In the Economist: Conventional economic models failed to foresee the financial crisis. Could agent-based modelling do better?
from Bruce Edmonds
Agents of change
Conventional economic models failed to foresee the financial crisis. Could agent-based modelling do better?
Jul 22nd 2010
From Lewis L. Smith
There is no longer any doubt that world production of crude oil [however defined] is going to peak within everybody’s planning horizons, if it hasn’t done so already. The only argument is over when.
The turning point in discussions of this subject came in 2008 when the Saudis stopped talking about producing 10 to 25 million barrels per day for the next 50 years and admitted that their production was going to peak at 12 million barrels per day within a few years and then begin to decline, until all their wells are capped.
Today the forecasts range from 2004 [Dr. Rafael Sandrea — conventional crude] to 2032 [Exxon/Mobil — all crudes] , with a preferred range of 2010 — 2015.
Needless to say, for strategic and electric-utility planners, these dates are “just around the corner”. Read more…
Dear Professor Davidson,
I must respectfully but strongly disagree with the implications of the statement by you, Lord Skidelsky, and my friend, Jamie Galbraith. The existence of a large public debt is a burden, especially in that it will inhibit deficit spending in future recessions. Deficits require someone to buy the newly issued securities; people already holding a large amount of government debt will demand higher and higher rates of return to hold more. There was an argument about the “burden of the debt,” in the 1960s; it was summed up in an excellent paper by Franco Modigliani, who, however, did not go into the implications for future counter-cyclical policy. Without going into details here, the point emphasized by Modigliani was the displacement of private investment. His model presupposed the absence of the Ricardo effect; if there were a Ricardo effect (prediction of future tax burdens due to debt issuance), then Keynesian policies could not possibly be effective, since people would increase saving to compensate for the deficit. Hence, the same argument that deficit financing is stimulating implies that public debt can be a burden. Read more…
I am getting married tomorrow. Will be back managing this blog on August 2.
In the immediate aftermath of the global financial crisis even the deepest market fundamentalists embraced the core Keynesian insight that when in deep recession, monetary policy will be ineffective and fiscal stimulus is required. They have now abandoned that view as calls for fiscal austerity abound regardless of the increasingly fragile nature of the global recovery.
While economists and policy-makers debate the short and medium-term remedies to the crisis, there is an incredibly surprising and under-discussed consensus emerging for the longer run. From the Financial Times to the South Centre there is agreement that the United States and East Asia (notably China) have to change the ‘structures’ of their economies.
The US has to stop over-consuming on credit and actually produce things for export again. East Asian nations have to slow down their over-reliance on exports and increase domestic consumption. Another way of putting it: the key actors in the world economy need to undergo structural change.
So are we all structuralists now? Read more…
and now co-signed by many of our friends, including Joseph Stiglitz, Robert
Reich, Laura Tyson, Derek Shearer, Alan Blinder and Richard Parker. We
support the central objective of the letter — a full employment policy
now, based on sharply expanded public effort. Yet we each, separately,
declined to sign it.
necessity of a program to cut the mid-and long-term federal deficit.. “
Since we do not agree with this statement, we could not sign the letter.
effects of unemployment itself the United States does not in fact face a
serious deficit problem over the next generation, and for this reason there
is no “necessity [for] a program to cut the mid-and long-term deficit.” Read more…
from David Ruccio
It’s not a liquidity trap, as the Keynesians want to see it, and it’s not a real business cycle, which is how it looks to the neoclassicals. It’s a political business cycle. And economists would know that if they ever read the work of Michael Kalecki.
But, of course, they don’t. And they don’t teach it to their students either. Essays like Kalecki’s “Political Aspects of Full Employment” [pdf] just aren’t on their reading lists.
If they did read Kalecki, they’d discover a prescient analysis of the current situation. Kalecki summarizes the debate concerning the “economic doctrine of full employment” (which seems not to have changed much in the past 60 years) and then analyzes the “political problems involved in the achievement of full employment.” Here’s Kalecki’s analysis of business opposition to measures designed to achieve full employment: Read more…
From: Evans, Harold Sent: Mon 7/19/2010 6:25 PM
To: Davidson, Paul
Subject: Reboot America – from Sir Harold Evans
Earlier today I was joined by Joseph Stiglitz, Alan Blinder, Robert Reich, Laura Tyson and several others in a call to action urging our leaders to get the economy back on track and the American people back to work. I am sending this to you with hope that you will join us with your support. Full recovery of the economy begins with replacing the lost purchasing power of the millions of unemployed and focusing on deficit reduction only after we create more jobs. If you would like to sign your name along with other leading economists and thought leaders to push Congress to support American families please respond to me here and pass this along to your networks as well.
With all of us together we may yet stave off a 1930’s economic collapse as long as we learn from the lessons that caused it.
Sir Harold Evans
From: Davidson, Paul Read more…
South Korea will join the growing group of nations that have recently resorted to currency controls in the wake of the global financial crisis. As a rash of new research has shown, such controls are legitimate tools to prevent and mitigate financial crises.
Yet if the pending South Korea-US free trade agreement that the US just agreed to expedite at the G20 meetings had been ratified by now, South Korea’s actions would be deemed illegal.
As the Obama administration works to put Bush-era trade policy behind and forge a “21st century trade policy” it should fix this flaw that could be fatal to South Korea’s financial stability.
Like many other emerging markets Read more…
from Dean Baker
It has been two-and-a-half years since the recession officially began in the United States. While the economy has been growing for more than a year, unemployment remains near the 10.1 percent peak of October 2009. Few economists predict a rapid decline from its June level of 9.5 percent and, with stimulus being phased down over the next year, it is very plausible that the rate will edge higher in coming months.
