4 things that mystify me about laissez-faire economists

I was watching a few videos on youtube, which had Paul Krugman in "debates" with people who oppose Keynesianism. The first video is a meeting where someone asked Krugman a question, and the second video is a discussion on a British TV show. There are some problems that they doesn't quite understand:

1. Inflation as theft is inaccurate, it is a redistribution of income between debtors and lenders. When interest rates are higher lenders are better off and borrowers can't borrow as much, when interest rates are lower the opposite happens. It isn't so much theft as a redistribution of wealth which are different things.
2. The real key point which Krugman got close to is that yes, inflation is important and extremely high inflation can destroy economies, but the big question is how high is our Real GDP per capita growth rate*, meaning is our economy growing after inflation and population growth? In this sense, the US and Canada are doing better than most of Europe. Canada's stayed the same, and the US declined by only -0.3% last year. This is compared to Greece which has seen its inflation collapse and go into negative territory to correct the immense collapse in demand (demand has collapsed forcing prices to drop which is negative inflation) which is the invisible hand at work correcting the collapse in the demand curve, but it has taken the invisible hand 5 years to correct the implementation of austerity. Looking at Real GDP per Capita is a much more accurate measure to determine whether the economy is growing because it corrects for population growth and inflation which are important points. Any one of the three inputs, GDP, inflation, and population growth give us only part of the picture. Because it is Real GDP per Capita that is important at the end of the day it tells us one very important lesson on inflation which is that if you increase inflation by 1% but your GDP growth rate rises by 2% your economy is better off at the end of the year with the higher inflation and higher growth than having a stagnant economy. This is one reason why government spending to counter a collapse in consumer demand works, along with my next point.
3. Government spending to offset consumer spending and private investment is important because of how GDP is calculated. GDP is calculated by multiple methods, but the expenditure approach is the sum of consumer spending, private investment, net exports, and government expenditure. This fixes many problems that one has when looking at an economy. Even if you are an economy that imports a lot (like most developed countries) if your GDP growth is positive that is not such a large issue because your economy is producing more than it is purchasing from abroad. It teaches us that if the consumer spending collapses (like happened when almost 5% of Americans lost their jobs between 2008 and 2009) the government needs to rebuild that loss in the economy and it can because the government is part of the economy too.
4. The last and most important thing people frequently don't understand is there is the multiplier effect of employment, similar to how there is a multiplier effect for money printed. The classic economic example is how the Federal Reserve (or really any central bank) creates money is that it will lend out to a bank which will lend to other banks and because our money supply is only 1/3 dollars for every dollar the Federal Reserve prints it injects more than $1 into the economy through lending and IOUs. A similar thing happens with businesses. One thing that the people from the second video surprisingly don't understand is that businesses need to make a profit, or at least have enough capital saved to survive if they don't make enough money to cover expenses. Even the most caring employer cannot stay in business if he/she has no customers to provide revenue, and investments from investors have to be paid back so are a very different to a businessman from actual hard income. When the government hires people into the public sector they will spend most of their income in the private sector generating demand for goods and services. When businesses and entrepreneurs find that there is demand for a good and a profit to be made someone will identify the market, hire employees, and provide the service. No entrepreneur on Earth can run a business without demand, and merely having a great product isn't enough if people don't want it, because demand is both ability and desire. With the increase in demand from public employees for private sector goods businesses will have more income and a similar multiplier effect will happen in the economy as happens in the federal reserve. The government may only spend a billion dollars to hire the workforce needed to get a project done, but those billion dollars (minus taxes which are usually minimal) will then be spent in the private sector increasing private sector revenue, and the multiplier effect will come into play. I honestly don't know how people who deny Keynesian policies think private businesses will be able to afford to hire employees when there is no one to purchase their product.

*The only drawback to using Real GDP per Capita growth rate is that it doesn't take into account income distribution which is an important part of having a stable economy where people have purchasing power, but its the best one I have seen to date.

Sources:
Wikipedia
http://www.stat.ee/29958

The early 1980s recession, a non-apologetic summary

I'm working on another post when I started looking at the 1980s recession. My primary reading is Wikipedia which is pulling from the CBO (since I don't want to spend hours doing this project).

The recession began in January 1980 by GDP growth which was quickly reversed by an expansionary economic policy by President Carter and the Federal Reserve which moved the economy back to above-average economic growth. When President Reagan got into office the unemployment rate had stabilized and the economy was growing until August 1981 when the Reagan administration arrived and the interest rate jumped to record highs. The economy entered recession until late 1982 with this policy unemployment hit its highest post-World War II levels peaking at 10.8% (0.8% higher than October 2009, the peak of the last recession). The short way to put this is they did exactly what Keynes would say not to do and the response was exactly what Keynes said would happen. They then reduced the interest rates and raised taxes in 1982 during the worst point of the recession. and the unemployment rate collapsed and growth was restored, exactly as Keynes predicted.

