Today's Buggy Topic: Actually Two of Them

The two lengthy buggy posts --- data-filled as usual; also with lots of links to good, easy-to-follow comments, diagrams, and tables elsewhere --- were posted earlier today at Economist's View . . . the praiseworthy economic blog run by Professor Mark Thoma, a well-known New Keynesian specialist at the University of Oregon.

The thread where prof bug's stuff is found there was actually started by Professor Nick Rowe --- another well known New Keynesian, who teaches in Canada and has a very good web site of his own.    Prof Rowe analyzed whether, all in all --- in the long-term --- economic growth is supply-constrained or demand-constrained.  Early, old-fashioned Keynesianism of the 1940s and early 1950s confused the two constraints.  If anything, it was simply concerned with aggregate-demand and took supply-side inputs for granted. 

The Problem 

That was true, note quickly. not just in the short-run, where, conceivably, a totally horizontal supply curve can be assumed --- which free-market economists, in any case, dispute.  Worse, though, lots of Keynesians in those days assumed that proper demand-management by means of fiscal policy --- monetary policy was regarded as impotent, even short of a liquidity trap --- would enhance long-term growth of the economy.

The reality?  Long-term growth is a matter of strict supply-side inputs, efficiently allocated: growth of the capital stock (capital investment), growth in the labor force, improvements in the quality of the labor force (formal education, job-training, flexibility, ability to cooperate spontaneously, and the like) . . . plus, most important of all, technological progress: the growth of knowledge, whether embodied in improved old production machinery, or in revolutionary new technologies of a far-reaching sort (like the PC and the Internet, or a century ago the internal combustion engine and Fordism in mass producing cars), or disembodied but reflected in better knowledge of managing firms. 

And some economists, prof bug included, would emphasize the importance of bold risk-taking entrepreneurs determined to start a new business and, where they have the talent and drive and opportunities, to bring new radical technologies and products successfully to the market place.  Think of Microsoft, Apple, Walmart, MacDonald's, Intel, Google, Amazon, and so on.  They didn't exist 30 years or so ago.  In fact, by the late 1990s, 75% of the Fortune 500 biggest companies didn't exist in the early 1970s.

Prof Bug's Two Comments

No need to say more.  Prof Rowe's lengthy intro --- be sure to click on the link at Economist View to his full commentary --- is somewhat demanding, but not technical; and in any case prof bug's first lengthy analysis in reply clarifies what Prof Rowe means by a long-run aggregate supply curve (LRAS) that is vertical.  That means changes in fiscal or monetary policy can't increase supply side output ---- only prices (up or down).  In effect, New Keynesians rightly note that this is the pre-Keynesian neo-classical view of economic growth.

That said, the NEW classical economists --- starting with Milton Friedman and especially the followers of Robert Lucas (Friedman's student and the major purveyor of rational-expectations in economics) --- generally regard short-term fluctuations around long-term trend growth (set by supply side inputs) as due to real shocks to the economy: hence recessions arise out of new technologies that dislocate temporarily the sectoral distribution of labor and capital on the supply side, along with other real shocks like resource-problems such as OPEC's huge oil-price rises in the 1970s (or more recently maybe), or marked changes in consumer preferences such as a switch from horse-and-buggies or bicycle transportation to new affordable Ford-produced cars, or maybe wars abroad. 

That theory of the business cycle --- booms and busts --- is called Real Business Cycle Theory, whose two pioneer scholars , Edward Prescott and Finn Kyland (the latter at UC Santa Barbara, prof bug's former employer), won the Nobel prize in economics in 2004. 

New Keynesians, by contrast, explain the business cycle's fluctuations as due to rigidities in various markets: products, labor-supply, and the like.  In particular, they argue that there are market failures due to at least three main problems --- sticky wages, sticky prices, and coordination problems --- that prevent the market economy from being self-adjusting in the way NEW classicals say it is. 

Click here for prof bug's comments.

Today's Buggy Topic

Posted at Economist's View, an outstanding economic blog run by a New Keynesian economist --- Mark Thoma of the University of Oregon --- it unfolds, this topic, in two lengthy buggy commentaries: Click here.  Be sure to click, too, on the "continue" button at the bottom of the linked-to page: when you do, you'll find the 2nd of prof bug's words to the wise . . . or something like that, all depending (no?). 

