I think it would be even worse because now you will have a lot of people re-skilling to move into unproductive jobs, all the while the collective “pie” keeps shrinking and shrinking because of this. So real wages will keep falling and falling and eventually you will wind up with the same situation as today with a lot of people not able to find work for the real wage they want, and holding out of the job market till they can.
Or maybe not, Maybe you will just have 100% employment all making the equivalent of today’s 20 cents per hour, it doesn’t matter. I don’t like the situation in either case.