Economic Crisis – Page 9 – artdiamondblog.com

Macro Policy Should Be Less Interventionist, More Rules-Based, and More Predictable

(p. 165) This article reviews the role of monetary and fiscal policy in the financial crisis and draws lessons for future macroeconomic policy. It shows that policy deviated from what had worked well in the previous two decades by becoming more interventionist, less rules-based, and less predictable. The policy implications are thus that policy should “get back on track.”

For the full article, from which the above abstract is quoted, see:
Taylor, John B. “Getting Back on Track: Macroeconomic Policy Lessons from the Financial Crisis.” Federal Reserve Bank of St. Louis Review 92, no. 3 (May-June 2010): 165-76.

Alexander Field Claims 1930s Were “Technologically Progressive”

Source of book image: http://yalepress.yale.edu/images/full13/9780300151091.jpg

(p. 1) UNDERNEATH the misery of the Great Depression, the United States economy was quietly making enormous strides during the 1930s. Television and nylon stockings were invented. Refrigerators and washing machines turned into mass-market products. Railroads became faster and roads smoother and wider. As the economic historian Alexander J. Field has said, the 1930s constituted “the most technologically progressive decade of the century.”
. . .
(p. 6) The closest thing to a unified explanation for these problems is a mirror image of what made the 1930s so important. Then, the United States was vastly increasing its productive capacity, as Mr. Field argued in his recent book, “A Great Leap Forward.” Partly because the Depression was eliminating inefficiencies but mostly because of the emergence of new technologies, the economy was adding muscle and shedding fat. Those changes, combined with the vast industrialization for World War II, made possible the postwar boom.
In recent years, on the other hand, the economy has not done an especially good job of building its productive capacity. Yes, innovations like the iPad and Twitter have altered daily life. And, yes, companies have figured out how to produce just as many goods and services with fewer workers. But the country has not developed any major new industries that employ large and growing numbers of workers.

For the full commentary, see:
DAVID LEONHARDT. “The Depression: If Only Things Were That Good.” The New York Times, SundayReview Section (Sun., October 9, 2011): 1 & 6.
(Note: ellipsis added.)
(Note: online version of the commentary is dated October 8, 2011.)

Book discussed:
Field, Alexander J. A Great Leap Forward: 1930s Depression and U.S. Economic Growth, Yale Series in Economic and Financial History. New Haven, CT: Yale University Press, 2011.

Technology Allows Start-Ups to Launch with Fewer Employees

“Start-up BiteHunter launched with three employees. Above, co-founders Gil Harel, left, and Ido Shilon.” Source of caption and photo: online version of the WSJ article quoted and cited below.

Lower costs to entry means more start-ups and that means more innovation, ceteris paribus. All good. For the labor market, there will be fewer initial jobs per start-up. But there will be more start-ups, and more opportunity for erstwhile laborers to themselves become entrepreneurs. So maybe still all good.

(p. B5) New businesses are getting off the ground with nearly half as many workers as they did a decade ago, as the spread of online tools and other resources enables start-ups to do more with less.

The change, which began before the recession, may be permanent, according to some analysts.
. . .
Rather than purchasing the tools and manpower needed to run their companies, more small firms are renting, sharing or outsourcing resources, typically through online services, according to Steve King, a partner at Emergent Research, a research and consulting firm for small businesses.
. . .
Last year, Gil Harel launched BiteHunter, a search engine for restaurant discounts, with just three employees. Based in New York, the site used shared screens and other communications tools to work with developers in Russia, Uruguay and Israel.
“Just to build the infrastructure to get a business off the ground used to take a lot of money and people. But things that you couldn’t do in the past, you can now do on your own,” Mr. Harel says.

For the full story, see:
ANGUS LOTEN. “With New Technology, Start-Ups Go Lean; Web-Based Services Mean Fewer Workers Needed.” The Wall Street Journal (Thurs., September 15, 2011): B5.
(Note: ellipses added.)

A Firm’s Social Responsibility Is to Make a Profit

(p. B1) Milton Friedman, the Nobel laureate economist, blasted the very idea of corporate social responsibility four decades ago, calling it a “fundamentally subversive doctrine.” Speaking for many capitalists then and now, he said, “there is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.”
Companies shouldn’t spend profits on unrelated job creation or social causes, he said. That money should go to shareholders–the owners of the companies. Pronouncements about corporate social responsibility, he added, are the indulgence of “pontificating executives” who are “incredibly shortsighted and muddleheaded in matters that are outside their businesses.” And that indulgence can lead to inefficient markets.
. . .
(p. B2) “Jobs are an input, not an output; they’re a cost of doing business, not a goal of doing business,” says William Frezza, a Boston-based venture capitalist and fellow at the Competitive Enterprise Institute.
“From the perspective of defending capitalism, if you accept the premise of your opponent that business has to give back to society, you’ve already lost,” he says. “To put sack cloth and ashes on–you’ve delegitimized capitalism, which is the goal of the protesters. Businesses give back to society every day by pleasing their customers and employing their employees. There’s nothing business owes other than selling the best product at the best price.”

