Thursday, January 22, 2015

Autopsy -- the Op-Ed

This was an Op-Ed in the Wall Street Journal December 22 2014. WSJ asks me not to post them for a month, so here it is now. I was trying for something upbeat, and to counter a recent spate of opeds on how ISLM is a great success and winning the war of ideas.

An Autopsy for the Keynesians

Source: Wall Street Journal
This year the tide changed in the economy. Growth seems finally to be returning. The tide also changed in economic ideas. The brief resurgence of traditional Keynesian ideas is washing away from the world of economic policy.

No government is remotely likely to spend trillions of dollars or euros in the name of “stimulus,” financed by blowout borrowing. The euro is intact: Even the Greeks and Italians, after six years of advice that their problems can be solved with one more devaluation and inflation, are sticking with the euro and addressing—however slowly—structural “supply” problems instead.

U.K. Chancellor of the Exchequer George Osborne wrote in these pages Dec. 14 that Keynesians wanting more spending and more borrowing “were wrong in the recovery, and they are wrong now.” The land of John Maynard Keynes and Adam Smith is going with Smith.

Why? In part, because even in economics, you can’t be wrong too many times in a row.

Keynesians told us that once interest rates got stuck at or near zero, economies would fall into a deflationary spiral. Deflation would lower demand, causing more deflation, and so on.

It never happened. Zero interest rates and low inflation turn out to be quite a stable state, even in Japan. Yes, Japan is growing more slowly than one might wish, but with 3.5% unemployment and no deflationary spiral, it’s hard to blame slow growth on lack of “demand.”

Our first big stimulus fell flat, leaving Keynesians to argue that the recession would have been worse otherwise. George Washington’s doctors probably argued that if they hadn’t bled him, he would have died faster.

With the 2013 sequester, Keynesians warned that reduced spending and the end of 99-week unemployment benefits would drive the economy back to recession. Instead, unemployment came down faster than expected, and growth returned, albeit modestly. The story is similar in the U.K.

These are only the latest failures. Keynesians forecast depression with the end of World War II spending. The U.S. got a boom. The Phillips curve failed to understand inflation in the 1970s and its quick end in the 1980s, and disappeared in our recession as unemployment soared with steady inflation.

Still, facts and experience are seldom decisive in economics. Maybe Washington’s doctors are right. There are always confounding influences. Logic matters too. And illogic hurts. Keynesian ideas are also ebbing from policy as sensible people understand how much topsy-turvy magical thinking they require.

Hurricanes are good, rising oil prices are good, and ATMs are bad, we were advised: Destroying capital, lower productivity and costly oil will raise inflation and occasion government spending, which will stimulate output. Though Japan’s tsunami and oil shock gave it neither inflation nor stimulus, worriers are warning that the current oil price decline, a boon in the past, will kick off the dreaded deflationary spiral this time.

I suspect policy makers heard this, and said to themselves “That’s how you think the world works? Really?” And stopped listening to such policy advice.

Keynesians tell us not to worry about huge debts, or to default or inflate them away (but please, call it “restructuring” or “repairing balance sheets”). Even the Obama administration has ignored that advice, promising long-run solutions to the debt problem from day one. Europeans have centuries of memories of what happens to governments that don’t pay debts, or who need to borrow for a new emergency but have stiffed their creditors once too often. More debt? Nein danke!

In Keynesian models, government spending stimulates even if totally wasted. Pay people to dig ditches and fill them up again. By Keynesian logic, fraud is good; thieves have notoriously high marginal propensities to consume. That’s a hard sell, so stimulus is routinely dressed in “infrastructure” clothes. Clever. How can anyone who hit a pothole complain about infrastructure spending?

But people feel they’ve been had when they discover that the economics is about wasted spending, and infrastructure was a veneer to get the bill passed. And they smell a rat when they hear economic arguments shaded for partisan politics.

Stimulus advocates: Can you bring yourselves to say that the Keystone XL pipeline, LNG export terminals, nuclear power plants and dams are infrastructure? Can you bring yourselves to mention that the Environmental Protection Agency makes it nearly impossible to build anything in the U.S.? How can you assure us that infrastructure does not mean “crony boondoggle,” or high-speed trains to nowhere?

