Are economists as dopey as they seem?
Posted by Fred Argy on Monday, May 5, 2008
One of my grand kids is studying economics at the University and, to help him with an essay on current macroeconomic policy in Australia, he asked me three rather pertinent questions..
1. If there is an inflation problem which is overwhelmingly supply-side driven, as we now seem to have in Australia, and if everyone expects a significant slow-down in domestic demand in the year or two ahead, why are the Reserve Bank and the Government responding (or planning to respond) with demand-deflation policies? That is not what my textbooks tell me is the right response.
2. I notice that rents are soaring and that is one of the reasons why the RBA felt it needed to act to curb the housing boom - but it seems to be having perverse results. The sharp rise in mortgage lending rates is causing a slump in new dwelling approvals and commencements – that is, the supply side problem (inadequate accommodation to house our rapidly rising population) will be worsened in the year ahead. Won’t this simply accentuate the rent inflation problem and what will the Bank do next?
3. Federal and State governments are expressing concern about the prospective erosion of revenue from the asset market decline, the slow down in retail and housing and a possible rise in unemployment. Their official response has been to try to “make up” for the expected revenue loss in the year ahead by blocking or deferring many “worthwhile” spending proposals (as a spokesperson from the Brumby Government put it). In aggregste, won’t this just accentuate the risk of an economic slow down and won’t this have adverse secondary effects on government revenue? What will they do next? My textbook tells me this is exactly why the Great Depression occurred in 1929.
I gave him the usual economic bullshit – distinguishing between short term and long term, between “micro” and “macro” effects and why it might be better to tolerate a little unemployment in order to avoid blowing out inflation expectations and starting a wage-price cycle. I added that macro policy is an imperfect science and that sometimes policy advisers get things wrong.
But I was far from convinced I gave him a good anwer. Perhaps smarter economists can help me out.
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This entry was posted on Monday, May 5th, 2008 at 8:45 AM and filed under Blogging - general.
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Is it just the ones in the media who are dopey? We’ve been in real recession for months if you were to believe the commentators. It’s just the real hard data, the evidence such as US growth and employment figures.
Posted on 05-May-08 at 10:41 am | PermalinkEconomists who use economic terms as throw away lines don’t deserve the money someone is paying them to make these erroneous statements.
“If there is an inflation problem which is overwhelmingly supply-side driven..”
Well we Austrian adherents would beg to differ right there and argue it’s largely a monetary expansion problem from which Central bankers and govts can no longer run and hide. The predicament we now find ourselves in is described quite succinctly here
Posted on 05-May-08 at 11:27 am | Permalinkhttp://brookesnews.com/080505debt.html
and as pointed out previously here too-
http://www.atimes.com/atimes/Global_Economy/JE02Dj05.html
Basically money matters and the deliberate and sustained debasement of currency, has real effects long term, creating malinvestments which will take equal amounts of time and energy to unwind. You only have to look at the size of successive Federal Budget monetary surpluses(and no doubt Swan’s current one too) to recognise that dilemma now. They’re not backed by any real savings out of production (ie real commodities like gold or perhaps oil in storage) and as a consequence Treasury, Finance and the Reserve would all be telling Swan what will happen if he attempts to spend it in the real economy. The best thing he can do is burn them and if he wants to reallocate spending, tax and reallocate that real production. That’s the hard part now that everywhere the Central banks’ dishonest Ponzi scheme is patently obvious. Of course Swan could always continue down the Mugabe road and keep cranking the printing presses, but he knows that won’t buy himuch of a reprieve. Welcome to real savings and investment now in order to increase living standards in future. Real taxing if he wants to reallocate spending too.
Fred:
Just explain to him that the problems we may be experiencing now are the result of past policy blunders by the RBA for keeping rates far too low for too long in the earlier part of the decade.
Explain to him the interest rate targeting based on the CPI is beginning to fall apart and that we may need a new monetary order over the next decade as this one isn’t working.
