How do you disprove an Economic Theory?

[iNow]

I still am unsure if you grasp just how much my simple point dismantles yours. You are suggesting it was the US government policies and regulation and lending targets that fed the crisis and led to the suffering. You have not addressed how this had anything whatsoever to do with the fact that this was not a crisis isolated to the US, but was global in nature. You can't ignore what happened at the exact same time in other countries just to maintain your position.

 

If the US were the only ones to experience this crisis, you might have a point about what federal programs or targets might have done to feed it. However, the breakdown was global. That right there shows why your arguments are a bit lacking. They don't explain what actually happened. They don't explain the reality we faced. They don't hold up under even remedial scrutiny. They appear to do little more than rationalize for you an inaccurate narrative that you seem reluctant to challenge and ultimately abandon.

 

 

http://www.nytimes.com/2011/12/24/opinion/nocera-the-big-lie.html

http://www.washingtonpost.com/business/what-caused-the-financial-crisis-the-big-lie-goes-viral/2011/10/31/gIQAXlSOqM_story.html

http://www.washingtonpost.com/business/examining-the-big-lie-how-the-facts-of-the-economic-crisis-stack-up/2011/11/16/gIQA7G23cN_story.html

 

 

Another point against your CRA claims (you know, besides the fact that the crisis was global and not isolated to the US): areas disproportionately served by lenders covered by the CRA experienced lower delinquency rates and less risky lending than the rest of the country. Shiny. http://www.federalreserve.gov/pubs/feds/2011/201136/201136abs.html

 

Fannie defaulted at about half the rate of private sector loans. Shiny again. http://www.nytimes.com/2011/12/20/opinion/nocera-an-inconvenient-truth.html

 

Finally, for even more sparkle, we have this conclusion from Bloomberg: "Other analysts say the lure of profits, not government encouragement, prompted companies to get into subprime. From 2001 to 2005, private lenders’ share of mortgage-backed security issuance rose to 55.2 percent of the market from 19.7 percent."

[JustinW]

I still am unsure if you grasp just how much my simple point dismantles yours. You are suggesting it was the US government policies and regulation and lending targets that fed the crisis and led to the suffering. You have not addressed how this had anything whatsoever to do with the fact that this was not a crisis isolated to the US, but was global in nature. You can't ignore what happened at the exact same time in other countries just to maintain your position.

I'm not ignoring it. The link you gave, along with graph, actually explained the reason the rest of the world felt an impact. It was express in that link along with what I had stated previously that it was a result of the Federal Reserve's actions.

 

 

Another point against your CRA claims (you know, besides the fact that the crisis was global and not isolated to the US): areas disproportionately served by lenders covered by the CRA experienced lower delinquency rates and less risky lending than the rest of the country.

Probably because the banks that were forced to buy the CRA mortgage securities wouldn't have done so in the first place, but since were forced to do so, stayed at the minimal amount of risk that would still qualify for CRA acceptance.

 

 

Fannie defaulted at about half the rate of private sector loans.

It's funny you should mention fannie, since most of the CRA backed securities were securitized by freddie.

 

"Other analysts say the lure of profits, not government encouragement, prompted companies to get into subprime. From 2001 to 2005, private lenders' share of mortgage-backed security issuance rose to 55.2 percent of the market from 19.7 percent."

Also I never said that private companies didn't follow the same path that fannie and freddie did. But my origional point in including fannie and freddie was to establish that, YES, government was involved and partly responsible for the instability of that crisis. Even with a lot of private investment into subsidised loan bundleing, they were still investing through GSE's with an assurance of backing from the US treasury.(wich they got)

 

Even your links have stated that the crisis here and abroad started with the actions of the Federal Reserve through monetary expansion and the reduction of interest rates. I believe that has shown to be direct link between government action and instability in markets.

Edited January 18, 2012 by JustinW

[iNow]

Here's what the sources says, word for word:

 

We must distinguish between US legislative policy — and that includes Fannie/Freddie and the CRA — with the monetary policy of the US Federal Reserve, and its impact around the world.

 

American legislative policies had some impact domestically, but the total result of the CRA was not global, not was the GSE impact Global. Hence, how could FNM/FRE/CRA cause a global housing boom & bust? Answer, it didn’t.

 

The US Federal Reserve’s monetary policy, on the other hand, did have a global impact. The US has the world’s reserve currency, the biggest economy and the most important central bank. When the Fed took rates down to 1%, it had an ginormous impact on everything priced in debt, dollars or leverage. That includes housing, around the world.

 

Yes, we stipulate that the FED influences the global economy with its decisions. It does seem to me, however, to be a bit of an oversimplification to suggest that they caused instability in the markets and to imply that they caused the meltdown, especially adherence to such a position forces you to ignore the action and behavior of the European, Asian, and middle eastern / oil-petrol countries central banks.

 

I guess I'm not going to shake you from your narrative no matter how much information I share, am I?

 

You just want to blame the big bad government for intervening and screwing up the perfect invisible hand of the market and call it a day, right?

[JustinW]

I guess not, and I fear we may have been off topic for awhile even though it was closely related.I will concede to you that you probably have a good point in saying that the private market had it's part to play. But I remain unmoved considering the actions of multiple government agencies and feel they had their part to play as well. I also remain adament that either it wouldn't have been as bad, or might have been averted altogether had the government not been involved. As you may recall this is how this whole debate got started in the first place.

 

This is what I've said all along about the difficulty of testing an economic theory. You might as well not even try unless that theory takes into account any possible authoritative manipulations.

 

 

 

You just want to blame the big bad government for intervening and screwing up the perfect invisible hand of the market and call it a day, right?

