Category Archives: The dismal science

Andrew Sheng Says Sustainability Means Caging Godzillas

Andrew Sheng, Chief Adviser to the China Banking Regulatory Commission, is wonderfully straightforward and realistic for an economist. He is willing to say, as he does in this video, things that are obvious yet somehow unacceptable to ‘fess up to in policy circles, like the planet simply cannot support 3 billion people in Asia living European lifestyles. He warns of the danger of creating the mother of all crises if governments cannot stem the tide of leveraged capital flows, and also discusses the role of China on the global stage.

Philip Pilkington: Economic Fetishism – Three Objects of Perverse Intellectual Pleasure

By Philip Pilkington, a journalist and writer based in Dublin, Ireland

Watch out, I have a large, very large fur, with which I could cover you up entirely, and I have a mind to catch you in it as in a net.
– Leopold von Sacher-Masoch

Many aspects of contemporary economic theory certainly seem to have their origins in the mythic and the moral rather than in the realm of the rational. But while this seems to be an accurate description of the system as a whole, it does not seem quite able to account for certain aspects of this system which appear to be rather obsessive in the minds of its adherents.

These obsessions, or ‘fetishes’, can be explained in like terms, that is: compared to certain primitive rituals and superstitions. To do so we will first have to form a better understanding of the fetish itself; an Enlightenment concept that has a long and interesting history.

The specific fetishes we will explore will be the most important today: the government, inflation and gold. All these phenomena are interconnected in neoclassical economic theory (yes, even gold, or at least the ghost thereof), however, they tend to lead their own individual existence outside of the Grand Neoclassical System itself. In and of themselves they are, for economists and economic commentators, fetishes that can be worshipped in dark rooms away from the great hall. They are like fragments of the main theory that adherents smuggle out of the temple and obsess over in their own private shrines.

DeLong Illustrates Why We Should Be Scared of Economists

Several readers sent me links to a Brad DeLong post which they took to be a rebuttal to a takedown I did of a recent Ezra Klein piece.

Since DeLong did not link to or mention my post, I doubt his piece had anything to do with mine. But his post is noteworthy for a completely different reason: it illustrates how economists have refused to learn much, if anything, from the crisis.

Martin Wolf: Why China Could Fail Like Japan

The Financial Times’ economics editor Martin Wolf takes up the theme treated at some length by China-based economist MIchael Pettis: that Chinas’ economy has moved into unknown and dangerous terrain. No sizeable economy has had investment and exports combined constitute nearly 50% of GDP, and that model is not sustainable. As we have indicted, there is evidence that investment is becoming less and less productive. China is taking $7 of debt to generate $1 of GDP, when the US at the tail end of the bubble needed a mere $4 to $5 of debt for each incremental $1 of growth.

We’ve often recapped Pettis here and are glad to see Wolf take up his analysis.

Wolf does recite the optimist case on China, with the biggest factor being that China has a long way to go in improving the incomes of its citizens, and that alone can give it a very long lasting growth trajectory.

On the risks, Wolf sets aside commodities scarcity and environmental issues to focus solely on the economics case.

“Economics Upside Down” or Why “Free Markets” Don’t Exist

This is an instructive interview with Ha-Joon Chang, author of the new book “23 Things They Don’t Tell You About Capitalism.” He debunks some widely accepted beliefs, such at the existence of “free markets” or the necessity of “free trade” for the development of capitalism.

Enjoy!

Richard Alford: If War Is Too Important To Be Left To The Generals, Isn’t Economic Policy Too Important To Be Left To Economists?

By Richard Alford, a former economist at the New York Fed. Since then, he has worked in the financial industry as a trading floor economist and strategist on both the sell side and the buy side.

Apologies to both Clemenceau (Prime Minister of France 1917-1920) and General Jack D. Ripper (Dr. Strangelove 1964)

The recent crisis and continuing economic and financial dislocations has led many to question the usefulness of the current macroeconomic paradigm, if not economics more generally. Raghuram Rajan, whose paper, “Has Financial Development made the World Riskier,” was summarily dismissed at the Fed Jackson Hole Conference in 2005, has recently posted a piece titled “Why Did Economists Not Foresee the Crisis?” In this piece, Rajan rejects three popular explanations for the failure of economics and economic policy, i.e. the absence of “models that could account for the behavior”, “ideology”, and “corruption”. Rajan offers alternative explanation(s): “I (Rajan) would argue that three factors largely explain our (economists) collective failure: specialization, the difficulty of forecasting, and the disengagement of much of the profession from the real world.” The logical conclusion of Rajan’s explanation(s) is that to avoid future crises, the role of economists, or at least academic economists, in the policy formulation process should be reduced. More troubling yet for economists, including Rajan, is some recent work by Frydman and Goldberg which argues that current economic models are inherently flawed.

Rajan dismisses the argument that economics lacked relevant models. He cites the fact that academic economists have studied and modeled many of the factors that contributed to the crisis. Rajan does, however, cite the compartmentalization of economics which leaves macroeconomists ignorant of findings in other sub-disciplines of economics.

