Category Archives: The dismal science

Fed Holds Fire on Disinflation Threat

Yves here. This post will not doubt give readers some grist to chew on in the ongoing debate as to whether the Fed is a very very clever bank stooge or not all that smart (and therefore a bumbling bank stooge, by virtue of cognitive capture). This discussion of the Fed’s blindness on disinflation, when commodities prices have fallen, oil is continuing its downward slide, and Europe has tipped into deflation, strongly suggests that the Fed is so desperately in need of believing in its own virtue that it will ignore any contrary evidence. That refusal to look at reality and to learn, particularly after how the central bank’s past ideologically-driven policies helped drive the global economy into the ditch, is a form of stupidity that seems to be drummed into orthodox economists.

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Welcome to the Hunger Games, Brought to You by Mainstream Economics

As a virulent strain of austerity capitalism takes over Europe, leaving shattered lives in its shadow, researchers Servaas Storm and C.W.M. Naastepad, Senior Lecturers in Economics at Delft University of Technology in The Netherlands, consider how things got so bad, what role economists and misguided policy-makers have played, and which models and ideas are needed to change course. In the following interview, they discuss how most are getting the story about Europe wrong. They explain how their research shows that when countries try to compete with each other by lowering wages and slashing the social safety net, the costs are high both economically and socially, and why co-operative and regulated capitalism is a far better path.

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You Are Worth More Than The “Market” Says

Yves here. Ed Walker’s post below, on how mainstream economics tries to explain how wages are set, reveals that making them look market-determined is ideology that bears no relationship to facts. But that’s precisely why economics is so attached to theory and so leery of data.

In a bit of synchonicity, Ed’s post dovetails with our piece on Polanyi’s The Great Transformation last week. By e-mail, he quoted Polanyi…

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Free Markets: Yellow Brick Road to War

Yves here. I’m a believer in synchronicity, and this post will allow readers to continue the discussion we’ve been having over the last few days about the forces for war versus peace in industrial and post industrial economies.

The author John Weeks does himself a disservice by letting his considerable frustration with how economics treats topics like trade and war descend into spurts of hyperventilation. However, I believe you’ll find his argument though-provoking. Some of his points include that analysis of trade assumes that countries, as opposed to companies, are the locus of activity, and that trade creates incentives for peace, when in fact trade just as often (if not more often) creates incentives for war, for instance, via competition for resources.

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Something That Changed My Perspective: Karl Polanyi’s The Great Transformation

The first Christmas-New Years period for this site, in 2007, we featured a series “Something That Changed My Perspective,” which presented some things that affected how I viewed the world. The offerings included John Kay on obliquity and Michael Prowse on how income inequality was bad for the health even of the wealthy.

Karl Polanyi’s The Great Transformation (which I should have read long ago) is proving to be a particularly potent example of this general phenomenon.

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Bill Mitchell: Demystifying Modern Monetary Theory

Yves here. This is a useful and accessible talk by one of the leading Modern Monetary Theory developers, Bill Mitchell of the University of Newcastle, interviewed here by Marshall Auerback of INET.

This talk is wide-ranging, and starts by pointing out that in key ways, Modern Monetary Theory incorporates basic concepts that have perversely omitted from mainstream macroeconomics, largely for ideological reasons. This conversation does not get much into central bank operations, which is the basis for MMT’s claim that it is a much more accurate representation of how monetary operations work for a fait currency issuer like the US than textbook or popular press accounts that are based on outdated “gold standard” notions.

In typical Australian fashion, Mitchell is blunt, so I suspect readers will find this talk to be more lively and accessible than typical economists’ fare.

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Stephen Roach Takes the Fed to the Woodshed

While the Fed appears to be getting nervous about increasing (and long overdue) criticism for its undue coziness with banks, it has for the most part ignored opponents of its aggressive monetary policies. And for good reason. Most of them have been fixated on the risk of inflation, which is not in the cards as long as labor bargaining power remains weak. There are other, more substantial grounds for taking issue with the central bank’s policies. For instance, gooding asset prices widens income and wealth inequality, which in the long term is a damper on growth. Moreover, one can argue that the sustained super-accommodative policy gave the impression that Something Was Being Done, which took the heat off the Administration to push for more spending. Indeed, the IMF recently found that infrastructure spending pays for itself, with each dollar of spending in an economy with high unemployment generating nearly $3 in GDP growth. And a lot of people are uncomfortable for aesthetic or pragmatic reasons. Aesthetically, a lot of investors, even ones that have done well, are deeply uncomfortable with a central bank meddling so much. And many investors and savers are frustrated by their inability to invest at a positive real yield without being forced to take on a lot of risk.

Stephen Roach, former chief economist of Morgan Stanley and later its chairman for Asia, offers a straightforward, sharply-worded critique: just as in the runup to the crisis of 2007-2008, the Fed’s failure to raise rates is leading to an underpricing of financial market risk, or in layspeak, to the blowing of bubbles. He argues that has to end badly.

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The Airing of the Grievances

For those who came in late, Festivus — I’m not big on the whole forced cheeriness of Xmas, as readers can probably, by this point, imagine — is normally celebrated on December 23. However, because Festivus really is for the rest of us, Festivus can also be celebrated at any time, so here we go! […]

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Combatting Eurozone Deflation: QE for the People

Yves here. This post describes why having the ECB give money directly to citizens would do a better job of fighting Eurozone deflation than the US version. The author starts from the premise that QE worked in the US, when there is ample reason to believe it worked only for financial institutions and a small portion of the population. Here, the ECB would engage in what amounts to a fiscal operation, which also would have dome more to stimulate the economy than the Fed’s QEs.

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Joseph Stiglitz: Economics Must Address Wealth and Income Inequality

Yves here. This interview with Joesph Stiglitz is pretty subversive for a talk with a Serious Economist. Stiglitz doesn’t simply talk about the problem of inequality, but the drivers that most mainstream economists choose to ignore, such as the rise of monopoly/oligopoly power, worker exploitation, and how central banks have allowed banks to engage increasingly in speculative rather than productive lending.

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