Shame on the Keynesians who didn't point this out and boast in the early 1980s, but if we are to blame anyone we need to blame the Democrats for not making this failure of policy which really disproved laissez faire and proved the efficacy of Keynesianism in the most effective way (trying both solutions and finding normal results) a major tenant of the 1984 election which both the economists and politicians of the day failed to do.

The 1980s should be seen as the triumph of Keynesianism, but since there were clearly no great economists in that era a golden opportunity to make some amazing papers on what types of policies should be practiced in different times. This needs to be public knowledge, and the policy that Reagan did that really brought the economy to recovery was Keynesian policies. It is unbelievable we took this recession as proof that neoliberal policies work because we should take the exact opposite meaning out of it.

Unemployment: http://www.google.com/publicdata/explore?ds=z1ebjpgk2654c1_#!ctype=l&strail=false&bcs=d&nselm=h&met_y=unemployment_rate&fdim_y=seasonality:S&scale_y=lin&ind_y=false&rdim=country&idim=country:US&ifdim=country&tstart=202287600000&tend=728380800000&hl=en_US&dl=en_US&ind=false

Interest rates: http://research.stlouisfed.org/fred2/graph/?id=FEDFUNDS

Reagan's tax policies of the era:

Tax cuts that preceded recession: http://en.wikipedia.org/wiki/Economic_Recovery_Tax_Act_of_1981

Tax increases that preceded recovery: http://en.wikipedia.org/wiki/Tax_Equity_and_Fiscal_Responsibility_Act_of_1982

Hong Kong as a model of supply-side economics

Hong Kong has long been regarded as an example of the successes of the economics policies of Milton Friedman. As a review, Milton Friedman's laissez-faire school usually has the following points:

1. Very low taxes, usually as a flat tax.
2. Little to no regulation on businesses and very low taxation.
3. In the most pure forms as are being advocated for by the modern Republican Party in America, Conservative Party in the UK, and CDU in Germany (in their European policies) most things should be privatized.
4. No minimum wage

When I read about Hong Kong however, I find the following:

1. A Progressive Salaries Tax, along with other Keynesian style taxes, with the one notable exception of no capital gains tax.
2. Regulations on their stock market
3. Public health care and public schools
4. A minimum wage

This is looking very Keynesian too me. They have no corporate income tax but most economists would agree this is a good thing (which is unusual for economists). The reason they are ranked as the most liberal economy is not because of the normal things Friedman proposes but the ability to form a business is the second easiest in the world, and wages in Hong Kong are really high compared to the rest of China (except Macau and Shanghai) which means people have expendable income and there is demand for new businesses. They have a lot of trade going through their port which is a major boost to their economy, and having a large free market is admirable (which both Keynesians and neo-liberals can agree on). But to go so far as to claim that Hong Kong is neo-liberal based on their tax code (which is regressive in the way that it lacks a Capital Gains tax) ignores all the other things the government does.

In one way, Hong Kong is actually the most socialist state in the free world because all land is publicly held. This isn't capitalist to any stretch of the imagination. This is why I think labeling Hong Kong as a neo-liberal example demonstrates a lakc of understanding of how Hong Kong actually works.

If anything, Hong Kong is a great example of how Keynesian economics work very well, as well as Australia, the only developed nation to avoid the 2008 recession.

Sources: Dissent and Wikipedia

Downsizing America

There is a trend in the United States of downsizing everything. Many people feel like we have gotten too big and that it has become unsustainable. We see large libraries which we feel we must close, we see the massive education budget and look at them like an accountant, without analyzing the long-term benefits that take more than two years of accounting to recognize. We saw ourselves pouring money into mass transit in the 1950s which we cut, shrinking the government's budgets on mass transit only to find massive literally never-ending traffic jams.

This is a very disturbing trend in the American conscious. We want schools to be self-sustaining in the short run, looking at library resources as an expense that don't immediately pay off. We postpone keeping educational resources up to date and instruments in top condition, while if we kept our public resources in top shape will yield huge dividends in the future. $100 to keep a piano in tune today is a small price to pay for every piano student in the school having a great piano to play on which improves their skills so they can be better musicians. We force people to go into debt if their parents didn't save for them and reduce funding for classes in academic disciplines, making required classes hard to get into by making supply be artificially lower than demand, never raising the number when there are always more students wanting the class than the amount of seats offered.

This is a very disturbing trend in the United States to move schools from the halls of learning to a place focused on profits. Small rural schools lack up to date technology keeping their students technologically illiterate across the nation. Funds that go into libraries are cut, and the government saves a little money every year from that, but it removes vital resources from people who need them to get a well rounded education whether they are children, college students or lifelong learners. References are removed which makes our quality of education and culture suffer. Not everything is available on-line, most maps have never been scanned in for the public, and when we close the map rooms of our universities (a trend I am seeing at different universities) the knowledge is lost forever to the public and will never be put on-line.

