Quote of the Week...

...is from Roger Garrison’s Time and Money (2007):

In response to the question "What about expectations?", we get New Classical monetary misperception theory, real business cycle theory, and new Keynesian theory. This is the state of modern macroeconomics. While each of these theories include rigorous demonstrations that the assumptions about expectations are consistent with the theory itself, none are accompanied by persuasive reasons for believing that there is a connection between the theoretical construct and the actual performance of the economy over a sequence of booms and busts. Applicability has been sacrificed to rigor. The Keynesian spur has led us to this dead end.

Time and Money is one of several assigned books for my macroeconomics course this semester. The second chapter displays Garrison’s strong grasp of other modern macro theories and their unfortunate divergence from trying to model/explain the world as we know it. Having only read through chapter three, which begins to lay out the foundation of Austrian Business Cycle Theory (ABCT), I’ve already come across several discrepancies with modern monetary operations. In forthcoming posts, I hope to address these disagreements and outline a new theory that combines the positive features of Post-Keynesian monetary economics and Austrian capital theory.

 
Bibliography
Roger W. Garrison (2007-03-16). Time and Money (Routledge Foundations of the Market Economy) (Kindle Locations 801-806). Taylor & Francis. Kindle Edition.

Teaching Austrians Endogenous Money

Last semester a couple PhD students in the economics program at George Mason started a Capital Theory Reading group. While the initial bi-weekly meetings were focused on Austrian Business Cycle Theory (ABCT), the discussion has more recently expanded beyond capital theory and into monetary theory. As the proponent of Post-Keynesian monetary economics among a group of Austrians, the conversation occasionally stalls when I try to explain the implications of endogenous money. The other students are, however, open to learning about endogenous money and we have collectively decided to make that subject the central theme of our next meeting.

This post (bleg) is a request for guidance in selecting the best and most appropriate readings to teach endogenous money to Austrians that are largely unfamiliar with the theory. What academic papers or book chapters would you recommend?

Thanks in advance for your help.

An Austrian, Post-Keynesian Economics?

After a brief hiatus from blogging due to final exams and mental recuperation, I’m ready to get back into the swing of things. While I have a ton of reading to catch up, there is one post in particular that I want to share with my readers. During the break, Mike Sax put forth the question, What School of Economics is Woj From?

Speaking of Woj, on a few occasions Nanute has asked me what Woj is-economically speaking. I always answer that he's an MMTer-or Post Keynesian-but Nanute has the impression that he's an Austrian.

  Just reading some posts there recently tells me that it's actually a bit of both. Which is interesting-you normally think of MMTers and Austrians to be diametrically opposed antipodes.

This question is personally relevant given my selection of PhD programs and the direction of this blog. Many readers are likely aware of my decision to attend the PhD in Economics program at George Mason University, a school known primarily for promoting Austrian economics. However, readers are also presumably aware that a majority of my blog posts focus on monetary and fiscal policy from a typical Post-Keynesian vantage point. Mike points out something that several colleagues have also picked up on this semester about the Austrian - Post Keynesian dichotomy:

It's a very interesting amalgamation: but I'm not sure how you practically can choose between policy prescriptions if you are both skeptical about government spending for malinvestment reasons and yet agree that fiscal deficits are necessary at least countercylically.

Are these two schools of economics mutually incompatible or are there sufficient overlapping ideas to create a unique vision? Which of the schools do you associate this blog with? Mike does an excellent job laying out some of my views on the topic and hopefully others will chime in here as well. After a few days, I will try to shed some light on Mike and Nanute’s debate with a more comprehensive take on the question from my own perspective.

Related posts:
Finding Common Ground
Hayekian Limits of Knowledge in a Post-Keynesian World
Are Theories of Modern Money and Heterogeneous Capital Compatible?
Post Keynesian and Austrian Perspectives on Heterogeneous Capital and the Capital Debates

Bubbling Up...12/6/12

1) Europe’s Avoidable Collision Course by Tyler Cowen @ The New York Times (h/t Mark Thoma)

It is thus a mistake to overreact to most of the headline events about the euro zone crisis. The good news is never quite as good as it looks, and the bad news often brings beneficial responses. It seems that for dozens of months now, we’ve been hearing that the fate of the euro zone will be decided “shortly,” yet somehow the drama continues.

