economics battle rap

Tag: economics battle rap

The Second Great Contraction

Professor Gerard’s posting on the debate about the role of fiscal policy starts with the Larry Summer’s point that the debt deal “solves the wrong problem.”  As pointed out previously (see here), I agree with that conclusion.  So, what is the “right problem?”  Kenneth Rogoff’s answer requires  that we understand that this recession is not a typically recession.

The phrase “Great Recession” creates the impression that the economy is following the contours of a typical recession, only more severe – something like a really bad cold. That is why, throughout this downturn, forecasters and analysts who have tried to make analogies to past post-war US recessions have gotten it so wrong. Moreover, too many policymakers have relied on the belief that, at the end of the day, this is just a deep recession that can be subdued by a generous helping of conventional policy tools, whether fiscal policy or massive bailouts.

But the real problem is that the global economy is badly overleveraged, and there is no quick escape without a scheme to transfer wealth from creditors to debtors, either through defaults, financial repression, or inflation.

Rogoff and Carmen Reinhart (R & R), along with others such as economic historian Harold James, emphasize that economic growth built upon too rapid a credit build-up cannot be sustained with expansionary monetary and fiscal policy. It requires de-leveraging (perhaps, you prefer credit build down), a process that cannot be accomplished quickly and offers little positive in the short run that can be gained to soften the blows. The only solutions require that the real level of debt must be reduced to a sustainable level.  As noted in the Rogoff quotation above, somehow creditors must bear some of the burden (a “haircut” in Wall Street parlance.)  The dynamics of this process lead R & R to deem our most recent period as “The Second Great Contraction.”

Rogoff’s suggests that inflation might be the least costly way to address problem – one might argue it is THE “time honored” policy of choice when governmental commitments exceed its ability to meet them.  Of course, this suggestion is not met with great enthusiasm (see “Kids Prefer Cheese” which argues that Rogoff proposes “theft, pure and simple.”)  Is it the least bad approach?  The answer depends upon one’s view of the functionally of our governance structure.  Let’s just say that “dysfunctional” would not egregiously mis-characterize U.S. governance at present.

Recognition of the right problem and a useful framework for policy discussion must come first.  As Rogoff puts it in the article linked above,

The big rush to jump on the “Great Recession” bandwagon happened because most analysts and policymakers simply had the wrong framework in mind. Unfortunately, by now it is far too clear how wrong they were.

Acknowledging that we have been using the wrong framework is the first step toward finding a solution. History suggests that recessions are often renamed when the smoke clears. Perhaps today the smoke will clear a bit faster if we dump the “Great Recession” label immediately and replace it with something more apt, like “Great Contraction.” It is too late to undo the bad forecasts and mistaken policies that have marked the aftermath of the financial crisis, but it is not too late to do better.

Keynes v. Hayek, Round 2

It’s here, the second major production from Russ Roberts and John Papola (all new mustaches!). Keep in mind, these guys are sympathetic (clearly) to the Austrian views.

Keynes v. Hayek, Round 2

For more on the Austrians, talk to someone from the Discovering Kirzner reading and discussion group.   And, rumor has it that The Road to Serfdom will be the book choice for the fall term reading group.

Austrian Economics and Politics

The Wall Street Journal profiles one of the standard bearers of Austrian economics, Pete Boettke of George Mason University, who blogs at Coordination Problem.  The title of the piece is is “Spreading Hayek, Spurning Keynes,” so you know where he’s coming from. This, of course, is a topic we have touched on before.

The blog wasn’t always called Coordination Problem, either.

The resurgence of Austrian economics does have its hazards, Mr. Boettke says. The antigovernment fervor on cable-television shows and the Internet may have popularized its theories, but it also “reinforces the idea to critics that these are crackpot ideas,” he said. He has tried to distance himself from conspiracy theorists and even dropped “Austrian” from the name of his blog. But he hasn’t yet thought of a better term.