Do you not agree that the government has been BIG and BAD over the last decade or more? It seems as though the bigger it gets the badder it gets also. (i know badder is not a word)

[iNow]

Except, the US government is really no bigger today than it was in the past. It's just that expenditures on social safety net programs like unemployment insurance and food stamps and Medicaid have gone up at the same time that revenues and GDP have gone down. So, as a percentage of GDP, yes... It appears that government is growing monstrously. But, it's not. That spending is on social safety net programs during a deep and prolonged recession, at a time when tax revenues are down and GDP is down... while at the same time there is a higher number of baby boomers entering social security and medicare benefits, and a really small fraction is from the one-time stimulus package that kept the economy from falling off a giant cliff, but that was temporary. On top of that, Obama actually has nearly half a million FEWER government employees now than when he took office AND has less people working for government than Ronald Reagan himself.

 

Looked at closely, they're not the monster government boogeyman that Fox News commentators and tea party or libertarians make them out to be. These people seem to consistently focus on ideology over facts, and it's annoying as hell.

 

http://krugman.blogs.nytimes.com/2011/07/29/the-truth-about-federal-spending/

http://krugman.blogs.nytimes.com/2011/11/27/the-obama-spending-non-surge/

Edited January 18, 2012 by iNow

[iNow]

---

Another post from a normally MUCH more conservative and ideological source confirming the lack of government expansion:

 

 

http://online.wsj.com/article/SB10001424052970204468004577164820504397092.html?mod=googlenews_wsj

 

Try to ignore the current shallowness in American politics, if you can, and assume that the federal budget deficit will be among the major issues of the 2012 campaign. It certainly should be, for while everyone wants a lower deficit, the two parties have starkly different visions of how to get there.

 

Sadly, however, the public debate over the deficit is full of misconceptions and falsehoods. Remember the Moynihan Principle? The late senator from New York once said that everyone is entitled to his own opinion, but not to his own facts. In that spirit, I'd like to explode four myths now masquerading as facts.

 

<...>

 

What drives this projected deficit explosion? That question brings us to:

 

• Myth No. 4 is that America has a generalized problem of runaway spending, one that requires cuts across the board. No. The truth is that we have a huge problem of exploding health-care costs, part of which shows up in Medicare and Medicaid spending.

 

<...>

 

The CBO projects federal spending on all purposes other than health care and interest to be roughly stable as a share of GDP from 2015 to 2035, and then to drift lower. So no, America, we don't have a generalized overspending problem for the long run. We have a humongous health-care problem.

 

If we could replace the Four Myths by the Four Facts, that would transform the nature of the public debate, focusing attention on what matters rather than what does not. But alas, this is an election year, creating an environment in which facts don't flourish. <read more>

[JustinW]

Except, the US government is really no bigger today than it was in the past.

 

How many czars do we have now? I keep losing track. But I do concede to this because it probably just seems bigger to me with all of the hysteria and I haven't looked at the actual number of government employees. Though it does seem like a lot even if it is less than previous administrations.

[Essay]

JW, rather than focus on tweaks to the system in any particular year (and trying to blame those), it might help to look at the big picture. If you look at the rise to dominance of our GDP, by the financial sector, then you can see that most of the "growth" over the past few decades has been only supported by that sector.

 

Next, you need to see that loans were the only "commodity" with enough volume to circulate among enough people to provide everyone with some profit. That is the way economies are supposed to work; commodities (and value added products made from basic commodities) are produced and circulated to consumers, and people take a little profit along the chain. That always seems to work with tangible commodities.

===

 

The financial sector did the same thing with loans, treating them as a commodity and trying to generate more loans (and derivatives of existing loans) to produce enough volume of commodity so everyone (involved with the financial sector) could make some profit as the commodity circulated.

 

On paper is seems to make sense, but in reality loans are not a tangible commodity with intrinsic value. Plus they are only circulated within the financial sector, so the chain of profit does not flow out to any consumer outside of the financial sector.

 

It does keep our GDP looking big, but it is based on a house of (paper loans) cards.

And we exported this strategy to most of the rest of the developed world. A few countries had laws restricting such activities, such as Canada and Germany (and Japan wasn't eligible) so they are doing much better now, as are many developing countries which were not "stable enough to take advantage" of such a neat trick.

 

But as a big picture strategy to make money (without producing anything of value) it is not sustainable, especially on a global scale.

 

I agree that the government let this happen. They wanted to keep the GDP up, and the financial sector had ideas on how to do that. As the scheme succeeded, more enthusiasm (lobbying) snowballed, restrictions on creative financing were rolled back, and here we are today. I blame the physicists who provided the business folks with formulas to get so creative with finances, but that doesn't change where we are now or what we need to do--focus on creating tangible value--getting away from ideologies and back to the basics of economic theory.

===

~

 

But about "bigger" government specifically....As the economy shrank over the past few years, the relative proportion of the govt. slice has, of course seemed to grow (relatively); but the growth of the Homeland Security Dept. is very real and does contribute to the fraction of GDP that government is contributing to....

===

 

~

 

p.s. Physicists: please don't get mad about my comment; it's just (mostly) a joke!

[JustinW]

Essay, That makes sense. My reason for arguing the point that stubbornly with iNow was because of my belief that government involvement is usually a negative factor in the growth of an economy. Also the fact that an economic model cannot be accurately tested unless that model provides for governmental manipulation. Which our current free market model, by intent, didn't origionally allow for other than taxation and foreign policy. I noticed you had mentioned that you agreed that government let this happen but didn't say if you thought it was either their action or inaction. This too is where I had a difference with iNow. I believe that they not only let it happen but actually fed its progression. That is the reason for my attention on the tweaks in a given year. I figure with their actions combined that it is obvious that government fed the problem instead of tried to solve it. Heck, it was them who said that there was no problem.

Edited January 19, 2012 by JustinW

[iNow]

I noticed you had mentioned that you agreed that government let this happen but didn't say if you thought it was either their action or inaction. This too is where I had a difference with iNow. I believe that they not only let it happen but actually fed its progression. That is the reason for my attention on the tweaks in a given year. I figure with their actions combined that it is obvious that government fed the problem instead of tried to solve it. Heck, it was them who said that there was no problem.