Unfortunately, longer-lasting solutions require coordinated agreement among many euro-zone nations and, possibly, the broader European Union. That would include significant debt write-offs (as the International Monetary Fund is suggesting), quick moves toward better-integrated European banking institutions, and a general agreement that the European Central Bank unconditionally support troubled debt securities without trying to manipulate home governments’ policies.

Could all of that happen? For comparison, the current fiscal standoff in the United States involves no more than a president and two houses of Congress. In Europe, however, the bargaining is much more precarious, as it must span numerous nations, many of which have coalition governments, separation of powers and, in the case of Spain and Belgium, significant ethnic and linguistic division. The European Union has even had trouble concluding routine budget negotiations, the disputed parts of which concern no more than 0.03 percent of the union’s gross domestic product.

Woj’s Thoughts - Though I hold some differing views about the feasibility of the European Union with a common currency, in this piece I think Tyler is right on the mark. It has been fascinating and frustrating to watch markets seemingly overreact to every bit of European news. The supposedly best efforts of politicians and economists have, to date, failed to change the direction of economic growth and unemployment in the region. As I’ve stated previously, the clear optimism that remains among markets and Europeans is a positive sign of how deep faith in an eventual resolution lies. The likelihood of that optimism being rewarded is unfortunately minute in the near future and remains unfavorable for the long-run.

2) Mandated Employer Health Insurance Is Biased Against Small Business (in the US) by Peter Dorman @ EconoSpeak

This morning’s story about the problems small business owners face in complying with the ACA doesn’t surprise me.  My first gig as an economist, way back in 1979, was a summer internship at the Small Business Administration, where, among other things, I prepared an analysis of the impact of health insurance mandates on small firms.  It was a pretty rudimentary piece of work: I was just a grad student and had not yet studied how to do applied micro analysis.  Still, I was able to see the main story line.

Actually, I got two out of the three pieces of the story.  First, I saw that there are economies of scale in group health insurance, and without some form of organization above the firm level, small employers will pay a higher unit cost.  Second, and quantitatively more important, small firms in the US are substantially more labor-intensive on average, so an increase in labor costs hits them harder.  The third piece, which I missed at the time, is that wages are lower in the small business sector, so a mandated benefit of given cost will constitute a larger share of the wage bill.

…

But the US suffers tremendously from duality*—the division in the economy between larger, better-capitalized, more productive, higher-paying operations and smaller, less productive sectors that offer crummy jobs.  (It isn’t entirely a division between firms because some large firms have established their own internal “secondary” sectors.)  ACA should be examined in this context, especially since the administration hasn’t proposed any measures at all to reverse the trend toward greater duality, which is one of the underlying factors behind the growth in inequality.

Woj’s Thoughts - The other day I offered thoughts on Furthering the Post-Keynesian View of Wealth and Income Concentration, which entailed some great discussion within the comments. A question that I posed regarding a Job Guarantee is, how will it interact with the current market structure? The above post suggests a similar approach should have been considered with the ACA. Yes it will increase access to health insurance, but what if it also leads to larger unemployment and inequality? There is no question that trying to quantify these effects is difficult and imprecise, at best. The end result may have even been the same. All I’m saying is that I would generally prefer to see these macro-policy decisions examined in a broader context.

3) Conflicting signals on dollar-yen by Walter Kurtz @ Sober Look

Clearly investors have some good reasons to continue shorting the yen, as fundamentals for the currency are terrible. The BOJ balance sheet as percentage of GDP is at a record.

Source: Merrill Lynch

…

Based on these fundamentals Merrill obviously predicts a weaker yen. As one would expect, monetary expansion is unlikely to improve credit, but it should impact the FX markets.

Woj’s Thoughts - Obviously many people have been trying, unsuccessfully, to short the Yen for a long time. The BOJ's efforts to create inflation have been equally unrewarded. I continue to think that until the government pledges and follows through on a massive fiscal stimulus (deficit increases), the economy will remain stagnant and the Yen will remain a strong safe-haven.

