Alan Blinder wrote a review of Jeff Madrick’s book “Seven Bad Ideas: How Mainstream Economists Have Damaged America and the World” – in the December edition of The New York Review of Books. The basis of the book is that ‘economists’ most fundamental ideas contributed centrally to the financial crisis of 2008 and the Great recession that followed.” Blinder quoted George Stigler’s contrary verdict “that economists exert a minor and scarcely detectable influence on the societies in which they live.” He comes up with a test that asks you which of the statements below comes closer to the truth.
The dominant academic thinking, research, and writing on economic policy issues exert a profound, if not dispositive, influence on decisions made by politicians.
Politicians use research findings the way a drunk uses a lamppost: for support, not for illumination.
Most people chose the second statement but Madrick’s answer seems closer to the first.
Blinder is at odds with three of Madrick’s ‘Bad Ideas’
1. The Influence of Economists – they don’t have as much influence on economic policy as Madrick suggests.
Blinder quotes his idea of Murphy’s Law of Economic Policy:
Economists have the least influence on policy where they know the most and are most agreed; they have the most influence in policy where they know the least and disagree the most vehemently.
However when you consider who has the most influence on the election of politicians it is the general public and not economic experts. According to Binder the GFC of 2008 has in part been the fault of economists. Most graduate take at least one economics paper but professors have failed to convince the public of even the most obvious lessons, like the virtues of international trade and the success of expansionary fiscal policy in a slump. It’s a pedagogical failure on a grand scale. Many economists teach and praise the efficient market hypothesis.
2. Mainstream economics is right wing.
Milton Friedman (University of Chicago) is targeted by Madrick with regard to right wing doctrine. It is quoted in the book that Keynesian economics is not part of what anybody has taught graduate students since the 1960’s. Keynesian ideas are fairly tales that have been proved false. Blinder refutes these statements with the latter being farcical. One can argue over the macroeconomic policies of the Chicago School but it’s clear that their views are far from the mainstream.
The success of Keynesian policy since the GFC has been well documented. Experts were asked whether they agreed or disagreed with the two statements about fiscal stimulus.
1. Because of the American Recovery and Reinvestment Act of 2009, the US unemployment rate was lower at the end of 2010 that it have been without the stimulus bill. 82% agreed 2% disagreed
2. Taking into account all the ARRA’s economic consequences – including the economic costs of raising taxes to pay for the spending, its effects on future spending, and any other likely future effects – the benefits of the stimulus will end up exceeding its costs. 56% agreed 5% disagreed and 23% uncertain.
So from this the mainstream is overwhelmingly Keynesian.
3. Bad ideas
Madrick’s first bad idea was Adam Smith’s invisible hand. Blinder sees this as a great idea as throughout history, there has never been a serious practical alternative to free competitive markets as a mechanism for delivering the right people at the lowest possible costs. So it is essential that students learn about the virtues of the invisible hand in their first economics course.
Blinder also challenges another of Madrick’s Bad Ideas – Say’s Law, which states that supply creates its own demand, means that an economy can never have a generalized insufficiency of demand (and hence mass unemployment) because people always spend what they earn. Therefore: no recessions, no depressions. The Great Depression and then Keynes put an end to Say’s Law.
A Bad Idea – Efficient Market Hypothesis (EMH)
This Bad Idea became destructive as the EMH gave Wall Street managers the tools with which to build monstrosities like Collateralized Debt Obligations and Credit Default Swaps on top of the rickety foundation of subprime mortgages. This was further backed up by the credit rating agencies who gave AAA ratings to risky investments. EMH also handed the conservative regulators a rationale for minimal financial regulation.
According to Blinder, Madrick is an important and eloquent voice for what’s left of the American left – at least in economic matters.
Greg Dyke, the chairman of Football Association, has stated in the media that the English Premier League and Championship are not giving young domestic talent sufficient opportunities at the highest level of English football. He declared that the EPL was gravitating towards being “owned by foreigners, managed by foreigners and played by foreigners.”
