The General Economics Thread

@Fighteer:

In the US, maybe. In most of Western Europe, as shown by the program of Clement Attlee, things were rather different^note  Most notably, a destinct lack of cash — most of which later came as Aid from the US in the form of the Marshall Plan...

edited 26th Feb '14 2:47:53 PM by Greenmantle

Europe had just been in a huge war, and not only were cash reserves depleted, but so was production. The crisis there was one of massively inadequate supply, requiring investment capital that the nations did not possess. The United States helped out with huge investment projects, solidifying itself as the dominant world economic power at the same time as it helped Europe rebuild.

Europe, in turn, adopted sweeping social democratic reforms that went well beyond the New Deal in America. Keynesianism really took hold over there, not over here, where it was paid lip service by people taking advantage of the boom it offered while quietly preparing to dismantle it at the earliest opportunity.

edited 26th Feb '14 2:49:14 PM by Fighteer

During the Depression, the Kill the Poor mentality was straight-up squashed because the rule of law itself had come apart at the seams. Factory owners close down their factories and lock their workers out? The workers cut the locks and take over the factories. According to Ayn Rand, of course, the proper response would be to march the workers out of the factories and impale them on short stakes as a warning to the next batch of commie scum, but FDR refused to do that and instead forced the New Deal through.

I wouldn't be surprised if the strength of the Tea Party correlates with a lack of Republicans who actually lived through the Depression. Hayek, Friedman and co. knew very well that hardcore libertarianism is impossible to impose when people aren't making a living wage.

People may have been waiting to dismantle Keynesianism the first chance they got, but in America, a very light Keynesian touch (that, or simply a lot of useful stuff to spend money on without needing to explicitly Keynesianize it) worked best until stagflation hit, and the Keynesians didn't update their models in time to prevent the Reagan hijack. There's a reason that postwar America built the world's greatest middle class, and part of that was (sigh) the old "rugged individualism" thing. There was enough of a consensus that people should get college educations and living wages that socialism, proper, seemed rather quaint.

edited 26th Feb '14 2:57:00 PM by Ramidel

I know, I live the other side of the Atlantic to you. At least we didn't browbeat Keynes so much that it led to his death soon afterwards...

Interestingly, Keynes and Hayek were at least, Worthy Opponents. See here and the last part of that:

edited 26th Feb '14 3:04:06 PM by Greenmantle

http://www.bloomberg.com/news/2014-02-26/crisis-gauge-rises-to-record-high-as-swaps-avoided.html

Meanwhile, China is looking uncomfortably like it might be on the verge of having its real estate bubble pop, as its markets are showing behavior uncomfortably similar to those in the US not long before the Lehman Brothers collapse.

edited 26th Feb '14 5:05:37 PM by PotatoesRock

"Billionaire investors George Soros and Bill Gross have drawn parallels between the situation in China now and that in the U.S. before the 2008 financial crisis, when traders gauged lending appetite by monitoring the difference between the London Interbank Borrowing Rate and the overnight indexed swap. Premier Li Keqiang’sefforts to curb leverage in the world’s second-largest economy by driving up borrowing costs need to be handled carefully to avoid wrecking confidence in the financial system, according to Nomura Holdings Inc.

“What I do see are increasing parallels between China and the U.S. in the run-up to the global financial crisis,” said Patrick Perret-Green, a London-based strategist at Australia & New Zealand Banking Group Ltd. “Shibor-repo is similar to Libor-OIS. Shadow banking is subprime. Credit spreads are widening as they did in 2007. Money growth is softening as tightening bites.”

Chickens. Coming home to roost.

It's not surprising to those who've been studying China's finances (note: I am not one; I only know what I've been reading in various second and third hand sources).

Basically, China has been artificially stimulating their economy for quite some time and has created the mother of all credit bubbles, which can only continue as long as they can keep their currency low and their trade balance high.

The higher the house of cards builds, the farther it has to fall.

edited 14th Mar '14 8:48:34 AM by Fighteer

Maybe that's part of the reason China's been so desperate to create so many trade deals weighted in their direction? If they can have a controlling interest in Canadian oil, that's one source of fuel they don't need to pay as much for.

Also, they just need oil. A rapidly industrializing nation of one billion people is very thirsty for black gold.