Post Keynesian and Austrian Perspectives on Heterogeneous Capital and the Capital Debates

Yesterday I posed the question, Are Theories of Modern Money and Heterogeneous Capital Compatible? In the discussion that followed on Facebook, the capital debates became a central theme. For those unfamiliar with the capital debates, here are a few choice selections from Matias Vernengo’s wonderful, yet brief introduction:

The capital debates are associated with the very notion of capital. Classical political economy authors, from William Petty to Karl Marx, including Quesnay, Smith and Ricardo, treated the process of production as a circular one. In this context, capital is a produced means of production,[2] rather than a factor of production used in the process of obtaining final goods. The most important result of the capital debates is that, once capital is defined as produced means of production, there is no direct relation between the relative abundance or scarcity of the means of production and its remuneration. Distribution, in other words, is not governed by supply and demand.

…

Even though the idea of intertemporal equilibrium, in which capital is treated as a vector of heterogeneous capital goods, was first developed by Eric Lindahl and then popularized by John R. Hicks in the 1930s, and used by Arrow and Debreu in the 1950s, it was only after the capital debates that it came to be dominant within the mainstream.

The problem with the use of heterogeneous capital goods is that it implies a change in the traditional method of economics. Normal equilibrium positions are associated to a uniform rate of profit; however, when dealing with heterogeneous capital goods that are not substitutable between each other, it becomes necessary to discard the notion of long run equilibrium.

Although I don’t want to stray too far from the original question, this last sentence by Vernengo appears to offer support for monetary non-neutrality in the long run. When discussing the subject recently, the question was posed “is the long run therefore simply a series of short run periods?” Perhaps surprising to many of my Austrian colleagues, it appears the introduction of heterogeneous capital provides reason “to discard the notion of long run equilibrium.”

Returning to the main subject at hand, The Radical Subjectivist offers Lachmann’s Quick Comment on The Cambridge Capital Debate:

The second reason rests on the fact that the purpose of all capital, hence also of the current maintenance of existing capital goods, is to secure a future income stream. But the future is unknowable, though not unimaginable, and men have to use knowledge substitutes in order to evaluate future income streams, viz. expectations. Experience shows that different persons will typically hold different expectations about the future income to be expected from the same resource, and that the same person may hold different expectations about the same future event at different points of time. The inevitably subjective nature of all ‘forward looking’ views renders the measurement of capital impossible.

Lachmann was seemingly critical of the capital debates for ignoring subjectivism and not giving credit to earlier authors, including Hayek, that discussed the impossibility of measuring capital. While these points may be correct, they don’t appear to undermine the deeper critiques of neoclassical (mainstream) economics laid out by Vernengo.

Summing up the current discussion, here is a straightforward answer from Lord Keynes (my emphasis):

Post Keynesian economics agrees with Austrian economics that capital goods are heterogeneous.

But heterogeneous capital can also have a significant degree of durability and substitutability. A capital structure in a capitalist economy where we find some important degree of adaptability, versatility and durability in the nature of capital goods means that the Austrian business cycle theory of Hayek, as propounded in Prices and Production, is not a realistic vision of modern economies.

Further reading:
Subjectivism and Economic Analysis: Essays in memory of Ludwig Lachmann
Revisiting the Cambridge Capital Theory Controversies: A Historical and Analytical Study

(Special thank you to Payam Sharifi, Gauchito Gil, and Pablo Bortz)

Furthering the Post-Keynesian View of Wealth and Income Concentration

As frequent readers of this blog are well aware, my approach to understanding business cycles is most closely associated with the Post-Keynesian sub-disciplines of Monetary Realism (MR) and Modern Monetary Theory (MMT). The order of appearance is intentional since I find myself more frequently in disagreement with MMT when its proponents stray too far from their monetary operations expertise into the realm of policy recommendations. Though I support the government’s ability to offset private sector deleveraging with budget deficits, I find it troubling that more specifics on the distribution of funds and current tax laws are often omitted from the discussion.

Although these disagreements are meaningful, they do not discount the shared goal of promoting multi-sectoral analysis of business cycles. Thornton (Tip) Parker, at New Economic Perspectives, puts forth two ideas to further this goal. His first idea revolves around the issue of wealth and income concentration that I noted above:

The wealthy use much of their money just to make more money by gambling through hedge funds, leveraged buy-out funds, and other financial schemes.  They take some out of the economy by spending in other countries and hiding from taxes with off-shore accounts.  They are not using much to make productive investments to create more jobs that would provide good pay and benefits in this country.  Too much of what high earners receive leaks out of the Main Street economy to Wall Street, and often to other countries.