Now you like roads and bridges. Where were you during decades of opposition to every new road on grounds that they only encouraged suburban “sprawl”? If you repeat in your textbooks how defense spending saved the economy in World War II, why do you support defense cutbacks today? Why is “infrastructure” spending abstract or anecdotal, not a plan for actual, valuable, concrete projects that someone might object to?

Keynesians tell us that “sticky wages” are the big underlying economic problem. But why do they just repeat this story to justify inflation and stimulus? Why do they not advocate policies to undo minimum wages, labor laws, occupational licenses and other regulations that make wages stickier?

Inequality was fashionable this year. But no government in the foreseeable future is going to enact punitive wealth taxes. Europe’s first stab at “austerity” tried big taxes on the wealthy, meaning on those likely to invest, start businesses or hire people. Burned once, Europe is moving in the opposite direction. Magical thinking—that, contrary to centuries of experience, massive taxation and government control of incomes will lead to growth, prosperity and social peace—is moving back to the salons.

Yes, there is plenty wrong and plenty to worry about. Growth is too slow, and not enough people are working. Even supporters acknowledge that Dodd-Frank and ObamaCare are a mess. Too many people on the bottom are stuck in terrible education, jobless poverty, and a dysfunctional criminal justice system. But the policy world has abandoned the notion that we can solve our problems with blowout borrowing, wasted spending, inflation, default and high taxes. The policy world is facing the tough tradeoffs that centuries of experience have taught us, not wishing them away.

Mr. Cochrane is a professor of finance at the University of Chicago Booth School of Business, a senior fellow at Stanford University’s Hoover Institution and an adjunct scholar at the Cato Institute.

Update: "The Keynesian Shell Game" by Scott Sumner over at econolog has a nice collection of recent Keynesian doom-mongering, and makes the nice point that the definition of "G" shifts conveniently over time.


  1. I think an autopsy is premature since the disease still hasn't run its full course. I think there is a huge pent-up deflationary force that has been fought to a draw so far by these monetary interventions, which is why we have seen neither dramatic inflation nor deflation.

    The distortions that have been created have not been unwound. We just had a small taste of what that looks like in shale oil and the Swiss franc, and the ramifications are still in the early stages. Given the size of QE the unwinding should be spectacular.

    Debt-deflation is Lake Conemaugh and QE is the South Fork Dam. All we need is a little rain.

    1. Current prevaling low interest rates show us that QE was unecessary, all it dit , if at all, was to shift money from one side to the other, and if you care to read the FED´s own research on the topic, from the average taxpayer to the very rich taxpayer, therefore doing nothing at best to reduce inequality. The only thing that can restore income levels for median earners is moderate deflation, which keynesians fear so much. They argue that debtors get wounded by this phenomenon, but really, even debtors get more income left to repay their debts with moderate deflation. The only debtor that on average sees its income reduced by deflation is the government. Governments with huge debt are the only ones that get hurt by deflation. Everyone else is better of. Keynesians old and new should just give up the name, and simply just call themselves leftist pro big government.

  2. Dr. Cochran,

    You wrote:"Keynesians told us that once interest rates got stuck at or near zero, economies would fall into a deflationary spiral."

    I believe that you have conflated two different ideas, the Deflationary Spiral and the Liquidity Trap. It was actually Dr. Fisher, not Dr. Keynes who developed the Deflationary Spiral theory [1] although Dr. Keynes certainly agreed with the theory. Dr. Keynes did indeed develop the theory of the Liquidity Trap in "The General Theory" (although he did not use the term "liquidity trap", that was coined by Dennis Robertson in 1940)[2]. More to the point, one can have a deflationary spiral without being in a liquidity trap. Prior to 1934 there were a number of deflationary spirals, most notably the Panic of 1873, where there was no liquidity trap. Dr. Krugman illustrates this point [3] by showing that a liquidity trap complicates the ability of a central bank to respond to a potential deflationary spiral but that one is not dependent upon the other. There can deflationary spirals without a liquidity traps and vice versa.




