
Advanced economies are so sick we need a new way to think about them - Amorymeltzer
https://www.washingtonpost.com/news/wonk/wp/2015/11/03/larry-summers-advanced-economies-are-so-sick-we-need-a-new-way-to-think-about-them/
======
clavalle
Perhaps if we expand the meaning of Keyensian "Government investment in
infrastructure" to include human infrastructure and provide stimulus, or at
least a stable platform, for the actual nodes of demand (the people) we can
get back to optimal growth faster.

The idea that we can have a quarter of the people or more (the poor and
working poor) in a state of playing zero sum or negative sum games --
exploitative economic relationships -- non-convex factors in what should,
ideally, be a convex efficiency curve, and still reach market efficiency is
silly. We just reach the state where the convex portions of our economy cannot
compensate for those massive destructions or stagnations of value during times
of contraction so it is easier to shake those results out of the aggregate.
But that destruction of value happens even in times of relative prosperity and
overall growth and it would be wise to whittle down the problem while is
relatively painless.

Take pain and death out of the equation for the people through direct
stimulus. Create a market where everyone must be enticed with value-add to
trade. Watch demand bubble up and create the strongest growth possible.

~~~
themartorana
Direct stimulus in what form? Guaranteed minimum income? The next stimulus
really needs to go directly to the people, not banks.

~~~
clavalle
Guaranteed minimum income, reverse taxation, or merely a solid welfare program
that provides solid housing, food, and medical care -- basically anything that
someone would die or be in pain without...these are all possible solutions.

I'd advocate for an experimental approach with smaller populations with
different possible solutions, ratcheting them up as they are shown to be
successful and sustainable.

~~~
at-fates-hands
>> Guaranteed minimum income, reverse taxation, or merely a solid welfare
program that provides solid housing, food, and medical care

The only problem with this is how this is impossible to scale to proper levels
in the US.

This works great in smaller economies (like you're advocating) like
Scandinavian countries where you have a much smaller population and it's easy
to support a few million people. You also have to take into account the
Scandinavian cultural norms as well.

When you have over 300 million? As we've seen in recent years, when you
institute measures like this it actually creates more dependency and self
reliance on the government - not something I would think you'd want to
advocate on such a large scale.

~~~
TheOtherHobbes
In the US, the banking and military sectors - and a large chunk of tech - are
at least as dependent on government handouts.

So the problem isn't one of scale, which is already huge. It's one of
distribution.

Money on its own is not the solution. You can only grow an economy when people
are building useful things of all kinds, doing useful things for each other,
and creating new businesses.

The big problem in the US isn't capitalism as such, it's the fact that there's
a layer of old and new money privilege accreted around Wall St and Washington.
It's such a resource sink it has literally locked out most of the rest of the
population.

It's a networking and patronage problem. The money is just a symptom.

If you're on the right side of the social firewall you can be a complete
failure and still get jobs at C-suite and board level. (See recent examples
from any number of tech companies - which are the obvious symptoms of a much
bigger issue.)

Prosperity only happens when an economy rewards ability much more than it
rewards the benefits of in-caste relationships.

This isn't even considered an issue in most descriptions of economics, but
it's a huge influence at every level of business. And with the partial
exception of the startup/accelerator/incubator scene, the current situation in
the US has been a tragic brake on real growth.

The best you'll get from throwing money at people is temporarily less crime,
starvation, and homelessness. Those are big wins on their own, but they're a
bandaid and the improvement isn't really sustainable. For a growth-oriented
economy, more is needed.

~~~
ZenoArrow
> "The big problem in the US isn't capitalism as such, it's the fact that
> there's a layer of old and new money privilege accreted around Wall St and
> Washington. It's such a resource sink it has literally locked out most of
> the rest of the population."

Just thinking out loud about this, but could part of the fix for this be using
a debt jubilee to reset debt after a set number of years?

EDIT: For anyone unfamiliar with debt jubilees:

[http://theconversation.com/the-debt-jubilee-an-old-
testament...](http://theconversation.com/the-debt-jubilee-an-old-testament-
solution-to-a-modern-financial-crisis-11816)

~~~
fennecfoxen
When the government decides that it's willing to do something as
interventionist as _bailing out literally everyone_ , that places a lot of
political risk over the financial industry as a whole. One can't be sure that
intervention will always be for the best, after all.