Ugh... The "New Deals". The New Deals didn't actually do anything besides putting the US well over 10 times more in debt than at the start of Roosevelt's 4-term fireside chat. And perhaps create non-vital and temporary jobs that quickly and easily disappeared into the internationally lucrative fray of WW 2.

It was a social crusade (rather than an economic one), and a complete one, as was demonstrated by the stunning lack of an improving situation thanks to it.

FDR's lucky that the world put on a grand ol' war that was just too exciting to not get into, or by this point the New New New New New Deal would have us spending trillions on Klingon research to create jobs for out-of-work professional SF scholars.

(no offense to world-famous SF scholars [?])

• rantface on and ready*... dun dun dun dunnnn

edited 27th Feb '14 12:58:18 PM by DellConagher

I do hope you're prepared to present some evidence and statistics to back up those rather aggressive assertions.

Sure! Lunch break is over, I'll get back sometime today.

I've read the argument before too. World War II fixed it because, in America, it boosted employment, destroyed no infrastructure, and yet forced personal austerity, so for the average American household, it was 4 employed years where they really couldn't buy much of anything (mad savings, with the massive government consumption meaning that there was not stagnation).

Evidence is cited that as soon as the programs rolled back in 1936-7, there was a brief contraction.

The idea, basically, is that stimulus changes nothing because stimulus cannot inspire business to build, because there is no guarantee of stimulus' permanancy and there is an expectation that conditions will return to pre-stimulus as soon as stimulus finishes. This is the basic argument for supply-side economics, in that something needs to be done to make it easier for businesses to expand employment, as that's really the only way to dig out of a depression.

The issue, however, is how supply-side economics are implemented. In the form of tax cuts for the wealthy, yes, capital is freed for investment, but given the bad economy, they don't invest in risky ventures like new business: they put it in gold, or real-estate, or T-bills, or inflated bank stocks, what have you.

It would be interested if stimulus were attempted as free money for businesses in key sectors, with the requirement that businesses spend it on capacity building (new plant/equipment, promising R&D, or employment). The trouble with that would be determining "key sectors" as that's just begging for rent-seekers to go into absolute overdrive in getting congressmen to declare their work to be "key" even when it really isn't.

edited 27th Feb '14 1:27:36 PM by Ogodei

What motive do businesses have to invest in new capacity when there isn't enough demand to fill existing capacity? That's the question that supply-siders never manage to answer. The objective is to create employment, so paying people to work at factories to produce cars that people can't afford to buy is not really any different than paying them to dig and fill ditches, or (to borrow a modern example) build M1A2 tanks that the Army doesn't need.

The New Deal wasn't just about spending enough money to get us out of the Great Depression (like the ARRA, it was insufficient to that task); it was about, literally, changing the "deal" in American society with respect to the relative market power of labor and employers. It achieved that with resounding success.

The amount of debt incurred was meaningless. Public debt is, in and of itself, a zero sum, a nullity. It's money we owe to ourselves. The only way it's possible for debt to cause a crisis is if the service on it eats up too large a portion of revenue, but a sovereign currency issuer has two ways out of that: it sets the rates on securities and it prints the money. We never paid off our WWII debt; we simply inflated it into meaninglessness.

The key limiting factor on the government's ability to issue currency or debt is inflation, but in a situation where demand is insufficient to meet supply, more than nominal inflation cannot happen no matter how much money is created.

edited 27th Feb '14 1:58:47 PM by Fighteer

Right, but the weakness comes in from the fact that the government is not going to continue policies indefinitely. Knowing that, businesses sit on their hands.

So the other "out" would be to enshrine Keynesian responses as both consistent responses across time and politically untouchable (basically permanent).

Businesses hate uncertainty, and Keynesian responses merely represent an uncertainty. It's also why the ACA has likely exacerbated anemic employment, simply because businesses have a hard time really judging how it's going to impact them, so will not feel "confident" in moving until they know what it will do to their bottom line.

The "uncertainty" factor is highly overrated. Businesses hire on the basis of current demand, not anticipated future demand. Besides, if you want to document instability, consider which party in the current Congress (and back in the 1930s as well!) is obstructing moves to heal the economy.