If I'm not mistaken, though, your argument was that it was their regulations that fed the problem... that they interfered in any way with the quote unquote perfect market with it's completely obscured limbs (that's an invisible hand reference for those only paying minimal attention). I don't think you were suggesting that their steps toward a deregulated system were to blame, especially given that you suggested regulations had increased during this time (a point a I feel I successfully countered)... and this point about it being too much regulation that led to the crisis (if that is indeed the point you're making) seems to be in violent disagreement with the multiple expert analyses of the crisis I've shared.

[Vent]

....my belief that government involvement is usually a negative factor in the growth of an economy.

 

I think you have to be a little careful with ideas of this sort because the claim that government involvement hampers an economy is not necessarily the case. There's a number of reasons why you need to be careful, not least of which is that it actually isn't the case that they "always" have a negative effect, and they can actually have a very beneficial effect on an economy, especially if taken over the long term. Take Korea and Singapore for the two most often used examples. The government, especially in Singapore, actually built that economy and it's now one of the central hubs in the world. Yes, it could be argued that they took years to do it (over a decade for various ventures in Korea and over two decades for Singapore), and therefore the funds that they were directing into various avenues in these time periods were actually being redirected away from areas that the population would have directed them instead. But then take the other extreme where companies in the west (most notably the Plc's), don't drive their resources towards the benefit of the future but rather drive them into the pockets of the shareholders. It's about the quick buck. It's why they flip and merge then sell. Granted, this is easier in the UK than the US, but it's hardly a formula for prosperity i think you'll agree. So when taken over the long term a government can have a beneficial effect on an economy, especially when you pit it against companies being run in the short term interest of the stockholders.

 

There's also the law, which, for example, allowed legislation to be enacted (and therefore enforced over a whole nation), that allowed companies to expand their capital way beyond their personal funds. If it wasn't for limited liability, which was only possible in the manner it was done due to the monopoly over the law which governments hold, our nation's companies wouldn't have been able to accumulate the vast amount of capital that they have done that has led to a vastly improved standard of living for everyone. The wealth of our nations is due to the capital accumulation of the past, which has been possible on the scale that it has achieved due our governments allowing growth by credit to be secured on the assets of a company only. Yes, law doesn't have to be monopolistic, but the fact of the matter is that it is in the world today, so when arguing that governments hamper economies you should understand that you aren't (and can't), argue against regulation only. You are in fact arguing against the entirety of the system that we currently live under and therefore you shouldn't be surprised that it's not just as easy as getting government out of the economy for it to prosper but rather you are also arguing against the government holding the law as well. You are in fact arguing for a whole new way of doing things if you think through your argument thoroughly. It's an extremely intricate system that we have and is one of the reasons why, in my opinion, there's no room for the non-professional politician.

 

Just to be clear, yes there is room for argument and i'm certainly not trying to shut you down (there is plenty of room for argument in politics if you ask me because our system is anything but perfect), but it's not as simple and easy as just removing the regulation. In fact, it's probably political philosophy that you want to direct your energies if you want to be involved in the argument to change things, not economics. It's philosophy then law then economics, not economics, philosophy, law (although yes, they are wrapped quite tightly together).

[Essay]

I believe that they not only let it happen but actually fed its progression. That is the reason for my attention on the tweaks in a given year. I figure with their actions combined that it is obvious that government fed the problem instead of tried to solve it. Heck, it was them who said that there was no problem.

....I noticed you had mentioned that you agreed that government let this happen but didn't say if you thought it was either their action or inaction.

...I did mention lobbying ...and what about "lack of inaction" & "poor action" & counterproductive action...."

 

Yes, that is a big point. Government "let this happen" so to speak. But it is not a big conspiracy by the government to take our money. This happens through ignorance, corruption, greed, and powerplays. It co-evolves with the private sector, as those things always do. The government is us! We have reached the limits of complexity, and this is the result! ...so to speak....

 

 

Also, if you want to pick a point (and start looking at resetting the dials on our constantly evolving economic model), I might start with the Keating Five... back in 1989. [Wiki says: "The Keating Five were five United States Senators accused of corruption in 1989, igniting a major political scandal as part of the larger Savings and Loan crisis. Remember the S & L Crisis!?! ...and John McCain's role as one of the Five?

[...shows how old I am....]

"Fixing" that crisis led to regulations... leading to the banking scandal of the 90's, which then led to the repeal of Glass-Steagall, which set the stage for the abuses of the 2000's.

 

Why pick on 2001, (when we were desperate to stimulate our economy "temporarily" and everyone agreed--[recall the DotCom Bubble? & 9-11-2001?]) or are you of an age where that is about the most recent history of which you are aware?

 

....Which our current free market model, by intent, didn't originally allow for other than taxation and foreign policy.

...yea, about "original intent," you should bone up on Adam Smith and economic theory, and replace some of that economic ideology that drives your postings, imho.

===

 

here are some links and commentary on the topic:

 

 

http://mises.org/jou.../thornton12.pdf

 

http://www.goodreads...4424.Adam_Smith

"It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion."

― Adam Smith

 

http://www.jstor.org/pss/40325376

"Despite his legacy as a powerful advocate of free-market capitalism, Adam Smith's writings can support an active role for government in affecting the distribution of income in society."

 

http://www.econlib.o...bios/Smith.html

"It may surprise those who would discount Smith as an advocate of ruthless individualism that his first major work concentrates on ethics and charity."

