Wednesday, January 21, 2009

Here's why mainstream economics lives in the wrong paradigm



Excerpts from a story that appeared in the Chicago Tribune.

John Cochrane, a professor at the University of Chicago Booth School of Business, says that among academics over the last 30 years, the idea of fiscal stimulus has been discredited and in graduate courses, it is "taught only for its fallacies."

Like revisionism in history. The "Holocaust didn't exist," etc.

New York University economist Thomas Sargent agrees: "The calculations that I have seen supporting the stimulus package are back-of-the-envelope ones that ignore what we have learned in the last 60 years of macroeconomic research."

Nobel Laureate Gary Becker says any benefits will be modest at best.

For the government to finance infrastructure spending or tax cuts, it has to borrow money. The money is thus unavailable for private investment or consumption. Right now, companies and individuals are having trouble getting credit, which is a big reason for the downturn. But if the government borrows more, they will have an even harder time finding lenders. So the effort could be self-defeating.


That's a Nobel Laureate who doesn't understand that in a world of floating exchange rates/non-convertible currency, currency issuing governments spend by crediting bank accounts and the spending occurs BEFORE the sale of securities and the collection of taxes. Thus, gov't deficit spending ADDS to the net worth of the public in the form of higher holdings of Treasuries (which are assets), without any effect on the net financial position prior to that spending. Translation: it takes nothing away from the public's holdings of cash or other assets. Nor does it inhibit in any way the public's ability to invest their savings. If anything it adds to it because the government is a net payer of interest, meaning that the extent interest payments add to overall income, savings should be higher and, therefore, investment.

Remember, as stated in the Fed's manual: "A payment by the Treasury adds to the amount of reserves available to depository institutions." This dynamic is clearly stated right there and says, unequivocally, that spending by the Treasury ADDS to the money of the private sector.

4 comments:

googleheim said...

MIKE,

TO CONFIRM, SUPPORT AND EXEMPLFIY YOUR ANALYSIS TODAY ON THE DANGEROUS ATTEMPT TO PRIVATIZE OUR SOCIAL SECURITY SYSTEM AND THE POTENTIAL FOR SOME PEOPLE AND OR MARKET DOWN FORCES TO CRASH THAT VERY PENSION / RETIREMENT, I POINT AGAIN TO THE RETIREMENT SYSTEM IN CHILE ( SOUTH AMERICA ) :

http://article.wn.com/view/2009/01/12/Chile_heavy_losses_for_pioneering_pension_funds_e/

CHILE IS EXPERIENCING HEAVY LOSSES AND ALL THEIR RETIREES ARE BITING THE DUST WHERE AS THE ARGENTINE SENIOR SYSTEM IS NOT PUMMELLED.

PLEASE NOTE THAT SCHULTZ ON CHARLIE ROSE POINTED OUT THAT CHILE WAS THE WONDER CHILD OF THE KISSINGER/SCHULTZ/BUSH/GREENSPAN GAME ( END GAME REALLY ).

USA HAS FREE TRADE WITH CHILE AFTER USA SENT COL. POWELL TO APOLOGIZE FOR USA SUPPORT OF COUP ON 9-11-1973 WHICH OVERTURNED A DEMOCRATICALLY ELECTED CHILEAN GOVERNMENT WHICH WAS REPLACED BY PINOCHET WHO KILLED TENS OF 1000'S.

BUSH 1 AND KISSINGER ARE DIRECTLY RESPONSIBLE FOR THIS COUP. NOW KISSINGER IS AN EXECUTIVE ON THE LARGEST COPPER MAGNATE IN THE WORLD WHICH IS BASED OUT OF CHILE, WHICH HAS THE LARGEST COPPER MINES.

IT WOULD BE GOOD IF HIS COMMODITIES ARE IN THE COMMODE.

THE CHILEAN EXPERIMENT WAS THEIR POSTER CHILD OF WHAT WE WERE TO ACCOMPLISH HERE. EVIDENTLY IT FAILED AND WE SHOULD TAKE IMMEDIATE HEED TO THIS DANGER.

