I have to confess, this thread is kind of freaking me out. I was halfway toying with making a major life decision (job-related) based on fears expressed in this thread. I think that’s going a tad too far, but still, is there any reason to be optimistic at this point? It sounds like there are way too many heads butting, way too many conflicting interests, and way too much stubbornness going on…
No, there aren’t, which is why it’s not a tool which actualy gets used all that often. In every single case, the data is unclear.
Pro-Keyneseans (who don’t actually listen to what Keynes said, naturally) always point to the Great Depression and WW2. Or course, that leaves aside the massive global disruption, the fact that it’s unclear if we even could afford that now, and the fact that the cause and effect isn’t clear at all. In fact, the biggest piece of evidence they have, the 1938 dip, also strongly suggests that .
But my biggest argument is the excuses. Keynesians always promise huge results, but the execution is puny. At the end of it, things never actually work out as planned. Then the whining starts. “Oh, you should have borrowed 80% of GDP. That would surely have been enough. Borrowing only 50% of GDP is simply a recipe for disaster, dummy. Everyone knows that.”
This relates to my point here. Yes, breaking the currency union will cause nasty problems. These problems are foreseeable and largely known, and therefore solvable or at least mitigatable to some degree. The alternative plan boils down to betting the farm on extremely risky schemes with many possible outcomes, most of whicha re very bad, and most of which are unknown. You can always say in hindsight (whether you’re accurate or even honest) that obviously just following the plan would have worked. But that plan has to operate in the real world, not some Ivory Tower. It has to suvive actual, real-world politics and people with different goals. If the plan can’t do that, then it’s useless.
I just love it when anti-Keynesianists cite the Roosevelt Recession as so-called evidence that expansionary monetary policy doesn’t work. It’s like the Catholic Church citing the extermination of the Cathars for the proof of the unifying factor of Christianity.
You know what? I’ll just leave this here: Great Depression - RationalWiki
In all seriousness, I too have been playing over some of these very troubling, sobering scenarios in my head as well, as several of the posters here seem awfully learned and knowledgeable about macro-economics, and as I also remember well the many stories my parents tell about the Great Depression (Dad was born in 1923, Mom in 1924) and how truly brutal things were back then, even here in insular Salt Lake City…
That said, with all respect to the others’ opinions, I assume that no one who has contributed to the discussions above me is making over $100,000 as a Professional Economist, and their various opinions are just that, personal opinions, and there is no reason in getting myself all worked up about the musings of strangers on the internet, especially when the greatest minds in the fields of Economics/Finance are not in agreement about what is likely to happen.
I certainly am not about to start making life-altering decisions based on the projections of armchair economists.
Oh, I was certainly not gonna do anything major solely based on the words of any of the yahoos here. (Kidding, people. ;)) It’s more like that the thread exposed me to the grave danger that I can’t do anything about–of the potential for some of the suggested bad consequences.
Yes and no. You may have noted that what will happen depends a lot on politics and that’s very hard to forecast over, for example, 3 year intervals. And while I argue that macroeconomic textbooks are pretty good, nobody pretends to be able to forecast future legislation that well. (Elections are another matter: they can be forecasted.) Besides I stress: my odds of a Great Depression 2.0* are under 50%, but sadly greater than 5%. And Hellestal so far has called the situation differently.
There’s more economic consensus than you might think. Some make their living analyzing the economy: the majors include IHS Global Insight, Macroeconomic Advisers, and Moody’s. All of them are in qualitative agreement: the stimulus package worked. Now the parameters of their models will differ and they will measure the baseline a little differently. But it’s simply very hard to make a serious claim that infrastructure spending won’t increase aggregate demand: for one thing if it doesn’t, then spontaneous increases in private investment spending won’t do that either and business confidence doesn’t matter. And nobody believes the latter.
The track record of mainstream economists isn’t too bad either. Krugman did a rough calculation of the effects of the stimulus package back in Jan 2009, before it had even passed. He said it wasn’t large enough. What’s more surprising is that he made a solid political prediction as well:
And that’s exactly what happened 6 months later and 2 years 10 months later. Technically, the stimulus didn’t win any Republican votes -not one-, but the cost of stopping the filibuster was much less aid to the states (thank you President Olympia Snowe), which is a form of spending with the highest multiplier, the most bang for the buck.