For the full commentary, see:
JOHN BUSSEY. “THE BUSINESS; Are Companies Responsible for Creating Jobs?.” The Wall Street Journal (Fri., October 28, 2011): B1-B2.
(Note: ellipsis added.)

Behavioral Economics Does Not Undermine Capitalism

Source of book image: http://www.brainpickings.org/wp-content/uploads/2011/10/thinkingfastandslow.jpg

Daniel Kahneman first gained fame in economics through research with Tversky in which they showed that some of economists’ assumptions about human rationality do not always hold true.
Kahneman, whose discipline is psychology, went on to win the Nobel Prize in economics, sharing the prize with Vernon Smith. (Since the Prize is not normally awarded posthumously, Tversky was not a candidate.)
I have always thought that ultimately there should be only one unified science of human behavior—not claims that are “true” in economics and other claims that are “true” in psychology. (I even thought of minoring in psychology in college, before I realized that the price of minoring included taking time-intensive lab courses where you watched rats run through mazes.)
But I don’t think the implications of current work in behavioral economics are as clear as has often been asserted.
Some important results in economics do not depend on strong claims of rationality. For instance, the most important “law” in economics is the law of demand, and that law is due to human constraints more than to human rationality. Gary Becker, early in his career, wrote an interesting paper in which he showed that the law of demand could also be derived from habitual and random behavior. (I remember in conversation, George Stigler saying that he did not like this paper by Becker, because it did not hone closely to the rationality assumption that Stigler and Becker defended in their “De Gustibus” article.)
The latest book by Kahneman is rich and stimulating. It mainly consists of cataloging the names of, and evidence for, a host of biases and errors that humans make in thinking. But that does not mean we cannot choose to be more rational when it matters. Kahneman believes that there is a conscious System 2 that can over-ride the unconscious System 1. In fact, part of his motive for cataloging bias and irrationality is precisely so that we can be aware, and over-ride when it matters.
Sometimes it is claimed, as for instance in a Nova episode on PBS, that bias and irrationality were the main reasons for the financial crisis of 2008. I believe the more important causes were policy mistakes, like Clinton and Congress pressuring Fannie Mae and Freddie Mac to make home loans to those who did not have the resources to repay them; and past government bailouts encouraging finance firms to take greater risks. And the length and depth of the crisis were increased by government stimulus and bailout programs. If instead, long-term cuts had been made in taxes, entrepreneurs would have had more of the resources they need to create start-ups that would have stimulated growth and reduced unemployment.
More broadly, aspects of behavioral economics mentioned, but not emphasized, by Kahneman, can actually strengthen the underpinnings for the case in favor of entrepreneurial capitalism. Entrepreneurs may be more successful when they are allowed to make use of informal knowledge that would not be classified as “rational” in the usual sense. (I discuss this some in my forthcoming paper, “The Epistemology of Entrepreneurship.”)
Still, there are some useful and important examples and discussions in Kahneman’s book. In the next several weeks, I will be quoting some of these.

Book discussed:
Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.

The Becker article mentioned above is:
Becker, Gary S. “Irrational Behavior and Economic Theory.” Journal of Political Economy 70, no. 1 (Feb. 1962): 1-13.

The Stigler-Becker article mentioned above is:
Stigler, George J., and Gary S. Becker. “De Gustibus Non Est Disputandum.” American Economic Review 67, no. 2 (March 1977): 76-90.

Tax Hikes Punish Hard Work and Reduce Incentives to Invest

(p. A15) The supply-sider has a different view from both the Keynesian and the budget balancer. Fundamentally, supply-side advocates focus on the harmful effects of tax increases. Raising tax rates hurts the economy directly because tax hikes reduce incentives to invest and because they punish hard work. As such, tax increases slow growth. But budget cuts work in the right direction by making lower tax revenues sustainable. If spending exceeds revenues, then the government must borrow and this commits future governments to raising taxes in order to service the debt.
. . .
On the tax side, there is strong evidence that supports the supply-siders. Christina Romer, President Obama’s first chairwoman of the President’s Council of Economic Advisers, and David Romer document the strong unfavorable effect of increasing tax rates on economic growth (American Economic Review, 2010). They report that an increase in taxes of 1% of gross domestic product lowers GDP by almost 3%. The evidence on government spending also suggests that high spending means lower growth.
For example, Swedish economists Andreas Bergh and Magnus Henrekson (Journal of Economic Surveys 2011) survey a large literature and conclude that an increase in government size by 10 percentage points of GDP is associated with a half to one percentage point lower annual growth rate.

For the full commentary, see:
EDWARD P. LAZEAR. “OPINION; Three Views of the ‘Fiscal Cliff’; It’s the tax increases we have to fear. Spending cuts won’t hurt the economy.” The Wall Street Journal (Mon., May 21, 2012): A15.
(Note: ellipsis added.)
(Note: the online version of the commentary is dated May 20, 2012 and has the title “OPINION; Edward Lazear: Three Views of the ‘Fiscal Cliff’; It’s the tax increases we have to fear. Spending cuts won’t hurt the economy.”)

