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Forums - General - Hows the economy doing?

HappySqurriel on 16 June 2009
akuma587 said:
There is no economic model than can adequately describe every economic phenomenon. Saying that staglation "disproves Keynsian economics" is extremely short-sighted.

By that logic, the recent economic phenomenon has disproved the assumption that markets are self-regulating, and that businesses act in their own long-term self-interest at all times (which the entire banking sector disproved). So I guess that means that we disproved neoclassical economics.

Keynsian economics is based on the assumption that you can't have inflationary pressures unless the economy is at capacity and you can therefore spend money with no consequences to bring an economy up to full capacity ... Stagflation demonstrates that an out of control money supply (from too much liquidity or too much government spending) can lead to high inflation even in an economy that is far below capacity.

The current economic crisis disproves nothing because markets were not given an adequate time to correct themself ... People don't ever suggest that markets will self regulate in a timely or clean fashion, just that they will correct themself. In 5 to 10 years the colapse of major players in the financial sector or American automobile manufacturers would have been a distant memory as better managed companies filled the void created by these companies, and produced better products or services at a lower cost.



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akuma587 on 16 June 2009
HappySqurriel said:
akuma587 said:
There is no economic model than can adequately describe every economic phenomenon. Saying that staglation "disproves Keynsian economics" is extremely short-sighted.

By that logic, the recent economic phenomenon has disproved the assumption that markets are self-regulating, and that businesses act in their own long-term self-interest at all times (which the entire banking sector disproved). So I guess that means that we disproved neoclassical economics.

Keynsian economics is based on the assumption that you can't have inflationary pressures unless the economy is at capacity and you can therefore spend money with no consequences to bring an economy up to full capacity ... Stagflation demonstrates that an out of control money supply (from too much liquidity or too much government spending) can lead to high inflation even in an economy that is far below capacity.

The current economic crisis disproves nothing because markets were not given an adequate time to correct themself ... People don't ever suggest that markets will self regulate in a timely or clean fashion, just that they will correct themself. In 5 to 10 years the colapse of major players in the financial sector or American automobile manufacturers would have been a distant memory as better managed companies filled the void created by these companies, and produced better products or services at a lower cost.

You are also assuming that Keynsesian economics hasn't significantly changed, or that anyone even follows traditional Keynseian economics these days:

From Wikipedia:

http://en.wikipedia.org/wiki/New_Keynesian_economics

Two main assumptions define the New Keynesian approach to macroeconomics. Like the New Classical approach, New Keynesian macroeconomic analysis usually assumes that households and firms have rational expectations. But the two schools differ in that New Keynesian analysis usually assumes a variety of market failures. In particular, New Keynesians assume prices and wages are "sticky", which means they do not adjust instantaneously to changes in economic conditions.

Wage and price stickiness, and the other market failures present in New Keynesian models, imply that the economy may fail to attain full employment. Therefore, New Keynesians argue that macroeconomic stabilization by the government (using fiscal policy) or by the central bankefficient macroeconomic outcome than a laissez faire policy would. However, New Keynesian economics is less optimistic about the benefits of activist policies than traditional Keynesian economics was. (using monetary policy) can lead to a more


New Keynesian economists fully agree with New Classical economists that in the long run, changes in the money supply are neutral. However, because prices are sticky in the New Keynesian model, an increase in the money supply (or equivalently, a decrease in the interest rate) does increase output and lower unemployment in the short run.

Nonetheless, New Keynesian economists do not advocate using expansive monetary policy just for short run gains in output and employment, because doing so would raise inflationary expectations and thus store up problems for the future. Instead, they advocate using monetary policy for stabilization. That is, suddenly increasing the money supply just to produce a temporary economic boom is a bad idea (because eliminating the increased inflationary expectations will be impossible without producing a recession). But when the economy is hit by some unexpected external shock, it may be a good idea to offset the macroeconomic effects of the shock with monetary policy. This is especially true if the unexpected shock is one (like a fall in consumer confidence) which tends to lower both output and inflation; in that case, expanding the money supply (lowering interest rates) helps by increasing output while stabilizing inflation and inflationary expectations.

