[ExI] "recession is going to end in about 6 weeks"

[Brent Neal]

On 6 May, 2009, at 10:34, Rafal Smigrodzki wrote:

>
>
> On Wed, May 6, 2009 at 4:15 AM, Brent Neal <brentn at freeshell.org>  
> wrote:
>
> On 5 May, 2009, at 23:08, Rafal Smigrodzki wrote:
>
>
> ### But the article insists that recessions are inflationary.

Exactly! You claimed in your original post (which, incidentally, I  
interpreted the same way Damien did as being very confident.  The  
article you quoted and the argument you used as reference essentially  
said "look at the past 6 downturns and you will conclude that this  
will be over quickly. My argument, which was essentially the same as  
this article's, is that the current downturn is deflationary, which  
makes it different from most of the last downturns and will mean  
vastly different market behaviors.

>
> ---------------------------------------
>
> Because I think we're seeing what many folks (including Damien) have  
> predicted - an economic disruption based on or exacerbated by the  
> fact that people don't need more manufactured stuff than they  
> already have and in fact are increasingly realizing that they will  
> pay some marginal amount for LESS stuff. The short term economic  
> forecast, as has been claimed before, is linked to a fall in  
> aggregate demand.
>
> ### This is completely off, I mean, Keynesianism lifting its head  
> from the grave. People always want to have more stuff, or more  
> services, or more of both. Desire is never a limiting factor on  
> economic activity. Only the ability to satisfy desires is a  
> limitation. Here we have a crisis due in part to misallocation of  
> resources (speculative homebuilding and homebuying) associated with  
> misjudgement of the validity of risk-prediction and mitigation  
> methods (S&P credit ratings, mortgage securitization, credit default  
> swaps) and exacerbated by massive levels of consumer fraud. There  
> was no primary problem with the manufacturing sector at all here -  
> this is a construction, real estate and financial crisis through and  
> through.

I disagree. Your statement that people always want more stuff is not  
necessarily true. When it costs too much to get it, people make a  
rational decision to forgo that consumption. Unfortunately, our  
consumer-driven economy can't handle consumers making a rational  
decision to forgo consumption, because we have ASSUMED that people  
will always buy more stuff and when they don't, due to the effects of  
overleveraging or due to a lack of confidence in their future income  
streams, the system starts to break down. Which, in turn, leads to a  
wage-price downward spiral.

As I wrote this, I started having flashbacks to macroeconomics class,  
way on back when.



>
> --------------------------------
>
> There are two routes that can be taken based on this - either try to  
> prop up the manufacturing sector or to transition to a different  
> type of economy.  We're, alas, doing the former, which I intuit will  
> make the short term outlook much poorer. But, to economists and  
> pundits completely immersed in industrial age economics, it appears  
> to be the only option, so they are making a rational choice, in some  
> sense.
>
> ### I agree with you here - politicians selected economists who  
> support the most idiotic way of dealing with the problems but  
> increase the power of politicians, that's why the apologist  
> economists are elevated as court economists, and reasonable  
> economists are reduced to blogging. Yet you are making a correct  
> conclusion (gov't economists are wrong) from incorrect premises  
> (Keynesian economics mixed with some New Age postindustrial stuff).

There is nothing particularly right or wrong about Keynesian economics  
nor monetarism. They have both shown to be efficacious in  
understanding behaviors of markets in certain situations. I recognize  
your irrational ideological bias, but being a physicist, I tend to be  
a little more pragmatic about using theories when they suit and  
ignoring the insistence on a foolish consistency in their  
application. :)

Remember, economics is fundamentally driven by two things - psychology  
and information.


> -------------------------------
>
> I disagree with that route though - I think that breaking the wage- 
> income link more, recognizing that networks of people have an  
> economic potential that is synergistically larger than the aggregate  
> economic potential of their individual units, and using something  
> like a reverse income tax - I prefer to think of it as a dividend,  
> since I think it is more accurate - to compensate them for that  
> value created will ultimately be the better solution to the current  
> problem.
>
> ### Reverse income tax? :)
>
> Sounds like something fun to rip into, once you explain what you mean.
>
>


The reverse income tax is what some call Milton Friedman's guaranteed  
income scheme, which has been discussed in another thread.

B

--
Brent Neal, Ph.D.
http://brentn.freeshell.org
<brentn at freeshell.org>