Daily Archives: January 11, 2017

Tom Ferguson: Monetary Policy Can’t Levitate a Broken Economy

Naked Capitalism has the article Tom Ferguson: Monetary Policy Can’t Levitate a Broken Economy.

Two generations ago, almost every economist knew what a catastrophe a deficiency of effective demand could create. And in a real crunch, they knew what to do about that. They realized you couldn’t push on a string, so somebody — the government — had to borrow and spend when private markets would not. From the 1980s on, though, the fundamental Keynesian point — the Principle of effective Demand —disappeared in a cloud of statistical double-talk that, when you deconstruct it, turns out to imply estimating potential output as a lagged function of whatever foolish policy is being pursued.

Of course I like this article. This is what I have been trying to tell people for more than the 10 years I have been publishing this blog. I have been waiting for someone to talk about pushing on a string so I could quote them, and not pretend that I invented the phrase.

Running across this article is a rather fortuitous bit of luck given my previous post Deficits Matter, Paul Krugman Doesn’t. Paul Krugman is one of those economists who learned his economics two generations ago like I did. Krugman’s problem and my good fortune is that he made a living being a noted economist while I had to work as an electrical engineer. He had the privilege of being on top of the economic thinking of the 1980’s to participate in making “the fundamental Keynesian point — the Principle of effective Demand — disappeared in a cloud of statistical double-talk.” Since I was too busy earning a living in my profession, I failed to realize that what I had learned about economics in college was being dismissed by the professionals. Now that I am retired and can pay more attention to economics, and it has become obvious that what I learned in college was correct, I can be ahead of the game compared to some of the professionals that sold themselves a bill of goods.

Deficits Matter, Paul Krugman Doesn’t

Ellis Winningham has posted the article Deficits Matter, Paul Krugman Doesn’t.

In his latest anti-knowledge drivel of January 9, 2017, Count Krugula apparently decided that he wants to make a total fool of himself in public yet again. Only this time, he wants it to be a sort of career-ending effort. As I said, in that effort, Paul Krugman has succeeded.

MarianneB brought this article to my attention. She wanted my opinion because I tend to read and understand articles like this one.

I have read varying amounts of the critique and the article to which it refers. The critic is closer to the truth than Krugman, but they both tend to gloss over subtleties.

Deficits do and don’t matter in ways too subtle for either of them to cover. The money the FED put out there is sitting in the hands of people who won’t put it into the economy right now. To make deficits work, the money has to be put in the right hands to match the circumstances. What the fed has done to get it into the wrong hands might need retraction if we start getting money into the right hands. Winningham glosses over the potential problem.

I am being too subtle too. When I use phrases such as “right now” and “match the circumstances”, you are supposed to understand that in other times other than “right now” things could (and will) be different. I can leave it to your imagination as to what could be different, but that would be a deriliction of the duty of an expert. The chances that the uninitiated would guess the differences that would change the economic prescription are not that great. Neither writer helps with that matter. This essay would be way longer than it is, if I were to go into the explanation, but at least I have warned you that there are holes in the arguments if these details are not discussed.