Safety will be more valuable than ever, so those with huge lump sums of
existing Capital will have even more power. We could replace modern corporate
finance with good old-fashioned robber-baron family-finance operations like
Carnegie, Rockefeller, and Gould.

~~~
ZenoArrow
Okay, how about this: Ownership of any property or asset can only last a
maximum of 50 years. After this point ownership will either revert back to the
commons or can be repurchased at current market rates.

~~~
fennecfoxen
So in essence the government seizes all property and rents it back to us?
Geez, man. Even medieval serfs could own property on better terms than that.

~~~
ZenoArrow
> "So in essence the government seizes all property and rents it back to us?
> Geez, man. Even medieval serfs could own property on better terms than
> that."

The ownership wouldn't transmit back to the government, it'd be converted into
public property but with the option to renew ownership. Public property is not
the same as government owned.

The idea is to get rid of accumulation of wealth beyond a single generation,
i.e. in general you only own what you earned in your own lifetime (plus some
extra from the generation that preceded you).

------
bigethan
Related: [http://www.nytimes.com/2015/11/01/upshot/is-the-economy-
real...](http://www.nytimes.com/2015/11/01/upshot/is-the-economy-really-in-
trouble.html) (plus a great gif in the header)

When economists are unsure what exactly is going on, what does that mean?
There's the quote by Buffet, "Be fearful when others are greedy and greedy
when others are fearful".

What should one do when others have no idea what's going on?

~~~
rushabh
I think we are witnessing a massive de-centralization of economics. We seem to
live in multi-tiered cellular societies that seem decoupled from one another.
People living in the same city are experience vastly different trends with
some are struggling, some are prospering.

Like how small startups are able to create value that usually needed large
corporate structures, small trends are becoming powerful and independent.
People are getting news from a large variety of sources and living in their
own bubbles.

The new normal is that there is no normal. Those who are fearful and greedy
are both right, but they no longer reside in the same world.

------
nostrademons
I actually think there are a fair number of prominent figures that have a good
grasp of what's actually going on with the economy, but they would rather make
money off of it than fix it. You have to divine their theories from their
actions and a few oblique public posts.

The academic economics community just seems terribly out-of-touch these days,
using models made a generation ago to try and explain an economy that has
changed dramatically since then.

~~~
tspike
Can you give an example?

~~~
nostrademons
I wasn't sure if I wanted to embarrass the people involved, but they're public
figures anyway.

For people: Marc Andreesen, Peter Thiel, Ray Dalio, Warren Buffett.
Interestingly, neo-Schumpeterianism (as championed by Perez/Andreesen) seems
to be making a comeback.

For important phenomena that mainstream academic macro-economics has no
explanation for:

\- How do you measure the "substitution effect" of greater quality at lower
prices? Most standard economics metrics assume that value = price; GDP is the
total value of all goods manufactured within a company. That means that when
the price of a computer falls from $2000 to $200, GDP falls. When Google gives
away web search, it counts for nothing; when they reduce the number of organic
results to show more ads, it increases GDP. When open-source Linux replaces
proprietary Windows, GDP falls.

\- Inflation is not uniform. Inflation in classical macroeconomics is treated
as the measured price of a basket of goods, and caused by an increase in the
money supply. But when the money supply increases, that increase does not
filter down to all goods equally. It tends to collect at goods with high
bargaining power and few substitutes (Warren Buffett was the first person I
know of to note this effect). So we have seen massive inflation in the
valuation of unicorns, and in the price of San Francisco real estate. We've
seen high inflation in health care and the price of a college degree. We've
seen steady inflation in home prices elsewhere. We've seen severe _deflation_
in competitive consumer goods markets, and in non-unionized wages. The basket
of goods used to calculate CPI is largely commodities, and so by definition
tends to understate inflation. That's why the Fed is continuing to step on the
gas even though the price of education, or health care, or homeownership is
rapidly moving beyond the reach of average Americans.