Explain to him that rent rises are not necessarily an inflationary signal as it could also be the price mechanism doing its work to attract new supply.
Tell all this and he ought to do fine.
Posted on 05-May-08 at 11:31 am | Permalink“I added that macro policy is an imperfect science and that sometimes policy advisers get things wrong.”
Posted on 05-May-08 at 11:45 am | PermalinkYou should have added that not only is it an imperfect science, but an impossibly presumptuous one, to ever think that public servants could regularly determine the real price at which real savers need to charge real investors for their forgone consumption. I guess just like stopped clocks, they could get the time right to the second, twice every 24 hours.
Yes JC, wouldn’t we Austrian fans all love an uncensored FOI transcript from our new open Govt, outlining word for word what Treasury, Finance and the Reseve’s advice to Swan was, as to why he can’t spend all that lovely money surplus right now.
Posted on 05-May-08 at 11:55 am | PermalinkDon Harding has a crack at answering Q1 in the Australian.
Posted on 05-May-08 at 5:21 pm | PermalinkWhile we’re waiting for someone smart to show up, here are my thoughts.
I tried to answer Question 1 in a pretty lengthy post a few weeks ago. Ask your grandson to draw an AS-AD diagram, with the two short run schedules intersecting on the vertical long-run supply schedule. Then move the long-run schedule to the left, ask him what will happen, and what the appropriate policy response is.
With Question 2 everything depends on what we mean by housing boom. If the relative price of accommodation is rising on account of microeconomic fundamentals — the income-elastic demand for accommodation and the absolute scarcity of land — then it’s just a fact of life. On the other hand, if easy credit has caused a bubble in real estate or assets generally, this needs to be burst sooner rather than later, even if some new fixed capital expenditure is delayed a little as a result.
As for Question 3, I think it’s clear that we’re living in age of surplus fetish, and rational arguments are doomed to be drowned out by fatuous slogans until the obsession dies.
Posted on 05-May-08 at 7:10 pm | PermalinkObserva, the problem with Austrian School economics is it rejects out of hand the need to back their claims with data and scientific analysis. Apparently all this stuff is just self evident and doesn’t require any. :rolleyes:
Posted on 05-May-08 at 8:52 pm | PermalinkI put it to you St Loyd, and I’d bet London to a brick that all Treasury, Finance and the Reserve’s advice to Swan now is not to spend the ‘funny money’ surplus he has at hand right now and the future estimated surplus which he will announce next week. That’s because it’s not real savings but monopoly money backed by nothing of any real value. That’s the Austrian line and they’re all singing it now as Swan’s rhetoric attests and any MSM’s FOI request to verify it would be laughed out of Canberra, as well as any direct question to Swan to verify, ducked and dodged. If you believe those overfed suits in the Reserve can set a market economy’s risk premium to forgo current consumption, why aren’t the banks listening to these gurus anymore? They got away with rolling the printing presses for a decade or more, simply because of changed demographics that staved off the inevitable consequences of what they were doing. When they rolled the printing presses in the early 70s, a young demographic inflated prices with it immediately. This time round, that same demographic used it to try and build wealth for their retirement, inflating asset prices until the music stopped and there wasn’t enough chairs (real goods)to go round. That’s why they’re hell bent on buying commodities or access to commodity streams in future right now. That is if they can beat the Chinese SWFs, etc to them. The world is fast waking up to CB’s international ponzi scheme and their funny money. They can’t turn it into real commodities (ie commodity money) fast enough now.
Posted on 05-May-08 at 11:41 pm | PermalinkSome interesting micro data on housing here http://www.news.com.au/business/money/story/0,25479,23633229-5013951,00.html
Posted on 06-May-08 at 4:44 pm | PermalinkProgressive income tax coupled with capital gains relief for the family home might well be drawing increasingly scarce building capacity toward the top end of the market.