demandside

Plus Paul Krugman on Ben Bernank…………….

Paul Krugman received the Nobel Prize in economics this past month.  You may have noticed Krugman is not among the economists favored here on Demand Side, but we still think it was nice.

Here is an excerpt with Krugman and Fresh Air’s Terry Gross.

Yes, the crisis is far bigger than Bernanke is able to deal with by giving money to banks.  We notice with continuing dismay that there is a marked absence of enthusiasm at the Fed in supporting the real economy which gives value to the securities that are dragging us into the drain.

George Stephanopolis, George Will, David Gergen, Tom Friedman, Donna Brasil.

As an unreconstructed Keynesian, I am appalled by this discussion.

We ought to be arranging our financing apparatus to promote productive activity, making food, increasing plant and equipment, reshaping transportation infrastructure, educating people of all ages, and oh yes, protecting the planet from global warming.

Instead we are making out that the financial apparatus is telling us what to do.  The choices of the banking system and shadow banking system have created such chaos and damage that they have taken rational action off the table.  Or if not their blunders, action is prohibited by virtue of the extreme measures being taken to rescue these profligate banking insitutions.

It is absolutely vital to rescue policy makers and the public  from this kind of thinking.  Generate productive activity and prosperity will follow.  Allow the entrenched interests to paralyze us and nobody will survive.

Not making room on the list of priorities for prosperity, and even more centrally, not understanding that a collapsing economy will do nobody any good displays a foolishness that is masked almost completely by the personal reputations of these news anchors and the confusion of their audience.

It will not be enough for Obamanomics to work, it will also be necessary to explain clearly what is working and why.  Otherwise we will slip back into the all-too-familiar market knows best foolishness.  Look, Paul Krugman got a Nobel Prize, but for every Krugman there are three Myron Sholes or Robert Lucases or Robert Mundels.

In any event, it will not be enough for Obamanomics to work.  It will be equally necessary to be able to explain clearly what is working and why.  Inevitably public works spending will generate jobs and consumer demand will pick up.  At that point the free marketeers will say, “We can take it from here.  We’ve learned our lesson.  Things are different now.  We’ll be good boys.”  Hell.  They’re already saying it.

FOOL

Inevitably the call will go out to shut down the public sector, so the responsible folks in the private market can again create their Hummers and one dollar hamburgers and so on.  The excesses of the freeforall market may have been extremely costly, but we need it in order to have an efficient economy.  This is what happened after the reforms of the New Deal.  There was an insistent, persistent pushing to dismantle the market structure of Glass-Steagall, for example, which has led us right back into the same chaos and apparently with even less idea of how we got here than in the Great Depression.  Social Security and public works spending are to this day anathema to House Republicans, whose campaigns are funded by market fundamentalist ideologues.

Economics as a discipline must also be held to account, yes.  The utter failure of the supply side nonsense must be exposed and realized.  The massive economic failure is not an accident or a minor blip or something that might have been avoided if one or two evil-doers had been put in their places.  It is an inevitable result of bad economics, which has allowed markets to be structured by their participants and government to be regulated by those who ought to be the regulatees.

Unfortunately, although market fundamentalism is dangerous and wrong, it is familiar and easy to explain.  In order for necessary public support to be mobilized, it will be necessary for the alternative demand side economics to be widely understood.  This is not so easy.  In fact, although economists had enormous prestige coming out of the Great Depression and World War II, it was not because people understood very well the principles they were practicing.  It was, in fact, the absence of broad comprehension that paved the way for the demagoging of the New Deal and Keynesian economics and the return of the classical and monetarist BS in the 1970s and 1980s.  Managing aggregate demand had worked to produce the most prosperous society in human history, but those who ran the economy could not or would not explain what was going on sufficiently to counteract the simplicity of the Reagan Revolution.

Taxes bad, regulation bad, government bad, corporations good.  Easy to understand.  Leas to tens of trillions in debt and a dilapidated economy, but easy to understand.  The why of the reverse has to be understood.

Rather than pick apart the confusion here, let us examine the purpose of a stimulus or recovery program.  Recovery efforts need to stablize and hopefully increase aggregate demand.  Because demand determines supply.  As we’ve said previously, this will not happen with a new consumer bubble because the consumer has been destroyed by the past consumer bubbles.

Focus is now on a public works, aid to states and help to the unemployed type of stimulus.  This is a much better idea than the checks from helicopters stimulus and much, much better than tax breaks for businesses.  Effective demand will stimulate supply, but no amount of better plant will create a sale.

A dollar of investment can generate much more than a dollar in increased demand because of the interrelated nature of our economy as described by the multiplier.  A dollar spent on capital gains tax reduction will generate less than forty cents of demand.  A dollar spent on extending unemployment benefits will generate more than one dollar seventy of demand.

In the first case the multiplier is point four.  In the second 1.7.

The multiplier works because the person who gets the first dollar spends it and it becomes income to a second person who spends it, and so on.

The reason the first bailout didn’t work is the person who got the first dollar paid down her credit card, put the money in savings, bought cheap goods from overseas suppliers, or just put higher priced gasoline in the tank.  The first two generated no increase in economic activity, because there is no economic activity involved in saving.  The second two generated a boost, but for China and the oil producers.

Infrastructure spending is high multiplier because it spends one hundred percent of the first dollar on American jobs.  The subsequent rounds of spending are deeper.  Rather than spending one hundred percent of his income on saving or discretionary spending, a job-holder spends on the whole spectrum of economic activity, from house payments to day care to groceries and so on.