\- Competition and capitalism are to some degree antonyms (this is the Peter
Thiel thesis). The first goal of most companies is to build a monopoly and
keep competitors out. This is covered in depth in _micro_ economics, but is
largely ignored in _macro_ economics. But monopolies behave very differently
from competitive businesses when it comes to the macroeconomics fundamentals
of employment, output, and wages. Monopolies tend to employ people because
_they have money and want to eliminate competition_ , not because _they need
output_ ; this explains a lot of crazy economics results like why people can
work 2 hours/day for six-figure salaries while others work 16 hours/day for
minimum wage, or why companies buy startups and then immediately kill their
products, or why companies would rather sit on cash than hire more people.

All of these are mentioned as footnotes in economics textbooks, but they're
mentioned to say "Yes, we know this is a problem with the model, but nobody
has yet found a better way to account for these phenomena." Policy response is
still very much dependent upon mainstream macroeconomics models, even though
the observed effect of that policy response isn't working.

~~~
crdoconnor
Spot on. Unfortunately, academic economists are incentivized to produce models
that justify existing power structures which leads many to go off the deep end
reality-wise.

That's how stupid assumptions like "natural rate of unemployment" or "perfect
competition" in particular get baked in.

Those assumptions are concealing sources of profit. Which is a feature, not a
bug.

------
AndrewKemendo
These are quite bold, and arguably heretical statements to modern neoclassical
economics:

 _New Keynesian models imply that stabilization policies cannot affect the
average level of output over time and that the only effect policy can have is
on the amplitude of economic fluctuations, not on the level of output_

But Summers tries to refute that, just by saying it's absurd and giving the
costanzian platitude "well I gotta do something!"

I think he makes his best point by saying:

 _Beginning the study of stabilization with this assumption takes away much of
the motivation for doing macroeconomics._

Indeed it does Larry.

------
nemo
Larry may be right on some points, but given his past support for and
architecting of deregulation of the U.S financial system (including the repeal
of the Glass-Steagall Act) while he was in the Clinton admin., along with
support for the disastrous privatization of the economies of the Post-Soviet
states that's lead to massive human suffering and political failure, as well
as gambling with Harvard's endowment and losing the school $1.8 billion,
triggering layoffs and budget slashing, I think we'd do well to find advice
from those with a less predictable and disastrous track record.

~~~
alienjr
"support for the disastrous privatization of the economies of the Post-Soviet
states that's lead to massive human suffering"

Lack of privatization in Post-Soviet states lead to massive human suffering.
In Poland the government constantly subsidies all companies that weren't
privitzed in 90s. What's worse quality of products and services in these
industries is terrible. That's why for instance electricity in Poland is one
of the most expensive in Europe. And it is impossible to change anything
because all these companies are highly unionized and have huge political
influences during elections.

Little state ownership may work fine in countries that has different culture
in rest of the economy has been capitalistic for last 200 years. In Post-
Soviet world it is disastrous. Look at Russia for intance - Gazprom and other
state companies were overtaken by the Putin's mafia.

~~~
nemo
I haven't got a problem with privatization per se, and recognize that some
approach to privatization was called for. I have major problems with the
disastrous "shock therapy" approach to privatization that was actually applied
where the US economic advice was what created the mafioso oligarchs.

~~~
xixi77
You are grossly overstating the influence of the "us economic advice", which
was zero. The mafioso oligarchs needed and used none of it.

~~~
jahewson
You might want to read up on this. It was US economic advice which led to the
rapid sell-off of public assets which resulted in the creation of the
oligarchs in the first place.

