Turkey’s Nominal GDP: No Recession?

by Andreas Hoffmann

These days many commentators suggest that in Turkey a recession is on the way. But nominal GDP has continued to grow along trend.

The Macroeconomics of Food Stamps

by Mario Rizzo

The expansion of food stamp eligibility in response to the Great Recession was part of the so-called stimulus package. There were several aspects. First, there was a simple increase in the maximum amount allowed to beneficiaries of about 14%. There was also a tremendous drive to get people who are eligible, but did not get food stamps, to apply and get them. Then there was a loosening of eligibility requirements in some states. Finally, there was the increase in unemployment resulting from the recession and thus an increase in the number of eligible people.

In 2007 the number of people on food stamps was 26 million. Today it is about 48 million! But look more closely at the data (in thousands):

2008	28,223
2009	33,490
2010	40,302
2011	44,709
2012	46,609
2013	47,637

The reader should note that, even as unemployment has declined, the number of food-stamp recipients has increased. Based on decades long trends we should have observed a significant decrease in the number of recipients.

O’Driscoll on Inflation

by Mario Rizzo

ThinkMarkets blogger, Cato Senior Scholar, and former VP of the Federal Reserve Bank of Dallas, Gerald P. O’Driscoll, Jr., speaks on the Fox Business channel about the problems of deliberate inflation as a policy to reduce unemployment and spur growth. See the video here:

Gerald O’Driscoll on Inflation

Uncertainty and the Keynesians

by Chidem Kurdas

At the current economic juncture two camps offer diametrically opposed macro policy prescriptions. Economists on the Keynesian side such as Joseph Stiglitz and Paul Krugman advocate further monetary easing by the Federal Reserve and massive new federal deficit spending. The opposing camp includes Austrians and monetarists. Among its distinguished members is Allan Meltzer, who in a recent Wall Street Journal op-ed column argues against monetary stimulus and favors reduced government spending.

These correspond to two ways of understanding the sluggishness of the US economy,  explanations based on different time horizons

Krugman Redistribution or Ponzi Scheme

by Chidem Kurdas

A nice thing about Paul Krugman, he does not mince his words. Thus his new book, End This Depression Now!, repeats as boldly as possible the central point he’s repeatedly made in his New York Times columns and blogs for years. Namely, governments have to spend a lot more. They have to run gigantic deficits, much more than they’re doing now. His penchant for going straight for the jugular means that the full implications of the scheme he advocates are crystal clear.

European Austerity in Perspective

by Chidem Kurdas

Attempts to rein in government spending necessarily have unpleasant side effects.  Thus the Dutch government collapsed amid budget talks to control the deficit.   And British national output appears to be shrinking.

Keynesians and advocates of the Obama administration’s colossal budget see this as vindication for unrestrained government spending. But in fact what we see in Europe is a very unfortunate consequence of past unrestrained spending.

Keynes, the Future and Present Austerity

by Chidem Kurdas

In 1930, John Maynard Keynes dashed off an amazing prophecy. Extrapolating from the productivity gains of the past centuries, he came to the bold conclusion that the fundamental economic problem of scarcity would fade away in 100 years or so. Thanks to technological innovation and the accumulation of capital, the ancient condition of limited resources to satisfy competing wants would give way to a new age of plenty. Human beings would then face a very different quandary, namely what to do with themselves once they no longer have to work in order to survive.

Eighty-one years into the timeline Keynes suggested in his article, “Economic Possibilities for Our Grandchildren,” scarcity shows no sign of disappearing. Where did he go wrong?

Malinvestment in Human Capital

by Jerry O’Driscoll

The Weekend Wall Street Journal has a front-page article on labor mismatch: “Help Wanted: In Unexpected Twist, Some Skilled Jobs Go Begging.” It focuses on the problems that the Union Pacific Railroad is experiencing trying to hire skilled workers to keep the trains rolling. These include electricians who work on diesel engines.

It is a widespread problem: the article reports survey results showing that 83 percent of manufacturers reported a moderate or severe shortage of skilled production workers.