I do not think that MMT and MS consider the leak adequately. They explain why the government must create more new dollars to offset private sector and foreign surpluses.  But they do not explain how to prevent many of those dollars from flowing up and increasing the wealth concentration.  I suspect that more dollars flow out of the Main Street economy through the leak than as payments for net imports.  Just the need of many middle and lower income families to borrow ensures that some of their income will flow up in the form of interest and finance charges.  (Margrit Kennedy has recently estimated that thirty-five to forty percent of all purchases go to interest.)

The effect of concentration might be analyzed by dividing households into two subgroups, one for the wealthy (say top 10%) and one the rest.  Showing each subgroup’s surplus or deficit in relation to the rest of the private sector and the foreign and government sectors would show how much of a problem inequality really is.

I know of no easy way to do that, but conceptually, it would debunk the idea that income inequality is an envy, special pleading, or made-up class warfare issue.  It would also show that taxes can do more than just prevent inflation, they can be used to limit the leak of money out of the productive parts of the economy.

Though this research project faces significant challenges, the potential results could vastly improve current policy discussions both among Post-Keynesians and in the broader political arena.

Related posts:
Debt Inequality Remains Major Headwind To Growth
Bubbles and Busts: IMF - Leveraging Inequality
Bubbles and Busts: Forgotten Lessons from Japan's Lost Decades
Hayekian Limits of Knowledge in a Post-Keynesian World

Hayekian Limits of Knowledge in a Post-Keynesian World

Steve Horwitz explains how The work of Friedrich Hayek shows why EU governments cannot spend their way out of the Eurozone crisis:

Politicians and bureaucrats lack the knowledge to know which pieces fit with which pieces as they cannot know the nature of the idled resources and what consumers want. They are unable to know what is needed to create a sustainable recovery. One of the most fundamental insights of Hayek and the Austrians was that prices, profits, and losses serve as knowledge surrogates to coordinate the decentralised decisions of producers and consumers, themselves often based on knowledge that they could not communicate any other way.

Politicians who are structurally unable to know how best to allocate stimulus resources will inevitably distribute them to those persons and groups who will give them the most electoral support. The Austrian caution about the limits of politicians’ knowledge suggests that no matter what is drawn up on the blackboard, the politicisation of stimulus spending is not an accident and cannot be avoided. Stimulus spending that goes to groups that will provide the most votes will ensure that the right combinations of capital and labour will not be formed.

On this blog I often outline my views of the macro-economy based on the Post-Keynesian tradition (including MMT, MR, circuitists, horizontalists, etc) because I believe they offer the most accurate version of monetary operations and a stock-flow consistent approach. Where I generally depart from these economic sects relates to their specific policy prescriptions. On these matters, I more frequently side with Austrians for the reasons highlighted by Horwitz above.

To explain my position in a bit more detail, I agree that government deficits can help sustain growth and employment while the private sector attempts to increase its savings. This view, however, does not imply that government spending should increase or that it will be productive. Aside from the difficulty of knowing what to produce, government spending and deficits are often prone to corporate favoritism that serves to enlarge the income inequality gap. From my perspective, these concerns too often go unaddressed in proposals for larger deficits and increased public spending. The Post-Keynesians may hold the upper hand regarding causal relationships among macroeconomic factors but they could learn a thing or two about the limits of knowledge.   

Australia: Market Monetarist Success or Post-Keynesian Failure?

Last month I countered positive remarks from Market Monetarists on the success of the Swiss central bank (SNB) in placing a currency floor against the euro with claims that the SNB was being forced to defend its action by purchasing large sums of euros. A few days later it was revealed that SNB Foreign-Currency Holdings Hit Record On Intervention. Over the past month the SNB has continued to protect its currency floor by purchasing foreign-currency, which signals the expectations channel of monetary policy (in this instance) is much weaker than some had presumed.

Today, I think Marcus Nunes (another Market Monetarist) is making a similar mistake in highlighting Australia’s consistent growth as a success of monetary policy. There are many charts in Marcus’ post, but I presume an important one to highlight is Australia’s NGDP during the past two decades (the post compares the relative success of Australia to New Zealand):Chart 8 is intended to depict how monetary policy maintained NGDP growth near trend through the Asia Crisis and above trend throughout the global financial crisis. A concern of many non-Market Monetarists is what portion of NGDP growth will be derived from inflation versus real growth. To address that question, Marcus offers the following chart and notes:

Chart 11 shows that generally, inflation has not been an ‘issue’ in either country.