 

"Adam Smith has sometimes been caricatured as someone who saw no role for government in economic life. In fact, he believed that government had an important role to play. Like most modern believers in free markets, Smith believed that the government should enforce contracts and grant patents and copyrights to encourage inventions and new ideas. He also thought that the government should provide public works, such as roads and bridges, that, he assumed, would not be worthwhile for individuals to provide. Interestingly, though, he wanted the users of such public works to pay in proportion to their use"

 

http://economistsvie...government.html

 

List of appropriate Govt. activities, per Adam Smith in Wealth of Nations.

 

"regulations of paper money in banking " -p.437

 

"rights of farmers to send farm produce to the best market (except 'only in the most urgent necessity') -p.539 OMG! An Exception! It's not totally Free!

 

"Premiums and other encouragements to advance the linen and woollen industries" Subsidies!

 

erecting and maintaining certain public works and public institutions intended to facilitate commerce (roads, bridges, canals and harbours) (WN723);

coinage and the mint (WN478; 1724);

post office (WN724);

 

regulation of institutions, such as company structures (joint- stock companies, co-partneries, regulated companies and so on) (WN731–58);

 

temporary monopolies, including copyright and patents, of fixed duration (WN754);

education of youth ('village schools', curriculum design and so on) (WN758–89);

 

http://www.futurecas...20Nations%20(II).htm

"The primary objective is to maximize the prosperity of the economy for the welfare of the people and the financial capabilities of the state." -A. Smith Hey, what about making personal profit!?!

 

With respect to capitalists, Smith is fairly evenhanded. He emphasizes equally their vital role and their many problems, along with their many weaknesses and abuses.

&

This exposition of the benefits of free competitive markets and government policies that facilitate commerce is distinctly liberal in its point of view. Always, the primary objective of the author is to maximize the prosperity of the economy for the welfare of the people and the financial capabilities of the state.

&

There are no simplistic laissez faire rationales here. In general, Smith opposes interventions that favor individual market participants or groups of participants, but favors policies that facilitate commerce as a whole or that prevent private parties from interfering with market mechanisms. Modern policies that he would favor would include:

 

Antitrust laws and disclosure-based securities regulations ....

 

Infrastructure projects - although, wherever practical, he preferred the private utility approach rather than government ownership. The need to properly regulate banks and the various aspects of the paper and virtual money supply and credit system also fall in this category as financial infrastructure.

 

Laws protecting the national interests against private interests. One of the concerns that is most pervasive in The Wealth of Nations is the extent to which the private interests of merchants and manufacturers are contrary to the national interest. It is thus reasonable to believe that Smith would favor such legislative and regulatory efforts - albeit again with considerable skepticism about the likelihood of objectivity and effectiveness - as Environmental laws, Occupational Health and Safety laws, Food and Drug safety laws, etc. They would be accepted warily - and constantly judged on the practical basis of their balance of benefits and burdens.

 

I tried to compose a paragraph about this, but gave up. Here are some links. Like the Bible, it is easy to find "counter" quotes and arguments from Adam Smith's writings, but I just wanted to indicate that the "original intent" saw many sides to the issue of a "free" market.

 

~

 

p.s. Don't get me wrong. I am in favor of capitalism and "free enterprise," but just not as the sole guiding principle of my political philosophy. That would be like a diet of pure sugar; not sustainable.

 

Pure "free enterprise" is more like survival of the fittest; and while I admire Darwin, I would like to think that there are some benefits to living in a society--over and above the "natural state" of a dog-eat-dog world. Hence we have governments to moderate the excesses. Adam Smith was a part of the Scottish Enlightenment... which you should also search and try to fit into your understanding of the evolution of economic models, imho....

Edited January 20, 2012 by Essay

[JustinW]

iNow,

If I'm not mistaken, though, your argument was that it was their regulations that fed the problem...

If you look back I never said that I thought there inactions didn't play apart as well. But yes, I did say their actions fed the problem. Also I said without those actions the crisis may not have been as bad or even averted altogether. I still say it as a matter of fact.

i Now,

that they interfered in any way with the quote unquote perfect market with it's completely obscured limbs

I never said I believed the market would be perfect without government involvement and if you look back several posts I specifically said as that I probably wouldn't even want it that way. Though I did say as the market would be steadier without that sort of involvement. My arguement was due to the fact that you presented your arguement in a way that seemed as though you thought the only way the government went wrong with that crisis was their inaction to correct the sircumstances. When I was itterating that it wasn't just their inaction but also there actions that fed the fire.

 

Vent and Essay, I will try to respond to you both in in a general way until I get some more time to read your links and think about the information you've provided.

 

I know it may seem as though I do not want government involved in any aspect that may effect our economy. This isn't exactly the case. I believe that a lot of things the government does has a possitive effect on how our economy is able to run. I believe in paying taxes for the institutions and infrastructures that are necessary for our way of life to be what it is. I also am not against certain regulations. As you can see by my posts it is not regulation that I argue against but mandates and aggressive actions. The government was giving quotas, dropping rates of interest, and dropping other rates to provide for people to get these loans that would have not qualified otherwise. I guess my overall point was that governments action and inaction was at fault when looking at how the government may be, at some level, responsible. I think it is absurd to say that government had NO fault though.

Edited January 20, 2012 by JustinW

[Vent]

I think it is absurd to say that government had NO fault though.

 

Of course. The government has consequences in every transaction that's made in the market. It has a blanketing nature, due in large part to the law. Unravelling every effect it has on each trade would be a mammoth task.

[JustinW]

Of course. The government has consequences in every transaction that's made in the market. It has a blanketing nature, due in large part to the law. Unravelling every effect it has on each trade would be a mammoth task.

But one that is necessary to promote a more stable economy, wouldn't you think?

[Vent]

Sounds like a reasonable idea.

[TruthSleuth]

" . . .and neo-Keynesianism is our best current model, and the most accurate tool available for viewing today's markets when used correctly."

Then "our best current model" has gotten us in really bad shape.

 

"When people disagree with his [Keynes] work, it's disagreement based on ideology and personal political beliefs, not evidence or empiricism."