The Infrastructure Death Rattle

by Mario Rizzo

The incessant discussion and demand for job-creating infrastructure spending on the part of the news media, Democratic politicians, and some unreconstructed Keynesian economists is both frustrating and pathetic. It is frustrating because how many times can people repeat the same thing without listening to the objections? It is pathetic because the level of understanding is akin to pre-Newtonian physics.

“A Divine Miracle”

by Jerry O’Driscoll  

In the August 24^th Wall Street Journal, Harvard Professor Robert Barro penned a hard-hitting op ed: “Keynesian Economics vs. Regular Economics.” He contrasts the lessons of standard economics with some of the unsubstantiated claims of Keynesian economics. He zeroes in on the idea that transfer payments provide economic stimulus.

Transfer payments in the guise of food stamps, unemployment benefits, and income redistribution generally have been the centerpiece of this administration’s policy to stimulate the economy. Barro quotes Agriculture Secretary Vilsack’s claim that the multiplier effect of food stamps is close to 2.

Trouble is, as Barro notes, “there is zero evidence that deficit-financed transfers raise GDP and employment – not to mention evidence for a multiplier of two.”

“Keynesian Death Spiral”

by Jerry O’Driscoll  

In Wednesday’s Wall Street Journal, Kevin Hassett explains the economic logic against fiscal stimulus (“Stimulus Optimists vs. Economic Reality”). It’s a superb piece.

The more powerful one believes fiscal stimulus to be, the more adept the Keynesian policymaker must be. If the stimulus has powerful positive effects when added, it will have powerful negative effects when withdrawn. Hence, the application of stimulus and its withdrawal must be precisely timed. An economist would ask from whence the knowledge to do this would come.

As Hassett notes, however, stimulus has not two but three stages. It may boost growth when added, but must slow growth when withdrawn. The third stage comes when taxes (current or future) must be paid to fund the stimulus. That stage is always negative in its effects. Thus, Hassett concludes that “the total impact of the Keynesian policy is negative over its life.”

The case for fiscal stimulus is even weaker in the aftermath of a major financial crisis, such as we have experienced. Downturns, measured by employment, are longer in the wake of such crises. Hassett cites the Reinhart and Rogoff estimate of an average duration of 4.8 years. Short-term stimulus becomes very problematic in the wake of such crises.

 “…Aggressive stimulus sets off a kind of Keynesian death spiral in which nervous politicians adopt repeated stimulus packages in order to avert near-term distress, the cumulative effect of which can be ruinous.”

(Though Hassett does not note it, Keynes was aware of the problem. He described it as the bismuth/castor oil cycle. The patient inevitably dies.)

Hassett’s analysis fits the current situation very well.

We Told You So

by Mario Rizzo  

In recent months – or has it been years? – Paul Krugman and Brad DeLong have been saying, in effect, “We told you so – the stimulus was not enough. Look at the sluggish economy and high unemployment rate.”

They are arguing that the problem with the fiscal stimulus is that it was not enough. The idea was right but the quantity was wrong.

Let it pass that at ThinkMarkets it was predicted that this is what the stimulus advocates would say in the event that the economy did not improve as much as they wanted.   

The basic problem with the quantitative claim is that it skirts some real problems in the analysis.

1. What was supposed to happen when the lines of spending actualized by the stimulus were exhausted?
2. How was the stimulus supposed to jump start private spending? Even the advocates of fiscal stimulus were not saying that the government stimulus had to be permanent .

Thanksgivings Past

by Chidem Kurdas

Thanksgiving was originally a spontaneous celebration. Over time it grew into a social custom. It did not become an official holiday until Lincoln issued a Thanksgiving proclamation in 1863. Then in 1939 Franklin D. Roosevelt moved the date.

Taylor, Krugman and Quantitative Easing

by Chidem Kurdas

In two substantial New York Review of Books articles, Paul Krugman and Robin Wells offer their views on various explanations of the property bubble and ways to get out of the slump.  On the latter front, they advocate aggressive deficit spending by the federal government and  quantitative easing by the Federal Reserve— No surprise to anyone who reads Professor Krugman’s writings.

