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Reconciliation

Recap: A look at post-stimulus America; two graphs that show why businesses aren't spending, and I'd like to see more politicians in the Wyden/Ryan mold.

Elsewhere:

1) The economic security index.

2) Some interesting thoughts on the Obama administration, the Republicans, and race.

3) A Keynes refresher.

By Ezra Klein  |  July 22, 2010; 7:18 PM ET
 
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Comments

A few comments on #3

"Workers bargain for money wages, and a reduction in their money incomes might leave total demand too low to employ all those willing to work."

This seems at odds with the facts. I cannot think of one recession that was caused by the sudden failure of workers across the economy to negotiate sufficient money wages. As we head to the boom's peak, workers wages rise steadily, and usually the continue rising into the recession. Even if money was being diverted from worker to employer, why do employers not spend?

What actually causes the 'big' recessions/depressions? Animal spirits? Or unsustainable credit expansion?

"Yet today most economists model unemployment as “voluntary” – a rational preference for leisure rather than work."

There are more subtle distinctions obscured by labels. Economists also acknowledge that we have a very path dependent and human capital intensive labor market, and it can be very painful switching from a field where you can earn $40/hr to one where you earn perhaps $5/hr - painful enough to rationally not make the switch, especially considering the possibility of hurting one's resume. So the unemployed real estate agent who isn't actively applying at fast food restaurants isn't expressing so much a preference for leisure, but is willing to accept unemployment over suboptimal employment.

In any case, some economists simply question the ability of the government to get unemployment down in a sustainable fashion given available policy options.

"This reinforces the idea that “stimulus” cannot do any good, since workers have as much employment as they want."

I haven't heard anyone suggest we are at full employment. The argument against the stimulus has (at least) four parts:

1. We cannot know what the alternative use of funds would have been, had the borrowing not taken place, although higher output and employment is admittedly possible.
2. Do the funds apply to useful projects and sustainable jobs, or are they applied to wasteful projects and jobs that disappear once the stimulus is gone?
3. You have to take away the stimulus at some point, and then you're stuck with a big mountain of debt.
4. The history of stimulus is mixed at best. 1920-1921 saw a severe recession but a very rapid recovery despite slashed government spending. Despite slashing spending after WWII, the private sector grew by leaps and bounds from 1945-1947, contra the expectations of that era's Keynesians. Japan didn't have much luck with fiscal stimulus, and now has a horrible debt problem.

"Today’s “efficient market theory” restored to economics the assumption of perfect knowledge by claiming that all risks are correctly priced."

More accurately put, prices rapidly incorporate public information so that one cannot consistently outperform the market on a risk adjusted basis. The price is "correct" only in the sense that it is hard for anyone to make excess profits trading on publicly available knowledge.

Posted by: justin84 | July 22, 2010 10:09 PM | Report abuse

Quote from #2: "[T]ake note of the way the Obama administration folded like a cheap suit in the face of a half-baked accusation from a non-credible source."

The Shirley Sherrod story has yet to fully be told. Despite the alleged *context* of the original video, there is reason to believe the lady still sees the world through the prism of racism. The NAACP, a collateral target in Breitbart's piece, is still sunk far below the lofty terms of its original charter. And the Obama administration went into panic exactly because Breitbart has credibility. And the administration's subsequent whipsaw turn, full of apologies, is almost as ill-advised as its original lurch. They've created a spectacle, and now, should further information on Sherrod's circumstances or demeanor surface, they're doubly stuck. The entire thing smacks of incompetence.

Posted by: msoja | July 22, 2010 11:09 PM | Report abuse

" went into panic exactly because Breitbart has credibility."

andrew breitbart has credibility??
do you really think so, msoja?
i think that andrew breitbart causes panic, because he is so ruthless, not because he is credible.

i think that ruthless people are very intimidating to most people.
in general, i think that ruthless people can be dangerous and unpredictable..and they do cause people to feel panicked or silenced.

and that is what gives them their power.


Posted by: jkaren | July 23, 2010 12:12 AM | Report abuse

--"i think that andrew breitbart causes panic, because he is so ruthless, not because he is credible."--

The two terms aren't mutually exclusive. One can be both, and Breitbart generally is.

Posted by: msoja | July 23, 2010 8:41 AM | Report abuse

"The two terms aren't mutually exclusive. One can be both,"

here is why i dont agree.
the ability to trust someone, is a great part of what gives them credibility.
ruthless actions are often imbalanced, and inspire, or are often meant to inspire, fear and intimidation.
ruthless people generally lack empathy and a human perspective, important qualities in making reasonable decisions.
when someone will act ruthlessly, as a means to achieving an end, i believe that it damages their credibility.


.


s

Posted by: jkaren | July 23, 2010 9:35 AM | Report abuse

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