  3. "Magical thinking—that, contrary to centuries of experience, massive taxation and government control of incomes will lead to growth, prosperity and social peace—is moving back to the salons."

    Yeah, right, all of Scandinavia does not exist. ^^
    The ones who are totally disconnected from the real world are the libertarian economists, not the progressive ones.

    1. The Scandinavians are able to fund their massive social safety net by following a very aggressive free trade and non-interventionist economic policy. They have a fascinating hybrid system where they seem to have sliced off the upper and lower extremes of the class structure within an otherwise minimally restrained capitalist economy. I think part of their success derives from an ethnic and cultural homogeneity that allows an entire modern society to behave as a tribe.

      When Nokia was collapsing the Finnish government refused to bail them out and I'd say Nokia was every bit as important to Finland as GM was to the US in 2008.

      Another example would be Switzerland, which follows a policy of sound money, investment funded by savings, and balanced budgets. They, too, have a strong social safety net which they can afford because they don't tinker with business. Keynesian theory notwithstanding, they have consistently had current account surpluses, low unemployment, and an enviable lifestyle.

      They recently tried abandoning sound money and wisely bailed out before it got out of hand. But as Mr. Draghi just showed us, fools rush in where gnomes fear to tread.

    2. So if gov't control of incomes generates growth, why did the USSR fall apart instead of surpass the US back in the 1980s? Why is China full of ghost cities?

      If there is some kind of nonlinearity to the benefits of totalitarianism, explain why it exists and how you know the optimal level of said totalitarianism.


    3. Here's a post with some interesting data on your comparison:

    4. I think people get their timelines backwards with the Scandinavian countries. If I'm not mistaken, they were already among the richest in the world several decades ago. It's not like these were poor countries that implemented high tax/welfare polices and then saw spectacular growth afterwards. And if we're allowed to use tiny countries for comparison, one could just as easily use Hong Kong and Singapore, which actually used to be relatively poor, as examples of the superiority of low tax, low spending governments.

    5. "I think people get their timelines backwards with the Scandinavian countries. If I'm not mistaken, they were already among the richest in the world several decades ago."
      Scandinavian countries also had the most pronounced welfare states a few decades ago.

      All so called Western liberal economies are mixed economies, i.e. the public sector makes up about 1/4 to 1/2 of GDP. Free education and a social safety net naturally have positive effects upon GDP while the thing Cochrane defends , socialism for the rich, i.e. low effective tax rates for the rich (yeah, yeah, the tax code is progressive but the effectively it is degressive), bank bailouts, a massively overblown defense sector and other forms of crony capitalism have negative effects.

      It is not a quantitative but a qualitative issue, it is not about the size of the government, stupid, it is about what government does.

    6. I think you need to remember that the Scandinavians are smarter and have a better sense of working together than the Germans or the Irish who dominate American public discourse. ;-)

    7. I fully agree with these comments re Switzerland and Scandinavian countries (I would also include the Netherlands and to a large extent Germany) - they are basically "socialist economies that follow sound money". This sounds like a contradiction to Anglo-Saxons. Krugman would like their high performance and large state sectors (good trains, roads, health systems etc) and corporatist centralised wage bargaining systems, but not their currency policies which put a premium on hard currency.

    8. Zack, Singapore and Hong Kong have large state sectors, in fact the state is very heavy handed. Firms look private, but if you look at their boards and share-ownership, they are basically semi-state bodies.

    9. Government spending as a percent of GDP in Singapore and Hong Kong is about half of what it is in the U.S. Taxes are much lower too. When right wing think tanks like the Heritage Foundation release their cumulative rankings of economic policy- fiscal, regulatory, trade, monetary etc.- both of those countries consistently rank at the top of their list. For that matter, the Nordic countries also rank fairly high. Go back and read JB McMunn's comment to see why. And yes, from what I can find, countries like Sweden and Denmark already ranked near the top of the world in GDP per capita as early as the first half of the 20th century.