Football has one of the most globalized markets for skilled labour and the EPL has embraced the benefits of open borders. Greg Dyke’s concern is plain to see:
There are 500 player jobs in the EPL – 20 teams x 25 players
1990’s – 345 (69%) of the 500 player jobs were filled by English players
Today – 185 (37%) of the 500 player jobs are filled by English players
This is contrast to the La Liga (Spanish League) where 61% of the players were Spanish and 59% of the Bundesliga (German League) were German. It is ironic that both the national sides of Spain and Germany have been most successful in recent times:
Spain – European Champions – 2008 and 2012. World Cup Winners 2010
Germany – World Cup Winners 2014.
Furthermore in the English second tier, the Championship, has seen English players account for less than 50% of the total minutes played during the early months of the current season as calculated by the BBC.
Solution to the English Game
Dykes has lobbied government to impose new limits on the supply of foreign players, by making it harder to get work permits. Furthermore he wants to somehow persuade teams to contract more English players in their squads of 25. In economics this is know as import substitution as Dykes is trying to encourage the development of the domestic industry by imposing protectionist policies. But as pointed out by the New York Times, England is not developing a new industry as football was invented there.
Are foreign players bad for the English game?
The money that it brings into the economy through sponsorship, television rights, shirt sales etc, is significant. Furthermore the English players that do play in the EPL are much better off that their predecessors:
2014/15 season – EPL average salary = £2.3 million
2014/15 season – Championship salary = £486,000
1992/93 season – average salary = £140,000 (adjusted for inflation)
Although fans are arguably watching a very high standard of football in the EPL it is ironic that no side from the EPL made the Quarter-Finals of the European Championship.
The Global Game
Globalisation has increased the competitive balance of international competitions like the World Cup, as players from smaller and less affluent countries, such as Ghana and Uruguay, have more opportunities at the game’s highest levels. That suggests England and other traditional powers are losing ground, in relative terms, because they now face stiffer competition.
Source: New York Times – Globalisation Under attack, on the Soccer Field.
Over the Easter break I heard a very good interview on Kim Hill’s Saturday morning programme. The interview was with Bronwyn Hayward Associate Professor of Politics and head of the Department of Political Science at the University of Canterbury, who will lead one of nine research teams for the new international Centre for the Understanding of Sustainable Prosperity (CUSP).
In short, “Sustainable prosperity” would come as a result of sustainable development that enables all human beings to live with their basic needs met, with their dignity acknowledged, and with abundant opportunity to pursue lives of satisfaction and happiness, all without risk of denying others in the present and the future the ability to do the same. This means not just preventing further degradation of Earth’s systems, but actively restoring those systems to full health. Source: Worldwatch.org
Here is the link to the interview
Radio New Zealand – Bronwyn Hayward Interview
A number of articles from The New Yorker magazine have outlined the problems facing Greece’s anti-austerity party Syriza. The party came to power on the election promise of reducing Greece’s debt burden and to liberate Greece from the Troika – the ECB, the IMF and the European Commission. However the extension recently granted to Greece will take place only within the framework of the existing arrangement. The budgetary targets for 2015 and 2016 have kept the economy stuck in recession.
* the Greek economy has contracted by 30% since 2008.
* 25% of the workforce are officially unemployed
* 50% of those under 24 years of age are unemployed
* 40% of Greek children live below the poverty line.
Money has been flowing out of the economy leaving the banking system on the verge of collapse see graphic from The Economist.
As with the Keynesian doctrine, Syriza’s solution in to create effective demand by pumping money into the system. One economics professor at the University of Athens called it “pure Keynesian policies. The big question is where will the money come from although some seem to think that it can raise revenue from tackling corruption and tax evasion. The latter is widespread in Greece amongst the upper-middle class and the very rich – the top-most bracket of households and businesses are responsible for 80% of the total tax debt owed to the government.
