Conventional Wisdom
When I want to know what the real conventional wisdom is among “mainstream economists” I listen to the Friday reports on the local economy by Dr Rick Harper director of the University of West Florida’s Hass Center for Business Research and Economic Development on the local NPR station, WUWF.
Dr Harper is definitely not shrill – not only does his volume control not have an 11, it doesn’t go above 3. This is the sort of bland that makes Wonderbread seem exciting. It is noted that “He represented Northwest Florida on Governor Jeb Bush’s Council of Economic Advisors from 2001 – 2006.”
If you go to Economic Reports and listen to the July 2nd show [it isn’t up yet], be prepared for a shock. It won’t be from Dr. Harper, it will be the contrast with what passes for “conventional wisdom” in the Village.
Be prepared to hear that the austerity moves in Europe are not a good idea because the economy isn’t strong enough coming out of the recession. Then there is his heresy that governments should run a surplus during boom times to cover the deficits during recessions. This wisdom is contained in that technical macro-economic phrase “save for a rainy day” which is entirely too complicated for regular folks without PhDs to understand. 😈
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The British economy weathered the problems better than almost anyone else in the world, but the electorate has decided that they want to join in the recession, so there’s not much to be said about it. You won’t like it, but you’ll find that out soon enough.
There is a time for reducing government budgets, but this isn’t it. As unemployment climbs and businesses fail from a lack of demand, people will notice the problem with the austerity program, especially as the deflation sets in. It happens every time, but people forget.
Mr. Duff, where are the bond markets going to put the money that you’re saying will be “cut off at the knees”? Into mortgage-backed securities? Into BP bonds?
Plus, there is this new invention that you may have heard of. I know you conservatives disdain new things, but this new invention exists anyhow. It was invented in the mid 1400’s, and is called the PRINTING PRESS. You may have heard of it at some point in time, though clearly you feel that it is a dubious innovation because if God had intended anybody other than monks to write books out in longhand on parchment, He would have sent down the printing press along with His holy son. But in any event, as long as British bonds are denominated in pounds sterling, the chances of default on British bonds are effectively ZERO (since the Bank of London could always simply print the money to repay the bonds if necessary), and they are attractive to investors accordingly, which is why Britain is paying effectively 0% interest on sovereign debt when it sells bonds at auction.
And lest you then start saying, “WEIMAR REPUBLIC! INFLATION! BLAH BLAH BLAH!”, first: The problem with the Weimar Republic was that their reparations were denominated in GOLD. So they were printing money in order to buy gold from the British and French, then send that gold to the British and French. That is an entirely different scenario from printing money to pay off sovereign bonds denominated in the local currency. Secondly, we are currently in a deflationary environment — every single asset value other than oil is going *down*. Printing money during deflation is a quite valid and appropriate activity, and until interest rates and asset values start going up to show the start of real inflation, there’s no need to worry about it. And, finally, capitalism requires a small amount of inflation in order to work properly, otherwise money turns into lumpy bed stuffing rather than residing in banks where it can be leveraged via lending into the capital investments that produce future output and thus allow capitalism to be the most nimble means of adjusting supply to demand of any economic system ever devised, and the terror of a modest amount of inflation (2-4%) that afflicts so many people who purport to be capitalist is ridiculous.
Okay, so I used a few large words here, Mr. Duff, and I’m sure they went straight above your head, since conservatives typically speak in terms of “conventional wisdom” that sounds suspiciously like the grunts and howls of chimpanzees and certainly don’t require any words of greater than one syllable. But in any event, that’s economics, as vs. “conventional wisdom”, which is just superstitious magical thinking that has no (zero) relation to any reality — such as your notion that the Magic Bond Fairy would quit buying British sovereign bonds if Britain continued running deficits, a notion which is patently absurd on its face given the fact that British sovereign bonds are 100% likely to be paid back since they are denominated in pounds sterling and the printing press does, in fact, exist. Name any other investment other than U.S. Treasuries that is 100% likely to be paid back. I dare you. You won’t find it. That’s why your notion of the Magic Bond Fairy is just that — a ridiculous exercise in magical thinking utterly deranged and detached from any observable objective reality. Have a nice day, Mr. Duff.
– Badtux the Educating Penguin
First off, Mr. Duff, liberals “tax and spend”, it is the conservatives who “borrow and spend” after they “cut taxes to increase revenues” in accordance with the magic of the Laffer Curve of “supply-side” dogma.