      And to Anonymous #2, what is your definition of low taxes? The top 1% in the U.S. pay an average federal rate of about 30%. Also, just because something is publicly funded does not mean it is "free."

  4. Dr. Cochrane,

    You also wrote:"Keynesians told us that ...Deflation would lower demand, causing more deflation, and so on. It never happened."

    This argument comes down to, on a practical level, that there have been no deflationary spirals of late so they cannot be a matter of concern[1]. This however begs the question, why have there been no deflation or deflationary spirals? The reason is that central banks, the Federal Reserve Bank (FRB) in particular, have conducted anti-deflationary monetary policies based on the works of Dr. Fisher and Dr. Keynes.

    At the beginning of the Great Recession, the FRB greatly increased the supply of money. At the beginning of 2008 the Currency Component of the M1 Money Supply (the narrowest form of money over which the Federal Reserve Bank (FRB) has the greatest control) was around 750 BUSD while today it is 1,262 BUSD, a fairly substantial increase[2]. The supply of M2 Money (a very board form of money over which the FRB has much less control) increased from 7.5 TUSD to 11.6 TUSD[3]. The Monetary Base increased from 860 BUSD to 3,941 BUSD[4]. Monetarists were up in arms, wailing about the impending massive inflation that this increase in the money supply would cause.

    The monetarists were of course half-correct, the massive increase in the supply of money, both narrow and broad, did indeed create massive *inflationary pressures* but there equal or slightly lesser *deflationary pressures* as indicated by the huge decline in monetary velocity[8]. The two sets of pressures largely balanced each other out, producing a slight low level of inflation[9].

    These are anti-deflationary efforts and they are effective, they create inflationary pressures that counter the deflationary pressures that would had historically lead to deflationary spirals. So the threat of deflationary spirals are real but because of the changes in monetary policy by the FRB, they have been avoided. By applying the theoretical works of Dr. Fisher and Dr. Keynes, central banks have prevented deflationary spirals. So the lack of deflationary spirals is not an indication that Fisherian and Keynsian economic theories are wrong but rather that they are correct.

    To suggest that the lack of deflationary spirals indicates Fisherian and Keynsian theories are not needed is rather like the fellow who lived down stream of a dam and complained that it was a waste of money because there had not been flood since it was built.







    1. It might be argued that ZIRP created a liquidity trap, causing deflationary forces that countered the inflationary effects so QE negated itself. Are we allowed to say that here since it was touted by He-Who-Shall-Not-Be-Named? I don't buy it as THE major factor but thought I'd toss it into the mix here.

      Looks like we agree on one thing though: whatever happened there was a clash of inflationary and deflationary forces and neither side won . . . yet. I think your declaration of victory over deflation is premature and right up there with Bush's "Mission Accomplished". Deflation is rising to the surface again and as they said in Jaws, we're gonna need a bigger boat.

  5. China may be the best argument. Krugman already revealed his fear of this. How much does it matter though? Is the problem economics or something else? Did Bork - a lawyer - really do anti-trust law a favor or did he help enshrine inefficient markets and hurt entrepreneurs (do you think Tom's toothpaste is made by Tom)? Doesn't the ACA encourage start-ups by lessening the incentive to stay with a firm for insurance? Robert Litan thinks so, in the current entrepreneurial edition of Foreign Affairs (contrary to your political dig). He still has a hit list like immigration policy, the failure to sunset the voluminous code of federal regulations, and poor public education. In that same edition, James Besson attacks government procurement, corporate lobbying monies - thanks citizens united, patent trolling - thanks Harry Reid, state covenant not to compete laws (but not in entrepreneurial Cali) and occupational licensing restrictions. But here, a grumpy battle over Keynesian theory. It seems as helpful as debating whether time exists. Because what practical and real influence do you or Paul Krugman have on actual government policy at the federal, state, and local level? What's your real utility? So, you know, again that joke about economists.

