Economics in action

Some interesting articles about economics, helping us understand our changing world.

  1. Fighting Downturns with Fiscal Policy“, Economic Letter of the Federal Reserve Bank of San Francisco, 19 June 2009
  2. The Science of Economic Bubbles and Busts“, Scientific American, Juy 2009 — “The worst economic crisis since the Great Depression has prompted a reassessment of how financial markets work and how people make decisions about money.”

These 2 articles show the vital role of economic theory, necessary to manage our complex global economy.

4.  “Japan on verge of sub-prime mortgage crisis as summer bonuses plunge“,  The Times, 26 June 2009

5.  “No Recovery in Sight“, Bob Herbert, op-ed in the New York Times, 27 June 2009

Excerpts

(1)  Fighting Downturns with Fiscal Policy“, Economic Letter of the Federal Reserve Bank of San Francisco, 19 June 2009 — Excerpt:

Contents

  • A simple theory of the effects of fiscal policy
  • Challenging the model
  • Recent empirical work
  • The stimulus package: Will it work?
  • References

Because of the severity of the recession and the uncertain effects of unconventional monetary policy tools, Congress and the Obama Administration have also enacted a fiscal stimulus package. The $787 billion program approved by Congress in February includes a mix of tax and spending measures aimed at creating jobs and boosting output.

Yet, economists and political leaders heatedly debate whether tax cuts or increased spending are more effective, a dispute that’s hard to resolve because of the difficulty of determining the precise magnitude of fiscal policy’s impact on real GDP. This Economic Letter examines some recent empirical studies analyzing data on the relative effects of higher spending and lower taxes on output.

(2)  The Science of Economic Bubbles and Busts“, Scientific American, Juy 2009 — “The worst economic crisis since the Great Depression has prompted a reassessment of how financial markets work and how people make decisions about money.”  Excerpt, from Andrew Lo, a professor of finance at the Massachusetts Institute of Technology and an official at a hedge fund:

“Economists suffer from a deep psychological disorder that I call ‘physics envy. We wish that 99% of economic behavior could be captured by three simple laws of nature. In fact, economists have 99 laws that capture 3% of behavior. Economics is a uniquely human endeavor and, as such, should be understood in the broader context of competition, mutation and natural selection—in other words, evolution.”

(3)  Japan on verge of sub-prime mortgage crisis as summer bonuses plunge“,  The Times, 26 June 2009 — Japan fights the long war against itself, the long defeat.  Excerpt:

Anaemic exports, a struggling domestic economy and a dramatic plunge in summer bonuses could cause Japan’s version of the sub-prime mortgage crisis to explode, a leading think-tank has warned.

A housing loan default problem is looming and likely to begin in the next few weeks. It amounts to the detonation of a ten-year time bomb that, researchers at the Tokyo Foundation say, started ticking around 1999 in the immediate aftermath of the Asian financial meltdown. This is the result of flawed government policy, whereby the state housing loan agency offered mortgages to families that they knew were unable to pay. According to the think-tank, those loans were made on the assumption that the traditional staples of Japanese corporate life — seniority-based pay increases, constantly rising bonuses and lifetime employment — would remain as fixtures.

The impending meltdown, which the Tokyo Foundation believes could affect some hundreds of thousands of households, will be focused initially on the country’s industrial heartlands, where corporate bankruptcy rates are rising. The residential zones around Toyota’s home territory of Nagoya could become ghost towns, Kazuo Ishikawa, the think-tank’s senior research fellow, said.

(5)  No Recovery in Sight“, Bob Herbert, op-ed in the New York Times, 27 June 2009 — Excerpt:

There are now more than five unemployed workers for every job opening in the United States. The ranks of the poor are growing, welfare rolls are rising and young American men on a broad front are falling into an abyss of joblessness.

… There were roughly 7 million people officially counted as unemployed in November 2007, a month before the recession began. Now there are about 14 million. If you add to these unemployed individuals those who are working part time but would like to work full time, and those who want jobs but have become discouraged and stopped looking, you get an underutilization rate that is truly alarming.

“By May 2009,” according to the Center for Labor Market Studies at Northeastern University in Boston, “the total number of underutilized workers had increased dramatically from 15.63 million to 29.37 million — a rise of 13.7 million, or 88 percent. Nearly 30 million working-age individuals were underutilized in May 2009, the largest number in our nation’s history. The overall labor underutilization rate in May 2009 had risen to 18.2 percent, its highest value in 26 years.”

