Look: I am eager to learn stuff I don't know--which requires actively courting and posting smart disagreement.

But as you will understand, I don't like to post things that mischaracterize and are aimed to mislead.

-- Brad Delong

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Wednesday, March 23, 2011

The Great Recession

Brad Delong dicusses a proper understanding of the Great Recession, it's causes and  cures, as well seven types of incorrect zombie analysis.

Read it all here.  It's 9500 words, and well worth your while.
Major theme:  It's Milton Friedman's fault for allowing people to believe that complex problems have simple solutions.

His social libertarianism prevented him from acknowledging that attempting to keep money growth constant was a (valid) example of government intervention.   "He sold the Chicago school an interventionist, technocratic managerial optimal monetary policy under the pretense that it was something -- laissez faire -- that it was not."  In doing so, he denied the Keynesian approach of more complicated interventions.   Since about 1980, his approach has failed, and in 2008 even extraordinary money growth could not prevent extraordinary levels of unemployment.  This left many economists with no foundation for understanding, and they simply started to either make stuff up on the fly or fall back on ideas that were discredited 80 years ago.

Wrong Models and Stuff They Made Up  (See Delong at the link for details and refutations)

Low Marginal Product Workers - We have 10.5 million unskilled workers who cannot be hired because their value is below minimum wage.   (Niall Ferguson, Tyler Cowan)

Structural Unemployment -  We have 12 million workers with the wrong skill sets (or locations) who need to be retrained (or relocated.)   (Narayana Kotcherlakota)

Overaccumulation of Capital - The problem is not a shortfall in aggregate demand, but a surplus of aggregate supply.  Thus, the economy needs to "liquidate" via unemployment, bankruptcy and obsolescence.  (Marx, Hayek, Mellon, Hoover)  BTW This is the Marxian argument of capitalism consuming itself and collapsing - thus, the logical solution, via Marx and rejected by the others is socialism.  The others took the collapse to be temporary, and when the dust cleared the whole cycle could start all over again.  So, take your lumps and shut the hell up.

Uncertainty - The election of Commie-socialist-Muslim-anti-imperialist-foreign-born dictator B. Hussein Obama and the specter of deficits and burdensome regulations he is oh-so-likely-to-impose has scared the wrinkled green shit out of capitalism; and so it is paralyzed like a deer in the headlights. (Alan Greenspan, Rethug Politicians, Rethug Sycophants, Idiots)

The Need to Control Inflation and Avoid Crowding Out - Further stimulative policies will cause a burst of inflation, raise interest rates, crowd out private investment and stifle economic growth long term. (John Cochran)   The inflation premium today on  10 Yr TIPS is 2.283%, on 30 Yr TIPS it's 2.355% (difference from non-indexed bond.)  Draw your own conclusions about inflation expectations.
Banking and Fiscal Policy Unnecessary -  Per Friedman, Fed open market operations are sufficient.  We can certainly see how well that is working.  (Nobel Prize winner Robert Lucas, who in his own words admits, "I really don't get it.")  Lovely.  Say and Mill got it back in 1829.

Banking and Fiscal Policy are Ineffective - This is a crowding out/future tax increase argument that simply bears no relationship to the real wold.  (Eugene Fama, Nobel Prize winner Myron Scholes)

As I've stated before, thinking like an economist means that zombie ideas eat your brain.

So - are we screwed, or what?


nanute said...

So are we screwed or what? To borrow a phrase from Atrios: "simple answers to simple questions", yes. I bookmarked the DeLong screed this morning for later reading. Thanks for the synopsis. It is rather unfortunate that the Chicago School, Austerian 'theory" has been the major force behind monetary and fiscal policy for far too long. I think Krugman noted recently that monetarism is dead. Unfortunately, the powers that be are still alive. (Word verification irony: rally.)

BadTux said...

Screwed. Totally. Not worth posting anything but cat pictures forever more. Siiiigh!

- Badtux the Waddling Penguin

The Arthurian said...

I'm iffy on DeLong.
It's 9500 words, and well worth your while.
Major theme: It's Milton Friedman's fault for allowing people to believe that complex problems have simple solutions.

My thought: Where is the analysis??? Everybody skips that step. And that, when all is said and done, is the reason that none of the solutions have worked.
Having done the analysis, I too believe the solutions are simple.

Maynard's thought: "The ideas ... are extremely simple and should be obvious. The difficulty lies, not in the new ideas, but in escaping from the old ones..."