Ideology is a "system of ideas and ideals, especially one that forms the basis of economic or political theory and policy" (New American Oxford Dictionary). This is exactly what we're talking about here along with evidence.

 

Recall that Keynes said in his forward to the 1936 German edition of his General 'Theory' that was sent to Hitler: "The theory of aggregate production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire. This is one of the reasons that justifies the fact that I call my theory a general theory."

 

First off, Keynes misused the word 'theory.' It should have been hypothesis. Since this is a science forum, we should call it what it is. The American Association for the Advancement of Science (and similarly the US National Academy of Sciences) states: "A scientific theory is a well-substantiated explanation of some aspect of the natural world, based on a body of facts that have been repeatedly confirmed through observation and experiment. Such fact-supported theories are not "guesses" but reliable accounts of the real world." None of which was true for his ideology at that time nor today.

 

If Keynesianism works best in a totalitarian state I'd also be leery that a state would seek to get to that best totalitarian state. Oh, wait, we're heading in that direction.

 

Back to, "How do you disprove an economic hypothesis?" Several reasons make it difficult, but not impossible. Psychology has already been mentioned. Confirmation bias is a really big player under that heading. But the most difficult reason to deal with is getting true data and information about the reigning state. Every administration for the last forty years has changed the definition, baseline, etc. for how they reported various numbers. Talk about fuzzy numbers. It was serious enough that an ex-government wonk, John Williams, created his website (http://www.shadowstats.com/): Shadow Government Statistics: Analysis Behind and Beyond Government Economic Reporting. He has many free charts there, but he sells subscriptions for his in-depth data and analysis. His clients are mostly businesses and corporations that need to plan based on real numbers.

 

Inflation is reported by the Bureau of Labor Statistics (BLS) in the form of the CPI. Supposedly it would take a hypothetical basket of thirty goods that most everyone buys and track its cost over time. In 1996, President Clinton formed the Boskin Commission and implemented their findings. So, now instead of simply measuring that basket of goods from one year to the next, they would use substitution, weighting, and hedonics on this basket.

 

For substitution, they proposed that if item A goes up in price, people will substitute a cheaper item B. I don't believe I did that on any item in the original basket. Using substitution the BLS calculated that food costs went up 4.1% from 2007 to 2008. However, the Farm Bureau, which just tracks it directly, calculated that same basket of thirty items went up 11.3%.

 

If basket items rise in price too quickly, the BLS applies a "geometric weighting" factor to lower their impact on the basket. So, while part of the government said that healthcare was about 17% of the economy, the BLS weighted it as only 6% in the CPI basket, because healthcare is rising too quickly.

 

Now we come to the most unbelievable adjustment of all, hedonics (the pleasure of). In 2004, the BLS recorded that a new 27 inch TV was selling at $329.99. This was the same as the prevous year's price, but it had a better screen. They surmised that this better screen was worth $135, subtracted $135 from the total price and reported that TV prices had fallen by 40%. Never mind that the TV still cost $329.99 in the store then. To make it even worse, they only apply hedonics to their benefit (i.e. reporting inflation as lower). They will use a discount on newer telephones because they have more features than the older wired phones. However, they don't adjust any for the fact that the old ones last thirty years and the new ones only a couple of years. Hedonics are now applied to everything from automobiles, dryers, refrigerators, washers, to college textbooks. Hedonics adjust as much as 46% of today's CPI. The BLS using the official methodology for computing CPI-U reported it as 3% for 2011. John Williams calculates, without the fuzzy math using the pre-1980 basis, today's CPI is 11% through December 2011.

 

A handy chart reference, compiled by a bipartisan group, is USA, Inc. - A Basic Summary of America's Financial Statements, February 2011. The forward states, "By imagining the federal government as a company, they provide a simple framework for understanding our current situation. They show how deficits are piling up on our income statement as spending outstrips income and how our liabilities far exceed nominal assets on our balance sheet. ...The authors' ingenious indirect approach is to ask what a turnaround expert would do and what questions he or she would ask. The report describes how we first stumbled into this mess, by failing to predict the magnitude of program costs, by creating perverse incentives for excessive behavior, and by missing important trends. By pointing to the impact of individual responsibility, USA Inc. gives us reason to believe that a practical solution exists and can be realized."

 

 

This is an excellent place to start to get a handle on the actual numbers and magnitude of the problem without even talking about economic philosophies.The free PDF is available here: www.kpcb.com/usainc.

[iNow]

" . . .and neo-Keynesianism is our best current model, and the most accurate tool available for viewing today's markets when used correctly."

Then "our best current model" has gotten us in really bad shape.

Your conclusion is only valid if we assume that those in power and making the decisions used the model correctly, or at all. They didn't. You may as well be blaming algebra itself for the economic collapse. This is not a persuasive argument you've just made.

 

 

"When people disagree with his [Keynes] work, it's disagreement based on ideology and personal political beliefs, not evidence or empiricism."

Ideology is a "system of ideas and ideals, especially one that forms the basis of economic or political theory and policy" (New American Oxford Dictionary). This is exactly what we're talking about here along with evidence.

Sorry, but no. Evidence stands independent from ideology, and is consistent regardless of worldview. My point is that people seem to ignore said evidence when it rebuts what they want to believe and what they wish were true. In the few short posts I've read from you, you've quickly identified yourself as a person who prizes opinion over fact. If I'm mistaken, and you do value evidence and truth over ideology, then the most slack I can cut you is that you're horribly misinformed and in need of correction.

 

 

Recall that Keynes said in his forward to the 1936 German edition of his General 'Theory' that was sent to Hitler: <snip> First off, Keynes misused the word 'theory.' It should have been hypothesis. <snip> If Keynesianism works best in a totalitarian state I'd also be leery that a state would seek to get to that best totalitarian state. Oh, wait, we're heading in that direction.