… Three-quarters of the workers let go over the past year were permanently displaced, as opposed to temporarily laid off. They won’t be going back to their jobs when economic conditions improve. And many of those who were permanently displaced were in fields like construction and manufacturing in which the odds of finding work, even after a recovery takes hold, are not good

Afterword

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For more information

To read other articles about these things, see the FM reference page on the right side menu bar. Of esp relevance to this topic:

Posts about economics:

  • The new President will need new solutions for the economic crisis, 9 October 2008
  • Debt – the core problem of this financial crisis, which also explains how we got in this mess, 22 October 2008
  • Causes of the financial crisis (no, its not the usual list), 29 November 2008
  • Government policy errors as a cause of the Great Depession, 1 November 2008
  • The greatness of John Maynard Keynes, our only guide in this crisis, 4 December 2008
  • Three people look at America’s economy, 5 December 2008
  • About the state of economic science, and advice from a famous economist, 8 December 2008
  • “A depression is for capitalism like a good, cold douche.”, 17 December 2008
  • Economics is not a morality tale, 14 January 2009
  • 5 thoughts on “Economics in action

    1. Re the Scientific American article: I certainly observed those biases in myself while I was in Vegas last week.

      While I think the article about how built in cognitive bias is fantastic, in any event it just seems like economics as applied in the real world (even if those biases did not exist) have too many “not politically correct or possible to model” factors to actually work. How can you predict when there are so many corrupt factors at play (false advertising, goldman sachs, etc) and propoganda (or at least optimistic articles from “experts” indicating that everything would go up forever). How can any model work when the game might be rigged?

      Of topic, but did you see {the following}? While it is nothing new, taming this beast could certainly make some dents in the current crisis.

      Shock and Audit“, a series in Mother Jones magazine — “MoJo dissects the Defense Budget so that you don’t have to.” Esp Part V: Mission Impossible.
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      Fabius Maximus relies: Economics is an immature science. It’s our fault, asking more of economics than it can provide at this point in its development. No matter how willing, Newton could not build an atomic bomb.

    2. Yes, according to the high priesthood of fiscal economics, all problems can be solved by manipulating the money supply. Unfortunately, it just ain’t so.
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      Fabius Maximus replies: I know of no economists who believes “all problems can be solved by manipulating the money supply.” This is certainly not a consensus belief.

    3. If I was running my country ( Ahgg! I would be Peter Mandelson ! )I would mentally separate the external and internal economies .
      The external economy needs fixing by paying off debt , then staying neutral . Needs a debt repayment plan , then , value of imports can only equal value of exports .
      The internal economy needs to focus on employment , because of the risk of social unrest and the need to provide basics for all . This to be accomplished through workfare – good ol’ outdoor agricultural gangwork always left me happy and tired – and by reducing expectations ( blow the plasmascreen , be grateful you have bread ).
      As my country is getting very overcrowded I’d run lots of adverts extolling the lovely opportunities in going back home to Romania ,Kosovo , Afghanistan . As vast welfare payments will be impossible , I’m going to point out to girls that men can be use rather than ornament , and point out to children , parents and neighbours ,that what they sow , they might want to reap .
      Oops , its 1950 again !

      What would you do ?

    4. In Physics, there are plenty of systems too complex to fully comprehend. The equations of motion for high Reynold’s Number fluids is just one example. That doesn’t stop us from designing pretty good boats. The way it’s done is you build robust designs with lots of safety factor for strength, and stability. Of course, this adds weight and slows you down.

      Only when you skate to the edge of disaster in your designs does the excuse, “You don’t understand how complicated this is.” come into use. Racing boats sometimes flip, and explode, operating at the edge of our knowledge, but not freighters, or oil tankers. As a society, one thing we must decide is our appetite for risk versus performance. Should our economy be a racing boat, or a nice and stable, but slower, freighter?
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      Fabius Maximus replies: This is an important public policy question. Should our monetary system allow a maximum of flexable management, or be rule-based — reliant on somewhat automatic stabilizers? Gold-based systems are the extreme case of the latter. The resulting economic volatility convinced everybody to abandon them for the other extreme of discretionary management. Perhaps there is a middle ground, somewhere.

      However, our problem is different than issues you describe. We make little attempt to analyze legislation. Like children, we consider forethought too much bother. So analogies to physics and boat design are not relevant.

    5. For understanding where we came from and the issues with conventional economics and where (some) economists are researching look no further that Steve Keen, Prof of Economics at the University of Western Sydney.

      He has 2 sites, one a blog on up to date info (DebtWatch), the other all the theoretical and historical stuff (Debunking Economics). There is a huge amount of stuff in his debunking site. Plus his book (Debunking Economics) is available as an e-book for $10. And no I’m not Steve Keen, but I read his book years ago and it was a revelation.

      He is an admirer and expert on Minsky (arguably, along with the reconstructed Fisher, one of the US’s greatest economists), who invented the ‘collapse’ theorem .. that we sadly totally ignored.

      Steve’s ‘Roving Cavaliers of Debt‘ {31 Jan 2009} article is a must read as he shows how private (ie non Govt) actors create money which leads to booms. This is where the anti-Fed people lose it .. they didn’t create all the money that created the asset inflationary booms, it was the private sector. Where the Fed (along with just about every other central bank) were at fault was for being cheerleaders for the deregulation that enabled it all to happen.
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      Fabius Maxmius replies: The Fisher-Minsky analysis of this crisis is described in Debt – the core problem of this financial crisis, which also explains how we got in this mess (22 October 2008).

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