Thursday 31 March 2011
Tuesday 22 February 2011
While I don’t particularly like the General Theory (I consider it turgid and opaque) – it is without doubt that its publication was highly influential and its message continued to dominate economic policy across the world for 4 decades. At the time, it was vehemently attacked by conservatives which included the mainstream neo-classical economists of the day (the basis for modern-day neo-liberalism) and the rabid Austrians like Hayek who are still rabid. But the facts are facts. Most nations enjoyed very low unemployment, strong economic growth and rising equality under the policy structures that Keynes had influenced. The neo-liberal policies that were tried in the early years of the Great Depression made matters worse. The conservative agenda is becoming more transparent ☀
Wednesday 28 July 2010
You Don’t Know John (Maynard Keynes) ☀
Perhaps Keynes was wrong — after all, we shouldn’t slavishly follow the scribblings of some defunct economist. But if so, we should tell the truth and admit we’re disagreeing with Keynes, not expounding his ideas. (Both Yglesias and Becker have not run a correction, despite my emails.) Furthermore, we should actually engage with Keynes’ argument.
On sticky wages, Keynes says that if nominal wages could fall, then nominal costs would fall, which would mean that nominal prices would fall, which means that real wages would end up staying the same.1 But, even worse, if there was no stickiness at all, nothing would stop nominal wages from falling further and further until eventually everyone was paid zero.2 I have never heard the New Keynesians respond to this argument.
On the question of budget surpluses, Keynes criticizes them as a pointless reduction of aggregate demand. They create unemployment because they take money out of circulation for no real purpose. It’s just supposed to sit around until a “rainy day” when the economy isn’t doing so well. But when that rainy day comes, the reason the economy isn’t doing well is because people are out of work. If that’s true, you can simply print more money to get them back to work without any ill effects. (Printing money only causes inflation at full employment.) You don’t get any benefit from having taken the money out of circulation earlier.3
Both these seem like strong arguments to me. Perhaps that’s why it’s easier to pretend they don’t exist.
Sunday 20 June 2010
Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil. John Maynard Keynes ☀
Wednesday 16 June 2010
Why the United States and Europe can't cut their way to economic prosperity ☀
In the United States, a different set of factors is driving the trend. With unemployment high and long-term interest rates near record lows, inflation under control, and Democrats poised to suffer losses in the midterm elections, further stimulus would seem to be a no-brainer. But the same internal debate that roiled the Clinton White House in 1993—when advisers Robert Rubin and Robert Reich tangled over the relative merits of deficit and reduction and stimulus—is being replayed today. In 1993 the Rubinites won the day, arguing that Democrats needed to demonstrate a commitment to deficit reduction to avoid being tarred as tax-and-spenders. Seventeen years later, the Obama administration has made a different calculation: Higher short-term deficits are a greater political risk than slower growth and higher unemployment. But the debate fails to recognize the anti-stimulus provided by states and cities, which are prohibited from running deficits. The Center on Budget and Policy Priorities calculated that 33 states made tax changes in 2008 or ‘09 that would increase annual revenues by $31.7 billion. Meanwhile, state and local governments slashed 22,000 jobs in May. “The actions that states are taking because of the recession and their balanced-budget requirements are slowing the economy,” said Nicholas Johnson, director of the state fiscal project at CBPP.
It’s difficult to contract your way to growth. The world’s large economies need to run higher deficits in the short term to promote growth and close the gaps later. St. Augustine famously pleaded: “Grant me chastity and continence, but not yet.” Policymakers might stop looking to Milton Friedman and John Maynard Keynes and rethink Augustine. Give us austerity and deficit reduction—but not yet.
Wednesday 17 March 2010
Japan Then, America Now ☀
As for Keynesian policy, though, argument stands. I’m an Austrian. It’s not the money supply - it’s what you’re spending the money on. Keynes failed in Japan because they built useless public works projects. Keynes is failing in America because we handed the money out to dying automakers and failed banking institutions to prop up debt-strapped consumer industries. That’s my perception, ymmv.
Is Japan really a model of economic failure?
The sense that Japan is doing badly is enormously greater abroad than it is here in Tokyo. We in Japan know we’re living in what is obviously one of the richest countries in the world.
Some of the most important measures of all, and some of the most culture-neutral measures of wealth, show that Japan is No. 1 in the world. To wit, life expectancy. The Japanese live five years longer than Americans. They’ve increased their life expectancy by one year in the last 10 years. And historically, the nation that has the highest life expectancy has been widely regarded as the richest nation in the world.
