Understanding Macro: The Great Depression (1/3)

from  Asad Zaman

Preliminary Remarks: “The trouble is not so much that macroeconomists say things that are inconsistent with the facts. The real trouble is that other economists do not care that the macroeconomists do not care about the facts. An indifferent tolerance of obvious error is even more corrosive to science than committed advocacy of error.” From The Trouble with Macroeconomics (Paul Romer)

Personally, I do not understand why indifference to error is worse than committed advocacy. For an illustration of committed advocacy of error, see postscript below on 70 years of economists’ commitment to a fallacious theory of supply and demand in the labor market. Furthermore, the problem is not confined to macro. Microeconomists are also dogmatically committed to utility maximization, when in fact this hypothesis about consumer behavior is solidly rejected by empirical evidence; see: The Empirical Evidence Against Neoclassical Utility Maximization: A Survey of the Literature

Understanding Macro: The Great Depression

Due to frequent headlines, there is a substantial public awareness of core macroeconomic issues like unemployment, trade agreements, exchange rates, deficit, taxes, interest rates, etc. However, even professionals are often ignorant of the intellectual battles which have shaped modern macroeconomics, since this is not taught in typical PhD programmes in economics. This article attempts to provide the history of ideas which led to the emergence of macroeconomics, since this is an essential background required for informed analysis of these issues.

Lord John Maynard Keynes invented the entire field of macroeconomics in response to the Great Depression in 1929, which could not be understood according to economic theories dominant until then. According to the classical economic theory, forces of supply and demand in the labour market would ensure full employment. Keynes starts his magnum opus, The General Theory of Employment, Interest, and Money, with the observation that the economic theory cannot explain the long, persistent and deep unemployment that was observed following the Great Depression. Keynes set himself the goal of creating a theory which could explain wide fluctuations in levels of employment that he observed. He discovered that creating such a theory involved rejecting deeply held convictions, central to economic theory.  read more

Greece — the perfect example of debt deflation

from Lars Syll

Deflationary policies are deflationary. To a large extent the deflation is caused by tight monetary and fiscal policies pursued by ECB. With a very defensive fiscal policy and a targeted inflation rate set at a very low level, real inflation has during the last couple of years been negative. Another consequence of the austere fiscal and monetary policies is that overall unemployment is stuck at an enormously high level.

This is deeply worrying.

So here’s a suggestion for reading …

Zoltan Pozsnar and Paul McCulley have written an absolutely splendid essay on what a liquidity trap means and why mainstream neoclassical economics has nothing to offer in way of solving the problems that it brings along – and why it is so important to get hold of the insights that Fisher, Keynes, and Minsky have given us on debt-deflation processes and liquidity traps:

How can we resolve the apparent conflict in Friedman’s views?

from Asad Zaman

Friedman & Scwhartz famously blame the contraction in the money supply for the Great Depression of 1929. However, their own data shows that money supply, prices and wages all fell by about 30% over the four year period following the Great Depression. So according to the quantity theory, there should have been no real effect from this contraction.

My question is the following: How can we resolve the apparent conflict in Friedman’s views, who both holds the Fed responsible for not preventing the Great Depression, and who also argues that the quantity theory is valid?

Sweden hit by deflation — a sad and worrying reminder of the impotence of mainstream economics

form Lars Syll

Sweden is according to new statistics from  Statistics Sweden in a state of deflation. The inflation rate was -0.6 percent in March.

To a large extent the deflation is caused by tight monetary and fiscal policies  pursued by Sweden’s  Central Bank and the government. With a very defensive fiscal policy and a targeted inflation rate set at a very low level, real inflation has during the last 2-3 years been very close to zero, and now even negative. Another consequence of the austere fiscal and monetary policies is that overall unemployment is still at almost 9 % and youth unemployment close to 26 %.

This is deeply worrying.