Further, insofar as infrastructure improves the efficiency of the economy, that efficiency improvement is a gain to private actors.

Aid to states and local governments is a way of preventing the multiplier from acting on negative numbers.  These levels of government are not able to run deficits, so they are scaling back, and yes, each dollar of job cuts is multiplied.

Here’s a good tax cut offset by a good tax:  A one dollar per gallon tax on gasoline that is offset by a one thousand dollar reduction in payroll taxes per year.  That is, no net tax increase on the individual, but a change from taxing payroll to taxing gasoline.  If you wanted to, you could use your tax cut in payroll taxes to fund your tax increase in gasoline.  But of course, people would prefer to use their money for something else.

Why is this a good tax?  It is not only the evniromental benefit of reducing gasoline consumption.  Oil is a resource that is imported, or even if domestic, is not particularly labor intensive.  Insofar as we shift from paying the owners of energy resources to doing something else, we are shifting income from the passive to the active and from the sidelines to workers and jobs and the demand that pulls the economy forward.

I bring up this good tax here to introduce other measures of increasing economic output that do not involve net borrowing that we’ll look at next week  The nonsense at the table with George Stephanopolis includes that even the highest income folks should not face tax increases.  We’ll visit that next week.  Suffice it to say here that the class distortions now in place offer plenty of opportunity for revenue that will not reduce economic activity.

But here’s a letter

from windy city

Mr Harvey,

I listen to every one of your podcasts. My beliefs are more in line with a Cato style liberal, but I do enjoy hearing and considering other points of view.

But simply replaying Bloomberg podcasts is below you. You can do better than that.

As a suggestion, the Jeffrey Sachs\’ Bloomberg interview could have been stopped in certain places for you to make points (or I suppose disagree with). Then at least there would have been ‘some’ content from you.

You\’ve had other podcasts from political hacks and the other 2 or 3 economists that agree with you that have been little more than an intro from you and a replay of other peoples work.

Simply replaying other peoples work and claiming it as your own is intellectually lazy and borders on plagiarism. It also lends itself well to jokes that the left wants to live off the work of others. And in this case it is true.

from Windy City

I appreciate this e-mail.  You can e-mail too at Alan@demandside dot net.

In this era of U Tube, rebroadcasting may be vaguely plagaristic, but

I do hope nobody thinks I taking credit for the economists that appear on the specials.  It is entirely for your convenience that I root these out from the various sources. I would add, too, that excerpting these voices from their original broadcast source is by no means an easy task.  You should compare, for example, the original Joseph Stiglitz to our edited version.  It is a matter of literally hours.  So plagarism?  I am giving, I hope, complete recognition to the voices.  I edit out the interviewers not to take credit for their work, and I hope I acknowledge all of these shows, but to shorten and focus the pieces.

That being said, I do gather these voices here because am lonely.  And from this side of the microphone it sounds like I am blathering on forever.  I am happy to be encouraged to do more of it.  In fact, it is far less time-consuming.

I also put Roubini, Stiglitz, Soros, Schumer and the others up because not only do they agree with me, but they have a track record of being right.  I condense them to make them useful, but do not interrupt them because for the most part they are correct in my view, and who am I to interrupt Joseph Stiglitz?  or George Soros?  I let Jeffrey Sachs ramble on about Russia last week because I was among those who had misunderstood his assistance to that nation in the early 1990s and actually blamed him for the Shock Therapy that destroyed that great opportunity to move Russia into a mixed economy.

But I am accepting the point.  We will suppose you can find these on your own and don’t need my Readers Digest version of them.

As to the joke about the Left wanting to live off the work of others.  I don’t know that joke.  It certainly is not much of a living.  You COULD send me money.

The purpose of Demand Side is to offer the perspective of this student of economics who has not drunk the kool-aid and continues to channel the orthodoxy of the New Deal and Keynesianism.  The bad news for the general, educated citizen is that the economics profession is a mess of Neo-Classical and Monetarist pap sponsored by an ideological aristocracy who show up at seminars and use mathematics and statistics on human behavior.  The good news is that you can learn more than these guys know in a very short time, since most of it is based on assumptions that are absurd and so they and the models they allow can quickly be eliminated from the reading list.

But speaking of making a living — and again, a sincere thank you to Windy City — let’s take a look at our funny money investment account.  One month ago, beginning actually on September 16, we took an imaginary $100,000 and began investing it in the markets.  We operated on the idea that the oil market was a bubble and we could invest on the downside.  Plus we are afraid that the fundamentals of the U.S. economy are so poor that the dollar might collapse.  And during the past two weeks we took some profits and bought GE on the idea that infrastructure is the only way out of an economic collapse.

So,

DDG US is up 35 percent since 9/16.  We sold half of our stake to get the GE.  That is a short oil and gas company ETF.  DUG US, an ultra-short oil and gas ETF is up 56 percent over the month.  Our FXE:US, a dollar short ETF is down nine percent, but it is a great portion of our funny money holdings.  And the GE we bought two weeks ago is off eleven percent already.  Starting with 100,000, we are up fifty-three hundred and sixty-eight dollars in realized gains and our portfolio is worth $101, 648, and we still have about twenty-five hundred in cash.

We are up over eight percent for the one month, although to demonstrate the extremely speculative nature of this game, you should note that is about two percent less than this morning..  We’ll be cashing out of the short oil between now and $50 per barrel and we’ll tell you how it goes it two weeks.

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