Regarding the causes of the bubble, they favor the “global savings glut” explanation.  This view absolves the Federal Reserve from having spiked the punch bowl at the intertwined credit and real estate parties—by keeping interest rates exceptionally low from 2002 to 2005. It is remarkable that Krugman and Wells dismiss the case against the Fed without even bothering to mention the work that argues and presents evidence for the Fed’s pivotal role in causing the crisis—namely, Stanford professor John Taylor’s book and articles, including a Wall Street Journal piece.  

Why does this matter?

Greenspan Paradox on Recovery

by Chidem Kurdas

Alan Greenspan exemplifies an inconsistency that appears to be widespread. He reportedly said that the stimulus has fallen far short of expectations and the government should get out of the way and allow businesses to power the recovery. At the same time, he’s so worried about budget deficits that he supports higher taxes.   

Threatening more taxes is not exactly the way to encourage economic activity.

Principled Economic Policy

by Jerry O’Driscoll  

Today’s Wall Street Journal features a major op ed, “Principles for Economic Revival,” co-authored by George P. Schultz, Michael J. Boskin, John F. Cogan, Allan H. Meltzer and John B. Taylor. It begins by noting that the “deep recession and anemic recovery have largely been driven by economic policies that have deviated from proven fact-based principles.”

As the piece’s title suggests, the authors advocate a return to policies for the long-run based on sound economic theory.  However much one may disagree with particulars, the emphasis on the long run must be applauded.  As they put it, “long-lasting economic policies based on a long-term strategy work; temporary policies don’t.”

The piece is very long, easily the size of two normal opinion pieces.  They cover a great deal of ground: bailouts, stimulus, health care, housing monetary policy, etc. It’s well-worth reading and should frame the policy debates going forward.

Let us once and for all be done with endless discussions of temporary policies with transient effects. They don’t work and they distract us from the business at hand.  Low marginal tax rates, transparent and not burdensome law and regulation, and non-inflationary monetary policy promote economic growth. The opposite leads to recession and anemic recovery.

Prices Must Be Free To Tell The Truth

by Mario Rizzo

According to an article in the September 6th issue of the New York Times, more and more “experts” are now saying that the government should not try to prop up the housing market but should let prices adjust to their correct levels as rapidly as possible.

Well, you read that here as early as November, 2008 and then again in March 2009. It is part of the continuing myopic harping on aggregate demand which ignores all of the relative price adjustments that a post-bubble economy must experience. The Keynesian habit of ignoring the causes of depressions and dealing only with the analytically-secondary phenomena of aggregate expenditure is or should be unacceptable among intelligent economists.

I repeat what I said in 2008: Let the housing market collapse — fast.

Heterogeneous Labor

by Jerry O’Driscoll  

In the September 4th issue of the Wall Street Journal, Jon Hilsenrath chronicles the debate over the reasons for persistently high unemployment.  What is being described is the problem of heterogeneous labor.

Labor, like capital goods, is specialized and specific to certain occupations. When those occupations disappear in recession, the next best alternative immediately available locally may pay considerably lower wages. Workers may “know” they have better alternatives, but their knowledge capital has also depreciated with the crisis and downturn. They must search for employment opportunities.

Perils of Macro Aggregation

by Mario Rizzo  

Richard Ebeling, as usual, does an excellent job of showing how the inability to see macroeconomic phenomena as the outcome of complex micro-processes leads to poor policy prescriptions. Take a look at his response, at EconomicPolicyJournal.com edited by Richard Wenzel, to a post by Tyler Cowen at Marginal Revolution. The upshot is that the subsidization of employment during a recession is a bad idea.

Ending Austerity in the Austerity Debate

by Mario Rizzo  

What has been disappointing about the recent stimulus vs. austerity debate is the recycling of arguments that have been gone over many times before in many newspapers and blogs. The debate has become tiresome and unenlightening.  

The major feature of the debate that is responsible for the lack of enlightenment is, well, its unrelenting macro-aggregate character.  The main variables are excess demand for goods, excess supply of financial assets, total government spending, deficit to GDP ratios, government debt to GDP ratios, the confidence of economic agents in government bonds (as measured by yields), and so forth.  