~~~
xixi77
Seriously, I do not need to read up on this, I was there. But one does not
really need to have first-hand experience to see the deliberate deception in
klein's "shock doctrine" and the like: for example, different countries in the
region had markedly different timings, different implementation of reforms,
different rhetoric, and different resources; but the outcomes pretty much fall
into two groups: places where people demanded and expected accountability on
part of government (ie. baltic states, and a few former warsaw pact countries)
did relatively fine, and others devolved into oligarchies (ie. the rest of the
former soviet union).

------
Rumford
Like maybe don't put a Soviet-style central committee in charge of the money
supply?

It's depressing to me that modern economies like the US and Europe can be so
shot through with central planning, and then when they produce bad results
everyone pretends it's the fault of some freewheeling laizzes-faire policy
that never existed.

~~~
crdoconnor
>Like maybe don't put a Soviet-style central committee in charge of the money
supply?

The US didn't have this at the end of the 19th century and they suffered
through multiple bouts of mass unemployment and deflation as a result. That's
why the Federal Reserve was created.

Central planning can be done well or badly. It can't not be done at all.

~~~
Rumford
The latter half of the 19th century up to WW1 was the USA's longest sustained
period of high growth and high economic mobility. No central bank. Moderate
deflation was the norm. According to the likes of Paul Krugman Americans
should have been eating dirt and living in caves by 1913, but the exact
opposite happened. Growth that the Keynesian technocrats have yet to match.

Except even then, government intervention in money fixed a certain price ratio
of gold and silver. When that ratio no longer reflected the real market
prices, chaos predictably appeared in the banking system. Go back over the
history of the late 19th century panics and you'll notice one metal was
fleeing the country and causing a lot of controversy. That's a government
price control at work, not unfettered capitalism. The Federal Reserve Act was
the wrong solution.

And yet even with the Fed, there's the stubborn little fact of the crash of
1920 -- bigger than that of 1929 -- and the rapid recovery that followed. The
Fed, Congress and the Presidency did basically nothing and it was over in 18
months. So judging from the objective facts laying before us, it looks like
the central planners perform best when they avoid central planning.

~~~
bsder
> According to the likes of Paul Krugman Americans should have been eating
> dirt and living in caves by 1913, but the exact opposite happened. Growth
> that the Keynesian technocrats have yet to match.

And my grandfather walked picket lines and got shot at. Robber barons were at
the peak of their power. Children were exploited as laborers.

Let's also quote Anthony Trollope, a Victorian Londoner who was no stranger to
pollution:

“Pittsburgh without exception is the blackest place which I ever saw, the site
is picturesque, even the filth and wondrous blackness are picturesque.... I
was never more in love with smoke and dirt than when I stood and watched the
darkness of night close in upon the floating soot which hovered over the
city.”

And that was in the 1860's! It only got worse from there until the 1940's.

Your rosy assessment of the country prior to the 1920's has no basis in
historical fact.

~~~
Houshalter
>And my grandfather walked picket lines and got shot at. Robber barons were at
the peak of their power. Children were exploited as laborers.

Which has been true since the beginning of time. Children worked hard labor on
farms instead of factories, and there was more rural poverty instead of city
poverty. On average things were improving.

But that's not even the point. Parent comment is talking about the health of
the economy and the federal reserve. You are talking about the distribution of
wealth. We could implement something like a basic income to redistribute
wealth, without getting rid of free markets and capitalism.

The goal of economic policy should be to generate the most total wealth. Then
we can decide what to do with that wealth.

~~~
crdoconnor
>The goal of economic policy should be to generate the most total wealth.

Somebody wants all the money to go to the 0.01%.

------
AngrySkillzz
Wouldn't a simpler hypothesis be that output trends before a recession are
artificially high? We know fairly well that economic trends tend to feed back
on themselves; the idea that growth leads to an acceleration of growth which
overreaches and ends in a crash isn't particularly far-fetched.

~~~
skylan_q
It blows my mind that Keynesians can't identify busts that were caused by
bubbles.