So yours truly thought he should give the Swedish Fed and the Swedish finance minister – Anders Borg –  a suggestion for reading …

Zoltan Pozsnar and Paul McCulley have written an absolutely splendid essay on what a liquidity trap means and why mainstream neoclassical economics has nothing to offer in way of solving the problems that it brings along – and why it is so important to get hold of the insights that Fisher, Keynes, Minsky and Krugman have given us on debt-deflation processes and liquidity traps:

Time to retire Greenspan and Trichet’s pensions

from Dean Baker

The economies of the United States and Europe are seeing their worst downturn since the Great Depression. Tens of millions of people are unemployed or underemployed. This has led to millions losing their homes, their access to health care, and, in some cases, their lives.
Remarkably, the two individuals who bear the greatest responsibility for this disaster, former Federal Reserve Board chairman Alan Greenspan former president of the European Central Bank Jean-Claude Trichet, do not appear to be suffering at all for their failure. Both are living comfortably and continue to be sought out for their expertise on economic policy. This should infuriate reasonable people everywhere.

At this point everyone should understand that the economic wreckage destroying tens of millions of lives across the globe was an entirely preventable disaster. In the case of both the United States and Europe unsustainable asset bubbles were allowed to grow to ever more dangerous levels. It was inevitable that the bubbles would burst and when they did the outcome would be a severe downturn from which it would not easy to recover.

15 percent of the U.S. population is receiving food-stamp benefits.

from David Ruccio

source

In 2007, at the start of the Second Great Depression, 26.3 million Americans—8.7 percent of the population—were on the Supplemental Nutrition Assistance Program (SNAP). Today, that number has risen to 47.6 million, which means that 15 percent of the U.S. population is receiving food-stamp benefits.

What’s that you say about a recovery?

Robert Lucas on the slump

from Lars Syll

In a recent lecture on the US recession – Robert Lucas gave an outline of what the New Classical school of macroeconomics today thinks on the latest downturn in the US economy and its future prospects.

Lucas starts by showing that real US GDP has grown at an average yearly rate of 3 per cent since 1870, with one big dip during the Depression of the 1930s and a big – but smaller – dip in the recent recession.

After stating his view that the US recession that started in 2008 was basically caused by a run for liquidity, Lucas then goes on to discuss the prospect of recovery, maintaining that past experience would suggest an “automatic” recovery, if the free market system is left to repair itself to equilibrium unimpeded by social welfare activities of the government.

As could be expected there is no room for any Keynesian type considerations on eventual shortages of aggregate demand discouraging the recovery of the economy. No, as usual in the New Classical macroeconomic school’s explanations and prescriptions, the blame game points to the government and its lack of supply side policies.

Lucas is convinced that what might arrest the recovery are higher taxes on the rich,

In not Of?

from Peter Radford

Today’s New York Times has a reminder of the damage the crisis has done to the economy, and, more importantly, to enduring attitudes towards opportunity. The article summarizes the results of a survey conducted by Rutgers University.

The main thrust of the article is that this crisis was both deep and broad enough to involve almost eighty percent of the population in one way or another. Unemployment and its awful effects were that widely felt. People’s lives were often ruined permanently. The entire trajectory of some people’s lives will be changed forever. The damage is incredible. The downdraft from Wall Street’s extraordinary greed driven stupidity caught almost all Americans and has left enormous psychological as well as material scars.

Yet we still have not dealt with the causes and have not undertaken strong remedial action.

Why not?

British Test Case

from Peter Radford

For those austerity advocates amongst you: may I draw your attention to the plight of the British economy?

Its’ headed down again. There’s a distinct possibility that it will enter recession. Make that a third recession. A rare triple dipper. The prolonged slump pervading Britain has now lasted longer than the Great Depression. It is taking an enormous toll. It is steadily eroding the future potential of the economy.

And it is entirely a manmade problem.

Manmade as in Conservative party made..

The British government, for ideological reasons, decided to trash the British economy, It is doing a fine job. So good is its effort that it surely would be eligible for some prize, were prizes given for most asinine, antisocial, deliberately destructive, and all round stupid economic policy.