The Romer and Romer paper mentioned is:
Romer, Christina D., and David H. Romer. “The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks.” American Economic Review 100, no. 3 (June 2010): 763-801.

The Bergh and Henrekson paper mentioned is:
Bergh, Andreas, and Magnus Henrekson. “Government Size and Growth: A Survey and Interpretation of the Evidence.” Journal of Economic Surveys 25, no. 5 (Dec. 2011): 872-97.

“An Entrenched Favors-for-Votes Culture Is Now Coming Unglued”

“Akis Tsochatzopoulos on April 11 became the highest-ranking Greek official ever to be detained on corruption charges.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. A6) Prosecutors accuse the former defense minister, Akis Tsochatzopoulos, 73, a founding member of the Socialist Party and the highest-ranking Greek official ever to be detained on corruption charges, of pocketing at least $26 million in kickbacks for Greece’s purchase of submarines and missile systems and funneling the money through offshore accounts to buy property.
. . .
The case of Mr. Tsochatzopoulos (pronounced zok-at-ZOP-ou-los) marks the rise — and perhaps fall — of a political culture that has dominated Greece for decades, in which alternating Socialist and center-right New Democracy governments helped spread the spoils and, critics say, the corruption, during the boom years. That system helped drive up Greece’s public debt to the point that it was forced to seek a foreign bailout in 2010.
As the money has run out, an entrenched favors-for-votes culture is now coming unglued, and Greeks have become less forgiving of high-level missteps.

For the full story, see:
RACHEL DONADIO and NIKI KITSANTONIS. “Corruption Case Hits Hard in a Tough Time for Greece.” The New York Times (Thurs., May 3, 2012): A6 & A11.
(Note: ellipsis added.)
(Note: the online version of the story is dated May 2, 2012.)

The One Percent’s Quick History: “We Worked Hard, We Went to College, We Tried to Better Our Lives”

(p. F1) SOON after the Occupy Wall Street encampment was set up at Zuccotti Park in Manhattan last fall, 26-year-old Ryan Quick told his father, Leslie C. Quick III, a financier, that he might drop by the site.

“Don’t you even let me see you over there,” the father replied.
The senior Mr. Quick later said that he and his son were both “half-kidding” each other. But he need not have worried about any class rebellion. According to Mr. Quick, his son came back from his visit and said: “It just looks like a Phish concert. It’s difficult to get engaged by something that doesn’t really have a purpose.”
As scions of a family that co-founded Quick & Reilly, a pioneering discount brokerage firm acquired for $1.6 billion by another company in 1997, the Quicks are undoubtedly among the “1 percent” — the wealthiest 1 percent of Americans targeted by the Occupy Wall Street movement. Indeed, having made their fortune in finance, the Quicks might be particular targets.
. . .
(p. F5) “Almost all my clients are self-made,” said Christopher J. Cordaro, chief executive of RegentAtlantic Capital, a wealth management firm based in Morristown, N.J., whose clients have at least $2 million in investable assets. “They’re saying, ‘We worked hard, we went to college, we tried to better our lives. Isn’t that what I’m supposed to do?’ ”
That is also the Quick family’s history. When he joined the year-old family firm after graduating from college in 1975, Leslie Quick recalled, “we didn’t know if my father was going to declare bankruptcy or this discount brokerage thing was going to work.”

For the full story, see:
FRAN HAWTHORNE. “Color the 1 Percent 99 Percent Conflicted.” The New York Times (Thurs., February 9, 2012): F1 & F5.
(Note: ellipsis added.)
(Note: the online version of the article is dated February 8, 2012.)

“Mind-Your-Own-Business Cowboy Libertarianism”

“Gov. Matt Mead at a meeting in the Capitol in Cheyenne. A portrait of his grandfather Clifford P. Hansen, a former governor, hangs behind him.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. A15) If Washington is broken and unable to lead — as millions of Americans believe, according to polls — then who is left to fill the void? Mr. Mead’s answer: States functional enough to soldier on through a time of dystopian crisis should be given the room to run. Whether they are led by conservatives or liberals does not matter so much, he said, as the ability to get things done.

“There certainly have to be national policies, and national rules and regulations — I understand that,” Mr. Mead, 49, a Republican and former prosecutor, said in an interview in his office here. “But I am in part a states’ rights guy because I think we can do so many things better.”
Better or not, Wyoming’s way — always idiosyncratic in the windblown, rural grain that mixes mind-your-own-business cowboy libertarianism and fiscal penny-pinching — is getting its moment in the spotlight.

For the full story, see:

KIRK JOHNSON. “STATEHOUSE JOURNAL; Idiosyncrasy Runs Deep in the Soil of Wyoming.” The New York Times (Fri., November 25, 2011): A15.
(Note: the online version of the story is dated November 24, 2011.)