Studies of optimal monetary policy in New Keynesian DSGE models have focused on interest rate rules (especially 'Taylor rules'), specifying how the central bank should adjust the nominal interest rate in response to changes in inflation and output. (More precisely, optimal rules usually react to changes in the output gap, rather than changes in output per se.) In some simple New Keynesian DSGE models, it turns out that stabilizing inflation suffices, because maintaining perfectly stable inflation also stabilizes output and employment to the maximum degree desirable. Blanchard and Galí have called this property the 'divine coincidence'.[13] However, they also show that in models with more than one market imperfection (for example, frictions in adjusting the employment level, as well as sticky prices), there is no longer a 'divine coincidence', and instead there is a tradeoff between stabilizing inflation and stabilizing employment.



We had two bags of grass, seventy-five pellets of mescaline, five sheets of high-powered blotter acid, a salt shaker half full of cocaine, a whole galaxy of multi-colored uppers, downers, screamers, laughers…Also a quart of tequila, a quart of rum, a case of beer, a pint of raw ether and two dozen amyls.  The only thing that really worried me was the ether.  There is nothing in the world more helpless and irresponsible and depraved than a man in the depths of an ether binge. –Raoul Duke

It is hard to shed anything but crocodile tears over White House speechwriter Patrick Buchanan's tragic analysis of the Nixon debacle. "It's like Sisyphus," he said. "We rolled the rock all the way up the mountain...and it rolled right back down on us...."  Neither Sisyphus nor the commander of the Light Brigade nor Pat Buchanan had the time or any real inclination to question what they were doing...a martyr, to the bitter end, to a "flawed" cause and a narrow, atavistic concept of conservative politics that has done more damage to itself and the country in less than six years than its liberal enemies could have done in two or three decades. -Hunter S. Thompson

HappySqurriel on 16 June 2009
akuma587 said:
HappySqurriel said:
akuma587 said:
There is no economic model than can adequately describe every economic phenomenon. Saying that staglation "disproves Keynsian economics" is extremely short-sighted.

By that logic, the recent economic phenomenon has disproved the assumption that markets are self-regulating, and that businesses act in their own long-term self-interest at all times (which the entire banking sector disproved). So I guess that means that we disproved neoclassical economics.

Keynsian economics is based on the assumption that you can't have inflationary pressures unless the economy is at capacity and you can therefore spend money with no consequences to bring an economy up to full capacity ... Stagflation demonstrates that an out of control money supply (from too much liquidity or too much government spending) can lead to high inflation even in an economy that is far below capacity.

The current economic crisis disproves nothing because markets were not given an adequate time to correct themself ... People don't ever suggest that markets will self regulate in a timely or clean fashion, just that they will correct themself. In 5 to 10 years the colapse of major players in the financial sector or American automobile manufacturers would have been a distant memory as better managed companies filled the void created by these companies, and produced better products or services at a lower cost.

You are also assuming that Keynsesian economics hasn't significantly changed, or that anyone even follows traditional Keynseian economics these days:

From Wikipedia:

http://en.wikipedia.org/wiki/New_Keynesian_economics

Two main assumptions define the New Keynesian approach to macroeconomics. Like the New Classical approach, New Keynesian macroeconomic analysis usually assumes that households and firms have rational expectations. But the two schools differ in that New Keynesian analysis usually assumes a variety of market failures. In particular, New Keynesians assume prices and wages are "sticky", which means they do not adjust instantaneously to changes in economic conditions.