Today's First Buggy Topic

By the time Franklyn D. Roosevelt came to office in March 1933, the USA's GDP had fallen over a third from the start of the Great Depression at the end of 1929.  Unemployment had soared from under 4.0% to over 20%.  Over the next three years, FDR's New Deal programs --- especially fiscal stimuli, the end of the dollar's link to gold, and its depreciation in exchange rate markets: plus the salvaging policies for sanitizing the banking system --- reversed the fall in GDP with fast economic recovery.  Similarly, unemployment fell from 20.6% to 9.1%

Enter the buggy topic: starting in late May 1937, a big contraction of GDP and a rise in unemployment occurred.  It was a major recession within the Great Depression.  And though a fast recovery resumed a year later --- GDP growing very fast from the end of 1938 until the end of 1941 (December 8th, recall, marked our entry into WWII) --- employment growth itself lagged. 

What Happened Here and How Serious Was It? 

The answers to these two questions are the subject of prof buggy's lengthy, data-filled comments that were posted earlier today at the Marginal Revolution . . . the very good economic blog run by Professor Tyler Cowen, a flexible, open-minded libertarian economist.  Click here for the thread started by Professor Cowen's post, along with the reply of prof bug. 

Today's Buggy Topic

Those efforts mentioned in the subject title emerged in the 1960s and 1970s, pioneered by a handful of macroeconomists from  within the Keynesian research paradigm who were dissatisfied with the dominant macroeconomic Keynesian theory as set out in the  IS-LM model . . . with its roots back to the late 1930s.  The model was developed originally in 1937 by Professor John Hicks of Oxford, a gifted economist who would figure on anybody's list of the 5-10 most influential economists of the 20th century . . . and not just for his IS-LM model of Keynes complex, hard-to-pin-down work in The General Theory of Employment, Interest, and Money (1936), but also for Hicks' updating neo-classical economics published in an influential book Value and Capital (1939) and elsewhere.  

 Click here for a good brief survey of Hicks' important work, for which he later won a Nobel Prize in Economics.   (Prof bug had the honor and pleasure of participating in a small discussion group that Hicks led back in the 1960s.)

Some Background Reading of a Fairly Easy Sort

Start with Hick's IS-LM model --- by far, the most influential interpretation of Keynes that ever emerged, with some modifications added about the same time by the USA's leading Keynesian in the 1930s and 1940s, Alvin Hansen.  For an intelligent summary of the model, click here.  

By the end of the 1960s and into the next decade, the IS-LM model was under attack --- and not just from a revival of free-market economics that was associated above all with Milton Friedman, his theory of monetarism, and the growing influence of the entire Chicago University economics department where Friedman was located.  No, the IS-LM model was also being criticized from a different angle by some younger Keynesians themselves --- among them, Axel Leijonhufvud, a Swedish economist by origin who obtained his Ph.D. at Northwestern and had a flourishing career for several decades at UCLA. 

These Keynesian dissidents divided into two groups. 

  *One group --- called New Keynesianism and now the prevailing Keynesian theoretical model --- sought to come to terms with the increasingly influential macroeconomics theories being launched by rational-expectations specialists out of Chicago and elsewhere. . . . these New Classical theories rejecting, please note, all forms of Keynesianism as wrong --- defective from top to bottom, including all its theoretical assumptions.  

In its place, the New Classical paradigm revived and updated pre-Keynesian free-market theories of the economy, with a stress on its self-adjusting tendencies to equilibrium in all markets: labor, production-oriented firms, retail and wholesale businesses, and financial markets.    These self-adjusting, self-regulating  tendencies, so the new classicals argued, were now anchored in a firm theoretical base --- unlike Keynesianism --- in the preferences, expectations, and behavior of all individual economic agents: whether workers, business owners and managers, or savers and investors. 

(For a more thorough analysis of New Classical economics --- yet still very readable even for non-economic specialists --- click here.   Similarly, for a readable, more probing tratment of New Keynesianism, do your clicking here.)