Many Happy Returns? 5 years of crisis

from Steve Keen

On this day 5 years ago, the global economic crisis began. The trigger was the decision by BNP to suspend redemptions from funds that were linked to the US housing market. Those of us who had been expecting a debt-deflationary crisis
and warning about it
for some time (see also here and here) could never have picked the trigger itself—that would have been prophecy, not prediction—but very rapidly it was clear that this was it.  

A tale of two economies

from David Ruccio

Back in May, at the Volcano Symposium at Oxford University, I made the argument that economists and pundits are not seeing the same economy.

We are, by almost any measure, in the midst of a Second Great Depression.

I am often amazed at how controversial that claim is. Many economists and pundits, on both the Left and the Right, refuse to admit we’re in the midst of a depression—qualitatively different from the succession of postwar recessions and comparable in scope to what we last experienced in the 1930s.

The only explanation, it seems to me, is we’re looking at two different economies. 

Politics, economics, and business cycles

from David Ruccio

source*

In the midst of the Second Great Depression, mainstream economists continue to heap scorn on one another concerning the relative merits of their “screw-the-unemployed” monetary-policy-has-no-effect and “hydraulic Keynesian” IS-LM-in-the-liquidity-trap models. 

Can you spot the recovery? (graph)

from Edward Fullbrook

United States Employment-Population Ratio
http://data.bls.gov/timeseries/LNS12300000
Data extracted on: August 2, 2012 (4:39:26 AM)
 
 

 

United States of declining minimum wage

from David Ruccio

In the midst of the First Great Depression, Secretary of Labor Frances Perkins made the case for a federal minimum wage. In making her argument, she quoted the Massachusetts Commissioner of Labor and Industries:

In the midst of the Second Great Depression

from David Ruccio

source

I would have written “chart of the day, year, and probably decade” if it included data for stagnant real wages. Then, it would be the single most important chart of the Second Great Depression.

As it stands, it indicates that

Break up the banks. Please.

from Peter Radford

How do I say this delicately?

The banking system, and in particular the biggest banks, were central players in the development of the crisis; they then played a major role in spreading contagion around the world; they then collapsed due to mismanagement, poor regulation, and endemic greed; this required that they be propped up beyond their normal subsidy by the taxpayer; the cost of propping them up transformed a private debt catastrophe into a sovereign debt catastrophe; this undermined national budget across the globe; which, in turn, induced a wave of austerity-driven debt reduction by governments; which has now ensured that the crisis has become a depression.

Well done banks. 

USA employment and unemployment levels – 5 graphs

 

Is this the Second Great Depression?

from David Ruccio

Readers know that I have come to refer to the current crises of capitalism as the Second Great Depression.

Apparently, at least one person agrees with me. And, after reading Dean Baker’s latest, she sent me the following question (which she also posted as a comment on Baker’s post):

Professor – I am NOT an economist but WHY would Dean Baker deny that we ARE in a GREAT DEPRESSION – how rich is he?  Yes, I am so livid at this dribble, his fairytale, I did post a comment. Regards,

Let me attempt a brief answer (brief only because, as a professor, I have lots of grading to catch up on). . .

Michael Hudson on the making of the crisis

from Merijn Knibbe

I stumbled upon what for me is the best analysis of the crisis I’ve read up to know: an article from Michael Hudson. An excerpt:

In this new financialized warfare, governments are being directed to act as enforcement agents on behalf of the financial conquerors against their own domestic populations. This is not new, to be sure. We have seen the IMF and World Bank impose austerity on Latin American dictatorships, African military chiefdoms and other client oligarchies from the 1960s through the 1980s. Ireland and Greece, Spain and Portugal are now to be subjected to similar asset stripping as public policy making is shifted into the hands of supra-governmental financial agencies acting on behalf of bankers – and thereby for the top 1% of the population.

Krugman considers Koo

Paul Krugman devotes his New York Times column to Richard Koo‘s RWER paper The world in balance sheet recession: causes, cure, and politics.  It includes the following.