Wage and price stickiness, and the other market failures present in New Keynesian models, imply that the economy may fail to attain full employment. Therefore, New Keynesians argue that macroeconomic stabilization by the government (using fiscal policy) or by the central bankefficient macroeconomic outcome than a laissez faire policy would. However, New Keynesian economics is less optimistic about the benefits of activist policies than traditional Keynesian economics was. (using monetary policy) can lead to a more


New Keynesian economists fully agree with New Classical economists that in the long run, changes in the money supply are neutral. However, because prices are sticky in the New Keynesian model, an increase in the money supply (or equivalently, a decrease in the interest rate) does increase output and lower unemployment in the short run.

Nonetheless, New Keynesian economists do not advocate using expansive monetary policy just for short run gains in output and employment, because doing so would raise inflationary expectations and thus store up problems for the future. Instead, they advocate using monetary policy for stabilization. That is, suddenly increasing the money supply just to produce a temporary economic boom is a bad idea (because eliminating the increased inflationary expectations will be impossible without producing a recession). But when the economy is hit by some unexpected external shock, it may be a good idea to offset the macroeconomic effects of the shock with monetary policy. This is especially true if the unexpected shock is one (like a fall in consumer confidence) which tends to lower both output and inflation; in that case, expanding the money supply (lowering interest rates) helps by increasing output while stabilizing inflation and inflationary expectations.

Studies of optimal monetary policy in New Keynesian DSGE models have focused on interest rate rules (especially 'Taylor rules'), specifying how the central bank should adjust the nominal interest rate in response to changes in inflation and output. (More precisely, optimal rules usually react to changes in the output gap, rather than changes in output per se.) In some simple New Keynesian DSGE models, it turns out that stabilizing inflation suffices, because maintaining perfectly stable inflation also stabilizes output and employment to the maximum degree desirable. Blanchard and Galí have called this property the 'divine coincidence'.[13] However, they also show that in models with more than one market imperfection (for example, frictions in adjusting the employment level, as well as sticky prices), there is no longer a 'divine coincidence', and instead there is a tradeoff between stabilizing inflation and stabilizing employment.

If were paying attention to what you posted, you would also note that the spending of the Obama adminstration goes far beyond the "New Keynsian" economics model and could only be justified if you used the classical Keynsian model.

As much as I agree with Ron Paul about the monetary policy of the Federal Reserve being (very) bad, I don't think many people care (that much) about it ... People are very worried about a $2+ trillion deficit (with how much lower tax revenues will be compared to projections this will happen) and doubling the overall debt in 5 years. This unprecidented spending and debt expansion will translate into high inflation which will be difficult to control unless you use a classical Keynsian model (which has been disproven).



Kasz216 on 16 June 2009
SamuelRSmith said:
Erm, Kasz, I don't know how the country could go bankrupt - yes, we have a lot of external debt: but that debt all has contracts, and as such, we cannot be forced to pay it before the end of the contract.

It's like getting a mortgage, you have to pay it back over a certain number of years - the bank can't just demand that you pay back the mortgage now.

When it comes to debt, it's not the people with the debt that are taking any risks, it's the people lending the money out.

All the UK needs to be able to do is pay the interest on the debt, if it can do that, the people lending the money will be fine with it, and actors will still be willing to lend more. When it comes to these things, it doesn't matter how much debt you previously had, it depends on whether you can afford the interest on the new debt.

In the long run, yes, it will have a negative effect on our standard of living (relatively, that is, we can still improve our standard of living, but not as the same rate as the people who lent us the money in the first place), but in the short run, which is what this recession is all about, having the debt is beneficiary.

btw, the UK's economy is the best in the EU, atm, and many economists are in agreement about this, now.

If so it's a lot different considering the bankruptcy fears that were worried about up till like... last month.

It's easy for the UK to go bankrupt though... not all of your debt does have contracts... since a LOT of it is individual external debt.  Not all governmental debt.

External debt in relation to people is a big problem as well.

As for economists.... if anything it's been shown they are less reliable then weathermen.  The sad truth is... nobody really knows for sure how the economy works and even our best theoreies have a LOT of flaws.

