Archive for the ‘Keynesian Revival’ Category

I COMPLETELY agree with the points made by Bill Gross in this article.  Here is an excerpt and the link:

“Faced with these two decidedly different routes to “level the playing field” it seems obvious that the United States is opting for “Easy Street” as opposed to “Buckle Down Road.” Granted, “The Ben Bernank” as a YouTube cartoon rather hilariously labeled him, has for several months importuned Congress and the Executive Branch to institute substantive reforms, while he attempts to keep the patient alive via non-conventional monetary policy. But very few others are willing to extract their heads from the sand. The President’s debt commission with its insistence on low personal and corporate income tax rates and a mere 15 cent increase in the gasoline tax was one example. The Republicans’ reluctance to advance detailed ideas for budget balancing is another. And the Democrats’ two-year focus on the biggest entitlement program since Social Security – healthcare – as opposed to fundamental reforms to counter our lack of global competitiveness – is perhaps the most grievous example of lost opportunity. Unlike the United Kingdom, where Prime Minister Cameron has championed fiscal conservatism, or even Euroland, which is being forced in the direction of Angela Merkel’s Germanic work ethic, the United States seems to acknowledge no bounds to what it can spend to bolster consumption or how much it can print to support its asset markets. We will more than likely continue to “level the playing field” via currency devaluation and an increasing emphasis on trade barriers and immigration, as opposed to constructive policies to make this country more competitive in the global marketplace.”


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This is brilliant.  We really do need to differentiate between industry interests and free market interests.  I think many of Geldon’s points about the credit card and securitization industries also apply to the US cell phone industry.  Are they competing transparently on price and quality?  Absolutely not.  Contracts are intentionally indecipherable and exclusivity agreements between phone manufacturers and carriers divide the market.  Perhaps free markets aren’t created by the absence of government involvement but instead are a result or condition that exists when markets are properly fostering transparent competition.  In the past, governments may have been most responsible for preventing this outcome but perhaps now it is private entities who are to blame.  Might intelligent regulation be just the medicine these industries need to function properly?  An interesting thought.

For those that contend the recent crisis diminishes the case for free markets, I also would like to point out that the US housing market was about as far from being a purely private free market as any utility.   Fannie, Freddie, huge tax incentives, federal housing initiatives – who knows what the US residential real estate industry would be like without all this.

“Over the past year, there has been much discussion about how the financial crisis exposed weaknesses in free-market theory.  What has attracted less discussion is the extent to which the high priests of free-market theory themselves destroyed meaningful contracts and other bedrocks of functioning markets and, in the process, created the conditions for the theory’s weaknesses to emerge.

The story begins before Wall Street’s capture of Washington in the 1980s and 1990s and the deregulatory push that began around the same time.  In many ways, it started in 1944.

In that year, Frederich von Hayek published The Road to Serfdom, putting forward many of the ideas behind the pro-market, anti-regulatory economic view that swept through America and the rest of the world in the decades that followed.  Von Hayek’s basic argument was that freedom to contract and to conduct business without government meddling allowed for free choice, allocated resources efficiently, facilitated economic growth, and made us all a little richer.  Milton Friedman built on Hayek, creating an ideology that resonated with conservatives and ultimately became the prevailing economic view in Washington.

While many have noted how information asymmetry, moral hazard, and agency costs reveal glaring holes in free-market theory and contributed to the current crisis, few have focused on the extent to which the supposed heirs to von Hayek and Friedman directly and purposefully created market distortions and, in the process, destroyed the assumptions of free-market theory.

In other words, the same interests that claim the mantle of von Hayek and Friedman pulled the threads from the free-market system and exposed the theory’s greatest weaknesses.

In the years leading up to the crisis, the proliferation of fine print, complex products, and hidden costs and dangers – and the push against government regulations over them – exemplified the larger pattern.  While touting complexity as a form of innovation and railing against every attempt at government interference, supposedly pro-market forces used that complexity to clog the gears of free market machinery and to reduce competition and maximize profit.

The greatest lesson from the crisis that we haven’t yet learned is that “industry interests” and “free-market interests” are not the same.  In fact, they are more like oil and water, as the industry profits most in the absence of true market competition.  And so it should be no surprise that Wall Street has devoted itself to making contracts indecipherable, building boundless negotiating leverage and fighting for favorable breaks and regulation at every turn.  What should be a surprise is that the same scoundrels that killed our markets (and also, mind you, wrecked the global economy and demanded taxpayer bailouts) have so ably sold themselves as natural heirs to von Hayek and Friedman — and that so many of us have let them.”