Is there anything important going on beneath the surface – factors that have a more direct causal relationship to the decisions of real economic agents?  

Now a breath of fresh air!  

The Dismal Jobs Picture

by Jerry O’Driscoll  

Steve Horwitz has stimulated a lively discussion of the slow recovery in jobs at Coordination Problem.  There are two letters in today’s Wall Street Journal addressing the issue.  One letter references an earlier article in the July 10^th Journal. 

The article is titled “Debt, Bank Troubles Leave U.S. Trailing in Job Growth.” It has charts showing how the U.S. is lagging shockingly in the jobs recovery compared to other major economies, and select developing countries (those reporting jobs numbers in a timely fashion). The only problem with the article is that it can’t explain the lag with the factors it adduces. Other countries with banking and debt problems are doing better than the U.S. in the jobs picture.

Just Lend And Be Done With It!

by Mario Rizzo  

Recently, there have been reports in the Wall Street Journal and the Financial Times that Ben Bernanke and others are concerned that banks have not been lending “enough” to small businesses. The accusation is that lending standards are too strict. 

As Jack Hopkins, the director of the Independent Community Bankers of America, says in the WSJ article linked above:  

“I keep hearing remarks that credit standards have tightened, and I don’t believe that… I need to make loans to survive, to make money.” 

So what happened? The WSJ reports:  

“Some lenders argued that current lending standards are a return to more-normal conditions following a period of laxity.” 

Still Hearing Defunct Economists in the Air: Krugman’s Misplaced Attack on Hayek

by Richard Ebeling*  On July 9th, Nobel economist and New York Times columnist, Paul Krugman, gave his read on the recently unearthed letters between J. M. Keynes and F. A. Hayek in the London Times in October 1932, which have been posted and discussed on ThinkMarkets. (and in the Wall Street Journal). Krugman insists that Hayek is worse than he thought and that Keynes was better than he imagined. He attacks Hayek for insisting that the best cure for recovering from the Great Depression would be to free up markets both domestically and internationally, and to rein in government spending. This, Hayek said, would create the political and fiscal environment that would foster a positive private sector return to a job generating rebalancing of supply and demand, and a sustainable investment climate. Not surprisingly, Krugman instead, hails Keynes as the advocate of fiscal stimulus that would “prime the pump” through deficit spending and government sponsored job creation. He thinks it is all a great tragedy that the same battle has to be fought all over again for sound Keynesian policies, nearly eighty years after the exchange of these letters. But what, instead, is Krugman missing?

F.A. Hayek and Tyler Cowen

Do we have more evidence of the continuing great debate between Hayek and Keynes?

In the now “famous” 1932 letter to The Times of London signed by F.A. Hayek, Lionel Robbins, T. E. Gregory and Arnold Plant, we read: 

The signatories of the letter referred to [by Keynes, Pigou et al.], however, appear to deprecate the purchase of existing securities on the ground that there is no guarantee that the money will find its way into real investment.  We cannot endorse this view.  Under modern conditions the security markets are an indispensable part of the mechanism of investment.  A rise in the value of old securities is an indispensable preliminary to the flotation of new issues.  The existence of a lag between the revival in old securities and revival elsewhere is not questioned.  But we should regard it as little short of a disaster if the public should infer from what has been said that the purchase of existing securities and the placing of deposits in building societies, etc., were at the present time contrary to public interest or that the sale of securities or the withdrawal of such deposits would assist the coming recovery.  It is perilous in the extreme to say anything which may still further weaken the habit of private saving.

And now we read Tyler Cowen at Marginal Revolution who is discussing the alleged problem of too much corporate saving: 

Austerity in Germany – A Keynesian Case

by Andreas Hoffmann*

The positions about economic policies could not have been more divided between Germany and the US during the latest G-20 summit.

On the one side, Barack Obama pushed Keynesian arguments about the need for further stimulus and the danger of austerity measures for economic recovery. On the other side, Miss “No” is back. Merkel promoted consolidation measures to prevent future debt crises and regain markets’ trust in sustainable government finance. And this time Merkel did not cave into US pressure.

I collected some arguments of why this may be a good idea: