AF447 Economics

For Ed everything is always about demographics. For Kevin Drum and others everything is always about energy. Other people have decided that productivity is so high that unemployment is inevitable, or that all consumption is now welfare reducing. Still others that the Chinese are our rightful masters – submit! although poor old Europe runs a trade surplus. And of course these aren’t the only discoveries.

Other people still will tell you that millions of Americans who were gainfully employed up to 2008-2009 are suddenly of literally zero productivity – well, they surely are as long as they’re on the dole, but that’s not what they mean – or just that everyone went mysteriously lazy in a sort of spontaneous mass conversion event. Or that the United States has a serious deficiency of fast trains, which only became apparent all at once in 2008. It has been an era of enormous creativity in the analytical function of economics, which has been more than matched by the united consensus among practitioners in its policy-advising function.

Behold the power of Leszek Kolakowski’s Principle of the Infinite Cornucopia. This holds that there is an infinite cornucopia of arguments in favour of whatever course of action or inaction you happen to have decided on for whatever reason. All these fancy intellectual theories, and none of them consider the possibility that there’s a recession on. If that was accepted, of course, it would suggest that things really are this bad, Alan Greenspan really was this incompetent, maldistribution works like it did in the 20s, this is as bad as it looks, and simply taking your hands off the stick and leaving it to George was relatively the best policy, just because it wasn’t actively harmful.

Actually, the aviation analogy worries me; I keep thinking of the pilots of Air France 447, who flew an entirely airworthy aeroplane from 35,000 feet into the sea in a fully developed stall without seriously trying to recover because (as far as anyone knows) the immediate effects were counterintuitive.

I’m sympathetic to the energy explanation, but I do think the idea that there’s a recession on might still be worth a crack, and we might try pushing down the nose and increasing the air speed.

6 thoughts on “AF447 Economics

  1. This recession however is the worst in living memory. That this is not just random chance has intuitive attraction to it.

  2. This is very good.

    But, would you mind spelling out just what you mean by “there’s a recession on”?

    What I *think* you mean is:

    (1) A large part of expenditure, including most private consumption but also most state/local government spending and some private investment, is strongly linked to current income. So if autonomous expenditure (the part that isn’t linked to current income) falls for any reason, total activity will fall more than proportionately. This is just the Keynesian multiplier we learn about in our first macroeconomics course. Plus,

    (2) Investment decisions are very sensitive to current activity levels. This may be because they are based on expectations of future profits, and since these are not knowable with any certainty, investment decisions overweight recent experience. Or it may be because firms are unable or unwilling to cut prices, so have no reason to add capacity when they are operating below normal capacity, even if current production is very profitable. Or, it may be because investment becomes harder to finance when activity falls because of increased liquidity preference for precautionary purposes. Or for some other reason.

    The important point is that because of the positive feedback from investment to output via the multiplier, and from output to investment via … something, it is perfectly possible for output to remain at an equilibrium below potential for an extended period, perhaps indefinitely, without any change in fundamentals at all.

    In this case, it might even make sense to say that the only reason so many people are unemployed, is because so many people are unemployed; if they were working, their wages would generate enough extra sales to make employing them profitable. So all that is needed is a temporary source of extra demand to start the ball rolling.

    I’m pretty sympathetic to this way of looking at things. But, is it what you mean? And if so, who do you see making this kind of argument? And what kind of evidence would we look for that it’s true?

  3. Confidence is what it boils down to.
    The balance sheet position of the US’s aggregates are precisely what Minsky would have predicted in the event of a near-depression: corporate balance sheets are rock-solid, households are deleveraging and therefore improving, and that has to mean that gov’t is running a big fat deficit. Which it is.
    So then the question becomes, why aren’t corporations hiring enough to create any jobs, net? And that brings you up against the wall of confidence. That takes time to get back after 2008, and all this debt-ceiling stuff we went through over here didn’t help.
    In Europe, confidence has to be getting beat up by the constant drumbeat of concern over all those insolvent “peripheral” countries. And that gets us back to the euro and the effect it has had on the whole deficit-spending routine that would normally at least keep things from getting worse, which is what it managed over here in the US. Can’t manage it over there because if you can’t induce growth via a lower exchange rate, and you can’t do it via a lower interest rate or quantitative easing, then you can’t do deficit-spending either because you would have no way of generating the income to pay off the debt.
    There’s a way of ending this little catch-22.
    Absent that, can someone tell me why Trichet raised the ECB’s rate a little while ago? That was a sure sign we were right in the middle of at least an echo of 2008, as it precisely echoed his equally idiotic move in July of that year.

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