In Rajan’s view, the inability to forecast accurately reflects shortcomings in the current model. All models of the economy abstract from the complexities of the economy and financial system. Models are simplifications of realty. Hence the models are incorrect. (We will return to this point later.) The only questions are how large and costly will the model-driven errors be.

Observers should not be surprised by the fact that the models employed by economists contained simplifying assumptions. However, they should be disturbed by the recent performance of policymakers. They ought to ask the question: why did economists remain wedded to their model despite the growth of all the macro-economically important economic and financial imbalances and unsustainabilities that existed in the years prior to the crisis?

Steve Keen: Dude! Where’s My Recovery?

By Steve Keen, Associate Professor of Economics & Finance at the University of Western Sydney, and author of the book Debunking Economics. Cross posted from Steve Keen’s Debtwatch.

I initially planned to call this post “Economic Growth, Asset Markets and the Credit Accelerator”, but recent negative data out of America makes me think that this title is more in line with conversations currently taking place in the White House.

According to the NBER, the “Great Recession” is now two years behind us, but the recovery that normally follows a recession has not occurred. While growth did rise for a while, it has been anaemic compared to the norm after a recession, and it is already trending down. Growth needs to exceed 3 per cent per annum to reduce unemployment—the rule of thumb known as Okun’s Law—and it needs to be substantially higher than this to make serious inroads into it. Instead, growth barely peeped its head above Okun’s level. It is now below it again, and trending down.

Philip Pilkington: Down in the Hole – Is America Becoming the Next Japan?

Philip Pilkington is a journalist currently sinking, together with the rest of his fellow countrymen, down into the hole in the Irish banking system

Will all your money
Keep you from madness
Keep you from sadness
When you’re down in the hole

Cause you’ll be down in the gutter
You’ll be bumming for cigarettes
Bumming for nylons
In the American Zone
–‘Down in the Hole’, The Rolling Stones

Everyone who is anyone is saying it: the US looks set to become the next Japan. Yet the particulars of the argument are never really trashed out. Certainly both countries suffer from the same malady – namely, a bursting asset bubble punching gigantic holes in private sector balance sheets. This leads to similar policy approaches – not to mention similar policy failures. But beyond this overarching comparison people tend not to tread.

Let’s start from the beginning; the asset bubbles that set off the crises.

Philip Pilkington: Debt, public or private?: The necessity of debt for economic growth

By Philip Pilkington. Journalist, writer, economic anti-moralist and aficionado of political theatre

‘Tis not due yet; I would be loath to pay him before
his day. What need I be so forward with him that
calls not on me? – Falstaff, ‘Henry VII’

The Anxieties of Government and Debt

Apart from debt, there is perhaps one other economic phenomenon that generates exceptionally large amounts of emotive nonsense both on the internet and in real life – and that is government. So it’s quite unsurprising that when government debt is the discussion of the day, passions flare, accusations are hurled and the coming apocalypse is invoked.

It would be interesting to undertake a psychological study of modern man’s aversion to government and to debt. If I were to guess I would say that many people tend to associate government with authority and debt with obligation. Authority and obligation – surely in our era of selfish hedonism no other potential restraints are so terrifying to so many. These phenomena intrude rudely on one of our most cherished contemporary ideological myths: individualism. More specifically, that outlandish individualism conjured up by marketing men to flog their wares and crystallised in novels and narratives written by lonely and isolated individuals like Ayn Rand. It is, of course, a fantasy individualism; one that few truly adhere to in their day-to-day lives – but it is, like the religions of days gone by, an important determinate in the messages people choose to accept and those they choose to reject.

To put the questions of individualism and of liberty aside though, from an economic point-of-view debt is inevitable.

Bill Black: Bad Cop; Crazed Cop – the IMF and the ECB

By Bill Black, an Associate Professor of Economics and Law at the University of Missouri-Kansas City. He is a white-collar criminologist, a former senior financial regulator, and the author of The Best Way to Rob a Bank is to Own One. Cross posted from http://neweconomicperspectives.blogspot.com/2011/05/in-praise-of-sorkins-praise-of.html“>New Economic Perspectives

Greetings again from Ireland. One of the many mysteries about the current crisis is why anyone listens to the IMF or anyone that supported its anti-regulatory policies. Prior to the crisis, even the IMF had begun to confess that its austerity programs made poor nations’ financial crises worse. In the lead up to the crisis the IMF was blind to the developing crises. It even praised nations like Ireland during the run up to the crisis, missing the largest bubble (relative to GDP) of any nation, an epidemic of banking control fraud, and the destruction of any pretense to effective Irish banking regulation.

Crises reveal many deficiencies and one of the most glaring was the European Central Bank (ECB).

Jean Pisani-Ferry on Europe’s Tiger and German Nightmares

This INET interview with Jean Pisani-Ferry gives a useful overview of how Greece and Ireland came to have sovereign debt woes and the viability of the remedies proposed for each. Pisani-Ferry argues, as many other economists do, that austerity measures will not succeed in Greece because they will prove to be politically unsustainable.