TOM DELAY CONSIDERED THE STATE DEPT AND THE DEPT OF EDUCATION AS UNCONSTITIONAL. OF COURSE ALL REPUBLICANS WAS TO STARVE THE BEAST ( SOC SEC, ETC ) AND THEN DECLARE IT BROKEN SO THEY CAN DISMANTLE IT FOR CONTROL BY THEIR CRONIES.

THEREFORE THIS URGE TO TEAR UP OUR STABILITY AND INFRASTRUCTURE FOR RETIREMENT IS EVIDENTLY FROM THE SAME STRAIN OF NEOCONSERVATIVE HOGWASH THAT IS SELLING OUT AMERICA AND LEAVING US IN THE MOST PRECARIOUS POSITION EVER.

Mike Norman said...

Yes, good points. Italy, too, went to a partially privatized pension system and it has turne out to be a disaster for those who opted to put their retirement savings in it. Now Italy is no longer a sovereign currency issuing nation; the Italian gov't can no longer just credit bank accounts to bail anyone out. They're in big trouble and why I think at some point Italy will withdraw from the Eurozone and go back to being a currency issuer. Gold standards have never worked and the Eurozone in its currenty structure imposes the same constraints on member nations as a gold standard does. It may take time, but it's almost a certainty that some nations will opt to abandon this arrangement. If a few do, then the whole thing falls apart.

googleheim said...

You also presented the opposite, but equally important, almost balancing concept today - that the snapshot of the private side banking is just momentary and should not be reason to tear up the private free market either.

Those who blame the government and those who blame the private sector - yadda etc - maybe to the right or left - on both blame games or on just one !!

Eric Coflaws' show had the Ayn Rand institute guy on today and they blame the government for opening the door to people to get a house and some how this is the cause of the whole problem. According to the free marketism - the free market should have been able to take care of this summer 2007 so that a stronger market would emerge.

Same program ( or maybe was Rowe's guest ) blames the 20 year olds with Phd's who created the exotic derivative instruments but that is not true at all. Many middle aged American, Russian, German, and other international mathematicians and physicians created these models and products which overleveraged 30:1 Besides the older folks were the bosses, so what were they doing getting involved in things they could not understand ??

Now, which is the bigger multiplier? The liar loans or the 30:1 overleverage ?

Again, if tax oversight had been in effect as you pointed out last summer, then this could have helped to mitigate the overleverage which is the real problem and not the false predicate logic that one migrant worker who qualified for a loan with a $15000 salary caused the whole economy to crater. His $750,000 house could have been sold for 10% less to the Del Walmsebly type of folk would have forced it back up to over a million, right ?

There is no free market not because Ayn Rand is trying to cover up their inherent fallacies by blaming a meddling government, there is no free market because of opaque, nontransparency which breeds collusion and speculation on pricing and economies of scale.

If Ayn Rand logic is so objective, and the director says that "there is no free market due to the government" , then why did they not predict this in 2004 ?

Even the tax rebates from Bush were really democrat-type handouts that were market manipulations by the government.

Mike Norman said...

These people should just get over it. All governments--everywhere--regardless of their ideological orientation (capitalist, communist, socialist, etc), exist for the public purpose. People get together and create government for that reason, thus, ALL policy flows forth from one single concept: the desire to achieve some public policy objective (defending the nation, creating vibrant market economies, creating shared wealth with no private ownership, educating the citizenry, or not educating them, etc). The notion that gov't is set up to be a profit seeking enterprise is laughable in how misguided that notion is. Furthermore, the assertion that in free market and capitalist oriented societies government's role should be strictly limited is naive. In today's world, where nations routinely employ policy to gain comparative advantage, any society that limited its own government's role in counterbalancing attempts by others to gain advantage would soon find itself with a lower standard of living vis-a-vis the rest of the world. Remember one thing: Ayn Rand was a novelist.