    1. By odd coincidence, the CEO of Tom's of Maine is named Tom (Tom O'Brien, per their website). However, he isn't the "Tom" who founded the company and they are owned by Colgate-Palmolive, which was your point.

  6. Unfortunately, it will take a lot of people like Pr. Cochrane for generations before the world is detoxified from the Keynesian ideas.

  7. Noah Smith does an excellent job of looking at Prof. Cochrane's Op-Ed:

    1. That was a pretty weak response, even by Noah Smith's standards. Among other things:

      1. He asks "by what measure did the stimulus 'fall flat'? Perhaps by looking at the administration's own forecasts...Perhaps by comparing this recovery to just about every previous one.

      2. Cochrane correctly pointed out that the sequester did not lead to a recession or even a significant slowdown in growth and employment as prominent Keynesians predicted. In fact job growth accelerated. Smith's has no response to this at all except to say "But didn't a 3% sales tax hike send Japan spiraling into recession?" That's right, apparently this country is now the picture of austerity.

      3. In response to failed predictions of a post-war depression, he cites the 1945 recession as proof that they were actually right. He then links to a Wikipedia page that he apparently didn't read very closely. The description on that page reads:

      "The decline in government spending at the end of World War II led to an enormous drop in gross domestic product, making this technically a recession. This was the result of demobilization and the shift from a wartime to peacetime economy. The post-war years were unusual in a number of ways (unemployment was never high) and this era may be considered a "sui generis end-of-the-war recession""

      Note: unemployment peaked at 5.2% in 1946. What a depression!

      4. Repeatedly using the word "commie" as if the original op-ed said anything close to that. Is Smith familiar with the term "Straw Man?"

  8. I'm a bit surprised that this column was republished. It just seems to be further proof of the failure of macro-economic studies. Not only can't people agree on what is Keynesian economics; they can't even agree on whose theories are Keynesian or who is a modern day Keynesian economist. It may be in the academic world that 'No one is teaching Keynesian economics at the Graduate school level' is an important fact. It has no importance in the policy world. In 2008-9 the people who set policy in Washington either believed in capital spending or believed in cutting taxes. Everyone who actually had a vote was a Keynesian. Low and behold our economy is doing better then most others. Some of us actually became well to do in the last 6 years. This wasn't the world of economics professors with their ingenious mathematical models. It was the real world where a lot of us try to make a living. The policies seemed to have worked, or at least not done any damage. GDP actually began to increase in early Spring of 2009 (before the President's stimulus could have had any effect, but just coinciding with the stress tests invented by Timothy Geithner, who did not have an advanced degree in economics, but did have an undergraduate degree from a little Ivy League School and a bit of common sense). Does anyone have a mathematical model to explain why?

  9. This oped is an exercise in emotional reasoning, not scholarship. A limbic system (mid-brain) response. The interesting question: why is this kind of primitive response appealing and satisfying to an otherwise distinguished academic?

  10. Krugman has never written about ISLM in his NYT oped column. Not once. (Check this yourself, if you don't believe me.)

    Krugman's blog, however, is a place for recording his unguarded and sometimes highly personal statements and feelings.

    If the Krugman "backstory" offends you, why not just stick to reading his oped column?

    1. JZ,

      "An op-ed (originally short for opposite the editorial page, latterly opinion editorial) is a piece typically published by newspapers, magazines, and the like which expresses the opinions of a named author usually not affiliated with the publication's editorial board. Op-eds are different from both editorials (opinion pieces submitted by editorial board members) and letters to the editor (opinion pieces submitted by readers)."

      Is Paul under the impression that his blog column isn't an op-ed? On his blog page his title is listed as such:

      "Paul Krugman is an Op-Ed columnist for The New York Times."

    2. I think both Krugman and the NY Times make a clear distinction between his op-ed column, which is subjected to editorial page standards, and his personal blog, which is self-edited.

      The economics blogosphere, for better or worse, has broken new ground in rhetorical style, informality, civility, etc. Krugman's NY Times op-ed column is not a part of the blogosphere, and his blog is not a part of the newspaper's op-ed page.