If I knew little about the Australian economy, Marcus’ display of graphs and explanation might prove very convincing. However, having long been a fan of Steve Keen (an Australian economist), I was surprised at the lack of discussion regarding Australia’s housing market. Keen, a highly regarded Post-Keynesian, has for years been pointing out the positive and negative effects of private credit on growth. Regarding this topic, Keen frequently points out similarities between the US and Australia. Here’s a chart from Steve’s blog comparing Australian and US real house prices:
After nearly doubling between the mid-1990’s to 2005, US house prices have now given back most of the gains. Meanwhile, in Australia, house prices nearly tripled from the late-1980’s to the recent peak in 2010. Currently house prices remain at levels double those witnessed in the mid-1990’s. Similar to the US, the rise in home values is not well accounted for in national inflation data. As Keen regularly notes, a major factor in both housing bubbles and macroeconomic cycles (frequently overlooked by mainstream economists and monetarists) is private debt. Below is a chart comparing the levels of private debt in Australia and the US:
During the extended period of growth in Australia, private debt to GDP has been growing consistently. The rise in private debt and housing prices, which supported Australian growth for two decades, have now turned south. Similar, more exaggerated, drops in the US were at the heart of the US crisis and continuing economic malaise. As the housing bubble in Australia busts and private sector deleveraging speeds up, the Australian central bank (RBA) will be unable to overcome the deflationary momentum. GDP growth in Australia has been slowing of late and the most recent unemployment report showed a surprise uptick. If Keen is right, monetary policy is likely to prove inept in the coming years as NGDP falls below trend without large fiscal stimulus.

The US experienced a great-run of economic growth on the back of a staggering rise in private debt that ultimately caused the subsequent crash and stagnation. Australia appears to have built its remarkable run on the same principles and will soon find out if the optimism was equally misplaced. Market Monetarists are claiming Australia a success, while the Post-Keynesians are warning of impending trouble. My bet is on Steve Keen and the Post-K’s. Where’s yours?     

Finding Common Ground

Steve Randy Waldman recently penned an encouraging post on the recent, heated debates in the econ blogosphere, posing the question, “Because the stakes are so small?” Waldman’s question refers to the common desire amongst various schools of economics to improve the current status quo in monetary and fiscal macro policy. The stakes in this game are a world with greater economic growth and less uncertainty about the future, goals that are certainly well worth the effort.

Waldman is the ultimate student of economics, striving to understand the strengths and weakness of different theories spanning Post-Keynesian, Market Monetarism, New Keynesian, MMT, Austrian and surely others. From his perspective, proponents of the different theories have much to gain from finding areas of common ground rather than arguing over their differences. The article offers a jumping off point for this discussion and is well worth a full reading.

The desire to highlight this blog post, in particular, is because my own intellectual pursuit in economics continues to include all of the various sects listed above. I’m often struck by the amount of overlap in thought process and general policy prescriptions, even if the details are, at times, worlds apart. Stemming from my personal experience, Post-Keynesians and Austrians often agree on the importance of private bank credit in determining business cycles. Market Monetarists and MMTers recognize the interplay and sometimes counteracting effects of monetary and fiscal policy. Nearly all the groups seem to prefer making both types of macro policy less ad hoc and more quickly responsive to business cycles. This is just the tip of the iceberg and I hope to read about and find far more similarities as I continue my studies.

Speaking of studies, I’m currently faced with the dilemma of choosing between two doctoral programs in economics that promote different types of heterodox economics. One program is more closely aligned with the Post-Keynesians, while the other is associated with the Austrian tradition. Waldman’s post offers hope that whichever program I chose, the opportunity will remain open to incorporate the best ideas among alternative theories. I certainly plan to seek alliances in my career and sincerely hope that many leaders in the field will follow Waldman’s lead in finding some common ground that helps improve outcomes for us all.  