Second, the problems of Greece and a couple of others is that they bought into the promise of the Euro, which means they can’t control their own money, a situation that has nothing to do with the US or the UK.
Third, the Chinese hold too many dollars for their own good. Unless they want to commit financial suicide, they aren’t going to radically affect the US. The damage they are doing to the rest of the world is caused by their refusal to allow their currency to float.
Fourth, any market is based on “supply and demand”, and you ignore the demand side at your own peril. All of this belt tightening may make certain people feel virtuous, but if it significantly reduces demand by raising unemployment, the economies will tank. There is no reason to invest in business if there is no demand for what you supply.
Fifth, the current problems were caused by greed and an over-abundance of investment capital. There is still a huge supply of capital looking for a home, and at the moment the safest places to put the capital are US and UK bonds. The other option is to buy gold or gemstones, but then you have to build someplace to put them.
Since World War II the US budget has been balanced by two Presidents – Lyndon Baines Johnson and William Jefferson Clinton, both Democrats. If he had been re-elected, James Earl Carter would have been the third, based on the data. The liberals keep getting elected to clean up the messes the conservatives caused. Since conservative thinking got us into these messes, it isn’t reasonable to assume that conservative policies will get us out.
I think we scared Mr. Duff away. Too many big words, I think ;).
BTW, the Laffer Curve is, in fact, real. It is simply that it is shaped like a line that goes from 0 to a place near the top of the tax rates where the line suddenly turns downward. The hump at which tax revenues cease rising with tax hikes and start declining is anywhere from 75% to 90% real tax rates (as vs. nominal tax rates, which typically are higher than real tax rates due to tax deductions), real tax rates which are far higher than any real tax rate that has existed in the United States since the Presidency of Dwight D. Eisenhower. Above that “knee”, a tax cut increases revenue. Below that “knee”, a tax cut has exactly the effect you would think — it reduces revenue. In any event, U.S. real tax rates on the U.S. population are 24% (that is, 24% of U.S. GDP is collected as taxes by government *at all levels*) and the highest tax bracket’s actual effective tax rates are around 31%, so the magical Laffer Fairy is, indeed, quite mythical at current U.S. tax rates… (Note: Tax numbers are from the right-wing organization The Tax Foundation, just in case Mr. Duff wishes to whine about “liberal numbers”, while the estimates of where the hump lies in the Laffer curve are based upon historical data from the Eisenhower/Kennedy administrations, past British administrations, and past Scandinavian tax policies, none of which say for certain where it lies but it does appear somewhere *way* at the top of effective tax rates).
– Badtux the Schooling Penguin
I think we can agree that the 95% tax rate above £ 10,000 that the Beatles referenced in Tax Man was definitely counter-productive, and highly unlikely to see serious consideration again, but 15% for “hedgehogs” making millions is absurd.
Absolutely agreed. For that matter, 24% of GDP as taxes (that is how much of U.S. GDP goes to taxes at all level of government from local to federal) is absurd — the only OECD countries with lower taxes are Mexico and Turkey, neither of which is exactly paradise on Earth, and the OECD average is around 35% GDP as taxes. If low taxes were such a boon, it would be *MEXICO* that had the illegal immigration problem, because everybody would be trying to go there. And BTW, that $1T federal deficit? You know how much of a tax hike it would take to close it up? 6%. Yep, raising the percentage Americans pay in taxes from 24% to 30% would completely eliminate the federal deficit. And would *not* make us uncompetitive vs. other Western nations, because their taxes are even higher.
But for some reason Americans still continue to insist that they can get the benefits of government — safe streets, honest cops, working courts, regulation of oil rigs that results in oil rigs *not* exploding into oil volcanos :wicked: — without paying for them. It is to laugh…
Too many people have bought into Reagan’s fairy tale and refuse to give it up in the face of reality. Most of the deficit can be laid at the door of Bush’s tax cuts which were nothing more than handing out the Social Security surplus to his friends.
With what you get for a CD these days, I would grab a T-bill tomorrow if I had that kind of cash. At around 3% they are the best things going. The banks sure aren’t interested in attracting money.
No matter how often the policies fail, the Village keeps trying them. It’s almost as if they want a depression.