-Dan Geldon


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I thought this Economist article contained an interesting combination of ideas.  First, it’s astonishing to note that although the level of our trade deficit with China has decreased, over the same period, our trade with China has grown to represent a greater portion of our total trade deficit.  The article presents several plausible explanations of why China’s share of global exports is rising but I am left wondering why the US/China trade relationship has changed so dramatically.

Even more interesting to me is Paul Krugman’s endorsement of currency-adjusting tarriffs as an appropriate response to Beijing’s stubbornly pegged Yuan.  Although I strongly believe China’s subsidized currency has created massive damaging distortions in world trade and capital flows, which are disturbingly ignored in Washington as senators seemingly prefer berating Wall Street “barons” to seeking actual cause,  it is ironic to me that Krugman, the borrow and stimulate Keynesian, doesn’t seem to realize that trade is a two way street.  America has completely lost touch with the reality that wealth is created through parsimony and hard work.  As much as I agree with Krugman’s diagnosis, Greenspan is also on board in spirit (see Greenspan’s March 2009 WSJ piece), I wish Krugman would recognize his part in the problem.

‘China takes an even bigger slice of America’s market. In the first ten months of 2009 America imported 15% less from China than in the same period of 2008, but its imports from the rest of the world fell by 33%, lifting China’s market share to a record 19%. So although America’s trade deficit with China narrowed, China now accounts for almost half of America’s total deficit, up from less than one-third in 2008.

Foreign hostility to China’s export dominance is growing. Paul Krugman, the winner of the 2008 Nobel economics prize, wrote recently in the New York Times that by holding down its currency to support exports, China “drains much-needed demand away from a depressed world economy”. He argued that countries that are victims of Chinese mercantilism may be right to take protectionist action.

Some forecasters, such as the IMF, expect China’s trade surplus to start widening again this year unless the government makes bold policy changes, such as revaluing the yuan. However, Chris Wood, an analyst at CLSA, a brokerage, argues that China is doing more for global rebalancing than America. Rebalancing requires that China spends more and America saves more. Mr Wood argues that China is doing more to boost domestic consumption (for example, through incentives to stimulate purchases of cars and consumer durables, and increased health-care spending) than America is doing to boost its saving. America’s total saving rate fell in the third quarter of last year to only 10% of GDP, barely half its level a decade ago. Households saved more, but this was more than offset by increased government “dissaving”.’


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I’m not entirely clear what’s motivating Paul Krugman at the moment.  His recent NYT Magazine piece (linked below) titled “How did economists get it so wrong” was certainly an interesting critique, but it also tasted spiteful and bitter by the end.  Cochrane claims he botched many facts and chose convenient but unfair quotes.  I don’t track the details of macro assumptions but there were a few points that even I knew Krugman hadn’t done justice to the ideas that ran counter to his own.  There were also many other points where his arguments contained gaping holes.

Personally, I am tired of the great Keynesian resurgence and Cochrane’s words ring much more true to my ears than Krugman’s assault:

“Krugman wants people to swallow his arguments whole from his authority, without demanding logic, or evidence.  Those who disagree with him, alas, are pretty smart and have pretty good arguments if you bother to read them. So, he tries to discredit them with personal attacks.

This is the political sphere, not the intellectual one. Don’t argue with them, swift-boat them. Find some embarrassing quote from an old interview. Well, good luck, Paul. Let’s just not pretend this has anything to do with economics, or actual truth about how the world works or could be made a better place.”

Krugman (NYT)


Cochrane (@ UChicago Booth)


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Just 2 years ago, the death of Milton Friedman brought a day of mourning at the LSE and Keynes was a relic whose theories had been disproven by stagflation and the prosperity of the the past 2 decades.  (OK, so it helped that Hayek was an LSE guy)  Now, the Chicago school’s name is dirt.

John Maynard Keynes wrote that “practical men who believe themselves to be quite immune from intellectual influences are usually the slaves of some defunct economist.” Most of today’s crop of economists are not defunct, but continue to work in the ideological vicinity of Chicago. Their assumptions should be ruthlessly exposed, for they have come close to destroying our world.


What if both schools of thought have valuable insights to offer?  How novel!  If we aren’t careful, we will end up bouncing between opposing extremes in a vicious cycle of over correction.

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