"Words ought to be a little wild, for they are the assault of thoughts on the unthinking" -JMK
- A historian suggests that Germany's rapid industrialization can be traced back to its lack of copyright laws (HT Mark Thoma). It would certainly follow the pattern of the early United States. Jeff Tucker picked up the article last night as well.
- Tyler Cowen talks about what we really mean when we refer to "aggregate demand". I think this "Keynesians aggregate too much" hand-wringing is a little bit silly. Anyone who's familiar with the day to day work of economists who forecast and look at this stuff knows that they don't just look at Y, C, I, and G. They have their eyes on specific markets, regions, investments, and products. You only make a big deal about aggregation if your knowledge of what macroeconomists do is restricted to an econ 101 national income equation. When people get up and talk about "aggregate demand" it's because they've been looking at everything and it all looks pretty bad, so you might as well use short-hand. Anyway, I think Cowen's excercise is still good because specific problems still have specific solutions. Cowen looks at three kinds of "demand deficiencies". I think all three are fairly apparent, and the first one he lists (a general collapse in demand) is suggested by the collapse of consumer and producer prices across the board (oh - except gold - thanks for that one Glenn Beck) combined with an increase in savings and profit retention. That all suggests a very general problem. But that doesn't mean his second and third factors aren't apparent as well, or that there isn't some supply shock (the long internet boom) impacting prices as well. I don't think it can be just a positive supply shock (a la the 1870s). If it were just that, you'd expect output to increase rather than decrease. But that doesn't mean there isn't any supply shock. And of course, there's probably something of an Austrian story going on too - if there is a productivity shock, it's certainly reasonable to think that we might be seeing an abrupt reallocation of labor and capital in response to that shock (the discovery of malinvestments or the reduction of animal spirits in pre-internet sectors... whatever way of putting it floats your boat). Anyway - we use shorthand for these things a lot, but I think Cowen is right to think through it step by step.
- Jonathan talks about "austerity" in Germany and he mentions my point on the 1920-21 depression. I think the 1920-21 depression stands out as a "this is not a demand issue" sort of recession, so in that sense it's a really obvious example of when fiscal stimulus isn't warranted (which is why I find it so bizarre that many Austrians think its a test case for Keynesianism). But I hope we can generalize this a lot farther beyond 1920-21. There are a lot of downturns where fiscal stimulus isn't warranted, and its hard to talk about that in the middle of a downturn where it is warranted, but if we don't I think we risk branding Keynesianism as an "always spend in a downturn" theory. 1920-21 and 1981 are obvious cases where you don't do fiscal stimulus. 1929-19?? and 2008-20?? are obvious cases where you do. But there are also a lot of in between cases where demand may be sub-optimal but not really in crisis. The question is - what to do in those cases? Keynes thought we could stimulate in those times (less vigorously, obviously) without a problem. Maybe we can, I don't know. But that's the more interesting and the harder to answer question.
Question for Bernanke?
1 hour ago