 *The other assault on the IS-LM model came from a much smaler group of Keynesians, specialists in trying to work out a more dynamic, disequilibrium theory of the economy that would update Keynesian assumptions and theoretical work without making any concessions to the new classicists. 

Who Were These Disequilibrium Specialists?

This second group --- one of whose members  (Axel Leijonhufvud) is the subject of prof bug's fairly lengthy commentary left at the Marginal Revolution a couple of days ago --- produced some stimulating work, even if all of it was soon eclipsed by the New Keynesian approaches.   They  found the IS-LM model too static.  Their aim was to develop a "disquilibrium" theory of Keynesianism that would account much more thoroughly for all the ups and downs of the market-economy along its long-term growth trend.

The  Core Background Problems of Old-Fashion IS-LM Keynesianism Shared by All the Critics, Keynesian or Free-Market 

By the late 1960s and even more in the next decade --- when the economies of the world were struck by a series of unexpected shocks that dislocated them --- several problems the dominant Keynesian IS-LM model had emerged that underpinned all this ferment, both within the larger Keynesian research-paradigm that Keynes had set out in the General Theory and that had been modeled by Hicks and Hansen, and --- more threatening to the entire Keynesian paradigm --- within the ever more confident circle of free-market New Classical theorists.  (Those dislocating shocks were the two major oil-price increases by OPEC, the collapse of the Bretton Woods monetary system of the IMF fixed exchange rates, the surge of inflation throughout the decade . . . accompanied by rising unemployment around the world.)   In particular --- confronted with this new turbulent economic environment, domestically and globally --- the old-fashioned Keynesian IS-LM model came apart at its seams on several counts.

1. It couldn't effectively explain, let alone offer a good policy-guide, for the growing concerns in the late 1960s and 1970s of increasing inflation.  That's because Keynesians tended to downplay an effective policy-making role for monetary policy, preferring instead fiscal policy for dealing with both recessions and inflationary periods.
2. A related reason followed: the main IS-LM policy-guide for dealing with both unemployment and inflation  --- the Phillips curve --- turned out  to have no firm grounding in microeconomics: which is to say that it couldn't deal with the change in the expectations and preferences of individual economic agents . . . whether workers, business managers, savers, and investors, and especially in the new inflationary environment amid rising unemployment..  The free-market work of rational expectations theorists --- explained briefly in prof bug's comments at the Marginal Revolution --- could explain why there was no stable tradeoff between a little more inflation and a little less unemployment at the margin.  Rather, rational expectations showed that once inflation got under way, workers that inflation would continue upwards, and press managers for higher (nominal) wages ---- which created not only a self-fulfilling prophecy of higher inflation, but a spiral of escalating price-levels.  And by 1981, the US faced an economy with double-digit inflation, even as unemployment had risen in the Carter era.
3. Keynesians of the old-fashioned sort, moreover, had no notion on the microeconomic level again why --- as Milton Friedman and especially Edmund Phelps had formulated convincingly in the 1960s: Phelps a New Keynesian himself, who would eventually win a Nobel Prize --- the inflationary spiral could be tamed only by credible monetary policymaking that would not seek to lower unemployment below the rate of natural unemployment.   Any effort to lower it below that threshold by expansionary monetary or fiscal stimuli would only backfire.  If the natural rate seemed to high to policymakers in the Fed or in the US government, then only improvements in labor productivity would help --- along with policy revisions that sought to lower the minimum wage and remove further restrictions in labor markets generally . . . such as shorter unemployment compensation, and better information about the availability of jobs, all of which would add to labor mobility.
4. All these problems essentially undermined the standard Keynesian focus on aggregate demand and fiscal policy for dealing with recessions or  unemployment and inflationary rises . 
5. And finally, as the free-market theorists especially stressed, IS-LM Keynesianism of the old-fashioned sort lacked effective understanding of long-term economic growth and hence how such growth depended on the supply side inputs of savings and capital investments, labor growth and improvements in its quality and education, and above all technological progress.

No Need To Say More By Way of Introduction to the Buggy Commentary

Remember, it's found at the Marginal Revolution web-site.  Click here for the original Tyler Cowen post that started the thread, and prof bug's two lengthy replies.