When the US real estate market started tanking, how was the boom supposed to
continue? More construction in an over-supplied housing market? Re-train
workers overnight and give them jobs in other industries? Transmute wood,
concrete, shingles, tractors, bulldozers, and excavators into other materials
and tools for other industries?

~~~
Mikeb85
> More construction in an over-supplied housing market?

You do realize that Keynes' departure from 'classical' economics was a model
that depended more on aggregate demand than supply, right?

Classical economics (ie. pre-Keynesian economics) would say "just build more".
Keynesian economics states that you should stimulate demand (lower interest
rates, increase government spending, increase money supply, etc...). Which is
exactly what got us out of the recession.

> It blows my mind that Keynesians can't identify busts that were caused by
> bubbles.

It's not about whether they can or can't. Some obviously did see the bubble
coming (some Goldman Sachs traders famously bet against the housing market).
The problem is that too many people profit from the 'bubble', and momentum
takes people over the edge (because, like it or not, consumers are NOT
rational).

~~~
skylan_q
>Which is exactly what got us out of the recession.

It's what caused it in the first place. i.e. 2% interest ninja loans, CRA,
"home ownership society", gov't-sponsored entities, etc...

~~~
Mikeb85
Yes and no. It was caused by too much exposure to debt, so when asset prices
dropped banks and consumers became insolvent.

Low interest rates by themselves wouldn't have caused the recession, although
rates probably should have been higher during that time period anyway.

Also keep in mind it's only recently that Keynesian and left-wing economics
has become fashionable once again...

------
jstalin
Surprise surprise, world's central banks are engaged on the largest bout of
central planning the world has even seen and... guess what, it doesn't work!

------
ThomPete
There are two very important things that would need to be factored in before
we start to better understand what is going on.

1) We need to understand that we live in a global economy not a national one.
One of the key elements to understanding this global economy would probably be
to look at something like Supply Chain Management. I.e. the productivity of
china should be closely tied with an understand of US economy. They aren't
separate anymore than two computers connected via a network is.

2) We need to find a way to factor in technology, digitalization and
automatization instead of treating it as the externality it is today, by
almost all economic thinkers.

Especially those who advice countries and central banks. It is one of the key
components in understanding what is going on. And before we find a way to
factor that in, we will keep fighting in the blind.

Until then we will have this fruitless idealistic fight between Keynes and
Austerity and not get to the heart of the discussion.

~~~
laotzu
Your ideas strongly relate to the message of the late Buckminster Fuller,
former president of the Mensa Society and winner of the Presidential Medal of
Freedom. Here are just a couple quotes that your post made me think of:

>Humanity is now experiencing history's most difficult evolutionary
transformation. We are moving away from a rooted life-style with a 95-percent
rate of illiteracy. We are almost unconsciously drifting away from
selfidentity with our ages-long, physically-remote-from-one-another existence
as 150 separate, sovereign nations. Now the uprooted humans of all nations are
spontaneously deploying into their physically integrated highways and airways
and satellite-relayed telephone speakways, into a big-city way-stationed,
world-around living system. We may soon be atom-bombed into extinction by the
preemptive folly of the political puppet administrators fronting for the
exclusively-for-money-making, supranational corporations' weaponry industry of
the now hopelessly bankrupt greatest-weapons-manufacturing nation (the
U.S.A.). If not bomb-terminated, we are on our ever swifter way to becoming an
omni-integrated, majorly literate, unified Spaceship Earth society. The new
human networks' emergence represents the natural evolutionary expansion into
the just completed, thirty-years-in - its-buildings world-embracing, physical
communications network. The new reorienting of human networking constitutes
the heart-and-mind-pumped flow of life and intellect into the world arteries.

