Category Archives: The dismal science

How Much Has the IMF Changed in Response to the Global Crisis?

Yves here. For US readers, the posture of the IMF may not seem like a terribly important topic. But most countries in the world face decent prospects of being subject at some point to its tender ministrations. And even those that would seem to be exempt, like Germany, nevertheless also are subject to its impact through how IMF programs affect its export markets and Eurozone arrangements.

The IMF’s policies received a great deal of attention last year as its chief economist, Olivier Blanchard, effectively admitted that austerity did not work. The formulation was that in most cases, fiscal multipliers are greater than one. That means that cutting government deficits, in an effort to lower government debt, is ultimately counterproductive because the economy shrinks even more than the reduction in spending. The result is that the debt to GDP ratio actually gets worse. This outcome is no surprise to anyone who has been paying attention, since the neoliberal experiment has produced the same bad results when administered in Greece, Latvia, Ireland, and Portugal, to name a few.

But what did this rare bout of empiricism mean for the IMF? This post gives that question a hard look.

Exclusive: How Private Debt Strangles Growth, Stokes Financial Crises, and Increases Inequality

Yves here. Richard Vague has been kind enough to allow us to feature an extract from his recent book, The Next Economic Disaster: Why It’s Coming and How to Avoid It. I first met Richard several years ago at the Atlantic Economy Summit. If my memory serves me correctly, he was then taken with the conventional view that debt was a dampener to growth…meaning government debt. The issue of what caused our economic malaise and what to do about it troubled him enough to lead him to make his own study, and he has come to reject the neoliberal view that government debt is problem and must therefore be contained.

This view implies, as many readers have pointed out, that the great lost opportunity of the crisis was restructuring mortgage debt. That would also have allowed housing prices to reset to levels in line with consumer incomes. Vague also mentions a less-widely-commeneted on debt explosion prior to the crisis, that of business debt. One big contributor was an explosion in takeover debt for private equity transactions. Indeed, a lot of experts were concerned about a blowup due to the difficulty of refinancing these deals in the 2012-2014 time horizon. But ZIRP and QE produced enormous hunger among investors for any type of asset with non-trivial yield, so the Fed enabled the deal barons to refinance on the cheap.

The New Normal of Monetary Policy

Yves here. This post describes the “new normal” of the role bank reserves play in hitting short-term policy rate targets in the US. The author ends on a cheery note about how the abnormal-looking situation we have, in particular super-low interest rates, could persist for a very long time. The author contends that the way one reacts to these new procedures and their results will reflect your monetary aesthetics, as in your beliefs about the way central bank balance sheets and reserves should look. However, given the way that negative short-term real interest rates are stoking financial speculation at the expense of real economy investment (a trend that was already well underway even before the crisis containment program turbo-charged it), one can hardly see a continuation of the new normal of low growth and redistribution to top earners as a positive development.

Americans Work Too Long and at Strange Times

Is inequality the reason Americans have such weird work habits?

Philip Pilkington: Is Economics a Science? Dogmatic Economics Vs. Reflective Economics

You can’t talk about whether economics is a science without getting clear on what you mean by “science”.

G20 Finance Ministers Reveal Impotence in the Face of Rising Stresses

Yves here. It’s hardly uncommon for big international pow-wows like the G20 to produce grand-sounding statements that when read carefully call for unthreatening, which usually means inconsequential, next steps. But this G20 just past was revealing, in a bad way, about the state of international political economy.

Is Rising Inequality Inevitable?

Yves here. In the wake of increased debates over rising inequality, particularly income inequality, many economists take the point of view that high levels of disparity are a state of nature. But that’s a terribly uninformed way to look at the question. Economies of any complexity are not natural; even modern capitalism comes in many forms. This post looks at developing economies that have done a better job of dampening inequality to see what they have in common.

The Deficit Disaster That Never Was

Some older readers might recall that during 2010-2013 politicians and the media manifested great anxiety over the unmanageable level of the deficit and a disastrously high public debt. So how has that movie ended?

Philip Pilkington: The Scottish Currency Question – A Solution

This week the Scots will vote on independence and the ghost of Bonnie Prince Charlie will ride once more…

Philip Pilkington: Krugman Still Wrong on Monetary Theory (Loanable Funds Edition)

Krugman is still pushing the discredited loanable funds model, the basis of failed Fed stimulus policies. Does Krugman really not get it or is he defending Bernanke and his loyal successor Yellen?

Steve Keen: The ECB’s Eurozone Medicine is Nonsense

Yves here. While the impetus for Steve Keen’s post is the ECB’s latest pretense that it can and is doing something to combat deflation, he provides an excellent and short debunking of two widespread misconceptions about money and banking. The first myth is the money multiplier and the second is that reserves are the basis for bank lending.

Are Advanced Economies Mature Enough to Handle No Growth?

Economists occasionally point out that societies generally move to the right during periods of sustained low growth and economic stress. Yet left-leaning advocates of low or even no growth policies rarely acknowledge the conflict between their antipathy towards growth and the sort of social values they like to see prevail. While some “the end of growth is nigh” types are simply expressing doubt that 20th century rates of increase can be attained in an era of resource scarcity, others see a low-growth future as attractive, even virtuous, with smaller, more autonomous, more cohesive communities.

Low Wage Growth, High Long-Term Unemployment Recognized as International Problem

High unemployment and low wage growth are solvable problems. But powerful and well placed people believe it is in their interest to keep them unsolved

Philip Pilkington: The Efficient Markets Hypothesis Has Been Proved Wrong But Economists Do Not Want to Listen

Yves here. The Efficient Markets Hypothesis, along with the Capital Assets Pricing Model, is one of the cornerstones of financial economics. Pity both are wrong.

Actually, it’s worse than a pity, since financial economics informs not only how professional investors construct their investment portfolios, but similarly is the foundation for orthodox thinking among retail investors. And the Efficient Markets Hypothesis and the Capital Assets Pricing Model both understate market risk, so following their dictates leads investors to take on more risk than they intended to.