Mr. Duff, two words for you: “slack resources”. When there are slack resources in an economy — when there are unemployed people, when there are underutilized factories, and so forth — it is impossible for there to be inflation. The reason is that any newly printed money simply mobilizes those slack resources and increases the goods and services in the economy. Inflation is caused by a mismatch between the amount of money in the economy and the amount of goods and services in the economy — i.e., more money is printed than there are goods and services to spend it on. Are you seriously saying that this is true now? The auto makers with lots full of unsold autos would beg to differ with you there — they will tell you flat out that there is not *enough* money in the economy to buy their product, not that there is *too much* money in the economy. Similarly, the unemployed bloke looking for a job will beg to differ with your assertion that there is enough money in the economy — he’s not being hired because there isn’t enough money in the economy to hire him, not because there’s too *much* money in the economy.
We have measures for inflation to determine when too much money is being printed, and on every single one of those measures, the problem they show is that not *enough* money is being printed — i.e., that we are in active *deflation*. Too much money has disappeared under (virtual) mattresses as “reserves” — into the Federal Reserve’s (virtual) vaults, into the Bank of London’s (virtual) vaults, and so forth, where it is no longer in the economy available to purchase goods and services.
Those are the facts, Mr. Duff. I realize that you object to facts that do not agree with your ideology, but reality simply *is*, and laughs at our puny limited human ideologies.
— Badtux the Schooling Penguin
I don’t know, maybe when you were last in bed with your gay lover?
In any event, it gets discouraging attempting to teach people basic economics when they want to instead believe the magical thinking and wishful imagination that is “conventional wisdom”, but so it goes. The observation that inflation happens when there is more money than goods and services to purchase with that money is not my observation. That is an observation by that loony liberal lefty Milton Friedman back in 1948 (the same Milton Friedman who spent his lifetime trying to get rid of public schooling as “socialism”, yes, that “loony lefty”). This is not new knowledge, it is not untested nor unproven, yet for some reason people still prefer to believe conventional wisdom, which holds that printing money is bad in *all* situations, not just in the situation where it results in more money being printed than there are goods and services in the economy to buy with said economy. Milton Friedman was quite clear that printing money while the economy was in deflation was a quite valid thing indeed to do — in fact, he even coined the term “helicopter drops” to describe the process.
In other words, this isn’t loony Keynesianism, even, it’s just plain old monetarism, about as controversial in the economics field as soda biscuits. It is as if I am in a convention of the Flat Earth Society, trying to convince them that the Earth is round as they resolutely insist that the photographs by our astronauts in orbit were faked. What can one do in such circumstances, if they refuse to accept evidence that the world is, in fact, round, other than derisively call them ignorant morons?
– Badtux the Schooling Penguin
Mr. Duff, once again you insist upon living in a fantasy world of your own creation. There are no (*ZERO*) monetary measures showing the least bit of inflation right now, indeed, all of them show active *deflation* due to collapsing asset values worldwide and the resulting flight of money to the safety of the underside of (virtual) mattresses, where it effectively disappears as far as the economy is concerned (since it is no longer being used to purchase goods and services in the economy or as collateral for loans in the economy). The question of whether Dubya and the Obamatron have done a lot of deficit spending is irrelevant to that reality, indeed in this environment of money lollygagging under mattresses all that deficit spending does is soak up some of that mattress money and put it back to work in the economy.
Now, I understand that in the ideology of right wingers there is no such thing as mattress money, just as there is no such thing as any other slack resources. But to paraphrase Galileo, yet it is, despite our beliefs to the contrary. Just as Roman Catholic ideology was unprepared to admit reality, so is conservative ideology all too often. Your insistence that printing money is bad in *all* situations (rather than being bad only when it results in more money than there exists goods and services to buy with it) is no different from that of the Inquisitors when they insisted that all heavenly bodies move around the Sun — it is a notion which is, in fact, contradicted by all measures of observable reality. Yet you persist. Baffling.
I am beginning to understand why Paul Krugman appears so dour. The wonder is that he has not totally snapped and turned into a one-man Terminator army afflicting the stupid who repeat “conventional wisdom” despite the fact that “conventional wisdom” has as much to do with objective reality as the Inquisition’s insistence that the Sun moves around the Earth rather than vice-versa.
Ah yes, one last thing. The nations which score at the top of measures of educational quality are those nations with the highest percentage of students attending public schools. Those nations which score at the bottom of measures of educational quality are those nations (like the U.K. and USA) with the highest percentage of students attending private schools. That is once again actual observable objective reality, which I realize contradicts your ideology that private is always better than public, yet it is what it is, despite the rantings of the Flat Earth Society that objective reality is overrated.
– Badtux the Schooling Penguin