-Grunch of Giants (1982)

>I'm going to give you an important kind of a picture. I hear a lot of people
say "I don't like machinery and technology it's making a lot of trouble", so
were going to take all the machinery away from all the countries of the world,
all machinery, all the tracks and the wires, and the works and were going to
dump it all in the ocean. And you discover that within 6 months, 2 billion
people will die of starvation having gone through great pain. So we say
"that's not a very good idea lets put all the machinery back where it was."
Then, were going to take all the politicians from all the countries around the
world and we're going to send them on a trip around the sun, and you'll find
we keep right on eating. And the political barriers now... scientists say very
clear you could make the world work and take care of 100% of the people at a
higher standard of living that anyone has ever known despite the increasing
population, but you cant do it with the barriers, any more than you can try
run a human organism with a wall between the ear the eye and the stomach. It
is an organic whole, it is total industrialization.

~~~
ThomPete
Thats interesting and yes I guess they do correlate.

It's not the global economy it's the networked economy. And so in order to
understand economy we need to look at it non-nationalistically. Thats the only
perspective where we will see whats going on IMO.

------
crdoconnor
Some background on Larry Summers: [http://www.prosebeforehos.com/article-of-
the-day/04/10/the-c...](http://www.prosebeforehos.com/article-of-the-
day/04/10/the-corruption-of-larry-summers/)

------
narrator
There's something wrong with the cost structure in "Advanced Economies". It's
just too cheap to make things in China. There are some products where the cost
of the raw materials would be more expensive in the U.S than having the
finished product shipped from China. There are sky high costs, and nobody can
figure out where they are coming from and everyone just shrugs their
shoulders. This kind of thing happens in healthcare and education too.

Has anyone in manufacturing looked at the financials of a Chinese manufacturer
with low unit cost? Where does the money go or not go that makes things so
cheap?

~~~
zeveb
> There's something wrong with the cost structure in "Advanced Economies".

Yes, and that something wrong is taxation and regulation (which is a hidden
form of tax). Those things are both absolutely necessary, but they greatly
inflate the cost of goods and services. What's more, they tend to be well-
hidden in order to prevent people from generally revolting.

~~~
wavefunction
I like regulation. I see these articles about people in China suffering from
severe asthma and entire major cities where you can't go outside due to the
haze of pollution and I thank my lucky stars our forerunners had the decency
and common sense to think of the future and not just short-term bottom-lines.

~~~
mikeash
I visit China every couple of years and I completely agree. The terrible air
quality is the worst thing about Beijing.

But it does explain a decent chunk of the cost disparity. The Chinese (or at
least the government) are willing to pollute the crap out of their air in
order to better compete, while we are not. That doesn't mean we should join
them, but it does explain their lower costs.

------
youngtaff
Perhaps instead of giving cheap money to the banks so they can make a profit
at our expense, we could give the money to the people so they can use it the
'best' way for them (save, spend, pay off debt etc)

~~~
fche
... or how about "none of the above".

~~~
littletimmy
"None of the above" means no money at all. Money is issued by the central bank
with the authority granted by the government which is in turn granted by the
people.

So long as there is money, there will be a monetary policy. The government
doing "nothing" is not an option.

~~~
xlm1717
I think nothing (or as fche said "none of the above) was an option. The
economy is sick because we insisted the sickest companies in the economy were
"too big to fail". We're keeping them on life support when they're sucking the
life out of the economy.

------
asquabventured
Keynesian economics creates market failures. Government "stimulus" does not
create natural demand and any "stimulus" has front-loaded costs that are paid
for by future generations.

Central "Planners" should be fired and our economic systems need to move to a
more decentralized economic model, à la Austrian Economic Theory[1] if we ever
want to see natural growth again.

[1][https://en.wikipedia.org/wiki/Austrian_School](https://en.wikipedia.org/wiki/Austrian_School)

~~~
ZenoArrow
The solution isn't decentralized economics, it's debt-free money. Get rid of
the need for money to create a return for its creators and you eliminate many
of the issues with money in our society, including future generations having
to pay for the spending of currently active governments.

------
6stringmerc
Bill Gross is a rather polarizing figure, but compared to Summers, I'd say
he's a lot more "hands on" and experienced in the way that financial systems
work - or don't. Here's his latest Janus newsletter / update:

[https://www.janus.com/bill-gross-investment-
outlook?utm_camp...](https://www.janus.com/bill-gross-investment-
outlook?utm_campaign=Bill%20Gross%20Feb%20IO&utm_medium=social%20&utm_source=twitter&utm_content=Bill_Gross_Feb)

~~~
mikeyouse
Bill Gross makes money from high interest rates, he's been wrong for about 7
years now with regards to every one of his predictions (QE will cause high
inflation, stopping QE will cause inflation, stopping QE will increase bond
yields), I wouldn't take his advice too seriously.