The US, unlike most western European countries, is not set up to sustain long periods of high unemployment. Its system of social welfare is very much centered on work. This is most evident with health care. The vast majority of non-elderly people get their health care through employer provided health insurance. Individual policies tend to be very expensive, especially for people with any history of medical problems. When people lose their jobs, they generally lose their health care coverage as well. While there is a public program for low-income families, it doesn’t cover most of the unemployed, and the quality is often quite poor. Read more…
from David Ruccio
Americans already work longer than in most countries. Now, it looks increasingly likely they won’t be able to retire. That means they’ll have to continue working until they die.
U.S. workers already have a higher retirement age than most of the rest of the developed world.
Peter Radford commenting on The GFC, the Great Recession and three structural changes in the US economy
All these three speak to an underlying common theme: the widespread acceptance throughout the ‘elites’ within policy making, business, and academia of the meld between neoclassical orthodoxy and individualist politics to create a powerful ideology. This ideology enabled the structural changes you speak about.
It became taboo to question the kind of outcomes you mention because those outcomes were deemed beyond the remit of orthodox economics. We had to accept them as they were, as long as ‘markets’ were unencumbered by government or other institutional infringements, and as long as the public could be persuaded that government ‘was a problem’, to paraphrase Reagan. The neat fit between positive economics and anti-government politics was made complete by the Lucasian project, which seems purposely designed to me, as an outsider, to be unreconstructed laissez-faire in a mathematical disguise. Read more…
from David Ruccio
As it turns out, 2009 was a very good year—for those at the top, although certainly not for the rest of us.
First, the bad news: according to the ILO’s Global Employment Trends [pdf], the global unemployment rate for 2009 was estimated at 6.6 percent, which meant that at least 212 million were unemployed worldwide—an increase of almost 34 million over the number of unemployed in 2007. Global youth unemployment increased by 10.2 million in 2009 compared to 2007, the largest rise since 1991. Even among those who kept a job, the numbers of both those who had vulnerable employment (defined as the sum of own-account workers and contributing family workers) and the working poor (earning $2 a day or less) increased. Read more…
firom Dean Baker
A few years back there was a fear in some parts about black UN helicopters that were supposedly taking part in the planning of an invasion of the United States. While there was no foundation for this fear, there is basis for concern about the attack of another international organization, the International Monetary Fund (IMF).
Last week the IMF told the United States that it needs to start getting its budget deficit down. It put cutting Social Security at the top of the steps that the country should take to achieve deficit reduction. This one is more than a bit outrageous for two reasons. Read more…
In the new issue of The New Republic, James Galbraith has an article arguing that the rule of law must be restored to the financial services industries and lamenting Obama’s failure to do so. It begins: Read more…
from Dean Baker
While BP has taken some heat over its spill in the Gulf, it is remarkable how limited the anger actually is. Many defenders of the company have made the obvious point: It was an accident. BP did not intend to have a massive spill that killed 11 people, devastated the Gulf ecosystem and threatens the livelihoods of hundreds of thousands of workers.
Of course this is true, but it is also true that a drunk driver who runs into a school bus did not intend to be involved in a fatal collision. As a society, we have no problem holding the drunk driver responsible for a predictable outcome of their recklessness. Read more…
I received this disheartening report from someone who attended the recent Western Economic Association International Meetins in Portland, Oregon.
As usual I went to a lot of meetings and lunches. This time I decided to ask some of the younger economists if they thought of themselves as neo-classical economists. They didn’t even seem to understand the question. Like, is there anything else? None of the young women economists were even aware that there was a sub-field calling itself feminist economics; nor had they heard the name of its founder Nancy Folbre.
from David Ruccio
The rise of the corporate university means the death of tenure.
According to the Chronicle of Higher Education, tenure is disappearing across higher education.
Over just three decades, the proportion of college instructors who are tenured or on the tenure track plummeted: from 57 percent in 1975 to 31 percent in 2007. The new report is expected to show that that proportion fell even further in 2009, dropping below one-third. If you add graduate teaching assistants to the mix, those with some kind of tenure status represent a mere quarter of all instructors. Read more…
Fan Gang is Professor of Economics at Beijing University and the Chinese Academy of Social Sciences, Director of China’s National Economic Research Institute, Secretary-General of the China Reform Foundation, and a member of the Monetary Policy Committee of the People’s Bank of China. In a recent short article for Project Syndicate he argues that China’s unmatched “sustained rapid economic growth for 30 years without significant fluctuations or interruption” is due to its superior competence at “modern economics” compared to Western nations. By “modern economics” Gang means post-neoclassical economics, most especially Keynes. He says that for someone who has read Keynes “there is nothing more abnormal about China’s unbroken pattern of growth than effective macroeconomic intervention in boom times”. Unlike Western governments, China’s central government has “put brakes on the economy whenever there is a tendency toward over-heating”.
Economic theory holds that all crises are caused by bubbles or over-heating, so Read more…
from Lewis L. Smith
There is an interesting calculation which one may make with regard to the Deep Horizon platform, which incidentally is located in an “oil play” called “Macondo” !
Following a major spill off Mexico, some 5,000 deep-water wells were drilled in the Gulf of Mexico without serious mishap.
Suppose suppose that you are the BP official in charge of Deep Horizon and are about to order the start of drilling.
You say to yourself that you should assume the worst, just to be on the safe side, and estimate that the maximum damage to be expected from a major spill would be $50 billion. Read more…