Today's 2nd Buggy Topic Continues the Mini-Series on Tax Cuts and Our Recession

What's more, this 2nd installment deals with the same source --- a very stimulating but complex argument set out in formal math manner by Gauti Eggertsson, a New Keynesian economist with the New York Federal Reserve branch.  To follow this new buggy commentary, you should read the initial prof bug post at this site: it explains who Greg Eggertsson is and what his model does . . . skipping the formal mathematical work by way of summary for those who are put off or unable to work through the Eggertsson model.

The new bugged out commentary pushes deeper into the model's theoretical argument and the policy-guides that may or may not follow from it for shortening our current recession.  More specifically, that commentary --- which was posted at Professor Nick Rowe's very good economic web-site --- takes issue with Prof Rowe's interpretation of Eggertsson's argument and with Rowe's own policy recommendation.

No Need To Say More Here

You'll find Professor Rowe's summary and analysis, as well as prof bug's lengthy rejoinder, if you click here.

Today's Buggy Topic Was . . .

... posted four days ago by prof bug at Economist's View  --- a very good economics blog run by Professor Mark Thoma of the University of Oregon, himself a well-known specialist in macro-economics . . . with a New Keynesian theoretical approach.  Don't worry about the meaning of this approach.  Prof bug explains it in the post.   The topic is accurately reflected in the subject-title above . . . though with a twist: it looks at the impact of tax cuts not directly on the demand-side of the economy --- such as how much of the tax cuts would lead households to spend their higher take-home income on new consumption and how much would instead be saved and reduce the impact effects of stimulating GDP growth --- but rather on the supply-side. 

And as you'll see, looking at tax cuts on household income --- labor income if you want --- turns out to have very paradoxical effects in a recessionary environment marked by a zero-bound nominal interest-rate . . . exactly the policy of reducing short-term interest rates that the Federal Reserve has purposefully brought about.

Some Background Here

The thread at Economist's View started with a link to a summary of a new study by Gauti Eggertsson . . . an economist with the Federal Reserve Bank of New York.   Does the name sound familiar to buggy visitors?  Possibly.  Back in the fall, prof bug analyzed an unusual study by Eggertsson that came out earlier in 2008 --- a sustained effort, with a lot of formal mathematical modeling, to justify what has always been the most controversial and criticized part of the early New Deal of FDR between 1933 and 1937:  in a word, its efforts to deal with the depression that FDR inherited not just by some deficit spending ---- FDR, remember, was generally a fiscal conservative, and his Budget Director and his Secretary of the Treasury were even more so (not to mention the head of the independent Federal Reserve --- nor in taking the $US off the gold standard and depreciating the dollar's value in exchange rate markets. 

No, not just these helpful policies, but rather in three other counters to the Depression:  1) to reorganize basic industry into cartels; 2) to destroy a lot of agricultural output; and 3) to push heavily for more unionization of the US work force and, additionally, urge unions to press management to raise their wages.

 Eggertsson's Counter to These Criticisms

Until Eggertsson's paper last year, these three additional programs were criticized as irrational and counter-productive.  What Eggertsson tried to do was show that this wasn't the case . . . at any rate, amid not just a serious plunge in GDP since 1929 by a third (compared to a slight overall GDP growth rate in the US last year despite the decline in the 4th quarter) --- or amid a dire environment of 20-25% unemployment --- but also  ongoing declines in the price-level of the US economy.  Such declines are know, of course, as deflation.  In such a case --- we haven't have deflation here since 1937 (except for a few months briefly in the mid-1950s) --- three things happen:

1. Households tend to reduce their spending, holding back until the prices of non-essential goods fall further.  That generates widespread expectations of future deflation, and in turn that further restrains consumption.
2. Business firms, faced with declining sales and profits, resort to further price cuts.  That accelerates the price decline and further reduces sales and profits.
3. On top of all this, the real interest rate --- as opposed to the nominal interest rate in dollar terms in which, say, business firms entered into earlier contracts or workers bought houses with mortgages or cars with loans --- tends to rise with the fall in the price level.   This shifts the burden away from creditors (who lose some of their loans' value with inflation is occurring over time) and toward debtors . . . not just the vast majority of average American workers and households, but also business firms that depend on bank loans for short-term and long-term investment purposes. 