~~~
6stringmerc
Savers are getting killed by no interest rates available in the market. He is
no less wrong than the Federal Reserve saying that zero interest rate policy
is good for growth, or that their policies aren't responsible for bubbles,
etc, etc, etc.

~~~
pessimizer
The Federal Reserve having an opinion about the economy that is different from
yours has nothing to do with Bill Gross being factually incorrect in every
prediction he has made about the economy since the recession, and performing
badly.

You don't get to distribute wrongness equally between supply-side and demand-
side people; that's not how reason works.

~~~
6stringmerc
What you call opinion I call active decision making, and while Gross hasn't
"predicted" well, neither has the Federal Reserve, thus they are equivalent,
practically speaking, in their efficacy. They balance each other out. But
sure, grind that axe against his perspectives all you want, I've got my own
CFA Level 3 Asset Manager guy that I follow closely.

------
caseysoftware
"Standard new Keynesian macroeconomics essentially abstracts away from most of
what is important in macroeconomics."

Yes, that has been the criticism for decades. There is nothing new here.

The only time Keynesian economics has "fixed" an economy was WW2 when we (the
US, specifically) had full employment because of the draft _and_ all of our
competition had been literally flattened and/or killed.

For another look at it, check out the Keynes vs Hayek rap battle:

[https://www.youtube.com/watch?v=GTQnarzmTOc](https://www.youtube.com/watch?v=GTQnarzmTOc)

~~~
astazangasta
Don't watch that rap battle, hayek's insights are surely worse than Keynes. At
least we can attribute one repaired economy to Keynes, we can attribute zero
to Hayek. In addition, while Keynes may not help us resume prior output, he at
least gives us some way to recover from recessions. Hayek's given us nothing,
unless you're one of those people who thinks "The Road to Serfdom" is a good
book.

~~~
sbuttgereit
First: watch the rap battle. Avoiding (or urging the avoiding) of contrarian
ideas is how you perpetuate ignorance. If Keynes is worth is weight in
stimulus, he'll be able to withstand the counter argument and win the day: if
not, then there's even greater reason to see other perspectives.

Sorry, but not buying your argument. If anything we can attribute a greater
length of the Great Depression to the Keynesian inspired policies, not a
repair (assuming that is the "fixed" economy attributed to Keynes). For some
reference on this consider: [http://newsroom.ucla.edu/releases/FDR-s-Policies-
Prolonged-D...](http://newsroom.ucla.edu/releases/FDR-s-Policies-Prolonged-
Depression-5409)

WW II ended the Depression insofar as its impact on employment, but it also
destroyed (literally) massive amounts of accumulated capital. Global quality
of life was greatly reduced: a failure by any rational standard. I suspect the
necessary economic restructuring for war, and the later return to a peacetime
economy, has much more to do with the repair of the economy that anything
Keynes ever conjured.

Later we have substantial numbers of completely unimpressive Keynesianesque
experiments, including our own current "recovery". For Hayek (or similar) you
are correct: there are really no instances of his policies repairing an
economy... but could you tell me how many times approaches like his have been
tried? There's some argument for the Depression of 1920, but on the whole
reduction in Government intervention during an economic downturn is just not
how bureaucrats roll. So I count no attempts. To suggest there are no Hayekian
successes because Hayek fails is simply deeply flawed thinking; there are no
successes simply because those approaches have never been tried. I think the
closest you can see are in certain emerging economies where, at first, no one
cares to regulate because there is nothing of worth there from a political
power point of view (e.g. early Hong Kong, much of the early U.S. even).

