LARS P. SYLL

Chicago economics — garbage in, gospel out

Every dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both. This form of “crowding out” is just accounting, and doesn’t rest on any perceptions or behavioral assumptions.

John Cochrane

And the tiny little problem? It’s utterly and completely wrong!

What Cochrane is reiterating here is nothing but Say’s law, basically saying that savings are equal to investments and that if the state increases investments, then private investments have to come down (‘crowding out’). As an accounting identity, there is, of course, nothing to say about the law, but as such, it is also totally uninteresting from an economic point of view. As some of my Swedish forerunners — Gunnar Myrdal and Erik Lindahl — stressed more than 80 years ago, it’s really a question of ex ante and ex post adjustments. And as further stressed by a famous English economist about the same time, what happens when ex ante savings and investments differ, is that we basically get output adjustments. GDP changes and so makes saving and investments equal ex ost. And this, nota bene, says nothing at all about the success or failure of fiscal policies!

Government borrowing is supposed to “crowd out” private investment.

The current reality is that on the contrary, the expenditure of the borrowed funds (unlike the expenditure of tax revenues) will generate added disposable income, enhance the demand for the products of private industry, and make private investment more profitable. As long as there are plenty of idle resources lying around, and monetary authorities behave sensibly, (instead of trying to counter the supposedly inflationary effect of the deficit) those with a prospect for profitable investment can be enabled to obtain financing. Under these circumstances, each additional dollar of deficit will in the medium long run induce two or more additional dollars of private investment. The capital created is an increment to someone’s wealth and ipso facto someone’s saving. “Supply creates its own demand” fails as soon as some of the income generated by the supply is saved, but investment does create its own saving, and more. Any crowding out that may occur is the result, not of underlying economic reality, but of inappropriate restrictive reactions on the part of a monetary authority in response to the deficit.

William Vickrey Fifteen Fatal Fallacies of Financial Fundamentalism

In a lecture on the US recession, Robert Lucas gave an outline of what the new classical school of macroeconomics today thinks on the latest downturns in the US economy and its future prospects.

Lucas starts by showing that real US GDP has grown at an average yearly rate of 3 per cent since 1870, with one big dip during the Depression of the 1930s and a big — but smaller — dip in the recent recession.

After stating his view that the US recession that started in 2008 was basically caused by a run for liquidity, Lucas then goes on to discuss the prospect of recovery from where the US economy is today, maintaining that past experience would suggest an “automatic” recovery if the free market system is left to repair itself to equilibrium unimpeded by social welfare activities of the government.

As could be expected there is no room for any Keynesian type considerations on eventual shortages of aggregate demand discouraging the recovery of the economy. No, as usual in the new classical macroeconomic school’s explanations and prescriptions, the blame game points to the government and its lack of supply-side policies.

Lucas is convinced that what might arrest the recovery are higher taxes on the rich, greater government involvement in the medical sector and tougher regulations of the financial sector. But — if left to run its course unimpeded by European type welfare state activities — the free market will fix it all.

In a rather cavalier manner — without a hint of argument or presentation of empirical facts — Lucas dismisses even the possibility of a shortfall of demand. For someone who already 30 years ago proclaimed Keynesianism dead — “people don’t take Keynesian theorizing seriously anymore; the audience starts to whisper and giggle to one another” — this is of course only what could be expected. Demand considerations are simply ruled out on whimsical theoretical-ideological grounds, much like we have seen other neo-liberal economists do over and over again in their attempts to explain away the fact that the latest economic crises show how the markets have failed to deliver. If there is a problem with the economy, the true cause has to be the government.

Chicago economics is a dangerous pseudo-scientific zombie ideology that ultimately relies on the poor having to pay for the mistakes of the rich. Trying to explain business cycles in terms of rational expectations has failed blatantly. Maybe it would be asking too much of freshwater economists like Lucas and Cochrane to concede that, but it’s still a fact that ought to be embarrassing. My rational expectation is that 30 years from now, no one will know who Robert Lucas or John Cochrane was. John Maynard Keynes, on the other hand, will still be known as one of the masters of economics.

Sweden would have been poorer with the euro new study shows

Sveriges ekonomiska utveckling har varit starkare tack vare att landet avstått från att införa euron. Sammantaget under perioden 2003–17 har tillväxten i ekonomisk aktivitet varit mellan en och en halv till tre gånger högre än om Sverige infört euron …

Empirin och teorin talar för att Sverige har gynnats av att stå utanför valutasamarbetet och att landet har goda skäl att invänta såväl det fortsatta arbetet med integrationen av euroländernas finanspolitiska ramverk som nästa ekonomiska nedgång. Först därefter kan frågan om ett fullvärdigt svenskt deltagande i eurosamarbetet åter bli aktuell.