- …as defined earlier.
I just hope it doesn’t get “cured” by World War 3.0.
Humor aside, Hellestal dismisses the possibility of Great Depression 2.0 in post 15. And “Yes it could happen,” refers to countries going back to their own currency.
It’s hard to envision WWIII over the next 5-10 years, isn’t it?
Absolutely. It is in many ways terribly unfair to the Spanish to get lumped in with the Greeks. The Germans are mad as hatters with their obsessions of the 1930s. There is a damned panic going on and someone needs to cut it off before it gets too bad. It’s mad that French bonds are priced well above UK, when objectively their finances are in better shape.
I don’t anticipate that any armies of the Vaterland will be crossing the Rhein with fire and sword.
Honestly, the OP asked worst-case. That’s what the discussion has been, but the future is a mystery. I can personally only say that if the ECB doesn’t step in, then the eurozone will break. I’m not cheerful myself but I can’t know their actual chances of taking action. No matter how gloomy I manage to sound, my own guesses about politics are no better than anyone else’s. They still have time to avoid a mess. Probably. There is some hope that things will keep muddling on.
What I said was that if we are in worst-case-scenario land, the severity wouldn’t be quite as bad in the US as in Europe. That’s no reason to drop the “Great”, just because it’s worse over there than here. 15% unemployment in the US and even higher across the pond is Great enough for me, if it actually gets that bad.
Gold standard during the Depression, showing a nearly perfect relationship between demand stimulus and growth (already cited). Monetary tightening in 1937, loosening again after the Roosevelt recession (cited just recently by Lago, or which you can also see here). Argentina dropping the dollar peg (already cited). Iceland depreciating by 50% (already cited). The entire Great Moderation was an exercise in monetary policy evening out the road-bumps of potential problems. (Just mentioned by Measure for Measure, and an interesting case study. The crash of 1987 was not followed by even a recession, let alone a depression like the crash of 1929: NGDP was stable. You don’t have to take my word for this.) Our current downturn? The biggest drop in NGDP since the depression, accompanied by the biggest recession since the Depression – an obvious failure to maintain demand.
For even more examples and explanations of the effect of money on demand, you can consult a more in-depth book like Friedman and Schwartz’s Monetary History, or consult a standard undergraduate macroeconomics text.
Aggregate demand is jump-started on a relatively frequent basis, and it’s managed constantly. It’s also frequently overstimulated by irresponsible governments, but the fact that some people die of fever is not evidence against the existence of hypothermia.
Which is not a demand measure. It is a monetary measure.
Not a demand measure, but a monetary measure. In fact, btoh of these suggest strongly against the Keynesian interpretation, which focuses on stimulus and demand management. It’s the kind of thing I would suggest, but which is only a secondary aspect fo Keynesian economics.
Demand Management: “It is inspired by Keynesian macroeconomics, though today elements of it are part of the economic mainstream.”
Same. It may be a good idea, but it isn’t Keynesian and it isn’t Demand Management.
Same.
[quote]
The entire Great Moderation was an exercise in monetary policy evening out the road-bumps of potential problems. (Just mentioned by Measure for Measure, and an interesting case study.
Likewise not the result of demand management.
I won’t comment on this one much, because that entire crash was largely a market event. Exactly why it occurred is not clear to me to this day, and it more or less cleared up on its own. I definitely don’t claim to be an expert on this event. However, there was no big government spending program afterward and no giant Stimulus.
Really? After a pack of monetarist examples you sudenly jump to Demand Management? They aren’t the same thing at all, unless you mean the utterly trivial suggestion that since both are attempts to put the economy back on track they are therefore “demand management.” One is an attempt to put a bunch of cash into people’s hands so they buy stuff. The other is an attempt to loosen the entire cash supply, greasing the wheels so it’s easier to invest, expand, and so forth.
Money is managed constantly. Demand is not, and it’s absurd to look at them as the same set of tools. Keynesian demand manage focus almost exclusively on government purchases, and implicitly presupposes two facts:
- The government can and does act quickly enough and with reasonable efficiency to put money in the hands of people. This government really sucks at doing this today. You’re also supposed to get something useful out of the deal for the gov, such as bridges or hydroelectric dams or something, which the government also sucks at. The shovel-ready projects weren’t, and while I like the idea of environmental impact statements, they also take way too long to be of any help.