There are a few easy challenges to your point. One, you rely on a lot of hyperbole instead of logic and reason. Two, you seem to attack the person instead of the merit of their suggestions. Three, you appear to forget that a lot has been learned since Keynes first proposed his ideas back in the early 1900s. The models in place today are not equivalent to the models in place more than 7 decades ago, yet it's the models from 7 decades ago to which you're leveling your criticisms. Four, when I argue these issues I argue for the fact that the models are an accurate method of describing the economy in which we exist. How those models are applied and what policy is implemented though legislation is not a fault of the model itself. It's like you're blaming climate models for the fact that we're witnessing higher temperature readings on thermometers. It's a meritless criticism, a bit myopic, and horribly misguided.

 

 

Inflation is reported by the Bureau of Labor Statistics (BLS) in the form of the CPI.

Well, the BLS is a reporting body for past metrics, not an economic model or set of forward looking economic prognosticators. Also, as has been noted numerous times by those who are active in the field, CPI is a very narrow and limited measure of core inflation and other methods are better:

 

http://krugman.blogs.nytimes.com/2010/02/26/core-logic/

http://krugman.blogs.nytimes.com/2011/04/26/core-notes/

 

I understand, though, that it's much easier to attack a strawman of what you think people are arguing instead of what they actually are.

 

 

A handy chart reference, compiled by a bipartisan group, is USA, Inc. - A Basic Summary of America's Financial Statements, February 2011. The forward states, "By imagining the federal government as a company, they provide a simple framework for understanding our current situation. They show how deficits are piling up on our income statement as spending outstrips income and how our liabilities far exceed nominal assets on our balance sheet. ...The authors' ingenious indirect approach is to ask what a turnaround expert would do and what questions he or she would ask.

I know this is difficult for some people to comprehend, but the government of a country with its own currency is not equivalent to a company or corporation. Trying to equate the two will lead you down an erroneous path. Sure, sometimes it can serve as a useful analogy, but most often, analogies fail when carried too far. I fear that may be the case here with your logic. In much the same way that we can describe a gravitational dimple in spacetime as similar to a bowling ball on a stretched sheet, we can describe a country as similar to a company. However, analogies have limitations, and they break down. Try not to confuse the map for the landscape.

 

 

 

More here:

 

http://krugman.blogs.nytimes.com/2010/09/22/no-no-ceo/

 

Economic policy requires a very different kind of thinking from that appropriate for company strategy. Companies are very much open systems, selling the vast bulk of what they produce to other people, able to draw in resources from outside mostly at will; countries — even small countries — mainly sell to themselves and have to make the most of the labor, land, and to some extent capital they have.

 

Beyond that, companies — even if they have relatively decentralized management — are top-down organizations in which people do what they’re told. Market economies are free-for-alls, in which the job of policy is largely to provide incentives to do things (and yes, that’s true even if we’re talking about monetary policy and fiscal stimulus).

 

 

http://www.nytimes.com/2012/01/13/opinion/krugman-america-isnt-a-corporation.html?_r=2&ref=opinion

 

There’s a deeper problem in the whole notion that what this nation needs is a successful businessman as president: America is not, in fact, a corporation. Making good economic policy isn’t at all like maximizing corporate profits. And businessmen — even great businessmen — do not, in general, have any special insights into what it takes to achieve economic recovery.

 

Why isn’t a national economy like a corporation? For one thing, there’s no simple bottom line. For another, the economy is vastly more complex than even the largest private company.

 

Most relevant for our current situation, however, is the point that even giant corporations sell the great bulk of what they produce to other people, not to their own employees — whereas even small countries sell most of what they produce to themselves, and big countries like America are overwhelmingly their own main customers.

 

Yes, there’s a global economy. But six out of seven American workers are employed in service industries, which are largely insulated from international competition, and even our manufacturers sell much of their production to the domestic market.

 

And the fact that we mostly sell to ourselves makes an enormous difference when you think about policy.

 

Consider what happens when a business engages in ruthless cost-cutting. From the point of view of the firm’s owners (though not its workers), the more costs that are cut, the better. Any dollars taken off the cost side of the balance sheet are added to the bottom line.

 

But the story is very different when a government slashes spending in the face of a depressed economy. Look at Greece, Spain, and Ireland, all of which have adopted harsh austerity policies. In each case, unemployment soared, because cuts in government spending mainly hit domestic producers. And, in each case, the reduction in budget deficits was much less than expected, because tax receipts fell as output and employment collapsed.

 

 

 

The report describes how we first stumbled into this mess, by failing to predict the magnitude of program costs, by creating perverse incentives for excessive behavior, and by missing important trends. By pointing to the impact of individual responsibility, USA Inc. gives us reason to believe that a practical solution exists and can be realized."

I've already shared above why it's an erroneous approach to begin with the assumption that the United States is equivalent to a corporation. I'll just add to this that your "basic summary" did not mention the collapse of the housing bubble and how the bubble itself was fed by massive deregulation and the allowance of over leveraging of assets. I'll share how they fail to describe or reference the swapping of default bundles and the manner in which they were gaming the system in a way that allowed them to make more money via insurance claims when mortgages went unpaid, and that this has zero to do with an economic model describing the outcome of said behaviors.

 

You know... I've heard once or twelve times that maybe sorta kinda that whole housing mess had a role in all of this turmoil, and that potentially one cannot so easily assign one-dimensional answers like "it was a failure of neo-keynesianism." I'm not sure how that jives with your narrative, though. It's just a fact, and I know those aren't always appreciated in these discussions.

 

 

http://economistsview.typepad.com/economistsview/2012/02/old-versus-new-keynesian-models.html

 

I very much prefer New Keynesianism over Old." So if he is really saying the data support the New Keynesian model, I don't have much to disagree with. (See here for a post highlighting the difference between Old and New Keynesian IS-LM models. I posted this when people tried to claim I support Old Keynesian models as a way of discrediting what I have to say, and I've posted lots of New Keynesian work on fiscal multipliers as well. But people like Williamson, who Tyler points to authoritatively for reasons that escape me, still make the false charge that I promote old-fashioned Keynesian ideas.)

