Archive for the ‘news’ Category
After spending some time at another location, we’ve decided to come back to WordPress. Subscribe to the feed for regular updates, or email us if you would like to contribute. Here’s to some great conversations!
I’ve been looking for an excuse to post this picure of Hayek for weeks now. Hayek’s birthday (May 8th) will do.
The full story of how Hayek had “inflation by the balls” here.
Here is Cato’s Dan Mitchell explaining the problems with Keynesian solutions to recessions.
Hat-tip to Krazy Kaju for his summary:
The idea that government fiscal stimulus can increase actual aggregate demand is false. That money needs to either be borrowed, taxed, or printed. If it’s borrowed, that’s less money that the private economy may borrow. If it is taxed, that is less money that the private economy has. If it is printed, that is less value per dollar that the private economy has.
Here is the 9 page document released by the G20 today, outlining its plans for “solving” the global economic crisis.
The agreements we have reached today, to treble resources available to the IMF to $750 billion, to support a new SDR allocation of $250 billion, to support at least $100 billion of additional lending by the MDBs, to ensure $250 billion of support for trade finance, and to use the additional resources from agreed IMF gold sales for concessional finance for the poorest countries, constitute an additional $1.1 trillion programme of support to restore credit, growth and jobs in the world economy.
We are undertaking an unprecedented and concerted fiscal expansion, which will save or create millions of jobs which would otherwise have been destroyed, and that will, by the end of next year, amount to $5 trillion, raise output by 4 per cent, and accelerate the transition to a green economy.
Our central banks have also taken exceptional action. Interest rates have been cut aggressively in most countries, and our central banks have pledged to maintain expansionary policies for as long as needed and to use the full range of monetary policy instruments, including unconventional instruments, consistent with price stability.
From about 5:00:
“You know, all the guys watching this program will know people who are in debt. You know, they have got five credit cards. They have overspent on them. And what would be the advice that you would give to somebody in that situation? You would say, curtail your spending. You know, try and live within your means. Keep your budget down.
But, when it is a government, the advice is, no! Spend more! There’s this brilliant magic wand called Keynes. And it means that, the more you spend, the more you borrow, the better you’re going to actually make the economy.
Well, you have to be either a banker or a politician to think that way.”
I’ve discovered a fantastic new website called KhanAcademy.org. It’s an awesome organisation that aims to provide “a high quality education to anyone, anywhere”. It’s has video lessons on everything you want to know about maths and physics, as well as a mean finance and banking section. Sadly there’s no pure economics section…yet.
Here are the Khan Academy’s concerns about the Geithner plan (Hat-tip to Karl Deeter)
We have upgraded our message board to Forumotion, and now have a dazzling array of features to offer new members. Over the next few days we will be migrating everybody to our new location, so if you’d like to get involved as we rebuild from the ground up, sign up here:
Don’t miss out, this is going to be big!
The Irish Economy‘s Alan Matthews has posted a piece which questions the effectiveness of the fiscal stimulus packages of various EU countries. Unsurprisingly, there is no discussion as to whether or not fiscal stimuli are the appropriate policy response to a recession. It is merely assumed. The post focusses on the size of the stimulus packages.
the IMF warned that “Monetary and fiscal policies need to become even more supportive of aggregate demand and sustain this stance over the foreseeable future, while developing strategies to ensure long-term fiscal sustainability.”…
On their estimates, the fiscal stimulus breaks down as follows: for the US €199.6 billion or 1.8% of US GDP; for the EU, €112.5 billion or 0.9% of GDP, and for China €233.1 billion or 7.1% of GDP….
But the question is, is this a sufficient contribution from the EU on the fiscal side to support aggregate demand in the coming year?
Now Alan Matthews is a smart guy and he teaches a mean stats class at Trinity College, but it seems that he has misidentified the root cause of economic downturns. Recessions do not stem from a sudden collapse in aggeregate demand. This is but a consequence of the credit induced boom. A lack of real savings is revealed, consumers begin to cut down on spending and begin saving. Bad investments are liquidated. Any government intervention preventing these adjustments is bound to prolong a recession.
In fact, Murray Rothbard lists six things a government can do to turn a short sharp recession into a decade of misery. Here is number 5:
Stimulate consumption and discourage saving. We have seen that more saving and less consumption would speed recovery; more consumption and less saving aggravate the shortage of saved-capital even further. Government can encourage consumption by “food stamp plans” and relief payments. It can discourage savings and investment by higher taxes, particularly on the wealthy and on corporations and estates. As a matter of fact, any increase of taxes and government spending will discourage saving and investment and stimulate consumption, since government spending is all consumption. Some of the private funds would have been saved and invested; all of the government funds are consumed. Any increase in the relative size of government in the economy, therefore, shifts the societal consumption-investment ratio in favor of consumption, and prolongs the depression.
Or to put this in layman’s terms: if Crusoe’s house burns down (the island equivalent of a sub-prime mortgage crisis), he should start cutting back his berry consumption and carefully repairing his home. Matthews thinks this is the cause of Crusoe’s woes and would urge Crusoe to consume more berries and his previously accumulated capital.
What perplexes me further is that while most of us identify credit expansion as a contribuing factor to our woes, Matthews (and the IMF) claim that fiscal and monetary policy should “become even more supportive of aggregate demand”.
So how can credit expansion and “aggressive” monetary policy be both a cause and solution to the crisis? This is surely nonsense.
But the final thing I want to emphasise is that Matthews wants to have his cake and eat it too. Matthews can claim that Keynesian style fiscal stimulus “works”, however he is already preparing an escape hatch in case it fails. An excellent way for someone to not have to reconsider his faith if I do say so myself.
Post-script: If anyone knows of any pro-Austrian school economists at Trinity (or other colleges) please drop us a line!
George Bush, speaking at the APEC conference in Peru argued that the free-market could resolve the current economic crisis while global protectionism could only worsen the situation.
Mr Bush spoke passionately about his belief in the free market despite the recent world economic downturn.
He called for an Asia-Pacific region of “free markets, free trade and free people”.
“It is also essential that governments resist the temptation to overcorrect by imposing regulations that would stifle innovation and strangle growth.
Considering the intensely anti-free market policies recently implemented in the USA, the UK, the EU, Ireland, as well as on a global level, one wonders what other so-called “free market” solutions we have in store.