Amid such a deflationary environment, so Eggertsson argued in that stimulating 2008 article, the interlocked programs of cartelization, the policy to reduce supply of agricultural output, and the push to get workers higher wages ---- however counter-intuitive --- actually made sense.  They were all an effort to do two things: first, to reverse deflation, and second and even more important, to reverse deflationary expectations and prod households to start buying non-essential goods as a way to boost aggregate demand and grow the economy.  And, of course, if the price level started rising again, then the real interest rate would fall and stimulate both new business investment and consumer purchases on loan-credit. 

Enter Eggertsson's Latest Paper on the Current Recession and the Impact of Tax-Cuts

It's a complex argument, which unfolds a mathematical model that looks initially at what happens to the aggregate supply-side of the US economy, and then shows how --- amid incipient deflation right now, and especially under the influence of a zero-bound limit to nominal interest-rates --- such tax cuts would likely lower the price-level and create or aggravate deflationary expectations . . . with all the pernicious effects that would follow: households reducing consumption while waiting for further price falls; the real interest rate rising; and business firms, faced with declining sales, reducing their prices even further while holding back from new investment.

Enough Background

The long buggy analysis will likely deal with all the questions you might have about Eggertsson's formal math model and the theoretical argument and policy-oriented conclusions that follow.  So click here for prof bug's length initial post at Economist's View.  

Why initial? 

Well, two days alter, prof bug found that Professor Nick Rowe, a talented Canadian economist, had started a thread at his web site that partly summarized Eggertsson's complicated argument while taking issue with its conclusions ---- at any rate, as far as the impact of a sales-tax went.  Prof bug set out a lengthy reply.  And tried to show that Professor Rowe --- whose work he respects --- hadn't fully grasped the complexities of Eggertsson's argument and tried to show why.  But that is the subject matter for the next prof bug post here. 

Today's Buggy Topic Is . . .

. . . quite a mouthful, wouldn't you say?  It could be rephrased and is by prof bug in different, more down-to-earth terms, to wit --- "Why all good things go together in my ideology (belief-system), whereas yours is flawed and likely to be ethically bad or evil."  No need to say anything more by way of introduction.  The lengthy buggy commentary on this topic --- starting with epistemological analysis, backed by concrete examples --- is found at the Marginal Revolution . . . a good web-site run by a flexible and talented libertarian economist, Tyler Cowen. 

Click here for the Cowen post.  You'll find prof bug's long commentary at the end of page 2 of the comments section --- or just click here when you're done reading Cowen's lead commentary, followed by the predictable spun-out string of of rigid orthodox assertions and counter-assertions, crammed with the predictably aggressive attacks of other ideologies and some clapper-clawing insults. 

Is This Surprising?  Hardly.

All this is what true-believing ideologues always do.  It's their habit, their conditioned gut-reactions. 

The social sciences, please note, are not noticeable exceptions here.  On the contrary, as you'll see when you read prof bug's analysis, certain predominant epistemological assumptions rife in those disciplines these days --- not least in economics--- are also vulnerable to these habitual efforts to assert and defend ideologies against all opponents . . . the fools!  the miscreants!  Only MY comprehensive, self-evidently true beliefs  --- or read: my theoretical and empirical work --- can illuminate the problems and ills that mar our societies.  And only THEY can offer surefooted policy-guides to reorganize and regenerate our political, economic, and social lives that will make us either happier or more efficient or more moral . . . or all of these valued things taken together. 

Note Quickly

None of this means all social science and philosophical or other humanistic approaches to our personal and social lives are doomed to an inevitably futile and self-defeating clash of competing ideological perspectives.  There is at least one alternative here.  And that alternative is set out clearly in the buggy analysis.

Today's Buggy Topic

It's part of an ongoing series --- to be exact, the third buggy post on China's economy and relations with the United States and others --- that started earlier this week.  And so it would help if you read the previous two posts on the subject:         Click here for the initial article, which compares the success of China's post-Maoist economic reforms since 1979 with the failure of Gorbachev's  campaign between 1985 and 1991 to salvage and reform the decrepit Soviet economy.  Then click here.