    3. It says "New York Times" right on the top of the blog page. Perhaps you think that is an excuse for slander even if it also says "blog." I think if the NY times' name is on it, their reputation for ethics is at stake. The NY times happily collects revenue from the ads on the site, and NY times people have admitted to me that they put up with what is written there because of the revenue stream. I don't notice anyone cutting me slack because this says "blog." If you look at what Krugman writes in the actual printed pages, it doesn't have a whole lot better standards of fact-checking or ad-hominem attacks either.

    4. I think there is no excuse for slander or libel. But I also think we share our world with people who are (1) analytically brilliant and (2) lacking in social skills. For a current popular take on this, I encourage you to see the movie _The Imitation Game_. Does the Alan Turing character remind you of anybody? I'd be very interested to hear your take on this.

      I've come to believe that there is a largely unrecognized "microfoundation" at work here: human psychology.

    5. P.S. Here is a very interesting column by the NY Times public editor on the role that blogs play at the Times.

    6. P.P.S. Krugman has just put up a fascinating NYT blog entry on the subject of ... blogging! See his entry: Floor Waxes, Dessert Toppings, and Blogging.

      Also, since I find the social dynamics here so fascinating, I extracted all of the personal ad hominem references to Cochrane that I could find in the Krugman blog archives. Here they are:

      right wing
      of great influence
      ignorant, not corrupt
      distinguished economist
      famous economist

      With this I am hoping that Cochrane might start to see that Krugman, in his own way, has considerable respect for him. And that misunderstanding, not malice, has been at work here.

  11. John,

    Really wish you hadn't gone there but:

    "5. Pick up any textbook and they'll tell you that Keynesian economics is about deficit spending. If you look at the official deficit figures you see an enormous drop in the deficit, from $1,087b in fiscal 2012 to only $680b in fiscal 2013."

    "Contrary to some critical characterizations of it, Keynesianism does not consist solely of deficit spending. Keynesianism recommends counter-cyclical policies. An example of a counter-cyclical policy is raising taxes to cool the economy and to prevent inflation when there is abundant demand-side growth, and engaging in deficit spending on labour-intensive infrastructure projects to stimulate employment and stabilize wages during economic downturns. Classical economics, on the other hand, argues that one should cut taxes when there are budget surpluses, and cut spending – or, less likely, increase taxes – during economic downturns.

    Scott has this wrong. Keynesians recommend counter cyclical government action - lower taxes, raise spending during recessions, Classical economists recommend pro-cyclical government action - raise taxes, lower spending during recessions.

  12. "Even the Greeks and Italians, after six years of advice that their problems can be solved with one more devaluation and inflation, are sticking with the euro and addressing—however slowly—structural “supply” problems instead."--Cochrane

    Egads, I hope 25% Southern Europe unemployment is not considered a success. And this lasts for how many more years? And this works better than Great Britain?

    Of course, the Greeks, Italians and Spaniards should break free of the ECB, have their own central banks, and inflate.

    Every democracy has structural impediments, including (in the USA) our entire USDA and rural economy, our gigantic "national security" apparatus, ethanol, the home mortgage tax deduction, and SSDI and VA "disability programs," to name a few.

    However, monetary suffocation does not get rid of the structural impediments. A tighter Fed does not mean rural America says "Okay, time to kill mandated and subsidized ethanol, now 10% of gasoline sold in America. The Fed has squeezed us hard enough we cry 'uncle.'"

    The corn farmers are not going to cry "uncle" no matter how hard the Fed asphyxiated America. I suspect the homebuilders and homeowner will not give up the mortgage interest tax deduction must because Janet Yellen gets tough.

    Monetary policy should be growth-oriented. So should supply-side policies. This is one of those cases in which two negatives do not make a positive.

    In calculus, two negatives do make a positive. Do not confuse calculus with economics.

    1. Curious,

      Under Keynesian theory:

      Keynes argued that the solution to the Great Depression was to stimulate the economy ("inducement to invest") through some combination of two approaches:

      1. A reduction in interest rates (monetary policy), and
      2. Government investment in infrastructure (fiscal policy).