Björn Olsson

Sixteen years ago, Swedish citizens were asked if they wanted to join the eurozone. Of the 83 % registered voters who participated in the referendum close to 57 % cast their ballot for the ‘no’ side. The result of the referendum came as a total shock to the Swedish establishment. All major parties and business organizations were for the euro. But although the ‘yes’ side outspent the ‘no’ side ten to one, the ‘no’ side won. Yours truly — unlike the ‘usual suspects’ among establishment economists — participated actively in the fight against the euro. It still makes me immensely proud.

The Swedish people got it right. The political and economic establishment got it wrong. The monetary union has not been able to show any noteworthy productivity jumps since it was launched 20 years ago. The economic problems have been growing and at times almost led to national catastrophes. The EMU is not an optimal currency union, and as history has told us, countries like Germany, Greece, Italy, Portugal and Spain do not fall into step when marching.

The problems with the euro should not come as a surprise. If a country gives up its own currency, it does not only give up the possibility of having its own over monetary policy. Membership in the European monetary union means less accommodation and flexibility when it comes to country-specific asymmetric shocks and fewer possibilities for freely using financial policies to guarantee low unemployment and high welfare levels.

The unfolding of the repeated economic crises in euroland during the last decade has shown beyond any doubts that the euro is not only an economic project but just as much a political one. What the neoliberal revolution during the 1980s and 1990s didn’t manage to accomplish, the euro shall now force on us.

One size does not fit all. The overall performance of the eurozone looks bleak. The establishment’s euro project has never been democratic. That is also one of the reasons for its low legitimacy among ordinary people. When the people were asked — as in Sweden — we said no. We understood that a single currency would lead to higher unemployment -– with a central bank that mainly focuses on inflation and pays little attention to financial stability would be to expect. The euro model is and has always been footed on an economic model that increases inequality and is to the disadvantage of the working classes.

Sweden has since the financial crisis hit Europe managed its economy far better than the eurozone countries. There is still nothing that speaks for Sweden to abandon the krona for the euro. With our own currency, we can pursue a much better macroeconomic stabilization policy.

How much whipping can economy and democracy take? How many have to be hurt and ruined before we end the euro madness? Instead of just go on mending the project it would be better to just admit that we have reached way’s end and that it is time to take another road. A road forward. A road without the euro.

Some limitations of the experimental approach

Without question, the experimental approach has produced genuine insights … All the same, there are serious limitations to a strategy centered on experimental design:

1. Good experimental design results in internal validity, where measurements actually measure the things they’re supposed to and confounding influences are suppressed. External validity, the extent to which results can be generalized to a wider array of situations beyond the confines of the experiment is a different matter. There are two specific aspects of experimentalism that raise questions on this front, the tendency for experiments to be small, local and time-bound …

2. The strategy of experimental design virtually requires a reductionist, small-bore approach to social change. A more sweeping, structural approach to poverty and inequality introduces too many variables and defeats experimental control. Thus, without any explicit ideological justification, we end up with incremental reformism when the entire social configuration may be the true culprit …

Using experimental methods to incorporate more learning in program administration should be standard practice; perhaps some day it will be. But the big problems in poverty and oppression are too complex and encompassing to be reduced to experimental bits, and there is no substitute for theoretical analysis and a willingness to take chances with large-scale collective action.

Peter Dorman

‘Ideally controlled experiments’ tell us with certainty what causes what effects — but only given the right ‘closures.’ Making appropriate extrapolations from (ideal, accidental, natural or quasi) experiments to different settings, populations or target systems, is not easy. “It works there” is no evidence for “it will work here”. Causes deduced in an experimental setting still have to show that they come with an export-warrant to the target population/system. The causal background assumptions made have to be justified, and without licenses to export, the value of ‘rigorous’ and ‘precise’ methods — and ‘on-average-knowledge’ — is despairingly small.

Apart from these methodological problems, I do think there is also a rather disturbing kind of scientific naïveté in the kind of experimentalist approach to combatting poverty that this years ‘Nobel prize’ winners Duflo/Banerjee/Kramer represent. The way they present their whole endeavour smacks of not so little ‘scientism’ where fighting poverty becomes a question of applying ‘objective’ quantitative ‘techniques.’ But that can’t be the right way to fight poverty! Fighting poverty and inequality is basically a question of changing the structure and institutions of our economies and societies.