Today's long bugged out commentary on the major challenges that face China's CP leadership --- as well as and the obstacles that need to be overcome if the challenges are to met successfully --- is found at a very good economic web-site run by Dr. Brad Setser of the Council of Foreign Relations.  His posts are always illuminating and written in clear, easy-to-follow English --- complete with lots of laudable data and other evidence.  Click here for the relevant thread he started on China, plus the long buggy reply.

Today's Buggy Topic

It's found at Worthwhile Canadian Initiative . . . a very good economic web-site run by Professor Nick Rowe of the University of Laval in Quebec.  Prof bug only recently found this website, and he has been impressed with the range and intelligence of Prof Rowe's illuminating posts.

No need to elaborate any more.  The original post by Prof Rowe is very readable, and --- let us hope: though you never know for sure, right? --- so is the bugged out stuff.

Click here for the relevant thread.

Today's 2nd Buggy Topic

You'll find prof bug's extensive commentary on two related topics at a web site run by Dr. Brad Setser:

• Why the $US has appreciated noticeably in the current global financial and economic crisis, mainly by attracting so much capital inflow from abroad. 
• And how,, more specifically, the over-valued $US influences our trade, investment, and overall relationship with China.

Dr. Setser, a Harvard and Oxford graduate and a former US Treasury official, posts daily on a variety of international economic topics . . . always illuminating and worth reading.  His site is actually run by the Council on Foreign Relations, and it has some other interesting blogs.  Setser's posts, please note, are generally non-technical and generally easy to follow . . . assuming anyway you remember the basics of your Econ 101 micro- and macr0-economies.

Click here for the Setser thread and prof bug's lengthy reply.

Note Quickly: Please Read the Previous Buggy Post for Today (February 5th, 2009)

It deals at length with why, on the one hand,  Gorbachev's efforts to reform the Soviet economy and political system --- the former reform depended on changes in how the Soviet government and CP worked to control Soviet life --- failed . . . to the point that the reform movement unleashed turmoil and political polarization that sent the decrepit Soviet system into a tailspin and self-destruction by 1991.    And why, on the other hand, China's post-Maoist CP leadership has been more successful by far in its reforms to date --- with a bugged out analysis at the end of the major challenges that still confront the leaders . . .  and why the likelihood of successfully tackling these challenges will hinge on the willingness of the CP big-shots to devolve over time enough of their huge power, prestige, and money-making that in effect they will be committing hari-kari in the process.

Click here for that previous buggy post.

                                   INTRODUCTORY COMMENTS 

Today's Buggy Topic

. . . was, believe it or not, posted at the Marginal Revolution about two months ago --- only to have been deleted by the team that runs that laudable econ-blog, Professors Tyler Cowen and Alexander Tabarrok.  The length buggy commentary, it seems, was deleted even though it joined an exchange between Prof. Tabarrok and Prof. Barkley Rosser . . . Tabarrok a flexible libertarian and Rosser a Keynesian and a very good econometrician who edits a journal specializing in up-to-date statistical tools for micro- and macro-economic analysis. 

Why Deleted

That debate was under way half-way through the lengthy thread when prof bug wandered into it and argued his case at length: namely, whether the Soviet Union benefited from a viable economy when it collapsed from its inner contradictions in 1990 and 1991.  Professor Tabarrok, an immigrant to the USA from Communist East Europe, strongly contested the claim of viability.  Prof Rosser, without denying there were problems with the Soviet economy by 1990, nonetheless supported the viable claim. 

The Buggy Take

Enter prof bug's two cents' worth . . . well, maybe a little more than that.  Ha! Surprise! Surprise! 

The buggy guy sided strongly with Tabarrok, setting out a lengthy analysis full of hard economic data to that end.  Next, he moved on to set out the reasons why the post-Maoist Communist Party in China was able to carry out a good number of market-oriented reforms after 1979, with impressive results --- whereas the Soviet Union's decrepit economy couldn't be salvaged by Mikhail Gorbachev's efforts at reform in the late 1980s.  By 1989 the Soviet economy was decrepit. 