There are many other statistics about how well the Japanese economy is doing that are being ignored. Look at penetration of mobile phones in Japan, much higher than in the United States. Mobile phones are much, much more sophisticated than in the United States. When I see a mobile phone in the United States, it looks like a brick. Those in Japan are the size of a toffee bar and have more capability than American cellphones. Take a dozen other indicators — travel abroad. In the first nine years of the 1990s, the number of Japanese citizens traveling abroad on vacation increased by more than 60 percent. Vacation travel overseas is a classic luxury. An improvement of that sort is indicative of a major improvement in economic well-being.
That article and supporting data is a bit dated (2001) though. Here is the same author (Eamonn Fingleton) with an economic look at Japan circa 2005.
Japan, by contrast, is a useful benchmark. One important fact ignored by the American media is that Japanese industrial wages are now among the world’s highest. Not only are they far higher than in China (between four and 15 times higher, depending on the region of China), they are actually 20 percent to 30 percent higher than in the United States. Yet Japan’s export industries have not only survived but thrived.
The largely untold story of Japan’s extraordinary manufacturing successes in recent years should inspire a radical reappraisal of fundamental American economic assumptions. Certainly Japan’s trade performance stands as a stunning rebuke to those who hold that high-wage nations can no longer compete in manufacturing. Their argument has fostered an utterly unwarranted sense of inevitability about America’s manufacturing implosion. The damage already done can be gauged from the fact that, at 5.7 percent of the gross domestic product, Am erica’s current account deficit last year was proportionately the second-worst of any major economy in history. It was exceeded only by Italy’s 7.7-percent deficit in 1924 — hardly a happy precedent, considering that Benito Mussolini seized dictatorial powers in January 1925.
Here are a few statistics that put Japan’s true economic standing in perspective:
* Measured at market exchange rates, Japan’s GDP last year came to $5.1 trillion — three times China’s $1.7 trillion.
* Japan’s current account surplus last year, at $171 billion, was more than two and a half times China’s. Even more impressively, that Japanese surplus was more than three times what Japan earned in 1989, the last year of the Tokyo financial boom. (Owing to higher oil prices, among other factors, the Japanese surplus may dip as low as $145 billion in 2005. But that would still be a nice contrast with the last time oil prices seriously cramped Tokyo’s mercantilist style; in 1980, after all, Japan incurred a deficit of more than $10 billion.)
* Japan makes most of the high-tech components and materials in China’s vaunted exports to the United States. In fact, Japan’s knowledge-intensive and capital-intensive factories are using China (as well as dozens of other nations) as an export pipeline to the United States. Judged by where the added value is really created, Japan is still a far larger source of U.S. imports than China, despite the higher dollar value of exports from the latter.
How can all this be reconciled with accounts of a perennially ailing Japan? It can’t, of course. The truth is that Japan is no basket case and never has been. Strange as it may seem, for many years Japanese leaders have — for very Japanese reasons — been assiduously exaggerating their nation’s weaknesses and u nderstating its strengths.
Perhaps the biggest surprise is how rich Japanese consumers have become. Their affluence is immediately obvious in the way they dress. Already considered the world capital of fashion by such style mavens as Suzy Menkes and Amy M. Spindler, Tokyo was recently pronounced “the coolest city on the planet” by the editors of GQ magazine.
As UCLA management professor Sanford Jacoby points out, Japan’s prosperity is also abundantly apparent on its roads, which are full of late-model cars, and in its electronics stores, which are constantly packed with free-spending males. Indeed, the Japanese are so wealthy that the most advanced new products — from the latest game machines to the most spectacular new flat-screen TVs — are often laun ched in Japan months or even years before they reach the United States.
“Japan is a very affluent country with an income distribution much less unequal than in the States,” says Jacoby, author of a new book on Japanese corporate governance. “Those in the bottom two-thirds of the income distribution enjoy a higher quality of life than their U.S. counterparts. As for the upper one-third, they, too, benefit from Japan’s high level of public services, as well as the security that comes from a stable, cohesive society.”
Even in the late 1990s, when commentators abroad were performing daily last rites for the Japanese economy, the palpable prosperity on the ground there stunned visiting Americans. Nathanial Gronewold, a University of Minnesota graduate who st udied economics in Hiroshima in 1997 and 1998, recalls: “My time in Hiroshima went down in the record books as two of the worst years for Japan’s economy. But the affluence I witnessed in and around Hiroshima was a stark contrast to the scores of empty sto refronts and offices in downtown Minneapolis, which was supposed to be booming at that time.”