And yes, I do consider the "Road to Serfdom" a good book :-)

~~~
astazangasta
>but on the whole reduction in Government intervention during an economic
downturn is just not how bureaucrats roll.

We had this exact experiment after 2008. Austerity in Europe, stimulus in the
US. The results are pretty clear.

~~~
clock_tower
Both lose?

~~~
astazangasta
[http://earlywarn.blogspot.com/2013/03/us-vs-european-
gdp.htm...](http://earlywarn.blogspot.com/2013/03/us-vs-european-gdp.html)

~~~
clock_tower
I didn't know until I clicked it whether this was going to be a pro-Europe or
a pro-America link. Austerity hasn't ended Europe's part of the Great
Recession; but the US's "recovery" has only extended to a few privileged
economic areas. In the South, the Midwest, and the interior of the coastal
states, the Great Recession never ended.

~~~
astazangasta
The South never recovered from the Civil War, seems to me.

~~~
clock_tower
What about the Midwest? The Northern and West Coast interior? Are they somehow
suffering from the Civil War as opposed to the never-ended-in-real-terms 2008
recession?

------
Animats
Classical macroeconomics has some real problems. These include:

\- Most models of capitalism are based on trading in goods. This was a
reasonable model a century ago, but today, services are much larger in the
developed world. This has tax policy implications - sales and import taxes
apply only to goods, not services.

\- Classical models assume that demand is infinite but capital is limited. For
most of history, the problem was making enough stuff. In today's economies in
the developed world, demand is a scarce resource but capital is not. The US
population is essentially maxed out on buying power, with a low savings rate.
Manufacturers could easily up production of just about anything if they could
sell it. There's lots of capital around looking for something which will
provide even a few percent reliable return, but few investment opportunities.
This is why tweaking the capital supply, which is all the Fed can do, doesn't
seem to affect much any more.

\- Technology has brought an asymmetry to recessions. In a recession, as
demand declines, the least efficient producers drop out first and there are
layoffs. Productivity increases. Now, when the recession is over, the most
efficient producers scale up, maintaining the productivity level they had,
increasing their market share. This may be the real cause of the "hysteresis"
of which Summers writes. It's also a way in which industries become more
concentrated.

\- Classical economics overestimates the effect of capital and underestimates
the effect of technology. Recent work indicates that most economic growth is
driven by technology, not capital, and has been since the Industrial
Revolution two centuries ago. (Economic growth rate pre-industrial revolution:
about 1%-2% per _century_.)

\- Classical models of the "free market" assume a large number of players.
That's rarely the case today. One big effect of computerization is that it's
now possible to run very large organizations, like Amazon, quite well.
Business used to have scaling problems - beyond some size, businesses became
harder to run, and couldn't get out of their own way. For most consumer-facing
industries, that's no longer a problem. There's now a tendency to consolidate
as far as antitrust enforcement will allow, which in the US, seems to be down
to a duopoly. When the number of competitors is very small, they tend not to
compete too hard.

\- Classical economics assumes labor is mostly direct labor, and that output
requires labor inputs. Today, direct labor is way down, and most labor is
indirect labor, leading to change, not direct output. Online businesses are an
extreme case - doing what the business did yesterday requires almost no labor.
Economics doesn't really have a handle on this yet.

~~~
RivieraKid
Interesting, very good insights. Do you have any links to resources with this
kind of thinking?

------
hackatroll
The article says the U.S. is about 10% below a trend estimated through 2007.
2007 was the peek of the bubble. Why are they using 2007 as a target? The
credit market was different back than. How much of that 10% output was fueled
by easy credit? It might be better to use a few years before 2007 as a target.
I would like to know where we are if you look at it before the Mania Phase of
the bubble.

------
jgome
Yes, you need new euphemisms and new twisted definitions to profit from naive
people, to convince them that they should buy your bullshit because they
"need" it, and to tell them that govt. subsidies/legal pardons given to
corporations are just fine, while giving "your" tax money poor people is a
bad, terrible idea.

People don't believe your BS anymore. And you know it.

------
sjg007
Can anyone ELI-5?