 

 

http://krugman.blogs.nytimes.com/2012/02/04/the-great-anti-keynesian-flip-out/

 

Keynesian economists made some pretty clear predictions around 3 years ago – predictions that were very much at odds with what anti-Keynesians were saying. We said that as long as the economy remained deeply depressed, even a huge rise in the monetary base would not be inflationary, and that even huge budget deficits would not send interest rates soaring. And we said that fiscal austerity would be contractionary, not expansionary.

 

All these predictions have been borne out. And some of the anti-Keynesians seem to be in the process of acknowledging, at least in a grudging way, that they got it wrong.

 

But some anti-Keynesians have tried to save their dignity, or something, by attacking supposed Keynesian propositions that nobody actually, you know, proposed.

 

http://krugman.blogs.nytimes.com/2012/02/05/keynesian-and-pseudo-keynesian-propositions/?pagewanted=all

 

Just a brief further thought on the anti-Keynesian flip-out. Consider three propositions:

 

1. Deficit spending is expansionary, other things equal.

 

2. Deficit spending is always expansionary.

 

3. Only deficit spending is expansionary.

 

Keynesian economics basically asserts proposition 1. Testing that proposition is tricky, but that’s always the case in economics; you have to look for natural experiments, or be very careful about controls. Christy Romer talks about this in her excellent speech (pdf) on the topic. But when you do it right, the evidence strongly supports proposition #1.

 

Proposition #2 is, well, stupid. It’s what you see in bad comment threads, where people rant about how if Keynesian economics was right, Greece would be a miracle economy.

 

And proposition #3 is worse. Which is why I am boggled to see professional economists apparently believing that this is the proposition to focus on.

Edited February 9, 2012 by iNow

[TruthSleuth]

Let's briefly consider the current reality.

 

1. The value of the dollar affects all who hold dollars or our debt.
2. Regardless of what label we put on it, we have a government system of economic control and fiat currency that has evolved over 200 years.
3. The data that tracks the various measurements of the economy varies by the administration reporting that data.
4. The USA, Inc. PDF (http://www.kpcb.com/usainc/) has a compilation of data from government sources. Or dig it out yourself from http://research.stlouisfed.org/fred2/, http://www.bls.gov/cpi/, http://www.shadowstats.com/, et al.
5. Regardless of size or complexity, the USA has revenues, expenses, assets, and liabilities like individuals and businesses. Its solvency or viability can be analyzed using the same methodology as a business.
6. The government monopoly creates fiat currency by selling debt instruments to its affiliate banks in return for paying interest to those banks from more created money, so that the government can spend more than it takes in in revenues. (That's all on The Fed's site.)
7. The US is doing what most of the 21 countries in the last 25 years have done that have gone into hyperinflation.
8. Regardless of which data set one looks at the trajectory of government size, money creation, debt, and dollar devaluation is unsustainable. Even Bernanke said the Federal budget is unsustainable. Understanding that there is a problem is the first step to correcting the situation.

[iNow]

The value of the dollar affects all who hold dollars or our debt.

Sure, but it's still relative to other currencies that all use the same structure and approach to economics that you so passionately seem to lament.

 

Regardless of size or complexity, the USA has revenues, expenses, assets, and liabilities like individuals and businesses.

It also has differences, and cannot be perfectly equated or conflated with a business or a corporation, the reasons for which I already described above. Ignoring those important differences doesn't suddenly make them disappear or become magically invalid. The US government is not equivalent to a company or corporation, no matter how many times you repeat yourself or share think tank articles that suggest otherwise.

 

Its solvency or viability can be analyzed using the same methodology as a business.

No, it cannot, because it's a government, not a business. You seem to acknowledge this yourself by reminding us that we can print our own currency and adjust the regulatory landscape through legislation, but you then appear to abandon that knowledge when it negates your argument.

 

 

 

 

The US is doing what most of the 21 countries in the last 25 years have done that have gone into hyperinflation.

Can you please name those countries, and also specify what specific actions those countries with hyperinflation took that you propose the US is taking right now? I suspect there are some important differences and caveats that you are conveniently omitting from your assertion, but I'll give you the benefit of the doubt.

 

As mentioned, inflation is actually quite low right now by historical standards, and those who keep saying "hyperinflation is just around the corner" have been demonstrated to be wrong at every turn. At some point when the boy keeps calling wolf and the wolf never shows up, one should stop listening. Yes, inflation is something to track and manage, but it's been steady around 2%. Right now, the focus should be on reducing unemployment, which is closer to 10%.

 

Wow... Look at all that hyperinflation... It's like we're Zimbabwe!!1!!2!!one!!cats!!1!(

 

 

 

Frankly, also a bit of inflation (around 4 or 5%) over the next few years would be a GOOD thing. Among other things, it would erode the real value of the debt and allow those who are underwater to come back to a sustainable level more naturally.

 

 

http://www.marketwatch.com/story/we-need-more-inflation-2011-10-20

 

Unfortunately, it looks like we’ll be stuck in a low-growth, high-unemployment economy for many more years, but there is a way out of our troubles if only we’d be willing to buck 35 years of conventional wisdom that’s taught us that inflation is always and everywhere bad for the economy.

 

The truth is, right now the U.S. economy needs a little more inflation, not less. It’s sacrilege, I know, but our slavish devotion to low-inflation policies is keeping us mired in a depression.

<...>

There are three ways of managing a debt overhang: Writing off the debts through bankruptcy or other means, grow your way out of it, or inflate your way out of it, allowing debtors to use cheaper dollars to pay off debts.