The Forthcoming Profit Recession

During the past few years many individuals, including myself, have been surprised by how strong the rebound in corporate profits has been amidst a weak recovery in GDP and unemployment. New all-time highs in corporate profits have seemingly been the main driver behind the more than 100% rise in the S&P 500 since its lows in March 2009.
Richard Bernstein supports this view in The First Sign of Weakness in Corporate America:

“Our research over the past twenty-five years has consistently suggested that profit cycles, rather than economic cycles, drive equity markets.”

Bernstein’s research note comments on the recent rise in companies reporting negative earnings surprises and negative earnings growth (year/year). Although corporate balance sheets are much improved over a few years ago, these factors are warning signs that profit growth is slowing and may turn negative.

Another highly regarded investor/analyst, James Montier of GMO, is also now expressing concern over a profit recession in his recent commentary What Goes Up Must Come Down. Montier is part of a relatively small group of individuals/investors that foresaw the large rise in corporate profits based on its relationship with government deficits. A common trait among this cohort is a view of economics consistent with Post-Keynesian macro, including its different branches e.g. MMT and MMR.

Montier breaks down the components of corporate profit margins in a flow of funds framework:

Profits = Investment – Household Savings – Government Savings – Foreign Savings + Dividends

This arrangement is an expanded derivation of (Michal) Kalecki’s profit equation, which says

Retained Earnings = Investment + Government Deficit - Household 

Savings

The insightful blogger, Ramanan, recently provided a more detailed background of Kalecki’s Profit Equation. Looking at corporate profits in this manner displays that government deficits have been the primary driver during this recovery.

For the current fiscal year (2012), the budget deficit (Gov’t Savings) is still expected to be more than 8% of GDP (over $1 trillion). However, with tons of tax breaks potentially expiring at the end of this year, next year’s budget deficit could be significantly lower (~5% of GDP). If this occurs then corporate profits are likely to decline in 2013. Regarding the murkiness of next year’s budget outlook, Cullen Roche also chimed in on WHERE ARE CORPORATE PROFITS HEADED? He comments, and I agree, that regardless of upcoming elections the budget deficit next year may very well end up being higher than current CBO projections. The following chart depicts possible outcomes for profits based on his assumptions:

Looking ahead I doubt much, if any, of the decisions on future tax rates get decided before the November elections. If recent debates in Congress offer any insight, decisions on the budget will remain on hold until the last possible minute. Fearing the potential outcome in red above, investors may seek safety in advance...  

Quote of the Week

...is from p.162-163 of Hyman Minsky’s superb book, John Maynard Keynes:

“The economy is now a controlled rather than a laissez-faire economy; however, the thrust of the controls is not in the direction envisaged by Keynes. Investment has not been socialized. Instead, measures designed to induce private investment, quite independently of the social utility of investment, have permeated the tax and subsidy system.”

“The success of a high-private-investment strategy depends upon the continued growth of relative needs to validate private investment. It also requires that policy be directed to maintain and increase the quasi-rents earned by capital—i.e., rentier and entrepreneurial income. But such high and increasing quasi-rents are particularly conducive to speculation, especially as these profits are presumably guaranteed by policy. The result is experimentation with liability structures that not only hypothecate increasing proportions of cash receipts but that also depend upon continuous refinancing of asset positions. A high-investment, high-profit strategy for full employment—even with the underpinning of an active fiscal policy and an aware Federal Reserve System—leads to an increasingly unstable financial system, and an increasingly unstable economic performance.”

Minsky has been on my mind frequently over the past few months as much of today’s economic work in Post-Keynesianism and Modern Monetary Theory stem from his unique insights about instability in a capitalist society. In Facebook's $500 Million Tax Refund and The BIG Political Lie, I was trying to shed light on the manner by which politicians control the tax system to redistribute income upwards. Minsky brilliantly expands on this concept above, noting how policy that guarantees profits (quasi-rents) from speculation leads to instability. The rise in non-traditional mortgages, extremely low levels of down payments and government support in the recent housing crisis represents a prime example of the consequences highlighted above. As long as policy continues in this manner, economic performance is likely to be volatile and current income inequality will persist or expand even further.

