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Paul Krugman appears to be saying that a temporary increase in government spending can provide a stimulus EVEN WHEN full Ricardian equivalence holds. All the comments on his blog are saying how simple his explanation is, and how the Chicago school is full of morons – but I don’t really think his argument water tight.
Brad Taylor doesn’t think that the government should be installing acne-revealing lighting to ward off teenage hoodlums. In the UK they’re installing special lights that highlight acne in areas where teenagers congregate to get drunk, intimidate people and write graffiti all over the walls. Apparently it’s been very successful at dispersing the crowds!
So crowds gather, litter, intimidate people and vandalise the area without actually paying for the cost of their actions. That’s an externality if ever I saw one! Read more
Earlier I mentioned a piece by Steven Gjerstand and Vernon Smith that was a bit harsh on monetarism – as it ignored that the monetarist explanation and a economic readjustment explanation could be complements instead of substitutes.
Now Barry Ritholtz points out another interesting point from the piece – their discussion of the fact that house price growth was effectively taken out of the CPI. The money quote is:
If home-ownership costs were included in the CPI, inflation would have been 6.2% instead of 3.3%. With nominal interest rates around 6% and inflation around 6%, the real interest rate was near zero, so household borrowing took off.
Let’s discuss.
Read more
Economist’s View links to an interesting article by Steven Gjerstand and Vernon Smith.
In this article they say that the high level of consumer debt in a number of countries is a concern – and indicates the possibility of a depression style contraction. This has the ring of truth. However, they also say:
The causes of the Great Depression need more study, but the claims that losses on stock-market speculation and a monetary contraction caused the decline of the banking system both seem inadequate
I am not quite sure that this is the case. Ultimately, there is a distinct difference between the contraction caused by a tightening in the money supply and a contraction that results from the reallocation of resources in the global economy. The Great Depression faced both – thanks to central banks around the world we only face the issues associated with the reallocation.
I see the monetarist explanation as an explanation of some of the “policy errors” during the Great Depression – not a strict explanation of the pain experienced during that period. Lets have a little discussion:
I am not a fan of policies that freeze wages. However, the idea that the government will freeze the wages of public sector doesn’t seem to really be being debated – outside of the seemingly biased view of the public sector union.
Now, this is one of those rare cases where I think the public sector union is right – and everyone else supporting the policy is wrong. Freezing public sector wages is a bad policy. (Disclaimer – I work in the private sector, so this really doesn’t impact on me directly).
Currently we are experiencing a sharp re-adjustment in both the size and composition of our economy. Now, in the medium term we expect to return to some level of economic activity – but there are fundamental adjustments between roles that have to occur. This implies that we need some stuff to change in the labour market.
In the medium term there will be some roles that are more highly valued than they are now and some roles that are less highly valued. As a result, we need wages to adjust such that people will train and move into the more highly valued roles. If we freeze wages we aren’t letting this happen. Inside government there are areas where we need more training and where we need more employees – in other parts of government we have staff we don’t need. If the government could recognise this and change wages accordingly (it would be nice to have some market mechanism to do this) then we ensure that our public sector becomes “more productive”.
Now, the government is always complaining about the productivity of the public sector – but freezing wages will not help to improve this. In fact, it is a step in the wrong direction!