Tersely put, Soviet economic growth --- which had been noticeably slowing down when Gorbachev started his reforms in the mid- and late-1980s --- had ground to a halt.   In effect, contrary to what Gorbachev thought, a state and a state-controlled economy in a condition of backwardness and lack of technological advance --- never mind a lack of flexibility and the irrationality of compulsory planning from the center --- couldn't be reformed. 

Far from it, the campaign to reform such a rickety system turned out --- as had previous reformers of decrepit states in history --- did little more than polarize the elites into contending camps: on one side, the old guard Communists and state-bureaucrats opposed all change, and on the other side more radical reformers --- in effect, revolutionaries like Boris Yeltsin --- pushed ever harder for massive innovations.  By 1990, the Soviet system was in turmoil.   When, finally, the non-Russian peoples exploited the first opportunity available to them to secede from the  Soviet Union, the old-guard mossbacks staged a military coup --- only to fail.  Yeltsin and the revolutionaries came to power in the late summer of 1991, sending the Soviet state and its Communist system into the trash-bin of history.

The Last Part: China

No need to say anything more by way of introduction.  The b ugged out argument at that point should be easy to follow.  Please note, though: the follow-up argument in the next buggy post will deal with US-Chinese relations in trade, investment, and exchange rates . . . and the current tensions that engulf the latter.

      WAS THE SOVIET ECONOMY VIABLE WHEN THE SOVIET UNION DISAPPEARED IN 1991?

The Rosser-Tabarrok Exchange

So far, the discussion between Barkley and Alex and some other Barkley-critics, has been illuminating.  That said, Barkley, I fear, is wrong about a number of things about the Soviet economy by 1984, the year Gorbachev took power . . . never mind when the Soviet Union broke apart and collapse seven years later.

Problem One: The slowdown in the growth rates of GDP and per capita income, already very noticeable in the 1970-1980 decade compared to earlier decades (save for the ruin caused by WWII and the recovery period until the late 1940s). Click here for a good, fairly up-to-date table of growth rates and other related matters between the start of Stalinism and forced industrialization and collectivization in 1928 and the collapse of the Soviet Union in 1990-91.

 Click on Continue

Today's Buggy Topic

A pretty big verbal mouthful --- the subject-tile above, no?  All the same, it captures the lengthy analysis set out last evening (January 31st, 2009) at Economist's View, an outstanding economics-blog run by Professor Mark Thoma --- a well-known Keynesian macroeconomics specialist.  Here's the relevant thread where you'll find the bugged-out comments.

What's At Stake

The original post by Prof Thoma quoted a good thoughtful and generally easy-to-follow argument set out by a Canadian economist, Professor Nick Rowe, on an important topic that has been slighted --- even ignored largely (not entirely) --- in the ongoing debate over President Obama's large fiscal stimulus program . . . some $850 billion dollars in size.  To wit: the success of any fiscal stimulus program depends on the multiplier impact on aggregate demand.  But there's a danger that some or even a possibility of all the multiplier impact being offset by the US economy's integration into the global economy, and for two reasons:

• Ordinarily, expansionary fiscal policies --- which increase the federal government's deficits --- will raise interest rates.  In a globally integrated economy, rising interest rates would then attract more foreign capital into the US from abroad.  The more capital flows into the US economy from Europe, Asia, and elsewhere, the more this would lead to the exchange rate of the $US rising against the euro, the yen, the Chinese Yuan (renminbi), and other currencies.  The result?  US exports would decline, and simultaneously US imports from abroad would rise. 

• The combination of declining exports and rising imports would increase the trade-deficit (current-account deficit: trade in goods and services).  The more that trade-deficit increases, the more slippage there's be of the multiplier effects of President Obama's fiscal stimulus program.  And hence the effort to prod the US economy out of recession would be offset on the trade-side. 

Some Background Links

Almost all of Professor Nick Rowe's original post is fairly understandable even if you can't remember much of your basic macroeconomics course in college or university.  So are the buggy prof's long analysis, and Rowe's reply.