Points of Public Interest

1. Why Jews Don’t Farm - Steve Landsburg approaches this question from the perspective of literacy and education as hallmarks of Jewish religion. (h/t Don Boudreaux, Cafe Hayek)
2. Repulsive progressive hypocrisy - Glenn Greenwald expresses fear over Democratic support for policies, including Guantanamo and drone usage, under the Obama Administration that were highly criticized when similarly carried out by the Bush Administration. I share Greenwald’s concern that political support may become tied to individuals rather than actual policy actions. (h/t Anthony Gregory, The Beacon: “Repulsive Progressive Hypocrisy” and Why Peaceniks Should Oppose Democrats)
3. What Europe might look like without the Eurozone and EU - Bruno Frey dispels with the view that a collapse of the Euro will lead to chaos and war. On the contrary, he argues that countries will likely establish more flexible, smaller agreements that maintain free trade and may even improve European economic prospects.
4. The Top Twelve Reasons Why You Should Hate the Mortgage Settlement by Yves Smith
5. S = I + (S – I) : The Most Important Equation in Economics The “mysterious” JKH explains a key component of sectoral balances in an incredibly clear and concise fashion.
6. How Economists Contributed to the Financial Crisis John T. Harvey discussed how making math the ends rather than means of economics has led much of the discipline off course from the real world. Post-Keynesianism, especially Steve Keen, and MMT receive acknowledgement for raising awareness of the crisis in advance and, in my opinion, continue to offer some of the best insights. (h/t Tom Hickey, Mike Norman Economics)

Points of Public Interest

1. Why Limiting Itemized Deductions (Still) Makes Sense - My former professor, Diane Lim Rogers, offers her support for a proposal to limit itemized deductions to a 15 percent rate. This policy will simultaneously increase the progressive nature of income taxes, substantially reduce total tax expenditures and raise revenue.
2. The Fed Is Misleading Congress About Europe - Warren Mosler, a founding member of Modern Monetary Theory, argues that the Fed’s dollar swap lines are unsecured lending and should therefore be the responsibility of Congress.
3. Philip Pilkington: Is QE/ZIRP Killing Demand? - Pilkington describes the counterproductive efforts of Fed policy. Milton Friedman also believed ZIRP (zero interest rate policy) would restrict demand as I outlined in Deflationary Monetary Policy.
4. The Liberalism of Classical Liberalism - Peter Boettke tries to correct some typical misrepresentations of classical liberalism with a good dose of historical background.
5. Show Me the Daylight 'twixt Sanction and Tariff - Samuel Wilson considers recent trade sanctions against Iran and China, and why the two are viewed in different lights by Americans.
6. The Future of Economics - Steve Keen, a leading post-Keynesian, makes a case for incorporating disequilibrium, dynamic modeling and emergent properties into the core of future economics.
7. The European Crisis Deepen - Peter Boone and Simon Johnson, former IMF Chief, explain why current optimism is likely unwarranted and how the realistic end may include a break-up of the Eurozone.

Quote of the Week

The first installment of the Quote of the Week comes from Time on the cross: can fiscal policy save Japan?, by Paul Krugman (9/21/99):

“What continues to amaze me is this: Japan's current strategy of massive, unsustainable deficit spending in the hopes that this will somehow generate a self-sustained recovery is currently regarded as the orthodox, sensible thing to do - even though it can be justified only by exotic stories about multiple equilibria, the sort of thing you would imagine only a professor could believe. Meanwhile further steps on monetary policy - the sort of thing you would advocate if you believed in a more conventional, boring model, one in which the problem is simply a question of the savings-investment balance - are rejected as dangerously radical and unbecoming of a dignified economy.”

For the past few years Krugman has been vigorously promoting the Japanese strategy he had previously ridiculed. To be clear, I do not disparage Krugman for simply changing his mind on this issue. What I do question is whether or not his view of other economic models has changed.

Heterodox economics has been gaining recognition over the past couple years, including this recent piece in The Economist (Marginal revolutionaries). One of the noted economists in the article, Scott Sumner, drew my attention to this quote during a recent podcast with Russ Roberts (Sumner on Money and the Fed; listen to the whole thing for a better understanding of market monetarism and NGDP targeting). Sumner is a primary proponent of greater monetary stimulus, who is perplexed that the above quote is now playing out in the US. Meanwhile other branches of economics, namely post-Keynesianism, are working to encourage acceptance of models with multiple equilibrium (which had reasonable success in forecasting the previous crisis).  

During the next few weeks I will outline the strengths and weaknesses of several branches of heterodox economics. Hopefully by acknowledging different models, the benefits of each can be combined to better shape policy responses.