      Presumably, a valid combination of Keynesian policy is all fiscal and no monetary.

      And so why do Greeks, Italians, and Spaniards need to break free of the ECB, when under Keynesian theory fiscal policy alone can stabilize the business cycle?

    2. Frank--
      I am a Market Monetarist, not a Keynesian.

    3. Frank - why would have the Greeks etc break free? Because, under the current arrangement, they cannot print their own money. If they issue bonds to finance all sorts of projects in infrastructure, they cannot inflate the value of those bonds away. They cannot create inflation, make the bonds (and their currency) worthless and dupe bond investors. As of now, if they issue bonds, they have to be able to repay this with the productivity of their economies - and, currently, for all sorts of reasons, the productivity of the Greek, Spanish, etc economy is pretty shitty.
      This new "quantitative easing" by the ECB is a small try to inflate the Euro. And this irks the Germans and other Nordic countries which use the Euro, because they are more productive than the Greeks, Spanish, etc.

    4. Nope. Greece is the only country in Europe which behaved irresponsibly whereas Spain had public debt / GDP >40% before the financial crisis (so the reason they are so highly publicly indebted right now was the financial crisis and the ensuing bank bail-out, not irresponsible fiscal policy). The other party that behaved irresponsibly were the folks who bought Greek public debt. Yep, unlike in law in econ the creditor as well as the lender are responsible for bad loans/bonds.
      Germany has basically bailed out its own banks and as you correctly pointed out, Greece has no control over its currency so it cannot increase inflation and ease deleveraging.
      As austerity has massively reduced GDP it has also increase the debt ratio of Greece.

      So Europe's public policies have, as Macro 101 predicts, lead to unemployment and intensified the debt problem. All for the sake of creditors.

    5. Manfred,

      A country need not issue bonds to finance it's projects any more than a large corporation needs to issue bonds to finance it's projects. The capital markets consist of both debt and equity.

    6. Ben,

      Okay, as a Market Monetarist, does fiscal policy play any role in regulating the macro economy?

      Judging from here:

      The answer would be no. But you make mention of supply-side policies in your post.

  13. Out of all the dead economist, the only orthodox one I can think about: Walter Bagehot. In regarding his conception about the role of government/central bank in times of recession/depression: "Entrepreneur/lender of last resort" (pure and simple)

    Dead or living economist at low or high degree are defenders of the paradigm : Nation-State

    A collection of counties/towns ruled as "independent republics" sharing some functions, could enjoy long term success rather than the heavy and over-bureaucratic Nation-State and its countless budgetary deficits.....(The soviet Union, EU, USA, Imperial China as a for instance)

    1. Richard,

      I am somewhat familiar with Bagehot regarding his recommendations for the central bank of England as lender of last resort described here:

      "In Bagehot's own words (Lombard Street, Chapter 7, paragraphs 57-58), lending by the central bank in order to stop a banking panic should follow two rules:

      First. That these loans should only be made at a very high rate of interest.
      Secondly. That at this rate these advances should be made on all good banking securities, and as largely as the public ask for them."

      I have never heard of Bagehot describing the government as "Entrepeneur of Last Resort" though the Humphrey Hawkins Act (U. S. 1978) has a reference to it:–Hawkins_Full_Employment_Act

      "Explicitly states that the federal government will rely primarily on private enterprise to achieve the four goals."

      "If private enterprise appears not to be meeting these goals, the Act expressly allows the government to create a reservoir of public employment. These jobs are required to be in the lower ranges of skill and pay to minimize competition with the private sector."

      Do you have a reference for Bagehot describing government as entrepreneur of last resort?

  14. Hi Frank:

    my original comment was not conclusive....You could think about HANSA or the Hanseatic League as a financially sound shape of state and government...

    On the other hand, here are some quotes By Walter Bagehot against bureaucracy and bureacrats, his contempt towards "official business" and the lack of skills of bureaucrats involving the art of business....

    So therefore, his quote: "lender of last resort" is extendable to enterprises in general and not only banks....


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