The exception: a reference to the IS-LMBP Mundell-Fleming model that links the macroeconomic study of aggregate demand --- a combination of C (private consumption), I (private-sector investment), G (government spending minus taxes) --- to NX (net exports: in the US case, about 4-5.0% negative in this decade each year).  Robert Mundell won a Nobel Prize in economics a few years ago for this and other important work on trade and capital movements and how they bear on both GDP growth and monetary-and-fiscal policymaking.

The First Link: The IS-LM Model

If you want some basic review, you might find the following two links to articles --- complete with nifty diagrams --- a useful review. 

For the IS-LM model ---- developed in 1937 by Professors John Hicks of Oxford and Alvin Hansen of Harvard (Hicks, a former prof bug professor, eventually won a Nobel Prize in economics for this and other work): click here. Note that this citizendium article is far better and easier to follow then the wikipedia counterpart. 

 The IS-LM model, please observe, was by far the most influential way of presenting Keynesian economics, at any rate down to the 1970s, by which time the revival of classical economics with rational expectations added by Robert Lucas of Chicago tended to undermine its general acceptance.   Along with Milton Friedman's monetarism, Lucas's pathbreaking work --- which earned him a Nobel Prize in economics --- spun off an entire anti-Keynesian approach to macroeconomics that's called New Classicism. 

• Note: not Neo-Classicism, rather New Classicism.  The former refers to the work of economists in the late 19th and early 20th century on price theory, the creation of marginal analysis, and the allocation of resources in efficient or non-efficient manner . . . with changes in the money supply largely considered unable to either expand or reduce real GDP growth, instead only raise or lower the general price level of an economy. 

• The methodological key here, keep in mind, is the use of rational expectations in statistical modeling --- a postulate about the behavior of average economic agents: business firms, workers, consumers, and savers and investors.  That postulate, along with assumptions that all markets clear automatically or at least quickly, links the behavior of individual economic agents with the performance of the aggregate national economy . . . something, note quickly, that New Keynesians have also done since the Lucas-inspired revolution of the early 1970s --- only with different views about the failure of markets to clear automatically or quickly.  Hence, in the New Keynesian view, the need for active fiscal and especially monetary policies as countercyclical instruments for fighting both recessions and inflationary tendencies on the aggregate level. 

• Real Business-Cycle Theory, for which Edward Prescott and Finn Kyland --- the latter at prof bug's former university, UC Santa Barbara --- shared a Nobel Prize in economics in 2004, goes further than the original Lucas innovations about rational expectations.  Contrary to all forms of Keynesianism --- New mainstream or Post-Keynesian radicalism --- real business-cycle theory argues that neither fiscal expansion nor monetary policy that influences either interest rates or the money supply can influence the length and depth of a recession. 

• Why is that?  On this view, to put it tersely, the business cycle is caused by "real" shocks such as changes in technology, the need to reallocate labor and capital across different sectors as a result of such changes, or because of other shocks like OPEC's oil price rises in the 1970s or again between late 2007 and mid-2008 or maybe because of war.  And since both fiscal policies and monetary policies can only influence "nominal" price levels, they have no beneficial impact as countercyclical efforts to combat recessions.  In fact, they can lengthen them.  In effect, it's pre-Keynesian classical and neo-classical theory of the business cycle revived in a sophisticated manner, using rational expectations theory and some elaborate statistical modeling.

• For that matter, in the early 1980s, Hicks did criticize some of the simplicities in the IS-LM model that sought, originally, to reconcile Keynes' macroeconomic innovations with classical and neo-classical economics.  He did so, interestingly, from a radical Keynesian slant.  Even so, the IS-LM model is still widely used in textbooks and as a basis of certain kinds of macroeconomic work.

Now Add Foreign Trade and Global Capital Movements to the IS-LM Model

And voila . . . you've now augmented the Hicks-Hansen approach to Keynesianism with the influence of globalizing tendencies --- both for trade in goods and services and, more important still, the impact of increasingly large capital movements around the globe.  So once you've refreshed your memory of the basic IS-LM model, you can find a good wikipedia article on the Mundell-Fleming augmented IS-LM model --- usually called the IS-LMBP: BP referring to balance of payments) --- here.  

Don't Worry Though

If you find the two links hard to understand, you won't have trouble following the original Nick Rowe commentary or prof bug's analysis or Professor Rowe's reply in the thread at Economist's View.