- The government has the fiscal means to raise enough money. It can significantly raise taxes without burdening the populace even more. I’m not certain this is true today. The amounts remanded by Stimulus proponents were trending into the absurd, amounts with the potential to cripple the nation.
I’m all for monetarist intervention. But it’s not Keynesian demand management. They accepted a role for monetary policy change, but only as a support for aggressive demand management. Monetary policy is associated much more closely with the un-Keynesian Neo-Classicist and (no surprise) Monetarists.
Finally, I’m aware of the material in economics textbooks. Amazingly, I have not somehow missed completely obvious facts. I do suggest you missed one: that the facts themselves are unclear, and if you look at the economic picture and get a clear vision of what will occur, you’re the one mising something.
In the current crisis, I might be in favor of a looser money supply. It may help. I am against the stimulus as it is and want a lot of measures nobody else seems to care about.
This kind of overstatement doesn’t help the argument. Those who fear inflation are generally quite clear in tying that fear to the increase in the supply of money stemming from whatever LOLR measures are proposed. They obviously differ from you in their assessment of the elasticity of the supply of money and (as your subsequent discussion with smiling bandit shows) its effect on demand, but to dismiss those differences as somehow magical does not advance anyone’s understanding.
Interesting thread.
What are the likely impacts of today’s events?
http://finance.yahoo.com/news/stock-futures-signal-losses-focus-094410132.html;_ylt=Ahiw5F_BBfTmynQq6Q0fX_iiuYdG;_ylu=X3oDMTNybHZuaWVhBG1pdANGUCBUb3AgU3RvcnkgTGVmdARwa2cDMTM1YTBmMWItMDAxNS0zN2QwLWE1Y2QtYzA3NmM0ZDlhZjA4BHBvcwMxBHNlYwN0b3Bfc3RvcnkEdmVyA2QyOTNlMzNjLTFiNWQtMTFlMS04ZTZmLTc4ZTdkMWZhZDRmZQ--;_ylg=X3oDMTFvdnRqYzJoBGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDBHBzdGNhdANob21lBHB0A3NlY3Rpb25zBHRlc3QD;_ylv=3
Am I right in thinking this is good news?
I was wondering too. I’ve seen it described as not a complete solution, but one that at least indicated that world powers were taking this seriously and were willing to work together to stave off disaster. I’d ask if this is so, but that’s a political question that this thread has consistently tried to stay away from, so I’ll leave it at that.
You’re not making any sense here.
“It’s not sunshine, it’s the light from the nearest star.” “It’s not water, it’s H[sub]2[/sub]O.” “It’s not the earth, it’s the third planet from the sun.”
Give me a million dollars today. What changes?
It will affect my market behavior in some way. That means it will affect supply or demand. No other options. At core, economics is about supply and demand. Am I more skilled than I was yesterday? No. Am I more efficient than I was yesterday? No. Do I have more real natural resources than yesterday, which I can immediately use to create more real stuff today? No. My own productive capacity does not change even the tiniest bit. It is just a million pieces of paper I have been given. Make more money today, and the total productive capacity of the economy today changes not even the tiniest bit. Supply does not change.
What changes immediately with more money? Demand. Only demand. Always demand. When I have a million dollars, I buy more things. Money always affects demand. Money is a determinant of demand. In macro, money demand and aggregate demand are inextricably linked. They can be seen as the exact same thing, two sides of the same coin. Less aggregate demand is in a way equivalent to more money demand.
You cannot build new houses from money. You cannot drive to Phoenix riding money. You cannot drink or eat money. You cannot plant money and grow more money. Money itself does not create or produce anything. Money does not supply anything.
Money is a claim on resources. By claiming resources, you step up and demand resources.
This is the bedrock of economics, part of the very foundations.
Ah. You seem to have some issues with standard terminology.
That’s why you have misinterpreted your own cite.
When Greenspan eased rates after the 1987 stock market crash, he was increasing demand. (Money is about demand.) He had the ability to do this as chair of an independent central bank.