One supposes that having a party in power that desires to sink the ship rather than keep it afloat would be a form of certainty, even if it's not necessarily the form that one might consider positive. But if people are really thinking long-term, instead of ideologically, then they ought to look at the stability that came after the New Deal and the great wealth rebalancing that came in its wake, versus the wild oscillations that came both before the 40's and after the 70's, and vote with their wallets for the Democrats.

edited 27th Feb '14 1:59:40 PM by Fighteer

And anyway, can't a Government just cancel the debt it owes to itself?

Although, on the subject of World War II, I'd advise you look into the relationships between General Motors and Ford (Ford especially) towards their German subsidiaries during that time.

edited 27th Feb '14 1:49:54 PM by Greenmantle

Certainly it could do that, just as a central bank can destroy any amount of currency it itself holds without affecting the economy one bit. There are economic and political reasons for the government to hold onto its own bonds, however: their existence is an implicit hedge against inflation expectations. When (if) the liquidity trap eases, the government can sell them back into the economy to contract the money supply.

What the whole exercise really demonstrates is the silliness of fixating on the debt as a measure of economic health. The Trillion Dollar Coin idea that was floated around during the debt ceiling standoff a while back was designed to illuminate that fact. The Treasury and the Federal Reserve could pay off the entire national debt if they wanted to, simply by creating the currency. Type $16 trillion into the credit side of the Treasury ledger and poof, done.

Edit: For the Europeans in this conversation, the same could be done in the Eurozone — have the ECB create truckloads of new euros and give them to the debtor nations to stabilize their domestic economies or to wipe out their bond obligations.

Before the dead horse gets brought out and beaten again: the reason that Keynesians were up in arms about the massive federal deficits under Reagan and the second Bush is that they were inflationary, occurring in boom times rather than busts. Combined with lax regulation, they practically forced bubbles to occur in the financial system which inevitably led to crashes. The Bush years were notable for the Fed holding down interest rates to further accelerate the economy, which forced it up against the zero lower bound much faster when the house of cards toppled.

Regarding your second item, I'd really prefer it if you'd make your own points rather than advising people to "look them up".

edited 28th Feb '14 9:15:48 AM by Fighteer

There's some more work being done on inflation in the U.S., or lack thereof, versus the continued Beltway insider obsession over the potential for becoming Zimbabwe. Some Krugman posts on the matter, noting that recent CPI changes seem almost entirely driven by changes in gas prices, which have no predictive power for long-term inflation.

Meanwhile, one of the commenters pointed out that if you subtract population growth and gas price fluctuations from core inflation, you get a trend number of somewhere around 0.1 to 0.2 percent, so tiny as to be barely noticeable. We are indeed stagnating, and the people who are continuing to freak out over inflation are utterly, completely wrong.

All signs, in fact, point to the economy trying very hard to deflate, and being held up by sticky prices and the continued monetary policy at the Fed.

edited 3rd Mar '14 8:41:05 AM by Fighteer

But what effect will the current crisis in Ukraine have on that — especially in Europe, which is reliant on Russian gas?

If gas prices go up, so do consumer prices, but the effect is transient. It has no long-term effect unless it goes on for a significant length of time — enough to cause actual damage to output.

Logically, I would expect a protracted increase in petroleum prices to drive overall demand down, and a protracted decrease in prices to drive overall demand up, but that has nothing to do inherently with inflation.

Fuel is a supply constraint on an economy, pure and simple, but its effect is largely independent of other factors.

edited 3rd Mar '14 9:04:43 AM by Fighteer

I'm British -- I don't mean petrol, I mean gas that is used for powering power stations, running ovens. That type of gas.

The BBC: Ukraine crisis: Europe’s stored gas high as prices soar

I know. It's a basic supply factor. Of course it's going to cause major problems when constrained. The point being made is that it has nothing to do with inflation driven by monetary policy or by excess demand.

Although, there might be knock-on effects, depending on events.

Let's hope that governments don't respond with Keynesian style stimulus — this is exactly the situation where you aren't supposed to try it. Although it would be interesting to see the competing effects given Europe's current depression.

Any way you look at it, life is going to suck worse for Europe's people.

You'd think that the constant threat of Russia throttling petroleum exports to Europe would be a strong motivator to seek alternative supply channels, though.

edited 3rd Mar '14 9:24:44 AM by Fighteer