Although Japan’s real-estate crash in the early ’90s has received plenty of attention, the construction boom Gronewold witnessed was no local phenomenon. As mea sured by the architectural Web site skyscrapers.com, 80 skyscrapers were built in Tokyo in the ’90s, versus just 49 in the ’80s (with skyscrapers being defined as buildings rising at least 115 feet). In Osaka, the total was 56 versus 18; in Yokohama, 19 ve rsus none. London’s total, by comparison, was 33 versus 28. New York actually registered a decline: Only 103 skyscrapers were built there in the ’90s, versus 257 in the ’80s.
There are still more ways to measure how well Japanese consumers have been doing:
Car-navigation systems. With 3 million systems sold annually, Japan is by far the largest market for these invaluable gadgets, which use satellite signals to pinpoint a car’s position, suggest routes, and provide alerts on traffic jams.
The Internet. As reported by London-based Total Telecom magazine, Japanese Internet connections are now not only the fastest in the world but also the cheapest, and Japan now leads the world in so-called FTTH (fiber to the home).
Mobile phones. Japan came from nowhere in the early ’90s to establish a lead of 25 percent over the United States in the rate of mobile-phone ownership. Japanese mobile-phone networks now lead the world in service quality. By 2003, according to the Virginia-based consulting firm TMG, nearly 2 9 percent of the Japanese population enjoyed Internet service on their mobile phones. Such access was then still almost unknown in the United States.
Health care. Since 1990, Japan’s excellent universal health-care system has cut infant mortality by more than one-quarter, to just 3.28 per 1,000 live births. At roughly half the American rate and a mere one-seventh of China’s, that is nearly a world record. And even though the Japanese have been eating more unhealthy Western food, they are living longer th an ever. They now live four years longer on average than Americans, and almost a decade longer than the Chinese.
Any comparisons between U.S. (circa 2008) and Japan are fraught with peril, according to Fingleton.
Of course we have been told that advanced nations no longer need to look to manufacturing for their comparative advantage. Supposedly, services now provide advanced nations with their most attractive and appropriate economic opportunities – and no nation is supposedly more productive in services than the United States. The trouble for those who advocate postindustrialism is that America’s trade record is screaming that that it is not enough. The fact is that while Japan’s trade surplus has nearly quadrupled since 1989, America’s trade deficit has multiplied sixfold. At more than 5 percent of gross domestic product in recent years, America’s current-account deficit represents the worst trade performance of any major nation since Italy in 1924. How bad things were in Italy in 1924 should be apparent from the fact that in January 1925 Benito Mussolini seized dictatorial powers to sort out the mess.
Basically the difference between Japan in the 1990s and the United States today therefore is trade. Japan continued to boost its exports and improve its trade surpluses through the worst of its financial difficulties. The United States by contrast is burdened with a vast trade deficit that is completely “baked in.” It would have to increase its manufacturing labor force by probably 40 percent merely to break even on trade again. And all of the new jobs would have to be in advanced manufacturing. There is not the slightest chance that the U.S. can achieve this within the foreseeable future. In the meantime the United States is fated to become ever more indebted to other nations, most notably China and Japan. The last superpower that tried this sort of financial policy was the Ottoman Empire. What became of that empire? It is time that U.S. policymakers checked the history books.
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Thursday 1 October 2009
The one economist who has emerged from the current troubles with his reputation not only intact but enhanced is, of course, Keynes. Every major nation, no matter its economic or political system, has followed Keynes’s prescription for combating a major downturn: increasing public spending to fill the gap created by the decline of private spending. That is why the world economy seems to be inching back from collapse and why the nations that have spent the most, China in particular, seem to be recovering fastest. But Keynes’s vision has yet to reestablish itself among economists, who, like the Catholic Church in Galileo’s time, aren’t about to change their cosmology just because the facts demonstrate that they happen to be wrong. The quants at the banking houses say that they simply failed to sufficiently factor some risks into their mathematical models. Once they do, their system will be corrected, and banks can resume their campaign to securitize everything (as some banks are already doing by establishing a secondary market in life insurance policies). Harold Meyerson ☀
Sunday 6 September 2009
Keynes did not, despite what you may have heard, want the government to run the economy. He described his analysis in his 1936 masterwork, “The General Theory of Employment, Interest and Money,” as “moderately conservative in its implications.” He wanted to fix capitalism, not replace it. But he did challenge the notion that free-market economies can function without a minder, expressing particular contempt for financial markets, which he viewed as being dominated by short-term speculation with little regard for fundamentals. And he called for active government intervention — printing more money and, if necessary, spending heavily on public works — to fight unemployment during slumps. It’s important to understand that Keynes did much more than make bold assertions. “The General Theory” is a work of profound, deep analysis — analysis that persuaded the best young economists of the day. Yet the story of economics over the past half century is, to a large degree, the story of a retreat from Keynesianism and a return to neoclassicism. Paul Krugman ☀
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