Based on your strange definitions, you would seem to be missing the entire history of 20th century macroeconomics. Keynesian demand management of the 50s and 60s was active with spending, trying to balance out recessions. It didn’t work like they wanted. There was a backlash. The monetarist critique, spearheaded by Milton Friedman, was based on a few strong points. For one, it’s impossible to time fiscal spending like the old Keynesians wanted. Also, the fiscal multiplier, estimated at 4 or 5 in the early years after the war, was reduced with more research to something closer to 1. The monetarists also emphasized the unreliability of the political process, which is why Friedman wanted central bankers following strict rules and not their own discretion.
What sums up the critiques from the monetarists? Money works better. It’s faster, cheaper, and more effective. But we have not stopped talking about demand. We are still talking about demand. Money is about demand, not supply. Controlling money is about managing demand. And Friedman’s point was that demand should not be managed actively by politicians, but instead based on strict rules executed by the independent central bank. (Or ideally, in his opinion, without any central bank at all.)
Demand management still exists in modern form. We just call it monetary policy, and it’s performed by independent central banks, just as your own cite says.
Somehow you got into your head a misfire: Demand = Keynesian spending = Bad. Nuh-uh. Not how it works. Demand is demand, whether it becomes from spending or from new money. After the 1987 stock market crash, they lowered rates to provide liquidity and prevent disaster. That was management of demand from Greenspan. Friedman’s entire point, the whole purpose of everything he talked about, was that money could do a better job than spending. Doing what? Keeping demand stable.
Go back and look through the thread. I didn’t bring up Keynes. You brought him up. Every one of those monetarist critiques above? I agree fully with them. I am actually a monetarist, of the market variety, and I favor monetary stimulus instead of fiscal spending to jump-start demand. Which means I’m probably much closer to your position than you were thinking. Money is cheaper, faster, and more efficient than debt and spending. Talk of a eurobond tends to depress me. It sounds like more costly debt, more euro-cratic burdens, for a problem that could be solved more easily and cheaply with money. (More politics here. I could easily be wrong about this.)
But you, you’ve got some big terminology idiosyncrasies. And hell, even if you want to talk about Keynes, there’s no reason anyone else here should listen to you about him when they can just watch Keynes explain for himself what he thought about devaluation during the Depression.
Keynes was in favor of both money and fiscal spending. In the end, they both affect demand.
Basically, I don’t think we can fruitfully discuss this any more. Yes, you have a point, but it’s a trivial point. You’re bending the word to mean what you want it to mean, not what it does mean. If you want to have an argument on “demand management,” I’m going to assume you’re using the word how everyone else does and not making up your own definition. If we’re talking about Keynesiansism, I can talk about what Keynes favored (in which money management was a secondary aspect) or I can talk about modern Keynesian thought (in which it’s used ad hoc). I can’t talk about what Hellestal means, whether we agree or not.
Aside from which, you are )sometimes wrong about some key facts here.
This is flat wrong, and I can’t imagine any economist who would agree. Demand may not change at all, which is one of the problems we see right now. Uncertainty, risk, and a host of other issues affect this. Moreover, you’re leaving out huge varieties of effects, the least of which is inflation.
Half-truth at best. The bedrock of economics is supply and demand. Increasing supply doesn’t always increase the quantity demanded, and as I mentioned this is a critical problem today. The Demand curve right now may be asymptotic (curve increasing to infinity), because nobody wants to spend.
An actual Keynesian solution wouldn’t necessarily seek to increase the money supply. Instead, they would argue for increased government spending. This pushes the markets for labor, raw materials, and specialized services and in theory helps things get humming again. In theory, this should work all else being equal. Increasing the money supply is a tool which may be used to help that happen, but isn’t always required.
:smack:
This is you using words however yuo want.
“Demand Management” is not normally used as a generic phrasing for all possible forms of managing demand, but has specifically Keynesian implications. The reason for this is (a) tradition, in that Keynes first proposed regularly managing demand, and (b) Monetarism covers a variety of other instances and cases outside the realm of demand manage, including inflation management which Keynes wasn’t focused on. Keynes wanted to expand the money supply as a measure involved in his demand pump only, and not necessarily even then because it wouldn’t be needed in all cases.