One needs only to look at the "Shotgun" blast our stimulus bills in the US was.

The reason our Stimulus plan cost trillions more then it should was because Obama looked at the econony and said

"Fuck, economists didn't see this coming, and nobody is completely positive what will pull us out of this, so we're going to spend a lot in a bunch of different places so we don't have our chickens in one basket.  We're spending multiple times more then we should but this is a gamble I believe we can't lose."

Of course he can't outright say that because all the news would report is "Obama admits he doesn't know how the economy works."

 



Kasz216 on 16 June 2009

Additionally here is an article of a historian who agrees the UK and other european countries could go bakrupt.

Historical Economist is a kickass profession I wish i would of known existed when i went to college.

http://www.guardian.co.uk/books/2009/may/25/hay-festival-niall-ferguson



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NJ5 on 17 June 2009

China now explicitly says they'll engage in protectionism in their stimulus bill (just like USA did).

http://www.telegraph.co.uk/finance/financetopics/recession/china-economic-slowdown/5556913/Chinas-Buy-Chinese-decree-with-400bn-stimulus-package-risks-US-protectionism-row.html

China has issued a ‘Buy Chinese’ order as part of its £400bn government stimulus package in a move that could fuel tensions between Beijing and Washington over claims of trade protectionism during the current financial crisis.

The edict, issued from the highest level of China’s government, comes less than six months after China described the short-lived ‘Buy American’ clauses in the US stimulus package as “protectionist poison” that would undermine the world economic recovery.

The government order, issued by nine Chinese ministries and the legislative office of the State Council, China’s cabinet, requires government-backed stimulus projects to seek explicit permission before buying foreign goods and services.

“Government investment projects should buy domestically made products unless products or services cannot be obtained in reasonable commercial conditions in China,” it said. “Projects that really need to buy imports should be approved by the relevant government departments before purchasing activity starts.”

The order appears to contradict assurances given last February by China’s deputy commerce minister, Jiang Zengwei, that China would “treat domestic and foreign goods equally so long as we need them.”

At the same time China bristled over attempts by the US Congress to insert ‘buy American’ clauses for iron and steel into their stimulus package.

Yao Jian, a Chinese commerce ministry spokesman, told reporters “Some countries raised clauses to prioritise the purchase of products of their own countries in their economic stimulus packages.

“We express deep concern about these [measures] ... under the current financial crisis, measures issued by all countries should not cause negative impacts, and especially they should not send out wrong messages.”

Ian Crawford, the executive director of the British Chamber of Commerce in Shanghai, said he was “very surprised” at the explicit nature of the ‘buy local’ directive, even though China already had extensive buy local provisions for government contracts.

China has remained unwilling to ratify a World Trade Organisation (WTO) treaty that requires it to give foreign firms equal rights when bidding for government procurement contracts – an agreement signed by the US and most other major economies.

“China has made such an issue about protectionism with the rest of the world, but it now appears that it can no longer hold itself up as ‘whiter than white’ on this issue,” he said. “The UK has maintained very open markets and we would urge and hope that China would do the same.”

Foreign businesses operating in China have increasingly complained in recent months that they are being denied fair access to stimulus projects which will account for a significant proportion of Chinese GDP growth this year.

Concerns were raised after official from the Ministry of Railways gave interviews promising to ‘buy domestic’ while European wind-turbine manufacturers complained that bidding procedures had effectively excluded them from a £3bn green power project.

The Chinese directive which was jointly issued by the ministries of industry and information, supervision, housing, transport, railways, water resources and commerce said it was responding to concerns among Chinese industry associations that foreign buyers were being wrongly favoured in government procurement processes.

Analysts said that the move also partly reflected growing concern among the Chinese leadership at the comparative slowness of private sector activity in the economy and the need to focus investment on creating jobs at home.