Greece’s creditors were mostly European banks, which had, in part, used public bailout money following the 2008 credit crunch to scoop up Greek bonds. For example, French and German banks were on the books for thirty-one and twenty-three billion euros, respectively. The troika stepped in during the spring of 2010, and again in 2012, to orchestrate bailouts of the Greek government, offering two hundred and forty billion euros in loans in exchange for a drastic reduction in government spending and other measures to make the Greek economy more competitive. Source: New Yorker
The conventional wisdom is that returning to the drachma would be a catastrophe for Greece. There are pros and cons to this decision – the following would be concerns about returning to the drachma:
* An immediate devaluation;
* The value of savings would tumble;
* The price of imported goods would soar.
However on the positive side of things you would get the following:
* Greek exports would become cheaper
* Labour costs even more competitive.
* Tourism would likely boom.
* Regaining control of its monetary and fiscal policy for the first time since 2001
It would give Greece the chance to deal with its economic woes. Other countries that have endured sudden devaluations have often found that long-term gain outweighs short-term pain. When Argentina defaulted and devalued the peso, in 2001, months of economic chaos were followed by years of rapid growth. Iceland had a similar experience after the financial crisis. The Greek situation would entail an entirely new currency rather than just a devaluation.
This conflict is as much about the ideology of austerity and whether smaller countries will have a meaningful say in their own economic fate. However one needs look back in history to remember that in debt-saddled Weimar German, humiliation and dispossession festered until it a gave rise to the Nazi party. Greece’s neo-nazi party won the third greatest number of parliament seats in the last election.
Barclays Capital have produced an interesting indicator in that its Skyscraper Index shows the relationship between construction of the next world’s tallest building and an imminent financial crisis.
Over the past 140 years it is interesting to see the economic environment post skyscraper completion. The Great Depression was matched by 3 record breaking New York skyscrapers. With the completion of the World Trade Center skyscrappers in 1973/4 saw the looming spectre of stagflation (high unemployment and high inflation) in both the US and UK economies. This condition was further compounded by the breakdown of the Bretton Woods Agreement.
The Petronas building in KL was followed by the Asian currency crisis and the Taipei 101 coincided with the early 2000’s recession and the end of the technology bubble. The Burj Khalifa was completed in 2010 which was amidst the current financial crisis. Its increase in height over the previous highest skyscraper is indicative of the extent of the current economic crisis.
Here is an image from the Barclays Capital publication which might be useful for the classroom environment. Just click on the image.
For the last lesson before the Easter break I got students to do a variety of graphs using M&M’s. Long-run Perfect Competition, Short-run Perfect Competition, MC, AC and AVC to name just a few. A good exercise and an incentive to get them correct with the reward of eating the graph. Some creations below:
Below is a very good video from the FT about how the fall in oil prices poses big problems for the Venezuela government already trying to cope with a shortage of basic goods. Some key points from the video:
* Venezuela has the largest oil reserves in the world
* 95% of Venezuela’s export revenue is from oil
* For every $1 fall in the oil price Venezuela loses almost $700m. A $20 drop in oil prices would result in a $14bn loss in gross revenues for the country.
* With falling oil revenue and therefore foreign currency the government has less money to buy imports. The reduction in imports includes: toilet paper, maize flour, sugar, powdered milk, medical supplies.
* People have been queuing for 2 to 3 hours for three weeks trying to get basic provisions. The further the oil price drops the longer the queues become.
* The Government have introduced mandatory finger printing in some supermarkets so people don’t try and hoard basic foodstuffs.
* The government, in trying to rally support, are slashing the prices of Chinese imported goods like fridges.
* At the heart of the problem are Venezuela’s price and currency controls
* Printing local currency (Bolivar) will keep widening the government deficit and fuel further inflation – see graph below.
* Oil exports aren’t enough to subsidise everything else