Who said I was a Monetarist? I have criticism of Keynes and the Monetarists, and I’m dubious on the capacity of human beings leading banks or governments to affect the market in deliberate and measured ways to get the outcome they prefer. In fact, I think Keynes was right in that perfect case, but the case is never perfect, and all kinds of messy realities get in the way - exactly as he predicted would likely occur in a Democracy.
You quite obviously are not. You have enormous misconceptions, and you are now making ridiculous mistakes in every post. I’m not going to play any more error Whack-a-Mole.
If anyone else out there is genuinely interested in a brief discussion of what this crazy “aggregate demand” thing is, then feel free to open a new thread “What is this crazy ‘aggregate demand’ thing?” and I’ll try to answer any questions when I have time. I would use standard definitions and models, such as the IS-LM model which can be used to derivate aggregate demand (LM referring, of course, to liquidity management and money). Or if not from me, I would again recommend popular macro texts. Mankiw’s book discusses aggregate demand in chapters ten and eleven, Aggregate Demand I: Building the IS-LM Model and Aggregate Demand II: Applying the IS-LM model. The immediate effect of new money is a demand-side change, and Mankiw offers some decent descriptions and graphical examples of how it works.
That’s all for me here. About Europe, all I can really add now is that something damn big will happen, one way or another.
Good arguement. Really showed me and my numerous cites. And the facts you’ve gotten flat wrong.
In a theory, sure. In practice, not always.
Helestal, I grant you may have better theory than I. What you completely ignore is any real-world conditions which constantly affect those models’ validity. You keep referring to models like they’re the word of God, when any serious student of economics knows that numerous alternative factors change things, which is why Economics is not a hard science, and why there isn’t a convenient answer to every question (as long as you want a correct answer). It’s why there are multiple competing major schools of economics, and why the ideas you propound in this thread haven’t been favored by, well, any major macro-economics pundit I can think of.
For a man (?) holding his nose that high, you don’t seem to have a good view of your foundation. Such as the fact that there are two kinds of models: those whose validity is definite, as they are direct references to known relationships in reality, and those who validity is suspect, because they’re models developed to simulate reality.
From your own link:
’ Hicks later agreed that the model missed important points from the Keynesian theory, criticizing it as having very limited use beyond “a classroom gadget.” ’
’ Most modern macroeconomists see the IS/LM model as being at best a first approximation for understanding the real world. ’
And further note the use of the worrd theory and hypothesis an awful lot, and not in the Hard-Sci version of the words, and also alternative models.
Italy has just presented a financial initiative that aims to balance the budget by 2013 and which includes additional public savings of 30 billion euro, privatisations and liberalisations &etc and immediately the market reacted with markedly reduced interest rates on Italian bonds. I don’t think the Euro is doomed or that the differences between various European economies are any larger than between US states. The euro-nations just need to learn fiscal discipline and balance their budgets better. Spain, Portugal and Greece needs to implement reforms and cut public spending. That the Eurozone is not a transfer zone many mean that the challenged nations need to show more discipline than otherwise, but that’ll be to their benefit on the longer stretch.
That’s nice. It won’t be enough to save Europe. It may not even save Italy. It’s still over 6% as-is, and this is likely only to delay things. This will also be hard pill for Italians to swallow. Let’s hope I’m wrong.
Go check wikipedia on germany. Note anything interesting about its economy?
It’s running about 40% on exports alone. Yes, it’s long been an exporter nation. It’s also jumped from 20% exports before the Euro. Yes, they have strong economies, but they benefit hugely from having a currency cheaper than it ought to be. It has downsides, but the upsides are real and significant. People buy Euros (commercially speaking, not just tourists and travellers) to buy cheap German goods.
The difference between Germany and Greece is so vast as to make any comparisons to the U.S. completely ridiculous.
It’s more than that - much more. The entirety of Southern Europe can’t compete with such a valuable currency. This is not so different from what happened with East Germany. Reunification was handled badly and completely destroyed their economy. Only this time, the banking systems will all be tied together and can take everyone down.
I hope I’m wrong, but far wiser men than I have carefully considered the Euro and strongly hold it’s just bad business.