If you are unfamiliar with the Austrians, here’s Bottke’s description of Austrian economics at The Library of Economics and Liberty.   We also have Israel Kirzner’s take from the New Palgrave Dictionary of Economics, available from campus IP addresses (thanks to the good folks over at The Mudd).

Kirzner is an especially important thinker about entrepreneurship, so those of you interested might take a peek at what he has to say.  You might also check out Peter Klein’s The Capitalist and the Entrepreneur, which is some of the most mature work fusing the Austrian school with transaction cost economics.

To Spend or Not To Spend…

Most economists haven’t really been thinking about this issue, they haven’t really focused on it. It’s not their specialty. Most economists today, they haven’t really been thinking about this kind of multiplier issue… I don’t think most economists are focused on this, or that they’re familiar with the empirical evidence. I don’t think they’ve really worked on the theory. So I don’t know, maybe they have some opinion that they got from graduate school or something. — Robert Barro in The Atlantic Monthly

Even if by accident, you’ve probably noticed that there is an on-going debate on whether a massive government spending campaign is needed to “prime the pump” to stimulate the economy (the Keynesian route), or whether fiscal discipline (austerity) is in order. Last week, most members of the G-20 (but not the US) came down on the side of austerity.

As a trained economist, I know the basic institutional details and understand the basic arguments, but as Barro suggests, I have no great insight on the empirics or which side of the debate is likely to be correct.

Certainly, the primary mouthpiece for the pro-spend crowd is recent Nobel Prize winner, Paul Krugman.  In a recent column, he tears into those who promote “austerity”:

So the next time you hear serious-sounding people explaining the need for fiscal austerity, try to parse their argument. Almost surely, you’ll discover that what sounds like hardheaded realism actually rests on a foundation of fantasy, on the belief that invisible vigilantes will punish us if we’re bad and the confidence fairy will reward us if we’re good.

Of course, not all economists agree with Krugman’s assessment. In addition to our friend Hayek, Robert Barro is pretty clearly on the austerity side. This interview with Barro is a good place to see a sketch of the battle lines in the debate, and certainly indicates that he and Krugman are not on particularly friendly terms.  This week, Harvard professor Alberto Alesina is getting some press for his advocacy of austerity measures. And, as for the regime uncertainty argument that Krugman caricatures, I would recommend Robert Higgs as the central proponent of that idea.

As for me, I am not sure exactly what I learned in grad school that prepares me to take a side in this debate. What I find interesting is that most people who engage me in a discussion seem to think the Keynsian spending route is the way to go, and many of these folks invoke Krugman on this point as if Krugman is the voice of the profession. As today’s Krugman piece indicates, he seems to think that many in the profession are moving in quite the opposite direction. It’s not clear to me whether this boils down to pre-conceived ideology or not, but that is certainly his claim.

I guess I will leave it at that.

UPDATE: Keynes v. Hayek in print. Commentary here.

Battle Rap Explained

Duke University Political Economist and some-time Libertarian gubernatorial candidate, Michael Munger, explains the Keynes v. Hayek battle rap for those of us who don’t quite get it.

Munger is also a frequent guest on Russ Roberts’s EconTalk podcast, an excellent resource for inquisitive minds.  (However, I am not sure how accurate the subject lines are there, as I was listening to the discussion of franchising and pretty soon I’m not sure what they were talking about).

Of course, Munger is probably most famous for his role as the limo driver in the Keynes v. Hayek video.

The Citizen Kane of Macro Battle Rap Videos

Do you find that your friends lose interest when you start discussing the nuances of Keynsian and Hayekian views on boom-and-bust cycles? Well, this might be just the video to help you get your point across.

The messages seem to align with my admittedly-limited understanding of macro theory, and I’m pretty certain Russ Roberts knows more about these issues than I do. And it has received critical kudos from Alex Tabarrok.

Catchy, too.

I’ll look forward to hearing this blaring in 120 and 320 in the coming years.