A spokesman for the US Embassy said that China already had long-standing and extensive “buy china” requirements which the new order relating to the stimulus package appeared to reflect.

“President Obama has emphasized the importance of avoiding protectionism in responding to the financial crisis,” he added.


I see a lot of mixed signals both from USA and China regarding protectionism... this can't be good!

If China can consume a significant amount of its industrial output, they won't need USA debt so much any more, then they can buy less of USA's debt, furthering their moves towards another reserve currency.

 



My Mario Kart Wii friend code: 2707-1866-0957

Kasz216 on 17 June 2009

I thought the US took out that "buy American" stuff out of their stimulus package.

I don't really see why it's too bad. I mean the EU does ok... and it's the most protectionist orginzation in the world.

It makes the US look like a haven of free trade.

Guess it makes it bad for the USA... but the USA is currently in a place much better off then most other countries when it comes to external debt.

Though it wouldn't surprise me if things got worse.  I mean the US spends like a socialized nation without any of the actual benefits.



NJ5 on 17 June 2009

@Kasz216: I thought EU's protectionism was pretty confined to the agricultural area (where USA also has subsidies now).

The question is not what happens to China, I'm sure they'll do fine enough... the question is the consequence for the dollar if China continues to move away from it (they're doing small but sure steps towards that).

I mean, the only reason why China doesn't dump the dollar is that they want the US economy to be stable so that they can export to the US. With more protectionism from their part, that concern becomes less important.

 



My Mario Kart Wii friend code: 2707-1866-0957

akuma587 on 17 June 2009
Kasz216 said:
Additionally here is an article of a historian who agrees the UK and other european countries could go bakrupt.

Historical Economist is a kickass profession I wish i would of known existed when i went to college.

http://www.guardian.co.uk/books/2009/may/25/hay-festival-niall-ferguson

I think you are missing something.  As a percentage of GDP, our national debt has been higher than this before.  And guess what happened in the years following that massive deficit spending?  The U.S. emerged as the strongest economic power in the world. Thus, the assumption that massive government spending will lead to bankruptcy can be refuted by historical evidence in this country.



We had two bags of grass, seventy-five pellets of mescaline, five sheets of high-powered blotter acid, a salt shaker half full of cocaine, a whole galaxy of multi-colored uppers, downers, screamers, laughers…Also a quart of tequila, a quart of rum, a case of beer, a pint of raw ether and two dozen amyls.  The only thing that really worried me was the ether.  There is nothing in the world more helpless and irresponsible and depraved than a man in the depths of an ether binge. –Raoul Duke

It is hard to shed anything but crocodile tears over White House speechwriter Patrick Buchanan's tragic analysis of the Nixon debacle. "It's like Sisyphus," he said. "We rolled the rock all the way up the mountain...and it rolled right back down on us...."  Neither Sisyphus nor the commander of the Light Brigade nor Pat Buchanan had the time or any real inclination to question what they were doing...a martyr, to the bitter end, to a "flawed" cause and a narrow, atavistic concept of conservative politics that has done more damage to itself and the country in less than six years than its liberal enemies could have done in two or three decades. -Hunter S. Thompson

HappySqurriel on 17 June 2009
akuma587 said:
Kasz216 said:
Additionally here is an article of a historian who agrees the UK and other european countries could go bakrupt.

Historical Economist is a kickass profession I wish i would of known existed when i went to college.

http://www.guardian.co.uk/books/2009/may/25/hay-festival-niall-ferguson

I think you are missing something.  As a percentage of GDP, our national debt has been higher than this before.  And guess what happened in the years following that massive deficit spending?  The U.S. emerged as the strongest economic power in the world. Thus, the assumption that massive government spending will lead to bankruptcy can be refuted by historical evidence in this country.

So are you planning on physically destroying all of Europe's (and most of Asia's) manufacturing sector in otder to ensure that the next 25 years of rebuilding them will be done using American manufactured goods and equipment?