I see this as part of what will probably become a much larger trend. How much longer will it be until we will say that people don't need to get a well-rounded education in college and everyone goes to trade school? How long until we start to send everyone to trade school? The argument I expect to hear is “you want to be a scientist, why do you need to know history?”, forgetting that they have lives beyond their careers. School will only be focused on getting a job and we will only take classes that make it so we can get the job we choose to get. Sure, you can learn many things online, but there is nothing like having a professor right there who can check your work, make certain you understand the content, and you can ask questions for immediate correct feedback. Khan Academy, Youtube, Udemy etc. are amazing invaluable resources, I use them every week and they have taught me many things, but they don't test me like school and I can't just write to CGPGrey and ask questions like I can for my professor. The teachers of these websites don't have the time to answer questions from each of their million students. The student just can't get the same amount of guidance. I fear that if we remove the wide base we get in college and continue cutting practically all funding from our schools we will be a weaker nation.

We need to stop cutting funding from our schools and keep supporting liberal arts schools with the resources they require because it is our national security. We need to keep having resources like old maps that are not available on-line, old books that you can only get for a $100 per year subscription, and other resources in our university libraries and public libraries because if we don't we will certainly be a weaker nation economically and culturally. I don't know how much more our country can take. You don't fill a water bottle by pouring out half the water.

The Estonian Miracle, repeatable?

Today I was reading about Estonia's economy and trying to find out what makes it so different from let's say, Greece. We have been taught by the media the past three years that the reason that the Mediterranean nations are failing economically is because they are part of the big bad Euro. However, when one looks at the information on unemployment across the Eurozone one finds that there is a wide range of unemployment ranging from 4.7% in Austria, to 14% in Ireland, and Greece is by far an outlier at 27%, the only country in Europe currently above 15% unemployment. This is really different from what the media have been implying, and compared to all countries in Africa, every European nation, including Greece, is doing extremely well in terms of unemployment. The current status of Greece nullifies the argument that Estonian economic growth is a direct product of austerity because the same claimed means of Estonia's growth are being used in Greece with the opposite effect. There is more to this story.

So, what is so different about Estonia? Well, Bloomberg spilled the beans, they are talking about massive private investment in Estonia going on right now. The equation is quite simple. Businesses move into Estonia and hire Estonians, Estonians work and have money to spend, their spending helps Estonian businesses grow by raising the demand curve, unemployment and productivity improve. The reduction of public investment in Estonia is being offset by private investment. What is happening in Greece in terms of the private sector is quite the opposite in fact. Greece and Estonia have both been practicing austerity. The difference is that while Estonia has seen the private sector come in reaction to a high credit rating and low corporate taxes, people have been fleeing Greece and their banks have run out of money, hurting the chances that they will be able to fund new businesses to put Greeks to work, which reduces one of the four major sectors of the economy (government, financial, consumers, producers/retailers).

I do agree the majority of the economy should be on a free market, I do agree with free trade balanced with human rights protections, and I think some parts of the economy that are naturally oligopolistic need to be regulated or controlled by a democratic government. The Estonian miracle is only repeatable so long as there is enough domestic and foreign investment to offset the collapse of the government's role in the economy.

The only questions remaining has to do with the implementation of a flat 20% income tax in Estonia, the only flat income tax in the world. My question is how is it going to effect their currently relatively equal distribution of wealth and how is that going to effect future growth if my concern of a less equitable economy is realized. What is going to happen to their quality and cost of health care and education in the long term if they are privatized? How much of this economic growth is being seen by the average Estonian? Only time will tell, but my knowledge of American economic history doesn't leave me optimistic.

One lesson however is clear, in the short term it doesn't matter where investment comes from after a recession, there must be investment. However, I am not certain on the effect it will have on distribution of wealth and the quality and cost of public goods. Only time will tell, and I am pessimistic about the long term because of the great potential of a skewed distribution of wealth if economic growth is only felt by a small percent of the population in the long-term which could offset growth if it is not balanced by making sure the doors of opportunity are open for all regardless of income.

The more I study economics the more I realize how balancing different pros and cons is critical, there is no one policy that works all the time, and no one absolute driver to economic growth. It is all about balance. One must counteract an excess of collectivization with privatization and an excess of privatization with some more collectivization. Bubbles must be avoided, economic growth must be positive. Even GDP growth is not isolated because it must be taken in relation to population growth. GDP per capita growth is a more useful metric, because if a country with negative population growth saw a negative GDP growth their GDP per capita growth could in fact be positive. The economist must then look at distribution of income which in the long run is a marker to determine long term stability. Estonia's case is just one more example of how it is critical for economists to look at the whole picture, not just their favorite statistic.