<...>

That leaves inflation as the least-bad option. To be clear, what we need is a temporary, general increase in all prices, especially wages and home prices. We’re not talking about Zimbabwe levels of hyperinflation, either. Instead of straining to keep inflation at 2%, let’s loosen up a little and let it run at 3% or 4% of even 6% for a while.

 

Economists on the right and left agree: Greg Mankiw, an adviser to George W. Bush and Mitt Romney, has called for a temporary period of modest inflation. Ken Rogoff, who has a sterling anti-inflation pedigree, wrote in the Financial Times recently that we should try “the option of trying to achieve some modest deleveraging through moderate inflation of, say, 4% to 6% for several years.” Read Rogoff’s op-ed. Evans of the Chicago Fed says the Fed should promise low rates for as long as unemployment is high and inflation remains below 3%.

<...>

the record shows that low-inflation policies haven’t been a boon for the economy, and there’s no evidence that a slightly higher target would hurt. In 2002, the International Monetary Fund (which is not exactly easy on inflation), concluded that inflation targets of 2% to 3% can be dangerously low because they inhibit the flexibility of the central bank to respond to a shock.

 

 

Regardless of which data set one looks at the trajectory of government size, money creation, debt, and dollar devaluation is unsustainable.

Government has not grown in size. It has actually shrunk in terms of employees... nearly a half million fewer under Obama than when he took office, and nearly as few as we had under Reagan.

 

As a percentage of GDP, yes... it would certainly appear to those only paying minimal attention that the government has grown enormously, but it hasn't. The expenditures of government as a percentage of GDP has gone up because tax revenues are down at the same time that spending on social safety net programs like unemployment insurance and food stamps has increased dramatically during the recession. The numerator has grown at the same time the denominator has shrunk. Of course the percentage is higher, but it is not explained by a monstrous government take over or increase in size as you seem to be here suggesting.

 

Really, the "growth in government" that we hear so many ideologues screaming about is a temporary issue and results almost purely from the economic slump, with a bit more from the fact that a lot of baby boomers are retiring right now and collecting social security.

 

Once the unemployment situation improves, revenues will increase at the same time that outlays for welfare programs decrease, and the government spending as a percentage of GDP will drastically reduce. Voila! Size of government complaints addressed!

 

The unsustainable expense, however, is really almost entirely from medical costs. Note also that I said medical costs, not medical insurance. Those medical costs need to be tackled, but that's not a "size of government" argument, it's a "let's figure out how to save money and reduce costs with medical care" argument... It's a "let's find ways to pay for the right things and stop wasting money on unnecessary tests and defensive prescription writing" argument... It's a "let's create a larger risk pool so the cost per patient of coverage goes down dramatically" argument.

 

Does little Johnny who sneezed after playing baseball really need that MRI? Should doctors be compensated based on how many tests they order, or based on how quickly their patients become healthy again? That's fixable stuff, and has zero to do with size of government, and everything to do with being smarter with our expenditures and policies and programs... This stuff won't be fixed by implementing some over simplified non-realistic version of a gold standard or Austrian austerity driven economy. You're living in a fantasy world if you think that, a manufactured reality.

 

It's not about costs of Medicare, either, as that does better than private insurance at reducing costs. Again, it's about cost of medical care itself and how to minimize those...

 

 

 

Even Bernanke said the Federal budget is unsustainable.

Yes, but again this is not a size of government issue. It's about the economic downturn, decreased revenues, and unpaid for wars, and other stupid shit that I'm sure you and I can both agree on.

 

 

 

 

And here's what Bernanke said:

 

http://www.nytimes.com/2010/06/10/business/economy/10fed.html

 

Mr. Bernanke, the Federal Reserve chairman, warned on Wednesday that "the federal budget appears to be on an unsustainable path,” but also recognized that an “exceptional increase” in the deficit had been necessary to ease the pain of recession.

 

To Republicans, he offered warnings about the fiscal perils of an aging population and the potential threat of soaring long-term interest rates. To Democrats, he made it clear that persistently high unemployment was a drag on growth and said that additional short-term stimulus spending might be needed.

 

<...>

 

“If markets continue to stabilize, then the effects of the crisis on economic growth in the United States seem likely to be modest,” Mr. Bernanke testified. “Although the recent fall in equity prices and weaker economic prospects in Europe will leave some imprint on the U.S. economy, offsetting factors include declines in interest rates on Treasury bonds and home mortgages, as well as lower prices for oil and some other globally traded commodities.”

 

That's really a big point there. "Globally traded." We are... whether you like it or not... a global economy, but for the types of ideas you seem to prefer to actually work, we'd need to be a closed economy... engaging in zero trade outside our borders, and able to produce all needs internal with our own resources. You're approach to this issue is similar to trying to draw blue prints and engineering diagrams for the hubble space telescope using fat crayon and a single piece of construction paper. WAY over simplified and painfully lacking representation of supremely important details.

 

 

Understanding that there is a problem is the first step to correcting the situation.

And the second step is to ensure that we understand and represent the problem accurately, and then the third step is to implement changes that are based more on evidence than on ideology and political bias.

Edited February 10, 2012 by iNow

[iNow]

Here's another nice post regarding concerns about returning to the gold standard: http://www.econbrowser.com/archives/2012/02/why_not_abolish.html

[AlexGheg]

It's easy to disprove an economic theory. For example, ask the right questions. What is quality? What is convenience? Physics can openly admit that they don't understand gravity. Economists don't want anyone to know that they don't understand quality and convenience. Next, is set up a simple test and watch it fail miserably. This video, done by an economist will show you exactly how it's done. The dirty little secret of economics is out for public viewing

 

[iNow]

This is a bit long, but a solid read for anyone with even a passing interest in the topic of what's been happening in the world of economics...

 

http://krugman.blogs.nytimes.com/2012/03/05/economics-in-the-crisis/